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

Western Asset Funds, Inc.

Name of Fund:

385 East Colorado Boulevard

Pasadena, CA 91101

Address of Principal Executive Offices:

Richard M. Wachterman, Esq.

Legg Mason & Co., LLC

100 Light Street

Baltimore, MD 21202

Name and address of agent for service:

Registrant’s telephone number, including area code: (410) 539-0000

Date of fiscal year end: March 31, 2008

Date of reporting period: March 31, 2008

Item 1 – Report to Shareholders

Western Asset Funds, Inc.

Western Asset Absolute Return Portfolio

Western Asset Core Bond Portfolio

Western Asset Core Plus Bond Portfolio

Western Asset High Yield Portfolio

Western Asset Inflation Indexed Plus Bond Portfolio

Western Asset Intermediate Bond Portfolio

Western Asset Intermediate Plus Bond Portfolio

Western Asset Limited Duration Bond Portfolio

Western Asset Non-U.S. Opportunity Bond Portfolio

Annual Report to Shareholders

March 31, 2008

Annual Report to Shareholders

Management’s Discussion of Fund Performance

Western Asset Absolute Return Portfolio

The average annual total returns for the Western Asset Absolute Return Portfolio for various periods ended March 31, 2008, are presented below:

	Three Months Ended 3/31/08	One Year	Since InceptionA
Western Asset Absolute Return Portfolio:
Institutional Class	-0.74%	+1.31%	+4.55%
Financial Intermediary Class	-0.80%	+1.03%	+3.20%
Lehman Aggregate Bond IndexB	+2.17%	+7.67%	+8.23%
Merrill Lynch Constant Maturity 3-month LIBOR IndexC	+1.33%	+5.62%	+5.60%

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. Performance figures for periods shorter than one year represent cumulative figures and are not annualized.

The gross expense ratios for the Institutional and Financial Intermediary Classes were 1.09% and 1.40%, respectively. Gross expenses are the Fund’s total annual operating expenses for the share classes for the fiscal year ended March 31, 2007, as indicated in the Fund’s prospectus dated August 1, 2007 and do not reflect fee waivers or reimbursements. These expenses include management fees, 12b-1 distribution fees (if any) and other expenses.

The net expense ratios for the Institutional and Financial Intermediary Classes were 0.89%, and 1.35%, respectively. Net expenses are the Fund’s total annual operating expenses for the share classes for the fiscal year ended March 31, 2007, as indicated in the Fund’s prospectus dated August 1, 2007 and reflect contractual fee waivers and/or reimbursements. The Fund’s Manager has contractually agreed to waive fees and/or reimburse operating expenses (exclusive of taxes, interest, deferred organizational expenses, brokerage and extraordinary expenses) until August 1, 2008 to limit total annual operating expenses to 1.10% with respect to the Institutional Class and 1.35% with respect to the Financial Intermediary Class of the Fund’s average daily net assets attributable to each share class. The Fund’s Board of Directors has currently limited payments of 12b-1 fees under the Financial Intermediary Class’s Distribution Plan to 0.25% of average net assets. Pursuant to the Distribution Plan for Financial Intermediary Class Shares, the Board of Directors may authorize payment of up to 0.40% of average net assets without shareholder approval.

^A The Fund’s Institutional Class inception date is July 6, 2006. The Fund’s Financial Intermediary Class inception date is September 6, 2006. Since-inception index returns are for periods beginning June 30, 2006. Although it is not possible to invest directly in an index, it is possible to purchase investment vehicles designed to track the performance of certain indexes.

^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.

^C An unmanaged index of 3-month constant maturity dollar-denominated deposits derived from interest rates on the most available dollar-denominated deposits.

1

Annual Report to Shareholders

Management’s Discussion of Fund Performance—Continued

A year ago, the Federal Reserve Board’s (Fed)^D predominant concern was that strong growth and a high level of resource utilization would sustain inflationary pressures. The financial crisis that erupted a few months later has defined the fixed-income landscape ever since. The period ended with the Fed not only focused on averting recession but struggling to unclog credit markets. The Ted spread (Ted)^E, a measure of systemic risk, rose five-fold during the 12-month period ended March 31, 2008, to peak near 220 basis points (bps)^F in November, and had only moderated slightly by period-end. Growing expectations for easing over the first half of the period were finally validated by the Fed’s decision to cut the funds rate by a total of 300 bps, including a surprise 75 bps reduction at an unscheduled Federal Open Market Committee (FOMC) meeting in January. Additionally, the Fed, along with a number of government housing agencies, announced new lending facilities targeted directly at strained credit conditions, with a specific focus on the mortgage market. The yield on the two-year Treasury note declined 303 bps, driving a powerful rally in the Treasury market. All other risky asset classes suffered as a severe flight-to-safety forced spreads sharply higher. Home prices declined and the drag from the homebuilding sector alone detracted more than 1% from gross domestic product growth. Still, the economy continued to expand modestly thanks to a robust trade sector and a stubborn consumer. The price of oil breached the $100 per barrel threshold despite slower growth concerns. The U.S. dollar lost substantial value against a trade-weighted basket of currencies. Equity markets came under serious pressure in the final four months and finished marginally lower.

The impact of market conditions on the Fund’s performance was negative for the 12-month period ended March 31, 2008, with strategies producing negative results. For this period, the Fund’s Institutional Class’s total return was +1.31%, which underperformed both of its benchmarks, the Lehman Aggregate Bond Index’s total return of +7.67% and the Merrill Lynch Constant Maturity 3-month LIBOR Index’s total return of +5.62%. The primary strategy was an emphasis on the mortgage-backed sector, which suffered in the wake of the financial crisis. We had diversified into a number of select non-agency issues, which were particularly impacted and further negatively impacted performance. Corporate bond spreads widened to their highest levels ever, and an allocation to investment grade and high yield corporate debt, as well as bank loans, also had a significant negative impact on performance. A modest allocation to Treasury Inflation-Protected Securities (TIPS) and a curve-steepening strategy were two bright spots, though these hedges were not nearly enough to offset the worst environment for taking risk during the post-war era.

Western Asset Management Company

April 21, 2008

Investment Risks: Bonds are subject to a variety of risks, including interest rate, credit and inflation risk. As interest rates rise, bond prices fall, reducing the value of a fund’s share price. Foreign securities are subject to certain risks of overseas investing, including currency fluctuations and changes in political and economic conditions. These risks are magnified in emerging markets. The Fund may invest in high-yield bonds, which are rated below investment grade and carry more risk than higher-rated securities. Mortgage-backed securities involve more risk, including prepayment and extension risks, than other investments in fixed income securities. The Fund may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance.

^D Federal Reserve Board (Fed) – is charged with, among other things, managing the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.

^E Ted Spread (Ted) – The price difference between three-month futures contracts for U.S. Treasuries and three-month contracts for euros having identical expiration months.

^F 100 basis points (bps) = 1%

2

Annual Report to Shareholders

Expense Example

Western Asset Absolute Return Portfolio

As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution (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, 2007 and held through March 31, 2008.

Actual Expense

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 value 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 if your shares were held for the entire period.

Hypothetical Examples 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 classes that appear in the shareholder reports of other funds.

	Beginning Account Value 10/1/07		Ending Account Value 3/31/08		Expenses PaidA During the Period 10/1/07 to 3/31/08
Institutional Class:
Actual	$	1,000.00	$	997.80	$	4.16
Hypothetical (5% return before expenses)		1,000.00		1,020.84		4.20
Financial Intermediary Class:
Actual	$	1,000.00	$	996.30	$	5.15
Hypothetical (5% return before expenses)		1,000.00		1,019.84		5.22

^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 ratios of 0.83% and 1.03% for the Institutional Class and Financial Intermediary Class, respectively, multiplied by the average values over the period, multiplied by the number of days in the most recent fiscal half-year (183), and divided by 366.

3

Annual Report to Shareholders

Performance Information

Western Asset Absolute Return Portfolio

The graphs compare the Fund’s total returns to that of two broad-based securities market indices. The graphs illustrate the cumulative total return of an initial $1,000,000 investment in each of 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 lines representing the securities market indexes do not include any transaction costs associated with buying and selling securities in the indexes 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 graphs and tables 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, economical 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 June 30, 2006.

4

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.

^B Index returns are for periods beginning August 31, 2006.

5

Annual Report to Shareholders

Performance Information—Continued

Portfolio Composition (as of March 31, 2008)^C

Standard & Poor’s Debt Ratings^D

(as a percentage of the portfolio)

Maturity Schedule (as a percentage of the portfolio)

^C The pie charts above represent the composition of the Fund’s portfolio as of March 31, 2008 and do not include derivatives such as Futures Contracts, Options Written, and Swaps. The Fund is actively managed. As a result, the composition of the portfolio holdings and sectors are subject to change at any time.

^D Source: Standard & Poor's.

6

Annual Report to Shareholders

Portfolio of Investments

Western Asset Absolute Return Portfolio

March 31, 2008

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Long-Term Securities	102.1%
Corporate Bonds and Notes	22.8%
Airlines	0.2%
Continental Airlines Inc.		6.820%	5/1/18	$	61,713	$	58,356
Continental Airlines Inc.		6.703%	6/15/21		63,424		60,887
United Air Lines Inc.		7.032%	10/1/10		163,897		162,258
United Air Lines Inc.		7.186%	10/1/12		618,334		612,150
US Airways Pass-Through Trust		6.850%	1/30/18		314,865		299,122
							1,192,773
Auto Components	0.1%
Visteon Corp.		8.250%	8/1/10		950,000		776,625
Automobiles	N.M.
Ford Motor Co.		4.250%	12/15/36		80,000		68,600	A
Building Products	0.1%
Associated Materials Inc.		9.750%	4/15/12		365,000		354,050
Associated Materials Inc.		0.000%	3/1/14		155,000		105,787	B
Masco Corp.		7.125%	8/15/13		50,000		50,367
							510,204
Capital Markets	2.9%
Goldman Sachs Capital II		5.793%	12/29/49		60,000		39,966	B
Lehman Brothers Holdings Capital Trust VII		5.857%	11/29/49		100,000		63,250	B
Lehman Brothers Holdings Inc.		5.625%	1/24/13		1,000,000		972,365
Lehman Brothers Holdings Inc.		6.200%	9/26/14		320,000		315,624
Lehman Brothers Holdings Inc.		6.750%	12/28/17		2,350,000		2,259,090
Merrill Lynch and Co. Inc.		5.450%	2/5/13		3,490,000		3,433,668
Merrill Lynch and Co. Inc.		6.050%	5/16/16		1,980,000		1,878,869
The Bear Stearns Cos. Inc.		6.950%	8/10/12		2,330,000		2,331,149
The Bear Stearns Cos. Inc.		7.250%	2/1/18		4,550,000		4,701,929
							15,995,910
Commercial Banks	1.4%
HSBC Bank PLC		7.000%	11/1/11		294,268		313,006
HSBC Bank USA		7.000%	11/1/11		265,317		286,585	C,D
HSBC Bank USA		7.000%	11/1/11		255,338		275,393	C,D
Wachovia Corp.		5.750%	2/1/18		6,850,000		6,709,465
							7,584,449

7

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Absolute Return Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Corporate Bonds and Notes—Continued
Commercial Services and Supplies	0.1%
Allied Security Escrow Corp.		11.375%	7/15/11	$	250,000	$	215,000
PHH Corp.		7.125%	3/1/13		110,000		104,785
							319,785
Consumer Finance	3.2%
American Express Co.		6.800%	9/1/66		40,000		37,609	B
American General Finance Corp.		6.900%	12/15/17		1,000,000		977,274
Ford Motor Credit Co.		7.375%	10/28/09		4,360,000		3,972,540
Ford Motor Credit Co.		9.750%	9/15/10		2,000,000		1,781,546
Ford Motor Credit Co.		9.875%	8/10/11		3,700,000		3,299,482
GMAC LLC		5.850%	1/14/09		1,320,000		1,230,892
GMAC LLC		6.875%	9/15/11		2,700,000		2,066,483
GMAC LLC		6.000%	12/15/11		1,600,000		1,195,989
GMAC LLC		6.625%	5/15/12		1,500,000		1,134,723
GMAC LLC		8.000%	11/1/31		2,930,000		2,099,908
							17,796,446
Containers and Packaging	N.M.
Graham Packaging Co. Inc.		9.875%	10/15/14		100,000		84,000
Graphic Packaging International Corp.		9.500%	8/15/13		150,000		144,000
							228,000
Diversified Financial Services	2.3%
Air 2 US		8.027%	10/1/19		892,253		811,950	C
BAC Capital Trust XIV		5.630%	12/31/49		40,000		29,248	B
Citigroup Inc.		5.500%	2/15/17		5,570,000		5,217,486
Citigroup Inc.		6.875%	3/5/38		1,380,000		1,379,024
East Lane Re Ltd.		9.239%	5/6/11		300,000		304,503	C,E
El Paso Performance-Linked		7.750%	7/15/11		340,000		347,629	C
General Electric Capital Corp.		6.375%	11/15/67		60,000		58,711	B
Glen Meadow Pass-Through Certificates		6.505%	2/12/67		100,000		85,356	B,C
Kaupthing Bank Hf		7.625%	2/28/15		3,130,000		2,946,269	C,F
Leucadia National Corp.		8.125%	9/15/15		250,000		251,250
Sigma Finance Inc.		8.500%	8/11/16		500,000		469,100	C,D
TNK-BP Finance SA		7.875%	3/13/18		370,000		341,788	C
Vanguard Health Holding Co. II LLC		9.000%	10/1/14		330,000		317,625
ZFS Finance USA Trust II		6.450%	12/15/65		500,000		454,525	B,C
							13,014,464

8

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Corporate Bonds and Notes—Continued
Diversified Telecommunication Services	0.8%
AT&T Inc.		5.500%	2/1/18	$	2,930,000	$	2,868,880
Citizens Communications Co.		7.875%	1/15/27		490,000		420,175
Level 3 Financing Inc.		9.250%	11/1/14		500,000		408,750
Qwest Corp.		7.500%	10/1/14		190,000		185,250
Windstream Corp.		8.625%	8/1/16		480,000		471,600
							4,354,655
Electric Utilities	1.2%
Energy Future Holdings Corp.		10.875%	11/1/17		20,000		20,200	C
Energy Future Holdings Corp.		11.250%	11/1/17		4,810,000		4,761,900	C,G
FirstEnergy Corp.		6.450%	11/15/11		1,870,000		1,957,438
FirstEnergy Corp.		7.375%	11/15/31		100,000		108,780
							6,848,318
Food and Staples Retailing	0.6%
CVS Corp.		9.350%	1/10/23		500,000		485,000	C
CVS Corp.		5.298%	1/11/27		33,752		32,211	C
CVS Lease Pass-Through Trust		5.880%	1/10/28		44,632		41,062	C
CVS Lease Pass-Through Trust		6.036%	12/10/28		119,548		113,887	C
Safeway Inc.		7.250%	2/1/31		1,360,000		1,449,971
The Kroger Co.		6.150%	1/15/20		1,100,000		1,129,586
							3,251,717
Food Products	0.1%
H.J. Heinz Co.		6.428%	12/1/08		100,000		101,692	C
Sara Lee Corp.		6.250%	9/15/11		150,000		158,913
							260,605
Gas Utilities	0.1%
Suburban Propane Partners LP		6.875%	12/15/13		600,000		585,000
Health Care Equipment and Supplies	N.M.
Advanced Medical Optics Inc.		7.500%	5/1/17		250,000		215,000
Health Care Providers and Services	2.5%
AmerisourceBergen Corp.		5.875%	9/15/15		50,000		49,098
Cardinal Health Inc.		5.800%	10/15/16		60,000		60,279
DaVita Inc.		6.625%	3/15/13		500,000		485,000
HCA Inc.		9.125%	11/15/14		10,000		10,300
HCA Inc.		6.500%	2/15/16		893,000		752,352
HCA Inc.		9.250%	11/15/16		910,000		944,125

9

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Absolute Return Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Corporate Bonds and Notes—Continued
Health Care Providers and Services—Continued
HCA Inc.		9.625%	11/15/16	$	599,000	$	621,462	G
Tenet Healthcare Corp.		6.375%	12/1/11		670,000		604,675
Tenet Healthcare Corp.		6.500%	6/1/12		380,000		335,350
Tenet Healthcare Corp.		9.875%	7/1/14		29,000		28,058
U.S. Oncology Holdings Inc.		7.949%	3/15/12		347,000		267,190	E,G
UnitedHealth Group Inc.		4.875%	2/15/13		6,360,000		6,282,351
UnitedHealth Group Inc.		4.875%	4/1/13		940,000		928,326
UnitedHealth Group Inc.		6.000%	2/15/18		1,210,000		1,185,216
WellPoint Inc.		5.875%	6/15/17		1,470,000		1,438,736
							13,992,518
Hotels, Restaurants and Leisure	0.1%
Inn of the Mountain Gods Resort and Casino		12.000%	11/15/10		250,000		242,500
MGM MIRAGE		6.625%	7/15/15		140,000		121,800
River Rock Entertainment Authority		9.750%	11/1/11		220,000		218,900
Starwood Hotels and Resorts Worldwide Inc.		7.875%	5/1/12		50,000		52,210
							635,410
Household Durables	0.1%
Norcraft Cos.		9.000%	11/1/11		480,000		483,600
Independent Power Producers and Energy Traders	0.9%
Dynegy Holdings Inc.		8.375%	5/1/16		420,000		415,800
Dynegy Holdings Inc.		7.750%	6/1/19		30,000		28,050
Edison Mission Energy		7.000%	5/15/17		190,000		189,050
Edison Mission Energy		7.200%	5/15/19		250,000		246,875
Edison Mission Energy		7.625%	5/15/27		90,000		84,600
NRG Energy Inc.		7.375%	2/1/16		250,000		245,000
The AES Corp.		7.750%	3/1/14		1,800,000		1,811,250
The AES Corp.		7.750%	10/15/15		300,000		302,250
The AES Corp.		8.000%	10/15/17		1,630,000		1,650,375
							4,973,250
Insurance	1.1%
American International Group Inc.		5.850%	1/16/18		4,420,000		4,337,527
ASIF Global Financing XIX		4.900%	1/17/13		1,400,000		1,378,807	C

10

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†			VALUE
Corporate Bonds and Notes—Continued
Insurance—Continued
MetLife Inc.		6.400%	12/15/36	$	50,000		$	39,732
The Travelers Cos. Inc.		6.250%	3/15/37		120,000			105,843	B
								5,861,909
IT Services	N.M.
SunGard Data Systems Inc.		10.250%	8/15/15		250,000			251,250
Media	0.2%
Affinion Group Inc.		11.500%	10/15/15		430,000			414,950
Charter Communications Operating LLC		10.875%	9/15/14		160,000			157,600	C
Comcast Corp.		6.500%	1/15/17		70,000			71,492
EchoStar DBS Corp.		7.125%	2/1/16		300,000			279,750
Gannett Co. Inc.		6.375%	4/1/12		40,000			41,283
Idearc Inc.		8.000%	11/15/16		250,000			161,875
News America Inc.		6.650%	11/15/37		50,000			50,425	C
Viacom Inc.		5.750%	4/30/11		100,000			101,065
								1,278,440
Metals and Mining	0.3%
Freeport-McMoRan Copper & Gold Inc.		8.375%	4/1/17		1,000,000			1,061,250
Steel Dynamics Inc.		7.750%	4/15/16		510,000			510,637	C
								1,571,887
Multi-Utilities	0.4%
Dominion Resources Inc.		5.700%	9/17/12		2,170,000			2,272,417
Multiline Retail	0.1%
The Neiman-Marcus Group Inc.		10.375%	10/15/15		470,000			470,000
Oil, Gas and Consumable Fuels	2.4%
Anadarko Petroleum Corp.		3.200%	9/15/09		170,000			166,783	E
Anadarko Petroleum Corp.		5.950%	9/15/16		540,000			558,440
Belden and Blake Corp.		8.750%	7/15/12		1,060,000			1,062,650
Chesapeake Energy Corp.		6.375%	6/15/15		400,000			388,000
Chesapeake Energy Corp.		6.500%	8/15/17		100,000			96,500
El Paso Corp.		7.000%	6/15/17		2,640,000			2,715,264
Energy Transfer Partners LP		6.700%	7/1/18		1,410,000			1,420,547
Exco Resources Inc.		7.250%	1/15/11		300,000			291,750
Gazprom		6.950%	8/6/09		5,470,000	RUB		231,594
Gazprom		6.790%	10/29/09		620,000	RUB		26,138
Gazprom		7.000%	10/27/11		210,000	RUB		8,723

11

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Absolute Return Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Corporate Bonds and Notes—Continued
Oil, Gas and Consumable Fuels—Continued
Kinder Morgan Energy Partners LP		6.000%	2/1/17	$	1,000,000	$	995,169
Kinder Morgan Energy Partners LP		5.950%	2/15/18		4,570,000		4,525,954
Parker Drilling Co.		9.625%	10/1/13		180,000		189,450
Petrohawk Energy Corp.		9.125%	7/15/13		250,000		256,875
SemGroup LP		8.750%	11/15/15		335,000		306,525	C
VeraSun Energy Corp.		9.375%	6/1/17		250,000		171,250	C
Whiting Petroleum Corp.		7.250%	5/1/12		160,000		158,000
							13,569,612
Pharmaceuticals	N.M.
Leiner Health Products Inc.		11.000%	6/1/12		250,000		313	H,F
Real Estate Investment Trusts	0.1%
Health Care Property Investors Inc.		6.450%	6/25/12		60,000		58,526
iStar Financial Inc.		5.850%	3/15/17		770,000		531,300
							589,826
Real Estate Management and Development	0.1%
Realogy Corp.		12.375%	4/15/15		755,000		335,975	C
Road and Rail	0.1%
Hertz Corp.		8.875%	1/1/14		200,000		189,500
Hertz Corp.		10.500%	1/1/16		530,000		496,213
Saint Acquisition Corp.		12.500%	5/15/17		120,000		48,900	C
							734,613
Textiles, Apparel and Luxury Goods	N.M.
Oxford Industries Inc.		8.875%	6/1/11		200,000		190,000
Thrifts and Mortgage Finance	1.2%
Countrywide Financial Corp.		3.196%	4/30/08		2,200,000		2,187,499	E
Countrywide Financial Corp.		2.874%	6/18/08		300,000		294,920	E
Residential Capital LLC		7.098%	4/17/09		90,000		51,300	E
Residential Capital LLC		6.178%	5/22/09		250,000		142,500	E,I
Residential Capital LLC		8.000%	2/22/11		1,480,000		725,200
Washington Mutual Inc.		5.250%	9/15/17		1,250,000		943,750
Washington Mutual Inc.		7.250%	11/1/17		2,930,000		2,292,725
							6,637,894
Trading Companies and Distributors	N.M.
Ashtead Capital Inc.		9.000%	8/15/16		200,000		162,000	C

12

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Corporate Bonds and Notes—Continued
Transportation Infrastructure	0.1%
Hawker Beechcraft Acquisition Co.		8.875%	4/1/15	$	480,000	$	490,800	G
Wireless Telecommunication Services	N.M.
Rural Cellular Corp.		6.076%	6/1/13		20,000		20,000	E
Total Corporate Bonds and Notes (Cost—$134,473,901)							127,524,265
Asset-Backed Securities	5.4%
Fixed Rate Securities	0.6%
ABSC Manufactured Housing Contract 2004-CN1		8.400%	12/2/30		170,000		141,950	C
Bombardier Capital Mortgage Securitization Corp. 2000-A A3		7.830%	6/15/30		1,766,467		1,222,317
Centex Home Equity 2003-B AF4		3.735%	2/25/32		142,664		138,460
Lehman XS Trust 2007-1 WF1		7.000%	1/25/37		1,723,528		1,447,344
Oakwood Mortgage Investors Inc. 1999-D A1		7.840%	11/15/29		317,598		309,777
Pegasus Aviation Lease Securitization 2000-1 A2		8.370%	3/25/30		390,000		195,232	C
							3,455,080
Indexed SecuritiesE	4.6%
ACE Securities Corp. 2006-GP1 A		2.729%	2/25/31		776,291		697,190
Asset Backed Securities Corp. Home Equity Loan Trust 2007-HE1 A4		2.739%	12/25/36		1,470,000		1,076,762
Bear Stearns Asset-Backed Securities Trust 2006-SD2		2.799%	6/25/36		902,135		811,005
Carrington Mortgage Loan Trust 2006-NC4 A2		2.699%	10/25/36		1,450,000		1,292,279
Citigroup Mortgage Loan Trust Inc. 2006-SHL1 A1		2.799%	11/25/45		233,061		201,520	C
Citigroup Mortgage Loan Trust Inc. 2007-SHL1 A		2.999%	11/25/46		591,024		354,431	C
Countrywide Home Equity Loan Trust 2006-B 2A		2.988%	5/15/36		590,709		483,077
Fremont Home Loan Trust 2006-B 2A2		2.699%	8/25/36		3,000,000		2,766,255
GMAC Mortgage Corp. Loan Trust 2006-HE4 A1		2.669%	12/25/36		2,600,000		2,593,008
GSAMP Trust 2006-SEA1 A		2.899%	5/25/36		486,125		383,966	C
GSRPM Mortgage Loan Trust 2006-2 A2		2.899%	9/25/36		677,126		504,330	C

13

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Absolute Return Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Asset-Backed Securities—Continued
Indexed Securities—Continued
HSI Asset Securitization Corp. Trust 2007-NC1 A3		2.779%	4/25/37	$	2,740,000	$	1,941,689
IndyMac Seconds Asset Backed Trust A-A		2.729%	6/25/36		1,443,387		556,182
IXIS Real Estate Capital Trust 2005-HE4 A3		2.939%	2/25/36		1,300,000		1,259,491
Lehman XS Trust 2006-16N A4B		2.839%	11/25/46		807,228		512,618
Lehman XS Trust 2006-2N 1A1		2.859%	2/25/46		508,830		385,861
Lehman XS Trust 2006-GP3 2A2		2.819%	6/25/46		823,480		555,453
Lehman XS Trust 2007-2N 3A1		2.689%	2/25/37		3,027,562		2,749,071
MASTR Asset Backed Securities Trust 2006-FRE1 A2		2.719%	12/25/35		947,529		923,900
MASTR Second Lien Trust 2005-1 A		2.869%	9/25/35		655,107		633,340
MASTR Specialized Loan Trust 2006-3 A		2.859%	6/25/46		580,537		507,133	C
MASTR Specialized Loan Trust 2007-1 A		2.969%	1/25/37		461,242		322,576	C
Morgan Stanley Home Equity Loans 2007-1 A3		2.739%	12/25/36		2,720,000		2,085,921
Morgan Stanley Mortgage Loan Trust 2006-12XS		2.719%	10/25/36		602,146		595,635
Option One Mortgage Loan Trust 2005-1 A4		2.999%	2/25/35		803,209		735,609
RAAC 2006-RP4 A		2.889%	1/25/46		867,216		788,686	C
							25,716,988
Stripped Securities	0.2%
First Franklin Mortgage Loan Asset-Backed Certificates 2006-FF5 2A5		0.000%	4/25/36		1,050,000		786,776	J2
Variable Rate SecuritiesD	N.M
GSAMP Trust 2006-S3 A1		6.085%	5/25/36		405,099		173,129	B
Total Asset-Backed Securities (Cost—$34,138,534)							30,131,973
Mortgage-Backed Securities	10.7%
Fixed Rate Securities	0.2%
Banc of America Funding Corp. 2006-8T2 A2		5.791%	10/25/36		666,736		674,082
BlackRock Capital Finance LP 1997-R1		7.750%	3/25/37		266,071		59,871	C
IndyMac Manufactured Housing Contract A2-2		6.170%	12/25/11		672,818		678,376
							1,412,329

14

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Mortgage-Backed Securities—Continued
Indexed SecuritiesE	7.9%
American Home Mortgage Assets 2006-6 A1A		2.789%	12/25/46	$	684,576	$	512,557
American Home Mortgage Investment Trust 2005-4 5A		5.350%	11/25/45		952,305		808,771
Banc of America Mortgage Securities 2003-F 1A1		7.157%	7/25/33		34,059		34,480
Banc of America Mortgage Securities 2003-I 2A5		4.143%	10/25/33		968,953		962,639
Banc of America Mortgage Securities 2004-A 1A1		6.812%	2/25/34		103,782		105,187
Banc of America Mortgage Securities 2004-E 2A3		4.112%	6/25/34		578,783		576,896
Bear Stearns Adjustable Rate Mortgage Trust 2005-12 23A1		5.729%	2/25/36		3,327,523		2,517,964
Bear Stearns Alt-A Trust 2004-10 1A1		2.939%	9/25/34		254,965		207,720
Bear Stearns Alt-A Trust 2004-11 1A2		3.019%	11/25/34		176,812		155,096
Bear Stearns Alt-A Trust 2005-2 1A1		2.849%	3/25/35		75,260		53,730
Bear Stearns Mortgage Funding Trust 2006-AR5 1A1		2.759%	12/25/46		1,236,194		939,198
Citigroup Mortgage Loan Trust Inc. 2005-9 1A1		2.859%	11/25/35		703,853		486,773
Countrywide Alternative Loan Trust 2005-24 4A1		2.766%	7/20/35		884,072		684,726
Countrywide Alternative Loan Trust 2005-51 2A1		2.836%	11/20/35		511,922		406,277
Countrywide Alternative Loan Trust 2005-59 1A1		3.449%	11/20/35		684,875		541,898
Countrywide Alternative Loan Trust 2005-76 3A1		2.859%	1/25/46		615,649		487,486
Countrywide Alternative Loan Trust 2005-J12		2.869%	8/25/35		410,276		284,538
Countrywide Alternative Loan Trust 2006-OA10 4A3		2.869%	8/25/46		2,329,295		1,135,026
Countrywide Alternative Loan Trust 2006-OA8 1A2		2.829%	7/25/46		749,885		467,400
Countrywide Alternative Loan Trust 2006-OA9 1A1		2.736%	7/20/46		1,319,054		844,880
Countrywide Home Loans 2001-HYB1 1A1		6.771%	6/19/31		39,515		39,469
Countrywide Home Loans 2003-60 1A1		4.732%	2/25/34		938,463		880,189

15

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Absolute Return Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Mortgage-Backed Securities—Continued
Indexed Securities—Continued
Countrywide Home Loans 2003-HYB1 1A1		6.748%	5/19/33	$	63,339	$	63,279
Countrywide Home Loans 2006-3 1A2		2.929%	3/25/36		618,919		394,701
Deutsche Mortgage Securities Inc. 2004-4 7AR2		3.049%	6/25/34		520,342		506,837
First Horizon Alternative Mortgage Securities 2005-AA12 1A1		5.941%	2/25/36		617,793		633,618
Greenpoint Mortgage Funding Trust 2006-AR3 3A1		2.829%	4/25/36		909,142		590,593
GSR Mortgage Loan Trust 2006-0A1 2A2		2.859%	8/25/46		709,035		455,766
Harborview Mortgage Loan Trust 2006-13 A		2.739%	11/19/46		686,250		515,747
Harborview Mortgage Loan Trust 2006-14 2A1A		2.709%	3/19/38		1,348,825		1,021,692
Impac CMB Trust 2004-5 1A1		2.959%	10/25/34		326,518		235,472
Impac CMB Trust 2004-6 1A2		3.379%	10/25/34		476,790		387,561
Impac CMB Trust 2005-7 A1		2.859%	11/25/35		631,433		450,528
Impac Secured Assets Corp. 2004-3 1A4		2.999%	11/25/34		26,189		19,647
Impac Secured Assets Corp. 2005-2		2.919%	3/25/36		513,906		365,788
IXIS Real Estate Capital Trust 2006-HE2 A1		2.659%	8/25/36		287,074		285,423
Lehman XS Trust 2006-GP2 1A1A		2.669%	6/25/46		423,653		390,139
Merit Securities Corp. 11PA B2		4.178%	9/28/32		53,954		49,950	C
Merrill Lynch Mortgage Investors Trust 2004-A3 4A3		5.028%	5/25/34		1,438,157		1,299,906
Residential Accredit Loans Inc. 2007-Q01 A1		2.749%	2/25/37		3,594,313		2,688,519
Structured Adjustable Rate Mortgage Loan Trust 2004-7 A1		2.869%	6/25/34		26,644		24,861
Structured Adjustable Rate Mortgage Loan Trust 2005-19XS		2.919%	10/25/35		2,052,984		1,622,840
Structured Asset Mortgage Investments Inc. 2003-AR2 A1		2.929%	12/19/33		135,007		114,011
Structured Asset Mortgage Investments Inc. 2006-AR6		2.789%	7/25/36		2,269,996		1,532,667
Structured Asset Mortgage Investments Inc. 2007-AR4 A1		2.799%	9/25/47		1,996,663		1,863,257
Structured Asset Securities Corp. 2002-08A 7A1		6.397%	5/25/32		148,503		148,147
Structured Asset Securities Corp. 2002-11A 1A1		6.896%	6/25/32		32,389		32,345

16

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Mortgage-Backed Securities—Continued
Indexed Securities—Continued
Structured Asset Securities Corp. 2002-16A 1A1		7.194%	8/25/32	$	301,786	$	301,374
Structured Asset Securities Corp. 2002-18A 1A1		7.173%	9/25/32		26,755		26,716
Structured Asset Securities Corp. 2004-NP1 A		2.999%	9/25/33		314,438		279,821	C
Thornburg Mortgage Securities Trust 2004-1 I2A		3.049%	3/25/44		61,327		60,908
Thornburg Mortgage Securities Trust 2005-3 A1		2.829%	10/25/45		187,939		184,410
Thornburg Mortgage Securities Trust 2005-3 A4		2.869%	10/25/45		725,206		716,428
Thornburg Mortgage Securities Trust 2006-1		2.769%	1/25/36		738,093		724,625
WaMu Mortgage Pass- Through Certificates 2006-AR11 3A1A		5.246%	9/25/46		3,054,119		2,361,216
WaMu Mortgage Pass-Through Certificates 2006-AR2 A1A		5.266%	4/25/46		5,040,181		3,832,017
WaMu Mortgage Pass-Through Certificates 2006-AR3 A1A		5.296%	5/25/46		4,050,108		2,976,216
WaMu Mortgage Pass-Through Certificates 2006-AR4 DA		5.296%	6/25/46		2,152,619		1,674,670
WaMu Mortgage Pass-Through Certificates 2006-AR6 2A		5.286%	8/25/46		2,922,767		2,239,571
							44,204,166
Variable Rate SecuritiesD	2.6%
Adjustable Rate Mortgage Trust 2004-1 4A1		5.547%	1/25/35		5,106,436		4,849,164
Bear Stearns Adjustable Rate Mortgage Trust 2004-12 1A1		6.692%	2/25/35		198,510		193,547
Bear Stearns Alt-A Trust 2003-5 2A1		4.995%	12/25/33		896,505		863,433
Bear Stearns Alt-A Trust 2005-10 21A1		5.754%	1/25/36		606,815		516,219
BlackRock Capital Finance LP 1996-R1		9.584%	9/25/26		466,385		209,872
Morgan Stanley Mortgage Loan Trust 2004-6AR		6.080%	8/25/34		141,798		143,563
Morgan Stanley Mortgage Loan Trust 2006-3AR 2A3		5.425%	3/25/36		715,887		558,612
Sequoia Mortgage Trust 2007-4 4A1		6.030%	7/20/47		1,796,838		1,611,943
Structured Adjustable Rate Mortgage Loan Trust 2004-17 A1		5.893%	11/25/34		80,025		72,714

17

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Absolute Return Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Mortgage-Backed Securities—Continued
Variable Rate Securities—Continued
Structured Adjustable Rate Mortgage Loan Trust 2004-4 3A2		4.590%	9/25/37	$	1,259,784	$	1,189,847
Thornburg Mortgage Securities Trust 2007-4 2A1		6.225%	11/25/17		1,925,960		1,791,437
Thornburg Mortgage Securities Trust 2007-4 3A1		6.217%	9/25/37		1,792,573		1,617,443
Wells Fargo Mortgage-Backed Securities Trust 2005-AR9 4A1		4.304%	5/25/35		796,799		798,151
							14,415,945
Total Mortgage-Backed Securities (Cost—$73,261,264)							60,032,440
Loan Participations and AssignmentsE	9.0%
Aerospace and Defense	0.3%
Dubai Aerospace Enterprise, Bridge Loan		6.450% to 6.999%	6/30/08		572,539		551,069
TransDigm Inc., Term Loan, Tranche B		4.655%	6/23/08		1,000,000		934,167
							1,485,236
Airlines	0.1%
Delta Air Lines Inc., Second Lien Term Loan		8.082%	4/30/08		992,500		783,082
Auto Components	0.2%
Allison Transmission Inc., Term Loan, Tranche B		5.740% to 5.750%	6/10/08		997,500		873,169
Automobiles	0.1%
Chrysler Financial Services NA LLC, First Lien Term Loan		6.800%	6/16/08		995,000		820,598
Chemicals	0.1%
Georgia Gulf Corp., Term Loan		5.580% to 6.750%	6/30/08		529,031		479,765

18

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Loan Participations and Assignments—Continued
Commercial Services and Supplies	0.4%
Aramark Corp., Letter of Credit		7.223%	4/1/08	$	131,683	$	122,502
Aramark Corp., Term Loan, Tranche B		4.571%	6/30/08		2,072,776		1,928,258
							2,050,760
Communications Equipment	0.2%
Telesat Canada, Delayed Draw Term Loan		5.790% to 7.250%	6/30/08		76,437		70,633
Telesat Canada, Term Loan B		5.710% to 7.840%	4/30/08		921,260		851,302
							921,935
Computers and Peripherals	0.3%
CCG, Term Loan, Tranche B		4.704%	4/30/08		887,500		829,812
SunGard Data Systems Inc., Term Loan, Tranche B		4.878%	5/8/08		985,000		912,244
							1,742,056
Containers and Packaging	0.3%
Amscan Holdings Inc., Term Loan, Tranche B		4.856% to 5.343%	6/25/08		990,000		831,600
Graham Packaging Co. LP, Term Loan, Tranche B		4.875% to 7.000%	6/25/08		990,000		904,200
							1,735,800
Distributors	0.1%
Keystone Automotive Industries Inc., Term Loan, Tranche B		6.099% to 7.750%	4/30/08		987,500		765,313
Diversified Consumer Services	0.2%
Thomson Medical Education, First Lien Term Loan		5.200%	6/30/08		995,000		853,337
Electric Utilities	0.2%
TXU, Term Loan		6.478% to 6.596%	8/11/08		1,246,875		1,134,798
Energy Equipment and Services	0.2%
Brand Energy, Term Loan, Tranche B		6.000% to 8.125%	6/30/08		995,000		925,350

19

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Absolute Return Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Loan Participations and Assignments—Continued
Health Care Providers and Services	1.0%
Community Health Systems Inc., Term Loan, Tranche B		5.335%	5/30/08	$	2,429,974	$	2,235,110
Davita Inc., Term Loan, Tranche B1		4.210% to 6.230%	5/21/08		1,000,000		936,705
HCA Inc., Term Loan, Tranche B		4.946%	6/30/08		987,500		906,296
IASIS Healthcare Corp., Term Loan		5.244%	4/29/08		994,756		896,938
Sheridan Healthcare Inc., Term Loan, Tranche B		5.196% to 6.555%	6/30/08		992,500		858,512
							5,833,561
Hotels, Restaurants and Leisure	0.6%
Harrah’s Entertainment Inc., Term Loan B		6.244%	4/25/08		1,000,000		915,179
Las Vegas Sands LLC		4.450%	6/30/08		994,000		876,076
Quiznos LLC, First Lien Term Loan		4.938% to 7.000%	6/30/08		984,925		811,155
Wimar Opco LLC, Term Loan, Tranche B		8.500%	6/30/08		947,645		901,447
							3,503,857
Independent Power Producers and Energy Traders	0.2%
NRG Energy Inc., Term Loan		6.330% to 6.580%	4/1/08		1,281,307		1,196,243
IT Services	0.5%
First Data Corp., Term Loan B2		5.349 to 5.446%	6/30/08		3,353,150		3,012,118
Machinery	0.3%
Nacco Materials Handling Group, Term Loan		4.704% to 6.738%	5/15/08		989,950		841,458
Oshkosh Truck Corp., Term Loan, Tranche B		4.760%	6/6/08		987,500		917,881
							1,759,339

20

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Loan Participations and Assignments—Continued
Media	1.6%
Cedar Fair LP, Term Loan, Tranche B		4.704%	4/30/08	$	982,500	$	906,356
Charter Communications Operating LLC, Term Loan		5.260%	4/30/08		1,000,000		843,958
Citadel Communication Group, Term Loan, Tranche B		4.296% to 4.329%	6/30/08		1,000,000		818,125
CSC Holdings Inc., Incremental Term Loan		4.704% to 4.750%	4/11/08		982,456		916,896
Idearc Inc., Term Loan, Tranche B		4.700% to 4.710%	6/30/08		987,500		788,519
Insight Midwest Holdings LLC, Term Loan, Tranche B		6.730%	4/2/08		675,000		613,768
Lodgenet Entertainment Corp., Term Loan, Tranche B		6.830%	6/30/08		992,500		821,294
Nielsen Finance LLC, Term Loan, Tranche B		5.346%	5/9/08		985,003		886,854
Tribune Co., Tranche B		5.542%	6/20/08		992,500		658,949
Univision Communications, Term Loan, Tranche B		4.954% to 5.494%	4/30/08		1,000,000		785,682
UPC Broadband Holding, Term Loan, Tranche N1		4.869%	4/1/08		1,000,000		887,500
							8,927,901
Metals and Mining	0.2%
Noranda Aluminum Acquisition Corp., Term Loan		5.065%	5/19/08		997,059		877,412
Multiline Retail	0.3%
Dollar General Corp., Term Loan, Tranche B		5.994%	4/30/08		1,000,000		895,625
Neiman Marcus Group Inc., Term Loan		4.758%	6/6/08		1,000,000		923,269
							1,818,894
Oil, Gas and Consumable Fuels	0.5%
Alpha Natural Resources, Term Loan, Tranche B		4.421%	6/30/08		941,919		899,533
Ashmore Energy, Term Loan		5.696%	6/30/08		980,444		833,377
Sandridge Energy, Term Loan		8.354%	4/1/08		1,000,000		920,000
							2,652,910

21

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Absolute Return Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Loan Participations and Assignments—Continued
Paper and Forest Products	0.2%
Georgia-Pacific Corp., First Lien Term Loan		4.446% to 4.835%	6/30/08	$	982,412	$	908,920
Personal Products	0.2%
Bausch and Lomb Inc., Term Loan, Tranche B		5.946%	6/30/08		800,000		774,727
Bausch and Lomb Inc., Term Loan, Tranche B		5.946%	6/30/08		198,000		191,745
							966,472
Road and Rail	0.1%
Swift Transportation, Term Loan		6.500%	5/1/08		883,721		658,057
Semiconductors and Semiconductor Equipment	0.3%
Freescale Semiconductor, Term Loan, Tranche B		4.869%	4/1/08		987,500		829,724
Sensata Technologies, Term Loan, Tranche B		5.056%	4/29/08		982,500		847,816
							1,677,540
Specialty Retail	0.1%
Michaels Stores Inc., Term Loan B		4.857% to 6.000%	6/11/08		994,975		831,177
Wireless Telecommunication Services	0.2%
ALLTEL Corp., Term Loan B, Tranche B2		5.550%	6/17/08		1,000,000		900,833
ALLTEL Corp., Term Loan, Tranche B3		5.568%	4/17/08		498,750		449,290
							1,350,123
Total Loan Participations and Assignments (Cost—$56,202,570)							50,545,723
U.S. Government and Agency Obligations	2.9%
Treasury Inflation-Protected SecuritiesK	2.9%
United States Treasury Inflation-Protected Security		2.000%	1/15/16		3,615,322		3,920,083

22

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
U.S. Government and Agency Obligations—Continued
Treasury Inflation-Protected Securities—Continued
United States Treasury Inflation-Protected Security		2.500%	7/15/16	$	4,127,869	$	4,649,978
United States Treasury Inflation-Protected Security		2.375%	1/15/17		4,374,454		4,882,301
United States Treasury Inflation-Protected Security		2.000%	1/15/26		106,333		109,623
United States Treasury Inflation-Protected Security		2.375%	1/15/27		2,605,835		2,843,429
Total U.S. Government and Agency Obligations (Cost—$14,496,046)							16,405,414
U.S. Government Agency Mortgage-Backed Securities	45.2%
Fixed Rate Securities	26.5%
Fannie Mae		5.000%	12/1/38		26,030,000		25,761,579	L
Fannie Mae		5.500%	12/1/38		75,500,000		76,207,812	L
Fannie Mae		6.000%	12/1/38		13,700,000		14,033,938	L
Freddie Mac		5.500%	12/1/37		29,543,764		29,864,135
Freddie Mac		6.000%	12/1/37		2,747,604		2,820,085
							148,687,549
Indexed SecuritiesE	18.7%
Fannie Mae		5.872%	3/1/36 to 4/1/37		8,536,172		8,584,391
Fannie Mae		5.851%	6/1/36		1,631,355		1,672,747
Fannie Mae		5.593%	12/1/36		1,358,081		1,377,987
Fannie Mae		6.440%	1/1/37		4,652,767		4,781,467
Fannie Mae		5.686%	2/1/37		15,701,703		15,957,784
Fannie Mae		5.701%	4/1/37		5,440,061		5,526,930
Fannie Mae		6.234%	4/1/37		4,037,698		4,136,595
Fannie Mae		5.874%	8/1/37		16,994,820		17,294,564
Freddie Mac		5.499%	1/1/36		2,784,768		2,831,493
Freddie Mac		5.976%	6/1/36		1,765,950		1,805,380
Freddie Mac		5.746%	7/1/36		8,145,682		8,309,884
Freddie Mac		6.485%	9/1/36		613,031		637,864
Freddie Mac		6.143%	12/1/36		4,658,463		4,800,256
Freddie Mac		5.594%	1/1/37		1,048,447		1,062,984
Freddie Mac		5.885%	2/1/37		1,051,811		1,068,574
Freddie Mac		5.811%	5/1/37		1,116,711		1,133,371
Freddie Mac		5.896%	5/1/37		3,182,713		3,234,207
Freddie Mac		5.944%	5/1/37		460,642		470,982

23

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Absolute Return Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
U.S. Government Agency Mortgage-Backed Securities—Continued
Indexed Securities—Continued
Freddie Mac		6.043%	5/1/37	$	8,199,918	$	8,426,926
Freddie Mac		5.796%	6/1/37		569,795		578,466
Freddie Mac		5.823%	8/1/37		2,154,795		2,175,806
Freddie Mac		5.950%	8/1/37		2,125,986		2,227,819
Freddie Mac		6.217%	9/1/37		6,727,334		6,830,868
							104,927,345
Total U.S. Government Agency Mortgage-Backed Securities (Cost—$251,034,820)							253,614,894
Yankee BondsM	3.6%
Commercial Banks	2.0%
Glitnir Banki Hf		6.375%	9/25/12		680,000		580,205	C
Glitnir Banki Hf		6.693%	6/15/16		1,810,000		1,458,885	B,C
Glitnir Banki Hf		7.451%	9/14/49		100,000		81,110	B,C
HBOS Capital Funding LP		6.071%	6/30/49		230,000		202,013	B,C
HSBK Europe BV		7.250%	5/3/17		1,480,000		1,280,200	C
ICICI Bank Ltd.		6.375%	4/30/22		1,422,000		1,222,913	B,C
ICICI Bank Ltd.		6.375%	4/30/22		160,000		139,094	B,C
Kaupthing Bank Hf		7.125%	5/19/16		240,000		161,943	C
Landsbanki Islands Hf		6.100%	8/25/11		2,190,000		1,913,302	C
Shinsei Finance Cayman Ltd.		6.418%	1/29/49		300,000		198,844	B,C
TuranAlem Finance BV		8.250%	1/22/37		1,330,000		1,043,119	C
TuranAlem Finance BV		8.250%	1/22/37		500,000		394,650	C
VTB Capital SA for Vneshtorgbank		3.839%	8/1/08		2,651,000		2,621,176	C,E
							11,297,454
Diversified Financial Services	0.3%
TNK-BP Finance SA		7.500%	7/18/16		550,000		510,812	C
TNK-BP Finance SA		7.500%	7/18/16		781,000		734,140	C
TNK-BP Finance SA		6.625%	3/20/17		200,000		173,000	C
TNK-BP Finance SA		6.625%	3/20/17		342,000		295,830	C
							1,713,782
Diversified Telecommunication Services	0.2%
Intelsat Bermuda Ltd.		9.250%	6/15/16		250,000		251,875
NTL Cable PLC		9.125%	8/15/16		340,000		304,300
Wind Acquisition Finance SA		10.750%	12/1/15		300,000		306,000	C
							862,175

24

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†			VALUE
Yankee Bonds—Continued
Energy Equipment and Services	0.1%
Compagnie Generale de Geophysique-Veritas		7.750%	5/15/17	$	250,000		$	253,750
Food and Staples Retailing	0.5%
Delhaize Group		6.500%	6/15/17		2,834,000			2,926,680
Metals and Mining	0.4%
Novelis Inc.		7.250%	2/15/15		440,000			389,400
Vale Overseas Ltd.		8.250%	1/17/34		60,000			67,000
Vale Overseas Ltd.		6.875%	11/21/36		1,546,000			1,508,455
								1,964,855
Oil, Gas and Consumable Fuels	N.M.
Teekay Shipping Corp.		8.875%	7/15/11		140,000			148,050
Paper and Forest Products	0.1%
Abitibi-Consolidated Co. of Canada		13.750%	4/1/11		500,000			511,250	C
Abitibi-Consolidated Inc.		6.950%	4/1/08		250,000			250,000
								761,250
Total Yankee Bonds (Cost—$22,002,584)								19,927,996
Foreign Government Obligations	2.5%
Brazil Notas do Tesouro Nacional Series B		6.000%	5/15/17		616,000	BRL		544,171
Brazil Notas do Tesouro Nacional Series F		10.000%	1/1/12		713,000	BRL		378,753
Commonwealth of Australia		4.000%	8/20/20		1,730,000	AUD		2,500,837	N
Federative Republic of Brazil		10.000%	1/1/10		1	BRL		532
Federative Republic of Brazil		10.000%	7/1/10		4,452	BRL		2,390,784
Federative Republic of Brazil		6.000%	5/15/15		591	BRL		517,379	N
Government of Indonesia		10.250%	7/15/27		10,665,000,000	IDR		994,206
Kingdom of Sweden Inflation- Protected Notes		3.500%	12/1/28		15,000,000	SEK		3,803,511	N
Republic of Argentina		2.000%	1/3/10		961,830	ARS		610,315	N
Turkey Government Bond		14.000%	9/26/12		1,900,000	TRY		1,329,686
United Kingdom Treasury Gilt		1.250%	11/22/55		376,657	GBP		951,684	N
Total Foreign Government Obligations (Cost—$13,154,374)								14,021,858

25

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Absolute Return Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†			VALUE
Preferred Stocks	N.M.
Fannie Mae		7.000%			1,900	shs	$	85,620	E
Total Preferred Stocks (Cost—$101,080)								85,620
Total Long-Term Securities (Cost—$598,864,557)								572,290,183
Short-Term Securities	18.8%
U.S. Government and Agency Obligations	0.5%
Fannie Mae		0.000%	12/15/08	$	3,028,000			2,985,033	O,P
Foreign Government Obligations	1.4%
Bank Negara Malaysia Monetary Notes		0.000%	4/10/08		629,000	MYR		193,698	O
Bank Negara Malaysia Monetary Notes		0.000%	4/22/08		3,414,000	MYR		1,065,306	O
Bank Negara Malaysia Monetary Notes		0.000%	5/8/08		114,000	MYR		35,518	O
Bank Negara Malaysia Monetary Notes		0.000%	7/17/08		2,989,000	MYR		920,644	O
Egypt Treasury Bills		0.000%	4/1/08		425,000	EGP		78,006	O
Egypt Treasury Bills		0.000%	10/28/08		4,175,000	EGP		737,105	O
Egypt Treasury Bills		0.000%	11/11/08		10,350,000	EGP		1,779,347	O
Egypt Treasury Bills		0.000%	11/11/08		925,000	EGP		159,024	O
Egypt Treasury Bills		0.000%	3/3/09		900,000	EGP		155,134	O
Egypt Treasury Bills		0.000%	3/17/09		2,300,000	EGP		396,521	O
Egypt Treasury Bills		0.000%	3/24/09		12,775,000	EGP		2,196,646	O
								7,716,949
Options PurchasedQ	N.M.
Eurodollar Futures Put, June 2008, Strike Price $93.75					202	R		1,263
Eurodollar Futures Put, June 2008, Strike Price $94.00					205	R		1,281
								2,544
Repurchase Agreement	16.9%
Deutsche Bank 2.25%, dated 3/31/08, to be repurchased at $94,824,925 on 4/1/08 (Collateral: $88,747,000 Fannie Mae mortgage-backed securities, 6.250%, due 2/1/11, value $96,716,481)					94,819,000			94,819,000
Total Short-Term Securities (Cost—$105,467,111)								105,523,526
Total Investments (Cost—$704,331,668)S	120.9%							677,813,709
Other Assets Less Liabilities	(20.9)%							(117,189,126	)
Net Assets	100.0%						$	560,624,583

26

Annual Report to Shareholders

	EXPIRATION	CONTRACTS	APPRECIATION/ (DEPRECIATION)
Futures Contracts PurchasedQ
Euribor Futures	June 2008	333	$	(631,487	)
Eurodollar Futures	June 2008	361		1,591,370
Eurodollar Futures	September 2008	64		22,280
Eurodollar Futures	March 2009	244		389,180
Eurodollar Futures	December 2009	249		195,380
German Republic Bond Futures	June 2008	45		(68,504	)
German Republic Bond Futures	June 2008	80		(147,251	)
U.S. Treasury Note Futures	June 2008	393		561,058
			$	1,912,026
Futures Contracts WrittenQ
Eurodollar Futures	December 2008	249	$	(1,339,620	)
Eurodollar Futures	June 2009	57		(342,473	)
U.S. Treasury Bond Futures	June 2008	30		(87,088	)
U.S. Treasury Note Futures	June 2008	613		(1,431,549	)
U.S. Treasury Note Futures	June 2008	5		(7,681	)
			$	(3,208,411	)
Options WrittenQ
Eurodollar Futures Put, Strike Price $97.25	March 2009	222	$	68,265
Eurodollar Futures Call, Strike Price $97.63	March 2009	254		(172,720	)
Eurodollar Futures Put, Strike Price $96.25	June 2008	44		13,805
Eurodollar Futures Put, Strike Price $97.13	March 2009	244		139,080
U.S. Treasury Note Futures Call, Strike Price $119.00	May 2008	42		(44,835	)
U.S. Treasury Note Futures Call, Strike Price $120.00	May 2008	98		(6,615	)
U.S. Treasury Note Futures Call, Strike Price $122.00	May 2008	246		87,176
U.S. Treasury Note Futures Call, Strike Price $123.00	May 2008	52		19,240
U.S. Treasury Note Futures Put, Strike Price $110.00	May 2008	42		20,790
U.S. Treasury Note Futures Put, Strike Price $113.00	May 2008	49		44,927
			$	169,113

N.M. Not Meaningful.

^A Convertible Security – Security may be converted into the issuer’s common stock.

^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 according to the predetermined schedule.

^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 5.74% of net assets.

^D The coupon rates shown on variable rate securities are the rates at March 31, 2008. These rates vary with the weighted average coupon of the underlying loans.

^E Indexed Security – The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”), the Euro Interbank Offered Rate (“EURIBOR”) Index, the Consumer Price Index (“CPI”), the one-year Treasury Bill Rate or the ten-year Japanese Government Bond Rate. The coupon rates are the rates as of March 31, 2008.

27

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Absolute Return Portfolio—Continued

^F Illiquid security valued at fair value under procedures approved by the Board of Directors. At March 31, 2008, the market value for these securities was $2,946,582.

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

^H Bond is in default as of March 31, 2008.

^I Credit Linked Security – The rates of interest earned on these securities are tied to the credit rating assigned by Standard & Poor’s Rating Service and/or Moody’s Investors Services.

^J 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.

^K 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.

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

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

^N Inflation-Protected Security – 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.

^O 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.

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

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

^R Par represents actual number of contracts.

^S At March 31, 2008, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes was substantially as follows:

Gross unrealized appreciation	$	7,409,687
Gross unrealized depreciation		(33,932,222	)
Net unrealized depreciation	$	(26,522,535	)

^† Securities are denominated in U.S. Dollars, unless otherwise noted.

ARS—Argentine Peso

AUD—Australian Dollar

BRL—Brazilian Real

EGP—Egyptian Pound

GBP—British Pound

IDR—Indonesian Rupiah

MYR—Malaysian Ringgit

RUB—Russian Ruble

SEK—Swedish Krona

TRY—Turkish Lira

See notes to financial statements.

28

Annual Report to Shareholders

Statement of Assets and Liabilities

Western Asset Absolute Return Portfolio

March 31, 2008

Assets:
Investment securities at market value (Cost—$598,864,557)			$	572,290,183
Short-term securities at value (Cost—$105,467,111)				105,523,526
Cash				1,925
Foreign currency at value (Cost—$848,918)				876,069
Receivable for securities sold				66,084,835
Interest receivable				4,775,275
Deposits with brokers for open futures contracts				1,604,913
Unrealized appreciation of forward foreign currency contracts				373,631
Receivable for fund shares sold				167,864
Other assets				1,700,000
Total assets				753,398,221
Liabilities:
Payable for securities purchased	$	186,200,229
Swap contracts at value		2,130,285
Payable for fund shares repurchased		1,269,993
Options written (Proceeds—$1,081,079)		911,967
Futures variation margin payable		844,373
Unrealized depreciation of forward foreign currency contracts		780,327
Accrued management fee		348,261
Income distribution payable		169,957
Amounts payable for open swaps		10,523
Accrued distribution fees		72
Accrued expenses		107,651
Total liabilities				192,773,638
Net Assets			$	560,624,583
Net assets consist of:
Accumulated paid-in-capital			$	576,055,400
Undistributed net investment income				1,582,356
Accumulated net realized gain on investments, options, futures, swaps and foreign currency transactions				13,033,903
Net unrealized depreciation on investments, options, futures, swaps and foreign currency translations				(30,047,076	)
Net Assets			$	560,624,583
Net Asset Value Per Share:
Institutional Class (57,019,956 shares outstanding)				$9.82
Financial Intermediary Class (41,298 shares outstanding)				$9.82

See notes to financial statements.

29

Annual Report to Shareholders

Statement of Operations

Western Asset Absolute Return Portfolio

For the Year Ended March 31, 2008

Investment Income:
Interest			$	28,055,991
Expenses:
Management fees	3,666,577
Distribution fees:
Financial Intermediary Class	260
Audit and legal fees	43,801
Custodian fees	103,678
Directors’ fees and expenses	5,814
Registration fees	32,978
Reports to shareholders	6,262
Transfer agent and shareholder servicing expense:
Institutional Class	17,925
Financial Intermediary	260
Fees Recaptured	189,329
Other expenses	47,463
	4,114,347
Less: Compensating balance credits	(47,077	)
Net expenses				4,067,270
Net Investment Income				23,988,721
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain on:
Investments	5,277,954
Options	80,340
Futures	8,349,372
Swaps	991,523
Foreign currency transactions	407,708
				15,106,897
Change in unrealized appreciation/(depreciation) of:
Investments, options, futures, swaps and foreign currency translations	(31,146,146	)
Assets and liabilities denominated in foreign currency	(119,683	)
				(31,265,829	)
Net Realized and Unrealized Loss on Investments				(16,158,932	)
Change in Net Assets Resulting From Operations			$	7,829,789

See notes to financial statements.

30

Annual Report to Shareholders

Statement of Changes in Net Assets

Western Asset Absolute Return Portfolio

	FOR THE YEARS ENDED MARCH 31,
`	2008			2007
Change in Net Assets:
Net investment income	$	23,988,721		$	5,736,559
Net realized gain		15,106,897			2,150,512
Change in unrealized appreciation/(depreciation)		(31,265,829	)		1,218,753
Change in net assets resulting from operations		7,829,789			9,105,824
Distributions to shareholders from:
Net investment income:
Institutional Class		(23,789,518	)		(5,733,712	)
Financial Intermediary Class		(4,728	)		(446	)
Net realized gain on investments:
Institutional Class		(2,180,665	)		(782,602	)
Financial Intermediary Class		(163	)		(125	)
Change in net assets from fund share transactions:
Institutional Class		207,117,247			368,649,391
Financial Intermediary Class		396,921			17,370
Change in net assets		189,368,883			371,255,700
Net Assets:
Beginning of year	$	371,255,700		$	—
End of year	$	560,624,583		$	371,255,700
Undistributed net investment income	$	1,582,356		$	79,358

See notes to financial statements.

31

Annual Report to Shareholders

Financial Highlights

Western Asset Absolute Return Portfolio

For a share of each class of capital stock outstanding:

Institutional Class:

	YEAR ENDED MARCH 31, 2008			PERIOD ENDED MARCH 31, 2007A
Net asset value, beginning of year	$	10.23		$	10.00
Investment operations:
Net investment income		.49	B		.36	B
Net realized and unrealized gain/(loss)		(.36	)		.29
Total from investment operations		.13			.65
Distributions from:
Net investment income		(.49	)		(.35	)
Net realized gain on investments		(.05	)		(.07	)
Total distributions		(.54	)		(.42	)
Net asset value, end of year	$	9.82		$	10.23
Total return		1.31	%		6.63	%C
Ratios to Average Net Assets:D
Total expenses		.84	%		1.09	%E
Expenses net of waivers, if any		.84	%		.93	%E
Expenses net of all reductions		.83	%		.89	%E
Net investment income		4.9	%		4.9	%E
Supplemental Data:
Portfolio turnover rate		386.9	%		182.2	%
Net assets, end of year (in thousands)	$	560,219		$	371,239

^A For the period July 6, 2006 (commencement of operations) to March 31, 2007.

^B Computed using average daily shares outstanding.

^C Not annualized.

^D 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.

^E Annualized.

See notes to financial statements.

32

Annual Report to Shareholders

Financial Highlights

Western Asset Absolute Return Portfolio

For a share of each class of capital stock outstanding:

Financial Intermediary Class:

	YEAR ENDED MARCH 31, 2008			PERIOD ENDED MARCH 31, 2007F
Net asset value, beginning of year	$	10.23		$	10.17
Investment operations:
Net investment income		.47	B		.27	B
Net realized and unrealized gain/(loss)		(.37	)		.13
Total from investment operations		.10			.40
Distributions from:
Net investment income		(.46	)		(.27	)
Net realized gain on investments		(.05	)		(.07	)
Total distributions		(.51	)		(.34	)
Net asset value, end of year	$	9.82		$	10.23
Total return		1.03	%		3.99	%C
Ratios to Average Net Assets:D
Total expenses		1.31	%		85.97	%E
Expenses net of waivers, if any		1.06	%		1.18	%E
Expenses net of all reductions		1.03	%		1.16	%E
Net investment income		4.7	%		4.6	%E
Supplemental Data:
Portfolio turnover rate		386.9	%		182.2	%
Net assets, end of year (in thousands)	$	406		$	17

^F For the period September 6, 2006 (commencement of operations) to March 31, 2007.

See notes to financial statements.

33

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 various periods ended March 31, 2008, are presented below:

	Three Months Ended 3/31/08		Average Annual Total Returns
		One Year	Five Years	Ten Years	Since InceptionA
Western Asset Core Bond Portfolio:
Institutional Class	-2.13%	-1.88%	+3.56%	+5.64%	+7.49%
Financial Intermediary Class	-2.28%	-2.12%	+3.29%	N/A	+5.58%
Lehman Aggregate Bond IndexB	+2.17%	+7.67%	+4.58%	+6.04%	+7.31%

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. Performance figures for periods shorter than one year represent cumulative figures and are not annualized.

The gross expense ratios for the Institutional and Financial Intermediary Classes were 0.47% and 0.72%, respectively. Gross expenses are the Fund’s total annual operating expenses for the share classes for the fiscal year ended March 31, 2007 as indicated in the Fund’s prospectus dated August 1, 2007 and do not reflect fee waivers or reimbursements. These expenses include management fees, 12b-1 distribution fees (if any) and other expenses.

The net expense ratios for the Institutional and Financial Intermediary Classes were 0.47% and 0.72%, respectively. Net expenses are the Fund’s total annual operating expenses for the share classes for the fiscal year ended March 31, 2007 as indicated in the Fund’s prospectus dated August 1, 2007 and reflect contractual fee waivers and/or reimbursements. The Fund’s Manager has contractually agreed to waive fees and/or reimburse operating expenses (exclusive of taxes, interest, deferred organizational expenses, brokerage and extraordinary expenses) until August 1, 2008 to limit total annual operating expenses to 0.50% for the Institutional Class and 0.75% for the Financial Intermediary Class of the Fund’s average daily net assets attributable to each share class. The Fund’s Board of Directors has currently limited payments of 12b-1 fees under the Financial Intermediary Class’s Distribution Plan to 0.25% of average net assets. Pursuant to the Distribution Plan for Financial Intermediary Class shares, the Board of Directors may authorize payment of up to 0.40% of average net assets without shareholder approval.

^A The Fund’s Institutional Class inception date is September 4, 1990. The Financial Intermediary Class inception date is July 22, 1999. Since-inception index returns are for periods beginning August 31, 1990. Although it is not possible to invest directly in an index, it is possible to purchase investment vehicles designed to track the performance of certain indexes.

^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.

34

Annual Report to Shareholders

A year ago, the Federal Reserve Board’s (Fed)^C predominant concern was that strong growth and a high level of resource utilization would sustain inflationary pressures. The financial crisis that erupted a few months later has defined the fixed-income landscape ever since. The period ended with the Fed not only focused on averting recession but struggling to unclog credit markets. The Ted spread (Ted) ^D, a measure of systemic risk, rose five-fold during the 12-month period ended March 31, 2008, to peak near 220 basis points (bps)^E in November, and had only moderated slightly by period-end. Growing expectations for easing over the first half of the period were finally validated by the Fed’s decision to cut the funds rate by a total of 300 bps, including a surprise 75 bps reduction at an unscheduled Federal Open Market Committee (FOMC) meeting in January. Additionally, the Fed, along with a number of government housing agencies, announced new lending facilities targeted directly at strained credit conditions, with a specific focus on the mortgage market. The yield on the two-year Treasury note declined 303 bps, driving a powerful rally in the Treasury market. All other risky asset classes suffered as a severe flight-to-safety forced spreads sharply higher. Home prices declined and the drag from the homebuilding sector alone detracted more than 1% from gross domestic product growth. Still, the economy continued to expand modestly thanks to a robust trade sector and a stubborn consumer. The price of oil breached the $100 per barrel threshold despite slower growth concerns. The U.S. dollar lost substantial value against a trade-weighted basket of currencies. Equity markets came under serious pressure in the final four months and finished marginally lower.

The impact of market conditions on the Fund’s performance was negative for the 12-month period ended March 31, 2008, with strategies producing negative results. For this period, the Fund’s Institutional Class’s total return of -1.88% underperformed its benchmark, the Lehman Aggregate Bond Index, which returned +7.67%. Overweight exposure to the mortgage-backed sector detracted significantly from returns as spreads widened and volatility increased. We had diversified into a number of select non-agency issues, which were particularly impacted and further negatively impacted performance. An emphasis on lower-quality credits was also a large negative as spreads trended higher in the wake of the subprime lending crisis, deteriorating liquidity conditions and slowing economic growth. On the positive side, a tactically driven duration posture contributed modestly to returns as bond yields rallied over the last 12 months. A curve-steepening strategy had a positive impact on performance as the spread between the two- and 10-year yields widened. Modest Treasury Inflation-Protected Securities (TIPS) exposure had a positive impact following a commodity-driven rise in headline inflation.

Western Asset Management Company

April 21, 2008

Investment Risks: Bonds are subject to a variety of risks, including interest rate, credit and inflation risk. As interest rates rise, bond prices fall, reducing the value of a fund’s share price. The Fund may invest in high-yield bonds, which are rated below investment grade and carry more risk than higher-rated securities. Mortgage-backed securities involve more risk, including prepayment and extension risks, than other investments in fixed income securities. The Fund may use derivatives, such as options and futures which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance.

^C Federal Reserve Board (Fed) – is charged with, among other things, managing the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.

^D Ted Spread (Ted) – The price difference between three-month futures contracts for U.S. Treasuries and three-month contracts for euros having identical expiration months.

^E 100 basis points (bps) = 1%

N/A – Not applicable

35

Annual Report to Shareholders

Expense Example

Western Asset Core Bond Portfolio

As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution (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, 2007 and held through March 31, 2008.

Actual Expenses

The first line for each class 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 value 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 if your shares were held for the entire period.

Hypothetical Examples 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 classes that appear in the shareholder reports of other funds.

	Beginning Account Value 10/1/07		Ending Account Value 3/31/08		Expenses PaidA During the Period 10/1/07 to 3/31/08
Institutional Class:
Actual	$	1,000.00	$	977.30	$	2.18
Hypothetical (5% return before expenses)		1,000.00		1,022.79		2.23
Financial Intermediary Class:
Actual	$	1,000.00	$	976.00	$	3.42
Hypothetical (5% return before expenses)		1,000.00		1,011.40		3.50

^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 ratios of 0.44% and 0.69% for the Institutional Class and Financial Intermediary Class, respectively, multiplied by the average values over the period, multiplied by the number of days in the most recent fiscal half-year (183), and divided by 366.

36

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 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 graphs and tables 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, economical 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.

37

Annual Report to Shareholders

Performance Information—Continued

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.

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

38

Annual Report to Shareholders

Portfolio Composition (as of March 31, 2008)^B

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

Maturity Schedule (as a percentage of the portfolio)

^B The pie charts above represent the composition of the Fund’s portfolio as of March 31, 2008 and do not include derivatives such as Futures Contracts, Options Written, and Swaps. The Fund is actively managed. As a result, the composition of the portfolio holdings and sectors are subject to change at any time.

^C Source: Standard & Poor's.

^D Preferred stocks do not have defined maturity dates.

