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, 2006

Date of reporting period: December 31, 2006

Item 1. Report to Shareholders

Annual Report to Shareholders

Legg Mason
Income Trust, Inc.

December 31, 2006

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, 2006, combining reports for the Legg Mason Core Bond Fund, High Yield Portfolio, Investment Grade Income Portfolio and Limited Duration Bond Portfolio.

The following table summarizes key statistics for the Primary Class of each portfolio, as of December 31, 2006:

					Net Asset Value
	SEC YieldA		Average Life		Per Share
Core Bond		4.07%		8.56 years	$	9.75
High Yield		6.46%		7.61 years	$	9.41
Investment Grade		5.14%		10.33 years	$	10.49
Limited Duration		4.39%		2.83 years	$	10.22

For the year ended December 31, 2006, total returns for the Primary Class of shares of the Core Bond, High Yield, Investment Grade and Limited Duration Portfolios were +4.71%, +13.35%, 6.01% and +4.46%, respectively. Total returns for the Institutional Class of shares of the High Yield, Investment Grade and Limited Duration Portfolios were +14.05%, +6.34%, and +4.98%, respectively.

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 Funds will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.

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, 2006, are included in this report.

At a special meeting of shareholders of Legg Mason Income Trust, Inc., shareholders approved a plan of reorganization with respect to the Legg Mason High Yield Portfolio whereby the Portfolio would transfer all of its assets and liabilities to Legg Mason Partners High Income Fund, a series of Legg Mason Partners Income Funds. Details of the shareholder meeting results can be found in the notes to financial statements.

^A SEC yields are for the 30 days ended December 31, 2006. Yields are subject to change at any time.

2  Annual Report to Shareholders

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

Sincerely,

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

January 19, 2007

Annual Report to Shareholders  3

Management’s Discussion of Fund Performance

Core Bond Fund

The average annual total return for the Core Bond Fund (“Fund”) for the period from its inception to December 31, 2006, is presented below, along with the total return of its benchmark:

			Since
	One Year		InceptionA
Core Bond Fund
Primary Class		+4.71%		+2.65%
Lehman Aggregate Bond IndexB		+4.33%		+3.22%

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 Core Bond Fund was generally well-positioned for a market dominated by moderately rising interest rates and narrowing mortgage-backed and credit spreads. 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 share class exceeded the performance of its primary benchmark, the Lehman Bros. Aggregate Bond Index, delivering 4.71% versus 4.33%. The Fund’s tactical duration strategy, which allowed duration to drift up and down with interest rates, contributed to returns as rates oscillated throughout the year, but its emphasis on the front end of the yield curve suffered as the yield curve flattened. An underweight exposure to the credit sector detracted from performance as spreads widened, but an emphasis on BBB-rated bonds benefited since they outperformed higher quality bonds. Overweight exposure to mortgage-backed securities for most of the period benefited as spreads narrowed and volatility trended down. A modest exposure to Treasury Inflation-Protected Securities^C detracted somewhat from performance as a significant decline in inflation in the latter part of the period caused them to underperform treasuries.

Western Asset Management Company

January 19, 2007

^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. An investor cannot invest directly in an index.

^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.

4  Annual Report to Shareholders

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, 2006, and held through December 31, 2006.

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
	7/1/06		12/31/06		7/1/06 to 12/31/06
Primary Class:
Actual	$	1,000.00	$	1,060.00	$	5.19
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  5

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.

6  Annual Report to Shareholders

Performance Information — Continued

Growth of a $10,000 Investment — Primary Class

Periods Ended December 31, 2006

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+4.71%		+4.71%
Life of Class*		+7.72%		+2.65%
* 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. Index returns are for the periods beginning February 29, 2004.

Annual Report to Shareholders  7

Portfolio Composition (as of December 31, 2006)^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.

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

8  Annual Report to Shareholders

Portfolio of Investments

Legg Mason Core Bond Fund

December 31, 2006

(Amounts in Thousands)

			Par/
	Rate	Maturity Date	Shares		Value
Long-Term Securities — 115.4%
Corporate Bonds and Notes — 19.0%
Aerospace and Defense — N.M.
United Technologies Corp.	5.400%	5/1/35	$	20	$	19
Airlines — 0.8%
JetBlue Airways Corp.	5.749%	8/15/16		282		282	A
JetBlue Airways Corp.	5.824%	11/15/16		300		294	A
						576
Automobiles — 2.3%
DaimlerChrysler NA Holding Corp.	4.050%	6/4/08		95		93
DaimlerChrysler NA Holding Corp.	7.200%	9/1/09		50		52
Ford Motor Co.	7.450%	7/16/31		720		565
General Motors Corp.	8.250%	7/15/23		1,000		930
						1,640
Capital Markets — 0.6%
Goldman Sachs Group LP	4.500%	6/15/10		70		69
Lehman Brothers Holdings Inc.	4.000%	1/22/08		115		113
Morgan Stanley	3.625%	4/1/08		30		29
Morgan Stanley	5.625%	1/9/12		110		112
Morgan Stanley	5.824%	10/18/16		40		40	A
The Goldman Sachs Group Inc.	5.000%	1/15/11		40		40
						403
Commercial Banks — 1.0%
Bank One Corp.	2.625%	6/30/08		335		322
Rabobank Capital Funding Trust II	5.260%	12/31/49		10		10	B,C
Rabobank Capital Funding Trust III	5.254%	10/21/49		20		19	B,C
SunTrust Capital VIII	6.100%	12/1/66		190		185	C
Wachovia Capital Trust III	5.800%	3/15/42		100		101	C
Wells Fargo Capital X	5.950%	12/15/86		100		98
						735

Annual Report to Shareholders  9

			Par/
	Rate	Maturity Date	Shares		Value
Corporate Bonds and Notes — Continued
Commercial Services and Supplies — 0.1%
Waste Management Inc.	6.375%	11/15/12	$	85	$	89
Consumer Finance — 3.2%
Ford Motor Credit Co.	4.950%	1/15/08		40		39
Ford Motor Credit Co.	6.625%	6/16/08		190		190
Ford Motor Credit Co.	7.375%	10/28/09		590		591
Ford Motor Credit Co.	7.375%	2/1/11		230		228
Ford Motor Credit Co.	7.250%	10/25/11		210		206
GMAC LLC	6.125%	8/28/07		230		230
GMAC LLC	5.625%	5/15/09		685		680
GMAC LLC	7.750%	1/19/10		110		115
						2,279
Diversified Financial Services — 1.8%
Bank of America Corp.	5.375%	8/15/11		160		161
CIT Group Inc.	4.000%	5/8/08		5		5
Citigroup Inc.	5.100%	9/29/11		230		229
General Electric Capital Corp.	4.250%	1/15/08		70		69
General Electric Capital Corp.	4.125%	9/1/09		90		88
HSBC Finance Corp.	4.125%	11/16/09		225		219
ILFC E-Capital Trust II	6.250%	2/21/65		20		20	B,C
Lilacs Repackaging 05-I	5.138%	1/15/64		490		475	B
Residential Capital Corp.	6.125%	11/21/08		50		50
						1,316
Diversified Telecommunication Services — 0.2%
AT&T Inc.	5.100%	9/15/14		90		87
BellSouth Corp.	4.750%	11/15/12		10		10
Verizon Global Funding Corp.	7.375%	9/1/12		35		38
						135

10  Annual Report to Shareholders

Portfolio of Investments — Continued

Legg Mason Core Bond Fund — Continued

			Par/
	Rate	Maturity Date	Shares		Value
Corporate Bonds and Notes — Continued
Electric Utilities — 1.1%
Duke Energy Corp.	6.250%	1/15/12	$	50	$	52
Duke Energy Corp.	5.625%	11/30/12		90		92
FirstEnergy Corp.	7.375%	11/15/31		145		165
Pacific Gas and Electric Co.	6.050%	3/1/34		135		136
The Cleveland Electric Illuminating Co.	5.650%	12/15/13		20		20
TXU Energy Co.	7.000%	3/15/13		320		335
						800
Food and Staples Retailing — 0.8%
CVS Lease Pass-Through Trust	6.036%	12/10/28		400		399	B
Wal-Mart Stores Inc.	3.375%	10/1/08		190		182
						581
Food Products — 0.1%
Kraft Foods Inc.	5.625%	11/1/11		65		66
Health Care Providers and Services — 0.8%
HCA Inc.	5.750%	3/15/14		700		581
Independent Power Producers and Energy Traders — 0.4%
TXU Corp.	5.550%	11/15/14		30		28
TXU Corp.	6.550%	11/15/34		300		281
						309
Insurance — 0.2%
ASIF Global Financing XIX	4.900%	1/17/13		20		19	B
MetLife Inc.	6.400%	12/15/66		150		151	C
						170
IT Services — N.M.
Electronic Data Systems Corp.	7.125%	10/15/09		10		10

Annual Report to Shareholders  11

			Par/
	Rate	Maturity Date	Shares		Value
Corporate Bonds and Notes — Continued
Leisure Equipment and Products — 0.7%
Eastman Kodak Co.	7.250%	11/15/13	$	540	$	537
Media — 0.9%
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.	6.250%	3/15/11		40		39
Clear Channel Communications Inc.	5.500%	9/15/14		15		13
Comcast Corp.	6.500%	1/15/15		170		177
Comcast Corp.	6.500%	1/15/17		70		73
Cox Communications Inc.	3.875%	10/1/08		70		68
Time Warner Inc.	6.875%	5/1/12		75		79
Time Warner Inc.	7.700%	5/1/32		75		85
Viacom Inc.	5.750%	4/30/11		60		60
						672
Multi-Utilities — 0.2%
Dominion Resources Inc.	4.750%	12/15/10		30		29
Dominion Resources Inc.	5.700%	9/17/12		95		96
						125
Multiline Retail — 0.2%
Target Corp.	5.400%	10/1/08		155		156
Oil, Gas and Consumable Fuels — 2.2%
Anadarko Petroleum Corp.	5.760%	9/15/09		160		161	A
Anadarko Petroleum Corp.	5.950%	9/15/16		10		10
Anadarko Petroleum Corp.	6.450%	9/15/36		60		61
Apache Corp.	6.250%	4/15/12		35		36
Conoco Inc.	6.950%	4/15/29		225		256
ConocoPhillips	4.750%	10/15/12		60		59
Devon Energy Corp.	7.950%	4/15/32		60		73
Hess Corp.	7.300%	8/15/31		245		273

12  Annual Report to Shareholders

Portfolio of Investments — Continued

Legg Mason Core Bond Fund — Continued

			Par/
	Rate	Maturity Date	Shares		Value
Corporate Bonds and Notes — Continued
Oil, Gas and Consumable   Fuels — Continued
Kerr-McGee Corp.	6.875%	9/15/11	$	300	$	316
Kinder Morgan Energy Partners LP	7.125%	3/15/12		65		69
Kinder Morgan Energy Partners LP	5.000%	12/15/13		35		33
Pemex Project Funding Master Trust	6.625%	6/15/35		50		51
XTO Energy Inc.	7.500%	4/15/12		145		158
						1,556
Paper and Forest Products — 0.1%
Weyerhaeuser Co.	6.750%	3/15/12		45		47
Tobacco — 0.2%
Altria Group Inc.	7.000%	11/4/13		155		168
Wireless Telecommunication Services — 1.1%
Sprint Capital Corp.	8.375%	3/15/12		540		600
Sprint Capital Corp.	8.750%	3/15/32		40		48
Sprint Nextel Corp.	6.000%	12/1/16		110		108
						756
Total Corporate Bonds and Notes (Cost — $13,938)						13,726
Asset-Backed Securities — 2.0%
Fixed Rate Securities — 0.3%
Bank One Issuance Trust 2003-C1	4.540%	9/15/10		200		198
Indexed SecuritiesA — 1.7%
Ace Securities Corp. Home Equity Loan Trust, Series 2006-SL3	5.450%	6/25/36		445		445
Bayview Financial Acquisition Trust 2004-C	5.770%	5/28/44		308		308
Brazos Texas Higher Education Authority Inc. 2005-1	5.418%	6/15/42		344		341

Annual Report to Shareholders  13

			Par/
	Rate	Maturity Date	Shares		Value
Asset-Backed Securities — Continued
Indexed Securities — Continued
Credit-Based Asset Servicing and Securitization 2005-RP1	5.530%	1/25/35	$	66	$	67	B
EQCC Trust 2002-1	5.650%	11/25/31		3		3
MSDWCC Heloc Trust 2005-1	5.540%	7/25/17		41		41
Wachovia Asset Securitization Inc. 2002-HE1	5.690%	9/27/32		77		78
						1,283
Total Asset-Backed Securities (Cost — $1,487)						1,481
Mortgage-Backed Securities — 21.1%
Fixed Rate Securities — 5.7%
Asset Securitization Corp. 1996-D2	6.920%	2/14/29		3		3
Banc of America Commercial Mortgage Inc. 2005-3 A4	4.668%	7/10/43		500		478
Banc of America Commercial Mortgage Inc. 2006-3 A4	5.889%	7/10/44		370		385
Countrywide Alternative Loan Trust 2004-2 CB	4.250%	3/25/34		210		205
GS Mortgage Securities Corp. II 2005-GG4	4.680%	7/10/39		200		194
LB-UBS Commercial Mortgage Trust 2005-C3 A5	4.739%	7/15/30		140		135
LB-UBS Commercial Mortgage Trust 2005-C3 AAB	4.664%	7/15/30		200		194
LB-UBS Commercial Mortgage Trust 2006-C7 A3	5.347%	11/15/38		370		370
MASTR Reperforming Loan Trust 2005-1	7.000%	8/25/34		244		251	B
Morgan Stanley Capital I, Series 2005-HQ6	4.989%	8/13/42		240		235
Prime Mortgage Trust 2006 — DR1 2A1	5.500%	5/25/35		979		972	B

14  Annual Report to Shareholders

Portfolio of Investments — Continued

Legg Mason Core Bond Fund — Continued

			Par/
	Rate	Maturity Date	Shares		Value
Mortgage-Backed Securities — Continued
Fixed Rate Securities — Continued
Prime Mortgage Trust 2006 — DR1 2A2	6.000%	11/25/36	$	588	$	586	B
Washington Mutual MSC Mortgage Pass-Through Certificates, Series 2004-RA1	7.000%	3/25/34		74		75
						4,083
Indexed SecuritiesA — 13.9%
ABFS Mortgage Loan Trust 2003-2	5.850%	4/25/34		70		70	B
Banc of America Funding Corp. 2005-E	5.812%	6/20/35		355		357
Countrywide Alternative Loan Trust 2005-17 1A1	5.610%	7/25/35		348		349
Countrywide Alternative Loan Trust 2005-38 A3	5.670%	9/25/35		349		350
Countrywide Home Loans 2005-03 1A2	5.640%	4/25/35		286		287
Countrywide Home Loans 2005-09 1A1	5.650%	5/25/35		299		300
Countrywide Home Loans 2005-11 3A3	6.024%	4/25/35		290		294
Countrywide Home Loans 2005-11 6A1	5.650%	3/25/35		242		242
DSLA Mortgage Loan Trust 2006-AR1 1A1A	5.747%	4/19/36		552		552
Greenpoint Mortgage Funding Trust 2005-AR1	5.570%	6/25/45		269		270
Greenpoint Mortgage Funding Trust 2005-AR4	5.610%	10/25/45		145		145
GSMPS Mortgage Loan Trust 2005-RP2	5.700%	3/25/35		276		276	B
Harborview Mortgage Loan Trust 2005-7	6.232%	6/19/45		417		419

Annual Report to Shareholders  15

			Par/
	Rate	Maturity Date	Shares		Value
Mortgage-Backed Securities — Continued
Indexed Securities — Continued
Harborview Mortgage Loan Trust 2005-9	5.690%	6/20/35	$	314	$	315
Impac CMB Trust 2003-7	5.960%	8/25/33		88		88
IXIS Real Estate Capital Trust 2006-HE2	5.410%	8/25/36		421		421
Lehman XS Trust 2005-7N 1A1B	5.650%	12/25/35		290		291
Lehman XS Trust 2006-GP2 1A1A	5.420%	6/25/46		607		607
Structured Asset Mortgage Investments Inc. 2006-AR7 A1A	5.560%	8/25/36		580		581
Thornburg Mortgage Securities Trust 2005-2 A1	5.570%	7/25/45		157		157
Thornburg Mortgage Securities Trust 2005-2 A2	5.580%	7/25/45		338		338
Thornburg Mortgage Securities Trust 2005-4 A4	5.550%	12/25/35		565		565
WaMu Mortgage Pass-Through Certificates, Series 2005-AR06 2A1A	5.580%	4/25/45		299		300
WaMu Mortgage Pass-Through Certificates, Series 2005-AR08 1A1A	5.620%	7/25/45		264		265
WaMu Mortgage Pass-Through Certificates, Series 2005-AR11 A1A	5.670%	8/25/45		827		829
WaMu Mortgage Pass-Through Certificates, Series 2005-AR13 A1A1	5.640%	10/25/45		378		378
WaMu Mortgage Pass-Through Certificates, Series 2005-AR19 A1A2	5.610%	12/25/45		514		516
Zuni Mortgage Loan Trust 2006-0A1	5.450%	8/25/36		499		498
						10,060

16  Annual Report to Shareholders

Portfolio of Investments — Continued

Legg Mason Core Bond Fund — Continued

			Par/
	Rate	Maturity Date	Shares		Value
Mortgage-Backed Securities — Continued
Stripped Securities — 0.6%
GE Capital Commercial Mortgage Corp. 2005-C4	5.334%	11/10/45	$	360	$	362	D1
Mach One Trust, Commercial Mortgage-Backed Securities 2004-1A	1.604%	5/28/40		1,284		52	D1,E
						414
Variable Rate SecuritiesF — 0.9%
Bear Stearns ARM Trust, Mortgage Pass-Through Certificates, Series 2004-4	3.517%	6/25/34		200		195
Credit-Based Asset Servicing and Securitization 1999-3	6.576%	1/3/29		57		55	B
IndyMac INDX Mortgage Loan Trust 2005-AR15	5.099%	9/25/35		132		128
JPMorgan Chase Commercial Mortgage Securities Corp., Series 2005-CB13	5.294%	1/12/43		100		100
JPMorgan Chase Commercial Mortgage Securities Corp., Series 2005-LDP4	4.918%	10/15/42		200		194
						672
Total Mortgage-Backed Securities (Cost — $15,297)						15,229
U.S. Government and Agency Obligations — 19.9%
Fixed Rate Securities — 13.9%
Fannie Mae	5.400%	4/13/09		30		30
Fannie Mae	6.625%	9/15/09		160		167
Fannie Mae	5.200%	11/8/10		170		169
Fannie Mae	5.625%	5/19/11		290		293
Fannie Mae	4.610%	10/10/13		560		539
Federal Home Loan Bank	3.875%	8/22/08		120		118
Federal Home Loan Bank	5.400%	1/2/09		130		130
Freddie Mac	5.550%	12/11/08		100		100

Annual Report to Shareholders  17

			Par/
	Rate	Maturity Date	Shares		Value
U.S. Government and Agency Obligations — Continued
Fixed Rate Securities — Continued
Freddie Mac	4.750%	1/18/11	$	110	$	109
Freddie Mac	5.250%	2/24/11		160		160
Freddie Mac	5.625%	3/15/11		40		41
Freddie Mac	4.650%	10/10/13		600		578
Freddie Mac	5.450%	11/21/13		180		180
Freddie Mac	5.300%	5/12/20		690		659
Freddie Mac	5.625%	11/23/35		210		202
United States Treasury Bonds	4.500%	2/15/36		1,970		1,873
United States Treasury Notes	3.750%	5/15/08		40		39
United States Treasury Notes	4.500%	2/15/09		60		60
United States Treasury Notes	4.125%	8/15/10		100		98
United States Treasury Notes	4.625%	10/31/11		2,600		2,591
United States Treasury Notes	3.875%	2/15/13		800		766
United States Treasury Notes	5.125%	5/15/16		830		855
United States Treasury Notes	4.875%	8/15/16		190		192
United States Treasury Notes	4.625%	11/15/16		110		109
						10,058
Stripped Securities — 0.3%
United States Treasury Bonds	0.000%	11/15/21		420		202	D2
Treasury Inflation-Protected SecuritiesG — 5.7%
United States Treasury Inflation-Protected Security	3.875%	1/15/09		25		25
United States Treasury Inflation-Protected Security	0.875%	4/15/10		394		374
United States Treasury Inflation-Protected Security	2.375%	4/15/11		1,800		1,793
United States Treasury Inflation-Protected Security	3.375%	1/15/12		80		83
United States Treasury Inflation-Protected Security	2.000%	1/15/14		71		69

