Net income for the three months ended September 30, 2006 increased from the prior year quarter 19% to $143.7 million from $121.0 million and diluted earnings per share increased 1% to $1.00 from $0.99 despite a 17% increase in the weighted average shares outstanding.  Income from continuing operations totaled $143.7 million, up 56% from the prior year’s quarter and income from continuing operations per diluted share increased 33% to $1.00.  Operating revenues increased to $1.0 billion from $466.4 million, up 121%.  Cash income from continuing operations (see Supplemental Non-GAAP Financial Information that follows) increased to $191.1 million from $104.9 million and cash income from continuing operations per diluted share increased to $1.32 from $0.86, up 82% and 53%, respectively.  The company’s revenues, expenses and earnings all increased primarily as a result of the addition of CAM and Permal. The pre-tax profit margin from continuing operations declined from 31.7% to 23.2% over the prior year period, primarily as a result of the impact of the CAM and Permal acquisitions, principally due to the resulting increase in distribution revenues, of which a substantial portion is passed through to third parties as distribution and servicing expense, a decrease in non-operating income as well as the addition of distribution expenses related to prior periods and lower revenues in a legacy asset manager which generates relatively higher average margins.  The pre-tax profit margin from continuing operations, as adjusted (see Supplemental Non-GAAP Financial Information), declined from 37.5% to 32.4% over the prior year period, primarily as a result of the impact of the acquisition of CAM, a decrease in non-operating income as well as lower revenues in a legacy asset manager which generates relatively higher average margins.  In the prior year’s quarter, income from discontinued operations, net of tax, totaled $28.9 million; diluted earnings per share from discontinued operations were $0.24.

Net income for the six months ended September 30, 2006 increased 28% to $299.7 million from $233.8 million and diluted earnings per share increased to $2.08 from $1.92, up 8%.  Income from continuing operations totaled $299.7 million, up 65% from the prior year’s period and income from continuing operations per diluted share increased 40% to $2.08.  Operating revenues increased to $2.1 billion from $904.1 million, up 129%.  Cash income from continuing operations (see Supplemental Non-GAAP Financial Information) increased to $393.7 million from $205.3 million and cash income from continuing operations per diluted share increased to $2.73 from $1.69, up 92% and 62%, respectively.  The company’s revenues, expenses and earnings all increased as a result of the addition of CAM and Permal.  The pre-tax profit margin from continuing operations declined from 32.1% to 23.8% over the prior year period, primarily as a result of the impact of the CAM and Permal acquisitions, principally due to the resulting increase in distribution revenues, of which a substantial portion is passed through to third parties as distribution and servicing expense, a decrease in non-operating income as well as lower revenues in a legacy asset manager which generates relatively higher average margins.  The pre-tax profit margin from continuing operations, as adjusted (see Supplemental Non-GAAP Financial Information), declined from 38.0% to 32.9% over the prior year period, primarily as a result of the impact of the acquisition of CAM, a decrease in non-operating income as well as lower revenues in a legacy asset manager which generates relatively higher average margins.  In the prior year’s period,

³ Nasdaq is a trademark of the Nasdaq Stock Market, Inc., which is not affiliated with Legg Mason.

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income from discontinued operations, net of tax, totaled $52.5 million; diluted earnings per share from discontinued operations were $0.43 in the prior year period.

Compared to the quarter ended June 30, 2006, net income for the September quarter decreased 8% to $143.7 million and diluted earnings per share decreased 7% from $1.08 to $1.00.  Income from continuing operations decreased 8% from the June quarter, primarily as a result of a 1% decrease in operating revenues primarily resulting from a lower level of average equity assets under management during the quarter, which led to reduced revenues from equity funds, and changes in the mix of the company’s mutual fund assets under management during the quarter toward lower revenue-generating fixed income and liquidity assets.  Recent investment performance issues at certain of our key equity asset managers contributed to net client outflows of equity assets during the quarter, which contributed to the changes in the assets under management mix.  In addition, mutual fund distribution expenses that related to prior quarters contributed to the decline in earnings during the quarter.  In the last three months, assets under management increased by $36.7 billion, or 4%, from $854.7 billion at June 30, 2006, primarily as a result of $20.3 billion in market appreciation and $16.4 billion in net client cash inflows.  The net client cash flows resulted from inflows in liquidity and fixed income assets, offset in part by net client outflows in equity assets.  Total compensation and benefits expense declined by $11.3 million during the quarter, as compared with the quarter ended June 30, 2006, primarily reflecting the elimination of certain expenses related to transitioning personnel as part of the integration of the acquired CAM business.  

