Western Asset Funds N-CSR Certified annual shareholder report (management investment company)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF

REGISTERED MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number:	811-06110
Name of Fund:	Western Asset Funds, Inc.
	Address of Principal Executive Offices:
	385 East Colorado Boulevard
	Pasadena, CA 91101
Name and address of agent for service:	Richard M. Wachterman, Esq.
	Legg Mason Wood Walker, Incorporated
	100 Light Street
	Baltimore, MD 21202.
Registrant’s telephone number, including area code:	(410) 539-0000
Date of fiscal year end:	March 31, 2006
Date of reporting period:	March 31, 2006

Item 1 – Report to Shareholders

Western Asset Funds, Inc.

Western Asset Limited Duration Bond Portfolio

Western Asset Intermediate Bond Portfolio

Western Asset Intermediate Plus Bond Portfolio

Western Asset Core Bond Portfolio

Western Asset Core Plus Bond Portfolio

Western Asset Inflation Indexed Plus Bond Portfolio

Western Asset High Yield Portfolio

Western Asset Non-U.S. Opportunity Bond Portfolio

Annual Report to Shareholders

March 31, 2006

Annual Report to Shareholders

Management’s Discussion of Fund Performance

Western Asset Limited Duration Bond Portfolio

The average annual total returns for the Western Asset Limited Duration Bond Portfolio for the period from its inception to March 31, 2006, are presented below, along with the total returns of its benchmark:

	Average Annual Total Returns Periods Ended March 31, 2006
	First Quarter 2006	One Year	Since InceptionA
Western Asset Limited Duration Bond Portfolio
Institutional Class	0.84%	3.01%	2.15%
Merrill Lynch 1-3 Year Treasury IndexB	0.38%	2.32%	1.25%

The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.westernassetfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.

Short-term interest rates rose significantly over the past 12 months, led by a 200 bps^C increase in the federal funds rate target. Long-term interest rates rose only moderately, resulting in a substantial flattening of the yield curve. Contrary to expectations that they would hike rates to only 4%, the Federal Reserve increased its target funds rate by 25 bps at every Federal Open Market Committee (“FOMC”) meeting, reaching 4.75% in March. Tighter-than-expected monetary policy pushed real yields up by more than nominal yields, reflecting reduced inflation expectations. The dollar also benefited from higher rates, rising some 7% against a basket of currencies. Mortgage-backed spreads began the period fairly tight, only to widen in the latter half of the period as concerns over extension risk mounted. Investment-grade credit spreads drifted wider, driven largely by fallout from the unexpected downgrade of Ford and GM debt. Thanks to a robust global economy, easy money, and strong gains in commodity prices, emerging market spreads tightened dramatically over the course of the period, leaving yields at record-low levels. High-yield spreads soared in the wake of the GM and Ford downgrades, but recovered dramatically to finish the period unchanged to somewhat tighter. Despite a substantial reduction of monetary policy accommodation during the period, gold rose over 35%, to $584 per ounce, returning to levels not seen since the inflation panic of 1980. Energy and industrial commodity prices also rose, registering substantial gains against all major currencies. Equity markets moved steadily higher over the course of the period.

The impact of market conditions on the Portfolio’s performance was negative for the 12-month period ended March 31, 2006, since short-term interest rates rose. With strategies producing generally positive results, the Portfolio’s total return of 3.01% (net of expenses) exceeded that of its benchmark, the Merrill Lynch 1-3 year Treasury Index, which recorded a total return of 2.32%. Duration management detracted from performance as yields, lead by the front-end, rose higher than we expected. The mortgage-backed sector contributed to performance as a higher carry and narrowing spreads late in the period generated excess returns beyond Treasuries. Exposure to BBB corporate securities was increased following the spread widening in the beginning of the period and this benefited the portfolio. A modest exposure to Treasury Inflation-Protected Securities was slightly negative as real yields rose faster than nominal yields.

Western Asset Management Company

^A The Fund’s Institutional Class inception date is October 1, 2003. Index returns are for periods beginning September 30, 2003.

^B A subset of the Merrill Lynch Treasury Master Index, consisting of bonds with an outstanding par that is greater than or equal to $25 million and fixed rate coupons greater than 4.25%. The maturity range on these securities is from 1 to 3 years. The index does not incur fees and expenses and cannot be purchased directly by investors.

^C 100 basis points = 1%.

1

Annual Report to Shareholders

Expense Example

Western Asset Limited Duration Bond Portfolio

As a shareholder of the Fund, you incur ongoing costs, including management fees and other Fund expenses. These examples are 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. The example is based on an investment of $1,000 invested on October 1, 2005, and held through March 31, 2006.

Actual Expenses

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

Hypothetical Example for Comparison Purposes

The second line in the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% 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 this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

	Beginning Account Value 10/1/05		Ending Account Value 3/31/06		Expenses PaidA During the Period 10/1/05 to 3/31/06
Institutional Class:
Actual	$	1,000.00	$	1,012.90	$	2.01
Hypothetical (5% return before expenses)		1,000.00		1,022.94		2.02

^A These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio of 0.40% multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (182), and divided by 365.

2

Annual Report to Shareholders

Performance Information

Western Asset Limited Duration Bond Portfolio

The graph compares the Fund’s total returns against that of an appropriate broad-based securities market index. The line illustrates the cumulative total return of an initial $1,000,000 investment for the periods indicated. The line for the Fund represents the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling securities. The line representing the securities market index does not include any transaction costs associated with buying and selling securities in the index or other investment management or administrative expenses.

Total return measures investment performance in terms of appreciation or depreciation in the Fund’s net asset value per share, plus dividends and any capital gain distributions. It assumes that dividends and distributions were reinvested at the time they were paid. Returns (and the graph and table found below) do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Average annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results.

Bonds are subject to a variety of risks, including interest rate, credit and inflation risk.

Growth of a $1,000,000 Investment—Institutional Class

The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information, please visit www.westernassetfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.

^A Index returns are for periods beginning September 30, 2003.

3

Annual Report to Shareholders

Performance Information—Continued

Portfolio Composition (as of March 31, 2006)

Standard & Poor’s Debt Ratings^B

(as a percentage of the portfolio)

Maturity Schedule (as a percentage of the portfolio)

^B Source: Standard & Poor's.

The Fund is actively managed. As a result, the composition of the portfolio holdings and sectors are subject to change at any time.

4

Annual Report to Shareholders

Portfolio of Investments

Western Asset Limited Duration Bond Portfolio

March 31, 2006

(Amounts in Thousands)

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Long-Term Securities	98.5%
Corporate Bonds and Notes	25.4%
Auto Parts and Equipment	0.1%
Johnson Controls, Inc.		4.830%	1/17/08	$	70	$	70	A
Banking and Finance	7.3%
Caterpillar Financial Services		3.450%	1/15/09		100		95
Countrywide Financial Corporation		5.170%	3/24/09		280		280	A
Ford Motor Credit Company		5.795%	9/28/07		450		432	A
Ford Motor Credit Company		6.625%	6/16/08		1,510		1,429
General Motors Acceptance Corporation		5.550%	7/16/07		100		97	A
General Motors Acceptance Corporation		6.090%	9/23/08		1,340		1,265	A
HSBC Finance Corporation		4.970%	5/10/10		310		311	A
Residential Capital Corporation		6.335%	6/29/07		600		604	A
Residential Capital Corporation		6.070%	11/21/08		300		304	A
SLM Corporation		4.763%	7/27/09		250		250	A
Wachovia Capital Trust III		5.800%	3/15/42		330		324	B
							5,391
Cable	0.6%
Comcast Cable Communications, Inc.		8.375%	5/1/07		230		237
Comcast Cable Communications, Inc.		6.875%	6/15/09		200		207
							444
Casino Resorts	0.4%
Caesars Entertainment, Inc.		7.500%	9/1/09		130		137
Harrah’s Operating Company, Inc.		5.315%	2/8/08		120		120	A,C
Harrah’s Operating Company, Inc.		7.500%	1/15/09		40		42
							299
Chemicals	0.3%
The Dow Chemical Company		5.970%	1/15/09		200		203
Computer Services and Systems	0.4%
Electronic Data Systems Corporation		7.125%	10/15/09		290		305
Diversified Financial Services	2.8%
Citigroup Inc.		5.000%	9/15/14		200		192
Capital One Financial Corporation		4.738%	5/17/07		90		89
CIT Group Incorporated		4.810%	1/30/09		300		300	A
General Electric Capital Corporation		5.010%	6/15/09		100		100	A
iStar Financial Inc.		5.220%	3/3/08		260		261	A

5

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Limited Duration Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Diversified Financial Services—Continued
iStar Financial Inc.		5.650%	9/15/11	$	640	$	631
ZFS Finance (USA) Trust III		6.060%	12/15/65		500		503	A,C
							2,076
Electric	1.5%
Appalachian Power Company		3.600%	5/15/08		300		289
Commonwealth Edison Company		3.700%	2/1/08		180		175
Dominion Resources, Inc.		4.125%	2/15/08		100		97
FirstEnergy Corp.		6.450%	11/15/11		430		445
Niagara Mohawk Power Corporation		7.750%	10/1/08		100		105
							1,111
Energy	1.3%
CenterPoint Energy, Inc.		5.875%	6/1/08		150		151
Duke Energy Corporation		3.750%	3/5/08		200		194
Pacific Gas and Electric Co.		3.600%	3/1/09		190		181
Progress Energy, Inc.		5.850%	10/30/08		200		201
Sempra Energy		5.240%	5/21/08		90		90	A
TXU Corp.		4.800%	11/15/09		180		173
							990
Environmental Services	0.6%
Waste Management, Inc.		6.500%	11/15/08		100		103
Waste Management, Inc.		7.375%	8/1/10		300		320
							423
Food, Beverage and Tobacco	0.7%
Altria Group, Inc.		7.200%	2/1/07		110		111
Altria Group, Inc.		7.650%	7/1/08		30		32
Altria Group, Inc.		5.625%	11/4/08		360		361
							504
Investment Banking/Brokerage	1.5%
Lehman Brothers Holdings Inc.		4.970%	11/10/09		100		100	A
Merrill Lynch & Co., Inc.		4.930%	2/5/10		300		301	A
Morgan Stanley		4.850%	1/18/11		250		251	A
The Bear Stearns Companies Inc.		4.898%	1/31/11		160		160	A
The Goldman Sachs Group, Inc.		5.265%	6/28/10		300		301	A
							1,113
Manufacturing (Diversified)	0.2%
Tyco International Group SA		4.436%	6/15/07		190		187	C

6

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Media	1.4%
Clear Channel Communications, Inc.		6.625%	6/15/08	$	60	$	61
Clear Channel Communications, Inc.		4.250%	5/15/09		340		323
Clear Channel Communications, Inc.		7.650%	9/15/10		20		21
Liberty Media Corporation		7.875%	7/15/09		300		316
Time Warner Inc.		6.150%	5/1/07		220		222
Viacom Inc.		5.625%	5/1/07		100		100
							1,043
Oil and Gas	2.8%
Amerada Hess Corporation		6.650%	8/15/11		420		439
Anadarko Petroleum Corporation		3.250%	5/1/08		230		220
Occidental Petroleum Corporation		7.375%	11/15/08		320		336
Ocean Energy Inc.		4.375%	10/1/07		100		99
Pemex Project Funding Master Trust		8.500%	2/15/08		50		52
Pemex Project Funding Master Trust		6.125%	8/15/08		490		494
Pemex Project Funding Master Trust		6.210%	6/15/10		140		144	A,C
Texas Eastern Transmission Corporation		5.250%	7/15/07		100		99
XTO Energy, Inc.		5.650%	4/1/16		180		178
							2,061
Paper and Forest Products	0.5%
International Paper Company		3.800%	4/1/08		190		184
Weyerhaeuser Company		6.125%	3/15/07		123		124
Weyerhaeuser Company		5.950%	11/1/08		40		40
							348
Pharmaceuticals	0.2%
Bristol-Myers Squibb Company		4.000%	8/15/08		140		136
Photo Equipment and Supplies	N.M.
Eastman Kodak Company		7.250%	11/15/13		10		10
Special Purpose	2.0%
BAE Systems Holdings Inc.		5.149%	8/15/08		100		100	A,C
DaimlerChrysler North America Holding Corporation		5.210%	10/31/08		370		371	A
DaimlerChrysler North America Holding Corporation		5.875%	3/15/11		100		100
ILFC E-Capital Trust I		5.900%	12/21/65		300		291	B,C
International Lease Finance Corporation		5.000%	4/15/10		140		137
National Rural Utilities Cooperative Finance Corporation		3.875%	2/15/08		100		98
Sprint Capital Corporation		6.125%	11/15/08		410		417
							1,514

7

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Limited Duration Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Telecommunications	0.3%
AT&T Inc.		4.125%	9/15/09	$	100	$	95
AT&T Inc.		5.300%	11/15/10		100		99
							194
Telecommunications (Cellular/Wireless)	0.4%
Motorola, Inc.		4.608%	11/16/07		100		99
New Cingular Wireless Services Inc.		7.500%	5/1/07		200		204
							303
Telecommunications Equipment	0.1%
New York Telephone Co.		6.000%	4/15/08		100		100
Total Corporate Bonds and Notes (Identified Cost—$19,066)							18,825
Asset-Backed Securities	8.2%
Fixed Rate Securities	2.9%
AmeriCredit Automobile Receivables Trust 2003-BX A4A		2.720%	1/6/10		302		297
MBNA Practice Solutions Owners Trust 2005-2		4.100%	5/15/09		400		393	C
Onyx Acceptance Owner Trust 2002-D		3.100%	7/15/09		60		60
Prestige Auto Receivables Trust 2005-1A		4.370%	6/15/12		200		196	C
Prestige Auto Receivables Trust 2006-1A		5.120%	2/15/10		592		590	C
UCFC Home Equity Loan 1998-D		6.905%	4/15/30		104		104
UPFC Auto Receivables Trust 2004-A		3.270%	9/15/10		500		493
							2,133
Indexed SecuritiesA	5.3%
AmeriCredit Automobile Loan Trust 2003-BX A4B		4.780%	1/6/10		23		23
AQ Finance Nim Trust 2003-N13		5.048%	12/25/08		21		21	C,D
Bayview Financial Acquisition Trust 2004-C		5.241%	5/28/44		210		211
Bear Stearns Asset-Backed Securities, Inc. 2005-AQ2		5.088%	9/25/35		500		500
Chase Funding Mortgage Loan Asset-Backed Certificates 2002-4		5.188%	10/25/32		27		27
Citibank Credit Card Issuance Trust 2002-C3		6.050%	12/15/09		160		162
Countrywide Asset-Backed Certificates 2002-3		5.188%	5/25/32		7		7
Countrywide Home Equity Loan Trust 2002-C		4.989%	5/15/28		43		43
Countrywide Home Equity Loan Trust 2004-J		5.039%	12/15/33		135		135
Countrywide Home Equity Loan Trust 2004-O		5.029%	2/15/34		171		171
CS First Boston Mortgage Securities Corporation 2004-HC1A		5.149%	12/15/21		564		564	C
EQCC Trust 2002-1		5.118%	11/25/31		35		35

8

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Asset-Backed Securities—Continued
Indexed Securities—Continued
First Franklin Mortgage Loan Asset-Backed Certificate 2004-FF10		5.218%	12/25/32	$	382	$	383
First North American National Bank 2003-A		5.229%	5/16/11		220		220
Fremont Home Loan Trust 2004-C		5.088%	1/25/32		134		134
GSAA Home Equity Trust 2004-9		5.198%	9/25/34		171		171
Navistar Financial Corp Owner Trust 2003-B		4.949%	4/15/08		119		119
Rental Car Finance Corp. 2004-1A		5.018%	6/25/09		500		501	C
Residential Asset Mortgage Products, Inc. 2002-RS6		5.268%	11/25/32		47		47
Superior Wholesale Inventory Financing Trust 2004-A10		4.849%	9/15/11		500		500
							3,974
Total Asset-Backed Securities (Identified Cost—$6,136)							6,107
Mortgage-Backed Securities	18.1%
Fixed Rate Securities	0.9%
Asset Securitization Corporation 1996-D2		6.920%	2/14/29		26		26
Countrywide Alternative Loan Trust 2004-J1		6.000%	2/25/34		55		55
Prime Mortgage Trust 2005-2		7.596%	10/25/32		234		239
Residential Asset Mortgage Products, Inc. 2004-SL2		8.500%	10/25/31		44		45
Residential Asset Mortgage Products, Inc. 2005-SL1		8.000%	5/25/32		273		285
							650
Indexed SecuritiesA	14.2%
Banc of America Mortgage Securities 2003-D		4.569%	5/25/33		189		186
Banc of America Mortgage Securities 2005-F		5.025%	7/25/35		736		723
Bear Stearns Arm Trust 2004-10		4.581%	1/25/35		115		114
CBA Commercial Small Balance Commercial 2005-1A		5.138%	7/25/35		637		637	C
Citigroup Mortgage Loan Trust, Inc. 2005-5		5.502%	8/25/35		450		447
Countrywide Alternative Loan Trust 2005-38		5.168%	9/25/35		693		697	C
Countrywide Asset-backed Certificates 2005-IM1		5.098%	11/25/35		1,000		1,000
Countrywide Home Loans 2005-R3		5.218%	9/25/35		796		799C
Crusade Global Trust 2003-2		5.120%	9/18/34		92		92	D
Granite Mortgages PLC 2003-1		4.791%	1/20/20		177		177
GSMPS Mortgage Loan Trust 2005-RP3		5.168%	9/25/35		613		615
J.P. Morgan Mortgage Trust 2003-A1		4.364%	10/25/33		291		281
Luminent Mortgage Trust 2006-2		5.018%	2/25/46		896		896
MASTR Adjustable Rate Mortgages Trust 2004-13		3.787%	11/21/34		350		329
Medallion Trust 2000-2G		5.130%	12/18/31		101		101	D

9

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Limited Duration Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Mortgage-Backed Securities—Continued
Indexed Securities—Continued
Medallion Trust 2003-1G		5.120%	12/21/33	$	91	$	91	D
MLCC Mortgage Investors, Inc. 2003-H		5.844%	1/25/29		62		63
Provident Funding Mortgage Loan Trust 2005-1		4.176%	5/25/35		318		312
Sequoia Mortgage Trust 2003-2 A2		4.700%	6/20/33		83		82
Structured Adjustable Rate Mortgage Loan Trust 2005-16XS		5.158%	8/25/35		601		602
Structured Adjustable Rate Mortgage Loan Trust 2005-19XS		5.118%	10/25/35		644		647
Torrens Trust 2000-1GA		5.009%	7/15/31		43		43	C,D
Wachovia Mortgage Loan Trust, LLC 2005-A		4.809%	8/20/35		407		403
WaMu Mortgage Pass-Through Certificates, Series 2003-AR10		4.065%	10/25/33		200		193
WaMu Mortgage Pass-Through Certificates, Series 2005-AR15		5.098%	11/25/45		970		973
							10,503
Variable Rate SecuritiesE	3.0%
Banc of America Funding Corporation 2004-B		4.198%	12/20/34		202		201
Banc of America Funding Corporation 2005-F		5.303%	9/20/35		313		312
Countrywide Alternative Loan Trust 2004-33 1A1		5.021%	12/25/34		118		118
Countrywide Alternative Loan Trust 2004-33 2A1		4.959%	12/25/34		57		57
Countrywide Alternative Loan Trust 2005-14		3.300%	5/25/35		178		173
IndyMac Index Mortgage Loan Trust 2004-AR15		5.061%	2/25/35		604		599
Residential Funding Mortgage Securities I 2005-SA3		4.944%	8/25/35		646		640
Structured Asset Securities Corporation 2004-SC1		9.524%	12/25/29		145		150	C
							2,250
Total Mortgage-Backed Securities (Identified Cost—$13,496)							13,403
U.S. Government and Agency Obligations	25.1%
Fixed Rate Securities	21.7%
Federal Home Loan Bank		3.125%	9/15/06		950		942
Federal Home Loan Bank		3.625%	11/14/08		375		362
Freddie Mac		3.800%	12/27/06		1,820		1,802
United States Treasury Notes		3.500%	5/31/07		2,160		2,127
United States Treasury Notes		3.625%	6/30/07		1,730		1,704
United States Treasury Notes		4.375%	1/31/08		9,220		9,143
							16,080

10

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
U.S. Government and Agency Obligations—Continued
Treasury Inflation-Protected SecuritiesF	3.4%
United States Treasury Inflation-Protected Security		3.000%	7/15/12	$	1,709	$	1,781
United States Treasury Inflation-Protected Security		2.375%	1/15/25		736		740
							2,521
Total U.S. Government and Agency Obligations (Identified Cost—$18,806)							18,601
U.S. Government Agency Mortgage-Backed Securities	17.9%
Fixed Rate Securities	7.6%
Fannie Mae		5.500%	12/1/36		2,100		2,050	G
Fannie Mae		6.000%	12/1/36		1,150		1,148	G
Freddie Mac		5.000%	12/1/36		100		95	G
Government National Mortgage Association		5.000%	8/15/33		93		90
Government National Mortgage Association		5.500%	12/1/36		2,100		2,079	G
Government National Mortgage Association		5.000%	12/1/36		130		126	G
							5,588
Variable Rate SecuritiesE	10.3%
Fannie Mae		4.214%	12/1/34		166		162
Fannie Mae		4.258%	12/1/34		158		154
Fannie Mae		4.332%	1/1/35		176		171
Fannie Mae		4.872%	1/1/35		325		322
Fannie Mae		4.813%	2/1/35		786		774
Fannie Mae		4.545%	3/1/35		359		350
Fannie Mae		5.129%	3/1/35		599		596
Fannie Mae		4.727%	7/1/35		4,662		4,600
Freddie Mac		4.352%	12/1/34		80		78
Freddie Mac		4.079%	1/1/35		57		56
Freddie Mac		4.105%	1/1/35		101		98
Freddie Mac		4.513%	1/1/35		301		295
							7,656
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost—$13,417)							13,244
Yankee BondsD	3.8%
Banking and Finance	0.5%
AIFUL CORPORATION		5.000%	8/10/10		230		222	C
MUFG Capital Finance 1 Limited		6.346%	7/29/49		140		138	B
							360

11

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Limited Duration Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Yankee Bonds—Continued
Foreign Governments	0.7%
Russian Federation		3.000%	5/14/08	$	330	$	313
Russian Federation		8.250%	3/31/10		40		42
Russian Federation		8.250%	3/31/10		170		180	C
							535
Manufacturing (Diversified)	0.9%
Tyco International Group SA		6.125%	11/1/08		670		679
Special Purpose	0.4%
Diageo Capital Plc		3.375%	3/20/08		280		270
Telecommunications	1.1%
British Telecommunications plc		8.375%	12/15/10		300		335
Koninklijke (Royal) KPN NV		8.000%	10/1/10		220		236
Telecom Italia Capital		4.000%	11/15/08		160		154
Telecom Italia Capital		5.160%	2/1/11		100		101	A
							826
Telecommunications (Cellular/Wireless)	0.2%
Vodafone Group Plc		3.950%	1/30/08		170		166
Total Yankee Bonds (Identified Cost—$2,878)							2,836
Total Long-Term Securities (Identified Cost—$73,799)							73,016
Short-Term Securities	8.5%
U.S. Government and Agency Obligations	0.1%
Fannie Mae		0.000%	5/15/06	$	60		60	H,I
Repurchase Agreements	8.4%
Deutsche Bank AG 4.75%, dated 3/31/06, to be repurchased at $6,250 on 4/3/06 (Collateral: $6,360 Federal Home Loan Bank bonds, 5%, due 2/29/08, value $6,344)					6,248		6,248
Total Short-Term Securities (Identified Cost—$6,308)							6,308
Total Investments (Identified Cost—$80,107)	107.0%						79,324
Other Assets Less Liabilities	(7.0)%						(5,181	)
Net Assets	100.0%					$	74,143

12

Annual Report to Shareholders

	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Futures Contracts PurchasedJ
U.S. Treasury Note Futures	June 2006	4	$	(4	)
Futures Contracts WrittenJ
U.S. Treasury Note Futures	June 2006	41	$	27

^A Indexed Security – The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”) or the one-year Treasury Bill rate. The coupon rates are the rates as of March 31, 2006.

^B Stepped Coupon Security – A security with a predetermined schedule of interest or dividend rate changes, at which time it begins to accrue interest or pay dividends.

^C Rule 144a Security – A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities, which the Fund’s investment adviser has determined to be liquid, represent 8.5% of net assets.

^D Yankee Bond – A dollar denominated bond issued in the U.S. by foreign entities.

^E The coupon rates shown on variable rate securities are the rates at March 31, 2006. These rates vary with the weighted average coupon of the underlying loans.

^F Treasury Inflation-Protected Security – A security whose principal value is adjusted daily in accordance with changes to the Consumer Price Index for All Urban Consumers. Interest is calculated on the basis of the current adjusted principal value.

^G When-issued Security – A security purchased on a delayed delivery basis. Final settlement amount and maturity date have not yet been announced.

^H Zero Coupon Bond – A bond with no periodic interest payments which is sold at such a discount as to produce a current yield to maturity.

^I All or a portion of this security is pledged as collateral to cover futures contracts.

^J Futures are described in more detail in the notes to financial statements.

N.M. – Not meaningful.

See note to financial statements.

13

Annual Report to Shareholders

Statement of Assets and Liabilities

Western Asset Limited Duration Bond Portfolio

March 31, 2006

(Amounts in Thousands)

Assets:
Investment securities at market value (Identified Cost—$73,799)			$	73,016
Short-term securities at value (Identified Cost—$6,308)				6,308
Cash				1
Receivable for securities sold				1,252
Interest receivable				502
Other assets				7
Total assets				81,086
Liabilities:
Payable for securities purchased	$	6,875
Payable for fund shares repurchased		5
Accrued management fee		7
Futures variation margin payable		2
Accrued expenses		54
Total liabilities				6,943
Net Assets			$	74,143
Net assets consist of:
Accumulated paid-in-capital applicable to:
7,566 Institutional Class shares outstanding			$	75,419
Undistributed net investment income				7
Accumulated net realized loss on investments and futures				(523	)
Unrealized appreciation/(depreciation) of investments and futures				(760	)
Net Assets			$	74,143
Net Asset Value Per Share:
Institutional Class				$9.80

See notes to financial statements.

14

Annual Report to Shareholders

Statement of Operations

Western Asset Limited Duration Bond Portfolio

For the Year Ended March 31, 2006

(Amounts in Thousands)

Investment Income:
Interest	$	2,873
Dividends		57
Total income					2,930
Expenses:
Advisory fee		238
Audit and legal fees		76
Custodian fees		54
Directors’ fees and expenses		11
Registration fees		29
Reports to shareholders		18
Transfer agent and shareholder servicing expense		13
Other expenses		22
		461
Less: Fees waived		(187	)
Compensating balance creditsA		(2	)
Total expenses, net of waivers and compensating balance credits					272
Net Investment Income					2,658
Net Realized and Unrealized Gain/(Loss) on Investments:
Realized gain/(loss) on:
Investments		(491	)
Futures		42
					(449	)
Change in unrealized appreciation/(depreciation) of investments and futures					(458	)
Net Realized and Unrealized Loss on Investments					(907	)
Change in Net Assets Resulting From Operations				$	1,751

^A See note 1, compensating balance credits, in the notes to financial statements.

See notes to financial statements.

15

Annual Report to Shareholders

Statement of Changes in Net Assets

Western Asset Limited Duration Bond Portfolio

(Amounts in Thousands)

	FOR THE YEARS ENDED
	3/31/06			3/31/05
Change in Net Assets:
Net investment income	$	2,658		$	855
Net realized gain/(loss) on investments and futures		(449	)		66
Change in unrealized appreciation/(depreciation) of investments and futures		(458	)		(552	)
Change in net assets resulting from operations		1,751			369
Distributions to Shareholders from:
Net investment income		(2,696	)		(882	)
Net realized gain on investments		—			(62	)
Change in net assets from Fund share transactions		37,662			11,819
Change in net assets		36,717			11,244
Net Assets:
Beginning of year		37,426			26,182
End of year	$	74,143		$	37,426
Undistributed net investment income	$	7		$	—

See notes to financial statements.

16

Annual Report to Shareholders

Financial Highlights

Western Asset Limited Duration Bond Portfolio

Contained below is per share operating performance data for a share of common stock outstanding throughout each period shown, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information in the financial statements.

Institutional Class:

	FOR THE YEARS ENDED MARCH 31,
	2006			2005			2004A
Net asset value, beginning of year	$	9.89		$	10.09		$	10.00
Investment operations:
Net investment income		.38			.24			.08
Net realized and unrealized gain/(loss) on investments and futures		(.09	)		(.17	)		.09
Total from investment operations		.29			.07			.17
Distributions paid from:
Net investment income		(.38	)		(.25	)		(.08)
Net realized gain on investments		—			(.02	)		—
Total distributions		(.38	)		(.27	)		(.08)
Net asset value, end of year	$	9.80		$	9.89		$	10.09
Total return		3.01	%		.69	%		1.69%	B
Ratios To Average Net Assets:C
Total expenses		.68	%		.73	%		.68%	D
Expenses net of waivers, if any		.40	%		.40	%		.40%	D
Expenses net of all reductions		.40	%		.40	%		.40%	D
Net investment income		3.9	%		2.4	%		1.6%	D
Supplemental Data:
Portfolio turnover rate		244.7	%		231.5	%		125.5%
Net assets at end of year (in thousands)	$	74,143		$	37,426			$26,182

^A For the period October 1, 2003 (commencement of operations) to March 31, 2004.

^B Not annualized.

^C Total expenses reflects operating expenses prior to any voluntary expense waivers and/or compensating balance credits. Expenses net of waivers reflects total expenses before compensating balance credits but net of any voluntary expense waivers. Expenses net of all reductions reflects expenses less any compensating balance credits and/or voluntary expense waivers.

^D Annualized.

See notes to financial statements.

17

Annual Report to Shareholders

Management’s Discussion of Fund Performance

Western Asset Intermediate Bond Portfolio

The average annual total returns for the Western Asset Intermediate Bond Portfolio for the period from its inception to March 31, 2006, are presented below, along with the total returns of its benchmark:

		Average Annual Total Returns Periods Ended March 31, 2006
	First Quarter 2006	One Year	Five Years	Ten Years
Western Asset Intermediate Bond Portfolio
Institutional Class	-0.19%	2.37%	5.38%	6.31%
Lehman Intermediate U.S. Government/Credit Bond IndexA	-0.38%	2.08%	4.71%	5.85%

The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.westernassetfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.

Short-term interest rates rose significantly over the past 12 months, led by a 200 bps^B increase in the federal funds rate target. Long-term interest rates rose only moderately, resulting in a substantial flattening of the yield curve. Contrary to expectations that they would hike rates to only 4%, the Federal Reserve increased its target funds rate by 25 bps at every FOMC meeting, reaching 4.75% in March. Tighter-than-expected monetary policy pushed real yields up by more than nominal yields, reflecting reduced inflation expectations. The dollar also benefited from higher rates, rising some 7% against a basket of currencies. Mortgage-backed spreads began the period fairly tight, only to widen in the latter half of the period as concerns over extension risk mounted. Investment-grade credit spreads drifted wider, driven largely by fallout from the unexpected downgrade of Ford and GM debt. Thanks to a robust global economy, easy money, and strong gains in commodity prices, emerging market spreads tightened dramatically over the course of the period, leaving yields at record-low levels. High yield spreads soared in the wake of the GM and Ford downgrades, but recovered dramatically to finish the period unchanged to somewhat tighter. Despite a substantial reduction of monetary policy accommodation during the period, gold rose over 35%, to $584 per ounce, returning to levels not seen since the inflation panic of 1980. Energy and industrial commodity prices also rose, registering substantial gains against all major currencies. Equity markets moved steadily higher over the course of the period.

The impact of market conditions on the Portfolio’s performance was negative for the 12-month period ended March 31, 2006, since short- and intermediate-term interest rates rose. With strategies producing mixed but generally positive results, the Portfolio’s total return of 2.37% (net of expenses) exceeded that of its benchmark, the Lehman Intermediate U.S. Government/Credit Bond Index, which recorded a total return of 2.08%. A short duration position benefited the portfolio as rates rose. However, this was partially offset by a curve steepening bet. A moderate overweight to the corporate sector contributed to outperformance as spreads narrowed. Mortgages contributed to outperformance as spreads narrowed late in the period and a high carry resulted in excess returns over Treasuries.

Western Asset Management Company

^A A market value-weighted index that tracks the daily price, coupon and total return performance of fixed-rate, publicly placed, dollar-denominated obligations. Issuers include the U.S. Treasury, U.S. Government agencies, quasi-federal corporations and corporations whose debt is guaranteed by the U.S. Government and has at least $100 million par amount outstanding and at least one year to maturity. The index does not incur fees and expenses and cannot be purchased directly by investors.

^B 100 basis points = 1%.

18

Annual Report to Shareholders

Expense Example

Western Asset Intermediate Bond Portfolio

As a shareholder of the Fund, you incur ongoing costs, including management fees, and other Fund expenses. These examples are 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. The example is based on an investment of $1,000 invested on October 1, 2005, and held through March 31, 2006.

Actual Expenses

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

Hypothetical Example for Comparison Purposes

The second line in the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% 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 this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

	Beginning Account Value 10/1/05		Ending Account Value 3/31/06		Expenses PaidA During the Period 10/1/05 to 3/31/06
Institutional Class:
Actual	$	1,000.00	$	1,001.80	$	2.25
Hypothetical (5% return before expenses)		1,000.00		1,022.69		2.27

^A These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio of 0.45% multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (182), and divided by 365.

19

Annual Report to Shareholders

Performance Information

Western Asset Intermediate Bond Portfolio

The graph compares the Fund’s total returns against that of an appropriate broad-based securities market index. The line illustrates the cumulative total return of an initial $1,000,000 investment for the periods indicated. The line for the Fund represents the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling securities. The line representing the securities market index does not include any transaction costs associated with buying and selling securities in the index or other investment management or administrative expenses.

Total return measures investment performance in terms of appreciation or depreciation in net asset value per share, plus dividends and any capital gain distributions. It assumes that dividends and distributions were reinvested at the time they were paid. Returns (and the graph and table found below) do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Average annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results.

Bonds are subject to a variety of risks, including interest rate, credit, and inflation risk.

Growth of a $1,000,000 Investment—Institutional Class

The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information, please visit www.westernassetfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.

20

Annual Report to Shareholders

Portfolio Composition (as of March 31, 2006)

Standard & Poor’s Debt Ratings^A

(as a percentage of the portfolio)

Maturity Schedule

(as a percentage of the portfolio)

^A Source: Standard & Poor's.

^B Preferred Stocks do not have a defined maturity date.

The Fund is actively managed. As a result, the composition of the portfolio holdings and sectors are subject to change at any time.

21

Annual Report to Shareholders

Portfolio of Investments

Western Asset Intermediate Bond Portfolio

March 31, 2006

(Amounts in Thousands)

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Long-Term Securities	95.3%
Corporate Bonds and Notes	36.1%
Aerospace/Defense	0.2%
United Technologies Corporation		6.350%	3/1/11	$	1,280	$	1,330
Auto Parts and Equipment	0.1%
Johnson Controls, Inc.		4.830%	1/17/08		880		881	A
Automotive	0.6%
Ford Motor Company		7.450%	7/16/31		1,430		1,062	B
General Motors Corporation		8.375%	7/15/33		4,440		3,252	B
							4,314
Banking and Finance	7.2%
Caterpillar Financial Services Corporation		3.450%	1/15/09		1,700		1,620	B
Ford Motor Credit Company		5.795%	9/28/07		9,540		9,156	A
Ford Motor Credit Company		7.680%	11/2/07		310		306	A
Ford Motor Credit Company		6.625%	6/16/08		11,290		10,686
General Motors Acceptance Corporation		6.125%	8/28/07		4,680		4,539
General Motors Acceptance Corporation		6.090%	9/23/08		1,228		1,159	A
General Motors Acceptance Corporation		6.750%	12/1/14		1,920		1,729	B
General Motors Acceptance Corporation		5.052%	9/19/35		2,290		2,255	A
HSBC Finance Corporation		4.970%	5/10/10		1,570		1,573	A
Nissan Motor Acceptance Corporation		5.625%	3/14/11		2,710		2,700	C
Residential Capital Corporation		6.335%	6/29/07		5,480		5,521	A,B
Residential Capital Corporation		6.000%	2/22/11		3,500		3,472
Wachovia Capital Trust III		5.800%	3/15/42		5,770		5,669D
Washington Mutual, Inc.		4.200%	1/15/10		2,990		2,856
							53,241
Cable	0.7%
Comcast Cable Communications, Inc.		6.750%	1/30/11		5,310		5,520	B
Casino Resorts	0.5%
Caesars Entertainment, Inc.		7.500%	9/1/09		990		1,042
Harrah’s Operating Company, Inc.		5.315%	2/8/08		530		531	A,C
Harrah’s Operating Company, Inc.		5.500%	7/1/10		400		396
Harrah’s Operating Company, Inc.		5.625%	6/1/15		1,700		1,629
							3,598

22

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Chemicals	0.4%
Rohm and Haas Company		7.400%	7/15/09	$	342	$	361
The Dow Chemical Company		5.750%	12/15/08		760		769
The Dow Chemical Company		5.970%	1/15/09		880		894
The Dow Chemical Company		6.000%	10/1/12		1,000		1,024
							3,048
Computer Services and Systems	0.5%
Electronic Data Systems Corporation		7.125%	10/15/09		3,240		3,404
Diversified Financial Services	1.2%
Capital One Bank		4.250%	12/1/08		2,030		1,975
iStar Financial Inc.		5.220%	3/3/08		1,280		1,283	A
ZFS Finance (USA) Trust III		6.060%	12/15/65		5,400		5,433A,C
							8,691
Drug and Grocery Store Chains	0.2%
The Kroger Co.		6.200%	6/15/12		1,090		1,105
Electric	1.6%
Appalachian Power Company		3.600%	5/15/08		3,350		3,228
Commonwealth Edison Company		6.150%	3/15/12		325		331
Dominion Resources, Inc.		4.750%	12/15/10		540		519
Dominion Resources, Inc.		5.700%	9/17/12		1,970		1,952	B
FirstEnergy Corp.		6.450%	11/15/11		3,550		3,673
Niagara Mohawk Power Corporation		7.750%	10/1/08		2,150		2,260
							11,963
Energy	2.4%
Alabama Power Company		4.990%	8/25/09		1,400		1,404A
CenterPoint Energy Inc.		5.875%	6/1/08		1,635		1,643
Duke Energy Corporation		6.250%	1/15/12		1,330		1,371
Duke Energy Corporation		5.625%	11/30/12		900		901
Exelon Corporation		6.750%	5/1/11		2,800		2,923
MidAmerican Energy Holdings Company		5.875%	10/1/12		1,020		1,030
Pacific Gas and Electric Company		3.600%	3/1/09		2,850		2,710
Progress Energy, Inc.		5.850%	10/30/08		1,250		1,260B
Progress Energy, Inc.		7.100%	3/1/11		1,650		1,750
TXU Corp.		4.800%	11/15/09		2,600		2,498
							17,490

23

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Environmental Services	0.8%
Waste Management, Inc.		6.875%	5/15/09	$	2,820	$	2,932
Waste Management, Inc.		7.375%	8/1/10		2,630		2,806
							5,738
Food, Beverage and Tobacco	1.6%
Altria Group, Inc.		6.950%	6/1/06		1,390		1,393
Altria Group, Inc.		7.200%	2/1/07		4,130		4,172
Altria Group, Inc.		7.000%	11/4/13		210		226
General Mills, Inc.		5.125%	2/15/07		440		439
Kraft Foods Inc.		5.625%	11/1/11		780		781
Pepsi Bottling Holdings Inc.		5.625%	2/17/09		2,441		2,463C
Sara Lee Corporation		2.750%	6/15/08		2,050		1,930
Sara Lee Corporation		6.250%	9/15/11		670		679
							12,083
Gas and Pipeline Utilities	0.5%
Kinder Morgan Energy Partners, L.P.		7.500%	11/1/10		1,630		1,750
The Williams Companies, Inc.		8.125%	3/15/12		1,900		2,040
							3,790
Investment Banking/Brokerage	3.2%
Goldman Sachs Group, L.P.		5.265%	6/28/10		6,780		6,808A
J.P. Morgan & Co. Incorporated		6.805%	2/15/12		2,190		2,308A
JPMorgan Chase & Co.		5.125%	9/15/14		1,770		1,701
JPMorgan Chase Capital XIII		5.910%	9/30/34		150		151A,B
Lehman Brothers Holdings		5.550%	8/19/65		3,870		3,881A,C
Merrill Lynch & Co. Inc.		4.930%	2/5/10		2,880		2,888A
Morgan Stanley		4.850%	1/18/11		1,000		1,002A
Morgan Stanley		5.050%	1/21/11		3,880		3,803
The Bear Stearns Companies Inc.		4.550%	6/23/10		1,380		1,333
							23,875
Investment Management	0.3%
Dryden Investor Trust		7.157%	7/23/08		1,839		1,871C
Manufacturing (Diversified)	0.4%
Tyco International Group SA		4.436%	6/15/07		3,350		3,296C
Media	1.9%
Clear Channel Communications, Inc.		6.000%	11/1/06		2,730		2,736
Clear Channel Communications, Inc.		4.250%	5/15/09		2,120		2,019
Liberty Media Corporation		7.875%	7/15/09		3,480		3,662B
News America Incorporated		5.300%	12/15/14		2,300		2,213

24

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Media—Continued
Time Warner Inc.		6.875%	5/1/12	$	1,590	$	1,667
Turner Broadcasting System, Inc.		8.375%	7/1/13		1,830		2,046
							14,343
Medical Care Facilities	0.2%
HCA, Inc.		8.750%	9/1/10		1,705		1,849
Oil and Gas	3.5%
Amerada Hess Corporation		6.650%	8/15/11		5,218		5,458
Pemex Project Funding Master Trust		8.500%	2/15/08		262		275B
Pemex Project Funding Master Trust		6.125%	8/15/08		660		665
Pemex Project Funding Master Trust		6.210%	6/15/10		5,680		5,830A,C
Pemex Project Funding Master Trust		5.430%	12/3/12		779		777A,C
Pemex Project Funding Master Trust		7.375%	12/15/14		220		235B
Occidental Petroleum Corporation		7.375%	11/15/08		2,370		2,487
Sonat Inc.		7.625%	7/15/11		4,880		5,026B
XTO Energy, Inc.		7.500%	4/15/12		1,060		1,157
XTO Energy, Inc.		6.250%	4/15/13		2,030		2,100
XTO Energy, Inc.		5.650%	4/1/16		1,990		1,966
							25,976
Paper and Forest Products	0.8%
International Paper Company		3.800%	4/1/08		2,310		2,233
International Paper Company		6.750%	9/1/11		1,000		1,039
Willamette Industries, Inc.		7.125%	7/22/13		2,270		2,417
							5,689
Photo Equipment and Supplies	0.3%
Eastman Kodak Company		7.250%	11/15/13		2,470		2,399
Special Purpose	4.9%
BAE Systems Holdings Inc.		5.149%	8/15/08		1,740		1,742	A,C
DaimlerChrysler NA Holding Corporation		4.875%	6/15/10		1,800		1,735
DaimlerChrysler NA Holding Corporation		6.500%	11/15/13		4,020		4,088
DaimlerChrysler NA Holding Corporation		5.210%	10/31/08		2,840		2,851	A
Devon Financing Corporation ULC		6.875%	9/30/11		2,500		2,651
ILFC E-Capital Trust I		5.900%	12/21/65		2,580		2,504	C,D
International Lease Finance Corporation		5.000%	4/15/10		5,260		5,159	B
National Rural Utilities Cooperative Finance Corporation		3.875%	2/15/08		1,160		1,131	B
National Rural Utilities Cooperative Finance Corporation		5.750%	12/1/08		690		694

25

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Special Purpose—Continued
Sprint Capital Corporation		6.125%	11/15/08	$	3,270	$	3,328
Sprint Capital Corporation		8.375%	3/15/12		4,280		4,836
Verizon Global Funding Corp.		7.250%	12/1/10		5,000		5,309
							36,028
Telecommunications	0.7%
AT&T Inc.		4.125%	9/15/09		2,380		2,276
AT&T Inc.		5.300%	11/15/10		3,080		3,039
							5,315
Telecommunications (Cellular/Wireless)	0.7%
New Cingular Wireless Services Inc.		8.125%	5/1/12		4,634		5,203
Transportation	0.7%
Continental Airlines, Inc.		6.545%	2/12/19		1,285		1,302
Delta Air Lines, Inc.		5.869%	3/18/11		390		395
Delta Air Lines, Inc.		6.718%	1/2/23		2,229		2,252
U.S. Airways		6.850%	1/30/18		1,197		1,222
							5,171
Total Corporate Bonds and Notes (Identified Cost—$272,129)							267,211
Asset-Backed Securities	1.6%
Fixed Rate Securities	0.7%
ABFS Mortgage Loan Trust 2002-3		4.263%	9/15/33		883		869
Conseco Finance Securitizations Corp. 2000-4		8.310%	5/1/32		800		660
Green Tree Financial Corporation 1994-6		8.900%	1/15/20		2,790		2,867
Mego Mortgage Home Loan Trust 1996-2		7.275%	9/25/16		20		20
UCFC Home Equity Loan 1998-D		6.905%	4/15/30		584		584
							5,000
Indexed SecuritiesA	0.8%
AFC Home Equity Loan Trust 2003-3		5.011%	10/25/30		1,435		1,440	C
AMRESCO Residential Securities Mortgage Loan Trust 1998-2		5.643%	6/25/28		305		305
Countrywide Asset-Backed Certificates 2002-BC1		5.148%	4/25/32		853		853
IndyMac Home Equity Loan Asset-Backed Trust 2001-A		5.078%	3/25/31		740		740
Morgan Stanley ABS Capital I 2003-NC8 A2		5.178%	9/25/33		181		181
MSDWCC HELOC Trust 2003-1		5.088%	11/25/15		1,830		1,830
Residential Asset Securities Corporation 2003-KS1		5.188%	1/25/33		745		747
							6,096

26

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Asset-Backed Securities—Continued
Stripped Securities	0.1%
ACA CDS 2002-1, Ltd.		2.742%	7/15/08	$	7,600	$	270	E1
Oakwood Mortgage Investors Inc. 2001-C		6.000%	5/15/08		4,053		410	E1
							680
Total Asset-Backed Securities (Identified Cost—$12,238)							11,776
Mortgage-Backed Securities	5.0%
Fixed Rate Securities	0.7%
Asset Securitization Corporation 1996-D2		6.920%	2/14/29		162		162
Fannie Mae Grantor Trust 2002-T3		5.763%	12/25/11		3,830		3,920
GMAC Commercial Mortgage Securities Inc. 1998-C1		6.700%	5/15/30		749		764
Ocwen Residential MBS Corporation 1998-R1		7.000%	10/25/40		9		9	C
							4,855
Indexed SecuritiesA	0.3%
Countrywide Home Loans 2003-49		3.697%	10/25/33		1,000		969
Impac CMB Trust 2003-12		5.198%	12/25/33		1,379		1,379
							2,348
Variable Rate SecuritiesF	4.0%
Banc of America Funding Corporation 2005-B		5.116%	4/25/35		3,231		3,186
Bear Stearns ALT-A Trust 2005-2		4.763%	4/25/35		2,888		2,839
Citigroup Mortgage Loan Trust, Inc. Series 2005-8 1A1A		5.325%	10/25/35		2,654		2,623
Countrywide Home Loans 2004-20		6.146%	9/25/34		2,226		2,287
MASTR Adjustable Rate Mortgages Trust 2004-13		3.787%	11/21/34		7,300		6,869
Merrill Lynch Mortgage Investors, Inc. 1998-C1		6.310%	11/15/26		205		205
Merrill Lynch Mortgage Investors, Inc. 2005-A2		4.495%	2/25/35		2,331		2,269
MLCC Mortgage Investors, Inc. 2005-1 2A1		4.969%	4/25/35		1,225		1,204
MLCC Mortgage Investors, Inc. 2005-1 2A2		4.969%	4/25/35		3,812		3,748
WaMu Mortgage Pass-Through Certificates 2004-AR11		4.590%	10/25/34		552		539
Wells Fargo Mortgage Backed Securities Trust 2004-S		3.540%	9/25/34		4,350		4,132
							29,901
Total Mortgage-Backed Securities (Identified Cost—$37,993)							37,104
U.S. Government and Agency Obligations	28.2%
Fixed Rate Securities	22.9%
Fannie Mae		7.250%	1/15/10		200		214
Fannie Mae		4.375%	3/15/13		3,540		3,373
Fannie Mae		4.625%	5/1/13		290		276

27

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
U.S. Government and Agency Obligations—Continued
Fixed Rate Securities—Continued
Fannie Mae		5.125%	1/2/14	$	1,300	$	1,272
Farmer Mac		4.250%	7/29/08		1,240		1,218
Federal Farm Credit Bank		4.875%	4/4/12		3,160		3,116
Federal Home Loan Bank		3.125%	9/15/06		6,000		5,949
Federal Home Loan Bank		4.125%	4/18/08		2,460		2,416	B
Federal Home Loan Bank		5.800%	3/30/09		600		611
Freddie Mac		4.750%	1/18/11		7,280		7,155	B
Tennessee Valley Authority		5.625%	1/18/11		460		468
Tennessee Valley Authority		6.790%	5/23/12		3,390		3,667
Tennessee Valley Authority		5.880%	4/1/36		220		236
United States Treasury Bonds		8.000%	11/15/21		3,430		4,506	B
United States Treasury Bonds		6.125%	11/15/27		1,820		2,072	B
United States Treasury Bonds		6.250%	5/15/30		230		269	B
United States Treasury Bonds		5.375%	2/15/31		840		884	B
United States Treasury Bonds		4.500%	2/15/36		3,670		3,443	B
United States Treasury Notes		2.375%	8/15/06		30		30
United States Treasury Notes		2.250%	2/15/07		2,370		2,317	B
United States Treasury Notes		4.375%	5/15/07		980		975	B
United States Treasury Notes		6.625%	5/15/07		2,290		2,333	B
United States Treasury Notes		2.750%	8/15/07		520		505	B
United States Treasury Notes		4.000%	8/31/07		44,690		44,168	B
United States Treasury Notes		4.375%	1/31/08		100		99	B
United States Treasury Notes		3.750%	5/15/08		24,240		23,719	B
United States Treasury Notes		3.875%	5/15/09		4,870		4,737
United States Treasury Notes		4.000%	6/15/09		5,240		5,112	B
United States Treasury Notes		3.875%	5/15/10		33,480		32,293	B
United States Treasury Notes		4.500%	11/15/10		7,000		6,906	B
United States Treasury Notes		4.500%	2/28/11		3,600		3,548	B
United States Treasury Notes		4.250%	8/15/15		1,630		1,553	B
							169,440
Stripped Securities	0.3%
United States Treasury Bonds		0.000%	11/15/21		2,350		1,064	B,E2
United States Treasury Bonds		0.000%	11/15/27		2,860		967	B,E2
							2,031
Treasury Inflation-Protected SecuritiesG	5.0%
United States Treasury Inflation-Protected Security		0.875%	4/15/10		2,972		2,815	B
United States Treasury Inflation-Protected Security		3.000%	7/15/12		1,555		1,620	B

