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: December 31

Date of reporting period: December 31, 2016

ITEM 1. REPORT TO STOCKHOLDERS.

The Annual Report to Stockholders is filed herewith.

LOGO


Annual Report		December 31, 2016

WESTERN ASSET

INFLATION INDEXED PLUS 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			15
Statement of operations			17
Statements of changes in net assets			18
Financial highlights			19
Notes to financial statements			26
Report of independent registered public accounting firm			42
Board approval of management and advisory agreements			43
Additional information			46
Important tax information			51

Fund objective

The Fund seeks to maximize total return, consistent with preservation of capital.

Letter from the president

LOGO

Dear Shareholder,

We are pleased to provide the annual report of Western Asset Inflation Indexed Plus Bond Fund for the twelve-month reporting period ended December 31, 2016. 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.

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. 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

January 31, 2017


II		Western Asset Inflation Indexed Plus Bond Fund

Investment commentary

Economic review

The pace of U.S. economic activity fluctuated during the twelve months ended December 31, 2016 (the “reporting period”). Looking back, the U.S. Department of Commerce reported that first and second quarter 2016 U.S. gross domestic product (“GDP”)ⁱ growth was 0.8% and 1.4%, respectively. GDP growth for the third quarter of 2016 was 3.5%, the strongest reading in two years. The U.S. Department of Commerce’s initial reading for fourth quarter 2016 GDP growth — released after the reporting period ended — was 1.9%. The deceleration in growth reflected a downturn in exports, an acceleration in imports, a deceleration in personal consumption expenditures and a downturn in federal government spending.

While there was a pocket of weakness in May 2016, job growth in the U.S. was solid overall and a tailwind for the economy during the reporting period. When the reporting period ended on December 31, 2016, the unemployment rate was 4.7%, as reported by the U.S. Department of Labor. The percentage of longer-term unemployed also declined over the period. In December 2016, 24.2% of Americans looking for a job had been out of work for more than six months, versus 26.9% when the period began.

After an extended period of maintaining the federal funds rateⁱⁱ at a historically low range between zero and 0.25%, the Federal Reserve Board (the “Fed”)ⁱⁱⁱ increased the rate at its meeting on December 16, 2015. This marked the first rate hike since 2006. In particular, the U.S. central bank raised the federal funds rate to a range between 0.25% and 0.50%. The Fed then kept rates on hold at each meeting prior to its meeting in mid-December 2016. On December 14, 2016, the Fed raised rates to a range between 0.50% and 0.75%. In the Fed’s statement after the December meeting it said, “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

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

Sincerely,

LOGO

Jane Trust, CFA

President and Chief Executive Officer

January 31, 2017

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

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 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.

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


Western Asset Inflation Indexed Plus Bond Fund		III

Fund overview

Q. What is the Fund’s investment strategy?

A. The Fund’s investment objective is to maximize total return, consistent with preservation of capital. Under normal market conditions, the Fund invests at least 80% of its net assets in inflation-indexed fixed- income securities and at least 70% of its net assets in U.S. Treasury Inflation Protected Securities (“TIPS”)ⁱ. Fundamental investment techniques are used to select issues. Although the Fund may invest in securities of any maturity, the Fund will normally maintain a dollar-weighted average effective durationⁱⁱ, as estimated by the Fund’s subadvisers, within three years of that of its benchmark, the Bloomberg Barclays U.S. TIPS Indexⁱⁱⁱ. Therefore, the range within which the dollar-weighted average effective duration of the Fund is expected to fluctuate is six to twelve years, although this may vary. The Fund is expected to maintain a dollar-weighted average credit quality of at least A/A.

The Fund intends to sell protection in connection with credit default swaps relating to corporate debt securities. It is currently expected that the notional amount of the credit default swaps will not exceed 40% of the Fund’s net assets, although such exposure may exceed 40% from time to time.

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, swaps, foreign currency futures and forwards.

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. Other instruments may also be used to a significant extent from time to time.

At Western Asset Management Company (“Western Asset”), the Fund’s subadviser, 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 Fund’s reporting period?

A. The overall fixed income market experienced periods of volatility but generated positive results over the twelve-month reporting period ended December 31, 2016. The spreads sectors (non-Treasuries) had a weak start to the reporting period, partially driven by concerns over moderating growth in China and uncertainties regarding future Federal Reserve Board (the “Fed”)^iv monetary policy. However, from February through September 2016, the spread sectors largely rallied and overcame several headwinds, including generally modest economic growth, questions related to global monetary policy, implications of the U.K.‘s referendum to leave the European Union (“Brexit”) and a number of geopolitical


Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report		1

Fund overview (cont’d)

issues. Finally, U.S. Treasury yields moved sharply higher and most segments of the fixed income market generated weak results during the final three months of the year (yields and prices move in the opposite direction). This turnaround was triggered by expectations for improving economic growth and higher inflation in the Trump administration. In addition, for the first time in a year the Fed raised rates in December 2016. The U.S. central bank also indicated that it may institute more rate hikes in 2017 than it previously had projected.

Both short- and long-term Treasury yields moved higher during the reporting period as a whole. The yield for the two-year Treasury began the reporting period at 1.06% and ended the period at 1.20%. Their peak of 1.29% occurred on December 15, 2016, and they were as low as 0.56% on July 5, 2016. The yield for the ten-year Treasury was 2.27% at the beginning of the period and ended the period at 2.45%. Their peak of 2.60% was on both December 15 and 16, 2016, and their low of 1.37% occurred on both July 5 and July 8, 2016. All told, the Bloomberg Barclays U.S. Aggregate Index^v returned 2.65% for the twelve months ended December 31, 2016.

Inflation was generally well contained during the reporting period. For the twelve months ended December 31, 2016, the seasonally unadjusted rate of inflation, as measured by the Consumer Price Index for All Urban Consumers (“CPI-U”)^vi, was 2.1%. The CPI-U less food and energy was 2.2% over the same time frame. U.S. TIPS generated positive results for the reporting period, as the Bloomberg Barclays U.S. TIPS Index gained 4.68%. This was driven, in part, by expectations for improved growth and an increase in inflation in 2017.

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

A. A number of adjustments were made to the Fund during the reporting period. We tactically adjusted the Fund’s duration^vii throughout the year. Over the first half of the period, we had a short duration exposure versus that of the benchmark as we anticipated an uptick in global growth and rising rates. As the year progressed, we added to the Fund’s duration amid expectations that global growth would remain relatively tepid and we ended the year with a long duration versus that of the benchmark. We also adjusted our allocation to U.S. TIPS. We initially had an underweight to U.S. TIPS as inflation pressures appeared to be muted given weak energy and commodity prices. We reduced our U.S. TIPS underweight in the third quarter of 2016 as commodity prices rallied and moved closer to a neutral position versus the benchmark. During the fourth quarter of 2016 we increased our U.S. TIPS allocation, moving to an overweight position, based on increased inflation expectations in the market. We continued to favor TIPSs over nominal Treasuries. We also had limited exposure to investment grade credit, to which we added throughout the fourth quarter. These positions performed well versus Treasuries as commodity prices remained firm. Finally, we reduced our foreign exchange exposures, including the Canadian dollar, to neutral in the first half of the year and remained fully hedged through the remainder of the year.

The Fund employed interest rate Treasury, Eurodollar and Eurobund futures and options to manage its yield curve^viii positioning and duration. The use of these instruments detracted from performance. Currency


2		Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report

forwards, which were used to manage the Fund’s currency exposure, detracted from results during the year.

Performance review

For the twelve months ended December 31, 2016, Class I shares of Western Asset Inflation Indexed Plus Bond Fund returned 2.40%. The Fund’s unmanaged benchmark, the Bloomberg Barclays U.S. TIPS Index, returned 4.68% for the same period. The Lipper Inflation Protected Bond Funds Category Average¹ returned 4.66% over the same time frame.


Performance Snapshot as of December 31, 2016 (unaudited)
(excluding sales charges)	6 months			12 months
Western Asset Inflation Indexed Plus Bond Fund:
Class A		-2.20	%		2.13	%
Class C		-2.51	%		1.53	%
Class C1		-2.44	%		1.57	%
Class FI		-2.14	%		2.14	%
Class R		-2.44	%		1.75	%
Class I		-2.09	%		2.40	%
Class IS		-1.96	%		2.61	%
Bloomberg Barclays U.S. TIPS Index		-1.47	%		4.68	%
Lipper Inflation Protected Bond Funds Category Average¹		-0.47	%		4.66	%

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/mutualfunds.

All share class returns assume the reinvestment of all distributions 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 lower. Performance figures for periods shorter than one year represent cumulative figures and are not annualized.

The 30-Day SEC Yields for the period ended December 31, 2016 for Class A, Class C, Class C1, Class FI, Class R, Class I and Class IS shares were 1.10%, 0.58%, 0.77%, 1.13%, 0.57%, 1.48% and 1.62%, 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. The 30-Day SEC Yield includes adjustments for inflation to both U.S. and foreign portfolio securities that are linked to inflation indices. Please note, inflation adjustments to U.S. securities often occur at different intervals than foreign securities. These adjustments can cause the SEC Yield to change substantially from month-to-month. Increases in the inflation rate may result in the Fund reporting an exceptionally high yield which may not be repeated.