18  Annual Report to Shareholders

Portfolio of Investments — Continued

Legg Mason Core Bond Fund — Continued

			Par/
	Rate	Maturity Date	Shares		Value
U.S. Government and Agency Obligations — Continued
Treasury Inflation-Protected Securities — Continued
United States Treasury Inflation-Protected Security	1.875%	7/15/15	$	52	$	50
United States Treasury Inflation-Protected Security	2.000%	1/15/16		386		373
United States Treasury Inflation-Protected Security	2.500%	7/15/16		290		292
United States Treasury Inflation-Protected Security	2.375%	1/15/25		701		698
United States Treasury Inflation-Protected Security	2.000%	1/15/26		41		38
United States Treasury Inflation-Protected Security	3.875%	4/15/29		270		340
						4,135
Total U.S. Government and Agency Obligations (Cost — $14,440)						14,395
U.S. Government Agency Mortgage-Backed Securities — 45.9%
Fixed Rate Securities — 45.9%
Fannie Mae	5.500%	12/1/17 to 9/1/35		1,144		1,132
Fannie Mae	5.000%	10/1/20 to 3/1/36		2,082		2,035
Fannie Mae	6.000%	8/1/21 to 9/1/36		4,093		4,124
Fannie Mae	4.500%	9/1/35		93		87
Fannie Mae	5.000%	12/1/36		10,600		10,232	H
Fannie Mae	5.500%	12/1/36		1,650		1,635	H
Fannie Mae	6.000%	12/1/36		2,300		2,315	H
Fannie Mae	6.500%	12/1/36		4,790		4,880	H
Freddie Mac	4.500%	4/1/19		274		265
Freddie Mac	5.000%	7/1/20 to 9/1/35		1,343		1,316

Annual Report to Shareholders  19

			Par/
	Rate	Maturity Date	Shares		Value
U.S. Government Agency Mortgage-Backed Securities — Continued
Fixed Rate Securities — Continued
Government National Mortgage Association	6.000%	11/15/28 to 12/15/33	$	695	$	707
Government National Mortgage Association	6.500%	2/15/32		264		271
Government National Mortgage Association	5.000%	8/15/33 to 5/15/34		900		877
Government National Mortgage Association	5.500%	2/15/35		2,630		2,618
Government National Mortgage Association	6.500%	12/1/36		700		718	H
Total U.S. Government Agency Mortgage-Backed Securities (Cost — $33,512)						33,212
Yankee BondsI — 7.2%
Commercial Banks — 2.4%
BNP Paribas NY	6.875%	3/1/09		110		114
Eksportfinans ASA	5.500%	5/25/16		160		165
Glitnir Banki Hf	6.330%	7/28/11		130		133	B
Glitnir Banki Hf	6.693%	6/15/16		120		124	B,C
Kaupthing Bank Hf	6.061%	4/12/11		270		272	A,B
Kaupthing Bank Hf	7.125%	5/19/16		440		466	B
Landsbanki Islands Hf	6.100%	8/25/11		230		234	B
Resona Preferred Global Securities	7.191%	7/30/49		140		146	B,C
Shinsei Finance Cayman Ltd.	6.418%	7/20/49		100		100	B,C
						1,754

20  Annual Report to Shareholders

Portfolio of Investments — Continued

Legg Mason Core Bond Fund — Continued

			Par/
	Rate	Maturity Date	Shares		Value
Yankee Bonds — Continued
Diversified Financial Services — 0.9%
Banagricola DPR Funding Ltd.	6.370%	3/15/10	$	163	$	164	A,B
MUFG Capital Finance 1 Ltd.	6.346%	7/25/49		100		102	C
SMFG Preferred Capital	6.078%	1/25/49		250		246	B,C
TNK-BP Finance SA	7.500%	7/18/16		140		149	B
						661
Diversified Telecommunication Services — 0.5%
British Telecommunications PLC	8.625%	12/15/10		100		111	F
Deutsche Telekom International Finance BV	5.750%	3/23/16		75		74
Koninklijke (Royal) KPN NV	8.000%	10/1/10		80		86
Telecom Italia Capital SpA	4.950%	9/30/14		70		65
Telecom Italia Capital SpA	5.250%	10/1/15		20		19
						355
Foreign Government Obligations — 1.6%
Russian Federation	5.000%	3/31/30		620		700	B,C
United Mexican States	5.625%	1/15/17		4		4
United Mexican States	8.300%	8/15/31		100		128
United Mexican States	7.500%	4/8/33		293		345
						1,177
Industrial Conglomerates — 0.7%
Tyco International Group SA	6.375%	10/15/11		45		47
Tyco International Group SA	6.000%	11/15/13		100		104
Tyco International Group SA	6.875%	1/15/29		310		352
						503
Media — 0.1%
Rogers Cable Inc.	5.500%	3/15/14		90		86
Metals and Mining — 0.3%
Vale Overseas Ltd.	6.875%	11/21/36		170		174

Annual Report to Shareholders  21

			Par/
	Rate	Maturity Date	Shares			Value
Yankee Bonds — Continued
Oil, Gas and Consumable Fuels — 0.7%
Apache Finance Canada Corp.	4.375%	5/15/15	$	60		$	55
ChevronTexaco Capital Co.	3.500%	9/17/07		140			139
Conoco Funding Co.	6.350%	10/15/11		10			11
Gazprom Capital	6.212%	11/22/16		170			171	B
Petrobras International Finance Co.	6.125%	10/6/16		130			131
							507
Total Yankee Bonds (Cost — $5,024)							5,217
Preferred Stocks — 0.3%
Fannie Mae	5.375%			—	Jshs		100	K
General Motors Corp.	5.250%			7			140	K
Total Preferred Stocks (Cost — $213)							240
Total Long-Term Securities (Cost — $83,911)							83,500
Short-Term Securities — 12.3%
U.S. Government and Agency Obligations — 0.2%
Fannie Mae	0.000%	6/25/07	$	161			157	L,M
Options PurchasedN — 0.2%
Eurodollar Futures Call, July 2007, Strike Price $94.00				24	O		46
Eurodollar Futures Call, March 2007, Strike Price $94.00				14	O		24
Eurodollar Futures Call, 2007, Strike Price $94.75				24	O		2
Eurodollar Futures Call, September 2007, Strike Price $95.00				11	O		5
Eurodollar Futures Put, April 2007, Strike Price $93.00				2	O		—	P
Eurodollar Futures Put, April 2007, Strike Price $95.50				6	O		12

22  Annual Report to Shareholders

Portfolio of Investments — Continued

Legg Mason Core Bond Fund — Continued

	Par/
	Shares			Value
Short-Term Securities — Continued
Options Purchased — Continued
U.S. Treasury Note Futures Call, March 2007, Strike Price $102.00		7	O	$	22
U.S. Treasury Note Futures Call, March 2007, Strike Price $102.50		21	O		54
					165
Repurchase Agreements — 11.9%
Lehman Brothers Inc. 5.2%, dated 12/29/06 to be repurchased at $4,296 on 1/2/07 (Collateral: $17,880 Federal Home Loan Bank zero-coupon bonds, due 9/29/28, value $4,380)	$	4,294			4,294
Merrill Lynch Government Securities Inc. 5.21%, dated 12/29/06, to be repurchased at $4,295 on 1/2/07 (Collateral: $4,325 Freddie Mac notes, 5.125%, due 10/15/08, value $4,379)		4,293			4,293
					8,587
Total Short-Term Securities (Cost — $8,929)					8,909
Total Investments — 127.7% (Cost — $92,840)					92,409
Other Assets Less Liabilities — (27.7)%					(20,059	)
Net Assets — 100.0%				$	72,350

Annual Report to Shareholders  23

		Actual	Appreciation/
	Expiration	Contracts	(Depreciation)
Futures Contracts PurchasedN
Eurodollar Futures	March 2007	18	$	(1	)
Eurodollar Futures	June 2007	6		(1	)
Eurodollar Futures	September 2007	28		(12	)
Eurodollar Futures	March 2008	4		2
U.S. Treasury Bond Futures	March 2007	25		(44	)
U.S. Treasury Note Futures	March 2007	139		(69	)
			$	(125	)
Futures Contracts WrittenN
U.S. Treasury Note Futures	March 2007	84	$	84
Options WrittenN
Eurodollar Futures Call, Strike Price $95.125	March 2007	2	$	—	P
Eurodollar Futures Put, Strike Price $94.50	April 2007	5		1
Eurodollar Futures Put, Strike Price $94.625	March 2007	5		1
U.S. Treasury Bond Futures Call, Strike Price $114.00	March 2007	12		7
U.S. Treasury Bond Futures Call, Strike Price $115.00	March 2007	13		8
U.S. Treasury Bond Futures Call, Strike Price $116.00	March 2007	7		4
U.S. Treasury Bond Futures Put, Strike Price $109.00	March 2007	17		5
U.S. Treasury Bond Futures Put, Strike Price $111.00	March 2007	2		(1	)
U.S. Treasury Bond Futures Put, Strike Price $113.00	March 2007	9		(13	)
U.S. Treasury Note Futures Call, Strike Price $109.00	March 2007	27		10
U.S. Treasury Note Futures Call, Strike Price $110.00	March 2007	86		35

24  Annual Report to Shareholders

Portfolio of Investments — Continued

Legg Mason Core Bond Fund — Continued

		Actual	Appreciation/
	Expiration	Contracts	(Depreciation)
Options Written — Continued
U.S. Treasury Note Futures Call, Strike Price $111.00	March 2007	8	$	2
U.S. Treasury Note Futures Put, Strike Price $104.00	March 2007	6		1
U.S. Treasury Note Futures Put, Strike Price $106.00	March 2007	24		5
U.S. Treasury Note Futures Put, Strike Price $107.00	March 2007	4		(1	)
U.S. Treasury Note Futures Put, Strike Price $108.00	March 2007	5		(2	)
			$	62

A	Indexed Security — The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”), the Consumer Price Index (“CPI”), and the one-year Treasury Bill Rate. The coupon rates are the rates as of December 31, 2006.
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 8.46% of net assets.
C	Stepped Coupon Security — A security with a predetermined schedule of interest or dividend rate changes at which time it begins to accrue interest or pay dividends according to the predetermined schedule.
D	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	Private placement.

^F The coupon rates shown on variable rate securities are the rates at December 31, 2006.

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

^I Yankee Bond — A dollar-denominated bond issued in the U.S. by a foreign entity.

^J Amount represents less than 0.05.

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

^L 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.

^M Collateral to cover futures and options contracts.

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

^O Par represents actual number of contracts.

^P Amount represents less than 1.

N.M. —  Not Meaningful.

See notes to financial statements.

Annual Report to Shareholders  25

Statement of Assets and Liabilities

Core Bond Fund

December 31, 2006

(Amounts in Thousands)

Assets:
Investment securities at market value (Cost – $83,911)			$	83,500
Short-term securities at value (Cost – $8,929)				8,909
Receivable for fund shares sold				350
Interest and dividends receivable				556
Total assets				93,315
Liabilities:
Payable for securities purchased	$	20,079
Payable for fund shares repurchased		705
Accrued management fee		3
Accrued distribution and service fees		31
Income distribution payable		9
Futures variation margin payable		4
Options written (Proceeds – $118)		56
Accrued expenses		78
Total liabilities				20,965
Net Assets			$	72,350
Net assets consist of:
Accumulated paid-in capital applicable to:
7,420 Primary Class shares outstanding			$	73,636
Undistributed net investment income				34
Accumulated net realized loss on investments, options, and futures				(910	)
Unrealized appreciation/(depreciation) of investments, options and futures				(410	)
Net Assets			$	72,350
Net Asset Value Per Share:
Primary Class				$9.75

See notes to financial statements.

26  Annual Report to Shareholders

Statement of Operations

Core Bond Fund

For the Year Ended December 31, 2006

(Amounts in Thousands)

Investment Income:
Interest	$	3,690
Dividends		16
Total income				$	3,706
Expenses:
Management fees		321
Distribution and service fees		357
Audit and legal fees		58
Custodian fees		98
Directors’ fees and expenses		28
Registration fees		37
Reports to shareholders		30
Transfer agent and shareholder servicing expense		56
Other expenses		46
		1,031
Less: Fees waived		(306	)
Compensating balance credits		(11	)A
Total expenses, net of waivers and compensating balance credits					714
Net Investment Income					2,992
Net Realized and Unrealized Gain/(Loss) on Investments:
Realized gain/(loss) on:
Investments		234
Options		172
Futures		(547	)
					(141	)
Change in unrealized appreciation/(depreciation) of investments, options and futures					402
Net Realized and Unrealized Gain on Investments					261
Change in Net Assets Resulting From Operations				$	3,253

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

See notes to financial statements.

Annual Report to Shareholders  27

Statement of Changes in Net Assets

Core Bond Fund

(Amounts in Thousands)

	For the Years Ended
	12/31/06			12/31/05
Change in Net Assets:
Net investment income	$	2,992		$	2,333
Net realized loss on investments, options and futures		(141	)		(663	)
Change in unrealized appreciation/(depreciation) of investments, options and futures		402			(1,045	)
Change in net assets resulting from operations		3,253			625
Distributions to shareholders from:
Net investment income:
Primary Class		(2,992	)		(2,400	)
Net realized gain on investments:
Primary Class		—			(11	)
Change in net assets from Fund share transactions:
Primary Class		264			9,838
Change in net assets		525			8,052
Net Assets:
Beginning of year		71,825			63,773
End of year	$	72,350		$	71,825
Undistributed net investment income	$	34		$	—	A

^A Amount less than $1.

See notes to financial statements.

28  Annual Report to Shareholders

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,
	2006			2005			2004A
Net asset value, beginning of year		$9.71			$9.95			$10.00
Investment operations:
Net investment income		.40	B		.32			.18
Net realized and unrealized gain/(loss) on investments		.04			(.23	)		.004
Total from investment operations		.44			.09			.18
Distributions from:
Net investment income		(.40	)		(.33	)		(.21	)
Net realized gain on investments		—			(.002	)		(.02	)
Total distributions		(.40	)		(.33	)		(.23	)
Net asset value, end of year		$9.75			$9.71			$9.95
Total return		4.71	%		.94	%		1.90	%C
Ratios to Average Net Assets:D
Total expenses		1.44	%		1.38	%		1.56	%E
Expenses net of waivers, if any		1.02	%		1.00	%		1.00	%E
Expenses net of all reductions		1.00	%		1.00	%		1.00	%E
Net investment income		4.19	%		3.29	%		2.50	%E
Supplemental Data:
Portfolio turnover rate		428.1	%		435.7	%		233.8	%C
Net assets, end of year (in thousands)		$72,350			$71,825			$63,773

A	For the period February 27, 2004 (commencement of operations) to December 31, 2004.
B	Computed using average daily shares outstanding.
C	Not annualized.
D	Total expenses reflects operating expenses prior to any voluntary expense waivers and/or compensating balance credits. Expenses net of waivers reflects total expenses before compensating balance credits but net of any voluntary expense waivers. Expenses net of all reductions reflects expenses less any compensating balance credits and/or voluntary expense waivers.

^E Annualized.

See notes to financial statements.

Annual Report to Shareholders  29

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, 2006, are presented below:

			Average Annual Total Returns Through December 31, 2006
	One		Five		Ten		Since
	Year		Years		Years		InceptionA
High Yield
Primary Class		+13.35%		+8.37%		+4.44%		+5.65%
Institutional Class		+14.05%		+8.90%		N/A		+3.12%
Lehman High Yield Index 2% Issuer ConstrainedB		+10.76%		+10.20%		+6.63%		+7.17%
Lehman High Yield IndexC		+11.85%		+10.18%		+6.59%		+7.13%
Lipper High Current Yield FundsD		+10.05%		+8.83%		+5.31%		+7.44%

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.

The Fund’s Primary Class returned 13.35% for the 12-month period ending, December 31, 2006. This compares favorably to the Fund’s benchmark, the Lehman High Yield 2% Issuer Constrained Index, which returned 10.76%, and the 10.05% total return for the Lipper High Current Yield Funds. Credit spreads in general narrowed during the period helping the asset class outperform U.S. treasuries. The index generated 843 basis points^E of excess return versus

^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%. An investor cannot invest directly in an index.

^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 Average of 490 funds comprising the Lipper universe of funds that aim at high (relative) current yield from fixed income securities, have no quality or maturity restrictions, and tend to invest in low-grade debt issues.

^E 100 basis points = 1%.

30  Annual Report to Shareholders

similar duration treasuries. The portfolio’s outperformance versus its benchmark was due to industry allocation and issue selection. Overweights to the consumer cyclicals and transportation subsectors, which returned 12.5% and 11.9%, respectively, helped relative performance. Three of the Fund’s five largest overweights returned between 17% and 24% for the period, aiding performance. The Fund’s issuer underweights also helped performance as nine of the Fund’s 10 largest underweights underperformed the broad market.

Western Asset Management Company

January 19, 2007

Annual Report to Shareholders  31

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, 2006, and held through December 31, 2006.

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
	7/1/06		12/31/06		7/1/06 to 12/31/06
Primary Class:
Actual	$	1,000.00	$	1,092.30	$	7.59
Hypothetical (5% return before expenses)		1,000.00		1,017.95		7.32
Institutional Class:
Actual	$	1,000.00	$	1,095.80	$	4.97
Hypothetical (5% return before expenses)		1,000.00		1,020.47		4.79

^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 1.44% and 0.94% for the Primary Class and Institutional Class, respectively, multiplied by the average values over the period, multiplied by the number of days in the most recent fiscal half-year (184), and divided by 365.

32  Annual Report to Shareholders

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 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  33

Growth of a $10,000 Investment — Primary Class

Periods Ended December 31, 2006

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+13.35%		+13.35%
Five Years		+49.46%		+8.37%
Ten Years		+54.46%		+4.44%

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.

34  Annual Report to Shareholders

Performance Information — Continued

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

Periods Ended December 31, 2006

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+14.05%		+14.05%
Five Years		+53.14%		+8.90%
Life of Class*		+30.49%		+3.12%
* 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.

Annual Report to Shareholders  35

Portfolio Composition (as of December 31, 2006)^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 provide capital markets with credit ratings for the evaluation and assessment of credit risk.

^F Common Stocks, Preferred Stocks and Warrants do not have a defined maturity date.

