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Legg Mason Partners Equity Trust – ‘N-14AE’ on 4/18/08 – EX-99.17F

On: Friday, 4/18/08, at 1:35pm ET · Accession #: 1193125-8-84591 · File #: 333-150314

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 4/18/08  Legg Mason Partners Equity Trust  N-14AE                14:4.7M                                   RR Donnelley/FA
          → Legg Mason ClearBridge Capital Fund ⇒ Class A — Class B — Class C — Class I
          → Legg Mason Partners Classic Values Fund ⇒ Class A (SCLAX) — Class B (SCLBX) — Class C (SCLLX) — Class I

Registration Statement of an Open-End Investment Company (Business Combination) with Automatic Effectiveness — Form N-14
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: N-14AE      Lmp Equity Trust -- Lmp Classic Values Fund         HTML   1.13M 
 2: EX-99.11A   Opinion of Consent of Willkie Farr                  HTML     11K 
 3: EX-99.11B   Opinion and Consent of Venable LLP                  HTML     17K 
 4: EX-99.12    Form of Opinion of Willkie Farr                     HTML     18K 
 5: EX-99.14    Consent of Kpmg LLP                                 HTML     10K 
 6: EX-99.16    Powers of Attorney                                  HTML     18K 
 7: EX-99.17A   Form of Proxy Card                                  HTML     22K 
 8: EX-99.17B   Prospectus of Lmp Classic Values Fund Dated April   HTML    313K 
                          16, 2007, as Supplement                                
 9: EX-99.17C   Statement of Additional Information of Lmp Classic  HTML    441K 
                          Values Fund                                            
10: EX-99.17D   Statement of Additional Information of Lmp Capital  HTML    728K 
                          Fund                                                   
11: EX-99.17E   Annual Report of Lmp Classic Values Fund            HTML    449K 
12: EX-99.17F   Annual Report of Lmp Capital Fund                   HTML    525K 
13: EX-99.17I   Code of Ethics of Olstein                           HTML    146K 
14: EX-99.17K   Form of Fee Waiver and Expense Reimbursement        HTML     13K 
                          Agreement

EX-99.17F — Annual Report of Lmp Capital Fund

This exhibit is an HTML Document rendered as filed. [ Alternative Formats ]

Annual Report of LMP Capital Fund

Exhibit (17)(F)

Annual Report dated 12/31/2007 for

524694106: Capital Fund Class A

ANNUAL REPORT

DECEMBER 31, 2007

LOGO

Legg Mason Partners

Capital Fund

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

Legg Mason Partners Capital Fund

Annual Report • December 31, 2007

What’s

Inside

Fund Objective

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


Letter from the Chairman		I

Fund Overview		1

Fund at a Glance		5

Fund Expenses		6

Fund Performance		8

Historical Performance		9

Schedule of Investments		10

Statement of Assets and Liabilities		13

Statement of Operations		14

Statements of Changes in Net Assets		15

Financial Highlights		16

Notes to Financial Statements		20

Report of Independent Registered Public Accounting Firm		30

Board Approval of Management and Subadvisory Agreements		31

Additional Information		36

Important Tax Information		42

Letter from the Chairman

LOGO

R. JAY GERKEN, CFA

Chairman, President and Chief Executive Officer

Dear Shareholder,

While the U.S. economy continued to expand during the 12-month reporting period ended December 31, 2007, it weakened late in the period. In the first quarter of 2007, U.S. gross domestic product (“GDP”)ⁱ growth was a tepid 0.6%, according to the U.S. Commerce Department. This was the lowest growth rate since the fourth quarter of 2002. The economy then rebounded, as second quarter 2007 GDP growth was a solid 3.8%. GDP growth accelerated in the third quarter to 4.9%, its strongest showing in four years. A surge in inventory-building and robust exports supported the economy during the third quarter. However, continued weakness in the housing market and an ongoing credit crunch then took their toll on the economy during the last three months of 2007. During this period, the advance estimate for GDP growth was 0.6%.

Ongoing issues related to the housing and subprime mortgage markets and an abrupt tightening in the credit markets prompted the Federal Reserve Board (“Fed”)ⁱⁱ to take several actions during the reporting period. The Fed initially responded by lowering the discount rate — the rate the Fed uses for loans it makes directly to banks — from 6.25% to 5.75% in mid-August 2007. Then, at its meeting on September 18, the Fed reduced the discount rate to 5.25% and the federal funds rateⁱⁱⁱ from 5.25% to 4.75%. This marked the first reduction in the federal funds rate since June 2003. The Fed again lowered rates in October and December 2007, bringing the federal funds rate to 4.25% at the end of the year. Shortly after the reporting period ended, the Fed continued to ease monetary policy in an attempt to ward off a recession. In a surprise move, the Fed aggressively cut the federal funds rate on January 22, 2008 by 0.75% to 3.50%. The Fed again lowered the federal funds rate during its meeting on January 30, 2008, bringing it to 3.00%. In its statement accompanying its latest rate cut, the Fed stated: “Today’s policy action, combined

Legg Mason Partners Capital Fund I

with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.”

Despite periods of extreme volatility, the U.S. stock market produced overall positive results during the 12-month reporting period. After rising in four of the first five months of the period, the market reversed course beginning in June 2007. Earlier in the reporting period, U.S. stock prices rose on the back of solid corporate profits, an active merger and acquisition (M&A) environment and hopes that the Fed would lower the federal funds rate in 2007. U.S. equity prices then faltered in June and July 2007 due to troubles in the housing market and expectations that the Fed would not lower short-term interest rates in the foreseeable future. U.S. stock prices then rallied from August through October 2007, as the Fed lowered interest rates and it appeared the credit crunch was easing. However, stock prices then fell sharply in November and modestly in December due to mounting losses related to subprime mortgages and fears of slower economic growth in 2008. All told, the S&P 500 Index^iv returned 5.49% during the 12 months ended December 31, 2007.

Looking at the U.S. stock market more closely, large- and mid-cap stocks outperformed their small-cap counterparts, as the Russell 1000^v, Russell Midcap^vi and Russell 2000^vii Indexes returned 5.77%, 5.60% and -1.57%, respectively, during the 12 months ended December 31, 2007. From an investment style perspective, growth stocks outperformed value stocks, with the Russell 3000 Growth ^viii and Russell 3000 Value^ix Indexes returning 11.40% and -1.01%, respectively. This marked the first calendar year since 1999 that, overall, growth stocks outperformed value stocks.

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

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

II Legg Mason Partners Capital Fund

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.

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, 2008

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 that is generally representative of the performance of larger companies in the U.S.

^v	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.

^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 III

Fund Overview

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

A. For the financial markets, 2007 was a tumultuous year that, remarkably, managed to produce modest gains for much of the broad U.S. stock market, despite high levels of volatility and widely disparate performance among different market sectors. After a solid start to the year, U.S. stock indexes fell sharply in February following China’s worst one-day stock market performance in 10 years, which had widespread repercussions for global markets. However, by mid-March, the domestic equity market had resumed its ascent on the strength of positive economic and corporate earnings news and continued merger and acquisition (M&A) activity that helped lift the Dow Jones Industrial Average (“DJIA”)ⁱ to new record highs of 13,000 and 14,000 during the summer.

But while the stock market was performing well, headlines began to shift to concerns about rising subprime mortgage default rates, which rapidly grew into a full-fledged crisis for the collateralized debt market. As news of the crisis unfolded, a number of credit-rating downgrades and announcements of massive write-downs by prominent financial firms with subprime exposure contributed to growing investor fears and increasing levels of market volatility. The Federal Reserve Board (“Fed”)ⁱⁱ soon joined central banks around the world in an effort to normalize credit markets by injecting large amounts of liquidity into the markets and lowering key interest rates.