Quarter Ended September 30, 2006 Compared to Quarter Ended September 30, 2005

Assets Under Management

The component changes in our assets under management (in billions) for the quarters ended September 30 were as follows:

Assets under management for the quarter ended September 30, 2006 were $891.4 billion, up $472.9 billion or 113% from the quarter ended September 30, 2005. The acquisitions of CAM and Permal accounted for approximately $426.1 billion at their acquisition dates or 90% of the net increase, with market performance, including currency translation, accounting for $36.2 billion, or 8% of the increase, and net client cash flows accounting for $15.2 billion, or 3%.  In the ordinary course of business, our asset managers will reduce, or waive, the management fees charged, or cap total expenses, for certain products, including liquidity products, for particular time periods to manage investment returns, or for other reasons, and to help attract or retain client assets under management. Our Institutional Asset Management division represented 53% of total assets managed, our Managed Investments division represented 40% and our Wealth Management division represented 7%. Non-U.S. domiciled clients accounted for 29% of total assets under management, which compares with 25% of non-U.S. client assets at September 30, 2005, with the increase primarily due to the acquisition of assets of non-U.S. domiciled clients managed by CAM and Permal.

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Our assets under management by division (in billions) as of September 30 were as follows:

⁽¹⁾ In the June 2006 quarter, the Mutual Funds/Managed Services division was renamed the Managed Investments division.

CAM’s fixed income and international equity separate account assets under management are included in our Institutional division, while its U.S. equity separate accounts, which are primarily retail in nature, and all proprietary mutual and other fund assets under management, including assets in institutional liquidity funds, are included in our Managed Investments division. Permal’s assets under management, including its fund assets, are included in our Wealth Management division.

Assets under management by asset class (in billions) as of September 30, 2006 and 2005 are as follows:

Our operating revenues by Asset Management division (in millions) for the quarter ended September 30 were as follows:

⁽¹⁾ Quarter ended September 2005 includes a reclassification of approximately $15.4 million from the Institutional division to the Managed Investments division to reflect a change whereby the revenues generated by all proprietary funds, except those managed by Permal, are included in Managed Investments division.

The increase in operating revenues in the Managed Investments and Institutional divisions was primarily due to the acquisition of CAM. The increase in operating revenues in the Wealth Management division was primarily due to the acquisition of Permal, offset in part by decreases at Private Capital Management (“PCM”).

Results of Continuing Operations

Operating Revenues

Revenues from continuing operations in the quarter ended September 30, 2006 were $1.0 billion, up 121% from $466.4 million in the prior year quarter, with over 90% of the increase, resulting from the CAM and Permal acquisitions.     

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Investment advisory fees from separate accounts increased 46% or $114.2 million to $364.9 million, primarily as a result of the CAM acquisition, which accounted for over 90% of the increase.  

Investment advisory fees from funds increased 254% to $490.6 million, with over 90% of the increase attributable to the acquisitions of CAM and Permal.     

Distribution and service fees increased 133% to $169.8 million, with approximately 85% of the increase due to the addition of distribution and service fees from CAM.  These fees reflect our continuing role as our proprietary funds’ distributor, with a related distribution expense.  In addition, distribution and service fees from Permal contributed to the increase.  

Other operating revenues increased 22% to $5.4 million, primarily due to increased commissions at PCM’s related brokerage, offset in part by changes in contractual arrangements with transfer agents.

