N-14

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 23, 2009.

SECURITIES ACT FILE NO. 333-[            ]

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM N-14

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

PRE-EFFECTIVE AMENDMENT NO.	¨
POST-EFFECTIVE AMENDMENT NO.	¨

LEGG MASON PARTNERS INCOME TRUST

(Exact Name of Registrant as Specified in Charter)

55 WATER STREET, NEW YORK, NY 10041

(Address of Principal Executive Offices) (Zip Code)

1-800-822-5544

1-888-425-6432

(Registrant’s Area Code and Telephone Number)

R. JAY GERKEN

LEGG MASON & CO., LLC

620 8TH AVENUE

NEW YORK, NY 10018

(Name and Address of Agent for Service)

With Copies To:

ROGER P. JOSEPH, ESQ.	ROBERT I. FRENKEL, ESQ.
BINGHAM McCUTCHEN LLP	LEGG MASON & CO., LLC
ONE FEDERAL STREET	100 FIRST STAMFORD PLACE
BOSTON, MA 02110	STAMFORD, CT 06902

Approximate Date of Proposed Public Offering: As soon as practicable after this Registration Statement is declared effective.

It is proposed that this filing become effective April 22, 2009 pursuant to Rule 488.

Title of Securities Being Registered:

Class C shares, Class P shares and Class I shares

The Registrant has registered an indefinite amount of securities under the Securities Act of 1933, as amended, pursuant to Section 24(f) under the Investment Company Act of 1940, as amended; accordingly, no fee is payable herewith because of reliance upon Section 24(f).

LEGG MASON INCOME TRUST, INC.

100 Light Street

Baltimore, Maryland 21202

SPECIAL MEETING OF SHAREHOLDERS TO BE HELD JUNE 12, 2009

[                    ], 2009

Dear Shareholder:

You are being asked to vote on a proposed reorganization transaction related to one or more of the Legg Mason funds you own.

A chart summarizing the proposal to reorganize the funds is set forth below, and detailed information about each of the proposals is contained in the enclosed materials.

Your Fund	Surviving Fund
Legg Mason Investment Grade Income Portfolio	Legg Mason Partners Corporate Bond Fund
Legg Mason Limited Duration Bond Portfolio	Legg Mason Partners Short-Term Bond Fund

The Board of Directors of your fund has called a special meeting of shareholders (“Meeting”) for your fund to be held on June 12, 2009, at the offices of Legg Mason, Inc., 100 Light Street, 34^th Floor, Baltimore, Maryland 21202 at 10:00 a.m., Eastern time, in order to consider and vote on the proposed transaction regarding your fund(s). The transaction involves a proposal to reorganize your fund into a corresponding surviving fund (a “Reorganization”). The attached Proxy Statement/Prospectus only asks for your approval of the proposed Reorganization for your fund(s). After careful consideration, the Board of the respective fund(s) recommends that you vote “FOR” each proposed Reorganization.

Your vote is very important to us regardless of the number of shares you own. Whether or not you plan to attend the Meeting in person, please read the Proxy Statement/Prospectus and authorize a proxy to vote promptly. To authorize a proxy to cast your vote, simply complete, sign and return the Proxy Card in the enclosed postage-paid envelope or follow the instructions on the Proxy Card for voting by touch-tone telephone or on the internet.

It is important that your vote be received no later than the time of the Meeting.

Sincerely,

/s/ David R. Odenath

David R. Odenath, President

Legg Mason Income Trust, Inc.

LEGG MASON INCOME TRUST, INC.

IMPORTANT NEWS FOR SHAREHOLDERS

The enclosed combined Proxy Statement/Prospectus describes a proposal to reorganize your fund into a compatible fund. While we encourage you to read the full text of the enclosed combined Proxy Statement/Prospectus, here is a brief overview of the proposed fund reorganizations. Please refer to the more complete information contained elsewhere in the combined Proxy Statement/Prospectus about the reorganizations.

COMMON QUESTIONS ABOUT THE PROPOSED REORGANIZATIONS

Q. Why is a shareholder meeting being held?

A. The Board of your fund (the “Board”) has approved a reorganization, subject to shareholder approval, under which your fund would be combined with another Legg Mason-affiliated fund that has investment objectives and policies similar to your fund. If shareholders of your fund approve the reorganization, you would become a shareholder of the corresponding surviving fund shown in the chart below.

Your Fund	Surviving Fund
Legg Mason Investment Grade Income Portfolio	Legg Mason Partners Corporate Bond Fund
Legg Mason Limited Duration Bond Portfolio	Legg Mason Partners Short-Term Bond Fund

Q. How will a reorganization affect me?

A. If the reorganization of your fund is approved, your fund’s assets and liabilities will be combined with the assets and liabilities of the surviving fund and you will become a shareholder of the surviving fund. You will receive shares of the surviving fund having an aggregate net asset value equal to the aggregate net asset value of the shares of your fund that you own on the date of the reorganization.

If you own Primary Class shares of Legg Mason Investment Grade Income Portfolio, you will receive newly-created Class P shares of Legg Mason Partners Corporate Bond Fund. If you own Institutional Class shares, you will receive Class I shares.

If you own Primary Class shares of Legg Mason Limited Duration Bond Portfolio, you will receive Class C shares of Legg Mason Partners Short-Term Bond Fund. If you own Institutional Class shares, you will receive Class I shares.

Q. Why are the reorganizations being recommended?

A. Management’s goal is to end up with funds that are best positioned to seek superior long-term growth of assets and to structure funds in a manner designed to provide attractive long-term performance to shareholders. Each proposed reorganization would combine a fixed-income fund in the Legg Mason fund family with a similar fund in the Legg Mason Partners fund family. Your fund and the surviving fund have pursued similar investment strategies. Combining the two funds will create one larger fund, thereby increasing asset size, eliminating product duplication, and reducing investor confusion. In addition, these funds share portfolio managers from Western Asset Management Company. In the absence of the proposed reorganization, the two funds likely will continue to overlap each other in many respects.

Q. Are my Fund’s investment objectives and policies similar to those of the Surviving Fund?

A. Yes. There may be, however, certain differences in investment objectives, principal investment policies and strategies, and principal risks between your fund and the surviving fund. Please see “Comparison of Investment Objectives, Strategies, and Principal Risks of Investing in the Funds” in the Proxy Statement/Prospectus. The following chart provides a brief summary of some of the more significant of these differences, as considered by the Board.

I

Reorganization	Significant Differences in Objectives and Strategies
•      Legg Mason Investment Grade Income Portfolio into Legg Mason Partners Corporate Bond Fund	The funds have similar investment objectives. The surviving fund seeks as high a level of current income as is consistent with prudent investment management and preservation of capital and your fund’s investment objective is to seek a high level of current income through investment in a diversified portfolio of debt securities.
	The principal investment policies of the funds differ as follows: •      Each fund invests at least 80% of its net assets plus any borrowings for investment purposes in investment grade fixed-income securities. The surviving fund invests principally in corporate debt securities and related investments. •      Both funds may invest in securities of any maturity, but your fund currently expects to maintain a dollar-weighted average maturity of between five and twenty years. The surviving fund does not include among its principal policies or strategies an average maturity target or range. As of February 28, 2009, the average maturity of the surviving fund and of your fund were 11.7 years and 11.9 years, respectively. •      The surviving fund may invest in a variety of derivative transactions for hedging purposes, as a substitute for buying and selling securities, as a cash flow management technique or to enhance returns. The surviving fund may use derivatives and synthetic instruments to a substantial extent and even as its primary means of gaining investment exposures. Your fund may invest in a variety of transactions using derivatives, such as futures, options, warrants and swaps to enhance income or yield or to hedge its investments. Your fund will purchase a particular derivative instrument only if the fund is authorized to invest in the type of asset on which the instrument is based. In addition, your fund is subject to certain percentage limitations on the amount of assets it can invest in certain derivatives.
•      Legg Mason Limited Duration Bond Portfolio into Legg Mason Partners Short-Term Bond Fund	The funds have similar investment objectives. The surviving fund seeks current income, preservation of capital and liquidity and your fund’s investment objective is to maximize total return, consistent with prudent investment management by investing to obtain the specified average duration.
	The principal investment policies of the funds differ as follows: •      Your fund’s average modified duration will range within 25% of the duration of the Merrill Lynch 1-3 Year Treasury Index. The surviving fund may invest in securities of any maturity, but normally

II

Reorganization

Significant Differences in Objectives and Strategies

maintains a dollar-weighted average portfolio maturity of not more than three years. •      The surviving fund may invest in a variety of derivatives transactions for hedging purposes, as a substitute for buying or selling securities, as a cash flow technique or to enhance returns. The surviving fund may use derivatives and synthetic instruments to a substantial extent and even as its primary means of gaining investment exposures. Your fund may invest in derivatives such as futures, options and swaps both for hedging and non-hedging purposes, including for purposes of enhancing returns; buy or sell securities on a forward commitment basis; and engage in reverse repurchase agreements. Your fund will purchase a particular derivative instrument only if the fund is authorized to invest in the type of asset on which the instrument is based. In addition, your fund is subject to certain percentage limitations on the amount of assets it can invest in certain derivatives.

Q. How will the reorganizations affect Fund fees and expenses?

A. The chart below illustrates the effect of the reorganization on your fund’s fees and expenses:

Reorganization

Effect on Fees and Expenses

•      Legg Mason Investment Grade Income Portfolio into Legg Mason Partners Corporate Bond Fund

•      If you hold Primary Class shares of your fund, you will receive Class P shares of the surviving fund. Class P shares of the surviving fund will be newly-issued and are expected to have total operating expenses (1.18%) that are lower than the total operating expenses of Primary Class shares of your fund (1.28%), before giving effect to fee waivers. After giving effect to fee waivers, the net total operating expenses of Primary Class shares of your fund are lower than the expected net total operating expenses of Class P shares of the surviving fund. Management has agreed to contractually waive fees and/or reimburse ordinary expenses to limit net total annual operating expenses to 1.15% for Class P shares of the surviving fund until April 30, 2010. Currently, your fund’s manager voluntarily waives fees or reimburses expenses so that net total operating expenses for Primary Class shares do not exceed 1.00%. This waiver is voluntary and is expected to continue until April 30, 2009, but may be terminated at any time. Effective May 1, 2009, your fund’s manager voluntarily waives fees or reimburses expenses so that net total annual operating expenses for Primary Class shares do not exceed 1.15%. This waiver is voluntary and is expected to continue until the proposed

III

Reorganization	Effect on Fees and Expenses
	Reorganization is completed, but may be terminated at any time. •      If you hold Institutional Class shares of your fund, you will receive Class I shares of the surviving fund. The total operating expenses of Class I shares of the surviving fund are expected to be lower (0.73%) than the total operating expenses of Institutional Class shares of your fund (0.85%), before giving effect to fee waivers. After giving effect to fee waivers, the net total operating expenses of Institutional Class shares of your fund are lower than the expected net total operating expenses of Class I shares of the surviving fund. Management has agreed to contractually waive fees and/or reimburse ordinary expenses to limit net total annual operating expenses to 0.65% for Class I of the surviving fund until April 30, 2010. Currently, your fund’s manager voluntarily waives fees or reimburses expenses so that net total operating expenses for Institutional Class shares do not exceed 0.50%. This waiver is voluntary and is expected to continue until April 30, 2009, but may be terminated at any time. Effective May 1, 2009, your fund’s manager voluntarily waives fees or reimburses expenses so that net total operating expenses for Institutional Class shares do not exceed 0.65%. This waiver is voluntary and is expected to continue until the proposed Reorganization is completed, but may be terminated at any time. •      Neither Primary Class of your fund nor Class P of the surviving fund has a sales load. Neither Institutional Class of your fund nor Class I of the surviving fund has a sales load. •      The management fee of the surviving fund (0.55%) will be lower than your fund’s current management fee (0.60%).
•      Legg Mason Limited Duration Bond Portfolio into Legg Mason Partners Short-Term Bond Fund	•      If you hold Primary Class shares of your fund, you will receive Class C shares of the combined surviving fund. The total operating expenses of Class C shares of the surviving fund are expected to be lower (1.12%) than the total operating expenses of Primary Class shares of your fund (1.22%), before giving effect to fee waivers. After giving effect to fee waivers, the net total operating expenses of Primary Class shares of your fund are lower than the expected net total operating expenses of Class C shares of the surviving fund. Management of the surviving fund has agreed to contractually waive fees and/or reimburse ordinary expenses to limit net total annual operating expenses for Class C of the surviving fund to 1.10% until April 30, 2010. Until April 30, 2009,

IV

Reorganization

Effect on Fees and Expenses

your fund’s manager has agreed to contractually waive fees and/or reimburse ordinary expenses so that net total operating expenses for Primary Class shares do not exceed 1.00%. Effective May 1, 2009, your fund’s manager voluntarily waives fees or reimburses ordinary expenses so that net total annual operating expenses for Primary Class shares do not exceed 1.10%. This waiver is voluntary and is expected to continue until the proposed Reorganization is completed, but may be terminated at any time. •      If you hold Institutional Class shares of your fund, you will receive Class I shares of the surviving fund. The total operating expenses of Class I shares of the surviving fund are expected to be lower (0.52%) than the total operating expenses of Institutional Class shares of your fund (0.77%), before giving effect to fee waivers. After giving effect to fee waivers, the net total operating expenses of Institutional Class shares your fund are lower than the expected net total operating expenses of Class I shares of the surviving fund. Until April 30, 2009, your fund’s manager has agreed to contractually waive fees and/or reimburse ordinary expenses so that net total operating expenses for Institutional Class shares do not exceed 0.50%. Effective May 1, 2009, your fund’s manager voluntarily waives fees or reimburses ordinary expenses so that net total annual operating expenses for Institutional Class shares do not exceed 0.51%. This waiver is voluntary and is expected to continue until the proposed Reorganization is completed, but may be terminated at any time. •      Neither Primary Class of your fund nor Class C of the surviving fund has a sales load. Neither Institutional Class of your fund nor Class I of the surviving fund has a sales load. •      The management fee of the surviving fund (0.45%) will be equal to your fund’s current management fee.

Please see “Comparison of Fees and Expenses” in the Proxy Statement/Prospectus for a detailed breakdown of the fees and expenses paid by your fund in comparison with those paid by the surviving fund.

Q. Will I have to pay any sales load, charge or other commission in connection with a reorganization?

A. No. No sales load, contingent deferred sales charge, commission, redemption fee or other transactional fee will be charged as a result of the reorganizations. You will receive shares of the surviving fund having an aggregate net asset value equal to the aggregate net asset value of the shares of your fund that you own on the date of the reorganization. The Board will adopt the valuation procedures of the surviving fund before the Closing Date of the reorganization.

V

Q. What if I redeem or exchange my shares before the closing of the reorganization of my Fund?

A. Redemptions or exchanges of fund shares that occur before the closing of the reorganization will be processed according to your fund’s policies and procedures in effect at the time of the redemption or exchange.

Q. Will my shareholder privileges change as a result of the reorganization of my Fund?

A. Generally, no. If you hold Primary Class shares of Legg Mason Investment Grade Income Portfolio, you will receive Class P shares of Legg Mason Partners Corporate Bond Fund. If you hold Primary Class shares of Legg Mason Limited Duration Bond Portfolio, you will receive Class C shares of Legg Mason Partners Short-Term Bond Fund. If you hold Institutional Class shares of your fund, you will receive Class I shares of the surviving fund. After the Reorganization, Class I shares of Legg Mason Partners Short-Term Bond Fund will be closed to new investors, but Class I shareholders will be permitted to make additional investments in Class I shares.

Your current privilege to exchange shares of your fund for shares of other Legg Mason funds will be replaced with new exchange privileges with funds sold by the surviving fund’s distributor (a larger number of funds), except that Class P shares of Legg Mason Partners Corporate Bond Fund will not have exchange privileges. Primary Class shares are not currently exchangeable for Legg Mason Partners funds.

Please see “Comparison of Sales Loads, Distribution and Shareholder Servicing Arrangements and Purchase, Redemption and Exchange Policies and Procedures”, and Appendix B, “Purchases, Redemptions and Exchanges of Fund Shares; Other Shareholder Information” in the Proxy Statement/Prospectus for a description of the differences among fund classes.

Q. Can I purchase additional shares in my Fund prior to the reorganization?

A. Yes. If the reorganization is approved for your fund, it will close to new purchases and exchanges five business days prior to the closing of the reorganization.

Q. Will I have to pay any taxes as a result of the reorganizations?

A. Each reorganization is intended to qualify as a tax-free transaction for federal income tax purposes. Assuming the reorganization of your fund qualifies for such treatment, you will not recognize a gain or loss for federal income tax purposes as a result of the reorganization. As a condition to the closing of the reorganization, your fund will receive an opinion of Bingham McCutchen LLP to the effect that the reorganization will qualify for such treatment. Opinions of counsel are not binding on the Internal Revenue Service or the courts. You should talk to your tax advisor about any state, local and other tax consequences of your fund’s reorganization.

Q. What happens if shareholders of one Fund approve its reorganization, while shareholders of the other Fund do not?

A. Neither proposed reorganization is contingent upon the approval of the other reorganization. Thus, if shareholders of your fund approve the reorganization of your fund, your fund will be reorganized into the surviving fund even if shareholders of the other fund do not approve the reorganization of their fund.

Q. Who will pay for the reorganizations?

A. Your fund’s manager will be responsible for 100% of the fees, costs and expenses in connection with the reorganization allocated to your fund and 50% of the fees, costs and expenses allocated to the surviving fund. The surviving fund will bear 50% of such fees and expenses allocated to the surviving fund. Any transaction costs associated with repositioning a fund’s portfolio in connection with the reorganization will be borne by that fund.

Q. How does the board recommend that I vote?

A. The Board, including all of the independent Board members, unanimously recommends that you vote FOR the reorganization of your fund.

Q. What happens if a reorganization is not approved?

A. If the shareholders of your fund do not approve the reorganization of your fund, then you will remain a shareholder of your fund.

VI

Q. I am an investor who holds a small number of shares. Why should I vote?

A. Your vote makes a difference. If many shareholders like you fail to vote their proxies, your fund may not receive enough votes to go forward with the shareholder meeting, and additional costs will be incurred to solicit additional proxies.

Q. When is the reorganization of my Fund expected to happen?

A. If shareholders approve the reorganization of your fund, the reorganization of your fund is expected to occur on or about June 19, 2009.

Q. How can I vote?

A. In addition to voting in person at the Meeting or authorizing a proxy to vote by mail by returning the enclosed proxy card, you also may authorize a proxy to vote by either touch-tone telephone or online via the Internet, as follows:

To authorize a proxy to vote by touch-tone telephone:	To authorize a proxy to vote by Internet:
(1)    Read the Proxy Statement/Prospectus and have your Proxy Card at hand.	(1)    Read the Proxy Statement/Prospectus and have your Proxy Card at hand.
(2)    Call the toll-free number that appears on your Proxy Card.	(2)    Go to the website that appears on your Proxy Card.
(3)    Enter the control number set out on the Proxy Card and follow the simple instructions.	(3)    Enter the control number set out on the Proxy Card and follow the simple instructions.

Q. Who gets to vote?

A. If you owned shares of your fund at the close of business on April 15, 2009, you are entitled to vote those shares, even if you are no longer a shareholder of the fund.

Q. Whom do I call if I have questions?

A. If you need more information or have any questions about how to authorize a proxy to cast your vote, please call Broadridge Investor Communications Solutions, Inc., your fund’s proxy solicitor, at 866-586-0633.

Your vote is important. Please authorize a proxy to vote promptly to avoid the additional expense of another solicitation.

VII

LEGG MASON INCOME TRUST, INC.

a Maryland corporation

Legg Mason Investment Grade Income Portfolio

Legg Mason Limited Duration Bond Portfolio

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

TO BE HELD ON JUNE 12, 2009

Please take notice that a Special Meeting of Shareholders (the “Meeting”) of each of the above-referenced Funds (each, an “Acquired Fund”), will be held at the offices of Legg Mason, Inc., 100 Light Street, 34^th Floor, Baltimore, Maryland 21202, on June 12, 2009, at 10:00 a.m., Eastern time, for the following purposes:

PROPOSAL 1:	To consider and vote upon an Agreement and Plan of Reorganization, providing for (i) the acquisition of all of the assets of an Acquired Fund, in exchange for the assumption of all of the liabilities of an Acquired Fund and for shares of the corresponding Acquiring Fund listed opposite its name in the following chart to be distributed to the shareholders of the Acquired Fund and (ii) the subsequent termination of the Acquired Fund:
	Acquired Fund	Acquiring Fund
	Legg Mason Investment Grade Income Portfolio	Legg Mason Partners Corporate Bond Fund
	Legg Mason Limited Duration Bond Portfolio	Legg Mason Partners Short-Term Bond Fund
PROPOSAL 2:	To transact such other business as may properly come before the Meeting or any adjournments or postponements thereof.

The appointed proxies will vote in their discretion on any other business as may properly come before the Meeting or any adjournments or postponements thereof.

Shareholders of record of an Acquired Fund at the close of business on April 15, 2009 are entitled to notice of, and to vote at, the Meeting and at any adjournments or postponements thereof.

YOUR VOTE ON THIS MATTER IS IMPORTANT. PLEASE AUTHORIZE A PROXY TO VOTE YOUR SHARES PROMPTLY BY SIGNING AND DATING THE ENCLOSED PROXY CARD AND RETURNING IT IN THE ACCOMPANYING POSTAGE-PAID RETURN ENVELOPE OR BY FOLLOWING THE ENCLOSED INSTRUCTIONS TO AUTHORIZE A PROXY TO VOTE YOUR SHARES BY TELEPHONE OR OVER THE INTERNET.

By order of the Board of Directors,

Richard M. Wachterman

Secretary

Legg Mason Income Trust, Inc.

[            ], 2009

I

The information in this Proxy Statement/Prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Proxy Statement/Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED MARCH 23, 2009

PROXY STATEMENT/PROSPECTUS

[            ], 2009

PROSPECTUS FOR:

LEGG MASON PARTNERS INCOME TRUST

LEGG MASON PARTNERS CORPORATE BOND FUND

LEGG MASON PARTNERS SHORT-TERM BOND FUND

(EACH, AN “ACQUIRING FUND,” AND, COLLECTIVELY, THE “ACQUIRING FUNDS”)

55 Water Street

New York, New York 10041

1-800-822-5544

1-888-425-6432

PROXY STATEMENT FOR:

LEGG MASON INCOME TRUST, INC.

LEGG MASON INVESTMENT GRADE INCOME PORTFOLIO

LEGG MASON LIMITED DURATION BOND PORTFOLIO

(EACH, AN “ACQUIRED FUND,” AND, COLLECTIVELY, THE “ACQUIRED FUNDS”)

(EACH A “FUND” AND, COLLECTIVELY, THE “FUNDS”)

100 Light Street

Baltimore, Maryland 21202

1-800-822-5544

This combined Proxy Statement and Prospectus (the “Proxy Statement/Prospectus”) is being furnished in connection with the solicitation of proxies by the Board of Directors (the “Board”) of the Acquired Funds for a joint Special Meeting of Shareholders of the Acquired Funds (the “Meeting”). The Meeting will be held on June 12, 2009, at 10:00 a.m., Eastern time, at the offices of Legg Mason, Inc., 100 Light Street, 34^th Floor, Baltimore, Maryland 21202. At the Meeting, shareholders of each Acquired Fund will be asked to consider and act upon the following:

PROPOSAL 1: To approve an Agreement and Plan of Reorganization (a “Reorganization Agreement”), providing for (i) the acquisition of all of the assets of an Acquired Fund, in exchange for the assumption of all of the liabilities of an Acquired Fund and for shares of the corresponding Acquiring Fund listed opposite its name in the following chart to be distributed to the shareholders of the Acquired Fund (each, a “Reorganization” and collectively, the “Reorganizations”) and (ii) the subsequent termination of the Acquired Fund:

Acquired Fund	Acquiring Fund
Legg Mason Investment Grade Income Portfolio	Legg Mason Partners Corporate Bond Fund
Legg Mason Limited Duration Bond Portfolio	Legg Mason Partners Short-Term Bond Fund

PROPOSAL 2: To transact such other business as may properly come before the Meeting or any adjournments or postponements thereof.

Each Reorganization Agreement contemplates the transfer of all of the assets of an Acquired Fund to the corresponding Acquiring Fund, in exchange for the assumption of all of the liabilities of such Acquired Fund by the corresponding Acquiring Fund and for shares of the corresponding Acquiring Fund having an aggregate net asset value equal to the aggregate net asset value of such Acquired Fund. Each Acquired Fund would then distribute to its shareholders the portion of the shares of the corresponding Acquiring Fund to which each such shareholder is entitled, with each shareholder receiving shares of the corresponding Acquiring Fund having an aggregate net asset value equal to the aggregate net asset value of the shares of the Acquired Fund held by that shareholder as of the close of business on the day of the closing of the Reorganization. Thereafter, each Acquired Fund would be terminated.

As a shareholder of an Acquired Fund, you are being asked to consider and vote upon the approval of a Reorganization Agreement pursuant to which the Reorganization of your Fund would be accomplished. Because each Reorganization will result in shareholders of an Acquired Fund holding shares of the corresponding Acquiring Fund, this Proxy Statement also serves as a Prospectus for each of the Acquiring Funds.

If the Reorganization of an Acquired Fund is approved, the shareholders of the Acquired Fund will receive shares of the corresponding Acquiring Fund according to the following chart:

Acquired Fund – Share Class Exchanged	Acquiring Fund – Share Class Received
Legg Mason Investment Grade Income Portfolio Primary Class	Legg Mason Partners Corporate Bond Fund Class P
Legg Mason Investment Grade Income Portfolio Institutional Class	Legg Mason Partners Corporate Bond Fund Class I
Legg Mason Limited Duration Bond Portfolio Primary Class	Legg Mason Partners Short-Term Bond Fund Class C
Legg Mason Limited Duration Bond Portfolio Institutional Class	Legg Mason Partners Short-Term Bond Fund Class I

No sales charge will be imposed on the shares of the Acquiring Fund received by Acquired Fund shareholders in connection with the Reorganization. For more information about the classes of shares offered by each of the Funds, see “Comparison of Sales Loads, Distribution and Shareholder Servicing Arrangements” below and “Purchases, Redemptions and Exchanges of Fund Shares; Other Shareholder Information” in Appendix B.

Each Reorganization is being structured as a tax-free reorganization for federal income tax purposes. See “Information about the Proposed Reorganizations—Federal Income Tax Consequences” below. Shareholders should consult their tax advisors to determine the actual impact of the Reorganizations in light of their individual tax circumstances.

2

Each Fund is a series of an open-end management investment company. The investment objectives and principal investment strategies of each Acquired Fund are similar to those of the corresponding Acquiring Fund. There may be certain differences, however, in investment objectives, policies, strategies and principal risks. Please see “Comparison of Investment Objectives, Strategies and Principal Risks of Investing in the Funds” in this Proxy Statement/Prospectus.

Prior to September 2, 2008, Legg Mason Partners Corporate Bond Fund was named Legg Mason Partners Investment Grade Bond Fund and Legg Mason Partners Short-Term Bond Fund was named Legg Mason Partners Short-Term Investment Grade Bond Fund.

This Proxy Statement/Prospectus, which you should retain for future reference, sets forth concisely the information about each of the Acquiring Funds that a prospective investor should know before investing. A Statement of Additional Information (the “Reorganization SAI”) dated [                    ] relating to this Proxy Statement/Prospectus and the Reorganizations has been filed with the Securities and Exchange Commission (the “SEC”) and is incorporated by reference into this Proxy Statement/Prospectus. A copy of the Reorganization SAI is available upon request and without charge by writing to the applicable Acquiring Fund at the address listed above or calling 1-800-822-5544 or 1-888-425-6432.

For more information regarding the Funds, see the current prospectuses and statements of additional information of the Funds (the “Fund SAIs”), filed with the SEC on the dates listed in Appendix J; the prospectuses of the Acquired Funds and each Fund SAI are incorporated into this Proxy Statement/Prospectus by reference.

The most recent annual report and the semi-annual report next succeeding such annual report, if any, for each Fund, which highlight certain important information such as investment performance and expense and financial information, have been filed with the SEC. You may request a copy of the prospectus, Fund SAI, annual report and semi-annual report for each Fund by calling 1-800-822-5544 or 1-888-425-6432 (for the Acquiring Funds) or 1-800-822-5541 (for the Acquired Funds), by writing to the Funds at the addresses listed above or by visiting the Funds’ website at www.leggmason.com/individualinvestors.

In addition, you can copy and review this Proxy Statement/Prospectus and the complete filing on Form N-14 containing the Proxy Statement/Prospectus and any of the above-referenced documents at the SEC’s Public Reference Room in Washington, DC. You may obtain information about the operation of the Public Reference Room by calling the SEC at (202) 551-8090. Reports and other information about each Fund are available on the EDGAR Database on the SEC’s Internet site at www.sec.gov. You may also obtain copies of this information, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, 100 F Street, N.E., Washington, DC 20549.

A copy of the form of Reorganization Agreement pertaining to each Reorganization accompanies this Proxy Statement/Prospectus as Appendix A1 or Appendix A2.

The information contained herein concerning each Acquired Fund has been provided by, and is included herein in reliance upon, that Acquired Fund. The information contained herein concerning each Acquiring Fund has been provided by, and is included herein in reliance upon, that Acquiring Fund.

The Securities and Exchange Commission has not approved or disapproved these securities nor passed upon the accuracy or adequacy of this Proxy Statement/Prospectus. Any representation to the contrary is a criminal offense.

3

TABLE OF CONTENTS

	Page
SUMMARY	1
Proposed Reorganizations	1
Certain Defined Terms Used in this Proxy Statement/Prospectus	2
Comparison of Investment Objectives and Principal Investment Strategies	2
Effect on Expenses	3
Comparison of Fees and Expenses	5
Comparison of Sales Loads, Distribution and Shareholder Servicing Arrangements and Purchase, Redemption and Exchange Policies and Procedures	13
COMPARISON OF INVESTMENT OBJECTIVES, STRATEGIES AND PRINCIPAL RISKS OF INVESTING IN THE FUNDS	14
Legg Mason Investment Grade Income Portfolio (Acquired Fund) and Legg Mason Partners Corporate Bond Fund (Acquiring Fund)	14
Investment Objectives	14
Primary Investment Policies and Strategies	14
Risk Factors	15
Fundamental Investment Restrictions	18
Legg Mason Limited Duration Bond Portfolio (Acquired Fund) and Legg Mason Partners Short-Term Bond Fund (Acquiring Fund)	20
Investment Objectives	20
Primary Investment Policies and Strategies	21
Risk Factors	21
Fundamental Investment Restrictions	24
INFORMATION ABOUT THE PROPOSED REORGANIZATIONS	28
The Reorganization Agreements	28
Description of the Acquiring Funds’ Shares	29
Reasons for the Reorganizations and Board Considerations	29
Federal Income Tax Consequences	30
Information Regarding Tax Capital Loss Carryforwards	31
TERMINATION OF THE ACQUIRED FUNDS	32
PORTFOLIO SECURITIES	32
INFORMATION ABOUT MANAGEMENT OF THE ACQUIRING FUNDS	33
Investment Manager and Subadviser	33
Certain Legal Proceedings	34
Portfolio Managers of the Acquiring Funds	36
ADDITIONAL INFORMATION ABOUT THE ACQUIRED FUNDS AND THE ACQUIRING FUNDS	37
Performance of the Funds	37
Financial Highlights	37
Distribution Arrangements	38
FORM OF ORGANIZATION	38
CAPITALIZATION	39
DIVIDENDS AND DISTRIBUTIONS	40
OTHER BUSINESS	41
SHAREHOLDER COMMUNICATIONS WITH THE BOARDS	41
VOTING INFORMATION	41
Proxy Solicitation	42
Quorum	42
Vote Required	42
Effect of Abstentions and Broker “Non-Votes”	42
Adjournments	43
Future Shareholder Proposals	43
Record Date and Outstanding Shares	43

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INDEX OF APPENDICES

APPENDIX A1:	Form of Agreement and Plan of Reorganization—Legg Mason Investment Grade Income Portfolio and Legg Mason Partners Corporate Bond Fund	A1-1
APPENDIX A2:	Form of Agreement and Plan of Reorganization—Legg Mason Limited Duration Bond Portfolio and Legg Mason Partners Short-Term Bond Fund	A2-1
APPENDIX B:	Purchases, Redemptions and Exchanges of Fund Shares; Other Shareholder Information	B-1
APPENDIX C:	Comparison of Investment Objectives, Principal Investment Strategies and Management	C-1
APPENDIX D1:	Financial Highlights of Legg Mason Partners Corporate Bond Fund	D1-1
APPENDIX D2:	Financial Highlights of Legg Mason Partners Short-Term Bond Fund	D2-1
APPENDIX E:	Historical Performance for Each Fund	E-1
APPENDIX F:	Similarities and Differences in the Forms of Organization of the Acquired Funds and the Acquiring Funds	F-1
APPENDIX G:	5% Shareholders of the Acquired Funds and the Acquiring Funds	G-1
APPENDIX H:	Comparison of Board Composition	H-1
APPENDIX I:	Portfolio Manager Compensation	I-1
APPENDIX J:	Dates of Prospectuses, Statements of Additional Information and Shareholder Reports	J-1
APPENDIX K:	Instructions for Signing the Proxy Card	K-1

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SUMMARY

This summary is qualified in its entirety by reference to the additional information contained elsewhere in this Proxy Statement/Prospectus and each Reorganization Agreement, the forms of which are attached to this Proxy Statement/Prospectus as Appendix A1 and Appendix A2.

Proposed Reorganizations

At meetings held on February 12-13 and February 18-19, 2009, respectively, the Board of the Acquiring Funds and the Board of the Acquired Funds, including all of the Board members who are not “interested persons” of the Funds under the Investment Company Act of 1940, as amended (the “1940 Act”) (“Independent Board Members”), unanimously approved the relevant Reorganization Agreement. Each Reorganization Agreement provides for:

1. the transfer of all of the assets of an Acquired Fund, in exchange for the assumption of all of the liabilities of the applicable Acquired Fund and for shares of the corresponding Acquiring Fund listed opposite its name in the following chart having an aggregate net asset value equal to the aggregate net asset value of the shares of the Acquired Fund:

Acquired Fund	Acquiring Fund
Legg Mason Investment Grade Income Portfolio	Legg Mason Partners Corporate Bond Fund
Legg Mason Limited Duration Bond Portfolio	Legg Mason Partners Short-Term Bond Fund

2. the distribution of shares of the Acquiring Fund to the shareholders of the Acquired Fund; and

3. the termination of the Acquired Fund.

Each Reorganization Agreement is subject to approval by the shareholders of the applicable Acquired Fund. Each Reorganization, if approved by shareholders of the applicable Acquired Fund, is scheduled to be effective as of the close of business on June 19, 2009, or on such later date as the parties may agree (“Closing Date”). As a result of the Reorganization of an Acquired Fund, each shareholder of that Acquired Fund will become the owner of the number of full and fractional shares of the corresponding Acquiring Fund having an aggregate net asset value equal to the aggregate net asset value of the shareholder’s Acquired Fund shares as of the close of business on the Closing Date. Primary Class shareholders of Legg Mason Investment Grade Income Portfolio will receive Class P shares of Legg Mason Corporate Bond Fund. Primary Class shareholders of Legg Mason Limited Duration Bond Portfolio will receive Class C shares of Legg Mason Partners Short-Term Bond Fund. Institutional Class shareholders of each Acquired Fund will receive Class I shares of the corresponding Acquiring Fund. See “Information about the Proposed Reorganizations” below. For more information about the classes of shares offered by the Funds, see “Comparison of Sales Loads, Distribution and Shareholder Servicing Arrangements and Purchase, Redemption and Exchange Policies and Procedures” below and “Purchases, Redemptions and Exchanges of Fund Shares; Other Shareholder Information” in Appendix B.

For the reasons set forth below in “Information about the Proposed Reorganizations—Reasons for the Reorganizations and Board Considerations,” the Board of the Acquired Funds, including all of the Independent Board Members, has concluded that the Reorganization of each Acquired Fund would be in the best interests of that Acquired Fund and its shareholders and that the interests of that Acquired Fund’s existing shareholders would not be diluted as a result of the Reorganization. The Board, therefore, is hereby submitting the Reorganization Agreements to the shareholders of the Acquired Funds and recommending that shareholders of each Acquired Fund vote “FOR” the Reorganization Agreement effecting the Reorganization for that Fund. The Board of each Acquiring Fund has also approved the Reorganization on behalf of the corresponding Acquiring Fund.

Approval of the Reorganization of an Acquired Fund will require, if a quorum is present at the Meeting with respect to that Acquired Fund, the affirmative vote of a majority of the outstanding voting securities of the Acquired Fund, as defined in the 1940 Act. A “majority of the outstanding voting securities” is defined in the 1940 Act as the lesser of (a) 67% or more of the voting securities present at the Meeting, if the holders of more than 50% of the outstanding voting securities of the Acquired Fund are present at the Meeting or represented by proxy, or (b) more than 50% of the outstanding voting securities of the Acquired Fund. Neither of the proposed Reorganizations is contingent upon the approval of the other Reorganization. See “Voting Information” below.

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As a condition to the closing of each Reorganization, each party to the applicable Reorganization (other than Legg Mason Partners Fund Advisor, LLC (“LMPFA”)) must receive an opinion of Bingham McCutchen LLP to the effect that the Reorganization will be treated as a “reorganization” within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the “Code”). Accordingly, subject to the limited exceptions described below under the heading “Information about the Proposed Reorganizations—Federal Income Tax Consequences”, it is expected that neither of the Acquired Funds nor its shareholders will recognize gain or loss as a result of its Reorganization, and that the aggregate tax basis of the Acquiring Fund shares received by each Acquired Fund shareholder will be the same as the aggregate tax basis of the shareholder’s Acquired Fund shares. For more information about the federal income tax consequences of the Reorganizations, see “Information about the Proposed Reorganizations—Federal Income Tax Consequences” below.

Some of the portfolio assets of an Acquired Fund may be sold in connection with the Reorganization of that Acquired Fund. The tax impact of such sales will depend on the difference between the price at which such portfolio assets are sold and the Acquired Fund’s tax basis in such assets. Any capital gains recognized in these sales on a net basis, after the application of any available capital loss carryforwards, will be distributed to the Acquired Fund shareholders as capital gain dividends (to the extent of net realized long-term capital gains distributed) and/or ordinary dividends (to the extent of net capital gain, i.e., the excess of net long-term capital gain over net short-term capital loss) during or with respect to the Acquired Fund’s taxable year that ends on the Closing Date, and such distributions will be taxable to shareholders. In addition, each Acquired Fund will distribute to its shareholders, in one or more taxable distributions, all of the net investment income and net capital gain realized in the normal course of its operations and not previously distributed for taxable years ending on or prior to the Closing Date. The transaction costs associated with repositioning an Acquired Fund’s portfolio in connection with its Reorganization will be borne by such Acquired Fund.

Certain Defined Terms Used in this Proxy Statement/Prospectus

Each Acquired Fund is a series of a Maryland corporation. Each Acquiring Fund is a series of a Maryland business trust. For ease of reference and clarity of presentation, shares of common stock of each Acquired Fund and shares of beneficial interest of each Acquiring Fund are hereinafter referred to as “shares”, and holders of shares are hereinafter referred to as “shareholders”; the Board of Trustees overseeing the Acquiring Funds and the Board of Directors overseeing the Acquired Funds are each referred to herein as a “Board” and collectively as the “Boards”; the Declaration of Trust governing the Acquiring Funds and the Articles of Incorporation governing the Acquired Funds, each as amended and supplemented, are referred to herein as a “charter”; and the term “termination” refers to the termination and redemption for purposes of a series of a Maryland corporation.

Comparison of Investment Objectives and Principal Investment Strategies

This section will help you compare the investment objectives and principal investment strategies of each Acquired Fund and the corresponding Acquiring Fund. Please be aware that this is only a brief discussion. More detailed comparisons of each of the Funds, including risks, appear later in this Proxy Statement/Prospectus, and a chart providing a side-by-side comparison of the Funds and their investment objectives, principal investment strategies and management can be found in Appendix C. These discussions include material differences in each Fund’s “fundamental” investment policies, meaning those that can be changed only by shareholder vote. In each case, the investment objectives and principal investment strategies of the Acquiring Fund will apply to the combined Fund following the Reorganization. More information can be found in each Fund’s prospectus and Fund SAI.

Legg Mason Investment Grade Income Portfolio (Acquired Fund) and Legg Mason Partners Corporate Bond Fund (Acquiring Fund)

The Funds have similar investment objectives. The Acquiring Fund seeks as high a level of current income as is consistent with prudent investment management and preservation of capital. The Acquired Fund seeks a high level of current income through investment in a diversified portfolio of debt securities.

Under normal conditions, each Fund invests at least 80% of its assets, plus any borrowings for investment purposes, in debt and fixed-income securities of various maturities. Both Funds anticipate that all securities purchased will be investment grade, i.e., rated at the time of investment BBB/Baa or higher by at least one nationally recognized statistical rating organization (an “NRSRO”) or, if not rated by any NRSRO, determined by the portfolio managers to be of comparable quality.

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Primary differences between the Funds include:

• Both Funds may invest in securities of any maturity, but the Acquired Fund currently expects to maintain a dollar-weighted average maturity of between five and twenty years. The Acquiring Fund does not include among its principal policies or strategies an average maturity target or range. As of February 28, 2009, the average maturity of the Acquiring Fund and the Acquired Fund were 11.7 and 11.9, respectively.

• Instead of investing directly in particular securities, the Acquiring Fund may gain exposure to a security, an issuer, an index or basket of securities, or a market by investing through the use of instruments such as derivatives, including credit default swaps, futures contracts, synthetic instruments and other instruments that are intended to provide similar economic exposure. The Acquiring Fund may use one or more types of such instruments to a substantial extent and even as its primary means of gaining investment exposures. The Acquiring Fund may engage in a variety of transactions using derivatives, such as futures, options, swaps (including credit default swaps) and warrants and may purchase mortgage-related obligations and other derivative instruments. The Acquired Fund may invest in a variety of transactions using derivatives, such as futures, options, warrants and swaps to enhance income or yield or to hedge its investments. The Acquired Fund will purchase a particular derivative instrument only if the Fund is authorized to invest in the type of asset on which the instrument is based. In addition, the Acquired Fund is subject to certain percentage limitations on the amount of assets it can invest in derivatives.

Legg Mason Limited Duration Bond Portfolio (Acquired Fund) and Legg Mason Partners Short-Term Bond Fund (Acquiring Fund)

The Funds have similar investment objectives. The Acquiring Fund seeks current income, preservation of capital and liquidity. The Acquired Fund seeks to maximize total return, consistent with prudent investment management by investing to obtain the specified average duration.

Under normal market conditions, each Fund will invest at least 80% of its net assets, plus any borrowings for investment purposes, in debt and fixed-income securities rated at the time of purchase by a NRSRO within one of the top four categories, or, if unrated, judged by the subadviser to be of comparable credit quality.

Primary differences between the Funds include:

• The Acquired Fund’s average modified duration will range within 25% of the duration of the Merrill Lynch 1-3 Year Treasury Index. The Acquiring Fund may invest in securities of any maturity, but normally maintains a dollar-weighted average portfolio maturity of not more than three years.

• Instead of investing directly in particular securities, the Acquiring Fund may gain exposure to a security, an issuer, an index or basket of securities, or a market by investing through the use of instruments such as derivatives, including credit default swaps, futures contracts, synthetic instruments and other instruments that are intended to provide similar economic exposure. The Acquiring Fund may use one or more types of such instruments to a substantial extent and even as its primary means of gaining investment exposures. The Acquiring Fund may engage in a variety of transactions using derivatives, such as futures, options, swaps (including credit default swaps) and warrants and may purchase mortgage-related obligations and other derivative instruments. The Acquired Fund may invest in derivatives such as futures, options and swaps both for hedging and non-hedging purposes, including for purposes of enhancing returns; buy or sell securities on a forward commitment basis; and engage in reverse repurchase agreements. The Acquired Fund will purchase a particular derivative instrument only if the Fund is authorized to invest in the type of asset on which the instrument is based. In addition, the Acquired Fund is subject to certain percentage limitations on the amount of assets it can invest in derivatives.

• The Acquired Fund may invest up to 20% of its assets in non-debt securities. The Acquiring Fund does not have a comparable strategy.

Effect on Expenses

This section summarizes the effect of the Reorganizations on the fees and expenses of the Acquired Funds.

Primary Class shareholders of Legg Mason Investment Grade Income Portfolio will receive Class P shares of Legg Mason Corporate Bond Fund. Primary Class shareholders of Legg Mason Limited Duration Bond Portfolio will receive Class C shares of Legg Mason Partners Short-Term Bond Fund. Institutional Class shareholders of each Acquired Fund will receive Class I shares of the corresponding Acquiring Fund.

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Legg Mason Investment Grade Income Portfolio (Acquired Fund) and Legg Mason Partners Corporate Bond Fund (Acquiring Fund)

As a result of the Reorganization:

• Total annual operating expenses paid by Acquired Fund Primary Class shareholders are expected to decline from 1.28% (before giving effect to the voluntary fee waivers in effect for the Acquired Fund until April 30, 2009) to 1.18% (before giving effect to the contractual fee waivers in effect for Class P shares of the Acquiring Fund). Net total annual operating expenses paid by Acquired Fund Primary Class shareholders are expected to increase from 1.00% (after giving effect to the voluntary fee waiver in effect for the Acquired Fund until April 30, 2009) to 1.15% (after giving effect to a contractual fee waiver in effect for Class P shares of the Acquiring Fund).

• Total annual operating expenses paid by Acquired Fund Institutional Class shareholders are expected to decline from 0.85% (before giving effect to the voluntary fee waivers in effect for the Acquired Fund until April 30, 2009) to 0.73% (before giving effect to the contractual fee waivers in effect for Class I shares of the Acquiring Fund). Net total annual operating expenses paid by Acquired Fund Institutional Class shareholders are expected to increase from 0.50% (after giving effect to the voluntary fee waiver in effect for the Acquired Fund until April 30, 2009) to 0.65% (after giving effect to the contractual fee waivers in effect for Class I shares of the Acquiring Fund).

Management has agreed to contractually waive fees and/or reimburse expenses (other than interest, brokerage, taxes and extraordinary expenses) to limit total operating expenses to 1.15% for Class P shares and 0.65% for Class I shares of the combined Fund from the Closing Date of the Reorganization until April 30, 2010. Under this contractual agreement, the manager will be permitted to recapture amounts previously waived or reimbursed by the manager to the Acquiring Fund during the previous 12 months if the Acquiring Fund’s total annual operating expenses have fallen to a level below the contractual expense cap. In no case will the manager recapture any amount that would result, on any particular business day of the Acquiring Fund, in the Acquiring Fund’s total annual operating expenses exceeding the contractual expense cap and in no case will the aggregate amounts recaptured by the manager exceed the amounts previously waived or reimbursed by the manager. Prior to the Reorganization, no voluntary or contractual fee waivers are in effect for the Acquiring Fund.

Note that the manager of the Acquired Fund has voluntarily agreed to waive or reimburse ordinary expenses from May 1, 2009 through the date of the Reorganization so that net total annual operating expenses for Primary Class shares do not exceed 1.15% and net total annual operating expenses for Institutional Class shares do not exceed 0.65%.

Legg Mason Limited Duration Bond Portfolio (Acquired Fund) and Legg Mason Partners Short-Term Bond Fund (Acquiring Fund)

As a result of the Reorganization:

• Total annual operating expenses paid by Acquired Fund Primary Class shareholders are expected to decline from 1.22% (before giving effect to the contractual fee waivers in effect for the Acquired Fund until April 30, 2009) to 1.12% (before giving effect to the contractual fee waivers in effect for Class C shares of the Acquiring Fund). Net total annual operating expenses paid by Acquired Fund Primary Class shareholders are expected to increase from 1.00% (after giving effect to the contractual fee waiver in effect for the Acquired Fund) to 1.10%.

• Total annual operating expenses paid by Acquired Fund Institutional Class shareholders are expected to decline from 0.77% (before giving effect to the contractual fee waivers in effect for the Acquired Fund until April 30, 2009) to 0.52% (before giving effect to the contractual fee waivers in effect for Class I shares of the Acquiring Fund). Net total annual operating expenses paid by Acquired Fund Institutional Class shareholders are expected to increase from 0.50% (after giving effect to the contractual fee waiver in effect for the Acquired Fund until April 30, 2009) to 0.52%.

Management has agreed to contractually waive fees and/or reimburse expenses (other than interest, brokerage, taxes and extraordinary expenses) to limit total operating expenses to 1.10% for Class C shares of the combined Fund from the Closing Date of the Reorganization until April 30, 2010. Under this contractual agreement, the manager will be permitted to recapture amounts previously waived or reimbursed by the manager to the Acquiring Fund during the previous 12 months if the Acquiring Fund’s total annual operating expenses have fallen to a level below the contractual expense cap. In no case will the manager recapture any amount that would result, on any particular business day of the Acquiring Fund, in the Acquiring Fund’s total annual operating expenses exceeding the contractual expense cap and in no case will the aggregate amounts

4

recaptured by the manager exceed the amounts previously waived or reimbursed by the manager. Prior to the Reorganization, no voluntary or contractual fee waiver is in effect for the Acquiring Fund.

Note that the manager of the Acquired Fund has voluntarily agreed to waive or reimburse ordinary expenses from May 1, 2009 through the date of the Reorganization so that net total annual operating expenses from Primary Class shares do not exceed 1.10% and net total annual operating expenses for Institutional Class shares do not exceed 0.51%.

Comparison of Fees and Expenses

The tables below compare the fees and expenses of Primary and Institutional Class shares of each Acquired Fund for the fiscal year ended December 31, 2008, and Class C, Class P and Class I shares, as applicable, of the Acquiring Funds as of December 31, 2008. The tables also show the estimated fees and expenses of the Class C, Class P and Class I shares, as applicable, of each combined Fund, on a pro forma basis, as if the Reorganization occurred on December 31, 2008. The estimates are based on contracts and agreements in effect as of December 31, 2008 and reflect the operating expense accrual rates on that date, which are based on each Fund’s net assets as of December 31, 2008. As a general matter, changes (positive or negative) in a Fund’s expense ratio resulting from fluctuations in an Acquired Fund’s or Acquiring Fund’s net assets will be borne by the shareholders of the applicable Fund and the combined Fund. The actual fees and expenses of the Funds and the combined Funds as of the Closing Date may differ from those reflected in the tables below.

5

Legg Mason Investment Grade Income Portfolio (Acquired Fund) and Legg Mason Partners Corporate Bond Fund (Acquiring Fund)

	Pre-Reorganization
	Legg Mason Investment Grade Income Portfolio		Legg Mason Partners Corporate Bond Fund		Legg Mason Partners Corporate Bond Fund Pro Forma Combined Fund
	Primary Class*		Class P**		Class P
Shareholder Fees (fees paid directly from a shareholder’s investment):
Maximum Sales Charge (Load) imposed on purchases (as a % of the offering price)	None		None		None
Maximum Contingent Deferred Sales Charge (Load) (as a % of the lower of net asset value at purchase or redemption)	None		None		None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets):
Management Fees	0.60	%	0.65	%(a)	0.55	%(b)
Distribution and/or Service (12b-1) Fees	0.50	%	0.50	%	0.50	%
Other Expenses	0.18	%	0.10	%	0.13	%(c)
Total Annual Fund Operating Expenses	1.28	%(d)	1.25	%	1.18	%(e)

* Holders of Primary Class shares of Legg Mason Investment Grade Income Portfolio will receive Class P shares of Legg Mason Partners Corporate Bond Fund. Class P shares of Legg Mason Partners Corporate Bond Fund will be available for purchase after the Reorganization only by Class P shareholders as of the date of, and after giving effect to, the Reorganization.

** Class P shares of Legg Mason Partners Corporate Bond Fund are newly-issued, and “Other Expenses” are estimated.

^(a) The Fund has a management fee schedule that reduces the management fee rate as assets increase as follows: 0.65% on assets up to and including $500 million and 0.60% on assets over $500 million.

^(b) Management has agreed to reduce the contractual management fee expense for Legg Mason Partners Corporate Bond Fund from 0.65% to 0.55%, effective as of the Closing Date.

^(c) The Fund may pay a fee for recordkeeping services performed for the share class. As a result, operating expenses of the share class may increase over time.

^(d) The Acquired Fund’s manager voluntarily waives fees or reimburses expenses so that total annual operating expenses (exclusive of interest, taxes, brokerage commissions, and extraordinary expenses) for Primary Class shares do not exceed 1.00% of average daily net assets. Effective May 1, 2009, the Acquired Fund’s manager voluntarily waives fees or reimburses expenses so that total annual operating expenses for Primary Class shares do not exceed 1.15%. This voluntary waiver is expected to continue until the Closing Date of the Reorganization, but may be terminated at any time.

^(e) Management has agreed to contractually waive fees and/or reimburse operating expenses (other than interest, brokerage, taxes and extraordinary expenses) to limit total annual operating expenses to 1.15% for Class P shares of the combined Fund from the Closing Date of the Reorganization until April 30, 2010. Under this contractual agreement, the manager will be permitted to recapture amounts previously waived or reimbursed by the manager to the Fund during the previous 12 months if the Fund’s total annual operating expenses have fallen to a level below the contractual expense cap. In no case will the manager recapture any amount that would result, on any particular business day of the Fund, in the Fund’s total annual operating expenses exceeding the contractual expense cap and in no case will the aggregate amounts recaptured by the manager exceed the amounts previously waived or reimbursed by the manager.

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The following examples help you compare the costs of investing in Primary Class shares of the Acquired Fund, Class P shares of the Acquiring Fund and Class P shares of the combined Fund with the costs of investing in other mutual funds. The examples assume that you invest $10,000 for the periods shown, that your investment has a 5% return each year, that you reinvest all distributions and dividends, and that each Fund’s operating expenses (before fee waivers or expense reimbursements, if any) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

WITH OR WITHOUT REDEMPTION OF SHARES:
	1 Year		3 Years		5 Years		10 Years
Legg Mason Investment Grade Income Portfolio—Primary*	$	130	$	405	$	701	$	1,544
Legg Mason Partners Corporate Bond Fund—Class P**	$	127	$	396	$	686	$	1,511
Legg Mason Partners Corporate Bond Fund Pro Forma Combined Fund—Class P	$	120	$	375	$	650	$	1,433

* Primary Class shares of Legg Mason Investment Grade Income Portfolio will be exchanged for Class P shares of the combined Fund.

** Class P shares are not currently available for purchase.

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	Pre-Reorganization
	Legg Mason Investment Grade Income Portfolio		Legg Mason Partners Corporate Bond Fund		Legg Mason Partners Corporate Bond Fund Pro Forma Combined Fund
	Institutional Class*		Class I		Class I
Shareholder Fees (fees paid directly from a shareholder’s investment):
Maximum Sales Charge (Load) imposed on purchases (as a % of the offering price)	None		None		None
Maximum Contingent Deferred Sales Charge (Load) (as a % of the lower of net asset value at purchase or redemption)	None		None		None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets):
Management Fees	0.60	%	0.65	%(a)	0.55	%(b)
Distribution and/or Service (12b-1) Fees	None		None		None
Other Expenses	0.25	%	0.10	%(c)	0.18	%(c)
Total Annual Fund Operating Expenses	0.85	%(d)	0.75	%	0.73	%(e)

* Holders of Institutional Class shares of Legg Mason Investment Grade Income Portfolio will receive Class I shares of Legg Mason Partners Corporate Bond Fund.

^(a) The Fund has a management fee schedule that reduces the management fee rate as assets increase as follows: 0.65% on assets up to and including $500 million and 0.60% on assets over $500 million.

^(b) Management has agreed to reduce the contractual management fee expense for Legg Mason Partners Corporate Bond Fund from 0.65% to 0.55%, effective as of the Closing Date.

^(c) The Fund may pay a fee for recordkeeping services performed for the share class. As a result, operating expenses of affected share classes may increase over time. The recordkeeping fee for Class I shares is newly adopted and is not reflected in the “Other Expenses.” As a result, operating expenses of affected share class may increase over time.

^(d) The Acquired Fund’s manager voluntarily waives fees or reimburses expenses so that total annual operating expenses (exclusive of interest, taxes, brokerage commissions, and extraordinary expenses) for Institutional Class shares do not exceed 0.50% of average daily net assets. Effective May 1, 2009, the Acquired Fund’s manager voluntarily waives fees or reimburses expenses so that total annual operating expenses for Institutional Class shares do not exceed 0.65%. This voluntary waiver is expected to continue until the Closing Date of the Reorganization, but may be terminated at any time.

^(e) Management has agreed to contractually waive fees and/or reimburse operating expenses (other than interest, brokerage, taxes and extraordinary expenses) to limit total annual operating expenses to 0.65% for Class I shares of the combined Fund from the date of the Reorganization until April 30, 2010. Under this contractual agreement, the manager will be permitted to recapture amounts previously waived or reimbursed by the manager to the Fund during the previous 12 months if the Fund’s total annual operating expenses have fallen to a level below the contractual expense cap. In no case will the manager recapture any amount that would result, on any particular business day of the Fund, in the Fund’s total annual operating expenses exceeding the contractual expense cap and in no case will the aggregate amounts recaptured by the manager exceed the amounts previously waived or reimbursed by the manager.

8

The following examples help you compare the costs of investing in Institutional Class shares of the Acquired Fund or Class I shares of the Acquiring Fund and Class I shares of the combined Fund with the costs of investing in other mutual funds. The examples assume that you invest $10,000 for the periods shown, that your investment has a 5% return each year, that you reinvest all distributions and dividends, and that each Fund’s operating expenses (before fee waivers or expense reimbursements, if any) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

WITH OR WITHOUT REDEMPTION OF SHARES:

	1 Year		3 Years		5 Years		10 Years
Legg Mason Investment Grade Income Portfolio—Institutional*	$	87	$	271	$	471	$	1,048
Legg Mason Partners Corporate Bond Fund—Class I	$	77	$	240	$	417	$	930
Legg Mason Partners Corporate Bond Fund Pro Forma Combined Fund—Class I	$	75	$	234	$	407	$	908

* Institutional Class shares of Legg Mason Investment Grade Income Portfolio will be exchanged for Class I shares of the combined Fund.

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Legg Mason Limited Duration Bond Portfolio (Acquired Fund) and Legg Mason Partners Short-Term Bond Fund (Acquiring Fund)

	Pre-Reorganization
	Legg Mason Limited Duration Bond Portfolio		Legg Mason Partners Short- Term Bond Fund		Legg Mason Partners Short-Term Bond Fund Pro Forma Combined Fund
	Primary Class*		Class C		Class C
Shareholder Fees (fees paid directly from a shareholder’s investment):
Maximum Sales Charge (Load) imposed on purchases (as a % of the offering price)	None		None		None
Maximum Contingent Deferred Sales Charge (Load) (as a % of the lower of net asset value at purchase or redemption)	None		None		None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets):
Management Fees	0.45	%	0.45	%	0.45	%
Distribution and/or Service (12b-1) Fees	0.50	%	0.75	%	0.50	%(a)
Other Expenses	0.27	%	0.44	%(b)	0.17	%(b)
Total Annual Fund Operating Expenses	1.22	%(c)	1.64	%	1.12	%(d)

* Holders of Primary Class shares of Legg Mason Limited Duration Bond Portfolio will receive Class C shares of Legg Mason Partners Short-Term Bond Fund.

^(a) The 12b-1 fee for Class C shares of the Acquiring Fund will be reduced from 0.75% to 0.50% effective upon the closing of the Reorganization.

^(b) The Fund may pay a fee for recordkeeping services performed for the share class. As a result, operating expenses of the share class may increase over time.

^(c) The Acquired Fund’s manager has contractually agreed to waive fees or reimburse expenses so that operating expenses (exclusive of interest, taxes, brokerage commissions, and extraordinary expenses) for Primary Class shares do not exceed an annual rate of 1.00% of average daily net assets attributable to the share class. Waivers will remain in effect until April 30, 2009. Pursuant to an agreement approved by the Board, the Fund has agreed to repay the manager for waived fees and reimbursed expenses provided that payment does not cause operating expenses for Primary Class shares to exceed 1.00% of average net assets and payment is made within three years after the year in which the manager earned the fee or incurred the expense. The Acquired Fund’s manager has agreed to forgive this right of recapture effective as of the Closing Date. Effective May 1, 2009, the Acquired Fund’s manager voluntarily waives fees or reimburses expenses so that total annual operating expenses (exclusive of interest, taxes, brokerage commissions, and extraordinary expenses) for Primary Class shares do not exceed 1.10%. This waiver is voluntary and is expected to continue until the Closing Date of the Reorganization, but may be terminated at any time.

^(d) Management has agreed to contractually waive fees and/or reimburse operating expenses (other than interest, brokerage, taxes and extraordinary expenses) to limit total annual operating expenses to 1.10% for Class C shares from the Closing Date of the Reorganization until April 30, 2010. Under this contractual agreement, the manager will be permitted to recapture amounts previously waived or reimbursed by the manager to the Fund during the previous 12 months if the Fund’s total annual operating expenses have fallen to a level below the contractual expense cap. In no case will the manager recapture any amount that would result, on any particular business day of the Fund, in the Fund’s total annual operating expenses exceeding the contractual expense cap and in no case will the aggregate amounts recaptured by the manager exceed the amounts previously waived or reimbursed by the manager.

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The following examples help you compare the costs of investing in Primary Class shares of the Acquired Fund or Class C shares of the Acquiring Fund and Class C shares of the combined Fund with the costs of investing in other mutual funds. The examples assume that you invest $10,000 for the periods shown, that your investment has a 5% return each year, that you reinvest all distributions and dividends, and that each Fund’s operating expenses (before fee waivers and expense reimbursements, if any) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

WITH OR WITHOUT REDEMPTION OF SHARES:
	1 Year		3 Years		5 Years		10 Years
Legg Mason Limited Duration Bond Portfolio—Primary*	$	124	$	387	$	670	$	1,477
Legg Mason Partners Short-Term Bond Fund—Class C	$	167	$	525	$	913	$	1,999
Legg Mason Partners Short-Term Bond Fund Pro Forma Combined Fund—Class C	$	112	$	354	$	615	$	1,361

* Primary Class shares of Legg Mason Limited Duration Bond Portfolio will be exchanged for Class C shares of the combined Fund.

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	Pre-Reorganization
	Legg Mason Limited Duration Bond Portfolio		Legg Mason Partners Short-Term Bond Fund		Legg Mason Partners Short-Term Bond Fund Pro Forma Combined Fund
	Institutional Class*		Class I		Class I*
Shareholder Fees (fees paid directly from a shareholder’s investment):
Maximum Sales Charge (Load) imposed on purchases (as a % of the offering price)	None		None		None
Maximum Contingent Deferred Sales Charge (Load) (as a % of the lower of net asset value at purchase or redemption)	None		None		None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets):
Management Fees	0.45	%	0.45	%	0.45	%
Distribution and/or Service (12b-1) Fees	None		None		None
Other Expenses	0.32	%	0.05	%(a)	0.07	%(a)
Total Annual Fund Operating Expenses	0.77	%(b)	0.50	%	0.52	%

* Holders of Institutional Class shares of Legg Mason Limited Duration Bond Portfolio will receive Class I shares of Legg Mason Partners Short-Term Bond Fund. After the Closing Date of the Reorganization, the combined Fund’s Class I shares will be closed to new investors. However, Class I shareholders will be permitted to make additional investments in Class I shares.

^(a) The Fund may pay a fee for recordkeeping services performed for the share class. The recordkeeping fee for Class I shares is newly adopted and is not reflected in the “Other Expenses” shown in the table above. As a result, operating expenses of the share class may increase over time.

^(b) The Acquired Fund’s manager has contractually agreed to waive fees or reimburse expenses so that operating expenses (exclusive of interest, taxes, brokerage commissions, and extraordinary expenses) for Institutional Class shares do not exceed an annual rate of 0.50% of average daily net assets attributable to the share class. The waiver will remain in effect until April 30, 2009. Pursuant to an agreement approved by the Board, the Fund has agreed to repay the manager for waived fees and reimbursed expenses provided that payment does not cause operating expenses for Institutional Class shares to exceed 0.50% of average net assets and payment is made within three years after the year in which the manager earned the fee or incurred the expense. The Acquired Fund’s manager has agreed to forgive this right of recapture effective as of the Closing Date. Effective May 1, 2009, the Acquired Fund’s manager voluntarily waives fees or reimburses expenses so that total annual operating expenses (exclusive of interest, tax, brokerage commissions and extraordinary expenses) for Institutional Class shares do not exceed 0.51%. This waiver is voluntary and is expected to continue until the Closing Date of the Reorganization, but may be terminated at any time.

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The following examples help you compare the costs of investing in Institutional Class shares of the Acquired Fund, Class I shares of the Acquiring Fund and Class I shares of the combined Fund with the costs of investing in other mutual funds. The examples assume that you invest $10,000 for the periods shown, that your investment has a 5% return each year, that you reinvest all distributions and dividends, and that each Fund’s operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

WITH OR WITHOUT REDEMPTION OF SHARES:

	1 Year		3 Years		5 Years		10 Years
Legg Mason Limited Duration Bond Portfolio—Institutional*	$	79	$	246	$	428	$	955
Legg Mason Partners Short-Term Bond Fund—Class I	$	51	$	160	$	279	$	629
Legg Mason Partners Short-Term Bond Fund Pro Forma Combined Fund—Class I	$	53	$	167	$	291	$	652

* Institutional Class shares of Legg Mason Limited Duration Bond Portfolio will be exchanged for Class I shares of the combined Fund.

Comparison of Sales Loads, Distribution and Shareholder Servicing Arrangements and Purchase, Redemption and Exchange Policies and Procedures

No sales loads or deferred sales charges will be incurred by Acquired Fund shareholders as a result of the Reorganizations.

Purchases of Class P shares of Legg Mason Partners Corporate Bond Fund may be made after the Reorganization only by shareholders who held Primary Class shares of Legg Mason Investment Grade Income Portfolio on the Closing Date of the Reorganization. Class P shares of Legg Mason Partners Corporate Bond Fund are purchased at net asset value with no initial sales charge and no contingent deferred sales charge.

Purchases of Class C shares by shareholders of Legg Mason Partners Short-Term Bond Fund after the Reorganization will be made at net asset value with no initial sales charge and no contingent deferred sales charge.

Class I shares of Legg Mason Partners Corporate Bond Fund are purchased at net asset value with no initial sales charge and no contingent deferred sales charge. Class I shares of Legg Mason Partners Short-Term Bond Fund will be closed to new investors after the Reorganization.

After the Reorganization, shareholders of Legg Mason Partners Corporate Bond Fund also may purchase Class A, Class B and Class C shares of that Fund.

Class A shares of Legg Mason Partners Corporate Bond Fund are purchased at the offering price, which is the net asset value plus a maximum sales charge (load) of 4.25%. This sales load decreases as the size of the investment increases to certain levels called breakpoints. A shareholder may purchase Class A shares in an amount of $1,000,000 or more at net asset value without an initial sales charge, but if those shares are redeemed within 12 months of purchase, the shareholder will pay a contingent deferred sales charge of 1.00%. Class B shares of Legg Mason Partners Corporate Bond Fund are purchased without paying an initial sales load but if Class B shares are redeemed, the shareholder will pay a contingent deferred sales charge of up to 4.50%. This contingent deferred sales charge decreases by 0.50% for the first year after purchase and thereafter by 1.00% per year. Class C shares of Legg Mason Partners Corporate Bond Fund are purchased without paying an initial sales load but if Class C shares are redeemed within one year of purchase, the shareholder will pay a contingent deferred sales charge of 1.00%.

After the Reorganization, shareholders of Legg Mason Partners Short-Term Bond Fund also may purchase Class A or Class C shares of that Fund.

Class A shares of Legg Mason Partners Short-Term Bond Fund are purchased at the offering price, which is the net asset value plus a maximum sales load of 2.25%. This sales load decreases as the size of the investment increases to certain breakpoints. A shareholder may purchase Class A shares in an amount of $500,000 or more at net asset value without an initial sales charge, but if those shares are redeemed within 12 months of purchase, the shareholder will pay a contingent deferred sales charge of 0.50%. Class C shares of Legg Mason Partners Short-Term Bond Fund are purchased without paying

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an initial sales load but if Class C shares are redeemed within one year of purchase, the shareholder will pay a contingent deferred sales charge of 1.00%.

The exchange privileges that shareholders of the Acquired Funds currently have with the other Legg Mason funds will be replaced with new exchange privileges with funds sold by the distributor of the Acquiring Funds (a larger number of funds), except that Class P shares of Legg Mason Partners Short-Term Bond Fund will not have exchange privileges.

More information about the sales load, distribution and shareholder servicing arrangements for the shares of each Acquiring Fund and the procedures for making purchases, redemptions and exchanges of shares are set forth in “Purchases, Redemptions and Exchanges of Fund Shares; Other Shareholder Information” in Appendix B to this Proxy Statement/Prospectus.

COMPARISON OF INVESTMENT OBJECTIVES, STRATEGIES AND PRINCIPAL RISKS OF INVESTING IN THE FUNDS

The following discussion comparing the investment objectives, strategies and principal risks of each Acquired Fund with its corresponding Acquiring Fund is based upon and qualified in its entirety by the disclosure appearing in the prospectuses (as supplemented) of the Funds under the captions “Investments, risks and performance” (for the Acquiring Funds) or “Investment Objectives and Policies” (for the Acquired Funds) and “More on the fund’s investments” (for the Acquiring Funds) or “Principal Risks” (for the Acquired Funds). The prospectuses (as supplemented from time to time) are dated as follows:

Acquired Fund	Prospectus Dated
Legg Mason Investment Grade Income Portfolio	May 1, 2008
Legg Mason Limited Duration Bond Portfolio	May 1, 2008
Acquiring Fund	Prospectus Dated
Legg Mason Partners Corporate Bond Fund	April 28, 2008
Legg Mason Partners Short-Term Bond Fund	April 28, 2008

Additional information about each Fund’s investment objective and principal investment strategies and principal risks may also be found in Appendix C to this Proxy Statement/Prospectus. The investment objective and principal investment strategies and principal risks of each Acquiring Fund will apply to the combined Fund following the Reorganization with the corresponding Acquired Fund.

Legg Mason Investment Grade Income Portfolio (Acquired Fund) and Legg Mason Partners Corporate Bond Fund (Acquiring Fund)

Investment Objectives

The Acquiring Fund seeks as high a level of current income as is consistent with prudent investment management and preservation of capital. The Acquired Fund seeks a high level of current income through investment in a diversified portfolio of debt securities.

Primary Investment Policies and Strategies

Under normal circumstances, the Acquired Fund invests at least 80% of its assets, plus any borrowings for investment purposes, in debt and fixed-income securities of various maturities. Debt and fixed-income securities may include, among others, debt securities rated at the time of investment BBB/Baa or higher by at least one NRSRO or, if not rated by any NRSRO, determined by the Adviser to be of comparable quality and securities of, or guaranteed by, the U.S. Government, its agencies or instrumentalities. Under normal circumstances, the Acquiring Fund invests at least 80% of the value of its assets in “investment grade” fixed-income securities and related investments. The Acquiring Fund invests principally in corporate debt securities and related investments. The Acquiring Fund also may invest in U.S. Government securities and U.S. dollar denominated fixed-income securities of foreign issuers.

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There are several differences between the Funds:

• The Acquiring Fund may invest in a variety of derivative transactions for hedging purposes, as a substitute for buying and selling securities, as a cash flow management technique or to enhance returns. The Acquiring Fund may use derivatives and synthetic instruments to a substantial extent and even as its primary means of gaining investment exposures The Acquiring Fund may engage in a variety of transactions using derivatives, such as futures, options, swaps (including credit default swaps) and warrants and may purchase mortgage-related obligations and other derivative instruments. The Acquired Fund may invest in a variety of transactions using derivatives, such as futures, options, warrants and swaps to enhance income or yield or to hedge its investments. The Acquired Fund will purchase a particular derivative instrument only if the Fund is authorized to invest in the type of asset on which the instrument is based. The Acquired Fund may enter into swaps to preserve a return or spread on a particular investment, to protect against an increase in the price of securities the Fund anticipates purchasing in the future, or to enhance returns. The Acquired Fund does not intend to engage in swaps with a value equaling over 10% of its total assets. No more than 5% of the Acquired Fund’s assets can be exposed through swaps with any one counterparty, and each counterparty will have a minimum S&P rating of AA. The Acquired Fund may not invest more than 5% of its assets in warrants or more than 2% in warrants not listed on the New York Stock Exchange or American Stock Exchange.

• The Acquiring Fund includes sales of credit default protection among its principal strategies. The Acquired Fund does not.

• The Acquiring Fund includes investments in structured instruments among its investment strategies. The Acquired Fund does not include as a separate strategy investments in structured instruments.

• Both Funds may invest in securities of any maturity, but the Acquired Fund currently expects to maintain a dollar-weighted average maturity of between five and twenty years. The Acquiring Fund does not include among its principal policies or strategies an average maturity target or range.

• The Acquired Fund may invest a portion of its assets in securities convertible into or exchangeable for, or carry warrants to purchase, common stock or other equity interests. The Acquiring Fund does not include this as a separate principal investment strategy.

• The Acquiring Fund has the following non-fundamental investment policies that are not described as policies of the Acquired Fund: no investments in oil, gas or other mineral exploration or development programs; and no investments for the purpose of exercising control or management of the issuer.

• The Acquired Fund is subject to a 5% limit on investments in restricted securities. The Acquiring Fund is not.

Risk Factors

Because the Funds have similar investment objectives and principal investment policies and share portfolio managers, the Funds share many of the same risks, but each Fund characterizes its principal risks differently. You could lose money on your investment in either Fund or either Fund may not perform as well as other investments.

The following summarizes the risks of investing in either of the Funds:

• Interest rate risk. When interest rates rise, the value of fixed-income securities generally falls. A change in interest rates will not have the same impact on all fixed-income securities. Generally, the longer the maturity or duration of a fixed-income security, the greater the impact of a rise in interest rates on the security’s value. In addition, different interest rate measures (such as short- and long-term interest rates and U.S. and foreign interest rates), or interest rates on different types of securities or securities of different issuers, may not necessarily change in the same amount or in the same direction.

Certain fixed-income securities pay interest at variable or floating rates. Variable rate securities tend to reset at specified intervals, while floating rate securities may reset whenever there is a change in a specified index rate. In most cases, these reset provisions reduce the impact of changes in market interest rates on the value of the security. However, some securities do not track the underlying index directly, but reset based on formulas that may produce a leveraging effect; others may also provide for interest payments that vary inversely with market rates. The market prices of these securities may fluctuate significantly when interest rates change.

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• Credit risk. If an obligor (such as the issuer itself or a party offering credit enhancement) for a security held by the Fund fails to pay, otherwise defaults or is perceived to be less creditworthy, the security’s credit rating is downgraded or the credit quality or value of any underlying assets declines, the value of your investment in the Fund could decline. In addition, the Fund may incur expenses to protect the Fund’s interest in securities experiencing these events. Credit risk is broadly gauged by the credit ratings of the securities in which the Fund invests. However, ratings are only the opinions of the companies issuing them and are not guarantees as to quality.

The Fund is subject to greater levels of credit risk to the extent it invests in below investment grade securities, commonly known as “junk bonds.” These securities have a higher risk of issuer default and are considered speculative.

• Market risk. The market price of fixed-income and other securities owned by the Fund may go up or down, sometimes rapidly or unpredictably. If the market prices of the securities owned by the Fund fall, the value of your investment in the Fund will decline. The value of a security may fall due to general market conditions, such as real or perceived adverse economic or political conditions, inflation, changes in interest or currency rates, lack of liquidity in the bond markets or adverse investor sentiment. The equity and debt capital markets in the United States and internationally have experienced unprecedented volatility. This financial crisis has caused a significant decline in the value and liquidity of many securities. This environment could make identifying investment risks and opportunities especially difficult for the subadviser. These market conditions may continue or get worse. Changes in market conditions will not have the same impact on all types of securities. The value of a security may also fall due to specific conditions that affect a particular sector of the securities market or a particular issuer.

• Prepayment or call risk. Many fixed-income securities give the issuer the option to repay or call the security prior to its maturity date. Issuers often exercise this right when interest rates fall. Accordingly, if the Fund holds a fixed-income security subject to prepayment or call risk, it may not benefit fully from the increase in value that other fixed-income securities generally experience when interest rates fall. Upon prepayment of the security, the Fund would also be forced to reinvest the proceeds at then current yields, which would be lower than the yield of the security that was paid off. In addition, if the Fund purchases a fixed-income security at a premium (at a price that exceeds its stated par or principal value), the Fund may lose the amount of the premium paid in the event of prepayment.

• Portfolio managers’ judgment. The portfolio managers’ judgment about the quality, relative yield, value or market trends affecting a particular security, industry, sector, country or region, or about interest rates, may be incorrect.

• Derivatives risk. Derivatives involve special risks and costs and may result in losses to the Fund. The Fund’s use of certain derivatives may in some cases have a leveraging effect on the Fund, which may increase the volatility of the Fund as discussed below in “Leveraging risk.” Using derivatives can increase losses and reduce opportunities for gains when market prices, interest rates or currencies, or the derivative instruments themselves, behave in a way not anticipated by the Fund. The other parties to certain derivative contracts present the same types of credit risk as issuers of fixed-income securities. Derivatives also tend to involve greater liquidity risk as discussed below.

Investments by the Fund in structured securities, a type of derivative instrument, raise certain tax, legal, regulatory and accounting issues that may not be presented by direct investments in securities. These issues could be resolved in a manner that could hurt the performance of the Fund.

• Foreign securities risk. Investments in foreign securities (including those denominated in U.S. dollars) are subject to economic and political developments in the countries and regions where the issuers operate or are domiciled, or where the securities are traded, such as changes in economic or monetary policies. Values may also be affected by restrictions on receiving the investment proceeds from a foreign country.

Less information may be publicly available about foreign companies than about U.S. companies. Foreign companies are generally not subject to the same accounting, auditing and financial reporting standards as are U.S. companies. In addition, the Fund’s investments in foreign securities may be subject to the risk of nationalization or expropriation of assets, imposition of currency exchange controls or restrictions on the repatriation of foreign currency, confiscatory taxation, political or financial instability and adverse diplomatic developments. Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to non-U.S. withholding taxes, and special U.S. tax considerations may apply.

• Leveraging risk. When the Fund engages in transactions that have a leveraging effect on the Fund’s portfolio, the value of the Fund will be more volatile and all other risks will tend to be compounded. This is because leverage

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generally magnifies the effect of any increase or decrease in the value of the Fund’s underlying asset or creates investment risk with respect to a larger pool of assets than the Fund would otherwise have. The Fund may take on leveraging risk by, among other things, engaging in borrowing, derivative, when-issued, delayed-delivery, forward commitment or forward roll transactions or reverse repurchase agreements. Engaging in such transactions may cause the Fund to liquidate positions when it may not be advantageous to do so to satisfy its obligations or meet segregation requirements.

• Liquidity risk. Liquidity risk exists when particular investments are difficult to sell. Although most of the Fund’s securities must be liquid at the time of investment, securities may become illiquid after purchase by the Fund, particularly during periods of market turmoil. When the Fund holds illiquid investments, the portfolio may be harder to value, especially in changing markets, and if the Fund is forced to sell these investments to meet redemptions or for other cash needs, the Fund may suffer a loss. In addition, when there is illiquidity in the market for certain securities, the Fund, due to limitations on investments in illiquid securities, may be unable to achieve its desired level of exposure to a certain sector.

The Acquiring Fund characterizes the following as additional principal risks:

• Extension risk. When interest rates rise, repayments of fixed-income securities, particularly asset- and mortgage-backed securities, may occur more slowly than anticipated, extending the effective duration of these fixed-income securities and locking in below market interest rates. This may cause the Fund’s share price to be more volatile.

• Credit default swap risk. Credit default swap contracts, a type of derivative instrument, involve special risks and may result in losses to the Fund. Credit default swaps may in some cases be illiquid, and they increase credit risk since the Fund has exposure to both the issuer of the referenced obligation and the counterparty to the credit default swap. As there is no central exchange or market for credit default swap transactions, they may be difficult to trade or value, especially in the event of market disruptions. The swap market is a relatively new market and is largely unregulated. It is possible that developments in the swap market, including potential government regulation, could adversely affect the Fund’s ability to terminate existing credit default swap agreements or to realize amounts to be received under such agreements.

• Subordinated securities risk. The Fund may invest in securities which are subordinated to more senior securities of the issuer, or which represent interests in pools of such subordinated securities. Subordinated securities will be disproportionately affected by a default or even a perceived decline in creditworthiness of the issuer.

The Acquired Fund characterizes the following as additional principal risks:

• Mortgage/asset-backed securities risk. Mortgage-backed securities represent an interest in a pool of mortgages. When market interest rates decline, more mortgages are refinanced, and mortgage-backed securities are paid off earlier than expected. Prepayments may also occur on a scheduled basis or due to foreclosure. The effect on the Fund’s return is similar to that discussed above for call risk. When market interest rates increase, the market values of mortgage-backed securities decline. At the same time, however, mortgage refinancings and prepayments slow, which lengthens the effective maturities of these securities. As a result, the negative effect of the rate increase on the market value of mortgage-backed securities is usually more pronounced than it is for other types of fixed-income securities, potentially increasing the volatility of a fund that holds them.

Asset-backed securities are structured like mortgage-backed securities, but instead of mortgage loans or interests in mortgage loans, the underlying assets may include such items as motor vehicle installment sales or installment loan contracts, leases of various types of real and personal property, and receivables from credit card agreements. The ability of an issuer of asset-backed securities to enforce its security interest in the underlying assets may be limited. Asset-backed securities are subject to many of the same risks as mortgage-backed securities.

At times, some of the mortgage-backed and asset-backed securities in which the Fund may invest will have higher than market interest rates and therefore will be purchased at a premium above their par value. Prepayments may cause losses on securities purchased at a premium. Unscheduled prepayments, which are made at par, will cause the Fund to experience a loss equal to any unamortized premium.

• Hedging risk. The decision as to whether and to what extent the Fund will engage in hedging transactions to hedge against such risks as credit risk, market risk and currency exchange rate risk will depend on a number of factors, including the adviser’s evaluation of prevailing market conditions, the composition of the Fund and the availability of suitable transactions. Accordingly, there can be no assurance that the Fund will engage in hedging transactions at any given time or from time to time or that any such strategies, if used, will be successful. Hedging transactions involve costs and may result in losses.

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• High portfolio turnover risk. The investment strategies employed by the Fund often involve high turnover rates. Therefore, under certain market conditions, the Fund’s turnover rate may be higher than that of other mutual funds. Portfolio turnover generally involves some expense to the Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestment in other securities. These transactions may result in realization of capital gains. High portfolio turnover rates, generally defined as annual rates above 100%, are likely to result in higher brokerage commissions or other transaction costs and could give rise to a greater amount of capital gains that are taxable to shareholders when distributed to them.

• Foreign currency risk. Investment in securities denominated in foreign currencies may involve currency conversion costs, and certain investment strategies may subject the Fund to currency risk and it may be affected favorably or unfavorably by changes in the rates of exchange between those currencies and the U.S. dollar. Currency exchange rates can be volatile and affected by, among other factors, the general economics of a country, the actions of the U.S. and foreign governments or central banks, the imposition of currency controls, and speculation.

Fundamental Investment Restrictions

The following table lists (1) the fundamental investment restrictions for the Acquired Fund and (2) the fundamental investment restrictions for the Acquiring Fund. Following the table is an explanation of material differences between the Acquired Fund’s fundamental investment restrictions and the Acquiring Fund’s fundamental investment restrictions.

Subject	Legg Mason Investment Grade Income Portfolio (Acquired Fund) Restrictions	Legg Mason Partners Corporate Bond Fund (Acquiring Fund) Restrictions and Brief Discussion
Borrowing:	The Fund may not borrow money, except (1) in an amount not exceeding 33 1/3% of the Fund’s total assets (including the amount borrowed) less liabilities (other than borrowings) or (2) by entering into reverse repurchase agreements or dollar rolls.	The Fund may not borrow money except as permitted by (i) the 1940 Act, as amended, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority. The 1940 Act generally permits a fund to borrow money in amounts of up to one-third of the fund’s total assets from banks for any purpose, and to borrow up to 5% of the fund’s total assets from banks or other lenders for temporary purposes. Certain trading practices and investments, such as reverse repurchase agreements, dollar rolls and certain derivatives, may be considered to be borrowing and thus subject to 1940 Act restrictions. On the other hand, certain practices and investments may involve leverage but are not considered to be borrowing.
Underwriting:	The Fund may not engage in the business of underwriting the securities of other issuers, except as permitted by the Investment Company Act of 1940, as amended (“1940 Act”), and the rules and regulations promulgated thereunder, as such statute, rules, and regulations are amended from time to time or are interpreted from time to time by the SEC or SEC staff or to the extent that the Fund may be permitted to do so by exemptive order or other relief from the SEC or SEC staff (collectively, “1940 Act Laws, Interpretations and Exemptions”). This restriction does not prevent the Fund from engaging in transactions involving the acquisition, disposition or resale of portfolio securities, regardless of whether the Fund may be considered to be an underwriter under the Securities Act of 1933, as amended (the “1933 Act”).	The Fund may not engage in the business of underwriting the securities of other issuers except as permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority. The 1940 Act generally permits a fund to have underwriting commitments of up to 25% of its assets in certain circumstances. Currently, the Fund is not permitted to engage in the business of underwriting the securities of others.

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Subject	Legg Mason Investment Grade Income Portfolio (Acquired Fund) Restrictions	Legg Mason Partners Corporate Bond Fund (Acquiring Fund) Restrictions and Brief Discussion
Lending:	The Fund may not lend money or other assets, except to the extent permitted by the 1940 Act Laws, Interpretations and Exemptions. This restriction does not prevent the Fund from purchasing debt obligations in pursuit of its investment program, or for defensive or cash management purposes, entering into repurchase agreements, loaning its portfolio securities to financial intermediaries, institutions or institutional investors, or investing in loans, including assignments and participation interests.	The Fund may lend money or other assets to the extent permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority. The 1940 Act does not prohibit a fund from making loans; however, SEC staff interpretations currently prohibit funds from lending more that one-third of their total assets, except through the purchase of debt obligations or the use of repurchase agreements. (A repurchase agreement is an agreement to purchase a security, coupled with an agreement to sell that security back to the original seller on an agreed-upon date at a price that generally reflects current interest rates. The SEC frequently treats repurchase agreements as loans.)
Senior Securities:	The Fund may not issue senior securities, except as permitted under the 1940 Act Laws, Interpretations and Exemptions.	The Fund may not issue senior securities except as permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority. Senior securities are generally defined as fund obligations that have a priority over the fund’s shares with respect to the payment of dividends or distribution of fund assets. The 1940 Act prohibits a fund from issuing senior securities except that it generally permits a fund to borrow from banks for any purpose in amounts up to one-third of the fund’s total assets and to borrow up to 5% of its total assets from any source for temporary purposes. A fund’s temporary borrowings not exceeding 5% of its total assets are not considered senior securities.
Real Estate:	The Fund may not purchase or sell real estate unless acquired as a result of ownership of securities or other instruments. This restriction does not prevent the Fund from investing in issuers that invest, deal, or otherwise engage in transactions in or hold real estate or interests therein, investing in instruments that are secured by real estate or interests therein, or exercising rights under agreements relating to such securities, including the right to enforce security interests.	The Fund may not purchase or sell real estate except as permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority. The 1940 Act does not prohibit a fund from owning real estate; however, a mutual fund is limited in the amount of illiquid assets it may purchase (real estate is generally considered illiquid).

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Subject	Legg Mason Investment Grade Income Portfolio (Acquired Fund) Restrictions	Legg Mason Partners Corporate Bond Fund (Acquiring Fund) Restrictions and Brief Discussion
Commodities:	The Fund may not purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments. This restriction does not prevent the Fund from engaging in transactions involving foreign currency, futures contracts and options, forward contracts, swaps, caps, floors, collars, securities purchased or sold on a forward-commitment or delayed-delivery basis or other similar financial instruments, or investing in securities or other instruments that are secured by physical commodities.	The Fund may purchase or sell commodities or contracts related to commodities to the extent permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority. The 1940 Act does not prohibit a fund from owning commodities, whether physical commodities or contracts related to physical commodities (such as oil or grains and related futures contracts), or financial commodities and contracts related to financial commodities (such as currencies and, possibly, currency futures). However, a mutual fund is limited in the amount of illiquid assets it may purchase (certain commodities (especially physical commodities) may be considered to be illiquid).
Concentration:	The Fund may not make any investment if, as a result, the Fund’s investments will be concentrated (as that term may be defined or interpreted by the 1940 Act Laws, Interpretations and Exemptions) in any one industry. This restriction does not limit the Fund’s investment in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities and repurchase agreements with respect thereto, or securities of municipal issuers.	Except as permitted by exemptive or other relief or permission from the SEC, SEC staff or other authority with appropriate jurisdiction, the Fund may not make any investment if, as a result, the Fund’s investments will be concentrated in one industry. While the 1940 Act does not define what constitutes “concentration” in an industry, the SEC has taken the position that investment of 25% or more of a fund’s total assets in one or more issuers conducting their principal activities in the same industry constitutes concentration. It is possible that interpretations of concentration could change in the future.

Comparison between the Acquired Fund’s Fundamental Investment Restrictions and the Acquiring Fund’s Fundamental Investment Restrictions

There are no material differences between each Fund’s fundamental investment restrictions. Note that the Acquired Fund may not purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments, while the Acquiring Fund may purchase or sell commodities or contracts related to commodities, though it is limited in the amount of illiquid assets it may purchase. Certain commodities may be considered illiquid.

For purposes of the foregoing restrictions, the references to the 1940 Act and the related rules will be interpreted to mean the 1940 Act and related rules as they are in effect from time to time, and references to interpretations and modifications of or relating to the 1940 Act by the SEC and others will be interpreted to mean as they are given from time to time. When a restriction provides that an investment practice may be conducted as permitted by the 1940 Act, the restriction will be interpreted to mean either that the 1940 Act expressly permits the practice or that the 1940 Act does not prohibit the practice.

Legg Mason Limited Duration Bond Portfolio (Acquired Fund) and Legg Mason Partners Short-Term Bond Fund (Acquiring Fund)

Investment Objectives

The Acquiring Fund seeks current income, preservation of capital and liquidity. The Acquired Fund’s investment objective is to maximize total return, consistent with prudent investment management by investing to obtain the specified average duration.

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Primary Investment Policies and Strategies

Under normal market conditions, each Fund will invest at least 80% of its net assets, plus any borrowings for investment purposes, in debt and fixed-income securities rated at the time of purchase by a NRSRO within one of the top four categories, or, if unrated, judged by the subadviser to be of comparable credit quality.

There are several differences between the Funds:

• Instead of investing directly in particular securities, the Acquiring Fund may gain exposure to a security, an issuer, an index or basket of securities, or a market by investing through the use of instruments such as derivatives, including credit default swaps, futures contracts, synthetic instruments and other instruments that are intended to provide similar economic exposure. The Acquiring Fund may use one or more types of such instruments to a substantial extent and even as its primary means of gaining investment exposures. The Acquiring Fund may engage in a variety of transactions using derivatives, such as futures, options, swaps (including credit default swaps) and warrants and may purchase mortgage-related obligations and other derivative instruments. The Acquired Fund may invest in derivatives such as futures, options and swaps both for hedging and non-hedging purposes, including for purposes of enhancing returns; buy or sell securities on a forward commitment basis; and engage in reverse repurchase agreements. The Acquired Fund will purchase a particular derivative instrument only if the Fund is authorized to invest in the type of asset on which the instrument is based. The Acquired Fund may enter into swaps, caps, floors, and collars to preserve a return or a spread on a particular investment, to protect against any increase in the price of securities the Fund anticipates purchasing in the future, or to enhance returns. No more than 5% of the Acquired Fund’s assets can be exposed at any time through swaps with any one counterparty, and each counterparty will have a minimum S&P rating of AA. The Acquired Fund may not invest more than 5% of its assets in warrants or more than 2% in warrants not listed on the New York or American Stock Exchanges.

• The Acquiring Fund includes investments in structured instruments among its investment strategies. The Acquired Fund does not include as a separate strategy investments in structured instruments.

• Both Funds may invest in foreign issuers. The Acquired Fund may invest up to 25% of its total assets in the securities of foreign issuers. The Acquiring Fund is not subject to a percentage limitation with respect to investments in foreign issuers.

• The Acquired Fund may invest in the securities of foreign issuers that are denominated in foreign currencies and may temporarily hold uninvested cash in bank deposits in foreign currencies. The Acquiring Fund may invest only in U.S. dollar denominated securities of foreign issuers.

• The Acquired Fund may invest in foreign currency warrants. The Acquiring Fund does not include as a separate strategy investments in foreign currency warrants.

• The Acquired Fund may invest up to 20% of its assets in non-debt securities. The Acquiring Fund may invest in equity securities, but no explicit percentage limitation is provided.

• The Acquired Fund’s average modified duration will range within 25% of the duration of the Merrill Lynch 1-3 Year Treasury Index. The Acquiring Fund normally maintains a dollar-weighted average portfolio maturity of not more than three years.

• The Acquired Fund is subject to a 5% limitation on investments in restricted securities. The Acquiring Fund is not.

• The Acquired Fund may invest in municipal securities. The Acquiring Fund may not.

• The Acquiring Fund may invest in forward commitments. The Acquired Fund may not.

Risk Factors

Because the Funds have similar investment objectives, principal investment policies and share portfolio managers, many of the principal risks of investing in the Funds are substantially similar. The Funds share many of the same risks, but each Fund characterizes its principal risks differently. You could lose money on your investment in either Fund or either Fund may not perform as well as other investments.

The following summarizes the risks of investing in either of the Funds:

• Interest rate risk. When interest rates rise, the value of fixed-income securities generally falls. A change in interest rates will not have the same impact on all fixed-income securities. Generally, the longer the maturity or duration of

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a fixed-income security, the greater the impact of a rise in interest rates on the security’s value. In addition, different interest rate measures (such as short- and long-term interest rates and U.S. and foreign interest rates), or interest rates on different types of securities or securities of different issuers, may not necessarily change in the same amount or in the same direction.

Certain fixed-income securities pay interest at variable or floating rates. Variable rate securities tend to reset at specified intervals, while floating rate securities may reset whenever there is a change in a specified index rate. In most cases, these reset provisions reduce the impact of changes in market interest rates on the value of the security. However, some securities do not track the underlying index directly, but reset based on formulas that may produce a leveraging effect; others may also provide for interest payments that vary inversely with market rates. The market prices of these securities may fluctuate significantly when interest rates change.

• Credit risk. If an obligor (such as the issuer itself or a party offering credit enhancement) for a security held by the Fund fails to pay, otherwise defaults or is perceived to be less creditworthy, the security’s credit rating is downgraded or the credit quality or value of any underlying assets declines, the value of your investment in the Fund could decline. In addition, the Fund may incur expenses to protect the Fund’s interest in securities experiencing these events. Credit risk is broadly gauged by the credit ratings of the securities in which the Fund invests. However, ratings are only the opinions of the companies issuing them and are not guarantees as to quality.

The Fund is subject to greater levels of credit risk to the extent it invests in below investment grade securities, commonly known as “junk bonds.” These securities have a higher risk of issuer default and are considered speculative.

• Market risk. The market price of fixed-income and other securities owned by the Fund may go up or down, sometimes rapidly or unpredictably. If the market prices of the securities owned by the Fund fall, the value of your investment in the Fund will decline. The value of a security may fall due to general market conditions, such as real or perceived adverse economic or political conditions, inflation, changes in interest or currency rates, lack of liquidity in the bond markets or adverse investor sentiment. The equity and debt capital markets in the United States and internationally have experienced unprecedented volatility. This financial crisis has caused a significant decline in the value and liquidity of many securities. This environment could make identifying investment risks and opportunities especially difficult for the subadviser. These market conditions may continue or get worse. Changes in market conditions will not have the same impact on all types of securities. The value of a security may also fall due to specific conditions that affect a particular sector of the securities market or a particular issuer.

• Prepayment or call risk. Many fixed-income securities give the issuer the option to repay or call the security prior to its maturity date. Issuers often exercise this right when interest rates fall. Accordingly, if the Fund holds a fixed-income security subject to prepayment or call risk, it may not benefit fully from the increase in value that other fixed-income securities generally experience when interest rates fall. Upon prepayment of the security, the Fund would also be forced to reinvest the proceeds at then current yields, which would be lower than the yield of the security that was paid off. In addition, if the Fund purchases a fixed-income security at a premium (at a price that exceeds its stated par or principal value), the Fund may lose the amount of the premium paid in the event of prepayment.

• Portfolio managers’ judgment. The portfolio managers’ judgment about the quality, relative yield, value or market trends affecting a particular security, industry, sector, country or region, or about interest rates, may be incorrect.

• Derivatives risk. Derivatives involve special risks and costs and may result in losses to the Fund. The Fund’s use of certain derivatives may in some cases have a leveraging effect on the Fund, which may increase the volatility of the Fund as discussed below in “Leveraging risk.” Using derivatives can increase losses and reduce opportunities for gains when market prices, interest rates or currencies, or the derivative instruments themselves, behave in a way not anticipated by the Fund. The other parties to certain derivative contracts present the same types of credit risk as issuers of fixed-income securities. Derivatives also tend to involve greater liquidity risk as discussed below.

Investments by the Fund in structured securities, a type of derivative instrument, raise certain tax, legal, regulatory and accounting issues that may not be presented by direct investments in securities. These issues could be resolved in a manner that could hurt the performance of the Fund.

• Foreign securities risk. Investments in foreign securities (including those denominated in U.S. dollars) are subject to economic and political developments in the countries and regions where the issuers operate or are domiciled, or where the securities are traded, such as changes in economic or monetary policies. Values may also be affected by restrictions on receiving the investment proceeds from a foreign country.

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Less information may be publicly available about foreign companies than about U.S. companies. Foreign companies are generally not subject to the same accounting, auditing and financial reporting standards as are U.S. companies. In addition, the Fund’s investments in foreign securities may be subject to the risk of nationalization or expropriation of assets, imposition of currency exchange controls or restrictions on the repatriation of foreign currency, confiscatory taxation, political or financial instability and adverse diplomatic developments. Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to non-U.S. withholding taxes, and special U.S. tax considerations may apply.

• Leveraging risk. When the Fund engages in transactions that have a leveraging effect on the Fund’s portfolio, the value of the Fund will be more volatile and all other risks will tend to be compounded. This is because leverage generally magnifies the effect of any increase or decrease in the value of the Fund’s underlying asset or creates investment risk with respect to a larger pool of assets than the Fund would otherwise have. The Fund may take on leveraging risk by, among other things, engaging in borrowing, derivative, when-issued, delayed-delivery, forward commitment or forward roll transactions or reverse repurchase agreements. Engaging in such transactions may cause the Fund to liquidate positions when it may not be advantageous to do so to satisfy its obligations or meet segregation requirements.

