485BPOS 1 d485bpos.htm LEGG MASON PARTNERS EQUITY TRUST Legg Mason Partners Equity Trust

As filed with the U.S. Securities and Exchange Commission on April 24, 2008

Securities Act File No. 33-43446

Investment Company Act File No. 811-06444

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM N-1A

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933  x

Pre-Effective Amendment No.

Post-Effective Amendment No. 97

and/or

REGISTRATION STATEMENT

UNDER

THE INVESTMENT COMPANY ACT OF 1940  x

Amendment No. 97

(Check appropriate box or boxes)

 

 

Legg Mason Partners Equity Trust

(Exact Name of Registrant as Specified in Charter)

 

 

 

55 Water Street, New York, New York   10041
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone Number, including Area Code (800) 451-2010

Robert I. Frenkel

Legg Mason Partners Equity Trust

300 First Stamford Place

Stamford, Connecticut 06902

(Name and Address of Agent for Service)

 

 

COPY TO:

Burton M. Leibert, Esq.

Willkie Farr & Gallagher LLP

787 Seventh Avenue

New York, New York 10019

 

 

Continuous

(Approximate Date of Proposed Offering)

It is proposed that this filing will become effective:

  ¨ immediately upon filing pursuant to paragraph (b)
  x on April 28, 2008 pursuant to paragraph (b)
  ¨ 60 days after filing pursuant to paragraph (a)(1)
  ¨ on pursuant to paragraph (a)(1)
  ¨ 75 days after filing pursuant to paragraph (a)(2)
  ¨ on pursuant to paragraph (a)(2) of Rule 485.

If appropriate, check the following box:

 

  x This post-effective amendment designates a new effective date for a previously filed post-effective amendment.

This filing relates solely to Legg Mason Partners Appreciation Fund, Legg Mason Partners Capital and Income Fund, Legg Mason Partners Equity Fund, Legg Mason Partners Global Equity Fund, Legg Mason Partners Investors Value Fund, Legg Mason Partners S&P 500 Index Fund, Legg Mason Partners Small Cap Core Fund and Legg Mason Partners Small Cap Growth Fund.


PROSPECTUS

April 28, 2008

 

The Securities and Exchange Commission has not approved or disapproved these securities or determined whether this Prospectus is accurate or complete. Any statement to the contrary is a crime.

LOGO

Legg Mason Partners

Appreciation Fund

Class A, B, C, FI, R, I and IS Shares

 

 

INVESTMENT PRODUCTS: NOT  FDIC  INSURED • NO  BANK  GUARANTEE • MAY  LOSE  VALUE


 

LEGG MASON PARTNERS EQUITY TRUST

SUPPLEMENT DATED APRIL 28, 2008 TO THE PROSPECTUS DATED

APRIL 28, 2008 OF

LEGG MASON PARTNERS APPRECIATION FUND

Through June 30, 2008, please refer to the following chart for information concerning the minimum initial and additional investment amounts applicable to a purchase of fund shares:

Investment minimums

Minimum initial and additional investment amounts vary depending on the class of shares you buy and the nature of your investment.

 

   

Investment Minimum

Initial/Additional Investments(1)

     Class A   Class B   Class C   Class FI   Class R   Class I  

Class IS

General

  $ 500/$50   $ 500/$50   $ 500/$50   n/a   n/a   n/a   n/a
 

IRAs and Uniform Gifts or Transfers
to Minor Accounts

  $ 250/$50   $ 250/$50   $ 250/$50   n/a   n/a   n/a   n/a
 

SIMPLE IRAs

  $ 1/$1   $ 1/$1   $ 1/$1   n/a   n/a   n/a   n/a
 

Systematic Investment Plans

  $ 25/$25   $ 25/$25   $ 25/$25   n/a   n/a   n/a   n/a
 

Clients of Eligible Financial Intermediaries

  $ 1/$1     n/a     n/a   None/

None

  n/a   None/

None

 

n/a

 

Retirement Plans with omnibus accounts held on the books of
the fund

    n/a     n/a    

 

None/

None

  None/

None

  None/

None

  None/

None

 

None/
None

 

Other Retirement Plans

  $ 50/$50   $ 50/$50   $ 50/$50   n/a   n/a   n/a   n/a
 

Institutional Investors

  $ 500/$50   $ 500/$50   $ 500/$50   n/a   n/a   $1 million/

None

  $1 million/

None

 

(1)

 

Please refer to the section entitled “Retirement and institutional investors” for additional information regarding the investment minimum and eligibility requirements for Retirement Plans, Institutional Investors and Clients of Eligible Financial Intermediaries.

Effective July 1, 2008, the information shown above will no longer apply.

Instead, please refer to the section of the attached Prospectus titled “Choosing a class of shares to buy: Investment minimums” for information concerning the minimum initial and additional investment amounts applicable to a purchase of fund shares.

 


Legg Mason Partners Appreciation Fund

Contents

 

Investments, risks and performance

  2

More on the fund’s investments

  8

Management

  10

Choosing a class of shares to buy

  13

Comparing the fund’s classes

  15

Sales charges

  16

More about contingent deferred sales charges

  20

Retirement and institutional investors

  21

Buying shares

  24

Exchanging shares

  25

Redeeming shares

  27

Other things to know about transactions

  29

Dividends, distributions and taxes

  33

Share price

  35

Financial highlights

  37

As part of a number of initiatives launched in 2006 to restructure and streamline the Legg Mason Partners fund complex, the fund assumed the assets and liabilities of a predecessor fund with the same name, effective April 16, 2007. Any information in this Prospectus relating to the fund prior to April 16, 2007 relates to the fund’s predecessor.


 

Investments, risks and performance

Investment objective

The fund seeks to provide long-term appreciation of shareholders’ capital.

Principal investment strategies

Key investments

The fund invests primarily in equity securities of U.S. companies. The fund typically invests in medium and large capitalization companies, but may also invest in small capitalization companies. Equity securities include exchange-traded and over-the-counter common stocks and preferred stocks, debt securities convertible into equity securities and warrants and rights relating to equity securities.

Selection process

The portfolio managers’ investment strategy consists of individual company selection and management of cash reserves. The portfolio managers look for investments among a strong core of growth and value stocks, consisting primarily of blue chip companies dominant in their industries. The fund may also invest in companies with prospects for sustained earnings growth and/or a cyclical earnings record.

In selecting individual companies for the fund’s portfolio, the portfolio managers look for the following:

n  

Strong or rapidly improving balance sheets

n  

Recognized industry leadership

n  

Effective management teams that exhibit a desire to earn consistent returns for shareholders

In addition, the portfolio managers consider the following characteristics:

n  

Past growth records

n  

Future earnings prospects

n  

Technological innovation

n  

General market and economic factors

n  

Current yield or potential for dividend growth

Generally, companies in the fund’s portfolio fall into one of the following categories:

n  

Undervalued companies: companies with assets or earning power that are either unrecognized or undervalued. The portfolio managers generally look for a catalyst that will unlock these values. The portfolio managers also look for companies that are expected to have unusual earnings growth or whose stocks appear likely to go up in value because of market changes in the way they do business (for example, a corporate restructuring)

n  

Growth at a reasonable price: companies with superior demonstrated and expected growth characteristics whose stocks are available at a reasonable price. Typically, there is strong recurring demand for these companies’ products

The portfolio managers adjust the amount held in cash reserves depending on the portfolio managers’ outlook for the stock market. The portfolio managers will increase the fund’s allocation to cash when, in the portfolio managers’ opinion, market valuation levels become excessive. The portfolio managers may sometimes hold a significant portion of the fund’s assets in cash while waiting for buying opportunities or to provide a hedge against

 

2         Legg Mason Partners Funds


 

stock market declines. If the fund holds a significant portion of its assets in cash during periods of stock market increases, that could prevent the fund from achieving its investment objective.

Principal risks of investing in the fund

Investing in equity securities can bring benefits, but it may also involve risks. Investors could lose money on their investment in the fund, or the fund may not perform as well as other investments, if:

n  

The U.S. stock market declines

n  

Large and medium capitalization stocks or growth stocks are temporarily out of favor

n  

An adverse event depresses the value of a company’s stock

n  

The portfolio managers’ judgment about the attractiveness, value or potential appreciation of a particular stock or about the amount to hold in cash reserves proves to be incorrect

Who may want to invest

The fund may be an appropriate investment if you:

n  

Are seeking to participate in the long-term capital appreciation potential of the stock market

n  

Are willing to accept the risks of investing in the stock market

n  

Are planning for a long-term goal and can tolerate periods of market volatility

 

Legg Mason Partners Appreciation Fund         3


 

Performance information

The following shows summary performance information for the fund in a bar chart and an Average Annual Total Returns table. The information provides an indication of the risks of investing in the fund by showing changes in its performance from year to year and by showing how the fund’s average total annual returns compare with the returns of the S&P 500 Index, a broad-based unmanaged securities market index of large capitalization companies. The bar chart below shows performance of the fund’s Class A shares, but does not reflect the impact of sales charges (loads). If it did, the returns would be lower than those shown. Unlike the bar chart, the performance for Class A, B, C, I and R shares in the Average Annual Total Returns table reflects the impact of the maximum sales charge (load) applicable to the respective classes and, where indicated, the performance for Class A shares reflects the impact of taxes paid on distributions and on the redemption of shares at the end of the period. No performance information is presented for Class FI shares because there were no Class FI shares outstanding during the calendar year ended December 31, 2007. No performance information is presented for Class IS shares because no Class IS shares were offered prior to the date of this Prospectus. The returns of Class FI and Class IS shares would differ from those of other classes to the extent that these classes bear different expenses. The performance information shown below includes that of the fund’s predecessor. The fund’s past performance, before and after taxes, is not necessarily an indication of how the fund will perform in the future.

Total Returns for Class A Shares

LOGO

Highest and lowest quarter returns: (for periods shown in the bar chart)

Highest: 17.89% in 4th quarter 1998; Lowest: (13.34)% in 3rd quarter 2002.

 

4         Legg Mason Partners Funds


 

Average Annual Total Returns (for periods ended December 31, 2007)

 

     1 Year     5 Years     10 Years     Since
Inception
    Inception
Date

Class A

         
 
Return before taxes(1)   1.95 %   10.56 %   6.34 %   N/A     03/10/70
 
Return after taxes on distributions(1)(2)   (1.08 )%   9.23 %   4.83 %   N/A    
 
Return after taxes on distributions and sale of fund shares(1)(2)   1.47 %   8.60 %   4.79 %   N/A    
 

Other Classes (Return before taxes only)

 

       
 

Class B

  2.27 %   10.79 %   6.08 %   N/A     11/06/92
 

Class C

  6.39 %   11.02 %   6.14 %   N/A     02/04/93
 

Class I

  8.56 %   12.29 %   7.35 %   N/A     01/30/96
 

Class R

  7.87 %   N/A     N/A     7.39 %   12/28/06
 
S&P 500 Index(3)   5.49 %   12.83 %   5.91 %     n/a
 

 

(1)

 

On November 20, 2006, the maximum initial sales charge on Class A shares was increased for sales made on and after that date. The average annual returns for Class A shares in the table have been calculated as if the increased maximum initial sales charge had been in effect for the entire period.

 

(2)

 

After-tax returns are calculated using the highest historical individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In some cases the return after taxes may exceed the return before taxes due to an assumed tax benefit from any losses on a sale of fund shares at the end of the measurement period. After-tax returns shown above are for Class A shares only. After-tax returns for other share classes will vary.

 

(3)

 

The S&P 500 Index is an unmanaged market-value weighted index comprised of 500 widely held common stocks. The index does not reflect deductions for fees, expenses or taxes. An investor cannot invest directly in the index.

 

Legg Mason Partners Appreciation Fund         5


 

Fee table

This table sets forth the fees and expenses you may pay if you invest in fund shares.

Shareholder fees

 

(paid directly from

your investment)

  Class A     Class B     Class C     Class FI   Class R   Class I   Class IS
Maximum sales charge (load) imposed on purchases (as a % of offering price)   5.75 %   None     None     None   None   None   None
 
Maximum contingent deferred sales charge (load) (as a % of the lower of net asset value at purchase or redemption)   None (1)   5.00 %   1.00 %   None   None   None   None
 

Annual fund operating expenses

 

(paid by the fund as a % of
net assets)
  Class A     Class B     Class C     Class FI     Class R     Class I     Class IS  
Management fee(2)   0.56 %   0.56 %   0.56 %   0.56 %   0.56 %   0.56 %   0.56 %
   
Distribution and service (12b-1) fees   0.25 %   1.00 %   1.00 %   0.25 %   0.50 %   None     None  
   
Other expenses(3)   0.14 %   0.32 %   0.11 %   0.16 %   0.07 %   0.01 %   0.01 %
   
Total annual fund operating expenses   0.95 %   1.88 %   1.67 %   0.97 %   1.13 %   0.57 %   0.57 %
   

 

(1)

 

You may buy Class A shares in amounts of $1,000,000 or more at net asset value (without an initial sales charge) but if you redeem those shares within 12 months of their purchase, you will pay a contingent deferred sales charge of 1.00%.

 

(2)

 

The fund has a management fee schedule that reduces the management fee rate as assets increase as follows: 0.75% on assets up to and including $250 million; 0.70% on assets over $250 million and up to and including $500 million; 0.65% on assets over $500 million and up to and including $1 billion; 0.60% on assets over $1 billion and up to and including $2 billion; 0.55% on assets over $2 billion and up to and including $3 billion; and 0.50% on assets over $3 billion.

 

(3)

 

With respect to Class A, Class B, Class C, Class FI, Class R and Class I shares (as applicable), the fund may pay a fee for recordkeeping services performed for the share class. As a result, the operating expenses of affected share classes may increase over time. The recordkeeping fee for Class I shares is newly adopted and is not reflected in the other expenses shown in the table above. The other expenses for Class FI and Class IS have been estimated because no Class FI shares were outstanding as of December 31, 2007 and no Class IS shares have been offered prior to the date of this Prospectus.

 

6         Legg Mason Partners Funds


 

Example

This example helps you compare the costs of investing in the fund with the costs of investing in other mutual funds. Your actual costs may be higher or lower. The example assumes:

n  

You invest $10,000 in the fund for the period shown

n  

Your investment has a 5% return each year — the assumption of a 5% return is required by the Securities and Exchange Commission (the “SEC”) for purposes of this example and is not a prediction of the fund’s future performance

n  

You reinvest all distributions and dividends without a sales charge

n  

The fund’s operating expenses (before fee waivers and/or expense reimbursements, if any) remain the same

Number of years you own your shares

 

     1 year   3 years   5 years   10 years  

Class A (with or without redemption)

  $ 666   $ 860   $ 1,070   $ 1,675  
   

Class B (redemption at end of period)

  $ 691   $ 891   $ 1,116   $ 1,959 (1)
   

Class B (no redemption)

  $ 191   $ 591   $ 1,016   $ 1,959 (1)
   

Class C (redemption at end of period)

  $ 270   $ 526   $ 907   $ 1,977  
   

Class C (no redemption)

  $ 170   $ 526   $ 907   $ 1,977  
   

Class FI (with or without redemption)

  $ 99   $ 309   $ 536   $ 1,189  
   

Class R (with or without redemption)

  $ 115   $ 359   $ 622   $ 1,374  
   

Class I (with or without redemption)

  $ 58   $ 183   $ 318   $ 713  
   

Class IS (with or without redemption)

  $ 58   $ 183   $ 318   $ 713  
   

 

(1)

 

Assumes conversion to Class A shares approximately eight years after purchase.

 

Legg Mason Partners Appreciation Fund         7


 

More on the fund’s investments

The fund’s investment objective and principal investment strategies are described under the section entitled “Investments, risks and performance” above. This section provides further information about the investment strategies that may be used by the fund.

The fund’s investment objective may be changed by the Board of Trustees without shareholder approval.

Derivatives and hedging techniques

The fund may use derivative contracts, such as futures and options on securities and securities indices and options on these futures, for any of the following purposes:

n  

To hedge against the economic impact of adverse changes in the market value of its securities, because of changes in stock market prices

n  

As a substitute for buying or selling securities

n  

As a cash flow management technique

A derivative contract will obligate or entitle the fund to deliver or receive an asset or cash payment based on the change in value of one or more securities or indices. Even a small investment in derivative contracts can have a big impact on the fund’s stock market exposure. Therefore, using derivatives can disproportionately increase losses and reduce opportunities for gains when stock prices are changing. The fund may not fully benefit from or may lose money on derivatives if changes in their value do not correspond as anticipated to changes in the value of the fund’s holdings. The other parties to certain derivative contracts present the same types of credit risk as issuers of fixed income securities. Derivatives can also make the fund less liquid and harder to value, especially in declining markets.

Foreign investments

The fund may invest up to 10% of its net assets in the securities of foreign issuers, either directly or in the form of depositary receipts representing an interest in those securities. The fund’s investments in securities of foreign issuers involve greater risk than investments in securities of U.S. issuers. Many foreign countries the fund invests in have markets that are less liquid and more volatile than U.S. markets. In some foreign countries, less information is available about issuers and markets because of less rigorous accounting and regulatory standards than in the United States. Currency fluctuations could erase investment gains or add to investment losses. The risks of investing in foreign securities are greater for securities of emerging market issuers because political or economic instability, lack of market liquidity, and negative government actions, such as currency controls or seizure of private businesses or property, are more likely.

Defensive investing

The fund may depart from its principal investment strategies in response to adverse market, economic or political conditions by taking temporary defensive positions in any type of money market instrument and short-term debt securities or cash without regard to any percentage limitations. If the fund takes a temporary defensive position, it may be unable to achieve its investment objective.

 

8         Legg Mason Partners Funds


 

Short sales

The fund may sell securities short from time to time. The fund may hold no more than 25% of the fund’s net assets (taken at the then-current market value) as required collateral for such sales at any one time. A short sale is a transaction in which the fund sells securities it does not own in anticipation of a decline in the market price of the securities. A short sale of a security involves the risk that instead of declining, the price of the security sold short will rise. If the price of the security sold short increases between the time of the short sale and the time the fund replaces the borrowed security, the fund will incur a loss; conversely, if the price declines, the fund will realize a gain. The short sale of securities involves the possibility of a theoretically unlimited loss since there is a theoretically unlimited potential for the market price of the security sold short to increase.

Portfolio holdings

The fund’s policies and procedures with respect to the disclosure of the fund’s portfolio securities are described in the Statement of Additional Information (the “SAI”).

Other information

The fund also may use other strategies and invest in other securities that are described, along with their risks, in the fund’s SAI. However, the fund might not use all of the strategies and techniques or invest in all of the types of securities described in this Prospectus or in the SAI. Also note that there are many other factors, which are not described here, that could adversely affect your investment and that could prevent the fund from achieving its investment objective.

 

Legg Mason Partners Appreciation Fund         9


 

Management

Manager and subadviser

Legg Mason Partners Fund Advisor, LLC (“LMPFA” or the “manager”) is the fund’s investment manager. LMPFA, with offices at 620 Eighth Avenue, New York, New York 10018, also serves as the investment manager of other Legg Mason-sponsored funds. LMPFA provides administrative and certain oversight services to the fund and manages the fund’s cash and short-term instruments. As of December 31, 2007, LMPFA’s total assets under management were approximately $193 billion.

ClearBridge Advisors, LLC (“ClearBridge” or the “subadviser”) provides the day-to-day portfolio management of the fund. ClearBridge has offices at 620 Eighth Avenue, New York, New York 10018 and is an investment adviser that was formed to succeed to the equity securities portfolio management business of Citigroup Asset Management (“CAM”), which was acquired by Legg Mason, Inc. (“Legg Mason”) in December 2005. As of December 31, 2007, ClearBridge’s total assets under management were approximately $100.5 billion.

LMPFA and ClearBridge are wholly-owned subsidiaries of Legg Mason. Legg Mason, whose principal executive offices are at 100 Light Street, Baltimore, Maryland 21202, is a global asset management company. As of December 31, 2007, Legg Mason’s asset management operation had aggregate assets under management of approximately $998 billion.

Portfolio managers

Harry D. Cohen, Co-Portfolio Manager of the fund and Chief Investment Officer of the subadviser or its predecessors, has been responsible for the day-to-day management of the fund’s portfolio since 1979. Scott Glasser, Co-Portfolio Manager of the fund, Investment Officer of the subadviser or its predecessors and Co-Director of Research of the subadviser or its predecessors, has shared the responsibility for the day-to-day management of the fund’s portfolio since 1995.

The SAI provides additional information about the compensation of the portfolio managers, any other accounts managed by the portfolio managers, and any fund shares held by the portfolio managers.

Management fee

For the fiscal year ended December 31, 2007, the fund paid a management fee of 0.56% of the fund’s average daily net assets for management services.

A discussion regarding the basis for the Board’s approval of the fund’s current management agreement and subadvisory agreement is available in the fund’s annual report for the fiscal year ended December 31, 2007.

Distribution plan

Legg Mason Investor Services, LLC (“LMIS” or the “distributor”), a wholly-owned broker/dealer subsidiary of Legg Mason, serves as the fund’s sole and exclusive distributor.

The fund has adopted a shareholder services and distribution plan for its Class A, B, C, FI and R shares. Under the plan, the fund pays distribution and/or service fees. The plan provides for payments, based on annualized percentages of average daily net assets, of up to 0.25% for Class A and Class FI shares; up to 1.00% for Class B and Class C; and up to 0.50% for Class R shares. These fees are an ongoing expense and, over time, will increase

 

10         Legg Mason Partners Funds


 

the cost of your investment and may cost you more than other types of sales charges. Class I and Class IS shares are not subject to any distribution and/or service fees.

In addition, the distributor may make payments for distribution and/or shareholder servicing activities out of its past profits and other available sources. The distributor may also make payments to dealers for marketing, promotional or related expenses. The amount of these payments is determined by the distributor and may be substantial. The manager or an affiliate may make similar payments under similar arrangements.

The payments described in the paragraph above are often referred to as “revenue sharing payments.” The recipients of such payments may include the fund’s distributor, affiliates of the manager, broker/dealers, financial institutions and other financial intermediaries through which investors may purchase shares of the fund. In some circumstances, such payments may create an incentive for an intermediary or its employees or associated persons to recommend or sell shares of the fund to you. Please contact your financial intermediary for details about revenue sharing payments it may receive.

Recent developments

On May 31, 2005, the SEC issued an order in connection with the settlement of an administrative proceeding against Smith Barney Fund Management (“SBFM”), the then-investment adviser or manager to the fund, and Citigroup Global Markets Inc. (“CGMI”), a former distributor of the fund, relating to the appointment of an affiliated transfer agent for the Smith Barney family of mutual funds, including the fund (the “Affected Funds”).

The SEC order found that SBFM and CGMI willfully violated Section 206(1) of the Investment Advisers Act of 1940, as amended, and the rules promulgated thereunder (the “Advisers Act”). Specifically, the order found that SBFM and CGMI 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 CAM, the Citigroup Inc. (“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 CGMI. The order also found that SBFM and CGMI 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 limited 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 CGMI 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 CGMI and ordered them to cease and desist from violations of Sections 206(1) and 206(2) of the Advisers Act. The order required Citigroup to pay

 

Legg Mason Partners Appreciation Fund         11


 

$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 held in escrow 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 CGMI 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 Affected Funds’ Boards selected a new transfer agent for the Affected Funds. 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, the manager does not believe that this matter will have a material adverse effect on the Affected Funds.

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

 

12         Legg Mason Partners Funds


 

Choosing a class of shares to buy

Individual investors can generally choose among three classes of shares: Classes A, B and C shares. Individual investors that held Class I shares prior to November 20, 2006, may continue to invest in Class I shares. Institutional and retirement plan investors and clients of financial intermediaries should refer to “Retirement and institutional investors” below for a description of the classes available to them. Each class has different sales charges and expenses, allowing you to choose the class that best meets your needs.

When choosing which class of shares to buy, you should consider:

n  

How much you plan to invest

n  

How long you expect to own the shares

n  

The expenses paid by each class detailed in the Fee table and Example at the front of this Prospectus

n  

Whether you qualify for any reduction or waiver of sales charges

If you are choosing between Class A and Class B shares, it will in almost all cases be the more economical choice for you to purchase Class A shares if you plan to purchase shares in an amount of $100,000 or more (whether in a single purchase or through aggregation of eligible holdings). This is because of the reduced sales charge available on larger investments of Class A shares and the lower ongoing expenses of Class A shares compared to Class B shares.

If you intend to invest for only a few years, the effect of Class B contingent deferred sales charges on redemptions made within five years of purchase, as well as the effect of higher expenses of that class, might make an investment in Class C more appropriate. There is no initial sales charge on Class C shares, and the contingent deferred sales charge does not apply to shares redeemed one year or more after purchase.

However, if you plan to invest a large amount and your investment horizon is five years or more, Class C shares might not be as advantageous as Class A shares. The annual distribution and service fees on Class C shares may cost you more over the longer term than the front-end sales charge you would have paid for larger purchases of Class A shares.

You may buy shares:

n  

Through banks, brokers, dealers, insurance companies, investment advisers, financial consultants or advisors, mutual funds supermarkets and other financial intermediaries that have entered into an agreement with the distributor to sell shares of the fund (each called a “Service Agent”)

n  

Directly from the fund

Different types of shareholder services may be available to you under arrangements offered by different Service Agents. In addition, these services may vary depending on the share class in which you choose to invest. In making your decision regarding which share class to buy, please keep in mind that your Service Agent may receive different compensation depending on the share class in which you invest. Investors should consult with their Service Agent about comparative pricing of shareholder services available to them under each available share class, the compensation that will be received by their Service Agent in connection with each available share class, and other factors that may be relevant to the investor’s choice of share class in which to invest.

