N-CSR

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number: 811-05029

Name of Fund: Legg Mason Income Trust, Inc.

Address of Principal Executive Offices: 100 Light Street, Baltimore, MD 21202

Name and address of agent for service:

Richard M. Wachterman, Esq.
Legg Mason & Co., LLC
100 Light Street
Baltimore, MD 21202

Registrant’s telephone number, including area code: (410) 539-0000

Date of fiscal year end: December 31, 2005

Date of reporting period: December 31, 2005

Item 1. Report to Shareholders

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, 2005, combining reports for the Legg Mason Core Bond Fund, High Yield Portfolio, Investment Grade Income Portfolio, Limited Duration Bond Portfolio and the U.S. Government Money Market Portfolio.

   The following table summarizes key statistics for the Primary Class of each portfolio, as of December 31, 2005:

					Net Asset Value
	SEC YieldA		Average Life		Per Share
Core Bond		4.07%		8.42 years	$	9.71
High Yield		6.61%		6.94 years	$	8.93
Investment Grade		5.00%		10.31 years	$	10.40
Limited DurationB		3.89%		3.32 years	$	10.20
U.S. Government Money MarketC		3.55%		49 days	$	1.00

   For the year ended December 31, 2005, total returns for the Primary Class of shares of the Core Bond, High Yield, Investment Grade and Limited Duration Portfolios were +0.94%, +2.39%, +1.69%, and +1.83%, respectively. Total returns for the Institutional Class of shares of High Yield, Investment Grade and Limited Duration Portfolios were +2.94%, +2.27%, and +2.29%, respectively. (Total return measures investment performance in terms of appreciation or depreciation in a portfolio’s net asset value per share, plus dividends and any capital gain distributions.)

   For each of our Funds, historical performance is not indicative of future results, and the principal value of the Core Bond, High Yield, Investment Grade and Limited Duration Portfolios will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. The U.S. Government Money Market Portfolio seeks to preserve the value of your investment at $1.00 per share; however, it is possible to lose money by investing in the Fund. The U.S. Government Money Market Portfolio is primarily invested in government agency securities. Although most government agency securities are not backed by the full faith and credit of the U.S. government, all such securities held in the Portfolio at December 31, 2005 carry the highest quality ratings of the Standard & Poor’s and Moody’s rating services.

   PricewaterhouseCoopers LLP, the Funds’ independent registered public accounting firm, has completed its annual audit examination, and audited financial statements for the fiscal year ended December 31, 2005, are included in this report.

^A  SEC yields reported for the Core Bond, High Yield, Investment Grade and Limited Duration Portfolios are for the 30 days ended December 31, 2005. For the U.S. Government Money Market Portfolio, the SEC yield is for the 7 days ended December 31, 2005.

^B  Limited Duration was formerly the U.S. Government Intermediate Portfolio, see page 85 for additional information about the change.

^C  An investment in the U.S. Government Money Market Portfolio is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Report to Shareholders

2

   On January 3, 2006, the Board of Directors of the Legg Mason U.S. Government Money Market Portfolio approved, subject to shareholder approval, a Plan of Liquidation, Dissolution and Termination whereby all the Fund’s assets would be liquidated and the Fund would subsequently be dissolved. The estimated time of liquidation is February 27, 2006.

   Many of our shareholders regularly add to their Primary Class Fund holdings by authorizing automatic, monthly transfers from their bank checking or brokerage accounts. Your financial adviser will be happy to help you establish a dollar cost averaging plan should you wish to do so.

   Finally, we wanted to update you on previously announced news regarding Legg Mason. We recently completed a business transaction with Citigroup that enabled us to become one of the top five mutual fund companies in the United States.^D As of December 31, 2005, Legg Mason, Inc.’s assets under management totalled $850.8 billion. Of that amount, $362.6 billion were in mutual funds advised by the investment advisory affiliates of Legg Mason, Inc. On page 3 you will find a letter from Raymond A. “Chip” Mason, Legg Mason’s chairman and chief executive officer, describing the significance of this transaction and our deep commitment to the clients of all of our asset management businesses.

Sincerely,

John F. Curley, Jr. Chairman	Mark R. Fetting President

February 15, 2006

^D  Source: “Open and Closed-End Mutual Funds Third Quarter 2005 Market Shares,” published by Strategic Insight.

Annual Report to Shareholders

3

To Our Clients and Shareholders Worldwide,

   Today represents a major milestone in the proud, over a century history of Legg Mason. With the successful acquisition of Citigroup’s worldwide asset management business, Legg Mason has transformed itself from a well-regarded money management and regional securities firm into a global asset manager with more than $800 billion in assets under management. We undertook this important step to enable us to concentrate all of our resources on what we believe we do best: managing your money.

   While we understand some things will change, there are two core beliefs that you can continue to count on from us. First, we believe that the bedrock of any successful organization is its character and integrity. Second, we are deeply committed to encouraging and supporting the many talented money managers throughout the Legg Mason organization in their quest to be both independent and performance driven. All of our managers share a common organizational mission: “To be one of the best money managers in the world.”

   As a global money manager, we now offer institutions, mutual fund and high net worth individual investors around the world a constellation of sophisticated money management services from which to choose—from equity to alternative to fixed income products offered throughout the United States, United Kingdom, Europe, Japan, Hong Kong, Australia, Singapore, Latin America and Canada.

   So, whether you are a satisfied client of Legg Mason Capital Management, Western Asset Management, Private Capital Management, Royce, Brandywine, Batterymarch, Permal or any of the many former Citigroup mutual funds or separate accounts that now comprise the ‘new’ Legg Mason, you should know that we pledge to you that we will work hard to meet your investment objectives, every day.

Sincerely,

/s/ Raymond A. Mason

Raymond A. “Chip” Mason
Chairman, President and Chief Executive Officer

December 2005

Annual Report to Shareholders

4

Management’s Discussion of Fund Performance

Core Bond Fund

   The average annual total return for the Core Bond Fund for the period from its inception to December 31, 2005, is presented below, along with the total return of its benchmark:

				Since
		One Year		InceptionA
Core Bond Fund
	Primary Class		+0.94%		+1.54%
Lehman Aggregate Bond IndexB			+2.43%		+4.88%

The performance data quoted represents past performance and does 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.leggmasonfunds.com. 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 period.

   Our investment strategy produced generally negative results. The total return (appreciation or depreciation in the Fund’s net asset value per share, plus dividends and any capital gain distributions) of the Fund’s Primary Class lagged the performance of its primary benchmark, the Lehman Aggregate Bond Index, delivering 0.94% versus 2.43% for the index. The Fund’s underweight duration stance suffered as yields fell, but its barbelled exposure to maturities benefited from a flatter yield curve. A neutral-to-underweight exposure to the credit sector was rewarded as spreads widened, but an emphasis on BBB-rated bonds suffered since they underperformed higher-quality bonds. An overweight exposure to Treasury Inflation-Protected Securities^C subtracted modestly from performance as they underperformed Treasuries.

Western Asset Management Company

January 31, 2006

^A The Inception date of the Primary Class is February 27, 2004. Index returns are for periods beginning February 29, 2004.

^B A market value-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed rate, publicly placed, dollar-denominated, and nonconvertible investment grade debt issues with at least $100 million par amount outstanding and with at least one year to final maturity.

^C Security whose principal value is adjusted daily or monthly 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.

Annual Report to Shareholders

5

Expense Example

Core Bond Fund

   As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution and service (12b-1) fees, 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, 2005, and held through December 31, 2005.

Actual Expenses

   The first line in the table below provides information about actual account values and actual expenses for the Fund. 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 during this period.

Hypothetical Example for Comparison Purposes

   The second line in the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’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 that appear in the shareholder reports of other funds.

	Beginning		Ending		Expenses PaidA
	Account		Account		During the
	Value		Value		Period
	7/1/05		12/31/05		7/1/05 to 12/31/05
Actual	$	1,000.00	$	992.60	$	5.02
Hypothetical (5% return before expenses)		1,000.00		1,020.16		5.09

^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 ratio of 1.00% multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (184), and divided by 365.

Annual Report to Shareholders

6

Performance Information

Core Bond Fund

   The graph on the following page compares the Fund’s total returns to that of a closely matched broad-based securities market index. The graph illustrates the cumulative total return of an initial $10,000 investment in the Fund’s Primary Class shares, for the periods indicated. The line for the Fund represents the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling securities. The line representing the securities market index does not include any transaction costs associated with buying and selling securities in the index or other administrative expenses. Both the Fund’s and the index’s results assume reinvestment of all dividends and distributions.

   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. It assumes that dividends and distributions were reinvested 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, 2005

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+0.94%		+0.94%
Life of Class*		+2.87%		+1.54%
* Inception date: February 27, 2004

The performance data quoted represents past performance and does 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.leggmasonfunds.com. 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 market value-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed rate, publicly placed, dollar-denominated, and nonconvertible investment grade debt issues with at least $100 million par amount outstanding and with at least one year to final maturity.

Performance Information — Continued

Annual Report to Shareholders

8

Portfolio Composition (as of December 31, 2005)^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.

^C Standard & Poor’s Ratings Services provide capital markets with credit ratings for the evaluation and assessment of credit risk.

Annual Report to Shareholders

9

Portfolio of Investments

Legg Mason Core Bond Fund

December 31, 2005
(Amounts in Thousands)

				Maturity		Par/
		Rate		Date		Shares		Value
Long-Term Securities — 124.3%
Corporate Bonds and Notes — 23.2%
Aerospace/ Defense — 0.1%
	Northrop Grumman Corporation		4.079%		11/16/06	$	40	$	40
	United Technologies Corporation		5.400%		5/1/35		20		20
									60
Automotive — 1.7%
	Ford Motor Company		7.450%		7/16/31		720		490
	General Motors Corporation		8.250%		7/15/23		1,000		642
	General Motors Corporation		8.375%		7/15/33		150		99
									1,231
Banking and Finance — 3.2%
	Ford Motor Credit Company		4.950%		1/15/08		40		36
	Ford Motor Credit Company		6.625%		6/16/08		190		172
	Ford Motor Credit Company		7.375%		10/28/09		590		523
	Ford Motor Credit Company		7.375%		2/1/11		230		202
	Ford Motor Credit Company		7.250%		10/25/11		210		182
	General Motors Acceptance Corporation		6.125%		2/1/07		10		10
	General Motors Acceptance Corporation		6.150%		4/5/07		50		47
	General Motors Acceptance Corporation		6.125%		8/28/07		230		213
	General Motors Acceptance Corporation		5.625%		5/15/09		685		609
	General Motors Acceptance Corporation		7.750%		1/19/10		110		103
	HSBC Finance Corporation		4.125%		11/16/09		225		217
									2,314
Banks — 1.1%
	Bank of America Corporation		3.875%		1/15/08		90		88
	Bank of America Corporation		4.500%		8/1/10		120		118
	Bank One Corporation		6.500%		2/1/06		220		220
	Bank One Corporation		2.625%		6/30/08		335		318

Legg Mason Core Bond Fund — Continued

Annual Report to Shareholders

10

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Banks — Continued
	Rabobank Capital Funding Trust II		5.260%		12/31/49	$	10	$	10	A,B
	Rabobank Capital Funding Trust III		5.254%		12/29/49		20		20	A,B
									774
Cable — 0.5%
	Comcast Corporation		6.500%		1/15/15		240		254
	Cox Communications, Inc.		3.875%		10/1/08		70		67
									321
Diversified Financial Services — 1.6%
	CIT Group Inc.		4.000%		5/8/08		5		5
	Citigroup Inc.		4.125%		2/22/10		230		223
	General Electric Capital Corporation		4.250%		1/15/08		180		178
	Marsh & McLennan Companies, Inc.		5.150%		9/15/10		650		646
	Wells Fargo & Company		4.200%		1/15/10		105		102
									1,154
Electric — 0.7%
	Dominion Resources, Inc.		4.750%		12/15/10		30		29
	Dominion Resources, Inc.		5.700%		9/17/12		95		97
	FirstEnergy Corp.		7.375%		11/15/31		285		336
	Oncor Electric Delivery Company		6.375%		1/15/15		30		32
	The Cleveland Electric Illuminating Company		5.650%		12/15/13		20		20
									514
Energy — 2.6%
	Duke Energy Corporation		6.250%		1/15/12		50		53
	Duke Energy Corporation		5.625%		11/30/12		90		92
	Pacific Gas and Electric Company		6.050%		3/1/34		135		140

Annual Report to Shareholders

11

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Energy — Continued
	TXU Corp.		6.550%		11/15/34	$	800	$	756
	TXU Energy Co.		7.000%		3/15/13		770		820
									1,861
Environmental Services — 0.1%
	Waste Management, Inc.		6.375%		11/15/12		85		91
Food, Beverage and Tobacco — 0.5%
	Altria Group, Inc.		7.000%		11/4/13		155		169
	Anheuser-Busch Companies, Inc.		4.950%		1/15/14		155		155
	Kraft Foods Inc.		5.625%		11/1/11		65		67
									391
Investment Banking/ Brokerage — 0.7%
	BNP Paribas NY		6.875%		3/1/09		110		116
	Lehman Brothers Holdings Inc.		4.000%		1/22/08		115		113
	Morgan Stanley		3.625%		4/1/08		190		185
	The Goldman Sachs Group, Inc.		4.500%		6/15/10		110		108
									522
Media — 0.4%
	Clear Channel Communications, Inc.		4.625%		1/15/08		30		30
	Clear Channel Communications, Inc.		4.250%		5/15/09		50		48
	Clear Channel Communications, Inc.		5.500%		9/15/14		40		38
	Time Warner Inc.		6.875%		5/1/12		75		80
	Time Warner Inc.		7.700%		5/1/32		75		84
									280
Medical Care Facilities — 1.0%
	HCA, Inc.		5.750%		3/15/14		700		679

Legg Mason Core Bond Fund — Continued

Annual Report to Shareholders

12

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Medical Care Facilities — Continued
Oil and Gas — 1.7%
	Amerada Hess Corporation		7.300%		8/15/31	$	245	$	283
	Apache Corporation		6.250%		4/15/12		35		38
	Conoco Inc.		6.950%		4/15/29		225		271
	ConocoPhillips		4.750%		10/15/12		60		60
	Devon Energy Corporation		7.950%		4/15/32		140		181
	Kerr-McGee Corporation		6.875%		9/15/11		300		320
	XTO Energy, Inc.		7.500%		4/15/12		15		17
	XTO Energy, Inc.		6.250%		4/15/13		20		21
									1,191
Paper and Forest Products — 0.4%
	International Paper Company		5.500%		1/15/14		40		39
	Weyerhaeuser Company		6.750%		3/15/12		235		250
									289
Photo Equipment and Supplies — 0.7%
	Eastman Kodak Company		7.250%		11/15/13		540		516
Retail — 0.5%
	Target Corporation		5.400%		10/1/08		155		158
	Wal-Mart Stores, Inc.		3.375%		10/1/08		190		183
									341
Special Purpose — 4.8%
	ASIF Global Financing XIX		4.900%		1/17/13		40		40	A
	DaimlerChrysler NA Holding Corporation		4.050%		6/4/08		95		92
	DaimlerChrysler NA Holding Corporation		7.200%		9/1/09		50		53
	Lilacs Repackaging 05-I		5.138%		1/15/64		500		493	A
	Sprint Capital Corporation		4.780%		8/17/06		15		15
	Sprint Capital Corporation		6.000%		1/15/07		270		273

Annual Report to Shareholders

13

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Special Purpose — Continued
	Sprint Capital Corporation		8.375%		3/15/12	$	2,040	$	2,364
	Verizon Global Funding Corp.		7.375%		9/1/12		105		117
									3,447
Telecommunications — 0.1%
	BellSouth Corporation		4.750%		11/15/12		10		10
	SBC Communications Inc.		5.100%		9/15/14		70		68
									78
Transportation — 0.8%
	JetBlue Airways Corporation		4.715%		8/15/16		300		296	C
	JetBlue Airways Corporation		4.790%		11/15/16		300		294	C
									590
Total Corporate Bonds and Notes (Identified Cost — $17,415)									16,644
Asset-Backed Securities — 4.3%
Fixed Rate Securities — 1.0%
	Bank One Issuance Trust 2003-C1		4.540%		9/15/10		200		198
	BankAmerica Manufactured Housing Contract 1997-2		6.790%		12/10/22		32		32
	Citibank Credit Card Issuance Trust 2001-C3		6.650%		5/15/08		200		201
	Conseco Finance Home Equity Loan Trust 2001-A		7.440%		3/15/32		200		201
	MMCA Automobile Owner Trust 2002-4		3.050%		11/16/09		107		107
									739
Indexed SecuritiesC — 3.3%
	AAA Trust 2005-2		4.291%		11/26/35		191		191	A
	Ameriquest Mortgage Securities Inc. 2005-R3		4.469%		5/25/35		185		185
	Bayview Financial Acquisition Trust 2003-BA		4.859%		4/25/33		176		176	A

Legg Mason Core Bond Fund — Continued

Annual Report to Shareholders

14

				Maturity		Par/
		Rate		Date		Shares		Value
Asset-Backed Securities — Continued
Indexed SecuritiesC — Continued
	Bayview Financial Acquisition Trust 2004-C		4.799%		5/28/44	$	475	$	475
	Bayview Financial Acquisition Trust 2005-B		4.340%		4/28/39		250		250
	Carrington Mortgage Loan Trust 2005-OPT2		4.469%		5/25/35		325		325
	Credit-Based Asset Servicing and Securitization 2005-RP1		4.559%		1/25/35		182		182	A
	EQCC Trust 2002-1		4.679%		11/25/31		10		10
	Household Mortgage Loan Trust 2003-HC1		4.720%		2/20/33		127		127
	Morgan Stanley ABS Capital I 2005-WMC2		4.459%		2/25/35		267		266
	Residential Asset Mortgage Product Inc 2004-RPIA		4.490%		11/25/42		41		41	A
	Wachovia Asset Securitization, Inc. 2002-HE1		4.749%		9/27/32		127		127
									2,355
Total Asset-Backed Securities (Identified Cost — $3,109)									3,094
Mortgage-Backed Securities — 19.9%
Fixed Rate Securities — 3.0%
	Asset Securitization Corporation 1996-D2		6.920%		2/14/29		26		26
	Banc of America Commercial Mortgage Incorporated 2005-3		4.668%		7/10/43		500		482
	Countrywide Alternative Loan Trust 2004-2 CB		4.250%		3/25/34		297		293
	GS Mortgage Securities Corporation II 2005-GG4		4.680%		7/10/39		200		195
	J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 2005-LDP4		4.918%		10/15/42		200		196

Annual Report to Shareholders

15

				Maturity		Par/
		Rate		Date		Shares		Value
Mortgage-Backed Securities — Continued
Fixed Rate Securities — Continued
	LB-UBS Commercial Mortgage Trust 2005-C3 A5		4.739%		7/15/30	$	140	$	136
	LB-UBS Commercial Mortgage Trust 2005-C3 AAB		4.664%		7/15/30		200		194
	MASTR Reperforming Loan Trust 2005-1		7.000%		8/25/34		312		322	A
	Morgan Stanley Capital I, Series 2005-HQ6		4.989%		8/13/42		240		237
	Washington Mutual MSC Mortgage Pass-Through Certificates, Series 2004-RA1		7.000%		3/25/34		102		104
									2,185
Indexed SecuritiesC — 16.3%
	ABFS Mortgage Loan Trust 2003-2		4.879%		4/25/34		118		118	A
	Banc of America Funding Corporation 2005-E		4.402%		6/20/35		587		595
	Brazos Texas Higher Education Authority, Inc. 2005-1		4.549%		6/15/42		400		397
	Countrywide Alternative Loan Trust 2005-17		4.639%		7/25/35		614		612
	Countrywide Alternative Loan Trust 2005-38		4.729%		9/25/35		549		548
	Countrywide Home Loans 2005-11, 3A3		4.736%		4/25/35		497		499
	Countrywide Home Loans 2005-11, 6A1		4.679%		3/25/35		446		446
	Countrywide Home Loans 2005-3		4.669%		4/25/35		483		482
	Countrywide Home Loans 2005-9 1A1		4.679%		5/25/35		516		514
	Greenpoint Mortgage Funding Trust 2005-AR1		4.599%		6/25/45		500		500

Legg Mason Core Bond Fund — Continued

Annual Report to Shareholders

16

				Maturity		Par/
		Rate		Date		Shares		Value
Mortgage-Backed Securities — Continued
Indexed SecuritiesC — Continued
	Greenpoint Mortgage Funding Trust 2005-AR4		4.639%		10/25/45	$	314	$	313
	GSMPS Mortgage Loan Trust 2005-RP2		4.729%		3/25/35		360		361	A
	Harborview Mortgage Loan Trust 2005-7		4.822%		6/19/45		642		648
	Harborview Mortgage Loan Trust 2005-9		4.710%		6/20/35		570		569
	Impac CMB Trust 2003-7		4.699%		8/25/33		221		221
	Lehman XS Trust Mortgage Pass-Through Certificates Series 2005-7N		4.679%		12/25/35		359		359
	MSDWCC Heloc Trust 2005-1		4.569%		7/25/17		77		77
	Thornburg Mortgage Securities Trust 2005-2 A1		4.599%		7/25/35		251		251
	Thornburg Mortgage Securities Trust 2005-2 A2		4.609%		7/25/35		375		375
	WaMu Mortgage Pass-Through Certificates, Series 2005-AR13		4.669%		10/25/45		577		576
	WaMu Mortgage Pass-Through Certificates, Series 2005-AR19		4.660%		12/25/45		800		800
	WaMu Mortgage Pass-Through Certificates, Series 2005-AR11		4.699%		8/25/45		1,422		1,424
	WaMu Mortgage Pass-Through Certificates, Series 2005-AR6		4.609%		4/25/45		549		547
	WaMu Mortgage Pass-Through Certificates, Series 2005-AR8		4.649%		7/25/45		479		478
									11,710
Stripped Securities — 0.1%
	Mach One Trust, Commercial Mortgage-Backed Securities 2004-1A		1.624%		5/28/40		1,290		71	A,D1

Annual Report to Shareholders

17

				Maturity		Par/
		Rate		Date		Shares		Value
Mortgage-Backed Securities — Continued
Stripped Securities — Continued
Variable Rate SecuritiesE — 0.5%
	Bear Stearns ARM Trust, Mortgage Pass-Through Certificates, Series 2004-4		3.517%		6/25/34	$	200	$	193
	Credit-Based Asset Servicing and Securitization 1999-3		6.654%		2/3/29		44		43	A
	J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 2005-CIBC13		5.294%		1/12/43		100		101
									337
Total Mortgage-Backed Securities (Identified Cost — $14,386)									14,303
U.S. Government and Agency Obligations — 22.5%
Fixed Rate Securities — 14.0%
	Fannie Mae		4.610%		10/10/13		560		540
	Fannie Mae		3.000%		4/26/19		140		139	B
	Freddie Mac		4.125%		10/18/10		40		39
	Freddie Mac		4.650%		10/10/13		600		579
	Freddie Mac		5.625%		11/23/35		300		303
	United States Treasury Bonds		6.250%		8/15/23		150		179
	United States Treasury Bonds		5.250%		11/15/28		20		22
	United States Treasury Bonds		5.250%		2/15/29		270		295
	United States Treasury Bonds		6.250%		5/15/30		2,080		2,583
	United States Treasury Notes		1.500%		3/31/06		40		40
	United States Treasury Notes		2.750%		6/30/06		4,780		4,743
	United States Treasury Notes		3.750%		5/15/08		40		39
	United States Treasury Notes		4.375%		11/15/08		50		50
	United States Treasury Notes		4.125%		8/15/10		240		238
	United States Treasury Notes		4.500%		11/15/10		220		221
	United States Treasury Notes		3.875%		2/15/13		10		10
	United States Treasury Notes		4.500%		11/15/15		80		81
									10,101

Legg Mason Core Bond Fund — Continued

Annual Report to Shareholders

18

				Maturity		Par/
		Rate		Date		Shares		Value
U.S. Government and Agency Obligations — Continued
Stripped Securities — 0.4%
	United States Treasury Bonds		0.000%		11/15/21	$	420	$	201	D2
	United States Treasury Bonds		0.000%		11/15/27		210		77	D2
									278
Treasury Inflation-Protected SecuritiesF — 8.1%
	United States Treasury Inflation-Protected Security		3.375%		1/15/07		2,150		2,166
	United States Treasury Inflation-Protected Security		3.625%		1/15/08		197		203
	United States Treasury Inflation-Protected Security		3.875%		1/15/09		267		281
	United States Treasury Inflation-Protected Security		0.875%		4/15/10		620		590
	United States Treasury Inflation-Protected Security		3.375%		1/15/12		79		84
	United States Treasury Inflation-Protected Security		2.000%		1/15/14		70		70
	United States Treasury Inflation-Protected Security		1.625%		1/15/15		73		70
	United States Treasury Inflation-Protected Security		1.875%		7/15/15		72		70
	United States Treasury Inflation-Protected Security		2.375%		1/15/25		1,754		1,844
	United States Treasury Inflation-Protected Security		3.875%		4/15/29		315		425
									5,803
Total U.S. Government and Agency Obligations (Identified Cost — $16,208)									16,182
U.S. Government Agency Mortgage-Backed Securities — 47.1%
Fixed Rate Securities — 47.1%
	Fannie Mae		6.000%	8/1/17 to 10/1/35			763		774
	Fannie Mae		5.500%	12/1/17 to 9/1/35			1,305		1,293
	Fannie Mae		5.000%		10/1/20		1,587		1,570
	Fannie Mae		6.500%		12/1/34		356		366