28

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
U.S. Government and Agency Obligations—Continued
Treasury Inflation-Protected Securities—Continued
United States Treasury Inflation-Protected Security		1.875%	7/15/13	$	756	$	733	B
United States Treasury Inflation-Protected Security		2.000%	1/15/14		6,920		6,754	B
United States Treasury Inflation-Protected Security		2.000%	7/15/14		2,650		2,585	B
United States Treasury Inflation-Protected Security		1.875%	7/15/15		8,154		7,842	B
United States Treasury Inflation-Protected Security		2.375%	1/15/25		9,876		9,925	B
United States Treasury Inflation-Protected Security		2.000%	1/15/26		5,184		4,913	B
							37,187
Total U.S. Government and Agency Obligations (Identified Cost—$213,931)							208,658
U.S. Government Agency Mortgage-Backed Securities	16.7%
Fixed Rate Securities	14.1%
Fannie Mae		6.500%	6/1/14		183		188
Fannie Mae		8.000%	9/1/15		80		85
Fannie Mae		9.500%	4/15/21		58		64
Fannie Mae		5.000%	12/1/36		92,900		88,371	H
Fannie Mae		5.500%	12/1/36		600		586	H
Freddie Mac		4.375%	11/16/07		5,060		5,003
Freddie Mac		4.500%	1/15/13		2,450		2,355
Freddie Mac		6.500%	6/1/13 - 11/1/15		89		90
Freddie Mac		5.000%	7/15/14		6,270		6,185B
Freddie Mac		7.500%	4/1/17		5		5
Freddie Mac		9.300%	4/15/19		94		94
Freddie Mac		5.000%	12/1/36		1,100		1,046H
Government National Mortgage Association		9.000%	6/15/06		3		3
							104,075
Stripped Securities	N.M.
Fannie Mae		0.000%	5/25/22		13		11E2
Freddie Mac		10.000%	3/1/21		11		3E1
							14
Variable Rate SecuritiesF	2.6%
Fannie Mae		4.114%	3/1/18		38		38
Fannie Mae		4.323%	11/1/34		1,000		980
Fannie Mae		4.216%	12/1/34		1,226		1,193
Fannie Mae		4.872%	1/1/35		3,822		3,783
Fannie Mae		3.778%	3/1/35		2,148		2,076
Fannie Mae		4.775%	4/1/35		1,443		1,422
Freddie Mac		4.510%	1/1/19		11		11
Freddie Mac		4.352%	12/1/34		483		471

29

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
U.S. Government Agency Mortgage-Backed Securities—Continued
Variable Rate Securities—Continued
Freddie Mac		4.468%	12/1/34	$	2,322	$	2,274
Freddie Mac		4.079%	1/1/35		486		471
Freddie Mac		4.105%	1/1/35		857		833
Freddie Mac		4.602%	7/1/35		6,123		6,058
							19,610
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost—$125,278)							123,699
Yankee BondsI	7.6%
Aerospace/Defense	0.2%
Systems 2001 Asset Trust		6.664%	9/15/13		1,536		1,600C
Banking and Finance	1.6%
AIFUL CORPORATION		5.000%	8/10/10		2,590		2,506C
HBOS Treasury Services plc		4.000%	9/15/09		1,530		1,469B,C
HSBC Holdings plc		7.500%	7/15/09		5,700		6,039
MUFG Capital Finance 1 Limited		6.346%	7/29/49		1,990		1,958B,D
							11,972
Banks	0.8%
Banco Santiago SA		5.220%	12/9/09		290		290A,C
Royal Bank of Scotland Group plc		9.118%	3/31/49		3,000		3,362
The Korea Development Bank		5.001%	10/20/09		1,980		1,993A,B
							5,645
Electric	0.3%
SP PowerAssets Limited		5.000%	10/22/13		1,965		1,890C
Foreign Governments	0.8%
Russian Federation		5.000%	3/31/30		5,410		5,936D
Manufacturing (Diversified)	0.4%
Tyco International Group SA		6.375%	10/15/11		1,970		2,022
Tyco International Group SA		6.000%	11/15/13		1,020		1,025
							3,047
Special Purpose	0.7%
Anadarko Finance Company		6.750%	5/1/11		1,500		1,580
Deutsche Telekom International Finance BV		8.000%	6/15/10		1,990		2,167
Petrozuata Finance, Inc.		8.220%	4/1/17		1,090		1,074C
							4,821

30

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES			VALUE
Yankee Bonds—Continued
Telecommunications	2.4%
British Telecommunications plc		8.375%	12/15/10	$	4,610		$	5,142
France Telecom SA		7.750%	3/1/11		2,910			3,178
Koninklijke (Royal) KPN NV		8.000%	10/1/10		4,945			5,308
Telecom Italia Capital		4.000%	11/15/08		990			954
Telecom Italia Capital		5.160%	2/1/11		3,430			3,459	A,B
								18,041
Utilities	0.4%
United Utilities plc		6.450%	4/1/08		2,960			3,013	B
Total Yankee Bonds (Identified Cost—$55,918)								55,965
Preferred Stocks	0.1%
Home Ownership Funding Corporation		13.331%			1	shs		143	C,D
Home Ownership Funding Corporation II		13.338%			2			427	C,D
Total Preferred Stocks (Identified Cost—$1,942)								570
Total Long-Term Securities (Identified Cost—$719,429)								704,983
Investment of Collateral From Securities Lending	25.8%
State Street Navigator Securities Lending Prime Portfolio					190,679	shs		190,679
Total Investment of Collateral From Securities Lending (Identified Cost—$190,679)								190,679
Short-Term Securities	16.1%
U.S. Government and Agency Obligations	0.2%
Fannie Mae		0.000%	5/15/06	$	1,382			1,375	J,K
Options PurchasedL	N.M.
Eurodollar Futures Call, September 2006, Strike Price $94.75					595M			193
Deutsche Bank Swaption Call, May 2006, Strike Price $4.92					11,700,000	M		2
								195

31

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Short-Term Securities—Continued
Repurchase Agreements	15.9%
Goldman, Sachs & Company 4.77%, dated 3/31/06, to be repurchased at $117,683 on 4/3/06 (Collateral: $30,925 Fannie Mae notes, 4.0%, due 10/16/06, value $31,350; $90,000 Freddie Mac notes, 4.5%, to 5.75%, due 4/15/08 to 1/30/14, value $88,651)				$	117,636	$	117,636
Total Short-Term Securities (Identified Cost—$119,436)							119,206
Total Investments (Identified Cost—$1,029,544)	137.2%					$	1,014,868
Obligation to Return Collateral for Securities Loaned	(25.8)%						(190,679	)
Other Assets Less Liabilities	(11.4)%						(84,697	)
Net Assets	100.0%					$	739,492

	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Futures Contracts PurchasedL
Eurodollar Futures	June 2006	93	$	(84	)
Eurodollar Futures	September 2006	4		(3	)
U.S. Treasury Note Futures	June 2006	1,063		(707	)
U.S. Treasury Note Futures	June 2006	99		(94	)
			$	(888	)
Options WrittenL
Deutsche Bank Swaption Call, Strike Price $4.96	May 2006	4,900,000	$	60
U.S. Treasury Note Futures Call, Strike Price $109.00	June 2006	522		79
U.S. Treasury Note Futures Put, Strike Price $105.00	June 2006	497		(13	)
			$	126

^A Indexed security – The rates of interest earned on these securities are tied to the London Interbank Offered Rate ("LIBOR"), the Consumer Price Index ("CPI"), or the one-year Treasury Bill rate. The coupon rates are the rates as of March 31, 2006.

^B All or a portion of these securities is on loan.

^C Rule 144a – A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities, which the Fund’s investment adviser has determined to be liquid, represent 5.7% of net assets.

^D Stepped coupon security – A security with a predetermined schedule of interest or dividend rate changes, at which time it begins to accrue interest or pay dividends.

^E Stripped security – Security with interest-only or principal-only payment streams, denoted by a 1 or 2, respectively. For interest-only securities, the amount shown as principal is the notional balance used to calculate the amount of interest due.

^F The coupon rates shown on variable rate securities are the rates at March 31, 2006. These rates vary with the weighted average coupon of the underlying loans.

^G Treasury Inflation-Protected Security – Treasury security whose principal value is adjusted daily in accordance with changes to the Consumer Price Index for All Urban Consumers. Interest is calculated on the basis of the current adjusted principal value.

^H When-issued security—Security purchased on a delayed basis. Final settlement amount and maturity date have not yet been announced.

^I Yankee Bond – A dollar-denominated bond issued in the U.S. by foreign entities.

^J Zero coupon bond – A bond with no periodic interest payments which is sold at such a discount as to produce a current yield to maturity.

^K All or a portion of this security is pledged as collateral to cover futures and options contracts.

^L Options and futures are described in more detail in the notes to financial statements.

^M Par represents actual number of contracts.

N.M.—Not Meaningful.

See notes to financial statements.

32

Annual Report to Shareholders

Statement of Assets and Liabilities

Western Asset Intermediate Bond Portfolio

March 31, 2006

(Amounts in Thousands)

Assets:
Investment securities at market value (Identified Cost—$910,108)A			$	895,662
Short-term securities at value (Identified Cost—$119,436)				119,206
Swap contracts at value				174
Cash				—B
Receivable for securities sold				101,643
Receivable for fund shares sold				1,516
Interest and dividends receivable				7,703
Futures variation margin receivable				58
Total assets				1,125,962
Liabilities:
Payable for securities purchased	$	193,521
Payable for fund shares repurchased		1,404
Accrued management fee		265
Income distribution payable		271
Interest expense payable		19
Obligation to return collateral for securities loaned		190,679
Options written (Proceeds—$301)		175
Accrued expenses		136
Total liabilities				386,470
Net Assets			$	739,492
Net assets consist of:
Accumulated paid-in-capital applicable to:
72,456 Institutional Class shares outstanding			$	760,203
Undistributed net investment income				242
Accumulated net realized loss on investments, options, futures and swaps				(5,803	)
Unrealized appreciation/(depreciation) of investments, options, futures and swaps				(15,150	)
Net Assets			$	739,492
Net Asset Value Per Share:
Institutional Class				$10.21

^A The market value of securities on loan is $186,820.

^B Amount less than $1.

See notes to financial statements.

33

Annual Report to Shareholders

Statement of Operations

Western Asset Intermediate Bond Portfolio

For the Year Ended March 31, 2006

(Amounts in Thousands)

Investment Income:
Interest	$	32,680
Dividends		789
Total income				$	33,469
Expenses:
Advisory fee		2,842
Audit and legal fees		111
Custodian fees		187
Directors’ fees and expenses		41
Registration fees		34
Reports to shareholders		25
Transfer agent and shareholder servicing expense		25
Other expenses		56
		3,321
Less: Fees waived		(104	)
Compensating balance creditsA		(20	)
Total expenses, net of waivers and compensating balance credits					3,197
Net Investment Income					30,272
Net Realized and Unrealized Gain/(Loss) on Investments:
Realized gain/(loss) on:
Investments		(3,106	)
Options		671
Futures		(3,287	)
Swaps		89
					(5,633	)
Change in unrealized appreciation/(depreciation) on investments, options, futures, and swaps					(9,284	)
Net Realized and Unrealized Loss on Investments					(14,917)
Change in Net Assets Resulting From Operations				$	15,355

^A See note 1, compensating balance credits, in the notes to financial statements.

See notes to financial statements.

34

Annual Report to Shareholders

Statement of Changes in Net Assets

Western Asset Intermediate Bond Portfolio

(Amounts in Thousands)

	FOR THE YEARS ENDED
	3/31/06			3/31/05
Change in Net Assets:
Net investment income	$	30,272		$	21,360
Net realized gain/(loss) on investments, options, futures, and swaps		(5,633	)		7,190
Change in unrealized appreciation/(depreciation) of investments, options, futures, and swaps		(9,284	)		(19,466	)
Change in net assets resulting from operations		15,355			9,084
Distributions to Shareholders from:
Net investment income		(30,414	)		(21,565	)
Net realized gain on investments		(6,582	)		(15,309	)
Change in net assets from Fund share transactions		100,653			101,041
Change in net assets		79,012			73,251
Net Assets:
Beginning of year		660,480			587,229
End of year	$	739,492		$	660,480
Undistributed net investment income	$	242		$	79

See notes to financial statements.

35

Annual Report to Shareholders

Financial Highlights

Western Asset Intermediate Bond Portfolio

Contained below is per share operating performance data for a share of common stock outstanding throughout each period shown, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information in the financial statements.

Institutional Class

	FOR THE YEARS ENDED MARCH 31,
	2006			2005			2004			2003			2002
Net asset value, beginning of year	$	10.51		$	11.01		$	10.92		$	10.39		$	10.65
Investment operations:
Net investment income		.44			.38			.44			.53			.57
Net realized and unrealized gain/(loss) on investments, options, futures, and swaps		(.20	)		(.22	)		.36			.62			(.13	)
Total from investment operations		.24			.16			.80			1.15			.44
Distributions paid from:
Net investment income		(.44	)		(.38	)		(.44	)		(.53	)		(.57	)
Net realized gain on investments		(.10	)		(.28	)		(.27	)		(.09	)		(.13	)
Total distributions		(.54	)		(.66	)		(.71	)		(.62	)		(.70	)
Net asset value, end of year	$	10.21		$	10.51		$	11.01		$	10.92		$	10.39
Total return		2.37	%		1.66	%		7.58	%		11.37	%		4.20	%
Ratios To Average Net Assets:A
Total expenses		.47	%		.46	%		.47	%		.45	%		.47	%
Expenses net of waivers, if any		.45	%		.45	%		.45	%		.45	%		.45	%
Expenses net of all reductions		.45	%		.45	%		.45	%		.45	%		.45	%
Net investment income		4.3	%		3.6	%		4.0	%		5.0	%		5.3	%
Supplemental Data:
Portfolio turnover rate		266.1	%		215.7	%		255.1	%		238.5	%		274.8	%
Net assets at end of year (in thousands)	$	739,492		$	660,480		$	587,229		$	539,874		$	628,196

^A Total expenses reflects operating expenses prior to any voluntary expense waivers and/or compensating balance credits. Expenses net of waivers reflects total expenses before compensating balance credits but net of any voluntary expense waivers. Expenses net of all reductions reflects expenses less any compensating balance credits and/or voluntary expense waivers.

See notes to financial statements.

36

Annual Report to Shareholders

Management’s Discussion of Fund Performance

Western Asset Intermediate Plus Bond Portfolio

The average annual total returns for the Western Asset Intermediate Plus Bond Portfolio for the period from its inception to March 31, 2006, are presented below, along with the total returns of its benchmark:

	Average Annual Total Returns Periods Ended March 31, 2006
	First Quarter 2006	One Year	Since InceptionA
Western Asset Intermediate Plus Bond Portfolio
Institutional Class	-0.08%	2.99%	2.40%
Lehman Intermediate U.S. Government/Credit Bond IndexB	-0.38%	2.08%	0.87%

The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.westernassetfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.

Short-term interest rates rose significantly over the past 12 months, led by a 200 bps^C increase in the federal funds rate target. Long-term interest rates rose only moderately, resulting in a substantial flattening of the yield curve. Contrary to expectations that they would hike rates to only 4%, the Federal Reserve increased its target funds rate by 25 bps at every FOMC meeting, reaching 4.75% in March. Tighter-than-expected monetary policy pushed real yields up by more than nominal yields, reflecting reduced inflation expectations. The dollar also benefited from higher rates, rising some 7% against a basket of currencies. Mortgage-backed spreads began the period fairly tight, only to widen in the latter half of the period as concerns over extension risk mounted. Investment-grade credit spreads drifted wider, driven largely by fallout from the unexpected downgrade of Ford and GM debt. Thanks to a robust global economy, easy money, and strong gains in commodity prices, emerging market spreads tightened dramatically over the course of the period, leaving yields at record-low levels. High yield spreads soared in the wake of the GM and Ford downgrades, but recovered dramatically to finish the period unchanged to somewhat tighter. Despite a substantial reduction of monetary policy accommodation during the period, gold rose over 35%, to $584 per ounce, returning to levels not seen since the inflation panic of 1980. Energy and industrial commodity prices also rose, registering substantial gains against all major currencies. Equity markets moved steadily higher over the course of the period.

The impact of market conditions on the Portfolio’s performance was negative for the 12-month period ended March 31, 2006, since short-term interest rates rose. With strategies producing generally positive results, the Portfolio’s total return of 2.99% (net of expenses) exceeded that of its benchmark, the Lehman Intermediate U.S. Government/Credit Bond Index, which recorded a total return of 2.08%. A short duration position benefited the portfolio as rates rose. However, this was partially offset by a curve steepening bet. A moderate overweight to the corporate sector contributed to outperformance as spreads narrowed. Mortgages contributed to outperformance as spreads narrowed late in the period and a high carry resulted in excess returns over Treasuries. Emerging market debt was one of the best-performing asset classes and a moderate exposure contributed significantly to outperformance. The high-yield sector also performed impressively and a moderate contribution benefited the portfolio.

Western Asset Management Company

^A The Fund’s Institutional Class inception date is April 1, 2004. Index returns are for periods beginning March 31, 2004.

^B A market value-weighted index that tracks the daily price, coupon and total return performance of fixed-rate, publicly placed, dollar-denominated obligations. Issuers include the U.S. Treasury, U.S. Government agencies, quasi-federal corporations and corporations whose debt is guaranteed by the U.S. Government and has at least $100 million par amount outstanding and at least one year to maturity. The index does not incur fees and expenses and cannot be purchased directly by investors.

^C 100 basis points = 1%.

37

Annual Report to Shareholders

Expense Example

Western Asset Intermediate Plus Bond Portfolio

As a shareholder of the Fund, you incur ongoing costs, including management fees, and other Fund expenses. These examples are 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. The example is based on an investment of $1,000 invested on October 1, 2005, and held through March 31, 2006.

Actual Expenses

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

Hypothetical Example for Comparison Purposes

The second line in the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% 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 this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

	Beginning Account Value 10/1/05		Ending Account Value 3/31/06		Expenses PaidA During the Period 10/1/05 to 3/31/06
Institutional Class:
Actual	$	1,000.00	$	1,003.00	$	2.25
Hypothetical (5% return before expenses)		1,000.00		1,022.69		2.27

^A These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio of 0.45% multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (182), and divided by 365.

38

Annual Report to Shareholders

Performance Information

Western Asset Intermediate Plus Bond Portfolio

The graph compares the Fund’s total returns against that of an appropriate broad-based securities market index. The line illustrates the cumulative total return of an initial $1,000,000 investment for the periods indicated. The line for the Fund represents the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling securities. The line representing the securities market index does not include any transaction costs associated with buying and selling securities in the index or other investment management or administrative expenses.

Total return measures investment performance in terms of appreciation or depreciation in net asset value per share, plus dividends and any capital gain distributions. It assumes that dividends and distributions were reinvested at the time they were paid. Returns (and the graph and table found below) do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Average annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results.

Bonds are subject to a variety of risks, including interest rate, credit, and inflation risk.

Growth of a $1,000,000 Investment—Institutional Class

The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information, please visit www.westernassetfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.

^A Index returns are for periods beginning March 31, 2004.

39

Annual Report to Shareholders

Performance Information—Continued

Portfolio Composition (as of March 31, 2006)

Standard & Poor’s Debt Ratings^B (as a percentage of the portfolio)

Maturity Schedule (as a percentage of the portfolio)

^B Source: Standard & Poor's.

^C Preferred Stocks do not have a defined maturity date.

The Fund is actively managed. As a result, the composition of the portfolio holdings and sectors are subject to change at any time.

40

Annual Report to Shareholders

Portfolio of Investments

Western Asset Intermediate Plus Bond Portfolio

March 31, 2006

(Amounts in Thousands)

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Long-Term Securities	104.5%
Corporate Bonds and Notes	37.1%
Auto Parts and Equipment	0.1%
Johnson Controls, Inc.		4.830%	1/17/08	$	80	$	80	A
Automotive	0.2%
Ford Motor Company		7.450%	7/16/31		110		82
General Motors Corporation		8.375%	7/15/33		120		88
							170
Banking and Finance	9.0%
Caterpillar Financial Services Corporation		3.450%	1/15/09		120		114
Ford Motor Credit Company		5.795%	9/28/07		780		749	A
Ford Motor Credit Company		7.680%	11/2/07		420		414	A
Ford Motor Credit Company		6.625%	6/16/08		850		804
General Motors Acceptance Corporation		5.500%	1/16/07		700		689	A
General Motors Acceptance Corporation		6.125%	8/28/07		370		359
General Motors Acceptance Corporation		6.090%	9/23/08		450		425	A
General Motors Acceptance Corporation		6.750%	12/1/14		40		36
General Motors Acceptance Corporation		5.052%	9/19/35		187		184	A
HSBC Finance Corporation		4.970%	5/10/10		454		455	A
John Deere Capital Corporation		5.100%	1/15/13		100		98
Nissan Motor Acceptance Corporation		5.625%	3/14/11		320		319	B
Residential Capital Corporation		6.335%	6/29/07		520		524A
Residential Capital Corporation		6.000%	2/22/11		300		297
Wachovia Capital Trust III		5.800%	3/15/42		560		550	C
Washington Mutual, Inc.		4.200%	1/15/10		290		277
							6,294
Cable	0.8%
Comcast Cable Communications, Inc.		6.750%	1/30/11		510		530
Casino Resorts	0.5%
Caesars Entertainment, Inc.		7.500%	9/1/09		90		95
Harrah’s Operating Company, Inc.		5.315%	2/8/08		80		80	A,B
Harrah’s Operating Company, Inc.		5.500%	7/1/10		20		20
Harrah’s Operating Company, Inc.		5.625%	6/1/15		130		124
							319
Chemicals	0.4%
Rohm and Haas Company		7.400%	7/15/09		20		21
The Dow Chemical Company		5.750%	12/15/08		100		101

41

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Chemicals—Continued
The Dow Chemical Company		5.970%	1/15/09	$	70	$	71
The Dow Chemical Company		6.000%	10/1/12		100		103
							296
Computer Services and Systems	0.6%
Electronic Data Systems Corporation		7.125%	10/15/09		330		347
International Business Machines Corporation		4.750%	11/29/12		100		96
							443
Diversified Financial Services	1.1%
ZFS Finance (USA) Trust III		6.060%	12/15/65		500		503	A,B
Capital One Bank		4.250%	12/1/08		210		205
iStar Financial Inc.		5.220%	3/3/08		100		100	A
							808
Electric	1.9%
Alabama Power Company		4.990%	8/25/09		120		120	A
Appalachian Power Company		3.600%	5/15/08		277		267
Dominion Resources, Inc.		4.750%	12/15/10		20		19
Dominion Resources, Inc.		5.700%	9/17/12		180		179
FirstEnergy Corp.		6.450%	11/15/11		500		517
Niagara Mohawk Power Corporation		7.750%	10/1/08		50		52
The AES Corporation		9.500%	6/1/09		150		162
							1,316
Energy	2.0%
CenterPoint Energy, Inc.		5.875%	6/1/08		120		121
Duke Energy Corporation		5.625%	11/30/12		160		160
Exelon Corporation		6.750%	5/1/11		300		313
Pacific Gas and Electric Company		3.600%	3/1/09		320		304
Progress Energy, Inc.		5.850%	10/30/08		100		101
Progress Energy, Inc.		7.100%	3/1/11		170		180
TXU Corp.		6.375%	6/15/06		60		60
TXU Corp.		6.375%	1/1/08		90		91
TXU Corp.		4.800%	11/15/09		80		77
							1,407
Environmental Services	0.7%
Waste Management, Inc.		6.875%	5/15/09		250		260
Waste Management, Inc.		7.375%	8/1/10		230		245
							505

42

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Food, Beverage and Tobacco	1.3%
Altria Group, Inc.		7.000%	11/4/13	$	480	$	516
General Mills, Inc.		5.125%	2/15/07		40		40
Kraft Foods Inc.		5.625%	11/1/11		40		40
Pepsi Bottling Holdings Inc.		5.625%	2/17/09		120		121	B
Sara Lee Corporation		2.750%	6/15/08		150		141
Sara Lee Corporation		6.250%	9/15/11		60		61
							919
Gas and Pipeline Utilities	0.8%
ANR Pipeline, Inc.		8.875%	3/15/10		65		69
Kinder Morgan Energy Partners, L.P.		7.500%	11/1/10		90		97
Southern Natural Gas Company		8.875%	3/15/10		85		90
The Williams Companies, Inc.		6.536%	10/1/10		280		286	A,B
							542
Investment Banking/Brokerage	3.2%
Goldman Sachs Group, L.P.		5.265%	6/28/10		530		532	A
JPMorgan Chase & Co.		5.125%	9/15/14		390		375
JPMorgan Chase Capital XIII		5.910%	9/30/34		20		20	A
Lehman Brothers Holdings Inc.		4.500%	7/26/10		140		135
Lehman Brothers Holdings Inc.		5.550%	8/19/65		220		221	A,B
Merrill Lynch & Co., Inc.		4.930%	2/5/10		160		160	A
Morgan Stanley		4.850%	1/18/11		250		250	A
Morgan Stanley		5.050%	1/21/11		280		275
The Bear Stearns Companies Inc.		4.550%	6/23/10		250		242
							2,210
Manufacturing (Diversified)	0.4%
Tyco International Group SA		4.436%	6/15/07		280		275	B
Media	1.8%
Clear Channel Communications, Inc.		6.000%	11/1/06		180		180
Clear Channel Communications, Inc.		4.250%	5/15/09		240		229
Clear Channel Communications, Inc.		7.650%	9/15/10		10		11
Clear Channel Communications, Inc.		5.500%	9/15/14		40		37
Liberty Media Corporation		7.875%	7/15/09		270		284
News America Incorporated		5.300%	12/15/14		200		192
Time Warner Inc.		6.875%	5/1/12		200		210
Turner Broadcasting System, Inc.		8.375%	7/1/13		130		145
							1,288

43

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Medical Care Facilities	0.2%
HCA, Inc.		8.750%	9/1/10	$	50	$	54
HCA, Inc.		6.750%	7/15/13		70		70
							124
Medical Products	0.2%
Bristol-Myers Squibb Company		5.750%	10/1/11		110		111
Oil and Gas	4.2%
Amerada Hess Corporation		6.650%	8/15/11		530		554
El Paso Corporation		6.950%	12/15/07		300		302
Kerr-McGee Corporation		5.875%	9/15/06		115		115
Kerr-McGee Corporation		6.625%	10/15/07		60		61
Kerr-McGee Corporation		6.875%	9/15/11		330		345
Occidental Petroleum Corporation		7.375%	11/15/08		140		147
Occidental Petroleum Corporation		6.750%	1/15/12		200		214
Pemex Project Funding Master Trust		6.125%	8/15/08		540		544
Pemex Project Funding Master Trust		7.375%	12/15/14		230		246
XTO Energy, Inc.		7.500%	4/15/12		100		109
XTO Energy, Inc.		6.250%	4/15/13		190		197
XTO Energy, Inc.		5.650%	4/1/16		160		158
							2,992
Paper and Forest Products	0.6%
International Paper Company		3.800%	4/1/08		230		222
International Paper Company		6.750%	9/1/11		50		52
Weyerhaeuser Company		6.750%	3/15/12		130		136
							410
Photo Equipment and Supplies	0.6%
Eastman Kodak Company		3.625%	5/15/08		270		252
Eastman Kodak Company		7.250%	11/15/13		150		146
							398
Special Purpose	4.8%
BAE Systems Holdings Inc.		5.149%	8/15/08		130		130	A,B
DaimlerChrysler NA Holding Corporation		5.210%	10/31/08		130		130	A
DaimlerChrysler NA Holding Corporation		4.875%	6/15/10		360		347
DaimlerChrysler NA Holding Corporation		6.500%	11/15/13		460		468
Devon Financing Corporation ULC		6.875%	9/30/11		250		265
ILFC E-Capital Trust I		5.900%	12/21/65		200		194	B,C
International Lease Finance Corporation		5.000%	4/15/10		510		500
National Rural Utilities Cooperative Finance Corporation		3.875%	2/15/08		100		98

44

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Special Purpose—Continued
Sprint Capital Corporation		6.125%	11/15/08	$	280	$	285
Sprint Capital Corporation		8.375%	3/15/12		110		124
The Williams Companies, Inc. Credit-Linked Certificates		6.750%	4/15/09		170		172	B
The Williams Companies, Inc. Credit-Linked Certificates		7.930%	5/1/09		255		264	A,B
Verizon Global Funding Corp.		7.250%	12/1/10		350		372
							3,349
Telecommunications	1.0%
AT&T Inc.		4.125%	9/15/09		190		182
AT&T Inc.		5.300%	11/15/10		180		178
AT&T Inc.		6.250%	3/15/11		100		102
GTE Hawaiian Telephone Company, Inc.		7.375%	9/1/06		10		10
Qwest Communications International Incorporated		8.249%	2/15/09		200		204	A
							676
Telecommunications (Cellular/Wireless)	0.7%
New Cingular Wireless Services Inc.		8.125%	5/1/12		420		472
Total Corporate Bonds and Notes (Identified Cost—$26,383)							25,934
Asset-Backed Securities	0.2%
Indexed SecuritiesA	0.2%
Metris Master Trust 2004-1		5.056%	4/20/11		100		100
Morgan Stanley ABS Capital I 2003-NC8 A2		5.178%	9/25/33		6		6
Residential Asset Securities Corporation 2002-KS7		5.188%	11/25/32		27		27
							133
Total Asset-Backed Securities (Identified Cost—$133)							133
Mortgage-Backed Securities	3.3%
Fixed Rate Securities	0.1%
Washington Mutual MSC Mortgage Pass-Through Certificates, Series 2004-RA1		7.000%	3/25/34		31		32
Indexed SecuritiesA	0.1%
Merrill Lynch Mortgage Investors, Inc. 2004-B		5.756%	6/25/29		43		44
Variable Rate SecuritiesD	3.1%
Banc of America Funding Corporation 2005-B		5.116%	4/25/35		213		210
Bear Stearns ALT-A Trust 2005-2		4.763%	4/25/35		177		174

45

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Mortgage-Backed Securities—Continued
Variable Rate Securities—Continued
Countrywide Home Loans 2004-20		6.146%	9/25/34	$	43	$	44
J.P. Morgan Mortgage Trust 2004-A3		4.308%	7/25/34		350		341
MASTR Adjustable Rate Mortgages Trust 2004-13		3.787%	11/21/34		450		423
MLCC Mortgage Investors, Inc. 2005-1 2A1		4.969%	4/25/35		73		72
MLCC Mortgage Investors, Inc. 2005-1 2A2		4.969%	4/25/35		238		234
Structured Adjustable Rate Mortgage Loan Trust 2004-6 3A2		4.727%	6/25/34		233		228
WaMu Mortgage Pass-Through Certificates, Series 2005-AR12		4.843%	10/25/35		184		182
WaMu Mortgage Pass-Through Certificates, Series 2005-AR4		4.678%	4/25/35		300		290
							2,198
Total Mortgage-Backed Securities (Identified Cost—$2,326)							2,274
U.S. Government and Agency Obligations	40.4%
Fixed Rate Securities	36.1%
Farmer Mac		4.250%	7/29/08		80		78
Federal Home Loan Bank		3.125%	9/15/06		100		99
Federal Home Loan Bank		4.125%	4/18/08		140		138
Freddie Mac		4.750%	1/18/11		710		698
Tennessee Valley Authority		5.625%	1/18/11		10		10
Tennessee Valley Authority		6.790%	5/23/12		210		227
Tennessee Valley Authority		5.880%	4/1/36		20		22
United States Treasury Bonds		8.000%	11/15/21		410		539
United States Treasury Bonds		6.125%	11/15/27		110		125
United States Treasury Bonds		5.375%	2/15/31		510		537
United States Treasury Bonds		4.500%	2/15/36		468		439
United States Treasury Notes		4.000%	8/31/07		1,290		1,275
United States Treasury Notes		3.000%	11/15/07		3,600		3,497
United States Treasury Notes		4.375%	1/31/08		120		119
United States Treasury Notes		3.750%	5/15/08		3,940		3,855
United States Treasury Notes		3.125%	9/15/08		4,090		3,931
United States Treasury Notes		3.375%	9/15/09		770		735
United States Treasury Notes		3.375%	10/15/09		10		9
United States Treasury Notes		6.500%	2/15/10		40		42
United States Treasury Notes		3.875%	5/15/10		2,820		2,720
United States Treasury Notes		4.250%	10/15/10		1,080		1,055

46

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
U.S. Government and Agency Obligations—Continued
Fixed Rate Securities—Continued
United States Treasury Notes		4.500%	11/15/10	$	2,520	$	2,486
United States Treasury Notes		4.500%	2/28/11		350		345
United States Treasury Notes		4.250%	11/15/14		10		10
United States Treasury Notes		4.125%	5/15/15		2,200		2,079
United States Treasury Notes		4.250%	8/15/15		180		171
							25,241
Treasury Inflation-Protected SecuritiesE	4.0%
United States Treasury Inflation-Protected Security		0.875%	4/15/10		220		208
United States Treasury Inflation-Protected Security		2.000%	1/15/14		1,127		1,100
United States Treasury Inflation-Protected Security		2.000%	7/15/14		168		164
United States Treasury Inflation-Protected Security		1.875%	7/15/15		499		480
United States Treasury Inflation-Protected Security		2.375%	1/15/25		400		402
United States Treasury Inflation-Protected Security		2.000%	1/15/26		449		426
							2,780
Stripped Securities	0.3%
United States Treasury Bonds		0.000%	11/15/21		250		113	F2
United States Treasury Bonds		0.000%	11/15/27		270		91	F2
							204
Total U.S. Government and Agency Obligations (Identified Cost—$28,847)							28,225
U.S. Government Agency Mortgage-Backed Securities	15.3%
Fixed Rate Securities	13.3%
Fannie Mae		5.000%	12/1/36		8,900		8,466	G
Freddie Mac		4.375%	11/16/07		370		366
Freddie Mac		5.000%	7/15/14		390		385
Freddie Mac		5.000%	12/1/36		100		95	G
							9,312
Variable Rate SecuritiesD	2.0%
Fannie Mae		4.587%	9/1/35		444		439
Fannie Mae		4.317%	12/1/34		900		879
Freddie Mac		4.079%	1/1/35		28		27
Freddie Mac		4.105%	1/1/35		50		49
							1,394
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost—$10,819)							10,706

47

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Yankee BondsH	7.3%
Banking and Finance	0.6%
AIFUL CORPORATION		5.000%	8/10/10	$	190	$	184	B
HSBC Holdings plc		7.500%	7/15/09		120		127
MUFG Capital Finance 1 Limited		6.346%	7/29/49		150		148C
							459
Banks	0.6%
Banco Santiago SA		5.220%	12/9/09		200		200	A,B
Royal Bank of Scotland Group plc		9.118%	3/31/49		180		202
							402
Foreign Governments	2.3%
Federative Republic of Brazil		8.875%	4/15/24		30		35
Federative Republic of Brazil		8.875%	4/15/24		20		23
Federative Republic of Brazil		10.125%	5/15/27		12		16
Federative Republic of Brazil		12.250%	3/6/30		35		53
Federative Republic of Brazil		11.000%	8/17/40		137		176
Republic of Bulgaria		8.250%	1/15/15		30		35
Republic of Colombia		11.750%	2/25/20		78		111
Republic of Panama		7.125%	1/29/26		70		72
Republic of Panama		9.375%	4/1/29		20		25
Republic of Peru		5.000%	3/7/17		40		37C
Republic of Peru		8.750%	11/21/33		77		86
Russian Federation		5.000%	3/31/30		340		373	C
Russian Federation		5.000%	3/31/30		210		230	B,C
United Mexican States		8.300%	8/15/31		10		12
United Mexican States		7.500%	4/8/33		287		320
							1,604
Manufacturing (Diversified)	0.6%
Tyco International Group SA		6.375%	10/15/11		180		185
Tyco International Group SA		6.000%	11/15/13		250		251
							436
Special Purpose	0.6%
Anadarko Finance Company		6.750%	5/1/11		150		158
Deutsche Telekom International Finance BV		8.000%	6/15/10		240		261
							419

48

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES			VALUE
Yankee Bonds—Continued
Telecommunications	2.3%
British Telecommunications plc		8.375%	12/15/10	$	350		$	390
France Telecom SA		7.750%	3/1/11		300			327
Koninklijke (Royal) KPN NV		8.000%	10/1/10		460			494
Telecom Italia Capital		4.000%	11/15/08		40			39
Telecom Italia Capital		5.160%	2/1/11		370			373	A
								1,623
Utilities	0.3%
United Utilities plc		6.450%	4/1/08		170			173
Total Yankee Bonds (Identified Cost—$5,136)								5,116
Foreign Government Obligations	0.6%
Canadian Real Return Bond		4.000%	12/1/31		189	I		245	E
Queensland Treasury Corp		6.000%	6/14/11		270	J		197	E
Total Foreign Government Obligations (Identified Cost—$421)								442
Foreign Corporate Bonds	0.1%
General Motors Corporation		8.375%	7/5/33		50	J		44
Total Foreign Corporate Bonds (Identified Cost—$65)								44
Preferred Stocks	0.2%
General Motors Corporation		4.500%			7	shs		167
Total Preferred Stocks (Identified Cost—$168)								167
Total Long-Term Securities (Identified Cost—$74,298)								73,041
Short-Term Securities	7.8%
U.S. Government and Agency Obligations	0.1%
Fannie Mae		0.000%	5/15/06	$	107			107	K,L

49

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR			VALUE
Short-Term Securities—continued
Options PurchasedM	N.M.
Eurodollar Futures Call, September 2006, Strike Price $94.75					49N		$	16
Morgan Stanley Swaption Call, May 2006, Strike Price $4.92					2,200,000	N		0.4
								16
Repurchase Agreements	7.7%
Goldman, Sachs & Company 4.77%, dated 3/31/06, to be repurchased at $5,369 on 4/3/06 (Collateral: $5,365 Fannie Mae notes, 7.125%, due 3/15/07, value $5,479)				$	5,367			5,367
Total Short-Term Securities (Identified Cost—$5,514)								5,490
Total Investments (Identified Cost—$79,812)	112.3%							78,531
Other Assets Less Liabilities	(12.3)%							(8,623	)
Net Assets	100.0%						$	69,908

50

Annual Report to Shareholders

	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Futures Contracts PurchasedM
Eurodollar Futures	June 2006	7	$	(6	)
U.S. Treasury Note Futures	June 2006	52		(43	)
			$	(49	)
Futures Contracts WrittenM
U.S. Treasury Note Futures	June 2006	4	$	5
Options WrittenM
Morgan Stanley Swaption Call, Strike Price $4.96	May 2006	900,000	$	11
U.S. Treasury Note Futures Call, Strike Price $109.00	June 2006	51		8
U.S. Treasury Note Futures Put, Strike Price $105.00	June 2006	48		(1	)
			$	18

^A Indexed security – The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”), the Consumer Price Index (“CPI”), or the one-year Treasury Bill rate. The coupon rates are the rates as of March 31, 2006.

^B Rule 144a – A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities, which the Fund’s investment adviser has determined to be liquid, represent 4.5% of net assets.

^C Stepped coupon security – A security with a predetermined schedule of interest or dividend rate changes, at which time it begins to accrue interest or pay dividends.

^D The coupon rates shown on variable rate securities are the rates at March 31, 2006. These rates vary with the weighted average coupon of the underlying loans.

^E Inflation-Protected Security – A security whose principal value is adjusted daily or monthly in accordance with changes to the relevant country’s Consumer Price Index or its equivalent used as an inflation proxy. Interest is calculated on the basis of the current adjusted principal value.

^F Stripped security – Security with interest-only or principal-only payment streams, denoted by a 1 or 2, respectively. For interest-only securities, the amount shown as principal is the notional balance used to calculate the amount of interest due.

^G When-issued security – Security purchased on a delayed basis. Final settlement amount and maturity date have not yet been announced.

^H Yankee Bond – A dollar-denominated bond issued in the U.S. by foreign entities.

^I Denominated in Canadian dollars.

^J Denominated in euros.

^K Zero coupon bond – A bond with no periodic interest payments which is sold at such a discount as to produce a current yield to maturity.

^L All or a portion of this security is pledged as collateral to cover futures and options contracts.

^M Options and futures are described in more detail in the notes to financial statements.

^N Par represents actual number of contracts.

N.M.—Not Meaningful.

See notes to financial statements.

51

Annual Report to Shareholders

Statement of Assets and Liabilities

Western Asset Intermediate Plus Bond Portfolio

March 31, 2006

(Amounts in Thousands)

Assets:
Investment securities at market value (Identified Cost—$74,298)			$	73,041
Short-term securities at value (Identified Cost—$5,514)				5,490
Swap contracts at value				43
Cash and foreign currencies				1,604
Receivable for securities sold				8,075
Interest and dividends receivable				785
Futures variation margin receivable				2
Unrealized appreciation on forward foreign currency contracts				35
Total assets				89,075
Liabilities:
Payable for securities purchased	$	16,813
Payable for fund shares repurchased		2,200
Accrued management fee		15
Income distribution payable		51
Options written (Proceeds—$35)		17
Accrued expenses		71
Total liabilities				19,167
Net Assets			$	69,908
Net assets consist of:
Accumulated paid-in-capital applicable to:
7,177 Institutional Class shares outstanding			$	71,417
Overdistributions of net investment income				(36	)
Accumulated net realized loss on investments, options, futures, swaps and foreign currency transactions				(214	)
Unrealized appreciation/(depreciation) of investments, options, futures, swaps and foreign currency translations				(1,259	)
Net Assets			$	69,908
Net Asset Value Per Share:
Institutional Class				$9.74

See notes to financial statements.

52

Annual Report to Shareholders

Statement of Operations

Western Asset Intermediate Plus Bond Portfolio

For the Year Ended March 31, 2006

(Amounts in Thousands)

Investment Income:
Interest	$	2,529
Dividends		42
Total income				$	2,571
Expenses:
Advisory fee		228
Audit and legal fees		85
Custodian fees		62
Directors’ fees and expenses		2
Registration fees		7
Reports to shareholders		17
Transfer agent and shareholder servicing expense		15
Other expenses		16
		432
Less: Fees waived		(174	)
Compensating balance creditsA		(1	)
Total expenses, net of waivers and compensating balance credits					257
Net Investment Income					2,314
Net Realized and Unrealized Gain/(Loss) on Investments:
Realized gain/(loss) on:
Investments		(77	)
Options		63
Futures		(19	)
Foreign currency transactions		(2	)
Swaps		6
					(29	)
Change in unrealized appreciation/(depreciation) on:
Investments, options, futures, and swaps		(814	)
Assets and liabilities denominated in foreign currency		1
					(813	)
Net Realized and Unrealized Loss on Investments					(842	)
Change in Net Assets Resulting From Operations				$	1,472

^A See note 1, compensating balance credits, in the notes to financial statements.

See notes to financial statements.

53

Annual Report to Shareholders

Statement of Changes in Net Assets

Western Asset Intermediate Plus Bond Portfolio

(Amounts in Thousands)

	FOR THE YEARS ENDED
	3/31/06			3/31/05
Change in Net Assets:
Net investment income	$	2,314		$	530
Net realized loss on investments, options, futures, foreign currency transactions and swaps		(29	)		(107	)
Change in unrealized appreciation/(depreciation) of investments, options, futures, swaps and assets and liabilities denominated in foreign currencies		(813	)		(446	)
Change in net assets resulting from operations		1,472			(23	)
Distributions to Shareholders from:
Net investment income		(2,415	)		(543	)
Change in net assets from Fund share transactions		30,214			41,203
Change in net assets		29,271			40,637
Net Assets:
Beginning of year		40,637			—
End of year	$	69,908		$	40,637
Under/(over) distributions of net investment income	$	(36	)	$	18

See notes to financial statements.

54

Annual Report to Shareholders

Financial Highlights

Western Asset Intermediate Plus Bond Portfolio

Contained below is per share operating performance data for a share of common stock outstanding throughout each year shown, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information in the financial statements.

Institutional Class:

	FOR THE YEARS ENDED MARCH 31,
	2006			2005
Net asset value, beginning of year	$	9.86		$	10.00
Investment operations:
Net investment income		.40			.32
Net realized and unrealized loss on investments, options, futures, swaps, and foreign currency transactions		(.11	)		(.14	)
Total from investment operations		.29			.18
Distributions paid from:
Net investment income		(.41	)		(.32	)
Total distributions		(.41	)		(.32	)
Net asset value, end of year	$	9.74		$	9.86
Total return		2.99	%		1.81	%A
Ratios To Average Net Assets:B
Total expenses		.76	%		1.22	%C
Expenses net of waivers, if any		.45	%		.45	%C
Expenses net of all reductions		.45	%		.45	%C
Net investment income		4.1	%		3.1	%C
Supplemental Data:
Portfolio turnover rate		368.6	%		463.5	%
Net assets at end of year (in thousands)	$	69,908		$	40,637

^A Not annualized.

^B Total expenses reflects operating expenses prior to any voluntary expense waivers and/or compensating balance credits. Expenses net of waivers reflects total expenses before compensating balance credits but net of any voluntary expense waivers. Expenses net of all reductions reflects expenses less any compensating balance credits and/or voluntary expense waivers.

^C Annualized.

See notes to financial statements.

55

Annual Report to Shareholders

Management’s Discussion of Fund Performance

Western Asset Core Bond Portfolio

The average annual total returns for the Western Asset Core Bond Portfolio for the period from its inception to March 31, 2006, are presented below, along with the total returns of its benchmark:

			Average Annual Total Returns Periods Ended March 31, 2006
	First Quarter 2006	One Year	Five Years	Ten Years	Since InceptionA
Western Asset Core Bond Portfolio
Institutional Class	-0.39%	2.46%	5.77%	6.82%	8.08%
Financial Intermediary Class	-0.45%	2.19%	5.48%	N/A	6.43%
Lehman Aggregate Bond IndexB	-0.65%	2.26%	5.11%	6.29%	6.16%

The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.westernassetfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.

Short-term interest rates rose significantly over the past 12 months, led by a 200 bps^C increase in the federal funds rate target. Long-term interest rates rose only moderately, resulting in a substantial flattening of the yield curve. Contrary to expectations that they would hike rates to only 4%, the Federal Reserve increased its target funds rate by 25 bps at every FOMC meeting, reaching 4.75% in March. Tighter-than-expected monetary policy pushed real yields up by more than nominal yields, reflecting reduced inflation expectations. The dollar also benefited from higher rates, rising some 7% against a basket of currencies. Mortgage-backed spreads began the period fairly tight, only to widen in the latter half of the period as concerns over extension risk mounted. Investment-grade credit spreads drifted wider, driven largely by fallout from the unexpected downgrade of Ford and GM debt. Thanks to a robust global economy, easy money, and strong gains in commodity prices, emerging market spreads tightened dramatically over the course of the period, leaving yields at record-low levels. High-yield spreads soared in the wake of the GM and Ford downgrades, but recovered dramatically to finish the period unchanged to somewhat tighter. Despite a substantial reduction of monetary policy accommodation during the period, gold rose over 35%, to $584 per ounce, returning to levels not seen since the inflation panic of 1980. Energy and industrial commodity prices also rose, registering substantial gains against all major currencies. Equity markets moved steadily higher over the course of the period.

The impact of market conditions on the Portfolio’s performance was negative for the 12-month period ended March 31, 2006, since interest rates rose significantly. With strategies producing mixed but generally positive results, the Portfolio’s Institutional Class’s total return of 2.46% (net of expenses) exceeded that of its benchmark, the Lehman Aggregate Bond Index, which recorded a total return of 2.26%. Our decision to extend duration moderately as rates rose suffered since rates continued to drift higher. A barbelled exposure to the yield curve in the early part of the period benefited from a flatter curve, but this was more than offset by an emphasis on the front end of the curve during the balance of the period since short-term rates rose more than we expected. A moderately overweight exposure to BBB corporates contributed to returns as spreads narrowed. An underweight exposure to the mortgage-backed sector in the first part of the period benefited as spreads widened, and a shift to an overweight exposure later in the period benefited as spreads stabilized and then tightened modestly. A moderate exposure to Treasury Inflation-Protected Securities had a somewhat negative impact on returns since declining breakeven spreads were only partially offset by a higher-than-expected inflation adjustment for the period.

Western Asset Management Company

^A The Fund’s Institutional Class inception date is September 4, 1990. The Financial Intermediary Class inception date is July 22, 1999. Index returns are for periods beginning August 31, 1990.

^B A market value-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed rate, publicly placed, dollar-denominated, and nonconvertible investment grade debt issues with at least $100 million par amount outstanding and with at least one year to final maturity. The index does not incur fees and expenses and cannot be purchased directly by investors.

^C 100 basis points = 1%.

56

Annual Report to Shareholders

Expense Example

Western Asset Core Bond Portfolio

As a shareholder of the Fund, you incur ongoing costs, including management fees, service (12b-1) fees on Financial Intermediary Class shares, and other Fund expenses. These examples are 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. Each example is based on an investment of $1,000 invested on October 1, 2005, and held through March 31, 2006.

Actual Expenses

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

Hypothetical Example for Comparison Purposes

The second line in the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratios and an assumed rate of return of 5% 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 this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples for the relevant classes that appear in the shareholder reports of other funds.

	Beginning Account Value 10/1/05		Ending Account Value 3/31/06		Expenses PaidA During the Period 10/1/05 to 3/31/06
Institutional Class:
Actual	$	1,000.00	$	995.70	$	2.24
Hypothetical (5% return before expenses)		1,000.00		1,022.69		2.27
Financial Intermediary Class:
Actual	$	1,000.00	$	994.50	$	3.48
Hypothetical (5% return before expenses)		1,000.00		1,021.44		3.53

^A These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio of 0.45% and 0.70% for the Institutional Class and Financial Intermediary Class, respectively, multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (182), and divided by 365.

57

Annual Report to Shareholders

Performance Information

Western Asset Core Bond Portfolio

The graphs compare the Fund’s total returns to that of an appropriate broad-based securities market index. The graphs illustrate the cumulative total return of an initial $1,000,000 investment in the Institutional Class and Financial Intermediary Class of the Fund, for the periods indicated. The lines for the Fund represent the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling securities. The line representing the securities market index does not include any transaction costs associated with buying and selling securities in the index or other investment management or administrative expenses.

Total return measures investment performance in terms of appreciation or depreciation in a Fund’s net asset value per share, plus dividends and any capital gain distributions. It assumes that dividends and distributions were reinvested at the time they were paid. Returns (and the graph and table found below) do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Average annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results.

Bonds are subject to a variety of risks, including interest rate, credit and inflation risk.

Growth of a $1,000,000 Investment—Institutional Class

The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information, please visit www.westernassetfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.

58

Annual Report to Shareholders

Growth of a $1,000,000 Investment — Financial Intermediary Class

The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information, please visit www.westernassetfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.