 

Legg Mason Partners Appreciation Fund         13


 

Not all classes of shares are available through each Service Agent. You should contact your Service Agent for further information about available share classes.

Investment minimums

Minimum initial and additional investment amounts vary depending on the class of shares you buy and the nature of your investment.

 

   

Investment Minimum

Initial/Additional Investments(1)(2)

(effective July 1, 2008)

     Class A   Class B   Class C   Class FI   Class R   Class I  

Class IS

General

  $ 1,000/$50   $ 1,000/$50   $ 1,000/$50   n/a   n/a   n/a   n/a
 

Uniform Gifts or Transfers to Minor Accounts

  $ 1,000/$50   $ 1,000/$50   $ 1,000/$50   n/a   n/a   n/a   n/a
 

IRAs

  $ 250/$50   $ 250/50   $ 250/$50   n/a   n/a   n/a   n/a
 

SIMPLE IRAs

   

 

None/

None

   

 

None/

None

   

 

None/

None

  n/a   n/a   n/a   n/a
 

Systematic Investment Plans

  $ 50/$50   $ 50/$50   $ 50/$50   n/a   n/a   n/a   n/a
 

Clients of Eligible Financial Intermediaries

   

 

None/

None

    n/a     n/a   None/

None

  n/a   None/

None

 

n/a

 

Retirement Plans with omnibus accounts held on the books of the fund

   

 

None/

None(3)

    n/a(4)    

 

None/

None

  None/

None

  None/

None

  None/

None

 

None/
None

 

Other Retirement Plans

   

 

None/

None

   

 

None/

None

   

 

None/

None

  n/a   n/a   n/a   n/a
 

Institutional Investors

  $ 1,000/$50   $ 1,000/$50   $ 1,000/$50   n/a   n/a   $1 million/

None

  $1 million/

None

 

 

(1)

 

For information regarding investment minimums prior to July 1, 2008, please refer to the supplement at the front of this Prospectus.

 

 

(2)

 

Different minimums may apply to clients of certain Service Agents. Contact your Service Agent for more information. Please refer to the section entitled “Retirement and institutional investors” for additional information regarding the investment minimum and eligibility requirements for Retirement Plans, Institutional Investors, and Clients of Eligible Financial Intermediaries.

 

(3)

 

Class A shares are not available to new Retirement Plan investors through a Service Agent if the Service Agent makes Class FI shares available.

 

(4)

 

Retirement Plans that held Class B shares prior to December 1, 2006 are permitted to make additional investments in that class.

More information about the fund’s classes of shares is available through the Legg Mason Partners funds’ website. You’ll find detailed information about sales charges and ways you can qualify for reduced or waived sales charges, including:

n  

The front-end sales charges that apply to the purchase of Class A shares

n  

The contingent deferred sales charges that apply to the redemption of Class B shares, Class C shares and certain Class A shares (redeemed within one year)

n  

Who qualifies for lower sales charges on Class A shares

n  

Who qualifies for a sales load waiver

To access the website, go to http://www.leggmason.com/individualinvestors and click on the name of the fund.

 

14         Legg Mason Partners Funds


 

Comparing the fund’s classes

The following table compares key features of the fund’s classes. You should review the Fee table and Example at the front of this Prospectus carefully before choosing your share class. Your Service Agent can help you decide which class meets your goals. Your Service Agent may receive different compensation depending upon which class you choose. Please contact your Service Agent regarding the availability of Class FI or Class R shares.

 

     Class A   Class B   Class C   Class FI   Class R   Class I  

Class IS

Key features  

n Initial sales charge

n You may qualify for reduction or waiver of initial sales charge

n Generally lower annual expenses than Class B and Class C

 

n No initial sales charge

n Contingent deferred sales charge declines over time

n Converts to Class A after approximately 8 years

n Generally higher annual expenses than Class A

 

n No initial sales charge

n Contingent deferred sales charge for only 1 year

n Does not convert to Class A

n Generally higher annual expenses than Class A

 

n No initial or contingent deferred sales charge

n Only offered to Clients of Eligible Financial Intermediaries and eligible Retirement Plans

 

n No initial or contingent deferred sales charge

n Only offered to eligible Retirement Plans with omnibus accounts held on the books of the fund

 

n No initial or contingent deferred sales charge

n Only offered to institutional and other eligible investors

n Generally lower expenses than Class A, Class B,
Class C, Class FI and Class R

 

n No initial or contingent deferred sales charge

n Only offered to institutional and other eligible investors

n Generally lower expenses than the other classes

Initial sales charge  

Up to 5.75%; reduced or waived for large purchases and certain investors. No charge for purchases of $1 million or more

 

None

 

None

 

None

 

None

 

None

 

None

Contingent deferred sales charge  

1.00% on purchases of $1 million or more if you redeem within 1 year of purchase; waived for certain investors

 

Up to 5.00% charged when you redeem shares. The charge is reduced over time and there is no contingent deferred sales charge after 5 years; waived for certain investors

 

1.00% if you redeem within 1 year of purchase; waived for certain investors

 

None

 

None

 

None

 

None

Annual distribution and/or service fees  

0.25% of average daily net assets

 

1.00% of average daily net assets

 

1.00% of average daily net assets

 

0.25% of average daily net assets

 

0.50% of average daily net assets

 

None

 

None

Exchange

Privilege(1)

 

Class A shares of most Legg Mason Partners funds

 

Class B shares of most Legg Mason Partners funds

 

Class C shares of most Legg Mason Partners funds

 

Class FI shares of applicable Legg Mason Partners funds

 

Class R shares of applicable Legg Mason Partners funds

 

Class I shares of most Legg Mason Partners funds

 

Class IS shares of applicable Legg Mason Partners funds

 

(1)

 

Ask your Service Agent about the Legg Mason Partners Funds available for exchange.

 

Legg Mason Partners Appreciation Fund         15


 

Sales charges

Class A shares

You buy Class A shares at the offering price, which is the net asset value plus a sales charge. You pay a lower rate as the size of your investment increases to certain levels called breakpoints. You do not pay a sales charge on the fund’s distributions or dividends you reinvest in additional Class A shares.

The table below shows the rate of sales charge you pay, depending on the amount you purchase. The table below also shows the amount of broker/dealer compensation that will be paid out of the sales charge if you buy shares from a Service Agent (except Premier Financial Services (“PFS”)). For Class A shares sold directly by LMIS, LMIS will receive the sales charge imposed on purchases of Class A shares (or any contingent deferred sales charge paid on redemptions) and will retain the full amount of such sales charge. For Class A shares sold by PFS between December 1, 2007 through the close of business on May 31, 2008, PFS will receive the sales charge imposed on purchases of Class A shares (or any contingent deferred sales charge paid on redemptions) and will retain the full amount of such sales charge. Thereafter, PFS will receive the same level of compensation as other Service Agents. Service Agents will also receive a service fee payable on Class A shares at an annual rate of up to 0.25% of the average daily net assets represented by the Class A shares serviced by them.

 

Amount of investment   Sales Charge
as % of
offering
price
  Sales Charge
as % of net
amount
invested
  Broker/Dealer
Commission
as % of
offering price

Less than $25,000

  5.75   6.10   5.00
 

$25,000 but less than $50,000

  5.00   5.26   4.25
 

$50,000 but less than $100,000

  4.50   4.71   3.75
 

$100,000 but less than $250,000

  3.50   3.63   2.75
 

$250,000 but less than $500,000

  2.50   2.56   2.00
 

$500,000 but less than $750,000

  2.00   2.04   1.60
 

$750,000 but less than $1 million

  1.50   1.52   1.20
 

$1 million or more(1)

  -0-   -0-   up to 1.00
 

 

(1)

 

The distributor may pay a commission of up to 1.00% to a Service Agent for purchase amounts of $1 million or more. In such cases, starting in the thirteenth month after purchase, the Service Agent will also receive an annual distribution/service fee of up to 0.25% of the average daily net assets represented by the Class A shares held by its clients. Prior to the thirteenth month, the distributor will retain this fee. Where the Service Agent does not receive the payment of this commission, the Service Agent will instead receive the annual distribution/service fee starting immediately after purchase. Please contact your Service Agent for more information.

Investments of $1,000,000 or more

You do not pay an initial sales charge when you buy $1,000,000 or more of Class A shares. However, if you redeem these Class A shares within one year of purchase, you will pay a contingent deferred sales charge of 1.00%.

 

16         Legg Mason Partners Funds


 

Qualifying for a reduced Class A sales charge

There are several ways you can combine multiple purchases of Class A shares of Legg Mason Partners funds to take advantage of the breakpoints in the sales charge schedule. In order to take advantage of reductions in sales charges that may be available to you when you purchase fund shares, you must inform your Service Agent or Legg Mason Partners Shareholder Services if you are eligible for a letter of intent or a right of accumulation and if you own shares of other Legg Mason Partners funds that are eligible to be aggregated with your purchases. Certain records, such as account statements, may be necessary in order to verify your eligibility for reduced sales charges.

n  

Accumulation privilege – allows you to combine the current value of Class A shares of the fund with other shares of Legg Mason Partners funds that are owned by:

  ¨  

you; or

  ¨  

your spouse and children under the age of 21

with the dollar amount of your next purchase of Class A shares for purposes of calculating the initial sales charge.

Shares of certain money market funds advised by the manager or its affiliates (other than money market fund shares acquired by exchange from other Legg Mason Partners funds offered with a sales charge), Legg Mason Partners S&P 500 Index Fund and Class O shares of Legg Mason Partners Equity Fund may not be combined.

If you hold shares of Legg Mason Partners funds in accounts at two or more Service Agents, please contact your Service Agents to determine which shares may be combined.

Certain trustees and fiduciaries may be entitled to combine accounts in determining their sales charge.

n  

Letter of intent – allows you to purchase Class A shares of Legg Mason Partners funds over a 13-month period and pay the same sales charge on Class A shares, if any, as if all shares had been purchased at once. At the time you enter into the letter of intent, you select your asset goal amount. Generally, purchases of Legg Mason Partners fund shares that are purchased during the 13-month period by

  ¨  

you; or

  ¨  

your spouse and children under the age of 21

are eligible for inclusion under the letter, based on the public offering price at the time of the purchase, and any capital appreciation on those shares. Purchases made 90 days prior to the 13-month period are also eligible to be treated as purchases made under the letter of intent. In addition, you can include towards your asset goal amount the current value of any eligible purchases that were made prior to the date of entering into the letter of intent and are still held.

If you hold shares of Legg Mason Partners funds in accounts at two or more Service Agents, please contact your Service Agents to determine which shares may be credited towards your letter of intent asset goal.

Shares of certain money market funds advised by the manager or its affiliates (other than money market fund shares acquired by exchange from other Legg Mason Partners funds offered with a sales charge), Legg Mason Partners S&P 500 Index Fund and Class O shares of Legg Mason Partners Equity Fund may not be credited toward your letter of intent asset goal.

If you do not meet your asset goal amount, shares in the amount of any sales charges due, based on the amount of your actual purchases, will be redeemed from your account.

 

Legg Mason Partners Appreciation Fund         17


 

Waivers for certain Class A investors

Class A initial sales charges are waived for certain types of investors, including:

n  

Employees of Service Agents having dealer, service or other selling agreements with the fund’s distributor

n  

Investors who redeemed Class A shares of a Legg Mason Partners fund in the past 60 days, if the investor’s Service Agent is notified

n  

Directors and officers of any Legg Mason-sponsored fund

n  

Employees of Legg Mason and its subsidiaries

n  

Investors investing through certain retirement plans

If you qualify for a waiver of the Class A initial sales charge, you must notify your Service Agent or the transfer agent at the time of purchase and provide sufficient information at the time of purchase to permit verification that the purchase qualifies for the initial sales charge waiver.

If you want to learn about additional waivers of Class A initial sales charges, contact your Service Agent, consult the SAI or access the Legg Mason Partners funds’ website, http://www.leggmason.com/individualinvestors, and click on the name of the fund.

Class B shares

You buy Class B shares at net asset value without paying an initial sales charge. However, if you redeem your Class B shares within five years of your purchase payment, you will pay a contingent deferred sales charge. The contingent deferred sales charge decreases as the number of years since your purchase payment increases.

 

Year after purchase   1st     2nd     3rd     4th     5th     6th through 8th  

Contingent deferred sales charge

  5 %   4 %   3 %   2 %   1 %   0 %
   

LMIS will generally pay Service Agents, other than PFS, selling Class B shares a commission of up to 4.00% of the purchase price of the Class B shares they sell and LMIS will retain the contingent deferred sales charges. For Class B shares sold by PFS, PFS pays a commission of up to 4.00% of the purchase price of the Class B shares sold by its agents and retains the contingent deferred sales charges paid upon certain redemptions. PFS will receive any service and distribution fees paid on all shares held by PFS clients. Service Agents also receive an annual distribution/service fee of up to 1.00% of the average daily net assets represented by the Class B shares serviced by them.

Class B conversion

After approximately 8 years, Class B shares automatically convert into Class A shares. This helps you because Class A shares have lower annual expenses. Your Class B shares will convert to Class A shares as follows:

 

Shares issued:

At initial purchase

  

Shares issued:

On reinvestment of
dividends and
distributions

  

Shares issued:

Upon exchange from
another Legg Mason
Partners fund

Approximately 8 years after the date of purchase payment    In same proportion as the number of Class B shares converting is to total Class B shares you own (excluding shares issued as dividends)    On the date the shares originally acquired would have converted into Class A shares
 

 

18         Legg Mason Partners Funds


 

Class C shares

You buy Class C shares at net asset value without paying an initial sales charge. However, if you redeem your Class C shares within one year of purchase, you will pay a contingent deferred sales charge of 1.00%.

LMIS will generally pay Service Agents selling Class C shares a commission of up to 1.00% of the purchase price of the Class C shares they sell and LMIS will retain the contingent deferred sales charge and an annual distribution/service fee of up to 1.00% of the average daily net assets represented by the Class C shares serviced by these Service Agents until the thirteenth month after purchase. Starting in the thirteenth month after purchase, these Service Agents will receive an annual distribution/service fee of up to 1.00% of the average daily net assets represented by the Class C shares serviced by them.

Class FI, Class R, Class I and Class IS shares

Class FI, Class R, Class I and Class IS shares are purchased at net asset value with no initial sales charge and no contingent deferred sales charge when redeemed. Service Agents will receive a distribution/service fee of up to 0.50% of the average daily net assets represented for Class R and up to 0.25% for Class FI shares serviced by them.

 

Legg Mason Partners Appreciation Fund         19


 

More about contingent deferred sales charges

The contingent deferred sales charge is based on the net asset value at the time of purchase or redemption, whichever is less, and therefore you do not pay a sales charge on amounts representing appreciation or depreciation.

In addition, you do not pay a contingent deferred sales charge:

n  

When you exchange shares for shares of another Legg Mason Partners fund

n  

On shares representing reinvested distributions and dividends

n  

On shares no longer subject to the contingent deferred sales charge

Each time you place a request to redeem shares, the fund will first redeem any shares in your account that are not subject to a contingent deferred sales charge and then the shares in your account that have been held the longest.

If you redeemed shares of a Legg Mason Partners fund and paid a contingent deferred sales charge, you may, under certain circumstances, reinvest all or part of the redemption proceeds within 60 days and receive pro rata credit for any contingent deferred sales charge imposed on the prior redemption. Please contact your Service Agent for additional information.

The fund’s distributor receives contingent deferred sales charges as partial compensation for its expenses in selling shares, including the payment of compensation to your Service Agent.

Contingent deferred sales charge waivers

The contingent deferred sales charge for each share class will generally be waived:

n  

On payments made through certain systematic withdrawal plans

n  

On certain distributions from a retirement plan

n  

For retirement plans with omnibus accounts held on the books of the fund

n  

For involuntary redemptions of small account balances

n  

For 12 months following the death or disability of a shareholder

If you want to learn about additional waivers of contingent deferred sales charges, contact your Service Agent, consult the SAI or access the Legg Mason Partners funds’ website, http://www.leggmason.com/individualinvestors, and click on the name of the fund.

 

20         Legg Mason Partners Funds


 

Retirement and institutional investors

Eligible Investors

Retirement Plans

Retirement Plans with omnibus accounts held on the books of the fund can generally choose among five classes of shares: Class C, Class R, Class FI, Class I and Class IS shares.

Class A and Class B shares are no longer offered through Service Agents for Retirement Plans with omnibus accounts held on the books of the fund, with limited exceptions. Class A shares will cease to be available to new Retirement Plan investors through a Service Agent if the Service Agent makes Class FI shares available. Please see below for additional information.

“Retirement Plans” include 401(k) plans, 457 plans, employer-sponsored 403(b) plans, profit-sharing plans, non-qualified deferred compensation plans and other similar employer-sponsored retirement plans. Retirement Plans do not include individual retirement vehicles, such as traditional and Roth IRAs, Coverdell education savings accounts, individual 403(b)(7) custodial accounts, Keogh plans, SEPs, SARSEPs, SIMPLE IRAs, or Section 529 savings accounts. Although Retirement Plans with omnibus accounts held on the books of the fund are not subject to minimum initial investment requirements for any of these share classes, certain investment minimums may be imposed by a financial intermediary.

Other Retirement Plans

Other Retirement Plans can generally choose among three classes of shares: Class A, Class B and Class C. “Other Retirement Plans” include Retirement Plans investing through brokerage accounts, and also include certain Retirement Plans with direct relationships to the fund that are neither Institutional Investors nor investing through omnibus accounts. Individual retirement vehicles, such as IRAs, may also choose among these share classes. Other Retirement Plans and individual retirement vehicles are treated like individual investors for purposes of determining sales charges and any applicable sales charge reductions or waivers.

Clients of Eligible Financial Intermediaries

Clients of Eligible Financial Intermediaries may generally choose among three classes of shares: Class A, Class FI and Class I. “Clients of Eligible Financial Intermediaries” are investors who invest in the fund through financial intermediaries that offer their clients fund shares through investment programs as authorized by LMIS. Such investment programs may include fee-based advisory account programs and college savings vehicles such as Section 529 plans. The financial intermediary may impose separate investment minimums.

Institutional Investors

Institutional Investors may invest in Class I or Class IS shares if they meet the $1,000,000 minimum initial investment requirement. Institutional Investors may also invest in Class A, B and C shares, which have different investment minimums and fees and expenses. “Institutional Investors” generally include corporations, banks, trust companies, insurance companies, investment companies, foundations, endowments, pension and profit-sharing plans and other similar entities with direct relationships to the fund.

 

Legg Mason Partners Appreciation Fund         21


 

Class C — Retirement Plans

Retirement Plans with omnibus accounts held on the books of the fund may buy Class C shares at net asset value without paying a contingent deferred sales charge. LMIS does not pay Service Agents selling Class C shares to Retirement Plans with omnibus accounts held on the books of the fund a commission on the purchase price of Class C shares sold by them. Instead, immediately after purchase, LMIS may pay these Service Agents an annual distribution/service fee of up to 1.00% of the average daily net assets represented by the Class C shares serviced by them.

Certain retirement plan programs with exchange features in effect prior to November 20, 2006, as approved by LMIS, will remain eligible for exchange from Class C shares to Class A shares in accordance with the program terms. Please read the SAI for more details.

Class R

Class R shares are offered only to Retirement Plans with accounts held on the books of the fund (either at the plan level or at the level of the financial intermediary). LMIS may pay Service Agents selling Class R shares an annual distribution/service fee of up to 0.50% of the average daily net assets represented by the Class R shares serviced by them.

Class FI

Class FI shares are offered to investors who invest in the fund through certain financial intermediary and retirement plan programs. LMIS may pay Service Agents selling Class FI shares an annual distribution/service fee of up to 0.25% starting immediately after purchase.

Class I

Class I shares are offered only to Institutional Investors who meet the $1,000,000 minimum initial investment requirement, Clients of Eligible Financial Intermediaries, Retirement Plans with omnibus accounts held on the books of the fund, and other investors as authorized by LMIS.

Class IS

Class IS shares are offered to Institutional Investors who meet the $1,000,000 minimum initial investment requirement and to investors deemed by LMIS to have low cost shareholder characteristics similar to Institutional Investors, for example, a 401K plan where the plan intermediary maintains a single fund account and bears all the costs of printing and distributing shareholder communications to the participants in the plan. In order to purchase Class IS shares, an investor must hold its shares in one account with the fund.

Class A and Class B — Retirement Plans

Class A and Class B shares are no longer offered through Service Agents to Retirement Plans with omnibus accounts held on the books of the fund. However, certain Retirement Plans that held Class B shares prior to December 1, 2006 are permitted to make additional investments in that class. Certain existing programs for current and prospective Retirement Plan investors sponsored by financial intermediaries also remain eligible for Class A shares. Under these programs, the initial sales charge and contingent deferred sales charge for Class A shares are waived where:

n  

Such Retirement Plan’s record keeper offers only load-waived shares,

 

22         Legg Mason Partners Funds


 

n  

Fund shares are held on the books of the fund through an omnibus account, and

n  

The Retirement Plan has more than 100 participants, or has total assets exceeding $1 million

LMIS does not pay Service Agents selling Class A shares to Retirement Plans with a direct omnibus relationship with the fund a commission on the purchase price of Class A shares sold by them. However, for certain Retirement Plans that purchased shares at net asset value prior to November 20, 2006, LMIS may continue to pay Service Agents commissions of up to 1.00% of the purchase price of the Class A shares that are purchased with regular ongoing plan contributions. Please contact your Service Agent for more information.

Other considerations

Plan sponsors, plan fiduciaries and other financial intermediaries may choose to impose qualification requirements for plans that differ from the fund’s share class eligibility standards. In certain cases this could result in the selection of a share class with higher service and distribution-related fees than otherwise would have been charged. The fund is not responsible for, and has no control over, the decision of any plan sponsor, plan fiduciary or financial intermediary to impose such differing requirements. Please consult with your plan sponsor, plan fiduciary or financial intermediary for more information about available share classes.

With respect to Class A, Class B, Class C, Class FI, Class R and Class I shares, as applicable, the fund may pay a fee for recordkeeping services performed for the share class.

Not all share classes may be made available by your Service Agent; please contact your Service Agent for additional details.

 

Legg Mason Partners Appreciation Fund         23


 

Buying shares

 

Generally   

You may buy shares at their net asset value next determined after receipt by your Service Agent or the transfer agent of your request in good order, plus any applicable sales charge.

The fund generally will not permit non-resident aliens with a non-U.S. address to establish an account. U.S. citizens with an APO/FPO address or an address in the United States (including its territories) and resident aliens with a U.S. address are permitted to establish an account with the fund. Subject to the requirements of local law, U.S. citizens residing in foreign countries are permitted to establish an account with the fund.

 
Through a
Service Agent
  

You should contact your Service Agent to open a brokerage account and make arrangements to buy shares. You must provide the following information for your order to be processed:

n   Class of shares being bought

n  Dollar amount or number of shares being bought

n  Account number (if existing account)

Your Service Agent may charge an annual account maintenance fee.

 
Through the fund   

n  Investors should write to the fund at the following address:

Legg Mason Partners Funds

c/o PFPC Inc.

P.O. Box 9699

Providence, Rhode Island 02940-9699

n  Enclose a check to pay for the shares. For initial purchases, complete and send an account application available upon request from Legg Mason Partners Shareholder Services at the number below

n  Specify the name of the fund, the share class you wish to purchase and your account number (if existing account)

n  For more information, please call Legg Mason Partners Shareholder Services at 800-451-2010

 
Through a systematic investment plan   

You may authorize your Service Agent or the transfer agent to transfer funds automatically from (i) a regular bank account, (ii) cash held in a brokerage account opened with a Service Agent or (iii) certain money market funds in order to buy shares on a regular basis.

n  Amounts transferred must be at least $25 monthly

n  Amounts may be transferred monthly, every alternate month, quarterly, semi-annually or annually

  

n  If you do not have sufficient funds in your account on a transfer date, your Service Agent or the transfer agent may charge you a fee

 

For more information, please contact your Service Agent or Legg Mason Partners Shareholder Services agent or consult the SAI.

 

24         Legg Mason Partners Funds


 

Exchanging shares

 

Generally    You may exchange shares at their net asset value next determined after receipt by your Service Agent or the transfer agent of your exchange request in good order.
 
Legg Mason Partners offers a distinctive family of funds tailored to help meet the varying needs of both large and small investors   

You should contact your Service Agent to exchange into other Legg Mason Partners funds. Be sure to read the prospectus of the Legg Mason Partners fund into which you are exchanging. An exchange is a taxable transaction, unless you are investing through a tax-qualified savings plan or account.

n  If you bought shares through a Service Agent, you may exchange shares only for shares of the same class of certain other Legg Mason Partners funds made available for exchange by your Service Agent. Not all Legg Mason Partners funds made available for exchange by your Service Agent may offer all classes. Please contact your Service Agent for more information about the funds and classes that are available for exchange

n  If you bought shares directly from the fund, you may exchange shares only for shares of the same class of another Legg Mason Partners fund, other than shares of Legg Mason Partners S& P 500 Index Fund. Not all Legg Mason Partners funds offer all classes

n  Not all Legg Mason Partners funds may be offered in your state of residence. Contact your Service Agent or the transfer agent for further information

  

n  Exchanges of Class A, B and C shares are subject to minimum investment requirements (except for systematic investment plan exchanges), and all shares are subject to the other requirements of the fund into which exchanges are made

n  If you hold share certificates, the transfer agent must receive the certificates endorsed for transfer or with signed stock powers before the exchange is effective

n  The fund may suspend or terminate your exchange privilege if you engage in an excessive pattern of exchanges

 
Sales charges   

In most instances, your shares will not be subject to an initial sales charge or a contingent deferred sales charge at the time of the exchange.