Annual Report to Shareholders

19

				Maturity		Par/
		Rate		Date		Shares		Value
U.S. Government Agency Mortgage-Backed Securities — Continued
Fixed Rate Securities — Continued
	Fannie Mae		4.500%		9/1/35	$	99	$	94
	Fannie Mae		5.000%		12/1/35		8,900		8,622	G
	Fannie Mae		5.500%		12/1/35		5,150		5,099	G
	Fannie Mae		6.000%		12/1/35		6,000		6,054	G
	Fannie Mae		6.500%		12/1/35		2,350		2,410	G
	Freddie Mac		4.500%		4/1/19		319		311
	Freddie Mac		5.000%	7/1/20 to 9/1/35 11/15/28 to			1,542		1,522
	Government National Mortgage Association		6.000%		12/15/33		891		914
	Government National Mortgage Association		6.500%		2/15/32		382		399
	Government National Mortgage Association		5.000%	8/15/33 to 5/15/34			1,103		1,089
	Government National Mortgage Association		5.500%		2/15/35		3,168		3,189
	Government National Mortgage Association		5.000%		12/15/35		100		99	G
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost — $33,756)									33,805
Yankee BondsH — 6.2%
Cable — 0.1%
	Rogers Cable Inc.		5.500%		3/15/14		90		84
Foreign Governments — 2.6%
	Russian Federation		5.000%		3/31/30		860		971	B
	United Mexican States		8.375%		1/14/11		20		23
	United Mexican States		8.300%		8/15/31		120		154
	United Mexican States		7.500%		4/8/33		588		696
									1,844
Manufacturing (Diversified) — 2.1%
	Tyco International Group SA		6.375%		10/15/11		45		47
	Tyco International Group SA		6.000%		11/15/13		100		102

Legg Mason Core Bond Fund — Continued

Annual Report to Shareholders

20

				Maturity		Par/
		Rate		Date		Shares		Value
Yankee BondsH — Continued
Manufacturing (Diversified) — Continued
	Tyco International Group SA		7.000%		6/15/28	$	10	$	11
	Tyco International Group SA		6.875%		1/15/29		1,235		1,346
									1,506
Special Purpose — 1.0%
	Anadarko Finance Company		6.750%		5/1/11		125		135
	Apache Finance Canada Corporation		4.375%		5/15/15		60		58
	Banagricola DPR Funding Ltd.		5.420%		3/15/10		213		213	A,C
	ChevronTexaco Capital Company		3.500%		9/17/07		140		137
	Conoco Funding Company		6.350%		10/15/11		10		11
	Deutsche Telekom International Finance BV		5.250%		7/22/13		40		40
	Resona Preferred Global Securities Limited		7.191%		12/29/49		140		148	A,B
									742
Telecommunications — 0.4%
	British Telecommunications plc		8.375%		12/15/10		100		114
	Koninklijke (Royal) KPN NV		8.000%		10/1/10		50		55
	Telecom Italia Capital S.p.A.		4.950%		9/30/14		70		67
	Telecom Italia Capital S.p.A.		5.250%		10/1/15		20		19
									255
Total Yankee Bonds (Identified Cost — $4,236)									4,431

Annual Report to Shareholders

21

				Maturity		Par/
		Rate		Date		Shares			Value
Municipal Bonds — 0.6%
	Liberty New York Development Corporation Revenue		5.250%		10/1/35	$	410		$	462
Total Municipal Bonds (Identified Cost — $458)										462
Preferred Stocks — 0.5%
	Fannie Mae		7.000%				3	shs		160	C
	Fannie Mae		5.380%				0.001			92	I
	General Motors Corporation		5.250%				8			124	I
Total Preferred Stocks (Identified Cost — $398)										376
Total Long-Term Securities (Identified Cost — $89,966)										89,297
Short-Term Securities — 5.7%
U.S. Government and Agency Obligations — 0.1%
	Fannie Mae		0.000%		5/15/06	$	51			50	J,K
Options PurchasedL — 0.4%
Eurodollar Futures Call, April 2006, Strike Price $95.00							94	M		54
Eurodollar Futures Call, January 2006, Strike Price $94.50							23	M		42
Eurodollar Futures Call, July 2006, Strike Price $94.50							58	M		95
Eurodollar Futures Call, July 2006, Strike Price $95.00							10	M		6
Eurodollar Futures Call, October 2006, Strike Price $94.50							11	M		18
Eurodollar Futures Put, July 2006, Strike Price $94.00							4	M		—
U.S. Treasury Note Futures Call, March 2006, Strike Price $103.00							27	M		90
U.S. Treasury Note Futures Call, March 2006, Strike Price $106.50							7	M		3
U.S. Treasury Note Futures Call, March 2006, Strike Price $109.00							5	M		6
										314

Legg Mason Core Bond Fund — Continued

Annual Report to Shareholders

22

	Par/Shares		Value
Repurchase Agreements — 5.2%
Deutsche Bank AG 4.15%, dated 12/30/05 to be repurchased at $1,867 on 1/3/06 (Collateral: $1,890 Federal Home Loan Bank notes, 4.5%, due 9/8/08, value $1,904)	$	1,866	$	1,866
Lehman Brothers, Inc. 4.15%, dated 12/30/05 to be repurchased at $1,866 on 1/3/06 (Collateral: $8,230 Federal Home Loan Bank zero-coupon bonds, due 9/18/28, value $1,902)		1,865		1,865
				3,731
Total Short-Term Securities (Identified Cost — $4,172)				4,095
Total Investments — 130.0% (Identified Cost — $94,138)				93,392
Other Assets Less Liabilities — (30.0)%				(21,567	)
Net Assets — 100.0%			$	71,825

Annual Report to Shareholders

23

			Actual		Appreciation/
		Expiration	Contracts		(Depreciation)
Futures Contracts PurchasedL
	Eurodollar Futures	March 2006		4	$	(1	)
	Eurodollar Futures	June 2006		7		(11	)
	Eurodollar Futures	September 2006		7		1
	Eurodollar Futures	December 2006		3		—	N
	U.S. Treasury Note Futures	March 2006		12		10
	U.S. Treasury Note Futures	March 2006		96		13
					$	12
Futures Contracts WrittenL
	U.S. Treasury Bond Futures	March 2006		50	$	(101	)
	U.S. Treasury Note Futures	March 2006		3		1
					$	(100	)
Options WrittenL
	Eurodollar Futures Call, Strike Price $95.25	April 2006		3	$	—	N
	Eurodollar Futures Call, Strike Price $95.38	April 2006		2		—	N
	Eurodollar Futures Call, Strike Price $95.50	April 2006		2		1
	Eurodollar Futures Call, Strike Price $95.50	October 2006		5		—	N
	Eurodollar Futures Put, Strike Price $95.75	April 2006		8		(8	)
	Eurodollar Futures Put, Strike Price $95.75	July 2006		11		(12	)
	U.S. Treasury Bond Futures Call, Strike Price $116.00	March 2006		12		1
	U.S. Treasury Bond Futures Call, Strike Price $117.00	March 2006		3		2
	U.S. Treasury Bond Futures Put, Strike Price $107.00	March 2006		4		3
	U.S. Treasury Bond Futures Put, Strike Price $109.00	March 2006		15		12
	U.S. Treasury Bond Futures Put, Strike Price $110.00	March 2006		4		1

Legg Mason Core Bond Fund — Continued

Annual Report to Shareholders

24

			Actual		Appreciation/
		Expiration	Contracts		(Depreciation)
Options WrittenL — Continued
	U.S. Treasury Bond Futures Put, Strike Price $111.00	March 2006		2	$	3
	U.S. Treasury Bond Futures Put, Strike Price $112.00	March 2006		2		1
	U.S. Treasury Note Futures Call, Strike Price $107.00	March 2006		4		—	N
	U.S. Treasury Note Futures Call, Strike Price $110.00	March 2006		15		(2	)
	U.S. Treasury Note Futures Call, Strike Price $111.00	March 2006		38		11
	U.S. Treasury Note Futures Call, Strike Price $112.00	March 2006		2		1
	U.S. Treasury Note Futures Call, Strike Price $113.00	March 2006		5		2
	U.S. Treasury Note Futures Call, Strike Price $111.00	June 2006		3		—	N
	U.S. Treasury Note Futures Call, Strike Price $112.00	June 2006		4		—	N
	U.S. Treasury Note Futures Call, Strike Price $110.00	June 2006		6		(1	)
	U.S. Treasury Note Futures Put, Strike Price $107.00	March 2006		18		7
	U.S. Treasury Note Futures Put, Strike Price $106.00	June 2006		4		—	N
					$	22

^A Rule 144a Security — A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities, which the Fund’s investment adviser has determined to be liquid, represent 3.4% of net assets.

B	Stepped coupon security — A security with a predetermined schedule of interest or dividend rate changes.
C	Indexed security — The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”) or the ten year Treasury Bill Constant Maturity Rate. The coupon rates are the rates as of December 31, 2005.
D	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.

^E The coupon rates shown on variable rate securities are the rates at December 31, 2005. These rates vary with the weighted average coupon of the underlying loans.

Annual Report to Shareholders

25

^F Inflation-Protected Securities — Security whose principal value is adjusted daily or monthly 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.

G	When-issued security — Security purchased on a delayed delivery basis. Final settlement amount and maturity have not yet been announced.
H	Yankee Bond — A dollar-denominated bond issued in the U.S. by foreign entities.

I	Convertible Security — Security may be converted into issuer’s common stock.
J	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.

K	Collateral to cover options and futures contracts.
L	Options and futures are described in more detail in the notes to financial statements.

M	Par represents actual number of contracts.
N	Amounts less than $1.

See notes to financial statements.

Annual Report to Shareholders

26

Statement of Assets and Liabilities

Core Bond Fund

December 31, 2005

(Amounts in Thousands)

Assets:
Investment securities at market value (Identified Cost – $89,966)				$89,297
Short-term securities at value (Identified Cost – $4,172)				4,095
Cash				5
Receivable for securities sold				101
Receivable for fund shares sold				206
Receivable for futures variation margin				6
Interest and dividends receivable				657
	Total assets			94,367
Liabilities:
Proceeds from option written (Identified Cost – $101)		$	79
Payable for fund shares repurchased			69
Payable for securities purchased			22,322
Income distribution payable			8
Accrued distribution and service fees			19
Accrued expenses			45
	Total liabilities			22,542
Net Assets				$71,825
Net assets consist of:
Accumulated paid-in capital applicable to:
	7,398 Primary Class shares outstanding			$73,372
Undistributed net investment income				—	A
Accumulated net realized loss on investments, options, and futures				(735)
Unrealized appreciation/(depreciation) of investments, options and futures				(812)
Net Assets				$71,825
Net Asset Value Per Share:
Primary Class				$9.71

^A Amounts less than $1.

See notes to financial statements.

Annual Report to Shareholders

27

Statement of Operations

Core Bond Fund

For the Year Ended December 31, 2005

(Amounts in Thousands)

Investment Income:
	Interest			$	3,017
	Dividends				25
			Total income				$	3,042
Expenses:
	Management fees			$	319
	Distribution and service fees				355
	Audit and legal fees				68
	Custodian fees				105
	Directors’ fees and expenses				14
	Registration fees				22
	Reports to shareholders				30
	Transfer agent and shareholder servicing expense				51
	Other expenses				17
					981
	Less: Fees waived				(272	)
		Compensating balance credits			—	A,B
		Total expenses, net of waivers and compensating balance credits						709
Net Investment Income								2,333
Net Realized and Unrealized Gain/(Loss) on Investments:
	Realized gain/(loss) on:
		Investments			(461	)
		Options			307
		Futures			(509	)
								(663	)
	Change in unrealized depreciation of investments, options and futures							(1,045	)
Net Realized and Unrealized Loss on Investments								(1,708	)
Change in Net Assets Resulting From Operations							$	625

^A Amounts less than $1.

^B See note 1, Compensating Balance Credits, in the notes to financial statements..

See notes to financial statements.

Annual Report to Shareholders

28

Statement of Changes in Net Assets

Core Bond Fund

(Amounts in Thousands)

			For the Years Ended
			12/31/05			12/31/04A
Change in Net Assets:
Net investment income			$	2,333		$	951
Net realized gain/(loss) on investments, options and futures				(663	)		238
Change in unrealized appreciation/(depreciation) of investments, options and futures				(1,045	)		233
Change in net assets resulting from operations				625			1,422
Distributions to shareholders:
	From net investment income:
		Primary Class		(2,400	)		(1,051	)
	From net realized gain on investments:
		Primary Class		(11	)		(132	)
Change in net assets from Fund share transactions:
	Primary Class			9,838			63,534
Change in net assets				8,052			63,773
Net Assets:
Beginning of year				63,773			—
End of year			$	71,825		$	63,773
Undistributed net investment income			$	—	B	$	—

^A For the period February 27, 2004 (commencement of operations) to December 31, 2004.

^B Amount less than $1.

See notes to financial statements.

Annual Report to Shareholders

29

Financial Highlights

Core Bond Fund

   Contained below is per share operating performance data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information provided in the financial statements.

Primary Class:

		Years Ended December 31,
		2005			2004A
Net asset value, beginning of year		$	9.95		$	10.00
Investment operations:
	Net investment income		.32	B		.18	B
	Net realized and unrealized loss on investments		(.23	)		.004
	Total from investment operations		.09			.18
Distributions:
	From net investment income		(.33	)		(.21	)
	From net realized gain on investments		(.002	)		(.02	)
	Total distributions		(.33	)		(.23	)
Net asset value, end of year		$	9.71		$	9.95
Ratios/supplemental data:
	Total return		.94%			1.90%	C
	Total expenses to average net assetsD		1.00%	B		1.00%	B,E
	Net expenses to average net assetsF		1.00%	B		1.00%	B,E
	Net investment income to average net assets		3.29%	B		2.50%	B,E
	Portfolio turnover rate		435.7%			233.8%	C
Net assets, end of year (in thousands)		$	71,825			$63,773

^A For the period February 27, 2004 (commencement of operations) to December 31, 2004

B	Net of fees waived by LMFA for expenses in excess of the voluntary expense limitation of 1.00% until April 30, 2006. If no fees had been waived by LMFA, the annualized ratio of expenses to daily average net assets would have been as follows: for the years ended December 31, 2005, 1.38%; and 2004, 1.56%.
C	Not annualized.
D	This ratio reflects total expenses before compensating balance credits, but net of the voluntary expense waivers described above.

E	Annualized.
F	This ratio reflects expenses net of compensating balance credits and voluntary expense waivers described above.

See notes to financial statements.

Annual Report to Shareholders

30

Management’s Discussion of Fund Performance

High Yield Portfolio

   Average annual total returns for the High Yield Portfolio (“Fund”) and its benchmark for various periods ended December 31, 2005, are presented below:

		One		Five		Ten		Since
		Year		Years		Years		InceptionA
High Yield
	Primary Class		+2.39%		+5.66%		+4.59%		+5.03%
	Institutional Class		+2.94%		+6.06%		N/A		+1.77%
Lehman High Yield Index 2% Issuer ConstrainedB			+2.76%		+9.12%		+6.70%		+6.87%
Lehman High Yield IndexC			+2.74%		+8.85%		+6.54%		+6.74%

The performance data quoted represents past performance and does 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 for the Primary Class please visit www.leggmasonfunds.com; for the Institutional Class please call 1-888-425-6432. 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.

   For the calendar year 2005 the Primary Class of the Fund returned 2.39% versus 2.76% for the Fund’s primary benchmark, the Lehman High Yield Index 2% Issuer Constrained. Effective September 1, 2005, the Fund changed its comparative index from the Lehman High Yield Index to the Lehman High Yield Index 2% Issuer Constrained (“High Yield Constrained Index”). As a result of significant changes to the Lehman High Yield composition and Lehman index methodology rules, the adviser has determined that the High Yield Constrained Index is more representative of the overall high yield market and therefore, more accurately reflects the types of securities in which the fund invests. The option-adjusted-spread (“OAS”)^D of the index widened from +288 basis points (“bps”)^E on 12/31/04, to +336 bps on 12/31/05. A significant part of the spread widening is attributable

^A The inception date of the Primary Class is February 1, 1994. The inception date of the Institutional Class is May 5, 1998. Index returns are for periods beginning January 31, 1994.

^B A market value-weighted index that tracks the daily price, coupon, and total return performance of non-investment grade, fixed rate, publicly placed, dollar-denominated, and non-convertible debt registered with the U.S. Securities and Exchange Commission. The index limits the maximum exposure to any one issuer to 2%.

^C A market value-weighted index that tracks the daily price, coupon, and total return performance of non-investment grade, fixed rate, publicly placed, dollar-denominated, and non-convertible debt registered with the U.S. Securities and Exchange Commission.

^D This is a measuring tool for evaluating price differences between similar products with different embedded options. A larger OAS implies a greater return for greater risks.

^E 100 basis points = 1%.

Annual Report to Shareholders

31

to the inclusion of the autos into the high yield index in the second half of the year as opposed to an actual widening of the issues that were in the index for the entire year.

   The Fund’s underperformance is attributable to the adviser’s decision to overweight the lower quality spectrum of the high yield market. The CCC and lower rated issues in the index returned 0.89%. Consistent with the adviser’s overall strategy the portfolio maintained a short duration position, which had minimal impact on performance as short rates rose and long rates declined.

Western Asset Management Company

January 31, 2006

Annual Report to Shareholders

32

Expense Example

High Yield 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, 2005, and held through December 31, 2005.

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 during this 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		Ending		Expenses PaidA
		Account		Account		During the
		Value		Value		Period
		7/1/05		12/31/05		7/1/05 to 12/31/05
Primary Class:
	Actual	$	1,000.00	$	1,019.70	$	7.11
	Hypothetical (5% return before expenses)		1,000.00		1,018.16		7.11
Institutional Class:
	Actual	$	1,000.00	$	1,022.40	$	4.29
	Hypothetical (5% return before expenses)		1,000.00		1,020.96		4.29

^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 1.40% and 0.84% for the Primary Class and Institutional Class, respectively, multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (184), and divided by 365.

Annual Report to Shareholders

33

Performance Information

High Yield Portfolio

   The graphs on the following pages compare the Fund’s total returns to that of two closely matched broad-based securities market indices. The graphs illustrate the cumulative total return of an initial $10,000 investment in the Primary Class and an initial $1,000,000 investment in the Institutional Class 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 line representing the securities market index does not include any transaction costs associated with buying and selling securities in the index or other administrative expenses. Both the Fund’s and the index’s results assume reinvestment of all dividends and distributions.

   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. It assumes that dividends and distributions were reinvested 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.

Performance Information — Continued

Annual Report to Shareholders

34

Growth of a $10,000 Investment — Primary Class

Periods Ended December 31, 2005

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+2.39%		+2.39%
Five Years		+31.68%		+5.66%
Ten Years		+56.58%		+4.59%

The performance data quoted represents past performance and does 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.leggmasonfunds.com. 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 market value-weighted index that tracks the daily price, coupon, and total return performance of non-investment grade, fixed rate, publicly placed, dollar-denominated, and non-convertible debt registered with the U.S. Securities and Exchange Commission. The index limits the maximum exposure to any one issuer to 2%.

^B  A market value-weighted index that tracks the daily price, coupon, and total return performance of non-investment grade, fixed rate, publicly placed, dollar-denominated, and non-convertible debt registered with the U.S. Securities and Exchange Commission.

Annual Report to Shareholders

35

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

 Periods Ended December 31, 2005 

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+2.94%		+2.94%
Five Years		+34.19%		+6.06%
Life of Class*		+14.42%		+1.77%
*Inception date: May 5, 1998

The performance data quoted represents past performance and does 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 call 1-888-425-6432. 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.

^C Index returns are for periods beginning April 30, 1998.

Performance Information — Continued

Annual Report to Shareholders

36

Portfolio Composition (as of December 31, 2005)^D

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

Maturity Schedule (as a percentage of the portfolio)

^D The Fund is actively managed. As a result, the composition of its portfolio holdings and sectors is subject to change at any time.

^E Standard & Poor’s Ratings Services provides capital markets with credit ratings for the evaluation and assessment of credit risk.

Annual Report to Shareholders

37

Portfolio of Investments

High Yield Portfolio
December 31, 2005

(Amounts in Thousands)

				Maturity		Par/
		Rate		Date		Shares		Value
Long-Term Securities — 97.2%
Corporate Bonds and Notes — 88.0%
Advertising — 1.0%
	Affinion Group Inc.		10.125%		10/15/13	$	990	$	965	A
	WDAC Subsidiary Corp.		8.375%		12/1/14		770		746	A
									1,711
Apparel — 1.5%
	Levi Strauss & Co.		8.804%		4/1/12		750		755	B
	Oxford Industries, Inc.		8.875%		6/1/11		891		908
	Russell Corporation		9.250%		5/1/10		858		870
									2,533
Auto and Automotive Parts — 3.2%
	Commercial Vehicle Group, Inc.		8.000%		7/1/13		840		829	A
	Keystone Automotive Operations Inc.		9.750%		11/1/13		1,260		1,090
	TRW Automotive		9.375%		2/15/13		480		520
	TRW Automotive		11.000%		2/15/13		400		449
	Visteon Corporation		8.250%		8/1/10		2,954		2,511
									5,399
Automotive — 0.1%
	General Motors Corporation		8.375%		7/15/33		240		158
Automotive Retailer — 0.4%
	Asbury Automotive Group Inc.		9.000%		6/15/12		676		676
Banking and Finance — 3.7%
	EPL Finance Corp		11.750%		11/15/13		570		568	A
	Ford Motor Credit Company		7.375%		2/1/11		610		535
	General Motors Acceptance Corporation		6.875%		8/28/12		2,260		2,037
	General Motors Acceptance Corporation		8.000%		11/1/31		3,370		3,228
									6,368
Building Materials — 2.8%
	Associated Materials Incorporated		0.000%		3/1/14		2,420		1,186	C
	Interface, Inc.		7.300%		4/1/08		402		406

Portfolio of Investments — Continued

High Yield Portfolio — Continued

Annual Report to Shareholders

38

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Building Materials — Continued
	Interface, Inc.		10.375%		2/1/10	$	1,183	$	1,280
	K Hovnanian Enterprises Inc.		6.250%		1/15/16		720		668
	Nortek, Inc.		8.500%		9/1/14		370		357
	NTK Holdings, Inc.		0.000%		3/1/14		1,510		944	C
									4,841
Cable — 3.7%
	Charter Communications Holdings, LLC		10.250%		9/15/10		1,215		1,209
	Charter Communications Holdings, LLC		11.750%		5/15/14		3,090		1,715	A,C
	CSC Holdings Inc.		8.125%		8/15/09		430		434
	CSC Holdings Inc.		7.625%		4/1/11		165		164
	CSC Holdings Inc.		7.000%		4/15/12		510		482	A
	EchoStar DBS Corporation		7.780%		10/1/08		450		459	B
	EchoStar DBS Corporation		6.625%		10/1/14		950		911
	LodgeNet Entertainment Corporation		9.500%		6/15/13		882		959
									6,333
Casino Resorts — 2.9%
	Boyd Gaming Corporation		8.750%		4/15/12		340		364
	Boyd Gaming Corporation		6.750%		4/15/14		180		179
	Inn of The Mountain Gods Resort and Casino		12.000%		11/15/10		1,660		1,644
	Pinnacle Entertainment, Inc.		8.250%		3/15/12		850		879
	Premier Entertainment Biloxi LLC		10.750%		2/1/12		1,911		1,844
									4,910
Chemicals — 0.6%
	Westlake Chemical Corporation		8.750%		7/15/11		887		949
Coal — 0.6%
	Alpha Natural Resources LLC		10.000%		6/1/12		1,010		1,092
Computer Services and Systems — 1.5%
	Activant Solutions, Inc.		10.054%		4/1/10		870		897	A,B
	Sungard Data Systems Incorporated		10.250%		8/15/15		1,620		1,620	A
									2,517

