N-CSR

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: 811-05029

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:

     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: December 31, 2004

Item 1 — Report to Shareholders

 

Annual Report to Shareholders

Legg Mason

Income Trust, Inc.

December 31, 2004

1

Annual Report to Shareholders

To Our Shareholders,

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

   The following table summarizes key statistics for the Primary Class of each portfolio, as of December 31, 2004:

					Net Asset Value
	SEC YieldA		Average Life		Per Share
Core Bond		2.50%		5.85 years	$	9.95
High Yield		5.87%		5.42 years	$	9.39
Investment Grade		4.06%		9.23 years	$	10.81
Limited DurationB		2.44%		3.23 years	$	10.36
U.S. Government Money MarketC		1.38%		51 days	$	1.00

   For the year ended December 31, 2004, total returns for the Primary Class of shares of the High Yield, Investment Grade and Limited Duration Portfolios were +10.51%, +6.29%, and +1.89%, respectively. Total returns for the Institutional Class of shares were +11.15%, +6.85%, and +2.41%, respectively. The Core Bond Fund’s Primary Class of Shares, which commenced operations on February 27, 2004, had a total return of +1.90% for the period from its inception to December 31, 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 Limited Duration 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. The U.S. Government Money Market Portfolio is primarily invested in government agency securities. Although most government agency securities are not backed by the full faith and credit of the U.S. government, all such securities held in the Portfolio at December 31, 2004 carry the highest quality ratings of the Standard & Poor’s and Moody’s rating services.

^A  SEC yields reported for the Core Bond, High Yield, Investment Grade and Limited Duration Portfolios are for the 30 days ended December 31, 2004. For the U.S. Government Money Market Portfolio, the SEC yield is for the 7 days ended December 31, 2004.

^B  Limited Duration was formerly the U.S. Government Intermediate Portfolio, see page 81 for additional information about the change.

^C  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

Annual Report to Shareholders

   PricewaterhouseCoopers LLP, Income Trust’s independent registered public accounting firm, has completed its annual examination, and audited financial statements for the fiscal year ended December 31, 2004, are included in this report.

   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

February 11, 2005

3

Annual Report to Shareholders

Management’s Discussion of Fund Performance

Core Bond Fund

   The cumulative total return for the Core Bond Fund for the period from its inception (February 27, 2004) to December 31, 2004, is presented below, along with the total return of its benchmark:

		Since
		Inception
Core Bond Fund
	Primary Class		+1.90%
Lehman Aggregate Bond IndexA			+2.40%

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.

   Stronger-than-expected economic activity, higher-than-expected inflation, and a moderate tightening of monetary policy drove short- and intermediate-term yields substantially higher this past year, while bond yields were steady to somewhat lower. The yield curve flattened significantly in the process. Considering that both core and headline consumer price inflation rates roughly doubled from the levels of 2003, and the economy enjoyed a second year of above-trend growth, the bond market’s stability in the face of these pressures was remarkable. Non-U.S. fixed-income markets generally performed better and with substantially less volatility, thanks to slower growth and subdued inflation. Japanese rates were relatively stable, and deflationary pressures eased. The Bank of England raised its target rate four times during the period, while the European Central Bank (“ECB”) remained on hold. Monetary conditions in the U.K. are now tight enough to have inverted both the nominal and real yield curves. Bolstered by a stronger economy and generally accommodative monetary policies, investment grade spreads tightened, with spreads on lower-quality issuers and emerging market bonds narrowing significantly as yield-starved investors found them increasingly attractive against a backdrop of excellent economic and policy fundamentals.

^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. It is not possible to invest in an index.

4

Annual Report to Shareholders

Management’s Discussion of Fund

     Performance — Continued

Despite higher short-term yields and a flatter curve, spreads on mortgage-backed issues tightened, and the mortgage-backed security sector delivered good risk-adjusted performance overall. U.S. Treasury Inflation-Protected Securities (“TIPS”) enjoyed strong performance as real yields declined relative to nominal yields, and inflation proved to be higher than expected.

   The Core Bond Fund was challenged by this environment, with strategies producing mixed results. From its inception on February 27, 2004, the total return (appreciation or depreciation in the Fund’s net asset value per share, plus dividends and any capital gain distributions) of the Primary Class lagged the performance of its benchmark, the Lehman Aggregate Bond Index, delivering 1.90% vs. 2.40%. The Fund benefited from an emphasis on BBB-rated bonds, thanks to a general tightening of credit spreads. An overweight exposure to U.S. Treasury Inflation-Protected Securities (“TIPS”) for most of the period also contributed to performance, since real yields rose by less than their nominal counterparts, and inflation proved to be somewhat higher than expected. Modestly overweight exposure to the mortgage-backed sector for most of the period added to performance as spreads tightened, but this was largely offset later in the period as mortgage exposure was reduced to underweight yet the sector continued to perform well. Duration exposure was neutral to somewhat short for the period, and this detracted from performance since most yields rose by less than forward rates had anticipated. A barbelled exposure to maturities had a positive impact on performance, since the yield curve flattened.

Western Asset Management Company

January 28, 2005

5

Annual Report to Shareholders

Expense Example

Core Bond Fund

   As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Each example is based on an investment of $1,000 invested on July 1, 2004, and held through December 31, 2004.

Actual Expenses

   The first line for each class in the table below provides information about actual account values and actual expenses for the Fund. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes

   The second line in the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples that appear in the shareholder reports of other funds.

	Beginning		Ending		Expenses PaidA		Annualized
	Account Value		Account Value		During the Period		Expense
	7/1/04		12/31/04		7/1/04 to 12/31/04		Ratio
Actual	$	1,000.00	$	1,040.80	$	5.14		1.00%
Hypothetical (5% return before expenses)		1,000.00		1,020.16		5.09

^A These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (184), and divided by 365.

6

Annual Report to Shareholders

Performance Information

Core Bond Fund

   The following graph compares the Fund’s total returns against that of a closely matched broad-based securities market index. The graph illustrates the cumulative total return of an initial $10,000 investment in the Fund’s Primary Class shares, 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 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. No adjustment has been made for any income taxes payable by shareholders.

7

Annual Report to Shareholders

Growth of a $10,000 Investment — Primary Class

Period Ended December 31, 2004

	Cumulative
	Total Return
Life of Class*		+1.90%
* Inception date — February 27, 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.

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.

^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.

8

Annual Report to Shareholders

Performance Information — Continued

Portfolio Composition (As of December 31, 2004)

Debt Ratings^B (As a percentage of the portfolio)

Maturity Schedule (As a percentage of the portfolio)

^B Source: Standard & Poor’s

9

Annual Report to Shareholders

Portfolio of Investments

Core Bond Fund

December 31, 2004
(Amounts in Thousands)

				Maturity		Par/
		Rate		Date		Shares		Value
Long-Term Securities — 75.4%
Corporate Bonds and Notes — 14.5%
Aerospace/Defense — 0.1%
	Northrop Grumman Corporation		4.079%		11/16/06	$	40	$	41
Banking and Finance — 1.5%
	Ford Motor Credit Company		6.875%		2/1/06		240		248
	Ford Motor Credit Company		7.375%		10/28/09		130		140
	Ford Motor Credit Company		7.000%		10/1/13		70		74
	General Motors Acceptance Corporation		5.625%		5/15/09		285		285
	Household Finance Corporation		4.625%		1/15/08		225		230
									977
Banks — 0.7%
	Bank of America Corporation		3.875%		1/15/08		210		211
	Bank One Corporation		6.500%		2/1/06		220		228
									439
Cable — 0.5%
	Comcast Corporation		6.500%		1/15/15		240		267
	Cox Communications, Inc.		3.875%		10/1/08		70		69
									336
Diversified Financial Services — 1.1%
	CIT Group Inc.		4.000%		5/8/08		5		5
	Citigroup Inc.		4.250%		7/29/09		230		232
	General Electric Capital Corporation		4.250%		1/15/08		230		234
	Wells Fargo & Company		3.500%		4/4/08		215		214
									685
Electric — 0.7%
	Dominion Resources, Inc.		5.700%		9/17/12		115		122
	FirstEnergy Corp.		7.375%		11/15/31		235		268

10

Annual Report to Shareholders

Portfolio of Investments — Continued

Core Bond Fund — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Electric — Continued
	Oncor Electric Delivery Company		6.375%		1/15/15	$	30	$	33
	The Cleveland Electric Illuminating Company		5.650%		12/15/13		20		21
									444
Energy — 1.3%
	Duke Energy Corporation		5.625%		11/30/12		140		147
	Pacific Gas and Electric Company		2.720%		4/3/06		20		20	A
	Pacific Gas and Electric Company		6.050%		3/1/34		65		68
	TXU Energy Co.		2.838%		1/17/06		25		25	A,B
	TXU Energy Co.		7.000%		3/15/13		500		558
									818
Environmental Services — 0.1%
	Waste Management, Inc.		6.375%		11/15/12		85		94
Food, Beverage and Tobacco — 0.7%
	Altria Group, Inc.		7.000%		11/4/13		155		168
	Anheuser-Busch Companies, Inc.		4.950%		1/15/14		165		169
	Kraft Foods Inc.		5.625%		11/1/11		135		143
									480
Investment Banking/Brokerage — 1.3%
	J.P. Morgan Chase & Co.		3.625%		5/1/08		335		332
	Lehman Brothers Holdings Inc.		4.000%		1/22/08		115		116
	Morgan Stanley		3.625%		4/1/08		190		189
	The Goldman Sachs Group, Inc.		4.125%		1/15/08		160		162
									799
Media — 0.3%
	Time Warner Inc.		6.875%		5/1/12		75		85
	Time Warner Inc.		7.700%		5/1/32		75		92
									177

11

Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Medical Care Facilities — 1.1%
	HCA, Inc.		5.750%		3/15/14	$	700	$	678
Oil and Gas — 1.2%
	Amerada Hess Corporation		7.300%		8/15/31		130		145
	Apache Corporation		6.250%		4/15/12		65		73
	Conoco Inc.		6.950%		4/15/29		225		266
	ConocoPhillips		4.750%		10/15/12		40		41
	Devon Energy Corporation		7.950%		4/15/32		140		179
	XTO Energy, Inc.		7.500%		4/15/12		15		17
	XTO Energy, Inc.		6.250%		4/15/13		20		22
									743
Paper and Forest Products — 0.5%
	International Paper Company		5.500%		1/15/14		70		72
	MeadWestvaco Corporation		6.850%		4/1/12		45		51
	Weyerhaeuser Company		6.750%		3/15/12		190		214
									337
Photo Equipment and Supplies — 0.5%
	Eastman Kodak Company		7.250%		11/15/13		300		323
Retail — 0.5%
	Target Corporation		5.400%		10/1/08		155		164
	Wal-Mart Stores, Inc.		3.375%		10/1/08		190		188
									352
Special Purpose — 1.3%
	Anadarko Finance Company		6.750%		5/1/11		125		141
	ChevronTexaco Capital Company		3.500%		9/17/07		140		141
	DaimlerChrysler NA Holding Corporation		4.050%		6/4/08		95		95
	DaimlerChrysler NA Holding Corporation		7.200%		9/1/09		50		55
	Sprint Capital Corporation		4.780%		8/17/06		15		15

12

Annual Report to Shareholders

Portfolio of Investments — Continued

Core Bond Fund — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Special Purpose — Continued
	Sprint Capital Corporation		6.000%		1/15/07	$	270	$	283
	Verizon Global Funding Corp.		7.375%		9/1/12		75		88
									818
Telecommunications — 0.2%
	BellSouth Corporation		4.750%		11/15/12		30		30
	SBC Communications Inc.		5.100%		9/15/14		70		71
									101
Transportation — 0.9%
	JetBlue Airways Corporation		2.665%		8/15/16		300		301	A
	JetBlue Airways Corporation		2.740%		11/15/16		300		301	A
									602
Total Corporate Bonds and Notes (Identified Cost — $9,222)									9,244
Asset-Backed Securities — 3.0%
Fixed Rate Securities — 2.1%
	BankAmerica Manufactured Housing Contract 1997-2		6.790%		12/10/22		135		137
	Bank One Issuance Trust 2003-C1		4.540%		9/15/10		200		203
	Citibank Credit Card Issuance Trust 2000-B1		7.050%		9/17/07		200		206
	Citibank Credit Card Issuance Trust 2001-C3		6.650%		5/15/08		200		208
	Conseco Finance Home Equity Loan Trust 2001-A		7.440%		3/15/32		200		200
	Green Tree Home Improvement Loan Trust 1999-E		9.450%		10/15/24		152		154
	MMCA Automobile Owner Trust 2002-4		3.050%		11/16/09		200		200
									1,308

13

Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Asset-Backed Securities — Continued
Indexed SecuritiesA — 0.9%
	Citibank Credit Card Issuance Trust 2000-C2		2.720%		10/15/07	$	200	$	200
	EQCC Trust 2002-1		2.718%		11/25/31		22		22
	Merrill Lynch Mortgage Investors, Inc. 2002-NC1		2.738%		5/25/33		11		11
	Residential Asset Mortgage Product, Inc 2004-RPIA		2.718%		11/25/42		165		165
	Wachovia Asset Securitization, Inc. 2002-HE1		2.788%		9/27/32		195		195
									593
Total Asset-Backed Securities (Identified Cost — $1,914)									1,901
Mortgage-Backed Securities — 1.2%
Fixed Rate Securities — 1.0%
	Asset Securitization Corporation 1996-D2		6.920%		2/14/29		66		69
	Bear Stearns ARM Trust, Mortgage Pass-Through Certificates, Series 2004-4		3.516%		6/25/34		400		391
	Washington Mutual Mortgage Securities Corporation 2004-RA1		7.000%		3/25/34		174		178
									638
Stripped Securities — 0.1%
	Mach One Trust, Commercial Mortgage-Backed Securities 2004-1A		1.636%		5/28/40		1,296		83	B,C1

14

Annual Report to Shareholders

Portfolio of Investments — Continued

Core Bond Fund — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Mortgage-Backed Securities — Continued
Variable Rate SecuritiesD — 0.1%
	Credit-Based Asset Servicing and Security 1999-3		5.922%		1/3/29	$	57	$	55	B
Total Mortgage-Backed Securities (Identified Cost — $779)									776
U.S. Government and Agency Obligations — 43.7%
Fixed Rate Securities — 34.9%
	Fannie Mae		1.650%		5/16/05		305		304
	Fannie Mae		3.000%		4/26/19		140		139
	United States Treasury Bonds		6.250%		8/15/23		150		176
	United States Treasury Bonds		2.375%		1/15/25		415		444
	United States Treasury Bonds		5.250%		11/15/28		20		21
	United States Treasury Bonds		5.250%		2/15/29		200		210
	United States Treasury Bonds		6.250%		5/15/30		10		12
	United States Treasury Bonds		5.375%		2/15/31		3,620		3,914
	United States Treasury Notes		1.500%		7/31/05		110		109
	United States Treasury Notes		1.500%		3/31/06		40		39
	United States Treasury Notes		2.750%		6/30/06		5,780		5,764
	United States Treasury Notes		2.875%		11/30/06		740		738
	United States Treasury Notes		3.000%		12/31/06		720		719
	United States Treasury Notes		3.125%		5/15/07		100		100
	United States Treasury Notes		3.000%		11/15/07		3,050		3,031
	United States Treasury Notes		4.000%		6/15/09		1,290		1,315
	United States Treasury Notes		3.625%		7/15/09		40		40
	United States Treasury Notes		3.500%		8/15/09		430		429
	United States Treasury Notes		3.375%		10/15/09		240		238
	United States Treasury Notes		3.500%		12/15/09		2,650		2,637
	United States Treasury Notes		4.250%		11/15/13		20		20

15

Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
U.S. Government and Agency Obligations — Continued
Fixed Rate Securities — Continued
	United States Treasury Notes		4.250%		8/15/14	$	1,860	$	1,864
	United States Treasury Notes		4.250%		11/15/14		20		20
									22,283
Indexed SecuritiesE — 8.7%
	United States Treasury Inflation-Protected Security		3.375%		1/15/07		2,614		2,769
	United States Treasury Inflation-Protected Security		3.875%		1/15/09		175		196
	United States Treasury Inflation-Protected Security		0.875%		4/15/10		1,723		1,706
	United States Treasury Inflation-Protected Security		3.375%		1/15/12		75		86
	United States Treasury Inflation-Protected Security		2.000%		1/15/14		243		251
	United States Treasury Inflation-Protected Security		2.000%		7/15/14		354		365
	United States Treasury Inflation-Protected Security		3.875%		4/15/29		151		207
									5,580
Stripped Securities — 0.1%
	United States Treasury Bonds		0.000%		2/15/23		50		20	C2
	United States Treasury Bonds		0.000%		11/15/27		50		16	C2
									36
Total U.S. Government and Agency Obligations (Identified Cost — $27,819)									27,899
U.S. Government Agency Mortgage-Backed Securities — 8.1%
Fixed Rate Securities — 8.1%
	Fannie Mae		6.000%	8/1/17 to 5/1/34			935		974
	Fannie Mae		5.500%	12/1/17 to 5/1/34			647		660
	Freddie Mac		4.500%		4/1/19		376		375
	Government National Mortgage Association		6.000%	11/15/28 to 12/15/33			1,362		1,413

16

Annual Report to Shareholders

Portfolio of Investments — Continued

Core Bond Fund — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
U.S. Government Agency Mortgage-Backed Securities — Continued
Fixed Rate Securities — Continued
	Government National Mortgage Association		6.500%		2/15/32	$	611	$	644
	Government National Mortgage Association		5.000%	8/15/33 to 5/15/34			1,076		1,077
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost — $5,144)									5,143
Yankee BondsF — 4.4%
Cable — 0.1%
	Rogers Cable Inc.		5.500%		3/15/14		90		85
Foreign Governments — 3.0%
	Russian Federation		5.000%		3/31/30		860		890
	United Mexican States		8.375%		1/14/11		220		258
	United Mexican States		7.500%		4/8/33		688		743
									1,891
Manufacturing (Diversified) — 0.6%
	Tyco International Group SA		6.375%		10/15/11		45		50
	Tyco International Group SA		6.000%		11/15/13		100		109
	Tyco International Group SA		6.875%		1/15/29		195		223
									382
Special Purpose — 0.4%
	Apache Finance Canada Corp.		4.375%		5/15/15		60		58
	Banagricola DPR Funding Ltd.		3.453%		3/15/10		175		175	A,B
	Deutsche Telekom International Finance BV		5.250%		7/22/13		40		41
									274

17

Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares			Value
Yankee Bonds — Continued
Telecommunications — 0.3%
	British Telecommunications plc		8.375%		12/15/10	$	100		$	120
	INTELSAT		6.500%		11/1/13		10			9
	Telecom Italia S.p.A		4.950%		9/30/14		70			69	B
										198
Total Yankee Bonds (Identified Cost — $2,708)										2,830
Preferred Stocks — 0.5%
	Fannie Mae		7.000%				4	shs		204	A
	Fannie Mae		5.375%				1			106	G
Total Preferred Stocks (Identified Cost — $286)										310
Total Long-Term Securities (Identified Cost — $47,872)										48,103
Short-Term Securities — 22.2%
Corporate Bonds and Notes — 0.5%
	Bank of America NA		2.300%		2/16/05	$	300			300	A
U.S. Government and Agency Obligations — 0.6%
	Fannie Mae		0.000%		4/1/05		380			378	H,I
Options PurchasedJ — 0.2%
	Eurodollar Futures Call, April 2005, Strike Price $96.75						7	K		6
	Eurodollar Futures Call, July 2005, Strike Price $96.00						6			12
	Eurodollar Futures Call, October 2005, Strike Price $95.50						5			14
	Eurodollar Futures Call, October 2005, Strike Price $96.00						25			41
	Eurodollar Futures Put, April 2005, Strike Price $97.50						4			4
	Eurodollar Futures Put, April 2005, Strike Price $97.75						13			21

18

Annual Report to Shareholders

Portfolio of Investments — Continued

Core Bond Fund — Continued

			Par/
			Shares			Value
Options Purchased — Continued
	Eurodollar Futures Put, October 2005, Strike Price $95.00			63	K		2
	Eurodollar Futures Put, October 2005, Strike Price $96.50			1			1
	U. S. Treasury Bond Futures Call, March 2005, Strike Price $112.00			3			5
	U. S. Treasury Bond Futures Call, March 2005, Strike Price $114.00			4			3
							109
Repurchase Agreements — 20.9%
	Deutsche Bank AG
		2.20%, dated 12/31/04, to be repurchased at $6,800 on 1/3/05 (Collateral: $6,955 Federal Home Loan Bank notes, 2.375%, due 4/5/06, value $6,980)		$6,800			6,800
	Nomura Securities Co. Ltd.
		2.26%, dated 12/31/04, to be repurchased at $6,562 on 1/3/05 (Collateral: $6,655 Federal Home Loan Bank notes, 6.00%, due 11/15/24, value $6,747)		6,562			6,562
							13,362
Total Short-Term Securities (Identified Cost — $14,144)							14,149
Total Investments — 97.6% (Identified Cost — $62,016)							62,252
Other Assets Less Liabilities — 2.4%							1,521
Net Assets — 100.0%						$	63,773

19

Annual Report to Shareholders

				Actual		Appreciation/
		Expiration		Contracts		(Depreciation)
Futures Contracts PurchasedJ
	Eurodollar Futures		June 2005		4	$	—
	Eurodollar Futures		September 2005		94		(46	)
	Eurodollar Futures		December 2005		1		—
	Eurodollar Futures		March 2005		31		(26	)
	U.S. Treasury Note Futures		March 2005		18		6
						$	(66	)
Futures Contracts WrittenJ
	U.S. Treasury Bond Futures		March 2005		5	$	2
	U.S. Treasury Note Futures		March 2005		37		(23	)
						$	(21	)
Options WrittenJ
	U.S. Treasury Bond Futures Put, Strike Price $108.00		March 2005		27	$	14
	U.S. Treasury Bond Futures Put, Strike Price $111.00		March 2005		15		8
	U.S. Treasury Bond Futures Put, Strike Price $108.00		June 2005		3		1
	U.S. Treasury Note Futures Call, Strike Price $112.00		February 2005		1		—
	U.S. Treasury Note Futures Call, Strike Price $114.00		March 2005		45		27
	U.S. Treasury Note Futures Call, Strike Price $116.00		March 2005		14		9
	U.S. Treasury Note Futures Call, Strike Price $113.00		March 2005		14		1
	U.S. Treasury Note Futures Call, Strike Price $114.00		June 2005		2		—
	U.S. Treasury Note Futures Put, Strike Price $102.00		March 2005		3		2
	U.S. Treasury Note Futures Put, Strike Price $111.00		March 2005		18		7
	U.S. Treasury Note Futures Put, Strike Price $108.00		March 2005		13		5
	U.S. Treasury Note Futures Put, Strike Price $109.00		March 2005		15		6
	U.S. Treasury Note Futures Put, Strike Price $110.00		March 2005		11		4
						$	84

20

Annual Report to Shareholders

Portfolio of Investments — Continued

Core Bond Fund — Continued

^A Indexed Security — The rates of interest earned on these securities are tied to the London Interbank Offered Rate (’LIBOR”) or the one year Treasury Bill Constant Maturity Rate. The coupon rates are the rates as of December 31, 2004.