Your contingent deferred sales charge (if any) will continue to be measured from the date of your original purchase of shares subject to a contingent deferred sales charge and you will be subject to the contingent deferred sales charge of the fund you originally purchased.

 

Legg Mason Partners Appreciation Fund         25


 

By telephone   

If you do not have a brokerage account with a Service Agent, you may be eligible to exchange shares through the fund. You must complete an authorization form to authorize telephone transfers. If eligible, you may make telephone exchanges on any day the New York Stock Exchange (“NYSE”) is open. Shareholders should call Legg Mason Partners Shareholder Services at 800-451-2010 between 8:30 a.m. and 4:00 p.m. (Eastern time).

You can make telephone exchanges only between accounts that have identical registrations.

 
By mail    If you do not have a brokerage account, contact your Service Agent or write to the fund at the address on the following page.
 
Through a systematic exchange plan   

You may be permitted to schedule exchanges of shares of any class of the fund for shares of the same class of other Legg Mason Partners funds.

n  Exchanges may be made monthly, every alternate month, quarterly, semi-annually or annually

n  A predetermined dollar amount of at least $25 per exchange is required

 

For more information, please contact your Service Agent or Legg Mason Partners Shareholder Services or consult the SAI.

 

26         Legg Mason Partners Funds


 

Redeeming shares

 

Generally   

You may redeem shares at their net asset value next determined after receipt by your Service Agent or the transfer agent of your redemption request in good order, less any applicable contingent deferred sales charge.

Contact your Service Agent to redeem shares of the fund.

If you hold share certificates, the transfer agent must receive the certificates endorsed for transfer or with signed stock powers with a signature guarantee before you may redeem.

If the shares are held by a fiduciary or corporation, other documents may be required.

Your redemption proceeds will normally be sent within 3 business days after your request is received in good order but in any event within 7 days. Your redemption proceeds may be delayed for up to 10 days if your purchase was made by check.

If you have a brokerage account with a Service Agent, your redemption proceeds will be sent to your Service Agent. In other cases, unless you direct otherwise, your redemption proceeds will be paid by check mailed to your address of record.

 
By mail   

For accounts held directly at the fund, send written requests to the fund at the following address:

  

For clients of a PFS Registered Representative:

Primerica Shareholder Services

c/o PFPC Inc.

P.O. Box 9662

Providence, Rhode Island 02940-9662

For all other investors, send your request to:

Legg Mason Partners Funds

c/o PFPC Inc.

P.O. Box 9699

Providence, Rhode Island 02940-9699

Your written request must provide the following:

n  The name of the fund, the class of shares to be redeemed, and your account number

n  The dollar amount or number of shares to be redeemed

n  Signatures of each owner exactly as the account is registered

n  Signature guarantees, as applicable

 
By telephone    If you do not have a brokerage account with a Service Agent, you may be eligible to redeem shares (except those held in certain retirement plans) in amounts up to $50,000 per day through the fund. You must complete an authorization form to authorize telephone redemptions. If eligible, you may request redemptions by telephone on any day the NYSE is open. Shareholders should call Legg Mason Partners Shareholder Services at 800-451-2010 between 8:30 a.m. and 4:00 p.m. (Eastern time).

 

Legg Mason Partners Appreciation Fund         27


 

  

Your redemption proceeds can be sent by check to your address of record or by wire or electronic transfer (ACH) to a bank account designated on your authorization form. You must submit a new authorization form to change the bank account designated to receive wire or electronic transfers and you may be asked to provide certain other documents. The transfer agent may charge a fee on a wire or an electronic transfer (ACH).

 
Automatic cash withdrawal plans   

You can arrange for the automatic redemption of a portion of your shares monthly, every alternate month, quarterly, semi-annually or annually. To qualify you must own shares of the fund with a value of at least $10,000 ($5,000 for retirement plan accounts) and each automatic redemption must be at least $50. If your shares are subject to a contingent deferred sales charge, the sales charge will be waived if your automatic redemptions are equal to or less than 2% per month of your account balance on the date the withdrawals commence, up to a maximum of 12% in one year.

The following conditions apply:

n  Your shares must not be represented by certificates

n  All dividends and distributions must be reinvested

 

For more information, please contact your Service Agent or consult the SAI.

 

28         Legg Mason Partners Funds


 

Other things to know about transactions

When you buy, exchange or redeem shares, your request must be in good order. This means you have provided the following information, without which your request may not be processed:

n  

Name of the fund

n  

Your account number

n  

Class of shares being bought, and if you own more than one class, the class of shares being exchanged or redeemed

n  

Dollar amount or number of shares being bought, exchanged or redeemed

n  

Signature of each owner exactly as the account is registered

The transfer agent or Legg Mason Partners Shareholder Services will employ reasonable procedures to confirm that any telephone exchange or redemption request is genuine, which may include recording calls, asking the caller to provide certain personal identification information, sending you a written confirmation or requiring other confirmation procedures from time to time. If these procedures are followed, neither the fund nor its agents will bear any liability for such transactions.

Signature guarantees

To be in good order, your redemption request must include a signature guarantee if you:

n  

Are redeeming over $50,000

n  

Are sending signed share certificates or stock powers to the transfer agent

n  

Instruct the transfer agent to mail the check to an address different from the one on your account registration

n  

Changed your account registration or your address within 30 days

n  

Want the check paid to someone other than the account owner(s)

n  

Are transferring the redemption proceeds to an account with a different registration

You can obtain a signature guarantee from most banks, dealers, brokers, credit unions and federal savings and loan institutions, but not from a notary public.

The fund has the right to:

n  

Suspend the offering of shares

n  

Waive or change minimum and additional investment amounts

n  

Reject any purchase or exchange order

n  

Change, revoke or suspend the exchange privilege

n  

Suspend telephone transactions

n  

Suspend or postpone redemptions of shares on any day when trading on the NYSE is restricted, or as otherwise permitted by the SEC

n  

Pay redemption proceeds by giving you securities. You may pay transaction costs to dispose of the securities

Small account balances/Mandatory redemptions

If at any time the aggregate net asset value of the fund shares in your account is less than $500 for any reason (including solely due to declines in net asset value and/or failure to invest at least $500 within a reasonable period), the fund reserves the right to ask you to bring your account up to the applicable minimum investment amount as determined by

 

Legg Mason Partners Appreciation Fund         29


 

your Service Agent. In such case you shall be notified in writing and will have 60 days to make an additional investment to bring your account value up to the required level. If you choose not to do so within this 60-day period, the fund may close your account and send you the redemption proceeds. In the event your account is closed due to a failure to increase your balance to the minimum required amount, you will not be eligible to have your account subsequently reinstated without imposition of any sales charges that may apply to your new purchase. The fund may, with prior notice, change the minimum size of accounts subject to mandatory redemption, which may vary by class, or implement fees for small accounts.

Subject to applicable law, the fund may, with prior notice, adopt other policies from time to time requiring mandatory redemption of shares in certain circumstances.

For more information, please contact your Service Agent or Legg Mason Partners Shareholder Services or consult the SAI.

Frequent purchases and redemptions of fund shares

Frequent purchases and redemptions of fund shares may interfere with the efficient management of the fund’s portfolio by its portfolio managers, increase portfolio transaction costs, and have a negative effect on the fund’s long-term shareholders. For example, in order to handle large flows of cash into and out of the fund, the portfolio managers may need to allocate more assets to cash or other short-term investments or sell securities, rather than maintaining full investment in securities selected to achieve the fund’s investment objective. Frequent trading may cause the fund to sell securities at less favorable prices. Transaction costs, such as brokerage commissions and market spreads, can detract from the fund’s performance. In addition, the return received by long-term shareholders may be reduced when trades by other shareholders are made in an effort to take advantage of certain pricing discrepancies, when, for example, it is believed that the fund’s share price, which is determined at the close of the NYSE on each trading day, does not accurately reflect the value of the fund’s portfolio securities. Funds investing in foreign securities have been particularly susceptible to this form of arbitrage, but other funds could also be affected.

Because of the potential harm to funds in the Legg Mason Partners funds complex and their long-term shareholders, the Board of the fund has approved policies and procedures that are intended to discourage and prevent excessive trading and market timing abuses through the use of various surveillance techniques. Under these policies and procedures, the fund may limit additional exchanges or purchases of fund shares by shareholders who are believed by the manager to be engaged in these abusive trading activities in the fund or in other funds within the fund complex. In the event that an exchange request is rejected, the shareholder may nonetheless redeem its shares. The intent of the policies and procedures is not to inhibit legitimate strategies, such as asset allocation, dollar cost averaging, or similar activities that may nonetheless result in frequent trading of fund shares. Under the fund’s policies and procedures, the fund reserves the right to restrict or reject purchases of shares (including exchanges) without prior notice whenever a pattern of excessive trading by a shareholder is detected within the fund complex. A committee established by the manager administers the policy. The policy provides that the committee will use its best efforts to restrict a shareholder’s trading privileges in the Legg Mason Partners funds complex if that shareholder has engaged in a total of four or more “Round Trips” (as

 

30         Legg Mason Partners Funds


 

defined below) across all Legg Mason Partners funds during any rolling 12-month period. However, the committee has the discretion to determine that restricting a shareholder’s trading privileges is not necessary (or that a new limit on Round Trips should be established for the shareholder) if it is determined that the pattern of trading is not abusive or harmful. In making such a determination, the committee will consider, among other things, the nature of the shareholder’s account, the reason for the frequent trading, the amount of trading and the particular funds in which the trading has occurred. Additionally, the committee has the discretion to make inquiries or to take action against any shareholder whose trading appears inconsistent with the frequent trading policy. Examples of the types of actions the committee may take to deter excessive trading in a shareholder account include restricting the shareholder from purchasing additional shares in the fund altogether or imposing other restrictions (such as requiring purchase orders to be submitted by mail) that would deter the shareholder from trading frequently in the fund.

A “Round Trip” is defined as a purchase (including subscriptions and exchanges) into the fund followed by a sale (including redemptions and exchanges) of the same or a similar number of shares out of the fund within 30 days of such purchase. Purchases and sales of the fund’s shares pursuant to an automatic investment plan or similar program for periodic transactions are not considered in determining Round Trips. For purposes of these policies and procedures, the Legg Mason Partners funds complex also includes certain Western Asset funds and Barrett Opportunity Fund, Inc., but does not include money market funds in the fund complex.

The policies apply to any account, whether an individual account or accounts with financial intermediaries such as investment advisers, broker/dealers or retirement plan administrators, commonly called omnibus accounts, where the intermediary holds fund shares for a number of its customers in one account. The fund’s ability to monitor trading in omnibus accounts may, however, be severely limited due to the lack of access to an individual investor’s trading activity when orders are placed through these types of accounts. There may also be operational and technological limitations on the ability of the fund’s service providers to identify or terminate frequent trading activity within the various types of omnibus accounts. The fund’s distributor has entered into agreements with intermediaries requiring the intermediaries to, among other things, help identify frequent trading activity and to prohibit further purchases or exchanges by a shareholder identified as having engaged in frequent trading. These agreements took effect on October 16, 2007.

The fund’s policies also require personnel such as portfolio managers and investment staff to report any abnormal or otherwise suspicious investment activity, and prohibit short-term trades by such personnel for their own account in mutual funds managed by the manager and its affiliates, other than money market funds. Additionally, the fund has adopted policies and procedures to prevent the selective release of information about the fund’s portfolio holdings, as such information may be used for market-timing and similar abusive practices.

The fund’s policies provide for ongoing assessment of the effectiveness of current policies and surveillance tools, and the fund’s Board reserves the right to modify these or adopt additional policies and restrictions in the future. Shareholders should be aware, however, that any surveillance techniques currently employed by the funds or other techniques that may be adopted in the future may not be effective, particularly where the trading takes

 

Legg Mason Partners Appreciation Fund         31


 

place through certain types of omnibus accounts. As noted above, if the fund is unable to detect and deter trading abuses, the fund’s performance and its long-term shareholders may be harmed. In addition, shareholders may be harmed by the extra costs and portfolio management inefficiencies that result from frequent trading of fund shares, even when the trading is not for abusive purposes. Furthermore, the fund may not apply its policies consistently or uniformly, resulting in the risk that some shareholders may be able to engage in frequent trading while others will bear the costs and effects of that trading. The fund will provide advance notice to its shareholders and prospective investors of any specific restrictions on the trading of fund shares that the Board may adopt in the future.

Share certificates

Share certificates for the fund will no longer be issued. If you currently hold share certificates of the fund, such certificates will continue to be honored. If you would like to return your share certificates to the fund and hold your shares in uncertificated form, please contact your Service Agent or Legg Mason Partners Shareholder Services.

Record ownership

If you hold shares through a Service Agent, your Service Agent may establish and maintain your account and be the shareholder of record. In the event that the fund holds a shareholder meeting your Service Agent, as record holder, will vote your shares in accordance with your instructions. If you do not give your Service Agent voting instructions, your Service Agent may nonetheless, under certain circumstances, be entitled to vote your shares.

 

32         Legg Mason Partners Funds


 

Dividends, distributions and taxes

Dividends and distributions

The fund generally pays dividends and makes capital gain distributions, if any, typically once or twice a year. The fund may pay additional distributions and dividends at other times if necessary for the fund to avoid a federal tax. The fund expects distributions to be primarily from capital gains. Capital gain distributions and dividends are reinvested in additional fund shares of the same class you hold. You do not pay a sales charge on reinvested distributions or dividends. Alternatively, you can instruct your Service Agent or Legg Mason Partners Shareholder Services to have your distributions and/or dividends paid in cash. You can change your choice at any time to be effective as of the next distribution or dividend.

Taxes

In general, redeeming shares, exchanging shares and receiving dividends and distributions (whether in cash or additional shares) are all taxable events. The following table summarizes the tax status to you of certain transactions related to the fund.

 

Transaction    Federal tax status
Redemption or exchange of shares    Usually capital gain or loss; long-term only if shares owned more than one year
 
Long-term capital gain distributions    Long-term capital gain
 
Dividends    Ordinary income for individuals, potentially taxable at long-term capital gain rates
 

Distributions attributable to short-term capital gains are treated as dividends, taxable as ordinary income. Dividends and long-term capital gain distributions are taxable whether received in cash or reinvested in additional fund shares. Although dividends (including dividends from short-term capital gains) are generally taxable as ordinary income, individual shareholders who satisfy certain holding period and other requirements are taxed on such dividends at long-term capital gain rates to the extent the dividends are attributable to “qualified dividend income” received by the fund. Qualified dividend income generally consists of dividends received from U.S. corporations (other than dividends from tax-exempt organizations and certain dividends from real estate investment trusts and regulated investment companies) and certain foreign corporations.

Long-term capital gain distributions are taxable to you as long-term capital gain regardless of how long you have owned your shares. You may want to avoid buying shares when the fund is about to declare a long-term capital gain distribution or a dividend, because it will be taxable to you even though it may actually be a return of a portion of your investment. A dividend declared by the fund in October, November or December and paid during January of the following year will in certain circumstances be treated as paid in December for tax purposes.

After the end of each year, your Service Agent or the fund will provide you with information about the distributions and dividends you received and any redemptions of shares during the previous year. If you do not provide the fund with your correct taxpayer

 

Legg Mason Partners Appreciation Fund         33


 

identification number and any required certifications, you may be subject to back-up withholding on your distributions, dividends and redemption proceeds. Because each shareholder’s circumstances are different and special tax rules may apply, you should consult your tax adviser about your investment in the fund.

The above discussion is applicable to shareholders who are U.S. persons. If you are a non-U.S. person, please consult your own tax adviser with respect to the tax consequences to you of an investment in the fund.

 

34         Legg Mason Partners Funds


 

Share price

You may buy, exchange or redeem shares at their net asset value next determined after receipt of your request in good order, plus any applicable sales charge. The fund’s net asset value per share is the value of its assets minus its liabilities divided by the number of shares outstanding. Net asset value is calculated separately for each class of shares. The fund calculates its net asset value every day the NYSE is open. This calculation is done when regular trading closes on the NYSE (normally 4:00 p.m., Eastern time). The NYSE is closed on certain holidays listed in the SAI.

The Board has approved procedures to be used to value the fund’s securities for the purposes of determining the fund’s net asset value. The valuation of the securities of the fund is determined in good faith by or under the direction of the Board. The Board has delegated certain valuation functions for the fund to the manager.

The fund generally values its securities based on market prices determined at the close of regular trading on the NYSE. The fund’s currency valuations, if any, are done as of when the London Stock Exchange closes, which is usually at 12 noon Eastern time, as the manager believes that these valuations typically reflect the largest trading volume in the foreign currency markets. A material change in the value of currency during the period between the close of the London Stock Exchange and the calculation of the fund’s net asset value on the same date is considered a significant event, as described below, in response to which the fund may use fair valuation procedures to value the affected investments. For equity securities that are traded on an exchange, the market price is usually the closing sale or official closing price on that exchange. In the case of securities not traded on an exchange, or if such closing prices are not otherwise available, the market price is typically determined by independent third party pricing vendors approved by the fund’s Board using a variety of pricing techniques and methodologies. Short-term debt obligations that will mature in 60 days or less are valued at amortized cost, unless it is determined that using this method would not reflect an investment’s fair value. If vendors are unable to supply a price, or if the price supplied is deemed by the manager to be unreliable, the market price may be determined using quotations received from one or more broker/dealers that make a market in the security. When such prices or quotations are not available, or when the manager believes that they are unreliable, the manager may price securities using fair value procedures approved by the Board. The fund may also use fair value procedures if the manager determines that a significant event has occurred between the time at which a market price is determined and the time at which the fund’s net asset value is calculated. In particular, the value of foreign securities may be materially affected by events occurring after the close of the market on which they are valued, but before the fund prices its shares. The fund uses a fair value model developed by an independent third party pricing service to price foreign equity securities on days when there is a certain percentage change in the value of a domestic equity security index, as such percentage may be determined by the manager from time to time.

Valuing securities at fair value involves greater reliance on judgment than valuation of securities based on readily available market quotations. A fund that uses fair value to price securities may value those securities higher or lower than another fund using market quotations or its own fair value methodologies to price the same securities. There can be

 

Legg Mason Partners Appreciation Fund         35


 

no assurance that the fund could obtain the fair value assigned to a security if it were to sell the security at approximately the time at which the fund determines its net asset value.

The fund invests in securities that are listed on foreign exchanges that trade on weekends and other day when the fund does not price its shares. Therefore, the value of the fund’s shares may change on days when you will not be able to purchase or redeem the fund’s shares.

In order to buy, redeem or exchange shares at that day’s price, you must place your order with your Service Agent or the transfer agent before the NYSE closes. If the NYSE closes early, you must place your order prior to the actual closing time.

It is the responsibility of the Service Agents to transmit all orders to buy, exchange or redeem shares to the transfer agent on a timely basis.

 

36         Legg Mason Partners Funds


 

Financial highlights

The financial highlights tables are intended to help you understand the performance of each class for the past five years (or since the inception of that class). No financial highlights for Class FI shares are provided as no Class FI shares were outstanding as of December 31, 2007. No financial highlights are provided for Class IS shares as the fund commenced the offering of such shares as of the date of this Prospectus. The returns for Class FI and Class IS shares will differ from those of the other classes to the extent that their expenses differ. Certain information reflects financial results for a single share. Total return represents the rate that a shareholder would have earned (or lost) on a fund share assuming reinvestment of all dividends and distributions. The information in the following tables has been derived from the fund’s and the predecessor fund’s financial statements. Those financial statements have been audited by KPMG LLP, an independent registered public accounting firm, whose report, along with the fund’s financial statements, is included in the annual report (available upon request). The financial information shown below for periods prior to April 16, 2007 is that of the fund’s predecessor.

 

For a share of each class of beneficial interest outstanding throughout each year ended December 31:   
Class A Shares(1)   2007(2)     2006(2)     2005(2)     2004(2)     2003(2)  

Net Asset Value, Beginning of Year

  $15.47     $14.42     $14.67     $13.79     $11.13  
   

Income From Operations:

         

Net investment income

  0.14     0.13     0.09     0.14     0.07  

Net realized and unrealized gain

  1.14     1.94     0.52     1.09     2.67  
   

Total Income From Operations

  1.28     2.07     0.61     1.23     2.74  
   

Less Distributions From:

         

Net investment income

  (0.13 )   (0.13 )   (0.07 )   (0.14 )   (0.08 )

Net realized gains

  (1.38 )   (0.89 )   (0.79 )   (0.21 )    
   

Total Distributions

  (1.51 )   (1.02 )   (0.86 )   (0.35 )   (0.08 )
   

Net Asset Value, End of Year

  $15.24     $15.47     $14.42     $14.67     $13.79  
   

Total Return(3)

  8.14 %   14.57 %   4.15 %   8.92 %   24.70 %
   

Net Assets, End of Year (millions)

  $3,786     $3,817     $3,587     $3,575     $3,210  
   

Ratios to Average Net Assets:

         

Gross expenses

  0.95 %   0.96 %(4)   0.96 %   0.95 %   0.96 %

Net expenses

  0.95     0.95 (4)(5)   0.96     0.93 (5)   0.96  

Net investment income

  0.85     0.88     0.61     0.96     0.55  
   

Portfolio Turnover Rate

  45 %   33 %   53 %   40 %   42 %
   

 

(1)

 

Per share amounts have been calculated using the average shares method.

 

(2)

 

Represents a share of capital stock outstanding prior to April 16, 2007.

 

(3)

 

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

 

(4)

 

Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the fund during the year. Without these fees, the gross and net expense ratios would have been 0.94% and 0.93%, respectively.

 

(5)

 

Reflects fee waivers and/or expense reimbursements.

 

Legg Mason Partners Appreciation Fund         37


 

For a share of each class of beneficial interest outstanding throughout each year ended December 31:   
Class B Shares(1)   2007(2)     2006(2)     2005(2)     2004(2)     2003(2)  

Net Asset Value, Beginning of Year

  $15.08     $14.09     $14.40     $13.54     $10.95  
   

Income (Loss) From Operations:

         

Net investment income (loss)

  (0.02 )   (0.01 )   (0.03 )   0.02     (0.03 )

Net realized and unrealized gain

  1.12     1.89     0.51     1.06     2.62  
   

Total Income From Operations

  1.10     1.88     0.48     1.08     2.59  
   

Less Distributions From:

         

Net investment income

          (0.00 )(3)   (0.01 )    

Net realized gains

  (1.38 )   (0.89 )   (0.79 )   (0.21 )    
   

Total Distributions

  (1.38 )   (0.89 )   (0.79 )   (0.22 )    
   

Net Asset Value, End of Year

  $14.80     $15.08     $14.09     $14.40     $13.54  
   

Total Return(4)

  7.18 %   13.55 %   3.31 %   7.99 %   23.65 %
   

Net Assets, End of Year (millions)

  $754     $912     $986     $1,078     $1,075  
   

Ratios to Average Net Assets:

         

Gross expenses

  1.88 %   1.87 %(5)   1.80 %   1.78 %   1.76 %

Net expenses

  1.88     1.87 (5)(6)   1.80     1.76 (6)   1.76  

Net investment income (loss)

  (0.10 )   (0.04 )   (0.23 )   0.11     (0.26 )
   

Portfolio Turnover Rate

  45 %   33 %   53 %   40 %   42 %
   

 

(1)

 

Per share amounts have been calculated using the average shares method.

 

(2)

 

Represents a share of capital stock outstanding prior to April 16, 2007.

 

(3)

 

Amount represents less than $0.01 per share.

 

(4)

 

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

 

(5)

 

Included in the expense ratios are certain non-recurring restructuring (and reorganization if applicable) fees that were incurred by the fund during the year. Without these fees, the gross and net expense ratios would both have been 1.85%.

 

(6)

 

Reflects fee waivers and/or expense reimbursements.

 

38         Legg Mason Partners Funds


 

For a share of each class of beneficial interest outstanding throughout each year ended December 31:   
Class C Shares(1)   2007(2)     2006(2)     2005(2)     2004(2)     2003(2)  

Net Asset Value, Beginning of Year

  $15.12     $14.11     $14.42     $13.55     $10.96  
   

Income (Loss) From Operations:

         

Net investment income (loss)

  0.02     0.02     (0.03 )   0.02     (0.03 )

Net realized and unrealized gain

  1.11     1.90     0.51     1.08     2.62  
   

Total Income From Operations

  1.13     1.92     0.48     1.10     2.59  
   

Less Distributions From:

         

Net investment income

  (0.01 )   (0.02 )   (0.00 )(3)   (0.02 )    

Net realized gains

  (1.38 )   (0.89 )   (0.79 )   (0.21 )    
   

Total Distributions

  (1.39 )   (0.91 )   (0.79 )   (0.23 )    
   

Net Asset Value, End of Year

  $14.86     $15.12     $14.11     $14.42     $13.55  
   

Total Return(4)

  7.37 %   13.80 %   3.31 %   8.08 %   23.63 %
   

Net Assets, End of Year (millions)

  $606     $658     $661     $614     $531  
   

Ratios to Average Net Assets:

         

Gross expenses

  1.67 %   1.70 %(5)   1.77 %   1.76 %   1.80 %

Net expenses

  1.67     1.66 (5)(6)   1.77     1.74 (6)   1.80  

Net investment income (loss)

  0.12     0.17     (0.20 )   0.16     (0.28 )
   

Portfolio Turnover Rate

  45 %   33 %   53 %   40 %   42 %
   

 

(1)

 

Per share amounts have been calculated using the average shares method.

