Exhibit 17(e)

Annual Report to Shareholders 1

To Our Shareholders,

We are pleased to provide you with Legg Mason Income Trust’s annual report for the year ended December 31, 2008, combining reports for the Legg Mason Investment Grade Income Portfolio and Legg Mason Limited Duration Bond Portfolio.

The following table summarizes key statistics for the Primary Class of each portfolio, as of December 31, 2008:

	SEC YieldA		Average Life	Net Asset Value Per Share
Investment Grade	12.29	%	11.74 years	$	6.96
Limited Duration	6.92	%	4.96 years	$	7.95

^A SEC yields reported are for the 30 days ended December 31, 2008. Yields are subject to change at any time.

For the year ended December 31, 2008, total returns for the Primary Class of shares of the Investment Grade Income and Limited Duration Portfolios were -26.19% and -16.52%, respectively. Total returns for the Institutional Class of shares of the Investment Grade Income and Limited Duration Portfolios were -25.71% and -16.09%, respectively.

The performance data quoted represent past performance and do not guarantee future results. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information, please visit www.leggmason.com/individualinvestors. The investment return and principal value of the Funds 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.

Information about each Fund’s performance over longer periods of time is shown in the respective Performance Information sections within this report. For more information about the Funds’ share classes included in this report, please contact your financial advisor.

PricewaterhouseCoopers LLP, the Funds’ independent registered public accounting firm, has completed its annual examination of the Funds, and audited financial statements for the fiscal year ended December 31, 2008 are included in this report.

Many Primary Class shareholders invest regularly in Fund shares on a dollar cost averaging basis. Most do so by authorizing automatic, monthly transfers of $50 or more from their bank checking or brokerage accounts. Dollar cost averaging is a convenient and sensible way to invest, as it encourages continued purchases over time regardless of fluctuating price levels. Of course, it does not ensure a profit nor protect against declines in the value of your investment. Your financial advisor will be happy to help you establish a dollar cost averaging account should you wish to do so.

2 Annual Report to Shareholders

This is my first letter to you as Chairman of the Funds. In November, the Funds’ Board of Directors elected David Odenath as President and me as Chairman of the Board of Directors of the Funds. At that meeting, Jack Curley, who served as Chairman of all the Legg Mason Funds, retired after many years of exemplary service. Jack embodied the finest qualities of a good chairman; he was ethical, hard-working and perceptive. He had a deep understanding of mutual fund issues and always acted in the shareholders’ best interests. I have big shoes to fill and I will work hard to do so. We wish Jack all the best and thank him for his many years of service.

On behalf of the Board and the entire team at Legg Mason, we appreciate your support.

Sincerely,

Mark R. Fetting	David Odenath
Chairman	President

February 27, 2009

Annual Report to Shareholders 3

Management’s Discussion of Fund Performance

Legg Mason Investment Grade Income Portfolio

Total returns for the Fund for various periods ended December 31, 2008 are presented below, along with those of comparative indices:

			Average Annual Total Returns
	One Year		Five Years		Ten Years		Since InceptionA
Investment Grade:
Primary Class	–26.19	%	–2.92	%	+1.86	%	+5.39	%
Institutional Class	–25.71	%	–2.41	%	+2.40	%	+3.65	%
Barclays Capital U.S. Credit Bond IndexB	–3.08	%	+2.65	%	+4.85	%	+7.41	%
Lipper Corporate Debt Funds BBB Rated
Category AverageC	–9.44	%	+1.05	%	+3.61	%	+6.28	%

The performance data quoted represent past performance and do not guarantee future results. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information for the Primary and Institutional Classes, please visit www.leggmason.com/individualinvestors. 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 gross expense ratios for the Primary and Institutional Classes were 1.30% and 0.74%, respectively, as indicated in the Fund’s most current prospectus dated May 1, 2008 and do not reflect fee waivers or reimbursements. These expenses include management fees, 12b-1 distribution and service fees and other expenses.

The net expense ratios for the Primary and Institutional Classes were 1.00%, and 0.50%, respectively, as indicated in the Fund’s prospectus dated May 1, 2008 and reflect voluntary fee waivers and/or reimbursements, which are currently expected to continue until April 30, 2009, but which may be reduced or terminated at any time.

For the 12 months ended December 31, 2008, Primary Class shares of Legg Mason Investment Grade Income Portfolio returned -26.19%. The Fund’s unmanaged benchmark, the Barclays Capital U.S. Credit Bond Index (the “Index”), returned -3.08% for the same period. The Lipper Corporate Debt Funds BBB Rated Category Average returned -9.44% over the same time frame.

4 Annual Report to Shareholders

Issue selection had a negative impact on relative performance due, in large part, to 19 of the portfolio’s 20 largest overweights underperforming. Sub-sector allocation also had a negative impact on relative performance due, in large part, to the portfolio’s overweights in basic Industry, Financials and Energy, which returned -10.07%, -8.37% and -5.84%, respectively, as well as underweights to Non-Corporates, Consumer Noncyclicals and Capital Goods, which returned 6.68%, 4.12% and -1.27%, respectively. In addition, credit quality allocation had a negative impact on relative performance. This was due to the portfolio’s overweight to BBB-rated issues, which returned -8.67%, and an underweight to AAA-rated issues, which returned 8.15%.

Western Asset Management Company

January 20, 2009

^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. Although it is not possible to invest in an index, it is possible to purchase investment vehicles designed to track the performance of certain indices.

^B The Barclays Capital (formerly Lehman Brothers) U.S. Credit Bond Index is an index composed of corporate and non-corporate debt issues that are investment grade (rated Baa3/BBB- or higher).

^C Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. The Lipper Corporate Debt Funds BBB Rated Category Average is comprised of the Fund’s peer group of mutual funds.

Annual Report to Shareholders 5

Expense Example

Legg Mason Investment Grade Income Portfolio

As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution and service (12b-1) fees on Primary Class shares; 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, 2008, and held through December 31, 2008. The ending values assume dividends were reinvested at the time they were paid.

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 if your shares were held through the entire 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 ratio 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 Account Value 7/1/08		Ending Account Value 12/31/08		Expenses PaidA During the Period 7/1/08 to 12/31/08
Primary Class:
Actual	$	1,000.00	$	761.30	$	4.43
Hypothetical (5% return before expenses)		1,000.00		1,020.11		5.08
Institutional Class:
Actual	$	1,000.00	$	764.40	$	2.22
Hypothetical (5% return before expenses)		1,000.00		1,022.62		2.54

^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 ratios of 1.00%, and .50% for the Primary Class and Institutional Class, respectively, multiplied by the average values over the period, multiplied by the number of days in the most recent fiscal half-year (184), and divided by 366.

6 Annual Report to Shareholders

Performance Information

Legg Mason investment Grade Income Portfolio

The graphs on the following pages compare the Fund’s total returns to 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 of the Fund 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 the securities market index do not take into account any transaction costs associated with buying and selling portfolio 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. Both the Fund’s results and the index’s results assume reinvestment of all dividends and distributions 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.

Annual Report to Shareholders 7

Growth of a $10,000 Investment — Primary Class

Periods Ended December 31, 2008

	Cumulative Total Return		Average Annual Total Return
One Year	-26.19	%	-26.19	%
Five Years	-13.78	%	-2.92	%
Ten Years	+20.21	%	+1.86	%

The performance data quoted represent past performance and do 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.leggmason.com/individualinvestors. 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 consists of publicly issued US corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements. To qualify, bonds must be SEC-registered. The index includes both corporate (industrial, utility and finance) and non-corporate (sovereign, supranational, foreign agency, and foreign local government) sectors. Formerly: Lehman Credit Bond Index. The name change is a result of Barclays’ purchase of Lehman Brothers in September 2008.

8 Annual Report to Shareholders

Performance Information — Continued

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

Periods Ended December 31, 2008

	Cumulative Total Return		Average Annual Total Return
One Year	-25.71	%	-25.71	%
Five Years	-11.46	%	-2.41	%
Ten Years	+26.71	%	+2.40	%

The performance data quoted represent past performance and do 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.leggmason.com/individualinvestors. 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.

Annual Report to Shareholders 9

Portfolio Composition (as of December 31, 2008)^B

Standard & Poor’s Debt Ratings^C (as a percentage of the portfolio)

Maturity Schedule (as a percentage of the portfolio)

^B The Fund is actively managed. As a result, the composition of its portfolio holdings and sectors is subject to change at any time. The charts do not include derivatives such as Futures Contracts and Options Written.

^C Standard & Poor’s Ratings Service provides capital markets with credit ratings for the evaluation and assessment of credit risk. These ratings are the opinions of S&P and not absolute measures of quality or guarantees of performance.

^D Preferred Stocks do not have a defined maturity date.

10 Annual Report to Shareholders

Performance Information — Continued

Legg Mason Investment Grade

Spread Duration

December 31, 2008

Economic Exposure

Spread duration is defined as the change in value for a 100 basis point change in the spread relative to Treasuries. The spread over Treasuries is the annual risk- premium demanded by investors to hold non-Treasury securities. This chart highlights the market sector exposure of the portfolio and the exposure relative to the selected benchmark as of the end of the reporting period.

EM	— Emerging Markets
LCBI	— Barclays U.S. Capital Credit Bond Index
HY	— High Yield
IG Credit	— Investment Grade Credit
ABS	— Asset Backed Securities

Annual Report to Shareholders 11

Legg Mason Investment Grade

Effective Duration

December 31, 2008

Interest Rate Exposure

Effective duration is defined as the change in value for a 100 basis point change in Treasury yields. This chart highlights the interest rate exposure of the portfolio relative to the selected benchmark as of the end of the reporting period.

EM	— Emerging Markets
LCBI	— Barclays U.S. Capital Credit Bond Index
HY	— High Yield
IG Credit	— Investment Grade Credit
ABS	— Asset Backed Securities

12 Annual Report to Shareholders

Portfolio of Investments

Investment Grade Income Portfolio

December 31, 2008

	Rate		Maturity Date	Par/Shares		Value
Long-Term Securities — 97.3%
Corporate Bonds and Notes — 76.6%
Aerospace and Defense — 1.1%
L-3 Communications Corp.	7.625	%	6/15/12	$	1,000,000	$	977,500
United Technologies Corp.	6.125	%	2/1/19		200,000		213,979
United Technologies Corp.	5.400	%	5/1/35		1,140,000		1,074,344
							2,265,823
Airlines — 0.2%
Continental Airlines Inc.	6.545	%	2/2/19		149,004		119,203
Continental Airlines Inc.	7.256	%	3/15/20		427,062		328,838
							448,041
Automobiles — 1.1%
DaimlerChrysler NA Holding Corp.	8.500	%	1/18/31		600,000		438,733
Ford Motor Co.	7.450	%	7/16/31		1,975,000		553,000
Ford Motor Co.	8.900	%	1/15/32		370,000		88,800
General Motors Corp.	8.250	%	7/15/23		650,000		107,250
General Motors Corp.	8.375	%	7/15/33		6,190,000		1,083,250
							2,271,033
Beverages — 0.3%
Foster’s Finance Corp.	4.875	%	10/1/14		840,000		721,875	A
Building Products — N.M.
American Standard Inc.	8.250	%	6/1/09		37,000		37,225
American Standard Inc.	7.625	%	2/15/10		5,000		5,000
							42,225
Capital Markets — 5.0%
BankAmerica Capital III	5.323	%	1/15/27		585,000		310,192	B
Goldman Sachs Capital II	5.793	%	12/29/49		2,755,000		1,059,085	C
Lehman Brothers Holdings Capital Trust VII	5.857	%	11/29/49		3,100,000		310	C,D
Lehman Brothers Holdings Inc.	6.500	%	7/19/17		2,000,000		200	D
Merrill Lynch and Co. Inc.	6.050	%	8/15/12		540,000		532,753

Annual Report to Shareholders 13

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Capital Markets — Continued
Merrill Lynch and Co. Inc.	5.700	%	5/2/17	$	2,400,000	$	2,126,294
Merrill Lynch and Co. Inc.	6.400	%	8/28/17		1,210,000		1,212,259
Merrill Lynch and Co. Inc.	6.110	%	1/29/37		910,000		818,022
Morgan Stanley	5.050	%	1/21/11		400,000		384,198
Morgan Stanley	5.250	%	11/2/12		750,000		682,106
Morgan Stanley	4.750	%	4/1/14		65,000		49,523
Morgan Stanley	6.625	%	4/1/18		1,050,000		921,154
The Bear Stearns Cos. Inc.	6.400	%	10/2/17		440,000		457,238
The Bear Stearns Cos. Inc.	7.250	%	2/1/18		590,000		646,555
The Goldman Sachs Group Inc.	6.345	%	2/15/34		2,025,000		1,469,449
							10,669,338
Chemicals — 0.4%
The Dow Chemical Co.	7.375	%	11/1/29		800,000		753,422
Commercial Banks — 7.4%
CBA Capital Trust I	5.805	%	6/30/49		3,510,000		2,356,509	A
Comerica Capital Trust II	6.576	%	2/20/37		990,000		397,436	C
KeyBank NA	5.800	%	7/1/14		5,000		4,401
Rabobank Capital Funding Trust II	5.260	%	12/31/49		320,000		169,290	A,C
Rabobank Capital Funding Trust III	5.254	%	10/21/49		3,120,000		1,710,612	A,C
RBS Capital Trust III	5.512	%	9/30/49		4,020,000		1,607,027	C
SunTrust Bank	5.000	%	9/1/15		770,000		712,265
SunTrust Capital VIII	6.100	%	12/15/36		1,550,000		1,091,216	C
SunTrust Preferred Capital I	5.853	%	12/15/49		1,100,000		594,000	C
UnionBanCal Corp.	5.250	%	12/16/13		785,000		668,696
Wachovia Capital Trust III	5.800	%	3/15/42		2,580,000		1,522,200	C
Wachovia Corp.	5.625	%	10/15/16		2,000,000		1,826,994
Wachovia Corp.	5.750	%	6/15/17		580,000		577,298

14 Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Commercial Banks — Continued
Wells Fargo Capital X	5.950	%	12/15/36	$	1,260,000	$	1,079,880
Wells Fargo Capital XIII	7.700	%	12/29/49		1,500,000		1,237,966	C
							15,555,790
Commercial Services and Supplies — 0.3%
Waste Management Inc.	7.375	%	5/15/29		690,000		588,889
Consumer Finance — 7.1%
American Express Co.	6.800	%	9/1/66		3,930,000		2,034,368	C
Capital One Financial Corp.	6.750	%	9/15/17		670,000		648,945
Ford Motor Credit Co.	7.375	%	2/1/11		2,390,000		1,817,504
Ford Motor Credit Co.	7.246	%	6/15/11		6,828,000		4,506,480	B
GMAC LLC	7.500	%	12/31/13		2,687,000		1,961,510	A
GMAC LLC	0.000	%	6/15/15		40,000		6,753	E
GMAC LLC	8.000	%	12/31/18		348,000		174,000	A
GMAC LLC	8.000	%	11/1/31		2,465,000		1,465,171	A
Nelnet Inc.	7.400	%	9/29/36		1,310,000		392,796	C
SLM Corp.	5.000	%	10/1/13		1,400,000		1,001,728
SLM Corp.	8.450	%	6/15/18		1,290,000		1,019,901
							15,029,156
Diversified Financial Services — 10.9%
AGFC Capital Trust I	6.000	%	1/15/67		860,000		205,408	A,C
AIG SunAmerica Global Financing VI	6.300	%	5/10/11		5,170,000		4,445,528	A
BAC Capital Trust XI	6.625	%	5/23/36		1,000,000		924,062
BAC Capital Trust XIV	5.630	%	3/15/49		2,730,000		1,093,791	C
Bank of America Corp.	8.000	%	12/29/49		1,540,000		1,107,703	C
Beaver Valley II Funding	9.000	%	6/1/17		996,000		933,740
Capital One Bank	6.500	%	6/13/13		690,000		614,865
Capmark Financial Group Inc.	5.875	%	5/10/12		1,000,000		340,991
Chase Capital II	3.693	%	2/1/27		1,980,000		1,034,411	B
Citigroup Capital XXI	8.300	%	12/21/57		970,000		748,100	C