The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

^A Index returns are for periods beginning July 31, 1999.

59

Annual Report to Shareholders

Performance Information—Continued

Portfolio Composition (as of March 31, 2006)

Standard & Poor’s Debt Ratings^B (as a percentage of the portfolio)

Maturity Schedule (as a percentage of the portfolio)

^B Source: Standard & Poor's.

^C Preferred Stocks does not have a defined maturity date.

The Fund is actively managed. As a result, the composition of the portfolio holdings and sectors are subject to change at any time.

60

Annual Report to Shareholders

Portfolio of Investments

Western Asset Core Bond Portfolio

March 31, 2006

(Amounts in Thousands)

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Long-Term Securities	109.2%
Corporate Bonds and Notes	16.8%
Aerospace/Defense	0.1%
Lockheed Martin Corporation		7.650%	5/1/16	$	135	$	155
Northrop Grumman Corporation		4.079%	11/16/06		2,600		2,581
Raytheon Company		6.000%	12/15/10		32		32	A
Raytheon Company		5.500%	11/15/12		65		65
Raytheon Company		5.375%	4/1/13		705		696	A
United Technologies Corporation		5.400%	5/1/35		1,460		1,376
							4,905
Automotive	0.4%
Ford Motor Company		7.450%	7/16/31		15,410		11,442	A
General Motors Corporation		8.375%	7/15/33		11,020		8,072	A
							19,514
Banking and Finance	3.0%
Boeing Capital Corporation		7.375%	9/27/10		3,240		3,490
Ford Motor Credit Company		6.625%	6/16/08		8,900		8,424	A
Ford Motor Credit Company		7.375%	10/28/09		50,175		47,171
Ford Motor Credit Company		7.875%	6/15/10		6,310		5,916
Ford Motor Credit Company		7.375%	2/1/11		6,435		5,920
Ford Motor Credit Company		7.250%	10/25/11		5,910		5,385
General Motors Acceptance Corporation		6.125%	2/1/07		5,210		5,130	A
General Motors Acceptance Corporation		6.150%	4/5/07		4,150		4,076	A
General Motors Acceptance Corporation		6.125%	8/28/07		8,620		8,361	A
General Motors Acceptance Corporation		5.625%	5/15/09		9,550		8,887	A
General Motors Acceptance Corporation		7.750%	1/19/10		5,355		5,221
General Motors Acceptance Corporation		7.250%	3/2/11		820		777
General Motors Acceptance Corporation		0.000%	6/15/15		13,910		6,072	B
HSBC Finance Corporation		7.875%	3/1/07		2,800		2,861
HSBC Finance Corporation		8.000%	7/15/10		690		753
HSBC Finance Corporation		7.000%	5/15/12		700		748
HSBC Finance Corporation		6.375%	11/27/12		440		456
SB Treasury Company LLC		9.400%	12/29/49		2,930		3,153	C,D
SLM Corporation		4.540%	4/1/09		7,960		7,705	E
Wachovia Capital Trust III		5.800%	3/15/42		6,130		6,022	E
							136,528
Banks	0.2%
Bank of America Corporation		7.400%	1/15/11		2,000		2,162
Bank One Corporation		7.875%	8/1/10		4,500		4,907

61

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Banks—Continued
Bank One Corporation		5.900%	11/15/11	$	2,000	$	2,032
Firstar Bank NA		7.125%	12/1/09		450		476
							9,577
Cable	0.4%
Comcast Corporation		6.500%	1/15/15		1,800		1,844
Comcast Corporation		7.050%	3/15/33		3,130		3,221	A
Comcast MO of Delaware Inc.		9.000%	9/1/08		2,200		2,364
Cox Communications, Inc.		7.875%	8/15/09		9,640		10,207
							17,636
Computer Services and Systems	0.2%
Electronic Data Systems Corporation		7.125%	10/15/09		7,685		8,073
Diversified Financial Services	1.0%
Marsh & McLennan Companies, Inc.		5.150%	9/15/10		38,220		37,358
U.S. Bancorp		3.125%	3/15/08		10,300		9,904
Wells Fargo & Company		5.000%	11/15/14		690		663
							47,925
Electric	1.0%
Dominion Resources, Inc.		4.125%	2/15/08		10,850		10,580
Dominion Resources, Inc.		5.125%	12/15/09		50		49
Dominion Resources, Inc.		4.750%	12/15/10		570		548
Dominion Resources, Inc.		5.700%	9/17/12		2,050		2,031	A
Exelon Corporation		5.625%	6/15/35		4,840		4,393
FirstEnergy Corp.		5.500%	11/15/06		15,290		15,294
FirstEnergy Corp.		6.450%	11/15/11		340		352
FirstEnergy Corp.		7.375%	11/15/31		10,850		12,052
The Cleveland Electric Illuminating Company		5.650%	12/15/13		280		277
The Detroit Edison Company		6.125%	10/1/10		920		941
							46,517
Energy	1.3%
Duke Energy Corporation		6.250%	1/15/12		590		608
Duke Energy Corporation		5.625%	11/30/12		1,330		1,332
Pacific Gas and Electric Company		6.050%	3/1/34		940		920
Progress Energy, Inc.		7.100%	3/1/11		3,170		3,362
TXU Corp.		6.375%	6/15/06		8,380		8,395
TXU Corp.		4.800%	11/15/09		9,000		8,647
TXU Corp.		6.550%	11/15/34		11,020		9,945	A
TXU Energy Co.		7.000%	3/15/13		25,800		26,872
							60,081

62

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Environmental Services	0.5%
Waste Management, Inc.		7.125%	10/1/07	$	10,330	$	10,574
Waste Management, Inc.		6.875%	5/15/09		2,000		2,079
Waste Management, Inc.		6.375%	11/15/12		2,530		2,628
Waste Management, Inc.		7.125%	12/15/17		6,000		6,555
Waste Management, Inc.		7.375%	5/15/29		1,220		1,369
							23,205
Food, Beverage and Tobacco	0.2%
Altria Group, Inc.		7.000%	11/4/13		3,815		4,101
Altria Group, Inc.		7.750%	1/15/27		2,500		2,861
R.J. Reynolds Tobacco Holdings, Inc.		7.875%	5/15/09		3,240		3,378
							10,340
Gas and Pipeline Utilities	0.7%
Dynegy Holdings Inc.		8.750%	2/15/12		11,260		11,767	A
Southern Natural Gas Company		8.000%	3/1/32		7,390		8,105
Tennessee Gas Pipeline Company		8.375%	6/15/32		1,110		1,267	A
The Williams Companies, Inc.		8.125%	3/15/12		3,730		4,005
The Williams Companies, Inc.		7.500%	1/15/31		5,000		5,187
The Williams Companies, Inc.		8.750%	3/15/32		3,240		3,791
							34,122
Health Care	0.2%
Tenet Healthcare Corporation		6.375%	12/1/11		2,500		2,256	A
Tenet Healthcare Corporation		7.375%	2/1/13		9,462		8,634
							10,890
Investment Banking/Brokerage	0.8%
J.P. Morgan & Co. Incorporated		6.805%	2/15/12		2,000		2,108	E
JPMorgan Chase & Co.		5.750%	1/2/13		3,770		3,795
Lehman Brothers Holdings Inc.		4.721%	4/20/07		5,470		5,478	E
Merrill Lynch & Co., Inc.		4.790%	3/12/07		5,210		5,172	E
Merrill Lynch & Co., Inc.		3.375%	9/14/07		11,120		10,822
Morgan Stanley		5.300%	3/1/13		3,380		3,306
The Goldman Sachs Group, Inc.		4.750%	7/15/13		4,370		4,129
							34,810
Investment Management	0.2%
Dryden Investor Trust		7.157%	7/23/08		7,713		7,849	C

63

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Media	1.1%
Clear Channel Communications, Inc.		4.625%	1/15/08	$	1,430	$	1,404
Clear Channel Communications, Inc.		4.250%	5/15/09		2,130		2,028
Clear Channel Communications, Inc.		5.500%	9/15/14		1,650		1,525
Liberty Media Corporation		6.410%	9/17/06		10,573		10,616	E
Liberty Media Corporation		7.875%	7/15/09		9,000		9,470	A
Liberty Media Corporation		3.750%	2/15/30		290		164	G
News America, Inc.		6.200%	12/15/34		605		567
Time Warner Inc.		6.875%	5/1/12		8,270		8,671
Time Warner Inc.		6.950%	1/15/28		2,000		2,028
Time Warner Inc.		7.625%	4/15/31		1,350		1,471
Time Warner Inc.		7.700%	5/1/32		8,565		9,419
Viacom Inc.		5.625%	8/15/12		970		953
							48,316
Medical Care Facilities	0.8%
HCA, Inc.		5.750%	3/15/14		40,360		37,762
Oil and Gas	1.6%
Amerada Hess Corporation		7.300%	8/15/31		12,535		13,956
Conoco Inc.		6.950%	4/15/29		9,950		11,256
ConocoPhillips		4.750%	10/15/12		1,770		1,707	A
Devon Energy Corporation		7.950%	4/15/32		4,145		5,076
El Paso Corporation		7.800%	8/1/31		110		110
El Paso Natural Gas Company		8.375%	6/15/32		3,610		4,082
Kerr-McGee Corporation		6.875%	9/15/11		17,000		17,773
Pemex Project Funding Master Trust		6.625%	6/15/35		12,805		12,370	A,C
Sonat Inc.		7.625%	7/15/11		5,000		5,150	A
XTO Energy, Inc.		7.500%	4/15/12		1,110		1,212
XTO Energy, Inc.		6.250%	4/15/13		980		1,014	A
							73,706
Paper and Forest Products	0.1%
Weyerhaeuser Company		6.750%	3/15/12		3,445		3,586
Pharmaceuticals	N.M.
Bristol-Myers Squibb Company		5.750%	10/1/11		830		839
Photo Equipment and Supplies	1.1%
Eastman Kodak Company		3.625%	5/15/08		17,500		16,334	A
Eastman Kodak Company		7.250%	11/15/13		34,680		33,689
							50,023

64

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Real Estate	N.M.
Socgen Real Estate Co. LLC		7.640%	12/29/49	$	260	$	267	C,D
Retail	0.1%
Target Corporation		4.000%	6/15/13		4,445		4,085	A
Wal-Mart Stores, Inc.		5.450%	8/1/06		150		150
							4,235
Special Purpose	1.3%
ASIF Global Financing XIX		4.900%	1/17/13		2,010		1,939	C
DaimlerChrysler North America Holding Corporation		4.050%	6/4/08		1,530		1,482
DaimlerChrysler North America Holding Corporation		7.200%	9/1/09		1,240		1,295
DaimlerChrysler North America Holding Corporation		5.875%	3/15/11		700		697
Patrons’ Legacy 2003 IV		5.775%	1/23/17		5,800		5,792	C
Rabobank Capital Funding Trust II		5.260%	12/31/49		470		452	C,D
Rabobank Capital Funding Trust III		5.254%	12/29/49		3,030		2,864	C,D
Sprint Capital Corporation		6.000%	1/15/07		31,760		31,911
Sprint Capital Corporation		8.375%	3/15/12		7,935		8,966
Texaco Capital Inc.		5.500%	1/15/09		1,000		1,009
Unilever Capital Corporation		7.125%	11/1/10		1,730		1,841
Verizon Global Funding Corp.		7.250%	12/1/10		2,220		2,357
Verizon Global Funding Corp.		7.375%	9/1/12		5		6
							60,611
Telecommunications	0.1%
AT&T Inc.		5.100%	9/15/14		4,960		4,708
BellSouth Corporation		4.750%	11/15/12		440		416
GTE Hawaiian Telephone Company, Inc.		7.375%	9/1/06		700		700
							5,824
Transportation	0.4%
Continental Airlines, Inc.		6.900%	1/2/18		312		318
Continental Airlines, Inc.		6.545%	2/2/19		2,569		2,603
Delta Air Lines, Inc.		6.718%	1/2/23		3,947		3,987
Delta Air Lines, Inc.		7.111%	9/18/11		500		499
Southwest Airlines Co.		5.496%	11/1/06		9,000		9,014
							16,421
Total Corporate Bonds and Notes (Identified Cost—$789,708)							773,562

65

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Asset-Backed Securities	2.2%
Fixed Rate Securities	0.3%
Advanta Mortgage Loan Trust 1999-3		7.590%	6/25/14	$	242	$	243
Conseco Finance Securitizations Corp. 2000-5		7.960%	2/1/32		4,700		3,850
Equity One ABS, Inc. 2003-3		4.995%	12/25/33		6,796		6,762
Green Tree Financial Corporation 1996-5		8.100%	7/15/26		789		127
Green Tree Home Improvement Loan Trust 1997-D		7.450%	9/15/28		416		416
							11,398
Indexed SecuritiesE	1.9%
AAA Trust 2005-2		4.918%	11/26/35		5,302		5,308	C
Aegis Asset Backed Securities Trust 2005-2		4.918%	6/25/35		10,992		10,993
Aesop Funding II LLC 2003-4A		5.006%	8/20/07		11,583		11,589	C
Amortizing Residential Collateral Trust 2002-BC1M		5.098%	1/1/32		326		326
Asset Backed Funding Certificates 2002-SB1		5.248%	12/25/30		2,323		2,329
Brazos Higher Education Authority, Inc. 2005-1		4.990%	9/26/16		17,777		17,759
CDC Mortgage Capital Trust 2002-HE1		5.128%	1/25/33		957		958
CIT Group Home Equity Loan Trust 2002-1		5.108%	3/25/33		779		781
Countrywide Asset-Backed Certificates 2003-BC3		5.128%	9/25/33		1,272		1,273
Countrywide Asset-Backed Certificates 2005-AB1		4.918%	8/25/35		9,624		9,626
Fleet Home Equity Loan Trust 2003-1		5.026%	1/20/33		5,016		5,021
Long Beach Mortgage Loan Trust 2000-1		5.300%	1/21/31		361		361
Provident Bank Home Equity Loan Trust 1999-3		5.208%	1/25/31		1,234		1,235
Residential Asset Mortgage Products, Inc. 2003-RS2		5.158%	3/25/33		459		459
Residential Asset Securities Corporation 2001-KS2		5.048%	6/25/31		663		663
Residential Asset Securities Corporation 2001-KS3		5.048%	9/25/31		265		265
Structured Asset Investment Loan Trust 2005-3		4.948%	4/25/35		18,351		18,354
							87,300
Stripped Securities	N.M.
Diversified REIT Trust 1999-1A		0.532%	3/18/11		109,631		1,439	H1
Total Asset-Backed Securities (Identified Cost—$101,540)							100,137

66

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Mortgage-Backed Securities	20.9%
Fixed Rate Securities	3.7%
Asset Securitization Corporation 1996-D2		6.920%	2/14/29	$	1,050	$	1,053
Banc of America Commercial Mortgage Inc. 2005-5		5.115%	10/10/45		6,440		6,229
Criimi Mae Commercial Mortgage Trust 1998-C1		7.000%	6/2/33		7,350		7,451	C
Deutsche Mortgage and Asset Receiving Corporation 1998-C1		6.538%	6/15/31		8,671		8,806
GS Mortgage Securities Corporation II 2005-GG4		4.680%	7/10/39		12,900		12,337
J.P. Morgan Chase Commercial Mortgage Pass-Through Certificates, Series 2005-CIBC12		4.895%	9/12/37		1,610		1,531
LB-UBS Commercial Mortgage Trust 2005-C3 A5		4.739%	7/15/30		13,356		12,582
LB-UBS Commercial Mortgage Trust 2005-C3 AAB		4.664%	7/15/30		15,000		14,305
LB-UBS Commercial Mortgage Trust 2005-C5		4.954%	9/15/30		10,800		10,341
MASTR Reperforming Loan Trust 2005-1		7.000%	8/25/34		13,294		13,539	C
MASTR Specialized Loan Trust 2005-1		6.500%	8/25/34		1,601		1,575	C
Merrill Lynch Mortgage Investors, Inc. 1996-C2		6.960%	11/21/28		61		61
Morgan Stanley Capital I 2005-HQ6		4.989%	8/13/42		13,450		12,890
Residential Asset Mortgage Products, Inc. 2005-SL2		7.500%	2/25/32		6,360		6,521
Residential Asset Securitization Trust 2003-A14		4.750%	2/25/19		61,769		59,182
							168,403
Indexed SecuritiesE	16.0%
Banc of America Funding Corporation 2005-E		4.916%	6/20/35		31,766		32,143
Chevy Chase Mortgage Funding Corporation 2003-2A		5.198%	5/25/34		4,671		4,680
Countrywide Alternative Loan Trust 2005-14		5.028%	5/25/35		19,441		19,460
Countrywide Alternative Loan Trust 2005-17 1A1		5.078%	7/25/35		24,867		24,927
Countrywide Alternative Loan Trust 2005-17 2A1		5.058%	7/25/35		43,587		43,572
Countrywide Alternative Loan Trust 2005-38		5.168%	9/25/35		780		784
Countrywide Asset-Backed Certificates 2005-3		5.108%	4/25/35		24,892		24,938
Countrywide Home Loans 2005-9 1A1		5.118%	5/25/35		27,111		27,212
Countrywide Home Loans 2005-9 2A1		5.038%	5/25/35		17,615		17,613
Credit-Based Asset Servicing and Securitization 2001-CB2		5.108%	8/25/33		903		903

67

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Mortgage-Backed Securities—Continued
Indexed Securities—Continued
Granite Mortgages PLC 2003-1		4.791%	1/20/20	$	3,928	$	3,934	I
Greenpoint Mortgage Funding Trust 2005-AR1		5.038%	6/25/45		21,234		21,328
Greenpoint Mortgage Funding Trust 2005-AR4		5.078%	10/25/45		7,225		7,246
GSMPS Mortgage Loan Trust 2005-RP2		5.168%	3/25/35		24,803		24,906	C
Harborview Mortgage Loan Trust 2005-7		5.146%	6/19/45		34,298		34,480
Impac CMB Trust 2003-7		5.458%	8/25/33		1,810		1,811
Lehman XS Trust 2006-2N		5.078%	2/25/46		27,902		27,955
Lehman XS Trust 2005-5N		5.118%	11/25/35		17,101		17,106
Medallion Trust 2000-1G		4.799%	7/12/31		184		184	I
Medallion Trust 2000-2G		5.130%	12/18/31		1,315		1,317	I
Medallion Trust 2003-1G		5.120%	12/21/33		3,192		3,201	I
MLCC Mortgage Investors, Inc. 2003-B		5.158%	4/25/28		5,983		6,018
MSDWCC Heloc Trust 2005-1		5.008%	7/25/17		3,332		3,333
People’s Choice Home Loan Securities Trust 2005-2		4.928%	5/25/35		3,275		3,276
Thornburg Mortgage Securities Trust 2006-1		4.988%	1/25/36		67,736		67,601
Thornburg Mortgage Securities Trust 2005-2 A1		5.038%	7/25/45		14,038		14,031
Thornburg Mortgage Securities Trust 2005-2 A2		5.048%	7/25/45		18,185		18,195
WaMu Mortgage Pass-Through Certificates, Series 2005-AR6 A1A		5.048%	4/25/45		24,447		24,442
WaMu Mortgage Pass-Through Certificates, Series 2005-AR8 1A		5.088%	7/25/45		32,358		32,370
WaMu Mortgage Pass-Through Certificates, Series 2005-AR11		5.138%	8/25/45		74,180		74,564
WaMu Mortgage Pass-Through Certificates, Series 2005-AR13 A1A1		5.108%	10/25/45		32,004		32,155
WaMu Mortgage Pass-Through Certificates, Series 2005-AR13 B10		5.781%	10/25/45		4,189		3,318
WaMu Mortgage Pass-Through Certificates, Series 2005-AR17		5.108%	12/25/45		20,374		20,425
WaMu Mortgage Pass-Through Certificates, Series 2005-AR19 A1A1		5.088%	12/25/45		46,720		46,809
WaMu Mortgage Pass-Through Certificates, Series 2005-AR19 A1A2		5.108%	12/25/45		51,119		51,242
							737,479
Stripped Securities	N.M.
FFCA Secured Lending Corporation 1999-1A		1.468%	9/18/25		8,060		304	C,H1
LB-UBS Commercial Mortgage Trust 2001-C3		0.977%	6/15/36		18,894		737	C,H1
Structured Mortgage Asset Residential Trust 1991-8		0.013%	1/25/23		625		0.1H1
							1,041

68

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Mortgage-Backed Securities—Continued		��
Variable Rate SecuritiesF	1.2%
GE Capital Commercial Mortgage Corporation 2005-C4		5.331%	11/10/45	$	6,650	$	6,560
IndyMac INDX Mortgage Loan Trust 2005-AR15		5.099%	9/25/35		9,511		9,154
J.P. Morgan Chase Commercial Mortgage Pass-Through Certificates, Series 2005-CB13		5.295%	1/12/43		7,500		7,369
Merrill Lynch Mortgage Trust 2005-CKI1		5.245%	11/12/37		23,750		23,315
Morgan Stanley Mortgage Loan Trust 2005-3AR		5.244%	7/25/35		7,113		7,080
Wachovia Bank Commercial Mortgage Trust		5.118%	7/15/42		4,000		3,861
							57,339
Total Mortgage-Backed Securities (Identified Cost—$972,001)							964,262
U.S. Government and Agency Obligations	16.2%
Fixed Rate Securities	13.6%
Fannie Mae		4.875%	4/15/09		11,890		11,809	A
Fannie Mae		5.200%	11/8/10		10,910		10,814
Federal Home Loan Bank		7.250%	2/15/07		100		102
Freddie Mac		4.625%	2/21/08		7,540		7,478
Freddie Mac		4.750%	1/18/11		6,560		6,447	A
Freddie Mac		5.250%	2/24/11		21,300		21,197
Freddie Mac		5.125%	4/18/11		5,080		5,072
Tennessee Valley Authority		6.750%	11/1/25		2,560		2,991
Tennessee Valley Authority		7.125%	5/1/30		2,450		3,034
United States Treasury Bonds		7.500%	11/15/16		1,490		1,801	A
United States Treasury Bonds		7.250%	8/15/22		13,010		16,133	A
United States Treasury Bonds		6.250%	8/15/23		1,980		2,246	A
United States Treasury Bonds		2.000%	1/15/26		18,431		17,466	A
United States Treasury Bonds		5.250%	11/15/28		5,630		5,781	A
United States Treasury Bonds		5.250%	2/15/29		31,240		32,077	A
United States Treasury Bonds		6.250%	5/15/30		17,115		20,002	A
United States Treasury Bonds		5.375%	2/15/31		530		558	A
United States Treasury Bonds		4.500%	2/15/36		56,767		53,263	A
United States Treasury Notes		2.750%	6/30/06		10,360		10,312	A
United States Treasury Notes		2.500%	9/30/06		89,540		88,522	A
United States Treasury Notes		3.000%	2/15/08		12,760		12,343	A
United States Treasury Notes		3.750%	5/15/08		2,840		2,779	A
United States Treasury Notes		3.125%	10/15/08		12,680		12,170	A
United States Treasury Notes		4.375%	11/15/08		5,590		5,526	A
United States Treasury Notes		4.500%	2/15/09		4,270		4,233	A

69

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
U.S. Government and Agency Obligations—Continued
Fixed Rate Securities—Continued
United States Treasury Notes		2.625%	3/15/09	$	10,510	$	9,882	A
United States Treasury Notes		3.500%	8/15/09		4,700		4,508	A
United States Treasury Notes		3.375%	10/15/09		750		715	A
United States Treasury Notes		3.500%	12/15/09		18,492		17,671	A
United States Treasury Notes		3.625%	1/15/10		39,670		38,031	A
United States Treasury Notes		3.500%	2/15/10		12,250		11,678	A
United States Treasury Notes		4.125%	8/15/10		4,660		4,532	A
United States Treasury Notes		3.875%	9/15/10		16,010		15,400	A
United States Treasury Notes		4.250%	10/15/10		2,530		2,471
United States Treasury Notes		4.500%	11/15/10		77,580		76,537	A
United States Treasury Notes		4.500%	2/28/11		89,680		88,373	A
United States Treasury Notes		2.000%	1/15/16		439		426	A
United States Treasury Notes		4.500%	2/15/16		30		29	A
							624,409
Treasury Inflation-Protected SecuritiesJ	2.6%
United States Treasury Inflation-Protected Security		3.375%	1/15/07		14,828		14,987	A
United States Treasury Inflation-Protected Security		3.625%	1/15/08		601		618	A
United States Treasury Inflation-Protected Security		3.875%	1/15/09		8,849		9,264	A
United States Treasury Inflation-Protected Security		3.375%	1/15/12		7,816		8,286	A
United States Treasury Inflation-Protected Security		1.875%	7/15/13		14,928		14,496	A
United States Treasury Inflation-Protected Security		2.000%	1/15/14		633		618	A
United States Treasury Inflation-Protected Security		2.000%	7/15/14		32		31	A
United States Treasury Inflation-Protected Security		2.375%	1/15/25		51,767		52,024	A
United States Treasury Inflation-Protected Security		3.625%	4/15/28		12,331		15,157	A
United States Treasury Inflation-Protected Security		3.875%	4/15/29		3,859		4,953	A
							120,434
Total U.S. Government and Agency Obligations (Identified Cost—$756,475)							744,843

70

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
U.S. Government Agency Mortgage-Backed Securities	47.9%
Fixed Rate Securities	45.3%
Fannie Mae		7.000%	9/1/07 to 2/1/33	$	12,074	$	12,444
Fannie Mae		4.610%	10/10/13		30,420		28,902
Fannie Mae		8.000%	5/1/15		47		50
Fannie Mae		6.000%	11/1/16 to 10/1/35		34,211		34,249
Fannie Mae		5.500%	4/1/18 to 10/1/35		64,016		62,609
Fannie Mae		4.500%	7/1/18 to 9/1/35		13,979		13,067
Fannie Mae		4.000%	8/1/20 to 9/1/20		6,243		5,838
Fannie Mae		5.000%	8/1/20 to 1/1/36		160,657		153,512
Fannie Mae		7.500%	6/1/25 to 7/1/29		826		863
Fannie Mae		6.500%	7/1/28 to 7/1/35		23,932		24,473
Fannie Mae		5.000%	12/1/36		656,350		624,763	K
Fannie Mae		5.000%	12/1/36		60,400		57,455	K
Fannie Mae		5.500%	12/1/36		500		487	K
Fannie Mae		5.500%	12/1/36		404,800		395,060	K
Fannie Mae		6.000%	12/1/36		281,850		281,410	K
Fannie Mae		6.500%	12/1/36		90,850		92,554	K
Freddie Mac		9.750%	7/1/08		13		13
Freddie Mac		6.000%	3/1/09 to 5/1/29		1,635		1,655
Freddie Mac		4.125%	10/18/10		2,490		2,388	A
Freddie Mac		4.650%	10/10/13		34,390		32,659
Freddie Mac		5.500%	12/1/13 to 8/1/35		36,344		35,530
Freddie Mac		9.300%	4/15/19		181		180
Freddie Mac		5.000%	9/1/20 to 8/1/33		66,721		64,116
Freddie Mac		7.000%	4/1/24 to 5/1/32		3,956		4,074
Freddie Mac		6.500%	6/1/32		75		76
Freddie Mac		5.625%	11/23/35		16,370		15,716
Government National Mortgage Association		10.000%	11/15/09		0.3		0.3
Government National Mortgage Association		8.000%	10/15/16 to 7/15/17		233		246
Government National Mortgage Association		7.500%	10/15/22 to 8/15/32		465		486
Government National Mortgage Association		7.000%	6/15/23 to 5/15/32		516		538
Government National Mortgage Association		6.500%	10/15/23 to 3/15/33		23,826		24,710
Government National Mortgage Association		6.000%	3/15/26 to 8/15/35		42,198		42,713

71

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
U.S. Government Agency Mortgage-Backed Securities—Continued
Fixed Rate Securities—Continued
Government National Mortgage Association		5.500%	1/15/33	$	274	$	271
Government National Mortgage Association		5.000%	6/15/35 to 9/15/35		72,591		70,340
							2,083,447
Stripped Securities	N.M.
Fannie Mae		9.500%	2/1/17		17		4	H1
Fannie Mae		1009.300%	2/25/20		0		0.3H1
Fannie Mae		1009.300%	8/25/21		1		17	H1
Fannie Mae		0.000	5/25/22		156		132	H2
Financing Corporation		0.000%	4/5/19		1,150		578	H2
Freddie Mac		10.000%	3/1/21		119		33	H1
Freddie Mac		0.000%	7/15/22		19		16	H2
							780
Variable Rate SecuritiesF	2.6%
Fannie Mae		4.778%	6/1/35		17,607		17,517
Fannie Mae		4.340%	8/1/35		1,545		1,520
Fannie Mae		4.619%	9/1/35		9,030		8,932
Fannie Mae		4.706%	9/1/35		4,045		4,012
Fannie Mae		4.598%	10/1/35		3,451		3,415
Fannie Mae		4.680%	10/1/35		3,871		3,837
Fannie Mae		4.739%	10/1/35		5,764		5,725
Fannie Mae		4.841%	10/1/35		3,839		3,824
Fannie Mae		5.500%	7/1/34		924		903
Fannie Mae		5.655%	10/1/35		20,342		20,819
Fannie Mae		5.656%	11/1/35		8,475		8,674
Fannie Mae		5.651%	11/1/35		8,506		8,706
Fannie Mae		5.654%	11/1/35		8,459		8,658
Fannie Mae		5.657%	11/1/35		8,449		8,647
Fannie Mae		5.661%	11/1/35		8,427		8,625
Freddie Mac		4.884%	10/1/35		6,221		6,184
							119,998
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost—$2,228,932)							2,204,225

72

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Yankee BondsI	4.9%
Aerospace/Defense	0.1%
Systems 2001 Asset Trust		6.664%	9/15/13	$	3,167	$	3,301	C
Banking and Finance	0.2%
AIFUL CORPORATION		5.000%	8/10/10		4,030		3,899	C
MUFG Capital Finance 1 Limited		6.346%	7/25/49		4,660		4,586	A,D
							8,485
Banks	0.3%
Shinsei Fin Cayman Ltd		6.418%	1/29/49		7,240		7,126	A,C,D
The Korea Development Bank		4.250%	11/13/07		6,045		5,939
							13,065
Cable	0.1%
Rogers Cable Inc.		5.500%	3/15/14		4,340		4,112
Electric	N.M.
Hydro-Quebec		6.300%	5/11/11		570		594
Foreign Governments	2.0%
Quebec Province		5.500%	4/11/06		200		200
Russian Federation		5.000%	3/31/30		49,315		54,109	D
United Mexican States		5.625%	1/15/17		818		792	A
United Mexican States		8.300%	8/15/31		6,100		7,372
United Mexican States		7.500%	4/8/33		28,342		31,601
							94,074
Manufacturing (Diversified)	1.1%
Tyco International Group SA		5.800%	8/1/06		10,250		10,262
Tyco International Group SA		6.750%	2/15/11		430		447
Tyco International Group SA		6.375%	10/15/11		1,230		1,263
Tyco International Group SA		6.000%	11/15/13		2,300		2,310
Tyco International Group SA		7.000%	6/15/28		3,700		3,893
Tyco International Group SA		6.875%	1/15/29		29,900		31,219
							49,394
Mining	N.M.
Corporacion Nacional del Cobre-Codelco		4.750%	10/15/14		1,750		1,638	C
Oil and Gas	0.1%
YPF Sociedad Anonima		7.750%	8/27/07		3,250		3,299

73

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES			VALUE
Yankee Bonds—Continued
Special Purpose	0.6%
Anadarko Finance Company		6.750%	5/1/11	$	1,590		$	1,675
Conoco Funding Company		6.350%	10/15/11		400			417
Conoco Funding Company		7.250%	10/15/31		350			409
CVRD Finance Ltd.		5.250%	10/15/07		3,503			3,503	C,E
HSBC Capital Funding LP		4.610%	4/27/49		1,630			1,497	A,C,D
Petronas Capital Ltd.		7.875%	5/22/22		1,340			1,586	C
Petrozuata Finance, Inc.		8.220%	4/1/17		3,950			3,891	C
Resona Preferred Global Securities (Cayman) Ltd.		7.191%	7/30/49		13,670			14,263	C,D
								27,241
Telecommunications	0.4%
British Telecommunications plc		8.375%	12/15/10		1,755			1,957
Deutsche Telekom International Finance B.V.		5.750%	3/23/16		5,370			5,246
Koninklijke (Royal) KPN NV		8.000%	10/1/10		8,240			8,845
Telecom Italia Capital S.p.A.		5.250%	11/15/13		965			914
Telecom Italia Capital S.p.A.		4.950%	9/30/14		2,570			2,365
Telecom Italia Capital S.p.A.		5.250%	10/1/15		2,060			1,917
								21,244
Total Yankee Bonds (Identified Cost—$216,892)								226,447
Preferred Stocks	0.3%
Fannie Mae		5.375%			0	shs		4,216	G
General Motors Corporation		5.250%			368			5,980	G
Home Ownership Funding Corporation		13.331%			6			1,323	C,D
Home Ownership Funding Corporation II		13.338%			5			1,187	C,D
Total Preferred Stocks (Identified Cost—$19,963)								12,706
Total Long-Term Securities (Identified Cost—$5,085,511)								5,026,182

74

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES			VALUE
Investment of Collateral From Securities Lending	18.0%
State Street Navigator Securities Lending Prime Portfolio					827,860	shs	$	827,860
Total Investment of Collateral From Securities Lending (Identified Cost—$827,860)								827,860
Short-Term Securities	22.2%
U.S. Government and Agency Obligations	19.7%
Fannie Mae		0.000%	5/15/06	$	4,736			4,710	B,L
Fannie Mae		0.000%	5/31/06		30,000			29,780	A,B
Freddie Mac		0.000%	4/3/06		300,000			299,923	B
Freddie Mac		0.000%	4/3/06		500,000			499,871	B
United States Treasury Bills		0.000%	4/6/06		75,160			75,120	A,B
								909,404
Options PurchasedM	0.3%
Deutsche Bank Swaption Futures Call, May 2006, Strike Price $5.04					83,500,000	N		26
Eurodollar Futures Call, December 2006, Strike Price $94.50					2,305	N		1,974
Eurodollar Futures Call, June 2006, Strike Price $94.50					3,575	N		2,636
Eurodollar Futures Call, June 2006, Strike Price $95.00					485	N		18
Eurodollar Futures Call, September 2006, Strike Price $94.00					1,863	N		3,423
Eurodollar Futures Call, September 2006, Strike Price $94.50					2,214	N		1,564
Eurodollar Futures Put, June 2006, Strike Price $94.00					215	N		0
Goldman Sachs Swaption Futures Call, December 2006, Strike Price $4.848					260,550,000	N		794
Goldman Sachs Swaption Futures Call, May 2006, Strike Price $4.875					250,000,000	N		40
Goldman Sachs Swaption Futures Call, May 2006, Strike Price $4.97					101,500,000	N		17
Goldman Sachs Swaption Futures Call, May 2006, Strike Price $5.01					71,200,000	N		56
Goldman Sachs Swaption Futures Call, May 2006, Strike Price $5.03					71,200,000	N		62

75

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Bond Portfolio—Continued

	% OF NET ASSETS	PAR			VALUE
Short-Term Securities—Continued
Options Purchased—Continued
Goldman Sachs Swaption Futures Call, August 2006, Strike Price $5.07			74,900,000	N	$	298
U.S. Treasury Bond Futures Call, June 2006, Strike Price $111.00			2	N		1
U.S. Treasury Note Futures Call, June 2006, Strike Price $103.00			1,579	N		2,418
						13,327
Repurchase Agreements	2.2%
Goldman, Sachs & Company 4.77%, dated 3/31/06, to be repurchased at $99,952 on 4/3/06 (Collateral; $58,295 Fannie Mae notes, 4.625% to 7.125%, due 1/15/08 to 1/15/30, value $63,125; $40,000 Federal Home Loan Bank bonds, 4.375%, due 9/17/10, value $38,880)		$	99,912			99,912
Total Short-Term Securities (Identified Cost—$1,037,374)						1,022,643
Total Investments (Identified Cost—$6,950,745)	149.4%					6,876,685
Other Assets Less Liabilities	(31.4)%					(1,444,758	)
Obligation to Return Collateral for Securities Loaned	(18.0)%					(827,860	)
Net Assets	100.0%				$	4,604,067

	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Futures Contracts PurchasedM
Eurodollar Futures	June 2006	682	$	(1,171	)
Eurodollar Futures	September 2006	3,651		(1,707	)
Eurodollar Futures	December 2006	366		(454	)
Eurodollar Futures	March 2008	509		(231	)
U.S. Treasury Bond Futures	June 2006	1,258		(2,464	)
U.S. Treasury Note Futures	June 2006	462		(171	)
U.S. Treasury Note Futures	June 2006	961		(926	)
			$	(7,124	)
Options WrittenM
Deutsche Bank Swaption Call, Strike Price $5.12	May 2006	33,400,000		347
Eurodollar Futures Call, Strike Price $94.875	September 2006	182		0.2
Eurodollar Futures Call, Strike Price $95.00	September 2006	2,723		253
Eurodollar Futures Call, Strike Price $95.25	September 2006	392		40

76

Annual Report to Shareholders

	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Options Written—Continued
Eurodollar Futures Call, Strike Price $95.50	September 2006	1,290	$	395
Eurodollar Futures Put, Strike Price $95.75	May 2006	76		(142	)
Goldman Sachs Swaption Call, Strike Price $4.946	December 2006	121,155,750		1,767
Goldman Sachs Swaption Call, Strike Price $5.04	May 2006	33,850,000		371
U.S. Treasury Bond Futures Call, Strike Price $110.00	May 2006	325		28
U.S. Treasury Bond Futures Call, Strike Price $113.00	May 2006	1,582		881
U.S. Treasury Bond Futures Call, Strike Price $113.00	August 2006	342		162
U.S. Treasury Bond Futures Call, Strike Price $114.00	May 2006	174		52
U.S. Treasury Bond Futures Call, Strike Price $116.00	May 2006	839		685
U.S. Treasury Bond Futures Put, Strike Price $109.00	May 2006	630		(208	)
U.S. Treasury Bond Futures Put, Strike Price $110.00	May 2006	346		(309	)
U.S. Treasury Note Futures Call, Strike Price $105.00	May 2006	266		(1	)
U.S. Treasury Note Futures Call, Strike Price $106.00	May 2006	330		76
U.S. Treasury Note Futures Call, Strike Price $107.00	May 2006	340		43
U.S. Treasury Note Futures Call, Strike Price $108.00	May 2006	1,241		201
U.S. Treasury Note Futures Call, Strike Price $108.00	August 2006	425		(7	)
U.S. Treasury Note Futures Call, Strike Price $109.00	May 2006	68		28
U.S. Treasury Note Futures Call, Strike Price $109.00	August 2006	374		29
U.S. Treasury Note Futures Call, Strike Price $110.00	May 2006	1,706		870
U.S. Treasury Note Futures Call, Strike Price $110.00	August 2006	440		175
U.S. Treasury Note Futures Call, Strike Price $111.00	May 2006	337		212
U.S. Treasury Note Futures Call, Strike Price $112.00	May 2006	771		304
U.S. Treasury Note Futures Put, Strike Price $106.00	May 2006	250		(32	)
U.S. Treasury Note Futures Put, Strike Price $107.00	May 2006	174		(126	)
			$	6,094

^A All or a portion of this security is on loan. See note 4 to the notes to financial statements.

^B Zero Coupon Bond – A bond with no periodic interest payments which is sold at such a discount as to produce a current yield to maturity.

^C Rule 144a Security – A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities, which the Fund’s investment adviser has determined to be liquid, represent 3.1% of net assets.

^D Stepped Coupon Security – A security with a predetermined schedule of interest or dividend rate changes, at which time it begins to accrue interest or pay dividends.

^E Indexed Security – The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”), the Consumer Price Index (“CPI”), or the Eleventh District Cost of Funds Index (“COFI”) rate. The coupon rates are the rates as of March 31, 2006.

^F The coupon rates shown on variable rate securities are the rates at March 31, 2006. These rates vary with the weighted average coupon of the underlying loans.

^G Convertible Security – The security may be converted into the issuer’s common stock.

^H Securities with interest-only or principal-only payment streams, denoted by a 1 or 2, respectively. For interest-only securities, the amount shown as principal is the notional balance used to calculate the amount of interest due.

^I Yankee Bond – A dollar denominated bond issued in the U.S. by foreign entities.

^J Treasury Inflation-Protected Security – A security whose principal value is adjusted daily in accordance with changes to the Consumer Price Index for All Urban Consumers. Interest is calculated on the basis of the current adjusted principal value.

^K When-issued Security – A security purchased on a delayed delivery basis. Final settlement amount and maturity date have not yet been announced.

77

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Bond Portfolio—Continued

^L All or a portion of this security is pledged as collateral to cover futures and options contracts.

^M Options and futures are described in more detail in the notes to financial statements.

^N Par represents actual number of contracts.

N.M. – Not meaningful.

See notes to financial statements.

78

Annual Report to Shareholders

Statement of Assets and Liabilities

Western Asset Core Bond Portfolio

March 31, 2006

(Amounts in Thousands)

Assets:
Investment securities at market value (Identified Cost—$5,913,371)A			$	5,854,042
Short-term securities at value (Identified Cost—$1,037,374)				1,022,643
Cash				320
Receivable for securities sold				434,598
Receivable for fund shares sold				10,791
Interest and dividends receivable				37,543
Futures variation margin receivable				152
Other assets				1
Total assets				7,360,090
Liabilities:
Payable for securities purchased	$	1,899,121
Payable for fund shares repurchased		1,779
Accrued management fee		1,597
Accrued distribution fee		78
Income distribution payable		972
Interest expense payable		3,765
Obligation to return collateral for securities loaned		827,860
Options written (Proceeds—$10,926)		4,832
Swap contracts at value		15,537
Accrued expenses		482
Total liabilities				2,756,023
Net Assets			$	4,604,067
Net assets consist of:
Accumulated paid-in-capital applicable to:
384,055 Institutional Class shares outstanding			$	4,347,295
32,654 Financial Intermediary Class shares outstanding				372,292
Undistributed net investment income				3,688
Accumulated net realized loss on investments, options, futures and swaps				(36,106	)
Unrealized appreciation/(depreciation) of investments, options, futures and swaps				(83,102	)
Net Assets			$	4,604,067
Net Asset Value Per Share:
Institutional Class				$11.05
Financial Intermediary Class				$11.05

^A The market value of securities on loan is $811,288.

See notes to financial statements.

79

Annual Report to Shareholders

Statement of Operations

Western Asset Core Bond Portfolio

For the Year Ended March 31, 2006

(Amounts in Thousands)

Investment Income:
Interest	$	195,037
Dividends		2,626
Total income				$	197,663
Expenses:
Advisory fee		16,884
Distribution and service fees		798
Audit and legal fees		228
Custodian fees		780
Directors’ fees and expenses		189
Registration fees		172
Reports to shareholders		45
Transfer agent and shareholder servicing expense:
Institutional Class		72
Financial Intermediary Class		19
Other expenses		91
		19,278
Less: Compensating balance creditsA		(12	)
Total expenses, net of compensating balance credits					19,266
Net Investment Income					178,397
Net Realized and Unrealized Gain/(Loss) on Investments:
Realized gain/(loss) on:
Investments		(37,839	)
Options		18,083
Futures		(29,732	)
Swaps		22,249
					(27,239	)
Change in unrealized appreciation/(depreciation) on investments options, futures and swaps					(66,457	)
Net Realized and Unrealized Loss on Investments					(93,696	)
Change in Net Assets Resulting From Operations				$	84,701

^A See note 1, compensating balance credits, in the notes to financial statements.

See notes to financial statements.

80

Annual Report to Shareholders

Statement of Changes in Net Assets

Western Asset Core Bond Portfolio

(Amounts in Thousands)

	FOR THE YEARS ENDED
	3/31/06			3/31/05
Change in Net Assets:
Net investment income	$	178,397		$	94,566
Net realized gain/(loss) on investments, options, futures, and swaps		(27,239	)		21,564
Change in unrealized appreciation/(depreciation) of investments, options, futures, and swaps		(66,457	)		(68,316	)
Change in net assets resulting from operations		84,701			47,814
Distributions to Shareholders from:
Net investment income:
Institutional Class		(173,004	)		(88,562	)
Financial Intermediary Class		(13,718	)		(5,081	)
Net realized gain on investments:
Institutional Class		(1,163	)		(62,444	)
Financial Intermediary Class		(95	)		(3,343	)
Change in net assets from Fund share transactions:
Institutional Class		1,060,406			1,195,269
Financial Intermediary Class		103,640			150,821
Change in net assets		1,060,767			1,234,474
Net Assets:
Beginning of year		3,543,300			2,308,826
End of year	$	4,604,067		$	3,543,300
Under/(over) distributions of net investment income	$	3,688		$	(482	)

See notes to financial statements.

81

Annual Report to Shareholders

Financial Highlights

Western Asset Core Bond Portfolio

Contained below is per share operating performance data for a share of common stock outstanding throughout each year shown, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information in the financial statements.

Institutional Class:

	FOR THE YEARS ENDED MARCH 31,
	2006			2005			2004			2003			2002
Net asset value, beginning of year	$	11.29		$	11.81		$	11.57		$	11.01		$	11.09
Investment operations:
Net investment income		.49			.39			.41			.55			.62
Net realized and unrealized gain/(loss) on investments, options, futures, and swaps		(.22	)		(.21	)		.45			.65			.05
Total from investment operations		.27			.18			.86			1.20			.67
Distributions paid from:
Net investment income		(.51	)		(.39	)		(.44	)		(.55	)		(.62	)
Net realized gain on investments		—B			(.31	)		(.18	)		(.09	)		(.13	)
Total distributions		(.51	)		(.70	)		(.62	)		(.64	)		(.75	)
Net asset value, end of year	$	11.05		$	11.29		$	11.81		$	11.57		$	11.01
Total return		2.46	%		1.68	%		7.64	%		11.19	%		6.14	%
Ratios To Average Net Assets:A
Total expenses		.45	%		.46	%		.49	%		.49	%		.52	%
Expenses net of waivers, if any		.45	%		.46	%		.49	%		.49	%		.50	%
Expenses net of all reductions		.45	%		.46	%		.49	%		.49	%		.50	%
Net investment income		4.3	%		3.4	%		3.5	%		4.9	%		5.6	%
Supplemental Data:
Portfolio turnover rate		540.4	%		407.2	%		464.6	%		438.6	%		595.2	%
Net assets at end of year (in thousands)	$	4,243,248		$	3,277,782		$	2,187,219		$	1,400,431		$	971,544

^A Total expenses reflects operating expenses prior to any voluntary expense waivers and/or compensating balance credits. Expenses net of waivers reflects total expenses before compensating balance credits but net of any voluntary expense waivers. Expenses net of all reductions reflects expenses less any compensating balance credits and/or voluntary expense waivers.

^B $(.004) per share.

See notes to financial statements.

82

Annual Report to Shareholders

Financial Intermediary Class:

	FOR THE YEARS ENDED MARCH 31,
	2006			2005			2004			2003			2002
Net asset value, beginning of year	$	11.29		$	11.81		$	11.57		$	11.02		$	11.10
Investment operations:
Net investment income		.47			.38			.40			.53			.59
Net realized and unrealized gain/(loss) on investments, options, futures, and swaps		(.22	)		(.23	)		.43			.63			.06
Total from investment operations		.25			.15			.83			1.16			.65
Distributions paid from:
Net investment income		(.49	)		(.36	)		(.41	)		(.52	)		(.60	)
Net realized gain on investments		—B			(.31	)		(.18	)		(.09	)		(.13	)
Total distributions		(.49	)		(.67	)		(.59	)		(.61	)		(.73	)
Net asset value, end of year	$	11.05		$	11.29		$	11.81		$	11.57		$	11.02
Total return		2.19	%		1.42	%		7.36	%		10.80	%		5.88	%
Ratios To Average Net Assets:A
Total expenses		.70	%		.72	%		.76	%		.75	%		.77	%
Expenses net of waivers, if any		.70	%		.72	%		.75	%		.75	%		.75	%
Expenses net of all reductions		.70	%		.72	%		.75	%		.75	%		.75	%
Net investment income		4.1	%		4.2	%		3.3	%		4.1	%		5.3	%
Supplemental Data:
Portfolio turnover rate		540.4	%		407.2	%		464.6	%		438.6	%		595.2	%
Net assets at end of year (in thousands)	$	360,819		$	265,518		$	121,607		$	79,120		$	1,885

See notes to financial statements.

83

Annual Report to Shareholders

Management’s Discussion of Fund Performance

Western Asset Core Plus Bond Portfolio

The average annual total returns for the Western Asset Core Plus Bond Portfolio for the period from its inception to March 31, 2006, are presented below, along with the total returns of its benchmark:

		Average Annual Total Returns Periods Ended March 31, 2006
	First Quarter 2006	One Year	Three Years	Five Years	Since InceptionA
Western Asset Core Plus Bond Portfolio
Institutional Class	-0.22%	2.57%	5.19%	6.71%	6.66%
Financial Intermediary Class	-0.29%	2.32%	4.94%	N/A	6.05%
Lehman Aggregate Bond IndexB	-0.65%	2.26%	2.92%	5.11%	5.64%

The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.westernassetfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.

Short-term interest rates rose significantly over the past 12 months, led by a 200 bps^C increase in the federal funds rate target. Long-term interest rates rose only moderately, resulting in a substantial flattening of the yield curve. Contrary to expectations that they would hike rates to only 4%, the Federal Reserve increased its target funds rate by 25 bps at every FOMC meeting, reaching 4.75% in March. Tighter-than-expected monetary policy pushed real yields up by more than nominal yields, reflecting reduced inflation expectations. The dollar also benefited from higher rates, rising some 7% against a basket of currencies. Mortgage-backed spreads began the period fairly tight, only to widen in the latter half of the period as concerns over extension risk mounted. Investment-grade credit spreads drifted wider, driven largely by fallout from the unexpected downgrade of Ford and GM debt. Thanks to a robust global economy, easy money, and strong gains in commodity prices, emerging market spreads tightened dramatically over the course of the period, leaving yields at record-low levels. High yield spreads soared in the wake of the GM and Ford downgrades, but recovered dramatically to finish the period unchanged to somewhat tighter. Despite a substantial reduction of monetary policy accommodation during the period, gold rose over 35%, to $584 per ounce, returning to levels not seen since the inflation panic of 1980. Energy and industrial commodity prices also rose, registering substantial gains against all major currencies. Equity markets moved steadily higher over the course of the period.