36  Annual Report to Shareholders

Portfolio of Investments

High Yield Portfolio

December 31, 2006

(Amounts in Thousands)

			Par/
	Rate	Maturity Date	Shares		Value
Long-Term Securities — 97.3%
Corporate Bonds and Notes — 84.1%
Aerospace and Defense — 1.5%
Alliant Techsystems Inc.	6.750%	4/1/16	$	490	$	490
DRS Technologies Inc.	6.625%	2/1/16		340		343
DRS Technologies Inc.	7.625%	2/1/18		470		484
L-3 Communications Corp.	6.375%	10/15/15		1,085		1,074
						2,391
Airlines — 1.4%
Continental Airlines Inc.	8.750%	12/1/11		370		373
United Air Lines Inc.	7.032%	10/1/10		474		483
United Air Lines Inc.	7.186%	10/1/12		1,247		1,272
						2,128
Auto Components — 1.3%
Keystone Automotive Operations Inc.	9.750%	11/1/13		810		802
Visteon Corp.	8.250%	8/1/10		564		550
Visteon Corp.	7.000%	3/10/14		690		604
						1,956
Automobiles — 2.2%
Ford Motor Co.	8.875%	1/15/22		875		761
Ford Motor Co.	7.450%	7/16/31		275		216
Ford Motor Co.	4.250%	12/15/36		200		214	A
General Motors Corp.	7.200%	1/15/11		405		393
General Motors Corp.	8.375%	7/15/33		2,030		1,877
						3,461
Building Products — 2.1%
Associated Materials Inc.	9.750%	4/15/12		265		273
Associated Materials Inc.	11.250%	3/1/14		830		560	B
Jacuzzi Brands Inc.	9.625%	7/1/10		902		959
Nortek Inc.	8.500%	9/1/14		490		480
NTK Holdings Inc.	0.000%	3/1/14		1,340		938	B
						3,210

Annual Report to Shareholders  37

			Par/
	Rate	Maturity Date	Shares		Value
Corporate Bonds and Notes — Continued
Capital Markets — 0.5%
E*Trade Financial Corp.	7.375%	9/15/13	$	450	$	468
E*Trade Financial Corp.	7.875%	12/1/15		332		353
						821
Chemicals — 1.3%
Chemtura Corp.	6.875%	6/1/16		105		101
Georgia Gulf Corp.	9.500%	10/15/14		800		780	C
Huntsman International LLC	7.875%	11/15/14		235		237	C
Lyondell Chemical Co.	8.000%	9/15/14		210		218
Lyondell Chemical Co.	8.250%	9/15/16		175		183
Westlake Chemical Corp.	6.625%	1/15/16		525		508
						2,027
Commercial Services and Supplies — 0.4%
Allied Security Escrow Corp.	11.375%	7/15/11		105		108
Rental Service Corp.	9.500%	12/1/14		450		464	C
						572
Consumer Finance — 4.4%
Ford Motor Credit Co.	7.375%	2/1/11		825		817
Ford Motor Credit Co.	9.875%	8/10/11		1,730		1,850
Ford Motor Credit Co.	8.110%	1/13/12		270		267	D
GMAC LLC	6.875%	8/28/12		640		657
GMAC LLC	8.000%	11/1/31		2,800		3,215
						6,806
Containers and Packaging — 1.8%
Berry Plastics Holding Corp.	8.875%	9/15/14		335		340	C
Graham Packaging Co. Inc.	9.875%	10/15/14		756		763
Graphic Packaging International Corp.	8.500%	8/15/11		135		140
Graphic Packaging International Corp.	9.500%	8/15/13		619		653
Plastipak Holdings Inc.	8.500%	12/15/15		840		874	C
						2,770

38  Annual Report to Shareholders

Portfolio of Investments — Continued

High Yield Portfolio — Continued

			Par/
	Rate	Maturity Date	Shares		Value
Corporate Bonds and Notes — Continued
Diversified Consumer Services — 0.4%
Education Management LLC	8.750%	6/1/14	$	390	$	403	C
Service Corp. International	7.875%	2/1/13		90		95
Service Corp. International	7.625%	10/1/18		45		48
						546
Diversified Financial Services — 5.3%
AAC Group Holding Corp.	10.250%	10/1/12		1,220		1,068	B
CCM Merger Inc.	8.000%	8/1/13		385		376	C
DI Finance LLC	9.500%	2/15/13		1,460		1,548
GrafTech Finance Inc.	10.250%	2/15/12		435		458
Milacron Escrow Corp.	11.500%	5/15/11		1,665		1,582
Standard Aero Holdings Inc.	8.250%	9/1/14		1,005		1,015
UGS Corp.	10.000%	6/1/12		600		654
Vanguard Health Holding Co. I LLC	11.250%	10/1/15		285		219	B
Vanguard Health Holding Co. II LLC	9.000%	10/1/14		1,285		1,301
						8,221
Diversified Telecommunication Services — 4.3%
Cincinnati Bell Inc.	7.000%	2/15/15		649		650
Cincinnati Bell Inc.	6.300%	12/1/28		380		342
Citizens Communications Co.	7.875%	1/15/27		165		167	C
Citizens Communications Co.	9.000%	8/15/31		465		505
Hawaiian Telcom Communications Inc.	10.889%	5/1/13		40		40	D
Hawaiian Telcom Communications Inc.	12.500%	5/1/15		1,420		1,487
Level 3 Communications Inc.	11.500%	3/1/10		270		286
Level 3 Financing Inc.	11.800%	3/15/11		190		201	D
Level 3 Financing Inc.	9.250%	11/1/14		320		326	C
Qwest Communications International Inc.	7.250%	2/15/11		703		719

Annual Report to Shareholders  39

			Par/
	Rate	Maturity Date	Shares		Value
Corporate Bonds and Notes — Continued
Diversified Telecommunication         Services — Continued
Qwest Communications International Inc.	7.500%	2/15/14	$	620	$	639
Qwest Corp.	7.500%	10/1/14		525		556
Windstream Corp.	8.625%	8/1/16		725		794	C
						6,712
Electric Utilities — 1.7%
Edison Mission Energy	7.500%	6/15/13		95		99
IPALCO Enterprises Inc.	8.625%	11/14/11		720		783
Midwest Generation LLC	8.560%	1/2/16		396		436
Orion Power Holdings Inc.	12.000%	5/1/10		375		426
Sierra Pacific Resources	6.750%	8/15/17		980		961
						2,705
Energy Equipment and Services — 1.3%
Geokinetics Inc.	11.860%	12/15/12		160		161	C,D
Gulfmark Offshore Inc.	7.750%	7/15/14		820		836
Pride International Inc.	7.375%	7/15/14		940		971
						1,968
Food and Staples Retailing — 0.8%
Delhaize America Inc.	8.125%	4/15/11		464		501
Delhaize America Inc.	9.000%	4/15/31		630		748
						1,249
Food Products — 0.4%
Dole Food Co. Inc.	7.250%	6/15/10		715		681
Gas Utilities — 1.0%
Southern Natural Gas Co.	8.000%	3/1/32		415		485
Suburban Propane Partners LP	6.875%	12/15/13		1,110		1,088
						1,573

40  Annual Report to Shareholders

Portfolio of Investments — Continued

High Yield Portfolio — Continued

			Par/
	Rate	Maturity Date	Shares		Value
Corporate Bonds and Notes — Continued
Health Care Equipment and Supplies — 0.2%
Fresenius Medical Care Capital Trust II	7.875%	2/1/08	$	100	$	102	E
Fresenius Medical Care Capital Trust IV	7.875%	6/15/11		170		178
						280
Health Care Providers and Services — 3.9%
DaVita Inc.	7.250%	3/15/15		1,160		1,183
HCA Inc.	6.300%	10/1/12		220		201
HCA Inc.	9.000%	12/15/14		270		262
HCA Inc.	6.500%	2/15/16		220		185
HCA Inc.	9.250%	11/15/16		480		514	C
HCA Inc.	9.625%	11/15/16		440		473	C
HCA Inc.	7.690%	6/15/25		280		232
HCA Inc.	7.500%	11/15/95		855		643
Tenet Healthcare Corp.	9.875%	7/1/14		1,757		1,788
Tenet Healthcare Corp.	9.250%	2/1/15		300		300
Triad Hospitals Inc.	7.000%	11/15/13		270		272
						6,053
Hotels, Restaurants and Leisure — 5.5%
Boyd Gaming Corp.	8.750%	4/15/12		340		355
Boyd Gaming Corp.	6.750%	4/15/14		180		180
Denny’s Holdings Inc.	10.000%	10/1/12		350		369
Domino’s Inc.	8.250%	7/1/11		814		844
El Pollo Loco Inc.	11.750%	11/15/13		570		619
Inn of the Mountain Gods Resort and Casino	12.000%	11/15/10		1,460		1,577
Isle of Capri Casinos Inc.	7.000%	3/1/14		170		169
MGM MIRAGE	8.375%	2/1/11		465		482
MGM MIRAGE	7.625%	1/15/17		705		707
Pinnacle Entertainment Inc.	8.250%	3/15/12		800		808
River Rock Entertainment Authority	9.750%	11/1/11		1,290		1,367
Station Casinos Inc.	7.750%	8/15/16		670		675

Annual Report to Shareholders  41

			Par/
	Rate	Maturity Date	Shares		Value
Corporate Bonds and Notes — Continued
Hotels, Restaurants and Leisure — Continued
Turning Stone Casino Resort Enterprise	9.125%	9/15/14	$	235	$	240	C
Wimar Opco LLC	9.625%	12/15/14		60		59	C
						8,451
Household Durables — 2.4%
Beazer Homes USA Inc.	8.625%	5/15/11		265		273
Beazer Homes USA Inc.	8.375%	4/15/12		230		237
Beazer Homes USA Inc.	8.125%	6/15/16		255		270
Interface Inc.	10.375%	2/1/10		943		1,042
K Hovnanian Enterprises Inc.	6.250%	1/15/16		820		775
K Hovnanian Enterprises Inc.	8.625%	1/15/17		90		96
Norcraft Cos LP	9.000%	11/1/11		890		921
Norcraft Holdings LP	0.000%	9/1/12		160		135	B
						3,749
Household Products — 0.6%
Nutro Products Inc.	9.400%	10/15/13		90		93	C,D
Nutro Products Inc.	10.750%	4/15/14		235		257	C
Spectrum Brands Inc.	8.500%	10/1/13		222		208
Spectrum Brands Inc.	7.375%	2/1/15		100		86
Visant Holding Corp.	8.750%	12/1/13		330		340
						984
Independent Power Producers and Energy Traders — 2.5%
Mirant Americas Generation LLC	8.300%	5/1/11		950		974
NRG Energy Inc.	7.375%	2/1/16		2,170		2,181
The AES Corp.	7.750%	3/1/14		755		796
						3,951
Insurance — 0.4%
Crum and Forster Holdings Corp.	10.375%	6/15/13		500		541

42  Annual Report to Shareholders

Portfolio of Investments — Continued

High Yield Portfolio — Continued

			Par/
	Rate	Maturity Date	Shares		Value
Corporate Bonds and Notes — Continued
Internet and Catalog Retail — 0.8%
Brookstone Co. Inc.	12.000%	10/15/12	$	810	$	792
FTD Inc.	7.750%	2/15/14		425		425
						1,217
IT Services — 1.1%
SunGard Data Systems Inc.	10.250%	8/15/15		1,620		1,729
Machinery — 0.4%
Mueller Group Inc.	10.000%	5/1/12		350		381
Mueller Holdings Inc.	14.750%	4/15/14		315		283	B
						664
Marine — 0.4%
American Commercial Lines LLC	9.500%	2/15/15		500		556
Media — 9.6%
Affinion Group Inc.	10.125%	10/15/13		790		837
Affinion Group Inc.	11.500%	10/15/15		30		32
AMC Entertainment Inc.	11.000%	2/1/16		1,070		1,201
CCH I Holdings LLC	11.750%	5/15/14		630		569
CCH I Holdings LLC	11.000%	10/1/15		910		934
CCH I Holdings LLC	11.000%	10/1/15		67		69	C
CCH II Holdings LLC	10.250%	10/1/13		1,136		1,209	C
Charter Communications Holdings LLC	9.920%	4/1/11		50		46
Charter Communications Holdings LLC	11.750%	5/15/11		180		173
Charter Communications Holdings LLC	12.125%	1/15/12		195		182	B
CMP Susquehanna Corp.	9.875%	5/15/14		490		488	C
CSC Holdings Inc.	8.125%	7/15/09		100		104
CSC Holdings Inc.	8.125%	8/15/09		45		47
CSC Holdings Inc.	6.750%	4/15/12		965		941	C
EchoStar DBS Corp.	7.000%	10/1/13		755		754
EchoStar DBS Corp.	6.625%	10/1/14		950		926

Annual Report to Shareholders  43

			Par/
	Rate	Maturity Date	Shares		Value
Corporate Bonds and Notes — Continued
Media — Continued
EchoStar DBS Corp.	7.125%	2/1/16	$	330	$	330
Idearc Inc.	8.000%	11/15/16		460		467	C
LIN Television Corp.	6.500%	5/15/13		435		414
LIN Television Corp.	6.500%	5/15/13		250		238
LodgeNet Entertainment Corp.	9.500%	6/15/13		332		358
PRIMEDIA Inc.	8.875%	5/15/11		1,270		1,295
R.H. Donnelley Corp.	6.875%	1/15/13		525		503
R.H. Donnelley Corp.	6.875%	1/15/13		960		920
Rainbow National Services LLC	8.750%	9/1/12		510		536	C
Rainbow National Services LLC	10.375%	9/1/14		360		400	C
WMG Acquisition Corp.	7.375%	4/15/14		420		416
XM Satellite Radio Inc.	9.871%	5/1/13		170		165	D
XM Satellite Radio Inc.	9.750%	5/1/14		365		365
						14,919
Metals and Mining — 2.5%
Aleris International Inc.	10.000%	12/15/16		115		116	C
Chaparral Steel Co.	10.000%	7/15/13		790		882
CitiSteel USA Inc.	12.949%	9/1/10		520		538	D
CitiSteel USA Inc.	15.000%	10/1/10		155		175	C,F
Metals USA Holdings Corp.	11.365%	1/15/12		720		691	C,D
Metals USA Inc.	11.125%	12/1/15		600		659
RathGibson Inc.	11.250%	2/15/14		835		885
						3,946
Multiline Retail — 0.8%
The Neiman-Marcus Group Inc.	9.000%	10/15/15		1,090		1,189
Oil, Gas and Consumable Fuels — 10.8%
ANR Pipeline Inc.	9.625%	11/1/21		282		374
Belden and Blake Corp.	8.750%	7/15/12		2,055		2,107
Chesapeake Energy Corp.	6.375%	6/15/15		375		371
Chesapeake Energy Corp.	6.500%	8/15/17		565		552
Chesapeake Energy Corp.	6.250%	1/15/18		810		780
Colorado Interstate Gas Co.	6.800%	11/15/15		500		520
Complete Production Services Inc.	8.000%	12/15/16		450		461	C

44  Annual Report to Shareholders

Portfolio of Investments — Continued

High Yield Portfolio — Continued

			Par/
	Rate	Maturity Date	Shares		Value
Corporate Bonds and Notes — Continued
Oil, Gas and Consumable Fuels — Continued
El Paso Corp.	7.750%	6/15/10	$	230	$	243
El Paso Corp.	8.050%	10/15/30		950		1,054
El Paso Corp.	7.800%	8/1/31		1,150		1,256
Encore Acquisition Co.	6.250%	4/15/14		160		150
Encore Acquisition Co.	6.000%	7/15/15		310		283
Encore Acquisition Co.	7.250%	12/1/17		400		387
Enterprise Products Operating LP	8.375%	8/1/66		370		401	B
Exco Resources Inc.	7.250%	1/15/11		810		822
International Coal Group Inc.	10.250%	7/15/14		560		560
Mariner Energy Inc.	7.500%	4/15/13		295		286
Petrohawk Energy Corp.	9.125%	7/15/13		390		410
Pogo Producing Co.	6.875%	10/1/17		910		869
SemGroup LP	8.750%	11/15/15		865		869	C
SESI LLC	6.875%	6/1/14		30		30
Stone Energy Corp.	8.250%	12/15/11		230		226
Stone Energy Corp.	6.750%	12/15/14		285		272
The Williams Cos. Inc.	7.500%	1/15/31		440		457
The Williams Cos. Inc.	8.750%	3/15/32		1,896		2,143
Whiting Petroleum Corp.	7.000%	2/1/14		820		818
						16,701
Paper and Forest Products — 1.6%
Appleton Papers Inc.	9.750%	6/15/14		830		855
NewPage Corp.	11.621%	5/1/12		320		346	D
NewPage Corp.	12.000%	5/1/13		725		767
Verso Paper Holdings LLC	9.125%	8/1/14		120		125	C
Verso Paper Holdings LLC	11.375%	8/1/16		310		325	C
						2,418
Pharmaceuticals — 0.5%
Leiner Health Products Inc.	11.000%	6/1/12		790		818
Real Estate Investment Trusts — 1.1%
Host Marriott LP	6.750%	6/1/16		420		420
Kimball Hill Inc.	10.500%	12/15/12		490		458

Annual Report to Shareholders  45

			Par/
	Rate	Maturity Date	Shares		Value
Corporate Bonds and Notes — Continued
Real Estate Investment Trusts — Continued
Ventas Inc.	8.750%	5/1/09	$	475	$	505
Ventas Inc.	6.750%	6/1/10		200		206
Ventas Inc.	9.000%	5/1/12		158		179
						1,768
Real Estate Management and Development — 0.6%
Ashton Woods USA LLC	9.500%	10/1/15		110		100
Forest City Enterprises Inc.	6.500%	2/1/17		830		813
						913
Road and Rail — 1.7%
Hertz Corp.	8.875%	1/1/14		470		493	C
Hertz Corp.	10.500%	1/1/16		1,290		1,419	C
Kansas City Southern Railway	7.500%	6/15/09		710		716
						2,628
Semiconductors and Semiconductor Equipment — 0.5%
Freescale Semiconductor Inc.	8.875%	12/15/14		750		747	C
Software — 0.2%
Activant Solutions Inc.	9.500%	5/1/16		335		312	C
Specialty Retail — 0.4%
Blockbuster Inc.	9.000%	9/1/12		440		425
Linens ’n Things Inc.	10.999%	1/15/14		205		199	D
Michaels Stores Inc.	13.000%	11/1/16		125		68	B,C
						692

46  Annual Report to Shareholders

Portfolio of Investments — Continued

High Yield Portfolio — Continued

			Par/
	Rate	Maturity Date	Shares		Value
Corporate Bonds and Notes — Continued
Textiles, Apparel and Luxury Goods — 1.0%
Levi Strauss and Co.	9.750%	1/15/15	$	750	$	808
Levi Strauss and Co.	8.875%	4/1/16		50		52
Oxford Industries Inc.	8.875%	6/1/11		691		714
						1,574
Tobacco — 0.5%
Alliance One International Inc.	11.000%	5/15/12		130		139
Reynolds American Inc.	6.500%	7/15/10		580		588
						727
Trading Companies and Distributors — 0.9%
Ashtead Capital Inc.	9.000%	8/15/16		327		350	C
H&E Equipment Services Inc.	8.375%	7/15/16		245		257
Penhall International Corp.	12.000%	8/1/14		680		734	C
						1,341
Transportation Infrastructure — 0.6%
H-Lines Finance Holding Corp.	11.000%	4/1/13		994		924	B
Wireless Telecommunication Services — 0.5%
Rural Cellular Corp.	9.875%	2/1/10		760		808
Total Corporate Bonds and Notes (Cost — $126,974)						130,397

Annual Report to Shareholders  47

			Par/
	Rate	Maturity Date	Shares		Value
Mortgage-Backed Securities — 0.3%
Fixed Rate Securities — 0.3%
BlackRock Capital Finance LP 1996-R1	9.532%	9/25/26	$	502	$	391
BlackRock Capital Finance LP 1997-R1	7.750%	3/25/37		408		82	C
Ocwen Residential Mortgage Corp. 1998-R1	7.000%	10/25/40		146		14
Total Mortgage-Backed Securities (Cost — $736)						487
Yankee BondsG — 11.8%
Chemicals — 0.5%
Montell Finance Co. BV	8.100%	3/15/27		850		807	C
Commercial Services and Supplies — 0.2%
Quebecor World Capital Corp.	8.750%	3/15/16		340		326	C
Diversified Financial Services — 0.3%
Basell AF SCA	8.375%	8/15/15		500		514	C
Diversified Telecommunication Services — 2.6%
Inmarsat Finance PLC	7.625%	6/30/12		200		206
Intelsat Bermuda Ltd.	9.250%	6/15/16		135		145	C
Intelsat Bermuda Ltd.	11.250%	6/15/16		1,145		1,257	C
Intelsat Ltd.	7.625%	4/15/12		500		466
Nordic Telephone Co. Holdings ApS	8.875%	5/1/16		380		407	C
NTL Cable PLC	9.125%	8/15/16		550		581
Wind Acquisition Finance SA	10.750%	12/1/15		790		899	C
						3,961

48  Annual Report to Shareholders

Portfolio of Investments — Continued

High Yield Portfolio — Continued

			Par/
	Rate	Maturity Date	Shares		Value
Yankee Bonds — Continued
Energy Equipment and Services — 0.5%
Compagnie Generale de Geophysique SA	7.500%	5/15/15	$	780	$	784
Foreign Government Obligations — 1.7%
Federative Republic of Brazil	8.000%	1/15/18		190		211
Federative Republic of Brazil	11.000%	8/17/40		470		623
Republic of Panama	9.375%	4/1/29		93		124
Russian Federation	5.000%	3/31/30		1,450		1,637	B,C
						2,595
Independent Power Producers and Energy Traders — 0.6%
AES China Generating Co. Ltd.	8.250%	6/26/10		995		995
Media — 2.0%
Kabel Deutschland GmbH	10.625%	7/1/14		705		782
Quebecor Media Inc.	7.750%	3/15/16		1,325		1,353
Rogers Cable Inc.	5.500%	3/15/14		400		382
Rogers Cable Inc.	6.750%	3/15/15		530		546
						3,063
Oil, Gas and Consumable Fuels — 1.5%
OMI Corp.	7.625%	12/1/13		666		681
OPTI Canada Inc.	8.250%	12/15/14		375		385	C
Utilicorp Canada Finance Corp.	7.750%	6/15/11		510		538
Western Oil Sands Inc.	8.375%	5/1/12		640		711
						2,315
Paper and Forest Products — 0.3%
Domtar Inc.	7.875%	10/15/11		450		467
Road and Rail — 0.3%
Grupo Transportacion Ferroviaria Mexicana SA de CV	9.375%	5/1/12		370		395

Annual Report to Shareholders  49

			Par/
	Rate	Maturity Date	Shares			Value
Yankee Bonds — Continued
Semiconductors and Semiconductor Equipment — 0.3%
NXP BV/NXP Funding LLC	7.875%	10/15/14	$	365		$	377	C
NXP BV/NXP Funding LLC	9.500%	10/15/15		115			118	C
							495
Wireless Telecommunication Services — 1.0%
Rogers Wireless Inc.	7.250%	12/15/12		330			350
Rogers Wireless Inc.	8.000%	12/15/12		155			165
True Move Co. Ltd.	10.750%	12/16/13		1,030			1,007	C
							1,522
Total Yankee Bonds (Cost — $17,722)							18,239
Common Stocks and Equity Interests — N.M.
Washington Group International Inc.				0.3	shs		20	H
Total Common Stocks and Equity Interests (Cost — $ — )I							20
Preferred Stocks — 1.1%
Chesapeake Energy Corp.	6.250%			1			240	A
ION Media Networks Inc.	14.250%			0.2			1,413	F
Total Preferred Stocks (Cost — $1,769)							1,653

50  Annual Report to Shareholders

Portfolio of Investments — Continued

High Yield Portfolio — Continued

	Par/
	Shares			Value
Warrants — N.M.
Next Generation Network Inc.		16	wts	$	—	H,I
Total Warrants (Cost — $237)					—	I
Total Long-Term Securities (Cost — $147,438)					150,796
Short-Term Securities — 0.2%
Repurchase Agreements — 0.2%
Lehman Brothers Inc. 5.2%, dated 12/29/06, to be repurchased at $181 on 1/2/07 (Collateral: $180 Fannie Mae notes, 6.03%, due 8/15/16, value $185)	$	181			181
Merrill Lynch Government Securities Inc. 5.2%, dated 12/29/06, to be repurchased at $181 on 1/2/07 (Collateral: $185 Freddie Mac notes, 5.125%, due 10/15/08, value $187)		181			181
Total Short-Term Securities (Cost — $362)					362
Total Investments — 97.5% (Cost — $147,800)					151,158
Other Assets Less Liabilities — 2.5%					3,895
Net Assets — 100.0%				$	155,053

A	Convertible Security — Security may be converted into the issuer’s common stock.
B	Stepped Coupon Security — A security with a predetermined schedule of interest or dividend rate changes at which time it begins to accrue interest or pay dividends according to the predetermined schedule.
C	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 investment adviser has determined to be liquid, represent 16.46% of net assets.
D	Indexed Security — The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”), the Euro Interbank Offered Rate (“EURIBOR”) Index, the Consumer Price Index (“CPI”), and the one-year Treasury Bill Rate. The coupon rates are the rates as of December 31, 2006.
E	Unit — A security which consists of a bond and warrants to purchase the common stock of the issuer.

