N-CSR 1 c45157_n-csr.htm 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 811-5813

Liquid Reserves Portfolio
(Exact name of registrant as specified in charter)

125 Broad Street, New York, NY 10004
(Address of principal executive offices) (Zip code)

Robert I. Frenkel, Esq.
Legg Mason & Co., LLC
300 First Stamford Place, 4^th Fl.
Stamford, CT 06902
(Name and address of agent for service)

Registrant's telephone number, including area code: (800) 451-2010

Date of fiscal year end: August 31,
Date of reporting period: August 31, 2006

ITEM 1. REPORT TO STOCKHOLDERS.

The Annual Report to Stockholders is filed herewith.

Schedule of Investments (August 31, 2006)

LIQUID RESERVES PORTFOLIO



Face
Amount		Security	Value

SHORT-TERM INVESTMENTS — 99.5%
Asset-Backed Security — 1.6%
$	500,000,000	Restructured Asset Certificates with Enhanced Returns (RACERS) Trust, Series 2004-6-MM, 5.346% due 9/22/06 (a)(b)	$	500,000,000

Certificates of Deposit — 0.8%
		Wells Fargo Bank NA:
	154,500,000	4.800% due 1/17/07		154,001,919
	116,000,000	4.860% due 1/31/07		116,000,000

		Total Certificates of Deposit		270,001,919

Certificates of Deposit (Yankee) — 13.4%
		Barclays Bank PLC NY:
	214,000,000	5.460% due 10/11/06		214,000,000
	319,000,000	5.430% due 2/5/07		319,000,000
		BNP Paribas NY Branch:
	244,000,000	4.975% due 9/20/06		244,000,000
	257,000,000	5.000% due 9/27/06		257,000,000
	80,000,000	4.700% due 9/29/06		80,000,000
		Calyon NY:
	100,000,000	5.000% due 9/27/06		100,000,000
	200,000,000	4.750% due 10/26/06		200,000,000
	250,000,000	4.640% due 11/1/06		250,000,000
	250,000,000	Canadian Imperial Bank, 5.340% due 9/1/06 (b)		250,000,000
	248,500,000	Credit Suisse First Boston NY, 4.355% due 9/28/06		248,500,000
		Credit Suisse New York:
	306,900,000	4.700% due 11/3/06		306,900,000
	250,000,000	5.384% due 11/13/06 (b)		250,000,000
	100,000,000	5.080% due 2/22/07		100,000,000
	200,000,000	Depfa Bank PLC NY, 4.740% due 11/20/06		200,000,000
		Deutsche Bank NY:
	85,000,000	4.970% due 9/18/06		85,000,000
	115,000,000	4.360% due 9/29/06		115,000,000
	175,000,000	4.730% due 11/6/06		175,000,000
	75,000,000	Dexia Credit Local NY, 4.525% due 11/17/06		74,967,513
	150,000,000	HBOS Treasury Services NY, 5.410% due 2/20/07		150,000,000
	200,000,000	Nordea Bank Finland NY, 5.260% due 12/7/06		200,000,000
	100,000,000	Royal Bank of Scotland NY, 4.640% due 11/1/06		100,000,000
	95,000,000	Societe Generale NY, 4.540% due 11/17/06		94,961,748
	197,000,000	Svenska Handelsbanken NY, 4.645% due 11/1/06		197,001,594
	120,000,000	Toronto Dominion Bank NY, 5.170% due 10/18/06		120,000,848

		Total Certificates of Deposit (Yankee)		4,331,331,703

Commercial Paper — 48.0%
	100,000,000	Aegis Finance LLC Economic, 5.483% due 10/10/06 (c)		99,413,917
		Amstel Funding Corp.:
	110,000,000	5.209% due 10/27/06 (a)(c)		109,130,756
	150,000,000	5.446% due 10/30/06 (a)(c)		148,679,875
	234,445,000	5.220% due 11/3/06 (a)(c)		232,356,681

See Notes to Financial Statements.


34	Liquid Reserves Portfolio 2006 Annual Report

Schedule of Investments (August 31, 2006) (continued)


Face
Amount		Security	Value

Commercial Paper — 48.0% (continued)
$	149,349,000	5.221% due 11/10/06 (a)(c)	$	147,870,860
	298,255,000	5.283% due 11/28/06 (a)(c)		294,500,301
	260,000,000	5.550% due 1/22/07 (a)(c)		254,423,000
	120,346,000	Atlantis One Funding Corp., 5.171% due 10/16/06 (c)		119,587,820
	101,035,000	Atomium Funding Corp., 5.371% due 11/14/06 (c)		99,934,280
		Bank of America Corp.:
	250,000,000	5.455% due 10/6/06 (c)		248,692,118
	249,000,000	5.525% due 12/18/06 (c)		244,978,152
	175,000,000	5.550% due 12/29/06 (c)		171,877,060
		Bank of America NA Charlotte, NC:
	300,000,000	5.220% due 11/15/06		300,000,000
	150,000,000	5.550% due 12/22/06		150,000,000
	250,000,000	Bear Stearns Co., 5.393% due 9/1/06 (b)		250,000,000
		Berkeley Square Finance LLC:
	471,023,000	5.351% due 9/1/06 (c)		471,023,000
	250,000,000	5.356% due 9/5/06 (b)		249,973,757
	100,000,000	Carrera Capital Finance Ltd., 5.314% due 9/25/06 (b)		100,000,000
		Chesham Finance LLC:
	300,000,000	5.300% due 9/1/06 (b)		299,980,671
	150,000,000	5.305% due 9/1/06 (b)		149,954,756
	245,000,000	5.182% due 10/16/06 (c)		243,453,438
	200,000,000	5.162% due 10/19/06 (c)		198,658,667
	450,000,000	5.399%-5.420% due 2/28/07 (c)		438,154,999
		Cheyne Finance LLC:
	100,000,000	5.330% due 9/1/06 (a)(b)		99,988,616
	100,000,000	5.300% due 9/15/06 (b)		99,996,238
	100,000,000	5.598% due 1/10/07 (c)		98,020,444
		Cobbler Funding LLC:
	46,529,000	5.496% due 9/28/06 (c)		46,339,860
	46,534,000	5.537% due 9/28/06 (c)		46,343,443
		Concord Minuteman Capital Co.:
	153,215,000	5.017% due 9/18/06 (c)		152,861,201
	104,934,000	5.295% due 9/18/06 (c)		104,672,860
	182,367,000	5.552% due 1/12/07 (c)		178,728,778
	66,839,000	5.529% due 1/17/07 (c)		65,460,557
	100,000,000	5.544% due 1/22/07 (c)		97,858,972
		Cullinan Finance Corp.:
	150,000,000	5.284% due 9/25/06 (b)		149,958,379
	126,511,000	5.268% due 11/22/06 (a)(c)		125,029,837
	102,892,000	5.518% due 1/23/07 (a)(c)		100,683,937
		Curzon Funding LLC:
	200,000,000	5.267% due 12/5/06 (c)		197,292,500
	120,000,000	5.399% due 2/28/07 (c)		116,846,400
	154,850,000	Davis Square Funding III Corp., 5.493% due 10/6/06 (c)		154,034,026
		Ebury Finance LLC:
	226,000,000	5.182% due 10/17/06 (c)		224,541,672
	348,700,000	5.183% due 10/20/06 (c)		346,303,172

See Notes to Financial Statements.