The impact of market conditions on the Portfolio’s performance was negative for the 12-month period ended March 31, 2006, since interest rates rose significantly. With strategies producing mixed but generally positive results, the Portfolio’s Institutional Class’s total return of 2.57% (net of expenses) exceeded that of its benchmark, the Lehman Aggregate Bond Index, which recorded a total return of 2.26%. Our decision to extend duration moderately as rates rose suffered since rates continued to drift higher. A barbelled exposure to the yield curve in the early part of the period benefited from a flatter curve, but this was more than offset by an emphasis on the front end of the curve during the balance of the period since short-term rates rose more than had been expected. A moderately overweight exposure to BBB corporates contributed to returns as spreads narrowed, but an emphasis on BB bonds, particularly increased exposure to GM and Ford in the wake of their unexpected downgrades, suffered as spreads continued to widen. An underweight exposure to the mortgage-backed sector in the first part of the period benefited as spreads widened, and a shift to an overweight exposure later in the period benefited as spreads stabilized and then tightened modestly. A moderate exposure to Treasury Inflation-Protected Securities had a somewhat negative impact on returns since declining break-even spreads were only partially offset by a higher-than-expected inflation adjustment for the period. A modest exposure to emerging market debt had a positive impact on performance as spreads moved generally tighter. Moderate nondollar bond exposure had a positive impact on performance as our choice of bonds outperformed their U.S. counterparts.

Western Asset Management Company

^A The Fund’s Institutional Class inception date is July 8, 1998. The Financial Intermediary Class inception date is January 8, 2002. The index return shown above is for the period beginning June 30, 1998.

^B A market value-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed rate, publicly placed, dollar-denominated, and nonconvertible investment grade debt issues with at least $100 million par amount outstanding and with at least one year to final maturity. The index does not incur fees and expenses and cannot be purchased directly by investors.

^C 100 basis points = 1%.

84

Annual Report to Shareholders

Expense Example

Western Asset Core Plus Bond Portfolio

As a shareholder of the Fund, you incur ongoing costs, including management fees, service (12b-1) fees on Financial Intermediary Class shares, and other Fund expenses. These examples are 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. The example is based on an investment of $1,000 invested on October 1, 2005, and held through March 31, 2006.

Actual Expenses

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

Hypothetical Example for Comparison Purposes

The second line for each class in the table below provides information about hypothetical account values and hypothetical expenses based on the relevant class’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the class’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 this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples for the relevant class that appear in the shareholder reports of other funds.

	Beginning Account Value 10/1/05		Ending Account Value 3/31/06		Expenses PaidA During the Period 10/1/05 to 3/31/06
Institutional Class:
Actual	$	1,000.00	$	994.20	$	2.24
Hypothetical (5% return before expenses)		1,000.00		1,022.69		2.27
Financial Intermediary Class:
Actual		1,000.00	$	991.90	$	3.48
Hypothetical (5% return before expenses)		1,000.00		1,021.44		3.53

^A These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio of 0.45% and 0.70% for the Institutional Class and Financial Intermediary Class, respectively, multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (182), and divided by 365.

85

Annual Report to Shareholders

Performance Information

Western Asset Core Plus Bond Portfolio

The graphs compare the Fund’s total returns to that of an appropriate broad-based securities market index. The graphs illustrate the cumulative total return of an initial $1,000,000 investment in the Institutional Class and Financial Intermediary Class of the Fund, for the periods indicated. The lines for the Fund represent the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling securities. The line representing the securities market index does not include any transaction costs associated with buying and selling securities in the index or other investment management or administrative expenses.

Total return measures investment performance in terms of appreciation or depreciation in a fund’s net asset value per share, plus dividends and any capital gain distributions. It assumes that dividends and distributions were reinvested at the time they were paid. Returns (and the graph and table found below) do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Average annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results.

Bonds are subject to a variety of risks, including interest rate, credit and inflation risk.

Growth of a $1,000,000 Investment—Institutional Class

The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information, please visit www.westernassetfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.

^A Index returns are for periods beginning June 30, 1998.

86

Annual Report to Shareholders

Growth of a $1,000,000 Investment — Financial Intermediary Class

The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information, please visit www.westernassetfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.

The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

^B Index returns are for periods beginning December 31, 2001.

87

Annual Report to Shareholders

Performance Information—Continued

Portfolio Composition (as of March 31, 2006)

Standard & Poor’s Debt Ratings^C (as a percentage of the portfolio)

Maturity Schedule (as a percentage of the portfolio)

^C Source: Standard & Poor's.

^D Preferred Stocks do not have a defined maturity date.

The Fund is actively managed. As a result, the composition of the portfolio holdings and sectors are subject to change at any time.

88

Annual Report to Shareholders

Portfolio of Investments

Western Asset Core Plus Bond Portfolio

March 31, 2006

(Amounts in Thousands)

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Long-Term Securities	106.3%
Corporate Bonds and Notes	14.4%
Aerospace/Defense	0.1%
L-3 Communications Corp.		7.625%	6/15/12	$	852	$	880
Lockheed Martin Corporation		7.650%	5/1/16		945		1,083
Lockheed Martin Corporation		8.500%	12/1/29		20		26
Northrop Grumman Corporation		4.079%	11/16/06		3,580		3,554
Raytheon Company		6.750%	8/15/07		15		15
Raytheon Company		6.000%	12/15/10		41		42
Raytheon Company		5.500%	11/15/12		75		74
Raytheon Company		5.375%	4/1/13		875		864
							6,538
Apparel	N.M.
Oxford Industries, Inc.		8.875%	6/1/11		800		824
Russell Corporation		9.250%	5/1/10		130		135	A
							959
Auto Trucks and Parts	N.M.
Visteon Corporation		8.250%	8/1/10		2,050		1,691	A
Automotive	1.0%
Ford Motor Company		7.450%	7/16/31		42,400		31,482	A
General Motors Corporation		8.250%	7/15/23		8,000		5,760	A
General Motors Corporation		8.375%	7/15/33		46,380		33,973	A
							71,215
Banking and Finance	2.2%
Boeing Capital Corporation		5.800%	1/15/13		2,030		2,067	A
Countrywide Home Loans, Inc.		4.960%	2/27/08		25,000		24,996	B
Countrywide Financial Corporation		4.770%	11/3/06		15,000		14,999	A,B
Ford Motor Credit Company		6.625%	6/16/08		7,040		6,663	A
Ford Motor Credit Company		7.375%	10/28/09		45,920		43,171
Ford Motor Credit Company		7.875%	6/15/10		3,560		3,337
Ford Motor Credit Company		7.375%	2/1/11		19,135		17,604
Ford Motor Credit Company		7.250%	10/25/11		14,030		12,785	A
General Motors Acceptance Corporation		6.311%	11/30/07		4,570		4,269
General Motors Acceptance Corporation		8.000%	11/1/31		4,000		3,780	A
HSBC Finance Corporation		7.200%	7/15/06		3,750		3,770
HSBC Finance Corporation		6.400%	6/17/08		20		21
HSBC Finance Corporation		6.500%	11/15/08		40		41

89

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Banking and Finance—Continued
HSBC Finance Corporation		8.000%	7/15/10	$	70	$	76
HSBC Finance Corporation		6.375%	8/1/10		1,000		1,033
HSBC Finance Corporation		7.000%	5/15/12		160		171
HSBC Finance Corporation		6.375%	11/27/12		520		539
SB Treasury Company LLC		9.400%	12/29/49		360		387	C,D
SLM Corporation		4.540%	4/1/09		11,220		10,861	B
Wachovia Capital Trust III		5.800%	3/15/42		9,420		9,255	D
							159,825
Banks	1.1%
American Express Bank Fsb		4.782%	6/29/06		50,000		50,005	B
Bank of America Corporation		7.400%	1/15/11		3,090		3,340
Bank One Corporation		4.125%	9/1/07		2,780		2,734	A
Bank One Corporation		7.875%	8/1/10		150		163	A
Bank One Corporation		5.900%	11/15/11		2,000		2,033
Firstar Bank NA		7.125%	12/1/09		350		370
Royal Bank of Scotland/New York		4.581%	7/5/06		21,900		21,908	B
							80,553
Cable	0.3%
Comcast Cable Communications, Inc.		6.750%	1/30/11		680		707	A
Comcast Corporation		6.500%	1/15/15		1,690		1,732	A
Comcast Corporation		7.050%	3/15/33		6,530		6,720	A
Comcast MO of Delaware Inc.		9.000%	9/1/08		1,060		1,139
Cox Communications, Inc.		7.875%	8/15/09		7,680		8,132
CSC Holdings Inc.		6.750%	4/15/12		500		489	A,C
CSC Holdings Inc.		7.875%	2/15/18		260		260
CSC Holdings Inc.		7.625%	7/15/18		568		561
DIRECTV Holdings LLC		6.375%	6/15/15		2,450		2,419
EchoStar DBS Corporation		6.625%	10/1/14		805		778
							22,937
Casino Resorts	0.1%
Caesars Entertainment Inc.		8.125%	5/15/11		733		797	A
Inn of The Mountain Gods Resort and Casino		12.000%	11/15/10		1,070		1,156
Mandalay Resort Group		9.500%	8/1/08		80		85
MGM MIRAGE		6.750%	9/1/12		815		814
MGM MIRAGE		6.625%	7/15/15		2,240		2,204
Premier Entertainment Biloxi LLC		10.750%	2/1/12		810		773
							5,829

90

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Chemicals	N.M.
IMC Global Inc.		11.250%	6/1/11	$	132	$	140
IMC Global Inc.		10.875%	8/1/13		460		527
MacDermid, Incorporated		9.125%	7/15/11		1,067		1,126
Westlake Chemical Corporation		6.625%	1/15/16		1,255		1,241	A
							3,034
Computer Services and Systems	0.3%
Electronic Data Systems Corporation		7.125%	10/15/09		19,905		20,909
International Business Machines Corporation		4.750%	11/29/12		40		39
SunGard Data Systems Inc.		9.125%	8/15/13		1,640		1,734	C
							22,682
Containers and Packaging	N.M.
Horizon Lines, LLC		9.000%	11/1/12		855		904
Diversified Financial Services	0.5%
American General Finance Corporation (AGFC)		5.090%	6/27/08		18,300		18,330	B
CIT Group Inc.		5.750%	9/25/07		80		80	A
Citigroup Inc.		5.000%	3/6/07		500		499	A
Citigroup Inc.		5.125%	2/14/11		2,790		2,752	A
Citigroup Inc.		5.000%	9/15/14		150		143
General Electric Capital Corporation		5.450%	1/15/13		225		225	A
Mizuho Preferred Capital Corp. LLC		8.790%	12/29/49		3,380		3,594	C,D
U.S. Bancorp		3.125%	3/15/08		8,290		7,971
Wells Fargo & Company		4.980%	6/12/06		50		50	B
Wells Fargo & Company		5.000%	11/15/14		2,750		2,644
							36,288
Electric	2.0%
Dominion Resources, Inc.		4.125%	2/15/08		2,000		1,950	A
Dominion Resources, Inc.		5.125%	12/15/09		1,260		1,242
Dominion Resources, Inc.		4.750%	12/15/10		1,010		970
Dominion Resources, Inc.		5.700%	9/17/12		3,335		3,305	A
FirstEnergy Corp.		5.500%	11/15/06		15,580		15,584
FirstEnergy Corp.		6.450%	11/15/11		1,640		1,697
FirstEnergy Corp.		7.375%	11/15/31		15,140		16,817	A
General Electric Company		5.000%	2/1/13		8,205		7,981
Niagara Mohawk Power Corporation		7.750%	10/1/08		500		525
The AES Corporation		8.750%	5/15/13		18,838		20,345	C

91

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Electric—Continued
The AES Corporation		7.750%	3/1/14	$	63,005	$	66,155	A
The AES Corporation		9.000%	5/15/15		7,700		8,355	C
The Cleveland Electric Illuminating Company		5.650%	12/15/13		1,495		1,482
The Detroit Edison Company		5.200%	10/15/12		10		10
TXU Electric Delivery Company		6.375%	1/15/15		685		707	A
							147,125
Energy	0.5%
Duke Energy Corporation		6.250%	1/15/12		620		639
Duke Energy Corporation		5.625%	11/30/12		1,420		1,422	A
Exelon Corporation		5.625%	6/15/35		7,510		6,816	A
MidAmerican Energy Holdings Company		5.875%	10/1/12		30		30
Pacific Gas and Electric Company		6.050%	3/1/34		590		577
Peabody Energy Corporation		6.875%	3/15/13		860		873
Peabody Energy Corporation		5.875%	4/15/16		880		838
Progress Energy, Inc.		7.100%	3/1/11		110		117
TXU Corp.		6.375%	6/15/06		9,795		9,813
TXU Corp.		4.800%	11/15/09		7,760		7,455	A
TXU Corp.		6.550%	11/15/34		13,325		12,025
TXU Energy Co.		7.000%	3/15/13		10		10
							40,615
Environmental Services	0.5%
Waste Management, Inc.		7.000%	10/15/06		5,330		5,376
Waste Management, Inc.		7.125%	10/1/07		10,940		11,199
Waste Management, Inc.		6.500%	11/15/08		4,340		4,451
Waste Management, Inc.		6.875%	5/15/09		8,000		8,318
Waste Management, Inc.		7.375%	8/1/10		6,055		6,460
Waste Management, Inc.		7.125%	12/15/17		500		546
Waste Management, Inc.		7.000%	7/15/28		3,010		3,222
Waste Management, Inc.		7.375%	5/15/29		80		90
Waste Management, Inc.		7.750%	5/15/32		750		880
							40,542
Food, Beverage and Tobacco	0.2%
Altria Group, Inc.		7.000%	11/4/13		4,905		5,274	A
Altria Group, Inc.		7.750%	1/15/27		5,000		5,721	A
R.J. Reynolds Tobacco Holdings, Inc.		7.875%	5/15/09		730		761
Sara Lee Corporation		6.250%	9/15/11		30		30
Sara Lee Corporation		3.875%	6/15/13		20		18
							11,804

92

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Funeral Parlors and Cemeteries	N.M.
Service Corporation International		7.500%	6/15/17	$	1,510	$	1,536	C
Gaming	N.M.
Mohegan Tribal Gaming Authority		8.000%	4/1/12		245		257
River Rock Entertainment Authority		9.750%	11/1/11		220		237
							494
Gas and Pipeline Utilities	0.4%
Dynegy Holdings Inc.		8.750%	2/15/12		5,890		6,155	A
Southern Natural Gas Company		8.000%	3/1/32		8,940		9,805
The Williams Companies, Inc.		7.750%	6/15/31		530		562	A
The Williams Companies, Inc.		8.750%	3/15/32		10,130		11,852
							28,374
Health Care	0.7%
Tenet Healthcare Corporation		6.375%	12/1/11		2,500		2,256	A
Tenet Healthcare Corporation		7.375%	2/1/13		6,222		5,678	A
Tenet Healthcare Corporation		9.875%	7/1/14		27,435		27,778	A
Tenet Healthcare Corporation		9.500%	2/1/15		12,430		12,461	C
							48,173
Homebuilding	N.M.
Beazer Homes USA, Inc.		8.375%	4/15/12		210		218	A
Insurance	N.M.
Loews Corporation		8.875%	4/15/11		90		101
Investment Banking/Brokerage	0.4%
E*TRADE Financial Corporation		7.375%	9/15/13		590		602
JPMorgan Chase & Co.		6.000%	2/15/09		10		10
JPMorgan Chase & Co.		4.500%	11/15/10		140		135
JPMorgan Chase & Co.		5.750%	1/2/13		4,430		4,460
JPM Capital Trust II		7.950%	2/1/27		20		21
Lehman Brothers Holdings Inc.		4.000%	1/22/08		6,840		6,689
Lehman Brothers Holdings Inc.		7.000%	2/1/08		160		164
Merrill Lynch & Co., Inc.		3.375%	9/14/07		3,130		3,046
Merrill Lynch & Co., Inc.		3.125%	7/15/08		3,115		2,976
Merrill Lynch & Co., Inc.		6.375%	10/15/08		2,670		2,741
Morgan Stanley		3.625%	4/1/08		90		87	A
Morgan Stanley		5.300%	3/1/13		4,090		4,000

93

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Investment Banking/Brokerage—Continued
The Goldman Sachs Group, Inc.		6.600%	1/15/12	$	2,810	$	2,946
The Goldman Sachs Group, Inc.		4.750%	7/15/13		1,420		1,342
							29,219
Investment Management	N.M.
Dryden Investor Trust		7.157%	7/23/08		1,006		1,024	C
Lodging/Hotels	N.M.
Host Marriott Corporation		7.875%	8/1/08		83		84
Host Marriott LP		6.750%	6/1/16		2,140		2,137	C
Starwood Hotels & Resorts Worldwide, Inc.		7.375%	5/1/07		890		906
							3,127
Machinery	N.M.
Terex Corporation		7.375%	1/15/14		1,734		1,777
Manufacturing (Diversified)	N.M.
American Achievement Corp.		8.250%	4/1/12		250		255
Jacuzzi Brands Incorporated		9.625%	7/1/10		200		215
Procter & Gamble Company		8.500%	8/10/09		90		99
The Gillette Company		2.500%	6/1/08		160		151
							720
Media	0.6%
Clear Channel Communications, Inc.		4.625%	1/15/08		165		162
Clear Channel Communications, Inc.		4.250%	5/15/09		2,760		2,628
Clear Channel Communications, Inc.		5.500%	9/15/14		12,140		11,217
Lamar Media Corporation		7.250%	1/1/13		1,459		1,496	A
Liberty Media Corporation		5.700%	5/15/13		535		497	A
Liberty Media Corporation		3.750%	2/15/30		170		96	E
News America, Inc.		6.200%	12/15/34		1,300		1,218
News America, Inc.		6.750%	1/9/38		200		204
Readers Digest Association, Inc.		6.500%	3/1/11		460		459	A
Sinclair Broadcast Group, Inc.		8.000%	3/15/12		360		367	A
Time Warner Inc.		6.875%	5/1/12		5,850		6,134
Time Warner Inc.		7.625%	4/15/31		440		479	A
Time Warner Inc.		7.700%	5/1/32		14,180		15,594
Viacom Inc.		5.625%	8/15/12		1,350		1,327
							41,878

94

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Medical Care Facilities	0.2%
DaVita, Inc.		7.250%	3/15/15	$	1,270	$	1,276	A
HCA, Inc.		8.750%	9/1/10		256		278
HCA, Inc.		6.300%	10/1/12		3		3
HCA, Inc.		5.750%	3/15/14		150		140
HCA, Inc.		7.690%	6/15/25		723		715
HCA, Inc.		7.500%	11/6/33		14,640		14,335	A
Health Care REIT, Inc.		8.000%	9/12/12		128		140
							16,887
Medical Products	N.M.
Fresenius Medical Care Capital Trust II		7.875%	2/1/08		938		961	F
Fresenius Medical Care Capital Trust IV		7.875%	6/15/11		681		722
							1,683
Oil and Gas	1.3%
Amerada Hess Corporation		7.300%	8/15/31		16,795		18,700
Amerigas Partners, L.P.		7.250%	5/20/15		990		990
Chesapeake Energy Corporation		7.500%	9/15/13		700		731
Chesapeake Energy Corporation		6.250%	1/15/18		1,970		1,926	A
Conoco Inc.		6.950%	4/15/29		9,093		10,287	A
ConocoPhillips		8.750%	5/25/10		3,100		3,479
ConocoPhillips		4.750%	10/15/12		2,590		2,498	A
ConocoPhillips		5.900%	10/15/32		10		10
Devon Energy Corporation		7.950%	4/15/32		5,035		6,166	A
El Paso Corporation		7.800%	8/1/31		8,230		8,271
El Paso Corporation		7.750%	1/15/32		9,560		9,632	A
El Paso Natural Gas Company		8.375%	6/15/32		1,310		1,481
Kerr-McGee Corporation		6.875%	9/15/11		800		836
Kerr-McGee Corporation		7.875%	9/15/31		8,000		9,138	A
Pacific Energy Partners		7.125%	6/15/14		630		641
Pemex Project Funding Master Trust		6.625%	6/15/35		14,385		13,896	C
Pemex Project Funding Master Trust		8.500%	2/15/08		110		115
Plains Exploration & Production Company		7.125%	6/15/14		1,010		1,038	A
Pogo Producing Company		6.875%	10/1/17		850		839
Pride International, Inc.		7.375%	7/15/14		1,440		1,512
Seariver Maritime Inc.		0.000%	9/1/12		70		50	G
Suburban Propane Partners LP		6.875%	12/15/13		1,990		1,910	A
Vintage Petroleum, Inc.		8.250%	5/1/12		661		703
XTO Energy, Inc.		7.500%	4/15/12		691		754	A
XTO Energy, Inc.		6.250%	4/15/13		2,317		2,397
							98,000

95

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Paper and Forest Products	0.1%
Georgia-Pacific Corp.		8.125%	5/15/11	$	9	$	10
Georgia-Pacific Corp.		9.500%	12/1/11		191		209
Georgia-Pacific Corp.		7.700%	6/15/15		176		177
Weyerhaeuser Company		6.750%	3/15/12		4,635		4,825
							5,221
Pharmaceuticals	0.2%
AmerisourceBergen Corporation		5.875%	9/15/15		1,720		1,692	C
Bristol-Myers Squibb Company		5.750%	10/1/11		8,840		8,937
Omnicare, Inc.		6.875%	12/15/15		709		707	A
							11,336
Photo Equipment and Supplies	0.3%
Eastman Kodak Company		3.625%	5/15/08		1,430		1,335	A
Eastman Kodak Company		7.250%	11/15/13		21,284		20,676	A
							22,011
Real Estate	0.1%
Forest City Enterprises, Inc.		7.625%	6/1/15		360		380
Forest City Enterprises, Inc.		6.500%	2/1/17		597		589
Ventas, Inc.		8.750%	5/1/09		770		816
Ventas, Inc.		9.000%	5/1/12		440		494
Ventas, Inc.		6.625%	10/15/14		50		50
Ventas, Inc.		6.750%	6/1/10		800		808	A
Ventas, Inc.		7.125%	6/1/15		800		822
							3,959
Rental and Lease Services	N.M.
Hertz Corporation		8.875%	1/1/14		1,435		1,489	C
Retail	0.1%
J.C. Penney Company, Inc.		7.400%	4/1/37		690		744
Target Corporation		4.000%	6/15/13		5,340		4,907	A
Wal-Mart Stores, Inc.		4.125%	2/15/11		3,160		2,992	A
							8,643
Special Purpose	0.9%
AAC Group Holding Corp.		0.000%	10/1/12		770		597	D
Air 2 US Series A		8.027%	10/1/19		158		157	C
ASIF Global Financing XIX		4.900%	1/17/13		3,980		3,840	C

96

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Special Purpose—Continued
DaimlerChrysler North America Holding Corporation		4.050%	6/4/08	$	610	$	591	A
DaimlerChrysler North America Holding Corporation		7.200%	9/1/09		620		647
DaimlerChrysler North America Holding Corporation		5.875%	3/15/11		500		498
DaimlerChrysler North America Holding Corporation		7.300%	1/15/12		3,315		3,503	A
DaimlerChrysler North America Holding Corporation		6.500%	11/15/13		1,290		1,312	A
Di Finance Corporation		9.500%	2/15/13		1,100		1,144
Entercom Capital Inc.		7.625%	3/1/14		565		576
Hexion U.S. Finance Corp./Hexion Nova Scotia Finance, ULC		9.000%	7/15/14		790		814
John Deere Capital Corporation		7.000%	3/15/12		80		86
Patrons’ Legacy 2003 IV		5.775%	1/23/17		7,900		7,889	C
Philip Morris Capital Corporation		7.500%	7/16/09		190		199
Rabobank Capital Funding Trust II		5.260%	12/31/49		590		567	C,D
Rabobank Capital Funding Trust III		5.254%	12/29/49		4,140		3,913	C,D
Sprint Capital Corporation		4.780%	8/17/06		4,725		4,715	D
Sprint Capital Corporation		6.000%	1/15/07		16,370		16,448
Sprint Capital Corporation		6.125%	11/15/08		130		132
Sprint Capital Corporation		8.375%	3/15/12		13,945		15,757
TCI Communications Financing III		9.650%	3/31/27		1,480		1,591
Texaco Capital Inc.		5.500%	1/15/09		1,600		1,615
UGS Corporation		10.000%	6/1/12		400		440
Unilever Capital Corporation		7.125%	11/1/10		1,450		1,543
Verizon Global Funding Corp.		7.375%	9/1/12		5		5
							68,579
Telecommunications	0.2%
AT&T Inc.		5.100%	9/15/14		8,630		8,191
BellSouth Corporation		4.750%	11/15/12		640		606
Cincinnati Bell Inc.		7.000%	2/15/15		2,452		2,427
Citizens Communications Company		9.250%	5/15/11		530		582
							11,806
Telecommunications (Cellular/Wireless)	N.M.
Nextel Communications, Inc.		5.950%	3/15/14		493		488
Nextel Communications, Inc.		7.375%	8/1/15		1,980		2,077
							2,565

97

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Transportation	0.1%
Continental Airlines, Inc.		6.545%	2/2/19	$	4,255	$	4,312
Delta Air Lines, Inc.		5.869%	3/18/11		1,386		1,406
Delta Air Lines, Inc.		6.417%	7/2/12		40		40	A
Delta Air Lines, Inc.		6.718%	1/2/23		2,252		2,275
Norfolk Southern Corporation		6.200%	4/15/09		20		20
							8,053
Total Corporate Bonds and Notes (Identified Cost—$1,084,504)							1,069,414
Asset-Backed Securities	2.1%
Fixed Rate Securities	0.3%
Bay View Auto Trust 2003-LJ1		3.440%	4/25/12		253		247
Conseco Finance Securitizations Corp. 2000-4		8.310%	5/1/32		2,200		1,814
Conseco Finance Securitizations Corp. 2000-6		6.770%	9/1/32		325		326
Contimortgage Home Equity Loan Trust 1997-4		7.330%	10/15/28		1,374		1,133
Green Tree Financial Corporation 1992-2		9.150%	1/15/18		316		279
Green Tree Financial Corporation 1993-2		8.000%	7/15/18		879		854
Green Tree Home Improvement Loan Trust 1996-A		7.400%	2/15/26		546		472
Green Tree Home Improvement Loan Trust 1997-D		7.450%	9/15/28		297		297
Lehman ABS Manufactured Housing Contract 2001-B A3		4.350%	5/15/14		4,339		4,127
Lehman ABS Manufactured Housing Contract 2001-B A6		6.467%	8/15/28		3,262		3,307
Pegasus Aviation Lease Securitization 2000-1		8.370%	3/25/30		2,500		1,584	C
Residential Asset Mortgage Products, Inc. 2004-SL4		7.500%	7/25/32		2,868		2,952
UCFC Home Equity Loan Trust 1998-C		5.935%	1/15/30		30		30
Vanderbilt Mortgage Finance 1996-A		8.150%	5/7/26		526		532
Vanderbilt Mortgage Finance 1997-B		8.155%	10/7/26		250		257
Vanderbilt Mortgage Finance 1997-C		7.830%	8/7/27		500		508
							18,719
Indexed SecuritiesB	1.5%
AAA Trust 2005-2		4.918%	11/26/35		7,131		7,140	C
AFC Home Equity Loan Trust 2002-2		4.961%	6/25/30		744		746

98

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Asset-Backed Securities—Continued
Indexed Securities—Continued
Asset Backed Securities Corporation Home Equity Loan Trust 2001-HE3		5.289%	11/15/31	$	595	$	595
Bear Stearns Asset Backed Securities Series 2005-CL1		5.318%	9/25/34		17,332		17,340
Bear Stearns Asset Backed Securities, Inc. 2005-AQ2		4.978%	9/25/34		16,579		16,581
CDC Mortgage Capital Trust 2002-HE1		5.128%	1/25/33		912		913
Citibank Credit Card Issuance Trust 2002-C1		5.700%	2/9/09		2,040		2,053
Conseco Finance 2000-C		5.119%	12/15/29		73		73
Countrywide Asset-Backed Certificates 2002-BC1		5.148%	4/25/32		296		296
Countrywide Asset-Backed Certificates 2003-1		5.158%	6/25/33		470		471
Countrywide Asset-Backed Certificates 2003-BC3		5.128%	9/25/33		1,734		1,736
Countrywide Asset-Backed Certificates 2005-BC2		4.671%	5/25/35		4,210		4,210
Countrywide Home Equity Loan Trust 2002-F		5.099%	11/15/28		1,454		1,463
Credit Suisse First Boston Mortgage Securities Corp. 2005-AGE1		4.958%	2/25/32		19,315		19,318
Fannie Mae Grantor Trust 2002-T15		5.018%	11/25/32		1,942		1,942
Fannie Mae Grantor Trust 2005-T2		4.285%	11/28/35		11,390		11,388
Fleet Home Equity Loan Trust 2003-1		5.026%	1/20/33		8,394		8,402
Greenpoint Mortgage Funding Trust 2005-HE1		5.218%	9/25/34		1,200		1,204
IndyMac Home Equity Loan Asset-Backed Trust 2001-A		5.078%	3/25/31		178		178
Option One Mortgage Loan Trust 2003-1		5.238%	2/25/33		17		17
Popular ABA Morgage Pass-Through Trust 2005-A		4.918%	6/25/35		4,691		4,692
Provident Bank Home Equity Loan Trust 2000-2		5.088%	8/25/31		521		521
Residential Asset Mortgage Products, Inc. 2003-RS4		5.148%	5/25/33		2,686		2,706
Residential Funding Mortgage Securities II, Inc. 2003-HS3		5.108%	8/25/33		69		69
Salomon Brothers Mortgage Securities VII 2002-CIT1		5.118%	3/25/32		1,284		1,287

99

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Asset-Backed Securities—Continued
Indexed Securities—Continued
Southern Pacific Secured Assets Corporation 1998-2		5.158%	7/25/29	$	40	$	40
Vanderbilt Mortgage Finance 1999-D		7.920%	1/7/30		4,100		4,303
Wachovia Asset Securitization, Inc. 2002-HE1		5.031%	9/27/32		2,074		2,078
Wachovia Asset Securitization, Inc. 2002-HE2		5.091%	12/25/32		178		179
Wachovia Asset Securitization, Inc. 2003-HE1		5.108%	3/25/33		78		78
							112,019
Stripped Securities	N.M.
Diversified REIT Trust 2001-1		0.656%	3/8/10		14,234		352	C,H1
Green Tree Financial Corporation 1996-5		8.100%	7/15/27		4,520		726	H1
Oakwood Mortgage Investors Inc. 2001-E		6.000%	11/15/09		5,795		860	H1
							1,938
Variable Rate SecuritiesJ	0.3%
Countrywide Asset-Backed Certificates 2004-15		4.614%	12/25/32		11,882		11,515
Origen Manufactured Housing Contract Trust 2005-B A4		5.910%	1/15/37		4,797		4,691
Origen Manufactured Housing Contract Trust 2005-B M1		5.990%	1/15/37		1,500		1,474
Origen Manufactured Housing Contract Trust 2005-B M2		6.480%	1/15/37		2,100		2,055
							19,735
Total Asset-Backed Securities (Identified Cost—$153,561)							152,411
Mortgage-Backed Securities	18.3%
Fixed Rate Securities	1.6%
Asset Securitization Corporation 1996-D2		6.920%	2/14/29		1,632		1,637
Banc of America Funding Corporation 2003-1		6.000%	5/20/33		706		688
Blackrock Capital Finance L.P. 1997-R3		7.220%	11/25/28		58		58	C
Criimi Mae Commercial Mortgage Trust 1998-C1		7.000%	6/2/33		535		543	C
GMAC Commercial Mortgage Securities Inc. 1998-C1		6.700%	5/15/30		8,086		8,255

100

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Mortgage-Backed Securities—Continued
Fixed Rate Securities—Continued
GMAC Commercial Mortgage Securities Inc. 1999-C2		6.945%	9/15/33	$	340	$	354
GS Mortgage Securities Corporation II 1998-C1		6.620%	10/18/30		5,030		5,140
GS Mortgage Securities Corporation II 2005-GG4		4.680%	7/10/39		18,650		17,836
J.P. Morgan Chase Commercial Mortgage Securities Corp., 2005-CIBC12		4.895%	9/12/37		3,000		2,853
J.P. Morgan Commercial Mortgage Finance Corp., 1999-C8		7.400%	7/15/31		2,000		2,093
LB-UBS Commercial Mortgage Trust 2005-C3 A5		4.739%	7/15/30		8,640		8,140
LB-UBS Commercial Mortgage Trust 2005-C3 AAB		4.664%	7/15/30		4,100		3,910
MASTR Reperforming Loan Trust 2005-1 1A1		6.000%	8/25/34		7,803		7,752	C
MASTR Reperforming Loan Trust 2005-1 1A3		7.000%	8/25/34		11,715		11,932	C
Morgan Stanley Capital I 2005-HQ6		4.989%	8/13/42		21,070		20,193
Residential Asset Mortgage Products, Inc. 2005-SL2		7.500%	3/25/32		19,876		20,379
Residential Asset Securitization Trust 2003-A14		4.750%	2/25/19		3,573		3,423
Structured Asset Securities Corporation 1996-CFL		7.750%	2/25/28		1,071		1,086
							116,272
Indexed SecuritiesB	15.1%
American Home Mortgage Investment Trust 2005-4		5.108%	11/25/45		32,093		32,146
Citigroup Mortgage Loan Trust 2005-HE2		5.218%	5/25/35		27,029		27,089	C
Countrywide Alternative Loan Trust 2005-38		5.168%	9/25/35		39,772		39,982
Countrywide Alternative Loan Trust 2005-44 1A1		5.148%	10/25/35		53,681		53,747
Countrywide Alternative Loan Trust 2005-44 2A1		5.128%	10/25/35		37,134		37,169
Countrywide Alternative Loan Trust 2005-56 3A1		5.108%	11/25/35		45,146		45,290
Countrywide Alternative Loan Trust 2005-56 4A1		5.128%	11/25/35		13,056		13,096

101

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Mortgage-Backed Securities—Continued
Indexed Securities—Continued
Countrywide Alternative Loan Trust 2005-H		4.989%	12/25/35	$	5,735	$	5,746
Countrywide Alternative Loan Trust 2005-J12		5.088%	11/25/35		1,855		1,859
Countrywide Home Loans 2005-9		5.118%	5/25/35		22,835		22,920
Government National Mortgage Association 2001-36		5.176%	8/20/31		4		4
GSMPS Mortgage Loan Trust 2005-RP2		5.168%	3/25/35		33,042		33,179	C
GSMPS Mortgage Loan Trust 2005-RP3		5.168%	9/25/35		49,183		49,399
Harborview Mortgage Loan Trust 2005-3		5.016%	6/19/35		44,902		44,878
Impac CMB Trust 2003-4		5.138%	10/25/33		727		728
Impac CMB Trust 2003-5		5.241%	8/25/33		867		867
Impac CMB Trust 2003-7		5.458%	8/25/33		1,853		1,853
Lehman XS Trust 2005-5N		5.118%	11/25/35		52,550		52,566
Medallion Trust 2000-2G		5.130%	12/18/31		455		456	F
MLCC Mortgage Investors, Inc. 2003-B		5.158%	4/25/28		8,299		8,347
MSDWCC Heloc Trust 2005-1		5.008%	7/25/17		4,676		4,677
Nomura Asset Acceptance Corporation 2005-AP3		4.948%	8/25/35		26,574		26,587
Residential Accredit Loans, Inc. 2005-Q03		5.218%	10/25/45		3,871		3,881
Sequoia Mortgage Trust 4		5.154%	11/22/24		26		26
Thornburg Mortgage Secs Trust 2006-1		4.988%	1/25/36		104,332		104,124
WaMu Mortgage Pass-Through Certificates 2005-AR06		5.048%	4/25/45		34,860		34,853
WaMu Mortgage Pass-Through Certificates 2005-AR08		5.088%	7/25/45		20,342		20,350
WaMu Mortgage Pass-Through Certificates 2005-AR11		5.138%	8/25/45		101,033		101,556
WaMu Mortgage Pass-Through Certificates 2005-AR13 A1A1		5.108%	10/25/45		50,057		50,293
WaMu Mortgage Pass-Through Certificates 2005-AR13 B10		5.781%	10/25/45		6,273		4,968
WaMu Mortgage Pass-Through Certificates 2005-AR15 A1A1		5.078%	11/25/45		40,658		40,729
WaMu Mortgage Pass-Through Certificates 2005-AR15 A1A2		5.098%	11/25/45		60,259		60,394
WaMu Mortgage Pass-Through Certificates 2005-AR17		5.108%	12/25/45		31,195		31,273
WaMu Mortgage Pass-Through Certificates 2005-AR19 A1A1		5.088%	12/25/45		75,163		75,306
WaMu Mortgage Pass-Through Certificates 2005-AR19 A1A2		5.108%	12/25/45		83,080		83,280
							1,113,618

102

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Mortgage-Backed Securities—Continued
Stripped Securities	N.M.
Commercial Capital Access One, Inc. 2		1200.00%	11/15/27	$	2,515	$	1,093	H1
FFCA Secured Lending Corporation 1999-1A		1.468%	9/18/25		491		19	C,H1
GMAC Commercial Mortgage Securities Inc. 1999-CTL1		0.799%	12/15/16		1,203		10	C,H1
LB-UBS Commercial Mortgage Trust 2001-C3		0.977%	6/15/36		5,290		206	C,H1
							1,328
Variable Rate SecuritiesI	1.6%
Banc of America Commercial Mortgage Inc. 2005-5		5.115%	10/10/45		7,630		7,379
Commercial Mortgage Asset Trust 1999-C2		7.546%	11/17/32		330		349
GE Capital Commercial Mortgage Corporation 2005-C4		5.331%	11/10/45		15,020		14,816
Harborview Mortgage Loan Trust 2005-7		5.146%	6/19/45		16,624		16,712
Harborview Mortgage Loan Trust 2006-2		5.500%	4/25/36		10,000		9,981
IndyMac INDX Mortgage Loan Trust 2005-AR15		5.099%	9/25/35		14,044		13,517
J.P. Morgan Chase Commercial Mortgage Securities Corp. 2005-CIBC13		5.295%	1/12/43		11,800		11,594
Merrill Lynch Mortgage Trust 2005-CKI1		5.245%	11/12/37		17,280		16,963
Merrill Lynch Mortgage Trust 2005-MCP1		4.747%	6/12/43		15,240		14,343
Morgan Stanley Mortgage Loan Trust 2005-3AR		5.244%	7/25/35		15,546		15,475
							121,129
Total Mortgage-Backed Securities (Identified Cost—$1,357,213)							1,352,347
U.S. Government and Agency Obligations	20.9%
Fixed Rate Securities	17.4%
Fannie Mae		3.125%	12/15/07		35,000		33,890	A
Fannie Mae		4.875%	4/15/09		18,870		18,741	A
Fannie Mae		5.200%	11/8/10		17,470		17,316
Fannie Mae		4.610%	10/10/13		40,690		38,659
Federal Home Loan Bank		4.875%	11/15/06		100		100
Federal Home Loan Bank		3.500%	11/15/07		100		97
Federal Home Loan Bank		5.875%	11/15/07		750		759
Freddie Mac		4.625%	2/21/08		11,930		11,832	A

103

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
U.S. Government and Agency Obligations—Continued
Fixed Rate Securities—Continued
Freddie Mac		5.250%	2/24/11	$	34,230	$	34,064
Freddie Mac		5.125%	4/18/11		8,070		8,057
Tennessee Valley Authority		6.250%	12/15/17		40		44
Tennessee Valley Authority		6.750%	11/1/25		1,670		1,951
Tennessee Valley Authority		7.125%	5/1/30		840		1,040
United States Treasury Bonds		6.250%	8/15/23		510		578	A
United States Treasury Bonds		2.000%	1/15/26		27,761		26,308	A
United States Treasury Bonds		5.250%	2/15/29		84,830		87,103	A
United States Treasury Bonds		6.250%	5/15/30		18,045		21,089	A
United States Treasury Bonds		5.375%	2/15/31		1,650		1,737	A
United States Treasury Bonds		4.500%	2/15/36		96,743		90,772	A
United States Treasury Notes		2.500%	9/30/06		84,980		84,014	A
United States Treasury Notes		3.000%	12/31/06		11,784		11,622	A
United States Treasury Notes		3.000%	2/15/08		26,210		25,353	A
United States Treasury Notes		3.750%	5/15/08		25,460		24,913	A
United States Treasury Notes		4.375%	11/15/08		66,590		65,831	A
United States Treasury Notes		4.500%	2/15/09		6,560		6,503	A
United States Treasury Notes		2.625%	3/15/09		6,940		6,525	A
United States Treasury Notes		3.500%	8/15/09		36,100		34,622	A
United States Treasury Notes		3.375%	10/15/09		5,910		5,634	A
United States Treasury Notes		3.500%	12/15/09		177,095		169,236	A
United States Treasury Notes		3.625%	1/15/10		11,280		10,814	A
United States Treasury Notes		3.500%	2/15/10		20		19	A
United States Treasury Notes		4.000%	4/15/10		10		10	A
United States Treasury Notes		3.875%	7/15/10		10		10	A
United States Treasury Notes		4.250%	10/15/10		17,340		16,935
United States Treasury Notes		4.500%	11/15/10		317,160		312,898	A
United States Treasury Notes		4.250%	1/15/11		25,000		24,380	A
United States Treasury Notes		4.500%	2/28/11		94,420		93,044	A
United States Treasury Notes		4.250%	8/15/13		140		135	A
United States Treasury Notes		2.000%	1/15/16		2,158		2,093	A
United States Treasury Notes		4.500%	2/15/16		70		68	A
							1,288,796
Indexed SecuritiesJ	3.3%
United States Treasury Inflation-Protected Security		3.375%	1/15/07		23,399		23,650	A
United States Treasury Inflation-Protected Security		3.625%	1/15/08		884		907	A

104

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
U.S. Government and Agency Obligations—Continued
Indexed Securities—Continued
United States Treasury Inflation-Protected Security		3.875%	1/15/09	$	12,886	$	13,491	A
United States Treasury Inflation-Protected Security		3.375%	1/15/12		12,081		12,808	A
United States Treasury Inflation-Protected Security		1.875%	7/15/13		20,898		20,293	A
United States Treasury Inflation-Protected Security		2.000%	1/15/14		1,223		1,194	A
United States Treasury Inflation-Protected Security		2.000%	7/15/14		42		41	A
United States Treasury Inflation-Protected Security		2.375%	1/15/25		111,748		112,303	A
United States Treasury Inflation-Protected Security		3.625%	4/15/28		23,007		28,281	A
United States Treasury Inflation-Protected Security		3.875%	4/15/29		22,334		28,665	A
							241,633
Stripped Securities	0.2%
United States Treasury Bonds		0.000%	11/15/21		37,190		16,835	A,H2
Total U.S. Government and Agency Obligations (Identified Cost—$1,572,149)							1,547,264
U.S. Government Agency Mortgage-Backed Securities	43.0%
Fixed Rate Securities	40.3%
Fannie Mae		6.500%	5/1/14 to 7/1/35		25,793		26,355
Fannie Mae		6.000%	5/1/16 to 1/1/36		35,624		35,653
Fannie Mae		5.500%	1/1/17 to 10/1/35		51,787		50,752
Fannie Mae		9.500%	11/1/21		2		2
Fannie Mae		7.000%	8/1/29 to 7/1/32		6,373		6,569
Fannie Mae		7.500%	11/1/29		30		32
Fannie Mae		5.000%	6/1/35 to 1/1/36		213,600		203,400
Fannie Mae		4.500%	12/1/36		26,400		24,346	K
Fannie Mae		5.000%	12/1/36		423,000		402,643	K
Fannie Mae		5.000%	12/31/36		1,036,900		986,351	K
Fannie Mae		5.500%	12/1/36		437,300		426,438	K
Fannie Mae		6.000%	12/1/36		268,305		267,886	K

105

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
U.S. Government Agency Mortgage-Backed Securities—Continued
Fixed Rate Securities—Continued
Fannie Mae		6.500%	12/1/36	$	60,800	$	61,940	K
Freddie Mac		6.000%	6/1/08 to 11/1/35		15,245		15,380
Freddie Mac		4.125%	10/18/10		28,720		27,540	A
Freddie Mac		4.750%	1/18/11		9,890		9,721	A
Freddie Mac		4.650%	10/10/13		47,200		44,824
Freddie Mac		5.500%	12/1/13 to 5/1/35		15,468		15,136
Freddie Mac		7.000%	10/1/16 to 4/1/32		2,078		2,140
Freddie Mac		6.500%	7/1/29		509		521
Freddie Mac		5.625%	11/23/35		25,880		24,846
Freddie Mac		5.000%	12/1/36		35,000		33,294	K
Government National Mortgage Association		7.500%	3/15/23 to 9/15/31		314		330
Government National Mortgage Association		7.000%	7/15/23 to 7/15/31		991		1,033
Government National Mortgage Association		6.500%	4/15/28 to 4/15/33		23,299		24,162
Government National Mortgage Association		6.000%	1/15/29 to 11/15/35		113,737		115,114
Government National Mortgage Association		8.000%	12/15/30 to 1/15/31		36		39
Government National Mortgage Association		5.000%	7/15/33 to 11/15/35		61,762		59,885
Government National Mortgage Association		5.500%	7/15/33 to 6/15/35		29,195		28,927
Government National Mortgage Association		5.000%	12/1/36		92,060		89,154	K
							2,984,413
Stripped Securities	N.M.
Financing Corporation		0.000%	11/30/17		1,250		679	H2
Financing Corporation		0.000%	4/5/19		320		161	H2
							840
Variable Rate SecuritiesI	2.7%
Fannie Mae		4.778%	6/1/35		25,834		25,702
Fannie Mae		4.340%	8/1/35		2,329		2,292
Fannie Mae		4.619%	9/1/35		13,750		13,600
Fannie Mae		4.706%	9/1/35		6,096		6,046
Fannie Mae		4.598%	10/1/35		5,171		5,116

106

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
U.S. Government Agency Mortgage-Backed Securities—Continued
Variable Rate Securities—Continued
Fannie Mae		4.680%	10/1/35	$	5,764	$	5,714
Fannie Mae		4.739%	10/1/35		8,652		8,593
Fannie Mae		4.841%	10/1/35		5,769		5,747
Fannie Mae		5.655%	10/1/35		85,206		87,204
Fannie Mae		5.659%	10/1/35		8,169		8,361
Fannie Mae		5.645%	11/1/35		19,624		20,084
Freddie Mac		4.884%	10/1/35		9,214		9,159
							197,618
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost—$3,210,733)							3,182,871
Yankee BondsL	6.0%
Aerospace/Defense	N.M.
Systems 2001 Asset Trust		6.664%	9/15/13		2,693		2,807	C
Banks	1.0%
KFW Kreditanstalt fuer Wiederaufbau		2.375%	9/25/06		240		237	A
MUFG Capital Finance 1 Limited		6.346%	7/25/49		7,400		7,282	A,D
Nordea Bank AB		4.680%	5/9/07		52,000		52,003	B,C
Shinsei Fin Cayman Ltd		6.418%	1/29/49		11,565		11,383	C,D
The Korea Development Bank		4.250%	11/13/07		200		196
The Korea Development Bank		5.500%	11/13/12		60		60	A
							71,161
Cable	N.M.
Kabel Deutschland GmbH		10.625%	7/1/14		680		726	C
Rogers Cable Inc.		7.875%	5/1/12		687		735
Rogers Cable Inc.		5.500%	3/15/14		860		815
Rogers Cable Inc.		6.750%	3/15/15		130		132	A
							2,408
Diversified Financial Services	0.2%
AIFUL CORPORATION		5.000%	8/10/10		10,430		10,091	C
Pemex Finance LTD.		9.030%	2/15/11		10		11
							10,102
Electric	N.M.
Hydro-Quebec		6.300%	5/11/11		1,720		1,793	A
Foreign Governments	3.2%
Federative Republic of Brazil		8.875%	4/15/24		3,830		4,427
Federative Republic of Brazil		8.875%	4/15/24		888		1,027

107

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Yankee Bonds—Continued
Foreign Governments—Continued
Federative Republic of Brazil		10.125%	5/15/27	$	955	$	1,238
Federative Republic of Brazil		12.250%	3/6/30		5,740		8,739
Federative Republic of Brazil		11.000%	8/17/40		18,777		24,091	A
Province of British Columbia		4.300%	5/30/13		180		174
Province of Ontario		3.500%	9/17/07		110		108	A
Republic of Bulgaria		8.250%	1/15/15		6,090		7,139
Republic of Colombia		11.750%	2/25/20		3,515		5,009
Republic of Colombia		8.125%	5/21/24		8,560		9,587	A
Republic of Panama		7.125%	1/29/26		4,390		4,478	A
Republic of Panama		8.875%	9/30/27		690		838
Republic of Panama		6.700%	1/26/36		1,582		1,579	A
Republic of Peru		5.000%	3/7/17		3,679		3,495	D
Republic of Peru		5.000%	3/7/17		40		38	C,D
Republic of Peru		7.350%	7/21/25		2,770		2,721	A
Republic of Peru		8.750%	11/21/33		3,061		3,413	A
Russian Federation		5.000%	3/31/30		66,420		72,876	D
United Mexican States		5.625%	1/15/17		1,900		1,840	A
United Mexican States		11.500%	5/15/26		9,330		14,485	A
United Mexican States		8.300%	8/15/31		8,250		9,970
United Mexican States		7.500%	4/8/33		50,654		56,479
							233,751
Insurance	N.M.
Foundation Re Ltd		8.850%	11/24/08		2,150		2,125	B,C
Oil Insurance Ltd		5.150%	8/15/33		35		35	C,D
							2,160
Manufacturing (Diversified)	0.8%
Tyco International Group SA		5.800%	8/1/06		10,250		10,262	A
Tyco International Group SA		6.125%	11/1/08		100		101
Tyco International Group SA		6.750%	2/15/11		460		479
Tyco International Group SA		6.375%	10/15/11		5,580		5,728
Tyco International Group SA		7.000%	6/15/28		1,035		1,089
Tyco International Group SA		6.875%	1/15/29		40,530		42,318
							59,977
Media	N.M.
Quebecor Media Inc.		7.750%	3/15/16		550		565	C
Shaw Communications Inc.		8.250%	4/11/10		27		29
Shaw Communications Inc.		7.250%	4/6/11		630		650
Shaw Communications Inc.		7.200%	12/15/11		395		408
							1,652

108

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Yankee Bonds—Continued
Mining	0.1%
Corporacion Nacional del Cobre—Codelco		4.750%	10/15/14	$	2,590	$	2,424	C
Oil and Gas	N.M.
YPF Sociedad Anonima		7.750%	8/27/07		1,000		1,015	A
Publishing	N.M.
Sun Media Corporation		7.625%	2/15/13		565		582
Special Purpose	0.2%
Anadarko Finance Company		6.750%	5/1/11		240		253
Cascadia Ltd		7.985%	6/13/08		1,400		1,404	B,C
ChevronTexaco Capital Company		3.500%	9/17/07		20		20
Conoco Funding Company		6.350%	10/15/11		590		615
Conoco Funding Company		7.250%	10/15/31		810		947
Eircom Funding		8.250%	8/15/13		900		969
European Investment Bank		4.000%	3/3/10		100		96
General Motors Nova Scotia Finance Company		6.850%	10/15/08		1,550		1,306	A
HSBC Capital Funding LP		4.610%	6/27/49		2,090		1,919	A,C,D
Resona Preferred Global Securities		7.191%	7/30/49		8,970		9,359	C,D
							16,888
Telecommunications	0.4%
British Telecommunications plc		8.375%	12/15/10		1,145		1,277
Deutsche Telekom International Finance BV		5.750%	3/23/16		8,560		8,362	A
Intelsat (Bermuda), Ltd.		8.625%	1/15/15		540		558	A
Koninklijke (Royal) KPN NV		8.000%	10/1/10		12,650		13,578
Telecom Italia Capital S.p.A		4.950%	9/30/14		3,730		3,432
Telecom Italia Capital S.p.A		5.250%	10/1/15		2,950		2,745
Telecom Italia Capital S.p.A.		5.250%	11/15/13		1,260		1,194
							31,146
Telecommunications (Cellular/Wireless)	N.M.
Rogers Wireless Communications Inc.		6.375%	3/1/14		1,850		1,845
Transportation	0.1%
OMI Corporation		7.625%	12/1/13		1,450		1,483	A
Teekay Shipping Corporation		8.875%	7/15/11		1,729		1,902
							3,385
Total Yankee Bonds (Identified Cost—$423,245)							443,096

