Western Asset Funds N-CSRS Certified semi-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.

(Exact name of registrant as specified in charter)

55 Water Street, New York, NY 10041

(Address of principal executive offices) (Zip code)

Robert I. Frenkel, Esq.

Legg Mason & Co., LLC

100 First Stamford Place

Baltimore, MD 21202

(Name and address of agent for service)

Registrant’s telephone number, including area code: 1-888-425-6432

Date of fiscal year end: December 31

Date of reporting period: June 30, 2010

ITEM 1. REPORT TO STOCKHOLDERS.

The Semi-Annual Report to Stockholders is filed herewith.

June 30, 2010

Semi-Annual Report

Western Asset

Limited Duration Bond Portfolio

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

II Western Asset Limited Duration Bond Portfolio

Fund objective

The Fund seeks to maximize total return consistent with prudent investment management and liquidity needs, by investing to obtain an average duration which is expected to range within 25% of the duration of its benchmark.

What’s inside
Letter from the president	II
Investment commentary	III
Fund at a glance	1
Fund expenses	2
Spread duration	3
Effective duration	4
Schedule of investments	5
Statement of assets and liabilities	13
Statement of operations	14
Statements of changes in net assets	15
Financial highlights	16
Notes to financial statements	18

Letter from the president

Dear Shareholder,

We are pleased to provide the semi-annual report of Western Asset Limited Duration Bond Portfolio for the six-month reporting period ended June 30, 2010.

Please read on for Fund performance information and a detailed look at prevailing economic and market conditions during the Fund’s reporting period.

As always, we remain committed to providing you with excellent service and a full spectrum of investment choices. We also remain committed to supplementing the support you receive from your financial advisor. One way we accomplish this is through our website, www.leggmason.com/individualinvestors. Here you can gain immediate access to market and investment information, including:

Ÿ Fund prices and performance,

Ÿ Market insights and commentaries from our portfolio managers, and

Ÿ A host of educational resources.

We look forward to helping you meet your financial goals.

Sincerely,

R. Jay Gerken, CFA

President

July 30, 2010

Western Asset Limited Duration Bond Portfolio III

Investment commentary

Economic review

While the overall U.S. economy continued to expand over the six months ended June 30, 2010, several economic data points weakened toward the end of the reporting period. This, in combination with sovereign debt woes in Europe, caused investor sentiment to turn negative and had significant implications for the financial markets.

Looking back, the U.S. Department of Commerce reported that U.S. gross domestic product (“GDP”)ⁱ contracted four consecutive quarters, beginning in the third quarter of 2008 through the second quarter of 2009. Economic conditions then began to improve in the third quarter of 2009, as GDP growth was 1.6%. A variety of factors helped the economy to regain its footing, including the government’s $787 billion stimulus program. Economic growth then accelerated during the fourth quarter of 2009, as GDP growth was 5.0%. A slower drawdown in business inventories and renewed consumer spending were contributing factors spurring the economy’s higher growth rate. While the recovery continued during the first half of 2010, it did so at a more modest pace, as GDP growth was 3.7% during the first quarter of 2010 and an estimated 2.4% during the second quarter. The slower pace of growth in the second quarter was due, in part, to slower consumer spending, which rose an annualized 1.6% during the quarter, versus a 1.9% gain over the first three months of the year.

Even before GDP growth turned positive, there were signs that the economy was on the mend. The manufacturing sector, as measured by the Institute for Supply Management’s PMIⁱⁱ, rose to 52.8 in August 2009, the first time it surpassed 50 since January 2008 (a reading below 50 indicates a contraction, whereas a reading above 50 indicates an expansion). While June 2010’s PMI reading of 56.2 was lower than May’s reading of 59.7, manufacturing has now expanded eleven consecutive months according to PMI data. The manufacturing sector’s growth remained fairly broad-based with thirteen of the eighteen industries tracked by the Institute for Supply Management expanding during June.

After experiencing sharp job losses in 2009, the U.S. Department of Labor reported that over one million new positions were added during the first five months of 2010. Included in that total, however, were 700,000 temporary government jobs tied to the 2010 Census. In June, 225,000 of these temporary positions were eliminated, offsetting private sector growth and resulting in a net loss of 125,000 jobs for the month. However, the unemployment rate fell to

9.5% in June, versus 9.7% and 9.9% in May and April, respectively.

There was mixed news in the housing market during the period. According to the National Association of Realtors, existing home sales increased 7.0% and 8.0% in March and April, respectively, after sales had fallen for the period from December 2009 through February 2010. The rebound was largely attributed to people rushing to take advantage of the government’s $8,000 tax credit for first-time home buyers that expired at the end of April. However, with the end of the tax credit, existing home sales then declined 2.2% and 5.1% in May and June, respectively. In addition, the inventory of unsold homes increased 2.5% to 3.99 million in June. Looking at home prices, the S&P/Case-Shiller Home Price Indexⁱⁱⁱ indicated that month-to-month U.S. home prices rose 1.3% in May. This marked the second straight monthly increase following six consecutive months of declining prices.

Financial market overview

During the first half of the reporting period, the financial markets were largely characterized by healthy investor risk appetite and solid results by lower-quality bonds. However, the market experienced a sharp sell-off during the second half of the reporting period, during which risk aversion returned and investors flocked to the relative safety of U.S. Treasury securities.

Given certain pockets of weakness in the economy, including elevated unemployment in the U.S., the Federal Reserve Board (“Fed”)^iv remained cautious. At its meeting in June 2010, the Fed said it “will maintain the target range for the federal funds rate^v at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

However, the Fed took several steps in reversing its accommodative monetary stance. On February 18, 2010, the Fed raised the discount rate, the interest rate it charges banks for temporary loans, from 1/2 to 3/4 percent. The Fed also concluded its $1.25 trillion mortgage securities purchase program at the end of the first quarter of 2010. However, the Fed left the door open for future stimulus measures if needed. In the minutes of its June meeting that were released on July 14^th (after the reporting period ended), the Fed said, “In addition to continuing to develop and test instruments to exit from the period of unusually

IV Western Asset Limited Duration Bond Portfolio

Investment commentary (cont’d)

accommodative monetary policy, the Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably.”

Fixed-income market review

Continuing the trend that began in the second quarter of 2009, nearly every spread sector (non-Treasury) outperformed equal-duration^vi Treasuries during the first half of the reporting period. Over that time, investor confidence was high given encouraging economic data, continued low interest rates, benign inflation and rebounding corporate profits. However, robust investor appetite was replaced with heightened risk aversion toward the end of April and during the month of May. This was due to the escalating sovereign debt crisis in Europe, uncertainties regarding new financial reforms in the U.S. and some worse-than-expected economic data. Most spread sectors then produced positive absolute returns in June, as investor demand for these securities began to again increase.

Both short- and long-term Treasury yields fluctuated during the period but generally moved lower. When the period began, two- and ten-year Treasury yields were 1.14% and 3.85%, respectively. Two- and ten-year Treasury yields initially rose, reaching as high as 1.18% and 4.01%, respectively, in early April. Yields then largely declined amid the investor “flight to quality.” On June 30, 2010, two- and ten-year Treasury yields reached their lows for the reporting period: 0.61% and 2.97%, respectively. Over the six-month reporting period, the yield curve^vii flattened, with longer-term Treasury yields declining more than their shorter-term counterparts. For the six months ended June 30, 2010, the Barclays Capital U.S. Aggregate Index^viii returned 5.33%.

Performance review

For the six months ended June 30, 2010, Class I shares of Western Asset Limited Duration Bond Portfolio returned 4.35%. The Fund’s unmanaged benchmark, the BofA Merrill Lynch 1-3 Year Treasury Index^ix, returned 1.87% for the same period. The Lipper Short-Intermediate Investment Grade Debt Funds Category Average¹ returned 3.92% over the same time frame.

Performance Snapshot as of June 30, 2010 (unaudited)
	6 months
Western Asset Limited Duration Bond Portfolio:
Class IS2	4.41	%
Class I2	4.35	%
BofA Merrill Lynch 1-3 Year Treasury Index	1.87	%
Lipper Short-Intermediate Investment Grade Debt Funds Category Average	3.92	%

The performance shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown above. Principal value, investment returns and yields will fluctuate and investors’ shares, when redeemed, may be worth more or less than their original cost. To obtain performance data current to the most recent month-end, please visit our website at www.leggmason.com/individualinvestors.

All share class returns assume the reinvestment of all distributions, including returns of capital, if any, at net asset value and the deduction of all Fund expenses. Returns have not been adjusted to include the deduction of taxes that a shareholder would pay on Fund distributions. Performance figures for periods shorter than one year represent cumulative figures and are not annualized.

Performance figures reflect expense reimbursements and/or fee waivers, without which the performance would have been lower.

The 30-Day SEC Yields for the period ended June 30, 2010 for Class IS and I shares were 2.39% and 2.30%, respectively. Absent current expense reimbursements and/or fee waivers, the 30-Day SEC Yields for Class IS and I shares would have been 2.17% and 2.10%, respectively. The 30-Day SEC Yield is the average annualized net investment income per share for the 30-day period indicated and is subject to change.

Total Annual Operating Expenses (unaudited)

As of the Fund’s most current prospectus dated April 30, 2010, the gross total operating expense ratios for Class IS and Class I shares were 0.65% and 0.64%, respectively.

Actual expenses may be higher. For example, expenses may be higher than those shown if average net assets decrease. Net assets are more likely to decrease and Fund expense ratios are more likely to increase when markets are volatile.

As a result of an expense limitation agreement, the ratio of expenses, other than interest, brokerage, taxes, deferred organizational expenses and extraordinary expenses, to average net assets will not exceed 0.40% for Class IS shares. In addition, Class I shares’ operating expenses will be waived and/or reimbursed at an annual rate of 0.10%. This expense limitation agreement cannot be terminated prior to April 30, 2011 without the Board of Directors’ consent.

With respect to Class IS shares, the manager is permitted to recapture amounts forgone or reimbursed to the class within three years after the day on which the manager earned the fee or incurred the expense if the class’ total annual operating expenses have fallen to a level below the lower of the limit described above or the limit then in effect.

¹ Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the six-month period ended June 30, 2010, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 154 funds in the Fund’s Lipper category.

² Class IS and Class I shares were formerly known as Institutional Select Class and Institutional Class shares, respectively. Fund share classes were renamed in April 2010.

Western Asset Limited Duration Bond Portfolio V

As always, thank you for your confidence in our stewardship of your assets.