Liquid Reserves Portfolio 2006 Annual Report	35

Schedule of Investments (August 31, 2006) (continued)


Face
Amount		Security	Value

Commercial Paper — 48.0% (continued)
$	150,000,000	5.215% due 10/27/06 (c)	$	148,814,667
	250,000,000	5.249% due 11/13/06 (c)		247,409,514
	250,000,000	5.236% due 11/16/06 (c)		247,308,333
	122,000,000	5.448% due 2/16/07 (c)		118,982,533
		General Electric Capital Corp.:
	200,000,000	5.212% due 11/1/06 (c)		198,278,444
	200,000,000	5.402% due 2/5/07 (c)		195,412,111
		Grampian Funding LLC:
	100,000,000	5.207% due 10/17/06 (a)(c)		99,349,611
	250,000,000	5.165% due 10/25/06 (a)(c)		248,111,875
	250,000,000	5.497% due 12/13/06 (a)(c)		246,173,264
	221,000,000	5.510% due 1/17/07 (a)(c)		216,454,950
		Halkin Finance LLC:
	115,410,000	5.311% due 9/1/06 (c)		115,410,000
	300,000,000	5.320% due 9/11/06 (b)		299,946,580
	200,000,000	5.509% due 1/26/07 (c)		195,622,666
	250,000,000	Ixis Commercial Paper Corp., 5.545% due 1/9/07 (c)		245,125,000
	89,429,000	Kaiserplatz Delaware, 5.291% due 9/13/06 (c)		89,271,903
	130,000,000	Lexington Parker Capital Corp., 5.394% due 2/16/07 (c)		126,808,933
		Mica Funding LLC:
	250,000,000	5.373% due 9/5/06		249,851,389
	75,000,000	5.292% due 9/15/06 (c)		74,846,292
	750,000,000	Morgan Stanley Dean Witter Co., 5.300% due 9/1/06 (b)		750,000,000
		Morrigan TRR Funding LLC:
	642,902,000	5.371% due 9/1/06 (c)		642,902,000
	103,000,000	5.350% due 9/5/06 (c)		102,939,001
	100,000,000	5.320% due 9/11/06 (b)		99,995,625
	100,000,000	5.352% due 9/21/06 (c)		99,703,889
	100,000,000	5.464% due 10/2/06 (c)		99,534,139
	199,000,000	5.441% due 2/28/07 (c)		193,731,474
		New Center Asset Trust:
	224,050,000	5.451% due 11/2/06 (c)		221,974,052
	68,965,000	5.401% due 1/29/07 (c)		67,450,643
	105,000,000	5.410% due 2/9/07 (c)		102,525,297
	100,000,000	Nyala Funding LLC, 5.552% due 1/16/07 (c)		97,945,000
		Ormond Quay Funding LLC:
	224,500,000	5.296% due 9/19/06 (c)		223,908,443
	125,000,000	5.288% due 9/29/06 (b)		124,984,392
		Perry Global Funding LLC:
	116,394,000	5.223% due 11/1/06 (c)		115,390,134
	116,749,000	5.561% due 1/16/07 (c)		114,345,365
	100,000,000	Picaros Funding PLC, 5.515% due 1/19/07 (c)		97,913,611
	100,000,000	Santander Centro Hispano LLC, 5.403% due 2/14/07 (c)		97,574,556
		Societe Generale North America:
	100,000,000	5.227% due 11/13/06 (c)		98,967,861
	249,500,000	5.405% due 2/16/07 (c)		243,375,608

See Notes to Financial Statements.


36	Liquid Reserves Portfolio 2006 Annual Report

Schedule of Investments (August 31, 2006) (continued)


Face
Amount		Security	Value

Commercial Paper — 48.0% (continued)
		Tulip Funding Corp.:
$	230,000,000	5.420 % due 9/1/06 (c)	$	230,000,000
	199,894,000	5.428% due 9/5/06 (c)		199,774,064
		UBS Finance Delaware LLC:
	198,900,000	5.516% due 12/19/06 (c)		195,654,007
	300,000,000	5.430% due 2/5/07 (c)		293,085,459
	59,532,000	Versailles LLC, 5.496% due 9/28/06 (c)		59,290,002
	119,000,000	Westpac Banking Corp., 5.158% due 10/13/06 (c)		118,301,668

		Total Commercial Paper		15,482,049,355

Liquidity Notes(c) — 6.6%
		Albis Capital Corp.:
	100,000,000	5.469% due 9/14/06		99,804,278
	50,000,000	5.532% due 10/5/06		49,742,167
	39,600,000	5.541% due 10/6/06		39,389,405
	46,000,000	5.577% due 10/11/06		45,718,889
	75,000,000	5.536% due 10/24/06		74,397,125
	115,000,000	5.437% due 11/16/06		113,696,284
		Fenway Funding LLC:
	220,000,000	5.310% due 9/5/06		219,870,444
	200,000,000	5.348% due 9/14/06		199,615,778
	100,000,000	Ford Credit Floorplan Motown, Master Owner Trust, Motown Notes, Series 2002-1A, 5.483% due 10/25/06 (c)		99,188,500
	467,570,000	KKR Pacific Funding Trust, 5.373%-5.374% due 9/6/06		467,222,570
	101,050,000	Mitten GMAC Mortgage Corp., 5.347% due 9/25/06 (c)		100,692,283
		Strand Capital LLC:
	135,000,000	5.374% due 9/7/06		134,879,625
	200,000,000	5.365% due 10/24/06		198,436,500
		Thornburg Mortgage Capital Resource:
	172,000,000	5.374% due 9/6/06		171,872,194
	105,000,000	5.373% due 11/17/06		103,809,709

		Total Liquidity Notes		2,118,335,751

Master Note — 1.7%
	550,000,000	Merrill Lynch, 5.443% due 9/1/06		550,000,000

Medium-Term Notes — 12.2%
		Cheyne Finance LLC:
	50,000,000	5.320% due 9/1/06 (a)(b)		49,994,309
	100,000,000	5.300% due 9/15/06 (a)(b)		99,993,836
	300,000,000	5.294% due 9/25/06 (a)(b)		299,990,375
	150,000,000	5.300% due 9/29/06 (a)(b)		149,989,447
	100,000,000	5.445% due 10/25/06 (b)		99,994,784
		Series Medium-Term Notes:
	100,000,000	5.376% due 9/5/06 (a)(b)		99,992,192
	150,000,000	5.300% due 9/15/06 (a)(b)		149,987,055
	145,000,000	4.790% due 1/12/07 (a)		144,994,716
	250,000,000	K2 USA LLC, Medium-Term Notes, 5.325% due 9/1/06 (a)(b)		249,966,404

See Notes to Financial Statements.


Liquid Reserves Portfolio 2006 Annual Report	37

Schedule of Investments (August 31, 2006) (continued)


Face
Amount		Security	Value

Medium-Term Notes — 12.2% (continued)
		Premier Asset Collateralized Entity LLC, Medium-Term Notes:
$	175,000,000	5.330% due 9/1/06 (a)(b)	$	174,992,356
	100,000,000	5.333% due 9/1/06 (a)(b)		99,993,671
	100,000,000	5.335% due 9/1/06 (a)(b)		100,000,000
		Sigma Finance Inc.:
	100,000,000	5.498% due 12/13/06 (c)		98,469,306
	250,000,000	Series Medium-Term Note, 4.785% due 1/16/07 (a)		249,990,693
		Stanfield Victoria Funding LLC:
	100,000,000	5.285% due 9/15/06 (a)(b)		99,998,896
	100,000,000	5.369% due 9/19/06 (a)(b)		99,998,554
	50,000,000	5.285% due 9/20/06 (a)(b)		49,998,006
	300,000,000	5.284% due 9/25/06 (a)(b)		299,992,349
	82,000,000	5.496% due 9/27/06 (c)		81,679,016
	`	Medium-Term Notes:
	250,000,000	5.310% due 9/1/06 (a)(b)		249,958,401
	420,000,000	5.320% due 9/1/06 (a)(b)		419,930,252
	250,000,000	Steers Delaware Business Trust, Senior Secured Notes, Series 2006-2, 5.348% due 9/27/06 (a)(b)		250,000,000
	102,784,000	Strategic Money Market Trust, 2006-M, Secured Notes, 5.466% due 11/10/06 (a)(b)		102,784,000
	210,000,000	Tango Finance Corp., Medium-Term Notes, 5.330% due 9/1/06 (a)(b)		209,981,186

		Total Medium-Term Notes		3,932,669,804

Promissory Note — 3.4%
	1,100,000,000	Goldman Sachs Group Inc., 5.430% due 9/1/06 (b)		1,100,000,000

Time Deposits — 3.2%
	200,000,000	ABN AMRO Bank Grand Cayman, 5.280% due 9/1/06		200,000,000
	85,142,000	Dresdner Bank Grand Cayman, 5.280% due 9/1/06		85,142,000
	295,072,000	KBC Bank NV Grand Cayman, 5.290% due 9/1/06		295,072,000
	150,000,000	Societe Generale NY, 5.281% due 9/1/06		150,000,000
	300,000,000	State Street Cayman Islands, 5.280% due 9/1/06		300,000,000

		Total Time Deposits		1,030,214,000

U.S. Government & Agency Obligations — 8.6%
U.S. Government Agencies(c) — 8.4%
		Federal Home Loan Mortgage Corp. (FHLMC), Discount Notes:
	125,000,000	4.605% due 9/18/06		124,737,917
	87,500,000	4.356% due 9/27/06		87,236,163
	261,878,000	4.609%-4.610% due 9/27/06		261,041,081
	200,000,000	4.345% due 9/29/06		199,352,111
	100,000,000	4.576% due 11/1/06		99,247,667
	150,000,000	4.623% due 11/1/06		148,876,583
	100,000,000	4.644% due 11/1/06		99,256,986
	98,614,000	4.629% due 11/14/06		97,716,010
	100,000,000	4.640% due 11/14/06		99,088,361
	111,314,000	4.675% due 11/14/06		110,288,922

See Notes to Financial Statements.