 

(2)

 

Represents a share of capital stock outstanding prior to April 16, 2007.

 

(3)

 

Amount represents less than $0.01 per share.

 

(4)

 

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

 

(5)

 

Included in the expense ratios are certain non-recurring restructuring (and reorganization if applicable) fees that were incurred by the fund during the year. Without these fees, the gross and net expense ratios would have been 1.67% and 1.64%, respectively.

 

(6)

 

Reflects fee waivers and/or expense reimbursements.

 

Legg Mason Partners Appreciation Fund         39


 

For a share of each class of beneficial interest outstanding throughout each year ended December 31:   
Class I Shares(1)   2007(2)     2006(2)     2005(2)     2004(2)     2003(2)  

Net Asset Value, Beginning of Year

  $15.42     $14.38     $14.63     $13.76     $11.15  
   

Income From Operations:

         

Net investment income

  0.20     0.19     0.15     0.19     0.12  

Net realized and unrealized gain

  1.14     1.93     0.53     1.09     2.67  
   

Total Income From Operations

  1.34     2.12     0.68     1.28     2.79  
   

Less Distributions From:

         

Net investment income

  (0.19 )   (0.19 )   (0.14 )   (0.20 )   (0.18 )

Net realized gains

  (1.38 )   (0.89 )   (0.79 )   (0.21 )    
   

Total Distributions

  (1.57 )   (1.08 )   (0.93 )   (0.41 )   (0.18 )
   

Net Asset Value, End of Year

  $15.19     $15.42     $14.38     $14.63     $13.76  
   

Total Return(3)

  8.56 %   14.97 %   4.62 %   9.30 %   25.11 %
   

Net Assets, End of Year (millions)

  $765     $720     $667     $642     $474  
   

Ratios to Average Net Assets:

         

Gross expenses

  0.57 %   0.59 %(4)   0.57 %   0.57 %   0.59 %

Net expenses

  0.57     0.59 (4)(5)   0.57     0.55 (5)   0.59  

Net investment income

  1.22     1.24     1.00     1.35     0.96  
   

Portfolio Turnover Rate

  45 %   33 %   53 %   40 %   42 %
   

 

(1)

 

Per share amounts have been calculated using the average shares method.

 

(2)

 

Represents a share of capital stock outstanding prior to April 16, 2007.

 

(3)

 

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

 

(4)

 

Included in the expense ratios are certain non-recurring restructuring (and reorganization if applicable) fees that were incurred by the fund during the year. Without these fees, the gross and net expense ratios would both have been 0.57%.

 

(5)

 

Reflects fee waivers and/or expense reimbursements.

 

40         Legg Mason Partners Funds


 

For a share of each class of beneficial interest outstanding throughout each year ended December 31, unless otherwise noted:   
Class R Shares(1)   2007(2)     2006(2)(3)  

Net Asset Value, Beginning of Year

  $15.47     $15.53  
   

Income (Loss) From Operations:

   

Net investment income (loss)

  0.14     (0.00 )(4)

Net realized and unrealized gain (loss)

  1.09     (0.06 )
   

Total Income (Loss) From Operations

  1.23     (0.06 )
   

Less Distributions From:

   

Net investment income

  (0.09 )    

Net realized gains

  (1.38 )    
   

Total Distributions

  (1.47 )    
   

Net Asset Value, End of Year

  $15.23     $15.47  
   

Total Return(5)

  7.87 %   (0.39 )%
   

Net Assets, End of Year (000s)

  $449     $10  
   

Ratios to Average Net Assets:

   

Gross expenses

  1.13 %   1.22 %(6)(7)

Net expenses

  1.13     1.22 (6)(7)

Net investment income (loss)

  0.85     (0.28 )(7)
   

Portfolio Turnover Rate

  45 %   33 %
   

 

(1)

 

Per share amounts have been calculated using the average shares method.

 

(2)

 

Represents a share of capital stock outstanding prior to April 16, 2007.

 

(3)

 

For the period December 28, 2006 (inception date) to December 31, 2006.

 

(4)

 

Amount represents less than $0.01 per share.

 

(5)

 

Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

 

(6)

 

Included in the expense ratios are certain non-recurring restructuring (and reorganization if applicable) fees that were incurred by the fund during the year. Without these fees, the gross and net expense ratios would both have been 1.20%.

 

(7)

 

Annualized.

 

Legg Mason Partners Appreciation Fund         41


 

Legg Mason Partners Funds Privacy Policy

We are committed to keeping nonpublic personal information about you secure and confidential. This notice is intended to help you understand how we fulfill this commitment. From time to time, we may collect a variety of personal information about you, including:

n  

Information we receive from you on applications and forms, via the telephone, and through our websites;

n  

Information about your transactions with us, our affiliates, or others (such as your purchases, sales, or account balances); and

n  

Information we receive from consumer reporting agencies.

We do not disclose your nonpublic personal information, except as permitted by applicable law or regulation. For example, we may share this information with others in order to process your transactions. We may also provide this information to companies that perform services on our behalf, such as printing and mailing, or to other financial institutions with whom we have joint marketing agreements. We will require these companies to protect the confidentiality of this information and to use it only to perform the services for which we hired them.

With respect to our internal security procedures, we maintain physical, electronic, and procedural safeguards to protect your nonpublic personal information, and we restrict access to this information.

If you decide at some point either to close your account(s) or become an inactive customer, we will continue to adhere to our privacy policies and practices with respect to your nonpublic personal information.

[This page is not part of the prospectus.]

 


 

 

 

(Investment Company Act

file no. 811-6444)

FD0202 04/08

LOGO

Legg Mason Partners Appreciation Fund

 

You may visit the fund’s web site at http://www.leggmason.com/individualinvestors for a free copy of a Prospectus, Statement of Additional Information (“SAI”) or an Annual or Semi-Annual Report, or to request other information.

Shareholder reports Additional information about the fund’s investments is available in the fund’s Annual and Semi-Annual Reports to shareholders. In the fund’s Annual Report, you will find a discussion of the market conditions and investment strategies that significantly affected the fund’s performance.

The fund sends only one report to a household if more than one account has the same last name and same address. Contact your Service Agent or Legg Mason Partners Shareholder Services if you do not want this policy to apply to you.

Statement of additional information The SAI provides more detailed information about the fund and is incorporated by reference into (is legally a part of) this Prospectus.

You can make inquiries about the fund or obtain shareholders reports (without charge) by contacting your Service Agent, by calling Legg Mason Partners Shareholder Services at 800-451-2010, or by writing to the fund at Legg Mason Partners Funds, 55 Water Street, New York, New York 10041.

Information about the fund (including the SAI) can be reviewed and copied at the Securities and Exchange Commission’s (the “SEC”) Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-202-551-8090. Reports and other information about the fund are available on the EDGAR Database on the SEC’s Internet site at http://www.sec.gov. Copies of this information may be obtained for a duplicating fee by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-0102.

If someone makes a statement about the fund that is not in this Prospectus, you should not rely upon that information. Neither the fund nor the distributor is offering to sell shares of the fund to any person to whom the fund may not lawfully sell its shares.


PROSPECTUS

April 28, 2008

The Securities and Exchange Commission has not approved or disapproved these securities or determined whether this Prospectus is accurate or complete. Any statement to the contrary is a crime.

LOGO

Legg Mason Partners

Capital and Income Fund

Class A, B, C, FI, R and I Shares

 

 

 

INVESTMENT PRODUCTS: NOT FDIC INSURED Ÿ NO BANK GUARANTEE Ÿ MAY LOSE VALUE

 


 

SUPPLEMENT DATED APRIL 28, 2008 TO THE PROSPECTUS DATED APRIL 28, 2008 OF

LEGG MASON PARTNERS CAPITAL AND INCOME FUND

Investment minimums

Minimum initial and additional investment amounts vary depending on the class of shares you buy and the nature of your investment.

 

   

Investment Minimum

Initial/Additional Investment(1)

     Class A   Class B   Class C   Class FI   Class R  

Class I

General

  $ 500/$50   $ 500/$50   $ 500/$50   n/a   n/a   n/a
 

IRAs and Uniform Gifts or Transfers to Minor Accounts

  $ 250/$50   $ 250/$50   $ 250/$50   n/a   n/a   n/a
 

SIMPLE IRAs

  $ 1/$1   $ 1/$1   $ 1/$1   n/a   n/a   n/a
 

Systematic Investment Plans

  $ 25/$25   $ 25/$25   $ 25/$25   n/a   n/a   n/a
 

Clients of Eligible Financial Intermediaries

  $ 1/$1     n/a     n/a   None/None   n/a   None/None
 

Retirement Plans with omnibus accounts held on the books of the fund

    n/a     n/a     None/None   None/None   None/None   None/None
 

Other Retirement Plans

  $ 50/$50   $ 50/$50   $ 50/$50   n/a   n/a   n/a
 

Institutional Investors

  $ 500/$50   $ 500/$50   $ 500/$50   n/a   n/a   $1 million/None
 

 

(1)

 

Please refer to the section entitled “Retirement and institutional investors” for additional information regarding the investment minimum and eligibility requirements for Retirement Plans, Institutional Investors and Clients of Eligible Financial Intermediaries.

Effective July 1, 2008, the information shown above will no longer apply.

Instead, please refer to the section of the attached Prospectus titled “Choosing a class of shares to buy: investment minimums” for information concerning the minimum initial and additional amounts applicable to a purchase of fund shares.

 


Legg Mason Partners

Capital and Income Fund

Contents

 

Investments, risks and performance

  2

More on the fund’s investments

  7

Management

  11

Choosing a class of shares to buy

  14

Comparing the fund’s classes

  16

Sales charges

  18

More about contingent deferred sales charges

  22

Retirement and institutional investors

  23

Buying shares

  26

Exchanging shares

  27

Redeeming shares

  29

Other things to know about transactions

  31

Dividends, distributions and taxes

  35

Share price

  37

Financial highlights

  39

 

As part of a number of initiatives launched in 2006 to restructure and streamline the Legg Mason Partners fund complex, the fund assumed the assets and liabilities of a predecessor fund with the same name, effective April 16, 2007. Any information in this Prospectus relating to the fund prior to April 16, 2007 relates to the fund’s predecessor.


 

Investments, risks and performance

Investment objective

The fund seeks total return (that is, a combination of income and long-term capital appreciation).

Principal investment strategies

Key investments

The fund invests in equity and fixed income securities of both U.S. and foreign issuers. The fund seeks to generate income and appreciation by allocating fund assets to income and non-income producing equity and equity related securities, including common stocks, real estate investment trusts (“REITs”) and convertible securities. To generate income and enhance exposure to the equity markets, the fund may purchase investment grade and high yield fixed income securities or unrated securities of equivalent quality along with options on securities indices. Securities rated below investment grade are commonly referred to as “junk bonds.” Fixed income securities may be of any maturity.

By investing in a combination of equity and fixed income securities, the fund seeks to produce a pattern of total return that moves with the S&P 500 Index, while generating high income. The fund may also use options, futures and options on futures to increase exposure to part or all of the market or to hedge against adverse changes in the market value of its securities.

Selection process

The portfolio managers employ fundamental research and due diligence to assess a company’s:

n  

Growth potential, stock price, potential appreciation and valuation

n  

Credit quality, taking into account financial condition and profitability

n  

Future capital needs

n  

Potential for change in bond rating and industry outlook

n  

Competitive environment and management ability

Principal risks of investing in the fund

Investors could lose money on their investment in the fund, or the fund may not perform as well as other investments, if:

n  

The stock market declines generally, thereby reducing the value of the fund’s equity portfolio

n  

Companies in which the fund invests fail to meet earnings expectations, or fall out of favor with investors, or other events depress their stock prices

n  

Interest rates increase, causing the prices of fixed income securities to decline, thereby reducing the value of the fund’s fixed income portfolio

n  

The issuer of a security owned by the fund defaults on its obligation to pay principal and/or interest or has its credit rating downgraded

n  

The portfolio managers’ judgment about interest rates or the attractiveness, value or income potential of a particular security proves to be incorrect

 

2         Legg Mason Partners Funds


 

Investments in REITs expose the fund to risks similar to investing directly in real estate. The value of these underlying investments may be affected by changes in the value of the underlying real estate, the creditworthiness of the issuer of the investments, and changes in property taxes, interest rates and the real estate regulatory environment.

Convertible securities, which are debt securities that may be converted into stock, are subject to the market risks of stocks as well as the risks of debt securities.

Below investment grade securities, which are commonly known as “junk bonds,” are speculative and their issuers may have diminished capacity to pay principal and interest. These securities have a higher risk of default, tend to be less liquid, and may be more difficult to value. Changes in economic conditions or other circumstances are likely to weaken the capacity of issuers of these securities to make principal and interest payments.

In addition to the foregoing principal risks, the fund is also subject to risks associated with investing in foreign securities and derivatives. The risks are more fully described in “More on the fund’s investments.”

Who may want to invest

The fund may be an appropriate investment if you:

n  

Are seeking to invest in a portfolio that includes both equity and fixed income securities

n  

Are willing to accept the risks of both the stock market and the bond markets

Performance information

The following shows summary performance information for the fund in a bar chart and an Average Annual Total Returns table. The information provides an indication of the risks of investing in the fund by showing changes in its performance from year to year and by showing how the fund’s average annual returns compare with the returns of two broad-based securities market indices. The bar chart below shows performance of the fund’s Class B shares, but do not reflect the impact of sales charges (loads). If it did, the returns would be lower than those shown. Unlike the bar chart, the performance for Class A, B, C and I shares in the Average Annual Total Returns table reflects the impact of the maximum sales charge (load) applicable to the respective classes, and, where indicated, the performance for Class B shares reflects the impact of taxes paid on distributions and the redemption of shares at the end of the period. The performance information shown below includes that of the fund’s predecessor. No performance information is presented for Class FI or Class R shares because no Class FI or Class R shares were offered prior to the date of this Prospectus. The returns of Class FI and Class R shares would differ from those of other classes to the extent that these classes bear different expenses. The fund’s past performance, before and after taxes, is not necessarily an indication of how the fund will perform in the future.

 

Legg Mason Partners Capital and Income Fund         3


 

Total Return for Class B Shares

LOGO

Highest and Lowest Quarterly Returns (for the periods shown in the bar chart):

Highest: 13.62% in 2nd quarter 2003; Lowest: (11.99)% in 3rd quarter 2002.

 

Average Annual Total Returns (for periods ended December 31, 2007)

 

Class B Shares    1 Year    5 Years    10 Years    Since
Inception(5)
   Date of
Inception

Class B Return Before Taxes

   1.48%    13.09%    6.08%       9/16/85
 

Class B Return After Taxes
on Distributions(1)

   (2.16)%    11.06%    3.46%       9/16/85
 

Class B Return After Taxes on Distributions and Sale of
Fund Shares(1)

   1.77%    10.43%    3.82%       9/16/85
 
Other Classes (Return
Before Taxes Only)
                        

Class A Return Before Taxes(2)

   0.64%    12.47%    6.01%       11/6/92
 

Class C Return Before Taxes

   5.04%    12.94%    N/A    5.57%    6/15/98
 

Class I Return Before Taxes

   7.13%    14.23%    7.02%       2/7/96
 
Comparative Indexes                         

S&P 500 Index(3)

   5.49%    12.83%    5.91%       N/A
 

Lehman Brothers U.S. Aggregate Index(4)

   6.97%    4.42%    5.97%       N/A
 

 

(1)

 

After-tax returns are calculated using the highest historical individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and the after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In some cases the return after taxes may exceed the return before taxes due to an assumed tax benefit from any losses on a sale of fund shares at the end of the measurement period. After-tax returns shown above are for Class B shares only. After-tax returns for other share classes will vary.

 

(2)

 

On November 20, 2006, the maximum initial sales charge on Class A shares was increased for sales made on or after that date. The average annual returns for Class A shares in the table have been calculated as if the increased maximum initial sales charge had been in effect for the entire period.

 

 

(3)

 

The S&P 500 Index is a market value-weighted index comprised of 500 widely held common stocks, but reflects no deduction for fees, expenses or taxes. An investor cannot invest directly in the index.

 

(4)

 

The Lehman Brothers U.S. Aggregate Index covers the U.S. dollar-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. The index includes bonds from the U.S. Treasury, government-related, corporate, mortgage-backed securities, asset-backed securities, and commercial mortgage-back securities sectors. The index reflects no deduction for fees, expenses or taxes. An investor cannot invest directly in the index.

 

(5)

 

Information is provided only for classes with less than 10 years performance history.

 

4         Legg Mason Partners Funds


 

Fee table

This table sets forth the fees and expenses you may pay if you invest in fund shares.

Shareholder Fees

 

(paid directly from your
investment)
  Class A     Class B     Class C     Class FI(4)   Class R   Class I
Maximum sales charge (load) imposed on purchases (as a % of offering price)   5.75 %   None     None     None   None   None
 
Maximum contingent deferred sales charge (load) (as a % of the lower of net asset value at purchase or redemption)   None (1)   5.00 %   1.00 %   None   None   None
 

Annual Fund Operating Expenses

 

(paid by the fund as a % of
net assets)
  Class A     Class B     Class C     Class FI(4)     Class R     Class I  
Management fee(2)   0.72 %   0.72 %   0.72 %   0.72 %   0.72 %   0.72 %
   
Distribution and service (12b-1) fees   0.25 %   0.75 %   1.00 %   0.25 %   0.50 %   None  
   
Other expenses(3)   0.10 %   0.17 %   0.10 %   0.20 %   0.20 %   0.05 %
   
Total annual fund operating expenses   1.07 %   1.64 %   1.82 %   1.17 %   1.42 %   0.77 %
   

 

(1)

 

You may buy Class A shares in amounts of $1,000,000 or more at net asset value (without an initial sales charge), but if you redeem those shares within 12 months of their purchase, you will pay a contingent deferred sales charge of 1.00%.

 

(2)

 

The fund has a management fee schedule that reduces the management fee rate as assets increase as follows: 0.750% on assets up to and including $1 billion; 0.725% on assets over $1 billion and up to and including $2 billion; 0.700% on assets over $2 billion and up to and including $5 billion; 0.675% on assets over $5 billion and up to and including $10 billion; and 0.650% on assets over $10 billion.

 

(3)

 

With respect to Class A, Class B, Class C, Class FI, Class R and Class I shares (as applicable), the fund may pay a fee for recordkeeping services performed for the share class. As a result, the operating expenses of affected share classes may increase over time. The recordkeeping fee for Class I shares is newly adopted and is not reflected in the other expenses shown in the table above. The other expenses for Class FI and Class R have been estimated because no Class FI or Class R shares were offered prior to the date of this Prospectus.

 

(4)

 

The fund does not currently offer Class FI shares.

 

Legg Mason Partners Capital and Income Fund         5


 

Example

This example helps you compare the costs of investing in the fund with the costs of investing in other mutual funds. Your actual costs may be higher or lower. The example assumes:

n  

You invest $10,000 in the fund for the period shown

n  

Your investment has a 5% return each year — the assumption of a 5% return is required by the Securities and Exchange Commission (the “SEC”) for purposes of this example and is not a prediction of the fund’s future performance

n  

You reinvest all distributions and dividends without a sales charge

n  

The fund’s operating expenses (before fee waivers and/or expense reimbursements, if any) remain the same

Number of Years You Own Your Shares

 

Share Classes   1 year   3 years   5 years   10 years  

Class A (with or without redemption)

  $ 678   $ 896   $ 1,131   $ 1,806  
   

Class B (redemption at end of period)

  $ 667   $ 817   $ 991   $ 1,791 (1)
   

Class B (no redemption)

  $ 167   $ 517   $ 891   $ 1,791 (1)
   

Class C (redemption at end of period)

  $ 285   $ 573   $ 986   $ 2,138  
   

Class C (no redemption)

  $ 185   $ 573   $ 986   $ 2,138  
   

Class FI (with or without redemption)

  $ 119   $ 372   $ 644   $ 1,420  
   

Class R (with or without redemption)

  $ 145   $ 450   $ 777   $ 1,703  
   

Class I (with or without redemption)

  $ 79   $ 246   $ 428   $ 955  
   

 

(1)

 

Assumes conversion to Class A shares approximately eight years after purchase.

 

6         Legg Mason Partners Funds


 

More on the fund’s investments

The fund’s investment objective and principal investment strategies are described under the section entitled “Investments, risks and performance” above. This section provides further information about the investment strategies that may be used by the fund. The fund’s investment objective may be changed by the Board of Trustees without shareholder approval.

Equity securities

The fund’s investments in equity securities may include common stocks traded on an exchange or in the over-the-counter market, preferred stocks, warrants, rights, convertible securities, trust certificates, limited partnership interests, equity-linked debt securities, depository receipts, REITs and other equity participations.

Fixed income securities

The fund’s investments in fixed income securities may include bonds, notes (including structured notes), mortgage-related and asset-backed securities, convertible securities, preferred stocks and money market instruments. Fixed income securities may have all types of interest rate, payment and reset terms, including fixed rate, adjustable rate, zero coupon, contingent, deferred, payment in kind and auction rate features.

Foreign and emerging market investments

The fund may invest in foreign securities, including emerging market issuers, or invest in depositary receipts. Because the value of a depositary receipt is dependent upon the market price of an underlying foreign security, depositary receipts are subject to most of the risks associated with investing in foreign securities directly. Investing in foreign issuers, including emerging market issuers, may involve additional risks compared to investing in the securities of U.S. issuers. Some of these risks do not apply to larger more developed countries. These risks are more pronounced to the extent the fund invests in issuers in countries with emerging markets or if the fund invests significantly in one country. These risks may include:

n  

Prices of foreign securities may go down because of foreign government actions, political instability or the more limited availability of accurate information about foreign companies;

n  

Currency fluctuations could erase investment gains or add to investment losses;

n  

Less information about non-U.S. issuers or markets may be available due to less rigorous disclosure and accounting standards or regulatory practices;

n  

Many non-U.S. markets are smaller, less liquid and more volatile than U.S. markets. In a changing market, the portfolio managers may not be able to sell the portfolio’s securities in amounts and at prices the portfolio managers consider reasonable or the fund may have difficulty determining the fair value of its securities;

n  

The U.S. dollar may appreciate against non-U.S. currencies or a foreign government may impose restrictions on currency conversion or trading;

n  

The economies of non-U.S. countries may grow at a slower rate than expected or may experience a downturn or recession; and

 

Legg Mason Partners Capital and Income Fund         7


 

n  

Economic, political and social developments may adversely affect non-U.S. securities markets.

Derivative contracts

The fund may, but need not, use derivative contracts, such as futures, options on securities, securities indices and futures, forward foreign currency contracts and swaps, for the following purposes:

n  

To hedge against the economic impact of adverse changes in the market value of portfolio securities, because of changes in stock market prices, interest rates or currency exchange rates

n  

As a substitute for buying or selling securities

n  

As a cash flow management technique

n  

To increase the fund’s total return

A derivative contract will obligate or entitle the fund to deliver or receive an asset or cash payment based on the change in value of one or more securities, indices or currencies. The fund may use derivatives to gain exposure to a security, issuer or market. The fund may from time to time sell protection on debt securities by entering into credit default swaps, a type of derivative transaction. In return for periodic payments, the fund is obligated to pay the counterparty if the bond which is the subject of the credit default swap defaults or is subject to a specified credit event. As the seller the fund could be considered leveraged because, in addition to the investment exposure that it has on its assets, the fund is subject to investment exposure on the notional amount of the swap.

Even a small investment in derivative contracts can have a large impact on a fund’s stock price, and interest rate and currency exposure. Therefore, using derivatives can disproportionately increase losses and reduce opportunities for gains when stock price, interest rates or currency exchange rates are changing. The fund may not fully benefit from or may lose money on derivatives if changes in their value do not correspond accurately to changes in the value of the fund’s holdings. The other parties to certain derivative contracts present the same types of default risk as issuers of fixed income securities. Derivatives can also make a fund less liquid and harder to value, especially in declining markets.

Mortgage-backed and asset-backed securities

The fund may invest in mortgage-backed and asset-backed securities. Mortgage-backed securities may be issued by private companies including government related entities such as Fannie Mae or Freddie Mac or by agencies of the U.S. government and represent direct or indirect participations in, or are collateralized by and payable from, mortgage loans secured by real property. Unlike mortgage-related securities issued or guaranteed by the U.S. government or its agencies and instrumentalities, mortgage-related securities issued by private issuers do not have a government or government-sponsored entity guarantee (but may have other credit enhancements), and may, and frequently do, have less favorable collateral, credit risk or other underwriting characteristics. Asset-backed securities represent participations in, or are secured by and payable from, assets such as installment sales or loan contracts, leases, credit card receivables and other categories of receivables. Certain asset-backed securities present a heightened level of risk because, in the event of default, the

 

8         Legg Mason Partners Funds


 

liquidation value of the underlying assets may be inadequate to pay any unpaid principal or interest or may be nonexistent.

Certain debt instruments may only pay principal at maturity or may only represent the right to receive payments of principal or payments of interest on underlying pools of mortgages or government securities, but not both. The value of these types of instruments may change more drastically than debt securities that pay both principal and interest during periods of changing interest rates. Interest-only and principal-only mortgage-backed securities are especially sensitive to interest rate changes, which can affect not only their prices but can also change the prepayment assumptions about those investments and income flows the fund receives from them. For mortgage derivatives and structured securities that have embedded leverage features, small changes in interest or prepayment rates may cause large and sudden price movements. Mortgage derivatives can also become illiquid and hard to value in declining markets.