Sincerely,

R. Jay Gerken, CFA

President

July 30, 2010

RISKS: Fixed-income securities involve interest rate, credit, inflation and reinvestment risks. As interest rates rise, the value of fixed-income securities falls. Derivatives, such as options, futures and swaps, can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. International investments are subject to special risks including social, economic and political uncertainties, which could increase volatility. Asset-backed, mortgage-backed or mortgage-related securities are subject to prepayment and extension risks. Diversification does not assure a profit or protect against market loss. Please see the Fund’s prospectus for more information on these and other risks.

All investments are subject to risk including the possible loss of principal. All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.

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

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

ⁱⁱ The Institute for Supply Management’s PMI is based on a survey of purchasing executives who buy the raw materials for manufacturing at more than 350 companies. It offers an early reading on the health of the manufacturing sector.

ⁱⁱⁱ The S&P/Case-Shiller Home Price Index measures the residential housing market, tracking changes in the value of the residential real estate market in twenty metropolitan regions across the United States.

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

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

^vi Duration is the measure of the price sensitivity of a fixed-income security to an interest rate change of 100 basis points. Calculation is based on the weighted average of the present values for all cash flows.

^vii The yield curve is the graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities.

^viii The Barclays Capital U.S. Aggregate Index is a broad-based bond index comprised of government, corporate, mortgage- and asset-backed issues, rated investment grade or higher, and having at least one year to maturity.

^ix The BofA Merrill Lynch 1-3 Year Treasury Index is a market capitalization-weighted index including all U.S. Treasury notes and bonds with maturities greater than or equal to one year and less than three years.

Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report 1

Fund at a glance^†(unaudited)

Standard & Poor’s Debt Ratings¹(%) as a percent of total investments

Maturity Schedule(%) as a percent of total investments

† The bar graphs above represent the composition of the Fund’s investments as of June 30, 2010 and do not include derivatives such as Futures Contracts, Written Options and Swaps. The Fund is actively managed. As a result, the composition of the Fund’s investments is subject to change at any time.

¹ Source: Standard & Poor’s Rating Service. The ratings shown are based on each portfolio security’s rating as determined by Standard & Poor’s (“S&P”), a Nationally Recognized Statistical Ratings Organization (“NRSRO”). These ratings are the opinions of S&P and are not measures of quality or guarantees of performance. Securities held by the Fund may be rated by other NRSROs, and these ratings may be higher or lower. The Fund itself has not been rated by a NRSRO and the credit quality of the investments in the Fund’s portfolio does not apply to the stability or safety of the Fund.

² Preferred stocks do not have defined maturity dates.

2 Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report

Fund expenses (unaudited)

Example

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

This example is based on an investment of $1,000 invested on January 1, 2010 and held for the six months ended June 30, 2010.

Actual expenses

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

Hypothetical example for comparison purposes

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

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

Based on actual total return1											Based on hypothetical total return1
	Actual Total Return2		Beginning Account Value		Ending Account Value		Annualized Expense Ratio		Expenses Paid During the Period3			Hypothetical Annualized Total  Return		Beginning Account Value		Ending Account Value		Annualized Expense Ratio		Expenses Paid During the Period3
Class IS4	4.41	%	$	1,000.00	$	1,044.10	0.40	%	$	2.03	Class IS4	5.00	%	$	1,000.00	$	1,022.81	0.40	%	$	2.01
Class I4	4.35			1,000.00		1,043.50	0.52			2.63	Class I4	5.00			1,000.00		1,022.22	0.52			2.61

¹ For the six months ended June 30, 2010.

² Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value. Total return is not annualized, as it may not be representative of the total return for the year. Performance figures may reflect compensating balance agreements and/or expense reimbursements. In the absence of compensating balance arrangements and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

³ Expenses (net of compensating balance arrangements and/or expense reimbursements) are equal to each class’ respective annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year (181), then divided by 365.

⁴ In April 2010, Institutional Select Class and Institutional Class shares were renamed Class IS and Class I shares, respectively.

Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report 3

Spread duration (unaudited)

Economic exposure — June 30, 2010

Spread duration is defined as the change in value for a 100 basis point change in the spread relative to Treasuries. The spread over Treasuries is the annual risk-premium demanded by investors to hold non-Treasury securities. This chart highlights the market sector exposure of the Fund’s portfolio and the exposure relative to the selected benchmark as of the end of the reporting period.

ABS	—Asset Backed Securities
CMBS	—Commercial Mortgage Backed Securities
HY	—High Yield
IG Credit	—Investment Grade Credit
MBS	—Mortgage Backed Securities
MLTI	—BofA Merrill Lynch 1-3 Year Treasury Index

4 Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report

Effective duration (unaudited)

Interest rate exposure — June 30, 2010

Effective duration is defined as the change in value for a 100 basis point change in Treasury yields. This chart highlights the interest rate exposure of the Fund’s portfolio relative to the selected benchmark as of the end of the reporting period.

ABS	—Asset Backed Securities
CMBS	—Commercial Mortgage Backed Securities
HY	—High Yield
IG Credit	—Investment Grade Credit
MBS	—Mortgage Backed Securities
MLTI	—BofA Merrill Lynch 1-3 Year Treasury Index

Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report 5

Schedule of investments (unaudited)

June 30, 2010

Western Asset Limited Duration Bond Portfolio

Security	Rate		Maturity Date	Face Amount		Value
Corporate Bonds & Notes — 49.5%
Consumer Discretionary — 1.3%
Leisure Equipment & Products — 0.0%
Eastman Kodak Co., Senior Notes	7.250	%	11/15/13	$	10,000	$	9,800
Media — 1.0%
Comcast Cable Communications Inc., Senior Notes	6.750	%	1/30/11		200,000		206,258
Time Warner Cable Inc., Senior Notes	8.250	%	2/14/14		140,000		165,487
Walt Disney Co., Senior Notes	4.700	%	12/1/12		160,000		173,528
Total Media							545,273
Multiline Retail — 0.3%
Macy’s Retail Holdings Inc.	5.350	%	3/15/12		150,000		153,375
Total Consumer Discretionary							708,448
Consumer Staples — 2.3%
Beverages — 0.9%
Anheuser-Busch InBev Worldwide Inc., Senior Notes	4.125	%	1/15/15		180,000		188,429
Diageo Capital PLC	5.200	%	1/30/13		210,000		228,420
Dr. Pepper Snapple Group Inc., Senior Notes	2.350	%	12/21/12		70,000		70,810
Total Beverages							487,659
Food & Staples Retailing — 0.1%
Kroger Co., Notes	3.900	%	10/1/15		80,000		84,390
Food Products — 0.4%
Kraft Foods Inc., Senior Notes	2.625	%	5/8/13		220,000		224,170
Tobacco — 0.9%
Altria Group Inc., Senior Notes	8.500	%	11/10/13		50,000		58,367
Altria Group Inc., Senior Notes	9.250	%	8/6/19		10,000		12,481
Philip Morris International Inc.	4.875	%	5/16/13		300,000		324,459
Reynolds American Inc., Senior Notes	7.250	%	6/1/13		120,000		132,013
Total Tobacco							527,320
Total Consumer Staples							1,323,539
Energy — 3.9%
Oil, Gas & Consumable Fuels — 3.9%
BP Capital Markets PLC, Guaranteed Notes	5.250	%	11/7/13		40,000		36,770
BP Capital Markets PLC, Senior Notes	3.125	%	3/10/12		40,000		36,981
Devon Financing Corp. ULC, Notes	6.875	%	9/30/11		260,000		277,593
El Paso Natural Gas Co., Senior Notes	5.950	%	4/15/17		370,000		393,166
Energy Transfer Partners LP, Senior Notes	9.700	%	3/15/19		90,000		108,743
Kinder Morgan Energy Partners LP, Notes	6.750	%	3/15/11		310,000		320,899
Occidental Petroleum Corp., Senior Notes	7.000	%	11/1/13		400,000		467,460
Pemex Project Funding Master Trust, Senior Notes	1.136	%	12/3/12		320,000		318,400	(a)(b)
Shell International Finance BV, Senior Notes	1.875	%	3/25/13		60,000		60,504
XTO Energy Inc., Senior Notes	5.650	%	4/1/16		170,000		194,758
Total Energy							2,215,274
Financials — 33.0%
Capital Markets — 5.6%
Deutsche Bank AG, Senior Notes	6.000	%	9/1/17		300,000		330,876
Goldman Sachs Capital II, Junior Subordinated Bonds	5.793	%	6/1/12		440,000		332,200	(b)(c)
Goldman Sachs Group Inc., Notes	6.600	%	1/15/12		210,000		222,105

See Notes to Financial Statements.

6 Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report

Schedule of investments (unaudited) (cont’d)