• Liquidity risk. Liquidity risk exists when particular investments are difficult to sell. Although most of the Fund’s securities must be liquid at the time of investment, securities may become illiquid after purchase by the Fund, particularly during periods of market turmoil. When the Fund holds illiquid investments, the portfolio may be harder to value, especially in changing markets, and if the Fund is forced to sell these investments to meet redemptions or for other cash needs, the Fund may suffer a loss. In addition, when there is illiquidity in the market for certain securities, the Fund, due to limitations on investments in illiquid securities, may be unable to achieve its desired level of exposure to a certain sector.

The Acquiring Fund characterizes the following as additional principal risks:

• Extension risk. When interest rates rise, repayments of fixed-income securities, particularly asset- and mortgage-backed securities, may occur more slowly than anticipated, extending the effective duration of these fixed-income securities and locking in below market interest rates. This may cause the Fund’s share price to be more volatile.

• Credit default swap risk. Credit default swap contracts, a type of derivative instrument, involve special risks and may result in losses to the Fund. Credit default swaps may in some cases be illiquid, and they increase credit risk since the Fund has exposure to both the issuer of the referenced obligation and the counterparty to the credit default swap. As there is no central exchange or market for credit default swap transactions, they may be difficult to trade or value, especially in the event of market disruptions. The swap market is a relatively new market and is largely unregulated. It is possible that developments in the swap market, including potential government regulation, could adversely affect the Fund’s ability to terminate existing credit default swap agreements or to realize amounts to be received under such agreements.

• Subordinated securities risk. The Fund may invest in securities which are subordinated to more senior securities of the issuer, or which represent interests in pools of such subordinated securities. Subordinated securities will be disproportionately affected by a default or even a perceived decline in creditworthiness of the issuer.

The Acquired Fund characterizes the following as additional principal risks:

• Mortgage/asset-backed securities risk. Mortgage-backed securities represent an interest in a pool of mortgages. When market interest rates decline, more mortgages are refinanced, and mortgage-backed securities are paid off earlier than expected. Prepayments may also occur on a scheduled basis or due to foreclosure. The effect on the Fund’s return is similar to that discussed above for call risk. When market interest rates increase, the market values of mortgage-backed securities decline. At the same time, however, mortgage refinancings and prepayments slow, which lengthens the effective maturities of these securities. As a result, the negative effect of the rate increase on the market value of mortgage-backed securities is usually more pronounced than it is for other types of fixed-income securities, potentially increasing the volatility of a fund that holds them.

Asset-backed securities are structured like mortgage-backed securities, but instead of mortgage loans or interests in mortgage loans, the underlying assets may include such items as motor vehicle installment sales or installment loan contracts, leases of various types of real and personal property, and receivables from credit card agreements. The ability of an issuer of asset-backed securities to enforce its security interest in the underlying assets may be limited. Asset-backed securities are subject to many of the same risks as mortgage-backed securities.

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At times, some of the mortgage-backed and asset-backed securities in which the Fund may invest will have higher than market interest rates and therefore will be purchased at a premium above their par value. Prepayments may cause losses on securities purchased at a premium. Unscheduled prepayments, which are made at par, will cause the Fund to experience a loss equal to any unamortized premium.

The Acquiring Fund also may invest in mortgage- and asset-backed securities, but its prospectus does not characterize risks associated with these investments as principal risks.

• Foreign currency risk. Investment in securities denominated in foreign currencies may involve currency conversion costs, and certain investment strategies may subject the Fund to currency risk and it may be affected favorably or unfavorably by changes in the rates of exchange between those currencies and the U.S. dollar. Currency exchange rates can be volatile and affected by, among other factors, the general economics of a country, the actions of the U.S. and foreign governments or central banks, the imposition of currency controls, and speculation.

• Hedging risk. The decision as to whether and to what extent the Fund will engage in hedging transactions to hedge against such risks as credit risk, market risk and currency exchange rate risk will depend on a number of factors, including the adviser’s evaluation of prevailing market conditions, the composition of the Fund and the availability of suitable transactions. Accordingly, there can be no assurance that the Fund will engage in hedging transactions at any given time or from time to time or that any such strategies, if used, will be successful. Hedging transactions involve costs and may result in losses.

• High portfolio turnover risk. The investment strategies employed by the Fund often involve high turnover rates. Therefore, under certain market conditions, the Fund’s turnover rate may be higher than that of other mutual funds. Portfolio turnover generally involves some expense to the Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestment in other securities. These transactions may result in realization of capital gains. High portfolio turnover rates, generally defined as annual rates above 100%, are likely to result in higher brokerage commissions or other transaction costs and could give rise to a greater amount of capital gains that are taxable to shareholders when distributed to them.

Fundamental Investment Restrictions

The following table lists (1) the fundamental investment restrictions for the Acquired Fund and (2) the fundamental investment restrictions for the Acquiring Fund. Following the table is an explanation of material differences between the Acquired Fund’s fundamental investment restrictions and the Acquiring Fund’s fundamental investment restrictions.

Subject	Legg Mason Limited Duration Bond Portfolio (Acquired Fund) Restrictions	Legg Mason Partners Short-Term Bond Fund (Acquiring Fund) Restrictions and Brief Discussion
Borrowing:	The Fund may not borrow money, except (1) in an amount not exceeding 33 1/3% of the Fund’s total assets (including the amount borrowed) less liabilities (other than borrowings) or (2) by entering into reverse repurchase agreements or dollar rolls.	The Fund may not borrow money except as permitted by (i) the 1940 Act, as amended, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority. The 1940 Act generally permits a fund to borrow money in amounts of up to one-third of the fund’s total assets from banks for any purpose, and to borrow up to 5% of the fund’s total assets from banks or other lenders for temporary purposes. Certain trading practices and investments, such as reverse repurchase agreements, dollar rolls and certain derivatives, may be considered to be borrowing and thus subject to 1940 Act restrictions. On the other hand, certain practices and investments may involve leverage but are not considered to be borrowing.

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Subject	Legg Mason Limited Duration Bond Portfolio (Acquired Fund) Restrictions	Legg Mason Partners Short-Term Bond Fund (Acquiring Fund) Restrictions and Brief Discussion
Underwriting:	The Fund may not engage in the business of underwriting the securities of other issuers, except as permitted by the Investment Company Act of 1940, as amended (“1940 Act”), and the rules and regulations promulgated thereunder, as such statute, rules, and regulations are amended from time to time or are interpreted from time to time by the SEC or SEC staff or to the extent that the Fund may be permitted to do so by exemptive order or other relief from the SEC or SEC staff (collectively, “1940 Act Laws, Interpretations and Exemptions”). This restriction does not prevent the Fund from engaging in transactions involving the acquisition, disposition or resale of portfolio securities, regardless of whether the Fund may be considered to be an underwriter under the Securities Act of 1933, as amended (the “1933 Act”).	The Fund may not engage in the business of underwriting the securities of other issuers except as permitted by (i) the 1940 Act, as amended, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority. The 1940 Act generally permits a fund to have underwriting commitments of up to 25% of its assets in certain circumstances. Currently, the Fund is not permitted to engage in the business of underwriting the securities of others.
Lending:	The Fund may not lend money or other assets, except to the extent permitted by the 1940 Act Laws, Interpretations and Exemptions. This restriction does not prevent the Fund from purchasing debt obligations in pursuit of its investment program, or for defensive or cash management purposes, entering into repurchase agreements, loaning its portfolio securities to financial intermediaries, institutions or institutional investors, or investing in loans, including assignments and participation interests.	The Fund may lend money or other assets to the extent permitted by (i) the 1940 Act, as amended, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority. The 1940 Act does not prohibit a fund from making loans; however, SEC staff interpretations currently prohibit funds from lending more that one-third of their total assets, except through the purchase of debt obligations or the use of repurchase agreements. (A repurchase agreement is an agreement to purchase a security, coupled with an agreement to sell that security back to the original seller on an agreed-upon date at a price that generally reflects current interest rates. The SEC frequently treats repurchase agreements as loans.)
Senior Securities:	The Fund may not issue senior securities, except as permitted under the 1940 Act Laws, Interpretations and Exemptions.	The Fund may not issue senior securities except as permitted by (i) the 1940 Act, as amended, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority. Senior securities are generally defined as fund obligations that have a priority over the fund’s shares with respect to the payment of dividends or distribution of fund assets. The 1940 Act prohibits a fund from issuing senior securities except that it generally permits a fund to borrow from banks for any purpose in amounts up to one-third of the fund’s total assets and to borrow up to 5% of its total assets from any source for temporary purposes. A fund’s temporary borrowings not exceeding 5% of its total assets are not considered senior securities.

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Subject	Legg Mason Limited Duration Bond Portfolio (Acquired Fund) Restrictions	Legg Mason Partners Short-Term Bond Fund (Acquiring Fund) Restrictions and Brief Discussion
Real Estate:	The Fund may not purchase or sell real estate unless acquired as a result of ownership of securities or other instruments. This restriction does not prevent the Fund from investing in issuers that invest, deal, or otherwise engage in transactions in or hold real estate or interests therein, investing in instruments that are secured by real estate or interests therein, or exercising rights under agreements relating to such securities, including the right to enforce security interests.	The Fund may not purchase or sell real estate except as permitted by (i) the 1940 Act, as amended, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority. The 1940 Act does not prohibit a fund from owning real estate; however, a mutual fund is limited in the amount of illiquid assets it may purchase (real estate is generally considered illiquid).
Commodities:	The Fund may not purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments. This restriction does not prevent the Fund from engaging in transactions involving foreign currency, futures contracts and options, forward contracts, swaps, caps, floors, collars, securities purchased or sold on a forward-commitment or delayed-delivery basis or other similar financial instruments, or investing in securities or other instruments that are secured by physical commodities.	The Fund may purchase or sell commodities or contracts related to commodities to the extent permitted by (i) the 1940 Act, as amended, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority. The 1940 Act does not prohibit a fund from owning commodities, whether physical commodities or contracts related to physical commodities (such as oil or grains and related futures contracts), or financial commodities and contracts related to financial commodities (such as currencies and, possibly, currency futures). However, a mutual fund is limited in the amount of illiquid assets it may purchase (certain commodities (especially physical commodities) may be considered to be illiquid).
Concentration:	The Fund may not make any investment if, as a result, the Fund’s investments will be concentrated (as that term may be defined or interpreted by the 1940 Act Laws, Interpretations and Exemptions) in any one industry. This restriction does not limit the Fund’s investment in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities and repurchase agreements with respect thereto, or securities of municipal issuers.	Except as otherwise permitted by exemptive or other relief or permission from the SEC, SEC staff or other authority with appropriate jurisdiction, the Fund may not make any investment if, as a result, the Fund’s investments will be concentrated in any one industry. While the 1940 Act does not define what constitutes “concentration” in an industry, the SEC has taken the position that investment of 25% or more of a fund’s total assets in one or more issuers conducting their principal activities in the same industry constitutes concentration. It is possible that interpretations of concentration could change in the future.

Comparison between the Acquired Fund’s Fundamental Investment Restrictions and the Acquiring Fund’s Fundamental Investment Restrictions

There are no material differences between each Fund’s fundamental investment restrictions. Note that the Acquired Fund may not purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments, while the Acquiring Fund may purchase or sell commodities or contracts related to commodities, though it is limited in the amount of illiquid assets it may purchase. Certain commodities may be considered illiquid.

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For purposes of the foregoing restrictions, references to the 1940 Act and the related rules will be interpreted to mean the 1940 Act and related rules as they are in effect from time to time, and references to interpretations and modifications of or relating to the 1940 Act by the SEC and others will be interpreted to mean as they are given from time to time. When a restriction provides that an investment practice may be conducted as permitted by the 1940 Act, the restriction will be interpreted to mean either that the 1940 Act expressly permits the practice or that the 1940 Act does not prohibit the practice.

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INFORMATION ABOUT THE PROPOSED REORGANIZATIONS

The Reorganization Agreements

The following summary of each Reorganization Agreement is qualified in its entirety by reference to the forms of Reorganization Agreement attached as Appendix A1 and Appendix A2 to this Proxy Statement/Prospectus. Each Reorganization Agreement provides for (1) the transfer of all of the assets of the Acquired Fund to the Acquiring Fund, in exchange for the assumption of all of the liabilities of the Acquired Fund and for shares of the corresponding Acquiring Fund having an aggregate net asset value equal to the aggregate net asset value of the shares of the Acquired Fund, (2) the distribution of Class C, Class P and Class I shares, as applicable, of the Acquiring Fund to the shareholders of the Acquired Fund and (3) the subsequent redemption of the Acquired Fund shares and termination of the Acquired Fund. Subject to the satisfaction of the conditions described below, each Reorganization is scheduled to occur as of the close of business on June 19, 2009, or on such later date as the parties may agree (“Closing Date”).

If the Reorganization of an Acquired Fund is approved, shareholders of Primary Class shares of that Acquired Fund will receive Class C shares of Legg Mason Short-Term Bond Fund or Class P shares of Legg Mason Partners Corporate Bond Fund, as applicable, and shareholders of Institutional Class shares of that Acquired Fund will receive Class I shares of the corresponding Acquiring Fund. The net asset value of each Acquired Fund shall be computed using the valuation procedures established by the Acquired Funds’ Board, which will adopt before the Reorganization the valuation procedures of the Acquiring Funds’ Board with respect to the Acquired Funds. The net asset value per share of each Acquiring Fund will be determined using the valuation procedures established by the Acquiring Funds’ Board.

The number of full and fractional shares of the corresponding Acquiring Fund to be received by each Acquired Fund shareholder in the Reorganization will be equal in aggregate net asset value to the aggregate net asset value of the shares of the Acquired Fund held by that shareholder as of the close of regularly scheduled trading on the New York Stock Exchange (“NYSE”) on the Closing Date or such later time as the Acquired Fund’s net asset value is calculated. As promptly as practicable after the Closing Date, each Acquired Fund will distribute pro rata to its shareholders of record, as of the close of regularly scheduled trading on the NYSE on the Closing Date, the shares of the corresponding Acquiring Fund received by the Acquired Fund in the Reorganization, and will terminate. The distribution of each Acquiring Fund’s shares will be accomplished by the transfer of the corresponding Acquiring Fund shares then credited to the account of the Acquired Fund on the books of the Acquiring Fund to open accounts on the share records of the Acquiring Fund in the names of the Acquired Fund’s shareholders.

All issued and outstanding shares of each Acquired Fund will thereafter be canceled on the books of that Acquired Fund, and any share certificates representing shares of the Acquired Fund will be null and void. The Acquiring Funds will not issue certificates representing Class C, Class P and Class I shares, as applicable, issued in connection with the Reorganizations.

After such distribution, each Acquired Fund will take all necessary steps under Maryland law, its charter and any other applicable law to effect its termination.

The Board of the Acquired Funds and the Board of the Acquiring Funds have determined with respect to each of its respective Funds that the interests of its Fund’s shareholders will not be diluted as a result of the Reorganization and that participation in the Reorganization is in the best interests of the Fund. In making these determinations, each Board took into account that LMPFA will pay all of the costs of the Reorganization allocated to each Acquired Fund and 50% of the costs of the Reorganization allocated to each Acquiring Fund, and that each Acquiring Fund will pay the remaining 50% of the costs of the Reorganization allocated to it, except that any transaction costs associated with repositioning a Fund’s portfolio in connection with the Reorganization will be borne by the Fund.

Each Reorganization Agreement may be terminated and the Reorganization abandoned at any time prior to the Closing Date if circumstances develop that, in the opinion of the Board of the Acquired Fund or the Board of the Acquiring Fund, make proceeding with that Reorganization inadvisable. Each Reorganization Agreement provides that the Acquired Fund and the corresponding Acquiring Fund may waive compliance with any of the covenants or conditions made therein for the benefit of either Fund, other than the requirements that: (a) the Reorganization Agreement be approved by shareholders of the Acquired Fund; and (b) the Funds receive the opinion of Bingham McCutchen LLP that the transaction contemplated by the Reorganization Agreement will constitute a tax-free reorganization for Federal income tax purposes. Each Reorganization

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Agreement may be amended, modified or supplemented in such manner as may be deemed necessary or advisable by the authorized officers of the Acquired Fund and the Acquiring Fund, provided, however, that following the Meeting, no such amendment shall have the effect of changing the provisions for determining the number of Acquiring Fund shares to be issued to Acquired Fund shareholders to the detriment of such shareholders without their further approval.

Approval of each Reorganization Agreement will require the affirmative vote of a majority of the outstanding voting securities of the relevant Acquired Fund as defined in the 1940 Act. See “Voting Information” below.

Description of the Acquiring Funds’ Shares

Primary Class shareholders of Legg Mason Investment Grade Income Portfolio will receive Class P shares of Legg Mason Corporate Bond Fund. Primary Class shareholders of Legg Mason Limited Duration Bond Portfolio will receive Class C shares of Legg Mason Partners Short-Term Bond Fund. Institutional Class shareholders of each Acquired Fund will receive Class I shares of the corresponding Acquiring Fund. Each such share will be fully paid and non-assessable when issued and will have no preemptive or conversion rights. The Acquiring Funds will not issue share certificates.

Reasons for the Reorganizations and Board Considerations

The proposed Reorganizations were presented to the Acquired Funds’ Board for consideration at a Board meeting held in February 2009, and were approved at that meeting. Following extensive discussions of the advantages and disadvantages to each Acquired Fund, based on its evaluation of all material factors, including those described below, the Acquired Funds’ Board, including all of the Independent Board Members, determined that: (1) the proposed Reorganization would be in the best interests of each Acquired Fund; and (2) the Reorganization would not result in the dilution of the interests of either Acquired Fund’s shareholders. In considering the proposal, the Board did not identify any single factor or piece of information as all-important or controlling.

The Acquired Funds’ Board considered a number of factors in recommending the Reorganization of such Acquired Fund, including the following:

• the benefits to the Funds and Legg Mason that are expected to be derived from the integration of the Funds, as described below;

• the objective of management to eliminate comparable or duplicative product offerings among the Legg Mason and Legg Mason Partners funds as part of an overall integration initiative to reduce the potential for investor confusion;

• the compatibility of the investment objectives, strategies, policies and risks of each Acquired Fund with those of the corresponding Acquiring Fund;

• that the portfolio managers of the Acquired Fund and the corresponding Acquiring Fund are the same;

• the relative sizes of the Acquired Fund and the corresponding Acquiring Fund;

• the expense ratios of each Acquired Fund and the corresponding Acquiring Fund and information as to specific fees and expenses of Class C, Class P and Class I shares, as applicable, of the Acquiring Fund and Primary and Institutional Class shares of the Acquired Fund;

• greater marketing and distribution focus on a smaller number of funds, which may promote asset growth over time;

• the absence of a dilutive effect on interests of current shareholders of the Acquired Fund;

• the federal tax consequences of the Reorganization to the Acquired Fund and its shareholders, including that the Reorganization has been structured to qualify as a “reorganization” under Section 368(a) of the Code;

• the impending expiration of the manager’s voluntary and contractual agreements to cap total annual operating expenses of each Acquired Fund;

• that LMPFA will pay all of the costs of the Reorganization allocated to the Acquired Fund; and

• the potential for greater economies of scale and lower expenses, resulting from greater asset growth over time.

The Board considered the benefits to Legg Mason. If the Reorganization of an Acquired Fund is approved by its shareholders and is consummated, Legg Mason is expected to achieve higher profitability due to decreased costs. Legg

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Mason is expected to reduce the level of its operational expenses for administrative, compliance and portfolio management services as the number of separate funds declines. To the extent that the Reorganization helps to streamline the fund families, encourage a more focused marketing and distribution effort, reduce investor confusion, produce better performance and generally make the funds more attractive investment vehicles to the investing public, Legg Mason will benefit from the increased revenues of rising asset levels.

Federal Income Tax Consequences

Each of the Reorganizations is conditioned upon the receipt by the parties to the applicable Reorganization (other than LMPFA) of an opinion from Bingham McCutchen LLP, substantially to the effect that, based upon certain facts, assumptions and representations of the parties, for federal income tax purposes:

(i) The transfer to the Acquiring Fund of all of the assets of the Acquired Fund solely in exchange for shares of the Acquiring Fund and the assumption by the Acquiring Fund of all of the liabilities of the Acquired Fund, followed by the distribution by the Acquired Fund to its shareholders of shares of the Acquiring Fund and the termination of the Acquired Fund, all pursuant to the Reorganization Agreement, will constitute a “reorganization” within the meaning of Section 368(a) of the Code, and the Acquired Fund and the Acquiring Fund will each be a “party to a reorganization” within the meaning of Section 368(b) of the Code;

(ii) The Acquired Fund will not recognize gain or loss upon the transfer of its assets to the Acquiring Fund solely in exchange for shares of the Acquiring Fund and the assumption of all of the liabilities of the Acquired Fund by the Acquiring Fund, or upon the distribution by the Acquired Fund to the Acquired Fund’s shareholders of shares of the Acquiring Fund in liquidation of Acquired Fund, except for (A) any gain or loss that may be recognized on the transfer of “section 1256 contracts” as defined in Section 1256(b) of the Code, (B) any gain that may be recognized on the transfer of stock in a “passive foreign investment company” as defined in Section 1297(a) of the Code, and (C) any other gain or loss that may be required to be recognized as a result of the closing of the tax year of the Acquired Fund;

(iii) Shareholders of the Acquired Fund will not recognize gain or loss on the receipt of shares of the Acquiring Fund solely in exchange for shares of the Acquired Fund pursuant to the Reorganization;

(iv) The aggregate basis of the shares of the Acquiring Fund received by each Acquired Fund shareholder pursuant to the Reorganization will be the same as the aggregate basis of the shares of the Acquired Fund exchanged therefor;

(v) The holding period of the shares of the Acquiring Fund received by each Acquired Fund shareholder pursuant to the Reorganization will include the holding period of the shares of the Acquired Fund exchanged therefor, provided that the Acquired Fund shareholder held the shares of the Acquired Fund as a capital asset at the time of the Reorganization;

(vi) The Acquiring Fund will not recognize gain or loss upon the receipt of the assets of the Acquired Fund in exchange for shares of the Acquiring Fund and the assumption by the Acquiring Fund of all of the liabilities of the Acquired Fund;

(vii) The basis of each asset of the Acquired Fund transferred to the Acquiring Fund in the Reorganization will be the same in the hands of the Acquiring Fund as the basis of such asset in the hands of the Acquired Fund immediately prior to the transfer, increased by the amount of gain (or decreased by the amount of loss), if any, recognized by the Acquired Fund upon the transfer; and

(viii) The holding periods of each asset of the Acquired Fund transferred to the Acquiring Fund in the Reorganization in the hands of the Acquiring Fund will include the period during which such asset was held by the Acquired Fund (except to the extent that the investment activities of the Acquiring Fund reduce or eliminate such holding period).

While none of the Funds is aware of any adverse state or local tax consequences of the proposed Reorganizations, they have not requested any ruling or opinion with respect to such consequences and shareholders should consult their own tax advisor with respect to such matters.

Immediately prior to its Reorganization, each Acquired Fund will pay a dividend or dividends, which together with all previous dividends, are intended to have the effect of distributing to its shareholders all of its investment company taxable income for taxable years ending on or prior to the Closing Date (computed without regard to any deduction for dividends paid) and all of its net capital gain, if any, realized in taxable years ending on or prior to the Closing Date (after reduction for

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any available capital loss carryover). Such dividends will be included in the taxable income of each of the Acquired Fund’s shareholders.

Information Regarding Tax Capital Loss Carryforwards

Federal income tax law permits a regulated investment company to carry forward its net capital losses for a period of up to eight taxable years. The Acquired Funds are presently entitled to net capital loss carryforwards for federal income tax purposes in the amounts set forth below. The Reorganization will cause the tax years of the Acquired Funds to close, which will accelerate the schedule for expiration of their respective net capital loss carryforwards, and could also result in a net capital loss for the tax year ending on the Closing Date. In addition, the Reorganization is expected to result in a limitation on the applicable Acquiring Fund’s abilities to use carryforwards of the corresponding Acquired Fund and, potentially, to use unrealized capital losses inherent in the tax basis of the assets acquired, once realized. That limitation, imposed by Section 382 of the Code, will apply if the shareholders of each Acquired Fund own less than 50% of the corresponding Acquiring Fund immediately after the applicable Reorganization, and will be imposed on an annual basis. The annual Section 382 limitation for periods following the Reorganization generally will equal the product of the net asset value of the applicable Acquired Fund immediately prior to the Reorganization and the “long-term tax-exempt rate,” published by the Internal Revenue Service, in effect at the time of the Reorganization. Each Acquiring Fund may also be prohibited, under Section 384 of the Code, from using the corresponding Acquired Fund’s loss carryforwards and unrealized losses against the unrealized gains of the Acquiring Fund at the time of the Reorganization to the extent such gains are realized within five years following the Reorganization.

[As of the date of this Proxy Statement/Prospectus, the product of the long-term tax-exempt rate and the net asset value of the Legg Mason Investment Grade Income Portfolio is substantially in excess of the current capital loss carryforwards of that Fund. As a result, the Section 382 limitation is not expected to be a significant factor in the usability of the Legg Mason Investment Grade Income Portfolio’s capital loss carryforwards. However, no assurance can be given as to the net asset value of either Acquired Fund or the long-term tax exempt rate that will be in effect at the time of the Reorganization. Even if an Acquiring Fund were able to fully utilize the net capital loss carryforwards and unrealized losses of an Acquired Fund, the tax benefit resulting from those losses will be shared by both the applicable Acquired Fund and Acquiring Fund shareholders following the Reorganization. Therefore, an Acquired Fund shareholder may pay more taxes, or pay taxes sooner, than such shareholder otherwise would if the Reorganization did not occur.]

Legg Mason Investment Grade Income Portfolio (Acquired Fund) and Legg Mason Partners Corporate Bond Fund (Acquiring Fund)

As of December 31, 2008, the Funds had the following unused capital loss carryforwards:

Acquired Fund					Acquiring Fund
Fiscal Year Generated	Amount of Carryforward			Fiscal Year of Expiration Prior to Reorganization	Fiscal Year Generated	Amount of Carryforward			Fiscal Year of Expiration Prior to Reorganization
					12/31/2006	$	(13,489,887	)	12/31/2014
12/31/2007	$	(750,316	)	12/31/2015	12/31/2007	$	(2,662,743	)	12/31/2015
12/31/2008	$	(4,924,337	)	12/31/2016	12/31/2008	$	(14,242,088	)	12/31/2016
Total	$	(5,674,653	)		Total	$	(30,394,718	)

Acquired Fund

The Reorganization would impact the use of the Acquired Fund’s loss carryforwards in the following manner: (1) the expiration date of the loss carryforwards would move up one year; for example, the losses due to expire on December 31, 2015 would expire on December 31, 2014; (2) the loss carryforwards will benefit the shareholders of the combined Fund, rather than only the shareholders of the Acquired Fund; (3) the amount of the Acquired Fund’s capital loss carryforwards that can be utilized in any taxable year is equal to the long-term tax-exempt rate at the time of the Reorganization, multiplied by the aggregate net asset value of the Acquired Fund at the time of Reorganization (approximately $11,605,000 per year based on data as of a recent date); (4) any losses recognized after the Reorganization that are attributable to depreciation in the Acquired Fund’s portfolio at the time of the Reorganization are subject to these same limitations.

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Acquiring Fund

The Reorganization would impact the use of the Acquiring Fund’s loss carryforwards by benefiting the shareholders of the combined Fund, rather than only the shareholders of the Acquiring Fund.

Legg Mason Limited Duration Bond Portfolio (Acquired Fund) and Legg Mason Partners Short-Term Bond Fund (Acquiring Fund)

As of December 31, 2008, the Funds had the following unused capital loss carryforwards:

Acquired Fund					Acquiring Fund
Fiscal Year Generated	Amount of Carryforward			Fiscal Year of Expiration Prior to Reorganization	Fiscal Year Generated	Amount of Carryforward			Fiscal Year of Expiration Prior to Reorganization
12/31/2004	$	(4,535,866	)	12/31/2012
12/31/2005	$	(554,986	)	12/31/2013	12/31/2005	$	(818,123	)	12/31/2013
12/31/2006	$	(1,406,678	)	12/31/2014	12/31/2006	$	(6,746,682	)	12/31/2014
12/31/2007	$	(1,560,852	)	12/31/2015	12/31/2007	$	(306,147	)	12/31/2015
Total	$	(8,058,382	)		Total	$	(7,870,952	)

Acquired Fund

The Reorganization would impact the use of the Acquired Fund’s loss carryforwards in the following manner: (1) the expiration date of the loss carryforwards would move up by one year; for example, the losses due to expire on December 31, 2012 would expire on December 31, 2011; (2) the loss carryforwards will benefit the shareholders of the combined Fund, rather than only the shareholders of the Acquired Fund; (3) the amount of the Acquired Fund’s capital loss carryforwards that can be utilized in any taxable year is equal to the long-term tax-exempt rate at the time of the Reorganization, multiplied by the aggregate net asset value of the Acquired Fund at the time of Reorganization (approximately $5,725,000 per year based on data as of a recent date); (4) any losses recognized after the Reorganization that are attributable to depreciation in the Acquired Fund’s portfolio at the time of the Reorganization are subject to these same limitations.

Acquiring Fund

The Reorganization would impact the use of the Acquiring Fund’s loss carryforwards by benefiting the shareholders of the combined Fund, rather than only the shareholders of the Acquiring Fund.

Information Applicable to all Funds

Since the Reorganizations are not expected to close until approximately June 19, 2009, the capital loss carryforwards and limitations described above may change significantly between now and the Closings. Further, the ability of each Fund to use these losses (even in the absence of a Reorganization) depends on factors other than loss limitations, such as the future realization of capital gains or losses. The combination of these factors on the use of loss carryforwards may result in some portion of the loss carryforwards of any or all of the Funds expiring unused.

TERMINATION OF THE ACQUIRED FUNDS

If the Reorganization of an Acquired Fund is effected, that Acquired Fund will be terminated.

PORTFOLIO SECURITIES

If the Reorganization of an Acquired Fund is effected, management will analyze and evaluate the portfolio securities of the Acquired Fund being transferred to the corresponding Acquiring Fund. Consistent with each Acquiring Fund’s investment objectives and policies, any restrictions imposed by the Code and in the best interests of the Acquiring Fund’s shareholders (including former shareholders of the Acquired Fund), management will influence the extent and duration to

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which the portfolio securities of the Acquired Fund will be maintained by the Acquiring Fund. It is possible that there may be some dispositions of the portfolio securities of an Acquired Fund in connection with the Reorganization of that Fund. Subject to market conditions at the time of any such disposition, the disposition of the portfolio securities of an Acquired Fund may result in a capital gain or loss. The actual tax consequences of any disposition of portfolio securities will vary depending upon the specific security(ies) being sold and the corresponding Acquiring Fund’s ability to use any available loss carryforwards. The transaction costs associated with repositioning an Acquired Fund’s portfolio in connection with its Reorganization will be borne by that Acquired Fund.

INFORMATION ABOUT MANAGEMENT OF THE ACQUIRING FUNDS

Investment Manager and Subadviser

LMPFA is each Acquiring Fund’s investment manager. LMPFA, with offices at 620 Eighth Avenue, New York, New York 10018, also serves as the investment manager of other Legg Mason-sponsored funds. LMPFA provides administrative and certain oversight services to the Funds. As of December 31, 2008, LMPFA’s total assets under management were approximately $172 billion.

Western Asset Management Company (“Western Asset” or the “subadviser”) provides the day-to-day portfolio management of each Acquiring Fund as subadviser. Western Asset, established in 1971, has offices at 385 East Colorado Boulevard, Pasadena, California 91101 and 620 Eighth Avenue, New York, New York 10018. Western Asset has served as subadviser to each Acquiring Fund since August 1, 2006.

Western Asset acts as investment adviser to institutional accounts, such as corporate pension plans, mutual funds and endowment funds. As of December 31, 2008, the total assets under management of Western Asset and its supervised affiliates were approximately $513.3 billion.

LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”). Legg Mason, whose principal executive offices are at 100 Light Street, Baltimore, Maryland 21202, is a global asset management company. As of December 31, 2008, Legg Mason’s asset management operations, including Western Asset and its supervised affiliates, had aggregate assets under management of approximately $698.2 billion.

Management and sub-advisory fees paid to LMPFA and Western Asset prior to the Reorganization are as follows:

Legg Mason Partners Corporate Bond Fund

Investment Manager	Fee Rate (percentage of average daily net assets)	Subadviser	Rate Received by Subadviser
LMPFA	First $500 million 0.650%; Over $500 million 0.600%	Western Asset	The sub-advisory fee is 70% of the management fee paid to LMPFA, net of expense waivers and reimbursements

For the fiscal year ended December 31, 2008, Legg Mason Partners Corporate Bond Fund paid management fees, after waivers and reimbursements, if any, of 0.65% of its average daily net assets for management services.

Legg Mason Partners Short-Term Bond Fund

Investment Manager	Fee Rate (percentage of average daily net assets)	Subadviser	Rate Received by Subadviser
LMPFA	0.45%	Western Asset	The sub-advisory fee is 70% of the management fee paid to LMPFA, net of expense waivers and reimbursements

For the fiscal year ended December 31, 2008, Legg Mason Partners Short-Term Bond Fund paid management fees, after waivers and reimbursements, if any, of 0.45% of its average daily net assets for management services.

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Information about the factors considered by the Board of Legg Mason Partners Corporate Bond Fund in approving the investment management agreement with LMPFA and the sub-advisory agreement with Western Asset is contained in the Annual Report for the Fund for the fiscal year ended December 31, 2008. Additional information about the factors considered by the Board of Legg Mason Partners Short-Term Bond Fund in approving the investment management agreement with LMPFA and the sub-advisory agreement with Western Asset is contained in the Annual Report for the Fund for the fiscal year ended December 31, 2008.

Certain Legal Proceedings

Beginning in June 2004, class action lawsuits alleging violations of the federal securities laws were filed against Citigroup Global Markets Inc. (“CGMI”), a former distributor of the Acquiring Funds and other affiliated funds (collectively the “funds”), Smith Barney Fund Management LLC (“SBFM”) and Salomon Brothers Asset Management Inc. (“SBAM”), which were then investment adviser or manager to certain of the funds (the “Managers”), substantially all of the mutual funds then managed by the Managers (the “Defendant Funds”), and Board Members of the Defendant Funds (collectively, the “Defendants”). The complaints alleged, among other things, that CGMI created various undisclosed incentives for its brokers to sell Smith Barney and Salomon Brothers funds. In addition, according to the complaints, the Managers caused the Defendant Funds to pay excessive brokerage commissions to CGMI for steering clients towards proprietary funds. The complaints also alleged that the Defendants breached their fiduciary duty to the Defendant Funds by improperly charging Rule 12b-1 fees and by drawing on fund assets to make undisclosed payments of soft dollars and excessive brokerage commissions. The complaints also alleged that the Defendant Funds failed to adequately disclose certain of the allegedly wrongful conduct. The complaints sought injunctive relief and compensatory and punitive damages, rescission of the Defendant Funds’ contracts with the Managers, recovery of all fees paid to the Managers pursuant to such contracts and an award of attorneys’ fees and litigation expenses.

On December 15, 2004, a consolidated amended complaint (the “Complaint”) was filed alleging substantially similar causes of action. On May 27, 2005, all of the Defendants filed motions to dismiss the Complaint. On July 26, 2006, the court issued a decision and order (1) finding that plaintiffs lacked standing to sue on behalf of the shareholders of the Defendant Funds in which none of the plaintiffs had invested and dismissing those Defendant Funds from the case (although stating that they could be brought back into the case if standing as to them could be established), and (2) other than one stayed claim, dismissing all of the causes of action against the remaining Defendants, with prejudice, except for the cause of action under Section 36(b) of the 1940 Act, which the court granted plaintiffs leave to replead as a derivative claim.

On October 16, 2006, plaintiffs filed their Second Consolidated Amended Complaint (“Second Amended Complaint”) which alleges derivative claims on behalf of nine funds identified in the Second Amended Complaint, under Section 36(b) of the 1940 Act, against Citigroup Asset Management (“CAM”), Salomon Brothers Asset Management Inc, SBFM and CGMI as investment advisers to the identified funds, as well as CGMI as a distributor for the identified funds (collectively, the “Second Amended Complaint Defendants”). The funds were not identified in the Second Amended Complaint. The Second Amended Complaint alleges no claims against the funds or their Board Members. Under Section 36(b), the Second Amended Complaint alleges similar facts and seeks similar relief against the Second Amended Complaint Defendants as the Complaint.

On December 3, 2007, the court granted the Defendants’ motion to dismiss, with prejudice. On January 2, 2008, the plaintiffs filed an appeal in the U.S. Court of Appeals for the Second Circuit. The appeal has been briefed, and the parties await oral argument.

Additional lawsuits arising out of these circumstances and presenting similar allegations and requests for relief may be filed in the future.

*  *  *

On May 31, 2005, the SEC issued an order in connection with the settlement of an administrative proceeding against SBFM and CGMI relating to the appointment of an affiliated transfer agent for the Smith Barney family of mutual funds, including the Acquiring Funds (the “Affected Funds”).

The SEC order found that SBFM and CGMI willfully violated Section 206(1) of the Investment Advisers Act of 1940, as amended, and the rules promulgated thereunder (the “Advisers Act”). Specifically, the order found that SBFM and CGMI

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knowingly or recklessly failed to disclose to the boards of the Affected Funds in 1999 when proposing a new transfer agent arrangement with an affiliated transfer agent: that First Data Investors Services Group (“First Data”), the Affected Funds’ then-existing transfer agent, had offered to continue as transfer agent and do the same work for substantially less money than before; and that CAM, the Citigroup business unit that, at the time, included the Affected Funds’ investment manager and other investment advisory companies, had entered into a side letter with First Data under which CAM agreed to recommend the appointment of First Data as sub-transfer agent to the affiliated transfer agent in exchange for, among other things, a guarantee by First Data of specified amounts of asset management and investment banking fees to CAM and CGMI. The order also found that SBFM and CGMI willfully violated Section 206(2) of the Advisers Act by virtue of the omissions discussed above and other misrepresentations and omissions in the materials provided to the Affected Funds’ boards, including the failure to make clear that the affiliated transfer agent would earn a high profit for performing limited functions while First Data continued to perform almost all of the transfer agent functions, and the suggestion that the proposed arrangement was in the Affected Funds’ best interests and that no viable alternatives existed. SBFM and CGMI do not admit or deny any wrongdoing or liability. The settlement does not establish wrongdoing or liability for purposes of any other proceeding.

The SEC censured SBFM and CGMI and ordered them to cease and desist from violations of Sections 206(1) and 206(2) of the Advisers Act. The order required Citigroup to pay $208.1 million, including $109 million in disgorgement of profits, $19.1 million in interest, and a civil money penalty of $80 million. Approximately $24.4 million has already been paid to the Affected Funds, primarily through fee waivers. The remaining $183.7 million, including the penalty, has been paid to the U.S. Treasury and will be distributed pursuant to a plan submitted for the approval of the SEC. The order also required that transfer agency fees received from the Affected Funds since December 1, 2004, less certain expenses, be placed in escrow and provided that a portion of such fees might be subsequently distributed in accordance with the terms of the order. On April 3, 2006, an aggregate amount of approximately $9 million held in escrow was distributed to the Affected Funds.

The order required SBFM to recommend a new transfer agent contract to the Affected Funds’ boards within 180 days of the entry of the order; if a Citigroup affiliate submitted a proposal to serve as transfer agent or sub-transfer agent, SBFM and CGMI would have been required, at their expense, to engage an independent monitor to oversee a competitive bidding process. On November 21, 2005, and within the specified timeframe, the Affected Funds’ Boards selected a new transfer agent for the Affected Funds. No Citigroup affiliate submitted a proposal to serve as transfer agent. Under the order, SBFM also must comply with an amended version of a vendor policy that Citigroup instituted in August 2004.

Although there can be no assurance, the manager does not believe that this matter will have a material adverse effect on the Affected Funds.

On December 1, 2005, Citigroup completed the sale of substantially all of its global asset management business, including SBFM, to Legg Mason.

Neither of the Acquired Funds is an Affected Fund, and, therefore, neither implemented the transfer agent arrangements described above. The Acquired Funds have not received and will not receive any portion of the distributions.

*  *  *

Beginning in August 2005, five class action lawsuits alleging violations of federal securities laws and state law were filed against CGMI and SBFM (collectively, the “Defendants”) based on the May 31, 2005 settlement order issued against the Defendants by the SEC as described above. The complaints seek injunctive relief and compensatory and punitive damages, removal of SBFM as the investment manager for the Smith Barney family of funds, rescission of the funds’ management and other contracts with SBFM, recovery of all fees paid to SBFM pursuant to such contracts, and an award of attorneys’ fees and litigation expenses. The five actions were subsequently consolidated, and a consolidated complaint was filed.

On September 26, 2007, the United States District Court for the Southern District of New York issued an order dismissing the consolidated complaint, and judgment was later entered. An appeal has been filed and is pending before the U.S. Court of Appeals for the Second Circuit.

*  *  *

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On or about May 30, 2006, John Halebian, a purported shareholder of Citi New York Tax Free Reserves, a series of Legg Mason Partners Money Market Trust, formerly a series of CitiFunds Trust III (the “Subject Trust”), filed a complaint in the United States District Court for the Southern District of New York against the independent trustees of the Subject Trust (Elliott J. Berv, Donald M. Carlton, A. Benton Cocanougher, Mark T. Finn, Stephen Randolph Gross, Diana R. Harrington, Susan B. Kerley, Alan G. Merten and R. Richardson Pettit). The Subject Trust is also named in the complaint as a nominal defendant.

The complaint alleges both derivative claims on behalf of the Subject Trust and class claims on behalf of a putative class of shareholders of the Subject Trust in connection with the 2005 sale of Citigroup’s asset management business to Legg Mason and the related approval of new investment advisory agreements by the trustees and shareholders. In the derivative claim, the plaintiff alleges, among other things, that the independent trustees breached their fiduciary duty to the Subject Trust and its shareholders by failing to negotiate lower fees or seek competing bids from other qualified investment advisers in connection with Citigroup’s sale to Legg Mason. In the claims brought on behalf of the putative class of shareholders, the plaintiff alleges that the independent trustees violated the proxy solicitation requirements of the 1940 Act, and breached their fiduciary duty to shareholders, by virtue of the voting procedures, including “echo voting,” used to obtain approval of the new investment advisory agreements and statements made in a proxy statement regarding those voting procedures. The plaintiff alleges that the proxy statement was misleading because it failed to disclose that the voting procedures violated the 1940 Act. The relief sought includes an award of damages, rescission of the advisory agreement, and an award of costs and attorney fees.

In advance of filing the complaint, Mr. Halebian’s lawyers made written demand for relief on the Board of the Subject Trust, and the Board’s independent trustees formed a demand review committee to investigate the matters raised in the demand, and subsequently in the complaint, and recommend a course of action to the Board. The committee, after a thorough review, has determined that the independent trustees did not breach their fiduciary duties as alleged by Mr. Halebian, and that the action demanded by Mr. Halebian would not be in the best interests of the Subject Trust. The Board of the Subject Trust (the trustee who is an “interested person” of the Subject Trust, within the meaning of the 1940 Act, having recused himself from the matter), after receiving and considering the committee’s report and based upon the findings of the committee, subsequently also has so determined and, adopting the recommendation of the committee, has directed counsel to move to dismiss Mr. Halebian’s complaint. A motion to dismiss was filed on October 23, 2006. Opposition papers were filed on or about December 7, 2006. The complaint was dismissed on July 31, 2007. Mr. Halebian has filed an appeal in the U.S. Court of Appeals for the Second Circuit. The appeal has been briefed. The Court heard oral argument on February 5, 2009 and reserved judgment.

*  *  *

The foregoing speaks only as of the date of this Proxy Statement/Prospectus. Additional lawsuits presenting allegations and requests for relief arising out of or in connection with any of the foregoing matters may be filed against these and related parties in the future.

Portfolio Managers of the Acquiring Funds

Information about the portfolio managers of each Acquiring Fund is listed below. The SAI for each Acquiring Fund provides information about each portfolio manager’s compensation, other accounts managed by the portfolio managers and the portfolio manager’s ownership of securities in the Acquiring Fund. Similar information with respect to portfolio manager compensation is also included in Appendix I.

Legg Mason Partners Corporate Bond Fund

The Fund is managed by a team of portfolio managers, sector specialists and other investment professionals led by S. Kenneth Leech, Stephen A. Walsh, Jeffrey D. Van Schaick, Carl L. Eichstaedt, Edward A. Moody and Mark Lindbloom. Messrs. Leech, Walsh, Van Schaick and Eichstaedt have been portfolio managers of the Fund since February 2006. Messrs. Moody and Lindbloom have been portfolio managers of the Fund since August 2007. The portfolio managers are responsible for the day-to-day portfolio management and oversight of the Fund.

Messrs. Leech, Walsh, Van Schaick, Eichstaedt and Moody are portfolio managers of Western Asset and have been employed by Western Asset for more than five years.

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Mr. Lindbloom is a portfolio manager with Western Asset. Mr. Lindbloom joined Western Asset in 2006. Prior to that time, Mr. Lindbloom was a Managing Director of Citigroup Asset Management and had been associated with its predecessor companies since 1986.

Legg Mason Partners Short-Term Bond Fund

The Fund is managed by a team of portfolio managers, sector specialists and other investment professionals. The Fund’s portfolio managers are S. Kenneth Leech, Stephen A. Walsh, James J. Flick, Andrea A. Mack and Michael C. Buchanan The portfolio managers are responsible for the day-to-day portfolio management and oversight of the Fund. Messrs. Leech, Walsh and Flick have been portfolio managers of the Fund since March 2006. Mr. Buchanan and Ms. Mack have been portfolio managers of the Fund since August 2007. The portfolio managers lead the team, and their focus is on portfolio structure, including sector allocation, duration weighting and term structure decisions.

Messrs. Leech, Walsh and Flick and Ms. Mack are portfolio managers of Western Asset and have been employed by Western Asset for more than five years.

Mr. Buchanan is a portfolio manager with Western Asset. Mr. Buchanan joined Western Asset in 2005. Prior to that time, Mr. Buchanan was a Managing Director with Credit Suisse Asset Management, beginning in 2003. Mr. Buchanan also was Executive Vice President and Portfolio Manager with Janus Capital Management in 2003.

ADDITIONAL INFORMATION ABOUT THE ACQUIRED FUNDS AND THE ACQUIRING FUNDS

Legg Mason and certain of the Acquiring Funds’ service providers, which include Legg Mason-affiliated service providers, have a financial interest in the Reorganizations because their respective fees under agreements with the Acquiring Funds generally increase as the amount of the assets of the Acquiring Funds increases, and the amount of those assets will increase as a result of the Reorganizations. However, the increase in assets of each Acquiring Fund is expected to be offset by the concomitant loss of the corresponding Acquired Fund’s assets, resulting in decreases of fees of certain Legg Mason-affiliated service providers to the Acquired Funds.

Information about the Funds is included in the Prospectuses and Fund SAIs, annual reports and semi-annual reports filed with the SEC and dated as listed in Appendix J. Copies of these documents, the Reorganization SAI and any subsequently released shareholder reports are available upon request and without charge by calling the Acquiring Funds at 1-800-822-5544 or 1-888-425-6432 or the Acquired Funds at 1-800-822-5544, by writing to the Acquired Funds at 100 Light Street, Baltimore, Maryland 21202 or the Acquiring Funds at 55 Water, New York, New York 10041, or by visiting Legg Mason’s website at www.leggmason.com/individualinvestors.

All of the Funds are subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith file reports and other information including proxy materials, reports and charter documents with the SEC. These reports and other information can be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, NE, Washington, DC 20549. Reports and other information about each Fund are available on the EDGAR Database on the SEC’s website at www.sec.gov. Copies of such material can also be obtained from the Public Reference Branch, Office of Consumer Affairs and Information Services, SEC, 100 F Street, NE, Washington, DC 20549 at prescribed rates.

Performance of the Funds

Historical performance of each Fund is detailed in Appendix E of this Proxy Statement/Prospectus.

Financial Highlights

The most recent fiscal year end of each of the Acquired Funds and Acquiring Funds is December 31, 2008.

The financial highlights of each Acquiring Fund contained in Appendix D1 and Appendix D2 have been derived from financial statements audited by KPMG LLP, the Funds’ independent registered public accounting firm.

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Distribution Arrangements

Legg Mason Investor Services, LLC (“LMIS” or the “distributor”), a wholly-owned broker/dealer subsidiary of Legg Mason, located at 100 Light Street, Baltimore, Maryland 21202, serves as each Acquiring Fund’s sole and exclusive distributor. LMIS is a wholly-owned subsidiary of Legg Mason.

Each Acquiring Fund has adopted a shareholder services and distribution plan for its Class A, B, C, FI and R shares, as applicable. Under the plan, each Acquiring Fund pays distribution and/or service fees. With respect to Legg Mason Partners Corporate Bond Fund, the plan provides for payments, based on annualized percentages of average daily net assets, of up 0.25% for Class A shares; up to 0.75% for Class B shares; up to 0.70% for Class C shares; up to 0.25% for Class FI shares; up to 0.50% for Class R shares; and up 0.50% for Class P shares. With respect to Legg Mason Partners Short-Term Bond Fund, the plan provides for payments, based on annualized percentages of average daily net assets, of up to 0.25% for Class A shares; up to 0.75% for Class B shares; up to 0.75% for Class C shares; and up to 0.50% for Class R shares. Effective upon the closing of the Reorganization, the plan will be amended to provide for payments, based on annualized percentages of average daily net assets, of up 0.50% for Class C shares of Legg Mason Partners Short-Term Bond Fund. Class I shares of the Acquiring Funds are not subject to any distribution and/or service fees. Distribution and/or service fees are an ongoing expense and, over time, will increase the cost of your investment and may cost you more than other types of sales charges.

In addition, the distributor, the manager and/or their affiliates make payments for distribution, shareholder servicing, marketing and promotional activities and related expenses out of their profits and other available sources, including profits from their relationships with each Acquiring Fund. These payments are not reflected as additional expenses in the fee tables contained in this Proxy Statement/Prospectus.

The recipients of these payments may include the Acquiring Funds’ distributor and affiliates of the manager, as well as non-affiliated broker/dealers, financial institutions and other financial intermediaries through which investors may purchase shares of a Fund, including your financial intermediary. The total amount of these payments is substantial, may be substantial to any given recipient and may exceed the costs and expenses incurred by the recipient for any fund related marketing or shareholder servicing activities. The payments described in this paragraph are often referred to as “revenue sharing payments.” Revenue sharing arrangements are separately negotiated.

Revenue sharing payments may create an incentive for an intermediary or its employees or associated persons to recommend or sell shares of a Fund to you. Contact your financial intermediary for details about revenue sharing payments it receives or may receive. Revenue sharing payments, as well as the payments under the shareholder services and distribution plan (where applicable), also benefit the manager, the distributor and their affiliates to the extent the payments result in more assets being invested in a Fund on which fees are being charged.

FORM OF ORGANIZATION

Each Acquired Fund is a series of a Maryland corporation. Each Acquiring Fund is a series of a Maryland business trust. A comparison of Maryland corporations and Maryland business trusts is attached to this Proxy Statement/Prospectus as Appendix F.

A comparison of the composition of the Boards of the Acquired Funds and the Acquiring Funds is attached to this Proxy Statement/Prospectus as Appendix H.

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CAPITALIZATION

The following tables set forth the unaudited capitalization of each Acquired Fund and each Acquiring Fund as of the date set out below, and on a pro forma basis as of that date, giving effect to the proposed acquisition of assets at net asset value. The pro forma capitalization information is for informational purposes only. No assurance can be given as to how many shares of the applicable Acquiring Fund shareholders of an Acquired Fund will receive on the Closing Date, and the information below should not be relied upon to reflect the number of shares of the Acquiring Fund that actually will be received.

Pro Forma Combined Capitalization Table

Legg Mason Investment Grade Income Portfolio and Legg Mason Partners Corporate Bond Fund

As of December 31, 2008 (unaudited)

	Legg Mason Investment Grade Income Portfolio		Legg Mason Partners Corporate Bond Fund		Pro Forma Adjustments			Pro Forma Combined Legg Mason Partners Corporate Bond Fund
Class A:
Net Assets		—	$	254,935,628	$	(12,799	)(a)	$	254,922,829
Shares Outstanding		—		30,228,959		—			30,228,959
Net Asset Value Per Share		—	$	8.43		—		$	8.43
Class B:
Net Assets		—	$	55,708,838	$	(2,797	)(a)	$	55,706,041
Shares Outstanding		—		6,620,662		—			6,620,662
Net Asset Value Per Share		—	$	8.41		—		$	8.41
Class C:
Net Assets		—	$	45,560,127	$	(2,287	)(a)	$	45,557,840
Shares Outstanding		—		5,434,260		—			5,434,260
Net Asset Value Per Share		—	$	8.38		—		$	8.38
Class I:
Net Assets		—	$	2,092,319	$	9,977,609	(a)(b)(c)	$	12,069,928
Shares Outstanding		—		248,396		1,184,594	(c)		1,432,990
Net Asset Value Per Share		—	$	8.42		—		$	8.42
Class P:
Net Assets		—		—	$	202,099,906	(a)(b)(c)	$	202,099,906
Shares Outstanding		—		—		23,965,169	(c)(d)		23,965,169
Net Asset Value Per Share		—		—		—		$	8.43
Primary Class:
Net Assets	$	201,436,976			$	(201,436,976	)(c)		—
Shares Outstanding		28,922,278				(28,922,278	)(c)		—
Net Asset Value Per Share	$	6.96							—
Institutional Class:
Net Assets	$	9,944,985			$	(9,944,985	)(c)		—
Shares Outstanding		1,427,647				(1,427,647	)(c)		—
Net Asset Value Per Share	$	6.97							—

(a) Reflects adjustment for estimated reorganization costs of $28,600 related to the Acquiring Fund.

(b) Reflects adjustment resulting from adoption by the Acquired Fund’s Board prior to the Reorganization of the valuation policies and procedures applicable to the Acquiring Fund.

(c) Legg Mason Investment Grade Income Portfolio Primary Class and Institutional Class shares will be exchanged for Legg Mason Partners Corporate Bond Fund Class P and Class I shares, respectively.

(d) Pro forma shares adjustment for Class P shares are based on the net asset value per share of Class A shares.

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Pro Forma Combined Capitalization Table

Legg Mason Limited Duration Bond Portfolio and Legg Mason Partners Short-Term Bond Fund

As of December 31, 2008 (unaudited)

	Legg Mason Limited Duration Bond Portfolio		Legg Mason Partners Short- Term Bond Fund		Pro Forma Adjustments			Pro Forma Combined Legg Mason Partners Short-Term Bond Fund
Class A:
Net Assets		—	$	39,396,167	$	1,293,359	(a)(b)	$	40,689,526
Shares Outstanding		—		11,794,748		387,268			12,182,016
Net Asset Value Per Share		—	$	3.34				$	3.34
Class B:
Net Assets		—	$	1,298,479	$	(1,298,479	)(b)		—
Shares Outstanding		—		388,873		(388,873	)		—
Net Asset Value Per Share		—	$	3.34					—
Class C:
Net Assets		—	$	5,073,669	$	96,724,605	(a)(c)(d)	$	101,798,274
Shares Outstanding		—		1,517,310		28,930,013			30,447,323
Net Asset Value Per Share		—	$	3.34				$	3.34
Class I:
Net Assets		—	$	181,560,229	$	7,704,436	(a)(c)(e)	$	189,264,665
Shares Outstanding		—		54,337,425		2,306,096			56,643,521
Net Asset Value Per Share		—	$	3.34				$	3.34
Primary Class :
Net Assets	$	96,573,829		—	$	(96,573,829	)(d)		—
Shares Outstanding		12,143,287		—		(12,143,287	)		—
Net Asset Value Per Share	$	7.95		—					—
Institutional Class:
Net Assets	$	7,715,182		—	$	(7,715,182	)(e)		—
Shares Outstanding		970,198		—		(970,198	)		—
Net Asset Value Per Share	$	7.95		—					—

^(a) Reflects adjustment for estimated reorganization costs of $28,600 related to the Acquiring Fund.

^(b) Legg Mason Partners Short-Term Bond Fund Class B shares will be converted to Class A shares.

^(c) Reflects adjustment resulting from adoption by the Acquired Fund’s Board prior to the Reorganization of the valuation policies and procedures applicable to the Acquiring Fund.

^(d) Legg Mason Limited Duration Bond Portfolio Primary shares will be exchanged for Legg Mason Partners Short-Term Bond Fund Class C.

^(e) Legg Mason Limited Duration Bond Portfolio Institutional shares will be exchanged for Legg Mason Partners Short-Term Bond Fund Class I.

DIVIDENDS AND DISTRIBUTIONS

Each Acquired Fund declares dividends from any net investment income daily and pays them monthly and makes capital gain distributions, if any, annually in December. Each Acquiring Fund generally pays dividends monthly and makes capital gain distributions, if any, once a year, typically in December.

Each Acquired Fund and each Acquiring Fund pays dividends and distributions on a per-share basis. This means that the value of your shares will be reduced by the amount of the payment. If you purchase shares shortly before the record date for a dividend or a distribution of capital gains, you will pay the full price for the shares and receive some portion of the price back as a taxable dividend or distribution.

For more information on the distribution policies of each Acquiring Fund, see “Purchases, Redemptions and Exchanges of Fund Shares; Other Shareholder Information” in Appendix B to this Proxy Statement/Prospectus.

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OTHER BUSINESS

The Board of each Acquired Fund does not intend to present any other business at the Meeting. If, however, any other matters are properly brought before the Meeting or any adjournment or postponement thereof, the persons named as proxies will vote thereon in accordance with their discretion.

SHAREHOLDER COMMUNICATIONS WITH THE BOARDS

A shareholder who wants to communicate with the Boards or any individual Board member should write to his or her Fund to the attention of Richard M. Wachterman, Secretary, 100 Light Street, 32nd Floor, Baltimore, Maryland 21202 (with respect to an Acquired Fund), or Robert I. Frenkel, Secretary, 100 First Stamford Place, Stamford, Connecticut 06902 (with respect to an Acquiring Fund). The letter should indicate that you are a Fund shareholder. If the communication is intended for a specific Board member and so indicates, it will be sent only to that Board member. If a communication does not indicate a specific Board member it will be sent to the chair of the nominating and governance committee of the Board and the outside counsel to the Independent Board Members for further distribution as deemed appropriate by such persons.

VOTING INFORMATION

This Proxy Statement/Prospectus is furnished in connection with a solicitation of proxies by the Acquired Funds’ Board to be used at the Meeting. This Proxy Statement/Prospectus, along with the Notice of Special Meeting and a proxy card, are first being mailed to shareholders of each Acquired Fund on or about [May     , 2009] or as soon as practicable thereafter. Only shareholders of record as of the close of business on the Record Date will be entitled to notice of, and to vote at, the Meeting, and at any adjournments or postponements thereof. Because the proposals in this Proxy Statement/Prospectus are voted on separately for each Acquired Fund, it is essential that shareholders who own shares of more than one Acquired Fund complete, date, sign and return each proxy card they receive. If the enclosed proxy card is properly completed, signed and dated and returned in time to be voted at the Meeting, the proxies named thereon will vote the shares represented by the proxy card in accordance with the instructions marked thereon. Unmarked but properly signed and dated proxy cards will be voted “FOR” approval of the applicable Reorganization Agreement and “FOR” any other matters the proxies deem appropriate. Please see Appendix K to this Proxy Statement/Prospectus for instructions on how to sign your proxy card.

A shareholder may revoke a proxy at any time prior to its exercise at the Meeting by (1) submitting to the applicable Acquired Fund a subsequently executed proxy, (2) delivering to the applicable Acquired Fund a written notice of revocation (addressed to the Secretary at the principal executive office of the Acquired Fund at the address shown at the beginning of this Proxy Statement/Prospectus) or (3) otherwise giving notice of revocation at the Meeting. Merely attending the Meeting, however, will not revoke any previously executed proxy. Unless revoked, all valid and executed proxies will be voted in accordance with the specifications thereon or, in the absence of such specifications, for approval of the Reorganization Agreement and the Reorganization contemplated thereby.

Even if you plan to attend the Meeting, we ask that you sign, date and return the enclosed proxy card or authorize your vote by telephone or through the Internet. This will help us ensure that an adequate number of shares are present for the Meeting to be held. Votes cast by proxy or in person at the Meeting will be tabulated by the inspectors of election appointed for the Meeting. The inspectors of election will determine whether or not a quorum is present at the Meeting. The inspectors of election will treat abstentions and “broker non-votes” as present for purposes of determining a quorum.

Broker-dealer firms holding shares of a Fund in “street name” for the benefit of their customers and clients will request the instructions of such customers and clients on how to vote their shares with respect to approval of the Reorganization Agreement before the Meeting. The NYSE takes the position that a broker-dealer that is a member of the NYSE and that has not received instructions from a customer or client prior to the date specified in the broker-dealer firm’s request for voting instructions may not vote such customer’s or client’s shares with respect to approval of the Reorganization Agreement. A signed proxy card or other authorization by a beneficial owner of Acquired Fund shares that does not specify how the beneficial owner’s shares should be voted on the proposal may be deemed an instruction to vote such shares in favor of the proposal.

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If you hold shares of an Acquired Fund through a bank or other financial institution or intermediary (called a service agent) that has entered into a service agreement with the Acquired Fund or the distributor of the Acquired Fund, the service agent may be the record holder of your shares. At the Meeting, a service agent will vote shares for which it receives instructions from its customers in accordance with those instructions. A signed proxy card or other authorization by a shareholder that does not specify how the shareholder’s shares should be voted on the proposal may be deemed an instruction to vote such shares in favor of the proposal. Depending on its policies, applicable law or contractual or other restrictions, a service agent may be permitted to vote shares with respect to which it has not received specific voting instructions from its customers. In those cases, the service agent may, but may not be required to, vote such shares in the same proportion as those shares for which the service agent has received voting instructions.

If you beneficially own shares that are held in “street name” through a broker-dealer or that are held of record by a service agent, and if you do not give specific voting instructions for your shares, they may not be voted at all or, as described above, they may be voted in a manner that you may not intend. Therefore, you are strongly encouraged to give your broker-dealer or service agent specific instructions as to how you want your shares to be voted.

Photographic identification will be required for admission to the Meeting.

Proxy Solicitation

LMPFA will pay all of the costs of each Reorganization, including any proxy solicitation costs, allocated to an Acquired Fund and 50% of the costs of the Reorganization allocated to that Acquiring Fund, and an Acquiring Fund will pay the remaining 50% of the costs of the Reorganization allocated to it, except that any transaction costs associated with repositioning a Fund’s portfolio in connection with a Reorganization will be borne by that Fund.

Solicitation may be made by letter or telephone by officers or employees of Legg Mason, or by dealers and their representatives. Brokerage houses, banks and other fiduciaries may be requested to forward proxy solicitation material to the beneficial owner of shares of the applicable Acquired Fund to obtain authorization for the execution of proxies. Each Acquired Fund will reimburse brokerage firms, custodians, banks and fiduciaries for their expenses in forwarding the Proxy Statement/Prospectus and proxy materials to the beneficial owners of an Acquired Fund’s shares. In addition, Legg Mason, on behalf of each Acquired Fund, has retained Broadridge Investor Communications Solutions, Inc., a proxy solicitation firm, to assist in the solicitation of proxies. It is anticipated that Broadridge Investor Communications Solutions, Inc. will be paid approximately $29,479 for such solicitation services, to be borne by LMPFA and the Acquiring Funds as described above. Broadridge Investor Communications Solutions, Inc. may solicit proxies personally and by telephone.

Quorum

The quorum requirement for each Acquired Fund is one-third of shares entitled to vote. An Acquired Fund’s shareholders may hold a Meeting for that Fund if the quorum requirement for that Fund is met, regardless of whether the other Acquired Fund’s quorum requirement is met.

Vote Required

For each Acquired Fund, approval of the Reorganization Agreement will require, if a quorum is present at the Meeting, the affirmative vote of a majority of the outstanding voting securities of such Acquired Fund, which under applicable law means the lesser of (a) 67% or more of the voting power of the voting securities present at the Meeting, if the holders of more than 50% of the outstanding voting securities of the Acquired Fund are present at the Meeting or represented by proxy, or (b) more than 50% of the voting power of the outstanding voting securities of the Acquired Fund. Shareholders of each Acquired Fund are entitled to one vote for each share and fractional shares are entitled to proportional voting rights.

Effect of Abstentions and Broker “Non-Votes”

For purposes of determining the presence of a quorum for transacting business at the Meeting, executed proxies marked as abstentions and “broker non-votes” (i.e., proxies from brokers or nominees indicating that such persons have not received instructions from the beneficial owner or other persons entitled to vote shares on a particular matter with respect to which the brokers or nominees do not have discretionary power) will be treated as shares that are present for quorum purposes but

42

which have not been voted. Accordingly, abstentions and broker non-votes will have the effect of a vote against approval of the applicable Reorganization. As a result, shareholders are urged to sign and date their proxy card and forward their voting instructions promptly.

Adjournments

If a quorum is not present or upon a motion by the person presiding over the Meeting, the holders of shares representing a majority of the voting power of the shares present in person or by proxy and entitled to vote thereat, may adjourn the Meeting. In the event of an adjournment, no further notice is needed. Unless a proxy provides otherwise, the persons named as proxies will vote upon such adjournment in their discretion. In addition, the person presiding over the Meeting may adjourn the Meeting without a vote of shareholders. With respect to each Acquired Fund, the Meeting may be adjourned up to 120 days after the Record Date for the Meeting without further notice other than announcement at the Meeting.

Future Shareholder Proposals

The Acquired Funds do not hold annual meetings of shareholders. A shareholder proposal intended to be presented at a future special meeting of shareholders of an Acquired Fund must be received at the offices of the Acquired Fund, 100 Light Street, Baltimore, Maryland 21202, in accordance with the time periods set forth for advance notice in the bylaws applicable to the Acquired Fund or, if no such time period is specified, at a reasonable time before the Acquired Fund begins to print and mail its proxy materials. Timely submission of a proposal does not guarantee that such proposal will be included in a proxy statement.

Record Date and Outstanding Shares

Only shareholders of record of an Acquired Fund at the close of business on the Record Date are entitled to notice of and to vote at the Meeting and at any postponements or adjournments thereof. The chart below lists the number of Primary and Institutional Class shares of each Acquired Fund that were outstanding and entitled to vote as of the close of business on the Record Date.

[Insert chart]

To the knowledge of the Funds, as of the Record Date, except as set forth in Appendix G, no person owned beneficially or of record 5% or more of any class of an Acquired Fund’s or an Acquiring Fund’s outstanding shares.

To the knowledge of the Funds, as of                             , less than 1% of the outstanding shares of each Acquired Fund and each Acquiring Fund were owned directly or beneficially in the aggregate by the Board members and officers of each Acquired Fund and each Acquiring Fund.

THE BOARD OF EACH ACQUIRED FUND, INCLUDING THE INDEPENDENT BOARD MEMBERS, RECOMMENDS APPROVAL OF THE REORGANIZATION AGREEMENT FOR THAT ACQUIRED FUND. ANY UNMARKED PROXIES WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR OF APPROVAL OF THE RELEVANT REORGANIZATION AGREEMENT.

By order of the Boards of Directors,

/s/ [signature to come]

Richard M. Wachterman

Secretary

Legg Mason Income Trust, Inc.

43

INDEX OF APPENDICES

Appendix A1:	Form of Agreement and Plan of Reorganization—Legg Mason Investment Grade Income Portfolio and Legg Mason Partners Corporate Bond Fund
Appendix A2:	Form of Agreement and Plan of Reorganization—Legg Mason Limited Duration Bond Portfolio and Legg Mason Partners Short-Term Bond Fund
Appendix B:	Purchases, Redemptions and Exchanges of Fund Shares; Other Shareholder Information
Appendix C:	Comparison of Investment Objectives, Principal Investment Strategies and Management
Appendix D1:	Financial Highlights of Legg Mason Partners Corporate Bond Fund
Appendix D2:	Financial Highlights of Legg Mason Partners Short-Term Bond Fund
Appendix E:	Historical Performance for Each Fund
Appendix F:	Similarities and Differences in the Forms of Organization of the Acquired Funds and the Acquiring Funds
Appendix G:	5% Shareholders of the Acquired Funds and the Acquiring Funds
Appendix H:	Comparison of Board Composition
Appendix I:	Portfolio Manager Compensation
Appendix J:	Dates of Prospectuses, Statements of Additional Information and Shareholder Reports
Appendix K:	Instructions for Signing the Proxy Card

APPENDIX A1

FORM OF AGREEMENT AND PLAN OF REORGANIZATION

Legg Mason Investment Grade Income Portfolio and Legg Mason Partners Corporate Bond Fund

This AGREEMENT AND PLAN OF REORGANIZATION (“Agreement”) is made as of this [            ] day of [            ], 2009, by and among Legg Mason Partners Income Trust, a Maryland business trust (the “Acquiring Entity”), with its principal place of business at 55 Water Street, New York, New York 10041, on behalf of its series Legg Mason Partners Corporate Bond Fund (the “Acquiring Fund”), and Legg Mason Income Trust, Inc., a Maryland corporation (the “Acquired Entity”), with its principal place of business at 100 Light Street, Baltimore, Maryland 21202, on behalf of its series Legg Mason Investment Grade Income Portfolio (the “Acquired Fund”), and, solely for purposes of paragraph 10.2 hereof, Legg Mason Partners Fund Advisor, LLC (“LMPFA”).

WHEREAS, each of the Acquired Fund and the Acquiring Fund is a series of an open-end management investment company registered pursuant to the Investment Company Act of 1940, as amended (the “1940 Act”);

WHEREAS, it is intended that, for United States federal income tax purposes (i) the transactions contemplated by this Agreement constitute a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and (ii) this Agreement constitutes a plan of reorganization within the meaning of Section 368 of the Code and Treasury Regulations Section 1.368-2(g);

WHEREAS, the reorganization will consist of (1) the sale, assignment, conveyance, transfer and delivery of all of the property and assets of the Acquired Fund to the Acquiring Fund in exchange solely for shares of beneficial interest of the Acquiring Fund (the “Acquiring Fund Shares”) corresponding in class to the outstanding shares of the Acquired Fund (the “Acquired Fund Shares”), as described herein, and the assumption by the Acquiring Fund of all liabilities of the Acquired Fund, and (2) the distribution of the Acquiring Fund Shares to the shareholders of the Acquired Fund and the subsequent redemption of the Acquired Fund Shares and termination of the Acquired Fund, as provided herein (the “Reorganization”), all upon the terms and conditions hereinafter set forth in this Agreement;

WHEREAS, the Board of Trustees of the Acquiring Entity (the “Acquiring Entity Board”) has determined, with respect to the Acquiring Fund, that the sale, assignment, conveyance, transfer and delivery of all of the property and assets of the Acquired Fund for Acquiring Fund Shares and the assumption of all liabilities of the Acquired Fund by the Acquiring Fund is in the best interests of the Acquiring Fund and its shareholders and that the interests of the existing shareholders of the Acquiring Fund will not be diluted as a result of the Reorganization;

WHEREAS, the Board of Directors of the Acquired Entity (the “Acquired Entity Board”) has determined, with respect to the Acquired Fund, that the sale, assignment, conveyance, transfer and delivery of all of the property and assets of the Acquired Fund for Acquiring Fund Shares and the assumption of all liabilities of the Acquired Fund by the Acquiring Fund is in the best interests of the Acquired Fund and that the interests of the existing shareholders of the Acquired Fund will not be diluted as a result of this the Reorganization; and

WHEREAS, in this Agreement, any references to a Fund taking action shall mean and include all necessary actions of the Acquiring Entity or Target Entity, as applicable, on behalf of a Fund, unless the context of this Agreement or the 1940 Act requires otherwise;

NOW, THEREFORE, in consideration of the premises and of the covenants and agreements hereinafter set forth, the parties hereto covenant and agree as follows:

1. TRANSFER OF ASSETS OF THE ACQUIRED FUND TO THE ACQUIRING FUND IN EXCHANGE FOR ACQUIRING FUND SHARES, ASSUMPTION OF ALL ACQUIRED FUND LIABILITIES AND TERMINATION OF THE ACQUIRED FUND

1.1 Subject to requisite approvals and the other terms and conditions herein set forth and on the basis of the representations and warranties contained herein, the Acquired Entity, on behalf of the Acquired Fund, agrees to sell, assign, convey, transfer and deliver all of its property and assets, as set forth in paragraph 1.2, to the Acquiring Fund, and the Acquiring Entity, on behalf of the Acquiring Fund, agrees in exchange therefor: (a) to deliver to the Acquired Fund the

A1-1

number of full and fractional Acquiring Fund Shares corresponding to the Acquired Fund Shares as of the time and date set forth in paragraph 3.1, determined by dividing the value of the Acquired Fund’s net assets (computed in the manner and as of the time and date set forth in paragraph 2.1) by the net asset value of one share of the corresponding class of Acquiring Fund Shares (computed in the manner and as of the time and date set forth in paragraph 2.2); and (b) to assume all liabilities of the Acquired Fund. Such transactions shall take place on a closing date as provided for in paragraph 3.1 (the “Closing Date”). For purposes of this Agreement, the Primary Class shares of the Acquired Fund corresponds to the newly-created Class P shares of the Acquiring Fund and the Institutional Class shares of the Acquired Fund corresponds to the Class I shares of the Acquiring Fund, and the term “Acquiring Fund Shares” shall be read to mean such classes of shares of the Acquiring Fund.

1.2 The property and assets of the Acquired Entity attributable to the Acquired Fund to be sold, assigned, conveyed, transferred and delivered to and acquired by the Acquiring Entity, on behalf of the Acquiring Fund, shall consist of all assets and property of every kind and nature of the Acquired Fund, including, without limitation, all rights, receivables (including dividend, interest and other receivables), cash, cash equivalents, claims (whether absolute or contingent, known or unknown), securities, commodities and futures interests, good will and other intangible property, any deferred or prepaid expenses and all interests, rights, privileges and powers, the Acquired Fund owns at the Valuation Date (as defined in paragraph 2.1) (collectively, “Assets”). The Acquiring Entity, on behalf of the Acquiring Fund, shall assume all of the liabilities and obligations of the Acquired Fund, including, without limitation, all indemnification obligations of the Acquired Fund with respect to the current and former members of the Acquired Entity Board and officers of the Acquired Entity, whether accrued or contingent, known or unknown, existing at the Valuation Date (collectively, “Liabilities”). The Acquired Fund will sell, assign, convey, transfer and deliver to the Acquiring Entity, on behalf of the Acquiring Fund, any rights, stock dividends, or other securities received by the Acquired Fund after the Closing Date as stock dividends or other distributions on or with respect to the property and assets transferred, which rights, stock dividends, and other securities shall be deemed included in the property and assets transferred to the Acquiring Entity, on behalf of the Acquiring Fund, at the Closing Date and shall not be separately valued, in which case any such distribution that remains unpaid as of the Closing Date shall be included in the determination of the value of the assets of the Acquired Fund acquired by the Acquiring Entity on behalf of the Acquiring Fund.

1.3 The Acquired Fund will make reasonable efforts to discharge all of its known Liabilities prior to the Valuation Date.

1.4 On or as soon as practicable prior to the Closing Date, the Acquired Fund will declare and pay to its shareholders of record one or more dividends and/or other distributions so that it will have distributed substantially all of its investment company taxable income as defined in the Code (computed without regard to any deduction for dividends paid) and realized net capital gain as defined in the Code (after deduction for any available capital loss carryover), if any, for all tax periods ending on or before the Closing Date (and treating the current taxable year as ending on the Closing Date) such that the Acquired Fund will have no tax liability under Section 852 or Section 4982 for the current and any prior tax periods.

1.5 Immediately following the actions contemplated by paragraph 1.1, the Acquired Entity shall take such actions as may be necessary or appropriate to complete the liquidation of the Acquired Fund. To complete the liquidation, the Acquired Entity, on behalf of the Acquired Fund, shall (a) distribute to the shareholders of record of the Acquired Fund Shares as of the Closing Date (“Acquired Fund Shareholders”), on a pro rata basis, the Acquiring Fund Shares received by the Acquired Entity, on behalf of the Acquired Fund, pursuant to paragraph 1.1, (b) redeem shares of the Acquired Fund and (c) terminate the Acquired Fund in accordance with Maryland law. Such distribution and redemption shall be accomplished, with respect to the Acquired Fund Shares, by the transfer of the Acquiring Fund Shares then credited to the account of the Acquired Fund on the books of the Acquiring Fund to open accounts on the share records of the Acquiring Fund in the names of the Acquired Fund Shareholders. The aggregate net asset value of the Acquiring Fund Shares to be so credited to the Acquired Fund Shareholders shall be equal to the aggregate net asset value of the Acquired Fund Shares owned by Acquired Fund Shareholders on the Closing Date. All issued and outstanding Acquired Fund Shares will be cancelled on the books of the Acquired Fund. The Acquiring Fund shall not issue certificates representing any class of Acquiring Fund Shares in connection with such exchange.

1.6 Ownership of Acquiring Fund Shares will be shown on the books of the Acquiring Fund’s transfer agent.

1.7 Any reporting responsibility of the Acquired Fund, including, but not limited to, the responsibility for filing regulatory reports, tax returns, or other documents with the Securities and Exchange Commission (“Commission”), any state securities commission, and any federal, state or local tax authorities or any other relevant regulatory authority, is and shall remain the responsibility of the Acquired Entity, on behalf of the Acquired Fund. The Acquiring Entity shall fully cooperate to the extent necessary or desirable for these responsibilities to be discharged.

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2. VALUATION

2.1 The value of the Assets and the amount of the Liabilities shall be determined as of the time for calculation of net asset value as set forth in the then-current prospectus for the Acquired Fund, and after the declaration of any dividends by the Acquired Fund, on the Closing Date (such time and date being hereinafter called the “Valuation Date”), computed using the valuation procedures established by the Acquired Entity Board. All computations of value and amounts shall be made by (a) State Street Bank and Trust Company, in its capacity as accounting agent for the Acquired Fund, or (b) in the case of securities subject to fair valuation, in accordance with the valuation procedures of the Acquired Entity adopted in good faith by the Acquired Entity Board. All computations of value and amounts pursuant to this paragraph 2.1 shall be subject to confirmation by the Acquiring Fund’s independent registered public accounting firm.

2.2. The net asset value per share of each class of Acquiring Fund Shares shall be determined to the nearest full cent on the Valuation Date, using the valuation procedures established by the Acquiring Entity Board. All computations of value shall be made by (a) State Street Bank and Trust Company, in its capacity as accounting agent for the Acquiring Fund, or (b) in the case of securities subject to fair valuation, in accordance with the valuation procedures of the Acquiring Entity adopted in good faith by the Acquiring Entity Board. All computations of value and amounts pursuant to this paragraph 2.2 shall be subject to confirmation by the Acquired Fund’s independent registered public accounting firm.

3. CLOSING AND CLOSING DATE

3.1 Subject to the terms and conditions set forth herein, the Closing Date shall be [            ], 2009, or such other date as the parties may agree. All acts taking place at the closing of the transactions provided for in this Agreement (“Closing”) shall be deemed to take place simultaneously as of the “close of business” on the Closing Date unless otherwise agreed to by the parties. The close of business on the Closing Date shall be as of 4:00 p.m., Eastern Time or such later time on that date as the Acquired Fund’s net asset value is calculated in accordance with paragraph 2.2 and after the declaration of any dividends. The Closing shall be held at the offices of [            ] or at such other time and/or place as the parties may agree.

3.2 The Acquired Entity shall direct State Street Bank and Trust Company (the “Custodian”) to transfer ownership of the Assets from the accounts of the Acquired Fund that the Custodian maintains as custodian for the Acquired Fund to the accounts of the Acquiring Fund that the Custodian maintains as custodian for the Acquiring Fund and to deliver to the Acquiring Entity, at the Closing, a certificate of an authorized officer stating that (i) the Assets of the Acquired Fund have been so transferred as of the Closing Date, and (ii) all necessary taxes in connection with the delivery of the Assets of the Acquired Fund, including all applicable federal and state stock transfer stamps, if any, have been paid or provision for payment has been made.

3.3 The Acquired Entity shall direct Boston Financial Data Services, in its capacity as transfer agent for the Acquired Fund (“Transfer Agent”), to deliver to the Acquiring Entity at the Closing a certificate of an authorized officer stating that its records contain the name and address of each Acquired Fund Shareholder and the number and percentage ownership of the outstanding class of Acquired Fund Shares owned by each such shareholder immediately prior to the Closing. The Acquiring Fund shall deliver to the Secretary of the Acquired Fund a confirmation evidencing that (a) the appropriate number of Acquiring Fund Shares have been credited to the Acquired Fund’s account on the books of the Acquiring Fund pursuant to paragraph 1.1 prior to the actions contemplated by paragraph 1.4 and (b) the appropriate number of Acquiring Fund Shares have been credited to the accounts of the Acquired Fund Shareholders on the books of the Acquiring Fund pursuant to paragraph 1.4. At the Closing, each party shall deliver to the other party such bills of sale, checks, assignments, share certificates, if any, receipts or other documents as the other party or its counsel may reasonably request.

3.4 In the event that on the Valuation Date (a) the New York Stock Exchange or another primary trading market for portfolio securities of the Acquiring Fund or the Acquired Fund (each, an “Exchange”) shall be closed to trading or trading thereupon shall be restricted, or (b) trading or the reporting of trading on such Exchange or elsewhere shall be disrupted so that accurate appraisal of the value of the net assets of the Acquired Fund or the Acquiring Fund is impracticable (in the judgment of the Acquiring Entity Board with respect to the Acquiring Fund and the Acquired Entity Board with respect to the Acquired Fund), the Closing Date shall be postponed until the first Friday (that is also a business day) after the day when trading shall have been fully resumed and reporting shall have been restored.

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4. REPRESENTATIONS AND WARRANTIES

4.1 Except as has been fully disclosed to the Acquiring Entity in Schedule 4.1 of this Agreement, the Acquired Entity, on behalf of the Acquired Fund, represents and warrants to the Acquiring Entity and the Acquiring Fund as follows:

(a) The Acquired Fund is duly established as a series of the Acquired Entity, which is a corporation duly organized, validly existing and in good standing under the laws of the State of Maryland, with power under its Charter (the “Acquired Entity Charter”), to own all of its assets and to carry on its business as it is being conducted as of the date hereof. The Acquired Entity is duly qualified to do business as a foreign corporation in each jurisdiction in which the conduct of its business makes such qualification necessary except where the failure to so qualify would not have a material adverse effect on the condition (financial or otherwise), business, properties, net assets or results of operations of the Acquired Entity. The Acquired Entity has all necessary federal, state and local authorizations to carry on its business as now being conducted and to fulfill the terms of this Agreement, except as set forth in paragraph 4.1(c).

(b) The Acquired Entity is a registered open-end management investment company, and its registration with the Commission as an investment company under the 1940 Act, and the registration of each class of Acquired Fund Shares under the Securities Act of 1933, as amended (“1933 Act”), is in full force and effect.

(c) No consent, approval, authorization, or order of any court or governmental authority is required for the consummation by the Acquired Fund of the transactions contemplated herein, except such as may be required under the 1933 Act, the Securities Exchange Act of 1934, as amended (“1934 Act”), the 1940 Act, state securities laws and the Hart-Scott-Rodino Act.

(d) The current prospectus and statement of additional information of the Acquired Fund (true and correct copies of which have been delivered to the Acquiring Entity) and each prospectus and statement of additional information of the Acquired Fund used during the three (3) years prior to the date of this Agreement conforms or conformed at the time of its use in all material respects to the applicable requirements of the 1933 Act and the 1940 Act and the rules and regulations of the Commission thereunder and does not or did not at the time of its use include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not materially misleading.

(e) On the Closing Date, the Acquired Entity, on behalf of the Acquired Fund, will have good title to the Assets and full right, power and authority to sell, assign, convey, transfer and deliver such Assets hereunder free of any liens or other encumbrances, and upon delivery and payment for the Assets, the Acquiring Entity, on behalf of the Acquiring Fund, will acquire good title thereto, subject to no restrictions on the full transfer thereof, excluding such restrictions as might arise under the 1933 Act.

(f) The Acquired Fund is not engaged currently, and the execution, delivery and performance of this Agreement by the Acquired Entity, on behalf of the Acquired Fund, will not result, in a material violation of Maryland law or of the Acquired Entity Charter or the bylaws of the Acquired Entity, or of any agreement, indenture, instrument, contract, lease or other undertaking to which the Acquired Entity, on behalf of the Acquired Fund, is a party or by which it is bound, and the execution, delivery and performance of this Agreement by the Acquired Entity, on behalf of the Acquired Fund, will not result in the acceleration of any material obligation, or the imposition of any material penalty, under any agreement, indenture, instrument, contract, lease, judgment or decree to which the Acquired Entity, on behalf of the Acquired Fund, is a party or by which it is bound.

(g) All material contracts or other commitments of the Acquired Fund (other than this Agreement, certain investment contracts, including options, futures, swaps and forward contracts, the indemnification agreements of the current and former members of the Acquired Entity Board, and those contracts listed in Schedule 4.1) will terminate without liability to the Acquired Fund on or prior to the Closing Date. Each contract listed in Schedule 4.1 is a valid, binding and enforceable obligation of the Acquired Fund and, to the Acquired Fund’s knowledge, the other parties thereto (assuming due authorization, execution and delivery by the other parties thereto) and the assignment by the Acquired Fund to the Acquiring Fund of each such contract will not result in the termination of such contract, any breach or default thereunder by the Acquired Fund or the imposition of any penalty thereunder.

(h) No litigation or administrative proceeding or investigation of or before any court or governmental body is pending or, to the Acquired Entity’s knowledge, threatened against the Acquired Entity, with respect to the Acquired Fund or any of its properties or assets, that, if adversely determined, would materially and adversely affect its financial condition or the conduct of the Acquired Fund’s business. The Acquired Entity, on behalf of the Acquired Fund, is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body that materially and adversely affects the Acquired Fund’s business or the Acquired Entity’s ability to consummate the transactions herein contemplated on behalf of the Acquired Fund.

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(i) The Statement of Assets and Liabilities, Statements of Operations and Changes in Net Assets and Schedule of Investments of the Acquired Fund as of the last day of and for the most recently completed fiscal year of the Acquired Fund prior to the date of this Agreement have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, and are in accordance with accounting principles generally accepted in the United States of America (“GAAP”) consistently applied, and such statements (true and correct copies of which have been furnished to the Acquiring Entity) present fairly, in all material respects, the financial condition of the Acquired Fund as of such date and for such period in accordance with GAAP, and there are no known contingent, accrued or other liabilities of the Acquired Fund required to be reflected on a balance sheet (including the notes thereto) in accordance with GAAP as of such date that are not disclosed therein.

(j) Since the last day of the most recently completed fiscal year of the Acquired Fund prior to the date of this Agreement, there has not been any material adverse change in the Acquired Fund’s financial condition, assets, liabilities or business, or any incurrence by the Acquired Fund of indebtedness for money borrowed maturing more than one year from the date such indebtedness was incurred. For the purposes of this subparagraph (j), a decline in net asset value per share of Acquired Fund Shares due to declines in market values of securities held by the Acquired Fund, the discharge of Acquired Fund liabilities, or the redemption of Acquired Fund Shares by shareholders of the Acquired Fund shall not constitute a material adverse change.

(k) On the Closing Date, all federal and other tax returns, dividend reporting forms and other tax-related reports of the Acquired Fund required by law to have been filed by such date (including any extensions) shall have been filed and are or will be correct in all material respects, and all federal and other taxes shown as due or required to be shown as due on said returns and reports shall have been paid or provision shall have been made for the payment thereof and, to the best of the Acquired Entity’s knowledge, no such return is currently under audit and no assessment has been asserted with respect to such returns.

(l) The Acquired Fund is a separate series of the Acquired Entity that is treated as a corporation separate from any and all other series of the Acquired Entity under Section 851(g) of the Code. For each taxable year of its operation (including the taxable year ending on the Closing Date), the Acquired Fund has met (or will meet) the requirements of Subchapter M of Chapter 1 of the Code for qualification and treatment as a “regulated investment company,” has elected to be treated as such, has been (or will be) eligible to compute and has computed (or will compute) its federal income tax under Section 852 of the Code, and on or before the Closing Date, will have distributed or will have declared dividends intended to be sufficient to distribute substantially all of (i) the excess of (x) its investment income excludible from gross income under Section 103 of the Code over (y) its deductions disallowed under Sections 265 and 171 of the Code (“net tax-exempt income”), (ii) its investment company taxable income (as defined in the Code) (computed without regard to any deduction for dividends paid) and (iii) any net capital gain (as defined in the Code) (after reduction for any allowable capital loss carryover) that has accrued or been recognized, respectively, through the Closing Date such that for all tax periods ending on or before the Closing Date (and treating the current tax year as ending on the Closing Date) the Acquired Fund will not have any tax liability under Section 852 or Section 4982.

(m) All issued and outstanding Acquired Fund Shares are, and on the Closing Date will be, duly authorized and validly and legally issued and outstanding, fully paid and non-assessable by the Acquired Entity and have been offered and sold in any state, territory or the District of Columbia in compliance in all material respects with applicable registration requirements of all applicable federal and state securities laws. All of the issued and outstanding Acquired Fund Shares will, at the time of Closing, be held by the persons and in the amounts set forth in the records of the Transfer Agent, on behalf of the Acquired Fund, as provided in paragraph 3.3. The Acquired Fund does not have outstanding any options, warrants or other rights to subscribe for or purchase any of the Acquired Fund Shares, nor is there outstanding any security convertible into any of the Acquired Fund Shares.

(n) The Acquired Fund will review its assets to ensure that at any time after its shareholders have approved this Agreement and prior to the Closing Date its assets do not include any assets that the Acquiring Fund is not permitted, or reasonably believes to be unsuitable for it, to acquire, including without limitation any security that, prior to its acquisition by the Acquired Fund, is unsuitable for the Acquiring Fund to acquire.

(o) The execution, delivery and performance of this Agreement, and the transactions contemplated herein, have been duly authorized by all necessary action on the part of the Acquired Entity Board, on behalf of the Acquired Fund, and this Agreement constitutes a valid and binding obligation of the Acquired Entity, on behalf of the Acquired Fund, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors’ rights and to general equity principles.

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(p) The combined proxy statement and prospectus (“Proxy Statement”) to be included in the Registration Statement (as defined in paragraph 5.6), insofar as it relates to the Acquired Fund, from the effective date of the Registration Statement through the date of the meeting of shareholders of the Acquired Fund contemplated therein and on the Closing Date, will (i) not contain any statement which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading (provided that this representation and warranty shall not apply to statements in or omissions from the Proxy Statement made in reliance upon and in conformity with information that was furnished by the Acquiring Entity for use therein) and (ii) comply in all material respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder. The information to be furnished by the Acquired Fund for use in registration statements and other documents filed or to be filed with any federal, state or local regulatory authority, which may be necessary in connection with the transactions contemplated hereby, shall be accurate and complete in all material respects and shall comply in all material respects with federal securities and other laws and regulations thereunder applicable thereto.

4.2 Except as has been fully disclosed to the Acquired Entity in Schedule 4.2 to this Agreement, the Acquiring Entity, on behalf of the Acquiring Fund, represents and warrants to the Acquired Entity and the Acquired Fund as follows:

(a) The Acquiring Fund is duly established as a series of the Acquiring Entity, which is a business trust duly organized, validly existing and in good standing under the laws of the State of Maryland, with the power under its Declaration of Trust, as amended and/or supplemented (the “Acquiring Entity Charter”), to own all of its assets and to carry on its business as it is being conducted as of the date hereof. The Acquiring Entity is duly qualified to do business as a foreign trust in each jurisdiction in which the conduct of its business makes such qualification necessary except where the failure to so qualify would not have a material adverse effect on the condition (financial or otherwise), business, properties, net assets or results of operations of the Acquiring Entity. The Acquiring Entity has all necessary federal, state and local authorizations to carry on its business as now being conducted and to fulfill the terms of this Agreement except as described in paragraph 4.2(c).

(b) The Acquiring Entity is a registered open-end management investment company, and its registration with the Commission as an investment company under the 1940 Act, and the registration of the class of Acquiring Fund Shares under the 1933 Act, is in full force and effect or will be in full force and effect as of the Closing Date.

(c) No consent, approval, authorization, or order of any court or governmental authority is required for the consummation by the Acquiring Fund of the transactions contemplated herein, except such as may be required under the 1933 Act, the 1934 Act, the 1940 Act, state securities laws and the Hart-Scott-Rodino Act.

(d) The current prospectus and statement of additional information of the Acquiring Fund (true and correct copies of which have been delivered to the Acquired Entity) and each prospectus and statement of additional information of the Acquiring Fund used during the three (3) years prior to the date of this Agreement conforms or conformed at the time of its use in all material respects to the applicable requirements of the 1933 Act and the 1940 Act and the rules and regulations of the Commission thereunder and does not or did not at the time of its use include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not materially misleading.

(e) The Acquiring Fund is not engaged currently, and the execution, delivery and performance of this Agreement by the Acquiring Entity, on behalf of the Acquiring Fund, will not result, in a material violation of Maryland law or the Acquiring Entity Charter or the bylaws of the Acquiring Entity, or of any agreement, indenture, instrument, contract, lease or other undertaking to which the Acquiring Entity, on behalf of the Acquiring Fund, is a party or by which it is bound, and the execution, delivery and performance of this Agreement by the Acquiring Entity, on behalf of the Acquiring Fund, will not result in the acceleration of any material obligation, or the imposition of any material penalty, under any agreement, indenture, instrument, contract, lease, judgment or decree to which the Acquiring Entity, on behalf of the Acquiring Fund, is a party or by which it is bound.

(f) No litigation or administrative proceeding or investigation of or before any court or governmental body is pending or, to the Acquiring Entity’s knowledge, threatened against the Acquiring Entity, with respect to the Acquiring Fund, or any of its properties or assets, that, if adversely determined, would materially and adversely affect its financial condition or the conduct of the Acquiring Fund’s business. The Acquiring Entity, on behalf of the Acquiring Fund, is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body that materially and adversely affects the Acquiring Fund’s business or the Acquiring Entity’s ability to consummate the transactions herein contemplated on behalf of the Acquiring Fund.

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(g) The Statement of Assets and Liabilities, Statements of Operations and Changes in Net Assets and Schedule of Investments of the Acquiring Fund as of the last day of and for the most recently completed fiscal year of the Acquiring Fund prior to the date of this Agreement have been audited by KPMG LLP, an independent registered public accounting firm, and are in accordance with GAAP consistently applied, and such statements (true and correct copies of which have been furnished to the Acquired Entity) present fairly, in all material respects, the financial condition of the Acquiring Fund as of such date and for such period in accordance with GAAP, and there are no known contingent, accrued or other liabilities of the Acquiring Fund required to be reflected on a balance sheet (including the notes thereto) in accordance with GAAP as of such date that are not disclosed therein.

(h) Since the last day of the most recently completed fiscal year of the Acquiring Fund prior to the date of this Agreement, there has not been any material adverse change in the Acquiring Fund’s financial condition, assets, liabilities or business, or any incurrence by the Acquiring Fund of indebtedness for money borrowed maturing more than one year from the date such indebtedness was incurred. For the purposes of this subparagraph (h), a decline in net asset value per share of Acquiring Fund Shares due to declines in market values of securities held by the Acquiring Fund, the discharge of Acquiring Fund liabilities, or the redemption of Acquiring Fund Shares by shareholders of the Acquiring Fund shall not constitute a material adverse change.

(i) On the Closing Date, all federal and other tax returns, dividend reporting forms and other tax-related reports of the Acquiring Fund required by law to have been filed by such date (including any extensions) shall have been filed and are or will be correct in all material respects, and all federal and other taxes shown as due or required to be shown as due on said returns and reports shall have been paid or provision shall have been made for the payment thereof and, to the best of the Acquiring Entity’s knowledge, no such return is currently under audit and no assessment has been asserted with respect to such returns.

(j) The Acquiring Fund is a separate series of the Acquiring Entity that is treated as a corporation separate from any and all other series of the Acquiring Entity under Section 851(g) of the Code. For each taxable year of its operation (including the taxable year that includes the Closing Date), the Acquiring Fund has met (or will meet) the requirements of Subchapter M of Chapter 1 of the Code for qualification and treatment as a “regulated investment company,” has elected to be treated as such, and has been (or will be) eligible to compute and has computed (or will compute) its federal income tax under Section 852 of the Code, and will have distributed (or will distribute pursuant to the provisions of Section 855 of the Code) substantially all of (i) its net tax-exempt income, (ii) its investment company taxable income (as defined in the Code) (computed without regard to any deduction for dividends paid) and (iii) any net capital gain (as defined in the Code) (after reduction for any capital loss carryover) for taxable years ending prior to the Closing Date such that for all those years the Acquiring Fund will have no tax liability under Section 852 or Section 4982.

(k) All issued and outstanding Acquiring Fund Shares are, and on the Closing Date will be, duly authorized and validly and legally issued and outstanding, fully paid and non-assessable by the Acquiring Entity and will have been offered and sold in any state, territory or the District of Columbia in compliance in all material respects with applicable registration requirements of all applicable federal and state securities laws. The Acquiring Fund does not have outstanding any options, warrants or other rights to subscribe for or purchase any Acquiring Fund Shares, nor is there outstanding any security convertible into any Acquiring Fund Shares. All of the Acquiring Fund Shares to be issued and delivered to the Acquired Entity, for the account of the Acquired Fund Shareholders, pursuant to this Agreement, will on the Closing Date have been duly authorized and, when so issued and delivered, will be duly and validly and legally issued Acquiring Fund Shares and be fully paid and non-assessable by the Acquiring Entity.

(l) The execution, delivery and performance of this Agreement, and the transactions contemplated herein, have been duly authorized by all necessary action on the part of the Acquiring Entity Board, on behalf of the Acquiring Fund, and this Agreement constitutes a valid and binding obligation of the Acquiring Entity, on behalf of the Acquiring Fund, enforceable in accordance with its terms, subject, as to enforcement, bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors’ rights and to general equity principles.

(m) The Proxy Statement to be included in the Registration Statement, insofar as it relates to the Acquiring Fund and the Acquiring Fund Shares, from the effective date of the Registration Statement through the date of the meeting of shareholders of the Acquired Fund contemplated therein and on the Closing Date, will (i) not contain any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary to make the statements therein not false or misleading (provided that this representation and warranty shall not apply to statements in or omissions from the Proxy Statement made in reliance upon and in conformity with information that was furnished by the Acquired Entity for use therein) and (ii) comply in all material respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and

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regulations thereunder. The information to be furnished by the Acquiring Fund for use in registration statements and other documents filed or to be filed with any federal, state or local regulatory authority, which may be necessary in connection with the transactions contemplated hereby, shall be accurate and complete in all material respects and shall comply in all material respects with federal securities and other laws and regulations applicable thereto.

5. COVENANTS

The Acquired Entity, on behalf of the Acquired Fund, and the Acquiring Entity, on behalf of the Acquiring Fund, respectively, hereby further covenant as follows:

5.1 The Acquired Fund and the Acquiring Fund each will operate its business in the ordinary course and shall comply in all material respects with all applicable laws, rules and regulations between the date hereof and the Closing Date, it being understood that such ordinary course of business will include the declaration and payment of customary dividends and other distributions, and any other distribution that may be advisable.