Annual Report to Shareholders

39

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Containers and Packaging — 1.4%
	Graham Packaging Company Inc.		8.500%		10/15/12	$	174	$	171
	Graham Packaging Company Inc.		9.875%		10/15/14		526		513
	Graphic Packaging International Corp.		9.500%		8/15/13		869		830
	Plastipak Holdings Inc.		8.500%		12/15/15		840		849	A
									2,363
Drug and Grocery Store Chains — 0.8%
	Delhaize America, Inc.		8.125%		4/15/11		504		549
	Delhaize America, Inc.		9.000%		4/15/31		630		741
									1,290
Electric — 2.1%
	Mirant Americas Generation, LLC		8.300%		5/1/11		1,050		1,328
	Mirant North America LLC		7.375%		12/31/13		570		577	A
	The AES Corporation		7.750%		3/1/14		940		986
	The AES Corporation		9.000%		5/15/15		643		704	A
									3,595
Electronics — 1.2%
	L-3 Communications Corporation		6.375%		10/15/15		1,470		1,466	A
	Rayovac Corporation		8.500%		10/1/13		615		537
									2,003
Energy — 2.6%
	Elwood Energy LLC		8.159%		7/5/26		1,413		1,521
	Midwest Generation LLC		8.560%		1/2/16		1,068		1,161
	Sierra Pacific Resources		6.750%		8/15/17		980		975	A
	VeraSun Energy Corporation		9.875%		12/15/12		720		731	A
									4,388
Entertainment — 0.2%
	Warner Music Group		7.375%		4/15/14		420		417

Portfolio of Investments — Continued

High Yield Portfolio — Continued

Annual Report to Shareholders

40

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Environmental Services — 0.5%
	Allied Waste North America Incorporated		8.500%		12/1/08	$	314	$	330
	Waste Services Inc.		9.500%		4/15/14		500		500
									830
Food, Beverage and Tobacco — 1.3%
	Domino’s, Inc.		8.250%		7/1/11		974		1,018
	R.J. Reynolds Tobacco Holdings Inc.		6.500%		7/15/10		580		577	A
	Stater Bros. Holdings Inc.		7.991%		6/15/10		640		640	B
									2,235
Funeral Parlors and Cemeteries — 0.3%
	Service Corporation International		7.500%		6/15/17		480		476	A
Gaming — 0.8%
	River Rock Entertainment Authority		9.750%		11/1/11		1,290		1,390
Gas and Pipeline Utilities — 4.1%
	ANR Pipeline, Inc.		9.625%		11/1/21		477		583
	Colorado Interstate Gas Company		6.800%		11/15/15		500		511	A
	Dynegy Holdings Inc.		9.875%		7/15/10		230		252	A
	Dynegy Holdings Inc.		8.750%		2/15/12		600		648
	Dynegy Holdings Inc.		10.125%		7/15/13		1,270		1,435	A
	Southern Natural Gas Company		8.875%		3/15/10		338		361
	The Williams Companies, Inc.		7.500%		1/15/31		440		455
	The Williams Companies, Inc.		8.750%		3/15/32		2,281		2,646
									6,891
Health Care — 1.9%
	Tenet Healthcare Corporation		9.875%		7/1/14		2,417		2,447
	Tenet Healthcare Corporation		9.250%		2/1/15		770		764	A
									3,211

Annual Report to Shareholders

41

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Homebuilding — 0.9%
	Beazer Homes USA, Inc.		8.375%		4/15/12	$	230	$	239
	Beazer Homes USA, Inc.		6.875%		7/15/15		300		288
	KB HOME		6.250%		6/15/15		500		484
	Kimball Hill, Inc.		10.500%		12/15/12		490		482	A
									1,493
Investment Banking/ Brokerage — 0.5%
	E*Trade Financial Corporation		7.375%		9/15/13		450		455	A
	E*Trade Financial Corporation		7.875%		12/1/15		332		343
									798
Machinery — 0.8%
	Case New Holland Incorporated		9.250%		8/1/11		190		203
	Terex Corporation		7.375%		1/15/14		1,140		1,129
									1,332
Manufacturing (Diversified) — 1.9%
	Jacuzzi Brands Incorporated		9.625%		7/1/10		1,150		1,222
	Ki Holdings Inc.		0.000%		11/15/14		1,926		1,262	C
	Simmons Bedding Company		7.875%		1/15/14		729		674
									3,158
Media — 2.8%
	AMC Entertainment Incorporated		8.000%		3/1/14		500		452
	Lamar Media Corporation		6.625%		8/15/15		430		432
	LIN Television Corporation		6.500%		5/15/13		500		479
	LIN Television Corporation		6.500%		5/15/13		250		240
	Paxson Communications Corporation		0.000%		1/15/09		270		286	C
	PRIMEDIA Inc.		9.715%		5/15/10		1,155		1,110	B
	PRIMEDIA Inc.		8.875%		5/15/11		140		129
	Readers Digest Association, Inc.		6.500%		3/1/11		460		450
	Sinclair Broadcast Group, Inc.		8.750%		12/15/11		940		990
	Sinclair Broadcast Group, Inc.		8.000%		3/15/12		210		216
									4,784

Portfolio of Investments — Continued

High Yield Portfolio — Continued

Annual Report to Shareholders

42

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Medical Care Facilities — 1.7%
	Community Health Systems Inc.		6.500%		12/15/12	$	210	$	204
	DaVita, Inc.		7.250%		3/15/15		940		952
	HCA, Inc.		9.000%		12/15/14		270		316
	HCA, Inc.		7.690%		6/15/25		330		343
	HCA, Inc.		7.500%		11/6/33		190		196
	Select Medical Corporation		7.625%		2/1/15		950		914
									2,925
Medical Products — 0.2%
	Fresenius Medical Care Capital Trust II		7.875%		2/1/08		100		103	D
	Fresenius Medical Care Capital Trust IV		7.875%		6/15/11		170		181
									284
Metals — 0.3%
	Metals USA, Inc.		11.125%		12/1/15		580		595	A
Oil and Gas — 10.3%
	AmeriGas Partners, L.P.		7.250%		5/20/15		800		816
	Belden & Blake Corporation		8.750%		7/15/12		2,055		2,096
	Chesapeake Energy Corporation		7.500%		9/15/13		40		42
	Chesapeake Energy Corporation		6.375%		6/15/15		130		130
	Chesapeake Energy Corporation		6.250%		1/15/18		810		794
	El Paso CGP Co.		7.750%		6/15/10		230		235
	El Paso Corporation		7.800%		8/1/31		870		868
	El Paso Corporation		7.750%		1/15/32		1,110		1,113
	El Paso Production Holding Company		7.750%		6/1/13		1,210		1,255
	Encore Acquisition Company		6.250%		4/15/14		160		152
	Encore Acquisition Company		6.000%		7/15/15		380		350
	Encore Acquisition Company		7.250%		12/1/17		400		396
	Exco Resources, Inc.		7.250%		1/15/11		810		822
	Kerr-McGee Corporation		7.875%		9/15/31		940		1,115
	Parker Drilling Company		9.625%		10/1/13		1,140		1,273
	Plains Exploration & Production Company		7.125%		6/15/14		810		838
	Pogo Producing Company		6.875%		10/1/17		910		887	A
	Pride International, Inc.		7.375%		7/15/14		940		1,008

Annual Report to Shareholders

43

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Oil and Gas — Continued
	SemGroup, L.P.		8.750%		11/15/15	$	1,130	$	1,155	A
	Suburban Propane Partners LP		6.875%		12/15/13		1,110		1,038
	Whiting Petroleum Corporation		7.000%		2/1/14		1,030		1,033	A
									17,416
Paper and Forest Products — 1.5%
	Georgia-Pacific Corp.		9.500%		12/1/11		760		801
	NewPage Corporation		12.000%		5/1/13		1,890		1,739
									2,540
Pharmaceuticals — 0.3%
	Leiner Health Products Inc.		11.000%		6/1/12		490		461
Printing and Copying Services — 0.3%
	Clarke American Corporation		11.750%		12/15/13		590		590	A
Real Estate — 1.0%
	Forest City Enterprises, Inc.		6.500%		2/1/17		910		892
	Ventas, Inc.		6.750%		6/1/10		200		205
	Ventas, Inc.		9.000%		5/1/12		158		180
	Ventas, Inc.		8.750%		5/1/09		475		513
									1,790
Rental and Lease Services — 1.9%
	Hertz Corporation		8.875%		1/1/14		600		611	A
	Hertz Corporation		10.500%		1/1/16		1,150		1,185	A
	NationsRent Inc.		9.500%		10/15/10		1,390		1,515
									3,311
Retail — 3.0%
	Ames True Temper		8.150%		1/15/12		930		874	B
	Brookstone Company Inc.		12.000%		10/15/12		810		757	A
	J.C. Penney Company, Inc.		6.875%		10/15/15		550		596

Portfolio of Investments — Continued

High Yield Portfolio — Continued

Annual Report to Shareholders

44

				Maturity		Par/
		Rate		Date		Shares			Value
Corporate Bonds and Notes — Continued
Retail — Continued
	J.C. Penney Company, Inc.		7.400%		4/1/37	$	120		$	134
	Neiman Marcus Group, Inc.		10.375%		10/15/15		1,240			1,260	A
	Norcraft Companies		9.000%		11/1/11		1,420			1,470
										5,091
Special Purpose — 9.3%
	AAC Group Holding Corp.		0.000%		10/1/12		1,820			1,315	C
	Alamosa Incorporated		11.000%		7/31/10		294			331
	Alamosa Incorporated		8.500%		1/31/12		710			768
	Di Finance Corporation		9.500%		2/15/13		1,600			1,664
	H & E Equipment Services LLC		11.125%		6/15/12		1,444			1,596
	H-Lines Finance Holding Corp.		0.000%		4/1/13		994			822	C
	Milacron Escrow Corporation		11.500%		5/15/11		2,265			1,937
	Rainbow National Services LLC		8.750%		9/1/12		510			543	A
	Rainbow National Services LLC		10.375%		9/1/14		360			403	A
	Standard Aero Holdings Inc.		8.250%		9/1/14		1,170			959
	Stripes Acquisition LLC		10.625%		12/15/13		595			604	A
	Texas Genco LLC		6.875%		12/15/14		323			350	A
	The Williams Companies, Inc. Credit Certificate Trust		6.750%		4/15/09		410			415	A
	TransDigm Funding Corp.		8.375%		7/15/11		1,100			1,158
	UCAR Finance Inc.		10.250%		2/15/12		1,015			1,072
	UGS Corporation		10.000%		6/1/12		900			981
	Vanguard Health Holding Company I LLC		11.250%		10/1/15		710			518
	Vanguard Health Holding Company II LLC		9.000%		10/1/14		270			287
										15,723
Steel Products — 1.4%
	Chaparral Steel Company		10.000%		7/15/13		970	1,045
	Citisteel USA, Inc.		11.553%		9/1/10		1,270			1,264	A,B
										2,309

Annual Report to Shareholders

45

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Special Purpose — Continued
Storage Facilities — 0.3%
	Mobile Mini, Inc.		9.500%		7/1/13	$	490	$	538
Telecommunications — 4.5%
	Cincinnati Bell Inc.		7.000%		2/15/15		1,819		1,783
	Citizens Communications Company		9.000%		8/15/31		340		344
	Hawaiian Telcom Communications, Inc.		12.500%		5/1/15		1,810		1,693	A
	Qwest Communications International Inc.		7.250%		2/15/11		1,703		1,737
	Qwest Communications International Inc.		7.500%		2/15/14		620		637
	Qwest Communications International Inc.		3.500%		11/15/25		450		521	E
	Qwest Corporation		7.875%		9/1/11		830		894
									7,609
Telecommunications (Cellular/ Wireless) — 1.0%
	Rural Cellular Corporation		9.875%		2/1/10		1,050		1,108
	Ubiquitel Operating Company		9.875%		3/1/11		610		675
									1,783
Transportation — 4.9%
	American Airlines, Inc.		7.800%		4/1/08		1,130		1,115
	American Commercial Lines LLC		9.500%		2/15/15		500		540
	Continental Airlines, Inc.		7.568%		12/1/06		1,400		1,380
	Continental Airlines, Inc.		7.033%		12/15/12		827		753
	Gulfmark Offshore, Inc.		7.750%		7/15/14		930		967
	Horizon Lines, LLC		9.000%		11/1/12		428		451
	Kansas City Southern Railway		9.500%		10/1/08		121		131
	Kansas City Southern Railway		7.500%		6/15/09		710		733
	OMI Corporation		7.625%		12/1/13		966		979
	Progress Rail Services Corp.		7.750%		4/1/12		900		922	A
	United Air Lines, Inc.		7.811%		10/1/09		344		299
									8,270

Portfolio of Investments — Continued

High Yield Portfolio — Continued

Annual Report to Shareholders

46

			Maturity		Par/
	Rate		Date		Shares		Value
Total Corporate Bonds and Notes (Identified Cost — $150,886)							$	149,376
Mortgage-Backed Securities — 0.4%
Blackrock Capital Finance L.P. 1996-R1		9.517%		9/25/26	$	643		399
Blackrock Capital Finance L.P. 1997-R1		7.750%		3/25/37		520		182	A
Ocwen Residential Mortgage Corporation 1998-R1		7.000%		10/25/40		203		32
Total Mortgage-Backed Securities (Identified Cost — $808)								613
Yankee BondsF — 7.7%
Cable — 0.4%
Rogers Cable Inc.		5.500%		3/15/14		790		740
Chemicals —
Nell Af SARL		8.375%		8/15/15		980		970	A
Rhodia SA		10.250%		6/1/10		760		832
								1,802
Electronics — 0.4%
Flextronics Intl Ltd		6.500%		5/15/13		670		681
Exploration and Production — 0.3%
Ocean Rig Norway AS		8.375%		7/1/13		520		554	A
Media — 0.7%
Kabel Deutschland GmbH		10.625%		7/1/14		1,100		1,158	A

Annual Report to Shareholders

47

			Maturity		Par/
	Rate		Date		Shares		Value
Yankee Bonds — Continued
Oil and Gas — 0.4%
Utilicorp Canada Finance Corp		7.750%		6/15/11	$	510	$	522
Western Oil Sands Inc.		8.375%		5/1/12		100		112
								634
Paper and Forest Products — 0.4%
Domtar Inc.		7.875%		10/15/11		450		414
Domtar Inc.		5.375%		12/1/13		130		104
Tembec Industries, Inc.		8.500%		2/1/11		420		233
								751
Semiconductor Equipment and Production — 0.1%
MagnaChip Semiconductor S.A.		8.000%		12/15/14		235		224
Services — 0.5%
Compagnie Generale de Geophysique SA (CGG)		7.500%		5/15/15		780		807
Special
Montell Finl Co Bv		8.100%		3/15/27		750		686	A
Steel (Producers) — 0.4%
Ispat Inland Ulc		9.750%		4/1/14		600		680
Telecommunications — 1.3%
Intelsat, Ltd.		7.625%		4/15/12		2,000		1,615
Wind Acquisition Finance SA		10.750%		12/1/15		630		650	A
								2,265

Portfolio of Investments — Continued

High Yield Portfolio — Continued

Annual Report to Shareholders

48

				Maturity		Par/
		Rate		Date		Shares			Value
Yankee Bonds — Continued
Telecommunications (Cellular/ Wireless) — 1.0%
	Rogers Wireless Communications Inc.		9.625%		5/1/11	$	1,088		$	1,251
	Rogers Wireless Communications Inc.		8.000%		12/15/12		330			350
										1,601
Transportation — 0.3%
	Teekay Shipping Corporation		8.875%		7/15/11		426			481
Total Yankee Bonds (Identified Cost — $13,235)										13,064
Preferred Stocks — 0.9%
	Paxson Communications Corporation		14.250%				0.1	shs		1,566	G,H
Total Preferred Stocks (Identified Cost — $1,429)										1,566
Warrants — 0.2%
	American Tower Corporation						1	wts		318	A,I
	Next Generation Network, Inc.						16			0.2	I
Total Warrants (Identified Cost — $291)										318
Total Long-Term Securities (Identified Cost — $166,649)										164,937
Short-Term Securities — 0.6%
Repurchase Agreements — 0.6%
Goldman, Sachs & Company 4.24%, dated 12/30/05, to be repurchased at $531 on 1/3/06 (Collateral: $545 Freddie Mac notes, 5%, due 12/27/07, value $546)						$	531			531

Annual Report to Shareholders

49

	Par/
	Shares		Value
Repurchase Agreements — Continued
Lehman Brothers, Inc. 4.15%, dated 12/30/05, to be repurchased at $530 on 1/3/06 (Collateral: $2,245 Federal Home Loan Bank zero-coupon bonds, due 9/29/28, value $547)	$	530	$	530
Total Short-Term Securities (Identified Cost — $1,061)				1,061
Total Investments — 97.8% (Identified Cost — $167,710)				165,998
Other Assets Less Liabilities — 2.2%				3,790
Net Assets — 100.0%			$	169,788

A	Rule 144a Security — A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities, which the Fund’s investment adviser has determined to be liquid, represent 21.7% of net assets.
B	Indexed Security — The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”). The coupon rates are the rates as of December 31, 2005.
C	Stepped coupon security — A security with a predetermined schedule of interest or dividend rate changes.
D	Unit — A security which consists of a bond and warrants to purchase the stock of the issuer.
E	Convertible Security — Security may be converted into issuer’s common stock.

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

G	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.
H	Private placement.

^I Non-income producing.

See notes to financial statements.

Annual Report to Shareholders

50

Statement of Assets and Liabilities

High Yield Portfolio

December 31, 2005

(Amounts in Thousands)

Assets:
Investment securities at market value (Identified Cost – $166,649)				$	164,937
Short-term securities at value (Identified Cost – $1,061)					1,061
Cash					1
Interest and dividends receivable					3,495
Receivable for fund shares sold					1,069
	Total assets				170,563
Liabilities:
Payable for fund shares repurchased		$	390
Income distribution payable			148
Accrued management fee			95
Accrued distribution and service fees			67
Accrued expenses			75
	Total liabilities				775
Net Assets				$	169,788
Net assets consist of:
Accumulated paid-in capital applicable to:
	17,633 Primary Class shares outstanding			$	313,676
	1,383 Institutional Class shares outstanding				12,701
Undistributed net investment income					1
Accumulated net realized loss on investments					(154,878	)
Unrealized appreciation/(depreciation) of investments					(1,712	)
Net Assets				$	169,788
Net Asset Value Per Share:
Primary Class				$	8.93
Institutional Class				$	8.96

See notes to financial statements.

Annual Report to Shareholders

51

Statement of Operations

High Yield Portfolio

For the Year Ended December 31, 2005

(Amounts in Thousands)

Investment Income:
	Interest			$	16,556
	Dividends				196
			Total income				$	16,752
Expenses:
	Management fees				1,254
	Distribution and service fees				910
	Audit and legal fees				84
	Custodian fees				94
	Directors’ fees and expenses				15
	Registration fees				45
	Reports to shareholders				53
	Transfer agent and shareholder servicing expense:
		Primary Class			157
		Institutional Class			2
	Other expenses				27
					2,641
			Less compensating balance credits		(6	)A
			Total expenses, net of compensating balance credits					2,635
Net Investment Income								14,117
Net Realized and Unrealized Gain/(Loss) on Investments:
	Realized gain on investments				765
	Change in unrealized depreciation of investments				(10,653	)
Net Realized and Unrealized Loss on Investments								(9,888	)
Change in Net Assets Resulting From Operations							$	4,229

^A See note 1, Compensating Balance Credits, in the notes to financial statements.

See notes to financial statements.

Annual Report to Shareholders

52

Statement of Changes in Net Assets

High Yield Portfolio

(Amounts in Thousands)

			For the Years Ended
			12/31/05			12/31/04
Change in Net Assets:
Net investment income			$	14,117		$	14,774
Net realized gain/(loss) on investments				765			2,146
Change in unrealized appreciation/(depreciation) on investments				(10,653	)		4,056
Change in net assets resulting from operations				4,229			20,976
Distributions to shareholders:
	From net investment income:
		Primary Class		(13,197	)		(14,195	)
		Institutional Class		(861	)		(565	)
Change in net assets from Fund share transactions:
		Primary Class		(38,618	)		(24,402	)
		Institutional Class		4,174			2,040
Change in net assets				(44,273	)		(16,146	)
Net Assets:
Beginning of year				214,061			230,207
End of year			$	169,788		$	214,061
Under/(over) distributed net investment income			$	1		$	(92	)

See notes to financial statements.

Annual Report to Shareholders

53

Financial Highlights

High Yield Portfolio

   Contained below is per share operating performance data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information provided in the financial statements.

Primary Class:

		Years Ended December 31,
		2005			2004			2003			2002			2001
Net asset value, beginning of year		$	9.39		$	9.10		$	7.96		$	9.22		$	10.18
Investment operations:
	Net investment income		.67			.62			.63			.77			.94
	Net realized and unrealized gain/(loss) on investments		(.46	)		.29			1.15			(1.26	)		(.94	)
	Total from investment operations		.21			.91			1.78			(.49	)		—
Distributions:
	From net investment income		(.67	)		(.62	)		(.64	)		(.77	)		(.96	)
	Total distributions		(.67	)		(.62	)		(.64	)		(.77	)		(.96	)
Net asset value, end of year		$	8.93		$	9.39		$	9.10		$	7.96		$	9.22
Ratios/supplemental data:
	Total return		2.39	%		10.51	%		23.03	%		(5.28	)%		(.13	)%
	Total expenses to average net assetsA		1.40	%		1.36	%		1.41	%		1.36	%		1.51	%
	Net expenses to average net assetsB		1.40	%		1.36	%		1.41	%		1.36	%		1.51	%
	Net investment income to average net assets		7.28	%		6.79	%		7.26	%		9.06	%		9.59	%
	Portfolio turnover rate		134.0	%		109.1	%		122.3	%		96.6	%		130.0	%
Net assets, end of year (in thousands)		$	157,399		$	205,314		$	223,773		$	162,175		$	199,214

A	This ratio reflects total expenses before compensating balance credits.
B	This ratio reflects expenses net of compensating balance credits.

See notes to financial statements.

Annual Report to Shareholders

54

Institutional Class:

		Years Ended December 31,
		2005			2004			2003			2002			2001
Net asset value, beginning of year			$9.41		$	9.11		$	7.96		$	9.20		$	10.18
Investment operations:
	Net investment income		.71			.66			.66			.78			1.01
	Net realized and unrealized gain/(loss) on investments,		(.45	)		.31			1.15			(1.24	)		(1.00	)
	Total from investment operations		.26			.97			1.81			(.46	)		.01
Distributions:
	From net investment income		(.71	)		(.67	)		(.66	)		(.78	)		(.99	)
	Total distributions		(.71	)		(.67	)		(.66	)		(.78	)		(.99	)
Net asset value, end of year			$8.96		$	9.41		$	9.11		$	7.96		$	9.20
Ratios/supplemental data:
	Total return		2.94	%		11.15	%		23.54	%		(5.00	)%		(.06	)%
	Total expenses to average net assetsA		.85	%		.80	%		.85	%		.82	%		.97	%
	Net expenses to average net assetsB		.84	%		.80	%		.85	%		.82	%		.97	%
	Net investment income to average net assets		7.93	%		7.38	%		7.78	%		9.63	%		10.20	%
	Portfolio turnover rate		134.0	%		109.1	%		122.3	%		96.6	%		130.0	%
Net assets, end of year (in thousands)		$	12,389		$	8,747		$	6,434		$	2,704		$	1,331

See notes to financial statements.

Annual Report to Shareholders

55

Management’s Discussion of Fund Performance

Investment Grade Income Portfolio

   Average annual total returns for the Investment Grade Income Portfolio (“Fund”) and its benchmark for various periods ended December 31, 2005, are presented below:

		One		Five		Ten		Since
		Year		Years		Years		InceptionA
Investment Grade
	Primary Class		+1.69%		+6.86%		+6.37%		+7.61%
	Institutional Class		+2.27%		+7.43%		+6.95%		+6.98%
Lehman Credit Bond IndexB			+1.96%		+7.12%		+6.46%		+8.31%
Lehman Aggregate Bond IndexC			+2.43%		+5.87%		+6.16%		+7.77%

The performance data quoted represents past performance and does 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 for the Primary Class please visit www.leggmasonfunds.com; for the Institutional Class please call 1-888-425-6432. 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.

   For the calendar year 2005 the Primary Class of the Fund returned 1.69% versus 1.96% for its primary benchmark, the Lehman Credit Bond Index. The option-adjusted-spread (“OAS”)^D of the index widened from +75 basis points (“bps”)^E to similar duration treasuries on 12/31/04, to +83 bps on 12/31/05. The asset class underperformed similar duration Treasuries in large part due to the poor performance of the auto sector. The Fund’s underperformance is primarily attributable to the adviser’s decision to overweight the consumer cyclical sub-sector (inclusive of the auto companies) which returned - -4.71% for the period. Being overweight to the utility sector, which returned 3.02% and having

^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.