Mortgage dollar rolls

The fund may enter into dollar rolls in which the fund sells mortgage-backed securities for delivery in the current month, realizing a gain or loss, and simultaneously contracts to repurchase substantially similar (same type, coupon and maturity) securities to settle on a specified future date. During the roll period, the fund forgoes interest paid on the securities. The fund is compensated by the interest earned on the cash proceeds of the initial sale and by the lower repurchase price at the specified future date. The fund maintains a segregated account, the dollar value of which is at least equal to its obligations with respect to dollar rolls.

The fund executes its mortgage dollar rolls entirely in the to-be-announced (“TBA”) market, where the fund makes a forward commitment to purchase a security and, instead of accepting delivery, the position is offset by a sale of the security with a simultaneous agreement to repurchase at a future date.

The obligation to repurchase securities on a specified future date involves the risk that the market value of the securities the fund is obligated to repurchase under the agreement may decline below the repurchase price. In the event the buyer of securities under a mortgage dollar roll files for bankruptcy, becomes insolvent or defaults on its obligations, the fund’s use of proceeds of the dollar roll may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the fund’s obligation to repurchase the securities. Dollar roll transactions may result in a form of leverage that increases the fund’s sensitivity to interest rate changes and may increase the overall risk of investing in the fund.

Short sales

The fund may sell securities short from time to time. The fund may hold no more than 25% of the fund’s net assets (taken at the then-current market value) as required collateral for such sales at any one time. A short sale is a transaction in which the fund sells securities it does not own in anticipation of a decline in the market price of the securities. A short sale of a security involves the risk that instead of declining, the price of the security sold short will rise. If the price of the security sold short increases between the time of the short sale and the time the fund replaces the borrowed security, the fund will incur a loss; con-

 

Legg Mason Partners Capital and Income Fund         9


 

versely, if the price declines, the fund will realize a gain. The short sale of securities involves the possibility of a theoretically unlimited loss since there is a theoretically unlimited potential for the market price of the security sold short to increase.

Defensive investing

The fund may depart from its principal investment strategies in response to adverse market, economic or political conditions by taking temporary defensive positions in any type of money market instruments and short-term debt securities or cash without regard to any percentage limitations. If the fund takes a temporary defensive position, it may be unable to achieve its investment objective.

Portfolio holdings

The fund’s policies and procedures with respect to the disclosure of the fund’s portfolio securities are described in the Statement of Additional Information (the “SAI”).

Other information

The fund may also use other strategies and invest in other securities that are described, along with their risks, in the fund’s SAI. However, the fund might not use all of the strategies and techniques or invest in all of the types of securities described in this Prospectus or in the SAI. Also note that there are many other factors, which are not described here, that could adversely affect your investment and that could prevent the fund from achieving its investment objective.

 

10         Legg Mason Partners Funds


 

Management

Manager and subadvisers

Legg Mason Partners Fund Advisor, LLC (“LMPFA” or the “manager”) is the fund’s investment manager. LMPFA, with offices at 620 Eighth Avenue, New York, New York 10018, also serves as the investment manager of other Legg Mason-sponsored funds. LMPFA provides administrative and certain oversight services to the fund. As of December 31, 2007, LMPFA’s total assets under management were approximately $193 billion.

ClearBridge Advisors, LLC (“ClearBridge”), Western Asset Management Company (“Western Asset”) and Western Asset Management Company Limited (“Western Asset Limited” and, together with ClearBridge and Western Asset, the “subadvisers”) provide the day-to-day portfolio management of the fund.

ClearBridge has offices at 620 Eighth Avenue, New York, New York 10018 and is an investment adviser that was formed to succeed to the equity securities portfolio management business of Citigroup Asset Management (“CAM”), which was acquired by Legg Mason, Inc. (“Legg Mason”) in December 2005. As of December 31, 2007, ClearBridge’s total assets under management were approximately $100.5 billion.

Western Asset, established in 1971, has offices at 385 East Colorado Boulevard, Pasadena, California 91101. Western Asset Limited has offices at 10 Exchange Place, London, England. Western Asset and Western Asset Limited act as investment advisers to institutional accounts, such as corporate pension plans, mutual funds and endowment funds. As of December 31, 2007, Western Asset’s total assets under management were approximately $457 billion, and Western Asset Limited’s total assets under management were approximately $104 billion.

LMPFA, ClearBridge, Western Asset and Western Asset Limited are wholly-owned subsidiaries of Legg Mason. Legg Mason, whose principal executive offices are at 100 Light Street, Baltimore, Maryland 21202, is a global asset management company. As of December 31, 2007, Legg Mason’s asset management operation had aggregate assets under management of approximately $998 billion.

Portfolio managers

Robert Gendelman is lead portfolio manager of the fund with portfolio management responsibility for overseeing the fund’s allocation between equity and fixed-income securities as well as the fund’s equity investments in general. Mr. Gendelman has been a portfolio manager of the fund since July 2006.

Mr. Gendelman joined ClearBridge as a portfolio manager and Managing Director in July of 2006. Mr. Gendelman was employed by Cobble Creek Partners, L.P., a registered investment adviser, beginning in October 2003 and prior to that time was a portfolio manager at Neuberger and Berman for more than five years.

S. Kenneth Leech, Stephen A. Walsh, Jeffrey D. Van Schaick, Keith J. Gardner and Detlev S. Schlichter, each of whom is associated with Western Asset, serve as portfolio managers of the fixed income portion of the fund. Messrs. Leech and Walsh have been involved in the day-to-day management of the fixed income portion of the fund since March 2006, while Messrs. Van Schaick and Gardner became co-portfolio managers in April 2007. Mr. Schlichter became a co-portfolio manager in May 2007.

 

Legg Mason Partners Capital and Income Fund         11


 

These portfolio managers lead a larger team and their focus is on portfolio structure, including sector allocation, duration weighting and term structure decisions.

Messrs. Leech, Walsh, Van Schaick, Gardner and Schlichter are portfolio managers of Western Asset and have been employed by Western Asset for at least the past five years.

The SAI provides information about the compensation of the portfolio managers, other accounts they manage, and any fund shares held by the portfolio managers.

Management fee

For the fiscal year ended December 31, 2007, the fund paid a management fee after waiver and/or expense reimbursement of 0.72% of the fund’s average daily net assets for management services.

A discussion regarding the basis for the Board’s approval of the fund’s current management agreement and subadvisory agreements is available in the fund’s Annual Report for the fiscal year ended December 31, 2007.

Distribution plan

Legg Mason Investor Services, LLC (“LMIS” or the “distributor”), a wholly-owned broker/dealer subsidiary of Legg Mason, serves as the fund’s sole and exclusive distributor.

The fund has adopted a shareholder services and distribution plan for its Class A, B, C, FI and R shares. Under the plan, the fund pays distribution and/or service fees. The plan provides for payments, based on annualized percentages of average daily net assets, of up to 0.25% for Class A and FI shares; up to 0.75% for Class B shares; up to 0.50% for Class R shares; and up to 1.00% for Class C shares. These fees are an ongoing expense and, over time, will increase the cost of your investment and may cost you more than other types of sales charges. Class I shares are not subject to any distribution and/or service fees.

In addition, the distributor may make payments for distribution and/or shareholder servicing activities out of its past profits and other available sources. The distributor may also make payments to dealers for marketing, promotional or related expenses. The amount of these payments is determined by the distributor and may be substantial. The manager or an affiliate may make similar payments under similar arrangements.

The payments described in the paragraph above are often referred to as “revenue sharing payments.” The recipients of such payments may include the fund’s distributor, affiliates of the manager, broker/dealers, financial institutions and other financial intermediaries through which investors may purchase shares of the fund. In some circumstances, such payments may create an incentive for an intermediary or its employees or associated persons to recommend or sell shares of the fund to you. Please contact your financial intermediary for details about revenue sharing payments it may receive.

Recent developments

On May 31, 2005, the SEC issued an order in connection with the settlement of an administrative proceeding against Smith Barney Fund Management, LLC (“SBFM”), the then-investment adviser or manager to the fund, and Citigroup Global Markets Inc. (“CGMI”), a former distributor of the fund, relating to the appointment of an affiliated transfer agent for the Smith Barney family of mutual funds, including the fund (the “Affected Funds”).

The SEC order found that SBFM and CGMI willfully violated Section 206(1) of the Investment Advisers Act of 1940, as amended, and the rules promulgated thereunder (the “Advisers Act”). Specifically, the order found that SBFM and CGMI knowingly or reck-

 

12         Legg Mason Partners Funds


 

lessly 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 CAM, the Citigroup Inc. (“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 CGMI. The order also found that SBFM and CGMI 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 limited 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 CGMI 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 CGMI and ordered them to cease and desist from violations of Sections 206(1) and 206(2) of the Advisers Act. The order required 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 held in escrow 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 CGMI 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 Affected Funds’ boards selected a new transfer agent for the Affected Funds. 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, the manager does not believe that this matter will have a material adverse effect on the Affected Funds.

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

 

Legg Mason Partners Capital and Income Fund         13


 

Choosing a class of shares to buy

Individual investors can generally choose among three classes of shares: Classes A, B and C shares. Individual investors that held Class I shares prior to November 20, 2006, may continue to invest in Class I shares. Institutional and retirement plan investors and clients of financial intermediaries should refer to “Retirement and institutional investors” below for a description of the classes available to them.

Each class has different sales charges and expenses, allowing you to choose the class that best meets your needs. When choosing which class of shares to buy, you should consider:

n  

How much you plan to invest

n  

How long you expect to own the shares

n  

The expenses paid by each class detailed in the Fee table and Example at the front of this Prospectus

n  

Whether you qualify for any reduction or waiver of sales charges

If you are choosing between Class A and Class B shares, it will in almost all cases be the more economical choice for you to purchase Class A shares if you plan to purchase shares in an amount of $100,000 or more (whether in a single purchase or through aggregation of eligible holdings). This is because of the reduced sales charges available on larger investments of Class A shares and the lower ongoing expenses of Class A shares compared to Class B shares.

If you intend to invest for only a few years, the effect of Class B contingent deferred sales charges on redemptions made within five years of purchase, as well as the effect of higher expenses of that class, might make an investment in Class C more appropriate. There is no initial sales charge on Class C shares, and the contingent deferred sales charge does not apply to shares redeemed one year or more after purchase.

However, if you plan to invest a large amount and your investment horizon is five years or more, Class C shares might not be as advantageous as Class A shares. The annual distribution and service fees on Class C shares may cost you more over the longer term than the front-end sales charge you would have paid for larger purchases of Class A shares.

You may buy shares:

n  

Through banks, brokers, dealers, insurance companies, investment advisers, financial consultants or advisors, mutual fund supermarkets and other financial intermediaries that have entered into an agreement with the distributor to sell shares of the fund (each called a “Service Agent”)

n  

Directly from the fund

Different types of shareholder services may be available to you under arrangements offered by different Service Agents. In addition, these services may vary depending on the share class in which you choose to invest. In making your decision regarding which share class to buy, please keep in mind that your Service Agent may receive different compensation depending on the share class in which you invest. Investors should consult with their Service Agent about comparative pricing of shareholder services available to them under each available share class, the compensation that will be received by their Service Agent in connection with each available share class, and other factors that may be relevant to the investor’s choice of share class in which to invest.

Not all classes of shares are available through each Service Agent. You should contact your Service Agent for further information about available share classes.

 

14         Legg Mason Partners Funds


 

Investment minimums

Minimum initial and additional investment amounts vary depending on the class of shares you buy and the nature of your investment.

 

   

Investment Minimum

Initial/Additional Investment(1)(2)

(effective July 1, 2008)

     Class A     Class B   Class C   Class FI(5)   Class R   Class I

General

  $ 1,000/$50     $ 1,000/$50   $ 1,000/$50   n/a   n/a   n/a
 

Uniform Gifts or Transfers to Minor Accounts

  $ 1,000/$50     $ 1,000/$50   $ 1,000/$50   n/a   n/a  
 

IRAs

  $ 250/$50     $ 250/$50   $ 250/$50   n/a   n/a   n/a
 

SIMPLE IRAs

    None/None       None/None     None/None   n/a   n/a   n/a
 

Systematic Investment Plans

  $ 50/$50     $ 50/$50   $ 50/$50   n/a   n/a   n/a
 

Clients of Eligible Financial Intermediaries

    None/None       n/a     n/a   None/None   n/a   None/None
 

Retirement Plans with omnibus accounts held on the books of the fund

    None/None (3)     n/a(4)     None/None   None/None   None/None   n/a
 

Other Retirement Plans

    None/None       None/None     None/None   n/a   n/a   n/a
 

Institutional Investors

  $ 1,000/$50     $ 1,000/$50   $ 1,000/$50   n/a   n/a   $1 million/None
 

 

(1)

 

For information regarding investment minimums prior to July 1, 2008, please refer to the supplement at the front of this Prospectus.

 

(2)

 

Different minimums may apply to clients and certain Service Agents. Contact your Service Agent for additional information. Please refer to the section entitled “Retirement and institutional investors” for additional information regarding the investment minimum and eligibility requirements for Retirement Plans, Institutional Investors and Clients of Eligible Financial Intermediaries.

 

(3)

 

Class A shares are not available to new Retirement Plan Investors through a Service Agent if the Service Agent makes Class FI shares available.

 

(4)

 

Retirement Plans that held Class B shares prior to December 1, 2006 are permitted to make additional investments in that class.

 

(5)

 

The fund does not currently offer Class FI shares.

More information about the fund’s classes of shares is available through the Legg Mason Partners funds’ website. You’ll find detailed information about sales charges and ways you can qualify for reduced or waived sales charges, including:

n  

The front-end sales charges that apply to the purchase of Class A shares

n  

The contingent deferred sales charges that apply to the redemption of Class B shares, Class C shares and certain Class A shares (redeemed within one year)

n  

Who qualifies for lower sales charges on Class A shares

n  

Who qualifies for a sales load waiver

To access the website, go to http://www.leggmason.com/individualinvestors and click on the name of the fund.

 

Legg Mason Partners Capital and Income Fund         15


 

Comparing the fund’s classes

The following table compares key features of the fund’s classes. You should review the Fee table and Example at the front of this Prospectus carefully before choosing your share class. Your Service Agent can help you decide which class meets your goals. Your Service Agent may receive different compensation depending upon which class you choose. Please ask your Service Agent regarding the availability of Class FI or Class R.

 

     Class A   Class B   Class C   Class FI(2)   Class R  

Class I

(formerly Y)

Key features  

n  Initial sales charge

n  You may qualify for reduction or waiver of initial sales charge

n  Generally lower annual expenses than Class B and Class C

 

n  No initial sales charge

n  Contingent deferred sales charge declines over time

n  Converts to Class A after approximately 8 years

n  Generally higher annual expenses than Class A

 

n  No initial sales charge

n  Contingent deferred sales charge for only 1 year

n  Does not convert to Class A

n  Generally higher annual expenses than Class A

 

n  No initial or contingent deferred sales charge

n  Only offered to Clients of Eligible Financial Intermediaries and eligible Retirement Plans

 

n  No initial or contingent deferred sales charge

n  Only offered to eligible Retirement Plans with omnibus accounts held on the books of the fund

 

n  No initial or contingent deferred sales charge

n  Only offered to institutional and other eligible investors

n  Generally lower annual expenses than the other classes

Initial sales charge  

Up to 5.75%; reduced or waived for large purchases and certain investors. No charge for purchases of $1 million or more

 

None

 

None

 

None

 

None

 

None

 

16         Legg Mason Partners Funds


 

     Class A   Class B   Class C   Class FI(2)   Class R  

Class I

(formerly Y)

Contingent deferred sales charge  

1.00% on purchases of $1 million or more if you redeem within 1 year of purchase; waived for certain investors

 

Up to 5.00% charged when you redeem shares. This charge is reduced over time and there is no contingent deferred sales charge after 5 years; waived for certain investors

 

1.00% if you redeem within 1 year of purchase; waived for certain investors

 

None

 

None

 

None

Annual distribution and/or service fees  

0.25% of average daily net assets

 

0.75% of average daily net assets

 

1.00% of average daily net assets

 

0.25% of average daily net assets

 

0.50% of average daily net assets

 

None

Exchange privilege(1)  

Class A shares of most Legg Mason Partners funds

 

Class B shares of most Legg Mason Partners funds

 

Class C shares of most Legg Mason Partners funds

 

Class FI shares of applicable Legg Mason Partners funds

 

Class R shares of applicable Legg Mason Partners funds

 

Class I shares of most Legg Mason Partners funds

 

(1)

 

Ask your Service Agent about the Legg Mason Partners Funds available for exchange.

 

(2)

 

The fund does not currently offer Class FI shares.

 

Legg Mason Partners Capital and Income Fund         17


 

Sales charges

Class A shares

You buy Class A shares at the offering price, which is the net asset value plus a sales charge. You pay a lower rate as the size of your investment increases to certain levels called breakpoints. You do not pay a sales charge on the fund’s distributions or dividends you reinvest in additional Class A shares.

The table below shows the rate of sales charge you pay, depending on the amount you purchase. The table below also shows the amount of broker/dealer compensation that will be paid out of the sales charge if you buy shares from a Service Agent (except Primerica Financial Services (“PFS”)). For Class A shares sold by LMIS, LMIS will receive the sales charge imposed on purchases of Class A shares (or any contingent deferred sales charge paid on redemptions) and will retain the full amount of such sales charge. For Class A shares sold by PFS from December 1, 2007 through the close of business on May 31, 2008, PFS will receive the sales charge imposed on purchases of Class A shares (or any contingent deferred sales charge paid on redemptions) and will retain the full amount of such sales charge. Thereafter, PFS will receive the same level of compensation as other Service Agents. Service Agents will also receive a service fee payable on Class A shares at an annual rate of up to 0.25% of the average daily net assets represented by the Class A shares serviced by them.

 

Amount of investment  

Sales Charge

as a % of

offering price

  Sales Charge as
a % of net
amount invested
  Broker/Dealer
Commission
as % of
offering price

Less than $25,000

  5.75   6.10   5.00
 

$25,000 but less than $50,000

  5.00   5.26   4.25
 

$50,000 but less than $100,000

  4.50   4.71   3.75
 

$100,000 but less than $250,000

  3.50   3.63   2.75
 

$250,000 but less than $500,000

  2.50   2.56   2.00
 

$500,000 but less than $750,000

  2.00   2.04   1.60
 

$750,000 but less than $1 million

  1.50   1.52   1.20
 

$1 million or more(1)

  -0-   -0-   up to 1.00
 

 

(1)

 

The distributor may pay a commission of up to 1.00% to a Service Agent for purchase amounts of $1 million or more. In such cases, starting in the thirteenth month after purchase, the Service Agent will also receive an annual distribution/service fee of up to 0.25% of the average daily net assets represented by the Class A shares held by its clients. Prior to the thirteenth month, the distributor will retain this fee. Where the Service Agent does not receive the payment of this commission, the Service Agent will instead receive the annual distribution/service fee starting immediately after purchase. Please contact your Service Agent for more information.

Investments of $1,000,000 or more

You do not pay an initial sales charge when you buy $1,000,000 or more of Class A shares. However, if you redeem these Class A shares within one year of purchase, you will pay a contingent deferred sales charge of 1.00%.

 

18         Legg Mason Partners Funds


 

Qualifying for a reduced Class A sales charge

There are several ways you can combine multiple purchases of Class A shares of Legg Mason Partners funds to take advantage of the breakpoints in the sales charge schedule. In order to take advantage of reductions in sales charges that may be available to you when you purchase fund shares, you must inform your Service Agent or the transfer agent if you are eligible for a letter of intent or a right of accumulation and if you own shares of other Legg Mason Partners funds that are eligible to be aggregated with your purchases. Certain records, such as account statements, may be necessary in order to verify your eligibility for reduced sales charges.

n  

Accumulation Privilege – allows you to combine the current value of Class A shares of the fund with other shares of Legg Mason Partners funds that are owned by:

  ¨  

you; or

  ¨  

your spouse and children under the age of 21

with the dollar amount of your next purchase of Class A shares for purposes of calculating the initial sales charge.

Shares of certain money market funds advised by the manager or its affiliates (other than money market fund shares acquired by exchange from other Legg Mason Partners funds offered with a sales charge), Legg Mason Partners S&P 500 Index Fund and Class O shares of Legg Mason Partners Equity Fund may not be combined.

If you hold shares of Legg Mason Partners funds in accounts at two or more Service Agents, please contact your Service Agents to determine which shares may be combined.

Certain trustees and fiduciaries may be entitled to combine accounts in determining their sales charge.

n  

Letter of Intent – allows you to purchase Class A shares of Legg Mason Partners funds over a 13-month period and pay the same sales charge on Class A shares, if any, as if all shares had been purchased at once. At the time you enter into the letter of intent, you select your asset goal amount. Generally, purchases of Legg Mason Partners fund shares that are purchased during the 13-month period by:

  ¨  

you; or

  ¨  

your spouse and children under the age of 21

are eligible for inclusion under the letter, based on the public offering price at the time of the purchase, and any capital appreciation on those shares. Purchases made 90 days prior to the 13-month period are also eligible to be treated as purchases made under the letter of intent. In addition, you can include towards your asset goal amount the current value of any eligible purchases that were made prior to the date of entering into the letter of intent and are still held.

If you hold shares of Legg Mason Partners funds in accounts at two or more Service Agents, please contact your Service Agents to determine which shares may be credited toward your letter of intent asset goal.

Shares of certain money market funds advised by the manager or its affiliates (other than money market fund shares acquired by exchange from other Legg Mason Partners funds offered with a sales charge), Legg Mason Partners S&P 500 Index Fund and Class O shares of Legg Mason Partners Equity Fund may not be credited toward your letter of intent asset goal.

If you do not meet your asset goal amount, shares in the amount of any sales charges due, based on the amount of your actual purchases, will be redeemed from your account.

 

Legg Mason Partners Capital and Income Fund         19


 

Waivers for certain Class A investors

Class A initial sales charges are waived for certain types of investors, including:

n  

Employees of Service Agents having dealer, service or other selling agreements with the fund’s distributor

n  

Investors who redeemed Class A shares of a Legg Mason Partners fund in the past 60 days, if the investor’s Service Agent is notified

n  

Directors and officers of any Legg Mason-sponsored fund

n  

Employees of Legg Mason and its subsidiaries

n  

Investors investing through certain retirement plans

If you qualify for a waiver of the Class A initial sales charge, you must notify your Service Agent or the transfer agent at the time of purchase and provide sufficient information at the time of purchase to permit verification that the purchase qualifies for the initial sales charge waiver.

If you want to learn about additional waivers of Class A initial sales charges, contact your Service Agent, consult the SAI or access the Legg Mason Partners funds’ website: http://www.leggmason.com/individualinvestors and click on the name of the fund.

Class B shares

You buy Class B shares at net asset value without paying an initial sales charge. However, if you redeem your Class B shares within five years of your purchase payment, you will pay a contingent deferred sales charge. The contingent deferred sales charge decreases as the number of years since your purchase payment increases.

 

Year after purchase   1st     2nd     3rd     4th     5th     6th through 8th  

Contingent deferred sales charge

  5 %   4 %   3 %   2 %   1 %   0 %
   

LMIS will generally pay Service Agents, other than PFS, selling Class B shares a commission of up to 4.00% of the purchase price of the Class B shares they sell, and LMIS will retain the contingent deferred sales charges. For Class B shares sold by PFS, PFS pays a commission of up to 4.00% of the purchase price of the Class B shares sold by its agents and retains the contingent deferred sales charges paid upon certain redemptions. PFS will receive any service and distribution fees paid on all shares held by PFS clients. Service Agents also receive an annual distribution/service fee of up to 0.25% of the average daily net assets represented by the Class B shares serviced by them.

 

20         Legg Mason Partners Funds


 

Class B conversion

After approximately 8 years, Class B shares automatically convert into Class A shares. This helps you because Class A shares have lower annual expenses. Your Class B shares will convert to Class A shares as follows:

 

Shares issued:
At initial purchase
   Shares issued:
On reinvestment of
dividends and
distributions
  

Shares issued:

Upon exchange from
another Legg Mason
Partners fund

Approximately 8 years after the date of
purchase payment
   In same proportion as the number of Class B shares converting is to total Class B shares you own (excluding shares issued as dividends)   

On the date the shares originally acquired

would have converted into Class A shares

 

Class C shares

You buy Class C shares at net asset value without paying an initial sales charge. However, if you redeem your Class C shares within one year of purchase, you will pay a contingent deferred sales charge of 1.00%.

LMIS will generally pay Service Agents selling Class C shares a commission of up to 1.00% of the purchase price of the Class C shares they sell and LMIS will retain the contingent deferred sales charges and an annual distribution/service fee of up to 1.00% of the average daily net assets represented by the Class C shares serviced by these Service Agents until the thirteenth month after purchase. Starting in the thirteenth month after purchase, these Service Agents will receive an annual distribution/service fee of up to 1.00% of the average daily net assets represented by the Class C shares serviced by them.

Class FI, Class R and Class I shares

Class FI, Class R and Class I shares are purchased at net asset value with no initial sales charge and no contingent deferred sales charge when redeemed. Service Agents will receive a distribution/service fee at an annual rate of up to 0.25% of the average daily net assets represented by Class FI shares and up to 0.50% of the average daily net assets represented by Class R shares. The fund does not currently offer Class FI shares.