Annual Report to Shareholders 15

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Diversified Financial Services — Continued
Citigroup Inc.	6.125	%	8/25/36	$	1,000,000	$	895,795
Citigroup Inc.	8.400	%	4/29/49		375,000		247,609	C
General Electric Capital Corp.	6.750	%	3/15/32		5,000		5,316
General Electric Capital Corp.	6.375	%	11/15/67		2,040,000		1,282,281	C
Glen Meadow Pass-Through Certificates	6.505	%	2/12/67		860,000		384,500	A,C
HSBC Finance Capital Trust IX	5.911	%	11/30/35		2,500,000		1,046,010	C
HSBC Finance Corp.	5.500	%	1/19/16		1,260,000		1,196,623
ILFC E-Capital Trust II	6.250	%	12/21/65		2,320,000		968,862	A,C
JPMorgan Chase and Co.	4.891	%	9/1/15		1,035,000		1,039,958	C
JPMorgan Chase and Co.	6.125	%	6/27/17		325,000		319,840
TNK-BP Finance SA	7.875	%	3/13/18		310,000		155,000	A
UBS Preferred Funding
Trust V	6.243	%	5/15/49		3,030,000		1,654,756	C
ZFS Finance USA Trust II	6.450	%	12/15/65		4,990,000		2,330,574	A,C
							22,975,723
Diversified Telecommunication Services — 2.5%
AT&T Corp.	8.000	%	11/15/31		1,200,000		1,507,362
AT&T Inc.	5.100	%	9/15/14		760,000		747,070
AT&T Inc.	5.600	%	5/15/18		500,000		509,072
Embarq Corp.	7.082	%	6/1/16		930,000		716,100
Verizon Global Funding Corp.	7.750	%	6/15/32		375,000		414,695
Verizon Global Funding Corp.	5.850	%	9/15/35		1,350,000		1,343,182
							5,237,481
Electric Utilities — 4.1%
Commonwealth Edison Co.	5.800	%	3/15/18		1,590,000		1,437,055
Energy Future Holdings Corp.	10.875	%	11/1/17		130,000		92,300	A

16 Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Electric Utilities — Continued
Energy Future Holdings Corp.	11.250	%	11/1/17	$	2,930,000	$	1,421,050	A,F
FirstEnergy Corp.	7.375	%	11/15/31		2,565,000		2,426,531
Pacific Gas and Electric Co.	6.050	%	3/1/34		1,900,000		2,017,912
The Cleveland Electric Illuminating Co.	7.880	%	11/1/17		850,000		873,182
The Detroit Edison Co.	5.200	%	10/15/12		310,000		305,836
							8,573,866
Energy Equipment and Services — 1.1%
CenterPoint Energy Resources Corp.	7.875	%	4/1/13		1,010,000		935,557
EEB International Ltd.	8.750	%	10/31/14		790,000		732,725	A
Pride International Inc.	7.375	%	7/15/14		800,000		744,000
							2,412,282
Food and Staples Retailing — 0.6%
Safeway Inc.	6.250	%	3/15/14		120,000		120,622
The Kroger Co.	8.000	%	9/15/29		1,000,000		1,129,665
							1,250,287
Food Products — 0.8%
Ahold Finance USA Inc.	8.250	%	7/15/10		960,000		954,796
Tyson Foods Inc.	7.850	%	4/1/16		1,040,000		769,600	G
							1,724,396
Gas Utilities — 0.2%
Southern Natural Gas Co.	5.900	%	4/1/17		480,000		380,380	A
Health Care Equipment and Supplies — 0.3%
Hospira Inc.	6.050	%	3/30/17		840,000		682,263
Health Care Providers and Services — 5.5%
Cardinal Health Inc.	5.800	%	10/15/16		1,100,000		995,146
Coventry Health Care Inc.	5.950	%	3/15/17		1,150,000		599,544

Annual Report to Shareholders 17

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Health Care Providers and Services — Continued
HCA Inc.	6.300	%	10/1/12	$	1,790,000	$	1,261,950
HCA Inc.	6.250	%	2/15/13		2,130,000		1,331,250
HCA Inc.	5.750	%	3/15/14		150,000		90,750
HCA Inc.	9.125	%	11/15/14		1,100,000		1,020,250
HCA Inc.	9.250	%	11/15/16		1,380,000		1,266,150
Humana Inc.	6.450	%	6/1/16		600,000		474,388
Quest Diagnostics Inc.	5.125	%	11/1/10		565,000		548,435
UnitedHealth Group Inc.	6.000	%	11/15/17		1,610,000		1,439,234
Universal Health Services Inc.	7.125	%	6/30/16		1,450,000		1,251,536
WellPoint Inc.	5.875	%	6/15/17		1,560,000		1,419,810
							11,698,443
Independent Power Producers and Energy Traders — 1.2%
Dynegy Holdings Inc.	8.750	%	2/15/12		1,690,000		1,487,200
TXU Corp.	6.500	%	11/15/24		2,730,000		965,841
							2,453,041
Industrial Conglomerates — 0.7%
Tyco International Ltd. / Tyco International Finance SA	6.875	%	1/15/21		2,051,000		1,585,983
Insurance — 4.3%
Ace Ina Holdings Inc.	5.700	%	2/15/17		410,000		367,624
Allstate Corp.	6.500	%	5/15/57		1,450,000		815,348	C
American International Group Inc.	6.250	%	3/15/37		230,000		85,968
ASIF Global Financing XIX	4.900	%	1/17/13		90,000		72,247	A
Everest Reinsurance Holdings Inc.	6.600	%	5/15/37		760,000		310,177	C
Hartford Financial Services Group Inc.	8.125	%	6/15/38		825,000		434,362	C
Liberty Mutual Group	5.750	%	3/15/14		720,000		465,436	A

18 Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Insurance — Continued
Liberty Mutual Group	7.800	%	3/15/37	$	810,000	$	363,489	A
MetLife Inc.	6.400	%	12/15/36		3,325,000		1,995,000	C
Prudential Financial Inc.	8.875	%	6/15/38		910,000		586,249	C
The Chubb Corp.	6.375	%	3/29/37		910,000		564,375	C
The Travelers Cos. Inc.	6.250	%	3/15/37		1,790,000		1,172,516	C
The Travelers Cos. Inc.	6.250	%	6/15/37		710,000		682,644
Willis North America Inc.	5.125	%	7/15/10		760,000		620,424
Willis North America Inc.	5.625	%	7/15/15		660,000		483,125
							9,018,984
IT Services — 0.3%
Electronic Data Systems Corp.	7.450	%	10/15/29		570,000		617,492
Leisure Equipment and Products — 0.6%
Eastman Kodak Co.	7.250	%	11/15/13		500,000		322,500
Hasbro Inc.	6.300	%	9/15/17		970,000		917,177	I
							1,239,677
Media — 3.7%
Clear Channel Communications Inc.	4.400	%	5/15/11		1,210,000		296,450
Clear Channel Communications Inc.	5.500	%	9/15/14		500,000		60,000
Comcast Cable Holdings LLC	7.125	%	2/15/28		180,000		170,225
Comcast Corp.	6.950	%	8/15/37		1,800,000		1,895,494
Comcast Corp.	6.400	%	5/15/38		750,000		748,247
News America Inc.	6.550	%	3/15/33		1,495,000		1,340,365
Omnicom Group Inc.	0.000	%	7/1/38		300,000		271,125	E,J
Time Warner Entertainment Co. LP	8.375	%	7/15/33		505,000		509,610
Time Warner Inc.	6.875	%	5/1/12		500,000		480,348

Annual Report to Shareholders 19

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Media — Continued
Time Warner Inc.	9.125	%	1/15/13	$	1,130,000	$	1,119,837
Time Warner Inc.	7.700	%	5/1/32		1,015,000		1,016,251
							7,907,952
Metals and Mining — 2.8%
Alcoa Inc.	6.000	%	7/15/13		260,000		235,088
Freeport-McMoRan Copper & Gold Inc.	8.375	%	4/1/17		4,520,000		3,706,400
GTL Trade Finance Inc.	7.250	%	10/20/17		2,232,000		1,872,335	A
							5,813,823
Multi-Utilities — 0.1%
DTE Energy Co.	6.350	%	6/1/16		270,000		241,970
Multiline Retail — 0.9%
Federated Retail Holdings Inc.	5.350	%	3/15/12		435,000		323,106
Macy’s Retail Holdings Inc.	5.875	%	1/15/13		1,000,000		703,762
May Department Stores Co.	5.750	%	7/15/14		1,070,000		678,875
May Department Stores Co.	6.650	%	7/15/24		490,000		268,965
							1,974,708
Oil, Gas and Consumable Fuels — 8.1%
DCP Midstream LLC	6.750	%	9/15/37		1,830,000		1,381,123	A
Devon Financing Corp. ULC	7.875	%	9/30/31		560,000		616,618
Duke Capital LLC	6.250	%	2/15/13		340,000		323,508
El Paso Corp.	7.800	%	8/1/31		1,660,000		1,081,495
El Paso Corp.	7.750	%	1/15/32		340,000		220,701
EOG Resources Inc.	5.875	%	9/15/17		1,100,000		1,116,708
Hess Corp.	7.875	%	10/1/29		2,970,000		2,851,146
KazMunaiGaz Exploration Production — GDR	8.375	%	7/2/13		910,000		709,800	A
Kerr-McGee Corp.	6.950	%	7/1/24		390,000		341,971

20 Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Oil, Gas and Consumable Fuels — Continued
Kinder Morgan Energy Partners LP	7.125	%	3/15/12	$	1,430,000	$	1,381,097
Pemex Project Funding Master Trust	6.625	%	6/15/35		3,624,000		3,067,716
Pemex Project Funding Master Trust	6.625	%	6/15/35		260,000		220,090	A
Tennessee Gas Pipeline Co.	8.375	%	6/15/32		1,000,000		862,891
The Williams Cos. Inc.	7.625	%	7/15/19		2,000,000		1,562,500
Valero Energy Corp.	6.875	%	4/15/12		390,000		392,196
XTO Energy Inc.	6.100	%	4/1/36		1,270,000		1,054,538
							17,184,098
Paper and Forest Products — 0.4%
Weyerhaeuser Co.	6.750	%	3/15/12		870,000		778,780
Pharmaceuticals — 0.2%
Wyeth	5.950	%	4/1/37		440,000		488,526
Real Estate Investment Trusts (REITs) — 1.0%
Health Care REIT Inc.	5.875	%	5/15/15		1,440,000		994,228
iStar Financial Inc.	5.375	%	4/15/10		10,000		4,600
iStar Financial Inc.	5.950	%	10/15/13		3,610,000		1,137,150
							2,135,978
Road and Rail — 0.2%
Burlington Northern Rail Road Co.	7.330	%	6/23/10		38,638		39,302
Norfolk Southern Corp.	7.875	%	5/15/43		348,000		345,415
							384,717
Thrifts and Mortgage Finance — 0.7%
BB&T Capital Trust II	6.750	%	6/7/36		1,750,000		1,397,525

Annual Report to Shareholders 21

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Tobacco — 1.1%
Philip Morris International Inc.	6.875	%	3/17/14	$	1,120,000	$	1,176,995
Reynolds American Inc.	7.875	%	5/15/09		860,000		851,561
Reynolds American Inc.	7.625	%	6/1/16		270,000		224,859
							2,253,415
Wireless Telecommunication Services — 1.4%
New Cingular Wireless Services Inc.	8.750	%	3/1/31		980,000		1,225,084
Nextel Communications Inc.	5.950	%	3/15/14		469,000		196,980
Nextel Communications Inc.	7.375	%	8/1/15		1,600,000		672,000
Sprint Capital Corp.	8.375	%	3/15/12		360,000		288,000
Sprint Capital Corp.	6.900	%	5/1/19		920,000		653,200
							3,035,264
Total Corporate Bonds and Notes (Cost — $230,142,996)							161,792,646
Mortgage-Backed Securities — 1.0%
Variable Rate SecuritiesI —1.0%
Thornburg Mortgage Securities Trust 2007-4 2A1	6.216	%	9/25/37		1,384,327		980,405
Thornburg Mortgage Securities Trust 2007-4 3A1	6.203	%	9/25/37		1,317,919		1,011,128
Total Mortgage-Backed Securities (Cost — $2,678,761)							1,991,533
U.S. Government Agency Mortgage-Backed Securities — N.M.
Indexed SecuritiesB — N.M.
Freddie Mac	5.111	%	9/1/24		45,677		45,493	J
Total U.S. Government Agency Mortgage-Backed Securities (Cost — $45,717)							45,493

22 Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Yankee BondsK — 19.6%
Commercial Banks — 9.1%
AES El Salvador Trust	6.750	%	2/1/16	$	2,080,000	$	1,482,628	A
ATF Capital BV	9.250	%	2/21/14		2,280,000		1,482,000	A
Banco Mercantil del Norte SA	6.135	%	10/13/16		2,030,000		1,300,398	A,C
Barclays Bank PLC	7.434	%	9/29/49		2,750,000		1,390,345	A,C
Barclays Bank PLC	7.700	%	12/31/49		840,000		555,458	A,C
BOI Capital Funding	5.571	%	2/1/49		2,000,000		439,614	A,C
Glitnir Banki Hf	6.330	%	7/28/11		1,100,000		52,250	A,D
Glitnir Banki Hf	6.693	%	6/15/16		1,900,000		285	A,C,D
Glitnir Banki Hf	7.451	%	12/14/49		700,000		105	A,C,D
HBOS Capital Funding LP	6.071	%	6/30/49		1,490,000		551,078	A,C
HSBC Capital Funding LP	4.610	%	6/27/49		760,000		411,836	A,C
HSBK Europe BV	7.250	%	5/3/17		1,640,000		885,600	A
ICICI Bank Ltd.	6.375	%	4/30/22		702,000		368,629	A,C
ICICI Bank Ltd.	6.375	%	4/30/22		170,000		89,610	A,C
Kaupthing Bank Hf	5.750	%	10/4/11		1,340,000		80,400	A,D
Kaupthing Bank Hf	7.625	%	2/28/15		1,700,000		102,000	A,D,L
Kaupthing Bank Hf	7.125	%	5/19/16		3,585,000		26,887	A,D
Landsbanki Islands Hf	7.431	%	12/31/49		2,250,000		337	A,C,D
Mizuho Financial Group	5.790	%	4/15/14		3,565,000		3,165,695	A
Natixis	10.000	%	4/29/49		1,270,000		589,166	A,C
Resona Preferred Global Securities	7.191	%	7/30/49		2,520,000		1,199,742	A,C
Royal Bank of Scotland Group PLC	7.640	%	3/31/49		200,000		79,657	C
RSHB Capital SA	7.175	%	5/16/13		2,040,000		1,479,000	A
RSHB Capital SA	7.125	%	1/14/14		1,700,000		1,139,000	A
RSHB Capital SA	6.299	%	5/15/17		570,000		324,900	A
Shinsei Finance Cayman Ltd.	6.418	%	7/20/49		3,385,000		707,979	A,C