B	Rule 144a Security — A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities represent 0.64% of net assets.
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	The coupon rates shown on variable securities are the rates at December 31, 2004. These rates vary with the weighted average coupon of the underlying loans.

E	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.
F	Yankee Bond — A dollar-denominated bond issued in the U.S. by foreign entities.

G	Convertible Security — Security may be converted into issuer’s common stock.
H	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.

I	Collateral to cover options and futures contracts.
J	Options and futures are described in more detail in the notes to financial statements.

^K Represents actual number of contracts.

See notes to financial statements.

21

Annual Report to Shareholders

Statement of Assets and Liabilities

Core Bond Fund

December 31, 2004

(Amounts in Thousands)

Assets:
	Investment securities at market value (Identified Cost — $47,872)			$	48,103
	Repurchase Agreements, at cost				13,362
	Short-term securities at value (Identified Cost — $782)				787
			Total investments			$	62,252
	Receivable for:
		Securities sold					1,020
		Fund shares sold					642
		Interest					419
							64,333
Liabilities:
	Options proceeds (Identified Cost — $154)						70
	Payable for:
		Securities purchased					112
		Fund shares repurchased					174
		Futures variation margin					2
		Income distribution					5
	Due to:
		Manager					24
		Distributor					35
	Accrued expenses						64
	Other liabilities						74
							560
Net Assets						$	63,773
Net assets consist of:
	Accumulated paid-in capital applicable to
			6,408 Primary Class shares outstanding	$	63,534
	Accumulated net realized gain/(loss) on investments, options, futures, and swaps				6
	Unrealized appreciation/(depreciation) of investments, options and futures				233
Net Assets						$	63,773
Net Asset Value Per Share:
	Primary Class						$9.95

See notes to financial statements.

22

Annual Report to Shareholders

Statement of Operations

Core Bond Fund

For the Period Ended December 31, 2004^A

(Amounts in Thousands)

Investment Income:
	Interest							$	1,331
Expenses:
	Management fees				$	171
	Distribution and service fees					190
	Audit and legal fees					62
	Custodian fees					75
	Directors’ fees and expenses					12
	Registration fees					15
	Reports to shareholders					24
	Transfer agent and shareholder servicing expense					27
	Organization expense					13
	Other expenses					4
						593
		Less: Fees waived				(212	)
				Compensating balance credits		(1	)
			Total expenses, net of waivers and compensating balance credits						380
Net Investment Income									951
Net Realized and Unrealized Gain/(Loss) on Investments:
	Realized gain/(loss) on:
		Investments				238
		Options				65
		Futures				(82	)
		Swaps				17
									238
	Increase in unrealized appreciation/(depreciation) of investments, options and futures								233
Net Realized and Unrealized Gain/(Loss) on Investments									471
Increase in Net Assets Resulting From Operations								$	1,422

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

See notes to financial statements.

23

Annual Report to Shareholders

Statement of Changes in Net Assets

Core Bond Fund

(Amounts in Thousands)

			For the Period
			Ended
			12/31/04A
Increase in Net Assets:
Net investment income			$	951
Net realized gain/(loss) on investments, options, futures and swaps				238
Increase in unrealized appreciation/(depreciation) of investments, options, futures and swaps				233
Increase in net assets resulting from operations				1,422
Distributions to shareholders:
	From net investment income:
		Primary Class		(1,051	)
	From net realized gain on investments:
		Primary Class		(132	)
Increase in net assets from Fund share transactions:
		Primary Class		63,534
Increase in net assets				63,773
Net Assets:
Beginning of period				—
End of period			$	63,773
Under/(over) distributed net investment income			$	—

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

See notes to financial statements.

24

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
		December 31, 2004A
Net asset value, beginning of period		$	10.00
Investment operations:
	Net investment income		.18	B
	Net realized and unrealized gain/(loss) on investments		N.M.
	Total from investment operations		.18
Distributions:
	From net investment income		(.21	)
	From net realized gain on investments		(.02	)
	Total distributions		(.23	)
Net asset value, end of period		$	9.95
Ratios/supplemental data:
	Total return		1.90%	C
	Expenses to average net assets		1.00%	B,D
	Net investment income to average net assets		2.50%	B,D
	Portfolio turnover rate		234%	C
Net assets, end of period (in thousands)			$63,773

^A For the period February 27, 2004 (commencement of operations) to December 31, 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 for the period ended December 31, 2004 would have been 1.56%.
C	Not annualized.
D	Annualized.

N.M. — Not meaningful.

See notes to financial statements.

25

Annual Report to Shareholders

Management’s Discussion of Fund Performance

High Yield Portfolio

   Average annual total returns for the High Yield Portfolio and its benchmark for various periods ended December 31, 2004, are presented below:

		One		Five		Ten		Since
		Year		Years		Years		InceptionA
High Yield
	Primary Class		+10.51%		+1.45%		+6.08%		+5.28%
	Institutional Class		+11.15%		+1.84%		N/A		+1.60%
Lehman High Yield IndexB			+11.13%		+6.97%		+8.13%		+7.11%

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 for the primary class please visit www.leggmasonfunds.com; for the Institutional Class please call 1-888-425-6432. 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.

   For the calendar year 2004, the Primary Class of the Fund returned 10.51% versus 11.13% for the Fund’s benchmark, the Lehman High Yield Index (“Index”). The option-adjusted spread of the Index narrowed from +394 basis points (bps)^C on December 31, 2003, to +288 bps on December 31, 2004. The portfolio’s underperformance is primarily attributable to the portfolio manager’s decision to underweight the top performing industries: natural gas pipelines, and chemicals which were up 14.04% and 15.72%, respectively in 2004. Duration exposure was neutral to somewhat short for the period, and this detracted from performance since most yields rose by less than forward rates had anticipated. Once again, lower-rated issuers in the Index drove performance in the high yield sector. CCC rated issues returned 15.77% vs. BB rated issues, which returned just 9.61%.

^A The inception date of the Primary Class is February 1, 1994. The inception date of the Institutional Class is May 5, 1998. Index returns are for periods beginning January 31, 1994.

^B 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.

^C 100 basis points = 1%.

26

Annual Report to Shareholders

Management’s Discussion of Fund

     Performance — Continued

The portfolio was positioned to benefit from performance in the lower-rating categories by being overweight CCCs and underweight BBs.

Western Asset Management Company

January 28, 2005

27

Annual Report to Shareholders

Expense Example

High Yield Portfolio

   As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Each example is based on an investment of $1,000 invested on July 1, 2004, and held through December 31, 2004.

Actual Expenses

   The first line for each class in the table below provides information about actual account values and actual expenses for each class. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes

   The second line for each class in the table below provides information about hypothetical account values and hypothetical expenses based on the relevant class’s actual expense ratios and an assumed rate of return of 5% per year before expenses, which is not the class’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples for the relevant class that appear in the shareholder reports of other funds.

		Beginning		Ending		Expenses PaidA
		Account		Account		During the		Annualized
		Value		Value		Period		Expense
		7/1/04		12/31/04		7/1/04 to 12/31/04		Ratio
Primary Class:
	Actual	$	1,000.00	$	1,095.90	$	7.18		1.36%
	Hypothetical (5% return before expenses)		1,000.00		1,018.35		6.92
Institutional Class:
	Actual	$	1,000.00	$	1,099.00	$	4.23		0.80%
	Hypothetical (5% return before expenses)		1,000.00		1,021.17		4.08

^A These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (184), and divided by 365.

28

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 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 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.

29

Annual Report to Shareholders

Growth of a $10,000 Investment — Primary Class

Periods Ended December 31, 2004

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+10.51%		+10.51%
Five Years		+7.48%		+1.45%
Ten Years		+80.48%		+6.08%

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.

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.

^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.

30

Annual Report to Shareholders

Performance Information — Continued

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

Periods Ended December 31, 2004

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+11.15%		+11.15%
Five Years		+9.52%		+1.84%
Life of Class*		+11.15%		+1.60%
*Inception date: May 5, 1998

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 call 1-888-425-6432. 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.

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.

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

31

Annual Report to Shareholders

Portfolio Composition (As of December 31, 2004)

Debt Ratings^C (As a percentage of the portfolio)

Maturity Schedule (As a percentage of the portfolio)

^C Source: Standard & Poor’s

32

Annual Report to Shareholders

Portfolio of Investments

High Yield Portfolio
December 31, 2004

(Amounts in Thousands)

				Maturity		Par/
		Rate		Date		Shares		Value
Long-Term Securities — 97.6%
Corporate Bonds and Notes — 88.7%
Advertising — 0.7%
	Vertis Inc.		10.875%		6/15/09	$	1,385	$	1,503
Aerospace/ Defense — 1.7%
	Armor Holdings, Inc.		8.250%		8/15/13		1,450		1,624
	Esterline Technologies Corporation		7.750%		6/15/13		943		1,030
	Hexcel Corporation		9.875%		10/1/08		966		1,072
									3,726
Animal Hospitals — 0.5%
	Vicar Operating, Inc.		9.875%		12/1/09		915		1,002
Apparel — 1.8%
	Levi Strauss & Co.		9.750%		1/15/15		470		465	A
	Oxford Industries, Inc.		8.875%		6/1/11		1,161		1,247
	Russell Corporation		9.250%		5/1/10		998		1,070
	The William Carter Company		10.875%		8/15/11		917		1,027
									3,809
Auto and Automotive Parts — 1.2%
	Keystone Automotive Operations Inc.		9.750%		11/1/13		1,560		1,669
	TRW Automotive Inc.		9.375%		2/15/13		839		973
									2,642
Automotive Retailer — 0.9%
	Asbury Automotive Group Inc.		9.000%		6/15/12		1,896		1,991
Banking and Finance — 0.8%
	Refco Finance Holdings		9.000%		8/1/12		1,480		1,621	A
Building Materials — 2.3%
	Associated Materials Incorporated		0.000%		3/1/14		1,990		1,433	B
	Interface, Inc.		7.300%		4/1/08		553		565

33

Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Building Materials — Continued
	Interface, Inc.		10.375%		2/1/10	$	1,373	$	1,579
	Nortek, Inc.		8.500%		9/1/14		1,370		1,432	A
									5,009
Cable — 4.2%
	Charter Communications Holdings, LLC		9.625%		11/15/09		1,250		1,097
	Charter Communications Holdings, LLC		10.250%		9/15/10		2,535		2,687
	CSC Holdings Inc.		7.625%		4/1/11		990		1,067
	CSC Holdings Inc.		6.750%		4/15/12		170		175	A
	CSC Holdings Inc.		7.875%		2/15/18		430		464
	CSC Holdings Inc.		7.625%		7/15/18		946		1,000
	Insight Communications Company, Inc.		0.000%		2/15/11		1,140		1,109	B
	LodgeNet Entertainment Corporation		9.500%		6/15/13		1,152		1,273
									8,872
Casino Resorts — 2.1%
	Inn of The Mountain Gods Resort		12.000%		11/15/10		1,610		1,884
	Isle of Capri Casinos, Inc.		9.000%		3/15/12		570		628
	Premier Entertainment Biloxi LLC		10.750%		2/1/12		747		816
	River Rock Entertainment		9.750%		11/1/11		990		1,110
	Station Casinos, Inc.		6.875%		3/1/16		90		94
									4,532
Chemicals — 2.8%
	Georgia Gulf Corporation		7.625%		11/15/05		6		6
	Huntsman International LLC		10.125%		7/1/09		766		806
	Lyondell Chemical Company		9.625%		5/1/07		1,558		1,714
	Lyondell Chemical Company		10.500%		6/1/13		400		476
	MacDermid, Incorporated		9.125%		7/15/11		22		25
	Millennium America Inc.		9.250%		6/15/08		892		1,015
	Nalco Company		8.875%		11/15/13		640		702
	Westlake Chemical Corporation		8.750%		7/15/11		1,032		1,166
									5,910

34

Annual Report to Shareholders

Portfolio of Investments — Continued

High Yield Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Coal — 0.7%
	Alpha Natural Resources LLC		10.000%		6/1/12	$	1,360	$	1,550	A
Containers and Packaging — 3.3%
	Graham Packaging Company, Inc.		9.875%		10/15/14		1,410		1,505	A
	Graphic Packaging International Corp.		9.500%		8/15/13		1,160		1,319
	Owens Brockway Glass Containers		8.750%		11/15/12		1,040		1,172
	Owens-Illinois, Inc.		7.500%		5/15/10		420		446
	Jefferson Smurfit Corporation (U.S.)		8.250%		10/1/12		840		916
	Solo Cup Company		8.500%		2/15/14		1,670		1,737
									7,095
Electric — 2.2%
	Orion Power Holdings, Inc.		12.000%		5/1/10		1,270		1,613
	The AES Corporation		9.000%		5/15/15		2,743		3,141	A
									4,754
Electronics — 0.5%
	Rayovac Corporation		8.500%		10/1/13		960		1,066
Energy — 3.9%
	Calpine Corporation		7.625%		4/15/06		1,200		1,179
	Calpine Generating Co., LLC		11.169%		4/1/11		1,280		1,251	C
	Calpine Generating Co., LLC		11.500%		4/1/11		1,730		1,644
	Midwest Generation LLC		8.560%		1/2/16		750		832
	Midwest Generation LLC		8.750%		5/1/34		1,000		1,135
	NRG Energy, Inc.		8.000%		12/15/13		1,402		1,528	A
	Reliant Energy Inc.		6.750%		12/15/14		750		745
									8,314
Entertainment — 0.8%
	Cinemark, Inc.		0.000%		3/15/14		1,390		1,050	B
	Loews Cineplex Entertainment Corporation		9.000%		8/1/14		680		736	A
									1,786

35

Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Environmental Services — 1.8%
	Allied Waste North America Incorporated		7.625%		1/1/06	$	69	$	71
	Allied Waste North America Incorporated		8.875%		4/1/08		508		544
	Allied Waste North America Incorporated		8.500%		12/1/08		1,364		1,446
	Capital Environment Resource, Inc.		9.500%		4/15/14		1,790		1,781	A
									3,842
Food, Beverage and Tobacco — 1.3%
	Cott Beverages Incorporated		8.000%		12/15/11		950		1,034
	Domino’s, Inc.		8.250%		7/1/11		1,014		1,108
	Stater Bros. Holdings Inc.		5.990%		6/15/10		640		658	C
									2,800
Gaming — 0.8%
	Argosy Gaming Company		9.000%		9/1/11		1,432		1,597
Gas and Pipeline Utilities — 3.3%
	ANR Pipeline, Inc.		8.875%		3/15/10		322		361
	ANR Pipeline, Inc.		9.625%		11/1/21		477		600
	Dynegy Holdings Inc.		8.750%		2/15/12		1,010		1,058
	Dynegy Holdings Inc.		10.125%		7/15/13		1,260		1,443	A
	Northwest Pipelines Corporation		8.125%		3/1/10		481		532
	Sonat Inc.		6.875%		6/1/05		700		709
	Southern Natural Gas Company		8.875%		3/15/10		678		759
	The Williams Companies, Inc.		8.750%		3/15/32		1,471		1,690
									7,152
Health Care — 3.2%
	Ardent Health Services		10.000%		8/15/13		2,000		2,100
	Community Health Systems Inc.		6.500%		12/15/12		590		594	A
	Equinox Holdings Inc		9.000%		12/15/09		940		1,001
	Tenet Healthcare Corporation		9.875%		7/1/14		2,887		3,147	A
									6,842

36

Annual Report to Shareholders

Portfolio of Investments — Continued

High Yield Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Homebuilding — 0.3%
	KB HOME		5.875%		1/15/15	$	730	$	723
Lodging/ Hotels — 0.1%
	La Quinta Inns, Inc.		8.875%		3/15/11		70		78
	Starwood Hotels & Resorts Worldwide, Inc.		7.875%		5/1/12		100		114
									192
Machinery — 2.3%
	Case New Holland Incorporated		9.250%		8/1/11		848		943	A
	Case New Holland Incorporated		9.250%		8/1/11		152		169	A
	Grant Prideco, Inc.		9.000%		12/15/09		877		971
	Joy Global Inc.		8.750%		3/15/12		1,125		1,260
	Terex Corporation		7.375%		1/15/14		1,430		1,534
									4,877
Manufacturing (Diversified) — 3.5%
	Ames True Temper		10.000%		7/15/12		1,000		1,025
	Jacuzzi Brands Incorporated		9.625%		7/1/10		2,304		2,557
	KI Holdings Incorporated		0.000%		11/15/14		1,140		730	B
	Koppers Inc.		9.875%		10/15/13		920		1,049
	MMI Products, Inc.		11.250%		4/15/07		1,030		1,045
	Samsonite Corporation		8.875%		6/1/11		960		1,039
									7,445
Media — 2.8%
	EchoStar DBS Corporation		5.256%		10/1/08		1,090		1,129	C
	Lamar Media Corporation		7.250%		1/1/13		650		702
	Paxson Communications Corporation		10.750%		7/15/08		645		677
	Paxson Communications Corporation		0.000%		1/15/09		25		24	B
	PRIMEDIA Inc.		7.665%		5/15/10		940		997	C
	PRIMEDIA Inc.		8.875%		5/15/11		300		317
	Sinclair Broadcast Group, Inc.		8.750%		12/15/11		990		1,078
	Warner Music Group		7.375%		4/15/14		1,040		1,066	A
									5,990

37

Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Medical Care Facilities — 0.9%
	HCA Inc.		7.875%		2/1/11	$	510	$	562
	HCA Inc.		9.000%		12/15/14		970		1,145
	HCA, Inc.		8.750%		9/1/10		246		281
									1,988
Medical Products — 0.1%
	Fresenius Medical Care Capital Trust II		7.875%		2/1/08		89		97	D
Medical Supplies and Services — 0.4%
	AmeriPath Inc.		10.500%		4/1/13		838		890
Metals — 0.2%
	Century Aluminum Company		7.500%		8/15/14		490		522	A
Oil and Gas — 7.0%
	Amerigas Partners LP		8.875%		5/20/11		806		879
	Belden Blake Corporation		8.750%		7/15/12		1,230		1,248	A
	Chesapeake Energy Corporation		9.000%		8/15/12		1,083		1,237
	Chesapeake Energy Corporation		7.500%		9/15/13		40		44
	El Paso CGP Co.		7.750%		6/15/10		1,180		1,233
	El Paso Corporation		6.950%		12/15/07		838		878
	El Paso Corporation		7.875%		6/15/12		750		785
	El Paso Corporation		7.800%		8/1/31		730		701
	El Paso Corporation		7.750%		1/15/32		670		641
	El Paso Production Holding Company		7.750%		6/1/13		330		346
	Ferrellgas LP		6.750%		5/1/14		510		524
	KCS Energy, Inc.		7.125%		4/1/12		930		976
	Pacific Energy Partners		7.125%		6/15/14		460		490
	Parker Drilling Company		7.150%		9/1/10		1,060		1,110	A,C
	Plains Exploration & Production Company		7.125%		6/15/14		810		883
	Pride International, Inc.		7.375%		7/15/14		920		1,005
	Suburban Propane Partners LP		6.875%		12/15/13		1,000		1,020