109

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES			VALUE
Foreign Government Obligations	1.1%
Canadian Real Return Bond		4.000%	12/1/31	$	11,475	M	$	14,833	J
Government of Canada		5.250%	6/1/12		45,000	M		40,706
Queensland Treasury Corp		6.000%	6/14/11		31,020	N		22,692	J
								78,231
Total Foreign Government Obligations (Identified Cost—$71,774)								78,231
Foreign Corporate Bonds	0.1%
General Motors Corporation		8.375%	7/5/33		9,520	O		8,298
Total Foreign Corporate Bonds (Identified Cost—$12,359)								8,298
Preferred Stocks	0.4%
Fannie Mae		5.375%			0.029	shs		2,779	E
Ford Motor Company		7.500%			16			282
General Motors Corporation		7.500%			260			4,166
General Motors Corporation		5.250%			813			13,201	E
General Motors Corporation		7.250%			128			2,037
General Motors Corporation		7.250%			56			884
General Motors Corporation		7.250%			45			710
General Motors Corporation		7.375%			328			5,212
Home Ownership Funding Corporation		13.331%			2			356	C,D
Home Ownership Funding Corporation II		13.338%			1			308	C,D
								29,935
Total Preferred Stocks (Identified Cost—$31,605)								29,935
Options PurchasedQ	N.M.
BellSouth Telecommunications Inc. Call, July 2006, Strike Price $97.72					500	R		24
International Business Machines Corporation Call, July 2006, Strike Price $99.90					500	R		54
Total Options Purchased (Identified Cost—$18)								78
Total Long-Term Securities (Identified Cost—$7,917,161)								7,863,945

110

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES			VALUE
Investment of Collateral From Securities Lending	22.9%
State Street Navigator Securities Leading Prime Portfolio					1,696,920	shs	$	1,696,920
Total Investment of Collateral From Securities Lending (Identified Cost—$1,696,920)								1,696,920
Short-Term Securities	21.8%
Corporate Bonds and Notes	4.0%
BankAmerica Corporation		4.460%	5/24/06	$	63,000			62,566
Danske Corporation Series A Copenhagen		4.745%	4/27/06		60,000			59,794
General Electric Capital Corporation		4.910%	5/12/06		50,000			50,001	B
Morgan Stanley		4.580%	4/11/06		42,700			42,700
State Street Bank & Trust Company		4.400%	4/10/06		50,000			50,000	S
Washington Mutual		4.790%	5/22/06		30,000			30,000
								295,061
U.S. Government and Agency Obligations	15.6%
Fannie Mae		0.000%	5/15/06		11,072			11,013	G,P
Freddie Mac		0.000%	4/3/06		1,000,000			999,742	G
Freddie Mac		0.000%	5/15/06		1,570			1,561	G,P
United States Treasury Bills		0.000%	4/6/06		141,480			141,404	A,G
								1,153,720
Options PurchasedQ	0.3%
Deutsche Bank Swaption Futures Call, May 2006, Strike Price $5.04					128,100,000	R		40
Euro Currency Futures Call, June 2006, Strike Price $1.16					50	R		370
Euro Currency Futures Call, June 2006, Strike Price $1.18					75	R		394
Euro Currency Futures Call, April 2006, Strike Price $1.18					50	R		237
Eurodollar Futures Call, June 2006, Strike Price $94.50					3,937	R		2,903
Eurodollar Futures Call, June 2006, Strike Price $95.00					685	R		26
Eurodollar Futures Call, September 2006, Strike Price $94.00					2,737	R		5,029
Eurodollar Futures Call, September 2006, Strike Price $94.50					2,819	R		1,991
Eurodollar Futures Call, December 2006, Strike Price $94.50					2,883	R		2,469

111

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	MATURITY DATE	PAR			VALUE
Short-Term Securities—Continued
Options Purchased—Continued
Eurodollar Futures Put, June 2005, Strike Price $93.75				1,000	R	$	0
Eurodollar Futures Put, June 2005, Strike Price $94.00				284	R		0
Goldman Sachs Swaption Futures Call, August 2006, Strike Price $5.07				117,400,000	R		466
Goldman Sachs Swaption Futures Call, December 2006, Strike Price $4.848				403,660,000	R		1,230
Goldman Sachs Swaption Futures Call, February 2007, Strike Price $4.97				292,700,000	R		407
Goldman Sachs Swaption Futures Call, February 2007, Strike Price $5.03				292,700,000	R		462
Goldman Sachs Swaption Futures Call, May 2006, Strike Price $4.875				250,000,000	R		40
Goldman Sachs Swaption Futures Call, May 2006, Strike Price $4.97				155,800,000	R		27
Goldman Sachs Swaption Futures Call, May 2006, Strike Price $5.01				107,900,000	R		85
Goldman Sachs Swaption Futures Call, May 2006, Strike Price $5.03				107,600,000	R		94
U.S. Treasury Note Futures Call, June 2006, Strike Price $103.00				2,462	R		3,770
							20,040
Repurchase Agreements	1.9%
Goldman, Sachs & Company 4.77%, dated 3/31/06, to be repurchased at $143,294 on 4/3/06 (Collateral: $47,675 Freddie Mac notes, 4.0%, due 12/15/09, value $46,483; $100,000 Fannie Mae notes, 4.875%, due 4/15/09, value $99,625)			$	143,237			143,237
Total Short-Term Securities (Identified Cost—$1,632,367)							1,612,058
Total Investments (Identified Cost—$11,246,448)	151.0%					$	11,172,923
Obligation to Return Collateral for Securities Loaned	(22.9)%						(1,696,920	)
Other Assets Less Liabilities	(28.1)%						(2,075,971	)
Net Assets	100.0%					$	7,400,032

112

Annual Report to Shareholders

	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Futures Contracts PurchasedQ
Australian Treasury Bond Futures	June 2006	50	$	(13	)
British Pound Futures	June 2006	50		(134	)
Canadian Dollar Futures	June 2006	511		(575	)
Euro Currency Futures	June 2006	612		648
Eurodollar Futures	June 2006	912		(1,520	)
Eurodollar Futures	September 2006	4,252		(2,063	)
Eurodollar Futures	December 2006	385		(456	)
Eurodollar Futures	March 2008	833		(377	)
Japanese Yen Futures	June 2006	2,020		(904	)
LIBOR Futures	June 2006	554		(175	)
U.S. Treasury Note Futures	June 2006	3,923		(1,628	)
U.S. Treasury Note Futures	June 2006	3,166		(3,247	)
U.S. Treasury Bond Futures	June 2006	58		(4	)
			$	(10,448	)
Futures Contracts WrittenQ
Australian Dollar Futures	June 2006	25	$	3
British Pound Futures	June 2006	10		8
Canadian Dollar Futures	June 2006	120		4
Bundesobligation Futures	June 2006	323		444
			$	459
Options WrittenQ
Deutsche Bank Swaption Futures Call, Strike Price $5.12	May 2006	51,300,000	$	533
Euro Currency Futures Call, Strike Price $1.24	June 2006	100		9
Euro Currency Futures Call, Strike Price $1.25	June 2006	55		8
Eurodollar Futures Call, Strike Price $95.00	September 2006	4,466		429
Eurodollar Futures Call, Strike Price $95.50	September 2006	1,577		485
Eurodollar Futures Call, Strike Price $95.25	September 2006	562		54
Eurodollar Futures Call, Strike Price $94.875	September 2006	302		0.4
Euro Currency Futures Put, Strike Price $1.20	June 2006	100		10
Eurodollar Futures Put, Strike Price $95.75	June 2006	103		(192	)
Goldman Sachs Swaption Futures Call, Strike Price $4.946	December 2006	187,701,900		2,738
Goldman Sachs Swaption Futures Call, Strike Price $5.005	February 2007	64,700,000		452
Goldman Sachs Swaption Futures Call, Strike Price $5.045	February 2007	64,700,000		418
Goldman Sachs Swaption Futures Call, Strike Price $5.04	May 2006	51,900,000		569
Japanese Yen Futures Call, Strike Price $89.00	June 2006	160		68
Japanese Yen Futures Call, Strike Price $88.00	June 2006	50		27
Japanese Yen Futures Put, Strike Price $85.00	June 2006	30		(5	)
Japanese Yen Futures Put, Strike Price $84.00	June 2006	10		4

113

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Options Written—Continued
U.S. Treasury Note Futures Call, Strike Price $105.00	June 2006	437	$	(2	)
U.S. Treasury Note Futures Call, Strike Price $106.00	June 2006	510		117
U.S. Treasury Note Futures Call, Strike Price $107.00	June 2006	546		70
U.S. Treasury Note Futures Call, Strike Price $108.00	June 2006	1,983		321
U.S. Treasury Note Futures Call, Strike Price $109.00	June 2006	109		45
U.S. Treasury Note Futures Call, Strike Price $110.00	June 2006	2,656		1,354
U.S. Treasury Bond Futures Call, Strike Price $110.00	June 2006	528		45
U.S. Treasury Note Futures Call, Strike Price $111.00	June 2006	536		339
U.S. Treasury Bond Futures Call, Strike Price $111.00	June 2006	5		—
U.S. Treasury Note Futures Call, Strike Price $112.00	June 2006	1,186		468
U.S. Treasury Bond Futures Call, Strike Price $113.00	June 2006	2,502		1,390
U.S. Treasury Bond Futures Call, Strike Price $114.00	June 2006	276		83
U.S. Treasury Bond Futures Call, Strike Price $116.00	June 2006	1,290		1,051
U.S. Treasury Note Futures Call, Strike Price $108.00	September 2006	687		(11	)
U.S. Treasury Note Futures Call, Strike Price $109.00	September 2006	597		47
U.S. Treasury Note Futures Call, Strike Price $110.00	September 2006	691		275
U.S. Treasury Bond Futures Call, Strike Price $113.00	September 2006	558		263
U.S. Treasury Note Futures Put, Strike Price $106.00	June 2006	387		(50	)
U.S. Treasury Note Futures Put, Strike Price $107.00	June 2006	269		(195	)
U.S. Treasury Bond Futures Put, Strike Price $110.00	June 2006	535		(478	)
U.S. Treasury Bond Futures Put, Strike Price $109.00	June 2006	980		(321	)
			$	10,418

^A All or a portion of this security is on loan. See note 4 to the notes to financial statements.

^B Indexed Security – The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”), the Consumber Price Index (“CPI”), or the Eleventh District Cost of Funds Index (“COFI”). The coupon rates are the rates as of March 31, 2006.

^C Rule 144a Security – A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities, which the Fund’s investment adviser has determined to be liquid, represent 3.6% of net assets.

^D Stepped Coupon Security – A security with a predetermined schedule of interest or dividend rate changes, at which time it begins to accrue interest or pay dividends.

^E Convertible Security – The security may be converted into issuer’s common stock.

^F Unit – A security which consists of a bond and warrants to purchase stock of the issuer.

^G Zero Coupon Bond – A bond with no periodic interest payments which is sold at such a discount as to produce a current yield to maturity.

^H Securities with interest-only or principal-only payment streams, denoted by a 1 or 2, respectively. For interest-only securities, the amount shown as principal is the notional balance used to calculate the amount of interest due.

^I The coupon rates shown on variable rate securities are the rates at March 31, 2006. These rates vary with the weighted average coupon of the underlying loans.

^J Inflation Protected Security – A security whose principal value is adjusted daily or monthly in accordance with changes to the relevant country’s Consumer Price Index or its equivalent used as an inflation proxy. Interest is calculated on the basis of the current adjusted principal value.

^K When-issued Security – A security purchased on a delayed delivery basis. Final settlement amount and maturity date have not yet been announced.

^L Yankee Bond – A dollar denominated bond issued in the U.S. by foreign entities.

^M Denominated in Canadian dollars.

^N Denominated in Australian dollars.

^O Denominated in euros.

^P All or a portion of this security is pledged as collateral to cover futures and options contracts.

^Q Options and futures are described in more detail in the notes to financial statements.

^R Par represents actual number of contracts.

^S All or a portion of this security is pledged as collateral for credit default swap agreements.

N.M. – Not meaningful.

See notes to financial statements.

114

Annual Report to Shareholders

Statement of Assets and Liabilities

Western Asset Core Plus Bond Portfolio

March 31, 2006

(Amounts in Thousands)

Assets:
Investment securities at market value (Identified Cost—$9,614,081)A			$	9,560,865
Short-term securities at value (Identified Cost—$1,632,367)				1,612,058
Cash and foreign currencies				185,092
Restricted cash pledged as collateral for swaps				16,700
Receivable for securities sold				1,672,398
Receivable for fund shares sold				34,486
Interest and dividends receivable				68,317
Unrealized appreciation of forward foreign currency contracts				2,859
Total assets				13,152,775
Liabilities:
Payable for securities purchased	$	3,988,954
Payable for fund shares repurchased		11,663
Accrued management fee		2,531
Accrued distribution fee		105
Income distribution payable		3,109
Interest expense payable		8,098
Obligation to return collateral for securities loaned		1,696,920
Options written (Proceeds—$19,381)		8,963
Swap contracts at value		29,314
Futures variation margin payable		513
Unrealized depreciation of foreign forward currency contracts		1,579
Accrued expenses		994
Total liabilities				5,752,743
Net Assets			$	7,400,032
Net assets consist of:
Accumulated paid-in-capital applicable to:
673,517 Institutional Class shares outstanding			$	6,999,875
49,122 Financial Intermediary Class shares outstanding				517,927
Undistributed net investment income				7,196
Accumulated net realized loss on investments, options, futures, swaps and foreign currency transactions				(31,907	)
Unrealized appreciation/(depreciation) of investments, options, futures, swaps and foreign currency translations				(93,059	)
Net Assets			$	7,400,032
Net Asset Value Per Share:
Institutional Class				$10.24
Financial Intermediary Class				$10.24

^A The market value of securities on loan is $1,718,643.

See notes to financial statements.

115

Annual Report to Shareholders

Statement of Operations

Western Asset Core Plus Bond Portfolio

For the Year Ended March 31, 2006

(Amounts in Thousands)

Investment Income:
Interest	$	281,734
Dividends		2,382
Total income				$	284,116
Expenses:
Advisory fee		24,377
Distribution and service fees		809
Audit and legal fees		431
Custodian fees		1,075
Directors’ fees and expenses		269
Registration fees		346
Reports to shareholders		130
Transfer agent and shareholder servicing expense:
Institutional Class		68
Financial Intermediary Class		1
Other expenses		103
		27,609
Plus: Fees recaptured		174
Less: Compensating balance creditsA		(23	)
Total expenses, net of fees recaptured and compensating balance credits					27,760
Net Investment Income					256,356
Net Realized and Unrealized Gain/(Loss) on Investments:
Realized gain/(loss) on:
Investments		(27,408	)
Options		7,191
Futures		(26,355	)
Assets and liabilities denominated in foreign currency		(6,405	)
Swaps		41,742
					(11,235	)
Change in unrealized appreciation/(depreciation) on:
Investments, options, futures, and swaps		(129,904	)
Assets and liabilities denominated in foreign currency		170
					(129,734	)
Net Realized and Unrealized Gain/(Loss) on Investments					(140,969	)
Change in Net Assets Resulting From Operations				$	115,387

^A See note 1, compensating balance credits, in the notes to financial statements.

See notes to financial statements.

116

Annual Report to Shareholders

Statement of Changes in Net Assets

Western Asset Core Plus Bond Portfolio

(Amounts in Thousands)

	FOR THE YEARS ENDED
	3/31/06			3/31/05
Change in Net Assets:
Net investment income	$	256,356		$	130,635
Net realized gain/(loss) on investments, options, futures, assets and liabilities denominated in foreign currency and swaps transactions		(11,235	)		109,589
Change in unrealized appreciation/(depreciation) of investments, options, futures, swaps and assets and liabilities denominated in foreign currencies		(129,734	)		(83,280	)
Change in net assets resulting from operations		115,387			156,944
Distributions to Shareholders from:
Net investment income:
Institutional Class		(282,055	)		(129,075	)
Financial Intermediary Class		(15,483	)		(2,045	)
Net realized gain on investments:
Institutional Class		(14,478	)		(86,844	)
Financial Intermediary Class		(622	)		(995	)
Change in net assets from:
Fund share transactions:
Institutional Class		2,515,953			1,338,685
Financial Intermediary Class		325,191			185,779
Change in net assets		2,643,893			1,462,449
Net Assets:
Beginning of year		4,756,139			3,293,690
End of year	$	7,400,032		$	4,756,139
Undistributed net investment income	$	7,196		$	19,833

See notes to financial statements.

117

Annual Report to Shareholders

Financial Highlights

Western Asset Core Plus Bond Portfolio

Contained below is per share operating performance data for a share of common stock outstanding throughout each year shown, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information in the financial statements.

Institutional Class:

	FOR THE YEARS ENDED MARCH 31,
	2006			2005			2004			2003			2002
Net asset value, beginning of year	$	10.52		$	10.71		$	10.40		$	9.88		$	10.07
Investment operations:
Net investment income		.45	A		.37			.37			.51			.56A
Net realized and unrealized gain/(loss) on investments, options, futures, swaps, and foreign currency transactions		(.18	)A		.04			.55			.62			.06A
Total from investment operations		.27			.41			.92			1.13			.62
Distributions paid from:
Net investment income		(.52	)		(.35	)		(.41	)		(.51	)		(.54	)
Net realized gain on investments		(.03	)		(.25	)		(.20	)		(.10	)		(.27	)
Total distributions		(.55	)		(.60	)		(.61	)		(.61	)		(.81	)
Net asset value, end of year	$	10.24		$	10.52		$	10.71		$	10.40		$	9.88
Total return		2.57	%		4.01	%		9.12	%		11.78	%		6.34	%
Ratios To Average Net Assets:B
Total expenses		.45	%		.45	%		.48	%		.50	%		.54	%
Expenses net of waivers, if any		.45	%		.45	%		.45	%		.45	%		.45	%
Expenses net of all reductions		.45	%		.45	%		.45	%		.45	%		.45	%
Net investment income		4.3	%		3.3	%		3.6	%		5.0	%		5.3	%
Supplemental Data:
Portfolio turnover rate		549.4	%		586.1	%		463.8	%		422.6	%		590.7	%
Net assets at end of year (in thousands)	$	6,896,815		$	4,565,054		$	3,286,650		$	1,866,619		$	991,673

^A The amount presented is calculated pursuant to a methodology prescribed by the Securities and Exchange Commission for a share outstanding throughout the period. This amount is inconsistent with the Fund’s aggregate gains and losses because of the timing of sales and redemptions of Fund shares in relation to fluctuating market values for the investment portfolio.

^B Total expenses reflects operating expenses prior to any voluntary expense waivers and/or compensating balance credits. Expenses net of waivers reflects total expenses before compensating balance credits but net of any voluntary expense waivers. Expenses net of all reductions reflects expenses less any compensating balance credits and/or voluntary expense waivers.

See notes to financial statements.

118

Annual Report to Shareholders

Financial Intermediary Class:

	FOR THE YEARS ENDED MARCH 31,
	2006			2005			2004			2003			2002C
Net asset value, beginning of year	$	10.52		$	10.71		$	10.40		$	9.87		$	10.04
Investment operations:
Net investment income		.42A			.35			.36			.48			.11A
Net realized and unrealized gain/(loss) on investments, options, futures, swaps, and foreign currency transactions		(.18	)A		.04			.54			.63			(.17	)A
Total from investment operations		.24			.39			.90			1.11			(.06	)
Distributions paid from:
Net investment income		(.49	)		(.33	)		(.39	)		(.48	)		(.11	)
Net realized gain on investments		(.03	)		(.25	)		(.20	)		(.10	)		—
Total distributions		(.52	)		(.58	)		(.59	)		(.58	)		(.11	)
Net asset value, end of year	$	10.24		$	10.52		$	10.71		$	10.40		$	9.87
Total return		2.32	%		3.77	%		8.82	%		11.57	%		(.57	)%D
Ratios To Average Net Assets:B
Total expenses		.70	%		.70	%		.73	%		.75	%		.75	%E
Expenses net of waivers, if any		.70	%		.70	%		.70	%		.70	%		.70	%E
Expenses net of all reductions		.70	%		.70	%		.70	%		.70	%		.70	%E
Net investment income		4.0	%		2.9	%		3.2	%		4.8	%		5.3	%E
Supplemental Data:
Portfolio turnover rate		549.4	%		586.1	%		463.8	%		422.6	%		590.7	%D
Net assets at end of year (in thousands)	$	503,217		$	191,085		$	7,040		$	369		$	235

^C For the period January 8, 2002 (commencement of operations) to March 31, 2002.

^D Not annualized

^E Annualized

See notes to financial statements.

119

Annual Report to Shareholders

Management’s Discussion of Fund Performance

Western Asset Inflation Indexed Plus Bond Portfolio

The average annual total returns for the Western Asset Inflation Indexed Plus Bond Portfolio for the period from its inception to March 31, 2006, are presented below, along with the total returns of its benchmark:

		Average Annual Total Returns Periods Ended March 31, 2006
	First Quarter 2006	One Year	Three Years	Five Years	Since InceptionA
Western Asset Inflation Indexed Plus Bond Portfolio
Institutional Class	-1.75%	1.44%	4.95%	7.23%	7.23%
Lehman U.S. Treasury Inflation Notes IndexB	-2.25%	0.86%	4.78%	7.24%	7.27%

The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.westernassetfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.

Short-term interest rates rose significantly over the past 12 months, led by a 200 bps^C increase in the federal funds rate target. Long-term interest rates rose only moderately, resulting in a substantial flattening of the yield curve. Contrary to expectations that they would hike rates to only 4%, the Federal Reserve increased its target funds rate by 25 bps at every FOMC meeting, reaching 4.75% in March. Tighter-than-expected monetary policy pushed real yields up by more than nominal yields, reflecting reduced inflation expectations. The dollar also benefited from higher rates, rising some 7% against a basket of currencies. Mortgage-backed spreads began the period fairly tight, only to widen in the latter half of the period as concerns over extension risk mounted. Investment-grade credit spreads drifted wider, driven largely by fallout from the unexpected downgrade of Ford and GM debt. Thanks to a robust global economy, easy money, and strong gains in commodity prices, emerging market spreads tightened dramatically over the course of the period, leaving yields at record-low levels. High yield spreads soared in the wake of the GM and Ford downgrades, but recovered dramatically to finish the period unchanged to somewhat tighter. Despite a substantial reduction of monetary policy accommodation during the period, gold rose over 35%, to $584 per ounce, returning to levels not seen since the inflation panic of 1980. Energy and industrial commodity prices also rose, registering substantial gains against all major currencies. Equity markets moved steadily higher over the course of the period.

The impact of market conditions on the Portfolio’s performance was negative for the 12-month period ended March 31, 2006, since real yields rose in sympathy with rising nominal yields. With strategies producing mixed but generally positive results, the Fund’s total return of 1.44% (net of expenses) exceeded that of its benchmark, the Lehman U.S. Treasury Inflation-Protected Securities (“TIPS”) Index, which recorded a total return of 0.86%. Our expectation that the front-end of the yield curve would steepen was the only detractor among otherwise successful strategies. Exposure to emerging market debt was the single largest contributor to performance as spreads narrowed to historically low levels. A modest exposure to nondollar inflation-linked bonds also added to returns since foreign real yields rose less than their domestic counterparts. Exposure to corporate debt contributed to performance, especially during the lasts few months as positive news in the auto sector drove spreads tighter.

Western Asset Management Company

^A The Fund’s Institutional Class inception date is March 1, 2001. Index returns are for periods beginning February 28, 2001.

^B An unmanaged index that measures the performance of intermediate (1 to 10 year) U.S. Treasury inflation-protected securities. The index does not incur fees and expenses and cannot be purchased directly by investors.

^C 100 basis points = 1%.

120

Annual Report to Shareholders

Expense Example

Western Asset Inflation Indexed Plus Bond Portfolio

As a shareholder of the Fund, you incur ongoing costs, including management fees, and other Fund expenses. These examples are 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. The example is based on an investment of $1,000 invested on October 1, 2005, and held through March 31, 2006.

Actual Expenses

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

Hypothetical Example for Comparison Purposes

The second line in the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% 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 this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

	Beginning Account Value 10/1/05		Ending Account Value 3/31/06		Expenses PaidA During the Period 10/1/05 to 3/31/06
Institutional Class:
Actual	$	1,000.00	$	982.90	$	1.24
Hypothetical (5% return before expenses)		1,000.00		1,023.68		1.26

^A These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio of 0.25% multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (182), and divided by 365 .

121

Annual Report to Shareholders

Performance Information

Western Asset Inflation Indexed Plus Bond Portfolio

The graph compares the Fund’s total returns against that of an appropriate broad-based securities market index. The line illustrates the cumulative total return of an initial $1,000,000 investment for the periods indicated. The line for the Fund represents the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling securities. The line representing the securities market index does not include any transaction costs associated with buying and selling securities in the index or other investment management or administrative expenses.

Total return measures investment performance in terms of appreciation or depreciation in a Fund’s net asset value per share, plus dividends and any capital gain distributions. It assumes that dividends and distributions were reinvested at the time they were paid. Returns (and the graph and table found below) do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Average annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results.

Bonds are subject to a variety of risks, including interest rate, credit and inflation risk.

Growth of a $1,000,000 Investment—Institutional Class

The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information, please visit www.westernassetfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.

^A Index returns are for periods beginning February 28, 2001.

122

Annual Report to Shareholders

Portfolio Composition (as of March 31, 2006)

Standard & Poor’s Debt Ratings^B (as a percentage of the portfolio)

Maturity Schedule (as a percentage of the portfolio)

^B Source: Standard & Poor's.

The Fund is actively managed. As a result, the composition of the portfolio holdings and sectors are subject to change at any time.

123

Annual Report to Shareholders

Portfolio of Investments

Western Asset Inflation Indexed Plus Bond Portfolio

March 31, 2006

(Amounts in Thousands)

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Long-Term Securities	102.3%
Corporate Bonds and Notes	2.6%
Gas and Pipeline Utilities
The Williams Companies, Inc.	0.4%	8.750%	3/15/32	$	1,900	$	2,223
Investment Banking/Brokerage
J.P. Morgan & Co. Incorporated	1.4%	6.805%	2/15/12		2,690		2,835	A
Merrill Lynch & Co., Inc.		4.790%	3/12/07		4,600		4,566	A
							7,401
Special Purpose
Allstate Life Global Funding Trust	0.8%	4.270%	4/2/07		4,600		4,570	A
Total Corporate Bonds and Notes (Identified Cost—$14,112)							14,194
Asset-Backed Securities	0.4%
Indexed SecuritiesA	0.4%
ACE Securities Corp. Home Equity Loan Trust 2003-HS1		5.188%	6/25/33		30		30
Bear Stearns Asset Backed Securities, Inc. 2003-ABF1		5.188%	2/25/34		398		399
Chase Funding Mortgage Loan Asset-Backed Certificates 2002-4		5.188%	10/25/32		237		238
Countrywide Asset-Backed Certificates 2002-1		5.098%	8/25/32		83		83
EMC Mortgage Loan Trust ABS Security 2002-B		5.368%	11/25/41		1,126		1,129	B
EQCC Trust 2002-1		5.118%	11/25/31		210		210
Residential Asset Mortgage Products, Inc. 2003-RS2		5.158%	3/25/33		163		163
Total Asset-Backed Securities (Identified Cost—$2,248)							2,252
Mortgage-Backed Securities	0.5%
Indexed SecuritiesA	0.5%
Crusade Global Trust 2003-2		5.120%	9/18/34		1,268		1,271	C
CS First Boston Mortgage Securities Corp. 2001-28		5.468%	11/25/31		883		886
GSRPM Mortgage Loan Trust Series 2003-2		5.518%	6/25/33		591		593
Total Mortgage-Backed Securities (Identified Cost—$2,744)							2,750
U.S. Government and Agency Obligations	92.2%
Indexed SecuritiesD	91.6%
Tennessee Valley Authority		3.375%	1/15/07		8,008		8,061
United States Treasury Inflation-Protected Security		3.375%	1/15/07		18,820		19,021	E

124

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
U.S. Government and Agency Obligations—(Continued)
Indexed Securities—(Continued)
United States Treasury Inflation-Protected Security		3.625%	1/15/08	$	28,906	$	29,695	E
United States Treasury Inflation-Protected Security		3.875%	1/15/09		37,994		39,778
United States Treasury Inflation-Protected Security		4.250%	1/15/10		18,453		19,826	E
United States Treasury Inflation-Protected Security		0.875%	4/15/10		13,950		13,213	F
United States Treasury Inflation-Protected Security		3.500%	1/15/11		23,425		24,762	E
United States Treasury Inflation-Protected Security		3.375%	1/15/12		18,623		19,745	E
United States Treasury Inflation-Protected Security		3.000%	7/15/12		26,297		27,404	E
United States Treasury Inflation-Protected Security		1.875%	7/15/13		27,687		26,886	E
United States Treasury Inflation-Protected Security		2.000%	1/15/14		40,214		39,248	E
United States Treasury Inflation-Protected Security		2.000%	7/15/14		20,909		20,392	E
United States Treasury Inflation-Protected Security		1.625%	1/15/15		24,991		23,584	E
United States Treasury Inflation-Protected Security		1.875%	7/15/15		19,313		18,573	E
United States Treasury Inflation-Protected Security		2.000%	1/15/16		13,884		13,468	E
United States Treasury Inflation-Protected Security		2.375%	1/15/25		19,710		19,807	E
United States Treasury Inflation-Protected Security		2.000%	1/15/26		31,256		29,620	E
United States Treasury Inflation-Protected Security		3.625%	4/15/28		40,437		49,706	E
United States Treasury Inflation-Protected Security		3.875%	4/15/29		40,568		52,066E
United States Treasury Inflation-Protected Security		3.375%	4/15/32		1,821		2,243	E
							497,098
Stripped Securities	0.6%
United States Treasury Bonds		0.000%	11/15/21		6,520		2,952	E,H2
Total U.S. Government and Agency Obligations (Identified Cost—$508,629)							500,050
U.S. Government Agency Mortgage-Backed Securities	3.4%
Fannie Mae		5.000%	12/31/36		19,340		18,397	I
Total U.S. Government Agency Mortagage-Backed Securities (Identified Cost—$18,532)							18,397
Yankee BondsC	2.5%
Foreign Governments	2.5%
Federative Republic of Brazil		8.875%	4/15/24		86		99
Federative Republic of Brazil		8.875%	4/15/24		350		405
Federative Republic of Brazil		10.125%	5/15/27		130		169
Federative Republic of Brazil		12.250%	3/6/30		392		597

125

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Inflation Indexed Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES			VALUE
Yankee Bonds—(Continued)
Foreign Governments—(Continued)
Federative Republic of Brazil		11.000%	8/17/40	$	1,090		$	1,398	E
Republic of Colombia		11.750%	2/25/20		900			1,283
Republic of Panama		7.125%	1/29/26		940			959
Republic of Peru		5.000%	3/7/17		474			450	J
Republic of Peru		7.350%	7/21/25		290			285	E
Republic of Peru		8.750%	11/21/33		327			365
Russian Federation		5.000%	3/31/30		4,620			5,069	J
United Mexican States		7.500%	4/8/33		1,960			2,185
Total Yankee Bonds (Identified Cost—$12,703)								13,264
Foreign Government Obligations	0.7%
Canadian Real Return Bond		3.000%	12/1/36		930	K		1,073D
Kingdom of Sweden Inflation-Protected Notes		3.500%	12/1/28		14,480	L		2,658D
Total Foreign Government Obligations (Identified Cost—$3,585)								3,731
Total Long-Term Securities (Identified Cost—$562,553)								554,638
Investment of Collateral From Securities Lending	25.3%
State Street Navigator Securities Lending Prime Portfolio					137,477	shs		137,477
Total Investment of Collateral From Securities Lending (Identified Cost—$137,477)								137,477
Short-Term Securities—0.4%	0.4%
U.S. Government and Agency Obligations	0.4%
Fannie Mae		0.000%	5/31/06	$	2,000			1,985	E,G
Freddie Mac		0.000%	5/15/06		301			300	F,G
Total Short-Term Securities (Identified Cost—$2,285)								2,285
Total Investments (Identified Cost—$702,315)	128.0%							694,400
Obligation to Return Collateral for Securities Loaned	(25.3)%							(137,477	)
Other Assets Less Liabilities	(2.7)%							(14,391	)
Net Assets	100.0%						$	542,532

126

Annual Report to Shareholders

	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Futures Contracts PurchasedM
Eurodollar Futures	December 2006	721	$	(695	)
U.S. Treasury Bond Futures	June 2006	18		2
				(693)
Options WrittenM
U.S. Treasury Note Futures Call, Strike Price $108.00	May 2006	162	$	50

^A Indexed security – The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”), the Consumer Price Index (“CPI”), or the one-year Treasury Bill rate. The coupon rates are the rates as of March 31, 2006.

^B Rule 144a Security – A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities, which the Fund’s investment adviser has determined to be liquid, represent 0.2% of net assets.

^C Yankee Bond – A dollar-denominated bond issued in the U.S. by foreign entities.

^D Inflation-Protected Security – A security whose principal value is adjusted daily or monthly in accordance with changes to the relevant country’s Consumer Price Index or its equivalent used as an inflation proxy. Interest is calculated on the basis of the current adjusted principal value.

^E All or a portion of these securities is on loan.

^F All or a portion of this security is pledged as collateral to cover futures and options contracts.

^G Zero coupon bond – A bond with no periodic interest payments which is sold at such a discount as to produce a current yield to maturity.

^H Stripped security – Security with interest-only or principal-only payment streams, denoted by a 1 or 2, respectively. For interest-only securities, the amount shown as principal is the notional balance used to calculate the amount of interest due.

^I When-issued security – Security purchased on a delayed basis. Final settlement amount and maturity date have not yet been announced.

^J Stepped coupon security – A security with a predetermined schedule of interest or dividend rate changes, at which time it begins to accrue interest or pay dividends.

^K Denominated in Canadian dollars.

^L Denominated in Swedish krona.

^M Options and futures are described in more detail in the notes to financial statements.

See notes to financial statements.

127

Annual Report to Shareholders

Statement of Assets and Liabilities

Western Asset Inflation Indexed Plus Bond Portfolio

March 31, 2006

(Amounts in Thousands)

Assets:
Investment securities at market value (Identified Cost—$700,030)A			$	692,115
Short-term securities at value (Identified Cost—$2,285)				2,285
Swap contracts at value				527
Cash and foreign currencies				3,053
Receivable for securities sold				18,618
Receivable for fund shares sold				606
Interest and dividends receivable				4,079
Futures variation margin receivable				9
Unrealized appreciation on forward foreign currency contracts				233
Total assets				721,525
Liabilities:
Payable for securities purchased	$	40,740
Accrued management fee		74
Income distribution payable		56
Obligation to return collateral for securities loaned		137,477
Options written (Proceeds—$57)		7
Payable for fund shares repurchased		4
Unrealized depreciation of foreign forward currency contracts		539
Accrued expenses		96
Total liabilities				178,993
Net Assets			$	542,532
Net assets consist of:
Accumulated paid-in-capital applicable to:
52,949 Institutional Class shares outstanding			$	551,066
Overdistributions of net investment income				(90	)
Accumulated net realized loss on investments, options, futures, swaps and foreign currency transactions				(496	)
Unrealized appreciation/(depreciation) of investments, options, futures, swaps and foreign currency translations				(7,948	)
Net Assets			$	542,532
Net Asset Value Per Share:
Institutional Class				$10.25

^A The market value of securities on loan is $135,095.

See notes to financial statements.

128

Annual Report to Shareholders

Statement of Operations

Western Asset Inflation Indexed Plus Bond Portfolio

For the Year Ended March 31, 2006

(Amounts in Thousands)

Investment Income:
Interest				$	24,839
Expenses:
Advisory fee	$	939
Audit and legal fees		85
Custodian fees		133
Directors’ fees and expenses		29
Registration fees		17
Reports to shareholders		10
Transfer agent and shareholder servicing expense		17
Other expenses		41
		1,271
Less: Fees waived		(92	)
Compensating balance creditsA		(5	)
Total expenses, net of waivers and compensating balance credits					1,174
Net Investment Income					23,665
Net Realized and Unrealized Gain/(Loss) on Investments:
Realized gain/(loss) on:
Investments		4,298
Options		11
Futures		(2,300	)
Foreign currency transactions		329
Swaps		1,233
					3,571
Change in unrealized appreciation/(depreciation) on:
Investments, options, futures, and swaps		(22,028	)
Assets and liabilities denominated in foreign currency		1
					(22,027	)
Net Realized and Unrealized Loss on Investments					(18,456	)
Change in Net Assets Resulting From Operations				$	5,209

^A See note 1, compensating balance credits, in the notes to financial statements.

See notes to financial statements.

129

Annual Report to Shareholders

Statement of Changes in Net Assets

Western Asset Inflation Indexed Plus Bond Portfolio

(Amounts in Thousands)

	FOR THE YEARS ENDED
	3/31/06			3/31/05
Change in Net Assets:
Net investment income	$	23,665		$	14,554
Net realized gain on investments, options, futures, foreign currency transactions and swaps		3,571			1,791
Change in unrealized appreciation/(depreciation) of investments, options, futures, swaps and assets and liabilities denominated in foreign currencies		(22,027	)		(2,789	)
Change in net assets resulting from operations		5,209			13,556
Distributions to Shareholders from:
Net investment income		(24,662	)		(14,661	)
Net realized gain on investments:		(3,825	)		(12,719	)
Change in net assets from Fund share transactions		104,064			129,191
Change in net assets		80,786			115,367
Net Assets:
Beginning of year		461,746			346,379
End of year	$	542,532		$	461,746
Under/(over) distributions of net investment income	$	(90	)	$	598

See notes to financial statements.

130

Annual Report to Shareholders

Financial Highlights

Western Asset Inflation Indexed Plus Bond Portfolio

Contained below is per share operating performance data for a share of common stock outstanding throughout each year shown, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information in the financial statements.

Institutional Class:

	FOR THE YEARS ENDED MARCH 31,
	2006			2005			2004			2003			2002
Net asset value, beginning of year	$	10.74		$	11.24		$	10.96		$	9.92		$	9.98
Investment operations:
Net investment income		.54			.42			.37			.51			.41
Net realized and unrealized gain/(loss) on investments, options, futures, foreign currency transactions and swaps		(.38	)		(.10	)		.71			1.19			.01
Total from investment operations		.16			.32			1.08			1.70			.42
Distributions paid from:
Net investment income		(.56	)		(.42	)		(.37	)		(.51	)		(.41	)
Net realized gain on investments		(.09	)		(.40	)		(.43	)		(.15	)		(.07	)
Total distributions		(.65	)		(.82	)		(.80	)		(.66	)		(.48	)
Net asset value, end of year	$	10.25		$	10.74		$	11.24		$	10.96		$	9.92
Total return		1.44	%		3.27	%		10.33	%		17.62	%		4.28	%
Ratios To Average Net Assets:A
Total expenses		.27	%		.27	%		.27	%		.27	%		.67	%
Expenses net of waivers, if any		.25	%		.25	%		.25	%		.25	%		.25	%
Expenses net of all reductions		.25	%		.25	%		.25	%		.25	%		.25	%
Net investment income		5.0	%		3.8	%		3.4	%		4.8	%		5.0	%
Supplemental Data:
Portfolio turnover rate		177.1	%		255.5	%		281.8	%		75.4	%		79.5	%
Net assets at end of year (in thousands)	$	542,532		$	461,746		$	346,379		$	290,306		$	210,635

^A Total expenses reflects operating expenses prior to any voluntary expense waivers and/or compensating balance credits. Expenses net of waivers reflects total expenses before compensating balance credits but net of any voluntary expense waivers. Expenses net of all reductions reflects expenses less any compensating balance credits and/or voluntary expense waivers.

See notes to financial statements.

131

Annual Report to Shareholders

Management’s Discussion of Fund Performance

Western Asset High Yield Portfolio

The average annual total returns for the Western Asset High Yield Portfolio for the period from its inception to March 31, 2006, are presented below, along with the total returns of its current and former benchmark:

			Average Annual Total Returns Periods Ended March 31, 2006
	First Quarter 2006	One Year	Three Years	Since InceptionA
Western Asset High Yield Bond Portfolio
Institutional Class	3.09%	7.30%	11.01%	9.14%
Lehman High Yield, 2% Issuer Constrained IndexB	2.60%	7.15%	11.96%	10.89%
Lehman High Yield IndexC	2.89%	7.43%	12.08%	10.70%

The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.westernassetfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.

Short-term interest rates rose significantly over the past 12 months, led by a 200 bps^D increase in the federal funds rate target. Long-term interest rates rose only moderately, resulting in a substantial flattening of the yield curve. Contrary to expectations that they would hike rates to only 4%, the Federal Reserve increased its target funds rate by 25 bps at every FOMC meeting, reaching 4.75% in March. Tighter-than-expected monetary policy pushed real yields up by more than nominal yields, reflecting reduced inflation expectations. The dollar also benefited from higher rates, rising some 7% against a basket of currencies. Mortgage-backed spreads began the period fairly tight, only to widen in the latter half of the period as concerns over extension risk mounted. Investment-grade credit spreads drifted wider, driven largely by fallout from the unexpected downgrade of Ford and GM debt. Thanks to a robust global economy, easy money, and strong gains in commodity prices, emerging market spreads tightened dramatically over the course of the period, leaving yields at record-low levels. High-yield spreads soared in the wake of the GM and Ford downgrades, but recovered dramatically to finish the period unchanged to somewhat tighter. Despite a substantial reduction of monetary policy accommodation during the period, gold rose over 35%, to $584 per ounce, returning to levels not seen since the inflation panic of 1980. Energy and industrial commodity prices also rose, registering substantial gains against all major currencies. Equity markets moved steadily higher over the course of the period.

For the 12-month period ending March 31, 2006, the Fund returned 7.30%, net of fees, versus 7.15% for the Lehman High Yield 2% Issuer Constrained Index. Effective September 1, 2005, the Fund changed its comparative index from the Lehman High Yield Index to the Lehman High Yield Index 2% Issuer Constrained (“High Yield Constrained Index”). As a result of significant changes to the Lehman High Yield composition and Lehman index methodology rules, the adviser has determined that the High Yield Constrained Index is more representative of the overall high yield market and therefore more accurately reflects the types of securities in which the Fund invests. The primary reasons for outperformance include: (1) overweight to lower-rated issues; (2) issue selections; and (3) industry allocations. The Fund had an overweight to below B rated issuers. In general, CCC and below rated issues returned 7.43% for the period. Five of the Fund’s top 10 overweights generated returns between 10.96% and 19.07%. Eight of the Fund’s top 10 underweights underperformed the index between 101 and 951 basis points. The Fund had an overweight to transportation and capital goods, which returned 11.00% and 8.27%, respectively. Given the recent spread tightening, our enthusiasm for high yield remains somewhat guarded. In our opinion, returns for the balance of the year will be driven more by lower treasury rates and coupon. We feel any spread tightening from current levels will be limited. Regarding fundamentals, the backdrop continues to be favorable. Corporate cash flow is strong, debt leverage remains reasonable, and cash levels on the balance sheet as well as inventories are encouraging. However, we recognize that the credit cycle has peaked. We expect to see deterioration in credit statistics over the next few quarters, but overall economic conditions should temper this deterioration.

Western Asset Management Company

^A The Fund’s Institutional Class inception date is September 28, 2001. Index returns are for periods beginning September 30, 2001.

^B A market value-weighted index that tracks the daily price, coupon, and total return performance of non-investment grade, fixed rate, publicly placed, dollar-denominated, and non-convertible debt registered with the U.S. Securities and Exchange Commission. The index limits the maximum exposure to any one issuer to 2%. The index does not incur fees and expenses and cannot be purchased directly by investors.

^C A market value-weighted index that tracks the daily price, coupon, and total return performance of non- investment grade, fixed rate, publicly placed, dollar-denominated, and non-convertible debt registered with the U.S. Securities and Exchange Commission. The index does not incur fees and expenses and cannot be purchased directly by investors.

^D 100 basis points = 1%.

132

Annual Report to Shareholders

Expense Example

Western Asset High Yield Portfolio

As a shareholder of the Fund, you incur ongoing costs, including management fees and other Fund expenses. These examples are 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. The example is based on an investment of $1,000 invested on October 1, 2005, and held through March 31, 2006.

Actual Expenses

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

Hypothetical Example for Comparison Purposes

The second line in the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratios and an assumed rate of return of 5% 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 this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

	Beginning Account Value 10/1/05		Ending Account Value 3/31/06		Expenses PaidA During the Period 10/1/05 to 3/31/06
Institutional Class:
Actual	$	1,000.00	$	1,037.10	$	3.15
Hypothetical (5% return before expenses)		1,000.00		1,021.84		3.13

^A These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio of 0.62% multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (182), and divided by 365.

133

Annual Report to Shareholders

Performance Information

Western Asset High Yield Portfolio

The graph compares the Fund’s total returns against that of two broad-based securities market indices. The lines illustrate the cumulative total return of an initial $1,000,000 investment for the periods indicated. The line for the Fund represents the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling securities. The lines representing the securities market indices do not include any transaction costs associated with buying and selling securities in the indices or other investment management or administrative expenses.

Total return measures investment performance in terms of appreciation or depreciation in a Fund’s net asset value per share, plus dividends and any capital gain distributions. It assumes that dividends and distributions were reinvested at the time they were paid. Returns (and the graph and table found below) do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Average annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results.

Bonds are subject to a variety of risks, including interest rate, credit and inflation risk. High Yield Securities are subject to greater fluctuations in value and greater risk of loss of income and principle due to default by the issuer than are higher rated bonds.

Growth of a $1,000,000 Investment—Institutional Class

The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information, please visit www.westernassetfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.

^A Index returns are for periods beginning September 30, 2001.

134

Annual Report to Shareholders

Portfolio Composition (as of March 31, 2006)

Standard & Poor’s Debt Ratings^B (as a percentage of the portfolio)

Maturity Schedule (as a percentage of the portfolio)

^B Source: Standard & Poor's.

^C Preferred Stocks does not have a defined maturity date.

The Fund is actively managed. As a result, the composition of the portfolio holdings and sectors are subject to change at any time.

