Western Asset Funds NCSR Certified annual shareholder report (management investment company)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-06110

Western Asset Funds, Inc.

(Exact name of registrant as specified in charter)

620 Eighth Avenue, 49^th Floor, New York, NY 10018

(Address of principal executive offices) (Zip code)

Robert I. Frenkel, Esq.

Legg Mason & Co., LLC

100 First Stamford Place

Stamford, CT 06902

(Name and address of agent for service)

Registrant’s telephone number, including area code: 1-877-721-1926

Date of fiscal year end: May 31

Date of reporting period: May 31, 2015

ITEM 1.

REPORT TO STOCKHOLDERS.

The Annual Report to Stockholders is filed herewith.

LOGO


Annual Report		May 31, 2015

WESTERN ASSET

INTERMEDIATE BOND

FUND

LOGO

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


What’s inside
Letter from the president			II
Investment commentary			III
Fund overview			1
Fund at a glance			6
Fund expenses			7
Fund performance			9
Spread duration			11
Effective duration			12
Schedule of investments			13
Statement of assets and liabilities			33
Statement of operations			35
Statements of changes in net assets			36
Financial highlights			37
Notes to financial statements			42
Report of independent registered public accounting firm			62
Additional information			63
Important tax information			68

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 20% of the duration of its benchmark.

Letter from the president

LOGO

Dear Shareholder,

We are pleased to provide the annual report of Western Asset Intermediate Bond Fund for the twelve-month reporting period ended May 31, 2015. Please read on for a detailed look at prevailing economic and market conditions during the Fund’s reporting period and to learn how those conditions have affected Fund performance.

I am pleased to introduce myself as the new President and Chief Executive Officer of the Fund, succeeding Kenneth D. Fuller. I am honored to have been appointed to my new role. During my 27 year career with Legg Mason, I have seen the investment management industry evolve and expand. Throughout these changes, maintaining an unwavering focus on our shareholders and their needs has remained paramount.

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:

Fund prices and performance,

Market insights and commentaries from our portfolio managers, and

A host of educational resources.

We look forward to helping you meet your financial goals.

Sincerely,

LOGO

Jane Trust, CFA

President and Chief Executive Officer

June 26, 2015


II		Western Asset Intermediate Bond Fund

Investment commentary

Economic review

The U.S. economy expanded moderately during the twelve months ended May 31, 2015 (the “reporting period”). While the U.S. Department of Commerce reported that second quarter 2014 U.S. gross domestic product (“GDP”)ⁱ growth was 4.6%, the economy gained momentum as third quarter GDP growth was 5.0%, its strongest reading since the third quarter of 2003. However, fourth quarter 2014 GDP growth slowed to a more modest 2.2%. The deceleration in growth primarily reflected an upturn in imports, a downturn in federal government spending and moderating nonresidential fixed investment. In addition, the U.S. Department of Commerce reported that first quarter 2015 GDP growth was -0.2%. This downturn was attributed to a number of factors, including a deceleration in personal consumption expenditures, along with negative contributions from exports, nonresidential fixed investment, and state and local government spending.

Activity in the U.S. manufacturing sector also moderated during the reporting period. Based on the Institute for Supply Management’s Purchasing Managers’ Index (“PMI”)ⁱⁱ, U.S. manufacturing expanded during all twelve months of the reporting period (a reading below 50 indicates a contraction, whereas a reading above 50 indicates an expansion). After a reading of 55.7 in June 2014, the PMI generally rose over the next two months, reaching a high of 58.1 in August, its best reading since April 2011. Manufacturing activity then decelerated over much of the last eight months of the reporting period and the PMI was 52.8 in May 2015.

The labor market was a tailwind for the economy during the reporting period. When the period began, unemployment was 6.1%, as reported by the U.S. Department of Labor. Unemployment generally declined during the reporting period and was 5.5% in May 2015, close to its lowest level since May 2008.

The Federal Reserve Board (“Fed”)ⁱⁱⁱ took a number of actions as it sought to meet its dual mandate of fostering maximum employment and price stability. As it has since December 2008, the Fed maintained the federal funds rate^iv at a historically low range between zero and 0.25%. The Fed ended its asset purchase program that was announced in December 2012. In December 2014, the Fed said that “it can be patient in beginning to normalize the stance of monetary policy.” At its meeting that ended on April 29, 2015, the Fed said, “…economic growth slowed during the winter months, in part reflecting transitory factors.” Finally, at its meeting that concluded on June 17, 2015, after the reporting period ended, the Fed said, “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

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

Sincerely,

LOGO

Jane Trust, CFA

President and Chief Executive Officer

June 26, 2015

All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results.


Western Asset Intermediate Bond Fund		III

Investment commentary (cont’d)

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 U.S. manufacturing sector.

ⁱⁱⁱ	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.

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


IV		Western Asset Intermediate Bond Fund

Fund overview

Q. What is the Fund’s investment strategy?

A. The Fund seeks to maximize total return, consistent with prudent investment management and liquidity needs, by investing to obtain the average durationⁱ specified below. The Fund invests in a portfolio of fixed-income securities of various maturities and, under normal market conditions, will invest at least 80% of its net assets in debt and fixed-income securities. Although the Fund may invest in debt and fixed-income securities of any maturity, under normal market conditions, the target dollar-weighted average effective durationⁱⁱ for the Fund is expected to range within 20% of the duration of its benchmark, the Barclays Intermediate U.S. Government/Credit Indexⁱⁱⁱ (generally, this range is two to five years).

The Fund presently intends to limit its investments to U.S. dollar-denominated securities and currently anticipates that it will only purchase debt securities that are rated in the Baa or BBB categories or above at the time of purchase by one or more Nationally Recognized Statistical Rating Organizations (“NRSROs”) or unrated securities that we determine to be of comparable quality at the time of purchase (that is, “investment grade securities”). The Fund may invest up to 25% of its total assets in the securities of non-U.S. issuers.

The Fund may also enter into various exchange-traded and over-the-counter derivative transactions for both hedging and non-hedging purposes, including for purposes of enhancing returns. These derivative transactions include, but are not limited to, futures, options and swaps.

In particular, the Fund may use interest rate swaps, credit default swaps (including buying and selling credit default swaps on individual securities and/or baskets of securities), options (including options on credit default swaps) and futures contracts to a significant extent, although the amounts invested in these instruments may change from time to time. The Fund may also invest in mortgage-backed securities to a significant extent. Other instruments may also be used to a significant extent from time to time.

At Western Asset Management Company (“Western Asset”), the Fund’s investment adviser, we utilize a fixed-income team approach, with decisions derived from interaction among various investment management sector specialists. The sector teams are comprised of Western Asset’s senior portfolio management personnel, research analysts and an in-house economist. Under this team approach, management of client fixed income portfolios will reflect a consensus of interdisciplinary views within the Western Asset organization.

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

A. The spread sectors (non-Treasuries) were volatile at times and produced mixed results versus equal-duration Treasuries over the twelve months ended May 31, 2015. Risk aversion was prevalent at times given mixed economic data, questions surrounding the outlook for global growth, changing monetary policy by the Federal Reserve Board (“Fed”)^iv and other central banks, and several geopolitical issues.

Short-term Treasury yields moved higher, whereas long-term Treasury yields declined during the twelve months ended May 31, 2015. Two-year Treasury yields rose from


Western Asset Intermediate Bond Fund 2015 Annual Report		1

Fund overview (cont’d)

0.37% at the beginning of the period to 0.61% at the end of the period. Their peak of 0.73% occurred toward the end of December 2014, and again on March 6, 2015, and they were as low as 0.34% on October 15, 2014. Ten-year Treasury yields were 2.48% at the beginning of the period and ended the period at 2.12%. Their peak of 2.66% occurred on June 17, 2014 and they reached a low of 1.68% at the end of January and early February 2015. All told, the Barclays U.S. Aggregate Index^v returned 3.03% during the reporting period.

Q. How did we respond to these changing market conditions?

A. There were no significant adjustments made to the Fund during the reporting period. We remained comfortable with the Fund’s sector positioning and we continued to have a yield curve^vi flattening bias.

We used U.S. Treasury futures, Eurodollar futures, options on both U.S. Treasury futures and Eurodollar futures, as well as interest rate swaps to manage the Fund’s exposure to interest rate risk. These instruments contributed to performance. Credit default swaps, which were used to manage the Fund’s exposure to an investment grade credit, did not have a meaningful impact on results.

Performance review

For the twelve months ended May 31, 2015, Class I shares of Western Asset Intermediate Bond Fund returned 2.53%. The Fund’s unmanaged benchmark, the Barclays Intermediate U.S. Government/Credit Index, returned 2.21% for the same period. The Lipper Short-Intermediate Investment Grade Debt Funds Category Average¹ returned 1.09% over the same time frame.


Performance Snapshot as of May 31, 2015 (unaudited)
(excluding sales charges)	6 months			12 months
Western Asset Intermediate Bond Fund:
Class A		1.32	%		2.12	%
Class C		0.94	%		1.36	%
Class R		1.10	%		1.86	%
Class I		1.52	%		2.53	%
Class IS		1.45	%		2.58	%
Barclays Intermediate U.S. Government/Credit Index		1.10	%		2.21	%
Lipper Short-Intermediate Investment Grade Debt Funds Category Average¹		0.72	%		1.09	%

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 sales charges that may apply or the deduction of taxes that a shareholder would pay on Fund distributions. If sales charges were reflected, the performance quoted would be

Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the period ended May 31, 2015, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 186 funds for the six-month period and among the 177 funds for the twelve-month period in the Fund’s Lipper category, and excluding sales charges.


2		Western Asset Intermediate Bond Fund 2015 Annual Report

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

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

The 30-Day SEC Yields for the period ended May 31, 2015 for Class A, Class C, Class R, Class I and Class IS shares were 1.32%, 0.62%, 1.11%, 1.75% and 1.80%, respectively. Absent fee waivers and/or expense reimbursements, the 30-Day SEC Yields for Class C and Class R shares would have been 0.58% and 1.06%, respectively. The 30-Day SEC Yield is subject to change and is based on the yield to maturity of the Fund’s investments over a 30-day period and not on the dividends paid by the Fund, which may differ.

Total Annual Operating Expenses (unaudited)

As of the Fund’s current prospectus dated September 30, 2014, as supplemented January 13, 2015, the gross total annual operating expense ratios for Class A, Class C, Class R, Class I and Class IS shares were 1.03%, 1.71%, 1.34%, 0.51% and 0.46%, 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 expense limitation arrangements, the ratio of expenses, other than interest, brokerage commissions, taxes, extraordinary expenses and deferred organizational expenses, to average net assets is not expected to exceed 0.90% for Class A shares, 1.65% for Class C shares, 1.15% for Class R shares and 0.45% for Class IS shares. In addition, total annual fund operating expenses for Class IS shares will not exceed total annual fund operating expenses for Class I shares, subject to recapture as described below. These expense limitation arrangements cannot be terminated prior to December 31, 2016 without the Board of Directors’ consent.

The manager is permitted to recapture amounts waived and/or reimbursed to a class within two years after the fiscal year in which the manager earned the fee or incurred the expense if the class’ total annual operating expenses have fallen to a level below the expense limitation (“expense cap”) in effect at the time the fees were earned or the expenses incurred. In no case will the manager recapture any amount that would result, on any particular business day of the Fund, in the class’ total annual operating expenses exceeding the expense cap or any other lower limit then in effect.

Q. What were the leading contributors to performance?

A. The largest contributor to the Fund’s relative performance during the reporting period was its yield curve and duration positioning. As mentioned, the Fund had a flattening bias, with an overweight to the longer end of the curve. In addition, the Fund’s duration was slightly longer than the benchmark. This positioning was beneficial for results as the yield curve flattened, with long-term rates declining, whereas short-term rates moved higher.

The Fund’s overweight to investment grade corporate bonds was also beneficial. In particular, the Fund’s holdings in the Financials sector were additive for results. Overweight positions in Wells Fargo, Goldman Sachs and Credit Agricole added the most value during the reporting period. The Fund’s out-of-benchmark allocation to non-agency


Western Asset Intermediate Bond Fund 2015 Annual Report		3

Fund overview (cont’d)

mortgage-backed securities was positive for performance. They were supported by attractive yields, continued principal paydowns and overall strong investor demand. Finally, the Fund’s overweights to asset-backed securities and commercial mortgage-backed securities contributed to performance.

Q. What were the leading detractors from performance?

A. While the Fund outperformed the benchmark, an overweight to emerging market corporate bonds detracted from its relative results. Examples of weak performers included the Fund’s overweights to Petrobras and Vale Overseas. In the investment grade corporate bond space, the Fund’s overweight to Cliffs Natural Resources was negative for results.

Elsewhere, an out-of-benchmark allocation to U.S. Treasury Inflation-Protected Securities (“TIPS”)^vii was a small drag on performance. Inflation expectations were generally muted during the reporting period, partially due to the sharp decline in the price of oil.

Thank you for your investment in Western Asset Intermediate Bond Fund. As always, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Fund’s investment goals.

Sincerely,

Western Asset Management Company

June 16, 2015

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. Please see the Fund’s prospectus for a more complete discussion of these and other risks, and the Fund’s investment strategies.

Portfolio holdings and breakdowns are as of May 31, 2015 and are subject to change and may not be representative of the portfolio managers’ current or future investments. Please refer to pages 13 through 32 for a list and percentage breakdown of the Fund’s holdings.

The mention of sector breakdowns is for informational purposes only and should not be construed as a recommendation to purchase or sell any securities. The information provided regarding such sectors is not a sufficient basis upon which to make an investment decision. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies discussed should consult their financial professional. Portfolio holdings are subject to change at any time and may not be representative of the portfolio managers’ current or future investments. The Fund’s top five sector holdings (as a percentage of net assets) as of May 31, 2015 were: U.S. Government & Agency Obligations (26.4%), Financials (16.2%), Collateralized Mortgage Obligations (14.5%), Asset-Backed Securities (10.1%) and Energy (3.9%). The Fund’s portfolio composition is subject to change at any time.

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


4		Western Asset Intermediate Bond Fund 2015 Annual Report

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	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.

ⁱⁱ	Effective duration measures the expected sensitivity of market price to changes in interest rates, taking into account the effects of structural complexities. (For example, some bonds can be prepaid by the issuer.)

ⁱⁱⁱ	The Barclays Intermediate U.S. Government/Credit Index is a market value weighted performance benchmark for government and corporate fixed-rate debt issues (rated Baa/BBB or higher) with maturities between one and ten years.

^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 Barclays 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.

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

^vii

U.S. Treasury Inflation-Protected Securities (“TIPS”) are inflation-indexed securities issued by the U.S. Treasury in five-year, ten-year and twenty-year maturities. The principal is adjusted to the Consumer Price Index, the commonly used measure of inflation. The coupon rate is constant, but generates a different amount of interest when multiplied by the inflation-adjusted principal.


Western Asset Intermediate Bond Fund 2015 Annual Report		5

Fund at a glance^† (unaudited)

Investment breakdown (%) as a percent of total investments

LOGO

†

The bar graph above represents the composition of the Fund’s investments as of May 31, 2015 and May 31, 2014 and does not include derivatives such as futures contracts, written options and swap contracts. The Fund is actively managed. As a result, the composition of the Fund’s investments is subject to change at any time.

‡	Represents less than 0.1%.


6		Western Asset Intermediate Bond Fund 2015 Annual Report

Fund expenses (unaudited)

Example

As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including front-end and back-end sales charges (loads) on purchase payments; and (2) ongoing costs, including management fees; service and/or distribution (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 December 1, 2014 and held for the six months ended May 31, 2015.

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 Return Without Sales Charge²			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 A		1.32	%	$	1,000.00	$	1,013.20		0.90	%	$	4.52		Class A		5.00	%	$	1,000.00	$	1,020.44		0.90	%	$	4.53
Class C		0.94			1,000.00		1,009.40		1.65			8.27		Class C		5.00			1,000.00		1,016.70		1.65			8.30
Class R		1.10			1,000.00		1,011.00		1.15			5.77		Class R		5.00			1,000.00		1,019.20		1.15			5.79
Class I		1.52			1,000.00		1,015.20		0.49			2.46	��	Class I		5.00			1,000.00		1,022.49		0.49			2.47
Class IS		1.45			1,000.00		1,014.50		0.45			2.26		Class IS		5.00			1,000.00		1,022.69		0.45			2.27


Western Asset Intermediate Bond Fund 2015 Annual Report		7

Fund expenses (unaudited) (cont’d)

¹	For the six months ended May 31, 2015.

Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value and does not reflect the deduction of the applicable sales charge with respect to Class A shares or the applicable contingent deferred sales charge (“CDSC”) with respect to Class C shares. Total return is not annualized, as it may not be representative of the total return for the year. Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

Expenses (net of compensating balance arrangements, fee waivers and/or expense reimbursements) are equal to each class’ respective annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year (182), then divided by 365.


8		Western Asset Intermediate Bond Fund 2015 Annual Report

Fund performance (unaudited)


Average annual total returns
Without sales charges¹	Class A			Class C			Class R			Class I			Class IS
Twelve Months Ended 5/31/15		2.12	%		1.36	%		1.86	%		2.53	%		2.58	%
Five Years Ended 5/31/15		N/A			N/A			N/A			4.34			4.38
Ten Years Ended 5/31/15		N/A			N/A			N/A			4.87			N/A
Inception* through 5/31/15		2.46			1.76			2.20			—			6.35

With sales charges²	Class A			Class C			Class R			Class I			Class IS
Twelve Months Ended 5/31/15		-2.19	%		0.36	%		1.86	%		2.53	%		2.58	%
Five Years Ended 5/31/15		N/A			N/A			N/A			4.34			4.38
Ten Years Ended 5/31/15		N/A			N/A			N/A			4.87			N/A
Inception* through 5/31/15		1.02			1.76			2.20			—			6.35


Cumulative total returns
Without sales charges¹
Class A (Inception date of 4/30/12 through 5/31/15)	7.80	%
Class C (Inception date of 4/30/12 through 5/31/15)	5.55
Class R (Inception date of 4/30/12 through 5/31/15)	6.96
Class I (5/31/05 through 5/31/15)	60.82
Class IS (Inception date of 10/3/08 through 5/31/15)	50.72

All figures represent past performance and are not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower.

¹	Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value and does not reflect the deduction of the applicable sales charge with respect to Class A shares or the applicable contingent deferred sales charge (“CDSC”) with respect to Class C shares.

Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value. In addition, Class A shares reflect the deduction of the maximum initial sales charge of 4.25%. Class C shares reflect the deduction of a 1.00% CDSC, which applies if shares are redeemed within one year from purchase payment.

*	Inception dates for Class A, C, R, I and IS shares are April 30, 2012, April 30, 2012, April 30, 2012, July 1, 1994 and October 3, 2008, respectively.


Western Asset Intermediate Bond Fund 2015 Annual Report		9

Fund performance (unaudited) (cont’d)

Historical performance

Value of $1,000,000 invested in

Class I Shares of Western Asset Intermediate Bond Fund vs. Barclays Intermediate U.S. Government/Credit Index† — May 2005 - May 2015

LOGO

†

Hypothetical illustration of $1,000,000 invested in Class I shares of Western Asset Intermediate Bond Fund on May 31, 2005, assuming the reinvestment of all distributions, including returns of capital, if any, at net asset value through May 31, 2015. The hypothetical illustration also assumes a $1,000,000 investment in the Barclays Intermediate U.S. Government/Credit Index. The Barclays Intermediate U.S. Government/Credit Index is a market value weighted performance benchmark for government and corporate fixed-rate debt issues (rated Baa/BBB or higher) with maturities between one and ten years. The Index is unmanaged and not subject to the same management and trading expenses as a mutual fund. Please note that an investor cannot invest directly in an index. The performance of the Fund’s other classes may be greater or less than the performance of Class I shares performance indicated on this chart, depending on whether higher or lower sales charges and fees were incurred by shareholders investing in the other classes.


10		Western Asset Intermediate Bond Fund 2015 Annual Report

Spread duration (unaudited)

Economic exposure — May 31, 2015

LOGO

Spread duration measures the sensitivity to changes in spreads. The spread over Treasuries is the annual risk-premium demanded by investors to hold non-Treasury securities. Spread duration is quantified as the % change in price resulting from a 100 basis points change in spreads. For a security with positive spread duration, an increase in spreads would result in a price decline and a decline in spreads would result in a price increase. This chart highlights the market sector exposure of the Fund’s sectors relative to the selected benchmark sectors as of the end of the reporting period.