38

Annual Report to Shareholders

Portfolio of Investments — Continued

High Yield Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Oil and Gas — Continued
	Vintage Petroleum, Inc.		7.875%		5/15/11	$	722	$	769
	Vintage Petroleum, Inc.		8.250%		5/1/12		250		276
									15,045
Paper and Forest Products — 1.0%
	Georgia-Pacific Corp.		9.500%		12/1/11		902		1,112
	Georgia-Pacific Corp.		9.375%		2/1/13		887		1,033
									2,145
Pharmaceuticals — 0.5%
	Leiner Health Products Inc.		11.000%		6/1/12		940		1,027
Publishing — 0.4%
	Dex Media East LLC		9.875%		11/15/09		19		22
	Dex Media East LLC		12.125%		11/15/12		641		781
									803
Real Estate — 0.7%
	Forest City Enterprises, Inc.		7.625%		6/1/15		140		149
	Ventas Realty, Limited Partnership		8.750%		5/1/09		695		779
	Ventas Realty, Limited Partnership		9.000%		5/1/12		408		476
									1,404
Rental and Lease Services (Commercial) — 0.7%
	NationsRent Inc.		9.500%		10/15/10		1,390		1,557
Retail — 1.2%
	Norcraft Companies		9.000%		11/1/11		1,470		1,587
	Toys “R” Us, Inc.		7.875%		4/15/13		980		973
									2,560
Special Purpose — 11.5%
	AAC Group Holding Corporation		0.000%		10/1/12		1,510		1,015	A,B
	Alamosa Incorporated		11.000%		7/31/10		444		523
	Alamosa Incorporated		8.500%		1/31/12		640		699

39

Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Special Purpose — Continued
	Dennys Corp. Holdings, Inc.		10.000%		10/1/12	$	1,010	$	1,087	A
	Goodman Global Holding Company, Inc.		7.875%		12/15/12		1,090		1,079	A
	H & E Equipment Services LLC		11.125%		6/15/12		1,434		1,577
	H Lines Finance Holding Corporation		0.000%		4/1/13		1,580		1,138	A,B
	Huntsman Advanced Materials LLC		10.000%		7/15/08		10		11	A,C
	Huntsman Advanced Materials LLC		11.000%		7/15/10		370		440	A
	Jostens IH Corporation		7.625%		10/1/12		1,520		1,581	A
	K&F Acquisition Incorporated		7.750%		11/15/14		608		628	A
	Milacron Escrow Corporation		11.500%		5/15/11		1,295		1,373
	Norcraft Holdings LP		0.000%		9/1/12		670		502	B
	Qwest Capital Funding Incorporated		7.900%		8/15/10		1,253		1,266
	Rainbow National Services LLC		8.750%		9/1/12		510		560	A
	Rainbow National Services LLC		10.375%		9/1/14		1,000		1,127	A
	Sensus Metering Systems Inc.		8.625%		12/15/13		1,481		1,518
	Sithe Independence Funding Corporation		9.000%		12/30/13		930		1,044
	Texas Genco LLC		6.875%		12/15/14		1,253		1,295	A
	The Williams Companies, Inc. Credit-Linked Certificates		6.750%		4/15/09		910		981	A
	TransDigm		8.375%		7/15/11		1,027		1,101
	UCAR Finance Inc.		10.250%		2/15/12		1,315		1,502
	UGS Corporation		10.000%		6/1/12		900		1,024	A
	WII Components, Inc.		10.000%		2/15/12		1,000		1,000
	WMG Holdings Corporation		0.000%		12/15/14		1,010		645	A,B
									24,716
Steel Products — 0.6%
	Allegheny Technologies, Inc.		8.375%		12/15/11		1,120		1,243
Storage Facilities — 0.7%
	Mobile Mini, Inc.		9.500%		7/1/13		1,260		1,468
Telecommunications — 5.7%
	AT&T Corp.		9.050%		11/15/11		720		829
	AT&T Corp.		9.750%		11/15/31		680		812

40

Annual Report to Shareholders

Portfolio of Investments — Continued

High Yield Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Telecommunications — Continued
	Cincinnati Bell Inc.		8.375%		1/15/14	$	2,280	$	2,308
	GTE Hawaiian Telephone Company, Inc.		7.000%		2/1/06		300		309
	GTE Hawaiian Telephone Company, Inc.		7.375%		9/1/06		230		240
	MCI Inc.		6.908%		5/1/07		377		386
	MCI Inc.		7.688%		5/1/09		377		390
	MCI Inc.		8.735%		5/1/14		1,333		1,433
	Qwest Communications International Inc.		7.500%		2/15/11		1,080		1,107	A
	Qwest Corporation		7.875%		9/1/11		1,580		1,714	A
	Qwest Services Corporation		14.000%		12/15/10		2,139		2,572	A
									12,100
Telecommunications (Cellular/ Wireless) — 3.3%
	Centennial Communications Corporation		8.125%		2/1/14		1,980		2,034
	Nextel Communications, Inc.		5.950%		3/15/14		1,132		1,172
	Nextel Communications, Inc.		7.375%		8/1/15		495		544
	Rural Cellular Corporation		9.750%		1/15/10		450		407
	Rural Cellular Corporation		8.250%		3/15/12		370		392
	SBA Communications Corporation		8.500%		12/1/12		996		1,016	A
	Ubiquitel Operating Company		9.875%		3/1/11		610		685	A
	US Unwired Inc.		10.000%		6/15/12		800		902	A
									7,152
Transportation — 3.3%
	Continental Airlines, Inc.		7.373%		12/15/15		951		803
	Gulfmark Offshore, Inc.		7.750%		7/15/14		1,110		1,176	A
	Horizon Lines, LLC		9.000%		11/1/12		800		860	A
	Kansas City Southern Railway		9.500%		10/1/08		1,834		2,084
	OMI Corporation		7.625%		12/1/13		956		1,023
	US Airways		8.360%		1/20/19		1,154		1,164
									7,110
Water Utilities — 0.7%
	National Waterworks, Inc.		10.500%		12/1/12		1,247		1,403
Total Corporate Bonds and Notes (Identified Cost — $178,971)									189,872

41

Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Mortgage-Backed Securities — 0.3%
Fixed Rate Securities — 0.3%
	Blackrock Capital Finance L.P. 1996-R1		9.479%		9/25/26	$	806	$	540
	Ocwen Residential Mortgage Corporation 1998-R1		7.000%		10/25/40		310		50
Mortgage-Backed Securities (Identified Cost — $621)									590
Yankee BondsE — 7.5%
Cable — 0.1%
	Rogers Cable Inc.		6.750%		3/15/15		330		337	A
Chemicals — 1.6%
	Rhodia SA		10.250%		6/1/10		1,360		1,530
	Rhodia SA		8.875%		6/1/11		1,980		1,995
									3,525
Foreign Governments — 0.7%
	Federative Republic of Brazil		14.500%		10/15/09		1,070		1,427
Media — 0.8%
	Kabel Deutschland GmbH		10.625%		7/1/14		1,540		1,771	A
Oil and Gas — 0.7%
	Western Oil Sands Inc.		8.375%		5/1/12		1,355		1,584
Paper and Forest Products — 0.3%
	Abitibi Consolidated Inc.		5.990%		6/15/11		536		552	C
Services — 0.3%
	Compagnie Generale de Geophysique S.A.		10.625%		11/15/07		708		746

42

Annual Report to Shareholders

Portfolio of Investments — Continued

High Yield Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares			Value
Yankee Bonds — Continued
Special Purpose — 0.2%
	JSG Funding PLC		15.500%		10/1/13	$	370		$	433
Telecommunications — 1.5%
	Inmarsat Finance II Plc		0.000%		11/15/12		1,591			1,146	A,B
	Inmarsat Finance Plc		7.625%		6/30/12		1,360			1,414
	Nortel Networks Ltd.		6.125%		2/15/06		551			561
										3,121
Telecommunications (Cellular/ Wireless) — 0.8%
	Rogers Wireless Communications Inc.		9.625%		5/1/11		1,088			1,275
	Rogers Wireless Communications Inc.		8.000%		12/15/12		330			349	A
										1,624
Transportation — 0.5%
	Teekay Shipping Corporation		8.875%		7/15/11		915			1,061
Total Yankee Bonds (Identified Cost — $15,153)										16,181
Common Stocks — 0.1%
Engineering and Construction — 0.1%
	Washington Group International, Inc.						8	shs	$	350	F
Food — N.M.
	International Fast Food Corporation						40			0.01	F
Telecommunications — N.M.
	Cincinnati Bell Inc.						0.1			1	F
Total Common Stocks (Identified Cost — $2,847)										351

43

Annual Report to Shareholders

				Par/
		Rate		Shares			Value
Preferred Stocks — 0.8%
	High Voltage Engineering Corporation		12.50%		0.4	shs	$	5	G
	Paxson Communications Corporation		14.25%		0.1			1,165	G,H
	Fannie Mae		7.00%		9			482	C
Total Preferred Stocks (Identified Cost — $2,155)								1,652
Warrants — 0.2%
	American Tower Corporation				1	wts		191	A,F
	Horizon PCS, Inc.				2			0.02	A,F
	Next Generation Network, Inc.				16			0.1	F
	Washington Group International, Series A				5			70	F
	Washington Group International, Series B				6			62	F
	Washington Group International, Series C				3			29	F
Total Warrants (Identified Cost — $310)								352
Total Long-Term Securities (Identified Cost — $200,057)								208,998
Short-Term Securities — 0.7%
Repurchase Agreements — 0.7%
	Deutsche Bank AG
2.2%, dated 12/31/04, to be repurchased at $755 on 1/3/05 (Collateral: $755 Freddie Mac notes, 2.375%, due 4/5/06, value $775)				$	755			755
	Goldman, Sachs & Company
2.22%, dated 12/31/04, to be repurchased at $700 on 1/3/05 (Collateral: $655 Freddie Mac notes, 5.625%, due 3/15/11, value $716)					700			700
Total Short-Term Securities (Identified Cost — $1,455)								1,455
Total Investments — 98.3% (Identified Cost — $201,512)								210,453
Other Assets Less Liabilities — 1.7%								3,608
Net Assets — 100.0%							$	214,061

44

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 23.64% of net assets.

B	Stepped coupon security — A security with a predetermined schedule of interest or dividend rate changes, at which time it begins to accrue interest or pay dividends.
C	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 December 31, 2004.
D	Unit — A security which consists of a bond and warrants to purchase the common stock of the issuer.

E	Yankee Bond — A dollar-denominated bond issued in the U.S. by foreign entities.
F	Non-income producing.

G	Pay-in-Kind (“PIK”) security — A bond in which interest or dividends during the initial few years is paid in additional PIK securities rather than in cash.
H	Private placement.

N.M. — Not meaningful.

See notes to financial statements.

45

Annual Report to Shareholders

Statement of Assets and Liabilities

High Yield Portfolio

December 31, 2004

(Amounts in Thousands)

Assets:
	Investment securities at market value (Identified Cost — $200,057)			$	208,998
	Short-term securities at value (Identified Cost — $1,455)				1,455
			Total investments				$	210,453
	Cash							530
	Receivable for:
		Securities sold						243
		Fund shares sold						226
		Dividend and interest income						3,947
								215,399
Liabilities:
	Payable for:
		Securities purchased						240
		Fund shares repurchased						635
		Income distribution						151
	Due to:
		Manager						119
		Distributor						87
	Accrued expenses							106
								1,338
Net Assets							$	214,061
Net assets consist of:
	Accumulated paid-in-capital applicable to:
			21,862 Primary Class shares outstanding	$	352,359
			929 Institutional Class shares outstanding		8,532
	Under/(over) distributed net investment income				(92	)
	Accumulated net realized gain/(loss) on investments				(155,679	)
	Unrealized appreciation/(depreciation) of investments				8,941
Net Assets							$	214,061
Net Asset Value Per Share:
	Primary Class							$9.39
	Institutional Class							$9.41

See notes to financial statements.

46

Annual Report to Shareholders

Statement of Operations

High Yield Portfolio

For the Year Ended December 31, 2004

(Amounts in Thousands)

Investment Income:
	Dividends			$	192
	Interest				17,485
			Total income				$	17,677
Expenses:
	Management fees				1,410
	Distribution and service fees				1,046
	Audit and legal fees				52
	Custodian fees				122
	Directors’ fees and expenses				21
	Registration fees				24
	Reports to shareholders				37
	Transfer agent and shareholder servicing expense:
		Primary Class			182
		Institutional Class			2
	Other expenses				11
					2,907
		Less compensating balance credits			(4	)
			Total expenses, net of compensating balance credits					2,903
Net Investment Income								14,774
Net Realized and Unrealized Gain/(Loss) on Investments:
	Realized gain/(loss) on investments				2,146
	Change in unrealized appreciation/(depreciation) of investments				4,056
Net Realized and Unrealized Gain/(Loss) on Investments								6,202
Change in Net Assets Resulting From Operations							$	20,976

See notes to financial statements.

47

Annual Report to Shareholders

Statement of Changes in Net Assets

High Yield Portfolio

(Amounts in Thousands)

		For the Years Ended
		12/31/04			12/31/03
Change in Net Assets:
Net investment income		$	14,774		$	15,039
Net realized gain/(loss) on investments			2,146			2,379
Change in unrealized appreciation/(depreciation) on investments			4,056			24,619
Change in net assets resulting from operations			20,976			42,037
Distributions to shareholders from net investment income:
	Primary Class		(14,195	)		(14,885	)
	Institutional Class		(565	)		(389	)
Change in net assets from Fund share transactions:
	Primary Class		(24,402	)		35,499
	Institutional Class		2,040			3,066
Change in net assets			(16,146	)		65,328
Net Assets:
Beginning of year			230,207			164,879
End of year		$	214,061		$	230,207
Under/(over) distributed net investment income		$	(92	)	$	(88	)

See notes to financial statements.

48

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:

		Years Ended December 31,
		2004			2003			2002			2001			2000
Net asset value, beginning of year			$9.10		$	7.96		$	9.22		$	10.18		$	14.97
Investment operations:
	Net investment income		.62			.63			.77			.94			1.32
	Net realized and unrealized gain/(loss) on investments		.29			1.15			(1.26	)		(.94	)		(3.45	)
	Total from investment operations		.91			1.78			(.49	)		—			(2.13	)
Distributions:
	From net investment income		(.62	)		(.64	)		(.77	)		(.96	)		(1.27	)
	From net realized gain on investments		—			—			—			—			(1.39	)
	Total distributions		(.62	)		(.64	)		(.77	)		(.96	)		(2.66	)
Net asset value, end of year			$9.39		$	9.10		$	7.96		$	9.22		$	10.18
Ratios/supplemental data:
	Total return		10.51	%		23.03	%		(5.28)	%		(.13)	%		(16.43)	%
	Expenses to average net assets		1.36	%		1.41	%		1.36	%		1.51	%		1.51	%
	Net investment income to average net assets		6.79	%		7.26	%		9.06	%		9.59	%		9.98	%
	Portfolio turnover rate		109	%		122	%		97	%		130	%		45	%
Net assets, end of year (in thousands)		$	205,314		$	223,773		$	162,175		$	199,214		$	217,769

See notes to financial statements.

49

Annual Report to Shareholders

Institutional Class:

		Years Ended December 31,
		2004			2003			2002			2001			2000
Net asset value, beginning of year			$9.11		$	7.96		$	9.20		$	10.18		$	14.97
Investment operations:
	Net investment income		.66			.66			.78			1.01			1.41
	Net realized and unrealized gain/(loss) on investments		.31			1.15			(1.24	)		(1.00	)		(3.47	)
	Total from investment operations		.97			1.81			(.46	)		.01			(2.06	)
Distributions:
	From net investment income		(.67	)		(.66	)		(.78	)		(.99	)		(1.34	)
	From net realized gain on investments		—			—			—			—			(1.39	)
	Total distributions		(.67	)		(.66	)		(.78	)		(.99	)		(2.73	)
Net asset value, end of year			$9.41		$	9.11		$	7.96		$	9.20		$	10.18
Ratios/supplemental data:
	Total return		11.15	%		23.54	%		(5.00)	%		(.06)	%		(15.99)	%
	Expenses to average net assets		.80	%		.85	%		.82	%		.97	%		1.03	%
	Net investment income to average net assets		7.38	%		7.78	%		9.63	%		10.20	%		10.98	%
	Portfolio turnover rate		109	%		122	%		97	%		130	%		45	%
Net assets, end of year (in thousands)			$8,747		$	6,434		$	2,704		$	1,331		$	673

See notes to financial statements.

50

Annual Report to Shareholders

Management’s Discussion of Fund Performance

Investment Grade Income Portfolio

   Average annual total returns for the Investment Grade Income Portfolio and its benchmark for various periods ended December 31, 2004, are presented below:

		One		Five		Ten		Since
		Year		Years		Years		InceptionA
Investment Grade
	Primary Class		+6.29%		+8.38%		+8.16%		+7.96%
	Institutional Class		+6.85%		+8.94%		N/A		+7.51%
Lehman Credit Bond IndexB			+4.08%		+8.05%		+7.91%		+8.19%

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.

   For the calendar year 2004, the Primary Class of the Fund returned 6.29% versus 4.08% for the Fund’s benchmark, the Lehman Credit Bond Index. The option-adjusted spread of the Index narrowed from +89 basis points (bps)^C to similar duration Treasuries on December 31, 2003, to +75 bps on December 31, 2004. The portfolio’s outperformance is primarily attributable to the manager’s decision to overweight BBB rated issues, which returned 6.25% for the year, as well as favorable overweight and underweight sub-sector and issue selection decisions. Overweights to communications and energy which were up 6.38% and 7.12%, respectively in 2004 and an underweight to non-corporate issuers which were up 4.48% helped relative performance. Duration exposure was neutral to somewhat short for the period, and this detracted from performance since most yields rose by less than forward rates had anticipated.

Western Asset Management Company

January 28, 2005

^A The inception date of the Primary Class is August 7, 1987. The inception date of the Institutional Class is December 1, 1995. Index returns are for periods beginning July 31, 1987.

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.
C	100 basis points = 1%.

51

Annual Report to Shareholders

Expense Example

Investment Grade Income Portfolio

   As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Each example is based on an investment of $1,000 invested on July 1, 2004, and held through December 31, 2004.

Actual Expenses

   The first line for each class in the table below provides information about actual account values and actual expenses for each class. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes

   The second line for each class in the table below provides information about hypothetical account values and hypothetical expenses based on the relevant class’s actual expense ratios and an assumed rate of return of 5% per year before expenses, which is not the class’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples for the relevant class that appear in the shareholder reports of other funds.

		Beginning		Ending		Expenses PaidA
		Account		Account		During the		Annualized
		Value		Value		Period 7/1/04 to		Expense
		7/1/04		12/31/04		12/31/04		Ratio
Primary Class:
	Actual	$	1,000.00	$	1,067.70	$	5.21		1.00%
	Hypothetical (5% return before expenses)		1,000.00		1,020.16		5.09
Institutional Class:
	Actual	$	1,000.00	$	1,071.60	$	2.45		0.47%
	Hypothetical (5% return before expenses)		1,000.00		1,022.84		2.40

^A These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (184), and divided by 365.

52

Annual Report to Shareholders

Performance Information

Investment Grade Income 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 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 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.

53

Annual Report to Shareholders

Growth of a $10,000 Investment — Primary Class

Periods Ended December 31, 2004

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+6.29%		+6.29%
Five Years		+49.54%		+8.38%
Ten Years		+119.16%		+8.16%

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.

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.

^A 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.

54

Annual Report to Shareholders

Performance Information — Continued

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

Periods Ended December 31, 2004

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+6.85%		+6.85%
Five Years		+53.42%		+8.94%
Life of Class*		+93.01%		+7.51%
*Inception date: December 1, 1995

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 call 1-888-425-6432. 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.

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.

