EXECUTIVE OVERVIEW

Legg Mason, Inc., a holding company, with its subsidiaries (which collectively comprise "Legg Mason") is a global asset management firm. Acting through our subsidiaries, we provide investment management and related services to institutional and individual clients, company-sponsored mutual funds and other investment vehicles. We offer these products and services directly and through various financial intermediaries. We have operations principally in the United States of America and the United Kingdom and also have offices in Australia, Bahamas, Brazil, Canada, Chile, China, Dubai, France, Germany, Italy, Japan, Luxembourg, Poland, Singapore, Spain and Taiwan.

We operate in one reportable business segment, Asset Management. In connection with changes to our executive management during fiscal 2009 and a desire to expand multi-channel distribution capabilities and to better align our resources to access new growth opportunities, we realigned our management responsibilities. As a result, we now manage our business in two divisions or operating segments, Americas and International, which are primarily based on the geographic location of the advisor or the domicile of fund families we manage. Our division managers report directly to our Chief Executive Officer. The Americas Division consists of our U.S.-domiciled fund families, the separate account businesses of our U.S.-based investment affiliates and the domestic distribution organization. Similarly, the International Division consists of our fund complexes, distribution teams and investment affiliates located outside the U.S. We believe this structure will provide greater focus and allow us to maximize distribution efforts and more efficiently take advantage of growth opportunities locally and abroad. Presentation of all previously reported amounts have been conformed to the new management structure.

Our operating revenues primarily consist of investment advisory fees, from separate accounts and funds, and distribution and service fees. Investment advisory fees are generally calculated as a percentage of the assets of the investment portfolios that we manage. In addition, performance fees may be earned under certain investment advisory contracts for exceeding performance benchmarks. Distribution and service fees are fees received for distributing investment products and services or for providing other support services to investment portfolios, and are generally calculated as a percentage of the assets in an investment portfolio or as a percentage of new assets added to an investment portfolio. Our revenues, therefore, are dependent upon the level of our assets under management, and thus are affected by factors such as securities market conditions, our ability to attract and maintain assets under management and key investment personnel, and investment performance. Our assets under management primarily vary from period to period due to inflows and outflows of client assets and market performance. Client decisions to increase or decrease their assets under our management, and decisions by potential clients to utilize our services, may be based on one or more of a number of factors. These factors include our reputation in the marketplace, the investment performance, both absolute and relative to benchmarks or competitive products, of our products and services, the client or potential client's situation, including investment objectives, liquidity needs, investment horizon and amount of assets managed, our relationships with distributors and the external economic environment, including market conditions.

The fees that we charge for our investment services vary based upon factors such as the type of underlying investment product, the amount of assets under management, and the type of services (and investment objectives) that are provided. Fees charged for equity asset management services are generally higher than fees charged for fixed income and liquidity asset management services. Accordingly, our revenues will be affected by the composition of our assets under management. In addition, in the ordinary course of our business, we may reduce or waive investment management fees, or limit total expenses, on certain products or services for particular time periods to manage fund expenses, or for other reasons, and to help retain or increase managed assets. Under revenue sharing agreements, certain of our subsidiaries retain different percentages of revenues to cover their costs, including compensation. As such, our net income, profit margin and compensation as a percentage of operating revenues are impacted based on which subsidiaries generate our revenues, and a change in assets under management at one subsidiary can have a dramatically different effect on our revenues and earnings than an equal change at another subsidiary.

The most significant component of our cost structure is employee compensation and benefits, of which a majority is variable in nature and includes incentive compensation that is primarily based upon revenue levels and profits. The next largest component of our cost structure is distribution and servicing fees, which are primarily fees paid to third party distributors for selling our asset management products and services and are largely variable in nature. Certain other operating costs are fixed in nature, such as occupancy, depreciation and amortization, and fixed contract commitments for market data, communication and technology services, and usually do not decline with reduced levels of business activity or, conversely, usually do not rise proportionately with increased business activity.