39

Annual Report to Shareholders

Portfolio of Investments

Western Asset Core Bond Portfolio

March 31, 2008

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Long-Term Securities	110.0%
Corporate Bonds and Notes	19.0%
Aerospace and Defense	N.M.
United Technologies Corp.		5.400%	5/1/35	$	1,460,000	$	1,380,488
Airlines	0.9%
Continental Airlines Inc.		6.900%	1/2/18		410,508		395,114
Continental Airlines Inc.		6.820%	5/1/18		555,419		525,199
Continental Airlines Inc.		6.545%	2/2/19		2,622,764		2,522,784
Delta Air Lines Inc.		7.379%	5/18/10		4,465,593		4,398,609
Delta Air Lines Inc.		7.570%	11/18/10		12,026,000		11,988,479
Delta Air Lines Inc.		7.111%	9/18/11		15,600,000		15,366,000
Delta Air Lines Inc.		6.821%	8/10/22		7,101,725		6,808,424	A
Northwest Airlines Corp.		7.575%	3/1/19		5,973,541		5,902,455
Southwest Airlines Co.		5.125%	3/1/17		2,640,000		2,463,033	B
US Airways Pass-Through Trust		6.850%	1/30/18		10,091,178		9,586,619
							59,956,716
Automobiles	0.2%
DaimlerChrysler NA Holding Corp.		4.050%	6/4/08		1,530,000		1,530,565
DaimlerChrysler NA Holding Corp.		7.200%	9/1/09		1,240,000		1,282,630
DaimlerChrysler NA Holding Corp.		5.875%	3/15/11		700,000		715,571
Ford Motor Co.		7.450%	7/16/31		13,410,000		8,850,600	B
							12,379,366
Building Products	0.1%
Masco Corp.		7.125%	8/15/13		3,320,000		3,344,366
Masco Corp.		6.125%	10/3/16		4,120,000		3,631,652
							6,976,018
Capital Markets	2.5%
Goldman Sachs Capital II		5.793%	12/29/49		770,000		512,897	C
Lehman Brothers Holdings Capital Trust VII		5.857%	11/29/49		1,300,000		822,250	C
Lehman Brothers Holdings Inc.		4.733%	4/2/08		50,532,000		50,532,000	D
Lehman Brothers Holdings Inc.		6.200%	9/26/14		4,370,000		4,310,236
Lehman Brothers Holdings Inc.		4.500%	9/15/22		42,560,000		41,286,294	D
Merrill Lynch and Co. Inc.		2.900%	6/16/08		31,040,000		30,992,788	D
Merrill Lynch and Co. Inc.		6.110%	1/29/37		3,510,000		2,774,325
Morgan Stanley		4.750%	4/1/14		3,070,000		2,849,826
Morgan Stanley		4.401%	10/18/16		4,040,000		3,638,553	B,D
The Bear Stearns Cos. Inc.		5.550%	1/22/17		7,855,000		7,013,235	B

40

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Corporate Bonds and Notes—Continued
Capital Markets—Continued
The Bear Stearns Cos. Inc.		6.400%	10/2/17	$	17,120,000	$	16,904,305
The Goldman Sachs Group Inc.		5.625%	1/15/17		9,935,000		9,530,894
							171,167,603
Commercial Banks	0.7%
Bank One Corp.		7.875%	8/1/10		4,500,000		4,808,745
Bank One Corp.		5.900%	11/15/11		2,000,000		2,121,840
HBOS Treasury Services PLC		5.250%	2/21/17		2,500,000		2,653,530	A
Rabobank Capital Funding Trust II		5.260%	12/31/49		470,000		403,481	A,C
Rabobank Capital Funding Trust III		5.254%	12/31/49		3,030,000		2,516,640	A,C
SunTrust Capital VIII		6.100%	12/15/36		14,970,000		11,853,246	C
Wachovia Capital Trust III		5.800%	3/15/49		6,130,000		4,367,625	C
Wachovia Corp.		5.750%	6/15/17		16,100,000		15,626,692
Wells Fargo Capital X		5.950%	12/15/36		1,890,000		1,702,869
							46,054,668
Commercial Services and Supplies	0.3%
PHH Corp.		7.125%	3/1/13		5,010,000		4,772,461
Waste Management Inc.		6.875%	5/15/09		2,000,000		2,051,756
Waste Management Inc.		6.375%	11/15/12		2,530,000		2,627,334
Waste Management Inc.		5.000%	3/15/14		3,440,000		3,376,419
Waste Management Inc.		7.125%	12/15/17		6,000,000		6,662,742
							19,490,712
Communications Equipment	0.1%
Motorola Inc.		8.000%	11/1/11		5,600,000		5,691,504
Consumer Finance	2.0%
American Express Co.		6.800%	9/1/66		4,460,000		4,193,426	C
American General Finance Corp.		6.900%	12/15/17		4,070,000		3,977,505
Capital One Financial Corp.		6.150%	9/1/16		3,170,000		2,662,027
Ford Motor Credit Co.		6.625%	6/16/08		8,900,000		8,799,421
Ford Motor Credit Co.		7.375%	10/28/09		50,175,000		45,716,098
Ford Motor Credit Co.		7.875%	6/15/10		6,310,000		5,501,922
Ford Motor Credit Co.		7.375%	2/1/11		6,435,000		5,365,896
Ford Motor Credit Co.		7.250%	10/25/11		5,910,000		4,854,616
GMAC LLC		5.625%	5/15/09		9,550,000		8,702,953	B
GMAC LLC		7.750%	1/19/10		5,355,000		4,631,893
GMAC LLC		7.250%	3/2/11		820,000		645,639
GMAC LLC		0.000%	6/15/15		220,000		77,499	E

41

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Corporate Bonds and Notes—Continued
Consumer Finance—Continued
SLM Corp.		5.210%	4/1/09	$	8,960,000	$	8,556,800	F
SLM Corp.		5.375%	5/15/14		3,000,000		2,251,410
SLM Corp.		5.625%	8/1/33		42,895,000		29,246,669
							135,183,774
Diversified Financial Services	2.2%
Air 2 US		8.027%	10/1/19		11,012,279		10,021,174	A
BAC Capital Trust XIV		5.630%	12/31/49		500,000		365,598	C
Citigroup Inc.		6.125%	8/25/36		2,000,000		1,756,478
Citigroup Inc.		5.875%	5/29/37		17,000,000		14,765,248
Citigroup Inc.		6.875%	3/5/38		17,330,000		17,317,748
Dryden Investor Trust		7.157%	7/23/08		2,222,559		2,236,650	A
General Electric Capital Corp.		6.375%	11/15/67		22,960,000		22,466,796	C
Glen Meadow Pass-Through Certificates		6.505%	2/12/67		12,080,000		10,311,005	A,C
HSBC Finance Corp.		8.000%	7/15/10		690,000		728,149
HSBC Finance Corp.		7.000%	5/15/12		700,000		726,048
HSBC Finance Corp.		6.375%	11/27/12		440,000		445,643
ILFC E-Capital Trust II		6.250%	12/21/65		4,160,000		3,717,501	A,C
J.P. Morgan and Co. Inc.		5.886%	2/15/12		2,000,000		2,057,680	D
JPMorgan Chase and Co.		5.750%	1/2/13		3,770,000		3,938,398
Kaupthing Bank Hf		7.625%	2/28/15		20,280,000		19,089,564	A,G
SB Treasury Co. LLC		9.400%	12/29/49		2,930,000		2,968,239	A,C
Sigma Finance Inc.		8.500%	8/11/16		17,200,000		16,137,040	A,H
Sigma Finance Inc.		8.000%	6/22/17		19,210,000		12,870,700	A,H
TNK-BP Finance SA		7.875%	3/13/18		6,420,000		5,930,475	A
Unilever Capital Corp.		7.125%	11/1/10		1,730,000		1,896,852
							149,746,986
Diversified Telecommunication Services	0.2%
AT&T Inc.		5.100%	9/15/14		4,960,000		4,927,611
BellSouth Corp.		4.750%	11/15/12		440,000		441,280
BellSouth Corp.		5.200%	9/15/14		4,270,000		4,262,933
CenturyTel Inc.		6.000%	4/1/17		4,120,000		3,959,683
Verizon Global Funding Corp.		7.250%	12/1/10		2,220,000		2,384,227
Verizon Global Funding Corp.		7.375%	9/1/12		5,000		5,492
							15,981,226
Electric Utilities	0.3%
Exelon Corp.		5.625%	6/15/35		345,000		303,378
FirstEnergy Corp.		6.450%	11/15/11		290,000		303,560

42

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Corporate Bonds and Notes—Continued
Electric Utilities—Continued
FirstEnergy Corp.		7.375%	11/15/31	$	10,610,000	$	11,541,569
Pacific Gas and Electric Co.		6.050%	3/1/34		940,000		921,513
Pacific Gas and Electric Co.		5.800%	3/1/37		7,330,000		6,934,737
Progress Energy Inc.		7.100%	3/1/11		1,488,000		1,601,716
The Cleveland Electric Illuminating Co.		5.700%	4/1/17		630,000		611,479
The Detroit Edison Co.		6.125%	10/1/10		920,000		974,585
							23,192,537
Food and Staples Retailing	0.8%
CVS Lease Pass-Through Trust		6.117%	1/10/13		1,559,297		1,654,180	A
CVS Lease Pass-Through Trust		6.036%	12/10/28		35,593,087		33,907,754	A
The Kroger Co.		6.400%	8/15/17		580,000		612,117
The Kroger Co.		6.150%	1/15/20		850,000		872,862
Wal-Mart Stores Inc.		5.800%	2/15/18		19,020,000		19,933,455
							56,980,368
Food Products	0.2%
General Mills Inc.		5.700%	2/15/17		3,580,000		3,609,456
H.J. Heinz Co.		6.428%	12/1/08		6,650,000		6,762,518	A
Sara Lee Corp.		6.250%	9/15/11		5,500,000		5,826,810
							16,198,784
Gas Utilities	0.1%
Southern Natural Gas Co.		8.000%	3/1/32		7,390,000		8,074,284
Health Care Providers and Services	0.9%
AmerisourceBergen Corp.		5.625%	9/15/12		3,520,000		3,639,574
AmerisourceBergen Corp.		5.875%	9/15/15		3,050,000		2,995,002
Cardinal Health Inc.		5.800%	10/15/16		3,530,000		3,546,404
Cardinal Health Inc.		5.850%	12/15/17		12,985,000		13,002,725
HCA Inc.		5.750%	3/15/14		35,430,000		29,229,750
Tenet Healthcare Corp.		6.375%	12/1/11		2,500,000		2,256,250
Tenet Healthcare Corp.		7.375%	2/1/13		6,584,000		5,876,220
WellPoint Inc.		5.875%	6/15/17		900,000		880,859
							61,426,784
Hotels, Restaurants and Leisure	0.1%
Marriott International Inc.		5.810%	11/10/15		4,400,000		4,145,575
Starwood Hotels and Resorts Worldwide Inc.		7.875%	5/1/12		3,050,000		3,184,822
							7,330,397

43

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Corporate Bonds and Notes—Continued
Household Durables	0.1%
Pulte Homes Inc.		8.125%	3/1/11	$	3,480,000	$	3,375,600
Independent Power Producers and Energy Traders	0.1%
TXU Corp.		6.500%	11/15/24		1,090,000		773,985
TXU Corp.		6.550%	11/15/34		9,930,000		7,010,362
							7,784,347
Insurance	1.3%
American International Group Inc.		5.850%	1/16/18		2,370,000		2,325,778
American International Group Inc.		6.250%	3/15/37		12,690,000		10,280,232
ASIF Global Financing XIX		4.900%	1/17/13		1,210,000		1,191,683	A
Marsh and McLennan Cos. Inc.		5.150%	9/15/10		3,070,000		3,062,936	B
MetLife Inc.		6.400%	12/15/36		46,870,000		37,244,777
The Travelers Cos. Inc.		6.250%	3/15/37		37,460,000		33,040,619	C
							87,146,025
IT Services	0.1%
Electronic Data Systems Corp.		7.125%	10/15/09		7,685,000		7,838,039
Leisure Equipment and Products	0.8%
Eastman Kodak Co.		3.625%	5/15/08		17,500,000		17,412,500
Eastman Kodak Co.		7.250%	11/15/13		34,680,000		33,119,400
							50,531,900
Media	0.9%
CBS Corp.		7.625%	1/15/16		2,750,000		2,936,797
Clear Channel Communications Inc.		4.250%	5/15/09		2,130,000		2,066,100
Clear Channel Communications Inc.		6.250%	3/15/11		5,580,000		4,924,350	B
Clear Channel Communications Inc.		5.500%	9/15/14		790,000		568,800
Comcast Corp.		6.500%	1/15/15		1,200,000		1,228,871
Comcast Corp.		6.500%	1/15/17		1,500,000		1,531,980
Comcast Corp.		6.950%	8/15/37		3,130,000		3,136,276
Comcast MO of Delaware Inc.		9.000%	9/1/08		2,200,000		2,235,039
Cox Communications Inc.		7.875%	8/15/09		9,640,000		10,089,484
Liberty Media LLC		7.875%	7/15/09		9,000,000		9,031,257
Liberty Media LLC		3.750%	2/15/30		290,000		142,100	I
News America Inc.		6.200%	12/15/34		105,000		100,000
News America Inc.		6.650%	11/15/37		700,000		705,942	A
Time Warner Inc.		6.875%	5/1/12		8,270,000		8,537,427

44

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Corporate Bonds and Notes—Continued
Media—Continued
Time Warner Inc.		6.950%	1/15/28	$	2,000,000	$	1,942,676
Time Warner Inc.		7.625%	4/15/31		350,000		366,068
Viacom Inc.		5.750%	4/30/11		8,580,000		8,671,377
Viacom Inc.		6.250%	4/30/16		3,400,000		3,309,662
							61,524,206
Multi-Utilities	N.M.
Dominion Resources Inc.		5.125%	12/15/09		50,000		51,181
Dominion Resources Inc.		4.750%	12/15/10		570,000		583,358
Dominion Resources Inc.		5.700%	9/17/12		2,050,000		2,146,754
							2,781,293
Multiline Retail	0.1%
Target Corp.		4.000%	6/15/13		4,445,000		4,330,523	B
Oil, Gas and Consumable Fuels	1.9%
Anadarko Petroleum Corp.		3.200%	9/15/09		12,340,000		12,106,453	D
Anadarko Petroleum Corp.		5.950%	9/15/16		13,280,000		13,791,811
Anadarko Petroleum Corp.		6.450%	9/15/36		3,360,000		3,421,666
Conoco Inc.		6.950%	4/15/29		2,780,000		3,165,528
El Paso Natural Gas Co.		8.375%	6/15/32		3,610,000		4,099,841
Hess Corp.		7.875%	10/1/29		3,840,000		4,557,085
Hess Corp.		7.300%	8/15/31		8,695,000		9,796,430
Kerr-McGee Corp.		6.875%	9/15/11		17,000,000		18,273,725
Kerr-McGee Corp.		6.950%	7/1/24		650,000		689,082
Kinder Morgan Energy Partners LP		7.125%	3/15/12		4,650,000		4,940,262	B
Kinder Morgan Energy Partners LP		5.000%	12/15/13		3,180,000		3,135,388
Kinder Morgan Energy Partners LP		6.000%	2/1/17		990,000		985,217
Kinder Morgan Energy Partners LP		6.950%	1/15/38		410,000		402,361
Pemex Project Funding Master Trust		6.625%	6/15/35		17,313,000		17,916,826	B
Pemex Project Funding Master Trust		6.625%	6/15/35		410,000		424,300	A
Sonat Inc.		7.625%	7/15/11		5,000,000		5,167,945
Tennessee Gas Pipeline Co.		8.375%	6/15/32		1,110,000		1,260,616
Texaco Capital Inc.		5.500%	1/15/09		1,000,000		1,015,734
The Williams Cos. Inc.		8.125%	3/15/12		3,240,000		3,539,700
The Williams Cos. Inc.		7.500%	1/15/31		7,262,000		7,570,635
The Williams Cos. Inc.		8.750%	3/15/32		3,240,000		3,742,200
XTO Energy Inc.		7.500%	4/15/12		10,379,000		11,495,438
							131,498,243

45

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Corporate Bonds and Notes—Continued
Paper and Forest Products	0.1%
Weyerhaeuser Co.		6.750%	3/15/12	$	2,775,000	$	2,917,702
Pharmaceuticals	0.1%
Wyeth		5.950%	4/1/37		9,750,000		9,526,286
Real Estate Investment Trusts	0.1%
Health Care Property Investors Inc.		6.450%	6/25/12		3,550,000		3,462,780
Specialty Retail	0.3%
Autozone Inc.		6.950%	6/15/16		5,620,000		5,803,262
Home Depot Inc.		4.625%	8/15/10		1,380,000		1,381,615
Home Depot Inc.		5.250%	12/16/13		2,740,000		2,680,841
Home Depot Inc.		5.400%	3/1/16		4,250,000		3,994,766
Limited Brands Inc.		6.125%	12/1/12		9,420,000		8,857,353
							22,717,837
Thrifts and Mortgage Finance	1.3%
Countrywide Financial Corp.		2.819%	3/24/09		3,000,000		2,755,869	B,D
Countrywide Financial Corp.		6.250%	5/15/16		18,400,000		14,929,337	B
Residential Capital LLC		8.125%	11/21/08		8,180,000		5,644,200	B
Residential Capital LLC		7.098%	4/17/09		1,280,000		729,600	D
Residential Capital LLC		6.178%	5/22/09		3,550,000		2,023,500	D,F
Residential Capital LLC		8.000%	2/22/11		19,580,000		9,594,200	F
Residential Capital LLC		8.500%	6/1/12		880,000		431,200	F
Washington Mutual Inc.		4.625%	4/1/14		52,534,000		37,036,470
Washington Mutual Inc.		7.250%	11/1/17		14,090,000		11,025,425
							84,169,801
Tobacco	0.1%
Reynolds American Inc.		7.875%	5/15/09		3,240,000		3,312,900	B
Wireless Telecommunication Services	0.1%
Sprint Capital Corp.		8.375%	3/15/12		7,935,000		7,339,875
Sprint Capital Corp.		6.900%	5/1/19		230,000		181,125
Sprint Capital Corp.		8.750%	3/15/32		1,050,000		887,250
							8,408,250
Total Corporate Bonds and Notes (Cost—$1,383,285,904)							1,288,537,947

46

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Asset-Backed Securities	4.2%
Fixed Rate Securities	0.6%
Conseco Finance Securitizations Corp. 2000-5		7.960%	2/1/32	$	4,540,762	$	4,147,126
Drive Auto Receivables Trust 2006-2 A3		5.330%	4/15/14		25,360,000		23,992,777	A
E-Trade RV and Marine Trust A3-1		3.620%	10/8/18		264,843		261,748
Equity One ABS Inc. 2003-3		4.995%	12/25/33		4,068,582		4,047,238
Green Tree Financial Corp. 1996-5		8.100%	7/15/26		521,104		125,703
Patrons’ Legacy 2003-IV		5.775%	12/23/63		5,800,000		5,057,020	A
							37,631,612
Indexed SecuritiesD	3.6%
Asset-Backed Funding Certificates 2002-SB1		3.029%	12/25/30		1,440,525		1,389,648
Bear Stearns Asset Backed Securities Trust 2007-HE6 1A1		3.849%	8/25/37		11,365,882		10,516,850
Brazos Higher Education Authority Inc. 2005-1		2.629%	9/26/16		8,784,000		8,684,390
CDC Mortgage Capital Trust 2002-HE1		3.219%	1/25/33		517,945		444,167
CIT Group Home Equity Loan Trust 2002-1		2.889%	3/25/33		357,357		322,577
Countrywide Asset-Backed Certificates 2003-BC3		3.219%	9/25/33		467,213		455,356
Fleet Home Equity Loan Trust 2003-1		2.786%	1/20/33		2,409,454		2,010,304
GMAC Mortgage Corp. Loan Trust 2004-VF1 A1		3.489%	2/25/31		56,723,297		47,171,094	A
GMAC Mortgage Corp. Loan Trust 2005-HE3 A1VN		2.859%	2/25/36		29,174,622		21,985,813
GSAMP Trust 2006-S4		2.689%	5/25/36		2,619,182		2,104,729
Lehman XS Trust 2005-5N		2.899%	11/25/35		8,819,299		6,907,355
Lehman XS Trust 2006-2N 1A1		2.859%	2/25/46		16,028,141		12,154,615
Lehman XS Trust 2006-GP4		2.669%	8/25/46		2,977,870		2,755,046
Long Beach Mortgage Loan Trust 2000-1		3.119%	1/21/31		220,428		196,965
Merrill Lynch Mortgage Investors Trust 2007-SD1 A1		3.049%	2/25/47		56,659,646		47,028,691
MSDWCC Heloc Trust 2005-1		2.789%	7/25/17		1,305,738		1,108,132
Provident Bank Home Equity Loan Trust 1999-3		3.379%	1/25/31		711,514		586,882
Residential Asset Mortgage Products Inc. 2003-RS2		3.279%	3/25/33		174,660		133,392
Residential Asset Securities Corp. 2001-KS2		3.059%	6/25/31		292,083		280,458
Residential Asset Securities Corp. 2001-KS3 AII		3.059%	9/25/31		108,279		105,005
SACO I Trust 2005-10 1A		2.859%	6/25/36		5,452,228		4,345,789

47

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Bond Portfolio—Continued

	% OF NET ASSETS		RATE	MATURITY DATE	PAR/ SHARES		VALUE
Asset-Backed Securities—Continued
Indexed Securities—Continued
SACO I Trust 2005-8 A1			2.879%	11/25/20	$	1,577,779	$	1,355,129
SACO I Trust 2006-1 A			2.769%	9/25/35		2,000,734		1,256,274
Securitized Asset Backed Receivables LLC Trust 2007-BR2 A2			2.829%	2/25/37		56,604,103		45,146,357
SLM Student Loan Trust 2006-5			3.321%	7/25/17		28,412,578		28,239,704
								246,684,722
Total Asset-Backed Securities (Cost—$333,417,863)								284,316,334
Mortgage-Backed Securities	18.1%
Fixed Rate Securities	5.9%
Banc of America Commercial Mortgage Inc. 2006-3 A4			5.889%	7/10/44		25,420,000		25,772,870
Citicorp Mortgage Securities Inc. 2003-7 A1			4.750%	8/25/18		7,577,675		7,389,045
Commercial Mortgage Asset Trust 1999-C1 A3			6.640%	1/17/32		2,364,970		2,389,827
Countrywide Alternative Loan Trust 2003-20CB 1A1		��	5.500%	10/25/33		10,295,792		10,327,966
Credit Suisse Mortgage Capital Certificates 2006-C5 A3			5.311%	12/15/39		14,800,000		14,375,810
CS First Boston Mortgage Securities Corp. 1998-C1 A1B			6.480%	5/17/40		55,424		55,422
GE Capital Commercial Mortgage Corp. 2007-C1 A4			5.543%	12/10/49		1,330,000		1,300,578
GMAC Commercial Mortgage Securities Inc. 2006-C1 A4			5.238%	11/10/45		3,800,000		3,717,587
GS Mortgage Securities Corp. II 2005-GG4			4.680%	7/10/39		12,900,000		12,364,516
GSR Mortgage Loan Trust 2005-4F 1A1			4.500%	4/25/20		7,439,313		7,136,566
JP Morgan Chase Commercial Mortgage Pass-Through Certificates 2005-CIBC12			4.895%	9/12/37		1,610,000		1,572,106
JP Morgan Chase Commercial Mortgage Securities Corp. 2007-LDPX A3			5.420%	5/15/49		56,130,000		54,312,303
JP Morgan Commercial Mortgage Finance Corp. 1999-C8 A2			7.400%	7/15/31		3,855,665		3,908,687
LB-UBS Commercial Mortgage Trust 2005-C3 A5			4.739%	7/15/30		13,356,000		12,951,472
LB-UBS Commercial Mortgage Trust 2005-C3 AAB			4.664%	7/15/30		15,000,000		14,229,879

48

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Mortgage-Backed Securities—Continued
Fixed Rate Securities—Continued
LB-UBS Commercial Mortgage Trust 2005-C5		4.954%	9/15/30	$	17,880,000	$	17,544,936
MASTR Reperforming Loan Trust 2005-1		6.500%	8/25/34		1,059,991		990,803	A
MASTR Reperforming Loan Trust 2005-1 1A3		7.000%	8/25/34		8,904,797		8,948,238	A
Merrill Lynch/Countrywide Commercial Mortgage 2007-6 A4		5.485%	3/12/51		18,740,000		18,222,540
Merrill Lynch/Countrywide Commercial Mortgage Trust 2007-5 A4		5.378%	8/12/48		1,030,000		996,427
Morgan Stanley Capital I 2005-HQ6		4.989%	8/13/42		13,450,000		13,216,205
Morgan Stanley Capital I 2006-IQ12 A4		5.332%	12/15/43		8,700,000		8,462,617
Prime Mortgage Trust 2006-DR1 1A1		5.500%	5/25/35		27,863,246		27,395,143	A
Prime Mortgage Trust 2006-DR1 1A2		6.000%	5/25/35		12,406,771		12,313,721	A
Prime Mortgage Trust 2006-DR1 2A2		6.000%	5/25/35		46,489,135		45,610,491	A
Residential Asset Mortgage Products Inc. 2005-SL2		7.500%	2/25/32		3,603,282		3,217,337
Residential Asset Securitization Trust 2003-A14		4.750%	2/25/19		43,189,775		42,906,364
Structured Asset Securities Corp. 2003-29 1A1		4.750%	9/25/18		25,924,738		25,787,025
WaMu Mortgage Pass-Through Certificates 2003-S7 A1		4.500%	8/25/18		4,799,262		4,652,285
							402,068,766
Indexed SecuritiesD	8.6%
American Home Mortgage Assets 2006-4		2.809%	10/25/46		956,014		642,678
American Home Mortgage Investment Trust 2006-2 1A1		2.679%	6/25/46		2,501,928		2,445,913
Amortizing Residential Collateral Trust 2002-BC1M		2.879%	1/1/32		1,903,245		1,675,183
Banc of America Funding Corp. 2005-E		5.663%	6/20/35		12,664,738		9,772,013
Bear Stearns Adjustable Rate Mortgage Trust 2004-9 24A1		5.470%	11/25/34		19,430,095		17,468,405
Bear Stearns Mortgage Funding Trust 2007-AR5 1A1A		2.769%	6/25/47		7,783,948		5,435,843
Bear Stearns Structured Products Inc. 2007-R11 A1A		3.635%	9/27/37		10,301,341		9,812,027	A
Citigroup Mortgage Loan Trust Inc. 2005-HE2		2.999%	5/25/35		3,141,093		2,786,491	A

49

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Mortgage-Backed Securities—Continued
Indexed Securities—Continued
Countrywide Alternative Loan Trust 2005-14		2.809%	5/25/35	$	7,511,318	$	5,933,914
Countrywide Alternative Loan Trust 2005-17 1A1		2.859%	7/25/35		9,433,641		7,499,667
Countrywide Alternative Loan Trust 2005-17 2A1		2.839%	7/25/35		19,579,297		15,458,757
Countrywide Alternative Loan Trust 2005-38 A3		2.949%	9/25/35		6,030,244		4,763,775
Countrywide Alternative Loan Trust 2005-56 3A1		2.889%	11/25/35		866,503		687,929
Countrywide Alternative Loan Trust 2005-59 1A1		3.449%	11/20/35		2,511,207		1,986,960
Countrywide Alternative Loan Trust 2006-0A7		2.809%	6/25/46		12,266,983		10,221,223
Countrywide Home Loans 2005-03 1A2		2.889%	4/25/35		10,353,152		8,171,622
Countrywide Home Loans 2005-09 1A1		2.899%	5/25/35		10,565,230		8,258,804
Countrywide Home Loans 2005-09 2A1		2.819%	5/25/35		5,352,608		4,549,114
Downey Savings and Loan Association Mortgage Loan Trust 2005-AR6		2.849%	10/19/45		2,600,577		2,013,793
GMAC Mortgage Corp. Loan Trust 2004-AR2 3A		4.378%	8/19/34		38,510,283		38,999,499
Granite Mortgages PLC 2003-1		4.084%	1/20/20		433,075		430,905	A,J
Greenpoint Mortgage Funding Trust 2005-AR1		2.819%	6/25/45		8,472,691		6,351,716
Greenpoint Mortgage Funding Trust 2005-AR4		2.859%	10/25/35		1,854,471		1,355,096
Greenpoint Mortgage Funding Trust 2006-AR4		2.699%	9/25/46		33,413,653		28,461,593
Greenpoint Mortgage Funding Trust 2006-AR5		2.679%	10/25/46		37,756,021		32,948,638
GSMPS Mortgage Loan Trust 2005-RP2		2.949%	3/25/35		15,990,225		12,566,737	A
Harborview Mortgage Loan Trust 2005-7		5.922%	6/19/45		16,020,909		12,679,047
Harborview Mortgage Loan Trust 2006-14 2A1A		2.709%	3/19/38		809,295		613,015
Harborview Mortgage Loan Trust 2006-9 2A1A		2.769%	11/19/36		965,284		734,705
Harborview Mortgage Loan Trust 2007-7 2A1A		3.599%	11/25/47		59,050,021		44,287,515
Impac Secured Assets Corp. 2005-2		2.919%	3/25/36		1,541,719		1,097,365

50

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Mortgage-Backed Securities—Continued
Indexed Securities—Continued
IndyMac Inda Mortgage Loan Trust 2007-AR7 1A1		6.260%	11/25/37	$	8,476,937	$	8,078,118
IXIS Real Estate Capital Trust 2006-HE2 A1		2.659%	8/25/36		287,074		285,423
MASTR Adjustable Rate Mortgages Trust 2007-3 22A2		2.809%	5/25/47		34,908,000		22,317,089
Medallion Trust 2003-1G		2.789%	12/21/33		1,824,156		1,713,345
MLCC Mortgage Investors Inc. 2003-B		2.939%	4/25/28		2,133,594		1,903,253
Structured Adjustable Rate Mortgage Loan Trust 2005-19XS		2.919%	10/25/35		1,734,418		1,371,021
Structured Asset Mortgage Investments Inc. 2006-AR6		2.789%	7/25/36		17,381,680		11,735,850
Structured Asset Mortgage Investments Inc. 2006-AR7 A1A		2.809%	8/25/36		36,869,085		27,081,357
Thornburg Mortgage Securities Trust 2005-2 A2		2.829%	7/25/45		14,513,148		14,462,610
Thornburg Mortgage Securities Trust 2006-1		2.769%	1/25/36		43,437,175		42,644,590
Thornburg Mortgage Securities Trust 2006-3		2.704%	5/25/46		4,017,582		3,944,414
WaMu Alternative Mortgage Pass-Through Certificates 2007-OA4 A1A		5.282%	4/25/47		52,912,507		38,097,005
WaMu Mortgage Pass-Through Certificates, 2005-AR06 2A1A		2.829%	4/25/45		9,607,279		7,422,031
WaMu Mortgage Pass-Through Certificates, 2005-AR08 1A1A		2.869%	7/25/45		10,333,917		7,286,503
WaMu Mortgage Pass-Through Certificates, 2005-AR11		2.919%	8/25/45		25,661,982		19,906,510
WaMu Mortgage Pass-Through Certificates, 2005-AR13 A1A1		2.889%	10/25/45		15,363,588		12,248,089
WaMu Mortgage Pass-Through Certificates, 2005-AR13 B10		4.335%	10/25/45		3,860,895		849,397	A
WaMu Mortgage Pass-Through Certificates, 2005-AR17 A1A2		2.889%	12/25/45		9,589,687		7,424,464
WaMu Mortgage Pass-Through Certificates, 2005-AR19 A1A1		2.869%	12/25/45		19,274,536		15,335,773
WaMu Mortgage Pass-Through Certificates, 2005-AR19 A1A2		2.889%	12/25/45		18,702,379		14,774,477
Zuni Mortgage Loan Trust 2006-OA1		2.729%	8/25/36		20,854,028		19,770,878
							578,762,139

51

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Mortgage-Backed Securities—Continued
Stripped Securities	0.1%
Diversified REIT Trust 1999-1A		0.204%	3/18/11	$	42,293,170	$	463,110	A,G,K1
FFCA Secured Lending Corp. 1999-1A		1.421%	9/18/25		5,320,350		198,933	A,G,K1
GE Capital Commercial Mortgage Corp. 2005-C4		5.333%	11/10/45		7,110,000		7,141,386	K1
LB-UBS Commercial Mortgage Trust 2001-C3 X		0.936%	6/15/36		16,028,798		398,117	A,G,K1
Structured Mortgage Asset Residential Trust 1991-8		0.014%	1/25/23		586,469		1	G,K1
							8,201,547
Variable Rate SecuritiesH	3.5%
Banc of America Commercial Mortgage Inc. 2005-5 A4		5.115%	10/10/15		10,400,000		10,267,735
Citigroup Mortgage Loan Trust Inc. 2005-5 3A2A		5.628%	10/25/35		4,835,844		3,777,335
Credit Suisse Mortgage Capital Certificates 2006-C1 A4		5.555%	2/15/39		5,080,000		5,062,772
Credit Suisse Mortgage Capital Certificates A3-C2		5.659%	3/15/39		53,500,000		53,752,916
Greenwich Capital Commercial Funding Corp. 2006-GG7		5.913%	7/10/38		22,870,000		23,344,145
IndyMac INDX Mortgage Loan Trust 2005-AR15		5.099%	9/25/35		6,978,608		5,351,222
JP Morgan Chase Commercial Mortgage Securities Corp. 2005-CB13		5.294%	1/12/43		7,600,000		7,604,449
JP Morgan Chase Commercial Mortgage Securities Corp. 2007-CB20 A4		5.794%	2/12/51		40,800,000		40,424,566
MASTR Adjustable Rate Mortgages Trust 2004-15		6.946%	12/25/34		196,099		197,351
Merrill Lynch Mortgage Investors Inc. 1998-C1 A3		6.720%	11/15/26		2,800,000		2,898,502
Merrill Lynch Mortgage Trust 2005-CIP1 A4		5.047%	7/12/38		1,450,000		1,427,042
Merrill Lynch Mortgage Trust 2005-CKI1		5.244%	11/12/37		23,750,000		23,730,409
Morgan Stanley Mortgage Loan Trust 2005-3AR		5.338%	7/25/35		3,786,422		3,870,847
Thornburg Mortgage Securities Trust 2007-4 2A1		6.225%	9/25/37		26,537,504		24,683,931
Thornburg Mortgage Securities Trust 2007-4 3A1		6.220%	9/25/37		25,671,537		23,163,487

52

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Mortgage-Backed Securities—Continued
Variable Rate Securities—Continued
Wachovia Bank Commercial Mortgage Trust 2005-C20		5.118%	7/15/42	$	4,000,000	$	3,952,665
							233,509,374
Total Mortgage-Backed Securities (Cost—$1,368,227,647)							1,222,541,826
U.S. Government and Agency Obligations	6.6%
Fixed Rate Securities	2.6%
Fannie Mae		4.610%	10/10/13		30,420,000		30,435,545	B
Fannie Mae		6.000%	4/18/36		9,300,000		10,007,535	B
Federal Home Loan Bank		3.875%	8/22/08		5,460,000		5,490,822
Freddie Mac		5.250%	2/24/11		9,960,000		10,190,504	B
Freddie Mac		4.650%	10/10/13		34,390,000		34,405,097	B
Freddie Mac		5.450%	11/21/13		11,340,000		11,518,185
Freddie Mac		5.300%	5/12/20		53,095,000		54,182,333	B
Freddie Mac		5.625%	11/23/35		12,290,000		12,799,064
Tennessee Valley Authority		7.125%	5/1/30		2,450,000		3,198,938	B
United States Treasury Notes		3.750%	5/15/08		2,840,000		2,848,210	B
United States Treasury Notes		4.875%	6/30/12		120,000		132,234	B
							175,208,467
Treasury Inflation-Protected SecuritiesL	4.0%
United States Treasury Inflation-Protected Security		2.000%	1/15/14		673,892		729,909	B
United States Treasury Inflation-Protected Security		2.375%	1/15/17		6,331,446		7,066,489	B
United States Treasury Inflation-Protected Security		2.625%	7/15/17		2,331,884		2,657,254	B
United States Treasury Inflation-Protected Security		1.625%	1/15/18		20,148		21,157	B
United States Treasury Inflation-Protected Security		2.375%	1/15/25		40,485,821		44,050,476	B
United States Treasury Inflation-Protected Security		2.000%	1/15/26		71,806,675		74,028,230	B
United States Treasury Inflation-Protected Security		2.375%	1/15/27		74,020,360		80,797,812	B
United States Treasury Inflation-Protected Security		1.750%	1/15/28		13,549,530		13,432,029	B

53

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
U.S. Government and Agency Obligations—Continued
Treasury Inflation-Protected Securities—Continued
United States Treasury Inflation-Protected Security		3.625%	4/15/28	$	13,126,791	$	17,021,759	B
United States Treasury Inflation-Protected Security		3.875%	4/15/29		16,458,188		22,248,129	B
United States Treasury Inflation-Protected Security		3.375%	4/15/32		5,398,015		7,088,268	B
							269,141,512
Total U.S. Government and Agency Obligations (Cost—$410,563,245)							444,349,979
U.S. Government Agency Mortgage-Backed Securities	55.7%
Fixed Rate Securities	52.0%
Fannie Mae		7.000%	5/1/09 to 2/1/33		8,233,656		8,754,732
Fannie Mae		8.000%	5/1/15		7,158		7,570
Fannie Mae		5.500%	4/1/18 to 3/1/37		327,291,069		330,673,485
Fannie Mae		4.500%	7/1/18 to 9/1/35		11,383,341		11,107,324
Fannie Mae		4.000%	8/1/20 to 9/1/20		5,002,529		4,881,394
Fannie Mae		5.000%	8/1/20 to 11/1/36		817,766,021		812,494,596
Fannie Mae		7.500%	6/1/25 to 5/1/28		500,855		542,126
Fannie Mae		6.000%	1/1/26 to 9/1/37		510,137,045		523,169,713
Fannie Mae		6.500%	7/1/28 to 11/1/37		56,278,155		58,376,902
Fannie Mae		4.500%	12/1/38		188,000,000		181,243,656	M
Fannie Mae		5.000%	12/1/38		299,500,000		296,284,652	M
Fannie Mae		5.500%	12/1/38		430,900,000		434,939,687	M
Fannie Mae		6.000%	12/1/38		8,370,000		8,613,249	M
Freddie Mac		9.750%	7/1/08		260		262
Freddie Mac		6.000%	3/1/09 to 12/1/37		919,574		948,558
Freddie Mac		5.500%	12/1/13 to 8/1/35		31,886,250		32,273,818
Freddie Mac		9.300%	4/15/19		98,457		106,395
Freddie Mac		5.000%	9/1/20 to 4/1/38		654,445,471		649,228,863
Freddie Mac		7.000%	4/1/24 to 5/1/32		2,625,920		2,788,155
Freddie Mac		6.500%	6/1/32		42,657		44,532
Government National Mortgage Association		10.000%	11/15/09		129		136

54

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES			VALUE
U.S. Government Agency Mortgage-Backed Securities—Continued
Fixed Rate Securities—Continued
Government National Mortgage Association		8.000%	10/15/16 to 7/15/17	$	122,816		$	133,691
Government National Mortgage Association		7.500%	10/15/22 to 8/15/32		237,493			256,042
Government National Mortgage Association		7.000%	6/15/23 to 5/15/32		292,224	��		312,840
Government National Mortgage Association		6.500%	10/15/23 to 3/15/33		14,913,096			15,576,062
Government National Mortgage Association		6.000%	3/15/26 to 8/15/35		28,133,610			29,127,167
Government National Mortgage Association		5.500%	1/15/33		217,745			222,593
Government National Mortgage Association		5.000%	6/15/35 to 9/15/35		58,716,253			58,796,257
Government National Mortgage Association		5.000%	12/1/38		56,300,000			56,141,684	M
								3,517,046,141
Indexed SecuritiesD	3.7%
Fannie Mae		4.838%	6/1/35		9,646,784			9,709,803
Fannie Mae		4.561%	7/1/35		4,461,387			4,481,398
Fannie Mae		4.364%	8/1/35		990,517			998,453
Fannie Mae		4.650%	9/1/35		5,921,931			5,943,066
Fannie Mae		4.722%	9/1/35		2,316,296			2,324,851
Fannie Mae		4.943%	9/1/35		4,130,697			4,197,861
Fannie Mae		4.609%	10/1/35		1,972,212			1,981,403
Fannie Mae		4.682%	10/1/35		2,810,888			2,817,148
Fannie Mae		4.769%	10/1/35		2,092,091			2,102,603
Fannie Mae		4.892%	10/1/35		1,854,887			1,850,708
Fannie Mae		6.535%	10/1/35		16,541,423			17,012,388
Fannie Mae		6.505%	11/1/35		6,124,821			6,305,715
Fannie Mae		6.516%	11/1/35		5,612,503			5,772,031
Fannie Mae		6.519%	11/1/35		5,777,520			5,941,739
Fannie Mae		6.522%	11/1/35		6,333,904			6,514,089
Fannie Mae		6.540%	11/1/35		6,301,742			6,481,316
Fannie Mae		5.509%	2/1/37		59,728,718			60,678,632
Fannie Mae		5.638%	4/1/37		13,794,173			14,189,555
Freddie Mac		4.822%	10/1/35		3,495,695			3,487,687
Freddie Mac		5.889%	2/1/37		59,456,526			60,485,527

55

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
U.S. Government Agency Mortgage-Backed Securities—Continued
Indexed Securities—Continued
Freddie Mac		5.830%	8/1/37	$	21,614,330	$	21,854,186
Freddie Mac		6.084%	10/1/37		6,004,574		6,094,368
							251,224,527
Stripped Securities	N.M.
Fannie Mae		9.500%	2/1/17		11,482		2,349	G,K1
Fannie Mae		1,009.500%	2/25/20		1		18	G,K1
Fannie Mae		1,009.250%	8/25/21		331		6,229	G,K1
Fannie Mae		0.000%	5/25/22		75,564		71,682	E,G,K2
Financing Corp.		0.000%	4/5/19		1,150,000		712,993	E,G,K2
Freddie Mac		10.000%	3/1/21		65,396		14,751	G,K1
Freddie Mac		0.000%	7/15/22		11,839		10,941	E,G,K2
							818,963
Total U.S. Government Agency Mortgage-Backed Securities (Cost—$3,698,903,135)							3,769,089,631
Yankee BondsJ	5.7%
Aerospace and Defense	0.1%
Systems 2001 Asset Trust		6.664%	9/15/13		4,055,648		4,167,178	A
Commercial Banks	1.7%
Eksportfinans ASA		5.500%	5/25/16		10,700,000		11,727,778
Glitnir Banki Hf		6.330%	7/28/11		6,080,000		5,221,072	A
Glitnir Banki Hf		6.375%	9/25/12		8,920,000		7,610,928	A
Glitnir Banki Hf		6.693%	6/15/16		11,830,000		9,535,146	A,C
Glitnir Banki Hf		7.451%	9/14/49		1,600,000		1,297,760	A,C
HBOS Capital Funding LP		6.071%	6/30/49		3,105,000		2,727,168	A,C
HSBC Capital Funding LP		4.610%	6/27/49		1,630,000		1,436,724	A,C
Kaupthing Bank Hf		5.750%	10/4/11		2,960,000		2,362,781	A
Kaupthing Bank Hf		7.125%	5/19/16		30,520,000		20,593,797	A
Landsbanki Islands Hf		6.100%	8/25/11		17,170,000		15,000,639	A
Resona Preferred Global Securities		7.191%	12/29/49		13,670,000		11,938,394	A,C
Royal Bank of Scotland Group PLC		7.640%	3/31/49		3,700,000		3,186,403	C
Royal Bank of Scotland Group PLC		6.990%	10/29/49		5,720,000		4,855,708	A,C
RSHB Capital SA		6.299%	5/15/17		15,740,000		14,579,175	A
Shinsei Finance Cayman Ltd.		6.418%	1/29/49		11,080,000		7,343,957	A,C
							119,417,430

56

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Yankee Bonds—Continued
Diversified Financial Services	0.5%
Aiful Corp.		5.000%	8/10/10	$	4,030,000	$	3,800,617	A
MUFG Capital Finance 1 Ltd.		6.346%	7/29/49		4,660,000		3,797,429	C
SMFG Preferred Capital		6.078%	1/29/49		13,800,000		10,819,200	A,C
TNK-BP Finance SA		7.500%	7/18/16		9,940,000		9,231,775	A
TNK-BP Finance SA		7.500%	7/18/16		726,000		682,440	A
TNK-BP Finance SA		6.625%	3/20/17		318,000		275,070	A
TNK-BP Finance SA		6.625%	3/20/17		4,830,000		4,177,950	A
							32,784,481
Diversified Telecommunication Services	0.3%
British Telecommunications PLC		8.625%	12/15/10		1,755,000		1,930,086	F
Deutsche Telekom International Finance BV		5.750%	3/23/16		5,370,000		5,309,179
Koninklijke (Royal) KPN NV		8.000%	10/1/10		8,240,000		8,847,733
Telecom Italia Capital SpA		5.250%	11/15/13		965,000		901,686
Telecom Italia Capital SpA		4.950%	9/30/14		2,570,000		2,338,854
Telecom Italia Capital SpA		5.250%	10/1/15		2,060,000		1,871,525
							21,199,063
Electric Utilities	N.M.
Hydro-Quebec		6.300%	5/11/11		570,000		623,126
Foreign Governments	0.7%
Russian Federation		7.500%	3/31/30		18,523,890		21,330,259	A
United Mexican States		5.625%	1/15/17		160,000		168,160	B
United Mexican States		7.500%	4/8/33		302,000		366,175
United Mexican States		6.750%	9/27/34		25,404,000		28,338,162
							50,202,756
Gas Utilities	0.2%
Intergas Finance BV		6.375%	5/14/17		13,221,000		11,535,323	A
Intergas Finance BV		6.375%	5/14/17		1,220,000		1,070,550	A
							12,605,873
Industrial Conglomerates	1.0%
Tyco International Group SA		6.125%	11/1/08		820,000		826,133
Tyco International Group SA		6.125%	1/15/09		330,000		333,776
Tyco International Group SA		6.750%	2/15/11		26,549,000		27,975,982
Tyco International Group SA		6.375%	10/15/11		6,560,000		6,536,955
Tyco International Group SA		6.000%	11/15/13		2,950,000		2,962,290

57

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
Industrial Conglomerates—Continued
Tyco International Group SA		7.000%	6/15/28	$	3,380,000		$	3,245,706
Tyco International Group SA		6.875%	1/15/29		24,710,000			24,159,412
								66,040,254
Insurance	0.2%
Merna Reinsurance Ltd.		6.580%	7/7/10		13,500,000			12,316,050	A,D
Metals and Mining	0.3%
Corporacion Nacional del Cobre—Codelco		4.750%	10/15/14		1,750,000			1,745,113	A
Vale Overseas Ltd.		8.250%	1/17/34		330,000			368,497
Vale Overseas Ltd.		6.875%	11/21/36		20,252,000			19,760,180
								21,873,790
Oil, Gas and Consumable Fuels	0.6%
Anadarko Finance Co.		7.500%	5/1/31		730,000			821,320
Conoco Funding Co.		6.350%	10/15/11		400,000			435,813
Conoco Funding Co.		7.250%	10/15/31		350,000			408,204
Gazprom		6.212%	11/22/16		15,410,000			14,254,250	A
Gazprom		6.510%	3/7/22		12,230,000			10,899,987	A
Petrobras International Finance Co.		6.125%	10/6/16		10,020,000			9,991,944
Petrozuata Finance Inc.		8.220%	4/1/17		3,950,000			3,974,687	A
								40,786,205
Wireless Telecommunication Services	0.1%
America Movil SA de CV		5.625%	11/15/17		6,820,000			6,742,354
Total Yankee Bonds (Cost—$423,558,561)								388,758,560
Preferred Stocks	0.7%
Fannie Mae		7.000%			26,600	shs		1,198,662	D
Fannie Mae		8.250%			578,475			13,912,324	C
Fannie Mae		5.375%			44			2,942,500	I
Freddie Mac		8.375%			844,875			20,614,950	C
General Motors Corp.		5.250%			292,725			4,750,927	I
Home Ownership Funding Corp.		1.000%			5,575			992,002	A,G
Home Ownership Funding Corp. II		1.000%			5,000			889,687	A,G
Total Preferred Stocks (Cost—$55,550,837)								45,301,052
Total Long-Term Securities (Cost—$7,673,507,192)								7,442,895,329

58

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/SHARES			VALUE
Investment of Collateral From Securities Lending	8.5%
State Street Navigator Securities Lending Prime Portfolio					578,572,379shs		$	578,572,379
Total Investment of Collateral From Securities Lending (Cost—$578,572,379)								578,572,379
Short-Term Securities	6.8%
U.S. Government and Agency Obligations	5.7%
Fannie Mae		0.000%	12/15/08	$	62,800,000			61,908,868	E,N
United States Treasury Bill		0.000%	4/24/08		181,724,000			181,460,524	B,E
United States Treasury Bill		0.000%	9/11/08		145,000,000			144,034,880	B,E
								387,404,272
Yankee BondsJ	0.6%
Deutsche Bank AG		3.442%	11/26/08		38,100,000			38,082,474
Options PurchasedO	N.M.
Barclays Swaption Call, April 2008, Strike Price $3.00					114,900,000	P		390,660
Barclays Swaption Call, April 2008, Strike Price $3.00					35,000,000	P		119,000
Barclays Swaption Call, April 2008, Strike Price $3.00					35,000,000	P		119,000
Barclays Swaption Call, April 2008, Strike Price $3.00					73,100,000	P		248,540
Barclays Swaption Call, May 2008, Strike Price $3.35					27,500,000	P		368,500
Barclays Swaption Call, May 2008, Strike Price $3.45					22,500,000	P		351,000
JP Morgan Swaption Call, April 2008, Strike Price $3.00					35,000,000	P		119,000
Lehman Swaption Call, May 2008, Strike Price $4.20					9,600,000	P		344,640
U.S. Treasury Bond Futures Call, May 2008, Strike Price $120.00					101	P		186,219
U.S. Trerasury Note Futures Call, May 2008, Strike Price $145.00					1,975	P		30,859
								2,277,418

59

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Bond Portfolio—Continued

	% OF NET ASSETS	PAR/ SHARES		VALUE
Short-Term Securities—Continued
Repurchase Agreement	0.5%
Merrill Lynch Government Securities Inc. 2.25%, dated 3/31/08, to be repurchased at $34,456,153 on 4/1/08 (Collateral: $35,263,000 Federal Home Loan Bank, zero-coupon bond due 5/23/08, value $35,143,071)		$	34,454,000	$	34,454,000
Total Short-Term Securities (Cost—$466,212,630)					462,218,164
Total Investments (Cost—$8,718,292,201)Q	125.3%				8,483,685,872
Obligation to Return Collateral for Securities Loaned	(8.5)%				(578,572,379	)
Other Assets Less Liabilities	(16.8)%				(1,137,436,964	)
Net Assets	100.0%			$	6,767,676,529

	EXPIRATION	CONTRACTS	APPRECIATION/ (DEPRECIATION)
Futures Contracts PurchasedO
Eurodollar Futures	June 2008	6,270	$	14,573,765
Eurodollar Futures	September 2008	2,099		1,557,680
Eurodollar Futures	June 2009	1,505		(288,775	)
U.S. Treasury Bond Futures	June 2008	94		(26,985	)
U.S. Treasury Note Futures	June 2008	1,758		(70,095	)
			$	15,745,590
Futures Contracts WrittenO
Eurodollar Futures	December 2008	37		(19,997	)
Eurodollar Futures	March 2009	603		(854,753	)
Eurodollar Futures	September 2009	100		(115,500	)
U.S. Treasury Note Futures	June 2008	11,001		(19,242,918	)
U.S. Treasury Note Futures	June 2008	276		(423,227	)
			$	(20,656,395	)
Options WrittenO
Barclays Swaption Call, Strike Price $2.10	April 2008	40,200,000	$	200,960
Barclays Swaption Call, Strike Price $2.20	April 2008	20,300,000		102,495
Barclays Swaption Call, Strike Price $2.30	April 2008	35,300,000		183,560
Barclays Swaption Call, Strike Price $2.30	April 2008	18,500,000		85,100
Barclays Swaption Call, Strike Price $2.30	April 2008	35,100,000		171,990
Barclays Swaption Call, Strike Price $2.40	April 2008	17,000,000		68,000
Barclays Swaption Call, Strike Price $2.50	April 2008	16,900,000		84,500
Barclays Swaption Call, Strike Price $2.50	April 2008	21,400,000		98,440
Bear Stearns Swaption Call, Strike Price $2.50	April 2008	21,700,000		95,480
Bear Stearns Swaption Call, Strike Price $4.80	April 2008	25,130,000		(1,216,594	)

60

Annual Report to Shareholders

	EXPIRATION	CONTRACTS	APPRECIATION/ (DEPRECIATION)
Options Written—Continued
Bear Stearns Swaption Put, Strike Price $3.93	May 2008	72,500,000	$	624,298
Bear Stearns Swaption Put, Strike Price $5.30	April 2008	25,130,000		285,602
Eurodollar Futures Put, Strike Price $95.25	June 2008	1,000		201,250
Eurodollar Futures Put, Strike Price $96.125	June 2008	988		155,735
Eurodollar Futures Put, Strike Price $96.25	June 2008	574		287,705
Eurodollar Futures Put, Strike Price $96.75	June 2008	411		95,626
Eurodollar Futures Put, Strike Price $97.00	September 2008	302		49,527
Eurodollar Futures Put, Strike Price $97.25	June 2008	592		126,490
Eurodollar Futures Put, Strike Price $97.75	June 2008	1,559		(56,170	)
Eurodollar Futures Put, Strike Price $97.75	September 2008	2,358		29,422
Greenwich Swaption Call, Strike Price $4.85	April 2008	24,750,000		(1,304,597	)
Greenwich Swaption Call, Strike Price $5.16	November 2012	23,000,000		(113,735	)
Greenwich Swaption Put, Strike Price $5.16	November 2012	23,000,000		41,469
Greenwich Swaption Put, Strike Price $5.35	April 2008	24,750,000		284,476
JP Morgan Swaption Call, Strike Price $2.10	April 2008	20,300,000		83,210
JP Morgan Swaption Call, Strike Price $2.40	April 2008	63,200,000		322,320
JP Morgan Swaption Call, Strike Price $2.40	April 2008	17,600,000		89,760
JP Morgan Swaption Call, Strike Price $2.40	April 2008	17,500,000		70,000
JP Morgan Swaption Put, Strike Price $4.77	May 2008	44,700,000		600,455
Lehman Swaption Call, Strike Price $2.15	April 2008	40,400,000		201,960
Lehman Swaption Call, Strike Price $2.20	April 2008	20,000,000		81,980
Lehman Swaption Call, Strike Price $2.40	April 2008	34,300,000		174,930
Lehman Swaption Call, Strike Price $2.40	April 2008	16,700,000		85,587
Lehman Swaption Call, Strike Price $2.40	April 2008	15,900,000		63,600
U.S. Treasury Bond Futures Call, Strike Price $118.00	May 2008	611		(212,414	)
U.S. Treasury Bond Futures Put, Strike Price $110.00	May 2008	199		61,192
U.S. Treasury Bond Futures Put, Strike Price $115.00	May 2008	1,680		893,975
U.S. Treasury Bond Futures Put, Strike Price $115.00	May 2008	1,261		671,758
U.S. Treasury Bond Futures Put, Strike Price $117.00	May 2008	587		(223,154	)
U.S. Treasury Note Futures Call, Strike Price $117.00	May 2008	1,014		(1,827,773	)
U.S. Treasury Note Futures Call, Strike Price $118.00	May 2008	5,248		(5,394,974	)
U.S. Treasury Note Futures Call, Strike Price $123.00	May 2008	191		28,889
U.S. Treasury Note Futures Put, Strike Price $112.00	May 2008	396		245,520
U.S. Treasury Note Futures Put, Strike Price $112.50	May 2008	296		350,067
U.S. Treasury Note Futures Put, Strike Price $113.00	May 2008	2,760		2,408,309
U.S. Treasury Note Futures Put, Strike Price $113.00	May 2008	886		43,991
U.S. Treasury Note Futures Put, Strike Price $116.00	May 2008	508		633,882
U.S. Treasury Note Futures Put, Strike Price $117.00	May 2008	1,768		36,582
U.S. Treasury Note Futures Put, Strike Price $117.50	April 2008	1,542		245,509
USD Put, Strike Price $95.50	June 2008	1,194		267,718
			$	583,908

61

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Bond Portfolio—Continued

N.M. Not Meaningful.

^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 8.21% of net assets.

^B All or a portion of this security is on loan.

^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 according to the predetermined schedule.

^D 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, 2008.

^E 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.

^F Credit Linked Security – The rates of interest earned on these securities are tied to the credit rating assigned by Standard & Poor’s Rating Service and/or Moody’s Investors Services.

^G Illiquid security valued at fair value under procedures approved by the Board of Directors. At March 31, 2008, the market value for these securities was $22,850,377.

^H The coupon rates shown on variable rate securities are the rates at March 31, 2008. These rates vary with the weighted average coupon of the underlying loans.

^I Convertible Security – Security may be converted into the issuer’s common stock.

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

^K 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.

^L 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.

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

^N All or a portion of this security is collateral to cover futures and options contracts written.

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

^P Par represents actual number of contracts.

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

Gross unrealized appreciation	$	126,293,666
Gross unrealized depreciation		(362,052,573	)
Net unrealized depreciation	$	(235,758,907	)

See notes to financial statements.

62

Annual Report to Shareholders

Statement of Assets and Liabilities

Western Asset Core Bond Portfolio

March 31, 2008

Assets:
Investment securities at market value (Cost—$8,252,079,571)			$	8,021,467,708	A
Short-term securities at value (Cost—$466,212,630)				462,218,164
Receivable for securities sold				1,293,711,760
Receivable for fund shares sold				9,255,673
Interest receivable				70,627,656
Other assets				801,487
Total assets				9,858,082,448
Liabilities:
Payable for securities purchased	$	2,224,829,970
Obligation to return collateral for securities loaned		578,572,379
Swap contracts at value		231,988,634
Options written (Proceeds—$28,791,485)		28,207,578
Amounts payable for open swaps		10,677,944
Payable for fund shares repurchased		7,779,856
Income distribution payable		2,519,986
Futures variation margin payable		2,205,114
Accrued management fee		2,252,556
Accrued expenses		908,548
Accrued distribution fees		340,497
Cash overdraft		71,388
Other payable		51,469
Total liabilities				3,090,405,919
Net Assets			$	6,767,676,529
Net assets consist of:
Accumulated paid-in-capital			$	7,250,092,497
Undistributed net investment income				16,291,168
Accumulated net realized loss on investments, options, futures and swaps				(92,067,837	)
Net unrealized depreciation on investments, options, futures and swaps				(406,639,299	)
Net Assets			$	6,767,676,529
Net Asset Value Per Share:
Institutional Class (487,825,655 shares outstanding)				$10.54
Financial Intermediary Class (154,450,533 shares outstanding)				$10.54

^A The market value of securities on loan is $614,575,426.

See notes to financial statements.

63

Annual Report to Shareholders

Statement of Operations

Western Asset Core Bond Portfolio

For the Year Ended March 31, 2008

Investment Income:
Interest	$	393,569,154
Income from securities lending		2,103,127
Total income				$	395,672,281
Expenses:
Management fees		27,807,910
Distribution fee:
Financial Intermediary Class		3,882,741
Audit and legal fees		188,874
Custodian fees		621,548
Directors’ fees and expenses		188,556
Registration fees		100,282
Reports to shareholders		1,336,970
Transfer agent and shareholder servicing expense:
Institutional Class		52,088
Financial Intermediary Class		26,803
Other expenses		112,296
Total expenses					34,318,068
Net Investment Income					361,354,213
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) on:
Investments		39,732,323
Options		35,482,732
Futures		(236,297,498	)
Swaps		83,401,448
					(77,680,995	)
Change in unrealized appreciation/(depreciation) of investments, options, futures and swaps					(418,890,141	)
Net Realized and Unrealized Loss on Investments					(496,571,136	)
Change in Net Assets Resulting From Operations				$	(135,216,923	)

See notes to financial statements.

64

Annual Report to Shareholders

Statement of Changes in Net Assets

Western Asset Core Bond Portfolio

	FOR THE YEARS ENDED MARCH 31,
	2008			2007
Change in Net Assets:
Net investment income	$	361,354,213		$	259,135,907
Net realized gain/(loss)		(77,680,995	)		69,502,656
Change in unrealized appreciation/(depreciation)		(418,890,141	)		95,353,218
Change in net assets resulting from operations		(135,216,923	)		423,991,781
Distributions to shareholders from:
Net investment income:
Institutional Class		(279,146,241	)		(224,496,328	)
Financial Intermediary Class		(77,801,855	)		(45,594,813	)
Net realized gain on investments:
Institutional Class		(22,347,640	)		—
Financial Intermediary Class		(6,284,549	)		—
Change in net assets from fund share transactions:
Institutional Class		567,219,859			611,643,176
Financial Intermediary Class		343,480,947			1,008,162,458
Change in net assets		389,903,598			1,773,706,274
Net Assets:
Beginning of year	$	6,377,772,931		$	4,604,066,657
End of year	$	6,767,676,529		$	6,377,772,931
Undistributed net investment income	$	16,291,168		$	3,789,043

See notes to financial statements.

65

Annual Report to Shareholders

Financial Highlights

Western Asset Core Bond Portfolio

For a share of each class of capital stock outstanding:

Institutional Class:

	YEARS ENDED MARCH 31,
	2008			2007			2006			2005			2004
Net asset value, beginning of year	$	11.37		$	11.05		$	11.29		$	11.81		$	11.57
Investment operations:
Net investment income		.58	A		.55	A		.49	B		.39	B		.41	B
Net realized and unrealized gain/(loss)		(.78	)		.34			(.22	)		(.21	)		.45
Total from investment operations		(.20	)		.89			.27			.18			.86
Distributions from:
Net investment income		(.58	)		(.57	)		(.51	)		(.39	)		(.44	)
Net realized gain on investments		(.05	)		—			—	C		(.31	)		(.18	)
Total distributions		(.63	)		(.57	)		(.51	)		(.70	)		(.62	)
Net asset value, end of year	$	10.54		$	11.37		$	11.05		$	11.29		$	11.81
Total return		(1.88	)%		8.23	%		2.46	%		1.68	%		7.64	%
Ratios to Average Net Assets:D
Total expenses		.44	%		.47	%		.45	%		.46	%		.49	%
Expenses net of waivers, if any		.44	%		.47	%		.45	%		.46	%		.49	%
Expenses net of all reductions		.44	%		.47	%		.45	%		.46	%		.49	%
Net investment income		5.3	%		4.9	%		4.3	%		3.4	%		3.5	%
Supplemental Data:
Portfolio turnover rate		455.0	%		431.7	%		540.4	%		407.2	%		464.6	%
Net assets, end of year (in thousands)	$	5,140,277		$	4,975,052		$	4,243,248		$	3,277,782		$	2,187,219

^A Computed using average daily shares outstanding.

^B Computed using SEC method.

^C Amount less than $.01 per share.

^D 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.

66

Annual Report to Shareholders

Financial Highlights

Western Asset Core Bond Portfolio

For a share of each class of capital stock outstanding:

Financial Intermediary Class:

	YEARS ENDED MARCH 31,
	2008			2007			2006			2005			2004
Net asset value, beginning of year	$	11.37		$	11.05		$	11.29		$	11.81		$	11.57
Investment operations:
Net investment income		.56	A		.51	A		.47	B		.38	B		.40	B
Net realized and unrealized gain/(loss)		(.79	)		.35			(.22	)		(.23	)		.43
Total from investment operations		(.23	)		.86			.25			.15			.83
Distributions from:
Net investment income		(.55	)		(.54	)		(.49	)		(.36	)		(.41	)
Net realized gain on investments		(.05	)		—			—	C		(.31	)		(.18	)
Total distributions		(.60	)		(.54	)		(.49	)		(.67	)		(.59	)
Net asset value, end of year	$	10.54		$	11.37		$	11.05		$	11.29		$	11.81
Total return		(2.12	)%		7.95	%		2.19	%		1.42	%		7.36	%
Ratios to Average Net Assets:D
Total expenses		.69	%		.72	%		.70	%		.72	%		.76	%
Expenses net of waivers, if any		.69	%		.72	%		.70	%		.72	%		.75	%
Expenses net of all reductions		.69	%		.72	%		.70	%		.72	%		.75	%
Net investment income		5.1	%		4.6	%		4.1	%		4.2	%		3.3	%
Supplemental Data:
Portfolio turnover rate		455.0	%		431.7	%		540.4	%		407.2	%		464.6	%
Net assets, end of year (in thousands)	$	1,627,400		$	1,402,721		$	360,819		$	265,518		$	121,607

See notes to financial statements.

67

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 various periods ended March 31, 2008, are presented below:

	Three Months Ended 3/31/08		Average Annual Total Returns
		One Year	Three Years	Five Years	Since InceptionA
Western Asset Core Plus Bond Portfolio:
Institutional Class	-1.92%	-0.72%	+3.37%	+4.63%	+6.06%
Financial Intermediary Class	-1.87%	-0.97%	+3.15%	+4.38%	+5.24%
Lehman Aggregate Bond IndexB	+2.17%	+7.67%	+5.48%	+4.58%	+5.95%

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. Performance figures for periods shorter than one year represent cumulative figures and are not annualized.

The gross expense ratios for the Institutional and Financial Intermediary Classes were 0.44% and 0.69%, respectively. Gross expenses are the Fund’s total annual operating expenses for the share classes for the fiscal year ended March 31, 2007, as indicated in the Fund’s prospectus dated August 1, 2007 and do not reflect fee waivers or reimbursements. These expenses include management fees, 12b-1 distribution fees (if any) and other expenses.

The net expense ratios for the Institutional and Financial Intermediary Classes were 0.44%, and 0.69%, respectively. Net expenses are the Fund’s total annual operating expenses for the share classes for the fiscal year ended March 31, 2007, as indicated in the Fund’s prospectus dated August 1, 2007 and reflect contractual fee waivers and/or reimbursements. The Fund’s Manager has contractually agreed to waive fees and/or reimburse operating expenses (exclusive of taxes, interest, deferred organizational expenses, brokerage and extraordinary expenses) until August 1, 2008 to limit total annual operating expenses to 0.45% for the Institutional Class and 0.70% for the Financial Intermediary Class of the Fund’s average daily net assets attributable to each share class. The Fund’s Board of Directors has currently limited payments of 12b-1 fees under the Financial Intermediary Class’s Distribution Plan to 0.25% of average net assets. Pursuant to the Distribution Plan for Financial Intermediary Class shares, the Board of Directors may authorize payment of up to 0.40% of average net assets without shareholder approval.

^A The Fund’s Institutional Class inception date is July 8, 1998. The Financial Intermediary Class inception date is January 7, 2002. Since-inception index returns are for periods beginning June 30, 1998. Although it is not possible to invest directly in an index, it is possible to purchase investment vehicles designed to track the performance of certain indexes.

^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.

68

Annual Report to Shareholders

A year ago, the Federal Reserve Board’s (Fed)^C predominant concern was that strong growth and a high level of resource utilization would sustain inflationary pressures. The financial crisis that erupted a few months later has defined the fixed-income landscape ever since. The period ended with the Fed not only focused on averting recession but struggling to unclog credit markets. The Ted spread (TED) ^D, a measure of systemic risk, rose five-fold during the 12-month period ended March 31, 2008, to peak near 220 basis points (bps)^E in November, and had only moderated slightly by period-end. Growing expectations for easing over the first half of the period were finally validated by the Fed’s decision to cut the funds rate by a total of 300 bps, including a surprise 75 bps reduction at an unscheduled Federal Open Market Committee (FOMC) meeting in January. Additionally, the Fed, along with a number of government housing agencies, announced new lending facilities targeted directly at strained credit conditions, with a specific focus on the mortgage market. The yield on the two-year Treasury note declined 303 bps, driving a powerful rally in the Treasury market. All other risky asset classes suffered as a severe flight-to-safety forced spreads sharply higher. Home prices declined and the drag from the homebuilding sector alone detracted more than 1% from gross domestic product growth. Still, the economy continued to expand modestly thanks to a robust trade sector and a stubborn consumer. The price of oil breached the $100 per barrel threshold despite slower growth concerns. The U.S. dollar lost substantial value against a trade-weighted basket of currencies. Equity markets came under serious pressure in the final four months and finished marginally lower.

The impact of market conditions on the Fund’s performance was negative for the 12-month period ended March 31, 2008, with strategies producing negative results. The Fund’s Institutional Class’s total return of -0.72% underperformed the Lehman Aggregate Bond Index’s return of +7.67%. Overweight exposure to the mortgage-backed sector detracted significantly from returns as spreads widened and volatility increased. We had diversified into a number of select non-agency issues, which were particularly impacted and further negatively impacted performance. An emphasis on lower-quality credits was also a large negative as spreads trended higher in the wake of the subprime lending crisis, deteriorating liquidity conditions and slowing economic growth. A modest exposure to international bonds in other advanced economies had a negative impact as the flight-to-safety outside the U.S. has been minimal relative to U.S. Treasury markets. On the positive side, a tactically-driven duration posture contributed modestly to returns as bond yields rallied over the last 12 months. A curve-steepening strategy had a positive impact on performance as the spread between the two- and 10-year yields widened. Modest Treasury Inflation-Protected Securities (TIPS) exposure had a positive impact following a commodity-driven rise in headline inflation.

Western Asset Management Company

April 21, 2008

Investment Risks: Bonds are subject to a variety of risks, including interest rate, credit and inflation risk. As interest rates rise, bond prices fall, reducing the value of a fund’s share price. Foreign securities are subject to certain risks of overseas investing, including currency fluctuations and changes in political and economic conditions. These risks are magnified in emerging markets. The Fund may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance.

^C Federal Reserve Board (Fed) – is charged with, among other things, managing the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.

^D Ted Spread (Ted) – The price difference between three-month futures contracts for U.S. Treasuries and three-month contracts for euros having identical expiration months.

^E 100 basis points (bps) = 1%

69

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, distribution (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, 2007, and held through March 31, 2008.

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 value 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 if your shares were held for the 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 that appear in the shareholder reports of other funds.

	Beginning Account Value 10/1/07		Ending Account Value 3/31/08		Expenses PaidA During the Period 10/01/07 to 03/31/08
Core Plus Bond Portfolio:
Institutional Class
Actual	$	1,000.00	$	986.40	$	2.14
Hypothetical (5% return before expenses)		1,000.00		1,022.84		2.18
Financial Intermediary Class
Actual	$	1,000.00	$	985.20	$	3.38
Hypothetical (5% return before expenses)		1,000.00		1,021.59		3.45

^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 ratios of 0.43% and 0.68% for the Institutional Class and Financial Intermediary Class, respectively, multiplied by the average values over the period, multiplied by the number of days in the most recent fiscal half-year (183), and divided by 366.

70

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 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 graphs and tables 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. investment are subject to currency fluctuations, social, economical 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 Since-inception index returns are for periods beginning June 30, 1998.

71

Annual Report to Shareholders

Performance Information—Continued

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.

^B Since-inception index returns are for periods beginning December 31, 2001.

72

Annual Report to Shareholders

Portfolio Composition (as of March 31, 2008)^C

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

Maturity Schedule (as a percentage of the portfolio)

^C The pie charts above represent the composition of the Fund’s Portfolio as of March 31, 2008 and do not include derivatives such as Futures Contracts, Options Written, and Swaps. The Fund is actively managed. As a result, the composition of the portfolio holdings and sectors are subject to change at any time.

^D Source: Standard & Poor's.

^E Preferred stocks and warrants do not have a defined maturity date.

73

Annual Report to Shareholders

Portfolio of Investments

Western Asset Core Plus Bond Portfolio

March 31, 2008

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†			VALUE
Long-Term Securities	100.9%
Corporate Bonds and Notes	17.1%
Aerospace and Defense	N.M.
DRS Technologies Inc.		6.625%	2/1/16	$	10,000		$	9,775
L-3 Communications Corp.		7.625%	6/15/12		852,000			872,235
								882,010
Airlines	0.6%
Continental Airlines Inc.		6.545%	8/2/20		7,674,956			7,382,386
Continental Airlines Inc.		5.983%	4/19/22		8,300,000			7,394,553
DAE Aviation Holdings Inc.		11.250%	8/1/15		1,950,000			1,920,750	A
Delta Air Lines Inc.		6.619%	3/18/11		3,093,046			3,031,186
Delta Air Lines Inc.		7.570%	5/18/12		11,375,000			11,339,510
Delta Air Lines Inc.		6.821%	8/10/22		14,463,199			13,865,869	A
Northwest Airlines Corp.		7.575%	3/1/19		11,988,854			11,846,187
Northwest Airlines Inc.		3.642%	8/6/13		1,199,998			1,091,969	B
Southwest Airlines Co.		5.125%	3/1/17		5,320,000			4,963,384	C
United Air Lines Inc.		7.032%	4/1/12		491,692			486,775
United Air Lines Inc.		7.186%	10/1/12		14,840,010			14,691,610
United Air Lines Inc.		6.602%	3/1/15		3,470,154			3,456,097
								81,470,276
Auto Components	N.M.
Visteon Corp.		8.250%	8/1/10		2,050,000			1,675,875	C
Automobiles	0.5%
DaimlerChrysler NA Holding Corp.		4.050%	6/4/08		610,000			610,225
DaimlerChrysler NA Holding Corp.		7.200%	9/1/09		620,000			641,315
DaimlerChrysler NA Holding Corp.		5.875%	3/15/11		500,000			511,123
DaimlerChrysler NA Holding Corp.		7.300%	1/15/12		3,315,000			3,539,389
DaimlerChrysler NA Holding Corp.		6.500%	11/15/13		1,390,000			1,465,182
Ford Motor Co.		7.450%	7/16/31		30,335,000			20,021,100	C
Ford Motor Co.		4.250%	12/15/36		175,000			150,063	D
General Motors Corp.		8.250%	7/15/23		8,240,000			5,768,000	C
General Motors Corp.		8.375%	7/5/33		9,520,000	EUR		10,073,724
General Motors Corp.		8.375%	7/15/33		46,230,000			32,592,150	C
								75,372,271
Building Products	0.1%
Masco Corp.		7.125%	8/15/13		5,830,000			5,872,786
Masco Corp.		6.125%	10/3/16		8,270,000			7,289,749	C
								13,162,535

74

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Corporate Bonds and Notes—Continued
Capital Markets	0.9%
Goldman Sachs Capital II		5.793%	12/29/49	$	1,790,000	$	1,192,319	E
Goldman Sachs Group LP		4.500%	6/15/10		1,450,000		1,460,988
Lehman Brothers Holdings Capital Trust VII		5.857%	11/29/49		5,530,000		3,497,725	E
Lehman Brothers Holdings Inc.		5.250%	2/6/12		1,690,000		1,630,742
Lehman Brothers Holdings Inc.		5.625%	1/24/13		5,280,000		5,134,087
Lehman Brothers Holdings Inc.		6.200%	9/26/14		8,690,000		8,571,156
Merrill Lynch and Co. Inc.		3.125%	7/15/08		3,115,000		3,096,513
Merrill Lynch and Co. Inc.		3.168%	8/22/08		42,800,000		42,683,841	B,C
Merrill Lynch and Co. Inc.		6.375%	10/15/08		2,670,000		2,694,770
Morgan Stanley		3.625%	4/1/08		120,000		120,000
Morgan Stanley		5.625%	1/9/12		110,000		110,822
Morgan Stanley		4.750%	4/1/14		8,460,000		7,853,266	C
Morgan Stanley		4.401%	10/18/16		7,290,000		6,565,607	B,C
The Bear Stearns Cos. Inc.		5.550%	1/22/17		60,000		53,570	C
The Bear Stearns Cos. Inc.		7.250%	2/1/18		39,400,000		40,715,605
The Goldman Sachs Group Inc.		6.600%	1/15/12		2,810,000		2,971,035
The Goldman Sachs Group Inc.		5.625%	1/15/17		1,420,000		1,362,242
							129,714,288
Chemicals	N.M.
Georgia Gulf Corp.		9.500%	10/15/14		3,750,000		2,896,875	C
Westlake Chemical Corp.		6.625%	1/15/16		1,265,000		1,106,875
							4,003,750
Commercial Banks	0.2%
Bank One Corp.		7.875%	8/1/10		150,000		160,292
Bank One Corp.		5.900%	11/15/11		2,000,000		2,121,840	C
HBOS Treasury Services PLC		5.250%	2/21/17		4,570,000		4,850,653	A
HSBC Bank PLC		7.000%	11/1/11		2,629,429		2,796,871
HSBC Bank USA		7.000%	11/1/11		2,212,272		2,389,613	A,F
HSBC Bank USA		7.000%	11/1/11		2,129,069		2,296,290	A,F
Rabobank Capital Funding Trust II		5.260%	12/31/49		590,000		506,497	A,E
Rabobank Capital Funding Trust III		5.254%	12/31/49		4,140,000		3,438,577	A,E
SunTrust Capital VIII		6.100%	12/15/36		2,660,000		2,106,188	C,E
Wachovia Capital Trust III		5.800%	3/15/42		9,480,000		6,754,500	E
Wachovia Corp.		5.250%	8/1/14		210,000		207,424
Wells Fargo and Co.		5.000%	11/15/14		130,000		130,600	C
Wells Fargo Capital X		5.950%	12/15/36		6,895,000		6,212,319	C,E
							33,971,664

75

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Corporate Bonds and Notes—Continued
Commercial Services and Supplies	0.3%
PHH Corp.		7.125%	3/1/13	$	8,640,000	$	8,230,352
Rental Service Corp.		9.500%	12/1/14		1,900,000		1,586,500
Waste Management Inc.		6.500%	11/15/08		4,340,000		4,426,310
Waste Management Inc.		6.875%	5/15/09		8,000,000		8,207,024
Waste Management Inc.		7.375%	8/1/10		6,055,000		6,378,961
Waste Management Inc.		6.375%	11/15/12		1,770,000		1,838,095
Waste Management Inc.		5.000%	3/15/14		6,938,000		6,809,765
Waste Management Inc.		7.125%	12/15/17		500,000		555,228
Waste Management Inc.		7.750%	5/15/32		90,000		99,143
							38,131,378
Communications Equipment	0.1%
Motorola Inc.		8.000%	11/1/11		10,850,000		11,027,289
Computers and Peripherals	N.M.
International Business Machines Corp.		4.750%	11/29/12		40,000		41,398
Consumer Finance	2.0%
American Express Co.		6.800%	9/1/66		10,175,000		9,566,840	C,E
American General Finance Corp.		4.988%	6/27/08		18,300,000		18,199,259	B
American General Finance Corp.		6.900%	12/15/17		8,600,000		8,404,556
Ford Motor Credit Co.		5.800%	1/12/09		4,180,000		3,982,227
Ford Motor Credit Co.		7.875%	6/15/10		3,560,000		3,104,096
Ford Motor Credit Co.		8.050%	6/15/11		5,724,000		4,543,654	B,C
Ford Motor Credit Co.		7.800%	6/1/12		19,090,000		15,746,845
Ford Motor Credit Co.		8.000%	12/15/16		22,000,000		17,221,710
GMAC LLC		5.125%	5/9/08		345,000		342,976
GMAC LLC		6.625%	5/15/12		280,000		211,815
GMAC LLC		8.000%	11/1/31		165,360,000		118,512,189	C
SLM Corp.		2.935%	5/12/08		40,000,000		39,927,880	A,B
SLM Corp.		5.210%	4/1/09		11,220,000		10,715,100	B
SLM Corp.		5.000%	10/1/13		17,665,000		13,296,463
SLM Corp.		5.375%	5/15/14		25,005,000		18,765,502
SLM Corp.		5.050%	11/14/14		4,690,000		3,410,924
SLM Corp.		5.000%	4/15/15		740,000		527,266
SLM Corp.		5.625%	8/1/33		4,160,000		2,836,371
							289,315,673

76

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†			VALUE
Corporate Bonds and Notes—Continued
Diversified Consumer Services	N.M.
Service Corp. International		6.750%	4/1/16	$	1,530,000		$	1,480,275
Service Corp. International		7.625%	10/1/18		400,000			402,000
Service Corp. International		7.500%	4/1/27		5,385,000			4,577,250
								6,459,525
Diversified Financial Services	3.1%
AAC Group Holding Corp.		0.000%	10/1/12		770,000			623,700	C,E
Air 2 US		8.027%	10/1/19		14,677,560			13,356,580	A
American Honda Finance Corp.		3.168%	5/12/08		28,000,000			28,004,620	A,B
BAC Capital Trust XIV		5.630%	12/31/49		2,230,000			1,630,565	E
Banca Italease SpA		4.574%	2/2/10		49,100,000	EUR		66,495,755	B
Bank of America Corp.		3.135%	7/25/08		75,000,000			74,941,275	B
Bank of America Corp.		5.420%	3/15/17		2,030,000			2,013,551
Citigroup Inc.		5.000%	9/15/14		150,000			141,364
Citigroup Inc.		6.125%	8/25/36		1,560,000			1,370,053
Citigroup Inc.		5.875%	5/29/37		6,040,000			5,246,006
Citigroup Inc.		6.875%	3/5/38		36,010,000			35,984,541
DI Finance LLC		9.500%	2/15/13		1,004,000			1,026,590
Dryden Investor Trust		7.157%	7/23/08		382,799			385,226	A
General Electric Capital Corp.		5.450%	1/15/13		1,155,000			1,209,733
General Electric Capital Corp.		6.375%	11/15/67		46,985,000			45,975,715	E
HSBC Finance Corp.		6.400%	6/17/08		20,000			20,090
HSBC Finance Corp.		6.500%	11/15/08		40,000			40,477
HSBC Finance Corp.		8.000%	7/15/10		70,000			73,870
HSBC Finance Corp.		6.375%	8/1/10		1,000,000			1,023,607
HSBC Finance Corp.		7.000%	5/15/12		160,000			165,954
HSBC Finance Corp.		6.375%	11/27/12		520,000			526,668
ILFC E-Capital Trust II		6.250%	12/21/65		7,220,000			6,452,009	A,E
JPMorgan Chase and Co.		5.750%	1/2/13		4,430,000			4,627,879
JPMorgan Chase and Co.		5.125%	9/15/14		200,000			197,610
JPMorgan Chase and Co.		5.150%	10/1/15		110,000			108,051
Kaupthing Bank Hf		7.625%	2/28/15		80,340,000			75,624,042	A,G
LVB Acquisition Merger Sub Inc.		10.375%	10/15/17		1,800,000			1,867,500	A,H
Mizuho Preferred Capital Co. LLC		8.790%	12/29/49		3,380,000			3,396,663	A,E
SB Treasury Co. LLC		9.400%	12/29/49		360,000			364,698	A,E
Sigma Finance Inc.		8.500%	8/11/16		29,650,000			27,817,630	A,F
Sigma Finance Inc.		8.000%	6/22/17		37,320,000			25,004,400	A,F
TNK-BP Finance SA		7.875%	3/13/18		13,000,000			12,008,750	A
Unilever Capital Corp.		7.125%	11/1/10		1,450,000			1,589,847
								439,315,019

77

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Corporate Bonds and Notes—Continued
Diversified Telecommunication Services	0.4%
AT&T Inc.		5.100%	9/15/14	$	8,640,000	$	8,583,581
BellSouth Corp.		4.750%	11/15/12		640,000		641,862
BellSouth Corp.		5.200%	9/15/14		8,250,000		8,236,346
CenturyTel Inc.		6.000%	4/1/17		8,270,000		7,948,198
Citizens Communications Co.		9.250%	5/15/11		530,000		548,550
Citizens Communications Co.		7.875%	1/15/27		5,290,000		4,536,175
Intelsat Corp.		9.000%	6/15/16		1,690,000		1,702,675
Level 3 Financing Inc.		9.250%	11/1/14		4,695,000		3,838,163
Qwest Communications International Inc.		6.565%	2/15/09		10,000		9,900	B
Qwest Communications International Inc.		7.500%	2/15/14		6,774,000		6,367,560	C
Qwest Corp.		7.500%	10/1/14		2,680,000		2,613,000
Qwest Corp.		6.875%	9/15/33		5,600,000		4,480,000
Verizon Global Funding Corp.		7.375%	9/1/12		45,000		49,427
Verizon New York Inc.		6.875%	4/1/12		3,942,000		4,145,813	C
Windstream Corp.		8.625%	8/1/16		10,100,000		9,923,250
							63,624,500
Electric Utilities	1.3%
Duke Energy Corp.		5.625%	11/30/12		790,000		839,949	C
Energy Future Holdings Corp.		10.875%	11/1/17		1,051,000		1,061,510	A
Energy Future Holdings Corp.		11.250%	11/1/17		142,119,000		140,697,810	A,H
Exelon Corp.		5.625%	6/15/35		255,000		224,236
FirstEnergy Corp.		6.450%	11/15/11		3,000,000		3,140,274
FirstEnergy Corp.		7.375%	11/15/31		20,130,000		21,897,434
Niagara Mohawk Power Corp.		7.750%	10/1/08		500,000		508,776
Pacific Gas and Electric Co.		6.050%	3/1/34		4,990,000		4,891,862
Pacific Gas and Electric Co.		5.800%	3/1/37		11,750,000		11,116,393	C
Progress Energy Inc.		7.100%	3/1/11		52,000		55,974
The Cleveland Electric Illuminating Co.		5.700%	4/1/17		1,080,000		1,048,249
The Detroit Edison Co.		5.200%	10/15/12		10,000		10,385
							185,492,852
Energy Equipment and Services	0.1%
Complete Production Services Inc.		8.000%	12/15/16		5,355,000		5,140,800
Pacific Energy Partners		7.125%	6/15/14		630,000		667,170
Pride International Inc.		7.375%	7/15/14		1,440,000		1,497,600
							7,305,570
Food and Staples Retailing	0.3%
CVS Caremark Corp.		6.943%	1/10/30		3,260,566		3,447,559	A
CVS Corp.		5.298%	1/11/27		599,097		571,755	A
CVS Lease Pass-Through Trust		5.880%	1/10/28		5,783,185		5,320,530	A