Despite high levels of volatility during the course of the year, the U.S. equity market managed to perform well in 2007. This was notable, especially in light of the bursting of the housing market bubble, record high oil prices, weakening consumer spending and intensifying concerns about inflation and recession. The DJIA registered a total return of 8.88% for the 12 months ended December 31, 2007, while the broader S&P 500 Indexⁱⁱⁱ gained 5.49% and the small-cap market, as represented by the Russell 2000 Index^iv, returned -1.57% for the same period. The Financials and Consumer Discretionary sectors were the weakest performers within the S&P 500 Index in 2007, suffering double-digit losses, while the Energy, Materials, Utilities and Information Technology (“IT”) sectors all had strong double-digit gains over the same period.

Performance Review

For the 12 months ended December 31, 2007, Class A shares of Legg Mason Partners Capital Fund, excluding sales charges, returned 0.69%. The Fund’s unmanaged benchmark, the Russell 3000 Index^v, returned 5.14% for the same time frame. The Lipper Multi-Cap Core Funds Category Average¹ increased 6.42% over the same period.

Lipper, Inc. is a major independent mutual-fund tracking organization. Returns are based on the 12-month period ended December 31, 2007, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 886 funds in the Fund’s Lipper category, and excluding sales charges.

Legg Mason Partners Capital Fund 2007 Annual Report 1

Performance Snapshot as of December 31, 2007 (excluding sales charges) (unaudited)


	6 Months		12 Months
Capital Fund – Class A Shares	-5.16	%	0.69	%

Russell 3000 Index	-1.84	%	5.14	%

Lipper Multi-Cap Core Funds Category Average¹	-1.49	%	6.42	%

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 -5.40%, Class C shares returned -5.42% and Class I shares returned -4.93% over the six months ended December 31, 2007. Excluding sales charges, Class B shares returned 0.05%, Class C shares returned 0.05% and Class I shares returned 1.07% over the 12 months ended December 31, 2007. 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 16, 2007, the gross total operating expenses for Class A, Class B, Class C and Class I shares were 0.99%, 1.80%, 1.79% and 0.62%, respectively.

Q. What were the most significant factors affecting Fund performance?

What were the leading contributors to performance?

A. Relative to the Russell 3000 Index, stock selection in the Financials and Industrials sectors contributed significantly to performance for the year, as did overweights to the IT and Energy sectors and an underweight to the Consumer Discretionary sector. On an individual stock basis, the leading contributors to performance included positions in Shaw Group Inc. and L-3 Communications Holdings Inc., both in the Industrials sector, Juniper Networks Inc. in the IT sector, as well as Diamond Offshore Drilling Inc. and Anadarko Petroleum Corp., both in the Energy sector.

What were the leading detractors from performance?

A. Relative to the Russell 3000 Index, both overall stock selection and overall sector allocation negatively impacted Fund performance for the period. Specifically, stock selection in the IT and Consumer Discretionary sectors was a significant detractor from relative performance, along with an overweight to the Financials sector and underweights to the Consumer Staples and Materials sectors. On an individual stock basis, the leading detractors from Fund performance for the year included holdings in LSI Corp. and Motorola Inc., both in the IT sector, Warner Music Group Corp. in the Consumer Discretionary sector, as well as Marsh & McLennan Cos. and American Express Co., both in the Financials sector.

Lipper, Inc. is a major independent mutual-fund tracking organization. Returns are based on the period ended December 31, 2007, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 919 funds for the six-month period and among the 886 funds for the 12-month period in the Fund’s Lipper category, and excluding sales charges.

2 Legg Mason Partners Capital Fund 2007 Annual Report

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

A. During the period, we closed our position in a number of existing Fund holdings, including Marsh & McLennan Companies, Inc. and Capital One Financial Corp., both in the Financials sector, as well as Time Warner Inc. in the Consumer Discretionary sector and Cameron International Corporation in the Energy sector. We added new Fund positions in a number of stocks including Newfield Exploration Co. and Nabors Industries Ltd., both in the Energy sector, International Business Machines Corp. in the IT sector and American International Group, Inc. in the Financials sector.

Compared to the start of the year, at the close of the period the Fund was more heavily weighted in the IT and Energy sectors, and we had significantly reduced our allocations to the Consumer Discretionary, Financials and Telecommunication Services sectors. However, we continued to invest in what we believe are the most attractively priced securities, with little concern for sector weightings versus a benchmark. We remained intensely focused on generating positive returns for our clients. We sought to do this by exploiting the opportunism and flexibility that are characteristic of the Fund.

Thank you for your investment in Legg Mason Partners Capital Fund. 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 S. Posner		Brian M. Angerame
Portfolio Manager		Co-Portfolio Manager
ClearBridge Advisors, LLC		ClearBridge Advisors, LLC

January 15, 2008

Legg Mason Partners Capital Fund 2007 Annual Report 3

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, 2007 and are subject to change and may not be representative of the portfolio managers’ current or future investments. The Fund’s top ten holdings (as a percentage of net assets) as of this date were: General Electric Co. (5.3%), Cisco Systems Inc. (5.0%), American Express Co. (4.8%), Accenture Ltd., Class A Shares (4.0%), Newfield Exploration Co. (4.0%), JPMorgan Chase & Co. (3.9%), WPP Group PLC (3.5%), UnitedHealth Group Inc. (3.2%), ION Geophysical Corp. (3.1%) and Lehman Brothers Holdings Inc. (2.9%). Please refer to pages 10 through 12 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, 2007 were: Information Technology (36.1%), Financials (23.9%), Industrials (15.0%), Energy (13.6%) and Consumer Discretionary (6.0%). 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 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 S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.

^iv	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.

^v	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.

4 Legg Mason Partners Capital Fund 2007 Annual Report

Fund at a Glance (unaudited)

LOGO

Legg Mason Partners Capital Fund 2007 Annual Report 5

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, 2007 and held for the six months ended December 31, 2007.

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 Return⁽¹⁾


	Actual Total Return Without Sales Charges⁽²⁾		Beginning Account Value		Ending Account Value		Annualized Expense Ratio		Expenses Paid During the Period⁽³⁾
Class A	(5.16	)%	$	1,000.00	$	948.40	1.08	%	$	5.30

Class B	(5.40	)		1,000.00		946.00	1.66			8.14

Class C	(5.42	)		1,000.00		945.80	1.63			7.99

Class I	(4.93	)		1,000.00		950.70	0.61			3.00

⁽¹⁾	For the six months ended December 31, 2007.

⁽²⁾

Assumes 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 365.

6 Legg Mason Partners Capital Fund 2007 Annual Report

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 Return⁽¹⁾


	Hypothetical Annualized Total Return		Beginning Account Value		Ending Account Value		Annualized Expense Ratio		Expenses Paid During the Period⁽²⁾
Class A	5.00	%	$	1,000.00	$	1,019.76	1.08	%	$	5.50

Class B	5.00			1,000.00		1,016.84	1.66			8.44

Class C	5.00			1,000.00		1,016.99	1.63			8.29

Class I	5.00			1,000.00		1,022.13	0.61			3.11

⁽¹⁾	For the six months ended December 31, 2007.

⁽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 365.