Annual Report to Shareholders 23

	Rate		Maturity Date	Par/Shares		Value
Yankee Bonds — Continued
Commercial Banks — Continued
Sumitomo Mitsui Banking Corp.	5.625	%	10/15/49	$	730,000	$	540,618	A,C
TuranAlem Finance BV	8.250	%	1/22/37		1,709,000		734,870	A
TuranAlem Finance BV	8.250	%	1/22/37		300,000		129,000	A
							19,309,087
Consumer Finance — 0.5%
Aiful Corp.	6.000	%	12/12/11		2,165,000		876,907	A
HSBC Holdings PLC	5.250	%	12/12/12		105,000		105,497
							982,404
Diversified Financial Services — 1.2%
Lukoil International
Finance BV	6.356	%	6/7/17		982,000		599,020	A
Petroplus Finance Ltd.	7.000	%	5/1/17		750,000		457,500	A
SMFG Preferred Capital	6.078	%	1/29/49		230,000		155,165	A,C
TNK-BP Finance SA	7.500	%	7/18/16		870,000		452,400	A
TNK-BP Finance SA	6.625	%	3/20/17		100,000		48,000	A
UFJ Finance Aruba AEC	6.750	%	7/15/13		920,000		899,206
							2,611,291
Diversified Telecommunication Services — 2.8%
British Telecommunications PLC	9.125	%	12/15/30		420,000		446,435	H
Deutsche Telekom International Finance BV	8.750	%	6/15/30		1,400,000		1,726,399	H
Deutsche Telekom International Finance BV	9.250	%	6/1/32		670,000		852,670	H
Telecom Italia Capital	7.200	%	7/18/36		2,070,000		1,593,900
Telefonica Emisiones S.A.U.	7.045	%	6/20/36		800,000		873,225
VIP Finance Ireland Ltd	8.375	%	4/30/13		680,000		435,200	A
							5,927,829
Food and Staples Retailing — 0.4%
Delhaize Group	6.500	%	6/15/17		860,000		780,875

24 Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Yankee Bonds — Continued
Gas Utilities — 0.2%
Intergas Finance BV	6.375	%	5/14/17	$	850,000	$	493,000	A
Insurance — 0.5%
Axa	8.600	%	12/15/30		1,630,000		1,067,288
Metals and Mining — 1.1%
Evraz Group SA	8.875	%	4/24/13		540,000		275,400	A
Vale Overseas Ltd.	6.875	%	11/21/36		2,178,000		1,976,971
							2,252,371
Oil, Gas and Consumable Fuels — 2.9%
Anadarko Finance Co.	6.750	%	5/1/11		10,000		10,004
Anadarko Finance Co.	7.500	%	5/1/31		3,860,000		3,413,309
Gazprom	6.212	%	11/22/16		1,439,000		949,740	A
Gazprom	6.510	%	3/7/22		1,160,000		690,200	A
Petrobras International Finance Co.	5.875	%	3/1/18		1,280,000		1,150,720
							6,213,973
Wireless Telecommunication Services — 0.9%
America Movil SA de CV	5.625	%	11/15/17		1,070,000		951,261
Rogers Wireless Inc.	6.375	%	3/1/14		1,000,000		950,598
							1,901,859
Total Yankee Bonds (Cost — $75,931,825)							41,539,977
Preferred Stocks — 0.1%
Fannie Mae	8.250	%			35,925shs		29,818	C,J
Freddie Mac	8.375	%			244,245		95,255	C,J
Preferred Blocker Inc.	9.000	%			616		154,000	A
Total Preferred Stocks (Cost — $4,615,075)							279,073
Total Long-Term Securities (Cost — $313,414,374)							205,648,722

Annual Report to Shareholders 25

	Rate		Maturity Date	Par/Shares		Value
Short-Term Securities — 0.1%
U.S. Government and Agency Obligations — 0.1%
Fannie Mae	0.000	%	5/18/09	$	300,000	$	299,716	E,J
Total Short-Term Securities (Cost — $299,600)							299,716
Total Investments — 97.4% (Cost — $313,713,974)N							205,948,438
Other Assets Less Liabilities — 2.6%							5,433,523
Net Assets — 100.0%						$	211,381,961

26 Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

	Expiration	Actual Contracts	Appreciation/ (Depreciation)
Futures Contracts PurchasedO
Eurodollar Futures	March 2009	265	$	1,290,075
U.S. Treasury Bond Futures	March 2009	1		13,440
U.S. Treasury Note Futures	March 2009	291		944,295
			$	2,247,810
Futures Contracts WrittenO
U.S. Treasury Note Futures	March 2009	245	$	(1,909,795	)

N. M. Not Meaningful.

^A Rule 144a Security — A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold under that rule except to qualified institutional buyers. These securities, which the Fund’s investment adviser has determined to be liquid, represent 23.45% of net assets.

^B Indexed Security — The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”), the Euro Interbank Offered Rate (“EURIBOR”) Index, the Consumer Price Index (“CPI”), the one-year Treasury Bill Rate or the ten-year Japanese Government Bond Rate. The coupon rates are the rates as of December 31, 2008.

^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 according to the predetermined schedule.

^D Bond is currently in default.

^E 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.

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

^G Credit Linked Security — The rates of interest earned on these securities are tied to the credit rating assigned by Standard & Poor’s Rating Service and/or Moody’s Investors Services.

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

^I The coupon rates shown on variable rate securities are the rates at December 31, 2008. These rates vary with the weighted average coupon of the underlying loans.

^J On September 7, 2008, the Federal Housing Finance Agency placed Fannie Mae and Freddie Mac into Conservatorship.

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

^L Illiquid security valued at fair value under the procedures approved by the Board of Directors.

^M All or a portion of this security is collateral to cover futures and options contracts written.

^N At December 31, 2008, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:

Gross unrealized appreciation	$	1,259,425
Gross unrealized depreciation		(109,029,768	)
Net unrealized depreciation	$	(107,770,343	)

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

See notes to financial statements.

Annual Report to Shareholders 27

Statement of Assets and Liabilities

Investment Grade Income Portfolio

December 31, 2008

Assets:
Investment securities at market value (Cost – $313,414,374)			$	205,648,722
Short-term securities at value (Cost – $299,600)				299,716
Cash				108,092
Receivable for securities sold				6,270,550
Interest and dividends receivable				4,645,644
Receivable for fund shares sold				328,220
Futures variation margin receivable				207,765
Other assets				1,226
Total assets				217,509,935
Liabilities:
Payable for securities purchased	$	3,833,796
Payable for fund shares repurchased		2,059,799
Accrued distribution and service fees		104,877
Accrued management fee		6,124
Accrued expenses		123,378
Total liabilities				6,127,974
Net Assets			$	211,381,961
Net assets consist of:
Accumulated paid-in-capital			$	334,821,684
Undistributed net investment income				216,024
Accumulated net realized loss on investments and futures				(16,228,226	)
Net unrealized depreciation on investments and futures				(107,427,521	)
Net Assets			$	211,381,961
Net Asset Value Per Share:
Primary Class (28,922,278 shares outstanding)			$	6.96
Institutional Class (1,427,647 shares outstanding)			$	6.97

See notes to financial statements.

28 Annual Report to Shareholders

Statement of Operations

Investment Grade Income Portfolio

For the Year Ended December 31, 2008

Investment Income:
Interest	$	25,454,461
Dividends		119,560
Total income				$	25,574,021
Expenses:
Management fees		1,973,193
Distribution and service fees:
Primary Class		1,569,891
Audit and legal fees		70,459
Custodian fees		52,417
Directors’ fees and expenses		64,022
Registration fees		38,064
Reports to shareholders:
Primary Class		77,779
Institutional Class		3,718
Transfer agent and shareholder servicing expense:
Primary Class		237,022
Institutional Class		20,055
Other expenses		50,696
		4,157,316
Less: Fees waived		(942,422	)
Compensating balance credits		(676	)
Net expenses					3,214,218
Net Investment Income					22,359,803
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) on:
Investments		(15,718,934	)
Futures		238,839
					(15,480,095	)
Change in unrealized appreciation/(depreciation) of investments and futures					(97,822,130	)
Net Realized and Unrealized Loss on Investments					(113,302,225	)
Change in Net Assets Resulting From Operations				$	(90,942,422	)

See notes to financial statements.

Annual Report to Shareholders 29

Statement of Changes in Net Assets

Investment Grade Income Portfolio

	For the Years Ended December 31,
	2008			2007
Change in Net Assets:
Net investment income	$	22,359,803		$	23,270,259
Net realized loss		(15,480,095	)		(636,366	)
Change in unrealized appreciation/(depreciation)		(97,822,130	)		(14,426,794	)
Change in net assets resulting from operations		(90,942,422	)		8,207,099
Distributions to shareholders from:
Net investment income:
Primary Class		(21,039,955	)		(21,444,590	)
Institutional Class		(1,065,882	)		(1,750,021	)
Net realized gain on investments:
Primary Class		—			(1,197,499	)
Institutional Class		—			(46,104	)
Change in net assets from fund share transactions:
Primary Class		(76,519,144	)		(3,651,630	)
Institutional Class		(33,416,476	)		37,490,814
Change in net assets		(222,983,879	)		17,608,069
Net Assets:
Beginning of year		434,365,840			416,757,771
End of year	$	211,381,961		$	434,365,840
Undistributed/(Overdistributed) net investment income	$	216,024		$	(38,830	)

See notes to financial statements.

30 Annual Report to Shareholders

Financial Highlights

Investment Grade Income Portfolio

For a share of each class of capital stock outstanding:

Primary Class:

	Years Ended December 31,
	2008			2007			2006			2005			2004
Net asset value, beginning of year	$	10.11		$	10.49		$	10.40		$	10.81		$	10.88
Investment operations:
Net investment income		.61	A		.55	A		.51	A		.49			.49
Net realized and unrealized gain/(loss)		(3.16	)		(.35	)		.09			(.31	)		.18
Total from investment operations		(2.55	)		.20			.60			.18			.67
Distributions from:
Net investment income		(.60	)		(.55	)		(.51	)		(.49	)		(.49	)
Net realized gain on investments		—			(.03	)		—	B		(.10	)		(.25	)
Total distributions		(.60	)		(.58	)		(.51	)		(.59	)		(.74	)
Net asset value, end of year	$	6.96		$	10.11		$	10.49		$	10.40		$	10.81
Total return		(26.19	)%		1.93	%		6.01	%		1.69	%		6.29	%
Ratios to Average Net Assets:C
Total expenses		1.28	%		1.28	%		1.33	%		1.30	%		1.27	%
Expenses net of waivers, if any		1.00	%		1.00	%		1.00	%		1.00	%		1.00	%
Expenses net of all reductions		1.00	%		1.00	%		1.00	%		1.00	%		1.00	%
Net investment income		6.78	%		5.32	%		4.98	%		4.64	%		4.47	%
Supplemental Data:
Portfolio turnover rate		15.3	%		47.2	%		65.7	%		51.1	%		74.9	%
Net assets, end of year (in thousands)	$	201,437		$	386,094		$	404,864		$	366,329		$	403,361

^A Computed using average daily shares outstanding.

^B Amount less than $.01 per share.

^C Total expenses reflects operating expenses prior to any voluntary expense waivers and/or compensating balance credits. Expenses net of waivers reflects total expenses before compensating balance credits but net of any voluntary expense waivers. Expenses net of all reductions reflects expenses less any compensating balance credits and/or voluntary expense waivers.

See notes to financial statements.

Annual Report to Shareholders 31

Financial Highlights

Investment Grade Income Portfolio

For a share of each class of capital stock outstanding:

Institutional Class:

	Years Ended December 31,
	2008			2007			2006			2005			2004
Net asset value, beginning of year	$	10.11		$	10.49		$	10.41		$	10.82		$	10.89
Investment operations:
Net investment income		.65	A		.61	A		.56	A		.55			.54
Net realized and unrealized gain/(loss)		(3.14	)		(.36	)		.08			(.31	)		.17
Total from investment operations		(2.49	)		.25			.64			.24			.71
Distributions from:
Net investment income		(.65	)		(.60	)		(.56	)		(.55	)		(.53	)
Net realized gain on investments		—			(.03	)		—	B		(.10	)		(.25	)
Total distributions		(.65	)		(.63	)		(.56	)		(.65	)		(.78	)
Net asset value, end of year	$	6.97		$	10.11		$	10.49		$	10.41		$	10.82
Total return		(25.71	)%		2.44	%		6.45	%		2.27	%		6.85	%
Ratios to Average Net Assets:C
Total expenses		.85	%		.74	%		.74	%		.74	%		.74	%
Expenses net of waivers, if any		.50	%		.50	%		.50	%		.44	%		.47	%
Expenses net of all reductions		.50	%		.50	%		.50	%		.44	%		.47	%
Net investment income		7.24	%		5.95	%		5.47	%		5.26	%		5.02	%
Supplemental Data:
Portfolio turnover rate		15.3	%		47.2	%		65.7	%		51.1	%		74.9	%
Net assets, end of year (in thousands)	$	9,945		$	48,272		$	11,894		$	20,441		$	10,216

See notes to financial statements.

32 Annual Report to Shareholders

Management’s Discussion of Fund Performance

Legg Mason Limited Duration Bond Portfolio

Total returns for the Fund for various periods ended December 31, 2008 are presented below, along with those of comparative indices:

	One Year		Average Annual Total Returns
			Five Years		Ten Years		Since InceptionA
Limited Duration Bond Portfolio:B
Primary Class	–16.52	%	–1.58	%	+1.54	%	+4.73	%
Institutional Class	–16.09	%	–1.10	%	+2.07	%	+3.87	%
Merrill Lynch 1-3 Year Treasury IndexC	+6.61	%	+4.06	%	+4.71	%	+6.07	%
Lipper Short-Intermediate Investment Grade
Debt Funds Category AverageD	–2.82	%	+1.80	%	+3.78	%	+5.93	%

The performance data quoted represent past performance and do not guarantee future results. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information for the Primary and Institutional Classes, please visit www.legg-mason.com/individualinvestors. 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 gross expense ratios for the Primary and Institutional Classes were 1.18% and 0.72%, respectively, as indicated in the Fund’s most current prospectus dated May 1, 2008 and do not reflect fee waivers or reimbursements. These expenses include management fees, 12b-1 distribution and service fees and other expenses.