5.2 The Acquired Entity will call and hold a meeting of the shareholders of the Acquired Fund to consider and act upon this Agreement and to take all other action necessary to obtain approval of the transactions contemplated herein.

5.3 The Acquiring Fund Shares to be acquired by the Acquired Fund hereunder are not being acquired for the purpose of making any distribution thereof, other than in accordance with the terms of this Agreement.

5.4 The Acquired Entity, on behalf of the Acquired Fund, will assist the Acquiring Entity in obtaining such information as the Acquiring Entity reasonably requests concerning the beneficial ownership of the Acquired Fund Shares.

5.5 Subject to the provisions of this Agreement, the Acquiring Entity, on behalf of the Acquiring Fund, and the Acquired Entity, on behalf of the Acquired Fund, each will take, or cause to be taken, all action, and do or cause to be done, all things reasonably necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement.

5.6 The Acquiring Entity, on behalf of the Acquiring Fund, shall prepare and file a Registration Statement on Form N-14 in compliance with the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder with respect to the Reorganization (the “Registration Statement”). The Acquired Entity, on behalf of the Acquired Fund, will provide to the Acquiring Entity such information regarding the Acquired Fund as may be reasonably necessary for the preparation of the Registration Statement.

5.7 The Acquiring Entity, on behalf of the Acquiring Fund, and the Acquired Entity, on behalf of the Acquired Fund, each will use all reasonable efforts to fulfill or obtain the fulfillment of the conditions precedent to effect the transactions contemplated by this Agreement as promptly as practicable.

5.8 The Acquired Entity, on behalf of the Acquired Fund, will, from time to time, as and when reasonably requested by the Acquiring Entity, execute and deliver or cause to be executed and delivered all such assignments and other instruments and will take or cause to be taken such further action as the Acquiring Entity, on behalf of the Acquiring Fund, may reasonably deem necessary or desirable in order to vest in and confirm (a) the Acquired Entity’s title to and possession of the Acquiring Fund Shares to be delivered hereunder and (b) the Acquiring Entity’s title to and possession of all the Assets, and to otherwise carry out the intent and purpose of this Agreement.

5.9 The Acquiring Entity, on behalf of the Acquiring Fund, will use all reasonable efforts to obtain the approvals and authorizations required by the 1933 Act, the 1940 Act and such of the state blue sky or securities laws as may be necessary in order to continue its operations after the Closing Date.

5.10 The Acquiring Entity shall not change the Acquiring Entity Charter, or the Acquiring Fund’s prospectus or statement of additional information so as to restrict permitted investments for the Acquiring Fund, except as required by the Commission prior to the Closing.

5.11 Prior to the Valuation Date, the Acquired Entity Board shall adopt the valuation procedures of the Acquiring Entity with respect to the Acquired Fund.

5.12 The Acquired Fund and the Acquiring Fund will each report the Reorganization as a reorganization within the meaning of Section 368(a) of the Code on its federal income tax return for its respective taxable year in which the Reorganization occurs, including filing any and all statements required by Treas. Reg. § 1.368-3.

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6. CONDITIONS PRECEDENT TO OBLIGATIONS OF ACQUIRED ENTITY

The obligations of the Acquired Entity, on behalf of the Acquired Fund, to consummate the transactions provided for herein shall be subject, at the Acquired Entity’s election, to the following conditions:

6.1 All representations and warranties of the Acquiring Entity, on behalf of the Acquiring Fund, contained in this Agreement shall be true and correct in all material respects as of the date hereof and, except as they may be affected by the transactions contemplated by this Agreement, as of the Closing Date, with the same force and effect as if made on and as of the Closing Date.

6.2 The Acquiring Entity, on behalf of the Acquiring Fund, shall have performed all of the covenants and complied with all of the provisions required by this Agreement to be performed or complied with by the Acquiring Entity, on behalf of the Acquiring Fund, on or before the Closing Date.

6.3 The Acquiring Entity, on behalf of the Acquiring Fund, shall have executed and delivered an assumption of the Liabilities and all such other agreements and instruments as the Acquired Entity may reasonably deem necessary or desirable in order to vest in and confirm (a) the Acquired Fund’s title to and possession of the Acquiring Fund Shares to be delivered hereunder and (b) the Acquiring Entity’s assumption of all of the Liabilities, and to otherwise carry out the intent and purpose of this Agreement.

6.4 The Acquiring Entity, on behalf of the Acquiring Fund, shall have delivered to the Acquired Fund a certificate executed in the name of the Acquiring Entity, on behalf of the Acquiring Fund, by the Acquiring Entity’s President or Vice President and its Treasurer or Assistant Treasurer, in a form reasonably satisfactory to the Acquired Entity and dated as of the Closing Date, as to the matters set forth in paragraphs 6.1 and 6.2 and as to such other matters as the Acquired Entity shall reasonably request.

6.5 The Acquiring Entity, on behalf of the Acquiring Fund, and the Acquired Entity, on behalf of the Acquired Fund, shall have agreed on the number of full and fractional Acquiring Fund Shares to be issued in connection with the Reorganization after such number has been calculated in accordance with paragraph 1.1.

7. CONDITIONS PRECEDENT TO OBLIGATIONS OF ACQUIRING ENTITY

The obligations of the Acquiring Entity, on behalf of the Acquiring Fund, to consummate the transactions provided for herein shall be subject, at the Acquiring Entity’s election, to the following conditions:

7.1 All representations and warranties of the Acquired Entity, on behalf of the Acquired Fund, contained in this Agreement shall be true and correct in all material respects as of the date hereof and, except as they may be affected by the transactions contemplated by this Agreement, as of the Closing Date, with the same force and effect as if made on and as of the Closing Date.

7.2 The Acquired Entity, on behalf of the Acquired Fund, shall have performed all of the covenants and complied with all of the provisions required by this Agreement to be performed or complied with by the Acquired Entity, on behalf of the Acquired Fund, on or before the Closing Date.

7.3 The Acquired Entity, on behalf of the Acquired Fund, shall have delivered to the Acquiring Entity, on behalf of the Acquiring Fund, a Statement of Assets and Liabilities of the Acquired Fund as of the Closing Date, including a schedule of investments, certified by the Treasurer of the Acquired Entity on behalf of the Acquired Fund. The Acquired Entity, on behalf of the Acquired Fund, shall have executed and delivered all such assignments and other instruments of transfer as the Acquiring Entity may reasonably deem necessary or desirable in order to vest in and confirm (a) the Acquired Fund’s title to and possession of the Acquiring Fund Shares to be delivered hereunder and (b) the Acquiring Fund’s title to and possession of all the Assets and to otherwise carry out the intent and purpose of this Agreement.

7.4 The Acquired Entity, on behalf of the Acquired Fund, shall have delivered to the Acquiring Entity a certificate executed in the name of the Acquired Entity, on behalf of the Acquired Fund, by the Acquired Entity’s President or Vice President and its Treasurer or Assistant Treasurer, in a form reasonably satisfactory to the Acquiring Entity and dated as of the Closing Date, as to the matters set forth in paragraphs 7.1 and 7.2 and as to such other matters as the Acquiring Entity shall reasonably request.

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7.5 The Acquired Entity, on behalf of the Acquired Fund, and the Acquiring Entity, on behalf of the Acquiring Fund, shall have agreed on the number of full and fractional Acquiring Fund Shares to be issued in connection with the Reorganization after such number has been calculated in accordance with paragraph 1.1.

8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF ACQUIRING ENTITY AND ACQUIRED ENTITY

If any of the conditions set forth in paragraph 8.1 or 8.5 have not been satisfied on or before the Closing Date, the Transaction contemplated by this Agreement shall not be consummated. If any of the other conditions set forth below have not been satisfied on or before the Closing Date with respect to the Acquired Entity, on behalf of the Acquired Fund, or the Acquiring Entity, on behalf of the Acquiring Fund, the other party to this Agreement shall be entitled on behalf of the Acquired Fund or Acquiring Fund, as applicable, at its option, to refuse to consummate the transactions contemplated by this Agreement:

8.1 This Agreement and the transactions contemplated herein shall have been approved by the requisite vote of the holders of the outstanding shares of the Acquired Fund, in accordance with the provisions of the 1940 Act and the Acquired Entity Charter, the bylaws of the Acquired Entity, and Maryland law, as applicable, and certified copies of the report of the inspector of elections evidencing such approval, if any such approval is required, shall have been delivered to the Acquiring Entity. Notwithstanding anything herein to the contrary, neither the Acquiring Entity nor the Acquired Entity may waive the condition set forth in this paragraph 8.1.

8.2 On the Closing Date, no court or governmental agency of competent jurisdiction shall have issued any order that remains in effect and that restrains or enjoins the Acquired Entity, with respect to the Acquired Fund, or the Acquiring Entity, with respect to the Acquiring Fund, from completing the transactions contemplated by this Agreement.

8.3 All consents of other parties and all other consents, orders and permits of federal, state and local regulatory authorities deemed necessary by the Acquiring Entity or the Acquired Entity to permit consummation, in all material respects, of the transactions contemplated hereby shall have been obtained, except where failure to obtain any such consent, order or permit would not involve a risk of a material adverse effect on the assets or properties of the Acquiring Fund or the Acquired Fund.

8.4 The Registration Statement shall have become effective under the 1933 Act and no stop orders suspending the effectiveness thereof shall have been issued and, to the best knowledge of the parties hereto, no investigation or proceeding for that purpose shall have been instituted or be pending.

8.5 The parties (other than LMPFA) shall have received the opinion of Bingham McCutchen LLP, dated the Closing Date, substantially to the effect that, based upon certain facts, assumptions and representations and upon certifications made by the Acquired Entity, on behalf of the Acquired Fund, the Acquiring Entity, on behalf of the Acquiring Fund, and their respective authorized officers, (i) the Reorganization will constitute a “reorganization” within the meaning of Section 368(a) of the Code, and the Acquired Fund and the Acquiring Fund will each be a “party to a reorganization” within the meaning of Section 386(b) of the Code; (ii) no gain or loss will be recognized by the Acquiring Fund upon receipt of the Assets solely in exchange for the Acquiring Fund Shares and the assumption by the Acquiring Fund of the Acquired Fund Liabilities; (iii) the basis in the hands of the Acquiring Fund of the Assets will be the same as the basis of the Assets in the hands of the Acquired Fund immediately prior to the transfer, increased by the amount of gain (or decreased by the amount of loss), if any, recognized by the Acquired Fund upon the transfer; (iv) the holding periods of the Assets in the hands of the Acquiring Fund will include the periods during which the Assets were held by the Acquired Fund (except where investment activities of the Acquiring Fund have the effect of reducing or eliminating the holding period with respect to an Asset); (v) no gain or loss will be recognized by the Acquired Fund upon the transfer of the Assets to the Acquiring Fund in exchange for the Acquiring Fund Shares and the assumption by the Acquiring Fund of the Acquired Fund Liabilities, or upon the distribution of the Acquiring Fund Shares by the Acquired Fund to its shareholders in liquidation except for (A) any gain or loss that may be recognized with respect to contracts subject to Section 1256 of the Code, (B) any gain that may be recognized on the transfer of stock in a “passive foreign investment company” as defined in Section 1297(a) of the Code and (C) any other gain or loss that may be required to be recognized as a result of the closing of the Acquired Fund’s taxable year; (vi) no gain or loss will be recognized by the Acquired Fund shareholders upon the exchange of their Acquired Fund Shares solely for the Acquiring Fund Shares as part of the Reorganization; (vii) the aggregate basis of the Acquiring Fund Shares that each Acquired Fund shareholder receives in connection with the Reorganization will be the same as the aggregate basis of his or her Acquired

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Fund Shares exchanged therefor; and (viii) an Acquired Fund shareholder’s holding period for his or her Acquiring Fund Shares will include the period for which he or she held the Acquired Fund Shares exchanged therefor, provided that he or she held the Acquired Fund Shares as capital assets on the date of the exchange. The delivery of such opinion is conditioned upon the receipt by Bingham McCutchen LLP of representations it shall request of the Acquiring Entity and the Acquired Entity. Notwithstanding anything herein to the contrary, no party hereto may waive the condition set forth in this paragraph 8.5.

8.6 The Acquiring Entity, on behalf of the Acquiring Fund, shall have received on the Closing Date an opinion of K&L Gates LLP, in a form reasonably satisfactory to the Acquiring Entity, and dated as of the Closing Date, substantially to the effect that, based upon certain facts and certifications made by the Acquired Entity, on behalf of the Acquired Fund, and its authorized officers: (a) the Acquired Entity is a corporation validly existing under the laws of the State of Maryland; (b) the Acquired Entity, with respect to the Acquired Fund, has the corporate power to carry on its business as presently conducted in accordance with the description thereof in the Acquired Entity’s registration statement as an open-end investment company registered under the 1940 Act; (c) this Agreement has been duly authorized, executed and, so far as known to such counsel, delivered by the Acquired Entity, on behalf of the Acquired Fund, and assuming due authorization, execution and delivery of this Agreement by the Acquiring Entity, on behalf of the Acquiring Fund, constitutes a valid and legally binding obligation of the Acquired Entity, on behalf of the Acquired Fund, enforceable against the Acquired Entity in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and laws of general applicability relating to or affecting creditors’ rights and to general equity principles (whether in a proceeding under equity or at law); provided that such counsel shall be entitled to state that it expresses no opinion with respect to the validity, binding effect or enforceability of any contractual provisions purporting to provide indemnification of any person for any claims, damages, liabilities or expenses which may be limited by any applicable federal or state securities laws or as a matter of public policy; (d) the execution and delivery of this Agreement did not, and the transfer of the Assets for Acquiring Fund Shares and the assumption by the Acquiring Fund of the Liabilities pursuant to this Agreement will not, violate the Acquired Entity Charter or the bylaws of the Acquired Entity; and (e) to the knowledge of such counsel, all regulatory or court consents, authorizations, approvals, orders or filings required to be obtained or made by the Acquired Entity, on behalf of the Acquired Fund, under the federal laws of the United States or the laws of the State of Maryland for the transfer of the Assets for Acquiring Fund Shares and the assumption by the Acquiring Fund of the Liabilities pursuant to this Agreement have been obtained or made, except such as may be required under state securities or blue sky laws as to which such counsel need express no opinion. Such opinion may state that it is solely for the benefit of the Acquiring Entity and the Acquiring Entity Board. Such opinion may contain such assumptions and limitations as shall be in the opinion of K&L Gates LLP appropriate to render the opinions expressed therein. With respect to all matters of Maryland law, such counsel shall be entitled to state that, with the approval of the Acquiring Entity, it has relied on the opinion of Venable LLP and that its opinion is subject to the same assumptions, qualifications and limitations with respect to such matters as are contained in the opinion of Venable LLP.

8.7 The Acquired Entity, on behalf of the Acquired Fund, shall have received on the Closing Date an opinion of Bingham McCutchen LLP, in a form reasonably satisfactory to the Acquired Entity, and dated as of the Closing Date, substantially to the effect that, based upon certain facts and certifications made by the Acquiring Entity, on behalf of the Acquiring Fund and its authorized officers: (a) the Acquiring Entity is a business trust validly existing under the laws of the State of Maryland; (b) the Acquiring Entity, with respect to the Acquiring Fund, has the power as a business trust to carry on its business as presently conducted in accordance with the description thereof in the Acquiring Entity’s registration statement as an open-end investment company registered under the 1940 Act; (c) this Agreement has been duly authorized, executed and, so far as is known to such counsel, delivered by the Acquiring Entity, on behalf of the Acquiring Fund, and assuming due authorization, execution and delivery of this Agreement by the Acquired Entity, on behalf of the Acquired Fund, constitutes a valid and legally binding obligation of the Acquiring Entity, on behalf of the Acquiring Fund, enforceable against the Acquiring Entity in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and laws of general applicability relating to or affecting creditors’ rights and to general equity principles (whether in a proceeding under equity or at law); provided that such counsel shall be entitled to state that it expresses no opinion with respect to the validity, binding effect or enforceability of any contractual provisions purporting to provide indemnification of any person for any claims, damages, liabilities or expenses which may be limited by any applicable federal or state securities laws or as a matter of public policy; (d) the execution and delivery of this Agreement did not, and the issuance of the Acquiring Fund Shares and the assumption of the Liabilities in exchange for the transfer of the Assets pursuant to this Agreement will not, violate the Acquiring Entity Charter or the bylaws of the Acquiring Entity; and (e) to the knowledge of such counsel, all regulatory or court consents, authorizations, approvals, orders or filings required to be obtained or made by the Acquiring Entity, on behalf of the Acquiring Fund, under the federal laws of the United States or the laws of the State of Maryland with respect to the issuance of the Acquiring Fund Shares, the transfer

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of the Assets and the assumption of the Liabilities pursuant to this Agreement have been obtained or made, except such as may be required under state securities or blue sky laws, as to which such counsel need express no opinion. Such opinion may state that it is solely for the benefit of the Acquired Entity and the Acquired Entity Board. Such opinion may contain such assumptions and limitations as shall be in the opinion of Bingham McCutchen LLP appropriate to render the opinions expressed therein. With respect to all matters of Maryland law, such counsel shall be entitled to state that, with the approval of the Acquired Entity, it has relied on the opinion of Venable LLP and that its opinion is subject to the same assumptions, qualifications and limitations with respect to such matters as are contained in the opinion of Venable LLP.

8.8 The Assets will include no assets which the Acquiring Fund, by reason of limitations contained in the Acquiring Entity Charter or in investment restrictions in effect on the Closing Date, may not properly acquire.

9. INDEMNIFICATION

9.1 The Acquiring Entity, out of the Acquiring Fund’s assets and property (including any amounts paid to the Acquiring Fund pursuant to any applicable liability insurance policies or indemnification agreements), agrees to indemnify and hold harmless the Acquired Entity and the members of the Acquired Entity Board and its officers from and against any and all losses, claims, damages, liabilities or expenses (including, without limitation, the payment of reasonable legal fees and reasonable costs of investigation) to which the Acquired Entity and those board members and officers may become subject, insofar as such loss, claim, damage, liability or expense (or actions with respect thereto) arises out of or is based on (a) any breach by the Acquiring Entity, on behalf of the Acquiring Fund, of any of its representations, warranties, covenants or agreements set forth in this Agreement or (b) any act, error, omission, neglect, misstatement, materially misleading statement, breach of duty or other act wrongfully done or attempted to be committed by the Acquiring Entity or the members of the Acquiring Entity Board or its officers prior to the Closing Date, provided that such indemnification by the Acquiring Entity is not (i) in violation of any applicable law or (ii) otherwise prohibited as a result of any applicable order or decree issued by any governing regulatory authority or court of competent jurisdiction.

9.2 The Acquired Entity, out of the Acquired Fund’s assets and property (including any amounts paid to the Acquired Fund pursuant to any applicable liability insurance policies or indemnification agreements), agrees to indemnify and hold harmless the Acquiring Entity and the members of the Acquiring Entity Board and its officers from and against any and all losses, claims, damages, liabilities or expenses (including, without limitation, the payment of reasonable legal fees and reasonable costs of investigation) to which the Acquiring Entity and those board members and officers may become subject, insofar as such loss, claim, damage, liability or expense (or actions with respect thereto) arises out of or is based on (a) any breach by the Acquired Entity, on behalf of the Acquired Fund, of any of its representations, warranties, covenants or agreements set forth in this Agreement or (b) any act, error, omission, neglect, misstatement, materially misleading statement, breach of duty or other act wrongfully done or attempted to be committed by the Acquired Entity or the members of the Acquired Entity Board or its officers prior to the Closing Date, provided that such indemnification by the Acquired Entity is not (i) in violation of any applicable law or (ii) otherwise prohibited as a result of any applicable order or decree issued by any governing regulatory authority or court of competent jurisdiction.

10. BROKER FEES AND EXPENSES

10.1 The Acquiring Entity, on behalf of the Acquiring Fund, and the Acquired Entity, on behalf of the Acquired Fund, represent and warrant to each other that there are no brokers or finders entitled to receive any payments in connection with the transactions provided for herein.

10.2 LMPFA will pay all of the costs of the Reorganization allocated to the Acquired Fund and fifty percent of the costs of the Reorganization allocated to the Acquiring Fund, and the Acquiring Fund will pay the remaining fifty percent of the costs of the Reorganization allocated to it, except that any transaction costs associated with repositioning a Fund’s portfolio in connection with the Reorganization will be borne by the Fund. Notwithstanding any of the foregoing, expenses will in any event be paid by the party directly incurring such expenses if and to the extent that the payment by another person of such expenses would result in the disqualification of such party as a “regulated investment company” within the meaning of Section 851 of the Code or would prevent the Reorganization from qualifying as a tax-free reorganization.

11. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES

11.1 The Acquiring Entity and the Acquired Entity agree that neither party has made any representation, warranty or covenant, on behalf of either the Acquiring Fund or the Acquired Fund, respectively, not set forth herein and that this Agreement constitutes the entire agreement between the parties.

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11.2 The covenants to be performed after the Closing by both the Acquiring Entity and the Acquired Entity, and the obligations of the Acquiring Entity, on behalf of the Acquiring Fund, in Article 9, shall survive the Closing. All other representations, warranties and covenants contained in this Agreement or in any document delivered pursuant hereto or in connection herewith shall not survive the consummation of the transactions contemplated hereunder and shall terminate on the Closing.

12. TERMINATION

This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing Date by resolution of either the Acquiring Entity Board or the Acquired Entity Board, if circumstances should develop that, in the opinion of that Board, make proceeding with the Agreement inadvisable with respect to the Acquiring Fund or the Acquired Fund, respectively. Any such termination resolution will be effective when communicated to the other party. The obligations of LMPFA set forth in paragraph 10.2 shall survive termination of this Agreement.

13. AMENDMENTS

This Agreement may be amended, modified or supplemented in such manner as may be deemed necessary or advisable by the authorized officers of the Acquired Entity and the Acquiring Entity; provided, however, that following the meeting of the Acquired Fund shareholders called by the Acquired Fund pursuant to paragraph 5.2 of this Agreement, no such amendment may have the effect of changing the provisions for determining the number of Acquiring Fund Shares to be issued to Acquired Fund shareholders under this Agreement to the detriment of such shareholders without their further approval.

14. NOTICES

Any notice, report, statement or demand required or permitted by any provisions of this Agreement shall be in writing and shall be given by facsimile, electronic delivery (i.e., e-mail), personal service or prepaid or certified mail addressed to the Acquiring Entity or the Acquired Entity, at its address set forth in the preamble to this Agreement, in each case to the attention of its President.

15. HEADINGS; COUNTERPARTS; GOVERNING LAW; SEVERABILITY; ASSIGNMENT; LIMITATION OF LIABILITY

15.1 The Article headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

15.2 This Agreement may be executed in any number of counterparts, each of which shall be deemed an original.

15.3 This Agreement shall be governed by and construed and interpreted in accordance with the internal laws of the State of Maryland.

15.4 This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns, but no assignment or transfer hereof or of any rights or obligations hereunder shall be made by any party without the written consent of the other parties. Nothing herein expressed or implied is intended or shall be construed to confer upon or give any person, firm or corporation, other than the parties hereto and their respective successors and assigns, any rights or remedies under or by reason of this Agreement.

15.5 Consistent with the Acquiring Entity Charter, the obligations of the Acquiring Entity with respect to the Acquiring Fund entered into in the name or on behalf of the Acquiring Entity by any of its Trustees, officers, employees or agents are made not individually, but in such capacities, and are not binding upon any of the Trustees, officers, employees, agents or shareholders of the Acquiring Entity, personally, but bind only the assets of the Acquiring Entity belonging to the Acquiring Fund, and all persons dealing with any series or funds of the Acquiring Entity must look solely to the assets of the Acquiring Entity belonging to such series or fund for the enforcement of any claims against the Acquiring Entity.

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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by its duly authorized officer.

LEGG MASON PARTNERS INCOME TRUST,

on behalf of its series LEGG MASON PARTNERS CORPORATE BOND FUND

By:                                                                                                        

Name:                                                                                                 

Title:                                                                                                    

LEGG MASON INCOME TRUST, INC.,

on behalf of its series LEGG MASON INVESTMENT GRADE INCOME PORTFOLIO

By:                                                                                                       

Name:                                                                                                 

Title:                                                                                                    

Solely for purposes of paragraph 10.2 of the Agreement:

LEGG MASON PARTNERS FUND ADVISOR, LLC

By:                                                                                                       

Name:                                                                                                 

Title:                                                                                                    

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SCHEDULE 4.1

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SCHEDULE 4.2

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APPENDIX A2

FORM OF AGREEMENT AND PLAN OF REORGANIZATION

Legg Mason Limited Duration Bond Portfolio and Legg Mason Partners Short-Term Bond Fund

This AGREEMENT AND PLAN OF REORGANIZATION (“Agreement”) is made as of this [            ] day of [                    ], 2009, by and among Legg Mason Partners Income Trust, a Maryland business trust (the “Acquiring Entity”), with its principal place of business at 55 Water Street, New York, New York 10041, on behalf of its series Legg Mason Partners Short-Term Bond Fund (the “Acquiring Fund”), and Legg Mason Income Trust, Inc., a Maryland corporation (the “Acquired Entity”), with its principal place of business at 100 Light Street, Baltimore, Maryland 21202, on behalf of its series Legg Mason Limited Duration Bond Portfolio (the “Acquired Fund”), and, solely for purposes of paragraph 10.2 hereof, Legg Mason Partners Fund Advisor, LLC (“LMPFA”).

WHEREAS, each of the Acquired Fund and the Acquiring Fund is a series of an open-end management investment company registered pursuant to the Investment Company Act of 1940, as amended (the “1940 Act”);

WHEREAS, it is intended that, for United States federal income tax purposes (i) the transactions contemplated by this Agreement constitute a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and (ii) this Agreement constitutes a plan of reorganization within the meaning of Section 368 of the Code and Treasury Regulations Section 1.368-2(g);

WHEREAS, the reorganization will consist of (1) the sale, assignment, conveyance, transfer and delivery of all of the property and assets of the Acquired Fund to the Acquiring Fund in exchange solely for shares of beneficial interest of the Acquiring Fund (the “Acquiring Fund Shares”) corresponding in class to the outstanding shares of the Acquired Fund (the “Acquired Fund Shares”), as described herein, and the assumption by the Acquiring Fund of all liabilities of the Acquired Fund, and (2) the distribution of the Acquiring Fund Shares to the shareholders of the Acquired Fund and the subsequent redemption of the Acquired Fund Shares and termination of the Acquired Fund, as provided herein (the “Reorganization”), all upon the terms and conditions hereinafter set forth in this Agreement;

WHEREAS, the Board of Trustees of the Acquiring Entity (the “Acquiring Entity Board”) has determined, with respect to the Acquiring Fund, that the sale, assignment, conveyance, transfer and delivery of all of the property and assets of the Acquired Fund for Acquiring Fund Shares and the assumption of all liabilities of the Acquired Fund by the Acquiring Fund is in the best interests of the Acquiring Fund and its shareholders and that the interests of the existing shareholders of the Acquiring Fund will not be diluted as a result of the Reorganization;

WHEREAS, the Board of Directors of the Acquired Entity (the “Acquired Entity Board”) has determined, with respect to the Acquired Fund, that the sale, assignment, conveyance, transfer and delivery of all of the property and assets of the Acquired Fund for Acquiring Fund Shares and the assumption of all liabilities of the Acquired Fund by the Acquiring Fund is in the best interests of the Acquired Fund and that the interests of the existing shareholders of the Acquired Fund will not be diluted as a result of the Reorganization; and

WHEREAS, in this Agreement, any references to a Fund taking action shall mean and include all necessary actions of the Acquiring Entity or Target Entity, as applicable, on behalf of a Fund, unless the context of this Agreement or the 1940 Act requires otherwise;

NOW, THEREFORE, in consideration of the premises and of the covenants and agreements hereinafter set forth, the parties hereto covenant and agree as follows:

1. TRANSFER OF ASSETS OF THE ACQUIRED FUND TO THE ACQUIRING FUND IN EXCHANGE FOR ACQUIRING FUND SHARES, ASSUMPTION OF ALL ACQUIRED FUND LIABILITIES AND TERMINATION OF THE ACQUIRED FUND

1.1 Subject to requisite approvals and the other terms and conditions herein set forth and on the basis of the representations and warranties contained herein, the Acquired Entity, on behalf of the Acquired Fund, agrees to sell, assign, convey, transfer and deliver all of its property and assets, as set forth in paragraph 1.2, to the Acquiring Fund, and the

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Acquiring Entity, on behalf of the Acquiring Fund, agrees in exchange therefor: (a) to deliver to the Acquired Fund the number of full and fractional Acquiring Fund Shares corresponding to the Acquired Fund Shares as of the time and date set forth in paragraph 3.1, determined by dividing the value of the Acquired Fund’s net assets (computed in the manner and as of the time and date set forth in paragraph 2.1) by the net asset value of one share of the corresponding class of Acquiring Fund Shares (computed in the manner and as of the time and date set forth in paragraph 2.2); and (b) to assume all liabilities of the Acquired Fund. Such transactions shall take place on a closing date as provided for in paragraph 3.1 (the “Closing Date”). For purposes of this Agreement, the Primary Class shares of the Acquired Fund corresponds to the Class C shares of the Acquiring Fund and the Institutional Class shares of the Acquired Fund corresponds to the Class I shares of the Acquiring Fund, and the term “Acquiring Fund Shares” shall be read to mean such classes of shares of the Acquiring Fund.

1.2 The property and assets of the Acquired Entity attributable to the Acquired Fund to be sold, assigned, conveyed, transferred and delivered to and acquired by the Acquiring Entity, on behalf of the Acquiring Fund, shall consist of all assets and property of every kind and nature of the Acquired Fund, including, without limitation, all rights, receivables (including dividend, interest and other receivables), cash, cash equivalents, claims (whether absolute or contingent, known or unknown), securities, commodities and futures interests, good will and other intangible property, any deferred or prepaid expenses and all interests, rights, privileges and powers, the Acquired Fund owns at the Valuation Date (as defined in paragraph 2.1) (collectively, “Assets”). The Acquiring Entity, on behalf of the Acquiring Fund, shall assume all of the liabilities and obligations of the Acquired Fund, including, without limitation, all indemnification obligations of the Acquired Fund with respect to the current and former members of the Acquired Entity Board and officers of the Acquired Entity, whether accrued or contingent, known or unknown, existing at the Valuation Date (collectively, “Liabilities”). The Acquired Fund will sell, assign, convey, transfer and deliver to the Acquiring Entity, on behalf of the Acquiring Fund, any rights, stock dividends, or other securities received by the Acquired Fund after the Closing Date as stock dividends or other distributions on or with respect to the property and assets transferred, which rights, stock dividends, and other securities shall be deemed included in the property and assets transferred to the Acquiring Entity, on behalf of the Acquiring Fund, at the Closing Date and shall not be separately valued, in which case any such distribution that remains unpaid as of the Closing Date shall be included in the determination of the value of the assets of the Acquired Fund acquired by the Acquiring Entity on behalf of the Acquiring Fund.

1.3 The Acquired Fund will make reasonable efforts to discharge all of its known Liabilities prior to the Valuation Date.

1.4 On or as soon as practicable prior to the Closing Date, the Acquired Fund will declare and pay to its shareholders of record one or more dividends and/or other distributions so that it will have distributed substantially all of its investment company taxable income as defined in the Code (computed without regard to any deduction for dividends paid) and realized net capital gain as defined in the Code (after deduction for any available capital loss carryover), if any, for all tax periods ending on or before the Closing Date (and treating the current taxable year as ending on the Closing Date) such that the Acquired Fund will have no tax liability under Section 852 or Section 4982 for the current and any prior tax periods.

1.5 Immediately following the actions contemplated by paragraph 1.1, the Acquired Entity shall take such actions as may be necessary or appropriate to complete the liquidation of the Acquired Fund. To complete the liquidation, the Acquired Entity, on behalf of the Acquired Fund, shall (a) distribute to the shareholders of record of the Acquired Fund Shares as of the Closing Date (“Acquired Fund Shareholders”), on a pro rata basis, the Acquiring Fund Shares received by the Acquired Entity, on behalf of the Acquired Fund, pursuant to paragraph 1.1, (b) redeem shares of the Acquired Fund and (c) terminate the Acquired Fund in accordance with Maryland law. Such distribution and redemption shall be accomplished, with respect to the Acquired Fund Shares, by the transfer of the Acquiring Fund Shares then credited to the account of the Acquired Fund on the books of the Acquiring Fund to open accounts on the share records of the Acquiring Fund in the names of the Acquired Fund Shareholders. The aggregate net asset value of the Acquiring Fund Shares to be so credited to the Acquired Fund Shareholders shall be equal to the aggregate net asset value of the Acquired Fund Shares owned by Acquired Fund Shareholders on the Closing Date. All issued and outstanding Acquired Fund Shares will be cancelled on the books of the Acquired Fund. The Acquiring Fund shall not issue certificates representing any class of Acquiring Fund Shares in connection with such exchange.

1.6 Ownership of Acquiring Fund Shares will be shown on the books of the Acquiring Fund’s transfer agent.

1.7 Any reporting responsibility of the Acquired Fund, including, but not limited to, the responsibility for filing regulatory reports, tax returns, or other documents with the Securities and Exchange Commission (“Commission”), any state securities commission, and any federal, state or local tax authorities or any other relevant regulatory authority, is and shall remain the responsibility of the Acquired Entity, on behalf of the Acquired Fund. The Acquiring Entity shall fully cooperate to the extent necessary or desirable for these responsibilities to be discharged.

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2. VALUATION

2.1 The value of the Assets and the amount of the Liabilities shall be determined as of the time for calculation of net asset value as set forth in the then-current prospectus for the Acquired Fund, and after the declaration of any dividends by the Acquired Fund, on the Closing Date (such time and date being hereinafter called the “Valuation Date”), computed using the valuation procedures established by the Acquired Entity Board. All computations of value and amounts shall be made by (a) State Street Bank and Trust Company, in its capacity as accounting agent for the Acquired Fund, or (b) in the case of securities subject to fair valuation, in accordance with the valuation procedures of the Acquired Entity adopted in good faith by the Acquired Entity Board. All computations of value and amounts pursuant to this paragraph 2.1 shall be subject to confirmation by the Acquiring Fund’s independent registered public accounting firm.

2.2. The net asset value per share of each class of Acquiring Fund Shares shall be determined to the nearest full cent on the Valuation Date, using the valuation procedures established by the Acquiring Entity Board. All computations of value shall be made by (a) State Street Bank and Trust Company, in its capacity as accounting agent for the Acquiring Fund, or (b) in the case of securities subject to fair valuation, in accordance with the valuation procedures of the Acquiring Entity adopted in good faith by the Acquiring Entity Board. All computations of value and amounts pursuant to this paragraph 2.2 shall be subject to confirmation by the Acquired Fund’s independent registered public accounting firm.

3. CLOSING AND CLOSING DATE

3.1 Subject to the terms and conditions set forth herein, the Closing Date shall be [            ], 2009, or such other date as the parties may agree. All acts taking place at the closing of the transactions provided for in this Agreement (“Closing”) shall be deemed to take place simultaneously as of the “close of business” on the Closing Date unless otherwise agreed to by the parties. The close of business on the Closing Date shall be as of 4:00 p.m., Eastern Time or such later time on that date as the Acquired Fund’s net asset value is calculated in accordance with paragraph 2.2 and after the declaration of any dividends. The Closing shall be held at the offices of [            ] or at such other time and/or place as the parties may agree.

3.2 The Acquired Entity shall direct State Street Bank and Trust Company (the “Custodian”) to transfer ownership of the Assets from the accounts of the Acquired Fund that the Custodian maintains as custodian for the Acquired Fund to the accounts of the Acquiring Fund that the Custodian maintains as custodian for the Acquiring Fund and to deliver to the Acquiring Entity, at the Closing, a certificate of an authorized officer stating that (i) the Assets of the Acquired Fund have been so transferred as of the Closing Date, and (ii) all necessary taxes in connection with the delivery of the Assets of the Acquired Fund, including all applicable federal and state stock transfer stamps, if any, have been paid or provision for payment has been made.

3.3 The Acquired Entity shall direct Boston Financial Data Services, in its capacity as transfer agent for the Acquired Fund (“Transfer Agent”), to deliver to the Acquiring Entity at the Closing a certificate of an authorized officer stating that its records contain the name and address of each Acquired Fund Shareholder and the number and percentage ownership of the outstanding class of Acquired Fund Shares owned by each such shareholder immediately prior to the Closing. The Acquiring Fund shall deliver to the Secretary of the Acquired Fund a confirmation evidencing that (a) the appropriate number of Acquiring Fund Shares have been credited to the Acquired Fund’s account on the books of the Acquiring Fund pursuant to paragraph 1.1 prior to the actions contemplated by paragraph 1.4 and (b) the appropriate number of Acquiring Fund Shares have been credited to the accounts of the Acquired Fund Shareholders on the books of the Acquiring Fund pursuant to paragraph 1.4. At the Closing, each party shall deliver to the other party such bills of sale, checks, assignments, share certificates, if any, receipts or other documents as the other party or its counsel may reasonably request.

3.4 In the event that on the Valuation Date (a) the New York Stock Exchange or another primary trading market for portfolio securities of the Acquiring Fund or the Acquired Fund (each, an “Exchange”) shall be closed to trading or trading thereupon shall be restricted, or (b) trading or the reporting of trading on such Exchange or elsewhere shall be disrupted so that accurate appraisal of the value of the net assets of the Acquired Fund or the Acquiring Fund is impracticable (in the judgment of the Acquiring Entity Board with respect to the Acquiring Fund and the Acquired Entity Board with respect to the Acquired Fund), the Closing Date shall be postponed until the first Friday (that is also a business day) after the day when trading shall have been fully resumed and reporting shall have been restored.

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4. REPRESENTATIONS AND WARRANTIES

4.1 Except as has been fully disclosed to the Acquiring Entity in Schedule 4.1 of this Agreement, the Acquired Entity, on behalf of the Acquired Fund, represents and warrants to the Acquiring Entity and the Acquiring Fund as follows:

(a) The Acquired Fund is duly established as a series of the Acquired Entity, which is a corporation duly organized, validly existing and in good standing under the laws of the State of Maryland, with power under its Charter (the “Acquired Entity Charter”), to own all of its assets and to carry on its business as it is being conducted as of the date hereof. The Acquired Entity is duly qualified to do business as a foreign corporation in each jurisdiction in which the conduct of its business makes such qualification necessary except where the failure to so qualify would not have a material adverse effect on the condition (financial or otherwise), business, properties, net assets or results of operations of the Acquired Entity. The Acquired Entity has all necessary federal, state and local authorizations to carry on its business as now being conducted and to fulfill the terms of this Agreement, except as set forth in paragraph 4.1(c).

(b) The Acquired Entity is a registered open-end management investment company, and its registration with the Commission as an investment company under the 1940 Act, and the registration of each class of Acquired Fund Shares under the Securities Act of 1933, as amended (“1933 Act”), is in full force and effect.

(c) No consent, approval, authorization, or order of any court or governmental authority is required for the consummation by the Acquired Fund of the transactions contemplated herein, except such as may be required under the 1933 Act, the Securities Exchange Act of 1934, as amended (“1934 Act”), the 1940 Act, state securities laws and the Hart-Scott-Rodino Act.

(d) The current prospectus and statement of additional information of the Acquired Fund (true and correct copies of which have been delivered to the Acquiring Entity) and each prospectus and statement of additional information of the Acquired Fund used during the three (3) years prior to the date of this Agreement conforms or conformed at the time of its use in all material respects to the applicable requirements of the 1933 Act and the 1940 Act and the rules and regulations of the Commission thereunder and does not or did not at the time of its use include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not materially misleading.

(e) On the Closing Date, the Acquired Entity, on behalf of the Acquired Fund, will have good title to the Assets and full right, power and authority to sell, assign, convey, transfer and deliver such Assets hereunder free of any liens or other encumbrances, and upon delivery and payment for the Assets, the Acquiring Entity, on behalf of the Acquiring Fund, will acquire good title thereto, subject to no restrictions on the full transfer thereof, excluding such restrictions as might arise under the 1933 Act.

(f) The Acquired Fund is not engaged currently, and the execution, delivery and performance of this Agreement by the Acquired Entity, on behalf of the Acquired Fund, will not result, in a material violation of Maryland law or of the Acquired Entity Charter or the bylaws of the Acquired Entity, or of any agreement, indenture, instrument, contract, lease or other undertaking to which the Acquired Entity, on behalf of the Acquired Fund, is a party or by which it is bound, and the execution, delivery and performance of this Agreement by the Acquired Entity, on behalf of the Acquired Fund, will not result in the acceleration of any material obligation, or the imposition of any material penalty, under any agreement, indenture, instrument, contract, lease, judgment or decree to which the Acquired Entity, on behalf of the Acquired Fund, is a party or by which it is bound.

(g) All material contracts or other commitments of the Acquired Fund (other than this Agreement, certain investment contracts, including options, futures, swaps and forward contracts, the indemnification agreements of the current and former members of the Acquired Entity Board, and those contracts listed in Schedule 4.1) will terminate without liability to the Acquired Fund on or prior to the Closing Date. Each contract listed in Schedule 4.1 is a valid, binding and enforceable obligation of the Acquired Fund and, to the Acquired Fund’s knowledge, the other parties thereto (assuming due authorization, execution and delivery by the other parties thereto) and the assignment by the Acquired Fund to the Acquiring Fund of each such contract will not result in the termination of such contract, any breach or default thereunder by the Acquired Fund or the imposition of any penalty thereunder.

(h) No litigation or administrative proceeding or investigation of or before any court or governmental body is pending or, to the Acquired Entity’s knowledge, threatened against the Acquired Entity, with respect to the Acquired Fund or any of its properties or assets, that, if adversely determined, would materially and adversely affect its financial condition or the conduct of the Acquired Fund’s business. The Acquired Entity, on behalf of the Acquired Fund, is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body that materially and adversely affects the Acquired Fund’s business or the Acquired Entity’s ability to consummate the transactions herein contemplated on behalf of the Acquired Fund.

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(i) The Statement of Assets and Liabilities, Statements of Operations and Changes in Net Assets and Schedule of Investments of the Acquired Fund as of the last day of and for the most recently completed fiscal year of the Acquired Fund prior to the date of this Agreement have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, and are in accordance with accounting principles generally accepted in the United States of America (“GAAP”) consistently applied, and such statements (true and correct copies of which have been furnished to the Acquiring Entity) present fairly, in all material respects, the financial condition of the Acquired Fund as of such date and for such period in accordance with GAAP, and there are no known contingent, accrued or other liabilities of the Acquired Fund required to be reflected on a balance sheet (including the notes thereto) in accordance with GAAP as of such date that are not disclosed therein.

(j) Since the last day of the most recently completed fiscal year of the Acquired Fund prior to the date of this Agreement, there has not been any material adverse change in the Acquired Fund’s financial condition, assets, liabilities or business, or any incurrence by the Acquired Fund of indebtedness for money borrowed maturing more than one year from the date such indebtedness was incurred. For the purposes of this subparagraph (j), a decline in net asset value per share of Acquired Fund Shares due to declines in market values of securities held by the Acquired Fund, the discharge of Acquired Fund liabilities, or the redemption of Acquired Fund Shares by shareholders of the Acquired Fund shall not constitute a material adverse change.

(k) On the Closing Date, all federal and other tax returns, dividend reporting forms and other tax-related reports of the Acquired Fund required by law to have been filed by such date (including any extensions) shall have been filed and are or will be correct in all material respects, and all federal and other taxes shown as due or required to be shown as due on said returns and reports shall have been paid or provision shall have been made for the payment thereof and, to the best of the Acquired Entity’s knowledge, no such return is currently under audit and no assessment has been asserted with respect to such returns.

(l) The Acquired Fund is a separate series of the Acquired Entity that is treated as a corporation separate from any and all other series of the Acquired Entity under Section 851(g) of the Code. For each taxable year of its operation (including the taxable year ending on the Closing Date), the Acquired Fund has met (or will meet) the requirements of Subchapter M of Chapter 1 of the Code for qualification and treatment as a “regulated investment company,” has elected to be treated as such, has been (or will be) eligible to compute and has computed (or will compute) its federal income tax under Section 852 of the Code, and on or before the Closing Date, will have distributed or will have declared dividends intended to be sufficient to distribute substantially all of (i) the excess of (x) its investment income excludible from gross income under Section 103 of the Code over (y) its deductions disallowed under Sections 265 and 171 of the Code (“net tax-exempt income”), (ii) its investment company taxable income (as defined in the Code) (computed without regard to any deduction for dividends paid) and (iii) any net capital gain (as defined in the Code) (after reduction for any allowable capital loss carryover) that has accrued or been recognized, respectively, through the Closing Date such that for all tax periods ending on or before the Closing Date (and treating the current tax year as ending on the Closing Date) the Acquired Fund will not have any tax liability under Section 852 or Section 4982.

(m) All issued and outstanding Acquired Fund Shares are, and on the Closing Date will be, duly authorized and validly and legally issued and outstanding, fully paid and non-assessable by the Acquired Entity and have been offered and sold in any state, territory or the District of Columbia in compliance in all material respects with applicable registration requirements of all applicable federal and state securities laws. All of the issued and outstanding Acquired Fund Shares will, at the time of Closing, be held by the persons and in the amounts set forth in the records of the Transfer Agent, on behalf of the Acquired Fund, as provided in paragraph 3.3. The Acquired Fund does not have outstanding any options, warrants or other rights to subscribe for or purchase any of the Acquired Fund Shares, nor is there outstanding any security convertible into any of the Acquired Fund Shares.

(n) The Acquired Fund will review its assets to ensure that at any time after its shareholders have approved this Agreement and prior to the Closing Date its assets do not include any assets that the Acquiring Fund is not permitted, or reasonably believes to be unsuitable for it, to acquire, including without limitation any security that, prior to its acquisition by the Acquired Fund, is unsuitable for the Acquiring Fund to acquire.

(o) The execution, delivery and performance of this Agreement, and the transactions contemplated herein, have been duly authorized by all necessary action on the part of the Acquired Entity Board, on behalf of the Acquired Fund, and this Agreement constitutes a valid and binding obligation of the Acquired Entity, on behalf of the Acquired Fund, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors’ rights and to general equity principles.

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(p) The combined proxy statement and prospectus (“Proxy Statement”) to be included in the Registration Statement (as defined in paragraph 5.6), insofar as it relates to the Acquired Fund, from the effective date of the Registration Statement through the date of the meeting of shareholders of the Acquired Fund contemplated therein and on the Closing Date, will (i) not contain any statement which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading (provided that this representation and warranty shall not apply to statements in or omissions from the Proxy Statement made in reliance upon and in conformity with information that was furnished by the Acquiring Entity for use therein) and (ii) comply in all material respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder. The information to be furnished by the Acquired Fund for use in registration statements and other documents filed or to be filed with any federal, state or local regulatory authority, which may be necessary in connection with the transactions contemplated hereby, shall be accurate and complete in all material respects and shall comply in all material respects with federal securities and other laws and regulations thereunder applicable thereto.

4.2 Except as has been fully disclosed to the Acquired Entity in Schedule 4.2 to this Agreement, the Acquiring Entity, on behalf of the Acquiring Fund, represents and warrants to the Acquired Entity and the Acquired Fund as follows:

(a) The Acquiring Fund is duly established as a series of the Acquiring Entity, which is a business trust duly organized, validly existing and in good standing under the laws of the State of Maryland, with the power under its Declaration of Trust, as amended and/or supplemented (the “Acquiring Entity Charter”), to own all of its assets and to carry on its business as it is being conducted as of the date hereof. The Acquiring Entity is duly qualified to do business as a foreign trust in each jurisdiction in which the conduct of its business makes such qualification necessary except where the failure to so qualify would not have a material adverse effect on the condition (financial or otherwise), business, properties, net assets or results of operations of the Acquiring Entity. The Acquiring Entity has all necessary federal, state and local authorizations to carry on its business as now being conducted and to fulfill the terms of this Agreement except as described in paragraph 4.2(c).

(b) The Acquiring Entity is a registered open-end management investment company, and its registration with the Commission as an investment company under the 1940 Act, and the registration of the class of Acquiring Fund Shares under the 1933 Act, is in full force and effect or will be in full force and effect as of the Closing Date.

(c) No consent, approval, authorization, or order of any court or governmental authority is required for the consummation by the Acquiring Fund of the transactions contemplated herein, except such as may be required under the 1933 Act, the 1934 Act, the 1940 Act, state securities laws and the Hart-Scott-Rodino Act.

(d) The current prospectus and statement of additional information of the Acquiring Fund (true and correct copies of which have been delivered to the Acquired Entity) and each prospectus and statement of additional information of the Acquiring Fund used during the three (3) years prior to the date of this Agreement conforms or conformed at the time of its use in all material respects to the applicable requirements of the 1933 Act and the 1940 Act and the rules and regulations of the Commission thereunder and does not or did not at the time of its use include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not materially misleading.

(e) The Acquiring Fund is not engaged currently, and the execution, delivery and performance of this Agreement by the Acquiring Entity, on behalf of the Acquiring Fund, will not result, in a material violation of Maryland law or the Acquiring Entity Charter or the bylaws of the Acquiring Entity, or of any agreement, indenture, instrument, contract, lease or other undertaking to which the Acquiring Entity, on behalf of the Acquiring Fund, is a party or by which it is bound, and the execution, delivery and performance of this Agreement by the Acquiring Entity, on behalf of the Acquiring Fund, will not result in the acceleration of any material obligation, or the imposition of any material penalty, under any agreement, indenture, instrument, contract, lease, judgment or decree to which the Acquiring Entity, on behalf of the Acquiring Fund, is a party or by which it is bound.

(f) No litigation or administrative proceeding or investigation of or before any court or governmental body is pending or, to the Acquiring Entity’s knowledge, threatened against the Acquiring Entity, with respect to the Acquiring Fund, or any of its properties or assets, that, if adversely determined, would materially and adversely affect its financial condition or the conduct of the Acquiring Fund’s business. The Acquiring Entity, on behalf of the Acquiring Fund, is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body that materially and adversely affects the Acquiring Fund’s business or the Acquiring Entity’s ability to consummate the transactions herein contemplated on behalf of the Acquiring Fund.

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(g) The Statement of Assets and Liabilities, Statements of Operations and Changes in Net Assets and Schedule of Investments of the Acquiring Fund as of the last day of and for the most recently completed fiscal year of the Acquiring Fund prior to the date of this Agreement have been audited by KPMG LLP, an independent registered public accounting firm, and are in accordance with GAAP consistently applied, and such statements (true and correct copies of which have been furnished to the Acquired Entity) present fairly, in all material respects, the financial condition of the Acquiring Fund as of such date and for such period in accordance with GAAP, and there are no known contingent, accrued or other liabilities of the Acquiring Fund required to be reflected on a balance sheet (including the notes thereto) in accordance with GAAP as of such date that are not disclosed therein.

(h) Since the last day of the most recently completed fiscal year of the Acquiring Fund prior to the date of this Agreement, there has not been any material adverse change in the Acquiring Fund’s financial condition, assets, liabilities or business, or any incurrence by the Acquiring Fund of indebtedness for money borrowed maturing more than one year from the date such indebtedness was incurred. For the purposes of this subparagraph (h), a decline in net asset value per share of Acquiring Fund Shares due to declines in market values of securities held by the Acquiring Fund, the discharge of Acquiring Fund liabilities, or the redemption of Acquiring Fund Shares by shareholders of the Acquiring Fund shall not constitute a material adverse change.

(i) On the Closing Date, all federal and other tax returns, dividend reporting forms and other tax-related reports of the Acquiring Fund required by law to have been filed by such date (including any extensions) shall have been filed and are or will be correct in all material respects, and all federal and other taxes shown as due or required to be shown as due on said returns and reports shall have been paid or provision shall have been made for the payment thereof and, to the best of the Acquiring Entity’s knowledge, no such return is currently under audit and no assessment has been asserted with respect to such returns.

(j) The Acquiring Fund is a separate series of the Acquiring Entity that is treated as a corporation separate from any and all other series of the Acquiring Entity under Section 851(g) of the Code. For each taxable year of its operation (including the taxable year that includes the Closing Date), the Acquiring Fund has met (or will meet) the requirements of Subchapter M of Chapter 1 of the Code for qualification and treatment as a “regulated investment company,” has elected to be treated as such, and has been (or will be) eligible to compute and has computed (or will compute) its federal income tax under Section 852 of the Code, and will have distributed (or will distribute pursuant to the provisions of Section 855 of the Code) substantially all of (i) its net tax-exempt income, (ii) its investment company taxable income (as defined in the Code) (computed without regard to any deduction for dividends paid) and (iii) any net capital gain (as defined in the Code) (after reduction for any capital loss carryover) for taxable years ending prior to the Closing Date such that for all those years the Acquiring Fund will have no tax liability under Section 852 or Section 4982.

(k) All issued and outstanding Acquiring Fund Shares are, and on the Closing Date will be, duly authorized and validly and legally issued and outstanding, fully paid and non-assessable by the Acquiring Entity and will have been offered and sold in any state, territory or the District of Columbia in compliance in all material respects with applicable registration requirements of all applicable federal and state securities laws. The Acquiring Fund does not have outstanding any options, warrants or other rights to subscribe for or purchase any Acquiring Fund Shares, nor is there outstanding any security convertible into any Acquiring Fund Shares. All of the Acquiring Fund Shares to be issued and delivered to the Acquired Entity, for the account of the Acquired Fund Shareholders, pursuant to this Agreement, will on the Closing Date have been duly authorized and, when so issued and delivered, will be duly and validly and legally issued Acquiring Fund Shares and be fully paid and non-assessable by the Acquiring Entity.

(l) The execution, delivery and performance of this Agreement, and the transactions contemplated herein, have been duly authorized by all necessary action on the part of the Acquiring Entity Board, on behalf of the Acquiring Fund, and this Agreement constitutes a valid and binding obligation of the Acquiring Entity, on behalf of the Acquiring Fund, enforceable in accordance with its terms, subject, as to enforcement, bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors’ rights and to general equity principles.

(m) The Proxy Statement to be included in the Registration Statement, insofar as it relates to the Acquiring Fund and the Acquiring Fund Shares, from the effective date of the Registration Statement through the date of the meeting of shareholders of the Acquired Fund contemplated therein and on the Closing Date, will (i) not contain any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary to make the statements therein not false or misleading (provided that this representation and warranty shall not apply to statements in or omissions from the Proxy Statement made in reliance upon and in conformity with information that was furnished by the Acquired Entity for use therein) and (ii) comply in all material respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and

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regulations thereunder. The information to be furnished by the Acquiring Fund for use in registration statements and other documents filed or to be filed with any federal, state or local regulatory authority, which may be necessary in connection with the transactions contemplated hereby, shall be accurate and complete in all material respects and shall comply in all material respects with federal securities and other laws and regulations applicable thereto.

5. COVENANTS

The Acquired Entity, on behalf of the Acquired Fund, and the Acquiring Entity, on behalf of the Acquiring Fund, respectively, hereby further covenant as follows:

5.1 The Acquired Fund and the Acquiring Fund each will operate its business in the ordinary course and shall comply in all material respects with all applicable laws, rules and regulations between the date hereof and the Closing Date, it being understood that such ordinary course of business will include the declaration and payment of customary dividends and other distributions, and any other distribution that may be advisable.

5.2 The Acquired Entity will call and hold a meeting of the shareholders of the Acquired Fund to consider and act upon this Agreement and to take all other action necessary to obtain approval of the transactions contemplated herein.

5.3 The Acquiring Fund Shares to be acquired by the Acquired Fund hereunder are not being acquired for the purpose of making any distribution thereof, other than in accordance with the terms of this Agreement.

5.4 The Acquired Entity, on behalf of the Acquired Fund, will assist the Acquiring Entity in obtaining such information as the Acquiring Entity reasonably requests concerning the beneficial ownership of the Acquired Fund Shares.

5.5 Subject to the provisions of this Agreement, the Acquiring Entity, on behalf of the Acquiring Fund, and the Acquired Entity, on behalf of the Acquired Fund, each will take, or cause to be taken, all action, and do or cause to be done, all things reasonably necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement.

5.6 The Acquiring Entity, on behalf of the Acquiring Fund, shall prepare and file a Registration Statement on Form N-14 in compliance with the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder with respect to the Reorganization (the “Registration Statement”). The Acquired Entity, on behalf of the Acquired Fund, will provide to the Acquiring Entity such information regarding the Acquired Fund as may be reasonably necessary for the preparation of the Registration Statement.

5.7 The Acquiring Entity, on behalf of the Acquiring Fund, and the Acquired Entity, on behalf of the Acquired Fund, each will use all reasonable efforts to fulfill or obtain the fulfillment of the conditions precedent to effect the transactions contemplated by this Agreement as promptly as practicable.

5.8 The Acquired Entity, on behalf of the Acquired Fund, will, from time to time, as and when reasonably requested by the Acquiring Entity, execute and deliver or cause to be executed and delivered all such assignments and other instruments and will take or cause to be taken such further action as the Acquiring Entity, on behalf of the Acquiring Fund, may reasonably deem necessary or desirable in order to vest in and confirm (a) the Acquired Entity’s title to and possession of the Acquiring Fund Shares to be delivered hereunder and (b) the Acquiring Entity’s title to and possession of all the Assets, and to otherwise carry out the intent and purpose of this Agreement.

5.9 The Acquiring Entity, on behalf of the Acquiring Fund, will use all reasonable efforts to obtain the approvals and authorizations required by the 1933 Act, the 1940 Act and such of the state blue sky or securities laws as may be necessary in order to continue its operations after the Closing Date.

5.10 The Acquiring Entity shall not change the Acquiring Entity Charter, or the Acquiring Fund’s prospectus or statement of additional information so as to restrict permitted investments for the Acquiring Fund, except as required by the Commission prior to the Closing.

5.11 Prior to the Valuation Date, the Acquired Entity Board shall adopt the valuation procedures of the Acquiring Entity with respect to the Acquired Fund.

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5.12 The Acquired Fund and the Acquiring Fund will each report the Reorganization as a reorganization within the meaning of Section 368(a) of the Code on its federal income tax return for its respective taxable year in which the Reorganization occurs, including filing any and all statements required by Treas. Reg. § 1.368-3.

6. CONDITIONS PRECEDENT TO OBLIGATIONS OF ACQUIRED ENTITY

The obligations of the Acquired Entity, on behalf of the Acquired Fund, to consummate the transactions provided for herein shall be subject, at the Acquired Entity’s election, to the following conditions:

6.1 All representations and warranties of the Acquiring Entity, on behalf of the Acquiring Fund, contained in this Agreement shall be true and correct in all material respects as of the date hereof and, except as they may be affected by the transactions contemplated by this Agreement, as of the Closing Date, with the same force and effect as if made on and as of the Closing Date.

6.2 The Acquiring Entity, on behalf of the Acquiring Fund, shall have performed all of the covenants and complied with all of the provisions required by this Agreement to be performed or complied with by the Acquiring Entity, on behalf of the Acquiring Fund, on or before the Closing Date.

6.3 The Acquiring Entity, on behalf of the Acquiring Fund, shall have executed and delivered an assumption of the Liabilities and all such other agreements and instruments as the Acquired Entity may reasonably deem necessary or desirable in order to vest in and confirm (a) the Acquired Fund’s title to and possession of the Acquiring Fund Shares to be delivered hereunder and (b) the Acquiring Entity’s assumption of all of the Liabilities, and to otherwise carry out the intent and purpose of this Agreement.

6.4 The Acquiring Entity, on behalf of the Acquiring Fund, shall have delivered to the Acquired Fund a certificate executed in the name of the Acquiring Entity, on behalf of the Acquiring Fund, by the Acquiring Entity’s President or Vice President and its Treasurer or Assistant Treasurer, in a form reasonably satisfactory to the Acquired Entity and dated as of the Closing Date, as to the matters set forth in paragraphs 6.1 and 6.2 and as to such other matters as the Acquired Entity shall reasonably request.

6.5 The Acquiring Entity, on behalf of the Acquiring Fund, and the Acquired Entity, on behalf of the Acquired Fund, shall have agreed on the number of full and fractional Acquiring Fund Shares to be issued in connection with the Reorganization after such number has been calculated in accordance with paragraph 1.1.

7. CONDITIONS PRECEDENT TO OBLIGATIONS OF ACQUIRING ENTITY

The obligations of the Acquiring Entity, on behalf of the Acquiring Fund, to consummate the transactions provided for herein shall be subject, at the Acquiring Entity’s election, to the following conditions:

7.1 All representations and warranties of the Acquired Entity, on behalf of the Acquired Fund, contained in this Agreement shall be true and correct in all material respects as of the date hereof and, except as they may be affected by the transactions contemplated by this Agreement, as of the Closing Date, with the same force and effect as if made on and as of the Closing Date.

7.2 The Acquired Entity, on behalf of the Acquired Fund, shall have performed all of the covenants and complied with all of the provisions required by this Agreement to be performed or complied with by the Acquired Entity, on behalf of the Acquired Fund, on or before the Closing Date.

7.3 The Acquired Entity, on behalf of the Acquired Fund, shall have delivered to the Acquiring Entity, on behalf of the Acquiring Fund, a Statement of Assets and Liabilities of the Acquired Fund as of the Closing Date, including a schedule of investments, certified by the Treasurer of the Acquired Entity on behalf of the Acquired Fund. The Acquired Entity, on behalf of the Acquired Fund, shall have executed and delivered all such assignments and other instruments of transfer as the Acquiring Entity may reasonably deem necessary or desirable in order to vest in and confirm (a) the Acquired Fund’s title to and possession of the Acquiring Fund Shares to be delivered hereunder and (b) the Acquiring Fund’s title to and possession of all the Assets and to otherwise carry out the intent and purpose of this Agreement.

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7.4 The Acquired Entity, on behalf of the Acquired Fund, shall have delivered to the Acquiring Entity a certificate executed in the name of the Acquired Entity, on behalf of the Acquired Fund, by the Acquired Entity’s President or Vice President and its Treasurer or Assistant Treasurer, in a form reasonably satisfactory to the Acquiring Entity and dated as of the Closing Date, as to the matters set forth in paragraphs 7.1 and 7.2 and as to such other matters as the Acquiring Entity shall reasonably request.

7.5 The Acquired Entity, on behalf of the Acquired Fund, and the Acquiring Entity, on behalf of the Acquiring Fund, shall have agreed on the number of full and fractional Acquiring Fund Shares to be issued in connection with the Reorganization after such number has been calculated in accordance with paragraph 1.1.

8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF ACQUIRING ENTITY AND ACQUIRED ENTITY

If any of the conditions set forth in paragraph 8.1 or 8.5 have not been satisfied on or before the Closing Date, the Transaction contemplated by this Agreement shall not be consummated. If any of the other conditions set forth below have not been satisfied on or before the Closing Date with respect to the Acquired Entity, on behalf of the Acquired Fund, or the Acquiring Entity, on behalf of the Acquiring Fund, the other party to this Agreement shall be entitled on behalf of the Acquired Fund or Acquiring Fund, as applicable, at its option, to refuse to consummate the transactions contemplated by this Agreement:

8.1 This Agreement and the transactions contemplated herein shall have been approved by the requisite vote of the holders of the outstanding shares of the Acquired Fund, in accordance with the provisions of the 1940 Act and the Acquired Entity Charter, the bylaws of the Acquired Entity, and Maryland law, as applicable, and certified copies of the report of the inspector of elections evidencing such approval, if any such approval is required, shall have been delivered to the Acquiring Entity. Notwithstanding anything herein to the contrary, neither the Acquiring Entity nor the Acquired Entity may waive the condition set forth in this paragraph 8.1.

8.2 On the Closing Date, no court or governmental agency of competent jurisdiction shall have issued any order that remains in effect and that restrains or enjoins the Acquired Entity, with respect to the Acquired Fund, or the Acquiring Entity, with respect to the Acquiring Fund, from completing the transactions contemplated by this Agreement.

8.3 All consents of other parties and all other consents, orders and permits of federal, state and local regulatory authorities deemed necessary by the Acquiring Entity or the Acquired Entity to permit consummation, in all material respects, of the transactions contemplated hereby shall have been obtained, except where failure to obtain any such consent, order or permit would not involve a risk of a material adverse effect on the assets or properties of the Acquiring Fund or the Acquired Fund.

8.4 The Registration Statement shall have become effective under the 1933 Act and no stop orders suspending the effectiveness thereof shall have been issued and, to the best knowledge of the parties hereto, no investigation or proceeding for that purpose shall have been instituted or be pending.

8.5 The parties (other than LMPFA) shall have received the opinion of Bingham McCutchen LLP, dated the Closing Date, substantially to the effect that, based upon certain facts, assumptions and representations and upon certifications made by the Acquired Entity, on behalf of the Acquired Fund, the Acquiring Entity, on behalf of the Acquiring Fund, and their respective authorized officers, (i) the Reorganization will constitute a “reorganization” within the meaning of Section 368(a) of the Code, and the Acquired Fund and the Acquiring Fund will each be a “party to a reorganization” within the meaning of Section 386(b) of the Code; (ii) no gain or loss will be recognized by the Acquiring Fund upon receipt of the Assets solely in exchange for the Acquiring Fund Shares and the assumption by the Acquiring Fund of the Acquired Fund Liabilities; (iii) the basis in the hands of the Acquiring Fund of the Assets will be the same as the basis of the Assets in the hands of the Acquired Fund immediately prior to the transfer, increased by the amount of gain (or decreased by the amount of loss), if any, recognized by the Acquired Fund upon the transfer; (iv) the holding periods of the Assets in the hands of the Acquiring Fund will include the periods during which the Assets were held by the Acquired Fund (except where investment activities of the Acquiring Fund have the effect of reducing or eliminating the holding period with respect to an Asset); (v) no gain or loss will be recognized by the Acquired Fund upon the transfer of the Assets to the Acquiring Fund in exchange for the Acquiring Fund Shares and the assumption by the Acquiring Fund of the Acquired Fund Liabilities, or upon the distribution of the Acquiring Fund Shares by the Acquired Fund to its shareholders in liquidation except for (A) any gain or loss that may be

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recognized with respect to contracts subject to Section 1256 of the Code, (B) any gain that may be recognized on the transfer of stock in a “passive foreign investment company” as defined in Section 1297(a) of the Code and (C) any other gain or loss that may be required to be recognized as a result of the closing of the Acquired Fund’s taxable year; (vi) no gain or loss will be recognized by the Acquired Fund shareholders upon the exchange of their Acquired Fund Shares solely for the Acquiring Fund Shares as part of the Reorganization; (vii) the aggregate basis of the Acquiring Fund Shares that each Acquired Fund shareholder receives in connection with the Reorganization will be the same as the aggregate basis of his or her Acquired Fund Shares exchanged therefor; and (viii) an Acquired Fund shareholder’s holding period for his or her Acquiring Fund Shares will include the period for which he or she held the Acquired Fund Shares exchanged therefor, provided that he or she held the Acquired Fund Shares as capital assets on the date of the exchange. The delivery of such opinion is conditioned upon the receipt by Bingham McCutchen LLP of representations it shall request of the Acquiring Entity and the Acquired Entity. Notwithstanding anything herein to the contrary, no party hereto may waive the condition set forth in this paragraph 8.5.

8.6 The Acquiring Entity, on behalf of the Acquiring Fund, shall have received on the Closing Date an opinion of K&L Gates LLP, in a form reasonably satisfactory to the Acquiring Entity, and dated as of the Closing Date, substantially to the effect that, based upon certain facts and certifications made by the Acquired Entity, on behalf of the Acquired Fund, and its authorized officers: (a) the Acquired Entity is a corporation validly existing under the laws of the State of Maryland; (b) the Acquired Entity, with respect to the Acquired Fund, has the corporate power to carry on its business as presently conducted in accordance with the description thereof in the Acquired Entity’s registration statement as an open-end investment company registered under the 1940 Act; (c) this Agreement has been duly authorized, executed and, so far as known to such counsel, delivered by the Acquired Entity, on behalf of the Acquired Fund, and assuming due authorization, execution and delivery of this Agreement by the Acquiring Entity, on behalf of the Acquiring Fund, constitutes a valid and legally binding obligation of the Acquired Entity, on behalf of the Acquired Fund, enforceable against the Acquired Entity in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and laws of general applicability relating to or affecting creditors’ rights and to general equity principles (whether in a proceeding under equity or at law); provided that such counsel shall be entitled to state that it expresses no opinion with respect to the validity, binding effect or enforceability of any contractual provisions purporting to provide indemnification of any person for any claims, damages, liabilities or expenses which may be limited by any applicable federal or state securities laws or as a matter of public policy; (d) the execution and delivery of this Agreement did not, and the transfer of the Assets for Acquiring Fund Shares and the assumption by the Acquiring Fund of the Liabilities pursuant to this Agreement will not, violate the Acquired Entity Charter or the bylaws of the Acquired Entity; and (e) to the knowledge of such counsel, all regulatory or court consents, authorizations, approvals, orders or filings required to be obtained or made by the Acquired Entity, on behalf of the Acquired Fund, under the federal laws of the United States or the laws of the State of Maryland for the transfer of the Assets for Acquiring Fund Shares and the assumption by the Acquiring Fund of the Liabilities pursuant to this Agreement have been obtained or made, except such as may be required under state securities or blue sky laws as to which such counsel need express no opinion. Such opinion may state that it is solely for the benefit of the Acquiring Entity and the Acquiring Entity Board. Such opinion may contain such assumptions and limitations as shall be in the opinion of K&L Gates LLP appropriate to render the opinions expressed therein. With respect to all matters of Maryland law, such counsel shall be entitled to state that, with the approval of the Acquiring Entity, it has relied on the opinion of Venable LLP and that its opinion is subject to the same assumptions, qualifications and limitations with respect to such matters as are contained in the opinion of Venable LLP.

8.7 The Acquired Entity, on behalf of the Acquired Fund, shall have received on the Closing Date an opinion of Bingham McCutchen LLP, in a form reasonably satisfactory to the Acquired Entity, and dated as of the Closing Date, substantially to the effect that, based upon certain facts and certifications made by the Acquiring Entity, on behalf of the Acquiring Fund and its authorized officers: (a) the Acquiring Entity is a business trust validly existing under the laws of the State of Maryland; (b) the Acquiring Entity, with respect to the Acquiring Fund, has the power as a business trust to carry on its business as presently conducted in accordance with the description thereof in the Acquiring Entity’s registration statement as an open-end investment company registered under the 1940 Act; (c) this Agreement has been duly authorized, executed and, so far as is known to such counsel, delivered by the Acquiring Entity, on behalf of the Acquiring Fund, and assuming due authorization, execution and delivery of this Agreement by the Acquired Entity, on behalf of the Acquired Fund, constitutes a valid and legally binding obligation of the Acquiring Entity, on behalf of the Acquiring Fund, enforceable against the Acquiring Entity in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and laws of general applicability relating to or affecting creditors’ rights and to general equity principles (whether in a proceeding under equity or at law); provided that such counsel shall be entitled to state that it expresses no opinion with respect to the validity, binding effect or enforceability of any contractual provisions purporting to provide indemnification of any person for any claims, damages, liabilities or expenses which may be limited by

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any applicable federal or state securities laws or as a matter of public policy; (d) the execution and delivery of this Agreement did not, and the issuance of the Acquiring Fund Shares and the assumption of the Liabilities in exchange for the transfer of the Assets pursuant to this Agreement will not, violate the Acquiring Entity Charter or the bylaws of the Acquiring Entity; and (e) to the knowledge of such counsel, all regulatory or court consents, authorizations, approvals, orders or filings required to be obtained or made by the Acquiring Entity, on behalf of the Acquiring Fund, under the federal laws of the United States or the laws of the State of Maryland with respect to the issuance of the Acquiring Fund Shares, the transfer of the Assets and the assumption of the Liabilities pursuant to this Agreement have been obtained or made, except such as may be required under state securities or blue sky laws, as to which such counsel need express no opinion. Such opinion may state that it is solely for the benefit of the Acquired Entity and the Acquired Entity Board. Such opinion may contain such assumptions and limitations as shall be in the opinion of Bingham McCutchen LLP appropriate to render the opinions expressed therein. With respect to all matters of Maryland law, such counsel shall be entitled to state that, with the approval of the Acquired Entity, it has relied on the opinion of Venable LLP and that its opinion is subject to the same assumptions, qualifications and limitations with respect to such matters as are contained in the opinion of Venable LLP.

8.8 The Assets will include no assets which the Acquiring Fund, by reason of limitations contained in the Acquiring Entity Charter or in investment restrictions in effect on the Closing Date, may not properly acquire.

9. INDEMNIFICATION

9.1 The Acquiring Entity, out of the Acquiring Fund’s assets and property (including any amounts paid to the Acquiring Fund pursuant to any applicable liability insurance policies or indemnification agreements), agrees to indemnify and hold harmless the Acquired Entity and the members of the Acquired Entity Board and its officers from and against any and all losses, claims, damages, liabilities or expenses (including, without limitation, the payment of reasonable legal fees and reasonable costs of investigation) to which the Acquired Entity and those board members and officers may become subject, insofar as such loss, claim, damage, liability or expense (or actions with respect thereto) arises out of or is based on (a) any breach by the Acquiring Entity, on behalf of the Acquiring Fund, of any of its representations, warranties, covenants or agreements set forth in this Agreement or (b) any act, error, omission, neglect, misstatement, materially misleading statement, breach of duty or other act wrongfully done or attempted to be committed by the Acquiring Entity or the members of the Acquiring Entity Board or its officers prior to the Closing Date, provided that such indemnification by the Acquiring Entity is not (i) in violation of any applicable law or (ii) otherwise prohibited as a result of any applicable order or decree issued by any governing regulatory authority or court of competent jurisdiction.

9.2 The Acquired Entity, out of the Acquired Fund’s assets and property (including any amounts paid to the Acquired Fund pursuant to any applicable liability insurance policies or indemnification agreements), agrees to indemnify and hold harmless the Acquiring Entity and the members of the Acquiring Entity Board and its officers from and against any and all losses, claims, damages, liabilities or expenses (including, without limitation, the payment of reasonable legal fees and reasonable costs of investigation) to which the Acquiring Entity and those board members and officers may become subject, insofar as such loss, claim, damage, liability or expense (or actions with respect thereto) arises out of or is based on (a) any breach by the Acquired Entity, on behalf of the Acquired Fund, of any of its representations, warranties, covenants or agreements set forth in this Agreement or (b) any act, error, omission, neglect, misstatement, materially misleading statement, breach of duty or other act wrongfully done or attempted to be committed by the Acquired Entity or the members of the Acquired Entity Board or its officers prior to the Closing Date, provided that such indemnification by the Acquired Entity is not (i) in violation of any applicable law or (ii) otherwise prohibited as a result of any applicable order or decree issued by any governing regulatory authority or court of competent jurisdiction.

10. BROKER FEES AND EXPENSES

10.1 The Acquiring Entity, on behalf of the Acquiring Fund, and the Acquired Entity, on behalf of the Acquired Fund, represent and warrant to each other that there are no brokers or finders entitled to receive any payments in connection with the transactions provided for herein.

10.2 LMPFA will pay all of the costs of the Reorganization allocated to the Acquired Fund and fifty percent of the costs of the Reorganization allocated to the Acquiring Fund, and the Acquiring Fund will pay the remaining fifty percent of the costs of the Reorganization allocated to it, except that any transaction costs associated with repositioning a Fund’s portfolio in connection with the Reorganization will be borne by the Fund. Notwithstanding any of the foregoing, expenses will in any event be paid by the party directly incurring such expenses if and to the extent that the payment by another person

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of such expenses would result in the disqualification of such party as a “regulated investment company” within the meaning of Section 851 of the Code or would prevent the Reorganization from qualifying as a tax-free reorganization.

11. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES

11.1 The Acquiring Entity and the Acquired Entity agree that neither party has made any representation, warranty or covenant, on behalf of either the Acquiring Fund or the Acquired Fund, respectively, not set forth herein and that this Agreement constitutes the entire agreement between the parties.

11.2 The covenants to be performed after the Closing by both the Acquiring Entity and the Acquired Entity, and the obligations of the Acquiring Entity, on behalf of the Acquiring Fund, in Article 9, shall survive the Closing. All other representations, warranties and covenants contained in this Agreement or in any document delivered pursuant hereto or in connection herewith shall not survive the consummation of the transactions contemplated hereunder and shall terminate on the Closing.

12. TERMINATION

This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing Date by resolution of either the Acquiring Entity Board or the Acquired Entity Board, if circumstances should develop that, in the opinion of that Board, make proceeding with the Agreement inadvisable with respect to the Acquiring Fund or the Acquired Fund, respectively. Any such termination resolution will be effective when communicated to the other party. The obligations of LMPFA set forth in paragraph 10.2 shall survive termination of this Agreement.

13. AMENDMENTS

This Agreement may be amended, modified or supplemented in such manner as may be deemed necessary or advisable by the authorized officers of the Acquired Entity and the Acquiring Entity; provided, however, that following the meeting of the Acquired Fund shareholders called by the Acquired Fund pursuant to paragraph 5.2 of this Agreement, no such amendment may have the effect of changing the provisions for determining the number of Acquiring Fund Shares to be issued to Acquired Fund shareholders under this Agreement to the detriment of such shareholders without their further approval.

14. NOTICES

Any notice, report, statement or demand required or permitted by any provisions of this Agreement shall be in writing and shall be given by facsimile, electronic delivery (i.e., e-mail), personal service or prepaid or certified mail addressed to the Acquiring Entity or the Acquired Entity, at its address set forth in the preamble to this Agreement, in each case to the attention of its President.

15. HEADINGS; COUNTERPARTS; GOVERNING LAW; SEVERABILITY; ASSIGNMENT; LIMITATION OF LIABILITY

15.1 The Article headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

15.2 This Agreement may be executed in any number of counterparts, each of which shall be deemed an original.

15.3 This Agreement shall be governed by and construed and interpreted in accordance with the internal laws of the State of Maryland.

15.4 This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns, but no assignment or transfer hereof or of any rights or obligations hereunder shall be made by any party without the written consent of the other parties. Nothing herein expressed or implied is intended or shall be construed to confer upon or give any person, firm or corporation, other than the parties hereto and their respective successors and assigns, any rights or remedies under or by reason of this Agreement.

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15.5 Consistent with the Acquiring Entity Charter, the obligations of the Acquiring Entity with respect to the Acquiring Fund entered into in the name or on behalf of the Acquiring Entity by any of its Trustees, officers, employees or agents are made not individually, but in such capacities, and are not binding upon any of the Trustees, officers, employees, agents or shareholders of the Acquiring Entity, personally, but bind only the assets of the Acquiring Entity belonging to the Acquiring Fund, and all persons dealing with any series or funds of the Acquiring Entity must look solely to the assets of the Acquiring Entity belonging to such series or fund for the enforcement of any claims against the Acquiring Entity.

IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by its duly authorized officer.

LEGG MASON PARTNERS INCOME TRUST,

on behalf of its series LEGG MASON PARTNERS SHORT-TERM BOND FUND

By:                                                                                                       

Name:                                                                                                 

Title:                                                                                                    

LEGG MASON INCOME TRUST, INC.,

on behalf of its series LEGG MASON LIMITED DURATION BOND PORTFOLIO

By:                                                                                                       

Name:                                                                                                 

Title:                                                                                                    

Solely for purposes of paragraph 10.2 of the Agreement:

LEGG MASON PARTNERS FUND ADVISOR, LLC

By:                                                                                                       

Name:                                                                                                 

Title:                                                                                                    

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SCHEDULE 4.1

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SCHEDULE 4.2

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APPENDIX B

PURCHASES, REDEMPTIONS AND EXCHANGES OF FUND SHARES; OTHER SHAREHOLDER INFORMATION

This section describes the classes of shares that each Acquiring Fund will make available after the Reorganization and how shareholders may buy and sell fund shares. It also describes how each Acquiring Fund values its securities and the fund’s policies on frequent trading of fund shares.

Legg Mason Partners Corporate Bond Fund

Choosing a Class of Shares to Buy

Individual investors can generally choose among three classes of shares: Class A, B and C shares. Individual investors that held Class I shares prior to November 20, 2006, may continue to invest in Class I shares. Class P shares are not currently available for purchase.¹ Institutional and retirement plan investors and clients of financial intermediaries should refer to “Retirement and institutional investors-eligible investors” below for a description of the classes available to them.

Each class has different sales charges and expenses, allowing you to choose the class that best meets your needs.

When choosing which class of shares to buy, you should consider:

• How much you plan to invest

• How long you expect to own the shares

• The expenses paid by each class detailed in the fee table and example at the front of this Prospectus

• Whether you qualify for any reduction or waiver of sales charges

• Availability of share classes

If you are choosing between Class A and Class B shares, it will in almost all cases be the more economical choice for you to purchase Class A shares if you plan to purchase shares in an amount of $100,000 or more (whether in a single purchase or through aggregation of eligible holdings). This is because of the reduced sales charge available on larger investments of Class A shares and the lower ongoing expenses of Class A shares compared to Class B shares.

If you intend to invest for only a few years, the effect of Class B contingent deferred sales charges on redemptions made within five years of purchase, as well as the effect of higher expenses of that class, might make an investment in Class C shares more appropriate. There is no initial sales charge on Class C shares, and the contingent deferred sales charge does not apply to shares redeemed one year or more after purchase.

However, if you plan to invest a large amount and/or your investment horizon is five years or more, Class C shares might not be as advantageous as Class A shares. The annual distribution and service fees on Class C shares may cost you more over the longer term than the front-end sales charge you would have paid for larger purchases of Class A shares.

You may buy shares:

• From banks, brokers, dealers, insurance companies, investment advisors, financial consultants or advisors, mutual fund supermarkets and other financial intermediaries that have entered into an agreement with the distributor to sell shares of the fund (each called a “Service Agent”)

• Directly from the fund

Your Service Agent may provide shareholder services that differ from the services provided by other Service Agents. Services provided by your Service Agent may vary by class, and you should ask your Service Agent to explain the shareholder services it provides for each class and the compensation it receives in connection with each class. Remember that your Service Agent may receive different compensation depending on the share class in which you invest.

Your Service Agent may not offer all classes of shares. You should contact your Service Agent for further information.

¹ If the Reorganization is approved by the Acquired Fund shareholders, upon completion of the Reorganization Class P shares will be available for purchase solely by the holders of the Primary shares of the Acquired Fund who received Class P shares as of the date of the Reorganization.

B-1

Investment Minimums

Minimum initial and additional investment amounts vary depending on the class of shares you buy and the nature of your investment.

Investment Minimum Initial/Additional Investment1
	Class A	Class B	Class C	Class FI	Class R	Class I	Class P2
General	$1,000/$50	$1,000/$50	$1,000/$50	n/a	n/a	n/a	$1,000/$50
Uniform Gifts or Transfers to Minor Accounts	$1,000/$50	$1,000/$50	$1,000/$50	n/a	n/a	n/a	$1,000/$50
IRAs	$250/$50	$250/$50	$250/$50	n/a	n/a	n/a	$250/$50
SIMPLE IRAs	None/None	None/None	None/None	n/a	n/a	n/a	n/a
Systematic Investment Plans	$50/$50	$50/$50	$50/$50	n/a	n/a	n/a	$50/$50
Clients of Eligible Financial Intermediaries	None/None	n/a	n/a	None/None	n/a	None/None	n/a
Retirement Plans with omnibus accounts held on the books of the fund	None/None3	n/a4	None/None	None/None	None/None	None/None	n/a
Other Retirement Plans	None/None	None/None	None/None	n/a	n/a	n/a	n/a
Institutional Investors	$1,000/$50	$1,000/$50	$1,000/$50	n/a	n/a	$1 million/none	n/a

¹ Different minimums may apply to clients of certain Service Agents. Contact your Service Agent for more information. Refer to the section entitled “Retirement and institutional investors-eligible investors” for additional information regarding the investment minimum and eligibility requirements for Retirement Plans, Institutional Investors and Clients of Eligible Financial Intermediaries.

² Class P shares are not currently available for purchase. If the Reorganization is approved by the Acquired Fund shareholders, upon completion of the Reorganization Class P shares will be available for purchase solely by the holders of the Primary shares of the Acquired Fund who received Class P shares as of the date of the Reorganization.

³ Class A shares are not available to new Retirement Plan investors through a Service Agent if the Service Agent makes Class FI shares available.

⁴ Retirement Plans that held Class B shares prior to December 1, 2006 are permitted to make additional investments in that class.

More information about the fund’s classes of shares is available through the Legg Mason Partners funds’ website. You’ll find detailed information about sales charges and ways you can qualify for reduced or waived sales charges, including:

• The front-end sales charges that apply to the purchase of Class A shares

• The contingent deferred sales charges that apply to the redemption of Class B, Class C and certain Class A shares (redeemed within one year)

• Who qualifies for lower sales charges on Class A shares

• Who qualifies for a sales load waiver

To access the website, go to http://www.leggmason.com/individual investors and click on the name of the fund.

B-2

Comparing the Fund’s Classes

The following table compares key features of the fund’s classes. You should review the fee table and example at the front of this Prospectus carefully before choosing your share class. Your Service Agent can help you decide which class meets your goals. Please contact your Service Agent regarding the availability of Class FI or Class R shares. You may be required to provide appropriate documentation confirming your eligibility to invest in these share classes. Your Service Agent may receive different compensation depending upon which class you choose.

	Key Features	Initial Sales Charge	Contingent Deferred Sales Charge	Annual Distribution and/or Service Fees	Exchange Privilege1
Class A	•   Initial sales charge •   You may qualify for reduction or waiver of initial sales charge •   Generally, lower annual expenses than Class B and Class C	Up to 4.25%; reduced or waived for large purchases and certain investors. No charge for purchases of $1 million or more	1.00% on purchases of $1 million or more if you redeem within 1 year of purchase; waived for certain investors	0.25% of average daily net assets	Class A shares (or, if offered, Exchange A shares) of funds sold by the distributor
Class B	•   No initial sales charge •   Contingent deferred sales charge declines over time •   Converts to Class A after approximately 8 years •   Generally, higher annual expenses than Class A	None	Up to 4.50% charged when you redeem shares. The charge is reduced over time and there is no contingent deferred sales charge after 5 years; waived for certain investors	0.75% of average daily net assets	Class B shares of funds sold by the distributor
Class C	•   No initial sales charge •   Contingent deferred sales charge for only 1 year •   Does not convert to Class A •   Generally, higher annual expenses than Class A	None	1.00% if you redeem within 1 year of purchase; waived for certain investors	0.70% of average daily net assets	Class C shares of funds sold by the distributor
Class FI	•   No initial or contingent deferred sales charge •   Only offered to Clients of Eligible Financial Intermediaries and eligible Retirement Plans	None	None	0.25% of average daily net assets	Class FI shares of funds sold by the distributor
Class R	•   No initial or contingent deferred sales charge •   Only offered to eligible Retirement Plans with omnibus accounts held on the books of the fund	None	None	0.50% of average daily net assets	Class R shares of funds sold by the distributor
Class I	•   No initial or contingent deferred sales charge •   Only offered to institutional and other eligible investors •   Generally, lower annual expenses than the other classes	None	None	None	Class I shares of funds sold by the distributor

B-3

	Key Features	Initial Sales Charge	Contingent Deferred Sales Charge	Annual Distribution and/or Service Fees	Exchange Privilege1
Class P	•   Not currently available for purchase. If the Reorganization is approved by the Acquired Fund shareholders, upon completion of the Reorganization Class P shares will be available for purchase solely by the holders of the Primary shares of the Acquired Fund who received Class P shares as of the date of the Reorganization. •   No initial or contingent deferred sales charge	None	None	0.50% of average daily net assets	Class P shares are not exchangeable

¹ Ask your Service Agent about the funds available for exchange.

B-4

Sales Charges

Class A Shares

You buy Class A shares at the offering price, which is the net asset value plus a sales charge. You pay a lower rate as the size of your investment increases to certain levels called breakpoints. You do not pay a sales charge on the fund’s distributions or dividends that you reinvest in additional Class A shares.

The table below shows the rate of sales charge you pay, depending on the amount you purchase. It also shows the amount of broker/dealer compensation that will be paid out of the sales charge if you buy shares from a Service Agent. For Class A shares sold by LMIS, LMIS will receive the sales charge imposed on purchases of Class A shares (or any contingent deferred sales charge paid on redemptions) and will retain the full amount of such sales charge. Service Agents will receive a service fee payable on Class A shares at an annual rate of up to 0.25% of the average daily net assets represented by the Class A shares serviced by them.

Amount of Purchase	Sales Charge as a % of Offering Price	Sales Charge as a % of Net Amount	Broker/Dealer Commission as a % of Offering Price
Less than $100,000	4.25	4.44	4.00
$100,000 but less than $250,000	3.50	3.63	3.00
$250,000 but less than $500,000	2.50	2.56	2.00
$500,000 but less than $750,000	2.00	2.04	1.60
$750,000 but less than $1 million	1.50	1.52	1.20
$1 million or more1	-0-	-0-	up to 1.00

¹ The distributor may pay a commission of up to 1.00% to a Service Agent for purchase amounts of $1 million or more. In such cases, starting in the thirteenth month after purchase, the Service Agent will also receive an annual distribution/service fee of up to 0.25% of the average daily net assets represented by the Class A shares held by its clients. Prior to the thirteenth month, the distributor will retain this fee. Where the Service Agent does not receive the payment of this commission, the Service Agent will instead receive the annual distribution/service fee starting immediately after purchase. Please contact your Service Agent for more information.

Investments of $1,000,000 or More

You do not pay an initial sales charge when you buy $1,000,000 or more of Class A shares. However, if you redeem these Class A shares within one year of purchase, you will pay a contingent deferred sales charge of 1.00%.

Qualifying for a Reduced Class A Sales Charge

There are several ways you can combine multiple purchases of Class A shares of funds sold by the distributor to take advantage of the breakpoints in the sales charge schedule. In order to take advantage of reductions in sales charges that may be available to you when you purchase fund shares, you must inform your Service Agent or Funds Investor Services or Institutional Shareholder Services if you are eligible for a letter of intent or a right of accumulation and if you own shares of other funds that are eligible to be aggregated with your purchases. Certain records, such as account statements, may be necessary in order to verify your eligibility for a reduced sales charge.

• Accumulation Privilege—allows you to combine the current value of shares of the fund with other shares of funds sold by the distributor that are owned by:

• you; or

• your spouse and children under the age of 21

with the dollar amount of your next purchase of Class A shares for purposes of calculating the initial sales charge.

Shares of money market funds sold by the distributor acquired by exchange from other funds offered with a sales charge may be combined. Certain funds and classes of shares of other funds sold by the distributor may not be combined until May 18, 2009. Please contact your Service Agent for additional information.

B-5

If you hold fund shares in accounts at two or more Service Agents, please contact your Service Agents to determine which shares may be combined.

Certain trustees and fiduciaries may be entitled to combine accounts in determining their sales charge.

• Letter of Intent—allows you to purchase Class A shares of funds sold by the distributor over a 13-month period and pay the same sales charge, if any, as if all shares had been purchased at once. At the time you enter into the letter of intent, you select your asset goal amount. Generally, purchases of shares of funds sold by the distributor that are purchased during the 13-month period by:

• you; or

• your spouse and children under the age of 21

are eligible for inclusion under the letter, based on the public offering price at the time of the purchase, and any capital appreciation on those shares. In addition, you can include towards your asset goal amount the current value of any eligible holdings.

If you hold shares of funds sold by the distributor in accounts at two or more Service Agents, please contact your Service Agents to determine which shares may be credited toward your letter of intent asset goal.

Shares of money market funds sold by the distributor acquired by exchange from other funds offered with a sales charge may be credited toward your letter of intent asset goal. Certain funds and certain classes of shares of other funds sold by the distributor may not be credited toward your letter of intent asset goal until May 18, 2009. Please contact your Service Agent for additional information.

If you do not meet your asset goal amount, shares in the amount of any sales charges due based on the amount of your actual purchases will be redeemed from your account.

Waivers for Certain Class A Investors

Class A initial sales charges are waived for certain types of investors, including:

• Employees of Service Agents

• Investors who redeemed Class A shares of a Legg Mason Partners fund in the past 60 days, if the investor’s Service Agent is notified

• Directors and officers of any Legg Mason-sponsored fund

• Employees of Legg Mason and its subsidiaries

• Investors investing through certain retirement plans

If you qualify for a waiver of the Class A initial sales charge, you must notify your Service Agent or the transfer agent at the time of purchase and provide sufficient information at the time of purchase to permit verification that the purchase qualifies for the initial sales charge waiver.

If you want to learn about additional waivers of Class A initial sales charges, contact your Service Agent, consult the SAI or access the Legg Mason Partners funds’ website, http://www.leggmason.com/individualinvestors, and click on the name of the fund.

Class B Shares

You buy Class B shares at net asset value without paying an initial sales charge. However, if you redeem your Class B shares within 5 years of your purchase payment, you will pay a contingent deferred sales charge. The contingent deferred sales charge decreases as the number of years since your purchase payment increases.

Year After Purchase	1st		2nd		3rd		4th		5th		6th Through 8th
Contingent deferred sales charge	4.5	%	4	%	3	%	2	%	1	%	0	%

B-6

LMIS will pay Service Agents selling Class B shares a commission of up to 4.00% of the purchase price of the Class B shares they sell, and LMIS will retain the contingent deferred sales charges. For Class B shares sold by PFS, PFS pays a commission of up to 4.00% of the purchase price of the Class B shares sold by its Agents and retains the contingent deferred sales charges paid upon certain redemptions. PFS will receive any service and distribution fees paid on all shares held by PFS clients. Service Agents also receive an annual distribution/service fee of up to 0.25% of the average daily net assets represented by the Class B shares serviced by them.

Class B Conversion

After approximately 8 years, Class B shares automatically convert into Class A shares. This helps you because Class A shares have lower annual expenses. Your Class B shares will convert to Class A shares as follows:

Shares Issued: at Initial Purchase	Shares Issued: on Reinvestment of Dividends and Distributions	Shares Issued: Upon Exchange From Another Legg Mason Partners Fund
Approximately 8 years after the date of purchase	In same proportion as the number of Class B shares converting is to total Class B shares you own (excluding shares issued as dividends)	On the date the shares originally acquired would have converted into Class A shares

Class C Shares

You buy Class C shares at net asset value without paying an initial sales charge. However, if you redeem your Class C shares within one year of purchase, you will pay a contingent deferred sales charge of 1.00%.

LMIS will generally pay Service Agents selling Class C shares a commission of up to 0.75% of the purchase price of the Class C shares they sell, and LMIS will retain the contingent deferred sales charges and an annual distribution/service fee of up to 0.70% of the average daily net assets represented by the Class C shares serviced by these Service Agents until the thirteenth month after purchase. Starting in the thirteenth month after purchase, these Service Agents will receive an annual distribution/service fee of up to 0.70% of the average daily net assets represented by the Class C shares serviced by them.

Class FI and Class R Shares

Class FI and R shares are purchased at net asset value with no initial sales charge and no contingent deferred sales charge when redeemed.

Service Agents receive a distribution/service fee of: up to 0.25% of the average daily net assets represented by the Class FI shares serviced by them; and up to 0.50% of the average daily net assets represented by the Class R shares serviced by them.

Class I Shares

Class I shares are purchased at net asset value with no initial sales charge and no contingent deferred sales charge when redeemed. Class I shares are not subject to any distribution or service fees.

Class P Shares

Class P shares are not currently available for purchase. If the Reorganization is approved by the Acquired Fund shareholders, upon completion of the Reorganization Class P shares will be available for purchase solely by the holders of the Primary shares of the Acquired Fund who received Class P shares as of the date of the Reorganization. Following the Reorganization, Class P shares will be available for purchase at net asset value with no initial sales charge and no contingent deferred sales charge when redeemed. Service Agents will receive a distribution/service fee of up to 0.50% of the average daily net assets represented by the Class P shares serviced by them.

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More about Contingent Deferred Sales Charges

The contingent deferred sales charge is based on the net asset value at the time of purchase or redemption, whichever is less, and therefore you do not pay a sales charge on amounts representing appreciation or depreciation.

In addition, you do not pay a contingent deferred sales charge:

• When you exchange shares for shares of another fund sold by the distributor

• On shares representing reinvested distributions and dividends

• On shares no longer subject to the contingent deferred sales charge

Each time you place a request to redeem shares, the fund will first redeem any shares in your account that are not subject to a contingent deferred sales charge and then redeem the shares in your account that have been held the longest.

If you redeemed shares of a Legg Mason Partners fund and paid a contingent deferred sales charge, you may, under certain circumstances, reinvest all or part of the redemption proceeds within 60 days and receive pro rata credit for any contingent deferred sales charge imposed on the prior redemption. Please contact your Service Agent for additional information.

The distributor receives contingent deferred sales charges as partial compensation for its expenses in selling shares, including the payment of compensation to your Service Agent.

Contingent Deferred Sales Charge Waivers

The contingent deferred sales charge for each share class will generally be waived:

• On payments made through certain systematic withdrawal plans

• On certain distributions from a retirement plan

• For retirement plans with omnibus accounts held on the books of the fund

• For involuntary redemptions of small account balances

• For 12 months following the death or disability of a shareholder

If you want to learn more about additional waivers of contingent deferred sales charges, contact your Service Agent, consult the SAI or look at the Legg Mason Partners funds’ website, http://www.leggmason.com/individualinvestors, and click on the name of the fund.

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Retirement and Institutional Investors—Eligible Investors

Retirement Plans

Retirement Plans with omnibus accounts held on the books of the fund can generally choose among four classes of shares: Class C, Class FI, Class R and Class I shares.

Class A and B shares are no longer offered through Service Agents for Retirement Plans with omnibus accounts held on the books of the fund, with limited exceptions. Class A shares will cease to be available to new Retirement Plan investors through a Service Agent if the Service Agent makes Class FI shares available. Please see below for additional information.

“Retirement Plans” include 401(k) plans, 457 plans, employer-sponsored 403(b) plans, profit-sharing plans, non-qualified deferred compensation plans and other similar employer-sponsored retirement plans. Retirement Plans do not include individual retirement vehicles, such as traditional and Roth individual retirement accounts, Coverdell education savings accounts, individual 403(b)(7) custodial accounts, Keogh plans, SEPs, SARSEPs, SIMPLE IRAs, or similar accounts. Although Retirement Plans with omnibus accounts held on the books of the fund are not subject to minimum initial investment requirements for any of these share classes, certain investment minimums may be imposed by a financial intermediary.

Other Retirement Plans

Other Retirement Plan investors can generally choose among three classes of shares: Class A, Class B and Class C. “Other Retirement Plans” include Retirement Plans investing through brokerage accounts, and also include certain Retirement Plans with direct relationships to the fund that are neither Institutional Investors nor investing through omnibus accounts. Individual retirement vehicles, such as IRAs, may also choose among these share classes. Other Retirement Plans and individual retirement vehicles are treated like individual investors for purposes of determining sales charges and any applicable sale charge reductions or waivers.

Clients of Eligible Financial Intermediaries

Clients of Eligible Financial Intermediaries may generally choose among three classes of shares: Class A, Class FI and Class I. “Clients of Eligible Financial Intermediaries” are investors who invest in the fund through financial intermediaries that offer their clients fund shares through investment programs as authorized by LMIS. Such investment programs may include fee-based advisory account programs, and college savings vehicles such as Section 529 plans. The financial intermediary may impose separate investment minimums.