ABS		— Asset-Backed Securities
Benchmark		— Barclays Intermediate U.S. Government/Credit Index
EM		— Emerging Markets
HY		— High Yield
IG Credit		— Investment Grade Credit
MBS		— Mortgage-Backed Securities
WAIBF		— Western Asset Intermediate Bond Fund


Western Asset Intermediate Bond Fund 2015 Annual Report		11

Effective duration (unaudited)

Interest rate exposure — May 31, 2015

LOGO

Effective duration measures the sensitivity to changes in relevant interest rates. Effective duration is quantified as the % change in price resulting from a 100 basis points change in interest rates. For a security with positive effective duration, an increase in interest rates would result in a price decline and a decline in interest rates would result in a price increase. This chart highlights the interest rate exposure of the Fund’s sectors relative to the selected benchmark sectors as of the end of the reporting period.


ABS		— Asset-Backed Securities
Benchmark		— Barclays Intermediate U.S. Government/Credit Index
EM		— Emerging Markets
HY		— High Yield
IG Credit		— Investment Grade Credit
MBS		— Mortgage-Backed Securities
WAIBF		— Western Asset Intermediate Bond Fund


12		Western Asset Intermediate Bond Fund 2015 Annual Report

Schedule of investments

May 31, 2015

Western Asset Intermediate Bond Fund


Security	Rate			Maturity Date		Face Amount		Value
Corporate Bonds & Notes — 32.9%
Consumer Discretionary — 1.3%
Automobiles — 0.7%
Daimler Finance NA LLC, Senior Notes		2.950	%		1/11/17	$	1,210,000	$	1,243,797	^(a)
Ford Motor Co., Senior Notes		4.750	%		1/15/43		280,000		284,911
Ford Motor Credit Co., LLC, Senior Notes		8.125	%		1/15/20		1,010,000		1,250,286
Ford Motor Credit Co., LLC, Senior Notes		5.875	%		8/2/21		750,000		869,151
Ford Motor Credit Co., LLC, Senior Notes		3.664	%		9/8/24		400,000		401,617
Hyundai Capital America, Senior Notes		1.625	%		10/2/15		380,000		380,889	^(a)
Total Automobiles									4,430,651
Internet & Catalog Retail — 0.2%
Amazon.com Inc., Senior Notes		3.800	%		12/5/24		1,170,000		1,205,356
Media — 0.4%
Comcast Corp., Senior Notes		5.150	%		3/1/20		750,000		853,153
Comcast Corp., Senior Notes		3.375	%		2/15/25		440,000		446,529
NBCUniversal Enterprise Inc., Senior Notes		1.974	%		4/15/19		150,000		150,471	^(a)
NBCUniversal Media LLC, Senior Notes		4.375	%		4/1/21		1,110,000		1,220,022
Time Warner Cable Inc., Senior Notes		8.250	%		4/1/19		40,000		47,388
Viacom Inc., Senior Notes		4.250	%		9/1/23		200,000		206,965
Total Media									2,924,528
Total Consumer Discretionary									8,560,535
Consumer Staples — 2.8%
Beverages — 1.0%
Anheuser-Busch InBev Worldwide Inc., Senior Notes		5.375	%		1/15/20		1,240,000		1,414,583
Anheuser-Busch InBev Worldwide Inc., Senior Notes		5.000	%		4/15/20		130,000		147,163
Anheuser-Busch InBev Worldwide Inc., Senior Notes		2.500	%		7/15/22		280,000		274,046
Diageo Capital PLC, Senior Bonds		4.828	%		7/15/20		1,210,000		1,366,547
Diageo Capital PLC, Senior Notes		1.500	%		5/11/17		140,000		141,198
Heineken NV, Senior Notes		1.400	%		10/1/17		210,000		210,488	^(a)
PepsiCo Inc., Senior Notes		0.700	%		8/13/15		640,000		640,262
Pernod-Ricard SA, Senior Notes		2.950	%		1/15/17		220,000		225,473	^(a)
Pernod-Ricard SA, Senior Notes		4.450	%		1/15/22		830,000		897,483	^(a)
Suntory Holdings Ltd., Notes		1.650	%		9/29/17		650,000		654,022	^(a)
Total Beverages									5,971,265
Food & Staples Retailing — 0.5%
CVS Health Corp., Senior Notes		2.250	%		12/5/18		700,000		713,406
CVS Health Corp., Senior Notes		4.000	%		12/5/23		700,000		735,347
Kroger Co., Notes		3.900	%		10/1/15		865,000		874,170

See Notes to Financial Statements.


Western Asset Intermediate Bond Fund 2015 Annual Report		13

Schedule of investments (cont’d)

May 31, 2015

Western Asset Intermediate Bond Fund


Security	Rate			Maturity Date		Face Amount		Value
Food & Staples Retailing — continued
Kroger Co., Senior Notes		4.000	%		2/1/24	$	830,000	$	885,165
Total Food & Staples Retailing									3,208,088
Food Products — 0.6%
Kraft Foods Group Inc., Senior Notes		5.375	%		2/10/20		582,000		655,010
Kraft Foods Group Inc., Senior Notes		3.500	%		6/6/22		30,000		30,633
Mondelez International Inc., Senior Notes		4.000	%		2/1/24		540,000		574,843
Tyson Foods Inc., Senior Bonds		3.950	%		8/15/24		270,000		280,491
Tyson Foods Inc., Senior Bonds		4.875	%		8/15/34		660,000		697,347
WM Wrigley Jr. Co., Senior Notes		2.400	%		10/21/18		480,000		490,240	^(a)
WM Wrigley Jr. Co., Senior Notes		2.900	%		10/21/19		1,200,000		1,227,866	^(a)
Total Food Products									3,956,430
Tobacco — 0.7%
Altria Group Inc., Senior Notes		9.250	%		8/6/19		660,000		839,173
Altria Group Inc., Senior Notes		2.850	%		8/9/22		650,000		637,873
Imperial Tobacco Finance PLC, Senior Notes		2.050	%		2/11/18		270,000		270,826	^(a)
Lorillard Tobacco Co., Senior Notes		8.125	%		6/23/19		980,000		1,188,826
Philip Morris International Inc., Senior Notes		5.650	%		5/16/18		1,280,000		1,432,383
Reynolds American Inc., Senior Notes		3.250	%		11/1/22		230,000		226,688
Total Tobacco									4,595,769
Total Consumer Staples									17,731,552
Energy — 3.9%
Energy Equipment & Services — 0.4%
Baker Hughes Inc., Senior Notes		7.500	%		11/15/18		810,000		965,649
Petrofac Ltd., Senior Notes		3.400	%		10/10/18		700,000		697,321	^(a)
Transocean Inc., Senior Notes		5.050	%		12/15/16		720,000		747,000
Total Energy Equipment & Services									2,409,970
Oil, Gas & Consumable Fuels — 3.5%
Anadarko Petroleum Corp., Senior Notes		5.950	%		9/15/16		70,000		74,185
Anadarko Petroleum Corp., Senior Notes		6.375	%		9/15/17		1,330,000		1,469,006
Apache Corp., Senior Notes		3.250	%		4/15/22		616,000		619,773
BP Capital Markets PLC, Senior Bonds		3.506	%		3/17/25		580,000		584,978
BP Capital Markets PLC, Senior Notes		3.125	%		10/1/15		320,000		322,830
BP Capital Markets PLC, Senior Notes		3.561	%		11/1/21		10,000		10,549
BP Capital Markets PLC, Senior Notes		3.245	%		5/6/22		510,000		518,133
CNOOC Finance 2015 USA LLC, Senior Notes		3.500	%		5/5/25		1,360,000		1,349,072
ConocoPhillips, Senior Notes		5.200	%��		5/15/18		1,310,000		1,450,467
Continental Resources Inc., Senior Notes		5.000	%		9/15/22		30,000		29,925
Devon Energy Corp., Senior Notes		6.300	%		1/15/19		1,170,000		1,330,647

See Notes to Financial Statements.


14		Western Asset Intermediate Bond Fund 2015 Annual Report

Western Asset Intermediate Bond Fund


Security	Rate			Maturity Date		Face Amount		Value
Oil, Gas & Consumable Fuels — continued
Ecopetrol SA, Senior Notes		4.250	%		9/18/18	$	430,000	$	453,650
Enbridge Energy Partners LP, Senior Notes		9.875	%		3/1/19		590,000		737,619
Enterprise Products Operating LLC, Senior Bonds		6.300	%		9/15/17		1,540,000		1,706,261
Gazprom, Loan Participation Notes		6.212	%		11/22/16		120,000		123,600	^(a)
Noble Energy Inc., Senior Notes		8.250	%		3/1/19		380,000		456,572
Noble Energy Inc., Senior Notes		4.150	%		12/15/21		270,000		284,987
Occidental Petroleum Corp., Senior Notes		3.125	%		2/15/22		70,000		71,534
Occidental Petroleum Corp., Senior Notes		2.700	%		2/15/23		330,000		324,755
Petrobras Global Finance BV, Senior Notes		3.151	%		3/17/20		370,000		352,314	^(b)
Petrobras Global Finance BV, Senior Notes		5.375	%		1/27/21		520,000		507,260
Petrobras Global Finance BV, Senior Notes		4.375	%		5/20/23		670,000		597,975
Petrobras Global Finance BV, Senior Notes		6.250	%		3/17/24		760,000		754,984
Petrobras International Finance Co., Senior Notes		3.875	%		1/27/16		600,000		602,400
Petrobras International Finance Co., Senior Notes		5.750	%		1/20/20		1,233,000		1,231,644
Petroleos Mexicanos, Senior Notes		8.000	%		5/3/19		220,000		260,810
Petroleos Mexicanos, Senior Notes		3.500	%		1/30/23		1,015,000		980,744
Petroleos Mexicanos, Senior Notes		4.875	%		1/18/24		880,000		917,726
Petroleos Mexicanos, Senior Notes		4.250	%		1/15/25		1,220,000		1,213,290	^(a)
Phillips 66, Senior Notes		2.950	%		5/1/17		310,000		319,395
Plains Exploration & Production Co., Senior Notes		6.500	%		11/15/20		72,000		76,320
Plains Exploration & Production Co., Senior Notes		6.875	%		2/15/23		99,000		106,301
Shell International Finance BV, Senior Notes		4.375	%		3/25/20		760,000		841,307
Shell International Finance BV, Senior Notes		3.250	%		5/11/25		790,000		801,294
Sinopec Group Overseas Development 2012 Ltd., Senior Notes		2.750	%		5/17/17		270,000		275,544	^(a)
Sinopec Group Overseas Development Ltd., Senior Notes		4.375	%		4/10/24		990,000		1,060,736	^(a)
Williams Cos. Inc., Notes		7.875	%		9/1/21		200,000		244,670
Total Oil, Gas & Consumable Fuels									23,063,257
Total Energy									25,473,227
Financials — 16.2%
Banks — 9.6%
Abbey National Treasury Services PLC, Senior Notes		4.000	%		4/27/16		680,000		699,829
ANZ National International Ltd., Senior Notes		1.850	%		10/15/15		250,000		251,228	^(a)
Bank of America Corp., Senior Notes		6.500	%		8/1/16		3,375,000		3,576,798
Bank of America Corp., Senior Notes		2.600	%		1/15/19		550,000		558,769
Bank of America Corp., Senior Notes		5.625	%		7/1/20		90,000		102,920
Bank of America Corp., Senior Notes		3.300	%		1/11/23		200,000		200,373
Bank of America Corp., Senior Notes		4.100	%		7/24/23		930,000		975,810
Bank of America Corp., Senior Notes		4.000	%		4/1/24		1,560,000		1,625,754

See Notes to Financial Statements.


Western Asset Intermediate Bond Fund 2015 Annual Report		15

Schedule of investments (cont’d)

May 31, 2015

Western Asset Intermediate Bond Fund


Security	Rate			Maturity Date		Face Amount		Value
Banks — continued
Bank of America Corp., Senior Notes		5.000	%		1/21/44	$	1,230,000	$	1,334,347
Bank of America Corp., Subordinated Notes		4.200	%		8/26/24		710,000		721,286
Bank of America Corp., Subordinated Notes		4.000	%		1/22/25		320,000		318,930
Bank of America Corp., Subordinated Notes		4.250	%		10/22/26		400,000		402,618
Barclays Bank PLC, Subordinated Notes		10.179	%		6/12/21		820,000		1,101,641	^(a)
BBVA US Senior SAU, Senior Notes		4.664	%		10/9/15		200,000		202,573
BNP Paribas SA, Senior Notes		2.375	%		9/14/17		290,000		295,612
BNP Paribas SA, Senior Notes		2.700	%		8/20/18		1,110,000		1,142,376
Citigroup Inc., Senior Notes		6.000	%		8/15/17		1,060,000		1,159,961
Citigroup Inc., Senior Notes		8.500	%		5/22/19		1,460,000		1,801,244
Citigroup Inc., Senior Notes		3.875	%		10/25/23		300,000		312,735
Citigroup Inc., Senior Notes		3.300	%		4/27/25		3,510,000		3,452,548
Citigroup Inc., Subordinated Notes		4.050	%		7/30/22		20,000		20,856
Citigroup Inc., Subordinated Notes		3.500	%		5/15/23		230,000		228,627
Citigroup Inc., Subordinated Notes		5.500	%		9/13/25		870,000		969,966
Citigroup Inc., Subordinated Notes		4.300	%		11/20/26		180,000		182,494
Citigroup Inc., Subordinated Notes		5.300	%		5/6/44		200,000		216,319
Commonwealth Bank of Australia, Senior Notes		1.250	%		9/18/15		430,000		431,028
Cooperatieve Centrale Raiffeisen-Boerenleenbank BA, Junior Subordinated Notes		11.000	%		6/30/19		665,000		851,200	^(a)(b)(c)
Cooperatieve Centrale Raiffeisen-Boerenleenbank BA, Senior Notes		3.375	%		1/19/17		1,010,000		1,048,491
Cooperatieve Centrale Raiffeisen-Boerenleenbank BA, Subordinated Notes		4.625	%		12/1/23		720,000		765,102
Credit Agricole SA, Junior Subordinated Notes		8.375	%		10/13/19		1,080,000		1,274,400	^(a)(b)(c)
Credit Agricole SA, Subordinated Notes		4.375	%		3/17/25		400,000		397,208	^(a)
Danske Bank A/S, Senior Notes		3.875	%		4/14/16		930,000		953,194	^(a)
HSBC Holdings PLC, Subordinated Notes		4.250	%		3/14/24		430,000		448,499
HSBC Holdings PLC, Subordinated Notes		6.500	%		5/2/36		340,000		423,191
ING Bank NV, Senior Secured Notes		2.625	%		12/5/22		1,000,000		1,016,060	^(a)
ING Bank NV, Subordinated Notes		5.800	%		9/25/23		730,000		824,193	^(a)
Intesa Sanpaolo SpA, Senior Notes		3.625	%		8/12/15		370,000		371,848	^(a)
Intesa Sanpaolo SpA, Senior Notes		3.125	%		1/15/16		240,000		242,869
Intesa Sanpaolo SpA, Subordinated Bonds		5.017	%		6/26/24		1,360,000		1,364,399	^(a)
Itau Unibanco Holding SA, Senior Notes		2.850	%		5/26/18		1,590,000		1,593,975	^(a)
JPMorgan Chase & Co., Senior Notes		3.150	%		7/5/16		310,000		317,205
JPMorgan Chase & Co., Senior Notes		4.400	%		7/22/20		490,000		534,867
JPMorgan Chase & Co., Senior Notes		4.250	%		10/15/20		130,000		140,885

See Notes to Financial Statements.


16		Western Asset Intermediate Bond Fund 2015 Annual Report

Western Asset Intermediate Bond Fund


Security	Rate			Maturity Date		Face Amount		Value
Banks — continued
JPMorgan Chase & Co., Subordinated Notes		3.375	%		5/1/23	$	540,000	$	536,032
JPMorgan Chase & Co., Subordinated Notes		3.875	%		9/10/24		990,000		995,576
Landwirtschaftliche Rentenbank, Senior Notes		2.500	%		2/15/16		3,980,000		4,039,143
Lloyds Bank PLC, Senior Notes		2.300	%		11/27/18		940,000		953,822
National Australia Bank Ltd., Secured Bonds		1.250	%		3/8/18		3,240,000		3,229,936	^(a)
National Bank of Canada, Secured Bonds		2.200	%		10/19/16		1,100,000		1,121,414	^(a)
Nordea Bank AB, Subordinated Notes		4.875	%		5/13/21		1,000,000		1,094,579	^(a)
Royal Bank of Canada, Senior Secured Bonds		0.625	%		12/4/15		3,000,000		3,002,199
Royal Bank of Scotland Group PLC, Senior Notes		2.550	%		9/18/15		240,000		241,116
Royal Bank of Scotland NV, Subordinated Notes		4.650	%		6/4/18		650,000		684,308
Skandinaviska Enskilda Banken AB, Secured Mortgage Notes		1.375	%		5/29/18		2,200,000		2,197,987	^(a)
Sparebank 1 Boligkreditt AS, Secured Bonds		2.625	%		5/27/16		1,310,000		1,334,434	^(a)
Sumitomo Mitsui Banking Corp., Senior Notes		3.150	%		7/22/15		520,000		521,866	^(a)
Swedbank AB, Senior Secured Notes		2.375	%		4/5/17		1,900,000		1,947,618	^(a)
Wachovia Bank N.A., Subordinated Notes		6.000	%		11/15/17		250,000		277,164
Wachovia Capital Trust III, Junior Subordinated Bonds		5.570	%		7/6/15		3,908,000		3,871,851	^(b)(c)
Wells Fargo & Co., Senior Notes		1.500	%		1/16/18		210,000		211,066
Wells Fargo & Co., Subordinated Notes		3.450	%		2/13/23		690,000		700,164
Wells Fargo & Co., Subordinated Notes		4.100	%		6/3/26		400,000		412,825
Total Banks									62,227,328
Capital Markets — 3.6%
Bear Stearns Cos. LLC, Senior Notes		6.400	%		10/2/17		970,000		1,076,822
Credit Suisse AG/Guernsey, Secured Bonds		2.600	%		5/27/16		1,110,000		1,130,072	^(a)
Credit Suisse Group Funding Guernsey Ltd., Senior Notes		3.750	%		3/26/25		760,000		750,029	^(a)
Credit Suisse NY, Senior Notes		2.300	%		5/28/19		1,060,000		1,066,478
Credit Suisse NY, Senior Notes		3.625	%		9/9/24		540,000		549,493
Goldman Sachs Capital II, Junior Subordinated Bonds		4.000	%		7/6/15		2,020,000		1,560,450	^(b)(c)
Goldman Sachs Group Inc., Senior Notes		2.375	%		1/22/18		640,000		649,723
Goldman Sachs Group Inc., Senior Notes		5.375	%		3/15/20		3,000,000		3,371,448
Goldman Sachs Group Inc., Senior Notes		6.000	%		6/15/20		60,000		69,262
Goldman Sachs Group Inc., Senior Notes		5.250	%		7/27/21		40,000		45,140
Goldman Sachs Group Inc., Senior Notes		5.750	%		1/24/22		1,940,000		2,237,342
Goldman Sachs Group Inc., Senior Notes		4.000	%		3/3/24		1,480,000		1,527,767
Goldman Sachs Group Inc., Senior Notes		3.850	%		7/8/24		280,000		285,867
Lehman Brothers Holdings Capital Trust VII, Junior Subordinated Notes		5.857	%		7/6/15		6,200,000		0	^{(c)(d)(e)(f)(g)}
Lehman Brothers Holdings E-Capital Trust I, Junior Subordinated Notes		3.850	%		8/19/65		360,000		0	^(d)(e)(f)(g)

See Notes to Financial Statements.