The net expense ratios for the Primary and Institutional Classes were 1.00% and 0.50%, respectively, as indicated in the Fund’s prospectus dated May 1, 2008 and reflect contractual fee waivers and/or reimbursements. As a result of contractual expense limitations, the ratio of expenses, other than interest, brokerage, taxes and extraordinary expenses, to average net assets will not exceed 1.00% for Primary Class shares and 0.50% for Institutional Class shares until April 30, 2009.

Strategies produced predominantly negative results over the past 12 months. Our tactically-driven duration^E posture and yield curve^F strategy contributed to performance as bond yields rallied over the year and the yield curve steepened. An emphasis on lower-quality credits and select financial issues was also a large detractor from performance as spreads soared in the wake of the subprime lending crisis, deteriorating

Annual Report to Shareholders 33

liquidity conditions and slowing economic growth. Spreads widened to new all-time highs in mid-March, before partially recovering in April and May. These gains were given back later in the period, however, on deteriorating investor sentiment and poor earnings. The high-yield sector performed poorly on news of more ratings downgrades, rising defaults, and a volatile and declining stock market. A large overweight exposure to the mortgage-backed sector also detracted from performance as volatility remained high and negative housing news continued to damage market sentiment. We had diversified into a number of non-agency mortgage-backed issues that were particularly impacted and further detracted from performance due to a lack of liquidity, rising defaults and uncertainty in that marketplace.

Western Asset Management Company

January 20, 2009

^A The inception date of the Primary Class is August 7, 1987. The inception date of the Institutional Class is December 1, 1994. Index returns are for periods beginning July 31, 1987. Although it is not possible to invest in an index, it is possible to purchase investment vehicles designed to track the performance of certain indices.

^B Prior to August 31, 2004, the Fund was known as 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.

^C The Merrill Lynch 1-3 Year Treasury Index is a market capitalization-weighted index including all U.S. Treasury notes and bonds with maturities greater than or equal to one year and less than three years.

^D Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. The Lipper Short-Intermediate Investment Grade Debt Funds Category Average is comprised of the Fund’s peer group of mutual funds.

^E Duration is the measure of the price sensitivity of a fixed-income security to an interest rate change of 100 basis points. Calculation is based on the weighted average of the present values for all cash flows.

^F The yield curve is the graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities.

34 Annual Report to Shareholders

Expense Example

Legg Mason Limited Duration Bond Portfolio

As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution and service (12b-1) fees on Primary Class shares; 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, 2008, and held through December 31, 2008. The ending values assume dividends were reinvested at the time they were paid.

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 if your shares were held through the entire 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 ratio 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 Account Value 7/1/08		Ending Account Value 12/31/08		Expenses PaidA During the Period 7/1/08 to 12/31/08
Primary Class:
Actual	$	1,000.00	$	861.50	$	4.68
Hypothetical (5% return before expenses)		1,000.00		1,020.11		5.08
Institutional Class:
Actual	$	1,000.00	$	863.70	$	2.34
Hypothetical (5% return before expenses)		1,000.00		1,022.62		2.54

^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 ratios of 1.00% and 0.50% for the Primary Class and Institutional Class respectively, multiplied by the average values over the period, multiplied by the number of days in the most recent fiscal half-year (184), and divided by 366.

Annual Report to Shareholders 35

Performance Information

Legg Mason Limited Duration Bond Portfolio

The graphs on the following pages compare the Fund’s total returns to that of a closely matched broad-based securities market index. 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 the securities market index do not take into account any transaction costs associated with buying and selling portfolio 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. Both the Fund’s results and the index’s results assume reinvestment of all dividends and distributions 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.

36 Annual Report to Shareholders

Performance Information — Continued

Growth of a $10,000 Investment — Primary Class

Periods Ended December 31, 2008

	Cumulative Total Return		Average Annual Total Return
One Year	–16.52	%	–16.52	%
Five Years	–7.65	%	–1.58	%
Ten Years	+16.55	%	+1.54	%

The performance data quoted represent past performance and do 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.leggmason.com/individualinvestors. 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 rate of return index based on daily closing prices and consisting of Treasury bills with a maturity of 1-3 years.

Annual Report to Shareholders 37

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

Periods Ended December 31, 2008

	Cumulative Total Return		Average Annual Total Return
One Year	–16.09	%	–16.09	%
Five Years	–5.36	%	–1.10	%
Ten Years	+22.72	%	+2.07	%

The performance data quoted represent past performance and do 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.leggmason.com/individualinvestors. 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.

38 Annual Report to Shareholders

Performance Information — Continued

Portfolio Composition (as of December 31, 2008)^B

Standard & Poor’s Debt Ratings^C (as a percentage of the portfolio)

Maturity Schedule (as a percentage of the portfolio)

^B The Fund is actively managed. As a result, the composition of its portfolio holdings and sectors is subject to change at any time. The charts do not include derivatives such as Futures Contracts, Options Written.

^C Standard & Poor’s Ratings Service provides capital markets with credit ratings for the evaluation and assessment of credit risk. These ratings are the opinions of S&P and not absolute measures of quality or guarantees of performance.

^D Preferred Stocks do not have a defined maturity date.

Annual Report to Shareholders 39

Legg Mason Limited Duration

Spread Duration

December 31, 2008

Economic Exposure

Spread duration is defined as the change in value for a 100 basis point change in the spread relative to Treasuries. The spread over Treasuries is the annual risk-premium demanded by investors to hold non-Treasury securities. This chart highlights the market sector exposure of the portfolio and the exposure relative to the selected benchmark as of the end of the reporting period.

ABS	— Asset Backed Securities
LCBI	— Barclays U.S. Capital Credit Bond Index
CMBS	— Commercial Mortgage Backed Securities
HY	— High Yield
IG Credit	— Investment Grade Credit
MBS	— Mortgage Backed Securities

40 Annual Report to Shareholders

Performance Information — Continued

Legg Mason Limited Duration

Effective Duration

December 31, 2008

Interest Rate Exposure

Effective duration is defined as the change in value for a 100 basis point change in Treasury yields. This chart highlights the interest rate exposure of the portfolio relative to the selected benchmark as of the end of the reporting period.

ABS	— Asset Backed Securities
LCBI	— Barclays U.S. Capital Credit Bond Index
CMBS	— Commercial Mortgage Backed Securities
HY	— High Yield
IG Credit	— Investment Grade Credit
MBS	— Mortgage Backed Securities

Annual Report to Shareholders 41

Portfolio of Investments

Limited Duration Bond Portfolio

December 31, 2008

	Rate		Maturity Date	Par/Shares		Value
Long-Term Securities — 94.7%
Corporate Bonds and Notes — 30.3%
Aerospace and Defense — 0.4%
United Technologies Corp.	5.375	%	12/15/17	$	410,000	$	414,467
Airlines — 1.5%
Continental Airlines Inc.	7.056	%	9/15/09		70,000		67,200
Continental Airlines Inc.	6.900	%	1/2/18		435,955		348,764
Continental Airlines Inc.	6.545	%	2/2/19		387,411		309,929
Continental Airlines Inc.	6.703	%	6/15/21		286,978		215,233
Northwest Airlines Inc.	2.968	%	5/20/14		845,819		592,074	A
							1,533,200
Capital Markets — 2.9%
Goldman Sachs Capital II	5.793	%	12/29/49		2,080,000		799,600	B
Lehman Brothers Holdings Capital Trust VII	5.857	%	11/29/49		970,000		97	C
Lehman Brothers Holdings Inc.	6.500	%	7/19/17		340,000		34	C
Merrill Lynch and Co. Inc.	6.050	%	8/15/12		700,000		690,605
Merrill Lynch and Co. Inc.	6.150	%	4/25/13		720,000		713,440
Morgan Stanley	6.600	%	4/1/12		330,000		319,041
The Bear Stearns Cos. Inc.	6.400	%	10/2/17		200,000		207,836
The Goldman Sachs Group Inc.	6.600	%	1/15/12		350,000		345,333
							3,075,986
Chemicals — 0.1%
The Dow Chemical Co.	5.700	%	5/15/18		90,000		79,957
Commercial Banks — 4.1%
HSBC Bank PLC	7.333	%	7/20/12		1,000,000		505,000	A,D
HSBC Bank PLC	7.468	%	8/20/12		70,000		37,569	A
Keycorp	2.646	%	12/15/10		1,900,000		1,906,975	A
SunTrust Capital VIII	6.100	%	12/15/36		120,000		84,481	B

42 Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Commercial Banks — Continued
Wachovia Capital Trust III	5.800	%	8/29/49	$	1,960,000	$	1,156,400	B
Wells Fargo Capital X	5.950	%	12/15/36		300,000		257,114	B
Wells Fargo Capital XIII	7.700	%	12/29/49		350,000		288,859	B
							4,236,398
Commercial Services and Supplies — 0.6%
Waste Management Inc.	7.375	%	8/1/10		650,000		658,702
Consumer Finance — 3.3%
American Express Bank FSB	3.150	%	12/9/11		1,900,000		1,915,126
American Express Co.	6.800	%	9/1/66		600,000		310,591	B
GMAC LLC	7.500	%	12/31/13		8,530,000		622,690	D
Nelnet Inc.	7.400	%	9/29/36		380,000		113,941	B
SLM Corp.	8.450	%	6/15/18		590,000		466,466
							3,428,814
Diversified Financial Services — 3.9%
AGFC Capital Trust I	6.000	%	1/15/67		860,000		205,409	B,D
Capmark Financial Group Inc.	5.875	%	5/10/12		400,000		136,396	E
General Electric Capital Corp.	3.116	%	12/9/11		2,000,000		2,033,960	A
General Electric Capital Corp.	6.375	%	11/15/67		675,000		424,284	B
IBM International Group Capital LLC	5.050	%	10/22/12		950,000		991,261
ZFS Finance USA Trust III	3.146	%	12/15/65		970,000		293,425	A,D
							4,084,735
Diversified Telecommunication Services — 0.4% Qwest Corp.	7.875	%	9/1/11		230,000		211,600
Verizon Communications Inc.	8.750	%	11/1/18		150,000		175,983
							387,583

Annual Report to Shareholders 43

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Electric Utilities — 0.5%
Pacific Gas and Electric Co.	4.800	%	3/1/14	$	500,000	$	491,028
Food and Staples Retailing — 0.5%
Wal-Mart Stores Inc.	5.800	%	2/15/18		500,000		553,275
Health Care Equipment and Supplies — 0.4%
Hospira Inc.	5.550	%	3/30/12		500,000		473,734
Health Care Providers and Services — 0.2%
Quest Diagnostics Inc.	5.125	%	11/1/10		180,000		174,723
IT Services — 1.0%
Electronic Data Systems Corp.	7.125	%	10/15/09		1,000,000		1,016,625
Leisure Equipment and Products — 0.1%
Eastman Kodak Co.	7.250	%	11/15/13		110,000		70,950
Media — 2.7%
Clear Channel Communications Inc.	4.250	%	5/15/09		1,100,000		968,000
Comcast Cable Communications Inc.	6.875	%	6/15/09		600,000		602,811
The Walt Disney Co.	4.700	%	12/1/12		280,000		288,171
Time Warner Cable Inc.	8.250	%	2/14/14		180,000		182,604
Time Warner Inc.	5.500	%	11/15/11		830,000		779,880
							2,821,466
Multi-Utilities — 0.3%
Dominion Resources Inc.	8.875	%	1/15/19		300,000		323,517

44 Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Multiline Retail — 0.2%
Federated Retail Holdings Inc.	5.350	%	3/15/12	$	330,000	$	245,115
Office Electronics — 0.3% Xerox Corp.	5.500	%	5/15/12		330,000		276,556
Oil, Gas and Consumable Fuels — 4.0%
Apache Corp.	6.250	%	4/15/12		520,000		544,573
Devon Financing Corp. ULC	6.875	%	9/30/11		350,000		353,206
El Paso Natural Gas Co.	5.950	%	4/15/17		590,000		468,827
Energy Transfer Partners LP	9.700	%	3/15/19		120,000		123,649
Hess Corp.	6.650	%	8/15/11		510,000		509,798
Kinder Morgan Energy Partners LP	6.750	%	3/15/11		810,000		787,839
Occidental Petroleum Corp.	7.000	%	11/1/13		690,000		753,097
Pemex Project Funding Master Trust	2.820	%	12/3/12		252,000		210,420	A,D
XTO Energy Inc.	5.650	%	4/1/16		440,000		403,686
							4,155,095
Real Estate Investment Trusts (REITs) — 1.0%iStar Financial Inc.	2.336	%	9/15/09		1,330,000		758,100	A
iStar Financial Inc.	5.650	%	9/15/11		1,000,000		320,000
							1,078,100
Thrifts and Mortgage Finance — 1.1%
Countrywide Financial Corp.	1.686	%	3/24/09		610,000		605,037	A
Countrywide Financial Corp.	5.800	%	6/7/12		600,000		584,792
							1,189,829

Annual Report to Shareholders 45

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Tobacco — 0.4%
Philip Morris International Inc.	4.875	%	5/16/13	$	400,000	$	401,145
Wireless Telecommunication Services — 0.4%
Sprint Capital Corp.	6.375	%	5/1/09		30,000		29,813
Vodafone Group PLC	5.350	%	2/27/12		450,000		444,262
							474,075
Total Corporate Bonds and Notes (Cost — $40,031,782)							31,645,075
Asset-Backed Securities — 8.9%
Fixed Rate Securities — 2.0%
Countryplace Manufactured Housing Contract Trust 2007-1 A1	5.484	%	7/15/37		60,601		59,721	B,D
Drive Auto Receivables Trust 2006-1 A4	5.540	%	12/16/13		900,000		828,314	D
Prestige Auto Receivables Trust 2005-1A	4.370	%	6/16/12		438,340		401,513	D
Structured Asset Securities Corp. 2003-AL1	3.357	%	4/25/31		478,526		377,103	D
Wells Fargo Financial Auto Owner Trust 2005-A A4	4.280	%	5/15/12		386,844		376,557
							2,043,208
Indexed SecuritiesA — 6.3%
Asset Backed Funding Certificates 2002-WF2	1.596	%	5/25/32		221,263		198,550
Asset Backed Funding Certificates 2004-OPT2 M1	1.021	%	8/25/33		400,000		241,869
Bear Stearns Asset Backed Securities Inc. 2004-1	0.991	%	6/25/34		1,972,585		1,069,411
Citigroup Mortgage Loan Trust Inc. 2007-SHL1 A	0.871	%	11/25/46		1,467,646		549,046	D

