Strong equity markets helped Legg Mason ( LM) beat analysts' expectations for earnings in the three months ended Dec. 31, even as the asset management company's net income fell 77% on the year.

Net income for the third fiscal quarter was $174.6 million, or $1.21 per diluted share, compared with $760.3 million, or $5.8 per diluted share, a year earlier. Analysts surveyed by Thomson First Call had been looking for net income of $1.13 per share, on average.

The year-earlier results included a gain of $643.4 million, after taxes, related to the company's sale of its brokerage business, as well as $16.1 million of income from discontinued operations.

Legg Mason's total assets under management rose by $53.4 million, or 6%, during the fiscal third quarter to a record $944.8 billion.

Market appreciation was responsible for $30.9 billion of the increase, as rising markets lifted assets in the firm's equity, fixed-income and money market products. The remaining $23 billion came from net new money. Clients actually pulled more money out of Legg Mason's equity funds than they contributed during the quarter, but this was offset by new purchases of the firm's fixed income and money market funds.

In 2005, Legg Mason and Citigroup ( C) swapped their asset management and brokerage operations. The resulting changes in fund managers and the merging of some funds prompted some of Citigroup's former clients to walk out the door. Some of Legg Mason's star equity fund managers also produced lackluster returns for much of 2006.

"We set a 12-15 months timetable for achieving our integration goals for Citigroup's asset management business and we are in the advanced stages of completing those tasks," Raymond A. "Chip" Mason, the company's chairman and chief executive said in a press release. He said the firm had realized the cost savings originally projected from the integration by the end of the third quarter.

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