78

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Corporate Bonds and Notes—Continued
Food and Staples Retailing—Continued
CVS Lease Pass-Through Trust		6.036%	12/10/28	$	19,895,428	$	18,953,380	A
The Kroger Co.		6.400%	8/15/17		1,270,000		1,340,325
The Kroger Co.		6.150%	1/15/20		1,830,000		1,879,220
Wal-Mart Stores Inc.		5.800%	2/15/18		4,350,000		4,558,913
							36,071,682
Food Products	0.2%
General Mills Inc.		5.700%	2/15/17		7,210,000		7,269,324
H.J. Heinz Co.		6.428%	12/1/08		11,660,000		11,857,287	A
Sara Lee Corp.		6.250%	9/15/11		9,750,000		10,329,345
							29,455,956
Gas Utilities	0.1%
Southern Natural Gas Co.		5.900%	4/1/17		20,000		19,551	A
Southern Natural Gas Co.		8.000%	3/1/32		9,410,000		10,281,328
Suburban Propane Partners LP		6.875%	12/15/13		2,000,000		1,950,000
							12,250,879
Health Care Equipment and Supplies	N.M.
Fresenius Medical Care Capital Trust IV		7.875%	6/15/11		681,000		706,538
Health Care Providers and Services	0.7%
AmerisourceBergen Corp.		5.625%	9/15/12		6,330,000		6,545,030
AmerisourceBergen Corp.		5.875%	9/15/15		7,070,000		6,942,514
Cardinal Health Inc.		5.800%	10/15/16		6,260,000		6,289,090
Community Health Systems Inc.		8.875%	7/15/15		7,910,000		7,939,662
DaVita Inc.		6.625%	3/15/13		4,435,000		4,301,950
HCA Inc.		8.750%	9/1/10		256,000		256,000
HCA Inc.		6.250%	2/15/13		1,243,000		1,081,410
HCA Inc.		5.750%	3/15/14		86,000		70,950	C
HCA Inc.		9.125%	11/15/14		1,280,000		1,318,400
HCA Inc.		6.500%	2/15/16		379,000		319,308
HCA Inc.		9.250%	11/15/16		10,500,000		10,893,750
HCA Inc.		9.625%	11/15/16		9,809,000		10,176,837	H
HCA Inc.		7.690%	6/15/25		723,000		573,011
HCA Inc.		7.500%	11/6/33		14,640,000		11,309,400
Tenet Healthcare Corp.		6.375%	12/1/11		2,500,000		2,256,250
Tenet Healthcare Corp.		7.375%	2/1/13		6,222,000		5,553,135
Tenet Healthcare Corp.		9.875%	7/1/14		2,668,000		2,581,290	C
Tenet Healthcare Corp.		9.250%	2/1/15		12,430,000		11,622,050	C
WellPoint Inc.		5.875%	6/15/17		2,780,000		2,720,875
							92,750,912

79

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Corporate Bonds and Notes—Continued
Hotels, Restaurants and Leisure	0.2%
Boyd Gaming Corp.		6.750%	4/15/14	$	10,000	$	8,200
Boyd Gaming Corp.		7.125%	2/1/16		20,000		16,100
Inn of the Mountain Gods Resort and Casino		12.000%	11/15/10		1,070,000		1,037,900	C
Mandalay Resort Group		9.500%	8/1/08		80,000		80,000
Marriott International Inc.		5.810%	11/10/15		7,950,000		7,490,299
MGM MIRAGE		6.750%	9/1/12		435,000		403,463
MGM MIRAGE		6.625%	7/15/15		380,000		330,600
MGM MIRAGE		7.500%	6/1/16		4,000,000		3,600,000
MGM MIRAGE		7.625%	1/15/17		4,670,000		4,249,700	C
Mohegan Tribal Gaming Authority		8.000%	4/1/12		245,000		224,175	C
River Rock Entertainment Authority		9.750%	11/1/11		220,000		218,900
Starwood Hotels and Resorts Worldwide Inc.		7.875%	5/1/12		5,350,000		5,586,491
Station Casinos Inc.		7.750%	8/15/16		9,760,000		7,856,800	C
							31,102,628
Household Durables	N.M.
Pulte Homes Inc.		8.125%	3/1/11		6,890,000		6,683,300	C
Household Products	N.M.
American Achievement Corp.		8.250%	4/1/12		250,000		223,125
Procter and Gamble Co.		8.500%	8/10/09		90,000		96,912
							320,037
Independent Power Producers and Energy Traders	1.1%
Dynegy Holdings Inc.		7.750%	6/1/19		9,730,000		9,097,550
NRG Energy Inc.		7.250%	2/1/14		3,130,000		3,090,875
NRG Energy Inc.		7.375%	2/1/16		6,791,000		6,655,180
NRG Energy Inc.		7.375%	1/15/17		595,000		578,637
The AES Corp.		8.750%	5/15/13		11,741,000		12,210,640	A
The AES Corp.		7.750%	3/1/14		33,375,000		33,583,594	C
The AES Corp.		7.750%	10/15/15		8,070,000		8,130,525	C
The AES Corp.		8.000%	10/15/17		51,840,000		52,488,000
TXU Corp.		5.550%	11/15/14		1,560,000		1,218,112
TXU Corp.		6.500%	11/15/24		2,850,000		2,023,722
TXU Corp.		6.550%	11/15/34		33,925,000		23,950,304	C
							153,027,139

80

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Corporate Bonds and Notes—Continued
Industrial Conglomerates	0.1%
General Electric Co.		5.000%	2/1/13	$	7,055,000	$	7,307,731
Insurance	0.2%
American International Group Inc.		5.850%	1/16/18		5,090,000		4,995,026
ASIF Global Financing XIX		4.900%	1/17/13		2,180,000		2,146,999	A
Marsh and McLennan Cos. Inc.		5.150%	9/15/10		5,990,000		5,976,217
MetLife Capital Trust IV		7.875%	12/15/37		13,000,000		11,821,030	A,E
MetLife Inc.		6.400%	12/15/66		2,280,000		1,811,779	C,E
The Travelers Cos. Inc.		6.250%	3/15/67		2,450,000		2,160,959	E
							28,912,010
Internet and Catalog Retail	0.1%
Amazon.com Inc.		4.750%	2/1/09		14,210,000		14,956,025	C,D
IT Services	0.2%
Electronic Data Systems Corp.		7.125%	10/15/09		21,645,000		22,076,039
SunGard Data Systems Inc.		9.125%	8/15/13		1,650,000		1,666,500
							23,742,539
Leisure Equipment and Products	0.2%
Eastman Kodak Co.		7.250%	11/15/13		21,264,000		20,307,120
Eastman Kodak Co.		3.375%	10/15/33		13,820,000		13,388,125	D
							33,695,245
Machinery	N.M.
Terex Corp.		8.000%	11/15/17		2,680,000		2,653,200
Media	0.8%
CBS Corp.		7.625%	1/15/16		5,500,000		5,873,593
Charter Communications Operating LLC		10.875%	9/15/14		3,640,000		3,585,400	A,C
Clear Channel Communications Inc.		4.250%	5/15/09		2,760,000		2,677,200
Clear Channel Communications Inc.		6.250%	3/15/11		6,600,000		5,824,500
Clear Channel Communications Inc.		5.500%	9/15/14		8,120,000		5,846,400
Comcast Cable Communications Inc.		6.750%	1/30/11		210,000		218,329
Comcast Cable Communications Inc.		8.875%	5/1/17		40,000		45,754
Comcast Corp.		6.500%	1/15/15		3,760,000		3,850,462	C
Comcast Corp.		6.500%	1/15/17		2,940,000		3,002,681
Comcast Corp.		5.875%	2/15/18		10,000		9,740
Comcast Corp.		6.950%	8/15/37		7,470,000		7,484,977
Comcast MO of Delaware Inc.		9.000%	9/1/08		1,060,000		1,076,883
Cox Communications Inc.		7.875%	8/15/09		7,680,000		8,038,095	C

81

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Corporate Bonds and Notes—Continued
Media—Continued
CSC Holdings Inc.		6.750%	4/15/12	$	500,000	$	482,500	C
CSC Holdings Inc.		7.875%	2/15/18		260,000		240,500
CSC Holdings Inc.		7.625%	7/15/18		568,000		518,300
DirecTV Holdings LLC		8.375%	3/15/13		2,531,000		2,565,801
EchoStar DBS Corp.		7.000%	10/1/13		6,340,000		5,975,450
EchoStar DBS Corp.		6.625%	10/1/14		1,185,000		1,078,350
EchoStar DBS Corp.		7.125%	2/1/16		20,000		18,650
Gannett Co. Inc.		6.375%	4/1/12		4,560,000		4,706,276	C
Idearc Inc.		8.000%	11/15/16		8,250,000		5,341,875
Lamar Media Corp.		7.250%	1/1/13		314,000		298,300
Lamar Media Corp.		6.625%	8/15/15		2,010,000		1,768,800
Liberty Media LLC		5.700%	5/15/13		535,000		468,416	C
Liberty Media LLC		3.750%	2/15/30		170,000		83,300	D
News America Inc.		6.200%	12/15/34		240,000		228,572
News America Inc.		6.650%	11/15/37		1,320,000		1,331,205	A
News America Inc.		6.750%	1/9/38		200,000		209,344
R.H. Donnelley Corp.		8.875%	10/15/17		2,000,000		1,250,000	A
Time Warner Entertainment Co. LP		8.375%	7/15/33		20,000		22,504
Time Warner Inc.		6.875%	5/1/12		5,950,000		6,142,405
Time Warner Inc.		7.625%	4/15/31		440,000		460,200
Time Warner Inc.		7.700%	5/1/32		5,554,000		5,847,290
Viacom Inc.		5.750%	4/30/11		14,870,000		15,028,366
Viacom Inc.		6.250%	4/30/16		6,600,000		6,424,638
							108,025,056
Metals and Mining	0.1%
Freeport-McMoRan Copper & Gold Inc.		8.375%	4/1/17		14,090,000		14,953,013
Steel Dynamics Inc.		6.750%	4/1/15		5,890,000		5,772,200
							20,725,213
Multi-Utilities	0.1%
Dominion Resources Inc.		5.125%	12/15/09		1,260,000		1,289,752
Dominion Resources Inc.		4.750%	12/15/10		1,010,000		1,033,670
Dominion Resources Inc.		5.700%	9/17/12		5,135,000		5,377,357
							7,700,779
Multiline Retail	0.1%
J.C. Penney Co. Inc.		7.400%	4/1/37		690,000		637,766
Target Corp.		4.000%	6/15/13		5,340,000		5,202,474	C
The Neiman-Marcus Group Inc.		10.375%	10/15/15		7,000,000		7,000,000	C
							12,840,240

82

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†			VALUE
Corporate Bonds and Notes—Continued
Office Electronics	N.M.
Xerox Corp.		6.750%	2/1/17	$	1,180,000		$	1,245,630
Oil, Gas and Consumable Fuels	1.8%
Anadarko Petroleum Corp.		3.200%	9/15/09		21,500,000			21,093,091	B
Anadarko Petroleum Corp.		6.450%	9/15/36		33,540,000			34,155,560
Chesapeake Energy Corp.		6.375%	6/15/15		1,205,000			1,168,850
Chesapeake Energy Corp.		6.250%	1/15/18		1,970,000			1,881,350
Conoco Inc.		6.950%	4/15/29		83,000			94,510	C
ConocoPhillips		8.750%	5/25/10		3,100,000			3,459,789
ConocoPhillips		5.900%	10/15/32		10,000			10,222
El Paso Corp.		7.000%	6/15/17		69,240,000			71,213,963
El Paso Corp.		7.800%	8/1/31		4,277,000			4,391,363
El Paso Corp.		7.750%	1/15/32		8,074,000			8,292,281
El Paso Natural Gas Co.		8.375%	6/15/32		2,520,000			2,861,939
Gazprom		6.950%	8/6/09		546,352,000	RUB		23,131,930
Gazprom		6.790%	10/29/09		71,970,000	RUB		3,034,107
Gazprom		7.000%	10/27/11		23,990,000	RUB		996,560
Hess Corp.		7.875%	10/1/29		5,290,000			6,277,860
Hess Corp.		7.300%	8/15/31		13,235,000			14,911,530
Kerr-McGee Corp.		6.875%	9/15/11		800,000			859,940
Kerr-McGee Corp.		6.950%	7/1/24		2,560,000			2,713,923
Kerr-McGee Corp.		7.875%	9/15/31		10,555,000			12,360,063
Kinder Morgan Energy Partners LP		6.300%	2/1/09		10,000			10,196
Kinder Morgan Energy Partners LP		6.750%	3/15/11		60,000			62,857
Kinder Morgan Energy Partners LP		7.125%	3/15/12		7,565,000			8,037,222
Kinder Morgan Energy Partners LP		5.000%	12/15/13		1,804,000			1,778,692
Kinder Morgan Energy Partners LP		6.000%	2/1/17		5,170,000			5,145,024
Kinder Morgan Energy Partners LP		6.950%	1/15/38		1,507,000			1,478,923
Peabody Energy Corp.		6.875%	3/15/13		1,085,000			1,101,275
Peabody Energy Corp.		5.875%	4/15/16		880,000			831,600
Pemex Project Funding Master Trust		4.100%	6/15/10		13,000			12,902	A,B
Pemex Project Funding Master Trust		3.676%	12/3/12		104,000			101,244	A,B
Pemex Project Funding Master Trust		6.625%	6/15/35		20,386,000			21,097,003	A,C
Pemex Project Funding Master Trust		6.625%	6/15/35		850,000			879,645	A
Seariver Maritime Inc.		0.000%	9/1/12		70,000			59,475	I
Texaco Capital Inc.		5.500%	1/15/09		1,600,000			1,625,174
The Williams Cos. Inc.		7.500%	1/15/31		990,000			1,032,075
The Williams Cos. Inc.		7.750%	6/15/31		530,000			563,125	C
XTO Energy Inc.		7.500%	4/15/12		971,000			1,075,448
								257,800,711

83

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Corporate Bonds and Notes—Continued
Paper and Forest Products	0.1%
Georgia-Pacific Corp.		8.125%	5/15/11	$	9,000	$	8,933
Weyerhaeuser Co.		6.750%	3/15/12		7,090,000		7,454,596
							7,463,529
Personal Products	N.M.
The Gillette Co.		2.500%	6/1/08		160,000		159,914
Pharmaceuticals	0.1%
Wyeth		5.950%	4/1/37		19,765,000		19,311,492
Real Estate Investment Trusts	0.1%
Health Care Property Investors Inc.		6.450%	6/25/12		6,240,000		6,086,689	C
Host Marriott LP		6.750%	6/1/16		2,065,000		1,930,775
Ventas Inc.		8.750%	5/1/09		770,000		781,550
Ventas Inc.		6.750%	6/1/10		800,000		801,000
Ventas Inc.		9.000%	5/1/12		440,000		463,100
Ventas Inc.		6.750%	4/1/17		850,000		830,875
							10,893,989
Real Estate Management and Development	N.M.
Forest City Enterprises Inc.		7.625%	6/1/15		360,000		342,000
Forest City Enterprises Inc.		6.500%	2/1/17		597,000		537,300
							879,300
Road and Rail	N.M.
Hertz Corp.		8.875%	1/1/14		3,285,000		3,112,537
Hertz Corp.		10.500%	1/1/16		1,780,000		1,666,525	C
Norfolk Southern Corp.		6.200%	4/15/09		20,000		20,585
							4,799,647
Semiconductors and Semiconductor Equipment	N.M.
Freescale Semiconductor Inc.		8.875%	12/15/14		10,000		7,825
Specialty Retail	0.3%
Autozone Inc.		6.950%	6/15/16		10,890,000		11,245,112
Home Depot Inc.		4.625%	8/15/10		2,720,000		2,723,182
Home Depot Inc.		5.250%	12/16/13		5,510,000		5,391,034
Home Depot Inc.		5.400%	3/1/16		8,230,000		7,735,747	C
Limited Brands Inc.		6.125%	12/1/12		16,900,000		15,890,580	C
							42,985,655

84

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Corporate Bonds and Notes—Continued
Textiles, Apparel and Luxury Goods	N.M.
Oxford Industries Inc.		8.875%	6/1/11	$	800,000	$	760,000
Thrifts and Mortgage Finance	0.3%
Countrywide Financial Corp.		3.196%	4/30/08		25,000,000		24,857,950	B
Countrywide Financial Corp.		2.874%	6/18/08		30,000		29,492	B
Countrywide Financial Corp.		4.786%	1/5/09		30,000		28,079	B
Residential Capital LLC		7.098%	4/17/09		2,650,000		1,510,500	B
Residential Capital LLC		6.178%	5/22/09		7,170,000		4,086,900	J
Residential Capital LLC		8.000%	2/22/11		11,835,000		5,799,150	J
Residential Capital LLC		8.500%	6/1/12		700,000		343,000	J
							36,655,071
Tobacco	0.1%
Philip Morris Capital Corp.		7.500%	7/16/09		190,000		192,755
Reynolds American Inc.		7.875%	5/15/09		730,000		746,425	C
Reynolds American Inc.		6.750%	6/15/17		8,430,000		8,526,633
							9,465,813
Wireless Telecommunication Services	0.2%
Nextel Communications Inc.		6.875%	10/31/13		60,000		47,400	C
Nextel Communications Inc.		5.950%	3/15/14		493,000		364,820
Nextel Communications Inc.		7.375%	8/1/15		1,980,000		1,524,600
Sprint Capital Corp.		6.125%	11/15/08		130,000		129,025
Sprint Capital Corp.		8.375%	3/15/12		17,025,000		15,748,125
Sprint Capital Corp.		6.900%	5/1/19		720,000		567,000
Sprint Capital Corp.		8.750%	3/15/32		3,385,000		2,860,325	C
							21,241,295
Total Corporate Bonds and Notes (Cost—$2,570,837,353)							2,417,562,853
Asset-Backed Securities	4.1%
Fixed Rate Securities	0.3%
Conseco Finance Securitizations Corp. 2000-4		8.310%	5/1/32		2,066,692		1,646,291
Contimortgage Home Equity Trust 1997-4 B1F		7.330%	10/15/28		1,220,513		618,009
Green Tree Financial Corp. 1992-2 B		9.150%	1/15/18		167,520		132,806
Green Tree Financial Corp. 1993-2		8.000%	7/15/18		488,031		487,623
Green Tree Financial Corp. 1996-5		8.100%	7/15/27		3,014,587		727,194

85

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Asset-Backed Securities—Continued
Fixed Rate Securities—Continued
Green Tree Home Improvement Loan Trust 1996-A		7.400%	2/15/26	$	285,545	$	254,160
Lehman ABS Manufactured Housing Contract 2001-B A3		4.350%	5/15/14		3,456,463		3,129,013
Lehman ABS Manufactured Housing Contract 2001-B A6		6.467%	8/15/28		2,350,335		2,302,943
Merrill Lynch Mortgage Investors Inc. 2005-SD1 A2		5.666%	5/25/46		1,543,762		1,512,320
Origen Manufactured Housing Contract Trust 2005-B		5.910%	1/15/37		4,797,000		4,659,490
Origen Manufactured Housing Contract Trust 2005-B		5.990%	1/15/37		1,500,000		1,397,595
Origen Manufactured Housing Contract Trust 2005-B		6.480%	1/15/37		2,100,000		1,951,647
Patrons’ Legacy 2003-IV		5.775%	12/23/63		8,900,000		7,759,910	A
Pegasus Aviation Lease Securitization 2000-1 A2		8.370%	3/25/30		4,475,000		2,240,165	A
Terwin Mortgage Trust 2006-10SL A1		4.750%	10/25/37		28,787,744		9,643,894
UCFC Home Equity Loan 1998-C		5.935%	1/15/30		7,916		6,811
Vanderbilt Mortgage Finance 1997-B 1B2		8.155%	10/7/26		206,788		212,557
Vanderbilt Mortgage Finance 1997-C		7.830%	8/8/27		382,615		392,561
WEF Issuer LLC 2006-A		5.190%	12/15/14		630,151		599,550	A
						��	39,674,539
Indexed SecuritiesB	3.7%
Ace Securities Corp. Home Equity Loan Trust 2006-SL3		3.235%	6/25/36		1,140,925		577,340
AFC Home Equity Loan Trust 2002-2		3.435%	6/25/30		469,053		318,798
Asset Backed Securities Corp. Home Equity Loan Trust 2001-HE3		3.358%	11/15/31		258,130		229,820
Bear Stearns Asset Backed Securities Inc. 2005-CL1		3.635%	9/25/34		10,096,497		9,088,637
Bear Stearns Asset Backed Securities Inc. 2006-1 A		3.415%	2/25/36		2,488,361		2,316,064
Bear Stearns Second Lien Trust 2007-SV1A A3		3.385%	12/25/36		2,911,540		2,038,078	A
CDC Mortgage Capital Trust 2002-HE1		3.745%	1/25/33		493,876		423,527
Countrywide Asset-Backed Certificates 2002-BC1		3.795%	4/25/32		158,326		142,426

86

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Asset-Backed Securities—Continued
Indexed Securities—Continued
Countrywide Asset-Backed Certificates 2003-1		3.815%	6/25/33	$	361,016	$	355,144
Countrywide Asset-Backed Certificates 2003-BC3		3.755%	9/25/33		637,078		620,910
Countrywide Asset-Backed Certificates 2006-SD4 A1		3.475%	12/25/36		251,447		187,051	A
Countrywide Home Equity Loan Trust 2002-F		3.168%	11/15/28		557,769		448,605
Countrywide Home Equity Loan Trust 2006-RES		3.078%	6/15/29		671,162		374,602	A
Credit-Based Asset Servicing and Securitization 2007-RP1 A		3.445%	5/25/46		41,901,840		41,456,385	A
EMC Mortgage Loan Trust 2002-B A1		3.785%	2/25/41		635,608		548,784	A
Fairbanks Capital Mortgage Loan Trust 1999-1 A		4.335%	5/25/28		971,185		953,750	A
Fleet Home Equity Loan Trust 2003-1		3.364%	1/20/33		4,031,820		3,363,908
GMAC Mortgage Corp. Loan Trust 2004-HE3 A2VN		3.375%	10/25/34		69,937,255		58,722,816
GMAC Mortgage Corp. Loan Trust 2004-VF1 A1		3.885%	2/25/31		6,067,316		5,045,580	A
GMAC Mortgage Corp. Loan Trust 2005-HE3 A1VN		3.395%	2/25/36		54,131,282		40,792,996
GMAC Mortgage Corp. Loan Trust 2006-HE1 A		3.345%	11/25/36		1,387,684		483,132
Greenpoint Mortgage Funding Trust 2005-HE1		3.535%	9/25/34		4,270,000		2,869,693
GSRPM Mortgage Loan Trust 2004-1 A1		3.615%	9/25/42		2,524,788		2,491,269	A
IndyMac Home Equity Loan Asset-Backed Trust 2001-A		3.395%	3/25/31		104,570		94,093
Lehman XS Trust 2005-5N		3.435%	11/25/35		21,680,778		16,980,580
Lehman XS Trust 2005-5N 3A1A		2.899%	11/25/35		5,786,004		4,551,279
Lehman XS Trust 2006-2N 1A1		2.859%	2/25/46		271,376		205,793
Lehman XS Trust 2006-4N A2A		3.355%	4/25/46		7,349,561		5,067,934
Lehman XS Trust 2007-8H A1		3.265%	6/25/37		96,405,986		91,183,924
Merrill Lynch Mortgage Investors Trust 2007-SD1 A1		3.585%	2/25/37		109,254,026		90,683,125
MSDWCC Heloc Trust 2005-1		3.325%	7/25/17		1,687,905		1,432,463
Option One Mortgage Loan Trust 2003-1		3.975%	2/25/33		16,348		13,379

87

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Asset-Backed Securities—Continued
Indexed Securities—Continued
Provident Bank Home Equity Loan Trust 2000-2		3.675%	8/25/31	$	314,554	$	230,030
RAAC 2006-RP3 A		3.405%	5/25/36		50,730		44,929	A
RAAC 2006-RP4 A		2.889%	1/25/46		34,440,846		31,322,117	A
Renaissance Home Equity Loan Trust 2005-1		3.465%	5/25/35		3,000,000		2,894,587
Residential Asset Mortgage Products Inc. 2003-RS4		3.795%	5/25/33		1,045,568		801,896
Residential Funding Mortgage Securities II 2003-HS3		3.425%	8/25/33		291,561		278,297
Residential Funding Securities Corp. 2002-RP2 A1		3.885%	10/25/32		5,285,248		4,492,461	A
SACO I Trust 2006-3 A3		3.365%	4/25/36		4,004,197		2,225,158
SACO I Trust 2006-6 A		3.265%	6/25/36		1,088,861		393,881
Salomon Brothers Mortgage Securities VII 2002-CIT1		3.435%	3/25/32		495,416		480,578
Securitized Asset Backed Receivables LLC 2007-BR3 A2B		3.355%	4/25/37		70,887,000		49,866,793
Securitized Asset Backed Receivables LLC Trust 2007-BR2 A2		3.365%	2/25/37		41,619,382		33,194,828
SLM Student Loan Trust 2006-10 A2		3.341%	10/25/17		401,496		399,865
Southern Pacific Secured Asset Corp. 1998-2		3.475%	7/25/29		21,769		19,379
Structured Asset Securities Corp. 2006-ARS1 A1		3.245%	2/25/36		1,304,930		418,712	A
Truman Capital Mortgage Loan Trust 2006-1		3.395%	3/25/36		25,566,510		17,385,227	A
Vanderbilt Mortgage Finance 1999-D		6.325%	1/7/30		4,100,000		4,406,972
Wachovia Asset Securitization Inc. 2002-HE1		3.505%	9/27/32		834,030		761,643
Wachovia Asset Securitization Inc. 2002-HE2		3.030%	12/25/32		85,214		78,267
Wachovia Asset Securitization Inc. 2003-HE1		3.425%	3/25/33		19,611		16,667
							533,774,172
Stripped Securities	N.M.
Oakwood Mortgage Investors Inc. 2001-E		6.000%	11/15/09		4,363,589		100,799	K1

88

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Asset-Backed Securities—Continued
Variable Rate SecuritiesF	0.1%
Countrywide Asset-Backed Certificates 2004-15		4.614%	12/25/32	$	11,882,000	$	11,674,699
Irwin Home Equity Corp. 2005-1 2A2		4.720%	6/25/35		1,475,835		1,470,647
							13,145,346
Total Asset-Backed Securities (Cost—$715,940,252)							586,694,856
Mortgage-Backed Securities	12.1%
Fixed Rate Securities	2.8%
Banc of America Commercial Mortgage Inc. 2006-1 A4		5.372%	9/10/45		310,000		305,763
Banc of America Funding Corp. 2003-1		6.000%	5/20/33		578,811		581,343
Banc of America Funding Corp. 2006-8T2 A2		5.791%	10/25/36		180,971		182,965
BlackRock Capital Finance LP 1997-R3		7.220%	11/25/28		25		25	A
Commercial Capital Access One Inc. 2I		12.000%	11/15/27		1,905,807		519,650
Commercial Mortgage Pass-Through Certificates 2001-J1A A2		6.457%	2/14/34		362,163		370,257	A
Countrywide Alternative Loan Trust 2003-20CB 1A1		5.500%	10/25/33		22,789,104		22,860,320
Credit Suisse Mortgage Capital Certificates 2006-C4 A3		5.467%	9/15/39		1,500,000		1,475,012
CS First Boston Mortgage Securities Corp. 1998-C1 A1B		6.480%	5/17/40		332,543		332,533
GE Capital Commercial Mortgage Corp. 2007-C1 A4		5.543%	12/10/49		32,530,000		31,810,375
GMAC Commercial Mortgage Securities Inc. 1999-C2		6.945%	9/15/33		319,183		323,637
GS Mortgage Securities Corp. II 1998-C1		6.620%	10/18/30		2,495,908		2,491,928
GS Mortgage Securities Corp. II 2005-GG4		4.680%	7/10/39		18,650,000		17,875,831
JP Morgan Chase Commercial Mortgage Pass-Through Certificates 2005-CIBC12		4.895%	9/12/37		3,000,000		2,929,390
JP Morgan Chase Commercial Mortgage Securities Corp. 2006-CB15		5.814%	6/12/43		2,370,000		2,392,121

89

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Mortgage-Backed Securities—Continued
Fixed Rate Securities—Continued
JP Morgan Chase Commercial Mortgage Securities Corp. 2006-LDP9 A3		5.336%	5/15/47	$	75,000,000	$	72,758,123
JP Morgan Chase Commercial Mortgage Securities Corp. 2007-LDPX A3		5.420%	1/15/49		37,340,000		36,130,793
JP Morgan Commercial Mortgage Finance Corp. 1999-C8 A2		7.400%	7/15/31		1,542,266		1,563,475
LB-UBS Commercial Mortgage Trust 2000-C3 A2		7.950%	5/15/25		97,866		101,876
LB-UBS Commercial Mortgage Trust 2005-C3 A5		4.739%	7/15/30		8,640,000		8,378,311
LB-UBS Commercial Mortgage Trust 2005-C3 AAB		4.664%	7/15/30		4,100,000		3,889,500
MASTR Reperforming Loan Trust 2005-1 1A1		6.000%	8/25/34		5,249,701		5,097,746	A
MASTR Reperforming Loan Trust 2005-1 1A3		7.000%	8/25/34		7,847,455		7,885,738	A
Merrill Lynch/Countrywide Commercial Mortgage 2007-6 A4		5.485%	3/12/51		22,470,000		21,849,545
Morgan Stanley Capital I 2005-HQ6		4.989%	8/13/42		21,070,000		20,703,751
Morgan Stanley Capital I 2007-IQ14 A4		5.692%	4/15/49		36,175,000		35,619,811
Prime Mortgage Trust 2006-DR1 2A2		6.000%	11/25/36		79,133,198		77,637,581	A
Residential Asset Mortgage Products Inc. 2004-SL2		8.500%	10/25/31		234,322		225,855
Residential Asset Mortgage Products Inc. 2004-SL4		7.500%	7/25/32		2,267,732		2,217,418
Residential Asset Mortgage Products Inc. 2005-SL2		7.500%	3/25/32		11,260,258		10,054,178
Residential Asset Securitization Trust 2003-A14		4.750%	2/25/19		2,498,270		2,481,876
							391,046,727
Indexed SecuritiesB	6.8%
American Home Mortgage Assets Trust 2006-3		3.325%	7/25/46		18,984,154		14,331,573
American Home Mortgage Investment Trust 2005-4		3.425%	11/25/45		16,559,349		12,998,056
Bayview Commercial Asset Trust 2006-2A A1		3.365%	7/25/36		1,953,005		1,695,918	A
Bayview Commercial Asset Trust 2006-SP1 A1		3.405%	4/25/36		2,368,204		2,172,367	A

90

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Mortgage-Backed Securities—Continued
Indexed Securities—Continued
Bear Stearns Mortgage Funding Trust 2006-AR5 1A1		2.759%	12/25/36	$	1,407,359	$	1,069,241
Bear Stearns Second Lien Trust 2007-SV1A A1		3.355%	12/25/36		9,507,566		7,130,675	A
Bear Stearns Structured Products Inc. 2007-R10 A1		2.956%	9/26/37		43,438,028		41,483,317	A
Bear Stearns Structured Products Inc. 2007-R11 A1A		3.635%	9/27/37		137,027,085		130,518,299	A
Citigroup Mortgage Loan Trust Inc. 2005-5		5.433%	8/25/35		247,312		169,687
Citigroup Mortgage Loan Trust Inc. 2005-HE2		3.535%	7/25/35		11,313,012		10,035,871	A
Countrywide Alternative Loan Trust 2004-J9 3A4		3.766%	10/25/34		157,824		142,278
Countrywide Alternative Loan Trust 2005-38 A3		3.485%	9/25/35		18,264,284		14,428,429
Countrywide Alternative Loan Trust 2005-44 1A1		3.465%	10/25/35		21,607,878		16,678,868
Countrywide Alternative Loan Trust 2005-44 2A1		3.445%	10/25/35		11,865,915		9,160,867
Countrywide Alternative Loan Trust 2005-56 3A1		3.425%	11/25/35		14,522,585		11,529,695
Countrywide Alternative Loan Trust 2005-56 4A1		3.445%	11/25/35		6,952,374		5,393,159
Countrywide Alternative Loan Trust 2005-59 1A1		3.449%	11/20/35		6,677,528		5,283,508
Countrywide Alternative Loan Trust 2005-72 A1		3.405%	1/25/36		5,187,928		4,036,444
Countrywide Alternative Loan Trust 2005-J12		2.869%	8/25/35		1,127,282		781,801
Countrywide Alternative Loan Trust 2006-0A2 A5		2.766%	5/20/46		7,933,981		5,284,748
Countrywide Alternative Loan Trust 2006-OA1 2A1		2.746%	3/20/46		508,125		385,346
Countrywide Alternative Loan Trust 2006-OA17		2.731%	12/20/46		43,995,524		33,444,266
Countrywide Alternative Loan Trust 2006-OA18 A2		3.375%	12/25/36		345,518		225,149
Countrywide Alternative Loan Trust 2006-OC2 2A3		3.425%	2/25/36		9,400,000		5,715,998

91

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Mortgage-Backed Securities—Continued
Indexed Securities—Continued
Countrywide Home Loans 2005-09 1A1		3.435%	5/25/35	$	8,898,819	$	6,956,176
Countrywide Home Loans 2005-R3		3.535%	9/25/35		6,652,300		5,675,338	A
Countrywide Home Loans 2006-OA5 1A1		3.335%	4/25/46		5,466,088		4,167,632
DSLA Mortgage Loan Trust 2006-AR1 1A1A		5.442%	3/19/46		1,623,461		1,262,748
DSLA Mortgage Loan Trust 2006-AR1 1A1B		5.442%	3/19/37		1,623,461		874,386
GMAC Mortgage Corp. Loan Trust 2005-AR6 2A1		5.194%	11/19/35		313,621		301,269
Greenpoint Mortgage Funding Trust 2005-AR5 2A2		2.869%	11/25/46		6,145,913		3,496,369
Greenpoint Mortgage Funding Trust 2006-AR3 3A1		2.829%	4/25/36		7,035,027		4,570,064
Greenpoint Mortgage Funding Trust 2007-AR2 1A1		3.265%	4/25/47		75,859,874		62,002,422
GSMPS Mortgage Loan Trust 2005-RP2		3.485%	3/25/35		21,301,664		16,741,003	A
GSMPS Mortgage Loan Trust 2005-RP3		3.485%	9/25/35		33,166,191		27,696,781	A
Harborview Mortgage Loan Trust 2005-3		2.799%	6/19/35		17,625,101		13,654,904
Harborview Mortgage Loan Trust 2005-7		6.020%	6/19/45		7,765,236		6,145,456
Harborview Mortgage Loan Trust 2006-13 A		2.739%	11/19/46		617,628		464,175
Harborview Mortgage Loan Trust 2006-7		2.759%	10/19/37		3,832,654		2,917,813
Harborview Mortgage Loan Trust 2007-4 2A1		2.779%	7/19/47		36,881,985		27,097,168
Impac CMB Trust 2003-4 1A1		3.775%	10/25/33		178,132		162,149
IndyMac Inda Mortgage Loan Trust 2007-AR7 1A1		6.258%	11/25/37		16,473,877		15,698,822
IndyMac Index Mortgage Loan Trust 2004-AR2 2A1		3.445%	6/25/34		56,705		50,170
IndyMac Index Mortgage Loan Trust 2006-AR15 A1		3.255%	7/25/36		316,495		203,506
La Hipotecaria SA 2007-1GA A		6.023%	12/23/36		369,519		333,221	A
Lehman XS Trust 2006-GP2 1A1A		2.669%	6/25/46		988,524		910,324
Luminent Mortgage Trust 2006-7 2A1		3.305%	12/25/36		5,143,189		3,892,252
MASTR Adjustable Rate Mortgages Trust 2004-13		3.786%	11/21/34		1,830,000		1,742,937
MASTR Reperforming Loan Trust 2005-2 1A1F		3.485%	5/25/35		6,242,911		5,416,853	A

92

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Mortgage-Backed Securities—Continued
Indexed Securities—Continued
MLCC Mortgage Investors Inc. 2003-B		3.475%	4/25/28	$	2,959,446	$	2,639,947
Residential Accredit Loans Inc. 2005-QO3 A1		3.535%	10/24/45		2,626,667		2,040,145
Residential Accredit Loans Inc. 2006-QO10 A1		3.295%	1/25/37		345,955		259,353
Residential Accredit Loans Inc. 2006-QO5 3A1		3.205%	5/25/46		3,267		3,249
Residential Accredit Loans Inc. 2006-QO8 1A1A		3.225%	10/25/46		2,660,313		2,462,771
Residential Accredit Loans Inc. 2007-QO4 A1A		3.325%	5/25/47		14,580,818		10,924,935
Sequoia Mortgage Trust A4		3.478%	11/25/24		12,139		12,167
Structured Asset Mortgage Investments Inc. 2006-AR3 11A1		3.345%	4/25/36		6,169,201		4,668,231
Structured Asset Mortgage Investments Inc. 2006-AR7 A1A		2.809%	8/25/36		42,994,400		31,580,569
Thornburg Mortgage Securities Trust 2005-4 A4		3.335%	12/25/35		74,006,964		73,820,237
Thornburg Mortgage Securities Trust 2006-1		2.769%	1/25/36		92,957,250		91,261,087
Thornburg Mortgage Securities Trust 2006-1 A2		3.285%	1/25/36		7,199,143		7,142,205
WaMu Mortgage Pass-Through Certificates, 2005-AR06 2A1A		3.365%	4/25/45		12,244,729		9,459,572
WaMu Mortgage Pass-Through Certificates, 2005-AR08 1A1A		3.405%	7/25/45		11,841,259		8,349,338
WaMu Mortgage Pass-Through Certificates, 2005-AR1 A1A		3.455%	1/25/45		2,776,662		2,213,025
WaMu Mortgage Pass-Through Certificates, 2005-AR11		3.455%	8/25/45		37,085,024		28,767,591
WaMu Mortgage Pass-Through Certificates, 2005-AR13 A1A1		3.425%	10/25/45		21,143,784		16,856,150
WaMu Mortgage Pass-Through Certificates, 2005-AR13 B10		4.576%	10/25/45		6,049,349		1,330,857	A
WaMu Mortgage Pass-Through Certificates, 2005-AR15 A1A1		3.395%	11/25/45		19,281,625		15,532,980
WaMu Mortgage Pass-Through Certificates, 2005-AR15 A1A2		2.879%	11/25/45		30,325,993		23,950,304
WaMu Mortgage Pass-Through Certificates, 2005-AR17 A1A2		3.425%	12/25/45		19,216,081		14,877,348

93

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Mortgage-Backed Securities—Continued
Indexed Securities—Continued
WaMu Mortgage Pass-Through Certificates, 2005-AR19 A1A1		3.405%	12/25/45	$	27,499,291	$	21,879,794
WaMu Mortgage Pass-Through Certificates, 2005-AR19 A1A2		3.425%	12/25/45		30,395,835		24,012,056
WaMu Mortgage Pass-Through Certificates, 2007-OA5 A1A		5.362%	5/25/47		1,521,534		1,194,642
Zuni Mortgage Loan Trust 2006-OA1		2.729%	8/25/36		27,399,178		25,976,075
							967,744,126
Stripped Securities	N.M.
Diversified REIT Trust 2001-1A		0.769%	3/8/10		8,374,717		148,651	A,G,K1
FFCA Secured Lending Corp. 1999-1A		1.421%	9/18/25		324,412		12,130	A,G,K1
GMAC Commercial Mortgage Securities Inc. 1999-CTL1		0.232%	12/15/16		278,409		256	A,G,K1
LB-UBS Commercial Mortgage Trust 2001-C3 X		0.936%	6/15/36		8,495,263		211,002	A,G,K1
							372,039
Variable Rate SecuritiesF	2.5%
Banc of America Commercial Mortgage Inc. 2005-5 A4		5.115%	10/10/45		7,630,000		7,532,963
Banc of America Commercial Mortgage Inc. 2006-2 A4		5.740%	5/10/45		28,805,000		29,102,155
Banc of America Funding Corp. 2005-F 2A1		5.176%	9/20/35		23,757,567		23,589,972
Commercial Mortgage Asset Trust 1999-C2		7.546%	11/17/32		367,580		375,818
Countrywide Home Loan Mortgage Pass Through Trust 2006-HYB1 2A1		5.336%	3/20/36		242,784		194,131
Credit Suisse Mortgage Capital Certificates 2006-C1 A4		5.555%	2/15/39		1,830,000		1,823,794
Credit Suisse Mortgage Capital Certificates 2007-C4 A4		5.811%	9/15/39		11,390,000		11,387,233
Credit Suisse Mortgage Capital Certificates A3-C2		5.659%	3/15/39		8,200,000		8,238,765
GE Capital Commercial Mortgage Corp. 2005-C4		5.333%	11/10/45		15,020,000		15,086,304
Greenwich Capital Commercial Funding Corp. 2008-GG5 A5		5.224%	4/10/37		3,660,000		3,638,324

94

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Mortgage-Backed Securities—Continued
Variable Rate Securities—Continued
GS Mortgage Securities Corp. II 2007-GG10 A4		5.799%	8/10/45	$	2,510,000	$	2,506,003
GSR Mortgage Loan Trust 2005-AR7 1A1		5.120%	11/25/35		3,354,468		3,426,268
Harborview Mortgage Loan Trust 2006-2		5.458%	2/25/36		6,453,288		4,839,966
IndyMac INDX Mortgage Loan Trust 2004-AR15		6.743%	2/25/35		558,967		507,689
IndyMac INDX Mortgage Loan Trust 2005-AR1 1A1		6.883%	3/25/35		84,375		76,548
IndyMac INDX Mortgage Loan Trust 2005-AR13		4.479%	8/25/35		804,264		654,043
IndyMac INDX Mortgage Loan Trust 2005-AR15		5.099%	9/25/35		10,304,854		7,901,800
JP Morgan Chase Commercial Mortgage Securities Corp. 2005-CB13		5.294%	1/12/43		11,800,000		11,806,908
JP Morgan Chase Commercial Mortgage Securities Corp. 2006-LDP9 HS		5.749%	5/15/47		5,000,000		2,818,555	A
MASTR Adjustable Rate Mortgages Trust 2004-4 3A1		4.158%	5/25/34		2,869,411		2,888,026
MASTR Adjustable Rate Mortgages Trust 2006-2 3A1		4.850%	1/25/36		183,602		175,353
Merrill Lynch Mortgage Investors Trust 2006-A1 1A1		5.859%	3/25/36		37,891,261		29,628,681
Merrill Lynch Mortgage Trust 2005-CKI1		5.244%	11/12/37		18,740,000		18,724,541
Merrill Lynch Mortgage Trust 2005-MCP1		4.747%	6/12/43		15,240,000		14,779,688
Merrill Lynch Mortgage Trust 2006-C1 A4		5.658%	5/12/39		130,000		130,867
Merrill Lynch/Countrywide Commercial Mortgage Trust 2007-7 A4		5.750%	6/12/50		5,150,000		5,105,941
Merrill Lynch/Countrywide Commercial Mortgage Trust 2007-8 A3		5.957%	8/12/49		2,800,000		2,824,511
Morgan Stanley Capital I 2007-HQ11 A4		5.447%	2/12/44		1,670,000		1,619,346

95

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Mortgage-Backed Securities—Continued
Variable Rate Securities—Continued
Morgan Stanley Mortgage Loan Trust 2005-3AR		5.338%	7/25/35	$	8,275,479	$	8,459,996
Prime Mortgage Trust 2005-2		7.431%	10/25/32		714,169		719,960
Structured Adjustable Rate Mortgage Loan Trust 2004-16 5A2		5.070%	11/25/34		41,215,615		37,377,234
Thornburg Mortgage Securities Trust 2004-1		5.982%	3/25/44		93,860		95,452
Thornburg Mortgage Securities Trust 2007-4 2A1		6.225%	9/25/37		52,294,439		48,641,813
Thornburg Mortgage Securities Trust 2007-4 3A1		6.217%	9/25/37		48,506,091		43,767,158
WaMu Mortgage Pass-Through Certificates 2005-AR14 1A1		5.056%	12/25/35		281,496		273,780
WaMu Mortgage Pass-Through Certificates 2007-HY4 4A1		5.501%	9/25/36		142,241		135,038
							350,854,624
Total Mortgage-Backed Securities (Cost—$1,920,380,843)							1,710,017,516
Loan Participations and AssignmentsB	0.4%
Auto Components	N.M.
Allison Transmission Inc., Term Loan, Tranche B		5.740% to 5.750%	6/10/08		997,500		873,169
Communications Equipment	N.M.
Panamsat Corp., Term Loan, Tranche A		5.611%	4/3/08		1,750,000		1,582,656
Computers and Peripherals	N.M.
SunGard Data Systems Inc., Term Loan, Tranche B		4.878% to 5.128%	5/8/08		1,970,000		1,824,488
Containers and Packaging	N.M.
Amscan Holdings Inc., Term Loan, Tranche B		4.856% to 5.343%	6/25/08		990,000		831,600

96

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Loan Participations and Assignments—Continued
Diversified Consumer Services	N.M.
Thomson Medical Education, First Lien Term Loan		5.200%	6/30/08	$	995,000	$	853,337
Diversified Financial Services	N.M
CCM Merger Inc., Term Loan, Tranche B		4.671% to 5.080%	6/27/08		982,330		869,362
Electric Utilities	N.M.
TXU, Term Loan, Tranche B2		6.478% to 6.596%	8/11/08		1,246,875		1,134,798
Health Care Providers and Services	N.M.
Davita Inc., Term Loan, Tranche B1		4.210% to 6.230%	5/27/08		2,000,000		1,873,410
Sheridan Healthcare Inc., Term Loan, Tranche B		5.196% to 6.555%	6/30/08		992,500		858,512
Vanguard Health Holding Co. II, Replacement Term Loan		4.954%	4/30/08		1,965,261		1,819,504
							4,551,426
Hotels, Restaurants and Leisure	N.M.
Metro-Goldwyn-Mayer Studios Inc., Term Loan, Tranche B		5.946%	6/30/08		1,473,684		1,160,526
IT Services	0.3%
First Data Corp., Term Loan, Tranche B1		5.349% to 5.446%	6/30/08		39,610,950		35,611,353
Media	0.1%
Carmike Cinemas Inc., Delayed Draw Term Loan		6.490%	6/10/08		747,611		699,016
Cedar Fair LP, Term Loan, Tranche B		4.704%	4/30/08		982,500		906,356
Charter Communications Operating LLC, Term Loan		5.260%	4/30/08		2,000,000		1,687,916

97

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Loan Participations and Assignments—Continued
Media—Continued
Citadel Communication Group, Term Loan, Tranche B		4.321% to 6.455%	6/30/08	$	1,000,000	$	818,125
CSC Holdings Inc., Incremental Term Loan		4.750%	4/11/08		982,456		916,896
Idearc Inc., Term Loan, Tranche B		4.700% to 4.710%	6/30/08		987,500		788,519
Nielsen Finance LLC, Term Loan, Tranche B		5.346%	5/9/08		1,970,009		1,773,711
Tribune Co., Tranche B		5.542%	6/20/08		992,500		658,950
Univision Communications, Term Loan, Tranche B		4.954% to 5.494%	4/30/08		1,000,000		785,682
UPC Broadband Holding, Term Loan, Tranche N1		4.869%	4/1/08		1,000,000		887,500
							9,922,671
Multiline Retail	N.M.
Dollar General Corp., Term Loan, Tranche B		5.994%	4/30/08		1,000,000		895,625
Paper and Forest Products	N.M.
Georgia-Pacific Corp., First Lien Term Loan		4.740% to 4.835%	6/30/08		982,412		908,920
Road and Rail	N.M.
Swift Transportation, Term Loan		6.500%	5/1/08		883,721		658,057
Semiconductors and Semiconductor Equipment	N.M.
Sensata Technologies, Term Loan, Tranche B		5.056%	4/29/08		1,473,750		1,271,724
Total Loan Participations and Assignments (Cost—$69,281,070)							62,949,712

98

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
U.S. Government and Agency Obligations	9.6%
Fixed Rate Securities	4.9%
Fannie Mae		5.625%	5/19/11	$	31,580,000	$	32,674,626
Fannie Mae		4.610%	10/10/13		40,690,000		40,710,793	C
Fannie Mae		6.000%	4/18/36		18,560,000		19,972,026	C
Farmer Mac		5.125%	8/25/16		410,000		442,491
Federal Home Loan Bank		3.875%	8/22/08		8,640,000		8,688,773
Federal Home Loan Bank		5.100%	9/19/08		800,000		810,111
Federal Home Loan Bank		4.500%	11/5/08		22,500,000		22,546,507
Federal Home Loan Bank		5.000%	12/21/15		240,000		257,549
Federal Home Loan Bank		5.500%	7/15/36		3,040,000		3,322,294
Freddie Mac		4.750%	1/18/11		280,000		295,691	C
Freddie Mac		5.250%	2/24/11		16,000,000		16,370,288	C
Freddie Mac		5.625%	3/15/11		25,450,000		27,481,750	C
Freddie Mac		5.125%	4/18/11		14,440,000		15,421,776	C
Freddie Mac		4.650%	10/10/13		47,200,000		47,220,721	C
Freddie Mac		5.450%	11/21/13		18,230,000		18,516,448
Freddie Mac		5.300%	5/12/20		75,000,000		76,535,925	C
Freddie Mac		5.625%	11/23/35		19,270,000		20,068,183
Tennessee Valley Authority		6.250%	12/15/17		40,000		47,033
Tennessee Valley Authority		7.125%	5/1/30		840,000		1,096,779
Tennessee Valley Authority		5.980%	4/1/36		120,000		135,009
United States Treasury Bonds		8.750%	5/15/17		10,000		14,090	C
United States Treasury Bonds		8.875%	8/15/17		10,000		14,245	C
United States Treasury Bonds		4.375%	2/15/38		9,730,000		9,845,544	C
United States Treasury Notes		3.750%	5/15/08		25,460,000		25,533,605	C
United States Treasury Notes		5.000%	7/31/08		5,835,000		5,903,835	C
United States Treasury Notes		4.500%	3/31/09		19,490,000		20,062,519	C
United States Treasury Notes		4.625%	7/31/09		44,630,000		46,436,131	C
United States Treasury Notes		4.000%	8/31/09		174,060,000		180,016,159	C
United States Treasury Notes		2.000%	2/28/10		10,000		10,070	C
United States Treasury Notes		4.500%	11/15/10		23,190,000		24,867,657	C
United States Treasury Notes		4.875%	6/30/12		180,000		198,352
United States Treasury Notes		4.625%	7/31/12		3,330,000		3,640,106	C
United States Treasury Notes		4.750%	8/15/17		14,090,000		15,589,261	C
United States Treasury Notes		3.500%	2/15/18		510,000		512,948	C
							685,259,295
Indexed SecuritiesB	0.2%
Farmer Mac		2.474%	2/23/09		27,000,000		26,998,218

99

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
U.S. Government and Agency Obligations—Continued
Stripped Securities	0.3%
United States Treasury Bonds		0.000%	11/15/21	$	37,190,000	$	20,419,616	C,K2
United States Treasury Bonds		0.000%	11/15/24		32,510,000		15,290,168	C,K2
United States Treasury Bonds		0.000%	5/15/30		17,830,000		6,604,571	C,K2
							42,314,355
Treasury Inflation-Protected SecuritiesL	4.2%
United States Treasury Inflation-Protected Security		1.875%	7/15/13		8,606,684		9,283,118	C
United States Treasury Inflation-Protected Security		2.000%	1/15/14		1,302,097		1,410,333	C
United States Treasury Inflation-Protected Security		2.000%	1/15/16		39,258,144		42,567,487	C
United States Treasury Inflation-Protected Security		2.500%	7/15/16		8,046,731		9,064,514	C
United States Treasury Inflation-Protected Security		2.375%	1/15/17		12,851,266		14,343,220	C
United States Treasury Inflation-Protected Security		2.625%	7/15/17		4,877,609		5,558,187	C
United States Treasury Inflation-Protected Security		1.625%	1/15/18		130,962		137,520	C
United States Treasury Inflation-Protected Security		2.375%	1/15/25		73,626,869		80,109,494	C
United States Treasury Inflation-Protected Security		2.000%	1/15/26		141,678,089		146,061,326	C
United States Treasury Inflation-Protected Security		2.375%	1/15/27		162,336,182		177,200,008	C
United States Treasury Inflation-Protected Security		1.750%	1/15/28		14,184,192		14,061,187	C
United States Treasury Inflation-Protected Security		3.625%	4/15/28		24,492,035		31,759,287	C
United States Treasury Inflation-Protected Security		3.875%	4/15/29		40,426,547		54,648,485	C
United States Treasury Inflation-Protected Security		3.375%	4/15/32		10,439,332		13,708,148	C
							599,912,314
Total U.S. Government and Agency Obligations (Cost—$1,265,306,145)							1,354,484,182

100

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
U.S. Government Agency Mortgage-Backed Securities	49.6%
Fixed Rate Securities	46.6%
Fannie Mae		6.500%	5/1/14 to 12/1/37	$	131,111,894	$	135,943,483
Fannie Mae		5.500%	1/1/17 to 3/1/37		687,347,774		694,843,363
Fannie Mae		9.500%	11/1/21		1,296		1,431
Fannie Mae		5.000%	12/1/23		125,000,000		126,171,875	M
Fannie Mae		6.000%	12/1/23		8,530,000		8,777,899	M
Fannie Mae		6.000%	4/1/24 to 8/1/37		730,511,027		749,113,708
Fannie Mae		7.000%	8/1/29 to 6/1/32		4,014,907		4,270,237
Fannie Mae		7.500%	11/1/29		19,460		21,041
Fannie Mae		5.000%	7/1/33 to 3/1/38		3,031,303,981		3,008,694,688
Fannie Mae		4.500%	12/1/34 to 3/1/35		14,485,231		13,979,755
Fannie Mae		4.500%	12/1/38		53,300,000		51,384,505	M
Fannie Mae		5.500%	12/1/38		511,300,000		516,093,438	M
Freddie Mac		6.000%	6/1/08 to 12/1/37		9,913,576		10,210,125
Freddie Mac		5.500%	12/1/13 to 5/1/35		11,634,477		11,784,865
Freddie Mac		7.000%	10/1/16 to 4/1/32		1,314,963		1,396,312
Freddie Mac		6.500%	7/1/29		338,797		355,024
Freddie Mac		5.000%	12/1/34 to 4/1/38		807,491,551		800,558,486
Government National Mortgage Association		7.500%	3/15/23 to 9/15/31		226,360		243,992
Government National Mortgage Association		7.000%	7/15/23 to 7/15/31		690,328		738,534
Government National Mortgage Association		6.500%	4/15/28 to 4/15/33		14,932,120		15,588,734
Government National Mortgage Association		6.000%	1/15/29 to 11/15/35		73,989,476		76,591,304
Government National Mortgage Association		8.000%	12/15/30 to 1/15/31		24,147		26,502
Government National Mortgage Association		5.000%	7/15/33 to 11/15/35		71,476,113		71,506,831
Government National Mortgage Association		5.500%	7/15/33 to 6/15/35		20,805,830		21,267,125
Government National Mortgage Association		5.000%	12/1/38		275,900,000		275,124,169	M
							6,594,687,426
Indexed SecuritiesB	3.0%
Fannie Mae		4.609%	5/1/35 to 10/1/35		7,835,184		7,892,486
Fannie Mae		4.838%	6/1/35		14,154,154		14,246,618
Fannie Mae		5.348%	6/1/35		2,958,789		3,018,173

101

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
U.S. Government Agency Mortgage-Backed Securities—Continued
Indexed Securities—Continued
Fannie Mae		4.364%	8/1/35	$	1,493,593	$	1,505,558
Fannie Mae		4.650%	9/1/35		9,016,994		9,049,175
Fannie Mae		4.722%	9/1/35		3,490,560		3,503,453
Fannie Mae		4.682%	10/1/35		4,218,860		4,228,256
Fannie Mae		4.769%	10/1/35		3,115,394		3,131,048
Fannie Mae		4.892%	10/1/35		2,787,725		2,781,444
Fannie Mae		6.514%	10/1/35		25,895,814		26,631,868
Fannie Mae		6.535%	10/1/35		33,970,564		34,937,769
Fannie Mae		6.502%	11/1/35		14,587,357		15,018,189
Fannie Mae		5.274%	12/1/35		5,023,662		5,081,210
Fannie Mae		6.440%	1/1/37		23,182,210		23,823,452
Fannie Mae		5.509%	2/1/37		37,055,883		37,645,213
Fannie Mae		5.701%	4/1/37		27,104,867		27,537,688
Fannie Mae		5.872%	4/1/37		16,860,112		17,156,995
Fannie Mae		6.157%	8/1/37		30,030,755		30,862,769
Freddie Mac		4.690%	8/1/35		15,545,495		15,510,065
Freddie Mac		4.783%	9/1/35		6,266,610		6,292,111
Freddie Mac		5.153%	9/1/35		2,066,721		2,106,969
Freddie Mac		4.822%	10/1/35		5,177,006		5,165,146
Freddie Mac		5.134%	12/1/35		7,184,811		7,297,216
Freddie Mac		5.201%	12/1/35		485,917		492,215
Freddie Mac		5.815%	2/1/37		65,567		66,620
Freddie Mac		6.073%	3/1/37		36,100,684		37,110,161
Freddie Mac		5.811%	5/1/37		5,701,375		5,786,433
Freddie Mac		5.896%	5/1/37		16,205,473		16,467,665
Freddie Mac		5.942%	5/1/37		181,326		184,471
Freddie Mac		5.946%	5/1/37		126,660		129,227
Freddie Mac		5.796%	6/1/37		2,869,059		2,912,716
Freddie Mac		5.905%	7/1/37		42,403,423		43,083,047
Freddie Mac		5.908%	8/1/37		13,760,747		13,977,777
Government National Mortgage Association		2.936%	8/20/31		2,565		2,524
							424,635,727
Stripped Securities	N.M.
Financing Corp.		0.000%	11/30/17 to 4/5/19		1,570,000		1,039,893	G,K2
Total U.S. Government Agency Mortgage-Backed Securities (Cost—$6,915,751,877)							7,020,363,046

102

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Yankee BondsN	5.6%
Aerospace and Defense	N.M.
Systems 2001 Asset Trust		6.664%	9/15/13	$	2,307,661	$	2,371,122	A
Automobiles	N.M.
General Motors Nova Scotia Finance Co.		6.850%	10/15/08		1,550,000		1,519,000
Commercial Banks	1.6%
Glitnir Banki Hf		6.330%	7/28/11		10,670,000		9,162,639	A
Glitnir Banki Hf		6.375%	9/25/12		18,040,000		15,392,504	A
Glitnir Banki Hf		6.693%	6/15/16		19,600,000		15,797,874	A,E
Glitnir Banki Hf		7.451%	9/14/49		3,065,000		2,486,022	A,E
HSBC Capital Funding LP		4.610%	6/27/49		2,090,000		1,842,180	A,E
ICICI Bank Ltd.		6.375%	4/30/22		14,359,000		12,348,668	A,E
ICICI Bank Ltd.		6.375%	4/30/22		15,561,000		13,527,706	A,C,E
Kaupthing Bank Hf		5.750%	10/4/11		5,550,000		4,430,215	A
Kaupthing Bank Hf		7.125%	5/19/16		6,060,000		4,089,070	A
Korea Development Bank		5.500%	11/13/12		60,000		62,046	C
Landsbanki Islands Hf		6.100%	8/25/11		28,520,000		24,916,612	A
Resona Preferred Global Securities		7.191%	12/29/49		11,630,000		10,156,805	A,E
Royal Bank of Scotland Group PLC		7.640%	3/31/49		7,400,000		6,372,806	E
Royal Bank of Scotland Group PLC		6.990%	10/29/49		12,030,000		10,212,267	A,E
RSHB Capital SA		6.299%	5/15/17		30,690,000		28,426,613	A
Shinsei Finance Cayman Ltd.		6.418%	1/29/49		25,685,000		17,024,326	A,E
TuranAlem Finance BV		8.250%	1/22/37		29,590,000		23,207,437	A
TuranAlem Finance BV		8.250%	1/22/37		30,793,000		24,304,915	A
							223,760,705
Diversified Financial Services	0.4%
Aiful Corp.		5.000%	8/10/10		12,430,000		11,722,497	A
Cascadia Ltd.		6.115%	6/13/08		4,100,000		4,097,130	A,B
Credit Suisse Guernsey Ltd.		5.860%	5/29/49		40,000		33,885	E
European Investment Bank		4.000%	3/3/10		100,000		103,309
European Investment Bank		4.625%	3/21/12		50,000		53,155
MUFG Capital Finance 1 Ltd.		6.346%	7/29/49		7,400,000		6,030,253	C,E
Pemex Finance Ltd.		9.030%	2/15/11		6,000		6,358
TNK-BP Finance SA		7.500%	7/18/16		17,280,000		16,048,800	A
TNK-BP Finance SA		7.500%	7/18/16		1,650,000		1,551,000	A
TNK-BP Finance SA		6.625%	3/20/17		724,000		626,260	A
TNK-BP Finance SA		6.625%	3/20/17		11,350,000		9,817,750	A
							50,090,397

103

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Yankee Bonds—Continued
Diversified Telecommunication Services	0.4%
British Telecommunications PLC		8.625%	12/15/10	$	2,315,000	$	2,545,954	J
Deutsche Telekom International Finance BV		5.750%	3/23/16		20,000,000		19,773,480	C
Intelsat Bermuda Ltd.		9.250%	6/15/16		1,105,000		1,113,287
Koninklijke (Royal) KPN NV		8.000%	10/1/10		14,470,000		15,537,220
Telecom Italia Capital SpA		5.250%	11/15/13		1,260,000		1,177,331
Telecom Italia Capital SpA		4.950%	9/30/14		3,730,000		3,394,524
Telecom Italia Capital SpA		5.250%	10/1/15		6,090,000		5,532,808
Wind Acquisition Finance SA		10.750%	12/1/15		4,800,000		4,896,000	A
							53,970,604
Electric Utilities	N.M.
Hydro-Quebec		6.300%	5/11/11		1,720,000		1,880,311
Energy Equipment and Services	0.1%
Compagnie Generale de Geophysique-Veritas		7.500%	5/15/15		1,970,000		1,999,550
Compagnie Generale de Geophysique-Veritas		7.750%	5/15/17		8,594,000		8,722,910
							10,722,460
Foreign Governments	1.0%
Province of British Columbia		4.300%	5/30/13		180,000		189,182	C
Russian Federation		7.500%	3/31/30		64,901,430		74,733,997	A
United Mexican States		5.625%	1/15/17		374,000		393,074	C
United Mexican States		6.750%	9/27/34		53,566,000		59,752,873
							135,069,126
Gas Utilities	0.2%
Intergas Finance BV		6.375%	5/14/17		27,909,000		24,350,602	A
Intergas Finance BV		6.375%	5/14/17		2,220,000		1,948,050	A
							26,298,652
Industrial Conglomerates	0.7%
Tyco International Group SA		6.125%	11/1/08		1,738,000		1,750,999
Tyco International Group SA		6.125%	1/15/09		644,000		651,370
Tyco International Group SA		6.750%	2/15/11		35,798,000		37,722,107
Tyco International Group SA		6.375%	10/15/11		15,948,000		15,891,975
Tyco International Group SA		6.000%	11/15/13		4,808,000		4,828,030
Tyco International Group SA		7.000%	6/15/28		945,000		907,453
Tyco International Group SA		6.875%	1/15/29		31,995,000		31,282,087
							93,034,021

104

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Yankee Bonds—Continued
Insurance	0.2%
Foundation Re Ltd.		7.170%	11/24/08	$	9,400,000	$	9,191,320	A,B
Merna Reinsurance Ltd.		6.580%	6/30/12		26,450,000		24,130,335	A,B
							33,321,655
Media	N.M.
Rogers Cable Inc.		7.875%	5/1/12		687,000		750,597
Rogers Cable Inc.		6.750%	3/15/15		130,000		129,496
Shaw Communications Inc.		7.250%	4/6/11		630,000		648,900
Sun Media Corp.		7.625%	2/15/13		1,125,000		1,063,125
							2,592,118
Metals and Mining	0.3%
Corporacion Nacional del Cobre—Codelco		4.750%	10/15/14		2,590,000		2,582,766	A
Vale Overseas Ltd.		8.250%	1/17/34		770,000	��	859,827	C
Vale Overseas Ltd.		6.875%	11/21/36		40,565,000		39,579,879	C
							43,022,472
Oil, Gas and Consumable Fuels	0.6%
Anadarko Finance Co.		7.500%	5/1/31		15,957,000		17,953,157
Conoco Funding Co.		6.350%	10/15/11		590,000		642,824	C
Conoco Funding Co.		7.250%	10/15/31		810,000		944,700
Gazprom		6.212%	11/22/16		29,470,000		27,259,750	A
Gazprom		6.510%	3/7/22		23,180,000		20,659,175	A
OPTI Canada Inc.		8.250%	12/15/14		2,405,000		2,380,950
Petrobras International Finance Co.		6.125%	10/6/16		18,870,000		18,817,164
Teekay Shipping Corp.		8.875%	7/15/11		1,729,000		1,828,417	C
							90,486,137
Paper and Forest Products	N.M.
Abitibi-Consolidated Co. of Canada		5.250%	6/20/08		2,500,000		2,500,000
Semiconductors and Semiconductor Equipment	N.M.
NXP BV/NXP Funding LLC		7.875%	10/15/14		3,935,000		3,600,525	C
NXP BV/NXP Funding LLC		9.500%	10/15/15		2,660,000		2,187,850	C
							5,788,375
Thrifts and Mortgage Finance	N.M.
Willow Re Ltd.		8.369%	6/16/10		250,000		253,123	A,B

105

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†			VALUE
Yankee Bonds—Continued
Wireless Telecommunication Services	0.1%
America Movil SA de CV		5.625%	11/15/17	$	13,920,000		$	13,761,521
Rogers Wireless Inc.		6.375%	3/1/14		1,850,000			1,834,203
								15,595,724
Total Yankee Bonds (Cost—$847,984,565)								792,276,002
Foreign Government Obligations	1.4%
Bank Negara Islamic Notes		0.000%	7/24/08		7,890,000	MYR		2,440,115	I
Brazil Notas do Tesouro Nacional Series B		6.000%	5/15/17		21,719,000	BRL		19,186,428
Canadian Government Bond		5.250%	6/1/12		45,000,000	CAD		47,820,438
Canadian Real Return Bond		4.000%	12/1/31		6,961,715	CAD		9,944,717	O
Federal Republic of Germany		3.750%	1/4/15		18,440,000	EUR		29,114,471
Federative Republic of Brazil		10.000%	1/1/10		1	BRL		532
Federative Republic of Brazil		10.000%	7/1/10		135,481	BRL		72,755,131
Federative Republic of Brazil		6.000%	5/15/15		18,938	BRL		16,578,895
Total Foreign Government Obligations (Cost—$170,172,129)								197,840,727
Preferred Stocks	1.0%
AES Trust III		6.750%			71,200	shs		3,310,800	C,D
Fannie Mae		5.375%			29			1,939,375	D
Fannie Mae		7.000%			53,100			2,392,819	B
Fannie Mae		8.250%			1,193,775			28,710,289	E
Ford Motor Co.		7.500%			16,300			224,777
Freddie Mac		8.375%			1,737,615			42,397,806	E
General Motors Corp.		1.500%			259,700			4,388,930	C
General Motors Corp.		1.500%			399,400			9,146,260	C
General Motors Corp.		5.250%			207,050			3,360,421	D
General Motors Corp.		6.250%			2,749,475			45,366,337
General Motors Corp.		7.250%			127,900			1,877,572
General Motors Corp.		7.250%			56,300			847,878	C
General Motors Corp.		7.250%			45,400			670,104	C
General Motors Corp.		7.375%			327,800			5,074,344	C
Home Ownership Funding Corp.		1.000%			1,500			266,906	A,G
Home Ownership Funding Corp. II		1.000%			1,300			231,319	A,G
Total Preferred Stocks (Cost—$175,927,770)								150,205,937

106

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†			VALUE
Warrants	N.M.
Bear Stearns Trust Certficates 2001-2, Strike Price $97.72					5,000	wts	$	62,431	P
Bear Stearns Trust Certficates 2001-3, Strike Price $99.897					5,000			16,066	P
Total Warrants (Cost—$17,900)								78,497
Total Long-Term Securities (Cost—$14,651,599,904)								14,292,473,328
Investment of Collateral From Securities Lending	8.3%
State Street Navigator Securities Lending Prime Portfolio					1,170,604,429	shs		1,170,604,429
Total Investment of Collateral From Securities Lending (Cost—$1,170,604,429)								1,170,604,429
Short-Term Securities	4.4%
U.S. Government and Agency Obligations	1.7%
Fannie Mae		0.000%	4/7/08	$	1,720,000			1,718,716	I,Q
Fannie Mae		0.000%	12/15/08		240,000,000			236,594,400	I,Q
								238,313,116
Foreign Government Obligations	0.4%
Bank Negara Malaysia Monetary Notes		0.000%	4/10/08		6,509,000	MYR		2,004,419	I
Bank Negara Malaysia Monetary Notes		0.000%	4/22/08		85,793,000	MYR		26,770,848	I
Bank Negara Malaysia Monetary Notes		0.000%	5/8/08		58,539,000	MYR		18,238,752	I
Bank Negara Malaysia Monetary Notes		0.000%	6/5/08		8,159,000	MYR		2,515,870	I
Bank Negara Malaysia Monetary Notes		0.000%	7/17/08		13,284,000	MYR		4,095,195	I
								53,625,084
Options PurchasedR	0.1%
Barclays Swaption Call, April 2008, Strike Price $3.00					185,100,000	S		629,340
Barclays Swaption Call, April 2008, Strike Price $3.00					65,000,000	S		221,000
Barclays Swaption Call, April 2008, Strike Price $3.00					65,000,000	S		221,000
Barclays Swaption Call, June 2008, Strike Price $3.75					61,400,000	S		1,577,980
Barclays Swaption Call, May 2008, Strike Price $3.35					129,750,000	S		1,738,650

107

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†			VALUE
Short-Term Securities—Continued
Options Purchased—Continued
Barclays Swaption Call, May 2008, Strike Price $3.45					12,250,000	S	$	191,100
Barclays Swaption Call, May 2008, Strike Price $4.20					32,800,000	S		1,177,520
Greenwich Swaption Call, August 2008, Strike Price $3.72					244,600,000	S		1,092,868
Greenwich Swaption Call, May 2008, Strike Price $3.72					316,500,000	S		304,917
Japanese Yen Futures Put, July 2008, Strike Price $94.00					1,500	S		431,250
JP Morgan Swaption Call, April 2008, Strike Price $3.00					65,000,000	S		221,000
Lehman Swaption Call, May 2008, Strike Price $4.20					71,600,000	S		2,570,440
Merrill Swaption Call, September 2009, Strike Price $4.50					2,300,000	S		36,501
U.S. Treasury Bond Futures Call, May 2008, Strike Price $120.00					211	S		389,031
U.S. Treasury Note Futures Call, June 2008, Strike Price $134.00					10,000	S		156,250
U.S. Treasury Note Futures Call, June 2008, Strike Price $138.00					9,400	S		146,875
U.S. Trerasury Note Futures Call, May 2008, Strike Price $145.00					4,025	S		62,891
								11,168,613
Repurchase Agreements	2.2%
Lehman Brothers Inc. 2.25%, dated 3/31/08, to be repurchased at $135,735,483 on 4/1/08 (Collateral: $380,615,000 Resolution Fuding Corporation principal-only securities, due 1/15/30, value $138,411,094)				$	135,727,000			135,727,000

108

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Short-Term Securities—Continued
Repurchase Agreements—Continued
Merrill Lynch Government Securities Inc. 2.25%, dated 3/31/08, to be repurchased at $179,295,205 on 4/1/08 (Collateral: $27,690,000 Federal Home Bank zero-coupon notes, due 5/8/08, value $27,620,581; $150,000,000 Federal Home Loan Bank notes, due 10/16/09, value $155,249,100)				$	179,284,000	$	179,284,000
							315,011,000
Total Short-Term Securities (Cost—$626,163,294)							618,117,813
Total Investments (Cost—$16,448,367,627)T	113.6%						16,081,195,570
Obligation to Return Collateral For Securities Loaned	(8.3)%						(1,170,604,429	)
Other Assets Less Liabilities	(5.3)%						(750,724,438	)
Net Assets	100.0%					$	14,159,866,703

	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Futures Contracts PurchasedR
Australian Treasury Bond Futures	June 2008	97	$	(20,482	)
Canada Government Bond Futures	June 2008	461		1,713,888
Canadian Dollar Futures	June 2008	2,674		(9,145,080	)
Euribor Futures	June 2008	1,840		(1,140,606	)
Eurodollar Futures	June 2008	12,663		30,345,908
Eurodollar Futures	September 2008	4,265		3,218,625
Eurodollar Futures	June 2009	3,149		(602,095	)
German Republic Bond Futures	June 2008	15,146		(24,540,472	)
LIBOR Futures	September 2008	3,472		3,270,595
LIBOR Futures	June 2009	497		(230,515	)
U.S. Treasury Note Futures	June 2008	4,595		790,143
United Kingdon Treasury Bond Futures	June 2008	1,380		7,278,804
			$	10,938,713
Futures Contracts WrittenR
Australian Dollar Futures	June 2008	809	$	744,280
British Pound Futures	June 2008	3,358		3,488,123
Euro Currency Futures	June 2008	2,520		(13,987,975	)

109

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Futures Contracts WrittenR—Continued
Eurodollar Futures	December 2008	73	$	(39,453	)
Eurodollar Futures	March 2009	1,212		(1,718,010	)
Eurodollar Futures	September 2009	202		(233,310	)
Japanese Yen Futures	June 2008	905		(4,724,500	)
Swiss Franc Futures	June 2008	50		(242,125	)
U.S. Treasury Bond Futures	June 2008	1,688		(1,751,698	)
U.S. Treasury Note Futures	June 2008	26,973		(70,210,595	)
U.S. Treasury Note Futures	June 2008	345		(528,917	)
			$	(89,204,180	)
Options WrittenR
Barclays Swaption Call, Strike Price $2.10	April 2008	64,500,000	$	322,436
Barclays Swaption Call, Strike Price $2.20	April 2008	31,800,000		160,558
Barclays Swaption Call, Strike Price $2.30	April 2008	66,800,000		347,360
Barclays Swaption Call, Strike Price $2.30	April 2008	32,800,000		150,880
Barclays Swaption Call, Strike Price $2.30	April 2008	66,400,000		325,360
Barclays Swaption Call, Strike Price $2.40	April 2008	64,700,000		362,320
Barclays Swaption Call, Strike Price $2.40	April 2008	29,200,000		116,800
Barclays Swaption Call, Strike Price $2.50	April 2008	32,500,000		162,500
Barclays Swaption Call, Strike Price $2.50	April 2008	31,500,000		144,900
Bear Stearns Swaption Call, Strike Price $2.50	April 2008	30,700,000		135,080
Bear Stearns Swaption Call, Strike Price $4.80	April 2008	50,990,000		(2,468,528	)
Bear Stearns Swaption Call, Strike Price $5.00	April 2008	177,970,000		(11,745,486	)
Bear Stearns Swaption Put, Strike Price $3.93	May 2008	150,000,000		1,291,650
Bear Stearns Swaption Put, Strike Price $5.30	April 2008	50,990,000		579,501
Bear Stearns Swaption Put, Strike Price $5.50	April 2008	177,970,000		2,046,655
Eurodollar Futures Put, Strike Price $96.125	June 2008	2,029		319,836
Eurodollar Futures Put, Strike Price $96.25	June 2008	1,193		598,041
Eurodollar Futures Put, Strike Price $96.75	June 2008	830		193,038
Eurodollar Futures Put, Strike Price $97.00	September 2008	634		104,005
Eurodollar Futures Put, Strike Price $97.25	June 2008	1,213		259,229
Eurodollar Futures Put, Strike Price $97.75	June 2008	3,276		(117,980	)
Eurodollar Futures Put, Strike Price $97.75	September 2008	4,943		61,623
Goldman Swaption Call, Strike Price $4.95	September 2009	511,000		(16,790	)
Greenwich Swaption Call, Strike Price $3.32	May 2008	230,400,000		2,995
Greenwich Swaption Call, Strike Price $3.42	August 2008	172,700,000		(534,161	)
Greenwich Swaption Call, Strike Price $4.85	April 2008	49,990,000		(2,635,023	)
Greenwich Swaption Call, Strike Price $5.16	November 2012	47,500,000		(234,888	)
Greenwich Swaption Put, Strike Price $5.16	November 2012	47,500,000		85,642
Greenwich Swaption Put, Strike Price $5.35	April 2008	49,990,000		574,585
JP Morgan Swaption Call, Strike Price $2.10	April 2008	35,200,000		144,285

110

Annual Report to Shareholders

	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Options WrittenR—Continued
JP Morgan Swaption Call, Strike Price $2.40	April 2008	53,400,000	$	272,340
JP Morgan Swaption Call, Strike Price $2.40	April 2008	31,600,000		161,160
JP Morgan Swaption Call, Strike Price $2.40	April 2008	31,900,000		127,600
JP Morgan Swaption Put, Strike Price $4.77	May 2008	92,500,000		1,242,552
Lehman Swaption Call, Strike Price $2.15	April 2008	65,000,000		324,935
Lehman Swaption Call, Strike Price $2.20	April 2008	31,800,000		130,348
Lehman Swaption Call, Strike Price $2.40	April 2008	62,100,000		316,710
Lehman Swaption Call, Strike Price $2.40	April 2008	30,600,000		156,825
Lehman Swaption Call, Strike Price $2.40	April 2008	29,600,000		118,400
U.S. Treasury Bond Futures Call, Strike Price $118.00	May 2008	1,290		(447,606	)
U.S. Treasury Bond Futures Put, Strike Price $110.00	May 2008	414		127,305
U.S. Treasury Bond Futures Put, Strike Price $115.00	May 2008	3,498		1,851,026
U.S. Treasury Bond Futures Put, Strike Price $115.00	May 2008	2,670		1,422,416
U.S. Treasury Bond Futures Put, Strike Price $117.00	May 2008	1,232		(468,488	)
U.S. Treasury Note Futures Call, Strike Price $117.00	May 2008	2,108		(3,799,743	)
U.S. Treasury Note Futures Call, Strike Price $118.00	May 2008	10,879		(11,185,442	)
U.S. Treasury Note Futures Call, Strike Price $123.00	May 2008	398		60,197
U.S. Treasury Note Futures Put, Strike Price $112.00	May 2008	792		490,977
U.S. Treasury Note Futures Put, Strike Price $112.50	May 2008	607		717,824
U.S. Treasury Note Futures Put, Strike Price $113.00	May 2008	5,706		4,966,283
U.S. Treasury Note Futures Put, Strike Price $113.00	May 2008	1,857		92,113
U.S. Treasury Note Futures Put, Strike Price $116.00	May 2008	1,046		1,305,317
U.S. Treasury Note Futures Put, Strike Price $117.00	May 2008	3,717		76,884
U.S. Treasury Note Futures Put, Strike Price $117.50	April 2008	3,274		522,911
USD Put, Strike Price $95.50	June 2008	1,397		311,109
			$	(10,369,624	)

N.M. Not Meaningful.