Legg Mason Partners Capital Fund 2007 Annual Report 7

Fund Performance

Average Annual Total Returns⁽¹⁾ (unaudited)


	Without Sales Charges⁽²⁾
	Class A		Class B		Class C		Class I⁽³⁾
Twelve Months Ended 12/31/07	0.69	%	0.05	%	0.05	%	1.07	%

Five Years Ended 12/31/07	14.49		13.57		13.59		14.93

Ten Years Ended 12/31/07	10.55		9.68		9.68		10.93


	With Sales Charges⁽⁴⁾
	Class A		Class B		Class C		Class I⁽³⁾
Twelve Months Ended 12/31/07	(5.09	)%	(4.01	)%	(0.76	)%	1.07	%

Five Years Ended 12/31/07	13.14		13.45		13.59		14.93

Ten Years Ended 12/31/07	9.90		9.68		9.68		10.93

Cumulative Total Returns⁽¹⁾ (unaudited)


	Without Sales Charges⁽²⁾
Class A (12/31/97 through 12/31/07)	172.73	%

Class B (12/31/97 through 12/31/07)	151.90

Class C (12/31/97 through 12/31/07)	151.83

Class I⁽³⁾ (12/31/97 through 12/31/07)	182.20

⁽¹⁾

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 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.

⁽³⁾

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 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.

8 Legg Mason Partners Capital Fund 2007 Annual Report

Historical Performance (unaudited)

Value of $10,000 Invested in Class I Shares of the Legg Mason Partners Capital Fund vs. Russell 3000 Index† (December 1997 — December 2007)

LOGO

†

Hypothetical illustration of $10,000 invested in Class I shares on December 31, 1997, assuming reinvestment of all distributions, including returns of capital, if any, at net asset value through December 31, 2007. The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represent 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.

Legg Mason Partners Capital Fund 2007 Annual Report 9

Schedule of Investments (December 31, 2007)

LEGG MASON PARTNERS CAPITAL FUND


Shares	Security	Value
COMMON STOCKS — 97.8%
CONSUMER DISCRETIONARY — 6.0%
Media — 6.0%
1,100,000	Lions Gate Entertainment Corp.*	$	10,362,000
1,836,900	Warner Music Group Corp.		11,131,614
2,483,500	WPP Group PLC		31,795,524

	TOTAL CONSUMER DISCRETIONARY		53,289,138
CONSUMER STAPLES — 0.0%
Food & Staples Retailing — 0.0%
466,286	FHC Delaware Inc. (a)(b)*		1
ENERGY — 13.6%
Energy Equipment & Services — 9.4%
827,200	BJ Services Co.		20,067,872
77,800	Diamond Offshore Drilling Inc.		11,047,600
1,771,700	ION Geophysical Corp.*		27,957,426
936,100	Nabors Industries Ltd.*		25,639,779

	Total Energy Equipment & Services		84,712,677

Oil, Gas & Consumable Fuels — 4.2%
675,000	Newfield Exploration Co.*		35,572,500
51,998	SandRidge Energy Inc. (c)*		1,864,648

	Total Oil, Gas & Consumable Fuels		37,437,148

	TOTAL ENERGY		122,149,825
FINANCIALS — 23.9%
Capital Markets — 6.2%
515,000	Invesco Ltd.		16,160,700
392,900	Lehman Brothers Holdings Inc.		25,711,376
255,000	Merrill Lynch & Co. Inc.		13,688,400

	Total Capital Markets		55,560,476

Consumer Finance — 4.8%
827,200	American Express Co.		43,030,944

Diversified Financial Services — 3.9%
800,000	JPMorgan Chase & Co.		34,920,000

Insurance — 4.9%
405,900	American International Group Inc.		23,663,970
289,500	Arch Capital Group Ltd.*		20,366,325

	Total Insurance		44,030,295

Thrifts & Mortgage Finance — 4.1%
1,129,400	Hudson City Bancorp Inc.		16,963,588
571,800	NewAlliance Bancshares Inc.		6,587,136
400,000	People’s United Financial Inc.		7,120,000
300,000	Washington Federal Inc.		6,333,000

	Total Thrifts & Mortgage Finance		37,003,724

	TOTAL FINANCIALS		214,545,439

See Notes to Financial Statements.

10 Legg Mason Partners Capital Fund 2007 Annual Report

Schedule of Investments (December 31, 2007) (continued)


Shares	Security	Value
HEALTH CARE — 3.2%
Health Care Providers & Services — 3.2%
499,100	UnitedHealth Group Inc.	$	29,047,620
INDUSTRIALS — 15.0%
Aerospace & Defense — 2.2%
188,600	L-3 Communications Holdings Inc.		19,980,284

Commercial Services & Supplies — 1.7%
475,000	Monster Worldwide Inc.*		15,390,000

Construction & Engineering — 2.6%
385,000	Shaw Group Inc.*		23,269,400

Electrical Equipment — 1.1%
190,000	Thomas & Betts Corp.*		9,317,600

Industrial Conglomerates — 7.4%
1,282,200	General Electric Co.		47,531,154
480,900	Tyco International Ltd.		19,067,685

	Total Industrial Conglomerates		66,598,839

	TOTAL INDUSTRIALS		134,556,123
INFORMATION TECHNOLOGY — 36.1%
Communications Equipment — 11.4%
1,650,000	Cisco Systems Inc.*		44,665,500
1,199,500	Comverse Technology Inc.*		20,691,375
537,700	Dycom Industries Inc.*		14,329,705
1,417,800	Motorola Inc.		22,741,512

	Total Communications Equipment		102,428,092

Computers & Peripherals — 8.0%
1,075,000	EMC Corp.*		19,919,750
227,500	International Business Machines Corp.		24,592,750
803,100	Network Appliance Inc.*		20,045,376
1,127,200	Palm Inc.		7,146,448

	Total Computers & Peripherals		71,704,324

Electronic Equipment & Instruments — 1.1%
1,173,898	Photon Dynamics Inc.*		9,743,354

Internet Software & Services — 1.3%
300,000	VeriSign Inc.*		11,283,000

IT Services — 4.0%
1,002,900	Accenture Ltd., Class A Shares		36,134,487

Semiconductors & Semiconductor Equipment — 5.1%
4,260,200	LSI Corp.*		22,621,662
700,000	Texas Instruments Inc.		23,380,000

	Total Semiconductors & Semiconductor Equipment		46,001,662

See Notes to Financial Statements.

Legg Mason Partners Capital Fund 2007 Annual Report 11

Schedule of Investments (December 31, 2007) (continued)


Shares	Security	Value
Software — 5.2%
372,200	Blackboard Inc.*	$	14,981,050
461,800	Check Point Software Technologies Ltd.*		10,141,128
953,100	Oracle Corp.*		21,520,998

	Total Software		46,643,176

	TOTAL INFORMATION TECHNOLOGY		323,938,095
	TOTAL COMMON STOCKS (Cost — $851,470,325)		877,526,241
Contracts
PURCHASED OPTIONS — 0.1%
4,500	Amgen Inc., Call @ $60.00, expires 1/17/09 (Cost — $2,925,180)		1,035,000
	TOTAL INVESTMENTS BEFORE SHORT-TERM INVESTMENT (Cost — $854,395,505)		878,561,241
Face Amount
SHORT-TERM INVESTMENT — 2.4%
Repurchase Agreement — 2.4%
$21,723,000	Interest in $840,894,000 joint tri-party repurchase agreement dated 12/31/07 with Greenwich Capital Markets Inc., 4.350% due 1/2/08; Proceeds at maturity — $21,728,250; (Fully collateralized by various U.S. government agency obligations, 0.000% to 7.000% due 2/15/08 to 12/19/25; Market value — $22,157,574) (Cost — $21,723,000)		21,723,000
	TOTAL INVESTMENTS — 100.3% (Cost — $876,118,505#)		900,284,241
	Liabilities in Excess of Other Assets — (0.3)%		(2,971,492	)

	TOTAL NET ASSETS — 100.0%	$	897,312,749

*	Non-income producing security.