Western Asset Intermediate Bond Fund 2015 Annual Report		17

Schedule of investments (cont’d)

May 31, 2015

Western Asset Intermediate Bond Fund


Security	Rate			Maturity Date		Face Amount		Value
Capital Markets — continued
Lehman Brothers Holdings Inc., Subordinated Notes		6.500	%		7/19/17	$	30,000	$	0	^(d)(e)(f)(g)
Merrill Lynch & Co. Inc., Subordinated Notes		5.700	%		5/2/17		1,810,000		1,941,187
Morgan Stanley, Medium-Term Notes		5.550	%		4/27/17		800,000		861,895
Morgan Stanley, Senior Notes		7.300	%		5/13/19		2,370,000		2,809,512
State Street Corp., Junior Subordinated Notes		4.956	%		3/15/18		610,000		657,924
UBS AG London, Senior Secured Notes		0.750	%		3/24/16		2,530,000		2,534,301	^(a)
Total Capital Markets									23,124,712
Consumer Finance — 0.5%
HSBC Finance Corp., Senior Notes		6.676	%		1/15/21		840,000		988,545
Navient Corp., Medium-Term Notes, Senior Notes		8.450	%		6/15/18		530,000		593,600
Navient Corp., Senior Notes		3.875	%		9/10/15		590,000		592,950
Synchrony Financial, Senior Bonds		3.000	%		8/15/19		430,000		437,863
Toyota Motor Credit Corp., Senior Notes		1.375	%		1/10/18		940,000		944,030
Total Consumer Finance									3,556,988
Diversified Financial Services — 1.7%
CDP Financial Inc., Senior Notes		4.400	%		11/25/19		1,270,000		1,402,838	^(a)
General Electric Capital Corp., Senior Notes		1.625	%		7/2/15		220,000		220,243
General Electric Capital Corp., Senior Notes		5.625	%		5/1/18		1,000,000		1,118,512
General Electric Capital Corp., Senior Notes		6.000	%		8/7/19		220,000		256,352
General Electric Capital Corp., Senior Notes		5.550	%		5/4/20		220,000		255,080
General Electric Capital Corp., Senior Notes		4.375	%		9/16/20		20,000		22,133
General Electric Capital Corp., Senior Notes		4.650	%		10/17/21		1,840,000		2,062,909
General Electric Capital Corp., Subordinated Debentures		6.375	%		11/15/67		1,495,000		1,629,550	^(b)
General Electric Capital Corp., Subordinated Notes		5.300	%		2/11/21		640,000		736,315
International Lease Finance Corp., Senior Secured Notes		6.750	%		9/1/16		1,930,000		2,040,975	^(a)
Private Export Funding Corp., Secured Notes		2.125	%		7/15/16		1,130,000		1,149,558
Total Diversified Financial Services									10,894,465
Insurance — 0.3%
American International Group Inc., Medium-Term Notes, Senior Notes		5.850	%		1/16/18		250,000		276,995
MetLife Capital Trust IV, Junior Subordinated Notes		7.875	%		12/15/37		620,000		804,450	^(a)
MetLife Inc., Senior Bonds		1.903	%		12/15/17		400,000		402,637
Teachers Insurance & Annuity Association of America — College Retirement Equity Fund, Notes		6.850	%		12/16/39		370,000		491,085	^(a)
Total Insurance									1,975,167
Real Estate Investment Trusts (REITs) — 0.2%
WEA Finance LLC/Westfield UK & Europe Finance PLC, Notes		2.700	%		9/17/19		1,100,000		1,113,151	^(a)

See Notes to Financial Statements.


18		Western Asset Intermediate Bond Fund 2015 Annual Report

Western Asset Intermediate Bond Fund


Security	Rate			Maturity Date		Face Amount		Value
Thrifts & Mortgage Finance — 0.3%
Countrywide Financial Corp., Subordinated Notes		6.250	%		5/15/16	$	810,000	$	846,369
Santander Holdings USA Inc., Senior Notes		4.625	%		4/19/16		50,000		51,579
Santander Holdings USA Inc., Senior Notes		3.450	%		8/27/18		520,000		540,334
Stadshypotek AB, Secured Notes		1.875	%		10/2/19		390,000		391,946	^(a)
Total Thrifts & Mortgage Finance									1,830,228
Total Financials									104,722,039
Health Care — 2.3%
Biotechnology — 0.3%
Amgen Inc., Senior Notes		3.625	%		5/22/24		250,000		255,894
Gilead Sciences Inc., Senior Bonds		2.050	%		4/1/19		1,390,000		1,407,982
Total Biotechnology									1,663,876
Health Care Equipment & Supplies — 0.5%
Baxter International Inc., Senior Notes		5.900	%		9/1/16		570,000		602,921
Becton, Dickinson & Co., Senior Notes		3.734	%		12/15/24		180,000		183,722
Becton, Dickinson & Co., Senior Notes		4.685	%		12/15/44		550,000		560,423
Medtronic Inc., Senior Notes		4.450	%		3/15/20		390,000		432,069
Medtronic Inc., Senior Notes		3.125	%		3/15/22		210,000		216,563
Medtronic Inc., Senior Notes		3.500	%		3/15/25		1,500,000		1,536,002	^(a)
Total Health Care Equipment & Supplies									3,531,700
Health Care Providers & Services — 0.5%
Anthem Inc., Senior Notes		1.250	%		9/10/15		130,000		130,217
Anthem Inc., Senior Notes		5.875	%		6/15/17		100,000		108,817
Anthem Inc., Senior Notes		4.350	%		8/15/20		690,000		756,654
Anthem Inc., Senior Notes		3.700	%		8/15/21		70,000		73,748
Anthem Inc., Senior Notes		3.125	%		5/15/22		330,000		330,138
Humana Inc., Senior Notes		7.200	%		6/15/18		760,000		876,180
Humana Inc., Senior Notes		3.150	%		12/1/22		110,000		110,096
UnitedHealth Group Inc., Senior Notes		1.625	%		3/15/19		630,000		626,684
UnitedHealth Group Inc., Senior Notes		3.875	%		10/15/20		380,000		413,669
Total Health Care Providers & Services									3,426,203
Life Sciences Tools & Services — 0.3%
Agilent Technologies Inc., Senior Notes		5.000	%		7/15/20		860,000		951,562
Thermo Fisher Scientific Inc., Senior Notes		2.400	%		2/1/19		520,000		523,829
Thermo Fisher Scientific Inc., Senior Notes		3.600	%		8/15/21		280,000		289,645
Total Life Sciences Tools & Services									1,765,036
Pharmaceuticals — 0.7%
AbbVie Inc., Senior Notes		1.750	%		11/6/17		470,000		471,689
AbbVie Inc., Senior Notes		2.900	%		11/6/22		220,000		216,642

See Notes to Financial Statements.


Western Asset Intermediate Bond Fund 2015 Annual Report		19

Schedule of investments (cont’d)

May 31, 2015

Western Asset Intermediate Bond Fund


Security	Rate			Maturity Date		Face Amount		Value
Pharmaceuticals — continued
AbbVie Inc., Senior Subordinated Notes		3.600	%		5/14/25	$	590,000	$	593,772
Actavis Funding SCS, Senior Notes		3.450	%		3/15/22		400,000		403,481
Actavis Funding SCS, Senior Notes		3.800	%		3/15/25		510,000		513,578
Merck & Co., Inc., Senior Notes		2.750	%		2/10/25		420,000		409,259
Perrigo Co. PLC, Senior Notes		2.300	%		11/8/18		750,000		754,141
Perrigo Finance PLC, Senior Notes		3.500	%		12/15/21		900,000		919,687
Zoetis Inc., Senior Notes		1.875	%		2/1/18		240,000		240,016
Zoetis Inc., Senior Notes		3.250	%		2/1/23		170,000		166,636
Total Pharmaceuticals									4,688,901
Total Health Care									15,075,716
Industrials — 1.4%
Aerospace & Defense — 0.2%
Boeing Co., Senior Notes		6.000	%		3/15/19		1,250,000		1,442,669
Airlines — 0.1%
United Airlines Inc., Pass-Through Certificates		6.545	%		2/2/19		116,642		126,557
US Airways, Pass-Through Trust, Pass-Through Trust		6.850	%		1/30/18		703,241		745,435
Total Airlines									871,992
Commercial Services & Supplies — 0.1%
Waste Management Inc., Senior Notes		3.500	%		5/15/24		500,000		511,072
Electrical Equipment — 0.3%
Eaton Corp., Senior Notes		1.500	%		11/2/17		200,000		200,956
Eaton Corp., Senior Notes		2.750	%		11/2/22		1,520,000		1,501,688
Total Electrical Equipment									1,702,644
Industrial Conglomerates — 0.1%
General Electric Co., Senior Notes		4.500	%		3/11/44		340,000		361,853
United Technologies Corp., Senior Notes		4.500	%		4/15/20		280,000		312,313
Total Industrial Conglomerates									674,166
Machinery — 0.1%
John Deere Capital Corp., Senior Notes		2.250	%		4/17/19		360,000		366,447
John Deere Capital Corp., Senior Notes		1.700	%		1/15/20		110,000		108,794
Total Machinery									475,241
Road & Rail — 0.5%
Burlington Northern Santa Fe LLC, Senior Bonds		4.550	%		9/1/44		1,090,000		1,109,933
Canadian National Railway Co. Financing Pass-Through Trusts, Secured Bonds		7.195	%		1/2/16		2,133,615		2,208,068
Total Road & Rail									3,318,001
Total Industrials									8,995,785

See Notes to Financial Statements.


20		Western Asset Intermediate Bond Fund 2015 Annual Report

Western Asset Intermediate Bond Fund


Security	Rate			Maturity Date		Face Amount		Value
Information Technology — 0.5%
Internet Software & Services — 0.1%
Tencent Holdings Ltd., Senior Notes		3.375	%		5/2/19	$	450,000	$	464,092	^(a)
IT Services — 0.1%
MasterCard Inc., Senior Notes		3.375	%		4/1/24		640,000		667,735
Semiconductors & Semiconductor Equipment — 0.2%
KLA-Tencor Corp., Senior Notes		4.125	%		11/1/21		1,130,000		1,173,545
Software — 0.1%
Oracle Corp., Senior Notes		1.200	%		10/15/17		860,000		862,641
Total Information Technology									3,168,013
Materials — 2.0%
Chemicals — 0.3%
Ecolab Inc., Senior Notes		4.350	%		12/8/21		180,000		196,012
OCP SA, Senior Notes		4.500	%		10/22/25		880,000		858,000	^(a)
Potash Corp. of Saskatchewan Inc., Senior Notes		6.500	%		5/15/19		360,000		419,452
Potash Corp. of Saskatchewan Inc., Senior Notes		4.875	%		3/30/20		200,000		222,524
Total Chemicals									1,695,988
Metals & Mining — 1.6%
Barrick Gold Corp., Senior Notes		4.100	%		5/1/23		560,000		555,066
BHP Billiton Finance USA Ltd., Senior Notes		6.500	%		4/1/19		810,000		946,605
BHP Billiton Finance USA Ltd., Senior Notes		3.250	%		11/21/21		300,000		312,641
Freeport-McMoRan Inc., Senior Notes		4.000	%		11/14/21		750,000		744,549
Glencore Finance Canada Ltd., Senior Bonds		5.800	%		11/15/16		100,000		105,924	^(a)
Glencore Finance Canada Ltd., Senior Notes		2.050	%		10/23/15		530,000		531,694	^(a)
Glencore Finance Canada Ltd., Senior Notes		2.700	%		10/25/17		680,000		690,618	^(a)
Glencore Funding LLC, Senior Notes		2.500	%		1/15/19		470,000		469,764	^(a)
Glencore Funding LLC, Senior Notes		2.875	%		4/16/20		1,420,000		1,412,991	^(a)
Rio Tinto Finance USA Ltd., Senior Notes		2.500	%		5/20/16		1,100,000		1,117,432
Rio Tinto Finance USA Ltd., Senior Notes		4.125	%		5/20/21		590,000		633,188
Southern Copper Corp., Senior Notes		3.500	%		11/8/22		1,350,000		1,336,446
Vale Overseas Ltd., Senior Notes		6.250	%		1/23/17		650,000		692,659
Vale Overseas Ltd., Senior Notes		4.375	%		1/11/22		1,076,000		1,057,417
Vale Overseas Ltd., Senior Notes		6.875	%		11/21/36		50,000		49,170
Total Metals & Mining									10,656,164
Paper & Forest Products — 0.1%
Celulosa Arauco y Constitucion SA, Senior Notes		4.750	%		1/11/22		330,000		347,651
Total Materials									12,699,803

See Notes to Financial Statements.


Western Asset Intermediate Bond Fund 2015 Annual Report		21

Schedule of investments (cont’d)

May 31, 2015

Western Asset Intermediate Bond Fund


Security	Rate			Maturity Date		Face Amount		Value
Telecommunication Services — 2.0%
Diversified Telecommunication Services — 1.8%
AT&T Inc., Global Notes		5.500	%		2/1/18	$	360,000	$	395,911
AT&T Inc., Senior Notes		1.400	%		12/1/17		400,000		399,384
AT&T Inc., Senior Notes		4.450	%		5/15/21		120,000		129,150
AT&T Inc., Senior Notes		3.875	%		8/15/21		290,000		304,011
AT&T Inc., Senior Notes		3.400	%		5/15/25		1,500,000		1,458,908
British Telecommunications PLC, Senior Notes		2.350	%		2/14/19		950,000		963,846
Deutsche Telekom International Finance BV, Senior Notes		5.750	%		3/23/16		550,000		570,635
Telefonica Emisiones SAU, Senior Notes		5.134	%		4/27/20		110,000		122,320
Verizon Communications Inc., Senior Notes		2.625	%		2/21/20		987,000		995,543
Verizon Communications Inc., Senior Notes		4.500	%		9/15/20		320,000		349,009
Verizon Communications Inc., Senior Notes		3.450	%		3/15/21		790,000		818,536
Verizon Communications Inc., Senior Notes		2.450	%		11/1/22		200,000		191,233
Verizon Communications Inc., Senior Notes		5.150	%		9/15/23		2,680,000		2,993,051
Verizon Communications Inc., Senior Notes		6.550	%		9/15/43		1,560,000		1,894,907
Total Diversified Telecommunication Services									11,586,444
Wireless Telecommunication Services — 0.2%
America Movil SAB de CV, Senior Notes		5.000	%		3/30/20		1,110,000		1,246,874
Total Telecommunication Services									12,833,318
Utilities — 0.5%
Electric Utilities — 0.5%
Exelon Corp., Notes		4.900	%		6/15/15		600,000		600,855
FirstEnergy Corp., Notes		7.375	%		11/15/31		140,000		176,138
FirstEnergy Corp., Senior Notes		2.750	%		3/15/18		880,000		897,443
FirstEnergy Corp., Senior Notes		4.250	%		3/15/23		1,080,000		1,112,156
Majapahit Holding BV, Senior Notes		7.750	%		1/20/20		320,000		373,216	^(h)
Total Utilities									3,159,808
Total Corporate Bonds & Notes (Cost — $210,844,391)									212,419,796
Asset-Backed Securities — 10.1%
Access Group Inc., 2005-A A3		0.677	%		7/25/34		2,527,160		2,419,000	^(b)
Access Group Inc., 2005-B A2		0.507	%		7/25/22		227,017		226,175	^(b)
ACS Pass Through Trust, 2007-1A G1		0.490	%		6/14/37		995,870		973,463	^(a)(b)
Aegis Asset-Backed Securities Trust, 2005-3 M1		0.655	%		8/25/35		667,853		660,551	^(b)
AESOP Funding II LLC, 2011-3A A		3.410	%		11/20/17		1,200,000		1,234,728	^(a)
ALM Loan Funding, 2015-12A A1		1.826	%		4/16/27		1,500,000		1,500,600	^(a)(b)
Apidos CDO, 2013-16A B		3.075	%		1/19/25		800,000		795,602	^(a)(b)
Apollo Credit Funding IV Ltd., 2004-A A1		1.726	%		4/15/27		1,000,000		1,004,200	^(a)(b)
Arrowpoint CLO Ltd., 2014-2A A1L		1.768	%		3/12/26		1,270,000		1,267,931	^(a)(b)

See Notes to Financial Statements.


22		Western Asset Intermediate Bond Fund 2015 Annual Report

Western Asset Intermediate Bond Fund


Security	Rate			Maturity Date		Face Amount		Value
Asset-Backed Securities — continued
Avis Budget Rental Car Funding AESOP II LLC, 2012-2A A		2.802	%		5/20/18	$	250,000	$	256,165	^(a)
Avis Budget Rental Car Funding AESOP LLC, 2013-2A A		2.970	%		2/20/20		3,050,000		3,141,643	^(a)
Bear Stearns Asset-Backed Securities Trust, 2004-SD2 A3		2.594	%		3/25/44		871,004		850,082	^(b)
BMW Floorplan Master Owner Trust, 2012-1A A		0.586	%		9/15/17		1,420,000		1,423,110	^(a)(b)
Carlyle Global Market Strategies, 2013-4A A1		1.740	%		10/15/25		250,000		250,048	^(a)(b)
Consumer Credit Origination Loan Trust, 2015-1 A		2.820	%		3/15/21		2,547,759		2,563,529	^(a)
Countrywide Asset-Backed Certificates, 2002-BC1		0.845	%		4/25/32		187,728		126,451	^(b)
Countrywide Home Equity Loan Trust, 2004-E 2A		0.446	%		6/15/29		751,658		723,114	^(b)
Countrywide Home Equity Loan Trust, 2006-HW 2A1B		0.305	%		11/15/36		1,535,778		1,342,114	^(b)
Covenant Credit Partners CLO Ltd., 2014-1A A		1.755	%		7/20/26		500,000		498,689	^(a)(b)
Credit-Based Asset Servicing and Securitization LLC, 2005-CB3 M1		0.621	%		5/25/35		154,029		153,357	^(b)
Credit-Based Asset Servicing and Securitization LLC, 2005-RP1 M1		0.805	%		1/25/35		243,084		240,208	^(a)(b)
CS First Boston Mortgage Securities Corp., 2002-MH3 A		6.700	%		12/25/31		243,723		258,438
Educational Funding of the South Inc., 2011-1 A2		0.927	%		4/25/35		1,999,213		1,995,759	^(b)
First Franklin Mortgage Loan Asset Backed Certificates, 2003-FF1 A1		1.305	%		3/25/33		1,140,493		1,096,899	^(b)
Flatiron CLO Ltd., 2013-1A B		3.020	%		1/17/26		500,000		492,832	^(a)(b)
Greenpoint Manufactured Housing, 2001-2 IA2		3.685	%		2/20/32		300,000		275,274	^(b)
Greenpoint Manufactured Housing, 2001-2 IIA2		3.675	%		3/13/32		450,000		407,607	^(b)
GRMT Mortgage Loan Trust, 2001-1A A5		6.650	%		7/20/31		134,853		133,279	^(a)
GSAA Home Equity Trust, 2005-8 A4		0.455	%		6/25/35		782,518		759,986	^(b)
Hertz Vehicle Financing LLC, 2013-1A A1		1.120	%		8/25/17		180,000		180,064	^(a)
Indymac Home Equity Loan Asset-Backed Trust, 2001-A		0.701	%		3/25/31		122,717		99,502	^(b)
Long Beach Mortgage Loan Trust, 2004-6 A3		1.485	%		11/25/34		357,483		353,741	^(b)
Magnetite CLO Ltd., 2012-6A CR		2.884	%		9/15/23		1,250,000		1,250,000	^(a)(b)(f)
MASTR Asset-Backed Securities Trust, 2007-NCW A2		0.785	%		5/25/37		3,380,000		2,945,454	^(a)(b)
Morgan Stanley Dean Witter Capital I Inc. Trust, 2003-NC2 M1		1.535	%		2/25/33		1,168,393		1,109,838	^(b)
National Collegiate Student Loan Trust, 2005-1 A4		0.425	%		11/27/28		1,158,722		1,138,035	^(b)
National Collegiate Student Loan Trust, 2006-4 A2		0.325	%		12/27/27		449,990		444,429	^(b)
NCUA Guaranteed Notes, 2010-A1 A		0.530	%		12/7/20		1,445,694		1,447,256	^(b)
Neuberger Berman CLO Ltd., 2014-16A A1		1.745	%		4/15/26		390,000		390,096	^(a)(b)
OHA Loan Funding Ltd., 2014-1A A1		1.762	%		10/20/26		1,000,000		1,000,511	^(a)(b)
Opteum Mortgage Acceptance Corp., 2005-1 M4		0.955	%		2/25/35		1,180,000		1,096,293	^(b)
OZLM Ltd., 2014-8A A1A		1.714	%		10/17/26		250,000		249,937	^(a)(b)
OZLM Ltd., 2014-8A A2A		2.424	%		10/17/26		250,000		249,566	^(a)(b)
Residential Asset Mortgage Products Inc., 2003-RZ4 A7		4.790	%		6/25/33		61,654		63,159
Saranac CLO Ltd., 2014-2A B		2.326	%		2/20/25		500,000		495,917	^(a)(b)

See Notes to Financial Statements.