38	Liquid Reserves Portfolio 2006 Annual Report

Schedule of Investments (August 31, 2006) (continued)


Face Amount		Security		Value

U.S. Government Agencies(c) — 8.4% (continued)
$	120,000,000	4.669% due 12/1/06	$	118,647,133
	250,000,000	4.708%-4.711% due 12/1/06		247,156,250
	100,073,000	4.655% due 1/9/07		98,464,882
	250,000,000	5.207% due 1/31/07		244,690,556
	100,000,000	4.980% due 2/16/07		97,785,667
	73,875,000	Series RB, 5.196% due 11/21/06		73,033,102
		Federal National Mortgage Association (FNMA), Discount Notes:
	125,000,000	3.939% due 9/1/06		125,000,000
	56,810,000	4.350% due 9/29/06		56,625,746
	200,000,000	4.684% due 12/1/06		197,737,639
	100,000,000	4.692% due 12/1/06		98,866,924

		Total U.S. Government Agencies		2,684,849,700

U.S. Government Obligation(c) — 0.2%
	75,000,000	U.S. Treasury Bills, 4.951% due 11/30/06		74,094,375

		Total U.S. Government & Agency Obligations		2,758,944,075

		TOTAL INVESTMENTS — 99.5% (Cost — $32,073,546,607#)		32,073,546,607
		Other Assets in Excess of Liabilities — 0.5%		156,794,596

		TOTAL NET ASSETS — 100.0%	$	32,230,341,203


^(a)	Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. This security has been deemed liquid pursuant to guidelines approved by the Board of Trustees, unless otherwise noted.

^(b)	Variable rate security. Interest rate disclosed is that which is in effect at August 31, 2006.

^(c)	Rate shown represents yield-to-maturity.

^#	Aggregate cost for federal income tax purposes is substantially the same.

See Notes to Financial Statements.


Liquid Reserves Portfolio 2006 Annual Report	39

Liquid Reserves Portfolio

Statement of Assets and Liabilities (August 31, 2006)


ASSETS:
Investments, at amortized cost	$	32,073,546,607
Cash		504
Interest receivable		157,705,216
Receivable from investment manager		157,560

Total Assets		32,231,409,887

LIABILITIES:
Trustees’ fees payable		922,984
Accrued expenses		145,700

Total Liabilities		1,068,684

Total Net Assets	$	32,230,341,203

REPRESENTED BY:
Paid in capital	$	32,230,341,203

See Notes to Financial Statements.


40	Liquid Reserves Portfolio 2006 Annual Report

Liquid Reserves Portfolio

Statement of Operations (For the year ended August 31, 2006)


INVESTMENT INCOME:
Interest (Note 1)	$	1,682,385,229

EXPENSES:
Investment management fee (Note 2)		39,891,170
Custody fees		5,883,427
Trustees’ fees		725,496
Legal fees		256,478
Audit and tax		34,000
Miscellaneous expenses		6,949

Total Expenses		46,797,520
Less: Fee waivers and/or expense reimbursements (Note 2)		(11,760,948	)
Fees paid indirectly (Note 1)		(10,715	)

Net Expenses		35,025,857

Net Investment Income		1,647,359,372

Net Realized Loss on Investments		(7,271,827	)

Increase in Net Assets From Operations	$	1,640,087,545

See Notes to Financial Statements.


Liquid Reserves Portfolio 2006 Annual Report	41

Liquid Reserves Portfolio

Statements of Changes in Net Assets (For the years ended August 31,)


	2006			2005

OPERATIONS:
Net investment income	$	1,647,359,372		$	1,099,544,089
Net realized gain (loss)		(7,271,827	)		78,302

Increase in Net Assets From Operations		1,640,087,545			1,099,622,391

CAPITAL TRANSACTIONS:
Net proceeds from sale of shares		108,485,763,858			100,595,035,548
Cost of shares repurchased		(122,684,334,964	)		(94,492,475,937	)

Increase (Decrease) in Net Assets From Capital Transactions		(14,198,571,106	)		6,102,559,611

Increase (Decrease) in Net Assets		(12,558,483,561	)		7,202,182,002
NET ASSETS:
Beginning of year		44,788,824,764			37,586,642,762

End of year	$	32,230,341,203		$	44,788,824,764

See Notes to Financial Statements.


42	Liquid Reserves Portfolio 2006 Annual Report

Liquid Reserves Portfolio

Financial Highlights

For the year ended August 31:



	2006			2005			2004			2003			2002

Net Assets, End of Year (millions)	$	32,230		$	44,789		$	37,587		$	39,447		$	45,007

Total Return⁽¹⁾		4.53	%		2.54	%		1.09	%		1.49	%		2.36	%

Ratios to Average Net Assets:
Gross expenses		0.12	%		0.17	%		0.17	%		0.17	%		0.19	%
Net expenses^(2)(3)(4)		0.09			0.10			0.10			0.10			0.10
Net investment income		4.33			2.57			1.09			1.39			2.29


⁽¹⁾	Performance figures may reflect fee waivers and/or expense reimbursements. Past performance is no guarantee of future results. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower.

⁽²⁾	As a result of an expense limitation, the ratio of expenses to average net assets of the Portfolio did not exceed 0.10%.

⁽³⁾	Reflects fee waivers and/or expense reimbursements.

⁽⁴⁾	There was no impact to the expense ratio as result of fees paid indirectly.

See Notes to Financial Statements.


Liquid Reserves Portfolio 2006 Annual Report	43

Notes to Financial Statements


1.	Organization and Significant Accounting Policies

Liquid Reserves Portfolio (the “Portfolio”) is registered under the U.S. Investment Company Act of 1940, as amended (the “1940 Act”), as a no-load, diversified, open-end management investment company which was organized as a trust under the laws of the State of New York. The Declaration of Trust permits the Trustees to issue beneficial interests in the Portfolio. At August 31, 2006, all investors in the Portfolio were funds advised by the manager of the fund and/or its affiliates.

The following are significant accounting policies consistently followed by the Portfolio and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ.

(a) Investment Valuation. Money market instruments are valued at amortized cost, in accordance with Rule 2a-7 under the 1940 Act, which approximates market value. This method involves valuing portfolio securities at its cost and thereafter assuming a constant amortization to maturity of any discount or premium. The Portfolio’s use of amortized cost is subject to their compliance with certain conditions as specified under Rule 2a-7 of the 1940 Act.

(b) Interest Income and Expenses. Interest income consists of interest accrued and discount earned (including both original issue and market discount adjusted for amortization of premium) on the investments of the Portfolio. Expenses of the Portfolio are accrued daily. The Portfolio bears all costs of its operations other than expenses specifically assumed by the manager.

(c) Income Taxes. The Portfolio is classified as a partnership for federal income tax purposes. As such, each investor in the Portfolio is treated as owner of its proportionate share of the net assets, income, expenses and realized gains and losses of the Portfolio. Therefore, no federal income tax provision is required. It is intended that the Portfolio’s assets will be managed so an investor in the Portfolio can satisfy the requirements of the subchapter M of the Internal Revenue Code.