June 30, 2010

Western Asset Limited Duration Bond Portfolio

Security	Rate		Maturity Date	Face Amount		Value
Capital Markets — continued
Goldman Sachs Group Inc., Notes	5.250	%	10/15/13	$	180,000	$	189,740
Goldman Sachs Group Inc., Senior Notes	5.250	%	4/1/13		100,000		105,248
Goldman Sachs Group Inc., Senior Notes	5.375	%	3/15/20		60,000		59,287
Kaupthing Bank HF, Senior Notes	5.750	%	10/4/11		290,000		69,600	(a)(d)(e)
Kaupthing Bank HF, Senior Notes	7.625	%	2/28/15		700,000		168,000	(a)(d)(e)
Lehman Brothers Holdings Capital Trust VII, Medium-Term Notes	5.857	%	5/31/12		570,000		57	(b)(c)(d)
Lehman Brothers Holdings Inc., Subordinated Notes	6.500	%	7/19/17		200,000		100	(d)
Macquarie Bank Ltd.	2.600	%	1/20/12		580,000		592,602	(a)
Merrill Lynch & Co. Inc., Medium-Term Notes	6.150	%	4/25/13		450,000		481,113
Morgan Stanley, Notes	5.300	%	3/1/13		200,000		207,982
Morgan Stanley, Senior Notes	2.930	%	5/14/13		100,000		100,358	(b)
UBS AG Stamford CT, Senior Notes	3.875	%	1/15/15		270,000		268,663
Total Capital Markets							3,127,931
Commercial Banks — 16.0%
Achmea Hypotheekbank NV	3.200	%	11/3/14		360,000		371,937	(a)
ANZ National International Ltd., Senior Notes	2.375	%	12/21/12		200,000		202,579	(a)
Bank of Ireland Governor & Co., Senior Notes	2.750	%	3/2/12		410,000		406,901	(a)
Bank of Montreal, Secured Bonds	2.850	%	6/9/15		140,000		142,288	(a)
Bank of Nova Scotia, Senior Notes	0.788	%	3/5/12		280,000		279,766	(b)
Bank of Scotland PLC, Senior Secured Notes	5.000	%	11/21/11		310,000		321,656	(a)
Bank of Tokyo-Mitsubishi UFJ Ltd., Senior Notes	2.600	%	1/22/13		40,000		40,654	(a)
Bank of Tokyo-Mitsubishi UFJ Ltd., Senior Notes	3.850	%	1/22/15		200,000		208,076	(a)
Barclays Bank PLC, Senior Notes	2.500	%	1/23/13		160,000		159,352
Barclays Bank PLC, Senior Notes	5.200	%	7/10/14		120,000		126,642
BNP Paribas, Senior Notes	2.125	%	12/21/12		100,000		99,729
Cie de Financement Foncier, Secured Bonds	2.125	%	4/22/13		200,000		201,936	(a)
Commonwealth Bank of Australia, Senior Notes	2.900	%	9/17/14		530,000		540,340	(a)
Commonwealth Bank of Australia, Senior Notes	3.750	%	10/15/14		150,000		154,204	(a)
Credit Agricole SA, Senior Notes	3.500	%	4/13/15		130,000		127,225	(a)
Credit Agricole SA, Subordinated Notes	8.375	%	10/13/19		100,000		94,500	(a)(b)(c)
Depfa ACS Bank, Senior Secured Bonds	4.250	%	8/16/10		500,000		501,081	(a)
Dexia Credit Local NY, Senior Notes	2.000	%	3/5/13		550,000		549,696	(a)
Glitnir Banki HF, Notes	3.226	%	1/21/11		720,000		187,200	(a)(b)(d)(e)
Landsbanki Islands HF	7.431	%	10/19/17		140,000		175	(a)(c)(d)(e)
Landsbanki Islands HF, Senior Notes	6.100	%	8/25/11		410,000		46,125	(a)(d)(e)
Landwirtschaftliche Rentenbank	1.875	%	9/24/12		250,000		253,069
Lloyds TSB Bank PLC, Bonds	4.375	%	1/12/15		150,000		144,519	(a)
Nordea Bank AB, Senior Notes	3.700	%	11/13/14		100,000		101,871	(a)
Resona Preferred Global Securities Cayman Ltd., Junior Subordinated Bonds	7.191	%	7/30/15		360,000		331,276	(a)(b)(c)
Royal Bank of Scotland PLC, Senior Notes	4.875	%	3/16/15		220,000		218,892
Santander US Debt SA Unipersonal, Senior Notes	3.724	%	1/20/15		100,000		96,070	(a)
Shinsei Finance Cayman Ltd., Junior Subordinated Bonds	6.418	%	7/20/16		110,000		70,716	(a)(b)(c)
SunTrust Capital, Trust Preferred Securities	6.100	%	12/1/66		60,000		45,675	(b)
Swedbank AB, Bonds	3.000	%	12/22/11		320,000		329,869	(a)
Wachovia Capital Trust III, Junior Subordinated Bonds	5.800	%	3/15/11		770,000		612,150	(b)(c)
Wells Fargo Capital X, Capital Securities	5.950	%	12/1/86		150,000		133,037

See Notes to Financial Statements.

Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report 7

Western Asset Limited Duration Bond Portfolio

Security	Rate		Maturity Date	Face Amount		Value
Commercial Banks — continued
Wells Fargo Capital XIII, Medium-Term Notes	7.700	%	3/26/13	$	290,000	$	292,900	(b)(c)
Westpac Banking Corp.	0.444	%	4/19/11		500,000		499,518	(a)(b)
Westpac Banking Corp., Notes	3.250	%	12/16/11		210,000		216,004	(a)
Westpac Banking Corp., Senior Bonds	2.250	%	11/19/12		350,000		352,976
Westpac Banking Corp., Senior Notes	2.900	%	9/10/14		560,000		573,863	(a)
Total Commercial Banks							9,034,467
Consumer Finance — 3.4%
American Express Credit Corp., Senior Notes	0.501	%	10/4/10		550,000		549,932	(b)
American Honda Finance Corp., Senior Notes	5.125	%	12/15/10		550,000		559,829	(a)
FIA Credit Services N.A., Subordinated Notes	7.125	%	11/15/12		150,000		163,330	(a)
GMAC Inc., Senior Notes	7.500	%	12/31/13		153,000		152,617
GMAC Inc., Subordinated Notes	8.000	%	12/31/18		127,000		116,840
SLM Corp., Medium-Term Notes, Senior Notes	8.450	%	6/15/18		420,000		387,581
Total Consumer Finance							1,930,129
Diversified Financial Services — 5.2%
Bank of America Corp., Senior Notes	4.500	%	4/1/15		30,000		30,322
Citigroup Inc., Notes	6.000	%	12/13/13		150,000		157,367
Citigroup Inc., Senior Notes	5.500	%	10/15/14		60,000		61,687
Citigroup Inc., Subordinated Notes	5.000	%	9/15/14		500,000		500,100
FDIC Structured Sale Guaranteed Notes, Notes	0.000	%	10/25/13		250,000		234,927	(a)
General Electric Capital Corp., Subordinated Debentures	6.375	%	11/15/67		450,000		418,500	(b)
JPMorgan Chase Bank N.A., Medium-Term Notes	3.278	%	2/11/11		205,000		205,021	(a)(b)
MUFG Capital Finance 1 Ltd., Preferred Securities	6.346	%	7/25/16		240,000		232,198	(b)(c)
Private Export Funding Corp., Notes	4.950	%	11/15/15		240,000		270,934
TNK-BP Finance SA	6.875	%	7/18/11		190,000		195,472	(a)
Westpac Securities NZ Ltd., Senior Notes	2.500	%	5/25/12		130,000		132,974	(a)
ZFS Finance USA Trust I	1.687	%	12/15/65		540,000		487,350	(a)(b)
Total Diversified Financial Services							2,926,852
Insurance — 2.7%
Berkshire Hathaway Inc., Senior Notes	0.354	%	2/10/11		500,000		499,948	(b)
Berkshire Hathaway Inc., Senior Notes	2.125	%	2/11/13		220,000		224,614
Metropolitan Life Global Funding I, Notes	2.875	%	9/17/12		170,000		174,039	(a)
Prudential Financial Inc., Senior Notes	2.750	%	1/14/13		140,000		140,684
Suncorp-Metway Ltd., Senior Notes	1.803	%	7/16/12		450,000		462,237	(a)(b)
Total Insurance							1,501,522
Thrifts & Mortgage Finance — 0.1%
Countrywide Financial Corp., Medium-Term Notes	5.800	%	6/7/12		60,000		63,092
Total Financials							18,583,993
Health Care — 1.6%
Health Care Equipment & Supplies — 1.4%
Baxter FinCo BV	4.750	%	10/15/10		260,000		263,062
Baxter International Inc., Senior Notes	1.800	%	3/15/13		130,000		131,521
Hospira Inc., Senior Notes	5.550	%	3/30/12		200,000		212,950
Medtronic Inc., Senior Notes	3.000	%	3/15/15		170,000		176,105
Total Health Care Equipment & Supplies							783,638

See Notes to Financial Statements.

8 Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report

Schedule of investments (unaudited) (cont’d)

June 30, 2010

Western Asset Limited Duration Bond Portfolio

Security	Rate		Maturity Date	Face Amount		Value
Health Care Providers & Services — 0.2%
UnitedHealth Group Inc., Senior Notes	4.875	%	2/15/13	$	110,000	$	118,199
Total Health Care							901,837
Industrials — 2.2%
Airlines — 1.7%
Continental Airlines Inc., Pass-Through Certificates	6.900	%	1/2/18		283,663		283,663
Continental Airlines Inc., Pass-Through Certificates	6.545	%	8/2/20		175,675		176,554
Continental Airlines Inc., Pass-Through Certificates	6.703	%	6/15/21		182,082		181,627
Northwest Airlines Inc., Pass-Through Certificates	1.215	%	5/20/14		326,776		289,605	(b)
Total Airlines							931,449
Commercial Services & Supplies — 0.2%
Allied Waste North America Inc., Senior Notes	7.125	%	5/15/16		120,000		128,700
Industrial Conglomerates — 0.3%
United Technologies Corp., Senior Notes	5.375	%	12/15/17		140,000		160,474
Total Industrials							1,220,623
Materials — 0.6%
Chemicals — 0.4%
Dow Chemical Co., Notes	5.700	%	5/15/18		60,000		63,252
E.I. du Pont de Nemours & Co., Senior Notes	3.250	%	1/15/15		170,000		177,349
Total Chemicals							240,601
Metals & Mining — 0.2%
Vale Overseas Ltd., Notes	6.250	%	1/23/17		80,000		87,137
Total Materials							327,738
Telecommunication Services — 3.5%
Diversified Telecommunication Services — 2.2%
AT&T Inc., Senior Notes	4.850	%	2/15/14		250,000		273,811
France Telecom SA, Notes	7.750	%	3/1/11		200,000		208,700
Qwest Corp., Notes	8.875	%	3/15/12		130,000		139,425
Telefonica Emisiones SAU	0.674	%	2/4/13		400,000		385,687	(b)
Telefonica Emisiones SAU, Senior Notes	3.729	%	4/27/15		120,000		119,650
Verizon Communications Inc., Senior Notes	8.750	%	11/1/18		100,000		129,997
Total Diversified Telecommunication Services							1,257,270
Wireless Telecommunication Services — 1.3%
America Movil SAB de CV, Senior Notes	3.625	%	3/30/15		100,000		102,535	(a)
Cellco Partnership/Verizon Wireless Capital LLC, Senior Notes	3.750	%	5/20/11		260,000		266,300
Rogers Wireless Inc., Secured Notes	6.375	%	3/1/14		300,000		340,610
Total Wireless Telecommunication Services							709,445
Total Telecommunication Services							1,966,715
Utilities — 1.1%
Electric Utilities — 1.1%
FirstEnergy Corp., Notes	6.450	%	11/15/11		5,000		5,281
FirstEnergy Solutions Corp., Senior Notes	4.800	%	2/15/15		160,000		167,423
Pacific Gas & Electric Co.	4.800	%	3/1/14		400,000		433,443
Total Utilities							606,147
Total Corporate Bonds & Notes (Cost — $29,857,292)							27,854,314

See Notes to Financial Statements.

Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report 9

Western Asset Limited Duration Bond Portfolio

Security	Rate		Maturity Date	Face Amount		Value
Asset-Backed Securities — 17.9%
Financials — 17.9%
Automobiles — 2.0%
ARI Fleet Lease Trust, 2010-A A	1.800	%	8/15/18	$	119,354	$	119,350	(a)(b)
Ford Credit Auto Owner Trust, 2009-B A2	2.100	%	11/15/11		244,275		244,785
Ford Credit Auto Owner Trust, 2009-D A2	1.210	%	1/15/12		237,096		237,367
Nissan Master Owner Trust Receivables, 2010-AA A	1.487	%	1/15/15		290,000		290,715	(a)(b)
Volkswagen Auto Loan Enhanced Trust, 2008-1 A4	2.048	%	10/20/14		240,000		245,409	(b)
Total Automobiles							1,137,626
Credit Cards — 3.8%
Bank of America Credit Card Trust, 2006-A9 A9	0.360	%	2/15/13		650,000		649,813	(b)
Bank of America Credit Card Trust, 2008-A1 A1	0.930	%	4/15/13		420,000		420,664	(b)
Chase Issuance Trust, 2006-A5 A	0.370	%	11/15/13		600,000		598,378	(b)
Citibank Credit Card Issuance Trust, 2009-A5 A5	2.250	%	12/23/14		470,000		478,379
Total Credit Cards							2,147,234
Home Equity — 5.6%
Ameriquest Mortgage Securities Inc., 2005-R11 A2D	0.677	%	1/25/36		240,000		161,783	(b)
Asset Backed Funding Certificates, 2004-OPT2 M1	0.897	%	8/25/33		180,000		140,098	(b)
Bayview Financial Acquisition Trust, 2004-C A1	0.977	%	5/28/44		54,298		47,664	(b)
Bayview Financial Acquisition Trust, 2006-D 2A4	0.627	%	12/28/36		419,176		283,494	(b)
Bear Stearns Asset-Backed Securities Inc., 2007-SD2 2A1	0.747	%	9/25/46		262,026		144,929	(b)
Bear Stearns Asset-Backed Securities Trust, 2006-SD2	0.547	%	6/25/36		162,033		155,736	(b)
Bear Stearns Second Lien Trust, 2007-SV1A A1	0.567	%	12/25/36		162,453		127,004	(a)(b)
Countrywide Asset-Backed Certificates, 2003-5 AF5	5.739	%	2/25/34		570,266		485,456
Countrywide Home Equity Loan Trust, 2004-O	0.630	%	2/15/34		45,156		22,297	(b)
Countrywide Home Equity Loan Trust, 2006-HW 2A1B	0.487	%	11/15/36		258,300		186,194	(b)
Ellington Loan Acquisition Trust, 2007-1 A2A1	1.347	%	5/26/37		171,146		148,842	(a)(b)
MASTR Specialized Loan Trust, 2006-2	0.607	%	2/25/36		224,816		106,392	(a)(b)
MASTR Specialized Loan Trust, 2006-3 A	0.607	%	6/25/46		384,752		199,188	(a)(b)
Morgan Stanley Mortgage Loan Trust, 2006-12XS A1	0.467	%	10/25/36		3,240		3,224	(b)
Residential Asset Securities Corp., 2003-KS10 AI6	4.540	%	12/25/33		150,189		149,478	(b)
Residential Asset Securities Corp., 2006-KS1 A4	0.647	%	2/25/36		310,000		187,964	(b)
SACO I Trust, 2006-3 A3	0.807	%	4/25/36		502,057		85,313	(b)
Small Business Administration, 2004-2	3.080	%	9/25/18		221,801		232,523	(b)
Specialty Underwriting & Residential Finance, 2003-BC4 M1	1.247	%	11/25/34		240,000		188,516	(b)
Structured Asset Securities Corp., 2004-SC1	8.598	%	12/25/29		63,395		60,360	(a)(b)
UCFC Home Equity Loan, 1998-D MF1	6.905	%	4/15/30		33,160		30,699
Total Home Equity							3,147,154
Manufactured Housing — 1.4%
Countryplace Manufactured Housing Contract Trust, 2007-1 A2	5.232	%	7/15/37		229,664		225,071	(a)(b)(f)
Green Tree, 2008-MH1 A1	7.000	%	4/25/38		333,523		340,716	(a)(b)
Origen Manufactured Housing, 2006-A	0.500	%	11/15/18		242,474		225,508	(b)
Total Manufactured Housing							791,295
Student Loan — 5.1%
Nelnet Student Loan Trust, 2008-4 A4	1.796	%	4/25/24		1,090,000		1,122,882	(b)
SLM Student Loan Trust, 2003-11 A4	0.727	%	6/15/20		79,781		79,531	(b)
SLM Student Loan Trust, 2003-7A A5A	1.737	%	12/15/33		200,000		202,688	(a)(b)

See Notes to Financial Statements.

10 Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report

Schedule of investments (unaudited) (cont’d)

June 30, 2010

Western Asset Limited Duration Bond Portfolio

Security	Rate		Maturity Date	Face Amount		Value
Student Loan — continued
SLM Student Loan Trust, 2005-10 A3	0.366	%	10/25/16	$	330,511	$	330,203	(b)
SLM Student Loan Trust, 2005-10 A4	0.426	%	10/25/19		150,000		148,359	(b)
SLM Student Loan Trust, 2006-5 A5	0.426	%	1/25/27		200,000		188,539	(b)
SLM Student Loan Trust, 2007-2 A2	0.316	%	7/25/17		225,961		224,065	(b)
SLM Student Loan Trust, 2007-6 A1	0.486	%	4/27/15		174,056		173,978	(b)
SLM Student Loan Trust, 2008-1 A2	0.666	%	10/25/16		200,000		200,694	(b)
Student Loan Consolidation Center, 2002-1 A3	1.918	%	3/1/42		100,000		89,000	(a)(b)(f)
Student Loan Consolidation Center, 2002-2 A14	1.851	%	7/1/42		100,000		89,000	(a)(b)(f)
Total Student Loan							2,848,939
Total Asset-Backed Securities (Cost — $11,222,679)							10,072,248
Collateralized Mortgage Obligations — 14.0%
American Home Mortgage Investment Trust, 2005-SD1 1A1	0.797	%	9/25/35		389,718		204,073	(a)(b)
Banc of America Funding Corp., 2004-B 3A2	3.464	%	12/20/34		66,053		40,360	(b)
Banc of America Mortgage Securities, 2003-D	2.961	%	5/25/33		78,870		75,833	(b)
Bayview Commercial Asset Trust, 2005-2A A2	0.697	%	8/25/35		278,278		190,995	(a)(b)
Bear Stearns ARM Trust, 2004-10 15A1	3.228	%	1/25/35		145,948		123,988	(b)
Bear Stearns Commercial Mortgage Securities Inc., 2004-PWR4 A2	5.286	%	6/11/41		362,961		380,195	(b)
CBA Commercial Small Balance Commercial Trust, 2005-1A	0.667	%	7/25/35		263,168		150,006	(a)(b)
Citigroup Mortgage Loan Trust Inc., 2005-5	2.267	%	8/25/35		189,370		104,005	(b)
Citigroup Mortgage Loan Trust Inc., 2007-AR8 1A1A	5.620	%	8/25/47		418,787		314,240	(b)
Countrywide Alternative Loan Trust, 2005-51 2A1	0.647	%	11/20/35		244,023		133,757	(b)
Countrywide Asset-Backed Certificates, 2005-IM1 A2	0.627	%	11/25/35		139,663		128,884	(b)
Countrywide Home Loans, 2005-R3 AF	0.747	%	9/25/35		351,214		281,951	(a)(b)
Crusade Global Trust, 2003-2	0.729	%	9/18/34		25,583		25,427	(b)(f)
CS First Boston Mortgage Securities Corp., 2004-AR5 7A2	2.708	%	6/25/34		203,592		199,649	(b)
CS First Boston Mortgage Securities Corp., 2004-AR6 1A1	2.700	%	10/25/34		103,910		97,778	(b)
Federal National Mortgage Association (FNMA), 2002-83 MD	5.000	%	9/25/16		408,775		419,448
First Horizon Alternative Mortgage Securities, 2004-AA4 A1	2.249	%	10/25/34		169,832		144,819	(b)
First Union National Bank-Bank of America Commercial Mortgage Trust, 2001-C1 A2	6.136	%	3/15/33		121,734		122,881
GE Capital Commercial Mortgage Corp., 2001-2 A4	6.290	%	8/11/33		270,851		279,453
Government National Mortgage Association (GNMA), 2010-H02 FA	1.034	%	2/20/60		410,372		415,009	(b)
Government National Mortgage Association (GNMA), 2010-H03 FA	0.904	%	3/20/60		209,650		212,270	(b)(f)
Government National Mortgage Association (GNMA), 2010-H10 FB	1.264	%	5/20/60		240,000		247,056	(b)(f)
Greenpoint Mortgage Funding Trust, 2006-AR7 1A1B	0.467	%	12/25/46		81,309		8,644	(b)
GS Mortgage Securities Corp. II, 2001-1285 C	6.712	%	8/15/18		200,000		206,458	(a)
GSMPS Mortgage Loan Trust, 2005-RP3 1AF	0.697	%	9/25/35		322,370		258,162	(a)(b)
Indymac INDX Mortgage Loan Trust, 2004-AR15	2.813	%	2/25/35		141,331		86,490	(b)
LB-UBS Commercial Mortgage Trust, 2001-WM A2	6.530	%	7/14/16		170,000		176,212	(a)
Luminent Mortgage Trust, 2006-7 2A2	0.567	%	12/25/36		898,970		184,764	(b)
Medallion Trust, 2003-1G A	0.729	%	12/21/33		29,638		28,342	(b)
Merrill Lynch Mortgage Investors Inc., 2003-H A3	2.058	%	1/25/29		12,984		12,410	(b)
Merrill Lynch Mortgage Investors Trust, 2004-A1 2A1	2.821	%	2/25/34		178,690		166,573	(b)
Prime Mortgage Trust, 2005-2 2A1	7.329	%	10/25/32		82,235		79,917	(b)
Residential Asset Mortgage Products Inc., 2004-SL1	7.000	%	11/25/31		35,031		32,940
Residential Asset Mortgage Products Inc., 2004-SL2 A4	8.500	%	10/25/31		19,745		20,117

See Notes to Financial Statements.

Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report 11

Western Asset Limited Duration Bond Portfolio

Security	Rate		Maturity Date	Face Amount		Value
Collateralized Mortgage Obligations — continued
Residential Asset Mortgage Products Inc., 2005-SL1 A7	8.000	%	5/25/32	$	385,743	$	357,267
Sequoia Mortgage Trust, 2003-2 A2	1.095	%	6/20/33		19,765		15,813	(b)
Sequoia Mortgage Trust, 2004-6 A1	2.003	%	7/20/34		98,576		83,372	(b)
Structured ARM Loan Trust, 2005-12 3A1	2.568	%	6/25/35		282,825		203,704	(b)
Structured Asset Securities Corp., 2003-22A 3A	2.562	%	6/25/33		470,697		451,330	(b)
Structured Asset Securities Corp., 2004-NP1 A	0.747	%	9/25/33		117,519		95,191	(a)(b)(e)(f)
Structured Asset Securities Corp., 2005-4XS 3A4	4.790	%	3/25/35		300,000		275,379
Wachovia Mortgage Loan Trust LLC, 2005-A 1A1	3.435	%	8/20/35		118,103		78,441	(b)
WaMu Mortgage Pass-Through Certificates, 2003-AR8 A	2.834	%	8/25/33		169,891		169,949	(b)
WaMu Mortgage Pass-Through Certificates, 2005-AR19	0.757	%	12/25/45		404,247		252,350	(b)
WaMu Mortgage Pass-Through Certificates, 2007-HY7 1A1	4.515	%	7/25/37		285,810		198,932	(b)
Washington Mutual Mortgage Pass-Through Certificates, 2006-AR4 DA	1.391	%	6/25/46		383,393		166,670	(b)
Total Collateralized Mortgage Obligations (Cost — $10,273,390)							7,901,504
Mortgage-Backed Securities — 2.5%
FNMA — 2.1%
Federal National Mortgage Association (FNMA)	5.500	%	3/1/18 - 9/1/21		537,007		582,452
Federal National Mortgage Association (FNMA)	2.888	%	12/1/34		70,416		73,483	(b)
Federal National Mortgage Association (FNMA)	2.891	%	12/1/34		53,009		55,218	(b)
Federal National Mortgage Association (FNMA)	2.082	%	1/1/35		158,526		165,956	(b)
Federal National Mortgage Association (FNMA)	2.050	%	3/1/35		258,740		271,581	(b)
Total FNMA							1,148,690
GNMA — 0.4%
Government National Mortgage Association (GNMA)	1.860	%	1/20/60		238,434		244,442	(b)(f)
Total Mortgage-Backed Securities (Cost — $1,367,022)							1,393,132
Sovereign Bond — 0.9%
Canada — 0.9%
Province of Ontario, Notes (Cost — $479,490)	2.950	%	2/5/15		480,000		492,117
U.S. Government & Agency Obligations — 8.3%
U.S. Government Agencies — 1.8%
Federal Home Loan Bank (FHLB), Bonds	0.875	%	8/22/12		600,000		600,591
Federal Home Loan Mortgage Corp. (FHLMC), Senior Notes	5.000	%	2/16/17		390,000		445,125
Total U.S. Government Agencies							1,045,716
U.S. Government Obligations — 6.5%
U.S. Treasury Notes	1.000	%	4/30/12		360,000		362,700
U.S. Treasury Notes	1.375	%	5/15/13		1,010,000		1,022,312
U.S. Treasury Notes	2.125	%	5/31/15		675,000		686,603
U.S. Treasury Notes	2.500	%	6/30/17		400,000		401,750
U.S. Treasury Notes	3.375	%	11/15/19		920,000		952,847
U.S. Treasury Notes	3.625	%	2/15/20		210,000		221,878
Total U.S. Government Obligations							3,648,090
Total U.S. Government & Agency Obligations (Cost — $4,595,571)							4,693,806
				Shares
Preferred Stocks — 0.0%
Financials — 0.0%
Thrifts & Mortgage Finance — 0.0%
Federal Home Loan Mortgage Corp. (FHLMC)	8.375	%			12,125		4,122	*(b)
Federal National Mortgage Association (FNMA)	8.250	%			8,850		3,009	*(b)
Total Preferred Stocks (Cost — $524,375)							7,131

See Notes to Financial Statements.

12 Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report

Schedule of investments (unaudited) (cont’d)

June 30, 2010

Western Asset Limited Duration Bond Portfolio

Security		Expiration Date	Contracts		Value
Purchased Options — 0.0%
Eurodollar Futures, Put @ $99.38		9/13/10		34	$	8,713
Eurodollar Mid Curve 1-Year Futures, Put @ $98.75		9/10/10		15		2,906
Total Purchased Options (Cost — $15,697)						11,619
Total Investments before Short-Term Investments (Cost — $58,335,516)						52,425,871
	Rate	Maturity Date	Face Amount
Short-Term Investments — 4.4%
U.S. Government Agencies — 0.2%
Federal Home Loan Mortgage Corp. (FHLMC), Discount Notes	0.190% - 0.200%	8/23/10	$	18,000		17,997	(g)(h)
Federal National Mortgage Association (FNMA), Discount Notes	0.180%	8/23/10		120,000		119,980	(g)(h)
Total U.S. Government Agencies (Cost — $137,963)						137,977
Repurchase Agreement — 4.2%
Goldman Sachs & Co. repurchase agreement dated 6/30/10; Proceeds at maturity — $2,362,001; (Fully collateralized by U.S. government agency obligations, 6.625% due 11/15/30; Market value — $2,413,350) (Cost — $2,362,000)	0.020%	7/1/10		2,362,000		2,362,000
Total Short-Term Investments (Cost — $2,499,963)						2,499,977
Total Investments — 97.5% (Cost — $60,835,479#)						54,925,848
Other Assets in Excess of Liabilities — 2.5%						1,384,661
Total Net Assets — 100.0%					$	56,310,509

* Non-income producing security.

^(a) Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. This security has been deemed liquid pursuant to guidelines approved by the Board of Directors, unless otherwise noted.

^(b) Variable rate security. Interest rate disclosed is that which is in effect at June 30, 2010.

^(c) Security has no maturity date. The date shown represents the next call date.

^(d) The coupon payment on these securities is currently in default as of June 30, 2010.

^(e) Illiquid security.

^(f) Security is valued in good faith at fair value in accordance with procedures approved by the Board of Directors (See Note 1).

^(g) Rate shown represents yield-to-maturity.

^(h) All or a portion of this security is held at the broker as collateral for open futures contracts.

# Aggregate cost for federal income tax purposes is substantially the same.

Abbreviation used in this schedule:
ARM	— Adjustable Rate Mortgage

Schedule of Written Options
Security	Expiration Date	Strike Price		Contracts	Value
Eurodollar Futures, Call	3/14/11	$	98.88	26	$	27,138
Eurodollar Futures, Call	9/13/10		98.75	7		10,938
Eurodollar Futures, Call	9/13/10		99.13	25		17,031
Eurodollar Futures, Call	9/13/10		99.25	12		5,025
Eurodollar Futures, Put	9/13/10		99.13	59		7,744
Eurodollar Futures, Put	3/14/11		98.88	26		8,612
Eurodollar Futures, Put	9/13/10		99.00	36		3,600
Eurodollar Mid Curve 1-Year Futures, Put	9/10/10		98.50	15		1,500
Total Written Options (Premiums received — $96,743)					$	81,588

See Notes to Financial Statements.

Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report 13

Statement of assets and liabilities (unaudited)

June 30, 2010

Assets:
Investments, at value (Cost — $60,835,479)	$	54,925,848
Cash		58
Receivable for Fund shares sold		1,219,538
Interest receivable		369,794
Premiums paid for open swaps		41,035
Unrealized appreciation on swaps		12,627
Principal paydown receivable		8,169
Receivable for open swap contracts		66
Prepaid expenses		12,447
Total Assets		56,589,582
Liabilities:
Written options, at value (premium received $96,743)		81,588
Unrealized depreciation on swaps		74,959
Premium received for open swaps		22,626
Payable for Fund shares repurchased		6,599
Investment management fee payable		6,378
Distributions payable		4,189
Payable to broker — variation margin on open futures contracts		1,700
Payable for open swap contracts		884
Directors’ fees payable		741
Accrued expenses		79,409
Total Liabilities		279,073
Total Net Assets	$	56,310,509
Net Assets:
Par value (Note 7)	$	6,201
Paid-in capital in excess of par value		71,756,546
Overdistributed net investment income		(51,534)
Accumulated net realized loss on investments, futures contracts, written options and swap contracts		(9,454,398)
Net unrealized depreciation on investments, futures contracts, written options and swap contracts		(5,946,306)
Total Net Assets	$	56,310,509
Shares Outstanding:
Class IS1		2,744,154
Class I1		3,457,343
Net Asset Value:
Class IS1		$9.08
Class I1		$9.08

¹ In April 2010, Institutional Select Class and Institutional Class shares were renamed Class IS and Class I shares, respectively.

See Notes to Financial Statements.

14 Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report

Statement of operations (unaudited)

For the Six Months Ended June 30, 2010

Investment Income:
Interest	$	917,139
Expenses:
Investment management fee (Note 2)		99,736
Legal fees		19,438
Audit and tax		19,415
Shareholder reports (Note 5)		17,915
Custody fees		12,109
Transfer agent fees (Note 5)		8,401
Registration fees		3,910
Directors’ fees		1,488
Miscellaneous expenses		2,348
Total Expenses		184,760
Less: Fee waivers and/or expense reimbursements (Notes 2 and 5)		(49,404)
Net Expenses		135,356
Net Investment Income		781,783
Realized and Unrealized Gain (Loss) on Investments, Futures Contracts, Written Options and Swap Contracts (Notes 1, 3 and 4):
Net Realized Gain (Loss) From:
Investment transactions		(354,058)
Futures contracts		32,238
Written options		35,235
Swap contracts		(18,264)
Net Realized Loss		(304,849)
Change in Net Unrealized Appreciation/Depreciation From:
Investments		1,910,513
Futures contracts		12,658
Written options		6,509
Swap contracts		60,179
Change in Net Unrealized Appreciation/Depreciation		1,989,859
Net Gain on Investments, Futures Contracts, Written Options and Swap Contracts		1,685,010
Increase in Net Assets from Operations	$	2,466,793

See Notes to Financial Statements.

Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report 15

Statements of changes in net assets

For the Six Months Ended June 30, 2010 (unaudited) and the Year Ended December 31, 2009	2010		2009
Operations:
Net investment income	$	781,783	$	2,322,700
Net realized loss		(304,849)		(1,234,185)
Change in net unrealized appreciation/depreciation		1,989,859		7,803,289
Increase in Net Assets From Operations		2,466,793		8,891,804
Distributions to Shareholders From (Notes 1 and 6):
Net investment income		(789,771)		(2,362,163)
Decrease in Net Assets from Distributions to Shareholders		(789,771)		(2,362,163)
Fund Share Transactions (Note 7):
Net proceeds from sale of shares		9,894,750		11,513,468
Reinvestment of distributions		759,694		2,006,661
Cost of shares repurchased		(12,106,086)		(42,575,536)
Decrease in Net Assets From Fund Share Transactions		(1,451,642)		(29,055,407)
Increase (Decrease) in Net Assets		225,380		(22,525,766)
Net Assets:
Beginning of period		56,085,129		78,610,895
End of period*	$	56,310,509	$	56,085,129
* Includes overdistributed net investment income of:		$(51,534)		$(43,546)

See Notes to Financial Statements.