Western Asset Intermediate Bond Fund 2015 Annual Report		23

Schedule of investments (cont’d)

May 31, 2015

Western Asset Intermediate Bond Fund


Security	Rate			Maturity Date		Face Amount		Value
Asset-Backed Securities — continued
SASCO Mortgage Loan Trust, 2005-GEL1 M1		0.731	%		12/25/34	$	710,105	$	692,658	^(b)
Shackleton CLO Ltd., 2013-4A B1		2.276	%		1/13/25		500,000		499,980	^(a)(b)
SLM Student Loan Trust, 2002-A A2		0.821	%		12/16/30		2,023,389		1,997,087	^(b)
SLM Student Loan Trust, 2003-04 A5A		1.021	%		3/15/33		529,501		529,507	^(a)(b)
SLM Student Loan Trust, 2003-04 A5E		1.021	%		3/15/33		1,910,569		1,910,592	^(a)(b)
SLM Student Loan Trust, 2003-11 A6		1.021	%		12/15/25		880,000		879,746	^(a)(b)
SLM Student Loan Trust, 2005-05 B		0.527	%		10/25/40		750,047		674,320	^(b)
SLM Student Loan Trust, 2005-07 A4		0.427	%		10/25/29		1,000,000		976,235	^(b)
SLM Student Loan Trust, 2006-BW A5		0.471	%		12/15/39		4,070,000		3,688,262	^(b)
SLM Student Loan Trust, 2011-B A1		1.036	%		12/16/24		317,031		317,788	^(a)(b)
SLM Student Loan Trust, 2013-A A1		0.786	%		8/15/22		492,959		493,407	^(a)(b)
Small Business Administration Participation Certificates, 2013-20J 1		3.370	%		10/1/33		568,055		597,736
Small Business Administration Participation Certificates, 2015-20D 1		2.510	%		4/1/35		460,000		462,621
SMB Private Education Loan Trust, 2014-A A1		0.682	%		9/15/21		4,120,216		4,118,473	^(a)(b)
Sound Point CLO Ltd., 2014-2A A1		1.635	%		10/20/26		500,000		496,950	^(a)(b)
Soundview Home Equity Loan Trust, 2005-3 M2		0.965	%		6/25/35		49,588		49,378	^(b)
TICP CLO II Ltd., 2014-2A A1A		1.725	%		7/20/26		500,000		497,975	^(a)(b)
Trade Maps Ltd., 2013-1A A		0.882	%		12/10/18		2,590,000		2,589,438	^(a)(b)
UCFC Home Equity Loan, 1998-D MF1		6.905	%		4/15/30		333,848		341,442
United States Small Business Administration, 2015-10A 1		2.517	%		3/10/25		660,000		665,796
Venture CDO Ltd., 2013-15A B1		2.325	%		7/15/25		500,000		499,995	^(a)(b)
Venture CDO Ltd., 2014-16A A1L		1.753	%		4/15/26		1,480,000		1,480,508	^(a)(b)
Voya CLO Ltd., 2014-4A A1		1.777	%		10/14/26		1,500,000		1,500,810	^(a)(b)
Total Asset-Backed Securities (Cost — $64,785,421)									65,545,336
Collateralized Mortgage Obligations — 14.5%
ARM Trust, 2004-5 4A1		2.628	%		4/25/35		1,353,397		1,321,071	^(b)
BAMLL Commercial Mortgage Securities Trust, 2015-200P A		3.218	%		4/14/33		900,000		913,140	^(a)(b)
Banc of America Commercial Mortgage Trust, 2006-2 AJ		5.763	%		5/10/45		2,540,000		2,634,567	^(b)
Banc of America Commercial Mortgage Trust, 2006-5 AM		5.448	%		9/10/47		770,000		804,585
Banc of America Funding Corp., 2015-R3 3A2		0.896	%		4/29/47		3,099,000		2,712,865	^(a)(b)
Bayview Commercial Asset Trust, 2006-3A A1		0.435	%		10/25/36		1,410,455		1,217,415	^(a)(b)
BCAP LLC Trust, 2015-RR6 1A2		3.500	%		5/26/37		2,285,000		2,062,213	^(a)(b)(f)
Bear Stearns Alt-A Trust, 2005-2 2A4		2.516	%		4/25/35		653,107		622,421	^(b)
Bear Stearns Commercial Mortgage Securities Trust, 2007-PW18 AM		6.084	%		6/11/50		340,000		373,070	^(b)
Citigroup Commercial Mortgage Trust, 2014-388G A		0.936	%		6/15/33		1,240,000		1,237,680	^(a)(b)
Citigroup Commercial Mortgage Trust, 2014-GC25 AS		4.017	%		10/10/47		640,000		682,552

See Notes to Financial Statements.


24		Western Asset Intermediate Bond Fund 2015 Annual Report

Western Asset Intermediate Bond Fund


Security	Rate			Maturity Date		Face Amount		Value
Collateralized Mortgage Obligations — continued
Citigroup Mortgage Loan Trust Inc., 2005-8, 1A1A		2.517	%		10/25/35	$	943,736	$	799,192	^(b)
Citigroup Mortgage Loan Trust Inc., 2010-3 4A1		2.360	%		2/25/36		409,677		409,147	^(a)(b)
COMM Mortgage Trust, 2013-300P B		4.394	%		8/10/30		560,000		612,111	^(a)(b)
COMM Mortgage Trust, 2013-CR13 XA, IO		1.003	%		12/10/23		2,675,587		146,644	^(b)
COMM Mortgage Trust, 2014-CR18 XA, IO		1.297	%		7/15/47		6,214,767		469,998	^(b)
Commercial Mortgage Pass-Through Certificates, 2013-CR12 AM		4.300	%		10/10/46		170,000		186,410
Commercial Mortgage Pass-Through Certificates, 2013-CR12 B		4.762	%		10/10/46		70,000		77,055	^(b)
Commercial Mortgage Pass-Through Certificates, 2013-CR12 C		5.085	%		10/10/46		40,000		43,851	^(b)
Commercial Mortgage Trust, 2014-UBS2 XA, IO		1.424	%		3/10/47		4,114,906		346,265	^(b)
Connecticut Avenue Securities, 2014-C03 1M1		1.385	%		7/25/24		338,618		338,353	^(b)
Core Industrial Trust, 2015-TEXW D		3.848	%		2/10/34		620,000		624,744	^(a)(b)
Countrywide Home Loans, 2004-20 2A1		2.500	%		9/25/34		194,561		146,994	^(b)
Countrywide Home Loans, 2004-R1 1AF		0.533	%		11/25/34		169,376		154,605	^(a)(b)
Credit Suisse Mortgage Trust, 2014-6R 11A1		0.362	%		9/27/36		1,171,876		1,110,534	^(a)(b)
Credit Suisse Mortgage Trust, 2014-TIKI A		1.140	%		9/15/38		580,000		578,349	^(a)(b)
Credit Suisse Mortgage Trust, 2014-TIKI B		1.540	%		9/15/38		894,000		889,266	^(a)(b)
Credit Suisse Mortgage Trust, 2015-3R 4A1		0.421	%		12/29/35		3,513,956		3,335,840	^(a)(b)
CS First Boston Mortgage Securities Corp., 2005-9 3A1		6.000	%		10/25/35		1,024,296		791,078
Del Coronado Trust, 2013-HDC A		0.986	%		3/15/26		920,000		920,256	^(a)(b)
Deutsche Mortgage Securities Inc., 2004-4 3AR1		2.798	%		6/25/34		350,198		329,582	^(b)
Deutsche Mortgage Securities Inc., 2006-PR1 3AF1		0.455	%		4/15/36		2,002,386		1,862,219	^(a)(b)
FDIC Structured Sale Guaranteed Notes, 2010-S1 1A		0.730	%		2/25/48		276,910		277,001	^(a)(b)
FDIC Structured Sale Guaranteed Notes, 2010-S2		0.880	%		12/29/45		1,059,156		1,061,755	^(a)(b)
Federal Home Loan Mortgage Corp. (FHLMC), 001 Z		9.300	%		4/15/19		3,593		3,785
Federal Home Loan Mortgage Corp. (FHLMC), 170 B, IO		10.000	%		3/1/21		578		72
Federal Home Loan Mortgage Corp. (FHLMC), 4066 PI, IO		3.500	%		9/15/31		6,131,476		862,214
Federal Home Loan Mortgage Corp. (FHLMC), 4203 PS, IO, PAC		6.064	%		9/15/42		1,350,245		260,100	^(b)
Federal Home Loan Mortgage Corp. (FHLMC), Multi-Family Structured Pass-Through Certificates, K715 X1, IO		1.167	%		1/25/21		6,674,632		366,477	^(b)
Federal National Mortgage Association (FNMA), 2012-118 CI, IO		3.500	%		12/25/39		2,461,709		345,946
Federal National Mortgage Association (FNMA), 2013-073 IA, IO		3.000	%		9/25/32		2,531,564		302,067
Federal National Mortgage Association (FNMA), 2013-M1 X1, IO		4.540	%		11/25/16		10,567,630		400,006	^(b)

See Notes to Financial Statements.


Western Asset Intermediate Bond Fund 2015 Annual Report		25

Schedule of investments (cont’d)

May 31, 2015

Western Asset Intermediate Bond Fund


Security	Rate			Maturity Date		Face Amount		Value
Collateralized Mortgage Obligations — continued
Federal National Mortgage Association (FNMA), 2014-M5 SA, IO		4.768	%		1/25/17	$	6,418,114	$	54,554	^(b)
Federal National Mortgage Association (FNMA), 2015-M8 A2		2.900	%		1/25/25		490,000		499,585
Federal National Mortgage Association (FNMA), 2015-M8 AB2		2.829	%		1/25/25		490,000		494,604
Federal National Mortgage Association (FNMA), PO, PAC		0.000	%		5/25/22		471		471
FREMF Mortgage Trust, 2013-KF02 C		4.181	%		12/25/45		163,116		166,661	^(a)(b)
FREMF Mortgage Trust, 2014-K36 C		4.362	%		12/25/46		50,000		51,910	^(a)(b)
FREMF Mortgage Trust, 2014-K503 C		3.079	%		10/25/47		160,000		158,710	^(a)(b)
FREMF Mortgage Trust, 2014-K714 C		3.856	%		1/25/47		150,000		153,330	^(a)(b)
FREMF Mortgage Trust, 2015-K44 B		3.685	%		1/25/48		510,000		507,093	^(a)(b)
FREMF Mortgage Trust, 2015-K44 C		3.685	%		1/25/48		520,000		502,422	^(a)(b)
GE Business Loan Trust, 2006-2A A		0.366	%		11/15/34		1,627,710		1,557,058	^(a)(b)
GMAC Commercial Mortgage Securities Inc., 2006-C1 AM		5.290	%		11/10/45		870,000		886,486	^(b)
Government National Mortgage Association (GNMA), 2010-H26 LF		0.528	%		8/20/58		1,084,010		1,082,994	^(b)
Government National Mortgage Association (GNMA), 2011-H01 AF		0.628	%		11/20/60		2,382,541		2,382,724	^(b)
Government National Mortgage Association (GNMA), 2011-H07 FA		0.678	%		2/20/61		789,138		790,500	^(b)
Government National Mortgage Association (GNMA), 2011-H09 AF		0.678	%		3/20/61		391,227		392,015	^(b)
Government National Mortgage Association (GNMA), 2011-H19 FA		0.648	%		8/20/61		3,430,550		3,433,524	^(b)
Government National Mortgage Association (GNMA), 2012-027 IO, IO		1.226	%		4/16/53		5,042,402		296,256	^(b)
Government National Mortgage Association (GNMA), 2012-044 A		2.170	%		4/16/41		602,601		610,697
Government National Mortgage Association (GNMA), 2012-33 A		1.899	%		3/16/40		620,128		625,634
Government National Mortgage Association (GNMA), 2012-H30 GA		0.528	%		12/20/62		1,598,142		1,587,849	^(b)
Government National Mortgage Association (GNMA), 2013-95, IO, IO		0.709	%		4/16/47		12,148,662		699,095	^(b)
Government National Mortgage Association (GNMA), 2013-H08 BF		0.578	%		3/20/63		3,303,225		3,287,842	^(b)
Government National Mortgage Association (GNMA), 2014-105 IO, IO		1.100	%		6/16/54		7,381,894		581,309	^(b)
Government National Mortgage Association (GNMA), 2014-130 IB, IO		0.959	%		8/16/54		5,063,966		339,959	^(b)
Government National Mortgage Association (GNMA), 2014-157 IO, IO		0.889	%		5/16/55		7,416,086		530,517	^(b)

See Notes to Financial Statements.


26		Western Asset Intermediate Bond Fund 2015 Annual Report

Western Asset Intermediate Bond Fund


Security	Rate			Maturity Date		Face Amount		Value
Collateralized Mortgage Obligations — continued
Government National Mortgage Association (GNMA), 2014-186 IO, IO		0.895	%		8/16/54	$	8,454,524	$	593,364	^(b)
Government National Mortgage Association (GNMA), 2015-07 IO		0.959	%		1/16/57		5,944,550		500,406	^(b)
GS Mortgage Securities Trust, 2013-GC16 B		5.161	%		11/10/46		240,000		269,164	^(b)
GSMPS Mortgage Loan Trust, 2005-RP1 1AF		0.535	%		1/25/35		220,781		185,114	^(a)(b)
HarborView Mortgage Loan Trust, 2004-10 4A		2.522	%		1/19/35		464,754		463,039	^(b)
HarborView Mortgage Loan Trust, 2005-9 B1		0.784	%		6/20/35		1,953,405		1,743,353	^(b)
IMPAC Secured Assets Corp., 2006-5 2A		0.385	%		12/25/36		1,085,891		1,019,369	^(b)
JPMBB Commercial Mortgage Securities Trust, 2013-C15 C		5.081	%		11/15/45		160,000		175,760	^(b)
JPMBB Commercial Mortgage Securities Trust, 2013-C17 B		4.887	%		1/15/47		90,000		100,455	^(b)
JPMBB Commercial Mortgage Securities Trust, 2014-C22 C		4.561	%		9/15/47		300,000		312,509	^(b)
JPMBB Commercial Mortgage Securities Trust, 2014-C23 AS		4.202	%		9/15/47		540,000		585,372	^(b)
JPMorgan Chase Commercial Mortgage Securities Corp., 2005-LDP5 AM		5.278	%		12/15/44		500,000		508,559	^(b)
JPMorgan Chase Commercial Mortgage Securities Trust, 2014-PHH C		2.286	%		8/15/27		400,000		402,818	^(a)(b)
JPMorgan Reremic, 2015-2 1A2		0.929	%		8/26/36		1,920,000		1,642,752	^(a)(b)
LB Commercial Conduit Mortgage Trust, 2007-C3 AM		5.903	%		7/15/44		1,110,000		1,204,337	^(b)
MASTR ARM Trust, 2004-11 M1		0.825	%		11/25/34		289,939		288,485	^(b)
Merrill Lynch Mortgage Investors Trust, 2004-A1 2A1		2.393	%		2/25/34		534,060		536,784	^(b)
MLCC Mortgage Investors Inc., 2005-1, 2A1		2.130	%		4/25/35		155,017		146,762	^(b)
Morgan Stanley Bank of America Merrill Lynch Trust, 2013-C10 A4		4.082	%		7/15/46		550,000		605,942	^(b)
Morgan Stanley Capital I Trust, 2014-CPT AM		3.402	%		7/13/29		1,820,000		1,901,492	^(a)(b)
Morgan Stanley Capital I Trust, 2014-CPT B		3.446	%		7/13/29		1,540,000		1,600,459	^(a)(b)
Morgan Stanley Mortgage Loan Trust, 2004-6AR 1A		1.081	%		7/25/34		624,270		611,522	^(b)
Morgan Stanley Reremic Trust, 2015-R3 9A2		1.000	%		9/26/36		3,517,000		2,932,299	^(a)(b)(f)
MSCG Trust, 2015-ALDR A2		3.577	%		6/7/35		1,440,000		1,483,004	^(a)(b)
Nomura Resecuritization Trust		0.356	%		5/26/46		1,920,000		1,833,600	^(a)(b)^(f)
PFP III, 2014-1 D		4.286	%		6/14/31		230,000		230,293	^(a)(b)
Residential Asset Securitization Trust, 2003-A14 A1		4.750	%		2/25/19		189,503		193,453
SACO I Trust, 2007-VA1 A		8.974	%		6/25/21		641,772		672,261	^(a)(b)
Sequoia Mortgage Trust, 2003-03 A1		0.844	%		7/20/33		542,599		509,004	^(b)
Sequoia Mortgage Trust, 2004-11 A1		0.484	%		12/20/34		741,932		720,601	^(b)
Structured Agency Credit Risk Debt Notes, 2014-DN1 M2		2.385	%		2/25/24		1,330,000		1,346,113	^(b)
Structured Agency Credit Risk Debt Notes, 2014-DN2 M2		1.835	%		4/25/24		2,490,000		2,481,838	^(b)
Structured Agency Credit Risk Debt Notes, 2014-DN3 M2		2.585	%		8/25/24		1,230,000		1,248,840	^(b)
Structured Agency Credit Risk Debt Notes, 2014-HQ1 M2		2.685	%		8/25/24		1,880,000		1,912,720	^(b)

See Notes to Financial Statements.


Western Asset Intermediate Bond Fund 2015 Annual Report		27

Schedule of investments (cont’d)

May 31, 2015

Western Asset Intermediate Bond Fund


Security	Rate			Maturity Date		Face Amount		Value
Collateralized Mortgage Obligations — continued
Structured Agency Credit Risk Debt Notes, 2014-HQ3 M2		2.835	%		10/25/24	$	1,450,000	$	1,479,940	^(b)
UBS Commercial Mortgage Trust, 2012-C1 XA, IO		2.270	%		5/10/45		9,647,435		1,064,045	^(a)(b)
UBS-Barclays Commercial Mortgage Trust, 2012-C4 D		4.499	%		12/10/45		570,000		564,036	^(a)(b)
Wachovia Bank Commercial Mortgage Trust, 2007-C30 AMFL		0.386	%		12/15/43		1,618,000		1,564,634	^(a)(b)
WaMu Mortgage Pass-Through Certificates, 2004-AR13 A2A		0.925	%		11/25/34		270,794		256,068	^(b)
Wells Fargo Mortgage-Backed Securities Trust, 2004-M A7		2.617	%		8/25/34		531,799		539,650	^(b)
WF-RBS Commercial Mortgage Trust, 2012-C10 XA, IO		1.780	%		12/15/45		4,394,891		408,901	^(a)(b)
WF-RBS Commercial Mortgage Trust, 2014-C23 B		4.376	%		10/15/57		1,610,000		1,735,670	^(b)
WF-RBS Commercial Mortgage Trust, 2014-C23 C		3.849	%		10/15/57		520,000		517,787	^(b)
WF-RBS Commercial Mortgage Trust, 2014-C23 XA, IO		0.719	%		10/15/57		6,097,131		281,712	^(b)
Total Collateralized Mortgage Obligations (Cost — $93,972,430)									93,681,580
Mortgage-Backed Securities — 1.8%
FHLMC — 0.2%
Federal Home Loan Mortgage Corp. (FHLMC)		2.361	%		12/1/34		279,834		299,621	^(b)
Federal Home Loan Mortgage Corp. (FHLMC)		2.223	%		7/1/35		798,977		850,811	^(b)
Total FHLMC									1,150,432
FNMA — 1.3%
Federal National Mortgage Association (FNMA)		8.000	%		9/1/15		48		48
Federal National Mortgage Association (FNMA)		2.033	%		3/1/18		2,032		2,108	^(b)
Federal National Mortgage Association (FNMA)		9.500	%		4/15/21		7,180		8,286
Federal National Mortgage Association (FNMA)		3.500	%		8/1/33-9/1/43		786,812		827,877
Federal National Mortgage Association (FNMA)		2.250	%		12/1/34		113,521		121,393	^(b)
Federal National Mortgage Association (FNMA)		1.914	%		1/1/35		1,066,810		1,110,235	^(b)
Federal National Mortgage Association (FNMA)		1.863	%		5/1/43		5,192,328		5,354,258	^(b)
Federal National Mortgage Association (FNMA)		5.000	%		7/14/45		800,000		888,875	⁽ⁱ⁾
Total FNMA									8,313,080
GNMA — 0.3%
Government National Mortgage Association (GNMA)		1.996	%		6/20/60		2,180,859		2,303,694	^(b)
Total Mortgage-Backed Securities (Cost — $11,454,568)									11,767,206
Municipal Bonds — 0.2%
Virginia — 0.2%
Virginia State Housing Development Authority (Cost — $1,032,067)		6.000	%		6/25/34		1,046,589		1,120,122
Sovereign Bonds — 2.6%
Canada — 0.7%
Province of Ontario, Senior Bonds		1.100	%		10/25/17		1,400,000		1,402,584

See Notes to Financial Statements.