46 Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Asset-Backed Securities — Continued
Indexed Securities — Continued
Countrywide Asset-Backed Certificates 2007-13 2A1	1.371	%	10/25/47	$	907,779	$	668,420
Countrywide Home Equity Loan Trust 2004-O	1.475	%	2/15/34		366,545		107,312
Lehman XS Trust 2005-5N 3A1A	0.771	%	11/25/35		1,317,094		613,016
Long Beach Mortgage Loan Trust 2006-A A1	0.561	%	5/25/36		1,006,369		58,636
Nelnet Student Loan Trust 2008-4 A4	5.015	%	4/25/24		1,600,000		1,296,214
RAAC Series 2005-RP1	0.811	%	7/25/37		178,386		174,929	D
Securitized Asset Backed Receivables LLC 2006- FR3 A2	0.611	%	5/25/36		621,451		540,711
Specialty Underwriting & Residential Finance Trust 2001-BC4 M1	1.071	%	11/25/34		530,000		325,517
Structured Asset Securities Corp. 2007-BC3 1A2	0.611	%	5/25/47		800,000		412,669
WaMu Asset-Backed Certificates 2007-HE1 2A3	0.621	%	1/25/37		800,000		268,435
							6,524,735
Variable Rate SecuritiesF — 0.6%
Green Tree 2008-MH1 A1	7.000	%	4/25/38		780,195		682,670	D
Total Asset-Backed Securities (Cost — $14,921,115)							9,250,613
Mortgage-Backed Securities — 20.7% Fixed Rate Securities — 2.0%
Residential Asset Mortgage Products Inc. 2005-SL1	8.000	%	5/25/32		1,041,429		732,581

Annual Report to Shareholders 47

	Rate		Maturity Date	Par/Shares		Value
Mortgage-Backed Securities — Continued
Fixed Rate Securities — Continued
Washington Mutual MSC Mortgage Pass-Through Certificates Series 2004- RA1	7.000	%	3/25/34	$	1,566,516	$	1,401,543
							2,134,124
Indexed SecuritiesA — 14.0%
Banc of America Mortgage Securities 2005-F	5.007	%	7/25/35		1,761,326		1,280,469
Bayview Commercial Asset Trust 2005-2A A2	0.821	%	8/25/35		533,354		418,596	D
Bear Stearns Alt-A Trust 2007-1 1A1	0.631	%	1/25/47		1,631,573		579,559
Bear Stearns ARM Trust 2004-10	5.042	%	1/25/35		264,284		194,066
Countrywide Alternative Loan Trust 2005-59 1A1	1.783	%	11/20/35		1,235,349		617,526
Countrywide Alternative Loan Trust 2006-0A2 A5	0.738	%	5/20/46		1,568,191		569,763
Countrywide Alternative Loan Trust 2007-AL1 A1	0.721	%	6/25/37		420,396		158,856
CS First Boston Mortgage Securities Corp. 2004-AR5 7A2	4.604	%	6/25/34		527,332		386,775
First Horizon Alternative Mortgage Securities 2006-FA8 1A8	0.841	%	2/25/37		362,665		108,541
Greenpoint Mortgage Funding Trust 2006-AR7 1A1B	0.591	%	12/25/46		610,570		335,654
Harborview Mortgage Loan Trust 2004-8 3A2	0.981	%	11/29/34		357,275		169,827
HomeBanc Mortgage Trust 2004-2 A1	0.841	%	12/25/34		786,465		508,172

48 Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Mortgage-Backed Securities — Continued
Indexed Securities — Continued
HomeBanc Mortgage Trust 2005-1 A1	0.721	%	3/25/35	$	1,239,679	$	707,101
Impac CMB Trust 2004-6 1A2	1.251	%	10/25/34		244,977		123,738
IndyMac Inda Mortgage Loan Trust 2007-AR7 1A1	6.217	%	11/25/37		791,512		487,959
JPMorgan Mortgage Trust 2004-A1 1A1	4.347	%	10/25/33		1,856,649		1,302,015
JPMorgan Mortgage Trust 2004-A1 1A1	4.794	%	2/25/34		547,110		412,238
MASTR Adjustable Rate Mortgages Trust 2004-13	3.788	%	11/21/34		3,000,000		1,920,062
MASTR Adjustable Rate Mortgages Trust 2006-OA2 1A1	3.279	%	12/25/46		980,303		200,015
MASTR Specialized Loan Trust 2006-01 A	0.771	%	12/25/35		431,459		344,687	D
Sequoia Mortgage Trust 2003-2 A2	4.859	%	6/20/33		304,377		235,676
Structured Asset Mortgage Investments Inc. 2006-AR2 A1	0.701	%	2/25/36		682,314		283,188
Structured Asset Mortgage Investments Inc. 2006-AR7 A1A	0.681	%	8/25/36		1,188,246		472,072
WaMu Alternative Mortgage Pass-Through Certificates 2006-AR01 A1B	0.791	%	2/25/36		1,174,807		285,050
WaMu Mortgage Pass Through Certificates 2003-AR8 A	4.282	%	8/25/33		411,330		306,816

Annual Report to Shareholders 49

	Rate		Maturity Date	Par/Shares		Value
Mortgage-Backed Securities — Continued
Indexed Securities — Continued
WaMu Mortgage Pass-Through Certificates 2003-AR10	4.672	%	10/25/33	$	1,968,483	$	1,621,598
WaMu Mortgage Pass-Through Certificates 2004-AR08 A1	1.858	%	6/25/44		461,208		264,002
WaMu Mortgage Pass-Through Certificates 2006-AR4 DA	3.449	%	6/25/46		789,543		252,654
							14,546,675
Variable Rate SecuritiesF — 4.7%
Banc of America Funding Corp. 2004-B	5.258	%	12/20/34		294,739		178,855
Chase Mortgage Finance Corp. 2007-A1 2A3	4.137	%	2/25/37		725,927		569,865
Citigroup Mortgage Loan Trust Inc. 2007-AR4 2A1A	5.471	%	3/25/37		1,752,320		980,230
Citigroup Mortgage Loan Trust Inc. 2007-AR8 1A1A	5.727	%	8/25/47		895,649		470,656
Countrywide Alternative Loan Trust 2004-33 1A1	6.249	%	12/25/34		162,469		92,400
Countrywide Alternative Loan Trust 2004-33 2A1	5.395	%	12/25/34		113,503		53,086
JPMorgan Mortgage Trust 2006-A2 5A1	5.152	%	11/25/33		288,250		217,346
Nomura Asset Acceptance Corp. 2004-AR4 1A1	4.889	%	12/25/34		921,399		540,587
Prime Mortgage Trust 2005-2	7.399	%	10/25/32		823,219		572,395

50 Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Mortgage-Backed Securities — Continued
Variable Rate SecuritiesF — Continued
Structured Adjustable Rate Mortgage Loan Trust 2005-12 3A1	5.677	%	6/25/35	$	598,525	$	409,751
WaMu Mortgage Pass-Through Certificates 2004- AR14 A1	4.255	%	1/25/35		1,146,103		789,619
							4,874,790
Total Mortgage-Backed Securities (Cost — $36,153,703)							21,555,589
U.S. Government and Agency Obligations — 8.1%
Treasury Inflation-Protected SecuritiesG — 8.1%
United States Treasury Inflation-Protected Security	0.875	%	4/15/10		8,268,011		7,770,641
United States Treasury Inflation-Protected Security	3.875	%	4/15/29		527,136		651,054	H
Total U.S. Government and Agency Obligations (Cost — $8,801,098)							8,421,695
U.S. Government Agency Mortgage-Backed Securities — 15.4%
Fixed Rate Securities — 10.2%
Fannie Mae	8.500	%	6/1/10 to 8/1/11		705		727	I
Fannie Mae	6.500	%	7/1/13 to 10/1/32		928,836		966,807	I
Fannie Mae	9.500	%	7/1/14		2,846		2,940	I
Fannie Mae	11.000	%	12/1/15		15,320		16,966	I
Fannie Mae	12.500	%	1/1/18		19,334		22,902	I
Fannie Mae	9.000	%	11/1/21		62,679		67,236	I
Fannie Mae	7.000	%	12/1/26 to 1/1/33		3,275,562		3,465,906	I
Fannie Mae	6.000	%	11/1/27 to 7/1/38		291,349		300,239	I
Fannie Mae	5.000	%	6/1/35		962,288		984,432	I
Fannie Mae	5.500	%	4/1/36		1,475,953		1,483,534	I
Fannie Mae	6.000	%	12/1/38		600,000		617,625	I,J
Freddie Mac	9.750	%	11/1/09		18		18	I
Freddie Mac	9.000	%	1/1/17 to 1/1/21		56,528		59,740	I
Freddie Mac	8.500	%	6/1/21		1,563		1,672	I

Annual Report to Shareholders 51

	Rate		Maturity Date	Par/Shares		Value
U.S. Government Agency Mortgage-Backed Securities — Continued
Fixed Rate Securities — Continued
Freddie Mac	8.000	%	2/1/31	$	169,159	$	180,352	I
Freddie Mac	7.000	%	4/1/32		1,161,813		1,220,985	I
Freddie Mac	5.000	%	11/1/35		153,795		157,382	I
Government National Mortgage Association	6.000	%	5/15/14 to 11/15/28		154,980		162,380
Government National Mortgage Association	9.000	%	6/15/22 to 9/15/22		1,449		1,551
Government National Mortgage Association	6.000	%	12/1/38		900,000		927,843	J
							10,641,237
Indexed SecuritiesA — 4.8%
Fannie Mae	4.341	%	10/1/34		660,950		663,231	I
Fannie Mae	4.329	%	1/1/35		877,318		848,628	I
Fannie Mae	4.795	%	2/1/35		467,434		472,978	I
Fannie Mae	4.961	%	3/1/35		3,021,454		3,049,118	I
							5,033,955
Stripped Securities — 0.4%
Government National Mortgage Association	7.438	%	6/16/26		1,354,626		214,244	K,L1
Government National Mortgage Association	7.488	%	8/16/26		938,143		145,429	K,L1
							359,673
Total U.S. Government Agency Mortgage-Backed Securities (Cost — $16,351,516)							16,034,865
Yankee BondsM — 11.1%
Beverages — 0.3%
Diageo Capital PLC	5.200	%	1/30/13		350,000		344,407
Capital Markets — 0.9%
Deutsche Bank AG	6.000	%	9/1/17		900,000		954,948

52 Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Yankee Bonds — 11.1%
Commercial Banks — 1.0%
Glitnir Banki Hf	5.815	%	1/21/11	$	1,550,000	$	73,625	A,C,D
Glitnir Banki Hf	6.693	%	6/15/16		50,000		8	B,C,D
HSBC Bank PLC	7.718	%	8/20/12		70,000		37,905	A
Kaupthing Bank Hf	4.958	%	1/15/10		190,000		11,400	A,C,D
Kaupthing Bank Hf	5.750	%	10/4/11		420,000		25,200	C,D
Kaupthing Bank Hf	7.625	%	2/28/15		330,000		19,800	C,D,K
Landsbanki Islands Hf	6.100	%	8/25/11		620,000		10,850	C,D
Landsbanki Islands Hf	7.431	%	12/31/49		240,000		36	B,C,D
Resona Preferred Global Securities	7.191	%	12/29/49		830,000		395,153	B,D
Shinsei Finance Cayman Ltd.	6.418	%	1/29/49		640,000		133,857	B,D
TuranAlem Finance BV	5.434	%	1/22/09		320,000		300,800	A,D
							988,834
Diversified Financial Services — 1.8%
Aiful Corp.	5.000	%	8/10/10		1,280,000		703,743	D
MUFG Capital Finance 1 Ltd.	6.346	%	7/29/49		600,000		418,034	B
TNK-BP Finance SA	6.875	%	7/18/11		1,090,000		795,700	D
							1,917,477
Diversified Telecommunication Services — 3.0%
British Telecommunications PLC	8.625	%	12/15/10		520,000		534,924	E
Deutsche Telekom International Finance BV	8.500	%	6/15/10		650,000		669,548	E
France Telecom SA	7.750	%	3/1/11		570,000		599,813
Koninklijke (Royal) KPN NV	8.000	%	10/1/10		680,000		686,258
Telefonica Emisiones S.A.U.	3.356	%	2/4/13		790,000		633,733	A
							3,124,276
Health Care Equipment and Supplies — 0.5%
Baxter Finco BV	4.750	%	10/15/10		520,000		518,530

Annual Report to Shareholders 53

	Rate		Maturity Date	Par/Shares		Value
Yankee Bonds — 11.1%
Industrial Conglomerates — 1.4%
Tyco International Group SA	6.375	%	10/15/11	$	1,480,000	$	1,454,757
Insurance — 0.4%
Merna Reinsurance Ltd.	3.218	%	7/7/10		400,000		361,160	A,D
Metals and Mining — 1.0%
Vale Overseas Ltd.	6.250	%	1/23/17		1,130,000		1,065,364
Oil, Gas and Consumable Fuels — 0.8%
Anadarko Finance Co.	6.750	%	5/1/11		870,000		870,311
Total Yankee Bonds (Cost — $17,154,505)							11,619,864
Preferred Stocks — 0.2%
Fannie Mae	8.250	%			15,950shs		13,238	B,I
Freddie Mac	8.375	%			21,700		8,463	B,I
Home Ownership Funding Corp.	1.000	%			500		49,275	D,F
Home Ownership Funding Corp. II	1.000	%			1,400		137,970	D,F
Total Preferred Stocks (Cost — $2,478,698)							208,946
Total Long-Term Securities (Cost — $135,892,417)							98,736,647
Short-Term Securities — 3.1%
U.S. Government and Agency Obligations — 3.1%
Fannie Mae	0.000	%	5/18/09	$	806,000		805,239	I,N
Federal Home Loan Bank	0.000	%	3/26/09		2,500,000		2,499,598	N
							3,304,837

54 Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

	Rate	Maturity Date	Par/Shares		Value
Short-Term Securities — Continued
Options PurchasedO — N.M.
U.S. Treasury Note Futures Put, February 2009, Strike Price $85.00			59	P	$	922
Total Short-Term Securities (Cost — $3,306,190)						3,305,759
Total Investments — 97.8% (Cost — $139,198,607)Q						102,042,406
Other Assets Less Liabilities — 2.2%						2,246,605
Net Assets — 100.0%					$	104,289,011

Annual Report to Shareholders 55

	Expiration	Actual Contracts	Appreciation/ (Depreciation)
Futures Contracts PurchasedO
Eurodollar Futures	March 2009	190	$	931,575
Eurodollar Futures	June 2009	174		950,493
Eurodollar Futures	September 2009	66		421,933
Eurodollar Futures	September 2010	16		(4,368	)
U.S. Treasury Note Futures	March 2009	83		183,030
U.S. Treasury Note Futures	March 2009	319		775,967
			$	3,258,630
Futures Contracts WrittenO
U.S. Treasury Bond Futures	March 2009	62	$	(797,013	)
U.S. Treasury Note Futures	March 2009	100		(320,203	)
			$	(1,117,216	)
Options WrittenO
Eurodollar Futures Call, Strike Price $97.63	September 2009	66	$	(142,917	)
Eurodollar Futures Call, Strike Price $98.25	March 2009	124		(156,845	)
U.S. Treasury Note Futures Call, Strike Price $117.00	February 2009	32		(49,410	)
U.S. Treasury Note Futures Call, Strike Price $118.00	February 2009	65		(475,216	)
U.S. Treasury Note Futures Put, Strike Price $110.00	February 2009	65		79,175
			$	(745,213	)

N.M. Not Meaningful.

^A Indexed Security — The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”), the Euro Interbank Offered Rate (“EURIBOR”) Index, the Consumer Price Index (“CPI”), the one-year Treasury Bill Rate or the ten-year Japanese Government Bond Rate. The coupon rates are the rates as of December 31, 2008.

56 Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

^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 according to the predetermined schedule.