135

Annual Report to Shareholders

Portfolio of Investments

Western Asset High Yield Portfolio

March 31, 2006

(Amounts in Thousands)

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Long-Term Securities	96.2%
Corporate Bonds and Notes	86.0%
Advertising	1.6%
Affinion Group Inc.		10.125%	10/15/13	$	3,020	$	3,065	A
R.H. Donnelley Corp.		6.875%	1/15/13		1,395		1,305	A
R.H. Donnelley Corp.		6.875%	1/15/13		2,520		2,356	A
WDAC Subsidiary Corp.		8.375%	12/1/14		2,615		2,582	A
							9,308
Aerospace/Defense	1.4%
Alliant Techsystems Inc.		6.750%	4/1/16		1,680		1,701
DRS Technologies, Inc.		6.625%	2/1/16		1,350		1,343
DRS Technologies, Inc.		7.625%	2/1/18		1,500		1,545
Standard Aero Holdings Inc.		8.250%	9/1/14		4,240		3,731
							8,320
Apparel	1.1%
Levi Strauss & Co.		9.750%	1/15/15		1,560		1,642
Levi Strauss & Co.		8.875%	4/1/16		1,200		1,203	A
Oxford Industries, Inc.		8.875%	6/1/11		1,484		1,528
Russell Corporation		9.250%	5/1/10		2,316		2,403
							6,776
Auto and Automotive Parts	0.9%
Keystone Automotive Operations Inc.		9.750%	11/1/13		3,400		2,975
TRW Automotive		9.375%	2/15/13		2,260		2,444
							5,419
Auto Parts and Equipment	1.6%
Commercial Vehicle Group, Inc.		8.000%	7/1/13		2,170		2,170
Visteon Corporation		8.250%	8/1/10		9,082		7,493
							9,663
Automotive	0.7%
Ford Motor Company		7.450%	7/16/31		1,915		1,422
General Motors Corporation		8.375%	7/15/33		4,200		3,076
							4,498
Automotive Retailer	0.5%
Asbury Automotive Group Inc.		9.000%	6/15/12		2,832		2,892
Banking and Finance	3.8%
EPL Finance Corp.		11.750%	11/15/13		2,401		2,461	A
Ford Motor Credit Company		8.625%	11/1/10		1,310		1,255

136

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Banking and Finance—Continued
Ford Motor Credit Company		7.375%	2/1/11	$	3,670	$	3,376
General Motors Acceptance Corporation		6.875%	8/28/12		2,090		1,928
General Motors Acceptance Corporation		8.000%	11/1/31		14,700		13,893
							22,913
Building Materials	2.9%
Associated Materials Incorporated		0.000%	3/1/14		5,260		3,024	B
Interface, Inc.		7.300%	4/1/08		411		419
Interface, Inc.		10.375%	2/1/10		3,182		3,485
K Hovnanian Enterprises Inc.		6.250%	1/15/16		3,250		2,946
K Hovnanian Enterprises Inc.		7.500%	5/15/16		1,400		1,380
Nortek, Inc.		8.500%	9/1/14		5,820		5,922
							17,176
Cable	3.1%
CCH I Holdings, LLC		0.000%	5/15/14		3,130		1,628	B
Charter Communications Holdings, LLC		10.250%	9/15/10		4,449		4,371
CSC Holdings Inc.		7.625%	4/1/11		820		824
CSC Holdings Inc.		7.250%	4/15/12		3,785		3,700	A
CSC Holdings Inc.		7.875%	2/15/18		150		150
EchoStar DBS Corporation		5.750%	10/1/08		1,100		1,089
EchoStar DBS Corporation		6.625%	10/1/14		3,030		2,928
EchoStar DBS Corporation		7.125%	2/1/16		730		718	A
LodgeNet Entertainment Corporation		9.500%	6/15/13		2,652		2,864
							18,272
Casino Resorts	3.2%
Boyd Gaming Corporation		8.750%	4/15/12		862		920
Boyd Gaming Corporation		6.750%	4/15/14		480		479
Inn of The Mountain Gods Resort and Casino		12.000%	11/15/10		5,370		5,800
Mandalay Resort Group		9.375%	2/15/10		58		63
Pinnacle Entertainment, Inc.		8.250%	3/15/12		2,260		2,367
Premier Entertainment Biloxi LLC		10.750%	2/1/12		5,414		5,170
Station Casinos, Inc.		6.625%	3/15/18		1,410		1,378	A
Wynn Las Vegas, LLC		6.625%	12/1/14		3,000		2,914
							19,091
Chemicals	0.2%
Westlake Chemical Corporation		6.625%	1/15/16		1,377		1,362

137

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset High Yield Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Coal	0.6%
Alpha Natural Resources LLC		10.000%	6/1/12	$	2,965	$	3,261
Computer Services and Systems	2.0%
Activant Solutions, Inc.		10.530%	4/1/10		2,700		2,754	A,C
Activant Solutions, Inc.		10.530%	4/1/10		3,050		3,111	A,C
SunGard Data Systems Inc.		10.250%	8/15/15		5,805		6,110	A
							11,975
Containers and Packaging	1.6%
Graham Packaging Company Inc.		8.500%	10/15/12		413		417
Graham Packaging Company Inc.		9.875%	10/15/14		1,056		1,070
Graphic Packaging International Corp.		9.500%	8/15/13		3,060		2,861
Owens Brockway Glass Containers		8.750%	11/15/12		1,790		1,915
Plastipak Holdings Inc.		8.500%	12/15/15		2,810		2,866	A
							9,129
Drug and Grocery Store Chains	0.7%
Delhaize America, Inc.		8.125%	4/15/11		1,208		1,304
Delhaize America, Inc.		9.000%	4/15/31		2,580		2,984
							4,288
Electric	1.5%
Mirant Americas Generation, LLC		8.300%	5/1/11		1,620		1,677
Mission Energy Holding Company		13.500%	7/15/08		1,200		1,377
The AES Corporation		8.750%	5/15/13		1,400		1,512	A
The AES Corporation		7.750%	3/1/14		3,100		3,255
The AES Corporation		9.000%	5/15/15		995		1,079	A
							8,900
Electronics	1.4%
L-3 Communications Corporation		7.625%	6/15/12		550		568
L-3 Communications Corporation		6.375%	10/15/15		3,800		3,743
Rayovac Corporation		8.500%	10/1/13		4,600		4,255
							8,566
Energy	2.7%
Elwood Energy LLC		8.159%	7/5/26		2,871		3,057
Midwest Generation LLC		8.560%	1/2/16		1,205		1,299
NRG Energy, Inc.		7.375%	2/1/16		7,260		7,414

138

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Energy—Continued
Sierra Pacific Resources		6.750%	8/15/17	$	2,360	$	2,369	A
Verasun Energy Corp.		9.875%	12/15/12		1,930		2,046	A
							16,185
Entertainment	0.2%
Warner Music Group		7.375%	4/15/14		1,000		990
Environmental Services	0.7%
Allied Waste North America Incorporated		8.875%	4/1/08		1,522		1,598
Allied Waste North America Incorporated		8.500%	12/1/08		1,185		1,246
Waste Services Inc.		9.500%	4/15/14		1,090		1,124
							3,968
Food, Beverage and Tobacco	0.9%
Domino’s, Inc.		8.250%	7/1/11		2,424		2,485
R.J. Reynolds Tobacco Holdings, Inc.		6.500%	7/15/10		1,330		1,340
Stater Bros. Holdings Inc.		8.410%	6/15/10		1,280		1,307	C
							5,132
Funeral Parlors and Cemeteries	0.2%
Service Corporation International		7.500%	6/15/17		1,270		1,292	A
Gaming	0.7%
River Rock Entertainment Authority		9.750%	11/1/11		3,650		3,942
Gas and Pipeline Utilities	3.7%
ANR Pipeline, Inc.		9.625%	11/1/21		1,604		1,964
Colorado Interstate Gas Company		6.800%	11/15/15		1,340		1,363	A
Dynegy Holdings Inc.		9.875%	7/15/10		1,820		2,002	A
Dynegy Holdings Inc.		8.750%	2/15/12		355		371
Dynegy Holdings Inc.		10.125%	7/15/13		1,435		1,644	A
Dynegy Holdings Inc.		8.375%	5/1/16		2,565		2,552	A
Southern Natural Gas Company		8.000%	3/1/32		1,590		1,744
The Williams Companies, Inc.		7.500%	1/15/31		1,350		1,401
The Williams Companies, Inc.		8.750%	3/15/32		7,989		9,347
							22,388
Health Care	1.9%
Tenet Healthcare Corporation		9.875%	7/1/14		9,522		9,641
Tenet Healthcare Corporation		9.500%	2/1/15		1,830		1,835	A
							11,476

139

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset High Yield Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Homebuilding	0.8%
Beazer Homes USA, Inc.		8.625%	5/15/11	$	720	$	752
Beazer Homes USA, Inc.		8.375%	4/15/12		580		603
Beazer Homes USA, Inc.		6.875%	7/15/15		770		732
KB HOME		6.250%	6/15/15		1,270		1,186
Kimball Hill, Inc.		10.500%	12/15/12		1,535		1,458	A
Schuler Homes, Inc.		10.500%	7/15/11		69		73
							4,804
Investment Banking/Brokerage	0.5%
E*Trade Financial Corporation		7.375%	9/15/13		1,210		1,234
E*Trade Financial Corporation		7.875%	12/1/15		1,547		1,632
							2,866
Lodging/Hotels	0.2%
Host Marriott LP		6.750%	6/1/16		1,500		1,498	A
Machinery	0.5%
Terex Corporation		7.375%	1/15/14		2,960		3,034
Manufacturing (Diversified)	1.3%
American Achievement Corp.		8.250%	4/1/12		530		541
Jacuzzi Brands Incorporated		9.625%	7/1/10		4,156		4,457
Ki Holdings Inc.		0.000%	11/15/14		3,488		2,529	B
							7,527
Media	3.3%
AMC Entertainment Inc.		11.000%	2/1/16		3,520		3,634	A
Clear Channel Communications, Inc.		5.500%	12/15/16		3,100		2,766
Lamar Media Corporation		7.250%	1/1/13		920		943
LIN Television Corporation		6.500%	5/15/13		1,040		977
LIN Television Corporation		6.500%	5/15/13		670		630
Paxson Communications Corporation		7.777%	1/15/12		1,760		1,769	A,C
PRIMEDIA Inc.		8.875%	5/15/11		4,135		4,032
Readers Digest Association, Inc.		6.500%	3/1/11		595		594
Sinclair Broadcast Group, Inc.		8.000%	3/15/12		4,360		4,447
							19,792
Medical Care Facilities	1.4%
DaVita, Inc.		7.250%	3/15/15		4,000		4,020
HCA, Inc.		9.000%	12/15/14		56		63
HCA, Inc.		7.690%	6/15/25		2,150		2,126

140

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Medical Care Facilities—Continued
HCA, Inc.		7.500%	11/6/33	$	700	$	686
Select Medical Corporation		7.625%	2/1/15		1,730		1,561
							8,456
Medical Products	0.3%
Fresenius Medical Care Capital Trust II		7.875%	2/1/08		1,667		1,709	D
Fresenius Medical Care Capital Trust IV		7.875%	6/15/11		150		159
							1,868
Metals	0.3%
Metals USA, Inc.		11.125%	12/1/15		1,500		1,650	A
Oil and Gas	8.9%
AmeriGas Partners, L.P.		7.250%	5/20/15		860		860
Belden & Blake Corporation		8.750%	7/15/12		7,470		7,694
Chesapeake Energy Corporation		7.500%	9/15/13		100		105
Chesapeake Energy Corporation		6.375%	6/15/15		500		492
Chesapeake Energy Corporation		6.250%	1/15/18		1,760		1,720
El Paso Corporation		7.750%	6/15/10		1,568		1,617	A
El Paso Corporation		8.050%	10/15/30		4,040		4,151
El Paso Corporation		7.800%	8/1/31		4,320		4,342
El Paso Natural Gas Company		8.375%	6/15/32		1,600		1,809
Encore Acquisition Company		6.250%	4/15/14		310		297
Encore Acquisition Company		6.000%	7/15/15		1,030		960
Encore Acquisition Company		7.250%	12/1/17		1,030		1,033
Exco Resources, Inc.		7.250%	1/15/11		2,153		2,142
Kerr-Mcgee Corporation		6.950%	7/1/24		765		778
Kerr-McGee Corporation		7.875%	9/15/31		1,205		1,376
Pacific Energy Partners		7.125%	6/15/14		510		519
Parker Drilling Company		9.625%	10/1/13		2,578		2,862
Plains Exploration & Production Company		7.125%	6/15/14		1,340		1,377
Pogo Producing Company		6.875%	10/1/17		2,995		2,958
Pride International, Inc.		7.375%	7/15/14		1,890		1,984
SemGroup, L.P.		8.750%	11/15/15		2,890		2,948	A
SESI, LLC		8.875%	5/15/11		2,290		2,393
Stone Energy Corporation		8.250%	12/15/11		315		317
Stone Energy Corporation		6.750%	12/15/14		1,550		1,449
Suburban Propane Partners LP		6.875%	12/15/13		5,115		4,910
Whiting Petroleum Corporation		7.000%	2/1/14		2,120		2,099
							53,192

141

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset High Yield Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Paper and Forest Products	2.1%
Appleton Papers Inc.		9.750%	6/15/14	$	1,385	$	1,375
Caraustar Industries, Inc.		9.875%	4/1/11		2,500		2,628
Georgia-Pacific Corp.		9.500%	12/1/11		1,940		2,124
Georgia-Pacific Corp.		7.700%	6/15/15		770		774
NewPage Corporation		10.000%	5/1/12		800		840
NewPage Corporation		12.000%	5/1/13		4,600		4,784
							12,525
Pharmaceuticals	0.5%
Leiner Health Products Inc.		11.000%	6/1/12		2,930		2,875
Omnicare, Inc.		6.875%	12/15/15		300		299
							3,174
Printing and Copying Services	0.4%
Xerox Corporation		6.400%	3/15/16		2,180		2,164
Real Estate	0.8%
Forest City Enterprises, Inc.		7.625%	6/1/15		255		269
Forest City Enterprises, Inc.		6.500%	2/1/17		1,700		1,679
Ventas, Inc.		8.750%	5/1/09		1,576		1,671
Ventas, Inc.		9.000%	5/1/12		752		844
Ventas, Inc.		6.625%	10/15/14		290		290
							4,753
Rental and Lease Services	1.8%
Hertz Corporation		8.875%	1/1/14		1,770		1,836	A
Hertz Corporation		10.500%	1/1/16		3,680		3,993	A
NationsRent Inc.		9.500%	10/15/10		3,134		3,408
NationsRent Inc.		9.500%	5/1/15		1,205		1,302
							10,539
Retail	2.2%
Ames True Temper		8.600%	1/15/12		2,010		1,955	C
Brookstone Company Inc.		12.000%	10/15/12		2,030		1,867	A
J.C. Penney Company, Inc.		6.875%	10/15/15		1,055		1,102
J.C. Penney Company, Inc.		7.400%	4/1/37		980		1,057
Neiman Marcus Group, Inc.		10.375%	10/15/15		3,150		3,347	A
Norcraft Companies		9.000%	11/1/11		3,755		3,905
							13,233

142

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Special Purpose	10.4%
AAC Group Holding Corp.		0.000%	10/1/12	$	4,060	$	3,146	B
Denny’s Holdings, Inc.		10.000%	10/1/12		1,240		1,280
Di Finance Corporation		9.500%	2/15/13		4,920		5,117
Dow Jones CDX.NA.HY. Credit-Linked Trust Certificates		8.125%	6/29/11		18,720		18,486	A,E
H & E Equipment Services LLC		11.125%	6/15/12		3,845		4,258
H-Lines Finance Holding Corp.		0.000%	4/1/13		1,671		1,387	B
Hexion U. S. Finance Corporation		9.000%	7/15/14		2,852		2,938
Milacron Escrow Corporation		11.500%	5/15/11		5,464		5,000
Norcraft Holdings LP		0.000%	9/1/12		295		233	B
Rainbow National Services LLC		8.750%	9/1/12		1,373		1,462	A
Rainbow National Services LLC		10.375%	9/1/14		2,060		2,307	A
TransDigm Funding Corp.		8.375%	7/15/11		3,480		3,637
UCAR Finance Inc.		10.250%	2/15/12		3,176		3,390
UGS Corporation		10.000%	6/1/12		1,640		1,804
Vanguard Health Holding Company I, LLC		0.000%	10/1/15		1,861		1,359	B
Vanguard Health Holding Company II, LLC		9.000%	10/1/14		5,089		5,203
Visant Holding Corp.		8.750%	12/1/13		1,230		1,181	A
							62,188
Steel Products	1.5%
Chaparral Steel Company		10.000%	7/15/13		3,120		3,479
Citisteel USA, Inc.		12.480%	9/1/10		2,920		2,993	A,C
Rathgibson Inc.		11.250%	2/15/14		2,695		2,816	A
							9,288
Telecommunications	3.5%
Cincinnati Bell Inc.		7.000%	2/15/15		2,257		2,234
Cincinnati Bell Inc.		6.300%	12/1/28		1,070		987
Citizens Communications Company		9.000%	8/15/31		2,600		2,779
Hawaiian Telcom Communications, Inc.		12.500%	5/1/15		5,970		5,910	A
Qwest Communications International Inc.		8.249%	2/15/09		720		736	C
Qwest Communications International Inc.		7.250%	2/15/11		2,652		2,719
Qwest Communications International Inc.		7.500%	2/15/14		1,610		1,658
Qwest Communications International Inc.		7.500%	2/15/14		1,492		1,537
Qwest Corporation		7.875%	9/1/11		2,180		2,327
							20,887

143

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset High Yield Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Telecommunications (Cellular/Wireless)	0.9%
Rural Cellular Corporation		9.875%	2/1/10	$	3,765	$	4,019
Ubiquitel Operating Company		9.875%	3/1/11		1,250		1,366
							5,385
Transportation	4.6%
American Airlines, Inc.		7.800%	10/1/06		4,940		4,955
American Commercial Lines LLC		9.500%	2/15/15		1,161		1,277
Continental Airlines, Inc.		7.568%	12/1/06		3,474		3,451
Continental Airlines, Inc.		7.033%	6/15/11		2,624		2,507
Gulfmark Offshore, Inc.		7.750%	7/15/14		2,250		2,295
Horizon Lines, LLC		9.000%	11/1/12		2,656		2,809
Kansas City Southern Railway		7.500%	6/15/09		1,400		1,421
Progress Rail Corp.		7.750%	4/1/12		2,040		2,121	A
United Air Lines, Inc.		7.811%	10/1/09		933		928
United Air Lines, Inc.		7.032%	10/1/10		1,538		1,534
United Air Lines, Inc.		7.186%	4/1/11		4,040		4,101
							27,399
Total Corporate Bonds and Notes (Identified Cost—$514,934)							513,404
Mortgage-Backed Securities	0.1%
Fixed Rate Securities
Blackrock Capital Finance L.P. 1996-R1		9.523%	9/25/26		1,086		652
Ocwen Residential Mortgage Corporation 1998-R1		7.000%	10/25/40		336		54
Total Mortgage-Backed Securities (Identified Cost—$897)							706
Yankee BondsF	9.8%
Cable	1.0%
Rogers Cable Inc.		5.500%	3/15/14		1,650		1,563
Rogers Cable Inc.		6.750%	3/15/15		4,540		4,631
							6,194
Chemicals	1.1%
Montell Finl Co Bv		8.100%	3/15/27		4,600		4,462	A
Nell Af SARL		8.375%	8/15/15		2,330		2,313	A
							6,775
Containers and Packaging	0.2%
Sea Containers Limited		10.750%	10/15/06		1,500		1,470
Electric	0.2%
AES China Generating Co., Ltd.		8.250%	6/26/10		1,100		1,106

144

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Yankee Bonds—Continued
Electronics	0.2%
Flextronics Intl Ltd		6.500%	5/15/13	$	1,160	$	1,151
Media	1.3%
Kabel Deutschland GmbH		10.625%	7/1/14		3,855		4,115	A
Quebecor Media Inc.		7.750%	3/15/16		3,650		3,751	A
							7,866
Oil and Gas	1.2%
Ocean Rig Norway AS		8.375%	7/1/13		1,810		1,928
Utilicorp Canada Finance Corporation		7.750%	6/15/11		1,330		1,373
Western Oil Sands Inc.		8.375%	5/1/12		3,285		3,646
							6,947
Paper and Forest Products	0.5%
Domtar Inc.		7.875%	10/15/11		1,030		976
Domtar Inc.		5.375%	12/1/13		2,350		1,927
							2,903
Pharmaceuticals	0.2%
Angiotech Pharmaceuticals, Inc.		7.750%	4/1/14		1,310		1,323	A
Printing and Copying Services	0.2%
Quebecor World Capital Corp.		8.750%	3/15/16		1,120		1,092	A
Semiconductor Equipment and Production	0.5%
Magnachip Semiconductor S.A.		8.000%	12/15/14		3,080		2,880
Services	0.3%
Compagnie Generale de Geophysique SA (CGG)		7.500%	5/15/15		1,870		1,926
Special Purpose	0.1%
MDP Acquisitions PLC		9.625%	10/1/12		475		502
Steel (Producers)	0.2%
Ispat Inland ULC		9.750%	4/1/14		1,170		1,324
Telecommunications	1.3%
Intelsat, Ltd.		7.625%	4/15/12		5,700		4,703
Wind Acquisition Finance SA		10.750%	12/1/15		2,605		2,813	A
							7,516
Telecommunications (Cellular/Wireless)	0.2%
Rogers Wireless Inc.		7.250%	12/15/12		1,060		1,117

145

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset High Yield Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES			VALUE
Yankee Bonds—Continued
Transportation	1.1%
Grupo Transportacion Ferroviaria Mexicana, S.A de C.V. (TFM)		9.375%	5/1/12	$	1,930		$	2,123
OMI Corporation		7.625%	12/1/13		2,779			2,842
Teekay Shipping Corporation		8.875%	7/15/11		1,438			1,582
								6,547
Total Yankee Bonds (Identified Cost—$58,692)								58,639
Preferred Stocks	0.2%
Paxson Communications Corporation					0.2	shs		1,448	G
Total Preferred Stocks (Identified Cost—$1,237)
Warrants	0.1%
American Tower Corporation					1	wts		315	H
Next Generation Network, Inc.					3			0	H
Total Warrants (Identified Cost—$48)								315
Total Long-Term Securities (Identified Cost—$575,808)								574,512
Short-Term Securities	6.9%
Repurchase Agreements	6.9%
Deutsche Bank 4.75%, dated 3/31/06, to be repurchased at $8,218 on 4/3/06 (Collateral: $8,360 Federal Home Loan Bank bonds, 5%, due 2/29/08, value $8,351)				$	8,215			8,215
Goldman, Sachs & Company 4.77%, dated 3/31/06, to be repurchased at $32,902 on 4/3/06 (Collateral: $32,300 Freddie Mac notes, 5.75%, due 1/15/12, value $33,552)					32,889			32,889
Total Short-Term Securities (Identified Cost—$41,104)								41,104
Total Investments (Identified Cost—$616,912)	103.1%						$	615,616
Other Assets Less Liabilities	(3.1)%							(18,698	)
Net Assets	100.0%							$596,918

^A Rule 144a Security – A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities, which the Fund’s investment adviser has determined to be liquid, represent 22.5% of net assets.

^B Stepped Coupon Security – A security with a predetermined schedule of interest or dividend rate changes, at which time it begins to accrue interest or pay dividends.

^C Indexed Security – The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”), the Consumber Price Index (“CPI”), or the one-year Treasury Bill rate. The coupon rates are the rates as of March 31, 2006.

^D Unit – A security which consists of a bond and warrants to purchase to the common stock of the issuer.

^E Certificates are linked to a portfolio of Repurchase Agreements and Credit Default Swap Agreements.

^F Yankee Bond – A dollar denominated bond issued in the U.S. by foreign entities.

^G Pay-in-kind (“PIK”) Security – A bond in which interest or dividends during the initial few years is paid in additional PIK securities rather than in cash.

^H Non-income producing.

See notes to financial statements.

146

Annual Report to Shareholders

Statement of Assets and Liabilities

Western Asset High Yield Portfolio

March 31, 2006

(Amounts in Thousands)

Assets:
Investment securities at market value (Identified Cost—$575,808)			$	574,512
Short-term securities at value (Identified Cost—$41,104)				41,104
Cash				1
Receivable for securities sold				2,199
Interest and dividends receivable				12,649
Total assets				630,465
Liabilities:
Payable for securities purchased	$	33,170
Accrued management fee		274
Accrued expenses		103
Total liabilities				33,547
Net Assets			$	596,918
Net assets consist of:
Accumulated paid-in-capital applicable to:
57,711 Institutional Class shares outstanding			$	586,754
Undistributed net investment income				11,678
Accumulated net realized loss on investments				(218	)
Unrealized appreciation/(depreciation) of investments				(1,296	)
Net Assets			$	596,918
Net Asset Value Per Share:
Institutional Class				$10.34

See notes to financial statements.

147

Annual Report to Shareholders

Statement of Operations

Western Asset High Yield Portfolio

For the Year Ended March 31, 2006

(Amounts in Thousands)

Investment Income:
Interest	$	39,541
Dividends		188
Total income				$	39,729
Expenses:
Advisory fee		2,581
Audit and legal fees		88
Custodian fees		129
Directors’ fees and expenses		28
Registration fees		23
Reports to shareholders		17
Transfer agent and shareholder servicing expense		16
Other expenses		38
		2,920
Less: Compensating balance creditsA		(13	)
Total expenses, net of compensating balance credits					2,907
Net Investment Income					36,822
Net Realized and Unrealized Gain/(Loss) on Investments:
Realized gain on investments					38
Change in unrealized appreciation/(depreciation) on investments					(2,759	)
Net Realized and Unrealized Loss on Investments					(2,721)
Change in Net Assets Resulting From Operations				$	34,101

^A See note 1, compensating balance credits, in the notes to financial statements

See notes to financial statements.

148

Annual Report to Shareholders

Statement of Changes in Net Assets

Western Asset High Yield Portfolio

(Amounts in Thousands)

	FOR THE YEARS ENDED MARCH 31,
	2006			2005
Change in Net Assets:
Net investment income	$	36,822		$	25,540
Net realized gain on investments		38			9,217
Change in unrealized appreciation/(depreciation) of investments		(2,759	)		(5,788	)
Change in net assets resulting from operations		34,101			28,969
Distributions to Shareholders from:
Net investment income		(32,038	)		(21,159	)
Net realized gain on investments		(5,384	)		—
Change in net assets from Fund share transactions		185,822			217,149
Change in net assets		182,501			224,959
Net Assets:
Beginning of year		414,417			189,458
End of year	$	596,918		$	414,417
Undistributed net investment income	$	11,678		$	6,953

See notes to financial statements.

149

Annual Report to Shareholders

Financial Highlights

Western Asset High Yield Portfolio

Contained below is per share operating performance data for a share of common stock outstanding throughout each year shown, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information in the financial statements.

Institutional Class:

	FOR THE YEARS ENDED MARCH 31,
	2006			2005			2004			2003			2002A
Net asset value, beginning of year	$	10.49		$	10.28		$	9.56		$	10.36		$	10.00
Investment operations:
Net investment income		.76			.61			.78			.96			.53
Net realized and unrealized gain/(loss) on investments and foreign currency transactions		(.05	)		.17			.89			(.82	)		.07
Total from investment operations		.71			.78			1.67			.14			.60
Distributions paid from:
Net investment income		(.73	)		(.57	)		(.95	)		(.94	)		(.24	)
Net realized gain on investments		(.13	)		—			—			—			—
Total distributions		(.86	)		(.57	)		(.95	)		(.94	)		(.24	)
Net asset value, end of year	$	10.34		$	10.49		$	10.28		$	9.56		$	10.36
Total return		7.30	%		7.81	%		18.27	%		2.22	%		6.02	%B
Ratios To Average Net Assets:C
Total expenses		.62	%		.62	%		.67	%		.67	%		.75	%D
Expenses net of waivers, if any		.62	%		.62	%		.58	%		.55	%		.55	%D
Expenses net of all reductions		.62	%		.62	%		.58	%		.55	%		.55	%D
Net investment income		7.8	%		7.0	%		7.9	%		10.2	%		10.4	%D
Supplemental Data:
Portfolio turnover rate		147.2	%		121.0	%		116.0	%		110.1	%		51.8	%B
Net assets at end of year (in thousands)	$	596,918		$	414,417		$	189,458		$	149,937		$	152,729

^A For the period September 28, 2001 (commencement of operations) to March 31, 2002.

^B Not annualized

^C Total expenses reflects operating expenses prior to any voluntary expense waivers and/or compensating balance credits. Expenses net of waivers reflects total expenses before compensating balance credits but net of any voluntary expense waivers. Expenses net of all reductions reflects expenses less any compensating balance credits and/or voluntary expense waivers.

^D Annualized

See notes to financial statements.

150

Annual Report to Shareholders

Management’s Discussion of Fund Performance

Western Asset Non-U.S. Opportunity Bond Portfolio

The average annual total returns for the Western Asset Core Bond Portfolio for the period from its inception to March 31, 2006, are presented below, along with the total returns of its benchmark:

			Average Annual Total Returns Periods Ended March 31, 2006
	First Quarter 2006	One Year	Three Years	Five Years	Since InceptionA
Western Asset Non-U.S. Opportunity Bond Portfolio
Institutional Class	-0.21%	5.33%	7.47%	9.27%	7.62%
Citigroup World Government
ex-U.S. Bond Index (Hedged)B	-0.92%	3.44%	3.46%	4.37%	5.47%

The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.westernassetfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.

Short-term interest rates rose significantly over the past 12 months, led by a 200 bps^C increase in the federal funds rate target. Long-term interest rates rose only moderately, resulting in a substantial flattening of the yield curve. Contrary to expectations that they would hike rates to only 4%, the Federal Reserve increased its target funds rate by 25 bps at every FOMC meeting, reaching 4.75% in March. Tighter-than-expected monetary policy pushed real yields up by more than nominal yields, reflecting reduced inflation expectations. The dollar also benefited from higher rates, rising some 7% against a basket of currencies. Mortgage-backed spreads began the period fairly tight, only to widen in the latter half of the period as concerns over extension risk mounted. Investment-grade credit spreads drifted wider, driven largely by fallout from the unexpected downgrade of Ford and GM debt. Thanks to a robust global economy, easy money, and strong gains in commodity prices, emerging market spreads tightened dramatically over the course of the period, leaving yields at record-low levels. High-yield spreads soared in the wake of the GM and Ford downgrades, but recovered dramatically to finish the period unchanged to somewhat tighter. Despite a substantial reduction of monetary policy accommodation during the period, gold rose over 35%, to $584 per ounce, returning to levels not seen since the inflation panic of 1980. Energy and industrial commodity prices also rose, registering substantial gains against all major currencies. Equity markets moved steadily higher over the course of the period.

The Fund outperformed its benchmark over the review period. The portfolio benefited mainly from our duration and currency positions. The return (in USD) for the Fund was 5.33% compared to the return of the benchmark (Citigroup World Government ex-U.S. Bond Index USD hedged) of 3.44%. During the year we have maintained the same broad strategic themes: overweight the markets where monetary policy has been tightened substantially (U.K., Australia and Poland) and underweight the markets where monetary policy is relatively easy (euro zone, Japan). During the second quarter 2005 we tactically overweighed the euro zone market as it became apparent that the US recovery was not yet feeding through the European continent. All of these positions worked well throughout the year. Tactical adjustments to position sizes have been supportive of performance. Sector decisions boosted performance, in particular our allocation to euro zone inflation-linked bonds in the third quarter 2005 as break-even inflation rates increased in the second part of 2005 and the beginning of 2006. Our currency strategy of a modest underweight in the euro against overweight positions in U.S. dollar, Australian dollar, Polish zloty, and Japanese yen, contributed positively to performance.

Western Asset Management Company

^A The Fund’s Institutional Class inception date is July 15, 1998. Index returns are for periods beginning July 31, 1998.

^B An index encompassing an all-inclusive universe of institutionally traded bonds, including all fixed rate bonds with remaining maturities of one year or longer and with amounts outstanding of at least the equivalent of $25 million USD. This Index excludes the U.S. and is currency-hedged as a means of achieving low-risk interest rate diversification. The index does not incur fees and expenses and cannot be purchased directly by investors.

^C 100 basis points = 1%.

151

Annual Report to Shareholders

Expense Example

Western Asset Non-U.S. Opportunity Bond Portfolio

As a shareholder of the Fund, you incur ongoing costs, including management fees and other Fund expenses. These examples are 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. The example is based on an investment of $1,000 invested on October 1, 2005, and held through March 31, 2006.

Actual Expenses

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

Hypothetical Example for Comparison Purposes

The second line in the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% 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 this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

	Beginning Account Value 10/1/05		Ending Account Value 3/31/06		Expenses PaidA During the Period 10/1/05 to 3/31/06
Institutional Class:
Actual	$	1,000.00	$	1,006.00	$	2.75
Hypothetical (5% return before expenses)		1,000.00		1,022.19		2.77

^A These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio of 0.55% multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (182), and divided by 365.

152

Annual Report to Shareholders

Performance Information

Western Asset Non-U.S. Opportunity Bond Portfolio

The graph compares the Fund’s total returns against that of an appropriate broad-based securities market index. The line illustrates the cumulative total return of an initial $1,000,000 investment for the periods indicated. The line for the Fund represents the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling securities. The line representing the securities market index does not include any transaction costs associated with buying and selling securities in the index or other investment management or administrative expenses.

Total return measures investment performance in terms of appreciation or depreciation in a Fund’s net asset value per share, plus dividends and any capital gain distributions. It assumes that dividends and distributions were reinvested at the time they were paid. Returns (and the graph and table found below) do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Average annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results.

Bonds are subject to a variety of risks, including interest rate, credit and inflation risk. Non U.S. investments are subject to currency fluctuations, social, economic and political risk.

Growth of a $1,000,000 Investment—Institutional Class

The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information, please visit www.westernassetfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.

^A Index returns are for periods beginning July 31, 1998.

153

Annual Report to Shareholders

Performance Information—Continued

Portfolio Composition (as of March 31, 2006)

Standard & Poor’s Debt Ratings^B (as a percentage of the portfolio)

Maturity Schedule (as a percentage of the portfolio)

^B Source: Standard & Poor's.

The Fund is actively managed. As a result, the composition of the portfolio holdings and sectors are subject to change at any time.

154

Annual Report to Shareholders

Portfolio of Investments

Western Asset Non-U.S. Opportunity Bond Portfolio

March 31, 2006

(Amounts in Thousands)

	% OF NET ASSETS	RATE	MATURITY DATE	PARA	VALUE
Long-Term Securities	83.4%
Australian Dollar	13.5%
Government Obligations	13.5%
Commonwealth of Australia		5.750%	6/15/11	7,650	$	5,568
Queensland Treasury Corp		6.000%	6/14/11	9,100		6,657	B
Total Australian Dollar						12,225
British Sterling	28.5%
Corporate Bonds and Notes	10.9%
Banking and Finance	4.7%
European Investment Bank		4.250%	12/7/10	2,280		3,889
Landesbank Hessen-Thueringen Girozentrale		5.375%	3/7/12	200		358
						4,247
Diversified Financial Services	6.2%
Irish Nationwide Building Society		5.875%	12/15/08	200		356
Network Rail MTN Finance PLC		4.875%	3/6/09	3,000		5,240
						5,596
Government Obligations	17.6%
United Kingdom of Great Britain and Northern Ireland		8.000%	6/7/21	960		2,336
United Kingdom Treasury Bond		4.750%	9/7/15	230		410
United Kingdom Treasury Stock		4.750%	6/7/10	4,440		7,801
United Kingdom Treasury Stock		5.000%	3/7/12	2,980		5,332
						15,879
Total British Sterling						25,722
Canadian Dollar	5.8%
Government Obligations	5.8%
Canadian Real Return Bond		4.500%	6/1/15	5,390		4,702	B
Canadian Real Return Bond		4.000%	12/1/31	426		551	B
Total Canadian Dollar						5,253

155

Annual Report to Shareholders

Portfolio of Investments

Western Asset Non-U.S. Opportunity Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PARA	VALUE
Danish Krone	8.2%
Corporate Bonds and Notes	4.8%
Nordea Kredit Realkreditaktieselskab		4.000%	10/1/35	6,527	$	988
Nykredit Realkredit AS		4.000%	10/1/38	7,210		1,080
Realkredit Danmark AS		4.000%	10/1/38	15,210		2,274
						4,342
Government Obligations	3.4%
Kingdom of Denmark		5.000%	11/15/13	17,460		3,065
Total Danish Krone						7,407
Euro	22.7%
Corporate Bonds and Notes	8.8%
Banks	2.7%
Bank Nederlandse Gemeenten NV		5.625%	10/25/10	1,850		2,429
Diversified Financial Services	2.6%
Kreditanstalt fuer Wiederaufbau		5.250%	1/4/10	1,800		2,312
Investment Banking/Brokerage	3.5%
Caisse de Refinancement L’ Habitat		4.200%	4/25/11	2,000		2,486
Morgan Stanley		2.805%	7/20/12	600		727	C
						3,213
U.S. Government and Agency Obligations	1.3%
Freddie Mac		5.750%	9/15/10	900		1,182
Government Obligations	12.6%
Federal Republic of Germany		3.750%	1/4/15	730		884
Federal Republic of Germany		4.750%	7/4/34	800		1,090
Kingdom of Spain		5.750%	7/30/32	1,970		3,045
Kingdom of the Netherlands		5.500%	1/15/28	1,270		1,869
Republic of France		3.000%	7/25/12	1,981		2,625	B
Republic of France		4.000%	4/25/55	1,500		1,827	B
						11,340
Total Euro						20,476
Norwegian Krone	1.2%
Government Obligations	1.2%
Kingdom of Norway		6.500%	5/15/13	3,580		635
Kingdom of Norway		5.000%	5/15/15	2,820		467
Total Norwegian Krone						1,102

156

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PARA		VALUE
Polish Zloty	2.6%
Government Obligations	2.6%
Republic of Poland		6.000%	5/24/09		670	$	216
Republic of Poland		5.000%	10/24/13		3,020		943
Republic of Poland		6.250%	10/24/15		3,510		1,186
Total Polish Zloty							2,345
South African Rand	0.9%
Government Obligations	0.9%
Republic of South Africa		8.75%	12/21/14		4,540		796
Total Long-Term Securities (Identified Cost—$73,668)							75,326
Short-Term Securities	9.5%
Repurchase Agreements	9.5%
Goldman, Sachs & Company 4.77%, dated 3/31/06, to be repurchased at $8,639 on 4/3/06 (Collateral: $8,690 Federal Home Loan Bank bonds, 5%, due 10/27/08, value $8,809)				$	8,636		8,636
Total Short-Term Securities (Identified Cost—$8,636)							8,636
Total Investments (Identified Cost—$82,304)	92.9%					$	83,962
Other Assets Less Liabilities	7.1%						6,459
Net Assets	100.0%					$	90,421

	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Futures Contracts PurchasedD
Australian Treasury Bond Futures	June 2006	87	$	14
U.K. Treasury Bond Futures	June 2006	30		(21	)
			$	(7	)
Futures Contracts WrittenD
Bundesobligation Futures	June 2006	185	$	249
Bundesobligation Futures	June 2006	25		21
			$	270

^A Securities are grouped by the currencies in which they were issued, and the par amounts are also in the issuance currency of the security.

^B Inflation-Protected Security – A security whose principal value is adjusted daily or monthly in accordance with changes to the relevant country’s Consumer Price Index or its equivalent used as an inflation proxy. Interest is calculated on the basis of the current adjusted principal value.

^C Indexed Security – The rates of interest earned on these securities is tied to the London Interbank Offered Rate (“LIBOR”). The coupon rates are the rates as of March 31, 2006.

^D Futures are described in more detail in the notes to financial statements.

See notes to financial statements.

157

Annual Report to Shareholders

Statement of Assets and Liabilities

Western Asset Non U.S. Opportunity Bond Portfolio

March 31, 2006

(Amounts in Thousands)

Assets:
Investment securities at market value (Identified Cost—$73,668)			$	75,326
Short-term securities at value (Identified Cost—$8,636)				8,636
Cash and foreign currencies				3,081
Receivable for fund shares sold				453
Interest receivable				1,252
Futures variation margin receivable				262
Unrealized appreciation on forward foreign currency contracts				1,905
Total assets				90,915
Liabilities:
Payable for fund shares repurchased	$	56
Accrued management fee		4
Unrealized depreciation on forward foreign currency contracts		371
Accrued expenses		63
Total liabilities				494
Net Assets			$	90,421
Net assets consist of:
Accumulated paid-in-capital applicable to:
9,427 Institutional Class shares outstanding			$	87,528
Overdistributions of net investment income				(545	)
Unrealized appreciation/(depreciation) of investments, futures and foreign currency translations				3,438
Net Assets			$	90,421
Net Asset Value Per Share:
Institutional Class				$9.59

See notes to financial statements.

158

Annual Report to Shareholders

Statement of Operations

Western Asset Non-U.S. Opportunity Bond Portfolio

For the Year Ended March 31, 2006

(Amounts in Thousands)

Investment Income:
Interest				$	3,114
Total income
Expenses:
Advisory fee	$	366
Audit and legal fees		69
Custodian fees		83
Directors’ fees and expenses		7
Registration fees		14
Reports to shareholders		11
Transfer agent and shareholder servicing expense		15
Other expenses		36
		601
Less: Fees waived		(153	)
Compensating balance creditsA		(1	)
Total expenses, net of waivers and compensating balance credits					447
Net Investment Income					2,667
Net Realized and Unrealized Gain on Investments:
Realized gain on:
Investments		2,948
Futures		361
Foreign currency transactions		7,954
					11,263
Change in unrealized appreciation/(depreciation) on:
Investments and futures		(9,573	)
Assets and liabilities denominated in foreign currency		13
					(9,560	)
Net Realized and Unrealized Gain on Investments					1,703
Change in Net Assets Resulting From Operations				$	4,370

^A See note 1, compensating balance credits, in the notes to financial statements.

See notes to financial statements.

159

Annual Report to Shareholders

Statement of Changes in Net Assets

Western Asset Non-U.S. Opportunity Bond Portfolio

(Amounts in Thousands)

	FOR THE YEARS ENDED
	3/31/06			3/31/05
Change in Net Assets:
Net investment income	$	2,667		$	3,166
Net realized gain on investments, futures and foreign currency transactions		11,263			5,065
Change in unrealized appreciation/(depreciation) of investments, futures and assets and liabilities denominated in foreign currencies		(9,560	)		(506	)
Change in net assets resulting from operations		4,370			7,725
Distributions to Shareholders from:
Net investment income		(7,829	)		(2,732	)
Net realized gain on investments		(5,345	)		(137	)
Change in net assets from Fund share transactions		10,055			(12,713	)
Change in net assets		1,251			(7,857	)
Net Assets:
Beginning of year		89,170			97,027
End of year	$	90,421		$	89,170
Overdistributed net investment income	$	(545	)	$	(1,907	)

See notes to financial statements.

160

Annual Report to Shareholders

Financial Highlights

Western Asset Non-U.S. Opportunity Bond Portfolio

Contained below is per share operating performance data for a share of common stock outstanding throughout each year shown, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information in the financial statements.

Institutional Class:

	FOR THE YEARS ENDED MARCH 31,
	2006			2005			2004			2003			2002
Net asset value, beginning of year	$	10.98		$	10.52		$	10.91		$	9.25		$	9.25
Investment operations:
Net investment income		.64			.19			.97			.25			—A
Net realized and unrealized gain/(loss) on investments, options, futures, and foreign currency transactions		(.07	)		.57			(.01	)		1.52			.46A
Total from investment operations		.57			.76			.96			1.77			.46
Distributions paid from:
Net investment income		(1.16	)		(.29	)		(1.01	)		(.11	)		(.46	)
Net realized gain on investments		(.80	)		(.01	)		(.34	)		—			—
Total distributions		(1.96	)		(.30	)		(1.35	)		(.11	)		(.46	)
Net asset value, end of year	$	9.59		$	10.98		$	10.52		$	10.91		$	9.25
Total return		5.33	%		7.60	%		9.06	%		19.26	%		5.21	%
Ratios To Average Net Assets:B
Total expenses		.74	%		.68	%		.80	%		.82	%		.82	%
Expenses net of waivers, if any		.55	%		.55	%		.55	%		.55	%		.55	%
Expenses net of all reductions		.55	%		.55	%		.55	%		.55	%		.55	%
Net investment income		3.3	%		3.2	%		4.0	%		4.4	%		4.5	%
Supplemental Data:
Portfolio turnover rate		140.1	%		40.8	%		42.8	%		187.5	%		307.6	%
Net assets at end of year (in thousands)	$	90,421		$	89,170		$	97,027		$	59,026		$	47,487

^A The amount presented is calculated pursuant to a methodology prescribed by the Securities and Exchange Commission for a share outstanding throughout the period. This amount is inconsistent with the Fund’s aggregate gains and losses because of the timing of sales and redemptions of Fund shares in relation to fluctuating market values for the investment portfolio.

^B Total expenses reflects operating expenses prior to any voluntary expense waivers and/or compensating balance credits. Expenses net of waivers reflects total expenses before compensating balance credits but net of any voluntary expense waivers. Expenses net of all reductions reflects expenses less any compensating balance credits and/or voluntary expense waivers.

See notes to financial statements.

161

Annual Report to Shareholders

Notes to Financial Statements

(Amounts in Thousands)

1. Significant Accounting Policies:

Western Asset Funds, Inc. (“Corporation”), consisting of Western Asset Limited Duration Bond Portfolio (“Limited Duration”), Western Asset Intermediate Bond Portfolio (“Intermediate”), Western Asset Intermediate Plus Bond Portfolio (“Intermediate Plus”), Western Asset Core Bond Portfolio (“Core”), Western Asset Core Plus Bond Portfolio (“Core Plus”), Western Asset Inflation Indexed Plus Bond Portfolio (“Inflation Indexed”), Western Asset High Yield Portfolio (“High Yield”), and Western Asset Non-U.S. Opportunity Bond Portfolio (“Non-U.S.”) (individually a “Fund,” collectively the “Funds”), is registered under the Investment Company Act of 1940, as amended (“1940 Act”), as a diversified, open-end management investment company with the exception of Non-U.S., which is non-diversified.

Each Fund offers two classes of shares: Institutional Class and Financial Intermediary Class. Shares in the Financial Intermediary Class bear a distribution fee. The Financial Intermediary Class shares of Limited Duration, Intermediate, Intermediate Plus, Inflation Indexed, High Yield, and Non-U.S. have not commenced operations. The income and expenses of each of the Funds are allocated proportionately to the two classes of shares based on daily net assets, except for Rule 12b-1 distribution fees, which are charged only on the Financial Intermediary Class shares, and transfer agent and shareholder servicing expenses, which are determined separately for each class.

Preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from these estimates. The following is a summary of significant accounting policies followed by the Funds in the preparation of their financial statements:

Security Valuation

Securities owned by the Funds for which market quotations are readily available are valued at current market value. Securities for which market quotations are not readily available are fair valued pursuant to procedures approved by and under the general oversight of the Board of Directors. In determining fair value, all relevant qualitative and quantitative factors available are considered. These factors are subject to change over time and are reviewed periodically. The values assigned to fair value investments are based on available information and do not necessarily represent amounts that might ultimately be realized, since such amounts depend on future developments inherent in long-term investments. Further, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market of the investments existed, and the differences could be material.

With respect to Intermediate Plus, Core Plus, Inflation Indexed, High Yield and Non-U.S., where a security is traded on more than one market, which may include foreign markets, the securities are generally valued on the market considered by the Funds’ adviser to be the primary market. The Funds will value their foreign securities in U.S. dollars on the basis of the then-prevailing exchange rates.

Security Transactions

Security transactions are recorded on the trade date. Realized gains and losses from security transactions are reported on an identified cost basis for both financial reporting and federal income tax purposes.

For the year ended March 31, 2006, investment transactions (excluding short-term investments) were:

	Purchases				Proceeds From Sales
	U.S. Gov’t Securities		Other		U.S. Gov’t Securities		Other
Limited Duration	$	150,238	$	47,019	$	133,332	$	26,660
Intermediate		1,363,138		442,242		1,279,490		462,460
Intermediate Plus		180,163		56,302		154,417		44,290
Core		23,285,379		3,541,585		22,671,737		2,604,718
Core Plus		31,613,168		7,602,967		29,227,173		5,947,993
Inflation Indexed		865,274		68,320		780,445		79,209
High Yield		—		840,656		—		665,345
Non-U.S.		—		107,134		—		100,750

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Forward Commitments

The Funds may enter into commitments to purchase securities on a “forward commitment” basis, including purchases on a “when-issued” basis or a “to be announced” basis. When such transactions are negotiated, certain terms may be fixed at the time the commitment is made, but delivery and payment for the securities takes place at a later date. During the period between a commitment and settlement, no payment is made by the purchaser for the securities purchased and, thus, no interest accrues to the purchaser from the transaction. In a “to be announced” transaction, a Fund commits to purchase securities for which all specific information is not yet known at the time of the trade, particularly the exact face amount in forward commitment mortgage backed securities transactions. Depending on market conditions, a Fund’s forward commitment purchases could cause its net asset value to be more volatile.

A Fund may sell the securities subject to a forward commitment purchase, which may result in a gain or loss. When a Fund purchases securities on a forward commitment basis, it assumes the risks of ownership, including the risk of price fluctuation, at the time of purchase, not at the time of receipt. Purchases of forward commitment securities also involve a risk of loss if the seller fails to deliver after the value of the securities has risen.

Each Fund may also enter into a forward commitment to sell securities it owns and will generally do so only with the intention of actually delivering the securities. In a forward sale, a Fund does not participate in gains or losses on the security occurring after the commitment date. Forward commitments to sell securities also involve a risk of loss if the seller fails to take delivery after the value of the securities has declined.

Foreign Currency Translation

Assets and liabilities initially expressed in non-U.S. currencies are translated into U.S. dollars using currency exchange rates determined prior to the close of trading on the Exchange, usually at 2:00 p.m. Eastern time. Purchases and sales of securities and income and expenses are translated into U.S. dollars at the prevailing market rates on the dates of such transactions. The effects of changes in non-U.S. currency exchange rates on investment securities and other assets and liabilities are included with the net realized and unrealized gain or loss on foreign currency transactions.

Repurchase Agreements

The Funds may engage in repurchase agreement transactions. Under the terms of a typical repurchase agreement, a fund takes possession of an underlying debt obligation subject to an obligation of the seller to repurchase, and a fund to resell, the obligation at an agreed-upon price and time, thereby determining the yield during a fund’s holding period. This arrangement results in a fixed rate of return that is not subject to market fluctuations during the fund’s holding period. The value of the collateral is at all times at least equal to the total amount of the repurchase obligation, including interest. In the event of counterparty default, a fund has the right to use the collateral to satisfy the terms of the repurchase agreement. However, there could be potential loss to the fund in the event the fund is delayed or prevented from exercising its right to dispose of the collateral securities, including the risk of a possible decline in the value of the collateral securities during the period in which the fund seeks to assert its rights. The Funds’ investment advisers review the value of the collateral and the creditworthiness of those banks and dealers with which the Funds enter into repurchase agreements to evaluate potential risks.

Options, Futures and Swap Agreements

The current market value of a traded option is the last sale price or, in the absence of a sale, the mean between the closing bid and asked price. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. Futures contracts are marked-to-market on a daily basis. As a contract’s value fluctuates, payments known as variation margin are made or received by a Fund each day, depending on the daily fluctuation in the value of the contract. The daily changes in contract value are recorded as unrealized gains or losses, and the Fund recognizes a gain or loss when the contract is closed. Swap agreements are priced daily based upon quotations from brokers and the change, if any, is recorded as unrealized appreciation or depreciation.

Investment Income and Distributions to Shareholders

Investment income and distributions to shareholders are allocated at the class level and are recorded on the ex-dividend date. Dividends from net investment income are declared daily and paid monthly for each Fund except High Yield and Non-U.S., which

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Notes to Financial Statements—Continued

declare and pay dividends quarterly. Net capital gain distributions, which are calculated at the Fund level, are declared and paid annually in May. An additional distribution may be made in November to the extent necessary in order to comply with federal excise tax requirements. Distributions are determined in accordance with federal income tax regulations, which may differ from those determined in accordance with accounting principles generally accepted in the United States of America; accordingly, periodic reclassifications are made within the Funds’ capital accounts to reflect income and gains available for distribution under federal income tax regulations. Interest income and expenses are recorded on the accrual basis. Bond discounts and premiums are amortized and included in interest income for financial reporting and federal income tax purposes.

Compensating Balance Credits

The Funds have an arrangement with their custodian bank, whereby a portion of the custodian’s fee is paid indirectly by credits earned on the Funds’ cash on deposit with the bank. This deposit arrangement is an alternative to purchasing overnight investments.

Other

In the normal course of business, each Fund enters into contracts that provide general indemnifications. Each Fund’s maximum exposure under these arrangements is dependent upon claims that may be made against the Fund in the future and, therefore, cannot be estimated; however, based on experience, the risk of material loss from such claims in considered remote.

2. Federal Income Taxes:

No provision for federal income or excise taxes is required since each Fund intends to continue to qualify as a regulated investment company and distribute substantially all of its taxable income and capital gains to its shareholders. Because federal income tax regulations differ from accounting principles generally accepted in the United States of America, income and capital gain distributions determined in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Accordingly, the character of distributions and composition of net assets for tax purposes may differ from those reflected in the accompanying financial statements.

Distributions during the years ended March 31, 2006 and 2005, were characterized as follows for tax purposes:

	Limited Duration				Intermediate				Intermediate Plus
	2006		2005		2006		2005		2006		2005
Ordinary income	$	2,696	$	932	$	31,624	$	30,579	$	2,415	$	543
Long-term capital gains		—		12		5,372		6,295		—		—
Total distributions	$	2,696	$	944	$	36,996	$	36,874	$	2,415	$	543
	Core				Core Plus				Inflation Indexed
	2006		2005		2006		2005		2006		2005
Ordinary income	$	187,980	$	130,278	$	308,295	$	190,928	$	26,548	$	20,831
Long-term capital gains		0		29,152		4,343		28,031		1,940		6,549
Total distributions	$	187,980	$	159,430	$	312,638	$	218,959	$	28,488	$	27,380
	High Yield				Non-U.S.
	2006		2005		2006		2005
Ordinary income	$	33,337	$	21,159	$	9,761	$	2,029
Long-term capital gains		4,085		—		3,413		840
Total distributions	$	37,422	$	21,159	$	13,174	$	2,869

Pursuant to federal income tax regulations applicable to investment companies, the Funds have elected to treat net capital losses realized between November 1 and March 31 of each year (“post-October loss”) as occurring on the first day of the

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following tax year. For the year ended March 31, 2006, realized capital losses reflected in the accompanying financial statements, as shown in the table below, will not be recognized for federal income tax purposes until 2006.