Our financial position and results of operations are materially affected by the overall trends and conditions of the financial markets, particularly in the United States, but increasingly in the other countries in which we operate. Results of any individual period should not be considered representative of future results. Our profitability is sensitive to a variety of factors, including the amount and composition of our assets under management, and the volatility and general level of securities prices and interest rates, among other things. Sustained periods of unfavorable market conditions are likely to affect our profitability adversely. In addition, the diversification of services and products offered, investment performance, access to distribution channels, reputation in the market, attracting and retaining key employees and client relations are significant factors in determining whether we are successful in attracting and retaining clients. The economic downturn of the past year contributed to a significant contraction in our business.

The financial services business in which we are engaged is extremely competitive. Our competition includes numerous global, national, regional and local asset management firms, broker-dealers and commercial banks. The industry has been dramatically impacted by the economic downturn of the past year, and in prior years by the consolidation of financial services firms through mergers and acquisitions. During the fiscal years ended March 31, 2009 and 2008, the fixed income markets have endured substantial turmoil. One effect of this turmoil was that liquidity in the markets for many types of asset backed commercial paper and medium term notes issued by structured investment vehicles ("SIVs") became substantially reduced. As a result, and to protect our clients, we entered into several arrangements during fiscal 2008 and 2009 to provide support to liquidity funds that are managed by a subsidiary that had invested in SIV securities.

The industry in which we operate is also subject to extensive regulation under federal, state, and foreign laws. Like most firms, we have been impacted by the regulatory and legislative changes. Responding to these changes has required us to incur costs that continue to impact our profitability.

All references to fiscal 2009, 2008 or 2007 refer to our fiscal year ended March 31 of that year. Terms such as "we," "us," "our," and "company" refer to Legg Mason.

BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS

The financial environment globally and in the United States was volatile during fiscal 2009 and challenging market conditions persisted throughout most of our fiscal year. The sharp decline in equity markets and continuing dislocations in the credit markets adversely affected the entire financial sector during fiscal 2009. The equity markets suffered from pullback in consumer spending, which led to weak performance in global markets, increased unemployment, and significant declines in the values of assets owned by financial institutions. Investors' confidence continued to weaken, which caused a shift in the markets from equity and corporate bonds to U.S. treasury notes and bonds. As a result, all three major U.S. equity market indices declined sharply during the fiscal year. The Dow Jones Industrial Average,(1) NASDAQ Composite Index(2) and the S&P 500(3) were down 38%, 33% and 40%, respectively, for the fiscal year. The Barclays Capital U.S. Aggregate Bond Index(4) increased 3% and the Barclays Capital Global Aggregate Bond Index(4) decreased 5%. During fiscal 2009, the Federal Reserve Board reduced the discount rate by 2.00% to the current rate of 0.25%. Our results were negatively impacted by many of these factors. The financial environment in which we operate continues to be challenging moving into fiscal 2010. We expect the challenges presented by the credit markets to persist throughout the next fiscal year. We cannot predict how these uncertainties will impact the Company's results.

º (1)
º Dow Jones Industrial Average is a trademark of Dow Jones & Company, which is not affiliated with Legg Mason. º (2)
º NASDAQ is a trademark of the NASDAQ Stock Market, Inc., which is not affiliated with Legg Mason. º (3)
º S&P is a trademark of Standard & Poor's, a division of the McGraw-Hill Companies, Inc., which is not affiliated with Legg Mason. º (4)
º Barclays Capital U.S. Aggregate Bond Index and Barclays Capital Global Aggregate Bond Index are trademarks of Barclays Capital, which is not affiliated with Legg Mason.

The following table sets forth, for the periods indicated, items in the Consolidated Statements of Operations as a percentage of operating revenues and the increase (decrease) by item as a percentage of the amount for the previous period:

                                         Percentage of Operating Revenues          Period to Period Change(1)
                                                      Years Ended                   2009               2008
                                                       March 31,                  Compared           Compared
                                        2009              2008         2007        to 2008            to 2007

Operating Revenues
    Investment advisory fees
            Separate accounts               30.3 %            31.6 %     33.3 %         (30.5 )%             1.3 %
            Funds                           54.7              50.1       46.5           (20.8 )             14.7
            Performance fees                 0.5               2.9        3.3           (86.9 )             (6.7 )
    Distribution and service fees           14.2              14.9       16.5           (31.4 )             (3.4 )
    Other                                    0.3               0.5        0.4           (54.0 )             53.9