^B This index includes all publicly issued, fixed rate, non-convertible, investment grade, and domestic corporate debt. It also includes Yankee bonds, which are dollar- denominated, SEC-registered public, non-convertible debt issued or guaranteed by foreign sovereign governments, municipalities, governmental agencies, and international agencies.

^C A market value-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed rate, publicly placed, dollar-denominated, and non- convertible investment grade debt issues with at least $100 million par amount outstanding and with at least one year to final maturity.

^D This is a measurement tool for evaluating price differences between similar products with different embedded options. A larger OAS implies a greater return for greater risks.

^E 100 basis points = 1%.

Annual Report to Shareholders

56

exposure to U.S. Treasury securities helped relative performance. Consistent with the adviser’s overall strategy, the Fund maintained a short duration position which had minimal impact on performance as short rates rose and long rates declined.

Western Asset Management Company

January 31, 2006

Annual Report to Shareholders

57

Expense Example

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, 2005, and held through December 31, 2005.

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 during this 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		Ending		Expenses PaidA
		Account		Account		During the
		Value		Value		Period
		7/1/05		12/31/05		7/1/05 to 12/31/05
Primary Class:
	Actual	$	1,000.00	$	994.00	$	5.03
	Hypothetical (5% return before expenses)		1,000.00		1,020.16		5.09
Institutional Class:
	Actual	$	1,000.00	$	997.80	$	2.22
	Hypothetical (5% return before expenses)		1,000.00		1,022.68		2.24

^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 0.44% for the Primary Class and Institutional Class, respectively, multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (184), and divided by 365.

Annual Report to Shareholders

58

Performance Information

Investment Grade Income Portfolio

   The graphs on the following pages compare the Fund’s total returns to that of two closely matched broad-based securities market indices. The graphs 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 line representing each securities market index does not include any transaction costs associated with buying and selling securities in the index or other administrative expenses. Both the Fund’s and the indices results assume reinvestment of all dividends and distributions.

   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. It assumes that dividends and distributions were reinvested 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

59

Growth of a $10,000 Investment — Primary Class

Periods Ended December 31, 2005    

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+1.69%		+1.69%
Five Years		+39.32%		+6.86%
Ten Years		+85.51%		+6.37%

The performance data quoted represents past performance and does 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.leggmasonfunds.com. 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 includes all publicly issued, fixed rate, non-convertible, investment grade, domestic corporate debt. It also includes Yankee bonds, which are dollar-denominated, SEC-registered public, non-convertible debt issued or guaranteed by foreign sovereign governments, municipalities, governmental agencies, and international agencies.

^B A market value-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed rate, publicly placed, dollar-denominated, and nonconvertible investment grade debt issues with at least $100 million par amount outstanding and with at least one year to final maturity.

Performance Information — Continued

Annual Report to Shareholders

60

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

Periods Ended December 31, 2005

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+2.27%		+2.27%
Five Years		+43.12%		+7.43%
Ten Years		+95.76%		+6.95%

The performance data quoted represents past performance and does 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 call 1-888-425-6432. 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

61

Portfolio Composition (as of December 31, 2005)^C

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

Maturity Schedule (as a percentage of the portfolio)

^C The Fund is actively managed. As a result, the composition of its portfolio holdings and sectors is subject to change at any time.

^D Standard & Poor’s Ratings Services provides capital markets with credit ratings for the evaluation and assessment of credit risk.

Annual Report to Shareholders

62

Portfolio of Investments

Investment Grade Income Portfolio

December 31, 2005
(Amounts in Thousands)

				Maturity		Par/
		Rate		Date		Shares		Value
Long-Term Securities — 98.6%
Corporate Bonds and Notes — 73.9%
Aerospace/ Defense — 1.0%
	L-3 Communications Corp.		7.625%		6/15/12	$	1,000	$	1,053
	Lockheed Martin Corporation		8.500%		12/1/29		760		1,036
	Northrop Grumman Corporation		7.750%		2/15/31		170		217
	Raytheon Company		6.150%		11/1/08		489		507
	Raytheon Company		5.375%		4/1/13		1,240		1,257
									4,070
Auto Parts and Equipment — 0.2%
	American Axle & Manufacturing Inc.		5.250%		2/11/14		800		630
Automotive — 0.9%
	Ford Motor Company		7.450%		7/16/31		1,975		1,343
	Ford Motor Company		8.900%		1/15/32		370		271
	General Motors Corporation		8.250%		7/15/23		650		418
	General Motors Corporation		8.375%		7/15/33		1,990		1,313
									3,345
Banking and Finance — 8.7%
	AIFUL Corporation		5.000%		8/10/10		2,105		2,078	A
	Boeing Capital Corporation		6.500%		2/15/12		1,000		1,079
	Boeing Capital Corporation		5.800%		1/15/13		530		556
	Countrywide Home Loans, Inc.		3.250%		5/21/08		1,200		1,152
	Countrywide Home Loans, Inc.		4.125%		9/15/09		340		328
	Ford Motor Credit Company		4.950%		1/15/08		250		224
	Ford Motor Credit Company		6.625%		6/16/08		8,210		7,447
	Ford Motor Credit Company		7.375%		10/28/09		2,970		2,634
	Ford Motor Credit Company		7.375%		2/1/11		2,390		2,095
	Ford Motor Credit Company		7.250%		10/25/11		2,410		2,082
	General Motors Acceptance Corporation		6.150%		4/5/07		1,570		1,483
	General Motors Acceptance Corporation		6.125%		8/28/07		2,680		2,484
	General Motors Acceptance Corporation		6.311%		11/30/07		320		289
	General Motors Acceptance Corporation		5.625%		5/15/09		590		525

Annual Report to Shareholders

63

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Banking and Finance — Continued
	General Motors Acceptance Corporation		6.875%		9/15/11	$	750	$	684
	General Motors Acceptance Corporation		0.000%		6/15/15		2,700		1,243	B
	HSBC Finance Corporation		4.750%		4/15/10		1,325		1,305
	John Deere Capital Corporation		4.500%		8/22/07		5		5
	MBNA America Bank		5.375%		1/15/08		1,200		1,210
	National Rural Utilities Cooperative Finance Corporation		7.250%		3/1/12		1,700		1,896
	Residential Capital Corporation		6.375%		6/30/10		1,970		2,002
	SB Treasury Company LLC		9.400%		12/29/49		840		920	A,C
									33,721
Banks — 5.8%
	Bank of America Corporation		7.400%		1/15/11		3,165		3,486
	Bank of America Corporation		4.750%		8/15/13		470		461
	BankAmerica Capital III		4.720%		1/15/27		585		565	D
	BB&T Capital Trust I		5.850%		8/18/35		1,750		1,748
	CBA Capital Trust I		5.805%		12/31/49		3,510		3,615	A
	Chase Capital II		4.750%		2/1/27		1,980		1,869	D
	Key Bank NA		5.800%		7/1/14		535		556
	Rabobank Capital Funding Trust II		5.260%		12/31/49		320		317	A,C
	Rabobank Capital Funding Trust III		5.254%		12/29/49		3,120		3,059	A,C
	Suntrust Bank		5.000%		9/1/15		1,450		1,433
	UnionBanCal Corporation		5.250%		12/16/13		785		783
	Wachovia Bank NA		7.800%		8/18/10		2,640		2,963
	Washington Mutual, Inc.		4.200%		1/15/10		700		678
	Washington Mutual, Inc.		4.625%		4/1/14		1,000		940
									22,473
Building Materials — N.M.
	American Standard, Inc.		8.250%		6/1/09		37		40
	American Standard, Inc.		7.625%		2/15/10		5		6
									46
Cable — 1.7%
	Comcast Cable Communications, Inc.		6.750%		1/30/11		960		1,017
	Comcast Corporation		7.050%		3/15/33		1,800		1,943
	Cox Communications, Inc.		4.625%		1/15/10		1,410		1,365

Portfolio of Investments  —  Continued

Investment Grade Income Portfolio  —  Continued

Annual Report to Shareholders

64

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Cable — Continued
	CSC Holdings Inc.		7.625%		7/15/18	$	1,500	$	1,425
	EchoStar DBS Corporation		7.304%		10/1/08		500		510	D
	Tele-Communications, Inc.		7.125%		2/15/28		180		193
									6,453
Casino Resorts — 0.6%
	Harrah’s Operating Company, Inc.		5.500%		7/1/10		410		410
	Harrah’s Operating Company, Inc.		5.750%		10/1/17		2,110		2,053
									2,463
Chemicals — 0.7%
	E. I. du Pont de Nemours and Company		4.875%		4/30/14		1,100		1,081
	The Dow Chemical Company		6.000%		10/1/12		750		788
	The Dow Chemical Company		7.375%		11/1/29		800		964
									2,833
Computer Services and Systems — 0.9%
	Electronic Data Systems Corporation		7.125%		10/15/09		530		563
	Electronic Data Systems Corporation		6.500%		8/1/13		500		514
	Electronic Data Systems Corporation		7.450%		10/15/29		570		606
	International Business Machines Corporation		4.750%		11/29/12		1,750		1,736
									3,419
Consumer Products — 0.1%
	The Clorox Company		5.000%		1/15/15		350		345
	The Procter & Gamble Company		4.300%		8/15/08		200		198
									543
Diversified Financial Services — 7.4%
	AIG SunAmerica Global Financing VI		6.300%		5/10/11		5,170		5,492	A
	Associates Corporation of North America		8.150%		8/1/09		775		856
	Beaver Valley Funding Corp.		9.000%		6/1/17		1,100		1,262
	Capital One Bank		4.875%		5/15/08		150		149
	Capital One Bank		5.750%		9/15/10		870		891
	Capital One Bank		6.500%		6/13/13		690		733
	Capital One Financial Corporation		8.750%		2/1/07		400		415
	Capital One Financial Corporation		7.125%		8/1/08		340		356

Annual Report to Shareholders

65

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Diversified Financial Services — Continued
	Citigroup Inc.		5.000%		9/15/14	$	1,600	$	1,575
	General Electric Capital Corporation		4.000%		6/15/09		3,640		3,533
	General Electric Capital Corporation		3.750%		12/15/09		4,900		4,701
	General Electric Capital Corporation		5.450%		1/15/13		2,000		2,049
	General Electric Capital Corporation		6.750%		3/15/32		5		6
	iStar Financial Inc.		5.375%		4/15/10		3,180		3,152
	iStar Financial Inc.		6.000%		12/15/10		580		589
	Marsh & McLennan Companies, Inc.		5.150%		9/15/10		240		238
	Marsh & McLennan Companies, Inc.		5.875%		8/1/33		900		862
	Mizuho Preferred Capital Corp. LLC		8.790%		12/29/49		1,520		1,643	A,C
	Wells Fargo & Company		5.000%		11/15/14		90		89
									28,591
Drug and Grocery Store Chains — 0.7%
	Kroger Company		8.000%		9/15/29		1,000		1,162
	Safeway Inc.		7.500%		9/15/09		600		641
	Safeway Inc.		5.800%		8/15/12		750		754
									2,557
Electric — 4.3%
	AEP Texas Central Company		5.500%		2/15/13		1,060		1,073
	American Electric Power Company, Inc.		5.250%		6/1/15		350		349
	Commonwealth Edison Company		6.150%		3/15/12		560		583
	Dominion Resources, Inc.		5.125%		12/15/09		490		488
	Dominion Resources, Inc.		4.750%		12/15/10		140		137
	Dominion Resources, Inc.		5.700%		9/17/12		510		519
	FirstEnergy Corp.		6.450%		11/15/11		2,285		2,422
	FirstEnergy Corp.		7.375%		11/15/31		4,440		5,239
	Niagara Mohawk Power Corporation		7.750%		10/1/08		1,010		1,078
	System Energy Resources, Inc.		4.875%		10/1/07		1,020		1,013
	Tampa Electric Company		6.375%		8/15/12		380		406
	The Cleveland Electric Illuminating Company		5.650%		12/15/13		940		958
	The Cleveland Electric Illuminating Company		7.880%		11/1/17		850		1,029
	The Detroit Edison Company		5.200%		10/15/12		1,260		1,267
									16,561

Portfolio of Investments  —  Continued

Investment Grade Income Portfolio  —  Continued

Annual Report to Shareholders

66

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Energy — 4.0%
	Alabama Power Company		3.125%		5/1/08	$	920	$	884
	DTE Energy Company		6.375%		4/15/33		350		358
	Duke Energy Corporation		5.625%		11/30/12		270		277
	Exelon Corporation		6.750%		5/1/11		2,000		2,129
	MidAmerican Energy Holdings Company		5.875%		10/1/12		750		774
	Pacific Gas and Electric Company		6.050%		3/1/34		4,610		4,771
	Sempra Energy		4.840%		5/21/08		1,685		1,688	D
	TXU Corp.		6.550%		11/15/34		2,730		2,580
	TXU Energy Co.		7.000%		3/15/13		930		991
	Xcel Energy, Inc.		7.000%		12/1/10		900		969
									15,421
Environmental Services — 0.3%
	Waste Management, Inc.		6.375%		11/15/12		310		330
	Waste Management, Inc.		7.375%		5/15/29		690		807
									1,137
Food, Beverage and Tobacco — 1.4%
	Altria Group, Inc.		7.000%		11/4/13		1,385		1,515
	Kellogg Company		6.600%		4/1/11		1,000		1,071
	Kellogg Company		7.450%		4/1/31		650		803
	R.J. Reynolds Tobacco Holdings, Inc.		7.875%		5/15/09		860		894
	The Pepsi Bottling Group, Inc.		7.000%		3/1/29		340		408
	Tyson Foods, Inc.		7.000%		1/15/28		800		842
									5,533
Gas and Pipeline Utilities — 1.6%
	CenterPoint Energy Resources Corp.		7.875%		4/1/13		1,010		1,155
	Dynegy Holdings Inc.		8.750%		2/15/12		1,690		1,825
	Tennessee Gas Pipeline Company		8.375%		6/15/32		1,000		1,135
	The Williams Companies, Inc.		7.625%		7/15/19		2,000		2,145
									6,260
Health Care — 1.1%
	Tenet Healthcare Corporation		9.875%		7/1/14		2,310		2,339
	Tenet Healthcare Corporation		6.875%		11/15/31		750		604
	WellPoint Inc.		5.000%		12/15/14		1,330		1,306
									4,249

Annual Report to Shareholders

67

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Homebuilding — 0.3%
	Centex Corporation		5.125%		10/1/13	$	420	$	403
	D.R. Horton, Inc.		5.250%		2/15/15		610		571
	Pulte Homes, Inc.		6.250%		2/15/13		385		392
									1,366
Insurance — 0.7%
	Liberty Mutual Group		5.750%		3/15/14		720		710	A
	The St. Paul Travelers Companies, Inc.		5.500%		12/1/15		1,100		1,108
	Willis Group North America		5.125%		7/15/10		760		758
									2,576
Investment Banking/ Brokerage — 5.5%
	J.P. Morgan Chase & Co.		5.125%		9/15/14		3,195		3,163
	J.P. Morgan Chase & Co.		4.891%		9/1/15		1,035		1,024	C
	J.P. Morgan Chase & Co.		5.150%		10/1/15		2,000		1,971
	Merrill Lynch & Co., Inc.		3.375%		9/14/07		1,345		1,312
	Merrill Lynch & Co., Inc.		6.000%		2/17/09		800		825
	Merrill Lynch & Co., Inc.		5.000%		1/15/15		65		64
	Morgan Stanley		5.800%		4/1/07		2,600		2,627
	Morgan Stanley		5.050%		1/21/11		900		900
	Morgan Stanley		4.750%		4/1/14		2,660		2,551
	The Bear Stearns Companies Inc.		4.550%		6/23/10		1,600		1,570
	The Goldman Sachs Group, Inc.		5.125%		1/15/15		3,100		3,065
	The Goldman Sachs Group, Inc.		6.345%		2/15/34		2,025		2,127
									21,199
Machinery — 0.3%
	Case New Holland Incorporated		9.250%		8/1/11		1,000		1,070
Media — 3.1%
	Clear Channel Communications, Inc.		4.400%		5/15/11		1,210		1,126
	Clear Channel Communications, Inc.		5.500%		9/15/14		940		899
	Liberty Media Corporation		7.875%		7/15/09		1,000		1,054
	Liberty Media Corporation		8.500%		7/15/29		340		337
	Liberty Media Corporation		8.250%		2/1/30		120		117
	News America, Inc.		6.550%		3/15/33		1,495		1,538
	News America, Inc.		6.200%		12/15/34		115		114

Portfolio of Investments  —  Continued

Investment Grade Income Portfolio  —  Continued

Annual Report to Shareholders

68

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Media — Continued
	Time Warner Entertainment Company, L.P.		8.375%		7/15/33	$	855	$	1,010
	Time Warner Inc.		6.150%		5/1/07		1,390		1,407
	Time Warner Inc.		9.125%		1/15/13		1,130		1,337
	Time Warner Inc.		7.700%		5/1/32		1,625		1,828
	Viacom Inc.		7.700%		7/30/10		90		97
	Viacom Inc.		5.625%		8/15/12		1,095		1,087
									11,951
Media and Entertainment — 0.3%
	The Walt Disney Company		6.200%		6/20/14		1,280		1,347
Medical Care Facilities — 1.7%
	Coventry Health Care, Inc.		5.875%		1/15/12		1,050		1,061
	HCA, Inc.		6.300%		10/1/12		1,790		1,799
	HCA, Inc.		6.250%		2/15/13		2,130		2,132
	HCA, Inc.		5.750%		3/15/14		150		145
	Health Care REIT, Inc.		5.875%		5/15/15		1,440		1,429
									6,566
Metals and Mining — 0.5%
	Alcoa Inc.		5.375%		1/15/13		1,800		1,828
Oil and Gas — 5.7%
	Amerada Hess Corporation		7.300%		8/15/31		3,740		4,328
	Apache Corporation		6.250%		4/15/12		1,150		1,236
	Conoco Inc.		6.950%		4/15/29		600		724
	ConocoPhillips		4.750%		10/15/12		2,290		2,276
	Devon Energy Corporation		7.950%		4/15/32		1,080		1,393
	El Paso Corporation		7.800%		8/1/31		1,660		1,656
	El Paso Corporation		7.750%		1/15/32		340		341
	Kerr-McGee Corporation		7.875%		9/15/31		4,700		5,577
	Ocean Energy Inc.		4.375%		10/1/07		965		954
	Panhandle Eastern Pipe Line Company		4.800%		8/15/08		1,170		1,157
	Pemex Project Funding Master Trust		8.500%		2/15/08		100		106
	Pride International, Inc.		7.375%		7/15/14		800		858

Annual Report to Shareholders

69

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Oil and Gas — Continued
	Valero Energy Corporation		6.875%		4/15/12	$	565	$	616
	XTO Energy, Inc.		6.250%		4/15/13		745		789
									22,011
Paper and Forest Products — 1.4%
	International Paper Company		5.500%		1/15/14		900		885
	Weyerhaeuser Company		6.125%		3/15/07		127		129
	Weyerhaeuser Company		6.750%		3/15/12		2,150		2,282
	Weyerhaeuser Company		7.375%		3/15/32		1,785		1,984
									5,280
Pharmaceuticals — 0.3%
	Bristol-Myers Squibb Company		5.750%		10/1/11		1,160		1,198
Photo Equipment and Supplies — 0.4%
	Eastman Kodak Company		3.625%		5/15/08		975		896
	Eastman Kodak Company		7.250%		11/15/13		500		478
									1,374
Real Estate — 0.4%
	EOP Operating Limited Partnership		6.750%		2/15/12		1,500		1,592
Retail — 0.4%
	Target Corporation		5.875%		3/1/12		860		903
	Wal-Mart Stores, Inc.		6.875%		8/10/09		475		506
									1,409
Special Purpose — 7.0%
	Ahold Finance USA, Inc.		8.250%		7/15/10		960		1,038
	Arch Western Finance, LLC		6.750%		7/1/13		1,000		1,019
	ASIF Global Financing XIX		4.900%		1/17/13		1,120		1,114	A
	Caterpillar Financial Services Corporation		4.500%		6/15/09		1,040		1,026
	DaimlerChrysler NA Holding Corporation		6.400%		5/15/06		800		804
	DaimlerChrysler NA Holding Corporation		4.960%		9/10/07		1,520		1,523	D

Portfolio of Investments  —  Continued

Investment Grade Income Portfolio  —  Continued

Annual Report to Shareholders

70

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Special Purpose — Continued
	DaimlerChrysler NA Holding Corporation		4.050%		6/4/08	$	470	$	457
	DaimlerChrysler NA Holding Corporation		7.200%		9/1/09		260		275
	DaimlerChrysler NA Holding Corporation		7.300%		1/15/12		735		793
	DaimlerChrysler NA Holding Corporation		6.500%		11/15/13		290		304
	DaimlerChrysler NA Holding Corporation		8.500%		1/18/31		1,800		2,178
	Duke Capital Corporation		6.250%		2/15/13		340		354
	Fosters Finance Corporation		4.875%		10/1/14		840		808	A
	International Lease Finance Corporation		6.375%		3/15/09		890		924
	Reed Elsevier Capital Inc.		4.625%		6/15/12		2,300		2,229
	Sprint Capital Corporation		6.000%		1/15/07		700		707
	Sprint Capital Corporation		8.375%		3/15/12		1,860		2,155
	Sprint Capital Corporation		8.750%		3/15/32		2,170		2,880
	TCI Communications Financing III		9.650%		3/31/27		3,350		3,625
	Unilever Capital Corporation		7.125%		11/1/10		480		523
	Verizon Global Funding Corp.		6.125%		6/15/07		2,065		2,100
	Verizon Global Funding Corp.		7.750%		6/15/32		375		447
									27,283
Telecommunications — 1.5%
	BellSouth Corporation		4.750%		11/15/12		830		809
	GTE Hawaiian Telephone Company, Inc.		7.000%		2/1/06		750		749
	Qwest Corporation		5.625%		11/15/08		550		544
	SBC Communications Inc.		5.100%		9/15/14		1,910		1,866
	Verizon New York Inc.		6.875%		4/1/12		1,820		1,897
									5,865
Telecommunications (Cellular/ Wireless) — 1.7%
	Cingular Wireless LLC		5.625%		12/15/06		800		806
	Motorola, Inc.		7.625%		11/15/10		135		150
	New Cingular Wireless Services Inc.		7.500%		5/1/07		1,500		1,550
	New Cingular Wireless Services Inc.		8.125%		5/1/12		570		659
	New Cingular Wireless Services Inc.		8.750%		3/1/31		980		1,298

Annual Report to Shareholders

71

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Telecommunications (Cellular/ Wireless) — Continued
	Nextel Communications, Inc.		5.950%		3/15/14	$	469	$	471
	Nextel Communications, Inc.		7.375%		8/1/15		1,600		1,689
									6,623
Transportation — 1.3%
	Burlington Northern Railroad Company		6.960%		3/22/09		182		189
	Burlington Northern Railroad Company		7.330%		6/23/10		137		144
	Continental Airlines, Inc.		7.256%		3/15/20		539		548
	Continental Airlines, Inc.		6.545%		2/2/19		165		164
	CSX Transportation, Inc.		7.875%		5/15/43		252		327
	Delta Air Lines, Inc.		7.570%		11/18/10		300		296
	Delta Air Lines, Inc.		6.718%		7/2/24		698		708
	Norfolk Southern Corporation		7.875%		5/15/43		348		445
	Northwest Airlines Corporation		7.575%		3/1/19		191		192
	Union Pacific Corporation		4.875%		1/15/15		1,740		1,697
	United Airlines, Inc.		7.783%		1/1/14		245		244
									4,954
Total Corporate Bonds and Notes (Identified Cost — $287,275)									285,797
U.S. Government and Agency Obligations — 3.3%
Fixed Rate Securities — 0.3%
	Tennessee Valley Authority		5.375%		11/13/08		150		152
	United States Treasury Bonds		5.375%		2/15/31		750		847
									999
Treasury Inflation-Protected SecuritiesE — 3.0%
	United States Treasury Inflation-Protected Security		1.875%		7/15/15		11,807		11,612
Total U.S. Government and Agency Obligations (Identified Cost — $12,719)									12,611