28		Western Asset Intermediate Bond Fund 2015 Annual Report

Western Asset Intermediate Bond Fund


Security	Rate			Maturity Date		Face Amount		Value
Canada — continued
Province of Ontario, Senior Bonds		4.400	%		4/14/20	$	1,440,000	$	1,615,447
Province of Quebec, Notes		2.625	%		2/13/23		1,400,000		1,430,254
Total Canada									4,448,285
Colombia — 0.1%
Republic of Colombia, Senior Bonds		5.625	%		2/26/44		910,000		980,525
Germany — 0.1%
FMS Wertmanagement, Senior Bonds		1.000	%		11/21/17		370,000		370,433
Indonesia — 0.2%
Republic of Indonesia, Senior Bonds		5.875	%		3/13/20		240,000		270,600	^(h)
Republic of Indonesia, Senior Notes		5.875	%		1/15/24		769,000		865,125	^(a)
Total Indonesia									1,135,725
Mexico — 0.7%
United Mexican States, Senior Notes		3.500	%		1/21/21		4,151,000		4,279,681
Poland — 0.2%
Republic of Poland, Senior Notes		4.000	%		1/22/24		1,480,000		1,581,898
Russia — 0.2%
Russian Foreign Bond — Eurobond, Senior Bonds		7.500	%		3/31/30		568,125		665,274	^(h)
Russian Foreign Bond — Eurobond, Senior Bonds		7.500	%		3/31/30		181,250		212,244	^(a)
Russian Foreign Bond — Eurobond, Senior Notes		4.500	%		4/4/22		400,000		392,343	^(h)
Total Russia									1,269,861
South Africa — 0.2%
Republic of South Africa, Senior Notes		5.875	%		9/16/25		1,150,000		1,304,997
Turkey — 0.2%
Republic of Turkey, Senior Bonds		5.625	%		3/30/21		140,000		152,775
Republic of Turkey, Senior Bonds		5.750	%		3/22/24		970,000		1,069,142
Republic of Turkey, Senior Notes		6.250	%		9/26/22		278,000		313,715
Total Turkey									1,535,632
Total Sovereign Bonds (Cost — $16,035,325)									16,907,037
U.S. Government & Agency Obligations — 26.4%
U.S. Government Agencies — 4.0%
Farmer Mac, Guaranteed Trust		5.125	%		4/19/17		3,350,000		3,616,626	^(a)
Federal Home Loan Bank (FHLB), Bonds		0.875	%		5/24/17		40,000		40,180
Federal Home Loan Bank (FHLB), Bonds		5.625	%		6/11/21		1,910,000		2,311,967
Federal Home Loan Mortgage Corp. (FHLMC), Notes		1.250	%		10/2/19		4,780,000		4,738,543
Federal National Mortgage Association (FNMA), Debentures		0.000	%		10/9/19		8,690,000		7,980,653
Residual Funding Corp. Principal Strip, Bonds		0.000	%		10/15/19		2,050,000		1,905,344
Tennessee Valley Authority, Bonds		5.980	%		4/1/36		70,000		92,638
Tennessee Valley Authority, Notes		5.250	%		9/15/39		760,000		957,198

See Notes to Financial Statements.


Western Asset Intermediate Bond Fund 2015 Annual Report		29

Schedule of investments (cont’d)

May 31, 2015

Western Asset Intermediate Bond Fund


Security	Rate			Maturity Date		Face Amount		Value
U.S. Government Agencies — continued
Tennessee Valley Authority, Senior Bonds		3.875	%		2/15/21	$	3,600,000	$	3,993,768
Total U.S. Government Agencies									25,636,917
U.S. Government Obligations — 22.4%
U.S. Treasury Notes		1.500	%		7/31/16		650,000		658,531
U.S. Treasury Notes		0.625	%		11/30/17		17,310,000		17,239,687
U.S. Treasury Notes		1.500	%		8/31/18		1,900,000		1,927,757
U.S. Treasury Notes		1.500	%		12/31/18		5,740,000		5,812,198
U.S. Treasury Notes		1.625	%		7/31/19		5,850,000		5,924,494
U.S. Treasury Notes		1.500	%		11/30/19		19,150,000		19,247,244
U.S. Treasury Notes		1.625	%		12/31/19		5,360,000		5,411,504
U.S. Treasury Notes		1.375	%		4/30/20		40,000		39,822
U.S. Treasury Notes		2.000	%		5/31/21		30,460,000		30,971,637
U.S. Treasury Notes		2.250	%		7/31/21		31,940,000		32,918,162
U.S. Treasury Notes		1.875	%		11/30/21		330,000		331,701
U.S. Treasury Notes		1.500	%		1/31/22		5,540,000		5,426,602
U.S. Treasury Notes		1.875	%		5/31/22		7,200,000		7,215,185
U.S. Treasury Notes		2.500	%		5/15/24		3,490,000		3,620,330
U.S. Treasury Notes		2.000	%		2/15/25		8,400,000		8,329,121
Total U.S. Government Obligations									145,073,975
Total U.S. Government & Agency Obligations (Cost — $167,379,177)									170,710,892
U.S. Treasury Inflation Protected Securities — 3.3%
U.S. Treasury Bonds, Inflation Indexed		2.375	%		1/15/25		3,682,056		4,408,975
U.S. Treasury Bonds, Inflation Indexed		1.375	%		2/15/44		1,235,787		1,376,261
U.S. Treasury Bonds, Inflation Indexed		0.750	%		2/15/45		982,470		939,947
U.S. Treasury Notes, Inflation Indexed		1.875	%		7/15/15		3,398,332		3,419,571
U.S. Treasury Notes, Inflation Indexed		0.375	%		7/15/23		7,303,824		7,409,386
U.S. Treasury Notes, Inflation Indexed		0.625	%		1/15/24		2,509,165		2,587,968
U.S. Treasury Notes, Inflation Indexed		0.125	%		7/15/24		1,222,891		1,211,331
Total U.S. Treasury Inflation Protected Securities (Cost — $20,951,897)									21,353,439

				Expiration Date		Contracts
Purchased Options — 0.0%
Eurodollar Futures, Call @ $99.63					12/14/15		73		5,475
Eurodollar Futures, Put @ $98.88					12/14/15		73		1,825
U.S. Treasury 10-Year Notes Futures, Put @ $123.50					8/21/15		30		7,500
Total Purchased Options (Cost — $30,978)									14,800
Total Investments before Short-Term Investments (Cost — $586,486,254)									593,520,208

See Notes to Financial Statements.


30		Western Asset Intermediate Bond Fund 2015 Annual Report

Western Asset Intermediate Bond Fund

Security

Rate

Maturity
Date

Face
Amount

Value

Short-Term Investments — 0.4%

Repurchase Agreements — 0.4%

Goldman Sachs & Co. repurchase agreement dated 5/29/15; Proceeds at maturity — $2,900,022; (Fully collateralized by U.S. government agency obligations, 1.250% due 1/30/17; Market value — $2,958,725) (Cost — $2,900,000)

0.090

6/1/15

2,900,000

2,900,000

Total Investments — 92.2% (Cost — $589,386,254)

596,420,208

Other Assets in Excess of Liabilities — 7.8%

50,136,517

Total Net Assets — 100.0%

646,556,725

^(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 as of the most recent information available.

^(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 May 31, 2015.

^(e)	Value is less than $1.

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

^(g)	Illiquid security (unaudited).

^(h)

Security is exempt from registration under Regulation S of the Securities Act of 1933. Regulation S applies to securities offerings that are made outside of the United States and do not involve direct selling efforts in the United States. This security has been deemed liquid pursuant to guidelines approved by the Board of Directors, unless otherwise noted.

⁽ⁱ⁾	This security is traded on a to-be-announced (“TBA”) basis. At May 31, 2015, the Fund held TBA securities with a total cost of $888,625 (See Note 1).

#	Aggregate cost for federal income tax purposes is $589,421,769.


Abbreviations used in this schedule:
ARM		— Adjustable Rate Mortgage
CDO		— Collateralized Debt Obligation
CLO		— Collateral Loan Obligation
IO		— Interest Only
PAC		— Planned Amortization Class
PO		— Principal Only

See Notes to Financial Statements.


Western Asset Intermediate Bond Fund 2015 Annual Report		31

Schedule of investments (cont’d)

May 31, 2015

Western Asset Intermediate Bond Fund


Schedule of Written Options
Security	Expiration Date		Strike Price		Contracts		Value
Eurodollar Futures, Call		9/14/15	$	99.50		52	$	16,575
Eurodollar Futures, Call		12/14/15		99.25		73		41,975
Eurodollar Futures, Put		9/14/15		99.50		52		3,575
Eurodollar Futures, Put		12/14/15		99.25		73		8,213
Eurodollar Mid Curve 1-Year Futures, Put		6/12/15		98.75		56		351
U.S. Treasury 10-Year Notes Futures, Call		6/26/15		130.00		63		8,859
U.S. Treasury 10-Year Notes Futures, Call		6/26/15		132.00		75		2,344
U.S. Treasury 10-Year Notes Futures, Call		6/26/15		131.50		46		2,156
U.S. Treasury 10-Year Notes Futures, Call		6/26/15		133.00		80		1,250
U.S. Treasury 10-Year Notes Futures, Call		8/21/15		129.00		48		39,750
U.S. Treasury 10-Year Notes Futures, Call		8/21/15		130.00		30		16,406
U.S. Treasury 10-Year Notes Futures, Call		8/21/15		129.50		23		15,453
U.S. Treasury 10-Year Notes Futures, Put		6/26/15		126.50		46		16,531
U.S. Treasury 30-Year Bonds Futures, Call		6/26/15		173.00		40		625
U.S. Treasury 30-Year Bonds Futures, Put		6/26/15		153.00		40		45,000
Total Written Options (Premiums received — $254,550)							$	219,063

See Notes to Financial Statements.


32		Western Asset Intermediate Bond Fund 2015 Annual Report

Statement of assets and liabilities

May 31, 2015



Assets:
Investments, at value (Cost — $589,386,254)	$	596,420,208
Cash		59,787,372
Interest receivable		3,767,292
Deposits with brokers for open futures contracts		1,056,111
Receivable for securities sold		939,707
Deposits with brokers for centrally cleared swap contracts		415,000
Receivable from broker — variation margin on open futures contracts		166,338
Receivable for Fund shares sold		151,937
Deposits with brokers for open written options		79,712
OTC swaps, at value (premiums paid — $9,282)		6,462
Deposits with brokers for open purchased options		5,385
Principal paydown receivable		4,217
Receivable for open OTC swap contracts		1,744
Prepaid expenses		57,542
*Total Assets*		*662,859,027*

Liabilities:
Payable for securities purchased		15,424,905
Distributions payable		239,653
Written options, at value (premiums received — $254,550)		219,063
Investment management fee payable		216,570
Payable to broker — variation margin on centrally cleared swaps		48,949
Payable for Fund shares repurchased		23,270
Directors’ fees payable		3,567
Service and/or distribution fees payable		425
Accrued expenses		125,900
*Total Liabilities*		*16,302,302*
Total Net Assets	$	646,556,725

Net Assets:
Par value (Note 7)	$	57,862
Paid-in capital in excess of par value		640,816,157
Undistributed net investment income		265,706
Accumulated net realized loss on investments, futures contracts, written options and swap contracts		(2,581,085)
Net unrealized appreciation on investments, futures contracts, written options and swap contracts		7,998,085
Total Net Assets	$	646,556,725

See Notes to Financial Statements.


Western Asset Intermediate Bond Fund 2015 Annual Report		33

Statement of assets and liabilities (cont’d)



Shares Outstanding:
Class A			76,596
Class C			20,687
Class R			9,460
Class I			20,354,352
Class IS			37,401,235

Net Asset Value:
Class A (and redemption price)			$11.17
Class C*			$11.19
Class R (and redemption price)			$11.18
Class I (and redemption price)			$11.17
Class IS (and redemption price)			$11.17
Maximum Public Offering Price Per Share:
Class A (based on maximum initial sales charge of 4.25%)			$11.67

*	Redemption price per share is NAV of Class C shares reduced by a 1.00% CDSC, if shares are redeemed within one year from purchase payment (See Note 2).

See Notes to Financial Statements.


34		Western Asset Intermediate Bond Fund 2015 Annual Report

Statement of operations

For the Year Ended May 31, 2015



Investment Income:
*Interest*	$	*15,405,250*

Expenses:
Investment management fee (Note 2)		2,325,751
Transfer agent fees (Note 5)		114,269
Registration fees		75,675
Fund accounting fees		61,258
Audit and tax fees		51,383
Shareholder reports		33,372
Legal fees		28,517
Directors’ fees		26,394
Custody fees		11,076
Insurance		9,443
Service and/or distribution fees (Notes 2 and 5)		4,902
Fees recaptured by investment manager (Note 2)		1,815
Miscellaneous expenses		5,975
*Total Expenses*		*2,749,830*
Less: Fee waivers and/or expense reimbursements (Notes 2 and 5)		(38,439)
*Net Expenses*		*2,711,391*
Net Investment Income		12,693,859

Realized and Unrealized Gain (Loss) on Investments, Futures Contracts, Written Options and Swap Contracts (Notes 1, 3 and 4):
Net Realized Gain From:
Investment transactions		3,706,332
Futures contracts		115,218
Written options		1,393,918
Swap contracts		226,047
*Net Realized Gain*		*5,441,515*
Change in Net Unrealized Appreciation (Depreciation) From:
Investments		(4,156,290)
Futures contracts		596,199
Written options		218,842
Swap contracts		302,589
*Change in Net Unrealized Appreciation (Depreciation)*		*(3,038,600)*
Net Gain on Investments, Futures Contracts, Written Options and Swap Contracts		2,402,855
Increase in Net Assets from Operations	$	15,096,714

See Notes to Financial Statements.


Western Asset Intermediate Bond Fund 2015 Annual Report		35

Statements of changes in net assets


For the Year Ended May 31, 2015, the Period Ended May 31, 2014 and the Year Ended December 31, 2013	2015		2014†		2013

Operations:
Net investment income	$	12,693,859	$	5,090,291	$	9,828,346
Net realized gain (loss)		5,441,515		1,405,695		(1,834,705)
Change in net unrealized appreciation (depreciation)		(3,038,600)		9,263,418		(10,971,838)
*Increase (Decrease) in Net Assets from Operations*		*15,096,714*		*15,759,404*		*(2,978,197)*

Distributions to Shareholders From (Notes 1 and 6):
Net investment income		(12,621,441)		(4,932,539)		(9,938,294)
*Decrease in Net Assets from Distributions to Shareholders*		*(12,621,441)*		*(4,932,539)*		*(9,938,294)*

Fund Share Transactions (Note 7):
Net proceeds from sale of shares		161,039,390		59,421,963		187,529,150
Reinvestment of distributions		10,106,530		3,857,993		7,282,363
Cost of shares repurchased		(57,933,779)		(36,995,835)		(91,427,475)
*Increase in Net Assets from Fund Share Transactions*		*113,212,141*		*26,284,121*		*103,384,038*
*Increase in Net Assets*		*115,687,414*		*37,110,986*		*90,467,547*

Net Assets:
Beginning of year		530,869,311		493,758,325		403,290,778
End of year*	$	646,556,725	$	530,869,311	$	493,758,325
*Includes undistributed (overdistributed) net investment income, respectively, of:		$265,706		$147,874		$(19,893)

†	For the period January 1, 2014 through May 31, 2014.

See Notes to Financial Statements.


36		Western Asset Intermediate Bond Fund 2015 Annual Report

Financial highlights


For a share of each class of capital stock outstanding throughout each year ended May 31, unless otherwise noted:
Class A Shares¹	2015			2014²			2013³			2012⁴

Net asset value, beginning of year		$11.13			$10.90			$11.23			$10.97

Income (loss) from operations:
Net investment income		0.19			0.09			0.20			0.14
Net realized and unrealized gain (loss)		0.04			0.23			(0.33)			0.28
*Total income (loss) from operations*		*0.23*			*0.32*			*(0.13)*			*0.42*

Less distributions from:
Net investment income		(0.19)			(0.09)			(0.20)			(0.15)
Net realized gains		—			—			—			(0.01)
*Total distributions*		*(0.19)*			*(0.09)*			*(0.20)*			*(0.16)*

Net asset value, end of year		$11.17			$11.13			$10.90			$11.23
*Total return⁵*		*2.12*	%		*2.91*	%		*(1.18)*	%		*3.81*	%

Net assets, end of year (000s)		$856			$197			$181			$106

Ratios to average net assets:
Gross expenses		0.92	%⁶		1.06	%⁷		1.10	%⁶		0.96	%⁷
Net expenses^8,9		0.90	⁶		0.90	⁷		0.89	⁶		0.87	⁷
Net investment income		1.72			1.96	⁷		1.78			1.92	⁷

Portfolio turnover rate¹⁰		59	%		34	%		119	%		101	%

¹	Per share amounts have been calculated using the average shares method.

²	For the period January 1, 2014 through May 31, 2014.

³	For the year ended December 31.

⁴	For the period April 30, 2012 (inception date) to December 31, 2012.

⁵

Performance figures, exclusive of sales charges, may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, 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	Reflects recapture of expenses waived/reimbursed from prior fiscal years.

⁷	Annualized.

⁸

As a result of an expense limitation arrangement, the ratio of expenses, other than interest, brokerage commissions, taxes, extraordinary expenses and deferred organizational expenses, to average net assets of Class A shares did not exceed 0.90%. This expense limitation arrangement cannot be terminated prior to December 31, 2016 without the Board of Directors’ consent.

⁹	Reflects fee waivers and/or expense reimbursements.

¹⁰	Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 61% for the year ended May 31, 2015, 46% for the period ended May 31, 2014 and 162% and 118% for the years ended December 31, 2013 and 2012, respectively.

See Notes to Financial Statements.


Western Asset Intermediate Bond Fund 2015 Annual Report		37

Financial highlights (cont’d)


For a share of each class of capital stock outstanding throughout each year ended May 31, unless otherwise noted:
Class C Shares¹	2015			2014²			2013³			2012⁴

Net asset value, beginning of year		$11.15			$10.92			$11.23			$10.97

Income (loss) from operations:
Net investment income		0.11			0.05			0.11			0.09
Net realized and unrealized gain (loss)		0.04			0.23			(0.30)			0.28
*Total income (loss) from operations*		*0.15*			*0.28*			*(0.19)*			*0.37*

Less distributions from:
Net investment income		(0.11)			(0.05)			(0.12)			(0.10)
Net realized gains		—			—			—			(0.01)
*Total distributions*		*(0.11)*			*(0.05)*			*(0.12)*			*(0.11)*

Net asset value, end of year		$11.19			$11.15			$10.92			$11.23
*Total return⁵*		*1.36*	%		*2.68*	%		*(1.83)*	%		*3.31*	%

Net assets, end of year (000s)		$231			$340			$364			$45

Ratios to average net assets:
Gross expenses		1.67	%⁶		1.79	%^6,7		1.77	%⁶		1.87	%⁷
Net expenses^8,9		1.65	⁶		1.65	^6,7		1.64	⁶		1.60	⁷
Net investment income		1.01			1.20	⁷		1.04			1.23	⁷

Portfolio turnover rate¹⁰		59	%		34	%		119	%		101	%

¹	Per share amounts have been calculated using the average shares method.

