LMP Equity Trust -- Legg Mason Partners Capital Fund

N-CSR 1 dncsr.htm LMP EQUITY TRUST -- LEGG MASON PARTNERS CAPITAL FUND LMP Equity Trust -- Legg Mason Partners Capital Fund

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES


Investment Company Act file number		811-06444

Legg Mason Partners Equity Trust

(Exact name of registrant as specified in charter)


55 Water Street, New York, NY		10041
(Address of principal executive offices)		(Zip code)

Robert I. Frenkel, Esq.

Legg Mason & Co., LLC

100 First Stamford Place, 4^th Floor

Stamford, CT 06902

(Name and address of agent for service)

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

Date of fiscal year end: December 31

Date of reporting period: December 31, 2008

ITEM 1.

REPORT TO STOCKHOLDERS.

The Annual Report to Stockholders is filed herewith.

LOGO

ANNUAL REPORT / DECEMBER 31, 2008

Legg Mason Partners

Capital Fund


Managed by		CLEARBRIDGE ADVISORS

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

Fund objective

The Fund seeks capital appreciation through investment in securities which the portfolio managers believe have above-average capital appreciation potential.

What’s inside



Letter from the chairman		I

Fund overview		1

Fund at a glance		6

Fund expenses		7

Fund performance		9

Historical performance		10

Schedule of investments		11

Statement of assets and liabilities		14

Statement of operations		15

Statements of changes in net assets		16

Financial highlights		17

Notes to financial statements		21

Report of independent registered public accounting firm		32

Board approval of management and subadvisory agreements		33

Additional information		38

Important tax information		45

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s investment manager and ClearBridge Advisors, LLC (“ClearBridge”) is the Fund’s subadviser. LMPFA and ClearBridge are wholly-owned subsidiaries of Legg Mason, Inc.

Letter from the chairman

LOGO

R. Jay Gerken, CFA

Chairman, President and Chief Executive Officer

Dear Shareholder,

The U.S. economy weakened significantly during the 12-month reporting period ended December 31, 2008. Looking back, U.S. gross domestic product (“GDP”)ⁱ contracted 0.2% in the fourth quarter of 2007. This was due to continued weakness in the housing market, an ongoing credit crunch and soaring oil and food prices. The economy then expanded 0.9% and 2.8% during the first and second quarters of 2008, respectively. Contributing to this rebound were rising exports that were buoyed by a weakening U.S. dollar. In addition, consumer spending accelerated, aided by the government’s tax rebate program. However, the dollar’s rally and the end of the rebate program, combined with other strains on the economy, caused GDP to take a step backward during the second half of 2008. According to the U.S. Department of Commerce, third quarter 2008 GDP declined 0.5% and its advance estimate for fourth quarter GDP decline was 3.8%, the latter being the worst quarterly reading since 1982.

While there were increasing signs that the U.S. was headed for a recession, the speculation ended in December 2008. At that time, the National Bureau of Economic Research (“NBER”) — which has the final say on when one begins and ends — announced that a recession had begun in December 2007. The NBER determined that a recession had already started using its definition, which is based on “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income and other indicators.”

Regardless of how one defines a recession, it felt like we were in the midst of an economic contraction for much of 2008. Consumer spending, which represents approximately two-thirds of GDP, has been disappointing. According to the International Council of Shopping Centers, retail sales rose a tepid 1% in 2008, the weakest level in at least 38 years. In terms of the job market, the U.S. Department of Labor reported that payroll employment declined in each of the 12 months of 2008. During 2008 as a whole, 2.6 million jobs were lost, the largest annual decline since World War II ended in 1945. In addition, at the end of 2008, the unemployment rate had risen to 7.2%, its highest level since January 1993.


Legg Mason Partners Capital Fund		I

Letter from the chairman continued

Ongoing issues related to the housing and subprime mortgage markets and seizing credit markets prompted the Federal Reserve Board (“Fed”)ⁱⁱ to take aggressive and, in some cases, unprecedented actions. When 2008 began, the federal funds rateⁱⁱⁱ was 4.25%. This was quickly brought down to 3.00% by the end of January 2008, on the back of two Fed rate cuts. The Fed continued to lower the federal funds rate to 2.00% by the end of April 2008, but then left rates on hold for several months. This was due to growing inflationary pressures as a result of soaring oil and commodity prices, coupled with the sagging U.S. dollar. However, as inflation receded along with oil prices and the global financial crisis escalated, the Fed cut rates twice in October to 1.00%. Then, in mid-December 2008, it reduced the federal funds rate to a range of zero to 0.25%, an historic low. In conjunction with its December meeting, the Fed stated that it “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”

In addition to the interest rate cuts, the Fed took several actions to improve liquidity in the credit markets. In March 2008, it established a new lending program allowing certain brokerage firms, known as primary dealers, to also borrow from its discount window. Also in March, the Fed played a major role in facilitating the purchase of Bear Stearns by JPMorgan Chase. In mid-September 2008, it announced an $85 billion rescue plan for ailing AIG and pumped $70 billion into the financial system as Lehman Brothers’ bankruptcy and mounting troubles at other financial firms roiled the markets.

The U.S. Department of the Treasury has also taken an active role in attempting to stabilize the financial system, as it orchestrated the government’s takeover of mortgage giants Fannie Mae and Freddie Mac in September 2008. In addition, on October 3, 2008, the Treasury’s $700 billion Troubled Asset Relief Program (“TARP”) was approved by Congress and signed into law by President Bush. As part of TARP, the Treasury had planned to purchase bad loans and other troubled financial assets. However, in November 2008, Treasury Secretary Paulson said, “Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending.”

The U.S. stock market was extremely volatile and generated very poor results during the 12 months ended December 31, 2008. Stock prices declined during each of the first three months of the reporting period. This was due, in part, to the credit crunch, weakening corporate profits, rising inflation and fears of an impending recession. The market then reversed course and posted positive returns in April and May 2008. The market’s gains were largely attributed to hopes that the U.S. would skirt a recession and that corporate profits would rebound as the year progressed. However,


II		Legg Mason Partners Capital Fund

given the escalating credit crisis and the mounting turmoil in the financial markets, stock prices moved lower during five of the last seven months of the reporting period, including S&P 500 Index^iv (the “Index”) returns of -8.91%, -16.79% and -7.18% in September, October and November 2008, respectively. While the Index rallied approximately 20% from its low on November 20, 2008 through the end of the year, it was too little, too late. All told, the Index returned -37.00% in 2008, its third worst year ever and the biggest calendar year loss since 1937.

Looking at the U.S. stock market more closely, its descent was broad in scope, with every major index posting double-digit losses. In terms of market capitalizations, large-, mid- and small-cap stocks, as measured by the Russell 1000^v, Russell Midcap^vi and Russell 2000^vii Indexes, returned -37.60%, -41.46% and -33.79%, respectively, during the 12-month period ended December 31, 2008. From an investment style perspective, growth and value stocks, as measured by the Russell 3000 Growth^viii and Russell 3000 Value^ix Indexes, returned -38.44% and -36.25%, respectively.

A special note regarding increased market volatility

In recent months, we have experienced a series of events that have impacted the financial markets and created concerns among both novice and seasoned investors alike. In particular, we have witnessed the failure and consolidation of several storied financial institutions, periods of heightened market volatility, and aggressive actions by the U.S. federal government to steady the financial markets and restore investor confidence. While we hope that the worst is over in terms of the issues surrounding the credit and housing crises, it is likely that the fallout will continue to impact the financial markets and the U.S. economy well into 2009.

Like all asset management firms, Legg Mason has not been immune to these difficult and, in some ways, unprecedented times. However, today’s challenges have only strengthened our resolve to do everything we can to help you reach your financial goals. Now, as always, we remain committed to providing you with excellent service and a full spectrum of investment choices. And rest assured, we will continue to work hard to ensure that our investment managers make every effort to deliver strong long-term results.

We also remain committed to supplementing the support you receive from your financial advisor. One way we accomplish this is through our enhanced website, www.leggmason.com/individualinvestors. Here you can gain immediate access to many special features to help guide you through difficult times, including:

•

Fund prices and performance,

•

Market insights and commentaries from our portfolio managers, and

•

A host of educational resources.


Legg Mason Partners Capital Fund		III

Letter from the chairman continued

During periods of market unrest, it is especially important to work closely with your financial advisor and remember that reaching one’s investment goals unfolds over time and through multiple market cycles. Time and again, history has shown that, over the long run, the markets have eventually recovered and grown.

Information about your fund

As you may be aware, several issues in the mutual fund industry have come under the scrutiny of federal and state regulators. Affiliates of the Fund’s manager have, in recent years, received requests for information from various government regulators regarding market timing, late trading, fees, and other mutual fund issues in connection with various investigations. The regulators appear to be examining, among other things, the Fund’s response to market timing and shareholder exchange activity, including compliance with prospectus disclosure related to these subjects. The Fund is not in a position to predict the outcome of these requests and investigations.

Please read on for a more detailed look at prevailing economic and market conditions during the Fund’s reporting period and to learn how those conditions have affected Fund performance.

Important information with regard to recent regulatory developments that may affect the Fund is contained in the Notes to Financial Statements included in this report.

As always, thank you for your confidence in our stewardship of your assets. We look forward to helping you meet your financial goals.

Sincerely,

LOGO

R. Jay Gerken, CFA

Chairman, President and Chief Executive Officer

January 30, 2009


IV		Legg Mason Partners Capital Fund

All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.

ⁱ	Gross domestic product (“GDP”) is the market value of all final goods and services produced within a country in a given period of time.

ⁱⁱ	The Federal Reserve Board (“Fed”) is responsible for the formulation of policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

ⁱⁱⁱ	The federal funds rate is the rate charged by one depository institution on an overnight sale of immediately available funds (balances at the Federal Reserve) to another depository institution; the rate may vary from depository institution to depository institution and from day to day.

^iv	The S&P 500 Index is an unmanaged index of 500 stocks and is generally representative of the performance of larger companies in the U.S.

The Russell 1000 Index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index. The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the U.S. equity market.

^vi	The Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index, which represents approximately 25% of the total market capitalization of the Russell 1000 Index.

^vii	The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.

^viii

The Russell 3000 Growth Index measures the performance of those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth values. (A price-to-book ratio is the price of a stock compared to the difference between a company’s assets and liabilities.)

^ix	The Russell 3000 Value Index measures the performance of those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth values.


Legg Mason Partners Capital Fund		V

Fund overview

Q. What is the Fund’s investment strategy?

A. The Fund seeks capital appreciation through investment in securities which the portfolio managers believe have above-average capital appreciation potential. The Fund invests primarily in equity securities of U.S. companies that typically range in size from established large-capitalization companies to medium-sized companies, and may also invest in small-capitalization companies.

Our investment philosophy is predicated on the belief that over a reasonable time horizon, real economic returns — as determined by a company’s current and prospective cash flow characteristics — are the key determinants of stock valuations. While basic in concept, the process of understanding and quantifying those returns — absolute and relative to the expectations embedded in a stock’s current valuation — depends on careful, thoughtful, thorough fundamental and valuation analysis.

The Fund is a professionally managed portfolio, which is not constrained by typical style box restrictions. We seek to add value by relying on bottom-up, proprietary research to identify companies attractively priced relative to their current or prospective free cash flow.

Whether a company is traditionally defined as being “value” or “growth” is irrelevant to our analysis. There is a price at which we want to own a company and a price at which we are not interested, regardless of the strength of its underlying fundamentals.

The Fund has the ability to shift investments across industries, market capitalization and asset classes to help maximize return potential and manage risk in all stages of a market cycle. The Fund’s portfolio is not constrained to a single style box and, over time, may move from one style box to another.