Total Annual Operating Expenses (unaudited)

As of the Fund’s current prospectus dated May 1, 2016, the gross total annual fund operating expense ratios for Class A, Class C, Class C1, Class FI, Class R, Class I and Class IS shares were 0.65%, 1.30%, 1.10%, 0.64%, 0.99%, 0.38% and 0.25%, respectively.

Actual expenses may be higher. For example, expenses may be higher than those

Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the period ended December 31, 2016, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 249 funds for the six-month period and among the 245 funds for the twelve-month period in the Fund’s Lipper category, excluding sales charges, if any.


Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report		3

Fund overview (cont’d)

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.

Q. What were the leading contributors to performance?

A. While the Fund underperformed its benchmark during the reporting period, having an underweight to U.S. TIPS over the first quarter of the year was beneficial as breakevens, a measure of inflation expectations, declined amid weak global growth concerns.

Elsewhere, modest allocations to investment-grade and high-yield corporate bonds were beneficial as their spreads narrowed given overall strong demand from investors looking to generate incremental yield in the low interest rate environment.

Q. What were the leading detractors from performance?

A. The largest detractor from the Fund’s relative performance for the period was its duration positioning. In particular, having a short duration the first half of the year was a negative as global growth concerns caused inflation expectations to decrease and yields generally declined across the yield curve. Moving to a long duration during the second half of the year was also detrimental for results as rates moved higher given expectations for improving growth and rising inflation under the Trump administration.

Finally, the Fund’s short exposure to the Canadian dollar, taken in the second quarter of 2016 and intended as a diversifier to our pro-inflation, risk-on strategies, detracted from performance.

Thank you for your investment in Western Asset Inflation Indexed Plus 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

January 21, 2017

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. The use of leverage may increase volatility and possibility of loss. Risks of high-yield securities (commonly known as “junk” bonds) include greater price volatility, illiquidity and possibility of default. The Fund may be subject to interest rate, income and deflation risks. Changes in inflation will cause the Fund’s income to fluctuate, sometimes substantially. Periods of deflation may adversely affect the Fund’s net asset value. International investments are subject to special risks including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. 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 December 31, 2016 and are subject to change and may not be representative of the portfolio managers’ current or future investments. Please


4		Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report

refer to pages 13 through 14 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 three sector holdings (as a percentage of net assets) as of December 31, 2016 were: U.S. Treasury Inflation Protected Securities (92.8%), Corporate Bonds & Notes (2.7%) and Asset-backed securities (0.0%). 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.

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

U.S. Treasury Inflation-Protected Securities (“TIPS”) are inflation-indexed securities issued by the U.S. Treasury in five-year, ten-year and thirty-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.

ⁱⁱ

Effective duration is a duration calculation for bonds with embedded options. Effective duration takes into account that expected cash flows will fluctuate as interest rates change. Please note, duration measures the sensitivity of price (the value of principal) of a fixed-income investment to a change in interest rates. Funds that employ leverage calculate effective duration based off of Net Assets.

ⁱⁱⁱ	The Bloomberg Barclays U.S. TIPS Index represents an unmanaged market index made up of U.S. Treasury Inflation-Linked Index securities.

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

^v	The Bloomberg 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 Consumer Price Index for All Urban Consumers (“CPI-U”) is a measure of the average change in prices over time of goods and services purchased by households, which covers approximately 87% of the total population and includes, in addition to wage earners and clerical worker households, groups such as professional, managerial and technical workers, the self-employed, short-term workers, the unemployed and retirees and others not in the labor force.

^vii	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.

^viii

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


Western Asset Inflation Indexed Plus Bond Fund 2016 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 December 31, 2016 and December 31, 2015 and does not include derivatives, such as futures contracts, written options and forward foreign currency 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 Inflation Indexed Plus Bond Fund 2016 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 July 1, 2016 and held for the six months ended December 31, 2016.

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		-2.20	%	$	1,000.00	$	978.00		0.71	%	$	3.53	Class A		5.00	%	$	1,000.00	$	1,021.57		0.71	%	$	3.61
Class C		-2.51			1,000.00		974.90		1.32			6.55	Class C		5.00			1,000.00		1,018.50		1.32			6.70
Class C1		-2.44			1,000.00		975.60		1.13			5.61	Class C1		5.00			1,000.00		1,019.46		1.13			5.74
Class FI		-2.14			1,000.00		978.60		0.67			3.33	Class FI		5.00			1,000.00		1,021.77		0.67			3.40
Class R		-2.44			1,000.00		975.60		1.14			5.66	Class R		5.00			1,000.00		1,019.41		1.14			5.79
Class I		-2.09			1,000.00		979.10		0.37			1.84	Class I		5.00			1,000.00		1,023.28		0.37			1.88
Class IS		-1.96			1,000.00		980.40		0.26			1.29	Class IS		5.00			1,000.00		1,023.83		0.26			1.32


Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report		7

Fund expenses (unaudited) (cont’d)

¹	For the six months ended December 31, 2016.

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 (184), then divided by 366.


8		Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report

Fund performance (unaudited)


Average annual total returns
Without sales charges¹	Class A			Class C			Class C1			Class FI			Class R			Class I			Class IS
Twelve Months Ended 12/31/16		2.13	%		1.53	%		1.57	%		2.14	%		1.75	%		2.40	%		2.61	%
Five Years Ended 12/31/16		N/A			N/A			N/A			-0.24			N/A			0.12			0.26
Ten Years Ended 12/31/16		N/A			N/A			N/A			N/A			N/A			3.65			N/A
Inception* through 12/31/16		-0.76			-1.50			-2.11			3.40			-1.14			—			3.81

With sales charges²	Class A			Class C			Class C1			Class FI			Class R			Class I			Class IS
Twelve Months Ended 12/31/16		-2.20	%		0.53	%		1.57	%		2.14	%		1.75	%		2.40	%		2.61	%
Five Years Ended 12/31/16		N/A			N/A			N/A			-0.24			N/A			0.12			0.26
Ten Years Ended 12/31/16		N/A			N/A			N/A			N/A			N/A			3.65			N/A
Inception* through 12/31/16		-1.68			-1.50			-2.11			3.40			-1.14			—			3.81


Cumulative total returns
Without sales charges¹
Class A (Inception date of 4/30/12 through 12/31/16)	-3.49	%
Class C (Inception date of 4/30/12 through 12/31/16)	-6.81
Class C1 (Inception date of 10/5/12 through 12/31/16)	-8.65
Class FI (Inception date of 6/28/07 through 12/31/16)	37.39
Class R (Inception date of 4/30/12 through 12/31/16)	-5.20
Class I (12/31/06 through 12/31/16)	43.14
Class IS (Inception date of 12/18/08 through 12/31/16)	35.03

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, C1, FI, R, I and IS shares are April 30, 2012, April 30, 2012, October 5, 2012, June 28, 2007, April 30, 2012, March 1, 2001 and December 18, 2008, respectively.


Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report		9

Fund performance (unaudited) (cont’d)

Historical performance

Value of $1,000,000 invested in

Class I Shares of Western Asset Inflation Indexed Plus Bond Fund vs. Bloomberg Barclays U.S. TIPS Index† — December 2006 - December 2016

LOGO

†

Hypothetical illustration of $1,000,000 invested in Class I shares of Western Asset Inflation Indexed Plus Bond Fund on December 31, 2006, assuming the reinvestment of all distributions, including returns of capital, if any, at net asset value through December 31, 2016. The hypothetical illustration also assumes a $1,000,000 investment in the Bloomberg Barclays U.S. TIPS Index. The Bloomberg Barclays U.S. TIPS Index represents an unmanaged market index made up of U.S. Treasury Inflation-Linked Index securities. 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 Class I shares’ performance indicated on this chart, depending on whether greater or lesser sales charges and fees were incurred by shareholders investing in the other classes.


10		Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report

Spread duration (unaudited)

Economic exposure — December 31, 2016

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.


Benchmark		— Bloomberg Barclays U.S. TIPS Index
EM		— Emerging Markets
HY		— High Yield
IG Credit		— Investment Grade Credit
WA Inflation Indexed		— Western Asset Inflation Indexed Plus Bond Fund


Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report		11

Effective duration (unaudited)

Interest rate exposure — December 31, 2016

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.