²	For the period January 1, 2014 through May 31, 2014.

³	For the year ended December 31.

⁴	For the period April 30, 2012 (inception date) to December 31, 2012.

⁵

Performance figures, exclusive of CDSC, may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, 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	Reflects recapture of expenses waived/reimbursed from prior fiscal years.

⁷	Annualized.

⁸

As a result of an expense limitation arrangement, the ratio of expenses, other than interest, brokerage commissions, taxes, extraordinary expenses and deferred organizational expenses, to average net assets of Class C shares did not exceed 1.65%. This expense limitation arrangement cannot be terminated prior to December 31, 2016 without the Board of Directors’ consent.

⁹	Reflects fee waivers and/or expense reimbursements.

¹⁰	Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 61% for the year ended May 31, 2015, 46% for the period ended May 31, 2014 and 162% and 118% for the years ended December 31, 2013 and 2012, respectively.

See Notes to Financial Statements.


38		Western Asset Intermediate Bond Fund 2015 Annual Report


For a share of each class of capital stock outstanding throughout each year ended May 31, unless otherwise noted:
Class R Shares¹	2015			2014²			2013³			2012⁴

Net asset value, beginning of year		$11.13			$10.90			$11.23			$10.97

Income (loss) from operations:
Net investment income		0.16			0.08			0.17			0.13
Net realized and unrealized gain (loss)		0.06			0.22			(0.33)			0.27
*Total income (loss) from operations*		*0.22*			*0.30*			*(0.16)*			*0.40*

Less distributions from:
Net investment income		(0.17)			(0.07)			(0.17)			(0.13)
Net realized gains		—			—			—			(0.01)
*Total distributions*		*(0.17)*			*(0.07)*			*(0.17)*			*(0.14)*

Net asset value, end of year		$11.18			$11.13			$10.90			$11.23
*Total return⁵*		*1.86*	%		*2.80*	%		*(1.44)*	%		*3.64*	%

Net assets, end of year (000s)		$106			$15			$14			$10

Ratios to average net assets:
Gross expenses		1.19	%⁶		1.28	%⁷		1.37	%		1.21	%⁷
Net expenses^8,9		1.15	⁶		1.15	⁷		1.15			1.14	⁷
Net investment income		1.45			1.71	⁷		1.53			1.72	⁷

Portfolio turnover rate¹⁰		59	%		34	%		119	%		101	%

¹	Per share amounts have been calculated using the average shares method.

²	For the period January 1, 2014 through May 31, 2014.

³	For the year ended December 31.

⁴	For the period April 30, 2012 (inception date) to December 31, 2012.

⁵

Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, 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	Reflects recapture of expenses waived/reimbursed from prior fiscal years.

⁷	Annualized.

⁸

As a result of an expense limitation arrangement, the ratio of expenses, other than interest, brokerage commissions, taxes, extraordinary expenses and deferred organizational expenses, to average net assets of Class R shares did not exceed 1.15%. This expense limitation arrangement cannot be terminated prior to December 31, 2016 without the Board of Directors’ consent.

⁹	Reflects fee waivers and/or expense reimbursements.

¹⁰	Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 61% for the year ended May 31, 2015, 46% for the period ended May 31, 2014 and 162% and 118% for the years ended December 31, 2013 and 2012, respectively.

See Notes to Financial Statements.


Western Asset Intermediate Bond Fund 2015 Annual Report		39

Financial highlights (cont’d)


For a share of each class of capital stock outstanding throughout each year ended May 31, unless otherwise noted:
Class I Shares^1,2	2015			2014³			2013⁴			2012⁴			2011⁴			2010⁴

Net asset value, beginning of year		$11.13			$10.90			$11.23			$10.76			$10.67			$10.31

Income (loss) from operations:
Net investment income		0.24			0.11			0.24			0.28			0.34			0.39
Net realized and unrealized gain (loss)		0.04			0.22			(0.33)			0.48			0.23			0.50
*Total income (loss) from operations*		*0.28*			*0.33*			*(0.09)*			*0.76*			*0.57*			*0.89*

Less distributions from:
Net investment income		(0.24)			(0.10)			(0.24)			(0.28)			(0.35)			(0.40)
Net realized gains		—			—			—			(0.01)			(0.13)			(0.13)
*Total distributions*		*(0.24)*			*(0.10)*			*(0.24)*			*(0.29)*			*(0.48)*			*(0.53)*

Net asset value, end of year		$11.17			$11.13			$10.90			$11.23			$10.76			$10.67
*Total return⁵*		*2.53*	%		*3.08*	%		*(0.78)*	%		*7.10*	%		*5.35*	%		*8.76*	%

Net assets, end of year (000s)		$227,426			$191,802			$210,537			$245,534			$271,537			$341,090

Ratios to average net assets:
Gross expenses		0.50	%		0.51	%⁶		0.50	%		0.49	%		0.49	%		0.48	%
Net expenses⁷		0.49			0.49	⁶		0.48			0.45			0.48			0.48
Net investment income		2.15			2.36	⁶		2.18			2.57			3.15			3.63

Portfolio turnover rate		59	%⁸		34	%⁸		119	%⁸		101	%⁸		69	%⁸		99	%

¹	Per share amounts have been calculated using the average shares method.

²	In April 2010, Institutional Class shares were renamed Class I shares.

³	For the period January 1, 2014 through May 31, 2014.

⁴	For the year ended December 31.

⁵

⁶	Annualized.

⁷	Reflects fee waivers and/or expense reimbursements.

⁸

Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 61% for the year ended May 31, 2015, 46% for the period ended May 31, 2014 and 162%, 118% and 75% for the years ended December 31, 2013, 2012 and 2011, respectively.

See Notes to Financial Statements.


40		Western Asset Intermediate Bond Fund 2015 Annual Report


For a share of each class of capital stock outstanding throughout each year ended May 31, unless otherwise noted:
Class IS Shares^1,2	2015			2014³			2013⁴			2012⁴			2011⁴			2010⁴

Net asset value, beginning of year		$11.13			$10.90			$11.23			$10.76			$10.67			$10.31

Income (loss) from operations:
Net investment income		0.24			0.11			0.25			0.28			0.34			0.39
Net realized and unrealized gain (loss)		0.04			0.23			(0.33)			0.48			0.23			0.50
*Total income (loss) from operations*		*0.28*			*0.34*			*(0.08)*			*0.76*			*0.57*			*0.89*

Less distributions from:
Net investment income		(0.24)			(0.11)			(0.25)			(0.28)			(0.35)			(0.40)
Net realized gains		—			—			—			(0.01)			(0.13)			(0.13)
*Total distributions*		*(0.24)*			*(0.11)*			*(0.25)*			*(0.29)*			*(0.48)*			*(0.53)*

Net asset value, end of year		$11.17			$11.13			$10.90			$11.23			$10.76			$10.67
*Total return⁵*		*2.58*	%		*3.10*	%		*(0.74)*	%		*7.11*	%		*5.39*	%		*8.79*	%

Net assets, end of year (000s)		$417,938			$338,515			$282,662			$157,596			$82,120			$59,403

Ratios to average net assets:
Gross expenses		0.45	%⁶		0.47	%⁷		0.47	%		0.48	%		0.48	%		0.47	%
Net expenses⁸		0.45	^6,9		0.45	^7,9		0.44	⁹		0.44	⁹		0.45			0.45
Net investment income		2.20			2.41	⁷		2.25			2.56			3.17			3.65

Portfolio turnover rate		59	%¹⁰		34	%¹⁰		119	%¹⁰		101	%¹⁰		69	%¹⁰		99	%

¹	Per share amounts have been calculated using the average shares method.

²	In April 2010, Institutional Select Class shares were renamed Class IS shares.

³	For the period January 1, 2014 through May 31, 2014.

⁴	For the year ended December 31.

⁵

⁶	Reflects recapture of expenses waived/reimbursed from prior fiscal years.

⁷	Annualized.

⁸	Reflects fee waivers and/or expense reimbursements.

⁹

As a result of an expense limitation arrangement, the ratio of expenses, other than interest, brokerage commissions, taxes, extraordinary expenses and deferred organizational expenses, to average net assets of Class IS shares did not exceed 0.45%. In addition, total annual fund operating expenses for Class IS shares did not exceed total annual fund operating expenses for Class I shares. These expense limitation arrangements cannot be terminated prior to December 31, 2016 without the Board of Directors’ consent.

¹⁰

See Notes to Financial Statements.


Western Asset Intermediate Bond Fund 2015 Annual Report		41

Notes to financial statements

1. Organization and significant accounting policies

Western Asset Intermediate Bond Fund (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 following are significant accounting policies consistently followed by the Funds 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. The valuations for fixed income securities (which may include, but are not limited to, corporate, government, municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) and certain derivative instruments are typically the prices supplied by independent third party pricing services, which may use market prices or broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar securities. Short-term fixed income securities that will mature in 60 days or less are valued at amortized cost, unless it is determined that using this method would not reflect an investment’s fair value. 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 the Fund holds securities or other assets that are denominated in a foreign currency, the Fund will normally use the currency exchange rates as of 4:00 p.m. (Eastern Time). If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers or at the transaction price if the security has recently been purchased and no value has yet been obtained from a pricing service or pricing broker. When reliable prices are not readily available, 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 values these securities as determined in accordance with procedures approved by the Fund’s Board of Directors.

The Board of Directors is responsible for the valuation process and has delegated the supervision of the daily valuation process to the Legg Mason North Atlantic Fund Valuation Committee (formerly, Legg Mason North American Fund Valuation Committee) (the “Valuation Committee”). The Valuation Committee, pursuant to the policies adopted by the


42		Western Asset Intermediate Bond Fund 2015 Annual Report

Board of Directors, is responsible for making fair value determinations, evaluating the effectiveness of the Fund’s pricing policies, and reporting to the Board of Directors. When determining the reliability of third party pricing information for investments owned by the Fund, the Valuation Committee, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.

The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security; the issuer’s financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts’ research and observations from financial institutions; information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable companies; and the existence of a shelf registration for restricted securities.

For each portfolio security that has been fair valued pursuant to the policies adopted by the Board of Directors, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are reported to the Board of Directors quarterly.

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 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 discount estimated future cash flows to present value.

GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. These inputs are summarized in the three broad levels listed below:

Level 1 — quoted prices in active markets for identical investments

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

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


Western Asset Intermediate Bond Fund 2015 Annual Report		43

Notes to financial statements (cont’d)

The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.

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


ASSETS
Description	Quoted Prices (Level 1)		Other Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Total
Long-term investments†:
Corporate bonds & notes:
Financials		—	$	104,722,039	$	0	*	$	104,722,039
Industrials		—		8,123,793		871,992			8,995,785
Other corporate bonds & notes		—		98,701,972		—			98,701,972
Asset-backed securities		—		63,124,617		2,420,719			65,545,336
Collateralized mortgage obligations		—		84,778,556		8,903,024			93,681,580
Mortgage-backed securities		—		11,767,206		—			11,767,206
Municipal bonds		—		1,120,122		—			1,120,122
Sovereign bonds		—		16,907,037		—			16,907,037
U.S. government & agency obligations		—		170,710,892		—			170,710,892
U.S. Treasury inflation protected securities		—		21,353,439		—			21,353,439
Purchased options	$	14,800		—		—			14,800
Total long-term investments	$	14,800	$	581,309,673	$	12,195,735		$	593,520,208
Short-term investments†		—		2,900,000		—			2,900,000
Total investments	$	14,800	$	584,209,673	$	12,195,735		$	596,420,208
Other financial instruments:
Futures contracts	$	782,374		—		—		$	782,374
OTC credit default swaps on corporate issues — sell protection‡		—	$	6,462		—			6,462
Centrally cleared interest rate swaps		—		273,109		—			273,109
Total other financial instruments	$	782,374	$	279,571		—		$	1,061,945
Total	$	797,174	$	584,489,244	$	12,195,735		$	597,482,153

LIABILITIES
Description	Quoted Prices (Level 1)		Other Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Total
Other financial instruments:
Written options	$	219,063		—		—		$	219,063
Futures contracts		124,019		—		—			124,019
Total	$	343,082		—		—		$	343,082

†	See Schedule of Investments for additional detailed categorizations.

*	Amount represents less than $1.

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


44		Western Asset Intermediate Bond Fund 2015 Annual Report

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


	Corporate Bonds & Notes
Investments in Securities	Financials			Industrials		Asset- Backed Securities		Collateralized Mortgage Obligations		Total
Balance as of May 31, 2014	$	0	*		—	$	3,770,840		—	$	3,770,840
Accrued premiums/discounts		6,876			—		2,818	$	3,552		13,246
Realized gain (loss)¹		—			—		(26,462)		3,181		(23,281)
Change in unrealized appreciation (depreciation)²		(6,876)			—		(1,949)		(25,636)		(34,461)
Purchases		—			—		—		7,117,753		7,117,753
Sales		—			—		(2,252,439)		(58,045)		(2,310,484)
Transfers into Level 3³		—		$	871,992		2,420,719		1,862,219		5,154,930
Transfers out of Level 3⁴		—			—		(1,492,808)		—		(1,492,808)
Balance as of May 31, 2015	$	0	*	$	871,992	$	2,420,719	$	8,903,024	$	12,195,735
Net change in unrealized appreciation (depreciation) for investments in securities still held at May 31, 2015²	$	(6,876)			—		—	$	(25,636)	$	(32,512)

The Fund’s policy is to recognize transfers between levels as of the end of the reporting period.

*	Amount represents less than $1.

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

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.

³	Transferred into Level 3 as a result of the unavailability of a quoted price in an active market for an identical investment or the unavailability of other significant observable inputs.

⁴	Transferred out of Level 3 as a result of the availability of a quoted price in an active market for an identical investment or the availability of other significant observable inputs.

(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, the Fund acquires a debt security subject to an obligation of the seller to repurchase, and of the Fund to resell, the security at an agreed-upon price and time, thereby determining the yield during the 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 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


Western Asset Intermediate Bond Fund 2015 Annual Report		45

Notes to financial statements (cont’d)

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) Inflation-indexed bonds. Inflation-indexed bonds are fixed-income securities whose principal value or interest rate is periodically adjusted according to the rate of inflation. As the index measuring inflation changes, the principal value or interest rate of inflation-indexed bonds will be adjusted accordingly. Inflation adjustments to the principal amount of inflation-indexed bonds are reflected as an increase or decrease to investment income on the Statement of Operations. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds. For bonds that do not provide a similar guarantee, the adjusted principal value of the bond repaid at maturity may be less than the original principal.

(d) Purchased options. When the Fund purchases an option, an amount equal to the premium paid by the Fund is recorded as an investment on the Statement of Assets and Liabilities, the value of which is marked-to-market to reflect the current market value of the option purchased. If the purchased option expires, the Fund realizes a loss equal to the amount of premium paid. When an instrument is purchased or sold through the exercise of an option, the related premium paid is added to the basis of the instrument acquired or deducted from the proceeds of the instrument sold. The risk associated with purchasing put and call options is limited to the premium paid.

(e) 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 an uncovered 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.


46		Western Asset Intermediate Bond Fund 2015 Annual Report

(f) Futures contracts. The Fund uses futures contracts generally to gain exposure to, or hedge against, changes in interest rates or gain exposure to, or hedge against, changes in certain asset classes. 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. 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.

(g) Options on futures contracts. An option on a futures contract gives the purchaser the right, in return for the premium paid, to assume a position in the underlying futures contract at the specified option exercise price at any time prior to the expiration date of the option. Upon exercise of an option, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by delivery of the accumulated balance in the writer’s futures margin account that represents the amount by which the market price of the futures contract exceeds (in the case of a call) or is less than (in the case of a put) the exercise price of the option on the futures contract. The potential for loss related to the purchase of an option on a futures contract is limited to the premium paid for the option plus transaction costs. Because the value of the option is fixed at the point of purchase, there are no daily cash payments by the purchaser to reflect changes in the value of the underlying contract; however, the value of the option changes daily and that change would be reflected in the net asset value of the Fund. The potential for loss related to writing call options is unlimited. The potential for loss related to writing put options is limited only by the aggregate strike price of the put option less the premium received.

(h) Swap agreements. The Fund invests 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 other portfolio transactions. Swap agreements are privately negotiated in the over-the-counter market (“OTC Swaps”) or may be executed on a registered exchange (“Centrally Cleared Swaps”). Unlike Centrally Cleared Swaps, the Fund has credit exposure to the counterparties of OTC Swaps.

Swap contracts are marked-to-market daily and changes in value are recorded as unrealized appreciation (depreciation). The daily change in valuation of Centrally Cleared Swaps, if any, is recorded as a receivable or payable for variation margin on the Statement of Assets and Liabilities. Gains or losses are realized upon termination of the swap agreement.


Western Asset Intermediate Bond Fund 2015 Annual Report		47

Notes to financial statements (cont’d)

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 posted 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 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.

OTC swap 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. Net periodic payments received or paid by the Fund are recognized as a realized gain or loss in the Statement of Operations.

The Fund’s maximum exposure in the event of a defined credit event on a credit default swap to sell protection is the notional amount. As of May 31, 2015, the total notional value of all credit default swaps to sell protection is $860,000. This amount would be offset by the value of the swap’s reference entity, upfront premiums received on the swap and any amounts received from the settlement of a credit default swap where the Fund bought protection for the same referenced security/entity.

For average notional amounts of swaps held during the year ended May 31, 2015, see Note 4.

Credit default swaps

The Fund enters 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 an 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


48		Western Asset Intermediate Bond Fund 2015 Annual Report

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.

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.

Interest rate swaps

The Fund enters into interest rate swap contracts to manage its exposure to interest rate risk. Interest rate swaps are agreements between two parties to exchange cash flows based on a notional principal amount. The Fund may elect to pay a fixed rate and receive a floating rate, or receive a fixed rate and pay a floating rate, on a notional principal amount. Interest rate swaps are marked-to-market daily based upon quotations from market makers and the change, if any, is recorded as an unrealized gain or loss in the Statement of Operations. When a swap contract is terminated early, the Fund records a realized gain or loss equal to the difference between the original cost and the settlement amount of the closing transaction.


Western Asset Intermediate Bond Fund 2015 Annual Report		49

Notes to financial statements (cont’d)

The risks of interest rate swaps include changes in market conditions that will affect the value of the contract or changes in the present value of the future cash flow streams and the possible inability of the counterparty to fulfill its obligations under the agreement. The Fund’s maximum risk of loss from counterparty credit risk is the discounted net value of the cash flows to be received from the counterparty over the contract’s remaining life, to the extent that that amount is positive. This risk is mitigated by the posting of collateral by the counterparty to the Fund to cover the Fund’s exposure to the counterparty.

(i) Securities traded on a to-be-announced basis. The Fund may trade securities on a to-be-announced (“TBA”) basis. In a TBA transaction, the Fund commits to purchasing or selling securities which have not yet been issued by the issuer and for which specific information, such as the face amount, maturity date and underlying pool of investments in U.S. government agency mortgage pass-through securities, is not announced. Securities purchased on a TBA basis are not settled until they are delivered to the Fund. Beginning on the date the Fund enters into a TBA transaction, cash, U.S. government securities or other liquid high-grade debt obligations are segregated in an amount equal in value to the purchase price of the TBA security. These securities are subject to market fluctuations and their current value is determined in the same manner as for other securities.

(j) Mortgage dollar rolls. The Fund may enter into mortgage dollar rolls in which the Fund sells mortgage-backed securities for delivery in the current month, realizing a gain or loss, and simultaneously contracts to repurchase substantially similar (same type, coupon and maturity) securities to settle on a specified future date.

The Fund executes its mortgage dollar rolls entirely in the TBA market, whereby the Fund makes a forward commitment to purchase a security and, instead of accepting delivery, the position is offset by a sale of the security with a simultaneous agreement to repurchase at a future date. The Fund accounts for mortgage dollar rolls as purchases and sales.

The risk of entering into mortgage dollar rolls is that the market value of the securities the Fund is obligated to repurchase under the agreement may decline below the repurchase price. In the event the buyer of securities under a mortgage dollar roll files for bankruptcy or becomes insolvent, the Fund’s use of the proceeds of the mortgage dollar roll may be restricted pending a determination by the counterparty, or its trustee or receiver, whether to enforce the Fund’s obligation to repurchase the securities.