(d) Fees Paid Indirectly. The Portfolio’s custodian calculates its fees based on the Portfolio’s average daily net assets. The fee is reduced according to a fee arrangement, which provides for custody fees to be reduced based on a formula developed to measure the value of cash deposited with the custodian by the Portfolio. This amount is shown as a reduction of expenses on the Statement of Operations.

(e) Other. Purchases, maturities and sales of money market instruments are accounted for on the date of the transaction. Realized gains and losses are calculated on the identified cost basis.


2.	Investment Management Agreement and Other Transactions with Affiliates

On December 1, 2005, Citigroup Inc. (“Citigroup”) completed the sale of substantially all of its asset management business to Legg Mason, Inc. (“Legg Mason”). As a result, the Portfolio’s then investment manager, Citi Fund Management Inc. (“CFM”), previously an


44	Liquid Reserves Portfolio 2006 Annual Report

Notes to Financial Statements (continued)

indirect wholly-owned subsidiary of Citigroup, became a wholly-owned subsidiary of Legg Mason. Completion of the sale caused the Portfolio’s then existing investment management contract to terminate. The Portfolio’s investors approved a new investment management contract between the Portfolio and CFM, which became effective on December 27, 2005. An interim management agreement took effect upon the closing of the sale and continued in effect until December 27, 2005.

Prior to October 1, 2005, the Portfolio paid CFM an investment management fee calculated at an annual rate of 0.15% of the Portfolio’s average daily net assets.

Effective October 1, 2005 and continuing under a new investment management agreement, which became effective December 27, 2005, the Portfolio paid CFM an investment management fee calculated daily and paid monthly, at an annual rate of 0.10% of the Portfolio’s average daily net assets.

Effective August 1, 2006, Legg Mason Partners Fund Advisor, LLC (“LMPFA”) became the Portfolio’s investment manager and Western Asset Management Company (“Western Asset”) became the Portfolio’s subadviser. The portfolio manager who is responsible for the day-to-day management of the Portfolio remains the same immediately prior to and immediately after the date of these changes. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason.

LMPFA provides administrative and certain oversight services to the Portfolio. LMPFA has delegated to the subadviser the day-to-day portfolio management of the Portfolio. The Portfolio’s investment management fee remains unchanged. For its services LMPFA will pay Western Asset 70% of the net management fee that it receives from the Portfolio.

During the year ended August 31, 2006, the Portfolio had an expense limitation in place of 0.10% of the Portfolio’s average daily net assets.

During the year ended August 31, 2006, CFM and LMPFA waived a portion of their fees in the amount of $11,603,388. In addition, during the year ended August 31, 2006, the Portfolio was reimbursed for expenses in the amount of $157,560.

The Portfolio pays no compensation directly to any Trustee or any officer who is affiliated with Legg Mason, all of whom receive remuneration for their services to the Portfolio from Legg Mason or its affiliates.

Certain of the officers and one Trustee of the Portfolio are employees of Legg Mason or its affiliates and do not receive compensation from the Trust.

During a special meeting in June, 2006 the Portfolio’s Board approved a number of initiatives to streamline and restructure the fund complex. In that connection the Board voted to establish a mandatory retirement age of 75 for current Trustees and 72 for all future Trustees and to allow current Trustees to elect to retire as of the date on which Trustees elected in accordance with the Joint Proxy Statement commence service as Trustees of the realigned and consolidated Board (the “Effective Date”).

On July 10, 2006, the Board also voted to amend its retirement plans to provide for the payment of certain benefits (in lieu of any other retirement payments under the plans) to Trustees who have not elected to retire as of the Effective Date. Under the amended plan, Trustees electing to receive benefits under the amendments must waive all rights under the plan prior to amendment. Each fund overseen by the Board (including the Portfolio) will pay


Liquid Reserves Portfolio 2006 Annual Report	45

Notes to Financial Statements (continued)

a pro rata share (based upon asset size) of such benefits. As of August 31, 2006, the Portfolio’s allocable share of benefits under this amendment are $869,651.

Under the previous Retirement Plan (the “Plan”), all Trustees, who were not “interested persons” of the Fund, within the meaning of the 1940 Act, were required to retire from the Board as of the last day of the calendar year in which the applicable Trustees attained age 75. Trustees were able to retire under the Plan before attaining the mandatory retirement age. Trustees who had served as Trustee of the Portfolio or any of the investment companies associated with CFM and LMPFA for at least ten years when they retired continue to be eligible to receive the maximum retirement benefit under the previous Plan, subject to the terms of the amended Plans. The maximum retirement benefit was an amount equal to five times the amount of retainer and regular meeting fees payable to a Trustee during the entirety of the calendar year of the Trustee’s retirement (assuming no change in relevant facts for the balance of the year following the Trustee’s retirement). Amounts owed under the Plan may be paid in installments or in a lump sum (discounted to present value). Benefits under the Plan are unfunded. Two former Trustees are currently receiving payments under the Plan. In addition, three other Trustees elected to receive full payments under the Plan.


3.	Federal Income Tax Basis of Investment Securities

The tax cost on investment securities owned at August 31, 2006, for federal income tax purposes, amounted to $32,073,546,607.


4.	Regulatory Matters

On May 31, 2005, the U.S. Securities and Exchange Commission (“SEC”) issued an order in connection with the settlement of an administrative proceeding against Smith Barney Fund Management LLC (“SBFM”) and Citigroup Global Markets (“CGM”) relating to the appointment of an affiliated transfer agent for the Smith Barney family of mutual funds (the “Affected Funds”).

The SEC order finds that SBFM and CGM willfully violated Section 206(1) of the Investment Advisers Act of 1940 (“Advisers Act”). Specifically, the order finds that SBFM and CGM knowingly or recklessly failed to disclose to the boards of the Affected Funds in 1999 when proposing a new transfer agent arrangement with an affiliated transfer agent that: First Data Investors Services Group (“First Data”), the Affected Funds’ then-existing transfer agent, had offered to continue as transfer agent and do the same work for substantially less money than before; and that Citigroup Asset Management (“CAM”), the Citigroup business unit that, at the time, included the Affected Funds’ investment manager and other investment advisory companies, had entered into a side letter with First Data under which CAM agreed to recommend the appointment of First Data as sub-transfer agent to the affiliated transfer agent in exchange for, among other things, a guarantee by First Data of specified amounts of asset management and investment banking fees to CAM and CGM. The order also finds that SBFM and CGM willfully violated Section 206(2) of the Advisers Act by virtue of the omissions discussed above and other misrepresentations and omissions in the materials provided to the Affected Funds’ boards, including the failure to make clear that the affiliated transfer agent would earn a high profit for performing lim-


46	Liquid Reserves Portfolio 2006 Annual Report

Notes to Financial Statements (continued)

ited functions while First Data continued to perform almost all of the transfer agent functions, and the suggestion that the proposed arrangement was in the Affected Funds’ best interests and that no viable alternatives existed. SBFM and CGM do not admit or deny any wrongdoing or liability. The settlement does not establish wrongdoing or liability for purposes of any other proceeding.

The SEC censured SBFM and CGM and ordered them to cease and desist from violations of Sections 206(1) and 206(2) of the Advisers Act. The order requires Citigroup to pay $208.1 million, including $109 million in disgorgement of profits, $19.1 million in interest, and a civil money penalty of $80 million. Approximately $24.4 million has already been paid to the Affected Funds, primarily through fee waivers. The remaining $183.7 million, including the penalty, has been paid to the U.S. Treasury and will be distributed pursuant to a plan submitted for the approval of the SEC. At this time, there is no certainty as to how the above-described proceeds of the settlement will be distributed, to whom such distributions will be made, the methodology by which such distributions will be allocated, and when such distributions will be made.

The order also required that transfer agency fees received from the Affected Funds since December 1, 2004 less certain expenses be placed in escrow and provided that a portion of such fees might be subsequently distributed in accordance with the terms of the order.

On April 3, 2006, an aggregate amount of approximately $9 million was distributed to the Affected Funds.