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

G	Yankee Bond — A dollar-denominated bond issued in the U.S. by a foreign entity.
H	Non-income producing.

^I Amount represents less than 1.

N.M. — Not meaningful.

See notes to financial statements.

Annual Report to Shareholders  51

Statement of Assets and Liabilities

High Yield Portfolio

December 31, 2006

(Amounts in Thousands)

Assets:
Investment securities at market value (Cost – $147,438)			$	150,796
Short-term securities at value (Cost – $362)				362
Cash				1
Receivable for securities sold				1,345
Receivable for fund shares sold				290
Interest receivable				3,236
Total assets				156,030
Liabilities:
Payable for fund shares repurchased	$	632
Accrued management fee		85
Accrued distribution and service fees		64
Income distribution payable		107
Accrued expenses		89
Total liabilities				977
Net Assets			$	155,053
Net assets consist of:
Accumulated paid-in capital applicable to:
15,918 Primary Class shares outstanding			$	298,022
554 Institutional Class shares outstanding				5,183
Overdistributions of net investment income				(24	)
Accumulated net realized loss on investments				(151,486	)
Unrealized appreciation/(depreciation) of investments				3,358
Net Assets			$	155,053
Net Asset Value Per Share:
Primary Class			$	9.41
Institutional Class			$	9.39

See notes to financial statements.

52  Annual Report to Shareholders

Statement of Operations

High Yield Portfolio

For the Year Ended December 31, 2006

(Amounts in Thousands)

Investment Income:
Interest	$	13,927
Dividends		122
Total income				$	14,049
Expenses:
Management fees		1,051
Distribution and service fees		755
Audit and legal fees		59
Custodian fees		83
Directors’ fees and expenses		29
Registration fees		48
Reports to shareholders		61
Transfer agent and shareholder servicing expense:
Primary Class		138
Institutional Class		14
Other expenses		47
		2,285
Less: Compensating balance credits		(5	)A
Total expenses, net of compensating balance credits					2,280
Net Investment Income					11,769
Net Realized and Unrealized Gain/(Loss) on Investments:
Realized gain on investments		3,400
Change in unrealized appreciation/(depreciation) of investments		5,070
Net Realized and Unrealized Gain on Investments					8,470
Change in Net Assets Resulting From Operations				$	20,239

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

See notes to financial statements.

Annual Report to Shareholders  53

Statement of Changes in Net Assets

High Yield Portfolio

(Amounts in Thousands)

	For the Years Ended
	12/31/06			12/31/05
Change in Net Assets:
Net investment income	$	11,769		$	14,117
Net realized gain on investments		3,400			765
Change in unrealized appreciation/(depreciation) on investments		5,070			(10,653	)
Change in net assets resulting from operations		20,239			4,229
Distributions to shareholders from:
Net investment income:
Primary Class		(10,957	)		(13,197	)
Institutional Class		(828	)		(861	)
Change in net assets from Fund share transactions:
Primary Class		(15,670	)		(38,618	)
Institutional Class		(7,519	)		4,174
Change in net assets		(14,735	)		(44,273	)
Net Assets:
Beginning of year		169,788			214,061
End of year	$	155,053		$	169,788
Under/(over) distributions of net investment income	$	(24	)	$	1

See notes to financial statements.

54  Annual Report to Shareholders

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,
	2006			2005			2004			2003			2002
Net asset value, beginning of year		$8.93			$9.39			$9.10			$7.96			$9.22
Investment operations:
Net investment income		.66			.67			.62			.63			.77
Net realized and unrealized gain/(loss) on investments		.48			(.46	)		.29			1.15			(1.26	)
Total from investment operations		1.14			.21			.91			1.78			(.49	)
Distributions from:
Net investment income		(.66	)		(.67	)		(.62	)		(.64	)		(.77	)
Total distributions		(.66	)		(.67	)		(.62	)		(.64	)		(.77	)
Net asset value, end of year		$9.41			$8.93			$9.39			$9.10			$7.96
Total return		13.35	%		2.39	%		10.51	%		23.03	%		(5.28	)%
Ratios to Average Net Assets:A
Total expenses		1.45	%		1.40	%		1.36	%		1.41	%		1.36	%
Expenses net of waivers, if any		1.45	%		1.40	%		1.36	%		1.41	%		1.36	%
Expenses net of all reductions		1.44	%		1.40	%		1.36	%		1.41	%		1.36	%
Net investment income		7.24	%		7.28	%		6.79	%		7.26	%		9.06	%
Supplemental Data:
Portfolio turnover rate		88.3	%		134.0	%		109.1	%		122.3	%		96.6	%
Net assets, end of year (in thousands)		$149,846			$157,399			$205,314			$223,773			$162,175

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

See notes to financial statements.

Annual Report to Shareholders  55

Institutional Class:

	Years Ended December 31,
	2006			2005			2004			2003			2002
Net asset value, beginning of year		$8.96			$9.41			$9.11			$7.96			$9.20
Investment operations:
Net investment income		.77			.71			.66			.66			.78
Net realized and unrealized gain/(loss) on investments		.43			(.45	)		.31			1.15			(1.24	)
Total from investment operations		1.20			.26			.97			1.81			(.46	)
Distributions from:
Net investment income		(.77	)		(.71	)		(.67	)		(.66	)		(.78	)
Total distributions		(.77	)		(.71	)		(.67	)		(.66	)		(.78	)
Net asset value, end of year		$9.39			$8.96			$9.41			$9.11			$7.96
Total return		14.05	%		2.94	%		11.15	%		23.54	%		(5.00	)%
Ratios to Average Net Assets:A
Total expenses		.94	%		.85	%		.80	%		.85	%		.82	%
Expenses net of waivers, if any		.94	%		.85	%		.80	%		.85	%		.82	%
Expenses net of all reductions		.94	%		.84	%		.80	%		.85	%		.82	%
Net investment income		7.82	%		7.93	%		7.38	%		7.78	%		9.63	%
Supplemental Data:
Portfolio turnover rate		88.3	%		134.0	%		109.1	%		122.3	%		96.6	%
Net assets, end of year (in thousands)		$5,207			$12,389			$8,747			$6,434			$2,704

See notes to financial statements.

56  Annual Report to Shareholders

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, 2006, are presented below:

			Average Annual Total Returns Through December 31, 2006
							Since
	One Year		Five Years		Ten Years		InceptionA
Investment Grade
Primary Class		+6.01%		+6.56%		+6.55%		+7.53%
Institutional Class		+6.45%		+7.10%		+7.11%		+6.93%
Lehman Credit Bond IndexB		+4.26%		+5.90%		+6.56%		+8.10%
Lipper Corporate Debt Funds
BBB Rates AverageC		+4.62%		+5.77%		+5.91%		+5.61%

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. Performance figures for periods shorter than one year represent cumulative figures and are not annualized.

The Fund returned 6.01% for the 12-month period ending, December 31, 2006. This compares favorably to the Fund’s benchmark, the Lehman Credit Bond Index, which returned 4.26%, and the 4.62% total return of the Lipper Corporate Debt Funds BBB Rates Average. Credit spreads in general narrowed during the period helping the asset class outperform U.S. treasuries. The Credit Index generated 119 basis points^D of excess return versus similar duration treasuries. The Fund’s outperformance versus the benchmark is attributable to industry allocation, issue selection and an overweight to lower rated issuers. The Fund

^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. An investor cannot invest directly in an index.

^C Average of the 176 funds comprising the Lipper universe of funds that invest at least 65% of assets in corporate and government debt issues rated in the top four grades.

^D 100 basis points = 1%.

Annual Report to Shareholders  57

benefited from overweights to media cable and financial institutions, which returned 5.84% and 4.86%, respectively. The decision to maintain exposure to both GM and Ford greatly benefited the Fund as they each returned over 20% for the period. Finally, the Fund’s overweight to BBB-rated issues benefited relative performance as the returns for BBB-rated issues on average exceeded index returns.

Western Asset Management Company

January 19, 2007

58  Annual Report to Shareholders

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, 2006, and held through December 31, 2006.

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
	7/1/06		12/31/06		7/1/06 to 12/31/06
Primary Class:
Actual	$	1,000.00	$	1,072.50	$	5.22
Hypothetical (5% return before expenses)		1,000.00		1,020.16		5.09
Institutional Class:
Actual	$	1,000.00	$	1,074.20	$	2.61
Hypothetical (5% return before expenses)		1,000.00		1,022.68		2.55

^A These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratios of 1.00% and 0.50% for the Primary Class and Institutional Class, respectively, multiplied by the average values over the period, multiplied by the number of days in the most recent fiscal half-year (184), and divided by 365.

Annual Report to Shareholders  59

Performance Information

Investment Grade Income Portfolio

The graphs on the following pages compare the Fund’s total returns to that of a closely matched broad-based securities market index. The graphs illustrate the cumulative total return of an initial $10,000 investment in Primary Class shares 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 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.

60  Annual Report to Shareholders

Performance Information — Continued

Growth of a $10,000 Investment — Primary Class

Periods Ended December 31, 2006

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+6.01%		+6.01%
Five Years		+37.39%		+6.56%
Ten Years		+88.56%		+6.55%

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.

Annual Report to Shareholders  61

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

Periods Ended December 31, 2006

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+6.45%		+6.45%
Five Years		+40.88%		+7.10%
Ten Years		+98.70%		+7.11%

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.

62  Annual Report to Shareholders

Performance Information — Continued

Portfolio Composition (as of December 31, 2006)^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  63

Portfolio of Investments

Legg Mason Investment Grade Income Portfolio

December 31, 2006

(Amounts in Thousands)

	Rate	Maturity Date	Par		Value
Long-Term Securities — 96.1%
Corporate Bonds and Notes — 70.3%
Aerospace and Defense — 0.3%
L-3 Communications Corp.	7.625%	6/15/12	$	1,000	$	1,035
Airlines — 0.2%
Continental Airlines Inc.	6.545%	8/2/20		160		165
Continental Airlines Inc.	7.256%	9/15/21		502		528
						693
Automobiles — 1.7%
DaimlerChrysler NA Holding Corp.	4.050%	6/4/08		160		157
DaimlerChrysler NA Holding Corp.	7.200%	9/1/09		260		270
DaimlerChrysler NA Holding Corp.	5.875%	3/15/11		300		301
DaimlerChrysler NA Holding Corp.	7.300%	1/15/12		735		780
DaimlerChrysler NA Holding Corp.	6.500%	11/15/13		290		298
DaimlerChrysler NA Holding Corp.	8.500%	1/18/31		850		1,012
Ford Motor Co.	7.450%	7/16/31		1,975		1,550
Ford Motor Co.	8.900%	1/15/32		370		332
General Motors Corp.	8.250%	7/15/23		650		604
General Motors Corp.	8.375%	7/15/33		1,990		1,841
						7,145

64  Annual Report to Shareholders

Portfolio of Investments — Continued

Legg Mason Investment Grade Income Portfolio — Continued

	Rate	Maturity Date	Par		Value
Corporate Bonds and Notes — Continued
Beverages — 0.2%
Foster’s Finance Corp.	4.875%	10/1/14	$	840	$	788	A
Building Products — N.M.
American Standard Inc.	8.250%	6/1/09		37		39
American Standard Inc.	7.625%	2/15/10		5		5
						44
Capital Markets — 2.5%
BankAmerica Capital III	5.944%	1/15/27		585		567	B
Lehman Brothers Holdings Inc.	5.750%	1/3/17		3,980		4,031
Merrill Lynch and Co. Inc.	6.000%	2/17/09		800		813
Morgan Stanley	5.050%	1/21/11		900		894
Morgan Stanley	4.750%	4/1/14		65		62
The Bear Stearns Cos. Inc.	5.500%	8/15/11		1,650		1,666
The Bear Stearns Cos. Inc.	5.550%	1/22/17		320		320
The Goldman Sachs Group Inc.	6.345%	2/15/34		2,025		2,050
						10,403
Chemicals — 0.7%
E.I. du Pont de Nemours and Co.	4.875%	4/30/14		1,100		1,064
The Dow Chemical Co.	6.000%	10/1/12		750		771
The Dow Chemical Co.	7.375%	11/1/29		800		925
						2,760
Commercial Banks — 4.5%
CBA Capital Trust I	5.805%	6/30/49		3,510		3,525	A
Comerica Bank	5.750%	11/21/16		990		989
KeyBank NA	5.800%	7/1/14		5		5
Rabobank Capital Funding Trust II	5.260%	12/31/49		320		313	A,C
Rabobank Capital Funding Trust III	5.254%	10/21/49		3,120		3,008	A,C
RBS Capital Trust III	5.512%	9/30/49		4,020		3,974	C

Annual Report to Shareholders  65

	Rate	Maturity Date	Par		Value
Corporate Bonds and Notes — Continued
Commercial Banks — Continued
SunTrust Bank	5.000%	9/1/15	$	770	$	747
SunTrust Capital VIII	6.100%	12/1/66		1,070		1,041	C
UnionBanCal Corp.	5.250%	12/16/13		785		771
Wachovia Capital Trust III	5.800%	3/15/42		520		524	C
Wachovia Corp.	5.625%	10/15/16		2,300		2,320
Wells Fargo Capital X	5.950%	12/15/36		1,740		1,705	C
						18,922
Commercial Services and Supplies — 0.3%
Waste Management Inc.	6.375%	11/15/12		310		325
Waste Management Inc.	7.375%	5/15/29		690		779
						1,104
Communications Equipment — N.M.
Motorola Inc.	7.625%	11/15/10		135		145
Computers and Peripherals — 0.4%
International Business Machines Corp.	4.750%	11/29/12		1,750		1,708
Consumer Finance — 5.7%
American Express Co.	6.800%	9/1/66		2,760		2,943	C
Capital One Financial Corp.	7.125%	8/1/08		340		349
Caterpillar Financial Services Corp.	4.500%	6/15/09		1,040		1,023
Ford Motor Credit Co.	7.375%	10/28/09		2,970		2,976
Ford Motor Credit Co.	7.375%	2/1/11		2,390		2,366
Ford Motor Credit Co.	10.610%	6/15/11		6,828		7,288	A,B
Ford Motor Credit Co.	7.250%	10/25/11		2,410		2,360
GMAC LLC	6.125%	8/28/07		2,680		2,681
GMAC LLC	6.311%	11/30/07		320		318
GMAC LLC	5.625%	5/15/09		590		585

66  Annual Report to Shareholders

Portfolio of Investments — Continued

Legg Mason Investment Grade Income Portfolio — Continued

	Rate	Maturity Date	Par		Value
Corporate Bonds and Notes — Continued
Consumer Finance — Continued
GMAC LLC	6.875%	9/15/11	$	750	$	769
GMAC LLC	0.000%	6/15/15		40		22	D
John Deere Capital Corp.	4.500%	8/22/07		5		5
						23,685
Diversified Financial Services — 13.7%
AIG SunAmerica Global Financing VI	6.300%	5/10/11		5,170		5,380	A
American Express Travel Related Services Co. Inc.	5.250%	11/21/11		830		829	A
American General Finance Corp.	5.750%	9/15/16		830		842
Associates Corp. of North America	8.150%	8/1/09		775		829
Bank of America Corp.	4.750%	8/15/13		110		106
Bank of America Corp.	5.420%	3/15/17		3,100		3,066	A
Beaver Valley II Funding	9.000%	6/1/17		1,100		1,235
Boeing Capital Corp.	6.500%	2/15/12		1,000		1,054
Boeing Capital Corp.	5.800%	1/15/13		530		544
Capital One Bank	4.875%	5/15/08		150		149
Capital One Bank	5.750%	9/15/10		870		884
Capital One Bank	6.500%	6/13/13		690		727
Chase Capital II	5.871%	2/1/27		1,980		1,896	B
Citigroup Inc.	6.125%	8/25/36		1,530		1,593
Countrywide Home Loans Inc.	3.250%	5/21/08		1,200		1,167
Deutsche Bank Capital Funding Trust	5.628%	1/19/49		1,760		1,730	A,C
General Electric Capital Corp.	4.000%	6/15/09		3,640		3,544
General Electric Capital Corp.	3.750%	12/15/09		4,900		4,717
General Electric Capital Corp.	6.000%	6/15/12		960		994
General Electric Capital Corp.	6.750%	3/15/32		5		6
HSBC Finance Capital Trust IX	5.911%	11/30/35		2,500		2,512	C
HSBC Finance Corp.	5.700%	6/1/11		1,280		1,302
HSBC Finance Corp.	5.500%	1/19/16		1,610		1,618
ILFC E-Capital Trust II	6.250%	12/21/65		2,320		2,357	A,C