Portfolio of Investments  —  Continued

Investment Grade Income Portfolio  —  Continued

Annual Report to Shareholders

72

				Maturity		Par/
		Rate		Date		Shares		Value
U.S. Government Agency Mortgage-Backed Securities — N.M.
Fixed Rate Securities — N.M.
	Fannie Mae		8.000%		4/25/06	$	1	$	2
Indexed SecuritiesD — N.M.
	Freddie Mac		5.329%		9/1/24		85		87
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost — $86)									89
Yankee BondsF — 21.1%
Banking and Finance — 2.2%
	Corporacion Andina de Fomento		4.556%		1/26/07		1,260		1,260	D
	HBOS Capital Funding LP		6.071%		6/30/49		1,490		1,540	A,C
	HBOS Treasury Services plc		4.000%		9/15/09		1,080		1,051	A
	Mizuho Financial Group, Inc.		5.790%		4/15/14		3,565		3,683	A
	Sumitomo Mitsui Banking Corporation		5.625%		7/29/49		730		727	A,C
									8,261
Cable — 0.2%
	British Sky Broadcasting Group plc		6.875%		2/23/09		870		911
Diversified Financial Services — 0.7%
	Encana Holdings Finance Corp		5.800%		5/1/14		2,725		2,840
Electric — 1.0%
	Empresa Nacional de Electricidad S.A.		8.500%		4/1/09		1,805		1,968
	Hydro-Quebec		7.500%		4/1/16		1,625		1,948
									3,916
Foreign Governments — 5.8%
	Federative Republic of Brazil		5.250%		4/15/12		329		325	D
	Federative Republic of Brazil		5.250%		4/15/12		505		498	D
	Federative Republic of Brazil		8.875%		4/15/24		240		268
	Federative Republic of Brazil		10.125%		5/15/27		740		930
	Federative Republic of Brazil		12.250%		3/6/30		510		736
	Province of Nova Scotia		5.750%		2/27/12		1,000		1,045
	Province of Ontario		4.500%		2/3/15		460		451
	Republic of Chile		4.630%		1/28/08		120		120	D
	Republic of Colombia		11.750%		2/25/20		570		788
	Republic of Panama		9.375%		1/16/23		270		338

Annual Report to Shareholders

73

				Maturity		Par/
		Rate		Date		Shares		Value
Yankee Bonds — Continued
Foreign Governments — Continued
	Republic of Panama		7.125%		1/29/26	$	740	$	750
	Republic of Peru		5.000%		3/7/17		558		534	C
	Republic of Peru		5.000%		3/7/17		205		193	A,C
	Republic of Peru		8.750%		11/21/33		500		563
	Republic of South Africa		7.375%		4/25/12		650		723
	Republic of South Africa		6.500%		6/2/14		700		757
	Russian Federation		5.000%		3/31/30		4,320		4,877	C
	United Mexican States		8.375%		1/14/11		705		804
	United Mexican States		11.500%		5/15/26		1,100		1,798
	United Mexican States		8.300%		8/15/31		820		1,054
	United Mexican States		7.500%		4/8/33		3,942		4,667
									22,219
Insurance — 0.7%
	Axa		8.600%		12/15/30		1,630		2,178
	Oil Insurance Ltd		5.150%		8/15/33		585		581	A,C
	XL Capital Ltd.		5.250%		9/15/14		20		20
									2,779
Manufacturing (Diversified) — 0.5%
	Tyco International Group SA		6.375%		10/15/11		250		260
	Tyco International Group SA		7.000%		6/15/28		554		609
	Tyco International Group SA		6.875%		1/15/29		1,051		1,146
									2,015
Oil and Gas — 1.5%
	Petrobras International Finance Company (PIFCO)		9.750%		7/6/11		905		1,063
	Petroliam Nasional Berhad		7.625%		10/15/26		610		756	A
	YPF Sociedad Anonima		10.000%		11/2/28		3,500		4,113
									5,932
Special Purpose — 4.2%
	Anadarko Finance Company		6.750%		5/1/11		970		1,050
	Conoco Funding Company		6.350%		10/15/11		520		557
	Deutsche Telekom International Finance BV		8.250%		6/15/30		1,400		1,781
	Deutsche Telekom International Finance BV		9.250%		6/1/32		670		923

Portfolio of Investments  —  Continued

Investment Grade Income Portfolio  —  Continued

Annual Report to Shareholders

74

				Maturity		Par/
		Rate		Date		Shares		Value
Yankee Bonds — Continued
Special Purpose — Continued
	General Motors Nova Scotia Finance Company		6.850%		10/15/08	$	1,160	$	870
	HSBC Capital Funding LP		4.610%		12/29/49		760		717	A,C
	HSBC Holdings plc		5.250%		12/12/12		3,850		3,863
	Molson Coors Capital Finance		4.850%		9/22/10		1,305		1,287
	Petronas Capital Ltd.		7.875%		5/22/22		770		961	A
	Resona Preferred Global Securities Limited		7.191%		12/29/49		2,120		2,249	A,C
	Telefonica Europe BV		8.250%		9/15/30		800		994
	UFJ Finance Aruba AEC		6.750%		7/15/13		920		1,005
									16,257
Telecommunications — 3.6%
	British Telecommunications plc		8.375%		12/15/10		900		1,024
	British Telecommunications plc		8.875%		12/15/30		420		562
	France Telecom SA		7.750%		3/1/11		3,000		3,351
	France Telecom SA		8.500%		3/1/31		340		453
	INTELSAT		7.625%		4/15/12		32		26
	INTELSAT		6.500%		11/1/13		1,333		993
	Koninklijke (Royal) KPN NV		8.000%		10/1/10		990		1,087
	Koninklijke (Royal) KPN NV		8.375%		10/1/30		655		776
	Tele Norte Leste Participacoes S.A.		8.000%		12/18/13		1,080		1,145
	Telecom Italia Capital S.p.A.		5.250%		11/15/13		2,025		1,987
	Telecom Italia Capital S.p.A.		4.950%		9/30/14		1,860		1,777
	Telus Corporation		7.500%		6/1/07		700		723
									13,904
Telecommunications (Cellular/ Wireless) — 0.3%
	Rogers Wireless Communications Inc.		6.375%		3/1/14		1,000		1,003
Utilities — 0.4%
	United Utilities plc		5.375%		2/1/19		1,550		1,519
Total Yankee Bonds (Identified Cost — $77,790)									81,556

Annual Report to Shareholders

75

				Maturity		Par/
		Rate		Date		Shares			Value
Municipal Bonds — 0.1%
	Liberty New York Development Corporation Revenue		5.250%		10/1/35	$	320		$	361
Total Municipal Bonds (Identified Cost — $354)										361
Preferred Stocks — 0.2%
	Fannie Mae		7.000%				16	shs		883	D
Total Preferred Stocks (Identified Cost — $810)										883
Total Long-Term Securities (Identified Cost — $379,034)										381,297
Short-Term Securities — 0.2%
U.S. Government and Agency Obligations — N.M.
	Fannie Mae		0.000%		5/15/06	$	168			165	B,G
Repurchase Agreements — 0.2%
Lehman Brothers, Inc. 4.15%, dated 12/30/05, to be repurchased at $336 on 1/3/06 (Collateral: $315 Fannie Mae notes, 7.125%, due 6/15/10, value $343)							336			336
Merrill Lynch Government Securities, Inc. 4.24%, dated 12/30/05, to be repurchased at $336 on 1/3/06 (Collateral: $340 Federal Home Loan Bank notes, 4.18%, due 7/14/08, value $342)							336			336
										672
Total Short-Term Securities (Identified Cost — $837)										837
Total Investments — 98.8% (Identified Cost — $379,871)										382,134
Other Assets Less Liabilities — 1.2%										4,636
Net Assets — 100.0%									$	386,770

Portfolio of Investments  —  Continued

Investment Grade Income Portfolio  —  Continued

Annual Report to Shareholders

76

				Actual		Appreciation/
		Expiration		Contracts		(Depreciation)
Futures Contracts PurchasedH
	U.S. Treasury Note Futures		March 2006		392	$	172
Futures Contracts WrittenH
	U.S. Treasury Bond Futures		March 2006		32	$	(64	)
	U.S. Treasury Note Futures		March 2006		352		(331	)
						$	(395	)

^A Rule 144a Security — A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities, which the Fund’s investment adviser has determined to be liquid, represent 8.3% of net assets.

B	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.
C	Stepped coupon security — A security with a predetermined schedule of interest or dividend rate changes.
D	Indexed Security — The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”) or the ten year Treasury Bill Constant Maturity Rate. The coupon rates are the rates as of December 31, 2005.

E	Inflation-Protected Securities — Treasury Security whose principal value is adjusted daily or monthly in accordance with changes in the Consumer Price Index for all Urban Consumers, Interest is calculated on the basis of current adjusted principal value.
F	Yankee Bond — A dollar-denominated bond issued in the U.S. by foreign entities.

G	Collateral to cover futures contracts.
H	Futures are described in more detail in the notes to financial statements.

N.M. — Not meaningful.

See notes to financial statements.

Annual Report to Shareholders

77

Statement of Assets and Liabilities

Investment Grade Income Portfolio

December 31, 2005

(Amounts in Thousands)

Assets:
Investment securities at market value (Identified Cost – $379,034)				$	381,297
Short-term securities at value (Identified Cost – $837)					837
Cash					1
Receivable for futures variation martin					50
Receivable for fund shares sold					678
Interest and dividends receivable					6,212
Other assets					1
	Total assets				389,076
Liabilities:
Payable for fund shares repurchased		$	1,085
Payable for securities purchased			862
Income distribution payable			77
Accrued management fee			156
Accrued distribution and service fees			51
Accrued expenses			75
	Total liabilities				2,306
Net Assets				$	386,770
Net assets consist of:
Accumulated paid-in capital applicable to:
	35,212 Primary Class shares outstanding			$	364,096
	1,964 Institutional Class shares outstanding				20,925
Overdistributed net investment income					(118	)
Accumulated net realized loss on investments, options, and futures					(173	)
Unrealized appreciation/(depreciation) of investments, options and futures					2,040
Net Assets				$	386,770
Net Asset Value Per Share:
Primary Class				$	10.40
Institutional Class				$	10.41

See notes to financial statements.

Annual Report to Shareholders

78

Statement of Operations

Investment Grade Income Portfolio

For the Year Ended December 31, 2005

(Amounts in Thousands)

Investment Income:
	Interest				$	22,905
	Dividends					57
			Total income					$	22,962
Expenses:
	Management fees				$	2,443
	Distribution and service fees					1,956
	Audit and legal fees					65
	Custodian fees					131
	Directors’ fees and expenses					46
	Registration fees					58
	Reports to shareholders					71
	Transfer agent and shareholder servicing expense:
		Primary Class				364
		Institutional Class				3
	Other expenses					45
						5,182
		Less: Fees waived				(1,197	)
				Compensating balance credits		(3	)A
			Total expenses, net of waivers and compensating balance credits						3,982
Net Investment Income									18,980
Net Realized and Unrealized Gain/(Loss) on Investments:
	Realized gain/(loss) on:
		Investments				2,392
		Futures				(90	)
									2,302
	Change in unrealized depreciation of investments and futures								(14,161	)
Net Realized and Unrealized Loss on Investments									(11,859	)
Change in Net Assets Resulting From Operations								$	7,121

^A See note 1, Compensating Balance Credits, in the notes to financial statements.

See notes to financial statements.

Annual Report to Shareholders

79

Statement of Changes in Net Assets

Investment Grade Income Portfolio

(Amounts in Thousands)

			For the Years Ended
			12/31/05			12/31/04
Change in Net Assets:
Net investment income			$	18,980		$	18,372
Net realized gain on investments, and futures				2,302			9,812
Change in unrealized depreciation of investments, and futures				(14,161	)		(3,555	)
Change in net assets resulting from operations				7,121			24,629
Distributions to shareholders:
	From net investment income:
		Primary Class		(18,146	)		(17,963	)
		Institutional Class		(836	)		(411	)
	From net realized gain on investments:
		Primary Class		(3,431	)		(9,054	)
		Institutional Class		(157	)		(220	)
Change in net assets from Fund share transactions:
		Primary Class		(22,272	)		(2,354	)
		Institutional Class		10,914			4,370
Change in net assets				(26,807	)		(1,003	)
Net Assets:
Beginning of year				413,577			414,580
End of year			$	386,770		$	413,577
Overdistributed net investment income			$	(118	)	$	(117	)

See notes to financial statements.

Annual Report to Shareholders

80

Financial Highlights

Investment Grade Income Portfolio

   Contained below is per share operating performance data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information provided in the financial statements.

Primary Class:

		Years Ended December 31,
		2005			2004			2003			2002			2001
Net asset value, beginning of year		$	10.81		$	10.88		$	10.42		$	10.10		$	9.97
Investment operations:
	Net investment income		.49	A		.49	A		.50	A		.54	A		.60	A
	Net realized and unrealized gain/(loss) on investments, options and futures		(.31	)		.18			.53			.32			.14
	Total from investment operations		.18			.67			1.03			.86			.74
Distributions:
	From net investment income		(.49	)		(.49	)		(.50	)		(.54	)		(.61	)
	From net realized gain on investments		(.10	)		(.25	)		(.07	)		—			—
	Total distributions		(.59	)		(.74	)		(.57	)		(.54	)		(.61	)
Net asset value, end of year		$	10.40		$	10.81		$	10.88		$	10.42		$	10.10
Ratios/supplemental data:
	Total return		1.69	%		6.29	%		10.16	%		8.82	%		7.52	%
	Total expenses to average net assetsB		1.00	%A		1.00	%A		1.00	%A		1.00	%A		1.00	%A
	Net expenses to average net assetsC		1.00	%A		1.00	%A		1.00	%A		1.00	%A		1.00	%A
	Net investment income to average net assets		4.64	%A		4.47	%A		4.62	%A		5.32	%A		5.90	%A
	Portfolio turnover rate		51.1	%		74.9	%		78.2	%		131.0	%		131.3	%
Net assets, end of year (in thousands)		$	366,329		$	403,361		$	408,685		$	334,763		$	255,298

^A Net of fees waived by LMFA for expenses in excess of a voluntary expense limitation of 1.00% until April 30, 2006. If no fees had been waived by LMFA, the annualized ratio of expenses to average daily net assets would have been as follows: for the years ended December 31, 2005, 1.30%; 2004, 1.27%; 2003, 1.28%; 2002, 1.30%; and 2001, 1.27%.

B	This ratio reflects total expenses before compensating balance credits, but net of the voluntary expense waivers described above.
C	This ratio reflects expenses net of compensating balance credits and voluntary expense waivers described above.

See notes to financial statements.

Annual Report to Shareholders

81

Institutional Class:

		Years Ended December 31,
		2005			2004			2003			2002			2001
Net asset value, beginning of year		$	10.82		$	10.89		$	10.43		$	10.11			$9.97
Investment operations:
	Net investment income		.55	D		.54	D		.55	D		.59	D		.66	D
	Net realized and unrealized gain/(loss) on investments, options and futures		(.31	)		.17			.53			.31			.14
	Total from investment operations		.24			.71			1.08			.90			.80
Distributions:
	From net investment income		(.55	)		(.53	)		(.55	)		(.58	)		(.66	)
	From net realized gain on investments		(.10	)		(.25	)		(.07	)		—			—
	Total distributions		(.65	)		(.78	)		(.62	)		(.58	)		(.66	)
Net asset value, end of year		$	10.41		$	10.82		$	10.89		$	10.43		$	10.11
Ratios/supplemental data:
	Total return		2.27	%		6.85	%		10.71	%		9.38	%		8.16	%
	Total expenses to average net assetsB		.44	% D		.47	% D		.50	% D		.48	% D		.47	% D
	Net expenses to average net assetsC		.44	% D		.47	% D		.50	% D		.48	% D		.47	% D
	Net investment income to average net assets		5.26	% D		5.02	% D		5.13	% D		5.85	% D		6.50	% D
	Portfolio turnover rate		51.1	%		74.9	%		78.2	%		131.0	%		131.3	%
Net assets, end of year (in thousands)		$	20,441		$	10,216		$	5,895		$	2,836		$	1,424

^D Net of fees waived by LMFA for expenses in excess of a voluntary expense limitation of 0.50% until April 30, 2006. If no fees had been waived by LMFA, the annualized ratio of expenses to average daily net assets would have been as follows: for the years ended December 31, 2005, 0.74%; 2004, 0.73%; 2003, 0.78%; 2002, 0.78%; and 2001, 0.74%.

See notes to financial statements.

Annual Report to Shareholders

82

Management’s Discussion of Fund Performance

Limited Duration Bond Portfolio

   Average annual total returns for the Limited Duration Bond Portfolio and its benchmark for various periods ended December 31, 2005, are presented below:

		One		Five		Ten		Since
		Year		Years		Years		InceptionA
Limited Duration Bond PortfolioB
	Primary Class		+1.83%		+3.66%		+4.54%		+6.19%
	Institutional Class		+2.29%		+4.18%		+5.09%		+5.91%
Merrill Lynch 1-3 Year Treasury IndexC,D			+1.67%		+3.67%		+4.79%		+6.09%
Lehman Intermediate U.S. Government Bond IndexC,E			+1.68%		+4.82%		+5.50%		+7.19%

The performance data quoted represents past performance and does 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 for the Primary Class please visit www.leggmasonfunds.com; for the Institutional Class please call 1-888-425-6432. 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.

   Our investment strategies were generally rewarded as the Fund’s total return (appreciation or depreciation in the Fund’s net asset value per share, plus dividends and any capital gain distributions) of the various share classes exceeded the performance of its primary benchmark, the Merrill Lynch 1-3 Year Treasury Index. For the calendar year, the Fund’s Primary Class returned 1.83% versus the benchmark’s return of 1.67%. The Fund’s modestly underweight duration posture for most of the period contributed to performance, since interest rates rose by more than the market had expected, and the Fund’s barbelled exposure to maturities for most of the period was rewarded by a flatter yield curve. Overweight exposure to short- and intermediate-maturity mortgage-backed securities and

^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.

^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  Effective June 30, 2004, Limited Duration changed its comparative index from the Lehman Intermediate Government Bond Index to the Merrill Lynch 1-3 year Treasury Index, because the new index is more representative of the types of securities in which the Fund invests.

^D  A total rate of return index based on daily closing prices and consisting of Treasury bills with a maturity of 1 to 3 years.

^E  The total return index consisting of investment grade corporate debt issues as well as U.S. government securities. The debt issues all maintain maturities within a range of 1 to 10 years.

Annual Report to Shareholders

83

asset-backed securities contributed substantially to performance, as their higher yields and relatively stable spreads resulted in excess returns relative to Treasuries. A modest exposure to BBB-rated corporate bonds detracted somewhat from performance, however, as spreads generally widened.

Western Asset Management Company

January 31, 2006

Annual Report to Shareholders

84

Expense Example

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, 2005, and held through December 31, 2005.

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 during this 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		Ending		Expenses PaidA
		Account		Account		During the
		Value		Value		Period
		7/1/05		12/31/05		7/1/05 to 12/31/05
Primary Class:
	Actual	$	1,000.00	$	1,008.40	$	5.06
	Hypothetical (5% return before expenses)		1,000.00		1,020.16		5.09
Institutional Class:
	Actual	$	1,000.00	$	1,010.10	$	2.33
	Hypothetical (5% return before expenses)		1,000.00		1,022.68		2.35

^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 0.46% for the Primary Class and Institutional, Class respectively, multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (184), and divided by 365.

Annual Report to Shareholders

85

Performance Information

Limited Duration Bond Portfolio

   The graphs on the following pages compare the Fund’s total returns to those of closely matched broad-based securities market indices. 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 each securities market index do not include any transaction costs associated with buying and selling securities in the index or other administrative expenses. Both the Fund’s and the indices’ results assume reinvestment of all dividends and distributions.

   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. It assumes that dividends and distributions were reinvested 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.

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

\

Performance Information — Continued

Annual Report to Shareholders

86

Growth of a $10,000 Investment — Primary Class

Periods Ended December 31, 2005

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+1.83%		+1.83%
Five Years		+19.67%		+3.66%
Ten Years		+55.94%		+4.54%

The performance data quoted represents past performance and does 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.leggmasonfunds.com. 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.

^B A total return index consisting of investment grade corporate debt issues as well as U.S. government securities. The debt issues all maintain maturities within a range of 1 to 10 years.

Annual Report to Shareholders

87

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

Periods Ended December 31, 2005

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+2.29%		+2.29%
Five Years		+22.71%		+4.18%
Ten Years		+64.34%		+5.09%

The performance data quoted represents past performance and does 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 call 1-888-425-6432. 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.

Performance Information — Continued

Annual Report to Shareholders

88

Portfolio Composition (as of December 31, 2005)^C

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

Maturity Schedule (as a percentage of the portfolio)

C	The Fund is actively managed. As a result, the composition of its portfolio holdings and sectors is subject to change at any time.
D	Standard & Poor’s Ratings Services provides capital markets with credit ratings for the evaluation and assessment of credit risk.

Annual Report to Shareholders

89

Portfolio of Investments

Limited Duration Bond Portfolio

December 31, 2005

(Amounts in Thousands)

				Maturity		Par/
		Rate		Date		Shares		Value
Long-Term Securities — 99.0%
Corporate Bonds and Notes — 29.1%
Banking and Finance — 6.8%
	Countrywide Financial Corporation		4.541%		5/5/08	$	20	$	20	A
	Countrywide Financial Corporation		4.767%		12/19/08		690		690	A
	Ford Motor Credit Company		5.349%		9/28/07		1,020		943	A
	Ford Motor Credit Company		6.625%		6/16/08		4,810		4,363
	General Motors Acceptance Corporation		5.100%		7/16/07		110		103	A
	General Motors Acceptance Corporation		5.654%		9/23/08		4,000		3,617	A
	HSBC Finance Corporation		4.560%		5/10/10		690		690	A
	iStar Financial Inc.		4.830%		3/3/08		1,160		1,159	A
	John Deere Capital Corporation		3.900%		1/15/08		1,000		980
	Nissan Motor Acceptance Corporation		4.625%		3/8/10		660		645	B
	Residential Capital Corporation		5.896%		6/29/07		1,680		1,684	A
	SLM Corporation		4.340%		7/27/09		1,140		1,139	A
	U.S. Bank National Association		4.400%		8/15/08		240		238
									16,271
Cable — 0.5%
	Comcast Cable Communications, Inc.		8.375%		5/1/07		230		240
	Cox Communications, Inc.		5.039%		12/14/07		1,050		1,058	A
									1,298
Chemicals — 0.5%
	The Dow Chemical Company		5.000%		11/15/07		310		310
	The Dow Chemical Company		5.750%		12/15/08		560		574
	The Dow Chemical Company		5.970%		1/15/09		330		341
									1,225

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

Annual Report to Shareholders

90

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Chemicals — Continued
Computer Services and Systems — 0.5%
	Electronic Data Systems Corporation		7.125%		10/15/09	$	1,000	$	1,063
Diversified Financial Services — 1.4%
	Capital One Financial Corporation		4.738%		5/17/07		690		688
	CIT Group Inc.		4.590%		5/23/08		690		692	A
	General Electric Capital Corporation		4.591%		6/15/09		1,470		1,472	A
	ZFS Finance USA Trust III		5.651%		12/15/65		500		501	A,B
									3,353
Electric — 1.0%
	Appalachian Power Company		3.600%		5/15/08		1,700		1,647
	Niagara Mohawk Power Corporation		7.750%		10/1/08		460		491
	Ohio Edison Company		4.000%		5/1/08		310		303
									2,441
Energy — 2.5%
	Alabama Power Company		4.580%		8/25/09		1,000		1,002	A
	CenterPoint Energy, Inc.		5.875%		6/1/08		440		446
	Duke Energy Corporation		3.750%		3/5/08		1,500		1,465
	Pacific Gas and Electric Company		3.600%		3/1/09		1,000		959
	Sempra Energy		4.840%		5/21/08		2,000		2,004	A
									5,876
Environmental Services — 0.8%
	Waste Management, Inc.		6.500%		11/15/08		570		591
	Waste Management, Inc.		7.375%		8/1/10		1,090		1,186
									1,777

Annual Report to Shareholders

91

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Food, Beverage and Tobacco — 1.4%
	Altria Group, Inc.		5.625%		11/4/08	$	3,000	$	3,041
	Sara Lee Corporation		6.250%		9/15/11		230		237
									3,278
Investment Banking/Brokerage — 1.2%
	Lehman Brothers Holdings Inc.		4.560%		11/10/09		1,120		1,125	A
	Morgan Stanley		4.430%		1/15/10		630		631	A
	The Bear Stearns Companies Inc.		4.730%		9/9/09		1,000		1,004	A
									2,760
Manufacturing (Diversified) — 1.3%
	Tyco International Group SA		4.436%		6/15/07		3,000		2,963	B
Media — 2.4%
	Clear Channel Communications, Inc.		6.625%		6/15/08		140		143
	Clear Channel Communications, Inc.		4.250%		5/15/09		550		529
	Clear Channel Communications, Inc.		7.650%		9/15/10		610		653
	Liberty Media Corporation		7.875%		7/15/09		1,330		1,401
	News America Incorporated		6.625%		1/9/08		2,000		2,063
	Viacom Inc.		5.625%		5/1/07		1,000		1,005
									5,794
Oil and Gas — 3.6%
	Amerada Hess Corporation		6.650%		8/15/11		1,710		1,837
	Anadarko Petroleum Corporation		3.250%		5/1/08		1,440		1,387
	Occidental Petroleum Corporation		7.375%		11/15/08		1,140		1,218