The order required SBFM to recommend a new transfer agent contract to the Affected Funds boards within 180 days of the entry of the order; if a Citigroup affiliate submitted a proposal to serve as transfer agent or sub-transfer agent, SBFM and CGM would have been required, at their expense, to engage an independent monitor to oversee a competitive bidding process. On November 21, 2005, and within the specified timeframe, the Fund’s Board selected a new transfer agent for the Fund. No Citigroup affiliate submitted a proposal to serve as transfer agent. Under the order, SBFM also must comply with an amended version of a vendor policy that Citigroup instituted in August 2004.

Although there can be no assurance, SBFM does not believe that this matter will have a material adverse effect on the Affected Funds.

This Portfolio is not one of the Affected Funds and therefore did not implement the transfer agent arrangement described above and therefore has not received and will not receive any portion of the distributions.

On December 1, 2005, Citigroup completed the sale of substantially all of its global asset management business, including SBFM, to Legg Mason.


5.	Legal Matters

Beginning in August 2005, five class action lawsuits alleging violations of federal securities laws and state law were filed against CGM and SBFM, (collectively, the “Defendants”) based on the May 31, 2005 settlement order issued against the Defendants by the SEC as described in Note 4. The complaints seek injunctive relief and compensatory and punitive damages, removal of SBFM as the advisor for the Smith Barney family of funds, rescission of the Funds’ management and other contracts with SBFM, recovery of all fees paid to SBFM pursuant to such contracts, and an award of attorneys’ fees and litigation expenses.


Liquid Reserves Portfolio 2006 Annual Report	47

Notes to Financial Statements (continued)

On October 5, 2005, a motion to consolidate the five actions and any subsequently-filed, related action was filed. That motion contemplates that a consolidated amended complaint alleging substantially similar causes of action will be filed in the future.

As of the date of this report, the Portfolio’s investment manager believes that resolution of the pending lawsuit will not have a material effect on the financial position or results of operations of the Funds or the ability of the Portfolio’s investment manager and it affiliates to continue to render services to the Funds under their respective contracts.


6.	Other Matters

On September 16, 2005, the staff of the SEC informed SBFM and Salomon Brothers Asset Managenent Inc. (“SBAM”) that the staff is considering recommending that the SEC institute administrative proceedings against SBFM and SBAM for alleged violations of Section 19(a) and 34(b) of the Investment Company Act (and related Rule 19a-1). The notification is a result of an industry wide inspection by the SEC and is based upon alleged deficiencies in disclosures regarding dividends and distributions paid to shareholders of certain funds. Section 19(a) and related Rule 19a-1 of the Investment Company Act generally require funds that are making dividend and distribution payments to provide shareholders with a written statement disclosing the source of the dividends and distributions, and, in particular, the portion of the payments made from each of net investment income, undistributed net profits and/ or paid-in capital. In connection with the contemplated proceedings, the staff may seek a cease and desist order and/or monetary damages from SBFM or SBAM.

Although there can be no assurance, SBFM and SBAM believe that this matter is not likely to have a material adverse effect on the Portfolio.


7.	Additional Investor Information

The Portfolio’s Board approved a number of initiatives designed to streamline and restructure the fund complex, and has authorized seeking investor approval for those initiatives where investor approval is required. As a result, Portfolio investors will be asked to elect a new Board, approve matters that will result in the Portfolio being grouped for organizational and governance purposes with other funds in the fund complex, and domicile the Portfolio as a Maryland business trust, with all funds operating under uniform charter documents. Portfolio investors also will be asked to approve investment matters, including standardized fundamental investment policies.

Materials describing these matters are expected to be sent to investors later in 2006. If investor approval is obtained, these matters generally are expected to be implemented during the first quarter of 2007.


8.	Recent Accounting Pronouncements

During 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, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 prescribes a comprehensive model for how a fund should recognize, measure, present, and disclose in its financial state-


48	Liquid Reserves Portfolio 2006 Annual Report

Notes to Financial Statements (continued)

ments uncertain tax positions that the fund has taken or expects to take on a tax return. FIN 48 requires that the tax effects of a position be recognized only if it is “more likely than not” to be sustained based solely on its technical merits. Management must be able to conclude that the tax law, regulations, case law, and other objective information regarding the technical merits sufficiently support the position’s sustainability with a likelihood of more than 50 percent. FIN 48 is effective for fiscal periods beginning after December 15, 2006, which for this Portfolio will be September 1, 2007. At adoption, the financial statements must be adjusted to reflect only those tax positions that are more likely than not to be sustained as of the adoption date. Management of the Fund is currently evaluating the impact that FIN 48 will have on the financial statements.

* * *

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.


Liquid Reserves Portfolio 2006 Annual Report	49

Report of Independent Registered Public Accounting Firm

The Board of Trustees and Investors
Liquid Reserves Portfolio:

We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Liquid Reserves Portfolio as of August 31, 2006, and the related statement of operations for the year then ended, the statements of changes in net assets and the financial highlights for each of the years in the two-year period then ended. These financial statements and financial highlights are the responsibility of the Portfolio’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for each of the years in the three-year period ended August 31, 2004 were audited by other independent registered public accountants whose report thereon, dated October 22, 2004, expressed an unqualified opinion on those financial highlights.

We conducted our audits in accordance with 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 and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 2006 by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Liquid Reserves Portfolio as of August 31, 2006, the results of its operations for the year then ended, the changes in its net assets, and the financial highlights for each of the years in the two-year period then ended, in conformity with U.S. generally accepted accounting principles.

(KPMG LLP LOGO)

New York, New York October 26, 2006		/s/ KPMG LLP


50	Liquid Reserves Portfolio 2006 Annual Report

Board Approval of Management and Subadvisory Agreements (unaudited)

At a meeting held in person on June 19, 2006, the Portfolio’s Board, including a majority of the Board Members who are not “interested persons” of the Portfolio or Legg Mason Partners Fund Advisor, LLC (the “Manager”) or any sub-investment adviser or proposed sub-investment adviser as defined in the Investment Company Act of 1940, as amended (the “1940 Act”) (the “Independent Board Members”), approved a new management agreement (the “New Management Agreement”) between the Portfolio and the Manager. The Portfolio’s Board, including a majority of the Independent Board Members, also approved one or more new subadvisory agreements between the Manager and Western Asset Management Company (the “Subadviser”) (the “New Subadvisory Agreement”). The New Management Agreement and the New Subadvisory Agreement replaced the Portfolio’s prior management agreement with Citi Fund Management Inc. and were entered into in connection with an internal reorganization of the Manager’s, the prior manager’s and the Subadviser’s parent organization, Legg Mason. In approving the New Management Agreement and New Subadvisory Agreement, the Board, including the Independent Board Members, considered the factors discussed below, among other things.

The Board noted that the Manager will provide administrative and certain oversight services to the Portfolio, and that the Manager will delegate to the Subadviser the day-to-day portfolio management of the Portfolio. The Board Members reviewed the qualifications, backgrounds and responsibilities of the senior personnel that will provide oversight and general management services and the portfolio management team that would be primarily responsible for the day-to-day management of the Portfolio. The Board Members noted that the portfolio management team was expected to be the same as then managing the Portfolio.

The Board Members received and considered information regarding the nature, extent and quality of services expected to be provided to the Portfolio by the Manager under the New Management Agreement and by the Subadviser under the New Subadvisory Agreement. The Board Members’ evaluation of the services expected to be provided by the Manager and the Subadviser took into account the Board Members’ knowledge and familiarity gained as Fund Board Members, including as to the scope and quality of Legg Mason’s investment management and other capabilities and the quality of its administrative and other services. The Board Members considered, among other things, information and assurances provided by Legg Mason as to the operations, facilities and organization of the Manager and the Subadviser and the qualifications, backgrounds and responsibilities of their senior personnel. The Board Members further considered the financial resources available to the Manager, the Subadviser and Legg Mason. The Board Members concluded that, overall, the nature, extent and quality of services expected to be provided under the New Management Agreement and the New Subadvisory Agreement were acceptable.