Operating Expenses

Total compensation and benefits increased 75% to $368.3 million, primarily as a result of the addition of compensation costs from the acquired businesses and increased revenue share-based incentive expense on higher revenues at certain of our other subsidiaries. Compensation as a percentage of operating revenues was 36% for the quarter ended September 30, 2006, down from 45% in the prior period primarily as a result of lower incentive compensation as a percentage of revenues from the acquired businesses due to the significant portion of fund revenues of these businesses that are passed through to third parties as distribution and servicing expense.

Distribution and servicing expenses increased 305% to $294.3 million, with over 90% of the increase resulting from the addition of the acquired businesses. Communications and technology, occupancy, amortization of intangible assets and other expenses all increased primarily as a result of the addition of expenses related to the CAM acquisition. The increase in other expenses was primarily from professional fees, travel and promotional expenses.  

Other Income (Expense)

Interest expense increased $8.1 million to $18.7 million primarily due to the issuance of a $700 million term loan incurred in the CAM acquisition, offset in part by the repayment at maturity of $100 million in senior notes during the March 31, 2006 quarter and the conversion of all of the company’s outstanding zero-coupon contingent convertible senior notes.  

Provision for Income Taxes

The provision for income taxes increased 71% to $95.0 million, as a result of the increase in income from continuing operations. The effective tax rate from continuing operations increased to 39.8% from 37.6% in the prior year’s quarter, primarily due to a higher provision for state income taxes as a result of the acquisitions of CAM and Permal, which operate in state and local jurisdictions with higher effective income tax rates.

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Six Months Ended September 30, 2006 Compared to Six Months Ended September 30, 2005

Assets Under Management

The component changes in our assets under management (in billions) for the six months ended September 30 were as follows:

Our operating revenues by Asset Management division (in millions) for the six months ended September 30 were as follows:

⁽¹⁾ Six months ended September 2005 includes a reclassification of approximately $31.3 million from the Institutional division to the Managed Investments division to reflect a change whereby the revenues generated by all proprietary funds, except those managed by Permal, are included in Managed Investments division.

The increase in operating revenues in the Managed Investments and Institutional divisions was primarily due to the acquisition of CAM. The increase in operating revenues in the Wealth Management division was primarily due to the acquisition of Permal, offset in part by decreases at PCM.

Results of Continuing Operations

Operating Revenues

Revenues from continuing operations in the six months ended September 30, 2006 were $2.1 billion, up 129% from $904.1 million in the prior year six months ended September 30, 2005, with over 90% of the increase resulting from the CAM and Permal acquisitions.  

Investment advisory fees from separate accounts increased 50% or $241.7 million to $729.5 million, primarily as a result of the CAM acquisition, which accounted for approximately 90% of the increase.

Investment advisory fees from funds increased 272% to $980.8 million, with over 90% of the increase attributable to the acquisitions of CAM and Permal.     

Distribution and service fees increased 145% to $349.4 million, with approximately 83% of the increase primarily due to the addition of distribution and service fees from CAM.  These fees reflect our continuing role as our proprietary funds’ distributor, with a related distribution expense.  In addition, distribution and service fees from Permal contributed to the increase.  

Other operating revenues decreased 9% to $9.2 million, primarily due to changes in contractual arrangements with transfer agents.

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Operating Expenses

Total compensation and benefits increased 86% to $747.8 million, primarily as a result of the addition of compensation costs from the acquired businesses and increased revenue share-based incentive expense on higher revenues at certain of our other subsidiaries.  Compensation as a percentage of operating revenues was 36% for the six months ended September 30, 2006, down from 44% as a result of lower incentive compensation as a percentage of revenues from the acquired businesses due to the significant portion of fund revenues of these businesses that are passed through to third parties as distribution and servicing expense.

Distribution and servicing expenses increased 306% to $574.8 million, with over 90% of the increase resulting from the addition of the acquired businesses. Communications and technology, occupancy, amortization of intangible assets and other expenses all increased primarily as a result of the addition of expenses related to the CAM acquisition. The increase in other expenses was primarily from travel, promotional costs and professional fees.  