Benchmark		— Bloomberg Barclays U.S. TIPS Index
EM		— Emerging Markets
HY		— High Yield
IG Credit		— Investment Grade Credit
WA Inflation Indexed		— Western Asset Inflation Indexed Plus Bond Fund


12		Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report

Schedule of investments

December 31, 2016

Western Asset Inflation Indexed Plus Bond Fund


Security	Rate			Maturity Date		Face Amount		Value
U.S. Treasury Inflation Protected Securities — 92.8%
U.S. Treasury Bonds, Inflation Indexed		2.375	%		1/15/25	$	1,301,585	$	1,494,488
U.S. Treasury Bonds, Inflation Indexed		2.375	%		1/15/27		1,198,620		1,404,125
U.S. Treasury Bonds, Inflation Indexed		1.750	%		1/15/28		31,591,318		35,272,654
U.S. Treasury Bonds, Inflation Indexed		3.625	%		4/15/28		5,828,511		7,664,037
U.S. Treasury Bonds, Inflation Indexed		2.500	%		1/15/29		17,382,939		20,966,484
U.S. Treasury Bonds, Inflation Indexed		3.875	%		4/15/29		20,982,180		28,686,774
U.S. Treasury Bonds, Inflation Indexed		2.125	%		2/15/40		2,275,730		2,818,515
U.S. Treasury Bonds, Inflation Indexed		2.125	%		2/15/41		6,953,877		8,656,617
U.S. Treasury Bonds, Inflation Indexed		0.750	%		2/15/42		11,767,140		11,140,210
U.S. Treasury Bonds, Inflation Indexed		1.375	%		2/15/44		16,262,669		17,747,629
U.S. Treasury Bonds, Inflation Indexed		0.750	%		2/15/45		11,701,986		11,010,879
U.S. Treasury Notes, Inflation Indexed		0.125	%		4/15/18		13,447,445		13,569,749
U.S. Treasury Notes, Inflation Indexed		2.125	%		1/15/19		2,927,210		3,092,887
U.S. Treasury Notes, Inflation Indexed		0.125	%		4/15/19		29,369,083		29,735,697
U.S. Treasury Notes, Inflation Indexed		0.125	%		4/15/20		35,094,460		35,459,092
U.S. Treasury Notes, Inflation Indexed		1.125	%		1/15/21		20,641,213		21,653,974
U.S. Treasury Notes, Inflation Indexed		0.125	%		1/15/22		16,034,822		16,062,017
U.S. Treasury Notes, Inflation Indexed		0.125	%		7/15/22		2,207,352		2,212,939
U.S. Treasury Notes, Inflation Indexed		0.125	%		1/15/23		22,996,732		22,826,878
U.S. Treasury Notes, Inflation Indexed		0.375	%		7/15/23		7,686,232		7,755,062
U.S. Treasury Notes, Inflation Indexed		0.625	%		1/15/24		25,898,750		26,353,817
U.S. Treasury Notes, Inflation Indexed		0.125	%		7/15/24		19,240,200		18,901,476
U.S. Treasury Notes, Inflation Indexed		0.250	%		1/15/25		288		283
U.S. Treasury Notes, Inflation Indexed		0.625	%		1/15/26		32,593,972		32,880,179
Total U.S. Treasury Inflation Protected Securities (Cost — $370,864,854)									377,366,462
Asset-Backed Securities — 0.0%
Bear Stearns Asset-Backed Securities Trust, 2003-ABF1 A		1.324	%		1/25/34		33,349		32,255	^(a)
EMC Mortgage Loan Trust, 2003-B A1		1.134	%		11/25/41		28,105		26,747	^(a)(b)
Total Asset-Backed Securities (Cost — $59,655)									59,002
Corporate Bonds & Notes — 2.7%
Energy — 1.2%
Oil, Gas & Consumable Fuels — 1.2%
Devon Energy Corp., Senior Notes		5.850	%		12/15/25		2,500,000		2,840,342
Occidental Petroleum Corp., Senior Notes		3.000	%		2/15/27		500,000		483,788
Targa Resources Partners LP/Targa Resources Partners Finance Corp., Senior Notes		5.375	%		2/1/27		800,000		792,000	^(b)
WPX Energy Inc., Senior Notes		7.500	%		8/1/20		580,000		623,500
Total Energy									4,739,630

See Notes to Financial Statements.


Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report		13

Schedule of investments (cont’d)

December 31, 2016

Western Asset Inflation Indexed Plus Bond Fund


Security	Rate			Maturity Date		Face Amount		Value
Materials — 1.5%
Metals & Mining — 1.5%
ArcelorMittal SA, Senior Notes		8.000	%		10/15/39	$	580,000	$	636,457
Barrick Gold Corp., Senior Notes		4.100	%		5/1/23		2,700,000		2,769,771
Southern Copper Corp., Senior Notes		5.250	%		11/8/42		2,380,000		2,180,508
Teck Resources Ltd., Senior Notes		3.750	%		2/1/23		430,000		406,350
Total Materials									5,993,086
Total Corporate Bonds & Notes (Cost — $10,752,824)									10,732,716
Total Investments before Short-Term Investments (Cost — $381,677,333)									388,158,180
Short-Term Investments — 3.8%
Repurchase Agreements — 1.2%
Goldman Sachs & Co. repurchase agreement dated 12/30/16; Proceeds at maturity — $5,000,239; (Fully collateralized by U.S. government agency obligations, 0.944% due 3/21/18; Market value — $5,102,370) (Cost — $5,000,000)		0.430	%		1/3/17		5,000,000		5,000,000

						Shares
Money Market Funds — 2.6%
State Street Institutional U.S. Government Money Market Fund, Premier Class (Cost — $10,722,406)		0.411	%				10,722,406		10,722,406
Total Short-Term Investments (Cost — $15,722,406)									15,722,406
Total Investments — 99.3% (Cost — $397,399,739#)									403,880,586
Other Assets in Excess of Liabilities — 0.7%									2,672,549
Total Net Assets — 100.0%								$	406,553,135

^(a)	Variable rate security. Interest rate disclosed is as of the most recent information available.

^(b)

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.

#	Aggregate cost for federal income tax purposes is $399,756,420.

See Notes to Financial Statements.


14		Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report

Statement of assets and liabilities

December 31, 2016



Assets:
Investments, at value (Cost — $397,399,739)	$	403,880,586
Receivable for securities sold		4,819,647
Interest receivable		1,395,929
Unrealized appreciation on forward foreign currency contracts		892,610
Receivable for Fund shares sold		774,706
Prepaid expenses		67,030
*Total Assets*		*411,830,508*

Liabilities:
Payable for securities purchased		3,632,553
Unrealized depreciation on forward foreign currency contracts		865,641
Payable for Fund shares repurchased		482,868
Distributions payable		105,730
Investment management fee payable		68,139
Service and/or distribution fees payable		7,323
Directors’ fees payable		2,919
Accrued expenses		112,200
*Total Liabilities*		*5,277,373*
Total Net Assets	$	406,553,135

Net Assets:
Par value (Note 7)	$	36,780
Paid-in capital in excess of par value		420,056,512
Overdistributed net investment income		(87,970)
Accumulated net realized loss on investments, futures contracts, written options and foreign currency transactions		(19,960,006)
Net unrealized appreciation on investments and foreign currencies		6,507,819
Total Net Assets	$	406,553,135

See Notes to Financial Statements.


Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report		15

Statement of assets and liabilities (cont’d)

December 31, 2016



Net Assets:
Class A			$23,070,774
Class C			$1,617,821
Class C1			$1,409,786
Class FI			$1,438,103
Class R			$933,539
Class I			$70,676,556
Class IS			$307,406,556

Shares Outstanding:
Class A			2,111,550
Class C			151,747
Class C1			130,962
Class FI			132,596
Class R			86,512
Class I			6,412,320
Class IS			27,754,338

Net Asset Value:
Class A (and redemption price)			$10.93
Class C*			$10.66
Class C1 (and redemption price)			$10.76
Class FI (and redemption price)			$10.85
Class R (and redemption price)			$10.79
Class I (and redemption price)			$11.02
Class IS (and redemption price)			$11.08
Maximum Public Offering Price Per Share:
Class A (based on maximum initial sales charge of 4.25%)			$11.42

*	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.


16		Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report

Statement of operations

For the Year Ended December 31, 2016



Investment Income:
*Interest*	$	*8,568,765*

Expenses:
Investment management fee (Note 2)		1,037,771
Transfer agent fees (Note 5)		158,785
Registration fees		99,634
Service and/or distribution fees (Notes 2 and 5)		89,874
Fund accounting fees		55,979
Audit and tax fees		49,985
Shareholder reports		26,369
Legal fees		22,270
Directors’ fees		15,661
Insurance		8,754
Custody fees		6,242
Commitment fees (Note 8)		6,147
Miscellaneous expenses		17,401
*Total Expenses*		*1,594,872*
Net Investment Income		6,973,893

Realized and Unrealized Gain (Loss) on Investments, Futures Contracts, Written Options and Foreign Currency Transactions (Notes 1, 3 and 4):
Net Realized Gain (Loss) From:
Investment transactions		4,838,196
Futures contracts		(6,432,624)
Written options		779,550
Foreign currency transactions		(2,311,825)
*Net Realized Loss*		*(3,126,703)*
Change in Net Unrealized Appreciation (Depreciation) From:
Investments		13,149,196
Futures contracts		183,356
Written options		29,055
Foreign currencies		37,430
*Change in Net Unrealized Appreciation (Depreciation)*		*13,399,037*
Net Gain on Investments, Futures Contracts, Written Options and Foreign Currency Transactions		10,272,334
Increase in Net Assets From Operations	$	17,246,227

See Notes to Financial Statements.


Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report		17

Statements of changes in net assets


For the Years Ended December 31,	2016		2015

Operations:
Net investment income	$	6,973,893	$	590,689
Net realized loss		(3,126,703)		(3,533,221)
Change in net unrealized appreciation (depreciation)		13,399,037		(11,742,369)
*Increase (Decrease) in Net Assets From Operations*		*17,246,227*		*(14,684,901)*

Distributions to Shareholders From (Notes 1 and 6):
Net investment income		(5,343,971)		(1,090,466)
Net realized gains		(705,995)		—
Return of capital		—		(1,053,757)
*Decrease in Net Assets From Distributions to Shareholders*		*(6,049,966)*		*(2,144,223)*

Fund Share Transactions (Note 7):
Net proceeds from sale of shares		129,124,247		296,980,533
Reinvestment of distributions		5,602,477		2,065,400
Cost of shares repurchased		(323,308,183)		(267,007,137)
*Increase (Decrease) in Net Assets From Fund Share Transactions*		*(188,581,459)*		*32,038,796*
*Increase (Decrease) in Net Assets*		*(177,385,198)*		*15,209,672*

Net Assets:
Beginning of year		583,938,333		568,728,661
End of year*	$	406,553,135	$	583,938,333
*Includes overdistributed net investment income of:		$(87,970)		$(606,240)

See Notes to Financial Statements.


18		Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report

Financial highlights


For a share of each class of capital stock outstanding throughout each year ended December 31, unless otherwise noted:
Class A Shares¹	2016			2015			2014			2013			2012²

Net asset value, beginning of year		$10.83			$11.17			$11.08			$12.22			$12.10

Income (loss) from operations:
Net investment income (loss)		0.13			(0.03)			0.10			0.04			0.20
Net realized and unrealized gain (loss)		0.10			(0.27)			0.18			(1.08)			0.23
*Total income (loss) from operations*		*0.23*			*(0.30)*			*0.28*			*(1.04)*			*0.43*

Less distributions from:
Net investment income		(0.11)			(0.02)			(0.19)			(0.10)			(0.16)
Net realized gains		(0.02)			—			(0.00)	³		—			(0.15)
Return of capital		—			(0.02)			—			—			—
*Total distributions*		*(0.13)*			*(0.04)*			*(0.19)*			*(0.10)*			*(0.31)*

Net asset value, end of year		$10.93			$10.83			$11.17			$11.08			$12.22
*Total return⁴*		*2.13*	%		*(2.72)*	%		*2.53*	%		*(8.52)*	%		*3.56*	%

Net assets, end of year (000s)		$23,071			$20,050			$16,401			$15,703			$26,958

Ratios to average net assets:
Gross expenses		0.70	%		0.65	%		0.73	%		0.66	%		0.67	%⁵
Net expenses⁶		0.70			0.65			0.73			0.66			0.67	⁵
Net investment income (loss)		1.15			(0.27)			0.92			0.33			2.42	⁵

Portfolio turnover rate		81	%		69	%		36	%		32	%		54	%

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

²	For the period April 30, 2012 (inception date) to December 31, 2012.

³	Amount represents less than $0.005 per share.

⁴

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.

⁵	Annualized.

⁶

As a result of an expense limitation arrangement, the ratio of total annual fund operating 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, 2018 without the Board of Directors’ consent.

See Notes to Financial Statements.


Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report		19

Financial highlights (cont’d)


For a share of each class of capital stock outstanding throughout each year ended December 31, unless otherwise noted:
Class C Shares¹	2016			2015			2014			2013			2012²

Net asset value, beginning of year		$10.61			$11.01			$10.98			$12.17			$12.10

Income (loss) from operations:
Net investment income (loss)		0.05			(0.10)			0.00	³		(0.04)			0.09
Net realized and unrealized gain (loss)		0.11			(0.27)			0.18			(1.08)			0.27
*Total income (loss) from operations*		*0.16*			*(0.37)*			*0.18*			*(1.12)*			*0.36*

Less distributions from:
Net investment income		(0.09)			(0.02)			(0.15)			(0.07)			(0.14)
Net realized gains		(0.02)			—			(0.00)	³		—			(0.15)
Return of capital		—			(0.01)			—			—			—
*Total distributions*		*(0.11)*			*(0.03)*			*(0.15)*			*(0.07)*			*(0.29)*

Net asset value, end of year		$10.66			$10.61			$11.01			$10.98			$12.17
*Total return⁴*		*1.53*	%		*(3.36)*	%		*1.62*	%		*(9.23)*	%		*2.97*	%

Net assets, end of year (000s)		$1,618			$1,183			$1,334			$1,628			$1,987

Ratios to average net assets:
Gross expenses		1.31	%		1.30	%⁵		1.61	%⁵		1.51	%		1.29	%⁶
Net expenses⁷		1.31			1.30	⁵		1.61	⁵		1.40	⁸		1.29	⁶
Net investment income (loss)		0.49			(0.89)			0.04			(0.35)			1.15	⁶

Portfolio turnover rate		81	%		69	%		36	%		32	%		54	%

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

²	For the period April 30, 2012 (inception date) to December 31, 2012.

³	Amount represents less than $0.005 per share.

⁴

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.

⁵	Reflects recapture of expenses waived/reimbursed from prior fiscal years.

⁶	Annualized.

⁷

As a result of an expense limitation arrangement, the ratio of total annual fund operating 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, 2018 without the Board of Directors’ consent.

⁸	Reflects fee waivers and/or expense reimbursements.

See Notes to Financial Statements.


20		Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report


For a share of each class of capital stock outstanding throughout each year ended December 31, unless otherwise noted:
Class C1 Shares¹	2016			2015			2014			2013			2012²

Net asset value, beginning of year		$10.71			$11.09			$11.03			$12.21			$12.35

Income (loss) from operations:
Net investment income (loss)		0.07			(0.08)			0.05			(0.03)			0.05
Net realized and unrealized gain (loss)		0.10			(0.27)			0.17			(1.07)			(0.03)
*Total income (loss) from operations*		*0.17*			*(0.35)*			*0.22*			*(1.10)*			*0.02*

Less distributions from:
Net investment income		(0.10)			(0.02)			(0.16)			(0.08)			(0.06)
Net realized gains		(0.02)			—			(0.00)	³		—			(0.10)
Return of capital		—			(0.01)			—			—			—
*Total distributions*		*(0.12)*			*(0.03)*			*(0.16)*			*(0.08)*			*(0.16)*

Net asset value, end of year		$10.76			$10.71			$11.09			$11.03			$12.21
*Total return⁴*		*1.57*	%		*(3.14)*	%		*2.00*	%		*(9.09)*	%		*0.13*	%

Net assets, end of year (000s)		$1,410			$1,808			$2,084			$3,078			$5,642

Ratios to average net assets:
Gross expenses		1.13	%		1.10	%		1.30	%		1.26	%		1.22	%⁵
Net expenses⁶		1.13			1.10			1.30			1.26			1.22	⁵
Net investment income (loss)		0.61			(0.77)			0.41			(0.28)			1.84	⁵

Portfolio turnover rate		81	%		69	%		36	%		32	%		54	%

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

²	For the period October 5, 2012 (inception date) through December 31, 2012.

³	Amount represents less than $0.005 per share.

⁴

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.

⁵	Annualized.

⁶

As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage commissions, taxes, extraordinary expenses and deferred organizational expenses, to average net assets of Class C1 shares did not exceed 1.40%. This expense limitation arrangement cannot be terminated prior to December 31, 2018 without the Board of Directors’ consent.

See Notes to Financial Statements.


Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report		21

Financial highlights (cont’d)


For a share of each class of capital stock outstanding throughout each year ended December 31:
Class FI Shares¹	2016			2015			2014			2013			2012

Net asset value, beginning of year		$10.75			$11.09			$11.00			$12.14			$11.80

Income (loss) from operations:
Net investment income		0.07			0.06			0.02			0.02			0.16
Net realized and unrealized gain (loss)		0.16			(0.36)			0.25			(1.06)			0.57
*Total income (loss) from operations*		*0.23*			*(0.30)*			*0.27*			*(1.04)*			*0.73*

Less distributions from:
Net investment income		(0.11)			(0.02)			(0.18)			(0.10)			(0.24)
Net realized gains		(0.02)			—			(0.00)	²		—			(0.15)
Return of capital		—			(0.02)			—			—			—
*Total distributions*		*(0.13)*			*(0.04)*			*(0.18)*			*(0.10)*			*(0.39)*

Net asset value, end of year		$10.85			$10.75			$11.09			$11.00			$12.14
*Total return³*		*2.14*	%		*(2.74)*	%		*2.48*	%		*(8.64)*	%		*6.22*	%

Net assets, end of year (000s)		$1,438			$1,845			$3,189			$2,737			$1,577

Ratios to average net assets:
Gross expenses		0.65	%		0.64	%⁴		0.76	%⁴		0.84	%⁴		0.89	%⁴
Net expenses⁵		0.65			0.64	⁴		0.76	⁴		0.83	^4,6		0.80	^4,6
Net investment income		0.67			0.54			0.18			0.14			1.30

Portfolio turnover rate		81	%		69	%		36	%		32	%		54	%

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

²	Amount represents less than $0.005 per share.

³	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.

⁴	Reflects recapture of expenses waived/reimbursed from prior fiscal years.