The Board Members also received and considered performance information for the Portfolio as well as comparative information with respect to a peer group of funds (the “Performance Universe”) selected by Lipper, Inc. (“Lipper”), an independent provider of investment company data. This information was included within performance information presented for each fund investing in the Portfolio. The Board Members were provided with a description of the methodology Lipper used to determine the similarity of the Portfolio to


Liquid Reserves Portfolio	51

Board Approval of Management and Subadvisory Agreements (unaudited) (continued)

the funds included in the Performance Universe. The Board Members noted that they had received and discussed with management, at periodic intervals, information comparing the Portfolio’s performance against, among other things, its benchmark. Based on the Board Members’ review, which included careful consideration of the factors noted above, the Board Members concluded that the performance of the Fund under the circumstances, supported approval of the New Management Agreement and New Subadvisory Agreement.

The Board Members reviewed and considered the management fee that would be payable by the Portfolio to the Manager in light of the nature, extent and quality of the management services expected to be provided by the Manager, including the fee waiver and/or expense reimbursement arrangements currently in place. Additionally, the Board Members received and considered information comparing the Portfolio’s management fee and overall expenses with those of comparable funds in both the relevant expense group and a broader group of funds, each selected and provided by Lipper. The Board Members also reviewed and considered the subadvisory fee that would be payable by the Manager to the Subadviser in light of the nature, extent and quality of the management services expected to be provided by the Subadviser. The Board Members noted that the Manager, and not the Portfolio, will pay the subadvisory fee to the Subadviser. The Board Members determined that the Portfolio’s management fee and the Portfolio’s subadvisory fee were reasonable in light of the nature, extent and quality of the services expected to be provided to the Portfolio under the New Management Agreement and the New Subadvisory Agreement.

The Board Members received and considered a pro-forma profitability analysis of Legg Mason and its affiliates in providing services to the Portfolio, including information with respect to the allocation methodologies used in preparing the profitability data. The Board Members recognized that Legg Mason may realize economies of scale based on its internal reorganization and synergies of operations. The Board Members noted that it was not possible to predict with a high degree of confidence how Legg Mason’s and its affiliates’ profitability would be affected by its internal reorganization and by other factors including potential economies of scale, but that based on their review of the pro forma profitability analysis, their most recent prior review of the profitability of the predecessor manager and its affiliates from their relationship with the Portfolio and other factors considered, they determined that the management fee was reasonable. The Board Members noted that they expect to receive and evaluate profitability information on an annual basis.

In their deliberations, the Board Members also considered the information that had been received, the factors that had been identified and the conclusions that had been reached by the Board in connection with the Board’s most recent approval of the Portfolio’s prior management agreement, in addition to information provided in connection with the Board’s evaluation of the terms and conditions of the New Management Agreement and the New Subadvisory Agreement.

The Board Members considered Legg Mason’s advice and the advice of its counsel that the New Management Agreement and the New Subadvisory Agreement were being entered into in connection with an internal reorganization within Legg Mason, that did not involve an actual change of control or management. The Board Members further noted that the


52	Liquid Reserves Portfolio

Board Approval of Management and Subadvisory Agreements (unaudited) (continued)

terms and conditions of the New Management Agreement are substantially identical to those of the Portfolio’s previous management agreement except for the identity of the Manager, and that the initial term of the New Management Agreement (after which it will continue in effect only if such continuance is specifically approved at least annually by the Board, including a majority of the Independent Board Members) was the same as that under the prior management agreement.

In light of all of the foregoing, the Board, including the Independent Board Members, approved the New Management Agreement and the New Subadvisory Agreement. No single factor reviewed by the Board Members was identified as the principal factor in determining whether to approve the New Management Agreement and the New Subadvisory Agreement. The Independent Board Members were advised by separate independent legal counsel throughout the process. The Independent Board Members also discussed the proposed approval of the New Management Agreement and the New Subadvisory Agreement in private sessions with their independent legal counsel at which no representatives of the Manager or Subadviser were present.


Liquid Reserves Portfolio	53

Additional Information (unaudited)

Information about Trustees and Officers

The business and affairs of Liquid Reserves Portfolio (the “Portfolio”) are managed under the direction of the Board of Trustees. Information pertaining to the Trustees and officers of the Fund is set forth below. Each Trustee and officer holds office for his or her lifetime, unless that individual resigns, retires or is otherwise removed.


Name, Address and Birth Year	Position(s) Held with Fund	Term of Office* and Length of Time Served	Principal Occupation(s) During Past Five Years	Number of Portfolios In Fund Complex Overseen by Trustee	Other Board Memberships Held by Trustee During Past Five Years

Non-Interested Trustees:
Elliott J. Berv c/o R. Jay Gerken Legg Mason & Co., LLC (“Legg Mason”) 399 Park Avenue New York, NY 10022 Birth Year: 1943	Trustee	Since 2001	President and Chief Executive Officer, Catalyst (consulting) (since 1984); Chief Executive Officer, Rocket City Enterprises media) (2000 to 2005); Chief Executive Officer, Landmark City (real estate development) (2001 to 2004); Executive Vice President, DigiGym Systems (personal fitness systems) (2001 to 2004); Chief Executive Officer, Motorcity USA (Motorsport Racing) (2004 to 2005)	37	Board Member, American Identity Corp. (doing business as Morpheus Technologies) (biometric information management) (since 2001); Director, Lapoint Industries (industrial filter company) (since 2002); Director, Alzheimer’s Association (New England Chapter) (since 1998)

Donald M. Carlton c/o R. Jay Gerken Legg Mason 399 Park Avenue New York, NY 10022 Birth Year: 1937	Trustee	Since 2001	Consultant, URS Corporation (engineering) (since 1999); former Chief Executive Officer, Radian International LLC (engineering) (from 1996 to 1998), Member of the Management Committee, Signature Science (research and development) (since 2000)	37	Director, Tempe-Inland (forest products) (since 2003); Director, American Electric Power Co. (electric utility) (since 1999); Director, National Instruments Corp. technology) (since 1994); formerly, Director, Valero Energy (petroleum refining) (since 2003)

A. Benton Cocanougher c/o R. Jay Gerken Legg Mason 399 Park Avenue New York, NY 10022 Birth Year: 1938	Trustee	Since 2001	Dean Emeritus and Professor, Texas A&M University (since 2001); formerly, Interim Chancellor, Texas A&M University System (2003 to 2004); formerly, Special Advisor to the President, Texas A&M University (2002-2003); formerly, Dean and Professor of Marketing, College and Graduate School of Business, Texas A&M University (1987 to 2001)	37	None


54	Liquid Reserves Portfolio

Additional Information (unaudited) (continued)


Name, Address and Birth Year	Position(s) Held with Fund	Term of Office* and Length of Time Served	Principal Occupation(s) During Past Five Years	Number of Portfolios In Fund Complex Overseen by Trustee	Other Board Memberships Held by Trustee During Past Five Years

Non-Interested Trustees:
Mark T. Finn c/o R. Jay Gerken Legg Mason 399 Park Avenue New York, NY 10022 Birth Year: 1943	Trustee	Since 2001	Adjunct Professor, College of William & Mary (since 2002); Principal/Member, Balvan Partners (investment management) (since 2002); Chairman, Chief Executive Officer and Owner, Vantage Consulting Group, Inc. (investment management) (since 1988); formerly, Vice Chairman and Chief Operating Officer, Lindner Asset Management Company (mutual fund company) (1999 to 2001); formerly, General Partner and Shareholder, Greenwich Ventures LLC (investment partnership) (1996 to 2001)	37	None

Stephen Randolph Gross c/o R. Jay Gerken Legg Mason 399 Park Avenue New York, NY 10022 Birth Year: 1947	Trustee	Since 2001	Chairman, HLB Gross Collins, P.C. (accounting and consulting firm) (since 1979); Treasurer, Coventry Limited, Inc. (Senior Living Facilities) (since 1985); formerly, Managing Director, Fountainhead Ventures, L.L.C. (technology accelerator) (1998 to 2003); formerly, Treasurer, Hank Aaron Enterprises (fast food franchise) (1985 to 2001); formerly, Partner, Capital Investment Advisory Partners (leverage buyout consulting) (2000 to 2002); formerly, Secretary, Carint N.A. (manufacturing) (1998 to 2002)	37	Director, Andersen Calhoun (assisted living) (since 1987); formerly, Director, United Telesis, Inc. (telecommunications) (1997 to 2002); formerly, Director, ebank Financial Services, Inc. (1997 to 2004)