Q. What were the overall market conditions during the Fund’s reporting period?

A. The popping of the housing bubble, the unwinding of the financial system’s excessive leverage and the multiplying effect of credit derivatives combined to make 2008 a horrible year, the worst since 1931, as measured by the Dow Jones Industrial Average (“DJIA”)ⁱ.

Economic numbers deteriorated significantly in the fourth quarter of the year. The unemployment rate rose to 7.2% and threatened to move far higher. During the Christmas season, retail sales fell 2.6%, the worst since 1970. Auto sales collapsed to a 10.5 million seasonally adjusted annual rate (“SAAR”), the lowest level since the early 1980s. Chrysler and GM are teetering on the edge of bankruptcy. Housing starts and permits hit new lows. Home prices fell sharply and have not yet stabilized, while inventories remain elevated.


Legg Mason Partners Capital Fund 2008 Annual Report		1

Fund overview continued

The stock market in September and in the fourth quarter reeled from blow after blow to the U.S. financial system. On Monday, September 15, 2008 the U.S. Department of the Treasury and the Federal Reserve Board (“Fed”)ⁱⁱ decided to allow Lehman Brothers to declare bankruptcy, without interfering to protect creditors as they had with Bear Stearns in March. Their lack of action led to panic in the U.S. credit markets.

Only in November, when the Fed announced a plan to purchase mortgage-backed securities, did the markets start to settle. Since early November, numerous signs of credit improvement appeared. Mortgage rates fell below 5%, London Interbank Offered Rate (“LIBOR”)ⁱⁱⁱ fell back to pre-crisis levels and high-quality bond spreads fell enough that several large companies issued debt in late December. The stock market responded to the signs of credit easing by rallying more than 20% between the bottom on November 20^th and the end of the year.

Q. How did we respond to these changing market conditions?

A. Employing proprietary fundamental research and bottom-up stock selection, we continued to seek out and invest in what we believed to be the most undervalued securities. As the credit crisis unfolded over the course of the year and the odds of a serious recession increased, we steered the Fund into a more defensive position by holding more cash and reducing our exposure to those securities that we believed were most vulnerable, especially stocks in the Financials, Energy and Information Technology (“IT”) sectors, while increasing our exposure to the Health Care, Industrials and Consumer Discretionary sectors. We continued to avoid exposure to the Consumer Staples, Materials, Telecommunication Services (“Telecom”) and Utilities sectors.

The nearly indiscriminate treatment of stocks during the last six months of the year has produced an opportunity to buy and own what we feel are some of the world’s best companies at very attractive prices. In the second half of 2008, we purchased shares of some of these companies and, as we write this report, continue to find new and compelling investment opportunities.

Performance review

For the 12 months ended December 31, 2008, Class A shares of Legg Mason Partners Capital Fund, excluding sales charges, returned -42.06%. The Fund’s unmanaged benchmark, the Russell 3000 Index^iv, returned -37.31% over the same time frame. The Lipper Multi-Cap Core Funds Category Average¹ returned -38.79 % for the same period.

Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the 12-month period ended December 31, 2008, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 787 funds in the Fund’s Lipper category, and excluding sales charges.


2		Legg Mason Partners Capital Fund 2008 Annual Report


PERFORMANCE SNAPSHOT as of December 31, 2008 (excluding sales charges) (unaudited)
	6 MONTHS	12 MONTHS
Capital Fund — Class A Shares	-36.87%	-42.06%
Russell 3000 Index	-29.52%	-37.31%
Lipper Multi-Cap Core Funds Category Average¹	-31.57%	-38.79%

The performance shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown above. Principal value and investment returns will fluctuate and investors’ shares, when redeemed, may be worth more or less than their original cost. To obtain performance data current to the most recent month-end, please visit our website at www.leggmason.com/individualinvestors.
Excluding sales charges, Class B shares returned -37.13%, Class C shares returned -37.09% and Class I shares returned -36.75% over the six months ended December 31, 2008. Excluding sales charges, Class B shares returned -42.52%, Class C shares returned -42.46% and Class I shares returned -41.85% over the 12 months ended December 31, 2008. All share class returns assume the reinvestment of all distributions, including returns of capital, if any, at net asset value and the deduction of all Fund expenses. Returns have not been adjusted to include sales charges that may apply when shares are purchased or the deduction of taxes that a shareholder would pay on Fund distributions.
TOTAL ANNUAL OPERATING EXPENSES (unaudited)
As of the Fund’s most current prospectus dated April 28, 2008, the gross total operating expense ratios for Class A, Class B, Class C and Class I shares were 0.99%, 1.65%, 1.66% and 0.61%, respectively.

Q. What were the leading contributors to performance?

A. Relative to the benchmark, the Fund’s stock selection in the IT, Financials and Consumer Staples sectors contributed to performance for the year, as did an underweight to the Materials sector and an overweight to the Energy sector. The Fund’s allocation to several options contracts also had a net positive impact on relative performance for the year.

In terms of individual Fund holdings, leading contributors to performance for the period included positions in Travelers Cos. Inc. in the Financials sector, Nabors Industries Ltd. in the Energy sector, Foundry Networks and Photon Dynamics, both in the IT sector, and Sherwin-Williams Co. in the Consumer Discretionary sector.

Q. What were the leading detractors from performance?

A. Both the Fund’s overall stock selection and overall sector allocation detracted from performance as measured against the benchmark for the period. Specifically, the Fund’s stock selection in the Energy, Industrials, Health Care and Consumer Discretionary sectors negatively impacted relative performance. The Fund’s overweights to the IT, Financials and Industrials

Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the period ended December 31, 2008, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 823 funds for the six-month period and among the 787 funds for the 12-month period in the Fund’s Lipper category, and excluding sales charges.


Legg Mason Partners Capital Fund 2008 Annual Report		3

Fund overview continued

sectors, and its underweights to the Consumer Staples, Health Care, Utilities and Telecom sectors also hurt relative performance for the year.

In terms of individual Fund holdings, leading detractors from performance for the period included positions in General Electric Co. and McDermott International Inc., both in the Industrials sector, ION Geophysical Corp. in the Energy sector, Cisco Systems Inc. in the IT sector and WPP PLC in the Consumer Discretionary sector.

Q. Were there any significant changes to the Fund during the reporting period?

A. During the reporting period, we closed our existing positions in a number of holdings including American Express Co., Lehman Brothers Holdings Inc. and American International Group Inc., all in the Financials sector, UnitedHealth Group Inc. in the Health Care sector, Nabors Industries Ltd. in the Energy sector, and a number of IT sector holdings including Texas Instruments Inc., Motorola Inc., LSI Corp., Oracle Corp. and Comverse Technology Inc.

We established several new positions during the period, including those in Travelers Cos. Inc. in the Financials sector, Roche Holding AG, Shire Ltd. (ADR) and Genentech Inc., all in the Health Care sector, Juniper Networks Inc. and Google Inc. (Class A Shares) in the IT sector, Comstock Resources Inc. in the Energy sector, Quanta Services Inc. in the Industrials sector and Li Ning Co., Ltd. and American Eagle Outfitters Inc., both in the Consumer Discretionary sector.

Thank you for your investment in Legg Mason Partners Capital Fund. Though 2008 was a tragic year for nearly all investors, we pledge to work as tirelessly as anyone and to try to make the good investment decisions that you have come to expect from us. As always, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Fund’s investment goals.

Sincerely,



Brian M. Angerame		Derek J. Deutsch, CFA
Portfolio Manager		Portfolio Manager
ClearBridge Advisors, LLC		ClearBridge Advisors, LLC

January 20, 2009


4		Legg Mason Partners Capital Fund 2008 Annual Report

The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole.

Portfolio holdings and breakdowns are as of December 31, 2008 and are subject to change and may not be representative of the portfolio managers’ current or future investments. The Fund’s top 10 holdings (as a percentage of net assets) as of this date were: General Electric Co. (5.4%), Cisco Systems Inc. (5.2%), Travelers Cos. Inc. (5.2%), Roche Holding AG (5.1%), Accenture Ltd., Class A Shares (4.6%), Shire Ltd., ADR (4.4%) WPP PLC (3.4%), Invesco Ltd. (3.3%), L-3 Communications Holdings Inc. (3.3%) and Juniper Networks Inc. (3.1%). Please refer to pages 11 through 13 for a list and percentage breakdown of the Fund’s holdings.

The mention of sector breakdowns is for informational purposes only and should not be construed as a recommendation to purchase or sell any securities. The information provided regarding such sectors is not a sufficient basis upon which to make an investment decision. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies discussed should consult their financial professional. The Fund’s top five sector holdings (as a percentage of net assets) as of December 31, 2008 were: Information Technology (26.7%), Industrials (18.2%), Health Care (14.8%), Financials (14.5%) and Energy (11.0%). The Fund’s portfolio composition is subject to change at any time.

RISKS: Investments in small- and medium capitalization companies may involve a higher degree of risk and volatility than investments in larger, more established companies. The Fund may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. Please see the Fund’s prospectus for more information on these and other risks.

All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.

ⁱ

The Dow Jones Industrial Average (“DJIA”) is a widely followed measurement of the stock market. The average is comprised of 30 stocks that represent leading companies in major industries. These stocks, widely held by both individual and institutional investors, are considered to be all blue-chip companies.

ⁱⁱ	The Federal Reserve Board (“Fed”) is responsible for the formulation of policies designed to promote economic growth, full employment, stable prices and a sustainable pattern of international trade and payments.

ⁱⁱⁱ	The London Interbank Offered Rate (“LIBOR”) is the interest rate offered by a specific group of London banks for U.S. dollar deposits of a stated maturity. LIBOR is used as a base index for setting rates of some adjustable rate financial instruments, including Adjustable Rate Mortgages (“ARMs”).

^iv	The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the U.S. equity market.


Legg Mason Partners Capital Fund 2008 Annual Report		5

Fund at a glance (unaudited)

INVESTMENT BREAKDOWN (%) As a percent of total investments — December 31, 2008

LOGO


6		Legg Mason Partners Capital Fund 2008 Annual Report

Fund expenses (unaudited)

Example

As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including front-end and back-end sales charges (loads) on purchase payments; and (2) ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.

This example is based on an investment of $1,000 invested on July 1, 2008 and held for the six months ended December 31, 2008.

Actual expenses

The table below titled “Based on Actual Total Return” provides information about actual account values and actual expenses. You may use the information provided in this table, together with the amount you invested, to estimate the expenses that you paid over the period. To estimate the expenses you paid on your account, divide your ending account value by $1,000 (for example, an $8,600 ending account value divided by $1,000 = 8.6), then multiply the result by the number under the heading entitled “Expenses Paid During the Period”.


BASED ON ACTUAL TOTAL RETURN¹
	ACTUAL TOTAL RETURN WITHOUT SALES CHARGES²		BEGINNING ACCOUNT VALUE		ENDING ACCOUNT VALUE		ANNUALIZED EXPENSE RATIO		EXPENSES PAID DURING THE PERIOD³
Class A	(36.87	)%	$	1,000.00	$	631.30	1.14	%	$	4.67
Class B	(37.13	)		1,000.00		628.70	1.89			7.74
Class C	(37.09	)		1,000.00		629.10	1.81			7.41
Class I	(36.75	)		1,000.00		632.50	0.77			3.16

¹	For the six months ended December 31, 2008.

Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value and does not reflect the deduction of the applicable sales charge with respect to Class A shares or the applicable contingent deferred sales charges (“CDSC”) with respect to Class B and C shares. Total return is not annualized, as it may not be representative of the total return for the year. Performance figures may reflect fee waivers and/or expense reimbursements. Past performance is no guarantee of future results. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower.

³	Expenses (net of fee waivers and/or expense reimbursements) are equal to each class’ respective annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year, then divided by 366.