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

55

Annual Report to Shareholders

Portfolio Composition (As of December 31, 2004)

Debt Ratings^D (As a percentage of the portfolio)

Maturity Schedule (As a percentage of the portfolio)

^D Source: Standard & Poor’s

56

Annual Report to Shareholders

Portfolio of Investments

Investment Grade Income Portfolio

December 31, 2004
(Amounts in Thousands)

				Maturity		Par/
		Rate		Date		Shares		Value
Long-Term Securities — 97.5%
Corporate Bonds and Notes — 72.9%
Aerospace/ Defense — 1.3%
	General Dynamics Corporation		3.000%		5/15/08	$	525	$	513
	L-3 Communications Corp.		7.625%		6/15/12		1,000		1,098
	Lockheed Martin Corporation		8.500%		12/1/29		760		1,040
	Northrop Grumman Corporation		4.079%		11/16/06		680		687
	Northrop Grumman Corporation		7.750%		2/15/31		170		218
	Raytheon Company		6.150%		11/1/08		489		526
	Raytheon Company		5.375%		4/1/13		400		416
	Raytheon Company		6.400%		12/15/18		840		927
									5,425
Auto Parts and Equipment — 0.2%
	American Axle & Manufacturing Inc.		5.250%		2/11/14		800		768
	Lear Corporation		7.960%		5/15/05		231		235
									1,003
Automotive — 0.6%
	Ford Motor Company		7.450%		7/16/31		725		729
	Ford Motor Company		8.900%		1/15/32		370		421
	General Motors Corporation		8.250%		7/15/23		650		677
	General Motors Corporation		8.375%		7/15/33		660		684
									2,511
Banking and Finance — 9.9%
	Boeing Capital Corporation		6.500%		2/15/12		1,000		1,121
	Boeing Capital Corporation		5.800%		1/15/13		1,500		1,618
	Countrywide Home Loans, Inc.		2.875%		2/15/07		1,320		1,297
	Countrywide Home Loans, Inc.		3.250%		5/21/08		1,200		1,173
	Ford Motor Credit Company		6.875%		2/1/06		250		257
	Ford Motor Credit Company		6.500%		1/25/07		6,950		7,227
	Ford Motor Credit Company		7.375%		10/28/09		2,970		3,204
	Ford Motor Credit Company		7.250%		10/25/11		2,070		2,220
	Ford Motor Credit Company		7.000%		10/1/13		2,730		2,894
	General Motors Acceptance Corporation		3.185%		5/18/06		1,725		1,717	A

57

Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Banking and Finance — Continued
	General Motors Acceptance Corporation		6.125%		8/28/07	$	3,000	$	3,089
	General Motors Acceptance Corporation		5.625%		5/15/09		590		590
	General Motors Acceptance Corporation		6.875%		9/15/11		750		769
	General Motors Acceptance Corporation		0.000%		6/15/15		2,700		1,276	B
	Household Finance Corporation		4.125%		11/16/09		1,325		1,318
	John Deere Capital Corporation		4.500%		8/22/07		495		506
	MBNA America Bank		5.375%		1/15/08		1,200		1,253
	Mizuho Financial Group, Inc.		5.790%		4/15/14		2,595		2,726	C
	National Rural Utilities Cooperative Finance Corporation		7.250%		3/1/12		1,700		1,962
	SB Treasury Company LLC		9.400%		12/29/49		840		968	C
	Toyota Motor Credit Corporation		5.500%		12/15/08		1,000		1,059
	Wells Fargo & Company		5.125%		2/15/07		2,600		2,690
	Wells Fargo & Company		5.000%		11/15/14		90		91
									41,025
Banks — 4.4%
	Bank of America Corporation		3.375%		2/17/09		1,500		1,470
	Bank of America Corporation		7.400%		1/15/11		1,785		2,068
	Bank of America Corporation		4.750%		8/15/13		470		469
	Bank One Corporation		4.125%		9/1/07		2,130		2,164
	BankAmerica Capital		2.640%		1/15/27		585		565	A
	CBA Capital Trust I		5.805%		6/30/15		3,510		3,654	C
	Chase Capital II		2.660%		2/1/27		1,980		1,860	A
	Key Bank NA		5.800%		7/1/14		535		567
	UnionBanCal Corporation		5.250%		12/16/13		785		796
	Wachovia Bank NA		7.800%		8/18/10		580		681
	Wachovia Corporation		3.625%		2/17/09		2,400		2,372
	Washington Mutual, Inc.		4.200%		1/15/10		700		697
	Washington Mutual, Inc.		4.625%		4/1/14		1,000		956
									18,319

58

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	$	43
	American Standard, Inc.		7.625%		2/15/10		5		5
									48
Cable — 2.0%
	Comcast Cable Communications, Inc.		6.750%		1/30/11		960		1,078
	Comcast Corporation		7.050%		3/15/33		1,800		2,060
	Cox Communications, Inc.		7.125%		10/1/12		2,875		3,223
	CSC Holdings Inc.		7.625%		7/15/18		1,500		1,586
	Tele-Communications, Inc.		7.125%		2/15/28		180		203
									8,150
Casino Resorts — 0.2%
	Harrah’s Operating Company, Inc.		7.875%		12/15/05		500		520
	Harrah’s Operating Company, Inc.		5.500%		7/1/10		410		424
									944
Chemicals — 0.7%
	E. I. du Pont de Nemours and Company		4.875%		4/30/14		1,100		1,123
	The Dow Chemical Company		6.000%		10/1/12		750		819
	The Dow Chemical Company		7.375%		11/1/29		800		971
									2,913
Computer Services and Systems — 1.2%
	Electronic Data Systems Corporation		7.125%		10/15/09		530		583
	Electronic Data Systems Corporation		6.500%		8/1/13		500		528
	Electronic Data Systems Corporation		7.450%		10/15/29		570		616
	Hewlett-Packard Company		3.625%		3/15/08		1,500		1,493
	International Business Machines Corporation		4.750%		11/29/12		1,750		1,787
									5,007
Consumer Products — 0.3%
	The Clorox Company		5.000%		1/15/15		350		356	C
	The Procter & Gamble Company		4.300%		8/15/08		1,000		1,025
									1,381

59

Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Diversified Financial Services — 5.8%
	Associates Corporation of North America		8.150%		8/1/09	$	775	$	905
	Capital One Bank		4.875%		5/15/08		150		154
	Capital One Financial Corporation		8.750%		2/1/07		400		439
	Capital One Financial Corporation		7.125%		8/1/08		340		373
	CIT Group Inc.		3.875%		11/3/08		1,065		1,056
	Citigroup Inc.		5.500%		8/9/06		1,000		1,034
	Citigroup Inc.		5.000%		3/6/07		4,800		4,954
	Citigroup Inc.		5.625%		8/27/12		1,600		1,704
	General Electric Capital Corporation		3.500%		5/1/08		4,140		4,109
	General Electric Capital Corporation		3.750%		12/15/09		4,900		4,822
	General Electric Capital Corporation		5.450%		1/15/13		2,000		2,111
	General Electric Capital Corporation		6.750%		3/15/32		5		6
	IBJ Preferred Capital Corp. LLC		8.790%		12/29/49		1,520		1,722	C
	iStar Financial Inc.		6.000%		12/15/10		580		612
									24,001
Diversified Services — 0.3%
	SPX Corporation		7.500%		1/1/13		1,000		1,085
Drug and Grocery Store Chains — 0.5%
	Kroger Company		8.000%		9/15/29		1,000		1,245
	Safeway Inc.		5.800%		8/15/12		750		792
									2,037
Electric — 4.7%
	AEP Texas Central Company		5.500%		2/15/13		1,060		1,101
	American Electric Power Company, Inc.		6.125%		5/15/06		965		1,000
	American Electric Power Company, Inc.		5.250%		6/1/15		350		353
	Commonwealth Edison Company		6.150%		3/15/12		560		616
	Dominion Resources, Inc.		5.125%		12/15/09		490		507
	Dominion Resources, Inc.		5.700%		9/17/12		590		625
	FirstEnergy Corp.		6.450%		11/15/11		2,285		2,483
	FirstEnergy Corp.		7.375%		11/15/31		4,440		5,070

60

Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Electric — Continued
	Niagara Mohawk Power Corporation		7.750%		10/1/08	$	1,010	$	1,136
	Oncor Electric Delivery Company		7.000%		9/1/22		500		570
	Southern California Edison Company		8.000%		2/15/07		950		1,035
	System Energy Resources, Inc.		4.875%		10/1/07		1,020		1,042
	Tampa Electric Company		6.375%		8/15/12		380		419
	The Cleveland Electric Illuminating Company		5.650%		12/15/13		940		975
	The Cleveland Electric Illuminating Company		7.880%		11/1/17		850		1,046
	The Detroit Edison Company		5.200%		10/15/12		1,260		1,309
									19,287
Energy — 3.6%
	Alabama Power Company		3.125%		5/1/08		920		901
	DTE Energy Company		6.375%		4/15/33		350		365
	Duke Energy Corporation		3.750%		3/5/08		1,020		1,019
	Duke Energy Corporation		5.625%		11/30/12		270		284
	Exelon Corporation		6.750%		5/1/11		2,000		2,237
	MidAmerican Energy Holdings Company		5.875%		10/1/12		750		795
	Pacific Gas and Electric Company		2.720%		4/3/06		832		833	A
	Pacific Gas and Electric Company		6.050%		3/1/34		4,270		4,435
	Sempra Energy		2.809%		5/21/08		1,685		1,679	A
	TXU Corp.		6.375%		6/15/06		100		104
	TXU Energy Co.		2.838%		1/17/06		355		356	A,C
	TXU Energy Co.		7.000%		3/15/13		930		1,039
	Xcel Energy, Inc.		7.000%		12/1/10		900		1,014
									15,061
Environmental Services — 0.6%
	Republic Services, Inc.		6.750%		8/15/11		1,340		1,505
	Waste Management, Inc.		6.375%		11/15/12		310		343
	Waste Management, Inc.		7.375%		5/15/29		690		811
									2,659

61

Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Food, Beverage and Tobacco — 3.3%
	Altria Group, Inc.		6.375%		2/1/06	$	490	$	502
	Altria Group, Inc.		7.000%		11/4/13		1,385		1,501
	Coca-Cola Enterprises Inc.		5.250%		5/15/07		980		1,019
	Kellogg Company		6.600%		4/1/11		1,000		1,120
	Kellogg Company		7.450%		4/1/31		650		819
	Kraft Foods Inc.		4.125%		11/12/09		3,850		3,829
	Kraft Foods Inc.		6.250%		6/1/12		210		231
	Kraft Foods Inc.		6.500%		11/1/31		1,050		1,158
	R.J. Reynolds Tobacco Holdings, Inc.		7.750%		5/15/06		1,280		1,338
	R.J. Reynolds Tobacco Holdings, Inc.		7.875%		5/15/09		860		922
	The Pepsi Bottling Group, Inc.		7.000%		3/1/29		340		410
	Tyson Foods, Inc.		7.000%		1/15/28		800		865
									13,714
Gas and Pipeline Utilities — 1.5%
	CenterPoint Energy Resources Corp.		7.875%		4/1/13		1,010		1,200
	Dynegy Holdings Inc.		8.750%		2/15/12		1,690		1,770
	Tennessee Gas Pipeline Company		8.375%		6/15/32		1,000		1,128
	The Williams Companies, Inc.		7.625%		7/15/19		2,000		2,200
									6,298
Health Care — 1.0%
	Tenet Healthcare Corporation		7.375%		2/1/13		2,310		2,241
	Tenet Healthcare Corporation		6.875%		11/15/31		750		639
	WellPoint Inc.		5.000%		12/15/14		1,330		1,326	C
									4,206
Homebuilding — 0.2%
	Centex Corporation		5.125%		10/1/13		420		420
	Pulte Homes, Inc.		6.250%		2/15/13		385		410
									830
Insurance — 0.3%
	Loews Corporation		7.000%		10/15/23		1,000		1,013

62

Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Investment Banking/ Brokerage — 5.7%
	J.P. Morgan Chase & Co.		5.125%		9/15/14	$	6,175	$	6,215
	Lehman Brothers Holdings Inc.		6.250%		5/15/06		2,000		2,081
	Lehman Brothers Holdings Inc.		4.800%		3/13/14		800		789
	Merrill Lynch & Co., Inc.		3.375%		9/14/07		1,345		1,337
	Merrill Lynch & Co., Inc.		6.000%		2/17/09		800		859
	Merrill Lynch & Co., Inc.		5.000%		1/15/15		1,420		1,414
	Morgan Stanley		5.800%		4/1/07		2,600		2,726
	The Bear Stearns Companies Inc.		4.000%		1/31/08		1,600		1,612
	The Goldman Sachs Group, Inc.		4.750%		7/15/13		4,490		4,443
	The Goldman Sachs Group, Inc.		6.345%		2/15/34		2,025		2,109
									23,585
Machinery — 0.3%
	Case New Holland Incorporated		9.250%		8/1/11		1,000		1,113	C
Manufacturing (Diversified) — 0.1%
	The Gillette Company		2.875%		3/15/08		410		401
Media — 2.9%
	AOL Time Warner Inc.		6.150%		5/1/07		1,390		1,470
	Clear Channel Communications, Inc.		4.400%		5/15/11		1,210		1,175
	EchoStar DBS Corporation		5.256%		10/1/08		500		518	A
	Liberty Media Corporation		3.990%		9/17/06		2,335		2,364	A
	Liberty Media Corporation		8.500%		7/15/29		340		394
	Liberty Media Corporation		8.250%		2/1/30		120		136
	News America, Inc.		6.550%		3/15/33		965		1,027
	Time Warner Entertainment Company, L.P.		8.375%		7/15/33		855		1,105
	Time Warner Inc.		6.875%		5/1/12		1,260		1,435
	Time Warner Inc.		7.700%		5/1/32		1,740		2,128
	Viacom Inc.		7.700%		7/30/10		90		105
	Viacom Inc.		5.625%		8/15/12		240		257
									12,114

63

Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Media and Entertainment — 0.3%
	The Walt Disney Company		6.200%		6/20/14	$	1,280	$	1,417
Medical Care Facilities — 1.0%
	HCA, Inc.		6.300%		10/1/12		1,790		1,815
	HCA, Inc.		5.750%		3/15/14		2,280		2,209
									4,024
Metals and Mining — 0.5%
	Alcoa Inc.		5.375%		1/15/13		1,800		1,893
Oil and Gas — 4.3%
	Amerada Hess Corporation		7.300%		8/15/31		3,740		4,173
	Apache Corporation		6.250%		4/15/12		1,150		1,287
	Conoco Inc.		6.950%		4/15/29		820		968
	ConocoPhillips		4.750%		10/15/12		2,810		2,865
	Devon Energy Corporation		7.950%		4/15/32		1,520		1,942
	El Paso Corporation		7.800%		8/1/31		1,660		1,594
	El Paso Corporation		7.750%		1/15/32		340		325
	Ocean Energy Inc.		4.375%		10/1/07		965		979
	Panhandle Eastern Pipe Line Company		4.800%		8/15/08		1,170		1,195
	Pemex Project Funding Master Trust		8.500%		2/15/08		100		113
	Pride International, Inc.		7.375%		7/15/14		800		874
	Valero Energy Corporation		6.875%		4/15/12		565		641
	XTO Energy, Inc.		6.250%		4/15/13		745		815
									17,771
Paper and Forest Products — 1.1%
	International Paper Company		5.500%		1/15/14		1,000		1,033
	MeadWestvaco Corporation		6.850%		4/1/12		1,080		1,221
	Weyerhaeuser Company		6.125%		3/15/07		331		348
	Weyerhaeuser Company		6.750%		3/15/12		1,070		1,206
	Weyerhaeuser Company		7.375%		3/15/32		720		854
									4,662

64

Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Pharmaceuticals — 0.4%
	Bristol-Myers Squibb Company		4.750%		10/1/06	$	300	$	307
	Bristol-Myers Squibb Company		5.750%		10/1/11		1,160		1,242
									1,549
Photo Equipment and Supplies — 0.4%
	Eastman Kodak Company		3.625%		5/15/08		975		950
	Eastman Kodak Company		7.250%		11/15/13		500		539
									1,489
Real Estate — 0.4%
	EOP Operating Limited Partnership		6.750%		2/15/12		1,500		1,670
Retail — 0.6%
	Target Corporation		5.875%		3/1/12		860		936
	Toys “R” Us, Inc.		7.875%		4/15/13		1,000		993
	Wal-Mart Stores, Inc.		6.875%		8/10/09		475		533
									2,462
Special Purpose — 7.7%
	Ahold Finance USA, Inc.		8.250%		7/15/10		960		1,087
	American Honda Finance Corporation		3.850%		11/6/08		960		957	C
	Anadarko Finance Company		6.750%		5/1/11		970		1,092
	Arch Western Finance, LLC		6.750%		7/1/13		1,000		1,033
	Caterpillar Financial Services Corporation		4.500%		6/15/09		1,040		1,062
	ChevronTexaco Capital Company		3.500%		9/17/07		1,000		1,004
	Conoco Funding Company		5.450%		10/15/06		1,250		1,295
	DaimlerChrysler NA Holding Corporation		6.400%		5/15/06		800		832
	DaimlerChrysler NA Holding Corporation		2.940%		9/10/07		1,520		1,525	A
	DaimlerChrysler NA Holding Corporation		4.050%		6/4/08		470		469
	DaimlerChrysler NA Holding Corporation		7.200%		9/1/09		260		289

65

Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Special Purpose — Continued
	DaimlerChrysler NA Holding Corporation		7.300%		1/15/12	$	735	$	835
	DaimlerChrysler NA Holding Corporation		6.500%		11/15/13		290		315
	DaimlerChrysler NA Holding Corporation		8.500%		1/18/31		1,800		2,249
	Duke Capital Corporation		6.250%		2/15/13		340		367
	Fosters Finance Corporation		4.875%		10/1/14		840		835	C
	NiSource Finance Corp.		3.200%		11/1/06		985		976
	Rabobank Capital Funding Trust III		5.254%		12/31/16		1,020		1,014	C
	Sprint Capital Corporation		4.780%		8/17/06		1,055		1,075	D
	Sprint Capital Corporation		6.000%		1/15/07		700		733
	Sprint Capital Corporation		8.375%		3/15/12		1,520		1,852
	Sprint Capital Corporation		8.750%		3/15/32		2,170		2,891
	TCI Communications Financing III		9.650%		3/31/27		3,350		3,874
	Unilever Capital Corporation		7.125%		11/1/10		480		552
	Verizon Global Funding Corp.		6.125%		6/15/07		2,065		2,187
	Verizon Global Funding Corp.		7.750%		6/15/32		375		468
	Verizon Wireless Capital LLC		5.375%		12/15/06		800		829
									31,697
Telecommunications — 1.5%
	BellSouth Corporation		4.750%		11/15/12		830		835
	GTE Hawaiian Telephone Company, Inc.		7.000%		2/1/06		750		773
	Qwest Corporation		5.625%		11/15/08		550		559
	SBC Communications Inc.		5.100%		9/15/14		1,910		1,928
	Verizon New York Inc.		6.875%		4/1/12		1,820		2,043
									6,138
Telecommunications (Cellular/ Wireless) — 1.8%
	AT&T Wireless Services Inc.		7.500%		5/1/07		1,500		1,629
	AT&T Wireless Services Inc.		8.125%		5/1/12		390		472
	AT&T Wireless Services Inc.		8.750%		3/1/31		980		1,321
	Cingular Wireless LLC		5.625%		12/15/06		800		831

66

Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Telecommunications (Cellular/ Wireless) — Continued
	Motorola, Inc.		7.625%		11/15/10	$	850	$	986
	Nextel Communications, Inc.		5.950%		3/15/14		469		485
	Nextel Communications, Inc.		7.375%		8/1/15		1,600		1,760
									7,484
Transportation — 1.3%
	Burlington Northern Railroad Company		6.960%		3/22/09		230		242
	Burlington Northern Railroad Company		7.330%		6/23/10		167		167
	Continental Airlines, Inc.		6.545%		2/2/19		169		167
	Continental Airlines, Inc.		7.256%		3/15/20		576		590
	CSX Transportation, Inc.		7.875%		5/15/43		252		315
	Delta Air Lines, Inc.		7.570%		11/18/10		400		395
	Delta Air Lines, Inc.		6.718%		1/2/23		746		778
	Norfolk Southern Corporation		7.875%		5/15/43		348		445
	Northwest Airlines Corporation		7.575%		3/1/19		196		203
	Union Pacific Corporation		4.875%		1/15/15		1,740		1,724
	United Airlines, Inc.		7.783%		1/1/14		245		217
									5,243
Total Corporate Bonds and Notes (Identified Cost — $293,660)									301,629
U.S. Government and Agency Obligations — 1.6%
Fixed Rate Securities — 0.1%
	Tennessee Valley Authority		5.375%		11/13/08		150		159
	United States Treasury Notes		3.000%		11/15/07		180		179
									338