Diana R. Harrington c/o R. Jay Gerken Legg Mason 399 Park Avenue New York, NY 10022 Birth Year: 1940	Trustee	Since 1992	Professor, Babson College (since 1992)	37	None


Liquid Reserves Portfolio	55

Additional Information (unaudited) (continued)


Name, Address and Birth Year	Position(s) Held with Fund	Term of Office* and Length of Time Served	Principal Occupation(s) During Past Five Years	Number of Portfolios In Fund Complex Overseen by Trustee	Other Board Memberships Held by Trustee During Past Five Years

Non-Interested Trustees:
Susan B. Kerley c/o R. Jay Gerken Legg Mason 399 Park Avenue New York, NY 10022 Birth Year: 1951	Trustee	Since 1992	Investment Consultant, Partner Strategic Management Advisors, LLC (investment consulting) (since 1990)	37	Chairperson and Independent Board Member of Eclipse Fund, Inc. and Eclipse Funds (which trade as Mainstay Funds) (currently supervises 16 investment companies in the Fund complex) (since 1991)

Alan G. Merten c/o R. Jay Gerken Legg Mason 399 Park Avenue New York, NY 10022 Birth Year: 1941	Trustee	Since 2001	President, George Mason University (since 1996)	37	Trustee, First Potomac Realty Trust (since 2005); Director, Xybernaut Corporation (information technology) (2004 to 2006); Director, Digital Net Holdings, Inc. (2003 to 2004); Director, Comshare, Inc. (information technology) (1985 to 2003); Director, BTG, Inc. (information systems) (1997 to 2001)

R. Richardson Pettit c/o R. Jay Gerken Legg Mason 399 Park Avenue New York, NY 10022 Birth Year: 1942	Trustee	Since 2001	Formerly, Duncan Professor of Finance, University of Houston (1977 to 2006)	37	None

Interested Trustee:
R. Jay Gerken, CFA** Legg Mason 399 Park Avenue 4th Floor New York, NY 10022 Birth Year: 1951	Director, Chairman, President and Chief Executive Officer, Class II	Since 2002	Managing Director, Legg Mason; Chairman of the Board, Trustee, or Director of 167 funds associated with Legg Mason Partners Fund Advisor, LLC (“LMPFA”) and its affiliates; President, LMPFA (since 2006); Chairman, President and Chief Executive Officer of certain mutual funds associated with Legg Mason or its affiliates; formerly, Chairman, Smith Barney Fund Management LLC (“SBFM”) and Citi Fund Management, Inc., (“CFM”) (2002 to 2005); formerly, Chairman, President and Chief Executive Officer, Travelers Investment Advisers Inc. (2002 to 2005)	167	Trustee, Consulting Group Capital Markets Fund


56	Liquid Reserves Portfolio

Additional Information (unaudited) (continued)


Name, Address and Birth Year	Position(s) Held with Fund	Term of Office* and Length of Time Served	Principal Occupation(s) During Past Five Years	Number of Portfolios In Fund Complex Overseen by Trustee	Other Board Memberships Held by Trustee During Past Five Years

Officers:
Frances M. Guggino Legg Mason 125 Broad Street 10th Floor New York, NY 10004 Birth Year: 1957	Chief Financial Officer and Treasurer	Since 2004	Director of Legg Mason; Chief Financial Officer and Treasurer of certain mutual funds associated with Legg Mason	N/A	N/A

	Controller	2002- 2004	Formerly, Controller of certain mutual funds associated with Legg Mason (from 1999 to 2004)

Ted P. Becker Legg Mason 399 Park Avenue 4th Floor New York, NY 10022 Birth Year: 1951	Chief Compliance Officer	Since 2006	Chief Compliance Officer of LMPFA (since 2006); Managing Director of Compliance at Legg Mason (2005–Present); Chief Compliance Officer with certain mutual funds associated with Legg Mason (since 2006); Managing Director of Compliance at Legg Mason or its predecessor (2002–2005); Prior to 2002, Managing Director-Internal Audit & Risk Review at Citigroup, Inc.	N/A	N/A

John Chiota Legg Mason 300 First Stamford Place 4th Floor Stamford, CT 06902 Birth Year: 1968	Chief Anti-Money Laundering Compliance Officer	Since 2006	Vice President of Legg Mason or its predecessor (since 2004); Chief Anit-Money Laundering Compliance Officer with certain mutual funds associated with Legg Mason (since 2006); Prior to August 2004, Chief AML Compliance Officer with TD Waterhouse	N/A	N/A

Wendy S. Setnicka Legg Mason 125 Broad Street 10th Floor New York, NY 10004 Birth Year: 1964	Controller	Since 2004	Vice President of Legg Mason (since 2003); Controller of certain mutual funds associated with Legg Mason; formerly, Assistant Controller of Legg Mason (from 2002 to 2004); Accounting Manager of Legg Mason (from 1998 to 2002)	N/A	N/A


Liquid Reserves Portfolio	57

Additional Information (unaudited) (continued)


Name, Address and Birth Year	Position(s) Held with Fund	Term of Office* and Length of Time Served	Principal Occupation(s) During Past Five Years	Number of Portfolios In Fund Complex Overseen by Trustee	Other Board Memberships Held by Trustee During Past Five Years

Officers:
Robert I. Frenkel Legg Mason 300 First Stamford Place 4th Floor Stamford, CT 06902 Birth Year: 1954	Secretary and Chief Legal Officer	Since 2003	Managing Director and General Counsel of Global Mutual Funds for Legg Mason and its predecessors (since 1994); Secretary and Chief Legal Officer of mutual funds associated with Legg Mason (since 2003); formerly, Secretary of CFM (from 2001 to 2004)	N/A	N/A


*	Each Trustee and Officer serves until his or her successor has been duly elected and qualified.
**	Mr. Gerken is an “interested person” of the Fund as defined in the Investment Company Act of 1940, as amended, because Mr. Gerken is an officer of LMPFA and certain of its affiliates.


58	Liquid Reserves Portfolio

ITEM 2.	CODE OF ETHICS.

	The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer,
	principal financial officer, principal accounting officer or controller.

ITEM 3.	AUDIT COMMITTEE FINANCIAL EXPERT.

	The Board of Trustees of the registrant has determined that Mr. Steven Randolph Gross, the
	Chairman of the Board’s Audit Committee, possesses the technical attributes identified in Instruction
	2(b) of Item 3 to Form N-CSR to qualify as an “audit committee financial expert,” and has designated
	Mr. Gross as the Audit Committee’s financial expert. Mr. Gross is an “independent” Trustee pursuant
	to paragraph (a)(2) of Item 3 to Form N-CSR.

ITEM 4.	PRINCIPAL ACCOUNTANT FEES AND SERVICES.

	a) Audit Fees. Effective June 17, 2005, PricewaterhouseCoopers LLP (“PwC”) resigned as the
	Registrant’s principal accountant (the “Auditor”). The Registrant’s audit committee approved the
	engagement of KPMG LLP (“KPMG”) as the Registrant’s new principal accountant for the fiscal
	year ended August 31, 2006. The aggregate fees billed in the last two fiscal years ending August 31,
	2005 and August 31, 2006 (the "Reporting Periods") for professional services rendered for the audit
	of the Registrant's annual financial statements, or services that are normally provided by the Auditor
	in connection with the statutory and regulatory filings or engagements for the Reporting Periods,
	were $26,000 in 2005 and $25,000 in 2006.

	b) Audit-Related Fees. The aggregate fees billed in the Reporting Periods for assurance and related
	services by PwC or KPMG that are reasonably related to the performance of the audit of the
	Registrant's financial statements and are not reported under paragraph (a) of this Item 4 were $2,500
	in 2005 and $912 in 2006. The services consisting of procedures performed in connection with the
	Annual Registration Statement filed on Form N-1A on behalf of the Liquid Reserves Portfolio were
	rendered in 2005. The services consisting of procedures performed in connection with the resignation
	of PwC as the Registrant’s principal accountant were rendered in 2006.