Legg Mason Partners Capital Fund 2008 Annual Report		7

Fund expenses (unaudited) continued

Hypothetical example for comparison purposes

The table below titled “Based on Hypothetical Total Return” provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio and an assumed rate of return of 5.00% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use the information provided in this table to compare the ongoing costs of investing in the Fund and other funds. To do so, compare the 5.00% hypothetical example relating to the Fund with the 5.00% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table below are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front-end or back-end sales charges (loads). Therefore, the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.


BASED ON HYPOTHETICAL TOTAL RETURN¹
	HYPOTHETICAL ANNUALIZED TOTAL RETURN		BEGINNING ACCOUNT VALUE		ENDING ACCOUNT VALUE		ANNUALIZED EXPENSE RATIO		EXPENSES PAID DURING THE PERIOD²
Class A	5.00	%	$	1,000.00	$	1019.41	1.14	%	$	5.79
Class B	5.00			1,000.00		1015.63	1.89			9.58
Class C	5.00			1,000.00		1016.04	1.81			9.17
Class I	5.00			1,000.00		1021.27	0.77			3.91

¹	For the six months ended December 31, 2008.

²	Expenses (net of fee waivers and/or expense reimbursements) are equal to each class’ respective annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year, then divided by 366.


8		Legg Mason Partners Capital Fund 2008 Annual Report

Fund performance (unaudited)


AVERAGE ANNUAL TOTAL RETURNS¹
	WITHOUT SALES CHARGES²
	CLASS A		CLASS B		CLASS C		CLASS I³
Twelve Months Ended 12/31/08	(42.06	)%	(42.52	)%	(42.46	)%	(41.85	)%
Five Years Ended 12/31/08	(4.54	)	(5.28	)	(5.26	)	(4.18	)
Ten Years Ended 12/31/08	2.48		1.68		1.69		2.85

	WITH SALES CHARGES⁴
	CLASS A		CLASS B		CLASS C		CLASS I³
Twelve Months Ended 12/31/08	(45.40	)%	(45.34	)%	(43.02	)%	(41.85	)%
Five Years Ended 12/31/08	(5.66	)	(5.41	)	(5.26	)	(4.18	)
Ten Years Ended 12/31/08	1.87		1.68		1.69		2.85

CUMULATIVE TOTAL RETURNS¹
	WITHOUT SALES CHARGES²
Class A (12/31/98 through 12/31/08)	27.75%
Class B (12/31/98 through 12/31/08)	18.11
Class C (12/31/98 through 12/31/08)	18.21
Class I³ (12/31/98 through 12/31/08)	32.51

All figures represent past performance and are not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. 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.

²	Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value and does not reflect the deduction of the applicable sales charge with respect to Class A shares or the applicable CDSC with respect to Class B and C shares.

Class Y shares were renamed Class I shares on November 20, 2006. The Class I shares were converted into Class O shares and redesignated as Class I shares on December 1, 2006. The former Class I shares were terminated. The inception date and performance history of the former Class O shares have been maintained.

⁴

Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value. In addition, Class A shares reflect the deduction of the maximum initial sales charge of 5.75%; Class B shares reflect the deduction of a 5.00% CDSC, which applies if shares are redeemed within one year from purchase payment and declines thereafter by 1.00% per year until no CDSC is incurred. Class C shares also reflect the deduction of a 1.00% CDSC, which applies if shares are redeemed within one year from purchase payment.


Legg Mason Partners Capital Fund 2008 Annual Report		9

Historical performance (unaudited)

VALUE OF $10,000 INVESTED IN CLASS I SHARES OF LEGG MASON PARTNERS CAPITAL FUND VS.
RUSSELL 3000 INDEX^† — December 1998 - December 2008

LOGO

^†

Hypothetical illustration of $10,000 invested in Class I shares of Legg Mason Partners Capital Fund on December 31, 1998, assuming the reinvestment of all distributions, including returns of capital, if any, at net asset value through December 31, 2008. The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the U.S. equity market. The Index is unmanaged and is not subject to the same management and trading expenses as a mutual fund. Please note that an investor cannot invest directly in an index. The performance of the Fund’s other classes may be greater or less than the Class I shares’ performance indicated on this chart, depending on whether greater or lesser sales charges and fees were incurred by shareholders investing in the other classes.


10		Legg Mason Partners Capital Fund 2008 Annual Report

Schedule of investments

December 31, 2008


LEGG MASON PARTNERS CAPITAL FUND
SHARES	SECURITY	VALUE

COMMON STOCKS — 96.1%
CONSUMER DISCRETIONARY — 10.9%
	Hotels, Restaurants & Leisure — 1.1%
180,000	Ctrip.com International Ltd., ADR	$	4,284,000
	Leisure Equipment & Products — 2.2%
5,500,000	Li Ning Co., Ltd.^(a)		8,689,994
	Media — 3.4%
2,283,500	WPP PLC^(a)		13,311,073
	Specialty Retail — 4.2%
900,000	American Eagle Outfitters Inc.		8,424,000
135,000	Sherwin-Williams Co.		8,066,250
	Total Specialty Retail		16,490,250
	TOTAL CONSUMER DISCRETIONARY		42,775,317
CONSUMER STAPLES — 0.0%
	Food & Staples Retailing — 0.0%
466,286	FHC Delaware Inc.^(a)(b)*		0
ENERGY — 11.0%
	Energy Equipment & Services — 4.6%
145,000	Diamond Offshore Drilling Inc.		8,546,300
1,175,000	ION Geophysical Corp.*		4,030,250
500,000	Weatherford International Ltd.*		5,410,000
	Total Energy Equipment & Services		17,986,550
	Oil, Gas & Consumable Fuels — 6.4%
250,000	Comstock Resources Inc.*		11,812,500
770,000	El Paso Corp.		6,029,100
375,000	Newfield Exploration Co.*		7,406,250
	Total Oil, Gas & Consumable Fuels		25,247,850
	TOTAL ENERGY		43,234,400
FINANCIALS — 14.5%
	Capital Markets — 5.3%
500,000	Charles Schwab Corp.		8,085,000
900,000	Invesco Ltd.		12,996,000
	Total Capital Markets		21,081,000
	Diversified Financial Services — 1.5%
192,300	JPMorgan Chase & Co.		6,063,219
	Insurance — 5.2%
450,000	Travelers Cos. Inc.		20,340,000
	Thrifts & Mortgage Finance — 2.5%
550,000	People’s United Financial Inc.		9,806,500
	TOTAL FINANCIALS		57,290,719

See Notes to Financial Statements.


Legg Mason Partners Capital Fund 2008 Annual Report		11

Schedule of investments continued

December 31, 2008


LEGG MASON PARTNERS CAPITAL FUND
SHARES	SECURITY	VALUE

HEALTH CARE — 14.8%
	Biotechnology — 3.0%
140,000	Genentech Inc.*	$	11,607,400
	Health Care Providers & Services — 2.3%
100,000	McKesson Corp.		3,873,000
165,000	Pediatrix Medical Group Inc.*		5,230,500
	Total Health Care Providers & Services		9,103,500
	Pharmaceuticals — 9.5%
130,000	Roche Holding AG^(a)		20,011,380
390,000	Shire Ltd., ADR		17,464,200
	Total Pharmaceuticals		37,475,580
	TOTAL HEALTH CARE		58,186,480
INDUSTRIALS — 18.2%
	Aerospace & Defense — 3.3%
175,000	L-3 Communications Holdings Inc.		12,911,500
	Construction & Engineering — 5.4%
519,800	Quanta Services Inc.*		10,292,040
540,000	Shaw Group Inc.*		11,053,800
	Total Construction & Engineering		21,345,840
	Industrial Conglomerates — 9.5%
1,306,100	General Electric Co.		21,158,820
525,000	McDermott International Inc.*		5,187,000
519,995	Tyco International Ltd.		11,231,892
	Total Industrial Conglomerates		37,577,712
	TOTAL INDUSTRIALS		71,835,052
INFORMATION TECHNOLOGY — 26.7%
	Communications Equipment — 9.4%
1,250,000	Cisco Systems Inc.*		20,375,000
700,000	Juniper Networks Inc.*		12,257,000
125,000	QUALCOMM Inc.		4,478,750
	Total Communications Equipment		37,110,750
	Computers & Peripherals — 2.4%
68,400	International Business Machines Corp.		5,756,544
1,127,200	Palm Inc.*		3,460,504
	Total Computers & Peripherals		9,217,048
	Internet Software & Services — 5.0%
38,000	Google Inc., Class A Shares*		11,690,700
425,000	VeriSign Inc.*		8,109,000
	Total Internet Software & Services		19,799,700
	IT Services — 4.6%
550,000	Accenture Ltd., Class A Shares		18,034,500

See Notes to Financial Statements.


12		Legg Mason Partners Capital Fund 2008 Annual Report


LEGG MASON PARTNERS CAPITAL FUND
SHARES		SECURITY	VALUE

		Software — 5.3%
	451,020	Blackboard Inc.*	$	11,830,255
	485,000	Check Point Software Technologies Ltd.*		9,210,150
		Total Software		21,040,405
		TOTAL INFORMATION TECHNOLOGY		105,202,403
		TOTAL INVESTMENTS BEFORE SHORT-TERM INVESTMENT (Cost — $533,666,611)		378,524,371
FACE AMOUNT
	SHORT-TERM INVESTMENT — 4.6%
		Repurchase Agreement — 4.6%
$	18,232,000	Interest in $500,000,000 joint tri-party repurchase agreement dated 12/31/08 with Greenwich Capital Markets Inc., 0.060% due 1/2/09; Proceeds at maturity - $18,232,061; (Fully collateralized by various U.S. government agency obligations, 2.625% to 7.125% due 7/17/09 to 11/15/30; Market value - $18,596,785) (Cost - $18,232,000)		18,232,000
		TOTAL INVESTMENTS — 100.7% (Cost — $551,898,611#)		396,756,371
		Liabilities in Excess of Other Assets — (0.7)%		(2,615,311	)
		TOTAL NET ASSETS — 100.0%	$	394,141,060

*	Non-income producing security.

^(a)	Security is valued in good faith at fair value by or under the direction of the Board of Trustees (See Note 1).

^(b)	Illiquid security.

#	Aggregate cost for federal income tax purposes is $551,898,611.


Abbreviation used in this schedule:
ADR		—American Depositary Receipt

See Notes to Financial Statements.


Legg Mason Partners Capital Fund 2008 Annual Report		13

Statement of assets and liabilities

December 31, 2008


ASSETS:
Investments, at value (Cost — $551,898,611)	$	396,756,371
Foreign currency, at value (Cost — $41)		45
Cash		821
Dividends and interest receivable		669,420
Receivable for Fund shares sold		317,640
Prepaid expenses		69,412
Total Assets		397,813,709
LIABILITIES:
Payable for Fund shares repurchased		2,924,500
Investment management fee payable		246,301
Distribution fees payable		184,769
Trustees’ fees payable		21,933
Accrued expenses		295,146
Total Liabilities		3,672,649
TOTAL NET ASSETS	$	394,141,060
NET ASSETS:
Par value (Note 6)	$	292
Paid-in capital in excess of par value		723,720,118
Undistributed net investment income		139,886
Accumulated net realized loss on investments, written options and foreign currency transactions		(174,577,000	)
Net unrealized depreciation on investments and foreign currencies		(155,142,236	)
TOTAL NET ASSETS	$	394,141,060
Shares Outstanding:
Class A		10,481,698
Class B		5,364,607
Class C		9,254,734
Class I		4,055,101
Net Asset Value:
Class A (and redemption price)		$14.16
Class B¹		$12.68
Class C¹		$12.74
Class I (and redemption price)		$14.77
Maximum Public Offering Price Per Share:
Class A (based on maximum initial sales charge of 5.75%)		$15.02

¹	Redemption price per share is NAV of Class B and C shares reduced by a 5.00% and 1.00% CDSC, respectively, if shares are redeemed within one year from purchase payment (See Note 2).