Annual Report to Shareholders  67

	Rate	Maturity Date	Par		Value
Corporate Bonds and Notes — Continued
Diversified Financial Services — Continued
JPMorgan Chase and Co.	5.125%	9/15/14	$	5	$	5
JPMorgan Chase and Co.	4.891%	9/1/15		1,035		1,014	C
Mizuho Preferred Capital Co. LLC	8.790%	12/29/49		1,520		1,590	A,C
National Rural Utilities Cooperative Finance Corp.	7.250%	3/1/12		1,700		1,847
Residential Capital Corp.	6.125%	11/21/08		1,340		1,347
Residential Capital Corp.	6.000%	2/22/11		2,400		2,396
SB Treasury Co. LLC	9.400%	6/30/49		840		884	A,C
UBS Preferred Funding Trust V	6.243%	5/15/49		3,030		3,138	C
Unilever Capital Corp.	7.125%	11/1/10		480		510
ZFS Finance USA Trust II	6.450%	12/15/65		4,990		5,089	A,C
						56,901
Diversified Telecommunication Services — 3.8%
AT&T Corp.	8.000%	11/15/31		1,200		1,489
AT&T Inc.	5.100%	9/15/14		1,910		1,854
BellSouth Corp.	4.750%	11/15/12		830		801
Embarq Corp.	7.082%	6/1/16		1,500		1,527
Qwest Corp.	5.625%	11/15/08		550		551
TCI Communications Financing III	9.650%	3/31/27		3,350		3,535
Verizon Global Funding Corp.	6.875%	6/15/12		1,030		1,100
Verizon Global Funding Corp.	7.750%	6/15/32		375		440
Verizon Global Funding Corp.	5.850%	9/15/35		1,580		1,513
Verizon New York Inc.	6.875%	4/1/12		2,810		2,913
						15,723
Electric Utilities — 4.3%
Alabama Power Co.	3.125%	5/1/08		920		894
Duke Energy Corp.	5.625%	11/30/12		270		275
Exelon Corp.	6.750%	5/1/11		1,370		1,431
FirstEnergy Corp.	6.450%	11/15/11		2,285		2,383

68  Annual Report to Shareholders

Portfolio of Investments — Continued

Legg Mason Investment Grade Income Portfolio — Continued

	Rate	Maturity Date	Par		Value
Corporate Bonds and Notes — Continued
Electric Utilities — Continued
FirstEnergy Corp.	7.375%	11/15/31	$	4,440	$	5,056
Niagara Mohawk Power Corp.	7.750%	10/1/08		1,010		1,046
Pacific Gas and Electric Co.	6.050%	3/1/34		2,380		2,400
Tampa Electric Co.	6.375%	8/15/12		380		397
The Cleveland Electric Illuminating Co.	5.650%	12/15/13		940		937
The Cleveland Electric Illuminating Co.	7.880%	11/1/17		850		994
The Detroit Edison Co.	5.200%	10/15/12		1,260		1,241
TXU Energy Co.	7.000%	3/15/13		930		973
						18,027
Energy Equipment and Services — 0.5%
CenterPoint Energy Resources Corp.	7.875%	4/1/13		1,010		1,121
Pride International Inc.	7.375%	7/15/14		800		826
						1,947
Food and Staples Retailing — 0.9%
CVS Corp.	5.750%	8/15/11		820		830
Safeway Inc.	7.500%	9/15/09		600		630
Safeway Inc.	5.800%	8/15/12		750		751
The Kroger Co.	8.000%	9/15/29		1,000		1,154
Wal-Mart Stores Inc.	6.875%	8/10/09		475		495
						3,860
Food Products — 1.0%
Ahold Finance USA Inc.	8.250%	7/15/10		960		1,040
Kellogg Co.	6.600%	4/1/11		1,000		1,049

Annual Report to Shareholders  69

	Rate	Maturity Date	Par		Value
Corporate Bonds and Notes — Continued
Food Products — Continued
Kellogg Co.	7.450%	4/1/31	$	650	$	776
Kraft Foods Inc.	6.250%	6/1/12		1,360		1,413
						4,278
Gas Utilities — 0.3%
Panhandle Eastern Pipe Line Co.	4.800%	8/15/08		1,170		1,153
Health Care Equipment and Supplies — 0.4%
Baxter International Inc.	5.900%	9/1/16		1,430		1,469
Health Care Providers and Services — 4.1%
Aetna Inc.	5.750%	6/15/11		1,490		1,513
Cardinal Health Inc.	5.800%	10/15/16		1,100		1,097	A
Coventry Health Care Inc.	5.875%	1/15/12		1,050		1,037
HCA Inc.	6.300%	10/1/12		1,790		1,638
HCA Inc.	6.250%	2/15/13		2,130		1,885
HCA Inc.	5.750%	3/15/14		150		124
HCA Inc.	9.125%	11/15/14		1,100		1,176	A
HCA Inc.	9.250%	11/15/16		1,380		1,478	A
Humana Inc.	6.450%	6/1/16		600		617
Quest Diagnostics Inc.	5.125%	11/1/10		790		778
Tenet Healthcare Corp.	9.875%	7/1/14		2,310		2,350
Tenet Healthcare Corp.	6.875%	11/15/31		750		602
Universal Health Services Inc.	7.125%	6/30/16		1,450		1,514
WellPoint Inc.	5.000%	12/15/14		1,330		1,288
						17,097

70  Annual Report to Shareholders

Portfolio of Investments — Continued

Legg Mason Investment Grade Income Portfolio — Continued

	Rate	Maturity Date	Par		Value
Corporate Bonds and Notes — Continued
Hotels, Restaurants and Leisure — 0.6%
Harrah’s Operating Co. Inc.	5.500%	7/1/10	$	770	$	754
Harrah’s Operating Co. Inc.	5.750%	10/1/17		2,110		1,768
						2,522
Household Durables — 0.5%
Centex Corp.	5.125%	10/1/13		420		402
DR Horton Inc.	5.250%	2/15/15		610		569
Pulte Homes Inc.	6.250%	2/15/13		385		391
The Black and Decker Corp.	5.750%	11/15/16		810		803
						2,165
Household Products — 0.1%
The Clorox Co.	5.000%	1/15/15		350		339
The Procter and Gamble Co.	4.300%	8/15/08		200		197
						536
Independent Power Producers and Energy Traders — 1.0%
Dynegy Holdings Inc.	8.750%	2/15/12		1,690		1,792
TXU Corp.	6.550%	11/15/34		2,730		2,553
						4,345
Insurance — 1.7%
ASIF Global Financing XIX	4.900%	1/17/13		90		88	A
Liberty Mutual Group	5.750%	3/15/14		720		717	A
Liberty Mutual Group	7.500%	8/15/36		900		985	A
MetLife Inc.	6.400%	12/15/36		2,060		2,069	C
Prudential Financial Inc.	5.700%	12/14/36		920		895
The St. Paul Travelers Cos. Inc.	6.250%	6/20/16		780		819

Annual Report to Shareholders  71

	Rate	Maturity Date	Par		Value
Corporate Bonds and Notes — Continued
Insurance — Continued
Willis North America Inc.	5.125%	7/15/10	$	760	$	741
Willis North America Inc.	5.625%	7/15/15		660		632
						6,946
IT Services — 0.4%
Electronic Data Systems Corp.	7.125%	10/15/09		530		553
Electronic Data Systems Corp.	6.500%	8/1/13		500		503	E
Electronic Data Systems Corp.	7.450%	10/15/29		570		624
						1,680
Leisure Equipment and Products — 0.3%
Eastman Kodak Co.	3.625%	5/15/08		975		940
Eastman Kodak Co.	7.250%	11/15/13		500		497
						1,437
Media — 4.7%
Clear Channel Communications Inc.	4.400%	5/15/11		1,210		1,091
Clear Channel Communications Inc.	5.500%	9/15/14		500		422
Comcast Cable Communications Inc.	6.750%	1/30/11		960		1,006
Comcast Cable Holdings LLC	7.125%	2/15/28		180		192
Comcast Corp.	7.050%	3/15/33		1800		1925
Comcast Corp.	6.450%	3/15/37		1,100		1,101
COX Communications Inc.	4.625%	1/15/10		1,410		1,380
CSC Holdings Inc.	7.625%	7/15/18		1,500		1,461
Liberty Media LLC	7.875%	7/15/09		1,000		1,043
Liberty Media LLC	8.500%	7/15/29		340		342
Liberty Media LLC	8.250%	2/1/30		120		118

72  Annual Report to Shareholders

Portfolio of Investments — Continued

Legg Mason Investment Grade Income Portfolio — Continued

	Rate	Maturity Date	Par		Value
Corporate Bonds and Notes — Continued
Media — Continued
News America Inc.	6.550%	3/15/33	$	1,495	$	1,502
News America Inc.	6.200%	12/15/34		115		111
The Walt Disney Co.	6.200%	6/20/14		1,220		1,277
Time Warner Entertainment Co. LP	8.375%	7/15/33		505		610
Time Warner Inc.	6.875%	5/1/12		1,350		1,427
Time Warner Inc.	9.125%	1/15/13		1,130		1,316
Time Warner Inc.	7.700%	5/1/32		1,015		1,145
Viacom Inc.	7.700%	7/30/10		90		96
Viacom Inc.	5.750%	4/30/11		990		990
Viacom Inc.	5.625%	8/15/12		1,095		1,080
						19,635
Multi-Utilities — 1.0%
Dominion Resources Inc	5.150%	7/15/15		1,140		1,104
DTE Energy Co.	6.375%	4/15/33		350		360
Sempra Energy	5.845%	5/21/08		1,685		1,686	B
Xcel Energy Inc.	7.000%	12/1/10		900		949
						4,099
Multiline Retail — 0.6%
May Department Stores Co.	5.750%	7/15/14		1,070		1,047
May Department Stores Co.	6.700%	7/15/34		490		483
Target Corp.	5.875%	3/1/12		860		884
						2,414
Oil, Gas and Consumable Fuels — 6.6%
Anadarko Petroleum Corp.	5.950%	9/15/16		430		431
Apache Corp.	6.250%	4/15/12		1,010		1,049
Conoco Inc.	6.950%	4/15/29		740		841
ConocoPhillips	4.750%	10/15/12		2,290		2,233

Annual Report to Shareholders  73

	Rate	Maturity Date	Par		Value
Corporate Bonds and Notes — Continued
Oil, Gas and Consumable Fuels — Continued
Devon Financing Corp. U.L.C.	7.875%	9/30/31	$	560	$	674
Duke Capital LLC	6.250%	2/15/13		340		350
El Paso Corp.	7.800%	8/1/31		1,660		1,814
El Paso Corp.	7.750%	1/15/32		340		372
Hess Corp.	7.875%	10/1/29		3,770		4,401
Kerr-McGee Corp.	6.950%	7/1/24		220		234
Kerr-McGee Corp.	7.875%	9/15/31		4,700		5,607
Kinder Morgan Energy Partners LP	7.125%	3/15/12		1,430		1,518
Ocean Energy Inc.	4.375%	10/1/07		965		957
Pemex Project Funding Master Trust	5.970%	12/3/12		107		107	A,B
Pemex Project Funding Master Trust	6.625%	6/15/35		2,900		2,967
Tennessee Gas Pipeline Co.	8.375%	6/15/32		1,000		1,215
The Williams Cos. Inc.	7.625%	7/15/19		2,000		2,140
Valero Energy Corp.	6.875%	4/15/12		565		597
						27,507
Paper and Forest Products — 0.3%
Weyerhaeuser Co.	6.750%	3/15/12		1,120		1,175
Pharmaceuticals — 0.5%
Wyeth	6.950%	3/15/11		2,000		2,124	E
Real Estate Investment Trusts — 1.6%
EOP Operating LP	6.750%	2/15/12		1,500		1,620
Health Care REIT Inc.	5.875%	5/15/15		1,440		1,422
iStar Financial Inc.	5.375%	4/15/10		10		10
iStar Financial Inc.	5.950%	10/15/13		3,610		3,628	A
						6,680

74  Annual Report to Shareholders

Portfolio of Investments — Continued

Legg Mason Investment Grade Income Portfolio — Continued

	Rate	Maturity Date	Par		Value
Corporate Bonds and Notes — Continued
Road and Rail — 0.6%
Burlington Northern Rail Road Co.	6.960%	3/22/09	$	131	$	133
Burlington Northern Rail Road Co.	7.330%	6/23/10		105		109
CSX Transportation Inc.	7.875%	5/15/43		252		313
Norfolk Southern Corp.	7.875%	5/15/43		348		436
Union Pacific Corp.	4.875%	1/15/15		1,740		1,668
						2,659
Thrifts and Mortgage Finance — 0.9%
BB&T Capital Trust II	6.750%	6/7/36		1,750		1,911
Countrywide Home Loans Inc.	4.125%	9/15/09		340		330
Washington Mutual Inc.	4.200%	1/15/10		700		678
Washington Mutual Inc.	4.625%	4/1/14		1,000		936
						3,855
Tobacco — 0.6%
Altria Group Inc.	7.000%	11/4/13		1,385		1,505
Reynolds American Inc.	7.875%	5/15/09		860		896
						2,401
Wireless Telecommunication Services — 2.8%
New Cingular Wireless Services Inc.	7.500%	5/1/07		1,500		1,509
New Cingular Wireless Services Inc.	8.125%	5/1/12		570		641
New Cingular Wireless Services Inc.	8.750%	3/1/31		980		1,274
Nextel Communications Inc.	5.950%	3/15/14		469		457
Nextel Communications Inc.	7.375%	8/1/15		1,600		1,641
Sprint Capital Corp.	8.375%	3/15/12		1,860		2,067

Annual Report to Shareholders  75

	Rate	Maturity Date	Par		Value
Corporate Bonds and Notes — Continued
Wireless Telecommunication Services — Continued
Sprint Capital Corp.	8.750%	3/15/32	$	2,650	$	3,189
Sprint Nextel Corp.	6.000%	12/1/16		990		965
						11,743
Total Corporate Bonds and Notes (Cost — $291,097)						292,810
U.S. Government and Agency Obligations — 3.6%
Fixed Rate Securities — 3.6%
Tennessee Valley Authority	5.375%	11/13/08		150		151
United States Treasury Bonds	6.250%	5/15/30		40		48
United States Treasury Bonds	4.500%	2/15/36		1,925		1,831
United States Treasury Notes	4.500%	2/15/09		2,035		2,023
United States Treasury Notes	4.875%	7/31/11		6,000		6,042
United States Treasury Notes	4.500%	9/30/11		3,260		3,231
United States Treasury Notes	4.625%	10/31/11		180		179
United States Treasury Notes	3.625%	5/15/13		950		895
United States Treasury Notes	4.625%	11/15/16		730		725
Total U.S. Government and Agency Obligations (Cost — $15,133)						15,125
U.S. Government Agency Mortgage-Backed Securities — N.M.
Indexed SecuritiesB — N.M.
Freddie Mac	6.939%	9/1/24		65		67
Total U.S. Government Agency Mortgage-Backed Securities (Cost — $65)						67
Yankee BondsF — 22.2%
Automobiles — 0.3%
General Motors Nova Scotia Finance Co.	6.850%	10/15/08		1,160		1,154
Beverages — 0.3%
Molson Coors Capital Finance	4.850%	9/22/10		1,305		1,279

76  Annual Report to Shareholders

Portfolio of Investments — Continued

Legg Mason Investment Grade Income Portfolio — Continued

	Rate	Maturity Date	Par		Value
Yankee Bonds — Continued
Commercial Banks — 8.8%
AES El Salvador Trust	6.750%	2/1/16	$	2,080	$	2,069	A
Banco Mercantil del Norte SA	6.135%	10/13/16		2,030		2,031	A,C
BOI Capital Funding	5.571%	2/1/49		2,000		1,953	A,C
Corp. Andina de Fomento	5.730%	1/26/07		1,260		1,260	B
Glitnir Banki Hf	6.330%	7/28/11		1,100		1,129	A
Glitnir Banki Hf	6.693%	6/15/16		1,900		1,961	A,C
Glitnir Banki Hf	7.451%	9/14/49		560		590	A,C
HBOS Capital Funding LP	6.071%	6/30/49		1,490		1,511	A,C
HBOS Treasury Services PLC	4.000%	9/15/09		1,080		1,047	A
HSBC Capital Funding LP	4.610%	6/27/49		760		708	A,C
Kaupthing Bank Hf	6.061%	4/12/11		1,440		1,450	A,B
Kaupthing Bank Hf	5.750%	10/4/11		1,340		1,339	A
Kaupthing Bank Hf	7.125%	5/19/16		3,585		3,803	A
Mizuho Financial Group	5.790%	4/15/14		3,565		3,586	A
Resona Preferred Global Securities	7.191%	7/30/49		2,880		3,005	A,C
RSHB Capital SA	7.175%	5/16/13		3,690		3,888	A
Shinsei Finance Cayman Ltd.	6.418%	7/20/49		3,055		3,051	A,C
Sumitomo Mitsui Banking Corp.	5.625%	10/15/49		730		714	A,C
VTB Capital SA for Vneshtorgbank	5.970%	8/1/08		1,560		1,561	A,B
						36,656
Consumer Finance — 0.2%
HSBC Holdings PLC	5.250%	12/12/12		830		827
Diversified Financial Services — 1.1%
AIFUL CORP.	5.000%	8/10/10		2,685		2,606	A
SMFG Preferred Capital	6.078%	1/25/49		230		226	A,C
TNK-BP Finance SA	7.500%	7/18/16		870		925	A
UFJ Finance Aruba AEC	6.750%	7/15/13		920		982
						4,739

Annual Report to Shareholders  77

	Rate	Maturity Date	Par		Value
Yankee Bonds — Continued
Diversified Telecommunication Services — 4.0%
British Telecommunications PLC	8.625%	12/15/10	$	900	$	1,004	E
British Telecommunications PLC	9.125%	12/15/30		420		575	E
Deutsche Telekom International Finance BV	8.250%	6/15/30		1,400		1,721
Deutsche Telekom International Finance BV	9.250%	6/1/32		670		876
France Telecom SA	7.750%	3/1/11		3,000		3,268
France Telecom SA	8.500%	3/1/31		340		446
Intelsat Ltd.	7.625%	4/15/12		32		30
Intelsat Ltd.	6.500%	11/1/13		1,333		1,133
Koninklijke (Royal) KPN NV	8.000%	10/1/10		990		1,068
Koninklijke (Royal) KPN NV	8.375%	10/1/30		655		750
Tele Norte Leste Participacoes SA	8.000%	12/18/13		1,080		1,148
Telecom Italia Capital	7.200%	7/18/36		2,070		2,163
Telefonica Emisiones S.A.U	7.045%	6/20/36		800		850
Telefonica Europe BV	7.750%	9/15/10		800		859
Telus Corp.	7.500%	6/1/07		700		705
						16,596
Electric Utilities — 1.0%
Enersis SA	7.375%	1/15/14		850		915
Enersis SA/Cayman Island	7.400%	12/1/16		1,211		1,331
Hydro Quebec	7.500%	4/1/16		1,625		1,887
						4,133
Foreign Government Obligations — 2.6%
Federative Republic of Brazil	8.875%	4/15/24		240		299
Federative Republic of Brazil	10.125%	5/15/27		740		1,040
Federative Republic of Brazil	7.125%	1/20/37		340		365
Province of Nova Scotia	5.750%	2/27/12		1,000		1,030
Republic of Colombia	7.375%	9/18/37		177		190

78  Annual Report to Shareholders

Portfolio of Investments — Continued

Legg Mason Investment Grade Income Portfolio — Continued

	Rate	Maturity Date	Par		Value
Yankee Bonds — Continued
Foreign Government Obligations — Continued
Republic of Panama	7.125%	1/29/26	$	500	$	540
Republic of Panama	6.700%	1/26/36		353		367
Russian Federation	5.000%	3/31/30		980		1,106	A,C
United Mexican States	11.500%	5/15/26		160		259
United Mexican States	8.300%	8/15/31		820		1,048
United Mexican States	7.500%	4/8/33		3,762		4,439
						10,683
Industrial Conglomerates — 0.8%
Tyco International Group SA	6.375%	10/15/11		250		262
Tyco International Group SA	7.000%	6/15/28		554		636
Tyco International Group SA	6.875%	1/15/29		2,051		2,331
						3,229
Insurance — 0.5%
Axa	8.600%	12/15/30		1,630		2,113
XL Capital Ltd.	5.250%	9/15/14		20		20
						2,133
Media — 0.2%
British Sky Broadcasting Group PLC	6.875%	2/23/09		870		896
Metals and Mining — 0.8%
Vale Overseas Ltd.	6.250%	1/23/17		1,474		1,481
Vale Overseas Ltd.	6.875%	11/21/36		1,800		1,846
						3,327

Annual Report to Shareholders  79

	Rate	Maturity Date	Par		Value
Yankee Bonds — Continued
Oil, Gas and Consumable Fuels — 1.4%
Anadarko Finance Co.	6.750%	5/1/11	$	10	$	10
Conoco Funding Co.	6.350%	10/15/11		520		544
Gazprom Capital	6.212%	11/22/16		1,180		1,188	A
Petrobras International Finance Co.	6.125%	10/6/16		2,186		2,208
Petroliam Nasional Bhd	7.625%	10/15/26		610		747	A
Petronas Capital Ltd.	7.875%	5/22/22		770		948	A
						5,645
Wireless Telecommunication Services — 0.2%
Rogers Wireless Inc.	6.375%	3/1/14		1,000		1,012
Total Yankee Bonds (Cost — $89,182)						92,309
Total Long-Term Securities (Cost — $395,477)						400,311

80  Annual Report to Shareholders

Portfolio of Investments — Continued

Legg Mason Investment Grade Income Portfolio — Continued

	Rate	Maturity Date	Par		Value
Short-Term Securities — 2.2%
U.S. Government and Agency Obligations — 0.1%
Fannie Mae	0.000%	6/25/07	$	255	$	249	D,G
Fannie Mae	0.000%	6/28/07		46		42	D,G
						291
Repurchase Agreements — 2.1%
Lehman Brothers Inc. 5.2%, dated 12/29/06, to be repurchased at $4,458 on 1/2/07 (Collateral: $4,420 Fannie Mae notes, 6.03%, due 8/15/16, value $4,544)				4,455		4,455
Merrill Lynch Government Securities Inc. 5.21%, dated 12/29/06, to be repurchased at $4,458 on 1/2/07 (Collateral: $4,490 Freddie Mac notes, 5.125%, due 10/15/08, value $4,546)				4,455		4,455
						8,910
Total Short-Term Securities (Cost — $9,204)						9,201
Total Investments — 98.3% (Cost — $404,681)						409,512
Other Assets Less Liabilities — 1.7%						7,246
Net Assets — 100.0%					$	416,758

Annual Report to Shareholders  81

		Actual		Appreciation/
	Expiration	Contracts		(Depreciation)
Futures Contracts PurchasedH
Eurodollar Futures	March 2007		140	$	(8	)
Eurodollar Futures	September 2007		557		(253	)
U.S. Treasury Note Futures	March 2007		207		(123	)
				$	(384	)
Futures Contracts WrittenH
U.S. Treasury Bond Futures	March 2007		20	$	59
U.S. Treasury Note Futures	March 2007		355		315
				$	374

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 21.18% of net assets.
B	Indexed Security — The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”), the Consumer Price Index (“CPI”), and the one-year Treasury Bill Rate. The coupon rates are the rates as of December 31, 2006.
C	Stepped Coupon Security — A security with a predetermined schedule of interest or dividend rate changes at which time it begins to accrue interest or pay dividends according to the predetermined schedule.
D	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.
E	The coupon rates shown on variable rate securities are the rates at December 31, 2006.