(k) Stripped securities. The Fund may invest in ‘‘Stripped Securities,’’ a term used collectively for components, or strips, of fixed income securities. Stripped securities can be principal only securities (“PO”), which are debt obligations that have been stripped of unmatured interest coupons, or interest only securities (“IO”), which are unmatured interest coupons that have been stripped from debt obligations. The market value of Stripped Securities will fluctuate in response to changes in economic conditions, rates of pre-payment, interest rates and the market’s perception of the securities. However, fluctuations in response to interest rates may be greater in Stripped Securities than for debt obligations of comparable maturities that pay interest currently. The amount of fluctuation may increase with a longer period of maturity.


50		Western Asset Intermediate Bond Fund 2015 Annual Report

The yield to maturity on IO’s is sensitive to the rate of principal repayments (including prepayments) on the related underlying debt obligation and principal payments may have a material effect on yield to maturity. If the underlying debt obligation experiences greater than anticipated prepayments of principal, the Fund may not fully recoup its initial investment in IO’s.

(l) Loan participations. The Fund may invest in loans arranged through private negotiation between one or more financial institutions. The Fund’s investment in any such loan may be in the form of a participation in or an assignment of the loan. In connection with purchasing participations, the Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement related to the loan, or any rights of off-set against the borrower and the Fund may not benefit directly from any collateral supporting the loan in which it has purchased the participation.

The Fund assumes the credit risk of the borrower, the lender that is selling the participation and any other persons interpositioned between the Fund and the borrower. In the event of the insolvency of the lender selling the participation, the Fund may be treated as a general creditor of the lender and may not benefit from any off-set between the lender and the borrower.

(m) Credit and market risk. The Fund invests in high-yield and emerging market instruments that are subject to certain credit and market risks. The yields of high-yield and emerging market debt obligations reflect, among other things, perceived credit and market risks. The Fund’s investments in securities rated below investment grade typically involve risks not associated with higher rated securities including, among others, greater risk related to timely and ultimate payment of interest and principal, greater market price volatility and less liquid secondary market trading. The consequences of political, social, economic or diplomatic changes may have disruptive effects on the market prices of investments held by the Fund. The Fund’s investments in non-U.S. dollar denominated securities may also result in foreign currency losses caused by devaluations and exchange rate fluctuations.

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 the 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.

(n) Counterparty risk and credit-risk-related contingent features of derivative instruments. The Fund may invest in certain securities or engage in other transactions, where the Fund is exposed to counterparty credit risk in addition to broader market risks. The Fund may invest in securities of issuers, which may also be considered counterparties


Western Asset Intermediate Bond Fund 2015 Annual Report		51

Notes to financial statements (cont’d)

as trading partners in other transactions. This may increase the risk of loss in the event of default or bankruptcy by the counterparty or if the counterparty otherwise fails to meet its contractual obligations. The Fund’s investment manager attempts to mitigate counterparty risk by (i) periodically assessing the creditworthiness of its trading partners, (ii) monitoring and/or limiting the amount of its net exposure to each individual counterparty based on its assessment and (iii) requiring collateral from the counterparty for certain transactions. Market events and changes in overall economic conditions may impact the assessment of such counterparty risk by the investment manager. In addition, declines in the values of underlying collateral received may expose the Fund to increased risk of loss.

The Fund has entered into master agreements with certain of its derivative counterparties that provide for general obligations, representations, agreements, collateral, events of default or termination and credit related contingent features. The credit related contingent features include, but are not limited to, a percentage decrease in the Fund’s net assets or NAV over a specified period of time. If these credit related contingent features were triggered, the derivatives counterparty could terminate the positions and demand payment or require additional collateral.

Collateral requirements differ by type of derivative. Collateral or margin requirements are set by the broker or exchange clearinghouse for exchange traded derivatives while collateral terms are contract specific for over-the-counter traded derivatives. Cash collateral that has been pledged to cover obligations of the Fund under derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities. Securities pledged as collateral, if any, for the same purpose are noted in the Schedule of Investments.

Absent an event of default by the counterparty or a termination of the agreement, the terms of the master agreements do not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the Fund and the applicable counterparty. The enforceability of the right to offset may vary by jurisdiction.

As of May 31, 2015, the Fund held written options with credit related contingent features which had a liability position of $219,063. If a contingent feature in the master agreements would have been triggered, the Fund would have been required to pay this amount to its derivatives counterparties. As of May 31, 2015, the Fund had posted with its counterparties cash and/or securities as collateral to cover the net liability of these derivatives amounting to $79,712, which could be used to reduce the required payment.

(o) 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. Paydown gains and losses on mortgage- and asset-backed securities are recorded as adjustments to interest income. 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, the Fund may halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default or credit event.


52		Western Asset Intermediate Bond Fund 2015 Annual Report

(p) Distributions to shareholders. Distributions from net investment income 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 to shareholders of the Fund are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.

(q) 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.

(r) 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.

(s) 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 intends 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 or state income tax provision is required in the Fund’s financial statements.

Management has analyzed the Fund’s tax positions taken on income tax returns for all open tax years and has concluded that as of May 31, 2015, 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 the Internal Revenue Service and state departments of revenue.

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

(t) 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 values per share. During the current year, the following reclassifications have been made:


	Undistributed Net Investment Income		Accumulated Net Realized Loss
(a)	$	45,414	$	(45,414)

^(a)	Reclassifications are due to losses from mortgage backed securities treated as capital losses for tax purposes and book/tax differences in the treatment of swap contracts.

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”).


Western Asset Intermediate Bond Fund 2015 Annual Report		53

Notes to financial statements (cont’d)

LMPFA provides the Fund with management and administrative services for which the Fund pays a fee calculated daily and paid monthly, at an annual rate of 0.40% of the Fund’s average daily net assets.

LMPFA has agreed to waive fees and/or reimburse operating expenses (other than interest, brokerage commissions, taxes, extraordinary expenses and deferred organizational expenses) so that total operating expenses are not expected to exceed 0.90%, 1.65%, 1.15% and 0.45% for Class A, Class C, Class R and Class IS shares, respectively. In addition, total annual fund operating expenses for Class IS shares did not exceed total annual fund operating expenses for Class I shares. These arrangements cannot be terminated prior to December 31, 2016 without the Board of Directors’ consent.

During the year ended May 31, 2015, fees waived and/or expenses reimbursed amounted to $38,439.

LMPFA is permitted to recapture amounts waived and/or reimbursed to a class within two years after the fiscal year in which the investment manager earned the fee or incurred the expense if the class’ total annual operating expenses have fallen to a level below the limits described above. In no case will the investment manager recapture any amount that would result, on any particular business day of the Fund, in the class’ total annual operating expenses exceeding the expense cap or any other lower limit then in effect.

Pursuant to these arrangements, at May 31, 2015, the Fund had remaining fee waivers and/or expense reimbursements subject to recapture by LMPFA and respective dates of expiration as follows:


	Class A		Class C		Class R		Class I		Class IS
Expires May 31, 2016	$	29	$	171	$	8	$	13,730	$	22,361
Expires May 31, 2017		74		67		23		24,562		13,713
Total fee waivers/expense reimbursements subject to recapture	$	103	$	238	$	31	$	38,292	$	36,074

For the year ended May 31, 2015, LMPFA recaptured $411, $186, $27 and $1,191 for Class A shares, Class C shares, Class R shares and Class IS shares, respectively.

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

There is a maximum initial sales charge of 4.25% for Class A shares. There is a contingent deferred sales charge (“CDSC”) of 1.00% on Class C shares, which applies if redemption occurs within 12 months from purchase payment. In certain cases, Class A shares have a 1.00% CDSC, which applies if redemption occurs within 18 months from purchase payment. This CDSC only applies to those purchases of Class A shares, which, when combined with current holdings of other shares of funds sold by LMIS, equal or exceed $1,000,000 in the aggregate. These purchases do not incur an initial sales charge.


54		Western Asset Intermediate Bond Fund 2015 Annual Report

For the year ended May 31, 2015, LMIS and its affiliates retained sales charges of $542 on sales of the Fund’s Class A shares. In addition, for the year ended May 31, 2015, CDSCs paid to LMIS and its affiliates were:


	Class C
CDSCs	$	255

As of May 31, 2015, Legg Mason and its affiliates owned 38% of the Fund.

All officers of the Corporation are employees of Legg Mason or its affiliates and do not receive compensation from the Corporation.

3. Investments

During the year ended May 31, 2015, 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	$	149,261,813	$	274,605,310
Sales		102,318,725		228,985,189

At May 31, 2015, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:


Gross unrealized appreciation	$	15,873,054
Gross unrealized depreciation		(8,874,615)
Net unrealized appreciation	$	6,998,439

At May 31, 2015, the Fund had the following open futures contracts:


	Number of Contracts		Expiration Date		Basis Value		Market Value		Unrealized Appreciation (Depreciation)
Contracts to Buy:
U.S. Treasury 2-Year Notes		192		9/15	$	41,984,999	$	42,021,000	$	36,001
U.S. Treasury 10-Year Notes		287		9/15		36,326,416		36,646,312		319,896
U.S. Treasury Long-Term Bonds		89		9/15		13,640,258		13,850,625		210,367
U.S. Treasury Ultra Long-Term Bonds		62		9/15		9,723,421		9,937,438		214,017
										780,281
Contracts to Sell:
90-Day Eurodollar		210		9/15		52,292,093		52,290,000		2,093
90-Day Eurodollar		380		12/15		94,430,165		94,463,250		(33,085)
90-Day Eurodollar		53		12/16		13,059,690		13,069,800		(10,110)
U.S. Treasury 5-Year Notes		227		9/15		27,097,106		27,177,930		(80,824)
										(121,926)
Net unrealized appreciation on open futures contracts									$	658,355


Western Asset Intermediate Bond Fund 2015 Annual Report		55

Notes to financial statements (cont’d)

During the year ended May 31, 2015, written option transactions for the Fund were as follows:


	Number of Contracts		Premiums
Written options, outstanding as of May 31, 2014		800	$	245,803
Options written		9,089		2,384,539
Options closed		(5,359)		(1,485,498)
Options exercised		(406)		(169,032)
Options expired		(3,327)		(721,262)
Written options, outstanding as of May 31, 2015		797	$	254,550

At May 31, 2015, the Fund had the following open swap contracts:


OTC CREDIT DEFAULT SWAPS ON CORPORATE ISSUES — SELL PROTECTION¹
Swap Counterparty (Reference Entity)	Notional Amount²		Termination Date		Implied Credit Spread at May 31, 2015³	Periodic Payments Received By The Fund^†	Market Value		Upfront Premiums Paid (Received)		Unrealized Depreciation
Barclays Capital Inc. (Metlife Inc., 4.750% due 2/8/21)	$	410,000		6/20/21	0.87%	1.000% quarterly	$	3,081	$	4,302	$	(1,221)
Goldman Sachs Group Inc. (Metlife Inc., 4.750%, due 2/8/21)		450,000		6/20/21	0.87%	1.000% quarterly		3,381		4,980		(1,599)
Total	$	860,000					$	6,462	$	9,282	$	(2,820)

CENTRALLY CLEARED INTEREST RATE SWAPS

Swap Counterparty

Notional
Amount

Termination

Date

Payments
Made By
The Fund^†

Payments
Received By
The Fund^†

Upfront
Premiums
Paid
(Received)

Unrealized
Appreciation

Barclays Capital Inc.

3,836,000

2/15/41

2.392% semi-annually

3-month LIBOR

—

155,335

Deutsche Bank AG

3,699,000

2/15/41

2.392% semi-annually

3-month LIBOR

32,014

117,774

Total

7,535,000

32,014

273,109

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.

²	The maximum potential amount the Fund could be required to pay 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.

Implied credit spreads, utilized in determining the market value of credit default swap agreements on corporate issues or sovereign issues of an emerging country as of period end serve as an indicator of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads 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. A credit spread identified as “Defaulted” indicates a credit event has occurred for the referenced entity or obligation.

†	Percentage shown is an annual percentage rate.


56		Western Asset Intermediate Bond Fund 2015 Annual Report

4. Derivative instruments 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 May 31, 2015.


ASSET DERIVATIVES¹
	Interest Rate Risk		Credit Risk		Total
Purchased options²	$	14,800		—	$	14,800
Futures contracts³		782,374		—		782,374
OTC swap contracts⁴		—	$	6,462		6,462
Centrally cleared swap contracts⁵		273,109		—		273,109
Total	$	1,070,283	$	6,462	$	1,076,745

LIABILITY DERIVATIVES¹
					Interest Rate Risk
Written options					$	219,063
Futures contracts³						124,019
Total					$	343,082

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 at 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 on 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.

⁵	Includes cumulative appreciation (depreciation) of centrally cleared swap contracts as reported in the footnotes. Only variation margin is reported within the receivables and/or payables on 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 year ended May 31, 2015. 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 change in unrealized appreciation (depreciation) resulting from the Fund’s derivatives and hedging activities during the period.


AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED
	Interest Rate Risk		Credit Risk		Total
Purchased options¹	$	(512,723)		—	$	(512,723)
Written options		1,393,918		—		1,393,918
Futures contracts		115,218		—		115,218
Swap contracts		233,009	$	(6,962)		226,047
Total	$	1,229,422	$	(6,962)	$	1,222,460

¹	Net realized gain (loss) from purchased options is reported in net realized gain (loss) from investment transactions in the Statement of Operations.


Western Asset Intermediate Bond Fund 2015 Annual Report		57

Notes to financial statements (cont’d)


CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED
	Interest Rate Risk		Credit Risk		Total
Purchased options¹	$	(59)		—	$	(59)
Written options		218,842		—		218,842
Futures contracts		596,199		—		596,199
Swap contracts		289,571	$	13,018		302,589
Total	$	1,104,553	$	13,018	$	1,117,571

¹	The change in unrealized appreciation (depreciation) from purchased options is reported in the change in net unrealized appreciation (depreciation) from investments in the Statement of Operations.

During the year ended May 31, 2015, the volume of derivative activity for the Fund was as follows:


	Average Market Value
Purchased options	$	58,459
Written options		237,789
Futures contracts (to buy)		180,330,761
Futures contracts (to sell)		73,464,149

	Average Notional Balance
Interest rate swap contracts		10,449,846
Credit default swap contracts (to buy protection)†		330,769
Credit default swap contracts (to sell protection)		898,462

†	At May 31, 2015, there were no open positions held in this derivative.

The following table presents by financial instrument, the Fund’s derivative assets net of the related collateral received by the Fund at May 31, 2015:


	Gross Amount of Derivative Assets in the Statement of Assets and Liabilities¹		Collateral Received		Net Amount
Purchased options²	$	14,800		—	$	14,800
Futures contracts³		166,338		—		166,338
OTC swap contracts		6,462		—		6,462
Total	$	187,600		—	$	187,600

The following table presents by financial instrument, the Fund’s derivative liabilities net of the related collateral pledged by the Fund at May 31, 2015:


	Gross Amount of Derivative Liabilities in the Statement of Assets and Liabilities¹		Collateral Pledged^4,5		Net Amount
Written options	$	219,063	$	(79,712)	$	139,351
Centrally cleared swap contracts³		48,949		(48,949)		—
Total	$	268,012	$	(128,661)	$	139,351

¹	Absent an event of default or early termination, derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities.


58		Western Asset Intermediate Bond Fund 2015 Annual Report

²	Market value of purchased options is shown in Investments at value in Statement of Assets and Liabilities.

³	Amount represents the current day’s variation margin as reported in the Statement of Assets and Liabilities. It differs from the cumulative appreciation (depreciation) presented in the previous table.

⁴	Gross amounts are not offset in the Statement of Assets and Liabilities.

⁵	In some instances, the actual collateral received and/or pledged may be more than the amount shown here due to overcollateralization.

5. Class specific expenses, waivers and/or expense reimbursements

The Fund has adopted a Rule 12b-1 shareholder services and distribution plan and under that plan the Fund pays service and/or distribution fees with respect to its Class A shares, Class C shares and Class R shares calculated at the annual rate of 0.25%, 1.00% and 0.50% of the average daily net assets of each class, respectively. Service and distribution fees are accrued daily and paid monthly.

For the year ended May 31, 2015, class specific expenses were as follows:


	Service and/or Distribution Fees		Transfer Agent Fees
Class A	$	1,195	$	610
Class C		3,414		552
Class R		293		114
Class I		—		108,702
Class IS		—		4,291
Total	$	4,902	$	114,269

For the year ended May 31, 2015, waivers and/or expense reimbursements by class were as follows:


	Waivers/Expense Reimbursements
Class A	$	74
Class C		67
Class R		23
Class I		24,562
Class IS		13,713
Total	$	38,439

6. Distributions to shareholders by class


	Year Ended May 31, 2015		Period Ended May 31, 2014†		Year Ended December 31, 2013
Net Investment Income:
Class A	$	8,277	$	1,458	$	2,729
Class C		3,388		1,411		3,215
Class R		822		100		199
Class I		4,459,127		2,025,654		5,176,625
Class IS		8,149,827		2,903,916		4,755,526
Total	$	12,621,441	$	4,932,539	$	9,938,294

†	For the period January 1, 2014 through May 31, 2014.


Western Asset Intermediate Bond Fund 2015 Annual Report		59

Notes to financial statements (cont’d)

7. Capital shares

At May 31, 2015, the Corporation had 42.7 billion shares of capital stock authorized with a par value of $0.001 per share.

Transactions in shares of each class were as follows:


	Year Ended May 31, 2015				Period Ended May 31, 2014†				Year Ended December 31, 2013
	Shares		Amount		Shares		Amount		Shares		Amount
Class A
Shares sold		72,823	$	808,535		2,569	$	28,281		17,422	$	192,730
Shares issued on reinvestment		743		8,276		132		1,452		246		2,710
Shares repurchased		(14,673)		(163,577)		(1,600)		(17,513)		(10,512)		(115,413)
Net increase		58,893	$	653,234		1,101	$	12,220		7,156	$	80,027

Class C
Shares sold		13,683	$	151,954		10,131	$	112,490		41,297	$	459,500
Shares issued on reinvestment		279		3,113		107		1,183		228		2,510
Shares repurchased		(23,753)		(265,001)		(13,060)		(143,939)		(12,199)		(134,607)
Net increase (decrease)		(9,791)	$	(109,934)		(2,822)	$	(30,266)		29,326	$	327,403

Class R
Shares sold		8,976	$	99,906		47	$	516		372	$	4,160
Shares issued on reinvestment		73		812		9		100		18		199
Shares repurchased		(958)		(10,761)		—		—		—		—
Net increase		8,091	$	89,957		56	$	616		390	$	4,359

Class I
Shares sold		6,123,354	$	68,043,142		1,020,930	$	11,205,063		3,194,269	$	35,370,489
Shares issued on reinvestment		181,914		2,025,928		89,616		989,314		234,356		2,586,113
Shares repurchased		(3,178,985)		(35,349,440)		(3,194,872)		(35,405,683)		(5,983,923)		(65,930,924)
Net increase (decrease)		3,126,283	$	34,719,630		(2,084,326)	$	(23,211,306)		(2,555,298)	$	(27,974,322)

Class IS
Shares sold		8,265,505	$	91,935,853		4,346,774	$	48,075,613		13,776,017	$	151,502,271
Shares issued on reinvestment		724,502		8,068,401		259,501		2,865,944		425,845		4,690,831
Shares repurchased		(1,992,216)		(22,145,000)		(129,998)		(1,428,700)		(2,311,410)		(25,246,531)
Net increase		6,997,791	$	77,859,254		4,476,277	$	49,512,857		11,890,452	$	130,946,571

†	For the period January 1, 2014 through May 31, 2014.


60		Western Asset Intermediate Bond Fund 2015 Annual Report

8. Income tax information and distributions to shareholders

The tax character of distributions paid for the fiscal year ended May 31, 2015, the period ended May 31, 2014 and the fiscal year ended December 31, 2013, was as follows:


	2015		2014		2013
Distributions paid from:
Ordinary income	$	12,621,441	$	4,932,539	$	9,938,294

As of May 31, 2015, the components of accumulated earnings on a tax basis were as follows:


Undistributed ordinary income — net	$	701,789
Other book/tax temporary differences^(a)		(2,981,653)
Unrealized appreciation (depreciation)^(b)		7,962,570
Total accumulated earnings (losses) — net	$	5,682,706

^(a)

Other book/tax temporary differences are attributable to the tax deferral of losses on straddles, the realization for tax purposes of unrealized gains (losses) on certain futures, book/tax difference in the accrual of interest income on securities in default and book/tax differences in the timing of the deductibility of various expenses.