67

Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
U.S. Government and Agency Obligations — Continued
Indexed SecuritiesE — 1.5%
	United States Treasury Inflation-Protected Security		0.875%		4/15/10	$	4,272	$	4,230
	United States Treasury Inflation-Protected Security		2.000%		7/15/14		1,732		1,787
									6,017
Total U.S. Government and Agency Obligations (Identified Cost — $6,322)									6,355
U.S. Government Agency Mortgage-Backed Securities — N.M.
Fixed Rate Securities — N.M.
	Fannie Mae		8.000%		4/25/06		13		13
Indexed SecuritiesA — N.M.
	Freddie Mac		3.783%		9/1/24		111		114
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost — $124)									127
Yankee BondsF — 22.8%
Banking and Finance — 1.0%
	Corporacion Andina de Fomento		2.460%		1/26/07		1,260		1,263	A
	HBOS Capital Funding LP		6.071%		6/30/14		1,490		1,597	C
	HBOS Treasury Services plc		4.000%		9/15/09		1,080		1,077	C
									3,937
Banks — 0.8%
	ABN Amro Bank Nv		4.650%		6/4/18		1,530		1,440
	ING Bank N.V.		5.125%		5/1/15		500		501	C
	Royal Bank of Scotland Group plc		8.817%		3/31/05		1,500		1,521
									3,462
Cable — 0.2%
	British Sky Broadcasting Group plc		6.875%		2/23/09		870		954
Containers and Packaging — 0.3%
	Cascades Inc.		7.250%		2/15/13		1,000		1,060

68

Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Yankee Bonds — Continued
Diversified Financial Services — 0.7%
	Encana Holdings Finance Corp.		5.800%		5/1/14	$	2,725	$	2,905
Electric — 1.0%
	Empresa Nacional de Electricidad S.A.		8.500%		4/1/09		1,805		2,054
	Hydro-Quebec		7.500%		4/1/16		1,625		2,005
									4,059
Foreign Governments — 7.8%
	Federative Republic of Brazil		3.125%		4/15/09		132		131	A
	Federative Republic of Brazil		14.500%		10/15/09		280		373
	Federative Republic of Brazil		12.000%		4/15/10		580		716
	Federative Republic of Brazil		3.125%		4/15/12		379		361	A
	Federative Republic of Brazil		3.125%		4/15/12		582		555	A
	Federative Republic of Brazil		8.000%		4/15/14		1,437		1,470
	Federative Republic of Brazil		11.000%		8/17/40		410		487
	Province of Nova Scotia		5.750%		2/27/12		1,500		1,630
	Province of Ontario		3.500%		9/17/07		1,000		998
	Province of Ontario		5.125%		7/17/12		450		470
	Quebec Province		7.500%		9/15/29		460		598
	Republic of Chile		2.519%		1/28/08		250		252	A
	Republic of Colombia		10.500%		7/9/10		360		420
	Republic of Colombia		11.750%		2/25/20		510		655
	Republic of Italy		3.750%		12/14/07		1,490		1,493
	Republic of Panama		9.625%		2/8/11		120		142
	Republic of Panama		10.750%		5/15/20		460		598
	Republic of Panama		9.375%		1/16/23		260		300
	Republic of Peru		5.000%		3/7/17		933		891	D
	Republic of Peru		5.000%		3/7/17		220		211	C,D
	Republic of Peru		8.750%		11/21/33		210		228
	Republic of South Africa		7.375%		4/25/12		650		744
	Republic of South Africa		6.500%		6/2/14		700		767
	Russian Federation		8.250%		3/31/10		80		88
	Russian Federation		5.000%		3/31/30		3,920		4,055	D

69

Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Yankee Bonds — Continued
Foreign Governments — Continued
	United Mexican States		8.375%		1/14/11	$	6,375	$	7,487
	United Mexican States		11.500%		5/15/26		1,100		1,683
	United Mexican States		7.500%		4/8/33		4,032		4,355
									32,158
Insurance — 0.8%
	Axa		8.600%		12/15/30		1,630		2,141
	Oil Insurance Ltd		5.150%		8/15/33		585		591	C
	XL Capital Ltd.		5.250%		9/15/14		700		701
									3,433
Manufacturing (Diversified) — 1.0%
	Tyco International Group SA		6.375%		2/15/06		1,900		1,963
	Tyco International Group SA		6.375%		10/15/11		250		276
	Tyco International Group SA		7.000%		6/15/28		554		644
	Tyco International Group SA		6.875%		1/15/29		1,051		1,204
									4,087
Oil and Gas — 1.5%
	Gazprom		9.625%		3/1/13		150		177	C
	Gazprom		9.625%		3/1/13		50		59
	Petrobras International Finance Company (PIFCO)		9.750%		7/6/11		905		1,086
	Petroliam Nasional Berhad		7.625%		10/15/26		610		745	C
	YPF Sociedad Anonima		10.000%		11/2/28		3,500		4,200
									6,267
Special Purpose — 3.5%
	Aries Vermogensverwaltungs		9.600%		10/25/14		1,000		1,230	C
	Deutsche Telekom International Finance BV		8.750%		6/15/30		1,400		1,849
	Deutsche Telekom International Finance BV		9.250%		6/1/32		670		953
	Diageo Capital plc		3.500%		11/19/07		630		628
	Diageo Capital plc		3.375%		3/20/08		120		119
	General Motors Nova Scotia Finance Company		6.850%		10/15/08		1,160		1,210

70

Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares			Value
Yankee Bonds — Continued
Special Purpose — Continued
	HSBC Capital Funding LP		4.610%		6/27/13	$	760		$	734	C
	HSBC Holdings plc		5.250%		12/12/12		4,400			4,561
	Petronas Capital Ltd.		7.875%		5/22/22		770			961	C
	Telefonica Europe BV		8.250%		9/15/30		800			1,073
	UFJ Finance Aruba AEC		6.750%		7/15/13		920			1,025
										14,343
Telecommunications — 3.3%
	British Telecommunications plc		8.375%		12/15/10		900			1,081
	British Telecommunications plc		8.875%		12/15/30		420			562
	France Telecom SA		8.500%		3/1/11		3,000			3,579
	France Telecom SA		9.250%		3/1/31		340			461
	INTELSAT		6.500%		11/1/13		1,365			1,242
	Koninklijke KPN NV		8.000%		10/1/10		990			1,169
	Tele Norte Leste Participacoes S.A.		8.000%		12/18/13		1,080			1,112
	Telecom Italia S.p.A.		5.250%		11/15/13		2,025			2,047
	Telecom Italia S.p.A		4.950%		9/30/14		1,860			1,822	C
	Telus Corporation		7.500%		6/1/07		700			761
										13,836
Telecommunications (Cellular/ Wireless) — 0.2%
	Rogers Wireless Communications Inc.		6.375%		3/1/14		1,000			990
Transportation — 0.3%
	Canadian Pacific Railway Limited		7.125%		10/15/31		1,000			1,194
Utilities — 0.4%
	United Utilities plc		5.375%		2/1/19		1,550			1,529
Total Yankee Bonds (Identified Cost — $86,166)										94,214
Preferred Stocks — 0.2%
	Fannie Mae		7.000%				16	shs		918	A
Total Preferred Stocks (Identified Cost — $810)										918
Total Long-Term Securities (Identified Cost — $387,082)										403,243

71

Annual Report to Shareholders

Short-Term Securities — 1.0%
U.S. Government and Agency Obligations — 0.1%
Fixed Rate Securities — 0.1%
	Fannie Mae	0.000%	4/1/05	$	385	$	383	B,G
Repurchase Agreements — 0.9%
	Deutsche Bank AG
2.2%, dated 12/31/04, to be repurchased at $1,929 on 1/3/05 (Collateral: $1,975 Freddie Mac notes, 2.375%, due 4/5/06, value $1,980)					1,929		1,929
	Goldman, Sachs & Company
2.22%, dated 12/31/04, to be repurchased at $1,800 on 1/3/05 (Collateral: $1,840 Federal Home Loan Bank zero coupon bonds, due 1/28/05, value $999)					1,800		1,800
							3,729
Total Short-Term Securities (Identified Cost — $4,112)							4,112
Total Investments — 98.5% (Identified Cost — $391,194)							407,355
Other Assets Less Liabilities — 1.5%							6,222
Net Assets — 100.0%						$	413,577

72

Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

			Actual		Appreciation/
		Expiration	Contracts		(Depreciation)
Futures Contracts PurchasedH
	U.S. Treasury Bond Futures	March 2005		15	$	11
Futures Contracts WrittenH
	U.S. Treasury Note Futures	March 2005		62	$	17
	U.S. Treasury Note Futures	March 2005		257		12
					$	29

^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 December 31, 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 5.97% of net assets.
D	Stepped coupon security — A security with a predetermined schedule of interest or dividend rate changes.

E	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.
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.

73

Annual Report to Shareholders

Statement of Assets and Liabilities

Investment Grade Income Portfolio

December 31, 2004

(Amounts in Thousands)

Assets:
	Investment securities at market value (Identified Cost — $387,082)			$	403,243
	Short-term securities at value (Identified Cost — $4,112)				4,112
			Total investments				$	407,355
	Cash							464
	Receivable for:
		Fund shares sold						1,114
		Interest						5,988
	Other assets							1
								414,922
Liabilities:
	Payable for:
		Fund shares repurchased						786
		Futures variation margin						66
		Income distribution						82
	Due to:
		Manager						124
		Distributor						170
	Accrued expenses							117
								1,345
Net Assets							$	413,577
Net assets consist of:
	Accumulated paid-in capital applicable to:
			37,316 Primary Class shares outstanding	$	386,368
			944 Institutional Class shares outstanding		10,011
	Under/(over) distributed net investment income				(117	)
	Accumulated net realized gain/(loss) on investments, options and futures				1,114
	Unrealized appreciation/(depreciation) of investments, options and futures				16,201
Net Assets							$	413,577
Net Asset Value Per Share:
	Primary Class							$10.81
	Institutional Class							$10.82

See notes to financial statements.

74

Annual Report to Shareholders

Statement of Operations

Investment Grade Income Portfolio

For the Year Ended December 31, 2004

(Amounts in Thousands)

Investment Income:
	Interest							$	22,425
Expenses:
	Management fees				$	2,458
	Distribution and service fees					2,007
	Audit and legal fees					64
	Custodian fees					147
	Directors’ fees and expenses					32
	Registration fees					44
	Reports to shareholders					47
	Transfer agent and shareholder servicing expense:
		Primary Class				320
		Institutional Class				4
	Other expenses					34
						5,157
		Less: Fees waived				(1,102	)
				Compensating balance credits		(2	)
			Total expenses, net of waivers and compensating balance credits						4,053
Net Investment Income									18,372
Net Realized and Unrealized Gain/(Loss) on Investments:
	Realized gain/(loss) on:
		Investments				8,966
		Futures				846
									9,812
	Change in unrealized appreciation/(depreciation) of investments, options and futures								(3,555	)
Net Realized and Unrealized Gain/(Loss) on Investments									6,257
Change in Net Assets Resulting From Operations								$	24,629

See notes to financial statements.

75

Annual Report to Shareholders

Statement of Changes in Net Assets

Investment Grade Income Portfolio

(Amounts in Thousands)

			For the Years Ended
			12/31/04			12/31/03
Change in Net Assets:
Net investment income			$	18,372		$	18,069
Net realized gain/(loss) on investments, options and futures				9,812			6,707
Change in unrealized appreciation/(depreciation) of investments, options, and futures				(3,555	)		11,745
Change in net assets resulting from operations				24,629			36,521
Distributions to shareholders:
	From net investment income:
		Primary Class		(17,963	)		(18,075	)
		Institutional Class		(411	)		(209	)
	From net realized gain on investments:
		Primary Class		(9,054	)		(2,770	)
		Institutional Class		(220	)		(36	)
Change in net assets from Fund share transactions:
		Primary Class		(2,354	)		58,641
		Institutional Class		4,370			2,909
Change in net assets				(1,003	)		76,981
Net Assets:
Beginning of year				414,580			337,599
End of year			$	413,577		$	414,580
Under/(over) distributed net investment income			$	(117	)	$	(116	)

See notes to financial statements.

76

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:

		Years Ended December 31,
		2004			2003			2002			2001			2000
Net asset value, beginning of year		$	10.88		$	10.42		$	10.10		$	9.97		$	9.78
Investment operations:
	Net investment income		.49	A		.50	A		.54	A		.60	A		.67	A
	Net realized and unrealized gain/(loss) on investments, options and futures		.18			.53			.32			.14			.19
	Total from investment operations		.67			1.03			.86			.74			.86
Distributions:
	From net investment income		(.49	)		(.50	)		(.54	)		(.61	)		(.67	)
	From net realized gain on investments		(.25	)		(.07	)		—			—			—
	Total distributions		(.74	)		(.57	)		(.54	)		(.61	)		(.67	)
Net asset value, end of year		$	10.81		$	10.88		$	10.42		$	10.10		$	9.97
Ratios/supplemental data:
	Total return		6.29	%		10.16	%		8.82	%		7.52	%		9.16	%
	Expenses to average net assets		1.00	%A		1.00	%A		1.00	%A		1.00	%A		1.00	%A
	Net investment income to average net assets		4.47	%A		4.62	%A		5.32	%A		5.90	%A		6.82	%A
	Portfolio turnover rate		75	%		78	%		131	%		131	%		94	%
Net assets, end of year (in thousands)		$	403,361		$	408,685		$	334,763		$	255,298		$	194,987

^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 years ended December 31, 2004, 1.27%; 2003, 1.28%; 2002, 1.30%; 2001, 1.27%; and 2000, 1.31%.

See notes to financial statements.

77

Annual Report to Shareholders

Institutional Class:

		Years Ended December 31,
		2004			2003			2002			2001			2000
Net asset value, beginning of year		$	10.89		$	10.43		$	10.11		$	9.97		$	9.79
Investment operations:
	Net investment income		.54	B		.55	B		.59	B		.66	B		.71	B
	Net realized and unrealized gain/(loss) on investments, options and futures		.17			.53			.31			.14			.19
	Total from investment operations		.71			1.08			.90			.80			.90
Distributions:
	From net investment income		(.53	)		(.55	)		(.58	)		(.66	)		(.72	)
	From net realized gain on investments		(.25	)		(.07	)		—			—			—
	Total distributions		(.78	)		(.62	)		(.58	)		(.66	)		(.72	)
Net asset value, end of year		$	10.82		$	10.89		$	10.43		$	10.11		$	9.97
Ratios/supplemental data:
	Total return		6.85	%		10.71	%		9.38	%		8.16	%		9.63	%
	Expenses to average net assets		.47	%B		.50	% B		.48	% B		.47	% B		.48	% B
	Net investment income to average net assets		5.02	% B		5.13	% B		5.85	% B		6.50	% B		7.32	% B
	Portfolio turnover rate		75	%		78	%		131	%		131	%		94	%
Net assets, end of year (in thousands)		$	10,216		$	5,895		$	2,836		$	1,424		$	839

^B 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 years ended December 31, 2004, 0.73%; 2003, 0.78%; 2002, 0.78%; 2001, 0.74%; and 2000, 0.79%.

See notes to financial statements.

78

Annual Report to Shareholders

Management’s Discussion of Fund Performance

Limited Duration Bond Portfolio

   Average annual total returns for the Limited Duration Bond Portfolio and its benchmark for various periods ended December 31, 2004, are presented below:

		One		Five		Ten
		Year		Years		Years
Limited Duration Bond Portfolio
	Primary Class		+1.89%		+5.26%		+5.72%
	Institutional Class		+2.41%		+5.83%		+6.28%
Lehman Intermediate Government Bond IndexA,C			+2.33%		+6.57%		+6.75%
Merrill Lynch 1-3 year Treasury IndexB,C			+0.91%		+4.93%		+5.71%

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.

   Stronger-than-expected economic activity, higher-than-expected inflation, and a moderate tightening of monetary policy drove short- and intermediate-term yields substantially higher this past year, while bond yields were steady to somewhat lower. The yield curve flattened significantly in the process. Considering that both core and headline consumer price inflation rates roughly doubled from the levels of 2003, and the economy enjoyed a second year of above-trend growth, the bond market’s stability in the face of these pressures was remarkable. Non-U.S. fixed-income markets generally performed better and with substantially less volatility, thanks to slower growth and subdued inflation. Japanese rates were relatively stable, and deflationary pressures eased. The Bank of England raised its target rate four times during the period, while the European Central Bank (“ECB”) remained on hold. Monetary conditions in the U.K. are now tight enough to have inverted both the nominal

^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. It is not possible to invest in an index.

^B A subset of the Merrill Lynch Treasury Master Index, consisting of bonds with an outstanding par that is greater than or equal to $25 million and fixed rate coupons greater than 4.25%. The maturity range on these securities is from 1 to 3 years.

^C Effective June 30, 2004, Limited Duration 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.

79

Annual Report to Shareholders

and real yield curves. Bolstered by a stronger economy and generally accommodative monetary policies, investment grade spreads tightened, with spreads on lower-quality issuers and emerging market bonds narrowing significantly as yield-starved investors found them increasingly attractive against a backdrop of excellent economic and policy fundamentals. Despite higher short-term yields and a flatter curve, spreads on mortgage-backed issues tightened, and the mortgage-backed security sector delivered good risk-adjusted performance overall. U.S. Treasury Inflation-Protected Securities (“TIPS”) enjoyed strong performance as real yields declined relative to nominal yields, and inflation proved to be higher than expected.

   The Limited Duration Bond Portfolio was challenged by this environment, but investment strategies were generally rewarded as the total returns (appreciation or depreciation in the Fund’s net asset value per share, plus dividends and any capital gain distributions) of each share class exceeded the performance of its benchmark. For the calendar year, the Primary Class of the Fund returned 1.89%, versus the benchmark return of 0.91%. The Fund’s neutral to underweight duration posture for most of the period contributed to returns as interest rates rose, and the Fund’s barbelled exposure to maturities was rewarded by a flatter yield curve. Overweight exposure to mortgage-backed securities also contributed to performance, as spreads tightened and the sector delivered excess returns relative to Treasuries.

Western Asset Management Company

January 28, 2005

80

Annual Report to Shareholders

Expense Example

Limited Duration Bond Portfolio

   As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Each example is based on an investment of $1,000 invested on July 1, 2004, and held through December 31, 2004.

Actual Expenses

   The first line for each class in the table below provides information about actual account values and actual expenses for each class. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes

   The second line for each class in the table below provides information about hypothetical account values and hypothetical expenses based on the relevant class’s actual expense ratios and an assumed rate of return of 5% per year before expenses, which is not the class’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples for the relevant class that appear in the shareholder reports of other funds.

		Beginning		Ending		Expenses PaidA
		Account		Account		During the		Annualized
		Value		Value		Period		Expense
		7/1/04		12/31/04		7/1/04 to 12/31/04		Ratio
Primary Class:
	Actual	$	1,000.00	$	1,023.90	$	5.10		1.00%
	Hypothetical (5% return before expenses)		1,000.00		1,020.16		5.09
Institutional Class:
	Actual	$	1,000.00	$	1,027.60	$	2.45		0.48%
	Hypothetical (5% return before expenses)		1,000.00		1,022.79		2.45

^A These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (184), and divided by 365.

81

Annual Report to Shareholders

Performance Information

Limited Duration Bond Portfolio (formerly U.S. Government Intermediate-Term Portfolio)

   The following graphs compare the Fund’s total returns against those of closely matched broad-based securities market indices. 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, Limited Duration 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.

   Prior to August 31, 2004, the Fund was known as the Legg Mason U.S. Government Intermediate-Term Portfolio and followed a policy of investing at least 80% of its assets in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities, or repurchase agreements secured by such investments, with a dollar-weighted average portfolio maturity between three and ten years. The fund’s performance prior to such change might have been better or worse had the fund been managed in accordance with its current objective, policies and strategies.

82

Annual Report to Shareholders

Performance Information — Continued

Growth of a $10,000 Investment — Primary Class

Periods Ended December 31, 2004

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+1.89%		+1.89%
Five Years		+29.20%		+5.26%
Ten Years		+74.38%		+5.72%

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.

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.

^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.

^B A subset of the Merrill Lynch Treasury Master Index, consisting of bonds with an outstanding par that is greater than or equal to $25 million and fixed rate coupons greater than 4.25%. The maturity range on these securities is from 1 to 3 years.

83

Annual Report to Shareholders

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

Periods Ended December 31, 2004

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+2.41%		+2.41%
Five Years		+32.74%		+5.83%
Ten Years		+83.86%		+6.28%

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 call 1-888-425-6432. 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.

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.