The litigation award settlement during the 2005 period reflects the reversal of $8.2 million of charges recorded in fiscal 2004 as a result of the settlement of a civil copyright infringement lawsuit.

Other Income (Expense)

Interest expense increased $14.1 million to $34.9 million primarily due to the issuance of a $700 million term loan incurred in the CAM acquisition, offset in part by the repayment at maturity of $100 million in senior notes during the March 31, 2006 quarter and the conversion of the zero-coupon contingent convertible senior notes.  

Provision for Income Taxes

The provision for income taxes increased 77% to $191.9 million, as a result of the increase in income from continuing operations. The effective tax rate from continuing operations increased to 39.0% from 37.5% in the prior year’s six months ended September 30, 2005, primarily due to a higher provision for state income taxes as a result of the acquisitions of CAM and Permal, which operate in state and local jurisdictions with higher effective income tax rates.

Supplemental Financial Information (Non-GAAP Information)

Cash income from continuing operations rose 82% for the quarter ended September 30, 2006 to $191.1 million or $1.32 per diluted share from $104.9 million or $0.86 per diluted share.  The pre-tax profit margin from continuing operations as adjusted for distribution and servicing expense for the quarters ended September 30, 2006 and 2005 was 32% and 38%, respectively.  Cash income from continuing operations rose 92% for the six months ended September 30, 2006 to $393.7 million or $2.73 per diluted share from $205.3 million or $1.69 per diluted share.  The pre-tax profit margin from continuing operations as adjusted for distribution and servicing expense for the six months ended September 30, 2006 and 2005 was 33% and 38%, respectively.

Cash income from continuing operations

As supplemental information, Legg Mason is providing a "non-GAAP" performance measure for "cash income from continuing operations" that management uses as a benchmark in evaluating the operating performance of Legg Mason and its subsidiaries.  We define "cash income from continuing operations" as income from continuing operations, plus amortization and deferred taxes related to intangible assets and stock-based compensation costs.  This measure is provided in addition to income from continuing operations, but is not a substitute for income from continuing operations and may not be comparable to non-GAAP performance measures, including measures of cash earnings or cash income, of other

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companies.  Legg Mason considers cash income from continuing operations to be useful to investors because it is an important metric in estimating the potential value of a company.

In calculating cash income from continuing operations, we add the after tax impact of the amortization of intangible assets from acquisitions, such as management contracts, to income from continuing operations to reflect the fact that this non-cash expense does not represent an actual decline in the value of the intangible assets.  Deferred taxes on intangible assets, including goodwill, represent the actual tax benefits that are not expected to be realized for GAAP purposes.  Since these deferred tax assets are not realized under GAAP absent an impairment charge or the disposition of the related business, we add them to income from continuing operations in the calculation of cash income from continuing operations.  Stock-based compensation is added back since it is a non-cash expense.  Although depreciation and amortization on fixed assets are non-cash expenses, we do not add these charges in calculating cash income from continuing operations because these charges are related to assets that will ultimately require replacement.  For the calculation of diluted cash income per share from continuing operations, the divisor is the number of total weighted average diluted shares outstanding used in the calculation of diluted earnings per share from continuing operations.  

A reconciliation of income from continuing operations to cash income from continuing operations is as follows:  

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Pre-tax profit margin from continuing operations, as adjusted

We believe that pre-tax profit margin from continuing operations adjusted for distribution and servicing expense is a useful measure of our performance because it indicates what our margins would have been without the distribution revenues that are passed through to third parties as a direct cost of selling our products, and thus shows the effect of these revenues on our margins.  This measure is provided in addition to the company's pre-tax profit margin from continuing operations calculated under GAAP, but is not a substitute for calculations of margin under GAAP and may not be comparable to non-GAAP performance measures, including measures of adjusted margins, of other companies.