⁵

As a result of an expense limitation arrangement, effective May 1, 2012, the ratio of total annual fund operating expenses, other than interest, brokerage commissions, taxes, extraordinary expenses and deferred organizational expenses, to average net assets of Class FI shares did not exceed 0.85%. This expense limitation arrangement cannot be terminated prior to December 31, 2018 without the Board of Directors’ consent. Prior to May 1, 2012, as a result of an expense limitation arrangement, the ratio of total annual fund operating expenses to average net assets of Class FI shares did not exceed 0.75%.

⁶	Reflects fee waivers and/or expense reimbursements.

See Notes to Financial Statements.


22		Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report


For a share of each class of capital stock outstanding throughout each year ended December 31, unless otherwise noted:
Class R Shares¹	2016			2015			2014			2013			2012²

Net asset value, beginning of year		$10.72			$11.11			$11.03			$12.20			$12.10

Income (loss) from operations:
Net investment income (loss)		0.09			(0.02)			(0.02)			(0.05)			0.10
Net realized and unrealized gain (loss)		0.10			(0.34)			0.27			(1.03)			0.31
*Total income (loss) from operations*		*0.19*			*(0.36)*			*0.25*			*(1.08)*			*0.41*

Less distributions from:
Net investment income		(0.10)			(0.02)			(0.17)			(0.09)			(0.16)
Net realized gains		(0.02)			—			(0.00)	³		—			(0.15)
Return of capital		—			(0.01)			—			—			—
*Total distributions*		*(0.12)*			*(0.03)*			*(0.17)*			*(0.09)*			*(0.31)*

Net asset value, end of year		$10.79			$10.72			$11.11			$11.03			$12.20
*Total return⁴*		*1.75*	%		*(3.03)*	%		*2.11*	%		*(8.93)*	%		*3.33*	%

Net assets, end of year (000s)		$934			$921			$425			$51			$10

Ratios to average net assets:
Gross expenses		1.07	%		0.99	%		1.10	%⁵		1.17	%⁵		0.99	%⁶
Net expenses⁷		1.07			0.99			1.10	⁵		1.07	^5,8		0.98	^6,8
Net investment income (loss)		0.79			(0.16)			(0.15)			(0.45)			1.19	⁶

Portfolio turnover rate		81	%		69	%		36	%		32	%		54	%

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

²	For the period April 30, 2012 (inception date) to December 31, 2012.

³	Amount represents less than $0.005 per share.

⁴

⁵	Reflects recapture of expenses waived/reimbursed from prior fiscal years.

⁶	Annualized.

⁷

As a result of an expense limitation arrangement, the ratio of total annual fund operating 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, 2018 without the Board of Directors’ consent.

⁸	Reflects fee waivers and/or expense reimbursements.

See Notes to Financial Statements.


Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report		23

Financial highlights (cont’d)


For a share of each class of capital stock outstanding throughout each year ended December 31:
Class I Shares¹	2016			2015			2014			2013			2012

Net asset value, beginning of year		$10.90			$11.22			$11.11			$12.23			$11.85

Income (loss) from operations:
Net investment income		0.15			0.03			0.14			0.08			0.21
Net realized and unrealized gain (loss)		0.11			(0.31)			0.17			(1.08)			0.59
*Total income (loss) from operations*		*0.26*			*(0.28)*			*0.31*			*(1.00)*			*0.80*

Less distributions from:
Net investment income		(0.12)			(0.02)			(0.20)			(0.12)			(0.27)
Net realized gains		(0.02)			—			(0.00)	²		—			(0.15)
Return of capital		—			(0.02)			—			—			—
*Total distributions*		*(0.14)*			*(0.04)*			*(0.20)*			*(0.12)*			*(0.42)*

Net asset value, end of year		$11.02			$10.90			$11.22			$11.11			$12.23
*Total return³*		*2.40*	%		*(2.50)*	%		*2.83*	%		*(8.19)*	%		*6.75*	%

Net assets, end of year (000s)		$70,677			$103,290			$265,527			$291,664			$380,571

Ratios to average net assets:
Gross expenses		0.37	%		0.38	%		0.41	%		0.31	%		0.31	%
Net expenses		0.37			0.38			0.41			0.31	⁴		0.30	^4,5
Net investment income		1.33			0.25			1.19			0.67			1.74

Portfolio turnover rate		81	%		69	%		36	%		32	%		54	%

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

²	Amount represents less than $0.005 per share.

³	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.

⁴	Reflects fee waivers and/or expense reimbursements.

⁵	Prior to May 1, 2012, the investment manager had contractually agreed to waive fees and/or reimburse operating expenses at an annual rate of 0.02%.

See Notes to Financial Statements.


24		Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report


For a share of each class of capital stock outstanding throughout each year ended December 31:
Class IS Shares¹	2016			2015			2014			2013			2012

Net asset value, beginning of year		$10.94			$11.24			$11.12			$12.24			$11.85

Income (loss) from operations:
Net investment income		0.15			0.00	²		0.15			0.08			0.23
Net realized and unrealized gain (loss)		0.14			(0.26)			0.18			(1.07)			0.58
*Total income (loss) from operations*		*0.29*			*(0.26)*			*0.33*			*(0.99)*			*0.81*

Less distributions from:
Net investment income		(0.13)			(0.02)			(0.21)			(0.13)			(0.27)
Net realized gains		(0.02)			—			(0.00)	²		—			(0.15)
Return of capital		—			(0.02)			—			—			—
*Total distributions*		*(0.15)*			*(0.04)*			*(0.21)*			*(0.13)*			*(0.42)*

Net asset value, end of year		$11.08			$10.94			$11.24			$11.12			$12.24
*Total return³*		*2.61*	%		*(2.30)*	%		*2.98*	%		*(8.17)*	%		*6.85*	%

Net assets, end of year (000s)		$307,407			$454,842			$279,769			$258,193			$248,235

Ratios to average net assets:
Gross expenses		0.26	%		0.25	%		0.26	%		0.27	%⁴		0.26	%⁴
Net expenses		0.26	⁵		0.25	⁵		0.26	⁵		0.27	^4,6		0.26	^4,6,7
Net investment income		1.37			0.02			1.36			0.71			1.93

Portfolio turnover rate		81	%		69	%		36	%		32	%		54	%

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

²	Amount represents less than $0.005 per share.

³	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.

⁴	Reflects recapture of expenses waived/reimbursed from prior fiscal years.

⁵

As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses for Class IS did not exceed the ratio of total annual fund operating expenses for Class I shares. This expense limitation arrangement cannot be terminated prior to December 31, 2018 without the Board of Directors’ consent.

⁶	Reflects fee waivers and/or expense reimbursements.

⁷	Prior to May 1, 2012, as a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage commissions, taxes, extraordinary expenses and deferred organizational expenses, to average net assets of Class IS shares did not exceed 0.25%.

See Notes to Financial Statements.


Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report		25

Notes to financial statements

1. Organization and significant accounting policies

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

(a) Investment valuation. 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. Investments in open-end funds are valued at the closing net asset value per share of each fund on the day of valuation. 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 (the “Valuation Committee”). The Valuation Committee, pursuant to the policies


26		Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report

adopted by the 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 Inflation Indexed Plus Bond Fund 2016 Annual Report		27

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†:
U.S. Treasury inflation protected securities		—	$	377,366,462		—	$	377,366,462
Asset-backed securities		—		59,002		—		59,002
Corporate bonds & notes		—		10,732,716		—		10,732,716
Total long-term investments		—		388,158,180		—		388,158,180
Short-term investments†:
Repurchase agreements		—		5,000,000		—		5,000,000
Money market funds	$	10,722,406		—		—		10,722,406
Total short-term investments		10,722,406		5,000,000		—		15,722,406
Total investments	$	10,722,406	$	393,158,180		—	$	403,880,586
Other financial instruments:
Forward foreign currency contracts		—		892,610		—		892,610
Total	$	10,722,406	$	394,050,790		—	$	404,773,196

LIABILITIES
Description	Quoted Prices (Level 1)		Other Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Other financial instruments:
Forward foreign currency contracts		—	$	865,641		—	$	865,641

†	See Schedule of Investments for additional detailed categorizations.

(b) Repurchase agreements. The Fund may enter into repurchase agreements with institutions that its subadviser 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


28		Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report

transaction. However, if the market value of the collateral declines during the period in which the Fund seeks to assert its rights or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited.

(c) 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) Forward foreign currency contracts. The Fund enters into a forward foreign currency contract to hedge exposure of bond positions or in an attempt to increase the Fund’s return. A forward foreign currency contract is an agreement between two parties to buy and sell a currency at a set price with delivery and settlement at a future date. The contract is marked-to-market daily and the change in value is recorded by the Fund as an unrealized gain or loss. When a forward foreign currency contract is closed, through either delivery or offset by entering into another forward foreign currency contract, the Fund recognizes a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value of the contract at the time it is closed.

Forward foreign currency contracts involve elements of market risk in excess of the amounts reflected on the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the foreign exchange rate underlying the forward foreign currency contract. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts.

(e) 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.

(f) 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


Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report		29

Notes to financial statements (cont’d)

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.

(g) 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.

(h) 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


30		Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report

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.

(i) Foreign currency translation. Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the respective dates of such transactions.

The Fund does not isolate that portion of the results of operations resulting from fluctuations in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss on investments.