^(a)	Illiquid security.

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

^(c)	All or a portion of this security is segregated for options written.

#	Aggregate cost for federal income tax purposes is $876,228,399.

Schedule of Options Written


Contracts		Expiration Date	Strike Price		Value
900	Merrill Lynch & Co. Inc., Call (Premiums received — $168,297)	1/19/08	$	60	$	40,500

See Notes to Financial Statements.

12 Legg Mason Partners Capital Fund 2007 Annual Report

Statement of Assets and Liabilities (December 31, 2007)


ASSETS:
Investments, at value (Cost — $876,118,505)	$	900,284,241
Cash		821
Receivable for securities sold		2,876,305
Receivable for Fund shares sold		1,155,246
Dividends and interest receivable		709,293
Prepaid expenses		43,405

Total Assets		905,069,311

LIABILITIES:
Payable for Fund shares repurchased		6,144,693
Distribution fees payable		487,264
Investment management fee payable		474,115
Options written, at value (premium received $168,297)		40,500
Directors’ fees payable		21,540
Accrued expenses		588,450

Total Liabilities		7,756,562

Total Net Assets	$	897,312,749
NET ASSETS:
Par value (Note 7)	$	379
Paid-in capital in excess of par value		860,471,658
Overdistributed net investment income		(157,019	)
Accumulated net realized gain on investments, options written and foreign currency transactions		12,693,569
Net unrealized appreciation on investments, options written and foreign currencies		24,304,162

Total Net Assets	$	897,312,749
Shares Outstanding:
Class A		11,800,783

Class B		8,725,768

Class C		12,801,573

Class I		4,592,133

Net Asset Value:
Class A	$	24.87

Class B (offering price) *	$	22.49

Class C (offering price) *	$	22.57

Class I (offering price and redemption price)	$	25.83

Maximum Public Offering Price Per Share:
Class A (based on maximum initial sales charge of 5.75%)	$	26.39

*	Redemption price 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.

Legg Mason Partners Capital Fund 2007 Annual Report 13

Statement of Operations (For the year ended December 31, 2007)


INVESTMENT INCOME:
Dividends	$	14,705,364
Interest		1,656,465

Total Investment Income		16,361,829

EXPENSES:
Investment management fee (Note 2)		7,297,062
Distribution fees (Notes 2 and 5)		7,080,730
Transfer agent fees (Note 5)		623,636
Shareholder reports (Note 5)		142,499
Legal fees		114,248
Registration fees		69,310
Audit and tax		65,878
Trustees’ fees		54,917
Insurance		23,357
Custody fees		10,745
Miscellaneous expenses		20,857

Total Expenses		15,503,239

Net Investment Income		858,590

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, OPTIONS WRITTEN AND FOREIGN CURRENCY TRANSACTIONS (NOTES 1 AND 3):
Net Realized Gain From:
Investment transactions		165,485,677
Options written		3,315,577
Foreign currency transactions		3,044

Net Realized Gain		168,804,298

Change in Net Unrealized Appreciation/Depreciation From:
Investments		(152,187,152	)
Options written		127,797
Foreign currencies		6,022

Change in Net Unrealized Appreciation/Depreciation		(152,053,333	)

Net Gain on Investments, Options Written and Foreign Currency Transactions		16,750,965

Increase in Net Assets From Operations	$	17,609,555

See Notes to Financial Statements.

14 Legg Mason Partners Capital Fund 2007 Annual Report

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


	2007			2006
OPERATIONS:
Net investment income (loss)	$	858,590		$	(1,504,927	)
Net realized gain		168,804,298			156,535,745
Change in net unrealized appreciation/depreciation		(152,053,333	)		(15,409,889	)

Increase in Net Assets From Operations		17,609,555			139,620,929

DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTES 1 AND 6):
Net investment income		(700,007	)		—
Net realized gains		(198,595,669	)		(130,950,398	)

Decrease in Net Assets From Distributions to Shareholders		(199,295,676	)		(130,950,398	)

FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sale of shares		107,862,114			161,843,298
Reinvestment of distributions		170,192,394			117,891,254
Cost of shares repurchased		(672,250,750	)		(501,350,625	)
Net assets of shares issued in connection with merger		—			23,733,930

Decrease in Net Assets From Fund Share Transactions		(394,196,242	)		(197,882,143	)

Decrease in Net Assets		(575,882,363	)		(189,211,612	)
NET ASSETS:
Beginning of year		1,473,195,112			1,662,406,724

*End of year†**	$	897,312,749		$	1,473,195,112
* Includes overdistributed net investment income of:	$	(157,019	)		—
† Includes accumulated net investment loss of:		—		$	(31,072	)

See Notes to Financial Statements.

Legg Mason Partners Capital Fund 2007 Annual Report 15

Financial Highlights

For a share of each class of beneficial interest outstanding throughout each year ended December 31:


Class A Shares⁽¹⁾	2007			2006⁽²⁾			2005⁽²⁾			2004⁽²⁾			2003⁽²⁾
Net Asset Value, Beginning of Year	$	29.89		$	29.50		$	30.42		$	27.04		$	18.87

Income (Loss) From Operations:
Net investment income (loss)		0.11			0.07			0.03			(0.02	)		0.05
Net realized and unrealized gain		0.22			2.90			2.26			3.87			8.18

Total Income From Operations		0.33			2.97			2.29			3.85			8.23

Less Distributions From:
Net investment income		(0.02	)		—			—			—			(0.02	)
Net realized gains		(5.33	)		(2.58	)		(3.21	)		(0.47	)		—
Return of capital		—			—			—			—			(0.04	)

Total Distributions		(5.35	)		(2.58	)		(3.21	)		(0.47	)		(0.06	)

Net Asset Value, End of Year	$	24.87		$	29.89		$	29.50		$	30.42		$	27.04

Total Return⁽³⁾		0.69	%		10.63	%		7.52	%		14.24	%		43.75	%

Net Assets, End of Year (000s)	$	293,510		$	351,107		$	353,098		$	351,092		$	336,324

Ratios to Average Net Assets:
Gross expenses		0.99	%		0.99	%⁽⁴⁾		1.11	%		1.02	%		1.08	%
Net expenses		0.99			0.99	⁽⁴⁾⁽⁵⁾		1.11			1.02			1.08
Net investment income (loss)		0.36			0.23			0.09			(0.07	)		0.21

Portfolio Turnover Rate		49	%		193	%		265	%		131	%		107	%

⁽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 have been 0.97% and 0.96%, respectively (Note 11).

⁽⁵⁾	Reflects fee waivers and/or expense reimbursements.

See Notes to Financial Statements.