^C Bond is currently in default.

^D Rule 144a Security — A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold under that rule except to qualified institutional buyers. These securities, which the Fund’s investment adviser has determined to be liquid, represent 8.33% of net assets.

^E Credit Linked Security — The rates of interest earned on these securities are tied to the credit rating assigned by Standard & Poor’s Rating Service and/or Moody’s Investors Services.

^F The coupon rates shown on variable rate securities are the rates at December 31, 2008. These rates vary with the weighted average coupon of the underlying loans.

^G 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.

^H All or a portion of this security is collateral to cover futures and options contracts written.

^I On September 7, 2008, the Federal Housing Finance Agency placed Fannie Mae and Freddie Mac into Conservatorship.

^J When-issued Security — Security purchased on a delayed delivery basis. Final settlement amount and maturity date have not yet been announced.

^K Illiquid security valued at fair value under the procedures approved by the Board of Directors.

^L 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.

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

^N 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.

^O Options and futures are described in more detail in the notes to financial statements.

^P Par represents actual number of contracts.

^Q At December 31, 2008, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:

Gross unrealized appreciation	$	730,253
Gross unrealized depreciation		(37,890,175	)
Net unrealized depreciation	$	(37,159,922	)

See notes to financial statements.

Annual Report to Shareholders 57

Statement of Assets and Liabilities

Limited Duration Bond Portfolio

December 31, 2008

Assets:
Investment securities at market value (Cost – $135,892,417)			$	98,736,647
Short-term securities at value (Cost – $3,306,190)				3,305,759
Cash				3,640,491
Receivable for securities sold				2,822,973
Interest receivable				886,608
Receivable for fund shares sold				369,404
Futures variation margin receivable				96,108
Other assets				11,324
Total assets				109,869,314
Liabilities:
Payable for securities purchased	$	3,796,501
Options written (Proceeds – $299,403)		1,044,616
Payable for fund shares repurchased		570,713
Accrued management fees		53,123
Accrued distribution and service fees		24,802
Payable for Lehman settlements		2,281
Accrued expenses		88,267
Total liabilities				5,580,303
Net Assets			$	104,289,011
Net assets consist of:
Accumulated paid-in-capital			$	150,880,774
Overdistributed net investment income				(200,722	)
Accumulated net realized loss on investments, options and futures				(10,631,041	)
Net unrealized depreciation of investments, options and futures				(35,760,000	)
Net Assets			$	104,289,011
Net Asset Value Per Share:
Primary Class (12,143,287 shares outstanding)			$	7.95
Institutional Class (970,198 shares outstanding)			$	7.95

See notes to financial statements.

58 Annual Report to Shareholders

Statement of Operations

Limited Duration Bond Portfolio

For the Year Ended December 31, 2008

Investment Income:
Interest	$	7,587,066
Dividends		66,748
Total income				$	7,653,814
Expenses:
Management fees		660,803
Distribution and service fees:
Primary Class		683,571
Audit and legal fees		61,376
Custodian fees		39,473
Directors’ fees and expenses		56,778
Registration fees		34,278
Reports to shareholders:
Primary Class		43,159
Institutional Class		436
Transfer agent and shareholder servicing expense:
Primary Class		104,014
Institutional Class		17,591
Other expenses		39,489
		1,740,968
Less: Fees waived		(322,885	)
Compensating balance credits		(299	)
Net expenses					1,417,784
Net Investment Income					6,236,030
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) on:
Investments		(2,069,499	)
Options		239,961
Futures		745,695
					(1,083,843	)
Change in unrealized appreciation/(depreciation) of investments, options and futures					(29,246,464	)
Net Realized and Unrealized Loss on Investments					(30,330,307	)
Change in Net Assets Resulting From Operations				$	(24,094,277	)

See notes to financial statements.

Annual Report to Shareholders 59

Statement of Changes in Net Assets

Limited Duration Bond Portfolio

	For the Years Ended December 31,
	2008			2007
Change in Net Assets:
Net investment income	$	6,236,030		$	8,863,309
Net realized loss		(1,083,843	)		(1,850,541	)
Change in unrealized appreciation/(depreciation)		(29,246,464	)		(2,874,447	)
Change in net assets resulting from operations		(24,094,277	)		4,138,321
Distributions to shareholders from:
Net investment income:
Primary Class		(6,092,645	)		(8,257,858	)
Institutional Class		(503,244	)		(597,941	)
Change in net assets from fund share transactions:
Primary Class		(42,218,056	)		(20,301,062	)
Institutional Class		(1,186,880	)		467,488
Change in net assets		(74,095,102	)		(24,551,052	)
Net Assets:
Beginning of year		178,384,113			202,935,165
End of year	$	104,289,011		$	178,384,113
(Overdistributed)/Undistributed net investment income	$	(200,722	)	$	75,612

See notes to financial statements.

60 Annual Report to Shareholders

Financial Highlights

Limited Duration Bond Portfolio

For a share of each class of capital stock outstanding:

Primary Class:

	Years Ended December 31,
	2008			2007			2006			2005			2004
Net asset value, beginning of year	$	9.97		$	10.22		$	10.20		$	10.36		$	10.54
Investment operations:
Net investment income		.39	A		.46	A		.42	A		.33			.29
Net realized and unrealized gain/(loss)		(1.99	)		(.25	)		.02			(.14	)		(.09	)
Total from investment operations		(1.60	)		.21			.44			.19			.20
Distributions from:
Net investment income		(.42	)		(.46	)		(.42	)		(.35	)		(.37	)
Net realized gain on investments		—			—			—			—			(.01	)
Total distributions		(.42	)		(.46	)		(.42	)		(.35	)		(.38	)
Net asset value, end of year	$	7.95		$	9.97		$	10.22		$	10.20		$	10.36
Total return		(16.52	)%		2.05	%		4.46	%		1.83	%		1.89	%
Ratios to Average Net Assets:B
Total expenses		1.22	%		1.18	%		1.21	%		1.15	%		1.21	%
Expenses net of waivers, if any		1.00	%		1.00	%		1.00	%		1.00	%		1.00	%
Expenses net of all reductions		1.00	%		1.00	%		1.00	%		1.00	%		1.00	%
Net investment income		4.21	%		4.51	%		4.10	%		3.21	%		2.81	%
Supplemental Data:
Portfolio turnover rate		224.1	%		286.8	%		237.2	%		81.6	%		238.0	%
Net assets, end of year (in thousands)	$	96,574		$	167,195		$	191,883		$	219,497		$	274,606

^A Computed using average daily shares outstanding.

^B Total expenses reflects operating expenses prior to any voluntary or contractual expense waivers and/or compensating balance credits. Expenses net of waivers reflects total expenses before compensating balance credits but net of any voluntary or contractual expense waivers. Expenses net of all reductions reflects expenses less any compensating balance credits and/or voluntary or contractual expense waivers.

See notes to financial statements.

Annual Report to Shareholders 61

Institutional Class:

	Years Ended December 31,
	2008			2007			2006			2005			2004
Net asset value, beginning of year	$	9.97		$	10.22		$	10.20		$	10.37		$	10.55
Investment operations:
Net investment income		.43	A		.51	A		.47	A		.40			.35
Net realized and unrealized gain/(loss)		(1.99	)		(.25	)		.03			(.17	)		(.10	)
Total from investment operations		(1.56	)		.26			.50			.23			.25
Distributions from:
Net investment income		(.46	)		(.51	)		(.48	)		(.40	)		(.42	)
Net realized gain on investments		—			—			—			—			(.01	)
Total distributions		(.46	)		(.51	)		(.48	)		(.40	)		(.43	)
Net asset value, end of year	$	7.95		$	9.97		$	10.22		$	10.20		$	10.37
Total return		(16.09	)%		2.56	%		4.98	%		2.29	%		2.41	%
Ratios to Average Net Assets:B
Total expenses		.77	%		.72	%		.64	%		.62	%		.70	%
Expenses net of waivers, if any		.50	%		.50	%		.50	%		.46	%		.48	%
Expenses net of all reductions		.50	%		.50	%		.50	%		.46	%		.48	%
Net investment income		4.71	%		5.02	%		4.58	%		3.85	%		3.22	%
Supplemental Data:
Portfolio turnover rate		224.1	%		286.8	%		237.2	%		81.6	%		238.0	%
Net assets, end of year (in thousands)	$	7,715		$	11,189		$	11,052		$	18,213		$	9,546

See notes to financial statements.

62 Annual Report to Shareholders

Notes to Financial Statements

Legg Mason Income Trust, Inc.

1. Organization and Significant Accounting Policies:

Legg Mason Income Trust, Inc. (“Corporation”), consisting of the Investment Grade Income Portfolio (“Investment Grade”), and the Limited Duration Bond Portfolio (“Limited Duration”) (each a “Fund”), is registered under the Investment Company Act of 1940 (“1940 Act”), as amended, as an open-end, diversified investment company.

Investment Grade and Limited Duration each 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 Fund in the preparation of its financial statements:

Investment Valuation

The Funds’ securities are valued under policies approved by and under the general oversight of the Board of Directors. Effective January 1, 2008, the Funds adopted Statement of Financial Accounting Standards No. 157 (FAS 157). FAS 157 establishes a single definition of fair value, creates a three-tier hierarchy as a framework for reporting methods of measuring fair value based on inputs used to value the Fund’s investments, and requires additional disclosure about fair value. The hierarchy of inputs is summarized below.

• Level 1 — quoted prices in active markets for identical investments

• Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)

• Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)

Debt securities are valued at the last quoted bid prices provided by an independent pricing service that are based on transactions in debt obligations, quotations from bond dealers, market transactions in comparable securities and various other relationships between securities. Equity securities for which market quotations are available are valued at the last sale price or official closing price on the primary market or exchange

Annual Report to Shareholders 63

on which they trade. Publicly traded foreign government debt securities are typically traded internationally in the over-the-counter market and are valued at the bid price as of the close of business of that market. When prices are not readily available, or are determined not to reflect fair value, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before a Fund calculates its net asset value, the Fund may value these securities at fair value as determined in accordance with the procedures approved by the Corporation’s Board of Directors.

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in these securities.

The following is a summary of the inputs used in valuing the Fund’s assets carried at fair value:

Legg Mason Investment Grade

	December 31, 2008		Quoted Prices (Level 1)		Other Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Investments in Securities	$	205,948,438	$	125,073	$	205,721,365	$	102,000
Other Financial Instruments*		338,015		338,015		—		—
Total	$	206,286,453	$	463,088	$	205,721,365	$	102,000

* Other financial instruments include written options and futures.

The following is a reconciliation between the beginning and ending balances of investments in which significant unobservable inputs (Level 3) were used in determining fair value:

	Investments
	in Securities
Balance as of December 31, 2007	$	—
Net purchases (sales)		1,425,316
Accrued Premiums/Discounts		18,353
Change in unrealized appreciation (depreciation)		(1,341,669	)
Balance as of December 31, 2008	$	102,000

64 Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

Legg Mason Limited Duration

	December 31, 2008		Quoted Prices (Level 1)		Other Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Investments in Securities	$	102,042,406	$	22,624	$	101,812,737	$	207,045
Other Financial Instruments*		1,396,201		1,396,201		—		—
Total	$	103,438,607	$	1,418,825	$	101,812,737	$	207,045

* Other financial instruments include written options and futures.

The following is a reconciliation between the beginning and ending balances of investments in which significant unobservable inputs (Level 3) were used in determining fair value:

	Investments in Securities
Balance as of December 31, 2007	$	—
Net purchases (sales)		276,362
Accrued Premiums/Discounts		2,874
Change in unrealized appreciation (depreciation)		(259,436	)
Transfers in and/or out of Level 3		187,245
Balance as of December 31, 2008	$	207,045

Security Transactions

Security transactions are accounted for as of 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, 2008, security transactions (excluding short-term investments) were as follows:

	Purchases				Proceeds From Sales
	US Gov’t. Securities		Other		US Gov’t. Securities		Other
Investment Grade	$	2,866,213	$	46,676,554	$	6,785,808	$	140,558,131
Limited Duration	$	299,437,104	$	16,701,924	$	334,855,525	$	21,184,677

Annual Report to Shareholders 65

Repurchase Agreements

Each Fund may enter into repurchase agreements with institutions that its investment adviser has determined are creditworthy. Each repurchase agreement is recorded at cost. 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 of the fund to resell, the obligation at an agreed-upon price and time, thereby determining the yield during a fund’s holding period. When entering into repurchase agreements, it is each Fund’s policy that its custodian acting on the Fund’s behalf, or a third party custodian take possession of the underlying collateral securities, the market value of which, at all times, at least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction exceeds one business day, the value of the collateral is marked to market daily in an effort to ensure the adequacy of the collateral. If the counterparty defaults, a Fund generally has the right to use the collateral to satisfy the terms of the repurchase transaction. However, if the market value of the collateral declines during the period in which a Fund seeks to assert its rights or if bankruptcy proceedings are commenced with respect to the seller of the security, realization on the collateral by a Fund may be delayed or limited.

Options and Futures

The current market value of an exchange traded option is the last sale price or, in the absence of a sale, the price obtained by reference to broker-dealer quotations. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. Futures contracts are marked-to-market on a daily basis. As the contract’s value fluctuates, payments known as variation margin are made or received by each 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 a Fund recognizes a gain or loss when the contract is closed.

Investment Income and Distributions to Shareholders

Interest income and expenses are recorded on the accrual basis. Bond premiums and discounts are amortized for financial reporting and federal income tax purposes. 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. Net capital gain distributions, which are calculated at the Fund level, are declared and paid annually 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.

66 Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

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.

Credit and Market Risk

Investments in structured securities collateralized by residential real estate mortgages are subject to certain credit and liquidity risks. When market conditions result in an increase in default rates of the underlying mortgages and the foreclosure values of underlying real estate properties are materially below the outstanding amounts of the respective underlying mortgages, collection of accrued interest and principal on these investments may be doubtful. Such market conditions may significantly impair the value of these investments resulting in a lack of correlation between their credit ratings and values.

Other

In the normal course of business, the Funds enter into contracts that provide general indemnifications. Each Fund’s 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:

It is the Funds’ policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, each Fund intends to distribute substantially all of its taxable income and net realized gains, if any, to shareholders each year. Therefore, no federal income tax provision is required in the Funds’ financial statements.

Management has analyzed each Fund’s tax positions taken on federal income tax returns for all open tax years and has concluded that as of December 31, 2008, no provision for income tax would be required in the Funds’ financial statements. The Funds’ federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.

Annual Report to Shareholders 67

Reclassifications:

Accounting principles generally accepted in the United States of America require that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset values per share. During the current year, the following reclassifications have been made:

Fund			Overdistributed/ Undistributed Net Investment Income		Accumulated Net Realized Loss			Paid-in Capital
Investment Grade	(a	)	$	888	$	(888	)		—
Limited Duration Bond	(a	)		83,525		(83,525	)		—
	(b	)		—		3,082,149		$	(3,082,149	)

^(a) Reclassifications are primarily due to losses from mortgage-backed securities treated as capital losses for tax purposes.

^(b) Reclassifications are primarily due to the expiration of a capital loss carryover.