Institutional Investors

Institutional Investors may invest in Class I shares if they meet the $1,000,000 minimum initial investment requirement. Institutional Investors may also invest in Class A, Class B, and Class C shares, which have different investment minimums and fees and expenses. “Institutional Investors” generally include corporations, banks, trust companies, insurance companies, investment companies, foundations, endowments, defined benefit plans and other similar entities with direct relationships to the fund.

Class C—Retirement Plans

Retirement Plans with omnibus accounts held on the books of the fund may buy Class C shares without paying a contingent deferred sales charge. LMIS does not pay Service Agents selling Class C shares to retirement plans with omnibus accounts held on the books of the fund a commission on the purchase price of Class C shares sold by them. Instead, immediately after purchase, LMIS may pay such Service Agents an annual distribution/service fee of up to 0.70% of the average daily net assets represented by the Class C shares serviced by them.

Certain retirement plan programs with exchange features in effect prior to November 20, 2006, as approved by LMIS, will remain eligible for exchange from Class C shares to Class A shares in accordance with the program terms. Please read the SAI for more details.

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Class FI

Class FI shares are offered only to investors who invest in the fund through certain financial intermediaries and Retirement Plan programs. LMIS may pay Service Agents selling Class FI shares an annual distribution/service fee of up to 0.25% of the average daily net assets represented by the Class FI shares serviced by them starting immediately after purchase.

Class R

Class R shares are offered only to Retirement Plans with accounts held on the books of the fund (either at the plan level or at the level of the financial intermediary). LMIS may pay Service Agents selling Class R shares an annual distribution/service fee of up to 0.50% of the average daily net assets represented by the Class R shares serviced by them.

Class I

Class I shares are offered only to Institutional Investors who meet the $1,000,000 minimum initial investment requirement, Clients of Eligible Financial Intermediaries, and other investors as authorized by LMIS. However, investors that held Class I shares prior to November 20, 2006 will be permitted to make additional investments in Class I shares.

In addition to Institutional Investors, the following individuals may purchase Class I shares: 1) current employees of Legg Mason or its affiliates; 2) current and former board members of investment companies managed by affiliates of Legg Mason; 3) current and former board members of Legg Mason; and 4) the immediate families of such persons. Immediate families are such person’s spouse, including the surviving spouse of a deceased board member, and children under the age of 21. For such investors, the minimum initial investment is $1,000 and the minimum for each purchase of additional shares is $50.

Class A and Class B—Retirement Plans

Class A and Class B shares are no longer offered through Service Agents to Retirement Plans with omnibus accounts held on the books of the fund. However, Retirement Plans that held Class B shares prior to December 1, 2006 are permitted to make additional investments in that class. Certain existing programs for current and prospective Retirement Plan investors sponsored by financial intermediaries also remain eligible for Class A shares. Under these programs, the initial sales charge and contingent deferred sales charge for Class A shares is waived where:

• Such Retirement Plan’s recordkeeper offers only load-waived shares,

• Fund shares are held on the books of the fund through an omnibus account, and

• The Retirement Plan has more than 100 participants, or has total assets exceeding $1 million.

LMIS does not pay Service Agents selling Class A shares to Retirement Plans with a direct omnibus relationship with the fund a commission on the purchase price of Class A shares sold by them. However, for certain Retirement Plans that are permitted to purchase shares at net asset value, LMIS may pay Service Agents commissions of up to 1.00% of the purchase price of the Class A shares that are purchased with regular ongoing plan contributions. Please contact your Service Agent for more information.

Other Considerations

Plan sponsors, plan fiduciaries and other financial intermediaries may choose to impose qualification requirements for plans that differ from the fund’s share class eligibility standards. In certain cases this could result in the selection of a share class with higher service and distribution-related fees than otherwise would have been charged. The fund is not responsible for, and has no control over, the decision of any financial intermediary to impose such differing requirements. Please consult with your financial intermediary for more information about available share classes.

With respect to each of Class A, Class C, Class R, Class FI and Class I shares, the fund may pay a fee for recordkeeping services performed for the share class.

Your Service Agent may not offer all share classes. Please contact your Service Agent for additional details.

B-10

Buying Shares

Generally	You may buy shares at their net asset value next determined after receipt by your Service Agent or the transfer agent of your purchase request in good order, plus any applicable sales charge. The fund generally will not permit non-resident aliens with a non-U.S. address to establish an account. U.S. citizens with an APO/FPO address or an address in the United States (including its territories) and resident aliens with a U.S. address are permitted to establish an account with the fund. Subject to the requirements of local law, U.S. citizens residing in foreign countries are permitted to establish an account with the fund.
Through a Service Agent	You should contact your Service Agent to open a brokerage account and make arrangements to buy shares. You must provide the following information for your order to be processed: •      Name of fund being bought •      Class of shares being bought •      Dollar amount or number of shares being bought •      Account number (if existing account) Your Service Agent may charge an annual account maintenance fee.
Through the fund	Investors should contact Funds Investor Services at 1-800-822-5544 or Institutional Shareholder Services at 1-888-425-6432 to open an account and make arrangements to buy shares. For initial purchases, complete and send your account application to the fund at the following address: Legg Mason Funds P.O. Box 55214 Boston, Massachusetts 02205-8504 Subsequent purchases should be sent to the same address. Enclose a check to pay for the shares. Specify the name of the fund, the share class you wish to purchase and your account number (if existing account). For more information, please call Funds Investor Services at 1-800-822-5544 or Institutional Shareholder Services at 1-888-425-6432 between 8:30 a.m. and 5:30 p.m. (Eastern time).
Through a systematic investment plan	You may authorize your Service Agent or the transfer agent to transfer funds automatically from (i) a regular bank account, (ii) cash held in a brokerage account with a Service Agent, or (iii) certain money market funds, in order to buy shares on a regular basis. •      Amounts transferred must meet the applicable minimums (see “Choosing a class of shares to buy- Investment minimums”) •      Amounts may be transferred monthly, every alternate month, quarterly, semi-annually or annually •      If you do not have sufficient funds in your account on a transfer date, your Service Agent or Funds Investor Services or Institutional Shareholder Services may charge you a fee For more information, please contact your Service Agent or Funds Investor Services or Institutional Shareholder Services or consult the SAI.

B-11

Exchanging shares

Generally	You may exchange shares of the fund other than Class P shares for the same class of shares of other funds sold by the distributor. Shares of certain funds and certain classes of shares of other funds sold by the distributor are not available for exchange until May 18, 2009. Class P shares are not exchangeable.
Legg Mason Partners offers a distinctive family of funds tailored to help meet the varying needs of large and small investors	You may exchange shares at their net asset value next determined after receipt by your Service Agent or the transfer agent of your exchange request in good order. •      If you bought shares through a Service Agent, contact your Service Agent to learn which funds your Service Agent makes available to you for exchanges •      If you bought shares directly from the fund, contact the transfer agent to learn which funds are available to you for exchanges •      You may exchange shares of the fund only for shares of the same class of other funds, with one exception: if you wish to exchange Class A shares of the fund for shares of another fund that offers Exchange A shares, you may exchange your Class A shares only for Exchange A shares of the other fund •      Not all funds offer all classes
	•      Some funds are offered only in a limited number of states. Your Service Agent or the transfer agent will provide information about the funds offered in your state •      Remember that an exchange is a taxable transaction, unless you are investing through a tax-qualified savings plan or account •      Always be sure to read the prospectus of the fund into which you are exchanging shares •      Exchanges of Class A, B and C shares are subject to minimum investment requirements (except for systematic investment plan exchanges), and all shares are subject to the other requirements of the fund into which exchanges are made
Investment minimums, sales charges and other requirements	•      In most instances, your shares will not be subject to an initial sales charge or a contingent deferred sales charge at the time of the exchange •      Your contingent deferred sales charge (if any) will continue to be measured from the date of your original purchase of shares subject to a contingent deferred sales charge and you will be subject to the contingent deferred sales charge of the fund that you originally purchased •      You will generally be required to meet the minimum investment requirement for the class of shares of the fund into which your exchange is made (except in the case of systematic exchange plans) •      Your exchange will also be subject to any other requirements of the fund into which you are exchanging shares •      If you hold share certificates, you must deliver the certificates, endorsed for transfer or with signed stock powers, to the transfer agent or your Service Agent before the exchange is effective •      The fund may suspend or terminate your exchange privilege if you engage in a pattern of excessive exchanges

B-12

By telephone	Contact your Service Agent or, if you hold shares directly with the fund, call Funds Investor Services at 1-800-822-5544 or Institutional Shareholder Services at 1-888-425-6432 between 8:30 a.m. and 5:30 p.m. (Eastern time) for information. Exchanges are priced at the net asset value next determined. Telephone exchanges may be made only between accounts that have identical registrations, and may be made on any day the New York Stock Exchange (“NYSE”) is open
By mail	Contact your Service Agent or, if you hold shares directly with the fund, write to the fund at the address specified in “Redeeming shares” below.
Through a systematic exchange plan	You may be permitted to schedule automatic exchanges of shares of the fund for shares of other funds available for exchange. All requirements for exchanging shares described above apply to these exchanges. In addition: •      Exchanges may be made monthly, every alternate month, quarterly, semi-annually or annually •      Each exchange must meet the applicable investment minimums for systematic investment plans (see “Choosing a class of shares to buy— Investment minimums”) For more information, please contact your Service Agent or Funds Investor Services or Institutional Shareholder Services or consult the SAI.

B-13

Redeeming shares

Generally

Contact your Service Agent or, if you hold shares directly with the fund, Funds Investor Services at 1-800-822-5544 or Institutional Shareholder Services at 1-888-425-6432 to redeem shares of the fund. You may redeem shares at their net asset value next determined after receipt by your Service Agent or the transfer agent of your redemption request in good order, less any applicable contingent deferred sales charge. If you hold share certificates, the transfer agent must receive the certificates endorsed for transfer or with signed stock powers with a signature guarantee before you may redeem. If the shares are held by a fiduciary or corporation, partnership or similar entity, other documents may be required.

Redemption proceeds

Your redemption proceeds normally will be sent within 3 business days after your request is received in good order, but in any event within 7 days, except that your proceeds may be delayed for up to 10 days if your share purchase was made by check. Your redemption proceeds may be delayed, or your right to receive proceeds suspended, if the NYSE is closed (other than on weekends or holidays) or trading is restricted, if an emergency exists, or otherwise as permitted by order of the SEC. If you have a brokerage account with a Service Agent, your redemption proceeds will be sent to your Service Agent. In other cases, unless you direct otherwise, your proceeds will be paid by check mailed to your address of record.

By mail

Contact your Service Agent or, if you hold your shares directly with the fund, write to the fund at the following address: Legg Mason Funds P.O. Box 55214 Boston, Massachusetts 02205-8504 Your written request must provide the following: •      The fund name, the class of shares to be redeemed, and your account number •      The dollar amount or number of shares to be redeemed •      Signatures of each owner exactly as the account is registered •      Signature guarantees, as applicable (see “Other things to know about transactions”)

By telephone

If your account application permits, you may be eligible to redeem shares by telephone. Contact your Service Agent or, if you hold your shares directly with the fund, call Funds Investor Services at 1-800-822-5544 or Institutional Shareholder Services at 1-888-425-6432 between 8:30 a.m. and 5:30 p.m. (Eastern time) for more information. Please have the following information ready when you call: •      Name of fund being redeemed •      Class of shares being redeemed •      Account number. If you hold shares directly with the fund, redemptions of shares may be made by telephone in amounts up to $50,000 per day, on any day the NYSE is open for business.

B-14

Your redemption proceeds can be sent by check to your address of record or by wire or electronic transfer (ACH) to a bank account designated by you when you authorize telephone redemptions. To change the bank account designated to receive wire or electronic transfers, you will be required to deliver a new written authorization and may be asked to provide other documents. The transfer agent may charge a fee on a wire or an electronic transfer (ACH).

Automatic cash withdrawal plans

You may be permitted to schedule automatic redemptions of a portion of your shares. To qualify, you must own shares of the fund with a value of at least $10,000 ($5,000 for Retirement Plan accounts), and each automatic redemption must be at least $50. The following conditions apply: •      Your shares may not be represented by certificates •      Redemptions may be made monthly, every alternate month, quarterly, semi-annually or annually •      If your shares are subject to a contingent deferred sales charge, the charge will be required to be paid upon redemption. However, the charge will be waived if your automatic redemptions are equal to or less than 2% per month of your account balance on the date the redemptions commence up to a maximum of 12% in one year •      You must elect to have all dividends and distributions reinvested For more information, please contact your Service Agent or consult the SAI.

B-15

Other Things to Know About Transactions

When you buy, exchange or redeem shares, your request must be in good order. This means you have provided the following information, without which your request may not be processed:

• Name of the fund

• Your account number

• In the case of a purchase (including a purchase as part of an exchange transaction), the class of shares being bought

• In the case of an exchange or redemption, the class of shares being exchanged or redeemed (if you own more than one class)

• Dollar amount or number of shares being bought, exchanged or redeemed

• Signature of each owner exactly as the account is registered

The transfer agent or Funds Investor Services or Institutional Shareholder Services will employ reasonable procedures to confirm that any telephone exchange or redemption request is genuine, which may include recording calls, asking the caller to provide certain personal identification information, sending you a written confirmation or requiring other confirmation procedures from time to time. If these procedures are followed, neither the fund nor its agents will bear any liability for executing any such transactions.

The fund has the right to:

• Suspend the offering of shares

• Waive or change minimum and additional investment amounts

• Reject any purchase or exchange order

• Change, revoke or suspend the exchange privilege

• Suspend telephone transactions

• Suspend or postpone redemptions of shares on any day when trading on the NYSE is restricted, or as otherwise permitted by the SEC

• Pay redemption proceeds by giving you securities. You may pay transaction costs to dispose of the securities

Signature guarantees

To be in good order, your redemption request must include a signature guarantee if you:

• Are redeeming shares with a value over $50,000

• Are sending signed share certificates or stock powers to the transfer agent

• Instruct the transfer agent to mail the check to an address different from the one on your account registration

• Changed your account registration or your address within 30 days

• Want the check paid to someone other than the account owner(s)

• Are transferring the redemption proceeds to an account with a different registration

You can obtain a signature guarantee from most banks, dealers, brokers, credit unions and federal savings and loan institutions, but not from a notary public.

Anti-Money Laundering

Federal anti-money laundering regulations require all financial institutions to obtain, verify and record information that identifies each person who opens an account. When you sign your account application, you may be asked to provide additional information in order for the fund to verify your identity in accordance with these regulations. Accounts may be restricted and/or closed, and the monies withheld, pending verification of this information or as otherwise required under these and other federal regulations.

B-16

Small Account Balances/Mandatory Redemptions

If at any time the aggregate net asset value of the fund shares in your account is less than $500 for any reason (including solely due to declines in net asset value and/or failure to invest at least $500 within a reasonable period), the fund reserves the right to ask you to bring your account up to the applicable minimum investment amount as determined by your Service Agent. In such case you shall be notified in writing and will have 60 days to make an additional investment to bring your account value up to the required level. If you choose not to do so within this 60-day period, the fund may close your account and send you the redemption proceeds. In the event your account is closed due to a failure to increase your balance to the minimum required amount, you will not be eligible to have your account subsequently reinstated without imposition of any sales charges that may apply to your new purchase. The fund may, with prior notice, change the minimum size of accounts subject to mandatory redemption, which may vary by class, or implement fees for small accounts.

Subject to applicable law, the fund may, with prior notice, adopt other policies from time to time requiring mandatory redemption of shares in certain circumstances.

For more information, please contact your Service Agent or Funds Investor Services or Institutional Shareholder Services or consult the SAI.

Frequent Purchases and Redemptions of Fund Shares

Frequent purchases and redemptions of fund shares may interfere with the efficient management of the fund’s portfolio by its portfolio managers, increase portfolio transaction costs and have a negative effect on the fund’s long-term shareholders. For example, in order to handle large flows of cash into and out of the fund, the portfolio managers may need to allocate more assets to cash or other short-term investments or sell securities, rather than maintaining full investment in securities selected to achieve the fund’s investment objective. Frequent trading may cause the fund to sell securities at less favorable prices. Transaction costs, such as brokerage commissions and market spreads, can detract from the fund’s performance. In addition, the return received by long-term shareholders may be reduced when trades by other shareholders are made in an effort to take advantage of certain pricing discrepancies, when, for example, it is believed that the fund’s share price, which is determined at the close of the NYSE on each trading day, does not accurately reflect the value of the fund’s portfolio securities. Funds investing in foreign securities have been particularly susceptible to this form of arbitrage, but other funds also could be affected.

Because of the potential harm to funds sold by the distributor and their long-term shareholders, the Board of the fund has approved policies and procedures that are intended to discourage and prevent excessive trading and market timing abuses through the use of various surveillance techniques. Under these policies and procedures, the fund may limit additional exchanges or purchases of fund shares by shareholders who are believed by the manager to be engaged in these abusive trading activities in the fund or in other funds sold by the distributor. In the event that an exchange request is rejected, the shareholder may nonetheless redeem its shares. The intent of the policies and procedures is not to inhibit legitimate strategies, such as asset allocation, dollar cost averaging, or similar activities that may nonetheless result in frequent trading of fund shares.

Under the fund’s policies and procedures, the fund reserves the right to restrict or reject purchases of shares (including exchanges) without prior notice whenever a pattern of excessive trading by a shareholder is detected in funds sold by the distributor. A committee established by the manager administers the policy. The policy provides that the committee will use its best efforts to restrict a shareholder’s trading privileges in the distributor sold funds if that shareholder has engaged in a total of four or more “Round Trips” (as defined below) across all distributor sold funds during any rolling 12-month period. However, the committee has the discretion to determine that restricting a shareholder’s trading privileges is not necessary (or that a new limit on Round Trips should be established for the shareholder) if it is determined that the pattern of trading is not abusive or harmful. In making such a determination, the committee will consider, among other things, the nature of the shareholder’s account, the reason for the frequent trading, the amount of trading and the particular funds in which the trading has occurred. Additionally, the committee has the discretion to make inquiries or to take action against any shareholder whose trading appears inconsistent with the frequent trading policy. Examples of the types of actions the committee may take to deter excessive trading in a shareholder account include restricting the shareholder from purchasing additional shares in the fund altogether or imposing other restrictions (such as requiring purchase orders to be submitted by mail) that would deter the shareholder from trading frequently in the funds.

B-17

A “Round Trip” is defined as a purchase (including subscriptions and exchanges) into the fund followed by a sale (including redemptions and exchanges) of the same or a similar number of shares out of the fund within 30 days of such purchase. Purchases and sales of the fund’s shares pursuant to an automatic investment plan or similar program for periodic transactions are not considered in determining Round Trips. These policies and procedures do not apply to money market funds sold by the distributor.

The policies apply to any account, whether an individual account, accounts with financial intermediaries such as investment advisers, broker/dealers or retirement plan administrators, commonly called omnibus accounts, where the intermediary holds fund shares for a number of its customers in one account. The fund’s ability to monitor trading in omnibus accounts may, however, be severely limited due to the lack of access to an individual investor’s trading activity when orders are placed through these types of accounts. There may also be operational and technological limitations on the ability of the fund’s service providers to identify or terminate frequent trading activity within the various types of omnibus accounts. The distributor has entered into agreements with intermediaries requiring the intermediaries to, among other things, help identify frequent trading activity and to prohibit further purchases or exchanges by a shareholder identified as having engaged in frequent trading.

The fund’s policies also require personnel such as the portfolio managers and investment staff to report any abnormal or otherwise suspicious investment activity, and prohibit short-term trades by such personnel for their own account in mutual funds managed by the manager and its affiliates, other than money market funds. Additionally, the fund has adopted policies and procedures to prevent the selective release of information about the fund’s portfolio holdings, as such information may be used for market-timing and similar abusive practices.

The fund’s policies provide for ongoing assessment of the effectiveness of current policies and surveillance tools, and the Board reserves the right to modify these or adopt additional policies and restrictions in the future. Shareholders should be aware, however, that any surveillance techniques currently employed by the fund or other techniques that may be adopted in the future may not be effective, particularly where the trading takes place through certain types of omnibus accounts. As noted above, if the fund is unable to detect and deter trading abuses, the fund’s performance, and its long-term shareholders, may be harmed. In addition, shareholders may be harmed by the extra costs and portfolio management inefficiencies that result from frequent trading of fund shares, even when the trading is not for abusive purposes. Furthermore, the fund may not apply its policies consistently or uniformly, resulting in the risk that some shareholders may be able to engage in frequent trading while others will bear the costs and effects of that trading. The fund will provide advance notice to shareholders and prospective investors of any specific restrictions on the trading of fund shares that the Board may adopt in the future.

Share Certificates

Share certificates for the fund will no longer be issued. If you currently hold share certificates of the fund, such certificates will continue to be honored. If you would like to return your share certificates to the fund and hold your shares in uncertificated form, please contact your Service Agent or Funds Investor Services or Institutional Shareholder Services.

Record Ownership

If you hold shares through a Service Agent, your Service Agent may establish and maintain your account and be the shareholder of record. In the event that the fund holds a shareholder meeting, your Service Agent, as record holder, will vote your shares in accordance with your instructions. If you do not give your Service Agent voting instructions, your Service Agent may nonetheless, under certain circumstances, be entitled to vote your shares.

B-18

Dividends, Distributions and Taxes

Dividends and Distributions

The fund’s policy is to declare daily dividends from net investment income. Dividends from income are paid monthly. The fund generally makes capital gain distributions, if any, once a year, typically in December. The fund may pay additional distributions and dividends at other times if necessary for the fund to avoid a federal tax. The fund expects distributions to be primarily from income and capital gain. Capital gain distributions and dividends are reinvested in additional fund shares of the same class you hold. You do not pay a sales charge on reinvested distributions or dividends. Alternatively, you can instruct your Service Agent or Legg Mason Partners Shareholder Services to have your distributions and/or dividends paid in cash. You can change your choice at any time to be effective as of the next distribution or dividend.

Taxes

The following discussion is very general. Because each shareholder’s circumstances are different and special tax rules may apply, you should consult your tax adviser about your investment in the fund.

In general, you will have to pay federal income taxes, as well as any state and local taxes, when you redeem shares, exchange shares or receive a distribution (whether paid in cash or reinvested in additional shares). Any tax liability that you owe as a result of any of these taxable events is your responsibility. The federal income tax treatment of redemptions, exchanges and distributions is summarized in the following table:

Transaction	Federal Tax Status
Redemption or exchange of shares	Usually capital gain or loss; long-term only if shares owned more than one year
Distributions of net capital gain (excess of net long-term capital gain over net short-term capital loss)	Long-term capital gain
Ordinary dividends (including distributions of net short-term capital gain)	Ordinary income

Distributions of net capital gain are taxable to you as long-term capital gain regardless of how long you have owned your shares. The fund does not expect any distributions to be treated as qualified dividend income, which is taxed at reduced rates.

You may want to avoid buying shares when the fund is about to declare a capital gain distribution, because it will be taxable to you even though it may effectively be a return of a portion of your investment.

After the end of the year, your Service Agent or the fund will provide you with information about the distributions and dividends you received and any redemptions of shares during the previous year. If you are neither a citizen nor a resident of the United States, the fund will withhold federal income tax at the rate of 30% (or such lower rate as may be determined in accordance with any applicable treaty) on ordinary dividends and other payments that are subject to such withholding. Distributions that are designated as “interest-related dividends” or “short-term capital gain dividends” are generally exempt from such withholding for taxable years of the fund beginning before January 1, 2010. The fund currently does not expect to designate any distributions as “interest-related dividends” or “short-term capital gain dividends.”

If you do not provide the fund with your correct taxpayer identification number and any required certifications, you will be subject to backup withholding at the rate of 28% on your distributions, dividends, and redemption proceeds. Backup withholding will not, however, be applied to payments that have been subject to the 30% withholding tax applicable to shareholders who are neither citizens nor residents of the United States.

Distributions derived from interest on U.S. government securities (but not distributions of gain from the sale of such securities) may be exempt from certain state and local taxes. Consult your tax adviser for restrictions and details.

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Share Price

You may buy, exchange or redeem shares at their net asset value next determined after receipt of your request in good order, adjusted for any applicable sales charge. The fund’s net asset value per share is the value of its assets minus its liabilities divided by the number of shares outstanding. Net asset value is calculated separately for each class of shares. The fund calculates its net asset value(s) every day the NYSE is open. These calculations are done as of the close of regular trading on the NYSE (normally 4:00 p.m., Eastern time). If the NYSE closes early, the fund calculates its net asset value(s) as of the actual closing time. The NYSE is closed on certain holidays listed in the SAI.

The Board has approved procedures to be used to value the fund’s securities and other assets for the purposes of determining the fund’s net asset value. The valuation of the fund’s assets is generally determined in good faith in accordance with these procedures. The Board has delegated most valuation functions for the fund to the manager. The procedures adopted by the Board cover types of assets in addition to those described below.

For certain derivative securities that are traded on an exchange, the market price is usually the closing sale or official closing price on that exchange. Where a security is traded on more than one exchange (as is often the case overseas), the security is generally valued on the exchange considered by the manager to be the primary exchange. In the case of securities not traded on an exchange, or if exchange prices are not otherwise available, the market price is typically determined by independent third party pricing services approved by the fund’s Board that use a variety of techniques and methodologies.

The market price for debt obligations and certain derivative securities is generally the price supplied by an independent third party pricing service approved by the fund’s Board, which may use quotations from one or more brokers, a matrix, formula or other method that takes into consideration market indices, yield curves and other specific adjustments. Short-term debt obligations 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.

The fund generally values its securities based on market prices determined at the close of regular trading on the NYSE. The valuations of securities traded on foreign markets and certain fixed income securities will generally be determined as of the earlier closing time of the markets on which they primarily 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 2:00 p.m. Eastern time.

If independent third party pricing services are unable to supply a price, or if the price supplied is deemed by the manager to be unreliable, the market price may be determined using quotations received from one or more broker-dealers that make a market in the security. When such prices or quotations are not available, or when the manager believes that they are unreliable, the manager may price securities using fair value procedures approved by the Board. Because the fund may invest in securities of issuers in emerging markets and securities rated below investment grade—some of which may be thinly-traded and for which market quotations may not be readily available or may be unreliable—the fund may use fair value procedures more frequently than funds that invest primarily in securities that are more widely traded. The fund may also use fair value procedures if the manager determines that a significant event has occurred between the time at which a market price is determined and the time at which the fund’s net asset value is calculated.

Valuing securities at fair value involves greater reliance on judgment than valuation of securities based on readily available market quotations. A fund that uses fair value procedures to price securities may value those securities higher or lower than another fund using market quotations or its own fair value methodologies to price the same securities. The valuation determined under the fair value procedures represents the amount determined in good faith that the fund might reasonably expect to receive upon the current sale of a security. However, there can be no assurance that the fund could obtain the fair value assigned to a security if it were to sell the security at approximately the time at which the fund determines its net asset value. Therefore, investors who purchase or redeem fund shares on days when the fund is holding fair-valued securities may receive a greater or lesser number of shares, or higher or lower redemption proceeds, than they would have received if the fund had not fair-valued the security or had used a different methodology.

The fund invests in securities that are listed on foreign exchanges that are open for trading on weekends and other days when the fund does not price its shares. Therefore, the value of the fund’s shares may change on days when you will not be able to purchase or redeem the fund’s shares.

In order to buy, redeem or exchange shares at a day’s price, you must place your order with your Service Agent or the transfer agent before the NYSE closes on that day. If the NYSE closes early on that day, you must place your order prior to the actual closing time.

It is the responsibility of the Service Agents to transmit all orders to buy, exchange or redeem shares to the transfer agent on a timely basis.

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Legg Mason Partners Short-Term Bond Fund

Choosing a Class of Shares to Buy

Individual investors can generally choose between two classes of shares: Class A and Class C shares. Class B shares are only available through exchange purchases.¹ Effective October 17, 2007, the fund’s Class I Shares were closed to purchases by new investors and incoming exchanges. Investors owning Class I shares on that date may continue to add to their Class I share positions.² Institutional and retirement plan investors and clients of financial intermediaries should refer to “Retirement and institutional investors-eligible investors” below for a description of the classes available to them. Each class has different sales charges and expenses, allowing you to choose the class that best meets your needs.

When choosing which class of shares to buy, you should consider:

• How much you plan to invest

• How long you expect to own the shares

• The expenses paid by each class detailed in the fee table and example at the front of this Prospectus

• Whether you qualify for any reduction or waiver of sales charges

If you plan to invest a large amount and your investment horizon is five years or more, Class C shares might not be as advantageous as Class A shares. The annual distribution and service fees on Class C shares may cost you more over the longer term than the front-end sales charge you would have paid for larger purchases of Class A shares.

You may buy shares:

• From banks, brokers, dealers, insurance companies, investment advisers, financial consultants or advisers, mutual fund supermarkets and other financial intermediaries that have entered into an agreement with the distributor to sell shares of the fund (each called a “Service Agent”)

• Directly from the fund

Your Service Agent may provide shareholder services that differ from the services provided by other Service Agents. Services provided by your Service Agent may vary by class, and you should ask your Service Agent to explain the shareholder services it provides for each class and the compensation it receives in connection with each class. Remember that your Service Agent may receive different compensation depending on the share class in which you invest.

Your Service Agent may not offer all classes of shares. You should contact your Service Agent for further information.

¹ If the Reorganization is approved by the Acquired Fund shareholders, Class B shares would be converted to Class A shares as of the date of the Reorganization, and Class B would be closed to further purchases and exchanges.

² If the Reorganization is approved by the Acquired Fund shareholders, holders of Institutional shares of the Acquired Fund would receive Class I shares upon the completion of the Reorganization and would also be permitted to add to their Class I positions after the Reorganization.

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Investment Minimums

Minimum initial and additional investment amounts vary depending on the class of shares you buy and the nature of your investment.

Investment Minimum Initial/Additional Investments1
	Class A	Class B (Exchange Purchase Only)	Class C	Class R	Class I
General	$1,000/$50	$1,000/$50	$1,000/$50	n/a	n/a
Uniform Gifts or Transfers to Minor Accounts	$1,000/$50	$1,000/$50	$1,000/$50	n/a	n/a
IRAs	$250/$50	$250/$50	$250/$50	n/a	n/a
SIMPLE IRAs	None/None	None/None	None/None	n/a	n/a
Systematic Investment Plans	$50/$50	$50/$50	$50/$50	n/a	n/a
Clients of Eligible Financial Intermediaries	None/None	n/a	n/a	n/a	None/None
Retirement Plans with omnibus accounts held on the books of the fund	None/None	n/a	None/None	None/None	None/None
Other Retirement Plans	None/None	None/None	None/None	n/a	n/a
Institutional Investors	$1,000/$50	$1,000/$50	$1,000/$50	n/a	$1 million/None

¹ Different minimums may apply to clients of certain Service Agents. Contact your Service Agent for more information. Refer to the section entitled “Retirement and institutional investors-eligible investors” for additional information regarding the investment minimum and eligibility requirements for Retirement Plans, Institutional Investors and Clients of Eligible Financial Intermediaries.

More information about the fund’s classes of shares is available through the Legg Mason Partners funds’ website. You’ll find detailed information about sales charges and ways you can qualify for reduced or waived sales charges, including:

• The front-end sales charges that apply to the purchase of Class A shares

• The contingent deferred sales charges that apply to the redemption of Class B shares and certain Class A shares (redeemed within one year)

• Who qualifies for lower sales charges on Class A shares

• Who qualifies for a sales load waiver

To access the website, go to http://www.leggmason.com/individualinvestors and click on the name of the fund.

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Comparing the Fund’s Classes

The following table compares key features of the fund’s classes. You should review the fee table and example at the front of this Prospectus carefully before choosing your share class. Your Service Agent can help you decide which class meets your goals. Please contact your Service Agent regarding the availability of Class R shares. You may be required to provide appropriate documentation confirming your eligibility to invest in these share classes. Your Service Agent may receive different compensation depending upon which class you choose.

	Key Features	Initial Sales Charge	Contingent Deferred Sales Charge	Annual Distribution and/or Service Fees	Exchange Privilege1
Class A	•   Initial sales charge •   You may qualify for reduction or waiver of initial sales charge •   Generally lower annual expenses than Class B and Class C	Up to 2.25%; reduced or waived for large purchases and certain investors. No charge for purchases of $500,000 or more	0.50% on purchases of $500,000 or more if you redeem within 1 year of purchase; waived for certain investors	0.25% of average daily net assets	Class A shares (or, if offered, Exchange A shares) of funds sold by the distributor
Class B	•   Available only in exchange from another fund2 •   No initial sales charge •   Contingent deferred sales charge declines over time •   Converts to Class A after approximately 8 years •   Generally higher annual expenses than Class A	None	Up to 5.00% charged when you redeem shares, based on the schedule of the fund that you originally purchased. The charge is reduced over time and there is no contingent deferred sales charge after 5 years; waived for certain investors	0.75% of average daily net assets	Class B shares of funds sold by the distributor
Class C	•   No initial or contingent deferred sales charge •   Does not convert to Class A •   Generally higher annual expenses than Class A	None	None	0.75% of average daily net assets3	Class C shares of funds sold by the distributor
Class R	•   No initial or contingent deferred sales charge •   Only offered to eligible Retirement Plans with omnibus accounts held on the books of the fund	None	None	0.50% of average daily net assets	Class R shares of funds sold by the distributor
Class I	•   Closed to purchases by new investors and incoming exchanges.4 •   No initial or contingent deferred sales charge •   Generally lower expenses than the other classes	None	None	None	Class I shares of funds sold by the distributor

¹ Ask your Service Agent about the funds available for exchange.

² If the Reorganization is approved by the Acquired Fund shareholders, Class B shares would be converted to Class A shares as of the date of the Reorganization, and Class B would be closed to all further purchases and exchanges.

³ If the Reorganization is approved by the Acquired Fund shareholders, upon completion of the Reorganization, the Class C distribution/service fee would be reduced to 0.50% of the average daily net assets attributable to Class C shares.

⁴ If the Reorganization is approved by the Acquired Fund shareholders, holders of Institutional shares of the Acquired Fund would receive Class I shares upon the completion of the Reorganization and would also be permitted to add to their Class I positions after the Reorganization.

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Sales Charges

Class A Shares

You buy Class A shares at the offering price, which is the net asset value plus a sales charge. You pay a lower rate as the size of your investment increases to certain levels called breakpoints. You do not pay a sales charge on the fund’s distributions or dividends that you reinvest in additional Class A shares.

The table below shows the rate of sales charge you pay, depending on the amount you purchase. It also shows the amount of broker/dealer compensation that will be paid out of the sales charge if you buy shares from a Service Agent. For Class A shares sold by LMIS, LMIS will receive the sales charge imposed on purchases of Class A shares (or any contingent deferred sales charge paid on redemptions) and will retain the full amount of such sales charge. Service Agents will receive a service fee payable on Class A shares at an annual rate of up to 0.25% of the average daily net assets represented by the Class A shares serviced by them.

Amount of Purchase	Sales Charge as a % of Offering Price	Sales Charge as a % of Net Amount	Broker/Dealer Commission as a % of Offering Price
Less than $100,000	2.25	2.30	2.00
$100,000 but less than $250,000	1.50	1.52	1.25
$250,000 but less than $500,000	1.25	1.27	1.00
$500,000 or more1	-0-	-0-	Up to 0.50

¹ The distributor may pay a commission of up to 0.50% to a Service Agent for purchase amounts of $500,000 or more. In such cases, starting in the thirteenth month after purchase, the Service Agent will also receive an annual distribution/service fee of up to 0.25% of the average daily net assets represented by the Class A shares held by its clients. Prior to the thirteenth month, the distributor will retain this fee. Where the Service Agent does not receive the payment of this commission, the Service Agent will instead receive the annual distribution/service fee starting immediately after purchase. Please contact your Service Agent for more information.

Investments of $500,000 or More

You do not pay an initial sales charge when you buy $500,000 or more of Class A shares. However, if you redeem these Class A shares within one year of purchase, you will pay a contingent deferred sales charge of 0.50%.

Qualifying for a Reduced Class A Sales Charge

There are several ways you can combine multiple purchases of Class A shares of funds sold by the distributor to take advantage of the breakpoints in the sales charge schedule. In order to take advantage of reductions in sales charges that may be available to you when you purchase fund shares, you must inform your Service Agent or Funds Investor Services or Institutional Shareholder Services if you are eligible for a letter of intent or a right of accumulation and if you own shares of other funds that are eligible to be aggregated with your purchases. Certain records, such as account statements, may be necessary in order to verify your eligibility for a reduced sales charge.

• Accumulation Privilege—allows you to combine the current value of Class A shares of the fund with other shares of funds sold by the distributor that are owned by:

• you; or

• your spouse and children under the age of 21

with the dollar amount of your next purchase of Class A shares for purposes of calculating the initial sales charge.

Shares of money market funds sold by the distributor acquired by exchange from other funds offered with a sales charge may be combined. Certain funds and classes of shares of other funds sold by the distributor may not be combined until May 18, 2009. Please contact your Service Agent for additional information.

If you hold fund shares in accounts at two or more Service Agents, please contact your Service Agents to determine which shares may be combined.

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Certain trustees and fiduciaries may be entitled to combine accounts in determining their sales charge.

• Letter of Intent—allows you to purchase Class A shares of funds sold by the distributor over a 13-month period and pay the same sales charge, if any, as if all shares had been purchased at once. At the time you enter into the letter of intent, you select your asset goal amount. Generally, purchases of shares of funds sold by the distributor that are purchased during the 13-month period by:

• you; or

• your spouse and children under the age of 21

are eligible for inclusion under the letter, based on the public offering price at the time of the purchase, and any capital appreciation on those shares. In addition, you can include towards your asset goal amount the current value of any eligible holdings.

If you hold shares of funds sold by the distributor in accounts at two or more Service Agents, please contact your Service Agents to determine which shares may be credited toward your letter of intent asset goal.

Shares of money market funds sold by the distributor acquired by exchange from other funds offered with a sales charge may be credited toward your letter of intent asset goal. Certain funds and certain classes of shares of other funds sold by the distributor may not be credited toward your letter of intent asset goal until May 18, 2009. Please contact your Service Agent for additional information.

If you do not meet your asset goal amount, shares in the amount of any sales charges due based on the amount of your actual purchases will be redeemed from your account.

Waivers for Certain Class A Investors

Class A initial sales charges are waived for certain types of investors, including:

• Employees of Service Agents

• Investors who redeemed Class A shares of a Legg Mason Partners fund in the past 60 days, if the investor’s Service Agent is notified

• Directors and officers of any Legg Mason-sponsored fund

• Employees of Legg Mason and its subsidiaries

• Investors investing through certain retirement plans

If you qualify for a waiver of the Class A initial sales charge, you must notify your Service Agent or the transfer agent at the time of purchase and provide sufficient information at the time of purchase to permit verification that the purchase qualifies for the initial sales charge waiver.

If you want to learn about additional waivers of Class A initial sales charges, contact your Service Agent, consult the SAI or access the Legg Mason Partners funds’ website, http://www.leggmason.com/individualinvestors, and click on the name of the fund.

Class B Shares

Class B shares, which are available only through exchanges of Class B shares of other Legg Mason Partners funds,² are purchased at net asset value without paying an initial sales charge. However, if you redeem your Class B shares within

² If the Reorganization is approved by the Acquired Fund shareholders, Class B shares would be converted to Class A shares as of the date of the Reorganization, and Class B would be closed to further purchases and exchanges.

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5 years of your original purchase payment, you will pay a contingent deferred sales charge. The contingent deferred sales charge decreases as the number of years since your purchase payment increases.

Year After Purchase	1st		2nd		3rd		4th		5th		6th Through 8th
Contingent deferred sales charge	Up to 5.00	%	4	%	3	%	2	%	1	%	0%

For Class B shares Service Agents receive an annual distribution/service fee of up to 0.25% of the average daily net assets represented by the Class B shares serviced by them.

Class B Conversion

After approximately 8 years, Class B shares automatically convert into Class A shares. This helps you because Class A shares have lower annual expenses. Your Class B shares will convert to Class A shares as follows:

Shares Issued: at Initial Purchase	Shares Issued: on Reinvestment of Dividends and Distributions	Shares Issued: Upon Exchange From Another Legg Mason Partners Fund
Approximately 8 years after the date of purchase	In same proportion as the number of Class B shares converting is to total Class B shares you own (excluding shares issued as dividends)	On the date the shares originally acquired would have converted into Class A shares

Class C Shares

You buy Class C shares at net asset value with no initial sales charge and no contingent deferred sales charge. However, if you exchange Class C shares that were not subject to a contingent deferred sales charge when initially purchased for Class C shares of a fund that imposes a contingent deferred sales charge, your contingent deferred sales charge will be measured from the date of your exchange.

Service Agents receive an annual fee of up to 0.75%³ of the purchase price of the Class C shares serviced by them.

Class R Shares

Class R shares are purchased at net asset value with no initial sales charge and no contingent deferred sales charge when redeemed.

Service Agents receive a distribution/service fee of up to 0.50% of the average daily net assets represented by the Class R shares serviced by them.

Class I Shares

Class I shares are purchased at net asset value with no initial sales charge and no contingent deferred sales charge when redeemed. Effective October 17, 2007, the fund’s Class I shares were closed to purchases by new investors and incoming exchanges. Investors owning Class I shares on that date may continue to add to their Class I share positions. If the Reorganization is approved by the Acquired Fund shareholders, holders of Institutional shares of the Acquired Fund would receive Class I shares upon the completion of the Reorganization and would be permitted to add to their Class I positions after the Reorganization. Class I shares are not subject to any distribution or service fee.

³ If the Reorganization is approved by the Acquired Fund shareholders, upon completion of the Reorganization, LMIS will generally pay Service Agents selling Class C shares an annual fee of up to 0.50% of the purchase price of the Class C shares they sell.

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More about Contingent Deferred Sales Charges

The contingent deferred sales charge is based on the net asset value at the time of purchase or redemption, whichever is less, and therefore you do not pay a sales charge on amounts representing appreciation or depreciation.

In addition, you do not pay a contingent deferred sales charge:

• When you exchange shares for shares of another fund sold by the distributor

• On shares representing reinvested distributions and dividends

• On shares no longer subject to the contingent deferred sales charge

Each time you place a request to redeem shares, the fund will first redeem any shares in your account that are not subject to a contingent deferred sales charge and then redeem the shares in your account that have been held the longest.

If you redeemed shares of a Legg Mason Partners fund and paid a contingent deferred sales charge, you may, under certain circumstances, reinvest all or part of the redemption proceeds within 60 days and receive pro rata credit for any contingent deferred sales charge imposed on the prior redemption. Please contact your Service Agent for additional information.

The fund’s distributor receives contingent deferred sales charges as partial compensation for its expenses in selling shares, including the payment of compensation to your Service Agent.

Contingent Deferred Sales Charge Waivers

The contingent deferred sales charge for each share class will generally be waived:

• On payments made through certain systematic withdrawal plans

• On certain distributions from a retirement plan

• For retirement plans with omnibus accounts held on the books of the fund

• For involuntary redemptions of small account balances

• For 12 months following the death or disability of a shareholder

If you want to learn more about additional waivers of contingent deferred sales charges, contact your Service Agent, consult the SAI or look at the Legg Mason Partners funds’ website, http://www.leggmason.com/individualinvestors, and click on the name of the fund.

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Retirement and Institutional Investors—Eligible Investors

Retirement Plans with Omnibus Accounts

Retirement Plans with omnibus accounts held on the books of the fund can generally choose between two classes of shares: Class C and Class R shares.

Class A and B shares are no longer offered through Service Agents for Retirement Plans with omnibus accounts held on the books of the fund, with limited exceptions.

“Retirement Plans” include 401(k) plans, 457 plans, employer-sponsored 403(b) plans, profit-sharing plans, non-qualified deferred compensation plans and other similar employer-sponsored retirement plans. Retirement Plans do not include individual retirement vehicles, such as traditional and Roth individual retirement accounts, Coverdell education savings accounts, individual 403(b)(7) custodial accounts, Keogh plans, SEPs, SARSEPs, SIMPLE IRAs, or similar accounts. Although Retirement Plans with omnibus accounts held on the books of the fund are not subject to minimum initial investment requirements for any of these share classes, certain investment minimums may be imposed by a financial intermediary.

Other Retirement Plans

Other Retirement Plan investors can generally choose among three classes of shares: Class A, Class B, and Class C. “Other Retirement Plans” include Retirement Plans investing through brokerage accounts, and also include certain Retirement Plans with direct relationships to the fund that are neither Institutional Investors nor investing through omnibus accounts. Individual retirement vehicles, such as IRAs, may also choose among these share classes. Other Retirement Plans and individual retirement vehicles are treated like individual investors for purposes of determining sales charges and any applicable sales charge reductions or waivers.

Clients of Eligible Financial Intermediaries

Clients of Eligible Financial Intermediaries may invest in Class A shares. “Clients of Eligible Financial Intermediaries” are investors who invest in the fund through financial intermediaries that offer their clients fund shares through investment programs as authorized by LMIS. Such investment programs may include fee-based advisory account programs and college savings vehicles such as Section 529 plans. The financial intermediary may impose separate investment minimums.

Institutional Investors

Institutional Investors owning Class I shares on October 17, 2007 may continue to add to their Class I positions. If the Reorganization is approved by the Acquired Fund shareholders, holders of Institutional shares of the Acquired Fund would receive Class I shares upon the completion of the Reorganization and would also be permitted to add to their Class I positions after the Reorganization. Institutional Investors may also invest in Class A and Class C shares, which have different investment minimums and fees and expenses. “Institutional Investors” generally include corporations, banks, trust companies, insurance companies, investment companies, foundations, endowments, defined benefit plans and other similar entities with direct relationships to the fund.

Class C—Retirement Plans

Retirement Plans with omnibus accounts held on the books of the fund may buy Class C shares without paying a contingent deferred sales charge. LMIS does not pay Service Agents selling Class C shares to retirement plans with omnibus accounts held on the books of the fund a commission on the purchase price of Class C shares sold by them. Instead, immediately after purchase, LMIS may pay these Service Agents an annual fee of up to 0.75% of the average daily net assets represented by the Class C shares serviced by them. If the Reorganization is approved by the Acquired Fund shareholders, upon completion of the Reorganization, the annual fee payable to these Service Agents would be reduced to an annual fee of up to 0.50% of the average daily net assets represented by the Class C shares serviced by them.

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Class R

Class R shares are offered only to Retirement Plans with accounts held on the books of the fund (either at the plan level or at the level of the financial intermediary). LMIS may pay Service Agents selling Class R shares an annual distribution/service fee of up to 0.50% of the average daily net assets represented by the Class R shares serviced by them.

Class I

Effective October 17, 2007, the fund’s Class I Shares were closed to purchases by new investors and incoming exchanges. Investors owning Class I shares on that date may continue to add to their Class I share positions. Please contact your Service Agent for more information. If the Reorganization is approved by the Acquired Fund shareholders, holders of Institutional shares of the Acquired Fund would receive Class I shares upon completion of the Reorganization and would also be permitted to add to their Class I positions after the Reorganization.

Class A and Class B—Retirement Plans

Class A and Class B shares are no longer offered through Service Agents to Retirement Plans with omnibus accounts held on the books of the fund. However, Retirement Plans that held Class B shares prior to December 1, 2006 are permitted to make additional investments in that class. Certain existing programs for current and prospective Retirement Plan investors sponsored by financial intermediaries also remain eligible for Class A shares. Under these programs, the initial sales charge and contingent deferred sales charge for Class A shares are waived where:

• Such Retirement Plan’s recordkeeper offers only load-waived shares,

• Fund shares are held on the books of the fund through an omnibus account, and

• The Retirement Plan has more than 100 participants, or has total assets exceeding $1 million.

LMIS does not pay Service Agents selling Class A shares to Retirement Plans with a direct omnibus relationship with the fund a commission on the purchase price of Class A shares sold by them. However, for certain Retirement Plans that are permitted to purchase shares at net asset value, LMIS may pay Service Agents commissions of up to 0.50% of the purchase price of the Class A shares that are purchased with regular ongoing plan contributions. Please contact your Service Agent for more information.

Other Considerations

Plan sponsors, plan fiduciaries and other financial intermediaries may choose to impose qualification requirements for plans that differ from the fund’s share class eligibility standards. In certain cases this could result in the selection of a share class with higher service and distribution-related fees than otherwise would have been charged. The fund is not responsible for, and has no control over, the decision of any financial intermediary to impose such differing requirements. Please consult with your financial intermediary for more information about available share classes.

With respect to each of Class A, Class B, Class C, Class R and Class I, the fund may pay a fee for recordkeeping services performed for the share class.

Your Service Agent may not offer all share classes. Please contact your Service Agent for additional details.

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Buying Shares

Generally	You may buy shares at their net asset value next determined after receipt by your Service Agent or the transfer agent of your purchase request in good order, plus any applicable sales charge. The fund generally will not permit non-resident aliens with a non-U.S. address to establish an account. U.S. citizens with an APO/FPO address or an address in the United States (including its territories) and resident aliens with a U.S. address are permitted to establish an account with the fund. Subject to the requirements of local law, U.S. citizens residing in foreign countries are permitted to establish an account with the fund.
Through a Service Agent	You should contact your Service Agent to open a brokerage account and make arrangements to buy shares. You must provide the following information for your order to be processed: •      Name of fund being bought •      Class of shares being bought •      Dollar amount or number of shares being bought •      Account number (if existing account) Your Service Agent may charge an annual account maintenance fee.
Through the fund	Investors should contact Funds Investor Services at 1-800-822-5544 or Institutional Shareholder Services at 1-888-425-6432 to open an account and make arrangements to buy shares. For initial purchases, complete and send your account application to the fund at the following address: Legg Mason Funds P.O. Box 55214 Boston, Massachusetts 02205-8504 Subsequent purchases should be sent to the same address. Enclose a check to pay for the shares. Specify the name of the fund, the share class you wish to purchase and your account number (if existing account). For more information, please call Funds Investor Services at 1-800-822-5544 or Institutional Shareholder Services at 1-888-425-6432 between 8:30 a.m. and 5:30 p.m. (Eastern time).
Through a systematic investment plan	You may authorize your Service Agent or the transfer agent to transfer funds automatically from (i) a regular bank account, (ii) cash held in a brokerage account with a Service Agent or (iii) certain money market funds, in order to buy shares on a regular basis. •      Amounts transferred must meet the applicable minimums (see “Choosing a class of shares to buy—Investment minimums”) •      Amounts may be transferred monthly, every alternate month, quarterly, semi-annually or annually •      If you do not have sufficient funds in your account on a transfer date, your Service Agent or Funds Investor Services or Institutional Shareholder Services may charge you a fee For more information, please contact your Service Agent or Funds Investor Services or Institutional Shareholder Services or consult the SAI.

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Exchanging Shares

Generally	You may exchange shares of the fund for the same class of shares of other funds sold by the distributor. Shares of certain funds and certain classes of shares of other funds sold by the distributor are not available for exchange until May 18, 2009.
Legg Mason Partners offers a distinctive family of funds tailored to help meet the varying needs of large and small investors	You may exchange shares at their net asset value next determined after receipt by your Service Agent or the transfer agent of your exchange request in good order. •      If you bought shares through a Service Agent, contact your Service Agent to learn which funds your Service Agent makes available to you for exchanges •      If you bought shares directly from the fund, contact the transfer agent to learn which funds are available to you for exchanges •      You may exchange shares of the fund only for shares of the same class of other funds, with one exception: if you wish to exchange Class A shares of the fund for shares of another fund that offers Exchange A shares, you may exchange your Class A shares only for Exchange A shares of the other fund •      Not all funds offer all classes •      Some funds are offered only in a limited number of states. Your Service Agent or the transfer agent will provide information about funds offered in your state •      Remember that an exchange is a taxable transaction, unless you are investing through a tax-qualified savings plan or account •      Always be sure to read the prospectus of the fund into which you are exchanging shares •      Exchanges of Class A, B and C shares are subject to minimum investment requirements (except for systematic investment plan exchanges), and all shares are subject to the other requirements of the fund into which exchanges are made
Investment minimums, sales charges and other requirements	•      In most instances, your shares will not be subject to an initial sales charge or a contingent deferred sales charge at the time of the exchange •      Your contingent deferred sales charge (if any) will continue to be measured from the date of your original purchase of shares subject to a contingent deferred sales charge and you will be subject to the contingent deferred sales charge of the fund that you originally purchased
	•      You will generally be required to meet the minimum investment requirement for the class of shares of the fund into which your exchange is made (except in the case of systematic exchange plans) •      Your exchange will also be subject to any other requirements of the fund into which you are exchanging shares •      If you hold share certificates, you must deliver the certificates, endorsed for transfer or with signed stock powers, to the transfer agent or your Service Agent before the exchange is effective •      The fund may suspend or terminate your exchange privilege if you engage in a pattern of excessive exchanges

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By telephone	Contact your Service Agent or, if you hold shares directly with the fund, call Funds Investor Services at 1-800-822-5544 or Institutional Shareholder Services at 1-888-425-6432 between 8:30 a.m. and 5:30 p.m. (Eastern time) for information. Exchanges are priced at the net asset value next determined. Telephone exchanges may be made only between accounts that have identical registrations, and may be made on any day the New York Stock Exchange (“NYSE”) is open
By mail	Contact your Service Agent or, if you hold shares directly with the fund, write to the fund at the address specified in “Redeeming shares” below.
Through a systematic exchange plan	You may be permitted to schedule automatic exchanges of shares of the fund for shares of other funds available for exchange. All requirements for exchanging shares described above apply to these exchanges. In addition: •      Exchanges may be made monthly, every alternate month, quarterly, semi-annually or annually •      Each exchange must meet the applicable investment minimums for systematic investment plans (see “Choosing a class of shares to buy— Investment minimums”) For more information, please contact your Service Agent or Legg Mason Partners Shareholder Services or consult the SAI.

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Redeeming Shares

Generally	Contact your Service Agent or, if you hold shares directly with the fund, Funds Investor Services at 1-800-822-5544 or Institutional Shareholder Services at 1-888-425-6432 to redeem shares of the fund. You may redeem shares at their net asset value next determined after receipt by your Service Agent or the transfer agent of your redemption request in good order, less any applicable contingent deferred sales charge. If you hold share certificates, the transfer agent must receive the certificates endorsed for transfer or with signed stock powers with a signature guarantee before you may redeem. If the shares are held by a fiduciary or corporation, partnership or similar entity, other documents may be required.
Redemption proceeds	Your redemption proceeds normally will be sent within 3 business days after your request is received in good order, but in any event within 7 days, except that your proceeds may be delayed for up to 10 days if your share purchase was made by check. Your redemption proceeds may be delayed, or your right to receive proceeds suspended, if the NYSE is closed (other than on weekends or holidays) or trading is restricted, if an emergency exists, or otherwise as permitted by order of the SEC. If you have a brokerage account with a Service Agent, your redemption proceeds will be sent to your Service Agent. In other cases, unless you direct otherwise, your proceeds will be paid by check mailed to your address of record.
By mail	Contact your Service Agent or, if you hold your shares directly with the fund, write to the fund at the following address: Legg Mason Funds P.O. Box 55214 Boston, Massachusetts 02205-8504
	Your written request must provide the following: •      The fund name, the class of shares to be redeemed, and your account number •      The dollar amount or number of shares to be redeemed •      Signatures of each owner exactly as the account is registered •      Signature guarantees, as applicable (see “Other things to know about transactions”)
By telephone	If your account application permits, you may be eligible to redeem shares by telephone. Contact your Service Agent or, if you hold your shares directly with the fund, call Funds Investor Services at 1-800-822-5544 or Institutional Shareholder Services at 1-888-425-6432 between 8:30 a.m. and 5:30 p.m. (Eastern time) for more information. Please have the following information ready when you call: •      Name of fund being redeemed •      Class of shares being redeemed •      Account number If you hold shares directly with the fund, redemptions of shares may be made by telephone in amounts up to $50,000 per day, on any day the NYSE is open for business.

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Your redemption proceeds can be sent by check to your address of record or by wire or electronic transfer (ACH) to a bank account designated by you when you authorize telephone redemptions. To change the bank account designated to receive wire or electronic transfers, you will be required to deliver a new written authorization and may be asked to provide other documents. The transfer agent may charge a fee on a wire or an electronic transfer (ACH).

Automatic cash withdrawal plans

You may be permitted to schedule automatic redemptions of a portion of your shares. To qualify, you must own shares of the fund with a value of at least $10,000 ($5,000 for Retirement Plan accounts), and each automatic redemption must be at least $50. The following conditions apply: •      Your shares may not be represented by certificates •      Redemptions may be made monthly, every alternate month, quarterly, semi-annually or annually •      If your shares are subject to a contingent deferred sales charge, the charge will be required to be paid upon redemption. However, the charge will be waived if your automatic redemptions are equal to or less than 2% per month of your account balance on the date the redemptions commence up to a maximum of 12% in one year •      You must elect to have all dividends and distributions reinvested For more information, please contact your Service Agent or consult the SAI.

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Other Things to Know about Transactions

When you buy, exchange or redeem shares, your request must be in good order. This means you have provided the following information, without which your request may not be processed:

• Name of the fund

• Your account number

• In the case of a purchase (including a purchase as part of an exchange transaction), the class of shares being bought

• In the case of an exchange or redemption, the class of shares being exchanged or redeemed (if you own more than one class)

• Dollar amount or number of shares being bought, exchanged or redeemed

• Signature of each owner exactly as the account is registered

The transfer agent or Funds Investor Services or Institutional Shareholder Services will employ reasonable procedures to confirm that any telephone exchange or redemption request is genuine, which may include recording calls, asking the caller to provide certain personal identification information, sending you a written confirmation or requiring other confirmation procedures from time to time. If these procedures are followed, neither the fund nor its agents will bear any liability for executing any such transactions.

The fund has the right to:

• Suspend the offering of shares

• Waive or change minimum and additional investment amounts

• Reject any purchase or exchange order

• Change, revoke or suspend the exchange privilege

• Suspend telephone transactions

• Suspend or postpone redemptions of shares on any day when trading on the NYSE is restricted, or as otherwise permitted by the SEC

• Pay redemption proceeds by giving you securities. You may pay transaction costs to dispose of the securities

Signature Guarantees

To be in good order, your redemption request must include a signature guarantee if you:

• Are redeeming shares with a value over $50,000

• Are sending signed share certificates or stock powers to the transfer agent

• Instruct the transfer agent to mail the check to an address different from the one on your account registration

• Changed your account registration or your address within 30 days

• Want the check paid to someone other than the account owner(s)

• Are transferring the redemption proceeds to an account with a different registration

You can obtain a signature guarantee from most banks, dealers, brokers, credit unions and federal savings and loan institutions, but not from a notary public.

Anti-Money Laundering

Federal anti-money laundering regulations require all financial institutions to obtain, verify and record information that identifies each person who opens an account. When you sign your account application, you may be asked to provide additional information in order for the fund to verify your identity in accordance with these regulations. Accounts may be restricted and/or closed, and the monies withheld, pending verification of this information or as otherwise required under these and other federal regulations.

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Small Account Balances/Mandatory Redemptions

If at any time the aggregate net asset value of the fund shares in your account is less than $500 for any reason (including solely due to declines in net asset value and/or failure to invest at least $500 within a reasonable period), the fund reserves the right to ask you to bring your account up to the applicable minimum investment amount as determined by your Service Agent. In such case you shall be notified in writing and will have 60 days to make an additional investment to bring your account value up to the required level. If you choose not to do so within this 60-day period, the fund may close your account and send you the redemption proceeds. In the event your account is closed due to a failure to increase your balance to the minimum required amount, you will not be eligible to have your account subsequently reinstated without imposition of any sales charges that may apply to your new purchase. The fund may, with prior notice, change the minimum size of accounts subject to mandatory redemption, which may vary by class, or implement fees for small accounts.

Subject to applicable law, the fund may, with prior notice, adopt other policies from time to time requiring mandatory redemption of shares in certain circumstances.

For more information, please contact your Service Agent or Funds Investor Services or Institutional Shareholder Services or consult the SAI.

Frequent Purchases and Redemptions of Fund Shares

Frequent purchases and redemptions of fund shares may interfere with the efficient management of the fund’s portfolio by its portfolio managers, increase portfolio transaction costs and have a negative effect on the fund’s long-term shareholders. For example, in order to handle large flows of cash into and out of the fund, the portfolio managers may need to allocate more assets to cash or other short-term investments or sell securities, rather than maintaining full investment in securities selected to achieve the fund’s investment objective. Frequent trading may cause the fund to sell securities at less favorable prices. Transaction costs, such as brokerage commissions and market spreads, can detract from the fund’s performance. In addition, the return received by long-term shareholders may be reduced when trades by other shareholders are made in an effort to take advantage of certain pricing discrepancies, when, for example, it is believed that the fund’s share price, which is determined at the close of the NYSE on each trading day, does not accurately reflect the value of the fund’s portfolio securities. Funds investing in foreign securities have been particularly susceptible to this form of arbitrage, but other funds also could be affected.

Because of the potential harm to funds sold by the distributor and their long-term shareholders, the Board of the fund has approved policies and procedures that are intended to discourage and prevent excessive trading and market timing abuses through the use of various surveillance techniques. Under these policies and procedures, the fund may limit additional exchanges or purchases of fund shares by shareholders who are believed by the manager to be engaged in these abusive trading activities in the fund or in other funds sold by the distributor. In the event that an exchange request is rejected, the shareholder may nonetheless redeem its shares. The intent of the policies and procedures is not to inhibit legitimate strategies, such as asset allocation, dollar cost averaging, or similar activities that may nonetheless result in frequent trading of fund shares.

Under the fund’s policies and procedures, the fund reserves the right to restrict or reject purchases of shares (including exchanges) without prior notice whenever a pattern of excessive trading by a shareholder is detected in funds sold by the distributor. A committee established by the manager administers the policy. The policy provides that the committee will use its best efforts to restrict a shareholder’s trading privileges in the distributor sold funds if that shareholder has engaged in a total of four or more “Round Trips” (as defined below) across all distributor sold funds during any rolling 12-month period. However, the committee has the discretion to determine that restricting a shareholder’s trading privileges is not necessary (or that a new limit on Round Trips should be established for the shareholder) if it is determined that the pattern of trading is not abusive or harmful. In making such a determination, the committee will consider, among other things, the nature of the shareholder’s account, the reason for the frequent trading, the amount of trading and the particular funds in which the trading has occurred. Additionally, the committee has the discretion to make inquiries or to take action against any shareholder whose trading appears inconsistent with the frequent trading policy. Examples of the types of actions the committee may take to deter excessive trading in a shareholder account include restricting the shareholder from purchasing additional shares in the fund altogether or imposing other restrictions (such as requiring purchase orders to be submitted by mail) that would deter the shareholder from trading frequently in the funds.

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A “Round Trip” is defined as a purchase (including subscriptions and exchanges) into the fund followed by a sale (including redemptions and exchanges) of the same or a similar number of shares out of the fund within 30 days of such purchase. Purchases and sales of the fund’s shares pursuant to an automatic investment plan or similar program for periodic transactions are not considered in determining Round Trips. These policies and procedures do not apply to money market funds sold by the distributor.

The policies apply to any account, whether an individual account, accounts with financial intermediaries such as investment advisers, broker/dealers or retirement plan administrators, commonly called omnibus accounts, where the intermediary holds fund shares for a number of its customers in one account. The fund’s ability to monitor trading in omnibus accounts may, however, be severely limited due to the lack of access to an individual investor’s trading activity when orders are placed through these types of accounts. There may also be operational and technological limitations on the ability of the fund’s service providers to identify or terminate frequent trading activity within the various types of omnibus accounts. The distributor has entered into agreements with intermediaries requiring the intermediaries to, among other things, help identify frequent trading activity and to prohibit further purchases or exchanges by a shareholder identified as having engaged in frequent trading.

The fund’s policies also require personnel such as the portfolio managers and investment staff to report any abnormal or otherwise suspicious investment activity, and prohibit short-term trades by such personnel for their own account in mutual funds managed by the manager and its affiliates, other than money market funds. Additionally, the fund has adopted policies and procedures to prevent the selective release of information about the fund’s portfolio holdings, as such information may be used for market-timing and similar abusive practices.

The fund’s policies provide for ongoing assessment of the effectiveness of current policies and surveillance tools, and the Board reserves the right to modify these or adopt additional policies and restrictions in the future. Shareholders should be aware, however, that any surveillance techniques currently employed by the fund or other techniques that may be adopted in the future may not be effective, particularly where the trading takes place through certain types of omnibus accounts. As noted above, if the fund is unable to detect and deter trading abuses, the fund’s performance, and its long-term shareholders, may be harmed. In addition, shareholders may be harmed by the extra costs and portfolio management inefficiencies that result from frequent trading of fund shares, even when the trading is not for abusive purposes. Furthermore, the fund may not apply its policies consistently or uniformly, resulting in the risk that some shareholders may be able to engage in frequent trading while others will bear the costs and effects of that trading. The fund will provide advance notice to shareholders and prospective investors of any specific restrictions on the trading of fund shares that the Board may adopt in the future.

Share Certificates

Share certificates for the fund will no longer be issued. If you currently hold share certificates of the fund, such certificates will continue to be honored. If you would like to return your share certificates to the fund and hold your shares in uncertificated form, please contact your Service Agent or Funds Investor Services or Institutional Shareholder Services.

Record Ownership

If you hold shares through a Service Agent, your Service Agent may establish and maintain your account and be the shareholder of record. In the event that the fund holds a shareholder meeting, your Service Agent, as record holder, will vote your shares in accordance with your instructions. If you do not give your Service Agent voting instructions, your Service Agent may nonetheless, under certain circumstances, be entitled to vote your shares.

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Dividends, Distributions and Taxes

Dividends and Distributions

The fund’s policy is to declare daily dividends from net investment income. Dividends from income are paid monthly. The fund generally makes capital gain distributions, if any, once a year, typically in December. The fund may pay additional distributions and dividends at other times if necessary for the fund to avoid a federal tax. The fund expects distributions to be primarily from income and capital gain. Capital gain distributions and dividends are reinvested in additional fund shares of the same class you hold. You do not pay a sales charge on reinvested distributions or dividends. Alternatively, you can instruct your Service Agent or Legg Mason Partners Shareholder Services to have your distributions and/or dividends paid in cash. You can change your choice at any time to be effective as of the next distribution or dividend.

Taxes

The following discussion is very general. Because each shareholder’s circumstances are different and special tax rules may apply, you should consult your tax adviser about your investment in the fund.

In general, you will have to pay federal income taxes, as well as any state and local taxes, when you redeem shares, exchange shares or receive a distribution (whether paid in cash or reinvested in additional shares). Any tax liability that you owe as a result of any of these taxable events is your responsibility. The federal income tax treatment of redemptions, exchanges and distributions is summarized in the following table:

Transaction	Federal Tax Status
Redemption or exchange of shares	Usually capital gain or loss; long-term only if shares owned more than one year
Distributions of net capital gain (excess of net long-term capital gain over net short-term capital loss)	Long-term capital gain
Ordinary dividends (including distributions of net short-term capital gain)	Ordinary income

Distributions of net capital gain are taxable to you as long-term capital gain regardless of how long you have owned your shares. The fund does not expect any distributions to be treated as qualified dividend income, which is taxed at reduced rates.

You may want to avoid buying shares when the fund is about to declare a capital gain distribution, because it will be taxable to you even though it may effectively be a return of a portion of your investment.

After the end of the year, your Service Agent or the fund will provide you with information about the distributions and dividends you received and any redemptions of shares during the previous year. If you are neither a citizen nor a resident of the United States, the fund will withhold federal income tax at the rate of 30% (or such lower rate as may be determined in accordance with any applicable treaty) on ordinary dividends and other payments that are subject to such withholding. Distributions that are designated as “interest-related dividends” or “short-term capital gain dividends” are generally exempt from such withholding for taxable years of the fund beginning before January 1, 2010. The fund currently does not expect to designate any distributions as “interest-related dividends” or “short-term capital gain dividends.” If you do not provide the fund with your correct taxpayer identification number and any required certifications, you will be subject to backup withholding at the rate of 28% on your distributions, dividends, and redemption proceeds. Backup withholding will not, however, be applied to payments that have been subject to the 30% withholding tax applicable to shareholders who are neither citizens nor residents of the United States.

Distributions derived from interest on U.S. government securities (but not distributions of gain from the sale of such securities) may be exempt from certain state and local taxes. Consult your tax adviser for restrictions and details.

Share Price

You may buy, exchange or redeem shares at their net asset value next determined after receipt of your request in good order, adjusted for any applicable sales charge. The fund’s net asset value per share is the value of its assets minus its liabilities divided by the number of shares outstanding. Net asset value is calculated separately for each class of shares. The

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fund calculates its net asset value(s) every day the NYSE is open. These calculations are done as of the close of regular trading on the NYSE (normally 4:00 p.m., Eastern time). If the NYSE closes early, the fund calculates its net asset value(s) as of the actual closing time. The NYSE is closed on certain holidays listed in the SAI.

The Board has approved procedures to be used to value the fund’s securities and other assets for the purposes of determining the fund’s net asset value. The valuation of the fund’s assets is generally determined in good faith in accordance with these procedures. The Board has delegated most valuation functions for the fund to the manager. The procedures adopted by the Board cover types of assets in addition to those described below.

For certain derivative securities that are traded on an exchange, the market price is usually the closing sale or official closing price on that exchange. Where a security is traded on more than one exchange (as is often the case overseas), the security is generally valued on the exchange considered by the manager to be the primary exchange. In the case of securities not traded on an exchange, or if exchange prices are not otherwise available, the market price is typically determined by independent third party pricing services approved by the fund’s Board that use a variety of techniques and methodologies.

The market price for debt obligations and certain derivative securities is generally the price supplied by an independent third party pricing service approved by the fund’s Board, which may use quotations from one or more brokers, a matrix, formula or other method that takes into consideration market indices, yield curves and other specific adjustments. Short-term debt obligations 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.

The fund generally values its securities based on market prices determined at the close of regular trading on the NYSE. The valuations of securities traded on foreign markets and certain fixed income securities will generally be determined as of the earlier closing time of the markets on which they primarily 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 2:00 p.m. Eastern time.

If independent third party pricing services are unable to supply a price, or if the price supplied is deemed by the manager to be unreliable, the market price may be determined using quotations received from one or more broker-dealers that make a market in the security. When such prices or quotations are not available, or when the manager believes that they are unreliable, the manager may price securities using fair value procedures approved by the Board. Because the fund may invest in securities of issuers in emerging markets and securities rated below investment grade—some of which may be thinly-traded and for which market quotations may not be readily available or may be unreliable—the fund may use fair value procedures more frequently than funds that invest primarily in securities that are more widely traded. The fund may also use fair value procedures if the manager determines that a significant event has occurred between the time at which a market price is determined and the time at which the fund’s net asset value is calculated.

Valuing securities at fair value involves greater reliance on judgment than valuation of securities based on readily available market quotations. A fund that uses fair value procedures to price securities may value those securities higher or lower than another fund using market quotations or its own fair value methodologies to price the same securities. The valuation determined under the fair value procedures represents the amount determined in good faith that the fund might reasonably expect to receive upon the current sale of a security. However, there can be no assurance that the fund could obtain the fair value assigned to a security if it were to sell the security at approximately the time at which the fund determines its net asset value. Therefore, investors who purchase or redeem fund shares on days when the fund is holding fair-valued securities may receive a greater or lesser number of shares, or higher or lower redemption proceeds, than they would have received if the fund had not fair-valued the security or had used a different methodology.

The fund invests in securities that are listed on foreign exchanges that are open for trading on weekends and other days when the fund does not price its shares. Therefore, the value of the fund’s shares may change on days when you will not be able to purchase or redeem the fund’s shares.

In order to buy, redeem or exchange shares at a day’s price, you must place your order with your Service Agent or the transfer agent before the NYSE closes on that day. If the NYSE closes early on that day, you must place your order prior to the actual closing time.

It is the responsibility of the Service Agents to transmit all orders to buy, exchange or redeem shares to the transfer agent on a timely basis.

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APPENDIX C

Comparison of Investment Objectives, Principal Investment Strategies and Management

Legg Mason Investment Grade Income Portfolio and Legg Mason Partners Corporate Bond Fund

The following chart lists the investment objective, principal investment policies, manager and portfolio manager. The chart provides a side-by-side comparison for shareholders of the Target Fund. For a more detailed analysis, including risk factors, please review the section “Comparison of Investment Objectives, Strategies and Principal Risks of Investing in the Fund” in the Proxy Statement/Prospectus.

	Legg Mason Investment Grade Income Portfolio (Target Fund)	Legg Mason Partners Corporate Bond Fund (Acquiring Fund)
Investment Objective(s)	High level of current income through investment in a diversified portfolio of debt securities.	The fund seeks as high a level of current income as is consistent with prudent investment management and preservation of capital.
Principal Investment Policies and Strategies	The fund invests primarily in fixed-income securities rated investment grade, i.e., rated at the time of investment BBB/Baa or higher by at least one NRSRO or, if not rated by any NRSRO, determined by the Adviser to be of comparable quality. Although the fund can invest in securities of any maturity, it normally expects to maintain a dollar-weighted average maturity of between five and twenty years. The fund invests, under normal circumstance, at least 80% of its net assets plus any borrowings for investment purposes in the following types of investment grade fixed-income securities: –       debt securities that are rated at the time of purchase within the four highest grades assigned by a NRSRO, or unrated securities judged by the Adviser to be of comparable quality; –       securities of, or guaranteed by, the U.S. Government, its agencies or instrumentalities; –       commercial paper and other money market instruments that are rated A-1 or A-2 by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (“S&P”) or Prime-1 or Prime-2 by Moody’s Investors Service, Inc. (“Moody’s”) at the date of investment or, if unrated by Moody’s or S&P, judged by the Adviser to be of comparable quality; bank certificates of deposit; and bankers’ acceptances; and –       preferred stocks (including step down preferred securities) rated no lower than Baa by Moody’s or, if unrated by Moody’s, judged by the Adviser to be of comparable quality.	Under normal circumstances, the fund invests at least 80% of the value of its assets in “investment grade” fixed-income securities and related investments. The fund invests principally in corporate debt securities and related investments. The fund also may invest in U.S. Government securities and U.S. dollar denominated fixed-income securities of foreign issuers. Instead of investing directly in particular securities, the fund may gain exposure to a security, an issuer, an index or basket of securities, or a market by investing through the use of instruments such as derivatives, including credit default swaps, futures contracts, synthetic instruments and other instruments that are intended to provide similar economic exposure. The fund may use one or more types of such instruments to a substantial extent and even as its primary means of gaining investment exposures. Corporate debt securities are fixed income securities usually issued by businesses to finance their operations. Various types of business entities may issue these securities, including corporations, trusts, limited partnerships, limited liability companies and other types of non-governmental legal entities. Notes, bonds, debentures and commercial paper are the most common types of corporate debt securities, with the primary difference being their maturities and secured or unsecured status. Commercial paper has the shortest term and is usually unsecured. The broad category of corporate debt securities includes debt issued by U.S. or foreign companies of all kinds, including those with small-, mid- and large capitalizations. Corporate debt may carry variable or floating rates of interest.

C-1

Legg Mason Investment Grade Income Portfolio (Target Fund)

Legg Mason Partners Corporate Bond Fund (Acquiring Fund)

The remainder of the fund’s assets, not in excess of 20% of its net assets, may be invested in: –       debt securities of issuers that are rated at the time of purchase below Moody’s and S&P’s four highest grades, commonly known as “junk bonds,” but rated B or better by Moody’s or S&P, or if unrated by Moody’s or S&P, judged by the Adviser to be of comparable quality; and –       securities that may be convertible into or exchangeable for, or carry warrants to purchase, common stock or other equity interests. The fund may invest in U.S. dollar-denominated obligations of foreign governments, international agencies or supranational organizations, and fixed-income securities of non-governmental domestic or foreign issuers consistent with the credit quality guidelines described above. Securities purchased by the fund may be privately placed. The fund may also engage in reverse repurchase agreements and dollar rolls with respect to the securities in which it primarily invests. The fund may engage in a variety of transactions using “derivatives,” such as futures, options, warrants and swaps. For temporary defensive purposes or pending investment, the fund may invest without limit in cash, U.S. dollar denominated money market instruments and repurchase agreements. If the fund invests substantially in such instruments, it will not be pursuing its principal investment strategies and may not achieve its investment objective.

The fund may invest in securities of any maturity. The maturity of a fixed income security is a measure of the time remaining until the final payment on the security is due. The fund may invest in individual securities of any duration and does not attempt to maintain an effective duration within any particular range. Duration is a calculation that seeks to measure the price sensitivity of a fixed income security to changes in interest rates. It is expressed in years, like maturity, but it is a better indicator of price sensitivity than maturity because it takes into account the time value of cash flows generated over the life of the fixed income security. Future interest and principal payments are discounted to reflect their present value and then multiplied by the number of years until they will be received to produce a weighted average value expressed in years—this is the duration. “Effective” duration takes into account call features and sinking fund payments that may shorten the life of a fixed income security. Investment grade securities are securities rated by a nationally recognized statistical ratings organization (“NRSRO”) within one of the top four categories, or, if unrated, judged by the subadviser to be of comparable credit quality. Securities rated in the lowest category of investment grade are deemed to have speculative characteristics. Securities rated below investment grade are commonly referred to as “junk bonds.” These securities have a higher risk of default, tend to be less liquid and may be more difficult to value. Adverse economic conditions or other adverse circumstances are likely to weaken the capacity of issuers of these securities to make principal and interest payments. In the event that a security is rated by multiple NRSROs and receives different ratings, the fund will treat the security as being rated in the highest rating category received from an NRSRO. The fund may engage in a variety of transactions using derivatives, such as futures, options, swaps (including credit default swaps) and warrants and may purchase mortgage-related obligations and other derivative instruments. Derivatives are financial instruments whose value depends upon, or is derived from, the value of something else, such

C-2

Legg Mason Investment Grade Income Portfolio (Target Fund)

Legg Mason Partners Corporate Bond Fund (Acquiring Fund)

as one or more underlying investments, indexes or currencies. Derivatives may be used by the fund for any of the following purposes: •      As a hedging technique in an attempt to manage risk in the fund’s portfolio •      As a substitute for buying or selling securities •      As a cash flow management technique •      As a means of enhancing returns The fund from time to time may sell protection on debt securities by entering into credit default swaps. In these transactions, the fund is generally required to pay the par (or other agreed-upon) value of a referenced debt security to the counterparty in the event of a default on or downgrade of the debt security and/or a similar credit event. In return, the fund receives from the counterparty a periodic stream of payments over the term of the contract. If no default occurs, the fund keeps the stream of payments and has no payment obligations. As the seller, the fund would effectively add leverage to its portfolio because, in addition to its net assets, the fund would be subject to investment exposure on the par (or other agreed-upon) value it had undertaken to pay. Credit default swaps may also be structured based on an index or the debt of a basket of issuers, rather than a single issuer, and may be customized with respect to the default event that triggers purchase or other factors (for example, a particular number of defaults within a basket, or defaults by a particular combination of issuers within the basket, may trigger a payment obligation). Using derivatives, especially for non-hedging purposes, may involve greater risks to the fund than investing directly in securities, particularly as these instruments may be very complex and may not behave in the manner anticipated by the fund. Certain derivatives transactions may have a leveraging effect on the fund. Certain risks associated with the use of derivatives are discussed below. Risks are magnified to the extent that a large portion of the fund’s assets are committed to derivatives in general or are invested in just one or a few types of derivatives.

C-3

	Legg Mason Investment Grade Income Portfolio (Target Fund)	Legg Mason Partners Corporate Bond Fund (Acquiring Fund)
		When the fund enters into derivative transactions, it may be required to segregate assets, or enter into offsetting positions, in accordance with applicable regulations. Such segregation will not limit the fund’s exposure to loss, however, and the fund will have investment risk with respect to both the derivative itself and the assets that have been segregated to cover the fund’s derivative exposure. If such segregated assets represent a large portion of the fund’s portfolio, this may impede portfolio management or the fund’s ability to meet redemption requests or other current obligations. The fund’s subadviser may choose not to make use of derivatives for a variety of reasons. Should the subadviser choose to use derivatives, the fund will, in determining compliance with any percentage limitation or requirement regarding the use or investment of fund assets, take into account derivative positions that are intended to reduce or create exposure to the applicable category of investments, even if they are not effective in achieving the desired result.
Selection Process		The portfolio managers emphasize individual bond selection while diversifying the fund’s investments across a range of issues, industries and maturity dates. When selecting securities for investment, the portfolio managers: •      Use fundamental credit analysis to estimate the relative value and attractiveness of various companies and debt security issues •      Identify undervalued corporate debt securities issues and attempt to avoid issues that may be subject to credit downgrades •      Determine sector and maturity weightings based on intermediate and long-term assessments of the economic environment and interest rate outlook The portfolio managers monitor the fund’s portfolio and make ongoing adjustments based on the relative values or maturities of individual corporate debt securities or changes in the creditworthiness or overall investment merits of an issue.
Investment Manager/ Subadviser	Legg Mason Fund Adviser, Inc. (“LMFA”)/Western Asset	LMPFA/Western Asset
Portfolio Managers	S. Kenneth Leech, Stephen A. Walsh and Jeffrey D. Van Schaick	S. Kenneth Leech, Stephen A. Walsh, and Jeffrey D. Van Schaick, Carl L. Eichstaedt, Edward A. Moody and Mark Lindbloom

C-4

Legg Mason Limited Duration Bond Portfolio and Legg Mason Partners Short-Term Bond Fund

	Legg Mason Limited Duration Bond Portfolio (Target Fund)	Legg Mason Partners Short-Term Bond Fund (Acquiring Fund)
Investment Objective(s)	Maximize total return, consistent with prudent investment management by investing to obtain the specified average duration.	The fund seeks current income, preservation of capital and liquidity.
Principal Investment Policies and Strategies	The fund invests in a portfolio of U.S. dollar-denominated debt and fixed-income securities. Under normal market conditions, the fund will invest at least 80% of its net assets plus any borrowing for investment purposes in debt and fixed-income securities. The fund currently anticipates that all securities it purchases will be investment grade, i.e., rated at the time of investment BBB/Baa or higher by at least one nationally recognized statistical rating organization (“NRSRO”) or, if not rated by any NRSRO, determined by the Adviser to be of comparable quality. The fund may invest in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities; corporate obligations, including bonds and other debt securities, preferred stock, convertible securities, zero coupon securities and pay-in-kind securities; inflation-indexed securities; mortgage- and other asset-backed securities; U.S. dollar-denominated obligations of non-U.S. issuers, including obligations of foreign governments, international agencies or supranational organizations; U.S. dollar-denominated fixed-income securities of non-governmental domestic or foreign issuers; municipal obligations; variable and floating rate debt securities; commercial paper and other short-term investments; certificates of deposit, time deposits and bankers’ acceptances; loan participations and assignments; structured notes; and repurchase agreements. The fund may invest up to 25% of its total assets in the securities of foreign issuers. The fund may also invest up to 20% of its net assets in non-debt securities, including common stock and warrants received as the result of an exchange or tender of fixed-income securities. The fund may invest in derivatives such as futures, options and swaps for both hedging and non-hedging purposes, including for purposes of enhancing returns; buy or sell securities on a forward commitment basis; and engage in reverse repurchase agreements.	Under normal market conditions, the fund will invest at least 80% of its assets in investment grade fixed-income securities and related investments. Securities in which the fund invests include corporate debt securities, bank obligations, mortgage- and asset-backed securities and securities issued by the U.S. government and its agencies and instrumentalities. The fund may also invest in U.S. dollar denominated fixed-income securities of foreign issuers. Instead of investing directly in particular securities, the fund may gain exposure to a security, an issuer, an index or basket of securities, or a market by investing through the use of instruments such as derivatives, including credit default swaps, futures contracts, synthetic instruments and other instruments that are intended to provide similar economic exposure. The fund may use one or more types of such instruments to a substantial extent and even as its primary means of gaining investment exposures. The fund may invest in securities of any maturity. The maturity of a fixed income security is a measure of the time remaining until the final payment on the security is due. The fund normally maintains an effective duration of not more than three years. If the fund’s effective duration falls outside of this range, the fund will take action to bring it within its expected range within a reasonable period of time. Duration is a calculation that seeks to measure the price sensitivity of a fixed income security to changes in interest rates. It is expressed in years, like maturity, but it is a better indicator of price sensitivity than maturity because it takes into account the time value of cash flows generated over the life of the fixed income security. Future interest and principal payments are discounted to reflect their present value and then multiplied by the number of years until they will be received to produce a weighted average value expressed in years—this is the duration. “Effective” duration takes into account call features and sinking fund payments that may shorten the life of a fixed income security.

C-5

Legg Mason Limited Duration Bond Portfolio (Target Fund)

Legg Mason Partners Short-Term Bond Fund (Acquiring Fund)

The fund may buy and sell investments relatively often, which involves higher brokerage commissions and other expenses, and may increase taxes payable by shareholders. “Duration” refers to the range within which the average modified duration of the fund is expected to fluctuate. Modified duration measures the expected sensitivity of a security’s market price to changes in interest rates, taking into account the effects of the security’s structural complexities. The average modified duration of the fund will range within 25% of the duration of the Merrill Lynch 1-3 Year Treasury Index. Over the past three years, the duration of this index has ranged between 1.49 and 1.79 years. There is, of course, no assurance that it will remain within those limits in the future. The Adviser may vary the duration of the fund in response to its expectation regarding interest rates. If the Adviser expects interest rates to rise, which would negatively impact the value of the fund’s fixed-income investments, the Adviser may decrease the duration of the fund. Conversely, if the Adviser expects interest rates to fall, the Adviser may increase the duration of the fund. For temporary defensive purposes or pending investment, the fund may invest without limit in cash, U.S. dollar-denominated money market instruments and repurchase agreements. If the fund invests substantially in such instruments, it will not be pursuing its principal investment strategies and may not achieve its investment objective.

Investment grade securities are securities rated by a nationally recognized statistical ratings organization (“NRSRO”) within one of the top four categories, or, if unrated, judged by the subadviser to be of comparable credit quality. Securities rated in the lowest category of investment grade are deemed to have speculative characteristics. Securities rated below investment grade are commonly referred to as “junk bonds.” These securities have a higher risk of default, tend to be less liquid and may be more difficult to value. Adverse economic conditions or other adverse circumstances are likely to weaken the capacity of issuers of these securities to make principal and interest payments In the event that a security is rated by multiple NRSROs and receives different ratings, the fund will treat the security as being rated in the highest rating category received from an NRSRO. The fund may engage in a variety of transactions using derivatives, such as futures, options, swaps (including credit default swaps) and warrants and may purchase mortgage-related obligations and other derivative instruments. Derivatives are financial instruments whose value depends upon, or is derived from, the value of something else, such as one or more underlying investments, indexes or currencies. Derivatives may be used by the fund for any of the following purposes: •      As a hedging technique in an attempt to manage risk in the fund’s portfolio •      As a substitute for buying or selling securities •      As a cash flow management technique •      As a means of enhancing returns The fund from time to time may sell protection on debt securities by entering into credit default swaps. In these transactions, the fund is generally required to pay the par (or other agreed-upon) value of a referenced debt security to the counterparty in the event of a default on or downgrade of the debt security and/or a similar credit event. In return, the fund receives from the counterparty a periodic stream of payments over the term of the contract. If no default occurs, the fund keeps the stream of payments and has no payment

C-6

Legg Mason Limited Duration Bond Portfolio (Target Fund)

Legg Mason Partners Short-Term Bond Fund (Acquiring Fund)

obligations. As the seller, the fund would effectively add leverage to its portfolio because, in addition to its net assets, the fund would be subject to investment exposure on the par (or other agreed-upon) value it had undertaken to pay. Credit default swaps may also be structured based on an index or the debt of a basket of issuers, rather than a single issuer, and may be customized with respect to the default event that triggers purchase or other factors (for example, a particular number of defaults within a basket, or defaults by a particular combination of issuers within the basket, may trigger a payment obligation). Using derivatives, especially for non-hedging purposes, may involve greater risks to the fund than investing directly in securities, particularly as these instruments may be very complex and may not behave in the manner anticipated by the fund. Certain derivatives transactions may have a leveraging effect on the fund. Certain risks associated with the use of derivatives are discussed below. Risks are magnified to the extent that a large portion of the fund’s assets are committed to derivatives in general or are invested in just one or a few types of derivatives. When the fund enters into derivative transactions, it may be required to segregate assets, or enter into offsetting positions, in accordance with applicable regulations. Such segregation will not limit the fund’s exposure to loss, however, and the fund will have investment risk with respect to both the derivative itself and the assets that have been segregated to cover the fund’s derivative exposure. If such segregated assets represent a large portion of the fund’s portfolio, this may impede portfolio management or the fund’s ability to meet redemption requests or other current obligations. The fund’s subadviser may choose not to make use of derivatives for a variety of reasons. Should the subadviser choose to use derivatives, the fund will, in determining compliance with any percentage limitation or requirement regarding the use or investment of fund assets, take into account derivative positions that are intended to reduce or create exposure to the applicable category of investments, even if they are not effective in achieving the desired result.

C-7

	Legg Mason Limited Duration Bond Portfolio (Target Fund)	Legg Mason Partners Short-Term Bond Fund (Acquiring Fund)
Selection Process		The portfolio managers focus on minimizing fluctuations in the fund’s net asset value by identifying short-term fixed-income securities that the portfolio managers believe are undervalued and that offer better protection of capital given current interest rate and market conditions. In selecting individual securities for investment, the portfolio managers: •      Monitor the spreads between U.S. Treasury and government agency or instrumentality issuers and purchase agency and instrumentality issues that they believe will provide a yield advantage •      Determine sector and maturity weightings based on assessments of the economic environment and relative value factors based on interest rate outlook •      Measure the potential impact of supply/demand imbalances, yield curve shifts and changing prepayment patterns to identify individual securities that balance potential return and risk •      Use research to uncover inefficient sectors of the government securities and mortgage markets and adjust portfolio positions to take advantage of new information
Investment Manager/Subadviser	LMFA/Western Asset	LMPFA/Western Asset
Portfolio Managers	Kenneth Leech, Stephen A. Walsh and James J. Flick	S. Kenneth Leech, Stephen A. Walsh, James J. Flick, Andrea A. Mack and Michael C. Buchanan

C-8

APPENDIX D1

Financial Highlights of Legg Mason Partners Corporate Bond Fund

For a share of each class of beneficial interest outstanding throughout each year ended December 31:

Class A Shares1	2008			2007			20062			20052			20042
Net Asset Value, Beginning of Year	$	11.74		$	12.16		$	12.42		$	12.88		$	12.92
Income (Loss) From Operations:
Net investment income		0.67			0.58			0.57			0.54			0.56
Net realized and unrealized gain (loss)		(3.29	)		(0.38	)		(0.22	)		(0.31	)		0.25
Total Income (Loss) From Operations		(2.62	)		0.20			0.35			0.23			0.81
Less Distributions From:
Net investment income		(0.69	)		(0.62	)		(0.61	)		(0.58	)		(0.62	)
Net realized gains		—			—			—			(0.11	)		(0.23	)
Total Distributions		(0.69	)		(0.62	)		(0.61	)		(0.69	)		(0.85	)
Net Asset Value, End of Year	$	8.43		$	11.74		$	12.16		$	12.42		$	12.88
Total Return3		(23.11	)%		1.63	%		3.03	%		1.82	%		6.47	%
Net Assets, End of Year (millions)	$	255		$	399		$	435		$	461		$	438
Ratios to Average Net Assets:
Gross expenses		1.17	%		1.10	%		1.08	%4		1.05	%		1.06	%
Net expenses		1.17	5		1.10	5		1.07	4,6		1.05			1.05	6
Net investment income		6.43			4.87			4.78			4.24			4.37
Portfolio Turnover Rate		25	%		53	%		94	%		40	%		43	%

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

² Represents a share of capital stock outstanding prior to April 16, 2007.

³ Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

⁴ Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would both have been 1.06%.

⁵ The impact to the expense ratio was less than 0.01% as a result of fees paid indirectly.

⁶ Reflects fee waivers and/or expense reimbursements.

D1-1

For a share of each class of beneficial interest outstanding throughout each year ended December 31:

Class B Shares1	2008			2007			20062			20052			20042
Net Asset Value, Beginning of Year	$	11.71		$	12.13		$	12.39		$	12.85		$	12.89
Income (Loss) From Operations:
Net investment income		0.60			0.50			0.50			0.47			0.50
Net realized and unrealized gain (loss)		(3.28	)		(0.39	)		(0.22	)		(0.31	)		0.24
Total Income (Loss) From Operations		(2.68	)		0.11			0.28			0.16			0.74
Less Distributions From:
Net investment income		(0.62	)		(0.53	)		(0.54	)		(0.51	)		(0.55	)
Net realized gains		—			—			—			(0.11	)		(0.23	)
Total Distributions		(0.62	)		(0.53	)		(0.54	)		(0.62	)		(0.78	)
Net Asset Value, End of Year	$	8.41		$	11.71		$	12.13		$	12.39		$	12.85
Total Return3		(23.60	)%		0.91	%		2.36	%		1.27	%		5.94	%
Net Assets, End of Year (millions)	$	56		$	97		$	125		$	161		$	182
Ratios to Average Net Assets:
Gross expenses		1.84	%		1.80	%		1.72	%4		1.59	%		1.56	%
Net expenses		1.84	5		1.80	5		1.72	4,6		1.59			1.55	6
Net investment income		5.76			4.16			4.13			3.70			3.87
Portfolio Turnover Rate		25	%		53	%		94	%		40	%		43	%

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

² Represents a share of capital stock outstanding prior to April 16, 2007.

³ Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

⁴ Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would have been 1.71% and 1.70%, respectively.

⁵ The impact to the expense ratio was less than 0.01% as a result of fees paid indirectly.

⁶ Reflects fee waivers and/or expense reimbursements.

D1-2

For a share of each class of beneficial interest outstanding throughout each year ended December 31:

Class C Shares1	2008			2007			20062			20052			20042
Net Asset Value, Beginning of Year	$	11.67		$	12.09		$	12.35		$	12.81		$	12.87
Income (Loss) From Operations:
Net investment income		0.59			0.50			0.49			0.46			0.49
Net realized and unrealized gain (loss)		(3.27	)		(0.39	)		(0.22	)		(0.30	)		0.24
Total Income (Loss) From Operations		(2.68	)		0.11			0.27			0.16			0.73
Less Distributions From:
Net investment income		(0.61	)		(0.53	)		(0.53	)		(0.51	)		(0.56	)
Net realized gains		—			—			—			(0.11	)		(0.23	)
Total Distributions		(0.61	)		(0.53	)		(0.53	)		(0.62	)		(0.79	)
Net Asset Value, End of Year	$	8.38		$	11.67		$	12.09		$	12.35		$	12.81
Total Return3		(23.67	)%		0.91	%		2.34	%		1.24	%		5.86	%
Net Assets, End of Year (millions)	$	45		$	68		$	71		$	72		$	60
Ratios to Average Net Assets:
Gross expenses		1.89	%		1.80	%		1.76	%4		1.69	%		1.58	%
Net expenses		1.89	5		1.80	5		1.73	4,6		1.69			1.57	6
Net investment income		5.73			4.18			4.12			3.61			3.85
Portfolio Turnover Rate		25	%		53	%		94	%		40	%		43	%

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

² Represents a share of capital stock outstanding prior to April 16, 2007.

³ Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

⁴ Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would have been 1.74% and 1.72%, respectively.

⁵ The impact to the expense ratio was less than 0.01% as a result of fees paid indirectly.

⁶ Reflects fee waivers and/or expense reimbursements.

D1-3

For a share of each class of beneficial interest outstanding throughout each year ended December 31:

Class I Shares1	2008			2007			20062			20052			20042
Net Asset Value, Beginning of Year	$	11.72		$	12.16		$	12.41		$	12.87		$	12.91
Income (Loss) From Operations:
Net investment income		0.68			0.63			0.63			0.59			0.62
Net realized and unrealized gain (loss)		(3.24	)		(0.41	)		(0.22	)		(0.31	)		0.24
Total Income (Loss) From Operations		(2.56	)		0.22			0.41			0.28			0.86
Less Distributions From:
Net investment income		(0.74	)		(0.66	)		(0.66	)		(0.63	)		(0.67	)
Net realized gains		—			—			—			(0.11	)		(0.23	)
Total Distributions		(0.74	)		(0.66	)		(0.66	)		(0.74	)		(0.90	)
Net Asset Value, End of Year	$	8.42		$	11.72		$	12.16		$	12.41		$	12.87
Total Return3		(22.72	)%		1.80	%		3.54	%		2.23	%		6.87	%
Net Assets, End of Year (millions)	$	2		$	0	4	$	158		$	286		$	319
Ratios to Average Net Assets:
Gross expenses		0.75	%		0.66	%		0.65	%5		0.65	%		0.65	%
Net expenses		0.75	6		0.66	6		0.65	5,7		0.65			0.64	7
Net investment income		6.80			5.13			5.22			4.63			4.79
Portfolio Turnover Rate		25	%		53	%		94	%		40	%		43	%

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

² Represents a share of capital stock outstanding prior to April 16, 2007.

³ Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

⁴ Amount represents less than $0.5 million.

⁵ Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would both have been 0.64%.

⁶ The impact to the expense ratio was less than 0.01% as a result of fees paid indirectly.

⁷ Reflects fee waivers and/or expense reimbursements.

D1-4

APPENDIX D2

Financial Highlights of Legg Mason Partners Short-Term Bond Fund

For a share of each class of beneficial interest outstanding throughout each year ended December 31:

Class A Shares1	2008			2007			20062			20052			20042
Net Asset Value, Beginning of Year	$	3.98		$	4.13		$	4.14		$	4.20		$	4.25
Income (Loss) From Operations:
Net investment income		0.15			0.19			0.14			0.11			0.10
Net realized and unrealized gain (loss)		(0.63	)		(0.15	)		0.02			(0.05	)		(0.04	)
Total Income (Loss) From Operations		(0.48	)		0.04			0.16			0.06			0.06
Less Distributions From:
Net investment income		(0.16	)		(0.19	)		(0.17	)		(0.12	)		(0.11	)
Total Distributions		(0.16	)		(0.19	)		(0.17	)		(0.12	)		(0.11	)
Net Asset Value, End of Year	$	3.34		$	3.98		$	4.13		$	4.14		$	4.20
Total Return3		(12.39	)%		1.00	%		3.98	%		1.44	%		1.45	%
Net Assets, End of Year (millions)	$	39		$	58		$	70		$	83		$	91
Ratios to Average Net Assets:
Gross expenses		1.02	%		0.90	%		0.86	%4		0.88	%		0.88	%
Net expenses		1.01	5,6		0.90	5		0.84	4,6		0.88			0.88	6
Net investment income		4.09			4.54			3.52			2.72			2.32
Portfolio Turnover Rate		46	%7		81	%7		124	%7		49	%		34	%7

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

² Represents a share of capital stock outstanding prior to April 16, 2007.

³ Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

⁴ Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would have been 0.85% and 0.83%, respectively.

⁵ The impact to the expense ratio was less than 0.01% as a result of fees paid indirectly.

⁶ Reflects fee waivers and/or expense reimbursements.