16 Legg Mason Partners Capital Fund 2007 Annual Report

Financial Highlights (continued)

For a share of each class of beneficial interest outstanding throughout each year ended December 31:


Class B Shares⁽¹⁾	2007			2006⁽²⁾			2005⁽²⁾			2004⁽²⁾			2003⁽²⁾
Net Asset Value, Beginning of Year	$	27.68		$	27.72		$	29.01		$	26.02		$	18.28

Income (Loss) From Operations:
Net investment loss		(0.09	)		(0.16	)		(0.22	)		(0.24	)		(0.14	)
Net realized and unrealized gain		0.23			2.70			2.14			3.70			7.90

Total Income From Operations		0.14			2.54			1.92			3.46			7.76

Less Distributions From:
Net investment income		—			—			—			—			(0.01	)
Net realized gains		(5.33	)		(2.58	)		(3.21	)		(0.47	)		—
Return of capital		—			—			—			—			(0.01	)

Total Distributions		(5.33	)		(2.58	)		(3.21	)		(0.47	)		(0.02	)

Net Asset Value, End of Year	$	22.49		$	27.68		$	27.72		$	29.01		$	26.02

Total Return⁽³⁾		0.05	%		9.75	%		6.59	%		13.30	%		42.48	%

Net Assets, End of Year (000s)	$	196,214		$	311,161		$	397,242		$	415,006		$	405,893

Ratios to Average Net Assets:
Gross expenses		1.65	%		1.80	%⁽⁴⁾		1.97	%		1.85	%		1.94	%
Net expenses		1.65			1.80	⁽⁴⁾⁽⁵⁾		1.97			1.85			1.94
Net investment loss		(0.33	)		(0.58	)		(0.77	)		(0.90	)		(0.65	)

Portfolio Turnover Rate		49	%		193	%		265	%		131	%		107	%

⁽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 have been 1.78% and 1.77%, respectively (Note 11).

⁽⁵⁾	Reflects fee waivers and/or expense reimbursements.

See Notes to Financial Statements.

Legg Mason Partners Capital Fund 2007 Annual Report 17

Financial Highlights (continued)

For a share of each class of beneficial interest outstanding throughout each year ended December 31:


Class C Shares⁽¹⁾	2007			2006⁽²⁾			2005⁽²⁾			2004⁽²⁾			2003⁽²⁾
Net Asset Value, Beginning of Year	$	27.76		$	27.80		$	29.07		$	26.07		$	18.31

Income (Loss) From Operations:
Net investment loss		(0.09	)		(0.16	)		(0.22	)		(0.24	)		(0.13	)
Net realized and unrealized gain		0.23			2.70			2.16			3.71			7.91

Total Income From Operations		0.14			2.54			1.94			3.47			7.78

Less Distributions From:
Net investment income		—			—			—			—			(0.01	)
Net realized gains		(5.33	)		(2.58	)		(3.21	)		(0.47	)		—
Return of capital		—			—			—			—			(0.01	)

Total Distributions		(5.33	)		(2.58	)		(3.21	)		(0.47	)		(0.02	)

Net Asset Value, End of Year	$	22.57		$	27.76		$	27.80		$	29.07		$	26.07

Total Return⁽³⁾		0.05	%		9.72	%		6.65	%		13.31	%		42.52	%

Net Assets, End of Year (000s)	$	288,955		$	407,661		$	504,642		$	492,644		$	518,298

Ratios to Average Net Assets:
Gross expenses		1.66	%		1.79	%⁽⁴⁾		1.94	%		1.83	%		1.92	%
Net expenses		1.66			1.78	⁽⁴⁾⁽⁵⁾		1.94			1.83			1.92
Net investment loss		(0.33	)		(0.57	)		(0.74	)		(0.88	)		(0.63	)

Portfolio Turnover Rate		49	%		193	%		265	%		131	%		107	%

⁽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 have been 1.77% and 1.76%, respectively (Note 11).

⁽⁵⁾	Reflects fee waivers and/or expense reimbursements.

See Notes to Financial Statements.

18 Legg Mason Partners Capital Fund 2007 Annual Report

Financial Highlights (continued)

For a share of each class of beneficial interest outstanding throughout each year ended December 31:


Class I Shares⁽¹⁾†	2007			2006⁽²⁾			2005⁽²⁾			2004⁽²⁾			2003⁽²⁾
Net Asset Value, Beginning of Year	$	30.81		$	30.25		$	30.98		$	27.42		$	19.08

Income From Operations:
Net investment income		0.18			0.18			0.17			0.09			0.14
Net realized and unrealized gain		0.27			2.96			2.31			3.94			8.28

Total Income From Operations		0.45			3.14			2.48			4.03			8.42

Less Distributions From:
Net investment income		(0.10	)		—			—			—			(0.03	)
Net realized gains		(5.33	)		(2.58	)		(3.21	)		(0.47	)		—
Return of capital		—			—			—			—			(0.05	)

Total Distributions		(5.43	)		(2.58	)		(3.21	)		(0.47	)		(0.08	)

Net Asset Value, End of Year	$	25.83		$	30.81		$	30.25		$	30.98		$	27.42

Total Return⁽³⁾		1.07	%		10.93	%		8.01	%		14.70	%		44.34	%

Net Assets, End of Year (000s)	$	118,634		$	403,266		$	406,387		$	344,239		$	294,073

Ratios to Average Net Assets:
Gross expenses		0.61	%		0.63	%⁽⁴⁾		0.67	%		0.64	%		0.65	%
Net expenses		0.61			0.62	⁽⁴⁾⁽⁵⁾		0.67			0.64			0.65
Net investment income		0.57			0.59			0.54			0.33			0.64

Portfolio Turnover Rate		49	%		193	%		265	%		131	%		107	%

⁽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 have both been 0.60% (Note 11).

⁽⁵⁾	Reflects fee waivers and/or expense reimbursements.

†

See Notes to Financial Statements.

Legg Mason Partners Capital Fund 2007 Annual Report 19

Notes to Financial Statements

1. Organization and Significant Accounting Policies

Legg Mason Partners Capital Fund (formerly known as Legg Mason Partners Capital Fund, Inc.) (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. Prior to April 16, 2007, the Fund was a Maryland Corporation and a non-diversified open-end management investment company registered under the 1940 Act.

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.

(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

20 Legg Mason Partners Capital Fund 2007 Annual Report

Notes to Financial Statements (continued)

commission, is treated as a realized gain or loss. When a written put option is exercised, the amount of the premium received is added to 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 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.

Legg Mason Partners Capital Fund 2007 Annual Report 21

Notes to Financial Statements (continued)

(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.

(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, 2007, no provision for income tax would be required in the Fund’s financial statements. The Fund’s federal and state income 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.

(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:


	Overdistributed Net Investment Income			Accumulated Net Realized Gain			Paid- in Capital
(a)	$	(82,248	)	$	(28,459,228	)	$	28,541,476
(b)		(202,282	)		202,282			—

(a)	Reclassifications are primarily due to tax adjustments associated with securities involved in an in-kind distribution and book/tax differences in the treatment of various items.

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

2. Investment Management Agreement and Other Transactions with Affiliates

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. (“Legg Mason”).

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

22 Legg Mason Partners Capital Fund 2007 Annual Report

Notes to Financial Statements (continued)

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.

Effective December 1, 2007, Legg Mason Investor Services, LLC (“LMIS”), a wholly- owned broker-dealer subsidiary of Legg Mason, serves as the Fund’s sole and exclusive distributor. Prior to December 1, 2007, Citigroup Global Markets Inc. (“CGM”) and LMIS served as co-distributors of the Fund.

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 thereafter by 1.00% per year until no CDSC is incurred. Class C shares also 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. Class I shares has no initial sales charge or CDSC.

For the year ended December 31, 2007, LMIS and its affiliates received sales charges of approximately $22,000 on sales of the Fund’s Class A shares. In addition, for the year ended December 31, 2007, CDSCs paid to LMIS and its affiliates were approximately:


	Class A			Class B		Class C
CDSCs	$	0	*	$	580,000	$	16,000

*	Amount represents less than $1,000.