 

Legg Mason Partners Capital and Income Fund         21


 

More about contingent deferred sales charges

The contingent deferred sales charge is based on the net asset value at the time of purchase or redemption, whichever is less, and therefore you do not pay a sales charge on amounts representing appreciation or depreciation.

In addition, you do not pay a contingent deferred sales charge:

n  

When you exchange shares for shares of another Legg Mason Partners fund

n  

On shares representing reinvested distributions and dividends

n  

On shares no longer subject to the contingent deferred sales charge

Each time you place a request to redeem shares, the fund will first redeem any shares in your account that are not subject to a contingent deferred sales charge and then the shares in your account that have been held the longest.

If you redeemed shares of a Legg Mason Partners fund and paid a contingent deferred sales charge, you may, under certain circumstances, reinvest all or part of the redemption proceeds within 60 days and receive pro rata credit for any contingent deferred sales charge imposed on the prior redemption. Please contact your Service Agent for additional information.

The fund’s distributor receives contingent deferred sales charges as partial compensation for its expenses in selling shares, including the payment of compensation to your Service Agent.

Contingent deferred sales charge waivers

The contingent deferred sales charge for each share class will generally be waived:

n  

On payments made through certain systematic withdrawal plans

n  

On certain distributions from a retirement plan

n  

For retirement plans with omnibus accounts held on the books of the fund

n  

For involuntary redemptions of small account balances

n  

For 12 months following the death or disability of a shareholder

If you want to learn more about additional waivers of contingent deferred sales charges, contact your Service Agent, consult the SAI or access the Legg Mason Partners funds’ website: http://www.leggmason.com/individualinvestors and click on the name of the fund.

 

22         Legg Mason Partners Funds


 

Retirement and institutional investors

Eligible investors

Retirement Plans

Retirement Plans with omnibus accounts held on the books of the fund can generally choose among four classes of shares: Class C, Class R, Class FI and Class I shares.

Class A and Class B shares are no longer offered through Service Agents for Retirement Plans with omnibus accounts held on the books of the fund, with limited exceptions. Class A shares will cease to be available to new Retirement Plan investors through a Service Agent if the Service Agent makes Class FI shares available. Please see below for additional information.

“Retirement Plans” include 401(k) plans, 457 plans, employer-sponsored 403(b) plans, profit-sharing plans, non-qualified deferred compensation plans and other similar employer-sponsored retirement plans. Retirement Plans do not include individual retirement vehicles, such as traditional and Roth IRAs, Coverdell education savings accounts, individual 403(b)(7) custodial accounts, Keogh plans, SEPs, SARSEPs, SIMPLE IRAs, or Section 529 savings accounts. Although Retirement Plans with omnibus accounts held on the books of the fund are not subject to minimum initial investment requirements for any of these share classes, certain investment minimums may be imposed by a financial intermediary.

Other Retirement Plans

Other Retirement Plans can generally choose among three classes of shares: Class A, Class B and Class C. “Other Retirement Plans” include Retirement Plans investing through brokerage accounts, and also include certain Retirement Plans with direct relationships to the fund that are neither Institutional Investors nor investing through omnibus accounts. Individual retirement vehicles, such as IRAs, may also choose among these share classes. Other Retirement Plans and individual retirement vehicles are treated like individual investors for purposes of determining sales charges and any applicable sales charge reductions or waivers.

Clients of Eligible Financial Intermediaries

Clients of Eligible Financial Intermediaries may generally choose among three classes of shares: Class A, Class FI and Class I. “Clients of Eligible Financial Intermediaries” are investors who invest in the fund through financial intermediaries that offer their clients fund shares through investment programs as authorized by LMIS. Such investment programs may include fee-based advisory account programs and college savings vehicles such as Section 529 plans. The financial intermediary may impose separate investment minimums.

Institutional Investors

Institutional Investors may invest in Class I shares if they meet the $1,000,000 minimum initial investment requirement. Institutional Investors may also invest in Class A, B and C shares, which have different investment minimums and fees and expenses. “Institutional Investors” generally include corporations, banks, trust companies, insurance companies, investment companies, foundations, endowments, pension and profit-sharing plans and other similar entities with direct relationships to the fund.

 

Legg Mason Partners Capital and Income Fund         23


 

Class C — Retirement Plans

Retirement Plans with omnibus accounts held on the books of the fund may buy Class C shares without paying a contingent deferred sales charge. LMIS does not pay Service Agents selling Class C shares to Retirement Plans with omnibus accounts held on the books of the fund a commission on the purchase price of Class C shares sold by them. Instead, immediately after purchase, LMIS may pay these Service Agents an annual distribution/service fee of up to 1.00% of the average daily net assets represented by the Class C shares serviced by them.

Certain Retirement Plan programs with exchange features in effect prior to November 20, 2006, as approved by LMIS, will remain eligible for exchange from Class C shares to Class A shares in accordance with the program terms. Please see the SAI for more details.

Class R

Class R shares are offered only to Retirement Plans with accounts held on the books of the fund (either at the plan level or at the level of the financial intermediary). LMIS may pay Service Agents selling Class R shares an annual distribution/service fee of up to 0.50% of the average daily net assets represented by the Class R shares serviced by them.

Class FI

Class FI shares are offered to investors who invest in the fund through certain financial intermediary and retirement plan programs. LMIS may pay Service Agents selling Class FI shares an annual distribution/service fee of up to 0.25% starting immediately after purchase. The fund does not currently offer Class FI shares.

Class I

Class I shares are offered only to Institutional Investors who meet the $1,000,000 minimum initial investment requirement, Clients of Eligible Financial Intermediaries, Retirement Plans with omnibus accounts held on the books of the fund, and other investors as authorized by LMIS. However, investors that held Class I shares prior to November 20, 2006 will be permitted to make additional investments in Class I shares.

Class A and Class B — Retirement Plans

Class A and Class B shares are no longer offered through Service Agents for Retirement Plans with omnibus accounts held on the books of the fund. However, certain Retirement Plans that held Class B shares prior to December 1, 2006 are permitted to make additional investments in that class. Certain existing programs for current and prospective Retirement Plan investors sponsored by financial intermediaries also remain eligible for Class A shares. Under these programs, the initial sales charge and contingent deferred sales charge for Class A shares are waived where:

n  

Such Retirement Plan’s record keeper offers only load-waived shares,

n  

Fund shares are held on the books of the fund through an omnibus account, and

n  

The Retirement Plan has more than 100 participants, or has total assets exceeding $1 million

LMIS does not pay Service Agents selling Class A shares to Retirement Plans with a direct omnibus relationship with the fund a commission on the purchase price of

 

24         Legg Mason Partners Funds


 

Class A shares sold by them. However, for certain Retirement Plans that purchased shares at net asset value prior to November 20, 2006, LMIS may continue to pay Service Agents commissions of up to 1.00% of the purchase price of Class A shares that are purchased with regular ongoing plan contributions. Please contact your Service Agent for more information.

Other considerations

Plan sponsors, plan fiduciaries and other financial intermediaries may choose to impose qualification requirements for plans that differ from the fund’s share class eligibility standards. In certain cases this could result in the selection of a share class with higher service and distribution related fees than otherwise would have been charged. The fund is not responsible for, and has no control over, the decision of any plan sponsor, plan fiduciary or financial intermediary to impose such differing requirements. Please consult with your plan sponsor, plan fiduciary or financial intermediary for more information about available share classes.

With respect to Class A, Class B, Class C, Class FI, Class R and Class I shares, the fund may pay a fee for recordkeeping services performed for the share class.

Not all share classes may be made available by your Service Agent. Please contact your Service Agent for additional details.

 

Legg Mason Partners Capital and Income Fund         25


 

Buying shares

 

Generally   

You may buy shares at their net asset value next determined after receipt by your Service Agent or the transfer agent of your purchase request in good order, plus any applicable sales charge.

Effective January 1, 2008, the fund generally will not permit non-resident aliens with a non-U.S. address to establish an account. U.S. citizens with an APO/FPO address or an address in the United States (including its territories) and resident aliens with a U.S. address are permitted to establish an account with the fund. Subject to the requirements of local law, U.S. citizens residing in foreign countries are permitted to establish an account with the fund.

 
Through a Service Agent   

You should contact your Service Agent to open a brokerage account and make arrangements to buy shares. You must provide the following information for your order to be processed:

n   Class of shares being bought

n  Dollar amount or number of shares being bought

n  Account number (if existing account)

Your Service Agent may charge an annual account maintenance fee.

 
Through the fund   

n  Investors should write to the fund at the following address:

Legg Mason Partners Funds

c/o PFPC Inc.

P.O. Box 9699

Providence, Rhode Island 02940-9699

n  Enclose a check to pay for the shares. For initial purchases, complete and send an account application available upon request from Legg Mason Partners Shareholder Services at the number below

n  Specify the name of the fund, the share class you wish to purchase and your account number (if existing account)

n  For more information, please call Legg Mason Partners Shareholder Services at 800-451-2010

 

Through a

systematic

investment plan

  

You may authorize your Service Agent or the transfer agent to transfer funds automatically from (i) a regular bank account, (ii) cash held in a brokerage account opened with a Service Agent or (iii) certain money market funds, in order to buy shares on a regular basis.

n  Amounts transferred must be at least $25

n  Amounts may be transferred monthly, every alternate month, quarterly, semi-annually or annually

n  If you do not have sufficient funds in your account on a transfer date, your Service Agent or Legg Mason Partners Shareholder Services may charge you a fee

 

For more information, please contact your Service Agent or Legg Mason Partners Shareholder Services or consult the SAI.

 

26         Legg Mason Partners Funds


 

Exchanging shares

 

Generally    You may exchange shares at their net asset value next determined after receipt by your Service Agent or the transfer agent of your exchange request in good order.
 
Legg Mason Partners offers a distinctive family of funds tailored to help meet the varying needs of both large and small investors   

You should contact your Service Agent to exchange into other Legg Mason Partners funds. Be sure to read the prospectus of the Legg Mason Partners fund into which you are exchanging. An exchange is a taxable transaction, unless you are investing through a tax qualified savings plan or account.

n  If you bought shares through a Service Agent, you may exchange shares only for shares of the same class of certain other Legg Mason Partners funds made available for exchange by your Service Agent. Not all Legg Mason Partners funds made available for exchange by your Service Agent may offer all classes. Please contact your Service Agent for more information about the funds and classes that are available for exchange

n  If you bought shares directly from the fund, you may exchange shares only for shares of the same class of another Legg Mason Partners fund other than shares of Legg Mason Partners S&P 500 Index Fund. Not all Legg Mason Partners funds offer all classes

n  Not all Legg Mason Partners funds may be offered in your state of residence. Contact your Service Agent or Legg Mason Partners Shareholder Services for further information

n  Exchanges of Class A, B and C shares are subject to minimum investment requirements (except for systematic investment plan exchanges), and all shares are subject to the other requirements of the fund into which exchanges are made

n  If you hold share certificates, the transfer agent must receive the certificates endorsed for transfer or with signed stock powers before the exchange is effective

n  The fund may suspend or terminate your exchange privilege if you engage in an excessive pattern of exchanges

      
Sales charges   

In most instances, your shares will not be subject to an initial sales charge or a contingent deferred sales charge at the time of the exchange.

Your contingent deferred sales charge (if any) will continue to be measured from the date of your original purchase of shares subject to a contingent deferred sales charge and you will be subject to the contingent deferred sales charge of the fund that you originally purchased.

 
By telephone    If you do not have a brokerage account with a Service Agent, you may be eligible to exchange shares through the fund. You must complete an authorization form to authorize telephone transfers. If eligible, you may make telephone exchanges on any day the

 

Legg Mason Partners Capital and Income Fund         27


 

  

New York Stock Exchange (“NYSE”) is open. Shareholders should call Legg Mason Partners Shareholder Services at 800-451-2010 between 8:30 a.m. and 4:00 p.m. (Eastern time).

You can make telephone exchanges only between accounts that have identical registrations.

 
By mail    If you do not have a brokerage account, contact your Service Agent or write to the fund at the address on the following page.
 

Through a

systematic

exchange plan

  

You may be permitted to schedule exchanges of shares of any class of the fund for shares of the same class of other Legg Mason Partners funds.

n  Exchanges may be made monthly, every alternate month, quarterly, semi-annually or annually

n  A predetermined dollar amount of at least $25 per exchange
is required

 

For more information, please contact your Service Agent or Legg Mason Partners Shareholder Services or consult the SAI.

 

28         Legg Mason Partners Funds


 

Redeeming shares

 

Generally   

You may redeem shares at their net asset value next determined after receipt by your Service Agent or the transfer agent of your redemption request in good order, less any applicable contingent deferred sales charge.

Contact your Service Agent to redeem shares of the fund.

If you hold share certificates, the transfer agent must receive the certificates endorsed for transfer or with signed stock powers with a signature guarantee before you may redeem.

If the shares are held by a fiduciary or corporation, other documents may be required.

Your redemption proceeds will normally be sent within three business days after your request is received in good order, but in any event within 7 days. Your redemption proceeds may be delayed for up to 10 days if your purchase was made by check.

If you have a brokerage account with a Service Agent, your redemption proceeds will be sent to your Service Agent. In other cases, unless you direct otherwise, your redemption proceeds will be paid by check mailed to your address of record.

 
By mail   

For accounts held directly at the fund, send written requests to the fund at the following address:

Legg Mason Partners Funds

c/o PFPC Inc.

P.O. Box 9699

Providence, Rhode Island 02940-9699

For clients of a PFS Registered Representative, send your request to:

Primerica Shareholder Services

c/o PFPC, Inc.

P.O. Box 9662

Providence, Rhode Island 02940-9662

Your written request must provide the following:

n  The fund name, the class of shares to be redeemed, and your account number

n  The dollar amount or number of shares to be redeemed

n  Signatures of each owner exactly as the account is registered

n  Signature guarantees, as applicable

 
By telephone    If you do not have a brokerage account with a Service Agent, you may be eligible to redeem shares (except those held in certain retirement plans) in amounts up to $50,000 per day through the fund. You must complete an authorization form to authorize telephone redemptions. If eligible, you may request redemptions by telephone on any day the NYSE is open. Shareholders should call Legg Mason Partners Shareholder Services at 800-451-2010 between 8:30 a.m. and 4:00 p.m. (Eastern time).

 

Legg Mason Partners Capital and Income Fund         29


 

  

Your redemption proceeds can be sent by check to your address of record or by wire or electronic transfer (ACH) to a bank account designated on your authorization form. You must submit a new authorization form to change the bank account designated to receive wire or electronic transfers and you may be asked to provide certain

   other documents. The transfer agent may charge a fee on a wire or an electronic transfer (ACH).
 
Automatic cash withdrawal plans   

You can arrange for the automatic redemption of a portion of your shares monthly, every alternate month, quarterly, semi-annually or annually. To qualify you must own shares of the fund with a value of at least $10,000 ($5,000 for retirement plan accounts) and each automatic redemption must be at least $50. If your shares are subject to a contingent deferred sales charge, the sales charge will be waived if your automatic redemptions are equal to or less than 2% per month of your account balance on the date the withdrawals commence, up to a maximum of 12% in any one year.

The following conditions apply:

n  Your shares must not be represented by certificates

n  All dividends and distributions must be reinvested

 

For more information, please contact your Service Agent or consult the SAI.

 

30         Legg Mason Partners Funds


 

Other things to know about transactions

When you buy, exchange or redeem shares, your request must be in good order. This means you have provided the following information, without which your request may not be processed:

n  

Name of the fund

n  

Your account number

n  

Class of shares being bought, and if you own more than one class, the class of shares being exchanged or redeemed

n  

Dollar amount or number of shares being bought, exchanged or redeemed

n  

Signature of each owner exactly as the account is registered

The fund’s transfer agent or Legg Mason Partners Shareholder Services will employ reasonable procedures to confirm that any telephone exchange or redemption request is genuine, which may include recording calls, asking the caller to provide certain personal identification information, sending you a written confirmation or requiring other confirmation procedures from time to time. If these procedures are followed, neither the fund nor its agent will bear any liability for such transactions.

Signature guarantees

To be in good order, your redemption request must include a signature guarantee if you:

n  

Are redeeming over $50,000

n  

Are sending signed share certificates or stock powers to the transfer agent

n  

Instruct the transfer agent to mail the check to an address different from the one on your account registration

n  

Changed your account registration or your address within 30 days

n  

Want the check paid to someone other than the account owner(s)

n  

Are transferring the redemption proceeds to an account with a different registration

You can obtain a signature guarantee from most banks, dealers, brokers, credit unions and federal savings and loan institutions, but not from a notary public.

The fund has the right to:

n  

Suspend the offering of shares

n  

Waive or change minimum and additional investment amounts

n  

Reject any purchase or exchange order

n  

Change, revoke or suspend the exchange privilege

n  

Suspend telephone transactions

n  

Suspend or postpone redemptions of shares on any day when trading on the NYSE is restricted, or as otherwise permitted by the SEC

n  

Pay redemption proceeds by giving you securities. You may pay transaction costs to dispose of the securities

Small account balances/Mandatory redemptions

If at any time the aggregate net asset value of the fund shares in your account is less than $500 for any reason (including solely due to declines in net asset value and/or failure to invest at least $500 within a reasonable period), the fund reserves the right to ask you to

 

Legg Mason Partners Capital and Income Fund         31


 

bring your account up to the applicable minimum investment amount as determined by your Service Agent. In such case you shall be notified in writing and will have 60 days to make an additional investment to bring your account value up to the required level. If you choose not to do so within this 60-day period, the fund may close your account and send you the redemption proceeds. In the event your account is closed due to a failure to increase your balance to the minimum required amount, you will not be eligible to have your account subsequently reinstated without imposition of any sales charges that may apply to your new purchase. The fund may, with prior notice, change the minimum size of accounts subject to mandatory redemption, which may vary by class, or implement fees for small accounts.

Subject to applicable law, the fund may, with prior notice, adopt other policies from time to time requiring mandatory redemption of shares in certain circumstances.

For more information, please contact your Service Agent or Legg Mason Partners Shareholder Services or consult the SAI.

Frequent purchases and redemptions of fund shares

Frequent purchases and redemptions of fund shares may interfere with the efficient management of the fund’s portfolio by its portfolio managers, increase portfolio transaction costs, and have a negative effect on the fund’s long-term shareholders. For example, in order to handle large flows of cash into and out of the fund, the portfolio managers may need to allocate more assets to cash or other short-term investments or sell securities, rather than maintaining full investment in securities selected to achieve the fund’s investment objective. Frequent trading may cause the fund to sell securities at less favorable prices. Transaction costs, such as brokerage commissions and market spreads, can detract from the fund’s performance. In addition, the return received by long-term shareholders may be reduced when trades by other shareholders are made in an effort to take advantage of certain pricing discrepancies, when, for example, it is believed that the fund’s share price, which is determined at the close of the NYSE on each trading day, does not accurately reflect the value of the fund’s portfolio securities. Funds investing in foreign securities have been particularly susceptible to this form of arbitrage, but other funds could also be affected.

Because of the potential harm to funds in the Legg Mason Partners funds complex and their long-term shareholders, the Board of the fund has approved policies and procedures that are intended to discourage and prevent excessive trading and market timing abuses through the use of various surveillance techniques. Under these policies and procedures, the fund may limit additional exchanges or purchases of fund shares by shareholders who are believed by the manager to be engaged in these abusive trading activities in the fund or in other funds within the fund complex. In the event that an exchange request is rejected, the shareholder may nonetheless redeem its shares. The intent of the policies and procedures is not to inhibit legitimate strategies, such as asset allocation, dollar cost averaging, or similar activities that may nonetheless result in frequent trading of fund shares.

Under the fund’s policies and procedures, the fund reserves the right to restrict or reject purchases of shares (including exchanges) without prior notice whenever a pattern of excessive trading by a shareholder is detected within the fund complex. A committee estab-

 

32         Legg Mason Partners Funds


 

lished by the manager administers the policy. The policy provides that the committee will use its best efforts to restrict a shareholder’s trading privileges in the Legg Mason Partners funds complex if that shareholder has engaged in a total of four or more “Round Trips” (as defined below) across all Legg Mason Partners funds during any rolling 12-month period. However, the committee has the discretion to determine that restricting a shareholder’s trading privileges is not necessary (or that a new limit on Round Trips should be established for the shareholder) if it is determined that the pattern of trading is not abusive or harmful. In making such a determination, the committee will consider, among other things, the nature of the shareholder’s account, the reason for the frequent trading, the amount of trading and the particular funds in which the trading has occurred. Additionally, the committee has the discretion to make inquiries or to take action against any shareholder whose trading appears inconsistent with the frequent trading policy. Examples of the types of actions the committee may take to deter excessive trading in a shareholder account include restricting the shareholder from purchasing additional shares in the fund altogether or imposing other restrictions (such as requiring purchase orders to be submitted by mail) that would deter the shareholder from trading frequently in the funds.

A “Round Trip” is defined as a purchase (including subscriptions and exchanges) into the fund followed by a sale (including redemptions and exchanges) of the same or a similar number of shares out of the fund within 30 days of such purchase. Purchases and sales of the fund’s shares pursuant to an automatic investment plan or similar program for periodic transactions are not considered in determining Round Trips. For purposes of these policies and procedures, the Legg Mason Partners funds complex also includes certain Western Asset funds and Barrett Opportunity Fund, Inc., but does not include money market funds in the fund complex.

The policies apply to any account, whether an individual account, accounts with financial intermediaries such as investment advisers, broker/dealers or retirement plan administrators, commonly called omnibus accounts, where the intermediary holds fund shares for a number of its customers in one account. The fund’s ability to monitor trading in omnibus accounts may, however, be severely limited due to the lack of access to an individual investor’s trading activity when orders are placed through these types of accounts. There may also be operational and technological limitations on the ability of the fund’s service providers to identify or terminate frequent trading activity within the various types of omnibus accounts. The fund’s distributor has entered into agreements with intermediaries requiring the intermediaries to, among other things, help identify frequent trading activity and to prohibit further purchases or exchanges by a shareholder identified as having engaged in frequent trading. These agreements took effect on October 16, 2007.

The fund’s policies also require personnel such as the portfolio managers and investment staff to report any abnormal or otherwise suspicious investment activity, and prohibit short-term trades by such personnel for their own account in mutual funds managed by the manager and its affiliates, other than money market funds. Additionally, the fund has adopted policies and procedures to prevent the selective release of information about the fund’s portfolio holdings, as such information may be used for market-timing and similar abusive practices.

The fund’s policies provide for ongoing assessment of the effectiveness of current policies and surveillance tools, and the Board reserves the right to modify these or adopt addi-

 

Legg Mason Partners Capital and Income Fund         33


 

tional policies and restrictions in the future. Shareholders should be aware, however, that any surveillance techniques currently employed by the fund or other techniques that may be adopted in the future may not be effective, particularly where the trading takes place through certain types of omnibus accounts. As noted above, if the fund is unable to detect and deter trading abuses, the fund’s performance, and its long-term shareholders, may be harmed. In addition, shareholders may be harmed by the extra costs and portfolio management inefficiencies that result from frequent trading of fund shares, even when the trading is not for abusive purposes. Furthermore, the fund may not apply its policies consistently or uniformly, resulting in the risk that some shareholders may be able to engage in frequent trading while others will bear the costs and effects of that trading. The fund will provide advance notice to shareholders and prospective investors of any specific restrictions on the trading of fund shares that the Board may adopt in the future.

Share certificates

The fund does not issue share certificates. If you currently hold share certificates of the fund, such certificates will continue to be honored. If you would like to return your share certificates to the fund and hold your shares in uncertificated form, please contact your Service Agent or Legg Mason Partners Shareholder Services.

Record ownership

If you hold shares through a Service Agent, your Service Agent may establish and maintain your account and be the shareholder of record. In the event that the fund holds a shareholder meeting, your Service Agent, as record holder, will vote your shares in accordance with your instructions. If you do not give your Service Agent voting instructions, your Service Agent may nonetheless, under certain circumstances, be entitled to vote your shares.

 

34         Legg Mason Partners Funds


 

Dividends, distributions and taxes

Dividends and distributions

The fund generally makes monthly distributions, which may include a combination of net investment income and/or currently accumulated net realized capital gains that are otherwise required to be distributed. The fund makes capital gains distributions, typically at least once or twice a year. The fund may pay additional distributions and dividends at other times if necessary for the fund to avoid a federal tax. The fund expects distributions to be primarily from capital gains. Long-term capital gain distributions and dividends are reinvested in additional fund shares of the same class you hold. You do not pay a sales charge on reinvested distributions or dividends. Alternatively, you can instruct your Service Agent or Legg Mason Partners Shareholder Services to have your distributions and/or dividends paid in cash. You can change your choice at any time to be effective as of the next distribution or dividend.

Taxes

In general, redeeming shares, exchanging shares and receiving dividends and distributions (whether in cash or additional shares) are all taxable events. The following table describes the tax consequences of certain transactions related to the fund.

 

Transaction    Federal tax status
Redemption or exchange of shares    Usually capital gain or loss; long-term only if shares owned more than one year
 
Long-term capital gain distributions    Long-term capital gain
 
Dividends    Ordinary income, potentially taxable at long-term capital gain rates
 

Distributions attributable to short-term capital gains are treated as dividends, taxable as ordinary income. Dividends and long-term capital gain distributions are taxable whether received in cash or reinvested in fund shares. Although dividends (including dividends from short-term capital gains) are generally taxable as ordinary income, individual shareholders who satisfy certain holding period and other requirements are taxed on such dividends at long-term capital gain rates to the extent the dividends are attributable to “qualified dividend income” received by the fund for taxable years beginning before January 1, 2011. “Qualified dividend income” generally consists of dividends received from U.S. corporations (other than dividends from tax exempt organizations and certain dividends from real estate investment trusts and regulated investment companies) and certain foreign corporations.