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

Annual Report to Shareholders

92

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Oil and Gas — Continued
	Ocean Energy Inc.		4.375%		10/1/07	$	580	$	573
	Pemex Project Funding Master Trust		8.500%		2/15/08		3,300		3,515
									8,530
Paper and Forest Products — 0.6%
	International Paper Company		3.800%		4/1/08		1,150		1,115
	Weyerhaeuser Company		6.125%		3/15/07		395		401
									1,516
Photo Equipment and Supplies — N.M.
	Eastman Kodak Company		7.250%		11/15/13		110		105
Special Purpose — 2.8%
	American Honda Finance Corporation		4.412%		5/12/08		900		900	A,B
	BAE Systems Holdings Inc.		4.740%		8/15/08		680		680	A,B
	DaimlerChrysler NA Holding Corporation		4.960%		9/10/07		3,060		3,067	A
	DaimlerChrysler NA Holding Corporation		4.780%		10/31/08		320		320	A
	International Lease Finance Corporation		5.000%		4/15/10		650		647
	National Rural Utilities Cooperative Finance Corporation		5.750%		12/1/08		330		337
	Sprint Capital Corporation		6.125%		11/15/08		470		483
	Verizon Global Funding Corp.		7.250%		12/1/10		240		260
									6,694
Telecommunications — 0.2%
	AT&T Inc.		5.300%		11/15/10		540		542

Annual Report to Shareholders

93

				Maturity		Par/
		Rate		Date		Shares		Value
Corporate Bonds and Notes — Continued
Telecommunications (Cellular/Wireless) — 1.6%
	ALLTEL Corporation		4.656%		5/17/07	$	2,310	$	2,299
	Motorola, Inc.		4.608%		11/16/07		1,500		1,491
									3,790
Total Corporate Bonds and Notes (Identified Cost — $70,524)									69,276
Asset-Backed Securities — 15.8%
Fixed Rate Securities — 4.3%
	AmeriCredit Automobile Receivables Trust 2003-BX		2.720%		1/6/10		2,649		2,609
	MBNA Practice Solutions Owners Trust 2005-2		4.100%		5/15/09		2,700		2,653	B
	Prestige Auto Receivables Trust 2005-1A		4.370%		6/15/12		1,300		1,285	B
	Structured Asset Securities Corporation 2003-AL1		3.356%		4/25/31		784		712	B
	UPFC Auto Receivables Trust 2004-A		3.270%		9/15/10		3,000		2,946
									10,205
Indexed SecuritiesA — 11.5%
	Asset Backed Funding Certificates 2002-WF2		5.129%		5/25/32		221		223
	Bear Stearns Asset Backed Securities, Inc. 2004-1		4.899%		6/25/34		3,000		3,019
	CHEC Loan Trust 2004-2		4.709%		2/25/31		3,500		3,505
	Citibank Credit Card Issuance Trust 2002-B1		4.849%		6/25/09		1,675		1,680
	Countrywide Home Equity Loan Trust 2002-G		4.739%		12/15/28		1,814		1,822
	Countrywide Home Equity Loan Trust 2004-J		4.659%		12/15/33		2,419		2,423
	Countrywide Home Equity Loan Trust 2004-O		4.649%		2/15/34		1,368		1,370

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

Annual Report to Shareholders

94

				Maturity		Par/
		Rate		Date		Shares		Value
Asset-Backed Securities — Continued
Indexed SecuritiesA — Continued
	Fremont Home Loan Trust 2004-C		4.649%		1/25/32	$	1,103	$	1,104
	GSAA Home Equity Trust 2004-9		4.759%		9/25/34		1,351		1,352
	Magnetite CBO II, Ltd.		4.820%		8/25/12		169		169	B,C
	RAAC Series 2005-RP1		4.719%		7/25/37		1,644		1,644	B
	Rental Car Finance Corp. 2003-1A		4.779%		5/25/08		3,000		3,010	B
	Rental Car Finance Corp. 2004-1A		4.579%		6/25/09		3,000		3,005	B
	Superior Wholesale Inventory Financing Trust 2004-A10		4.469%		9/15/11		3,000		3,001
									27,327
Total Asset-Backed Securities (Identified Cost — $37,687)									37,532
Mortgage-Backed Securities — 19.5%
Fixed Rate Securities — 3.2%
	Blackrock Capital Finance L.P. 1997-R3		7.220%		11/25/28		236		236	B
	Prime Mortgage Trust 2005-2		7.596%		10/25/32		1,904		1,962
	Residential Asset Mortgage Products, Inc. 2005-SL1 A7		8.000%		5/25/32		1,987		2,063
	Washington Mutual MSC Mortgage Pass-Through Certificates, Series 2004-RA1		7.000%		3/25/34		3,406		3,468
									7,729
Indexed SecuritiesA — 11.4%
	Banc of America Mortgage Securities 2005-F		5.027%		7/25/35		2,446		2,422
	Bear Stearns Arm Trust 2004-10		4.604%		1/25/35		1,049		1,039

Annual Report to Shareholders

95

				Maturity		Par/
		Rate		Date		Shares		Value
Mortgage-Backed Securities — Continued
Indexed SecuritiesA — Continued
	Harborview Mortgage Loan Trust 2004-8		4.770%		11/19/34	$	1,636	$	1,638
	HomeBanc Mortgage Trust 2004-2		4.749%		12/25/34		2,193		2,196
	HomeBanc Mortgage Trust 2005-1		4.629%		3/25/35		2,513		2,490
	Impac CMB Trust 2004-2		4.639%		4/25/34		1,176		1,178
	Impac CMB Trust 2004-6		4.769%		10/25/34		1,097		1,099
	Impac Secured Assets Corp. 2004-3		4.579%		11/25/34		880		880
	Provident Funding Mortgage Loan Trust 2005-1 1A1		4.180%		5/25/35		2,362		2,326
	Sequoia Mortgage Trust 2003-2 A2		4.700%		6/20/33		1,209		1,206
	Sequoia Mortgage Trust 2003-7 A1		4.690%		1/20/34		1,208		1,209
	Thornburg Mortgage Securities Trust 2004-2		4.529%		6/25/44		773		773
	Thornburg Mortgage Securities Trust 2005-4		4.570%		12/25/35		2,400		2,400
	Thornburg Mortgage Securities Trust 2005-4		4.580%		12/25/35		2,400		2,400
	WaMu Mortgage Pass-Through Certificates, Series 2004-AR8		4.670%		6/25/44		1,857		1,858
	WaMu Mortgage Pass-Through Certificates, Series 2003-AR10		4.066%		10/25/33		2,100		2,041
									27,155
Variable Rate SecuritiesD — 4.9%
	Banc of America Funding Corporation 2004-B		4.213%		12/20/34		1,638		1,631
	Countrywide Alternative Loan Trust 2004-33, 1A1		5.050%		12/25/34		1,051		1,050

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

Annual Report to Shareholders

96

				Maturity		Par/
		Rate		Date		Shares		Value
Mortgage-Backed Securities — Continued
Variable Rate SecuritiesD — Continued
	Countrywide Alternative Loan Trust 2004-33, 2A1		4.953%		12/25/34	$	553	$	551
	J.P. Morgan Mortgage Trust 2003-A1		4.363%		10/25/33		2,482		2,414
	MASTR Adjustable Rate Mortgages Trust 2004-13		3.787%		11/21/34		3,000		2,882
	MLCC Mortgage Investors, Inc. 2005-1 2A2		4.969%		4/25/35		3,048		3,019
									11,547
Total Mortgage-Backed Securities (Identified Cost — $46,856)									46,431
U.S. Government and Agency Obligations — 5.4%
Fixed Rate Securities — 2.1%
	Freddie Mac		3.800%		12/27/06		5,000		4,954
	United States Treasury Notes		3.500%		2/15/10		5		5
									4,959
Treasury Inflation-Protected SecuritiesE — 3.3%
	United States Treasury Inflation-Protected Security		0.875%		4/15/10		2,303		2,189
	United States Treasury Inflation-Protected Security		3.000%		7/15/12		3,323		3,514
	United States Treasury Inflation-Protected Security		2.375%		1/15/25		2,113		2,221
									7,924
Total U.S. Government and Agency Obligations (Identified Cost — $13,101)									12,883
U.S. Government Agency Mortgage-Backed Securities — 23.5%
Fixed Rate Securities — 12.7%
	Fannie Mae		8.500%	6/1/10 to 8/1/11			45		46
	Fannie Mae		7.000%	1/1/13 to 1/1/33			5,447		5,687
	Fannie Mae		6.500%	7/1/13 to 10/1/32			2,264		2,325
	Fannie Mae		9.500%		7/1/14		60		65
	Fannie Mae		11.000%		12/1/15		65		69

Annual Report to Shareholders

97

				Maturity		Par/
		Rate		Date		Shares		Value
U.S. Government Agency Mortgage-Backed Securities — Continued
Fixed Rate Securities — Continued
	Fannie Mae		12.500%	1/1/18 to 4/1/18		$	45	$	50
	Fannie Mae		9.000%		11/1/21		155		166
	Fannie Mae		6.000%		11/1/27		0.2		0.2
	Fannie Mae		5.000%		12/1/35		18,400		17,825	F
	Freddie Mac		8.250%		2/1/08		14		14
	Freddie Mac		8.500%	12/1/08 to 6/1/21			54		55
	Freddie Mac		9.750%	11/1/09 to 11/1/14			31		32
	Freddie Mac		9.000%	1/1/17 to 1/1/21			177		187
	Freddie Mac		7.000%	1/25/21 to 4/1/32			2,390		2,486
	Freddie Mac		8.000%		2/1/31		467		498
	Freddie Mac		5.000%		12/1/35		200		194	F
	Government National Mortgage Association		9.000%	6/15/06 to 9/15/22			107		109
	Government National Mortgage Association		6.000%	5/15/14 to 11/15/28			275		281
									30,089
Indexed SecuritiesA — 10.6%
	Fannie Mae		4.327%		11/1/34		1,333		1,311
	Fannie Mae		4.211%		12/1/34		1,524		1,494
	Fannie Mae		4.329%		1/1/35		1,268		1,239
	Fannie Mae		4.875%		1/1/35		2,429		2,428
	Fannie Mae		4.817%		2/1/35		5,461		5,463
	Fannie Mae		4.548%		3/1/35		2,866		2,831
	Fannie Mae		4.972%		3/1/35		5,596		5,582
	Freddie Mac		4.350%		12/1/34		591		581
	Freddie Mac		4.474%		12/1/34		2,914		2,871
	Freddie Mac		4.079%		1/1/35		552		538
	Freddie Mac		4.097%		1/1/35		997		972
									25,310

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

Annual Report to Shareholders

98

				Maturity		Par/
		Rate		Date		Shares		Value
U.S. Government Agency Mortgage-Backed Securities — Continued
Indexed Securities — Continued
Stripped Securities — 0.2%
	Government National Mortgage Association		4.125%		6/16/26	$	2,399	$	202	G1
	Government National Mortgage Association		4.175%		8/16/26		1,945		209	G1
									411
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost — $57,385)									55,810
Yankee BondsC — 3.6%
Banks — 0.4%
	The Korea Development Bank		4.750%		7/20/09		1,000		991
Energy — 0.4%
	SP PowerAssets Limited Global		3.800%		10/22/08		1,000		971	B
Foreign Governments — 0.8%
	Russian Federation		3.000%		5/14/08		1,940		1,840
Special Purpose — 0.1%
	ChevronTexaco Capital Company		3.500%		9/17/07		120		118
	Deutsche Telekom International Finance BV		3.875%		7/22/08		80		78
									196
Telecommunications — 1.6%
	British Telecommunications plc		8.375%		12/15/10		1,520		1,730
	Koninklijke (Royal) KPN NV		8.000%		10/1/10		900		988
	Telecom Italia Capital		4.730%		2/1/11		1,040		1,045	A
									3,763

Annual Report to Shareholders

99

				Maturity		Par/
		Rate		Date		Shares			Value
Yankee BondsC — Continued
Telecommunications — Continued
Telecommunications (Cellular/Wireless) — 0.3%
	Vodafone Group Plc		3.950%		1/30/08	$	730		$	717
Total Yankee Bonds (Identified Cost — $8,594)										8,478
Municipal Bonds — 0.1%
	Liberty New York Development Corporation Revenue		5.250%		10/1/35		200			225
Total Municipal Bonds (Identified Cost — $221)										225
Preferred Stocks — 2.0%
	Fannie Mae		7.000%				77	shs		4,221	A
	Home Ownership Funding Corporation		13.331%				5			138	B,H
	Home Ownership Funding Corporation II		13.338%				14			388	B,H
Total Preferred Stocks (Identified Cost — $5,837)										4,747
Total Long-Term Securities (Identified Cost — $240,205)										235,382
Short-Term Securities — 8.0%
U.S. Government and Agency Obligations — 7.0%
	Fannie Mae		0.000%		3/1/06	$	5,000			4,965	I
	Fannie Mae		0.000%		5/15/06		220			216	I,J
	Freddie Mac		0.000%		3/7/06		5,500			5,458	I
	Freddie Mac		0.000%		3/28/06		6,000			5,938	I
										16,577
Repurchase Agreements — 1.0%
Lehman Brothers, Inc. 4.15%, dated 12/30/05, to be repurchased at $1,220 on 1/3/06 (Collateral: $1,205 Federal Home Loan Bank bonds, 5.25%, due 12/11/20, value $1,243)							1,219			1,219

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

Annual Report to Shareholders

100

	Par/
	Shares		Value
Short-Term Securities — Continued
Repurchase Agreements — Continued
Merrill Lynch Government Securities, Inc. 4.24%, dated 12/30/05, to be repurchased at $1,220 on 1/3/06 (Collateral: $1,240 Federal Home Loan Bank notes, 4.75%, due 9/14/09, value $1,248)	$	1,220	$	1,220
				2,439
Total Short-Term Securities (Identified Cost — $19,016)				19,016
Total Investments — 107.0% (Identified Cost — $259,221)				254,398
Other Assets Less Liabilities — (7.0)%				(16,688	)
Net Assets — 100.0%			$	237,710

Annual Report to Shareholders

101

			Actual		Appreciation/
		Expiration	Contracts		(Depreciation)
Futures Contracts PurchasedK
	Eurodollar Futures	June 2006		117	$	1
	U.S. Treasury Note Futures	March 2006		102		(4	)
					$	(3	)
Futures Contracts WrittenK
	Eurodollar Futures	March 2006		208	$	337
	U.S. Treasury Note Futures	March 2006		41		(28	)
	U.S. Treasury Note Futures	March 2006		22		(9	)
					$	300

A	Indexed Security — The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”) or the ten year Treasury Bill Constant Maturity Rate. The coupon rates are the rates as of December 31, 2005.
B	Rule 144a Security — A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities, which the Fund’s investment adviser has determined to be liquid, represent 8.4% of net assets.
C	Yankee Bond — A dollar-denominated bond issued in the U.S. by foreign entities.
D	The coupon rates shown on variable rate securities are the rates at December 31, 2005. These rates vary with the weighted average coupon of the underlying loans.
E	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.

^F When Issued security — Securities purchased on a delayed delivery basis. Final settlement amount and maturity date have not yet been announced.

G	Securities 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.
H	Stepped coupon security — A security with a predetermined schedule of interest or dividend rate charges.

I	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. The amount shown as principal is the notional balance used to calculate the amount of interest due.
J	Collateral to cover futures and options contracts.

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

See notes to financial statements.

Annual Report to Shareholders

102

Statement of Assets and Liabilities

Limited Duration Bond Portfolio

December 31, 2005

(Amounts in Thousands)

Assets:
Investment securities at market value (Identified Cost – $240,205)			$235,382
Short-term securities at value (Identified Cost – $19,016)			19,016
Cash			24
Receivable for fund shares sold			246
Receivable for futures variation margin			2
Interest and dividends receivable			1,456
Other assets			11
	Total assets		256,137
Liabilities:
Payable for securities purchases		$17,810
Payable for fund shares repurchased		349
Income distribution payable		44
Accrued management fee		58
Accrued distribution and service fees		94
Accrued expenses		72
	Total liabilities		18,427
Net Assets			$237,710
Net assets consist of:
Accumulated paid-in capital applicable to:
	21,522 Primary Class shares outstanding		$233,909
	1,785 Institutional Class shares outstanding		18,402
Overdistributed net investment income			(97	)
Accumulated net realized loss on investments, options, and futures			(9,979	)
Unrealized appreciation/(depreciation) of investments, options and futures			(4,525	)
Net Assets			$237,710
Net Asset Value Per Share:
Primary Class			$10.20
Institutional Class			$10.20

See notes to financial statements.

Annual Report to Shareholders

103

Statement of Operations

Limited Duration Bond Portfolio

For the Year Ended December 31, 2005

(Amounts in Thousands)

Investment Income:
	Interest			$	10,798
	Dividends				516
			Total income				$	11,314
Expenses:
	Management fees				1,208
	Distribution and service fees				1,271
	Audit and legal fees				75
	Custodian fees				108
	Directors’ fees and expenses				31
	Registration fees				42
	Reports to shareholders				47
	Transfer agent and shareholder servicing expense:
		Primary Class			187
		Institutional Class			3
	Other expenses				50
					3,022
	Less: Fees waived				(410	)
	Compensating balance credits				(5	)A
			Total expenses, net of waivers and compensating balance credits					2,607
Net Investment Income								8,707
Net Realized and Unrealized Gain/(Loss) on Investments:
	Realized loss on:
		Investments			(1,005	)
		Futures			(269	)
								(1,274	)
	Change in unrealized depreciation of investments, and futures							(2,592	)
Net Realized and Unrealized Loss on Investments								(3,866	)
Change in Net Assets Resulting From Operations							$	4,841

^A See note 1, Compensating Balance Credits, in the notes to financial statements.

See notes to financial statements.

Annual Report to Shareholders

104

Statement of Changes in Net Assets

Limited Duration Bond Portfolio

(Amounts in Thousands)

			For the Years Ended
			12/31/05			12/31/04
Change in Net Assets:
Net investment income			$	8,707		$	8,628
Net realized gain/(loss) on investments, options and futures				(1,274	)		(4,077	)
Change in unrealized appreciation/(depreciation) of investments, options and futures				(2,592	)		1,121
Change in net assets resulting from operations				4,841			5,672
Distributions to shareholders from:
	Net investment income:
		Primary Class		(8,515	)		(10,465	)
		Institutional Class		(574	)		(348	)
	Net realized gain on investments:
		Primary Class		—			(186	)
		Institutional Class		—			(7	)
Change in net assets from Fund share transactions:
	Primary Class			(51,090	)		(47,055	)
	Institutional Class			8,896			1,957
Change in net assets				(46,442	)		(50,432	)
Net Assets:
Beginning of year				284,152			334,584
End of year			$	237,710		$	284,152
Overdistributed net investment income			$	(97	)	$	(106	)

See notes to financial statements.

Annual Report to Shareholders

105

Financial Highlights

Limited Duration Bond Portfolio

   Contained below is per share operating performance data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information provided in the financial statements.

Primary Class:

		Years Ended December 31,
		2005			2004			2003			2002			2001
Net asset value, beginning of year			$10.36		$	10.54		$	10.70		$	10.32		$	10.26
Investment operations:
	Net investment income		.33	A		.29	A		.26	A		.41	A		.53	A
	Net realized and unrealized gain/(loss) on investments, options and futures		(.14	)		(.09	)		(.14	)		.38			.06
	Total from investment operations		.19			.20			.12			.79			.59
Distributions:
	From net investment income		(.35	)		(.37	)		(.28	)		(.41	)		(.53	)
	From net realized gain on investments		—			(.01	)		—			—			—
	Total distributions		(.35	)		(.38	)		(.28	)		(.41	)		(.53	)
Net asset value, end of year		$	10.20		$	10.36		$	10.54		$	10.70		$	10.32
Ratios/supplemental data:
	Total return		1.83	%		1.89	%		1.11	%		7.79	%		5.83	%
	Total expenses to average net assetsB		1.00	% A		1.00	% A		1.00	% A		1.00	% A		1.00	% A
	Net expenses to average net assetsC		1.00	% A		1.00	% A		1.00	% A		1.00	% A		1.00	% A
	Net investment income to average net assets		3.21	% A		2.81	% A		2.48	% A		3.85	% A		5.08	% A
	Portfolio turnover rate		81.6	%		238.0	%		487.3	%		204.1	%		535.2	%
Net assets, end of year (in thousands)		$	219,497		$	274,606		$	326,844		$	379,793		$	300,597

^A Net of fees waived by LMFA for expenses in excess of a voluntary expense limitation of 1.00% until April 30, 2006. If no fees had been waived by LMFA, the annualized ratio of expenses to average daily net assets would have been as follows: for the years ended December 31, 2005, 1.15%; 2004, 1.21%; 2003, 1.21%; 2002, 1.19%; and 2001, 1.17%.

B	This ratio reflects total expenses before compensating balance credits, but net of the voluntary expense waivers described above.
C	This ratio reflects expenses net of compensating balance credits and voluntary expense waivers described above.

See notes to financial statements.

Annual Report to Shareholders

106

Institutional Class:

		Years Ended December 31,
		2005			2004			2003			2002			2001
Net asset value, beginning of year			$10.37		$	10.55		$	10.70		$	10.32		$	10.27
Investment operations:
	Net investment income		.40	D		.35	D		.32	D		.46	D		.58	D
	Net realized and unrealized gain/(loss) on investments, options and futures		(.17	)		(.10	)		(.14	)		.38			.05
	Total from investment operations		.23			.25			.18			.84			.63
Distributions:
	From net investment income		(.40	)		(.42	)		(.33	)		(.46	)		(.58	)
	From net realized gain on investments		—			(.01	)		—			—			—
	Total distributions		(.40	)		(.43	)		(.33	)		(.46	)		(.58	)
Net asset value, end of year			$10.20		$	10.37		$	10.55		$	10.70		$	10.32
Ratios/supplemental data:
	Total return		2.29	%		2.41	%		1.71	%		8.35	%		6.30	%
	Total expenses to average net assetsB		.46	% D		.48	% D		.46	% D		.47	% D		.46	% D
	Net expenses to average net assetsC		.46	% D		.48	% D		.46	% D		.47	% D		.46	% D
	Net investment income to average net assets		3.85	% D		3.22	% D		3.03	% D		4.38	% D		5.63	% D
	Portfolio turnover rate		81.6	%		238.0	%		487.3	%		204.1	%		535.2	%
Net assets, end of year (in thousands)		$	18,213		$	9,546		$	7,740		$	9,485		$	7,221

^D Net of fees waived by LMFA for expenses in excess of a voluntary expense limitation of 0.50% until April 30, 2006. If no fees had been waived by LMFA, the annualized ratio of expenses to average daily net assets would have been as follows: for the years ended December 31, 2005, 0.62%; 2004, 0.70%; 2003, 0.68%; 2002, 0.66%; and 2001, 0.63%.

See notes to financial statements.

Annual Report to Shareholders

107

Expense Example

U.S. Government Money Market Portfolio

   As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution and service (12b-1) fees, 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, 2005, and held through December 31, 2005.

Actual Expenses

   The first line in the table below provides information about actual account values and actual expenses for the Fund. 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 during this period.

Hypothetical Example for Comparison Purposes

   The second line in the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’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 that appear in the shareholder reports of other funds.

	Beginning		Ending		Expenses PaidA
	Account		Account		During the
	Value		Value		Period
	7/1/05		12/31/05		7/1/05 to 12/31/05
Actual	$	1,000.00	$	1,014.80	$	3.66
Hypothetical (5% return before expenses)		1,000.00	$	1,021.58	$	3.67

^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 ratio of 0.72% multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (184), and divided by 365.

Expense Example — Continued

U.S. Government Money Market Portfolio

Annual Report to Shareholders

108

Portfolio Composition (as of December 31, 2005)^B

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.