^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 10.00% of net assets.

^B Indexed Security – The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”), the Euro Interbank Offered Rate (“EURIBOR”) Index, the Consumer Price Index (“CPI”), the one-year Treasury Bill Rate or the ten-year Japanese Government Bond Rate. The coupon rates are the rates as of March 31, 2008.

^C All or a portion of this security is on loan.

^D Convertible Security – Security may be converted into the issuer’s common stock.

^E 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 according to the predetermined schedule.

^F The coupon rates shown on variable rate securities are the rates at March 31, 2008. These rates vary with the weighted average coupon of the underlying loans.

^G Illiquid security valued at fair value under procedures approved by the Board of Directors. At March 31, 2008, the market value for these securities was $77,534,199.

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

111

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Core Plus Bond Portfolio—Continued

^I 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.

^J Credit Linked Security – The rates of interest earned on these securities are tied to the credit rating assigned by Standard & Poor’s Rating Service and/or Moody’s Investors Services.

^K 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.

^L 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.

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

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

^O Inflation-Protected Security – 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.

^P Non-income producing.

^Q All or a portion of this security is collateral to cover futures and options contracts written.

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

^S Par represents actual number of contracts.

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

Gross unrealized appreciation	$	273,558,796
Gross unrealized depreciation		(642,542,469	)
Net unrealized depreciation	$	(368,983,673	)

^† Securities are denominated in U.S. Dollars, unless otherwise noted.

BRL—Brazilian Real

CAD—Canadian Dollar

EUR—Euro

MYR—Malaysian Ringgit

RUB—Russian Ruble

See notes to financial statements.

112

Annual Report to Shareholders

Statement of Assets and Liabilities

Western Asset Core Plus Bond Portfolio

March 31, 2008

Assets:
Investment securities at market value (Cost—$15,822,204,333)			$	15,463,077,757	A
Short-term securities at value (Cost—$626,163,294)				618,117,813
Cash				2,229,249
Foreign currency at value (Cost—$49,680,913)				49,768,588
Receivable for securities sold				2,647,679,208
Deposits with brokers for open futures contracts				65,069,717
Interest receivable				144,988,462
Receivable for fund shares sold				24,644,812
Unrealized appreciation of forward foreign currency contracts				23,253,638
Other assets				286,441,405
Total assets				19,325,270,649
Liabilities:
Payable for securities purchased	$	3,572,861,341
Obligation to return collateral for securities loaned		1,170,604,429
Swap contracts at value		269,847,702
Options written (Proceeds—$66,700,489)		77,070,113
Futures variation margin payable		20,933,095
Payable for fund shares repurchased		18,919,872
Amounts payable for open swaps		15,120,344
Income distribution payable		9,547,742
Unrealized depreciation of forward foreign currency contracts		4,534,300
Accrued management fee		4,356,013
Accrued distribution fees		255,003
Accrued expenses		1,353,992
Total liabilities				5,165,403,946
Net Assets			$	14,159,866,703
Net assets consist of:
Accumulated paid-in-capital			$	14,916,618,254
Undistributed net investment income				21,015,663
Accumulated net realized loss on investments, options, futures, swaps and foreign currency transactions				(154,445,893	)
Net unrealized depreciation on investments, options, futures, swaps and foreign currency translations				(623,321,321	)
Net Assets			$	14,159,866,703
Net Asset Value Per Share:
Institutional Class (1,310,828,651 shares outstanding)				$9.87
Financial Intermediary Class (123,135,394 shares outstanding)				$9.88

^A The market value of securities on loan is $1,273,274,105.

See notes to financial statements.

113

Annual Report to Shareholders

Statement of Operations

Western Asset Core Plus Bond Portfolio

For the Year Ended March 31, 2008

Investment Income:
Interest	$	795,165,480
Income from securities lending		6,336,863
Total income				$	801,502,343
Expenses:
Management fees		55,764,726
Distribution fees:
Financial Intermediary Class		2,612,165
Audit and legal fees		268,024
Custodian fees		1,734,768
Directors’ fees and expenses		325,957
Registration fees		249,896
Reports to shareholders		1,001,596
Transfer agent and shareholder servicing expense:
Institutional Class		461,953
Financial Intermediary Class		64,660
Other expenses		174,441
Total expenses					62,658,186
Net Investment Income					738,844,157
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) on:
Investments		169,698,926
Options		59,897,927
Futures		(505,286,122	)
Swaps		120,174,271
Foreign currency transactions		16,272,374
					(139,242,624	)
Change in unrealized appreciation/(depreciation) of:
Investments, options, futures, swaps and foreign currency translations		(693,529,022	)
Assets and liabilities denominated in foreign currency		(364,631	)
					(693,893,653	)
Net Realized and Unrealized Loss on Investments					(833,136,277	)
Change in Net Assets Resulting From Operations				$	(94,292,120	)

See notes to financial statements.

114

Annual Report to Shareholders

Statement of Changes in Net Assets

Western Asset Core Plus Bond Portfolio

	FOR THE YEARS ENDED MARCH 31,
	2008			2007
Change in Net Assets:
Net investment income	$	738,844,157		$	456,732,640
Net realized gain/(loss)		(139,242,624	)		130,745,217
Change in unrealized appreciation/(depreciation)		(693,893,653	)		163,631,048
Change in net assets resulting from operations		(94,292,120	)		751,108,905
Distributions to shareholders from:
Net investment income:
Institutional Class		(661,064,696	)		(451,787,836	)
Financial Intermediary Class		(51,232,414	)		(28,392,343	)
Net realized gain on investments:
Institutional Class		(92,868,453	)		(3,625,313	)
Financial Intermediary Class		(6,596,142	)		(231,118	)
Change in net assets from fund share transactions:
Institutional Class		2,284,647,990			4,348,340,511
Financial Intermediary Class		517,528,015			248,299,738
Change in net assets		1,896,122,180			4,863,712,544
Net Assets:
Beginning of year	$	12,263,744,523		$	7,400,031,979
End of year	$	14,159,866,703		$	12,263,744,523
Undistributed/(Overdistributed) net investment income	$	21,015,663		$	(14,155,123	)

See notes to financial statements.

115

Annual Report to Shareholders

Financial Highlights

Western Asset Core Plus Bond Portfolio

For a share of each class of capital stock outstanding:

Institutional Class:

	YEARS ENDED MARCH 31,
	2008			2007			2006			2005			2004
Net asset value, beginning of year	$	10.55		$	10.24		$	10.52		$	10.71		$	10.40
Investment operations:
Net investment income		.55	A		.51	A		.45	B		.37	B		.37	B
Net realized and unrealized gain/(loss)		(.62	)		.33			(.18	)		.04			.55
Total from investment operations		(.07	)		.84			.27			.41			.92
Distributions from:
Net investment income		(.53	)		(.53	)		(.52	)		(.35	)		(.41	)
Net realized gain on investments		(.08	)		—	C		(.03	)		(.25	)		(.20	)
Total distributions		(.61	)		(.53	)		(.55	)		(.60	)		(.61	)
Net asset value, end of year	$	9.87		$	10.55		$	10.24		$	10.52		$	10.71
Total return		(.72	)%		8.48	%		2.57	%		4.01	%		9.12	%
Ratios to Average Net Assets:D
Total expenses		.43	%		.44	%		.45	%		.45	%		.48	%
Expenses net of waivers, if any		.43	%		.44	%		.45	%		.45	%		.45	%
Expenses net of all reductions		.43	%		.44	%		.45	%		.45	%		.45	%
Net investment income		5.4	%		4.9	%		4.3	%		3.3	%		3.6	%
Supplemental Data:
Portfolio turnover rate		488.2	%		448.6	%		549.4	%		586.1	%		463.8	%
Net assets, end of year (in thousands)	$	12,943,882		$	11,495,842		$	6,896,815		$	4,565,054		$	3,286,650

^A Computed using average daily shares outstanding.

^B Computed using SEC method.

^C Amount less than $.01 per share.

^D 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.

116

Annual Report to Shareholders

Financial Highlights

Western Asset Core Plus Bond Portfolio

For a share of each class of capital stock outstanding:

Financial Intermediary Class:
	YEARS ENDED MARCH 31,
	2008			2007			2006			2005			2004
Net asset value, beginning of year	$	10.56		$	10.24		$	10.52		$	10.71		$	10.40
Investment operations:
Net investment income		.52	A		.48	A		.42	B		.35	B		.36	B
Net realized and unrealized gain/(loss)		(.62	)		.35			(.18	)		.04			.54
Total from investment operations		(.10	)		.83			.24			.39			.90
Distributions from:
Net investment income		(.50	)		(.51	)		(.49	)		(.33	)		(.39	)
Net realized gain on investments		(.08	)		—	C		(.03	)		(.25	)		(.20	)
Total distributions		(.58	)		(.51	)		(.52	)		(.58	)		(.59	)
Net asset value, end of year	$	9.88		$	10.56		$	10.24		$	10.52		$	10.71
Total return		(.97	)%		8.30	%		2.32	%		3.77	%		8.82	%
Ratios to Average Net Assets:D
Total expenses		.68	%		.69	%		.70	%		.70	%		.73	%
Expenses net of waivers, if any		.68	%		.69	%		.70	%		.70	%		.70	%
Expenses net of all reductions		.68	%		.69	%		.70	%		.70	%		.70	%
Net investment income		5.1	%		4.7	%		4.0	%		2.9	%		3.2	%
Supplemental Data:
Portfolio turnover rate		488.2	%		448.6	%		549.4	%		586.1	%		463.8	%
Net assets, end of year (in thousands)	$	1,215,985		$	767,903		$	503,217		$	191,085		$	7,040

See notes to financial statements.

117

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 various periods ended March 31, 2008, are presented below:

	Three Months Ended 3/31/08		Average Annual Total Returns
		One Year	Three Years	Five Years	Since InceptionA
Western Asset High Yield Bond Portfolio:
Institutional Class	-4.02%	-5.88%	+4.23%	+7.62%	+7.13%
Lehman High Yield Index, 2% Issuer ConstrainedB	-2.97%	-3.48%	+4.64%	+8.67%	+8.56%
Lehman High Yield IndexC	-3.02%	-3.74%	+4.89%	+8.62%	+8.48%

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. Performance figures for periods shorter than one year represent cumulative figures and are not annualized.

The expense ratio for the Institutional Class was 0.61% and represents the Fund’s total annual operating expenses for the share class for the fiscal year ended March 31, 2007 as indicated in the Fund’s prospectus dated August 1, 2007. These expenses include management fees and other expenses. The Fund’s Manager has contractually agreed to waive fees and/or reimburse operating expenses (exclusive of taxes, interest, deferred organizational expenses, brokerage and extraordinary expenses) until August 1, 2008 to limit total annual operating expenses of the Institutional Class to 0.65% of the Fund’s average daily net assets attributable to the Institutional Class.

^A The Fund’s Institutional Class inception date is September 28, 2001. Since-inception index returns are for periods beginning September 30, 2001. Although it is not possible to invest directly in an index, it is possible to purchase investment vehicles designed to track the performance of certain indexes.

^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%.

^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.

118

Annual Report to Shareholders

A year ago, the Federal Reserve Board’s (Fed)^D predominant concern was that strong growth and a high level of resource utilization would sustain inflationary pressures. The financial crisis that erupted a few months later has defined the fixed-income landscape ever since. The period ended with the Fed not only focused on averting recession but struggling to unclog credit markets. The Ted Spread (Ted) ^E, a measure of systemic risk, rose five-fold during the 12-month period ended March 31, 2008, to peak near 220 basis points (bps)^F in November, and had only moderated slightly by period-end. Growing expectations for easing over the first half of the period were finally validated by the Fed’s decision to cut the funds rate by a total of 300 bps, including a surprise 75 bps reduction at an unscheduled Federal Open Market Committee (FOMC) meeting in January. Additionally, the Fed, along with a number of government housing agencies, announced new lending facilities targeted directly at strained credit conditions, with a specific focus on the mortgage market. The yield on the two-year Treasury note declined 303 bps, driving a powerful rally in the Treasury market. All other risky asset classes suffered as a severe flight-to-safety forced spreads sharply higher. Home prices declined and the drag from the homebuilding sector alone detracted more than 1% from gross domestic product growth. Still, the economy continued to expand modestly thanks to a robust trade sector and a stubborn consumer. The price of oil breached the $100 per barrel threshold despite slower growth concerns. The U.S. dollar lost substantial value against a trade-weighted basket of currencies. Equity markets came under serious pressure in the final four months and finished marginally lower.

For the 12-month period ending March 31, 2008, the Portfolio underperformed its benchmarks returning -5.88% versus -3.48% for the Lehman High Yield Index, 2% Issuer Constrained (Index). Negative returns for the high yield asset class stand in stark contrast to U.S. Treasuries, which returned 12.21% for the same period. Underperformance relative to Treasuries resulted in significant spread widening. The option-adjusted spread (OAS)^G for the Index increased to 768 basis points from 275 basis points at the beginning of the period.

The primary reason for the Portfolio’s underperformance is attributable to its overweight to lower rated high yield issues. In general, issues rated CCC and lower returned -10.48% versus -0.64% and -2.33% for BB and B rated issues, respectively. Our overweight position to lower quality was based on our view that the generous yields available more than offset the increased risk given the supportive fundamental backdrop. While earnings, liquidity and leverage statistics were very solid, the technicals overwhelmed in the broad market flight to quality trade. The fact that the default rate fell during the period is evidence that fundamentals remained positive. The Fund’s outflows of almost 15% also hurt performance.

Issue selection aided relative performance as seven of the Fund’s top 10 overweights outperformed index returns. These overweights included DAE Aviation, which returned 9.18% and Belden & Blake, which returned 6.82%. The Fund also maintained an underweight to one of the worst-performing issuers, Rescap, which returned -29.85%.

Subsector allocation aided relative performance. The Fund benefited from overweights to utilities and capital goods, which returned 4.73% and -1.52% as well as from underweights to communications and consumer cyclical, which returned -8.43% and -7.61%, respectively.

Western Asset Management Company

April 21, 2008

Investment Risks: Bonds are subject to a variety of risks, including interest rate, credit and inflation risk. As interest rates rise, bond prices fall, reducing the value of a fund’s share price. Foreign securities are subject to certain risks of overseas investing, including currency fluctuations and changes in political and economic conditions. These risks are magnified in emerging markets. The Fund invests in high yield bonds, which are rated below investment grade and carry more risk than higher-rated securities. The Fund may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance.

^D Federal Reserve Board (Fed) – is charged with, among other things, managing the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.

^E Ted Spread (Ted) – The price difference between three-month futures contracts for U.S. Treasuries and three-month contracts for euros having identical expiration months.

^F 100 basis points (bps) =1%

^G OAS measures the yield spread that is not directly attributable to the security’s characteristics and is mainly used for fixed-income products.

119

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, 2007, and held through March 31, 2008.

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 value 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 if your shares were held during the entire 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 10/1/07		Ending Account Value 3/31/08		Expenses PaidA During the Period 10/1/07 to 3/31/08
Institutional Class:
Actual	$	1,000.00	$	944.50	$	2.83
Hypothetical (5% return before expenses)		1,000.00		1,022.09		2.94

^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 0.58% multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (183), and divided by 366.

120

Annual Report to Shareholders

Performance Information

Western Asset High Yield Portfolio

The graph compares the Fund’s total returns to that of two appropriate broad-based securities market indexes. 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 indexes do not include any transaction costs associated with buying and selling securities in the indexes 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.

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.

121

Annual Report to Shareholders

Performance Information—Continued

Portfolio Composition (as of March 31, 2008)^B

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

Maturity Schedule (as a percentage of the portfolio)

^B The pie charts above represent the composition of the Fund’s portfolio as of March 31, 2008 and do not include derivatives such as Futures Contracts, Options Written, and Swaps. The Fund is actively managed. As a result, the composition of the portfolio holdings and sectors are subject to change at any time.

^C Source: Standard & Poor's.

^D Preferred stocks and warrants do not have defined maturity dates.

122

Annual Report to Shareholders

Portfolio of Investments

Western Asset High Yield Portfolio

March 31, 2008

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Long-Term Securities	95.7%
Corporate Bonds and Notes	82.4%
Aerospace and Defense	1.1%
DRS Technologies Inc.		6.875%	11/1/13	$	280,000	$	274,400
DRS Technologies Inc.		6.625%	2/1/16		1,705,000		1,666,638
DRS Technologies Inc.		7.625%	2/1/18		1,500,000		1,500,000
L-3 Communications Corp.		7.625%	6/15/12		760,000		778,051
L-3 Communications Corp.		6.375%	10/15/15		4,455,000		4,354,762
							8,573,851
Airlines	1.8%
Continental Airlines Inc.		7.339%	4/19/14		1,455,000		1,294,950
Continental Airlines Inc.		8.388%	11/1/20		699,478		657,509
DAE Aviation Holdings Inc.		11.250%	8/1/15		7,650,000		7,535,250	A
Delta Air Lines Inc.		8.954%	8/10/14		2,022,042		1,870,388	A
United Air Lines Inc.		7.032%	10/1/10		846,622		838,156
United Air Lines Inc.		7.186%	10/1/12		2,426,801		2,402,533
							14,598,786
Auto Components	1.5%
Allison Transmission		11.000%	11/1/15		1,880,000		1,635,600	A
Allison Transmission		11.250%	11/1/15		2,660,000		2,234,400	A,B
Visteon Corp.		8.250%	8/1/10		10,377,000		8,483,198
							12,353,198
Automobiles	2.0%
Ford Motor Co.		7.450%	7/16/31		3,400,000		2,244,000
General Motors Corp.		8.250%	7/15/23		2,000,000		1,400,000
General Motors Corp.		8.375%	7/15/33		17,880,000		12,605,400
							16,249,400
Beverages	0.1%
Constellation Brands Inc.		7.250%	9/1/16		1,100,000		1,069,750
Building Products	1.8%
Associated Materials Inc.		9.750%	4/15/12		2,400,000		2,328,000
Associated Materials Inc.		0.000%	3/1/14		9,565,000		6,528,112	C
Nortek Inc.		8.500%	9/1/14		2,635,000		1,949,900
NTK Holdings Inc.		0.000%	3/1/14		6,875,000		3,334,375	C
							14,140,387

123

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset High Yield Portfolio—Continued

	% OF NET ASSETS	RATE		MATURITY DATE	PAR/ SHARES		VALUE
Corporate Bonds and Notes—Continued
Chemicals	1.0%
ARCO Chemical Co.		9.800%		2/1/20	$	80,000	$	67,200
Georgia Gulf Corp.		9.500%		10/15/14		3,400,000		2,626,500
Georgia Gulf Corp.		10.750%		10/15/16		3,630,000		2,377,650
Huntsman International LLC		7.875%		11/15/14		2,120,000		2,247,200
Westlake Chemical Corp.		6.625%		1/15/16		547,000		478,625
								7,797,175
Commercial Services and Supplies	2.2%
Allied Security Escrow Corp.		11.375%		7/15/11		6,820,000		5,865,200
Interface Inc.		10.375%		2/1/10		5,454,000		5,699,430
Interface Inc.		9.500%		2/1/14		200,000		207,000
Rental Service Corp.		9.500%		12/1/14		4,570,000		3,815,950
US Investigations Services Inc.		11.750%		5/1/16		2,140,000		1,594,300	A
								17,181,880
Consumer Finance	2.1%
AmeriCredit Corp.		8.500%		7/1/15		4,305,000		3,142,650
Ford Motor Credit Co.		8.625%		11/1/10		1,310,000		1,141,398
Ford Motor Credit Co.		8.000%		12/15/16		1,865,000		1,459,931
GMAC LLC		6.875%		8/28/12		2,120,000		1,611,052
GMAC LLC		8.000%		11/1/31		13,130,000		9,410,166
								16,765,197
Containers and Packaging	2.3%
Graham Packaging Co. Inc.		8.500%		10/15/12		260,000		234,000
Graham Packaging Co. Inc.		9.875%		10/15/14		3,346,000		2,810,640
Graphic Packaging International Corp.		9.500%		8/15/13		3,835,000		3,681,600
Greif Inc.		6.750%		2/1/17		3,850,000		3,792,250
Plastipak Holdings Inc.		8.500%	��	12/15/15		2,940,000		2,675,400	A
Rock-Tenn Co.		9.250%		3/15/16		1,470,000		1,521,450	A
Smurfit-Stone Container Enterprises Inc.		8.000%		3/15/17		4,190,000		3,519,600
								18,234,940
Distributors	0.3%
Keystone Automotive Operations Inc.		9.750%		11/1/13		4,220,000		2,363,200
Diversified Consumer Services	0.7%
Education Management LLC		8.750%		6/1/14		3,605,000		3,046,225
Education Management LLC		10.250%		6/1/16		785,000		624,075
Service Corp. International		7.875%		2/1/13		315,000		318,150
Service Corp. International		7.625%		10/1/18		575,000		577,875
Service Corp. International		7.500%		4/1/27		1,560,000		1,326,000
								5,892,325

124

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Corporate Bonds and Notes—Continued
Diversified Financial Services	3.5%
AAC Group Holding Corp.		0.000%	10/1/12	$	5,510,000	$	4,463,100	C
CCM Merger Inc.		8.000%	8/1/13		3,400,000		2,856,000	A
DI Finance LLC		9.500%	2/15/13		7,180,000		7,341,550
El Paso Performance-Linked		7.750%	7/15/11		155,000		158,478	A
Hexion US Finance Corp/Hexion Nova Scotia Finance ULC		7.565%	11/15/14		1,110,000		1,037,850	D
Leucadia National Corp.		8.125%	9/15/15		2,340,000		2,351,700
Leucadia National Corp.		7.125%	3/15/17		550,000		521,125
LVB Acquisition Merger Sub Inc.		10.375%	10/15/17		780,000		809,250	A,B
LVB Acquisition Merger Sub Inc.		11.625%	10/15/17		1,530,000		1,530,000	A
The Williams Cos. Inc. Credit Linked Certificate Trust		6.489%	5/1/09		470,000		474,700	A,D
TNK-BP Finance SA		7.875%	3/13/18		910,000		840,613	A
Vanguard Health Holding Co. II LLC		9.000%	10/1/14		5,629,000		5,417,912
							27,802,278
Diversified Telecommunication Services	3.3%
Cincinnati Bell Inc.		6.300%	12/1/28		3,160,000		2,528,000
Citizens Communications Co.		7.875%	1/15/27		2,085,000		1,787,887
Citizens Communications Co.		7.050%	10/1/46		380,000		260,300
Hawaiian Telcom Communications Inc.		9.750%	5/1/13		73,000		39,420
Hawaiian Telcom Communications Inc.		12.500%	5/1/15		130,000		46,800
Intelsat Corp.		9.000%	8/15/14		80,000		80,600
Intelsat Corp.		9.000%	6/15/16		725,000		730,438
Level 3 Financing Inc.		9.250%	11/1/14		4,065,000		3,323,137
Level 3 Financing Inc.		6.704%	2/15/15		3,475,000		2,432,500	D
MetroPCS Wireless Inc.		9.250%	11/1/14		1,315,000		1,209,800
Qwest Communications International Inc.		6.565%	2/15/09		240,000		237,600	D
Qwest Communications International Inc.		7.250%	2/15/11		2,652,000		2,545,920
Qwest Communications International Inc.		7.500%	2/15/14		3,262,000		3,066,280
Qwest Corp.		7.500%	10/1/14		2,035,000		1,984,125
Windstream Corp.		8.625%	8/1/16		6,160,000		6,052,200
							26,325,007
Electric Utilities	5.2%
Elwood Energy LLC		8.159%	7/5/26		2,488,475		2,408,379
Energy Future Holdings Corp.		11.250%	11/1/17		30,020,000		29,719,800	A,B
IPALCO Enterprises Inc.		8.625%	11/14/11		240,000		252,600	E
Midwest Generation LLC		8.560%	1/2/16		2,082,827		2,259,867

125

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset High Yield Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Corporate Bonds and Notes—Continued
Electric Utilities—Continued
Orion Power Holdings Inc.		12.000%	5/1/10	$	4,090,000	$	4,468,325
Texas Competitive Electrics Holdings Co. LLC		10.500%	11/1/16		2,470,000		2,420,600	A,B
							41,529,571
Energy Equipment and Services	1.4%
Complete Production Services Inc.		8.000%	12/15/16		3,610,000		3,465,600
Gulfmark Offshore Inc.		7.750%	7/15/14		2,300,000		2,334,500
Key Energy Services Inc.		8.375%	12/1/14		3,470,000		3,461,325	A
Pride International Inc.		7.375%	7/15/14		1,975,000		2,054,000
							11,315,425
Food and Staples Retailing	0.4%
Delhaize America Inc.		9.000%	4/15/31		2,588,000		3,114,681
Food Products	0.5%
Dole Food Co. Inc.		7.250%	6/15/10		4,275,000		3,291,750
Dole Food Co. Inc.		8.875%	3/15/11		165,000		133,650
Dole Food Co. Inc.		8.750%	7/15/13		290,000		217,500
							3,642,900
Gas Utilities	0.7%
Suburban Propane Partners LP		6.875%	12/15/13		5,910,000		5,762,250
Health Care Equipment and Supplies	0.3%
Advanced Medical Optics Inc.		7.500%	5/1/17		2,320,000		1,995,200
Fresenius Medical Care Capital Trust IV		7.875%	6/15/11		150,000		155,625
							2,150,825
Health Care Providers and Services	4.7%
Community Health Systems Inc.		8.875%	7/15/15		725,000		727,719
DaVita Inc.		7.250%	3/15/15		5,425,000		5,289,375
HCA Inc.		9.000%	12/15/14		56,000		52,005
HCA Inc.		6.375%	1/15/15		2,775,000		2,348,344
HCA Inc.		9.250%	11/15/16		2,730,000		2,832,375
HCA Inc.		9.625%	11/15/16		7,125,000		7,392,187	B
HCA Inc.		7.500%	12/15/23		170,000		133,483
HCA Inc.		7.690%	6/15/25		1,870,000		1,482,061
IASIS Healthcare LLC		8.750%	6/15/14		450,000		447,750
Tenet Healthcare Corp.		6.375%	12/1/11		2,455,000		2,215,638
Tenet Healthcare Corp.		6.500%	6/1/12		3,030,000		2,673,975
Tenet Healthcare Corp.		7.375%	2/1/13		1,365,000		1,218,263

126

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Corporate Bonds and Notes—Continued
Health Care Providers and Services—Continued
Tenet Healthcare Corp.		9.875%	7/1/14	$	3,185,000	$	3,081,487
Tenet Healthcare Corp.		9.250%	2/1/15		870,000		813,450
U.S. Oncology Holdings Inc.		7.949%	3/15/12		6,485,000		4,993,450	B,D
Universal Hospital Services Inc.		8.288%	6/1/15		940,000		836,600	D
Universal Hospital Services Inc.		8.500%	6/1/15		1,135,000		1,135,000	B
							37,673,162
Hotels, Restaurants and Leisure	4.6%
Boyd Gaming Corp.		6.750%	4/15/14		690,000		565,800
Buffets Inc.		12.500%	11/1/14		4,105,000		123,150	F
Caesars Entertainment Inc.		8.125%	5/15/11		165,000		138,600
Denny’s Holdings Inc.		10.000%	10/1/12		1,710,000		1,573,200
El Pollo Loco Inc.		11.750%	11/15/13		2,521,000		2,432,765
Fontainebleau Las Vegas Holdings LLC/Fontainebleau Las Vegas Capital Corp.		10.250%	6/15/15		1,945,000		1,371,225	A
Harrah’s Operating Co. Inc.		10.750%	2/1/16		1,800,000		1,516,500	A
Herbst Gaming Inc.		7.000%	11/15/14		190,000		34,675	G
Indianapolis Downs LLC and Capital Corp.		11.000%	11/1/12		2,720,000		2,366,400	A
Indianapolis Downs LLC and Capital Corp.		15.500%	11/1/13		2,750,000		2,612,500	A,B
Inn of the Mountain Gods Resort and Casino		12.000%	11/15/10		5,690,000		5,519,300
Mandalay Resort Group		9.375%	2/15/10		58,000		59,740
MGM MIRAGE		8.500%	9/15/10		85,000		87,763
MGM MIRAGE		8.375%	2/1/11		1,750,000		1,754,375
MGM MIRAGE		6.750%	9/1/12		125,000		115,937
MGM MIRAGE		7.500%	6/1/16		1,850,000		1,665,000
MGM MIRAGE		7.625%	1/15/17		950,000		864,500
Quapaw Downstream Development		12.000%	10/15/15		1,490,000		1,177,100	A
Sbarro Inc.		10.375%	2/1/15		2,895,000		2,402,850
Snoqualmie Entertainment Authority		6.936%	2/1/14		3,075,000		2,506,125	A,D
Station Casinos Inc.		6.000%	4/1/12		530,000		434,600
Station Casinos Inc.		7.750%	8/15/16		2,910,000		2,342,550
Station Casinos Inc.		6.625%	3/15/18		1,155,000		641,025
The Choctaw Resort Development Enterprise		7.250%	11/15/19		331,000		287,970	A
Turning Stone Casino Resort Enterprise		9.125%	9/15/14		995,000		950,225	A
Wynn Las Vegas LLC		6.625%	12/1/14		3,750,000		3,609,375	A
							37,153,250
Household Durables	1.6%
American Greetings Corp.		7.375%	6/1/16		260,000		258,050
Jarden Corp.		7.500%	5/1/17		3,335,000		2,918,125

127

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset High Yield Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Corporate Bonds and Notes—Continued
Household Durables—Continued
K Hovnanian Enterprises Inc.		6.500%	1/15/14	$	490,000	$	330,750
K Hovnanian Enterprises Inc.		6.250%	1/15/16		1,190,000		803,250
K Hovnanian Enterprises Inc.		7.500%	5/15/16		1,080,000		750,600
Norcraft Cos.		9.000%	11/1/11		6,100,000		6,145,750
Norcraft Holdings LP		0.000%	9/1/12		2,090,000		1,828,750	C
							13,035,275
Household Products	0.2%
Visant Holding Corp.		8.750%	12/1/13		1,395,000		1,304,325
Independent Power Producers and Energy Traders	4.4%
Dynegy Holdings Inc.		7.750%	6/1/19		4,870,000		4,553,450
Edison Mission Energy		7.750%	6/15/16		2,190,000		2,255,700
Edison Mission Energy		7.200%	5/15/19		1,410,000		1,392,375
Edison Mission Energy		7.625%	5/15/27		2,595,000		2,439,300
Mirant Mid Atlantic LLC		9.125%	6/30/17		2,231,847		2,468,981
Mirant Mid Atlantic LLC		10.060%	12/30/28		604,063		694,672
Mirant North America LLC		7.375%	12/31/13		1,735,000		1,752,350
NRG Energy Inc.		7.250%	2/1/14		860,000		849,250
NRG Energy Inc.		7.375%	2/1/16		7,180,000		7,036,400
NRG Energy Inc.		7.375%	1/15/17		3,045,000		2,961,262
The AES Corp.		9.375%	9/15/10		200,000		211,500
The AES Corp.		8.750%	5/15/13		1,152,000		1,198,080	A
The AES Corp.		7.750%	3/1/14		395,000		397,469
The AES Corp.		7.750%	10/15/15		435,000		438,262
The AES Corp.		8.000%	10/15/17		6,810,000		6,895,125
							35,544,176
IT Services	1.7%
Ceridian Corp.		12.250%	11/15/15		2,100,000		1,753,500	A,B
First Data Corp.		9.875%	9/24/15		5,460,000		4,490,850	A
SunGard Data Systems Inc.		9.125%	8/15/13		430,000		434,300
SunGard Data Systems Inc.		10.250%	8/15/15		7,155,000		7,190,775
							13,869,425
Machinery	0.3%
American Railcar Industries Inc.		7.500%	3/1/14		1,250,000		1,100,000
Terex Corp.		7.375%	1/15/14		1,400,000		1,386,000
							2,486,000

128

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Corporate Bonds and Notes—Continued
Media	7.4%
Affinion Group Inc.		10.125%	10/15/13	$	2,825,000	$	2,807,344
Affinion Group Inc.		11.500%	10/15/15		3,455,000		3,334,075
Cablevision Systems Corp.		8.000%	4/15/12		1,100,000		1,069,750
CCH I Holdings LLC		11.750%	5/15/14		1,655,000		835,775
CCH I Holdings LLC		12.125%	1/15/15		1,620,000		826,200
CCH I Holdings LLC		11.000%	10/1/15		15,364,000		10,677,980
CCH II Holdings LLC		10.250%	9/15/10		1,075,000		978,250
CCH II Holdings LLC		10.250%	10/1/13		35,000		30,013
Charter Communications Holdings LLC		11.750%	5/15/11		980,000		589,225
Charter Communications Holdings LLC		12.125%	1/15/12		1,185,000		702,112
Charter Communications Operating LLC		10.875%	9/15/14		5,420,000		5,338,700	A
CMP Susquehanna Corp.		9.875%	5/15/14		2,445,000		1,687,050
CSC Holdings Inc.		8.125%	7/15/09		325,000		328,250
CSC Holdings Inc.		8.125%	8/15/09		475,000		479,750
CSC Holdings Inc.		6.750%	4/15/12		4,030,000		3,888,950
Dex Media Inc.		0.000%	11/15/13		275,000		198,000	C
Dex Media Inc.		0.000%	11/15/13		145,000		104,400	C
Dex Media West LLC		9.875%	8/15/13		105,000		91,350
DirecTV Holdings LLC		8.375%	3/15/13		3,160,000		3,203,450
EchoStar DBS Corp.		7.000%	10/1/13		1,440,000		1,357,200
Idearc Inc.		8.000%	11/15/16		7,835,000		5,073,162
ION Media Networks Inc.		7.508%	1/15/12		1,760,000		1,425,600	A,D
ION Media Networks Inc.		11.000%	7/31/13		500		139	H
R.H. Donnelley Corp.		6.875%	1/15/13		5,305,000		3,236,050
R.H. Donnelley Corp.		6.875%	1/15/13		3,120,000		1,903,200
TL Acquisitions Inc.		10.500%	1/15/15		3,545,000		3,048,700	A
TL Acquisitions Inc.		0.000%	7/15/15		3,145,000		2,248,675	A,C
Tube City IMS Corp.		9.750%	2/1/15		4,575,000		4,026,000
							59,489,350
Metals and Mining	3.6%
Freeport-McMoRan Copper & Gold Inc.		8.375%	4/1/17		10,170,000		10,792,912
Metals USA Holdings Corp.		10.729%	7/1/12		2,615,000		1,948,175	B,D
Metals USA Inc.		11.125%	12/1/15		5,260,000		5,154,800
Noranda Aluminium Acquisition Corp.		8.738%	5/15/15		940,000		737,900	A,B,D
Noranda Aluminium Holding Corp.		10.488%	11/15/14		2,560,000		1,881,600	A,B,D
Ryerson Inc.		12.000%	11/1/15		6,725,000		6,355,125	A
Steel Dynamics Inc.		7.375%	11/1/12		1,575,000		1,590,750	A
							28,461,262

129

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset High Yield Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Corporate Bonds and Notes—Continued
Multiline Retail	1.7%
Dollar General Corp.		11.875%	7/15/17	$	5,830,000	$	5,101,250	B
The Neiman-Marcus Group Inc.		10.375%	10/15/15		6,675,000		6,675,000
The Neiman-Marcus Group Inc.		7.125%	6/1/28		2,010,000		1,758,750
							13,535,000
Oil, Gas and Consumable Fuels	9.1%
ANR Pipeline Inc.		9.625%	11/1/21		1,364,000		1,829,389
Belden and Blake Corp.		8.750%	7/15/12		10,440,000		10,466,100
Chesapeake Energy Corp.		7.500%	6/15/14		370,000		379,250
Chesapeake Energy Corp.		6.375%	6/15/15		2,065,000		2,003,050
Chesapeake Energy Corp.		6.625%	1/15/16		250,000		245,000
Chesapeake Energy Corp.		6.500%	8/15/17		2,525,000		2,436,625
Chesapeake Energy Corp.		6.250%	1/15/18		2,515,000		2,401,825
Colorado Interstate Gas Co.		6.800%	11/15/15		1,175,000		1,211,433
El Paso Corp.		7.750%	6/15/10		1,568,000		1,633,944
El Paso Corp.		7.875%	6/15/12		350,000		365,851
El Paso Corp.		7.800%	8/1/31		5,790,000		5,944,819
El Paso Corp.		7.750%	1/15/32		205,000		210,542
El Paso Natural Gas Co.		8.375%	6/15/32		1,600,000		1,817,104
Enterprise Products Operating LP		8.375%	8/1/66		3,640,000		3,543,030	C
Exco Resources Inc.		7.250%	1/15/11		4,048,000		3,936,680
Forbes Energy Services		11.000%	2/15/15		740,000		725,200	A
International Coal Group Inc.		10.250%	7/15/14		3,120,000		2,987,400
Mariner Energy Inc.		7.500%	4/15/13		1,210,000		1,161,600
Mariner Energy Inc.		8.000%	5/15/17		1,405,000		1,341,775
Northwest Pipelines Corp.		7.000%	6/15/16		155,000		164,688
Overseas Shipholding Group		8.250%	3/15/13		2,020,000		2,027,575
Parallel Petroleum Corp.		10.250%	8/1/14		1,895,000		1,814,462
Parker Drilling Co.		9.625%	10/1/13		673,000		708,332
Petrohawk Energy Corp.		9.125%	7/15/13		1,970,000		2,024,175
SemGroup LP		8.750%	11/15/15		4,340,000		3,971,100	A
Sonat Inc.		7.625%	7/15/11		95,000		98,191
Southwestern Energy Co.		7.500%	2/1/18		2,310,000		2,390,850	A
Stone Energy Corp.		8.250%	12/15/11		795,000		787,050
Stone Energy Corp.		6.750%	12/15/14		1,635,000		1,487,850
The Williams Cos. Inc.		7.500%	1/15/31		970,000		1,011,225
The Williams Cos. Inc.		8.750%	3/15/32		2,559,000		2,955,645
Transcontinental Gas Pipe Line Corp.		8.875%	7/15/12		1,060,000		1,205,750
VeraSun Energy Corp.		9.375%	6/1/17		4,205,000		2,880,425	A
W&T Offshore Inc.		8.250%	6/15/14		2,380,000		2,207,450	A

130

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Corporate Bonds and Notes—Continued
Oil, Gas and Consumable Fuels—Continued
Whiting Petroleum Corp.		7.250%	5/1/12	$	195,000	$	192,563
Whiting Petroleum Corp.		7.000%	2/1/14		2,350,000		2,326,500
							72,894,448
Paper and Forest Products	1.6%
Abitibi-Consolidated Finance		7.875%	8/1/09		420,000		352,800
Appleton Papers Inc.		8.125%	6/15/11		650,000		625,625
Appleton Papers Inc.		9.750%	6/15/14		4,025,000		3,813,687
NewPage Holding Corp.		9.489%	5/1/12		7,115,000		7,043,850	D
NewPage Holding Corp.		11.818%	11/1/13		1,440,000		1,209,600	B,D
							13,045,562
Pharmaceuticals	N.M.
Leiner Health Products Inc.		11.000%	6/1/12		9,460,000		11,825	F,I
Real Estate Investment Trusts	0.3%
Ventas Inc.		8.750%	5/1/09		866,000		878,990
Ventas Inc.		9.000%	5/1/12		762,000		802,005
Ventas Inc.		6.750%	4/1/17		910,000		889,525
							2,570,520
Real Estate Management and Development	0.8%
Ashton Woods USA LLC		9.500%	10/1/15		2,160,000		1,155,600
Forest City Enterprises Inc.		7.625%	6/1/15		465,000		441,750
Forest City Enterprises Inc.		6.500%	2/1/17		160,000		144,000
Realogy Corp.		10.500%	4/15/14		880,000		591,800
Realogy Corp.		11.000%	4/15/14		2,830,000		1,613,100	B
Realogy Corp.		12.375%	4/15/15		4,705,000		2,093,725
							6,039,975
Road and Rail	2.1%
Hertz Corp.		8.875%	1/1/14		3,025,000		2,866,187
Hertz Corp.		10.500%	1/1/16		7,855,000		7,354,244
Kansas City Southern Railway		7.500%	6/15/09		2,675,000		2,715,125
Saint Acquisition Corp.		10.815%	5/15/15		5,695,000		2,263,763	A,D
Saint Acquisition Corp.		12.500%	5/15/17		3,440,000		1,401,800	A
							16,601,119
Semiconductors and Semiconductor Equipment	0.1%
Freescale Semiconductor Inc.		8.875%	12/15/14		1,095,000		856,838

131

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset High Yield Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Corporate Bonds and Notes—Continued
Software	0.3%
Activant Solutions Inc.		9.500%	5/1/16	$	3,030,000	$	2,545,200
Specialty Retail	0.9%
AutoNation Inc.		6.258%	4/15/13		2,010,000		1,648,200	D
Blockbuster Inc.		9.000%	9/1/12		2,500,000		2,037,500
Eye Care Centers of America Inc.		10.750%	2/15/15		560,000		571,200
Michaels Stores Inc.		10.000%	11/1/14		2,170,000		1,898,750
Michaels Stores Inc.		11.375%	11/1/16		1,420,000		1,114,700
							7,270,350
Textiles, Apparel and Luxury Goods	0.3%
Oxford Industries Inc.		8.875%	6/1/11		1,644,000		1,561,800
Simmons Co.		0.000%	12/15/14		635,000		409,575	C
							1,971,375
Thrifts and Mortgage Finance	0.6%
Countrywide Financial Corp.		0.758%	4/15/37		1,315,000		1,163,775	D,H
Residential Capital LLC		7.828%	4/17/09		2,135,000		789,950	A,D
Residential Capital LLC		8.375%	6/30/10		1,980,000		994,950
Residential Capital LLC		8.000%	2/22/11		3,470,000		1,700,300	E
							4,648,975
Tobacco	0.8%
Alliance One International Inc.		8.500%	5/15/12		1,990,000		1,870,600
Alliance One International Inc.		11.000%	5/15/12		2,950,000		2,994,250
Reynolds American Inc.		6.500%	7/15/10		1,330,000		1,356,600
							6,221,450
Trading Companies and Distributors	1.5%
Ashtead Capital Inc.		9.000%	8/15/16		3,451,000		2,795,310	A
H&E Equipment Services Inc.		8.375%	7/15/16		5,140,000		4,240,500
Penhall International Corp.		12.000%	8/1/14		6,305,000		5,327,725	A
							12,363,535
Transportation Infrastructure	0.7%
Hawker Beechcraft Acquisition Co.		8.875%	4/1/15		3,775,000		3,859,938	B
Hawker Beechcraft Acquisition Co.		9.750%	4/1/17		1,505,000		1,497,475
							5,357,413
Wireless Telecommunication Services	0.9%
ALLTEL Communications Inc.		10.375%	12/1/17		2,570,000		2,120,250	A,B
iPCS Inc.		5.364%	5/1/13		1,175,000		904,750	D

132

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Corporate Bonds and Notes—Continued
Wireless Telecommunication Services—Continued
Rural Cellular Corp.		9.875%	2/1/10	$	1,575,000	$	1,618,313
Rural Cellular Corp.		6.076%	6/1/13		2,685,000		2,685,000	D
							7,328,313
Total Corporate Bonds and Notes (Cost—$741,620,624)							659,141,149
Mortgage-Backed Securities	N.M.
Fixed Rate Securities	N.M.
Ocwen Residential Mortgage Corp. 1998-R1		7.000%	10/25/40		191,923		5,757	I
Variable Rate SecuritiesJ	N.M.
BlackRock Capital Finance LP 1996-R1		9.587%	9/25/26		748,400		336,779
Total Mortgage-Backed Securities (Cost—$716,827)							342,536
Yankee BondsK	10.7%
Biotechnology	N.M.
FMC Finance III SA		6.875%	7/15/17		10,000		10,000
Chemicals	0.7%
Methanex Corp.		8.750%	8/15/12		2,507,000		2,688,757
Montell Finance Co. BV		8.100%	3/15/27		4,995,000		3,321,675	A
							6,010,432
Commercial Banks	0.5%
ATF Capital BV		9.250%	2/21/14		1,105,000		1,092,403	A
TuranAlem Finance BV		8.250%	1/22/37		1,720,000		1,348,996	A
TuranAlem Finance BV		8.250%	1/22/37		1,585,000		1,251,041	A
							3,692,440
Containers and Packaging	0.2%
Smurfit Capital Funding PLC		7.500%	11/20/25		2,225,000		1,958,000
Diversified Financial Services	0.8%
Basell AF SCA		8.375%	8/15/15		2,595,000		1,894,350	A
Petroplus Finance Ltd.		6.750%	5/1/14		1,110,000		1,012,875	A
Petroplus Finance Ltd.		7.000%	5/1/17		2,065,000		1,843,012	A
TNK-BP Finance SA		7.875%	3/13/18		1,904,000		1,761,200	A
							6,511,437

133

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
Diversified Telecommunication Services	2.7%
Intelsat Bermuda Ltd.		9.250%	6/15/16	$	2,605,000	$	2,624,537
Intelsat Bermuda Ltd.		11.250%	6/15/16		7,265,000		7,364,894
Nordic Telephone Co. Holdings ApS		8.875%	5/1/16		4,305,000		4,175,850	A
NTL Cable PLC		9.125%	8/15/16		6,910,000		6,184,450
Wind Acquisition Finance SA		10.750%	12/1/15		1,100,000		1,122,000	A
							21,471,731
Energy Equipment and Services	0.2%
Compagnie Generale de Geophysique-Veritas		7.500%	5/15/15		1,950,000		1,979,250
Foreign Government	0.1%
Russian Federation		7.500%	3/31/30		869,497		1,001,226	A
Independent Power Producers and Energy Traders	0.2%
AES China Generating Co. Ltd.		8.250%	6/26/10		1,562,000		1,475,164
Media	0.5%
Sun Media Corp.		7.625%	2/15/13		3,880,000		3,666,600
Metals and Mining	0.6%
Novelis Inc.		7.250%	2/15/15		5,125,000		4,535,625
Oil, Gas and Consumable Fuels	0.8%
Corral Finans AB		5.758%	4/15/10		2,248,952		1,709,204	A,B,D
OPTI Canada Inc.		7.875%	12/15/14		30,000		29,325
OPTI Canada Inc.		8.250%	12/15/14		2,645,000		2,618,550
Teekay Shipping Corp.		8.875%	7/15/11		1,662,000		1,757,565
							6,114,644
Paper and Forest Products	1.6%
Abitibi-Consolidated Co. of Canada		5.250%	6/20/08		1,130,000		1,130,000
Abitibi-Consolidated Co. of Canada		13.750%	4/1/11		4,340,000		4,437,650	A
Abitibi-Consolidated Co. of Canada		8.375%	4/1/15		400,000		206,000
Abitibi-Consolidated Inc.		6.950%	4/1/08		4,380,000		4,380,000
Abitibi-Consolidated Inc.		8.550%	8/1/10		1,800,000		1,035,000
Abitibi-Consolidated Inc.		7.750%	6/15/11		1,230,000		664,200
Abitibi-Consolidated Inc.		7.400%	4/1/18		2,885,000		1,269,400
							13,122,250

134

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES			VALUE
Yankee Bonds—Continued
Road and Rail	0.7%
Grupo Transportacion Ferroviaria Mexicana SA de CV		9.375%	5/1/12	$	2,120,000		$	2,188,900
Grupo Transportacion Ferroviaria Mexicana SA de CV		7.625%	12/1/13		1,915,000			1,800,100
Grupo Transportacion Ferroviaria Mexicana SA de CV		7.375%	3/1/14		1,380,000			1,273,050	A
								5,262,050
Semiconductors and Semiconductor Equipment	0.4%
NXP BV/NXP Funding LLC		7.008%	10/15/13		970,000			800,250	D
NXP BV/NXP Funding LLC		7.875%	10/15/14		1,165,000			1,065,975
NXP BV/NXP Funding LLC		9.500%	10/15/15		1,330,000			1,093,925
								2,960,150
Wireless Telecommunication Services	0.7%
True Move Co. Ltd.		10.750%	12/16/13		5,505,000			5,174,700	A
True Move Co. Ltd.		10.750%	12/16/13		865,000			816,896	A
								5,991,596
Total Yankee Bonds (Cost—$94,436,515)								85,762,595
Preferred Stocks	1.1%
Bank of America Corp.		7.250%			5,400	shs		5,578,200	G
Citigroup Inc.		6.500%			63,000			2,976,750	G
ION Media Networks Inc.		12.000%			7			18,200
Total Preferred Stocks (Cost—$8,658,029)								8,573,150
Warrants	N.M.
Next Generation Network Inc.					2,783	wts		—	H,K
Total Warrants (Cost—$28)								—
Loan Participations and AssignmentsD	1.5%
Auto Components	0.5%
Allison Transmission Inc., Term Loan, Tranche B		5.740 to 5.750%	6/10/08	$	4,239,375			3,710,966
Containers and Packaging	0.4%
Berry Plastics Holding Corp., Term Loan		11.646%	4/7/08		4,542,400			3,260,549

135

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset High Yield Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Diversified Telecommunication Services	0.4%
Wind Acquisition Holdings Finance SA, PIK Loan		0.000%	12/21/11	$	4,000,000	$	3,450,000	M
Independent Power Producers and Energy Traders	0.2%
Dynegy Holdings Inc., Term Loan		4.204%	4/30/08		1,203,515		1,105,730
Dynegy Holdings Inc., Term Loan, Tranche		4.683%	4/7/08		794,494		729,941	B
							1,835,671
Total Loan Participations and Assignments (Cost—$13,816,540)							12,257,186
Total Long-Term Securities (Cost—$859,248,563)							766,076,616
Short-Term Securities	2.0%
Foreign Government Obligations	0.8%
Egypt Treasury Bills		0.000%	11/4/08		18,250,000		3,218,390	M
Egypt Treasury Bills		0.000%	11/11/08		17,725,000		3,083,108	M
							6,301,498
Repurchase Agreement	1.2%
Lehman Brothers Inc. 2.25%, dated 3/31/08, to be repurchased at $9,390,587 on 4/1/08 (Collateral: $9,640,000 Fannie Mae zero-coupon bond, due 7/15/08, value $9,577,822)					9,390,000		9,390,000
Total Short-Term Securities (Cost—$15,692,839)							15,691,498
Total Investments (Cost—$874,941,402)N	97.7%						781,768,114
Other Assets Less Liabilities	2.3%						18,334,784
Net Assets	100.0%					$	800,102,898

N.M. Not Meaningful.

^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 20.99% of net assets.

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

^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 according to the predetermined schedule.

^D 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, 2008.

^E Credit Linked Security – The rates of interest earned on these securities are tied to the credit rating assigned by Standard & Poor’s Rating Service and/or Moody’s Investors Services.

136

Annual Report to Shareholders

^F Bond is in default as of March 31, 2008.

^G Subsequent to March 31, 2008 the bond is in default.

^H Convertible Security – Security may be converted into the issuer’s common stock.

^I Illiquid security valued at fair value under procedures approved by the Board of Directors. At March 31, 2008, the market value for these securities was $17,582.

^J The coupon rates shown on variable rate securities are the rates at March 31, 2008. These rates vary with the weighted average coupon of the underlying loans.

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

^L Non-income producing.

^M 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.

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

Gross unrealized appreciation	$	4,179,715
Gross unrealized depreciation		(98,053,121	)
Net unrealized depreciation	$	(93,873,406	)

See notes to financial statements.

137

Annual Report to Shareholders

Statement of Assets and Liabilities

Western Asset High Yield Portfolio

March 31, 2008

Assets:
Investment securities at market value (Cost—$859,248,563)			$	766,076,616
Short-term securities at value (Cost—$15,692,839)				15,691,498
Interest receivable				21,958,692
Receivable for securities sold				6,941,696
Receivable for fund shares sold				179,548
Other assets				900,000
Total assets				811,748,050
Liabilities:
Payable for securities purchased	$	10,033,438
Accrued management fee		395,145
Swap contracts at value		849,760
Cash overdraft		177,237
Payable for fund shares repurchased		87,315
Accrued expenses		102,257
Total liabilities				11,645,152
Net Assets			$	800,102,898
Net assets consist of:
Accumulated paid-in-capital			$	894,503,961
Undistributed net investment income				19,427,792
Accumulated net realized loss on investments and swaps				(19,802,038	)
Net unrealized depreciation on investments and swaps				(94,026,817	)
Net Assets			$	800,102,898
Net Asset Value Per Share:
Institutional Class (85,999,748 shares outstanding)				$9.30

See notes to financial statements.

138

Annual Report to Shareholders

Statement of Operations

Western Asset High Yield Portfolio

For the Year Ended March 31, 2008

Investment Income:
Interest			$	81,239,280
Expenses:
Management fees	5,035,782
Audit and legal fees	89,716
Custodian fees	110,697
Directors’ fees and expenses	24,190
Registration fees	27,687
Reports to shareholders	9,437
Transfer agent and shareholder servicing expense:
Institutional Class	15,237
Other expenses	50,412
	5,363,158
Less: Compensating balance credits	(60,278	)
Net expenses				5,302,880
Net Investment Income				75,936,400
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) on:
Investments	(17,778,987	)
Swaps	345,171
				(17,433,816	)
Change in unrealized appreciation/(depreciation) of investments and swaps:
				(113,737,089	)
Net Realized and Unrealized Loss on Investments				(131,170,905	)
Change in Net Assets Resulting From Operations			$	(55,234,505	)

See notes to financial statements.

139

Annual Report to Shareholders

Statement of Changes in Net Assets

Western Asset High Yield Portfolio

	FOR THE YEARS ENDED MARCH 31,
	2008			2007
Change in Net Assets:
Net investment income	$	75,936,400		$	53,017,362
Net realized gain/(loss)		(17,433,816	)		4,211,652
Change in unrealized appreciation/(depreciation)		(113,737,089	)		21,006,214
Change in net assets resulting from operations		(55,234,505	)		78,235,228
Distributions to shareholders from:
Net investment income:
Institutional Class		(73,407,062	)		(48,140,250	)
Net realized gain on investments:
Institutional Class		(5,888,441	)		(130,587	)
Change in net assets from fund share transactions:
Institutional Class		55,309,962			252,440,140
Change in net assets		(79,220,046	)		282,404,531
Net Assets:
Beginning of year	$	879,322,944		$	596,918,413
End of year	$	800,102,898		$	879,322,944
Undistributed net investment income	$	19,427,792		$	16,590,204

See notes to financial statements.

140

Annual Report to Shareholders

Financial Highlights

Western Asset High Yield Portfolio

For a share of each class of capital stock outstanding:

Institutional Class:

	YEARS ENDED MARCH 31,
	2008			2007			2006			2005			2004
Net asset value, beginning of year	$	10.75		$	10.34		$	10.49		$	10.28		$	9.56
Investment operations:
Net investment income		.83	A		.80	A		.76	B		.61	B		.78	B
Net realized and unrealized gain/(loss)		(1.41	)		.39			(.05	)		.17			.89
Total from investment operations		(.58	)		1.19			.71			.78			1.67
Distributions from:
Net investment income		(.80	)		(.78	)		(.73	)		(.57	)		(.95	)
Net realized gain on investments		(.07	)		—	C		(.13	)		—			—
Total distributions		(.87	)		(.78	)		(.86	)		(.57	)		(.95	)
Net asset value, end of year	$	9.30		$	10.75		$	10.34		$	10.49		$	10.28
Total return		(5.88	)%		12.14	%		7.30	%		7.81	%		18.27	%
Ratios to Average Net Assets:D
Total expenses		.59	%		.61	%		.62	%		.62	%		.67	%
Expenses net of waivers, if any		.59	%		.61	%		.62	%		.62	%		.58	%
Expenses net of all reductions		.58	%		.61	%		.62	%		.62	%		.58	%
Net investment income		8.3	%		7.8	%		7.8	%		7.0	%		7.9	%
Supplemental Data:
Portfolio turnover rate		59.1	%		63.6	%		147.2	%		121.0	%		116.0	%
Net assets, end of year (in thousands)	$	800,103		$	879,323		$	596,918		$	414,417		$	189,458

^A Computed using average daily shares outstanding.

^B Computed using SEC method.

^C Amount less than $.01 per share.

^D 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.

141

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 various periods ended March 31, 2008, are presented below:

	Three Months Ended 3/31/08		Average Annual Total Returns
		One Year	Three Years	Five Years	Since InceptionA
Western Asset Inflation Indexed Plus Bond Portfolio:
Institutional Class	+4.66%	+12.77%	+6.60%	+6.66%	+7.80%
Financial Intermediary Class	+4.54%	N/A	N/A	N/A	+14.29%	B
Lehman U.S. Treasury Inflation Notes IndexC	+4.43%	+12.21%	+6.60%	+4.80%	+5.83%

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. Performance figures for periods shorter than one year represent cumulative figures and are not annualized.

The gross expense ratios for the Institutional and Financial Intermediary Classes were 0.29% and 0.54%, respectively. Gross expenses are the Fund’s total annual operating expenses for the share classes for the fiscal year ended March 31, 2007 indicated in the Fund’s prospectus dated August 1, 2007 and do not reflect fee waivers or reimbursements. These expenses include management fees, 12b-1 distribution fees (if any) and other expenses.

The net expense ratios for the Institutional and Financial Intermediary Classes were 0.25%, and 0.50%, respectively. Net expenses are the Fund’s total annual operating expenses for the share classes for the fiscal year ended March 31, 2007 as indicated in the Fund’s prospectus dated August 1, 2007 and reflect contractual fee waivers and/or reimbursements. The Fund’s Manager has contractually agreed to waive fees and/or reimburse operating expenses (exclusive of taxes, interest, deferred organizational expenses, brokerage and extraordinary expenses) until August 1, 2008 to limit total annual operating expenses to 0.25% with respect to the Institutional Class and 0.50% with respect to the Financial Intermediary Class of the Fund’s average daily net assets attributable to each share class. The Fund’s Board of Directors has currently limited payments of 12b-1 fees under the Financial Intermediary Class’s Distribution Plan to 0.25% of average net assets. Pursuant to the Distribution Plan for Financial Intermediary Class shares, the Board of Directors may authorize payment of up to 0.40% of average net assets without shareholder approval.

^A The Fund’s Institutional Class inception date is March 1, 2001. The Fund’s Financial Intermediary Class inception date is June 28, 2007. Since-inception index returns are for periods beginning February 28, 2001. Although it is not possible to invest directly in an index, it is possible to purchase investment vehicles designed to track the performance of certain indexes.

^B Performance for periods less than one year are not annualized.

^C An unmanaged index consisting of all inflation-protected securities issued by the U.S. Treasury.

142

Annual Report to Shareholders

A year ago, the Federal Reserve Board’s (Fed)^D predominant concern was that strong growth and a high level of resource utilization would sustain inflationary pressures. The financial crisis that erupted a few months later has defined the fixed-income landscape ever since. The period ended with the Fed not only focused on averting recession but struggling to unclog credit markets. The Ted spread (TED) ^E, a measure of systemic risk, rose five-fold during the 12-month period ended March 31, 2008, to peak near 220 basis points (bps)^F in November, and had only moderated slightly by period-end. Growing expectations for easing over the first half of the period were finally validated by the Fed’s decision to cut the funds rate by a total of 300 bps, including a surprise 75 bps reduction at an unscheduled Federal Open Market Committee (FOMC) meeting in January. Additionally, the Fed, along with a number of government housing agencies, announced new lending facilities targeted directly at strained credit conditions, with a specific focus on the mortgage market. The yield on the two-year Treasury note declined 303 bps, driving a powerful rally in the Treasury market. All other risky asset classes suffered as a severe flight-to-safety forced spreads sharply higher. Home prices declined and the drag from the homebuilding sector alone detracted more than 1% from gross domestic product growth. Still, the economy continued to expand modestly thanks to a robust trade sector and a stubborn consumer. The price of oil breached the $100 per barrel threshold despite slower growth concerns. The U.S. dollar lost substantial value against a trade-weighted basket of currencies. Equity markets came under serious pressure in the final four months and finished marginally lower.

The impact of market conditions on the Fund’s performance was positive for the 12-month period ended March 31, 2008. The Fund’s Institutional Class’s total return of +12.77% outperformed the Lehman U.S. Treasury Inflation Notes Index’s return of +12.21%. Treasury Inflation-Protected Securities (TIPS) outperformed nearly every other asset class, driven by a major flight to safety in the wake of the financial turmoil. TIPS further benefited from soaring commodity prices and aggressive easing by the Federal Reserve. The Fund’s diversification away from TIPS and into mortgage-backed securities as well as the credit sector had a negative impact on returns. These sectors were severely impacted by rising financial tensions and were a significant drag on the Fund’s performance.

Western Asset Management Company

April 21, 2008

Investment Risks: Bonds are subject to a variety of risks, including interest rate, credit and inflation risk. As interest rates rise, bond prices fall, reducing the value of a fund’s share price. The Fund is subject to the additional risks associated with Inflation-Indexed Securities, including liquidity risk, prepayment risk, extension risk and deflation risk. Foreign securities are subject to certain risks of overseas investing, including currency fluctuations and changes in political and economic conditions. These risks are magnified in emerging markets. The Fund may invest in high-yield bonds, which are rated below investment grade and carry more risk than higher-rated securities. Mortgage-backed securities involve more risk, including prepayment and extension risks, than other investments in fixed income securities. The Fund may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance.

^D Federal Reserve Board (Fed) – is charged with, among other things, managing the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.

^E Ted Spread (Ted) – The price difference between three-month futures contracts for U.S. Treasuries and three-month contracts for euros having identical expiration months.

^F 100 basis points (bps) = 1%

N/A – Not applicable

143

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, distribution 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, 2007, and held through March 31, 2008.

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 value 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 if your shares were held for the entire 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 10/1/07		Ending Account Value 3/31/08		Expenses PaidA During the Period 10/01/07 to 03/31/08
Inflation Indexed Plus Bond Portfolio:
Institutional Class
Actual	$	1,000.00	$	1,092.30	$	1.31
Hypothetical (5% return before expenses)		1,000.00		1,023.75		1.27
Inflation Indexed Plus Bond Portfolio:
Financial Intermediary Class
Actual	$	1,000.00	$	1,090.40	$	2.52
Hypothetical (5% return before expenses)		1,000.00		1,022.59		2.43

^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 ratios of 0.25% and 0.48% for the Institutional 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 (183), and divided by 366 .

144

Annual Report to Shareholders

Performance Information

Western Asset Inflation Indexed Plus Bond Portfolio

The graph compares the Fund’s total returns to 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 Since-inception index returns are for periods beginning February 28, 2007.

145

Annual Report to Shareholders

Performance Information—Continued

The graph compares the Fund’s total returns to 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—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.

^B Since-inception index returns are for periods beginning June 30, 2007.

146

Annual Report to Shareholders

Portfolio Composition (as of March 31, 2008)^C

Standard & Poor’s Debt Ratings^D

(as a percentage of the portfolio)

Maturity Schedule (as a percentage of the portfolio)

^C The pie charts above represent the composition of the Fund’s portfolio as of March 31, 2008 and do not include derivatives such as Futures Contracts, Options Written, and Swaps. The Fund is actively managed. As a result, the composition of the portfolio holdings and sectors are subject to change at any time.

^D Source: Standard & Poor's.

^E Preferred stocks do not have defined maturity dates.

147

Annual Report to Shareholders

Portfolio of Investments

Western Asset Inflation Indexed Plus Bond Portfolio

March 31, 2008

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Long-Term Securities	98.7%
Corporate Bonds and Notes	2.5%
Consumer Finance	0.5%
SLM Corp.		5.361%	2/1/10	$	1,600,000	$	1,296,000	A
SLM Corp.		5.375%	1/15/13		2,775,000		2,126,677
SLM Corp.		5.375%	5/15/14		1,580,000		1,185,742
							4,608,419
Diversified Financial Services	1.0%
Bank of America Corp.		8.000%	12/29/49		3,550,000		3,554,260	B
J.P. Morgan and Co. Inc.		5.886%	2/15/12		2,690,000		2,767,580	A
TNK-BP Finance SA		7.875%	3/13/18		2,350,000		2,170,812	C
							8,492,652
Electric Utilities	0.5%
Energy Future Holdings Corp.		10.875%	11/1/17		20,000		20,200	C
Energy Future Holdings Corp.		11.250%	11/1/17		3,830,000		3,791,700	C,D
							3,811,900
Oil, Gas and Consumable Fuels	0.3%
The Williams Cos. Inc.		8.750%	3/15/32		1,900,000		2,194,500
Thrifts and Mortgage Finance	0.2%
Residential Capital LLC		8.000%	2/22/11		3,500,000		1,715,000	E
Total Corporate Bonds and Notes (Cost—$23,145,416)							20,822,471
Asset-Backed Securities	0.2%
Fixed Rate Securities	0.1%
Bayview Financial Acquisition Trust 2007-A 1A1		6.129%	5/28/37		974, 485		978,018
Indexed SecuritiesA	0.1%
Bear Stearns Asset Backed Securities Inc. 2003-ABF1		2.969%	2/25/34		181,278		162,790
Chase Funding Mortgage Loan Asset-Backed Certificates 2002-4		3.339%	10/25/32		138,805		117,612
Countrywide Asset-Backed Certificates 2002-1		3.159%	8/25/32		41,019		37,199
EMC Mortgage Loan Trust 2003-B		3.149%	11/25/41		482, 970		466,573	C

148

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Asset-Backed Securities—Continued
Indexed Securities—Continued
GSRPM Mortgage Loan Trust 2003-2		3.299%	6/25/33	$	265,334	$	260,909
Residential Asset Mortgage Products Inc. 2003-RS2		3.279%	3/25/33		43,174		32,973
							1,078,056
Total Asset-Backed Securities (Cost—$2,078,828)							2,056,074
Mortgage-Backed Securities	0.2%
Indexed SecuritiesA	0.2%
Credit Suisse First Boston Mortgage Securities Corp. 2001-28		3.249%	11/25/31		654,748		612,842
Crusade Global Trust 2003-2		2.954%	9/18/34		666,857		665,971	F
Sequoia Mortgage Trust 2004-4 A		5.339%	5/20/34		118,611		112,222
Total Mortgage-Backed Securities (Cost—$1,409,010)							1,391,035
U.S. Government and Agency Obligations	85.3%
Treasury Inflation-Protected SecuritiesG	85.3%
United States Treasury Inflation-Protected Security		0.875%	4/15/10		51,200,359		52,396,348	H
United States Treasury Inflation-Protected Security		3.500%	1/15/11		40,700,919		45,009,477
United States Treasury Inflation-Protected Security		2.375%	4/15/11		28,751,091		30,889,454	H
United States Treasury Inflation-Protected Security		3.000%	7/15/12		38,899,069		43,597,338	H
United States Treasury Inflation-Protected Security		1.875%	7/15/13		36,230,808		39,078,332	H
United States Treasury Inflation-Protected Security		2.000%	1/15/14		32,232,602		34,911,937	H
United States Treasury Inflation-Protected Security		1.625%	1/15/15		80,872,606		85,781,816	H
United States Treasury Inflation-Protected Security		1.875%	7/15/15		32,840,300		35,449,561	H
United States Treasury Inflation-Protected Security		2.000%	1/15/16		59,259,381		64,254,769	H
United States Treasury Inflation-Protected Security		2.625%	7/15/17		24,438,960		27,848,952	H

149

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
U.S. Government and Agency Obligations—Continued
Treasury Inflation-Protected Securities—Continued
United States Treasury Inflation-Protected Security		1.625%	1/15/18	$	38,714,382	$	40,653,121	H
United States Treasury Inflation-Protected Security		2.000%	1/15/26		80,887,513		83,390,011	H
United States Treasury Inflation-Protected Security		1.750%	1/15/28		24,590,634		24,377,384	H
United States Treasury Inflation-Protected Security		3.625%	4/15/28		39,132,452		50,743,793	H
United States Treasury Inflation-Protected Security		3.875%	4/15/29		46,935,362		63,447,083	H
Total U.S. Government and Agency Obligations (Cost—$681,006,725)							721,829,376
U.S. Government Agency Mortgage- Backed Securities	5.5%
Fixed Rate Securities	5.5%
Fannie Mae		6.000%	11/1/37		257,581		264,100
Fannie Mae		5.000%	12/1/38		46,800,000		46,310,835	I
Freddie Mac		6.000%	12/1/37		94,745		97,244
Total U.S. Government Agency Mortgage-Backed Securities (Cost—$45,653,112)							46,672,179
Yankee BondsF	1.2%
Commercial Banks	0.6%
Glitnir Banki Hf		6.693%	6/15/16		1,760,000		1,418,585	B,C
Kaupthing Bank Hf		7.125%	5/19/16		2,940,000		1,983,806	C
RSHB Capital SA		6.299%	5/15/17		1,500,000		1,389,375	C
							4,791,766
Foreign Government	0.4%
Russian Federation		7.500%	3/31/30		3,337,290		3,842,889	C
Metals and Mining	0.2%
Vale Overseas Ltd.		6.875%	11/21/36		1,463,000		1,427,471	H
Total Yankee Bonds (Cost—$11,260,921)							10,062,126

150

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†			VALUE
Foreign Government Obligations	3.0%
Brazil Notas do Tesouro Nacional Serie B		6.000%	5/15/17		3,575,000	BRL	$	3,158,132	J
Canadian Real Return Bond		3.000%	12/1/36		960,747	CAD		1,233,310	J
France Government Bond OAT		3.150%	7/25/32		9,316,551	EUR		17,337,615	J
Kingdom of Sweden Inflation-Protected Notes		3.500%	12/1/28		14,480,000	SEK		3,671,656	J
Total Foreign Government Obligations (Cost—$22,708,545)								25,400,713
Preferred Stocks	0.8%
Citigroup Inc.		8.125%			299,000	shs		7,187,960	H
Total Preferred Stocks (Cost—$7,475,000)
Total Long-Term Securities (Cost—$794,737,557)								835,421,934
Investment of Collateral From Securities Lending	22.0%
State Street Navigator Securities Lending Prime Portfolio					186,060,833	shs		186,060,833
Total Investment of Collateral From Securities Lending (Cost—$186,060,833)								186,060,833
Short-Term Securities	6.1%
Repurchase Agreement	6.1%
Lehman Brothers Inc. 2.25%, dated 3/31/08, to be repurchased at $51,975,248 on 4/1/08 (Collateral: $145,745,000 Resolution Funding Corporation principal-only securities, due 1/15/30, value $53,011,829)				$	51,972,000			51,972,000
Total Short-Term Securities (Cost—$51,972,000)								51,972,000
Total Investments (Cost—$1,032,770,390)K	126.8%							1,073,454,767
Obligation to Return Collateral from Securities Lending	(22.0)%							(186,060,833	)
Other Assets Less Liabilities	(4.8)%							(40,763,564	)
Net Assets	100.0%						$	846,630,370

151

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Inflation Indexed Plus Bond Portfolio—Continued

	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Futures Contracts PurchasedL
LIBOR Futures	September 2008	200	$	(6,326	)
U.S. Treasury Note Futures	June 2008	462		642,299
			$	635,973
Futures Contracts WrittenL
U.S. Treasury Bond Futures	June 2008	24	$	11,505

^A Indexed Security – The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”), the Euro Interbank Offered Rate (“EURIBOR”) Index, the Consumer Price Index (“CPI”), the one-year Treasury Bill Rate or the ten-year Japanese Government Bond Rate. The coupon rates are the rates as of March 31, 2008.

^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 according to the predetermined schedule.

^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 1.78% of net assets.

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

^E Credit Linked Security – The rates of interest earned on these securities are tied to the credit rating assigned by Standard & Poor’s Rating Service and/or Moody’s Investors Services.

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

^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 All or a portion of this security is on loan.

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

^J Inflation-Protected Security – 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 At March 31, 2008, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were substantially as follows:

Gross unrealized appreciation	$	44,988,991
Gross unrealized depreciation		(5,154,911	)
Net unrealized appreciation	$	39,834,080

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

^†Securities are denominated in U.S. Dollars, unless otherwise noted.

BRL—Brazilian Real

CAD—Canadian Dollar

EUR—Euro

SEK—Swedish Krona

See notes to financial statements.

152

Annual Report to Shareholders

Statement of Assets and Liabilities

Western Asset Inflation Indexed Plus Bond Portfolio

March 31, 2008

Assets:
Investment securities at market value (Cost—$980,798,390)			$	1,021,482,767	A
Short-term securities at value (Cost—$51,972,000)				51,972,000
Cash				1,835
Foreign currency at value (Cost—$3,085,200)				3,295,226
Deposits with brokers for open futures contracts				672,446
Interest receivable				5,481,213
Receivable for securities sold				2,972,227
Unrealized appreciation of forward foreign currency contracts				1,721,185
Receivable for fund shares sold				992,634
Futures variation margin receivable				113,460
Other assets				5,295,727
Total assets				1,094,000,720
Liabilities:
Obligation to return collateral for securities loaned	$	186,060,833
Payable for securities purchased		48,238,352
Swap contracts at value		6,661,658
Unrealized depreciation of forward foreign currency contracts		3,058,987
Payable for fund shares repurchased		2,752,535
Income distribution payable		319,369
Accrued management fee		131,995
Accrued distribution fee		14
Accrued expenses		146,607
Total liabilities				247,370,350
Net Assets			$	846,630,370
Net assets consist of:
Accumulated paid-in-capital			$	795,541,006
Undistributed net investment income				3,777,864
Accumulated net realized gain on investments, options, futures, swaps and foreign currency transactions				12,903,836
Unrealized appreciation of investments, futures, swaps and foreign currency translations				34,407,664
Net Assets			$	846,630,370
Net Asset Value Per Share:
Institutional Class (76,384,233 shares outstanding)				$11.08
Financial Intermediary Class (3,251 shares outstanding)				$11.06

^A The market value of securities on loan is $217,450,953.

See notes to financial statements.

153

Annual Report to Shareholders

Statement of Operations

Western Asset Inflation Indexed Plus Bond Portfolio

For the Year Ended March 31, 2008

Investment Income:
Interest	$	43,671,224
Income from securities lending		501,643
Total income				$	44,172,867
Expenses:
Management fees		1,450,226
Distribution and service fees:
Financial Intermediary Class		66
Audit and legal fees		77,726
Custodian fees		96,352
Directors’ fees and expenses		22,446
Registration fees		38,318
Reports to shareholders		67,244
Transfer agent and shareholder servicing expense:
Institutional Class		164,859
Financial Intermediary Class		57
Other expenses		52,512
		1,969,806
Less: Fees waived		(151,075	)
Compensating balance credits		(5,888	)
Net expenses					1,812,843
Net Investment Income					42,360,024
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) on:
Investments		16,272,903
Options		1,124,634
Futures		(1,271,970	)
Swaps		1,762,039
Foreign currency transactions		1,400,522
					19,288,128
Change in unrealized appreciation/(depreciation) of:
Investments, futures, swaps and foreign currency translations		29,233,266
Assets and liabilities denominated in foreign currency		18,321
					29,251,587
Net Realized and Unrealized Gain on Investments					48,539,715
Change in Net Assets Resulting From Operations				$	90,899,739

See notes to financial statements.

