Key questions from the third quarter earnings call conducted by Legg Mason, Inc. on January 25, 2007.

You are getting close to the March 31st time. Could you give update on your thinking on capital management?

The debt level remains higher than desired. It is prudent to build reasonable levels of free cash at this point. We have typically used our cash to make acquisitions and that should be the priority for cash because that is typically how we have built the company over the years. They think it is inappropriate in the process of a CEO transition to lever up the balance sheet more and therefore limit the flexibility of incoming management. They are fine with modest and opportunistic purchases now and in the future and we have some capability already allotted to do that. There was some concern that any overly active motion in this part would affect both Moody’s and S&P on their positive statements that they have made about us and on the potential of our moving up in our rankings. They believe that any meaningful change in that at this stage would not be received well by the rating agency.

The margins benefited from performance fees. When can you get some more operating leverage going forward?

We see expenses running to September. Some of it is going to be cleanup because most of the integration between March and June ought to be finished. When I said next, there is always going to be something in Japan or Australia we have not done yet. You will get in the rent area and in the fix-up area, we have had a tremendous amount of offices that we moved, or moving or in the process of moving, and that will continue until about September. What we need to do to get the margin up which began to happen in December and that is that our assets under management and our fees continue to grow. We believe that our base costs are well covered now. We will get a few surprises every now and then, but our fundamental base costs are now in line and so what we need to do is have asset growth which would then give us revenue growth. That would help profitability and margins.

One of your competitors on the fixed income side talked about clients preferring liquidity versus long-term fixed income. Are you seeing the same thing?

We are seeing strong growth in long-term fixed income products and liquidity. I would not say that we are seeing liquidity interest at the expense of long-term products at the moment. Across the board domestically and internationally there is constructive environments for us in terms of bringing in new assets in both liquidity and long-term fixed income products.

How do you think about the growth rates going forward in terms of non-US flows versus US flows over the next couple of years?

Longer term we believe that on a relative basis the flows outside the US will be stronger. We have just digested a significant platform outside the US, so near term it will be at the margin. We do see a lot of opportunities there. We believe that long term over the next decade each and every year we should see some exciting activity outside the US.

How big the merchant banking gain was?

6 million.

What do you think the pipeline looks like compared to a quarter ago?

As we moved in and gone through the acquisition and the integration, and we have continued to put up good performance across the board more and more of institutional clients funds consultants have felt comfortable with Legg Mason and its subsidiaries, certainly Western Asset has had a good year. Last but not least we feel that we have got the liquidity business settled down for the moment. It is a competitive area and volatile as well, but that was a big contributing factor in terms of the pipeline moving forward.

How likely it is you would pursue acquisitions in the near term and then what areas would be attractive to you at this point in a perfect world?

The acquisition situation has historically come when it comes. you do not often control when something appears. We are not open to do an acquisition currently because we are trying to make sure we have done what we have done. In terms of where we are now, we are in a better position to consider something than we have been up until this month or the end of December. We were still just trying to get done what we were doing. At this time we have moved back to offense, so we are better prepared. When the deals come in, they tend to come when they come and we are seeing things now and that could potentially have some interest. The area that we are the most interested in and we have a weakness is in European equity and the fact that we do not have a lot of it. And so things that pertained to equity at least as we see it now in, particularly Europe would be of great interest to us. Whether we will do anything or not, whether that is going to happen I do not know, but particularly that would be of most interest. We are interested in Asia and a lot of it in specific equity, but that is much harder to do and put together but we will be opportunistic over the next 12 months as this begins to develop. I do not see any needs or few in the fixed income side. They have covered well the marketplace and they seem to be on top of virtually every stylistic way that you would look at it. There is always something that would come up that would be of interest. On the equity side we have a need and we are interested in doing something in time, it would be better if it was later, but at our side the other thing you have to realize is it would have to be reasonably sizable to be the base for us.

Could you talk about Legg Mason Capital Management flows across the Smith Barney channel and are you able to isolate whether you saw any outflows from the CAM, equity size from the fund rationalization process you talked about?

Overall the Legg Mason Capital Management flows have remained strong. They have generally been decent. It has been principally on the institutional side and in institutional fund flows. On the retail side, we have not had much help and in fact it has been negative. In some cases the negative is not only coming from the Smith Barney, but from former Legg Mason brokers who have left and joined other firms and under the agreements, can not carry those funds with them. There has been liquidation in general in the retail side on capital management funds, which would be basically value trust more than any others. In CAM there were things we did not anticipate at least to the severity that they took place, liquidity in the front end. We anticipated it, just not quite as strong and as fast, but we did anticipate that there would be outflows for some time in the Citigroup, Smith Barney, whatever name you want to put on it, mutual funds. Most of the major national firms have over the last three or four years witnessed outflows, some of them earlier and have turned it around, others continue to have it in the national firms and that is to an extent the result of the difference in shifting the platforms around. What has happened is as you have gone to open platforms in the national firms, proprietary funds have suffered almost across the board or often across the board, over the last two, three years they have, and that has continued to take place in a number of fund channels. It is not unique to us, but we were expecting that to happen. We also expected it to happen to some extent in the SMA channel because they no longer are proprietary to the Smith Barney system. That has not surprised us. The negative flows have narrowed. We are hoping that that is a true long-term thing and we have hopes that during this year we will get to zero or even turn positive. We have had improvement in performance, and that improvement in performance we think will make a difference. We have a positive attitude, but this piece here would not and has not surprised us.

Is there anything specific to the fund rationalization in terms of outflows?

We have some, but it is too soon to answer that with any validity. We have had some and the fund rationalization has been a major factor in their losing proprietary fund assets that those people in those funds have been a seller of the fund and that is a bigger factor in our outflows than we realize. We are going to see that over the next couple of months. It has not helped them; they have had a lot of battles to fight that has been one of them. The fund rationalization will have positive effects. It will dramatically enhance their performance areas and which already have turned around nicely from everything that we can see. We are optimistic on that side that is an area we have been spending a lot of time and effort. We are happy with what is going on at Clear Bridge and what they are trying to do. We think moving forward that we could see some modest outflows from here, but feel constructive on the impact of the fund realignment. The most important thing that we believe is that we will have better focus, higher quality funds, and ultimately put better numbers on the board.

Can you quantify the outflows in the separately managed accounts and talk what style predominates there and whether you would also be shifting what you offer there or what you emphasize there?