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, 2007, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:


Purchases	$	596,714,405

Sales		964,745,709

At December 31, 2007, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:


Gross unrealized appreciation	$	109,890,548
Gross unrealized depreciation		(85,834,706	)

Net unrealized appreciation	$	24,055,842

Legg Mason Partners Capital Fund 2007 Annual Report 23

Notes to Financial Statements (continued)

During the year ended December 31, 2007, written option transactions for the Fund were as follows:


	Number of Contracts		Premiums Received
Options written, outstanding December 31, 2006	—			—
Options written	18,257		$	3,754,186
Options closed	(7,111	)		(1,091,929	)
Options exercised	(30	)		(2,666	)
Options expired	(10,216	)		(2,491,294	)

Options Written, Outstanding December 31, 2007	900		$	168,297

4. Redemptions-In-Kind

The Fund may make payment for Fund shares redeemed wholly or in part by distributing portfolio securities to shareholders. For the year ended December 31, 2007, the Fund had redemptions-in-kind with total proceeds in the amount of $208,512,095. The net realized gains on these redemptions-in-kind amounted to $28,459,475, which will not be realized for tax purposes.

5. Class Specific Expenses

The Fund has adopted a Rule 12b-1 distribution 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, 2007, class specific expenses were as follows:


	Distribution Fees		Transfer Agent Fees		Shareholder Reports Expenses
Class A	$	854,584	$	408,802	$	23,987
Class B		2,611,621		87,110		27,071
Class C		3,614,525		93,983		88,746
Class I		—		33,741		2,695

Total	$	7,080,730	$	623,636	$	142,499

24 Legg Mason Partners Capital Fund 2007 Annual Report

Notes to Financial Statements (continued)

6. Distributions to Shareholders by Class


	Year Ended December 31, 2007		Year Ended December 31, 2006
Net Investment Income:
Class A	$	251,811		—
Class I⁽¹⁾		448,196		—

Total	$	700,007		—

Net Realized Gains:
Class A	$	57,222,700	$	29,453,852
Class B		43,912,183		29,983,909
Class C		63,497,862		39,418,633
Class I⁽¹⁾		33,962,924		31,712,679
Class Y⁽¹⁾⁽²⁾		—		381,325

Total	$	198,595,669	$	130,950,398

⁽¹⁾	Class I shares were converted into Class O shares and redesignated as Class I shares on December 1, 2006.

⁽²⁾	As of November 20, 2006, Class Y shares were renamed Class I shares.

7. Shares of Beneficial Interest

At December 31, 2007, 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, including those specifically related to the distribution of its shares. Prior to April 16, 2007, the Fund 1 billion shares of capital stock authorized with a par value $0.001 per share.

Transactions in shares of each class were as follows:


	Year Ended December 31, 2007					Year Ended December 31, 2006
	Shares		Amount			Shares		Amount
Class A
Shares sold	2,738,055		$	81,110,536		2,891,207		$	87,121,997
Shares issued on reinvestment	1,837,012			48,872,295		937,071			26,797,813
Shares repurchased	(4,521,481	)		(135,131,153	)	(4,184,889	)		(122,597,346	)
Shares issued with merger	—			—		135,820			2,787,125

Net Increase (Decrease)	53,586		$	(5,148,322	)	(220,791	)	$	(5,890,411	)
Class B
Shares sold	262,483		$	6,720,317		486,295		$	13,731,347
Shares issued on reinvestment	1,517,530			36,739,929		953,476			25,299,392
Shares repurchased	(4,297,135	)		(117,895,051	)	(4,552,578	)		(124,734,238	)
Shares issued with merger	—			—		25,888			511,662

Net Decrease	(2,517,122	)	$	(74,434,805	)	(3,086,919	)	$	(85,191,837	)

Legg Mason Partners Capital Fund 2007 Annual Report 25

Notes to Financial Statements (continued)


	Year Ended December 31, 2007					Year Ended December 31, 2006
	Shares		Amount			Shares		Amount
Class C
Shares sold	709,587		$	18,688,878		1,157,884		$	32,599,064
Shares issued on reinvestment	2,166,894			52,494,577		1,294,487			34,431,157
Shares repurchased	(4,758,159	)		(129,513,403	)	(5,936,456	)		(161,952,849	)
Shares issued with merger	—			—		13,543			268,742

Net Decrease	(1,881,678	)	$	(58,329,948	)	(3,470,542	)	$	(94,653,886	)
Class I⁽¹⁾
Shares sold	44,082		$	1,342,383		476,284		$	23,890,885
Shares issued on reinvestment	1,111,710			32,085,593		1,052,624			30,981,566
Shares repurchased	(9,652,403	)		(289,711,143	)	(2,845,711	)		(86,276,273	)
Shares issued with merger	—			—		969,827			20,166,401

Net Decrease	(8,496,611	)	$	(256,283,167	)	(346,976	)	$	(11,237,421	)
Class Y⁽¹⁾⁽²⁾
Shares sold	—			—		133,957		$	4,500,005
Shares issued on reinvestment	—			—		12,070			381,326
Shares repurchased	—			—		(178,153	)		(5,789,919	)

Net Decrease	—			—		(32,126	)	$	(908,588	)

⁽¹⁾	Class I shares were converted into Class O shares and redesignated as Class I shares on December 1, 2006.

⁽²⁾	As of November 20, 2006, Class Y shares were renamed Class I shares.

8. Income Tax Information and Distributions to Shareholders

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


	2007		2006
Distributions Paid From:
Ordinary Income	$	161,468,418	$	19,146,646
Net Long-term Capital Gains		37,827,258		111,803,752

Total Distributions Paid	$	199,295,676	$	130,950,398

26 Legg Mason Partners Capital Fund 2007 Annual Report

Notes to Financial Statements (continued)

As of December 31, 2007, the components of accumulated earnings on a tax basis were as follows:


Undistributed ordinary income — net	$	5,018,119
Undistributed long-term capital gains — net		7,868,718

Total Undistributed Earnings		12,886,837
Other book/tax temporary differences^(a)	$	(240,393	)
Unrealized appreciation/(depreciation)^(b)		24,194,268

Total Accumulated Earnings/(Losses) — net	$	36,840,712

^(a)	Other book/tax temporary differences are attributable primarily to the tax deferral of losses on straddles and differences in the book/tax treatment of various items.

^(b)	The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to the tax deferral of losses on wash sales.

9. Legal Matters

Beginning in June 2004, class action lawsuits alleging violations of the federal securities laws were filled against 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 complaint 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 Defendants 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.

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.

Legg Mason Partners Capital Fund 2007 Annual Report 27

Notes to Financial Statements (continued)

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 Citigroup Asset Management (“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 Securities and Exchange Commission (“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.

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

On September 26, 2007, the United States District Court for the Southern District of New York issued an order dismissing the consolidated complaint. The plaintiffs have filed a notice of appeal.

10. Other Matters

As previously disclosed, on September 16, 2005 the staff of the SEC informed SBFM and SBAM, that the staff was considering recommending administrative proceedings against SBFM and SBAM for alleged violations of Section 19(a) and 34(b) of the Investment Company Act (and related Rule 19a-1). On September 27, 2007, SBFM and SBAM, without admitting or denying any findings therein, consented to the entry of an order by the SEC relating to the disclosure by certain other funds that are closed-end funds of the sources of distributions paid by the funds between 2001 and 2004. Each of SBFM and SBAM agreed to pay a fine of $450,000, for which it was indemnified by Citigroup, Inc., its former parent. It is not expected that this matter will adversely impact the Fund or its current investment adviser.