84

Annual Report to Shareholders

Performance Information — Continued

Portfolio Composition (As of December 31, 2004)

Debt Ratings^C (As a percentage of the portfolio)

Maturity Schedule (As a percentage of the portfolio)

^C Source: Standard & Poor’s

85

Annual Report to Shareholders

Portfolio of Investments

Limited Duration Bond Portfolio

December 31, 2004

(Amounts in Thousands)

				Maturity		Par/
		Rate		Date		Shares		Value
Long-Term Securities — 94.2%
Corporate Bonds and Notes — 25.7%
Aerospace/ Defense — 0.2%
	Northrop Grumman Corporation		4.079%		11/16/06	$	500	$	505
Banking and Finance — 3.1%
	Ford Motor Credit Company		3.379%		9/28/07		2,720		2,700	A
	General Motors Acceptance Corporation		2.970%		1/16/07		1,400		1,385	A
	General Motors Acceptance Corporation		3.680%		9/23/08		2,600		2,534	A
	Household Finance Corporation		2.625%		11/16/09		1,200		1,201	A
	John Deere Capital Corporation		3.900%		1/15/08		1,000		1,007
	SLM Corporation		2.300%		1/26/09		100		100	A
									8,927
Banks — 0.5%
	Bank of America Corporation		2.820%		9/15/14		750		755	A
	Washington Mutual Bank		2.870%		1/15/15		740		741	A
									1,496
Cable — 1.2%
	Comcast Cable Communications, Inc.		6.375%		1/30/06		2,000		2,066
	Comcast Cable Communications, Inc.		8.375%		5/1/07		230		254
	Cox Communications, Inc.		3.040%		12/14/07		1,050		1,052	A,B
									3,372

86

Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Cable — Continued
Computer Services and Systems — 0.4%
	Electronic Data Systems Corporation		7.125%		10/15/09	$	1,000	$	1,101
Diversified Financial Services — 1.1%
	CIT Group Inc.		2.530%		5/18/07		680		680	A
	Citigroup Inc.		2.480%		11/5/14		1,370		1,372	A
	General Electric Capital Corporation		2.510%		11/21/11		1,020		1,021	A
									3,073
Electric — 1.5%
	Dominion Resources, Inc.		2.590%		5/15/06		2,000		2,004	A
	FirstEnergy Corp.		5.500%		11/15/06		1,610		1,662
	FirstEnergy Corp.		6.450%		11/15/11		680		739
									4,405
Energy — 2.3%
	Alabama Power Company		2.571%		8/25/09		1,000		1,000	A
	DTE Energy Company		3.350%		6/1/07		1,050		1,054	A
	Duke Energy Corporation		3.750%		3/5/08		1,500		1,498
	Pacific Gas and Electric Company		3.600%		3/1/09		1,000		984
	Sempra Energy		2.809%		5/21/08		2,000		1,993	A
									6,529
Environmental Services — 0.4%
	Waste Management, Inc.		7.375%		8/1/10		1,090		1,249
Food, Beverage and Tobacco — 1.9%
	Altria Group, Inc.		5.625%		11/4/08		3,000		3,118
	General Mills, Inc.		6.449%		10/15/06		1,000		1,049
	Kraft Foods Inc.		5.625%		11/1/11		1,110		1,176
									5,343

87

Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Food, Beverage and Tobacco — Continued
Insurance — 0.1%
	Metropolitan Life Global Funding		2.740%		3/15/12	$	370	$	369	A,B
Investment Banking/ Brokerage — 2.5%
	J.P. Morgan Chase & Co.		2.160%		10/2/09		1,730		1,732	A
	Lehman Brothers Holdings Inc.		2.350%		11/10/09		1,120		1,121	A
	Merrill Lynch & Co., Inc.		2.715%		1/15/15		1,020		1,020	A
	Morgan Stanley		2.556%		1/15/10		700		701	A
	The Bear Stearns Companies Inc.		2.720%		9/9/09		1,000		999	A
	The Goldman Sachs Group, Inc.		2.430%		7/23/09		1,500		1,505	A
									7,078
Media — 1.8%
	Liberty Media Corporation		3.990%		9/17/06		1,160		1,174	A
	News America Incorporated		6.625%		1/9/08		2,000		2,159
	Time Warner Inc.		6.125%		4/15/06		550		570
	Viacom Inc.		5.625%		5/1/07		1,000		1,045
									4,948
Oil and Gas — 2.9%
	Amerada Hess Corporation		7.375%		10/1/09		1,500		1,676
	ConocoPhillips		4.750%		10/15/12		2,110		2,151
	Occidental Petroleum Corporation		7.650%		2/15/06		750		785
	Pemex Project Funding Master Trust		8.500%		2/15/08		3,300		3,721
									8,333
Paper and Forest Products — 0.3%
	Weyerhaeuser Company		6.750%		3/15/12		670		755

88

Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Paper and Forest Products — Continued
Pharmaceuticals — 0.7%
	Bristol-Myers Squibb Company		4.750%		10/1/06	$	2,000	$	2,045
Retail — 0.6%
	Wal-Mart Stores, Inc.		5.450%		8/1/06		1,500		1,551
Special Purpose — 2.9%
	American Honda Finance Corporation		2.398%		12/6/05		310		310	A,B
	American Honda Finance Corporation		2.200%		10/22/07		840		839	A,B
	DaimlerChrysler NA Holding Corporation		2.940%		9/10/07		3,000		3,010	A
	Sprint Capital Corporation		4.780%		8/17/06		3,000		3,057	C
	Verizon Wireless Capital LLC		5.375%		12/15/06		1,000		1,036
									8,252
Telecommunications (Cellular/ Wireless) — 1.3%
	AT&T Wireless Services Inc.		7.350%		3/1/06		2,000		2,092
	Motorola, Inc.		4.608%		11/16/07		1,500		1,530
									3,622
Total Corporate Bonds and Notes (Identified Cost — $73,132)									72,953
Asset-Backed Securities — 17.9%
Fixed Rate Securities — 3.0%
	AmeriCredit Automobile Receivables Trust 2003-BX		2.720%		1/6/10		3,000		2,974
	AmeriCredit Automobile Receivables Trust 2002-B		3.780%		2/12/07		1,646		1,647
	Structured Asset Securities Corporation 2003-AL1		3.356%		4/25/31		941		887	B

89

Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Asset-Backed Securities — Continued
Fixed Rate Securities — Continued
	UPFC Auto Receivables Trust 2004-A		3.270%		9/15/10	$	3,000	$	2,988
									8,496
Indexed SecuritiesA — 14.9%
	Asset Backed Funding Certificates 2002-WF2		2.858%		5/25/32		2,071		2,085
	Asset Backed Funding Corporation Certificates 2002-OPT1		2.931%		6/25/32		1,815		1,819
	Bear Stearns Asset Backed Securities, Inc. 2004-1		2.938%		6/25/34		3,000		3,000
	CHEC Loan Trust 2004-2		2.748%		2/25/31		3,500		3,499
	Citibank Credit Card Issuance Trust 2002-B1		2.879%		6/25/09		1,675		1,681
	Countrywide Home Equity Loan Trust 2002-G		2.773%		12/15/28		5,036		5,046
	Countrywide Home Equity Loan Trust 2004-J		2.693%		12/15/33		5,349		5,352
	Countrywide Home Equity Loan Trust 2004-O		2.683%		2/15/34		2,482		2,482
	Fremont Home Loan Trust 2004-C		2.688%		1/25/32		2,459		2,458
	GSAA Home Equity Trust 2004-9		2.798%		11/25/33		3,026		3,032
	Providian Gateway Master Trust 2002-B		3.103%		6/15/09		3,000		3,020	B
	Rental Car Finance Corp. 2003-1A		2.818%		5/25/08		3,000		3,006	B
	Rental Car Finance Corp. 2004-1A		2.618%		6/25/09		3,000		2,988	B

90

Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
Asset-Backed Securities — Continued
Indexed Securities — Continued
	Superior Wholesale Inventory Financing Trust 2004-A10		2.503%		9/15/11	$	3,000	$	3,007
									42,475
Total Asset-Backed Securities (Identified Cost — $51,023)									50,971
Mortgage-Backed Securities — 18.9%
Fixed Rate Securities — 8.8%
	Banc of America Funding Corporation 2004-B		4.289%		12/20/34		2,812		2,838
	Blackrock Capital Finance L.P. 1997-R3		7.220%		11/25/28		514		519	B
	Countrywide Alternative Loan Trust 2004-33		5.017%		12/25/34		854		865
	Countrywide Alternative Loan Trust 2004-33		5.126%		12/25/34		1,865		1,894
	Residential Asset Securitization Trust 2003-A14		4.750%		2/25/19		12,797		12,789
	Washington Mutual MSC Mortgage Pass -Through Certificates Series 2004-RA1		7.000%		3/25/34		5,786		5,947
									24,852
Indexed SecuritiesA — 10.1%
	Bear Stearns Arm Trust 2004-10		4.711%		1/25/35		1,614		1,630
	Harborview Mortgage Loan Trust 2004-8		2.810%		11/29/34		2,928		2,934
	HomeBanc Mortgage Trust 2004-2		2.788%		12/25/34		2,970		2,973
	Impac CMB Trust 2004-2		2.678%		4/25/34		2,313		2,317
	Impac CMB Trust 2004-6		2.808%		10/25/34		1,479		1,477
	Impac Secured Assets Corp. 2004-3		2.618%		11/25/34		3,570		3,566

91

Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
Mortgage-Backed Securities — Continued
Indexed Securities — Continued
	JPMorgan Mortgage Trust 2003-A1		4.380%		10/25/33	$	2,782	$	2,707
	Sequoia Mortgage Trust 2003-2		2.880%		6/20/33		2,178		2,166
	Sequoia Mortgage Trust 2003-7		2.730%		1/20/34		2,442		2,437
	Thornburg Mortgage Securities Trust 2004-2		2.568%		6/25/44		3,572		3,568
	Washington Mutual 2004-AR8		2.838%		6/25/44		2,876		2,876
									28,651
Total Mortgage-Backed Securities (Identified Cost — $50,937)									53,503
U.S. Government and Agency Obligations — 15.6%
Fixed Rate Securities — 6.6%
	Fannie Mae		0.000%		1/3/05		1,000		1,000	D
	Fannie Mae		3.125%		7/15/06		6,000		5,998
	Freddie Mac		2.500%		3/30/06		6,000		5,958
	Freddie Mac		3.125%		9/15/06		3,000		2,997
	United States Treasury Notes		3.000%		11/15/07		1,600		1,590
	United States Treasury Notes		3.375%		10/15/09		1,050		1,040
									18,583
Indexed SecuritiesE — 9.0%
	United States Treasury Inflation-Protected Security		3.625%		1/15/08		8,270		9,008
	United States Treasury Inflation-Protected Security		0.875%		4/15/10		3,798		3,761
	United States Treasury Inflation-Protected Security		3.000%		7/15/12		6,369		7,108

92

Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares		Value
U.S. Government and Agency Obligations — Continued
Indexed SecuritiesE — Continued
	United States Treasury Inflation-Protected Security		2.000%		7/15/14	$	2,521	$	2,601
	United States Treasury Inflation-Protected Security		3.875%		4/15/29		2,322		3,187
									25,665
Total U.S. Government and Agency Obligations (Identified Cost — $46,528)									44,248
U.S. Government Agency Mortgage-Backed Securities — 12.2%
Fixed Rate Securities — 7.0%
	Fannie Mae		8.500%	6/1/10 to 8/1/11			88		88
	Fannie Mae		6.500%	11/1/10 to 10/1/32			4,755		5,005
	Fannie Mae		7.000%	1/1/13 to 1/1/33			7,956		8,438
	Fannie Mae		9.500%		7/1/14		103		114
	Fannie Mae		11.000%		12/1/15		86		94
	Fannie Mae		12.500%	1/1/18 to 4/1/18			71		81
	Fannie Mae		9.000%		11/1/21		229		253
	Freddie Mac		8.250%		2/1/08		27		27
	Freddie Mac		8.500%	12/1/08 to 6/1/21			116		120
	Freddie Mac		9.750%	11/1/09 to 11/1/14			46		50
	Freddie Mac		9.000%	1/1/17 to 1/1/21			267		290
	Freddie Mac		7.000%	1/25/21 to 4/1/32			3,816		4,039
	Freddie Mac		8.000%		2/1/31		646		700
	Government National Mortgage Association		9.000%	6/15/06 to 9/15/22			388		403
	Government National Mortgage Association		6.000%	5/15/14 to 11/15/28			412		432
									20,134

93

Annual Report to Shareholders

				Maturity		Par/
		Rate		Date		Shares		Value
U.S. Government Agency Mortgage-Backed Securities — Continued
Fixed Rate Securities — Continued
Indexed SecuritiesA — 5.0%
	Fannie Mae		4.330%		11/1/34	$	1,762	$	1,771
	Fannie Mae		4.200%		12/1/34		1,700		1,702
	Fannie Mae		4.500%		12/1/34		1,400		1,409	F
	Fannie Mae		4.330%		12/1/34		3,100		3,117	F
	Freddie Mac		4.374%		12/1/34		700		703
	Freddie Mac		4.494%		12/1/34		3,600		3,625
	Freddie Mac		4.088%		1/1/35		633		630
	Freddie Mac		4.105%		1/1/35		1,147		1,142
									14,099
Stripped Securities — 0.2%
	Government National Mortgage Association		6.06%		6/16/26		3,039		317	G1
	Government National Mortgage Association		6.11%		8/16/26		2,560		284	G1
									601
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost — $35,016)									34,834
Yankee BondsH — 3.4%
Banks — 0.4%
	The Korea Development Bank		4.750%		7/20/09		1,000		1,019
Energy — 0.3%
	SP Powerassets Limited Global		3.800%		10/22/08		1,000		999	B
Foreign Governments — 0.5%
	Russian Federation		8.250%		3/31/10		1,360		1,509

94

Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

				Maturity		Par/
		Rate		Date		Shares			Value
Yankee Bonds — Continued
Foreign Governments — Continued
Manufacturing (Diversified) — 1.1%
	Tyco International Group SA		4.436%		6/15/07	$	3,000		$	3,048	B
Telecommunications — 1.1%
	British Telecommunications plc		7.875%		12/15/05		1,500			1,564
	Telecom Italia Capital		4.000%		1/15/10		1,500			1,471	B
										3,035
Total Yankee Bonds (Identified Cost — $9,640)										9,610
Preferred Stocks — 0.5%
	Fannie Mae		7.000%				11	shs		635	A
	Home Ownership Funding Corporation		13.331%				5			191	B,C
	Home Ownership Funding Corporation II		13.338%				14			534	B,C
Total Preferred Stocks (Identified Cost — $2,097)										1,360
Total Long-Term Securities (Identified Cost — $268,373)										267,479
Short-Term Securities — 7.3%
U.S. Government and Agency Obligations — 5.5%
Fixed Rate Securities — 5.5%
	Fannie Mae		0.000%		1/18/05	$	6,088			6,081	D
	Fannie Mae		0.000%		1/21/05		1,600			1,598	D
	Fannie Mae		0.000%		4/1/05		200			199	D,I
	Fannie Mae		0.000%		9/16/05		8,000			7,866	D
										15,744
Repurchase Agreements — 1.8%
	Deutsche Bank
2.2%, dated 12/31/04, to be repurchased at $2,563 on 1/3/05 (Collateral: $2,620 Freddie Mac notes, 2.375%, due 4/5/06, value $2,631)							2,563			2,563

95

Annual Report to Shareholders

	Par/Shares		Value
Repurchase Agreements — Continued
Goldman, Sachs & Company
2.22%, dated 12/31/04, to be repurchased at $2,600 on 1/3/05 (Collateral: $2,660 Freddie Mac zero     coupon notes, due 1/28/05, value $2,656)	$	2,600	$	2,600
				5,163
Total Short-Term Securities (Identified Cost — $21,907)				20,907
Total Investments — 101.5% (Identified Cost — $290,280)				288,386
Other Assets Less Liabilities — (1.5)%				(4,234	)
Net Assets — 100.0%			$	284,152

96

Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

			Actual		Appreciation/
		Expiration	Contracts		(Depreciation)
Futures Contracts PurchasedJ
	Eurodollar Futures	October 2005		37	$	(39	)

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 December 31, 2004.
B	Rule 144a Security — A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities represent 6.8% of net assets.
C	Stepped coupon security — A security with a predetermined schedule of interest or dividend rate changes, at which time it begins to accrue interest or pay dividends.
D	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.
E	Treasury Inflation-Protected Security — Treasury security whose principal value is adjusted daily 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.

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

G	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.
H	Yankee Bonds — A dollar denominated bond issued in the U.S. by foreign entities.
I	Collateral to cover futures and options contracts.

^J Futures are described in more detail in the notes to financial statements.

See notes to financial statements.

97

Annual Report to Shareholders

Statement of Assets and Liabilities

Limited Duration Bond Portfolio

December 31, 2004

(Amounts in Thousands)

Assets:
	Investment securities at market value (Identified Cost — $268,373)			$	267,479
	Short-term securities at value (Identified Cost — $21,907)				20,907
			Total investments				$	288,386
	Cash							1
	Receivable for:
		Fund shares sold						1,020
		Interest income						1,575
		Dividend income						11
		Futures variation margin						3
	Other assets							11
								291,007
Liabilities:
	Payable for:
		Securities purchased						4,538
		Fund shares repurchased						2,026
		Income distribution						38
	Due to:
		Manager						49
		Distributor						117
	Accrued expenses							87
								6,855
Net Assets							$	284,152
Net assets consist of:
	Accumulated paid-in-capital applicable to:
			26,505 Primary Class shares outstanding	$	285,013
			921 Institutional Class shares outstanding		9,507
	Under/(over) distributed net investment income				(106	)
	Accumulated net realized gain/(loss) on investments, options and futures				(8,329	)
	Unrealized appreciation/(depreciation) of investments, options and futures				(1,933	)
Net Assets							$	284,152
Net Asset Value Per Share:
	Primary Class						$	10.36
	Institutional Class						$	10.37

See notes to financial statements.

98

Annual Report to Shareholders

Statement of Operations

Limited Duration Bond Portfolio

For the Year Ended December 31, 2004

(Amounts in Thousands)

Investment Income:
	Dividends				$	253
	Interest					11,387
			Total income					$	11,640
Expenses:
	Management fees					1,585
	Distribution and service fees					1,485
	Audit and legal fees					99
	Custodian fees					127
	Directors’ fees and expenses					40
	Registration fees					29
	Reports to shareholders					29
	Transfer agent and shareholder servicing expense:
		Primary Class				255
		Institutional Class				4
	Other expenses					16
						3,669
		Less: Fees waived				(656	)
				Compensating balance credits		(1	)
			Total expenses, net of waivers and compensating balance credits						3,012
Net Investment Income									8,628
Net Realized and Unrealized Gain/(Loss) on Investments:
	Realized gain/(loss) on:
		Investments				(2,632	)
		Futures				(1,445	)
									(4,077	)
	Change in unrealized appreciation/(depreciation) of investments and futures								1,121
Net Realized and Unrealized Gain/(Loss) on Investments									(2,956	)
Change in Net Assets Resulting From Operations								$	5,672

See notes to financial statements.

99

Annual Report to Shareholders

Statement of Changes in Net Assets

Limited Duration Bond Portfolio

(Amounts in Thousands)

			For the Years Ended
			12/31/04			12/31/03
Change in Net Assets:
Net investment income			$	8,628		$	9,203
Net realized gain/(loss) on investments, options and futures				(4,077	)		8,052
Change in unrealized appreciation/(depreciation) of investments, options and futures				1,121			(13,276	)
Change in net assets resulting from operations				5,672			3,979
Distributions to shareholders:
	From net investment income:
		Primary Class		(10,465	)		(9,512	)
		Institutional Class		(348	)		(279	)
	From net realized gain on investments:
		Primary Class		(186	)		—
		Institutional Class		(7	)		—
Change in net assets from Fund share transactions:
		Primary Class		(47,055	)		(47,284	)
		Institutional Class		1,957			(1,598	)
Change in net assets				(50,432	)		(54,694	)
Net Assets:
Beginning of year				334,584			389,278
End of year			$	284,152		$	334,584
Under/(over) distributed net investment income			$	(106	)	$	1,269

See notes to financial statements.

100

Annual Report to Shareholders

Financial Highlights

Limited Duration Bond 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:

		Years Ended December 31,
		2004			2003			2002			2001			2000
Net asset value, beginning of year			$10.54		$	10.70		$	10.32		$	10.26		$	9.92
Investment operations:
	Net investment income		.29	A		.26	A		.41	A		.53	A		.62	A
	Net realized and unrealized gain/(loss) on investments, options and futures		(.09	)		(.14	)		.38			.06			.33
	Total from investment operations		.20			.12			.79			.59			.95
Distributions:
	From net investment income		(.37	)		(.28	)		(.41	)		(.53	)		(.61	)
	From net realized gain on investments		(.01	)		—			—			—			—
	Total distributions		(.38	)		(.28	)		(.41	)		(.53	)		(.61	)
Net asset value, end of year			$10.36		$	10.54		$	10.70		$	10.32		$	10.26
Ratios/supplemental data:
	Total return		1.89	%		1.11	%		7.79	%		5.83	%		9.95	%
	Expenses to average net assets		1.00	%A		1.00	%A		1.00	%A		1.00	%A		1.00	%A
	Net investment income to average net assets		2.81	%A		2.48	%A		3.85	%A		5.08	%A		6.14	%A
	Portfolio turnover rate		238	%		487	%		204	%		535	%		248	%
Net assets, end of year (in thousands)		$	274,606		$	326,844		$	379,793		$	300,597		$	272,668

^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 years ended December 31, 2004, 1.21%; 2003, 1.21%; 2002, 1.19%; 2001, 1.17%; and 2000, 1.19%.