154

Annual Report to Shareholders

Statement of Changes in Net Assets

Western Asset Inflation Indexed Plus Bond Portfolio

	FOR THE YEARS ENDED MARCH 31,
	2008			2007
Change in Net Assets:
Net investment income	$	42,360,024		$	22,204,411
Net realized gain/(loss)		19,288,128			(1,653,441	)
Change in unrealized appreciation/(depreciation)		29,251,587			13,103,572
Change in net assets resulting from operations		90,899,739			33,654,542
Distributions to shareholders from:
Net investment income:
Institutional Class		(42,554,324	)		(22,374,973	)
Financial Intermediary Class		(1,115	)		—
Change in net assets from fund share transactions:
Institutional Class		154,011,663			90,425,095
Financial Intermediary Class		37,906			—
Change in net assets		202,393,869			101,704,664
Net Assets:
Beginning of year	$	644,236,501		$	542,531,837
End of year	$	846,630,370		$	644,236,501
Undistributed net investment income	$	3,777,864		$	1,055,171

See notes to financial statements.

155

Annual Report to Shareholders

Financial Highlights

Western Asset Inflation Indexed Plus Bond Portfolio

For a share of each class of capital stock outstanding:

Institutional Class:

	YEARS ENDED MARCH 31,
	2008			2007			2006			2005			2004
Net asset value, beginning of year	$	10.43		$	10.25		$	10.74		$	11.24		$	10.96
Investment operations:
Net investment income		.61	A		.39	A		.54	B		.42	B		.37	B
Net realized and unrealized gain/(loss)		.67			.20			(.38	)		(.10	)		.71
Total from investment operations		1.28			.59			.16			.32			1.08
Distributions from:
Net investment income		(.63	)		(.41	)		(.56	)		(.42	)		(.37	)
Net realized gain on investments		—			—			(.09	)		(.40	)		(.43	)
Total distributions		(.63	)		(.41	)		(.65	)		(.82	)		(.80	)
Net asset value, end of year	$	11.08		$	10.43		$	10.25		$	10.74		$	11.24
Total return		12.77	%		5.89	%		1.44	%		3.27	%		10.33	%
Ratios to Average Net Assets:C
Total expenses		.27	%		.29	%		.27	%		.27	%		.27	%
Expenses net of waivers, if any		.25	%		.25	%		.25	%		.25	%		.25	%
Expenses net of all reductions		.25	%		.25	%		.25	%		.25	%		.25	%
Net investment income		5.8	%		3.8	%		5.0	%		3.8	%		3.4	%
Supplemental Data:
Portfolio turnover rate		141.7	%		96.4	%		177.1	%		255.5	%		281.8	%
Net assets, end of year (in thousands)	$	846,594		$	644,236		$	542,532		$	461,746		$	346,379

^A Computed using average daily shares outstanding.

^B Computed using SEC method.

^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.

See notes to financial statements.

156

Annual Report to Shareholders

Financial Intermediary Class:

	FOR THE PERIOD ENDED MARCH 31, 2008C
Net asset value, beginning of period	$	10.02
Investment operations:
Net investment income		.35	A
Net realized and unrealized gain		1.06
Total from investment operations		1.41
Distributions from:
Net investment income		(.37	)
Total distributions		(.37	)
Net asset value, end of period	$	11.06
Total return		14.29	%D
Ratios to Average Net Assets:B
Total expenses		.71	%E
Expenses net of waivers, if any		.48	%E
Expenses net of all reductions		.48	%E
Net investment income		4.1	%E
Supplemental Data:
Portfolio turnover rate		141.7	%
Net assets, end of period (in thousands)	$	36

^C For the period June 28, 2007 (commencement of operations) to March 31, 2008.

^D Not annualized.

^E Annualized.

See notes to financial statements.

157

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 various periods ended March 31, 2008, are presented below:

	Three Months Ended 03/31/08		Average Annual Total Returns
		One Year	Five Years	Ten Years	Since InceptionA
Western Asset Intermediate Bond Portfolio:
Institutional Class	+0.11%	+3.77%	+4.48%	+5.88%	+6.47%
Lehman Brothers Intermediate U.S. Government/Credit IndexB	+3.00%	+8.88%	+4.37%	+5.91%	+6.41%

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. Performance figures for periods shorter than one year represent cumulative figures and are not annualized.

The gross expense ratio for the Institutional Class was 0.46%. Gross expenses are the Fund’s total annual operating expenses for the fiscal year ended March 31, 2007 as indicated in the Fund’s prospectus dated August 1, 2007 and do not reflect fee waivers or reimbursements. These expenses include management fees and other expenses.

The net expense ratio for the Institutional Class was 0.45%. Net expenses are the Institutional Class’s total annual operating expenses for the fiscal year ended March 31, 2007 as indicated in the Fund’s prospectus dated August 1, 2007 and reflect contractual fee waivers and/or reimbursements. The Fund’s Manager has contractually agreed to waive fees and/or reimburse operating expenses (exclusive of taxes, interest, deferred organizational expenses, brokerage and extraordinary expenses) until August 1, 2008 to limit total annual operating expenses of the Institutional Class to 0.45% of the Fund’s average daily net assets attributable to the Institutional Class.

^A The Fund’s Institutional Class inception date is July 1, 1994. Index returns are for periods beginning June 30, 1994. Although it is not possible to invest directly in an index, it is possible to purchase investment vehicles designed to track the performance of certain indexes.

^B A total return index consisting of investment grade corporate debt issues as well as debt issues of U.S. government agencies and the U.S. Treasury. The debt issues all maintain maturities within a range of 1 to 10 years.

158

Annual Report to Shareholders

A year ago, the Federal Reserve Board’s (Fed)^C predominant concern was that strong growth and a high level of resource utilization would sustain inflationary pressures. The financial crisis that erupted a few months later has defined the fixed-income landscape ever since. The period ended with the Fed not only focused on averting recession but struggling to unclog credit markets. The Ted spread (TED)^D, a measure of systemic risk, rose five-fold during the 12-month period ended March 31, 2008, to peak near 220 basis points (bps)^E in November, and had only moderated slightly by period-end. Growing expectations for easing over the first half of the period were finally validated by the Fed’s decision to cut the funds rate by a total of 300 bps, including a surprise 75 bps reduction at an unscheduled Federal Open Market Committee (FOMC) meeting in January. Additionally, the Fed, along with a number of government housing agencies, announced new lending facilities targeted directly at strained credit conditions, with a specific focus on the mortgage market. The yield on the two-year Treasury note declined 303 bps, driving a powerful rally in the Treasury market. All other risky asset classes suffered as a severe flight-to-safety forced spreads sharply higher. Home prices declined and the drag from the homebuilding sector alone detracted more than 1% from gross domestic product growth. Still, the economy continued to expand modestly thanks to a robust trade sector and a stubborn consumer. The price of oil breached the $100 per barrel threshold despite slower growth concerns. The U.S. dollar lost substantial value against a trade-weighted basket of currencies. Equity markets came under serious pressure in the final four months and finished marginally lower.

The impact of market conditions on the Fund’s performance was negative for the 12-month period ended March 31, 2008, with strategies producing negative results. The Fund’s Institutional Class had a total return of +3.77%, which underperformed the Lehman Brothers Intermediate Government/Credit Bond Index’s return of +8.88%. Overweight exposure to the mortgage-backed sector detracted significantly from returns as spreads widened and volatility increased. We had diversified into a number of select non-agency issues, which were particularly impacted and further negatively impacted performance. An emphasis on lower-quality credits and the financial sector was also a large negative as spreads trended higher in the wake of the subprime lending crisis, deteriorating liquidity conditions and slowing economic growth. On the positive side, a tactically-driven duration posture contributed modestly to returns as bond yields rallied over the last 12 months. A curve-steepening strategy had a positive impact on performance as the spread between the two- and 10-year yields widened. Modest Treasury Inflation-Protected Securities (TIPS) exposure had a positive impact following a commodity-driven rise in headline inflation.

Western Asset Management Company

April 21, 2008

Investment Risks: Bonds are subject to a variety of risks, including interest rate, credit and inflation risk. As interest rates rise, bond prices fall, reducing the value of a Fund’s share price. Foreign securities are subject to certain risks of overseas investing, including currency fluctuations and changes in political and economic conditions. These risks are magnified in emerging markets.

^C Federal Reserve Board (Fed) – is charged with, among other things, managing the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.

^D Ted Spread (Ted) – The price difference between three-month futures contracts for U.S. Treasuries and three-month contracts for euros having identical expiration months.

^E 100 basis points (bps) = 1%

159

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, 2007, and held through March 31, 2008.

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 value 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 if your shares were held for the entire 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 10/1/07		Ending Account Value 3/31/08		Expenses PaidA During the Period 10/01/07 to 03/31/08
Intermediate Bond Portfolio
Institutional Class:
Actual	$	1,000.00	$	1,018.30	$	2.28
Hypothetical (5% return before expenses)		1,000.00		1,022.74		2.28

^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 (183), and divided by 366.

160

Annual Report to Shareholders

Performance Information

Western Asset Intermediate Bond Portfolio

The graph compares the Fund’s total returns to 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.

161

Annual Report to Shareholders

Performance Information—Continued

Portfolio Composition (as of March 31, 2008)^A

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

Maturity Schedule (as a percentage of the portfolio)

^A The pie charts above represent the composition of the Fund’s portfolio as of March 31, 2008 and do not include derivatives such as Futures Contracts, Options Written, and Swaps. The Fund is actively managed. As a result, the composition of the portfolio holdings and sectors are subject to change at any time.

^B Source: Standard & Poor's.

^C Preferred stocks do not have defined maturity dates.

162

Annual Report to Shareholders

Portfolio of Investments

Western Asset Intermediate Bond Portfolio

March 31, 2008

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Long-Term Securities	82.5%
Corporate Bonds and Notes	27.6%
Aerospace and Defense	0.2%
United Technologies Corp.		6.350%	3/1/11	$	1,037,000	$	1,120,517
Airlines	0.5%
Continental Airlines Inc.		6.545%	2/2/19		971,172		934,151
Delta Air Lines Inc.		6.619%	9/18/12		1,325,111		1,298,609
US Airways Pass-Through Trust		6.850%	1/30/18		1,426,186		1,354,876
							3,587,636
Automobiles	0.5%
DaimlerChrysler NA Holding Corp.		6.500%	11/15/13		2,050,000		2,160,881
Ford Motor Co.		7.450%	7/16/31		1,159,000		764,940	A
General Motors Corp.		8.375%	7/15/33		1,198,000		844,590	A
							3,770,411
Capital Markets	3.5%
Goldman Sachs Capital II		5.793%	12/29/49		11,810,000		7,866,641	B
Goldman Sachs Capital III		3.846%	9/29/49		2,590,000		1,631,700	C
Lehman Brothers Holdings Capital Trust VII		5.857%	12/31/49		6,500,000		4,111,250	B
Lehman Brothers Holdings E-Capital Trust I		3.850%	8/19/65		360,000		216,068	C
Lehman Brothers Holdings Inc.		5.625%	1/24/13		600,000		583,419
Lehman Brothers Holdings Inc.		6.500%	7/19/17		30,000		28,489
Merrill Lynch and Co. Inc.		3.315%	2/5/10		480,000		457,997	C
Merrill Lynch and Co. Inc.		5.700%	5/2/17		2,500,000		2,374,850	A
Morgan Stanley		5.550%	4/27/17		2,340,000		2,200,574
The Bear Stearns Cos. Inc.		6.400%	10/2/17		3,590,000		3,544,770
The Bear Stearns Cos. Inc.		7.250%	2/1/18		1,840,000		1,901,440
							24,917,198
Chemicals	0.7%
The Dow Chemical Co.		6.000%	10/1/12		4,850,000		5,108,786
Commercial Banks	1.9%
Comerica Capital Trust II		6.576%	2/20/37		960,000		639,374	B
SunTrust Capital VIII		6.100%	12/15/36		550,000		435,490	B
Wachovia Capital Trust III		5.800%	3/15/42		10,868,000		7,743,450	B
Wells Fargo Capital X		5.950%	12/15/36		4,740,000		4,270,688	A
							13,089,002

163

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Corporate Bonds and Notes—Continued
Consumer Finance	2.6%
American Express Co.		6.800%	9/1/66	$	6,590,000	$	6,196,116	B
Ford Motor Credit Co.		6.625%	6/16/08		9,148,000		9,044,618
GMAC LLC		3.749%	9/23/08		995,000		938,727	C
GMAC LLC		6.750%	12/1/14		1,556,000		1,101,183
Nelnet Inc.		7.400%	9/29/36		1,850,000		1,205,260	B
							18,485,904
Diversified Financial Services	2.7%
AGFC Capital Trust I		6.000%	1/15/67		3,310,000		2,727,619	B,D
BAC Capital Trust XIV		5.630%	12/31/49		50,000		36,560	B
Bank of America Corp.		8.000%	12/29/49		1,420,000		1,421,704	B
Capmark Financial Group Inc.		5.875%	5/10/12		2,500,000		1,583,940	D,E
Dryden Investor Trust		7.157%	7/23/08		331,679		333,782	D
General Electric Capital Corp.		6.375%	11/15/67		2,855,000		2,793,672	B
Glen Meadow Pass-Through Certificates		6.505%	2/12/67		3,260,000		2,782,605	B,D
JPMorgan Chase Capital XXII		6.450%	2/2/37		2,600,000		2,243,306	B
Kaupthing Bank Hf		7.625%	2/28/15		1,590,000		1,496,667	D,F
TNK-BP Finance SA		6.125%	3/20/12		210,000		197,662	D
TNK-BP Finance SA		7.500%	3/13/13		720,000		701,100	D
ZFS Finance USA Trust II		6.450%	12/15/65		2,060,000		1,872,645	B,D
ZFS Finance USA Trust III		3.950%	12/15/65		970,000		795,400	C,D
							18,986,662
Diversified Telecommunication Services	1.1%
Embarq Corp.		7.082%	6/1/16		1,880,000		1,779,865
Qwest Corp.		8.875%	3/15/12		1,510,000		1,540,200
Verizon Global Funding Corp.		7.250%	12/1/10		4,051,000		4,350,677
							7,670,742
Electric Utilities	0.6%
Duke Energy Corp.		6.250%	1/15/12		1,078,000		1,157,677
Duke Energy Corp.		5.625%	11/30/12		729,000		775,093	A
Exelon Corp.		6.750%	5/1/11		2,269,000		2,394,222
FirstEnergy Corp.		7.375%	11/15/31		140,000		152,292
Pacific Gas and Electric Co.		4.800%	3/1/14		70,000		70,606
							4,549,890
Food and Staples Retailing	0.3%
Safeway Inc.		6.500%	3/1/11		760,000		807,891
The Kroger Co.		6.200%	6/15/12		883,000		924,998
Wal-Mart Stores Inc.		5.800%	2/15/18		360,000		377,289
							2,110,178

164

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Corporate Bonds and Notes—Continued
Health Care Equipment and Supplies	0.3%
Baxter International Inc.		5.900%	9/1/16	$	500,000	$	527,756
Hospira Inc.		5.550%	3/30/12		1,700,000		1,757,183
							2,284,939
Health Care Providers and Services	0.7%
HCA Inc.		8.750%	9/1/10		822,000		822,000
Quest Diagnostics Inc.		7.500%	7/12/11		2,220,000		2,485,923
Universal Health Services Inc.		6.750%	11/15/11		1,720,000		1,840,336
WellPoint Inc.		5.875%	6/15/17		100,000		97,873
							5,246,132
Independent Power Producers and Energy Traders	0.3%
TXU Corp.		5.550%	11/15/14		2,480,000		1,936,486
Insurance	0.8%
American International Group Inc.		5.850%	1/16/18		250,000		245,335
MetLife Capital Trust IV		7.875%	12/15/37		3,100,000		2,818,861	B,D
MetLife Inc.		6.400%	12/15/36		70,000		55,625	A,B
The Travelers Cos. Inc.		6.250%	3/15/37		2,670,000		2,355,004	B
							5,474,825
Media	1.0%
Comcast Corp.		6.500%	1/15/17		3,400,000		3,472,488
News America Inc.		6.650%	11/15/37		70,000		70,594	D
Time Warner Inc.		5.500%	11/15/11		70,000		69,503	A
Time Warner Inc.		6.875%	5/1/12		1,288,000		1,329,650
Turner Broadcasting System Inc.		8.375%	7/1/13		1,483,000		1,620,608	A
Viacom Inc.		5.750%	4/30/11		410,000		414,366
							6,977,209
Multi-Utilities	0.6%
CenterPoint Energy Inc.		5.875%	6/1/08		1,325,000		1,327,018	A
Dominion Resources Inc.		4.750%	12/15/10		50,000		51,172
Dominion Resources Inc.		5.700%	9/17/12		1,596,000		1,671,326
MidAmerican Energy Holdings Co.		5.875%	10/1/12		827,000		873,906
							3,923,422
Multiline Retail	0.4%
Federated Retail Holdings Inc.		5.350%	3/15/12		1,050,000		1,000,433
JC Penney Corp. Inc.		5.750%	2/15/18		610,000		563,208
May Department Stores Co.		5.750%	7/15/14		1,470,000		1,342,817
							2,906,458

165

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Corporate Bonds and Notes—Continued
Office Electronics	0.3%
Xerox Corp.		5.500%	5/15/12	$	2,240,000	$	2,258,865
Oil, Gas and Consumable Fuels	5.0%
Anadarko Petroleum Corp.		5.950%	9/15/16		3,200,000		3,309,274
Hess Corp.		6.650%	8/15/11		5,468,000		5,887,035
Kinder Morgan Energy Partners LP		6.000%	2/1/17		3,700,000		3,682,125	A
Occidental Petroleum Corp.		6.750%	1/15/12		1,310,000		1,449,708	A
Pemex Project Funding Master Trust		4.100%	6/15/10		4,683,000		4,657,243	C,D
Pemex Project Funding Master Trust		4.100%	6/15/10		117,000		116,123	C,D
Pemex Project Funding Master Trust		3.676%	12/3/12		752,000		732,072	C,D
Pemex Project Funding Master Trust		5.750%	3/1/18		190,000		193,872	A,D
Sonat Inc.		7.625%	7/15/11		3,954,000		4,086,811
The Williams Cos. Inc.		7.125%	9/1/11		600,000		637,500	A
The Williams Cos. Inc.		8.125%	3/15/12		1,540,000		1,682,450
The Williams Cos. Inc.		7.875%	9/1/21		720,000		780,300
The Williams Cos. Inc.		7.500%	1/15/31		310,000		323,175
The Williams Cos. Inc.		7.750%	6/15/31		750,000		796,875
The Williams Cos. Inc.		8.750%	3/15/32		2,040,000		2,356,200
XTO Energy Inc.		7.500%	4/15/12		859,000		951,400
XTO Energy Inc.		6.250%	4/15/13		1,645,000		1,787,740	A
XTO Energy Inc.		5.650%	4/1/16		1,682,000		1,725,461
							35,155,364
Paper and Forest Products	0.3%
Willamette Industries Inc.		7.125%	7/22/13		1,839,000		1,989,881
Real Estate Investment Trusts	0.6%
iStar Financial Inc.		5.500%	6/15/12		3,980,000		2,945,200
iStar Financial Inc.		5.950%	10/15/13		1,400,000		1,022,000
							3,967,200
Thrifts and Mortgage Finance	1.9%
Countrywide Financial Corp.		3.345%	5/5/08		540,000		536,496	C
Countrywide Financial Corp.		2.819%	3/24/09		1,170,000		1,074,789	A,C
Countrywide Financial Corp.		5.800%	6/7/12		4,400,000		3,986,343
Residential Capital LLC		6.370%	11/21/08		5,130,000		3,488,400	C
Residential Capital LLC		7.098%	4/17/09		1,300,000		741,000	C
Residential Capital LLC		8.000%	2/22/11		1,286,000		630,140	E
Washington Mutual Inc.		4.625%	4/1/14		2,700,000		1,903,500
Washington Mutual Inc.		7.250%	11/1/17		1,700,000		1,330,250
							13,690,918

166

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Corporate Bonds and Notes—Continued
Wireless Telecommunication Services	0.8%
New Cingular Wireless Services Inc.		8.125%	5/1/12	$	3,000,000	$	3,357,276
Sprint Capital Corp.		8.375%	3/15/12		2,669,000		2,468,825
Vodafone Group PLC		5.350%	2/27/12		70,000		70,884	A
							5,896,985
Total Corporate Bonds and Notes (Cost—$214,292,414)							195,105,610
Asset-Backed Securities	1.3%
Fixed Rate Securities	0.2%
ABFS Mortgage Loan Trust 2002-3		4.263%	9/15/33		41,177		41,112	B
Conseco Finance Securitizations Corp. 2000-4		8.310%	5/1/32		608,735		484,907
Green Tree Financial Corp. 1994-6		8.900%	1/15/20		647,550		648,442
Mego Mortgage Home Loan Trust 1996-2		7.275%	8/25/17		1,120		896
UCFC Home Equity Loan 1998-D		6.905%	4/15/30		758,678		733,996
							1,909,353
Indexed SecuritiesC	1.1%
AFC Home Equity Loan Trust 2003-3		2.949%	10/25/30		759,471		644,703	D
AMRESCO Residential Securities Mortgage Loan Trust 1998-2		3.424%	6/25/28		4,567		4,529
Countrywide Asset-Backed Certificates 2002-BC1		3.259%	4/25/32		369,745		332,612
Indymac Home Equity Loan Asset-Backed Trust 2001-A		2.859%	3/25/31		249,214		224,244
Long Beach Mortgage Loan Trust 2005-WL3 2A2A		3.739%	11/25/35		1,000,512		981,813
MSDWCC Heloc Trust 2003-1		2.869%	11/25/15		570,261		511,715
Washington Mutual Master Note Trust 2006-A3A A3		2.848%	9/16/13		5,180,000		4,934,106	D
							7,633,722
Stripped Securities	N.M.
Oakwood Mortgage Investors Inc. 2001-C		6.000%	5/15/08		5,543,312		27,716	F,G1
Total Asset-Backed Securities (Cost—$10,138,716)							9,570,791
Mortgage-Backed Securities	7.3%
Fixed Rate Securities	1.8%
Fannie Mae Grantor Trust 2002-T3		5.763%	12/25/11		3,663,449		3,853,986
Prime Mortgage Trust 2006-DR1 2A2		6.000%	11/25/36		1,911,703		1,875,572	D

167

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Mortgage-Backed Securities—Continued
Fixed Rate Securities—Continued
Residential Asset Securitization Trust 2003-A14		4.750%	2/25/19	$	2,786,843	$	2,768,556
Virginia Housing Development Mortgage Bonds Pass-Through Certificates 2006		6.000%	6/25/34		4,282,587		4,283,230
							12,781,344
Indexed SecuritiesC	3.7%
Bayview Commercial Asset Trust 2005-1A A2		2.949%	4/25/35		1,520,519		1,325,553	D
Bear Stearns Structured Products Inc. 2007-R10 A1		2.956%	9/26/37		6,094,163		5,819,926	D
Citigroup Mortgage Loan Trust Inc. 2005-11 A3		4.900%	12/25/35		2,753,411		2,622,933
Countrywide Home Loans 2003-49		3.697%	10/25/33		614,684		607,617
First Horizon Mortgage Pass-Through Trust 2003-AR2 2A1		4.733%	7/25/33		1,441,626		1,435,471
GMAC Mortgage Corp. Loan Trust 2005-AR5 3A1		5.051%	9/19/35		1,366,031		1,311,835
IndyMac Inda Mortgage Loan Trust 2007-AR7 1A1		6.260%	11/25/37		3,305,643		3,150,121
MASTR Adjustable Rate Mortgages Trust 2004-13		3.786%	11/21/34		6,815,190		6,490,956
Wells Fargo Mortgage-Backed Securities Trust 2004-S		3.541%	9/25/34		3,525,000		3,501,067
							26,265,479
Variable Rate SecuritiesH	1.8%
Banc of America Funding Corp. 2005-B		5.096%	4/20/35		1,880,109		1,904,596
Bear Stearns Alt-A Trust 2005-2		4.701%	4/25/35		1,475,744		1,416,411
Citigroup Mortgage Loan Trust Inc. 2005-8 1A1A		5.292%	10/25/35		1,650,549		1,581,260
Countrywide Home Loans 2004-20		7.022%	9/25/34		547,667		430,814
Merrill Lynch Mortgage Investors Inc. 2005-A2		4.489%	2/25/35		1,523,025		1,391,246
Merrill Lynch Mortgage Investors Trust 2004-A1 2A1		4.580%	2/25/34		2,472,306		2,335,303
MLCC Mortgage Investors Inc. 2005-1 2A1		4.966%	4/25/35		720,925		728,705
MLCC Mortgage Investors Inc. 2005-1 2A2		4.966%	4/25/35		2,243,475		2,267,685
WaMu Mortgage Pass-Through Certificates 2004-AR11		4.556%	10/25/34		333,715		321,694
							12,377,714
Total Mortgage-Backed Securities (Cost—$52,157,835)							51,424,537

168

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
U.S. Government and Agency Obligations	19.1%
Fixed Rate Securities	16.3%
Fannie Mae		7.250%	1/15/10	$	162,000	$	176,034	A
Farmer Mac		4.250%	7/29/08		1,005,000		1,010,890
Farmer Mac		4.875%	4/4/12		2,561,000		2,738,739
Farmer Mac		5.125%	4/19/17		2,800,000		2,991,268	D
Federal Home Loan Bank		5.800%	3/30/09		485,000		501,785
Federal Home Loan Bank		5.500%	7/15/36		130,000		142,072
Freddie Mac		4.750%	1/18/11		1,769,000		1,868,137	A
Freddie Mac		3.500%	5/29/13		2,380,000		2,395,775	A
Freddie Mac		5.600%	9/26/13		870,000		882,719
Freddie Mac		5.600%	10/17/13		400,000		405,861
Tennessee Valley Authority		5.625%	1/18/11		373,000		402,487
Tennessee Valley Authority		6.790%	5/23/12		2,747,000		3,112,865
Tennessee Valley Authority		5.980%	4/1/36		70,000		78,755
United States Treasury Bonds		8.750%	5/15/17		10,000		14,090	A
United States Treasury Notes		4.625%	7/31/09		7,370,000		7,668,257	A
United States Treasury Notes		4.500%	11/15/10		5,590,000		5,994,403	A
United States Treasury Notes		4.875%	5/31/11		3,790,000		4,136,429	A
United States Treasury Notes		4.500%	9/30/11		1,890,000		2,048,287	A
United States Treasury Notes		4.625%	10/31/11		9,850,000		10,729,575	A
United States Treasury Notes		4.875%	6/30/12		4,400,000		4,848,593	A
United States Treasury Notes		4.625%	7/31/12		4,200,000		4,591,125	A
United States Treasury Notes		4.125%	8/31/12		38,720,000		41,536,260	A
United States Treasury Notes		3.875%	10/31/12		10,420,000		11,076,950	A
United States Treasury Notes		4.250%	11/15/17		5,880,000		6,273,684	A
							115,625,040
Treasury Inflation-Protected SecuritiesI	2.8%
United States Treasury Inflation-Protected Security		2.000%	1/15/14		1,021,118		1,105,998	A
United States Treasury Inflation-Protected Security		2.000%	7/15/14		163,466		177,527	A
United States Treasury Inflation-Protected Security		1.875%	7/15/15		1,337,830		1,444,124	A
United States Treasury Inflation-Protected Security		2.000%	1/15/16		1,495,042		1,621,070	A
United States Treasury Inflation-Protected Security		2.500%	7/15/16		762,872		859,363	A
United States Treasury Inflation-Protected Security		2.625%	7/15/17		6,425,410		7,321,954	A

169

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
U.S. Government and Agency Obligations—Continued
Treasury Inflation-Protected SecuritiesI—Continued
United States Treasury Inflation-Protected Security		2.375%	1/15/25	$	1,538,372	$	1,673,821	A
United States Treasury Inflation-Protected Security		2.000%	1/15/26		979,327		1,009,625	A
United States Treasury Inflation-Protected Security		2.375%	1/15/27		3,108,164		3,392,754	A
United States Treasury Inflation-Protected Security		1.750%	1/15/28		906,660		898,797	A
							19,505,033
Total U.S. Government and Agency Obligations (Cost—$127,246,167)							135,130,073
U.S. Government Agency Mortgage-Backed Securities	17.5%
Fixed Rate Securities	15.0%
Fannie Mae		6.500%	6/1/14 to 9/1/37		1,680,349		1,742,738
Fannie Mae		8.000%	9/1/15		35,498		36,987
Fannie Mae		9.500%	4/15/21		31,481		35,026
Fannie Mae		5.000%	2/1/36		8,003,542		7,933,191
Fannie Mae		6.000%	10/1/36 to 10/1/37		20,202,742		20,717,508
Fannie Mae		5.000%	12/1/38		43,370,000		42,922,768	J
Fannie Mae		5.500%	12/1/38		21,000,000		21,196,875	J
Freddie Mac		4.500%	1/15/13		1,985,000		2,093,395	A
Freddie Mac		6.500%	6/1/13 to 11/1/15		45,314		47,640
Freddie Mac		7.500%	4/1/17		1,904		1,978
Freddie Mac		9.300%	4/15/19		41,444		44,786
Freddie Mac		5.000%	11/1/35		444,140		440,470
Freddie Mac		5.000%	12/1/38		491,000		486,090	J
Government National Mortgage Association		5.000%	12/1/38		8,100,000		8,077,223	J
Government National Mortgage Association		6.000%	12/1/38		200,000		205,875	J
							105,982,550

170

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
U.S. Government Agency Mortgage-Backed Securities—Continued
Indexed SecuritiesC	2.5%
Fannie Mae		5.645%	3/1/18	$	19,799	$	19,817
Fannie Mae		4.338%	11/1/34		486,283		490,590
Fannie Mae		4.214%	12/1/34		735,948		740,271
Fannie Mae		4.855%	1/1/35		3,203,998		3,341,306
Fannie Mae		3.794%	3/1/35		821,405		812,700
Fannie Mae		4.753%	4/1/35		817,141		827,047
Fannie Mae		5.763%	9/1/37		5,681,092		5,778,914
Freddie Mac		6.018%	1/1/19		7,741		7,801
Freddie Mac		4.344%	12/1/34		258,000		260,207
Freddie Mac		4.468%	12/1/34		1,351,267		1,369,330
Freddie Mac		4.088%	1/1/35		266,316		264,548
Freddie Mac		4.148%	1/1/35		430,549		430,568
Freddie Mac		4.651%	7/1/35		3,105,130		3,123,851
							17,466,950
Stripped Securities	N.M.
Fannie Mae		0.000%	5/25/22		5,103		4,840	F,G2
Freddie Mac		10.000%	3/1/21		4,907		1,107	F,G1
							5,947
Total U.S. Government Agency Mortgage-Backed Securities (Cost—$121,393,065)							123,455,447
Yankee BondsK	9.2%
Aerospace and Defense	0.2%
Systems 2001 Asset Trust		6.664%	9/15/13		1,066,299		1,095,622	D
Commercial Banks	4.4%
Glitnir Banki Hf		4.334%	1/21/11		4,430,000		3,374,464	C,D
Glitnir Banki Hf		4.074%	7/28/11		120,000		104,891	C,D
Glitnir Banki Hf		4.421%	1/18/12		100,000		75,633	C,D
Glitnir Banki Hf		6.375%	9/25/12		1,980,000		1,689,421	D
Glitnir Banki Hf		6.693%	6/15/16		910,000		733,473	B,D
HBOS Treasury Services PLC		4.000%	9/15/09		1,240,000		1,247,938	D
Kaupthing Bank Hf		5.750%	10/4/11		4,090,000		3,264,789	D
Landsbanki Islands Hf		6.100%	8/25/11		2,330,000		2,035,614	D
Landsbanki Islands Hf		7.431%	12/31/49		1,830,000		1,532,017	A,B,D
Resona Preferred Global Securities		7.191%	12/29/49		4,640,000		4,052,242	B,D
Royal Bank of Scotland Group PLC		9.118%	3/31/49		2,431,000		2,452,427

171

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Yankee Bonds—Continued
Commercial Banks—Continued
RSHB Capital SA		6.299%	5/15/17	$	270,000	$	250,087	D
Santander Issuances		5.805%	6/20/16		1,030,000		1,022,088	B,D
Shinsei Finance Cayman Ltd.		6.418%	1/29/49		4,085,000		2,707,587	B,D
TuranAlem Finance BV		5.269%	1/22/09		970,000		907,726	C,D
VTB Capital SA for Vneshtorgbank		3.839%	8/1/08		3,880,000		3,836,350	C,D
VTB Capital SA for Vneshtorgbank		3.839%	8/1/08		367,000		362,688	C,D
VTB Capital SA for Vneshtorgbank		4.812%	11/2/09		1,850,000		1,812,718	C,D
							31,462,153
Diversified Financial Services	1.2%
Aiful Corp.		5.000%	8/10/10		3,491,000		3,292,296	D
MUFG Capital Finance 1 Ltd.		6.346%	7/29/49		3,402,000		2,772,286	B
TNK-BP Finance SA		6.875%	7/18/11		2,783,000		2,709,946	D
							8,774,528
Diversified Telecommunication Services	1.5%
Deutsche Telekom International Finance BV		8.000%	6/15/10		70,000		74,879	E
Deutsche Telekom International Finance BV		5.750%	3/23/16		1,800,000		1,779,613	A
France Telecom SA		7.750%	3/1/11		2,428,000		2,632,783
Telecom Italia Capital SpA		5.250%	10/1/15		1,400,000		1,271,910
Telefonica Emisiones S.A.U.		3.442%	2/4/13		5,230,000		4,635,830	C
							10,395,015
Energy Equipment and Services	0.2%
Transocean Inc.		5.250%	3/15/13		1,670,000		1,706,551
Foreign Government	N.M.
Russian Federation		7.500%	3/31/30		17,546		20,204	D
Industrial Conglomerates	0.3%
Tyco International Group SA		6.000%	11/15/13		2,358,000		2,367,823
Insurance	0.2%
Merna Reinsurance Ltd.		6.580%	6/30/12		1,300,000		1,185,990	C,D
Metals and Mining	0.5%
Vale Overseas Ltd.		6.250%	1/23/17		3,560,000		3,545,326

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Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES			VALUE
Yankee Bonds—Continued
Oil, Gas and Consumable Fuels	0.6%
Anadarko Finance Co.		6.750%	5/1/11	$	720,000		$	769,037
Gazprom		6.212%	11/22/16		1,710,000			1,581,750	D
Gazprom		6.510%	3/7/22		940,000			837,775	D
Petrozuata Finance Inc.		8.220%	4/1/17		883,000			888,519	D
								4,077,081
Wireless Telecommunication Services	0.1%
America Movil SA de CV		5.625%	11/15/17		680,000			672,258
Total Yankee Bonds (Cost—$72,069,946)								65,302,551
Preferred Stocks	0.5%
Fannie Mae		8.250%			61,925	shs		1,489,296	A
Freddie Mac		8.375%			84,900			2,071,560	A
Home Ownership Funding Corp.		1.000%			600			106,763	D,F
Home Ownership Funding Corp. II		1.000%			1,800			320,287	D,F
Total Preferred Stocks (Cost—$5,612,735)								3,987,906
Total Long-Term Securities (Cost—$602,910,878)								583,976,915
Investment of Collateral From Securities Lending	19.1%
State Street Navigator Securities Lending Prime Portfolio					134,911,807			134,911,807
Total Investment of Collateral From Securities Lending (Cost—$134,911,807)								134,911,807
Short-Term Securities	27.3%
U.S. Government and Agency Obligations	0.5%
Fannie Mae		0.000%	12/15/08	$	3,360,000			3,312,322	L,M
Repurchase Agreement	26.8%
Merrill Lynch Government Securities Inc. 2.25%, dated 3/31/08, to be repurchased at $189,221,826 on 4/1/08 (Collateral: $175,000,000 zero-coupon bonds to 4.30%, due 4/21/08 to 5/5/08, value $176,580,350; $16,455,000 Federal Home Loan Bank, zero-coupon bond, due 5/7/08, value $16,413,862)					189,210,000			189,210,000
Total Short-Term Securities (Cost—$192,526,656)								192,522,322

173

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Bond Portfolio—Continued

	% OF NET ASSETS	VALUE
Total Investments (Cost—$930,349,341)N	128.9%	$	911,411,044
Obligation to return collateral from securities lending	(19.1)%		(134,911,807	)
Other Assets Less Liabilities	(9.8)%		(69,626,484	)
Net Assets	100.0%	$	706,872,753

	Expiration	Contracts	Appreciation/ (Depreciation)
Futures Contracts PurchasedO
Eurodollar Futures	June 2008	142	$	886,990
Eurodollar Futures	September 2008	204		401,818
Eurodollar Futures	December 2008	46		82,220
Eurodollar Futures	March 2009	463		513,885
Eurodollar Futures	June 2009	16		60,945
Eurodollar Futures	September 2009	16		58,145
U.S. Treasury Note Futures	June 2008	651		672,467
U.S. Treasury Note Futures	June 2008	568		1,003,506
U.S. Treasury Note Futures	June 2008	152		175,241
			$	3,855,217
Options WrittenO
Barclays Swaption Call, Strike Price $1.20	April 2008	12,680,000	$	36,772
Bear Stearns Swaption Call, Strike Price $1.20	April 2008	22,200,000		51,060
Eurodollar Futures Call, Strike Price $97.25	September 2008	102		(121,635	)
U.S. Treasury Note Futures Call, Strike Price $121.00	May 2008	185		(49,925	)
U.S. Treasury Note Futures Put, Strike Price $113.00	May 2008	121		146,864
			$	63,136

N.M. Not Meaningful.

^A All or a portion of this security is on loan.

^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 according to the predetermined schedule.

^C 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, 2008.

^D 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 11.28% of net assets.

174

Annual Report to Shareholders

^E Credit Linked Security – The rates of interest earned on these securities are tied to the credit rating assigned by Standard & Poor’s Rating Service and/or Moody’s Investors Services.

^F Illiquid security valued at fair value under procedures approved by the Board of Directors. At March 31, 2008, the market value for these securities was $1,957,380.

^G 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.

^H The coupon rates shown on variable rate securities are the rates at March 31, 2008. These rates vary with the weighted average coupon of the underlying loans.

^I 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.

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

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

^L 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.

^M All or a portion of this security is collateral to cover futures and options contracts written.

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

Gross unrealized appreciation	$	12,921,324
Gross unrealized depreciation		(32,118,383	)
Net unrealized depreciation	$	(19,197,059	)

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

See notes to financial statements.

175

Annual Report to Shareholders

Statement of Assets and Liabilities

Western Asset Intermediate Bond Portfolio

March 31, 2008

Assets:
Investment securities at market value (Cost—$737,822,685)			$	718,888,722	A
Short-term securities at value (Cost—$192,526,656)				192,522,322
Cash				66,121
Other assets				8,500,000
Receivable for securities sold				8,252,938
Interest receivable				6,697,934
Receivable for fund shares sold				2,835,375
Futures variation margin receivable				462,754
Total assets				938,226,166
Liabilities:
Obligation to return collateral for securities loaned	$	134,911,807
Payable for securities purchased		80,620,958
Payable for fund shares repurchased		7,760,822
Swap contracts at value		6,612,271
Income distribution payable		612,116
Options written (Proceeds—$457,539)		394,403
Accrued management fee		265,437
Amounts payable for open swaps		53,064
Accrued expenses		122,535
Total liabilities				231,353,413
Net Assets			$	706,872,753
Net assets consist of:
Accumulated paid-in-capital			$	720,403,871
Undistributed net investment income				1,507,535
Accumulated net realized gain on investments, options, futures and swaps				4,814,195
Net unrealized depreciation on investments, options, futures and swaps				(19,852,848	)
Net Assets			$	706,872,753
Net Asset Value Per Share:
Institutional Class (68,623,722 shares outstanding)				$10.30

^A The market value of securities on loan is $137,786,793.

See notes to financial statements.

176

Annual Report to Shareholders

Statement of Operations

Western Asset Intermediate Bond Portfolio

For the Year Ended March 31, 2008

Investment Income:
Interest	$	37,979,550
Income from securities lending		494,752
Total income				$	38,474,302
Expenses:
Management fees		2,835,468
Audit and legal fees		91,840
Custodian fees		89,963
Directors’ fees and expenses		19,256
Registration fees		34,618
Reports to shareholders		2,405
Transfer agent and shareholder servicing expense:
Institutional Class		34,592
Fees recaptured		28,475
Other expenses		54,914
		3,191,531
Less: Compensating balance credits		(1,630	)
Net expenses					3,189,901
Net Investment Income					35,284,401
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain on:
Investments		2,718,068
Options		1,242,323
Futures		7,693,513
Swaps		71,775
					11,725,679
Change in unrealized appreciation/(depreciation) of investments, options, futures and swaps					(19,855,767	)
Net Realized and Unrealized Loss on Investments					(8,130,088	)
Change in Net Assets Resulting From Operations				$	27,154,313

See notes to financial statements.

177

Annual Report to Shareholders

Statement of Changes in Net Assets

Western Asset Intermediate Bond Portfolio

	FOR THE YEARS ENDED MARCH 31,
	2008			2007
Change in Net Assets:
Net investment income	$	35,284,401		$	30,716,282
Net realized gain/(loss)		11,725,679			(1,664,912	)
Change in unrealized appreciation/(depreciation)		(19,855,767	)		15,152,515
Change in net assets resulting from operations		27,154,313			44,203,885
Distributions to shareholders from:
Net investment income:
Institutional Class		(35,155,441	)		(30,869,536	)
Change in net assets from fund share transactions:
Institutional Class		75,139,298			(113,092,171	)
Change in net assets		67,138,170			(99,757,822	)
Net Assets:
Beginning of year	$	639,734,583		$	739,492,405
End of year	$	706,872,753		$	639,734,583
Undistributed net investment income	$	1,507,535		$	409,387

See notes to financial statements.

178

Annual Report to Shareholders

Financial Highlights

Western Asset Intermediate Bond Portfolio

For a share of each class of capital stock outstanding:

Institutional Class:

	YEARS ENDED MARCH 31,
	2008			2007			2006			2005			2004
Net asset value, beginning of year	$	10.43		$	10.21		$	10.51		$	11.01		$	10.92
Investment operations:
Net investment income		.52	A		.49	A		.44	B		.38	B		.44	B
Net realized and unrealized gain/(loss)		(.14	)		.22			(.20	)		(.22	)		.36
Total from investment operations		.38			.71			.24			.16			.80
Distributions from:
Net investment income		(.51	)		(.49	)		(.44	)		(.38	)		(.44	)
Net realized gain on investments		—			—			(.10	)		(.28	)		(.27	)
Total distributions		(.51	)		(.49	)		(.54	)		(.66	)		(.71	)
Net asset value, end of year	$	10.30		$	10.43		$	10.21		$	10.51		$	11.01
Total return		3.77	%		7.17	%		2.37	%		1.66	%		7.58	%
Ratios to Average Net Assets:C
Total expenses		.45	%		.46	%		.47	%		.46	%		.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		5.0	%		4.8	%		4.3	%		3.6	%		4.0	%
Supplemental Data:
Portfolio turnover rate		239.0	%		244.1	%		266.1	%		215.7	%		255.1	%
Net assets, end of year (in thousands)	$	706,873		$	639,735		$	739,492		$	660,480		$	587,229

^A Computed using average daily shares outstanding.

^B Computed using SEC method.

^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.

See notes to financial statements.

179

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 various periods ended March 31, 2008, are presented below:

	Three Months Ended 3/31/2008		Average Annual Total Return
		One Year	Three Years	Since InceptionA
Western Asset Intermediate Plus Bond Portfolio:
Institutional Class	-0.23%	+2.35%	+4.09%	+3.52%
Lehman Brothers Intermediate U.S. Government/ Credit IndexB	+3.00%	+8.88%	+5.66%	+4.13%

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. Performance figures for periods shorter than one year represent cumulative figures and are not annualized.

The gross expense ratio for the Institutional Class was 0.63%. Gross expenses are the Fund’s total annual operating expenses for the fiscal year ended March 31, 2007 as indicated in the Fund’s prospectus dated August 1, 2007 and do not reflect fee waivers or reimbursements. These expenses include management fees and other expenses.

The net expense ratio for the Institutional Class was 0.45%. Net expenses are the Fund’s total annual operating expenses for the fiscal year ended March 31, 2007 as indicated in the Fund’s prospectus dated August 1, 2007 and reflect contractual fee waivers and/or reimbursements. The Fund’s Manager has contractually agreed to waive fees and/or reimburse operating expenses (exclusive of taxes, interest, deferred organizational expenses, brokerage and extraordinary expenses) until August 1, 2008 to limit total annual operating expenses of the Institutional Class to 0.45% of the Fund’s average daily net assets attributable to the Institutional Class.

^A The Fund’s Institutional Class inception date is April 1, 2004. Since-inception index returns are for periods beginning March 31, 2004. Although it is not possible to invest directly in an index, it is possible to purchase investment vehicles designed to track the performance of certain indexes.

^B A total return index consisting of investment grade corporate debt issues as well as debt issues of U.S. government agencies and the U.S. Treasury. The debt issues all maintain maturities within a range of 1 to 10 years.

180

Annual Report to Shareholders

A year ago, the Federal Reserve Board’s (Fed)^C predominant concern was that strong growth and a high level of resource utilization would sustain inflationary pressures. The financial crisis that erupted a few months later has defined the fixed-income landscape ever since. The period ended with the Fed not only focused on averting recession but struggling to unclog credit markets. The Ted spread (TED)^D, a measure of systemic risk, rose five-fold during the 12-month period ended March 31, 2008, to peak near 220 basis points (bps)^E in November, and had only moderated slightly by period-end. Growing expectations for easing over the first half of the period were finally validated by the Fed’s decision to cut the funds rate by a total of 300 bps, including a surprise 75 bps reduction at an unscheduled Federal Open Market Committee (FOMC) meeting in January. Additionally, the Fed, along with a number of government housing agencies, announced new lending facilities targeted directly at strained credit conditions, with a specific focus on the mortgage market. The yield on the two-year Treasury note declined 303 bps, driving a powerful rally in the Treasury market. All other risky asset classes suffered as a severe flight-to-safety forced spreads sharply higher. Home prices declined and the drag from the homebuilding sector alone detracted more than 1% from gross domestic product growth. Still, the economy continued to expand modestly thanks to a robust trade sector and a stubborn consumer. The price of oil breached the $100 per barrel threshold despite slower growth concerns. The U.S. dollar lost substantial value against a trade-weighted basket of currencies. Equity markets came under serious pressure in the final four months and finished marginally lower.

The impact of market conditions on the Fund’s performance was negative for the 12-month period ended March 31, 2008, with strategies producing negative results. The Fund’s Institutional Class had a total return of +2.35%, which underperformed the Lehman Brothers Intermediate Government/Credit Bond Index’s return of +8.88%. Overweight exposure to the mortgage-backed sector detracted significantly from returns as spreads widened and volatility increased. We had diversified into a number of select non-agency issues, which were particularly impacted and further negatively impacted performance. An emphasis on lower-quality credits and the financial sector was also a negative as spreads trended higher in the wake of the subprime lending crisis, deteriorating liquidity conditions and slowing economic growth. A modest exposure to international bonds in other advanced economies had a negative impact as the flight-to-safety outside the U.S. has been minimal relative to U.S. Treasury markets. On the positive side, a tactically-driven duration posture contributed modestly to returns as bond yields rallied over the last 12 months. A curve-steepening strategy had a positive impact on performance as the spread between the two- and 10-year yields widened. Modest Treasury Inflation-Protected Securities (TIPS) exposure had a positive impact following a commodity-driven rise in headline inflation.

Western Asset Management Company

April 21, 2008

Investment Risks: Bonds are subject to a variety of risks, including interest rate, credit and inflation risk. As interest rates rise, bond prices fall, reducing the value of a Fund’s share price. Foreign securities are subject to certain risks of overseas investing, including currency fluctuations and changes in political and economic conditions. These risks are magnified in emerging markets.

^C Federal Reserve Board (Fed) – is charged with, among other things, managing the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.

^D Ted Spread (Ted) – The price difference between three-month futures contracts for U.S. Treasuries and three-month contracts for euros having identical expiration months.

^E 100 basis points (bps) = 1%

181

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, 2007, and held through March 31, 2008.

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 value 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 if your shares were held for the entire 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 10/1/07		Ending Account Value 3/31/08		Expenses PaidA During the Period 10/01/07 to 03/31/08
Intermediate Plus Bond Portfolio:
Institutional Class
Actual	$	1,000.00	$	1,008.30	$	2.27
Hypothetical (5% return before expenses)		1,000.00		1,022.74		2.28

^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 (183), and divided by 366.

182

Annual Report to Shareholders

Performance Information

Western Asset Intermediate Plus Bond Portfolio

The graph compares the Fund’s total returns to 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. 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 March 31, 2004.

183

Annual Report to Shareholders

Performance Information—Continued

Portfolio Composition (as of March 31, 2008)^B

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

Maturity Schedule (as a percentage of the portfolio)

^B The pie charts above represent the composition of the Fund’s Portfolio as of March 31, 2008 and do not include derivatives such as Futures Contracts, Options Written, and Swaps. The Fund is actively managed. As a result, the composition of the portfolio holdings and sectors are subject to change at any time.

^C Source: Standard & Poor’s

^D Preferred stocks do not have defined maturity dates.

184

Annual Report to Shareholders

Portfolio of Investments

Western Asset Intermediate Plus Bond Portfolio

March 31, 2008

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†			VALUE
Long-Term Securities	78.9%
Corporate Bonds and Notes	30.3%
Aerospace and Defense	0.3%
United Technologies Corp.		5.375%	12/15/17	$	350,000		$	359,068
Air Freight and Logistics	0.2%
United Parcel Service Inc.		4.500%	1/15/13		200,000			207,213
Airlines	0.2%
Delta Air Lines Inc.		7.570%	11/18/10		200,000			199,376
Automobiles	0.5%
DaimlerChrysler NA Holding Corp.		6.500%	11/15/13		370,000			390,013
Ford Motor Co.		7.450%	7/16/31		110,000			72,600
General Motors Corp.		8.375%	7/5/33		50,000	EUR		52,908
General Motors Corp.		8.375%	7/15/33		120,000			84,600
								600,121
Capital Markets	3.0%
Goldman Sachs Capital II		5.793%	12/29/49		1,720,000			1,145,692	A
Lehman Brothers Holdings Capital Trust VII		5.857%	12/31/49		850,000			537,625	A
Lehman Brothers Holdings Inc.		4.500%	7/26/10		140,000			133,902
Merrill Lynch and Co. Inc.		5.700%	5/2/17		420,000			398,975
Morgan Stanley		5.550%	4/27/17		310,000			291,529
The Bear Stearns Cos. Inc.		6.400%	10/2/17		510,000			503,574
The Bear Stearns Cos. Inc.		7.250%	2/1/18		330,000			341,019
								3,352,316
Chemicals	0.6%
The Dow Chemical Co.		6.000%	10/1/12		660,000			695,216
Commercial Banks	2.0%
Comerica Capital Trust II		6.576%	2/20/37		130,000			86,582	A
SunTrust Capital VIII		6.100%	12/15/36		80,000			63,344	A
Wachovia Capital Trust III		5.800%	8/29/49		1,550,000			1,104,375	A
Wells Fargo and Co.		5.250%	10/23/12		270,000			280,010
Wells Fargo Capital X		5.950%	12/15/36		740,000			666,732	A
								2,201,043
Commercial Services and Supplies	0.4%
Waste Management Inc.		7.375%	8/1/10		460,000			484,611

185

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Corporate Bonds and Notes—Continued
Consumer Finance	4.4%
American Express Co.		6.800%	9/1/66	$	710,000	$	667,563	A
Ford Motor Credit Co.		7.127%	1/13/12		1,160,000		858,099	B
Ford Motor Credit Co.		8.708%	4/15/12		1,200,000		1,127,584	B
GMAC LLC		6.875%	9/15/11		700,000		535,755
GMAC LLC		6.000%	12/15/11		1,180,000		882,042
GMAC LLC		6.750%	12/1/14		40,000		28,308
John Deere Capital Corp.		5.100%	1/15/13		100,000		103,999
Nelnet Inc.		7.400%	9/29/36		250,000		162,873	A
SLM Corp.		3.631%	1/27/14		700,000		490,267	B
							4,856,490
Diversified Financial Services	3.1%
AGFC Capital Trust I		6.000%	1/15/67		520,000		428,508	A,C
BAC Capital Trust XIII		3.200%	3/15/43		120,000		81,692	B
BAC Capital Trust XIV		5.630%	12/31/49		10,000		7,312	A
Bank of America Corp.		8.000%	12/29/49		300,000		300,360	A
Beaver Valley II Funding		9.000%	6/1/17		220,000		244,625
Capmark Financial Group Inc.		5.875%	5/10/12		350,000		221,752	C,D
General Electric Capital Corp.		6.375%	11/15/67		380,000		371,837	A
Glen Meadow Pass-Through Certificates		6.505%	2/12/67		450,000		384,102	A,C
JP Morgan Chase Capital XXII		6.450%	2/2/37		380,000		327,868	A
Kaupthing Bank Hf		7.625%	2/28/15		360,000		338,868	C,E
The Williams Cos. Inc. Credit Linked Certificate Trust		6.750%	4/15/09		170,000		172,975	C
The Williams Cos. Inc. Credit Linked Certificate Trust		6.489%	5/1/09		255,000		257,550	B,C
TNK-BP Finance SA		7.500%	3/13/13		100,000		97,375	C
ZFS Finance USA Trust II		6.450%	12/15/65		240,000		218,172	A,C
							3,452,996
Diversified Telecommunication Services	0.9%
Citizens Communications Co.		7.875%	1/15/27		40,000		34,300
Embarq Corp.		6.738%	6/1/13		110,000		106,370
Embarq Corp.		7.082%	6/1/16		250,000		236,684
Qwest Communications International Inc.		6.565%	2/15/09		67,000		66,330	B
Qwest Communications International Inc.		7.500%	2/15/14		90,000		84,600
Qwest Corp.		6.050%	6/15/13		70,000		63,000	B
Verizon Global Funding Corp.		7.250%	12/1/10		350,000		375,892
Windstream Corp.		8.625%	8/1/16		30,000		29,475
							996,651

186

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Corporate Bonds and Notes—Continued
Electric Utilities	0.9%
Duke Energy Corp.		6.250%	1/15/12	$	200,000	$	214,782
Duke Energy Corp.		5.625%	11/30/12		160,000		170,116
Energy Future Holdings Corp.		11.250%	11/1/17		250,000		247,500	C,F
Exelon Corp.		6.750%	5/1/11		300,000		316,557
FirstEnergy Corp.		7.375%	11/15/31		20,000		21,756
							970,711
Energy Equipment and Services	0.1%
Key Energy Services Inc.		8.375%	12/1/14		70,000		69,825	C
Food and Staples Retailing	0.2%
Safeway Inc.		6.500%	3/1/11		220,000		233,863
Health Care Equipment and Supplies	0.2%
Hospira Inc.		5.550%	3/30/12		200,000		206,727
Health Care Providers and Services	1.4%
DaVita Inc.		7.250%	3/15/15		30,000		29,250
HCA Inc.		8.750%	9/1/10		50,000		50,000
HCA Inc.		6.250%	2/15/13		30,000		26,100
HCA Inc.		6.750%	7/15/13		70,000		61,950
HCA Inc.		9.125%	11/15/14		10,000		10,300
HCA Inc.		9.250%	11/15/16		90,000		93,375
HCA Inc.		9.625%	11/15/16		60,000		62,250	F
Quest Diagnostics Inc.		7.500%	7/12/11		320,000		358,331
Tenet Healthcare Corp.		9.875%	7/1/14		170,000		164,475
UnitedHealth Group Inc.		6.000%	11/15/17		440,000		429,625
Universal Health Services Inc.		6.750%	11/15/11		240,000		256,791
WellPoint Inc.		5.875%	6/15/17		10,000		9,787
							1,552,234
Independent Power Producers and Energy Traders	0.7%
Dynegy Holdings Inc.		7.750%	6/1/19		70,000		65,450
Edison Mission Energy		7.625%	5/15/27		70,000		65,800
NRG Energy Inc.		7.375%	2/1/16		60,000		58,800
The AES Corp.		9.500%	6/1/09		150,000		154,800
The AES Corp.		7.750%	10/15/15		50,000		50,375
TXU Corp.		5.550%	11/15/14		480,000		374,804
							770,029

187

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Corporate Bonds and Notes—Continued
Insurance	0.4%
American International Group Inc.		5.850%	1/16/18	$	40,000	$	39,254
MetLife Capital Trust IV		7.875%	12/15/37		450,000		409,190	A,C
MetLife Inc.		6.400%	12/15/36		10,000		7,946	A
The Travelers Cos. Inc.		6.250%	3/15/37		10,000		8,820	A
							465,210
IT Services	N.M.
SunGard Data Systems Inc.		10.250%	8/15/15		30,000		30,150
Leisure Equipment and Products	N.M.
Eastman Kodak Co.		3.625%	5/15/08		10,000		9,950
Machinery	N.M.
Terex Corp.		7.375%	1/15/14		20,000		19,800
Media	1.3%
Comcast Corp.		6.500%	1/15/17		510,000		520,873
CSC Holdings Inc.		7.625%	4/1/11		60,000		59,325
EchoStar DBS Corp.		7.125%	2/1/16		130,000		121,225
Idearc Inc.		8.000%	11/15/16		90,000		58,275
News America Inc.		5.300%	12/15/14		220,000		220,025
News America Inc.		6.650%	11/15/37		10,000		10,085	C
Time Warner Inc.		6.875%	5/1/12		200,000		206,467
Turner Broadcasting System Inc.		8.375%	7/1/13		130,000		142,063
Viacom Inc.		5.750%	4/30/11		60,000		60,639
							1,398,977
Metals and Mining	0.4%
Freeport-McMoRan Copper & Gold Inc.		8.375%	4/1/17		410,000		435,113
Multi-Utilities	0.4%
CenterPoint Energy Inc.		5.875%	6/1/08		120,000		120,183
Dominion Resources Inc.		5.700%	9/17/12		280,000		293,215
							413,398
Multiline Retail	0.4%
Federated Retail Holdings Inc.		5.350%	3/15/12		140,000		133,391
JC Penney Corp. Inc.		5.750%	2/15/18		80,000		73,863
May Department Stores Co.		5.750%	7/15/14		210,000		191,831
							399,085

188

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Corporate Bonds and Notes—Continued
Office Electronics	0.3%
Xerox Corp.		5.500%	5/15/12	$	300,000	$	302,527
Oil, Gas and Consumable Fuels	3.9%
Anadarko Petroleum Corp.		5.950%	9/15/16		220,000		227,513
El Paso Corp.		7.000%	5/15/11		80,000		81,289
El Paso Corp.		6.875%	6/15/14		540,000		550,679
El Paso Corp.		7.000%	6/15/17		200,000		205,702
Kerr-McGee Corp.		6.875%	9/15/11		650,000		698,701
Kinder Morgan Energy Partners LP		6.000%	2/1/17		470,000		467,729
Occidental Petroleum Corp.		6.750%	1/15/12		200,000		221,329
Pemex Project Funding Master Trust		4.100%	6/15/10		24,000		23,820	B,C
Pemex Project Funding Master Trust		3.676%	12/3/12		196,000		190,806	B,C
Pemex Project Funding Master Trust		5.750%	3/1/18		250,000		255,095	C
The Williams Cos. Inc.		6.375%	10/1/10		60,000		61,500	C
The Williams Cos. Inc.		6.729%	10/1/10		280,000		285,600	B,C
The Williams Cos. Inc.		7.875%	9/1/21		110,000		119,212
The Williams Cos. Inc.		7.500%	1/15/31		40,000		41,700
The Williams Cos. Inc.		7.750%	6/15/31		110,000		116,875
The Williams Cos. Inc.		8.750%	3/15/32		10,000		11,550
XTO Energy Inc.		7.500%	4/15/12		100,000		110,757
XTO Energy Inc.		6.250%	4/15/13		190,000		206,487
XTO Energy Inc.		5.650%	4/1/16		460,000		471,886
							4,348,230
Paper and Forest Products	0.2%
Weyerhaeuser Co.		6.750%	3/15/12		180,000		189,256
Real Estate Investment Trusts	0.5%
iStar Financial Inc.		5.500%	6/15/12		470,000		347,800
iStar Financial Inc.		5.950%	10/15/13		310,000		226,300
							574,100
Real Estate Management and Development	0.1%
Realogy Corp.		12.375%	4/15/15		150,000		66,750
Road and Rail	N.M.
Hertz Corp.		10.500%	1/1/16		50,000		46,813
Semiconductors and Semiconductor Equipment	0.1%
Freescale Semiconductor Inc.		8.875%	12/15/14		90,000		70,425

189

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Corporate Bonds and Notes—Continued
Thrifts and Mortgage Finance	2.0%
Countrywide Financial Corp.		3.345%	5/5/08	$	80,000	$	79,481	B
Countrywide Financial Corp.		2.819%	3/24/09		230,000		211,283	B
Countrywide Financial Corp.		5.800%	6/7/12		600,000		543,592
Residential Capital LLC		6.370%	11/21/08		80,000		54,400	B
Residential Capital LLC		7.098%	4/17/09		200,000		114,000	B
Residential Capital LLC		7.828%	4/17/09		930,000		344,100	B,C
Residential Capital LLC		6.178%	5/22/09		160,000		91,200	B,D
Residential Capital LLC		8.375%	6/30/10		330,000		165,825
Residential Capital LLC		8.000%	2/22/11		300,000		147,000	D
Washington Mutual Inc.		4.625%	4/1/14		300,000		211,500
Washington Mutual Inc.		7.250%	11/1/17		360,000		281,700
							2,244,081
Wireless Telecommunication Services	1.2%
New Cingular Wireless Services Inc.		8.125%	5/1/12		400,000		447,637
Sprint Capital Corp.		8.375%	3/15/12		590,000		545,750
Vodafone Group PLC		5.350%	2/27/12		330,000		334,169
							1,327,556
Total Corporate Bonds and Notes (Cost—$37,531,672)							33,549,911
Asset-Backed Securities	0.7%
Indexed SecuritiesB	0.7%
Long Beach Mortgage Loan Trust 2005-WL3 2A2A		2.739%	11/25/35		142,314		139,654
Washington Mutual Master Note Trust 2006-A3A A3		2.848%	9/15/13		700,000		666,771	C
Total Asset-Backed Securities (Cost—$830,109)							806,425
Mortgage-Backed Securities	3.6%
Fixed Rate Securities	N.M.
Washington Mutual MSC Mortgage Pass-Through Certificates Series 2004-RA1		7.000%	3/25/34		18,263		18,252
Indexed SecuritiesB	1.7%
Bear Stearns Structured Products Inc. 2007-R10 A1		2.956%	9/26/37		821,685		784,709	C
GMAC Mortgage Corp. Loan Trust 2005-AR5 3A1		5.051%	9/19/35		138,013		132,538

190

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Mortgage-Backed Securities—Continued
Indexed SecuritiesB—Continued
IndyMac Inda Mortgage Loan Trust 2007-AR7 1A1		6.260%	11/25/37	$	452,828	$	431,523
MASTR Adjustable Rate Mortgages Trust 2004-13		3.786%	11/21/34		550,000		523,834
MLCC Mortgage Investors Inc. 2004-B		6.943%	5/25/29		13,140		12,545
							1,885,149
Variable Rate SecuritiesG	1.9%
Banc of America Funding Corp. 2005-B		5.096%	4/20/35		153,171		155,166
Bear Stearns Alt-A Trust 2005-2		4.701%	4/25/35		111,504		107,021
Countrywide Home Loans 2004-20		7.022%	9/25/34		13,108		10,311
JP Morgan Mortgage Trust 2004-A3		4.305%	7/25/34		483,036		486,959
Merrill Lynch Mortgage Investors Trust 2004-A1 2A1		4.580%	2/25/34		341,641		322,709
MLCC Mortgage Investors Inc. 2005-1 2A1		4.966%	4/25/35		53,117		53,690
MLCC Mortgage Investors Inc. 2005-1 2A2		4.966%	4/25/35		172,629		174,492
Structured Adjustable Rate Mortgage Loan Trust 2004-6 3A2		4.710%	6/25/34		160,777		162,755
Washington Mutual Inc. 2005-AR12		4.834%	10/25/35		418,018		387,464
Washington Mutual Inc. 2005-AR4		4.671%	4/25/35		300,000		279,570
							2,140,137
Total Mortgage-Backed Securities (Cost—$4,168,069)							4,043,538
U.S. Government and Agency Obligations	17.4%
Fixed Rate Securities	15.2%
Fannie Mae		5.200%	11/20/09		800,000		802,770
Farmer Mac		4.250%	7/29/08		80,000		80,469
Farmer Mac		5.125%	4/19/17		400,000		427,324	C
Federal Home Loan Bank		5.125%	6/13/08		140,000		140,746
Federal Home Loan Bank		5.000%	12/21/15		540,000		579,485
Federal Home Loan Bank		5.500%	7/15/36		10,000		10,929
Freddie Mac		3.500%	5/29/13		340,000		342,253
Freddie Mac		5.600%	9/26/13		130,000		131,901
Tennessee Valley Authority		5.625%	1/18/11		10,000		10,791
Tennessee Valley Authority		6.790%	5/23/12		210,000		237,969
Tennessee Valley Authority		5.980%	4/1/36		10,000		11,251
United States Treasury Bonds		8.750%	5/15/17		20,000		28,180
United States Treasury Bonds		8.875%	8/15/17		10,000		14,245
United States Treasury Notes		3.750%	5/15/08		3,940,000		3,951,390

191

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
U.S. Government and Agency Obligations—Continued
Fixed Rate Securities—Continued
United States Treasury Notes		4.000%	8/31/09	$	790,000	$	817,033
United States Treasury Notes		6.500%	2/15/10		40,000		43,562
United States Treasury Notes		4.500%	11/15/10		2,490,000		2,670,137
United States Treasury Notes		4.875%	5/31/11		400,000		436,562
United States Treasury Notes		4.500%	9/30/11		870,000		942,862
United States Treasury Notes		4.625%	10/31/11		470,000		511,970
United States Treasury Notes		4.875%	6/30/12		470,000		517,918
United States Treasury Notes		4.625%	7/31/12		890,000		972,881
United States Treasury Notes		4.125%	8/31/12		2,060,000		2,209,832
United States Treasury Notes		4.250%	11/15/17		870,000		928,249
							16,820,709
Treasury Inflation-Protected SecuritiesH	2.2%
United States Treasury Inflation-Protected Security		2.000%	1/15/14		205,594		222,684
United States Treasury Inflation-Protected Security		2.000%	7/15/14		11,196		12,159
United States Treasury Inflation-Protected Security		1.875%	7/15/15		141,053		152,260
United States Treasury Inflation-Protected Security		2.000%	1/15/16		191,399		207,534
United States Treasury Inflation-Protected Security		2.500%	7/15/16		104,503		117,721
United States Treasury Inflation-Protected Security		2.625%	7/15/17		875,729		997,921
United States Treasury Inflation-Protected Security		2.375%	1/15/25		78,374		85,275
United States Treasury Inflation-Protected Security		2.000%	1/15/26		106,333		109,623
United States Treasury Inflation-Protected Security		2.375%	1/15/27		444,771		485,495
United States Treasury Inflation-Protected Security		1.750%	1/15/28		130,962		129,826
							2,520,498
Total U.S. Government and Agency Obligations (Cost—$18,466,112)							19,341,207

192

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
U.S. Government Agency Mortgage-Backed Securities	17.1%
Fixed Rate Securities	15.2%
Fannie Mae		5.000%	2/1/36	$	1,135,394	$	1,125,414
Fannie Mae		5.000%	4/14/38		10,320,000		10,213,580	I
Fannie Mae		5.500%	4/14/38		4,200,000		4,239,375	I
Freddie Mac		5.000%	4/14/38		100,000		99,000	I
Government National Mortgage Association		5.000%	5/20/38		1,200,000		1,196,626	I
							16,873,995
Indexed SecuritiesB	1.9%
Fannie Mae		4.275%	12/1/34		547,504		552,817
Fannie Mae		4.596%	9/1/35		265,921		267,429
Fannie Mae		5.874%	8/1/37		394,098		401,049
Freddie Mac		4.088%	1/1/35		19,469		19,339
Freddie Mac		4.148%	1/1/35		32,198		32,199
Freddie Mac		6.114%	9/1/37		778,763		790,921
							2,063,754
Total U.S. Government Agency Mortgage-Backed Securities (Cost—$18,660,879)							18,937,749
Yankee BondsJ	9.3%
Commercial Banks	4.0%
Banco Santiago SA		3.340%	12/9/09		200,000		193,000	B,C
Glitnir Banki Hf		4.334%	1/21/11		640,000		487,507	B,C
Glitnir Banki Hf		4.421%	1/18/12		100,000		75,634	B,C
Glitnir Banki Hf		6.375%	9/25/12		260,000		221,843	C
Glitnir Banki Hf		6.693%	6/15/16		100,000		80,601	A,C
Kaupthing Bank Hf		5.750%	10/4/11		580,000		462,977	C
Landsbanki Islands Hf		6.100%	8/25/11		330,000		288,306	C
Landsbanki Islands Hf		7.431%	10/19/17		250,000		209,292	A,C
Resona Preferred Global Securities		7.191%	12/29/49		680,000		593,863	A,C
Royal Bank of Scotland Group PLC		9.118%	3/31/49		180,000		181,587
Santander Issuances		5.805%	6/20/16		140,000		138,925	A,C
Shinsei Finance Cayman Ltd.		6.418%	1/29/49		750,000		497,109	A,C
TuranAlem Finance BV		5.269%	1/22/09		130,000		121,654	B,C
VTB Capital SA for Vneshtorgbank		3.839%	8/1/08		578,000		571,497	B,C
VTB Capital SA for Vneshtorgbank		4.812%	11/2/09		280,000		274,357	B,C
							4,398,152

193

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Plus Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†		VALUE
Yankee BondsJ—Continued
Diversified Financial Services	1.0%
Aiful Corp.		5.000%	8/10/10	$	390,000	$	367,802	C
MUFG Capital Finance 1 Ltd.		6.346%	7/29/49		450,000		366,704	A
TNK-BP Finance SA		6.875%	7/18/11		380,000		370,025	C
							1,104,531
Diversified Telecommunication Services	2.6%
British Telecommunications PLC		8.625%	12/15/10		350,000		384,917	D
Deutsche Telekom International Finance BV		5.750%	3/23/16		500,000		494,337
France Telecom SA		7.750%	3/1/11		400,000		433,737
Intelsat Bermuda Ltd.		11.250%	6/15/16		30,000		30,413
Koninklijke (Royal) KPN NV		8.000%	10/1/10		490,000		526,139
Telecom Italia Capital SpA		5.250%	10/1/15		420,000		381,573
Telefonica Emisiones S.A.U.		3.442%	2/4/13		680,000		602,747	B
							2,853,863
Energy Equipment and Services	0.2%
Transocean Inc.		5.250%	3/15/13		220,000		224,815
Foreign Governments	0.1%
Russian Federation		7.500%	3/31/30		39,600		45,599	A,C
United Mexican States		6.750%	9/27/34		9,000		10,040
							55,639
Health Care Equipment and Supplies	0.2%
Baxter Finco BV		4.750%	10/15/10		220,000		227,224
Industrial Conglomerates	0.4%
Tyco International Group SA		6.000%	11/15/13		460,000		461,916
Metals and Mining	0.4%
Vale Overseas Ltd.		6.250%	1/23/17		460,000		458,104
Oil, Gas and Consumable Fuels	0.3%
Gazprom		6.212%	11/22/16		190,000		175,750	C
Gazprom		6.510%	3/7/22		110,000		98,037	C
OPTI Canada Inc.		8.250%	12/15/14		100,000		99,000
							372,787
Wireless Telecommunication Services	0.1%
America Movil SA de CV		5.625%	11/15/17		100,000		98,862
Total Yankee Bonds (Cost—$11,265,224)							10,255,893

194

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES†			VALUE
Preferred Stocks	0.5%
Fannie Mae		8.250%			8,850	shs	$	212,843
Freddie Mac		8.375%			12,075			294,630
Total Preferred Stocks (Cost—$523,125)								507,473
Total Long-Term Securities (Cost—$91,445,190)								87,442,196
Short-Term Securities	34.7%
U.S. Government and Agency Obligations	0.6%
Fannie Mae		0.000%	4/30/08	$	26,000			25,913	K,L
Fannie Mae		0.000%	12/15/08		671,000			661,479	K,L
								687,392
Repurchase Agreement	34.1%
Goldman Sachs & Company 2.23%, dated 3/31/08, to be repurchased at $37,775,340 on 4/1/08 (Collateral: $31,325,000 Tennessee Valley Authority bond, 8.25%, due 4/15/42, value $38,529,750)					37,773,000			37,773,000
Total Short-Term Securities (Cost—$38,461,308)								38,460,392
Total Investments (Cost—$129,906,498)M	113.6%						$	125,902,588
Other Assets Less Liabilities	(13.6)%							(15,088,820	)
Net Assets	100.0%						$	110,813,768

	EXPIRATION	CONTRACTS	APPRECIATION/ (DEPRECIATION)
Futures Contracts PurchasedN
Euribor Futures	June 2008	29	$	(34,580	)
Euribor Futures	September 2008	10		(25,349	)
Euribor Futures	December 2008	12		(6,491	)
Eurodollar Futures	June 2008	14		95,380
Eurodollar Futures	September 2008	31		61,258
Eurodollar Futures	December 2008	8		14,973
Eurodollar Futures	March 2009	25		18,088
Eurodollar Futures	June 2009	3		11,410
Eurodollar Futures	September 2009	3		10,885
German Republic Bond Futures	June 2008	9		(16,725	)
LIBOR Futures	June 2008	2		1,801
LIBOR Futures	September 2008	15		(16,349	)
Sterling Futures	December 2008	29		(13,764	)
U.S. Treasury Note Futures	June 2008	100		202,672

195

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Plus Bond Portfolio—Continued

	EXPIRATION	CONTRACTS	APPRECIATION/ (DEPRECIATION)
Futures Contracts PurchasedN—Continued
U.S. Treasury Note Futures	June 2008	131	$	232,603
U.S. Treasury Note Futures	June 2008	24		27,646
				$563,458
Options WrittenN
Barclays Swaption Call, Strike Price $1.20	April 2008	2,050,000	$	5,945
Bear Stearns Swaption Call, Strike Price $1.20	April 2008	3,100,000		7,130
Eurodollar Futures Call, Strike Price $97.25	September 2008	14		(16,695	)
U.S. Treasury Note Futures Call, Strike Price $121.00	May 2008	28		(7,562	)
U.S. Treasury Note Futures Put, Strike Price $113.00	May 2008	20		24,275
			$	13,093

N.M. – Not Meaningful.

^A 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 according to the predetermined schedule.

^B Indexed Security – The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”), the Euro Interbank Offered Rate (“EURIBOR”) Index, the Consumer Price Index (“CPI”), the one-year Treasury Bill Rate or the ten-year Japanese Government Bond Rate. The coupon rates are the rates as of March 31, 2008.

^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 10.08% of net assets.

^D Credit Linked Security – The rates of interest earned on these securities are tied to the credit rating assigned by Standard & Poor’s Rating Service and/or Moody’s Investors Services.

^E Illiquid security valued at fair value under procedures approved by the Board of Directors. At March 31, 2008, the market value for the securities was $338,868.

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

^G The coupon rates shown on variable rate securities are the rates at March 31, 2008. These rates vary with the weighted average coupon of the underlying loans.

^H 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.

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

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

^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 collateral to cover futures and options contracts written.

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

Gross unrealized appreciation	$	1,600,557
Gross unrealized depreciation		(5,625,283	)
Net unrealized depreciation	$	(4,024,726	)

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

^† Securities are denominated in U.S. Dollars, unless otherwise noted.

EUR—Euro

See notes to financial statements.

196

Annual Report to Shareholders

Statement of Assets and Liabilities

Western Asset Intermediate Plus Bond Portfolio

March 31, 2008

Assets:
Investment securities at market value (Cost—$91,445,190)			$	87,442,196
Short-term securities at value (Cost—$38,461,308)				38,460,392
Cash				379
Foreign currency at value (Cost—$20,685)				20,727
Receivable for securities sold				1,192,125
Interest receivable				1,129,042
Deposits with brokers for open futures contracts				244,037
Unrealized appreciation of forward foreign currency contracts				132,974
Other assets				300,000
Total assets				128,921,872
Liabilities:
Payable for securities purchased	$	16,748,341
Swap contracts at value		863,550
Unrealized depreciation of forward foreign currency contracts		220,990
Options written (Proceeds—$70,375)		57,283
Futures variation margin payable		40,203
Income distribution payable		30,508
Accrued management fee		35,493
Payable for fund shares repurchased		25,000
Amount payable for open swaps		7,109
Accrued expenses		79,627
Total liabilities				18,108,104
Net Assets			$	110,813,768
Net assets consist of:
Accumulated paid-in-capital			$	113,433,722
Overdistributed net investment income				34,069
Accumulated net realized gain on investments, options, futures, swaps and foreign currency transactions				1,480,812
Net unrealized depreciation on investments, options, futures, swaps and foreign currency translations				(4,134,835	)
Net Assets			$	110,813,768
Net Asset Value Per Share:
Institutional Class (11,462,257 shares outstanding)				$9.67

See notes to financial statements.