See Notes to Financial Statements.


14		Legg Mason Partners Capital Fund 2008 Annual Report

Statement of operations

For the Year Ended December 31, 2008


INVESTMENT INCOME:
Dividends	$	8,745,213
Interest		572,060
Total Investment Income		9,317,273
EXPENSES:
Investment management fee (Note 2)		4,265,599
Distribution fees (Note 4)		3,887,140
Transfer agent fees (Note 4)		583,646
Registration fees		79,051
Reorganization fees		58,300
Shareholder reports (Note 4)		47,626
Legal fees		46,494
Trustees’ fees		42,393
Audit and tax		33,739
Insurance		20,175
Custody fees		11,554
Miscellaneous expenses		10,835
Total Expenses		9,086,552
NET INVESTMENT INCOME		230,721
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, WRITTEN OPTIONS AND FOREIGN CURRENCY TRANSACTIONS (NOTES 1 AND 3):
Net Realized Gain (Loss) From:
Investment transactions		(149,319,717	)
Written options		533,145
Foreign currency transactions		9,671
Net Realized Loss		(148,776,901	)
Change in Net Unrealized Appreciation/Depreciation From:
Investments		(179,010,677	)
Written options		(127,797	)
Foreign currencies		(10,625	)
Change in Net Unrealized Appreciation/Depreciation		(179,149,099	)
NET LOSS ON INVESTMENTS, WRITTEN OPTIONS AND FOREIGN CURRENCY TRANSACTIONS		(327,926,000	)
DECREASE IN NET ASSETS FROM OPERATIONS	$	(327,695,279	)

See Notes to Financial Statements.


Legg Mason Partners Capital Fund 2008 Annual Report		15

Statements of changes in net assets


FOR THE YEARS ENDED DECEMBER 31,	2008			2007
OPERATIONS:
Net investment income	$	230,721		$	858,590
Net realized gain (loss)		(148,776,901	)		168,804,298
Change in net unrealized appreciation/depreciation		(179,149,099	)		(152,053,333	)
Increase (Decrease) in Net Assets From Operations		(327,695,279	)		17,609,555
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTES 1 AND 5):
Net investment income		—			(700,007	)
Net realized gains		(12,886,866	)		(198,595,669	)
Decrease in Net Assets From Distributions to Shareholders		(12,886,866	)		(199,295,676	)
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares		67,024,387			107,862,114
Reinvestment of distributions		11,052,458			170,192,394
Cost of shares repurchased		(316,577,838	)		(672,250,750	)
Net assets of shares issued in connection with merger (Note 7)		75,911,449			—
Decrease in Net Assets From Fund Share Transactions		(162,589,544	)		(394,196,242	)
DECREASE IN NET ASSETS		(503,171,689	)		(575,882,363	)
NET ASSETS:
Beginning of year		897,312,749			1,473,195,112
End of year*	$	394,141,060		$	897,312,749
* Includes undistributed and (overdistributed) net investment income, respectively, of:		$139,886			$(157,019)

See Notes to Financial Statements.


16		Legg Mason Partners Capital Fund 2008 Annual Report

Financial highlights


FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR ENDED DECEMBER 31:
CLASS A SHARES¹	2008			2007			2006²			2005²			2004²
NET ASSET VALUE, BEGINNING OF YEAR	$	24.87		$	29.89		$	29.50		$	30.42		$	27.04
INCOME (LOSS) FROM OPERATIONS:
Net investment income (loss)		0.07			0.11			0.07			0.03			(0.02	)
Net realized and unrealized gain (loss)		(10.36	)		0.22			2.90			2.26			3.87
Total income (loss) from operations		(10.29	)		0.33			2.97			2.29			3.85
LESS DISTRIBUTIONS FROM:
Net investment income		—			(0.02	)		—			—			—
Net realized gains		(0.42	)		(5.33	)		(2.58	)		(3.21	)		(0.47	)
Total distributions		(0.42	)		(5.35	)		(2.58	)		(3.21	)		(0.47	)
NET ASSET VALUE, END OF YEAR	$	14.16		$	24.87		$	29.89		$	29.50		$	30.42
Total return³		(42.06	)%		0.69	%		10.63	%		7.52	%		14.24	%
NET ASSETS, END OF YEAR (000s)		$148,374			$293,510			$351,107			$353,098			$351,092
RATIOS TO AVERAGE NET ASSETS:
Gross expenses		1.09	%⁴		0.99	%		0.99	%⁴		1.11	%		1.02	%
Net expenses		1.09	⁴		0.99			0.99	^4,5		1.11			1.02
Net investment income (loss)		0.35			0.36			0.23			0.09			(0.07	)
PORTFOLIO TURNOVER RATE		64	%		49	%		193	%		265	%		131	%

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 period. Without these fees, the gross and net expense ratios would both have been 1.08% for the year ended December 31, 2008 and 0.97% and 0.96%, respectively for the year ended December 31, 2006.

⁵	Reflects fee waivers and/or expense reimbursements.

See Notes to Financial Statements.


Legg Mason Partners Capital Fund 2008 Annual Report		17

Financial highlights continued


FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR ENDED DECEMBER 31:
CLASS B SHARES¹	2008			2007			2006²			2005²			2004²
NET ASSET VALUE, BEGINNING OF YEAR	$	22.49		$	27.68		$	27.72		$	29.01		$	26.02
INCOME (LOSS) FROM OPERATIONS:
Net investment loss		(0.08	)		(0.09	)		(0.16	)		(0.22	)		(0.24	)
Net realized and unrealized gain (loss)		(9.31	)		0.23			2.70			2.14			3.70
Total income (loss) from operations		(9.39	)		0.14			2.54			1.92			3.46
LESS DISTRIBUTIONS FROM:
Net realized gains		(0.42	)		(5.33	)		(2.58	)		(3.21	)		(0.47	)
Total distributions		(0.42	)		(5.33	)		(2.58	)		(3.21	)		(0.47	)
NET ASSET VALUE, END OF YEAR	$	12.68		$	22.49		$	27.68		$	27.72		$	29.01
Total return³		(42.52	)%		0.05	%		9.75	%		6.59	%		13.30	%
NET ASSETS, END OF YEAR (000s)		$68,012			$196,214			$311,161			$397,242			$415,006
RATIOS TO AVERAGE NET ASSETS:
Gross expenses		1.82	%⁴		1.65	%		1.80	%⁴		1.97	%		1.85	%
Net expenses		1.82	⁴		1.65			1.80	^4,5		1.97			1.85
Net investment loss		(0.42	)		(0.33	)		(0.58	)		(0.77	)		(0.90	)
PORTFOLIO TURNOVER RATE		64	%		49	%		193	%		265	%		131	%

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 period. Without these fees, the gross and net expense ratios would both have been 1.81% for the year ended December 31, 2008 and 1.78% and 1.77%, respectively, for the year ended December 31, 2006.

⁵	Reflects fee waivers and/or expense reimbursements.

See Notes to Financial Statements.


18		Legg Mason Partners Capital Fund 2008 Annual Report


FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR ENDED DECEMBER 31:
CLASS C SHARES¹	2008			2007			2006²			2005²			2004²
NET ASSET VALUE, BEGINNING OF YEAR	$	22.57		$	27.76		$	27.80		$	29.07		$	26.07
INCOME (LOSS) FROM OPERATIONS:
Net investment loss		(0.06	)		(0.09	)		(0.16	)		(0.22	)		(0.24	)
Net realized and unrealized gain (loss)		(9.35	)		0.23			2.70			2.16			3.71
Total income (loss) from operations		(9.41	)		0.14			2.54			1.94			3.47
LESS DISTRIBUTIONS FROM:
Net realized gains		(0.42	)		(5.33	)		(2.58	)		(3.21	)		(0.47	)
Total distributions		(0.42	)		(5.33	)		(2.58	)		(3.21	)		(0.47	)
NET ASSET VALUE, END OF YEAR	$	12.74		$	22.57		$	27.76		$	27.80		$	29.07
Total return³		(42.46	)%		0.05	%		9.72	%		6.65	%		13.31	%
NET ASSETS, END OF YEAR (000s)		$117,877			$288,955			$407,661			$504,642			$492,644
RATIOS TO AVERAGE NET ASSETS:
Gross expenses		1.76	%⁴		1.66	%		1.79	%⁴		1.94	%		1.83	%
Net expenses		1.76	⁴		1.66			1.78	^4,5		1.94			1.83
Net investment loss		(0.34	)		(0.33	)		(0.57	)		(0.74	)		(0.88	)
PORTFOLIO TURNOVER RATE		64	%		49	%		193	%		265	%		131	%

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 period. Without these fees, the gross and net expense ratios would both have been 1.75% for the year ended December 31, 2008 and 1.77% and 1.76%, respectively, for the year ended December 31, 2006.

⁵	Reflects fee waivers and/or expense reimbursements.

See Notes to Financial Statements.


Legg Mason Partners Capital Fund 2008 Annual Report		19

Financial highlights continued


FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR ENDED DECEMBER 31:
CLASS I SHARES^1,2	2008			2007			2006³			2005³			2004³
NET ASSET VALUE, BEGINNING OF YEAR	$	25.83		$	30.81		$	30.25		$	30.98		$	27.42
INCOME (LOSS) FROM OPERATIONS:
Net investment income		0.15			0.18			0.18			0.17			0.09
Net realized and unrealized gain (loss)		(10.79	)		0.27			2.96			2.31			3.94
Total income (loss) from operations		(10.64	)		0.45			3.14			2.48			4.03
LESS DISTRIBUTIONS FROM:
Net investment income		—			(0.10	)		—			—			—
Net realized gains		(0.42	)		(5.33	)		(2.58	)		(3.21	)		(0.47	)
Total distributions		(0.42	)		(5.43	)		(2.58	)		(3.21	)		(0.47	)
NET ASSET VALUE, END OF YEAR	$	14.77		$	25.83		$	30.81		$	30.25		$	30.98
Total return⁴		(41.85	)%		1.07	%		10.93	%		8.01	%		14.70	%
NET ASSETS, END OF YEAR (000s)		$59,878			$118,634			$403,266			$406,387			$344,239
RATIOS TO AVERAGE NET ASSETS:
Gross expenses		0.74	%⁵		0.61	%		0.63	%⁵		0.67	%		0.64	%
Net expenses		0.74	⁵		0.61			0.62	^5,6		0.67			0.64
Net investment income		0.70			0.57			0.59			0.54			0.33
PORTFOLIO TURNOVER RATE		64	%		49	%		193	%		265	%		131	%

Class Y shares were renamed as Class I shares on November 20, 2006. The Class I shares were converted into Class O shares and redesignated as Class I shares on December 1, 2006. The former Class I shares were terminated. The inception date and performance history of the former Class O shares have been maintained.

²	Per share amounts have been calculated using the average shares method.

³	Represents a share of capital stock outstanding prior to April 16, 2007.

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 period. Without these fees, the gross and net expense ratios would both have been 0.73% for the year ended December 31, 2008 and 0.60% for the year ended December 31, 2006.

⁶	Reflects fee waivers and/or expense reimbursements.

See Notes to Financial Statements.


20		Legg Mason Partners Capital Fund 2008 Annual Report

Notes to financial statements

1. Organization and significant accounting policies

Legg Mason Partners Capital Fund (the “Fund”) is a separate non-diversified investment series of the Legg Mason Partners Equity Trust (the “Trust”). The Trust, a Maryland business trust, is registered under the Investment Company Act of 1940, as amended, (the “1940 Act”), as an open-end management investment company.