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

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.

82  Annual Report to Shareholders

Statement of Assets and Liabilities

Investment Grade Income Portfolio

December 31, 2006

(Amounts in Thousands)

Assets:
Investment securities at market value (Cost – $395,477)			$	400,311
Short-term securities at value (Cost – $9,204)				9,201
Cash				676
Receivable for fund shares sold				1,816
Interest receivable				6,263
Futures variation margin receivable				5
Other assets				1
Total assets				418,273
Liabilities:
Payable for fund shares repurchased	$	1,016
Accrued management fee		125
Accrued distribution and service fees		142
Income distribution payable		86
Accrued expenses		146
Total liabilities				1,515
Net Assets			$	416,758
Net assets consist of:
Accumulated paid-in capital applicable to:
38,597 Primary Class shares outstanding			$	398,577
1,133 Institutional Class shares outstanding				12,341
Overdistributions of net investment income				(116	)
Undistributed net realized gain on investments and futures				1,133
Unrealized appreciation/(depreciation) of investments and futures				4,823
Net Assets			$	416,758
Net Asset Value Per Share:
Primary Class				$10.49
Institutional Class				$10.49

See notes to financial statements.

Annual Report to Shareholders  83

Statement of Operations

Investment Grade Income Portfolio

For the Year Ended December 31, 2006

(Amounts in Thousands)

Investment Income:
Interest	$	23,909
Total income				$	23,909
Expenses:
Management fees		2,400
Distribution and service fees		1,907
Audit and legal fees		73
Custodian fees		133
Directors’ fees and expenses		55
Registration fees		100
Reports to shareholders		103
Transfer agent and shareholder servicing expense:
Primary Class		360
Institutional Class		1
Other expenses		74
		5,206
Less: Fees waived		(1,294	)
Compensating balance credits		(5	)A
Total expenses, net of waivers and compensating balance credits					3,907
Net Investment Income					20,002
Net Realized and Unrealized Gain/(Loss) on Investments:
Realized gain/(loss) on:
Investments		519
Futures		802
					1,321
Change in unrealized appreciation/(depreciation) of investments and futures					2,783
Net Realized and Unrealized Gain on Investments					4,104
Change in Net Assets Resulting From Operations				$	24,106

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

See notes to financial statements.

84  Annual Report to Shareholders

Statement of Changes in Net Assets

Investment Grade Income Portfolio

(Amounts in Thousands)

	For the Years Ended
	12/31/06			12/31/05
Change in Net Assets:
Net investment income	$	20,002		$	18,980
Net realized gain on investments and futures		1,321			2,302
Change in unrealized appreciation/(depreciation) of investments and futures		2,783			(14,161	)
Change in net assets resulting from operations		24,106			7,121
Distributions to shareholders from:
Net investment income:
Primary Class		(18,986	)		(18,146	)
Institutional Class		(1,013	)		(836	)
Net realized gain on investments:
Primary Class		(15	)		(3,431	)
Institutional Class		(1	)		(157	)
Change in net assets from Fund share transactions:
Primary Class		34,481			(22,272	)
Institutional Class		(8,584	)		10,914
Change in net assets		29,988			(26,807	)
Net Assets:
Beginning of year		386,770			413,577
End of year	$	416,758		$	386,770
Overdistributions of net investment income	$	(116	)	$	(118	)

See notes to financial statements.

Annual Report to Shareholders  85

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,
	2006			2005			2004			2003			2002
Net asset value, beginning of year		$10.40			$10.81			$10.88			$10.42			$10.10
Investment operations:
Net investment income		.51	A		.49			.49			.50			.54
Net realized and unrealized gain/(loss) on investments, options and futures		.09			(.31	)		.18			.53			.32
Total from investment operations		.60			.18			.67			1.03			.86
Distributions from:
Net investment income		(.51	)		(.49	)		(.49	)		(.50	)		(.54	)
Net realized gain on investments		—B			(.10	)		(.25	)		(.07	)		—
Total distributions		(.51	)		(.59	)		(.74	)		(.57	)		(.54	)
Net asset value, end of year		$10.49			$10.40			$10.81			$10.88			$10.42
Total return		6.01	%		1.69	%		6.29	%		10.16	%		8.82	%
Ratios to Average Net Assets:C
Total expenses		1.33	%		1.30	%		1.27	%		1.28	%		1.30	%
Expenses net of waivers, if any		1.00	%		1.00	%		1.00	%		1.00	%		1.00	%
Expenses net of all reductions		1.00	%		1.00	%		1.00	%		1.00	%		1.00	%
Net investment income		4.98	%		4.64	%		4.47	%		4.62	%		5.32	%
Supplemental Data:
Portfolio turnover rate		65.7	%		51.1	%		74.9	%		78.2	%		131.0	%
Net assets, end of year (in thousands)		$404,864			$366,329			$403,361			$408,685			$334,763

^A Computed using average daily shares outstanding.

^B Amount represents less than $0.01 per share.

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

See notes to financial statements.

86  Annual Report to Shareholders

Financial Highlights — Continued

Investment Grade Income Portfolio — Continued

Institutional Class:

	Years Ended December 31,
	2006			2005			2004			2003			2002
Net asset value, beginning of year		$10.41			$10.82			$10.89			$10.43			$10.11
Investment operations:
Net investment income		.56	A		.55			.54			.55			.59
Net realized and unrealized gain/(loss) on investments, options and futures		.08			(.31	)		.17			.53			.31
Total from investment operations		.64			.24			.71			1.08			.90
Distributions from:
Net investment income		(.56	)		(.55	)		(.53	)		(.55	)		(.58	)
Net realized gain on investments		—B			(.10	)		(.25	)		(.07	)		—
Total distributions		(.56	)		(.65	)		(.78	)		(.62	)		(.58	)
Net asset value, end of year		$10.49			$10.41			$10.82			$10.89			$10.43
Total return		6.45	%		2.27	%		6.85	%		10.71	%		9.38	%
Ratios to Average Net Assets:C
Total expenses		.74	%		.74	%		.74	%		.78	%		.78	%
Expenses net of waivers, if any		.50	%		.44	%		.47	%		.50	%		.48	%
Expenses net of all reductions		.50	%		.44	%		.47	%		.50	%		.48	%
Net investment income		5.47	%		5.26	%		5.02	%		5.13	%		5.85	%
Supplemental Data:
Portfolio turnover rate		65.7	%		51.1	%		74.9	%		78.2	%		131.0	%
Net assets, end of year (in thousands)		$11,894			$20,441			$10,216			$5,895			$2,836

See notes to financial statements.

Annual Report to Shareholders  87

Management’s Discussion of Fund Performance

Limited Duration Bond Portfolio

Average annual total returns for the Limited Duration Bond Portfolio (“Fund”) and its benchmark for various periods ended December 31, 2006, are presented below:

			Average Annual Total Returns Through December 31, 2006
	One		Five		Ten		Since
	Year		Years		Years		InceptionA
Limited Duration Bond PortfolioB
Primary Class		+4.46%		+3.39%		+4.54%		+6.10%
Institutional Class		+4.98%		+3.92%		+5.08%		+5.84%
Merrill Lynch 1-3 Year Treasury IndexC		+3.96%		+2.82%		+4.69%		+5.98%
Lehman Intermediate U.S. Government Bond IndexD		+3.84%		+3.92%		+5.48%		+6.76%

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. Performance figures for periods shorter than one year represent cumulative figures and are not annualized.

The Limited Duration Bond Portfolio was generally well-positioned for a market dominated by moderately rising interest rates and narrowing mortgage-backed and credit spreads. The 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 for the year ending December 31, 2006, exceeded the performance of its primary benchmark, the Merrill Lynch U.S. Treasury 1-3 Year Index, delivering 4.46% versus 3.96%. The Fund’s tactical duration strategy, which allowed duration to drift up and down with interest rates, contributed to

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

^D 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.

88  Annual Report to Shareholders

returns as rates oscillated throughout the year, but its emphasis on the front end of the yield curve suffered as the yield curve flattened. Overweight exposure to short- and intermediate-maturity mortgage-backed securities and asset-backed securities contributed to performance, as their higher yields and stable to tighter spreads resulted in excess returns relative to treasuries. A modest exposure to BBB-rated corporate bonds also contributed to performance, as credit spreads generally tightened.

Western Asset Management Company

January 19, 2007

Annual Report to Shareholders  89

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, 2006, and held through December 31, 2006.

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
	7/1/06		12/31/06		7/1/06 to 12/31/06
Primary Class:
Actual	$	1,000.00	$	1,032.70	$	5.12
Hypothetical (5% return before expenses)		1,000.00		1,020.16		5.09
Institutional Class:
Actual	$	1,000.00	$	1,035.30	$	2.57
Hypothetical (5% return before expenses)		1,000.00		1,022.68		2.55

^A These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratios of 1.00% and 0.50% for the Primary Class and Institutional Class respectively, multiplied by the average values over the period, multiplied by the number of days in the most recent fiscal half-year (184), and divided by 365.

90  Annual Report to Shareholders

Performance Information

Limited Duration Bond Portfolio

The graphs on the following pages compare the Fund’s total returns to those of two 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.

Annual Report to Shareholders  91

Growth of a $10,000 Investment — Primary Class

Periods Ended December 31, 2006

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+4.46%		+4.46%
Five Years		+18.13%		+3.39%
Ten Years		+55.93%		+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.

92  Annual Report to Shareholders

Performance Information — Continued

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

Periods Ended December 31, 2006

	Cumulative		Average Annual
	Total Return		Total Return
One Year		+4.98%		+4.98%
Five Years		+21.20%		+3.92%
Ten Years		+64.18%		+5.08%

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  93

Portfolio Composition (as of December 31, 2006)^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 provide capital markets with credit ratings for the evaluation and assessment of credit risk.

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

94  Annual Report to Shareholders

Portfolio of Investments

Limited Duration Bond Portfolio

December 31, 2006

(Amounts in Thousands)

			Par/
	Rate	Maturity Date	Shares		Value
Long-Term Securities — 98.0%
Corporate Bonds and Notes — 27.1%
Auto Components — 0.2%
Johnson Controls Inc.	5.604%	1/17/08	$	430	$	431	A
Automobiles — 0.3%
DaimlerChrysler NA Holding Corp.	5.875%	3/15/11		700		703
Capital Markets — 0.4%
Lehman Brothers Holdings E-Capital Trust I	6.155%	8/19/65		30		30	A
Morgan Stanley	5.625%	1/9/12		830		844
						874
Chemicals — 0.4%
The Dow Chemical Co.	5.750%	12/15/08		560		564
The Dow Chemical Co.	5.970%	1/15/09		330		334
						898
Commercial Banks — 1.0%
SunTrust Capital VIII	6.100%	12/1/66		120		117	B
Wachovia Capital Trust III	5.800%	3/15/42		1,570		1,583	B
Wells Fargo Capital X	5.950%	12/15/36		300		294
						1,994
Commercial Services and Supplies — 0.6%
Waste Management Inc.	7.375%	8/1/10		1,150		1,223
Communications Equipment — 0.7%
Motorola Inc.	4.608%	11/16/07		1,500		1,490

Annual Report to Shareholders  95

			Par/
	Rate	Maturity Date	Shares		Value
Corporate Bonds and Notes — Continued
Consumer Finance — 4.9%
Ford Motor Credit Co.	6.193%	9/28/07	$	1,020	$	1,018	A
Ford Motor Credit Co.	6.625%	6/16/08		4,810		4,807
GMAC LLC	6.516%	9/23/08		4,000		4,023	A
						9,848
Diversified Financial Services — 2.2%
International Lease Finance Corp.	5.000%	4/15/10		650		643
Residential Capital Corp.	6.739%	6/29/07		1,630		1,638	A
Residential Capital Corp.	6.474%	4/17/09		200		202	A
Residential Capital LLC	6.675%	11/21/08		2,000		2,025	A
						4,508
Diversified Telecommunication Services — 0.9%
AT&T Inc.	5.300%	11/15/10		940		940
Verizon Global Funding Corp.	7.250%	12/1/10		800		853
						1,793
Electric Utilities — 3.4%
Alabama Power Co.	5.560%	8/25/09		1,000		1,003	A
Appalachian Power Co.	3.600%	5/15/08		1,700		1,660
Commonwealth Edison Co.	3.700%	2/1/08		580		568
Duke Energy Corp.	3.750%	3/5/08		1,500		1,472
FirstEnergy Corp.	6.450%	11/15/11		370		386
Niagara Mohawk Power Corp.	7.750%	10/1/08		460		477
Ohio Edison Co.	4.000%	5/1/08		440		432
Pacific Gas and Electric Co.	3.600%	3/1/09		1,000		966
						6,964
Hotels, Restaurants and Leisure — 0.2%
Caesars Entertainment Inc.	7.500%	9/1/09		330		343
Harrah’s Operating Co. Inc.	5.975%	2/8/08		150		150	A,C
						493

96  Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

			Par/
	Rate	Maturity Date	Shares		Value
Corporate Bonds and Notes — Continued
Independent Power Producers and Energy Traders — 0.6%
TXU Corp.	4.800%	11/15/09	$	1,160	$	1,132
IT Services — 0.5%
Electronic Data Systems Corp.	7.125%	10/15/09		1,000		1,042
Leisure Equipment and Products — 0.1%
Eastman Kodak Co.	7.250%	11/15/13		110		109
Media — 2.3%
Clear Channel Communications Inc.	6.625%	6/15/08		140		142
Clear Channel Communications Inc.	4.250%	5/15/09		790		765
Comcast Cable Communications Inc.	6.875%	6/15/09		1,100		1,138
Comcast MO of Delaware Inc.	9.000%	9/1/08		300		317
Liberty Media LLC	7.875%	7/15/09		1,120		1,168
The Walt Disney Co.	5.453%	9/10/09		10		10	A
Time Warner Inc.	5.500%	11/15/11		1,030		1,027
						4,567
Multi-Utilities — 1.2%
CenterPoint Energy Inc.	5.875%	6/1/08		440		441
Sempra Energy	5.845%	5/21/08		2,000		2,001	A
						2,442
Multiline Retail — 0.1%
May Department Stores Co.	5.750%	7/15/14		110		107

Annual Report to Shareholders  97

			Par/
	Rate	Maturity Date	Shares		Value
Corporate Bonds and Notes — Continued
Oil, Gas and Consumable Fuels — 3.4%
Devon Financing Corp. ULC	6.875%	9/30/11	$	440	$	465
Hess Corp.	6.650%	8/15/11		1,710		1,781
Kinder Morgan Energy Partners LP	6.750%	3/15/11		410		427
Pemex Project Funding Master Trust	5.970%	12/3/12		3,490		3,500	A,C
XTO Energy Inc.	5.650%	4/1/16		640		633
						6,806
Paper and Forest Products — 0.1%
Weyerhaeuser Co.	5.950%	11/1/08		170		171
Real Estate Investment Trusts — 1.3%
iStar Financial Inc.	5.700%	9/15/09		1,330		1,331	A,C
iStar Financial Inc.	5.650%	9/15/11		1,400		1,397
						2,728
Tobacco — 1.5%
Altria Group Inc.	5.625%	11/4/08		3,000		3,010
Wireless Telecommunication Services — 0.8%
New Cingular Wireless Services Inc.	8.125%	5/1/12		390		439
Sprint Capital Corp.	6.125%	11/15/08		1,150		1,163
Sprint Capital Corp.	6.375%	5/1/09		30		31
						1,633
Total Corporate Bonds and Notes (Cost — $54,974)						54,966

98  Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

			Par/
	Rate	Maturity Date	Shares		Value
Asset-Backed Securities — 9.3%
Fixed Rate Securities — 2.8%
AmeriCredit Automobile Receivables Trust 2003-BX	2.720%	1/6/10	$	1,315	$	1,303
MBNA Practice Solutions Owner Trust 2005-2	4.100%	5/15/09		2,592		2,572	C
Prestige Auto Receivables Trust 2005-1A	4.370%	6/15/12		1,300		1,284	C
Structured Asset Securities Corp. 2003-AL1	3.357%	4/25/31		655		582	C
						5,741
Indexed SecuritiesA — 6.3%
Asset Backed Funding Certificates 2002-WF2	6.070%	5/25/32		221		221
Bear Stearns Asset Backed Securities Inc. 2004-1	5.840%	6/25/34		2,740		2,759
CHEC Loan Trust 2004-2	5.650%	2/25/31		1,076		1,076
Citibank Credit Card Issuance Trust 2002-B1	5.696%	6/25/09		1,675		1,678
Countrywide Home Equity Loan Trust 2004-O	5.630%	2/15/34		702		704
RAAC Series 2005-RP1	5.660%	7/25/37		745		746	C
Rental Car Finance Corp. 2003-1A	5.720%	5/25/08		2,500		2,502	C
Rental Car Finance Corp. 2004-1A	5.550%	6/25/09		3,000		3,004	C
						12,690
Stripped Securities — 0.2%
HSI Asset Securitization Corp. Trust, Series 2006-OPT4	1.500%	3/25/36		26,414		331	D1
Total Asset-Backed Securities (Cost — $19,000)						18,762

Annual Report to Shareholders  99

			Par/
	Rate	Maturity Date	Shares		Value
Mortgage-Backed Securities — 18.6%
Fixed Rate Securities — 2.1%
BlackRock Capital Finance LP 1997-R3	7.220%	11/25/28	$	74	$	74	C
Residential Asset Mortgage Products Inc. 2005-SL1	8.000%	5/25/32		1,490		1,572
Washington Mutual MSC Mortgage Pass-Through Certificates, Series 2004-RA1	7.000%	3/25/34		2,477		2,503
						4,149
Indexed SecuritiesA — 14.8%
Banc of America Mortgage Securities 2005-F	5.018%	7/25/35		2,200		2,178
Bear Stearns ARM Trust 2004-10	4.501%	1/25/35		774		770
Countrywide Alternative Loan Trust 2005-59 1A1	5.650%	11/20/35		1,868		1,874
Countrywide Alternative Loan Trust 2006-OA2 A5	5.580%	5/20/46		2,267		2,269
Harborview Mortgage Loan Trust 2004-8	5.750%	11/19/34		716		718
HomeBanc Mortgage Trust 2004-2	5.690%	12/25/34		1,437		1,439
HomeBanc Mortgage Trust 2005-1	5.570%	3/25/35		1,841		1,841
Impac CMB Trust 2004-2	5.840%	4/25/34		448		448
Impac CMB Trust 2004-6	5.710%	10/25/34		525		526
JPMorgan Mortgage Trust 2003-A1	4.345%	10/25/33		2,223		2,173
Lehman XS Trust 2005-5N 3A1A	5.620%	11/25/35		2,141		2,143
MASTR Adjustable Rate Mortgages Trust 2004-13	3.786%	11/21/34		3,000		2,913
MASTR Specialized Loan Trust 2006-01 A	5.620%	1/25/36		874		874	C
Provident Funding Mortgage Loan Trust 2005-1 1A1	4.148%	5/25/35		1,840		1,827
Sequoia Mortgage Trust 2003-2 A2	5.747%	6/20/33		554		554
Sequoia Mortgage Trust 2003-7 A1	5.670%	1/20/34		534		534