197

Annual Report to Shareholders

Statement of Operations

Western Asset Intermediate Plus Bond Portfolio

For the Year Ended March 31, 2008

Investment Income:
Interest			$	5,527,905
Expenses:
Management fees	404,576
Audit and legal fees	79,762
Custodian fees	37,719
Directors’ fees and expenses	3,572
Registration fees	6,395
Reports to shareholders	11,975
Transfer agent and shareholder servicing expense:
Institutional Class	14,104
Other expenses	24,241
	582,344
Less: Fees waived	(124,716	)
Compensating balance credits	(2,481	)
Net expenses				455,147
Net Investment Income				5,072,758
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) on:
Investments	573,728
Options	175,472
Futures	935,985
Swaps	1,405
Foreign currency transactions	(220	)
				1,686,370
Change in unrealized appreciation/(depreciation) of:
Investments, options, futures, swaps and foreign currency translations	(4,385,681	)
Assets and liabilities denominated in foreign currency	(1,414	)
				(4,387,095	)
Net Realized and Unrealized Loss on Investments				(2,700,725	)
Change in Net Assets Resulting From Operations			$	2,372,033

See notes to financial statements.

198

Annual Report to Shareholders

Statement of Changes in Net Assets

Western Asset Intermediate Plus Bond Portfolio

	FOR THE YEARS ENDED MARCH 31,
	2008			2007
Change in Net Assets:
Net investment income	$	5,072,758		$	3,918,725
Net realized gain		1,686,370			225,039
Change in unrealized appreciation/(depreciation)		(4,387,095	)		1,511,215
Change in net assets resulting from operations		2,372,033			5,654,979
Distributions to shareholders from:
Net investment income:
Institutional Class		(4,962,617	)		(3,920,425	)
Net realized gain on investments:
Institutional Class		(254,925	)		—
Change in net assets from fund share transactions:
Institutional Class		26,837,152			15,179,431
Change in net assets		23,991,643			16,913,985
Net Assets:
Beginning of year	$	86,822,125		$	69,908,140
End of year	$	110,813,768		$	86,822,125
(Overdistributed)/Undistributed net investment income	$	34,069		$	(32,207	)

See notes to financial statements.

199

Annual Report to Shareholders

Financial Highlights

Western Asset Intermediate Plus Bond Portfolio

For a share of each class of capital stock outstanding:

Institutional Class:

	YEARS ENDED MARCH 31,
	2008			2007			2006			2005
Net asset value, beginning of year	$	9.95		$	9.74		$	9.86		$	10.00
Investment operations:
Net investment income		.49	A		.45	A		.40	B		.32	B
Net realized and unrealized gain/(loss)		(.26	)		.21			(.11	)		(.14	)
Total from investment operations		.23			.66			.29			.18
Distributions from:
Net investment income		(.49	)		(.45	)		(.41	)		(.32	)
Net realized gain on investments		(.02	)		—			—			—
Total distributions		(.51	)		(.45	)		(.41	)		(.32	)
Net asset value, end of year	$	9.67		$	9.95		$	9.74		$	9.86
Total return		2.35	%		6.98	%		2.99	%		1.81	%
Ratios to Average Net Assets:C
Total expenses		.58	%		.63	%		.76	%		1.22	%
Expenses net of waivers, if any		.45	%		.45	%		.45	%		.45	%
Expenses net of all reductions		.45	%		.45	%		.45	%		.45	%
Net investment income		5.0	%		4.6	%		4.1	%		3.1	%
Supplemental Data:
Portfolio turnover rate		300.0	%		312.2	%		368.6	%		463.5	%
Net assets, end of year (in thousands)	$	110,814		$	86,822		$	69,908		$	40,637

^A Computed using average daily shares outstanding.

^B Computed using SEC method.

^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.

See notes to financial statements.

200

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 various periods ended March 31, 2008, are presented below:

	Three Months Ended 3/31/08		Average Annual Total Returns
		One Year	Three Years	Since InceptionA
Western Asset Limited Duration Bond Portfolio:
Institutional Class	-4.33%	-4.72%	+1.24%	+1.36%
Merril Lynch 1-3 Year Treasury IndexB	+2.98%	+9.00%	+5.41%	+3.76%

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. Performance figures for periods shorter than one year represent cumulative figures and are not annualized.

The gross expense ratio for the Institutional Class was 0.58%. Gross expenses are the Fund’s total annual operating expenses for the fiscal year ended March 31, 2007, as indicated in the Fund’s prospectus dated August 1, 2007 and do not reflect fee waivers or reimbursements. These expenses include management fees and other expenses.

The net expense ratio for the Institutional Class was 0.40%. Net expenses are the Fund’s total annual operating expenses for the fiscal year ended March 31, 2007, as indicated in the Fund’s prospectus dated August 1, 2007 and reflect contractual fee waivers and/or reimbursements. The Fund’s Manager has contractually agreed to waive fees and/or reimburse operating expenses (exclusive of taxes, interest, deferred organizational expenses, brokerage and extraordinary expenses) until August 1, 2008 to limit total annual operating expenses of the Institutional Class to 0.40% of the Fund’s average daily net assets attributable to the Institutional Class.

^A The Fund’s Institutional Class inception date is October 1, 2003. Since-inception index returns are for periods beginning September 30, 2003. Although it is not possible to invest directly in an index, it is possible to purchase investment vehicles designed to track the performance of certain indexes.

^B A total rate of return index based on daily closing prices and consisting of Treasury bills with a maturity of 1 to 3 years.

201

Annual Report to Shareholders

Management’s Discussion of Fund Performance—Continued

A year ago, the Federal Reserve Board’s (Fed)^C predominant concern was that strong growth and a high level of resource utilization would sustain inflationary pressures. The financial crisis that erupted a few months later has defined the fixed-income landscape ever since. The period ended with the Fed not only focused on averting recession but struggling to unclog credit markets. The Ted Spread (Ted),^D a measure of systemic risk, rose five-fold during the 12-month period ended March 31, 2008, to peak near 220 basis points (bps)^E in November, and had only moderated slightly by period-end. Growing expectations for easing over the first half of the period were finally validated by the Fed’s decision to cut the funds rate by a total of 300 bps, including a surprise 75 bps reduction at an unscheduled Federal Open Market Committee (FOMC) meeting in January. Additionally, the Fed, along with a number of government housing agencies, announced new lending facilities targeted directly at strained credit conditions, with a specific focus on the mortgage market. The yield on the two-year Treasury note declined 303 bps, driving a powerful rally in the Treasury market. All other risky asset classes suffered as a severe flight-to-safety forced spreads sharply higher. Home prices declined and the drag from the homebuilding sector alone detracted more than 1% from gross domestic product growth. Still, the economy continued to expand modestly thanks to a robust trade sector and a stubborn consumer. The price of oil breached the $100 per barrel threshold despite slower growth concerns. The U.S. dollar lost substantial value against a trade-weighted basket of currencies. Equity markets came under serious pressure in the final four months and finished marginally lower.

The impact of market conditions on the Fund’s performance was negative for the 12-month period ended March 31, 2008, with strategies producing negative results. For this period, the Fund’s Institutional Class had a total return of -4.72%, which underperformed its benchmark, the Merrill Lynch 1-3 Year Treasury Index with a return of +9.00%. Agency mortgage exposure was a large negative with spreads widening significantly as volatility spiked and extension risk rose. Non-agency structured securities also underperformed heavily, and a further deleveraging from REITS, hedge funds and investment banks led to massive forced selling, causing non-agency mortgage-backed securities to decline dramatically in price. Investment grade credit corporate debt suffered on the flight to the safety of U.S. Treasuries following the eruption of the financial crisis. An emphasis on the financial sector was a further detractor as losses were heaviest in this area. Duration and curve strategies resulted in modest gains in performance.

Western Asset Management Company

April 21, 2008

Investment Risks: Bonds are subject to a variety of risks, including interest rate, credit and inflation risk. As interest rates rise, bond prices fall, reducing the value of a Fund’s share price.

^C Federal Reserve Board (Fed) – is charged with, among other things, managing the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.

^D Ted Spread (Ted) – The price difference between three-month futures contracts for U.S. Treasuries and three-month contracts for euros having identical expiration months.

^E 100 basis points (bps) = 1%

202

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, 2007 and held through March 31, 2008.

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 value 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 if your shares were held for the entire 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 10/1/07		Ending Account Value 3/31/08		Expenses PaidA During the Period 10/1/07 to 3/31/08
Institutional Class:
Actual	$	1,000.00	$	946.40	$	1.95
Hypothetical (5% return before expenses)		1,000.00		1,022.99	$	2.03

^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 (183), and divided by 366.

203

Annual Report to Shareholders

Performance Information

Western Asset Limited Duration Bond Portfolio

The graph compares the Fund’s total returns to 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. Non-U.S. investments are subject to currency fluctuations, social, economical 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 September 30, 2003.

204

Annual Report to Shareholders

Portfolio Composition (as of March 31, 2008)^B

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

Maturity Schedule (as a percentage of the portfolio)

^B The pie charts above represent the composition of the Fund’s portfolio as of March 31, 2008 and do not include derivatives such as Futures Contracts, Options Written, and Swaps. The Fund is actively managed. As a result, the composition of the portfolio holdings and sectors are subject to change at any time.

^C Source: Standard & Poor's.

^D Preferred stocks do not have defined maturity dates.

205

Annual Report to Shareholders

Portfolio of Investments

Western Asset Limited Duration Bond Portfolio

March 31, 2008

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Long-Term Securities	113.5%
Corporate Bonds and Notes	22.4%
Aerospace and Defense	0.2%
United Technologies Corp.		5.375%	12/15/17	$	240,000	$	246,218
Air Freight and Logistics	0.2%
United Parcel Service Inc.		4.500%	1/15/13		200,000		207,211
Airlines	0.4%
Northwest Airlines Inc.		3.820%	5/20/14		440,456		396,444	A
Capital Markets	2.4%
Goldman Sachs Capital II		5.793%	12/29/49		1,280,000		852,608	B
Lehman Brothers Holdings Capital Trust VII		5.857%	11/29/49		570,000		360,525	B
Lehman Brothers Holdings Inc.		6.500%	7/19/17		200,000		189,929
Merrill Lynch and Co. Inc.		6.050%	8/15/12		400,000		406,255
Morgan Stanley		6.600%	4/1/12		200,000		207,356
The Bear Stearns Cos. Inc.		6.400%	10/2/17		230,000		227,102
The Goldman Sachs Group Inc.		6.600%	1/15/12		210,000		222,035
							2,465,810
Commercial Banks	1.3%
HSBC Bank PLC		6.724%	7/20/12		500,000		413,015	A,C
HSBC Bank PLC		8.320%	8/20/12		40,000		36,372	A
SunTrust Capital VIII		6.100%	12/15/36		60,000		47,508	B
Wachovia Capital Trust III		5.800%	8/29/42		980,000		698,250	B
Wells Fargo Capital X		5.950%	12/15/36		150,000		135,148	B
							1,330,293
Consumer Finance	3.0%
American Express Co.		6.800%	9/1/66		300,000		282,069	B
Ford Motor Credit Co.		6.625%	6/16/08		1,510,000		1,492,936
GMAC LLC		3.749%	9/23/08		1,190,000		1,122,698	A
Nelnet Inc.		7.400%	9/29/36		280,000		182,418	B
							3,080,121
Diversified Financial Services	4.6%
AGFC Capital Trust I		6.000%	1/15/67		630,000		519,154	B,C
Bank of America Corp.		8.000%	12/29/49		300,000		300,360	B
Capmark Financial Group Inc.		5.875%	5/10/12		300,000		190,073	C,D
Citigroup Inc.		5.000%	9/15/14		500,000		471,213
General Electric Capital Corp.		5.000%	12/1/10		270,000		282,423

206

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Corporate Bonds and Notes—Continued
Diversified Financial Services—Continued
General Electric Capital Corp.		6.375%	11/15/67	$	450,000	$	440,334	B
IBM International Group Capital LLC		5.050%	10/22/12		540,000		564,061
JPMorgan Chase Bank NA		7.293%	2/11/11		805,000		796,989	A
Kaupthing Bank Hf		7.625%	2/28/15		700,000		658,910	C,E
TNK-BP Finance SA		7.500%	3/13/13		110,000		107,112	C
ZFS Finance USA Trust III		3.950%	12/15/65		540,000		442,800	B,C
							4,773,429
Diversified Telecommunication Services	0.1%
Qwest Corp.		8.875%	3/15/12		130,000		132,600
Electric Utilities	0.5%
FirstEnergy Corp.		6.450%	11/15/11		110,000		115,143
Ohio Edison Co. Credit Linked Certificate Trust		5.647%	6/15/09		20,000		20,277	C,D
Pacific Gas and Electric Co.		4.800%	3/1/14		400,000		403,466
							538,886
Health Care Equipment and Supplies	0.2%
Hospira Inc.		5.550%	3/30/12		200,000		206,727
Health Care Providers and Services	0.3%
Quest Diagnostics Inc.		5.125%	11/1/10		180,000		184,668
UnitedHealth Group Inc.		4.875%	2/15/13		110,000		108,657
							293,325
IT Services	0.7%
Electronic Data Systems Corp.		7.125%	10/15/09		690,000		703,741
Leisure Equipment and Products	N.M.
Eastman Kodak Co.		7.250%	11/15/13		10,000		9,550
Media	2.1%
Clear Channel Communications Inc.		6.625%	6/15/08		60,000		59,550
Clear Channel Communications Inc.		4.250%	5/15/09		760,000		737,200
Comcast Cable Communications Inc.		6.875%	6/15/09		300,000		309,784
Comcast Cable Communications Inc.		6.750%	1/30/11		200,000		207,932
Liberty Media LLC		7.875%	7/15/09		300,000		301,042
The Walt Disney Co.		4.700%	12/1/12		160,000		164,233
Time Warner Inc.		5.500%	11/15/11		400,000		397,159
							2,176,900

207

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Limited Duration Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Corporate Bonds and Notes—Continued
Multi-Utilities	0.5%
CenterPoint Energy Inc.		5.875%	6/1/08	$	150,000	$	150,229
Dominion Resources Inc.		4.750%	12/15/10		400,000		409,374
							559,603
Multiline Retail	0.2%
Federated Retail Holdings Inc.		5.350%	3/15/12		150,000		142,919
May Department Stores Co.		5.750%	7/15/14		50,000		45,674
							188,593
Office Electronics	0.2%
Xerox Corp.		5.500%	5/15/12		170,000		171,432
Oil, Gas and Consumable Fuels	2.3%
Devon Financing Corp. ULC		6.875%	9/30/11		260,000		283,785
El Paso Natural Gas Co.		5.950%	4/15/17		370,000		362,915
Hess Corp.		6.650%	8/15/11		420,000		452,186
Kinder Morgan Energy Partners LP		6.750%	3/15/11		310,000		324,761
Pemex Project Funding Master Trust		6.125%	8/15/08		6,000		6,039
Pemex Project Funding Master Trust		4.100%	6/15/10		242,000		240,669	A,C
Pemex Project Funding Master Trust		4.100%	6/15/10		59,000		58,558	A,C
Pemex Project Funding Master Trust		3.676%	12/3/12		380,000		369,930	A,C
XTO Energy Inc.		5.650%	4/1/16		290,000		297,493
							2,396,336
Real Estate Investment Trusts	0.6%
iStar Financial Inc.		3.140%	9/15/09		300,000		240,520	A
iStar Financial Inc.		5.650%	9/15/11		500,000		380,000
							620,520
Thrifts and Mortgage Finance	2.0%
Countrywide Financial Corp.		3.345%	5/5/08		30,000		29,805	A
Countrywide Financial Corp.		2.819%	3/24/09		570,000		523,615	A
Countrywide Financial Corp.		5.800%	6/7/12		60,000		54,359
Residential Capital LLC		6.370%	11/21/08		700,000		476,000	A
Residential Capital LLC		7.098%	4/17/09		510,000		290,700	A
Residential Capital LLC		8.000%	2/22/11		1,000,000		490,000	D
Washington Mutual Bank		2.950%	6/16/10		250,000		202,649	A
							2,067,128
Wireless Telecommunication Services	0.6%
Sprint Capital Corp.		6.125%	11/15/08		200,000		198,500

208

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Corporate Bonds and Notes—Continued
Wireless Telecommunication Services—Continued
Vodafone Group PLC		5.350%	2/27/12	$	400,000	$	405,054
							603,554
Total Corporate Bonds and Notes (Cost—$25,644,937)							23,168,421
Asset-Backed Securities	14.6%
Fixed Rate Securities	1.2%
Countryplace Manufactured Housing Contract Trust 2007-1 A1		5.484%	7/15/37		300,425		300,044	C
Countryplace Manufactured Housing Contract Trust 2007-1 A2		5.232%	7/15/37		500,000		489,992	C
GMAC Mortgage Corp. Loan Trust 2005-HE2 A3		4.622%	11/25/35		333,399		316,138
Prestige Auto Receivables Trust 2005-1A		4.370%	6/16/12		107,557		106,811	C
UCFC Home Equity Loan 1998-D		6.905%	4/15/30		40,695		39,371
							1,252,356
Indexed SecuritiesA	13.4%
AESOP Funding II LLC 2004-2A		2.756%	4/20/10		500,000		464,495	C
Ameriquest Mortgage Securities Inc. 2005-R11 A2D		2.929%	1/25/36		240,000		179,010
Asset Backed Securities Corp. Home Equity Loan Trust 2005-HE5 A1		2.759%	6/25/35		278,695		275,445
Bayview Financial Acquisition Trust 2004-C		3.308%	5/28/44		89,666		79,786
Bayview Financial Acquisition Trust 2006-D 2A4		2.958%	12/28/36		638,479		588,458
Bear Stearns Asset-Backed Securities Trust 2003-SD1 A		3.049%	12/25/33		376,780		282,179
Bear Stearns Asset-Backed Securities Trust 2007-HE6 1A1		3.849%	8/25/37		451,924		418,165
Bear Stearns Asset-Backed Securities Inc. 2005-AQ2		2.869%	9/25/35		336,638		331,820
Bear Stearns Asset-Backed Securities Inc. 2007-SD2 2A1		2.999%	9/25/46		399,632		303,477
Bear Stearns Asset-Backed Securities Trust 2006-SD2		2.799%	6/25/36		375,890		337,919
BNC Mortgage Loan Trust 2007-1 A3		2.699%	3/25/37		500,000		411,836
Chase Funding Mortgage Loan Asset-Backed Certificates 2002-4		3.339%	10/25/32		15,502		13,135

209

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Limited Duration Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Asset-Backed Securities—Continued
Indexed Securities—Continued
Citigroup Mortgage Loan Trust Inc. 2007-SHL1 A		2.999%	11/25/46	$	844,320	$	506,330	C
Countrywide Asset-Backed Certificates 2002-3		3.339%	5/25/32		7,179		6,498
Countrywide Asset-Backed Certificates 2007-13 2A1		3.499%	10/25/47		545,975		448,708
Countrywide Asset-Backed Certificates 2007-SE1 1A1		3.149%	5/25/47		949,352		785,978	C
Countrywide Asset-Backed Certificates 2007-SEA2 1A1		3.599%	8/25/47		465,013		449,801	C
Countrywide Home Equity Loan Trust 2004-J		3.108%	12/15/33		33,853		29,759
Countrywide Home Equity Loan Trust 2004-O		3.098%	2/15/34		62,330		50,757
Countrywide Home Equity Loan Trust 2007-GW A		3.368%	8/15/37		675,312		539,400
Ellington Loan Acquisition Trust 2007-1 A2A1		3.599%	5/26/37		294,861		282,560	C
FLAC Holdings LLC 2006-1 A1		3.020%	12/15/18		425,373		297,015	C
GSAA Home Equity Trust 2005-8 A2		2.819%	6/25/35		1,000,000		673,595
HSI Asset Securitization Corp. Trust 2005-I1 2A1		2.719%	11/25/35		40,886		40,777
Ixis Real Estate Capital Trust 2006-HE2 A3		2.759%	8/25/36		900,000		724,050
Long Beach Mortgage Loan Trust 2006-A A1		2.689%	5/25/36		469,768		152,893
MASTR Specialized Loan Trust 2006-3 A		2.859%	6/25/46		580,537		507,133	C
Morgan Stanley Mortgage Loan Trust 2006-12XS		2.719%	10/25/36		387,094		382,908
Origen Manufactured Housing 2006-A		2.968%	11/15/18		331,022		305,323
Ownit Mortgage Loan Asset-Backed Certificates 2005-2 A2C		2.899%	3/25/36		52,766		48,413
RAAC Series 2007-RP2 A		2.949%	2/25/46		663,653		497,482	C
RAAC Series 2007-RP2 M1		3.249%	2/25/46		600,000		322,336	C
Rental Car Finance Corp. 2004-1A		2.799%	6/25/09		375,000		374,771	C
Residential Asset Mortgage Products Inc. 2002-RS6		3.499%	11/25/32		8,801		5,894
Residential Asset Securities Corp. 2006-KS1 A4		2.899%	2/25/36		310,000		210,965
SACO I Trust 2006-3 A3		2.829%	4/25/36		808,929		449,527
Securitized Asset Backed Receivables LLC 2006-FR3 A2		2.739%	5/25/36		800,000		725,456
SLM Student Loan Trust 2007-6 A1		3.501%	4/27/15		490,282		487,826
Superior Wholesale Inventory Financing Trust 2004-A10		2.918%	9/15/11		500,000		484,745

210

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Asset-Backed Securities—Continued
Indexed Securities—Continued
WaMu Asset-Backed Certificates 2007-HE1 2A3		2.749%	1/25/37	$	500,000	$	393,398
							13,870,023
Total Asset-Backed Securities (Cost—$18,481,113)							15,122,379
Mortgage-Backed Securities	26.6%
Fixed Rate Securities	0.7%
Countrywide Alternative Loan Trust 2004-J1		6.000%	2/25/34		40,722		37,956
Residential Asset Mortgage Products Inc. 2004-SL1		7.000%	11/25/31		153,200		157,476
Residential Asset Mortgage Products Inc. 2004-SL2		8.500%	10/25/31		26,036		25,095
Residential Asset Mortgage Products Inc. 2005-SL1		8.000%	5/25/32		520,281		510,331
							730,858
Indexed SecuritiesA	19.2%
American Home Mortgage Investment Trust 2005-4 5A		5.350%	11/25/45		952,305		808,771
American Home Mortgage Investment Trust 2005-SD1		3.049%	9/25/35		449,464		430,987	C
Banc of America Mortgage Securities 2003-D		4.569%	5/25/33		156,396		157,105
Banc of America Mortgage Securities 2005-F		5.011%	7/25/35		740,001		723,455
Bayview Commercial Asset Trust 2005-2A A2		2.949%	8/25/35		382,351		356,980	C
Bear Stearns Alt-A Trust 2007-1 1A1		2.759%	1/25/47		1,017,330		639,012
Bear Stearns ARM Trust 2004-10		4.700%	1/25/35		335,984		334,895
Bear Stearns Second Lien Trust 2007-SV1A A1		2.819%	12/25/36		407,083		305,312	C
Bear Stearns Structured Products Inc. 2007-R10 A1		2.956%	9/26/37		915,836		874,624	C
CBA Commercial Small Balance Commercial Trust 2005-1A		2.919%	7/25/35		389,177		252,965	C
Citigroup Mortgage Loan Trust Inc. 2005-5		5.444%	8/25/35		247,312		169,687
Countrywide Alternative Loan Trust 2005-38 A3		2.949%	9/25/35		294,158		232,379
Countrywide Alternative Loan Trust 2005-51 2A1		2.836%	11/20/35		298,621		236,995
Countrywide Alternative Loan Trust 2006-0A22 A1		2.759%	2/25/47		983,322		748,278

211

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Limited Duration Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Mortgage-Backed Securities—Continued
Indexed Securities—Continued
Countrywide Alternative Loan Trust 2006-OA1 2A1		2.746%	3/20/46	$	244,880	$	185,709
Countrywide Asset-Backed Certificates 2005-IM1		3.415%	11/25/35		359,713		328,015
Countrywide Home Loans 2005-R3		2.999%	9/25/35		516,127		440,328	C
Credit Suisse/Morgan Stanley Commercial Mortgage Trust 2006-HC1A		3.008%	5/15/23		594,157		559,513	C
Crusade Global Trust 2003-2		2.954%	9/18/34		48,499		48,434	F
CS First Boston Mortgage Securities Corp. 2004-AR5 7A2		4.598%	6/25/34		318,039		319,801
CS First Boston Mortgage Securities Corp. 2004-AR6 1A1		5.545%	10/25/34		232,779		235,982
First Horizon Alternative Mortgage Securities 2004-AA4 A1		5.379%	10/25/34		241,133		222,361
Granite Mortgages PLC 2003-1		4.084%	1/20/20		18,235		18,143	C,F
Greenpoint Mortgage Funding Trust 2006-AR7 1A1B		2.719%	12/25/46		404,119		356,079
GSMPS Mortgage Loan Trust 2005-RP3		2.949%	9/25/35		409,459		341,936	C
Harborview Mortgage Loan Trust 2006-13 A		2.739%	11/19/46		374,318		281,317
Harborview Mortgage Loan Trust 2006-7		2.759%	10/19/37		604,130		459,927
Harborview Mortgage Loan Trust 2007-7 2A1A		3.599%	11/25/47		581,858		436,394
JPMorgan Mortgage Trust 2004-A1 1A1		4.340%	10/25/33		246,086		232,232
JPMorgan Mortgage Trust 2004-A1 1A1		4.801%	2/25/34		312,436		283,675
Luminent Mortgage Trust 2006-2		2.799%	2/25/46		544,419		412,240
Luminent Mortgage Trust 2006-7 2A2		2.819%	12/25/36		1,078,411		673,138
MASTR Adjustable Rate Mortgages Trust 2004-13		3.787%	11/21/34		350,000		333,349
MASTR Adjustable Rate Mortgages Trust 2006-OA2 1A1		5.322%	12/25/46		557,237		393,581
MASTR Specialized Loan Trust 2006-2		2.859%	2/25/36		344,553		308,877	C
Medallion Trust 2003-1G		2.789%	12/21/33		51,941		48,786	F
MLCC Mortgage Investors Inc. 2003-H		6.708%	1/25/29		18,296		17,945
Sequoia Mortgage Trust 2003-2 A2		5.759%	6/20/33		27,892		24,319
Structured Adjustable Rate Mortgage Loan Trust 2005-16XS		2.939%	8/25/35		163,961		128,329
Structured Adjustable Rate Mortgage Loan Trust 2005-19XS		2.899%	10/25/35		212,262		169,268
Structured Asset Mortgage Investments Inc. 2006-AR5 2A1		2.809%	5/25/36		332,454		247,667

212

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Mortgage-Backed Securities—Continued
Indexed Securities—Continued
Structured Asset Mortgage Investments Inc. 2006-AR5 4A1		2.819%	5/25/46	$	522,276	$	394,484
Structured Asset Mortgage Investments Inc. 2006-AR6		2.789%	7/25/36		583,713		394,114
Structured Asset Mortgage Investments Inc. 2006-AR7 A1A		2.809%	8/25/36		703,161		516,491
Thornburg Mortgage Securities Trust 2005-2 A4		2.849%	7/25/45		875,071		872,064
Thornburg Mortgage Securities Trust 2005-3		2.839%	10/25/35		598,817		584,431
Wachovia Mortgage Loan Trust LLC 2005-A		5.399%	8/20/35		197,658		200,203
WaMu Mortgage Pass Through Certificates 2003-AR8 A		4.030%	8/25/33		323,023		312,539
WaMu Mortgage Pass-Through Certificates 2003-AR10		4.054%	10/25/33		600,000		558,305
WaMu Mortgage Pass-Through Certificates 2005-AR19		3.009%	12/25/45		500,000		411,425
WaMu Mortgage Pass-Through Certificates 2006-AR11		5.826%	9/25/46		521,435		375,433
WaMu Mortgage Pass-Through Certificates 2006-AR4 DA		5.296%	6/25/46		486,075		378,151
WaMu Mortgage Pass-Through Certificates 2007-HY7 1A1		5.642%	7/25/37		434,093		431,664
WaMu Mortgage Pass-Through Certificates, 2005-AR15 A1A2		2.879%	11/25/45		460,182		363,434
Zuni Mortgage Loan Trust 2006-OA1		2.729%	8/25/36		335,004		317,604
							19,889,132
Variable Rate SecuritiesG	6.7%
Banc of America Funding Corp. 2004-B		6.801%	12/20/34		105,565		85,231
Banc of America Funding Corp. 2005-F 2A1		5.176%	9/20/35		1,007,495		1,000,388
Bear Stearns Alt-A Trust 2004-9 3A1		5.193%	9/25/34		298,022		287,829
Chase Mortgage Finance Corp. 2007-A1 2A3		4.137%	2/25/37		452,404		455,972
Citigroup Mortgage Loan Trust Inc. 2007-AR8 1A1A		5.749%	8/25/47		574,526		551,477
Countrywide Alternative Loan Trust 2004-33 1A1		6.738%	12/25/34		32,765		30,164
Countrywide Alternative Loan Trust 2004-33 2A1		6.783%	12/25/34		17,061		12,681
Countrywide Alternative Loan Trust 2005-14		5.774%	5/25/35		60,768		60,974
Countrywide Home Loans 1A1-11		4.979%	7/25/34		204,811		205,480

213

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Limited Duration Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Mortgage-Backed Securities—Continued
Variable Rate Securities—Continued
IndyMac INDX Mortgage Loan Trust 2004-AR15		6.789%	2/25/35	$	239,557	$	217,581
JPMorgan Mortgage Trust 2006-A2 5A1		3.754%	11/25/33		233,464		219,924
Merrill Lynch Mortgage Investors Trust 2004-A1 2A1		4.580%	2/25/34		374,703		353,939
Nomura Asset Acceptance Corp. 2004-AR4 1A1		4.893%	12/25/34		541,014		491,177
Prime Mortgage Trust 2005-2		7.420%	10/25/32		129,492		130,542
Residential Funding Mortgage Securities I 2005-SA3		4.921%	8/25/35		381,804		381,065
Small Business Administration Series 2004-2		7.080%	9/25/18		378,334		398,908
Structured Adjustable Rate Mortgage Loan Trust 2004-2 4A1		4.260%	3/25/34		254,900		238,755
Structured Adjustable Rate Mortgage Loan Trust 2005-12 3A1		5.683%	6/25/35		358,933		328,783
Structured Asset Securities Corp. 2003-22A 3A		4.420%	6/25/33		674,064		650,636
Structured Asset Securities Corp. 2004-SC1		9.801%	12/25/29		83,066		78,880	C
WaMu Mortgage Pass-Through Certificates 2007-HY3 4A1		5.349%	3/25/37		796,949		752,220
							6,932,606
Total Mortgage-Backed Securities (Cost—$31,690,137)							27,552,596
U.S. Government and Agency Obligations	10.4%
Fixed Rate Securities	7.1%
Fannie Mae		5.000%	9/15/08		150,000		151,995
Federal Home Loan Bank		5.000%	2/20/09		320,000		327,576
Freddie Mac		5.000%	6/11/09		4,200,000		4,334,421
Freddie Mac		5.125%	8/23/10		260,000		276,182
United States Treasury Notes		5.000%	7/31/08		500,000		505,898
United States Treasury Notes		4.000%	4/15/10		1,560,000		1,633,857
United States Treasury Notes		4.625%	10/31/11		145,000		157,948
							7,387,877
Treasury Inflation-Protected SecuritiesH	3.3%
United States Treasury Inflation-Protected Security		1.875%	7/15/15		108,502		117,123
United States Treasury Inflation-Protected Security		2.500%	7/15/16		731,521		824,047

214

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
U.S. Government and Agency Obligations—Continued
Treasury Inflation-Protected Securities—Continued
United States Treasury Inflation-Protected Security		2.375%	1/15/17	$	1,130,242	$	1,261,456
United States Treasury Inflation-Protected Security		2.375%	1/15/25		1,063,649		1,157,299
							3,359,925
Total U.S. Government and Agency Obligations (Cost—$10,154,212)							10,747,802
U.S. Government Agency Mortgage-Backed Securities	29.8%
Fixed Rate Securities	21.3%
Fannie Mae		5.000%	4/17/23 to 5/13/38		12,300,000		12,174,693	I
Fannie Mae		5.500%	4/17/23 to 4/14/38		9,550,000		9,646,281	I
Freddie Mac		5.000%	4/14/38		100,000		99,000	I
Government National Mortgage Association		5.000%	8/15/33		66,379		66,503
							21,986,477
Indexed SecuritiesA	8.5%
Fannie Mae		4.202%	12/1/34		121,327		122,140
Fannie Mae		4.237%	12/1/34		112,502		113,652
Fannie Mae		4.329%	1/1/35		136,376		139,961
Fannie Mae		4.855%	1/1/35		228,514		238,307
Fannie Mae		4.789%	2/1/35		529,978		542,417
Fannie Mae		4.535%	3/1/35		244,454		247,558
Fannie Mae		5.055%	3/1/35		416,846		433,339
Fannie Mae		4.714%	7/1/35		3,964,967		4,023,384
Freddie Mac		4.344%	12/1/34		53,067		53,521
Freddie Mac		4.088%	1/1/35		38,905		38,647
Freddie Mac		4.148%	1/1/35		62,664		62,666
Freddie Mac		4.460%	1/1/35		182,595		184,615
Freddie Mac		6.212%	12/1/36		2,559,997		2,629,155
							8,829,362
Total U.S. Government Agency Mortgage-Backed Securities (Cost—$30,395,328)							30,815,839

215

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Limited Duration Bond Portfolio—Continued

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE
Yankee BondsF	9.2%
Beverages	0.2%
Diageo Capital PLC		5.200%	1/30/13	$	210,000	$	217,255
Capital Markets	0.5%
Deutsche Bank AG		6.000%	9/1/17		500,000		520,560
Commercial Banks	2.8%
Glitnir Banki Hf		4.334%	1/21/11		720,000		548,446	A,C
HSBC Bank PLC		8.570%	8/20/12		40,000		36,726	A
Kaupthing Bank Hf		5.750%	10/4/11		290,000		231,489	C
Landsbanki Islands Hf		6.100%	8/25/11		410,000		358,198	C
Landsbanki Islands Hf		7.431%	10/19/17		140,000		117,203	B,C
Resona Preferred Global Securities		7.191%	12/29/49		360,000		314,398	B,C
Shinsei Finance Cayman Ltd.		6.418%	1/29/49		410,000		271,753	B,C
TuranAlem Finance BV		5.269%	1/22/09		130,000		121,654	A,C
VTB Capital SA for Vneshtorgbank		3.839%	8/1/08		639,000		631,811	A,C
VTB Capital SA for Vneshtorgbank		4.812%	11/2/09		280,000		274,357	A,C
							2,906,035
Diversified Financial Services	1.0%
Aiful Corp.		5.000%	8/10/10		500,000		471,540	C
MUFG Capital Finance 1 Ltd.		6.346%	7/29/49		240,000		195,576	B
TNK-BP Finance SA		6.875%	7/18/11		370,000		360,288	C
							1,027,404
Diversified Telecommunication Services	2.4%
British Telecommunications PLC		8.625%	12/15/10		400,000		439,905	D
Deutsche Telekom International Finance BV		8.000%	6/15/10		400,000		427,881
France Telecom SA		7.750%	3/1/11		400,000		433,737	D
Koninklijke (Royal) KPN NV		8.000%	10/1/10		400,000		429,502
Telefonica Emisiones S.A.U.		2.842%	6/19/09		410,000		399,339	A
Telefonica Emisiones S.A.U.		3.442%	2/4/13		400,000		354,557	A
							2,484,921
Foreign Governments	0.4%
Russian Federation		3.000%	5/14/08		180,000		179,622
Russian Federation		8.250%	3/31/10		22,223		23,513	C
Russian Federation		8.250%	3/31/10		205,565		217,179	C
							420,314
Health Care Equipment and Supplies	0.3%
Baxter Finco BV		4.750%	10/15/10		260,000		268,537

216

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES			VALUE
Yankee Bonds—Continued
Industrial Conglomerates	0.3%
Tyco International Group SA		6.375%	10/15/11	$	300,000		$	298,946
Metals and Mining	0.6%
Vale Overseas Ltd.		6.250%	1/23/17		620,000			617,444
Oil, Gas and Consumable Fuels	0.7%
Anadarko Finance Co.		6.750%	5/1/11		700,000			747,675
Total Yankee Bonds (Cost—$10,035,391)								9,509,091
Preferred Stocks	0.5%
Fannie Mae		8.250%			8,850	shs		212,843	B
Freddie Mac		8.375%			12,125			295,850	B
Total Preferred Stocks (Cost—$524,375)								508,693
Total Long-Term Securities (Cost—$126,925,493)								117,424,821
Short-Term Securities	7.1%
U.S. Government and Agency Obligations	0.5%
Fannie Mae		0.000%	4/30/08	$	25,000			24,917	J,K
Fannie Mae		0.000%	12/15/08		468,000			461,359	J,K
								486,276
Options PurchasedL	N.M.
U.S. Treasury Note Futures Call, May 2008, Strike Price $133.00					50	M		781
U.S. Treasury Note Futures Call, May 2008, Strike Price $135.00					50	M		781
U.S. Treasury Note Futures Put, May 2008, Strike Price $100.00					70	M		1,094
								2,656
Repurchase Agreement	6.6%
Lehman Brothers Inc. 2.25%, dated 3/31/08, to be repurchased at 6,865,429 on 4/1/08 (Collateral: $34,160,000 Federal Home Loan Bank zero-coupon bond, due 1/13/33, value $7,002,458)					6,865,000			6,865,000
Total Short-Term Securities (Cost—$7,355,386)								7,353,932
Total Investments—(Cost—$134,280,879)N	120.6%							124,778,753
Other Assets Less Liabilities	(20.6)%							(21,291,508	)
Net Assets	100.0%						$	103,487,245

217

Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Limited Duration Bond Portfolio—Continued

	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Futures Contracts PurchasedL
Eurodollar Futures	June 2008	84	$	346,517
Eurodollar Futures	September 2008	20		82,312
Eurodollar Futures	December 2008	20		76,525
Eurodollar Futures	March 2009	75		120,125
Eurodollar Futures	June 2009	43		89,548
Eurodollar Futures	September 2009	20		71,988
U.S. Treasury Note Futures	June 2008	325		303,972
			$	1,090,987
Futures Contracts Written
U.S. Treasury Note Futures	June 2008	177	$	(636,026	)
U.S. Treasury Note Futures	June 2008	70		(135,459	)
			$	(771,485	)
Options WrittenL
Eurodollar Futures Put, Strike Price $97.50	June 2008	12	$	(285	)
U.S. Treasury Note Futures Put, Strike Price $110.50	April 2009	34		21,611
			$	21,326

N.M. Not Meaningful.

^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, 2008.

^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 according to the predetermined schedule.

^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 15.77% of net assets.

^D Credit Linked Security – The rates of interest earned on these securities are tied to the credit rating assigned by Standard & Poor’s Rating Service and/or Moody’s Investors Services.

^E Illiquid security valued at fair value under procedures approved by the Board of Directors. At March 31, 2008, the market value for this security was $658,910.

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

^G The coupon rates shown on variable rate securities are the rates at March 31, 2008. These rates vary with the weighted average coupon of the underlying loans.

^H 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.

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

^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 collateral to cover futures and options contracts written.

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

^M Par represents actual number of contracts.

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

Gross unrealized appreciation	$	1,415,120
Gross unrealized depreciation		(10,922,147	)
Net unrealized depreciation	$	(9,507,027	)

See notes to financial statements.

218

Annual Report to Shareholders

Statement of Assets and Liabilities

Western Asset Limited Duration Bond Portfolio

March 31, 2008

Assets:
Investment securities at market value (Cost—$126,925,493)			$	117,424,821
Short-term securities at value (Cost—$7,355,386)				7,353,932
Cash				873
Receivable for securities sold				3,600,672
Interest receivable				822,266
Futures variation margin receivable				16,658
Total assets				129,219,222
Liabilities:
Payable for securities purchased	$	25,220,422
Swap contracts at value		412,410
Accrued management fee		28,369
Options written (Proceeds—$31,395)		10,069
Amounts payable for open swaps		6,166
Income distribution payable		2,060
Payable for fund shares repurchased		1,094
Accrued expenses		51,387
Total liabilities				25,731,977
Net Assets			$	103,487,245
Net assets consist of:
Accumulated paid-in-capital			$	114,082,936
Undistributed net investment income				(8,842	)
Accumulated net realized loss on investments, options, futures and swaps				(1,099,364	)
Net unrealized depreciation on investments, options, futures and swaps				(9,487,485	)
Net Assets			$	103,487,245
Net Asset Value Per Share:
Institutional Class (11,551,949 shares outstanding)				$8.96

See notes to financial statements.

219

Annual Report to Shareholders

Statement of Operations

Western Asset Limited Duration Bond Portfolio

For the Year Ended March 31, 2008

Investment Income:
Interest			$	5,940,539
Expenses:
Management fees	372,082
Audit and legal fees	58,536
Custodian fees	36,991
Directors’ fees and expenses	2,717
Registration fees	22,491
Reports to shareholders	1,252
Transfer agent and shareholder servicing expense:
Institutional Class	15,932
Other expenses	22,424
	532,425
Less: Fees waived	(101,940	)
Compensating balance credits	(5,249	)
Net expenses				425,236
Net Investment Income				5,515,303
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) on:
Investments	509,158
Options	47,875
Futures	(941,651	)
Swaps	(877,443	)
				(1,262,061	)
Change in unrealized appreciation/(depreciation) of investments, options, futures and swaps				(9,569,232	)
Net Realized and Unrealized Loss on Investments				(10,831,293	)
Change in Net Assets Resulting From Operations			$	(5,315,990	)

See notes to financial statements.

220

Annual Report to Shareholders

Statement of Changes in Net Assets

Western Asset Limited Duration Bond Portfolio

	FOR THE YEARS ENDED MARCH 31,
	2008			2007
Change in Net Assets:
Net investment income	$	5,515,303		$	3,946,150
Net realized loss		(1,262,061	)		(158,541	)
Change in unrealized appreciation/(depreciation)		(9,569,232	)		841,224
Change in net assets resulting from operations		(5,315,990	)		4,628,833
Distributions to shareholders from:
Net investment income:
Institutional Class		(4,689,218	)		(3,944,005	)
Tax return of capital
Institutional Class		(547,710	)		—
Change in net assets from fund share transactions:
Institutional Class		21,640,200			17,571,827
Change in net assets		11,087,282			18,256,655
Net Assets:
Beginning of year	$	92,399,963		$	74,143,308
End of year	$	103,487,245		$	92,399,963
(Overdistributed)/Undistributed net investment income	$	(8,842	)	$	34,081

See notes to financial statements.

221

Annual Report to Shareholders

Financial Highlights

Western Asset Limited Duration Bond Portfolio

For a share of each class of capital stock outstanding:

Institutional Class:

	YEARS ENDED MARCH 31,
	2008			2007			2006			2005			2004A
Net asset value, beginning of year	$	9.88		$	9.80		$	9.89		$	10.09		$	10.00
Investment operations:
Net investment income		.50	B		.47	B		.38	C		.24	C		.08	C
Net realized and unrealized gain/(loss)		(.94	)		.08			(.09	)		(.17	)		.09
Total from investment operations		(.44	)		.55			.29			.07			.17
Distributions from:
Net investment income		(.43	)		(.47	)		(.38	)		(.25	)		(.08	)
Tax return of capital		(.05	)		—			—			—			—
Net realized gain on investments		—			—			—			(.02	)		—
Total distributions		(.48	)		(.47	)		(.38	)		(.27	)		(.08	)
Net asset value, end of year	$	8.96		$	9.88		$	9.80		$	9.89		$	10.09
Total return		(4.72	)%		5.73	%		3.01	%		.69	%		1.69	%C
Ratios to Average Net Assets:D
Total expenses		.50	%		.58	%		.68	%		.73	%		.68	%E
Expenses net of waivers, if any		.40	%		.40	%		.40	%		.40	%		.40	%E
Expenses net of all reductions		.40	%		.40	%		.40	%		.40	%		.40	%E
Net investment income		5.2	%		4.8	%		3.9	%		2.4	%		1.6	%E
Supplemental Data:
Portfolio turnover rate		312.1	%		270.5	%		244.7	%		231.5	%		125.5	%
Net assets, end of year (in thousands)	$	103,487		$	92,400		$	74,143		$	37,426		$	26,182

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

^B Computed using average daily shares outstanding.

^C Computed using SEC method.

^D Not annualized.

^E 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.

^F Annualized.

See notes to financial statements.

222

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 Non-U.S. Opportunity Bond Portfolio for various periods ended March 31, 2008, are presented below:

	Three Months Ended 3/31/08		Average Annual Total Returns
		One Year	Three Years	Five Years	Since InceptionA
Western Asset Non-U.S. Opportunity Bond Portfolio:
Institutional Class	+0.10%	+2.11%	+3.77%	+5.66%	+6.65%
Citigroup World Government ex-U.S. Bond Index (Hedged)B	+2.14%	+6.15%	+4.86%	+4.30%	+5.50%

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. Performance figures for periods shorter than one year represent cumulative figures and are not annualized.

The gross expense ratio for the Institutional Class was 0.64%. Gross expenses are the Fund’s total annual operating expenses for the fiscal year ended March 31, 2007, as indicated in the Fund’s prospectus dated August 1, 2007 and do not reflect fee waivers or reimbursements. These expenses include management fees and other expenses.

The net expense ratio for the Institutional Class was 0.55%. Net expenses are the Fund’s total annual operating expenses for the fiscal year ended March 31, 2007, as indicated in the Fund’s prospectus dated August 1, 2007 and reflect contractual fee waivers and/or reimbursements. The Fund’s Manager has contractually agreed to waive fees and/or reimburse operating expenses (exclusive of taxes, interest, deferred organizational expenses, brokerage and extraordinary expenses) until August 1, 2008 to limit total annual operating expenses of the Institutional Class to 0.55% of the Fund’s average daily net assets attributable to the Institutional Class.

A year ago, the Federal Reserve Board’s (Fed)^C predominant concern was that strong growth and a high level of resource utilization would sustain inflationary pressures. The financial crisis that erupted a few months later has defined the fixed-income landscape ever since. The period ended with the Fed not only focused on averting recession but struggling to unclog credit markets. The Ted Spread (Ted),^D a measure of systemic risk, rose five-fold during the 12-month period ended March 31, 2008, to peak near 220 basis points (bps)^E in November, and had only moderated slightly by period-end. Growing expectations for easing over the first half of the period were finally validated by the Fed’s decision to cut the funds rate by a total of 300 bps, including a surprise 75 bps reduction at an unscheduled Federal Open Market Committee (FOMC) meeting in January. Additionally, the Fed, along with a number of government housing agencies, announced new lending facilities targeted directly at strained credit conditions, with a specific focus on the mortgage market. The yield on the two-year Treasury note declined 303 bps, driving a powerful rally in the Treasury market. All other risky asset classes suffered as a severe flight-to-safety forced spreads sharply higher. Home prices declined and the drag from the homebuilding sector alone detracted more than 1% from gross domestic product growth. Still, the economy continued to expand modestly thanks to a robust trade sector and a stubborn consumer. The price of oil breached the $100 per barrel threshold despite slower growth concerns. The U.S. dollar lost substantial value against a trade-weighted basket of currencies. Equity markets came under serious pressure in the final four months and finished marginally lower.

^A The Fund’s Institutional Class inception date is July 15, 1998. Since-inception index returns are for periods beginning July 31, 1998. Although it is not possible to invest directly in an index, it is possible to purchase investment vehicles designed to track the performance of certain indexes.

^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 U.S. dollars. This Index excludes the U.S. and is currency-hedged as a means of achieving low-risk interest rate diversification.

223

Annual Report to Shareholders

Management’s Discussion of Fund Performance—Continued

The Fund’s performance fell short of the benchmark over the last 12 months. The Fund’s return was +2.11% compared to the return of the benchmark (Citigroup World Government ex-U.S. Bond Index) of +6.15%. The key strategies for the portfolio over the year remained largely intact. We had a bias to build a position in the non-government sectors with a particular focus on European financials. These positions underperformed as credit spreads widened dramatically across all asset classes. As the U.S. housing market continued to exhibit weakness, concerns mounted over the location and extent of possible losses within the markets. This lead to a round of risk aversion, which escalated through market sectors as time went on and market liquidity dried up. The Fund looked to partially hedge this exposure via a tactical long duration position. This was largely held within Europe, which underperformed the U.S. government bond market as inflation concerns remained in play and European Central Bank rhetoric continued to highlight their bias toward tightening once market stresses eased. An overweight duration position in intermediate bonds helped offset some of the underperformance as yields fall and curves steepened in most western bond markets. Within currency markets, a long exposure in the Japanese yen worked as a hedge during the ongoing period of market stress. As investors’ appetites for risk fell, the key carry trades that had been in place were largely unwound, which led to something of the bid for the Japanese yen. A new position was initiated to overweight the U.S. dollar against the euro, but as short-end interest rates continued to diverge, the euro rallied strongly.

Western Asset Management Company

April 21, 2008

Investment Risks: Bonds are subject to a variety of risks, including interest rate, credit and inflation risk. As interest rates rise, bond prices fall, reducing the value of a fund’s share price. Foreign securities are subject to certain risks of overseas investing, including currency fluctuations and changes in political and economic conditions. These risks are magnified in emerging markets. Asset-backed and mortgage-backed securities involve more risk, including prepayment and extension risks, than other investments in fixed income securities. The Fund is subject to the additional risks associated with inflation-indexed securities, including liquidity risk, prepayment risk, extension risk and deflation risk. The Fund is not diversified, which means that it is permitted to invest a higher percentage of its assets in any one issuer than a diversified fund. This may magnify the Fund’s losses from events affecting a particular issuer. The Fund may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance.

^C Federal Reserve Board (Fed) – is charged with, among other things, managing the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.

^D Ted Spread (Ted) – The price difference between three-month futures contracts for U.S. Treasuries and three-month contracts for euros having identical expiration months.

^E 100 basis points (bps) = 1%

224

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, 2007, and held through March 31, 2008.

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 value 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 if your shares were held for the entire 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 10/1/07		Ending Account Value 3/31/08		Expenses PaidA During the Period 10/1/07 to 3/31/08
Institutional Class:
Actual	$	1,000.00	$	1,011.30	$	2.77
Hypothetical (5% return before expenses)		1,000.00		1,022.24	$	2.79

^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 (183), and divided by 366.

225

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 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. 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.

226

Annual Report to Shareholders

Portfolio Composition (as of March 31, 2008)^B

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

Maturity Schedule (as a percentage of the portfolio)

^B The pie charts above represent the composition of the Fund’s portfolio as of March 31, 2008 and do not include derivatives such as Futures Contracts, Options Written, and Swaps. The Fund is actively managed. As a result, the composition of the portfolio holdings and sectors are subject to change at any time.

^C Source: Standard & Poor's.

227

Annual Report to Shareholders

Portfolio of Investments

Western Asset Non-U.S. Opportunity Bond Portfolio

March 31, 2008

	% OF NET ASSETS	RATE	MATURITY DATE	PAR†		VALUE
Long-Term Securities	76.3%
Corporate Bonds and Notes	26.3%
Capital Markets	0.8%
Lehman Brothers Holdings Inc.		4.625%	3/14/19	1,300,000	EUR	$	1,564,574	A
Commercial Banks	8.6%
Alliance and Leicester PLC		5.000%	10/4/10	1,200,000	EUR		1,813,716
Banco Popolare di Verona e Novara Scrl		6.156%	6/29/49	1,000,000	EUR		1,250,055	A
Bayerische Landesbank		5.750%	10/23/17	250,000	EUR		376,260
Deutsche Postbank IV		5.983%	6/29/49	1,150,000	EUR		1,518,024	A
Dexia Municipal Agency		1.550%	10/31/13	282,000,000	JPY		2,884,020
ESFG International Ltd.		5.753%	6/29/49	750,000	EUR		1,019,095	A
European Investment Bank		4.250%	12/7/10	2,280,000	GBP		4,494,460
European Investment Bank		1.900%	1/26/26	236,000,000	JPY		2,274,730	B
HSH Nordbank Luxembourg		7.408%	6/29/49	1,100,000	EUR		1,452,978	A
HT1 Funding GmbH		6.352%	7/29/49	287,000	EUR		326,153	A
Shinsei Bank Ltd.		3.750%	2/23/16	100,000	EUR		140,703	A,B
Swedbank AB		5.570%	9/27/17	100,000	EUR		155,241	A
							17,705,435
Diversified Financial Services	13.3%
Banca Italease SpA		4.579%	5/27/08	200,000	EUR		313,723	C
Banca Italease SpA		4.567%	3/2/09	50,000	EUR		72,323	C
Banca Italease SpA		4.826%	10/15/09	50,000	EUR		71,576	C
Banca Italease SpA		4.574%	2/2/10	250,000	EUR		338,573	C
Banca Italease SpA		4.623%	11/23/10	200,000	EUR		269,390	C
Banca Italease SpA		4.659%	2/8/12	50,000	EUR		63,274	C
Banca Italease SpA		4.855%	3/14/12	50,000	EUR		63,956	C
Caisse Refinancement de l’Habitat		4.200%	4/25/11	2,000,000	EUR		3,172,948
Eksportfinans ASA		1.600%	3/20/14	365,000,000	JPY		3,738,529
Eurohypo Capital Funding Trust 1		6.445%	5/29/49	61,000	EUR		85,406	A
Irish Nationwide Building Society		5.875%	12/15/08	200,000	GBP		393,209
Japan Finance Corp. for Municipal Enterprises		1.350%	11/26/13	181,000,000	JPY		1,871,666
Kreditanstalt fuer Wiederaufbau		2.050%	2/16/26	553,000,000	JPY		5,426,356
Kreditanstalt fuer Wiederaufbau		2.600%	6/20/37	390,000,000	JPY		3,959,218
Landesbank Hessen-Thueringen Girozentrale		5.375%	3/7/12	200,000	GBP		403,100
Network Rail MTN Finance PLC		4.875%	3/6/09	3,000,000	GBP		5,974,196
Resona Bank Ltd.		4.125%	9/29/49	200,000	EUR		266,245	A,B
SNS Reaal		6.258%	7/17/17	650,000	EUR		830,244	A
							27,313,932

228

Annual Report to Shareholders

	% OF NET ASSETS	RATE	MATURITY DATE	PAR†		VALUE
Corporate Bonds and Notes—Continued
Diversified Telecommunication Services	0.7%
British Telecommunications PLC		5.250%	1/22/13	230,000	EUR	$	354,587
British Telecommunications PLC		5.250%	6/23/14	274,000	EUR		415,562
Deutsche Telekom International Finance BV		6.625%	7/11/11	108,000	EUR		177,572
Koninklijke (Royal) KPN N.V.		5.000%	11/13/12	250,000	EUR		378,748
Telecom Italia SpA		5.250%	3/17/55	200,000	EUR		211,863
							1,538,332
Insurance	1.7%
Aviva PLC		5.250%	10/2/23	630,000	EUR		927,629	A
AXA SA		6.211%	10/29/49	200,000	EUR		274,996	A
Groupama		6.298%	10/29/49	550,000	EUR		726,224	A
Mapfre SA		5.921%	7/24/37	400,000	EUR		532,324	A
Muenchener Rueckversicherungs-Gesellschaft AG (MunichRe)		5.767%	6/29/49	700,000	EUR		957,347	A
							3,418,520
Oil, Gas and Consumable Fuels	0.2%
BP Capital Markets PLC		5.750%	2/26/10	250,000	GBP		503,442
Pharmaceuticals	0.5%
AstraZeneca PLC		5.125%	1/15/15	639,000	EUR		1,022,879
Thrifts and Mortgage Finance	0.2%
Hypo Real Estate International Trust I		5.864%	6/14/17	350,000	EUR		333,018	A
Tobacco	0.3%
BAT International Finance PLC		5.375%	6/29/17	500,000	EUR		738,780
Total Corporate Bonds and Notes (Cost—$48,477,991)							54,138,912
U.S. Government and Agency Obligations	0.7%
Fixed Rate Securities	0.7%
Freddie Mac		5.750%	9/15/10	900,000	EUR		1,470,381
Total U.S. Government and Agency Obligations (Cost—$863,530)							1,470,381
Foreign Government Obligations	49.3%
Canadian Real Return Bond		4.500%	6/1/15	4,348,000	CAD		4,583,702	D
Canadian Real Return Bond		4.000%	12/1/31	195,760	CAD		279,640	D

229

Annual Report to Shareholders

Portfolio of Investments—Continued

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

	% OF NET ASSETS	RATE	MATURITY DATE	PAR†			VALUE
Foreign Government Obligations—Continued
Federal Republic of Germany		3.500%	4/8/11		2,000	EUR	$	3,155
Federal Republic of Germany		4.750%	7/4/34		810,000	EUR		1,314,069
France Government Bond OAT		4.000%	4/25/55		7,760,000	EUR		10,808,962
Government of Canada		4.000%	6/1/16		5,820,000	CAD		5,945,406
Government of Poland		5.000%	10/24/13		1,400,000	PLN		596,950
Government of Poland		6.250%	10/24/15		7,204,000	PLN		3,272,573
Government of Poland		5.750%	9/23/22		8,800,000	PLN		3,855,400
Hungary Government Bond		6.000%	10/24/12		75,430,000	HUF		398,798
Japan Development Bank		2.300%	3/19/26		560,000,000	JPY		5,719,268
Kingdom of Denmark		5.000%	11/15/13		17,460,000	DKK		3,897,586
Kingdom of Norway		6.500%	5/15/13		5,640,000	NOK		1,215,404
Kingdom of Norway		5.000%	5/15/15		29,280,000	NOK		5,991,209
Kingdom of Norway		4.250%	5/19/17		6,630,000	NOK		1,294,733
Kingdom of Spain		5.750%	7/30/32		1,970,000	EUR		3,561,651
Kingdom of the Netherlands		4.500%	7/15/17		2,500,000	EUR		4,075,907
Kingdom of the Netherlands		5.500%	1/15/28		1,270,000	EUR		2,233,891
Queensland Treasury Corp.		6.000%	6/14/11		16,640,000	AUD		14,870,636	D
Republic of France		5.000%	10/25/16		1,499,000	EUR		2,529,852	D
Republic of France		4.750%	4/25/35		2,220,000	EUR		3,555,418	D
United Kingdom of Great Britain and Northern Ireland		8.000%	6/7/21		960,000	GBP		2,539,985
United Kingdom Treasury Stock		5.000%	3/7/12		9,090,000	GBP		18,768,228
Total Foreign Government Obligations (Cost—$87,013,341)								101,312,423
Total Long-Term Securities (Cost—$136,354,862)								156,921,716
Short-Term Securities	21.8%
Options PurchasedE	0.1%
Euribor Call, June 2008, Strike Price $95.88				$	672	F		66,332
Euribor Call, June 2008, Strike Price $96.125					616	F		36,483
Euribor Call, September 2008, Strike Price $96.00					75	F		41,458
German Republic Bond Futures Call, June 2008, Strike Price $112.50					220	F		66,017
								210,290

230

Annual Report to Shareholders

	% OF NET ASSETS	PAR†		VALUE
Short-Term Securities—Continued
Repurchase Agreement	21.7%
Lehman Brothers Inc. 2.25%, dated 3/31/08, to be repurchased at $44,570,786 on 4/1/08 (Collateral: $124,980,000 Resolution Funding Corporation principal-only securities, due 1/15/30, value $45,458,975)		$	44,568,000	$	44,568,000
Total Short-Term Securities (Cost—$45,640,102)					44,778,290
Total Investments (Cost—$181,994,964)G	98.1%				201,700,006
Other Assets Less Liabilities	1.9%				3,954,224
Net Assets	100.0%			$	205,654,230

	EXPIRATION	CONTRACTS	APPRECIATION/ (DEPRECIATION)
Futures Contracts PurchasedE
Australia Treasury Bond Futures	June 2008	64	$	(13,494	)
German Republic Bond Futures	June 2008	33		(94,564	)
German Republic Bond Futures	June 2008	144		(263,710	)
U.S. Treasury Note Futures	June 2008	116		512,884
United Kingdon Treasury Bond Futures	June 2008	15		86,496
			$	227,612
Options WrittenE
Euro Currency Call, Strike Price $96.00	December 2008	566	$	(24,606	)
German Federal Republic Bond Futures Put, Strike Price $110.00	May 2008	76		5,766
German Federal Republic Bond Futures Put, Strike Price $110.50	May 2008	19		(8,840	)
			$	(27,680	)

^A 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 according to the predetermined schedule.

^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 1.30% of net assets.

^C Indexed Security – The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”), the Euro Interbank Offered Rate (“EURIBOR”) Index, the Consumer Price Index (“CPI”), the one-year Treasury Bill Rate or the ten-year Japanese Government Bond Rate. The coupon rates are the rates as of March 31, 2008.

231

Annual Report to Shareholders

Portfolio of Investments—Continued

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

^D Inflation-Protected Security – 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 Options and futures are described in more detail in the notes to financial statements.

^F Par represents actual number of contracts.

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

Gross unrealized appreciation	$	21,403,254
Gross unrealized depreciation		(1,740,597	)
Net unrealized appreciation	$	19,662,657

^† Securities are denominated in U.S. Dollars, unless otherwise noted.

AUD—Australian Dollar

CAD—Canadian Dollar

DKK—Danish Krone

EUR—Euro

GBP—British Pound

HUF—Hungarian Forint

JPY—Japanese Yen

NOK—Norwegian Krone

PLN—Polish Zloty

See notes to financial statements.

232

Annual Report to Shareholders

Statement of Assets and Liabilities

Western Asset Non-U.S. Opportunity Bond Portfolio

March 31, 2008

Assets:
Investment securities at market value (Cost—$136,354,862)			$	156,921,716
Short-term securities at value (Cost—$45,640,102)				44,778,290
Cash				996
Foreign currency at value (Cost—$7,138,787)				7,384,611
Interest receivable				3,220,823
Receivable for securities sold				2,411,505
Deposits with brokers for open futures contracts				1,852,124
Unrealized appreciation of forward foreign currency contracts				1,612,510
Receivable for fund shares sold				858,709
Futures variation margin receivable				227,612
Total assets				219,268,896
Liabilities:
Unrealized depreciation of forward foreign currency contracts	$	9,891,454
Payable for securities purchased		2,841,128
Options written (Proceeds—$653,739)		681,419
Accrued management fee		76,870
Payable for fund shares repurchased		45,415
Accrued expenses		78,380
Total liabilities				13,614,666
Net Assets			$	205,654,230
Net assets consist of:
Accumulated paid-in-capital			$	196,633,615
Undistributed net investment income				(2,442,558	)
Accumulated net realized loss on investments, options, futures and foreign currency transactions				(595,995	)
Unrealized appreciation of investments, options, futures and foreign currency translations				12,059,168
Net Assets			$	205,654,230
Net Asset Value Per Share:
Institutional Class (20,701,843 shares outstanding)				$9.93

See notes to financial statements.

233

Annual Report to Shareholders

Statement of Operations

Western Asset Non-U.S. Opportunity Bond Portfolio

For the Year Ended March 31, 2008

Investment Income:
Interest				$	7,674,533
Expenses:
Management fees	$	805,725
Audit and legal fees		67,468
Custodian fees		84,308
Directors’ fees and expenses		5,127
Registration fees		22,846
Reports to shareholders		9,589
Transfer agent and shareholder servicing expense:
Institutional Class		20,122
Other expenses		37,475
		1,052,660
Less: Fees waived		(63,146	)
Compensating balance credits		(4,739	)
Net expenses					984,775
Net Investment Income					6,689,758
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) on:
Investments		7,374,812
Options		23,360
Futures		(1,322,796	)
Foreign currency transactions		(16,611,006	)
					(10,535,630	)
Change in unrealized appreciation/(depreciation) of:
Investments, options, futures and foreign currency translations		7,285,124
Assets and liabilities denominated in foreign currency		116,207
					7,401,331
Net Realized and Unrealized Loss on Investments					(3,134,299	)
Change in Net Assets Resulting From Operations				$	3,555,459

See notes to financial statements.

234

Annual Report to Shareholders

Statement of Changes in Net Assets

Western Asset Non-U.S. Opportunity Bond Portfolio

	FOR THE YEARS ENDED MARCH 31,
	2008			2007
Change in Net Assets:
Net investment income	$	6,689,758		$	4,930,292
Net realized loss		(10,535,630	)		(979,032	)
Change in unrealized appreciation/(depreciation)		7,401,331			1,219,671
Change in net assets resulting from operations		3,555,459			5,170,931
Distributions to shareholders from:
Net investment income:
Institutional Class		—			(2,138,065	)
Net realized gain on investments:
Institutional Class		(461,385	)		—
Change in net assets from fund share transactions:
Institutional Class		25,251,687			83,854,409
Change in net assets		28,345,761			86,887,275
Net Assets:
Beginning of year	$	177,308,469		$	90,421,194
End of year	$	205,654,230		$	177,308,469
(Overdistributed)/Undistributed net investment income	$	(2,442,558	)	$	1,195,373

See notes to financial statements.

235

Annual Report to Shareholders

Financial Highlights

Western Asset Non-U.S. Opportunity Bond Portfolio

For a share of each class of capital stock outstanding:

Institutional Class:

	Years Ended March 31,
	2008			2007			2006			2005			2004
Net asset value, beginning of year	$	9.75		$	9.59		$	10.98		$	10.52		$	10.91
Investment operations:
Net investment income		.37	A		.36	A		.64	B		.19	B		.97	B
Net realized and unrealized gain/(loss)		(.16	)		—	C		(.07	)		.57			(.01	)
Total from investment operations		.21			.36			.57			.76			.96
Distributions from:
Net investment income		-—			(.20	)		(1.16	)		(.29	)		(1.01	)
Net realized gain on investments		(.03	)		—			(.80	)		(.01	)		(.34	)
Total distributions		(.03	)		(.20	)		(1.96	)		(.30	)		(1.35	)
Net asset value, end of year	$	9.93		$	9.75		$	9.59		$	10.98		$	10.52
Total return		2.11	%		3.89	%		5.33	%		7.60	%		9.06	%
Ratios to Average Net Assets:D
Total expenses		.59	%		.64	%		.74	%		.68	%		.80	%
Expenses net of waivers, if any		.55	%		.55	%		.55	%		.55	%		.55	%
Expenses net of all reductions		.55	%		.55	%		.55	%		.55	%		.55	%
Net investment income		3.7	%		3.7	%		3.3	%		3.2	%		4.0	%
Supplemental Data:
Portfolio turnover rate		68.4	%		117.9	%		140.1	%		40.8	%		42.8	%
Net assets, end of year (in thousands)	$	205,654		$	177,308		$	90,421		$	89,170		$	97,027

^A Computed using average daily shares outstanding.

^B Computed using SEC method.

^C Amount less than $.01 per share.

^D 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.

236

Annual Report to Shareholders

Notes to Financial Statements

1. Significant Accounting Policies:

Western Asset Funds, Inc. (“Corporation”), consisting of Western Asset Absolute Return Portfolio (“Absolute Return”), Western Asset Core Bond Portfolio (“Core”), Western Asset Core Plus Bond Portfolio (“Core Plus”), Western Asset High Yield Portfolio (“High Yield”), Western Asset Inflation Indexed Plus Bond Portfolio (“Inflation Indexed”), Western Asset Intermediate Bond Portfolio (“Intermediate”), Western Asset Intermediate Plus Bond Portfolio (“Intermediate Plus”), Western Asset Limited Duration Bond Portfolio (“Limited Duration”) 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, 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 shareholder servicing expenses, and certain other 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 those estimates. The following is a summary of significant accounting policies followed by each Fund in the preparation of its 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 Absolute Return, Core Plus, High Yield, Inflation Indexed, Intermediate Plus 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 accounted for as of 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, 2008, security transactions (excluding short-term investments) were:

	Purchases				Proceeds From Sales
	U.S. Gov’t Securities		Other		U.S. Gov’t Securities		Other
Absolute Return	$	1,840,707,844	$	230,071,702	$	1,674,233,324	$	42,376,580
Core		34,725,148,251		1,503,624,276		34,589,510,286		685,609,838
Core Plus		63,565,136,074		9,744,280,597		68,983,555,213		2,078,543,796
High Yield		8,427,981		589,255,421		10,749,069		503,743,209
Inflation Indexed		1,088,513,527		56,002,807		1,010,465,293		6,549,386
Intermediate		1,267,856,291		179,981,839		1,227,916,614		147,826,767
Intermediate Plus		229,716,850		29,928,140		226,065,439		21,254,643
Limited Duration		357,345,834		43,555,998		350,219,936		26,034,420
Non-U.S.		—		108,239,310		—		110,335,028

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Annual Report to Shareholders

Notes to Financial Statements—Continued

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 New York Stock 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 investment securities.

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. Each Fund’s investment adviser reviews 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 an exchange traded option is the last sale price or, in the absence of a sale, the price obtained by reference to broker-dealer quotations. 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 the contract’s value fluctuates, payments known as variation margin are made or received by the 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 by vendors or advisor models 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

238

Annual Report to Shareholders

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 December 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 each Fund’s cash on deposit with the bank. This deposit arrangement is an alternative to purchasing overnight investments.

Credit and Market Risk

Investments in structured securities collateralized by residential real estate mortgages are subject to certain credit and liquidity risks. When market conditions result in an increase in default rates of the underlying mortgages and the foreclosure values of underlying real estate properties are materially below the outstanding amount of these underlying mortgages, collection of accrued interest and principal on these investments may be doubtful. Such market conditions may significantly impair the value of these investments resulting in a lack of correlation between their credit ratings and values.

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 is considered remote.

2. Federal Income Taxes:

It is the Funds’ policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986, as amended, applicable to registered investment companies. Accordingly, the Funds intend to distribute substantially all of their taxable income and net realized gains, if any, to shareholders each year. Therefore, no federal income tax provision is required in the Funds’ financial statements.

��

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

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

Reclassifications:

Accounting principles generally accepted in the United States of America require that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset values per share. During the current year, the following reclassifications have been made:

Fund		(Over)/Undistributed Net Investment Income		Accumulated Net Realized Gain/(Loss)			Paid-in Capital
Absolute Return	A	$	125,529		—		$	(125,529	)
	B		1,182,994	$	(1,182,994	)		—
Core	C		—		922			(922	)
	D		8,096,008		(8,096,008	)		—

239

Annual Report to Shareholders

Notes to Financial Statements—Continued

Fund		(Over)/Undistributed Net Investment Income			Accumulated Net Realized Gain/(Loss)			Paid-in Capital
Core Plus	E	$	8,623,739		$	(8,623,739	)	—
High Yield	D		308,250			(308,250	)	—
Inflation Indexed	B		2,918,108			(2,918,108	)	—
Intermediate	D		969,188			(969,188	)	—
Intermediate Plus	B		(43,865	)		43,865		—
Limited Duration	D		(869,008	)		869,008		—
Non-U.S.	F		(10,327,689	)		10,327,689		—

^A Reclassifications are primarily due to non-deductible organization costs.

^B Reclassifications are primarily due to foreign currency transactions treated as ordinary income for tax purposes, losses from mortgage-backed securities treated as capital gains for tax purposes and book/tax differences in the treatment of swap contracts.

^C Reclassifications are primarily due to book/tax differences in the treatment of various items.

^D Reclassifications are primarily due to losses from mortgage-backed securities treated as capital gains for tax purposes and book/tax differences in the treatment of swap contracts.

^E Reclassifications are primarily due to foreign currency transactions treated as ordinary income for tax purposes, losses from mortgage-backed securities treated as capital gains for tax purposes, book/tax differences in the treatment of swap contracts and book/tax differences in the treatment of distributions.

^F Reclassifications are primarily due to foreign currency transactions treated as ordinary income for tax purposes and a tax net operating loss which offsets short-term capital gains for tax purposes.

Distributions to Shareholders:

Subsequent to the fiscal year end, the Funds have made the following distributions:

	Absolute Return				Core
Record Date Payable Date	Institutional Class		Financial Intermediary Class		Institutional Class		Financial Intermediary Class
Daily
4/30/2008	$	0.042141	$	0.040117	$	0.043975	$	0.041780
	Core Plus				Inflation Indexed
Record Date Payable Date	Institutional Class		Financial Intermediary Class		Institutional Class		Financial Intermediary Class
Daily
4/30/2008	$	0.040836	$	0.038794	$	0.043811	$	0.041471
	Intermediate		Intermediate Plus		Limited Duration
Record Date Payable Date	Institutional Class		Institutional Class		Institutional Class
Daily
4/30/2008	$	0.039155	$	0.035482	$	0.033776

240

Annual Report to Shareholders

The tax character of distributions paid during the fiscal year ended March 31, 2008 were as follows:

Distributions paid from:	Absolute Return		Core		Core Plus
Ordinary Income	$	25,150,309	$	362,380,368	$	780,420,856
Net Long-term Capital Gains		824,765		23,199,917		31,340,849
Total Distributions Paid	$	25,975,074	$	385,580,285	$	811,761,705
Distributions paid from:	High Yield		Inflation Indexed		Intermediate
Ordinary Income	$	74,729,646	$	42,555,439	$	35,155,441
Net Long-term Capital Gains		4,565,857		—		—
Total Distributions Paid	$	79,295,503	$	42,555,439	$	35,155,441
Distributions paid from:	Intermediate Plus		Limited Duration		Non-U.S.
Ordinary Income	$	5,126,363	$	4,689,218	$	736
Net Long-term Capital Gains		91,179		—		460,649
Total Taxable Distributions	$	5,217,542	$	4,689,218	$	461,385
Tax Return of Capital		—		547,710		—
Total Distributions Paid	$	5,217,542	$	5,236,928	$	461,385

The tax character of distributions paid during the fiscal year ended March 31, 2007 were as follows:

Distributions paid from:	Absolute Return		Core		Core Plus
Ordinary Income	$	6,162,620	$	270,091,141	$	480,180,179
Net Long-term Capital Gains		354,265		—		3,856,431
Total Distributions Paid	$	6,516,885	$	270,091,141	$	484,036,610
Distributions paid from:	High Yield		Inflation Indexed		Intermediate
Ordinary Income	$	48,139,933	$	22,374,973	$	30,869,536
Net Long-term Capital Gains		130,904		—		—
Total Distributions Paid	$	48,270,837	$	22,374,973	$	30,869,536
Distributions paid from:	Intermediate Plus		Limited Duration		Non-U.S.
Ordinary Income	$	3,920,425	$	3,944,005	$	2,138,065
Net Long-term Capital Gains		—		—		—
Total Taxable Distributions	$	3,920,425	$	3,944,005	$	2,138,065
Tax Return of Capital		—		—		—
Total Distributions Paid	$	3,920,425	$	3,944,005	$	2,138,065

241

Annual Report to Shareholders

Notes to Financial Statements—Continued

Accumulated Earnings on a Tax Basis:

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

	Absolute Return			Core			Core Plus
Undistributed ordinary income—net	$	9,300,938		$	17,130,856		$	40,501,347
Undistributed long-term capital gains—net		4,755,025			—			—
Total undistributed earnings	$	14,055,963		$	17,130,856		$	40,501,347
Capital loss carryforward (*)		—			(84,734,017	)		(103,577,292	)
Other book/tax temporary differences		564,872	(a)		(7,020,931	)(c)		(68,542,669	)(c)
Unrealized appreciation/(depreciation)		(30,051,652	)(b)		(407,791,876	)(b)		(625,132,937	)(d)
Total accumulated earnings/(losses)—net	$	(15,430,817	)	$	(482,415,968	)	$	(756,751,551	)
	High Yield			Inflation Indexed			Intermediate
Undistributed ordinary income—net	$	20,044,381		$	13,678,860		$	4,010,364
Undistributed long-term capital gains—net		—			6,239,509			6,782,813
Total undistributed earnings	$	20,044,381		$	19,918,369		$	10,793,177
Capital loss carryforward (*)		—			—			—
Other book/tax temporary differences		(19,718,509	)(e)		(2,386,372	)(g)		(4,212,685	)(f)
Unrealized appreciation/(depreciation)		(94,726,935	)(b)		33,557,367	(b)		(20,111,610	)(b)
Total accumulated earnings/(losses)—net	$	(94,401,063	)	$	51,089,364		$	(13,531,118	)
	Intermediate Plus			Limited Duration			Non-U.S.
Undistributed ordinary income—net	$	1,159,702			—			—
Undistributed long-term capital gains—net		1,356,749			—			—
Total undistributed earnings	$	2,516,451			—			—
Capital loss carryforward (*)		—		$	(663,010	)		—
Other book/tax temporary differences		(980,755	)(g)		(440,295	)(c)	$	(2,996,168	)(c)
Unrealized appreciation/(depreciation)		(4,155,650	)(b)		(9,492,386	)(b)		12,016,783	(b)
Total accumulated earnings/(losses)—net	$	(2,619,954	)	$	(10,595,691	)	$	9,020,615

* During the taxable year ended March 31, 2008, the following funds utilized the indicated amount of their capital loss carryovers available from a previous year:

Inflation Indexed	$	1,445,855
Intermediate		4,759,954
Limited Duration		663,010

As of the taxable year ended March 31, 2008, the following capital loss carryforwards are available:

Year of Expiration	Core			Core Plus			Limited Duration
3/31/2014		—			—		$	(234,847	)
3/31/2015		—			—			(394,050	)
3/31/2016	$	(84,734,017	)	$	(103,577,292	)		(34,113	)
	$	(84,734,017	)	$	(103,577,292	)	$	(663,010	)

(a) Other book/tax temporary differences are attributable primarily to the tax deferral of losses on straddles, the realization for tax purposes of unrealized losses on certain futures and foreign currency contracts, interest on defaulted securities accrued for tax not book and book/tax differences in the timing of the deductibility of various expenses.