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

(a) Investment valuation. Equity securities for which market quotations are available are valued at the last reported sales price or official closing price on the primary market or exchange on which they trade. Debt securities are valued at the mean between the last quoted bid and asked prices provided by an independent pricing service that are based on transactions in debt obligations, quotations from bond dealers, market transactions in comparable securities and various other relationships between securities. When prices are not readily available, or are determined not to reflect fair value, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund may value these securities at fair value as determined in accordance with the procedures approved by the Fund’s Board of Trustees. Short-term obligations with maturities of 60 days or less are valued at amortized cost, which approximates fair value.

Effective January 1, 2008, the Fund adopted Statement of Financial Accounting Standards No. 157 (“FAS 157”). FAS 157 establishes a single definition of fair value, creates a three-tier hierarchy as a framework for measuring fair value based on inputs used to value the Fund’s investments, and requires additional disclosure about fair value. The hierarchy of inputs is summarized below.

•

Level 1 — quoted prices in active markets for identical investments

•

Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)

•

Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)


Legg Mason Partners Capital Fund 2008 Annual Report		21

Notes to financial statements continued

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

The following is a summary of the inputs used in valuing the Fund’s assets carried at fair value:


	DECEMBER 31, 2008		QUOTED PRICES (LEVEL 1)		OTHER SIGNIFICANT OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)
Investments in Securities	$	396,756,371	$	336,511,924	$	60,244,447	$	0	*

*	Represents an amount less than $1.

(b) Repurchase agreements. When entering into repurchase agreements, it is the Fund’s policy that its custodian or a third party custodian take possession of the underlying collateral securities, the market value of which, at all times, at least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction exceeds one business day, the value of the collateral is marked-to-market to ensure the adequacy of the collateral. If the seller defaults, and the market value of the collateral declines or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited.

(c) Written options. When the Fund writes an option, an amount equal to the premium received by the Fund is recorded as a liability, the value of which is marked-to-market daily to reflect the current market value of the option written. If the option expires, the Fund realizes a gain from investments equal to the amount of the premium received. When a written call option is exercised, the difference between the premium received plus the option exercise price and the Fund’s basis in the underlying security (in the case of a covered written call option), or the cost to purchase the underlying security (in the case of an uncovered written call option), including brokerage commission, is treated as a realized gain or loss. When a written put option is exercised, the amount of the premium received is subtracted from the cost of the security purchased by the Fund from the exercise of the written put option to form the Fund’s basis in the underlying security purchased. The writer or buyer of an option traded on an exchange can liquidate the position before the exercise of the option by entering into a closing transaction. The cost of a closing transaction is deducted from the original premium received resulting in a realized gain or loss to the Fund.

The risk in writing a covered call option is that the Fund may forego the opportunity of profit if the market price of the underlying security increases and the option is exercised. The risk in writing a put option is that the Fund may incur a loss if the market price of the underlying security decreases and the option is exercised. The risk in writing a call option is that the Fund is exposed to the risk of loss if the market price of the underlying security increases. In


22		Legg Mason Partners Capital Fund 2008 Annual Report

addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.

(d) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults on an expected interest payment, the Fund’s policy is to generally halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default.

(e) Foreign currency translation. Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates at the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the respective dates of such transactions.

The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss on investments.

Net realized foreign exchange gains or losses arise from sales of foreign currencies, including gains and losses on forward foreign currency contracts, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund’s books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities, at the date of valuation, resulting from changes in exchange rates.

Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S. dollar denominated transactions as a result of, among other factors, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability.

(f) Distributions to shareholders. Distributions from net investment income and distributions of net realized gains, if any, are declared at least annually. Distributions to shareholders of the Fund are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.


Legg Mason Partners Capital Fund 2008 Annual Report		23

Notes to financial statements continued

(g) Class accounting. Investment income, common expenses and realized/unrealized gain (loss) on investments are allocated to the various classes of the Fund on the basis of daily net assets of each class. Fees relating to a specific class are charged directly to that class.

(h) Federal and other taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute substantially all of its taxable income and net realized gains, if any, to shareholders each year. Therefore, no federal income tax provision is required in the Fund’s financial statements.

Management has analyzed the Fund’s tax positions taken on federal income tax returns for all open tax years and has concluded that as of December 31, 2008, no provision for income tax would be required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.

Under the applicable foreign tax laws, a withholding tax may be imposed on interest, dividends and capital gains at various rates.

(i) Reclassification. GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset values per share.

During the current year, the following reclassifications have been made:


	UNDISTRIBUTED NET INVESTMENT INCOME	ACCUMULATED NET REALIZED LOSS			PAID-IN CAPITAL
(a)	$58,300		—		$	(58,300	)
(b)	1,090	$	(1,090	)		—

^(a)	Reclassifications are primarily due to non-deductible reorganization costs.

^(b)	Reclassifications are primarily due to foreign currency transactions treated as ordinary income for tax purposes and book/tax differences in the treatment of distributions.

2. Investment management agreement and other transactions with affiliates


24		Legg Mason Partners Capital Fund 2008 Annual Report

Under the investment management agreement, the Fund pays an investment management fee calculated daily and paid monthly, in accordance with the following breakpoint schedule:


AVERAGE DAILY NET ASSETS	ANNUAL RATE
First $100 million	1.000	%
Next $100 million	0.750
Next $200 million	0.625
Over $400 million	0.500

LMPFA provides administrative and certain oversight services to the Fund. LMPFA delegates to the subadviser the day-to-day portfolio management of the Fund, except for the management of cash and short-term instruments. For its services, LMPFA pays ClearBridge 70% of the net management fee it receives from the Fund.

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

There is a maximum initial sales charge of 5.75% for Class A shares. There is a contingent deferred sales charge (“CDSC”) of 5.00% on Class B shares, which applies if redemption occurs within one year from purchase payment and declines by 1.00% per year until no CDSC is incurred. Class C shares have a 1.00% CDSC, which applies if redemption occurs within one year from purchase payment. In certain cases, Class A shares have a 1.00% CDSC, which applies if redemption occurs within one year from purchase payment. This CDSC only applies to those purchases of Class A shares, which, when combined with current holdings of Class A shares, equal or exceed $1,000,000 in the aggregate. These purchases do not incur an initial sales charge.

For the year ended December 31, 2008, LMIS and its affiliates received sales charges of approximately $11,000 on sales of the Fund’s Class A shares. In addition, for the year ended December 31, 2008, CDSCs paid to LMIS and its affiliates were approximately:


	CLASS A		CLASS B		CLASS C
CDSCs	$	20,000	$	259,000	$	15,000

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

3. Investments

During the year ended December 31, 2008, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:


Purchases	$	409,140,031
Sales		587,309,869


Legg Mason Partners Capital Fund 2008 Annual Report		25

Notes to financial statements continued

At December 31, 2008, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:


Gross unrealized appreciation	$	7,061,651
Gross unrealized depreciation		(162,203,891	)
Net unrealized depreciation	$	(155,142,240	)

During the year ended December 31, 2008, written option transactions for the Fund were as follows:


	NUMBER OF CONTRACTS		PREMIUMS RECEIVED
Written options, outstanding December 31, 2007	900		$	168,297
Options written	1,917			429,006
Options closed	(2,317	)		(546,239	)
Options expired	(500	)		(51,064	)
Written options, outstanding December 31, 2008	—			—

4. Class specific expenses

The Fund has adopted a Rule 12b-1distribution plan and under that plan the Fund pays a service fee with respect to its Class A, B and C shares calculated at the annual rate of 0.25% of the average daily net assets of each respective class. The Fund also pays a service fee with respect to its Class B and C shares calculated at the annual rate of 0.75% of the average daily net assets of each respective class. Distribution fees are accrued daily and paid monthly.

For the year ended December 31, 2008, class specific expenses were as follows:


	DISTRIBUTION FEES		TRANSFER AGENT FEES		SHAREHOLDER REPORTS EXPENSES
Class A	$	570,739	$	294,227	$	24,108
Class B		1,282,809		156,189		5,651
Class C		2,033,592		103,633		14,755
Class I		—		29,597		3,112
Total	$	3,887,140	$	583,646	$	47,626

5. Distributions to shareholders by class


	YEAR ENDED DECEMBER 31, 2008		YEAR ENDED DECEMBER 31, 2007
Net Investment Income:
Class A		—	$	251,811
Class I		—		448,196
Total		—	$	700,007
Net Realized Gains:
Class A	$	4,263,348	$	57,222,700
Class B		2,565,374		43,912,183
Class C		4,255,267		63,497,862
Class I		1,802,877		33,962,924
Total	$	12,886,866	$	198,595,669


26		Legg Mason Partners Capital Fund 2008 Annual Report

6. Shares of beneficial interest

At December 31, 2008, the Trust had an unlimited number of shares of beneficial interest authorized with a par value of $0.00001 per share. The Fund has the ability to issue multiple classes of shares. Each share of a class represents an identical interest and has the same rights, except that each class bears certain direct expenses specifically related to the distribution of its shares. Prior to April 16, 2007, the Fund had 1 billion shares of capital stock authorized with a par value of $0.001 per share.

Transactions in shares of each class were as follows:


	YEAR ENDED DECEMBER 31, 2008					YEAR ENDED DECEMBER 31, 2007
	SHARES		AMOUNT			SHARES		AMOUNT
Class A
Shares sold	2,760,654		$	58,988,209		2,738,055		$	81,110,536
Shares issued on reinvestment	154,152			3,665,749		1,837,012			48,872,295
Shares repurchased	(5,513,454	)		(114,331,506	)	(4,521,481	)		(135,131,153	)
Shares issued with merger	1,279,563			28,086,652		—			—
Net increase (decrease)	(1,319,085	)	$	(23,590,896	)	53,586		$	(5,148,322	)
Class B
Shares sold	87,201		$	1,635,381		262,483		$	6,720,317
Shares issued on reinvestment	103,438			2,211,534		1,517,530			36,739,929
Shares repurchased	(4,887,789	)		(93,836,883	)	(4,297,135	)		(117,895,051	)
Shares issued with merger	1,335,989			26,353,388		—			—
Net decrease	(3,361,161	)	$	(63,636,580	)	(2,517,122	)	$	(74,434,805	)
Class C
Shares sold	182,103		$	3,372,348		709,587		$	18,688,878
Shares issued on reinvestment	164,877			3,539,905		2,166,894			52,494,577
Shares repurchased	(4,977,724	)		(93,379,859	)	(4,758,159	)		(129,513,403	)
Shares issued with merger	1,083,905			21,471,409		—			—
Net decrease	(3,546,839	)	$	(64,996,197	)	(1,881,678	)	$	(58,329,948	)
Class I
Shares sold	126,045		$	3,028,449		44,082		$	1,342,383
Shares issued on reinvestment	66,072			1,635,270		1,111,710			32,085,593
Shares repurchased	(729,149	)		(15,029,590	)	(9,652,403	)		(289,711,143	)
Net decrease	(537,032	)	$	(10,365,871	)	(8,496,611	)	$	(256,283,167	)


Legg Mason Partners Capital Fund 2008 Annual Report		27

Notes to financial statements continued

7. Transfer of net assets

On July 18, 2008, the Fund acquired the assets and certain liabilities of the Legg Mason Partners Classic Values Fund (the “Acquired Fund”), pursuant to a plan of reorganization approved by the Acquired Fund shareholders. Total shares issued by the Fund and the total net assets of the Acquired Fund and the Fund on the date of the transfer were as follows:


ACQUIRED FUND	SHARES ISSUED BY THE FUND	TOTAL NET ASSETS OF THE ACQUIRED FUND
Legg Mason Partners Classic Values Fund	3,669,457	$	75,911,449

The total net assets of the Fund on the date of the transfer were $643,585,899.

As part of the reorganization, for each share they held, shareholders of Legg Mason Partners Classic Values Fund Class A, Class B and Class C received 0.469677, 0.493841 and 0.492367 shares of the Fund’s Class A, Class B and Class C shares, respectively.