⁷ Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 291%, 372%, 270% and 51% for the years ended December 31, 2008, 2007, 2006 and 2004, respectively.

D2-1

For a share of each class of beneficial interest outstanding throughout each year ended December 31:

Class B Shares1	2008			2007			20062			20052			20042
Net Asset Value, Beginning of Year	$	3.98		$	4.13		$	4.14		$	4.19		$	4.25
Income (Loss) From Operations:
Net investment income		0.13			0.16			0.12			0.09			0.08
Net realized and unrealized gain (loss)		(0.63	)		(0.14	)		0.02			(0.04	)		(0.05	)
Total Income (Loss) From Operations		(0.50	)		0.02			0.14			0.05			0.03
Less Distributions From:
Net investment income		(0.14	)		(0.17	)		(0.15	)		(0.10	)		(0.09	)
Total Distributions		(0.14	)		(0.17	)		(0.15	)		(0.10	)		(0.09	)
Net Asset Value, End of Year	$	3.34		$	3.98		$	4.13		$	4.14		$	4.19
Total Return3		(12.90	)%		0.45	%		3.39	%		1.16	%		0.71	%
Net Assets, End of Year (millions)	$	1		$	2		$	3		$	4		$	6
Ratios to Average Net Assets:
Gross expenses		1.58	%		1.45	%		1.42	%4		1.40	%		1.39	%
Net expenses		1.58	5		1.45	5		1.41	4,6		1.40			1.38	6
Net investment income		3.53			3.97			2.95			2.19			1.80
Portfolio Turnover Rate		46	%7		81	%7		124	%7		49	%		34	%7

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

² Represents a share of capital stock outstanding prior to April 16, 2007.

³ Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

⁴ Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would both have been 1.41%.

⁵ The impact to the expense ratio was less than 0.01% as a result of fees paid indirectly.

⁶ Reflects fee waivers and/or expense reimbursements.

⁷ Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 291%, 372%, 270% and 51% for the years ended December 31, 2008, 2007, 2006 and 2004, respectively.

D2-2

For a share of each class of beneficial interest outstanding throughout each year ended December 31:

Class C Shares1	2008			2007			20062			20052			20042
Net Asset Value, Beginning of Year	$	3.99		$	4.14		$	4.15		$	4.20		$	4.26
Income (Loss) From Operations:
Net investment income		0.13			0.16			0.12			0.09			0.08
Net realized and unrealized gain (loss)		(0.64	)		(0.14	)		0.02			(0.04	)		(0.05	)
Total Income (Loss) From Operations		(0.51	)		0.02			0.14			0.05			0.03
Less Distributions From:
Net investment income		(0.14	)		(0.17	)		(0.15	)		(0.10	)		(0.09	)
Total Distributions		(0.14	)		(0.17	)		(0.15	)		(0.10	)		(0.09	)
Net Asset Value, End of Year	$	3.34		$	3.99		$	4.14		$	4.15		$	4.20
Total Return3		(13.15	)%		0.34	%		3.39	%		1.14	%		0.67	%
Net Assets, End of Year (millions)	$	5		$	7		$	9		$	13		$	24
Ratios to Average Net Assets:
Gross expenses		1.63	%		1.56	%		1.46	%4		1.41	%		1.41	%
Net expenses		1.63	5		1.56	5		1.42	4,6		1.41			1.41	6
Net investment income		3.47			3.86			2.92			2.15			1.77
Portfolio Turnover Rate		46	%7		81	%7		124	%7		49	%		34	%7

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

² Represents a share of capital stock outstanding prior to April 16, 2007.

³ Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

⁴ Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would have been 1.45% and 1.41%, respectively.

⁵ The impact to the expense ratio was less than 0.01% as a result of fees paid indirectly.

⁶ Reflects fee waivers and/or expense reimbursements.

⁷ Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 291%, 372%, 270% and 51% for the years ended December 31, 2008, 2007, 2006 and 2004, respectively.

D2-3

For a share of each class of beneficial interest outstanding throughout each year ended December 31:

Class I Shares1	2008			2007			20062			20052			20042
Net Asset Value, Beginning of Year	$	3.99		$	4.13		$	4.14		$	4.20		$	4.26
Income (Loss) From Operations:
Net investment income		0.17			0.20			0.16			0.13			0.11
Net realized and unrealized gain (loss)		(0.64	)		(0.13	)		0.02			(0.05	)		(0.04	)
Total Income (Loss) From Operations		(0.47	)		0.07			0.18			0.08			0.07
Less Distributions From:
Net investment income		(0.18	)		(0.21	)		(0.19	)		(0.14	)		(0.13	)
Total Distributions		(0.18	)		(0.21	)		(0.19	)		(0.14	)		(0.13	)
Net Asset Value, End of Year	$	3.34		$	3.99		$	4.13		$	4.14		$	4.20
Total Return3		(12.16	)%		1.63	%		4.34	%		1.83	%		1.61	%
Net Assets, End of Year (millions)	$	182		$	212		$	302		$	256		$	251
Ratios to Average Net Assets:
Gross expenses		0.50	%		0.52	%		0.50	%4		0.50	%		0.49	%
Net expenses		0.50	5		0.52	5		0.49	4,6		0.50			0.49	6
Net investment income		4.60			4.89			3.87			3.09			2.69
Portfolio Turnover Rate		46	%7		81	%7		124	%7		49	%		34	%7

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

² Represents a share of capital stock outstanding prior to April 16, 2007.

³ Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

⁴ Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would have been 0.49% and 0.48%, respectively.

⁵ The impact to the expense ratio was less than 0.01% as a result of fees paid indirectly.

⁶ Reflects fee waivers and/or expense reimbursements.

⁷ Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 291%, 372%, 270% and 51% for the years ended December 31, 2008, 2007, 2006 and 2004, respectively.

D2-4

APPENDIX E

Historical Performance for Each Fund

Legg Mason Investment Grade Income Portfolio

The information below provides an indication of the risks of investing in each fund by showing changes in its performance from year to year and by showing how each fund’s average annual total returns for various periods compare with those of a broad measure of market performance. Annual returns assume reinvestment of all distributions, if any. Historical performance of a fund, whether before or after taxes, does not necessarily indicate what will happen in the future. A fund’s yield is its net income over a recent 30-day period, expressed as an annualized rate of return. For a fund’s current yield, call Legg Mason Funds Investor Services, toll-free 1-800-822-5544.

Investment Grade—Primary Class Shares

Year-by-year total return as of December 31 of each year (before taxes) (%):

During the past ten calendar years:

	Quarter Ended	Total Return
Best quarter:	June 30, 2003	6.12%
Worst quarter:	September 30, 2008	(14.32)%

Average Annual Total Returns

The table below shows the fund’s average annual total returns before taxes for all classes. In addition, returns after taxes are shown for Primary Class shares to illustrate the effect of federal taxes on fund returns. The table also shows returns before taxes for the Barclays Capital U.S. Credit Bond Index, which includes all publicly issued, fixed rate, non-convertible, investment grade, and domestic corporate debt. It also includes Yankee bonds, which are dollar-denominated, SEC-registered public, non-convertible debt issued or guaranteed by foreign sovereign governments, municipalities, governmental agencies, and international agencies.

For the periods ended December 31, 2008:

Investment Grade	1 Year		5 Years		10 Years
Primary Class Shares—
Return Before Taxes	(26.19	)%	(2.92	)%	1.86	%
Return After Taxes on Distributions (a)	(27.96	)%	(4.81	)%	(0.27	)%
Return After Taxes on Distributions and Sale of Fund Shares (a)	(16.80	)%	(3.27	)%	0.46	%
Institutional Class Shares—
Return Before Taxes	(25.71	)%	(2.41	)%	2.40	%
Barclays Capital U.S. Credit Bond Index (reflects no deduction for fees expenses or taxes)	(3.08	)%	2.65	%	4.85	%

E-1

During periods of fund losses, the return after taxes on distributions and sale of fund shares may exceed the fund’s returns after taxes on distributions because the loss generates a tax benefit that is factored into the result.

(a) After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown. After-tax returns the fund’s Institutional Class will differ from those shown above for Primary Class shares. The after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements such as 401(k) plans or IRAs.

E-2

Legg Mason Limited Duration Bond Portfolio

The information below provides an indication of the risks of investing in each fund by showing changes in its performance from year to year and by showing how each fund’s average annual total returns for various periods compare with those of a broad measure of market performance. Annual returns assume reinvestment of all distributions, if any. Historical performance of a fund, whether before or after taxes, does not necessarily indicate what will happen in the future. A fund’s yield is its net income over a recent 30-day period, expressed as an annualized rate of return. For a fund’s current yield, call Legg Mason Funds Investor Services, toll-free 1-800-822-5544.

Limited Duration—Primary Class Shares

Year-by-year total return as of December 31 of each year (before taxes)(%): (a)

During the past ten calendar years: (a)

	Quarter Ended	Total Return
Best quarter:	September 30, 2001	4.12%
Worst quarter:	December 31, 2008	(8.65)%

Average Annual Total Returns (a)

The table below shows the fund’s average annual total returns before taxes for all classes. In addition, returns after taxes are shown for Primary Class shares to illustrate the effect of federal taxes on fund returns. The table also shows returns before taxes for the Merrill Lynch 1-3 Year Treasury Index, a total rate of return index based on daily closing prices and consisting of Treasury bills with a maturity of 1 to 3 years.

E-3

For the periods ended December 31, 2008:

Limited Duration	1 Year		5 Years		10 Years
Primary Class Shares—
Return Before Taxes	(16.52	)%	(1.58	)%	1.54	%
Return After Taxes on Distributions (b)	(17.84	)%	(2.96	)%	(0.07	)%
Return After Taxes on Distributions and Sale of Fund Shares (b)	(10.64	)%	(2.04	)%	0.40	%
Institutional Class Shares—
Return Before Taxes	(16.09	)%	(1.10	)%	2.07	%
Merrill Lynch 1-3 Year Treasury Index (reflects no deduction for fees, expenses or taxes)	6.61	%	4.06	%	4.71	%

During periods of fund losses, the return after taxes on distributions and sale of fund shares may exceed the fund’s returns after taxes on distributions because the loss generates a tax benefit that is factored into the result.

(a) Prior to August 31, 2004, the fund was known as Legg Mason U.S. Government Intermediate-Term Portfolio and followed a policy of investing at least 80% of its assets in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities, or repurchase agreements secured by such investments, with a dollar-weighted average portfolio maturity between three and ten years. The fund’s performance prior to such change might have been better or worse had the fund been managed in accordance with its current objective, policies and strategies.

(b) After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown. After-tax returns for the fund’s Institutional Class shares will differ from those shown above for Primary Class shares. The after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts (“IRAs”).

E-4

Legg Mason Partners Corporate Bond Fund

The bar chart and table below provide an indication of the risks of investing in the fund by showing the fund’s performance over time. The bar chart and the information following show the total return of the fund’s Class B shares for the calendar years indicated and for the best and worst calendar quarters during the years covered, but do not reflect the impact of sales charges (loads). If they did, the returns would be lower than those shown.

The table shows the average annual total returns of each class of the fund that has been in operation for at least one full calendar year and also compares the fund’s performance with the average annual total returns of a broad-based securities market index or other benchmark. Unlike the bar chart, the table reflects the impact of the maximum sales charge (load) applicable to the respective classes, and, where indicated, the performance for Class B shares reflects the impact of taxes paid on distributions and the redemption of shares at the end of the period. The performance of a share class with higher expenses than Class B expenses would have been lower than that shown, and the performance of a share class with expenses lower than Class B expenses would have been higher than that shown.

The fund’s past performance, before and after taxes, is not necessarily an indication of how the fund will perform in the future.

TOTAL RETURN FOR CLASS B SHARES¹

Highest and lowest quarter returns (for the periods shown in the bar chart):

Highest: 7.79% in 3rd quarter 2002; Lowest: (14.49)% in 3rd quarter 2008.

E-5

Average Annual Total Returns (for periods ended December 31, 2008)¹

	1 Year		5 Years		10 Years		Inception Date
Class B
Return before taxes	(26.84	)%	(3.42	)%	0.82	%	01/04/82
Return after taxes on distributions2	(28.47	)%	(5.09	)%	(1.05	)%
Return after taxes on distributions and sale of fund shares2	(17.28	)%	(3.61	)%	(0.29	)%
Other Classes (Return before taxes only)
Class A3	(26.37	)%	(3.52	)%	0.94	%	11/06/92
Class C	(24.39	)%	(3.32	)%	0.83	%	02/26/93
Class I	(22.72	)%	(2.31	)%	1.76	%	02/07/96
Barclays Capital U.S. Credit Index4,6	(3.08	)%	2.65	%	4.85	%	N/A
Lipper Corporate Debt Funds A-Rated Average5,6	(6.27	)%	1.47	%	3.65	%	N/A

¹ As part of a number of initiatives launched in 2006 to restructure and streamline the Legg Mason Partners fund complex, the fund assumed the assets of a predecessor fund effective April 16, 2007. The performance information shown includes that of the fund’s predecessor. Prior to September 2, 2008, the fund was named Legg Mason Partners Investment Grade Bond Fund.

² After-tax returns are calculated using the highest historical individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend upon an individual investor’s tax situation and may differ from those shown, and the after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In some cases the return after taxes may exceed the return before taxes due to an assumed tax benefit from any losses on a sale of fund shares at the end of the measurement period. After-tax returns for other share classes will vary.

³ On November 20, 2006, the maximum initial sales charge on Class A shares was reduced for sales made on and after that date. The average annual returns for Class A shares in the table have been calculated as if the reduced maximum initial sales charge had been in effect for the entire period.

⁴ The Barclays Capital U.S. Credit Index is a broad-based bond index composed of government and corporate issues, rated investment grade (rated Baa3/BBB- or higher), and having at least one year to maturity.

⁵ The Lipper Corporate Debt Funds A-Rated Average is composed of mutual funds investing in corporate bonds and reflects deductions for fees and expenses.

⁶ It is not possible to invest directly in an index or an average. An index does not reflect deductions for fees, expenses or taxes. An average reflects fees and expenses but no deductions for sales charges or taxes.

E-6

Legg Mason Partners Short-Term Bond Fund

The bar chart and table below provide an indication of the risks of investing in the fund by showing the fund’s performance over time. The bar chart and the information following show the total return of the fund’s Class A shares for the calendar years indicated and for the best and worst calendar quarters during the years covered, but do not reflect the impact of sales charges (loads). If they did, the returns would be lower than those shown.

The table shows the average annual total returns of each class of the fund that has been in operation for at least one full calendar year and also compares the fund’s performance with the average annual total returns of a broad-based securities market index or other benchmark. Unlike the bar chart, the table reflects the impact of the maximum sales charge (load) applicable to the respective classes, and, where indicated, the performance for Class A shares reflects the impact of taxes paid on distributions and the redemption of shares at the end of the period. The performance of a share class with higher expenses than Class A expenses would have been lower than that shown, and the performance of a share class with expenses lower than Class A expenses would have been higher than that shown.

The fund’s past performance, before and after taxes, is not necessarily an indication of how the fund will perform in the future.

TOTAL RETURN FOR CLASS A SHARES¹

Highest and lowest quarter returns (for the periods shown in the bar chart):

Highest: 3.16% in 3rd quarter 2001; Lowest: (5.37)% in 3rd quarter 2008.

E-7

Average Annual Total Returns (for periods ended December 31, 2008)¹

	1 Year		5 Years		10 Years		Since Inception		Inception Date
Class A2
Return before taxes	(14.33	)%	(1.54	)%	1.62	%	n/a		n/a
Return after taxes on distributions3	(15.61	)%	(2.82	)%	0.14	%	n/a		n/a
Return after taxes on distributions and sale of fund shares3	(9.25	)%	(1.97	)%	0.53	%	n/a		n/a
Other Classes (Return before taxes only)
Class B	(17.09	)%	(1.79	)%	n/a		(1.02	)%	1/13/03
Class C	(13.15	)%	(1.71	)%	n/a		(0.69	)%	8/5/02
Class I	(12.16	)%	(0.74	)%	2.29	%	n/a		n/a
Citigroup Treasury/Government Sponsored/Credit 1-3 Year Index4	5.07	%	3.85	%	4.85	%	n/a		n/a

¹ As part of a number of initiatives launched in 2006 to restructure and streamline the Legg Mason Partners fund complex, the fund assumed the assets of a predecessor fund effective April 16, 2007. The performance information shown includes that of the fund’s predecessor. Prior to September 2, 2008, the fund was named Legg Mason Partners Short-Term Investment Grade Bond Fund.

² On November 20, 2006, the maximum initial sales charge on Class A shares was increased for sales made on and after that date. The average annual returns for Class A shares in the table have been calculated as if the increased maximum initial sales charge had been in effect for the entire period.

³ After-tax returns are calculated using the highest historical individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend upon an individual investor’s tax situation and may differ from those shown, and the after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In some cases the return after taxes may exceed the return before taxes due to an assumed tax benefit from any losses on a sale of fund shares at the end of the measurement period. After-tax returns for other share classes will vary.

⁴ The Citigroup Treasury/Government Sponsored/Credit 1-3 Year Index and the Citigroup Treasury/Government Sponsored/Credit 1-5 Year Index are broad-based indexes of short-term U.S. Treasury and corporate debt securities. An index does not reflect deductions for fees, expenses or taxes. It is not possible to invest directly in an index.

E-8

APPENDIX F

Similarities and Differences in the Forms of Organization of the Acquired Funds and the Acquiring Funds

DISCUSSION OF MARYLAND CORPORATIONS AND MARYLAND TRUSTS

In General

Each Acquired Fund is organized as a series of a Maryland corporation (the “Corporation”). A Maryland corporation is governed both by Maryland corporate law and its charter and Bylaws. The Maryland General Corporation Law (the “MGCL”) prescribes many aspects of corporate governance.

Each Acquiring Fund is organized as a series of a Maryland business trust (the “Trust”). A Maryland business trust is an unincorporated business association that is established under and governed by Maryland law. Maryland law provides a statutory framework for the powers and duties and rights and obligations of the trustees and shareholders of the business trust, while the more specific powers, duties, rights and obligations of the trustees and the shareholders are determined by the trustees and set forth in the trust’s declaration of trust.

The Declaration of Trust (the “Declaration”) for the Trust provides flexibility to the trustees in the conduct of the Trust’s business and in the governance of the Trust and broad authority consistent with Maryland law. Many of the provisions of the Declaration are designed to permit the Trust to operate efficiently and in a cost effective manner.

The Acquired Funds

The Acquired Funds are governed by the MGCL and the charter and Bylaws of the Corporation. Some of the key provisions of the MGCL, the charter and Bylaws are summarized below. The following summary of the MGCL and the charter and Bylaws of the Corporation is qualified in its entirety by reference to the MGCL and the charters and Bylaws of the Corporation.

Shareholder Voting

Under the MGCL, a Maryland corporation generally cannot dissolve, amend its charter, or engage in a statutory share exchange, merger or consolidation unless approved by a vote of shareholders. Depending on the circumstances and the charter of the corporation, there may be various exceptions to these votes. Shareholders of Maryland corporations are generally entitled to one vote per share and fractional votes for fractional shares held. For each Acquired Fund, shareholders of all series and classes vote together as a single class, except as otherwise required by the 1940 Act or required or permitted by its charter.

Election and Removal of Trustees

Shareholders of a Maryland corporation may vote on the election and removal of directors. If the charter and Bylaws so provide, as is the case for the Corporation, a Maryland corporation registered as an open-end investment company is not required to hold annual meetings in any year that the election of directors is not required under the 1940 Act. Each Acquired Fund will call a meeting of shareholders whenever required by the 1940 Act to elect directors.

The Bylaws of the Corporation generally provide that the Board has the power to set the number of directors and, in most circumstances, to fill vacancies except when the 1940 Act requires that a vacancy be filled by the shareholders. Directors are elected by a plurality vote and serve until their successors are elected and qualify.

Amendments to the Charter

Under the MGCL, shareholders of corporations registered as open-end investment companies are entitled to vote on amendments to the charter. However, the board of directors of an open-end investment company is authorized, without a vote of the shareholders, to amend the charter to change the name of the corporation, to change the name or designation of any class or series of stock and to change the par value of the authorized shares. The board of directors is also authorized to supplement the charter to increase the number of authorized shares or the number of shares in any class or series.

F-1

Issuance and Redemption of Shares

The board of directors of a Maryland corporation has the power to authorize the issuance of stock and, prior to issuance of shares of each class or series, the board of directors is required by Maryland law to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series. A Maryland corporation registered an open-end investment company may involuntarily redeem a shareholder’s shares under certain circumstances, unless prohibited by the charter.

Series and Classes

The 1940 Act provides that an investment company may have multiple series and classes, and provides rules for the equitable treatment of holders and series and classes, including for the separate voting rights of series and classes, and for the differential fees that may be charged to different classes. The charter of the Corporation generally does not restrict the authority of directors within this statutory framework to establish series and classes in addition to those currently established and to determined the rights and preferences of the shares of the series and classes.

Shareholder, Director and Officer Liability

Under Maryland law, shareholders generally are not personally liable for debts or obligations of a corporation. With respect to directors, the MGCL provides that a director who has met his or her statutory standard of conduct has no liability for reason of having been a director. The MGCL permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its shareholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment as being material to the cause of action. The indemnification provisions and the limitation on liability are both subject to any limitations of the 1940 Act, which generally provides that no director or officer shall be protected from liability to the corporation or its shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. The provisions governing the advance of expenses are subject to applicable requirements of the 1940 Act or rules thereunder.

Derivative Actions

There are no provisions relating to shareholder derivative actions in the charter of the Corporation. Under Maryland law, applicable case law at the time of a particular derivative action and the MGCL will establish any requirements or limitations with respect to shareholder derivative actions.

The Trust

The Trust is governed by the Maryland Business Trust Act, the Declaration and its Bylaws. Some of the key provisions of the Maryland Business Trust Act, the Declaration and the Bylaws are summarized below. The following summary of the Maryland Business Trust Act, the Declaration and the Bylaws is qualified in its entirety by reference to the Maryland Business Trust Act, the Declaration and the Trust’s Bylaws.

Shareholder Voting

The 1940 Act requires a vote of shareholders on matters that Congress has determined might have a material effect on shareholders and their investments. For example, shareholder consent is required under the 1940 Act to approve new investment advisory agreements in most cases, an increase in an advisory fee or a 12b-1 fee, changes to fundamental policies, the election of directors or trustees in certain circumstances, and the merger or reorganization of a fund in certain circumstances, particularly where the merger or consolidation involves an affiliated party. The Declaration provides for shareholder voting as required by the 1940 Act or other applicable laws but otherwise permits, consistent with Maryland law, actions by the trustees without seeking the consent of shareholders. For example, the trustees may amend the Declaration without shareholder approval. This provision permits the trustees to act quickly in response to competitive or regulatory conditions without the cost and delay of a shareholder meeting when the trustees believe that the amendment is in the interests of shareholders. Similarly, the trustees have broad authority to provide for the merger or consolidation of the trust into another trust or entity, to reorganize the trust, or any series or class into another trust or entity or a series or class of another entity, to sell all or substantially all of the assets of the trust or any series or class to another entity, or a series or class of another entity, or to terminate the trust or any series or class.

F-2

The 1940 Act does not require funds to hold an annual meeting of shareholders, and the Trust does not hold such meetings. The Trust will call special meetings of shareholders whenever required by the 1940 Act or by the terms of the Declaration. The Declaration provides for “dollar-weighted voting,” which means that a shareholder’s voting power is determined not by the number of shares he or she owns, but by the dollar value of those shares determined on the Record Date. The Declaration provides that shareholders of all series and classes vote together, except where required by the 1940 Act to vote separately by series or by class, or when the trustees have determined that a matter affects only the interests of one or more series or classes of shares.

Election and Removal of Trustees

The Declaration provides that the trustees establish the number of trustees. The Declaration also provides that vacancies on the Board may be filled by the remaining trustees, except when election of trustees by the shareholders is required under the 1940 Act. Trustees are then elected by a plurality of votes cast by shareholders at a meeting at which a quorum is present. The Declaration also provides that a mandatory retirement age may be set by action of two-thirds of the trustees and that trustees may be removed, with or without cause, by vote of shareholders holding two-thirds of the voting power of the trust, or by vote of two-thirds of the remaining trustees. The provisions of the Declaration relating to the election and removal of trustees may not be amended without the approval of two-thirds of the trustees.

Amendments to the Declaration

The trustees of the Trust are authorized to amend the Declaration without the vote of shareholders except in certain circumstances. The Declaration prohibits amendments that impair the exemption from personal liability granted in the Declaration to persons who are or have been shareholders, trustees, officers or employees of the Trust or that limit the rights to indemnification or insurance provided in the Declaration with respect to actions or omissions of persons entitled to indemnification under the Declaration prior to the amendment.

Issuance and Redemption of Shares

The trustees of the Trust are permitted to cause the Trust to issue an unlimited number of shares for such consideration and on such terms as the trustees may determine. Shareholders are not entitled to any appraisal, preemptive, conversion, exchange or similar rights, except as the trustees may determine. The Declaration provides that a shareholder may redeem his or her shares at the price determined in accordance with the Declaration. The Declaration also provides that the Trust may involuntarily redeem a shareholder’s shares upon such conditions as may be determined by the trustees. For example, a shareholder’s shares may be redeemed if the shareholder fails to provide the Trust with identification, or if the Maryland Trust is unable to verify the information received from the shareholder.

Disclosure of Shareholder Holdings

The Declaration specifically requires shareholders, upon demand, to disclose to the Trust information with respect to the direct and indirect ownership of shares in order to comply with various laws or regulations, and the Trust may disclose such ownership if required by law or regulation.

Small Accounts

The Declaration gives the trustees the authority to deal with small accounts in a number of ways. For example, the shareholder’s account can be closed by redeeming all of the shares in the account, even if the shareholder would like to continue his or her investment in the Acquiring Fund. The Trust also could assess a fee for small accounts and redeem shares in the account to cover such fees, or convert the shares into another share class that is geared to smaller accounts.

Series and Classes

The 1940 Act provides that an investment company may have multiple series and classes, and provides rules for the fair and equitable treatment of holders of series and classes, including for the separate voting rights of series and classes, and for the differential fees that may be charged to different classes. The Declaration gives broad authority to the trustees within this statutory framework, and consistent with Maryland law, to establish series and classes in addition to those currently established and to determine the rights and preferences, limitations and restrictions, including qualifications for ownership,

F-3

conversion and exchange features, minimum purchase and account size, expenses and charges, and other features of the series and classes. The Declaration also gives authority to the trustees to change any of those features, to terminate any series or class, and to combine series with other series in the Trust, or to combine one of more classes of a series with another class in that series. For example, if an Acquiring Fund has one or more classes with few shares outstanding, the Acquiring Fund may combine one or more of its classes with another of its classes, or convert shares of one class into shares of another class, thus permitting the closure of small classes, and decreasing both costs and administrative burdens.

Each share of an Acquiring Fund represents an interest in that Acquiring Fund only, and not in the assets of any other fund generally.

Shareholder, Trustee and Officer Liability

The Declaration provides that shareholders are not personally liable for the obligations of the Trust and requires the Trust to indemnify a shareholder against any loss or expense arising from any such liability. In addition, the Trust will assume the defense of any claim against a shareholder for personal liability at the request of the shareholder. Similarly, the Declaration provides that a trustee acting in his or her capacity of trustee is not personally liable to any person other than the Trust or its shareholders, for any act, omission, or obligation of the Trust. Further, a trustee is held to the same standard of conduct as a director of a Maryland corporation. This requires that a trustee perform his or her duties in good faith and in a manner he or she reasonably believes to be in the best interests of the Trust, and with the care that an ordinarily prudent person in a like position would use under similar circumstances. The Declaration also permits the limitation of a trustee’s liability to the full extent provided under Maryland law. Under Maryland law, a trustee is liable to the Trust or its shareholders for monetary damages only (i) to the extent that it is proved that he or she actually received an improper benefit or profit in money, property, or services or (ii) to the extent that a judgment or other final adjudication adverse to the trustee is entered in a proceeding based on a finding in the proceeding that the trustee’s action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. The Declaration requires the Trust to indemnify any persons who are or who have been trustees, officers or employees of the trust for any liability for actions or failure to act except to the extent prohibited by applicable federal law. Under the 1940 Act, a trustee or officer may not be indemnified by the Trust for his or her own willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties. In making any determination as to whether any person is entitled to the advancement of expenses in connection with a claim for which indemnification is sought, such person is entitled to a rebuttable presumption that he or she did not engage in conduct for which indemnification is sought.

The Declaration also clarifies that any trustee who serves as chair of the board or of a committee of the board, lead independent trustee, or audit committee financial expert, or in any other similar capacity will not be subject to any greater standard of care or liability because of such position.

Derivative Actions

The Declaration provides a detailed process for the bringing of derivative actions by shareholders in order to permit legitimate inquiries and claims while avoiding the time, expense, distraction, and other harm that can be caused to the Trust or its shareholders as a result of spurious shareholder demands and derivative actions. Prior to bringing a derivative action, a demand by three unrelated shareholders must first be made on the trustees. The Declaration details various information, certifications, undertakings and acknowledgements that must be included in the demand. Following receipt of the demand, the trustees have a period of 90 days, which may be extended by an additional 60 days, to consider the demand. If a majority of the trustees who are considered independent for the purposes of considering the demand determine that maintaining the suit would not be in the best interests of the Trust, the trustees are required to reject the demand and the complaining shareholders may not proceed with the derivative action unless the shareholders are able to sustain the burden of proof to a court that the decision of the trustees not to pursue the requested action was not a good faith exercise of their business judgment on behalf of the Trust. The Declaration further provides that shareholders owning shares representing at least 5% of the voting power of the Trust must join in bringing the derivative action. If a demand is rejected, the complaining shareholders will be responsible for the costs and expenses (including attorneys’ fees) incurred by the Trust in connection with the consideration of the demand, if in the judgment of the independent trustees, the demand was made without reasonable cause or for an improper purpose. If a derivative action is brought in violation of the Declaration, the shareholders bringing the action may be responsible for the Trust’s costs, including attorneys’ fees.

F-4

The Declaration also requires that actions by shareholders against the Trust be brought only in federal court in Baltimore, Maryland, or if not permitted to be brought in federal court, then in state court in Baltimore, Maryland, and that the right to jury trial be waived to the full extent permitted by law.

Each Acquired Fund is a series of a Maryland corporation and operates under a charter that covers many of the same provisions discussed above. However, in most cases it is expected that the Declaration for the Trust will provide broader authority to the trustees of the Acquiring Funds than the existing charter for the Corporation provides the directors of the Acquired Funds.

F-5

APPENDIX G

5% Shareholders of the Acquired Funds and Acquiring Funds

[To be provided]

G-1

APPENDIX H

Comparison of Board Composition

Legg Mason Investment Grade Income Portfolio (Acquired Fund)

and Legg Mason Partners Corporate Bond Fund (Acquiring Fund)

Acquired Fund Board	Acquiring Fund Board
Ruby P. Hearn Arnold L. Lehman Robin J.W. Masters Jill E. McGovern Arthur S. Mehlman G. Peter O’Brien S. Ford Rowan Robert M. Tarola	Elliott J. Berv A. Benton Cocanougher Jane F. Dasher Mark T. Finn Rainer Greeven Stephen Randolph Gross Richard E. Hanson, Jr. Diana R. Harrington Susan M. Heilbron Susan B. Kerley Alan G. Merten R. Richardson Pettit
Interested Directors: John F. Curley Jr. Mark R. Fetting	Interested Trustee: R. Jay Gerken

Legg Mason Limited Duration Bond Portfolio (Acquired Fund)

and Legg Mason Partners Short-Term Bond Fund (Acquiring Fund)

Acquired Fund Board	Acquiring Fund Board
Ruby P. Hearn Arnold L. Lehman Robin J.W. Masters Jill E. McGovern Arthur S. Mehlman G. Peter O’Brien S. Ford Rowan Robert M. Tarola	Elliott J. Berv A. Benton Cocanougher Jane F. Dasher Mark T. Finn Rainer Greeven Stephen Randolph Gross Richard E. Hanson, Jr. Diana R. Harrington Susan M. Heilbron Susan B. Kerley Alan G. Merten R. Richardson Pettit
Interested Directors: John F. Curley Jr. Mark R. Fetting	Interested Trustee: R. Jay Gerken

H-1

APPENDIX I

Portfolio Manager Compensation

Western Asset’s compensation system assigns each employee a total compensation “target” and a respective cap, which are derived from annual market surveys that benchmark each role with its job function and peer universe. This method is designed to reward employees with total compensation reflective of the external market value of their skills, experience, and ability to produce desired results. Standard compensation includes competitive base salaries, generous employee benefits, and a retirement plan.

In addition, the subadviser’s employees are eligible for bonuses. These are structured to closely align the interests of employees with those of the subadviser, and are determined by the professional’s job function and pre-tax performance as measured by a formal review process. All bonuses are completely discretionary. One of the principal factors considered is a portfolio manager’s investment performance versus appropriate peer groups and benchmarks (e.g., a securities index and with respect to a fund, the benchmark set forth in the fund’s prospectus to which the fund’s average annual total returns are compared or, if none, the benchmark set forth in the fund’s annual report). Performance is reviewed on a 1, 3 and 5 year basis for compensation—with 3 years having the most emphasis. The subadviser may also measure a portfolio manager’s pre-tax investment performance against other benchmarks, as it determines appropriate. Because portfolio managers are generally responsible for multiple accounts (including the fund) with similar investment strategies, they are generally compensated on the performance of the aggregate group of similar accounts, rather than a specific account, though relative performance against the stated benchmark and its applicable Lipper peer group, is also considered. A smaller portion of a bonus payment is derived from factors that include client service, business development, length of service to the subadviser, management or supervisory responsibilities, contributions to developing business strategy and overall contributions to the subadviser’s business.

Finally, in order to attract and retain top talent, all professionals are eligible for additional incentives in recognition of outstanding performance. These were determined based upon the factors described above and include Legg Mason stock options and long-term incentives that vest over a set period of time past the award date.

I-1

APPENDIX J

Dates of Prospectuses, Statements of Additional Information and Shareholder Reports

Fund	Prospectus and Fund SAI Dated	Annual Reports
Legg Mason Investment Grade Income Portfolio	May 1, 2008 (filed on April 28, 2008)	December 31, 2008 (filed on March 5, 2009)
Legg Mason Partners Corporate Bond Fund	April 28, 2008 (filed on April 24, 2008)	December 31, 2008 (filed on March 5, 2009)
Legg Mason Limited Duration Bond Portfolio	May 1, 2008 (filed on April 28, 2008)	December 31, 2008 (filed on March 5, 2009)
Legg Mason Partners Short-Term Bond Fund	April 28, 2008 (filed on April 24, 2008)	December 31, 2008 (filed on March 6, 2009)

J-1

APPENDIX K

Instructions for Signing the Proxy Card 

The following general rules for signing the voting instruction card may be of assistance to you and avoid the time and expense involved in validating your vote if you fail to sign your voting instruction card properly.

1. Individual Accounts: Sign your name exactly as it appears in the registration on the voting instruction card.

2. Joint Accounts: Either party may sign, but the name of the party signing should conform exactly to the name shown in the registration on the voting instruction card.

3. All Other Accounts: The capacity of the individual signing the voting instruction card should be indicated unless it is reflected in the form of registration. For example:

Registration	Valid Signature
Corporate Accounts
(1) ABC Corp.	ABC Corp.
(2) ABC Corp.	John Doe, Treasurer
(3) ABC Corp., c/o John Doe, Treasurer	John Doe
(4) ABC Corp. Profit Sharing Plan	John Doe, Trustee
Trust Accounts
(1) ABC Trust	Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee, u/t/d 12/28/78	Jane B. Doe
Custodial or Estate Accounts
(1) John B. Smith, Cust., f/b/o John B. Smith, Jr. UGMA	John B. Smith
(2) Estate of John B. Smith	John B. Smith Jr., Executor

K-1

SUBJECT TO COMPLETION, DATED MARCH 23, 2009

LEGG MASON PARTNERS INCOME TRUST

Legg Mason Partners Corporate Bond Fund

Legg Mason Partners Short-Term Bond Fund

STATEMENT OF ADDITIONAL INFORMATION

[            ], 2009

Acquisition of the Assets and Liabilities of:	By and in Exchange for Shares of:
Legg Mason Investment Grade Income Portfolio	Legg Mason Partners Corporate Bond Fund
Legg Mason Limited Duration Bond Portfolio	Legg Mason Partners Short-Term Bond Fund
100 Light Street Baltimore, Maryland 21202 1-800-822-5544	55 Water Street New York, New York 10041 1-800-822-5544 1-888-425-6432

This Statement of Additional Information, which is not a prospectus, supplements and should be read in conjunction with the Proxy Statement/Prospectus dated [            ], 2009, relating specifically to the proposed transfer of all of the assets and the assumption of all of the liabilities of Legg Mason Investment Grade Income Portfolio and Legg Mason Limited Duration Bond Portfolio (each a “Target Fund”) in exchange for shares of Legg Mason Partners Corporate Bond Fund and Legg Mason Partners Short-Term Bond Fund (each a “Acquiring Fund”), respectively, having an aggregate value equal to those of the Target Fund. To obtain a copy of the Proxy Statement/Prospectus, please write to each Acquiring Fund at the address set forth above or call 1-800-451-2010. Each transfer is to occur pursuant to a Plan of Reorganization. Unless otherwise indicated, capitalized terms used herein and not otherwise defined have the same meanings as are given to them in the Proxy Statement/Prospectus.

TABLE OF CONTENTS

1. General Information	S-2
2. Financial Statements and Other Incorporated Documents	S-2
3. Pro Forma Financial Statements	S-3

S-1

GENERAL INFORMATION

A Special Meeting of Shareholders of the Acquired Funds to consider the Reorganizations will be held at Legg Mason, Inc., 100 Light Street, 34th Floor, Baltimore, Maryland 21202, on June 12, 2009, at 10:00 a.m., Eastern Time. For further information about the Reorganizations, see the Proxy Statement/Prospectus.

FINANCIAL STATEMENTS AND OTHER INCORPORATED DOCUMENTS

The Statement of Additional Information related to the Proxy Statement/Prospectus dated [            ], 2009, consists of this cover page, the accompanying pro forma financial statements and the following documents, each of which was filed electronically with the Securities and Exchange Commission and is incorporated by reference herein:

The Statement of Additional Information of each Acquiring Fund:

Fund	Date and Filing Date	Accession Number
Legg Mason Partners Corporate Bond Fund	April 28, 2008 Filed on April 24, 2008	0001193125-08-089318
Legg Mason Partners Short-Term Bond Fund	April 28, 2008 Filed on April 24, 2008	0001193125-08-089318

The financial statements of each Acquired Fund as included in the Fund’s Annual Report filed for the year ended December 31, 2008:

Fund	Year Ended/Filing Date	Accession Number
Legg Mason Investment Grade Income Portfolio	December 31, 2008 Filed on March 5, 2009	0001193125-09-046299
Legg Mason Limited Duration Bond Portfolio	December 31, 2008 Filed on March 5, 2009	0001193125-09-046035

The financial statements of the each Acquiring Fund as included in the Fund’s Annual Report filed for the year ended December 31, 2008:

Fund	Year Ended/Filing Date	Accession Number
Legg Mason Partners Corporate Bond Fund	December 31, 2008 Filed on March 5, 2009	0001193125-09-046299
Legg Mason Partners Short-Term Bond Fund	December 31, 2008 Filed on March 6, 2009	0001193125-09-047301

S-2

PRO FORMA FINANCIAL STATEMENTS

Legg Mason Investment Grade Income Portfolio (Acquired Fund) and Legg Mason Partners Corporate Bond Fund (Acquiring Fund)

Shown below are the financial statements for each of Legg Mason Investment Grade Income Portfolio and Legg Mason Partners Corporate Bond Fund and pro forma financial statements for the combined Funds, assuming the Reorganization of those Funds is consummated as of December 31, 2008. The first table presents the Schedule of Investments for each Fund and pro forma figures for the combined Fund. The second table presents the Statements of Assets and Liabilities for each Fund and estimated pro forma figures for the combined Fund. The third table presents the Statements of Operations for each Fund and estimated pro forma figures for the combined Fund. These tables are followed by the Notes to the Pro Forma Financial Statements.

The pro forma financial statements are unaudited and are based on financial statements as of and for the year ended December 31, 2008.

Pro Forma Combined Schedule of Investments

As of December 31, 2008 (unaudited)

Legg Mason Investment Grade Income Portfolio	Legg Mason Partners Corporate Bond Fund		Pro Forma Combined Legg Mason Partners Corporate Bond Fund			Legg Mason Investment Grade Income Portfolio		Legg Mason Partners Corporate Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Corporate Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value		Value		Value
CORPORATE BONDS & NOTES — 94.4%
CONSUMER DISCRETIONARY — 7.8%
Automobiles — 0.8%
$   600,000			$	600,000	DaimlerChrysler NA Holding Corp., 8.500% due 1/18/31	$	438,733			$	890	$	439,623
					Ford Motor Co.:
370,000				370,000	8.900% due 1/15/32		88,800				1,850		90,650
1,975,000	$	3,850,000		5,825,000	Notes, 7.450% due 7/16/31		553,000	$	1,097,250		9,875		1,660,125
					General Motors Corp.:
650,000				650,000	8.250% due 7/15/23		107,250				3,250		110,500
6,190,000		6,560,000		12,750,000	Senior Debentures, 8.375% due 7/15/33		1,083,250		1,180,800		30,950		2,295,000
					Total Automobiles		2,271,033		2,278,050		46,815		4,595,898
Leisure Equipment & Products — 0.4%
500,000				500,000	Eastman Kodak Co., 7.250% due 11/15/13		322,500				2,500		325,000
970,000		1,300,000		2,270,000	Hasbro Inc., Senior Notes, 6.300% due 9/15/17		917,177		1,231,215		1,499		2,149,891
					Total Leisure Equipment & Products		1,239,677		1,231,215		3,999		2,474,891
Media — 5.7%
					Clear Channel Communications Inc.:
1,210,000				1,210,000	4.400% due 5/15/11		296,450				6,050		302,500
500,000				500,000	5.500% due 9/15/14		60,000				2,500		62,500
					Comcast Corp.:
1,800,000				1,800,000	6.950% due 8/15/37		1,895,494				6,048		1,901,542
750,000		4,030,000		4,780,000	6.400% due 5/15/38		748,247		4,033,837		2,467		4,784,551
		926,000		926,000	Notes, 6.450% due 3/15/37				924,455				924,455
		4,235,000		4,235,000	Senior Notes, 6.500% due 1/15/17				4,189,414				4,189,414
180,000				180,000	Comcast Cable Holdings LLC, 7.125% due 2/15/28		170,225				431		170,656

See Notes to Pro Forma Combined Financial Statements

S-3

Legg Mason Investment Grade Income Portfolio	Legg Mason Partners Corporate Bond Fund		Pro Forma Combined Legg Mason Partners Corporate Bond Fund			Legg Mason Investment Grade Income Portfolio		Legg Mason Partners Corporate Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Corporate Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value		Value		Value
	$	3,850,000	$	3,850,000	News America Holdings Inc., Senior Debentures, 8.500% due 2/23/25			$	3,797,101			$	3,797,101
					News America Inc.:
$1,495,000				1,495,000	6.550% due 3/15/33	$	1,340,365			$	3,827		1,344,192
		1,910,000		1,910,000	Notes, 6.150% due 3/1/37				1,787,808				1,787,808
		2,289,000		2,289,000	Rogers Cable Inc., Senior Secured Second Priority Notes, 6.250% due 6/15/13				2,193,070				2,193,070
		780,000		780,000	Time Warner Cable Inc., Senior Notes, 8.750% due 2/14/19				849,564				849,564
		3,850,000		3,850,000	Time Warner Cos. Inc., Debentures, 7.570% due 2/1/24				3,718,553				3,718,553
505,000		1,563,000		2,068,000	Time Warner Entertainment Co., LP, Senior Notes, 8.375% due 7/15/33		509,610		1,581,379		1,328		2,092,317
					Time Warner Inc.:
500,000				500,000	6.875% due 5/1/12		480,348				349		480,697
1,130,000				1,130,000	9.125% due 1/15/13		1,119,837				924		1,120,761
1,015,000		601,000		1,616,000	Senior Debentures, 7.700% due 5/1/32		1,016,251		603,364		2,741		1,622,356
		1,070,000		1,070,000	Viacom Inc., Senior Notes, 8.625% due 8/1/12				875,620				875,620
					Total Media		7,636,827		24,554,165		26,665		32,217,657
Multiline Retail — 0.9%
435,000				435,000	Federated Retail Holdings Inc., 5.350% due 3/15/12		323,106				220		323,326
					Macy’s Retail Holdings Inc.:
1,000,000		1,350,000		2,350,000	5.875% due 1/15/13		703,762		950,860		579		1,655,201
490,000		3,965,000		4,455,000	6.650% due 7/15/24		268,965		2,180,413		493		2,449,871
1,070,000				1,070,000	May Department Stores Co., 5.750% due 7/15/14		678,875				721		679,596
					Total Multiline Retail		1,974,708		3,131,273		2,013		5,107,994
					TOTAL CONSUMER DISCRETIONARY		13,122,245		31,194,703		79,492		44,396,440
CONSUMER STAPLES — 4.3%
Beverages — 1.3%
		5,486,000		5,486,000	Diageo Capital PLC, Notes, 4.850% due 5/15/18				4,858,385				4,858,385
		910,000		910,000	Dr. Pepper Snapple Group Inc., Senior Notes, 6.820% due 5/1/18 (a)				899,106				899,106
840,000				840,000	Foster’s Finance Corp., 4.875% due 10/1/14 (a)		721,875				870		722,745
		770,000		770,000	PepsiCo Inc., 7.900% due 11/1/18				945,435				945,435
					Total Beverages		721,875		6,702,926		870		7,425,671
Food & Staples Retailing — 1.6%
860,000		1,186,000		2,046,000	Delhaize Group, 6.500% due 6/15/17		780,875		1,078,571		1,225		1,860,671
					Kroger Co.:
1,000,000				1,000,000	8.000% due 9/15/29		1,129,665				3,017		1,132,682
		2,887,000		2,887,000	Senior Notes, 6.750% due 4/15/12				2,916,133				2,916,133
					Safeway Inc.:
120,000				120,000	6.250% due 3/15/14		120,622				132		120,754
		3,100,000		3,100,000	Senior Notes, 6.350% due 8/15/17				3,069,958				3,069,958
					Total Food & Staples Retailing		2,031,162		7,064,662		4,374		9,100,198

See Notes to Pro Forma Combined Financial Statements

S-4

Legg Mason Investment Grade Income Portfolio	Legg Mason Partners Corporate Bond Fund		Pro Forma Combined Legg Mason Partners Corporate Bond Fund			Legg Mason Investment Grade Income Portfolio		Legg Mason Partners Corporate Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Corporate Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value		Value		Value
Food Products — 0.5%
$960,000			$	960,000	Ahold Finance USA Inc., 8.250% due 7/15/10	$	954,796			$	4,800	$	959,596
1,040,000	$	1,360,000		2,400,000	Tyson Foods Inc., Senior Notes, 7.850% due 4/1/16		769,600	$	1,013,200		5,200		1,788,000
					Total Food Products		1,724,396		1,013,200		10,000		2,747,596
Tobacco — 0.9%
1,120,000		1,740,000		2,860,000	Philip Morris International Inc., Senior Notes, 6.875% due 3/17/14		1,176,995		1,830,536		1,281		3,008,812
					Reynolds American Inc.:
860,000				860,000	7.875% due 5/15/09		851,561				75		851,636
270,000		1,540,000		1,810,000	7.625% due 6/1/16		224,859		1,284,240		300		1,509,399
					Total Tobacco		2,253,415		3,114,776		1,656		5,369,847
					TOTAL CONSUMER STAPLES		6,730,848		17,895,564		16,900		24,643,312
ENERGY — 11.2%
Energy Equipment & Services — 0.9%
1,010,000				1,010,000	CenterPoint Energy Resources Corp., 7.875% due 4/1/13		935,557				815		936,372
800,000				800,000	Pride International Inc., 7.375% due 7/15/14		744,000				4,000		748,000
		685,000		685,000	Southern Natural Gas Co., Notes, 5.900% due 4/1/17 (a)				546,258				546,258
		2,160,000		2,160,000	Transocean Inc., Senior Notes, 5.250% due 3/15/13				2,008,042				2,008,042
					Total Energy Equipment & Services		1,679,557		2,554,300		4,815		4,238,672
Oil, Gas & Consumable Fuels — 10.3%
					Anadarko Finance Co.:
10,000				10,000	6.750% due 5/1/11		10,004				5		10,009
3,860,000		6,361,000		10,221,000	Senior Notes, 7.500% due 5/1/31		3,413,309		5,639,065		8,604		9,060,978
		1,016,000		1,016,000	Apache Corp., Senior Notes, 6.000% due 1/15/37				988,467				988,467
1,830,000		1,710,000		3,540,000	DCP Midstream LLC, Senior Notes, 6.750% due 9/15/37 (a)		1,381,123		1,293,962		3,643		2,678,728
560,000		2,040,000		2,600,000	Devon Financing Corp. ULC, Debentures, 7.875% due 9/30/31		616,618		2,252,474		1,708		2,870,800
340,000				340,000	Duke Capital LLC, 6.250% due 2/15/13		323,508				287		323,795
					El Paso Corp.:
1,660,000				1,660,000	7.800% due 8/1/31		1,081,495				8,300		1,089,795
340,000				340,000	7.750% due 1/15/32		220,701				1,700		222,401
		580,000		580,000	Energy Transfer Partners LP, Senior Notes, 9.700% due 3/15/19				598,603				598,603
1,100,000		1,730,000		2,830,000	EOG Resources Inc., Senior Notes, 5.875% due 9/15/17		1,116,708		1,759,247		1,888		2,877,843
					Gazprom, Loan Participation Notes:
1,439,000		1,694,000		3,133,000	6.212% due 11/22/16 (a)		949,740		1,126,510		7,195		2,083,445
1,160,000		878,000		2,038,000	Senior Notes, 6.510% due 3/7/22 (a)		690,200		526,800		5,800		1,222,800
2,970,000		354,000		3,324,000	Hess Corp., Notes, 7.875% due 10/1/29		2,851,146		340,679		7,093		3,198,918
		1,070,000		1,070,000	Intergas Finance BV, Bonds, 6.375% due 5/14/17 (a)				625,950				625,950
910,000		2,470,000		3,380,000	KazMunaiGaz Finance Sub B.V., Senior Notes, 8.375% due 7/2/13 (a)		709,800		1,938,950		4,550		2,653,300

See Notes to Pro Forma Combined Financial Statements

S-5

Legg Mason Investment Grade Income Portfolio	Legg Mason Partners Corporate Bond Fund		Pro Forma Combined Legg Mason Partners Corporate Bond Fund			Legg Mason Investment Grade Income Portfolio		Legg Mason Partners Corporate Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Corporate Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value		Value		Value
$   390,000			$	390,000	Kerr-McGee Corp., 6.950% due 7/1/24	$	341,971			$	765	$	342,736
					Kinder Morgan Energy Partners LP:
	$	2,040,000		2,040,000	Medium-Term Notes, 6.950% due 1/15/38			$	1,654,318				1,654,318
1,430,000		770,000		2,200,000	Senior Notes, 7.125% due 3/15/12		1,381,097		744,187		965		2,126,249
		1,270,000		1,270,000	LUKOIL International Finance BV, 6.356% due 6/7/17 (a)				781,050				781,050
					Pemex Project Funding Master Trust:
260,000		210,000		470,000	6.625% due 6/15/35 (a)		220,090		178,815		1,300		400,205
3,624,000		8,975,000		12,599,000	Senior Bonds, 6.625% due 6/15/35		3,067,716		7,608,556		4,530		10,680,802
1,280,000		1,207,000		2,487,000	Petrobras International Finance Co., 5.875% due 3/1/18		1,150,720		1,091,128		6,400		2,248,248
		2,479,000		2,479,000	Petroplus Finance Ltd., Senior Notes, 7.000% due 5/1/17 (a)				1,524,585				1,524,585
1,000,000				1,000,000	Tennessee Gas Pipeline Co., 8.375% due 6/15/32		862,891				5,000		867,891
					Valero Energy Corp.:
390,000				390,000	6.875% due 4/15/12		392,196				284		392,480
		3,388,000		3,388,000	Notes, 4.750% due 6/15/13				3,116,042				3,116,042
2,000,000				2,000,000	Williams Cos. Inc., 7.625% due 7/15/19		1,562,500				2,580		1,565,080
1,270,000		1,860,000		3,130,000	XTO Energy Inc., Senior Notes, 6.100% due 4/1/36		1,054,538		1,549,055		3,150		2,606,743
					Total Oil, Gas & Consumable Fuels		23,398,071		35,338,443		75,747		58,812,261
					TOTAL ENERGY		25,077,628		37,892,743		80,562		63,050,933
FINANCIALS — 41.4%
Capital Markets — 5.3%
585,000				585,000	BankAmerica Capital III, 5.323% due 1/15/27		310,192				1,051		311,243
					Bear Stearns Cos. Inc.:
440,000				440,000	6.400% due 10/2/17		457,238				765		458,003
590,000		700,000		1,290,000	Senior Notes, 7.250% due 2/1/18		646,555		768,389		1,087		1,416,031
2,755,000		3,680,000		6,435,000	Goldman Sachs Capital II, Junior Subordinated Bonds, 5.793% due 6/1/12 (b)(c)		1,059,085		1,415,542		648		2,475,275
		1,120,000		1,120,000	Goldman Sachs Group Inc., Senior Notes, 6.150% due 4/1/18				1,078,137				1,078,137
					Kaupthing Bank HF:
1,700,000				1,700,000	7.625% due 2/28/15 (a)(d)		102,000						102,000
1,340,000		1,963,000		3,303,000	Senior Notes, 5.750% due 10/4/11 (a)(d)		80,400		127,595		6,700		214,695
3,585,000		3,927,000		7,512,000	Subordinated Notes, 7.125% due 5/19/16 (a)(d)		26,887		49,088		17,926		93,901
3,100,000		4,812,000		7,912,000	Lehman Brothers Holdings Capital Trust VII, Medium-Term Notes, 5.857% due 5/31/12 (b)(c)(d)		310		481		—		791
2,000,000		1,321,000		3,321,000	Lehman Brothers Holdings Inc., Subordinated Notes, 6.500% due 7/19/17 (d)		200		132		—		332
					Merrill Lynch & Co. Inc.:
540,000				540,000	6.050% due 8/15/12		532,753				425		533,178
1,210,000		2,670,000		3,880,000	Senior Notes, 6.400% due 8/28/17		1,212,259		2,679,382		1,993		3,893,634
					Subordinated Notes:
2,400,000		5,790,000		8,190,000	5.700% due 5/2/17		2,126,294		5,137,884		3,399		7,267,577
910,000		1,309,000		2,219,000	6.110% due 1/29/37		818,022		1,180,404		2,580		2,001,006

See Notes to Pro Forma Combined Financial Statements

S-6

Legg Mason Investment Grade Income Portfolio	Legg Mason Partners Corporate Bond Fund		Pro Forma Combined Legg Mason Partners Corporate Bond Fund			Legg Mason Investment Grade Income Portfolio		Legg Mason Partners Corporate Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Corporate Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value		Value		Value
					Morgan Stanley:
$400,000			$	400,000	5.050% due 1/21/11	$	384,198			$	182	$	384,380
65,000				65,000	4.750% due 4/1/14		49,523				54		49,577
1,050,000	$	1,750,000		2,800,000	6.625% due 4/1/18		921,154	$	1,537,793		1,522		2,460,469
750,000		4,210,000		4,960,000	Senior Notes, 5.250% due 11/2/12		682,106		3,832,102		573		4,514,781
		5,606,000		5,606,000	UBS Preferred Funding Trust, Subordinated Notes, 6.243% due 5/15/16 (b)(c)				3,065,394				3,065,394
					Total Capital Markets		9,409,176		20,872,323		38,905		30,320,404
Commercial Banks — 13.6%
2,080,000				2,080,000	AES El Salvador Trust, 6.750% due 2/1/16 (a)		1,482,628				10,400		1,493,028
2,280,000		3,280,000		5,560,000	ATF Capital BV, Senior Notes, 9.250% due 2/21/14 (a)		1,482,000		2,148,400		11,400		3,641,800
		2,820,000		2,820,000	BAC Capital Trust XI, Notes, 6.625% due 5/23/36				2,613,697				2,613,697
		3,700,000		3,700,000	BAC Capital Trust XIV, Junior Subordinated Notes, 5.630% due 3/15/12 (b)(c)				1,483,293				1,483,293
2,030,000		3,026,000		5,056,000	Banco Mercantil del Norte SA, Subordinated Bonds, 6.135% due 10/13/16 (a)(b)		1,300,398		1,953,555		10,149		3,264,102
					Barclays Bank PLC:
840,000		1,150,000		1,990,000	7.700% due 4/25/18 (a)(b)(c)		555,458		762,085		1,195		1,318,738
2,750,000		3,680,000		6,430,000	Junior Subordinated Bonds, 7.434% due 12/15/17 (a)(b)(c)		1,390,345		1,862,926		1,787		3,255,058
2,000,000				2,000,000	BOI Capital Funding, 5.571% due 2/1/49 (a)		439,614				396		440,010
3,510,000				3,510,000	CBA Capital Trust I, 5.805% due 6/30/49 (a)		2,356,509				6,781		2,363,290
990,000		1,232,000		2,222,000	Comerica Capital Trust II, Capital Securities, 6.576% due 2/20/37 (b)		397,436		495,370		629		893,435
					Glitnir Banki HF:
1,100,000		1,963,000		3,063,000	Notes, 6.330% due 7/28/11 (a)(d)		52,250		103,058		5,500		160,808
700,000		3,758,000		4,458,000	Subordinated Bonds, 7.451% due 9/14/16 (a)(b)(c)(d)		105		19,354		3,500		22,959
1,900,000		2,857,000		4,757,000	Subordinated Notes, 6.693% due 6/15/16 (a)(b)(d)		285		14,714		9,500		24,499
1,490,000				1,490,000	HBOS Capital Funding LP, 6.071% due 6/30/49 (a)		551,078				495		551,573
760,000				760,000	HSBC Capital Funding LP, 4.610% due 6/27/49 (a)		411,836				1,900		413,736
1,640,000		2,472,000		4,112,000	HSBK Europe BV, 7.250% due 5/3/17 (a)		885,600		1,347,240		8,200		2,241,040
					ICICI Bank Ltd., Subordinated Bonds:
702,000		735,000		1,437,000	6.375% due 4/30/22 (a)(b)		368,629		386,987		983		756,599
170,000		438,000		608,000	6.375% due 4/30/22 (a)(b)		89,610		231,279		156		321,045
5,000				5,000	KeyBank NA, 5.800% due 7/1/14		4,401				5		4,406
2,250,000		1,980,000		4,230,000	Landsbanki Islands HF, 7.431% due 10/19/17 (a)(b)(c)(d)		337		10,197		11,251		21,785
3,565,000				3,565,000	Mizuho Financial Group, 5.790% due 4/15/14 (a)		3,165,695				3,476		3,169,171
1,270,000		1,760,000		3,030,000	Natixis, 10.000% due 4/30/18 (a)(b)(c)		589,166		817,430		684		1,407,280
320,000				320,000	Rabobank Capital Funding Trust II, 5.260% due 12/31/49 (a)		169,290				161		169,451
3,120,000				3,120,000	Rabobank Capital Funding Trust III, 5.254% due 10/21/49 (a)		1,710,612				2,355		1,712,967
4,020,000		7,323,000		11,343,000	RBS Capital Trust III, Subordinated Notes, 5.512% due 9/30/14 (b)(c)		1,607,027		2,930,298		1,576		4,538,901
2,520,000		3,974,000		6,494,000	Resona Preferred Global Securities Cayman Ltd., Bonds, 7.191% due 7/30/15 (a)(b)(c)		1,199,742		1,893,846		1,187		3,094,775

See Notes to Pro Forma Combined Financial Statements

S-7

Legg Mason Investment Grade Income Portfolio	Legg Mason Partners Corporate Bond Fund		Pro Forma Combined Legg Mason Partners Corporate Bond Fund			Legg Mason Investment Grade Income Portfolio		Legg Mason Partners Corporate Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Corporate Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value		Value		Value
$   200,000	$	300,000	$	500,000	Royal Bank of Scotland Group PLC, Junior Subordinated Notes, Medium-Term Notes, 7.640% due 9/29/17 (b)(c)	$	79,657	$	119,619	$	89	$	199,365
					RSHB Capital, Loan Participation Notes:
2,040,000		1,863,000		3,903,000	7.175% due 5/16/13 (a)		1,479,000		1,359,990		10,200		2,849,190
1,700,000		5,400,000		7,100,000	7.125% due 1/14/14 (a)		1,139,000		3,645,000		8,500		4,792,500
570,000				570,000	RSHB Capital SA, 6.299% due 5/15/17 (a)		324,900				2,850		327,750
3,385,000		5,272,000		8,657,000	Shinsei Finance Cayman Ltd., Junior Subordinated Bonds, 6.418% due 7/20/16 (a)(b)(c)		707,979		1,103,493		542		1,812,014
730,000				730,000	Sumitomo Mitsui Banking Corp., 5.625% due 10/15/49 (a)		540,618				706		541,324
					SunTrust Bank:
770,000				770,000	5.000% due 9/1/15		712,265				986		713,251
		366,000		366,000	Subordinated Notes, 5.450% due 12/1/17				340,891				340,891
1,550,000		2,256,000		3,806,000	SunTrust Capital, Trust Preferred Securities, 6.100% due 12/15/36 (b)		1,091,216		1,592,533		2,945		2,686,694
1,100,000		1,420,000		2,520,000	SunTrust Preferred Capital I, 5.853% due 12/15/11 (b)(c)		594,000		767,242		342		1,361,584
					TuranAlem Finance BV, Bonds:
1,709,000		1,948,000		3,657,000	8.250% due 1/22/37 (a)		734,870		847,380		8,545		1,590,795
300,000		423,000		723,000	8.250% due 1/22/37 (a)		129,000		182,948		750		312,698
785,000				785,000	UnionBanCal Corp., 5.250% due 12/16/13		668,696				699		669,395
2,580,000		4,090,000		6,670,000	Wachovia Capital Trust III, Bank Guaranteed, 5.800% due 3/15/11 (b)(c)		1,522,200		2,414,163		671		3,937,034
					Wachovia Corp.:
580,000		1,124,000		1,704,000	Senior Notes, 5.750% due 6/15/17		577,298		1,120,613		954		1,698,865
2,000,000		3,811,000		5,811,000	Subordinated Notes, 5.625% due 10/15/16		1,826,994		3,486,665		2,796		5,316,455
1,260,000		1,809,000		3,069,000	Wells Fargo Capital X, Capital Securities, 5.950% due 12/15/36		1,079,880		1,555,235		3,368		2,638,483
1,500,000		6,010,000		7,510,000	Wells Fargo Capital XIII, Medium-Term Notes, 7.700% due 3/26/13 (b)(c)		1,237,966		4,964,332		1,052		6,203,350
					Total Commercial Banks		34,655,590		42,573,833		139,661		77,369,084
Consumer Finance — 5.5%
2,165,000		3,449,000		5,614,000	Aiful Corp., Notes, 6.000% due 12/12/11 (a)		876,907		1,397,721		468		2,275,096
					American Express Co.:
		710,000		710,000	7.000% due 3/19/18				719,121				719,121
3,930,000		5,159,000		9,089,000	Subordinated Debentures, 6.800% due 9/1/66 (b)		2,034,368		2,673,832		2,492		4,710,692
670,000		1,000,000		1,670,000	Capital One Financial Corp., Senior Notes,     6.750% due 9/15/17		648,945		970,137		1,047		1,620,129
					Ford Motor Credit Co.:
2,390,000				2,390,000	7.375% due 2/1/11		1,817,504				794		1,818,298
6,828,000				6,828,000	7.246% due 6/15/11		4,506,480				8,535		4,515,015
		2,600,000		2,600,000	Senior Notes, 12.000% due 5/15/15				1,943,492				1,943,492
					GMAC LLC:
2,687,000		2,158,000		4,845,000	7.500% due 12/31/13 (a)		1,961,510		1,607,710		40,305		3,609,525
348,000		710,000		1,058,000	8.000% due 12/31/18 (a)		174,000		365,650		5,220		544,870
2,465,000		2,379,000		4,844,000	8.000% due 11/1/31 (a)		1,465,171		1,416,647		2,687		2,884,505
40,000				40,000	zero coupon bond due 6/15/15		6,753				9		6,762
105,000				105,000	HSBC Holdings PLC, 5.250% due 12/12/12		105,497				92		105,589
1,310,000		1,902,000		3,212,000	Nelnet Inc., Notes, 7.400% due 9/29/36 (b)		392,796		570,553		172		963,521

See Notes to Pro Forma Combined Financial Statements

S-8

Legg Mason Investment Grade Income Portfolio	Legg Mason Partners Corporate Bond Fund		Pro Forma Combined Legg Mason Partners Corporate Bond Fund			Legg Mason Investment Grade Income Portfolio		Legg Mason Partners Corporate Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Corporate Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value		Value		Value
					SLM Corp.:
					Medium-Term Notes:
$1,400,000	$	3,325,000	$	4,725,000	5.000% due 10/1/13	$	1,001,728	$	2,381,435	$	981	$	3,384,144
		454,000		454,000	5.050% due 11/14/14				302,482				302,482
		816,000		816,000	5.625% due 8/1/33				496,274				496,274
1,290,000		540,000		1,830,000	Senior Notes, 8.450% due 6/15/18		1,019,901		427,570		1,516		1,448,987
					Total Consumer Finance		16,011,560		15,272,624		64,318		31,348,502
Diversified Financial Services — 11.3%
		3,734,000		3,734,000	AES El Salvador Trust, Senior Notes, 6.750% due 2/1/16 (a)				2,680,273				2,680,273
860,000		1,752,000		2,612,000	AGFC Capital Trust I, 6.000% due 1/15/67 (a)(b)		205,408		418,859		196		624,463
5,170,000				5,170,000	AIG SunAmerica Global Financing VI, 6.300% due 5/10/11 (a)		4,445,528				2,295		4,447,823
1,000,000				1,000,000	BAC Capital Trust XI, 6.625% due 5/23/36		924,062				2,781		926,843
2,730,000				2,730,000	BAC Capital Trust XIV, 5.630% due 3/15/49		1,093,791				639		1,094,430
1,540,000				1,540,000	Bank of America Corp., 8.000% due 12/29/49		1,107,703				1,590		1,109,293
996,000				996,000	Beaver Valley II Funding, 9.000% due 6/1/17		933,740				1,332		935,072
					Capital One Bank:
690,000				690,000	6.500% due 6/13/13		614,865				570		615,435
		2,342,000		2,342,000	Notes, 5.750% due 9/15/10				2,273,967				2,273,967
1,000,000		1,417,000		2,417,000	Capmark Financial Group Inc., 5.875% due 5/10/12		340,991		483,465		198		824,654
1,980,000				1,980,000	Chase Capital II, 3.693% due 2/1/27		1,034,411				3,535		1,037,946
970,000				970,000	Citigroup Capital XXI, 8.300% due 12/21/57		748,100				1,688		749,788
					Citigroup Inc.:
1,000,000				1,000,000	6.125% due 8/25/36		895,795				2,801		898,596
375,000		750,000		1,125,000	Junior Subordinated Notes, Preferred Securities, 8.400% due 4/30/18 (b)(c)		247,609		496,155		469		744,233
		4,730,000		4,730,000	Notes, 6.875% due 3/5/38				5,400,388				5,400,388
					General Electric Capital Corp.:
5,000		270,000		275,000	Medium-Term Notes, 6.750% due 3/15/32		5,316		287,933		16		293,265
		50,000		50,000	Senior Notes, Medium-Term Notes, 6.150% due 8/1/37				50,299				50,299
2,040,000		2,400,000		4,440,000	Subordinated Debentures, 6.375% due 11/15/67 (b)		1,282,281		1,510,791		1,891		2,794,963
860,000		1,240,000		2,100,000	Glen Meadow Pass-Through Certificates, 6.505% due 2/12/67 (a)(b)		384,500		555,076		472		940,048
2,025,000		2,695,000		4,720,000	Goldman Sachs Capital I, Capital Securities, 6.345% due 2/15/34		1,469,449		1,960,739		3,834		3,434,022
2,500,000				2,500,000	HSBC Finance Capital Trust IX, 5.911% due 11/30/35		1,046,010				1,170		1,047,180
1,260,000				1,260,000	HSBC Finance Corp., 5.500% due 1/19/16		1,196,623				1,710		1,198,333
2,320,000		1,933,000		4,253,000	ILFC E-Capital Trust II, Bonds, 6.250% due 12/21/65 (a)(b)		968,862		808,135		1,067		1,778,064
					International Lease Finance Corp.:
		1,320,000		1,320,000	6.375% due 3/25/13				897,425				897,425
		5,351,000		5,351,000	Notes, 5.875% due 5/1/13				3,575,442				3,575,442
					JPMorgan Chase & Co.:
1,035,000				1,035,000	4.891% due 9/1/15		1,039,958				410		1,040,368
					Subordinated Notes:
		2,782,000		2,782,000	6.625% due 3/15/12				2,851,906				2,851,906
325,000		6,176,000		6,501,000	6.125% due 6/27/17		319,840		6,087,844		521		6,408,205

See Notes to Pro Forma Combined Financial Statements

S-9

Legg Mason Investment Grade Income Portfolio	Legg Mason Partners Corporate Bond Fund		Pro Forma Combined Legg Mason Partners Corporate Bond Fund			Legg Mason Investment Grade Income Portfolio		Legg Mason Partners Corporate Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Corporate Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value		Value		Value
$982,000			$	982,000	Lukoil International Finance BV, 6.356% due 6/7/17 (a)	$	599,020					$	599,020
	$	1,263,000		1,263,000	MUFG Capital Finance 1 Ltd., Preferred Securities, 6.346% due 7/25/16 (b)(c)			$	881,156				881,156
750,000				750,000	Petroplus Finance Ltd., 7.000% due 5/1/17 (a)		457,500			$	3,750		461,250
230,000		2,194,000		2,424,000	SMFG Preferred Capital, Bonds, 6.078% due 1/25/17 (a)(b)(c)		155,165		1,491,108		1,150		1,647,423
					TNK-BP Finance SA:
100,000				100,000	6.625% due 3/20/17		48,000				500		48,500
870,000		1,394,000		2,264,000	Bonds, 7.500% due 7/18/16 (a)		452,400		731,850		4,350		1,188,600
310,000		1,170,000		1,480,000	Senior Notes, 7.875% due 3/13/18 (a)		155,000		590,850		1,550		747,400
920,000				920,000	UFJ Finance Aruba AEC, 6.750% due 7/15/13		899,206				860		900,066
3,030,000				3,030,000	UBS Preferred Funding Trust V, 6.243% due 5/15/49		1,654,756				2,066		1,656,822
4,990,000		7,238,000		12,228,000	ZFS Finance USA Trust II, Bonds, 6.450% due 12/15/65 (a)(b)		2,330,574		3,384,503		2,760		5,717,837
					Total Diversified Financial Services		27,056,463		37,418,164		46,171		64,520,798
Insurance — 4.2%
410,000		1,078,000		1,488,000	ACE INA Holdings Inc., Senior Notes, 5.700% due 2/15/17		367,624		968,099		577		1,336,300
1,450,000		1,771,000		3,221,000	Allstate Corp., 6.500% due 5/15/57 (b)		815,348		998,006		1,766		1,815,120
230,000		2,064,000		2,294,000	American International Group Inc., Junior Subordinated Debentures, 6.250% due 3/15/37		85,968		772,658		132		858,758
90,000				90,000	ASIF Global Financing XIX, 4.900% due 1/17/13 (a)		72,247				62		72,309
1,630,000				1,630,000	Axa, 8.600% due 12/15/30		1,067,288				1,976		1,069,264
910,000		1,301,000		2,211,000	Chubb Corp., Junior Subordinated Notes, 6.375% due 3/29/67 (b)		564,375		808,002		792		1,373,169
760,000		1,063,000		1,823,000	Everest Reinsurance Holdings Inc., 6.600% due 5/15/37 (b)		310,177		434,359		371		744,907
					Hartford Financial Services Group Inc.:
		550,000		550,000	6.300% due 3/15/18				417,722				417,722
825,000		500,000		1,325,000	8.125% due 6/15/38 (b)		434,362		263,588		558		698,508
					Liberty Mutual Group:
720,000				720,000	5.750% due 3/15/14 (a)		465,436				472		465,908
810,000		1,240,000		2,050,000	Junior Subordinated Bonds, 7.800% due 3/15/37 (a)		363,489		557,271		535		921,295
3,325,000		4,027,000		7,352,000	MetLife Inc., Junior Subordinated Debentures, 6.400% due 12/15/36		1,995,000		2,421,785		4,611		4,421,396
					Prudential Financial Inc.:
		1,670,000		1,670,000	5.150% due 1/15/13				1,357,633				1,357,633
910,000		1,410,000		2,320,000	8.875% due 6/15/38 (b)		586,249		909,577		783		1,496,609
					Travelers Cos. Inc.:
710,000				710,000	6.250% due 6/15/37		682,644				2,214		684,858
1,790,000		4,066,000		5,856,000	Junior Subordinated Debentures, 6.250% due 3/15/37 (b)		1,172,516		2,667,174		1,670		3,841,360
					Willis North America Inc.:
760,000				760,000	5.125% due 7/15/10		620,424				209		620,633
660,000		1,709,000		2,369,000	Senior Notes, 5.625% due 7/15/15		483,125		1,252,584		611		1,736,320
							10,086,272		13,828,458		17,339		23,932,069

See Notes to Pro Forma Combined Financial Statements

S-10

Legg Mason Investment Grade Income Portfolio	Legg Mason Partners Corporate Bond Fund		Pro Forma Combined Legg Mason Partners Corporate Bond Fund			Legg Mason Investment Grade Income Portfolio		Legg Mason Partners Corporate Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Corporate Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value		Value		Value
Real Estate Investment Trusts (REITs) — 0.6%
$1,440,000			$	1,440,000	Health Care REIT Inc., 5.875% due 5/15/15	$	994,228			$	1,204	$	995,432
					iStar Financial Inc.:
10,000				10,000	5.375% due 4/15/10		4,600				1		4,601
3,610,000				3,610,000	5.950% due 10/15/13		1,137,150				881		1,138,031
	$	3,715,000		3,715,000	Senior Notes, 5.150% due 3/1/12			$	1,170,868				1,170,868
					Total Real Estate Investment Trusts (REITs)		2,135,978		1,170,868		2,086		3,308,932
Thrifts & Mortgage Finance — 0.9%
1,750,000				1,750,000	BB&T Capital Trust II, 6.750% due 6/7/36		1,397,525				3,791		1,401,316
		4,110,000		4,110,000	Countrywide Financial Corp., Medium-Term Notes, 5.800% due 6/7/12				4,008,878				4,008,878
					Total Thrifts & Mortgage Finance		1,397,525		4,008,878		3,791		5,410,194
					TOTAL FINANCIALS		100,752,564		135,145,148		312,271		236,209,983
HEALTH CARE — 6.2%
Health Care Equipment & Supplies — 0.5%
		872,000		872,000	Baxter International Inc., Senior Notes, 5.900% due 9/1/16				944,592				944,592
840,000		1,209,000		2,049,000	Hospira Inc., Senior Notes, 6.050% due 3/30/17		682,263		983,472		1,043		1,666,778
					Total Health Care Equipment & Supplies		682,263		1,928,064		1,043		2,611,370
Health Care Providers & Services — 5.7%
		2,695,000		2,695,000	Aetna Inc., Senior Notes, 6.000% due 6/15/16				2,482,292				2,482,292
1,100,000		1,671,000		2,771,000	Cardinal Health Inc., Senior Notes, 5.800% due 10/15/16		995,146		1,514,009		1,509		2,510,664
1,150,000				1,150,000	Coventry Health Care Inc., 5.950% due 3/15/17		599,544				811		600,355
					HCA Inc.:
1,790,000				1,790,000	6.300% due 10/1/12		1,261,950				8,950		1,270,900
2,130,000				2,130,000	6.250% due 2/15/13		1,331,250				10,650		1,341,900
150,000				150,000	5.750% due 3/15/14		90,750				750		91,500
1,100,000				1,100,000	9.125% due 11/15/14		1,020,250				2,750		1,023,000
1,380,000				1,380,000	9.250% due 11/15/16		1,266,150				3,450		1,269,600
		3,303,000		3,303,000	Senior Notes, 6.500% due 2/15/16				2,047,860				2,047,860
					Humana Inc.:
600,000				600,000	6.450% due 6/1/16		474,388				654		475,042
		3,657,000		3,657,000	Senior Notes, 6.300% due 8/1/18				2,744,132				2,744,132
565,000		1,432,000		1,997,000	Quest Diagnostic Inc., Senior Notes, 5.125% due 11/1/10		548,435		1,390,607		233		1,939,275
					UnitedHealth Group Inc.:
1,610,000				1,610,000	6.000% due 11/15/17		1,439,234				2,384		1,441,618
		5,236,000		5,236,000	Senior Notes, 5.000% due 8/15/14				4,822,157				4,822,157
1,450,000		2,603,000		4,053,000	Universal Health Services Inc., Notes, 7.125% due 6/30/16		1,251,536		2,249,825		1,728		3,503,089
1,560,000				1,560,000	WellPoint Inc., 5.875% due 6/15/17		1,419,810				2,291		1,422,101

See Notes to Pro Forma Combined Financial Statements

S-11

Legg Mason Investment Grade Income Portfolio	Legg Mason Partners Corporate Bond Fund		Pro Forma Combined Legg Mason Partners Corporate Bond Fund			Legg Mason Investment Grade Income Portfolio		Legg Mason Partners Corporate Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Corporate Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value		Value		Value
	$	3,380,000	$	3,380,000	WellPoint Health Networks Inc., Notes, 6.375% due 1/15/12			$	3,259,794			$	3,259,794
					Total Health Care Providers & Services	$	11,698,443		20,510,676	$	36,160		32,245,279
Pharmaceuticals — 0.0%
$440,000				440,000	Wyeth, 5.950% due 4/1/37		488,526				1,755		490,281
					TOTAL HEALTH CARE		12,869,232		22,438,740		38,958		35,346,930
INDUSTRIALS — 3.1%
Aerospace and Defense — 0.4%
1,000,000				1,000,000	L-3 Communications Corp., 7.625% due 6/15/12		977,500				2,500		980,000
					United Technologies Corp.:
200,000				200,000	6.125% due 2/1/19		213,979				405		214,384
1,140,000				1,140,000	5.400% due 5/1/35		1,074,344				3,658		1,078,002
					Total Aerospace and Defense		2,265,823				6,563		2,272,386
Airlines — 0.1%
					Continental Airlines Inc.:
149,004				149,004	6.545% due 2/2/19		119,203						119,203
427,062				427,062	7.256% due 3/15/20		328,838						328,838
					Total Airlines		448,041						448,041
Building Products — 0.4%
					American Standard Inc.:
37,000				37,000	8.250% due 6/1/09		37,225				3		37,228
5,000				5,000	7.625% due 2/15/10		5,000				1		5,001
		3,159,000		3,159,000	GTL Trade Finance Inc., 7.250% due 10/20/17 (a)				2,654,015				2,654,015
					Total Building Products		42,225		2,654,015		4		2,696,244
Commercial Services & Supplies — 0.4%
					Waste Management Inc.:
690,000				690,000	7.375% due 5/15/29		588,889				1,423		590,312
		1,717,000		1,717,000	Senior Notes, 7.750% due 5/15/32				1,540,022				1,540,022
					Total Commercial Services & Supplies		588,889		1,540,022		1,423		2,130,334
Industrial Conglomerates — 1.2%
					Tyco International Group SA:
		40,000		40,000	Notes, 6.125% due 1/15/09				39,948				39,948
		120,000		120,000	Senior Notes, 6.375% due 10/15/11				118,027				118,027
2,051,000		4,000,000		6,051,000	Tyco International Ltd./Tyco International Finance SA, Senior Bonds, 6.875% due 1/15/21		1,585,983		3,098,844		2,949		4,687,776
		2,370,000		2,370,000	United Technologies Corp., Senior Notes, 5.400% due 5/1/35				2,241,110				2,241,110
					Total Industrial Conglomerates		1,585,983		5,497,929		2,949		7,086,861
Road & Rail — 0.6%
38,638				38,638	Burlington Northern Rail Road Co., 7.330% due 6/23/10		39,302						39,302

See Notes to Pro Forma Combined Financial Statements

S-12

Legg Mason Investment Grade Income Portfolio	Legg Mason Partners Corporate Bond Fund		Pro Forma Combined Legg Mason Partners Corporate Bond Fund			Legg Mason Investment Grade Income Portfolio		Legg Mason Partners Corporate Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Corporate Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value		Value		Value
$348,000			$	348,000	Norfolk Southern Corp., 7.875% due 5/15/43	$	345,415			$	1,017	$	346,432
	$	2,988,000		2,988,000	Union Pacific Corp., Debentures, 6.625% due 2/1/29			$	2,836,451				2,836,451
					Total Road & Rail		384,717		2,836,451		1,017		3,222,185
					TOTAL INDUSTRIALS		5,315,678		12,528,417		11,956		17,856,051
INFORMATION TECHNOLOGY — 0.4%
IT Services — 0.4%
570,000		1,540,000		2,110,000	Electronic Data Systems Corp., Notes, 7.450% due 10/15/29		617,492		1,672,865		1,685		2,292,042
MATERIALS — 4.7%
Chemicals — 0.4%
					Dow Chemical Co.:
		830,000		830,000	5.700% due 5/15/18				738,667				738,667
800,000				800,000	7.375% due 11/1/29		753,422				1,934		755,356
		950,000		950,000	PPG Industries Inc., 5.750% due 3/15/13				940,352				940,352
					Total Chemicals		753,422		1,679,019		1,934		2,434,375
Metals & Mining — 3.8%
260,000		1,570,000		1,830,000	Alcoa Inc., Notes, 6.000% due 7/15/13		235,088		1,420,928		225		1,656,241
		1,000,000		1,000,000	Barrick Gold Financeco LLC, Senior Notes, 6.125% due 9/15/13				949,160				949,160
540,000				540,000	Evraz Group SA, 8.875% due 4/24/13 (a)		275,400				2,700		278,100
4,520,000		7,469,000		11,989,000	Freeport-McMoRan Copper & Gold Inc., Senior Notes, 8.375% due 4/1/17		3,706,400		6,133,065		5,135		9,844,600
2,232,000				2,232,000	GTL Trade Finance Inc., 7.250% due 10/20/17 (a)		1,872,335				2,866		1,875,201
2,178,000		4,999,000		7,177,000	Vale Overseas Ltd., Notes, 6.875% due 11/21/36		1,976,971		4,550,090		5,445		6,532,506
		1,220,000		1,220,000	Vedanta Resources PLC, Senior Notes, 8.750% due 1/15/14 (a)				738,100				738,100
					Total Metals & Mining		8,066,194		13,791,343		16,371		21,873,908
Paper & Forest Products — 0.5%
870,000		1,979,000		2,849,000	Weyerhaeuser Co., Senior Notes, 6.750% due 3/15/12		778,780		1,772,725		538		2,552,043
					TOTAL MATERIALS		9,598,396		17,243,087		18,843		26,860,326
TELECOMMUNICATION SERVICES — 9.3%
Diversified Telecommunication Services — 6.8%
1,200,000		1,633,000		2,833,000	AT&T Corp., Senior Notes, 8.000% due 11/15/31		1,507,362		2,057,288		4,423		3,569,073
					AT&T Inc.:
760,000				760,000	5.100% due 9/15/14		747,070				911		747,981
500,000		2,730,000		3,230,000	5.600% due 5/15/18		509,072		2,784,567		922		3,294,561
420,000		1,155,000		1,575,000	British Telecommunications PLC, Bonds, 9.125% due 12/15/30		446,435		1,230,699		1,092		1,678,226
					Deutsche Telekom International Finance BV:
1,400,000				1,400,000	8.750% due 6/15/30		1,726,399				4,639		1,731,038
670,000				670,000	9.250% due 6/1/32		852,670				2,335		855,005
		4,478,000		4,478,000	Senior Notes, 5.750% due 3/23/16				4,292,718				4,292,718

See Notes to Pro Forma Combined Financial Statements

S-13

Legg Mason Investment Grade Income Portfolio	Legg Mason Partners Corporate Bond Fund		Pro Forma Combined Legg Mason Partners Corporate Bond Fund			Legg Mason Investment Grade Income Portfolio		Legg Mason Partners Corporate Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Corporate Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value		Value		Value
					Embarq Corp.:
$   930,000			$	930,000	7.082% due 6/1/16	$	716,100			$	955	$	717,055
	$	2,718,000		2,718,000	Notes, 7.995% due 6/1/36			$	1,838,466				1,838,466
		1,886,000		1,886,000	Senior Notes, 6.738% due 6/1/13				1,595,118				1,595,118
		1,247,000		1,247,000	France Telecom SA, Notes, 8.500% due 3/1/31				1,569,977				1,569,977
					Koninklijke KPN NV, Senior Notes:
		1,109,000		1,109,000	8.000% due 10/1/10				1,119,653				1,119,653
		1,380,000		1,380,000	8.375% due 10/1/30				1,562,837				1,562,837
		1,848,000		1,848,000	SBC Communications Inc., Notes, 5.100% due 9/15/14				1,818,776				1,818,776
					Telecom Italia Capital SpA:
2,070,000				2,070,000	7.200% due 7/18/36		1,593,900				4,014		1,597,914
		3,850,000		3,850,000	Senior Notes, 6.000% due 9/30/34				2,663,542				2,663,542
800,000		2,695,000		3,495,000	Telefonica Emisiones SAU, Senior Notes, 7.045% due 6/20/36		873,225		2,951,028		2,776		3,827,029
					Verizon Global Funding Corp., Senior Notes:
375,000		1,540,000		1,915,000	7.750% due 6/15/32		414,695		1,707,846		1,177		2,123,718
1,350,000		144,000		1,494,000	5.850% due 9/15/35		1,343,182		143,754		4,512		1,491,448
680,000				680,000	VIP Finance Ireland Ltd, 8.375% due 4/30/13 (a)		435,200				3,400		438,600
					Total Diversified Telecommunication Services		11,165,310		27,336,269		31,156		38,532,735
Wireless Telecommunication Services — 2.5%
1,070,000		1,740,000		2,810,000	America Movil SAB de CV, Senior Notes, 5.625% due 11/15/17		951,261		1,555,611		5,350		2,512,222
980,000		2,830,000		3,810,000	New Cingular Wireless Services Inc., Senior Notes, 8.750% due 3/1/31		1,225,084		3,547,453		3,363		4,775,900
					Nextel Communications Inc.:
469,000				469,000	5.950% due 3/15/14		196,980				178		197,158
1,600,000				1,600,000	7.375% due 8/1/15		672,000				306		672,306
1,000,000				1,000,000	Rogers Wireless Inc., 6.375% due 3/1/14		950,598				1,021		951,619
					Sprint Capital Corp.:
920,000		1,320,000		2,240,000	Global Notes, 6.900% due 5/1/19		653,200		938,740		1,073		1,593,013
					Senior Notes:
360,000		1,540,000		1,900,000	8.375% due 3/15/12		288,000		1,232,804		188		1,520,992
		3,000,000		3,000,000	8.750% due 3/15/32				2,028,813				2,028,813
					Total Wireless Telecommunication Services		4,937,123		9,303,421		11,479		14,252,023
					TOTAL TELECOMMUNICATION SERVICES		16,102,433		36,639,690		42,635		52,784,758
UTILITIES — 6.0%
Electric Utilities — 4.6%
850,000				850,000	Cleveland Electric Illuminating Co., 7.880% due 11/1/17		873,182				1,381		874,563
					Commonwealth Edison Co.:
1,590,000		390,000		1,980,000	5.800% due 3/15/18		1,437,055		353,092		2,474		1,792,621
		1,040,000		1,040,000	6.450% due 1/15/38				932,617				932,617
310,000				310,000	Detroit Edison Co., 5.200% due 10/15/12		305,836				259		306,095
790,000		1,040,000		1,830,000	EEB International Ltd., Senior Bonds, 8.750% due 10/31/14 (a)		732,725		969,800		3,950		1,706,475
					Energy Future Holdings Corp.:
130,000		10,000		140,000	10.875% due 11/1/17 (a)		92,300		7,150		650		100,100
2,930,000		3,160,000		6,090,000	11.250% due 11/1/17 (a)(e)		1,421,050		1,548,400		14,650		2,984,100

See Notes to Pro Forma Combined Financial Statements

S-14

Legg Mason Investment Grade Income Portfolio	Legg Mason Partners Corporate Bond Fund		Pro Forma Combined Legg Mason Partners Corporate Bond Fund			Legg Mason Investment Grade Income Portfolio		Legg Mason Partners Corporate Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Corporate Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value		Value		Value
					FirstEnergy Corp., Notes:
	$	583,000	$	583,000	6.450% due 11/15/11			$	551,435			$	551,435
$2,565,000		5,883,000		8,448,000	7.375% due 11/15/31	$	2,426,531		5,580,267	$	6,477		8,013,275
					Pacific Gas & Electric Co.:
1,900,000		2,605,000		4,505,000	First Mortgage Bonds, 6.050% due 3/1/34		2,017,912		2,775,823		6,681		4,800,416
		500,000		500,000	Senior Notes, 8.250% due 10/15/18				601,781				601,781
		3,080,000		3,080,000	Progress Energy Inc., Senior Notes, 7.750% due 3/1/31				3,091,858				3,091,858
		720,000		720,000	Virginia Electric and Power Co., Senior Notes, 8.875% due 11/15/38				913,990				913,990
					Total Electric Utilities		9,306,591		17,326,213		36,522		26,669,326
Gas Utilities — 0.7%
		3,657,000		3,657,000	AGL Capital Corp., Senior Notes, 4.950% due 1/15/15				3,224,373				3,224,373
850,000				850,000	Intergas Finance BV, 6.375% due 5/14/17 (a)		493,000				4,250		497,250
480,000				480,000	Southern Natural Gas Co., 5.900% due 4/1/17 (a)		380,380				2,400		382,780
					Total Gas Utilities		873,380		3,224,373		6,650		4,104,403
Independent Power Producers & Energy Traders — 0.7%
1,690,000				1,690,000	Dynegy Holdings Inc., 8.750% due 2/15/12		1,487,200				8,450		1,495,650
					TXU Corp., Senior Notes:
		38,000		38,000	5.550% due 11/15/14				17,945				17,945
2,730,000		3,349,000		6,079,000	6.500% due 11/15/24		965,841		1,201,581		13,650		2,181,072
		1,043,000		1,043,000	6.550% due 11/15/34				357,323				357,323
					Total Independent Power Producers & Energy Traders		2,453,041		1,576,849		22,100		4,051,990
Multi-Utilities — 0.0%
270,000				270,000	DTE Energy Co., 6.350% due 6/1/16		241,970				344		242,314
					TOTAL UTILITIES		12,874,982	$	22,127,435		65,616		35,068,033
					TOTAL CORPORATE BONDS & NOTES		203,061,498		334,778,392		668,918		538,508,808
					(Cost)	$	305,819,733	$	462,402,130			$	768,221,863
CONVERTIBLE BOND & NOTE — 0.2%
CONSUMER DISCRETIONARY — 0.2%
Media — 0.2%
300,000	$	490,000		790,000	Omnicom Group Inc., Senior Notes, zero coupon bond to yield 0.551% due 7/1/38		271,125		445,287		1,500		717,912
					(Cost)	$	255,088	$	416,643			$	671,731
COLLATERALIZED MORTGAGE OBLIGATIONS — 0.8%
					Thornburg Mortgage Securities Trust:
1,317,919		1,781,631		3,099,550	6.201% due 9/25/37 (b)		1,011,128		1,369,061		1,602		2,381,791
1,384,327		1,866,509		3,250,836	6.208% due 9/25/37 (b)		980,405		1,326,488		3,407		2,310,300
					TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS		1,991,533		2,695,549		5,009		4,692,091
					(Cost)	$	2,678,761	$	3,615,444			$	6,294,205

See Notes to Pro Forma Combined Financial Statements

S-15

Legg Mason Investment Grade Income Portfolio	Legg Mason Partners Corporate Bond Fund		Pro Forma Combined Legg Mason Partners Corporate Bond Fund			Legg Mason Investment Grade Income Portfolio		Legg Mason Partners Corporate Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Corporate Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value		Value		Value
MORTGAGE BACKED SECURITIES — 0.0%
FHLMC — 0.0%
$45,677			$	45,677	Federal Home Loan Mortgage Corp. (FHLMC), 5.111% due 9/1/24 (f) (Cost — $45,717)	$	45,493			$	14	$	45,507
U.S. GOVERNMENT & AGENCY OBLIGATION — 0.6%
U.S. Government Obligations — 0.6%
	$	2,955,000		2,955,000	U.S. Treasury Notes, 3.750% due 11/15/18 (Cost — $3,382,963)			$	3,346,074				3,346,074
Shares	Shares		Shares
PREFERRED STOCKS — 0.1%
FINANCIALS — 0.1%
Consumer Finance — 0.1%
616		594		1,210	Preferred Blocker Inc., 9.000% (a)*		154,000		178,200		30,800		363,000
Thrifts & Mortgage Finance — 0.0%
244,245		351,225		595,470	Federal Home Loan Mortgage Corp. (FHLMC), 8.375% (b)(f)*		95,255		136,978		1		232,234
35,925		46,575		82,500	Federal National Mortgage Association (FNMA), 8.250% (b)(f)*		29,818		38,657		—		68,475
					Total Thrifts & Mortgage Finance		125,073		175,635		1		300,709
					TOTAL PREFERRED STOCKS		279,073		353,835		30,801		663,709
					(Cost)	$	4,615,075	$	6,326,005			$	10,941,080
					TOTAL INVESTMENTS BEFORE SHORT-TERM INVESTMENTS		205,648,722		341,619,137		706,242		547,974,101
					(Cost)	$	313,414,374	$	476,143,185			$	789,557,559
Face Amount	Face Amount		Face Amount
SHORT-TERM INVESTMENTS — 1.3%
U.S. Government & Agency Obligation — 0.2%
$300,000	$	863,000	$	1,163,000	Federal National Mortgage Association (FNMA), Discount Notes, 0.351% due 5/18/09 (f)(g)(h)	$	299,716	$	862,266	$	29	$	1,162,011
					(Cost)	$	299,600	$	861,851			$	1,161,451

See Notes to Pro Forma Combined Financial Statements

S-16

Legg Mason Investment Grade Income Portfolio	Legg Mason Partners Corporate Bond Fund		Pro Forma Combined Legg Mason Partners Corporate Bond Fund			Legg Mason Investment Grade Income Portfolio		Legg Mason Partners Corporate Bond Fund		Pro Forma Adjustments			Pro Forma Combined Legg Mason Partners Corporate Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value		Value			Value
Repurchase Agreement — 1.1%
	$	6,351,000	$	6,351,000	Morgan Stanley tri-party repurchase agreement dated 12/31/08, 0.020% due 1/2/09; Proceeds at maturity — $6,351,007; (Fully collateralized by U.S. government agency obligation, 0.000% due 10/15/20; Market value — $6,478,474)			$	6,351,000				$	6,351,000
					(Cost)			$	6,351,000				$	6,351,000
					TOTAL SHORT-TERM INVESTMENTS	$	299,716		7,213,266	$	29			7,513,011
					(Cost)	$	299,600	$	7,212,851				$	7,512,451
					TOTAL INVESTMENTS — 97.4%		205,948,438		348,832,403		706,271			555,487,112
					(Cost#)	$	313,713,974	$	483,356,036				$	797,070,010
					Other Assets in Excess of Liabilities — 2.6%		5,433,523		9,464,509		(28,600	)		14,869,432
					TOTAL NET ASSETS — 100.0%	$	211,381,961	$	358,296,912	$	677,671		$	570,356,544

* Non-income producing security.

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

(b) Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2008.

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

(d) Security is currently in default.

(e) Payment-in-kind security for which part of the income earned may be paid as additional principal.

(f) On September 7, 2008, the Federal Housing Finance Agency placed Fannie Mae and Freddie Mac into conservatorship.

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

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

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

Abbreviations used in this schedule:

GMAC — General Motors Acceptance Corp.

See Notes to Pro Forma Combined Financial Statements

S-17

Pro Forma Combined Statement of Assets and Liabilities

As of December 31, 2008 (unaudited)

	Legg Mason Investment Grade Income Portfolio			Legg Mason Partners Corporate Bond Fund			Pro Forma Adjustments			Pro Forma Combined Legg Mason Partners Corporate Bond Fund
ASSETS:
Investments, at cost	$	313,713,974		$	483,356,036			—		$	797,070,010
Investments, at value	$	205,948,438		$	348,832,403		$	706,271	(a)	$	555,487,112
Cash		108,092			2,190,454			—			2,298,546
Receivable for securities sold		6,270,550			—			—			6,270,550
Receivable for Fund shares sold		328,220			2,323,972			—			2,652,192
Interest and dividends receivable		4,645,644			7,302,267			—			11,947,911
Receivable from broker—variation margin on open futures contracts		207,765			671,250			—			879,015
Prepaid expenses		—			44,582			—			44,582
Other assets		1,226			—			—			1,226
Total Assets		217,509,935			361,364,928			706,271			579,581,134
LIABILITIES:
Payable for securities purchased		3,833,796			—			—			3,833,796
Payable for Fund shares repurchased		2,059,799			2,242,321			—			4,302,120
Investment Management fee payable		6,124			186,490			—			192,614
Distribution fees payable		104,877			110,669			—			215,546
Trustees’/Directors’ fees payable		6,039			6,541			—			12,580
Distributions payable		—			66,830			—			66,830
Accrued expenses		117,339			455,165			28,600	(b)		601,104
Total Liabilities		6,127,974			3,068,016			28,600			9,224,590
Total Net Assets	$	211,381,961		$	358,296,912		$	677,671		$	570,356,544
NET ASSETS:
Par value	$	30,350		$	425		$	(30,099	)(c)	$	676
Paid-in capital in excess of par value		334,791,334			541,285,512			30,099	(c)		876,106,945
Undistributed/(overdistributed) net investment income		216,024			(135,260	)		(28,600	)(b)		52,164
Accumulated net realized loss on investments and futures contracts		(16,228,226	)		(46,385,225	)		—			(62,613,451	)
Net unrealized depreciation on investments and futures contracts		(107,427,521	)		(136,468,540	)		706,271	(a)		(243,189,790	)
Total Net Assets	$	211,381,961		$	358,296,912		$	677,671		$	570,356,544
Net Assets:
Class A		—		$	254,935,628		$	(12,799	)(b)	$	254,922,829
Class B		—			55,708,838			(2,797	)(b)		55,706,041
Class C		—			45,560,127			(2,287	)(b)		45,557,840
Class I		—			2,092,319			9,977,609	(a)(b)(d)		12,069,928
Class P		—			—			202,099,906	(a)(b)(d)		202,099,906
Primary Class	$	201,436,976			—			(201,436,976	)(d)		—
Institutional Class		9,944,985			—			(9,944,985	)(d)		—
	$	211,381,961		$	358,296,912		$	677,671		$	570,356,544

S-18

	Legg Mason Investment Grade Income Portfolio		Legg Mason Partners Corporate Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Corporate Bond Fund
Shares Outstanding:
Class A		—		30,228,959	—			30,228,959
Class B		—		6,620,662	—			6,620,662
Class C		—		5,434,260	—			5,434,260
Class I		—		248,396	1,184,594	(d)(e)		1,432,990
Class P		—		—	23,965,169	(d)(e)		23,965,169
Primary Class		28,922,278		—	(28,922,278	)(d)(e)		—
Institutional Class		1,427,647		—	(1,427,647	)(d)(e)		—
Net Asset Value:
Class A			$	8.43			$	8.43
Class B			$	8.41			$	8.41
Class C			$	8.38			$	8.38
Class I			$	8.42			$	8.42
Class P							$	8.43
Primary Class	$	6.96
Institutional Class	$	6.97

^(a) Reflects adjustment resulting from adoption by the Acquired Fund’s Board prior to the Reorganization of the valuation policies and procedures applicable to the Acquiring Fund.