16 Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report

Financial highlights

For a share of each class of capital stock outstanding throughout each year ended December 31, unless otherwise noted:
Class IS Shares1,2	20103		2009		20084
Net asset value, beginning of period	$8.82		$7.87		$8.01
Income (loss) from operations:
Net investment income	0.13		0.31		0.05
Net realized and unrealized gain (loss)	0.26		0.96		(0.13)
Total income (loss) from operations	0.39		1.27		(0.08)
Less distributions from:
Net investment income	(0.13)		(0.32)		(0.06)
Total distributions	(0.13)		(0.32)		(0.06)
Net asset value, end of period	$ 9.08		$ 8.82		$ 7.87
Total return5	4.41	%	16.42	%	(0.96)	%
Net assets, end of period (000s)	$24,914		$22,037		$13,274
Ratios to average net assets:
Gross expenses	0.61	%6	0.65	%	0.58	%6
Net expenses7	0.40	6,8	0.40	8	0.40	6,9
Net investment income	2.82	6	3.8		3.7	6
Portfolio turnover rate	82	%	168	%	261	%

¹ In April 2010, Institutional Select Class shares were renamed Class IS shares.

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

³ For the six months ended June 30, 2010 (unaudited).

⁴ For the period October 29, 2008 (commencement of operations) to December 31, 2008.

⁵ Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

⁶ Annualized.

⁷ Reflects fee waivers and/or expense reimbursements.

⁸ The impact of compensating balance arrangements to the expense ratio was less than 0.01%.

⁹ The impact of compensating balance arrangements to the expense ratio was 0.01%.

See Notes to Financial Statements.

Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report 17

For a share of each class of capital stock outstanding throughout each year ended December 31, unless otherwise noted:
Class I Shares1	20102		2009		20083		20084		20074		20064		20054
Net asset value, beginning of period	$8.82		$7.87		$8.96		$9.88		$9.80		$9.89		$10.09
Income (loss) from operations:
Net investment income	0.12	5	0.30	5	0.27	5	0.50	5	0.47	5	0.38		0.24
Net realized and unrealized gain (loss)	0.26		0.97		(1.08)		(0.94)		0.08		(0.09)		(0.17)
Total income (loss) from operations	0.38		1.27		(0.81)		(0.44)		0.55		0.29		0.07
Less distributions from:
Net investment income	(0.12)		(0.32)		(0.28)		(0.43)		(0.47)		(0.38)		(0.25)
Net realized gains	—		—		—		—		—		—		(0.02)
Return of capital	—		—		—		(0.05)		—		—		—
Total distributions	(0.12)		(0.32)		(0.28)		(0.48)		(0.47)		(0.38)		(0.27)
Net asset value, end of period	$ 9.08		$ 8.82		$ 7.87		$ 8.96		$ 9.88		$ 9.80		$ 9.89
Total return6	4.35	%	16.38	%	(9.23)	%	(4.72)	%	5.73	%	3.01	%	0.69	%
Net assets, end of period (000s)	$31,397		$34,048		$65,337		$103,487		$92,400		$74,143		$37,426
Ratios to average net assets:
Gross expenses	0.68	%7	0.64	%	0.58	%7	0.50	%	0.58	%	0.68	%	0.73	%
Net expenses8	0.52	7	0.43		0.46	7,9	0.40	9	0.40	9	0.40	9	0.40	9
Net investment income	2.70	7	3.7		4.2	7	5.2		4.8		3.9		2.4
Portfolio turnover rate	82	%	168	%	261	%	312	%	271	%	245	%	232	%

¹ In April 2010, Institutional Class shares were renamed Class I shares.

² For the six months ended June 30, 2010 (unaudited).

³ For the period April 1, 2008 through December 31, 2008.

⁴ For the year ended March 31.

⁵ Per share amounts have been calculated using the average shares method.

⁶ Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

⁷ Annualized.

⁸ Reflects fee waivers and/or expense reimbursements.

⁹ The impact of compensating balance arrangements to the expense ratio was less than 0.01%.

See Notes to Financial Statements.

18 Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report

Notes to financial statements (unaudited)

1. Organization and significant accounting policies

Western Asset Limited Duration Bond Portfolio (the “Fund”) is a separate diversified investment series of Western Asset Funds, Inc. (the “Corporation”). The Corporation, a Maryland Corporation, is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company.

The Fund offers three classes of shares: Class IS, Class I and Class FI. Prior to April 2010, Class IS, Class I and Class FI shares were known as Institutional Select Class, Institutional Class and Financial Intermediary Class shares, respectively. Shares in the Class FI bear a distribution fee. Class FI shares have not commenced operations. The income and expenses are allocated proportionately to each class of shares based on daily net assets, except for Rule 12b-1 distribution fees, which are charged only on the Class FI shares, and transfer agent and shareholder servicing expenses, and certain other expenses, which are determined separately for each class.

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

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

The Fund has adopted Financial Accounting Standards Board Codification Topic 820 (“ASC Topic 820”). ASC Topic 820 establishes a single definition of fair value, creates a three-tier hierarchy as a framework for measuring fair value based on inputs used to value the Fund’s investments, and requires additional disclosure about fair value. The hierarchy of inputs is summarized below.

Ÿ Level 1 — quoted prices in active markets for identical investments

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

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

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

The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of the security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to convert future amounts of cash flow to a single present amount.

Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report 19

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

Description	Quoted Prices (Level 1)		Other Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Long-term investments†:
Corporate bonds & notes		—	$	27,854,314		—	$	27,854,314
Asset-backed securities		—		9,669,177	$	403,071		10,072,248
Collateralized mortgage obligations		—		7,346,987		554,517		7,901,504
Mortgage-backed securities		—		1,148,690		244,442		1,393,132
Sovereign bond		—		492,117		—		492,117
U.S. government & agency obligations		—		4,693,806		—		4,693,806
Preferred stocks	$	7,131		—		—		7,131
Purchased options		11,619		—		—		11,619
Total long-term investments	$	18,750	$	51,205,091	$	1,202,030	$	52,425,871
Short-term investments†		—		2,499,977		—		2,499,977
Total investments	$	18,750	$	53,705,068	$	1,202,030	$	54,925,848
Other financial instruments:
Futures contracts	$	10,502		—		—	$	10,502
Written options		(81,588)		—		—		(81,588)
Credit default swaps on corporate issues — buy protection‡		—	$	13,797		—		13,797
Credit default swaps on credit indices — sell protection‡		—		(45,574)		—		(45,574)
Credit default swaps on credit indices — buy protection‡		—		(12,146)		—		(12,146)
Total other financial instruments	$	(71,086)	$	(43,923)		—	$	(115,009)
Total	$	(52,336)	$	53,661,145	$	1,202,030	$	54,810,839

† See Schedule of Investments for additional detailed categorizations.

‡ Values include any premiums paid or received with respect to swap contracts.

Following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value:

Investments in Securities	Asset-Backed Securities		Collateralized Mortgage Obligations		Mortgage-Backed Securities		Total
Balance as of December 31, 2009		—		—		—		—
Accrued premiums/discounts	$	43	$	10,442	$	(39)	$	10,446
Realized gain/(loss)1		—		591		(37)		554
Change in unrealized appreciation (depreciation)2		(5,543)		(12,090)		(286)		(17,919)
Net purchases (sales)		183,500		555,574		244,804		983,878
Transfers in to Level 3		225,071		—		—		225,071
Transfers out of Level 3		—		—		—		—
Balance as of June 30, 2010	$	403,071	$	554,517	$	244,442	$	1,202,030
Net change in unrealized appreciation (depreciation) for investments in securities still held at June 30, 20102	$	(5,543)	$	(12,090)	$	(286)	$	(17,919)

¹ This amount is included in net realized gain (loss) from investment transactions in the accompanying Statement of Operations.

² This amount is included in the change in net unrealized appreciation (depreciation) in the accompanying Statement of Operations. Change in unrealized appreciation (depreciation) includes net unrealized appreciation (depreciation) resulting from changes in investment values during the reporting period and the reversal of previously recorded unrealized appreciation (depreciation) when gains or losses are realized.

(b) Repurchase agreements. The Fund may enter into repurchase agreements with institutions that its investment adviser has determined are creditworthy. Each repurchase agreement is recorded at cost. 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 of the fund to resell, the obligation at an agreed-upon price and time, thereby determining the yield during a fund’s holding period. When entering into repurchase agreements, it is the Fund’s policy that its custodian or a third party custodian, acting on the

20 Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report

Notes to financial statements (unaudited) (cont’d)

Fund’s behalf, take possession of the underlying collateral securities, the market value of which, at all times, at least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction maturity exceeds one business day, the value of the collateral is marked to market and measured against the value of the agreement in an effort to ensure the adequacy of the collateral. If the counterparty defaults, the Fund generally has the right to use the collateral to satisfy the terms of the repurchase transaction. However, if the market value of the collateral declines during the period in which the Fund seeks to assert its rights or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited.

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

The risk in writing a covered call option is that the Fund may forego the opportunity of profit if the market price of the underlying security increases and the option is exercised. The risk in writing a put option is that the Fund may incur a loss if the market price of the underlying security decreases and the option is exercised. The risk in writing a call option is that the Fund is exposed to the risk of loss if the market price of the underlying security increases. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.

(d) Futures contracts. The Fund may use futures contracts to gain exposure to, or hedge against, changes in the value of interest rates or foreign currencies. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.

Upon entering into a futures contract, the Fund is required to deposit cash or cash equivalents with a broker in an amount equal to a certain percentage of the contract amount. This is known as the “initial margin” and 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 certain futures, including foreign denominated futures, variation margin is not settled daily, but is recorded as a net variation margin payable or receivable. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. The daily changes in contract value are recorded as unrealized gains or losses in the Statement of Operations and the Fund recognizes a realized gain or loss when the contract is closed.

Futures contracts involve, to varying degrees, risk of loss in excess of the amounts reflected in the financial statements. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.

(e) Swap agreements. The Fund may invest in swaps for the purpose of managing its 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.

Swap contracts 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 the Fund are recognized in the Statement 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. Securities held as collateral for swap contracts are identified in the Schedule of Investments and restricted cash, if any, is identified on the Statement of Assets and Liabilities. Risks may exceed amounts recorded in

Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report 21

the Statement 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.