The total net assets of the Acquired Fund before acquisition included unrealized depreciation of $297,299, accumulated net realized loss of $25,605,712 and undistributed net investment income of $6,794. Total net assets of the Fund immediately after the transfer were $719,497,348. The transaction was structured to qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as amended.

8. Income tax information and distributions to shareholders

The tax character of distributions paid during the fiscal years ended December 31, were as follows:


	2008		2007
Distributions Paid From:
Ordinary income	$	5,018,148	$	161,468,418
Net long-term capital gains		7,868,718		37,827,258
Total taxable distributions	$	12,886,866	$	199,295,676


28		Legg Mason Partners Capital Fund 2008 Annual Report

As of December 31, 2008, the components of accumulated earnings on a tax basis were as follows:


Undistributed ordinary income — net	$	149,807
Capital loss carryforward*		(159,619,924	)
Other book/tax temporary differences^(a)		(14,966,997	)
Unrealized appreciation/(depreciation)		(155,142,236	)
Total accumulated earnings/(losses) — net	$	(329,579,350	)

*	As of December 31, 2008, the Fund had the following net capital loss carryforwards remaining:


YEAR OF EXPIRATION	AMOUNT
12/31/2015	$	(25,603,316	)
12/31/2016		(134,016,608	)
	$	(159,619,924	)

These amounts will be available to offset any future taxable capital gains. However, $25,603,316 of this amount is subject to an annual limitation of $3,575,429 as a result of the reorganization described in Note 8.

^(a)	Other book/tax temporary differences are attributable primarily to the deferral of post-October capital losses for tax purposes and book/tax differences in the timing of the deductibility of various expenses.

9. Legal matters

Beginning in June 2004, class action lawsuits alleging violations of the federal securities laws were filed against Citigroup Global Markets Inc. (“CGM”), a former distributor of the Fund, and other affiliated funds (collectively, the “Funds”) and a number of its then affiliates, including Smith Barney Fund Management LLC (“SBFM”) and Salomon Brothers Asset Management Inc (“SBAM”), which were then investment adviser or manager to certain of the Funds (the “Managers”), substantially all of the mutual funds then managed by the Managers (the “Defendant Funds”), and Board members of the Defendant Funds (collectively, the “Defendants”). The complaints alleged, among other things, that CGM created various undisclosed incentives for its brokers to sell Smith Barney and Salomon Brothers funds. In addition, according to the complaints, the Managers caused the Defendant Funds to pay excessive brokerage commissions to CGM for steering clients towards proprietary funds. The complaints also alleged that the Defendants breached their fiduciary duty to the Defendant Funds by improperly charging Rule 12b-1 fees and by drawing on fund assets to make undisclosed payments of soft dollars and excessive brokerage commissions. The complaints also alleged that the Defendant Funds failed to adequately disclose certain of the allegedly wrongful conduct. The complaints sought injunctive relief and compensatory and punitive damages, rescission of the Defendant Funds’ contracts with the Managers, recovery of all fees paid to the Managers pursuant to such contracts and an award of attorneys’ fees and litigation expenses.


Legg Mason Partners Capital Fund 2008 Annual Report		29

Notes to financial statements continued

On December 15, 2004, a consolidated amended complaint (the “Complaint”) was filed alleging substantially similar causes of action. On May 27, 2005, all of the Defendants filed motions to dismiss the Complaint. On July 26, 2006, the court issued a decision and order (1) finding that plaintiffs lacked standing to sue on behalf of the shareholders of the Funds in which none of the plaintiffs had invested and dismissing those Funds from the case (although stating that they could be brought back into the case if standing as to them could be established), and (2) other than one stayed claim, dismissing all of the causes of action against the remaining Defendants, with prejudice, except for the cause of action under Section 36(b) of the 1940 Act, which the court granted plaintiffs leave to repeal as a derivative claim.

On October 16, 2006, plaintiffs filed their Second Consolidated Amended Complaint (“Second Amended Complaint”) which alleges derivative claims on behalf of nine funds identified in the Second Amended Complaint, under Section 36(b) of the 1940 Act, against CAM, SBAM and SBFM as investment advisers to the identified funds, as well as CGM as a distributor for the identified funds (collectively, the “Second Amended Complaint Defendants”). The Fund was not identified in the Second Amended Complaint. The Second Amended Complaint alleges no claims against any of the funds or any of their Board Members. Under Section 36(b), the Second Amended Complaint alleges similar facts and seeks similar relief against the Second Amended Complaint Defendants as the Complaint.

On December 3, 2007, the court granted the Defendants’ motion to dismiss, with prejudice. On January 2, 2008, the plaintiffs filed a notice of appeal to the Second Circuit Court of Appeals.

Additional lawsuits arising out of these circumstances and presenting similar allegations and requests for relief may be filed in the future.

* * *

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

On September 26, 2007, the United States District Court for the Southern District of New York issued an order dismissing the consolidated complaint, and judgment was later entered. An appeal has been filed and is pending before the U.S. Court of Appeals for the Second Circuit.


30		Legg Mason Partners Capital Fund 2008 Annual Report

10. Recent accounting pronouncement

In March 2008, the Financial Accounting Standards Board issued the Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (“FAS 161”). FAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. FAS 161 requires enhanced disclosures about the Fund’s derivative and hedging activities, including how such activities are accounted for and their effect on the Fund’s financial position, performance and cash flows. Management is currently evaluating the impact the adoption of FAS 161 will have on the Fund’s financial statements and related disclosures.


Legg Mason Partners Capital Fund 2008 Annual Report		31

Report of independent registered public accounting firm

The Board of Trustees and Shareholders

Legg Mason Partners Equity Trust:

We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Legg Mason Partners Capital Fund, a series of Legg Mason Partners Equity Trust as of December 31, 2008, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the four-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for the year ended December 31, 2004 were audited by other independent registered public accountants whose report thereon, dated February 18, 2005, expressed an unqualified opinion on those financial highlights.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2008, by correspondence with the custodian and broker. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Legg Mason Partners Capital Fund as of December 31, 2008, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the four-year period then ended, in conformity with U.S. generally accepted accounting principles.

LOGO

New York, New York

February 24, 2009


32		Legg Mason Partners Capital Fund 2008 Annual Report

Board approval of management and subadvisory agreements (unaudited)

At a meeting of the Fund’s Board of Trustees, the Board considered the re-approval for an annual period of the Fund’s management agreement, pursuant to which Legg Mason Partners Fund Advisor, LLC (the “Manager”) provides the Fund with investment advisory and administrative services, and the Fund’s sub-advisory agreement, pursuant to which ClearBridge Advisors, LLC (the “Sub-Adviser”) provides day-to-day management of the Fund’s portfolio. (The management agreement and sub-advisory agreement are collectively referred to as the “Agreements.”) The Manager and the Sub-Adviser are wholly-owned subsidiaries of Legg Mason, Inc. The Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940, as amended (the “Independent Trustees”)) of the Fund were assisted in their review by Fund counsel and independent legal counsel and met with independent legal counsel in executive sessions separate from representatives of the Manager and the Sub-Adviser. The Independent Trustees requested and received information from the Manager and the Sub-Adviser they deemed reasonably necessary for their review of the Agreements and the performance of the Manager and the Sub-Adviser. Included was information about the Manager, the Sub-Adviser and the Fund’s distributor (including any distributors affiliated with the Fund during the past two years), as well as the management, sub-advisory and distribution arrangements for the Fund and other funds overseen by the Board. This information was initially reviewed by a special committee of the Independent Trustees and then by the full Board.

In voting to approve the Agreements, the Independent Trustees considered whether the approval of the Agreements would be in the best interests of the Fund and its shareholders, an evaluation based on several factors including those discussed below.

Nature, extent and quality of the services provided to the fund under the management agreement and sub-advisory agreement

The Board received and considered information regarding the nature, extent and quality of services provided to the Fund by the Manager and the Sub-Adviser under the Management Agreement and Sub-Advisory Agreement, respectively, during the past two years. The Trustees also considered the Manager’s supervisory activities over the Sub-Adviser. In addition, the Independent Trustees received and considered other information regarding the administrative and other services rendered to the Fund and its shareholders by the Manager. The Board noted information received at regular meetings throughout the year related to the services rendered by the Manager in its management of the Fund’s affairs, including the management of cash and short-term instruments, and the Manager’s role in coordinating the activities of the Sub-Adviser and the Fund’s other service providers. The Board’s evaluation of the services provided by the Manager and the Sub-Adviser took into account the Board’s knowledge and familiarity gained as Trustees of funds in the Legg Mason Partners fund complex, including the scope and quality of


Legg Mason Partners Capital Fund		33

Board approval of management and subadvisory agreements (unaudited) continued

the investment management and other capabilities of the Manager and the Sub-Adviser and the quality of the Manager’s administrative and other services. The Board observed that the scope of services provided by the Manager had expanded over time as a result of regulatory and other developments, including maintaining and monitoring its own and the Fund’s expanded compliance programs. The Board reviewed information received from the Manager and the Fund’s Chief Compliance Officer regarding the Fund’s compliance policies and procedures established pursuant to Rule 38a-1 under the Investment Company Act of 1940, as amended.

The Board reviewed the qualifications, backgrounds and responsibilities of the Fund’s senior personnel and the portfolio management team primarily responsible for the day-to-day portfolio management of the Fund. The Board considered the degree to which the Manager implemented organizational changes to improve investment results and the services provided to the Legg Mason Partners fund complex. The Board also considered, based on its knowledge of the Manager and the Manager’s affiliates, the financial resources available to the Manager’s parent organization, Legg Mason, Inc.

The Board also considered the division of responsibilities between the Manager and the Sub-Adviser and the oversight provided by the Manager. The Board also considered the Manager’s and the Sub-Adviser’s brokerage policies and practices, the standards applied in seeking best execution, the Manager’s policies and practices regarding soft dollars, and the existence of quality controls applicable to brokerage allocation procedures. In addition, management also reported to the Board on, among other things, its business plans, recent organizational changes, portfolio manager compensation plan and policy regarding portfolio managers’ ownership of fund shares.

The Board concluded that, overall, it was satisfied with the nature, extent and quality of services provided (and expected to be provided) under the respective Agreement by the Manager and the Sub-Adviser.

Fund performance

The Board received and reviewed performance information for the Fund and for all retail and institutional multi-cap core funds (the “Performance Universe”) selected by Lipper, Inc. (“Lipper”), an independent provider of investment company data. The Board was provided with a description of the methodology Lipper used to determine the similarity of the Fund with the funds included in the Performance Universe. The Trustees noted that they also had received and discussed with management information at periodic intervals comparing the Fund’s performance to that of its benchmark index. The information comparing the Fund’s performance to that of the Performance Universe was for the one-, three-, five- and ten-year periods ended June 30, 2008. The Fund performed below the median for the one- and three-year


34		Legg Mason Partners Capital Fund

periods, and better than median for the five- and ten-year periods. The Board noted that the Fund’s performance for the ten-year period was in the first quintile for funds in the Performance Universe. The Board also reviewed performance information provided by the Manager for periods ended September 30, 2008, which showed the Fund’s performance was below the Lipper category average during the third quarter. The Trustees then discussed with representatives of management the portfolio management strategy of the Fund’s portfolio managers and noted that an additional primary portfolio manager joined the portfolio management team for the Fund in April 2008. The Trustees also noted that the Manager was committed to providing the resources necessary to assist the portfolio managers and improve Fund performance. Based on its review, the Board generally was satisfied with management’s efforts to improve performance going forward. The Board determined to continue to evaluate the Fund’s performance and directed the Independent Trustees’ performance committee to continue to periodically review Fund performance with the Manager and report to the full Board during periods between Board meetings.