^(b) Reflects adjustment for estimated reorganization costs of $28,600 related to the Acquiring Fund.

^(c) Adjustment to reflect the par value of the Combined Fund’s shares outstanding due to the Reorganization.

^(d) Legg Mason Investment Grade Income Portfolio Primary Class and Institutional Class shares will be exchanged for Legg Mason Partners Corporate Bond Fund Class P and Class I shares, respectively.

^(e) Reflects adjustments to the number of shares outstanding due to the Reorganization.

See Notes to Pro Forma Combined Financial Statements.

S-19

Pro Forma Combined Statement of Operations for Legg Mason Investment Grade Income Portfolio and Legg Mason Partners Corporate Bond Fund for the Year Ended December 31, 2008 (unaudited)

	Legg Mason Investment Grade Income Portfolio			Legg Mason Partners Corporate Bond Fund			Pro Forma Adjustments			Pro Forma Combined Legg Mason Partners Corporate Bond Fund
INVESTMENT INCOME:
Interest	$	25,454,461		$	35,628,753			—		$	61,083,214
Dividends		119,560			154,806			—			274,366
Total Investment Income		25,574,021			35,783,559			—			61,357,580
EXPENSES:
Investment management fee		1,973,193			3,049,059		$	(626,566	)(a)		4,395,686
Distribution fees:
Class A		—			837,211			—			837,211
Class B		—			584,727			—			584,727
Class C		—			401,455			—			401,455
Class P		—			—			1,569,891	(b)		1,569,891
Primary Class		1,569,891			—			(1,569,891	)(b)		—
Transfer agent fees:
Class A		—			586,516			—			586,516
Class B		—			292,306			—			292,306
Class C		—			278,944			—			278,944
Class I		—			93			20,055	(b)		20,148
Class P		—			—			237,022	(b)		237,022
Primary Class		237,022			—			(237,022	)(b)		—
Institutional Class		20,055			—			(20,055	)(b)		—
Shareholder reports:
Class A		—			207,636			—			207,636
Class B		—			19,248			—			19,248
Class C		—			8,761			—			8,761
Class I		—			3			2,977	(b)(c)		2,980
Class P		—			—			62,223	(b)(c)		62,223
Primary Class		77,779			—			(77,779	)(b)		—
Institutional Class		3,718			—			(3,718	)(b)		—
Custody fees		52,417			4,183			(50,000	)(c)		6,600
Registration fees		38,064			63,423			(19,032	)(c)		82,455
Legal fees		25,959			55,660			(20,393	)(c)		61,226
Insurance		40,493			12,374			(36,444	)(c)		16,423
Audit and tax		44,500			33,894			(33,375	)(c)		45,019
Trustees’/Directors’ fees		64,022			7,737			(51,218	)(c)		20,541
Miscellaneous expenses		10,203			7,941			(9,183	)(c)		8,961
Total Expenses		4,157,316			6,451,171			(862,508	)		9,745,979
Less: Fee waivers and/or expenses reimbursements		(942,422	)		—			849,763	(a)		(92,659	)
Fees paid indirectly		(676	)		(123	)		—			(799	)
Net Expenses		3,214,218			6,451,048			(12,745	)		9,652,521
Net Investment Income		22,359,803			29,332,511			12,745			51,705,059

S-20

	Legg Mason Investment Grade Income Portfolio			Legg Mason Partners Corporate Bond Fund			Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Corporate Bond Fund
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES CONTRACTS:
Net Realized Gain (Loss) From:
Investment transactions		(15,718,934	)		(20,555,840	)		—		(36,274,774	)
Futures contracts		238,839			(3,926,284	)		—		(3,687,445	)
Net Realized Loss		(15,480,095	)		(24,482,124	)		—		(39,962,219	)
Change in Net Unrealized Appreciation/Depreciation From:
Investments		(98,254,515	)		(120,742,763	)		—		(218,997,278	)
Futures contracts		432,385			(1,995,103	)		—		(1,562,718	)
Change in Net Unrealized Appreciation/Depreciation		(97,822,130	)		(122,737,866	)		—		(220,559,996	)
Net Loss on Investments and Futures Contracts		(113,302,225	)		(147,219,990	)		—		(260,522,215	)
Decrease in Net Assets From Operations	$	(90,942,422	)	$	(117,887,479	)	$	12,745	$	(208,817,156	)

^(a) To adjust expenses to reflect the Combined Fund’s estimated fees and expenses based upon the contractual rates that will become effective upon the completion of the reorganization.

^(b) Legg Mason Investment Grade Income Portfolio Primary Class and Institutional Class shares will be exchanged for Legg Mason Partners Corporate Bond Fund Class P and Class I shares, respectively.

^(c) Reflects elimination of duplicative expenses and economies of scale achieved as a result of the proposed Reorganization.

See Notes to Pro Forma Combined Financial Statements.

S-21

Legg Mason Investment Grade Income Portfolio Reorganization into Legg Mason Partners Corporate Bond Fund

Notes to Pro Forma Combined Financial Statements (unaudited)

1. Basis of Combination:

The accompanying unaudited Pro Forma Combined Statement of Assets and Liabilities, including the Pro Forma Combined Schedule of Investments as of December 31, 2008 and the related Pro Forma Combined Statement of Operations (“Pro Forma Statements”) for the year ended December 31, 2008, reflect the accounts of Legg Mason Investment Grade Income Portfolio (the “Acquired Fund”) and Legg Mason Partners Corporate Bond Fund (the “Acquiring Fund”), each a “Fund”. Following the combination, Legg Mason Partners Corporate Bond Fund will be the accounting survivor. Under the terms of the Agreement and Plan of Reorganization, the exchange of assets of the Acquired Fund for shares of the Acquiring Fund will be treated as a tax-free Reorganization and accordingly, the tax-free Reorganization will be accounted for in an “as-if” pooling of interests. The combination would be accomplished by an acquisition of the net assets of the Acquired Fund in exchange for shares of the Acquiring Fund at net asset value. The unaudited Pro Forma Combined Schedule of Investments and the unaudited Pro Forma Combined Statement of Assets and Liabilities have been prepared as though the combination had been effective on December 31, 2008. The unaudited Pro Forma Combined Statement of Operations reflects the results of the Funds for the year ended December 31, 2008 as if the Reorganization occurred on December 31, 2008. These Pro Forma Statements have been derived from the books and records of the Funds utilized in calculating daily net asset values at the dates indicated above in conformity with U.S. generally accepted accounting principles. The historical cost of investment securities will be carried forward to the surviving entity. The fiscal year-end is December 31 for both the Acquired Fund and the Acquiring Fund. The Pro Forma Financial Statements should be read in conjunction with the historical financial statements of each Fund, which are incorporated by reference in the Statement of Additional Information. The unaudited Pro Forma Combined Schedule of Investments does not reflect any adjustment for portfolio transactions because, upon consummation of the Reorganization, no securities of the Acquired Fund would need to be sold in order for the Acquiring Fund to comply with its investment restrictions or policies. Because the Funds may buy and sell securities in the normal course of their operations, the schedule of investments at the time of Reorganization may differ from that shown in the Pro Forma Combined Schedule of Investments.

2. Use of Estimates:

Management has made certain estimates and assumptions relating to the reporting of assets, liabilities, income, and expenses to prepare these Pro Forma Combined Financial Statements in conformity with U.S. generally accepted accounting principles for investment companies. Actual results could differ from these estimates.

3. Investment Valuation:

Debt securities are valued at the mean between the last quoted bid and asked prices provided by an independent pricing service that are based on transactions in debt obligations, quotations from bond dealers, market transactions in comparable securities and various other relationships between securities. Publicly traded foreign government debt securities are typically traded internationally in the over-the-counter market, and are valued at the mean between the last quoted bid and asked prices as of the close of business of that market. 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. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. When prices are not readily available, or are determined not to reflect fair value, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund may value these securities at fair value as determined in accordance with the procedures approved by the Fund’s Board of Trustees. Short-term obligations with maturities of 60 days or less are valued at amortized cost, which approximates fair value. The Acquired Fund values fixed income securities using bid prices. The difference in the valuation policies of the Acquired Fund and the Acquiring Fund resulted in an estimated pro forma adjustment to the Pro Forma Combined Schedule of Investments and Pro Forma Combined Statement of Assets and Liabilities of $706,271, as of December 31, 2008.

4. Shares of Beneficial Interest:

The unaudited pro forma net asset value per share assumes additional shares of beneficial interest of the Acquiring Fund were issued in connection with the proposed acquisition of the Acquired Fund as of December 31, 2008. The number of additional shares issued was calculated by dividing the net asset value of each class of the Acquired Fund by the respective class net asset value per share of the Acquiring Fund.

S-22

5. Pro Forma Operations:

In the Pro Forma Combined Statement of Operations certain expenses have been adjusted to reflect the expected expenses of the combined entity. Management has agreed to reduce the contractual management fee expense for Legg Mason Corporate Bond Fund from 0.65% to 0.55%, effective as of the Closing Date of the Reorganization. The pro forma investment management fee of the combined Fund is based on the Acquiring Fund’s combined level of average net assets and is calculated as if the contractual management fee rate effective upon the Closing Date of the Reorganization had been in effect for the year ended December 31, 2008. The pro-forma plan of distribution fees of the combined entity are based on the fee schedules in effect for the Acquiring Fund’s combined level of average net assets for the year ended December 31, 2008.

6. Federal Income Taxes:

It is the policy of the Funds to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, the Funds intend to distribute substantially all of their net investment income and net realized gains on investments, if any, to their shareholders. Therefore, no federal income tax provision is required.

S-23

Legg Mason Limited Duration Bond Portfolio (Acquired Fund) and Legg Mason Partners Short-Term Bond Fund (Acquiring Fund)

Shown below are the financial statements for each of Legg Mason Limited Duration Bond Portfolio and Legg Mason Partners Short-Term Bond Fund and pro forma financial statements for the combined Funds, assuming the Reorganization of those Funds is consummated as of December 31, 2008. The first table presents the Schedule of Investments for each Fund and pro forma figures for the combined Fund. The second table presents the Statements of Assets and Liabilities for each Fund and estimated pro forma figures for the combined Fund. The third table presents the Statements of Operations for each Fund and estimated pro forma figures for the combined Fund. These tables are followed by the Notes to the Pro Forma Financial Statements.

The pro forma financial statements are unaudited and are based on financial statements as of and for the year ended December 31, 2008.

Pro Forma Combined Schedule of Investments

As of December 31, 2008 (unaudited)

Limited Duration Bond Portfolio	Legg Mason Partners Short-Term Bond Fund		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund			Limited Duration Bond Portfolio		Legg Mason Partners Short-Term Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value				Value
CORPORATE BONDS & NOTES — 37.9%
CONSUMER DISCRETIONARY — 3.6%
Media — 3.4%
$1,100,000	$	2,400,000	$	3,500,000	Clear Channel Communications Inc., Senior Notes, 4.250% due 5/15/09	$	968,000	$	2,124,000	$	5,500	$	3,097,500
					Comcast Cable Communications Inc.:
600,000		1,500,000		2,100,000	6.875% due 6/15/09		602,811		1,507,191		65		2,110,067
		1,600,000		1,600,000	Senior Notes, 6.750% due 1/30/11				1,606,848				1,606,848
		1,000,000		1,000,000	News America Holdings Inc., 9.250% due 2/1/13				1,077,652				1,077,652
180,000		370,000		550,000	Time Warner Cable Inc., Senior Notes, 8.250% due 2/14/14		182,604		375,739		188		558,531
830,000		1,020,000		1,850,000	Time Warner Inc., 5.500% due 11/15/11		779,880		959,024		502		1,739,406
280,000		620,000		900,000	Walt Disney Co., Senior Notes, 4.700% due 12/1/12		288,171		638,659		256		927,086
					Total Media		2,821,466		8,289,113		6,511		11,117,090
Leisure Equipment and Products — 0.0%
110,000				110,000	Eastman Kodak Co., 7.250% due 11/15/13		70,950				550		71,500
Multiline Retail — 0.2%
330,000		660,000		990,000	Federated Retail Holdings Inc., 5.350% due 3/15/12		245,115		490,564		167		735,846
					TOTAL CONSUMER DISCRETIONARY		3,137,531		8,779,677		7,228		11,924,436
CONSUMER STAPLES — 0.9%
Beverages — 0.4%
350,000		830,000		1,180,000	Diageo Capital PLC, 5.200% due 1/30/13		344,407		817,474		311		1,162,192
Food & Staples Retailing — 0.2%
500,000				500,000	Wal-Mart Stores Inc., 5.800% due 2/15/18		553,275				991		554,266

See Notes to Pro Forma Combined Financial Statements

S-24

Limited Duration Bond Portfolio	Legg Mason Partners Short-Term Bond Fund		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund			Limited Duration Bond Portfolio		Legg Mason Partners Short-Term Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value				Value
Tobacco — 0.3%
$   400,000	$	700,000	$	1,100,000	Philip Morris International Inc., 4.875% due 5/16/13	$	401,145	$	702,687	$	390	$	1,104,222
					TOTAL CONSUMER STAPLES		1,298,827		1,520,161		1,692		2,820,680
ENERGY — 5.9%
Oil, Gas & Consumable Fuels — 5.9%
		1,440,000		1,440,000	Amerada Hess Corp., Senior Notes, 6.650% due 8/15/11				1,440,279				1,440,279
870,000		2,000,000		2,870,000	Anadarko Finance Co., Senior Notes, 6.750% due 5/1/11		870,311		2,001,774		461		2,872,546
520,000		1,300,000		1,820,000	Apache Corp., Notes, 6.250% due 4/15/12		544,573		1,362,438		402		1,907,413
		1,000,000		1,000,000	ConocoPhillips, 4.750% due 10/15/12				997,574				997,574
350,000		1,000,000		1,350,000	Devon Financing Corp. ULC, Notes, 6.875% due 9/30/11		353,206		1,009,782		218		1,363,206
		1,000,000		1,000,000	Duke Capital LLC, Senior Notes, 6.250% due 2/15/13				952,338				952,338
590,000		1,170,000		1,760,000	El Paso Natural Gas Co., Senior Notes, 5.950% due 4/15/17		468,827		935,557		2,950		1,407,334
120,000		250,000		370,000	Energy Transfer Partners LP, Senior Notes, 9.700% due 3/15/19		123,649		258,018		200		381,867
		890,000		890,000	Enterprise Products Operating LP, Senior Notes, 9.750% due 1/31/14				907,170				907,170
510,000				510,000	Hess Corp., 6.650% due 8/15/11		509,798						509,798
810,000		1,700,000		2,510,000	Kinder Morgan Energy Partners LP, Notes, 6.750% due 3/15/11		787,839		1,654,314		393		2,442,546
690,000		1,430,000		2,120,000	Occidental Petroleum Corp., Senior Notes, 7.000% due 11/1/13		753,097		1,562,371		774		2,316,242
252,000		479,000		731,000	Pemex Project Funding Master Trust, Senior Notes, 2.820% due 12/3/12 (a)(b)		210,420		402,360		1,260		614,040
440,000		1,000,000		1,440,000	XTO Energy Inc., Senior Notes, 5.650% due 4/1/16		403,686		918,793		583		1,323,062
					TOTAL ENERGY		5,025,406		14,402,768		7,240		19,435,415
FINANCIALS — 15.6%
Capital Markets — 3.4%
200,000		1,540,000		1,740,000	Bear Stearns Co. Inc., Senior Notes, 6.400% due 10/2/17		207,836		1,603,009		347		1,811,192
900,000				900,000	Deutsche Bank AG, 6.000% due 9/1/17		954,948				1,616		956,564
2,080,000		3,500,000		5,580,000	Goldman Sachs Capital II, Junior Subordinated Bonds, 5.793% due 6/1/12 (a)(c)		799,600		1,346,303		489		2,146,392
350,000		480,000		830,000	Goldman Sachs Group Inc., 6.600% due 1/15/12		345,333		473,918		232		819,483
190,000				190,000	Kaupthing Bank HF, 4.958% due 1/15/10 (b)(d)		11,400				950		12,350
					Kaupthing Bank HF, Senior Notes:
420,000		1,700,000		2,120,000	5.750% due 10/4/11 (b)(d)		25,200		110,500		2,100		137,800
330,000		560,000		890,000	7.625% due 2/28/15 (b)(d)(e)(f)		19,800		33,600				53,400
970,000		1,650,000		2,620,000	Lehman Brothers Holdings Capital Trust VII, Medium-Term Notes, 5.857% due 5/31/12 (a)(c)(d)		97		165				262
340,000		470,000		810,000	Lehman Brothers Holdings Inc., Subordinated Notes, 6.500% due 7/19/17 (d)		34		47				81

See Notes to Pro Forma Combined Financial Statements

S-25

Limited Duration Bond Portfolio	Legg Mason Partners Short-Term Bond Fund		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund			Limited Duration Bond Portfolio		Legg Mason Partners Short-Term Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value				Value
					Merrill Lynch & Co. Inc.:
					Medium-Term Notes:
	$	1,000,000	$	1,000,000	4.250% due 2/8/10			$	977,697			$	977,697
$   720,000		1,210,000		1,930,000	6.150% due 4/25/13	$	713,440		1,200,094	$	666		1,914,200
700,000		1,000,000		1,700,000	Senior Notes, Medium-Term Notes, 6.050% due 8/15/12		690,605		987,367		552		1,678,524
330,000		460,000		790,000	Morgan Stanley, Notes, 6.600% due 4/1/12		319,041		445,041		228		764,310
					Total Capital Markets		4,087,334		7,177,741		7,180		11,272,255
Commercial Banks — 4.3%
					Glitnir Banki HF:
1,550,000		2,000,000		3,550,000	Notes, 5.815% due 1/21/11 (a)(b)(d)		73,625		105,000		7,750		186,375
50,000		300,000		350,000	Subordinated Notes, 6.693% due 6/15/16 (a)(b)(d)		8		1,545		250		1,803
					HSBC Bank PLC:
1,000,000				1,000,000	7.333% due 7/20/12 (b)		505,000						505,000
70,000				70,000	7.468% due 8/20/12		37,569						37,569
70,000				70,000	7.718% due 8/20/12		37,905						37,905
1,900,000				1,900,000	Keycorp, 2.646% due 12/15/10 Landsbanki Islands HF:		1,906,975				1,089		1,908,064
240,000		350,000		590,000	7.431% due 10/19/17 (a)(b)(c)(d)		36		1,803		1,200		3,039
620,000		1,100,000		1,720,000	Senior Notes, 6.100% due 8/25/11 (b)(d)		10,850		24,750		3,100		38,700
830,000		1,460,000		2,290,000	Resona Preferred Global Securities Cayman Ltd., Bonds, 7.191% due 7/30/15 (a)(b)(c)		395,153		695,776		391		1,091,320
		2,130,000		2,130,000	Royal Bank of Scotland PLC, Senior Notes, 3.000% due 12/9/11 (b)				2,178,847				2,178,847
		1,050,000		1,050,000	RSHB Capital, Loan Participation Notes, 6.299% due 5/15/17 (b)				603,750				603,750
640,000		1,140,000		1,780,000	Shinsei Finance Cayman Ltd., Junior Subordinated Bonds, 6.418% due 7/20/16 (a)(b)(c)		133,857		238,616		103		372,576
120,000		230,000		350,000	SunTrust Capital, Trust Preferred Securities, 6.100% due 12/15/36 (a)		84,481		162,359		228		247,068
320,000		610,000		930,000	TuranAlem Finance BV, Bonds, 5.434% due 1/22/09 (a)(b)		300,800		574,162		400		875,362
		700,000		700,000	VTB Capital SA, Loan Participation Notes, 4.559% due 11/2/09 (a)(b)				622,390				622,390
1,960,000		3,100,000		5,060,000	Wachovia Capital Trust III, Bank Guaranteed, 5.800% due 3/15/11 (a)(c)		1,156,400		1,829,806		510		2,986,716
300,000		600,000		900,000	Wells Fargo Capital X, Capital Securities, 5.950% due 12/15/36		257,114		515,833		803		773,750
350,000		1,970,000		2,320,000	Wells Fargo Capital XIII, Medium-Term Notes, 7.700% due 3/26/13 (a)(c)		288,859		1,627,244		245		1,916,348
					Total Commercial Banks		5,188,632		9,181,881		16,069		14,386,582
Consumer Finance — 1.9%
1,900,000				1,900,000	American Express Bank FSB, 3.150% due 12/9/11		1,915,126				1,330		1,916,456
600,000		1,500,000		2,100,000	American Express Co., Subordinated Debentures, 6.800% due 9/1/66 (a)		310,591		777,428		380		1,088,399
					GMAC LLC:
853,000		2,195,000		3,048,000	7.500% due 12/31/13 (b)		622,690		1,635,275		12,795		2,270,760
		487,000		487,000	8.000% due 12/31/18 (b)				250,805				250,805
380,000		790,000		1,170,000	Nelnet Inc., Notes, 7.400% due 9/29/36 (a)		113,941		236,980		49		350,970
590,000				590,000	SLM Corp., 8.450% due 6/15/18		466,466				694		467,160
					Total Consumer Finance		3,428,814		2,900,488		15,248		6,344,550

See Notes to Pro Forma Combined Financial Statements

S-26

Limited Duration Bond Portfolio	Legg Mason Partners Short-Term Bond Fund		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund			Limited Duration Bond Portfolio		Legg Mason Partners Short-Term Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value				Value
Diversified Financial Services — 5.0%
$   860,000	$	1,400,000	$	2,260,000	AGFC Capital Trust I, 6.000% due 1/15/67 (a)(b)	$	205,409	$	334,705	$	196	$	540,310
1,280,000		1,300,000		2,580,000	Aiful Corp., Notes, 5.000% due 8/10/10 (b)		703,743		714,960		218		1,418,921
		890,000		890,000	Bank of America Corp., Notes, Preferred Securities, 8.000% due 1/30/18 (a)(c)				641,085				641,085
400,000		800,000		1,200,000	Capmark Financial Group Inc., 5.875% due 5/10/12		136,396		272,951		80		409,427
		1,150,000		1,150,000	Countrywide Home Loans Inc., Unsecured Notes, 6.250% due 4/15/09				1,150,319				1,150,319
					General Electric Capital Corp.:
2,000,000				2,000,000	3.116% due 12/9/11		2,033,960				1,722		2,035,682
		400,000		400,000	Senior Notes, 5.625% due 5/1/18				403,624				403,624
675,000		1,050,000		1,725,000	Subordinated Debentures, 6.375% due 11/15/67 (a)		424,284		660,971		626		1,085,881
950,000		1,700,000		2,650,000	IBM International Group Capital LLC, Senior Notes, 5.050% due 10/22/12		991,261		1,775,364		854		2,767,479
		270,000		270,000	ILFC E-Capital Trust I, 5.900% due 12/21/65 (a)(b)				86,566				86,566
		580,000		580,000	International Lease Finance Corp., Medium-Term Notes, 5.169% due 7/13/12 (a)				364,608				364,608
		1,060,000		1,060,000	JPMorgan Chase Bank N.A., Medium-Term Notes, 5.085% due 2/11/11 (a)(f)				886,197				886,197
		850,000		850,000	Merna Reinsurance Ltd., Subordinated Notes, 3.209% due 7/7/10 (a)(b)				767,465				767,465
600,000		1,000,000		1,600,000	MUFG Capital Finance 1 Ltd., Preferred Securities, 6.346% due 7/25/16 (a)(c)		418,034		697,669		567		1,116,270
					TNK-BP Finance SA:
1,090,000		1,850,000		2,940,000	6.875% due 7/18/11 (b)		795,700		1,359,750		5,450		2,160,900
		100,000		100,000	Notes, 6.125% due 3/20/12 (b)				64,500				64,500
970,000		1,420,000		2,390,000	ZFS Finance USA Trust I, 3.146% due 12/15/65 (a)(b)		293,425		431,325		1,213		725,963
					Total Diversified Financial Services		6,002,212		10,612,059		10,926		16,625,197
Insurance — 0.1%
400,000				400,000	Merna Reinsurance Ltd., 3.218% due 7/7/10 (b)		361,160						361,160
Real Estate Investment Trusts (REITs) — 0.5%
					iStar Financial Inc.:
1,330,000				1,330,000	2.336% due 9/15/09		758,100				1,663		759,763
1,000,000		2,090,000		3,090,000	5.650% due 9/15/11		320,000		669,111		149		989,260
					Total Real Estate Investment Trusts (REITs)		1,078,100		669,111		1,812		1,749,023
Thrifts and Mortgage Finance — 0.4%
					Countrywide Financial Corp.:
610,000				610,000	1.686% due 3/24/09		605,037				33		605,070
600,000				600,000	5.800% due 6/7/12		584,792				446		585,238
					Total Thrifts and Mortgage Finance		1,189,829				479		1,190,308
					TOTAL FINANCIALS		21,336,081		30,541,280		51,714		51,929,075
HEALTH CARE — 1.3%
Health Care Equipment & Supplies — 0.8%
520,000		810,000		1,330,000	Baxter FinCo BV, 4.750% due 10/15/10		518,530		808,051		219		1,326,800
500,000		1,100,000		1,600,000	Hospira Inc., Senior Notes, 5.550% due 3/30/12		473,734		1,042,968		342		1,517,044
					Total Health Care Equipment & Supplies		992,264		1,851,019		561		2,843,844

See Notes to Pro Forma Combined Financial Statements

S-27

Limited Duration Bond Portfolio	Legg Mason Partners Short-Term Bond Fund		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund			Limited Duration Bond Portfolio		Legg Mason Partners Short-Term Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value				Value
Health Care Providers & Services — 0.5%
$   180,000	$	1,000,000	$	1,180,000	Quest Diagnostic Inc., Senior Notes, 5.125% due 11/1/10	$	174,723	$	971,094	$	74	$	1,145,891
		510,000		510,000	UnitedHealth Group Inc., 4.875% due 2/15/13				476,581				476,581
					Total Health Care Providers & Services		174,723		1,447,675		74		1,622,472
					TOTAL HEALTH CARE		1,166,987		3,298,694		635		4,466,316
INDUSTRIALS — 2.8%
Aerospace & Defense — 0.4%
410,000		950,000		1,360,000	United Technologies Corp., Senior Notes, 5.375% due 12/15/17		414,467		962,044		731		1,377,242
Air Freight & Logistics — 0.2%
		520,000		520,000	United Parcel Service Inc., 4.500% due 1/15/13				536,894				536,894
Airlines — 1.0%
					Continental Airlines Inc., Pass-Through Certificates:
70,000		130,000		200,000	7.056% due 9/15/09		67,200		124,800				192,000
435,955		784,720		1,220,675	6.900% due 1/2/18		348,764		627,776				976,540
387,411		715,220		1,102,631	6.545% due 2/2/19		309,929		572,176				882,105
286,978		521,246		808,224	6.703% due 6/15/21		215,233		390,934				606,167
845,819		111,465		957,284	Northwest Airlines Inc., Pass-Through Certificates, 3.445% due 5/20/14 (a)		592,074		78,025				670,099
					Total Airlines		1,533,200		1,793,711				3,326,911
Commercial Services and Supplies — 0.2%
650,000				650,000	Waste Management Inc., 7.375% due 8/1/10		658,702				242		658,944
Industrial Conglomerates — 1.0%
1,480,000		2,000,000		3,480,000	Tyco International Group SA, Senior Notes, 6.375% due 10/15/11		1,454,757		1,967,118		906		3,422,781
					TOTAL INDUSTRIALS		4,061,126		5,259,767		1,879		9,322,772
INFORMATION TECHNOLOGY — 0.9%
IT Services — 0.9%
1,000,000		1,900,000		2,900,000	Electronic Data Systems Corp., Notes, 7.125% due 10/15/09		1,016,625		1,931,951		191		2,948,767
Office Electronics — 0.0%
330,000				330,000	Xerox Corp., 5.500% due 5/15/12		276,556				201		276,757
					TOTAL INFORMATION TECHNOLOGY		1,293,181		1,931,951		392		3,225,524
MATERIALS — 1.0%
Chemicals — 0.1%
90,000				90,000	The Dow Chemical Co., 5.700% due 5/15/18		79,957				140		80,097
Metals & Mining — 0.9%
1,130,000		2,070,000		3,200,000	Vale Overseas Ltd., Notes, 6.250% due 1/23/17		1,065,364		1,956,771		2,825		3,024,960

See Notes to Pro Forma Combined Financial Statements

S-28

Limited Duration Bond Portfolio	Legg Mason Partners Short-Term Bond Fund		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund			Limited Duration Bond Portfolio		Legg Mason Partners Short-Term Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value				Value
Paper & Forest Products — 0.0%
	$	80,000	$	80,000	Weyerhaeuser Co., Senior Notes, 6.750% due 3/15/12			$	71,662			$	71,662
					TOTAL MATERIALS	$	1,145,321		2,028,433	$	2,965		3,176,719
TELECOMMUNICATION SERVICES — 4.6%
Diversified Telecommunication Services — 3.9%
$   520,000				520,000	British Telecommunications PLC, 8.625% due 12/15/10		534,924				237		535,161
650,000		1,300,000		1,950,000	Deutsche Telekom International Finance BV, 8.500% due 6/15/10		669,548		1,339,547		226		2,009,321
570,000		1,500,000		2,070,000	France Telecom SA, Notes, 7.750% due 3/1/11		599,813		1,579,237		297		2,179,347
680,000		1,300,000		1,980,000	Koninklijke KPN NV, Senior Notes, 8.000% due 10/1/10		686,258		1,312,488		274		1,999,020
		1,400,000		1,400,000	New England Telephone & Telegraph Co., Notes, 5.875% due 4/15/09				1,400,036				1,400,036
230,000		970,000		1,200,000	Qwest Corp., Senior Notes, 7.875% due 9/1/11		211,600		897,250		1,150		1,110,000
		1,500,000		1,500,000	Telecom Italia Capital SA, 3.673% due 2/1/11 (a)				1,186,895				1,186,895
790,000		1,700,000		2,490,000	Telefonica Emisiones SAU, 3.356% due 2/4/13 (a)		633,733		1,365,306		733		1,999,772
150,000		290,000		440,000	Verizon Communications Inc., Senior Notes, 8.750% due 11/1/18		175,983		340,816		301		517,100
					Total Diversified Telecommunication     Services		3,511,859		9,421,575		3,218		12,936,652
Wireless Telecommunication Services — 0.7%
					Sprint Capital Corp.:
30,000				30,000	6.375% due 5/1/09		29,813				2		29,815
		1,290,000		1,290,000	Senior Notes, 8.375% due 3/15/12				1,032,673				1,032,673
450,000		870,000		1,320,000	Vodafone Group PLC, 5.350% due 2/27/12		444,262		859,520		317		1,304,099
					Total Wireless Telecommunication Services		474,075		1,892,193		319		2,366,587
					TOTAL TELECOMMUNICATION     SERVICES		3,985,934		11,313,768		3,537		15,303,239
UTILITIES — 1.3%
Electric Utilities — 0.8%
		1,580,000		1,580,000	FirstEnergy Corp., Notes, 6.450% due 11/15/11				1,494,454				1,494,454
500,000		600,000		1,100,000	Pacific Gas & Electric Co., Mortgage, 4.800% due 3/1/14		491,028		589,897		553		1,081,478
					Total Electric Utilities		491,028		2,084,351		553		2,575,932
Multi-Utilities — 0.5%
					Dominion Resources Inc.:
		1,300,000		1,300,000	Notes, 4.750% due 12/15/10				1,286,012				1,286,012
300,000				300,000	8.875% due 1/15/19		323,517				325		323,842
					Total Multi-Utilities		323,517		1,286,012		325		1,609,854
					TOTAL UTILITIES		814,545		3,370,363		878		4,185,786
					TOTAL CORPORATE BONDS & NOTES		43,264,939		82,446,862		78,161		125,789,962
					(Cost)		$57,186,287	$	106,006,238			$	163,192,525

See Notes to Pro Forma Combined Financial Statements

S-29

Limited Duration Bond Portfolio	Legg Mason Partners Short-Term Bond Fund		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund			Limited Duration Bond Portfolio		Legg Mason Partners Short-Term Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value				Value
ASSET-BACKED SECURITIES — 7.0%
FINANCIALS — 7.0%
Automobiles — 1.10%
$   900,000	$	1,500,000	$	2,400,000	Drive Auto Receivables Trust, 5.540% due 12/16/13 (b)	$	828,314	$	1,382,391	$	1,121	$	2,211,826
438,340				438,340	Prestige Auto Receivables Trust 2005-1A, 4.370% due 6/16/12 (b)		401,513				484		401,997
386,844		676,978		1,063,822	Wells Fargo Financial Auto Owner Trust, 4.280% due 5/15/12		376,557		659,343		210		1,036,110
					Total Automobiles		1,606,384		2,041,734		1,815		3,649,933
Home Equity — 4.8%
		620,000		620,000	Ameriquest Mortgage Securities Inc., 0.801% due 1/25/36 (a)				371,508				371,508
221,263				221,263	Asset Backed Funding Certificates 2002-WF2, 1.596% due 5/25/32		198,550				399		198,949
400,000				400,000	Asset Backed Funding Certificates 2004-OPT2 M1, 1.021% due 8/25/33		241,869				1,059		242,928
1,972,585				1,972,585	Bear Stearns Asset Backed Securities Inc. 2004-1, 0.991% due 6/25/34		1,069,411				5,349		1,074,760
1,467,646				1,467,646	Citigroup Mortgage Loan Trust Inc. 2007-SHL1 A, 0.871% due 11/25/46 (b)		549,046						549,046
					Countrywide Asset-Backed Certificates:
		299,524		299,524	4.800% due 5/25/32 (a)				234,374				234,374
907,779		1,318,025		2,225,804	1.371% due 10/25/47 (a)		668,420		973,307		1,937		1,643,664
		1,446,726		1,446,726	Countrywide Home Equity Loan Trust, 1.745% due 11/15/28 (a)(f)				761,652				761,652
366,545				366,545	Countrywide Home Equity Loan Trust, 2.197% due 2/15/34 (a)(f)		107,312						107,312
60,601				60,601	Countryplace Manufactured Housing Contract Trust 2007-1 A1, 5.484% due 7/15/37 (b)		59,721						59,721
780,195		1,531,846		2,312,041	Green Tree, 7.000% due 4/25/38 (a)(b)		682,670		1,340,365				2,023,035
		1,323,171		1,323,171	GSAMP Trust, 0.771% due 12/25/36 (a)(b)				701,281				701,281
					GSRPM Mortgage Loan Trust:
		1,834,687		1,834,687	0.771% due 3/25/35 (a)(b)				1,256,760				1,256,760
		2,379,490		2,379,490	0.871% due 3/25/37 (a)(b)				1,570,464				1,570,464
1,317,094				1,317,094	Lehman XS Trust 2005-5N 3A1A, 0.771% due 11/25/35		613,016				2,433		615,449
					Long Beach Mortgage Loan Trust:
		67,328		67,328	0.611% due 11/25/35 (a)				66,235				66,235
1,006,369		2,052,993		3,059,362	0.561% due 5/25/36 (a)		58,636		119,802		90		178,528
		1,945,472		1,945,472	RAAC Series, 0.761% due 5/25/46 (a)(b)				680,915				680,915
178,386				178,386	RAAC Series 2005-RP1, 0.811% due 7/25/37 (b)		174,929				39		174,968
		1,292,462		1,292,462	SACO I Trust, 0.621% due 4/25/36 (a)				253,068				253,068
621,451				621,451	Securitized Asset Backed Receivables LLC 2006-FR3 A2, 0.611% due 5/25/36		540,711				673		541,384
		1,218,821		1,218,821	Small Business Administration, 4.830% due 9/25/18 (a)				1,256,209				1,256,209
530,000				530,000	Specialty Underwriting & Residential Finance Trust 2001-BC4 M1, 1.071% due 11/25/34		325,517				1,480		326,997
					Structured Asset Securities Corp.:
478,526				478,526	2003-AL1, 3.357% due 4/25/31 (b)		377,103				758		377,861
800,000				800,000	2007-BC3 1A2, 0.611% due 5/25/47		412,669						412,670
800,000				800,000	WaMu Asset-Backed Certificates 2007-HE1 2A3, 0.621% due 1/25/37		268,435				2,331		270,766
					Total Home Equity		6,348,015		9,585,940		16,548		15,950,503

See Notes to Pro Forma Combined Financial Statements

S-30

Limited Duration Bond Portfolio	Legg Mason Partners Short-Term Bond Fund		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund			Limited Duration Bond Portfolio		Legg Mason Partners Short-Term Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value				Value
Student Loan — 1.1%
$1,600,000	$	2,790,000	$	4,390,000	Nelnet Student Loan Trust, 5.015% due 4/25/24 (a)	$	1,296,214	$	2,267,025	$	3,872	$	3,567,111
					TOTAL ASSET-BACKED SECURITIES		9,250,613		13,894,699		22,236		23,167,548
					(Cost)	$	14,921,115	$	22,240,542			$	37,161,657
COLLATERALIZED MORTGAGE OBLIGATIONS — 17.0%
					American Home Mortgage Investment Trust:
		2,250,164		2,250,164	5.294% due 6/25/45 (a)				1,058,861				1,058,861
		1,465,328		1,465,328	0.761% due 11/25/45 (a)				704,103				704,103
					Banc of America Funding Corp.:
		678,788		678,788	4.517% due 3/20/35 (a)				480,797				480,797
		1,499,550		1,499,550	0.678% due 5/20/36 (a)				1,006,069				1,006,069
		2,586,460		2,586,460	5.830% due 6/20/36 (a)				1,350,933				1,350,933
294,739				294,739	2004-B, 5.258% due 12/20/34		178,855				362		179,217
1,761,326				1,761,326	Banc of America Mortgage Securities 2005-F, 5.007% due 7/25/35		1,280,469				2,352		1,282,821
					Banc of America Mortgage Securities:
		175,092		175,092	5.560% due 9/25/32 (a)				175,003				175,003
		747,067		747,067	5.540% due 4/25/33 (a)				499,137				499,137
		1,673,039		1,673,039	4.000% due 4/25/34				1,604,063				1,604,063
		751,412		751,412	4.564% due 6/25/34 (a)				495,023				495,023
533,354		800,031		1,333,385	Bayview Commercial Asset Trust, 0.821% due 8/25/35 (a)(b)(f)		418,596		627,894				1,046,490
					Bear Stearns Alt-A Trust:
		675,975		675,975	5.199% due 9/25/34 (a)				378,163				378,163
1,631,573				1,631,573	2007-1 1A1, 0.631% due 1/25/47		579,559				2,592		582,151
264,284				264,284	Bear Stearns ARM Trust 2004-10, 5.042% due 1/25/35		194,066				413		194,479
		1,836,945		1,836,945	CBA Commercial Small Balance Commercial Mortgage, 0.721% due 6/25/38 (a)(b)(f)				993,181				993,181
725,927				725,927	Chase Mortgage Finance Corp. 2007-A1 2A3, 4.137% due 2/25/37		569,865				920		570,785
					Citigroup Mortgage Loan Trust Inc.:
1,752,320				1,752,320	2007-AR4 2A1A, 5.471% due 3/25/37		980,230				4,262		984,492
895,649				895,649	2007-AR8 1A1A, 5.727% due 8/25/47		470,656				982		471,638
					Countrywide Alternative Loan Trust:
		2,416,986		2,416,986	0.851% due 11/20/35 (a)				710,507				710,507
1,235,349				1,235,349	1.000% due 11/20/35 (a)		617,526				2,516		620,042
		739,760		739,760	0.781% due 11/25/35 (a)				343,161				343,161
		2,150,170		2,150,170	0.661% due 7/25/46 (a)				889,450				889,450
					Countrywide Alternative Loan Trust:
162,469				162,469	2004-33 1A1, 6.249% due 12/25/34		92,400				269		92,669
113,503				113,503	2004-33 2A1, 5.395% due 12/25/34		53,086						53,086
1,568,191				1,568,191	2006-0A2 A5, 0.738% due 5/20/46		569,763				2,844		572,607
420,396				420,396	2007-AL1 A1, 0.721% due 6/25/37		158,856				834		159,690
		392,538		392,538	Countrywide Asset-Backed Certificates, 0.751% due 7/25/35 (a)				332,113				332,113
					Countrywide Home Loan, Mortgage Pass-Through Trust:
		243,830		243,830	Whole Loan, 5.999% due 5/19/33 (a)				210,745				210,745
		977,197		977,197	6.406% due 11/25/34 (a)				477,801				477,801
					Countrywide Home Loans:
		2,187,453		2,187,453	4.000% due 3/25/33				1,891,713				1,891,713
		139,823		139,823	5.616% due 11/19/33 (a)				135,992				135,992
527,332		745,402		1,272,734	CS First Boston Mortgage Securities Corp., 4.604% due 6/25/34 (a)		386,775		547,846		797		935,418

See Notes to Pro Forma Combined Financial Statements

S-31

Limited Duration Bond Portfolio		Legg Mason Partners Short-Term Bond Fund		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund			Limited Duration Bond Portfolio		Legg Mason Partners Short-Term Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund
Face Amount		Face Amount		Face Amount		Security	Value		Value				Value
		$	502,591	$	502,591	Downey Savings and Loan Association Mortgage Loan Trust, 0.831% due 3/19/45 (a)			$	244,199			$	244,199
						Federal Home Loan Mortgage Corp. (FHLMC):
			304,579		304,579	4.500% due 4/15/32 (g)				303,923				303,923
			329,934		329,934	Structured Pass-Through Securities, 6.500% due 9/25/43 (a)(g)				338,030				338,030
			1,443,518		1,443,518	Federal National Mortgage Association (FNMA), 5.633% due 4/25/45 (a)(g)				1,312,302				1,312,302
$	362,665				362,665	First Horizon Alternative Mortgage Securities 2006-FA8 1A8, 0.841% due 2/25/37	$	108,541			$	619		109,160
			1,882,687		1,882,687	First Horizon Mortgage Pass-Through Trust, 6.250% due 2/25/35 (a)				1,383,521				1,383,521
			698,107		698,107	Greenpoint Mortgage Funding Trust, 0.701% due 9/25/35 (a)				287,597				287,597
	610,570				610,570	Greenpoint Mortgage Funding Trust 2006-AR7 1A1B, 0.591% due 12/25/46		335,654				771		336,425
			1,659,869		1,659,869	GSMPS Mortgage Loan Trust, 0.821% due 9/25/35 (a)(b)				1,305,845				1,305,845
	357,275				357,275	Harborview Mortgage Loan Trust 2004-8 3A2, 0.981% due 11/29/34		169,827				813		170,640
						HomeBanc Mortgage Trust:
	786,465				786,465	2004-2 A1, 0.841% due 12/25/34		508,172				1,832		510,004
	1,239,679				1,239,679	2005-1 A1, 0.721% due 3/25/35		707,101				2,914		710,015
	244,977				244,977	Impac CMB Trust 2004-6 1A2, 1.251% due 10/25/34		123,738				624		124,362
	791,512				791,512	IndyMac Inda Mortgage Loan Trust 2007-AR7 1A1, 6.217% due 11/25/37		487,959				1,327		489,286
			617,402		617,402	Indymac Index Mortgage Loan Trust, 0.831% due 1/25/35 (a)				320,687				320,687
	288,250		412,495		700,745	JP Morgan Mortgage Trust, 5.152% due 11/25/33 (a)		217,346		311,662				529,008
						JPMorgan Mortgage Trust 2004-A1 1A1:
	1,856,649				1,856,649	4.347% due 10/25/33		1,302,015				2,716		1,304,731
	547,110				547,110	4.794% due 2/25/34		412,238				881		413,119
			2,029,484		2,029,484	Luminent Mortgage Trust, 0.671% due 2/25/46 (a)				828,772				828,772
						MASTR:
			303,246		303,246	Adjustable Rate Mortgages Trust, 6.485% due 12/25/33 (a)				247,178				247,178
	3,000,000				3,000,000	Adjustable Rate Mortgages Trust 2004-13, 3.788% due 11/21/34		1,920,062				5,220		1,925,282
	980,303				980,303	Adjustable Rate Mortgages Trust 2006-OA2 1A1, 3.279% due 12/25/46		200,015						200,015
						Asset Securitization Trust:
			320,197		320,197	4.375% due 5/25/33				276,592				276,592
			839,421		839,421	5.000% due 2/25/34				770,859				770,859
	431,459				431,459	Specialized Loan Trust 2006-01 A, 0.771% due 12/25/35 (b)		344,687				703		345,390
						Merrill Lynch Mortgage Investors Inc.:
			1,684,360		1,684,360	5.268% due 3/25/33 (a)				1,269,305				1,269,305
			92,018		92,018	5.416% due 9/25/33 (a)				86,174				86,174
			1,355,926		1,355,926	New York Mortgage Trust Inc., 0.801% due 8/25/35 (a)				1,013,065				1,013,065
	921,399		1,312,038		2,233,437	Nomura Asset Acceptance Corp., 4.889% due 12/25/34 (a)		540,587		772,189		1,695		1,314,471
	823,219				823,219	Prime Mortgage Trust 2005-2, 7.399% due 10/25/32		572,395				1,856		574,251
	1,041,429				1,041,429	Residential Asset Mortgage Products Inc. 2005-SL1, 8.000% due 5/25/32		732,581				2,405		734,986

See Notes to Pro Forma Combined Financial Statements

S-32

Limited Duration Bond Portfolio	Legg Mason Partners Short-Term Bond Fund		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund			Limited Duration Bond Portfolio		Legg Mason Partners Short-Term Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value				Value
$   304,377			$	304,377	Sequoia Mortgage Trust 2003-2 A2, 4.859% due 6/20/33	$	235,676			$	598	$	236,274
					Structured Adjustable Rate Mortgage Loan Trust:
	$	730,647		730,647	5.345% due 1/25/35 (a)			$	382,689				382,689
		948,621		948,621	5.060% due 7/25/35 (a)				570,671				570,671
598,525				598,525	Structured Adjustable Rate Mortgage Loan Trust 2005-12 3A1, 5.677% due 6/25/35		409,751				641		410,392
					Structured ARM Loan Trust:
		497,552		497,552	3.640% due 4/25/34 (a)				277,093				277,093
		484,633		484,633	0.876% due 6/25/34 (a)				264,191				264,191
		820,939		820,939	5.189% due 3/25/35 (a)(f)				378,580				378,580
					Structured Asset Mortgage Investments Inc.:
682,314				682,314	2006-AR2 A1, 0.701% due 2/25/36		283,188				930		284,118
1,188,246				1,188,246	2006-AR7 A1A, 0.681% due 8/25/36		472,072				1,923		473,995
					Structured Asset Securities Corp.:
		2,316,200		2,316,200	6.500% due 3/25/32				1,608,715				1,608,715
		227,186		227,186	5.118% due 5/25/32 (a)				207,456				207,456
		252,753		252,753	5.341% due 6/25/32 (a)				110,536				110,536
		363,015		363,015	5.060% due 8/25/32 (a)				360,520				360,520
		1,463,768		1,463,768	4.260% due 3/25/34 (a)				939,060				939,060
		128,216		128,216	5.160% due 5/25/34 (a)				56,859				56,859
		1,466,009		1,466,009	5.762% due 6/25/35 (a)(b)(f)				1,026,452				1,026,452
1,174,807				1,174,807	WaMu Alternative Mortgage Pass-Through Certificates 2006-AR01 A1B, 0.791% due 2/25/36		285,050				843		285,893
					WaMu Mortgage Pass Through Certificates:
411,330				411,330	2003-AR8 A, 4.282% due 8/25/33		306,816				485		307,301
1,968,483				1,968,483	2003-AR10, 4.672% due 10/25/33		1,621,598				1,910		1,623,508
461,208				461,208	2004-AR08 A1, 1.858% due 6/25/44		264,002				730		264,732
1,146,103				1,146,103	2004-AR14 A1, 4.255% due 1/25/35		789,619				2,188		791,807
789,543				789,543	2006-AR4 DA, 3.449% due 6/25/46		252,654						252,654
					Washington Mutual Inc.:
		687,801		687,801	0.761% due 7/25/45 (a)				320,488				320,488
		815,251		815,251	0.791% due 7/25/45 (a)				335,934				335,934
		592,529		592,529	Washington Mutual Mortgage Pass-Through Certificates, Whole Loan, 4.562% due 6/25/33 (a)				533,030				533,030
1,566,516				1,566,516	Washington Mutual MSC Mortgage Pass-Through Certificates Series 2004-RA1, 7.000% due 3/25/34		1,401,543				1,976		1,403,519
		1,959,765		1,959,765	Washington Mutual Pass-Through Certificates, 0.751% due 11/25/45 (a)				965,780				965,780
					Wells Fargo Mortgage Backed Securities Trust:
		533,184		533,184	5.318% due 7/25/34 (a)				240,003				240,003
		361,535		361,535	PAC, 4.500% due 6/25/33				358,988				358,988
					TOTAL COLLATERALIZED MORTGAGE     OBLIGATIONS		21,555,589		34,921,500		55,743		56,532,832
					(Cost)	$	36,153,703	$	55,552,037			$	91,705,740
MORTGAGE-BACKED SECURITIES — 14.4%
FHLMC — 0.9%
		2,600,000		2,600,000	Federal Home Loan Mortgage Corp. (FHLMC), 6.000% due 1/13/39 (g)(h)				2,678,405				2,678,405

See Notes to Pro Forma Combined Financial Statements

S-33

Limited Duration Bond Portfolio		Legg Mason Partners Short-Term Bond Fund		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund			Limited Duration Bond Portfolio		Legg Mason Partners Short-Term Bond Fund		Pro Forma Adjustments	Pro Forma Combined Legg Mason Partners Short-Term Bond Fund
Face Amount		Face Amount		Face Amount		Security	Value		Value			Value
	FNMA—13.10%
						Federal National Mortgage Association (FNMA):
$	18			$	18	9.750% due 11/1/09 (g)	$	18				$	18
	705				705	8.500% due 6/1/10 to 8/1/11 (g)		727					727
	2,846				2,846	9.500% due 7/1/14 (g)		2,940					2,940
	15,320				15,320	11.000% due 12/1/15 (g)		16,966			77		17,043
	56,528				56,528	9.000% due 1/1/17 to 1/1/21 (g)		59,740					59,740
	19,334				19,334	12.500% due 1/1/18 (g)		22,902			97		22,999
	62,679				62,679	9.000% due 11/1/21 (g)		67,236			78		67,314
	1,563				1,563	8.500% due 6/1/21 (g)		1,672			2		1,674
	169,159				169,159	8.000% due 2/1/31 (g)		180,352			53		180,405
	1,161,813				1,161,813	7.000% due 4/1/32 (g)		1,220,985			363		1,221,348
	3,275,562				3,275,562	7.000% due 12/1/26 to 1/1/33 (g)		3,465,906					3,465,906
	928,836				928,836	6.500% due 7/1/13 to 10/1/32 (g)		966,807					966,807
		$	34,279		34,279	5.060% due 5/1/32 (a)(g)			$	34,586			34,586
			115,496		115,496	5.115% due 8/1/32 (a)(g)				114,650			114,650
			420,005		420,005	5.983% due 12/1/32 (a)(g)				414,951			414,951
			606,535		606,535	4.567% due 1/1/33 (a)(g)				606,181			606,181
			1,597,350		1,597,350	4.512% due 6/1/33 (a)(g)				1,601,387			1,601,387
			1,461,448		1,461,448	3.864% due 5/1/34 (a)(g)				1,483,523			1,483,523
	660,950				660,950	4.341% due 10/1/34 (g)		663,231					663,231
	877,318				877,318	4.329% due 1/1/35 (g)		848,628					848,628
	467,434				467,434	4.795% due 2/1/35 (g)		472,978					472,978
	3,021,454				3,021,454	4.961% due 3/1/35 (g)		3,049,118					3,049,118
			2,840,358		2,840,358	4.038% due 5/1/35 (a)(g)				2,859,833			2,859,833
	1,475,953				1,475,953	5.500% due 4/1/36 (g)		1,483,534			461		1,483,995
	153,795				153,795	5.000% due 11/1/35 (g)		157,382					157,382
	600,000				600,000	6.000% due 12/1/38 (g)(h)		617,625					617,625
	962,288		4,635,656		5,597,944	5.000% due 6/1/35-7/1/38 (g)		984,432		4,742,123			5,726,555
	291,349		539,541		830,890	6.000% due 10/1/37-7/1/38 (g)		300,239		556,103	10		856,352
			15,150,000		15,150,000	5.000% due 1/13/39 (g)(h)				15,469,574			15,469,574
			1,000,000		1,000,000	6.000% due 1/13/39 (g)(h)				1,029,531			1,029,531
						Total FNMA		14,583,418		28,912,442	1,141		43,497,001
	GNMA — 0.4%
						Government National Mortgage Association (GNMA):
	154,980				154,980	6.000% due 5/15/14 to 11/15/28		162,380					162,380
	1,449				1,449	9.000% due 6/15/22 to 9/15/22		1,551					1,551
	1,354,626				1,354,626	7.438% due 6/16/26 (e)		214,244			439		214,683
	938,143				938,143	7.488% due 8/16/26 (e)		145,429			292		145,721
	900,000				900,000	6.000% due 12/1/38 (h)		927,843					927,843
						Total GNMA		1,451,447			731		1,452,178
						TOTAL MORTGAGE-BACKED SECURITIES		16,034,865		31,590,847	1,872		47,627,584
						(Cost)	$	16,351,516	$	31,076,941		$	47,428,457
	SOVEREIGN BOND — 0.0%
	Russia — 0.0%
			215,600		215,600	Russian Federation, 7.500% due 3/31/30 (b)				190,194			190,194
						(Cost)			$	230,548		$	230,548

See Notes to Pro Forma Combined Financial Statements

S-34

Limited Duration Bond Portfolio	Legg Mason Partners Short-Term Bond Fund		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund			Limited Duration Bond Portfolio		Legg Mason Partners Short-Term Bond Fund		Pro Forma Adjustments		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value				Value
U.S. GOVERNMENT & AGENCY OBLIGATIONS — 13.9%
U.S. Government Agencies — 13.9%
					Federal Home Loan Bank (FHLB):
	$	14,000,000	$	14,000,000	4.089% due 1/8/09 (a)			$	14,003,444			$	14,003,444
		6,000,000		6,000,000	5.000% due 2/20/09				6,037,662				6,037,662
					Federal Home Loan Mortgage Corp. (FHLMC):
		6,000,000		6,000,000	4.750% due 3/5/09 (g)				6,044,664				6,044,664
		800,000		800,000	5.000% due 10/18/10 (g)				852,054	$	2,527		854,581
		1,940,000		1,940,000	2.750% due 4/11/11 (g)				1,989,555				1,989,555
					Notes:
		15,300,000		15,300,000	0.514% due 10/19/09 (a)(g)				15,279,834				15,279,834
		710,000		710,000	5.125% due 8/23/10 (g)				756,418				756,418
		1,163,428		1,163,428	Federal National Mortgage Association (FNMA), Six Month LIBOR, 4.660% due 4/1/33 (a)(g)				1,158,733				1,158,733
					TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS				46,122,364		2,527		46,124,891
					(Cost)			$	45,972,147			$	45,972,147
U.S. TREASURY INFLATION PROTECTED SECURITIES — 4.5%
$   527,136		1,041,094		1,568,230	U.S. Treasury Bonds, Inflation Indexed, 3.875% due 4/15/29 (i)	$	651,054		1,286,158		165		1,937,377
8,268,011		5,512,007		13,780,018	U.S. Treasury Notes, Inflation Indexed, 0.875% due 4/15/10 (i)		7,770,641		5,182,152		2,587		12,955,380
					TOTAL U.S. TREASURY INFLATION PROTECTED SECURITIES		8,421,695		6,468,310		2,752		14,892,757
					(Cost)	$	8,801,098	$	6,660,007			$	15,461,105
Shares	Shares		Shares
PREFERRED STOCKS — 0.1%
FINANCIALS — 0.1%
Thrifts & Mortgage Finance — 0.1%
21,700		31,375		53,075	Federal Home Loan Mortgage Corp. (FHLMC), 8.375% (a)(g)*		8,463		12,236				20,699
15,950		22,400		38,350	Federal National Mortgage Association (FNMA), 8.250% (a)(g)*		13,238		18,592				31,830
500				500	Home Ownership Funding Corp., 1.000% (b)(e)		49,275						49,275
1,400				1,400	Home Ownership Funding Corp. II, 1.000% (b)(e)		137,970						137,970
					TOTAL PREFERRED STOCKS		208,946		30,828				239,774
					(Cost)	$	2,478,698	$	1,344,375			$	3,823,073
PURCHASED OPTIONS — 0.0%
59				59	U.S. Treasury Note Futures Put, February 2009, Strike Price $85.00		922						922
					(Cost)	$	2,139					$	2,139
					TOTAL INVESTMENTS BEFORE SHORT-TERM INVESTMENTS		98,737,569		215,665,604		163,291		314,566,464
					(Cost)	$	135,894,556	$	269,082,835			$	404,977,391

See Notes to Pro Forma Combined Financial Statements

S-35

Limited Duration Bond Portfolio	Legg Mason Partners Short-Term Bond Fund		Pro Forma Combined Legg Mason Partners Short-Term Bond Fund			Limited Duration Bond Portfolio		Legg Mason Partners Short-Term Bond Fund			Pro Forma Adjustments			Pro Forma Combined Legg Mason Partners Short-Term Bond Fund
Face Amount	Face Amount		Face Amount		Security	Value		Value						Value
SHORT-TERM INVESTMENTS — 9.5%
U.S. Government Agencies — 8.0%
	$	10,000,000	$	10,000,000	Federal Home Loan Bank (FHLB), Discount Notes, 1.207% due 5/20/09 (j)			$	9,991,370					$	9,991,370
$2,500,000				2,500,000	Federal Home Loan Bank, 0.000% due 3/26/09	$	2,499,598				$	143			2,499,741
					Federal National Mortgage Association (FNMA), Discount Notes:
		11,700,000		11,700,000	2.733% due 1/5/09 (g)(j)				11,696,490						11,696,490
		2,000		2,000	0.651% due 1/27/09 (g)(i)(j)				1,999						1,999
806,000		1,621,000		2,427,000	0.000%-0.351% due 5/18/09 (g)(i)(j)		805,239		1,619,622			76			2,424,937
					Total U.S. Government Agencies		3,304,837		23,309,481			219			26,614,537
					(Cost)	$	3,304,051	$	23,271,001					$	26,575,052
Repurchase Agreement — 1.5%
		5,002,000		5,002,000	Morgan Stanley tri-party repurchase agreement dated 12/31/08, 0.020% due 1/2/09; Proceeds at maturity — $5,002,006; (Fully collateralized by U.S. government agency obligation, 2.265% due 4/14/09; Market value — $5,155,155)				5,002,000						5,002,000
					(Cost)			$	5,002,000					$	5,002,000
					TOTAL SHORT-TERM INVESTMENTS		3,304,837		28,311,481			219			31,616,537
					(Cost)	$	3,304,051	$	28,273,001					$	31,577,052
					TOTAL INVESTMENTS — 104.3%		102,042,406		243,977,085			163,510			346,183,001
					(Cost)	$	139,198,607	$	297,355,836					$	436,554,443
					Liabilities in Excess of Other Assets — (4.3)%		2,246,605		(16,648,541	)		(28,600	)		(14,430,536	)
					TOTAL NET ASSETS — 100.0%		$104,289,011	$	227,328,544		$	134,910		$	331,752,465

* Non-income producing security.

(a) Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2008.

(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 Trustees, unless otherwise noted.

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

(d) Security is currently in default.

(e) Illiquid security.

(f) Security is valued in good faith at fair value by or under the direction of the Board of Trustees.

(g) On September 7, 2008, the Federal Housing Finance Agency placed Fannie Mae and Freddie Mac into conservatorship.

(h) This security is traded on a to-be-announced (“TBA”) basis.

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

(j) Rate shown represents yield-to-maturity.

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

Abbreviations used in this schedule:

ARM — Adjustable Rate Mortgage

GMAC — General Motors Acceptance Corp.

GSAMP — Goldman Sachs Alternative Mortgage Products

LIBOR — London Interbank Offered Rate

MASTR — Mortgage Asset Securitization Transactions Inc.

PAC — Planned Amortization Class

See Notes to Pro Forma Combined Financial Statements

S-36

Pro Forma Combined Statement of Assets and Liabilities

As of December 31, 2008 (unaudited)

	Legg Mason Limited Duration Bond Portfolio			Legg Mason Partners Short- Term Bond Fund			Pro Forma Adjustments			Pro Forma Combined Legg Mason Partners Short-Term Bond Fund
ASSETS:
Investments at cost	$	139,198,607		$	297,355,836					$	436,554,443
Investments, at value	$	102,042,406		$	243,977,085		$	163,510	(a)	$	346,183,001
Cash		3,640,491			1,553,166			—			5,193,657
Receivable for securities sold		2,822,973			5,904,218			—			8,727,191
Receivable for Fund shares sold		369,404			352,704			—			722,108
Interest receivable		886,608			2,103,261			—			2,989,869
Receivable from broker—variation margin on open futures contracts		96,108			—			—			96,108
Deposits with brokers for open swap contracts					5,600,000						5,600,000
Interest receivable for open swap contracts		—			195						195
Other assets		11,324			36,337			—			47,661
Total Assets		109,869,314			259,526,966			163,510			369,559,790
LIABILITIES:
Payable for securities purchased		3,796,501			24,767,867			—			28,564,368
Payable for Fund shares repurchased		570,713			232,732			—			803,445
Payable to broker—variation margin on open futures contracts		—			398,825						398,825
Options written, at value (premium received $299,403 and 488,716, respectively)		1,044,616			1,695,625			—			2,740,241
Premium received for open swaps		—			32,749						32,749
Unrealized depreciation on swaps		—			4,846,300						4,846,300
Investment management fee payable		53,123			85,977			—			139,100
Distribution fees payable		24,802			17,859			—			42,661
Trustees’/Directors’ fees payable		—			14,358			—			14,358
Distributions payable		—			9,256			—			9,256
Accrued expenses		88,267			96,874			28,600	(b)		213,741
Other liabilities		2,281			—						2,281
Total Liabilities		5,580,303			32,198,422			28,600			37,807,325
Total Net Assets	$	104,289,011		$	227,328,544		$	134,910		$	331,752,465
NET ASSETS:
Par value	$	13,113		$	680		$	(12,801	)(c)	$	992
Paid-in capital in excess of par value		150,867,661			294,149,336			12,801	(c)		445,029,798
Undistributed/Overdistributed net investment income		(200,722	)		53,956			(28,600	)(b)		(175,366	)
Accumulated net realized gain (loss) on investments, futures contracts, written options and swap contracts		(10,631,041	)		(15,768,547	)		—			(26,399,588	)
Net unrealized depreciation on investments, futures contracts, written options and swap contracts		(35,760,000	)		(51,106,881	)		163,510	(a)		(86,703,371	)
Total Net Assets	$	104,289,011		$	227,328,544		$	134,910		$	331,752,465

S-37

	Legg Mason Limited Duration Bond Portfolio		Legg Mason Partners Short- Term Bond Fund		Pro Forma Adjustments			Pro Forma Combined Legg Mason Partners Short-Term Bond Fund
Net Assets:
Class A		—	$	39,396,167	$	1,293,359	(b)(d)	$	40,689,526
Class B		—		1,298,479		(1,298,479	)(d)		—
Class C		—		5,073,669		96,724,605	(a)(b)(e)		101,798,274
Class I		—		181,560,229		7,704,436	(a)(b)(f)		189,264,665
Primary Class	$	96,573,829		—		(96,573,829	)(e)		—
Institutional Class		7,715,182		—		(7,715,182	)(f)		—
	$	104,289,011	$	227,328,544	$	134,910		$	331,752,465
Shares Outstanding:
Class A		—		11,794,748		387,268	(b)(d)(g)		12,182,016
Class B		—		388,873		(388,873	)(d)(g)		—
Class C		—		1,517,310		28,930,013	(a)(b)(e)(g)		30,447,323
Class I		—		54,337,425		2,306,096	(a)(b)(d)(g)		56,643,521
Primary Class		12,143,287				(12,143,287	)(a)(e)(g)		—
Institutional Class		970,198				(970,198	)(a)(f)(g)		—
Net Asset Value:
Class A			$	3.34				$	3.34
Class B			$	3.34					—
Class C			$	3.34				$	3.34
Class I			$	3.34				$	3.34
Primary Class	$	7.95
Institutional Class	$	7.95

^(a) Reflects adjustment for resulting from adoption by the Acquired Fund’s Board prior to the Reorganization of the valuation policies and procedures applicable to the Acquiring Fund.

^(b) Reflects adjustment for estimated reorganization costs of $28,600 related to the Acquiring Funds.

^(c) Adjustment to reflect the par value of the Combined Fund’s shares outstanding due to the Reorganization.

^(d) Legg Mason Partners Short-Term Bond Fund Class B shares will be absorbed into Class A shares.

^(e) Legg Mason Limited Duration Bond Portfolio Primary shares will be exchanged for Legg Mason Partners Short-Term Bond Fund Class C

^(f) Legg Mason Limited Duration Bond Portfolio Institutional shares will be exchanged for Legg Mason Partners Short-Term Bond Fund Class I

^(g) Reflects adjustments to the number of shares outstanding due to the Reorganization.

See Notes to Pro Forma Combined Financial Statements

S-38

Pro Forma Combined Statement of Operations for Legg Mason Limited Duration Bond Portfolio and Legg Mason Partners Short-Term Bond Fund for Year Ended December 31, 2008 (unaudited)

	Limited Duration Bond Portfolio			Legg Mason Partners Short-Term Bond Fund			Pro Forma Adjustments			Pro Forma Combined Legg Mason Partners Short-Term Bond Fund
INVESTMENT INCOME:
Interest	$	66,748		$	74,805			—		$	141,553
Dividends		7,587,066			13,429,759			—			21,016,825
Total Investment Income		7,653,814			13,504,564			—			21,158,378
EXPENSES:
Investment management fee		660,803			1,192,742						1,853,545
Distribution fees:
Class A		—			121,395		$	4,206	(a)(b)		125,601
Class B		—			12,618			(12,618	)(a)(b)		—
Class C		—			41,749			669,655	(a)(c)		711,404
Primary Class		683,571			—			(683,571	)(a)(c)		—
Transfer agent fees:
Class A		—			84,179			599	(b)		84,778
Class B		—			599			(599	)(b)		—
Class C		—			1,452			104,014	(c)		105,466
Class I		—			201			17,591	(d)		17,792
Primary Class		104,014			—			(104,014	)(c)		—
Institutional Class		17,591			—			(17,591	)(d)		—
Shareholder reports:
Class A		—			48,099			4,942	(e)(b)		53,041
Class B		—			4,942			(4,942	)(e)(b)		—
Class C		—			19,709			34,527	(e)(c)		54,236
Class I		—			1,177			349	(e)(d)		1,526
Primary Class		43,159			—			(43,159	)(e)(c)		—
Institutional Class		436			—			(436	)(e)(d)		—
Custody fees		39,473			5,255			—			44,728
Registration fees		34,278			42,621			(17,139	)(e)		59,760
Legal fees		20,876			23,890			(18,487	)(e)		26,279
Insurance		—			11,918			—			11,918
Audit and tax		40,500			26,405			(35,219	)(e)		31,686
Trustees’/Directors’ fees		56,778			5,345			—			62,123
Miscellaneous expenses		39,489			10,963			(35,540	)(e)		14,912
Total Expenses		1,740,968			1,655,259			(137,432	)		3,258,795
Less: Fee waivers and/or expenses reimbursements		(322,885	)		(5,808	)		289,761			(38,932	)
Fees paid indirectly		(299	)		(141	)		—			(440	)
Net Expenses		1,417,784			1,649,310			152,329			3,219,423
Net Investment Income		6,236,030			11,855,254			(152,329	)		17,938,955

S-39

	Limited Duration Bond Portfolio			Legg Mason Partners Short-Term Bond Fund			Pro Forma Adjustments			Pro Forma Combined Legg Mason Partners Short-Term Bond Fund
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES CONTRACTS:
Net Realized Gain (Loss) From:
Investment transactions		(2,069,499	)		(4,576,007	)		—			(6,645,506	)
Options		239,961			485,579						725,540
Futures contracts		745,695			193,731			—			939,426
Swap contracts					(70,208	)					(70,208	)
Net Realized Loss		(1,083,843	)		(3,966,905	)		—			(5,050,748	)
Change in Net Unrealized Appreciation/Depreciation From:
Investments		(30,471,208	)		(43,924,746	)		—			(74,395,954	)
Options		(650,667	)		(1,068,578	)					(1,719,245	)
Swap contracts					(4,846,300	)					(4,846,300	)
Futures contracts		1,875,411			8,114,272			—			9,989,683
Change in Net Unrealized Appreciation/Depreciation		(29,246,464	)		(41,725,352	)		—			(70,971,816	)
Net Loss On Investments And Futures Contracts		(30,330,307	)		(45,692,257	)		—			(76,022,564	)
Decrease In Net Assets From Operations	$	(24,094,277	)	$	(33,837,003	)	$	(152,329	)	$	(58,083,610	)

^(a) Distribution Fee: Rates of acquired fund were at the rates of the aquiring fund for the 12-month period indicated.

^(b) Legg Mason Partners Short-Term Bond Fund Class B shares will be absorb into Class A shares.

^(c) Legg Mason Limited Duration Bond Portfolio Primary shares will be exchanged for Legg Mason Partners Short-Term Bond Fund Class C

^(d) Legg Mason Limited Duration Bond Portfolio Institutional shares will be exchanged for Legg Mason Partners Short-Term Bond Fund Class I

^(e) Reflects elimination of duplicative expenses and economies of scale achieved as a result of the proposed Reorganization.

See Notes to Pro Forma Combined Financial Statements.

S-40

Legg Mason Investment Limited Duration Bond Portfolio Reorganization Into Legg Mason Partners Short-Term Bond Fund Notes to Pro Forma Combined Financial Statements (unaudited)

1. Basis of Combination:

The accompanying unaudited Pro Forma Combined Statement of Assets and Liabilities, including the Pro Forma Combined Schedule of Investments as of December 31, 2008 and the related Pro Forma Combined Statement of Operations (“Pro Forma Statements”) for the year ended December 31, 2008, reflect the accounts of Legg Mason Limited Duration Bond Portfolio (the “Acquired Fund”) and Legg Mason Partners Short-Term Bond Fund (the “Acquiring Fund”), each a “Fund”. Following the combination, Legg Mason Partners Short-Term Bond Fund will be the accounting survivor. Under the terms of the Agreement and Plan of Reorganization, the exchange of assets of the Acquired Fund for shares of the Acquiring Fund will be treated as a tax-free Reorganization and accordingly, the tax-free Reorganization will be accounted for in an “as-if” pooling of interests. The combination would be accomplished by an acquisition of the net assets of the Acquired Fund in exchange for shares of the Acquiring Fund at net asset value. The unaudited Pro Forma Combined Schedule of Investments and the unaudited Pro Forma Combined Statement of Assets and Liabilities have been prepared as though the combination had been effective on December 31, 2008. The unaudited Pro Forma Combined Statement of Operations reflects the results of the Funds for the year ended December 31, 2008 as if the Reorganization occurred on December 31, 2008. These Pro Forma Statements have been derived from the books and records of the Funds utilized in calculating daily net asset values at the dates indicated above in conformity with U.S. generally accepted accounting principles. The historical cost of investment securities will be carried forward to the surviving entity. The fiscal year-end is December 31 for both the Acquired Fund and the Acquiring Fund. The Pro Forma Financial Statements should be read in conjunction with the historical financial statements of each Fund, which are incorporated by reference in the Statement of Additional Information. The unaudited Pro Forma Combined Schedule of Investments does not reflect any adjustment for portfolio transactions because, upon consummation of the Reorganization, no securities of the Acquired Fund would need to be sold in order for the Acquiring Fund to comply with its investment restrictions or policies. Because the Funds may buy and sell securities in the normal course of their operations, the schedule of investments at the time of Reorganization may differ from that shown in the Pro Forma Combined Schedule of Investments.

2. Use of Estimates:

Management has made certain estimates and assumptions relating to the reporting of assets, liabilities, income, and expenses to prepare these Pro Forma Combined Financial Statements in conformity with U.S. generally accepted accounting principles for investment companies. Actual results could differ from these estimates.

3. Investment Valuation:

Debt securities are valued at the mean between the last quoted bid and asked prices provided by an independent pricing service that are based on transactions in debt obligations, quotations from bond dealers, market transactions in comparable securities and various other relationships between securities. Publicly traded foreign government debt securities are typically traded internationally in the over-the-counter market, and are valued at the mean between the last quoted bid and asked prices as of the close of business of that market. 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. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. When prices are not readily available, or are determined not to reflect fair value, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund may value these securities at fair value as determined in accordance with the procedures approved by the Fund’s Board of Trustees. Short-term obligations with maturities of 60 days or less are valued at amortized cost, which approximates fair value. The Acquired Fund values fixed income securities using bid prices. The difference in the valuation policies of the Acquired Fund and the Acquiring Fund resulted in an estimated pro forma adjustment to the Pro Forma Combined Schedule of Investments and Pro Forma Combined Statement of Assets and Liabilities of $163,510, as of December 31, 2008.

4. Shares of Beneficial Interest:

The unaudited pro forma net asset value per share assumes additional shares of beneficial interest of the Acquiring Fund were issued in connection with the proposed acquisition of the Acquired Fund as of December 31, 2008. The number of additional shares issued was calculated by dividing the net asset value of each class of the Acquired Fund by the respective class net asset value per share of the Acquiring Fund.

S-41

5. Pro Forma Operations:

In the Pro Forma Combined Statement of Operations certain expenses have been adjusted to reflect the expected expenses of the combined entity. The pro-forma investment management fees and plan of distribution fees of the combined entity are based on the fee schedules in effect for the Acquiring Fund’s combined level of average net assets for the year ended December 31, 2008.

6. Federal Income Taxes:

It is the policy of the Funds to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, the Funds intend to distribute substantially all of their net investment income and net realized gains on investments, if any, to their shareholders. Therefore, no federal income tax provision is required.

S-42

PART C

OTHER INFORMATION

ITEM 15. INDEMNIFICATION

Provisions relating to indemnification of the Registrant’s Trustees and employees are included in Article IX of the Registrant’s Declaration of Trust, which is incorporated herein by reference.

Reference is hereby made to paragraph 10 of the Distribution Agreement between the Registrant and LMIS.

The Directors and officers of the Registrant and the personnel of the Registrant’s manager are insured under an errors and omissions liability insurance policy. The Registrant and its officers are also insured under the fidelity bond required by Rule 17g-1 under the Investment Company Act of 1940, as amended.

ITEM 16. EXHIBITS

Unless otherwise noted, all references are to the Registrant’s Registration Statement on Form N-1A (the “Registration Statement”) as filed with the Securities and Exchange Commission (the “SEC”) on March 13, 1985 (File Nos. 2-96408 and 811-4254).

(1)(a) The Registrant’s Declaration of Trust dated as of October 2, 2006 is incorporated by reference to Post-Effective Amendment No. 84 to the Registrant’s Registration Statement as filed with the SEC on April 16, 2007 (“Post-Effective Amendment No. 84”).

(1)(b) Designation of Series of Shares of Beneficial Interests of the Registrant effective as of February 6, 2007 is incorporated herein by reference to Post-Effective Amendment No. 84.

(1)(c) Amended and Restated Designation of Series of Shares of Beneficial Interests in the Registrant, effective as of May 14, 2008, and Amended and Restated Designation of Classes, effective as of May 14, 2008, is incorporated by reference to Post-Effective Amendment No. 116 to the Registrant’s Registration Statement as filed with the SEC on September 12, 2008 (“Post-Effective Amendment No. 116”).

(1)(d) Amended and Restated Designation of Series of Shares of Beneficial Interests in the Registrant, effective as of November 2008, and Amended and Restated Designation of Classes, effective as of November 2008, is incorporated herein by reference to Post-Effective Amendment No. 118 to the Registrant’s Registration Statement as filed with the SEC on November 19, 2008 (“Post-Effective Amendment No. 118”).

(1)(e) Amended and Restated Designation of Series of Shares of Beneficial Interests in the Registrant, effective as of January 1, 2009, and Amended and Restated Designation of Classes, effective as of January 1, 2009, is incorporated herein by reference to Post-Effective Amendment No. 124 as filed with the SEC on February 6, 2009 (“Post-Effective Amendment No. 124”).

(1)(f) Amended and Restated Designation of Series of Shares of Beneficial Interests in the Registrant, effective as of March 13, 2009, and Amended and Restated Designation of Classes, effective as of March 14, 2009, is filed herewith.

(2) The Registrant’s By-Laws dated October 4, 2006 are incorporated by reference to Post-Effective Amendment No. 84.

(3) Not Applicable.

(4) Forms of Agreement and Plan of Reorganization are included in Part A to the Registration Statement on Form N-14.

(5) Not Applicable.

(6)(a) Management Agreement between the Registrant, on behalf of Legg Mason Partners Corporate Bond Fund (formerly Legg Mason Partners Investment Grade Bond Fund), and Legg Mason Partners Fund Advisor, LLC (“LMPFA”) dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85 to the Registrant’s Registration Statement as filed with the SEC on June 27, 2007 (“Post-Effective Amendment No. 85”).

(6)(b) Form of Letter Amendment to Management Agreement between the Registrant, on behalf of Legg Mason Partners Corporate Bond Fund, and LMPFA is filed herewith.

(6)(c) Management Agreement between the Registrant, on behalf of Legg Mason Partners Short-Term Bond Fund (formerly Legg Mason Partner Short-Term Investment Grade Bond Fund), and LMPFA dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.

(6)(d) Subadvisory Agreement between LMPFA and Western Asset Management Company (“WAM”) with respect to Legg Mason Partners Corporate Bond Fund, dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.

(6)(e) Subadvisory Agreement between LMPFA and WAM, with respect to Legg Mason Partners Short-Term Investment Grade Bond Fund, dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.

(7) Distribution Agreement between the Registrant and Legg Mason Investor Services, LLC (“LMIS”), on behalf of Legg Mason Partners Adjustable Rate Income Fund, Legg Mason Partners California Municipals Fund, Legg Mason Partners Core Bond Fund, Legg Mason Partners Core Plus Bond Fund, Legg Mason Partners Strategic Income Fund, Legg Mason Partners Global High Yield Bond Fund, Legg Mason Partners Global Income Fund, Legg Mason Partners Government Securities Fund, Legg Mason Partners High Income Fund, Legg Mason Partners Global Inflation Management Fund, Legg Mason Partners Intermediate Maturity California Municipals Fund, Legg Mason Partners Intermediate Maturity New York Municipals Fund, Legg Mason Partners Intermediate-Term Municipals Fund, Legg Mason Partners Corporate Bond Fund, Legg Mason Partners Managed Municipals Fund, Legg Mason Partners Massachusetts Municipals Fund, Legg Mason Partners Municipal High Income Fund, Legg Mason Partners New Jersey Municipals Fund, Legg Mason Partners New York Municipals Fund, Legg Mason Partners Oregon Municipals Fund, Legg Mason Partners Pennsylvania Municipals Fund, Legg Mason Partners Short Duration Municipal Income Fund, Legg Mason Partners Short/Intermediate U.S. Government Fund, Legg Mason Partners Short-Term Bond Fund, Western Asset Emerging Market Debt Portfolio and Western Asset Global High Yield Bond Portfolio, dated December 1, 2008, is incorporated herein by reference to Post-Effective Amendment No. 124.

(8) Emeritus Retirement Plan relating to certain funds established effective as of January 1, 2007, is incorporated herein by reference to Post-Effective Amendment No. 78 to the Registrant’s Registration Statement on Form N-1A as filed with the SEC on January 8, 2007.

(9)(a) Custodian Services Agreement with State Street Bank and Trust Company (“State Street”) dated January 1, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.

(9)(b) Letter Agreement amending the Custodian Services Agreement with State Street dated April 9, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.

(10)(a) Shareholder Services and Distribution Plan pursuant to Rule 12b-1 of the Registrant, on behalf of Legg Mason Partners Adjustable Rate Income Fund, Legg Mason Partners California Municipals Fund, Legg Mason Partners Core Bond Fund, Legg Mason Partners Core Plus Bond Fund, Legg Mason Partners Strategic Income Fund, Legg Mason Partners Global High Yield Bond Fund, Legg Mason Partners Global Income Fund, Legg Mason Partners Government Securities Fund, Legg Mason Partners High Income Fund, Legg Mason Partners Global Inflation Management Fund, Legg Mason Partners Intermediate Maturity California Municipals Fund, Legg Mason Partners Intermediate Maturity New York Municipals Fund, Legg Mason Partners Intermediate-Term Municipals Fund, Legg Mason Partners Corporate Bond Fund, Legg Mason Partners Managed Municipals Fund, Legg Mason Partners Massachusetts Municipals Fund, Legg Mason Partners Municipal High Income Fund, Legg Mason Partners New Jersey Municipals Fund, Legg Mason Partners New York Municipals Fund, Legg Mason Partners Oregon Municipals Fund, Legg Mason Partners Pennsylvania Municipals Fund, Legg Mason Partners Short Duration Municipal Income Fund, Legg Mason Partners Short/Intermediate U.S. Government Fund, Legg Mason Partners Short-Term Bond Fund, Western Asset Emerging Market Debt Portfolio and Western Asset Global High Yield Bond Portfolio, dated February 6, 2007, as amended March 2009, is filed herewith.

(10)(b) Rule 18f-3(d) Multiple Class Plan of the Registrant dated February 6, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.

(11) Opinion and Consent of Venable LLP as to the legality of the securities is filed herewith.

(12) Forms of Opinion of Bingham McCutchen LLP supporting tax matters and consequences to shareholders discussed in the Proxy Statement/Prospectus are filed herewith.

(13)(a) Transfer Agency and Services Agreement with PFPC Inc. dated January 1, 2006 is incorporated herein by reference to Post-Effective Amendment No. 75 to the Registrant’s Registration Statement as filed with the SEC on September 20, 2006 (“Post-Effective Amendment No. 75”).

(13)(b) Letter Agreement amending the Transfer Agency and Services Agreement with PFPC Inc. dated April 9, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.

(13)(c) Form of License Agreement between the Registrant and Legg Mason Properties, Inc. is incorporated herein by reference to Post-Effective Amendment No. 77 to the Registrant’s Registration Statement as filed with the SEC on November 30, 2006.

(13)(d) Form of Fee Waiver and Expense Reimbursement Agreement for Legg Mason Partners Corporate Bond Fund is filed herewith.

(13)(e) Form of Fee Waiver and Expense Reimbursement Agreement for Legg Mason Partners Short-Term Bond Fund is filed herewith.

(14)(a) Consent of KPMG LLP, Independent Registered Public Accounting Firm, is filed herewith.

(14)(b) Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm, is filed herewith.

(15) Not Applicable.

(16) Power of Attorney dated March 16, 2009 is filed herewith.

(17)(a) Forms of Proxy Card are filed herewith.

(17)(b) Prospectus and Statement of Additional Information of Legg Mason Investment Grade Income Portfolio and Legg Mason Limited Duration Bond Portfolio dated May 1, 2008 is filed herewith.

(17)(c) Prospectus and Statement of Additional Information of Legg Mason Partners Corporate Bond Fund dated April 28, 2008, as supplemented September 2, 2008, is filed herewith.

(17)(d) Prospectus and Statement of Additional Information of Legg Mason Partners Short-Term Bond Fund dated April 28, 2008, as supplemented September 2, 2008, is filed herewith.

(17)(e) Annual Report of Legg Mason Investment Grade Income Portfolio for the year ended December 31, 2008 is filed herewith.

(17)(f) Annual Report of Legg Mason Partners Corporate Bond Fund and Legg Mason Limited Duration Bond Portfolio for the year ended December 31, 2008 is filed herewith.

(17)(g) Annual Report of Legg Mason Partners Short-Term Bond Fund for the year ended December 31, 2008 is filed herewith.

(17)(h) Code of Ethics of Citigroup Asset Management—North America (adopted by LMPFA), as amended September 13, 2005, is incorporated herein by reference to Post-Effective Amendment No. 75.

(17)(i) Code of Ethics of LMIS dated December 1, 2005 is incorporated herein by reference to Post-Effective Amendment No. 75.

(17)(j) Code of Ethics of WAM and certain supervised affiliates as of July 2007 is incorporated herein by reference to Post-Effective Amendment No. 116.

ITEM 17. UNDERTAKINGS

(1) The undersigned Registrant agrees that prior to any public reoffering of the securities registered through the use of a prospectus which is a part of this Registration Statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933, as amended (the “1933 Act”) [17 CFR 230.145c], the reoffering prospectus will contain the information called for by the applicable registration form for reofferings by persons who may be deemed underwriters, in addition to the information called for by the other terms of the applicable form.

(2) The undersigned Registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as a part of an amendment to this Registration Statement and will not be used until the amendment is effective, and that, in determining any liability under the 1933 Act, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them.

(3) The Registrant hereby undertakes to file, by post-effective amendment, the final opinion of Bingham McCutchen LLP supporting the tax consequences of the proposed reorganization as soon as practicable after the closing of the reorganization.

SIGNATURES

As required by the Securities Act of 1933, as amended, this registration statement has been signed on behalf of the registrant, in the City of New York and State of New York, on the 23rd day of March, 2009.

LEGG MASON PARTNERS INCOME TRUST, on behalf of its series:

Legg Mason Partners Corporate Bond Fund

Legg Mason Partners Short-Term Bond Fund

By:	/s/ R. Jay Gerken
	R. Jay Gerken
	President

As required by the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
/s/ R. Jay Gerken	President, Principal Executive Officer and Trustee	March 23, 2009
R. Jay Gerken
/s/ Frances M. Guggino	Treasurer and Chief Financial Officer	March 23, 2009
Frances M. Guggino
/s/ Elliott J. Berv*	Trustee	March 23, 2009
Elliott J. Berv
/s/ A. Benton Cocanougher*	Trustee	March 23, 2009
A. Benton Cocanougher
/s/ Jane F. Dasher*	Trustee	March 23, 2009
Jane F. Dasher
/s/ Mark T. Finn*	Trustee	March 23, 2009
Mark T. Finn
/s/ Rainer Greeven*	Trustee	March 23, 2009
Rainer Greeven
/s/ Stephen R. Gross*	Trustee	March 23, 2009
Stephen R. Gross
/s/ Richard E. Hanson, Jr.*	Trustee	March 23, 2009
Richard E. Hanson, Jr.
/s/ Diana R. Harrington*	Trustee	March 23, 2009
Diana R. Harrington
/s/ Susan M. Heilbron*	Trustee	March 23, 2009
Susan M. Heilbron
/s/ Susan B. Kerley*	Trustee	March 23, 2009
Susan B. Kerley

/s/ Alan G. Merten*		Trustee	March 23, 2009
Alan G. Merten
/s/ R. Richardson Pettit*		Trustee	March 23, 2009
R. Richardson Pettit
*By:	/s/ R. Jay Gerken
	R. Jay Gerken

* Attorney-in-Fact, pursuant to Power of Attorney.

EXHIBIT INDEX

EXHIBIT NO.	EXHIBITS
1(f)	Amended and Restated Designation of Series of Shares of Beneficial Interests in the Registrant, effective as of March 13, 2009, and Amended and Restated Designation of Classes, effective as of March 14, 2009.
6(b)	Form of Letter Amendment to Management Agreement between the Registrant, on behalf of Legg Mason Partners Corporate Bond Fund, and LMPFA.
10(a)	Shareholder Services and Distribution Plan pursuant to Rule 12b-1 of the Registrant, on behalf of Legg Mason Partners Adjustable Rate Income Fund, Legg Mason Partners California Municipals Fund, Legg Mason Partners Core Bond Fund, Legg Mason Partners Core Plus Bond Fund, Legg Mason Partners Strategic Income Fund, Legg Mason Partners Global High Yield Bond Fund, Legg Mason Partners Global Income Fund, Legg Mason Partners Government Securities Fund, Legg Mason Partners High Income Fund, Legg Mason Partners Global Inflation Management Fund, Legg Mason Partners Intermediate Maturity California Municipals Fund, Legg Mason Partners Intermediate Maturity New York Municipals Fund, Legg Mason Partners Intermediate-Term Municipals Fund, Legg Mason Partners Corporate Bond Fund, Legg Mason Partners Managed Municipals Fund, Legg Mason Partners Massachusetts Municipals Fund, Legg Mason Partners Municipal High Income Fund, Legg Mason Partners New Jersey Municipals Fund, Legg Mason Partners New York Municipals Fund, Legg Mason Partners Oregon Municipals Fund, Legg Mason Partners Pennsylvania Municipals Fund, Legg Mason Partners Short Duration Municipal Income Fund, Legg Mason Partners Short/Intermediate U.S. Government Fund, Legg Mason Partners Short-Term Bond Fund, Western Asset Emerging Market Debt Portfolio and Western Asset Global High Yield Bond Portfolio, dated February 6, 2007, as amended March 2009.
11	Opinion and consent of Venable LLP as to the legality of the securities being registered.
12	Forms of opinion of Bingham McCutchen LLP supporting the tax matters and consequences to shareholders discussed in the Prospectus/Proxy Statement.
13(d)	Form of Fee Waiver and Expense Reimbursement Agreement for Legg Mason Partners Corporate Bond Fund.
13(e)	Form of Fee Waiver and Expense Reimbursement Agreement for Legg Mason Partners Short-Term Bond Fund.
14(a)	Consent of KPMG LLP.
14(b)	Consent of PricewaterhouseCoopers LLP.
16	Power of Attorney.
17(a)	Forms of Proxy Card.
17(b)	Prospectus and Statement of Additional Information of Legg Mason Investment Grade Income Portfolio and Legg Mason Limited Duration Bond Portfolio dated May 1, 2008.
17(c)	Prospectus and Statement of Additional Information of Legg Mason Partners Corporate Bond Fund dated April 28, 2008.
17(d)	Prospectus and Statement of Additional Information of Legg Mason Partners Short-Term Bond Fund dated April 28, 2008.

17(e)	Annual Report of Legg Mason Investment Grade Income Portfolio and Legg Mason Limited Duration Bond Portfolio for the year ended December 31, 2008.
17(f)	Annual Report of Legg Mason Partners Corporate Bond Fund for the year ended December 31, 2008.
17(g)	Annual Report of Legg Mason Partners Short-Term Bond Fund for the year ended December 31, 2008.

EX-99.1(F)

Exhibit 1(f)

SCHEDULE A

LEGG MASON PARTNERS INCOME TRUST

Amended and Restated

Designation of Series of Shares of Beneficial Interests in the Trust

(Effective as of March 13, 2009)

WHEREAS, the Trustee(s) of the Trust, acting pursuant to Section 4.9 of the Declaration, have divided the Shares of the Trust into 25 Series; and

WHEREAS, the Trustee(s) of the Trust wish to amend and restate the Designation of Series of Shares of Beneficial Interests in the Trust;

NOW THEREFORE, the following Series of the Trust have been established and designated, with such rights, preferences, privileges, limitations, restrictions and other relative terms as are set forth below:

1.	Legg Mason Partners Adjustable Rate Income Fund
2.	Legg Mason Partners California Municipals Fund
3.	Legg Mason Partners Core Bond Fund
4.	Legg Mason Partners Core Plus Bond Fund
5.	Legg Mason Partners Corporate Bond Fund
6.	Legg Mason Partners Global High Yield Bond Fund
7.	Legg Mason Partners Global Inflation Management Fund
8.	Legg Mason Partners Government Securities Fund
9.	Legg Mason Partners High Income Fund
10.	Legg Mason Partners Intermediate Maturity California Municipals Fund
11.	Legg Mason Partners Intermediate Maturity New York Municipals Fund
12.	Legg Mason Partners Intermediate-Term Municipals Fund
13.	Legg Mason Partners Managed Municipals Fund
14.	Legg Mason Partners Massachusetts Municipals Fund
15.	Legg Mason Partners Municipal High Income Fund
16.	Legg Mason Partners New Jersey Municipals Fund
17.	Legg Mason Partners New York Municipals Fund
18.	Legg Mason Partners Oregon Municipals Fund
19.	Legg Mason Partners Pennsylvania Municipals Fund
20.	Legg Mason Partners Short Duration Municipal Income Fund
21.	Legg Mason Partners Short-Term Bond Fund
22.	Legg Mason Partners Strategic Income Fund
23.	Legg Mason Partners Tax Efficient Core Plus Income Fund
24.	Western Asset Emerging Markets Debt Portfolio
25.	Western Asset Global High Yield Bond Portfolio

SCHEDULE A

1. Each Share of each Series shall have a par value of $0.00001 per Share and shall be entitled to all the rights and preferences accorded to Shares under the Declaration.

2. The number of authorized Shares of each Series is unlimited.

3. Each Series shall be authorized to hold cash, invest in securities, instruments and other property, use investment techniques, and have such goals or objectives as from time to time are described in the prospectus and statement of additional information contained in the Trust’s then currently effective registration statement under the Securities Act of 1933 to the extent pertaining to the offering of Shares of the Series, as the same may be amended and supplemented from time to time (“Prospectus”). Each Share of a Series shall represent a beneficial interest in the net assets allocated or belonging to such Series only, and such interest shall not extend to the assets of the Trust generally (except to the extent that General Assets (as defined in the Declaration) are allocated to such Series), and shall be entitled to receive its pro rata share of the net assets of the Series upon liquidation of the Series, all as set forth in Section 4.9 of the Declaration.

4. With respect to the Shares of each Series, (a) the time and method of determining the purchase price, (b) the fees and expenses, (c) the qualifications for ownership, if any, (d) minimum purchase amounts, if any, (e) minimum account size, if any, (f) the price, terms and manner of redemption, (g) any conversion or exchange feature or privilege, (h) the relative dividend rights, and (i) any other relative rights, preferences, privileges, limitations, restrictions and other relative terms have been established by the Trustees in accordance with the Declaration and are set forth in the Prospectus with respect to such Series.

5. The Trustees may from time to time modify any of the relative rights, preferences, privileges, limitations, restrictions and other relative terms of a Series or the Shares of such Series that have been established by the Trustees or redesignate any of the Series without any action or consent of the Shareholders.

6. The designation of any Series hereby shall not impair the power of the Trustees from time to time to designate additional Series of Shares of the Trust or terminate any Series hereby designated.

7. Capitalized terms not defined herein have the meanings given to such terms in the Declaration.

SCHEDULE B

LEGG MASON PARTNERS INCOME TRUST

Amended and Restated

Designation of Classes

(Effective as of March 14, 2009)

WHEREAS, the Trustees of the Trust, acting pursuant to Section 4.9 of the Declaration, have divided the Series of the Trust into one or more Classes of Shares; and

WHEREAS, the Trustees of the Trust wish to amend and restate the Designation of Classes;

NOW THEREFORE, the Classes listed below with respect to the identified Series of the Trust have been established and designated, with such relative rights, preferences, privileges, limitations, restrictions and other relative terms as are set forth below:

	SERIES	CLASSES
1.	Legg Mason Partners Adjustable Rate Income Fund	A, B, C, I, FI, R
2.	Legg Mason Partners California Municipals Fund	A, B, C, I, FI, R
3.	Legg Mason Partners Core Bond Fund	A, B, C, I, FI, R
4.	Legg Mason Partners Core Plus Bond Fund	A, B, C, I, FI, R
5.	Legg Mason Partners Corporate Bond Fund	A, B, C, I, FI, R, P
6.	Legg Mason Partners Global High Yield Bond Fund	A, B, C, I, FI, R
7.	Legg Mason Partners Global Inflation Management Fund	A, C, I, FI, R
8.	Legg Mason Partners Government Securities Fund	A, B, C, I, 1, FI, R
9.	Legg Mason Partners High Income Fund	A, B, C, I, FI, R
10.	Legg Mason Partners Intermediate Maturity California Municipals Fund	A, C, I, FI, R
11.	Legg Mason Partners Intermediate Maturity New York Municipals Fund	A, C, I, FI, R
12.	Legg Mason Partners Intermediate-Term Municipals Fund	A, B, C, O, I, FI, R
13.	Legg Mason Partners Managed Municipals Fund	A, B, C, I, 1, FI, R
14.	Legg Mason Partners Massachusetts Municipals Fund	A, B, C, I, FI, R
15.	Legg Mason Partners Municipal High Income Fund	A, B, C, I, FI, R
16.	Legg Mason Partners New Jersey Municipals Fund	A, B, C, I, FI, R
17.	Legg Mason Partners New York Municipals Fund	A, B, C, I, FI, R
18.	Legg Mason Partners Oregon Municipals Fund	A, B, C, I, FI, R
19.	Legg Mason Partners Pennsylvania Municipals Fund	A, B, C, I, FI, R
20.	Legg Mason Partners Short Duration Municipal Income Fund	A, C, I, FI, R
21.	Legg Mason Partners Short-Term Bond Fund	A, B, C, I, FI, R
22.	Legg Mason Partners Strategic Income Fund	A, B, C, I, FI, R
23.	Legg Mason Partners Tax Efficient Core Plus Income Fund	—
24.	Western Asset Emerging Markets Debt Portfolio	A, C, I, FI, R, IS
25.	Western Asset Global High Yield Bond Portfolio	I, FI, R

SCHEDULE B

1. Each Share of each Class is entitled to all the rights and preferences accorded to Shares under the Declaration.

2. The number of authorized Shares of each Class is unlimited.

3. All Shares of a Class of a Series shall be identical with each other and with the Shares of each other Class of the same Series except for such variations between Classes as may be authorized by the Trustees from time to time and set forth in the Trust’s then currently effective registration statement under the Securities Act of 1933 to the extent pertaining to the offering of Shares of the Class of such Series, as the same may be amended and supplemented from time to time (“Prospectus”). The Trustees may change the name or other designation of a Class; and take such other action with respect to the Classes as the Trustees may deem desirable.

4. With respect to the Shares of a Class of a Series, (a) the time and method of determining the purchase price, (b) the fees and expenses, (c) the qualifications for ownership, if any, (d) minimum purchase amounts, if any, (e) minimum account size, if any, (f) the price, terms and manner of redemption, (g) any conversion or exchange feature or privilege, (h) the relative dividend rights, and (i) any other relative rights, preferences, privileges, limitations, restrictions and other relative terms have been established by the Trustees in accordance with the Declaration and are set forth in the Prospectus with respect to such Class of such Series.