Long-term capital gain distributions are taxable to you as long-term capital gain regardless of how long you have owned your shares. You may want to avoid buying shares when the fund is about to declare a capital gain distribution or a dividend, because it will be taxable to you even though it may actually be a return of a portion of your investment.

After the end of each year, your Service Agent or the fund will provide you with information about the distributions and dividends you received and any redemptions of

 

Legg Mason Partners Capital and Income Fund         35


 

shares during the previous year. If you do not provide the fund with your correct taxpayer identification number and any required certifications, you may be subject to back-up withholding at the rate of 28% on your distributions, dividends and redemption proceeds. Because each shareholder’s circumstances are different and special tax rules may apply, you should consult your tax adviser about your investment in the fund.

The above discussion is applicable to shareholders who are U.S. persons. If you are a non-U.S. person, please consult your own tax adviser with respect to the tax consequences to you of an investment in the fund.

 

36         Legg Mason Partners Funds


 

Share price

You may buy, exchange or redeem shares at their net asset value next determined after receipt of your request in good order, plus any applicable sales charge. The fund’s net asset value per share is the value of its assets minus its liabilities divided by the number of shares outstanding. Net asset value is calculated separately for each class of shares. The fund calculates its net asset value every day the NYSE is open. This calculation is done when regular trading closes on the NYSE (normally 4:00 p.m., Eastern time). The NYSE is closed on certain holidays listed in the SAI.

The Board has approved procedures to be used to value the fund’s securities for the purposes of determining the fund’s net asset value. The valuation of the securities of the fund is determined in good faith by or under the direction of the Board. The Board has delegated certain valuation functions for the fund to the manager.

The fund generally values its securities based on market prices determined at the close of regular trading on the NYSE. The fund’s currency valuations, if any, are done as of when the London Stock Exchange closes, which is usually at 12 noon Eastern time, as the manager believes that these valuations typically reflect the largest trading volume in the foreign currency markets. A material change in the value of currency during the period between the close of the London Stock Exchange and the calculation of the fund’s net asset value on the same date is considered a significant event, as described below, in response to which the fund may use fair valuation procedures to value the affected investments. For equity securities that are traded on an exchange, the market price is usually the closing sale or official closing price on that exchange. In the case of securities not traded on an exchange, or if such closing prices are not otherwise available, the market price is typically determined by independent third party pricing vendors approved by the fund’s Board using a variety of pricing techniques and methodologies. The market price for debt obligations is generally the price supplied by an independent third party pricing service approved by the fund’s Board, which may use a matrix, formula or other objective method that takes into consideration market indices, yield curves and other specific adjustments. Short-term debt obligations that will mature in 60 days or less are valued at amortized cost, unless it is determined that using this method would not reflect an investment’s fair value. If vendors are unable to supply a price, or if the price supplied is deemed by the manager to be unreliable, the market price may be determined using quotations received from one or more broker/dealers that make a market in the security. When such prices or quotations are not available, or when the manager believes that they are unreliable, the manager may price securities using fair value procedures approved by the Board. Because the fund may invest in securities rated below investment grade or securities of emerging market issuers — some of which may be thinly traded, for which market quotations may not be readily available or may be unreliable — the fund may use fair valuation procedures more frequently than funds that invest primarily in securities that are more liquid, such as securities of large capitalization domestic issuers. The fund may also use fair value procedures if the manager determines that a significant event has occurred between the time at which a market price is determined and the time at which the fund’s net asset value is calculated. In particular, the value of foreign securities may be materially affected by events occurring after the close of the market on which they are valued, but before the fund prices its shares.

 

Legg Mason Partners Capital and Income Fund         37


 

The fund uses a fair value model developed by an independent third party pricing service to price foreign equity securities on days when there is a certain percentage change in the value of a domestic equity security index, as such percentage may be determined by the manager from time to time.

Valuing securities at fair value involves greater reliance on judgment than valuation of securities based on readily available market quotations. A fund that uses fair value to price securities may value those securities higher or lower than another fund using market quotations or its own fair value methodologies to price the same securities. There can be no assurance that the fund could obtain the fair value assigned to a security if it were to sell the security at approximately the time at which the fund determines its net asset value.

International markets may be open on days when U.S. markets are closed and the value of foreign securities owned by the fund could change on days when you cannot buy or redeem shares.

In order to buy, redeem or exchange shares at that day’s price, you must place your order with your Service Agent or the transfer agent before the NYSE closes. If the NYSE closes early, you must place your order prior to the actual closing time.

It is the responsibility of the Service Agents to transmit all orders to buy, exchange or redeem shares to the transfer agent on a timely basis.

 

38         Legg Mason Partners Funds


 

Financial highlights

The financial highlights tables are intended to help you understand the performance of each class for the past five years (or since inception of that class). No financial highlights are provided for Class FI or R shares because no Class FI or Class R shares were offered prior to the date of this Prospectus. Certain information reflects financial results for a single share. Total return represents the rate that a shareholder would have earned (or lost) on a fund share assuming reinvestment of all dividends and distributions. The information in the following tables has been derived from the fund’s and the predecessor fund’s financial statements. Those financial statements have been audited by KPMG LLP, an independent registered public accounting firm, whose report, along with the fund’s financial statements, is included in the annual report (available upon request). The financial information shown below for periods prior to April 16, 2006 is that of the fund’s predecessor.

 

For a Class A share(1) outstanding throughout each year ended December 31:  
     2007     2006     2005     2004     2003  

Net Asset Value, Beginning of Year

  $17.06     $17.12     $16.50     $15.55     $11.99  
   

Income From Operations:

         

Net investment income

  0.26     0.48     0.53     0.54     0.62  

Net realized and unrealized gain

  0.88     1.45     0.62     0.94     3.60  
   

Total Income From Operations

  1.14     1.93     1.15     1.48     4.22  
   

Less Distributions From:

         

Net investment income

  (0.26 )   (0.48 )   (0.53 )   (0.53 )   (0.63 )

Net realized gains

  (1.91 )   (1.51 )            

Return of capital

                  (0.03 )
   

Total Distributions

  (2.17 )   (1.99 )   (0.53 )   (0.53 )   (0.66 )
   

Net Asset Value, End of Year

  $16.03     $17.06     $17.12     $16.50     $15.55  
   

Total Return(2)

  6.77 %   11.69 %(3)   7.11 %   9.75 %   36.17 %
   

Net Assets, End of Year (millions)

  $2,300     $2,295     $1,602     $1,356     $1,086  
   

Ratios to Average Net Assets:

         

Gross expenses

  1.07 %   1.09 %(4)   1.13 %   1.12 %   1.12 %

Net expenses

  1.07     1.08 (4)(5)   1.13     1.09 (5)   1.12  

Net investment income

  1.50     2.77     3.17     3.41     4.60  
   

Portfolio Turnover Rate

  189 %(6)   175 %(7)   49 %   66 %   77 %
   

 

(1)

 

Per share amounts have been calculated using the average shares method.

 

(2)

 

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

 

(3)

 

The prior investment manager fully reimbursed the fund for losses incurred resulting from an investment transaction error. Without this reimbursement, total return would not have changed.

 

(4)

 

Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the fund during the period. Without these fees, the gross and net expense ratios would have been 1.08% and 1.07%, respectively.

 

(5)

 

Reflects fee waivers and/or expense reimbursements.

 

(6)

 

Including mortgage dollar roll transactions. If mortgage dollar roll transactions had been excluded, the portfolio turnover rate would have been 166% for the year ended December 31, 2007.

 

(7)

 

Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 185% for the year ended December 31, 2006.

 

Legg Mason Partners Capital and Income Fund         39


 

For a Class B share(1) outstanding throughout each year ended December 31:  
     2007     2006     2005     2004     2003  

Net Asset Value, Beginning of Year

  $16.91     $16.99     $16.38     $15.45     $11.90  
   

Income From Operations:

         

Net investment income

  0.16     0.39     0.43     0.45     0.55  

Net realized and unrealized gain

  0.87     1.43     0.63     0.93     3.58  
   

Total Income From Operations

  1.03     1.82     1.06     1.38     4.13  
   

Less Distributions From:

         

Net investment income

  (0.19 )   (0.39 )   (0.45 )   (0.45 )   (0.55 )

Net realized gains

  (1.91 )   (1.51 )            

Return of capital

                  (0.03 )
   

Total Distributions

  (2.10 )   (1.90 )   (0.45 )   (0.45 )   (0.58 )
   

Net Asset Value, End of Year

  $15.84     $16.91     $16.99     $16.38     $15.45  
   

Total Return(2)

  6.16 %   11.03 %(3)   6.60 %   9.16 %   35.56 %
   

Net Assets, End of Year (millions)

  $512     $601     $599     $620     $612  
   

Ratios to Average Net Assets:

         

Gross expenses

  1.64 %   1.65 %(4)   1.66 %   1.63 %   1.63 %

Net expenses

  1.64     1.64 (4)(5)   1.66     1.61 (5)   1.63  

Net investment income

  0.93     2.23     2.63     2.88     4.11  
   

Portfolio Turnover Rate

  189 %(6)   175 %(7)   49 %   66 %   77 %
   

 

(1)

 

Per share amounts have been calculated using the average shares method.

 

(2)

 

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

 

(3)

 

The prior investment manager fully reimbursed the fund for losses incurred resulting from an investment transaction error. Without this reimbursement, total return would not have changed.

 

(4)

 

Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the fund during the period. Without these fees, the gross and net expense ratios would have been 1.64% and 1.63%, respectively.

 

(5)

 

Reflects fee waivers and/or expense reimbursements.

 

(6)

 

Including mortgage dollar roll transactions. If mortgage dollar roll transactions had been excluded, the portfolio turnover rate would have been 166% for the year ended December 31, 2007.

 

(7)

 

Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 185% for the year ended December 31, 2006.

 

40         Legg Mason Partners Funds


 

For a Class C share(1) outstanding throughout each year ended December 31:  
     2007     2006     2005     2004     2003  

Net Asset Value, Beginning of Year

  $16.96     $17.02     $16.42     $15.50     $11.94  
   

Income From Operations:

         

Net investment income

  0.13     0.35     0.39     0.41     0.50  

Net realized and unrealized gain

  0.87     1.45     0.62     0.93     3.60  
   

Total Income From Operations

  1.00     1.80     1.01     1.34     4.10  
   

Less Distributions From:

         

Net investment income

  (0.17 )   (0.35 )   (0.41 )   (0.42 )   (0.51 )

Net realized gains

  (1.91 )   (1.51 )            

Return of capital

                  (0.03 )
   

Total Distributions

  (2.08 )   (1.86 )   (0.41 )   (0.42 )   (0.54 )
   

Net Asset Value, End of Year

  $15.88     $16.96     $17.02     $16.42     $15.50  
   

Total Return(2)

  5.98 %   10.91 %(3)   6.29 %   8.83 %   35.17 %
   

Net Assets, End of Year (millions)

  $506     $513     $445     $392     $289  
   

Ratios to Average Net Assets:

         

Gross expenses

  1.82 %   1.86 %(4)   1.93 %   1.90 %   1.89 %

Net expenses

  1.80 (5)(6)   1.83 (4)(5)   1.93     1.88 (5)   1.89  

Net investment income

  0.78     2.02     2.37     2.63     3.69  
   

Portfolio Turnover Rate

  189 %(7)   175 %(8)   49 %   66 %   77 %
   

 

(1)

 

Per share amounts have been calculated using the average shares method.

 

(2)

 

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

 

(3)

 

The prior investment manager fully reimbursed the fund for losses incurred resulting from an investment transaction error. Without this reimbursement, total return would not have changed.

 

(4)

 

Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the fund during the period. Without these fees, the gross and net expense ratios would have been 1.84% and 1.82%, respectively.

 

(5)

 

Reflects fee waivers and/or expense reimbursements.

 

(6)

 

Effective March 16, 2007, the manager has contractually agreed to waive fees and/or reimburse operating expenses (other than brokerage, taxes and extraordinary expenses) to limit total annual operating expenses to 1.79% for Class C shares until May 1, 2008.

 

(7)

 

Including mortgage dollar roll transactions. If mortgage dollar roll transactions had been excluded, the portfolio turnover rate would have been 166% for the year ended December 31, 2007.

 

(8)

 

Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 185% for the year ended December 31, 2006.

 

Legg Mason Partners Capital and Income Fund         41


 

For a Class I share(1) outstanding throughout each year ended December 31:  
     2007     2006     2005     2004     2003  

Net Asset Value, Beginning of Year

  $17.33     $17.37     $16.72     $15.72     $12.12  
   

Income From Operations:

         

Net investment income

  0.33     0.56     0.59     0.60     0.68  

Net realized and unrealized gain

  0.89     1.45     0.64     0.98     3.63  
   

Total Income From Operations

  1.22     2.01     1.23     1.58     4.31  
   

Less Distributions From:

         

Net investment income

  (0.32 )   (0.54 )   (0.58 )   (0.58 )   (0.68 )

Net realized gains

  (1.91 )   (1.51 )            

Return of capital

                  (0.03 )
   

Total Distributions

  (2.23 )   (2.05 )   (0.58 )   (0.58 )   (0.71 )
   

Net Asset Value, End of Year

  $16.32     $17.33     $17.37     $16.72     $15.72  
   

Total Return(2)

  7.13 %   12.01 %(3)   7.53 %   10.32 %   36.62 %
   

Net Assets, End of Year (millions)

  $8     $2     $3     $3     $81  
   

Ratios to Average Net Assets:

         

Gross expenses

  0.77 %   0.78 %(4)   0.79 %   0.77 %   0.77 %

Net expenses

  0.74 (5)(6)   0.77 (4)(5)   0.79     0.76 (5)   0.77  

Net investment income

  1.85     3.12     3.50     3.58     4.99  
   

Portfolio Turnover Rate

  189 %(7)   175 %(8)   49 %   66 %   77 %
   

 

(1)

 

Per share amounts have been calculated using the average shares method.

 

(2)

 

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

 

(3)

 

The prior investment manager fully reimbursed the fund for losses incurred resulting from an investment transaction error. Without this reimbursement, total return would not have changed.

 

(4)

 

Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the fund during the period. Without these fees, the gross and net expense ratios would have been 0.77% and 0.76%, respectively.

 

(5)

 

Reflects fee waivers and/or expense reimbursements.

 

(6)

 

Effective March 16, 2007, the manager has contractually agreed to waive and/or reimburse operating expenses (other than brokerage, taxes and extraordinary expenses) to limit total annual expenses to 0.74% for Class I shares until May 1, 2008.

 

(7)

 

Including mortgage dollar roll transactions, If mortgage dollar roll transactions had been excluded, the portfolio turnover rate would have been 166% for the year ended December 31, 2007.

 

(8)

 

Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 185% for the year ended December 31, 2006.

 

42         Legg Mason Partners Funds


 

Legg Mason Partners Funds Privacy Policy

We are committed to keeping nonpublic personal information about you secure and confidential. This notice is intended to help you understand how we fulfill this commitment. From time to time, we may collect a variety of personal information about you, including:

n  

Information we receive from you on applications and forms, via the telephone, and through our websites;

n  

Information about your transactions with us, our affiliates, or others (such as your purchases, sales, or account balances); and

n  

Information we receive from consumer reporting agencies.

We do not disclose your nonpublic personal information, except as permitted by applicable law or regulation. For example, we may share this information with others in order to process your transactions. We may also provide this information to companies that perform services on our behalf, such as printing and mailing, or to other financial institutions with whom we have joint marketing agreements. We will require these companies to protect the confidentiality of this information and to use it only to perform the services for which we hired them.

With respect to our internal security procedures, we maintain physical, electronic, and procedural safeguards to protect your nonpublic personal information, and we restrict access to this information.

If you decide at some point either to close your account(s) or become an inactive customer, we will continue to adhere to our privacy policies and practices with respect to your nonpublic personal information.

[This page is not part of the prospectus.]


 

 

(Investment Company Act file no. 811-6444)

FD0213 04/08

LOGO

Legg Mason Partners

Capital and Income Fund

You may visit the fund’s web site at http://www.leggmason.com/individualinvestors for a free copy of a Prospectus, Statement of Additional Information (“SAI”) or an Annual or Semi-Annual Report, or to request other information.

Shareholder reports Additional information about the fund’s investments is available in the fund’s Annual and Semi-Annual Reports to shareholders. In the fund’s Annual Report, you will find a discussion of the market conditions and investment strategies that significantly affected the fund’s performance.

The fund sends only one report to a household if more than one account has the same last name and same address. Contact your Service Agent or Legg Mason Partners Shareholder Services if you do not want this policy to apply to you.

Statement of additional information The SAI provides more detailed information about the fund and is incorporated by reference into (is legally a part of) this Prospectus.

You can make inquiries about the fund or obtain shareholders reports (without charge) by contacting your Service Agent, by calling Legg Mason Partners Shareholder Services at 800-451-2010 or by writing to the fund at Legg Mason Partners Funds, 55 Water Street, New York, New York 10041.

Information about the fund (including the SAI) can be reviewed and copied at the Securities and Exchange Commission’s (the “SEC”) Public Reference Room in Washington, D.C. In addition, information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-202-551-8090. Reports and other information about the fund are available on the EDGAR Database on the SEC’s Internet site at http://www.sec.gov. Copies of this information may be obtained for a duplicating fee by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-0102.

If someone makes a statement about the fund that is not in this Prospectus, you should not rely upon that information. Neither the fund nor its distributor is offering to sell shares of the fund to any person to whom the fund may not lawfully sell its shares.


PROSPECTUS

April 28, 2008

The Securities and Exchange Commission has not approved or disapproved these securities or determined whether this Prospectus is accurate or complete. Any statement to the contrary is a crime.

LOGO

Legg Mason Partners Equity Fund

Class A, B, C, FI, R, I and O Shares

 

 

 

 

INVESTMENT PRODUCTS: NOT FDIC INSURED Ÿ NO BANK GUARANTEE Ÿ MAY LOSE VALUE

 


 

SUPPLEMENT DATED APRIL 28, 2008 TO THE PROSPECTUS DATED

APRIL 28, 2008 OF

LEGG MASON PARTNERS EQUITY FUND

Through June 30, 2008, please refer to the following chart for information concerning the minimum initial and additional investment amounts applicable to a purchase of fund shares:

Investment minimums

Minimum initial and additional investment amounts vary depending on the class of shares you buy and the nature of your investment account.

 

    Investment Minimum
Initial/Additional Investments(1)
   
     Class A   Class B   Class C   Class FI   Class R  

Class I

 

Class O(2)

General

  $500/$50   $500/$50   $500/$50   n/a   n/a   n/a   n/a
 

IRAs and Uniform Gifts or Transfers to Minor Accounts

  $250/$50   $250/$50   $250/$50   n/a   n/a   n/a   n/a
 

Simple IRAs

  $1/$1   $1/$1   $1/$1   n/a   n/a   n/a   n/a
 

Systematic Investment Plans

  $25/$25   $25/$25   $25/$25   n/a   n/a   n/a   n/a
 

Clients of Eligible Financial Intermediaries

  $1/$1   n/a   n/a   None/None   n/a   None/None   n/a
 

Retirement Plans with omnibus accounts held on the books of the fund

  n/a   n/a   None/None   None/None   None/None   None/None   n/a
 

Other Retirement Plans

  $50/$50   $50/$50   $50/$50   n/a   n/a   n/a   n/a
 

Institutional Investors

  $500/$50   $500/$50   $500/$50   n/a   n/a   $1 million/None   n/a
 

 

(1)

 

Please refer to the section entitled “Retirement plans and institutional investors” for additional information regarding the investment minimum and eligibility requirements for Retirement Plans, Institutional Investors and Clients of Eligible Financial Intermediaries.

 

(2)

 

Class O shares are offered only to holders of common stock of the fund’s predecessor on the conversion of the fund’s predecessor from a closed-end fund to an open-end fund. The information is presented for subsequent investments only.

Effective July 1, 2008, the information shown above will no longer apply.

Instead, please refer to the section of the attached Prospectus titled “Choosing a class of shares to buy: Investment minimums” for information concerning the minimum initial and additional investment amounts applicable to a purchase of fund shares.


Legg Mason Partners Equity Fund

Contents

 

 

Investments, risks and performance

  2

More on the fund’s investments

  9

Management

  15

Choosing a class of shares to buy

  19

Comparing the fund’s classes

  21

Sales charges

  23

More about contingent deferred sales charges

  27

Retirement and institutional investors

  28

Buying shares

  31

Exchanging shares

  32

Redeeming shares

  34

Other things to know about transactions

  36

Dividends, distributions and taxes

  40

Share price

  42

Financial highlights

  44

 

As part of a number of initiatives launched in 2006 to restructure and streamline the Legg Mason Partners fund complex, the fund assumed the assets and liabilities of a predecessor fund with substantially the same name, effective April 16, 2007. Any information in this Prospectus relating to the fund prior to April 16, 2007 relates to the fund’s predecessor. Prior to June 30, 2006, the fund’s predecessor operated as a closed-end investment company.


 

Investments, risks and performance

Investment objectives

The fund’s primary investment objectives are growth and conservation of capital. Income is a secondary investment objective.

Principal investment strategies

Key investments

The fund invests primarily in common stock or securities convertible into common stock of companies in industries the portfolio manager believes have the potential to grow at a faster rate than the economy as a whole and that appear to have above-average earnings and dividend growth potential.

Under normal market conditions, the fund invests at least 80% of its assets in equity securities. The fund emphasizes investments in U.S. stocks with large market capitalizations, but the fund also invests in stocks with small and medium capitalizations and may invest up to 25% of its assets in foreign securities. These securities may be denominated and traded in foreign currencies and may be traded in the U.S. or on international stock exchanges. The fund’s foreign investments are typically equity securities, but the fund may invest up to 10% of its assets in foreign fixed-income securities. In addition, the fund may invest up to 10% of its assets in securities of emerging markets issuers. The fund may invest up to 20% of its net assets in fixed-income securities, some or all of which may be high yield, lower quality securities rated below investment grade by a recognized rating agency or unrated securities determined by the portfolio manager to be of equivalent quality (commonly referred to as “junk bonds”).

Selection process

The fund intends to pursue both growth and conservation of capital while generally maintaining a rather fully-invested position in equities by selecting certain equity securities primarily for the growth opportunities they present and other equity securities primarily for the purpose of conserving capital. The portfolio manager looks for companies he believes are able to increase earnings and dividends at an above-average rate and still retain enough cash to finance future growth in their businesses. The portfolio manager emphasizes individual security selection while spreading the fund’s investments among industries and sectors for broad market exposure.

The portfolio manager seeks to construct an investment portfolio whose weighted average market capitalization is similar to the Standard & Poor’s 500 Index of Composite Stocks (“S&P 500 Index”). The portfolio manager uses fundamental analysis to identify high-quality companies — companies with an oligopoly or monopoly in their respective markets, a strong franchise and market share, a high return on equity and conservative accounting practices — and then considers whether the stocks are relatively over- or under-valued. The portfolio manager also looks for a catalyst for stock price appreciation, such as good management, positive changes in strategy or improvement in the company’s competitive position. The portfolio manager favors companies with above-average growth in dividend yields because the portfolio manager believes this shows responsible use of

 

2         Legg Mason Partners Funds


 

capital on the part of the companies. The fund invests for the longer term. The portfolio manager, however, continues to reappraise the fund’s holdings, take profits or losses and raise cash to reinvest in newly emerging areas of interest, within the scope of the fund’s investment policy.

The portfolio manager’s sell discipline is the result of the portfolio manager’s regular review of the fund’s portfolio holdings. If a company’s fundamentals deteriorate or its business fails to meet the portfolio manager’s expectations for growth or his conservation of capital, the portfolio manager evaluates the stock as a sale candidate. The portfolio manager continually assesses the risk and reward profile of companies in the portfolio. The portfolio manager generally will reduce a position as risk and reward become less favorable. The portfolio manager generally will eliminate a position whose valuation becomes excessive or unsustainable. The portfolio manager may also sell a stock to substitute a similar company with a materially better risk and reward.

Principal risks of investing in the fund

Investors could lose money on their investment in the fund, or the fund may not perform as well as other investments, if:

n  

Stock prices decline generally or stocks perform poorly relative to other types of investments

n  

Large capitalization companies fall out of favor with investors

n  

Companies in which the fund invests suffer unexpected losses or lower than expected earnings

n  

The portfolio manager’s judgment about the attractiveness, value or income potential of a particular security proves to be incorrect

n  

An adverse event, such as negative press reports about a company in the fund’s portfolio, depresses the value of the company’s securities

n  

There is greater volatility of share price because of the fund’s ability to invest in small and medium capitalization companies. Investing in small and medium capitalization companies involves a substantial risk of loss. Compared to large capitalization companies, small and medium capitalization companies and the market for their securities are more likely to:

  ¨  

Be more sensitive to changes in earnings results and investor expectations

  ¨  

Have more limited product lines, capital resources and management depth

  ¨  

Experience sharper swings in market values

  ¨  

Be harder to sell at the times and prices the portfolio manager believes appropriate

  ¨  

Offer greater potential for gain and loss

n  

The issuer of a debt security owned by the fund defaults on its obligation to pay principal and/or interest or has its credit rating downgraded. This risk is higher for below investment grade securities

Common stock and convertible securities

Most of the risks listed above pertain to investments in common stock and securities convertible into common stock.