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

242

Annual Report to Shareholders

(c) Other book/tax temporary differences are attributable primarily to the tax deferral of losses on straddles, the realization for tax purposes of unrealized gains/losses on certain futures and/or foreign currency contracts, the deferral of post-October capital and/or currency losses for tax purposes and book/tax differences in the timing of the deductibility of various expenses.

(d) The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to the tax deferral of losses on wash sales and book/tax differences in the accrual of income on certain debt instruments.

(e) Other book/tax temporary differences are attributable primarily to the deferral of post-October capital losses for tax purposes, interest on defaulted securities accrued for tax not book and book/tax differences in the timing of the deductibility of various expenses.

(f) Other book/tax temporary differences are attributable primarily to the tax deferral of losses on straddles, the realization for tax purposes of unrealized gains on certain futures contracts, and book/tax differences in the timing of the deductibility of various expenses.

(g) Other book/tax temporary differences are attributable primarily to the tax deferral of losses on straddles, the realization for tax purposes of unrealized gains/losses on certain futures and foreign currency contracts, and book/tax differences in the timing of the deductibility of various expenses.

Tax Cost of Investments:

As of March 31, 2008, the aggregate cost of investments for federal income tax purposes were as follows:

Absolute Return	$	704,336,244
Core		8,719,444,779
Core Plus		16,450,179,243
High Yield		875,641,520
Inflation Indexed		1,033,620,687
Intermediate		930,608,103
Intermediate Plus		129,927,314
Limited Duration		134,285,780
Non-U.S.		182,037,349

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.

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 a Fund as an unrealized gain or loss. When the contract is closed or delivery is taken, the Fund records 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 Fund could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts.

243

Annual Report to Shareholders

Notes to Financial Statements—Continued

At March 31, 2008, open forward currency exchange contracts (expressed in the contractual currency) were:

Absolute Return

Broker	Settlement Date	Contract to				Unrealized Gain/(Loss)
		Receive		Deliver
JPMorgan Chase Bank	6/16/08	INR	19,855,900	USD	490,360	$	1,607
UBS AG London	6/16/08	INR	29,745,300	USD	736,088		908
Citibank NA	5/7/08	JPY	173,092,800	USD	1,632,058		106,787
Credit Suisse First Boston	5/7/08	JPY	380,220,380	USD	3,586,985		232,609
Citibank NA	5/7/08	USD	1,150,311	CAD	1,150,138		31,720
Citibank NA	5/7/08	USD	9,758,468	EUR	6,656,945		(740,519	)
Citibank NA	5/7/08	USD	11,240,446	GBP	5,697,950		(36,829	)
Credit Suisse First Boston	5/7/08	USD	1,516,072	GBP	767,515		(2,979	)
						$	(406,696	)

Core Plus

Broker	Settlement Date	Contract to				Unrealized Gain/(Loss)
		Receive		Deliver
Goldman Sachs International	5/7/08	EUR	28,856,885	USD	42,469,832	$	3,041,746
Credit Suisse First Boston	5/7/08	JPY	6,924,498,000	USD	65,325,453		4,236,224
Deutsche Bank AG London	5/7/08	JPY	6,594,775,000	USD	62,301,257		3,948,109
Morgan Stanley London FX	5/7/08	JPY	13,222,000,000	USD	124,975,188		7,849,529
UBS AG London	5/7/08	JPY	3,680,000,000	USD	34,670,046		2,298,262
JPMorgan Chase Bank	5/7/08	USD	51,302,443	CAD	51,480,719		1,233,794
UBS AG London	5/7/08	USD	20,931,834	CAD	20,929,322		576,584
Citibank NA	5/7/08	USD	23,596,400	EUR	16,023,632		(1,675,238	)
Credit Suisse First Boston	5/7/08	USD	40,024,911	EUR	27,190,836		(2,859,062	)
JPMorgan Chase Bank	6/16/08	INR	547,399,750	USD	13,518,547		44,325
UBS AG London	6/16/08	INR	820,323,300	USD	20,300,007		25,065
						$	18,719,338

244

Annual Report to Shareholders

Inflation Indexed

Broker	Settlement Date	Contract to				Unrealized Gain/(Loss)
		Receive		Deliver
Citibank NA	5/7/08	CAD	216,000	USD	211,495	$	(1,420	)
Credit Suisse First Boston	5/7/08	CAD	8,043,729	AUD	8,790,000		(171,557	)
UBS AG London	5/7/08	CAD	12,862,436	USD	12,863,980		(354,348	)
Morgan Stanley London FX	5/7/08	EUR	2,834,218	USD	4,175,569		294,413
UBS AG London	5/7/08	EUR	1,160,000	USD	1,831,547		(2,056	)
Credit Suisse First Boston	5/7/08	GBP	3,105,000	USD	6,133,307		12,052
Credit Suisse First Boston	5/7/08	JPY	862,326,950	EUR	5,526,709		(53,730	)
Deutsche Bank AG London	5/7/08	JPY	640,263,600	USD	6,096,146		335,773
UBS AG London	5/7/08	JPY	1,182,190,000	USD	11,137,658		738,310
UBS AG London	5/7/08	SEK	1,700,000	USD	285,709		(60	)
Citibank NA	5/7/08	USD	1,944,208	EUR	1,320,255		(138,030	)
Credit Suisse First Boston	5/7/08	USD	6,076,302	CAD	6,100,000		143,620
Credit Suisse First Boston	5/7/08	USD	2,637,233	EUR	1,791,599		(188,383	)
Credit Suisse First Boston	5/7/08	USD	4,699,847	JPY	498,183,760		(304,776	)
Deutsche Bank AG London	5/7/08	USD	8,131,461	CAD	8,165,939		189,507
Deutsche Bank AG London	5/7/08	USD	2,001,246	SEK	12,850,000		(157,930	)
UBS AG London	5/7/08	USD	17,422,200	EUR	12,000,000		(1,503,576	)
UBS AG London	5/7/08	USD	29,200,846	GBP	14,780,000		(51,454	)
UBS AG London	5/7/08	USD	1,644,230	SEK	10,556,860		(129,632	)
						$	(1,343,277	)

Intermediate Plus

Broker	Settlement Date	Contract to				Unrealized Gain/(Loss)
		Receive		Deliver
Credit Suisse First Boston	5/7/08	AUD	289,277	USD	253,782	$	9,320
Credit Suisse First Boston	5/7/08	EUR	660,000	USD	977,460		63,457
Credit Suisse First Boston	5/7/08	JPY	104,501,670	USD	989,599		60,197
Citibank NA	5/7/08	USD	1,732,348	EUR	1,176,387		(122,989	)
Credit Suisse First Boston	5/7/08	USD	325,514	EUR	221,137		(23,252	)
Credit Suisse First Boston	5/7/08	USD	647,898	GBP	328,000		(1,273	)
Credit Suisse First Boston	5/7/08	USD	1,003,585	JPY	106,380,000		(65,080	)
UBS AG London	5/7/08	USD	238,746	AUD	271,728		(8,396	)
						$	(88,016	)

245

Annual Report to Shareholders

Notes to Financial Statements—Continued

Non-US

	Settlement Date	Contract to				Unrealized Gain/(Loss)
Broker		Receive		Deliver
Citibank NA	5/7/08	AUD	800,000	USD	703,232	$	24,381
UBS AG London	5/7/08	AUD	2,000,000	USD	1,757,240		61,794
JPMorgan Chase Bank	5/7/08	CAD	24,000,000	USD	24,375,149		(1,033,447	)
UBS AG London	5/7/08	DKK	12,386,174	USD	2,448,707		170,522
Citibank NA	5/7/08	EUR	1,286,944	USD	2,010,000		19,701
Morgan Stanley London FX	5/7/08	EUR	594,471	USD	875,815		61,752
UBS AG London	5/7/08	EUR	1,310,317	SEK	12,250,000		8,206
Citibank NA	5/7/08	GBP	1,761,887	USD	3,481,912		5,182
Deutsche Bank AG London	5/7/08	JPY	412,560,000	USD	3,897,480		246,988
Morgan Stanley London FX	5/7/08	JPY	41,140,000	USD	388,858		24,424
UBS AG London	5/7/08	NOK	2,237,866	USD	408,892		29,435
Credit Suisse First Boston	5/7/08	SEK	12,241,600	USD	1,904,714		152,233
Citibank NA	5/7/08	USD	364,987	AUD	400,000		1,180
Citibank NA	5/7/08	USD	1,790,874	DKK	9,055,016		(123,936	)
Citibank NA	5/7/08	USD	29,542,478	EUR	20,006,877		(2,011,327	)
Citibank NA	5/7/08	USD	13,310,930	JPY	1,411,730,647		(870,943	)
Citibank NA	5/7/08	USD	1,921,851	NOK	10,538,854		(142,376	)
Citibank NA	5/7/08	USD	7,172,670	PLN	17,662,977		(738,871	)
Credit Suisse First Boston	5/7/08	USD	5,734,592	CAD	5,756,957		135,543
Credit Suisse First Boston	5/7/08	USD	8,774,949	GBP	4,442,337		(17,242	)
Deutsche Bank AG London	5/7/08	USD	3,932,714	EUR	2,667,857		(274,890	)
Deutsche Bank AG London	5/7/08	USD	24,545,477	GBP	12,433,000		(61,684	)
Deutsche Bank AG London	5/7/08	USD	7,308,882	NOK	40,059,981		(537,598	)
Goldman Sachs International	5/7/08	USD	16,934,996	AUD	19,236,008		(560,477	)
Goldman Sachs International	5/7/08	USD	1,384,338	CAD	1,391,052		31,441
Goldman Sachs International	5/7/08	USD	1,074,370	EUR	730,000		(76,948	)
Goldman Sachs International	5/7/08	USD	493,433	GBP	250,000		(1,363	)
Goldman Sachs International	5/7/08	USD	8,352,421	JPY	884,630,000		(534,338	)
JPMorgan Chase Bank	5/7/08	USD	26,600,564	CAD	26,693,001		639,728
JPMorgan Chase Bank	5/7/08	USD	4,090,967	DKK	20,691,295		(284,496	)
JPMorgan Chase Bank	5/7/08	USD	16,394,199	EUR	11,131,238		(1,161,411	)
JPMorgan Chase Bank	5/7/08	USD	4,333,088	GBP	2,200,000		(21,111	)
UBS AG London	5/7/08	USD	20,239,555	EUR	13,742,976		(1,435,151	)
UBS AG London	5/7/08	USD	2,182,000	GBP	1,104,419		(3,845	)
						$	(8,278,944	)

AUD—Australian dollar

CAD—Canadian dollar

DKK—Danish krona

EUR—Euro

GBP—British pound

INR—Indian rupee

TRY—Turkish lira

JPY—Japanese yen

NOK—Norwegian krone

SEK—Swedish krona

USD—United States dollar

246

Annual Report to Shareholders

Loan Participations and Assignments

The Funds may invest in loans arranged through private negotiation between one or more financial institutions. The Funds’ investment in any such loan may be in the form of a participation in or an assignment of the loan. In connection with purchasing participations, the Funds generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loan, nor any rights of set-off against the borrower and the Funds may not benefit directly from any collateral supporting the loan in which it has purchased the participation.

The Funds will assume the credit risk of both the borrower and the lender that is selling the participation. In the event of the insolvency of the lender selling the participation, the Funds may be treated as a general creditor of the lender and may not benefit from any set-off between the lender and the borrower.

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 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.
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 net assets. 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

247

Annual Report to Shareholders

Notes to Financial Statements—Continued

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.

Activity in written call and put options during the year ended March 31, 2008, was as follows:

Absolute Return	Contracts		Premiums
Options outstanding at March 31, 2007	208		$	74,370
Options written	22,205,235			2,534,160
Options closed	(1,611	)		(723,729	)
Options expired	(21,401,788	)		(545,058	)
Options exercised	(800,751	)		(258,664	)
Options outstanding at March 31, 2008	1,293		$	1,081,079
Core	Contracts		Premiums
Options outstanding at March 31, 2007	28,799		$	12,147,130
Options written	2,610,739,826			122,632,865
Options closed	(177,776,631	)		(31,810,475	)
Options expired	(1,615,760,320	)		(52,254,882	)
Options exercised	(81,943,749	)		(21,923,152	)
Options outstanding at March 31, 2008	735,287,925		$	28,791,486
Core Plus	Contracts		Premiums
Options outstanding at March 31, 2007	48,443		$	20,216,638
Options written	5,195,393,829			247,221,365
Options closed	(334,706,155	)		(64,517,912	)
Options expired	(2,605,770,155	)		(90,548,090	)
Options exercised	(133,799,959	)		(45,671,512	)
Options outstanding at March 31, 2008	2,121,166,003		$	66,700,489
Inflation Indexed	Contracts		Premiums
Options outstanding at March 31, 2007	177		$	79,318
Options written	2,770			1,318,869
Options closed	(88	)		(39,435	)
Options expired	(2,233	)		(1,102,179	)
Options exercised	(626	)		(256,573	)
Options outstanding at March 31, 2008	0		$	0
Intermediate	Contracts		Premiums
Options outstanding at March 31, 2007	47,700,450		$	169,275
Options written	190,100,934			2,448,968
Options closed	(9,480,087	)		(1,062,336	)
Options expired	(120,310,112	)		(498,271	)
Options exercised	(73,130,777	)		(600,097	)
Options outstanding at March 31, 2008	34,880,408		$	457,539

248

Annual Report to Shareholders

Intermediate Plus	Contracts		Premiums
Options outstanding at March 31, 2007	10,000,060		$	28,305
Options written	26,830,414			349,927
Options closed	(7,200,285	)		(154,698	)
Options expired	(21,680,034	)		(100,327	)
Options exercised	(2,800,093	)		(52,831	)
Options outstanding at March 31, 2008	5,150,062		$	70,376
Limited Duration	Contracts		Premiums
Options outstanding at March 31, 2007	10,700,106		$	42,961
Options written	6,610,248			135,953
Options closed	(2,100,306	)		(118,811	)
Options expired	(15,210,002	)		(28,708	)
Options exercised	—			—
Options outstanding at March 31, 2008	46		$	31,395
Non-US	Contracts		Premiums
Options outstanding at March 31, 2007	—			—
Options written	1,770,661		$	678,828
Options closed	—			—
Options expired	(1,770,000	)		(25,090	)
Options exercised	—			—
Options outstanding at March 31, 2008	661		$	653,738

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 Absolute Return, Core Plus, Inflation Indexed, Intermediate Plus, and Non-U.S. Opportunity, 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 the value of 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, 2008 are listed at the end of each Fund’s portfolio of investments.

Swap Agreements

The Funds may invest in swaps for the purpose of managing their exposure to interest rate, credit or market risk, or for other purposes. The use of swaps involves risks that are different from those associated with ordinary portfolio transactions.

Credit default swaps 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

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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 and in certain instances, take delivery of the securities. The Fund may enter into credit default swaps in which the Fund or its counterparty act as guarantors. By acting as the guarantor of a swap, the Fund assumes the market and credit risk of the underlying instrument, including liquidity and loss of value. If a fund is a seller of protection and a credit event occurs, as defined under the terms of the particular swap agreement, the fund will pay to the buyer of the protection an amount up to the notional value of the swap and in certain instances, take delivery of the security.

Interest rate swap contracts involve the exchange of commitments to pay and receive interest based on a notional principal amount.

Commodity swaps are agreements to exchange cash flows at specified intervals to gain investment exposure to the relevant spread of commodity reference prices. 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 Fund will receive a payment from the counterparty. To the extent it is less, the Fund will make a payment to the counterparty. Periodic payments received or made by the Fund are recorded in the accompanying statements of operations as realized gains or losses, respectively.

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 Fund’s custodian in compliance with the terms of the 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.

As of March 31, 2008, the one-and three-month London Interbank Offered Rates were 2.70% and 2.69%, respectively. The Lehman Brothers US ABS AAA Floating Home Equities Index was 3.05%. The 28 day Mexican Interbank Deposit Rate was 7.93%.

The following is a summary of open swap contracts outstanding as of March 31, 2008.

Western Asset Absolute Return Portfolio
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Credit Default Swaps
Banc of America Securities LLC (Heinz Corp., 6.428%, due 12/01/08)	December 20, 2008	0.165% Quarterly	Specified amount upon credit event notice	$	100,000	$	78
Banc of America Securities LLC (PHH Corporate Note, 7.125%, due 3/1/13 )	March 20, 2013	1.05% Monthly	Specified amount upon credit event notice		110,000		15,059
Barclays Capital Inc. (Cardinal Health Inc. 5.85%, due 12/15/17)	September 20, 2016	0.49% Quarterly	Specified amount upon credit event notice		60,000		1,619
Barclays Capital Inc. (Health Care Property Investments Inc., 6.45%, due 06/25/12)	June 20, 2012	0.63% Quarterly	Specified amount upon credit event notice		60,000		8,047
Barclays Capital Inc. (Juneau Investments LLC, 5.9%, due 2/22/21)	December 20, 2012	3.6% Quarterly	Specified amount upon credit event notice		120,000		13,724

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Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Barclays Capital Inc. (Juneau Investments LLC, 5.9%, due 2/22/21)	December 20, 2012	3.6% Quarterly	Specified amount upon credit event notice	$	80,000	$	9,149
Bear Stearns, Inc. (Viacom Inc., 6.25%, due 4/30/16)	March 20, 2011	0.59% Quarterly	Specified amount upon credit event notice		100,000		2,672
Credit Suisse First Boston USA (Amerisource Bergen Corp., 8.125%, due 9/1/08)	September 20, 2015	0.9% Monthly	Specified amount upon credit event notice		50,000		1,543
Credit Suisse First Boston USA (Masco Corp., 5.875%, due 7/15/12)	September 20, 2013	0.75% Quarterly	Specified amount upon credit event notice		50,000		4,708
Credit Suisse First Boston USA (Starwood Hotels Resorts, 7.875%, due 8/25/34)	December 20, 2011	1.37% Quarterly	Specified amount upon credit event notice		50,000		1,350
Lehman Brothers Holdings Inc. (Sara Lee Corp., 6.125%, due 11/01/32)	September 20, 2011	0.44% Quarterly	Specified amount upon credit event notice		150,000		1,163
Morgan Stanley & Co., Inc. (Gannett Co., 6.375%, due 4/01/12)	March 20, 2012	0.46% Quarterly	Specified amount upon credit event notice		40,000		2,678
Barclays Capital Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		800,000		(69,983	)
Barclays Capital Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		10,000,000		(790,162	)
Barclays Capital Inc. (Countrywide Home Loans, Inc., 4%, due 3/22/11)	September 20, 2008	Specified amount upon credit event notice	4.8% Quarterly		3,500,000		(43,046	)
Barclays Capital Inc. (General Motors Corp. 7.125%, due 7/15/13)	March 20, 2012	Specified amount upon credit event notice	3.45% Quarterly		1,600,000		(324,457	)
Barclays Capital Inc. (MBIA Insurance Corporation, 5.37563%, due 10/6/10)	December 20, 2012	Specified amount upon credit event notice	3.1% Quarterly		150,000		(20,367	)
Barclays Capital Inc. (MBIA Insurance Corporation, 5.37563%, due 10/6/10)	December 20, 2012	Specified amount upon credit event notice	3.05% Quarterly		100,000		(13,732	)

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Western Asset Absolute Return Bond Portfolio—Continued
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Barclays Capital Inc. (SLM Corp., 5.125%, due 8/27/12)	September 20, 2012	Specified amount upon credit event notice	2.35% Quarterly	$	2,350,000	$	(459,894	)
Barclays Capital Inc. (The AES Corp., 7.75%, due 3/1/14)	September 20, 2012	Specified amount upon credit event notice	3.65% Quarterly		3,000,000		10,331
Barclays Capital Inc. (The AES Corp., 7.75%, due 3/1/14)	September 20, 2012	Specified amount upon credit event notice	3.15% Quarterly		3,000,000		(47,777	)
Barclays Capital Inc. (TXU Corp., 5.55%, due 11/15/14)	September 20, 2012	Specified amount upon credit event notice	2.97% Quarterly		2,000,000		(216,225	)
Deutsche Bank AG (ABX. HE-AAA 06-2)	May 25, 2046	Specified amount upon credit event notice	0.11% Monthly		700,000		(140,705	)
						$	(2,054,227	)
Interest Rate Swaps
Banc of America Securities LLC	December 1, 2008	5.03% Semi-Annually	3-month LIBOR		100,000		(1,653	)
Banc of America Securities LLC	March 1, 2013	5.104% Semi-Annually	3-month LIBOR		100,000		(8,205	)
Barclays Capital Inc.	June 25, 2012	5.06% Semi-Annually	3-month LIBOR		60,000		(4,642	)
Barclays Capital Inc.	October 20, 2016	5.326% Semi-Annually	3-month LIBOR		60,000		(6,182	)
Bear Stearns, Inc.	April 30, 2011	5.05% Semi-Annually	3-month LIBOR		100,000		(6,654	)
Credit Suisse First Boston USA	May 1, 2012	5.085% Semi-Annually	3-month LIBOR		50,000		(3,831	)
Credit Suisse First Boston USA	August 15, 2013	5.023% Semi-Annually	3-month LIBOR		50,000		(3,993	)
Credit Suisse First Boston USA	September 15, 2015	5.16% Semi-Annually	3-month LIBOR		50,000		(4,557	)
Lehman Brothers Holdings Inc.	September 15, 2011	5.193% Semi-Annually	3-month LIBOR		150,000		(11,272	)
RBS Greenwich	April 1, 2012	5.011% Semi-Annually	3-month LIBOR		40,000		(2,942	)

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Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Barclays Capital Inc.	December 15, 2009	3-month LIBOR	4% Semi-Annually	$	2,900,000	$	76,421
Barclays Capital Inc.	May 31, 2012	3-month LIBOR	4.4% Semi-Annually		2,641,000		131,493
						$	153,983
		Total Unrealized Appreciation/(Depreciation)				$	(1,900,244	)

Western Asset Core Bond Portfolio
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Credit Default Swaps
Banc of America Securities LLC (Heinz Corp., 6.428%, due 12/01/08)	December 20, 2008	0.165% Quarterly	Specified amount upon credit event notice	$	6,650,000	$	5,182
Banc of America Securities LLC (Home Depot Inc., 3.75%, due 9/15/09)	December 20, 2013	0.635% Quarterly	Specified amount upon credit event notice		2,740,000		164,151
Banc of America Securities LLC (Marriot International Inc., 4.625%, due 6/15/12 )	December 20, 2015	0.73% Monthly	Specified amount upon credit event notice		4,400,000		428,270
Banc of America Securities LLC (Masco Corp., 5.875%, due 7/15/12)	December 20, 2016	1.04% Quarterly	Specified amount upon credit event notice		4,120,000		420,499
Banc of America Securities LLC (PHH Corporate Note, 7.125%, due 3/1/13 )	March 20, 2013	1.05% Monthly	Specified amount upon credit event notice		5,010,000		685,865
Banc of America Securities LLC (Viacom Inc., 4.625%, due 5/15/18)	December 20, 2015	1.13% Quarterly	Specified amount upon credit event notice		2,750,000		164,593
Barclays Capital Inc. (Amerisource Bergen Corp., 5.625%, due 9/15/12)	September 20, 2012	0.5% Quarterly	Specified amount upon credit event notice		3,520,000		107,873
Barclays Capital Inc. (Cardinal Health Inc. 5.85%, due 12/15/17)	September 20, 2016	0.49% Quarterly	Specified amount upon credit event notice		3,530,000		95,258

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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)
Barclays Capital Inc. (Health Care Property Investments Inc., 6.45%, due 06/25/12)	June 20, 2012	0.63% Quarterly	Specified amount upon credit event notice	$	3,550,000	$	476,119
Barclays Capital Inc. (Juneau Investments LLC, 5.9%, due 2/22/21)	December 20, 2012	3.6% Quarterly	Specified amount upon credit event notice		1,650,000		188,706
Barclays Capital Inc. (Juneau Investments LLC, 5.9%, due 2/22/21)	December 20, 2012	3.6% Quarterly	Specified amount upon credit event notice		1,100,000		125,804
Barclays Capital Inc. (Motorola Inc., 6.5%, due 9/1/25)	December 20, 2011	0.32% Quarterly	Specified amount upon credit event notice		5,600,000		515,018
Bear Stearns, Inc. (Bell South Corp., 6%, due 10/15/11)	September 20, 2014	0.28% Quarterly	Specified amount upon credit event notice		4,270,000		82,014
Bear Stearns, Inc. (Juneau Investments LLC, 5.9%, due 2/22/21)	December 20, 2012	3.65% Quarterly	Specified amount upon credit event notice		4,040,000		455,666
Bear Stearns, Inc. (Viacom Inc., 6.25%, due 4/30/16)	March 20, 2011	0.59% Quarterly	Specified amount upon credit event notice		2,500,000		66,794
Credit Suisse First Boston USA (AAMES Mortgage Investment Trust 2005-1 M8, 1-Month LIBOR + 160 bp, due 6/25/35)	June 25, 2035	1.28% Monthly	Specified amount upon credit event notice		784,000		360,496
Credit Suisse First Boston USA (AAMES Mortgage Investment Trust 2005-1 M9, 1-Month LIBOR + 250 bp, due 6/25/35)	June 25, 2035	2.05% Monthly	Specified amount upon credit event notice		784,000		420,645
Credit Suisse First Boston USA (ACE Securities Corp. 2005-HE1 M8, 1-Month LIBOR + 138 bp, due 2/25/35)	February 25, 2035	1.31% Monthly	Specified amount upon credit event notice		784,000		217,579
Credit Suisse First Boston USA (ACE Securities Corp. 2005-HE1 M9, 1-Month LIBOR + 220bp, due 2/25/35)	February 25, 2035	2.06% Monthly	Specified amount upon credit event notice		515,779		256,329

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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 2004-4 B2, 1-Month LIBOR + 190bp, due 10/25/34)	October 25, 2034	1.37% Monthly	Specified amount upon credit event notice	$	595,911	$	266,605
Credit Suisse First Boston USA (Aegis Asset Backed Securities Trust 2005 B2, 1-Month LIBOR + 130 bp, due 3/25/35)	March 25, 2035	1.31% Quarterly	Specified amount upon credit event notice		784,000		587,185
Credit Suisse First Boston USA (Aegis Asset Backed Securities Trust 2005 B3, 1-Month LIBOR + 200 bp, due 3/25/35)	March 25, 2035	2.18% Quarterly	Specified amount upon credit event notice		784,000		656,334
Credit Suisse First Boston USA (Amerisource Bergen Corp., 8.125%, due 9/1/08)	September 20, 2015	0.9% Monthly	Specified amount upon credit event notice		3,050,000		94,096
Credit Suisse First Boston USA (Argent Securities Inc. 2004-W11 M10, 1-Month LIBOR + 350bp, due 11/25/34)	November 25, 2034	2.15% Monthly	Specified amount upon credit event notice		582,501		109,175
Credit Suisse First Boston USA (Argent Securities Inc. 2004-W11 M9, 1-Month LIBOR + 225bp, due 11/25/34)	November 25, 2034	1.33% Monthly	Specified amount upon credit event notice		784,000		134,191
Credit Suisse First Boston USA (Argent Securities Inc. 2004-W4 M3, 1-Month LIBOR + 300 bp, due 3/25/34)	March 25, 2034	2.2% Monthly	Specified amount upon credit event notice		371,871		196,264
Credit Suisse First Boston USA (Finance America Mortgage Loan Trust 2004-3 M8, 1-Month LIBOR + 180bp, due 11/25/34)	November 25, 2034	1.31% Monthly	Specified amount upon credit event notice		285,027		199,073
Credit Suisse First Boston USA (Finance America Mortgage Loan Trust 2004-3 M9, 1-Month LIBOR + 315bp, due 11/25/34)	November 25, 2034	2.18% Monthly	Specified amount upon credit event notice		285,008		212,772

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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 (Fremont Home Loan Trust 2005-A M8, 1-Month LIBOR + 135 bp, due 1/25/35)	January 25, 2035	1.31% Monthly	Specified amount upon credit event notice	$	310,788	$	216,444
Credit Suisse First Boston USA (Fremont Home Loan Trust 2005-A, 1-Month LIBOR + 100bp, due 1/25/35)	January 25, 2035	2.08% Monthly	Specified amount upon credit event notice		313,642		258,595
Credit Suisse First Boston USA (Home Depot Inc., 3.75%, due 9/15/09)	September 20, 2010	0.17% Quarterly	Specified amount upon credit event notice		1,380,000		41,307
Credit Suisse First Boston USA (IndyMac Home Equity Loan Asset-Backed, Trust 2004-C M8, 1-Month LIBOR + 190bp, due 3/25/35)	March 25, 2035	1.28% Monthly	Specified amount upon credit event notice		784,000		257,281
Credit Suisse First Boston USA (IndyMac Home Equity Loan Asset-Backed, Trust 2004-C M9, 1-Month LIBOR + 325bp, due 3/25/35)	March 25, 2035	2.05% Monthly	Specified amount upon credit event notice		784,000		278,924
Credit Suisse First Boston USA (Limited Brands Inc., 6.125%, due 12/01/12)	December 20, 2012	0.6% Monthly	Specified amount upon credit event notice		5,870,000		709,793
Credit Suisse First Boston USA (Long Beach Mortgage Loan Trust 2004-1 M9, 1-Month LIBOR + 350bp, due 2/25/34)	February 25, 2034	2.15% Monthly	Specified amount upon credit event notice		315,041		138,691
Credit Suisse First Boston USA (Long Beach Mortgage Loan Trust 2005-1 M8, 1-Month LIBOR + 170 bp, due 2/25/35)	February 25, 2035	1.31% Monthly	Specified amount upon credit event notice		784,000		248,922
Credit Suisse First Boston USA (Long Beach Mortgage Loan Trust 2005-1 M9, 1-Month LIBOR + 275bp, due 2/25/35)	February 25, 2035	2.08% Monthly	Specified amount upon credit event notice		784,000		308,937
Credit Suisse First Boston USA (Marsh & McLennan Company, Inc., 5.375%, due 7/15/14)	September 20, 2010	0.46% Quarterly	Specified amount upon credit event notice		3,070,000		16,359

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Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Credit Suisse First Boston USA (Masco Corp., 5.875%, due 7/15/12)	September 20, 2013	0.75% Quarterly	Specified amount upon credit event notice	$	3,320,000	$	312,605
Credit Suisse First Boston USA (MASTR Asset Backed Securities Trust 2005-NC1 M8, 1-Month LIBOR + 153bp, due 12/25/34)	December 25, 2034	1.31% Monthly	Specified amount upon credit event notice		784,000		490,627
Credit Suisse First Boston USA (MASTR Asset Backed Securities Trust 2005-NC1 M9, 1-Month LIBOR + 240bp, due 12/25/34)	December 25, 2034	2.08% Monthly	Specified amount upon credit event notice		784,000		477,946
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2004-WMC1 B3, 1-Month LIBOR + 225bp, due 9/25/35)	September 25, 2035	2.05% Monthly	Specified amount upon credit event notice		784,000		133,358
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2004-WMC4 B3, 1-Month LIBOR + 375bp, due 4/25/35)	April 25, 2035	2.15% Monthly	Specified amount upon credit event notice		665,146		156,815
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2005-NC1 B2, 1-Month LIBOR + 130bp, due 10/25/35)	October 25, 2035	1.28% Monthly	Specified amount upon credit event notice		784,000		129,263
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2005-NC1 B3, 1-Month LIBOR + 205bp, due 10/25/35)	October 25, 2035	2.05% Monthly	Specified amount upon credit event notice		784,000		177,811
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2005-WMC1 B2, 1-Month LIBOR + 135bp, due 9/25/35)	September 25, 2035	1.28% Monthly	Specified amount upon credit event notice		784,000		185,465
Credit Suisse First Boston USA (Morgan Stanley ABS Capital I 2005-WMC1 B2, 1-Month LIBOR + 130 bp, due 1/25/35)	January 25, 2035	1.31% Monthly	Specified amount upon credit event notice		248,671		177,457

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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 (Morgan Stanley ABS Capital I 2005-WMC1 B3, 1-Month LIBOR + 215bp, due 1/25/35)	January 25, 2035	2.18% Monthly	Specified amount upon credit event notice	$	290,482	$	237,266
Credit Suisse First Boston USA (New Century Home Equity Loan Trust 2004-2 M9, 1-Month LIBOR + 325bp, due 8/25/34)	August 25, 2034	2.15% Monthly	Specified amount upon credit event notice		380,796		164,333
Credit Suisse First Boston USA (New Century Home Equity Loan Trust 2005-1 M8, 1-Month LIBOR + 140 bp, due 3/25/35)	March 25, 2035	1.31% Monthly	Specified amount upon credit event notice		784,000		232,022
Credit Suisse First Boston USA (New Century Home Equity Loan Trust 2005-1 M9, 1-Month LIBOR + 205 bp, due 3/25/35)	March 25, 2035	2.18% Monthly	Specified amount upon credit event notice		784,000		260,086
Credit Suisse First Boston USA (Novastar Home Equity Loan 2005-1 B2, 1-Month LIBOR + 135 bp, due 6/25/35)	June 25, 2035	1.28% Monthly	Specified amount upon credit event notice		784,000		308,496
Credit Suisse First Boston USA (Novastar Home Equity Loan 2005-4 B3, 1-Month LIBOR + 195 bp, due 6/25/35)	June 25, 2035	2.05% Monthly	Specified amount upon credit event notice		784,000		423,654
Credit Suisse First Boston USA (Park Place Securities Inc. 2005-WCH1 M8, 1-Month LIBOR + 155bp, due 1/25/36)	January 25, 2036	1.36% Monthly	Specified amount upon credit event notice		784,000		385,392
Credit Suisse First Boston USA (Park Place Securities, Inc. 2005-WCH1 M9, 1-Month LIBOR + 250 bp, due 1/25/36)	January 25, 2036	2.18% Monthly	Specified amount upon credit event notice		784,000		444,731
Credit Suisse First Boston USA (People’s Choice Home Loan Securities Trust 2004-1 M6, 1-Month LIBOR + 230bp, due 6/25/34)	June 25, 2034	1.37% Quarterly	Specified amount upon credit event notice		832,088		158,637

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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 (People’s Choice Home Loan Securities Trust 2005-1 B3, 1-Month LIBOR + 260bp, due 1/25/35)	January 25, 2035	2.05% Monthly	Specified amount upon credit event notice	$	784,000	$	382,239
Credit Suisse First Boston USA (People’s Choice Home Loan Securities Trust 2005-1, 1-Month LIBOR + 165bp, due 1/25/35)	January 25, 2035	1.28% Monthly	Specified amount upon credit event notice		784,000		329,398
Credit Suisse First Boston USA (Pulte Homes Inc., 7.875%, due 8/1/11)	March 20, 2011	0.79% Quarterly	Specified amount upon credit event notice		2,100,000		180,251
Credit Suisse First Boston USA (Southwest Airlines Co., 5.25%, due 10/1/14)	March 20, 2017	0.69% Quarterly	Specified amount upon credit event notice		2,420,000		175,408
Credit Suisse First Boston USA (Starwood Hotels Resorts, 7.875%, due 8/25/34)	December 20, 2011	1.37% Quarterly	Specified amount upon credit event notice		3,050,000		82,315
Credit Suisse First Boston USA (Waste Management Inc., 7.375%, due 8/1/10)	March 20, 2014	0.49% Quarterly	Specified amount upon credit event notice		3,290,000		91,925
Deutsche Bank AG (Autozone Inc., 6.95%, due 6/15/16)	June 20, 2016	0.58% Quarterly	Specified amount upon credit event notice		5,620,000		222,786
Deutsche Bank AG (Centurytel Inc., 7.875%, due 8/15/12)	March 20, 2017	0.89% Quarterly	Specified amount upon credit event notice		4,120,000		203,524
Deutsche Bank AG (iBoxx IG TMT)	March 20, 2009	0.6% Quarterly	Specified amount upon credit event notice		7,400,000		(19,858	)
JP Morgan Chase & Co. (Limited Brands Inc., 6.125%, due 12/1/12)	December 20, 2012	0.67% Quarterly	Specified amount upon credit event notice		3,550,000		419,368
Lehman Brothers Holdings Inc. (Sara Lee Corp., 6.125%, due 11/01/32)	September 20, 2011	0.44% Quarterly	Specified amount upon credit event notice		5,500,000		42,637
Lehman Brothers Holdings Inc. (Viacom Inc., 6.25%, due 4/30/16)	March 20, 2011	0.57% Quarterly	Specified amount upon credit event notice		3,580,000		97,668

259

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)
Morgan Stanley & Co., Inc. (Pulte Homes Inc., 5.25%, due 1/15/14)	March 20, 2011	4% Quarterly	Specified amount upon credit event notice	$	1,370,000	$	5,684
Morgan Stanley & Co., Inc. (Viacom Inc., 6.25%, due 4/30/16)	March 20, 2012	0.36% Monthly	Specified amount upon credit event notice		5,460,000		263,078
Morgan Stanley & Co., Inc. (Weyerhaeuser Co. Note, 7.125%, due 7/15/23)	March 20, 2012	0.74% Quarterly	Specified amount upon credit event notice		2,750,000		97,284
RBS Greenwich (DSLA Mortgage Loan Trust 2005-AR5, 1-Month LIBOR + 175 bp, due 8/19/45)	August 19, 2045	4.5% Monthly	Specified amount upon credit event notice		1,297,838		(324,460	)
RBS Greenwich (General Mills Inc., 5.7%, due 2/15/17)	March 20, 2017	0.33% Quarterly	Specified amount upon credit event notice		3,580,000		75,403
RBS Greenwich (Harborview Mortgage Loan Trust 2005-12, 1-Month LIBOR + 175 bp, due 10/19/35)	October 19, 2035	2.5% Monthly	Specified amount upon credit event notice		1,293,953		(452,884	)
RBS Greenwich (Home Depot Inc., 5.4%, due 3/1/16)	March 20, 2016	0.48% Monthly	Specified amount upon credit event notice		4,250,000		365,533
RBS Greenwich (iBoxx IG Hi-Vol3)	March 20, 2010	1.05% Quarterly	Specified amount upon credit event notice		17,303,214		(456,000	)
RBS Greenwich (IndyMac Index Mortgage Loan Trust 2005-AR18, 1-Month LIBOR + 125 bp, due 10/25/36)	October 25, 2036	2.7% Monthly	Specified amount upon credit event notice		1,388,941		(416,683	)
RBS Greenwich (Washington Mutual 2005-AR11, 1-Month LIBOR + 120 bp, due 8/25/45)	August 25, 2045	2.55% Monthly	Specified amount upon credit event notice		497,019		(173,957	)
Banc of America Securities LLC (MBIA Global Funding LLC, 5.37563%, due 10/6/10)	September 20, 2008	Specified amount upon credit event notice	1.4% Quarterly		9,810,000		(667,797	)

260

Annual Report to Shareholders

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)
Banc of America Securities LLC (MBIA Global Funding LLC, 5.37563%, due 10/6/10)	September 20, 2008	Specified amount upon credit event notice	1.5% Quarterly	$	6,440,000	$	(435,444	)
Barclays Capital Inc. (CDX IG 9)	December 20, 2017	Specified amount upon credit event notice	0.8% Quarterly		49,070,000		(106,385	)
Barclays Capital Inc. (CDX IG 9)	December 20, 2017	Specified amount upon credit event notice	0.8% Quarterly		43,670,000		159,402
Barclays Capital Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		13,900,000		(1,188,346	)
Barclays Capital Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		16,600,000		(1,219,556	)
Barclays Capital Inc. (MBIA Insurance Corporation, 5.37563%, due 10/6/10)	December 20, 2012	Specified amount upon credit event notice	3.1% Quarterly		1,970,000		(267,487	)
Barclays Capital Inc. (MBIA Insurance Corporation, 5.37563%, due 10/6/10)	December 20, 2012	Specified amount upon credit event notice	3.05% Quarterly		1,310,000		(179,883	)
Bear Stearns, Inc. (ABX. HE-AAA 07-2)	January 25, 2038	Specified amount upon credit event notice	0.76% Monthly		5,000,000		(2,268,328	)
Bear Stearns, Inc. (ABX-HE-A 06-2)	May 25, 2046	Specified amount upon credit event notice	0.44% Quarterly		25,000,000		(20,594,048	)
Bear Stearns, Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	2.25% Quarterly		4,430,000		(664,951	)
Bear Stearns, Inc. (CDX IG 8)	June 20, 2012	Specified amount upon credit event notice	0.35% Quarterly		42,200,000		(1,724,776	)
Bear Stearns, Inc. (CDX IG 8)	June 20, 2012	Specified amount upon credit event notice	0.35% Quarterly		9,030,000		(357,819	)

261

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)
Bear Stearns, Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly	$	22,000,000	$	(1,969,315	)
Bear Stearns, Inc. (Ford Motor Credit Company, 7%, due 10/1/13)	June 20, 2010	Specified amount upon credit event notice	4.83% Quarterly		12,500,000		(1,301,613	)
Bear Stearns, Inc. (MBIA Insurance Corporation, 5.37563%, due 10/6/10)	December 20, 2012	Specified amount upon credit event notice	3.1% Quarterly		4,620,000		(627,304	)
Credit Suisse First Boston USA (ABX.HE-AAA 06-1)	July 25, 2045	Specified amount upon credit event notice	0.18% Monthly		104,840,924		(1,850,840	)
Credit Suisse First Boston USA (ABX.HE-AAA 06-1)	July 25, 2045	Specified amount upon credit event notice	0.18% Monthly		15,891,046		(201,437	)
Credit Suisse First Boston USA (ABX.HE-AAA 06-1)	July 25, 2045	Specified amount upon credit event notice	0.18% Monthly		124,420,961		(266,617	)
Credit Suisse First Boston USA (ABX.HE-AAA 07-2)	January 25, 2038	Specified amount upon credit event notice	0.76% Monthly		11,800,000		(5,436,270	)
Credit Suisse First Boston USA (ABX.HE-AAA 07-2)	January 25, 2038	Specified amount upon credit event notice	0.76% Monthly		6,400,000		(2,815,341	)
Credit Suisse First Boston USA (ABX.HE-AAA 07-2)	January 25, 2038	Specified amount upon credit event notice	0.76% Monthly		1,300,000		(576,636	)
Credit Suisse First Boston USA (ConocoPhillips, 4.75%, due 10/15/12)	September 20, 2012	Specified amount upon credit event notice	0.27% Quarterly		1,000,000		(11,464	)
Credit Suisse First Boston USA (Eastman Kodak Company, 7.25%, due 11/15/13)	March 20, 2010	Specified amount upon credit event notice	1.4% Quarterly		6,500,000		(200,632	)
Deutsche Bank AG (ABX. HE-AAA 06-2)	May 25, 2046	Specified amount upon credit event notice	0.11% Monthly		7,600,000		(1,527,658	)
Deutsche Bank AG (ABX. HE-AAA 06-2)	May 25, 2046	Specified amount upon credit event notice	0.11% Monthly		7,700,000		(1,509,773	)

262

Annual Report to Shareholders

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 (ABX.HE-AAA 06-1)	July 25, 2045	Specified amount upon credit event notice	0.18% Monthly	$	21,587,836	$	(367,639	)
Deutsche Bank AG (ABX.HE-AAA 06-1)	July 25, 2045	Specified amount upon credit event notice	0.18% Monthly		10,993,805		(139,359	)
Deutsche Bank AG (Countrywide Home Loan Inc., 4%, due 3/22/11)	March 20, 2017	Specified amount upon credit event notice	0.94% Quarterly		9,600,000		(842,914	)
Deutsche Bank AG (Eastman Kodak Company, 7.25%, due 11/15/13)	March 20, 2010	Specified amount upon credit event notice	1.25% Quarterly		1,100,000		(37,040	)
Deutsche Bank AG (Eastman Kodak Company, 7.25%, due 11/15/13)	March 20, 2015	Specified amount upon credit event notice	1.67% Quarterly		1,300,000		(179,682	)
Deutsche Bank AG (Fannie Mae, 6%, due 5/15/11)	December 20, 2009	Specified amount upon credit event notice	0.215% Quarterly		11,700,000		(11,844	)
Deutsche Bank AG (Ford Motor Credit Company, 7%, due 10/1/13)	December 20, 2010	Specified amount upon credit event notice	5.05% Quarterly		17,100,000		(1,980,185	)
Deutsche Bank AG (Ford Motor Credit Company, 7.45%, due 7/16/31)	March 20, 2015	Specified amount upon credit event notice	2.93% Quarterly		1,700,000		(543,734	)
Deutsche Bank AG (Freddie Mac, 5%, due 7/15/14)	March 20, 2015	Specified amount upon credit event notice	0.29% Quarterly		15,600,000		(213,706	)
Deutsche Bank AG (iBoxx IG Hi-Vol)	March 20, 2009	Specified amount upon credit event notice	1.25% Quarterly		2,262,000		(33,070	)
Deutsche Bank AG (iBoxx IG Hi-Vol2)	September 20, 2014	Specified amount upon credit event notice	1.3% Quarterly		8,042,667		(656,161	)
JP Morgan Chase & Co. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	6.43% Quarterly		12,000,000		238,729
JP Morgan Chase & Co. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		29,100,000		(2,482,328	)

263

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)
JP Morgan Chase & Co. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly	$	38,900,000	$	(3,254,407	)
JP Morgan Chase & Co. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		45,250,000		(4,044,549	)
JP Morgan Chase & Co. (General Motors Acceptance Corporation, 7.125%, due 7/15/13)	September 20, 2010	Specified amount upon credit event notice	6% Quarterly		10,500,000		(949,934	)
Lehman Brothers Holdings Inc. (ABX.HE-AAA 06-1)	July 25, 2045	Specified amount upon credit event notice	0.18% Monthly		5,197,071		(65,879	)
Lehman Brothers Holdings Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		7,400,000		(534,022	)
Lehman Brothers Holdings Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		97,000,000		(7,105,788	)
Lehman Brothers Holdings Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		14,900,000		(955,342	)
Lehman Brothers Holdings Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		15,000,000		(1,086,221	)
Lehman Brothers Holdings Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		33,600,000		(2,338,202	)
Lehman Brothers Holdings Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		100,000,000		(5,862,522	)
Lehman Brothers Holdings Inc. (General Motors Acceptance Corporation, 6.875%, due 8/28/12)	March 20, 2010	Specified amount upon credit event notice	5.25% Quarterly		10,000,000		(1,715,586	)
Lehman Brothers, Inc. (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		7,100,000		(589,316	)
Merrill Lynch & Co., Inc. (CDX HY 8)	June 20, 2012	Specified amount upon credit event notice	0.82 % Quarterly		47,600,000		(6,555,929	)
Merrill Lynch & Co., Inc. (CDX HY 8)	June 20, 2012	Specified amount upon credit event notice	0.9% Quarterly		16,400,000		(2,209,136	)

264

Annual Report to Shareholders

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)
Merrill Lynch & Co., Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	2% Quarterly	$	4,650,000	$	(745,256	)
Merrill Lynch & Co., Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	2.3% Quarterly		4,580,000		(678,152	)
Merrill Lynch & Co., Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	3.995% Quarterly		25,000,000		(1,978,180	)
Merrill Lynch & Co., Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	5.4% Quarterly		50,000,000		(1,099,075	)
Merrill Lynch & Co., Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	6.35% Quarterly		10,000,000		166,372
Merrill Lynch & Co., Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	6.43% Quarterly		8,000,000		159,153
Merrill Lynch & Co., Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	6.2% Quarterly		70,000,000		737,947
RBS Greenwich, Inc. (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		2,000,000		(50,451	)
RBS Greenwich (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		15,000,000		(434,297	)
RBS Greenwich (CDX IG 8)	June 20, 2012	Specified amount upon credit event notice	0.35% Quarterly		45,900,000		(1,960,449	)
RBS Greenwich (CDX IG 8)	June 20, 2012	Specified amount upon credit event notice	0.35% Quarterly		7,400,000		(221,378	)
RBS Greenwich (CDX IG 8)	June 20, 2012	Specified amount upon credit event notice	0.35% Quarterly		7,200,000		(225,001	)
RBS Greenwich (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		7,100,000		(642,531	)
RBS Greenwich (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		17,300,000		(1,528,224	)

265

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 (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly	$	29,300,000	$	(2,550,088	)
RBS Greenwich (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		14,400,000		(1,218,615	)
RBS Greenwich (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		14,400,000		(1,221,084	)
RBS Greenwich (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		18,100,000		(1,423,106	)
RBS Greenwich (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		14,400,000		(873,067	)
RBS Greenwich (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		100,000,000		(7,255,783	)
RBS Greenwich (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		91,800,000		(6,723,164	)
RBS Greenwich (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		87,700,000		(5,495,087	)
RBS Greenwich (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		7,500,000		(540,530	)
RBS Greenwich (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		15,900,000		(1,161,799	)
RBS Greenwich (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		15,500,000		(1,103,150	)
RBS Greenwich (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		100,000,000		(6,741,308	)
RBS Greenwich (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		7,500,000		(389,455	)

266

Annual Report to Shareholders

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 (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly	$	700,000	$	(29,911	)
RBS Greenwich (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		14,900,000		(354,068	)
RBS Greenwich (Centex Corporation, 5.25%, due 6/15/15)	December 20, 2012	Specified amount upon credit event notice	2.77% Quarterly		25,000,000		(1,780,588	)
RBS Greenwich (Countrywide Home Loan Inc., 4%, due 3/22/11)	March 20, 2012	Specified amount upon credit event notice	0.66% Quarterly		39,300,000		(3,870,150	)
RBS Greenwich (Countrywide Home Loan Inc., 4%, due 3/22/11)	June 20, 2012	Specified amount upon credit event notice	0.72% Quarterly		25,000,000		(2,390,065	)
RBS Greenwich (Countrywide Home Loans, Inc., 4%, due 3/22/11)	September 20, 2012	Specified amount upon credit event notice	0.86% Quarterly		9,100,000		(814,905	)
RBS Greenwich (Countrywide Home Loans, Inc., 4%, due 3/22/11)	September 20, 2012	Specified amount upon credit event notice	6% Quarterly		9,100,000		838,824
RBS Greenwich (Countrywide Home Loans, Inc., 4%, due 3/22/11)	September 20, 2012	Specified amount upon credit event notice	6.1% Quarterly		9,100,000		870,998
RBS Greenwich (Countrywide Home Loans, Inc., 4%, due 3/22/11)	September 20, 2012	Specified amount upon credit event notice	2.75% Quarterly		10,000,000		(227,277	)
RBS Greenwich (Countrywide Home Loans, Inc., 4%, due 3/22/11)	December 20, 2012	Specified amount upon credit event notice	5% Quarterly		10,000,000		1,822,232
RBS Greenwich (Ford Motor Credit Company, 7%, due 10/1/13)	December 20, 2010	Specified amount upon credit event notice	4.26% Quarterly		25,000,000		(3,254,933	)
RBS Greenwich (General Motors Acceptance Corporation, 6.875%, due 8/12/12)	June 20, 2010	Specified amount upon credit event notice	4.53% Quarterly		15,000,000		(2,547,006	)
RBS Greenwich (General Motors Acceptance Corporation, 6.875%, due 8/28/12)	June 20, 2010	Specified amount upon credit event notice	4.68% Quarterly		25,000,000		(4,185,465	)

267

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, 6.875%, due 8/28/12)	September 20, 2010	Specified amount upon credit event notice	5.75% Quarterly	$	7,500,000	$	(1,180,040	)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)	June 20, 2010	Specified amount upon credit event notice	8.4% Quarterly		12,500,000		(480,244	)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)	June 20, 2010	Specified amount upon credit event notice	7.1% Quarterly		5,800,000		(358,325	)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)	June 20, 2010	Specified amount upon credit event notice	6.8% Quarterly		5,900,000		(396,310	)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)	September 20, 2010	Specified amount upon credit event notice	7.7% Quarterly		12,500,000		(719,165	)
RBS Greenwich (Residential Capital Corp., 6.5%, due 4/17/13)	September 20, 2012	Specified amount upon credit event notice	2.32% Quarterly		25,000,000		(12,174,190	)
RBS Greenwich (Residential Capital, LLC, 7.5%, due 4/17/13)	September 20, 2012	Specified amount upon credit event notice	4.9% Quarterly		9,100,000		(4,114,068	)
RBS Greenwich (Ryland Group Inc., 5.375%, due 1/15/15)	December 20, 2012	Specified amount upon credit event notice	2.4% Quarterly		9,800,000		(531,217	)
RBS Greenwich (SLM Corp., 5.125%, due 8/27/12)	June 20, 2012	Specified amount upon credit event notice	1.38% Quarterly		20,000,000		(4,499,686	)
RBS Greenwich (SLM Corp., 5.125%, due 8/27/12)	June 20, 2012	Specified amount upon credit event notice	1.78% Quarterly		25,000,000		(5,200,440	)
RBS Greenwich (SLM Corp., 5.125%, due 8/27/12)	September 20, 2012	Specified amount upon credit event notice	2.35% Quarterly		1,500,000		(293,549	)
RBS Greenwich (SLM Corp., 5.125%, due 8/27/12)	September 20, 2012	Specified amount upon credit event notice	2.4% Quarterly		1,500,000		(291,165	)

268

Annual Report to Shareholders

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 (SLM Corp., 5.125%, due 8/27/12)	September 20, 2012	Specified amount upon credit event notice	2.44% Quarterly	$	25,000,000	$	(4,820,945	)
RBS Greenwich (SLM Corp., 5.125%, due 8/27/12)	September 20, 2012	Specified amount upon credit event notice	2.67% Quarterly		10,000,000		(1,855,244	)
RBS Greenwich (SLM Corp., 5.125%, due 8/27/12)	September 20, 2012	Specified amount upon credit event notice	2.67% Quarterly		10,000,000		(1,855,244	)
RBS Greenwich (Time Warner Inc. 6.875%, due 5/1/12)	September 20, 2010	Specified amount upon credit event notice	0.47% Quarterly		5,000,000		(133,846	)
RBS Greenwich (Time Warner Inc., 6.875%, due 5/1/12)	December 20, 2010	Specified amount upon credit event notice	0.5% Quarterly		12,500,000		(381,696	)
The Goldman Sachs Group, Inc. (CDX HY 8)	June 20, 2012	Specified amount upon credit event notice	0.82% Quarterly		47,700,000		(6,569,702	)
The Goldman Sachs Group, Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	1.8% Quarterly		17,580,000		(2,960,553	)
The Goldman Sachs Group, Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	2% Quarterly		4,360,000		(698,777	)
The Goldman Sachs Group, Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	5.44% Quarterly		50,000,000		(1,017,730	)
The Goldman Sachs Group, Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	6.356% Quarterly		50,000,000		844,065
The Goldman Sachs Group, Inc. (CDX IG 9)	December 20, 2017	Specified amount upon credit event notice	0.8% Quarterly		32,100,000		(195,250	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 10)	June 20, 2013	Specified amount upon credit event notice	3.5% Quarterly		131,400,000		(889,758	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 3)	March 20, 2010	Specified amount upon credit event notice	1.05% Quarterly		48,333,000		(1,312,919	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 3)	March 20, 2010	Specified amount upon credit event notice	1.05% Quarterly		16,433,220		(417,535	)

269

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)
The Goldman Sachs Group, Inc. (CDX IG HVOL 3)	March 20, 2010	Specified amount upon credit event notice	1.05% Quarterly	$	32,093,112	$	(645,235	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		80,900,000		(7,714,804	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		34,000,000		(3,108,898	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		100,000,000		(8,904,929	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		100,000,000		(8,703,294	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		100,000,000		(6,722,680	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		15,300,000		(907,695	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		12,000,000		(308,054	)
The Goldman Sachs Group, Inc. (Countrywide Home Loans, Inc., 4%, due 3/22/11)	September 20, 2012	Specified amount upon credit event notice	6% Quarterly		4,700,000		433,239
The Goldman Sachs Group, Inc. (Eastman Kodak Company, 7.25%, due 11/15/13)	March 20, 2015	Specified amount upon credit event notice	1.67% Quarterly		1,400,000		(193,504	)
The Goldman Sachs Group, Inc. (Ford Motor Credit Company, 7%, due 10/1/13)	June 20, 2010	Specified amount upon credit event notice	4.75% Quarterly		1,900,000		(200,297	)
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation, 6.875%, due 8/28/12)	June 20, 2010	Specified amount upon credit event notice	6% Quarterly		5,000,000		(732,294	)

270

Annual Report to Shareholders

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)
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation, 7.125%, due 7/15/13 )	June 20, 2010	Specified amount upon credit event notice	8.95% Quarterly	$	5,000,000	$	(142,681	)
UBS Warburg LLC (ABX.HE-AAA 06-2)	May 25, 2046	Specified amount upon credit event notice	0.11% Monthly		20,300,000		240,615
						$	(227,343,768	)
Interest Rate Swaps
Banc of America Securities LLC	December 1, 2008	5.03% Semi-Annually	3-month LIBOR		6,650,000		(109,908	)
Banc of America Securities LLC	March 1, 2013	5.104% Semi-Annually	3-month LIBOR		4,700,000		(385,650	)
Banc of America Securities LLC	December 16, 2013	5.381% Semi-Annually	3-month LIBOR		2,740,000		(272,807	)
Banc of America Securities LLC	November 10, 2015	4.864% Semi-Annually	3-month LIBOR		4,400,000		(313,101	)
Banc of America Securities LLC	January 15, 2016	5.45084% Semi-Annually	3-month LIBOR		2,750,000		(304,165	)
Banc of America Securities LLC	October 3, 2016	5.425% Semi-Annually	3-month LIBOR		4,120,000		(456,209	)
Barclays Capital Inc.	November 1, 2011	5.439% Semi-Annually	3-month LIBOR		5,600,000		(473,168	)
Barclays Capital Inc.	June 25, 2012	5.06% Semi-Annually	3-month LIBOR		3,550,000		(274,651	)
Barclays Capital Inc.	September 15, 2012	5.189% Semi-Annually	3-month LIBOR		3,520,000		(294,417	)
Barclays Capital Inc.	October 20, 2016	5.326% Semi-Annually	3-month LIBOR		3,530,000		(363,694	)
Bear Stearns, Inc.	April 30, 2011	5.05% Semi-Annually	3-month LIBOR		2,500,000		(166,351	)
Bear Stearns, Inc.	September 15, 2014	5% Semi-Annually	3-month LIBOR		4,270,000		(343,989	)
Credit Suisse First Boston USA	August 15, 2010	5.446% Semi-Annually	3-month LIBOR		1,380,000		(91,094	)
Credit Suisse First Boston USA	September 15, 2010	5.0025% Semi-Annually	3-month LIBOR		3,070,000		(175,996	)

271

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	March 1, 2011	5.229% Semi-Annually	3-month LIBOR	$	2,110,000	$	(146,379	)
Credit Suisse First Boston USA	May 1, 2012	5.085% Semi-Annually	3-month LIBOR		2,750,000		(210,719	)
Credit Suisse First Boston USA	December 1, 2012	4.9025% Semi-Annually	3-month LIBOR		5,870,000		(422,690	)
Credit Suisse First Boston USA	August 15, 2013	5.023% Semi-Annually	3-month LIBOR		3,020,000		(241,179	)
Credit Suisse First Boston USA	March 15, 2014	5.131% Semi-Annually	3-month LIBOR		3,290,000		(287,516	)
Credit Suisse First Boston USA	September 15, 2015	5.16% Semi-Annually	3-month LIBOR		3,050,000		(277,951	)
Credit Suisse First Boston USA	March 1, 2017	5.335% Semi-Annually	3-month LIBOR		2,420,000		(251,814	)
Deutsche Bank AG	June 15, 2016	5.1825% Semi-Annually	3-month LIBOR		5,620,000		(522,883	)
Deutsche Bank AG	April 1, 2017	5.435% Semi-annually	3-month LIBOR		4,120,000		(462,421	)
JP Morgan Chase & Co.	December 1, 2012	5.275% Semi-Annually	3-month LIBOR		3,550,000		(313,073	)
Lehman Brothers Holdings Inc.	April 30, 2011	5.0704% Semi-Annually	3-month LIBOR		3,580,000		(240,364	)
Lehman Brothers Holdings Inc.	September 15, 2011	5.193% Semi-Annually	3-month LIBOR		5,500,000		(413,320	)
Morgan Stanley & Co., Inc.	March 15, 2012	4.7625% Semi-annually	3-month LIBOR		2,750,000		(175,949	)
Morgan Stanley & Co., Inc.	April 30, 2016	5.189% Semi-Annually	3-month LIBOR		3,400,000		(317,963	)
RBS Greenwich	March 1, 2011	4.7% Semi-Annually	3-month LIBOR		1,370,000		(74,792	)
RBS Greenwich	March 1, 2016	5.12% Semi-Annually	3-month LIBOR		4,250,000		(375,067	)
RBS Greenwich	February 15, 2017	5.115% Semi-Annually	3-month LIBOR		3,580,000		(312,482	)
The Goldman Sachs Group, Inc.	October 19, 2016	5.69% Semi-Annually	3-month LIBOR		55,877,000		(6,729,741	)
Barclays Capital Inc.	December 15, 2009	3-month LIBOR	4% Semi-Annually		38,900,000		1,025,094

272

Annual Report to Shareholders

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)
Barclays Capital Inc.	May 31, 2012	3-month LIBOR	4.4% Semi-Annually	$	17,443,000	$	871,621
Barclays Capital Inc.	May 31, 2012	3-month LIBOR	4.4% Semi-Annually		18,340,000		913,132
Deutsche Bank AG	June 17, 2010	3-month LIBOR	4.3132% Semi-Annually		31,430,000		1,215,451
Deutsche Bank AG	October 11, 2010	3-month LIBOR	4.7077% Semi-Annually		206,790,000		10,522,883
Deutsche Bank AG	July 13, 2011	3-month LIBOR	5.6281% Semi-Annually		83,870,000		7,248,197
Deutsche Bank AG	July 21, 2016	3-month LIBOR	5.6931% Semi-Annually		77,910,000		10,066,993
JP Morgan Chase & Co.	June 8, 2009	3-month LIBOR	5.393% semi-annually		157,400,000		5,546,494
JP Morgan Chase & Co.	January 22, 2013	3-month LIBOR	5.1577% Semi-Annually		15,410,000		1,108,252
JP Morgan Chase & Co.	March 12, 2018	3-month LIBOR	4.52% Semi-Annually		31,400,000		1,154,820
The Goldman Sachs Group, Inc.	March 10, 2009	3-month LIBOR	4.36% Semi-Annually		54,100,000		1,104,229
The Goldman Sachs Group, Inc.	July 7, 2011	3-month LIBOR	5.7125% Semi-Annually		71,600,000		6,375,250
The Goldman Sachs Group, Inc.	November 3, 2011	3-month LIBOR	5.0435% Semi-Annually		81,800,000		5,821,837
The Goldman Sachs Group, Inc.	March 19, 2013	3-month LIBOR	4.75% Semi-Annually		220,600,000		9,250,548
The Goldman Sachs Group, Inc.	September 17, 2038	3-month LIBOR	5% Semi-Annually		354,170,000		12,977,756
						$	59,401,054
Total Return Swaps
Lehman Brothers Holdings Inc.	September 1, 2008	1-month LIBOR	LEHM Index		37,900,000		(364,391	)
						$	(364,391	)
		Total Unrealized Appreciation/(Depreciation)				$	(168,307,105	)

273

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 Default Swaps
Banc of America Securities LLC (Heinz Corp., 6.428%, due 12/01/08)	December 20, 2008	0.165% Quarterly	Specified amount upon credit event notice	$	11,660,000	$	9,085
Banc of America Securities LLC (Home Depot Inc., 3.75%, due 9/15/09)	December 20, 2013	0.635% Quarterly	Specified amount upon credit event notice		5,510,000		330,099
Banc of America Securities LLC (Marriot International Inc., 4.625%, due 6/15/12)	December 20, 2015	0.73% Monthly	Specified amount upon credit event notice		7,950,000		773,805
Banc of America Securities LLC (Masco Corp., 5.875%, due 7/15/12)	December 20, 2016	1.04% Quarterly	Specified amount upon credit event notice		8,270,000		844,059
Banc of America Securities LLC (PHH Corporate Note, 7.125%, due 3/1/13)	March 20, 2013	1.05% Monthly	Specified amount upon credit event notice		8,640,000		1,182,810
Banc of America Securities LLC (Viacom Inc., 4.625%, due 5/15/18)	December 20, 2015	1.13% Quarterly	Specified amount upon credit event notice		5,500,000		329,187
Barclays Capital Inc. (Amerisource Bergen Corp., 5.625%, due 9/15/12)	September 20, 2012	0.5% Quarterly	Specified amount upon credit event notice		6,330,000		193,987
Barclays Capital Inc. (Cardinal Health Inc. 5.85%, due 12/15/17)	September 20, 2016	0.49% Quarterly	Specified amount upon credit event notice		6,260,000		168,927
Barclays Capital Inc. (Health Care Property Investments Inc., 6.45%, due 06/25/12)	June 20, 2012	0.63% Quarterly	Specified amount upon credit event notice		6,240,000		836,896
Barclays Capital Inc. (Juneau Investments LLC, 5.9%, due 2/22/21)	December 20, 2012	3.6% Quarterly	Specified amount upon credit event notice		3,380,000		386,561
Barclays Capital Inc. (Juneau Investments LLC, 5.9%, due 2/22/21)	December 20, 2012	3.6% Quarterly	Specified amount upon credit event notice		2,250,000		257,326
Barclays Capital Inc. (Motorola Inc., 6.5%, due 9/1/25)	December 20, 2011	0.32% Quarterly	Specified amount upon credit event notice		10,850,000		997,847
Bear Stearns, Inc. (Bell South Corp., 6%, due 10/15/11)	September 20, 2014	0.28% Quarterly	Specified amount upon credit event notice		8,250,000		158,459

274

Annual Report to Shareholders

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)
Bear Stearns, Inc. (CDX HY 6B)	June 20, 2011	3% Quarterly	Specified amount upon credit event notice	$	11,600,000	$	(694,957	)
Bear Stearns, Inc. (Ford Motor Credit Company, 7%, due 10/1/13)	June 20, 2010	5.75% Quarterly	Specified amount upon credit event notice		12,500,000		863,960
Bear Stearns, Inc. (Juneau Investments LLC, 5.9%, due 2/22/21)	December 20, 2012	3.65% Quarterly	Specified amount upon credit event notice		8,250,000		930,506
Bear Stearns, Inc. (Viacom Inc., 6.25%, due 4/30/16)	March 20, 2011	0.59% Quarterly	Specified amount upon credit event notice		4,300,000		114,886
Credit Suisse First Boston USA (AAMES Mortgage Investment Trust 2005-1 M8, 1-Month LIBOR + 160 bp, due 6/25/35)	April 25, 2035	1.28% Monthly	Specified amount upon credit event notice		1,122,000		515,914
Credit Suisse First Boston USA (AAMES Mortgage Investment Trust 2005-1 M9, 1-Month LIBOR + 250 bp, due 6/25/35)	April 25, 2035	2.05% Monthly	Specified amount upon credit event notice		1,122,000		601,995
Credit Suisse First Boston USA (ACE Securities Corp. 2005-HE1 M8, 1-Month LIBOR + 138 bp, due 2/25/35)	February 25, 2035	1.31% Monthly	Specified amount upon credit event notice		1,122,000		311,382
Credit Suisse First Boston USA (ACE Securities Corp. 2005-HE1 M9, 1-Month LIBOR + 220bp, due 2/25/35)	February 25, 2035	2.06% Monthly	Specified amount upon credit event notice		738,143		366,839
Credit Suisse First Boston USA (Aegis Asset Backed Securities Trust 2004-4 B2, 1-Month LIBOR + 190bp, due 10/25/34)	October 25, 2034	1.37% Monthly	Specified amount upon credit event notice		851,139		380,792
Credit Suisse First Boston USA (Aegis Asset Backed Securities Trust 2005 B2, 1-Month LIBOR + 130 bp, due 3/25/35)	March 25, 2035	1.31% Quarterly	Specified amount upon credit event notice		1,122,000		840,333

275

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 (Aegis Asset Backed Securities Trust 2005 B3, 1-Month LIBOR + 200 bp, due 3/25/35)	March 25, 2035	2.18% Quarterly	Specified amount upon credit event notice	$	1,122,000	$	939,295
Credit Suisse First Boston USA (Amerisource Bergen Corp., 8.125%, due 9/1/08)	September 20, 2015	0.9% Quarterly	Specified amount upon credit event notice		5,350,000		165,054
Credit Suisse First Boston USA (Argent Securities Inc. 2004-W11 M10, 1-Month LIBOR + 350bp, due 11/25/34)	November 25, 2034	2.15% Monthly	Specified amount upon credit event notice		833,630		156,243
Credit Suisse First Boston USA (Argent Securities Inc. 2004-W11 M9, 1-Month LIBOR + 225bp, due 11/25/34)	November 25, 2034	1.33% Monthly	Specified amount upon credit event notice		1,122,000		192,044
Credit Suisse First Boston USA (Argent Securities Inc. 2004-W4 M3, 1-Month LIBOR + 300 bp, due 3/25/34)	March 25, 2034	2.2% Monthly	Specified amount upon credit event notice		531,142		280,324
Credit Suisse First Boston USA (Finance America Mortgage Loan Trust 2004-3 M8, 1-Month LIBOR + 180bp, due 11/25/34)	November 25, 2034	1.31% Monthly	Specified amount upon credit event notice		407,909		284,898
Credit Suisse First Boston USA (Finance America Mortgage Loan Trust 2004-3 M9, 1-Month LIBOR + 315bp, due 11/25/34)	November 25, 2034	2.18% Monthly	Specified amount upon credit event notice		407,881		304,502
Credit Suisse First Boston USA (Fremont Home Loan Trust 2005-A M8, 1-Month LIBOR + 135 bp, due 1/25/35)	January 25, 2035	1.31% Monthly	Specified amount upon credit event notice		444,776		309,758
Credit Suisse First Boston USA (Fremont Home Loan Trust 2005-A, 1-Month LIBOR + 100bp, due 1/25/35)	January 25, 2035	2.08% Monthly	Specified amount upon credit event notice		448,860		370,081

276

Annual Report to Shareholders

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 (Home Depot Inc., 3.75%, due 9/15/09)	September 20, 2010	0.17% Quarterly	Specified amount upon credit event notice	$	2,720,000	$	81,417
Credit Suisse First Boston USA (IndyMac Home Equity Loan Asset-Backed, Trust 2004-C M8, 1-Month LIBOR + 190bp, due 3/25/35)	March 25, 2035	1.28% Monthly	Specified amount upon credit event notice		1,122,000		368,200
Credit Suisse First Boston USA (IndyMac Home Equity Loan Asset-Backed, Trust 2004-C M9, 1-Month LIBOR + 325bp, due 3/25/35)	March 25, 2035	2.05% Monthly	Specified amount upon credit event notice		1,122,000		399,174
Credit Suisse First Boston USA (Limited Brands Inc., 6.125%, due 12/01/12)	December 20, 2012	0.6% Quarterly	Specified amount upon credit event notice		10,600,000		1,281,739
Credit Suisse First Boston USA (Long Beach Mortgage Loan Trust 2004-1 M9, 1-Month LIBOR + 350bp, due 2/25/34)	February 25, 2034	2.15% Monthly	Specified amount upon credit event notice		449,972		198,092
Credit Suisse First Boston USA (Long Beach Mortgage Loan Trust 2005-1 M8, 1-Month LIBOR + 170 bp, due 2/25/35)	February 25, 2035	1.31% Monthly	Specified amount upon credit event notice		1,122,000		356,237
Credit Suisse First Boston USA (Long Beach Mortgage Loan Trust 2005-1 M9, 1-Month LIBOR + 275bp, due 2/25/35)	February 25, 2035	2.08% Monthly	Specified amount upon credit event notice		1,122,000		442,126
Credit Suisse First Boston USA (Marsh & McLennan Company, Inc., 5.375%, due 7/15/14)	September 20, 2010	0.46% Quarterly	Specified amount upon credit event notice		5,990,000		31,920
Credit Suisse First Boston USA (Masco Corp., 5.875%, due 7/15/12)	September 20, 2013	0.75% Quarterly	Specified amount upon credit event notice		5,830,000		548,941
Credit Suisse First Boston USA (MASTR Asset Backed Securities Trust 2005-NC1 M8, 1-Month LIBOR + 153bp, due 12/25/34)1	December 25, 2034	1.31% Monthly	Specified amount upon credit event notice		1,122,000		702,148

277

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 (MASTR Asset Backed Securities Trust 2005-NC1 M9, 1-Month LIBOR + 240bp, due 12/25/34)	December 25, 2034	2.08% Monthly	Specified amount upon credit event notice	$	1,122,000	$	683,999
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2004-WMC1 B3, 1-Month LIBOR + 225bp, due 9/25/35)	September 25, 2035	2.05% Monthly	Specified amount upon credit event notice		1,122,000		190,852
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2004-WMC4 B3, 1-Month LIBOR + 375bp, due 4/25/35)	April 25, 2035	2.15% Monthly	Specified amount upon credit event notice		950,026		223,978
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2005-NC1 B2, 1-Month LIBOR + 130bp, due 10/25/35)	October 25, 2035	1.28% Monthly	Specified amount upon credit event notice		1,122,000		184,991
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2005-NC1 B3, 1-Month LIBOR + 205bp, due 10/25/35)	October 25, 2035	2.05% Monthly	Specified amount upon credit event notice		1,122,000		254,470
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2005-WMC1 B2, 1-Month LIBOR + 135bp, due 9/25/35)	September 25, 2035	1.28% Monthly	Specified amount upon credit event notice		1,122,000		265,423
Credit Suisse First Boston USA (Morgan Stanley ABS Capital I 2005-WMC1 B2, 1-Month LIBOR + 130 bp, due 1/25/35)	January 25, 2035	1.31% Monthly	Specified amount upon credit event notice		355,878		253,963
Credit Suisse First Boston USA (Morgan Stanley ABS Capital I 2005-WMC1 B3, 1-Month LIBOR + 215bp, due 1/25/35)	January 25, 2035	2.18% Monthly	Specified amount upon credit event notice		415,715		339,557
Credit Suisse First Boston USA (New Century Home Equity Loan Trust 2004-2 M9, 1-Month LIBOR + 325bp, due 8/25/34)	August 25, 2034	2.15% Monthly	Specified amount upon credit event notice		543,891		234,716

278

Annual Report to Shareholders

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 (New Century Home Equity Loan Trust 2005-1 M8, 1-Month LIBOR + 140 bp, due 3/25/35)	March 25, 2035	1.31% Monthly	Specified amount upon credit event notice	$	1,122,000	$	332,053
Credit Suisse First Boston USA (New Century Home Equity Loan Trust 2005-1 M9, 1-Month LIBOR + 205 bp, due 3/25/35)	March 25, 2035	2.18% Monthly	Specified amount upon credit event notice		1,122,000		372,215
Credit Suisse First Boston USA (Novastar Home Equity Loan 2005-1 B2, 1-Month LIBOR + 135 bp, due 6/25/35)	June 25, 2035	1.28% Monthly	Specified amount upon credit event notice		1,122,000		441,496
Credit Suisse First Boston USA (Novastar Home Equity Loan 2005-4 B3, 1-Month LIBOR + 195 bp, due 6/25/35)	June 25, 2035	2.05% Monthly	Specified amount upon credit event notice		1,122,000		606,301
Credit Suisse First Boston USA (Park Place Securities Inc. 2005-WCH1 M8, 1-Month LIBOR + 155bp, due 1/25/36)	January 25, 2036	1.36% Monthly	Specified amount upon credit event notice		1,122,000		551,544
Credit Suisse First Boston USA (Park Place Securities, Inc. 2005-WCH1 M9, 1-Month LIBOR + 250 bp, due 1/25/36)	January 25, 2036	2.18% Monthly	Specified amount upon credit event notice		1,122,000		636,465
Credit Suisse First Boston USA (People’s Choice Home Loan Securities Trust 2004-1 M6, 1-Month LIBOR + 230bp, due 6/25/34)	June 25, 2034	1.37% Quarterly	Specified amount upon credit event notice		1,188,469		226,581
Credit Suisse First Boston USA (People’s Choice Home Loan Securities Trust 2005-1 B3, 1-Month LIBOR + 260bp, due 1/25/35)	January 25, 2035	2.05% Monthly	Specified amount upon credit event notice		1,122,000		547,031
Credit Suisse First Boston USA (People’s Choice Home Loan Securities Trust 2005-1, 1-Month LIBOR + 165bp, due 1/25/35)	January 25, 2035	1.28% Monthly	Specified amount upon credit event notice		1,122,000		471,408

