Year-to-Date Financial Highlights

- Total revenues were $3.2 billion, up 101% from the previous year period primarily as a result of the transaction with Citigroup and the acquisition of the Permal Group.
- Income from continuing operations of $473.8 million represented an increase of 68% over the comparable period last year.
- Income from discontinued operations in the first nine months of fiscal 2006 was $68.6 million, or 55 cents per share, reflecting the results of the company''s private client and capital markets businesses, which were sold to Citigroup.

- Net income for the first nine months of fiscal 2007 was $474.3 million, or $3.29 per share, compared to $350.7 million, or $2.82 per share on a diluted basis, excluding the one - time gain from the sale of the company’s brokerage business, for the prior - year period. Weighted average shares increased 15% to 144.2 million from 125.3 million in the prior year period due primarily to the acquisitions.
- The pre- tax profit margin from continuing operations for the first nine months of fiscal 2007 was 24% versus 28.8% the prior - year period. The pre-tax profit margin from continuing operations, as adjusted,) was 33.1% versus 35.2% last year. Cash income from continuing operations of $620.3 million was 92% higher than the first nine months of fiscal 2006.

- At December 31, 2006, Legg Mason’s cash position was $1.1 billion; long-term debt was $1.2 billion; and stockholders'' equity was $6.4 billion. The ratio of total debt to total capital (total equity plus total debt) was 15%.

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?