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


Western Asset Intermediate Bond Fund 2015 Annual Report		61

Report of independent registered public accounting firm

To the Board of Directors of Western Asset Funds, Inc. and to the Shareholders of Western Asset Intermediate Bond Fund:

In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Western Asset Intermediate Bond Fund (one of the funds comprising Western Asset Funds, Inc., the “Fund”) at May 31, 2015, the results of its operations, the changes in its net assets and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at May 31, 2015 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Baltimore, Maryland

July 21, 2015


62		Western Asset Intermediate Bond Fund 2015 Annual Report

Additional information (unaudited)

Information about Directors and Officers

The business and affairs of Western Asset Intermediate Bond Fund (the “Fund”) are conducted by management under the supervision and subject to the direction of its Board of Directors. The business address of each Director is c/o Jane Trust, Legg Mason, 100 International Drive, 11^th Floor, Baltimore, Maryland 21202. Information pertaining to the Directors and officers of the Fund is set forth below.

The Statement of Additional Information includes additional information about Directors and is available, without charge, upon request by calling the Fund at 1-877-721-1926.


Independent Directors†
Robert Abeles, Jr.
Year of birth		1945
Position(s) held with Fund		Director
Term of office¹ and length of time served²		Since 2013
Principal occupations during the past five years		Senior Vice President, Finance and Chief Financial Officer (since 2009) of University of Southern California.
Number of portfolios in fund complex overseen³		11
Other directorships held during the past five years		None

Anita L. DeFrantz
Year of birth		1952
Position(s) held with Fund		Director
Term of office¹ and length of time served²		Since 1998
Principal occupations during the past five years		President (since 1987) and Director (since 1990) of LA84 (formerly Amateur Athletic Foundation of Los Angeles); Director of Kids in Sports (since 1994); Member of the International Olympic Committee (since 1986) and Member of Executive Board of International Olympic Committee (since 2014).
Number of portfolios in fund complex overseen³		11
Other directorships held during the past five years		OBN Holdings, Inc. (film, television and media company)

Avedick B. Poladian
Year of birth		1951
Position(s) held with Fund		Director
Term of office¹ and length of time served²		Since 2007
Principal occupations during the past five years		Executive Vice President and Chief Operating Officer of Lowe Enterprises, Inc. (real estate and hospitality firm) (since 2002); Partner, Arthur Andersen, LLP (1974 to 2002).
Number of portfolios in fund complex overseen³		11
Other directorships held during the past five years		Occidental Petroleum Corporation, California Resources Corporation and Public Storage


Western Asset Intermediate Bond Fund		63

Additional information (unaudited) (cont’d)

Information about Directors and Officers


Independent Directors cont’d
William E. B. Siart
Year of birth		1946
Position(s) held with Fund		Director and Chairman
Term of office¹ and length of time served²		Since 1997
Principal occupations during the past five years		Trustee of The Getty Trust (since 2005); Chairman of Walt Disney Concert Hall, Inc. (1998 to 2006); Chairman of Excellent Education Development (since 2000).
Number of portfolios in fund complex overseen³		11
Other directorships held during the past five years		None

Jaynie Miller Studenmund
Year of birth		1954
Position(s) held with Fund		Director
Term of office¹ and length of time served²		Since 2004
Principal occupations during the past five years		Director of Forest Lawn (since 2002) (memorial parks); Director of Pinnacle Entertainment, Inc. (since 2012) (gaming and hospitality company). Formerly: Director of Orbitz Worldwide, Inc. (2007 to 2014) (online travel company); Director of MarketTools, Inc. (2010 to 2012) (market research software provider); Director of eHarmony, Inc. (2005 to 2011) (online dating company).
Number of portfolios in fund complex overseen³		11
Other directorships held during the past five years		None

Interested Director
Ronald L. Olson⁴
Year of birth		1941
Position(s) held with Fund		Director
Term of office¹ and length of time served²		Since 2005
Principal occupations during the past five years		Senior Partner of Munger, Tolles & Olson LLP (a law partnership) (since 1968).
Number of portfolios in fund complex overseen³		11
Other directorships held during the past five years		Edison International, City National Corporation (financial services company), The Washington Post Company, and Berkshire Hathaway, Inc.


64		Western Asset Intermediate Bond Fund


Officers⁵
Jane Trust, CFA⁶
Year of birth		1962
Position(s) with Fund		President and Chief Executive Officer
Term of office¹ and length of time served²		Since 2015
Principal occupation(s) during past five years		Managing Director of Legg Mason & Co., LLC (“Legg Mason & Co.”) (since 2015); Officer and/or Trustee/Director of 126 funds associated with Legg Mason Partners Fund Advisor, LLC (“LMPFA”) or its affiliates (since 2015); Senior Vice President of LMPFA (since 2015); formerly, Director of ClearBridge, LLC (formerly, Legg Mason Capital Management, LLC) (2007 to 2014); formerly, Managing Director of Legg Mason Investment Counsel & Trust Co. (2000 to 2007).

Richard F. Sennett Legg Mason 100 International Drive, 7^th Floor, Baltimore, MD 21202
Year of birth		1970
Position(s) with Fund		Principal Financial Officer and Treasurer
Term of office¹ and length of time served²		Since 2011 and since 2013
Principal occupation(s) during past five years		Principal Financial Officer and Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011 and since 2013); Managing Director of Legg Mason & Co. and Senior Manager of the Treasury Policy group for Legg Mason & Co.’s Global Fiduciary Platform (since 2011); formerly, Chief Accountant within the SEC’s Division of Investment Management (2007 to 2011); formerly, Assistant Chief Accountant within the SEC’s Division of Investment Management (2002 to 2007)

Todd F. Kuehl Legg Mason 100 International Drive, 9^th Floor, Baltimore, MD 21202
Year of birth		1969
Position(s) held with Fund		Chief Compliance Officer
Term of office¹ and length of time served²		Since 2007
Principal occupations during the past five years		Managing Director of Legg Mason & Co. (since 2011); Chief Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006); formerly, Chief Compliance Officer of Legg Mason Private Portfolio Group (prior to 2010); Branch Chief, Division of Investment Management, U.S. Securities and Exchange Commission (2002 to 2006)


Western Asset Intermediate Bond Fund		65

Additional information (unaudited) (cont’d)

Information about Directors and Officers


Officers⁵ cont’d
Robert I. Frenkel Legg Mason 100 First Stamford Place, 6^th Floor, Stamford, CT 06902
Year of birth		1954
Position(s) held with Fund		Secretary and Chief Legal Officer
Term of office¹ and length of time served²		Since 2007
Principal occupations during the past five years		Vice President and Deputy General Counsel of Legg Mason, Inc. (since 2006); Managing Director and General Counsel of Global Mutual Funds for Legg Mason & Co. (since 2006) and Legg Mason & Co. predecessors (since 1994); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006).

Susan Kerr Legg Mason 620 Eighth Avenue, 49^th Floor, New York, NY 10018
Year of birth		1949
Position(s) held with Fund		Chief Anti-Money Laundering Compliance Officer
Term of office¹ and length of time served²		Since 2013
Principal occupation(s) during past five years		Assistant Vice President of Legg Mason & Co. and Legg Mason Investor Services, LLC (“LMIS”) (since 2010); Chief Anti-Money Laundering Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2013) and Anti-Money Laundering Compliance Officer of LMIS (since 2012); Senior Compliance Officer of LMIS (since 2011); formerly, AML Consultant, DTCC (2010); formerly, AML Consultant, Rabobank Netherlands, (2009); formerly, First Vice President, Director of Marketing & Advertising Compliance and Manager of Communications Review Group at Citigroup Inc. (1996 to 2008)

Vanessa A. Williams Legg Mason 100 First Stamford Place, 6^th Floor, Stamford, CT 06902
Year of birth		1979
Position(s) held with Fund		Identity Theft Prevention Officer
Term of office¹ and length of time served²		Since 2011
Principal occupation(s) during past five years		Vice President of Legg Mason & Co. (since 2012); Identity Theft Prevention Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011); formerly, Chief Anti-Money Laundering Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (2011 to 2013); formerly, Senior Compliance Officer of Legg Mason & Co. (2008 to 2011); formerly, Compliance Analyst of Legg Mason & Co. (2006 to 2008) and Legg Mason & Co. predecessors (prior to 2006)

†	Directors who are not “interested persons” of the Fund within the meaning of section 2(a)(19) of the Investment Company Act of 1940, as amended (the “1940 Act”).

¹	Each Director and Officer serves until his or her respective successor has been duly elected and qualified or until his or her earlier death, resignation, retirement or removal.


66		Western Asset Intermediate Bond Fund

²	Indicates the earliest year in which the Director became a board member for a fund in the Legg Mason fund complex or the officer took such office.

³	In addition to overseeing the 9 funds of the Corporation, each Director also serves as a Director of Western Asset Income Fund and a Trustee of Western Asset Premier Bond Fund (closed-end investment companies), which are considered part of the same Fund Complex as the Corporation.

⁴	Mr. Olson is an “interested person” (as defined above) of the Fund because his law firm has provided legal services to WAM.

⁵	Each officer of the Fund is an “interested person” (as defined above) of the Fund.

⁶	Ms. Trust became President and Chief Executive Officer effective June 1, 2015.


Western Asset Intermediate Bond Fund		67

Important tax information (unaudited)

The following information is provided with respect to the distributions paid during the taxable year ended May 31, 2015:


Record date:	Daily		Daily		Daily
Payable date:	June 2014		July 2014 to December 2014		January 2015 to May 2015
Ordinary income:
Qualified dividend income for individuals	3.18	%	3.17	%	2.84	%
Dividends qualifying for the dividends
received deduction for corporations	2.45	%	2.44	%	2.18	%
Interest from Federal obligations	17.01	%	17.01	%	17.01	%

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

The following information is applicable to non-U.S. resident shareholders:

The following ordinary income distributions paid monthly by the Fund represent Qualified Net Investment Income eligible for exemption from U.S. withholding tax for nonresident aliens and foreign corporations.


Record date:	Daily
Payable date:	Monthly
Qualified net investment income	70.00	%

Please retain this information for your records.


68		Western Asset Intermediate Bond Fund

Western Asset

Intermediate Bond Fund

Directors

William E. B. Siart,

Chairman

Robert Abeles, Jr.

Anita L. DeFrantz

Ronald L. Olson

Avedick B. Poladian

Jaynie M. Studenmund

Investment manager

Legg Mason Partners Fund Advisor, LLC

Investment adviser

Western Asset Management Company

Transfer agent

BNY Mellon Investment Servicing (US) Inc.

4400 Computer Drive

Westborough, MA 01581

Custodian

State Street Bank and Trust Company

Independent registered public accounting firm

PricewaterhouseCoopers LLP

Baltimore, MD

Legal counsel

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Western Asset Intermediate Bond Fund

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

Western Asset Intermediate Bond Fund

Legg Mason Funds

620 Eighth Avenue, 49^th Floor

New York, NY 10018

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, shareholders can call the Fund at 1-877-721-1926.

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 the Fund at 1-877-721-1926, (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 Intermediate Bond Fund. 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

Member FINRA, SIPC

Legg Mason Funds Privacy and Security Notice

Your Privacy and the Security of Your Personal Information is Very Important to the Legg Mason Funds

This Privacy and Security Notice (the “Privacy Notice”) addresses the Legg Mason Funds’ privacy and data protection practices with respect to nonpublic personal information the Funds receive. The Legg Mason Funds include any funds sold by the Funds’ distributor, Legg Mason Investor Services, LLC, as well as Legg Mason-sponsored closed-end funds and certain closed-end funds managed or sub-advised by Legg Mason or its affiliates. The provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.

The Type of Nonpublic Personal Information the Funds Collect About You

The Funds collect and maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not limited to:

Personal information included on applications or other forms;

Account balances, transactions, and mutual fund holdings and positions;

Online account access user IDs, passwords, security challenge question responses; and

Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of an individual’s total debt, payment history, etc.).

How the Funds Use Nonpublic Personal Information About You

The Funds do not sell or share your nonpublic personal information with third parties or with affiliates for their marketing purposes, or with other financial institutions or affiliates for joint marketing purposes, unless you have authorized the Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services you have authorized or as permitted or required by law. The Funds may disclose information about you to:

Employees, agents, and affiliates on a “need to know” basis to enable the Funds to conduct ordinary business or comply with obligations to government regulators;

Service providers, including the Funds’ affiliates, who assist the Funds as part of the ordinary course of business (such as printing, mailing services, or processing or servicing your account with us) or otherwise perform services on the Funds’ behalf, including companies that may perform marketing services solely for the Funds;

The Funds’ representatives such as legal counsel, accountants and auditors; and

Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust.

NOT PART OF THE ANNUAL REPORT

Legg Mason Funds Privacy and Security Notice (cont’d)

Except as otherwise permitted by applicable law, companies acting on the Funds’ behalf are contractually obligated to keep nonpublic personal information the Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them to perform.

The Funds may disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as permitted or required by applicable law, such as in connection with a law enforcement or regulatory request, subpoena, or similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be required to disclose your nonpublic personal information to third parties. While it is the Funds’ practice to obtain protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will remain unchanged.

Keeping You Informed of the Funds’ Privacy and Security Practices

The Funds will notify you annually of their privacy policy as required by federal law. While the Funds reserve the right to modify this policy at any time they will notify you promptly if this privacy policy changes.

The Funds’ Security Practices

The Funds maintain appropriate physical, electronic and procedural safeguards designed to guard your nonpublic personal information. The Funds’ internal data security policies restrict access to your nonpublic personal information to authorized employees, who may use your nonpublic personal information for Fund business purposes only.

Although the Funds strive to protect your nonpublic personal information, they cannot ensure or warrant the security of any information you provide or transmit to them, and you do so at your own risk. In the event of a breach of the confidentiality or security of your nonpublic personal information, the Funds will attempt to notify you as necessary so you can take appropriate protective steps. If you have consented to the Funds using electronic communications or electronic delivery of statements, they may notify you under such circumstances using the most current email address you have on record with them.

In order for the Funds to provide effective service to you, keeping your account information accurate is very important. If you believe that your account information is incomplete, not accurate or not current, or if you have questions about the Funds’ privacy practices, write the Funds using the contact information on your account statements, email the Funds by clicking on the Contact Us section of the Funds’ website at www.leggmason.com, or contact the Fund at 1-877-721-1926.

NOT PART OF THE ANNUAL REPORT

Western Asset Management Company

Legg Mason, Inc. Subsidiaries

www.leggmason.com/individualinvestors

WASX013143 7/15 SR15-2539

ITEM 2.

CODE OF ETHICS.

The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller.

ITEM 3.

AUDIT COMMITTEE FINANCIAL EXPERT.

The Board of Directors of the registrant has determined that Mr. Robert Abeles, Jr., possesses the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as “audit committee financial expert,” and have designated Mr. Abeles as the Audit Committee’s financial expert. Mr. Abeles is “independent” Directors pursuant to paragraph (a) (2) of Item 3 to Form N-CSR.

ITEM 4.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

a) Audit Fees. The aggregate fees billed in the last two fiscal years ending May 31, 2014 and May 31, 2015 (the “Reporting Periods”) for professional services rendered by the Registrant’s principal accountant (the “Auditor”) for the audit of the Registrant’s annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $71,592 in May 31, 2014 and in $121,110 May 31, 2015.

b) Audit-Related Fees. The aggregate fees billed in the Reporting Period for assurance and related services by the Auditor that are reasonably related to the performance of the Registrant’s financial statements were $0 in May 31, 2014 and $1,500 in May 31, 2015.

(c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning (“Tax Services”) were $0 in May 31, 2014 and $48,684 in May 31, 2015. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, and (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held.

There were no fees billed for tax services by the Auditors to service affiliates during the Reporting Periods that required pre-approval by the Audit Committee.

d) All Other Fees. The aggregate other fees billed in the Reporting Periods for products and services provided by the Auditor were $1,042 in May 31, 2014 and $997 in May 31, 2015, other than the services reported in paragraphs (a) through (c) for the Item for the Western Asset Funds, Inc.

All Other Fees. There were no other non-audit services rendered by the Auditor to Legg Mason Partners Fund Advisors, LLC (“LMPFA”), and any entity controlling, controlled by or under common control with LMPFA that provided ongoing services to Western Asset Funds, Inc. requiring pre-approval by the Audit Committee in the Reporting Period.

(e) Audit Committee’s pre–approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.

(1) The Charter for the Audit Committee (the “Committee”) of the Board of each registered investment company (the “Fund”) advised by LMPFA or one of their affiliates (each, an “Adviser”) requires that the Committee shall approve (a) all audit and permissible non-audit services to be provided to the Fund and (b) all permissible non-audit services to be provided by the Fund’s independent auditors to the Adviser and any Covered Service Providers if the engagement relates directly to the operations and financial reporting of the Fund. The Committee may implement policies and procedures by which such services are approved other than by the full Committee.

The Committee shall not approve non-audit services that the Committee believes may impair the independence of the auditors. As of the date of the approval of this Audit Committee Charter, permissible non-audit services include any professional services (including tax services), that are not prohibited services as described below, provided to the Fund by the independent auditors, other than those provided to the Fund in connection with an audit or a review of the financial statements of the Fund. Permissible non-audit services may not include: (i) bookkeeping or other services related to the accounting records or financial statements of the Fund; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service the Public Company Accounting Oversight Board determines, by regulation, is impermissible.

Pre-approval by the Committee of any permissible non-audit services is not required so long as: (i) the aggregate amount of all such permissible non-audit services provided to the Fund, the Adviser and any service providers controlling, controlled by or under common control with the Adviser that provide ongoing services to the Fund (“Covered Service Providers”) constitutes not more than 5% of the total amount of revenues paid to the independent auditors during the fiscal year in which the permissible non-audit services are provided to (a) the Fund, (b) the Adviser and (c) any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Fund during the fiscal year in which the services are provided that would have to be approved by the Committee; (ii) the permissible non-audit services were not recognized by the Fund at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Committee and approved by the Committee (or its delegate(s)) prior to the completion of the audit.

(2) For the Western Asset Funds, Inc., the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees were 100% and 100% for May 31, 2014 and May 31, 2015; Tax Fees were 100% and 100% for May 31, 2014 and May 31, 2015; and Other Fees were 100% and 100% for May 31, 2014 and May 31, 2015.

(f) N/A

(g) Non-audit fees billed by the Auditor for services rendered to Western Asset Funds, Inc., LMPFA and any entity controlling, controlled by, or under common control with LMPFA that provides ongoing services to Western Asset Funds, Inc. during the reporting period were $15,000 in May 31, 2014 and $170,028 in May 31, 2015.

(h) Yes. Western Asset Funds, Inc.’s Audit Committee has considered whether the provision of non-audit services that were rendered to Service Affiliates, which were not pre-approved (not requiring pre-approval), is compatible with maintaining the Accountant’s independence. All services provided by the Auditor to the Western Asset Funds, Inc. or to Service Affiliates, which were required to be pre-approved, were pre-approved as required.

ITEM 5.

AUDIT COMMITTEE OF LISTED REGISTRANTS.

The independent board members are acting as the registrant’s audit committee as specified in Section 3(a)(58)(B) of the Exchange Act. The Audit Committee consists of the following Board members:

Robert Abeles, Jr.

Anita L. DeFrantz

Ronald L. Olson

Avedick B. Poladian

William E.B. Siart

Jaynie Miller Studenmund

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 second fiscal quarter of the period covered by this report that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting.

ITEM 12.

EXHIBITS.

(a) (1) Code of Ethics attached hereto.

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/ Jane Trust
		Jane Trust
		Chief Executive Officer

Date: July 22, 2015

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/ Jane Trust
		Jane Trust
		Chief Executive Officer

Date: July 22, 2015

By:		/s/ Richard F. Sennett
		Richard F. Sennett
		Principal Financial Officer

Date: July 22, 2015

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