The tax basis components of net assets at March 31, 2006, were:

	Limited Duration			Intermediate			Intermediate Plus			Core			Core Plus			Inflation Indexed			High Yield			Non-U.S.
Unrealized appreciation	$	54		$	3,859		$	240		$	60,504		$	106,239		$	7,385		$	9,306		$	5,862
Unrealized depreciation		(852	)		(18,084	)		(1,535	)		(134,155	)		(191,264	)		(15,194	)		(10,950	)		(4,062	)
Net unrealized appreciation/ (depreciation)		(798	)		(14,225	)		(1,295	)		(73,651	)		(85,025	)		(7,809	)		(1,644	)		1,800
Undistributed ordinary income		7			500			50			4,762			24,753			393			11,677			2,127
Undistributed long-term capital gains		—			—			—			—			—			—			131			—
Capital loss carryforwards		(235	)		(3,777	)		(205	)		(22,155	)		(13,040	)		—			—			—
Post-October loss push and other loss deferrals		(250	)		(2,938	)		(9	)		(23,504	)		(41,348	)		(1,062	)		—			(1,034	)
Other temporary differences		—			(271	)		(50	)		(972	)		(3,110	)		(56	)		—			—
Paid-in capital		75,419			760,203			71,417			4,719,587			7,517,802			551,066			586,754			87,528
Net assets	$	74,143		$	739,492		$	69,908		$	4,604,067		$	7,400,032		$	542,532		$	596,918		$	90,421

The Funds intend to retain realized capital gains that may be offset against available capital loss carryforwards for federal income tax purposes.

At March 31, 2006, the Funds listed below had capital loss carryforwards as follows:

Expiration Date	Limited Duration		Intermediate		Intermediate Plus		Core		Core Plus
2013		$—	$	—	$	113	$	—	$	—
2014		235		3,777		92		22,155		13,040

For financial reporting purposes, capital accounts and distributions to shareholders are adjusted to reflect the tax character of permanent book/tax differences. For the year ended March 31, 2006, the Funds recorded the following permanent reclassifications. The reclassifications relate primarily to currency transactions, distribution reclassifications, gains/losses on paydown securities and/or swap transactions.

	Limited Duration			Intermediate			Intermediate Plus			Core			Core Plus			Inflation Indexed			High Yield			Non U.S.
Undistributed net investment income	$	45		$	305		$	47		$	12,495		$	28,544		$	309		$	(59	)	$	6,524
Accumulated realized gain/(loss)		(45	)		(305	)		(47	)		(12,495	)		(28,544	)		(309	)		59			(6,524	)

At March 31, 2006, the cost of investments for federal income tax purposes was $80,122 for Limited Duration, $1,029,440 for Intermediate, $79,851 for Intermediate Plus, $6,944,809 for Core, $11,297,961 for Core Plus, $703,127 for Inflation Indexed $617,259 for High Yield, and $82,304 for Non-U.S.

3. Financial Instruments:

Forward Currency Exchange Contracts

As part of their investment programs, the Funds may utilize forward currency exchange contracts. The nature and risks of these financial instruments and the reasons for using them are set forth more fully in the Corporation’s prospectus and statement of additional information.

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Notes to Financial Statements—Continued

Forward foreign currency contracts are marked-to-market daily using forward foreign currency exchange rates supplied by an independent pricing service. The change in a contract’s market value is recorded by the Funds as an unrealized gain or loss. When the contract is closed or delivery is taken, the Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.

The use of forward foreign currency exchange contracts does not eliminate fluctuations in the underlying prices of the Funds’ securities, but it does establish a rate of exchange that can be achieved in the future. These forward foreign currency exchange contracts involve market risk in excess of amounts reflected in the financial statements. Although forward foreign currency exchange contracts used for hedging purposes limit the risk of loss due to a decline in the value of the hedged currency, they also limit any potential gain that might result should the value of the currency increase. In addition, the Funds could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts.

At March 31, 2006, open forward foreign currency exchange contracts were as follows:

Intermediate Plus

Settlement Date	Contract to				Unrealized Gain/(Loss)
	ReceiveA		DeliverA
5/10/06	USD	204	AUD	272	$	9
5/10/06	USD	435	CAD	498		7
5/10/06	USD	1,419	EUR	1,153		19
					$	35

Core Plus

Settlement Date	Contract to				Unrealized Gain/(Loss)
	ReceiveA		DeliverA
5/10/06	EUR	28,857	USD	35,463	$	(392	)
5/10/06	USD	105,351	EUR	85,560		1,368
5/10/06	JPY	3,680,000	USD	32,624		(1,187	)
5/10/06	USD	23,119	AUD	31,627		500
5/10/06	USD	63,091	CAD	72,410		991
					$	1,280

Inflation Indexed

Settlement Date	Contract to				Unrealized Gain/(Loss)
	ReceiveA		DeliverA
5/10/06	CAD	14,402	USD	12,525	$	(174	)
5/10/06	USD	4,166	CAD	4,786		61
5/10/06	EUR	4,219	USD	5,177		(53	)
5/10/06	USD	7,659	EUR	6,216		104
5/10/06	JPY	1,046,770	USD	9,255		(312	)
5/10/06	USD	3,027	SEK	22,981		68
					$	(306	)

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Non-U.S.

Settlement Date	Contract to				Unrealized Gain/(Loss)
	ReceiveA		DeliverA
5/10/06	DKK	14,501	USD	2,337	$	25
5/10/06	USD	4,324	DKK	26,146		66
5/10/06	EUR	5,594	AUD	9,158		124
5/10/06	EUR	9,548	DKK	71,230		2
5/10/06	EUR	7,108	NOK	57,270		(61	)
5/10/06	NOK	40,876	EUR	5,072		45
5/10/06	EUR	3,216	PLN	12,778		32
5/10/06	PLN	2,640	EUR	694		(13	)
5/10/06	EUR	509	USD	627		(8	)
5/10/06	USD	35,073	EUR	28,629		280
5/10/06	EUR	684	ZAR	5,040		7
5/10/06	NOK	15,415	USD	2,361		(2	)
5/10/06	USD	3,129	NOK	20,419		5
5/10/06	USD	9,640	AUD	13,048		309
5/10/06	USD	5,485	CAD	6,297		84
5/10/06	USD	27,559	GBP	15,492		622
5/10/06	USD	635	PLN	1,991		19
5/10/06	USD	397	ZAR	2,464		(2	)
					$	1,534

^A Definitions of currency abbreviations:

AUD—Australian dollar

CAD—Canadian dollar

DKK—Danish krona

EUR—Euro

GBP—British pound

JPY—Japanese yen

NOK—Norwegian krone

PLN—Polish zloty

SEK—Swedish krona

USD—United States dollar

ZAR—South African rand

Options and Futures

As part of their investment programs, the Funds may utilize options and futures. Options may be written (sold) or purchased by the Funds. When a Fund purchases a put or call option, the premium paid is recorded as an investment and its value is marked-to-market daily. When a Fund writes a put or call option, an amount equal to the premium received by the Fund is recorded as a liability and its value is marked-to-market daily.

When options, whether written or purchased, expire, are exercised or are closed (by entering into a closing purchase or sale transaction), the Fund realizes a gain or loss as described in the chart below:

Purchased option:	Impact on the Fund:
The option expires	Realize a loss in the amount of the cost of the option.
The option is closed through a closing sale transaction	Realize a gain or loss depending on whether the proceeds from the closing sale transaction are greater or less than the cost of the option.
The Fund exercises a call option	The cost of the security purchased through the exercise of the option will be increased by the premium originally paid to purchase the call option.
The Fund exercises a put option	Realize a gain or loss from the sale of the underlying security. The proceeds of that sale will be reduced by the premium originally paid to purchase the put option.

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Written option:	Impact on the Fund:
The option expires	Realize a gain equal to the amount of the premium received.
The option is closed through a closing purchase transaction	Realize a gain or loss without regard to any unrealized gain or loss on the underlying security and eliminate the option liability. The Fund will realize a loss in this transaction if the cost of the closing purchase exceeds the premium received when the option was written.
A written call option is exercised by the option purchaser	Realize a gain or loss from the sale of the underlying security. The proceeds of that sale will be increased by the premium originally received when the option was written.
A written put option is exercised by the option purchaser	The amount of the premium originally received will reduce the cost of the security that the Fund purchased when the option was exercised.

The risk associated with purchasing options is limited to the premium originally paid. Options written by a Fund involve, to varying degrees, risk of loss in excess of the option value reflected in the statement of assets and liabilities. The risk in writing a covered call option is that a Fund may forgo 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 a Fund may incur a loss if the market price of the underlying security decreases and the option is exercised. In addition, there is the risk a Fund may not be able to enter into a closing transaction because of an illiquid secondary market or, for over-the-counter options, because of the counterparty’s inability or unwillingness to perform. The nature and risks of these financial instruments and the reasons for using them are set forth more fully in the Corporation’s prospectus and statement of additional information.

Activity in written call and put options during the year ended March 31, 2006, was as follows:

	Calls						Puts
Intermediate	Actual Contracts		Premiums				Actual Contracts		Premiums
Options outstanding at March 31, 2005	330		$	109			406		$	106
Options written	20,301,532			648			1,686			636
Options closed	(1,340	)		(548	)		(1,595	)		(616	)
Options expired	(15,400,000	)		(34	)		—			—
Options exercised	—			—
Options outstanding at March 31, 2006	4,900,522		$	175			497		$	126
	Calls						Puts
Intermediate Plus	Actual Contracts		Premiums			��	Actual Contracts		Premiums
Options outstanding at March 31, 2005	18		$	4			26		$	7
Options written	4,100,115			63			2,200,125			59
Options closed	(82	)		(31	)		(103	)		(41	)
Options expired	(3,200,000	)		(13	)		(2,200,000	)		(13	)
Options exercised	—			—			—			—
Options outstanding at March 31, 2006	900,051		$	23			48		$	12

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	Calls					Puts
Core	Actual Contracts		Premiums			Actual Contracts		Premiums
Options outstanding at March 31, 2005	6,504,873		$	3,162		136,603,194		$	2,866
Options written	438,450,171			33,533		236,925,937			20,793
Options closed	(107,812,347	)		(10,614	)	(188,537,133	)		(10,682	)
Options expired	(94,620,313	)		(14,034	)	(184,985,911	)		(8,889	)
Options exercised	(54,102,487	)		(2,117	)	(4,611	)		(3,092	)
Options outstanding at March 31, 2006	188,419,897		$	9,930		1,476		$	996
	Calls					Puts
Core Plus	Actual Contracts		Premiums			Actual Contracts		Premiums
Options outstanding at March 31, 2005	9,008,669		$	6,366		191,104,704		$	4,321
Options written	854,369,523			54,419		512,635,783			32,089
Options closed	(88,818,119	)		(15,476	)	(311,586,510	)		(15,113	)
Options expired	(279,828,473	)		(21,277	)	(392,143,404	)		(13,962	)
Options exercised	(74,407,351	)		(6,388	)	(8,139	)		(5,598	)
Options outstanding at March 31, 2006	420,324,249		$	17,644		2,434		$	1,737
Inflation Indexed	Actual Contracts		Premiums			Actual Contracts		Premiums
Options outstanding at March 31, 2005	38		$	24		—		$	—
Options written	680			337		1,256			194
Options closed	(480	)		(254	)	(333	)		(63	)
Options expired	(76	)		(50	)	(842	)		(87	)
Options exercised	—			—		(81	)		(44	)
Options outstanding at March 31, 2006	162		$	57		—		$	—

Upon entering into a futures contract, the Funds are required to deposit with the broker cash or cash equivalents in an amount equal to a certain percentage of the contract amount. This is known as the “initial margin.” Subsequent payments (“variation margin”) are made or received by the Fund each day, depending on the daily fluctuation in the value of the contract. For Non-U.S. and foreign denominated futures held in Intermediate Plus, Core Plus and Inflation Indexed, payment is not sent daily, but is recorded as a net payable or receivable by the Fund to or from the futures broker, which holds cash collateral from the Fund. The daily changes in contract value are recorded as unrealized gains or losses, and each Fund recognizes a realized gain or loss when the contract is closed. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded.

The Funds enter into futures contracts for various reasons, including in connection with their interest rate management strategy. Futures contracts involve, to varying degrees, risk of loss in excess of the amounts reflected in the financial statements. The change in value of the futures contracts primarily corresponds with the value of the underlying instruments, which may not correlate with changes in interest rates, if applicable. In addition, there is a risk that a Fund may not be able to enter into a closing transaction because of an illiquid secondary market. The nature and risks of these financial instruments and other reasons for using them are set forth more fully in the Corporation’s prospectus and statement of additional information.

The open futures positions and related appreciation or depreciation at March 31, 2006, are listed at the end of each Fund’s portfolio of investments.

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Notes to Financial Statements—Continued

Swap Agreements

The Funds may invest in swaps for the purpose of managing their exposure to interest rate, credit or market risk.

Total return swaps are agreements to exchange the return generated by one instrument for the return generated by another instrument, for example, the agreement to pay interest in exchange for a market-linked return based on a notional amount. To the extent the total return of the index exceeds the offsetting interest obligation, the Funds will receive a payment from the counterparty. To the extent it is less, the Funds will make a payment to the counterparty. Periodic payments received or made by the Funds are recorded in the accompanying statements of operations as realized gains or losses, respectively.

Credit default swaps (denoted in the table on the following pages by a superscript 1) involve the exchange of a fixed rate premium for protection against the loss in value of an underlying debt instrument in the event of a defined credit event (such as payment default or bankruptcy). Under the terms of the swap, one party acts as a “guarantor,” receiving a periodic payment that is a fixed percentage applied to a notional principal amount. In return, the party agrees to purchase the notional amount of the underlying instrument, at par, if a credit event occurs during the term of the swap. The Funds may enter into credit default swaps in which a Fund or its counterparty act as guarantors. By acting as the guarantor of a swap, a Fund assumes the market and credit risk of the underlying instrument, including liquidity and loss of value. Interest rate swap contracts (denoted in the table on the following pages by a superscript 2) involve the exchange of commitments to pay and receive interest based on a notional principal amount.

Swaps are marked-to-market daily and changes in value are recorded as unrealized appreciation/(depreciation). Gains or losses are realized upon termination of the swap agreement. Periodic payments and premiums received or made by a Fund are recorded in the accompanying statements of operations as realized gains or losses, respectively. Collateral, in the form of restricted cash or securities, may be required to be held in segregated accounts with the Funds’ custodian in compliance with swap contracts. Risks may exceed amounts recognized on the statements of assets and liabilities. These risks include changes in the returns of the underlying instruments, failure of the counterparties to perform under the contracts’ terms, and the possible lack of liquidity with respect to the swap agreements.

Western Asset Intermediate Bond Portfolio
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Deutsche Bank AG (Apache Corporation, 6.25%, due 4/15/12)1	March 20, 2010	Specified amount upon credit event noticeB	0.360% Quarterly	$	2,275	$	(7	)
Deutsche Bank AG (Freddie Mac, 5.00%, due 7/15/14)1	March 20, 2015	Specified amount upon credit event noticeB	0.290% Quarterly		2,400		22
Lehman Brothers Holdings Inc. (FNMA Preferred Agency, 4.75%, due 12/31/49)1	December 20, 2010	Specified amount upon credit event noticeC	0.67% Quarterly		5,200		60
Lehman Brothers Holdings Inc. (Dynegy Holdings, 8.75%, due 2/15/12)1	April 23, 2007	Specified amount upon credit event noticeC	3-month LIBORE		2,200		99
The Goldman Sachs Group, Inc. (iBoxx IG HI-Vol4)1	June 20, 2012	Specified amount upon credit event noticeB	1.000% Quarterly		9,640		114
				$	21,715	$	288

170

Annual Report to Shareholders

Western Asset Intermediate Plus Bond Portfolio
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Deutsche Bank AG (Apache Corporation, 6.25%, due 4/15/12)1	March 20, 2015	Specified amount upon credit event noticeB	0.360% Quarterly	$	100	$	(0.3	)
JPMorgan Chase & Co. (Countrywide Home Loans, 5.625%, due 7/15/09)1	June 20, 2010	Specified amount upon credit event noticeC	0.580% Quarterly		200		2
Lehman Brothers Holdings Inc. (FNMA Preferred Agency, 4.75%, due 12/31/49)1	December 20, 2010	Specified amount upon credit event noticeC	0.670% Quarterly		500		6
Merrill Lynch & Co., Inc. (iBoxx HY3)1	December 20, 2009	Specified amount upon credit event noticeB	3.750% Quarterly		388		11
The Goldman Sachs Group, Inc. (iBoxx HY2)1	September 20, 2009	Specified amount upon credit event noticeB	4.300% Quarterly		240		13
				$	1,428	$	32
Western Asset Core Bond Portfolio
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Bear Stearns, Inc. (Ford Motor Credit Company, 7.00%, due 10/1/13)1	June 20, 2010	Specified amount upon credit event noticeC	4.830% Quarterly	$	12,500	$	114
Credit Suisse First Boston USA (AAMES Mortgage Investment Trust 2005-1 M8 1-Month LIBORE + 160 bpF, due 6/25/35)1	April 25, 2035	1.280% Monthly	Specified amount upon credit event noticeD		784		1
Credit Suisse First Boston USA (AAMES Mortgage Investment Trust 2005-1 M9 1-Month LIBORE + 250 bpF, due 6/25/35)1	April 25, 2035	2.050% Monthly	Specified amount upon credit event noticeD		784		4
Credit Suisse First Boston USA (ACE Securities Corp. 2005-HE1 M8 1-Month LIBORE + 138 bpF, due 2/25/35)1	February 25, 2035	1.310% Monthly	Specified amount upon credit event noticeD		784		1
Credit Suisse First Boston USA (ACE Securities Corp. 2005-HE1 M9 1-Month LIBORE + 220 bpF, due 2/25/35)1	February 25, 2035	2.060% Monthly	Specified amount upon credit event noticeD		784		4
Credit Suisse First Boston USA (Aegis Asset-Backed Securities Trust 2004-4 B2 1-Month LIBORE + 190 bpF, due 10/25/34)1	October 25, 2034	1.370% Monthly	Specified amount upon credit event noticeD		1,046		(3	)

171

Annual Report to Shareholders

Notes to Financial Statements—Continued

Western Asset Core Bond Portfolio—Continued
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Credit Suisse First Boston USA (Aegis Asset-Backed Securities Trust 2005 B2 1-Month LIBORE + 130 bpF, due 3/25/35)1	March 25, 2035	1.310% Quarterly	Specified amount upon credit event noticeD	$	784	$	(0.1	)
Credit Suisse First Boston USA (Aegis Asset-Backed Securities Trust 2005 B3 1-Month LIBORE + 200 bpF, due 3/25/35)1	March 25, 2035	2.180% Quarterly	Specified amount upon credit event noticeD		784		3
Credit Suisse First Boston USA (Argent Securities Inc. 2004-W4 M3 1-Month LIBORE + 300 bpF, due 3/25/34)1	March 25, 2034	2.200% Monthly	Specified amount upon credit event noticeD		1,046		2
Credit Suisse First Boston USA (Argent Securities Inc, 2004-W11 M9 1-Month LIBORE + 225 bpF, due 11/25/34)1	November 25, 2034	1.330% Monthly	Specified amount upon credit event noticeD		784		(0.4	)
Credit Suisse First Boston USA (Argent Securities Inc, 2004-W11 M10 1-Month LIBORE + 350 bpF, due 11/25/34)1	November 25, 2034	2.150% Monthly	Specified amount upon credit event noticeD		784		2
Credit Suisse First Boston USA (Eastman Kodak Company, 7.25%, due 11/15/13)1	March 20, 2010	Specified amount upon credit event noticeB	1.400% Quarterly		6,500		(112	)
Credit Suisse First Boston USA (Finance America Mortgage Loan Trust 2004-3 M8 1-Month LIBORE + 180 bpF, due 11/25/34)1	November 25, 2034	1.310% Monthly	Specified amount upon credit event noticeD		784		(0.1)
Credit Suisse First Boston USA (Finance America Mortgage Loan Trust 2004-3 M9 1-Month LIBORE + 315 bpF, due 11/25/34)1	November 25, 2034	2.180% Monthly	Specified amount upon credit event noticeD		784		2
Credit Suisse First Boston USA (Fremont Home Loan Trust 2005-A M-8 1-Month LIBORE + 135 bpF, due 1/25/35)1	January 25, 2035	1.310% Monthly	Specified amount upon credit event noticeD		784		1
Credit Suisse First Boston USA (Fremont Home Loan Trust 2005-A 1-Month LIBORE + 100 bpF, due 1/25/35)1	January 25, 2035	2.080% Monthly	Specified amount upon credit event noticeD		784		6

172

Annual Report to Shareholders

Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Credit Suisse First Boston USA (IndyMac Home Equity Loan Asset-Backed Trust 2004-C M8 1-Month LIBORE + 190 bpF, due 3/25/35)1	March 25, 2035	1.280% Monthly	Specified amount upon credit event noticeD	$	784	$	0
Credit Suisse First Boston USA (IndyMac Home Equity Loan Asset-Backed Trust 2004-C M9 1-Month LIBORE + 325 bpF, due 3/25/35)1	March 25, 2035	2.050% Monthly	Specified amount upon credit event noticeD		784		5
Credit Suisse First Boston USA (Long Beach Mortgage Loan Trust 2004-1 M9 1-Month LIBORE + 350 bpF, due 2/25/34)1	February 25, 2034	2.150% Monthly	Specified amount upon credit event noticeD		1,046		2
Credit Suisse First Boston USA (Long Beach Mortgage Loan Trust 2005-1 M8 1-Month LIBORE + 170 bpF, due 2/25/35)1	February 25, 2035	1.310% Monthly	Specified amount upon credit event noticeD		784		1
Credit Suisse First Boston USA (Long Beach Mortgage Loan Trust 2005-1 M9 1-Month LIBORE + 275 bpF, due 2/25/35)1	February 25, 2035	2.080% Monthly	Specified amount upon credit event noticeD		784		4
Credit Suisse First Boston USA (MASTR Asset-Backed Securities Trust 2005-NC1 M8 1-Month LIBORE + 153 bpF, due 12/25/34)1	December 25, 2034	1.310% Monthly	Specified amount upon credit event noticeD		784		1
Credit Suisse First Boston USA (MASTR Asset-Backed Securities Trust 2005-NC1 M9 1-Month LIBORE + 240 bpF, due 12/25/34)1	December 25, 2034	2.080% Monthly	Specified amount upon credit event noticeD		784		3
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2004-WMC4 B3 1-Month LIBORE + 375 bpF, due 4/25/35)1	April 25, 2035	2.150% Monthly	Specified amount upon credit event noticeD		1,046		3
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2005-WMC1 B2 1-Month LIBORE + 135 bpF, due 9/25/35)1	September 25, 2035	1.280% Monthly	Specified amount upon credit event noticeD		784		1

173

Annual Report to Shareholders

Notes to Financial Statements—Continued

Western Asset Core Bond Portfolio—Continued
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2005-WMC1 B3 1-Month LIBORE + 225 bpF, due 9/25/35)1	September 25, 2035	2.050% Monthly	Specified amount upon credit event noticeD	$	784	$	5
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2005-NC1 B2 1-Month LIBORE + 130 bpF, due 10/25/35)1	October 25, 2035	1.280% Monthly	Specified amount upon credit event noticeD		784		0.5
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2005-NC1 B3 1-Month LIBORE + 205 bpF, due 10/25/35)1	October 25, 2035	2.050% Monthly	Specified amount upon credit event noticeD		784		4
Credit Suisse First Boston USA (Morgan Stanley ABS Capital I 2005-WMC1 B2 1-Month LIBORE + 130 bpF, due 1/25/35)1	January 25, 2035	1.310% Monthly	Specified amount upon credit event noticeD		784		(0.1	)
Credit Suisse First Boston USA (Morgan Stanley ABS Capital I 2005-WMC1 B3 1-Month LIBORE + 215 bpF, due 1/25/35)1	January 25, 2035	2.180% Monthly	Specified amount upon credit event noticeD		784		2
Credit Suisse First Boston USA (New Century Home Equity Loan Trust 2004-2 M9 1-Month LIBORE + 325 bpF, due 8/25/34)1	August 25, 2034	2.150% Monthly	Specified amount upon credit event noticeD		1,046		3
Credit Suisse First Boston USA (New Century Home Equity Loan Trust 2005-1 M8 1-Month LIBORE + 140 bpF, due 3/25/35)1	March 25, 2035	1.310% Monthly	Specified amount upon credit event noticeD		784		2
Credit Suisse First Boston USA (New Century Home Equity Loan Trust 2005-1 M9 1-Month LIBORE + 205 bpF, due 3/25/35)1	March 25, 2035	2.180% Monthly	Specified amount upon credit event noticeD		784		3
Credit Suisse First Boston USA (Novastar Home Equity Loan 2005-1 B2 1-Month LIBORE + 135 bpF, due 6/25/35)1	June 25, 2035	1.280% Monthly	Specified amount upon credit event noticeD		784		2
Credit Suisse First Boston USA (Novastar Home Equity Loan 2005-4 B3 1-Month LIBORE + 195 bpF, due 6/25/35)1	June 25, 2035	2.050% Monthly	Specified amount upon credit event noticeD		784		6

174

Annual Report to Shareholders

Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Credit Suisse First Boston USA (Park Place Securities Inc. 2005-WCH1 M8 1-Month LIBORE + 155 bpF, due 1/25/36)1	January 25, 2036	1.360% Monthly	Specified amount upon credit event noticeD	$	784	$	(0.1	)
Credit Suisse First Boston USA (Park Place Securities Inc. 2005-WCH1 M9 1-Month LIBORE + 250 bpF, due 1/25/36)1	January 25, 2036	2.180% Monthly	Specified amount upon credit event noticeD		784		3
Credit Suisse First Boston USA (People’s Choice Home Loan Securities Trust 2004-1 M6 1-Month LIBORE + 230 bpF,due 6/25/34)1	June 25, 2034	1.370% Quarterly	Specified amount upon credit event noticeD		1,046		(1	)
Credit Suisse First Boston USA (People’s Choice Home Loan Securities Trust 2005-1 1-Month LIBORE + 165 bpF, due 1/25/35)1	January 25, 2035	1.258% Monthly	Specified amount upon credit event noticeD		784		3
Credit Suisse First Boston USA (People’s Choice Home Loan Securities Trust 2005-1 B3 1-Month LIBORE + 260 bpF, due 1/25/35)1	January 25, 2035	2.050% Monthly	Specified amount upon credit event noticeD		784		6
Credit Suisse First Boston USA (iBoxx IG Hi-Vol2)1	September 20, 2009	1.150% Quarterly	Specified amount upon credit event noticeB		24,167		(147	)
Deutsche Bank AG (Apache Corporation, 6.25%, due 4/15/12)1	March 20, 2015	Specified amount upon credit event noticeB	0.360% Quarterly		1,170		(3	)
Deutsche Bank AG (Dynegy Holdings, 8.75%, due 2/15/12)1	May 1, 2007	Specified amount upon credit event noticeC	5.250% Quarterly		3,340		233
Deutsche Bank AG (Eastman Kodak Company, 7.25%, due 11/15/13)1	March 20, 2010	Specified amount upon credit event noticeB	1.250% Quarterly		1,100		(25	)
Deutsche Bank AG (Eastman Kodak Company, 7.25%, due 11/15/13)1	March 20, 2015	Specified amount upon credit event noticeB	1.670% Quarterly		1,300		(102	)
Deutsche Bank AG (Fannie Mae, 6.00%, due 5/15/11)1	December 20, 2009	Specified amount upon credit event noticeB	0.215% Quarterly		11,700		53
Deutsche Bank AG (Ford Motor Credit Company, 7.00%, due 10/1/13)1	December 20, 2010	Specified amount upon credit event noticeB	5.050% Quarterly		17,100		249

175

Annual Report to Shareholders

Notes to Financial Statements—Continued

Western Asset Core Bond Portfolio—Continued
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Deutsche Bank AG (Ford Motor Credit Company, 7.45%, due 7/16/31)1	March 20, 2015	Specified amount upon credit event noticeB	2.930% Quarterly	$	1,700	$	(398	)
Deutsche Bank AG (Freddie Mac, 5.00%, due 7/15/14)1	March 20, 2015	Specified amount upon credit event noticeB	0.290% Quarterly		15,600		140
Deutsche Bank AG (General Motors Acceptance Corporation, 6.875%, due 8/28/12)1	March 20, 2007	Specified amount upon credit event noticeB	2.280% Quarterly		5,000		(26	)
Deutsche Bank AG (General Motors Acceptance Corporation, 8.375%, due 7/15/33)1	March 20, 2015	Specified amount upon credit event noticeB	3.510% Quarterly		1,700		(463	)
Deutsche Bank AG (iBoxx IG TMT)1	March 20, 2009	0.600% Quarterly	Specified amount upon credit event noticeD		7,400		(67	)
Deutsche Bank AG (iBoxx 30 Hi-Vol)1	March 20, 2009	1.250% Quarterly	Specified amount upon credit event noticeD		7,153		26
Deutsche Bank AG (iBoxx IG Hi-Vol)1	March 20, 2009	Specified amount upon credit event noticeB	1.250% Quarterly		9,415		29
Deutsche Bank AG (iBoxx IG Hi-Vol2)1	September 20, 2014	Specified amount upon credit event noticeB	1.300% Quarterly		8,043		9
Deutsche Bank AG2	October 5, 2008	3-month LIBORE	4.655% Semi-annually		115,540		(1,675	)
Deutsche Bank AG2	June 17, 2010	3-month LIBORE	4.313% Semi-annually		31,430		(1,148	)
Deutsche Bank AG2	October 11, 2010	3-month LIBORE	4.708% Semi-annually		206,790		(4,869	)
JPMorgan Chase & Co. (General Motors Acceptance Corporation, 7.125%, due 7/15/13)1	September 20, 2010	Specified amount upon credit event noticeC	6.000% Quarterly		10,500		(1,660	)
Lehman Brothers Holdings Inc. (General Motors Acceptance Corporation, 6.875%, due 8/28/12)1	May 1, 2007	Specified amount upon credit event noticeB	5.250% Quarterly		10,000		66

176

Annual Report to Shareholders

Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Lehman Brothers Holdings Inc. (iBoxx IG Hi-Vol2)1	September 20, 2009	1.150% Quarterly	Specified amount upon credit event noticeD	$	8,507	$	(10	)
Lehman Brothers Holdings Inc. (iBoxx IG Hi-Vol3)1	March 20, 2010	1.050% Quarterly	Specified amount upon credit event noticeD		773		(1	)
Lehman Brothers Holdings Inc.2	October 7, 2007	3-month LIBORE	4.601% Semi-annually		630		(6	)
Merrill Lynch & Co., Inc. (Pacific Gas & Electric Co., 4.80%, due 3/1/14)1	June 20, 2009	Specified amount upon credit event noticeB	0.420% Quarterly		2,100		12
RBS Greenwich (DSLA Mortgage Loan Trust 2005-AR5 1-Month LIBORE + 175 bpF, due 8/19/45)1	August 19, 2045	4.500% Monthly	Specified amount upon credit event noticeB		1,299		37
RBS Greenwich (Ford Motor Credit Company, 7.00%, due 10/1/13)1	December 20, 2010	Specified amount upon credit event noticeC	4.260% Quarterly		25,000		(321	)
RBS Greenwich (General Motors Acceptance Corporation, 6.875%, due 8/12/12)1	June 20, 2010	Specified amount upon credit event noticeC	4.530% Quarterly		15,000		527
RBS Greenwich (General Motors Acceptance Corporation, 6.875%, due 8/28/12)1	June 20, 2010	Specified amount upon credit event noticeC	4.680% Quarterly		25,000		1,001
RBS Greenwich (General Motors Acceptance Corporation, 6.875%, due 8/28/12)1	September 20, 2010	Specified amount upon credit event noticeC	5.750% Quarterly		7,500		573
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)1	June 20, 2010	Specified amount upon credit event noticeC	6.800% Quarterly		5,900		(790	)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)1	June 20, 2010	Specified amount upon credit event noticeC	7.100% Quarterly		5,800		(731	)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)1	September 20, 2010	Specified amount upon credit event noticeC	7.700% Quarterly		12,500		(1,398	)

177

Annual Report to Shareholders

Notes to Financial Statements—Continued

Western Asset Core Bond Portfolio—Continued
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)1	June 20, 2010	Specified amount upon credit event noticeC	8.400% Quarterly	$	12,500	$	(1,147	)
RBS Greenwich (Harborview Mortgage Loan Trust 2005-12 1-Month LIBORE + 175 bpF, due 10/19/35)1	October 19, 2035	2.500% Monthly	Specified amount upon credit event noticeB		1,300		41
RBS Greenwich (IndyMac Index Mortgage Loan Trust 2005-AR18 1-Month LIBORE + 125 bpF, due 10/25/36)1	October 25, 2036	2.700% Monthly	Specified amount upon credit event noticeB		1,398		56
RBS Greenwich (Time Warner Inc., 6.875%, due 5/1/12)1	September 20, 2010	Specified amount upon credit event noticeC	0.470% Quarterly		5,000		3
RBS Greenwich (Time Warner Inc., 6.875%, due 5/1/12)1	December 20, 2010	Specified amount upon credit event noticeC	0.500% Quarterly		12,500		7
RBS Greenwich (Washington Mutual 2005-AR11 1-Month LIBORE + 120 bpF, due 8/25/45)1	August 25, 2045	2.550% Monthly	Specified amount upon credit event noticeB		570		16
RBS Greenwich (iBoxx IG Hi-Vol3)1	March 20, 2010	1.050% Quarterly	Specified amount upon credit event noticeB		17,303		213
RBS Greenwich (iBoxx IG Hi-Vol4)1	June 20, 2010	Specified amount upon credit event noticeB	0.900% Quarterly		36,300		238
RBS Greenwich (iBoxx IG Hi-Vol4)1	June 20, 2010	Specified amount upon credit event noticeB	0.900% Quarterly		11,800		126
The Goldman Sachs Group, Inc. (Eastman Kodak Company, 7.25%, due 11/15/13)1	March 20, 2015	Specified amount upon credit event noticeB	1.670% Quarterly		1,400		(110	)
The Goldman Sachs Group, Inc. (Ford Motor Credit Company, 7.00%, due 10/1/13)1	June 20, 2010	Specified amount upon credit event noticeC	4.750% Quarterly		1,900		12
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation, 6.875%, due 8/28/12)1	June 20, 2010	Specified amount upon credit event noticeC	6.000% Quarterly		5,000		414

178

Annual Report to Shareholders

Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation, 7.125%, due 7/15/13)1	June 20, 2010	Specified amount upon credit event noticeC	8.950% Quarterly	$	5,000	$	(387	)
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation, 8.375%, due 7/15/33)1	September 20, 2010	Specified amount upon credit event noticeB	6.000% Quarterly		18,500		(2,924	)
The Goldman Sachs Group, Inc. (iBoxx IG Fin 3)1	March 20, 2010	Specified amount upon credit event noticeB	0.500% Quarterly		5,200		30
The Goldman Sachs Group, Inc. (iBoxx IG Fin 3)1	March 20, 2015	Specified amount upon credit event noticeB	0.700% Quarterly		5,300		76
The Goldman Sachs Group, Inc. (iBoxx IG Hi-Vol3)1	March 20, 2010	Specified amount upon credit event noticeB	1.050% Quarterly		48,333		495
The Goldman Sachs Group, Inc. (iBoxx IG Hi-Vol3)1	March 20, 2010	Specified amount upon credit event noticeB	1.050% Quarterly		16,433		241
The Goldman Sachs Group, Inc. (iBoxx IG Hi-Vol3)1	March 20, 2010	Specified amount upon credit event noticeB	1.050% Quarterly		32,093		892
The Goldman Sachs Group, Inc. (iBoxx IG Hi-Vol4)1	June 20, 2010	Specified amount upon credit event noticeB	0.400% Quarterly		17,600		218
The Goldman Sachs Group, Inc. (iBoxx IG Hi-Vol4)1	June 20, 2010	Specified amount upon credit event noticeB	0.400% Quarterly		45,500		639
The Goldman Sachs Group, Inc. (iBoxx IG Hi-Vol4)1	June 20, 2010	Specified amount upon credit event noticeB	0.900% Quarterly		7,190		50
The Goldman Sachs Group, Inc. (iBoxx IG Hi-Vol4)1	June 20, 2010	Specified amount upon credit event noticeB	0.900% Quarterly		50,000		1,251
The Goldman Sachs Group, Inc. (iBoxx IG Hi-Vol4)1	June 20, 2010	Specified amount upon credit event noticeB	0.900% Quarterly		100,000		3,170
The Goldman Sachs Group, Inc.2	September 14, 2007	3-month LIBORE	3.215% Semi-annually		26,500		(761	)
The Goldman Sachs Group, Inc.2	March 10, 2009	3-month LIBORE	4.360% Semi-annually		54,100		(935	)
The Goldman Sachs Group, Inc.2	March 10, 2011	4.430% Semi-annually	3-month LIBORE		33,300		865
				$	1,222,541	$	(8,013	)

179

Annual Report to Shareholders

Notes to Financial Statements—Continued

Western Asset Core Plus Bond Portfolio
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Bear Stearns, Inc. (Ford Motor Credit Company, 7.00%, due 10/1/13)1	June 20, 2010	Specified amount upon credit event noticeC	4.830% Quarterly	$	12,500	$	114
Bear Stearns, Inc. (GIE PSA Tresorerie, 5.875%, due 9/27/11)1	March 20, 2011	0.320% Quarterly	Specified amount upon credit event noticeD		2,620		(12	)
Bear Stearns, Inc. (GIE PSA Tresorerie, 5.875%, due 9/27/11)1	March 20, 2011	0.320% Quarterly	Specified amount upon credit event noticeD		3,470		(6	)
Bear Stearns, Inc. (Renault S.A., 4.625%, due 5/28/10)1	March 20, 2011	0.350% Quarterly	Specified amount upon credit event noticeD		790		(2	)
Bear Stearns, Inc. (Renault S.A., 4.625%, due 5/28/10)1	March 20, 2011	0.360% Quarterly	Specified amount upon credit event noticeD		2,620		(7	)
Bear Stearns, Inc. (Renault S.A., 4.625%, due 5/28/10)1	March 20, 2011	0.360% Quarterly	Specified amount upon credit event noticeD		2,620		(7	)
Bear Stearns, Inc. (Volkswagen International Finance NV, 4.875%, due 5/22/13)1	March 20, 2011	0.330% Quarterly	Specified amount upon credit event noticeD		790		(1	)
Bear Stearns, Inc. (Volkswagen International Finance NV, 4.875%, due 5/22/13)1	March 20, 2011	0.335% Quarterly	Specified amount upon credit event noticeD		2,620		(4	)
Bear Stearns, Inc. (Volkswagen International Finance NV, 4.875%, due 5/22/13)1	March 20, 2011	0.340% Quarterly	Specified amount upon credit event noticeD		2,620		(4	)
Credit Suisse First Boston USA (AAMES Mortgage Investment Trust 2005-1 M8 1-Month LIBORE + 160 bpF, due 6/25/35)1	April 25, 2035	1.280% Monthly	Specified amount upon credit event noticeD		1,122		2
Credit Suisse First Boston USA (AAMES Mortgage Investment Trust 2005-1 M9 1-Month LIBORE + 250 bpF, due 6/25/35)1	April 25, 2035	2.050% Monthly	Specified amount upon credit event noticeD		1,122		6

180

Annual Report to Shareholders

Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Credit Suisse First Boston USA (ACE Securities Corp. 2005-HE1 M8 1-Month LIBORE + 138 bpF, due 2/25/35)1	February 25, 2035	1.310% Monthly	Specified amount upon credit event noticeD	$	1,122	$	1
Credit Suisse First Boston USA (ACE Securities Corp. 2005-HE1 M9 1-Month LIBORE + 220 bpF, due 2/25/35)1	February 25, 2035	2.060% Monthly	Specified amount upon credit event noticeD		1,122		6
Credit Suisse First Boston USA (Aegis Asset-Backed Securities Trust 2004-4 B2 1-Month LIBORE +190 bpF, due 10/25/34)1	October 25, 2034	1.370% Monthly	Specified amount upon credit event noticeD		1,494		(4	)
Credit Suisse First Boston USA (Aegis Asset-Backed Securities Trust 2005 B2 1-Month LIBORE + 130 bpF, due 3/25/35)1	March 25, 2035	1.310% Quarterly	Specified amount upon credit event noticeD		1,122		(0.2	)
Credit Suisse First Boston USA (Aegis Asset-Backed Securities Trust 2005 B3 1-Month LIBORE + 200 bpF, due 3/25/35)1	March 25, 2035	2.180% Quarterly	Specified amount upon credit event noticeD		1,122			4
Credit Suisse First Boston USA (Argent Securities Inc. 2004-W4 M3 1-Month LIBORE + 300 bpF, due 3/25/34)1	March 25, 2034	2.200% Monthly	Specified amount upon credit event noticeD		1,494		3
Credit Suisse First Boston USA (Argent Securities Inc, 2004-W11 M9 1-Month LIBORE + 225 bpF, due 11/25/34)1	November 25, 2034	1.330% Monthly	Specified amount upon credit event noticeD		1,122		(1	)
Credit Suisse First Boston USA (Argent Securities Inc, 2004-W11 M10 1-Month LIBORE + 350 bpF, due 11/25/34)1	November 25, 2034	2.150% Monthly	Specified amount upon credit event noticeD		1,122		4
Credit Suisse First Boston USA (Eastman Kodak Company, 7.25%, due 11/15/13)1	March 20, 2010	Specified amount upon credit event noticeB	1.400% Quarterly		9,000		(155	)

181

Annual Report to Shareholders

Notes to Financial Statements—Continued

Western Asset Core Plus Bond Portfolio—Continued
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Credit Suisse First Boston USA (Eastman Kodak Company, 7.25%, due 11/15/13)1	September 20, 2010	Specified amount upon credit event noticeB	2.320% Quarterly	$	2,400	$	20
Credit Suisse First Boston USA (Finance America Mortgage Loan Trust 2004-3 M8 1-Month LIBORE + 180 bpF, due 11/25/34)1	November 25, 2034	1.310% Monthly	Specified amount upon credit event noticeD		1,122		(0.1	)
Credit Suisse First Boston USA (Finance America Mortgage Loan Trust 2004-3 M9 1-Month LIBORE + 315 bpF, due 11/25/34)1	November 25, 2034	2.180% Monthly	Specified amount upon credit event noticeD		1,122		3
Credit Suisse First Boston USA (Fremont Home Loan Trust 2005-A M8 1-Month LIBORE + 135 bpF, due 1/25/35)1	January 25, 2035	1.310% Monthly	Specified amount upon credit event noticeD		1,122		1
Credit Suisse First Boston USA (Fremont Home Loan Trust 2005-A 1-Month LIBORE + 100 bpF, due 1/25/35)1	January 25, 2035	2.080% Monthly	Specified amount upon credit event noticeD		1,122		9
Credit Suisse First Boston USA (IndyMac Home Equity Loan Asset-Backed Trust 2004-C M8 1-Month LIBORE + 190 bpF, due 3/25/35)1	March 25, 2035	1.280% Monthly	Specified amount upon credit event noticeD		1,122		1
Credit Suisse First Boston USA (IndyMac Home Equity Loan Asset-Backed Trust 2004-C M9 1-Month LIBORE + 325 bpF, due 3/25/35)1	March 25, 2035	2.050% Monthly	Specified amount upon credit event noticeD		1,122		7
Credit Suisse First Boston USA (Long Beach Mortgage Loan Trust 2004-1 M9 1-Month LIBORE + 350 bpF, due 2/25/34)1	February 25, 2034	2.150% Monthly	Specified amount upon credit event noticeD		1,494		3
Credit Suisse First Boston USA (Long Beach Mortgage Loan Trust 2005-1 M8 1-Month LIBORE + 170 bpF, due 2/25/35)1	February 25, 2035	1.310% Monthly	Specified amount upon credit event noticeD		1,122		1

182

Annual Report to Shareholders

Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Credit Suisse First Boston USA (Long Beach Mortgage Loan Trust 2005-1 M9 1-Month LIBORE + 275 bpF, due 2/25/35)1	February 25, 2035	2.080% Monthly	Specified amount upon credit event noticeD	$	1,122	$	6
Credit Suisse First Boston USA (MASTR Asset-Backed Securities Trust 2005-NC1 M8 1-Month LIBORE + 153 bpF, due 12/25/34)1	December 25, 2034	1.310% Monthly	Specified amount upon credit event noticeD		1,122		1
Credit Suisse First Boston USA (MASTR Asset-Backed Securities Trust 2005-NC1 M9 1-Month LIBORE + 240 bpF, due 12/25/34)1	December 25, 2034	2.080% Monthly	Specified amount upon credit event noticeD		1,122		4
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2004-WMC4 B3 1-Month LIBORE + 375 bpF, due 4/25/35)1	April 25, 2035	2.150% Monthly	Specified amount upon credit event noticeD		1,494		4
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2005-NC1 B2 1-Month LIBORE + 130 bpF, due 10/25/35)1	October 25, 2035	1.280% Monthly	Specified amount upon credit event noticeD		1,122		1
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2005-NC1 B3 1-Month LIBORE + 205 bpF, due 10/25/35)1	October 25, 2035	2.050% Monthly	Specified amount upon credit event noticeD		1,122		7
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2005-WMC1 B2 1-Month LIBORE + 135 bpF, due 9/25/35)1	September 25, 2035	1.280% Monthly	Specified amount upon credit event noticeD		1,122		2
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2005-WMC1 B3 1-Month LIBORE + 225 bpF, due 9/25/35)1	September 25, 2035	2.050% Monthly	Specified amount upon credit event noticeD		1,122		7
Credit Suisse First Boston USA (Morgan Stanley ABS Capital I 2005-WMC1 B2 1-Month LIBORE + 130 bpF, due 1/25/35)1	January 25, 2035	1.310% Monthly	Specified amount upon credit event noticeD		1,122		(0.1	)

183

Annual Report to Shareholders

Notes to Financial Statements—Continued

Western Asset Core Plus Bond Portfolio—Continued
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Credit Suisse First Boston USA (Morgan Stanley ABS Capital I 2005-WMC1 B3 1-Month LIBORE + 215 bpF, due 1/25/35)1	January 25, 2035	2.180% Monthly	Specified amount upon credit event noticeD	$	1,122	$	3
Credit Suisse First Boston USA (New Century Home Equity Loan Trust 2004-2 M9 1-Month LIBORE + 325 bpF, due 8/25/34)1	August 25, 2034	2.150% Monthly	Specified amount upon credit event noticeD		1,494		5
Credit Suisse First Boston USA (New Century Home Equity Loan Trust 2005-1 M8 1-Month LIBORE + 140 bpF, due 3/25/35)1	March 25, 2035	1.310% Monthly	Specified amount upon credit event noticeD		1,122		3
Credit Suisse First Boston USA (New Century Home Equity Loan Trust 2005-1 M9 1-Month LIBORE + 205 bpF, due 3/25/35)1	March 25, 2035	2.180% Monthly	Specified amount upon credit event noticeD		1,122		4
Credit Suisse First Boston USA (Novastar Home Equity Loan 2005-1 B2 1-Month LIBORE + 135 bpF, due 6/25/35)1	June 25, 2035	1.280% Monthly	Specified amount upon credit event noticeD		1,122		2
Credit Suisse First Boston USA (Novastar Home Equity Loan 2005-4 B3 1-Month LIBORE + 195 bpF, due 6/25/35)1	June 25, 2035	2.050% Monthly	Specified amount upon credit event noticeD		1,122		8
Credit Suisse First Boston USA (Park Place Securities Inc. 2005-WCH1 M8 1-Month LIBORE + 155 bpF, due 1/25/36)1	January 25, 2036	1.360% Monthly	Specified amount upon credit event noticeD		1,122		(0.1	)
Credit Suisse First Boston USA (Park Place Securities Inc. 2005-WCH1 M9 1-Month LIBORE + 250 bpF, due 1/25/36)1	January 25, 2036	2.180% Monthly	Specified amount upon credit event noticeD		1,122		4
Credit Suisse First Boston USA (People’s Choice Home Loan Securities Trust 2004-1 M6 1-Month LIBORE + 230 bpF, due 6/25/34)1	June 25, 2034	1.370% Quarterly	Specified amount upon credit event noticeD		1,494		(2	)

184

Annual Report to Shareholders

Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Credit Suisse First Boston USA (People’s Choice Home Loan Securities Trust 2005-1 1-Month LIBORE + 165 bpF, due 1/25/35)1	January 25, 2035	1.258% Monthly	Specified amount upon credit event noticeD	$	1,122	$	4
Credit Suisse First Boston USA (People’s Choice Home Loan Securities Trust 2005-1 B3 1-Month LIBORE + 260 bpF, due 1/25/35)1	January 25, 2035	2.050% Monthly	Specified amount upon credit event noticeD		1,122		8
Credit Suisse First Boston USA (iBoxx IG Hi-Vol)1	March 20, 2009	Specified amount upon credit event noticeB	1.250% Quarterly		48,333		187
Credit Suisse First Boston USA (iBoxx IG Hi-Vol2)1	September 20, 2009	1.150% Quarterly	Specified amount upon credit event noticeB		24,167		(147	)
Credit Suisse First Boston USA (iBoxx HY 3)1	December 20, 2009	Specified amount upon credit event noticeB	4.000% Quarterly		3,078		266
Credit Suisse First Boston USA (iBoxx HY 3)1	December 20, 2009	Specified amount upon credit event noticeB	4.000% Quarterly		3,078		266
Credit Suisse First Boston USA (iBoxx HY 3)1	December 20, 2009	Specified amount upon credit event noticeB	4.000% Quarterly		15,539		799
Credit Suisse First Boston USA (iBoxx HY 3)1	December 20, 2009	Specified amount upon credit event noticeB	4.000% Quarterly		11,532		507
Deutsche Bank AG (Apache Corporation, 6.25%, due 4/15/12)1	March 20, 2015	Specified amount upon credit event noticeB	0.360% Quarterly		1,265		(4	)
Deutsche Bank AG (Dynegy Holdings, 8.75%, due 2/15/12)1	April 23, 2007	Specified amount upon credit event noticeC	2.950% Quarterly		2,250		100
Deutsche Bank AG (Dynegy Holdings, 8.75%, due 2/15/12)1	May 1, 2007	Specified amount upon credit event noticeC	5.250% Quarterly		3,460		241
Deutsche Bank AG (Eastman Kodak Company, 7.25%, due 11/15/13)1	March 20, 2010	Specified amount upon credit event noticeB	1.250% Quarterly		1,600		(36	)
Deutsche Bank AG (Eastman Kodak Company, 7.25%, due 11/15/13)1	March 20, 2015	Specified amount upon credit event noticeB	1.670% Quarterly		1,900		(149	)