See notes to financial statements.

101

Annual Report to Shareholders

Institutional Class:

		Years Ended December 31,
		2004			2003			2002			2001			2000
Net asset value, beginning of year			$10.55		$	10.70		$	10.32		$	10.27		$	9.92
Investment operations:
	Net investment income		.35	B		.32	B		.46	B		.58	B		.67	B
	Net realized and unrealized gain/(loss) on investments, options and futures		(.10	)		(.14	)		.38			.05			.35
	Total from investment operations		.25			.18			.84			.63			1.02
Distributions:
	From net investment income		(.42	)		(.33	)		(.46	)		(.58	)		(.67	)
	From net realized gain on investments		(.01	)		—			—			—			—
	Total distributions		(.43	)		(.33	)		(.46	)		(.58	)		(.67	)
Net asset value, end of year			$10.37		$	10.55		$	10.70		$	10.32		$	10.27
Ratios/supplemental data:
	Total return		2.41	%		1.71	%		8.35	%		6.30	%		10.64	%
	Expenses to average net assets		0.48	% B		.46	%B		.47	%B		.46	%B		.46	%B
	Net investment income to average net assets		3.22	% B		3.03	% B		4.38	% B		5.63	% B		6.66	% B
	Portfolio turnover rate		238	%		487	%		204	%		535	%		248	%
Net assets, end of year (in thousands)		$	9,546		$	7,740		$	9,485		$	7,221		$	6,723

^B  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 years ended December 31, 2004, 0.70%; 2003, 0.68%; 2002, 0.66%; 2001, 0.63%; and 2000, 0.65%.

See notes to financial statements.

102

Annual Report to Shareholders

Expense Example

U.S. Government Money Market Portfolio

   As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Each example is based on an investment of $1,000 invested on July 1, 2004, and held through December 31, 2004.

Actual Expenses

   The first line in the table below provides information about actual account values and actual expenses for the Fund. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes

   The second line in the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples that appear in the shareholder reports of other funds.

	Beginning		Ending		Expenses PaidA
	Account		Account		During the		Annualized
	Value		Value		Period		Expense
	7/1/04		12/31/04		7/1/04 to 12/31/04		Ratio
Actual	$	1,000.00	$	1,004.80	$	3.61		.71%
Hypothetical (5% return before expenses)		1,000.00	$	1,021.61	$	3.64

^A These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (184), and divided by 365.

103

Annual Report to Shareholders

Performance Information

U.S. Government Money Market Portfolio

Maturity Schedule (As a percentage of the portfolio)

104

Annual Report to Shareholders

Statement of Net Assets

U.S. Government Money Market Portfolio

December 31, 2004

(Amounts in Thousands)

			Maturity
		Rate	Date	Par		Value
U.S. Government and Agency Obligations — 86.3%
	Fannie Mae	1.00% to 2.46%	1/13/05 to 5/27/05	$	195,980	$	195,777
	Federal Home Loan Bank	1.30% to 2.45%	1/13/05 to 11/4/05		65,125		65,098
	Freddie Mac	1.24% to 2.321%	1/11/05 to 9/26/05		78,160		78,071
Total U.S. Government and Agency Obligations (Identified Cost — $338,946)							338,946
Repurchase Agreements — 11.2%
Goldman Sachs & Company 2.22%, dated 12/31/04, to be repurchased at $31,006 on 1/3/05 (Collateral: $28,845 Freddie Mac notes, 5.625%, due 3/15/11, value $32,099)					31,000		31,000
Lehman Brothers, Inc. 2.10%, dated 12/31/04, to be repurchased at $13,043 on 1/3/05 (Collateral: $13,355 Fannie Mae notes, 3.10%, due 4/4/07, value $13,402)					13,041		13,041
Total Repurchase Agreements (Identified Cost — $44,041)							44,041
Total Investments, at Amortized Cost and Value — 97.5%							382,987	A
Other Assets Less Liabilities — 2.5%							9,696
Net Assets Applicable to 392,684 Shares Outstanding — 100%						$	392,683
Net Asset Value Per Share						$	1.00

^A Also represents cost for income tax purposes.

See notes to financial statements.

105

Annual Report to Shareholders

Statement of Operations

U.S. Government Money Market Portfolio

For the Year Ended December 31, 2004

(Amounts in Thousands)

Investment Income:
	Interest					$	6,030
Expenses:
	Management fee		$	2,216
	Distribution and service fees			443
	Audit and legal fees			37
	Custodian fees			103
	Directors’ fees and expenses			23
	Registration fees			56
	Reports to shareholders			32
	Transfer agent and shareholder servicing expense			243
	Other expenses			17
				3,170
		Less compensating balance credits		(4	)
		Total expenses, net of compensating balance credits					3,166
Net Investment Income							2,864
Net Realized Gain/(Loss) on Investments:
	Realized gain/(loss) on investments						(1	)
Change in Net Assets Resulting From Operations						$	2,863

See notes to financial statements.

106

Annual Report to Shareholders

Statement of Changes in Net Assets

U.S. Government Money Market Portfolio

(Amounts in Thousands)

	For the Years Ended
	12/31/04			12/31/03
Change in Net Assets:
Net investment income	$	2,864		$	2,477
Net realized gain/(loss) on investments		(1	)		—
Change in net assets resulting from operations		2,863			2,477
Distributions to shareholders from net investment income		(2,864	)		(2,633	)
Change in net assets from Fund share transactions		(51,197	)		(97,836	)
Change in net assets		(51,198	)		(97,992	)
Net Assets:
Beginning of year		443,881			541,873
End of year	$	392,683		$	443,881

See notes to financial statements.

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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.

		Years Ended December 31,
		2004			2003			2002			2001			2000
Net asset value, beginning of year			$1.00		$	1.00		$	1.00		$	1.00		$	1.00
Investment operations:
	Net investment income		.01			.0049	A		.01	A		.04	A		.06	A
	Total from investment operations		.01			.0049			.01			.04			.06
Distributions:
	From net investment income		(.01	)		(.0049	)		(.01	)		(.04	)		(.06	)
	Total distributions		(.01	)		(.0049	)		(.01	)		(.04	)		(.06	)
Net asset value, end of year			$1.00		$	1.00		$	1.00		$	1.00		$	1.00
Ratios/supplemental data:
	Total return		.67	%		.51	%		1.13	%		3.57	%		5.66	%
	Expenses to average net assets		.71	%		.71	%A		.72	%A		.71	%A		.73	%A
	Net investment income to average net assets		.65	%		.49	%A		1.11	% A		3.46	% A		5.53	% A
Net assets, end of year (in thousands)		$	392,683		$	443,881		$	541,873		$	501,070		$	426,988

^A Net of 12b-1 service fees waived by Legg Mason Wood Walker, Inc. of 0.10% of average daily net assets. If no fees had been waived by Legg Mason, the annualized ratio of expenses to average daily net assets would have been as follows for the years ended December 31, 2003: 0.81%; 2002: 0.82%; 2001: 0.81% and 2000: 0.83%.

See notes to financial statements.

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Annual Report to Shareholders

Notes to Financial Statements

Legg Mason Income Trust, Inc.

(Amounts in Thousands)

1. Organization and 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 Limited Duration Bond Portfolio (“Limited Duration”, formerly the U.S. Government Intermediate Portfolio), 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 Limited Duration 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 Limited Duration 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 or the Funds’ Valuation Committee pursuant to procedures adopted by the Board. In determining fair value, the Board of Directors or the Funds’ Valuation Committee considers all relevant qualitative and quantitative factors 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.

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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. The Fund will value its foreign securities in U.S. dollars on the basis of the then-prevailing exchange rates. 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.

   For the year ended December 31, 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	$	114,405	$	21,636	$	80,293	$	13,735
High Yield		—		230,519		—		243,918
Investment Grade		79,013		221,545		95,751		207,889
Limited Duration		388,579		249,573		546,461		77,551

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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. An additional distribution may be made in December, to the extent necessary in order to comply with federal excise tax regulations. 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 December 31, 2004, accrued dividends payable were as follows: Core Bond, $5; High Yield, $150; Investment Grade, $82; Limited Duration, $38; and Government Money Market, $5. There were no capital gain distributions payable at December 31, 2004.

Compensating Balance Credits

   The Funds have an arrangement with their custodian bank, whereby a portion of the custodian’s fee is paid indirectly by credits earned on each Fund’s cash on deposit with the bank. This deposit arrangement is an alternative to purchasing overnight investments. For the year ended December 31, 2004, the following compensating balance credits were earned: Core Bond, $1; High Yield, $4; Investment Grade, $2; Limited Duration, $1 and Government Money Market, $4.

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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 upon 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 qualify or 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.

   Distributions during the years ended December 31, 2004 and 2003, were characterized as follows for tax purposes:

	Core Bond		High Yield				Investment Grade
	2004		2004		2003		2004		2003
Ordinary income	$	1,183	$	14,760	$	15,274	$	19,210	$	18,284
Long-term capital gains		—		—		—		8,438		2,806
Total distributions	$	1,183	$	14,760	$	15,274	$	27,648	$	21,090

					Government
	Limited Duration				Money Market
	2004		2003		2004		2003
Ordinary income	$	11,006	$	9,791	$	2,864	$	2,633
Long-term capital gains		—		—		—		—
Total distributions	$	11,006	$	9,791	$	2,864	$	2,633

   Pursuant to federal income tax regulations applicable to investment companies, the Funds have elected to treat net capital losses realized between November 1 and December 31 of each year (“post-October loss”) as occurring on the first day of the following tax year. For the year ended December 31, 2004, realized capital losses reflected in the accompanying financial statements, as shown in the table on the next page, will not be recognized for federal income tax purposes until 2005.

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Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

   The tax basis components of net assets at December 31, 2004, were:

	Core			High			Investment			Limited			Government
	Bond			Yield			Grade			Duration			Money Market
Unrealized appreciation	$	433		$	12,828		$	17,486		$	1,170		$	—
Unrealized depreciation		(205	)		(3,941	)		(1,631	)		(3,131	)		—
Net unrealized appreciation/depreciation		228			8,887			15,855			(1,961	)		—
Undistributed ordinary income		16			58			771			—			5
Undistributed long-term capital gains		—			—			654			—			—
Capital loss carryforwards		—			(154,555	)		—			(8,369	)		(1	)
Post-October loss push and other loss deferrals		—			(1,070	)		—			—			—
Paid-in capital		63,529			360,741			396,297			294,481			392,679
Net assets	$	63,773		$	214,061		$	413,577		$	284,151		$	392,683

   The Funds intend to retain realized capital gains that may be offset against available capital loss carryforwards for federal income tax purposes. At December 31, 2004, the Funds had capital loss carryforwards as follows:

				Limited			Government
Expiration Date	High Yield			Duration			Money Market
2008	$	(35,788	)	$	(3,834	)		—
2009		(83,723	)		—			—
2010		(32,488	)		—			—
2011		(2,556	)		—			—
2012		—			(4,535	)		(1	)

   For financial reporting purposes, capital accounts and distributions to shareholders are adjusted to reflect the tax character of permanent book/tax differences. For the year ended December 31, 2004, the Funds recorded the following permanent reclassifications, which relate primarily to reclassifications of gains/losses on paydown securities and swap securities. Results of operations and net assets were not affected by these reclassifications.

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Annual Report to Shareholders

							Investment			Limited			Government
	Core Bond			High Yield			Grade			Duration			Money Market
Undistributed net investment income	$	100		$	(18	)	$	1		$	810		$	—
Accumulated realized gain/(loss)		(100	)		140			(1	)		(782	)		—
Paid-in capital		—			(122	)		—			(28	)		—

   At December 31, 2004, the cost of investments for federal income tax purposes was $62,021 for Core Bond, $201,566 for High Yield, $391,540 for Investment Grade, $290,308 for Limited Duration, and $382,987 for Government Money Market.

3. Financial Instruments:

Options and Futures

   As part of their investment programs, Core Bond, High Yield, Investment Grade and Limited Duration 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.

   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.

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Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

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.

   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 year ended December 31, 2004, was as follows:

Core Bond:

	Calls						Puts
	Actual						Actual
	Contracts			Premiums			Contracts			Premiums
Options written		282		$	217			293		$	185
Options closed		(151	)		(120	)		(42	)		(24	)
Options expired		(55	)		(40	)		(146	)		(64	)
Options exercised		—			—			—			—
Options outstanding, December 31, 2004		76		$	57			105		$	97

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Annual Report to Shareholders

   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.

   The open futures positions and related appreciation or depreciation at December 31, 2004, for Core Bond, Investment Grade, and Limited Duration 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

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Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

because there is a risk of loss to the Fund if the counterparties do not complete the transaction.

   At December 31, 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.

   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.

   At December 31, 2004, there were no swap contracts outstanding.

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 Limited Duration are due to expire on April 30, 2005. High Yield and Government Money Market

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Annual Report to Shareholders

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:

						Year Ended			At
						December 31,			December 31,
						2004			2004
				Expense		Management			Management
Fund		Management Fee		Limitation		Fees Waived			Fees Payable
Core Bond			0.45%		1.00%	$	(127	)	$	24
High Yield
	— Primary Class		0.65%		None		—			114
	— Institutional Class		0.65%		None		—			5
Investment Grade
	— Primary Class		0.60%		1.00%		(1,080	)		121
	— Institutional Class		0.60%		0.50%		(22	)		3
Limited Duration
	— Primary Class		0.45%		1.00%		(637	)		47
	— Institutional Class		0.45%		0.50%		(19	)		2
Government Money Market		0.50% – 0.40% B			None		—			172

   Western Asset Management Company (“Adviser”) serves as investment adviser to the Funds. The Adviser is responsible for the actual investment activity of each Fund. LMFA pays the Adviser a fee, computed daily and payable monthly, at an annual rate of 40% of the management fee received by LMFA for Core Bond; 77% of the management fee received by LMFA for High Yield; 40% of the management fee received for Investment Grade; and 30% for Government Money Market. For Limited Duration, 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%

118

Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

   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 December 31, 2004, Legg Mason waived $85 of Core Bond’s distribution and service fees.

					At December 31, 2004
	Distribution		Service		Distribution and Service
	Fee		Fee		Fees Payable
Core Bond		0.25%		0.25%	$	35
High Yield		0.25%		0.25%		87
Investment Grade		0.25%		0.25%		170
Limited Duration		0.25%		0.25%		117
Government Money Market		N/A		0.10%		34

   LM Fund 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 December 31, 2004: Core Bond, $8; High Yield, $59; Investment Grade, $81; Limited Duration, $56; and Government Money Market, $91.

   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 year ended December 31, 2004, the Funds had no borrowings under the Credit Agreement.

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Annual Report to Shareholders

6. Fund Share Transactions:

   At December 31, 2004, there were 2,000,000 shares authorized at $.001 par value for all classes of each portfolio of the Corporation. At December 31, 2004, for U.S. Government Money Market, net assets consisted of paid-in capital of $392,684 and accumulated net realized loss of $1. Share transactions were as follows:

		Core Bond
		Period Ended
Shares
	Sold		7,274
	Reinvestment of Distributions		111
	Repurchased		(977	)
	Net Increase		6,408
Amount
	Sold	$	72,052
	Reinvestment of Distributions		1,103
	Repurchased		(9,621	)
	Net Increase	$	63,534

		High Yield
		Primary Class						Institutional Class
		Years Ended						Years Ended
		12/31/04			12/31/03			12/31/04			12/31/03
Shares
	Sold		4,287			11,415			608			978
	Reinvestment of Distributions		1,211			1,342			61			44
	Repurchased		(8,220	)		(8,542	)		(446	)		(656	)
	Net Change		(2,722	)		4,215			223			366
Amount
	Sold	$	39,099		$	97,837		$	5,538		$	8,358
	Reinvestment of Distributions		10,986			11,598			558			385
	Repurchased		(74,487	)		(73,936	)		(4,056	)		(5,677	)
	Net Change	$	(24,402	)	$	35,499		$	2,040		$	3,066

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

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Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

		Investment Grade
		Primary Class						Institutional Class
		Years Ended						Years Ended
		12/31/04			12/31/03			12/31/04			12/31/03
Shares
	Sold		7,793			14,879			557			412
	Reinvestment of Distributions		2,253			1,713			58			23
	Repurchased		(10,301	)		(11,141	)		(213	)		(165	)
	Net Change		(255	)		5,451			402			270
Amount
	Sold	$	84,747		$	159,989		$	6,057		$	4,456
	Reinvestment of Distributions		24,367			18,456			631			244
	Repurchased		(111,468	)		(119,804	)		(2,318	)		(1,791	)
	Net Change	$	(2,354	)	$	58,641		$	4,370		$	2,909

		Limited Duration
		Primary Class						Institutional Class
		Years Ended						Years Ended
		12/31/04			12/31/03			12/31/04			12/31/03
Shares
	Sold		5,553			10,382			499			417
	Reinvestment of Distributions		910			785			33			26
	Repurchased		(10,970	)		(15,656	)		(345	)		(595	)
	Net Change		(4,507	)		(4,489	)		187			(152	)
Amount
	Sold	$	58,022		$	110,857		$	5,222		$	4,469
	Reinvestment of Distributions		9,486			8,339			346			272
	Repurchased		(114,563	)		(166,480	)		(3,611	)		(6,339	)
	Net Change	$	(47,055	)	$	(47,284	)	$	1,957		$	(1,598	)

121

Annual Report to Shareholders

		U.S. Government Money
		Market
		Year Ended
		12/31/04			12/31/03
Shares
	Sold		1,461,762			1,306,465
	Reinvestment of Distributions		2,616			2,476
	Repurchased		(1,515,575	)		(1,406,777	)
	Net Change		(51,197	)		(97,836	)
Amount
	Sold	$	1,461,762		$	1,306,465
	Reinvestment of Distributions		2,616			2,476
	Repurchased		(1,515,575	)		(1,406,777	)
	Net Change	$	(51,197	)	$	(97,836	)

122

Annual Report to Shareholders

Report of Independent Registered Public Accounting Firm

To the Shareholders of Core Bond Fund, High Yield Portfolio, Investment Grade Income Portfolio, Limited Duration Bond Portfolio, and U.S. Government Money Market Portfolio, and to the Directors of Legg Mason Income Trust, Inc.:

   In our opinion, the accompanying statements of assets and liabilities for Core Bond Fund, High Yield Portfolio, Investment Grade Income Portfolio, and Limited Duration Bond Portfolio, including the portfolio of investments, and the statement of net assets for U.S. Government Money Market Portfolio, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Core Bond Fund, High Yield Portfolio, Investment Grade Income Portfolio, Limited Duration Bond Portfolio, and U.S. Government Money Market Portfolio (comprising Legg Mason Income Trust, Inc., hereafter referred to as the “Funds”) at December 31, 2004, the results of each of their operations, the changes in each of their net assets and the financial highlights for each of the fiscal periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2004 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Baltimore, Maryland

February 11, 2005

123

Annual Report to Shareholders

Directors and Officers

   The table below provides information about each of the Corporation’s directors and officers, including biographical information about their business experience and information about their relationships with Legg Mason, Inc. and its affiliates. The mailing address of each director and officer is 100 Light Street, c/o Legal and Compliance Department, 23rd Floor, Baltimore, Maryland 21202.

Name, Position(s) and	Number of Legg Mason
Year First Elected	Funds Overseen and	Principal Occupation(s)
With Fund, and Age	Other Directorships	During the Past Five Years
INDEPENDENT DIRECTORS:A
Hearn, Ruby P. Director since 2004 B Age 64	Director/ Trustee of all Legg Mason funds (consisting of 23 portfolios).	Senior Vice President Emerita of The Robert Wood Johnson Foundation since 2001. Formerly: Senior Vice President of The Robert Wood Johnson Foundation (1996-2001).
Lehman, Arnold L. Director since 1987 B Age 60	Director/ Trustee of all Legg Mason funds (consisting of 23 portfolios).	Director of The Brooklyn Museum of Art since 1997; Trustee of American Federation of Arts since 1998. Formerly: Director of The Baltimore Museum of Art (1979-1997).
Masters, Robin J.W. Director since 2002 B Age 49	Director/ Trustee of all Legg Mason funds (consisting of 23 portfolios).	Retired. Director of Bermuda SMARTRISK (non-profit) since 2001. Formerly: Chief Investment Officer of ACE Limited (insurance) (1986-2000).
McGovern, Jill E. Director since 1989 B Age 60	Director/ Trustee of all Legg Mason funds (consisting of 23 portfolios).	Chief Executive Officer of The Marrow Foundation since 1993. Formerly: Executive Director of the Baltimore International Festival (1991-1993); Senior Assistant to the President of The Johns Hopkins University (1986-1990).
Mehlman, Arthur S. Director since 2002 B Age 62	Director/ Trustee of all Legg Mason funds (consisting of 23 portfolios); Trustee of The Royce Family of Funds (consisting of 21 portfolios); Director of Municipal Mortgage & Equity, LLC.	Retired. Director of The League for People with Disabilities, Inc.; Director of University of Maryland Foundation and University of Maryland College Park Foundation (non-profits). Formerly: Partner, KPMG LLP (international accounting firm) (1972-2002).
O’Brien, G. Peter Director since 2002 B Age 59	Director/ Trustee of all Legg Mason funds (consisting of 23 portfolios); Trustee of The Royce Family of Funds (consisting of 21 portfolios); Director of Renaissance Capital Greenwich Funds; and Director of Technology Investment Capital Corp.	Trustee of Colgate University; President of Hill House, Inc. (residential home care). Formerly: Managing Director, Equity Capital Markets Group of Merrill Lynch & Co. (1971-1999).