Net realized foreign exchange gains or losses arise from sales of foreign currencies, including gains and losses on forward foreign currency contracts, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund’s books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the values of assets and liabilities, other than investments in securities, on the date of valuation, resulting from changes in exchange rates.

Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S. dollar denominated transactions as a result of, among other factors, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability.

(j) Credit and market risk. Investments in securities that are collateralized by 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.

(k) Foreign investment risks. The Fund’s investments in foreign securities may involve risks not present in domestic investments. Since securities may be denominated in foreign currencies, may require settlement in foreign currencies or pay interest or dividends in foreign currencies, changes in the relationship of these foreign currencies to the U.S. dollar


Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report		31

Notes to financial statements (cont’d)

can significantly affect the value of the investments and earnings of the Fund. Foreign investments may also subject the Fund to foreign government exchange restrictions, expropriation, taxation or other political, social or economic developments, all of which affect the market and/or credit risk of the investments.

(l) 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 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 subadviser 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 subadviser. 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 December 31, 2016, the Fund held forward foreign currency contracts with credit related contingent features which had a liability position of $865,641. 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.


32		Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report

(m) 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. Dividend income is recorded on the ex-dividend date. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults or a credit event occurs that impacts the issuer, 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.

(n) 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.

(o) 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.

(p) 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.

(q) 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 December 31, 2016, 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.


Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report		33

Notes to financial statements (cont’d)

(r) Reclassification. GAAP requires that certain components of net assets be reclassified to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share. During the current year, the following reclassifications have been made:


	Overdistributed Net Investment Income		Accumulated Net Realized Loss
(a)	$	(1,111,652)	$	1,111,652

^(a)	Reclassifications are due to foreign currency transactions treated as ordinary income for tax purposes, losses from mortgage backed securities treated as capital losses for tax purposes and book/tax differences in the treatment of inflation-indexed bonds.

2. Investment management agreement and other transactions with affiliates

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s investment manager. Western Asset Management Company (“Western Asset”), Western Asset Management Company Limited (“Western Asset Limited”), Western Asset Management Company Pte. Ltd. (“Western Singapore”) and Western Asset Management Company Ltd (“Western Japan”) are the Fund’s subadvisers. LMPFA, Western Asset, Western Asset Limited, Western Singapore and Western Japan are wholly owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).

LMPFA provides the Fund with management and administrative services for which the Fund pays a fee, calculated daily and paid monthly, at an annual rate of 0.20% of the Fund’s average daily net assets. For their services, LMPFA pays Western Asset, Western Asset Limited, Western Singapore and Western Japan monthly all of the management fee that it receives from the Fund.

As a result of expense limitation arrangements between the Fund and LMPFA, the ratio of total annual fund operating expenses, other than interest, brokerage commissions, taxes, extraordinary expenses and deferred organizational expenses, to average net assets of Class A, Class C, Class C1, Class FI and Class R shares did not exceed 0.90%, 1.65%, 1.40%, 0.85% and 1.15%, respectively. In addition, the ratio of total annual fund operating expenses for Class IS shares did not exceed the ratio of total annual fund operating expenses for Class I shares. These expense limitation arrangements cannot be terminated prior to December 31, 2018 without the Board of Directors’ consent.

LMPFA is permitted to recapture amounts waived and/or reimbursed to a class within two years after the fiscal year in which LMPFA 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 LMPFA 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 December 31, 2016, the Fund had no remaining fee waivers and/or expense reimbursements subject to recapture by LMPFA.

For the year ended December 31, 2016, LMPFA did not recapture any fees.


34		Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report

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.

For the year ended December 31, 2016, LMIS and its affiliates retained sales charges of $286 on sales of the Fund’s Class A shares. In addition, for the year ended December 31, 2016, CDSCs paid to LMIS and its affiliates were:


	Class C
CDSCs	$	509

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 December 31, 2016, 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	$	43,927,479	$	350,957,766
Sales		36,839,460		496,076,411

At December 31, 2016, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:


Gross unrealized appreciation	$	8,383,226
Gross unrealized depreciation		(4,259,060)
Net unrealized appreciation	$	4,124,166

During the year ended December 31, 2016, written option transactions for the Fund were as follows:


	Number of Contracts		Premiums
Written options, outstanding as of December 31, 2015		267	$	96,101
Options written		27,981		4,987,817
Options closed		(24,680)		(4,793,747)
Options exercised		—		—
Options expired		(3,568)		(290,171)
Written options, outstanding as of December 31, 2016		—		—


Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report		35

Notes to financial statements (cont’d)

At December 31, 2016, the Fund had the following open forward foreign currency contracts:

Currency
Purchased

Currency
Sold

Counterparty

Settlement
Date

Unrealized
Appreciation
(Depreciation)

JPY

759,970,000

USD

7,374,483

Citibank N.A.

1/20/17

(865,641)

USD

7,401,452

JPY

759,970,000

Citibank N.A.

1/20/17

892,610

Total

26,969


Abbreviations used in this table:
JPY		— Japanese Yen
USD		— United States Dollar

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 December 31, 2016.


ASSET DERIVATIVES¹
	Foreign Exchange Risk
Forward foreign currency contracts	$	892,610

LIABILITY DERIVATIVES¹
	Foreign Exchange Risk
Forward foreign currency contracts	$	865,641

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).

The following tables provide information about the effect of derivatives and hedging activities on the Fund’s Statement of Operations for the year ended December 31, 2016. 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		Foreign Exchange Risk		Total
Purchased options¹	$	(1,530,421)		—	$	(1,530,421)
Written options		779,550		—		779,550
Futures contracts		(6,432,624)		—		(6,432,624)
Forward foreign currency contracts²		—	$	(2,374,578)		(2,374,578)
Total	$	(7,183,495)	$	(2,374,578)	$	(9,558,073)

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

²	Net realized gain (loss) from forward foreign currency contracts is reported in net realized gain (loss) from foreign currency transactions in the Statement of Operations.


36		Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report


CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED
	Interest Rate Risk		Foreign Exchange Risk		Total
Written options	$	29,055		—	$	29,055
Futures contracts		183,356		—		183,356
Forward foreign currency contracts¹		—	$	36,444		36,444
Total	$	212,411	$	36,444	$	248,855

¹	The change in unrealized appreciation (depreciation) from forward foreign currency contracts is reported in the change in net unrealized appreciation (depreciation) from foreign currencies in the Statement of Operations.

During the year ended December 31, 2016, the volume of derivative activity for the Fund was as follows:


	Average Market Value
Purchased options†	$	217,479
Written options†		158,474
Futures contracts (to buy)†		443,781,918
Futures contracts (to sell)†		494,526,762
Forward foreign currency contracts (to buy)		26,894,278
Forward foreign currency contracts (to sell)		44,395,518

†	At December 31, 2016, 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 December 31, 2016:


	Gross Amount of Derivative Assets in the Statement of Assets and Liabilities¹		Collateral Received		Net Amount
Forward foreign currency contracts	$	892,610		—	$	892,610

The following table presents by financial instrument, the Fund’s derivative liabilities net of the related collateral pledged by the Fund at December 31, 2016:


	Gross Amount of Derivative Liabilities in the Statement of Assets and Liabilities¹		Collateral Pledged		Net Amount
Forward foreign currency contracts	$	865,641		—	$	865,641

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.

²	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.

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, Class C, Class C1, Class FI and Class R shares calculated at the annual rate of 0.25%, 1.00%, 0.75%, 0.25% and 0.50% of the average daily net assets of each class, respectively. Service and/or distribution fees are accrued daily and paid monthly.


Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report		37

Notes to financial statements (cont’d)

For the year ended December 31, 2016, class specific expenses were as follows:


	Service and/or Distribution Fees		Transfer Agent Fees
Class A	$	56,053	$	41,533
Class C		11,514		578
Class C1		12,722		2,114
Class FI		3,901		2,212
Class R		5,684		3,470
Class I		—		106,223
Class IS		—		2,655
Total	$	89,874	$	158,785

6. Distributions to shareholders by class


	Year Ended December 31, 2016		Year Ended December 31, 2015
Net Investment Income:
Class A	$	234,237	$	29,607
Class C		9,899		1,911
Class C1		14,639		2,917
Class FI		14,992		3,214
Class R		10,264		1,382
Class I		958,143		509,240
Class IS		4,101,797		542,195
Total	$	5,343,971	$	1,090,466

Net Realized Gains:
Class A	$	38,872		—
Class C		2,260		—
Class C1		2,556		—
Class FI		2,538		—
Class R		1,620		—
Class I		125,780		—
Class IS		532,369		—
Total	$	705,995		—

Return of Capital:
Class A		—	$	28,645
Class C		—		1,818
Class C1		—		2,791
Class FI		—		3,037
Class R		—		1,339
Class I		—		492,078
Class IS		—		524,049
Total		—	$	1,053,757


38		Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report

7. Capital shares

At December 31, 2016, 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 December 31, 2016				Year Ended December 31, 2015
	Shares		Amount		Shares		Amount
Class A
Shares sold		751,869	$	8,343,496		790,759	$	8,748,320
Shares issued on reinvestment		9,598		106,903		3,276		36,081
Shares repurchased		(501,420)		(5,576,024)		(411,145)		(4,561,014)
Net increase		260,047	$	2,874,375		382,890	$	4,223,387