Payments received or made at the beginning of the measurement period are reflected as a premium or deposit, respectively, on the Statement of Assets and Liabilities. These upfront payments are amortized over the life of the swap and are recognized as realized gain or loss in the Statement of Operations. A liquidation payment received or made at the termination of the swap is recognized as realized gain or loss in the Statement of Operations. Net periodic payments received or paid by the Fund are recognized as realized gain or loss at the time of receipt or payment in the Statement of Operations.

As disclosed in the Fund’s summary of open swap contracts, the aggregate fair value of credit default swaps in a net liability position as of June 30, 2010 was $57,720. The Fund did not hold or post collateral for its swap transactions. If a defined credit event had occurred as of June 30, 2010, the swaps’ credit-risk-related contingent features would have been triggered and the Fund would have been required to pay up to $364,600 less the value of the contracts’ related reference obligations

Credit default swaps

The Fund may enter into credit default swap (“CDS”) contracts for investment purposes, to manage its credit risk or to add leverage. CDS agreements involve one party making a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party, typically corporate or sovereign issuers, on a specified obligation, or in the event of a write-down, principal shortfall, interest shortfall or default of all or part of the referenced entities comprising a credit index. The Fund may use a CDS to provide protection against defaults of the issuers (i.e., to reduce risk where the Fund has exposure to a sovereign issuer) or to take an active long or short position with respect to the likelihood of a particular issuer’s default. As a seller of protection, the Fund generally receives an upfront payment or a stream of payments throughout the term of the swap provided that there is no credit event. If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the maximum potential amount of future payments (undiscounted) that the Fund could be required to make under a credit default swap agreement would be an amount equal to the notional amount of the agreement. These amounts of potential payments will be partially offset by any recovery of values from the respective referenced obligations. As a seller of protection, the Fund effectively adds leverage to its portfolio because, in addition to its total net assets, the Fund is subject to investment exposure on the notional amount of the swap. As a buyer of protection, the Fund generally receives an amount up to the notional value of the swap if a credit event occurs.

Implied spreads are the theoretical prices a lender receives for credit default protection. When spreads rise, market perceived credit risk rises and when spreads fall, market perceived credit risk falls. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to enter into the agreement. Wider credit spreads and decreasing market values, when compared to the notional amount of the swap, represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement. Credit spreads utilized in determining the period end market value of credit default swap agreements on corporate or sovereign issues are disclosed in the Notes to Financial Statements and serve as an indicator of the current status of the payment/performance risk and represent the likelihood or risk of default for credit derivatives. For credit default swap agreements on asset-backed securities and credit indices, the quoted market prices and resulting values, particularly in relation to the notional amount of the contract as well as the annual payment rate, serve as an indication of the current status of the payment/performance risk.

The Fund’s maximum risk of loss from counterparty risk, as the protection buyer, is the fair value of the contract (this risk is mitigated by the posting of collateral by the counterparty to the Fund to cover the Fund’s exposure to the counterparty). As the protection seller, the Fund’s maximum risk is the notional amount of the contract. Credit default swaps are considered to have credit risk-related contingent features since they require payment by the protection seller to the protection buyer upon the occurrence of a defined credit event.

22 Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report

Notes to financial statements (unaudited) (cont’d)

Entering into a CDS agreement involves, to varying degrees, elements of credit, market and documentation risk in excess of the related amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreement may default on its obligation to perform or disagree as to the meaning of the contractual terms in the agreement, and that there will be unfavorable changes in net interest rates.

(f) Credit and market risk. Investments in securities that are 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 foreclosure values of underlying real estate properties are materially below the outstanding amount of these underlying mortgages, collection of the full amount of accrued interest and principal on these investments may be doubtful. Such market conditions may significantly impair the value and liquidity of these investments and may result in a lack of correlation between their credit ratings and values.

(g) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults or a credit event occurs that impacts the issuer, a Fund may halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default or credit event.

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

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

(j) Compensating balance arrangements. The Fund has an arrangement with its custodian bank whereby a portion of the custodian’s fees is paid indirectly by credits earned on the Fund’s cash on deposit with the bank.

(k) Federal and other taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986 (the “Code”), as amended, applicable to regulated investment companies. Accordingly, the Fund intend to distribute its taxable income and net realized gains, if any, to shareholders in accordance with timing requirements imposed by the Code. Therefore, no federal income tax provision is required in the Fund’s financial statements.

Management has analyzed the Fund’s tax positions taken on federal income tax returns for all open tax years and has concluded that as of June 30, 2010, no provision for income tax is required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by Internal Revenue Service and state departments of revenue.

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

2. Investment management agreement and other transactions with affiliates

The Fund has an investment management agreement with Legg Mason Partners Fund Advisor, LLC (“LMPFA”). Western Asset Management Company (“Western Asset”) is the investment adviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).

LMPFA provides the Fund with management and administrative services for which the Fund pays a fee, computed daily and payable monthly, at an annual rate of the Fund’s average daily net assets. The manager has agreed to forgo fees and/or reimburse operating expenses (other than interest, taxes, extraordinary expenses and brokerage commissions) so that total operating expenses are not expected to

Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report 23

exceed the Fee Cap for Class IS and Class FI. With respect to Class I shares, the manager has contractually agreed to forgo fees and/or reimburse operating expenses at an amount equal to a specified rate of the Fund’s average daily net assets attributable to such share class (“Flat Waiver”). Western Asset has also agreed to waive their advisory fee (which is paid by LMPFA, and not the Fund) in amounts under both the Fee Cap and the Flat Waiver. This arrangement cannot be terminated prior to April 30, 2011, without the Board’s consent.

With respect to Class IS and Class FI, the manager is permitted to recapture amounts forgone or reimbursed to a class within three years after the day on which the manager earned the fee or incurred the expense if the class’s total annual operating expenses have fallen to a level below the lower of the limit described below or the limit then in effect. The following chart shows the annual rates of management fees, fee caps or waivers (as applicable), management fees waived and potential fees which may be recaptured for the Fund’s share classes.

	Asset Breakpoint for Management Fee	Management Fee		Fee Cap		Flat Waiver		Management Fees (Waived) Recaptured		Maximum Amount Subject to Recapture
Class IS1	All asset levels	0.350	%	0.40	%	—		$	(17,465)	62,350
Class I1	All asset levels	0.350		—		0.10	%		(26,220)	—

¹ In April 2010, Institutional Select Class and Institutional Class shares were renamed Class IS and Class I shares, respectively.

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

3. Investments

During the six months ended June 30, 2010, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) and U.S. Government & Agency Obligations were as follows:

	Investments		U.S. Government & Agency Obligations
Purchases	$	28,653,563	$	14,572,905
Sales		9,267,794		34,564,674

At June 30, 2010, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were substantially as follows:

Gross unrealized appreciation	$	1,152,518
Gross unrealized depreciation		(7,062,149)
Net unrealized depreciation	$	(5,909,631)

At June 30, 2010, the Fund had the following open futures contracts:

	Number of Contracts	Expiration Date	Basis Value		Market Value		Unrealized Gain/(Loss)
Contracts to Buy:
90-Day Eurodollar	12	9/10	$	2,973,364	$	2,980,350	$	6,986
U.S. Treasury 5-Year Notes	24	9/10		2,803,031		2,840,437		37,406
								44,392
Contracts to Sell:
U.S. Treasury 10-Year Notes	11	9/10		1,315,035		1,348,016		(32,981)
U.S. Treasury 2-Year Notes	1	9/10		217,919		218,828		(909)
								(33,890)
Net unrealized gain on open futures contracts							$	10,502

24 Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report

Notes to financial statements (unaudited) (cont’d)

During the six months ended June 30, 2010, written option transactions for the Fund were as follows:

	Number of Contracts	Premiums
Written options, outstanding December 31, 2009	67	$	38,853
Options written	403		149,940
Options closed	(195)		(83,816)
Options exercised	—		—
Options expired	(69)		(8,234)
Written options, outstanding June 30, 2010	206	$	96,743

At June 30, 2010, the Fund had the following open swap contracts:

CREDIT DEFAULT SWAPS ON CORPORATE ISSUES — BUY PROTECTION1
Swap Counterparty (Reference Entity)	Notional Amount2		Termination Date	Periodic Payments Made By The Fund‡	Market Value		Upfront Premiums Paid/ (Received)		Unrealized Appreciation/ (Depreciation)
Goldman Sachs Group, Inc. (Assured Guaranty Municipal Corp., 0.480%, due 11/15/13)	$	40,000	3/20/11	5.000% Quarterly	$	534	$	(298)	$	832
Goldman Sachs Group, Inc. (Assured Guaranty Municipal Corp., 0.480%, due 11/15/13)		30,000	3/20/13	5.000% Quarterly		2,256		(181)		2,437
Goldman Sachs Group, Inc. (Assured Guaranty Municipal Corp., 0.480%, due 11/15/13)		40,000	3/20/15	5.000% Quarterly		4,696		369		4,327
Goldman Sachs Group, Inc. (Assured Guaranty Municipal Corp., 0.480%, due 11/15/13)		50,000	3/20/20	5.000% Quarterly		6,311		1,280		5,031
Total	$	160,000			$	13,797	$	1,170	$	12,627

CREDIT DEFAULT SWAPS ON CREDIT INDICES — SELL PROTECTION4
Swap Counterparty (Reference Entity)	Notional Amount2		Termination Date	Periodic Payments Received By The Fund‡	Market Value3		Upfront Premiums Paid/ (Received)		Unrealized Appreciation/ (Depreciation)
Credit Suisse First Boston USA (ABX.HE-AAA 06-1)	$	364,600	7/25/45	0.180% Monthly	$	(45,574)	$	(22,147)	$	(23,427)

CREDIT DEFAULT SWAPS ON CREDIT INDICES — BUY PROTECTION1
Swap Counterparty (Reference Entity)	Notional Amount2		Termination Date	Periodic Payments Made By The Fund‡	Market Value3		Upfront Premiums Paid/ (Received)		Unrealized Appreciation/ (Depreciation)
Barclays Capital Inc. (CDX IG 11)	$	1,587,200	12/20/13	1.500% Quarterly	$	(12,146)	$	39,386	$	(51,532)

¹ If the Fund is a buyer of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) receive from the seller of protection an amount equal to the notional amount of the swap and deliver the underlying securities comprising the referenced index or (ii) receive a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the underlying securities comprising the referenced index.

² The maximum potential amount the Fund could be required to make as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

³ The quoted market prices and resulting values for credit default swap agreements on asset-backed securities and credit indices serve as an indicator of the current status of the payment/performance risk and represent the likelihood of an expected liability (or profit) for the credit derivative should the notional amount of the swap agreement been closed/sold as of the period end. Decreasing market values when compared to the notional amount of the swap, represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

⁴ If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

‡ Percentage shown is an annual percentage rate.

Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report 25

4. Derivative instruments and hedging activities

Financial Accounting Standards Board Codification Topic 815 requires enhanced disclosure about an entity’s derivative and hedging activities.

Below is a table, grouped by derivative type that provides information about the fair value and the location of derivatives within the Statement of Assets and Liabilities at June 30, 2010.

ASSET DERIVATIVES1
	Interest Rate Contracts Risk	Credit Contracts Risk	Total
Purchased options2	$11,619	—	$11,619
Futures contracts3	44,392	—	44,392
Swap contracts4	—	$53,662	53,662
Total	$56,011	$53,662	$109,673
LIABILITY DERIVATIVES1
	Interest Rate Contracts Risk	Credit Contracts Risk	Total
Written options	$ 81,588	—	$ 81,588
Futures contracts3	33,890	—	33,890
Swap contracts4	—	$97,585	97,585
Total	$115,478	$97,585	$213,063

¹ Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation(depreciation) and for liability derivatives is payables/net unrealized appreciation(depreciation).

² Market value of purchased options is reported in Investments of value in the Statement of Assets and Liabilities.

³ Includes cumulative appreciation/depreciation of futures contracts as reported in the footnotes. Only variation margin is reported within the receivables and/or payables of the Statement of Assets and Liabilities.

⁴ Values include premiums paid/(received) on swap contracts which are shown separately in the Statement of Assets and Liabilities.

The following tables provide information about the effect of derivatives and hedging activities on the Fund’s Statement of Operations for the six months ended June 30, 2010. The first table provides additional detail about the amounts and sources of gains/(losses) realized on derivatives during the period. The second table provides additional information about the changes in unrealized appreciation/(depreciation) resulting from the Fund’s derivatives and hedging activities during the period.

AMOUNT OF REALIZED GAIN OR (LOSS) ON DERIVATIVES RECOGNIZED
	Interest Rate Contracts Risk		Credit Contracts Risk		Total
Purchased options	$	(20,871)		—	$	(20,871)
Written options		35,235		—		35,235
Futures contracts		32,238		—		32,238
Swap contracts		—	$	(18,264)		(18,264)
Total	$	46,602	$	(18,264)	$	28,338

CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON DERIVATIVES RECOGNIZED
	Interest Rate Contracts Risk		Credit Contracts Risk		Total
Purchased options	$	2,140		—	$	2,140
Written options		6,509		—		6,509
Futures contracts		12,658		—		12,658
Swap contracts		—	$	60,179		60,179
Total	$	21,307	$	60,179	$	81,486

26 Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report

Notes to financial statements (unaudited) (cont’d)

During the six months ended June 30, 2010, the volume of derivative activity for the Fund was as follows:

	Average Market Value
Purchased options	$	4,819
Written options		55,412
Futures contracts (to buy)		6,040,491
Futures contracts (to sell)		4,260,855
	Average Notional Balance
Credit default swap contracts (to buy protection)	$	1,701,486
Credit default swap contracts (to sell protection)		378,721

The Fund has several credit related contingent features that if triggered would allow its derivatives counterparties to close out and demand payment or additional collateral to cover their exposure from the Fund. Credit related contingent features are established between the Fund and its derivatives counterparties to reduce the risk that the Fund will not fulfill its payment obligations to its counterparties. These triggering features include, but are not limited to, a percentage decrease in the Fund’s net assets and/or a percentage decrease in the Fund’s Net Asset Value or NAV. The contingent features are established within the Fund’s International Swap and Derivatives Association, Inc. master agreements which govern positions in swaps, over-the-counter options, and forward currency exchange contracts for each individual counterparty.

As of June 30, 2010, the total value of swap positions with credit related contingent features in a net liability position was $57,720. If a contingent feature would have been triggered as of June 30, 2010, the Fund would have been required to pay this amount in cash to its counterparties. The Fund did not hold or post collateral for its swap transactions.

5. Class specific expenses, waivers and/or reimbursements

The Fund has adopted a Rule 12b-1 distribution plan and under that plan the Fund pays a distribution fee with respect to its Class FI shares calculated at an annual rate of 0.25% of the average daily net assets of the Class FI. Distribution fees are accrued and paid monthly. As of June 30, 2010, Class FI shares have not commenced operations.

For the six months ended June 30, 2010, class specific expenses were as follows:

	Shareholder Reports		Transfer Agent Fees
Class IS1	$	3,203	$	2,484
Class I1		14,712		5,917
Total		$17,915	$	8,401

¹ In April 2010, Institutional Select Class and Institutional Class shares were renamed Class IS and Class I shares, respectively.

For the six months ended June 30, 2010, waivers and/or reimbursements by class were as follows:

	Waivers/ Reimbursements
Class IS1	$	23,184
Class I1		26,220
Total	$	49,404

¹ In April 2010, Institutional Select Class and Institutional Class shares were renamed Class IS and Class I shares, respectively.

6. Distributions to shareholders by class

	Six Months Ended June 30, 2010		Year Ended December 31, 2009
Net Investment Income:
Class IS1	$	323,098	$	563,500
Class I1		466,673		1,798,663
Total	$	789,771	$	2,362,163

¹ In April 2010, Institutional Select Class and Institutional Class shares were renamed Class IS and Class I shares, respectively.

Western Asset Limited Duration Bond Portfolio 2010 Semi-Annual Report 27

7. Capital shares

At June 30, 2010, the Corporation had 21.15 billion shares of capital stock authorized with a par value of $0.001 per share.

Transactions in shares of the Fund were as follows:

	Six Months Ended June 30, 2010			Year Ended December 31, 2009
	Shares	Amount		Shares	Amount
Class IS1
Shares sold	208,054	$	1,877,066	745,408	$	6,596,862
Shares issued on reinvestment	36,199		326,729	66,970		560,974
Net increase	244,253	$	2,203,795	812,378	$	7,157,836
Class I1
Shares sold	888,208	$	8,017,684	580,339	$	4,916,606
Shares issued on reinvestment	47,966		432,965	174,268		1,445,687
Shares repurchased	(1,340,417)		(12,106,086)	(5,199,750)		(42,575,536)
Net decrease	(404,243)	$	(3,655,437)	(4,445,143)	$	(36,213,243)

¹ In April 2010, Institutional Select Class and Institutional Class shares were renamed Class IS and Class I shares, respectively.

8. Capital loss carryforward

As of December 31, 2009, the Fund had a net capital loss carryforward of approximately $9,047,525, of which $234,847 expires in 2013, $394,050 expires in 2014, $34,113 expires in 2015, $5,768,220 expires in 2016 and $2,616,295 expires in 2017. These amounts will be available to offset any future taxable capital gains.

Western Asset

Limited Duration Bond Portfolio

Directors

William E. B. Siart, Chairman

Ronald J. Arnault

Anita L. DeFrantz

R. Jay Gerken

Ronald L. Olson

Avedick B. Poladian

Jaynie Miller Studenmund

Investment manager

Legg Mason Partners Fund Advisor, LLC

Investment adviser

Western Asset Management Company

Transfer agent

Boston Financial Data Services

2000 Crown Colony Drive

Quincy, MA 02169

Custodian

State Street Bank and Trust Company

Counsel

Ropes & Gray LLP

1211 Avenue of the Americas

New York, NY 10036

Independent registered public accounting firm

PricewaterhouseCoopers LLP

Baltimore, MD

Western Asset Limited Duration Bond Portfolio

The Fund is a separate investment series of Western Asset Funds, Inc.

Western Asset Limited Duration Bond Portfolio

Legg Mason Funds

55 Water Street

New York, NY 10041

The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s website at www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C., and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. To obtain information on Form N-Q from the Fund, shareholders can call Institutional Shareholder Services at 1-888-425-6432.

Information on how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling Institutional Shareholder Services at 1-888-425-6432, (2) on the Fund’s website at www.leggmason.com/individualinvestors and (3) on the SEC’s website at www.sec.gov.

This report is submitted for the general information of the shareholders of Western Asset Limited Duration Bond Portfolio. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by a current prospectus.

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

www.leggmason.com/individualinvestors

^© 2010 Legg Mason Investor Services, LLC

Member FINRA, SIPC

Privacy policy

We are committed to keeping nonpublic personal information about you secure and confidential. This notice is intended to help you understand how we fulfill this commitment. From time to time, we may collect a variety of personal information about you, including:

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

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

Ÿ Information we receive from consumer reporting agencies.

We do not disclose nonpublic personal information, about our customers or former customers, except to our affiliates (such as broker-dealers or investment advisers within the Legg Mason family of companies) or as is otherwise permitted by applicable law or regulation. For example, we may share this information with others in order to process your transactions or service an account. We may also provide this information to companies that perform marketing services on our behalf, such as printing and mailing, or to other financial institutions with whom we have joint marketing agreements. When we enter into such agreements, we will require these companies to protect the confidentiality of this information and to use it only to perform the services for which we hired them.

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

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

NOT PART OF THE SEMI-ANNUAL REPORT

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

Ÿ Each was purposefully chosen for their commitment to investment excellence.

Ÿ Each is focused on specific investment styles and asset classes.

Ÿ Each exhibits thought leadership in their chosen area of focus.

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

* Ranked eighth-largest money manager in the world, according to Pensions & Investments, May 31, 2010, based on 12/31/09 worldwide institutional assets under management.

Western Asset Management Company

Legg Mason, Inc. Subsidiaries

www.leggmason.com/individualinvestors

©2010 Legg Mason Investor Services, LLC Member FINRA, SIPC

WASX012832 8/10 SR10-1166

NOT PART OF THE SEMI-ANNUAL REPORT

ITEM 2. CODE OF ETHICS.

Not applicable.

ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.

Not applicable.

ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Not applicable.

ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.

Not applicable.

ITEM 6. SCHEDULE OF INVESTMENTS.

Included herein under Item 1.

ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

Not applicable.

ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

Not applicable.

ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.

Not applicable.

ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

ITEM 11. CONTROLS AND PROCEDURES.

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

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

ITEM 12. EXHIBITS.

(a) (1) Not applicable.

Exhibit 99.CODE ETH

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

Exhibit 99.CERT

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

Exhibit 99.906CERT

SIGNATURES

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

Western Asset Funds, Inc.
By:	/S/    R. JAY GERKEN
	(R. Jay Gerken) President of
	Western Asset Funds, Inc.
Date: August 30, 2010

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 of
	Western Asset Funds, Inc.
Date: August 30, 2010
By:	/S/    KAPREL OZSOLAK
	(Kaprel Ozsolak)
	Principal Financial and Accounting Officer
	Western Asset Funds, Inc.
Date: August 30, 2010