Distributions to Shareholders:

Subsequent to the fiscal year end, the Funds have made the following distributions:

Record Date	Investment Grade
Payable Date	Primary Class		Institutional Class
Daily 1/30/2009	$	0.044651	$	0.048341
Record Date	Limited Duration Bond
Payable Date	Primary Class		Institutional Class
Daily 1/30/2009	$	0.013374	$	0.021312

The tax character of distributions paid during the fiscal year ended December 31, 2008 were as follows:

	Investment Grade		Limited Duration Bond
Distributions paid from:
Ordinary Income	$	22,105,837	$	6,595,889

68 Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

The tax character of distributions paid during the fiscal year ended December 31, 2007 were as follows:

	Investment Grade		Limited Duration Bond
Distributions paid from:
Ordinary Income	$	23,195,204	$	8,855,799
Net Long-term Capital Gains		1,243,010		—
Total Distributions Paid	$	24,438,214	$	8,855,799

Accumulated Earnings on a Tax Basis:

As of December 31, 2008, the components of accumulated earnings on a tax basis were as follows:

				Limited Duration
	Investment Grade			Bond
Undistributed ordinary income-net	$	837,810		$	12,722
Capital loss carry forward(*)		(5,674,653	)		(8,058,382	)
Other book/tax temporary differences		(11,170,552	)(a)		(2,782,382	)(c)
Unrealized appreciation/(depreciation)		(107,432,328	)(b)		(35,763,721	)(b)
Total accumulated earnings/(losses)-net	$	(123,439,723	)	$	(46,591,763	)

(*) During the taxable year ended December 31, 2008, the following fund utilized the indicated amount of its capital loss carryovers available from a previous year:

Limited Duration Bond $  750,785

As of the taxable year ended December 31, 2008, the following capital loss carryforwards are available:

Year of Expiration	Investment Grade			Limited Duration Bond
12/31/2012	$	—		$	(4,535,866	)
12/31/2013		—			(554,986	)
12/31/2014		—			(1,406,678	)
12/31/2015		(750,316	)		(1,560,852	)
12/31/2016		(4,924,337	)		—
	$	(5,674,653	)	$	(8,058,382	)

These amounts will be available to offset any future taxable capital gains.

^(a) Other book/tax temporary differences are attributable primarily to the realization for tax purposes of unrealized losses on certain futures contracts, the deferral of post-October capital losses for tax purposes, difference between book/tax accrual of interest income on securities in default and book/tax differences in the timing of the deductibility of various expenses.

Annual Report to Shareholders 69

^(b) The difference between book-basis and tax-basis unrealized appreciation/ (depreciation) is attributable primarily to the tax deferral of losses on wash sales.

^(c) Other book/tax temporary differences are attributable primarily to the tax deferral of losses on straddles, the realization for tax purposes of unrealized gains on certain futures contracts, the deferral of post- October capital losses for tax purposes, differences between book/tax accrual of interest income on securities in default and book/tax differences in the timing of the deductibility of various expenses.

Tax Cost of investments:

As of December 31,2008, the aggregate cost of investments for federal income tax purposes were as follows:

Investment Grade	$	313,718,781
Limited Duration Bond		139,202,328

3. Financial Instruments:

Options and Futures

As part of their investment programs, the Funds may utilize options and futures. Options may be written (sold) or purchased by the 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.

70 Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

Purchased option:	Impact on the Fund:
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 most commonly realized risk in writing a covered call option is that a Fund may forgo the opportunity to profit if the market price of the underlying security increases and the option is exercised. The most commonly realized 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 or unwillingness to perform.

Activity in written call and put options during the year ended December 31, 2008, was as follows:

Limited Duration:	Actual Contracts		Premiums
Options outstanding at December 31, 2007	128		$	80,610
Options written	1,120			642,897
Options closed	(745	)		(342,859	)
Options expired	(33	)		(12,773	)
Options exercised	(118	)		(68,472	)
Options outstanding at December 31, 2008	352		$	299,403

Annual Report to Shareholders 71

Upon entering into a futures contract, each 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. The Fund realizes a 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, 2008 are listed at the end of each Fund’s portfolio of investments.

Swap Agreements

The Funds may invest in swaps for the purpose of managing their exposure to interest rate, credit or market risk, or for other purposes. The use of swaps involves risks that are different from those associated with ordinary portfolio transactions.

Each Fund may enter into credit default swap (“CDS”) contracts for investment purposes, to manage its credit risk or to add leverage. CDS agreements involve one party making a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party, typically corporate issuers or sovereign issuers of an emerging country, on a specified obligation or in the event of a write-down, principal shortfall, interest shortfall or default of all or part of the referenced entities comprising a credit index. Each Fund may use a CDS to provide a measure of protection against defaults of the issuers (i.e., to reduce risk where a Fund has exposure to the sovereign issuer) or to take an active long or short position with respect to the likelihood of a particular issuer’s default. As a seller of protection, the Fund generally receives an upfront payment or a stream of payments throughout the term of the swap provided that there is no credit event. If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the maximum potential amount of future payments (undiscounted) that the Fund could be required to make under a credit default swap agreement, would be an amount equal to the notional amount of the agreement. These amounts of potential

72 Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

payments will be partially offset by any recovery of values from the respective referenced obligations. As a seller of protection, the Fund effectively adds leverage to its portfolio because, in addition to its total net assets, the Fund would be subject to investment exposure on the notional amount of the swap. As a buyer of protection, the Fund generally receives an amount up to the notional value of the swap if a credit event occurs.

Implied spreads are the theoretical price a lender receives for credit default protection. When spreads rise, market perceived credit risk rises and when spreads fall, market perceived credit risk falls. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to enter into the agreement. Wider credit spreads and decreasing market values, when compared to the notional amount of the swap, represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement. Credit spreads utilized in determining the period end market value of credit default swap agreements on corporate issues or sovereign issues of an emerging country are disclosed in the Notes to Financial Statements and serve as an indicator of the current status of the payment/ performance risk and represent the likelihood or risk of default for credit derivatives. For credit default swap agreements on asset-backed securities and credit indices, the quoted market prices and resulting values particularly in relation to the notional amount of the contract, as well as the annual payment rate serve as an indication of the current status of the payment/performance risk.

Payments received or made at the beginning of the measurement period are reflected as a premium or deposit, respectively, on the Statement of Assets and Liabilities. These upfront payments are amortized over the life of the swap and are recognized as realized gain or loss on the Statement of Operations. A liquidation payment received or made at the termination of the swap is recognized as realized gain or loss on the Statement of Operations. Net periodic payments received or paid by the Fund are recognized as realized gain or loss at the time of receipt or payment on the Statement of Operations.

Entering into a CDS agreement involves, to varying degrees, elements of credit, market and documentation risk in excess of the related amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreement may default on its obligation to perform or disagree as to the meaning of the contractual terms in the agreement, and that there will be unfavorable changes in net interest rates.

Swaps are marked to market daily, and changes in value are recorded as unrealized appreciation/(depreciation). Gains or losses are realized upon termination of the swap agreement. Periodic payments and premiums received or made by a Fund are recorded in the accompanying Statements of Operations as realized gains or losses, respectively.

Annual Report to Shareholders 73

Collateral, in the form of restricted cash or securities, may be required to be held in segregated accounts with the Funds’ custodian in compliance with swap contracts. Risks may exceed amounts recognized on the statements of assets and liabilities. These risks include changes in the returns of the underlying instruments, failure of the counter-parties to perform under the contracts’ terms, and the possible lack of liquidity with respect to the swap agreements.

As of December 31, 2008, the Funds held no Swaps.

4. Transactions With Affiliates:

Each Fund has an investment 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 shown in the table below. LMFA has contractually agreed to waive its fees to the extent Limited Duration’s expenses (exclusive of taxes, interest, brokerage and extraordinary expenses) exceed during any month certain annual rates of the Fund’s average daily net assets. These contractual expense limitations are due to expire on April 30, 2009. LMFA has voluntarily agreed to waive fees to the extent that Investment Grade’s expenses (exclusive of taxes, interest, brokerage and extraordinary expenses) exceed during any month certain annual rates. This voluntary waiver is currently expected to continue until April 30, 2009, but may be terminated at any time. Pursuant to an agreement approved by the Board, Limited Duration agreed to repay LMFA for waived fees and reimbursed expenses provided that payment does not cause operating expenses to exceed 1.00% of the Primary Class’s average net assets and 0.50% of the Institutional Class’s average net assets and the payment is made within three years after the year in which LMFA earned the fee or incurred the expense. The following chart shows annual rates of management fees, expense limits, and management fees waived, for each Fund:

Fund	Management Fee		Expense Limitation		Year Ended December 31, 2008 Management Fees Waived			Maximum Amount Subject to Recapture
Investment Grade
— Primary Class	0.60	%	1.00	%	$	(738,099	)	$	2,422,595
— Institutional Class	0.60	%	0.50	%		(34,995	)		135,719
Limited Duration
— Primary Class	0.45	%	1.00	%	$	(187,628	)	$	659,385
— Institutional Class	0.45	%	0.50	%		(13,904	)		47,263

Western Asset Management Company (“Adviser”) serves as investment adviser to the Funds. The Adviser is responsible for the actual investment activity of each Fund.

74 Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

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 Investment Grade. For Limited Duration, LMFA pays the Adviser a fee, computed daily and payable monthly, of 0.20% of the Fund’s average daily net assets, not to exceed the fee received by LMFA after any fee waivers.

Legg Mason Investor Services, LLC (“LMIS”) serves as distributor of the Funds. LMIS 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 year ended December 31, 2008, LMIS waived $152,873 and $108,020 of the distribution and service fees for Investment Grade and Limited Duration, respectively.

Fund	Distribution Fee		Service Fee
Investment Grade	0.25	%	0.25	%
Limited Duration	0.25	%	0.25	%

LMFA, the Adviser, and LMIS are corporate affiliates and wholly owned subsidiaries of Legg Mason, Inc.

Under a Deferred Compensation Plan (“Plan”), directors may elect to defer receipt of all or a specified portion of their compensation. A participating director may select one or more funds in which his or her deferred director’s fees will be deemed to be invested. Deferred amounts remain in the funds until distributed in accordance with the Plan.

5. Line of Credit:

The Funds, along with 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 prevailing federal funds rate plus the federal funds rate margin. The Funds did not utilize the line of credit during the year ended December 31, 2008.

Annual Report to Shareholders 75

6. Fund Share Transactions:

At December 31, 2008, there were 100,000,000 shares authorized at $.001 par value for each of the Primary and Financial Intermediary Classes of Investment Grade and Limited Duration, and 50,000,000 shares authorized at $.001 par value for each of their Institutional Classes. Share transactions for the Funds were as follows: Investment Grade Income Portfolio

	Year Ended					Year Ended
	December 31, 2008					December 31, 2007
	Shares		Amount			Shares		Amount
Primary Class
Shares sold	5,602,244		$	51,251,221		10,373,591		$	107,619,637
Shares issued on reinvestment	2,367,708			20,528,846		1,914,513			19,726,308
Shares repurchased	(17,235,188	)		(148,299,211	)	(12,697,523	)		(130,997,575	)
Net Decrease	(9,265,236	)	$	(76,519,144	)	(409,419	)	$	(3,651,630	)
Institutional Class
Shares sold	697,516		$	5,974,142		4,021,567		$	41,398,237
Shares issued on reinvestment	119,333			1,033,284		173,253			1,772,017
Shares repurchased	(4,162,393	)		(40,423,902	)	(555,055	)		(5,679,440	)
Net Increase (Decrease)	(3,345,544	)	$	(33,416,476	)	3,639,765		$	37,490,814

Limited Duration Bond Portfolio

	Year Ended					Year Ended
	December 31, 2008					December 31, 2007
	Shares		Amount			Shares		Amount
Primary Class
Shares sold	2,349,770		$	21,834,372		2,517,235		$	25,588,486
Shares issued on reinvestment	660,072			6,003,189		751,053			7,616,464
Shares repurchased	(7,637,193	)		(70,055,617	)	(5,274,330	)		(53,506,012	)
Net Decrease	(4,627,351	)	$	(42,218,056	)	(2,006,042	)	$	(20,301,062	)
Institutional Class
Shares sold	694,527		$	6,452,975		570,046		$	5,775,650
Shares issued on reinvestment	55,370			501,071		44,813			454,047
Shares repurchased	(901,485	)		(8,140,926	)	(574,158	)		(5,762,209	)
Net Increase (Decrease)	(151,588	)	$	(1,186,880	)	40,701		$	467,488

76 Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

7. Recent Accounting Pronouncements

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (FAS 161). FAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. FAS 161 requires enhanced disclosures about each Fund’s derivative and hedging activities, including how such activities are accounted for and their effect on the Fund’s financial position, performance and cash flows. Management is currently evaluating the impact the adoption of FAS 161 will have on the Fund’s Financial Statements and related disclosures.

Annual Report to Shareholders 77

Report of Independent Registered Public Accounting Firm

To the Board of Directors of Legg Mason Income Trust, Inc. and to the Shareholders of Investment Grade Income Portfolio and Limited Duration Bond Portfolio:

In our opinion, the accompanying statements of assets and liabilities, including the portfolios of investments, 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 Investment Grade Income Portfolio and Limited Duration Bond Portfolio (two of the Portfolios comprising Legg Mason Income Trust, Inc., the “Funds”) at December 31, 2008, the results of their operations, the changes in their net assets, and the financial highlights for each of the 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, 2008 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Baltimore, Maryland

February 27, 2009

78 Annual Report to Shareholders

Important Tax Information (Unaudited)

The following information is provided with respect to the distributions paid during the taxable year ended December 31, 2008:

	Limited Duration Bond
Record Date: Payable Date:	Daily Monthly
Ordinary Income:
Qualified Dividend Income for Individuals	0.80	%

The following information is provided for shareholders who are not residents of the United States:

	Investment		Limited Duration
	Grade		Bond
Record Date:	Daily		Daily
Payable Date:	Monthly		Monthly
Qualified Interest Income	79.13	%	88.77	%

Please retain this information for your records.

Annual Report to Shareholders 79

Directors and Officers

The table below provides information about 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, Attn: Fund Secretary c/o Legal and Compliance Department, 32nd Floor, Baltimore, Maryland 21202.

Name, (Year of Birth) and Position with Corporation	Term of Office and Length of Time ServedA	Number of Funds in Fund Complex Overseen	Other Directorships Held	Principal Occupation(s) During the Past Five Years
INDEPENDENT DIRECTORS:B
Hearn,Ruby P. (1940) Director	Since 2004	14	None	Senior Vice President Emerita of The Robert Wood Johnson Foundation (non-profit) since 2001. Formerly: Senior Vice President of The Robert Wood Johnson Foundation (1996- 2001).
Lehman, Arnold L. (1944) Lead Independent Director	Since 1987	14	None	Director of the Brooklyn Museum since 1997; Trustee of American Federation of Arts since 1998. Formerly: Director of The Baltimore Museum of Art (1979-1997).
Masters, Robin J.W. (1955) Director	Since 2002	14	Director of Cheyne Capital International Limited (investment advisory firm). Director/Trustee of Legg Mason Asian Funds plc, Legg Mason Institutional Funds plc, Western Asset Fixed Income Funds plc, and Western Asset Debt Securities plc.	Retired. Formerly: Chief Investment Officer of ACE Limited (insurance) (1986-2000).