124

Annual Report to Shareholders

Directors and Officers — Continued

Name, Position(s) and	Number of Legg Mason
Year First Elected	Funds Overseen and	Principal Occupation(s)
With Fund, and Age	Other Directorships	During the Past Five Years
Rowan, S. Ford Director since 2002 B Age 61	Director/ Trustee of all Legg Mason funds (consisting of 23 portfolios).	Consultant, Rowan & Blewitt Inc. (management consulting); Chairman, National Center for Critical Incident Analysis, National Defense University, since 2004; Director of Santa Fe Institute (scientific research institute) since 1999; Director of Annapolis Center for Science-Based Public Policy since 1995.
Tarola, Robert M. Director since 2004 B Age 54	Director/ Trustee of all Legg Mason funds (consisting of 23 portfolios).	Senior Vice President and Chief Financial Officer of W. R. Grace & Co. (specialty chemicals) since 1999.
INTERESTED DIRECTORS:C
Curley, John F., Jr. Chairman and Director since 1987 B Age 65	Chairman and Director/ Trustee of all Legg Mason funds (consisting of 23 portfolios).	Chairman of the Board of all Legg Mason funds. Formerly: Vice Chairman and Director of Legg Mason, Inc. and Legg Mason Wood Walker, Incorporated (1982-1998); Director of Legg Mason Fund Adviser, Inc. (1982-1998) and Western Asset Management Company (1986-1998) (each a registered investment adviser).
Fetting, Mark R. President since 2001; Director since 2002B Age 50	President and Director/ Trustee of all Legg Mason funds (consisting of 23 portfolios); Trustee of The Royce Family of Funds (consisting of 21 portfolios).	Senior Executive Vice President of Legg Mason, Inc.; Director and/or officer of various Legg Mason affiliates since 2000. Formerly: Division President and Senior Officer of Prudential Financial Group, Inc. and related companies, including fund boards and consulting services to subsidiary companies (1991-2000); Partner, Greenwich Associates; Vice President, T. Rowe Price Group, Inc.
EXECUTIVE OFFICERS:D
Karpinski, Marie K. Vice President and Treasurer since 1987 B Age 55	Vice President and Treasurer of all Legg Mason funds (consisting of 23 portfolios).	Vice President and Treasurer of all Legg Mason funds. Vice President and Treasurer of Legg Mason Fund Adviser, Inc.; Treasurer of Western Asset Funds, Inc.; Treasurer and Principal Financial and Accounting Officer of Pacific American Income Shares, Inc., Western Asset Premier Bond Fund, Western Asset/ Claymore U.S. Treasury Inflation Protected Securities Fund, and Western Asset/ Claymore U.S. Treasury Inflation Protected Securities Fund 2.
Merz, Gregory T. Vice President and Chief Legal Officer since 2003B Age 46	Vice President and Chief Legal Officer of all Legg Mason funds (consisting of 23 portfolios).	Vice President and Deputy General Counsel of Legg Mason, Inc. since 2003. Formerly: Associate General Counsel, Fidelity Investments (1993-2002); Senior Associate, Debevoise & Plimpton (1985-1993).

125

Annual Report to Shareholders

Name, Position(s) and	Number of Legg Mason
Year First Elected	Funds Overseen and	Principal Occupation(s)
With Fund, and Age	Other Directorships	During the Past Five Years
Olmert, Amy M. Vice President and Chief Compliance Officer since 2004B Age 41	Vice President and Chief Compliance Officer of all Legg Mason funds (consisting of 23 portfolios).	Senior Vice President of Legg Mason, Inc. since 2004. Chief Compliance Officer of all Legg Mason funds, Western Asset Funds, Inc., Pacific American Income Shares, Inc., Western Asset Premier Bond Fund, Western Asset/ Claymore U.S. Treasury Inflation Protected Securities Fund, and Western Asset/ Claymore U.S. Treasury Inflation Protected Securities Fund 2 since 2004. Formerly: Managing Director, Deutsche Asset Management (1997-2004).

ADDITIONAL INFORMATION ABOUT THE CORPORATION’S DIRECTORS

AND OFFICERS IS CONTAINED 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).

^A Each of the Independent Directors serves on the standing committees of the Board of Directors, which include the Audit Committee (chair: Arthur Mehlman), the Nominating Committee (co-chairs: Peter O’Brien and Jill McGovern), and the Independent Directors Committee (chair: Arnold Lehman).

B	Directors of the Funds serve a term of indefinite length until their resignation or removal and stand for re-election by shareholders only as and when required by the 1940 Act. Officers of the Funds are elected annually to serve until their successors are elected and qualified.
C	Mr. Curley and Mr. Fetting are considered to be interested persons (as defined in the 1940 Act) of the Funds by virtue of being both employees of Legg Mason Wood Walker, Incorporated, the principal underwriter of the Funds, and as owners of common stock of Legg Mason, Inc.
D	Officers of the Funds are interested persons (as defined in the 1940 Act).

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
Dr. Ruby P. Hearn
Arnold L. Lehman
Robin J.W. Masters
Dr. Jill E. McGovern
Arthur S. Mehlman
G. Peter O’Brien
S. Ford Rowan
Robert M. Tarola

Officers

Marie K. Karpinski, Vice President and Treasurer
Gregory T. Merz, Vice President and Chief Legal Officer
Amy M. Olmert, Vice President and Chief Compliance Officer
Richard M. Wachterman, Secretary
Erin K. Morris, Assistant Treasurer
Jennifer P. Streaks, 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 Registered Public Accounting Firm

PricewaterhouseCoopers LLP
Baltimore, MD

About the Legg Mason Funds

Equity Funds
American Leading Companies Trust
Classic Valuation Fund
Growth Trust
Special Investment Trust
U.S. Small-Capitalization Value Trust
Value Trust
Specialty Funds
Balanced Trust
Financial Services Fund
Opportunity Trust
Global Funds
Emerging Markets Trust
Global Income Trust
International Equity Trust
Taxable Bond Funds
Core Bond Fund
High Yield Portfolio
Investment Grade Income Portfolio
Limited Duration Bond Portfolio
Tax-Free Bond Funds
Maryland Tax-Free Income Trust
Pennsylvania Tax-Free Income Trust
Tax-Free Intermediate-Term Income Trust
Money Market Funds
Cash Reserve Trust
Tax Exempt Trust
U.S. Government Money Market Portfolio 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.

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

The Fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Form N-Q is available on the SEC’s website or may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information about the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.

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

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 Applicable to Registrant’s Principal Executive Officer and Principal Financial Officer

(a)   Legg Mason Income Trust, Inc. (“Registrant”) has adopted a Code of Ethics, as defined in the instructions to Form N-CSR that applies to the Registrant’s President and Treasurer, which is designed to deter wrongdoing and to promote:

•   Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

•   Full, fair, accurate, timely and understandable disclosure in reports and documents the Registrant files with, or submits to, the SEC or in other public communications made by the Registrant;

•   Compliance with applicable governmental laws, rules and regulations;

•   Prompt internal reporting of violations of the Code of Ethics to an appropriate person or persons identified in the Code of Ethics; and

•   Accountability for adherence to the Code of Ethics.

(c)   On August 12, 2004, the Registrant’s Code of Ethics for Principal Executive and Financial Officers was amended. The amended Code is set forth as an exhibit to this filing. A brief description of the amendment is set forth below:

•   The fifth bullet point of Section IV has been revised to clarify that it applies to employment positions.

•   The sixth bullet point of Section IV has been revised to require that Covered Persons report any employment positions they (or a member of their immediate family) hold with a service provider to a fund.

•   Footnote one to the third bullet in Section II has been added. That third bullet of Section II states that a Covered Officer should confer with the Chief Legal Officer if the Covered Officer will serve as director of any public company. There is an exception to the requirement to confer with the Chief Legal Officer if the directorship is of the Legg Mason Funds or their investment advisers or any affiliated person thereof. Footnote one clarifies that the exception does not apply to a company that is affiliated with a fund because the fund owns 5% of the company’s stock, or because the company owns more than 5% of the fund’s stock and the company is not part of the Legg Mason complex.

(d)	The Registrant has not granted a waiver, including an implicit waiver, from a provision of the code of ethics to the Registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions during the period covered by this report.
(e)	Not applicable.
(f)	A copy of the Code of Ethics is attached as exhibit 12(a)(1) to this Form N-CSR.

Item 3 — Audit Committee Financial Expert

The directors of the Registrant determined that its board has at least one audit committee financial expert serving on its Audit Committee.

Mr. Arthur S. Mehlman is the Audit Committee financial expert. He is “independent.”

Item 4 — Principal Accountant Fees and Services

(a)	Audit Fees
	Fiscal Year Ended December 31, 2003 — $139,220 Fiscal Year Ended December 31, 2004 — $156,750
(b)	Audit-Related Fees
	There were no additional fees billed to the Registrant during either of the last two fiscal years in addition to those disclosed in Item (a) above.
	PricewaterhouseCoopers LLP did not bill fees for assurance and related services that required pre-approval by the Audit Committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the Registrant’s last two fiscal years.
(c)	Tax Fees
	Fiscal Year Ended December 31, 2003 — $3,480 Fiscal Year Ended December 31, 2004 — $5,000
	Services include preparation of federal and state income tax returns and preparation of excise tax returns.
	PricewaterhouseCoopers LLP did not bill fees for tax services that required pre-approval by the Audit Committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the Registrant’s last two fiscal years.
(d)	All Other Fees
	There were no fees billed to the Registrant by PricewaterhouseCoopers LLP during either of the last two fiscal years in addition to those disclosed in items (a) through (c) above.
	PricewaterhouseCoopers LLP did not bill fees for services not included in Items 4(a) through (c) above that required pre-approval by the Audit Committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the Registrant’s last two fiscal years.
(e)	(1) The Audit Committee’s policy is delegation to its Chairperson of the authority to pre-approve items for which a decision may be desired prior to the next meeting of the Committee. Such pre-approvals are reported at the next quarterly meeting of the Audit Committee.

(2)	There were no services provided to the Registrant that were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
	PricewaterhouseCoopers LLP did not bill fees for services where pre-approval by the Audit Committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X was waived pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X during the Registrant’s last two fiscal years.
(f)	The percentage of hours expended by the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountants’ full-time, permanent employees was zero.
(g)	Non-Audit Fees
	Fiscal Year Ended December 31, 2003 — $883,350 Fiscal Year Ended December 31, 2004 — $372,631
(h)	The members of the Registrant’s Audit Committee have considered whether the non-audit services that were rendered by the Registrant’s principal accountant to the Registrant’s investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the Registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X are compatible with maintaining the principal accountant’s independence.

Item 5 — Audit Committee of Listed Registrants

     The Registrant is not a listed issuer as defined in Rule 10A-3 under the Securities Exchange Act of 1934.

Item 6 — Schedule of Investments

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

Item 7 — Disclosure of Proxy Voting Policies and Procedures For Closed-End Management Investment Companies

     The Registrant is not a closed-end management investment company.

Item 8 — Portfolio Managers of Closed-End Management Investment Companies

     The Registrant is not a closed-end management investment company.

Item 9 — Purchases of Equity Securities by Closed-End Management Investment Companies and Affiliated Purchasers

     The Registrant is not a closed-end management investment company.

Item 10 — 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, 23^rd Floor, Baltimore, Maryland 21202, Attn: Fund Secretary .

Item 11 — Controls and Procedures

(a)

The Registrant’s principal executive and principal financial officers have concluded, based on their evaluation of the effectiveness of the design and operation of the Registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) 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 time periods specified in the Securities and Exchange Commission’s rule and forms 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 (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) during the Registrant’s second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

Item 12 — Exhibits

(a)	File the exhibits listed below as part of this Form.
(a)(1)	The Registrant’s code of ethics applicable to registrant’s principal executive officer and principal financial officer is attached hereto.
(a)(2)	Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3)	The Registrant is not a closed-end management investment company.
(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 Light Street Trust Trust, Inc.

Date: February 25, 2005

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: February 25, 2005

By:	/s/ Marie K. Karpinski
	Marie K. Karpinski
	Vice President and Treasurer Legg Mason Income Trust, Inc.

Date: February 25, 2005

EX-99.P

LEGG MASON FUNDS
CODE OF ETHICS
FOR
PRINCIPAL EXECUTIVE AND FINANCIAL OFFICERS
(As adopted August 7, 2003; revised August 12, 2004)

I.     Covered Officers and Purpose of the Code

Legg Mason Funds’ code of ethics (the “Code”) for the investment companies within the Legg Mason family of mutual funds (each a “Fund,” and collectively, the “Funds”) applies to each Fund’s Principal Executive Officer and Principal Financial Officer (the “Covered Officers” each of whom are set forth in Exhibit A) for the purpose of promoting:

•   honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

•   full, fair, accurate, timely and understandable disclosure in reports and documents that a registrant files with, or submits to, the Securities and Exchange Commission (“SEC”) and in other public communications made by the Funds;

•   compliance with applicable laws and governmental rules and regulations;

•   the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and

•   accountability for adherence to the Code.

Each Covered Officer should adhere to a high standard of business ethics and should
be sensitive to situations that may give rise to actual as well as apparent conflicts of interest.

II.     Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest

Overview. A “conflict of interest” occurs when a Covered Officer’s private interest interferes with the interests of, or his or her service to, a Fund. For example, a conflict of interest would arise if a Covered Officer, or a member of his or her family, receives improper personal benefits as a result of his or her position with a Fund.

Certain conflicts of interest arise out of the relationships between Covered Officers and a Fund and already are subject to conflict of interest provisions in the Investment Company Act of 1940 (“Investment Company Act”) and the Investment Advisers Act of 1940 (“Investment Advisers Act”). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with a Fund because of their status as “affiliated persons” of the Fund. The Funds’ and the investment advisers’ compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code.

Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between a Fund and an

investment adviser of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for a Fund or for the adviser, or for both), be involved in establishing policies and implementing decisions that will have different effects on the adviser and the Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationship between a Fund and an adviser and is consistent with the performance by the Covered Officers of their duties as officers of the Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the Funds’ Boards of Directors/Trustees (“Boards”) that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes.

Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of a Fund.

* * * * *

Each Covered Officer must:

•   not use his or her personal influence or personal relationships improperly to influence financial reporting by a Fund;

•   not cause a Fund to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit the Fund;

     There are some actual or potential conflict of interest situations that, if material, should always be discussed with a chief legal officer that has been appointed by the Board of the Funds (“Chief Legal Officer”). Examples of these include:

•   service as a director on the board of any public company (other than the Funds or their investment advisers or any affiliated person thereof) ¹;

•   the receipt of any non-nominal gifts (i.e., in excess of $100);

•   the receipt of any entertainment from any company with which a Fund has current or prospective business dealings unless such entertainment is business-related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety;

•   any ownership interest in, or any consulting or employment relationship with, any of the Funds’ service providers (other than their investment advisers, or principal underwriter, or any affiliated person thereof);

¹This exception for affiliated persons of a Fund does not apply if the affiliation arises because the Fund owns 5% or more of the company’s outstanding voting securities, or because the company owns 5% or more of the Fund’s outstanding shares and the company is not a part of the Legg Mason complex

•   a direct or indirect financial interest in commissions, transaction charges or spreads paid by a Fund for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer’s employment, such as compensation or equity ownership.

III.      Disclosure and Compliance

•   Each Covered Officer should familiarize him or herself with the disclosure requirements generally applicable to the Funds;

•   each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about a Fund to others, whether within or outside the Fund, including to the Fund’s directors and auditors, and to governmental regulators and self-regulatory organizations;

•   each Covered Officer should, to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the Funds and the advisers with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds; and

•   it is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations.

IV.      Reporting and Accountability

Each Covered Officer must:

•   upon adoption of the Code (or thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Board that he or she has received, read, and understands the Code;

•   annually thereafter affirm to the Board that he or she has complied with the requirements of the Code;

•   not retaliate against any other Covered Officer or any employee of the Funds or their advisers or any affiliated persons thereof or service providers of the Funds for reports of potential violations that are made in good faith; and

•   notify the Chief Legal Officer promptly if he or she knows of any violation of this Code. Failure to do so is itself a violation of this Code.

•   report at least annually any employment position, including officer or directorships, held by the Covered Officer or any immediate family member of a Covered Officer with affiliated persons of the Funds.

•   report at least annually any employment position, including officer or directorships, held by the Covered Officer or any immediate family member of a Covered Officer with a service provider to the fund.

The Chief Legal Officer is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation. However, any approvals or waivers sought by a Covered Officer will be considered by the Code of Ethics Review Committee (the “Committee”) responsible for oversight of the Funds code of ethics under Rule 17j-1 under the Investment Company Act. If a Covered Officer seeking an approval or waiver sits on the Committee, the Covered Person shall recuse him or herself from any such deliberations. Any approval or waiver granted by the Committee will be reported promptly to the Chair of the Audit Committees of the Funds.

The Funds will follow these procedures in investigating and enforcing this Code:

•   the Chief Legal Officer will take all appropriate action to investigate any potential violations reported to him;

•   if, after such investigation, the Chief Legal Officer believes that no violation has occurred, the Chief Legal Officer is not required to take any further action;

•   any matter that the Chief Legal Officer believes is a violation will be reported to the Committee;

•   if the Committee concurs that a violation has occurred, it will inform the Board, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer;

•   the Committee will be responsible for granting waivers, as appropriate; and

•   any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules.

V.      Other Policies and Procedures

This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Funds, the Funds’ advisers, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The Funds’ and their investment advisers’ and principal underwriter’s codes of ethics under Rule 17j-1 under the Investment Company Act are separate requirements applying to the Covered Officers and others, and are not part of this Code.

VI.      Amendments

Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of the Board.

VII.      Confidentiality

     All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the appropriate Board and Fund counsel, and the board of directors and fund counsel of any other investment company for whom a Covered Officer serves in a similar capacity.

VIII.     Internal Use

The Code is intended solely for the internal use by the Funds and does not constitute an admission, by or on behalf of any Fund, as to any fact, circumstance, or legal conclusion.

Date: August 12, 2004

LEGG MASON FUNDS
CODE OF ETHICS

Exhibit A

Principal Executive Officer:	Mark R. Fetting
Principal Financial Officer:	Marie K. Karpinski

EX-99.1

Certification Filed as Exhibit 12(a)(2) to Form N-CSR

CERTIFICATION

I, Mark R. Fetting, certify that:

1. I have reviewed this report on Form N-CSR of Legg Mason Income Trust, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal half-year (the registrant’s second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 25, 2005

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

Certification Filed as Exhibit 12(a)(2) to Form N-CSR

CERTIFICATION

I, Marie K. Karpinski, certify that:

1. I have reviewed this report on Form N-CSR of Legg Mason Income Trust, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal half-year (the registrant’s second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 25, 2005

//s// Marie K. Karpinski
Marie K. Karpinski
Vice President and Treasurer
Legg Mason Income Trust, Inc.

EX-99.2

Certification Filed as Exhibit 12(b) to Form N-CSR

CERTIFICATION

I, Mark R. Fetting, Chief Executive Officer of Legg Mason Income Trust, Inc. (“Trust”), certify, that to my knowledge:

     1. The Trust’s periodic report on Form N-CSR for the period ended December 31, 2004 fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. Section 78m(a) or 78o(d)); and

     2. The information contained in such Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Trust.

//s// Mark R. Fetting Mark R. Fetting
President February 25, 2005 Date

Certification Filed as Exhibit 12(b) to Form N-CSR

CERTIFICATION

I, Marie K. Karpinski, Chief Financial Officer of Legg Mason Income Trust, Inc. (“Trust”), certify, that to my knowledge:

1. The Trust’s periodic report on Form N-CSR for the period ended December 31, 2004 fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. Section 78m(a) or 78o(d)); and

2. The information contained in such Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Trust.

//s// Marie K. Karpinski Marie K. Karpinski
Vice President and Treasurer February 25, 2005 Date