This summary is based on the third quarter fiscal 2007 earnings call conducted by Legg Mason, Inc. (LM: chart) on January 25, 2007.

Key Investors Issues

- EPS were $1.21 per share compared to 89 cents per share last year.
- Net income was $174.6 million compared to $116.9 million a year ago.
- Revenues were $1.13 billion, up 10% from the $1.03 billion reported for the second quarter of fiscal 2007.

Third Quarter Highlights

Revenues were $1.13 billion, up 10% from the $1.03 billion reported for the second quarter of fiscal 2007, reflecting higher average assets under management, favorable equity market conditions and an increase in performance fees of $39.4 million from the prior quarter, primarily from the Permal Group.

- Income from continuing operations was $174.1 million, or $1.21 per share, compared to $143.7 million, or $1 per share, in the second quarter of fiscal 2007. The increase is primarily due to higher performance fees and higher average assets under management.
- Cash income from continuing operations was $226.7 million, or $1.57 per share, compared to $191.1 million, or $1.32 per share, during the second quarter of fiscal 2007.
- Total assets under management grew to $944.8 billion as of December 31, 2006, up $53.4 billion, or 6%, from $891.4 billion at September 30, 2006.
- Positive net client cash flows were $23 billion.

Net income was $174.6 million, or $1.21 per share, and reflects full-quarter contributions from the company’s acquisitions of Citigroup Asset Management and the Permal Group.

- The third quarter of fiscal 2006 included the results of the acquired companies only from their respective acquisition dates of December 1, 2005 and November 1, 2005. Net income in the third quarter of fiscal 2006 was $760.3 million, or $5.80 per share, including the $643.4 million, or $4.91 per share, after- tax gain related to the sale of the company’s brokerage business, as well as $16.1 million, or 12 cents per share, of income (net of tax) from discontinued operations. Net income, excluding the one -time gain from the sale of the company’s brokerage business was $116.9 million, or 89 cents per share, in the third quarter of fiscal 2006.

- Income from continuing operations was $100.8 million, or 77 cents per share, in the third quarter of fiscal 2006. Cash income from continuing operations was $117.6 million, or 90 cents per share, in the third quarter of fiscal 2006.

The third quarter was highlighted by the continued performance of Western Asset Management, primary fixed income manager that manages approximately 60% of total assets under management, and Permal, funds -of -hedge funds investment manager.

- Western had a record quarter of net client flows, amounting to approximately $23 billion, and continues to benefit from strong investment performance. Additionally, liquidity asset class has grown to new highs from the lows experienced earlier in the fiscal year. Permal’s performance fees contributed substantially to the increase in revenues and income in the quarter. Since its acquisition in November 2005, Permal has experienced strong asset growth, having increased assets almost 50% year over year, and continues to make meaningful progress in diversifying its distribution base. Permal completed its first agreement to distribute its products in the U.S. through a large distributor. Brandywine Global Investment Management also experienced strong asset growth, increasing assets almost 13% during the quarter and almost 50% year over year.
- Legg Mason’s equity assets under management benefited from generally favorable market conditions in the final quarter of calendar 2006.

The company sets a 12- 15 month timetable for achieving integration goals for Citigroup’s asset management business and it is in the advanced stages of completing those tasks.

Critical business systems are largely converted and on track for total conversion by the end of March. The company realized the cost savings originally projected from the integration by the end of the third quarter. The company has succeeded in keeping portfolio managers insulated from the integration process, allowing them to maintain their focus uninterrupted. With the integration all but complete, the company is focused on growth opportunities and leveraging the scope and scale of global platform.

Total assets under management grew to $944.8 billion as of December 31, 2006, up $53.4 billion, or 6%, from $891.4 billion at September 30, 2006.

Market appreciation was responsible for $30.9 billion of the increase and positive net client cash flows contributed 423 billion, as positive net client flows in the fixed income and liquidity assets were offset in small part by negative net client cash flows in equity assets. Average assets under management were $925 billion compared to $870.3 billion in the second quarter of fiscal 2007, representing a 6% increase.

All three of Legg Mason’s asset classes – fixed income, equity and liquidity – ended the third quarter with increases in assets under management.

Fixed income assets, managed principally by Western Asset, had positive net client cash flows and strong market appreciation and increased 4%. Equity assets, managed principally by investment managers ClearBridge Advisors, Legg Mason Capital Management, Brandywine Global Investment Management, Royce & Associates, the Permal Group, Private Capital Management and Batterymarch Financial Management, benefited primarily from favorable equity market conditions and increased 7%. Liquidity assets, managed principally by Western Asset, experienced strong positive net client cash flows and rose 9%.

- The composition of assets at December 31, 2006 was comparable to that at the end of the prior quarter, with fixed income assets aggregating $460 billion, or 49% of total assets under management; equity assets aggregating $337.1 billion, or 36% of total assets under management; and liquidity assets aggregating $147.7 billion, or 15% of total assets under management.
- The Institutional and Managed Investments divisions both experienced positive net client cash flows. Legg Mason’s Institutional division’s assets under management increased by 4% to $492.1 billion. The Managed Investments division''s assets increased by 8%, to $384.8 billion. The Wealth Management division''s assets increased by 6%, ending the quarter at $67.9 billion.
- Assets managed for U.S. - domiciled clients increased by 6%, to $676.8 billion, or 72% of total assets under management. Assets managed for non- U.S. domiciled clients increased by 5%, to $268 billion, or 28% of total assets under management.
- Expenses rose 9% compared to the second quarter, to $869.6 million, primarily reflecting:

An approximately $48 million increase in compensation and benefits expense related to higher incentive accruals on increased revenues, including performance fees.

- Increased investment in the areas of occupancy, technology and communications to further support the company’s new business model.
- Pre-tax profit margin from continuing operations increased to 24.5% from 23.2% in the second quarter of fiscal 2007. The pre-tax profit margin from continuing operations, as adjusted for distribution and servicing expenses, was 33.5% in the third quarter of fiscal 2007 and 32.4% in the second quarter of fiscal 2007. Net income in the third quarter of fiscal 2007 benefited from a decline in the effective tax rate primarily reflecting increased earnings in jurisdictions with lower effective tax rates.