Class C
Shares sold		76,777	$	827,193		3,177	$	35,090
Shares issued on reinvestment		1,122		12,156		345		3,729
Shares repurchased		(37,564)		(412,518)		(13,281)		(141,985)
Net increase (decrease)		40,335	$	426,831		(9,759)	$	(103,166)

Class C1
Shares sold		2,649	$	28,982		1,548	$	17,041
Shares issued on reinvestment		1,511		16,583		506		5,519
Shares repurchased		(42,119)		(462,973)		(21,156)		(233,953)
Net decrease		(37,959)	$	(417,408)		(19,102)	$	(211,393)

Class FI
Shares sold		155,278	$	1,688,304		410,450	$	4,581,677
Shares issued on reinvestment		1,587		17,529		571		6,248
Shares repurchased		(195,873)		(2,126,818)		(526,930)		(5,833,546)
Net decrease		(39,008)	$	(420,985)		(115,909)	$	(1,245,621)

Class R
Shares sold		66,326	$	725,447		73,231	$	808,546
Shares issued on reinvestment		306		3,407		135		1,471
Shares repurchased		(65,995)		(734,143)		(25,718)		(285,860)
Net increase (decrease)		637	$	(5,289)		47,648	$	524,157

Class I
Shares sold		2,441,237	$	27,264,162		3,692,644	$	41,617,148
Shares issued on reinvestment		90,558		1,018,700		88,861		984,651
Shares repurchased		(5,597,015)		(62,668,989)		(17,967,855)		(199,671,825)
Net decrease		(3,065,220)	$	(34,386,127)		(14,186,350)	$	(157,070,026)

Class IS
Shares sold		8,028,894	$	90,246,663		21,609,818	$	241,172,711
Shares issued on reinvestment		391,785		4,427,199		92,496		1,027,701
Shares repurchased		(22,236,092)		(251,326,718)		(5,018,165)		(56,278,954)
Net increase (decrease)		(13,815,413)	$	(156,652,856)		16,684,149	$	185,921,458


Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report		39

Notes to financial statements (cont’d)

8. Redemption facility

The Fund and certain other participating funds within the Corporation (the “Participating Funds”), have available an unsecured revolving credit facility (the “Redemption Facility”) from the lenders and The Bank of New York Mellon (“BNY Mellon”), as administrative agent for the lenders. The Redemption Facility is to be used for temporary or emergency purposes as an additional source of liquidity to fund redemptions of shares. Under the agreement, BNY Mellon provides a 364-day revolving credit facility, in the aggregate amount of $265 million. Unless renewed, the agreement will terminate on November 20, 2017. Any borrowings under the Redemption Facility will bear interest at current market rates as set forth in the credit agreement. The annual commitment fee to maintain the Redemption Facility is 0.10% and is incurred on the unused portion of the facility and is allocated to all Participating Funds pro rata based on net assets. For the year ended December 31, 2016, the Fund incurred a commitment fee in the amount of $6,147. The Fund did not utilize the Redemption Facility during the year ended December 31, 2016.

9. Income tax information and distributions to shareholders

The tax character of distributions paid during the fiscal years ended December 31, was as follows:


	2016		2015
Distributions paid from:
Ordinary income	$	5,605,340	$	1,090,466
Net long-term capital gains		444,626		—
Tax return of capital		—		1,053,757
Total distributions paid	$	6,049,966	$	2,144,223

As of December 31, 2016, the components of accumulated earnings (losses) on a tax basis were as follows:


Deferred capital losses*	$	(7,078,392)
Other book/tax temporary differences^(a)		(10,612,903)
Unrealized appreciation (depreciation)^(b)		4,151,138
Total accumulated earnings (losses) — net	$	(13,540,157)

*	These capital losses have been deferred in the current year as either short-term or long-term losses. The losses will be deemed to occur on the first day of the next taxable year in the same character as they were originally deferred and will be available to offset future taxable capital gains.

^(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 and foreign currency contracts, book/tax differences in the treatment of distributions 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 and other book/tax basis adjustments.


40		Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report

10. Recent accounting pronouncement

In October 2016, the U.S. Securities and Exchange Commission adopted new rules and amended existing rules (together, the “final rules”) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X is August 1, 2017. Management is currently evaluating the impact that the adoption of the amendments to Regulation S-X will have on the Fund’s financial statements and related disclosures.

11. Subsequent event

On September 16, 2016, the Fund announced that effective January 1, 2017, distributions from net investment income of the Fund, if any, will be declared and paid on a quarterly basis. 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.


Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report		41

Report of independent registered public accounting firm

To the Board of Directors of Western Asset Funds, Inc. and to the Shareholders of Western Asset Inflation Indexed Plus 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 Inflation Indexed Plus Bond Fund (one of the funds comprising Western Asset Funds, Inc., the “Fund”) as of December 31, 2016, 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 December 31, 2016 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Baltimore, Maryland

February 21, 2017


42		Western Asset Inflation Indexed Plus Bond Fund 2016 Annual Report

Board approval of management and advisory agreements (unaudited)

The Executive and Contracts Committee of the Board of Directors considered the Investment Management Agreement between the Corporation and LMPFA with respect to the Fund and the Investment Advisory Agreements between LMPFA and Western Asset Management Company (“Western Asset”), Western Asset Management Company Limited in London (“WAML”), Western Asset Management Company Pte. Ltd. in Singapore (“Western Singapore”) and Western Asset Management Company Ltd in Japan (“Western Japan,” and together with Western Singapore and WAML the “Non-U.S. Subadvisers” and together with Western Asset, the “Subadvisers”) (collectively, the “Agreements”) with respect to the Fund at meetings held on September 13, 2016 and October 18 and 25, 2016. At a meeting held on November 15, 2016, the Executive and Contracts Committee reported to the full Board of Directors its considerations and recommendation with respect to the Agreements, and the Board of Directors, including a majority of the Independent Directors, considered and approved renewal of the Agreements.

The Directors noted that although Western Asset’s business is operated through separate legal entities, such as the Non-U.S. Subadvisers, its business is highly integrated and senior investment personnel at Western Asset have supervisory oversight responsibility over the investment decisions made by the Non-U.S. Subadvisers. Therefore, in connection with their deliberations noted below, the Directors primarily focused on the information provided by Western Asset when considering the approval of the Investment Advisory Agreements between LMPFA and the Non-U.S. Subadvisers with respect to the Fund. The Directors also noted that the Fund does not pay any management fees directly to Western Asset or to any of the Non-U.S. Subadvisers because LMPFA pays the Subadvisers for services provided to the Fund out of the management fee LMPFA receives from the Fund.

In arriving at their decision to renew the Agreements, the Directors met with representatives of Western Asset, including relevant investment advisory personnel, as well as representatives of LMPFA; reviewed a variety of information prepared by LMPFA and Western Asset and materials provided by Broadridge and counsel to the Independent Directors; reviewed performance and expense information for the Fund’s peer group of comparable funds selected and prepared by Broadridge and for certain other comparable products available from Western Asset, including separate accounts managed by Western Asset; and requested and reviewed additional information as necessary. These reviews were in addition to information obtained by the Directors at their regular quarterly meetings with respect to the Fund’s performance and other relevant matters, and related discussions with Western Asset’s personnel.

As part of their review, the Directors examined LMPFA’s ability to provide high quality oversight and administrative and shareholder support services to the Fund, and the Subadvisers’ ability to provide high quality investment management services to the Fund. The Directors considered the experience of LMPFA’s personnel in providing the types of services that LMPFA is responsible for providing to the Fund; the ability of LMPFA to attract and retain capable personnel; the capability and integrity of LMPFA’s senior management and staff;


Western Asset Inflation Indexed Plus Bond Fund		43

Board approval of management and advisory agreements (unaudited) (cont’d)

and the level of skill required to provide such services to the Fund. The Directors considered the investment philosophy and research and decision-making processes of the Subadvisers; the experience of their key advisory personnel responsible for management of the Fund; the ability of the Subadvisers to attract and retain capable research and advisory personnel; the capability and integrity of the Subadvisers’ senior management and staff; and the level of skill required to manage the Fund. In addition, the Directors reviewed the quality of LMPFA’s and the Subadvisers’ services with respect to regulatory compliance and compliance with the investment policies of the Fund and conditions that might affect LMPFA’s or a Subadviser’s ability to provide high quality services to the Fund in the future under the Agreements, including its business reputation, financial condition and operational stability. Based on the foregoing, the Directors concluded that the Subadvisers’ investment process, research capabilities and philosophy were well suited to the Fund given the Fund’s investment objectives and policies, and that LMPFA and each of the Subadvisers would be able to meet any reasonably foreseeable obligations under the Agreements.

In reviewing the quality of the services provided to the Fund, the Directors also reviewed comparisons of the performance of the Fund to the performance of certain comparable funds in its peer group and to its investment benchmark over the one-, three-, five- and ten-year periods ended August 31, 2016. In that connection, the Directors noted that the performance of the Fund exceeded its peer average performance for the ten-year period, was approximately the same as its peer average for the five-year period and was lower than its peer average for the one- and three-year period. With respect to the Fund, the Directors considered the factors involved in its performance relative to the performance of its investment benchmark and peer group.