A reconciliation of pre-tax profit margin from continuing operations adjusted for distribution and servicing expense is as follows:

Results of Discontinued Operations

Income from discontinued operations, net of tax, for the quarter ended September 30, 2005 was $28.9 million. Diluted earnings per share from discontinued operations in that quarter was $0.24.  Income from discontinued operations, net of tax, for the six months ended September 30, 2005 was $52.5 million and diluted earnings per share from discontinued operations was $0.43.

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Liquidity and Capital Resources

The primary objective of our capital structure and funding practices is to appropriately support Legg Mason’s business strategies and to provide needed liquidity at all times, including maintaining required capital in certain subsidiaries. Liquidity and the access to liquidity is important to the success of our ongoing operations. For a further discussion of our principal liquidity and capital resources policies, see our Annual Report on Form 10-K for the fiscal year ended March 31, 2006.

Our assets from continuing operations consist primarily of intangible assets, goodwill, cash and cash equivalents and investment advisory fee receivables. Our assets are principally funded by equity capital and long-term debt.  

During the quarter ended September 30, 2006, we paid the former owners of PCM the maximum fifth anniversary payment of $300 million, which was accrued as a liability, with a corresponding increase to goodwill at March 31, 2006.  In addition, a post-closing purchase price adjustment of $86.2 million was paid to Citigroup in September 2006 based on the retention of certain assets under management acquired in the CAM acquisition.  We funded both of these obligations with cash from operations.  Since the CAM contingent payment was paid from available cash, the unsecured 5-year, $300 million floating-rate credit agreement that we had entered to fund this obligation terminated in accordance with its terms.

During the quarter ended June 30, 2006, all of the remaining approximately $65 million principal amount at maturity of senior convertible notes were converted into 756 thousand shares of common stock.

At September 30, 2006, our total assets and stockholders’ equity were $9.3 billion and $6.2 billion, respectively. During the six months ended September 30, 2006, cash and cash equivalents decreased from $1.02 billion at March 31, 2006 to $1.01 billion at September 30, 2006.  Cash flows from operating activities provided $463.2 million, primarily attributable to net income.  Cash flows from investing activities used $428.2 million, primarily attributable to contractual obligation payments for PCM and CAM, payments for fixed assets, and acquisition related costs, offset in part by sales of investments.  Financing activities used $48.5 million, primarily due to the payment of cash dividends and a portion of short-term borrowings.

During the six months ended September 30, 2006, we paid cash dividends of $50.3 million.  The cash dividends paid during the six months ended September 30, 2005 of $53.2 million included amounts for three quarterly dividends due to the timing of when the cash was transferred. On October 17, 2006, the Board of Directors approved a regular quarterly cash dividend in the amount of $0.21 per share.  In addition, the holders of 8.3902 non-voting participating preferred shares will receive a quarterly dividend of $210,000 per preferred share.

On September 21, 2006, Moody’s Investor Service upgraded the rating on our senior, unsecured debt to A2 from A3.  The company’s Standard & Poor’s senior, unsecured debt rating is BBB+.

Contractual Obligations and Contingent Payments

We have contractual obligations to make future payments in connection with our short and long-term debt and non-cancelable lease agreements. In addition, we may be required to make contingent payments under business purchase agreements if certain future events occur.

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The following table sets forth these contractual and contingent obligations by fiscal year as of September 30, 2006, unless otherwise noted:

 ⁽¹⁾

Coupon interest on floating rate long-term debt is based on rates outstanding at September 30, 2006.

⁽²⁾

Rental commitments include approximately $17.5 per year for New York office space commencing in November 2007 pursuant to a lease executed during the quarter.

⁽³⁾

The amount of contingent payments reflected for any year represents the maximum amount that could be payable at the earliest possible date under the terms of business purchase agreements.

⁽⁴⁾

The table above does not include approximately $39.4 in capital commitments to investment partnerships in which Legg Mason is a limited partner. These obligations will be funded, as required, through the end of the commitment periods that range from fiscal 2007 to 2011.