5. The Trustees may from time to time modify any of the relative rights, preferences, privileges, limitations, restrictions and other relative terms of a Class of a Series that have been established by the Trustees, divide or combine the issued or unissued Shares of any Class of a Series into a greater or lesser number; classify or reclassify any issued or unissued Shares of any Class of a Series into one or more Classes of such Series; combine two or more Classes of a Series into a single Class of such Series; in each case without any action or consent of the Shareholders.

6. The designation of any Class hereby shall not impair the power of the Trustees from time to time to designate additional Classes of Shares of a Series or terminate any one or more Classes of a Series hereby designated.

7. Capitalized terms not defined herein have the meanings given to such terms in the Declaration.

EX-99.6(B)

Exhibit 6(b)

Form of Letter Amendment to Management Agreement

Legg Mason Partners Fund Advisor, LLC

620 Eighth Avenue

New York, New York 10018

[Date]

Legg Mason Partners Income Trust

55 Water Street

New York, New York 10041

Re: Management Agreement, dated as of April 13, 2007, between Legg Mason Partners Income Trust (the “Trust”) and Legg Mason Partners Fund Advisor, LLC (the “Manager”) with respect to the Trust’s series Legg Mason Partners Corporate Bond Fund (formerly Legg Mason Partners Investment Grade Bond Fund) (the “Fund”)

Ladies and Gentlemen:

The Manager hereby confirms its agreement, in connection with the acquisition by the Fund of Legg Mason Investment Grade Income Portfolio (the “Reorganization”), to a reduction of the fee payable under the Management Agreement to an annual rate of 0.55% of the average daily net assets of the Fund. This reduction will become effective, however, only upon consummation of the Reorganization.

Except to the extent expressly set forth herein, this letter shall not be deemed to otherwise amend or modify any term of the Management Agreement.

Please sign below to acknowledge your consent and agreement to the above.

LEGG MASON PARTNERS FUND ADVISOR, LLC

By:

Name:

Title:

Consented and Agreed to:

LEGG MASON PARTNERS INCOME TRUST,

with respect to its series Legg Mason Partners

Corporate Bond Fund

By:

Name:

Title:

EX-99.10(A)

Exhibit 10(a)

LEGG MASON PARTNERS INCOME TRUST

SHAREHOLDER SERVICES AND

DISTRIBUTION PLAN

February 6, 2007

Amended as of March 2009

WHEREAS, the Board of Trustees of Legg Mason Partners Income Trust (“Trust”) wishes to adopt this Shareholder Services and Distribution Plan (“Plan”) adopted pursuant to Rule 12b-1 (the “Rule”) under the Investment Company Act of 1940, as amended (the “1940 Act”) for each series of the Trust (each a “Fund” and collectively, the “Funds”) listed in Appendix A, as it may be amended from time to time, to be effective as of the date set forth above.

NOW, THEREFORE, this Plan is adopted in accordance with the Rule with respect to those classes of shares (each a “Class”) of the Funds as listed in Appendix A, subject to the following terms and conditions:

Section 1. Annual Fee.

(a) Service and Distribution Fee for Class A shares. For each Fund with Class A shares, the Fund may pay to one or more principal underwriters, broker-dealers, financial intermediaries (which may include banks), and others that enter into a distribution, underwriting, selling or service agreement with respect to shares of a Fund or Class thereof (each of the foregoing a “Servicing Party”) a service and distribution fee, provided that the aggregate amount of all such payments with respect to Class A shares does not exceed an amount calculated at the annual rate set forth in Appendix A (the “Class A Service Fee”).

(b) Service and Distribution Fee for Class B shares. For each Fund with Class B shares, the Fund may pay to one or more Servicing Parties a service and distribution fee, provided that the aggregate amount of all such payments with respect to Class B shares does not exceed an amount calculated at the annual rate set forth in Appendix A (the “Class B Service Fee”).

(c) Service and Distribution Fee for Class C shares. For each Fund with Class C shares the Fund may pay to one or more Servicing Parties a service and distribution fee, provided that the aggregate amount of all such payments with respect to Class C shares does not exceed an amount calculated at the annual rate set forth in Appendix A (the “Class C Service Fee”).

(d) Service and Distribution Fee for Class FI shares. For each Fund with Class FI shares the Fund may pay to one or more Servicing Parties a service and distribution fee, provided that the aggregate amount of all such payments with respect to Class FI shares does not exceed an amount calculated at the annual rate set forth in Appendix A (the “Class FI Service Fee”).

(e) Service and Distribution Fee for Class R shares. For each Fund with Class R shares the Fund may pay to one or more Servicing Parties a service and distribution fee, provided that the aggregate amount of all such payments with respect to Class R shares does not exceed an amount calculated at the annual rate set forth in Appendix A (the “Class R Service Fee”).

(f) Service and Distribution Fee for Class O shares. For each Fund with Class O shares the Fund may pay to one or more Servicing Parties a service and distribution fee, provided that the aggregate amount of all such payments with respect to Class O shares does not exceed an amount calculated at the annual rate set forth in Appendix A (the “Class O Service Fee”).

(g) Service and Distribution Fee for Class I shares. For each Fund with Class I shares the Fund may pay to one or more Servicing Parties a service and distribution fee, provided that the aggregate amount of all such payments with respect to Class I shares does not exceed an amount calculated at the annual rate set forth in Appendix A (the “Class I Service Fee”).

(h) Service and Distribution Fee for Class 1 shares. For each Fund with Class 1 shares the Fund may pay to one or more Servicing Parties a service and distribution fee, provided that the aggregate amount of all such payments with respect to Class 1 shares does not exceed an amount calculated at the annual rate set forth in Appendix A (the “Class 1 Service Fee”).

(i) Service and Distribution Fee for Class IS shares. For each Fund with Class IS shares the Fund may pay to one or more Servicing Parties a service and distribution fee, provided that the aggregate amount of all such payments with respect to Class IS shares does not exceed an amount calculated at the annual rate set forth in Appendix A (the “Class IS Service Fee”).

(j) Service and Distribution Fee for Class P shares. For each Fund with Class P shares the Fund may pay to one or more Servicing Parties a service and distribution fee, provided that the aggregate amount of all such payments with respect to Class P shares does not exceed an amount calculated at the annual rate set forth in Appendix A (the “Class P Service Fee” and collectively with the Class A Service Fee, the Class B Service Fee, the Class C Service Fee, the Class FI Service Fee, the Class R Service Fee, the Class O Service Fee, the Class I Service Fee, the Class 1 Service Fee and the Class IS Service Fee, the “Service Fees”).

(k) Payment of Fees. The Service Fees described above will be calculated daily and paid monthly by the Fund with respect to each Class as provided in Appendix A.

The Trust is authorized to engage in the activities listed herein either directly or through other entities.

Section 2. Expenses Covered by the Plan.

With respect to the fees payable by each Class, the Service Fees for a Class may be used by a Servicing Party for expenses related to that Class, including without limitation: (a) costs of printing and distributing the Fund’s prospectuses, statements of additional information and reports to prospective investors in the Fund; (b) costs involved in preparing, printing and distributing sales literature pertaining to the Fund and reports for persons other than existing shareholders; (c) an allocation of overhead and other branch office distribution-related expenses of a Servicing Party; (d) payments made to, and expenses of, a Servicing Party (including on behalf of its financial consultants) and other persons who provide support or personal services to Fund shareholders in connection with the distribution of the Fund’s shares, including but not limited to, office space and equipment, communication facilities, answering routine inquiries regarding the Fund and its operations, processing shareholder transactions, promotional,

2

advertising or marketing activity, sub-accounting and recordkeeping services (in excess of ordinary payments made to the Fund’s transfer agent or other recordkeeper), obtaining shareholder information and providing information about the Fund, asset allocation services, compensating sales personnel, maintaining and servicing shareholder accounts (including the payment of a continuing fee to financial consultants); and (e) interest-related expenses, or the cost of capital associated with, the financing of any of the foregoing; provided, however, that (i) the Service Fee for a particular Class that may be used by the Servicing Party to cover expenses primarily intended to result in the sale of shares of that Class, including, without limitation, payments to the Servicing Party and other persons as compensation for the sale of the shares (including payments that may be deemed to be selling concessions or commissions) may not exceed the maximum amount, if any, as may from time to time be permitted for such services under the Financial Services Regulatory Authority (“FINRA”) Conduct Rule 2830 or any successor rule, in each case as amended or interpreted by FINRA (“Rule 2830”), and (ii) the Service Fee for a particular Class that may be used by the Servicing Party to cover expenses primarily intended for personal service and/or maintenance of shareholder accounts may not exceed the maximum amount, if any, as may from time to time be permitted for such services under Rule 2830. The Servicing Party may retain portions of the Service Fees in excess of its expenses incurred.

It is recognized that a Fund’s investment manager (“Manager”), principal underwriter, a Servicing Party, or an affiliate of the foregoing may use its management or advisory fee revenues, past profits or its resources from any other source, to make payment to a Servicing Party or any other entity with respect to any expenses incurred in connection with the distribution or marketing and sales of the Fund’s shares, including the activities referred to above. Notwithstanding any language to the contrary contained herein, to the extent that any payments made by the Fund to its Manager or any affiliate thereof, including payments made from such Manager or affiliate’s management or advisory fee or administrative fee or payments made for shareholder services should be deemed to be indirect financing of any activity primarily intended to result in the sale of Fund shares within the context of the Rule, then such payments shall be deemed to be authorized by this Plan but shall not be subject to the limitations set forth in Section 1.

It is further recognized that the Fund will enter into normal and customary custodial, transfer agency, recordkeeping and dividend disbursing agency and other service provider arrangements, and make separate payments under the terms and conditions of those arrangements. These arrangements shall not ordinarily be deemed to be a part of this Plan.

Section 3. Sales Charges

It is understood that, under certain circumstances, as disclosed in the Fund’s prospectus, an initial sales charge may be paid by investors who purchase Fund shares, and the Fund may pay to the Servicing Party, or the Fund may permit such persons to retain, as the case may be, such sales charge as fully or partial compensation for their services in connection with the sale of Fund shares. It is also understood that, under certain circumstances, as disclosed in the Fund’s prospectus, the Fund or the Servicing Party may impose certain deferred sales charges in connection with the repurchase of such Fund shares, and the Fund may pay to a Servicing Party, or the Fund may permit such persons to retain, as the case may be, all or any portion of such deferred sales charges.

Section 4. Approval by Shareholders.

Except to the extent that, in accordance with Section 8 below, this Plan amends an existing plan adopted pursuant to the Rule with respect to a Fund or Class, the Plan will not take effect, and no fee will be payable in accordance with Section 1 of the Plan, with respect to a Class of a Fund

3

until the Plan has been approved by a vote of at least a majority of the outstanding voting securities of that Class. The Plan will be deemed to have been approved with respect to a Class of each Fund so long as a majority of the outstanding voting securities of that Class votes for the approval of the Plan, notwithstanding that: (a) the Plan has not been approved by a majority of the outstanding voting securities of any other Class, or (b) the Plan has not been approved by a majority of the outstanding voting securities of the Fund.

Section 5. Approval by Board Members.

Neither the Plan nor any related agreements will take effect, with respect to a Class of a Fund, until approved by a majority vote of both (a) the Board of Directors or Trustees (“Board”) and (b) those Board members who are not interested persons of the Trust and who have no direct or indirect financial interest in the operation of the Plan or in any agreements related to it (the “Qualified Board Members”), cast in person at a meeting called for the purpose of voting on the Plan and the related agreements.

Section 6. Continuance of the Plan.

The Plan will continue in effect with respect to each Class until June 30, 2007 and thereafter for successive twelve-month periods with respect to each Class; provided, however, that such continuance is specifically approved at least annually by the Board members of the Trust and by a majority of the Qualified Board Members in accordance with Section 5.

Section 7. Termination.

The Plan may be terminated at any time with respect to a Class of a Fund (i) by the Fund without the payment of any penalty, by the vote of a majority of the outstanding voting securities of such Class of such Fund or (ii) by a majority vote of the Qualified Board Members. The Plan may remain in effect with respect to a particular Class of a Fund even if the Plan has been terminated in accordance with this Section 7 with respect to any other Class of such Fund.

Section 8. Amendments.

The Plan may not be amended with respect to any Class so as to increase materially the amounts of the fees described in Section 1, unless the amendment is approved by a vote of holders of at least a majority of the outstanding voting securities of that Class. No material amendment to the Plan may be made unless approved by the Trust’s Board in the manner described in Section 5.

Section 9. Selection of Certain Board Members.

While the Plan is in effect, the Trust shall comply with Rule 12b-1(c).

Section 10. Written Reports.

In each year during which the Plan remains in effect, the proper officers of the Fund will prepare and furnish to the Trust’s Board and the Board will review, at least quarterly, written reports complying with the requirements of the Rule, which set out the amounts expended under the Plan and the purposes for which those expenditures were made.

4

Section 11. Preservation of Materials.

The Trust will preserve copies of the Plan, any agreement relating to the Plan and any report made pursuant to Section 10, for a period of not less than six years (the first two years in an easily accessible place) from the date of the Plan.

Section 12. Meanings of Certain Terms.

As used in the Plan, the terms “interested person” and “majority of the outstanding voting securities” will be deemed to have the same meaning that those terms have under the rules and regulations under the 1940 Act, subject to any exemption that may be granted to the Trust under the 1940 Act, by the Securities and Exchange Commission (the “Commission”), or as interpreted by the Commission.

Section 13. Limitation of Liability

Notice is hereby given that this Plan has been adopted on behalf of the Fund by the Trustees of the Trust in their capacity as Trustee of the Trust and not individually and that the obligations of or arising out of this instrument are not binding upon any of the Trustees, officers or shareholders individually but are binding only upon the assets and property of the Fund.

Section 14. Severability

The provisions of the Plan are severable for each Fund and Class covered by this Plan, and actions taken with respect to a Plan in conformity with the Rule will be taken separately for each such Fund or Class.

Section 15. Governing Law

This plan shall be governed by, and construed in accordance with, the laws of the State of New York.

5

APPENDIX A

SHAREHOLDER SERVICES AND DISTRIBUTION PLAN

Name of Fund	Name of Class	Aggregate Service Fee1
Legg Mason Partners Adjustable Rate Income Fund	Class A	0.25%
	Class B	0.75%
	Class C	0.75%
	Class FI	0.25%
	Class R	0.50%
	Class I	None
Legg Mason Partners California Municipals Fund	Class A	0.15%
	Class B	0.65%
	Class C	0.70%
	Class FI	0.25%
	Class R	0.50%
	Class I	None
Legg Mason Partners Core Bond Fund	Class A	0.25%
	Class B	0.75%
	Class C	0.70%
	Class FI	0.25%
	Class R	0.50%
	Class I	None
Legg Mason Partners Core Plus Bond Fund	Class A	0.25%
	Class B	0.75%
	Class C	0.70%
	Class FI	0.25%
	Class R	0.50%
	Class I	None
Legg Mason Partners Corporate Bond Fund	Class A	0.25%
	Class B	0.75%
	Class C	0.70%
	Class FI	0.25%
	Class R	0.50%
	Class I	None
	Class P	0.50%
Legg Mason Partners Global High Yield Bond Fund	Class A	0.25%
	Class B	0.75%
	Class C	0.75%
	Class FI	0.25%
	Class R	0.50%
	Class I	None

¹ Expressed as an annual rate of the average daily net assets of the Fund attributable to that Class.

6

Legg Mason Partners Global Inflation Management Fund	Class A	0.25%
	Class C	0.75%
	Class FI	0.25%
	Class R	0.50%
	Class I	None
Legg Mason Partners Government Securities Fund	Class A	0.25%
	Class B	0.75%
	Class C	0.70%
	Class FI	0.25%
	Class R	0.50%
	Class I	None
	Class 1	None
Legg Mason Partners High Income Fund	Class A	0.25%
	Class B	0.75%
	Class C	0.70%
	Class FI	0.25%
	Class R	0.50%
	Class I	None
Legg Mason Partners Intermediate Maturity California Municipals Fund	Class A	0.15%
	Class C	0.75%
	Class FI	0.25%
	Class R	0.50%
	Class I	None
Legg Mason Partners Intermediate Maturity New York Municipals Fund	Class A	0.15%
	Class C	0.75%
	Class FI	0.25%
	Class R	0.50%
	Class I	None
Legg Mason Partners Intermediate-Term Municipals Fund	Class A	0.15%
	Class C	0.75%
	Class FI	0.25%
	Class R	0.50%
	Class I	None
Legg Mason Partners Managed Municipals Fund	Class A	0.15%
	Class B	0.65%
	Class C	0.70%
	Class FI	0.25%
	Class R	0.50%
	Class I	None
	Class 1	None

7

Legg Mason Partners Massachusetts Municipals Fund	Class A	0.15%
	Class B	0.65%
	Class C	0.70%
	Class FI	0.25%
	Class R	0.50%
	Class I	None
Legg Mason Partners Municipal High Income Fund	Class A	0.15%
	Class B	0.65%
	Class C	0.70%
	Class FI	0.25%
	Class R	0.50%
	Class I	None
Legg Mason Partners New Jersey Municipals Fund	Class A	0.15%
	Class B	0.65%
	Class C	0.70%
	Class FI	0.25%
	Class R	0.50%
	Class I	None
Legg Mason Partners New York Municipals Fund	Class A	0.15%
	Class B	0.65%
	Class C	0.70%
	Class FI	0.25%
	Class R	0.50%
	Class I	None
Legg Mason Partners Oregon Municipals Fund	Class A	0.15%
	Class B	0.65%
	Class C	0.70%
	Class FI	0.25%
	Class R	0.50%
	Class I	None
Legg Mason Partners Pennsylvania Municipals Fund	Class A	0.15%
	Class B	0.65%
	Class C	0.70%
	Class FI	0.25%
	Class R	0.50%
	Class I	None
Legg Mason Partners Short Duration Municipal Income Fund	Class A	0.15%
	Class C	0.50%
	Class FI	0.25%
	Class R	0.50%
	Class I	None

8

Legg Mason Partners Short-Term Bond Fund	Class A	0.25%
	Class B	0.75%
	Class C	0.75%
	Class FI	0.25%
	Class R	0.50%
	Class I	None
Legg Mason Partners Strategic Income Fund	Class A	0.25%
	Class B	0.75%
	Class C	0.70%
	Class FI	0.25%
	Class R	0.50%
	Class I	None
Western Asset Emerging Markets Debt Portfolio	Class A	0.25%
	Class C	0.75%
	Class I*	None
	Class FI	0.25%
	Class R	0.50%
	Class IS	None
Western Asset Global High Yield Bond Portfolio	Class I*	None
	Class FI	0.25%
	Class R	0.50%

* The existing undesignated class of shares of this series shall be renamed Class I shares as of the effective date of the registration of the offering of Class FI shares of this series.

9

EX-99.11

Exhibit 11

LETTERHEAD OF VENABLE LLP

March 20, 2009

Legg Mason Partners Income Trust

55 Water Street

New York, NY 10041

Bingham McCutchen LLP

One Federal Street

Boston, MA 02110

Re: Registration Statement on Form N-14

Ladies and Gentlemen:

We have served as Maryland counsel to Legg Mason Partners Income Trust, a Maryland business trust registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company (the “Trust”), in connection with the registration of shares (the “Shares”) of beneficial interest, par value $.00001 per share, of the Trust, classified and designated as the classes of the series listed on Schedule I hereto, pursuant to the Agreements and Plans of Reorganization listed on Schedule II hereto (collectively, the “Plans”), covered by the above-referenced Registration Statement (the “Registration Statement”), filed by the Trust on or about the date hereof with the Securities and Exchange Commission (the “Commission”), under the Securities Act of 1933, as amended (the “1933 Act”). Unless otherwise defined herein, capitalized terms used herein shall have the meanings assigned to them in the Registration Statement.

In connection with our representation of the Trust, and as a basis for the opinion hereinafter set forth, we have examined originals, or copies certified or otherwise identified to our satisfaction, of the following documents (hereinafter collectively referred to as the “Documents”):

1. The Registration Statement and the related form of prospectus included therein, substantially in the form transmitted to the Commission under the 1933 Act;

2. The Certificate of Trust of the Trust, certified by the State Department of Assessments and Taxation of Maryland (the “SDAT”);

3. The Declaration of Trust of the Trust, certified as of the date hereof by an officer of the Trust;

Legg Mason Partners Income Trust

Bingham McCutchen LLP

March 20, 2009

Page 2

4. The Bylaws of the Trust, certified as of the date hereof by an officer of the Trust;

5. A certificate of the SDAT as to the good standing of the Trust, dated as of a recent date;

6. The forms of the Plans, certified as of the date hereof by an officer of the Trust;

7. Resolutions adopted by the Board of Trustees of the Trust (the “Resolutions”) relating to the authorization of the registration, sale and issuance of the Shares and the approval of the Plans, certified as of the date hereof by an officer of the Trust;

8. A certificate executed by an officer of the Trust, dated as of the date hereof; and

9. Such other documents and matters as we have deemed necessary or appropriate to express the opinion set forth below, subject to the assumptions, limitations and qualifications stated herein.

In expressing the opinion set forth below, we have assumed the following:

1. Each individual executing any of the Documents, whether on behalf of such individual or another person, is legally competent to do so.

2. Each individual executing any of the Documents on behalf of a party (other than the Trust) is duly authorized to do so.

3. Each of the parties (other than the Trust) executing any of the Documents has duly and validly executed and delivered each of the Documents to which such party is a signatory, and such party’s obligations set forth therein are legal, valid and binding and are enforceable in accordance with all stated terms.

4. All Documents submitted to us as originals are authentic. The form and content of all Documents submitted to us as unexecuted drafts do not differ in any respect relevant to this opinion from the form and content of such Documents as executed and delivered. All Documents submitted to us as certified or photostatic copies conform to the original documents. All signatures on all Documents are genuine. All public records reviewed or relied

Legg Mason Partners Income Trust

Bingham McCutchen LLP

March 20, 2009

Page 3

upon by us or on our behalf are true and complete. All representations, warranties, statements and information contained in the Documents are true and complete. There has been no oral or written modification of or amendment to any of the Documents, and there has been no waiver of any provision of any of the Documents, by action or omission of the parties or otherwise.

5. The final Plans will not differ in any manner relevant to this opinion from the forms of the Plans.

Based upon the foregoing, and subject to the assumptions, limitations and qualifications stated herein, it is our opinion that:

1. The Trust is a business trust duly formed and existing under and by virtue of the laws of the State of Maryland and is in good standing with the SDAT.

2. The issuance of the Shares has been duly authorized and, when and if issued and delivered against payment therefor in accordance with the Resolutions, the Plans and the Registration Statement, the Shares will be validly issued, fully paid and nonassessable.

The foregoing opinion is limited to the substantive laws of the State of Maryland and we do not express any opinion herein concerning any other law. We express no opinion as to compliance with federal or state securities laws, including the securities laws of the State of Maryland, or the 1940 Act.

The opinion expressed herein is limited to the matters specifically set forth herein and no other opinion shall be inferred beyond the matters expressly stated. We assume no obligation to supplement this opinion if any applicable law changes after the date hereof or if we become aware of any fact that might change the opinion expressed herein after the date hereof.

This opinion is being furnished to you for submission to the Commission as an exhibit to the Registration Statement. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. In giving this consent, we do not admit that we are within the category of persons whose consent is required by Section 7 of the 1933 Act.

Very truly yours,

/s/    Venable LLP

SCHEDULE I

Legg Mason Partners Corporate Bond Fund

Class P shares

Class I shares

Legg Mason Partners Short-Term Bond Fund

Class C shares

Class I shares

SCHEDULE II

Agreements and Plans of Reorganization

1. Agreement and Plan of Reorganization, by and among the Trust, on behalf of its series, Legg Mason Partners Corporate Bond Fund, Legg Mason Income Trust, Inc., a Maryland corporation, on behalf of its series, Legg Mason Investment Grade Income Portfolio, and, solely for the purposes of paragraph 10.2 thereof, Legg Mason Partners Fund Advisor, LLC (“Legg Mason”).

2. Agreement and Plan of Reorganization, by and among the Trust, on behalf of its series, Legg Mason Partners Short-Term Bond Fund, Legg Mason Income Trust, Inc., a Maryland corporation, on behalf of its series, Legg Mason Limited Duration Bond Portfolio, and, solely for the purposes of paragraph 10.2 thereof, Legg Mason.

EX-99.12

Exhibit 12

[FORM OF OPINION OF BINGHAM McCUTCHEN LLP]

                    , 2009

Legg Mason Income Trust, Inc.

100 Light Street

Baltimore, Maryland 21202

Legg Mason Partners Income Trust

55 Water Street

New York, New York 10041

Ladies and Gentlemen:

This opinion is furnished to you pursuant to paragraph 8.5 of the Agreement and Plan of Reorganization, dated as of             , 2009, by and among Legg Mason Partners Income Trust (the “Acquiring Entity”), a Maryland business trust, on behalf of Legg Mason Partners Corporate Bond Fund, a series thereof (the “Acquiring Fund”), Legg Mason Income Trust, Inc. (the “Acquired Entity”), a Maryland corporation, on behalf of Legg Mason Investment Grade Income Portfolio, a series thereof (the “Acquired Fund”), and Legg Mason Partners Fund Advisor, LLC (the “Agreement”). All capitalized terms not otherwise defined herein have the meanings ascribed to them in the Agreement. The Agreement contemplates the acquisition of all of the assets of the Acquired Fund by the Acquiring Fund in exchange for (a) the assumption by the Acquiring Fund of the liabilities of the Acquired Fund and (b) the issuance and delivery by the Acquiring Fund to the Acquired Fund, for distribution, in accordance with Section 1.5 of the Agreement, pro rata within each class of Acquired Fund Shares, to the Acquired Fund Shareholders in exchange for their Acquired Fund Shares and in complete liquidation of the Acquired Fund, of a number of Acquiring Fund Shares of the corresponding class having an aggregate net asset value equal to the value of such assets, less the amount of such liabilities, of the Acquired Fund so transferred to the Acquiring Fund (the “Transaction”).

In connection with this opinion we have examined and relied upon the originals or copies, certified or otherwise identified to us to our satisfaction, of the Agreement, the the Combined Proxy Statement and Prospectus on Form N-14 filed with the Securities and Exchange Commission on or about             , 2009 with respect to the Transaction, and related documents (collectively, the “Transaction Documents”). In that examination, we have assumed the genuineness of all signatures, the authenticity and completeness of all documents purporting to be originals (whether reviewed by us in original or copy form) and the conformity to the originals of all documents purporting to be copies.

Legg Mason Income Trust, Inc.

Legg Mason Partners Income Trust

                    , 2009

Page 2

As to certain factual matters, we have relied with your consent upon, and our opinion is limited by, the representations of the various parties set forth in the Transaction Documents, and in certificates of the Acquired Entity and the Acquiring Entity dated as of the date hereof and attached hereto (the “Certificates”). Our opinion assumes (i) that all representations set forth in the Transaction Documents and in the Certificates will be true and correct in all material respects as of the date of the Transaction, and (ii) that the Agreement is implemented in accordance with its terms and consistent with the representations set forth in the Transaction Documents and Certificates. Our opinion is limited solely to the provisions of the Internal Revenue Code as presently in effect (the “Code”) and the regulations, rulings, and interpretations thereof in force as of this date. We assume no obligation to update our opinion to reflect any changes in law or in the interpretation thereof that may hereafter occur.

On the basis of and subject to the foregoing, we are of the opinion that, for United States federal income tax purposes:

1. The Reorganization will constitute a “reorganization” within the meaning of Section 368(a) of the Code, and the Acquiring Fund and the Acquired Fund will each be a “party to a reorganization” within the meaning of Section 368(b) of the Code.

2. No gain or loss will be recognized by the Acquired Fund upon the transfer of its Assets to the Acquiring Fund solely in exchange for Acquiring Fund Shares and the assumption by the Acquiring Fund of all of the Liabilities, or upon the distribution of the Acquiring Fund Shares by the Acquired Fund to its shareholders in liquidation, except for (A) any gain or loss that may be recognized on the transfer of “section 1256 contracts” as defined in Section 1256(b) of the Code, (B) any gain that may be recognized on the transfer of stock in a “passive foreign investment company” as defined in Section 1297(a) of the Code and (C) any other gain that may be required to be recognized as a result of the closing of the Acquired Fund’s tax year.

3. The tax basis in the hands of the Acquiring Fund of each Asset so transferred will be the same as the tax basis of such Asset in the hands of the Acquired Fund immediately prior to the transfer, increased by the amount of gain (or decreased by the amount of loss), if any, recognized by the Acquired Fund upon the transfer.

4. The holding period of each Asset in the hands of the Acquiring Fund, other than assets, if any, with respect to which gain or loss is required to be recognized, will include in each instance the period during which the Asset was held by the Acquired Fund (except where investment activities of the Acquiring Fund have the effect of reducing or eliminating the holding period with respect to an Asset).

Legg Mason Income Trust, Inc.

Legg Mason Partners Income Trust

                    , 2009

Page 3

5. No gain or loss will be recognized by the Acquiring Fund upon receipt of the Assets solely in exchange for Acquiring Fund Shares and the assumption by the Acquiring Fund of the Liabilities of the Acquired Fund.

6. No gain or loss will be recognized by the Acquired Fund Shareholders upon the exchange of all of their Acquired Fund Shares solely for Acquiring Fund Shares as part of the Reorganization.

7. The aggregate tax basis of the Acquiring Fund Shares that each Acquired Fund Shareholder receives in the Reorganization will be the same as the aggregate tax basis of the Acquired Fund Shares exchanged therefor.

8. The holding period for the Acquiring Fund Shares received by a Acquired Fund Shareholder will include the holding period of the Acquired Fund Shares exchanged therefor, provided that such Acquired Fund Shares were held as capital assets on the date of the exchange.

This opinion is being delivered solely to you for your use in connection with the referenced transaction, and may not be relied upon by any other person or used for any other purpose.

Very truly yours,

BINGHAM MCCUTCHEN LLP

[FORM OF OPINION OF BINGHAM McCUTCHEN LLP]

                    , 2009

Legg Mason Income Trust, Inc.

100 Light Street

Baltimore, Maryland 21202

Legg Mason Partners Income Trust

55 Water Street

New York, New York 10041

Ladies and Gentlemen:

This opinion is furnished to you pursuant to paragraph 8.5 of the Agreement and Plan of Reorganization, dated as of             , 2009, by and among Legg Mason Partners Income Trust (the “Acquiring Entity”), a Maryland business trust, on behalf of Legg Mason Partners Short-Term Bond Fund, a series thereof (the “Acquiring Fund”), Legg Mason Income Trust, Inc. (the “Acquired Entity”), a Maryland corporation, on behalf of Legg Mason Limited Duration Bond Portfolio, a series thereof (the “Acquired Fund”), and Legg Mason Partners Fund Advisor, LLC (the “Agreement”). All capitalized terms not otherwise defined herein have the meanings ascribed to them in the Agreement. The Agreement contemplates the acquisition of all of the assets of the Acquired Fund by the Acquiring Fund in exchange for (a) the assumption by the Acquiring Fund of the liabilities of the Acquired Fund and (b) the issuance and delivery by the Acquiring Fund to the Acquired Fund, for distribution, in accordance with Section 1.5 of the Agreement, pro rata within each class of Acquired Fund Shares, to the Acquired Fund Shareholders in exchange for their Acquired Fund Shares and in complete liquidation of the Acquired Fund, of a number of Acquiring Fund Shares of the corresponding class having an aggregate net asset value equal to the value of such assets, less the amount of such liabilities, of the Acquired Fund so transferred to the Acquiring Fund (the “Transaction”).

In connection with this opinion we have examined and relied upon the originals or copies, certified or otherwise identified to us to our satisfaction, of the Agreement, the the Combined Proxy Statement and Prospectus on Form N-14 filed with the Securities and Exchange Commission on or about             , 2009 with respect to the Transaction, and related documents (collectively, the “Transaction Documents”). In that examination, we have assumed the genuineness of all signatures, the authenticity and completeness of all documents purporting to be originals (whether reviewed by us in original or copy form) and the conformity to the originals of all documents purporting to be copies.

Legg Mason Income Trust, Inc.

Legg Mason Partners Income Trust

                    , 2009

Page 2

As to certain factual matters, we have relied with your consent upon, and our opinion is limited by, the representations of the various parties set forth in the Transaction Documents, and in certificates of the Acquired Entity and the Acquiring Entity dated as of the date hereof and attached hereto (the “Certificates”). Our opinion assumes (i) that all representations set forth in the Transaction Documents and in the Certificates will be true and correct in all material respects as of the date of the Transaction, and (ii) that the Agreement is implemented in accordance with its terms and consistent with the representations set forth in the Transaction Documents and Certificates. Our opinion is limited solely to the provisions of the Internal Revenue Code as presently in effect (the “Code”) and the regulations, rulings, and interpretations thereof in force as of this date. We assume no obligation to update our opinion to reflect any changes in law or in the interpretation thereof that may hereafter occur.

On the basis of and subject to the foregoing, we are of the opinion that, for United States federal income tax purposes:

1. The Reorganization will constitute a “reorganization” within the meaning of Section 368(a) of the Code, and the Acquiring Fund and the Acquired Fund will each be a “party to a reorganization” within the meaning of Section 368(b) of the Code.

2. No gain or loss will be recognized by the Acquired Fund upon the transfer of its Assets to the Acquiring Fund solely in exchange for Acquiring Fund Shares and the assumption by the Acquiring Fund of all of the Liabilities, or upon the distribution of the Acquiring Fund Shares by the Acquired Fund to its shareholders in liquidation, except for (A) any gain or loss that may be recognized on the transfer of “section 1256 contracts” as defined in Section 1256(b) of the Code, (B) any gain that may be recognized on the transfer of stock in a “passive foreign investment company” as defined in Section 1297(a) of the Code and (C) any other gain that may be required to be recognized as a result of the closing of the Acquired Fund’s tax year.

3. The tax basis in the hands of the Acquiring Fund of each Asset so transferred will be the same as the tax basis of such Asset in the hands of the Acquired Fund immediately prior to the transfer, increased by the amount of gain (or decreased by the amount of loss), if any, recognized by the Acquired Fund upon the transfer.

4. The holding period of each Asset in the hands of the Acquiring Fund, other than assets, if any, with respect to which gain or loss is required to be recognized, will include in each instance the period during which the Asset was held by the Acquired Fund (except where investment activities of the Acquiring Fund have the effect of reducing or eliminating the holding period with respect to an Asset).

Legg Mason Income Trust, Inc.

Legg Mason Partners Income Trust

                    , 2009

Page 3

5. No gain or loss will be recognized by the Acquiring Fund upon receipt of the Assets solely in exchange for Acquiring Fund Shares and the assumption by the Acquiring Fund of the Liabilities of the Acquired Fund.

6. No gain or loss will be recognized by the Acquired Fund Shareholders upon the exchange of all of their Acquired Fund Shares solely for Acquiring Fund Shares as part of the Reorganization.

7. The aggregate tax basis of the Acquiring Fund Shares that each Acquired Fund Shareholder receives in the Reorganization will be the same as the aggregate tax basis of the Acquired Fund Shares exchanged therefor.

8. The holding period for the Acquiring Fund Shares received by a Acquired Fund Shareholder will include the holding period of the Acquired Fund Shares exchanged therefor, provided that such Acquired Fund Shares were held as capital assets on the date of the exchange.

This opinion is being delivered solely to you for your use in connection with the referenced transaction, and may not be relied upon by any other person or used for any other purpose.

Very truly yours,

BINGHAM MCCUTCHEN LLP

EX-99.13(D)

Exhibit 13(d)

FORM OF

FEE WAIVER AND EXPENSE

REIMBURSEMENT AGREEMENT

AGREEMENT, effective as of             , 2009, by and among Legg Mason Partners Income Trust (the “Trust”), a Maryland business trust, on behalf of its Legg Mason Partners Corporate Bond Fund series (the “Fund”), and its successors, and Legg Mason Partners Fund Advisor, LLC, a Delaware limited liability company (“LMPFA”).

1. LMPFA hereby agrees to waive any and all fees it and its affiliated persons are entitled to receive from the Fund for advisory and all other services and/or reimburse ordinary operating expenses in an amount that would limit the total annualized ordinary operating expenses (other than extraordinary expenses) of the Fund or the class as provided in Exhibit A (“Expenses After Waiver/Reimbursement”) of the Fund’s average daily net assets until April 30, 2010. For the purposes of this Agreement, ordinary operating expenses for the Fund generally include costs not specifically borne by LMPFA or any distributor of the Fund, including management fees, fees for necessary professional services, expenses under a transfer agency agreement, expenses under a custodial agreement, organizational expenses, Fund board expenses, expenses of the Fund pursuant to any shareholder service or distribution plan, amortization of organizational expenses and costs associated with regulatory compliance and maintaining legal existence and shareholder relations, but excluding: (a) any expenses or charges related to litigation, derivative actions, demand related to litigation, regulatory or other government investigations and proceedings, “for cause” regulatory inspections and indemnification or advancement of related expenses or costs, to the extent any such expenses are considered extraordinary expenses for the purposes of fee disclosure in Form N-1A as the same may be amended from time to time; (b) transaction costs (such as brokerage commissions and dealer and underwriter spreads), interest, carrying costs and taxes; and (c) other extraordinary expenses as determined for the purposes of fee disclosure in Form N-1A, as the same may be amended from time to time. Without limiting the foregoing, extraordinary expenses are generally those that are unusual or expected to recur only infrequently, and may include such expenses, by way of illustration, as (i) expenses of the reorganization, restructuring, redomiciling or merger of the Fund or class or the acquisition of all or substantially all of the assets of another fund or class; (ii) expenses of holding, and soliciting proxies for, a meeting of shareholders of the Fund or class (except to the extent relating to routine items such as the election of board members or the approval of the independent registered public accounting firm); and (iii) expenses of converting to a new custodian, transfer agent or other service provider, in each case to the extent any such expenses are considered extraordinary expenses for the purposes of fee disclosure in Form N-1A as the same may be amended from time to time.

2. This Agreement may not be assigned by the Trust and its successors or LMPFA without the consent of the other party. This Agreement shall be binding upon any successor to LMPFA.

3. This Agreement may not be amended or terminated except by a writing signed by the parties.

4. If on any day that LMPFA is the investment manager of the Fund the estimated annualized operating expenses of the Fund or a Class for that day are less than the annualized ordinary operating expense limit for the Fund or the Class specified in Exhibit A, LMPFA shall

be entitled to reimbursement by the Fund of fees waived and expenses reimbursed by LMPFA on behalf of the Fund pursuant to this Agreement (the “Reimbursement Amount”) during any of the previous twelve (12) months, to the extent that the Fund’s or the applicable Class’s annualized ordinary operating expenses plus the amounts so reimbursed are less than or equal to, for such day, the limit specified in Exhibit A, provided further that such amounts paid to LMPFA will in no event exceed the total Reimbursement Amount and will not include any amounts previously reimbursed.

5. The Trust is a business trust organized under Maryland law and governed by a Declaration of Trust, to which reference is hereby made. It is expressly acknowledged and agreed that the obligations of the Trust entered into in the name or on behalf of the Trust by any of its trustees, officers, employees or agents are not made individually, but in such capacities, that the Trust’s obligations under this Agreement bind only the Fund and not any trustee, officer, employee, agent or shareholder individually, and that any liability of the Trust under this Agreement shall be discharged only out of the assets of the Fund.

Remainder of page left blank intentionally.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above.

LEGG MASON PARTNERS FUND ADVISOR, LLC
By:
Name:	R. Jay Gerken
Title:	President
LEGG MASON PARTNERS INCOME TRUST, on behalf of its series, Legg Mason Partners Corporate Bond Fund
By:
Name:	R. Jay Gerken
Title:	President

Exhibit A

Legg Mason Partners Corporate Bond Fund	Annualized Expenses After Waiver/Reimbursement
Class P	1.15	%
Class I	0.65	%

EX-99.13(E)

Exhibit 13(e)

FORM OF

FEE WAIVER AND EXPENSE

REIMBURSEMENT AGREEMENT

AGREEMENT, effective as of             , 2009, by and among Legg Mason Partners Income Trust (the “Trust”), a Maryland business trust, on behalf of its Legg Mason Partners Short-Term Bond Fund series (the “Fund”), and its successors, and Legg Mason Partners Fund Advisor, LLC, a Delaware limited liability company (“LMPFA”).

1. LMPFA hereby agrees to waive any and all fees it and its affiliated persons are entitled to receive from the Fund for advisory and all other services and/or reimburse ordinary operating expenses in an amount that would limit the total annualized ordinary operating expenses (other than extraordinary expenses) of the Fund or the class as provided in Exhibit A (“Expenses After Waiver/Reimbursement”) of the Fund’s average daily net assets until April 30, 2010. For the purposes of this Agreement, ordinary operating expenses for the Fund generally include costs not specifically borne by LMPFA or any distributor of the Fund, including management fees, fees for necessary professional services, expenses under a transfer agency agreement, expenses under a custodial agreement, organizational expenses, Fund board expenses, expenses of the Fund pursuant to any shareholder service or distribution plan, amortization of organizational expenses and costs associated with regulatory compliance and maintaining legal existence and shareholder relations, but excluding: (a) any expenses or charges related to litigation, derivative actions, demand related to litigation, regulatory or other government investigations and proceedings, “for cause” regulatory inspections and indemnification or advancement of related expenses or costs, to the extent any such expenses are considered extraordinary expenses for the purposes of fee disclosure in Form N-1A as the same may be amended from time to time; (b) transaction costs (such as brokerage commissions and dealer and underwriter spreads), interest, carrying costs and taxes; and (c) other extraordinary expenses as determined for the purposes of fee disclosure in Form N-1A, as the same may be amended from time to time. Without limiting the foregoing, extraordinary expenses are generally those that are unusual or expected to recur only infrequently, and may include such expenses, by way of illustration, as (i) expenses of the reorganization, restructuring, redomiciling or merger of the Fund or class or the acquisition of all or substantially all of the assets of another fund or class; (ii) expenses of holding, and soliciting proxies for, a meeting of shareholders of the Fund or class (except to the extent relating to routine items such as the election of board members or the approval of the independent registered public accounting firm); and (iii) expenses of converting to a new custodian, transfer agent or other service provider, in each case to the extent any such expenses are considered extraordinary expenses for the purposes of fee disclosure in Form N-1A as the same may be amended from time to time.

2. This Agreement may not be assigned by the Trust and its successors or LMPFA without the consent of the other party. This Agreement shall be binding upon any successor to LMPFA.

3. This Agreement may not be amended or terminated except by a writing signed by the parties.

4. If on any day that LMPFA is the investment manager of the Fund the estimated annualized operating expenses of the Fund or a Class for that day are less than the annualized ordinary operating expense limit for the Fund or the Class specified in Exhibit A, LMPFA shall

be entitled to reimbursement by the Fund of fees waived and expenses reimbursed by LMPFA on behalf of the Fund pursuant to this Agreement (the “Reimbursement Amount”) during any of the previous twelve (12) months, to the extent that the Fund’s or the applicable Class’s annualized ordinary operating expenses plus the amounts so reimbursed are less than or equal to, for such day, the limit specified in Exhibit A, provided further that such amounts paid to LMPFA will in no event exceed the total Reimbursement Amount and will not include any amounts previously reimbursed.

5. The Trust is a business trust organized under Maryland law and governed by a Declaration of Trust, to which reference is hereby made. It is expressly acknowledged and agreed that the obligations of the Trust entered into in the name or on behalf of the Trust by any of its trustees, officers, employees or agents are not made individually, but in such capacities, that the Trust’s obligations under this Agreement bind only the Fund and not any trustee, officer, employee, agent or shareholder individually, and that any liability of the Trust under this Agreement shall be discharged only out of the assets of the Fund.

Remainder of page left blank intentionally.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above.

LEGG MASON PARTNERS FUND ADVISOR, LLC
By:
Name:	R. Jay Gerken
Title:	President
LEGG MASON PARTNERS INCOME TRUST, on behalf of its series, Legg Mason Partners Short-Term Bond Fund
By:
Name:	R. Jay Gerken
Title:	President

Exhibit A

Legg Mason Partners Short-Term Bond Fund	Expenses After Waiver/Reimbursement
Class C	1.10	%

EX-99.14(A)

Exhibit 14(a)

Consent of Independent Registered Public Accounting Firm

The Board of Trustees

Legg Mason Partners Income Trust

We consent to the use of our reports dated February 24, 2009 for Legg Mason Partners Corporate Bond Fund and Legg Mason Partners Short-Term Bond Fund, each a series of the Legg Mason Partners Income Trust, as of December 31, 2008, incorporated herein by reference and to the reference to our firm under the heading “Financial Highlights” in the Proxy Statement/Prospectus on Form N-14.

New York, New York

March 20, 2009

EX-99.14(B)

Exhibit 14(b)

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in this combined Proxy Statement/Prospectus constituting parts of this Registration Statement on Form N-14 of our report dated February 27, 2009, relating to the financial statements and financial highlights, which appears in the December 31, 2008 Annual Report to Shareholders of Legg Mason Investment Grade Income Portfolio and Limited Duration Bond Portfolio (two of the portfolios comprising Legg Mason Income Trust, Inc.), which is also incorporated by reference into the Registration Statement. We also consent to the reference to us under the heading “Representations and Warranties” in such Registration Statement.

PricewaterhouseCoopers LLP

Baltimore, Maryland

March 19, 2009

EX-99.16

Exhibit 16

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby makes, constitutes and appoints each of R. Jay Gerken, Frances M. Guggino, Robert I. Frenkel, Thomas C. Mandia and Harris C. Goldblat with full power to act without the other, as his or her agent and attorney-in-fact for the purpose of executing in his or her name, in his or her capacity as a Trustee of Legg Mason Partners Income Trust (the “Trust”) registration statements on Form N-14 (including amendments thereto), with respect to Legg Mason Partners Corporate Bond Fund and Legg Mason Partners Short-Term Bond Fund, each a series of the Trust, to be filed with the United States Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

All past acts of an attorney-in-fact in furtherance of the foregoing are hereby ratified and confirmed.

This Power of Attorney may be executed in multiple counterparts, each of which shall be deemed an original, but which taken together shall constitute one instrument.

This power of attorney shall be valid from the date hereof until revoked by me.

WITNESS our hands on the date set forth below.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Power of Attorney has been signed below by the following persons in the capacities and as of the dates indicated.

/s/ R. Jay Gerken	Trustee and Chairman of the Board	March 16, 2009
R. Jay Gerken
/s/ Elliott J. Berv	Trustee	March 16, 2009
Elliott J. Berv
/s/ A. Benton Cocanougher	Trustee	March 16, 2009
A. Benton Cocanougher
/s/ Jane F. Dasher	Trustee	March 16, 2009
Jane F. Dasher
/s/ Mark T. Finn	Trustee	March 16, 2009
Mark T. Finn
/s/ Rainer Greeven	Trustee	March 16, 2009
Rainer Greeven
/s/ Stephen R. Gross	Trustee	March 16, 2009
Stephen R. Gross

/s/ Richard E. Hanson, Jr.	Trustee	March 16, 2009
Richard E. Hanson, Jr.
/s/ Diana R. Harrington	Trustee	March 16, 2009
Diana R. Harrington
/s/ Susan M. Heilbron	Trustee	March 16, 2009
Susan M. Heilbron
/s/ Susan B. Kerley	Trustee	March 16, 2009
Susan B. Kerley
/s/ Alan G. Merten	Trustee	March 16, 2009
Alan G. Merten
/s/ R. Richardson Pettit	Trustee	March 16, 2009
R. Richardson Pettit

EX-99.17(A)

Exhibit 17(a)

Your Proxy Vote is important!

And now you can Proxy Vote by PHONE or the INTERNET

It saves money! Telephone and Internet voting saves postage costs.

Savings which can help minimize expenses.

It saves time! Telephone and Internet voting is instantaneous—24 hours a day.

It’s easy! Just follow these simple steps:

1. Read your proxy statement and have it at hand.

2. Call toll free 866-586-0633, or go to the website: www.proxyweb.com.

3. Follow the recorded or on-screen directions.

4. Do not mail your Proxy Card when you vote by phone or the Internet.

Please detach at perforation before mailing

PROXY LEGG MASON INCOME TRUST LEGG MASON INVESTMENT GRADE INCOME PORTFOLIO PROXY

SPECIAL MEETING OF SHAREHOLDERS

JUNE 12, 2009 AT 10:00 A.M.

PROXY IS SOLICITED BY THE BOARD OF TRUSTEES. The undersigned holder of shares of Legg Mason Investment Grade Income Portfolio (the “Target Fund”), a series of Legg Mason Income Trust, hereby appoints [            ] and [            ] attorneys and proxies for the undersigned, each with full powers of substitution and revocation, to represent the undersigned and to vote on behalf of the undersigned all shares of each Target Fund that the undersigned is entitled to vote at the Special Meeting of Shareholders (the “Special Meeting”) of the Target Funds to be held on June 12, 2009, at the offices of Legg Mason, Inc., 100 Light Street, 34th Floor, Baltimore, Maryland 21202 at 10:00 a.m., Eastern Time, and any adjournments or postponements thereof. The undersigned hereby acknowledges receipt of the Notice of Special Meeting and Proxy Statement/Prospectus dated [                    ] and hereby instructs said attorneys and proxies to vote said shares as indicated herein. In their discretion, the proxies are authorized to vote upon such other business as may properly come before the Special Meeting or any adjournments or postponements thereof. A majority of the proxies present and acting at the Special Meeting in person or by substitute (or if only one shall be present, then that one) shall have and may exercise all of the power and authority of said proxies hereunder. The undersigned hereby revokes any proxy previously given.

VOTE VIA THE TELEPHONE: 866-586-0633

VOTE VIA THE INTERNET: www.proxyweb.com

Note: Please sign exactly as your name appears on this Proxy. If joint owners, EITHER may sign this Proxy. When signing as attorney, executor, administrator, trustee, guardian or corporate officer, please give your full title.

Signature(s)

Title(s), if applicable

            , 2009

Date

EVERY SHAREHOLDER’S VOTE IS IMPORTANT

PLEASE SIGN, DATE AND RETURN YOUR PROXY TODAY

Please detach at perforation before mailing.

This proxy, if properly executed, will be voted in the manner directed by the undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR APPROVAL OF THE PROPOSAL.

1. To approve an Agreement and Plan of Reorganization, providing for (i) the acquisition of all of the assets and the assumption of all of the liabilities Legg Mason Investment Grade Income Portfolio (the “Target Fund”), in exchange for shares of Legg Mason Partners Corporate Bond Fund, and (ii) the subsequent termination of each Target Fund.

FOR                                AGAINST                                 ABSTAIN                                 

2. To transact any other business which may properly come before the Special Meeting or any adjournments or postponements thereof.

Your Proxy Vote is important!

And now you can Proxy Vote by PHONE or the INTERNET

It saves money! Telephone and Internet voting saves postage costs.

Savings which can help minimize expenses.

It saves time! Telephone and Internet voting is instantaneous—24 hours a day.

It’s easy! Just follow these simple steps:

1. Read your proxy statement and have it at hand.

2. Call toll free 866-586-0633, or go to the website: www.proxyweb.com.

3. Follow the recorded or on-screen directions.

4. Do not mail your Proxy Card when you vote by phone or the Internet.

Please detach at perforation before mailing

PROXY LEGG MASON INCOME TRUST LEGG MASON LIMITED DURATION BOND PORTFOLIO PROXY

SPECIAL MEETING OF SHAREHOLDERS

JUNE 12, 2009 AT 10:00 A.M.

PROXY IS SOLICITED BY THE BOARD OF TRUSTEES. The undersigned holder of shares of Legg Mason Limited Duration Bond Portfolio (the “Target Fund”), a series of Legg Mason Income Trust, hereby appoints [            ] and [            ] attorneys and proxies for the undersigned, each with full powers of substitution and revocation, to represent the undersigned and to vote on behalf of the undersigned all shares of each Target Fund that the undersigned is entitled to vote at the Special Meeting of Shareholders (the “Special Meeting”) of the Target Funds to be held on June 12, 2009, at the offices Legg Mason, Inc., 100 Light Street, 34th Floor, Baltimore, Maryland 21202 at 10:00 a.m., Eastern Time, and any adjournments or postponements thereof. The undersigned hereby acknowledges receipt of the Notice of Special Meeting and Proxy Statement/Prospectus dated [                    ] and hereby instructs said attorneys and proxies to vote said shares as indicated herein. In their discretion, the proxies are authorized to vote upon such other business as may properly come before the Special Meeting or any adjournments or postponements thereof. A majority of the proxies present and acting at the Special Meeting in person or by substitute (or if only one shall be present, then that one) shall have and may exercise all of the power and authority of said proxies hereunder. The undersigned hereby revokes any proxy previously given.

VOTE VIA THE TELEPHONE: 866-586-0633

VOTE VIA THE INTERNET: www.proxyweb.com

Note: Please sign exactly as your name appears on this Proxy. If joint owners, EITHER may sign this Proxy. When signing as attorney, executor, administrator, trustee, guardian or corporate officer, please give your full title.

Signature(s)

Title(s), if applicable

            , 2009

Date

EVERY SHAREHOLDER’S VOTE IS IMPORTANT

PLEASE SIGN, DATE AND RETURN YOUR PROXY TODAY

Please detach at perforation before mailing.

This proxy, if properly executed, will be voted in the manner directed by the undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR APPROVAL OF THE PROPOSAL.

1. To approve an Agreement and Plan of Reorganization, providing for (i) the acquisition of all of the assets and the assumption of all of the liabilities Legg Mason Limited Duration Bond Portfolio (the “Target Fund”), in exchange for shares of Legg Mason Partners Short-Term Bond Fund, and (ii) the subsequent termination of the Target Fund.

FOR                                AGAINST                                 ABSTAIN                                 

2. To transact any other business which may properly come before the Special Meeting or any adjournments or postponements thereof.

EX-99.17(B)

Exhibit 17(b)

LEGG MASON INVESTMENT GRADE INCOME PORTFOLIO

LEGG MASON LIMITED DURATION BOND PORTFOLIO

(each a series of Legg Mason Income Trust, Inc.)

Supplement to the Prospectus dated May 1, 2008

The Board of Directors of Legg Mason Income Trust, Inc. (“Board”) has approved two Agreements and Plans of Reorganization (“Investment Grade Plan”, “Limited Duration Plan” or “Plans”) with respect to its series, Legg Mason Investment Grade Income Portfolio (“Investment Grade”) and Legg Mason Limited Duration Bond Portfolio (“Limited Duration”). Under the Investment Grade Plan, Investment Grade would be reorganized into Legg Mason Partners Corporate Bond Fund (“LMP Corporate Bond Fund”), a series of Legg Mason Partners Income Trust. The investment manager and principal underwriter of LMP Corporate Bond Fund are affiliates of the investment manager and principal underwriter of Investment Grade. Under the Limited Duration Plan, Limited Duration would be reorganized into Legg Mason Partners Short-Term Bond Fund (“LMP Short-Term Bond Fund”), a series of Legg Mason Partners Income Trust. The investment manager and principal underwriter of LMP Short-Term Bond Fund are affiliates of the investment manager and principal underwriter of Limited Duration.

The Plans are subject to the approval of shareholders of Investment Grade and Limited Duration. If the Investment Grade Plan is approved, shareholders of Investment Grade will become shareholders of LMP Corporate Bond Fund. The Investment Grade Plan provides for Primary Class shareholders of Investment Grade to receive newly-created Class P shares of LMP Corporate Bond Fund equal in aggregate value to their Investment Grade shares on the date of the reorganization. The Investment Grade Plan also provides for Institutional Class shareholders of Investment Grade to receive Class I shares of LMP Corporate Bond Fund equal in aggregate value to their Investment Grade shares on the date of the reorganization. Investment Grade would cease operations shortly thereafter. If the Limited Duration Plan is approved, shareholders of Limited Duration will become shareholders of LMP Short-Term Bond Fund. The Limited Duration Plan provides for Primary Class shareholders of Limited Duration to receive Class C shares of LMP Short-Term Bond Fund equal in aggregate value to their Limited Duration shares on the date of the reorganization. The Limited Duration Plan also provides for Institutional Class shareholders of Limited Duration to receive Class I shares of LMP Short-Term Bond Fund equal in aggregate value to their Limited Duration shares on the date of the reorganization. Limited Duration would cease operations shortly thereafter. Under each Plan, the board of either fund may terminate the proposed reorganization at any time prior to the closing date if, in the opinion of such board, circumstances develop that make proceeding with the proposed reorganization inadvisable.

To facilitate the reorganizations, the Board approved a change to the procedures for valuing Investment Grade’s and Limited Duration’s fixed-income securities so that such securities will be valued at the mean of last closing bid and asked prices. The new method of valuation is currently used by LMP Corporate Bond Fund and LMP Short-Term Bond Fund and the change will ensure that shareholders of Investment Grade and Limited Duration receive full value for their fund shares upon completion of the reorganizations. The change in valuation procedure is scheduled to take effect immediately prior to the consummation of the proposed reorganizations and is expected to have a very small effect on the respective net asset values of the shares of Investment Grade and Limited Duration.

You may continue to buy and redeem shares of Investment Grade and Limited Duration prior to the closing of the proposed reorganization. However, if the Plans are approved, sales of shares of Investment Grade and Limited Duration are expected to be suspended approximately five days prior to the consummation of the proposed reorganizations. Redemptions of shares will be allowed up until the consummation of the proposed reorganizations.

Prospectus Supplement 1

A shareholder meeting date of June 12, 2009 has been set for shareholders of record of Investment Grade and Limited Duration as of April 15, 2009 to vote on the Plans. If the Plans are approved, it is anticipated that each proposed reorganization will be consummated by the end of June 2009. The consummation of the reorganizations are not contingent on the approval of the other reorganization. It is expected that additional details about each proposed reorganization will be sent to shareholders of Investment Grade and Limited Duration along with proxy materials on or about May 1, 2009. Please read the proxy materials carefully, as they contain a fuller description of the Plans, the proposed reorganizations, LMP Corporate Bond Fund, and LMP Short-Term Bond Fund.

You should retain this supplement with your prospectus for future reference.

This supplement is dated February 20, 2009.

LMFX011637

DSTO SKU#00066164

2 Prospectus Supplement

Legg Mason Income Trust, Inc.

Primary Class

Institutional Class

Prospectus

May 1, 2008

Legg Mason Limited Duration Bond Portfolio

Legg Mason Investment Grade Income Portfolio

The shares offered by this Prospectus are subject to various fees and expenses, which may include distribution and service (12b-1) fees. See “Fees and Expenses of the Funds” on page 15 and “Distribution Plan” on page 19.

As with all mutual funds, the U.S. Securities and Exchange Commission (“SEC”) has not passed upon the accuracy or adequacy of this Prospectus, nor has it approved or disapproved these securities. It is a criminal offense to state otherwise.

Table of Contents

About the funds:
1	Investment objectives and policies
5	Principal risks
11	Performance
15	Fees and expenses of the funds
15	Primary Class fees and expenses
17	Institutional Class fees and expenses
19	Distribution plan
21	Management
About your investment:
23	Shareholder eligibility
25	How to invest
30	How to redeem your shares
33	Account policies
37	Services for investors
39	Distributions and taxes
41	Portfolio holdings disclosure policy
42	Financial highlights

Investment Objectives and Policies

Legg Mason Income Trust, Inc. (“Income Trust”) consists of two funds: Legg Mason Limited Duration Bond Portfolio (“Limited Duration”) and Legg Mason Investment Grade Income Portfolio (“Investment Grade”). Limited Duration and Investment Grade offer two classes of shares: Primary Class and Institutional Class. Each share class of a fund represents an investment in the same portfolio of securities, but is subject to different expenses, different distribution structures and different eligibility requirements for investing. (See “Fees and Expenses of the Funds” beginning on page 15 and “Shareholder Eligibility” beginning on page 23).

Western Asset Management Company (“Western Asset” or “Adviser”) is the funds’ investment adviser. Western Asset’s approach in managing these funds revolves around an investment outlook developed by its Investment Strategy Group, a team of senior professionals that meets at least twice a week to review developments in the economy and the markets. Based on their consensus view of the economic outlook for the following six months, this group arrives at a recommended portfolio structure, including targets for duration, yield curve exposure, and sector allocation. Western Asset’s Portfolio Management Group implements the strategy in a manner consistent with the investment policies of each fund, using information on the relative credit strength, liquidity, issue structure, event risk, covenant protection and market valuation of available securities. Each fund is managed in accordance with its investment objective and policies, described below.

LIMITED DURATION BOND PORTFOLIO

Investment objective: Maximize total return, consistent with prudent investment management by investing to obtain the specified average duration.

PRINCIPAL INVESTMENT STRATEGIES:

The fund invests in a portfolio of U.S. dollar-denominated debt and fixed-income securities. Under normal market conditions, the fund will invest at least 80% of its net assets plus any borrowing for investment purposes in

Legg Mason Income Trust, Inc.

1

debt and fixed-income securities. The fund currently anticipates that all securities it purchases will be investment grade, i.e., rated at the time of investment BBB/Baa or higher by at least one nationally recognized statistical rating organization (“NRSRO”) or, if not rated by any NRSRO, determined by the Adviser to be of comparable quality.

The fund may invest in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities; corporate obligations, including bonds and other debt securities, preferred stock, convertible securities, zero coupon securities and pay-in-kind securities; inflation-indexed securities; mortgage- and other asset-backed securities; U.S. dollar-denominated obligations of non-U.S. issuers, including obligations of foreign governments, international agencies or supranational organizations; U.S. dollar-denominated fixed-income securities of non-governmental domestic or foreign issuers; municipal obligations; variable and floating rate debt securities; commercial paper and other short-term investments; certificates of deposit, time deposits and bankers’ acceptances; loan participations and assignments; structured notes; and repurchase agreements. The fund may invest up to 25% of its total assets in the securities of foreign issuers.

The fund may also invest up to 20% of its net assets in non-debt securities, including common stock and warrants received as the result of an exchange or tender of fixed-income securities.

The fund may invest in derivatives such as futures, options and swaps for both hedging and non-hedging purposes, including for purposes of enhancing returns; buy or sell securities on a forward commitment basis; and engage in reverse repurchase agreements.

The fund may buy and sell investments relatively often, which involves higher brokerage commissions and other expenses, and may increase taxes payable by shareholders.

“Duration” refers to the range within which the average modified duration of the fund is expected to fluctuate. Modified duration measures the expected sensitivity of a security’s market price to changes in interest rates, taking into account the effects of the security’s structural complexities. The average modified duration of the fund will range within 25% of the duration of the Merrill Lynch 1-3 Year Treasury Index. Over the past three years, the duration of this index has ranged between 1.49 and 1.79 years. There is, of course, no assurance that it will remain within those limits in the future. The Adviser may vary the duration of the fund in response to its expectation regarding interest rates. If the Adviser expects interest rates to rise, which would negatively impact the value of the fund’s fixed-income investments, the Adviser may decrease the duration of the fund. Conversely, if the Adviser expects interest rates to fall, the Adviser may increase the duration of the fund.

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For temporary defensive purposes or pending investment, the fund may invest without limit in cash, U.S. dollar-denominated money market instruments and repurchase agreements. If the fund invests substantially in such instruments, it will not be pursuing its principal investment strategies and may not achieve its investment objective.

INVESTMENT GRADE INCOME PORTFOLIO

Investment objective: High level of current income through investment in a diversified portfolio of debt securities.

PRINCIPAL INVESTMENT STRATEGIES:

The fund invests primarily in fixed-income securities rated investment grade, i.e., rated at the time of investment BBB/Baa or higher by at least one NRSRO or, if not rated by any NRSRO, determined by the Adviser to be of comparable quality. Although the fund can invest in securities of any maturity, it normally expects to maintain a dollar-weighted average maturity of between five and twenty years.

The fund invests, under normal circumstances, at least 80% of its net assets plus any borrowings for investment purposes in the following types of investment grade fixed-income securities:

• debt securities that are rated at the time of purchase within the four highest grades assigned by a NRSRO, or unrated securities judged by the Adviser to be of comparable quality;

• securities of, or guaranteed by, the U.S. Government, its agencies or instrumentalities;

• commercial paper and other money market instruments that are rated A-1 or A-2 by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (“S&P”) or Prime-1 or Prime-2 by Moody’s Investors Service, Inc. (“Moody’s”) at the date of investment or, if unrated by Moody’s or S&P, judged by the Adviser to be of comparable quality; bank certificates of deposit; and bankers’ acceptances; and

• preferred stocks (including step down preferred securities) rated no lower than Baa by Moody’s or, if unrated by Moody’s, judged by the Adviser to be of comparable quality.

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The remainder of the fund’s assets, not in excess of 20% of its net assets, may be invested in:

• debt securities of issuers that are rated at the time of purchase below Moody’s and S&P’s four highest grades, commonly known as “junk bonds,” but rated B or better by Moody’s or S&P, or if unrated by Moody’s or S&P, judged by the Adviser to be of comparable quality; and

• securities that may be convertible into or exchangeable for, or carry warrants to purchase, common stock or other equity interests.

The fund may invest in U.S. dollar-denominated obligations of foreign governments, international agencies or supranational organizations, and fixed-income securities of non-governmental domestic or foreign issuers consistent with the credit quality guidelines described above. Securities purchased by the fund may be privately placed.

The fund may also engage in reverse repurchase agreements and dollar rolls with respect to the securities in which it primarily invests. In a reverse repurchase agreement, the fund sells a portfolio instrument to another person, such as a financial institution or broker-dealer, in return for cash and agrees to repurchase the instrument at a specified future date. In a dollar roll transaction, the fund sells a fixed income security for delivery in the current month and simultaneously contracts to purchase a substantially similar (same type coupon and maturity) security at an agreed upon future time. When engaging in such transactions, the fund complies with SEC guidance regarding segregation of assets or cover for these investment techniques. Any such transaction that extends for more than seven days may be considered illiquid and, if so, would be subject to the fund’s limit on investments in illiquid securities of 15% of net assets. In addition, the fund may engage in a variety of transactions using “derivatives,” such as futures, options, warrants and swaps.

For temporary defensive purposes or pending investment, the fund may invest without limit in cash, U.S. dollar denominated money market instruments and repurchase agreements. If the fund invests substantially in such instruments, it will not be pursuing its principal investment strategies and may not achieve its investment objective.

* * * * *

Each fund’s investment objective is non-fundamental and may be changed by Income Trust’s Board of Directors (“Board of Directors”) without shareholder approval. A fund may not change its policy to invest at least 80% of its net assets plus any borrowings for investment purposes in the type of securities suggested by its name (as described above for each fund), without providing shareholders at least 60 days’ prior written notice.

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Principal Risks

IN GENERAL:

There is no assurance that a fund will meet its investment objective; investors could lose money by investing in a fund. As with all mutual funds, an investment in any of these funds is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Unless otherwise stated, the following risks apply to each of the funds:

DEBT SECURITIES:

Debt securities are subject to interest rate risk, which is the possibility that the rates of interest income generated by a fund’s fixed-income investments may decline due to a decrease in market interest rates and the market prices of a fund’s fixed-income investments may decline due to an increase in market interest rates. Generally, the longer the maturity of a fixed-income security, the greater the effect on its value when rates increase.

Certain securities pay interest at variable or floating rates. Variable rate securities reset at specified intervals, while floating rate securities reset whenever there is a change in a specified index rate. In most cases, these reset provisions generally reduce the effect of market interest rates on the value of the security, but mean that declines in market interest rates are reflected more quickly in a fund’s holdings than they would be if a fund held fixed rate securities. However, some securities do not track the underlying index directly, but reset based on formulas that can produce an effect similar to leveraging; others may provide for interest payments that vary inversely with market rates. The market prices of these securities may fluctuate significantly when interest rates change.

Debt securities are also subject to credit risk, i.e., the risk that an issuer of securities will be unable to pay principal and interest when due, or that the value of the security will suffer because investors believe the issuer is less able to pay. This is broadly gauged by the credit ratings of the securities in which a fund invests. However, ratings are only the opinions of the NRSROs issuing them and are not absolute guarantees as to quality.

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Not all securities are rated. In the event that NRSROs assign different ratings to the same security, the Adviser will determine which rating it believes best reflects the security’s quality and risk at that time.

Moody’s considers debt securities rated Baa to have speculative characteristics. Debt securities rated below Baa/BBB are deemed by NRSROs to be speculative and may involve major risk or exposure to adverse conditions.

The continued holding of securities downgraded below investment grade or, if unrated, determined by the Adviser to be of comparable quality, will be evaluated by the Adviser on a case-by-case basis.

Not all obligations of the U.S. Government, its agencies and instrumentalities are backed by the full faith and credit of the United States; some are backed only by the credit of the issuing agency or instrumentality. For instance, obligations such as Government National Mortgage Association participation certificates are backed by the full faith and credit of the U.S. Treasury. However, obligations of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation are not backed by the full faith and credit of the U.S. Treasury but are backed only by the credit of the government sponsored entities. Accordingly, there may be some risk of default by the issuer in such cases.

CALL RISK:

Many fixed-income securities, especially those issued at high interest rates and with longer maturities, provide that the issuer may repay them early. Issuers often exercise this right when prevailing interest rates are lower than the interest rate of the security. Accordingly, holders of callable securities may not benefit fully from the increase in value that other fixed-income securities experience when rates decline. Furthermore, the funds most likely would have to reinvest the proceeds of the payoff at current yields, which would be lower than those paid by the security that was paid off.

SPECIAL RISKS OF HIGH YIELD SECURITIES:

To a limited extent, Investment Grade can invest in securities rated below Baa/BBB. Securities rated below Baa/BBB and unrated securities of equivalent quality are subject to greater fluctuations in value and risk of loss of income and principal due to default by the issuer, than are higher-rated securities. These securities may be less liquid than higher-rated securities, which means a fund may have difficulty selling them at times, and may have to apply a greater degree of judgment in establishing a daily price.

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SPECIAL RISKS OF MORTGAGE-BACKED SECURITIES:

Mortgage-backed securities represent an interest in a pool of mortgages. When market interest rates decline, more mortgages are refinanced, and mortgage-backed securities are paid off earlier than expected. Prepayments may also occur on a scheduled basis or due to foreclosure. The effect on a fund’s return is similar to that discussed above for call risk. When market interest rates increase, the market values of mortgage-backed securities decline. At the same time, however, mortgage refinancings and prepayments slow, which lengthens the effective maturities of these securities. As a result, the negative effect of the rate increase on the market value of mortgage-backed securities is usually more pronounced than it is for other types of fixed-income securities, potentially increasing the volatility of a fund that holds them.

Asset-backed securities are structured like mortgage-backed securities, but instead of mortgage loans or interests in mortgage loans, the underlying assets may include such items as motor vehicle installment sales or installment loan contracts, leases of various types of real and personal property, and receivables from credit card agreements. The ability of an issuer of asset-backed securities to enforce its security interest in the underlying assets may be limited. Asset-backed securities are subject to many of the same risks as mortgage-backed securities.

At times, some of the mortgage-backed and asset-backed securities in which a fund may invest will have higher than market interest rates and therefore will be purchased at a premium above their par value. Prepayments may cause losses on securities purchased at a premium. Unscheduled prepayments, which are made at par, will cause a fund to experience a loss equal to any unamortized premium.

LEVERAGING:

When a fund is borrowing money or otherwise leveraging its portfolio, the value of an investment in a fund will be more volatile and all other risks will tend to be compounded. This is because leverage tends to exaggerate the effect of any increase or decrease in the value of the fund’s holdings. A fund may take on borrowing risk or leveraging risks by using reverse repurchase agreements, dollar rolls or borrowings, through the use of when-issued, delayed-delivery or forward commitment transactions or by using other derivatives. The use of leverage may also cause the fund to liquidate positions when it may not be advantageous to do so to satisfy its obligations or meet segregation requirements.

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DERIVATIVES:

A fund may engage in a variety of transactions using “derivatives,” such as futures, options, warrants and swaps. Derivatives are financial instruments whose value depends upon, or is derived from, the value of something else, such as one or more underlying investments, indexes or currencies. Derivatives may be traded on organized exchanges, or in individually negotiated transactions with other parties (these are known as “over the counter” derivatives). A fund may use derivatives for both hedging and non-hedging purposes, including for purposes of enhancing returns. Although the Adviser has the flexibility to make use of derivatives, it may choose not to for a variety of reasons, even under very volatile market conditions.

Derivatives involve special risks and costs and may result in losses to a fund. The successful use of derivatives requires sophisticated management, and, to the extent that derivatives are used, a fund will depend on the Adviser’s ability to analyze and manage derivatives transactions. The prices of derivatives may move in unexpected ways, especially in abnormal market conditions. Some derivatives are “leveraged” and therefore may magnify or otherwise increase investment losses to a fund. A fund’s use of derivatives may also increase the amount of taxes payable by shareholders.

Other risks arise from the potential inability to terminate or sell derivatives positions. A liquid secondary market may not always exist for a fund’s derivatives positions. In fact, many over-the-counter instruments will not be liquid. Over-the-counter instruments also involve the risk that the other party will not meet its obligations to a fund.

Swap agreements will tend to shift a fund’s investment exposure from one type of investment to another. For example, if a fund agrees to exchange payments in U.S. dollars for payments in foreign currency, the swap agreement would tend to decrease the fund’s exposure to U.S. interest rates and increase its exposure to foreign currency and interest rates. As another example, if a fund agrees to exchange fixed rate payments for variable rate payments, the swap agreement would tend to decrease the fund’s exposure to market interest rates on the value of the security. The funds will not use swaps to incur a type or amount of risk exposure that they could not incur directly.

FOREIGN SECURITIES:

Investments in foreign securities (including those denominated in U.S. dollars) involve certain risks not typically associated with investments in securities of domestic issuers. The values of foreign securities are subject to economic and political developments in the countries and regions where the companies

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operate or are domiciled, or where the securities are traded, such as changes in economic or monetary policies, and to changes in exchange rates. Values may also be affected by foreign tax laws and restrictions on receiving the investment proceeds from a foreign country.

In general, less information is publicly available about foreign companies than about U.S. companies. Foreign companies are generally not subject to the same accounting, auditing and financial reporting standards as are U.S. companies. Some securities issued by foreign governments or their subdivisions, agencies and instrumentalities may not be backed by the full faith and credit of the foreign government. Even where a security is backed by the full faith and credit of a foreign government, it may be difficult for a fund to pursue its rights against a foreign government in that country’s courts. Some foreign governments have defaulted on principal and interest payments. In addition, a fund’s investments in foreign securities may be subject to the risk of nationalization or expropriation of assets, imposition of currency exchange controls or restrictions on the repatriation of foreign currency, confiscatory taxation, political or financial instability and adverse diplomatic developments. Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to foreign withholding taxes, and special U.S. tax considerations may apply. Many of these risks are greater when investing in emerging markets.

Investment in securities denominated in foreign currencies may involve currency conversion costs, and certain investment strategies may subject the funds to currency risk and they may be affected favorably or unfavorably by changes in the rates of exchange between those currencies and the U.S. dollar. Currency exchange rates can be volatile and affected by, among other factors, the general economics of a country, the actions of the U.S. and foreign governments or central banks, the imposition of currency controls, and speculation.

HEDGING:

The decision as to whether and to what extent a fund will engage in hedging transactions to hedge against such risks as credit risk, market risk and currency exchange rate risk will depend on a number of factors, including the adviser’s evaluation of prevailing market conditions, the composition of a fund and the availability of suitable transactions. Accordingly, there can be no assurance that a fund will engage in hedging transactions at any given time or from time to time or that any such strategies, if used, will be successful. Hedging transactions involve costs and may result in losses.

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LIQUIDITY:

Liquidity risk exists when particular investments are difficult to sell. A fund may not be able to sell these illiquid investments at the best prices. Investments in derivatives, foreign investments, restricted securities, securities having small market capitalization, and securities having substantial market and/or credit risk tend to involve greater liquidity risk. Each fund may invest up to 15% of its net assets in illiquid securities.

PORTFOLIO TURNOVER:

The investment strategies employed by the funds often involve high turnover rates. Therefore, under certain market conditions a fund's turnover rate may be higher than that of other mutual funds. Portfolio turnover generally involves some expense to the fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestment in other securities. These transactions may result in realization of taxable capital gains. High portfolio turnover rates, generally defined as annual rates above 100%, are likely to result in higher brokerage commissions or other transaction costs and could give rise to a greater amount of taxable capital gains.

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Performance

The information below provides an indication of the risks of investing in each fund by showing changes in its performance from year to year and by showing how each fund's average annual total returns for various periods compare with those of a broad measure of market performance. Annual returns assume reinvestment of all distributions, if any. Historical performance of a fund, whether before or after taxes, does not necessarily indicate what will happen in the future. A fund's yield is its net income over a recent 30-day period, expressed as an annualized rate of return. For a fund's current yield, call Legg Mason Funds Investor Services, toll-free 1-800-822-5544.

Limited Duration – Primary Class Shares

Year-by-year total return as of December 31 of each year (before taxes) (%): (a)

During the past ten calendar years: (a)

	Quarter Ended	Total Return
Best quarter:	September 30, 2001	4.12	%
Worst quarter:	June 30, 2004	(1.78	)%

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The table below shows the fund’s average annual total returns before taxes for all classes. In addition, returns after taxes are shown for Primary Class shares to illustrate the effect of federal taxes on fund returns. The table also shows returns before taxes for the Merrill Lynch 1-3 Year Treasury Index, a total rate of return index based on daily closing prices and consisting of Treasury bills with a maturity of 1 to 3 years.

Average Annual Total Returns (a)

For the periods ended December 31, 2007:

Limited Duration	1 Year		5 Years		10 Years
Primary Class Shares — Return Before Taxes	2.05	%	2.26	%	4.05	%
Return After Taxes on Distributions (b)	0.46	%	0.97	%	2.35	%
Return After Taxes on Distributions and Sale of Fund Shares (b)	1.33	%	1.18	%	2.42	%
Institutional Class Shares — Return Before Taxes	2.56	%	2.79	%	4.59	%
Merrill Lynch 1-3 Year Treasury Index (reflects no deduction for fees, expenses or taxes)	7.32	%	3.12	%	4.75	%

During periods of fund losses, the return after taxes on distributions and sale of fund shares may exceed the fund’s returns after taxes on distributions because the loss generates a tax benefit that is factored into the result.

(a) Prior to August 31, 2004, the fund was known as Legg Mason U.S. Government Intermediate-Term Portfolio and followed a policy of investing at least 80% of its assets in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities, or repurchase agreements secured by such investments, with a dollar-weighted average portfolio maturity between three and ten years. The fund’s performance prior to such change might have been better or worse had the fund been managed in accordance with its current objective, policies and strategies.

(b) After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown. After-tax returns for the fund’s Institutional Class shares will differ from those shown above for Primary Class shares. The after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts (“IRAs”).

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Investment Grade — Primary Class Shares

Year-by-year total return as of December 31 of each year (before taxes) (%):

During the past ten calendar years:

	Quarter Ended	Total Return
Best quarter:	June 30, 2003	6.12	%
Worst quarter:	June 30, 2004	(3.30	)%

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The table below shows the fund’s average annual total returns before taxes for all classes. In addition, returns after taxes are shown for Primary Class shares to illustrate the effect of federal taxes on fund returns. The table also shows returns before taxes for the Lehman Credit Bond Index, which includes all publicly issued, fixed rate, non-convertible, investment grade, and domestic corporate debt. It also includes Yankee bonds, which are dollar-denominated, SEC-registered public, non-convertible debt issued or guaranteed by foreign sovereign governments, municipalities, governmental agencies, and international agencies.

Average Annual Total Returns

For the periods ended December 31, 2007:

Investment Grade	1 Year		5 Years		10 Years
Primary Class Shares — Return Before Taxes	1.93	%	5.17	%	5.71	%
Return After Taxes on Distributions (a)	0.20	%	3.28	%	3.46	%
Return After Taxes on Distributions and Sale of Fund Shares (a)	1.43	%	3.38	%	3.53	%
Institutional Class Shares — Return Before Taxes	2.44	%	5.70	%	6.26	%
Lehman Credit Bond Index (reflects no deduction for fees expenses or taxes)	5.11	%	4.84	%	6.05	%

During periods of fund losses, the return after taxes on distributions and sale of fund shares may exceed the fund’s returns after taxes on distributions because the loss generates a tax benefit that is factored into the result.

(a) After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown. After-tax returns the fund’s Institutional Class will differ from those shown above for Primary Class shares. The after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements such as 401(k) plans or IRAs.

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Fees and Expenses of the Funds

The tables below describe the fees and expenses you may incur directly or indirectly as an investor in each respective class of a fund.

PRIMARY CLASS

Shareholder Fees

(fees paid directly from your investment)

Primary Class Shares of:	Limited Duration	Investment Grade
Sales Charge (Load) Imposed on Purchases	None	None
Sales Charge (Load) Imposed on Reinvested Dividends	None	None
Redemption Fee	None	None

Annual Fund Operating Expenses

(expenses that are deducted from fund assets)

Primary Class Shares of:	Limited Duration		Investment Grade
Management Fees	0.45	%	0.60	%
Distribution and/or Service (12b-1) Fees	0.50	%	0.50	%
Other Expenses	0.23	%	0.20	%
Total Annual Fund
Operating Expenses	1.18	%	1.30	%(a)
Less Contractual Fee Reduction	(0.18	)%(b)	N/A
Net Expenses	1.00	%	N/A

(a) The manager currently intends to voluntarily waive fees or reimburse expenses so that Primary Class operating expenses of Investment Grade (exclusive of interest, taxes, brokerage commissions, and extraordinary expenses) do not exceed an annual rate of 1.00% of average daily net assets attributable to Primary Class shares. This voluntary waiver is currently expected to continue until April 30, 2009, but may be terminated at any time. Including the effect of waivers, the fund’s total annual fund operating expenses for the fiscal year ended December 31, 2007 were 1.00%.

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(b) The manager has contractually agreed to waive fees or reimburse expenses so that Primary Class operating expenses of Limited Duration (exclusive of interest, taxes, brokerage commissions, and extraordinary expenses) do not exceed an annual rate of 1.00% of average daily net assets attributable to Primary Class shares. This waiver will remain in effect until April 30, 2009. Pursuant to an agreement approved by the Board of Directors, the fund has agreed to repay the manager for waived fees and reimbursed expenses provided that payment does not cause the Primary Class operating expenses to exceed 1.00% of its average net assets and the payment is made within three years after the year in which the manager earned the fee or incurred the expense.

Example:

This example helps you compare the cost of investing in Primary Class shares of a fund with the cost of investing in other mutual funds. Although your actual costs and returns may be higher or lower, you would pay the following expenses on a $10,000 investment in Primary Class shares of a fund, assuming (1) a 5% return each year, (2) Primary Class’s operating expenses remain the same as shown in the table above (including the effect of any contractually agreed to fee waivers, for the specified period), and (3) you redeem all of your shares at the end of the time periods shown.

Primary Class Shares of:	1 Year		3 Years		5 Years		10 Years
Limited Duration	$	102	$	357	$	632	$	1,416
Investment Grade	$	132	$	412	$	713	$	1,568

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INSTITUTIONAL CLASS

Shareholder Fees

(fees paid directly from your investment)

Institutional Class Shares of:	Limited Duration	Investment Grade
Sales Charge (Load) Imposed on Purchases	None	None
Sales Charge (Load) Imposed on Reinvested Dividends	None	None
Redemption Fee	None	None

Annual Fund Operating Expenses

(expenses that are deducted from fund assets)

Institutional Class Shares of:	Limited Duration		Investment Grade
Management Fees	0.45	%	0.60	%
Distribution and/or Service (12b-1) Fees	None		None
Other Expenses	0.27	%	0.14	%
Total Annual Fund
Operating Expenses	0.72	%	0.74	%(a)
Less Contractual Fee Reduction	0.22	%(b)	N/A
Net Expenses	0.50	%	N/A

(a) The manager currently intends to voluntarily waive fees or reimburse expenses so that Institutional Class operating expenses of Investment Grade (exclusive of interest, taxes, brokerage commissions, and extraordinary expenses) do not exceed an annual rate of 0.50% of average daily net assets attributable to Institutional Class shares. This voluntary waiver is currently expected to continue until April 30, 2009, but may be terminated at any time. Including the effect of waivers, the fund’s total annual fund operating expenses for the fiscal year ended December 31, 2007 were 0.50%.

(b) The manager has contractually agreed to waive fees or reimburse expenses so that Institutional Class operating expenses of Limited Duration (exclusive of interest, taxes, brokerage and extraordinary expenses) do not exceed an annual rate of 0.50% of average daily net assets attributable to Institutional Class shares. This waiver will remain in effect until April 30, 2009. Pursuant to an agreement approved by the Board of Directors, the fund has agreed to repay the manager for waived fees and reimbursed expenses provided that payment does not cause the Institutional Class operating expenses to exceed 0.50% of its average net assets and the payment is made within three years after the year in which the manager earned the fee or incurred the expense.

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Example:

This example helps you compare the cost of investing in Institutional Class shares of a fund with the cost of investing in other mutual funds. Although your actual costs and returns may be higher or lower, you would pay the following expenses on a $10,000 investment in Institutional Class shares of a fund, assuming (1) a 5% return each year, (2) Institutional Class’s operating expenses remain the same as shown in the table above (including the effect of any contractually agreed to fee waivers, for the specified period), and (3) you redeem all of your shares at the end of the time periods shown.

Institutional Class Shares of:	1 Year		3 Years		5 Years		10 Years
Limited Duration	$	51	$	208	$	379	$	874
Investment Grade	$	76	$	237	$	411	$	918

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Distribution Plan

DISTRIBUTOR OF A FUND’S SHARES:

Legg Mason Investor Services, LLC (“LMIS”), 100 Light Street, Baltimore, Maryland 21202, distributes each fund’s shares.

Each fund has adopted a plan under Rule 12b-1 that allows it to pay fees for the sale of its Primary Class shares and for services provided to Primary Class shareholders. These fees are calculated daily and paid monthly. Because these fees are paid out of each fund’s assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges.

Under each plan, each fund is authorized to pay LMIS an annual distribution fee equal to 0.25% of the fund’s average daily net assets attributable to Primary Class shares and an annual service fee equal to 0.25% of the fund’s average daily net assets attributable to Primary Class shares.

OTHER COMPENSATION TO DEALERS:

LMIS may enter into agreements with other brokers to sell Primary Class shares of each fund. LMIS pays these brokers up to 100% of the distribution and service fee that it receives from a fund for those sales and for services to the investors who hold the shares. LMIS may also enter into agreements with and make payments to brokers or other entities that support the distribution of fund shares or are engaged in the servicing or maintenance of shareholder accounts including, but not limited to, providing sub-accounting and recordkeeping services.

The Adviser and its affiliates are permitted to pay other entities, including LMIS and other affiliates of the adviser, out of their own assets to support the distribution of each share class, and for shareholder servicing. These payments may create an incentive for a dealer (or other financial intermediary) or its representatives to recommend or offer shares of the funds to its customers. Please contact your financial intermediary for details about revenue sharing payments it may receive.

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Shares of each class may be available through authorized financial intermediaries. For each class, a fund may pay such financial intermediaries for their services out of that class’s assets pursuant to the class’s distribution plan, if any, or otherwise, as appropriate. These services include sub-accounting and other shareholder services. A fund may pay different financial intermediaries different rates for the sub-accounting and other services they provide when the fund determines that this is in the best interest of the fund and its shareholders. LMIS and its affiliates (including the Adviser) may also from time to time, at their own expense, make payments to financial intermediaries that make shares of the funds available to their clients or to other parties in connection with the sale of shares. If investors effect transactions through a broker or agent, investors may be charged a fee by that broker or agent.

Salespersons and others entitled to receive compensation for selling or servicing fund shares may receive more with respect to one class than another.

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Management

MANAGER AND ADVISER:

Legg Mason Fund Adviser, Inc. (“LMFA”), 100 Light Street, Baltimore, Maryland 21202, is the funds’ manager. As manager, LMFA is responsible for the business affairs of the funds, providing office space and administrative staff for the funds and directing all matters related to the operation of the funds. LMFA has been registered as an investment adviser since 1982.

LMFA has delegated certain advisory responsibilities to Western Asset, 385 East Colorado Boulevard, Pasadena, California 91101. As Adviser, Western Asset provides investment management services to the funds, including the responsibility for making investment decisions and placing orders to buy, sell or hold a particular security. Western Asset acts as investment adviser to investment companies and private accounts with aggregate assets of approximately $634.4 billion as of December 31, 2007.

For its services during the fiscal year ended December 31, 2007, each fund paid LMFA the following percentage of its average daily net assets after the effect of any waiver of fees:

Limited Duration	0.35	%
Investment Grade	0.41	%

For its services during the fiscal year ended December 31, 2007, LMFA paid Western Asset a fee equal to the following percentage of each fund’s average daily net assets (net of any waivers) as follows:

Limited Duration	0.20	%
Investment Grade	0.16	%

A discussion regarding the basis for the Board of Directors’ approval of the continuation of each fund’s management agreement and investment advisory agreement is available in the funds’ annual report to shareholders for the period ending December 31, 2007.

LMFA, Western Asset and LMIS are wholly-owned subsidiaries of Legg Mason, Inc., a financial services holding company.

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PORTFOLIO MANAGEMENT:

Limited Duration Bond. Limited Duration is managed by a team of portfolio managers, sector specialists and other investment professionals led by Chief Investment Officer S. Kenneth Leech, Deputy Chief Investment Officer Stephen A. Walsh and Portfolio Manager James J. Flick. Messrs. Leech, Walsh, and Flick have each served as Portfolio Managers for Western Asset for over 10 years.

Mr. Leech and Mr. Walsh serve as co-team leaders responsible for day-to-day strategic oversight of the fund’s investments and for supervising the day-to-day operations of the various sector specialist teams dedicated to the specific asset classes in which the fund invests. Mr. Leech and Mr. Walsh have served as portfolio managers to the fund since its inception. Mr. Flick is responsible for portfolio structure, including sector allocation, duration weighting and term structure decisions. Mr. Flick has served as portfolio manager to the fund since 2004.

Investment Grade Income. Investment Grade Income is managed by a team of portfolio managers, sector specialists and other investment professionals led by Chief Investment Officer S. Kenneth Leech, Deputy Chief Investment Officer Stephen A. Walsh and Portfolio Manager Jeffrey D. Van Schaick. Messrs. Leech, Walsh and Van Schaick have each served as Portfolio Managers for Western Asset for over 10 years.

Mr. Leech and Mr. Walsh serve as co-team leaders responsible for day-to-day strategic oversight of the fund’s investments and for supervising the day-to-day operations of the various sector specialist teams dedicated to the specific asset classes in which the fund invests. Mr. Leech and Mr. Walsh have served as portfolio managers to the fund since its inception. Mr. Van Schaick is responsible for portfolio structure, including sector allocation, duration weighting and term structure decisions. Mr. Van Schaick has served as portfolio manager to the fund since 1987.

The funds’ Statement of Additional Information provides information about each portfolio manager’s compensation, other accounts managed by the portfolio managers and the portfolio managers’ ownership of securities in the fund they advise.

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Shareholder Eligibility

The funds generally will accept an application to establish a new account only if the beneficial owner has a U.S. address or, subject to requirements of local law, is a U.S. citizen with a foreign address. Existing non-U.S. investors in a fund will not be permitted to establish new accounts to purchase fund shares, but will continue to be able to purchase shares in that fund through their existing accounts.

Summarized below are the eligibility requirements for each share class. Once you determine which share class is available to you for investment, you should follow the purchasing instructions beginning on page 25 for Primary Class or the instructions beginning on page 27 for Institutional Class.

You can buy shares through banks, brokers, dealers, insurance companies, investment advisers, financial consultants, mutual fund supermarkets and other financial intermediaries that have entered into an agreement with LMIS to sell shares of the funds (“Financial Adviser”). You can also buy shares directly from the funds.

The funds reserve the right to revise the minimum initial investment and other eligibility requirements at any time. In addition, the funds may waive the minimum initial investment requirements in their sole discretion.

PRIMARY CLASS SHARES

For questions regarding your eligibility to invest in Primary Class shares, contact your Financial Adviser or LMIS’ Funds Investor Services Division (“FIS”) at 1-800-822-5544.

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	Primary Class Shares
Retail Account — Initial Investment Minimum (per fund)	$	1,000
Subsequent Minimum Investments (per fund)	$	50
IRA Account — Initial Investment Minimum (per fund)	$	250
Subsequent Minimum Investments (per fund)	$	50
Minimum Account Size (per fund)	$	500

RETIREMENT PLANS

Employer-sponsored retirement plans (i.e. 401(k), 403(b) or equivalent) where a Financial Adviser is providing advice, record-keeping or other shareholder services to the plan, are eligible for Primary Class shares. The minimum initial and additional purchase amounts may be waived at the sole discretion of the funds.

INSTITUTIONAL CLASS SHARES

For questions regarding your eligibility to invest in Institutional Class shares, call 1-888-425-6432 or contact your financial intermediary. You may be required to provide appropriate documentation confirming your eligibility to invest in these shares.

The following classes of investors may purchase Institutional Class shares:

• Institutional investors who make an initial investment of at least $1 million in a fund. Generally, institutional investors are corporations, banks, trust companies, insurance companies, investment companies, foundations, endowments, pension and profit-sharing plans, and similar entities.

• Investors who invest in the funds through financial intermediaries that offer their clients Institutional Class shares through investment programs (such as (i) fee-based advisory or brokerage account programs, (ii) employee benefit plans such as 401 (k), 457 or 403(b) retirement plans or (iii) college savings vehicles such as 529 plans) authorized by LMIS.

• Employees of the investment adviser to a Legg Mason fund and the spouses and children of such employees may purchase Institutional Class shares of that Legg Mason fund. For such investors, the minimum initial investment is $1,000 per fund and the minimum for each purchase of additional shares is $100.

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How to Invest

SHAREHOLDER ACCOUNTS

You have the following options for holding fund shares.

1. You may hold fund shares in a securities brokerage account with a firm that has an agreement with LMIS with respect to the class of shares that you own. At the present time, there are only a small number of securities firms that have agreements of this kind.

2. You may hold fund shares directly with a fund, through its transfer agent. There are no additional fees to you for holding your shares directly with a fund in this manner. You will receive confirmations of transactions from the fund’s transfer agent and periodic statements reporting your account activity and share ownership. To assist you in the management of your account you may direct the fund's transfer agent to send copies of your confirmations and/or periodic statements to another party whom you designate, at no charge. You may call the funds at 800-822-5544 (Primary Class) or 888-425-6432 (Institutional Class) regarding holding fund shares directly with a fund.

PURCHASING PRIMARY CLASS SHARES

Prior to opening an account you should consult the section “Shareholder Eligibility” on page 23, which outlines share class eligibility requirements as well as initial and subsequent investment minimums.

You can open a regular or retirement account or a Coverdell Education Savings Account by contacting your Financial Adviser. To open an account directly with the funds call 1-800-822-5544 or visit www.leggmason.com/individualinvestors for an account application.

Retirement accounts and plans include traditional IRAs, spousal IRAs, Roth IRAs, simplified employee pension plans, savings incentive match plans for employees and other qualified retirement plans. Contact your Financial Adviser to discuss which type of account or plan might be appropriate for you.

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To view additional information regarding each type of account or plan, contact your Financial Adviser or visit www.leggmason.com/individualinvestors.

Certain investment methods (for example, through certain retirement plans) may be subject to lower minimum initial and/or additional investment amounts. In certain limited circumstances, the minimum initial and additional purchase amounts may be waived. Contact your Financial Adviser or the funds with any questions regarding your investment options.

PRIMARY CLASS SHAREHOLDERS

Once your account is open, you may use the following methods to purchase additional shares of the funds.

Through Your Financial Adviser

Your Financial Adviser can purchase shares of the funds on your behalf and provide information on other methods available to you for purchasing additional shares. Investments made through your Financial Adviser may be subject to transaction fees or other purchase conditions as set by your Financial Adviser. Your Financial Adviser may have different minimum investment requirements for investments in Primary Class shares than the minimum investment requirements described in this Prospectus. You should consult its program literature for further information.

Directly With The Funds

Mail	Mail your check, payable to Legg Mason Funds, to the following address with either an Additional Purchase Form or a note indicating the fund you want to buy and your fund account number:
	Legg Mason Funds
	c/o Boston Financial Data Services
	P.O. Box 55214
	Boston, MA 02205-8504
Telephone or Wire	Call the funds at 1-800-822-5544 to arrange with your bank to transfer money directly from your checking or savings account. Wire transfers may be subject to a service charge by your bank.
Internet or TeleFund	Visit www.leggmason.com/individualinvestors or call TeleFund, the automated telephone account management service, at 1-877-6-LMFUNDS (1-877-656-3863).
Future First® Systematic Investment Plan	Contact the funds to enroll in Legg Mason’s Future First® Systematic Investment Plan. This plan allows you to automatically invest a specific dollar amount at regular intervals. The transfer agent will transfer money directly from your checking or savings account or another Legg Mason fund to purchase fund shares.

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The funds must receive your purchase order in proper form (meaning that it is complete and contains all necessary information; for example, number of shares or dollar amount to be invested and name of the fund) before the close of regular trading on the New York Stock Exchange (“Exchange”), normally 4:00 p.m., Eastern time, to receive that day’s price. Orders received after the close of the Exchange will be processed at the fund’s net asset value as of the close of the Exchange on the next day the Exchange is open. Orders received by your Financial Adviser before the close of regular trading on the Exchange and communicated to the fund on the following business day, will be processed at the net asset value determined on the day the order was received by the Financial Adviser. Certain Financial Advisers may have agreements to purchase shares of the funds with payment generally to follow the next business day, but no later than three business days after the order is placed. If payment is not received by that time, your order is subject to cancellation and you and the Financial Adviser could be held liable for resulting fees or losses. It is your Financial Adviser’s responsibility to transmit your order to the funds in a timely manner. If you purchase shares directly from the funds, your payment must accompany your order.

If you pay with a check or ACH transfer that does not clear or if your payment is not received in a timely manner, your purchase may be cancelled and you may be liable for any loss to the fund. The funds and their agents have the right to reject or cancel any purchase due to nonpayment.

When you purchase shares directly from the funds and have not identified a broker-dealer that has an agreement to distribute the funds, your order will be placed through LMIS, the funds’ distributor, which will provide shareholder services to you and will receive any distribution and service (12b-1) fees paid by the class of shares which you own. For more information regarding 12b-1 fees see “Distribution Plan.”

PURCHASING INSTITUTIONAL CLASS SHARES

To obtain an application, please call 1-888-425-6432.

If you invest through a financial intermediary, note that you may purchase shares only in accordance with your financial intermediary’s instructions and limitations. Your financial intermediary may have different minimum investment requirements for investments in Institutional Class shares than the minimum investment requirements described in this Prospectus.

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INSTITUTIONAL CLASS SHAREHOLDERS

Once your account is open, you may use the following methods to purchase additional shares of the funds.