80 Annual Report to Shareholders

Directors and Officers — Continued

Name, (Year of Birth) and Position with Corporation	Term of Office and Length of Time ServedA	Number of Funds in Fund Complex Overseen	Other Directorships Held	Principal Occupation(s) During the Past Five Years
McGovern, Jill E. (1944) Director	Since 1989	14	None	Senior Consultant, American Institute for Contemporary German Studies (AICGS) since 2007. Formerly: Chief Executive Officer of The Marrow Foundation (non-profit) (1993- 2007); Executive Director of the Baltimore International Festival (1991-1993); Senior Assistant to the President of The Johns Hopkins University (1986-1990).
Mehlman, Arthur S. (1942) Director	Since 2002	Director/ Trustee of all Legg Mason Funds consisting of 14 portfolios; Director/ Trustee of the Royce Family of Funds consisting of 28 portfolios.	Director of Municipal Mortgage & Equity, LLC.	Retired. Formerly: Partner, KPMG LLP (international accounting firm) (1972-2002).
O’Brien, G. Peter (1945) Director	Since 2002	Director/ Trustee of all Legg Mason Funds consisting of 14 portfolios; Director/ Trustee of the Royce Family of Funds consisting of 28 portfolios.	Director of Technology Investment Capital Corp.	Retired. Trustee Emeritus of Colgate University; Board Member, Hill House, Inc. (residential home care); Board Member, Bridges School (pre-school). Formerly: Managing Director, Equity Capital Markets Group of Merrill Lynch & Co. (1971-1999).
Rowan, S. Ford (1943) Director	Since 2002	14	None	Chairman, National Center for Critical Incident Analysis, National Defense University, since 2004; Professional Lecturer in Organizational Sciences, The George Washington University, since 2008. Formerly: Consultant, Rowan & Blewitt Inc. (management consulting) (1984- 2007).

Annual Report to Shareholders 81

Name, (Year of Birth) and Position with Corporation	Term of Office and Length of Time ServedA	Number of Funds in Fund Complex Overseen	Other Directorships Held	Principal Occupation(s) During the Past Five Years
Tarola, Robert M. (1950) Director	Since 2004	14	TeleTech Holdings, Inc. (business process outsourcing)	President of Right Advisory, LLC (corporate finance and governance consulting) since 2008; Formerly: Senior Vice President and Chief Financial Officer of W. R. Grace & Co. (specialty chemicals and materials) (1999- 2008), and of MedStar Health, Inc. (hospitals and healthcare) (1996 to 1999); Partner, PriceWaterhouse LLP (accounting and auditing) from (1984 to 1996)
INTERESTED DIRECTORS:C
Fetting, Mark R. (1954) Chairman and Director	Director since 2002 and Chairman since 2008.	Chairman and Director/ Trustee of all Legg Mason Funds consisting of 14 portfolios; Director/ Trustee of the Royce Family of Funds consisting of 28 portfolios.	None	President, CEO, Chairman of Legg Mason, Inc. and Chairman of Legg Mason Funds since 2008. Formerly: President of all Legg Mason Funds (2001- 2008). Senior Executive Vice President of Legg Mason, Inc., Director and/or officer of various Legg Mason, Inc. affiliates (2000-2008). 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 (financial consulting); Vice President, T. Rowe Price Group, Inc.

82 Annual Report to Shareholders

Directors and Officers — Continued

Name, (Year of Birth) and Position with Corporation	Term of Office and Length of Time ServedA	Number of Funds in Fund Complex Overseen	Other Directorships Held	Principal Occupation(s) During the Past Five Years
Odenath, David R. 1957 President and Director	Since 2008	14	None	Senior Executive Vice President of Legg Mason, Inc. and President of Legg Mason Funds since 2008. Formerly: President of Prudential Annuities (since August 2002); Executive Vice President (since May 2003) of American Skandia Investment Services, Inc; Chief Executive Officer and Director (since May 2003) of American Skandia Life Assurance Corporation, American Skandia Information Services and Technology Corporation and Skandia U.S. Inc; President, Chief Executive Officer and Director (since May 2003) of American Skandia Marketing, Inc.; Formerly President, Chief Executive Officer, Chief Operating Officer and Officer- In-Charge (1999-2003) of PI; Senior Vice President (since June 1999) of Prudential; formerly Senior Vice President (August 1993- May 1999) of Paine Webber Group, Inc.

Annual Report to Shareholders 83

Name, (Year of Birth) and Position with Corporation	Term of Office and Length of Time ServedA	Number of Funds in Fund Complex Overseen	Other Directorships Held	Principal Occupation(s) During the Past Five Years
EXECUTIVE OFFICERS:
Karpinski, Marie K. (1949) Vice President and Chief Financial Officer	Since 1987	14	None	Vice President and Chief Financial Officer of all Legg Mason Funds. Vice President and Treasurer of Legg Mason Fund Adviser, Inc.; Vice President and Principal Financial and Accounting Officer of Western Asset Funds, Inc., Western Asset Income Fund and Western Asset Premier Bond Fund; Treasurer and Principal Financial and Accounting Officer of Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund (2003-present), and Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund 2 (2004-present).
Merz, Gregory T. (1958) Vice President and Chief Legal Officer	Since 2003	14	None	Vice President and Deputy General Counsel of Legg Mason, Inc. since 2003. Formerly: Associate General Counsel, Fidelity Investments (1993- 2002).

84 Annual Report to Shareholders

Directors and Officers — Continued

Name, (Year of Birth) and Position with Corporation	Term of Office and Length of Time ServedA	Number of Funds in Fund Complex Overseen	Other Directorships Held	Principal Occupation(s) During the Past Five Years
Becker, Ted P. (1951) Vice President and Chief Compliance Officer	Since 2007	14	None	Director of Global Compliance at Legg Mason (2006 to present); Managing Director of Compliance at Legg Mason & Co. (2005 to present); Chief Compliance Officer with certain mutual funds associated with Legg Mason & Co. (since 2006); Chief Compliance Officer of Legg Mason Partners Fund Adviser and certain affiliates; Managing Director of Compliance at Citigroup Asset Management (2002 to 2005). Prior to 2002, Managing Director- Internal Audit & Risk Review at Citigroup Inc.
Wachterman, Richard M. (1947) Secretary	Since 2004	14	None	Associate General Counsel of Legg Mason, Inc. since 2004. Formerly: Managing Director, Victory Capital Management, Inc. (investment management) (1993- 2003).

Annual Report to Shareholders 85

Name, (Year of Birth) and Position with Corporation	Term of Office and Length of Time ServedA	Number of Funds in Fund Complex Overseen	Other Directorships Held	Principal Occupation(s) During the Past Five Years
Morris, Erin K. (1966) Treasurer	Since 2006	3	None	Vice President and Manager, Global Funds Administration, Legg Mason & Co., LLC (2005-present); Assistant Vice President of Legg Mason Wood Walker, Incorporated (2002- 2005); Treasurer of Legg Mason Income Trust, Inc., Legg Mason Tax- Free Income Fund, Western Asset Income Fund, Western Asset Premier Bond Fund and Western Asset Funds, Inc. (2006-present); Assistant Treasurer, Legg Mason Partners Fund fixed income complex (2007-present). Western Asset/Claymore Inflation-Linked Securities & Income Fund (2003-present); Western Asset/Claymore Inflation-Linked Opportunities & Income Fund (2004-present); Assistant Treasurer, the Corporation, Western Asset Income Fund, Western Asset Premier Bond Fund, Legg Mason Income Trust, Inc. and Legg Mason Tax-Free Income Fund (2001- 2006): Manager, Funds Accounting, Legg Mason Wood Walker, Incorporated (2000- 2005).

86 Annual Report to Shareholders

Directors and Officers — Continued

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 Directors of the Corporation serve a term of indefinite length until their retirement, in accordance with the Board’s retirement policy, resignation or removal and stand for re-election by shareholders only as and when required by the 1940 Act. Officers of the Corporation are elected annually to serve until their successors are elected and qualified.

^B 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).

^C Mr. Fetting and Mr. Odenath are considered to be interested persons, as defined in the 1940 Act, of the Corporation on the basis of their employment with the Funds’ adviser or their affiliated entities (including the Funds’ principal underwriter) or Legg Mason, Inc., the parent holding company of those entities, as well as their ownership of Legg Mason, Inc. stock.

^D Officers of the Corporation are interested persons (as defined in the 1940 Act).

Annual Report to Shareholders 87

Board Consideration of Legg Mason Income Trust, Inc.’s Investment Advisory Agreements and Management Agreements

At its November 2008 meeting, the Board of Directors (the “Board”), including all of the Independent Directors, approved the continuation of the Management Agreements between Legg Mason Fund Adviser, Inc. (the “Manager”) and Legg Mason Income Trust, Inc., on behalf of Legg Mason Limited Duration Bond Portfolio and Legg Mason Investment Grade Income Portfolio (each, a “Fund”), and the Investment Advisory Agreements between the Manager and Western Asset Management Company (the “Adviser”) for each Fund (each an “Agreement”). In voting to approve the continuation of each Agreement, the Board considered whether continuance would be in the best interest of the relevant Fund and its shareholders, an evaluation largely based on the nature and quality of the services provided under each Agreement and the overall fairness of each Agreement to the relevant Fund. In considering each Agreement, the Board did not identify any single factor or item of information as all-important or controlling. Based on its evaluation of all material factors, including those described below, the Board concluded that the terms of each Agreement are reasonable and fair and that the continuation of each Agreement is in the best interest of the relevant Fund and its shareholders.

Prior to the Board action, the Independent Directors met as a committee, together with experienced 1940 Act counsel, to consider their recommendation as to continuance of each Agreement. As part of the process to consider each Agreement, legal counsel to each Fund requested certain information from the Manager and the Adviser on behalf of the Independent Directors, and in response, the Manager and the Adviser provided extensive reports that addressed specific factors designed to inform the Board’s consideration of each Agreement. Counsel also provided the Independent Directors and the Board with a memorandum detailing their responsibilities pertaining to the continuance of each Agreement.

In addition to the November meeting, the Independent Directors met in executive session in October 2008, at which time they reviewed and analyzed materials relating to each Agreement. The Independent Directors also retained independent consultants to assist them in their review and analysis of each Agreement. The Board meets at least another three times per year in order to oversee the Legg Mason Funds, including meetings at which the portfolio managers of each Fund or others make presentations and discuss performance, compliance and other applicable issues. The Board also drew upon its long association with the Manager, the Adviser and their personnel and the Board members’ familiarity with their culture and the manner in which the management entities have sought to strengthen and enhance themselves.

88 Annual Report to Shareholders

With respect to the nature, scope and quality of the services provided, the Board considered the experience and commitment of the Manager’s and the Adviser’s personnel and their efforts to build and support a strong service team. The Board also considered the nature and quality of the Adviser’s investment process. In assessing performance, the Board compared the returns of each Fund to the average of an appropriate Lipper category, a specified benchmark index and a peer group of investment companies pursuing similar strategies, all over multiple time periods. The Board considered very carefully each Fund’s performance and discussed with the Manager and the Adviser steps that the Manager and the Adviser had taken, or intended to take, to improve performance. The Board considered whether a reduction in assets under management would adversely affect the resources available to the Manager and the Adviser. The Board also considered the level of service provided by the Manager to each Fund, including oversight of the transfer agent and the custodian and preparation of regulatory filings. The Board considered the Adviser’s procedures for executing portfolio transactions for each Fund. The Board also reviewed the Adviser’s policies and procedures for the selection of brokers and dealers and on obtaining research from brokers.

In determining whether the terms of each Agreement are reasonable and fair, the Board considered the terms and fee structure of each Agreement. In that connection, the Board considered the costs to the Manager and the Adviser in providing services to each Fund and profitability for the Manager and its affiliates from their overall association with each Fund. The Board reviewed information about the advisory fee schedule and overall expense ratio of each Fund and comparable fee schedules and expense ratios of a peer group of funds. In considering whether any economies of scale experienced by the Manager in providing services to each Fund were shared with that Fund, the Board noted that, while each Fund’s advisory fee structure does not provide for a reduction of payments, the current fees appear fair and reasonable in relation to the present asset size of each Fund and the Manager has contractually agreed to waive fees for Legg Mason Limited Duration Bond Portfolio and has voluntarily waived fees for Legg Mason Investment Grade Income Portfolio. The Board also compared the advisory fee schedule for each Fund to the advisory fees charged by the Manager and the Adviser to its other accounts managed in a similar style. In that connection, the Board considered the differences in the level of services provided and the differences in responsibility of the Manager and the Adviser to each Fund and to the other accounts. Finally, the Board considered other benefits accruing to the Manager, the Adviser and their affiliates by virtue of their relationship to each Fund.

After an evaluation of all material factors, including those in the foregoing discussion, the Board concluded that the continuation of each Agreement is in the best interest of the relevant Fund.

Fund Information

Investment Manager

Legg Mason Fund Adviser, Inc.

Baltimore, MD

Investment Adviser

Western Asset Management Company

Pasadena, CA

Board of Directors

Mark R. Fetting, Chairman

David R. Odenath, 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 Chief Financial Officer

Gregory T. Merz, Vice President and Chief Legal Officer

Ted P. Becker, Vice President and Chief Compliance Officer

Erin K. Morris, Treasurer

Susan C. Curry, Assistant Treasurer

Richard M. Wachterman, Secretary

Peter J. Ciliberti, Assistant Secretary

Transfer and Shareholder Servicing Agent

Boston Financial Data Services

Braintree, MA

Custodian

State Street Bank & Trust Company

Boston, MA

Counsel

K&L Gates 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 US Small- Capitalization Value Trust Value Trust	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.
Specialty Fund Opportunity Trust	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.
Global Funds Emerging Markets Trust International Equity Trust Taxable Bond Funds Investment Grade Income Portfolio Limited Duration Bond Portfolio	Information about the policies and procedures that each 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’s (“SEC”) website (http://www.sec.gov). Information regarding how each 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 Legg Mason Funds’ website at www.leggmason.com/individualinvestors.
Tax-Free Bond Fund Maryland Tax-Free Income Trust	Each Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. You may obtain a free copy of each Fund’s portfolio holdings as filed on Form N-Q, by contacting each Fund at the appropriate phone number, address or website listed below. Additionally, each Fund’s Form N-Q is available on the SEC’s website (http://www.sec.gov) or may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information about the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.

This report must be preceded or accompanied by a free prospectus. Investors should consider each Fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information about each Fund. For a free prospectus for these or any other Legg Mason Fund, visit www.leggmason.comindividualinvestors. Please read the prospectus carefully before investing.

Legg Mason Funds	Legg Mason Investor Services — Institutional
For Primary, R Class Shareholders	For FI, I and IS Class Shareholders
c/o BFDS	c/o BFDS
P.O. Box 55214	P.O. Box 8037
Boston, MA 02205-8504	Boston, MA 02206-8037
800-822-5544	888-425-6432
www.leggmason.com/individualinvestors	www.lminstitutionalfunds.com

Legg Mason Investor Services, LLC, Distributor
A Legg Mason, Inc. subsidiary