Restructuring Charges

Following the acquisition of CAM, we formulated plans to re-align our mutual fund complex, particularly funds acquired as part of the CAM business. As part of the fund realignment, certain domestic funds are being merged with funds of similar strategy and certain funds have been or are being re-domiciled or liquidated, subject to approval by the Boards of Directors of the funds or fund shareholders.  During the six months ended September 30, 2006, we accrued costs associated with these plans, which primarily include proxy solicitation, including printing and mailing, termination payments to funds’ directors, and legal and accounting costs, of approximately $43.0 million, of which $11.7 million has been paid to date.  In addition, following the acquisition of CAM, we began an evaluation of excess office space in several geographic regions resulting from staff reductions and business integration.  During the six months ended September 30, 2006, we recognized a liability of $7.7 million for an early lease termination and the future commitment for unused office space.  The costs for mutual fund realignment and excess office space are associated with integration of the acquired CAM business; therefore, such costs are reflected as additional goodwill.  We expect to recognize additional liabilities (and goodwill) as we complete the fund realignment and our evaluation of the remaining office locations acquired in the acquisition. We expect all of these costs to be paid through the first quarter of fiscal year 2008.  Involuntary termination payments of $4.4 million were made during the six months ended September 30, 2006.

Critical Accounting Policies

Accounting policies are an integral part of the preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America. Understanding these policies, therefore, is a key factor in understanding the reported results of operations and the financial position of Legg Mason. Certain critical accounting policies require us to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in the financial statements. Due to their nature, estimates involve judgment based upon available information. Therefore, actual results or amounts could differ from estimates and the difference could have a material impact on our consolidated financial statements.  During the six months ended September 30, 2006, there were no material changes

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to the matters discussed under the heading "Critical Accounting Policies" in Part II, Item 7 of Legg Mason's Annual Report on Form 10-K for the fiscal year ended March 31, 2006; however, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No.123 (R), “Share-Based Payment” as described in Note 2 of Notes to the Consolidated Financial Statements for the six months ended September 30, 2006.

Recent Accounting Developments

The Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), in July 2006.  FIN 48 clarifies previously issued FASB Statement No. 109, “Accounting for Income Taxes,” by prescribing a recognition threshold and a measurement attribute in financial statements for tax positions taken or expected to be taken in a tax return.  FIN 48 also provides guidance on derecognition, classification, interest and penalties, interim accounting, disclosure and transition and is effective for fiscal year 2008.  Legg Mason is evaluating the provisions of FIN 48 and cannot currently estimate the impact, if any, of adopting FIN 48 on its consolidated financial statements.

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”), to provide a consistent definition of fair value and establish a framework for measuring fair value in generally accepted accounting principles.  SFAS 157 has additional disclosure requirements and is effective for fiscal year 2009.  Legg Mason is evaluating the adoption of SFAS 157 and cannot estimate the impact, if any, on its consolidated financial statements at this time.

In September 2006, the FASB issued Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”).  SFAS 158 requires an employer that is a business entity that sponsors one or more single-employer defined benefit plans to recognize the funded status of its plans on its balance sheet as of the balance sheet date.  SFAS 158 also requires gains or losses and prior service costs or credits that are not components of net periodic benefit costs to be cycled through other comprehensive income until recognized as net periodic benefit cost.  SFAS 158 has additional disclosure requirements and must be adopted by Legg Mason by March 31, 2007.  The adoption of SFAS 158 is not expected to have a significant impact on Legg Mason’s consolidated financial statements.