Annual Report to Shareholders

109

Statement of Net Assets

U.S. Government Money Market Portfolio

December 31, 2005

(Amounts in Thousands)

			Maturity
		Rate	Date	Par		Value
U.S. Government and Agency Obligations — 41.4%
	Fannie Mae	2.25% to 5.50%	1/04/06 to 8/18/06	$	49,195	$	49,135
	Federal Home Loan Bank	1.00% to 4.20%	3/28/06 to 11/9/06		26,500		26,497	A
	Federal Home Loan Bank	3.70% to 4.50%	7/13/06 to 12/21/06		15,000		14,999	B
	Federal Home Loan Bank	2.00% to 4.00%	1/18/06 to 12/1/06		51,800		51,645
	Freddie Mac	1.66% to 5.25%	1/3/06 to 7/15/06		25,790		25,822
Total U.S. Government and Agency Obligations
(Identified Cost — $168,098)							168,098
Repurchase Agreements — 53.9%
Goldman Sachs & Company 4.24%, dated 12/30/05, to be repurchased at $100,803 on 1/3/06 (Collateral: $82,305 Tennessee Valley Authority bonds, 6.75%, due 11/1/25, value $102,778)					100,756		100,756
Lehman Brothers, Inc. 4.15%, dated 12/30/05, to be repurchased at $86,127 on 1/3/06 (Collateral: $24,615 Freddie Mac notes, 4.625%, due 9/15/08, value $24,827; $63,415 Federal Home Loan Bank notes, 2.5% to 4.125%, due 3/30/06 to 5/12/14, value $62,982)					86,087		86,087
Merrill Lynch Government Securities, Inc. 4.24%, dated 12/30/05, to be repurchased at $32,332 on 1/3/06 (Collateral: $32,885 Freddie Mac notes, 4.75%, due 10/17/08, value $32,967)					32,317		32,317
Total Repurchase Agreements (Identified Cost — $219,160)							219,160
Total Investments — 95.3% (Identified Cost — $387,258)							387,258	C
Other Assets Less Liabilities — 4.7%							19,150
Net Assets Applicable to 406,409 Shares Outstanding — 100.0%						$	406,408
Net Asset Value Per Share						$	1.00

^A Indexed Security — The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”). The coupon rates are the rates as of December 31, 2005.

^B Stepped coupon security — A security with a predetermined schedule of interest or dividend rate changes.

^C Also represents cost for income tax purposes.

See notes to financial statements.

Annual Report to Shareholders

110

Statement of Operations

U.S. Government Money Market Portfolio

For the Year Ended December 31, 2005

(Amounts in Thousands)

Investment Income:
	Interest					$	12,345
Expenses:
	Management fees			1,976
	Distribution and service fees			395
	Audit and legal fees			57
	Custodian fees			78
	Directors’ fees and expenses			33
	Registration fees			60
	Reports to shareholders			32
	Transfer agent and shareholder servicing expense			197
	Other expenses			29
				2,857
		Less: Compensating balance credits		(13	)
			Total expenses, net of compensating balance credits				2,844
Net Investment Income							9,501
Net Realized Gain/(Loss) on Investments:
	Realized gain/(loss) on investments						1
Change in Net Assets Resulting From Operations						$	9,502

See notes to financial statements.

Annual Report to Shareholders

111

Statement of Changes in Net Assets

U.S. Government Money Market Portfolio

(Amounts in Thousands)

	For the Years Ended
	12/31/05			12/31/04
Change in Net Assets:
Net investment income	$	9,501		$	2,864
Net realized gain/(loss) on investments		1			(1	)
Change in net assets resulting from operations		9,502			2,863
Distributions to shareholders from net investment income		(9,501	)		(2,864	)
Change in net assets from Fund share transactions		13,724			(51,197	)
Change in net assets		13,725			(51,198	)
Net Assets:
Beginning of year		392,683			443,881
End of year	$	406,408		$	392,683

See notes to financial statements.

Annual Report to Shareholders

112

Financial Highlights

U.S. Government Money Market Portfolio

   Contained below is per share operating performance data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information provided in the financial statements.

		Years Ended December 31,
		2005			2004			2003			2002			2001
Net asset value, beginning of year		$	1.00		$	1.00		$	1.00		$	1.00		$	1.00
Investment operations:
	Net investment income		.02			.01			.0049	A		.01	A		.04	A
	Total from investment operations		.02			.01			.0049			.01			.04
Distributions:
	From net investment income		(.02	)		(.01	)	(	.0049	)		(.01	)		(.04	)
	Total distributions		(.02	)		(.01	)	(	.0049	)		(.01	)		(.04	)
Net asset value, end of year			$1.00		$	1.00		$	1.00		$	1.00		$	1.00
Ratios/supplemental data:
	Total return		2.42	%		.67	%		.51	%		1.13	%		3.57	%
	Total expenses to average net assetsB		.72	%		.71	%		.71	%A		.72	%A		.71	%A
	Net expenses to average net assetsC		.72	%		.71	%		.71	%A		.72	%A		.72	%A
	Net investment income to average net assets		2.40	%		.65	%		.49	%		1.11	%		3.46	%
Net assets, end of year (in thousands)		$	406,408		$	392,683		$	443,881		$	541,873		$	501,070

^A Net of 12b-1 service fees waived by Legg Mason Wood Walker, Inc. of 0.10% of average daily net assets. If no fees had been waived by Legg Mason, the annualized ratio of expenses to average daily net assets would have been as follows: for the years ended December 31, 2003: 0.81%; 2002, 0.82% and 2001, 0.81%.

B	This ratio reflects total expenses before compensating balance credits, but net of the voluntary expense waivers described above.
C	This ratio reflects expenses net of compensating balance credits and voluntary expense waivers described above.

See notes to financial statements.

Annual Report to Shareholders

113

Notes to Financial Statements

Legg Mason Income Trust, Inc.

(Amounts in Thousands)

1. Organization and Significant Accounting Policies:

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

   The High Yield, Investment Grade and Limited Duration Portfolios 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 Funds in the preparation of their financial statements:

Security Valuation

   Securities owned by Core Bond, High Yield, Investment Grade and Limited Duration for which market quotations are readily available are valued at current market value. Securities for which market quotations are not readily available are fair valued pursuant to procedures approved by and under the general oversight of the Board of Directors. In determining fair value, all relevant qualitative and quantitative factors available are considered. These factors are subject to change over time and are reviewed periodically. The values assigned to fair value investments are based on available information and do not necessarily represent amounts that might ultimately be realized, since such amounts depend on future developments inherent in long-term investments. Further, because of the inherent uncertainty of valuation, those estimated values may differ significantly from quoted or published values or from the values that would have been used had a ready market of the investments existed, and the differences could be material.

   In accordance with Rule 2a-7, the investments of Government Money Market are valued on the basis of amortized cost, so long as the Fund’s Board of Directors determines that this method constitutes fair value. Under this method, securities are valued at cost when purchased and, thereafter, a constant proportionate accretion or amortization of any discount or premium is recorded until maturity of the security.

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

Annual Report to Shareholders

114

   With respect to High Yield, where a security is traded on more than one market, which may include foreign markets, the securities are generally valued on the market considered by the Fund’s adviser to be the primary market. The Fund will value its foreign securities in U.S. dollars on the basis of the then-prevailing exchange rates.

Foreign Currency Translation

   Assets and liabilities initially expressed in non-U.S. currencies are translated into U.S. dollars using currency exchange rates determined prior to the close of trading on the Exchange, usually at 2:00 p.m. Eastern time. Purchases and sales of securities and income and expenses are translated into U.S. dollars at the prevailing market rates on the dates of such transactions. The effects of changes in non-U.S. currency exchange rates on investment securities and other assets and liabilities are included with the net realized and unrealized gain or loss on investment securities.

Security Transactions

   Security transactions are recorded on the next business day after 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, 2005, investment transactions (excluding short-term investments) were as follows:

	Purchases				Proceeds From Sales
	U.S. Gov’t.				U.S. Gov’t.
	Securities		Other		Securities		Other
Core Bond	$	363,255	$	37,428	$	345,954	$	11,389
High Yield		—		252,998		—		288,338
Investment Grade		62,358		142,463		56,964		156,653
Limited Duration		113,440		99,462		123,265		117,891

Annual Report to Shareholders

115

Repurchase Agreements

   The Funds may engage in repurchase agreement transactions. 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 a fund to resell, the obligation at an agreed-upon price and time, thereby determining the yield during a fund’s holding period. This arrangement results in a fixed rate of return that is not subject to market fluctuations during the fund’s holding period. The value of the collateral is at all times at least equal to the total amount of the repurchase obligation, including interest. In the event of counterparty default, a fund has the right to use the collateral to satisfy the terms of the repurchase agreement. However, there could be potential loss to the fund in the event the fund is delayed or prevented from exercising its right to dispose of the collateral securities, including the risk of a possible decline in the value of the collateral securities during the period in which the fund seeks to assert its rights. The Funds’ investment adviser reviews the value of the collateral and the creditworthiness of those banks and dealers with which the Funds enter into repurchase agreements to evaluate potential risks.

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 except High Yield, which declares and pays dividends monthly. Net capital gain distributions, which are calculated at the Fund level, are declared and paid after the end of the tax year in which the gain is realized. An additional distribution may be made 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.

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.

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

Annual Report to Shareholders

116

Other

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

   No provision for federal income or excise taxes is required since each Fund intends to continue to qualify as a regulated investment company and distribute substantially all of its taxable income and capital gain to its shareholders. Because federal income tax regulations differ from accounting principles generally accepted in the United States of America, income and capital gain distributions determined in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Accordingly, the character of distributions and composition of net assets for tax purposes differ from those reflected in the accompanying financial statements.

   Distribution during the years ended December 31, 2005 and 2004, were characterized as follows for tax purposes:

	Core Bond				High Yield				Investment Grade
	2005		2004		2005		2004		2005		2004
Ordinary income	$	2,410	$	1,183	$	14,058	$	14,760	$	19,613	$	19,210
Long-term capital gains		—		—		—		—		2,957		8,438
Total Distribution	$	2,410	$	1,183	$	14,058	$	14,760	$	22,570	$	27,648

	Limited				Government
	Duration				Money Market
	2005		2004		2005		2004
Ordinary income	$	9,089	$	11,006	$	9,501	$	2,864
Long-term capital gains		—		—		—		—
Total Distribution	$	9,089	$	11,006	$	9,501	$	2,864

   Pursuant to federal income tax regulations applicable to investment companies, the Funds have elected to treat net capital losses realized between November 1 and December 31 of each year (“post-October loss”) as occurring on the first day of the following tax year. For the year ended December 31, 2005, realized capital losses reflected in the accompanying

Annual Report to Shareholders

117

financial statements, as shown in the table on the next page, will not be recognized for federal income tax purposes until 2006.

   The tax basis components of net assets at December 31, 2005, were:

	Core			High			Investment			Limited			Government
	Bond			Yield			Grade			Duration			Money Market
Unrealized appreciation	$	796		$	3,430		$	10,928		$	442		$	—
Unrealized depreciation		(1,507	)		(5,368	)		(8,920	)		(5,363	)		—
Net unrealized appreciation/depreciation		(711	)		(1,938	)		2,008			(4,921	)		—
Undistributed ordinary income		8			—			72			—			—
Undistributed long-term capital gains		—			—			14			—			—
Capital loss carryforwards		(582	)		(154,639	)		—			(8,924	)		—
Post-October loss push and other loss deferrals		(262	)		(12	)		(345	)		(756	)		—
Paid-in capital		73,372			326,377			385,021			252,311			406,408
Net assets	$	71,825		$	169,788		$	386,770		$	237,710		$	406,408

   The Funds intend to retain realized capital gains that may be offset against available capital loss carryforwards for federal income tax purposes. At December 31, 2005, the Funds had capital loss carryforwards as follows:

Expiration					High			Limited
Date		Core Bond			Yield			Duration
	2008	$	—		$	(35,788	)	$	(3,833	)
	2009		—			(83,723	)		—
	2010		—			(32,488	)		—
	2011		—			(2,556	)		—
	2012		—			—			(4,536	)
	2013		(582	)		(84	)		(555	)

   At December 31, 2003, there were no capital loss carryforwards for Government Money Market and Investment Grade.

   For financial reporting purposes, capital accounts and distributions to shareholders are adjusted to reflect the tax character of permanent book/tax differences. For the year ended December 31, 2005, the Funds recorded the following permanent reclassifications, which

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

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relate primarily to reclassifications of gains/losses on paydown, securities and swap securities and distribution in excess. Results of operations and net assets were not affected by these reclassifications.

	Core			High			Investment			Limited			Government
	Bond			Yield			Grade			Duration			Money Market
Undistributed net investment income	$	67		$	34		$	1		$	391		$	—
Accumulated realized gain/(loss)		(67	)		36			(1	)		(376	)		—
Paid-in capital		—			(70	)		—			(15	)		—

   At December 31, 2005, the cost of investments for federal income tax purposes was $94,037 for Core Bond, $167,936 for High Yield, $380,125 for Investment Grade, $259,319 for Limited Durations, and $387,258 for Government Money Market.

3. Financial Instruments:

Options and Futures

   As part of their investment programs, Core Bond, High Yield, Investment Grade and Limited Duration may utilize options and futures. Options may be written (sold) or purchased by these 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.

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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 risk in writing a covered call option is that a Fund may forgo the opportunity of profit if the market price of the underlying security increases and the option is exercised. The 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 to perform.

   Activity in written call and put options during the year ended December 31, 2005, was as follows:

Core Bond Fund:

	Calls						Puts
	Actual						Actual
	Contracts			Premiums			Contracts			Premiums
Options outstanding at December 31, 2004		76		$	57			105		$	97
Options written		600,587			393			527			364
Options closed		(218	)		(154	)		(293	)		(223	)
Options expired		(600,296	)		(216	)		(236	)		(173	)
Options exercised		(45	)		(22	)		(35	)		(22	)
Options outstanding at December 31, 2005		104		$	58			68		$	43

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

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   Upon entering into a futures contract, the 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 and the Fund recognizes a realized 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, 2005, for Core Bond, Investment Grade, and Limited Duration are listed at the end of each Fund’s portfolio of investments.

Forward Currency Exchange Contracts

   As part of its investment program, High Yield may utilize forward currency exchange contracts. The nature and risks of these financial instruments and the reasons for using them are set forth more fully in the Corporation’s prospectus and statement of additional information.

   Forward foreign currency contracts are marked-to-market daily using forward foreign currency exchange rates supplied by an independent pricing service. The change in a contract’s market value is recorded by High Yield as an unrealized gain or loss. When the contract is closed or delivery is taken, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.

   The use of forward foreign currency contracts does not eliminate fluctuations in the underlying prices of the Fund’s securities, but it does establish a rate of exchange that can be achieved in the future. These forward foreign currency contracts involve market risk in excess of amounts reflected in the financial statements. Although forward foreign currency contracts used for hedging purposes limit the risk of loss due to a decline in the value of the hedged currency, they also limit any potential gain that might result should the value of the currency increase. In addition, the Fund could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts. The Fund’s adviser will enter into forward foreign currency contracts only with parties approved by the Board of Directors

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because there is a risk of loss to the Fund if the counterparties do not complete the transaction.

   At December 31, 2005, High Yield had no open forward currency exchange contracts.

Swap Agreements

   The use of swaps involves risks that are different from those associated with ordinary portfolio securities transactions. Swap agreements may be considered to be illiquid. Although a Fund will not enter into any swap agreement unless the adviser believes that the other party to the transaction is creditworthy, a Fund does bear the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of the agreement counterparty. The nature and risks of these financial instruments and the reasons for using them are set forth more fully in the Corporation’s prospectus and statement of additional information.

   The Funds may invest in different types of swap agreements. Credit default swap contracts represent the exchange of commitments to provide a level of credit protection for a commitment to receive interest at a fixed rate based on the potential risk of default of the relevant underlying issuer. Interest rate swap contracts involve the exchange of commitments to pay and receive interest based on a notional principal amount. Total return swap contracts involve the exchange of commitments to pay and receive interest based on the total return of an index over a specified period.

   At December 31, 2005, there were no swap contracts outstanding for any fund.

4. Transactions With Affiliates:

   Each Fund has a 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. LMFA has contractually agreed to waive its fees to the extent each Fund’s expenses (exclusive of taxes, interest, brokerage and extraordinary expenses) exceed during any month certain annual rates. These contractual expense limitations for Core Bond, Investment Grade and Limited Duration are due to expire on April 30, 2006. Pursuant to an agreement approved by the Board, each Fund has 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. LMFA has also contractually agreed to waive its fees (and to the extent necessary, bear other expenses) from December 1, 2005 through December 31, 2006, to the extent that expenses of Government Money Market (exclusive of interest, taxes, brokerage commissions, and extraordinary expenses) exceed an annual rate of 0.72%. At December 31, 2005, High Yield has no expense limitation. The following chart shows

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

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annual rates of management fees, expense limits, and management fees waived, for each Fund:

						Year Ended
						December 31, 2005
				Expense		Management Fees
Fund		Management Fee		Limitation		Waived
Core Bond			0.45%		1.00%	$	(243	)
High Yield
	— Primary Class		0.65%		None		—
	— Institutional Class		0.65%		None		—
Investment Grade
	— Primary Class		0.60%		1.00%		(1,150	)
	— Institutional Class		0.60%		0.50%		(47	)
Limited Duration
	— Primary Class		0.45%		1.00%		(388	)
	— Institutional Class		0.45%		0.50%		(22	)
Government Money Market		0.50% – 0.40% A			0.72%B		—

^A Government Money Market’s management fee varies with the level of the Fund’s average daily net assets. The management fee is calculated as follows:

Average Net Assets	Advisory Fee Rate
$0 – $500 million		0.50%
next $500 million		0.475%
next $500 million		0.45%
next $500 million		0.425%
thereafter		0.40%

^B As of December 1, 2005.

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   Western Asset Management Company (“Adviser”) serves as investment adviser to the Funds. The Adviser is responsible for the actual investment activity of each Fund. 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 Core Bond; 77% of the management fee received by LMFA for High Yield; 40% of the management fee received for Investment Grade; and 30% for Government Money Market. For Limited Duration, LMFA pays the Adviser a fee, computed daily and payable monthly, of 0.20% of its average daily net assets, not to exceed the fee received by LMFA.

	Distribution		Service
	Fee		Fee
Core Bond		0.25%		0.25%
High Yield		0.25%		0.25%
Investment Grade		0.25%		0.25%
Limited Duration		0.25%		0.25%
Government Money Market		N/A		0.10%

   On December 1, 2005, Legg Mason Investor Services, LLC (“LMIS”) replaced Legg Mason Wood Walker, Inc. (“Legg Mason”) as Distributor. The compensation arrangements between the Funds and LMIS are identical to the previous arrangements between the Funds and Legg Mason. 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, 2005, Legg Mason waived $29 of the Core Bond’s distribution and service fees.

   LM Fund Services, Inc. (“LMFS”), a registered transfer agent, has an agreement with the Funds’ transfer agent to assist it with some of its duties. For this assistance, the transfer agent paid LMFS the following amounts during the year ended December 31, 2005: Core Bond, $18; High Yield, $51; Investment Grade, $80; Limited Duration, $51; and Government Money Market, $83.

   LMFA, the Adviser, LMIS and LMFS 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 fund until distributed in accordance with the Plan.

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

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5. Line of Credit:

   The Funds, excluding Government Money Market, but including 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 federal funds rate plus the federal funds rate margin. For the year ended December 31, 2005, the Funds had no borrowings under the credit agreement.

6. Fund Share Transactions:

   At December 31, 2005, there were 2,000,000 shares authorized at $.001 par value for all classes of each portfolio of the Corporation. At December 31, 2005, for U.S. Government Money Market, net assets consisted of paid-in capital of $406,408 and accumulated net realized gain of $1. Share transactions for the Funds were as follows:

		Core Bond
		Years Ended
		12/31/05			12/31/04A
Shares
	Sold		3,168			7,274
	Reinvestment of Distributions		226			111
	Repurchased		(2,404	)		(977	)
	Net Change		990			6,408
Amount
	Sold	$	31,295		$	72,052
	Reinvestment of Distributions		2,215			1,103
	Repurchased		(23,672	)		(9,621	)
Net Change		$	9,838		$	63,534

^A For the period February 27, 2004 (commencement of operations) to December 31, 2004.

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		High Yield
		Primary Class						Institutional Class
		Years Ended						Years Ended
		12/31/05			12/31/04			12/31/05			12/31/04
Shares
	Sold		2,693			4,287			855			608
	Reinvestment of Distributions		1,090			1,211			94			61
	Repurchased		(8,012	)		(8,220	)		(495	)		(446	)
	Net Change		(4,229	)		(2,722	)		454			223
Amount
	Sold	$	24,689		$	39,099		$	7,866		$	5,538
	Reinvestment of Distributions		9,912			10,986			857			558
	Repurchased		(73,219	)		(74,487	)		(4,549	)		(4,056	)
	Net Change	$	(38,618	)	$	(24,402	)	$	4,174		$	2,040

		Investment Grade
		Primary Class						Institutional Class
		Years Ended						Years Ended
		12/31/05			12/31/04			12/31/05			12/31/04
Shares
	Sold		6,762			7,793			1,449			557
	Reinvestment of Distributions		1,834			2,253			92			58
	Repurchased		(10,700	)		(10,301	)		(521	)		(213	)
	Net Change		(2,104	)		(255	)		1,020			402
Amount
	Sold	$	72,007		$	84,747		$	15,490		$	6,057
	Reinvestment of Distributions		19,415			24,367			970			631
	Repurchased		(113,694	)		(111,468	)		(5,546	)		(2,318	)
	Net Change	$	(22,272	)	$	(2,354	)	$	10,914		$	4,370

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

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		Limited Duration
		Primary Class						Institutional Class
		Years Ended						Years Ended
		12/31/05			12/31/04			12/31/05			12/31/04
Sold			3,474			5,553			1,392			499
	Reinvestment of Distributions		743			910			49			33
	Repurchased		(9,200	)		(10,970	)		(577	)		(345	)
	Net Change		(4,983	)		(4,507	)		864			187
Amount
	Sold	$	35,740		$	58,022		$	14,310		$	5,222
	Reinvestment of Distributions		7,624			9,486			510			346
	Repurchased		(94,454	)		(114,563	)		(5,924	)		(3,611	)
	Net Change	$	(51,090	)	$	(47,055	)	$	8,896		$	1,957

		U.S. Government
		Money Market
		Years Ended
		12/31/05			12/31/04
Shares
	Sold		1,334,100			1,461,762
	Reinvestment of Distributions		9,188			2,616
	Repurchased		(1,329,564	)		(1,515,575	)
	Net Change		13,724			(51,197	)
Amount
	Sold		1,334,100		$	1,461,762
	Reinvestment of Distributions		9,188			2,616
	Repurchased		(1,329,564	)		(1,515,575	)
	Net Change	$	13,724		$	(51,197	)

7. Subsequent Event:

   On January 3, 2006, the Board of Directors of the Legg Mason U.S. Government Money Market Portfolio approved, subject to shareholder approval, a Plan of Liquidation, Dissolution and Termination whereby all the Fund’s assets would be liquidated and the Fund would subsequently be dissolved. A special meeting of the shareholders is scheduled for February 24, 2006, and the estimated time of liquidation is February 27, 2006.

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Report of Independent Registered Public Accounting Firm

To the Shareholders of Core Bond Fund, High Yield Portfolio, Investment Grade Income Portfolio, Limited Duration Bond Portfolio, and U.S. Government Money Market Portfolio, and to the Directors of Legg Mason Income Trust, Inc.:

   In our opinion, the accompanying statements of assets and liabilities for Core Bond Fund, High Yield Portfolio, Investment Grade Income Portfolio, and Limited Duration Bond Portfolio, including the portfolio of investments, and the statement of net assets for U.S. Government Money Market Portfolio, 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 Core Bond Fund, High Yield Portfolio, Investment Grade Income Portfolio, Limited Duration Bond Portfolio, and U.S. Government Money Market Portfolio (comprising Legg Mason Income Trust, Inc., hereafter referred to as the “Funds”) at December 31, 2005, the results of each of their operations, the changes in each of their net assets and the financial highlights for each of the fiscal 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, 2005 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

   As explained in Note 7, the Board of Directors of U.S. Government Money Market Portfolio approved, subject to shareholder approval, a Plan of Liquidation, Dissolution and Termination whereby all the U.S. Government Money Market Portfolio’s assets would be liquidated and U.S. Government Money Market Portfolio would subsequently be dissolved.

PricewaterhouseCoopers LLP

Baltimore, Maryland

February 15, 2006

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128

Directors and Officers

   The table below provides information about each of 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, c/o Legal and Compliance Department, 23rd Floor, Baltimore, Maryland 21202.