100  Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

			Par/
	Rate	Maturity Date	Shares		Value
Mortgage-Backed Securities — Continued
Indexed Securities — Continued
Thornburg Mortgage Securities Trust 2005-4	5.530%	12/25/35	$	2,119	$	2,117
WaMu Alternative Mortgage Pass-Through Certificates 2006-AR01	5.640%	2/25/36		1,678		1,679
WaMu Mortgage Pass-Through Certificates 2003-AR10	4.062%	10/25/33		2,100		2,073
WaMu Mortgage Pass-Through Certificates 2004-AR08	5.795%	6/25/44		1,073		1,077
						30,027
Stripped Securities — N.M.
Nomura Asset Acceptance Corp. Series 2006-AP1	4.500%	1/25/36		288		8	D1
Variable Rate SecuritiesE — 1.7%
Banc of America Funding Corp. 2004-B	4.182%	12/20/34		977		999
Countrywide Alternative Loan Trust 2004-33, 1A1	4.992%	12/25/34		696		702
Countrywide Alternative Loan Trust 2004-33, 2A1	4.933%	12/25/34		367		365
Prime Mortgage Trust 2005-2	7.408%	10/25/32		1,387		1,421
						3,487
Total Mortgage-Backed Securities (Cost — $37,839)						37,671
U.S. Government and Agency Obligations — 3.9%
Fixed Rate Securities — 0.4%
United States Treasury Bonds	5.375%	2/15/31		190		203
United States Treasury Notes	4.625%	10/31/11		570		568
						771

Annual Report to Shareholders  101

			Par/
	Rate	Maturity Date	Shares		Value
U.S. Government and Agency Obligations — Continued
Treasury Inflation-Protected SecuritiesF — 3.5%
United States Treasury Inflation-Protected Security	2.375%	4/15/11	$	1,627	$	1,621
United States Treasury Inflation-Protected Security	3.000%	7/15/12		2,329		2,397
United States Treasury Inflation-Protected Security	2.500%	7/15/16		1,299		1,309
United States Treasury Inflation-Protected Security	2.375%	1/15/25		1,852		1,844
						7,171
Total U.S. Government and Agency Obligations (Cost — $8,114)						7,942
U.S. Government Agency Mortgage-Backed Securities — 27.7%
Fixed Rate Securities — 17.4%
Fannie Mae	8.500%	6/1/10 to
		8/1/11		15		15
Fannie Mae	7.000%	1/1/13 to
		1/1/33		4,468		4,600
Fannie Mae	6.500%	7/1/13 to
		10/1/32		1,431		1,461
Fannie Mae	9.500%	7/1/14		27		28
Fannie Mae	11.000%	12/1/15		45		46
Fannie Mae	12.500%	1/1/18 to
		4/1/18		43		46
Fannie Mae	9.000%	11/1/21		93		99
Fannie Mae	6.000%	11/1/27		0.3		—	G
Fannie Mae	5.000%	12/1/36		18,850		18,196	H
Fannie Mae	5.500%	12/1/36		3,200		3,162	H
Fannie Mae	6.000%	12/1/36		1,200		1,208	H
Freddie Mac	8.250%	2/1/08		2		3
Freddie Mac	8.500%	12/1/08 to
		6/1/21		27		27
Freddie Mac	9.750%	11/1/09 to
		11/1/14		16		16

102  Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

			Par/
	Rate	Maturity Date	Shares		Value
U.S. Government Agency Mortgage-Backed Securities — Continued
Fixed Rate Securities — Continued
Freddie Mac	9.000%	1/1/17 to
		1/1/21	$	122	$	127
Freddie Mac	8.000%	2/1/31		226		237
Freddie Mac	7.000%	4/1/32		1,715		1,765
Freddie Mac	5.000%	12/1/36		200		193	H
Government National Mortgage Association	6.000%	5/15/14 to
		11/15/28		240		244
Government National Mortgage Association	9.000%	6/15/22 to
		9/15/22		2		2
Government National Mortgage Association	5.500%	12/1/36		3,750		3,731	H
Government National Mortgage Association	6.000%	12/1/36		100		101	H
						35,307
Indexed SecuritiesA — 10.2%
Fannie Mae	4.324%	10/1/34		1,077		1,060
Fannie Mae	4.215%	12/1/34		1,332		1,306
Fannie Mae	4.330%	1/1/35		1,124		1,106
Fannie Mae	4.860%	1/1/35		1,958		1,951
Fannie Mae	4.784%	2/1/35		4,189		4,177
Fannie Mae	4.546%	3/1/35		2,391		2,362
Fannie Mae	4.954%	3/1/35		4,454		4,452
Freddie Mac	4.346%	12/1/34		484		476
Freddie Mac	4.459%	12/1/34		2,521		2,494
Freddie Mac	4.082%	1/1/35		452		442
Freddie Mac	4.111%	1/1/35		803		785
						20,611

Annual Report to Shareholders  103

			Par/
	Rate	Maturity Date	Shares		Value
U.S. Government Agency Mortgage-Backed Securities — Continued
Stripped Securities — 0.1%
Government National Mortgage Association	3.125%	6/16/26	$	1,892	$	131	D1
Government National Mortgage Association	3.175%	8/16/26		1,395		141	D1
						272
Total U.S. Government Agency Mortgage-Backed Securities (Cost — $58,025)						56,190
Yankee BondsI — 11.3%
Commercial Banks — 2.7%
Glitnir Banki Hf	5.800%	1/21/11		1,550		1,550	A,C
Kaupthing Bank Hf	6.061%	4/12/11		1,000		1,007	A,C
Kaupthing Bank Hf	5.750%	10/4/11		420		420	C
Landsbanki Islands Hf	6.100%	8/25/11		620		630	C
Resona Preferred Global Securities	7.191%	7/30/49		830		866	C,E
VTB Capital SA for Vneshtorgbank	5.970%	8/1/08		1,040		1,041	A,C
						5,514
Diversified Financial Services — 1.5%
Aiful Corp.	5.000%	8/10/10		1,280		1,242	C
MUFG Capital Finance 1 Ltd.	6.346%	7/25/49		600		609	B
TNK-BP Finance SA	6.875%	7/18/11		1,090		1,127	C
						2,978
Diversified Telecommunication Services — 2.9%
British Telecommunications PLC	8.625%	12/15/10		1,520		1,696	E
Deutsche Telekom International Finance BV	8.000%	6/15/10		650		704	E
France Telecom SA	7.750%	3/1/11		770		839	E
Koninklijke (Royal) KPN NV	8.000%	10/1/10		900		971

104  Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

			Par/
	Rate	Maturity Date	Shares		Value
Yankee Bonds — Continued
Diversified Telecommunication Services — Continued
Telecom Italia Capital	5.851%	2/1/11	$	1,040	$	1,034	A
Telefonica Emisones S.A.U.	5.665%	6/19/09		600		601	A
						5,845
Energy Equipment and Services — 0.5%
SP PowerAssets Ltd.	3.800%	10/22/08		1,000		975	C
Foreign Government Obligations — 0.9%
Russian Federation	3.000%	5/14/08		1,940		1,873
Health Care Equipment and Supplies — 0.2%
Baxter FinCo BV	4.750%	10/15/10		430		422
Industrial Conglomerates — 0.8%
Tyco International Group SA	6.375%	10/15/11		1,480		1,549
Metals and Mining — 0.5%
Vale Overseas Ltd.	6.250%	1/23/17		1,130		1,135
Oil, Gas and Consumable Fuels — 1.0%
Anadarko Finance Co.	6.750%	5/1/11		1,870		1,960
Wireless Telecommunication Services — 0.3%
Vodafone Group PLC	3.950%	1/30/08		730		719
Total Yankee Bonds (Cost — $22,900)						22,970
Common Stocks and Equity Interests — N.M.
Dynegy Inc.				1shs		5	J
Total Common Stocks and Equity Interests (Cost — $ — )G						5

Annual Report to Shareholders  105

			Par/
	Rate	Maturity Date	Shares			Value
Preferred Stocks — 0.1%
Home Ownership Funding Corp.	13.331%			5shs		$	74	B,C
Home Ownership Funding Corp. II	13.338%			14			206	B,C
Total Preferred Stocks (Cost — $1,537)							280
Total Long-Term Securities (Cost — $202,389)							198,786
Short-Term Securities — 14.9%
U.S. Government and Agency Obligations — 1.5%
Fannie Mae	0.000%	6/25/07	$	417			407	K
Fannie Mae	0.000%	2/9/07		2,650			2,635	K
							3,042
Options PurchasedL — N.M.
Eurodollar Futures Call, April 2007, Strike Price $94.625				189	M		35
Repurchase Agreements — 13.4%
Lehman Brothers Inc. 5.2%, dated 12/29/06, to be repurchased at $13,625 on 1/2/07 (Collateral: $13,505 Fannie Mae notes, 6.03%, due 8/15/16, value $13,889)				13,617			13,617
Merrill Lynch Government Securities Inc. 5.21%, dated 12/29/06, to be repurchased at $13,625 on 1/2/07 (Collateral: $13,720 Freddie Mac notes, 5.125%, due 10/15/08, value $13,892)				13,617			13,617
							27,234
Total Short-Term Securities (Cost — $30,317)							30,311
Total Investments — 112.9% (Cost — $232,706)							229,097
Other Assets Less Liabilities — (12.9)%							(26,162	)
Net Assets — 100.0%						$	202,935

106  Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

		Actual		Appreciation/
	Expiration	Contracts		(Depreciation)
Futures Contracts PurchasedL
U.S. Treasury Note Futures	March 2007		561	$	(298	)
Futures Contracts WrittenL
U.S. Treasury Note Futures	March 2007		276	$	164
U.S. Treasury Note Futures	March 2007		344		160
				$	324
Options WrittenL
U.S. Treasury Note Futures Call, Strike Price $110.00	March 2007		151	$	58
U.S. Treasury Note Futures Put, Strike Price $107.00	March 2007		270		(68	)
U.S. Treasury Note Futures Put, Strike Price $108.00	March 2007		76		(46	)
				$	(56	)

A	Indexed Security — The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”), the Consumer Price Index (“CPI”), and the one-year Treasury Bill Rate. The coupon rates are the rates as of December 31, 2006.
B	Stepped Coupon Security — A security with a predetermined schedule of interest or dividend rate changes at which time it begins to accrue interest or pay dividends according to the predetermined schedule.
C	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 12.69% of net assets.
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, 2006.

^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	Amount represents less than 1.
H	When-issued Security — Security purchased on a delayed delivery basis. Final settlement amount and maturity date have not yet been announced.

^I Yankee Bond — A dollar-denominated bond issued in the U.S. by a foreign entity.

^J Non-income producing.

^K 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.

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

^M Par represents actual number of contracts.

N.M. — Not meaningful.

See notes to financial statements.

Annual Report to Shareholders  107

Statement of Assets and Liabilities

Limited Duration Bond Portfolio

December 31, 2006

(Amounts in Thousands)

Assets:
Investment securities at market value (Cost – $202,389)			$	198,786
Short-term securities at value (Cost – $30,317)				30,311
Cash				1
Receivable for fund shares sold				216
Interest and dividends receivable				1,414
Futures variation margin receivable				12
Other assets				11
Total assets				230,751
Liabilities:
Payable for securities purchases	$	26,838
Payable for fund shares repurchased		503
Accrued management fee		58
Accrued distribution and service fees		70
Income distribution payable		27
Options written (Proceeds – $163)		219
Accrued expenses		101
Total liabilities				27,816
Net Assets			$	202,935
Net assets consist of:
Accumulated paid-in capital applicable to:
18,777 Primary Class shares outstanding			$	205,983
1,081 Institutional Class shares outstanding				11,218
Overdistributions of net investment income				(65	)
Accumulated net realized loss on investments, options and futures				(10,562	)
Unrealized appreciation/(depreciation) of investments, options and futures				(3,639	)
Net Assets			$	202,935
Net Asset Value Per Share:
Primary Class				$10.22
Institutional Class				$10.22

See notes to financial statements.

108  Annual Report to Shareholders

Statement of Operations

Limited Duration Bond Portfolio

For the Year Ended December 31, 2006

(Amounts in Thousands)

Investment Income:
Interest	$	10,886
Dividends		253
Total income				$	11,139
Expenses:
Management fees		984
Distribution and service fees		1,017
Audit and legal fees		53
Custodian fees		108
Directors’ fees and expenses		65
Registration fees		59
Reports to shareholders		52
Transfer agent and shareholder servicing expense:
Primary Class		166
Institutional Class		1
Other expenses		59
		2,564
Less: Fees waived		(449	)
Compensating balance credits		(4	)A
Total expenses, net of waivers and compensating balance credits					2,111
Net Investment Income					9,028
Net Realized and Unrealized Gain/(Loss) on Investments:
Realized gain/(loss) on:
Investments		22
Options		26
Futures		(432	)
					(384	)
Change in unrealized appreciation/(depreciation) of investments, options and futures					886
Net Realized and Unrealized Gain on Investments					502
Change in Net Assets Resulting From Operations					$9,530

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

See notes to financial statements.

Annual Report to Shareholders  109

Statement of Changes in Net Assets

Limited Duration Bond Portfolio

(Amounts in Thousands)

	For the Years Ended
	12/31/06			12/31/05
Change in Net Assets:
Net investment income	$	9,028		$	8,707
Net realized loss on investments, options and futures		(384	)		(1,274	)
Change in unrealized appreciation/(depreciation) of investments, options and futures		886			(2,592	)
Change in net assets resulting from operations		9,530			4,841
Distributions to shareholders from:
Net investment income:
Primary Class		(8,477	)		(8,515	)
Institutional Class		(703	)		(574	)
Change in net assets from Fund share transactions:
Primary Class		(27,940	)		(51,090	)
Institutional Class		(7,185	)		8,896
Change in net assets		(34,775	)		(46,442	)
Net Assets:
Beginning of year		237,710			284,152
End of year	$	202,935		$	237,710
Overdistributions of net investment income	$	(65	)	$	(97	)

See notes to financial statements.

110  Annual Report to Shareholders

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,
	2006			2005			2004			2003			2002
Net asset value, beginning of year		$10.20			$10.36			$10.54			$10.70			$10.32
Investment operations:
Net investment income		.42	A		.33			.29			.26			.41
Net realized and unrealized gain/(loss) on investments, options and futures		.02			(.14	)		(.09	)		(.14	)		.38
Total from investment operations		.44			.19			.20			.12			.79
Distributions from:
Net investment income		(.42	)		(.35	)		(.37	)		(.28	)		(.41	)
Net realized gain on investments		—			—			(.01	)		—			—
Total distributions		(.42	)		(.35	)		(.38	)		(.28	)		(.41	)
Net asset value, end of year		$10.22			$10.20			$10.36			$10.54			$10.70
Total return		4.46	%		1.83	%		1.89	%		1.11	%		7.79	%
Ratios to Average Net Assets:B
Total expenses		1.21	%		1.15	%		1.21	%		1.21	%		1.19	%
Expenses net of waivers, if any		1.00	%		1.00	%		1.00	%		1.00	%		1.00	%
Expenses net of all reductions		1.00	%		1.00	%		1.00	%		1.00	%		1.00	%
Net investment income		4.10	%		3.21	%		2.81	%		2.48	%		3.85	%
Supplemental Data:
Portfolio turnover rate		237.2	%		81.6	%		238.0	%		487.3	%		204.1	%
Net assets, end of year (in thousands)		$191,883			$219,497			$274,606			$326,844			$379,793

^A Computed using average daily shares outstanding.

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

See notes to financial statements.

Annual Report to Shareholders  111

Institutional Class:

	Years Ended December 31,
	2006			2005			2004			2003			2002
Net asset value, beginning of year		$10.20			$10.37			$10.55			$10.70			$10.32
Investment operations:
Net investment income		.47	A		.40			.35			.32			.46
Net realized and unrealized gain/(loss) on investments, options and futures		.03			(.17	)		(.10	)		(.14	)		.38
Total from investment operations		.50			.23			.25			.18			.84
Distributions from:
Net investment income		(.48	)		(.40	)		(.42	)		(.33	)		(.46	)
Net realized gain on investments		—			—			(.01	)		—			—
Total distributions		(.48	)		(.40	)		(.43	)		(.33	)		(.46	)
Net asset value, end of year		$10.22			$10.20			$10.37			$10.55			$10.70
Total return		4.98	%		2.29	%		2.41	%		1.71	%		8.35	%
Ratios to Average Net Assets:B
Total expenses		.64	%		.62	%		.70	%		.68	%		.66	%
Expenses net of waivers, if any		.50	%		.46	%		.48	%		.46	%		.47	%
Expenses net of all reductions		.50	%		.46	%		.48	%		.46	%		.47	%
Net investment income		4.58	%		3.85	%		3.22	%		3.03	%		4.38	%
Supplemental Data:
Portfolio turnover rate		237.2	%		81.6	%		238.0	%		487.3	%		204.1	%
Net assets, end of year (in thousands)		$11,052			$18,213			$9,546			$7,740			$9,485

See notes to financial statements.

112  Annual Report to Shareholders

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

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 the Funds 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.

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.

Annual Report to Shareholders  113

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 New York Stock 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 accounted for as of the trade date. Realized gains and losses from security transactions are reported on an identified cost basis for both financial reporting and federal income tax purposes.

For the year ended December 31, 2006, investment transactions (excluding short-term investments) were as follows:

	Purchases				Proceeds From Sales
	U.S. Gov’t. Securities		Other		U.S. Gov’t. Securities		Other
Core Bond	$	352,966	$	13,409	$	350,548	$	16,733
High Yield		—		139,521		—		160,527
Investment Grade		94,405		180,123		92,599		163,588
Limited Duration		457,173		58,924		456,535		91,454

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.

114  Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

Options and Futures

The current market value of a traded option is the last sale price or, in the absence of a sale, the mean between the closing bid and asked price. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. Futures contracts are marked-to-market on a daily basis. As a contract’s value fluctuates, payments known as variation margin are made or received by a Fund each day, depending on the daily fluctuation in the value of the contract. The daily changes in the contract value are recorded as unrealized gains or losses, and the Fund recognizes a gain or loss when the contract is closed.

Investment Income and Distributions to Shareholders

Interest income and expenses are recorded on the accrual basis. Bond premiums and discounts are amortized for financial reporting and federal income tax purposes. Dividend income and distributions to shareholders are allocated at the class level and are recorded on the ex-dividend date. Dividends from net investment income are declared daily and paid monthly for each Fund 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.

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

Annual Report to Shareholders  115

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.

Distributions during the years ended December 31, 2006 and 2005, were characterized as follows for tax purposes:

	Core Bond				High Yield
	2006		2005		2006		2005
Ordinary income	$	2,992	$	2,411	$	11,785	$	14,058
Long-term capital gains		—		—		—		—
Total Distributions	$	2,992	$	2,411	$	11,785	$	14,058

	Investment Grade				Limited Duration
	2006		2005		2006		2005
Ordinary income	$	19,999	$	19,613	$	9,180	$	9,089
Long-term capital gains		16		2,957		—		—
Total Distributions	$	20,015	$	22,570	$	9,180	$	9,089

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, 2006, realized capital losses reflected in the accompanying financial statements, as shown in the table on the next page, will not be recognized for federal income tax purposes until 2007.