In September 2006, the Securities and Exchange Commission (“SEC”) staff issued Staff Accountant Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”  (“SAB 108”) to eliminate diversity in how registrants quantify financial statement misstatements.  Prior to SAB 108, registrants have used one of two widely recognized methods to quantify financial statement misstatements: the “rollover” method or the “iron curtain” method.  The iron curtain method quantifies uncorrected misstatements based on the effects of correcting the misstatements existing in the balance sheet in the current year, irrespective of the year of origination of the misstatement.  The rollover method quantifies uncorrected misstatements based on the amount of misstatements originating in the current year income statement and ignores the effects of correcting the portion relating to balance sheet misstatements from prior years.    SAB 108 requires that a registrant consider both the iron curtain and rollover methods when evaluating uncorrected misstatements.  As such, uncorrected misstatements previously deemed to be immaterial under one method, may now be material under the new “dual approach” and require correction in the current year financial statements.  SAB 108 has additional disclosure requirements and must be adopted by Legg Mason by March 31, 2007.  Legg Mason is evaluating its adoption of SAB 108, but does not anticipate any impact on its consolidated financial statements.     

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Forward-Looking Statements

We have made in this report, and from time to time may otherwise make in our public filings, press releases and statements by our management, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 concerning our operations, economic performance and financial condition.  The words or phrases "can be", "may be", "expects", "may affect", "may depend", "believes", "estimate", "project" and similar words and phrases are intended to identify such forward-looking statements.  Such forward-looking statements are subject to various known and unknown risks and uncertainties and we caution readers that any forward-looking information provided by or on behalf of Legg Mason is not a guarantee of future performance.  Actual results could differ materially from those anticipated in such forward-looking statements due to a number of factors, some of which are beyond our control, including: those discussed elsewhere herein, in our Annual Report on Form 10-K for the fiscal year ended March 31, 2006 under the heading "Risk Factors,” and in our other public filings, press releases and statements by our management.  Due to such risks, uncertainties and other factors, we caution each person receiving such forward-looking information not to place undue reliance on such statements.  All such forward-looking statements are current only as of the date on which such statements were made. We do not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

During the quarter ended September 30, 2006, there were no material changes to the information contained in Part II, Item 7A of Legg Mason’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006.  

Item 4.    Controls and Procedures

As of September 30, 2006, Legg Mason’s management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of Legg Mason’s disclosure controls and procedures. In evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on that evaluation, Legg Mason’s management, including its Chief Executive Officer and its Chief Financial Officer, concluded that Legg Mason’s disclosure controls and procedures were effective on a reasonable assurances basis.  There have been no changes in Legg Mason’s internal controls over financial reporting that occurred during the quarter ended September 30, 2006 that have materially affected, or are reasonably likely to materially affect, Legg Mason’s internal control over financial reporting.

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PART II.  

OTHER INFORMATION

Item 1.    Legal Proceedings

In October 2006, Legg Mason, Inc. and several of its officers, former officers and directors were named as defendants in two related civil actions filed in the U.S. District Court for the Southern District of New York.  The complaints allege that the defendants violated the Securities Exchange Act of 1934 by making misleading statements to the public and omitting certain material facts with respect to the acquisition of the Citigroup asset management business in order to artificially inflate the price of Legg Mason common stock.  The complaints seek certification of a class of shareholders who purchased Legg Mason stock between June 24, 2005 and July 25, 2006 and seek unspecified damages.  Legg Mason intends to defend the actions vigorously.  Legg Mason cannot accurately predict the eventual outcome of these actions at this point, or whether they will have a material adverse effect on Legg Mason.

Item 1A.    Risk Factors

The following are updates to the risk factors set forth in our Report on Form 10-K for the fiscal year ended March 31, 2006.

Poor Investment Performance Could Lead to a Loss of Assets Under Management and a Decline in Revenues

We believe that investment performance is one of the most important factors for the maintenance and growth of our assets under management. Poor investment performance, either on an absolute or relative basis, could impair our revenues and growth because:

•

existing clients might withdraw funds in favor of better performing products, which would result in lower investment advisory and other fees;

•

our ability to attract funds from existing and new clients might diminish; or

•

negative absolute investment performance will directly reduce our managed assets.