            Total operating
            revenues                       100.0             100.0      100.0           (27.6 )              6.7

Operating Expenses
    Compensation and benefits               33.7              33.9       36.1           (27.9 )              0.1
    Distribution and servicing              28.9              27.5       27.5           (23.9 )              6.5
    Communications and technology            5.6               4.2        4.0            (2.3 )             10.7
    Occupancy                                6.2               2.8        2.3            61.9               29.2
    Amortization of intangible
    assets                                   1.1               1.2        1.6           (36.3 )            (16.3 )
    Impairment of goodwill and
    intangible assets                       39.0               3.3          -             n/m                n/m
    Other                                    5.4               4.4        4.8           (13.3 )              0.9

            Total operating
            expenses                       119.9              77.3       76.3            12.4                8.1

Operating Income (Loss)                    (19.9 )            22.7       23.7             n/m                2.1

Other Income (Expense)
    Interest income                          1.7               1.7        1.4           (26.8 )             30.6
    Interest expense                        (4.5 )            (1.8 )     (1.6 )          82.0               15.7
    Fund support                           (68.0 )           (13.1 )        -             n/m                n/m
    Other                                   (3.3 )             0.1        0.5             n/m                n/m

            Total other income
            (expense)                      (74.1 )           (13.1 )      0.3             n/m                n/m

Income (Loss) from Continuing
Operations before Income Tax
Provision (Benefit) and Minority
Interests                                  (94.0 )             9.6       24.0             n/m              (57.5 )
            Income tax provision
            (benefit)                      (36.1 )             3.8        9.1             n/m              (55.7 )

Income (Loss) from Continuing
Operations before Minority
Interests                                  (57.9 )             5.8       14.9             n/m              (58.5 )
            Minority interests,
            net of tax                      (0.1 )               -          -             n/m                n/m

Income from Continuing Operations          (58.0 )             5.8       14.9             n/m              (58.6 )
    Gain on sale of discontinued
    operations, net of tax                     -                 -          -             n/m                n/m

Net Income (Loss)                          (58.0 )%            5.8 %     14.9 %           n/m              (58.6 )

n/m-not meaningful

º (1)
º Calculated based on the change in actual amounts between fiscal years as a percentage of the prior year amount.

FISCAL 2009 COMPARED WITH FISCAL 2008

Financial Overview

Net loss for the year ended March 31, 2009 totaled $1.9 billion, or $13.85 per diluted share, compared to net income of $267.6 million, or $1.86 per diluted share in the prior year. During fiscal 2009, we eliminated the exposure to SIVs of all liquidity funds managed by a subsidiary by purchasing and subsequently selling, or reimbursing the funds for a portion of the losses they incurred in selling, all securities issued by SIVs held in our liquidity funds and held by us. The majority of these SIV securities were supported under capital support arrangements, letters of credit or a total return swap ("TRS") prior to the purchase. These transactions, along with charges related to remaining capital support arrangements that support securities other than SIVs, resulted in aggregate charges during the fiscal year of $2.3 billion. Also, during fiscal 2009, impairment charges of $1.3 billion were recorded, related to goodwill and intangible assets, primarily in our former Wealth Management division, as a result of declines in the assets under management ("AUM") and projected cash flows of affiliates in that division, and a reduction in the value of certain acquired management contract intangible assets and a related trade name. Cash loss from continuing operations (see Supplemental Non-GAAP Financial Information) was $2.2 billion, or $15.74 per diluted share, compared to cash income of $412.3 million, or $2.86 per diluted share, in the prior year. These decreases were primarily due to an increase in net losses related to the elimination of SIV exposure, net of income tax benefits and compensation related adjustments, of $1.1 billion, or $7.61 per diluted share, and an increase in pre-tax impairment charges of $1.2 billion, or $8.25 per diluted share. The pre-tax profit margin from continuing operations declined to (94.0%) from 9.6% in the prior year. The pretax profit margin from continuing operations, as adjusted (see Supplemental Non-GAAP Financial Information), declined to (132.2%) from 13.2% in the prior year. During fiscal 2009, losses related to liquidity fund support and the impairment charge reduced the pre-tax profit margin by 66.2 percentage points and 39.0 percentage points, respectively, and reduced the pre-tax profit margin, as adjusted, by 93.1 percentage points and 54.8 percentage points, respectively. During fiscal 2008, losses related to liquidity fund support and the impairment charge reduced the pre-tax profit margin by 11.0 percentage points and 3.3 percentage points, respectively, and reduced the pre-tax profit margin, as adjusted, by 15.1 percentage points and 4.5 percentage points, respectively.