28 Legg Mason Partners Capital Fund 2007 Annual Report

Notes to Financial Statements (continued)

11. Special Shareholder Meeting and Reorganization

Shareholders approved a number of initiatives designed to streamline and restructure the fund complex. These matters were implemented in early 2007. As noted in the proxy materials, Legg Mason paid for a portion of the costs related to these initiatives. The portion of the costs borne by the Fund were recognized in the period during which the expense was incurred. Such expenses relate to obtaining shareholder votes for proposals presented in the proxy, the election of board members, retirement of board members, as well as printing, mailing, and soliciting proxies.

The portions of these costs borne by the Fund are deemed extraordinary and, therefore, not subject to expense limitation agreements, if applicable.

12. Recent Accounting Pronouncement

On September 20, 2006, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”). FAS 157 establishes an authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair value measurements. The application of FAS 157 is required for fiscal years, beginning after November 15, 2007 and interim periods within those fiscal years. At this time, management is evaluating the implications of FAS 157.

Legg Mason Partners Capital Fund 2007 Annual Report 29

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 (formerly Legg Mason Partners Capital Fund, Inc.), a series of Legg Mason Partners Equity Trust as of December 31, 2007, 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 three-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 each of the years in the two-year period 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, 2007, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Legg Mason Partners Capital Fund as of December 31, 2007, 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 three-year period then ended, in conformity with U.S. generally accepted accounting principles.

New York, New York

February 25, 2008

30 Legg Mason Partners Capital Fund 2007 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 Board members of funds in the Legg Mason Partners fund complex, including the scope and quality of 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

Legg Mason Partners Capital Fund 31

Board Approval of Management and Subadvisory Agreements

(unaudited) (continued)

expanded compliance programs. The Board also considered the Manager’s response to recent regulatory compliance issues affecting the Manager and the Legg Mason Partners fund complex. 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 Board members 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, 2007. The Fund performed better than the median for the one-, five- and ten-year periods, and below the median for the three-year period. 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 2007, which showed the Fund’s performance continued to be competitive compared to the Lipper category average during the third quarter. The Board members then discussed with representatives of management, including the Chief Investment Officer for the

32 Legg Mason Partners Capital Fund

Board Approval of Management and Subadvisory Agreements

(unaudited) (continued)

Sub-Adviser, the portfolio management strategy of the Fund’s portfolio managers and noted that a new portfolio management team assumed responsibility for the Fund’s investment portfolio in July 2006. The Trustees also noted that the Manager was committed to providing the resources necessary to assist the portfolio managers. Based on its review, the Board generally was satisfied with the Fund’s performance and management’s efforts to continue to improve performance going forward.

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.

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 13 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 Expense Universe, and that the Fund’s actual total expense ratio also was lower than the median of the total expense ratios of the funds in the Expense Group and Expense Universe.

Legg Mason Partners Capital Fund 33

Board Approval of Management and Subadvisory Agreements

(unaudited) (continued)

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 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.

34 Legg Mason Partners Capital Fund

Board Approval of Management and Subadvisory Agreements

(unaudited) (continued)

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 35

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.


Name, Address and Birth Year	Position(s) Held with Fund⁽¹⁾	Term of Office⁽¹⁾ and Length of Time Served⁽²⁾	Principal Occupation(s) During Past Five Years	Number of Portfolios in Fund Complex Overseen by Trustee	Other Board Memberships Held by Trustee
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	Trustee	Since 1983	Law Firm of Paul R. Ades, PLLC (since 2000)	47	None

Andrew L. Breech c/o R. Jay Gerken, CFA Legg Mason 620 Eighth Avenue New York, NY 10018 Birth Year: 1952	Trustee	Since 1991	President, Dealer Operating Control Service, Inc. (automotive retail management) (since 1985)	47	None

Dwight B. Crane c/o R. Jay Gerken, CFA Legg Mason 620 Eighth Avenue New York, NY 10018 Birth Year: 1937	Trustee	Since 1981	Independent Consultant (since 1969); Professor Harvard Business School (from 1969 to 2007)	49	None

Robert M. Frayn, Jr. c/o R. Jay Gerken, CFA Legg Mason 620 Eighth Avenue New York, NY 10018 Birth Year: 1934	Trustee	Since 1981	Retired; Formerly, President and Director, Book Publishing Co. (from 1970 to 2002)	47	None

Frank G. Hubbard c/o R. Jay Gerken, CFA Legg Mason 620 Eighth Avenue New York, NY 10018 Birth Year: 1937	Trustee	Since 1993	President of Avatar International, Inc. (Business Development) (since 1998)	47	None

36 Legg Mason Partners Capital Fund

Additional Information (unaudited) (continued)


Name, Address and Birth Year	Position(s) Held with Fund⁽¹⁾	Term of Office⁽¹⁾ and Length of Time Served⁽²⁾	Principal Occupation(s) During Past Five Years	Number of Portfolios in Fund Complex Overseen by Trustee	Other Board Memberships Held by Trustee
Howard J. Johnson c/o R. Jay Gerken, CFA Legg Mason 620 Eighth Avenue New York, NY 10018 Birth Year: 1938	Trustee	From 1981 to 1998 and 2000 to Present	Chief Executive Officer, Genesis Imaging LLC (technology company) (since 2003)	47	None

David E. Maryatt c/o R. Jay Gerken, CFA Legg Mason 620 Eighth Avenue New York, NY 10018 Birth Year: 1936	Trustee	Since 1983	Private Investor; President and Director, ALS Co. (real estate management and development firm) (since 1993)	47	None

Jerome H. Miller c/o R. Jay Gerken, CFA Legg Mason 620 Eighth Avenue New York, NY 10018 Birth Year: 1938	Trustee	Since 1995	Retired	47	None

Ken Miller c/o R. Jay Gerken, CFA Legg Mason 620 Eighth Avenue New York, NY 10018 Birth Year: 1942	Trustee	Since 1983	President of Young Stuff Apparel Group, Inc. (since 1963)	47	None

John J. Murphy c/o R. Jay Gerken, CFA Legg Mason 620 Eighth Avenue New York, NY 10018 Birth Year: 1944	Trustee	Since 2002	President; Murphy Capital Management (investment advice) (since 1983)	47	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)

Legg Mason Partners Capital Fund 37

Additional Information (unaudited) (continued)


Name, Address and Birth Year	Position(s) Held with Fund⁽¹⁾	Term of Office⁽¹⁾ and Length of Time Served⁽²⁾	Principal Occupation(s) During Past Five Years	Number of Portfolios in Fund Complex Overseen by Trustee	Other Board Memberships Held by Trustee
Thomas F. Schlafly c/o R. Jay Gerken, CFA Legg Mason 620 Eighth Avenue New York, NY 10018 Birth Year: 1948	Trustee	Since 1983	Of Counsel, Husch Blackwell Sanders LLP (law firm) (since 1984); President, The Saint Louis Brewery, Inc. (brewery) (since 1989)	47	Director, Citizens National Bank of Greater St. Louis, MO (since 2006)

Jerry A. Viscione c/o R. Jay Gerken, CFA Legg Mason 620 Eighth Avenue New York, NY 10018 Birth Year: 1944	Trustee	Since 1993	Retired; Formerly, Executive Vice President, Marquette University (from 1997 to 2002)	47	None

Interested Trustee:

R. Jay Gerken, CFA⁽³⁾ Legg Mason 620 Eighth Avenue New York, NY 10018 Birth Year: 1951	Chairman, President and Chief Executive Officer	Since 2002	Managing Director of Legg Mason; Chairman of the Board and Trustee/ Director of 149 funds associated with Legg Mason Partners Fund Advisor, LLC (“LMPFA”) and its affiliates; Chairman, President and Chief Executive Officer of LMPFA (since 2006); Chairman, President and Chief Executive Officer of certain mutual funds associated with Legg Mason and its affiliates; Formerly Chairman President and Chief Executive Officer of Travelers Investment Adviser, Inc. (“TIA”) (from 2002 to 2005)	137	Trustee, Consulting Group Capital Markets Funds (from 2002 to 2006)

38 Legg Mason Partners Capital Fund

Additional Information (unaudited) (continued)


Name, Address and Birth Year	Position(s) Held with Fund⁽¹⁾	Term of Office⁽¹⁾ and Length of Time Served⁽²⁾	Principal Occupation(s) During Past Five Years	Number of Portfolios in Fund Complex Overseen by Trustee	Other Board Memberships Held by Trustee
Kaprel Ozsolak Legg Mason 55 Water Street New York, NY 10041 Birth Year: 1965	Chief Financial Officer and Treasurer	Since 2004	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)	N/A	N/A

Ted P. Becker Legg Mason 620 Eighth Avenue New York, NY 10018 Birth Year: 1951	Chief Compliance Officer	Since 2006	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 Legg Mason or its predecessor (from 2002 to 2005)	N/A	N/A

Legg Mason Partners Capital Fund 39

Additional Information (unaudited) (continued)


Name, Address and Birth Year	Position(s) Held with Fund⁽¹⁾	Term of Office⁽¹⁾ and Length of Time Served⁽²⁾	Principal Occupation(s) During Past Five Years	Number of Portfolios in Fund Complex Overseen by Trustee	Other Board Memberships Held by Trustee
John Chiota Legg Mason 300 First Stamford Place Stamford, CT 06902 Birth Year: 1968	Chief Anti- Money Laundering Compliance Officer	Since 2006	Vice President of Legg Mason or its predecessor (since 2004); Chief Anti-Money Laundering Compliance Officer with certain mutual funds associated with Legg Mason or its affiliates (since 2006); Prior to August 2004, Chief AML Compliance Officer with TD Waterhouse	N/A	N/A

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

Thomas C. Mandia Legg Mason 300 First Stamford Place Stamford, CT 06902 Birth Year: 1962	Assistant Secretary	Since 2000	Managing Director and Deputy General Counsel of Legg Mason (since 2005); Managing Director and Deputy General Counsel for CAM (since 1992); Assistant Secretary of certain mutual funds associated with Legg Mason	N/A	N/A

40 Legg Mason Partners Capital Fund

Additional Information (unaudited) (continued)


Name, Address and Birth Year	Position(s) Held with Fund⁽¹⁾	Term of Office⁽¹⁾ and Length of Time Served⁽²⁾	Principal Occupation(s) During Past Five Years	Number of Portfolios in Fund Complex Overseen by Trustee	Other Board Memberships Held by Trustee
Albert Laskaj Legg Mason 55 Water Street New York, NY 10041 Birth Year: 1977	Controller	Since 2007	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); Prior to 2003, Senior Analyst of certain mutual funds associated with certain predecessor firms of Legg Mason	N/A	N/A

Steven Frank Legg Mason 55 Water Street New York, NY 10041 Birth Year: 1967	Controller	Since 2005	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)	N/A	N/A

⁽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 Fund 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.

Legg Mason Partners Capital Fund 41

Important Tax Information (unaudited)

The following information is provided with respect to the distributions paid during the taxable year ended December 31, 2007:


Record Date:		6/21/2007			12/12/2007		12/26/2007
Payable Date:		6/22/2007			12/13/2007		12/27/2007

Ordinary Income:
Qualified Dividend Income for Individuals		25.16	%		12.33	%	12.33	%

Dividends Qualifying for the Dividends Received Deduction for Corporations		14.98	%		14.98	%	14.98	%

Long-Term Capital Gain Dividend	$	0.403647		$	0.582423		—

Please retain this information for your records.

42 Legg Mason Partners Capital Fund

Legg Mason Partners Capital Fund


TRUSTEES		INVESTMENT MANAGER
Paul R. Ades		Legg Mason Partners Fund Advisor, LLC
Andrew L. Breech
Dwight B. Crane		SUBADVISER
Robert M. Frayn		ClearBridge Advisors, LLC
R. Jay Gerken, CFA
Chairman		DISTRIBUTOR
Frank G. Hubbard		Legg Mason Investor Services, LLC
Howard J. Johnson
David E. Maryatt		CUSTODIAN
Jerome H. Miller		State Street Bank and Trust Company
Ken Miller
John J. Murphy		TRANSFER AGENT
Thomas F. Schlafly		PFPC Inc.
Jerry A. Viscione		4400 Computer Drive Westborough, Massachusetts 01581

		INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
		KPMG LLP
		345 Park Avenue
		New York, New York 10154

This report is submitted for the general information of the shareholders of Legg Mason Partners Capital Fund but it may also be used as sales literature when preceded or accompanied by the current Prospectus.

This report must be preceded or accompanied by a free 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

Investors Services, LLC

Member FINRA, SIPC


FDXX010733 2/08		SR08-519

LOGO

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

32nd Floor

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.

Dates Referenced Herein and Documents Incorporated by Reference

This ‘N-14AE’ Filing	Date	Other Filings

Filed on:	4/18/08
	2/25/08	485BXT, 497J
	1/30/08
	1/22/08
	1/15/08
	1/2/08
	12/31/07	24F-2NT, N-CSR, N-Q, NSAR-B
	12/3/07	485BPOS
	12/1/07
	11/15/07
	9/27/07	NSAR-A, NSAR-B
	9/26/07	N-Q
	7/1/07
	6/30/07	N-CSRS, N-PX, N-Q, NSAR-A
	4/16/07	485BPOS, N-8A/A
	12/31/06	24F-2NT, 24F-2NT/A, N-CSR, NSAR-B
	12/1/06
	11/20/06	497
	10/16/06
	9/20/06
	7/26/06
	10/5/05
	9/16/05
	5/31/05	497, N-CSRS, NSAR-A, NSAR-A/A
	5/27/05	497, N-Q
	2/18/05
	12/31/04	24F-2NT, N-CSR, NSAR-B
	12/15/04	497
	12/31/97
		List all Filings

1 Subsequent Filing that References this Filing

  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 7/28/08  Legg Mason Partners Inv Trust     NSAR-A      5/31/08    4:66K                                    Smith Barney Fd Mgmt LLC

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Filing Submission 0001193125-08-084591 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Legg Mason Partners Equity Trust – ‘N-14AE’ on 4/18/08 – EX-99.17F

On: Friday, 4/18/08, at 1:35pm ET · Accession #: 1193125-8-84591 · File #: 333-150314

Previous ‘N-14AE’: ‘N-14AE’ on 9/22/06 · Latest ‘N-14AE’: This Filing · 1 Reference: By: Legg Mason Partners Investment Trust – ‘NSAR-A’ on 7/28/08 for 5/31/08

Registration Statement of an Open-End Investment Company (Business Combination) with Automatic Effectiveness — Form N-14Filing Table of Contents

EX-99.17F — Annual Report of Lmp Capital Fund

This exhibit is an HTML Document rendered as filed. [ Alternative Formats ]

Dates Referenced Herein and Documents Incorporated by Reference

1 Subsequent Filing that References this Filing

Registration Statement of an Open-End Investment Company (Business Combination) with Automatic Effectiveness — Form N-14
Filing Table of Contents