Management fees and expense ratios

The Board reviewed and considered, the contractual management fee (the “Contractual Management Fee”) payable by the Fund to the Manager in light of the nature, extent and quality of the management and sub-advisory services provided by the Manager and the Sub-Adviser, respectively. The Board noted that the Manager, and not the Fund, pays the sub-advisory fee to the Sub-Adviser and, accordingly, that the retention of the Sub-Adviser does not increase the fees and expenses incurred by the Fund.

The Board also reviewed information regarding the fees the Manager and the Sub-Adviser charged any of their U.S. clients investing primarily in an asset class similar to that of the Fund including, where applicable, separate accounts. The Manager reviewed with the Board the significant differences in the scope of services provided to the Fund and to such other clients, noting that the Fund is provided with regulatory compliance and administrative services, office facilities and Fund officers (including the Fund’s chief financial, chief legal and chief compliance officers), and that the Manager coordinates and oversees the provision of services to the Fund by other fund service providers, including the Sub-Adviser. The Board considered the fee comparisons in light of the scope of services required to manage these different types of accounts.

The Board received an analysis of complex-wide management fees provided by the Manager, which, among other things, set out a framework of fees based on asset classes. Management also discussed with the Board the Fund’s distribution arrangements, including how amounts received by the Fund’s distributors are expended, and the fees received and expenses incurred in connection with such arrangements by affiliates of the Manager.


Legg Mason Partners Capital Fund		35

Board approval of management and subadvisory agreements (unaudited) continued

Additionally, the Board received and considered information comparing the Fund’s Contractual Management Fee and the Fund’s overall expense ratio with those of a group of 11 retail front-end load multi-cap core funds selected by Lipper as comparable to the Fund (the “Expense Group”), and a broader group of funds selected by Lipper consisting of all retail front-end load multi-cap core funds (“Expense Universe”). This information showed that the Fund’s Contractual Management Fee was lower than the median of management fees paid by the other funds in the Expense Group and lower than the average management fee paid by the other funds in the Expense Universe, and that the Fund’s actual total expense ratio was lower than the median of the total expense ratios of the funds in the Expense Group and lower than the average total expense ratio of the other funds in the Expense Universe.

Manager profitability

The Board received and considered a profitability analysis of the Manager and its affiliates in providing services to the Fund. The Board also received profitability information with respect to the Legg Mason Partners fund complex as a whole. In addition, the Board received information with respect to the Manager’s allocation methodologies used in preparing this profitability data as well as a report from an outside consultant that had reviewed the Manager’s methodology. The Board also noted the profitability percentage ranges determined by appropriate court cases to be reasonable given the services rendered to investment companies. The Board determined that the Manager’s profitability was not excessive in light of the nature, extent and quality of the services provided to the Fund.

Economies of scale

The Board received and considered information regarding whether there have been economies of scale with respect to the management of the Fund as the Fund’s assets grow, whether the Fund has appropriately benefited from any economies of scale, and whether there is potential for realization of any further economies of scale. The Board considered whether economies of scale in the provision of services to the Fund were being passed along to the shareholders.

The Board noted that the Manager instituted breakpoints in the Fund’s Contractual Management Fee, reflecting the potential for reducing the Contractual Management Fee as the Fund’s assets grow. The Board noted that the Fund’s assets exceeded the specified asset level at which one or more breakpoints to its Contractual Management Fee are triggered. Accordingly, the Fund and its shareholders realized economies of scale because the total expense ratio of the Fund was lower than it would have been if no breakpoints were in place. The Board also considered whether the breakpoint fee structure was a reasonable means of sharing any economies of scale, taking into consideration other efficiencies that might accrue as the Fund’s assets increase. The Board also noted that as the Fund’s assets have increased over


36		Legg Mason Partners Capital Fund

time, the Fund and its shareholders have realized economies of scale as certain expenses, such as fixed fund fees, became a smaller percentage of overall assets. The Board noted that it appeared that the benefits of any economies of scale also have been appropriately shared with shareholders through increased investment in fund management and administration resources.

Taking all of the above into consideration, the Board determined that the management fee was reasonable in light of the comparative performance and expense information and the nature, extent and quality of the services provided to the Fund under the Agreements.

Other benefits to the manager

The Board considered other benefits received by the Manager and its affiliates, including the Sub-Adviser, as a result of the Manager’s relationship with the Fund, including the opportunity to offer additional products and services to Fund shareholders.

In light of the costs of providing investment management and other services to the Fund and the Manager’s ongoing commitment to the Fund, the profits and other ancillary benefits that the Manager and its affiliates received were considered reasonable.

Based on their discussions and considerations, including those described above, the Trustees approved the Management Agreement and the Sub-Advisory Agreement to continue for another year.

No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve the Management Agreement and the Sub-Advisory Agreement.


Legg Mason Partners Capital Fund		37

Additional information (unaudited)

Information about Trustees and Officers

The business and affairs of the Legg Mason Partners Capital Fund (the “Fund”) are managed under the direction of the Board of Trustees. Information pertaining to the Trustees and Officers is set forth below. The Statement of Additional Information includes additional information about Trustees and is available, without charge, upon request by calling Legg Mason Partners Shareholder Services at 1-800-451-2010.


NON-INTERESTED TRUSTEES
PAUL R. ADES c/o R. Jay Gerken, CFA, Legg Mason & Co., LLC (“Legg Mason”) 620 Eighth Avenue, New York, NY 10018
Birth year		1940
Position(s) held with Fund¹		Trustee
Term of office¹ and length of time served²		Since 1983
Principal occupation(s) during past five years		Law Firm of Paul R. Ades, PLLC (since 2000)
Number of portfolios in fund complex overseen by Trustee		57
Other board memberships held by Trustee		None
ANDREW L. BREECH c/o R. Jay Gerken, CFA, Legg Mason 620 Eighth Avenue, New York, NY 10018
Birth year		1952
Position(s) held with Fund¹		Trustee
Term of office¹ and length of time served²		Since 1991
Principal occupation(s) during past five years		President, Dealer Operating Control Service, Inc. (automotive retail management) (since 1985)
Number of portfolios in fund complex overseen by Trustee		57
Other board memberships held by Trustee		None


38		Legg Mason Partners Capital Fund


DWIGHT B. CRANE c/o R. Jay Gerken, CFA, Legg Mason 620 Eighth Avenue, New York, NY 10018
Birth year		1937
Position(s) held with Fund¹		Trustee
Term of office¹ and length of time served²		Since 1981
Principal occupation(s) during past five years		Independent Consultant (since 1969); formerly, Professor, Harvard Business School (from 1969 to 2007)
Number of portfolios in fund complex overseen by Trustee		57
Other board memberships held by Trustee		None
ROBERT M. FRAYN, JR. c/o R. Jay Gerken, CFA, Legg Mason 620 Eighth Avenue, New York, NY 10018
Birth year		1934
Position(s) held with Fund¹		Trustee
Term of office¹ and length of time served²		Since 1981
Principal occupation(s) during past five years		Retired
Number of portfolios in fund complex overseen by Trustee		57
Other board memberships held by Trustee		None
FRANK G. HUBBARD c/o R. Jay Gerken, CFA, Legg Mason 620 Eighth Avenue, New York, NY 10018
Birth year		1937
Position(s) held with Fund¹		Trustee
Term of office¹ and length of time served²		Since 1993
Principal occupation(s) during past five years		President, Avatar International, Inc. (business development) (since 1998)
Number of portfolios in fund complex overseen by Trustee		57
Other board memberships held by Trustee		None


Legg Mason Partners Capital Fund		39

Additional information (unaudited) continued

Information about Trustees and Officers


HOWARD J. JOHNSON c/o R. Jay Gerken, CFA, Legg Mason 620 Eighth Avenue, New York, NY 10018
Birth year		1938
Position(s) held with Fund¹		Trustee
Term of office¹ and length of time served²		From 1981 to 1998 and 2000 to Present
Principal occupation(s) during past five years		Chief Executive Officer, Genesis Imaging LLC (technology company) (since 2003)
Number of portfolios in fund complex overseen by Trustee		57
Other board memberships held by Trustee		None
DAVID E. MARYATT c/o R. Jay Gerken, CFA, Legg Mason 620 Eighth Avenue, New York, NY 10018
Birth year		1936
Position(s) held with Fund¹		Trustee
Term of office¹ and length of time served²		Since 1983
Principal occupation(s) during past five years		Private Investor; President and Director, ALS Co. (real estate management and development firm) (since 1993)
Number of portfolios in fund complex overseen by Trustee		57
Other board memberships held by Trustee		None
JEROME H. MILLER c/o R. Jay Gerken, CFA, Legg Mason 620 Eighth Avenue, New York, NY 10018
Birth year		1938
Position(s) held with Fund¹		Trustee
Term of office¹ and length of time served²		Since 1995
Principal occupation(s) during past five years		Retired
Number of portfolios in fund complex overseen by Trustee		57
Other board memberships held by Trustee		None


40		Legg Mason Partners Capital Fund


KEN MILLER c/o R. Jay Gerken, CFA, Legg Mason 620 Eighth Avenue, New York, NY 10018
Birth year		1942
Position(s) held with Fund¹		Trustee
Term of office¹ and length of time served²		Since 1983
Principal occupation(s) during past five years		President, Young Stuff Apparel Group, Inc. (apparel manufacturer) (since 1963)
Number of portfolios in fund complex overseen by Trustee		57
Other board memberships held by Trustee		None
JOHN J. MURPHY c/o R. Jay Gerken, CFA, Legg Mason 620 Eighth Avenue, New York, NY 10018
Birth year		1944
Position(s) held with Fund¹		Trustee
Term of office¹ and length of time served²		Since 2002
Principal occupation(s) during past five years		President, Murphy Capital Management (investment advice) (since 1983)
Number of portfolios in fund complex overseen by Trustee		57
Other board memberships held by Trustee		Director, Nicholas Applegate funds; Trustee, Consulting Group Capital Markets Funds; formerly, Director, Atlantic Stewardship Bank (from 2004 to 2005); Director, Barclays International Funds Group Ltd. and affiliated companies (from 1983 to 2003)
THOMAS F. SCHLAFLY c/o R. Jay Gerken, CFA, Legg Mason 620 Eighth Avenue, New York, NY 10018
Birth year		1948
Position(s) held with Fund¹		Trustee
Term of office¹ and length of time served²		Since 1983
Principal occupation(s) during past five years		Of Counsel, Husch Blackwell Sanders LLP (law firm) (since 1984); President, The Saint Louis Brewery, Inc. (brewery) (since 1989)
Number of portfolios in fund complex overseen by Trustee		57
Other board memberships held by Trustee		Director, Citizens National Bank of Greater St. Louis, Maplewood, MO (since 2006)


Legg Mason Partners Capital Fund		41

Additional information (unaudited) continued

Information about Trustees and Officers


JERRY A. VISCIONE c/o R. Jay Gerken, CFA, Legg Mason 620 Eighth Avenue, New York, NY 10018
Birth year		1944
Position(s) held with Fund¹		Trustee
Term of office¹ and length of time served²		Since 1993
Principal occupation(s) during past five years		Retired
Number of portfolios in fund complex overseen by Trustee		57
Other board memberships held by Trustee		None
INTERESTED TRUSTEE
R. JAY GERKEN, CFA³ Legg Mason 620 Eighth Avenue, New York, NY 10018
Birth year		1951
Position(s) held with Fund¹		Trustee, President, Chairman, and Chief Executive Officer
Term of office¹ and length of time served²		Since 2002
Principal occupation(s) during past five years		Managing Director of Legg Mason; Chairman of the Board and Trustee/Director of 159 funds associated with Legg Mason Partners Fund Advisor, LLC (“LMPFA”) and its affiliates; President of LMPFA (since 2006); Chairman, President and Chief Executive Officer of certain mutual funds associated with Legg Mason and its affiliates; formerly, Chairman, Smith Barney Fund Management LLC (“SBFM”) and CitiFund Management Inc. (“CFM”) (from 2002 to 2005); formerly, Chairman President and Chief Executive Officer of Travelers Investment Adviser, Inc. (“TIA”) (from 2002 to 2005)
Number of portfolios in fund complex overseen by Trustee		146
Other board memberships held by Trustee		Trustee, Consulting Group Capital Markets Funds (from 2002 to 2006)
OFFICERS
KAPREL OZSOLAK Legg Mason 55 Water Street, New York, NY 10041
Birth year		1965
Position(s) held with Fund¹		Chief Financial Officer and Treasurer
Term of office¹ and length of time served²		Since 2004
Principal occupation(s) during past five years		Director of Legg Mason; Chief Financial Officer and Treasurer of certain mutual funds associated with Legg Mason; formerly, Controller of certain mutual funds associated with certain predecessor firms of Legg Mason (from 2002 to 2004)