Assets Under Management

The components of the changes in our AUM (in billions) for the years ended
March 31 were as follows:

                                                              2009      2008

        Beginning of period                                 $  950.1   $ 968.5
           Investment funds, excluding liquidity funds:
                 Sales                                          35.6      38.5
                 Redemptions                                   (58.3 )   (57.1 )
           Separate account flows, net                        (121.2 )   (13.4 )
           Liquidity fund flows, net                           (15.0 )     5.7

        Net client cash flows                                 (158.9 )   (26.3 )
        Market performance(1)                                 (157.7 )     9.9
        Dispositions                                            (1.1 )    (2.0 )

        End of period                                       $  632.4   $ 950.1

º (1)
º Includes impact of foreign exchange

AUM at March 31, 2009 were $632.4 billion, a decrease of $317.7 billion or 33% from March 31, 2008. The decrease in AUM was attributable to net client outflows of $159 billion and market depreciation of $158 billion, of which approximately 10% was related to the impact of foreign currency exchange fluctuation. There were net client outflows in all asset classes. The majority of outflows were in fixed income with $89 billion, or 56% of the outflows, followed by equity outflows and liquidity outflows of $47 billion and $23 billion, respectively. The majority of fixed income outflows were in products managed by Western Asset Management Company ("Western Asset") that have experienced investment performance issues, especially over the last fiscal year. Equity outflows were primarily experienced by key equity products managed at ClearBridge Advisors LLC ("ClearBridge"), Legg Mason Capital Management, Inc. ("LMCM") and Permal. Due in part to investment performance issues, we have experienced net equity outflows since fiscal 2007. We generally earn higher fees and profits on equity AUM, and outflows in this asset class will more negatively impact our revenues and net income than would outflows in other asset classes. In addition, due in part to recent investment performance issues, we have experienced outflows in our fixed income asset class for the past five quarters.

Our investment advisory and administrative contracts are generally terminable at will or upon relatively short notice, and investors in the mutual funds that we manage may redeem their investments in the funds at any time without prior notice. Institutional and individual clients can terminate their relationships with us, reduce the aggregate amount of assets under management, or shift their funds to other types of accounts with different rate structures for any number of reasons, including investment performance, changes in prevailing interest rates, changes in our reputation in the marketplace, changes in management or control of clients or third party distributors with whom we have relationships, loss of key investment management personnel or financial market performance.

In response to the unprecedented market turmoil, during the December quarter, Permal temporarily modified its redemption notice timing to require 95 day prior notification rather than the historical 20 days. With the objective of returning to the 20 day notice period by January 2010, the current 95 day notice period for redemptions will be reduced to 65 days beginning with the September 30, 2009 redemption date. As of March 31, 2009, Permal had received approximately $2.4 billion of gross redemption notices that, unless withdrawn, will be redeemed in the June quarter.

AUM by Asset Class

AUM by asset class (in billions) as of March 31 were as follows:

                                          % of                % of        %
                                2009      Total     2008      Total    Change

                Equity         $ 126.9      20.1   $ 271.6      28.6     (53.3 )
                Fixed Income     357.6      56.5     508.2      53.5     (29.6 )
                Liquidity        147.9      23.4     170.3      17.9     (13.2 )

                Total          $ 632.4     100.0   $ 950.1     100.0     (33.4 )

The component changes in our AUM by asset class (in billions) for the fiscal year ended March 31, 2009 were as follows:

                                                     Fixed
                                          Equity    Income     Liquidity     Total