In addition to those risks, investing in common stock involves risks because common stocks do not represent an obligation of the issuer, and do not offer the degree of protection of debt securities. The issuance of debt securities or preferred stock by an issuer will

 

Legg Mason Partners Equity Fund         3


 

create senior claims which could adversely affect the rights of holders of common stock with respect to the assets of the issuer upon liquidation or bankruptcy.

Investing in securities convertible into common stock also involves different risks. Because a convertible security provides an option to the holder to exchange the security for common shares or the cash value of common shares, the market price will tend to fluctuate in relationship to the price of the common shares into which the security is convertible. Because convertible securities are usually viewed by the issuer as future common stock, they are generally subordinated to other senior securities and may be rated lower than the issuer’s non-convertible debt obligations or preferred stock.

Foreign securities

Investing in non-U.S. issuers may involve different risks compared to investing in the securities of U.S. issuers. These risks are more pronounced to the extent the fund invests in issuers in countries with emerging markets or if the fund invests significantly in one country. Among these risks are the following:

n  

Less information about non-U.S. issuers or markets may be available due to less rigorous disclosure and accounting standards or regulatory practices

n  

Many non-U.S. markets are smaller, less liquid and more volatile than U.S. markets. In a changing market, the portfolio manager may not be able to sell the fund’s portfolio securities in amounts and at prices the portfolio manager considers reasonable

n  

Economic, political and social developments significantly disrupt the financial markets or interfere with the fund’s ability to enforce its rights against foreign government issuers

High yield, lower quality securities

High yield securities (commonly referred to as “junk bonds”) are considered speculative because they have a higher risk of issuer default and, compared to investment grade securities, tend to have:

n  

More volatile prices and increased price sensitivity to changing interest rates and to adverse economic and business developments

n  

Greater risk of loss due to default or declining credit quality

n  

Greater likelihood that adverse economic or company specific events will make the issuer unable to make interest and/or principal payments

n  

Greater susceptibility to negative market sentiments leading to depressed prices and decreased liquidity

Who may want to invest

The fund may be an appropriate investment if you:

n  

Are seeking to participate in the long-term growth potential of the U.S. stock market

n  

Are willing to accept the risks of the stock market

 

4         Legg Mason Partners Funds


 

Performance of Class O Shares

The bar chart and average annual total returns shown in the chart below represent returns of the fund’s Class O shares. On June 30, 2006, the fund’s predecessor converted from a closed-end investment company to an open-end fund with the same investment objectives and substantially similar investment strategies. Shares of the closed-end investment company outstanding at the time of the conversion were designated Class O shares. The information in the bar chart and average annual total returns table for periods prior to June 30, 2006 represents the performance of the closed-end investment company. As a closed-end investment company, the fund’s predecessor was not subject to the cash flow fluctuations and liquidity requirements of an open-end fund. The fund’s past performance may have been different if it had been a open-end fund since inception. Performance information for periods prior to April 16, 2007 is that of the fund’s predecessor. The fund’s past performance is not necessarily an indication of how the fund will perform in the future.

The fund’s Class A, Class B, Class C, Class FI, Class R, Class I and Class O shares are invested in the same portfolio of securities. However, the returns for the other classes would differ from those of Class O to the extent that those classes, except Class I, bear higher expenses than Class O shares. Class O shares of the fund are available for purchase only by holders of common stock of the fund’s predecessor on the conversion of the fund’s predecessor from a closed-end investment company to an open-end fund.

No performance information is presented for Class B, Class C or Class I shares since no shares of these classes were outstanding as of December 31, 2007. No performance information is presented for Class FI or Class R shares because no Class FI or Class R shares were offered prior to the date of this Prospectus.

 

 

Legg Mason Partners Equity Fund         5


 

Total Returns for Class O Shares

LOGO

Highest and lowest quarter returns (for the periods shown in the bar chart):

Highest: 19.96% in 4th quarter 1998; Lowest: (17.80)% in 3rd quarter 2002.

Average Annual Total Returns (calendar years ended December 31, 2007)

 

Class O Shares    1 year     5 years     10 years     Since
Inception(3)
    Inception Date
Return before taxes    8.39 %   13.06 %   6.51 %   N/A     9/24/29
 
Return after taxes on distributions(1)    3.71 %   11.32 %   4.31 %   N/A     9/24/29
 
Return after taxes on distributions and sale of fund shares(1)    6.20 %   10.67 %   4.65 %   N/A     9/24/29
 
Other Classes (Return
before taxes only)
                                 
Class A    1.84 %   N/A     N/A     1.35 %   12/28/06
 
Comparative Index                                  
S&P 500 Index(2)    5.49 %   12.83 %   5.91 %   N/A    
 

 

(1)

 

After-tax returns are calculated using the highest historical individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after tax returns depend upon an individual investor’s tax situation and may differ from those shown, and the after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In some cases the return after taxes may exceed the return before taxes due to an assumed tax benefit from any losses on a sale of fund shares at the end of the measurement period. After-tax returns shown above are for Class O shares only. After-tax returns for other share classes will vary.

 

(2)

 

The S&P 500 Index is a market-value weighted index comprised of 500 widely held common stocks. It is not possible to invest directly in the index. The index does not reflect deductions for fees, expenses or taxes.

 

(3)

 

Performance since inception is presented only for shares with less than 10 years of performance.

 

6         Legg Mason Partners Funds


 

Fee table

This table sets forth the fees and expenses you may pay if you invest in fund shares.

Shareholder Fees

 

(directly from your
investment)
  Class A     Class B     Class C     Class FI(5)   Class R(5)   Class I   Class O
Maximum sales charge (load) imposed on purchases (as a % of offering price)   5.75 %   None     None     None   None   None   None
 
Maximum contingent deferred sales charge (load) (as a % of the lower of net asset value at purchase or redemption)   None (1)   5.00 %   1.00 %   None   None   None   None
 

Annual Fund Operating Expenses

 

(paid by the fund as a % of
net assets)
  Class A     Class B     Class C     Class FI(5)     Class R(5)     Class I     Class O  
Management fee(2)(3)   0.56 %   0.56 %   0.56 %   0.56 %   0.56 %   0.56 %   0.56 %
   
Distribution and service (12b-1) fees   0.25 %   1.00 %   1.00 %   0.25 %   0.50 %   None     None  
   
Other expenses(4)   0.17 %   0.17 %   0.17 %   0.21 %   0.21 %   0.06 %   0.13 %
   
Total annual fund operating expenses   0.98 %   1.73 %   1.73 %   1.02 %   1.27 %   0.62 %   0.69 %
   

 

(1)

 

You may buy Class A shares in amounts of $1,000,000 or more at net asset value (without an initial sales charge) but if you redeem those shares within 12 months of their purchase, you will pay a contingent deferred sales charge of 1.00%.

 

(2)

 

The fund has a management fee schedule that reduces the management fee rate as assets increase as follows: 0.650% on average daily net assets up to $350 million, 0.550% on average daily net assets between $350 million and $500 million, 0.525% on average daily net assets between $500 million and $750 million, 0.500% on average daily net assets between $750 million and $1 billion and 0.450% average daily net on assets in excess of $1 billion. The management fee may be increased or decreased based on the performance of the fund relative to the investment record of the S&P 500 Index. This type of fee is sometimes referred to as a “fulcrum” fee. At the end of each calendar quarter, for each percentage point by which the investment performance of the fund exceeds or is exceeded by the investment record of the S&P 500 Index over the one-year period ending on the last day of the calendar quarter for which the adjustment is being calculated, the management fee will be adjusted upward or downward by the product of (i)  1/4 of 0.01% multiplied by (ii) the average daily net assets of the fund for the one-year period preceding the end of the calendar quarter. The base fee is calculated based on average daily net assets over the most recent quarter while the performance adjustment is based on average daily net assets over a one-year period. The performance adjustment, therefore, is based in part on the fund’s historical performance during a rolling one-year period preceding the time at which it is assessed.

 

 

 

Under the current breakpoint fee structure for the base fee, if the assets of the fund decrease, the rate of the base fee increases. Accordingly, as the fund’s assets decrease, the performance adjustment is added to or subtracted from a base fee of a higher rate. If the amount by which the fund outperforms or underperforms the S&P 500 Index is not a whole percentage point, a pro-rata adjustment shall be made. However, there will be no performance adjustment unless the investment performance of the fund exceeds or is exceeded by the investment record of the S&P 500 Index by at least one percentage point. The maximum quarterly adjustment is  1/4 of 0.10%, which would occur if the fund’s performance exceeds or is exceeded by the S&P 500 Index by ten or more percentage points. As a result, assuming the fund’s current asset level, the fund could pay an annualized management fee that ranges from 0.47% to 0.67% of the fund’s average daily net assets. The table below illustrates the management fee rate that would be applicable based on the relative performance of the fund and the S&P 500 Index during any 12-month period. The fee rate calculated with respect to any 12-month period will apply only for the next quarterly period and then will be subject to recalculation for the following quarter.

 

 

    Underperformance     Neu-
tral
    Outperformance  

Difference between fund
performance and S&P
500 Index return

  -10%
or
more
    -9%     -8%     -7%     -6%     -5%     -4%     -3%     -2%     -1%     0%     +1%     +2%     +3%     +4%     +5%     +6%     +7%     +8%     +9%     +10%
or
more
 
Management fee (annualized)   .47 %   .48 %   .49 %   .50 %   .51 %   .52 %   .53 %   .54 %   .55 %   .56 %   .57 %   .58 %   .59 %   .60 %   .61 %   .62 %   .63 %   .64 %   .65 %   .66 %   .67 %

 

    The first performance adjustment was paid on June 30, 1995 for the one-year period ended on that date after which any performance adjustment has been calculated quarterly based on a rolling one-year period.

 

(3)

 

Based on assets and performance as of December 31, 2007, the fund’s management fee is comprised of a base fee of 0.57% and a performance adjustment of (0.01)%.

 

(4)

 

With respect to Class A, Class B, Class C, Class FI, Class R and Class I shares (as applicable), the fund may pay a fee for recordkeeping services performed for the share class. As a result, the operating expenses of affected share classes may increase over time. The other expenses for Class B, Class C and Class I have been estimated because no Class B, Class C or Class I shares were outstanding as of December 31, 2007. The recordkeeping fee for Class I shares is newly adopted and is not reflected in the other expenses shown in the table above. The other expenses for Class FI and Class R shares have been estimated because no Class FI and Class R shares have been offered prior to the date of this Prospectus.

(5)

 

The fund does not currently offer Class FI or Class R shares.

 

Legg Mason Partners Equity Fund         7


 

Example

This example helps you compare the cost of investing in the fund with the costs of investing in other mutual funds. Your actual cost may be higher or lower. The example assumes:

n  

You invest $10,000 in the fund for the period shown

n  

Your investment has a 5% return each year — the assumption of a 5% return is required by the Securities and Exchange Commission (the “SEC”) for purposes of this example and is not a prediction of the fund’s future performance

n  

You reinvest all distributions and dividends without a sales charge

n  

The fund’s operating expenses (before fee waivers and/or expense reimbursements, if any) remain the same

Number of Years You Own Your Shares

 

     1 year   3 years   5 years   10 years  

Class A (with or without redemption)

  $ 669   $ 869   $ 1,085   $ 1,706  
   

Class B (redemption at end of period)

  $ 676   $ 846   $ 1,040   $ 1,844 (1)
   

Class B (no redemption)

  $ 176   $ 546   $ 940   $ 1,844 (1)
   

Class C (redemption at end of period)

  $ 276   $ 546   $ 940   $ 2,042  
   

Class C (no redemption)

  $ 176   $ 546   $ 940   $ 2,042  
   

Class FI (with or without redemption)(2)

  $ 104   $ 324   $ 563   $ 1,247  
   

Class R (with or without redemption)(2)

  $ 129   $ 402   $ 696   $ 1,532  
   

Class I (with or without redemption)

  $ 63   $ 198   $ 345   $ 774  
   

Class O (with or without redemption)

  $ 70   $ 221   $ 384   $ 859  
   

(1)

 

Assumes conversion to Class A shares approximately eight years after purchase.

(2)

 

The fund does not currently offer Class FI or Class R shares.

 

8         Legg Mason Partners Funds


 

Mo re on the fund’s investments

The fund’s investment objectives and principal investment strategies are described under the section entitled “Investments, risks and performance” above. This section provides further information about the investment strategies that may be used by the fund.

The fund’s investment objectives may be changed by the Board of Trustees without shareholder approval.

Principal investments

Equity securities

Under normal market conditions, the fund invests at least 80% of its assets in equity securities. Traditionally, the fund principally invests in common stock of large-capitalization companies.

Although the fund’s portfolio usually will consist of equity securities listed on the New York and other stock exchanges, issues traded in the over-the-counter market may also be purchased and held to the extent deemed advisable by the portfolio manager.

Common stock.  Common stocks are shares of a corporation or other entity that entitle the holder to a pro rata share of the profits of the corporation, if any, without preference over any other shareholder or class of shareholders, including holders of the entity’s preferred stock and other senior equity. Common stock usually carries with it the right to vote and frequently an exclusive right to do so.

Convertible securities.  Convertible securities are typically preferred stocks that are convertible into common stocks at a specified price or conversion ratio. Because they have the characteristics of both fixed-income securities and common stock, convertible securities are sometimes called “hybrid” securities. Thus, convertible securities will ordinarily provide opportunities for producing both current income and longer-term capital appreciation. Convertible preferred stocks are senior securities of a company offering a stated dividend rate. Convertible securities will at times be priced in the market like other fixed-income securities — that is, their prices will tend to rise when interest rates decline and will tend to fall when interest rates rise.

Foreign securities

The fund may invest up to 25% of its assets in foreign securities. These securities may be denominated and traded in foreign currencies, and may be traded in the United States or on international stock exchanges. The fund’s foreign investments are typically equity securities, but the fund may invest up to 10% of its assets in foreign fixed-income securities. Many foreign securities may be less liquid and their prices more volatile than securities of comparable U.S. companies. Other risks of investing in foreign securities include less governmental supervision and regulations with respect to the issuance of such securities as compared to the United States, less available information concerning foreign issuers than U.S. issuers and higher brokerage commissions and longer transaction settlement periods as compared to the United States. In addition, with respect to some foreign countries there is the possibility of nationalization, expropriation or confiscatory taxation. Income earned in a foreign nation may be subject to taxation (including withholding taxes on interest and

 

Legg Mason Partners Equity Fund         9


 

dividends), or other taxes may be imposed with respect to investments in foreign securities. Dividend income the fund receives from foreign securities may not be eligible for the special tax treatment applicable to qualified dividend income.

Foreign companies are not generally subject to uniform accounting, auditing and financial reporting standards or to other regulatory requirements comparable to those applicable to U.S. companies. Thus, there may be less available information concerning non-U.S. issuers of securities held by the fund than is available concerning U.S. companies. Other risks associated with investments in foreign securities include limitations on the removal of securities, property or other assets of the fund, difficulties in pursuing legal remedies and obtaining judgments in foreign courts, political or social instability and diplomatic developments that could adversely affect the fund’s investments in companies located in foreign countries.

Certain of the risks associated with international investments and investing in smaller capital markets are heightened for investments in emerging market countries. For example, some of the currencies of emerging market countries have experienced devaluation relative to the U.S. dollar, and major adjustments have been made periodically in certain of such currencies. Certain of such countries face serious exchange constraints. In addition, governments of many emerging market countries have exercised and continue to exercise substantial influence over many aspects of the private sector. In certain cases, the government owns or controls many companies. Accordingly, government actions in the future could have a significant effect on economic conditions in developing countries which could affect private sector companies and consequently, the value of certain securities held in the fund’s portfolio.

The fund may invest up to 10% of its assets in securities of emerging markets issuers. Investment in certain emerging market securities is restricted or controlled to varying degrees which may at times limit or preclude investment in certain emerging market securities and increase the costs and expenses of the fund. Certain emerging market countries require governmental approval prior to investments by foreign persons, limit the amount of investment by foreign persons in a particular issuer, limit the investment by foreign persons only to a specific class of securities of an issuer that may have less advantageous rights than other classes, restrict investment opportunities in issuers in industries deemed important to national interests and/or impose additional taxes on foreign investors.

Debt obligations

The fund may invest its assets in non-convertible bonds, debentures, notes or other evidences of indebtedness whether for the short or long term or hold a portion of its assets in cash, government securities or other types of securities whenever the fund’s portfolio manager deems such investments advisable. The fund may invest in debt obligations, which are securities used by issuers to borrow money, when the portfolio manager believes they may be useful for the purposes of generating income and growth of capital. The portfolio manager analyzes the credit quality of unrated securities similarly to how he analyzes equity investments (reviewing the business model and cash flows and talking to management) and then makes a quality determination. This analysis is done by the portfolio manager with the assistance of research analysts. Debt obligations include bonds, notes (including structured notes), debentures, commercial paper and other money market

 

10         Legg Mason Partners Funds


 

instruments issued by banks, corporations, local, state and national governments and instrumentalities, both U.S. and foreign, and supranational entities, mortgage-related and asset-backed securities, convertible securities and loan participations and assignments. Debt obligations may be fixed-income securities or have various types of payment and reset terms or features, including adjustable rate, zero coupon, contingent, deferred, payment in kind and auction rate features.

High yield, lower quality securities

The fund may invest up to 20% of its net assets in fixed-income securities that are high yield, lower quality securities rated below investment grade by a recognized rating agency or unrated securities determined by the portfolio manager to be of equivalent quality. These securities are commonly referred to as “junk bonds.” The issuers of lower quality bonds may be highly leveraged and have difficulty servicing their debts, especially during prolonged economic recessions or periods of rising interest rates. The prices of lower quality securities are volatile and may go down due to market perceptions of deteriorating issuer creditworthiness or economic conditions. Lower quality securities may become illiquid and hard to value in down markets.

Non-principal investments

Preferred stock

Preferred stocks, like common stocks, represent an equity ownership in an issuer, but generally have a priority claim over common stocks, but not over debt, with respect to dividend payments and upon the liquidation or bankruptcy of the issuer. Therefore, preferred stock is subject to the credit risk of the issuer, but because of its subordinate position to debt obligations of the issuer, the deterioration of the credit of an issuer is likely to cause greater decreases in the value of preferred stock than in more senior debt obligations.

Exchange-traded funds

The fund may invest in shares of open-end mutual funds or unit investment trusts that are traded on a stock exchange, called exchange-traded funds (“ETFs”). The fund may invest in both creation units and retail classes of ETF shares. Typically, an ETF seeks to track the performance of an index, such as the S&P 500 or the NASDAQ 100, by holding in its portfolio either the same securities that comprise the index or a representative sample of the index. Investing in an ETF will give the fund exposure to the securities comprising the index on which the ETF is based and the fund will gain or lose value depending on the performance of the index.

Like mutual funds, ETFs have expenses, including advisory fees paid by ETF holders, and, as a result, an investor is subject to a duplicative level of fees if the fund invests in ETFs.

Warrants

Warrants acquired by the fund entitle it to buy common stock from the issuer at a specified price and time. Warrants are subject to the same market risks as stocks, but may be more volatile in price. Because investing in warrants can provide a greater potential for profit or loss than an equivalent investment in the underlying security, warrants involve leverage and are considered speculative investments. At the time of issuance of a warrant, the cost is

 

Legg Mason Partners Equity Fund         11


 

generally substantially less than the cost of the underlying security itself, and therefore, the investor is able to gain exposure to the underlying security with a relatively low capital investment. Price movements in the underlying security are generally magnified in the price movements of the warrant, although changes in the market value of the warrant may not necessarily correlate to the prices of the underlying security. The fund’s investment in warrants will not entitle it to receive dividends or exercise voting rights and will become worthless if the warrants cannot be profitably exercised before the expiration dates.

Repurchase agreements

The fund may enter into repurchase agreements for cash management purposes. A repurchase agreement is a transaction in which the seller of a security commits itself at the time of the sale to repurchase that security from the buyer at a mutually agreed upon time and price. When the fund enters into a repurchase agreement, it is in effect lending money. The fund will enter into repurchase agreements only with dealers, domestic banks or recognized financial institutions which, in the opinion of the manager, based on guidelines established by the fund’s Board, are deemed creditworthy. The manager will monitor the value of the securities underlying the repurchase agreement at the time the transaction is entered into and at all times during the term of the repurchase agreement to ensure that the value of the securities always exceeds the repurchase price. In the event of default by the seller under the repurchase agreement, the fund may incur losses and experience time delays in connection with the disposition of the underlying securities. To the extent that, in the meantime, the value of the securities that the fund has purchased has decreased, the fund could experience a loss.

Securities lending

The fund may lend portfolio securities representing up to one-third of the value its of total assets in order to increase its net investment income. The loans are continuously secured by cash or liquid securities equal to no less than the market value, determined daily, of the securities loaned. The risks in lending securities consist of possible delay in receiving additional collateral, delay in recovery of securities when the loan is called or possible loss of collateral should the borrower fail financially.

Derivatives and hedging techniques

In order to enhance returns, reduce risks, and manage taxes and cash flows, the fund may invest in derivatives. The fund also uses several derivative strategies (such as options or index options) to hedge market risks (such as broad or specific market increments, interest rates and currency exchange rates) and cash flows and to seek to increase the fund’s income or gain, including the purchase of calls, puts and collars. The fund may own “in the money” calls on the S&P 500 Index, funded by a combination of cash, high yield bonds and convertible bonds (“in the money” means the value of the underlying instrument or stock index exceeds, in the case of a call option, or is less than, in the case of a put option, the exercise price of the option). This strategy keeps the fund fully invested, while giving it the flexibility to easily manage volatile cash flows. “In the money” call options on the S&P 500 Index fall less than the market does when the value of the S&P 500 Index nears or falls below the strike price of the option.

 

12         Legg Mason Partners Funds


 

Therefore, this strategy should make the fund less volatile than the S&P 500 Index in the event of a severe market decline. The fund may also own puts on the S&P 500 Index. This strategy will protect against a decline in the fund’s return in the event of a market decline. The fund may write covered calls in order to increase its returns. Both of these strategies should make the fund less volatile than the S&P 500 Index in the event of a market decline.

The fund may purchase put and call options and write covered put and call options on stocks and stock indices listed on domestic and foreign securities exchanges in order to hedge against movements in the equity markets or to increase income or gain to the fund. In addition, the fund may purchase options on stocks that are traded over-the-counter. Options on stock indices are similar to options on specific securities. However, because options on stock indices do not involve the delivery of an underlying security, the option represents the holder’s right to obtain from the writer cash in an amount equal to a fixed multiple of the amount by which the exercise price exceeds (in the case of a put) or is less than (in the case of a call) the closing value of the underlying stock index on the exercise date. Stock index options are subject to position and exercise limits and other regulations imposed by the exchange on which they are traded.

Borrowing

The fund may borrow to meet redemption requests. Certain borrowing may create an opportunity for increased return, but, at the same time, creates special risks. For example, borrowing may exaggerate changes in the net asset value of the fund’s shares and in the return on the fund’s portfolio. The fund may be required to liquidate portfolio securities at a time when it would be disadvantageous to do so in order to make payments with respect to any borrowings. Interest on any borrowings will be a fund expense and will reduce the value of the fund’s shares.

Short sales

The fund may sell securities short from time to time. The fund may hold no more than 25% of the fund’s net assets (taken at the then-current market value) as required collateral for such sales at any one time. A short sale is a transaction in which the fund sells securities it does not own in anticipation of a decline in the market price of the securities. A short sale of a security involves the risk that instead of declining, the price of the security sold short will rise. If the price of the security sold short increases between the time of the short sale and the time the fund replaces the borrowed security, the fund will incur a loss; conversely, if the price declines, the fund will realize a gain. The short sale of securities involves the possibility of a theoretically unlimited loss since there is a theoretically unlimited potential for the market price of the security sold short to increase.

Defensive investing

During adverse market, economic, political or other conditions, the manager may deem it advisable to invest varying portions of the fund’s assets in fixed-income securities or to hold substantial amounts of cash or its equivalent. These investments may be inconsistent with the fund’s investment objectives and principal investment strategies. To the extent that the fund invests defensively, it is unlikely the fund will achieve its investment objectives.

 

Legg Mason Partners Equity Fund         13


 

Percentage limitations

Any policy or limitation for the fund that is expressed as a percentage of assets is determined at the time of purchase of portfolio securities. The policy will not be violated if these limitations are exceeded after purchase because of changes in the market value of the fund’s assets or for any other reason. The fund will comply with any percentage limitations imposed on the fund by the Investment Company Act of 1940, as amended (e.g., borrowing restrictions) or by SEC staff positions (e.g., percentage limitations on illiquid securities).

Trading frequency

Although the fund generally invests for the longer term, the fund may engage in active and frequent trading, resulting in high portfolio turnover, in order to achieve its investment objectives. This may lead to the realization and distribution to shareholders of higher capital gains, increasing their tax liability. Frequent trading also increases transaction costs, which could detract from the fund’s performance. The “Financial highlights” section of this Prospectus shows the fund’s historical portfolio turnover rate.

Portfolio holdings

The fund’s policies and procedures with respect to the disclosure of the fund’s portfolio securities are described in the Statement of Additional Information (the “SAI”).

Other information

The fund may also use other strategies and invest in other securities that are described, along with their risks, in the fund’s SAI. However, the fund may not use all of the strategies and techniques or invest in all of the types of securities described in this Prospectus or in the SAI. Also note that