In addition, in the ordinary course of our business we may reduce or waive investment management fees, or cap total expenses, on certain products or services for particular time periods to manage investment returns, or for other reasons, and to help retain or increase managed assets.  If our revenues decline without a commensurate reduction in our expenses, our net income will be reduced.  Recently, several of our key equity asset managers have not produced strong investment performance, on a relative and, in some cases, an absolute basis, in certain products or accounts that they manage.  These investment performance issues may have hindered the ability of these asset managers to grow their assets under management and revenues and, in some cases, have contributed to a reduction in their assets under management and revenues.  There can be no assurance as to when, or if, these investment performance issues, or the resulting effects on the managers’ assets under management and revenues, will be resolved.

We May Not Be Able to Continue our Growth

Our operating revenues increased 68.4% and 36.2% in the fiscal years ended March 31, 2006 and 2005, respectively, while over the same periods our diluted earnings per share from continuing operations increased 30.9% and 52.4%. There may be any number of factors that reduce our growth rate, potentially including the acquisition and integration of the CAM business or our increased size resulting

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from the acquisition.  Based on our operating revenues and earnings per share reported for the first two quarters of fiscal year 2007, our growth rates in fiscal 2007, excluding the impact of acquisitions, will be significantly lower than our recent historical growth rates.  Accordingly, there can be no assurance that in any future period we will be able to grow our business, or that our asset managers will be able to match their recent historical investment or operating performance, at historical levels or at currently anticipated levels.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets out information regarding our purchases of Legg Mason common stock in each month during the quarter ended September 30, 2006:

⁽¹⁾ All shares were acquired through the surrender of shares by option holders to pay the exercise price of stock options.

⁽²⁾ On October 23, 2001, we announced that our Board of Directors had authorized Legg Mason, Inc. to purchase up to 3.0 million shares of Legg Mason common stock in open-market purchases.  There was no expiration date attached to the authorization.

Item 4.    Submission of Matters to a Vote of Security Holders

Our annual meeting of stockholders was held on July 18, 2006. In the election of directors, the five director nominees were elected with the following votes:

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The stockholders voted in favor of the Amendment of the Legg Mason, Inc. Articles of Incorporation to increase the number of authorized shares of Legg Mason common stock from 250,000,000 to 500,000,000 as follows:

The stockholders voted in favor of the re-approval of the Legg Mason, Inc. 1996 Equity Incentive Plan as follows:

The stockholders voted in favor of the ratification of the appointment of PricewaterhouseCoopers, LLP as independent registered public accounting firm for the fiscal year ending March 31, 2007 as follows:

Item 5.    Other Information

On July 31, 2006, Legg Mason’s wholly owned subsidiary, Permal Group Ltd., entered into a four-year agreement with a financial institution to finance, on a non-recourse basis, commissions to be paid to financial intermediaries in connection with future sales of certain share classes of proprietary funds.  The maximum amount that may be financed under the agreement is $90 million.    

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Item 6.    Exhibits

3.1

Articles of Incorporation of Legg Mason (incorporated by reference to Legg Mason’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006)

3.2       By-laws of Legg Mason as amended and restated April 25, 1988 (incorporated by reference to Legg Mason, Inc.’s Annual Report on Form 10-K for the year ended March 31, 1988)

10

Lease Agreement dated August 16, 2006 between Legg Mason, Inc. and FC Eighth Ave., LLC.

12

Computation of consolidated ratios of earnings to fixed charges

31.1     Certification of Chief Executive Officer

31.2  

Certification of Chief Financial Officer

32.1     Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted   pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2     Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

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

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INDEX TO EXHIBITS

3.1

Articles of Incorporation of Legg Mason (incorporated by reference to Legg Mason’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006)

3.2       By-laws of Legg Mason as amended and restated April 25, 1988 (incorporated by reference to Legg Mason, Inc.’s Annual Report on Form 10-K for the year ended March 31, 1988)

10

Lease Agreement dated August 16, 2006 between Legg Mason, Inc. and FC Eighth Ave., LLC.

12

Computation of consolidated ratios of earnings to fixed charges

31.1     Certification of Chief Executive Officer

31.2  

Certification of Chief Financial Officer

32.1     Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2     Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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