        March 31, 2008                    $ 271.6   $ 508.2    $    170.3   $  950.1
           Investment funds,
           excluding liquidity funds
                Sales                        20.9      14.7             -       35.6
                Redemptions                 (32.2 )   (26.1 )           -      (58.3 )
           Separate account flows, net      (35.3 )   (77.7 )        (8.2 )   (121.2 )
           Liquidity fund
           flows, net                           -         -         (15.0 )    (15.0 )

        Net client cash flows               (46.6 )   (89.1 )       (23.2 )   (158.9 )
        Market performance                  (97.0 )   (61.5 )         0.8     (157.7 )
        Dispositions                         (1.1 )       -             -       (1.1 )

        March 31, 2009                    $ 126.9   $ 357.6    $    147.9   $  632.4

Average AUM by asset class (in billions) for the year ended March 31 were as follows:

                                          % of                % of        %
                                2009      Total     2008      Total    Change

                Equity         $ 203.2      25.1   $ 327.6      33.1     (38.0 )
                Fixed Income     438.0      54.0     498.6      50.3     (12.2 )
                Liquidity        169.2      20.9     163.9      16.6       3.2

                Total          $ 810.4     100.0   $ 990.1     100.0     (18.1 )

AUM by Division

AUM by division (in billions) as of March 31 were as follows:

                          2009      % of Total     2008      % of Total     % Change

         Americas        $ 446.5           70.6   $ 671.2           70.6        (33.5 )
         International     185.9           29.4     278.9           29.4        (33.3 )

         Total           $ 632.4          100.0   $ 950.1          100.0        (33.4 )

The component changes in our AUM by division (in billions) for the year ended March 31, 2009 were as follows:

                                                   Americas     International     Total

March 31, 2008                                      $  671.2     $       278.9   $  950.1
   Investment funds, excluding liquidity funds
        Sales                                           28.3               7.3       35.6
        Redemptions                                    (46.4 )           (11.9 )    (58.3 )
   Separate account flows, net                         (84.5 )           (36.7 )   (121.2 )
   Liquidity fund flows, net                            (6.7 )            (8.3 )    (15.0 )

Net client cash flows                                 (109.3 )           (49.6 )   (158.9 )
Market performance                                    (114.3 )           (43.4 )   (157.7 )
Dispositions                                            (1.1 )               -       (1.1 )

March 31, 2009                                     $   446.5     $       185.9   $  632.4

During April 2009, we estimate that our AUM increased approximately 1% from March 31, 2009 as a result of positive market performance of 4% offset by net client outflows of 3%. These outflows were consistent with March quarter outflows. Equity assets increased 7% partially offset by a decrease in liquidity assets of 1%.

Investment Performance(5)

Legg Mason is a diversified global asset management company that offers a wide range of investment products. We provide investment services to both retail and institutional clients that span many asset classes, levels of risk, geographic locations and investment styles. As of March 31, 2009 and 2008, equity assets accounted for 20% and 29%, respectively, fixed income accounted for 57% and 53%, respectively, and liquidity accounted for the remaining 23% and 18%, respectively, of our assets under management.

The past 12 months were characterized by significant volatility with erratic, unprecedented price movements across a variety of markets. The markets have been significantly impacted by the failure of major financial institutions, the freeze in the credit markets and unprecedented government intervention. In addition, the downturn in housing that led the U.S. into a broader slowdown set off financial turmoil that continues. As a result, financial stocks led the equity markets lower, with the S&P 500 Financials Index down 63%, compared to the broader S&P 500 Index, which dropped 38%. As of March 31, 2009, for the trailing 1-year, 3-year, 5-year, and 10-year periods approximately 49%, 53%, 58%, and 88% of our marketed equity composite(6) assets outpaced their benchmarks, respectively. As of March 31, 2008, for the trailing 1-year, 3-year, 5-year, and 10-year periods approximately 53%, 53%, 49%, and 94% of our marketed equity composite assets outpaced their benchmarks, respectively.

º (5)
º Index performance in this section includes reinvestment of dividends and capital gains.

º (6)
º A composite is an aggregation of discretionary portfolios (separate accounts and investment funds) into a single group that represents a particular investment objective or strategy. Each of our asset managers has its own specific guidelines for including portfolios in its marketed composites. Assets under management that are not managed in accordance with the guidelines are not included in a composite. As of March 31, 2009, 85% . . .