116  Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

The tax basis components of net assets at December 31, 2006, were:

							Investment			Limited
	Core Bond			High Yield			Grade			Duration
Unrealized appreciation	$	657		$	5,092		$	10,498		$	961
Unrealized depreciation		(1,074	)		(2,055	)		(5,781	)		(4,596	)
Net unrealized appreciation/depreciation		(417	)		3,037			4,717			(3,635	)
Undistributed ordinary income		60			1			—			17
Undistributed long-term capital gains		—			—			1,243			—
Capital loss carryforwards		(830	)		(151,165	)		—			(10,342	)
Post-October loss deferrals		(74	)		—			—			(255	)
Other temporary differences		(25	)		(25	)		(120	)		(51	)
Paid-in capital		73,636			303,205			410,918			217,201
Net assets	$	72,350		$	155,053		$	416,758		$	202,935

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, 2006, the Funds had capital loss carryforwards as follows:

								Limited
Expiration Date		Core Bond			High Yield			Duration
	2008	$	—		$	(32,313	)	$	(3,833	)
	2009		—			(83,723	)		—
	2010		—			(32,488	)		—
	2011		—			(2,556	)		—
	2012		—			—			(4,536	)
	2013		(582	)		(85	)		(555	)
	2014		(248	)		—			(1,418	)

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, 2006, the Funds recorded the following permanent reclassifications, which

Annual Report to Shareholders  117

relate primarily to reclassifications of gains/losses on paydown securities.

							Investment			Limited
	Core Bond			High Yield			Grade			Duration
Undistributed net investment income	$	34		$	(9	)	$	(1	)	$	184
Accumulated realized gain/(loss)		(34	)		(8	)		1			(199	)
Paid-in capital		—			17			—			15

At December 31, 2006, the cost of investments for federal income tax purposes was $92,825 for Core Bond, $148,121 for High Yield, $404,795 for Investment Grade, and $232,732 for Limited Duration.

3. Financial Instruments:

Options and Futures

As part of their investment programs, the Funds may utilize options and futures. Options may be written (sold) or purchased by the Funds. When a Fund purchases a put or call option, the premium paid is recorded as an investment and its value is marked-to-market daily. When a Fund writes a put or call option, an amount equal to the premium received by the Fund is recorded as a liability and its value is marked-to-market daily.

When options, whether written or purchased, expire, are exercised or are closed (by entering into a closing purchase or sale transaction), the Fund realizes a gain or loss as described in the chart below:

Purchased option:	Impact on the Fund:
The option expires	Realize a loss in the amount of the cost of the option.
The option is closed through a closing sale transaction	Realize a gain or loss depending on whether the proceeds from the closing sale transaction are greater or less than the cost of the option.
The Fund exercises a call option	The cost of the security purchased through the exercise of the option will be increased by the premium originally paid to purchase the option.
The Fund exercises a put option	Realize a gain or loss from the sale of the underlying security. The proceeds of that sale will be reduced by the premium originally paid to purchase the put option.

118  Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

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, 2006, was as follows:

Core Bond Fund:

	Calls						Puts
	Actual						Actual
	Contracts			Premiums			Contracts			Premiums
Options outstanding at December 31, 2005		104		$	58			68		$	43
Options written		700			339			262			123
Options closed		(174	)		(107	)		(94	)		(52	)
Options expired		(413	)		(180	)		(134	)		(69	)
Options exercised		(62	)		(25	)		(25	)		(12	)
Options outstanding at December 31, 2006		155		$	85			77		$	33

Annual Report to Shareholders  119

Limited Duration Bond:

	Calls						Puts
	Actual						Actual
	Contracts			Premiums			Contracts			Premiums
Options outstanding at December 31, 2005		—		$	—			—		$	—
Options written		241			135			482			139
Options closed		(90	)		(65	)		(136	)		(46	)
Options expired		—			—			—			—
Options exercised		—			—			—			—
Options outstanding at December 31, 2006		151		$	70			346		$	93

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, 2006, 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

120  Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

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

At December 31, 2006, 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, 2006, 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 Core Bond and Limited Duration’s expenses (exclusive of taxes, interest, brokerage and extraordinary expenses) exceed during any month certain annual rates. These

Annual Report to Shareholders  121

contractual expense limitations are due to expire on April 30, 2007. LMFA has voluntarily agreed to waive fees to the extent that Investment Grade’s expense (exclusive of taxes, interest, brokerage and extraordinary expenses) exceed during any month certain annual rates. This voluntary waiver is currently expected to continue until April 30, 2007, but may be terminated at any time. Pursuant to an agreement approved by the Board, Core Bond and Limited Duration have 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. At December 31, 2006, High Yield has no expense limitation. The following chart shows annual rates of management fees, expense limits, and management fees waived, for each Fund:

				Year Ended			Maximum
				December 31, 2006			Amount
		Expense		Management Fees			Subject to
Fund	Management Fee	Limitation		Waived			Recapture
Core Bond	0.45%		1.00%	$	(299	)	$	(669	)
High Yield
— Primary Class	0.65%		None		—			—
— Institutional Class	0.65%		None		—			—
Investment Grade
— Primary Class	0.60%		1.00%		(912	)		(3,142	)
— Institutional Class	0.60%		0.50%		(45	)		(114	)
Limited Duration
— Primary Class	0.45%		1.00%		(280	)		(1,305	)
— Institutional Class	0.45%		0.50%		(21	)		(62	)

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; and 40% of the management fee received by LMFA for Investment Grade. For Limited Duration, LMFA pays the Adviser a fee, computed daily and payable monthly, of 0.20% of its average daily net assets, not to exceed the fee received by LMFA.

Legg Mason Investor Services, LLC (“LMIS”) serves as distributor of the Funds. LMIS receives an annual distribution fee and an annual service fee based on each Fund’s Primary Class’s average daily net assets, computed daily and payable monthly as shown in the table below. For the year ended December 31, 2006, LMIS waived $7, $337 and $148 of the distribution and service fees for Core Bond, Investment Grade and Limited Duration, respectively.

122  Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

	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%

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, 2006: Core Bond, $5; High Yield, $12; Investment Grade, $21; and Limited Duration, $13.

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.

5. Line of Credit:

The Funds, along with certain other Legg Mason Funds, participate in a $400 million line of credit (“Credit Agreement”) to be used for temporary or emergency purposes. Pursuant to the Credit Agreement, each participating Fund is liable only for principal and interest payments related to borrowings made by that Fund. Borrowings under the Credit Agreement bear interest at a rate equal to the federal funds rate plus the federal funds rate margin. For the year ended December 31, 2006, the Funds had no borrowings under the credit agreement.

Annual Report to Shareholders  123

6. Fund Share Transactions:

At December 31, 2006, there were 1,000,000 shares authorized at $.001 par value for all classes of each portfolio of the Corporation. Share transactions for the Funds were as follows:

	Core Bond
	Years Ended
	12/31/06			12/31/05
Shares
Sold		2,116			3,168
Reinvestment of Distributions		285			226
Repurchased		(2,379	)		(2,404	)
Net Change		22			990
Amount
Sold	$	20,412		$	31,295
Reinvestment of Distributions		2,738			2,215
Repurchased		(22,886	)		(23,672	)
Net Change	$	264		$	9,838

	High Yield
	Primary Class						Institutional Class
	Years Ended						Years Ended
	12/31/06			12/31/05			12/31/06			12/31/05
Shares
Sold		2,822			2,693			426			855
Reinvestment of Distributions		891			1,090			91			94
Repurchased		(5,428	)		(8,012	)		(1,346	)		(495	)
Net Change		(1,715	)		(4,229	)		(829	)		454
Amount
Sold	$	25,600		$	24,689		$	3,869		$	7,866
Reinvestment of Distributions		8,075			9,912			822			857
Repurchased		(49,345	)		(73,219	)		(12,210	)		(4,549	)
Net Change	$	(15,670	)	$	(38,618	)	$	(7,519	)	$	4,174

124  Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

	Investment Grade
	Primary Class						Institutional Class
	Years Ended						Years Ended
	12/31/06			12/31/05			12/31/06			12/31/05
Shares
Sold		11,858			6,762			945			1,449
Reinvestment of Distributions		1,643			1,834			92			92
Repurchased		(10,116	)		(10,700	)		(1,868	)		(521	)
Net Change		3,385			(2,104	)		(831	)		1,020
Amount
Sold	$	122,001		$	72,007		$	9,714		$	15,490
Reinvestment of Distributions		16,875			19,415			939			970
Repurchased		(104,395	)		(113,694	)		(19,237	)		(5,546	)
Net Change	$	34,481		$	(22,272	)	$	(8,584	)	$	10,914

	Limited Duration
	Primary Class						Institutional Class
	Years Ended						Years Ended
	12/31/06			12/31/05			12/31/06			12/31/05
Shares
Sold		2,693			3,474			491			1,392
Reinvestment of Distributions		761			743			54			49
Repurchased		(6,199	)		(9,200	)		(1,249	)		(577	)
Net Change		(2,745	)		(4,983	)		(704	)		864
Amount
Sold	$	27,414		$	35,740		$	4,987		$	14,310
Reinvestment of Distributions		7,746			7,624			545			510
Repurchased		(63,100	)		(94,454	)		(12,717	)		(5,924	)
Net Change	$	(27,940	)	$	(51,090	)	$	(7,185	)	$	8,896

Annual Report to Shareholders  125

7. Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (“FIN 48” or the “Interpretation”), Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109. FIN 48 supplements FASB Statement 109, Accounting for Income Taxes and establishes financial reporting rules regarding recognition, measurement, presentation, and disclosure in its financial statements of tax positions that a fund has taken or expects to take on a tax return. Management has evaluated the impact of FIN 48 on the Funds and has determined that the adoption of FIN 48 will not have a material impact on the Funds’ financial statements. FIN 48 is effective for fiscal periods beginning after June 1, 2007.

On September 20, 2006, the FASB released Statement of Financial Accounting Standards No. 157 “Fair Value Measurements” (“FAS 157”). FAS 157 establishes an authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements. The application of FAS 157 is required for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. At this time, management is evaluating the implications of FAS 157 and its impact on the financial statements has not yet been determined.

126  Annual Report to Shareholders

Shareholder Meeting Results: (Unaudited)

A Special Meeting of Shareholders was held on October 19, 2006, to approve a plan of reorganization of Legg Mason Income Trust, Inc. with respect to its series Legg Mason High Yield Portfolio whereby the Portfolio would transfer all of its assets and liabilities to Legg Mason Partners High Income Fund, a series of Legg Mason Partners Income Funds. It is anticipated that the proposed reorganization will be effected by March 31, 2007.

Shareholder Meeting Results (share amounts are not in thousands):

Affirmative	8,896,973.124 shares	50.284	% of shares outstanding
Against	248,815.486 shares	1.406	% of shares outstanding
Abstain	321,374.088 shares	1.816	% of shares outstanding

Annual Report to Shareholders  127

Report of Independent Registered Public Accounting Firm

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

In our opinion, the accompanying statements of assets and liabilities, including the portfolios of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial positions of Core Bond Fund, High Yield Portfolio, Investment Grade Income Portfolio and Limited Duration Bond Portfolio (comprising Legg Mason Income Trust, Inc., hereafter referred to as the “Funds”) at December 31, 2006, and 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, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Baltimore, Maryland

February 23, 2007

128  Annual Report to Shareholders

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.

	Term of
Name,	Office and
(Year of Birth) and	Length of	Number of Funds in
Position with	Time	Fund Complex	Other Directorships	Principal Occupation(s)
Corporation	ServedA	Overseen	Held	During the Past Years
INDEPENDENT DIRECTORS:B
Hearn, Ruby P. (1940) Director	Since 2004	Director/Trustee of all Legg Mason funds consisting of 21 portfolios.	None	Senior Vice President Emerita of The Robert Wood Johnson Foundation (non-profit) since 2001. Formerly: Senior Vice President of The Robert Wood Johnson Foundation (1996-2001).
Lehman, Arnold L. (1944) Lead Independent Director	Since 1987	Director/Trustee of all Legg Mason funds consisting of 21 portfolios.	None	Director of the Brooklyn Museum since 1997; Trustee of American Federation of Arts since 1998. Formerly: Director of The Baltimore Museum of Art (1979-1997).
Masters, Robin J.W. (1955) Director	Since 2002	Director/Trustee of all Legg Mason funds consisting of 21 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 21 portfolios.	None	Chief Executive Officer of The Marrow Foundation (non-profit) since 1993. Formerly: Executive Director of the Baltimore International Festival (1991-1993); Senior Assistant to the President of The Johns Hopkins University (1986-1990).

Annual Report to Shareholders  129

	Term of
Name,	Office and
(Year of Birth) and	Length of	Number of Funds in
Position with	Time	Fund Complex	Other Directorships	Principal Occupation(s)
Corporation	ServedA	Overseen	Held	During the Past Years
Mehlman, Arthur S. (1942) Director	Since 2002	Director/Trustee of all Legg Mason funds consisting of 21 portfolios; Director/Trustee of the Royce Family of Funds consisting of 25 portfolios.	Director of Municipal Mortgage & Equity, LLC.	Retired. Formerly: Partner, KPMG LLP (international accounting firm) (1972-2002).
O’Brien, G. Peter (1945) Director	Since 2002	Director/Trustee of all Legg Mason funds consisting of 21 portfolios; Director/Trustee of the Royce Family of Funds consisting of 25 portfolios.	Director of Technology Investment Capital Corp.	Retired. Trustee Emeritus of Colgate University; Board Member, 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 21 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 21 portfolios.	None	Senior Vice President and Chief Financial Officer of W. R. Grace & Co. (specialty chemicals) since 1999; Member of PCAOB standing advisory group (since 2006). 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 21 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).

130  Annual Report to Shareholders

Directors and Officers — Continued

	Term of
Name,	Office and
(Year of Birth) and	Length of	Number of Funds in
Position with	Time	Fund Complex	Other Directorships	Principal Occupation(s)
Corporation	ServedA	Overseen	Held	During the Past 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 21 portfolios; Director/Trustee of the Royce Family of Funds consisting of 25 portfolios.	None	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 (financial consulting); Vice President, T. Rowe Price Group, Inc.
EXECUTIVE OFFICERS:D
Karpinski, Marie K. (1949) Vice President and Chief Financial Officer	Since 1987	Vice President and Chief Financial Officer of all Legg Mason funds consisting of 21 portfolios.	None	Vice President and Chief Financial Officer of all Legg Mason Funds. Vice President and Treasurer of Legg Mason Fund Adviser, Inc. Vice President and Principal Financial and Accounting Officer of Western Asset Funds, Inc., Western Asset Income Fund, Western Asset Premier Bond Fund; Treasurer and Principal Financial and Accounting Officer of Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund (2003-present), and Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund 2 (2004-present).
Merz, Gregory T. (1958) Vice President and Chief Legal Officer	Since 2003	Vice President and Chief Legal Officer of all Legg Mason funds consisting of 21 portfolios.	None	Vice President and Deputy General Counsel of Legg Mason, Inc. since 2003. Formerly: Associate General Counsel, Fidelity Investments (1993-2002).
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 21 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).
Wachterman, Richard M. (1947) Secretary	Since 2004	Secretary of all Legg Mason funds consisting of 21 portfolios.	None	Associate General Counsel of Legg Mason, Inc. since 2004. Formerly: Managing Director, Victory Capital Management, Inc. (investment management) (1993-2003).

Annual Report to Shareholders  131

	Term of
Name,	Office and
(Year of Birth) and	Length of	Number of Funds in
Position with	Time	Fund Complex	Other Directorships	Principal Occupation(s)
Corporation	ServedA	Overseen	Held	During the Past Years
Morris, Erin K. (1966) Treasurer	Since 2006	Treasurer of Legg Mason Fixed Income funds consisting of 7 portfolios.	None	Assistant Vice President of Legg Mason & Co., LLC and Manager, Funds Accounting, LMIS since 2005. Treasurer of Western Asset Income Fund, Western Asset Premier Bond Fund and Western Asset Funds, Inc., Assistant Treasurer of Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund and Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund 2. Formerly: Assistant Treasurer on above, Assistant Vice President of Legg Mason Wood Walker, Incorporated (2002-2005) and Manager, Funds Accounting, Legg Mason Wood Walker, Incorporated (2000-2005).

ADDITIONAL INFORMATION ABOUT THE CORPORATION’S
DIRECTORS AND OFFICERS IS CONTAINED IN THE STATEMENT OF
ADDITIONAL INFORMATION, AVAILABLE WITHOUT CHARGE UPON
REQUEST BY CALLING 1-800-822-5544 OR ON THE SECURITIES AND
EXCHANGE COMMISSION WEBSITE (http://www.sec.gov).

A	Directors of the Funds 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 Corporation on the basis of their employment with the fund’s adviser or its affiliated entities (including the fund’s principal underwriter) and Legg Mason, Inc., the parent holding company of those entities, as well as their ownership of Legg Mason, Inc. stock.
D	Officers of the Funds are interested persons (as defined in the 1940 Act).

132  Annual Report to Shareholders

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

At its November 2006 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 an additional meeting in October 2006 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 the management entities 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 multiple time periods. The Board

Annual Report to Shareholders  133

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. The Board also considered the Manager’s proposal to merge High Yield Portfolio into the Legg Mason Partners Fund family. 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, CA

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 Chief Financial Officer

Gregory T. Merz, Vice President and Chief Legal Officer

Amy M. Olmert, Vice President and Chief Compliance Officer

Erin K. Morris, Treasurer

Richard M. Wachterman, Secretary

Peter J. Ciliberti, Assistant Secretary

Transfer and Shareholder Servicing Agent

Boston Financial Data Services

Braintree, MA

Custodian

State Street Bank & Trust Company

Boston, MA

Counsel

Kirkpatrick & Lockhart Preston Gates Ellis 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.leggmason.com/funds/about/aboutlmf.asp#Results.

Each Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. You may obtain a free copy of each Fund’s portfolio holdings as filed on Form N-Q, by contacting each Fund at the appropriate phone number, address or website listed below. Additionally, each Fund’s Form N-Q is available on the SEC’s website (http://www.sec.gov) or may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information about the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.

This report must be preceded or accompanied by a free prospectus. Investors should consider each Fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information about each Fund. 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 Investor Services — Institutional
For FI and I Class Shareholders
c/o BFDS
P.O. Box 8037
Boston, MA 02206-8037
888-425-6432
www.lminstitutionalfunds.com

Legg Mason Investor Services, LLC, Distributor

A Legg Mason, Inc. subsidiary

LMF-056 (2/07)/A 07-0063

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 have determined that the Registrant has at least one Audit Committee financial expert serving on its Audit Committee.
(a)	(2	)	The Audit Committee’s 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).

Item 4. Principal Accounting Fees and Services

(a) Audit Fees

PricewaterhouseCoopers LLP
Fiscal Year End December 31, 2005 — $162,725
Fiscal Year End December 31, 2006 — $148,390

(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 4(a).
	There were no fees billed to the Registrant 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
	PricewaterhouseCoopers LLP Fiscal Year End December 31, 2005 — $5,250 Fiscal Year End December 31, 2006 — $4,400
	Services include preparation of federal and state income tax returns and preparation of excise tax returns.
	There were no fees billed to the Registrant 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 Item 4(a) through Item 4(c) above. There were no fees billed to the Registrant for services not included in Items 4(a) through 4(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.

There were no fees billed to the Registrant 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.

(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.
	PricewaterhouseCoopers LLP Fiscal Year End December 31, 2005 — $279,508 Fiscal Year End December 31, 2006 — $327,554
(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.

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.

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

Date: February 27, 2007

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

Date: February 27, 2007

By: /s/ Marie K. Karpinski
Marie K. Karpinski
Vice President and Chief Financial Officer, Legg Mason Income Trust, Inc.

Date: February 26, 2007

EX-99.CODEETH

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

1

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.

III. Disclosure and Compliance

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• 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 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.

3

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: February 27, 2007

/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: February 26, 2007

/s/ Marie K. Karpinski

Marie K. Karpinski

Vice President and Chief Financial Officer

Legg Mason Income Trust, Inc.

EX-99.906.CERT 4 w27581exv99w906wcert.htm CERTIFICATIONS 906

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

CERTIFICATION

I, Mark R. Fetting, chief executive officer of Legg Mason Income Trust, Inc., a Maryland corporation (the “Corporation”), certify that, to my knowledge:

1. The Corporation’s periodic report on Form N-CSR for the period-end December 31, 2006, 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 Corporation.

/s/ Mark R. Fetting	February 27, 2007
Mark R. Fetting	Date
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., a Maryland corporation (the “Corporation”), certify that, to my knowledge:

1. The Corporation’s periodic report on Form N-CSR for the period-end December 31, 2006, 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 Corporation.

/s/ Marie K. Karpinski	February 26, 2007
Marie K. Karpinski	Date
Vice President and Chief Financial Officer

EX-99.906.CERT

exv99w906wcert