	In addition, there were no Audit-Related Fees billed in the Reporting Period for assurance and related
	services by the Auditor to the Registrant’s investment adviser (not including any sub-adviser whose
	role is primarily portfolio management and is subcontracted with or overseen by another investment
	adviser), and any entity controlling, controlled by or under common control with the investment
	adviser that provides ongoing services to the Liquid Reserves Portfolio (“service affiliates”), that
	were reasonably related to the performance of the annual audit of the service affiliates. Accordingly,
	there were no such fees that required pre-approval by the Audit Committee for the Reporting Periods
	(prior to May 6, 2003 services provided by the Auditor were not required to be pre-approved).

	(c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by
	PwC for tax compliance, tax advice and tax planning ("Tax Services") were $0 in 2005 and $2,163 in
	2006. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax
	returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory,
	regulatory or administrative developments, and (iii) tax advice regarding tax qualification matters
	and/or treatment of various financial instruments held or proposed to be acquired or held. As of
	August 31, 2006, KPMG has not billed the Registrant for any Tax Services rendered.
	There were no fees billed for tax services by PwC or KPMG to service affiliates during the Reporting
	Periods that required pre-approval by the Audit Committee.

	d) There were no non-audit services rendered by KPMG to SBAM, or any entity controlling,
	controlled by or under common control with SBAM that provided ongoing services to the Registrant.

	All Other Fees. There were no other non-audit services rendered by PwC or KPMG to Smith Barney
	Fund Management LLC (“SBFM”), and any entity controlling, controlled by or under common

	control with SBFM that provided ongoing services to Liquid Reserves Portfolio requiring pre-
	approval by the Audit Committee in the Reporting Period.

	(e) Audit Committee’s pre–approval policies and procedures described in paragraph (c) (7) of Rule
	2-01 of Regulation S-X.

	(1) The Charter for the Audit Committee (the “Committee”) of the Board of each registered
	investment company (the “Fund”) advised by Smith Barney Fund Management LLC or Salomon
	Brothers Asset Management Inc. or one of their affiliates (each, an “Adviser”) requires that the
	Committee shall approve (a) all audit and permissible non-audit services to be provided to the Fund
	and (b) all permissible non-audit services to be provided by the Fund’s independent auditors to the
	Adviser and any Covered Service Providers if the engagement relates directly to the operations and
	financial reporting of the Fund. The Committee may implement policies and procedures by which
	such services are approved other than by the full Committee.

	The Committee shall not approve non-audit services that the Committee believes may impair the
	independence of the auditors. As of the date of the approval of this Audit Committee Charter,
	permissible non-audit services include any professional services (including tax services), that are not
	prohibited services as described below, provided to the Fund by the independent auditors, other than
	those provided to the Fund in connection with an audit or a review of the financial statements of the
	Fund. Permissible non-audit services may not include: (i) bookkeeping or other services related to
	the accounting records or financial statements of the Fund; (ii) financial information systems design
	and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind
	reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or
	human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii)
	legal services and expert services unrelated to the audit; and (ix) any other service the Public
	Company Accounting Oversight Board determines, by regulation, is impermissible.

	Pre-approval by the Committee of any permissible non-audit services is not required so long as: (i)
	the aggregate amount of all such permissible non-audit services provided to the Fund, the Adviser
	and any service providers controlling, controlled by or under common control with the Adviser that
	provide ongoing services to the Fund (“Covered Service Providers”) constitutes not more than 5% of
	the total amount of revenues paid to the independent auditors during the fiscal year in which the
	permissible non-audit services are provided to (a) the Fund, (b) the Adviser and (c) any entity
	controlling, controlled by or under common control with the Adviser that provides ongoing services
	to the Fund during the fiscal year in which the services are provided that would have to be approved
	by the Committee; (ii) the permissible non-audit services were not recognized by the Fund at the time
	of the engagement to be non-audit services; and (iii) such services are promptly brought to the
	attention of the Committee and approved by the Committee (or its delegate(s)) prior to the
	completion of the audit.

	(2) For the Liquid Reserves Portfolio, the percentage of fees that were approved by the audit
	committee, with respect to: Audit-Related Fees were 100% and 100% for 2005 and 2006; Tax Fees
	were 100% and 100% for 2005 and 2006; and Other Fees were 100% and 100% for 2005 and 2006.

	(f) N/A

	(g) All Other Fees. The aggregate fees billed for all other non-audit services rendered by PwC to
	Salomon Brothers Asset Management (“SBAM”), and any entity controlling, controlled by or under
	common control with SBAM that provided ongoing services to Liquid Reserves Portfolio, requiring
	pre-approval by the Audit Committee for the year ended August 31, 2005 which include the issuance
	of reports on internal control under SAS No. 70 related to various Citigroup Asset Management
	(“CAM”) entities a profitability review of the Adviser and phase 1 of an analysis of Citigroup’s
	current and future real estate occupancy requirements in the tri-state area and security risk issues in
	the New York metro region was $1.3 million all of which was pre-approved by the Audit Committee.
	Non-audit fees billed by PwC for services rendered to Liquid Reserves Portfolio and CAM and any
	entity controlling, controlled by, or under common control with CAM that provides ongoing services

	to Liquid Reserves Portfolio during the reporting period was $2.7 million for the year ended August
	31, 2005.

	Non-audit fees billed by KPMG for services rendered to Liquid Reserves Portfolio and CAM and any
	entity controlling, controlled by, or under common control with CAM that provides ongoing services
	to Liquid Reserves Portfolio during the reporting period was $75,000 and $0 for the years ended
	August 31, 2005 and August 31, 2006, respectively. Such fees relate to services provided in
	connection with the transfer agent matter as fully described in the notes to the financial statements.

	(h) Yes. The Liquid Reserves Portfolio’s Audit Committee has considered whether the provision of
	non-audit services that were rendered to Service Affiliates which were not pre-approved (not
	requiring pre-approval) is compatible with maintaining the Accountant's independence. All services
	provided by the Auditor to the Liquid Reserves Portfolio or to Service Affiliates, which were
	required to be pre-approved, were pre-approved as required.

ITEM 5.	AUDIT COMMITTEE OF LISTED REGISTRANTS.

	Not applicable.

ITEM 6.	SCHEDULE OF INVESTMENTS.

	Included herein under Item 1.

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
	COMPANY AND AFFILIATED PURCHASERS.

	Not applicable.

ITEM 10.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

	Not applicable.

ITEM 11.	CONTROLS AND PROCEDURES.

	(a)	The registrant’s principal executive officer and principal financial officer have concluded
		that the registrant’s disclosure controls and procedures (as defined in Rule 30a- 3(c) under
		the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a
		date within 90 days of the filing date of this report that includes the disclosure required by
		this paragraph, based on their evaluation of the disclosure controls and procedures required
		by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of
		1934.

	(b)	There were no changes in the registrant’s internal control over financial reporting (as
		defined in Rule 30a-3(d) under the 1940 Act) that occurred during the registrant’s last fiscal
		half-year (the registrant’s second fiscal half-year in the case of an annual report) that have
		materially affected, or are likely to materially affect the registrant’s internal control over
		financial reporting.

ITEM 12.	EXHIBITS.

	(a)(1)	Code of Ethics attached hereto.

	Exhibit 99.CODE ETH

	(a)(2)	Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 attached hereto.

	Exhibit 99.CERT

	(b)	Certifications pursuant to section 906 of the Sarbanes-Oxley Act of 2002 attached hereto.

	Exhibit 99.906CERT

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, there unto duly authorized.

Liquid Reserves Portfolio

By:	/s/ R. Jay Gerken
	R. Jay Gerken
	Chief Executive Officer of
	Liquid Reserves Portfolio

Date:	November 9, 2006

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

By:	/s/ R. Jay Gerken
	R. Jay Gerken
	Chief Executive Officer of
	Liquid Reserves Portfolio

Date:	November 9, 2006


By:	/s/ Frances M. Guggino
	Frances M. Guggino
	Chief Financial Officer of
	Liquid Reserves Portfolio

Date:	November 9, 2006