185

Annual Report to Shareholders

Notes to Financial Statements—Continued

Western Asset Core Plus Bond Portfolio—Continued
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Deutsche Bank AG (Eastman Kodak Company, 7.25%, due 11/15/13)1	September 20, 2010	Specified amount upon credit event noticeB	2.300% Quarterly	$	3,020	$	23
Deutsche Bank AG (Eastman Kodak Company, 7.25%, due 11/15/13)1	September 20, 2010	Specified amount upon credit event noticeB	2.300% Quarterly		5,430		41
Deutsche Bank AG (Eastman Kodak Company, 7.25%, due 11/15/13)1	September 20, 2010	Specified amount upon credit event noticeB	2.320% Quarterly		3,200		27
Deutsche Bank AG (Fannie Mae, 6.00%, due 5/15/11)1	December 20, 2009	Specified amount upon credit event noticeB	0.215% Quarterly		17,000		77
Deutsche Bank AG (Ford Motor Credit Company, 7.00%, due 10/1/13)1	December 20, 2010	Specified amount upon credit event noticeB	5.050% Quarterly		25,400		369
Deutsche Bank AG (Ford Motor Credit Company, 7.45%, due 7/16/31)1	March 20, 2015	Specified amount upon credit event noticeB	2.930% Quarterly		2,600		(608	)
Deutsche Bank AG (Freddie Mac, 5.00%, due 7/15/14)1	March 20, 2015	Specified amount upon credit event noticeB	0.290% Quarterly		25,100		225
Deutsche Bank AG (General Motors Acceptance Corporation, 6.875%, due 8/12/12)1	March 20, 2010	Specified amount upon credit event noticeB	2.280% Quarterly		5,500		(29	)
Deutsche Bank AG (General Motors Acceptance Corporation, 8.375%, due 7/15/33)1	March 20, 2015	Specified amount upon credit event noticeB	3.510% Quarterly		2,600		(707	)
Deutsche Bank AG (GIE PSA Tresorerie, 5.875%, due 9/27/11)1	March 20, 2011	0.325% Quarterly	Specified amount upon credit event noticeD		2,540		(12	)
Deutsche Bank AG (GIE PSA Tresorerie, 5.875%, due 9/27/11)1	March 20, 2011	0.325% Quarterly	Specified amount upon credit event noticeD		2,540		(5	)
Deutsche Bank AG (GIE PSA Tresorerie, 5.875%, due 9/27/11)1	March 20, 2011	0.340% Quarterly	Specified amount upon credit event noticeD		2,540		(7	)
Deutsche Bank AG (Renault S.A., 4.625%, due 5/28/10)1	March 20, 2011	0.360% Quarterly	Specified amount upon credit event noticeD		2,540		(7	)
Deutsche Bank AG (Renault S.A., 4.625%, due 5/28/10)1	March 20, 2011	0.380% Quarterly	Specified amount upon credit event noticeD		2,540		(9	)

186

Annual Report to Shareholders

Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Deutsche Bank AG (Volkswagen International Finance NV, 4.875%, due 5/22/13)1	March 20, 2011	0.340% Quarterly	Specified amount upon credit event noticeD	$	2,540	$	(4	)
Deutsche Bank AG (Volkswagen International Finance NV, 4.875%, due 5/22/13)1	March 20, 2011	0.370% Quarterly	Specified amount upon credit event noticeD		2,540		(4	)
Deutsche Bank AG (iBoxx 100 HY)1	March 20, 2009	Specified amount upon credit event noticeB	4.250% Quarterly		9,500		591
Deutsche Bank AG (iBoxx 100 IG)1	March 20, 2009	4.250% Quarterly	Specified amount upon credit event noticeD		3,525		(25	)
Deutsche Bank AG (iBoxx IG Hi-Vol)1	March 20, 2009	Specified amount upon credit event noticeB	1.250% Quarterly		13,301		41
Deutsche Bank AG (iBoxx IG Hi-Vol2)1	September 20, 2014	Specified amount upon credit event noticeB	1.300% Quarterly		11,175		13
Deutsche Bank AG (iBoxx IG TMT)1	March 20, 2009	0.600% Quarterly	Specified amount upon credit event noticeD		6,450		(59	)
Deutsche Bank AG (iBoxx IG TMT)1	March 20, 2009	0.600% Quarterly	Specified amount upon credit event noticeD		9,500		(86	)
Deutsche Bank AG (iBoxx IG TMT)1	March 20, 2009	1.250% Quarterly	Specified amount upon credit event noticeD		9,183		34
Deutsche Bank AG (iBoxx 100 HY)1	March 20, 2009	4.250% Quarterly	Specified amount upon credit event noticeD		1,805		(115	)
Deutsche Bank AG (iBoxx HY 2)1	September 20, 2009	Specified amount upon credit event noticeB	4.800% Quarterly		2,559		250
Deutsche Bank AG (iBoxx HY B)1	March 20, 2009	Specified amount upon credit event noticeB	5.000% Quarterly		4,768		326
Deutsche Bank AG (iBoxx HY B)1	March 20, 2009	Specified amount upon credit event noticeB	5.000% Quarterly		9,535		617
Deutsche Bank AG2	January 10, 2008	3-month LIBORE	3.754% Semi-annually		143,500		(3,692	)

187

Annual Report to Shareholders

Notes to Financial Statements—Continued

Western Asset Core Plus Bond Portfolio—Continued
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Deutsche Bank AG2	October 5, 2008	3-month LIBORE	4.655% Semi-annually	$	194,330	$	(2,817	)
Deutsche Bank AG2	June 17, 2010	3-month LIBORE	4.313% Semi-annually		41,570		(1,518	)
Deutsche Bank AG2	October 11, 2010	3-month LIBORE	4.708% Semi-annually		299,650		(7,055	)
JPMorgan Chase & Co. (General Motors Acceptance Corporation, 7.125%, due 7/15/13)1	September 20, 2010	Specified amount upon credit event noticeC	6.000% Quarterly		14,300		(2,260	)
Lehman Brothers Holdings Inc. (General Motors Acceptance Corporation, 6.875%, due 8/12/12)1	March 20, 2010	Specified amount upon credit event noticeB	3.650% Quarterly		25,000		165
Lehman Brothers Holdings Inc. (iBoxx IG Hi-Vol2)1	September 20, 2009	1.150% Quarterly	Specified amount upon credit event noticeD		1,450		(3	)
Lehman Brothers Holdings Inc. (iBoxx IG Hi-Vol2)1	September 20, 2009	1.150% Quarterly	Specified amount upon credit event noticeD		12,180		(14	)
Lehman Brothers Holdings Inc. (iBoxx HY 3)1	December 20, 2009	Specified amount upon credit event noticeB	4.000% Quarterly		3,225		190
Lehman Brothers Holdings Inc. (iBoxx HY 3)1	December 20, 2009	Specified amount upon credit event noticeB	4.000% Quarterly		3,323		117
Lehman Brothers Holdings Inc. (iBoxx HY 3)1	December 20, 2009	Specified amount upon credit event noticeB	4.000% Quarterly		3,323		117
Lehman Brothers Holdings Inc. (iBoxx IG TMT)1	March 20, 2009	0.600% Quarterly	Specified amount upon credit event noticeD		9,000		(115	)
Lehman Brothers Holdings Inc.2	October 7, 2007	3-month LIBORE	4.601% Semi-annually		80,020		(799	)
Merrill Lynch & Co., Inc. (Eastman Kodak Company, 7.25%, due 11/15/13)1	September 20, 2010	Specified amount upon credit event noticeB	2.300% Quarterly		1,610		12
Merrill Lynch & Co., Inc. (Pacific Gas & Electric Co., 4.80%, due 3/1/14)1	June 20, 2009	Specified amount upon credit event noticeC	0.420% Quarterly		2,980		17
Morgan Stanley & Co., Inc. (Eastman Kodak Company, 7.25%, due 11/15/13)1	March 20, 2011	Specified amount upon credit event noticeC	2.700% Quarterly		5,000		78

188

Annual Report to Shareholders

Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
RBS Greenwich (DSLA Mortgage Loan Trust 2005-AR5 1-Month LIBORE +  175 bpF, due 8/19/45)1	August 19, 2045	4.500% Monthly	Specified amount upon credit event noticeB	$	2,098	$	60
RBS Greenwich (Eastman Kodak Company, 7.25%, due 11/15/13)1	December 20, 2010	Specified amount upon credit event noticeC	3.200% Quarterly		19,300		755
RBS Greenwich (General Motors Acceptance Corporation, 6.875%, due 8/28/12)1	September 20, 2010	Specified amount upon credit event noticeC	5.750% Quarterly		7,500		573
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)1	June 20, 2010	Specified amount upon credit event noticeC	6.800% Quarterly		7,500		(1,004	)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)1	June 20, 2010	Specified amount upon credit event noticeC	7.100% Quarterly		8,000		(1,008	)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)1	September 20, 2010	Specified amount upon credit event noticeC	7.700% Quarterly		12,500		(1,398	)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)1	June 20, 2010	Specified amount upon credit event noticeC	8.400% Quarterly		12,500		(1,147	)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)1	September 20, 2010	Specified amount upon credit event noticeB	6.100% Quarterly		8,000		(1,243	)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)1	September 20, 2010	Specified amount upon credit event noticeC	6.630% Quarterly		19,600		(2,762	)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)1	September 20, 2010	Specified amount upon credit event noticeC	6.900% Quarterly		10,000		(1,336	)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)1	September 20, 2010	Specified amount upon credit event noticeC	7.200% Quarterly		7,820		(981	)

189

Annual Report to Shareholders

Notes to Financial Statements—Continued

Western Asset Core Plus Bond Portfolio—Continued
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)1	December 20, 2010	Specified amount upon credit event noticeC	8.950% Quarterly	$	19,300	$	(1,513	)
RBS Greenwich (Harborview Mortgage Loan Trust 2005-12 1-Month LIBORE + 175 bpF, due 10/19/35)1	October 19, 2035	2.500% Monthly	Specified amount upon credit event noticeB		1,999		63
RBS Greenwich (IndyMac Index Mortgage Loan Trust 2005-AR18 1-Month LIBORE + 125 bpF, due 10/25/36)1	October 25, 2036	2.700% Monthly	Specified amount upon credit event noticeB		1,897		75
RBS Greenwich (Tenet Healthcare Corporation, 6.375%, due 12/1/11)1	September 20, 2010	Specified amount upon credit event noticeC	3.550% Quarterly		1,600		(5	)
RBS Greenwich (Tenet Healthcare Corporation, 6.375%, due 12/1/11)1	September 20, 2010	Specified amount upon credit event noticeC	3.550% Quarterly		3,900		(13	)
RBS Greenwich (Tenet Healthcare Corporation, 6.375%, due 12/1/11)1	September 20, 2010	Specified amount upon credit event noticeC	3.500% Quarterly		3,920		(20	)
RBS Greenwich (Tenet Healthcare Corporation, 6.375%, due 12/1/11)1	September 20, 2010	Specified amount upon credit event noticeC	3.670% Quarterly		5,000		5
RBS Greenwich (Tenet Healthcare Corporation, 6.375%, due 12/1/11)1	December 20, 2010	Specified amount upon credit event noticeC	3.870% Quarterly		7,700		17
RBS Greenwich (Time Warner Inc., 6.875%, due 5/1/12)1	September 20, 2007	Specified amount upon credit event noticeC	0.470% Quarterly		5,000		3
RBS Greenwich (Time Warner Inc., 6.875%, due 5/1/12)1	December 20, 2010	Specified amount upon credit event noticeC	0.500% Quarterly		12,500		7
RBS Greenwich (Washington Mutual 2005-AR11 1-Month LIBORE +  120 bpF, due 8/25/45)1	August 25, 2045	2.550% Monthly	Specified amount upon credit event noticeB		830		23
RBS Greenwich (iBoxx CDX)1	December 20, 2010	Specified amount upon credit event noticeB	2.000% Quarterly		13,114		475

190

Annual Report to Shareholders

Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
RBS Greenwich (iBoxx CDX)1	December 20, 2010	Specified amount upon credit event noticeB	2.000% Quarterly	$	15,154	$	288
RBS Greenwich (iBoxx Hi-Vol4)1	June 20, 2010	Specified amount upon credit event noticeB	0.900% Quarterly		17,700		189
RBS Greenwich (iBoxx Hi-Vol4)1	June 20, 2010	Specified amount upon credit event noticeB	0.900% Quarterly		38,500		309
RBS Greenwich (iBoxx Hi-Vol4)1	June 20, 2010	Specified amount upon credit event noticeB	0.900% Quarterly		50,000		327
The Goldman Sachs Group, Inc. (Eastman Kodak Company, 7.25%, due 11/15/13)1	March 20, 2015	Specified amount upon credit event noticeB	1.670% Quarterly		1,900		(149	)
The Goldman Sachs Group, Inc. (Ford Motor Credit Company, 7.00%, due 10/1/13)1	June 20, 2010	Specified amount upon credit event noticeC	4.750% Quarterly		2,500		16
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation, 6.875%, due 8/28/12)1	September 20, 2007	Specified amount upon credit event noticeB	4.900% Quarterly		10,000		257
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation, 6.875%, due 8/28/12)1	June 20, 2010	Specified amount upon credit event noticeB	5.750% Quarterly		10,000		748
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation, 6.875%, due 8/28/12)1	June 20, 2010	Specified amount upon credit event noticeB	5.950% Quarterly		500		41
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation, 6.875%, due 8/28/12)1	June 20, 2010	Specified amount upon credit event noticeC	6.000% Quarterly		5,000		414
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation, 7.125%, due 7/15/13)1	June 20, 2010	Specified amount upon credit event noticeC	8.950% Quarterly		5,000		(387	)
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation, 8.375%, due 7/15/33)1	September 20, 2010	Specified amount upon credit event noticeB	6.000% Quarterly		25,100		(3,967	)

191

Annual Report to Shareholders

Notes to Financial Statements—Continued

Western Asset Core Plus Bond Portfolio—Continued
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation, 8.375%, due 7/15/33)1	December 20, 2010	Specified amount upon credit event noticeC	7.000% Quarterly	$	42,500	$	(5,652	)
The Goldman Sachs Group, Inc. (iBoxx IG FIN 3)1	March 20, 2010	Specified amount upon credit event noticeB	0.500% Quarterly		7,500		44
The Goldman Sachs Group, Inc. (iBoxx IG FIN 3)1	March 20, 2015	Specified amount upon credit event noticeB	0.700% Quarterly		7,600		109
The Goldman Sachs Group, Inc. (iBoxx IG Hi-Vol3)1	March 20, 2010	Specified amount upon credit event noticeB	1.050% Quarterly		21,847		320
The Goldman Sachs Group, Inc. (iBoxx IG Hi-Vol3)1	March 20, 2010	Specified amount upon credit event noticeB	1.050% Quarterly		42,823		1,190
The Goldman Sachs Group, Inc. (iBoxx IG Hi-Vol4)1	June 20, 2010	Specified amount upon credit event noticeB	0.400% Quarterly		23,300		288
The Goldman Sachs Group, Inc. (iBoxx IG Hi-Vol4)1	June 20, 2010	Specified amount upon credit event noticeB	0.400% Quarterly		61,600		866
The Goldman Sachs Group, Inc. (iBoxx IG Hi-Vol4)1	June 20, 2010	Specified amount upon credit event noticeB	0.900% Quarterly		31,200		793
The Goldman Sachs Group, Inc. (iBoxx IG Hi-Vol4)1	June 20, 2010	Specified amount upon credit event noticeB	0.900% Quarterly		100,000		2,923
The Goldman Sachs Group, Inc. (iBoxx IG Hi-Vol4)1	June 20, 2010	Specified amount upon credit event noticeB	0.900% Quarterly		10,950		76
The Goldman Sachs Group, Inc. (iBoxx IG Hi-Vol4)1	June 20, 2010	Specified amount upon credit event noticeB	0.900% Quarterly		50,000		1,016
The Goldman Sachs Group, Inc. (iBoxx HY 3)1	December 20, 2009	Specified amount upon credit event noticeB	4.000% Quarterly		2,912		206
The Goldman Sachs Group, Inc. (iBoxx HY 3)1	December 20, 2009	Specified amount upon credit event noticeB	4.000% Quarterly		977		59

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Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
The Goldman Sachs Group, Inc. (iBoxx HY 3)1	December 20, 2009	4.000% Quarterly	Specified amount upon credit event noticeD	$	5,922	$	268
The Goldman Sachs Group, Inc. (iBoxx HY 4)1	June 20, 2010	Specified amount upon credit event noticeB	3.400% Quarterly		2,200		143
The Goldman Sachs Group, Inc. (iBoxx HY 5)1	December 20, 2010	Specified amount upon credit event noticeB	2.000% Quarterly		8,160		150
The Goldman Sachs Group, Inc. (iBoxx HY 5)1	December 20, 2010	Specified amount upon credit event noticeB	2.000% Quarterly		9,714		350
The Goldman Sachs Group, Inc.2	September 14, 2007	3-month LIBORE	3.215% Semi-annually		37,270		(1,070	)
The Goldman Sachs Group, Inc.2	September 24, 2009	3.714% Semi-annually	3-month LIBORE		100,000		4,920
The Goldman Sachs Group, Inc.2	March 10, 2009	3-month LIBORE	4.360% Semi-annually		74,400		(1,286	)
The Goldman Sachs Group, Inc.2	March 10, 2011	4.430% Semi-annually	3-month LIBORE		45,800		1,190
				$	2,292,119	$	(19,922	)

Western Asset Inflation Indexed Bond Plus Portfolio
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Deutsche Bank AG (iBoxx HY4)1	June 20, 2010	Specified amount upon credit event noticeB	3.600% Quarterly	$	9,600	$	435
JPMorgan Chase & Co. (Ford Motor Credit Company, 7.00%, due 8/15/12)1	June 20, 2010	Specified amount upon credit event noticeC	2.900% Quarterly		5,000		(264	)
JPMorgan Chase & Co. (iBoxx IG Hi-Vol4)1	June 20, 2010	Specified amount upon credit event noticeB	0.900% Quarterly		11,700		165
Merrill Lynch & Co., Inc. (El Paso Corporation, 7%, due 5/15/11)1	June 20, 2010	Specified amount upon credit event noticeB	3.625% Quarterly		2,500		179
Merrill Lynch & Co., Inc. (Ford Motor Credit Company, 7.375%, due 10/28/09)1	June 20, 2010	Specified amount upon credit event noticeC	5.500% Quarterly		2,500		77

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Annual Report to Shareholders

Notes to Financial Statements—Continued

Western Asset Inflation Indexed Bond Plus Portfolio—Continued
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Merrill Lynch & Co., Inc. (General Motors Acceptance Corporation, 7.75%, due 1/19/10)1	March 20, 2007	Specified amount upon credit event noticeB	3.550% Quarterly	$	5,000	$	18
Merrill Lynch & Co., Inc. (iBoxx IG Hi-Vol4)1	June 20, 2010	Specified amount upon credit event noticeB	0.900% Quarterly		5,000		(9	)
The Goldman Sachs Group, Inc. (Eastman Kodak Corporation, 7.25%, due 11/15/13)1	March 20, 2011	Specified amount upon credit event noticeC	2.570% Quarterly		4,800		49
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation, 6.875%, due 8/28/12)1	June 20, 2010	Specified amount upon credit event noticeC	4.500% Quarterly		7,500		256
The Goldman Sachs Group, Inc. (iBoxx IG Hi-Vol4)1	June 20, 2010	Specified amount upon credit event noticeB	0.900% Quarterly		9,500		43
					$63,100	$	949

^B Upon bankruptcy or failure to make a scheduled interest payment, the Fund will pay $1,000.

^C Upon bankruptcy or failure to make a scheduled interest payment, the Fund will pay $1,000; upon default, the Fund will pay $10,000.

^D Upon bankruptcy or failure to make a scheduled interest payment, the Fund will receive $1,000.

^E As of March 31, 2006, the one- and three-month London Interbank Offered Rates were 4.83% and 5.00%, respectively.

^F 100 basis points = 1%.

4. Securities Loaned:

Each Fund may lend its securities to approved brokers to earn additional income and will receive cash and U.S. government securities as collateral against the loans. Cash collateral received is invested in a money market pooled account by each Fund’s lending agent. Collateral is maintained over the life of the loan in an amount not less than 100% of the value of the loaned securities. At March 31, 2006, collateral for securities on loan by Core Plus and Inflation Indexed consisted of $1,696,920 and $137,477 in money market pooled accounts and U.S. government securities valued at $56,850 and $397, respectively.

5. Transactions With Affiliates:

Each Fund has a management agreement with Legg Mason Fund Adviser, Inc. (“LMFA”). Western Asset Management Company (“Western Asset”) is the investment adviser to Limited Duration, Intermediate, Intermediate Plus, Core, Core Plus, Inflation Indexed, and High Yield. Western Asset Management Company Limited (“WAML”) is the investment adviser to Non-U.S. and shares advisory responsibilities with Western Asset for Intermediate Plus, Core Plus and Inflation Indexed. Pursuant to their respective agreements, LMFA provides the Funds with management and administrative services for which each Fund pays a fee, computed daily and payable monthly, at annual rates of each Fund’s average daily net assets. LMFA, Western Asset and WAML have voluntarily agreed to waive their fees and reimburse the Funds to the extent each Fund’s expenses (exclusive of taxes, interest, brokerage and extraordinary expenses) exceed during any month certain annual rates of each Fund’s average daily net assets. Western Asset and WAML have also agreed to waive their advisory fees (which are paid by LMFA, and not the Funds) in corresponding amounts. Any amounts waived or reimbursed in a particular fiscal year will be subject to repayment by a Fund to LMFA, Western Asset and WAML, to the extent that from time to time during the next three fiscal years the repayment will not

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cause a Fund’s expenses to exceed the limit set forth by LMFA, Western Asset and WAML. The following chart shows annual rates of management fees, expense limits, management fees waived and potential fees which may be recaptured for each Fund.

Fund	Asset Breakpoint	Management Fee		Expense Limitation		Management Fees (Waived)/ Recaptured			Maximum Amount Subject to Recapture
Limited Duration	All asset levels	0.350	%	0.40	%	$	(187	)	$	(339	)
Intermediate	All asset levels	0.400	%	0.45	%		(104	)		(314	)
Intermediate Plus	All asset levels	0.400	%	0.45	%		(174	)		(303	)
Core
Institutional Class	Up to $500 million	0.450	%	0.50	%		—			—
	Next $500 million	0.425	%
	In excess of $1 billion	0.400	%
Financial Intermediary Class	Up to $500 million	0.450	%	0.75	%		—			(7	)
	Next $500 million	0.425	%
	In excess of $1 billion	0.400	%
Core Plus
Institutional Class	Up to $500 million	0.450	%	0.45	%		171			(778	)
	Next $500 million	0.425	%
	In excess of $1 billion	0.400	%
Financial Intermediary Class	Up to $500 million	0.450	%	0.70	%		3			—
	Next $500 million	0.425	%
	In excess of $1 billion	0.400	%
Inflation Indexed	All asset levels	0.200	%	0.25	%		(92	)		(252	)
High Yield	All asset levels	0.550	%	0.65	%		—			(156	)
Non-U.S.	All asset levels	0.450	%	0.55	%		(153	)		(436	)

On December 1, 2005, Legg Mason Investor Services, LLC (“LMIS”) replaced Legg Mason Wood Walker, Inc. (“Legg Mason”) as the Funds’ distributor. The compensation agreements between each Fund and LMIS are identical to the previous arrangements between each Fund and Legg Mason. LMIS receives from each Fund an annual distribution fee of 0.25% of the average daily net assets of the Financial Intermediary Class of each Fund, computed daily and payable monthly.

LMFA, Western Asset, WAML and LMIS are wholly owned subsidiaries of Legg Mason, Inc.

6. Fund Share Transactions:

At March 31, 2006, there were 13.1 billion shares of common stock of the Corporation authorized at $.001 par value. Transactions in Fund shares were as follows:

	Sold			Reinvestment of Dividends			Repurchased					Net Change
	Shares	Amount		Shares	Amount		Shares		Amount			Shares	Amount
Limited Duration
—Institutional Class
Year Ended Mar. 31, 2006	8,501	$	84,143	270	$	2,657	(4,989	)	$	(49,138	)	3,782	$	37,662
Year Ended Mar. 31, 2005	2,314		23,070	95		942	(1,220	)		(12,193	)	1,189		11,819

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Annual Report to Shareholders

Notes to Financial Statements—Continued

	Sold			Reinvestment of Dividends			Repurchased					Net Change
	Shares	Amount		Shares	Amount		Shares		Amount			Shares		Amount
Intermediate
—Institutional Class
Year Ended Mar. 31, 2006	21,900	$	228,223	3,348	$	34,866	(15,656	)	$	(162,436	)	9,592		$	100,653
Year Ended Mar. 31, 2005	15,429		163,649	3,396		35,624	(9,292	)		(98,232	)	9,533			101,041
Intermediate Plus
—Institutional Class
Year Ended Mar. 31, 2006	3,608	$	35,668	194	$	1,917	(748	)	$	(7,371	)	3,054		$	30,214
Year Ended Mar. 31, 2005	4,511		45,012	54		531	(442	)		(4,340	)	4,123			41,203
Core
—Institutional Class
Year Ended Mar. 31, 2006	130,793	$	1,480,041	14,372	$	162,380	(51,441	)	$	(582,015	)	93,724		$	1,060,406
Year Ended Mar. 31, 2005	130,619		1,488,655	12,384		139,680	(37,948	)		(433,066	)	105,055			1,195,269
—Financial Intermediary Class
Year Ended Mar. 31, 2006	15,127	$	171,088	1,215	$	13,731	(7,204	)	$	(81,179	)	9,138		$	103,640
Year Ended Mar. 31, 2005	16,894		192,947	746		8,418	(4,423	)		(50,544	)	13,217			150,821
Core Plus
—Institutional Class
Year Ended Mar. 31, 2006	296,675	$	3,113,891	25,658	$	268,904	(82,917	)	$	(866,842	)	239,416		$	2,515,953
Year Ended Mar. 31, 2005	178,983		1,885,071	18,064		188,984	(69,914	)		(735,370	)	127,133			1,338,685
—Financial Intermediary Class
Year Ended Mar. 31, 2006	36,104	$	378,970	1,537	$	16,071	(6,683	)	$	(69,850	)	30,958		$	325,191
Year Ended Mar. 31, 2005	19,384		205,763	286		3,027	(2,163	)		(23,011	)	17,507			185,779
Inflation Indexed
—Institutional Class
Year Ended Mar. 31, 2006	8,808	$	91,926	2,501	$	26,549	(1,335	)	$	(14,411	)	9,974		$	104,064
Year Ended Mar. 31, 2005	11,379		121,575	2,469		25,781	(1,683	)		(18,165	)	12,165			129,191
High Yield
—Institutional Class
Year Ended Mar. 31, 2006	22,272	$	227,228	3,705	$	37,311	(7,754	)	$	(78,717	)	18,223		$	185,822
Year Ended Mar. 31, 2005	29,305		305,054	2,049		21,159	(10,290	)		(109,064	)	21,064			217,149
Non-U.S.
—Institutional Class
Year Ended Mar. 31, 2006	2,472	$	24,939	1,316	$	12,870	(2,480	)	$	(27,754	)	1,308		$	10,055
Year Ended Mar. 31, 2005	760		8,175	285		2,869	(2,151	)		(23,757	)	(1,106	)		(12,713	)

196

Annual Report to Shareholders

Report of Independent Registered Public Accounting Firm

To the Board of Directors of Western Asset Funds, Inc. and Shareholders of Western Asset Limited Duration Bond Portfolio, Western Asset Intermediate Bond Portfolio, Western Asset Intermediate Plus Bond Portfolio, Western Asset Core Bond Portfolio, Western Asset Core Plus Bond Portfolio, Western Asset Inflation Indexed Plus Bond Portfolio, Western Asset High Yield Portfolio, and Western Asset Non-U.S. Opportunity Bond Portfolio:

In our opinion, the accompanying statements of assets and liabilities, including the portfolios of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Western Asset Limited Duration Bond Portfolio, Western Asset Intermediate Bond Portfolio, Western Asset Intermediate Plus Bond Portfolio, Western Asset Core Bond Portfolio, Western Asset Core Plus Bond Portfolio, Western Asset Inflation Indexed Plus Bond Portfolio, Western Asset High Yield Portfolio, and Western Asset Non-U.S. Opportunity Bond Portfolio (eight Portfolios comprising Western Asset Funds, Inc., hereafter referred to as the “Funds”) at March 31, 2006, the results of each of their operations, the changes in each of their net assets and the financial highlights for each of the fiscal periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at March 31, 2006, by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Baltimore, Maryland

May 19, 2006

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Annual Report to Shareholders

Directors and Officers (as of May 9, 2006)

The table below provides information about each of the Corporation’s directors and officers, including biographical information about their business experience and information about their relationships with Western Asset and its affiliates. Unless otherwise noted, the mailing address of each director and officer is 385 East Colorado Boulevard, Pasadena, California 91101.

Name and Year of Birth	Position(s) Held With Corporation	Term of Office and Length of Time ServedA	Number of Portfolios Overseen in the Fund ComplexB	Other Directorships HeldC	Principal Occupation(s) During the Past Five Years
Independent Directors:
Ronald J. Arnault 1943	Director	Since 1997	14	None	Retired.
John E. Bryson 1943	Director	Since 1998	12	The Boeing Company and the Walt Disney Company	Chairman and CEO, Edison International (electric power generator, distributor and structured finance provider) (1990-present); Chairman of Southern California Edison Company (1990-1999 and 2003-present).
Anita L. DeFrantz 1952	Director	Since 1998	14	OBN Holdings, Inc.	President (1987-present) and Director (1990-present), Amateur Athletic Foundation of Los Angeles; President and Director, Kids in Sports (1994-present); Member, International Olympic Committee (1986-present).
William E.B. Siart 1946	Director	Since 1997	14	None	Chairman, Walt Disney Concert Hall, Inc. (1998-present); Chairman, Excellent Education Development (2000-present).
Louis A. Simpson 1936	Director	Since 1994	14	Verision, Inc.	President and CEO, Capital Operations of GEICO Corporation (1993-present).
Jaynie Miller Studenmund 1954	Director	Since 2004	14	aQuantive Inc.	Director, eHarmony.com, Inc. (2005-present); Chief Operating Officer, Overture Services, Inc. (2001-2004); President and Chief Operating Officer, Paymybills.com (2000-2001).
Interested Director:
Ronald L. OlsonD 1941	Director	Since 2005	14	Edison International, City National Corporation, The Washington Post Company and Berkshire Hathaway, Inc.	Senior Partner of Munger, Tolles & Olson International (a law partnership) (1968-present).
Executive Officers:E
James W. Hirschmann III 1960	President	Since 1999	N/A	N/A	President, Legg Mason, Inc. (2006-present); Director (1999-present), and President and CEO (1999-2006), Western Asset; Director, WAML (1999-present); President, Western Asset Income Fund (1999-present) and Western Asset Premier Bond Fund (2001-present).
D. Daniel Fleet 1957	Vice President	Since 2006	N/A	N/A	President and CEO, Western Asset (2006-present); Director of Risk Management, Western Asset (1999-2006).

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Annual Report to Shareholders

Name and Year of Birth	Position(s) Held With Corporation	Term of Office and Length of Time ServedA	Number of Portfolios Overseen in the Fund ComplexB	Other Directorships HeldC	Principal Occupation(s) During the Past Five Years
Gavin L. James 1960	Vice President	Since 2001	N/A	N/A	Director, Global Client Services and Marketing, Western Asset (1998-present).
S. Kenneth Leech 1954	Vice President	Since 1990	N/A	N/A	Chief Investment Officer, Western Asset (1998-present); Vice President, Western Asset Income Fund (1998-present) and Western Asset Premier Bond Fund (2001-present).
Stephen A. Walsh 1958	Vice President	Since 1994	N/A	N/A	Deputy Chief Investment Officer, Western Asset (2000-present); Vice President of Western Asset Income Fund (1999-present).
Susanne D. Wilson 1961 100 Light Street Baltimore, MD 21202	Vice President	Since 1998	N/A	N/A	Vice President of Legg Mason & Co., LLC (2005-present); Vice President of Legg Mason Wood Walker, Incorporated (1998-2005).
Marie K. Karpinski 1949 100 Light Street Baltimore, MD 21202	Principal Financial and Accounting Officer	Since 1990	N/A	N/A	Vice President, Legg Mason & Co., LLC (2005-present); Vice President, Legg Mason Wood Walker, Incorporated (1992-2005); Vice President (1986-present), Treasurer (1986-2006) and Chief Financial Officer (2006-present) of all Legg Mason retail funds, open-end investment companies; Treasurer and Principal Financial and Accounting Officer of Western Asset Income Fund (2001-2006 and 2001-present, respectively), Western Asset Premier Bond Fund (2001-2006 and 2001-present, respectively), Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund (2003-present) and Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund 2 (2004-present); Treasurer of the Corporation (1999-2006).
Erin K. Morris 1966 100 Light Street Baltimore, MD 21202	Treasurer	Since 2006	N/A	N/A	Assistant Vice President and Manager, Funds Accounting, Legg Mason & Co., LLC (2005-present); Assistant Vice President (2002-2005) and Manager, Funds Accounting (2000-2005), of Legg Mason Wood Walker, Incorporated; Treasurer of Legg Mason Income Trust, Inc. and Legg Mason Tax-Free Income Fund (2006-present); Assistant Treasurer of the Corporation (2001-2006), Western Asset Income Fund (2001-2006), Western Asset Premier Bond Fund (2001-2006), Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund (2003-present), Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund 2 (2004-present), Legg Mason Income Trust, Inc. (2001-2006) and Legg Mason Tax-Free Income Fund (2001-2006).

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Annual Report to Shareholders

Directors and Officers—Continued

Name and Year of Birth	Position(s) Held With Corporation	Term of Office and Length of Time ServedA	Number of Portfolios Overseen in the Fund ComplexB	Other Directorships Held	Principal Occupation(s) During the Past Five Years
Amy M. Olmert 1963 100 Light Street Baltimore, MD 21202	Chief Compliance Officer	Since 2004	N/A	N/A	Senior Vice President of Legg Mason, Inc. (2004-present); Vice President and Chief Compliance Officer of all Legg Mason retail funds (open-end investment companies) (2004-present) and Legg Mason Charles Street Trust, Inc. (open-end investment company) (2004-present); Chief Compliance Officer of Western Asset Income Fund, Western Asset Premier Bond Fund, Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund and Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund 2 (2004-present). Formerly: Director (2000-2003) and Managing Director, (2003-2004) Deutsche Asset Management.
Lisa G. Mrozek 1962	Secretary	Since 1999	N/A	N/A	Senior Compliance Officer, Western Asset (1999-present); Secretary of Western Asset Income Fund (1999-present) and Western Asset Premier Bond Fund (2001-present).

^A Directors of the Corporation serve a term of indefinite length until their successors are elected and qualified, or until their earlier death, resignation or removal, and generally stand for re-election by stockholders only as and when required by the Investment Company Act of 1940, as amended (the “1940 Act”). Officers serve one-year terms, subject to annual reappointment by the Board of Directors.

^B In addition to overseeing the twelve portfolios of the Corporation, each Director except Mr. Bryson also serves as a Director of Western Asset Income Fund and a Trustee of Western Asset Premier Bond Fund (closed-end investment companies), which are considered part of the same Fund Complex as the Corporation.

^C Includes directorships with public companies and registered investment companies.

^D Mr. Olson is an “interested person” (as defined in Section 2(a)(19) of the 1940 Act) of the Corporation because his law firm has provided legal services to the Corporation’s investment adviser, Western Asset.

^E Officers of the Corporation are interested persons (as defined above) of the Corporation.

ADDITIONAL INFORMATION ABOUT THE CORPORATION’S

DIRECTORS AND OFFICERS IS CONTAINED IN THE

CORPORATION’S STATEMENT OF ADDITIONAL INFORMATION,

AVAILABLE WITHOUT CHARGE UPON REQUEST BY CALLING

1-888-425-6432, OR ON THE SECURITIES AND EXCHANGE

COMMISSION WEBSITE (http://www.sec.gov).

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Annual Report to Shareholders

Board Consideration of the Management and Advisory Agreements

The Executive and Contracts Committee of the Board of Directors considered the Investment Management Agreements between the Corporation and LMFA, the Investment Advisory Agreements between LMFA and Western Asset and the Investment Advisory Agreements between LMFA and WAML (collectively, the “Agreements”) with respect to each Portfolio at meetings held on September 13, 2005, October 24, 2005 and November 8, 2005. At a subsequent meeting held on November 8, 2005, the Executive and Contracts Committee reported to the full Board of Directors their considerations with respect to the Agreements, and the Board of Directors, including a majority of the Independent Directors, considered and approved renewal of the Agreements.

In arriving at their decision to renew the Agreements, the Directors met with representatives of Western Asset and WAML (together, the “Advisers”), including relevant investment advisory personnel as well as representatives of LMFA; reviewed a variety of information prepared by LMFA and the Advisers and materials provided by Lipper Inc. (“Lipper”) and counsel to the Independent Directors; and reviewed performance and expense information for peer groups of comparable funds selected and prepared by Lipper, and certain other comparable products available from Western Asset. These reviews were in addition to information obtained by the Directors at their regular quarterly meetings with respect to the Portfolios’ performance and other relevant matters, and related discussions with the Advisers’ personnel.

As part of their review, the Directors examined the Advisers’ ability to provide high quality investment management services to the Portfolios. The Directors considered the investment philosophy and research and decision-making processes of each Adviser; the experience of its key advisory personnel responsible for management of the Portfolios; the ability of the Advisers to attract and retain capable research and advisory personnel; the capability and integrity of the Advisers’ senior management and staff; and the level of skill required to manage each Portfolio. In addition, the Directors reviewed the quality of LMFA and Advisers’ services with respect to regulatory compliance and compliance with the investment policies of the Portfolios; the pending acquisition of Citigroup Asset Management by Legg Mason, Inc., the parent company of the Advisers and LMFA, and the impact such acquisition may have on the Advisers and LMFA; the nature and quality of certain administrative services LMFA is responsible for providing to the Portfolios; and conditions that might affect LMFA or an Adviser’s ability to provide high quality services to the Portfolios in the future under the Agreements, including LMFA and each Adviser’s business reputation, financial condition and operational stability. Based on the foregoing, the Directors concluded that the Advisers’ investment process, research capabilities and philosophy were well suited to the Portfolios given their respective investment objectives and policies, and that LMFA and each of the Advisers would be able to meet any reasonably foreseeable obligations under the Agreements.

In reviewing the quality of the services provided to the Portfolios, the Directors also reviewed comparisons of the performance of the Portfolios to the performance of certain comparable funds in their respective peer groups and to their respective investment benchmarks over one-, three-, five- and ten-year periods (as applicable). With respect to each of the Portfolios, the Directors discussed the factors involved in its performance relative to the performance of its investment benchmark and peer groups. In that connection, the Directors noted that the performance of the Portfolios over most of the periods was above the average of their respective peer groups, except with respect to the Inflation Indexed Plus Bond, High Yield and Non-U.S. Opportunity Bond Portfolios, which did not outperform all of their respective peer groups for all periods reviewed. With respect to the Inflation Indexed Plus Bond Portfolio, management noted that the Portfolio’s investment guidelines had been amended in May to allow the Portfolio to utilize new investments, including credit default swaps, emerging market and high yield debt instruments, in an effort to enhance performance. With respect to the High Yield Portfolio, management noted that Western Asset had recently hired a new leader for the high yield investment team and that the Portfolio’s performance had improved following such hire. With respect to the Non-U.S. Opportunity Bond Portfolio, management stated that it was important to note that the Portfolio was used primarily by the Advisers’ separate account clients desiring non-U.S. exposure in an investment company vehicle, and that, as a result, the Portfolio was not managed against a benchmark.

The Directors also gave substantial consideration to the management fees and total expenses payable by the Portfolios. They reviewed information concerning management fees paid to investment advisers of similarly-managed funds, as well as fees paid by the Advisers’ other clients, including separate accounts managed by the Advisers. The Directors observed that the management fees paid by the each of the Portfolios other than the Core Bond, Core Plus Bond and High Yield Portfolios were below the average of their respective peer groups. With respect to the Core Bond, Core Plus Bond and High Yield Portfolios, the Directors observed that, like the other Portfolios, total expenses were below the average of their respective peer groups. The Directors noted that the management fees paid by the Portfolios were generally higher than the fees paid by clients of the Advisers for

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Annual Report to Shareholders

Board Consideration of the Management and Advisory Agreements—Continued

accounts with similar investment strategies, but that the administrative and operational responsibilities for the Advisers with respect to the Portfolios were also relatively higher. In light of these differences, the Directors concluded that the differences in management fees were reasonable.

The Directors further evaluated the benefits of the advisory relationship to LMFA and the Advisers, including, among others, the profitability of the Portfolios to LMFA and the Advisers; the direct and indirect benefits that LMFA and each Adviser may receive from its relationship with the Portfolios, including any so-called “fallout benefits” to LMFA or the Advisers, such as reputational value derived from serving as investment manager or adviser; and the affiliations between LMFA, the Advisers and certain service providers for the Portfolios. In that connection, the Directors concluded that LMFA and each Adviser’s profitability was consistent with levels of profitability that had been determined by courts not to be “excessive.”

Finally, the Directors considered, in light of the profitability information provided by the Advisers, the extent to which economies of scale would be realized by the Advisers as the assets of the Portfolios grow. They further concluded that, where a Portfolio’s assets were currently at a level at which the Advisers potentially may realize economies of scale from any future growth in the Portfolio, fee breakpoints had been implemented to capture a portion of any economies of scale for the benefit of the Portfolio’s shareholders.

In their deliberations with respect to these matters, the Independent Directors were advised by their independent counsel, who are independent of LMFA and the Advisers within the meaning of the Securities and Exchange Commission rules regarding the independence of counsel. The Independent Directors weighed the foregoing matters in light of the advice given to them by their independent counsel as to the law applicable to the review of investment advisory contracts. In arriving at a decision, the Directors, including the Independent Directors, did not identify any single matter as all-important or controlling, and the foregoing summary does not detail all the matters considered. The Directors judged the terms and conditions of the Agreements, including the investment advisory fees, in light of all of the surrounding circumstances.

Based upon their review, the Directors, including all of the Independent Directors, determined, in the exercise of their business judgment, that they were satisfied with the quality of investment advisory services being provided by each Adviser; that the fees to be paid to the Advisers and LMFA under the relevant Agreements were fair and reasonable, given the scope and quality of the services rendered by the Advisers and LMFA; and that approval of the Agreements was in the best interest of the Corporation and its shareholders.

202

Annual Report to Shareholders

Privacy Policy

We are committed to keeping nonpublic personal information about you secure and confidential. This notice is intended to help you understand how we fulfill this commitment.

From time to time, we may collect a variety of personal information about you, including:

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

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

• Information we receive from consumer reporting agencies.

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

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

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

This notice is being provided on behalf of:

Western Asset Funds, Inc.

Western Asset Funds, Inc.

The Board of Directors

William E. B. Siart, Chairman

Ronald J. Arnault

John E. Bryson

Anita L. DeFrantz

Ronald L. Olson

Louis A. Simpson

Jaynie Miller Studenmund

Officers

James W. Hirschmann, President

D. Daniel Fleet, Vice President

Gavin L. James, Vice President

S. Kenneth Leech, Vice President

Stephen A. Walsh, Vice President

Susanne D. Wilson, Vice President

Marie K. Karpinski, Principal Financial and Accounting Officer

Erin K. Morris, Treasurer

Amy M. Olmert, Chief Compliance Officer

Lisa G. Mrozek, Secretary

Investment Manager

Legg Mason Fund Adviser, Inc.

P.O. Box 17635

Baltimore, Maryland 21297-1635

Investment Advisers

Western Asset Management Company

385 East Colorado Boulevard

Pasadena, California 91101

Western Asset Management Company Limited

10 Exchange Square

London, England EC2A2EN

Transfer and Shareholder Servicing Agent

Boston Financial Data Services

66 Brooks Drive

Braintree, Massachusetts 02184

Custodian

State Street Bank & Trust Company

P.O Box 1031

Boston, Massachusetts 02103

Counsel

Ropes & Gray LLP

45 Rockefeller Plaza

New York, New York 10111

Independent Registered Public Accounting Firm

PricewaterhouseCoopers LLP

250 West Pratt Street

Baltimore, Maryland 21201

Information about the policies and procedures that each Fund uses to determine how to vote proxies relating to each Fund’s portfolio securities is contained in the Statement of Additional Information, available upon request without charge by calling 1-888-425-6432 or on the Securities and Exchange Commission’s (“SEC”) website (http://www.sec.gov). Information regarding how the Funds voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is also available on the SEC’s website or without charge through www.westernassetfunds.com.

Each Fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Each Fund’s Form N-Q is available on the Securities and Exchange Commission’s (“SEC) website (http://www.sec.gov) and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information about the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. Quarterly portfolio holdings are also available upon request by calling 1-888-425-6432 or at www.westernassetfunds.com.

You should consider a fund’s investment objectives, risks, charges, and expenses carefully before investing. For a prospectus, which contains this and other information on any fund, call 1-888-425-6432 or visit www.westernassetfunds.com. Please read the prospectus carefully before investing.

This report is not to be distributed unless preceded or accompanied by a prospectus.

Legg Mason Investor Services, LLC, Distributor

Item 2 – Code of Ethics

(a) Western Asset Funds, Inc. (the “Registrant”) has adopted a Code of Ethics, as defined in Item 2 of Form N-CSR, that applies to the Registrant’s Principal Executive, Financial and Accounting Officers a copy of which is attached as an exhibit to this Form N-CSR.

(b) Omitted.

(c) Not applicable.

(d) Not applicable.

(e) Not applicable.

(f) Omitted.

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Item 3 – Audit Committee Financial Expert

The Audit Committee of the Registrant’s Board of Directors is comprised solely of Directors who are “independent” (as such term has been defined by the Securities and Exchange Commission (“SEC”) in regulations implementing Section 407 of the Sarbanes-Oxley Act of 2002 (the “Regulations”)). In addition, the Board of Directors of the Registrant has determined that Mr. Ronald J. Arnault qualifies as an “audit committee financial expert” (as such term has been defined by the Regulations) based on its review of his pertinent experience, knowledge and education. The SEC has stated that the designation or identification of a person as an audit committee financial expert pursuant to this Item 3 of Form N-CSR does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Audit Committee and the Board of Directors in absence of such designation or identification.

Item 4 – Principal Accountant Fees and Services

(a) Audit Fees

Fiscal Year Ended March 31, 2005 - $246,100

Fiscal Year Ended March 31, 2006 - $266,650

(b) Audit-Related Fees

Fiscal Year Ended March 31, 2005 - - $20,000

Fiscal Year Ended March 31, 2006 - $20,000

Services include interim audit security pricing.

PricewaterhouseCoopers LLP did not bill fees for audit-related services that required pre-approval by the Audit Committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the Registrant’s year ended March 31, 2005. PricewaterhouseCoopers LLP billed fees in the amount of $127,460 for non-audit services that required pre-approval by the Audit Committee pursuant to paragraph (C)(7)(ii) of Rule 2-01 of Regulation S-X during the Registrant’s fiscal year ended March 31, 2006.

PricewaterhouseCoopers LLP conducted a SAS 70 audit to review and test operating effectiveness of controls placed in operation for Western Asset Management Company.

(c) Tax Fees.

Fiscal Year Ended March 31, 2005 - $8,000

Fiscal Year Ended March 31, 2006 - $8,400

Services include preparation of federal and state income tax returns and preparation of excise tax returns.

PricewaterhouseCoopers LLP did not bill fees for tax services that required pre-approval by the Audit Committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the Registrant’s last two fiscal years.

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(d) All Other Fees

There were no fees billed to the Registrant during each of the last two fiscal years by PricewaterhouseCoopers LLP that were not disclosed in Items 4(a), (b) or (c) above.

PricewaterhouseCoopers LLP did not bill fees for services not included in Items 4(a), (b) or (c) above that required pre-approval by the Audit Committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the Registrant’s last two fiscal years.

(e)	(1)	The Audit Committee has determined that all work performed for the Registrant by PricewaterhouseCoopers LLP will be pre-approved by the full Audit Committee and, therefore, has not adopted pre-approval procedures.
	(2)	None

PricewaterhouseCoopers LLP did not bill fees for services where pre-approval by the Audit Committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X was waived pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X during the Registrant’s last two fiscal years.

(f) Not applicable.

(g) Non-Audit Fees

Fiscal Year Ended March 31, 2005 - $302,596

Fiscal Year Ended March 31, 2006 - $548,660

(h) The Audit Committee of the Registrant has considered whether the non-audit services that were rendered by the Registrant’s principal accountant to the Registrant’s investment adviser (not including any subadviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser) and any entity controlling, controlled by, or under common control with the investment adviser and that were not pre-approved by the Audit Committee are compatible with maintaining the principal accountant’s independence.

Item 5 – Audit Committee of Listed Registrants

Not applicable.

Item 6 – Schedule of Investments

The schedule of investments in unaffiliated issuers as of the close of the reporting period is included as part of the annual report to shareholders contained in Item 1 hereof.

Item 7 – Disclosure of Proxy Voting Policies and Procedures

Not applicable.

Page 3 of 5

Item 8 – Portfolio Managers of Closed-End Management Investment Companies

Not applicable.

Item 9 – Purchases of Equity Securities by Closed-End Management Investment Companies and Affiliated Purchasers

Not applicable.

Item 10 – Submission of Matters to a Vote of Security Holders

There have been no material changes to the procedures by which shareholders may recommend nominees to the Registrant’s Board of Directors that have been implemented since the Registrant last provided disclosure in response to the requirements of this Item 10.

Item 11 – Controls and Procedures

(a) The Registrant’s principal executive and principal financial officers have concluded, based on their evaluation of the Registrant’s disclosure controls and procedures as of a date within 90 days of the filing date of this report, that the Registrant’s disclosure controls and procedures are reasonably designed to ensure that information required to be disclosed by the Registrant on Form N-CSR is recorded, processed, summarized and reported within the required time periods and that information required to be disclosed by the Registrant in the reports that it files or submits on Form N-CSR is accumulated and communicated to the Registrant’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

(b) There were no changes in the Registrant’s internal control over financial reporting during the Registrant’s second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.

Item 12 – Exhibits

(a) File the exhibits listed below as part of this Form.

(1) Code of Ethics subject to disclosure required by Item 2 – filed as an exhibit hereto.

(2) Certifications pursuant to Rule 30a-2(a) under the Investment Company Act of 1940 – filed as an exhibit hereto.

(3) Not applicable.

(b) Certifications pursuant to Rule 30a-2(b) under the Investment Company Act of 1940 – filed as an exhibit hereto.

Page 4 of 5

SIGNATURES

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

Western Asset Funds, Inc.
By:	/s/ James W. Hirschmann
	James W. Hirschmann
	President
	Western Asset Funds, Inc.
Date:	June 5, 2006

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

By:	/s/ James W. Hirschmann
	James W. Hirschmann
	President
	Western Asset Funds, Inc.
Date:	June 5, 2006

By:	/s/ Marie K. Karpinski
	Marie K. Karpinski
	Treasurer and Principal Financial and Accounting Officer
	Western Asset Funds, Inc.
Date:	June 1, 2006

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