42		Legg Mason Partners Capital Fund


TED P. BECKER Legg Mason 620 Eighth Avenue, New York, NY 10018
Birth year		1951
Position(s) held with Fund¹		Chief Compliance Officer
Term of office¹ and length of time served²		Since 2006
Principal occupation(s) during past five years		Director of Global Compliance at Legg Mason (since 2006); Chief Compliance Officer of LMPFA (since 2006); Managing Director of Compliance at Legg Mason (since 2005); Chief Compliance Officer with certain mutual funds associated with Legg Mason, LMPFA and certain affiliates (since 2006); formerly, Managing Director of Compliance at CAM or its predecessor (from 2002 to 2005)
JOHN CHIOTA Legg Mason 100 First Stamford Place, Stamford, CT 06902
Birth year		1968
Position(s) held with Fund¹		Chief Anti-Money Laundering Compliance Officer/Identity Theft Prevention Officer
Term of office¹ and length of time served²		Since 2006/2008
Principal occupation(s) during past five years		Identity Theft Prevention Officer of certain mutual funds associated with Legg Mason & Co. (since 2008); Chief Anti-Money Laundering Compliance Officer of certain mutual funds associated with Legg Mason & Co. (since 2006); Vice President of Legg Mason & Co. (since 2005); Vice President at CAM (since 2004); Prior to August 2004, Chief Anti-Money Laundering Compliance Officer of TD Waterhouse
ROBERT I. FRENKEL Legg Mason 100 First Stamford Place, Stamford, CT 06902
Birth year		1954
Position(s) held with Fund¹		Secretary and Chief Legal Officer
Term of office¹ and length of time served²		Since 2003
Principal occupation(s) during past five years		Managing Director and General Counsel of Global Mutual Funds for Legg Mason and its predecessors (since 1994); Secretary and Chief Legal Officer of mutual funds associated with Legg Mason (since 2003); formerly, Secretary of CFM (from 2001 to 2004)
THOMAS C. MANDIA Legg Mason 100 First Stamford Place, Stamford, CT 06902
Birth year		1962
Position(s) held with Fund¹		Assistant Secretary
Term of office¹ and length of time served²		Since 2000
Principal occupation(s) during past five years		Managing Director and Deputy General Counsel of Legg Mason (since 2005); formerly, Managing Director and Deputy General Counsel for CAM (from 1992 to 2005)


Legg Mason Partners Capital Fund		43

Additional information (unaudited) continued

Information about Trustees and Officers


ALBERT LASKAJ Legg Mason 55 Water Street, New York, NY 10041
Birth year		1977
Position(s) held with Fund¹		Controller
Term of office¹ and length of time served²		Since 2007
Principal occupation(s) during past five years		Vice President of Legg Mason (since 2008); Controller of certain mutual funds associated with Legg Mason (since 2007); formerly, Assistant Controller of certain mutual funds associated with Legg Mason (from 2005 to 2007); formerly, Accounting Manager of certain mutual funds associated with certain predecessor firms of Legg Mason (from 2003 to 2005)
STEVEN FRANK Legg Mason 55 Water Street, New York, NY 10041
Birth year		1967
Position(s) held with Fund¹		Controller
Term of office¹ and length of time served²		Since 2005
Principal occupation(s) during past five years		Vice President of Legg Mason (since 2002); Controller of certain mutual funds associated with Legg Mason or its predecessors (since 2005); formerly, Assistant Controller of certain mutual funds associated with Legg Mason predecessors (from 2001 to 2005)

¹	Each Trustee and Officer serves until his or her successor has been duly elected and qualified or until his or her earlier death, resignation, retirement or removal.

²	Indicates the earliest year in which the Trustee or Officer became a Board Member or Officer, as applicable for a fund in the Legg Mason Partners funds complex.

³	Mr. Gerken is an “interested person” of the Trust as defined in the 1940 Act, because Mr. Gerken is an officer of LMPFA and certain of its affiliates.


44		Legg Mason Partners Capital Fund

Important tax information (unaudited)

The following information is provided with respect to the distributions paid during the taxable year ended December 31, 2008:


Record date:		6/18/2008
Payable date:		6/19/2008
Ordinary income:
Qualified dividend income for individuals		12.33	%
Dividends qualifying for the dividends received deduction for corporations		11.79	%
Long-term capital gain dividend	$	0.254911

Please retain this information for your records.


Legg Mason Partners Capital Fund		45

Legg Mason Partners Capital Fund

Trustees

Paul R. Ades

Andrew L. Breech

Dwight B. Crane

Robert M. Frayn, Jr.

R. Jay Gerken, CFA
Chairman

Frank G. Hubbard

Howard J. Johnson

David E. Maryatt

Jerome H. Miller

Ken Miller

John J. Murphy

Thomas F. Schlafly

Jerry A. Viscione

Investment manager

Legg Mason Partners Fund Advisor, LLC

Subadviser

ClearBridge Advisors, LLC

Distributor

Legg Mason Investor Services, LLC

Custodian

State Street Bank and Trust Company

Transfer agent

PNC Global Investment Servicing

4400 Computer Drive

Westborough,

Massachusetts 01581

Independent registered public accounting firm

KPMG LLP

345 Park Avenue

New York, New York 10154

Legg Mason Partners Capital Fund

The Fund is a separate investment series of Legg Mason Partners Equity Trust, a Maryland business trust.

LEGG MASON PARTNERS CAPITAL FUND

Legg Mason Partners Funds

55 Water Street

New York, New York 10041

The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s website at www.sec.gov. The Fund’s Forms N-Q may be reviewed and coped at the SEC’s Public Reference Room in Washington, D.C., and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. To obtain information on Form N-Q from the Fund, shareholders can call Legg Mason Partners Shareholder Services at 1-800-451-2010.

Information on how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling 1-800-451-2010, (2) on the Fund’s website at www.leggmason.com/individualinvestors and (3) on the SEC’s website at www.sec.gov.

This report is submitted for the general information of the shareholders of Legg Mason Partners Capital Fund. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by a current prospectus.

Investors should consider the Fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information about the Fund. Please read the prospectus carefully before investing.

www.leggmason.com/individualinvestors

Member FINRA, SIPC

BUILT TO WIN^SM

LOGO

At Legg Mason, we’ve assembled a collection of experienced investment management firms and empowered each of them with the tools, the resources and, most importantly, the independence to pursue the strategies they know best.

•

Each was purposefully chosen for their commitment to investment excellence.

•

Each is focused on specific investment styles and asset classes.

•

Each exhibits thought leadership in their chosen area of focus.

Together, we’ve built a powerful portfolio of solutions for financial advisors and their clients. And it has made us a world leader in money management.*

*	Ranked ninth-largest money manager in the world, according to Pensions & Investments, May 26, 2008, based on 12/31/07 worldwide assets under management.

www.leggmason.com/individualinvestors

FDXX010733 2/09 SR09-757

NOT PART OF THE ANNUAL REPORT

ITEM 2.

CODE OF ETHICS.

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

ITEM 3.

AUDIT COMMITTEE FINANCIAL EXPERT.

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

ITEM 4.

PRINCIPAL ACCOUNTANT FEES AND SERVICES.

a) Audit Fees. The aggregate fees billed in the last two fiscal years ending December 31, 2007 and December 31, 2008 (the “Reporting Periods”) for professional services rendered by the Registrant’s principal accountant (the “Auditor”) for the audit of the Registrant’s annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $320,200 in 2007 and $310,850 in 2008.

b) Audit-Related Fees. The aggregate fees billed in the Reporting Period for assurance and related services by the Auditor that are reasonably related to the performance of the Registrant’s financial statements were $54,633 in 2007 and $21,900 in 2008. These services consisted of procedures performed in connection with the Re-domiciliation of the various reviews of Prospectus supplements, and consent issuances related to the N-1A filings and calculations pursuant to Funds revolving credit for the Legg Mason Partners Equity Trust.

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

(c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning (“Tax Services”) were $33,900 in 2007 and $53,213 in 2008. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, and (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held.

There were no fees billed for tax services by the Auditors to service affiliates during the Reporting Periods that required pre-approval by the Audit Committee.

d) All Other Fees. The fees billed in the Reporting Periods for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) of this Item 4 for the Legg Mason Partners Equity Trust were $35,150 in 2007 and $0 in 2008. These fees consisted of procedures performed in connection with the mergers on December 1, 2006, March 2, 2007 and March 16, 2007.

All Other Fees. There were no other non-audit services rendered by the Auditor to Legg Mason Partners Fund Advisors, LLC (“LMPFA”), and any entity controlling, controlled by or under common control with LMPFA that provided ongoing services to Legg Mason Partners Equity Trust requiring pre-approval by the Audit Committee in the Reporting Period.

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

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

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

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

(2) For the Legg Mason Partners Equity Trust, the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees were 100% and 0% for 2007 and 2008; Tax Fees were 100% and 0% for 2007 and 2008; and Other Fees were 100% and 0% for 2007 and 2008.

(f) N/A

(g) Non-audit fees billed by the Auditor for services rendered to Legg Mason Partners Equity Trust, LMPFA and any entity controlling, controlled by, or under common control with LMPFA that provides ongoing services to Legg Mason Partners Equity Trust during the reporting period were $0 in 2008.

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

ITEM 5.

AUDIT COMMITTEE OF LISTED REGISTRANTS.

The independent board members are acting as the registrant’s audit committee as specified in Section 3(a)(58)(B) of the Exchange Act .The Audit Committee consists of the following Board members:

Paul R. Ades

Andrew L. Breech

Dwight B. Crane

Robert M. Frayn, Jr.

Frank G. Hubbard

Howard J. Johnson

David E. Maryatt

Jerome H. Miller

Ken Miller

John J. Murphy

Thomas F. Schlafly

Jerry A. Viscione

Not applicable.

ITEM 6.

SCHEDULE OF INVESTMENTS.

Included herein under Item 1.

ITEM 7.

DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

Not applicable.

ITEM 8.

PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

Not applicable.

ITEM 9.

PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.

Not applicable.

ITEM 10.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

ITEM 11.

CONTROLS AND PROCEDURES.

(a)

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

(b)

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

ITEM 12.

EXHIBITS.

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

Exhibit 99.CODE ETH

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

Exhibit 99.CERT

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

Exhibit 99.906CERT

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.


Legg Mason Partners Equity Trust

By:		/s/ R. Jay Gerken
		(R. Jay Gerken)
		Chief Executive Officer of Legg Mason Partners Equity Trust

Date: March 5, 2009

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


By:		/s/ R. Jay Gerken
		(R. Jay Gerken)
		Chief Executive Officer of Legg Mason Partners Equity Trust

Date: March 5, 2009


By:		/s/ Kaprel Ozsolak
		(Kaprel Ozsolak)
		Chief Financial Officer of Legg Mason Partners Equity Trust

Date: March 5, 2009