279

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 (Pulte Homes Inc., 7.875%, due 8/1/11)	March 20, 2011	0.79% Quarterly	Specified amount upon credit event notice	$	4,080,000	$	350,202
Credit Suisse First Boston USA (Southwest Airlines Co., 5.25%, due 10/1/14)	March 20, 2017	0.69% Quarterly	Specified amount upon credit event notice		4,880,000		353,716
Credit Suisse First Boston USA (Starwood Hotels Resorts, 7.875%, due 8/25/34)	December 20, 2011	1.37% Quarterly	Specified amount upon credit event notice		5,350,000		144,389
Credit Suisse First Boston USA (Waste Management Inc., 7.375%, due 8/1/10)	March 20, 2014	0.49% Quarterly	Specified amount upon credit event notice		6,630,000		185,246
Deutsche Bank AG (Autozone Inc., 6.95%, due 6/15/16)	June 20, 2016	0.58% Quarterly	Specified amount upon credit event notice		10,890,000		431,697
Deutsche Bank AG (Centurytel Inc., 7.875%, due 8/15/12)	March 20, 2017	0.89% Quarterly	Specified amount upon credit event notice		8,270,000		408,530
Deutsche Bank AG (iBoxx IG TMT)	March 20, 2009	0.6% Quarterly	Specified amount upon credit event notice		9,500,000		(25,493	)
Deutsche Bank AG (iBoxx IG TMT)	March 20, 2009	0.6% Quarterly	Specified amount upon credit event notice		6,450,000		(17,309	)
JP Morgan Chase & Co. (Limited Brands Inc., 6.125%, due 12/1/12)	December 20, 2012	0.67% Quarterly	Specified amount upon credit event notice		6,300,000		744,231
Lehman Brothers Holdings Inc. (iBoxx IG TMT)	March 20, 2009	0.6% Quarterly	Specified amount upon credit even notice		9,000,000		(30,864	)
Lehman Brothers Holdings Inc. (Sara Lee Corp., 6.125%, due 11/01/32)	September 20, 2011	0.44% Quarterly	Specified amount upon credit event notice		9,750,000		75,583
Lehman Brothers Holdings Inc. (Viacom Inc., 6.25%, due 4/30/16)	March 20, 2011	0.57% Quarterly	Specified amount upon credit event notice		6,270,000		171,056
Morgan Stanley & Co., Inc. (Gannett Co., 6.375%, due 4/01/12)	March 20, 2012	0.46% Quarterly	Specified amount upon credit event notice		4,560,000		305,317

280

Annual Report to Shareholders

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)
Morgan Stanley & Co., Inc. (Pulte Homes Inc., 5.25%, due 1/15/14)	March 20, 2011	4% Quarterly	Specified amount upon credit event notice	$	2,780,000	$	11,533
Morgan Stanley & Co., Inc. (Viacom Inc., 6.25%, due 4/30/16)	March 20, 2012	0.36% Quarterly	Specified amount upon credit event notice		10,540,000		507,846
Morgan Stanley & Co., Inc. (Weyerhaeuser Co. Note, 7.125%, due 7/15/23)	March 20, 2012	0.74% Quarterly	Specified amount upon credit event notice		5,540,000		195,983
RBS Greenwich (DSLA Mortgage Loan Trust 2005-AR5, 1-Month LIBOR + 175 bp, due 8/19/45)	August 19, 2045	4.5% Monthly	Specified amount upon credit event notice		2,096,508		(524,127	)
RBS Greenwich (General Mills Inc., 5.7%, due 2/15/17)	March 20, 2017	0.33% Quarterly	Specified amount upon credit event notice		7,210,000		151,860
RBS Greenwich (Harborview Mortgage Loan Trust 2005-12, 1-Month LIBOR + 175 bp, due 10/19/35)	October 19, 2035	2.5% Monthly	Specified amount upon credit event notice		1,990,698		(696,744	)
RBS Greenwich (Home Depot Inc., 5.4%, due 3/1/16)	March 20, 2016	0.48% Monthly	Specified amount upon credit event notice		8,230,000		707,844
RBS Greenwich (IndyMac Index Mortgage Loan Trust 2005-AR18, 1-Month LIBOR + 125 bp, due 10/25/36)	October 25, 2036	2.7% Monthly	Specified amount upon credit event notice		1,884,993		(565,498	)
RBS Greenwich (Washington Mutual 2005-AR11, 1-Month LIBOR + 120 bp, due 8/25/45)	August 25, 2045	2.55% Monthly	Specified amount upon credit event notice		723,729		(253,305	)
The Goldman Sachs Group, Inc. (iBoxx HY 3)	December 20, 2009	4% Quarterly	Specified amount upon credit event notice		5,784,512		(473	)
The Goldman Sachs Group, Inc. (JPM Chase Commercial Mortgage, 5.7966%, due 5/15/47)	May 15, 2047	0.75% Monthly	Specified amount upon credit event notice		5,000,000		3,669,955

281

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)
Barclays Capital Inc. (CDX IG 9)	December 20, 2017	Specified amount upon credit event notice	0.8% Quarterly	$	101,380,000	$	(219,794	)
Barclays Capital Inc. (CDX IG 9)	December 20, 2017	Specified amount upon credit event notice	0.8% Quarterly		87,700,000		320,117
Barclays Capital Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		27,100,000		(2,370,682	)
Barclays Capital Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		33,500,000		(2,461,152	)
Barclays Capital Inc. (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		13,200,000		(659,467	)
Barclays Capital Inc. (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		5,000,000		(101,097	)
Barclays Capital Inc. (General Motors Corp., 7.125%, due 07/15/13)	December 20, 2011	Specified amount upon credit event notice	4.16% Quarterly		7,000,000		(1,230,014	)
Barclays Capital Inc. (MBIA Insurance Corporation, 5.37563%, due 10/6/10)	December 20, 2012	Specified amount upon credit event notice	3.1% Quarterly		4,050,000		(549,909	)
Barclays Capital Inc. (MBIA Insurance Corporation, 5.37563%, due 10/6/10)	December 20, 2012	Specified amount upon credit event notice	3.05% Quarterly		2,700,000		(370,751	)
Barclays Capital Inc. (Residential Capital Corp., 6.5%, due 4/17/13)	September 20, 2008	Specified amount upon credit event notice	12% Quarterly		500,000		(78,067	)
Bear Stearns, Inc. (ABX. HE-AAA 07-2)	January 25, 2038	Specified amount upon credit event notice	0.76% Monthly		10,000,000		(4,536,604	)
Bear Stearns, Inc. (CDX HY 6B)	June 20, 2011	Specified amount upon credit event notice	3% Quarterly		25,000,000		(1,613,569	)
Bear Stearns, Inc. (CDX HY 8)	June 20, 2012	Specified amount upon credit even notice	0.91% Quarterly		31,750,000		(4,264,822	)

282

Annual Report to Shareholders

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)
Bear Stearns, Inc. (CDX HY 8)	June 20, 2012	Specified amount upon credit event notice	1.01% Quarterly	$	31,800,000	$	(4,151,248	)
Bear Stearns, Inc. (CDX HY 8)	June 20, 2012	Specified amount upon credit event notice	1.05% Quarterly		12,700,000		(1,638,671	)
Bear Stearns, Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	2.25% Quarterly		8,900,000		(1,335,905	)
Bear Stearns, Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	3.75% Quarterly		2,673,000		6,766
Bear Stearns, Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	6.2% Quarterly		50,000,000		527,105
Bear Stearns, Inc. (CDX IG 8)	June 20, 2012	Specified amount upon credit event notice	0.35% Quarterly		85,500,000		(3,494,512	)
Bear Stearns, Inc. (CDX IG 8)	June 20, 2012	Specified amount upon credit event notice	0.35% Quarterly		19,620,000		(777,454	)
Bear Stearns, Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		56,100,000		(5,021,753	)
Bear Stearns, Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		28,200,000		(2,386,508	)
Bear Stearns, Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		28,500,000		(2,419,242	)
Bear Stearns, Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		207,400,000		(15,093,276	)
Bear Stearns, Inc. (General Motors Acceptance Corporation, 7.125%, due 7/15/13)	March 20, 2012	Specified amount upon credit event notice	3.2% Quarterly		9,900,000		(2,071,839	)
Bear Stearns, Inc. (General Motors Acceptance Corporation, 7.125%, due 7/15/13)	March 20, 2012	Specified amount upon credit event notice	3.25% Quarterly		18,500,000		(3,847,600	)

283

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)
Bear Stearns, Inc. (MBIA Insurance Corporation, 5.37563%, due 10/6/10)	December 20, 2012	Specified amount upon credit event notice	3.1% Quarterly	$	9,530,000	$	(1,293,984	)
Credit Suisse First Boston USA (ABX.HE-AAA 06-1)	July 25, 2045	Specified amount upon credit event notice	0.18% Monthly		172,602,742		(3,047,095	)
Credit Suisse First Boston USA (ABX.HE-AAA 06-1)	July 25, 2045	Specified amount upon credit event notice	0.18% Monthly		24,786,034		(314,191	)
Credit Suisse First Boston USA (ABX.HE-AAA 07-2)	January 25, 2038	Specified amount upon credit event notice	0.76% Monthly		23,300,000		(10,734,147	)
Credit Suisse First Boston USA (ABX.HE-AAA 07-2)	January 25, 2038	Specified amount upon credit event notice	0.76% Monthly		2,600,000		(1,153,272	)
Credit Suisse First Boston USA (ABX.HE-AAA 07-2)	January 25, 2038	Specified amount upon credit event notice	0.76% Monthly		12,800,000		(5,630,683	)
Credit Suisse First Boston USA (ConocoPhillips, 4.75%, due 10/15/12)	September 20, 2012	Specified amount upon credit event notice	0.27% Quarterly		1,460,000		(16,738	)
Credit Suisse First Boston USA (Eastman Kodak Company, 7.25%, due 11/15/13)	September 20, 2010	Specified amount upon credit event notice	2.32% Quarterly		2,400,000		(51,886	)
Credit Suisse First Boston USA (Eastman Kodak Company, 7.25%, due 11/15/13)	March 20, 2010	Specified amount upon credit event notice	1.4% Quarterly		9,000,000		(277,799	)
Credit Suisse First Boston USA (iBoxx HY 3)	December 20, 2009	Specified amount upon credit event notice	4% Quarterly		3,006,801		39,082
Credit Suisse First Boston USA (iBoxx HY 3)	December 20, 2009	Specified amount upon credit event notice	4% Quarterly		3,006,801		39,082
Credit Suisse First Boston USA (iBoxx HY 3)	December 20, 2009	Specified amount upon credit event notice	4% Quarterly		15,177,186		25,304
Credit Suisse First Boston USA (iBoxx HY 3)	December 20, 2009	Specified amount upon credit event notice	4% Quarterly		11,263,572		(15,189	)

284

Annual Report to Shareholders

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 (iBoxx IG Hi-Vol)	March 20, 2009	Specified amount upon credit event notice	1.25% Quarterly	$	48,333,333	$	(699,188	)
Deutsche Bank AG (ABX. HE-AAA 06-2)	May 25, 2046	Specified amount upon credit event notice	0.11% Monthly		15,700,000		(3,155,819	)
Deutsche Bank AG (ABX.HE-AAA 06-1)	July 25, 2045	Specified amount upon credit event notice	0.18% Monthly		33,880,909		(576,988	)
Deutsche Bank AG (ABX.HE-AAA 06-1)	July 25, 2045	Specified amount upon credit event notice	0.18% Monthly		17,090,370		(216,639	)
Deutsche Bank AG (AES Corp., 7.75%, due 3/1/14)	December 20, 2016	Specified amount upon credit event notice	2.21% Quarterly		4,200,000		(570,050	)
Deutsche Bank AG (AES Corp., 7.75%, due 3/1/14)	December 20, 2016	Specified amount upon credit event notice	2.2% Quarterly		3,700,000		(504,417	)
Deutsche Bank AG (Eastman Kodak Company, 7.25%, due 11/15/13)	March 20, 2015	Specified amount upon credit event notice	1.67% Quarterly		1,900,000		(262,612	)
Deutsche Bank AG (Eastman Kodak Company, 7.25%, due 11/15/13)	September 20, 2010	Specified amount upon credit event notice	2.3% Quarterly		3,020,000		(66,678	)
Deutsche Bank AG (Eastman Kodak Company, 7.25%, due 11/15/13)	September 20, 2010	Specified amount upon credit event notice	2.32% Quarterly		3,200,000		(69,182	)
Deutsche Bank AG (Eastman Kodak Company, 7.25%, due 11/15/13)	March 20, 2010	Specified amount upon credit event notice	1.25% Quarterly		1,600,000		(53,877	)
Deutsche Bank AG (Eastman Kodak Company, 7.25%, due 11/15/13)	September 20, 2010	Specified amount upon credit event notice	2.3% Quarterly		5,430,000		(119,888	)
Deutsche Bank AG (Fannie Mae, 6%, due 5/15/11)	December 20, 2009	Specified amount upon credit event notice	0.215% Quarterly		17,000,000		(17,209	)
Deutsche Bank AG (Ford Motor Credit Co., 7.25%, due 10/25/11)	September 20, 2017	Specified amount upon credit event notice	3.65% Quarterly		4,450,000		(863,826	)

285

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 (Ford Motor Credit Co., 7.25%, due 10/25/11)	September 20, 2017	Specified amount upon credit event notice	3.65% Quarterly	$	3,500,000	$	(679,414	)
Deutsche Bank AG (Ford Motor Credit Company, 7%, due 10/1/13)	December 20, 2010	Specified amount upon credit event notice	5.05% Quarterly		25,400,000		(2,941,328	)
Deutsche Bank AG (Ford Motor Credit Company, 7.45%, due 7/16/31)	March 20, 2015	Specified amount upon credit event notice	2.93% Quarterly		2,600,000		(831,593	)
Deutsche Bank AG (Freddie Mac, 5%, due 7/15/14)	March 20, 2015	Specified amount upon credit event notice	0.29% Quarterly		25,100,000		(343,847	)
Deutsche Bank AG (iBoxx 100 HY)	March 20, 2009	Specified amount upon credit event notice	4.25% Quarterly		9,400,000		(36,237	)
Deutsche Bank AG (iBoxx HY 2)	September 20, 2009	Specified amount upon credit event notice	4.8% Quarterly		2,498,118		24,053
Deutsche Bank AG (iBoxx HY B)	March 20, 2009	Specified amount upon credit event notice	5% Quarterly		4,651,100		9,214
Deutsche Bank AG (iBoxx HY B)	March 20, 2009	Specified amount upon credit event notice	5% Quarterly		9,302,200		11,539
Deutsche Bank AG (iBoxx IG Hi-Vol)	March 20, 2009	Specified amount upon credit event notice	1.25% Quarterly		4,118,000		(60,205	)
Deutsche Bank AG (iBoxx IG Hi-Vol2)	September 20, 2014	Specified amount upon credit event notice	1.3% Quarterly		11,174,667		(911,685	)
JP Morgan Chase & Co. (ABX HE-AAA 06-1)	July 25, 2045	Specified amount upon credit event notice	0.18% Monthly		24,000,000		(1,930,467	)
JP Morgan Chase & Co. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	6.43% Quarterly		18,000,000		358,094
JP Morgan Chase & Co. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		87,875,000		(7,854,469	)

286

Annual Report to Shareholders

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)
JP Morgan Chase & Co. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly	$	56,800,000	$	(4,844,458	)
JP Morgan Chase & Co. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		76,900,000		(6,427,944	)
JP Morgan Chase & Co. (General Motors Acceptance Corporation, 7.125%, due 7/15/13)	September 20, 2010	Specified amount upon credit event notice	6% Quarterly		14,300,000		(1,293,720	)
Lehman Brothers Holdings, Inc. (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		10,200,000		(846,623	)
Lehman Brothers Holdings, Inc. (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		32,500,000		(2,450,457	)
Lehman Brothers Holdings Inc. (ABX.HE-AAA 06-1)	July 25, 2045	Specified amount upon credit event notice	0.18% Monthly		8,195,382		(103,886	)
Lehman Brothers Holdings Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		14,800,000		(1,067,377	)
Lehman Brothers Holdings Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		29,600,000		(1,897,860	)
Lehman Brothers Holdings Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		29,900,000		(2,165,200	)
Lehman Brothers Holdings Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		68,000,000		(4,732,075	)
Lehman Brothers Holdings Inc. (General Motors Acceptance Corporation, 6.875%, due 8/28/12)	March 20, 2010	Specified amount upon credit event notice	5.25% Quarterly		4,400,000		(754,858	)
Lehman Brothers Holdings Inc. (iBoxx HY 3)	December 20, 2009	Specified amount upon credit even notice	4% Quarterly		3,245,436		(12,386	)
Lehman Brothers Holdings Inc. (iBoxx HY 3)	December 20, 2009	Specified amount upon credit even notice	4% Quarterly		3,149,982		13,102
Lehman Brothers Holdings Inc. (iBoxx HY 3)	December 20, 2009	Specified amount upon credit even notice	4% Quarterly		3,245,436		(12,372	)

287

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)
Merrill Lynch & Co., Inc. (ABX.HE-AAA 06-1)	July 25, 2045	Specified amount upon credit event notice	0.18% Monthly	$	24,750,000	$	(875,731	)
Merrill Lynch & Co., Inc. (ABX.HE-AAA 06-1)	July 25, 2045	Specified amount upon credit event notice	0.18% Monthly		25,000,000		(1,195,262	)
Merrill Lynch & Co., Inc. (AES Corp., 7.75%, due 3/1/14)	March 20, 2017	Specified amount upon credit even notice	2.8% Quarterly		5,600,000		(620,148	)
Merrill Lynch & Co., Inc. (AES Corp., 7.75%, due 3/1/14)	March 20, 2017	Specified amount upon credit even notice	2.6% Quarterly		3,600,000		(415,724	)
Merrill Lynch & Co., Inc. (CDX HY 8)	June 20, 2012	Specified amount upon credit even notice	0.82% Quarterly		42,600,000		(5,867,281	)
Merrill Lynch & Co., Inc. (CDX HY 8)	June 20, 2012	Specified amount upon credit even notice	0.92% Quarterly		31,750,000		(4,252,811	)
Merrill Lynch & Co., Inc. (CDX HY 8)	June 20, 2012	Specified amount upon credit even notice	1.125% Quarterly		18,800,000		(2,372,413	)
Merrill Lynch & Co., Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	2% Quarterly		9,340,000		(1,496,922	)
Merrill Lynch & Co., Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	2.3% Quarterly		9,220,000		(1,365,188	)
Merrill Lynch & Co., Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	6.35% Quarterly		15,000,000		249,558
Merrill Lynch & Co., Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	6.43% Quarterly		12,000,000		238,729
Merrill Lynch & Co., Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	6.2% Quarterly		80,000,000		843,368
Merrill Lynch & Co., Inc. (The AES Corp., 7.75%, due 3/1/14)	September 20, 2017	Specified amount upon credit event notice	3.9% Quarterly		10,100,000		(389,620	)

288

Annual Report to Shareholders

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)
Merrill Lynch & Co., Inc. (Eastman Kodak Company, 7.25%, due 11/15/13)	September 20, 2010	Specified amount upon credit even notice	2.3% Quarterly	$	1,610,000	$	(35,547	)
Morgan Stanley & Co. Inc. (ABX. HE-AAA 06-2)	May 25, 2046	Specified amount upon credit event notice	0.11% Monthly		17,200,000		(3,372,479	)
Morgan Stanley & Co. Inc. (Residential Capital Corp., 6.5%, due 4/17/13)	September 20, 2008	Specified amount upon credit event notice	13.5% Quarterly		3,800,000		(570,802	)
Morgan Stanley & Co. Inc. (Residential Capital Corp., 6.5%, due 4/17/13)	September 20, 2008	Specified amount upon credit event notice	12.75% Quarterly		3,800,000		(582,054	)
Morgan Stanley & Co. Inc. (Residential Capital Corp., 6.5%, due 4/17/13)	September 20, 2008	Specified amount upon credit event notice	11.5% Quarterly		3,800,000		(600,808	)
Morgan Stanley and Co. Inc. (Residential Capital Corp., 6.5%, due 4/17/13)	September 20, 2008	Specified amount upon credit event notice	10.25% Quarterly		18,800,000		(3,065,201	)
RBS Greenwich (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	3.75% Quarterly		10,197,000		(669,226	)
RBS Greenwich (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	3.75% Quarterly		20,295,000		(1,330,091	)
RBS Greenwich (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	3.75% Quarterly		1,584,000		4,009
RBS Greenwich (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	3.75% Quarterly		12,870,000		(25,887	)
RBS Greenwich (CDX IG 8)	June 20, 2012	Specified amount upon credit event notice	0.35% Quarterly		16,900,000		(505,580	)
RBS Greenwich (CDX IG 8)	June 20, 2012	Specified amount upon credit event notice	0.35% Quarterly		14,500,000		(453,127	)
RBS Greenwich (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		250,000,000		(23,363,145	)

289

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 (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly	$	100,000	$	(9,050	)
RBS Greenwich (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		33,300,000		(2,941,610	)
RBS Greenwich (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		28,400,000		(2,403,379	)
RBS Greenwich (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		28,700,000		(2,433,688	)
RBS Greenwich (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		36,400,000		(2,861,937	)
RBS Greenwich (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		28,800,000		(1,746,134	)
RBS Greenwich (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		15,400,000		(1,109,888	)
RBS Greenwich (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		31,800,000		(2,323,599	)
RBS Greenwich (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		31,200,000		(2,220,535	)
RBS Greenwich (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		22,100,000		(1,430,108	)
RBS Greenwich (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		15,700,000		(815,259	)
RBS Greenwich (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		4,700,000		(200,832	)
RBS Greenwich (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		31,100,000		(739,028	)

290

Annual Report to Shareholders

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 (Countrywide Home Loan Inc., 4%, due 3/22/11)	March 20, 2012	Specified amount upon credit event notice	0.6% Quarterly	$	7,400,000	$	(742,893	)
RBS Greenwich (Countrywide Home Loans, Inc., 4%, due 3/22/11)	September 20, 2012	Specified amount upon credit event notice	0.66% Quarterly		9,900,000		(966,445	)
RBS Greenwich (Eastman Kodak Company, 7.25%, due 11/15/13)	September 20, 2012	Specified amount upon credit event notice	2.25% Quarterly		13,030,000		(898,519	)
RBS Greenwich (Eastman Kodak, 7.25%, due 11/15/13)	December 20, 2010	Specified amount upon credit event notice	3.2% Quarterly		19,300,000		(93,713	)
RBS Greenwich (Eastman Kodak, 7.25%, due 11/15/13)	December 20, 2016	Specified amount upon credit event notice	2.8% Quarterly		7,200,000		(686,545	)
RBS Greenwich (Ford Motor Credit Company, 7%, due 10/1/13)	September 20, 2011	Specified amount upon credit event notice	3.75% Quarterly		8,900,000		(1,332,811	)
RBS Greenwich (Ford Motor Credit Company, 7%, due 10/1/13)	March 20, 2012	Specified amount upon credit event notice	5.38% Quarterly		8,200,000		(1,437,636	)
RBS Greenwich (Ford Motor Credit Company, 7.45%, due 7/16/31)	June 20, 2012	Specified amount upon credit event notice	5.85% Quarterly		7,400,000		(1,269,226	)
RBS Greenwich (Ford Motor Credit Company, 7.45%, due 7/16/31)	June 20, 2012	Specified amount upon credit event notice	5.1% Quarterly		12,450,000		(2,398,405	)
RBS Greenwich (Ford Motor Credit Company, 7.45%, due 7/16/31)	June 20, 2012	Specified amount upon credit event notice	5.15% Quarterly		6,900,000		(1,319,519	)
RBS Greenwich (Ford Motor Credit Company, 7.45%, due 7/16/31)	September 20, 2011	Specified amount upon credit event notice	6.75% Quarterly		18,400,000		(2,208,114	)

291

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 Corp., 6.875%, due 8/28/12)	September 20, 2012	Specified amount upon credit event notice	5.95% Quarterly	$	3,800,000	$	(679,300	)
RBS Greenwich (General Motors Acceptance Corp., 7.125%, due 7/15/13)	September 20, 2010	Specified amount upon credit event notice	6.63% Quarterly		19,600,000		(1,533,974	)
RBS Greenwich (General Motors Acceptance Corp., Inc., 6.875%, due 8/28/12)	September 20, 2012	Specified amount upon credit event notice	7.2% Quarterly		10,700,000		(1,589,140	)
RBS Greenwich (General Motors Acceptance Corporation, 6%, due 4/1/11)	December 20, 2011	Specified amount upon credit event notice	1.34% Quarterly		780,000		(214,482	)
RBS Greenwich (General Motors Acceptance Corporation, 6.875%, due 8/28/12)	September 20, 2010	Specified amount upon credit event notice	5.75% Quarterly		1,250,000		(196,673	)
RBS Greenwich (General Motors Acceptance Corporation, 6.875%, due 8/28/12)	December 20, 2016	Specified amount upon credit event notice	1.55% Quarterly		4,200,000		(1,310,952	)
RBS Greenwich (General Motors Acceptance Corporation, 6.875%, due 8/28/12)	December 20, 2011	Specified amount upon credit event notice	1.2% Quarterly		680,000		(189,065	)
RBS Greenwich (General Motors Acceptance Corporation, 6.875%, due 8/28/12)	March 20, 2012	Specified amount upon credit event notice	1.17% Quarterly		8,500,000		(2,412,765	)
RBS Greenwich (General Motors Acceptance Corporation, 6.875%, due 8/28/12)	March 2, 2012	Specified amount upon credit event notice	1.4% Quarterly		9,400,000		(2,619,222	)
RBS Greenwich (General Motors Acceptance Corporation, 6.875%, due 8/28/12)	March 20, 2012	Specified amount upon credit event notice	1.85% Quarterly		9,700,000		(2,603,860	)
RBS Greenwich (General Motors Acceptance Corporation, 6.875%, due 8/28/12)	March 20, 2012	Specified amount upon credit event notice	2% Quarterly		9,300,000		(2,464,861	)

292

Annual Report to Shareholders

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)	September 20, 2010	Specified amount upon credit event notice	6.1% Quarterly	$	8,000,000	$	(708,260	)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)	September 20, 2010	Specified amount upon credit event notice	6.9% Quarterly		10,000,000		(730,328	)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)	September 20, 2010	Specified amount upon credit event notice	7.2% Quarterly		7,820,000		(525,664	)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)	December 20, 2010	Specified amount upon credit event notice	8.95% Quarterly		19,300,000		(728,984	)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)	March 20, 2012	Specified amount upon credit event notice	3.7% Quarterly		8,400,000		(1,648,870	)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)	June 20, 2010	Specified amount upon credit event notice	8.4% Quarterly		12,500,000		(480,244	)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)	June 20, 2010	Specified amount upon credit event notice	7.1% Quarterly		8,000,000		(494,242	)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)	June 20, 2010	Specified amount upon credit event notice	6.8% Quarterly		7,500,000		(503,784	)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)	September 20, 2010	Specified amount upon credit event notice	7.7% Quarterly		12,500,000		(719,165	)
RBS Greenwich (General Motors Acceptance Corporation, 7.125%, due 7/15/13)	December 20, 2012	Specified amount upon credit event notice	4.9% Quarterly		4,400,000		(808,424	)

293

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)	March 20, 2013	Specified amount upon credit event notice	8.6% Quaterly	$	9,000,000	$	(734,165	)
RBS Greenwich (LCDX HY 9)	December 20, 2012	Specified amount upon credit event notice	2.25% Quarterly		16,000,000		198,614
RBS Greenwich (Residential Capital, LLC, 7.5%, due 4/17/13)	December 20, 2012	Specified amount upon credit event notice	5% Quarterly		10,800,000		(3,646,875	)
RBS Greenwich (Residential Capital, LLC, 7.5%, due 4/17/13)	December 20, 2012	Specified amount upon credit event notice	5% Quarterly		10,800,000		(3,298,344	)
RBS Greenwich (SLM Corp., 5.125%, due 8/27/12)	June 20, 2012	Specified amount upon credit event notice	1.76% Quarterly		24,300,000		(5,069,668	)
RBS Greenwich (SLM Corp., 5.125%, due 8/27/12)	September 20, 2012	Specified amount upon credit event notice	2.4% Quarterly		3,600,000		(698,795	)
RBS Greenwich (SLM Corp., 5.125%, due 8/27/12)	September 20, 2012	Specified amount upon credit event notice	2.35% Quarterly		3,600,000		(704,518	)
RBS Greenwich (Time Warner Inc. 6.875%, due 5/1/12)	September 20, 2010	Specified amount upon credit event notice	0.47% Quarterly		5,000,000		(133,846	)
RBS Greenwich (Time Warner Inc., 6.875%, due 5/1/12)	December 20, 2010	Specified amount upon credit event notice	0.5% Quarterly		12,500,000		(381,696	)
The Goldman Sachs Group, Inc. (CDX HY 8)	June 20, 2012	Specified amount upon credit event notice	0.9% Quarterly		32,000,000		(4,310,509	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		3,000,000		(123,305	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		30,300,000		(1,315,464	)

294

Annual Report to Shareholders

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. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	1.8% Quarterly	$	35,500,000	$	(5,978,363	)
The Goldman Sachs Group, Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	2% Quarterly		8,780,000		(1,407,171	)
The Goldman Sachs Group, Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	3.75% Quarterly		18,216,000		(228,134	)
The Goldman Sachs Group, Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	3.75% Quarterly		11,484,000		(295,637	)
The Goldman Sachs Group, Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	3.75% Quarterly		21,780,000		(352,423	)
The Goldman Sachs Group, Inc. (CDX HY 9)	December 20, 2012	Specified amount upon credit event notice	6.356% Quarterly		75,000,000		1,266,098
The Goldman Sachs Group, Inc. (CDX IG 9)	December 20, 2017	Specified amount upon credit event notice	0.8% Quarterly		65,000,000		(395,366	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 10)	June 20, 2013	Specified amount upon credit event notice	3.5% Quarterly		308,400,000		(2,088,291	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 3)	March 20, 2010	Specified amount upon credit event notice	1.05% Quarterly		21,846,516		(555,076	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 3)	March 20, 2010	Specified amount upon credit event notice	1.05% Quarterly		42,823,038		(860,961	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		156,700,000		(14,943,260	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		65,500,000		(5,988,961	)

295

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. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly	$	150,000,000	$	(13,357,394	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		4,400,000		(358,401	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		31,100,000		(1,845,054	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		5,600,000		(460,318	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		12,100,000		(907,449	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		25,900,000		(1,232,261	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		50,000,000		(2,773,179	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		12,600,000		(538,286	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		12,600,000		(537,270	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		30,300,000		(1,292,007	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		29,400,000		(709,548	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		29,400,000		(908,478	)
The Goldman Sachs Group, Inc. (Eastman Kodak Company, 7.25%, due 11/15/13)	March 20, 2015	Specified amount upon credit event notice	1.67% Quarterly		1,900,000		(262,612	)

296

Annual Report to Shareholders

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. (Ford Motor Credit Co., 7%, due 10/1/2013)	September 20, 2017	Specified amount upon credit event notice	3.77% Quarterly	$	6,400,000	$	(1,219,643	)
The Goldman Sachs Group, Inc. (Ford Motor Credit Co., 7.45%, due 7/16/31)	September 20, 2011	Specified amount upon credit event notice	6.8% Quarterly		10,000,000		(1,187,500	)
The Goldman Sachs Group, Inc. (Ford Motor Credit Company, 7%, due 10/1/13)	June 20, 2010	Specified amount upon credit event notice	4.75% Quarterly		2,500,000		(263,549	)
The Goldman Sachs Group, Inc. (Ford Motor Credit Company, 7%, due 10/1/13)	September 20, 2011	Specified amount upon credit event notice	3.8% Quarterly		9,200,000		(1,436,139	)
The Goldman Sachs Group, Inc. (Ford Motor Credit Company, 7.45%, due 7/16/31)	March 20, 2012	Specified amount upon credit event notice	6.05% Quarterly		11,500,000		(1,806,457	)
The Goldman Sachs Group, Inc. (Ford Motor Credit Company, 7.45%, due 7/16/31)	September 20, 2011	Specified amount upon credit event notice	6.8% Quarterly		8,400,000		(997,500	)
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation, 6.875%, due 8/28/12)	June 20, 2010	Specified amount upon credit event notice	5.75% Quarterly		2,000,000		(300,857	)
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation, 6.875%, due 8/28/12)	June 20, 2010	Specified amount upon credit event notice	5.95% Quarterly		80,000		(11,780	)
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation, 6.875%, due 8/28/12)	June 20, 2010	Specified amount upon credit event notice	6% Quarterly		1,000,000		(146,459	)
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation, 7.125%, due 7/15/13)	June 20, 2010	Specified amount upon credit event notice	8.95% Quarterly		5,000,000		(142,681	)
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation, 7.125%, due 7/15/13)	March 20, 2012	Specified amount upon credit event notice	3.15% Quarterly		19,400,000		(4,085,153	)

297

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, 7.125%, due 7/15/13 )	March 20, 2012	Specified amount upon credit event notice	4.4% Quarterly	$	11,500,000	$	(2,048,364	)
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation, 8.375%, due 7/15/33)	December 20, 2010	Specified amount upon credit event notice	7% Quarterly		42,500,000		(3,319,390	)
The Goldman Sachs Group, Inc. (iBoxx HY 3)	December 20, 2009	Specified amount upon credit event notice	4% Quarterly		2,844,529		22,811
The Goldman Sachs Group, Inc. (iBoxx HY 3)	December 20, 2009	Specified amount upon credit event notice	4% Quarterly		954,540		4,368
The Goldman Sachs Group, Inc. (iBoxx HY 4)	June 20, 2010	Specified amount upon credit event notice	3.4% Quarterly		2,200,000		18,565
The Goldman Sachs Group, Inc. (iBoxx HY 6B)	June 20, 2011	Specified amount upon credit event notice	3% Quarterly		11,400,000		(721,224	)
The Goldman Sachs Group, Inc. (iBoxx HY 6B)	June 20, 2011	Specified amount upon credit event notice	3% Quarterly		15,000,000		(968,141	)
The Goldman Sachs Group, Inc. (LCDX 9)	December 20, 2012	Specified amount upon credit event notice	2.25% Quarterly		17,000,000		(1,206,188	)
The Goldman Sachs Group, Inc. (The AES Corp., 7.75%, due 3/1/14)	September 20, 2017	Specified amount upon credit event notice	3.8% Quarterly		4,320,000		(200,140	)
The Goldman Sachs Group, Inc. (TXU Corp., 5.55%, due 11/15/2014)	September 20, 2012	Specified amount upon credit even notice	3.24% Quarterly		2,700,000		(265,553	)
UBS Warburg LLC (ABX.HE-AAA 06-2)	May 25, 2046	Specified amount upon credit event notice	0.11% Monthly		54,800,000		649,541
						$	(306,699,508	)
Interest Rate Swaps
Banc of America Securities LLC	December 1, 2008	5.03% Semi-Annually	3-month LIBOR		11,660,000		(192,710	)

298

Annual Report to Shareholders

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)
Banc of America Securities LLC	March 1, 2013	5.104% Semi-Annually	3-month LIBOR	$	8,100,000	$	(664,630	)
Banc of America Securities LLC	December 16, 2013	5.381% Semi-Annually	3-month LIBOR		5,510,000		(548,600	)
Banc of America Securities LLC	November 10, 2015	4.864% Semi-Annually	3-month LIBOR		7,950,000		(565,715	)
Banc of America Securities LLC	January 15, 2016	5.45084% Semi-Annually	3-month LIBOR		5,500,000		(608,331	)
Banc of America Securities LLC	October 3, 2016	5.425% Semi-Annually	3-month LIBOR		8,270,000		(915,739	)
Barclays Capital Inc.	November 1, 2011	5.439% Semi-Annually	3-month LIBOR		10,850,000		(916,763	)
Barclays Capital Inc.	June 25, 2012	5.06% Semi-Annually	3-month LIBOR		6,240,000		(482,768	)
Barclays Capital Inc.	September 15, 2012	5.189% Semi-Annually	3-month LIBOR		6,330,000		(529,450	)
Barclays Capital Inc.	October 20, 2016	5.326% Semi-Annually	3-month LIBOR		6,260,000		(644,963	)
Bear Stearns, Inc.	April 30, 2011	5.05% Semi-Annually	3-month LIBOR		4,300,000		(286,123	)
Bear Stearns, Inc.	September 15, 2014	5% Semi-Annually	3-month LIBOR		8,250,000		(664,614	)
Credit Suisse First Boston USA	August 15, 2010	5.446% Semi-Annually	3-month LIBOR		2,720,000		(179,549	)
Credit Suisse First Boston USA	September 15, 2010	5.0025% Semi-Annually	3-month LIBOR		5,990,000		(343,392	)
Credit Suisse First Boston USA	March 1, 2011	5.229% Semi-Annually	3-month LIBOR		4,110,000		(285,126	)
Credit Suisse First Boston USA	May 1, 2012	5.085% Semi-Annually	3-month LIBOR		4,800,000		(367,801	)
Credit Suisse First Boston USA	December 1, 2012	4.9025% Semi-Annually	3-month LIBOR		10,600,000		(763,291	)
Credit Suisse First Boston USA	August 15, 2013	5.023% Semi-Annually	3-month LIBOR		5,300,000		(423,262	)
Credit Suisse First Boston USA	March 15, 2014	5.131% Semi-Annually	3-month LIBOR		6,630,000		(579,403	)
Credit Suisse First Boston USA	September 15, 2015	5.16% Semi-Annually	3-month LIBOR		5,350,000		(487,553	)

299

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	March 1, 2017	5.335% Semi-Annually	3-month LIBOR	$	4,880,000	$	(507,791	)
Deutsche Bank AG	June 15, 2016	5.1825% Semi-Annually	3-month LIBOR		10,890,000		(1,013,202	)
Deutsche Bank AG	April 1, 2017	5.435% Semi-annually	3-month LIBOR		8,270,000		(928,209	)
JP Morgan Chase & Co.	December 1, 2012	5.275% Semi-Annually	3-month LIBOR		6,300,000		(555,595	)
Lehman Brothers Holdings Inc.	April 30, 2011	5.0704% Semi-Annually	3-month LIBOR		6,270,000		(420,973	)
Lehman Brothers Holdings Inc.	September 15, 2011	5.193% Semi-Annually	3-month LIBOR		9,750,000		(732,705	)
Morgan Stanley & Co., Inc.	March 15, 2012	4.7625% Semi-annually	3-month LIBOR		5,540,000		(354,458	)
Morgan Stanley & Co., Inc.	April 30, 2016	5.189% Semi-Annually	3-month LIBOR		6,600,000		(617,222	)
RBS Greenwich	March 1, 2011	4.7% Semi-Annually	3-month LIBOR		2,780,000		(151,768	)
RBS Greenwich	April 1, 2012	5.011% Semi-Annually	3-month LIBOR		4,560,000		(335,428	)
RBS Greenwich	March 1, 2016	5.12% Semi-Annually	3-month LIBOR		8,230,000		(726,305	)
RBS Greenwich	February 15, 2017	5.115% Semi-Annually	3-month LIBOR		7,210,000		(629,328	)
The Goldman Sachs Group, Inc.	September 24, 2009	3.7135% Semi-Annually	3-month LIBOR		100,000,000		(2,026,400	)
Barclays Capital Inc.	December 15, 2009	3-month LIBOR	4% Semi-Annually		79,400,000		2,092,351
Barclays Capital Inc.	May 31, 2012	3-month LIBOR	4.4% Semi-Annually		35,905,000		1,794,161
Barclays Capital Inc.	May 31, 2012	3-month LIBOR	4.4% Semi-Annually		37,740,000		1,879,040
Bear Stearns, Inc.	December 22, 2011	3-month LIBOR	4.9925% Semi-annually		54,900,000		3,910,346
Credit Suisse First Boston USA	January 19, 2009	Mexican Interbank Deposit Rate	7.69% Monthly		144,500,000		19,565

300

Annual Report to Shareholders

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	June 17, 2010	3-month LIBOR	4.3132% Semi-Annually	$	41,570,000	$	1,607,582
Deutsche Bank AG	October 11, 2010	3-month LIBOR	4.7077% Semi-Annually		299,650,000		15,248,228
Deutsche Bank AG	July 13, 2011	3-month LIBOR	5.6281% Semi-Annually		133,350,000		11,524,346
Deutsche Bank AG	July 21, 2016	3-month LIBOR	5.6931% Semi-Annually		124,720,000		16,115,458
JP Morgan Chase & Co.	March 12, 2018	3-month LIBOR	4.52% Semi-Annually		65,500,000		2,408,939
JP Morgan Chase & Co.	November 6, 2011	3-month LIBOR	5.02% Semi-Annually		93,600,000		6,592,922
JP Morgan Chase & Co.	January 22, 2013	3-month LIBOR	5.1577% Semi-Annually		28,980,000		2,083,889
JP Morgan Chase & Co.	June 8, 2009	3-month LIBOR	5.393% Semi-annually		304,600,000		10,733,555
JP Morgan Chase & Co.	January 19, 2009	Mexican Interbank Deposit Rate	7.69% Monthly		144,500,000		19,567
The Goldman Sachs Group, Inc.	March 10, 2009	3-month LIBOR	4.36% Semi-Annually		74,400,000		1,518,570
The Goldman Sachs Group, Inc.	March 19, 2013	3-month LIBOR	4.75% Semi-Annually		421,850,000		17,689,258
The Goldman Sachs Group, Inc.	September 17, 2038	3-month LIBOR	5% Semi-Annually		599,880,000		21,981,241
The Goldman Sachs Group, Inc.	November 3, 2011	3-month LIBOR	5.0435% Semi-Annually		147,000,000		10,462,225
The Goldman Sachs Group, Inc.	July 7, 2011	3-month LIBOR	5.7125% Semi-Annually		113,400,000		10,097,114
						$	118,329,190
Total Return Swaps
Lehman Brothers Holdings Inc.	September 1, 2008	1-month LIBOR	LEHM Index		82,200,000	$	(790,316	)
		Total Unrealized Appreciation/(Depreciation)				$	(189,160,634	)

301

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Notes to Financial Statements—Continued

Western Asset High Yield Portfolio
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Credit Default Swaps
Deutsche Bank AG (Residential Capital Corp., 6.5%, due 4/17/13)	September 20, 2008	Specified amount upon credit event notice	8.5% Quarterly	$	5,000,000	$	(849,760	)
/		Total Unrealized Appreciation/(Depreciation)				$	(849,760	)

Western Asset Inflation Indexed Plus Bond Portfolio
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Credit Default Swaps
Barclays Capital Inc. (CDX HY 8)	June 20, 2012	Specified amount upon credit event notice	2.75% Quarterly	$	7,128,000	$	(300,510	)
Bear Stearns, Inc. (CDX HY 8)	June 20, 2012	Specified amount upon credit event notice	2.75% Quarterly		13,266,000		(1,104,814	)
Deutsche Bank AG (CDX HY 4)	June 20, 2010	Specified amount upon credit event notice	3.6% Quarterly		9,500,000		(98,363	)
Deutsche Bank AG (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		14,700,000		(1,350,685	)
J.P. Morgan Chase & Co. (Ford Motor Credit Company, 7%, due 8/15/12)	June 20, 2010	Specified amount upon credit event notice	2.9% Quarterly		5,000,000		(676,344	)
Merrill Lynch & Co., Inc. (El Paso Corporation, 7%, due 5/15/11)	June 20, 2010	Specified amount upon credit event notice	3.625% Quarterly		2,500,000		91,416
Merrill Lynch & Co., Inc. (Ford Motor Credit Company, 7.375%, due 10/28/09)	June 20, 2010	Specified amount upon credit event notice	5.5% Quarterly		2,500,000		(233,297	)
Merrill Lynch & Co., Inc. (General Motors Acceptance Corporation, 7.75%, due 1/19/10)	March 20, 2010	Specified amount upon credit event notice	3.55% Quarterly		5,000,000		(865,107	)
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation, 6.875%, due 8/28/12)	June 20, 2010	Specified amount upon credit event notice	4.5% Quarterly		7,500,000		(1,277,075	)
						$	(5,814,779	)

302

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Western Asset Intermediate Bond Portfolio
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Credit Default Swaps
Barclays Capital Inc. (CDX HVOL 8)	June 20, 2012	0.75% Quarterly	Specified amount upon credit event notice	$	5,200,000	$	(454,891	)
The Goldman Sachs Group, Inc. (CDX IG 8)	June 20, 2017	0.6% Quarterly	Specified amount upon credit event notice		15,420,000		820,499
Banc of America Securities LLC (MBIA Global Funding LLC, 5.37563%, due 10/6/10)	September 20, 2008	Specified amount upon credit event notice	1.4% Quarterly		980,000		(66,712	)
Banc of America Securities LLC (MBIA Global Funding LLC, 5.37563%, due 10/6/10)	September 20, 2008	Specified amount upon credit event notice	1.5% Quarterly		640,000		(43,274	)
Barclays Capital Inc. (CDX HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		3,600,000		(321,416	)
Barclays Capital Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		1,400,000		(122,471	)
Deutsche Bank AG (Freddie Mac, 5%, due 7/15/14)	March 20, 2015	Specified amount upon credit event notice	0.29% Quarterly		1,944,720		(26,641	)
JP Morgan Chase & Co. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		2,900,000		(253,681	)
JP Morgan Chase & Co. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		28,730,000		(1,689,530	)
Lehman Brothers Holdings Inc. (CDX IG 9)	December 20, 2012	Specified amount upon credit event notice	0.6% Quarterly		11,700,000		(159,629	)
Lehman Brothers Holdings Inc. (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		15,600,000		(997,265	)
Morgan Stanley & Co., Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		1,500,000		(139,779	)
Morgan Stanley & Co., Inc. (SLM Corp., 5.125%, due 8/27/12)	September 20, 2012	Specified amount upon credit event notice	2.6% Quarterly		800,000		(146,636	)

303

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Notes to Financial Statements—Continued

Western Asset Intermediate 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. (CDX IG 8)	June 20, 2012	Specified amount upon credit event notice	0.35% Quarterly	$	25,700,000	$	(1,069,069	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		5,500,000		(503,628	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		2,800,000		(254,136	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		2,800,000		(222,612	)
The Goldman Sachs Group, Inc. (iBoxx IG HiVol4)	June 20, 2012	Specified amount upon credit event notice	1% Quarterly		7,811,292		(486,865	)
						$	(6,137,736	)
Interest Rate Swaps
Barclays Capital Inc.	May 15, 2016	3.8% Semi-Annually	3-month LIBOR		32,400,000		105,454
Deutsche Bank AG	November 28, 2012	3-month LIBOR	5.27% Semi-Annually		14,900,000		1,199,378
						$	1,304,832
		Total Unrealized Appreciation/(Depreciation)				$	(4,832,904	)

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)
Credit Default Swaps
Barclays Capital Inc. (CDX HVOL 8)	June 20, 2012	0.75% Quarterly	Specified amount upon credit event notice	$	700,000	$	(61,235	)
The Goldman Sachs Group, Inc. (CDX IG 8)	June 20, 2017	0.6% Quarterly	Specified amount upon credit event notice		2,190,000		116,530
Barclays Capital Inc. (CDX HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		500,000		(44,641	)
Barclays Capital Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		200,000		(17,496	)

304

Annual Report to Shareholders

Western Asset Intermediate Plus Bond Portfolio—Continued
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
JP Morgan Chase & Co. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly	$	400,000	$	(34,990	)
JP Morgan Chase & Co. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		4,100,000		(241,110	)
Lehman Brothers Holdings Inc. (CDX IG 9)	December 20, 2012	Specified amount upon credit event notice	0.6% Quarterly		1,800,000		(24,558	)
Lehman Brothers Holdings Inc. (CDX IG HVOL 9)	December 20, 2012	Specified amount upon credit event notice	1.4% Quarterly		2,400,000		(153,426	)
Merrill Lynch & Co., Inc. (iBoxx HY3)	December 20, 2009	Specified amount upon credit event notice	3.75% Quarterly		384,000		(4,333	)
Morgan Stanley & Co., Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		200,000		(18,637	)
Morgan Stanley & Co., Inc. (SLM Corp., 5.125%, due 8/27/12)	September 20, 2012	Specified amount upon credit event notice	2.6% Quarterly		100,000		(18,330	)
The Goldman Sachs Group, Inc. (CDX IG 8)	June 20, 2012	Specified amount upon credit event notice	0.35% Quarterly		3,640,000		(151,417	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		700,000		(64,098	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		400,000		(36,305	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		400,000		(31,802	)
The Goldman Sachs Group, Inc. (iBoxx HY2)	September 20, 2009	Specified amount upon credit event notice	4.3% Quarterly		237,500		(1,686	)
						$	(787,534	)

305

Annual Report to Shareholders

Notes to Financial Statements—Continued

Western Asset Intermediate Plus Bond Portfolio—Continued
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Interest Rate Swaps
Barclays Capital Inc.	May 15, 2016	3.8% Semi-Annually	3-month LIBOR	$	5,100,000	$	16,582
Deutsche Bank AG	November 28, 2012	3-month LIBOR	5.27% Semi-Annually		1,900,000		152,941
						$	169,523
		Total Unrealized Appreciation/(Depreciation)				$	(618,011	)

Western Asset Limited Duration Bond Portfolio
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Credit Default Swaps
Barclays Capital Inc. (CDX HVOL 8)	June 20, 2012	0.75% Quarterly	Specified amount upon credit event notice	$	700,000	$	(61,235	)
Barclays Capital Inc. (CDX HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		1,600,000		(142,852	)
Barclays Capital Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		200,000		(17,496	)
Credit Suisse First Boston USA (ABX.HE-AAA 06-1)	July 25, 2045	Specified amount upon credit event notice	0.18% Monthly		450,000		(18,160	)
Deutsche Bank AG (CDX HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		240,000		(14,347	)
Deutsche Bank AG (CDX HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		240,000		(13,997	)
JP Morgan Chase & Co. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		400,000		(34,990	)
Morgan Stanley & Co. Inc. (CDX HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		200,000		(17,814	)
Morgan Stanley & Co. Inc. (CDX HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		100,000		(9,108	)

306

Annual Report to Shareholders

Western Asset Limited Duration Bond Portfolio—Continued
Agreement With:	Termination Date	The Fund Agrees to Pay	The Fund Will Receive	Contract Notional Amount		Unrealized Appreciation/ (Depreciation)
Morgan Stanley & Co. Inc. (CDX HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly	$	200,000	$	(17,956	)
Morgan Stanley & Co. Inc. (CDX HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		200,000		(18,171	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		1,100,000		(100,726	)
The Goldman Sachs Group, Inc. (CDX IG HVOL 8)	June 20, 2012	Specified amount upon credit event notice	0.75% Quarterly		300,000		(23,851	)
						$	(490,703	)
Interest Rate Swaps
Deutsche Bank AG	September 17, 2018	4.25% Semi-Annually	3-month LIBOR		6,500,000		(29,178	)
Deutsche Bank AG	November 28, 2012	3-month LIBOR	5.27% Semi-Annually		2,200,000		193,694
						$	164,516
		Total Unrealized Appreciation/(Depreciation)				$	(326,187	)

4. Securities Lending

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 the 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, 2008, collateral for securities on loan consisted of:

	Money Market Pooled Accounts		U.S. Government Securities
Core	$	578,572,379	$	48,552,019
Core Plus		1,170,604,429		128,757,836
Inflation Indexed		186,060,833		35,860,515
Intermediate		134,911,807		5,708,566

5. Transactions With Affiliates:

Each Fund has an investment management agreement with Legg Mason Fund Adviser, Inc. (“LMFA”). Western Asset Management Company (“Western Asset”) is the investment adviser to Absolute Return, Core, Core Plus, High Yield, Inflation Indexed, Intermediate, Intermediate Plus, and Limited Duration. Western Asset Management Company Limited (“WAML”) is the investment adviser to Non-U.S. and shares advisory responsibilities with Western Asset for Absolute Return, Core Plus, Inflation Indexed, and Intermediate Plus. 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

307

Annual Report to Shareholders

Notes to Financial Statements—Continued

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 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 for Management Fee	Management Fee		Expense Limitation		Fees (Waived)/ Recaptured			Maximum Amount Subject to Recapture
Absolute Return
Institutional Class	All asset levels	0.750	%	1.10	%	$	189,581		$	—
Financial Intermediary Class	All asset levels	0.750	%	1.35	%		8			—
Core
Institutional Class	Up to $500 million Next $500 million In excess of $1 billion	0.450 0.425 0.400	% % %	0.50	%		—			—
Financial Intermediary Class	Up to $500 million Next $500 million In excess of $1 billion	0.450 0.425 0.400	% % %	0.75	%		—			—
Core Plus
Institutional Class	Up to $500 million Next $500 million In excess of $1 billion	0.450 0.425 0.400	% % %	0.45	%		—			—
Financial Intermediary Class	Up to $500 million Next $500 million In excess of $1 billion	0.450 0.425 0.400	% % %	0.70	%		—			—
High Yield	All asset levels	0.550	%	0.65	%		—			—
Inflation Indexed
Institutional	All asset levels	0.200	%	0.25	%		(151,013	)		(457,255	)
Financial Intermediary	All asset levels	0.200	%	0.50	%		(6	)		(6	)
Intermediate	All asset levels	0.400	%	0.45	%		28,475			(194,771	)
Intermediate Plus	All asset levels	0.400	%	0.45	%		(124,716	)		(452,666	)
Limited Duration	All asset levels	0.350	%	0.40	%		(101,940	)		(437,554	)
Non-U.S.	All asset levels	0.450	%	0.55	%		(63,146	)		(340,403	)

Legg Mason Investor Services, LLC (“LMIS”) serves as distributor of the Funds’ shares. 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.

308

Annual Report to Shareholders

6. Fund Share Transactions:

At March 31, 2008, there were 13.1 billion shares of common stock of the Corporation authorized at $.001 par value. Transactions in the Funds’ shares were as follows:

	Year Ended March 31, 2008					Year Ended March 31, 2007
	Shares		Amount			Shares		Amount
Absolute Return
Institutional Class
Shares sold	25,040,517		$	250,612,343		36,584,554		$	371,514,164
Shares issued on reinvestment	2,465,367			24,781,815		631,102			6,441,688
Shares repurchased	(6,792,146	)		(68,276,911	)	(909,438	)		(9,306,461	)
Net Increase	20,713,738		$	207,117,247		36,306,218		$	368,649,391
Financial Intermediary Class
Shares sold	39,400		$	395,029		1,652		$	16,800
Shares issued on reinvestment	488			4,892		56			570
Shares repurchased	(298	)		(3,000	)	—			—
Net Increase	39,590		$	396,921		1,708		$	17,370
Core
Institutional Class
Shares sold	145,194,635		$	1,603,386,410		109,207,551		$	1,227,540,235
Shares issued on reinvestment	24,570,553			270,401,252		18,453,337			206,865,857
Shares repurchased	(119,670,207	)		(1,306,567,803	)	(73,985,323	)		(822,762,916	)
Net Increase	50,094,981		$	567,219,859		53,675,565		$	611,643,176
Financial Intermediary Class
Shares sold	61,374,893		$	675,386,074		104,516,429		$	1,162,120,339
Shares issued on reinvestment	7,607,185			83,678,848		4,041,530			45,485,796
Shares repurchased	(37,942,574	)		(415,583,975	)	(17,801,379	)		(199,443,677	)
Net Increase	31,039,504		$	343,480,947		90,756,580		$	1,008,162,458
Core Plus
Institutional Class
Shares sold	431,074,565		$	4,418,392,877		517,391,677		$	5,399,183,851
Shares issued on reinvestment	60,102,475			614,857,736		35,684,891			372,524,266
Shares repurchased	(269,816,777	)		(2,748,602,623	)	(137,124,692	)		(1,423,367,606	)
Net Increase	221,360,263		$	2,284,647,990		415,951,876		$	4,348,340,511
Financial Intermediary Class
Shares sold	92,870,337		$	950,307,000		35,661,598		$	372,492,531
Shares issued on reinvestment	5,521,041			56,470,452		2,729,449			28,500,650
Shares repurchased	(48,005,422	)		(489,249,437	)	(14,763,754	)		(152,693,443	)
Net Increase	50,385,956		$	517,528,015		23,627,293		$	248,299,738

309

Annual Report to Shareholders

Notes to Financial Statements—Continued

	Year Ended March 31, 2008					Year Ended March 31, 2007
	Shares		Amount			Shares		Amount
High Yield
Institutional Class
Shares sold	23,467,385		$	240,438,693		21,423,737		$	225,257,662
Shares issued on reinvestment	7,766,638			79,240,754		4,732,934			48,268,332
Shares repurchased	(27,068,309	)		(264,369,485	)	(2,033,622	)		(21,085,854	)
Net Increase	4,165,714		$	55,309,962		24,123,049		$	252,440,140
Inflation Indexed
Institutional Class
Shares sold	19,972,862		$	211,161,547		9,069,158		$	93,117,187
Shares issued on reinvestment	3,763,953			39,571,513		2,048,497			20,971,112
Shares repurchased	(9,104,549	)		(96,721,397	)	(2,315,019	)		(23,663,204	)
Net Increase	14,632,266		$	154,011,663		8,802,636		$	90,425,095
Financial Intermediary ClassA
Shares sold	21,815		$	238,876		—		$	—
Shares issued on reinvestment	108			1,186		—			—
Shares repurchased	(18,672	)		(202,156	)	—			—
Net Increase	3,251		$	37,906		—		$	—
Intermediate
Institutional Class
Shares sold	32,296,580		$	334,375,744		20,543,609		$	211,659,756
Shares issued on reinvestment	2,690,562			27,904,316		2,588,997			26,658,928
Shares repurchased	(27,670,873	)		(287,140,762	)	(34,281,270	)		(351,410,855	)
Net Increase (Decrease)	7,316,269		$	75,139,298		(11,148,664	)	$	(113,092,171	)
Intermediate Plus
Institutional Class
Shares sold	2,821,735		$	27,713,562		2,077,405		$	20,297,794
Shares issued on reinvestment	491,208			4,818,988		349,598			3,439,890
Shares repurchased	(580,831	)		(5,695,398	)	(873,959	)		(8,558,253	)
Net Increase	2,732,112		$	26,837,152		1,553,044		$	15,179,431
Limited Duration
Institutional Class
Shares sold	4,509,320		$	43,936,448		6,140,043		$	60,429,477
Shares issued on reinvestment	541,671			5,205,159		390,874			3,843,630
Shares repurchased	(2,848,957	)		(27,501,407	)	(4,747,155	)		(46,701,280	)
Net Increase	2,202,034		$	21,640,200		1,783,762		$	17,571,827
Non-U.S.
Institutional Class
Shares sold	7,776,592		$	76,569,432		10,430,916		$	100,110,270
Shares issued on reinvestment	39,858			394,372		192,711			1,792,208
Shares repurchased	(5,293,702	)		(51,712,115	)	(1,871,748	)		(18,048,069	)
Net Increase	2,522,748		$	25,251,689		8,751,879		$	83,854,409
AFinancial Intermediary Class commenced operations June 28, 2007.

310

Annual Report to Shareholders

7. Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (“FIN 48” or the “Interpretation”), Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109. FIN 48 supplements FASB Statement 109, Accounting for Income Taxes and establishes financial reporting rules regarding recognition, measurement, presentation, and disclosure in its financial statements of tax positions that a fund has taken or expects to take on a tax return. FIN 48 became effective for fiscal periods beginning after December 15, 2006. Effective April 1, 2007, the Fund adopted FIN 48. There was no material impact to the Financial Statements or disclosure there to as a result of this adoption.

In September 2006, the FASB released Statement of Financial Accounting Standards No. 157 “Fair Value Measurements” (“FAS 157”). FAS 157 establishes an authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements. The application of FAS 157 is required for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Management has evaluated the implications of FAS 157 and does not believe the adoption of FAS 157 will materially impact the amounts recorded in the financial statements, however, additional disclosure will be required in subsequent reports.

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

311

Annual Report to Shareholders

Report of Independent Registered Public Accounting Firm

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

In our opinion, the accompanying statements of assets and liabilities, including the schedules 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 Absolute Return Portfolio, Western Asset Core Bond Portfolio, Western Asset Core Plus Bond Portfolio, Western Asset High Yield Portfolio, Western Asset Inflation Indexed Plus Bond Portfolio, Western Asset Intermediate Bond Portfolio, Western Asset Intermediate Plus Bond Portfolio, Western Asset Limited Duration Bond Portfolio, and Western Asset Non-U.S. Opportunity Bond Portfolio (nine of the Portfolios comprising Western Asset Funds, Inc., the “Funds”) at March 31, 2008, the results 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, 2008 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Baltimore, Maryland

May 29, 2008

312

Annual Report to Shareholders

Important Tax Information (Unaudited)

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

		Absolute Return
Record Date:		Daily			5/23/2007		Daily			12/19/2007
Payable Date:		April 2007- December			5/25/2007		January 2008- March 2008			12/21/2007
Interest from Federal Obligations		4.47	%		4.47	%	2.82	%		—
Long-Term Capital Gain Dividend		—		$	0.017090		—		$	0.003200
		Core
Record Date:		Daily			5/23/2007		Daily
Payable Date:		April 2007- December 2007			5/25/2007		January 2008- March 2008
Ordinary Income:
Qualified Dividend Income for Individuals		0.09	%		0.15	%	1.19	%
Dividends Qualifying for the Dividends
Received Deduction for Corporations		0.17	%		0.17	%	1.36	%
Interest from Federal Obligations		10.30	%		10.30	%	2.68	%
Long-Term Capital Gain Dividend		—		$	0.039543		—
	Core Plus
Record Date:		Daily			5/23/2007		Daily
Payable Date:		April 2007- December 2007			5/25/2007		January 2008- March 2008
Ordinary Income:
Qualified Dividend Income for Individuals		0.69	%		0.07	%	1.08	%
Dividends Qualifying for the Dividends
Received Deduction for Corporations		0.62	%		0.62	%	1.08	%
Interest from Federal Obligations		8.94	%		8.94	%	12.56	%
Long-Term Capital Gain Dividend		—		$	0.025599		—
	High Yield
Record Date:		5/23/2007			7/11/2007		10/11/2007			12/19/2007
Payable Date:		5/25/2007			7/13/2007		10/15/2007			12/21/2007
Ordinary Income:
Qualified Dividend Income for Individuals		0.10	%		0.12	%	0.12	%		0.12	%
Dividends Qualifying for the Dividends
Received Deduction for Corporations		0.11	%		0.11	%	0.11	%		0.11	%
Long-Term Capital Gain Dividend	$	0.041940			—		—		$	0.011200
	Inflation Indexed
Record Date:		Daily			Daily
Payable Date:		April 2007- December 2007			January 2007- March 2007
Interest from Federal Obligations*		93.75	%		35.14	%
*       This Fund has met the quarterly asset requirements for California, Connecticut and New York resident shareholders.

313

Annual Report to Shareholders

	Intermediate
Record Date:		Daily			Daily
Payable Date:		April 2007- December 2007			January 2008- March 2008
Ordinary Income:
Qualified Dividend Income for Individuals		0.04	%		0.05	%
Dividends Qualifying for the Dividends
Received Deduction for Corporations		0.11	%		0.05	%
Interest from Federal Obligations		12.56	%		10.91	%
	Intermediate Plus
Record Date:		Daily			5/23/2007		Daily
Payable Date:		April 2007- December 2007			5/25/2007		January 2008- March 2008
Ordinary Income:
Qualified Dividend Income for Individuals		—			—		0.53	%
Dividends Qualifying for the Dividends
Received Deduction for Corporations		—			—		0.53	%
Interest from Federal Obligations		16.59	%		16.59	%	7.76	%
Long-Term Capital Gain Dividend		—		$	0.010400		—
	Limited Duration
Record Date:		Daily			Daily		Daily
Payable Date:		April 2007			May 2007- December 2007		January 2008- March 2008
Interest from Federal Obligations		10.02	%		10.02	%	4.25	%*
Tax Return of Capital		9.56	%		10.54	%	10.54	%
*       Expressed as a percentage of the distributions reduced for the return of capital.
	Non-U.S.
Record Date:		5/23/2007			12/19/2007
Payable Date:		5/25/2007			12/21/2007
Long-Term Capital Gain Dividend	$	0.004270		$	0.021200

The law varies in each state as to whether and what percentage of dividend income attributable to Federal obligations is exempt from state income tax. We recommend that you consult with your tax adviser to determine if any portion of the dividends you received is exempt from state income taxes.

Please retain this information for your records.

314

Annual Report to Shareholders

Directors and Officers

The Directors and officers of the Funds, their year of birth and a description of their principal occupations during the past five years are listed below. Except as shown, each Director’s and officer’s principal occupation and business experience for the last five years has been with the employer(s) indicated, although in some cases the Director or officer may have held different positions with such employer(s). Unless otherwise indicated, the business address of the persons listed below is c/o Western Asset Management Company, 385 East Colorado Blvd., Pasadena, California 91101.

Name and Year Born	Position(s) Held With Corporation	Term of Office and Length of Time ServedA	Number of Portfolios in Fund Complex OverseenB	Other Directorships Held	Principal Occupations During the Past 5 Years
Independent Directors
Ronald J. Arnault 1943	Director	Served since 1997	15	None	Retired.
Anita L. DeFrantz 1952	Director	Served since 1998	15	OBN Holdings, Inc.	President (1987-present) and Director (1990-present) of LA84 (formerly Amateur Athletic Foundation of Los Angeles); President and Director of Kids in Sports (1994-present); Member of the International Olympic Committee (1986-present).
Avedick B. Poladian 1951	Director	Served since 2007	15	Occidental Petroleum Corporation	Executive Vice President and Chief Administrative Officer of Lowe Enterprises, Inc. (real estate and hospitality firm) (2003-present); Partner, Arthur Andersen, LLP (1974-2002).
William E. B. Siart 1946	Director and Chairman	Served since 1997	15	None	Vice Chairman of The Getty Trust (2005-present); Chairman of Walt Disney Concert Hall, Inc. (1998-2006); Chairman of Excellent Education Development (2000-present).
Jaynie Miller Studenmund 1954	Director	Served since 2004	15	Orbitz Worldwide	Chief Operating Officer of Overture Services, Inc. (online marketing firm) (2001-2004); President and Chief Operating Officer of Paymybills.com (2000-2001).
Interested Directors
R. Jay Gerken 1951	Director and President	Served as a Director since 2006 and as President since 2007C	152	Trustee or Director of certain funds associated with Legg Mason & Co., LLC or its affiliates (consisting of 152 portfolios).	Managing Director of Legg Mason & Co., LLC, Chairman, President and Chief Executive Officer of certain mutual funds associated with Legg Mason & Co., LLC or its affiliates (2005-present); President of Legg Mason Partners Fund Advisor, LLC (“LMPFA”) (2006-present); Chairman of Smith Barney Fund Management LLC and Citi Fund Management Inc. (2002-2005); Chairman, President and Chief Executive Officer of Travelers Investment Adviser, Inc. (2002-2005).
Ronald L. Olson 1941	Director	Served since 2005D	15	Edison International, City National Corporation (financial services company), The Washington Post Company, and Berkshire Hathaway, Inc.	Senior Partner of Munger, Tolles & Olson LLP (a law partnership) (1968-present).

315

Annual Report to Shareholders

Directors and Officers—Continued

Name and Year Born	Position(s) Held With Corporation	Term of Office and Length of Time ServedA	Number of Portfolios in Fund Complex OverseenB	Other Directorships Held	Principal Occupations During the Past 5 Years
OfficersD
D. Daniel Fleet 1957	Vice President	Served since 2006	N/A	N/A	President of Western Asset (2006-present); Vice President of Western Asset Income Fund and Western Asset Premier Bond Fund (2006-present); Director, Western Asset Management Company Limited (2006-present); Director of Risk Management of Western Asset (1999-2006).
Gavin L. James 1960	Vice President	Served since 2001	N/A	N/A	Director of Global Client Services and Marketing of Western Asset (1998-present).
S. Kenneth Leech 1954	Vice President	Served since 1990	N/A	N/A	Chief Investment Officer of Western Asset (1998-present); Vice President of Western Asset Income Fund (1998-present) and Western Asset Premier Bond Fund (2001-present).
Stephen A. Walsh 1958	Vice President	Served since 1994	N/A	N/A	Deputy Chief Investment Officer of Western Asset (2000-present); Vice President of Western Asset Income Fund (1999-present) and Western Asset Premier Bond Fund (2001-present).
Susanne D. Wilson 1961 100 Light Street Baltimore, MD 21202	Vice President	Served 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	Served since 1990	N/A	N/A	Vice President, Legg Mason & Co., LLC (2005-present); Legg Mason Wood Walker, Incorporated (1992-2005); Vice President (1986-present), Chief Financial Officer (2006-present) and Treasurer (1986-2006) of all Legg Mason retail, open-end investment companies; Treasurer and Principal Financial and Accounting Officer, Western Asset/Claymore Inflation-Linked Securities & Income Fund (2003-present) and Western Asset/Claymore Inflation-Linked Opportunities & Income Fund (2004-present); Principal Financial and Accounting Officer of Western Asset Income Fund (2001-present) and Western Asset Premier Bond Fund (2001-present); Treasurer of the Corporation (1990-2006), Western Asset Income Fund (2001-2006) and Western Asset Premier Bond Fund (2001-2006).

316

Annual Report to Shareholders

317

Name and Year Born	Position(s) Held With Corporation	Term of Office and Length of Time ServedA	Number of Portfolios in Fund Complex OverseenB	Other Directorships Held	Principal Occupations During the Past 5 Years
Erin K. Morris 1966 100 Light Street Baltimore, MD 21202	Treasurer	Served since 2006	N/A	N/A	Assistant Vice President and Manager, Funds Accounting, Legg Mason & Co., LLC (2005-present); Assistant Vice President of Legg Mason Wood Walker, Incorporated (2002-2005); Treasurer of Legg Mason Income Trust, Inc., Legg Mason Tax-Free Income Fund, Western Asset Income Fund and Western Asset Premier Bond Fund (2006-present); Assistant Treasurer, Legg Mason Partners Fund complex (2007-present), Western Asset/Claymore Inflation-Linked Securities & Income Fund (2003-present), Western Asset/Claymore Inflation-Linked Opportunities & Income Fund (2004-present); Assistant Treasurer, the Corporation, Western Asset Income Fund, Western Asset Premier Bond Fund, Legg Mason Income Trust, Inc. and Legg Mason Tax-Free Income Fund (2001-2006); Manager, Funds Accounting, Legg Mason Wood Walker, Incorporated (2000-2005).
Susan C. Curry 1966 125 Broad St. New York, NY 10004	Assistant Treasurer	Served since 2007	N/A	N/A	Director of Tax—Mutual Funds, Legg Mason & Co., LLC (2005-present); Director of Tax—Mutual Funds, Citigroup (2004-2005); Assistant Treasurer, Western Asset Income Fund, Western Asset Premier Bond Fund, Western Asset Premier Bond Fund, Western Asset/Claymore Inflation-Linked Securities & Income Fund and Western Asset/Claymore Inflation-Linked Opportunities & Income Fund (2007-present); Partner, Deloitte & Touche (1990-2004).
Todd F. Kuehl 1969 100 Light Street Baltimore, MD 21202	Chief Compliance Officer	Served since 2007	N/A	N/A	Vice President, Legg Mason & Co., LLC (2006-present); Chief Compliance Officer of Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund, Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund 2, Western Asset Income Fund, Western Asset Premier Bond Fund (2007-present) and Barrett Growth Fund and Barrett Opportunity Fund (2006-present); Branch Chief, Division of Investment Management, U.S. Securities and Exchange Commission (2002-2006).
Richard M. Wachterman 1947 100 Light Street Baltimore, MD 21202	Secretary	Served since 2008	N/A	N/A	Associate General Counsel, Legg Mason & Co. (2004-present); Managing Director, Victory Capital Management (1981-2003); Secretary, Legg Mason Funds (2004-present); Secretary, Western Funds (2008-present); Vice President, Legg Mason Fund Adviser, Inc. (2007-present).

Annual Report to Shareholders

^A Each officer holds office until his or her respective successor is chosen and qualified, or in each case until he or she sooner dies, resigns, is removed with or without cause or becomes disqualified. Each of the Directors of the Corporation holds office until his or her successor shall have been duly elected and shall qualify, subject to prior death, resignation, retirement, disqualification or removal from office and applicable law and the rules of the New York Stock Exchange.

^B In addition to overseeing the thirteen portfolios of the Corporation, each Director 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. In addition, Mr. Gerken serves as Director/Trustee to 152 other funds associated with Legg Mason & Co., LLC or its affiliates. Legg Mason & Co., LLC is an affiliate of LMFA and Western Asset.

^C Mr. Gerken is an “interested person” (as defined in section 2(a)(19) of the Investment Company Act of 1940, as amended (the “1940 Act”)) of each Fund because of his positions with subsidiaries of, and ownership of shares of common stock of, Legg Mason, Inc., the parent company of Western Asset.

^D Mr. Olson is an “interested person” (as defined above) of each Fund because his law firm has provided legal services to Western Asset.

^E Each officer of the Corporation is an “interested person” (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’S WEBSITE (http://www.sec.gov).

318

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 Fund (other than the Absolute Return Portfolio) at meetings held on September 11, 2007, October 11, 2007 and October 27, 2007. At a subsequent meeting held on November 6, 2007, 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 Funds’ performance and other relevant matters, and related discussions with the Advisers’ personnel.

As part of their review, the Directors examined LMFA’s ability to provide high quality oversight and administrative and shareholder support services to the Funds, and Western Asset’s and WAML’s ability to provide high quality investment management services to the Funds. The Directors considered the experience of LMFA’s personnel in providing the types of services that LMFA is responsible for providing to the Funds; the ability of LMFA to attract and retain capable personnel; the capability and integrity of LMFA’s senior management and staff; and the level of skill required to provide such services to the Funds. 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 Funds; 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 Fund. In addition, the Directors reviewed the quality of LMFA and the Advisers’ services with respect to regulatory compliance and compliance with the investment policies of the Funds and conditions that might affect LMFA or an Adviser’s ability to provide high quality services to the Funds 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 Funds 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 Funds, the Directors also reviewed comparisons of the performance of the Funds 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 ended August 31, 2007 (as applicable). In that connection, the Directors noted that although the performance of most of the Funds for the one-year period was below their peer groups, the performance of most of the Funds over most of the periods was above the average of their respective investment benchmarks and peer groups. With respect to each of the Funds, the Directors considered the factors involved in its performance relative to the performance of its investment benchmark and peer groups.

The Directors also considered the management fees payable by the Funds to LMFA, the total expenses payable by the Funds and the fact that LMFA pays to the Advisers the entire management fee it receives from each Fund. They reviewed information concerning 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 to LMFA by each of the Funds other than Absolute Return, Core Bond, Core Plus Bond and High Yield were below the median of the funds in their respective peer groups. The Directors also observed that total expenses for each Fund except Core Bond were below the average of the funds in its respective peer group (and Core Bond’s expenses were close to the average). The Directors noted that the management fees paid by the Funds were generally higher than the fees paid by other clients of the Advisers for accounts with similar investment strategies, but that the administrative and operational responsibilities for the Advisers with respect to the Funds were also relatively higher. In light of these differences, the Directors concluded that the differences in management fees from those paid by the Advisers’ other clients were reasonable.

319

Annual Report to Shareholders

The Directors further evaluated the benefits of the advisory relationship to LMFA and the Advisers, including, among others, the profitability of the relationship to LMFA and the Advisers; the direct and indirect benefits that LMFA and each Adviser may receive from its relationship with the Funds, including any “fallout benefits”, 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 Funds grow. They further concluded that, where a Fund’s assets were currently at a level at which the Advisers potentially may realize economies of scale from any future growth in the Fund, fee breakpoints had been implemented to capture a portion of any economies of scale for the benefit of the Fund’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.

320

Board Consideration of the Management and Advisory Agreements—Continued

Annual Report to Shareholders

Privacy Policy

The Funds are committed to keeping nonpublic personal information secure and confidential. This notice is intended to help a shareholder understand how the Funds fulfill this commitment.

From time to time, the Funds, through their Service Provider, may collect a variety of personal information, including:

• Information received on applications and forms, via the telephone, and through websites;

• Information about transactions with the Funds, affiliates, or others (such as purchases, sales, or account balances); and

• Information about shareholders received from consumer reporting agencies.

The Funds do not disclose shareholder nonpublic personal information, except as permitted by applicable law or regulation. For example, the Funds may share this information with others in order to process transactions. Any information provided to companies that perform services on behalf of the Funds, such as printing and mailing or to other financial institutions with which the Funds have joint marketing agreements are required to protect the confidentiality of shareholders information and to use it only to perform the services for which the companies are hired.

The Funds, through their Service Provider, maintain physical, electronic, and procedural safeguards to protect shareholder nonpublic personal information Access to this information is restricted.

If a shareholder decides at some point either to close his/her account(s) or become an inactive customer, the Funds will continue to adhere to these privacy policies and practices with respect to shareholder 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

Anita L. DeFrantz

R. Jay Gerken

Ronald L. Olson

Avedick B. Poladian

Jaynie Miller Studenmund

Officers

R. Jay Gerken, 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

Susan C. Curry, Assistant Treasurer

Todd F. Kuehl, Chief Compliance Officer

Richard M. Wachterman, 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

1211 Avenue of the Americas

New York, New York 10036

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.lminstitutionalfunds.com/fund_information/fund_literature/gbl_literature/proxy_report.asp.

This report must be preceded or accompanied by a free prospectus. Investors should consider the Fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information about the Fund. Please read the prospectus carefully before investing.

Western Asset Management Company

Legg Mason Investor Services, LLC, Distributor

Legg Mason, Inc. Subsidiaries

WAF-A-(05/08) TN08-2143 WASX010993

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.

Page 1 of 4

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, 2007 - $310,975

Fiscal Year Ended March 31, 2008 - $366,800

(b) Audit-Related Fees

Fiscal Year Ended March 31, 2007 - - $20,750

Fiscal Year Ended March 31, 2008 - $25,500

Services include interim audit security pricing.

PricewaterhouseCoopers LLP billed fees in the amount of $145,000 and $208,000 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 years ended March 31, 2007 and March 31, 2008, respectively.

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

(c) Tax Fees

Fiscal Year Ended March 31, 2007 - $9,900

Fiscal Year Ended March 31, 2008 - $21,600

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, 2007 - $975,316

Fiscal Year Ended March 31, 2008 - $1,236,000

(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 March 31, 2008, 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.

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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 Registrant’s 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.

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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/ R. Jay Gerken
R. Jay Gerken
President
Western Asset Funds, Inc.
Date:	June 5, 2008

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

By:	/s/ R. Jay Gerken
R. Jay Gerken
President
Western Asset Funds, Inc.
Date:	June 5, 2008
By:	/s/ Marie K. Karpinski
Marie K. Karpinski
Principal Financial and Accounting Officer
Western Asset Funds, Inc.
Date:	June 5, 2008

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