The Directors also considered the management fee payable by the Fund to LMPFA, the total expenses payable by the Fund and the fact that LMPFA pays to the Subadvisers the entire management fee it receives from the Fund. They reviewed information concerning management fees paid to investment advisers of similarly managed funds, as well as fees paid by the Subadvisers’ other clients, including separate accounts managed by the Subadvisers. The Directors observed that the management fee paid by the Fund to LMPFA was lower than the average of the fees paid by funds in its peer group and that total expenses for the Fund were lower than the average of the funds in its peer group. The Directors noted that the management fee paid by the Fund was generally higher than the fees paid by other clients of the Subadvisers for accounts with similar investment strategies, but that the administrative and operational responsibilities for the Subadvisers with respect to the Fund were also relatively higher. In light of this difference, the Directors concluded that the management fee paid by the Fund relative to the fees paid by the Subadvisers’ other clients was reasonable.

The Directors further evaluated the benefits of the advisory relationship to LMPFA and the Subadvisers, including, among others, the profitability of the relationship to LMPFA and the Subadvisers; the direct and indirect benefits that LMPFA and each Subadviser may receive


44		Western Asset Inflation Indexed Plus Bond Fund

from its relationship with the Fund, including any “fallout benefits,” such as reputational value derived from serving as investment manager or adviser to the Fund; and the affiliations between LMPFA, the Subadvisers and certain service providers for the Fund. In that connection, the Directors concluded that LMPFA and each Subadviser’s profitability was consistent with levels of profitability that had been determined by courts not to be excessive. The Directors noted that Western Asset does not have soft dollar arrangements.

Finally, the Directors considered, in light of the profitability information provided by LMPFA and Western Asset, the extent to which economies of scale would be realized by the Subadvisers as the assets of the Fund grow. The Directors determined that the lack of breakpoints was appropriate and that the management fee structure for the Fund is reasonable.

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

Based upon their review, the Directors, including all of the Independent Directors, determined, in the exercise of their business judgment, that they were generally satisfied with the quality of services being provided by LMPFA and the Subadvisers, but they would continue to closely monitor the performance of LMPFA and the Subadvisers; that the fees to be paid to the Subadvisers and LMPFA under the relevant Agreements were fair and reasonable, given the scope and quality of the services rendered by the Subadvisers and LMPFA; and that approval of the Agreements was in the best interest of the Fund and its shareholders.


Western Asset Inflation Indexed Plus Bond Fund		45

Additional information (unaudited)

Information about Directors and Officers

The business and affairs of Western Asset Inflation Indexed Plus 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 Emeritus (since 2016) and formerly, Senior Vice President, Finance and Chief Financial Officer (2009 to 2016) at University of Southern California
Number of portfolios in fund complex overseen³		9
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 of Tubman Truth Corp. (since 2015); President Emeritus (since 2015) and formerly, President (1987 to 2015) and Director (1990 to 2015) of LA84 (formerly Amateur Athletic Foundation of Los Angeles); Member of the International Olympic Committee (since 1986) and Member of Executive Board of International Olympic Committee (since 2013)
Number of portfolios in fund complex overseen³		9
Other directorships held during the past five years		None

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		Director and Advisor (since 2017) and former Executive Vice President and Chief Operating Officer (2002 to 2016) of Lowe Enterprises, Inc. (privately held real estate and hospitality firm); formerly, Partner, Arthur Andersen, LLP (1974 to 2002)
Number of portfolios in fund complex overseen³		9
Other directorships held during the past five years		Occidental Petroleum Corporation, California Resources Corporation and Public Storage


46		Western Asset Inflation Indexed Plus Bond Fund


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		Chairman of Great Public Schools Now (since 2015); Trustee of The Getty Trust (since 2005); Chairman of Excellent Education Development (since 2000); formerly, Chairman of Walt Disney Concert Hall, Inc. (1998 to 2006)
Number of portfolios in fund complex overseen³		9
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 LifeLock, Inc. (identity theft protection company) (since 2015); Director of Pinnacle Entertainment, Inc. (gaming and hospitality company) (since 2012); Director of CoreLogic, Inc. (information, analytics and business services company) (since 2012) ; formerly, Director of Orbitz Worldwide, Inc. (online travel company) (2007 to 2014)
Number of portfolios in fund complex overseen³		9
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		Partner of Munger, Tolles & Olson LLP (law partnership) (since 1968)
Number of portfolios in fund complex overseen³		11
Other directorships held during the past five years		Graham Holdings Company (formerly, The Washington Post Company) and Berkshire Hathaway, Inc.


Western Asset Inflation Indexed Plus Bond Fund		47

Additional information (unaudited) (cont’d)

Information about Directors and Officers


Officers⁵
Jane Trust, CFA‡
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 2016); Officer and/or Trustee/Director of 156 funds associated with Legg Mason Partners Fund Advisor, LLC (“LMPFA”) or its affiliates (since 2015); President and Chief Executive Officer of LMPFA (since 2015); formerly, Senior Vice President of LMPFA (2015); Director of ClearBridge, LLC (formerly, Legg Mason Capital Management, LLC) (2007 to 2014); 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); 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); formerly, Branch Chief, Division of Investment Management, U.S. Securities and Exchange Commission (2002 to 2006)


48		Western Asset Inflation Indexed Plus Bond Fund


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 — U.S. 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); AML Consultant, Rabobank Netherlands, (2009); First Vice President, Director of Marketing & Advertising Compliance and Manager of Communications Review Group at Citigroup Inc. (1996 to 2008)

Jenna Bailey Legg Mason 100 First Stamford Place, 6^th Floor, Stamford, CT 06902
Year of birth		1978
Position(s) held with Fund		Identity Theft Prevention Officer
Term of office¹ and length of time served²		Since 2015
Principal occupation(s) during past five years		Identity Theft Prevention Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2015); Compliance Officer of Legg Mason & Co. (since 2013); Assistant Vice President of Legg Mason & Co. (since 2011); formerly, Associate Compliance Officer of Legg Mason & Co. (2011 to 2013); Risk Manager of U.S. Distribution of Legg Mason & Co. (2007 to 2011)


Western Asset Inflation Indexed Plus Bond Fund		49

Additional information (unaudited) (cont’d)

Information about Directors and Officers


Officers⁵ cont’d
Jeanne M. Kelly Legg Mason 620 Eighth Avenue, 49^th Floor, New York, NY 10018
Year of birth		1951
Position(s) with Trust		Senior Vice President
Term of office¹ and length of time served²		Since 2007
Principal occupation(s) during past five years		Senior Vice President of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2007); Senior Vice President of LMPFA (since 2006); President and Chief Executive Officer of LMAS and LMFAM (since 2015); Managing Director of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005); formerly, Senior Vice President of LMFAM (2013 to 2015)

†	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”).

‡	Ms. Trust is an “interested person” of the Fund, as defined in the 1940 Act, because of her position with LMPFA and/or certain of its affiliates.

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.

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 7 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.


50		Western Asset Inflation Indexed Plus Bond Fund

Important tax information (unaudited)

The following information is provided with respect to the distributions paid during the taxable year ended December 31, 2016:


Record date:	Daily	12/7/2016
Payable date:	January 2016 - December 2016	12/8/2016
Interest from Federal Obligations	100.00%	—
Long-term capital gain dividend	—	$0.012110

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

The following distributions represent Qualified Short-Term Capital Gains eligible for exemption from U.S. withholding tax for nonresident aliens and foreign corporations:


Record date:			12/7/2016
Payable date:			12/8/2016
Short-term capital gains per share			$0.007110

Please retain this information for your records.


Western Asset Inflation Indexed Plus Bond Fund		51

Western Asset

Inflation Indexed Plus Bond Fund

Directors

Robert Abeles, Jr.

Anita L. DeFrantz

Ronald L. Olson

Avedick B. Poladian

William E. B. Siart

Chairman

Jaynie M. Studenmund

Investment manager

Legg Mason Partners Fund Advisor, LLC

Subadvisers

Western Asset Management Company

Western Asset Management Company Limited

Western Asset Management Company Ltd

Western Asset Management Company Pte. Ltd.

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

Western Asset Inflation Indexed Plus Bond Fund

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

Western Asset Inflation Indexed Plus 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) at www.leggmason.com/mutualfunds 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 Inflation Indexed Plus 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

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

WASX013142 2/17 SR17-3007

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 an “independent” Director 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 December 31, 2015 and December 31, 2016 (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 $199,044 in December 31, 2015 and in $178,441 December 31, 2016.

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 December 31, 2015 and $0 in December 31, 2016.

(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 $20,000 in December 31, 2015 and $20,200 in December 31, 2016. 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 $1,674 in December 31, 2015 and $3,975 in December 31, 2016, 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 December 31, 2015 and December 31, 2016; Tax Fees were 100% and 100% for December 31, 2015 and December 31, 2016; and Other Fees were 100% and 100% for December 31, 2015 and December 31, 2016.

(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 $337,766 in December 31, 2015 and $200,054 in December 31, 2016.

(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:		February 27, 2017

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:		February 27, 2017

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

Date:		February 27, 2017

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