		Office
	Position(s)	and
	Held with	Length			Other
Name	the	of Time			Directorships
and Year of Birth	Corporation	ServedA		Number of Funds in Fund Complex Overseen	Held	Principal Occupation(s) During the Past Five Years
INDEPENDENT DIRECTORS:B
Hearn, Ruby P. 1940	Director		Since 2004	Director/Trustee of all Legg Mason funds (consisting of 23 portfolios).	None	Senior Vice President Emerita of the Robert Wood Johnson Foundation since 2001. Formerly: Senior Vice President of The Robert Wood Johnson Foundation (1996-2001).
Lehman, Arnold L. 1944	Director		Since 1987	Director/Trustee of all Legg Mason funds (consisting of 23 portfolios).	None	Director of The Brooklyn Museum of Art 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	Director/Trustee of all Legg Mason funds (consisting of 23 portfolios).	Chairman of the Board of Directors of Cap-a-Laige Ltd. (management company for charitable trust); Director of Cheyne Capital International Limited (investment advisory firm); Director of Cheyne Property Holdings Limited (real estate).	Retired. Director of Bermuda SMARTRISK (non-profit) since 2001. Formerly: Chief Investment Officer of ACE Limited (insurance) (1986-2000).
McGovern, Jill E. 1944	Director		Since 1989	Director/Trustee of all Legg Mason funds (consisting of 23 portfolios).	None	Chief Executive Officer of The Marrow Foundation since 1993. Formerly: Executive Director of the Baltimore International Festival (1991-1993); Senior Assistant to the President of The Johns Hopkins University (1986-1990).

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		Office
	Position(s)	and
	Held with	Length			Other
Name	the	of Time			Directorships
and Year of Birth	Corporation	ServedA		Number of Funds in Fund Complex Overseen	Held	Principal Occupation(s) During the Past Five Years
Mehlman, Arthur S. 1942	Director		Since 2002	Director/Trustee of all Legg Mason funds (consisting of 23 portfolios).	Trustee of The Royce Family of Funds (consisting of 23 portfolios); Director of Municipal Mortgage & Equity, LLC.	Retired. Formerly: Partner, KPMG LLP (international accounting firm) (1972-2002).
O’Brian, G. Peter 1945	Director		Since 2002	Director/Trustee of all Legg Mason funds (consisting of 23 portfolios).	Trustee of The Royce Family of Funds (consisting of 23 portfolios); Director of Technology Investment Capital Corp.	Retired. Trustee Emeritus of Colgate University; Board member of Hill House, Inc. (residential home care). Formerly: Managing Director, Equity Capital Markets Group of Merrill Lynch & Co. (1971-1999).
Rowan, S. Ford 1943	Director		Since 2002	Director/Trustee of all Legg Mason funds (consisting of 23 portfolios).	None	Consultant, Rowan & Blewitt Inc. (management consulting); Chairman, National Center for Critical Incident Analysis, National Defense University, since 2004; Director of Santa Fe Institute (scientific research institute) since 1999.
Tarola, Robert M. 1950	Director		Since 2004	Director/Trustee of all Legg Mason funds (consisting of 23 portfolios).	None	Senior Vice President and Chief Financial Officer of W. R. Grace & Co. (specialty chemicals) since 1999. Formerly: Chief Financial Officer of MedStar Health, Inc. (healthcare) (1996-1999); Partner, Price Waterhouse, LLP (accounting and auditing) (1984-1996).
INTERESTED DIRECTORS:C
Curley Jr., John F. 1939	Chairman and Director		Since 1987	Chairman and Director/Trustee of all Legg Mason funds (consisting of 23 portfolios).	None	Chairman of the Board of all Legg Mason funds. Formerly: Vice Chairman and Director of Legg Mason, Inc. and Legg Mason Wood Walker, Incorporated (1982-1998); Director of Legg Mason Fund Adviser, Inc. (1982-1998) and Western Asset Management Company (1986-1998) (each a registered investment adviser).

Directors and Officers — Continued

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		Office
	Position(s)	and
	Held with	Length			Other
Name	the	of Time			Directorships
and Year of Birth	Corporation	ServedA		Number of Funds in Fund Complex Overseen	Held	Principal Occupation(s) During the Past Five Years
Fetting, Mark R. 1954	President and Director	President since 2001 and Director since 2002		President and Director/Trustee of all Legg Mason funds (consisting of 23 portfolios).	Trustee of The Royce Family of Funds (consisting of 23 portfolios).	Senior Executive Vice President of Legg Mason, Inc.; Director and/or officer of various Legg Mason, Inc. affiliates since 2000. Formerly: 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; Vice President, T. Rowe Price Group, Inc.
EXECUTIVE OFFICERS:D
Karpinski, Marie K. 1949	Vice President and Treasurer		Since 1987	Vice President and Treasurer of all Legg Mason funds (consisting of 23 portfolios).	None	Vice President and Treasurer of all Legg Mason funds. Vice President and Treasurer of Legg Mason Fund Adviser, Inc. and Western Asset Funds, Inc.; Treasurer and Principal Financial and Accounting Officer of Western Asset Income Fund, Western Asset Premier Bond Fund, Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund, and Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund 2.
Merz, Gregory T. 1958	Vice President and Chief Legal Officer		Since 2003	Vice President and Chief Legal Officer of all Legg Mason funds (consisting of 23 portfolios).	None	Vice President and Deputy General Counsel of Legg Mason, Inc. since 2003. Formerly: Associate General Counsel, Fidelity Investments (1993-2002).

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		Office
	Position(s)	and
	Held with	Length			Other
Name	the	of Time			Directorships
and Year of Birth	Corporation	ServedA		Number of Funds in Fund Complex Overseen	Held	Principal Occupation(s) During the Past Five Years
Olmert, Amy M. 1963	Vice President and Chief Compliance Officer		Since 2004	Vice President and Chief Compliance Officer of all Legg Mason funds (consisting of 23 portfolios).	None	Senior Vice President of Legg Mason, Inc. since 2004. Chief Compliance Officer of Western Asset Funds, Inc., Western Asset Income Fund, Western Asset Premier Bond Fund, Western Asset/ Claymore U.S. Treasury Inflation Protected Securities Fund, and Western Asset/ Claymore U.S. Treasury Inflation Protected Securities Fund 2 since 2004. Formerly: Managing Director, Deutsche Asset Management (1997-2004).

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’S

WEBSITE (http://www.sec.gov)

^A Directors of the Fund serve a term of indefinite length until their resignation or removal and stand for re-election by shareholders only as and when required by the 1940 Act. Officers of the Funds 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. Curley and Mr. Fetting are considered to be interested persons (as defined in the 1940 Act) of the Funds by virtue of being employees of Legg Mason Wood Walker, Incorporated, the principal underwriter of the Funds, and as owners of common stock of Legg Mason, Inc.
D	Officers of the Fund are interested persons (as defined in the 1940 Act).

Directors and Officers — Continued

Annual Report to Shareholders

132

Board Consideration of Legg Mason Income Trust’s Investment Advisory Agreement and Management Agreement

   At its November 2005 meeting, the Board of Directors, including all of the Independent Directors, approved the continuation of the Management Agreements between Legg Mason Fund Adviser, Inc. (the “Manager”) and Income Trust on behalf of each of its separate series and the Investment Advisory Agreements between the Manager and Western Asset Management Company (the “Adviser”) for each separate series of Income Trust (each an “Agreement”). In voting to approve the continuation of each Agreement, the Board considered whether continuance would be in the best interests of each series of Income Trust 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 each series of Income Trust. 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 interests of each series of Income Trust and its shareholders.

   Prior to the Board action, the Independent Directors met as a committee to consider its recommendation as to continuance of each Agreement. As part of the process to consider each Agreement, legal counsel to Income Trust 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 meeting as a committee held additional meetings in September and October 2005 at which materials relating to each Agreement were reviewed and analyzed. The Independent Directors also retained an independent consultant 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 series of Income Trust or others submit or 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 they have sought to strengthen and enhance themselves.

   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 series of Income Trust to the average of an appropriate Lipper category and a peer group of investment companies pursuing similar strategies, all over

Annual Report to Shareholders

133

multiple time periods. The Board also considered the performance of each series of Income Trust in the context of the risk undertaken by the portfolio manager. The Board noted the performance record of each series of Income Trust and the measures that the Manager and the Adviser were taking in an effort to maintain or achieve attractive long-term performance. The Board also considered the level of service provided by the Manager to Income Trust, including oversight of the transfer agent, the custodian, fund legal counsel, and investment adviser and fund compliance, and preparation of regulatory filings. The Board considered the Adviser’s procedures for executing portfolio transactions for each series of Income Trust. The Board also reviewed the Adviser’s report on its policies and procedures for the selection of brokers and dealers.

   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 series of Income Trust and profitability for the Manager and its affiliates from their overall association with each series of Income Trust. The Board reviewed information about the advisory fee schedule and overall expense ratio of each series of Income Trust and comparable fee schedules and expense ratios of a peer group of funds. Although Limited Duration Bond Portfolio, Investment Grade Income Portfolio, High Yield Portfolio and Core Bond Fund had not yet grown to a size where any potential economies of scale might become apparent, the Board satisfied itself that the fees paid by each of these series at its current asset level are appropriate and noted the Manager’s agreement to waive fees for Limited Duration Bond Portfolio, Investment Grade Income Portfolio and Core Bond Fund. In considering whether any economies of scale experienced by the Manager and the Adviser in providing services to U.S. Government Money Market Portfolio were shared with that series, the Board further noted that the advisory fee structure for that series provides for a reduction of the effective fee rate as asset levels increase. The Board also compared the advisory fee schedule for each series of Income Trust to the advisory fees charged by 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 Adviser to each series of Income Trust and to the other accounts. Finally, the Board considered the benefits accruing to the Manager, the Adviser and their affiliates by virtue of their relationship to each series of Income Trust.

Fund Information

Investment Manager

Legg Mason Fund Adviser, Inc.
Baltimore, MD

Investment Adviser

Western Asset Management Company
Pasadena, PA

Board of Directors

John F. Curley, Jr., Chairman
Mark R. Fetting, 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 Treasurer
Gregory T. Merz, Vice President and Chief Legal Officer
Amy M. Olmert, Vice President and Chief Compliance Officer
Richard M. Wachterman, Secretary
Erin K. Morris, Assistant Treasurer

Transfer and Shareholder Servicing Agent

Boston Financial Data Services
Braintree, MA

Custodian

State Street Bank & Trust Company
Boston, MA

Counsel

Kirkpatrick & Lockhart Nicholson Graham 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
U.S. Small-Capitalization Value Trust
Value Trust
Specialty Funds
Balanced Trust
Financial Services Fund
Opportunity Trust
Global Funds
Emerging Markets Trust
Global Income Trust
International Equity Trust
Taxable Bond Funds
Core Bond Fund
High Yield Portfolio
Investment Grade Income Portfolio
Limited Duration Bond Portfolio
Tax-Free Bond Funds
Maryland Tax-Free Income Trust
Pennsylvania Tax-Free Income Trust
Tax-Free Intermediate-Term Income 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.

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.

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.leggmasonfunds.com/about.

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.

You should consider a fund’s investment objectives, risks, charges, and expenses carefully before investing. For a prospectus, which contains this and other information on any Legg Mason fund, call your financial adviser, call 1-800-577-8589, or visit www.leggmasonfunds.com. Please read the prospectus carefully before investing.

Legg Mason Funds
For Primary Class Shareholders
c/o BFDS
P.O. Box 55214
Boston, MA 02205-8504
800-822-5544
www.leggmasonfunds.com Legg Mason Institutional Funds
For FI and I Class Shareholders
P.O. Box 17635
Baltimore, MD 21297-1635
888-425-6432
www.lminstitutionalfunds.com

Legg Mason Investor Services, LLC, Distributor

A Legg Mason, Inc. subsidiary

LMF-056 (12/05)

Item 2. Code of Ethics Applicable to Registrant’s Principal Executive Officer and Principal Financial Officer

(a) Legg Mason Income Trust, Inc. (“Registrant”) has adopted a Code of Ethics, as defined in the instructions to Form N-CSR that applies to the Registrant’s President and Treasurer, which is designed to deter wrongdoing and to promote:

• Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

• Full, fair, accurate, timely and understandable disclosure in reports and documents the Registrant files with, or submits to, the SEC or in other public communications made by the Registrant;

• Compliance with applicable governmental laws, rules and regulations;

• Prompt internal reporting of violations of the Code of Ethics to an appropriate person or persons identified in the Code of Ethics; and

• Accountability for adherence to the Code of Ethics.

(b)	No response required.
(c)	Not applicable.
(d)	The Registrant has not granted a waiver, including an implicit waiver, from a provision of the Code of Ethics to the Registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions during the period covered by this report.
(e)	Not applicable.
(f)	A copy of the Code of Ethics is attached as Exhibit 12(a)(1) to this Form N-CSR.

Item 3. Audit Committee Financial Expert

(a)	(1	)	The Registrant’s board of directors has determined that the Registrant has at least one audit committee financial expert serving on its audit committee.
(a)	(2	)	The audit committee financial experts are Mr. Arthur S. Mehlman and Mr. Robert M. Tarola. They are “independent” as defined in Form N-CSR Item 3(a)(2).

Page 2 of 6

Item 4. Principal Accounting Fees and Services

(a)	Audit Fees
	Fiscal Year Ended December 31, 2004 – $139,220
	Fiscal Year Ended December 31, 2005 – $162,725
(b)	Audit-Related Fees
	There were no additional fees billed to the Registrant during either of the last two fiscal years in addition to those disclosed in Item (a) above.
	PricewaterhouseCoopers LLP did not bill fees for assurance and related services that required preapproval by the Audit Committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the Registrant’s last two fiscal years.
(c)	Tax Fees
	Fiscal Year Ended December 31, 2004 – $3,480
	Fiscal Year Ended December 31, 2005 – $5,250
	Services include preparation of federal and state income tax returns and preparation of excise tax returns.
	PricewaterhouseCoopers LLP did not bill fees for tax services that required preapproval by the Audit Committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the Registrant’s last two fiscal years.
(d)	All Other Fees
	There were no fees billed to the Registrant during either of the last two fiscal years in addition to those disclosed in items (a) through (c) above.
	PricewaterhouseCoopers LLP did not bill fees for services not included in Items 4(a) through (c) above that required preapproval by the Audit Committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the Registrant’s last two fiscal years.

(e)	(1	)	The Audit Committee’s policy is to delegate to its Chairperson the authority to preapprove items prior to the next meeting of the Committee. Such preapprovals are reported at the next quarterly meeting of the Audit Committee.
	(2	)	There were no services provided to the Registrant that were approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

PricewaterhouseCoopers LLP did not bill fees for services where pre-approval by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X during the Registrant’s last two fiscal years.

Page 3 of 6

(f)	The percentage of hours expended by the principal accountant’s engagement to audit the Registrant’s financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountants’ full-time, permanent employees was zero.
(g)	Non-Audit Fees for services rendered to Registrant or Registrant’s investment manager and any entity controlling, controlled by, or under common control with the investment manager.
	Fiscal Year Ended December 31, 2004 – $372,631
	Fiscal Year Ended December 31, 2005 – $279,508
(h)	The members of the Registrant’s Audit Committee have considered whether the non-audit services that were rendered by the Registrant’s principal accountant to the Registrant’s investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the Registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X are compatible with maintaining the principal accountant’s independence.

Item 5. Audit Committee of Listed Registrants

     The Registrant is not a listed issuer as defined in Rule 10A-3 under the Securities Exchange Act of 1934.

Item 6. Schedule of Investments

     The schedule of investments in securities of unaffiliated issuers is included in the annual report.

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies

     Not applicable.

Item 8. Portfolio Managers of Closed-End Management Investment Companies

     Not applicable.

Item 9. Purchases of Equity Securities by Closed-End Management Investment Companies and Affiliated Purchasers

     Not applicable.

Page 4 of 6

Item 10. Submission of Matters to a Vote of Security Holders

     The Nominating Committee will accept recommendations for nominations from shareholders. Shareholders may forward recommendations to the Fund Secretary at 100 Light Street, 23rd Floor, Baltimore, Maryland 21202, Attn: Fund Secretary.

Item 11. Controls and Procedures

(a)

The Registrant’s principal executive and principal financial officers have concluded, based on their evaluation of the effectiveness of the design and operation of the Registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) as of a date within 90 days of the filing date of this report, that the Registrant’s disclosure controls and procedures are reasonably designed to ensure that information required to be disclosed by the Registrant on Form N-CSR is recorded, processed, summarized and reported within the time periods specified in the SEC’s rule and forms and that information required to be disclosed by the Registrant in the reports that it files or submits on Form N-CSR is accumulated and communicated to the Registrant’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

(b)

There were no changes in the Registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) during the Registrant’s second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

Item 12. Exhibits

(a) File the exhibits listed below as part of this Form.

(1)	The Registrant’s Code of Ethics applicable to Registrant’s principal executive officer and principal financial officer is attached hereto.
(2)	Separate certifications for the Registrant’s chief executive officer and chief financial officer as required by Rule 30a-2(a) under the Investment Company Act of 1940 are attached hereto.

(b) Separate certifications for the Registrant’s chief executive officer and chief financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.

Page 5 of 6

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Legg Mason Income Trust, Inc.

By:	Mark R. Fetting
Mark R. Fetting
President, Legg Mason Income Trust, Inc.

Date: March 3, 2006

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

By:	Mark R. Fetting
Mark R. Fetting
President, Legg Mason Income Trust, Inc.

Date: March 3, 2006

By:	Marie K. Karpinski
Marie K. Karpinski
Chief Financial Officer, Legg Mason Income Trust, Inc.
Date:		March 2, 2006

Page 6 of 6

EX-99.CODE.ETH

LEGG MASON FUNDS
CODE OF ETHICS
FOR
PRINCIPAL EXECUTIVE AND FINANCIAL OFFICERS

I. Covered Officers and Purpose of the Code

Legg Mason Funds’ code of ethics (the “Code”) for the investment companies within the Legg Mason family of mutual funds (each a “Fund,” and collectively, the “Funds”) applies to each Fund’s Principal Executive Officer and Principal Financial Officer (the “Covered Officers” each of whom are set forth in Exhibit A) for the purpose of promoting:

• honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

• full, fair, accurate, timely and understandable disclosure in reports and documents that a registrant files with, or submits to, the Securities and Exchange Commission (“SEC”) and in other public communications made by the Funds;

• compliance with applicable laws and governmental rules and regulations;

• the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and

• accountability for adherence to the Code.

Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest.

II. Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest

Overview. A “conflict of interest” occurs when a Covered Officer’s private interest interferes with the interests of, or his or her service to, a Fund. For example, a conflict of interest would arise if a Covered Officer, or a member of his or her family, receives improper personal benefits as a result of his or her position with a Fund.

Certain conflicts of interest arise out of the relationships between Covered Officers and a Fund and already are subject to conflict of interest provisions in the Investment Company Act of 1940 (“Investment Company Act”) and the Investment Advisers Act of 1940 (“Investment Advisers Act”). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with a Fund because of their status as “affiliated persons” of the Fund. The Funds’ and the investment advisers’ compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code.

Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between a Fund and an investment adviser of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their

duties (whether formally for a Fund or for the adviser, or for both), be involved in establishing policies and implementing decisions that will have different effects on the adviser and the Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationship between a Fund and an adviser and is consistent with the performance by the Covered Officers of their duties as officers of the Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the Funds’ Boards of Directors/Trustees (“Boards”) that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes.

Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of a Fund.

« « « « «

Each Covered Officer must:

• not use his or her personal influence or personal relationships improperly to influence financial reporting by a Fund;

• not cause a Fund to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit the Fund;

             There are some actual or potential conflict of interest situations that, if material, should always be discussed with a chief legal officer that has been appointed by the Board of the Funds (“Chief Legal Officer”). Examples of these include:

• service as a director on the board of any public company (other than the Funds or their investment advisers or any affiliated person thereof);

• the receipt of any non-nominal gifts (i.e., in excess of $100);

• the receipt of any entertainment from any company with which a Fund has current or prospective business dealings unless such entertainment is business-related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety;

• any ownership interest in, or any consulting or employment relationship with, any of the Funds’ service providers (other than their investment advisers, or principal underwriter, or any affiliated person thereof);

• a direct or indirect financial interest in commissions, transaction charges or spreads paid by a Fund for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer’s employment, such as compensation or equity ownership.

2

III. Disclosure and Compliance

• Each Covered Officer should familiarize him or herself with the disclosure requirements generally applicable to the Funds;

• each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about a Fund to others, whether within or outside the Fund, including to the Fund’s directors and auditors, and to governmental regulators and self-regulatory organizations;

• each Covered Officer should, to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the Funds and the advisers with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds; and

• it is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations.

IV. Reporting and Accountability

Each Covered Officer must:

• upon adoption of the Code (or thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Board that he or she has received, read, and understands the Code;

• annually thereafter affirm to the Board that he or she has complied with the requirements of the Code;

• not retaliate against any other Covered Officer or any employee of the Funds or their advisers or any affiliated persons thereof or service providers of the Funds for reports of potential violations that are made in good faith; and

• notify the Chief Legal Officer promptly if he or she knows of any violation of this Code. Failure to do so is itself a violation of this Code.

• report at least annually any employment position, including officer or directorships, held by the Covered Officer or any immediate family member of a Covered Officer with affiliated persons of the Funds.

• report at least annually any employment position, including officer or directorships, held by the Covered Officer or any immediate family member of a Covered Officer with a service provider to the fund.

The Chief Legal Officer is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation. However, any approvals or waivers sought by a Covered Officer will be considered by the Code of Ethics Review Committee (the “Committee”) responsible for oversight of the Funds code of ethics under Rule 17j-1 under the

3

Investment Company Act. If a Covered Officer seeking an approval or waiver sits on the Committee, the Covered Person shall recuse him or herself from any such deliberations. Any approval or waiver granted by the Committee will be reported promptly to the Chair of the Audit Committees of the Funds.

The Funds will follow these procedures in investigating and enforcing this Code:

• the Chief Legal Officer will take all appropriate action to investigate any potential violations reported to him;

• if, after such investigation, the Chief Legal Officer believes that no violation has occurred, the Chief Legal Officer is not required to take any further action;

• any matter that the Chief Legal Officer believes is a violation will be reported to the Committee;

• if the Committee concurs that a violation has occurred, it will inform the Board, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer;

• the Committee will be responsible for granting waivers, as appropriate; and

• any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules.

V. Other Policies and Procedures

This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Funds, the Funds’ advisers, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The Funds’ and their investment advisers’ and principal underwriter’s codes of ethics under Rule 17j-1 under the Investment Company Act are separate requirements applying to the Covered Officers and others, and are not part of this Code.

VI. Amendments

Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of the Board.

VII. Confidentiality

All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than

4

the appropriate Board and Fund counsel, and the board of directors and fund counsel of any other investment company for whom a Covered Officer serves in a similar capacity.

VIII. Internal Use

The Code is intended solely for the internal use by the Funds and does not constitute an admission, by or on behalf of any Fund, as to any fact, circumstance, or legal conclusion.

Adopted: September, 2004
Revised:

5

LEGG MASON FUNDS
CODE OF ETHICS

Exhibit A

Principal Executive Officer: Mark R. Fetting

Principal Financial Officer: Marie K. Karpinski

6

EX-99.CERT

Certification Filed as Exhibit 12(a)(2) to Form N-CSR

CERTIFICATION

I, Mark R. Fetting, certify that:

1. I have reviewed this report on Form N-CSR of Legg Mason Income Trust, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 3, 2006

/s/ Mark R. Fetting

Mark R. Fetting

President

Legg Mason Income Trust, Inc.

Certification Filed as Exhibit 12(a)(2) to Form N-CSR

CERTIFICATION

I, Marie K. Karpinski, certify that:

1. I have reviewed this report on Form N-CSR of Legg Mason Income Trust, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 2, 2006

Marie K. Karpinski

Marie K. Karpinski

Chief Financial Officer

Legg Mason Income Trust, Inc.

EX-99.906.CERT

Certification Filed as Exhibit 12(b) to Form N-CSR

CERTIFICATION

I, Mark R. Fetting, Chief Executive Officer of Legg Mason Income Trust, Inc. (the “Trust”), certify that, to my knowledge:

1. The Trust’s periodic report on Form N-CSR for the period ended December 31, 2005, fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in such Form N-CSR fairly presents, in all material aspects, the financial condition and results of operations of the Trust.

/s/ Mark R. Fetting	Date:  March 3, 2006
Mark R. Fetting
President

Certification Filed as Exhibit 12(b) to Form N-CSR

CERTIFICATION

I, Marie K. Karpinski, Chief Financial Officer of Legg Mason Income Trust, Inc. (the “Trust”), certify that, to my knowledge:

1. The Trust’s periodic report on Form N-CSR for the period ended December 31, 2005, fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in such Form N-CSR fairly presents, in all material aspects, the financial condition and results of operations of the Trust.

/s/ Marie K. Karpinski	March 2, 2006
Marie K. Karpinski	Date
Chief Financial Officer