Directly With The Funds

Wire Transfers	Wire federal funds to State Street Bank and Trust Company, the fund’s custodian. Before wiring federal funds, you must first telephone the funds at 1-888-425-6432 to receive instructions for wire transfer. Please note that the following information will be required when calling: shareholder name; name of the person authorizing the transaction; shareholder account number; name of the fund and class of shares to be purchased; amount being wired; and name of the wiring bank. Funds should be wired through the Federal Reserve System to:
	State Street Bank and Trust Company
	ABA #011-000-028
	DDA #99046096
	Legg Mason [Insert name of fund and class of shares]
	[Insert account name and number]
	The wire should state that the funds are for the purchase of shares of a specific fund and share class and include the account name and number.
Contributions of Eligible Securities	Shares may be purchased and paid for by the contribution of eligible portfolio securities, subject in each case to approval by the adviser. Approval will depend on, among other things, the nature and quality of the securities offered and the current needs of the fund in question. Investors who wish to purchase fund shares through the contribution of securities should contact the funds at 1-888-425-6432 for instructions. Investors should realize that at the time of contribution they may recognize a gain or loss for tax purposes on securities contributed. The adviser, on behalf of a fund, has full discretion to accept or reject any appropriate securities offered as payment for shares. Securities will not be accepted in payment of fund shares from persons who are affiliated with the fund’s adviser or the fund. Securities offered in payment for shares will be valued in the same way and at the same time the fund values its portfolio securities for the purpose of determining net asset value. (See “Calculation of Net Asset Value” below.)

Through Your Financial Intermediary

Your financial intermediary can purchase shares of the funds on your behalf and provide information on other methods available to you for purchasing additional shares. Investments made through your financial intermediary may be subject to transaction fees or other purchase conditions as set by your financial intermediary. You should consult its program literature for further information.

The funds must receive your purchase order in proper form (meaning that it is complete and contains all necessary information; for example, number of shares or dollar amount to be invested and name of the fund) before the close of regular trading on the Exchange, normally 4:00 p.m., Eastern time, to receive that day’s price. Orders received after the close of the Exchange will be processed at the fund’s net asset value as of the close of the Exchange

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on the next day the Exchange is open. Orders received by certain retirement plans and other financial intermediaries before the close of regular trading on the Exchange and communicated to the fund on the following business day, will be processed at the net asset value determined on the day the order was received by the financial intermediary. Certain financial intermediaries may have agreements to purchase shares of the funds with payment generally to follow the next business day, but no later than three business days after the order is placed. If payment is not received by that time, your order is subject to cancellation and you and the financial intermediary could be held liable for resulting fees or losses. If you invest in the funds through a financial intermediary, it is your financial intermediary’s responsibility to transmit your order to the funds in a timely manner.

Any shares purchased or received as a distribution will be credited directly to the investor’s account.

The funds may be available for purchase by retirement plans, including 401(k) plans, 457 plans and 403(b) plans. The administrator of a plan or employee benefits office can provide participants or employees with detailed information on how to participate in the plan and how to elect a fund as an investment option. Participants in a retirement or savings plan may be permitted to elect different investment options, alter the amounts contributed to the plan, or change how contributions are allocated among investment options in accordance with the plan’s specific provisions.

For questions about participant accounts, participants should contact their employee benefits office, the plan administrator, or the organization that provides recordkeeping services for the plan. Investors who purchase shares through retirement plans should be aware that the plan administrator may aggregate purchase and redemption orders of participants in the plan. Therefore, there may be a delay between the time the investor places an order with the plan administrator and the time the order is forwarded to the funds for execution.

The funds may not be available for sale in certain states. Prospective investors should inquire as to whether a particular fund is available for sale in their state of residence.

Account Registration Changes:

Changes in registration or account privileges for accounts held directly with the funds must be made in writing. Signature guarantees are required. (See ‘ACCOUNT POLICIES – Signature Guarantee’ below.) All correspondence must include the account number and must be sent to:

Legg Mason Investor Services – Institutional

c/o Boston Financial Data Services

P.O. Box 8037

Boston, Massachusetts 02206-8037

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How to Redeem Your Shares

PRIMARY CLASS SHAREHOLDERS

You can redeem your shares through any of the following methods.

Through Your Financial Adviser

Your Financial Adviser can redeem shares of the funds on your behalf. Redemptions made through your Financial Adviser may be subject to transaction fees or other conditions as set by your Financial Adviser. You should consult its program literature for further information.

Directly With The Funds

Additional documentation may be required from corporations, executors, partnerships, administrators, trustees or custodians. Redemption proceeds can be mailed to your account address, sent to your bank by ACH transfer or wired to your bank account (provided that your bank information is already on file). Wire transfers may be subject to a service charge by your bank. For wire transfers, be sure that the fund has your bank account information on file.

Redemption requests for shares valued at $10,000 or more or when the proceeds are to be paid to someone other than the accountholder(s) may require a signature guarantee. (See “ACCOUNT POLICIES – Signature Guarantee.”)

Telephone	Call the funds at 1-800-822-5544 to request a redemption. Please have the following information ready when you call: the name of the fund, dollar amount (or number of shares) to be redeemed and your shareholder account number.
Internet or TeleFund	Redeem shares through the Internet at www.leggmason.com/individualinvestors or through TeleFund at 1-877-6-LMFUNDS (1-877-656-3863).
Mail	Send a letter to the funds requesting redemption of your shares to:
	Legg Mason Funds
	c/o Boston Financial Data Services
	P.O. Box 55214
	Boston, MA 02205-8504
	The letter should be signed by each owner of the account exactly as the account is registered.

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The funds must receive your redemption order in proper form (meaning that it is complete and contains all necessary information; for example, number of shares or dollar amount to be redeemed and name of the fund) before the close of regular trading on the Exchange, normally 4:00 p.m., Eastern time, to receive that day’s price. However, orders received by your Financial Adviser by the close of regular trading on the Exchange and communicated to the fund on the following business day, will be effected at the net asset value determined on the day the order was received by the Financial Adviser. It is your Financial Adviser’s responsibility to transmit your order to the funds in a timely manner.

INSTITUTIONAL CLASS SHAREHOLDERS

You can redeem your shares through any of the following methods.

Directly With The Funds

If your account is held directly with the funds, redemptions may be initiated by telephone by calling the funds at 1-888-425-6432, but must be confirmed in writing prior to processing.

All requests for redemption should indicate: 1) the number of shares or dollar amount to be redeemed and the investor’s shareholder account number; 2) the investor’s name and the names of any co-owners of the account, using exactly the same name or names used in establishing the account; 3) proof of authorization to request redemption on behalf of any co-owner of the account (please contact the funds for further details); and 4) the name, address, and account number to which the redemption payment should be sent.

Payment of redemption proceeds normally will be made by wire one business day after receipt of a redemption request in proper form (meaning that it is complete and contains all necessary information; for example, number of shares or dollar amount to be redeemed and name of the fund). Additional documentation may be required from corporations, executors, partnerships, administrators, trustees or custodians.

Mail	Send a letter to the funds requesting redemption of your shares to: Legg Mason Investor Services – Institutional, c/o Boston Financial Data Services, P.O. Box 8037, Boston, Massachusetts 02206-8037.
Fax	Fax a request for redemption to the funds at 781-796-3326.

Through Your Financial Intermediary

Your financial intermediary can redeem shares of the funds on your behalf. Redemptions made through your financial intermediary may be subject to transaction fees or other conditions as set by your financial intermediary. You should consult its program literature for further information.

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The funds must receive your redemption order in proper form (meaning that it is complete and contains all necessary information; for example, number of shares or dollar amount to be redeemed and name of the fund) before the close of regular trading on the Exchange, normally 4:00 p.m., Eastern time, to receive that day’s price. However, orders received by certain retirement plans and other financial intermediaries by the close of regular trading on the Exchange and communicated to the fund on the following business day, will be effected at the net asset value determined on the day the order was received by the financial intermediary. If you invest in the funds through a financial intermediary, it is your financial intermediary’s responsibility to transmit your order to the funds in a timely manner.

ADDITIONAL INFORMATION ABOUT REDEMPTIONS:

The funds’ service providers will follow reasonable procedures to ensure the validity of any telephone, electronic or other redemption request, such as requesting identifying information from users or employing identification numbers. The funds and their service providers will not be responsible for any account losses due to fraudulent telephone, electronic or other orders that they reasonably believe to be genuine.

Payment of redemption proceeds of shares that were recently purchased by check or automatic investment arrangements or acquired through reinvestment of distributions paid on such shares by the fund may be delayed for up to ten days from the purchase date until the check or automatic investment has cleared.

Each fund has reserved the right under certain conditions to redeem its shares in-kind by distributing portfolio securities in payment for redemptions. Shareholders who receive a redemption in-kind may incur costs to dispose of the securities they receive and may receive securities that are difficult to sell.

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Account Policies

CALCULATION OF NET ASSET VALUE:

Net asset value per share of each class of shares is determined daily as of the close of regular trading on the Exchange (normally 4:00 p.m. Eastern time) on every day the Exchange is open. The Exchange is normally closed on all national holidays and Good Friday. To calculate each class of shares’ sales price, the fund’s assets attributable to that class of shares are valued and totaled, liabilities attributable to that class of shares are subtracted, and the resulting net assets are divided by the number of shares outstanding for that class.

Each fund’s securities are generally valued on the basis of market quotations. A fund obtains pricing data in the first instance from independent pricing services, which use market quotations, prices provided by market makers or estimates of market values to develop their pricing information. Where a security is traded on more than one market, which may include foreign markets, the security generally is valued on the market considered by the adviser to be the primary market. When market quotations are not readily available or are considered by the adviser to be unreliable, a fund’s securities are valued at fair value as determined under policies approved by the Board of Directors. Fair value methods are necessarily estimates, and the use of fair value prices may cause the net asset value of a fund’s shares to differ from the net asset value that would be calculated using other methods of valuation.

Each fund’s foreign securities are valued as of the close of regular trading on the Exchange using the exchange rate as of 2:00 p.m. Eastern time (the exchange rate is the rate at which the value of securities is translated from the local currency into U.S. dollars). To the extent that a fund has portfolio securities that are primarily listed on foreign exchanges that trade on days when the fund does not price its shares, the net asset value of the fund may change on days when shareholders will not be able to purchase or redeem the fund’s shares.

SIGNATURE GUARANTEE:

When a signature guarantee is called for, the shareholder should have “Signature Guaranteed” stamped under his or her signature and guaranteed

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by any of the following entities: U.S. banks, foreign banks having a U.S. correspondent bank, credit unions, savings associations, U.S. registered securities dealers and brokers, municipal securities dealers and brokers, government securities dealers and brokers, national securities exchanges, registered securities associations, and clearing agencies (each an “Eligible Guarantor Institution”). Each fund and its agents reserve the right to reject any signature guarantee pursuant to written signature guarantee standards or procedures, which may be revised in the future to permit them to reject signature guarantees from Eligible Guarantor Institutions that do not, based on credit guidelines, satisfy such written standards or procedures. Any fund may change the signature guarantee requirements from time to time without prior notice to shareholders.

A signature guarantee may be required for the following situations:

• remitting redemption proceeds to any person, address or bank account not on record.

• making changes to the account registration after the account has been opened.

• transferring shares to an account in another Legg Mason fund with a different account registration.

OTHER:

Fund shares may not be held in, or transferred to, an account with any firm that does not have an agreement with LMIS or its affiliates.

If your account with a fund falls below $500, the fund may ask you to increase your balance. If after 60 days your account is still below $500, the fund may close your account and send you the proceeds. A fund will not require you to redeem accounts that fall below $500 solely as a result of a reduction in the fund’s net asset value.

The funds will not accept cash, money orders, traveler’s checks, or credit card convenience checks. Third-party checks will not be accepted unless they are from another financial institution made for the purpose of transfer or rollover. The funds will accept non-retirement checks from other fund families and investment companies as long as the registration name on your fund account is the same as that listed on the check.

Federal anti-money laundering regulations require all financial institutions to obtain, verify and record information that identifies each person who opens an account. When you sign your account application, you may be asked to provide additional information in order for the funds to verify your identity in accordance with these regulations. Accounts may be restricted and/or closed, and the monies withheld, pending verification of this information or as otherwise required under these and other federal regulations.

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Each fund reserves the right to:

• suspend the offering of shares permanently or for a period of time;

• change its minimum investment amounts;

• redeem shares if information provided in the application should prove to be incorrect in any manner judged by the fund to be material (i.e., in a manner such as to render the shareholder ineligible to purchase shares of that class); and

• delay sending out redemption proceeds for up to seven days if, in the judgment of the Adviser, the fund could be adversely affected by immediate payment. A fund may delay redemptions beyond seven days, or suspend redemptions, only as permitted by the SEC or the Investment Company Act of 1940, as amended.

FREQUENT TRADING OF FUND SHARES:

Frequent trading in a fund’s shares increases the fund’s administrative costs associated with processing shareholder transactions. In addition, frequent trading may potentially interfere with the efficient management of a fund’s portfolio and increase the fund’s costs associated with trading the fund’s portfolio securities. Under certain circumstances, frequent trading may also dilute the returns earned on shares held by a fund’s other shareholders. The funds therefore discourage frequent purchases and redemptions by shareholders.

Each fund reserves the right to refuse any client or reject any purchase order for shares (including exchanges) for any reason. In particular, the Board of Directors has determined that the funds are not designed to serve as vehicles for frequent trading in response to short-term fluctuations in the securities markets.

Under the funds’ frequent trading policy, each fund reserves the right to restrict or reject purchases of shares (including exchanges) without prior notice whenever a fund detects a pattern of excessive trading. The policy provides that a fund will use its best efforts to restrict a shareholder’s trading privileges in the Legg Mason Funds if that shareholder has engaged in four or more “Round Trips” (defined below) during any rolling 12-month period. However, each fund has the discretion to determine that restricting a shareholder’s trading privileges is not necessary (or that a new limit on Round Trips should be established for the shareholder) if it is determined that the

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pattern of trading is not abusive or harmful to the fund. In making such a determination, the fund will consider, among other things, the nature of the shareholder’s account, the reason for the frequent trading, the amount of trading and the particular fund in which the trading has occurred. Additionally, each fund has the discretion to make inquiries or to take action against any shareholder whose trading appears inconsistent with the frequent trading policy. Examples of the types of actions a fund may take to deter excessive trading in a shareholder account include restricting the shareholder from purchasing additional shares in the fund altogether or imposing other restrictions (such as requiring purchase orders to be submitted by mail) that would deter the shareholder from trading frequently in the fund.

A “Round Trip” is defined as a purchase (including subscriptions and exchanges) into a fund followed by a sale (including redemptions and exchanges) of the same or a similar number of shares out of the fund within 30 days of such purchase. Purchases and sales of a fund’s shares pursuant to the Future First^® Systematic Investment Plan and Systematic Withdrawal Plan are not considered in determining Round Trips.

With respect to accounts where shareholder transactions are processed or records are kept by third-party intermediaries, the funds use reasonable efforts to monitor such accounts to detect suspicious trading patterns. For any such account that is so identified, a fund will make such further inquiries and take such other actions as shall be considered necessary or appropriate to enforce the funds’ frequent trading policy against the shareholder(s) trading through such account and, if necessary, the third-party intermediary (retirement plan administrators, securities broker-dealers, and mutual fund marketplaces) maintaining such account. A fund may accept undertakings from intermediaries to enforce frequent trading policies on behalf of the fund that provide a substantially similar level of protection against excessive trading. Shareholders who own shares of a fund through financial intermediaries should examine any disclosures provided by the intermediaries to determine what restrictions apply to the shareholders.

Although each fund will monitor shareholder transactions for certain patterns of frequent trading activity, there can be no assurance that all such trading activity can be identified, prevented or terminated.

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Services for Investors

If you hold shares through a Financial Adviser, you may acquire shares of another Legg Mason fund by an exchange only if your Financial Adviser has an agreement with LMIS with respect to the class of shares of the Legg Mason fund that you seek to acquire.

Below is a description of services provided to shareholders who own shares directly with the funds. You should contact your Financial Adviser to determine if it offers similar services to those listed below.

CONFIRMATIONS AND ACCOUNT STATEMENTS:

You will receive a confirmation from the funds after each transaction (except a reinvestment of dividends or capital gain distributions, an investment made through the Future First^® Systematic Investment Plan and withdrawals made through the Systematic Withdrawal Plan). Primary Class shareholders will receive account statements monthly unless there has been no activity in the account. If there has been no monthly activity, Primary Class shareholders will receive a quarterly statement. Institutional Class shareholders will receive account statements monthly.

SYSTEMATIC WITHDRAWAL PLAN:

Primary Class shareholders who are purchasing or already own shares of a fund with a net asset value of $5,000 or more may elect to make systematic withdrawals from the fund. The minimum amount for each withdrawal is $50. Certain Institutional Class shareholders with an initial net asset value of $1,000,000 or more may also be eligible to make systematic withdrawals from a fund. These shareholders should contact Legg Mason Investor Services – Institutional at 1-888-425-6432 to determine their account’s eligibility. Ordinarily, you should not purchase additional shares of the fund when you are a participant in the plan, because there are tax disadvantages associated with such purchases and withdrawals.

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EXCHANGE PRIVILEGE:

Primary Class: Primary Class shares of a fund may be exchanged for Primary Class shares of any other Legg Mason fund (Legg Mason funds do not include the Legg Mason Partners Funds) and for Class A shares of the Western Asset Money Market Fund. If you choose to exchange your fund shares for shares of the Western Asset Money Market Fund and later wish to exchange out of the Western Asset Money Market Fund, the only exchange option available to you will be to exchange back to Primary Class shares of a Legg Mason fund. You can request an exchange in writing or by telephone.

Institutional Class: Institutional Class shares of a fund may be exchanged for shares of the Institutional Class of any other Legg Mason fund (Legg Mason funds do not include the Legg Mason Partners Funds), provided the investor meets the eligibility criteria of that class of that fund. You can request an exchange in writing (including by Fax).

Important Information About Exchanges: In each case, the fund and class into which you are exchanging must be eligible for sale in your state of residence. Be sure to read the current prospectus for the fund into which you are exchanging.

There is currently no fee for exchanges. An exchange of a fund’s shares will be treated as a sale of the shares being redeemed of the fund from which you are exchanging, and any gain on the sale will generally be taxable.

Each fund reserves the right to terminate or modify the exchange privilege after at least 60 days’ prior written notice to shareholders.

MAILING OF SHAREHOLDER COMMUNICATIONS:

If two or more members of your household are Legg Mason fund shareholders, you may elect to have all account communications for those funds combined in one convenient mailing by contacting the funds according to the instructions below. If you have previously elected to have your account communications combined, but wish to discontinue this service, please contact the funds per the instructions below.

Primary Class Shareholders	Call 1-800-822-5544 or write to Legg Mason Funds, c/o Boston Financial Data Services, P.O. Box 55214, Boston, MA 02205-8504.
Institutional Class Shareholders	Call 1-888-425-6432 or write to Legg Mason Investor Services – Institutional, c/o Boston Financial Data Services, P.O. Box 8037, Boston, MA 02206-8037.

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Distributions and Taxes

Each fund declares dividends from any net investment income daily and pays them monthly. Shares will normally begin to earn dividends on the first business day following the settlement date of purchase.

Each fund declares and pays dividends from the excess of net short-term capital gain over net long-term capital loss, if any, and distributes substantially all of its net capital gain (i.e., the excess of net long-term capital gain over net short-term capital loss) annually in December. A second distribution of such gain(s) may be necessary in some years to avoid imposition of a federal excise tax. There is no assurance that a fund will realize any capital gain in a given year.

Fund dividends and other distributions are taxable to investors (other than retirement plans and other tax-exempt investors) whether received in cash or reinvested in additional shares of a fund. Dividends from a fund’s investment company taxable income (which includes net investment income and the excess of net short-term capital gain over net long-term capital loss all determined without regard to any deduction for dividends paid) are taxable as ordinary income, except that the part of the dividends that is "qualified dividend income" (i.e., dividends on stock of most U.S. corporations and certain foreign corporations with respect to which a fund satisfies certain holding period, and other restrictions), if any, is subject to a maximum federal income tax rate of 15% (through December 31, 2010) for individual shareholders who satisfy those restrictions with respect to their shares on which the fund dividends are paid; it is not expected that a significant part of any fund’s dividends will so qualify. Distributions of a fund’s net capital gain are taxable as long-term capital gain (also at a maximum 15% rate for individual shareholders through December 31, 2010), regardless of how long you have held your fund shares. A tax statement will be sent to you after the end of each year detailing the tax status of your distributions.

The sale or exchange of fund shares may result in a taxable gain or loss, depending on whether the proceeds are more or less than the cost of your shares. Any capital gain an individual shareholder recognizes on a redemption or exchange through 2010 of his or her fund shares that have been held for more than one year will generally qualify for a 15% maximum federal income tax rate.

Legg Mason Income Trust, Inc.

39

A fund’s dividend and interest income on, and gains it realizes from disposition of, foreign securities may be subject to income, withholding or other taxes imposed by foreign countries and U.S. possessions.

As required by law, each fund will withhold 28% of all dividends, capital gain distributions and redemption proceeds otherwise payable to individuals and certain other non-corporate shareholders who do not provide the fund with a valid taxpayer identification number. Each fund is also required to withhold 28% of all dividends and capital gain distributions otherwise payable to those shareholders who are otherwise subject to backup withholding.

Because each investor’s tax situation is different, please consult your tax adviser about federal, state, and local tax considerations.

RECEIVING YOUR DIVIDENDS AND OTHER DISTRIBUTIONS:

Contact your Financial Adviser to discuss what options are available to you for receiving your dividends and other distributions.

If you own shares directly with the funds, the following conditions apply:

• your dividends and other distributions will be automatically reinvested in the distributing class of shares of the fund unless you elect to receive dividends and/or other distributions in cash.

• Primary Class shareholders who have a minimum account balance of $10,000 may request that their dividends and/or other distributions be invested in Primary Class shares of another eligible Legg Mason fund or Class A shares of the Cash Portfolio, provided these funds are available for sale in your state.

• to change your election, you must notify the fund at least ten days before the next distribution is to be paid.

• if the postal or other delivery service is unable to deliver your distribution check, your distribution election will automatically be converted to having all dividends and other distributions reinvested in fund shares. No interest will accrue on amounts represented by uncashed distribution or redemption checks.

Legg Mason Income Trust, Inc.

40

Portfolio Holdings Disclosure Policy

A description of the funds’ policies and procedures with respect to the disclosure of their portfolio holdings is available in the funds’ Statement of Additional Information. The funds’ complete portfolio holdings are available at http://www.leggmason.com/individualinvestors/products/mutual-funds/fullholdings/LMLD.aspx, for Limited Duration, or http://www.leggmason.com/individualinvestors/products/mutual-funds/fullholdings/LMIG.aspx, for Investment Grade, on a quarterly basis approximately 25 calendar days following the quarter-end, and partial information concerning the funds’ portfolio holdings (such as top ten holdings) is available on the Legg Mason Funds’ website, in fact sheets and other formats, approximately 11 business days following each quarter-end. Such information will remain available until the next quarter’s holdings are posted.

Legg Mason Income Trust, Inc.

41

Financial Highlights

The financial highlights table is intended to help you understand each fund’s financial performance for the past five years. Certain information reflects financial results for a single fund share. Total return represents the rate that an investor would have earned (or lost) on an investment in a fund, assuming reinvestment of all dividends and other distributions. This information has been audited by the funds’ independent registered public accounting firm, PricewaterhouseCoopers LLP, whose report, along with the funds’ financial statements, is incorporated by reference into the Statement of Additional Information (see back cover) and is included in the annual report for these funds. The funds’ annual report is available upon request by calling toll-free 1-800-822-5544 for holders of Primary Class shares or 1-888-425-6432 for holders of Institutional Class shares.

Legg Mason Income Trust, Inc.

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Limited Duration

Primary Class:

	Years Ended December 31,
	2007			2006			2005			2004			2003
Net asset value, beginning of year	$	10.22		$	10.20		$	10.36		$	10.54		$	10.70
Investment operations:
Net investment income		.46	(A)		.42	(A)		.33			.29			.26
Net realized and unrealized gain/ (loss)		(.25	)		.02			(.14	)		(.09	)		(.14	)
Total from investment operations		.21			.44			.19			.20			.12
Distributions from:
Net investment income		(.46	)		(.42	)		(.35	)		(.37	)		(.28	)
Net realized gain on investments		—			—			—			(.01	)		—
Total distributions		(.46	)		(.42	)		(.35	)		(.38	)		(.28	)
Net asset value, end of year	$	9.97		$	10.22		$	10.20		$	10.36		$	10.54
Total return		2.05	%		4.46	%		1.83	%		1.89	%		1.11	%
Ratios to Average Net Assets: (B)
Total expenses		1.18	%		1.21	%		1.15	%		1.21	%		1.21	%
Expenses net of waivers, if any		1.00	%		1.00	%		1.00	%		1.00	%		1.00	%
Expenses net of all reductions		1.00	%		1.00	%		1.00	%		1.00	%		1.00	%
Net investment income		4.51	%		4.10	%		3.21	%		2.81	%		2.48	%
Supplemental Data:
Portfolio turnover rate		286.8	%		237.2	%		81.6	%		238.0	%		487.3	%
Net assets, end of year (in thousands)	$	167,195		$	191,883		$	219,497		$	274,606		$	326,844

(A) Computed using average daily shares outstanding.

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

Legg Mason Income Trust, Inc.

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Limited Duration

Institutional Class:

	Years Ended December 31,
	2007			2006			2005			2004			2003
Net asset value, beginning of year	$	10.22		$	10.20		$	10.37		$	10.55		$	10.70
Investment operations:
Net investment income		.51	(A)		.47	(A)		.40			.35			.32
Net realized and unrealized gain/ (loss)		(.25	)		.03			(.17	)		(.10	)		(.14	)
Total from investment operations		.26			.50			.23			.25			.18
Distributions from:
Net investment income		(.51	)		(.48	)		(.40	)		(.42	)		(.33	)
Net realized gain on investments		—			—			—			(.01	)		—
Total distributions		(.51	)		(.48	)		(.40	)		(.43	)		(.33	)
Net asset value, end of year	$	9.97		$	10.22		$	10.20		$	10.37		$	10.55
Total return		2.56	%		4.98	%		2.29	%		2.41	%		1.71	%
Ratios to Average Net Assets: (B)
Total expenses		.72	%		.64	%		.62	%		.70	%		.68	%
Expenses net of waivers, if any		.50	%		.50	%		.46	%		.48	%		.46	%
Expenses net of all reductions		.50	%		.50	%		.46	%		.48	%		.46	%
Net investment income		5.02	%		4.58	%		3.85	%		3.22	%		3.03	%
Supplemental Data:
Portfolio turnover rate		286.8	%		237.2	%		81.6	%		238.0	%		487.3	%
Net assets, end of year (in thousands)	$	11,189		$	11,052		$	18,213		$	9,546		$	7,740

(A) Computed using average daily shares outstanding.

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

Legg Mason Income Trust, Inc.

44

Investment Grade

Primary Class:

	Years Ended December 31,
	2007			2006			2005			2004			2003
Net asset value, beginning of year	$	10.49		$	10.40		$	10.81		$	10.88		$	10.42
Investment operations:
Net investment income		.55	(A)		.51	(A)		.49			.49			.50
Net realized and unrealized gain/ (loss)		(.35	)		.09			(.31	)		.18			.53
Total from investment operations		.20			.60			.18			.67			1.03
Distributions from:
Net investment income		(.55	)		(.51	)		(.49	)		(.49	)		(.50	)
Net realized gain on investments		(.03	)		—	(B)		(.10	)		(.25	)		(.07	)
Total distributions		(.58	)		(.51	)		(.59	)		(.74	)		(.57	)
Net asset value, end of year	$	10.11		$	10.49		$	10.40		$	10.81		$	10.88
Total return		1.93	%		6.01	%		1.69	%		6.29	%		10.16	%
Ratios to Average Net Assets: (C)
Total expenses		1.28	%		1.33	%		1.30	%		1.27	%		1.28	%
Expenses net of waivers, if any		1.00	%		1.00	%		1.00	%		1.00	%		1.00	%
Expenses net of all reductions		1.00	%		1.00	%		1.00	%		1.00	%		1.00	%
Net investment income		5.32	%		4.98	%		4.64	%		4.47	%		4.62	%
Supplemental Data:
Portfolio turnover rate		47.2	%		65.7	%		51.1	%		74.9	%		78.2	%
Net assets, end of year (in thousands)	$	386,094		$	404,864		$	366,329		$	403,361		$	408,685

(A) Computed using average daily shares outstanding.

(B) Amount less than $.01 per share.

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

Legg Mason Income Trust, Inc.

45

Investment Grade

Institutional Class:

	Years Ended December 31,
	2007			2006			2005			2004			2003
Net asset value, beginning of year	$	10.49		$	10.41		$	10.82		$	10.89		$	10.43
Investment operations:
Net investment income		.61	(A)		.56	(A)		.55			.54			.55
Net realized and unrealized gain/(loss)		(.36	)		.08			(.31	)		.17			.53
Total from investment operations		.25			.64			.24			.71			1.08
Distributions from:
Net investment income		(.60	)		(.56	)		(.55	)		(.53	)		(.55	)
Net realized gain on investments		(.03	)		—	(B)		(.10	)		(.25	)		(.07	)
Total distributions		(.63	)		(.56	)		(.65	)		(.78	)		(.62	)
Net asset value, end of year	$	10.11		$	10.49		$	10.41		$	10.82		$	10.89
Total return		2.44	%		6.45	%		2.27	%		6.85	%		10.71	%
Ratios to Average Net Assets: (C)
Total expenses		.74	%		.74	%		.74	%		.74	%		.78	%
Expenses net of waivers, if any		.50	%		.50	%		.44	%		.47	%		.50	%
Expenses net of all reductions		.50	%		.50	%		.44	%		.47	%		.50	%
Net investment income		5.95	%		5.47	%		5.26	%		5.02	%		5.13	%
Supplemental Data:
Portfolio turnover rate		47.2	%		65.7	%		51.1	%		74.9	%		78.2	%
Net assets, end of year (in thousands)	$	48,272		$	11,894		$	20,441		$	10,216		$	5,895

(A) Computed using average daily shares outstanding.

(B) Amount less than $.01 per share.

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

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LEGG MASON FUNDS PRIVACY POLICY

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

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

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

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

• information we receive from consumer reporting agencies.

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

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

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

[This page is not part of the Prospectus]

Legg Mason Income Trust, Inc.

Legg Mason Income Trust, Inc.

The following additional information about the funds is available upon request and without charge:

Statement of Additional Information (SAI) – The SAI is filed with the SEC and is hereby incorporated by reference into (is considered part of) this Prospectus. The SAI provides further information and additional details about each fund and its policies. The SAI is available free of charge at the Legg Mason Funds’ website listed below.

Annual and Semi-Annual Reports – Additional information about each fund’s investments is available in the funds’ annual and semi-annual reports to shareholders. In the funds’ annual report, you will find a discussion of the market conditions and investment strategies that significantly affected each fund’s performance during its last fiscal year. These reports are available free of charge at the Legg Mason Funds’ website listed below.

To request the SAI or any reports to shareholders, or to obtain more information:

Primary Class	Institutional Class
Shareholders	Shareholders
Legg Mason Funds	Legg Mason Investor
c/o Boston Financial Data Services	Services – Institutional
P.O. Box 55214	c/o Boston Financial Data Services
Boston, Massachusetts 02205-8504	P.O. Box 8037
1-800-822-5544	Boston, Massachusetts 02206-8037
www.leggmason.com/individualinvestors	1-888-425-6432

Information about the funds, including the SAI, can be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-202-942-8090. Reports and other information about the funds are available on the EDGAR database on the SEC’s Internet site at www.sec.gov. Investors may also obtain this information, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-0102.

LMF-025 05/2008

KC SKU# 541744

Investment Company Act File Number 811-05029

LEGG MASON INCOME TRUST, INC.

Legg Mason Limited Duration Bond Portfolio

Legg Mason Investment Grade Income Portfolio

Primary Class and Institutional Class Shares

STATEMENT OF ADDITIONAL INFORMATION

May 1, 2007

as amended September 12, 2008

This Statement of Additional Information (“SAI”) is not a prospectus. It should be read in conjunction with the funds’ Prospectus dated May 1, 2008, which has been filed with the U.S. Securities and Exchange Commission (“SEC”). The funds’ financial statements, notes thereto and the report of their independent registered public accounting firm are incorporated by reference from the funds’ annual report to shareholders into (and are therefore legally part of) this SAI. A copy of the Prospectus or the annual report may be obtained without charge from the funds’ distributor, Legg Mason Investor Services, LLC (“LMIS”), by calling 1-800-822-5544 (Primary Class shares) or 1-888-425-6432 (Institutional Class shares).

Legg Mason Investor Services, LLC

100 Light Street

P.O. Box 1476

Baltimore, Maryland 21203-1476

(410) 539-0000 (800) 822-5544

TABLE OF CONTENTS

	Page
DESCRIPTION OF THE FUNDS	1
FUND POLICIES	1
INVESTMENT STRATEGIES AND RISKS	3
ADDITIONAL TAX INFORMATION	25
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION	28
VALUATION OF FUND SHARES	30
TAX-DEFERRED QUALIFIED PLANS—PRIMARY CLASS SHARES	33
MANAGEMENT OF THE FUNDS	34
THE FUNDS’ INVESTMENT ADVISER AND MANAGER	41
PORTFOLIO TRANSACTIONS AND BROKERAGE	47
THE FUNDS’ DISTRIBUTOR	49
CAPITAL STOCK INFORMATION	51
THE FUNDS’ CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING AGENT	51
THE CORPORATION’S LEGAL COUNSEL	51
THE CORPORATION’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	51
FINANCIAL STATEMENTS	52
RATINGS OF SECURITIES	A-1
PROXY VOTING POLICIES	B-1

No person has been authorized to give any information or to make any representations not contained in the Prospectus or this SAI in connection with the offerings made by the Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by any fund or its distributor. The Prospectus and this SAI do not constitute offerings by any fund or by the distributor in any jurisdiction in which such offerings may not lawfully be made.

DESCRIPTION OF THE FUNDS

Legg Mason Income Trust, Inc. (“Corporation”) is a diversified open-end management investment company established as a Maryland corporation on April 28, 1987. Legg Mason Limited Duration Bond Portfolio (“Limited Duration”) and Legg Mason Investment Grade Income Portfolio (“Investment Grade”) are separate series of the Corporation (each, a “fund”). Prior to August 31, 2004, Limited Duration was known as Legg Mason U.S. Government Intermediate Term Portfolio.

FUND POLICIES

The following information supplements the information concerning each fund’s investment objective, policies and limitations found in the Prospectus.

Limited Duration’s investment objective is to maximize total return, consistent with prudent investment management by investing to obtain an average modified duration of the fund that will range within 25% of the duration of the Merrill Lynch 1-3 Year Treasury Index. Investment Grade’s investment objective is to seek a high level of current income through investment in a diversified portfolio of debt securities. The investment objective of each fund is non-fundamental and may be changed by the Corporation’s Board of Directors (“Board of Directors”) without shareholder approval upon 60 days’ prior written notice to shareholders.

Each fund has adopted the following fundamental investment limitations, that cannot be changed except by a vote of its shareholders:

1. Borrowing: Each fund may not borrow money, except (1) in an amount not exceeding 33 ¹/3% of the fund’s total assets (including the amount borrowed) less liabilities (other than borrowings) or (2) by entering into reverse repurchase agreements or dollar rolls.

2. Underwriting: Each fund may not engage in the business of underwriting the securities of other issuers, except as permitted by the Investment Company Act of 1940, as amended (“1940 Act”), and the rules and regulations promulgated thereunder, as such statute, rules, and regulations are amended from time to time or are interpreted from time to time by the SEC or SEC staff or to the extent that the fund may be permitted to do so by exemptive order or other relief from the SEC or SEC staff (collectively, “1940 Act Laws, Interpretations and Exemptions”). This restriction does not prevent the fund from engaging in transactions involving the acquisition, disposition or resale of portfolio securities, regardless of whether the fund may be considered to be an underwriter under the Securities Act of 1933, as amended (the “1933 Act”).

3. Loans: Each fund may not lend money or other assets, except to the extent permitted by the 1940 Act Laws, Interpretations and Exemptions. This restriction does not prevent the fund from purchasing debt obligations in pursuit of its investment program, or for defensive or cash management purposes, entering into repurchase agreements, loaning its portfolio securities to financial intermediaries, institutions or institutional investors, or investing in loans, including assignments and participation interests.

4. Senior Securities: Each fund may not issue senior securities, except as permitted under the 1940 Act Laws, Interpretations and Exemptions.

5. Real Estate: Each fund may not purchase or sell real estate unless acquired as a result of ownership of securities or other instruments. This restriction does not prevent the fund from investing in issuers that invest, deal, or otherwise engage in transactions in or hold real estate or interests therein, investing in instruments that are secured by real estate or interests therein, or exercising rights under agreements relating to such securities, including the right to enforce security interests.

1

6. Commodities: Each fund may not purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments. This restriction does not prevent the fund from engaging in transactions involving foreign currency, futures contracts and options, forward contracts, swaps, caps, floors, collars, securities purchased or sold on a forward-commitment or delayed-delivery basis or other similar financial instruments, or investing in securities or other instruments that are secured by physical commodities.

7. Concentration: Each fund may not make any investment if, as a result, the fund’s investments will be concentrated (as that term may be defined or interpreted by the 1940 Act Laws, Interpretations and Exemptions) in any one industry. This restriction does not limit the fund’s investment in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities and repurchase agreements with respect thereto, or securities of municipal issuers.

Although not a part of each fund’s fundamental investment limitation on concentration, it is the current position of the SEC staff that a fund’s investments are concentrated in an industry when 25% or more of the fund’s net assets are invested in issuers whose principal business is in that industry.

The foregoing fundamental investment limitations may be changed only by “the vote of a majority of the outstanding voting securities” of the fund, a term defined in the 1940 Act to mean the vote (a) of 67% or more of the voting securities present at a meeting, if the holders of more than 50% of the outstanding voting securities of the fund are present, or (b) of more than 50% of the outstanding voting securities of the fund, whichever is less.

Each fund is diversified under the 1940 Act. Although not a part of each fund’s fundamental investment restrictions, the 1940 Act currently states that a fund is diversified if it invests at least 75% of the value of its total assets in cash and cash items (including receivables), U.S. Government securities, securities of other investment companies and other securities limited in respect of any one issuer to (1) no more than 5% of the value of the fund’s total assets and (2) no more than 10% of the outstanding voting securities of such issuer. Each fund may only change to non-diversified status with the affirmative vote of the fund’s shareholders.

Unless otherwise stated, each fund’s investment policies and limitations are non-fundamental and may be changed by the Board of Directors without shareholder approval. The following are some of the non-fundamental investment limitations that each fund currently observes:

1. Borrowing: Each fund will not borrow for investment purposes an amount in excess of 5% of its total assets.

2. Illiquid Securities: Each fund may invest up to 15% of its net assets in illiquid securities.

3. Short Sales: Each fund may not sell securities short (unless it owns or has the right to obtain securities equivalent in kind and amount to the securities sold short). This restriction does not prevent the fund from entering into short positions in foreign currency, futures contracts, options, forward contracts, swaps, caps, floors, collars, securities purchased or sold on a forward-commitment or delayed-delivery basis or other financial instruments.

4. Margin Purchases: Each fund may not purchase securities on margin, except that (1) the fund may obtain such short-term credits as are necessary for the clearance of transactions and (2) the fund may make margin payments in connection with foreign currency, futures contracts, options, forward contracts, swaps, caps, floors, collars, securities purchased or sold on a forward-commitment or delayed-delivery basis or other financial instruments.

2

Except as otherwise stated, if a fundamental or non-fundamental percentage limitation set forth in the Prospectus or this SAI is complied with at the time an investment is made, a later increase or decrease in percentage resulting from a change in the relevant parameters will not be considered to be outside the limitation. An investment will be deemed to have been made at the time a fund enters into a binding commitment to complete the investment. Each fund will monitor the level of borrowing and in its portfolio and will make necessary adjustments to maintain the required asset coverage. If, due to subsequent fluctuations in value or any other reasons, the value of a fund’s illiquid securities exceeds the percentage limitation applicable at the time of acquisition, the fund will consider what actions, if any, are necessary to maintain adequate liquidity.

Each fund may not change its policy to invest at least 80% of its net assets, plus any borrowing for investment purposes, in the type of securities suggested by its name as described in the prospectus (“Named Investments”) unless it provides shareholders with at least 60 days’ written notice of such change. Each fund will consider an instrument, including a synthetic instrument, to be a Named Investment if, in the judgment of the adviser, it has economic characteristics similar to a Named Investment. Such instruments would include, but are not limited to, futures contracts and related options, mortgage-related securities, asset-backed securities, reverse repurchase agreements and dollar rolls.

INVESTMENT STRATEGIES AND RISKS

The following apply to each fund, unless otherwise indicated:

Yield Factors and Ratings

Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (“S&P”), Moody’s Investors Service, Inc. (“Moody’s”) and other nationally recognized statistical rating organizations (“NRSROs”) are private services that provide ratings of the credit quality of obligations. Investment grade bonds are generally considered to be those bonds rated at the time of purchase within one of the four highest grades assigned by S&P or Moody’s. A fund may use these ratings in determining whether to purchase, sell or hold a security. These ratings represent Moody’s and S&P’s opinions as to the quality of the obligations which they undertake to rate. It should be emphasized, however, that ratings are general and are not absolute standards of quality. Consequently, obligations with the same maturity, interest rate and rating may have different market prices. A description of the ratings assigned to corporate debt obligations by S&P and Moody’s is included in Appendix A.

Credit rating agencies attempt to evaluate the safety of principal and interest payments and do not evaluate the risks of fluctuations in market value. Also, rating agencies may fail to make timely changes in credit ratings in response to subsequent events, so that an issuer’s current financial condition may be better or worse than the rating indicates. Subsequent to its purchase by a fund, an issue of obligations may cease to be rated or its rating may be reduced below the minimum rating required for purchase by that fund. The adviser will consider such an event in determining whether a fund should continue to hold the obligation, but is not required to dispose of it. If one rating agency has rated a security A or better and another agency has rated it below A, the fund’s adviser may rely on the higher rating in determining to purchase or retain the security. Bonds rated A may be given a “+” or “-” by a rating agency. Bonds denominated A, A+ or A- are considered to be included in the rating A.

In addition to ratings assigned to individual bond issues, the adviser will analyze interest rate trends and developments that may affect individual issuers, including factors such as liquidity, profitability and asset quality. The yields on bonds and other debt securities in which a fund invests are dependent on a variety of factors, including general money market conditions, general conditions in the bond market, the financial condition of the issuer, the size of the offering, the maturity of the obligation and its rating. There may be a wide variation in the quality of bonds, both within a particular classification and between classifications. A bond issuer’s obligations are subject to the provisions of bankruptcy, insolvency and other laws affecting the rights and remedies of bond holders or other creditors of an issuer; litigation or other conditions may also adversely affect the power or ability of bond issuers to meet their obligations for the payment of interest and principal.

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Securities Lending

Each fund may lend portfolio securities to brokers or dealers in corporate or government securities, banks or other recognized institutional borrowers of securities, provided that cash or equivalent collateral, equal to at least 100% of the market value of the securities loaned, is continuously maintained by the borrower with the fund’s custodian. During the time the securities are on loan, the borrower will pay the fund an amount equivalent to any dividends or interest paid on such securities, and the fund may invest the cash collateral and earn income, or it may receive an agreed upon amount of interest income from the borrower who has delivered equivalent collateral. When a fund loans a security to another party, it runs the risk that the other party will default on its obligation, and that the value of the collateral will decline before the fund can dispose of it.

These loans are subject to termination at the option of the fund or the borrower. Each fund may pay reasonable administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash or equivalent collateral to the borrower or placing broker. In the event of the bankruptcy of the other party to a securities loan, a fund could experience delays in recovering the securities lent. To the extent that, in the meantime, the value of the collateral had decreased or the securities that were lent increased, a fund could experience a loss.

Each fund will enter into securities loan transactions only with financial institutions that the adviser believes to present minimal risk of default during the term of the loan. Each fund does not have the right to vote securities on loan, but would terminate the loan and regain the right to vote if that were considered important with respect to the investment. The risks of securities lending are similar to those of repurchase agreements. Each fund presently does not intend to loan more than 5% of its portfolio securities at any given time.

Repurchase Agreements

When cash is temporarily available, or for temporary defensive purposes, each fund may invest without limit in repurchase agreements and U.S. dollar denominated money market instruments, including high-quality short-term debt securities. A repurchase agreement is an agreement under which either U.S. Government obligations or other high-quality liquid debt securities are acquired from a securities dealer or bank subject to resale at an agreed-upon price and date. The securities are held for each fund by a custodian bank as collateral until resold and will be supplemented by additional collateral if necessary to maintain a total value equal to or in excess of the value of the repurchase agreement. Each fund bears a risk of loss if the other party to a repurchase agreement defaults on its obligations and the fund is delayed or prevented from exercising its rights to dispose of the collateral securities, which may decline in value in the interim. The funds will enter into repurchase agreements only with financial institutions determined by each fund’s adviser to present minimal risk of default during the term of the agreement.

Repurchase agreements are usually for a term of one week or less, but may be for longer periods. Repurchase agreements maturing in more than seven days may be considered illiquid. A fund will not enter into repurchase agreements of more than seven days’ duration if more than 15% of its net assets would be invested in such agreements and other illiquid investments. To the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, a fund might suffer a loss. If bankruptcy proceedings are commenced with respect to the seller of the security, realization upon the collateral by a fund could be delayed or limited. However, each fund’s adviser monitors the creditworthiness of parties with which the fund may enter into repurchase agreements to minimize the prospect of such parties becoming involved in bankruptcy proceedings within the time frame contemplated by the repurchase agreement.

When a fund enters into a repurchase agreement, it will obtain as collateral from the other party securities equal in value to at least the repurchase amount including the interest factor. Such securities will be held

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for that fund by a custodian bank or an approved securities depository or book-entry system. Each fund may also engage in “tri-party” repurchase agreements, where an unaffiliated third party custodian maintains accounts to hold collateral for the fund and its counterparties.

In determining its status as a diversified fund, each fund, in accordance with SEC rules and staff positions, considers investment in a fully collateralized repurchase agreement to be equivalent to investment in the collateral.

Reverse Repurchase Agreements and Dollar Rolls

A reverse repurchase agreement is a portfolio management technique in which a fund temporarily transfers possession of a portfolio instrument to another person, such as a financial institution or broker-dealer, in return for cash. At the same time, the fund agrees to repurchase the instrument at an agreed-upon time (normally within seven days) and price, which includes an amount essentially equivalent to an interest payment.

A fund may engage in reverse repurchase agreements as a means of raising cash to satisfy redemption requests or for other temporary or emergency purposes without the necessity of selling portfolio investments. A fund may also engage in reverse repurchase agreements in order to reinvest the proceeds in other securities or repurchase agreements. Such a use of reverse repurchase agreements would constitute a form of leverage.

The funds may also enter into dollar roll transactions in which a fund sells a fixed income security for delivery in the current month and simultaneously contracts to purchase substantially similar (same type, coupon and maturity) securities at an agreed upon future time. By engaging in the dollar roll transaction the fund forgoes principal and interest paid on the security that is sold, but receives the difference between the current sales price and the forward price for the future purchase. The fund would also be able to invest the proceeds of the securities sold.

When a fund reinvests the proceeds of a reverse repurchase agreement or dollar roll in other securities, any fluctuations in the market value of either the securities the fund is committed to purchase from the other party or the securities in which the proceeds are invested would affect the market value of the fund’s assets. As a result, such transactions could increase fluctuation in the fund’s net asset value. If a fund reinvests the proceeds of the agreement or dollar roll at a rate lower than the cost of the agreement or dollar roll, engaging in the agreement or dollar roll will lower the fund’s yield.

Any reverse repurchase agreement or dollar roll that extends for more than seven days may be considered illiquid and, if so, would be subject to a fund’s limit on investments in illiquid securities of 15% of net assets.

To avoid potential leveraging effects of reverse repurchase agreements and dollar rolls, each fund will segregate cash or other appropriate liquid securities with a value at least equal to the fund’s obligation under the agreements or dollar rolls.

Although the funds do not consider dollar rolls to be borrowings within the meaning of their non-fundamental investment limitations, certain regulators may consider dollar rolls as borrowings for some purposes.

Warrants

Although not a fundamental policy subject to shareholder vote, each fund may not invest more than 5% of the value of its net assets, taken at the lower of cost or market value, in warrants or invest more than 2% of the value of such net assets in warrants not listed on the New York or American Stock Exchanges. For purposes of this restriction, the term “warrants” does not include options on securities, stock or bond indices, foreign currencies or futures contracts.

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Mortgage-Related Securities

Mortgage-related securities represent an ownership interest in a pool of residential mortgage loans. These securities are designed to provide monthly payments of interest and, in most instances, principal to the investor. The mortgagor’s monthly payments to his/her lending institution are “passed-through” to investors such as a fund. Most issuers or poolers provide guarantees of payments, regardless of whether or not the mortgagor actually makes the payment. The guarantees made by issuers or poolers are backed by various forms of credit, insurance and collateral. They may not extend to the full amount of the pool.

Pools consist of whole mortgage loans or participations in loans. The majority of these loans are made to purchasers of one- to four-family homes. The terms and characteristics of the mortgage instruments are generally uniform within a pool but may vary among pools. For example, in addition to fixed-rate, fixed-term mortgages, a fund may purchase pools of variable-rate mortgages, growing-equity mortgages, graduated-payment mortgages and other types.

All poolers apply standards for qualification to lending institutions which originate mortgages for the pools. Poolers also establish credit standards and underwriting criteria for individual mortgages included in the pools. In addition, many mortgages included in pools are insured through private mortgage insurance companies.

The majority of mortgage-related securities currently available are issued by governmental or government-related organizations formed to increase the availability of mortgage credit. The largest government-sponsored issuer of mortgage-related securities is Government National Mortgage Association (“GNMA”). GNMA certificates (“GNMAs”) are interests in pools of mortgage loans insured by the Federal Housing Administration or by the Farmer’s Home Administration (“FHA”) or guaranteed by the Veterans Administration (“VA”). Fannie Mae and Freddie Mac each issue pass-through securities that they respectively guarantee as to principal and interest. Securities issued by GNMA and Fannie Mae are fully modified pass-through securities, i.e., the timely payment of principal and interest is guaranteed by the issuer. Freddie Mac securities are modified pass-through securities, i.e., the timely payment of interest is guaranteed by Freddie Mac, principal is passed through as collected but payment thereof is guaranteed not later than one year after it becomes payable.

The average life of mortgage-related securities varies with the maturities and the nature of the underlying mortgage instruments. For example, GNMAs tend to have a longer average life than Freddie Mac participation certificates (“PCs”) because there is a tendency for the conventional and privately insured mortgages underlying Freddie Mac PCs to repay at faster rates than the FHA and VA loans underlying GNMAs. In addition, the term of a security may be shortened by unscheduled or early payments of principal and interest on the underlying mortgages through refinances or otherwise. The occurrence of mortgage prepayments is affected by various factors, including the level of interest rates, general economic conditions, the location and age of the mortgaged property and other social and demographic conditions.

In determining the dollar-weighted average maturity of a fund’s portfolio, the adviser will follow industry practice in assigning an average life to the mortgage-related securities of the fund unless the interest rate on the mortgages underlying such securities is such that a different prepayment rate is likely. For example, where a GNMA has a high interest rate relative to the market, that GNMA is likely to have a shorter overall maturity than a GNMA with a market rate coupon. Moreover, the adviser may deem it appropriate to change the projected average life for a fund’s mortgage-related securities as a result of fluctuations in market interest rates and other factors.

The average life of securities representing interests in pools of mortgage loans is likely to be substantially less than the original maturity of the mortgage pools as a result of prepayments or foreclosures of such mortgages. Prepayments are passed through to the registered holder of the mortgage-related security with the regular monthly payments of principal and interest, and have the effect of reducing future payments. To the extent the mortgages underlying a

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security representing an interest in a pool of mortgages are prepaid, a fund may experience a loss (if the price at which the respective security was acquired by the fund was at a premium over par, which represents the price at which the security will be redeemed upon prepayment) or a gain (if the price at which the respective security was acquired by the fund was at a discount from par). In addition, prepayments of such securities held by a fund will reduce the share price of the fund to the extent the market value of the securities at the time of prepayment exceeds their par value, and will increase the share price of the fund to the extent the par value of the securities exceeds their market value at the time of prepayment. Prepayments may occur with greater frequency in periods of declining mortgage rates because, among other reasons, it may be possible for mortgagors to refinance their outstanding mortgages at lower interest rates.

Although the market for mortgage-related securities issued by private organizations is becoming increasingly liquid, such securities may not be readily marketable. Each fund will not purchase mortgage-related securities for which there is no established market or any other investments which the adviser deems to be illiquid if, as a result, more than 15% of the value of the fund’s net assets would be invested in such illiquid securities and investments.

Step Down Preferred Securities

Some of the securities purchased by Investment Grade may also include step down perpetual preferred securities. These securities are issued by a real estate investment trust (“REIT”) making a mortgage loan to a single borrower. The dividend rate paid by these securities is initially relatively high, but “steps down” yearly. The securities are subject to call if the REIT suffers an unfavorable tax event and to tender by the REIT’s equity holders in the 10th year; both events could be on terms unfavorable to the holder of the preferred securities. The value of these securities will be affected by changes in the value of the underlying mortgage loan. The REIT is not diversified, and the value of the mortgaged property may not cover its obligations. Step down perpetual preferred securities are considered restricted securities under the 1933 Act.

Asset-Backed Securities

Asset-backed securities are structurally similar to mortgage-backed securities, but are secured by an interest in a different type of receivable. Asset-backed securities therefore present certain risks that are not presented by mortgage-related debt securities or other securities in which a fund may invest. Primarily, these securities do not have the benefit of the same security interest in the related collateral.

Asset-backed securities represent direct or indirect participations in, or are secured by and payable from, pools of assets such as motor vehicle installment sales contracts, installment loan contracts, leases of various types of real and personal property, and receivables from revolving credit agreements. The value of such securities partly depends on loan repayments by individuals, which may be adversely affected during general downturns in the economy. Like mortgage-related securities, asset-backed securities are subject to the risk of prepayment. The risk that recovery on repossessed collateral might be unavailable or inadequate to support payments on asset-backed securities, however, is greater than in the case of mortgage-backed securities.

Credit card receivables, for example, are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have a proper security interest in all of the obligations backing such receivables. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on these securities. Because asset-backed securities are relatively new, the market experience in these securities is limited and the market’s ability to sustain liquidity through all phases of the market cycle has not been tested.

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U.S. Government Obligations

U.S. Government securities include (1) U.S. Treasury bills (maturity of one year or less), U.S. Treasury notes (maturity of one to ten years) and U.S. Treasury bonds (maturities generally greater than ten years) and (2) obligations issued or guaranteed by U.S. Government agencies or instrumentalities that are supported by any of the following: (a) the full faith and credit of the U.S. Government (such as GNMA certificates); (b) the right of the issuer to borrow an amount limited to a specific line of credit from the U.S. Government (such as obligations of the Federal Home Loan Banks); (c) the discretionary authority of the U.S. Government to purchase certain obligations of agencies or instrumentalities (such as securities issued by Fannie Mae); or (d) only the credit of the instrumentality (such as securities issued by Freddie Mac). In the case of obligations not backed by the full faith and credit of the United States, a fund must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment and may not be able to assert a claim against the United States itself in the event the agency or instrumentality does not meet its commitments. Neither the U.S. Government nor any of its agencies or instrumentalities guarantees the market value of the securities they issue. Therefore, the market value of such securities will fluctuate in response to changes in interest rates.

Variable and Floating Rate Securities

Variable and floating rate securities provide for a periodic adjustment in the interest rate paid on the obligations. The terms of such obligations provide that interest rates are adjusted periodically based upon an interest rate adjustment index as provided in the respective obligations. The adjustment intervals may be regular, and range from daily up to annually, or may be event based, such as based on a change in the prime rate.

A fund may invest in floating rate debt instruments (“floaters”) and engage in credit-spread trades. The interest rate on a floater is a variable rate that is tied to another interest rate, such as a corporate bond index or Treasury bill rate. The interest rate on a floater resets periodically, typically every six months. While, because of the interest rate reset feature, floaters provide a fund with a certain degree of protection against rising interest rates, the fund will participate in any declines in interest rates as well. A credit spread trade is an investment position relating to a difference in the prices or interest rates of two bonds or other securities or currencies, where the value of the investment position is determined by movements in the difference between the prices or interest rates, as the case may be, of the respective securities or currencies.

A fund may also invest in inverse floating rate debt instruments (“inverse floaters”). The interest rate on an inverse floater resets in the opposite direction from the market rate of interest to which the inverse floater is indexed. An inverse floating rate security may exhibit greater price volatility than a fixed rate obligation of similar credit quality.

A floater may be considered to be leveraged to the extent that its interest rate varies by a magnitude that exceeds the magnitude of the change in the index rate of interest. The higher degree of leverage inherent in some floaters is associated with greater volatility in their market values.

With respect to purchasable variable and floating rate instruments, the fund’s adviser will consider the earning power, cash flows and liquidity ratios of the issuers and guarantors of such instruments and, if the instruments are subject to a demand feature, will monitor their financial status to meet payment on demand. Such instruments may include variable amount master demand notes that permit the indebtedness thereunder to vary in addition to providing for periodic adjustments in the interest rate. The absence of an active secondary market with respect to particular variable and floating rate instruments could make it difficult for the fund to dispose of a variable or floating rate note if the issuer defaulted on its payment obligation or during periods that the fund is not entitled to exercise its demand rights, and the fund could, for these or other reasons, suffer a loss with respect to such instruments. In determining average-weighted portfolio maturity, an instrument will be deemed to have a maturity equal to either the period remaining until the next interest rate adjustment or the time the fund can recover payment of principal as specified in the instrument, depending on the type of instrument involved.

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Commercial Paper and Other Short-Term Investments

A fund may purchase commercial paper issued pursuant to the private placement exemption in Section 4(2) of the Securities Act of 1933. Section 4(2) paper is restricted as to disposition under the federal securities laws in that any resale must similarly be made in an exempt transaction. The fund may or may not regard such securities as illiquid, depending on the circumstances of each case.

A fund may also invest in obligations (including certificates of deposit, demand and time deposits and bankers’ acceptances) of U.S. banks and savings and loan institutions. While domestic bank deposits are insured by an agency of the U.S. Government, a fund will generally assume positions considerably in excess of the insurance limits.

Corporate Debt Securities

Corporate debt securities are bonds or notes issued by corporations and other business organizations, including business trusts, in order to finance their short-term credit needs. Corporate debt securities include commercial paper, which consists of short-term (usually from 1 to 270 days) unsecured promissory notes issued by corporations in order to finance their current operations.

Corporate debt securities may pay fixed or variable rates of interest, or interest at a rate contingent upon some other factor, such as the price of some commodity. These securities may be convertible into preferred or common equity, or may be bought as part of a unit containing common stock. In selecting corporate debt securities for a fund, the adviser reviews and monitors the creditworthiness of each issuer and issue. The adviser also analyzes interest rate trends and specific developments that it believes may affect individual issuers.

Callable Debt Securities

A debt security may be callable, i.e., subject to redemption at the option of the issuer at a price established in the security’s governing instrument. If a debt security held by a fund is called for redemption, that fund will be required to permit the issuer to redeem the security or sell it to a third party. Either of these actions could have an adverse effect on a fund’s ability to achieve its investment objectives.

Inflation-Indexed Securities

The funds may also invest in U.S. Treasury securities whose principal value is adjusted daily in accordance with changes to the Consumer Price Index (also known as “Treasury Inflation-Indexed Securities”). Interest is calculated on the basis of the adjusted principal value on the payment date. The principal value of Treasury Inflation-Indexed Securities declines in periods of deflation, but holders at maturity receive no less than par. If inflation is lower than expected during the period a fund holds the security, the fund may earn less on it than on a conventional bond. Any increase in principal value is taxable in the year the increase occurs, even though the holders do not receive cash representing the increase at that time. Changes in market interest rates from causes other than inflation will likely affect the market prices of Treasury Inflation-Indexed Securities in the same manner as conventional bonds.

Preferred Stocks and Convertible Securities

A preferred stock pays dividends at a specified rate and has preference over common stock in the payment of dividends and the liquidation of an issuer’s assets, but is junior to the debt securities of the issuer in those same respects. The market prices of preferred stocks are subject to changes in interest rates and are more sensitive to changes in an issuer’s creditworthiness than are the prices of debt securities. Shareholders of preferred stock may suffer a loss of value if dividends are not paid. Under ordinary circumstances, preferred stock does not carry voting rights.

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A convertible security is a bond, debenture, note, preferred stock or other security that may be converted into or exchanged for a prescribed amount of common stock of the same or a different issuer within a particular period of time at a specified price or formula. A convertible security entitles the holder to receive interest paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Before conversion or exchange, convertible securities ordinarily provide a stream of income with generally higher yields than those of common stocks of the same or similar issuers, but lower than the yield of nonconvertible debt. Convertible securities are usually subordinated to comparable-tier non-convertible securities, but rank senior to common stock in a corporation’s capital structure.

The value of a convertible security is a function of (1) its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege and (2) its worth, at market value, if converted or exchanged into the underlying common stock. The price of a convertible security often reflects variations in the price of the underlying common stock in a way that non-convertible debt does not. A convertible security may be subject to redemption at the option of the issuer at a price established in the convertible security’s governing instrument, which may be less than the ultimate conversion or exchange value.

Many convertible securities are rated below investment grade or, if unrated, are considered to be of comparable quality by the adviser.

Investment Grade does not intend to exercise conversion rights for any convertible security it owns and does not intend to hold any security which has been subject to conversion.

Lower-Rated Securities

Non-investment grade securities, i.e., securities rated below Baa by Moody’s and/or BBB by S&P or comparable ratings of other NRSROs or unrated securities of comparable quality, are described as “speculative” by Moody’s and S&P and may be subject to greater market fluctuations and greater risk of loss of income or principal, including a greater possibility of default or bankruptcy of the issuer of such securities, than are more highly rated debt securities. Such securities are commonly referred to as “junk bonds.” A fund’s adviser seeks to minimize the risks of investing in all securities through diversification, in-depth credit analysis and attention to current developments in interest rates and market conditions and will monitor the ratings of securities held by the funds and the creditworthiness of their issuers. If the rating of a security in which a fund has invested falls below the minimum rating in which the fund is permitted to invest, the fund will either dispose of that security within a reasonable time or hold the security for so long as the fund’s adviser determines appropriate for that fund, having due regard for market conditions, tax implications and other applicable factors.

A lower-rated debt security may be callable, i.e., subject to redemption at the option of the issuer at a price established in the security’s governing instrument. If a debt security held by a fund is called for redemption, the fund will be required to permit the issuer to redeem the security or sell it to a third party. Either of these actions could have an adverse effect on a fund’s ability to achieve its investment objective because, for example, the fund may be able to reinvest the proceeds only in securities with lower yields or may receive a price upon sale that is lower than it would have received in the absence of the redemption. If a fund experiences unexpected net redemptions, it may be forced to sell its higher-rated securities, resulting in a decline in the overall credit quality of the fund’s investment portfolio and increasing the exposure of the fund to the risks of lower-rated securities.

At certain times in the past, the prices of many lower-rated securities declined, indicating concerns that issuers of such securities might experience financial difficulties. At those times, the yields on lower-rated securities rose dramatically, reflecting the risk that holders of such securities could lose a substantial portion of their value as a result of the issuers’ financial restructuring or default. There can be no assurance that such declines will not recur.

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The ratings of Moody’s and S&P represent the opinions of those agencies as to the quality of the debt securities that they rate. Such ratings are relative and subjective, and are not absolute standards of quality. Unrated debt securities are not necessarily of lower quality than rated securities, but they may not be attractive to as many buyers. If securities are rated investment grade by one rating organization and below investment grade by others, a fund’s investment adviser may rely on the rating that it believes is more accurate and may consider the instrument to be investment grade. The adviser will consider a security’s quality and credit rating when determining whether such security is an appropriate investment. Subject to its investment objective, policies and applicable law, a fund may purchase a security with the lowest rating.

The market for lower-rated securities may be thinner and less active than that for higher-rated securities, which can adversely affect the prices at which these securities can be sold, and may make it difficult for a fund to obtain market quotations daily. If market quotations are not available, these securities will be valued by a method that the Board of Directors believes accurately reflects fair market value. Judgment may play a greater role in valuing lower-rated debt securities than is the case with respect to securities for which a broader range of dealer quotations and last-sale information is available. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may also decrease the values and liquidity of lower-rated securities, especially in a thinly traded market.

Although the prices of lower-rated bonds are generally less sensitive to interest rate changes than are higher-rated bonds, the prices of lower-rated bonds may be more sensitive to adverse economic changes and developments regarding the individual issuer. When economic conditions appear to be deteriorating, medium- to lower-rated securities may decline in value due to heightened concern over credit quality, regardless of the prevailing interest rates. Investors should carefully consider the relative risks of investing in high yield securities and understand that such securities are not generally meant for short-term investing.

Adverse economic developments can disrupt the market for lower-rated securities and severely affect the ability of issuers, especially highly leveraged issuers, to service their debt obligations or to repay their obligations upon maturity, which may lead to a higher incidence of default on such securities. Lower-rated securities are especially affected by adverse changes in the industries in which the issuers are engaged and by changes in the financial condition of the issuers. Highly leveraged issuers may also experience financial stress during periods of rising interest rates. In addition, the secondary market for lower-rated securities, which is concentrated in relatively few market makers, may not be as liquid as the secondary market for more highly rated securities. As a result, a fund could find it more difficult to sell these securities without adversely affecting the market price, or may be able to sell the securities only at prices lower than if such securities were widely traded.

Zero Coupon Bonds

Zero coupon bonds are debt obligations that make no fixed interest payments but instead are issued at a significant discount from face value. Like other debt securities, the market price can reflect a premium or discount, in addition to the original issue discount, reflecting the market’s judgment as to the issuer’s creditworthiness, the interest rate or other similar factors. The original issue discount approximates the total amount of the interest the bonds will accrue and compound over the period until maturity or the first interest payment date at a rate of interest reflecting the market rate of the security at the time of issuance. Because zero coupon bonds do not make periodic interest payments, the prices of those bonds can be very volatile when market interest rates change.

The original issue discount on zero coupon bonds must be included in a fund’s gross income ratably as it accrues. Accordingly, to continue to qualify for tax treatment as a regulated investment company and to avoid a certain excise tax, a fund may be required to distribute as a dividend an amount that is greater than the total amount of cash it actually receives. See “Additional Tax Information.” These distributions must be made from a fund’s cash assets or, if necessary, from the proceeds of sales of portfolio securities. Such sales could occur at a time that would be disadvantageous to a fund and when the fund would not otherwise choose to dispose of the assets.

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Pay-In-Kind Securities

Limited Duration may invest in pay-in-kind securities, which have some characteristics similar to those of zero coupon securities, but interest on such securities generally is paid in the form of the issuer’s obligations of the same type rather than cash.

Trust Originated Preferred Securities

The funds may also invest in trust originated preferred securities, a type of security issued by financial institutions such as banks and insurance companies. Trust originated preferred securities represent interests in a trust formed by a financial institution. The trust sells preferred shares and invests the proceeds in notes issued by the financial institution. These notes may be subordinated and unsecured. Distributions on the trust originated preferred securities match the interest payments on the notes; if no interest is paid on the notes, the trust will not make current payments on its preferred securities. Trust originated preferred securities currently enjoy favorable tax treatment for the issuers. If the tax characterization of these securities were to change adversely, they could be redeemed by the issuers, which could result in a loss to a fund. In addition, some trust originated preferred securities are restricted securities available only to qualified institutional buyers under Rule 144A.

Illiquid Investments and Restricted Securities

Each fund may invest up to 15% of its net assets in illiquid investments. For this purpose, “illiquid investments” are those that cannot be sold or disposed of within seven days for approximately the price at which the fund values the security. Illiquid investments may include repurchase agreements with terms of greater than seven days and restricted securities other than those the adviser has determined are liquid pursuant to guidelines established by the Board of Directors and securities involved in swap, cap, floor, and collar transactions, and over-the-counter (“OTC”) options and their underlying collateral. Due to the absence of an active trading market, a fund may have difficulty valuing or disposing of illiquid investments promptly. Judgment plays a greater role in valuing illiquid securities than those for which a more active market exists.

As described under “Private Placements,” Limited Duration and Investment Grade are also subject to a 5% limit on investments in restricted securities. Restricted securities may be sold only in privately negotiated transactions, pursuant to a registration statement filed under the 1933 Act or pursuant to an exemption from registration, such as Rule 144 or Rule 144A under the 1933 Act. A fund may be required to pay part or all of the costs of such registration, and a considerable period may elapse between the time a decision is made to sell a restricted security and the time the registration statement becomes effective.

SEC regulations permit the sale of certain restricted securities to qualified institutional buyers. The adviser, acting pursuant to guidelines established by the Board of Directors, may determine that certain restricted securities qualified for trading on this market are liquid. If qualified institutional investors become uninterested in this market for a time, restricted securities in a fund’s portfolio may adversely affect the fund’s liquidity.

The assets used as cover for OTC options written by a fund will be considered illiquid unless the OTC options are sold to qualified dealers who agree that the fund may repurchase any OTC option it writes at a maximum price to be calculated by a formula set forth in the option agreement. The cover for an OTC option written subject to this procedure would be considered illiquid only to the extent that the maximum repurchase price under the formula exceeds the intrinsic value of the option.

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Senior Securities

The 1940 Act prohibits the issuance of senior securities by a registered open-end fund with one exception. Such a fund may borrow from banks, provided that immediately after any such borrowing there is an asset coverage of at least 300% for all borrowings of the fund. Each fund’s non-bank borrowings for temporary purposes only, and in an amount not exceeding 5% of the value of the total assets of the fund at the time the borrowing is made, are not deemed to be an issuance of a senior security.

There are various investment techniques that may give rise to an obligation of a fund to make a future payment about which the SEC has stated it would not raise senior security concerns, provided the fund complies with SEC guidance regarding cover for these investment techniques. Such investment techniques include, among other things, when-issued securities, futures and forward contracts, short-options positions, and repurchase agreements.

Municipal Obligations

The two principal classifications of municipal obligations are “general obligation” and “revenue” bonds. “General obligation” bonds are secured by the issuer’s pledge of its faith, credit and taxing power. “Revenue” bonds are payable only from the revenues derived from a particular facility or class of facilities or from the proceeds of a special excise tax or other specific revenue source such as the corporate user of the facility being financed. Private activity bonds (“PABs”) are usually revenue bonds and are not payable from the unrestricted revenues of the issuer. The credit quality of PABs is usually directly related to the credit standing of the corporate user of the facilities. In addition, certain types of PABs are issued by or on behalf of public authorities to finance various privately operated facilities, including certain pollution control facilities, convention or trade show facilities, and airport, mass transit, port or parking facilities. A third type of municipal obligation popular in some areas is the municipal lease obligation, which is issued by a state or local government to acquire land, equipment or facilities and typically is not fully backed by the municipality’s credit. If funds are not appropriated for the following year’s lease payments, a lease may terminate, with the possibility of default on the lease obligation and significant loss to a fund.

Securities of Other Investment Companies

The funds may invest in the securities of other investment companies, including open-end mutual funds, closed-end funds, unit investment trusts, private investment companies and offshore investment companies. An investment in an investment company involves risks similar to those of investing directly in the investment company’s portfolio securities, including the risk that the value of the portfolio securities may fluctuate in accordance with changes in the financial condition of their issuers, the value of stocks and other securities generally, and other market factors.

In addition, investing in the securities of other investment companies involves certain other risks, costs, and expenses for that fund. If a fund invests in another investment company, the fund will indirectly bear its proportionate share of the advisory fees and other operating expenses of such investment company, which are in addition to the advisory fees and other operational expenses incurred by the fund. In addition, a fund could incur a sales charge in connection with purchasing an investment company security or a redemption fee upon the redemption of such security. An investment in the shares of a closed-end investment company may also involve the payment of a substantial premium over, while sales of such shares may be made at a substantial discount from, the net asset value of the issuers’ portfolio securities.

The funds may also invest in the securities of private investment companies, including “hedge funds.” As with investments in other investment companies, if a fund invests in a private investment company, the fund will be charged its proportionate share of the advisory fees including incentive compensation and other operating expenses of such company. These fees, which can be substantial, would be in addition to the advisory fees and other operating expenses incurred by the fund. In addition, private investment companies are not registered with the SEC and may not be registered with any other regulatory authority. Accordingly, they are not subject to certain regulatory requirements and oversight to which other registered issuers are subject. There may be very little public information available about their investments and performance. Moreover, because sales of shares of private investment companies are generally restricted to certain qualified purchasers, such shares may be illiquid and it

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could be difficult for a fund to sell its shares at an advantageous price and time. Finally, because shares of private investment companies are not publicly traded, a fair value for a fund’s investment in these companies typically will have to be determined under policies approved by the Board of Directors.

The 1940 Act provides that the funds may not purchase or otherwise acquire the securities of other “registered investment companies” (as defined in the 1940 Act) if, as a result of such purchase or acquisition, it would own: (i) more than 3% of the total outstanding voting stock of the acquired investment company; (ii) securities issued by any one investment company having a value in excess of 5% of the fund’s total assets; or (iii) securities issued by all investment companies having an aggregate value in excess of 10% of the fund’s total assets. Certain exceptions may be available from these limits such as when the fund invests in an exchange-traded fund or a money market fund.

The funds will invest in the securities of other investment companies, including private investment companies, when, in the adviser’s judgment, the potential benefits of the investment justify the expense and risk of investing in such investment companies.

Securities of Exchange-Traded Funds

The funds may invest in the securities of exchange-traded funds (“ETFs”). ETFs are ownership interests in unit investment trusts, depositary receipts, and other pooled investment vehicles that are traded on an exchange and that hold a portfolio of securities or other financial instruments (the “Underlying Assets”). The Underlying Assets are typically selected to correspond to the securities that comprise a particular broad based, sector or international index, or to provide exposure to a particular industry sector or asset class. An investment in an ETF involves risks similar to investing directly in the Underlying Assets, including the risk that the value of the Underlying Assets may fluctuate in accordance with changes in the financial condition of their issuers, the value of securities and other financial instruments generally, and other market factors.

The performance of an ETF will be reduced by transaction and other expenses, including fees paid by the ETF to service providers. Investors in ETFs are eligible to receive their portion of income, if any, accumulated on the securities held in the portfolio, less fees and expenses of the ETF.

If an ETF is a registered investment company (as defined above), the limitations applicable to a fund’s ability to purchase securities issued by other investment companies will apply.

Private Placements

Each fund may acquire restricted securities in private placement transactions, directly from the issuer or from security holders, frequently at higher yields than comparable publicly traded securities. Privately-placed securities can be sold by each fund only (1) pursuant to SEC Rule 144A or another exemption; (2) in privately negotiated transactions to a limited number of purchasers; or (3) in public offerings made pursuant to an effective registration statement under the 1933 Act. Private or public sales of such securities by a fund may involve significant delays and expense. Private sales require negotiations with one or more purchasers and generally produce less favorable prices than the sale of comparable unrestricted securities. Public sales generally involve the time and expense of preparing and processing a registration statement under the 1933 Act and may involve the payment of underwriting commissions; accordingly, the proceeds may be less than the proceeds from the sale of securities of the same class which are freely marketable.

Restrictions: Restricted securities will not be purchased by either Limited Duration or Investment Grade if, as a result, more than the 5% of the fund’s assets would consist of restricted securities.

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The following information about futures and options applies to each fund as indicated:

Options, Futures and Other Strategies

GENERAL. Each fund may invest in certain options, futures contracts (sometimes referred to as “futures”), options on futures contracts, and swaps, and Limited Duration may also invest in forward currency contracts, swaps, caps, floors, collars, indexed securities and other derivative instruments (collectively, “Financial Instruments”), to attempt to enhance its income or yield or to attempt to hedge its investments. The strategies described below may be used in an attempt to manage Limited Duration’s foreign currency exposure (including exposure to the euro) as well as other risks of these funds’ investments that can affect their net asset values. The funds’ adviser may determine not to hedge particular risks, and a fund may be completely unhedged at any point in time.

As an operating policy, each fund will only purchase or sell a particular Financial Instrument if the fund is authorized to invest in the type of asset by which the return on, or value of, the Financial Instrument is primarily measured. Since Limited Duration is authorized to invest in foreign securities, it may purchase and sell foreign currency (including the euro) derivatives.

Hedging strategies can be broadly categorized as “short hedges” and “long hedges.” A short hedge is a purchase or sale of a Financial Instrument intended partially or fully to offset potential declines in the value of one or more investments held in a fund’s portfolio. Thus, in a short hedge a fund takes a position in a Financial Instrument whose price is expected to move in the opposite direction of the price of the investment being hedged.

Conversely, a long hedge is a purchase or sale of a Financial Instrument intended partially or fully to offset potential increases in the acquisition cost of one or more investments that the fund intends to acquire. Thus, in a long hedge, a fund takes a position in a Financial Instrument whose price is expected to move in the same direction as the price of the prospective investment being hedged. A long hedge is sometimes referred to as an anticipatory hedge. In an anticipatory hedge transaction, a fund does not own a corresponding security and, therefore, the transaction does not relate to a security the fund owns. Rather, it relates to a security that the fund intends to acquire. If a fund does not complete the hedge by purchasing the security it anticipated purchasing, the effect on the fund’s portfolio is the same as if the transaction were entered into for speculative purposes.

Financial Instruments on securities generally are used to attempt to hedge against price movements in one or more particular securities positions that a fund owns or intends to acquire. Financial Instruments on indices, in contrast, generally are used to attempt to hedge against price movements in market sectors in which a fund has invested or expects to invest. Financial Instruments on debt securities may be used to hedge either individual securities or broad debt market sectors.

The use of Financial Instruments is subject to applicable regulations of the SEC, the several exchanges upon which they are traded and the Commodity Futures Trading Commission (the “CFTC”). In addition, a fund’s ability to use Financial Instruments may be limited by tax considerations. See “Additional Tax Information.”

The funds are operated by persons who have claimed an exclusion, granted to operators of registered investment companies like the funds, from registration as a “commodity pool operator” with respect to the fund under the Commodity Exchange Act, and therefore are not subject to registration or regulation as a pool operator under the Commodity Exchange Act.

With respect to Limited Duration, in addition to the instruments, strategies and risks described below, the adviser expects to discover additional opportunities in connection with Financial Instruments and other similar or related techniques. These new opportunities may become available as the adviser develops new techniques, as regulatory authorities broaden the range of permitted transactions and as new Financial Instruments or other techniques are developed. The adviser may utilize these opportunities to the extent that they are consistent with the fund’s investment objective and permitted by its investment limitations and applicable regulatory authorities. The fund might not use any of these strategies, and there can be no assurance that any strategy used will succeed. The fund’s Prospectus or this SAI will be supplemented to the extent that new products or techniques involve materially different risks than those described below or in the Prospectus.

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SPECIAL RISKS. The use of Financial Instruments involves special considerations and risks, certain of which are described below. In general, these techniques may increase the volatility of a fund and may involve a small investment of cash relative to the magnitude of the risk assumed. Risks pertaining to particular Financial Instruments are described in the sections that follow.

(1) Successful use of most Financial Instruments depends upon the adviser’s ability to predict movements of the overall securities, currency and interest rate markets, which requires different skills than predicting changes in the prices of individual securities. There can be no assurance that any particular strategy will succeed, and use of Financial Instruments could result in a loss, regardless of whether the intent was to increase return or reduce risk.

(2) There might be an imperfect correlation, or even no correlation, between price movements of a Financial Instrument and price movements of the investments being hedged. For example, if the value of a Financial Instrument used in a short hedge increased by less than the decline in value of the hedged investment, the hedge would not be fully successful. Such a lack of correlation might occur due to factors unrelated to the value of the investments being hedged, such as speculative or other pressures on the markets in which Financial Instruments are traded. The effectiveness of hedges using Financial Instruments on indices will depend on the degree of correlation between price movements in the index and price movements in the securities being hedged.

Because there is a limited number of types of exchange-traded options and futures contracts, it is likely that the standardized contracts available will not match a fund’s current or anticipated investments exactly. A fund may invest in options and futures contracts based on securities with different issuers, maturities or other characteristics from the securities in which it typically invests, which involves a risk that the options or futures position will not track the performance of the fund’s other investments.

Options and futures prices can also diverge from the prices of their underlying instruments, even if the underlying instruments match a fund’s investments well. Options and futures prices are affected by such factors as current and anticipated short-term interest rates, changes in volatility of the underlying instrument, and the time remaining until expiration of the contract, which may not affect security prices the same way. Imperfect correlation may also result from differing levels of demand in the options and futures markets and the securities markets, from structural differences in how options and futures and securities are traded, or from the imposition of daily price fluctuation limits or trading halts. A fund may purchase or sell options and futures contracts with a greater or lesser value than the securities it wishes to hedge or intends to purchase in order to attempt to compensate for differences in volatility between the contract and the securities, although this may not be successful in all cases. If price changes in a fund’s options or futures positions are poorly correlated with its other investments, the positions may fail to produce anticipated gains or result in losses that are not offset by gains in other investments.

(3) If successful, the above-discussed strategies can reduce risk of loss by wholly or partially offsetting the negative effect of unfavorable price movements. However, such strategies can also reduce opportunity for gain by offsetting the positive effect of favorable price movements. For example, if a fund entered into a short hedge because the adviser projected a decline in the price of a security in the fund’s portfolio, and the price of that security increased instead, the gain from that increase might be wholly or partially offset by a decline in the price of the Financial Instrument. Moreover, if the price of the Financial Instrument declined by more than the increase in the price of the security, the fund could suffer a loss. In either such case, the fund would have been in a better position had it not attempted to hedge at all.

(4) As described below, a fund might be required to maintain segregated assets as “cover,” or make margin payments when it takes positions in Financial Instruments involving obligations to third parties (i.e., Financial Instruments other than purchased options). If a fund were unable to close out its positions in such Financial Instruments, it might be required to continue to maintain such assets or accounts or make such payments until the position expired or matured. These requirements might impair a fund’s ability to sell a portfolio security or make an investment at a time when it would otherwise be favorable to do so, or require that the fund sell a portfolio security at a disadvantageous time.

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(5) A fund’s ability to close out a position in a Financial Instrument prior to expiration or maturity depends on the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of the other party to the transaction (the “counterparty”) to enter into a transaction closing out the position. Therefore, there is no assurance that any position can be closed out at a time and price that is favorable to a fund.

COVER. Transactions using Financial Instruments, other than purchased options, expose a fund to an obligation to another party. A fund will not enter into any such transactions unless it owns either (1) an offsetting (“covering”) position in securities, currencies or other options, futures contracts or forward contracts, or (2) cash and liquid assets held in a segregated account, or designated on the funds’ books as segregated for this purpose, with a value, marked-to-market daily, sufficient to cover its potential obligations to the extent not covered as provided in (1) above. Each fund will comply with SEC guidelines regarding cover for these instruments and will, if the guidelines so require, segregate cash or liquid assets in the prescribed amount as determined daily.

Assets used as cover cannot be sold while the position in the corresponding Financial Instrument is open, unless they are replaced with other appropriate assets. As a result, the commitment of a large portion of a fund’s assets for cover or segregation could impede portfolio management or a fund’s ability to meet redemption requests or other current obligations.

OPTIONS. A call option gives the purchaser the right to buy, and obligates the writer to sell, the underlying investment at the agreed-upon price during the option period. A put option gives the purchaser the right to sell, and obligates the writer to buy, the underlying investment at the agreed-upon price during the option period. Purchasers of options pay an amount, known as a premium, to the option writer in exchange for the right under the option contract.

The purchase of call options can serve as a long hedge, and the purchase of put options can serve as a short hedge. Writing put or call options can enable a fund to enhance income or yield by reason of the premiums paid by the purchasers of such options. However, if the market price of the security underlying a put option declines to less than the exercise price of the option, minus the premium received, a fund would suffer a loss.

Writing call options can serve as a limited short hedge, because declines in the value of the hedged investment would be offset to the extent of the premium received for writing the option. However, if the security or currency appreciates to a price higher than the exercise price of the call option, it can be expected that the option will be exercised and the fund will be obligated to sell the security or currency at less than its market value. If the call option is an OTC option, the securities or other assets used as cover would be considered illiquid to the extent described under “Illiquid and Restricted Investments.”

Writing put options can serve as a limited long hedge because increases in the value of the hedged investment would be offset to the extent of the premium received for writing the option. However, if the security or currency depreciates to a price lower than the exercise price of the put option, it can be expected that the put option will be exercised and the fund will be obligated to purchase the security or currency at more than its market value. If the put option is an OTC option, the securities or other assets used as cover would be considered illiquid to the extent described under “Illiquid and Restricted Investments.”

The value of an option position will reflect, among other things, the current market value of the underlying investment, the time remaining until expiration, the relationship of the exercise price to the market price of the underlying investment, the historical price volatility of the underlying investment and general market conditions. Options that expire unexercised have no value.

Each fund may effectively terminate its right or obligation under an option by entering into a closing transaction. For example, a fund may terminate its obligation under a call or put option that it had written by purchasing an identical call or put option; this is known as a closing purchase transaction. Conversely, a fund may terminate a position in a put or call option it had purchased by writing an identical put or call option; this is known as a closing sale transaction. Closing transactions permit a fund to realize profits or limit losses on an option position prior to its exercise or expiration.

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A type of put that a fund may purchase is an “optional delivery standby commitment,” which is entered into by parties selling debt securities to the fund. An optional delivery standby commitment gives the fund the right to sell the security back to the seller on specified terms. This right is provided as an inducement to purchase the security.

RISKS OF OPTIONS ON SECURITIES. Options offer large amounts of leverage, which will result in a fund’s net asset value being more sensitive to changes in the value of the related instrument. Each fund may purchase or write both exchange-traded and OTC options. Exchange-traded options in the United States are issued by a clearing organization affiliated with the exchange on which the option is listed that, in effect, guarantees completion of every exchange-traded option transaction. In contrast, OTC options are contracts between a fund and its counterparty (usually a securities dealer or a bank) with no clearing organization guarantee. Thus, when a fund purchases an OTC option, it relies on the counterparty from whom it purchased the option to make or take delivery of the underlying investment upon exercise of the option. Failure by the counterparty to do so would result in the loss of any premium paid by a fund as well as the loss of any expected benefit of the transaction.

Each fund’s ability to establish and close out positions in exchange-listed options depends on the existence of a liquid market. However, there can be no assurance that such a market will exist at any particular time. Closing transactions can be made for OTC options only by negotiating directly with the counterparty, or by a transaction in the secondary market if any such market exists. There can be no assurance that a fund will in fact be able to close out an OTC option position at a favorable price prior to expiration. In the event of insolvency of the counterparty, a fund might be unable to close out an OTC option position at any time prior to its expiration.

If a fund were unable to effect a closing transaction for an option it had purchased, it would have to exercise the option to realize any profit. The inability to enter into a closing purchase transaction for a covered call option written by a fund could leave the fund unable to prevent material losses because the fund would be unable to sell the investment used as cover for the written option until the option expires or is exercised.

OPTIONS ON INDICES. Puts and calls on indices are similar to puts and calls on securities or futures contracts except that all settlements are in cash and gain or loss depends on changes in the index in question rather than on price movements in individual securities or futures contracts. When a fund writes a call on an index, it receives a premium and agrees that, prior to the expiration date, the purchaser of the call, upon exercise of the call, will receive from the fund an amount of cash if the closing level of the index upon which the call is based is greater than the exercise price of the call. The amount of cash is equal to the difference between the closing price of the index and the exercise price of the call times a specified multiple (“multiplier”), which determines the total dollar value for each point of such difference. When a fund buys a call on an index, it pays a premium and has the same rights as to such call as are indicated above. When a fund buys a put on an index, it pays a premium and has the right, prior to the expiration date, to require the seller of the put, upon the fund’s exercise of the put, to deliver to the fund an amount of cash if the closing level of the index upon which the put is based is less than the exercise price of the put, which amount of cash is determined by the multiplier, as described above for calls. When a fund writes a put on an index, it receives a premium and the purchaser of the put has the right, prior to the expiration date, to require the fund to deliver to it an amount of cash equal to the difference between the closing level of the index and exercise price times the multiplier if the closing level is less than the exercise price.

RISKS OF OPTIONS ON INDICES. The risks of investment in options on indices may be greater than options on securities. Because index options are settled in cash, when a fund writes a call on an index it cannot provide in advance for its potential settlement obligations by acquiring and holding the underlying securities. A fund can offset some of the risk of writing a call index option by holding a diversified portfolio of securities similar to those on which the underlying index is based. However, a fund cannot, as a practical matter, acquire and hold a portfolio containing exactly the same securities as underlie the index and, as a result, bears a risk that the value of the securities held will vary from the value of the index.

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Even if a fund could assemble a portfolio that exactly reproduced the composition of the underlying index, it still would not be fully covered from a risk standpoint because of the “timing risk” inherent in writing index options. When an index option is exercised, the amount of cash that the holder is entitled to receive is determined by the difference between the exercise price and the closing index level on the date when the option is exercised. As with other kinds of options, a fund, as the call writer, will not learn that the fund has been assigned until the next business day at the earliest. The time lag between exercise and notice of assignment poses no risk for the writer of a covered call on a specific underlying security, such as common stock, because there the writer’s obligation is to deliver the underlying security, not to pay its value as of a fixed time in the past. So long as the writer already owns the underlying security, it can satisfy its settlement obligations by simply delivering it, and the risk that its value may have declined since the exercise date is borne by the exercising holder. In contrast, even if the writer of an index call holds securities that exactly match the composition of the underlying index, it will not be able to satisfy its assignment obligations by delivering those securities against payment of the exercise price. Instead, it will be required to pay cash in an amount based on the closing index value on the exercise date. By the time it learns that it has been assigned, the index may have declined, with a corresponding decline in the value of its portfolio. This “timing risk” is an inherent limitation on the ability of index call writers to cover their risk exposure by holding securities positions.

If a fund has purchased an index option and exercises it before the closing index value for that day is available, it runs the risk that the level of the underlying index may subsequently change. If such a change causes the exercised option to fall out-of-the-money, a fund will be required to pay the difference between the closing index value and the exercise price of the option (times the applicable multiplier) to the assigned writer.

OTC OPTIONS. Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size, and strike price, the terms of OTC options (options not traded on exchanges) generally are established through negotiation with the other party to the option contract. While this type of arrangement allows a fund great flexibility to tailor the option to its needs, OTC options generally involve greater risk than exchange-traded options, which are guaranteed by the clearing organization of the exchanges where they are traded. Assets used as cover for OTC options may be considered illiquid as described under “Illiquied Investments and Restricted Securities.”

Generally, OTC foreign currency options used by each fund are European-style options. This means that the option is only exercisable immediately prior to its expiration. This is in contrast to American-style options, which are exercisable at any time prior to the expiration date of the option.

FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The purchase of futures or call options on futures can serve as a long hedge, and the sale of futures or the purchase of put options on futures can serve as a short hedge. Writing call options on futures contracts can serve as a limited short hedge, using a strategy similar to that used for writing call options on securities or indices. Similarly, writing put options on futures contracts can serve as a limited long hedge. Futures contracts and options on futures contracts can also be purchased and sold to attempt to enhance income or yield.

In addition, futures strategies can be used to manage the average duration of a fund’s fixed-income portfolio. If the adviser wishes to shorten the average duration of a fund’s fixed-income portfolio, the fund may sell a debt futures contract or a call option thereon, or purchase a put option on that futures contract. If the adviser wishes to lengthen the average duration of a fund’s fixed-income portfolio, the fund may buy a debt futures contract or a call option thereon, or sell a put option thereon.

No price is paid upon entering into a futures contract. Instead, at the inception of a futures contract a fund is required to deposit “initial margin” in an amount generally equal to 10% or less of the contract value. Margin must also be deposited when writing a call or put option on a futures contract, in accordance with applicable exchange rules. Unlike margin in securities transactions, initial margin on futures contracts does not represent a borrowing, but rather is in the nature of a performance bond or good-faith deposit that is returned to the fund at the termination of the transaction if all contractual obligations have been satisfied. Under certain circumstances, such as periods of high volatility, a fund may be required by an exchange to increase the level of its initial margin payment, and initial margin requirements might be increased generally in the future by regulatory action.

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Subsequent “variation margin” payments are made to and from the futures broker daily as the value of the futures position varies, a process known as “marking-to-market.” Variation margin does not involve borrowing, but rather represents a daily settlement of a fund’s obligations to or from a futures broker. When a fund purchases an option on a futures contract, the premium paid plus transaction costs is all that is at risk. In contrast, when a fund purchases or sells a futures contract or writes a call or put option thereon, it is subject to daily variation margin calls that could be substantial in the event of adverse price movements. If a fund has insufficient cash to meet daily variation margin requirements, it might need to sell securities at a time when such sales are disadvantageous.

Purchasers and sellers of futures contracts and options on futures can enter into offsetting closing transactions, similar to closing transactions on options, by selling or purchasing, respectively, an instrument identical to the instrument purchased or sold. Positions in futures and options on futures may be closed only on an exchange or board of trade that provides a secondary market. However, there can be no assurance that a liquid secondary market will exist for a particular contract at a particular time. In such event, it may not be possible to close a futures contract or options position.

Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract or an option on a futures contract can vary from the previous day’s settlement price; once that limit is reached, no trades may be made that day at a price beyond the limit. Daily price limits do not limit potential losses because prices could move to the daily limit for several consecutive days with little or no trading, thereby preventing liquidation of unfavorable positions.

If a fund were unable to liquidate a futures contract or an option on a futures position due to the absence of a liquid secondary market or the imposition of price limits, it could incur substantial losses. A fund would continue to be subject to market risk with respect to the position. In addition, except in the case of purchased options, a fund would continue to be required to make daily variation margin payments and might be required to maintain the position being hedged by the future or option or to maintain segregated cash or securities.

RISKS OF FUTURES CONTRACTS AND OPTIONS THEREON. The ordinary spreads between prices in the cash and futures markets (including the options on futures market), due to differences in the natures of those markets, are subject to the following factors, which may create distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions, which could distort the normal relationship between the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing distortion. Third, from the point of view of speculators, the deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions. Due to the possibility of distortion, a correct forecast of general interest rate, currency exchange rate or stock market trends by the adviser may still not result in a successful transaction. The adviser may be incorrect in its expectations as to the extent of various interest rate, currency exchange rate or stock market movements or the time span within which the movements take place.

INDEX FUTURES—Limited Duration only. The risk of imperfect correlation between movements in the price of index futures and movements in the price of the securities that are the subject of the hedge increases as the composition of the fund’s portfolio diverges from the securities included in the applicable index. The price of the index futures may move more than or less than the price of the securities being hedged. If the price of the index futures moves less than the price of the securities that are the subject of the hedge, the hedge will not be fully effective, but if the price of the securities being hedged has moved in an unfavorable direction, the fund would be

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in a better position than if it had not hedged at all. If the price of the securities being hedged has moved in a favorable direction, this advantage will be partially offset by the futures contract. If the price of the futures contract moves more than the price of the securities, the fund will experience either a loss or a gain on the futures contract that will not be completely offset by movements in the price of the securities that are the subject of the hedge. To compensate for the imperfect correlation of movements in the price of the securities being hedged and movements in the price of the index futures, the fund may buy or sell index futures in a greater dollar amount than the dollar amount of the securities being hedged if the historical volatility of the prices of such securities being hedged is more than the historical volatility of the prices of the securities included in the index. It is also possible that, where the fund has sold index futures contracts to hedge against decline in the market, the overall market may advance and the value of the particular securities held in the portfolio may decline. If this occurred, the fund would lose money on the futures contract and also experience a decline in value of its portfolio securities. However, while this could occur for a very brief period or to a very small degree, over time the value of a diversified portfolio of securities will tend to move in the same direction as the market indices on which the futures contracts are based.

Where index futures are purchased to hedge against a possible increase in the price of securities before a fund is able to invest in them in an orderly fashion, it is possible that the market may decline instead. If the fund then concludes not to invest in them at that time because of concern as to possible further market decline or for other reasons, it will realize a loss on the futures contract that is not offset by a reduction in the price of the securities it had anticipated purchasing.

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To the extent that a fund enters into futures contracts, options on futures contracts and/or options on foreign currencies traded on a CFTC-regulated exchange, in each case in which such transactions are not for bona fide hedging purposes (as defined by the CFTC), the aggregate initial margin and premiums required to establish these positions (excluding the amount by which options are “in-the-money” at the time of purchase) may not exceed 5% of the liquidation value of the fund’s portfolio, after taking into account unrealized profits and unrealized losses on any contracts the fund has entered into. (In general, a call option on a futures contract is “in-the-money” if the value of the underlying futures contract exceeds the strike, i.e., exercise, price of the call; a put option on a futures contract is “in-the-money” if the value of the underlying futures contract is exceeded by the strike price of the put.) This policy does not limit to 5% the percentage of a fund’s assets that are at risk in futures contracts, options on futures contracts and currency options.

COMBINED POSITIONS. Each fund may purchase and write options in combination with each other, or in combination with futures or forward contracts, to adjust the risk and return characteristics of its overall position. For example, a fund may purchase a put option and write a call option on the same underlying instrument, in order to construct a combined position whose risk and return characteristics are similar to selling a futures contract. Another possible combined position would involve writing a call option at one strike price and buying a call option at a lower price, in order to reduce the risk of the written call option in the event of a substantial price increase. Because combined options positions involve multiple trades, they result in higher transaction costs and may be more difficult to open and close out.

TURNOVER. Each fund’s options and futures activities may affect its turnover rate and brokerage commission payments. The exercise of calls or puts written by a fund, and the sale or purchase of futures contracts, may cause it to sell or purchase related investments, thus increasing its turnover rate. Once a fund has received an exercise notice on an option it has written, it cannot effect a closing transaction in order to terminate its obligation under the option and must deliver or receive the underlying securities at the exercise price. The exercise of puts purchased by a fund may also cause the sale of related investments, also increasing turnover; although such exercise is within the fund’s control, holding a protective put might cause it to sell the related investments for reasons that would not exist in the absence of the put. A fund will pay a brokerage commission each time it buys or sells a put or call or purchases or sells a futures contract. Such commissions may be higher than those that would apply to direct purchases or sales.

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SWAPS, CAPS, FLOORS AND COLLARS — Limited Duration may enter into swaps, caps, floors, and collars, and Investment Grade may enter into swaps, to preserve a return or a spread on a particular investment or portion of its portfolio, to protect against any increase in the price of securities the fund anticipates purchasing at a later date or to attempt to enhance yield. A swap involves the exchange by a fund with another party of their respective commitments to pay or receive cash flows, e.g., an exchange of floating rate payments for fixed-rate payments. The purchase of a cap entitles the purchaser, to the extent that a specified index exceeds a predetermined value, to receive payments on a notional principal amount from the party selling the cap. The purchase of a floor entitles the purchaser, to the extent that a specified index falls below a predetermined value, to receive payments on a notional principal amount from the party selling the floor. A collar combines elements of buying a cap and a floor.

Swap agreements, including caps, floors and collars, can be individually negotiated and structured to include exposure to a variety of different types of investments or market factors. Depending on their structure, swap agreements may increase or decrease the overall volatility of a fund’s investments and its share price and yield because, and to the extent, these agreements affect the fund’s exposure to long- or short-term interest rates (in the United States or abroad), foreign currency values, mortgage-backed security values, corporate borrowing rates or other factors such as security prices or inflation rates.

Swap agreements will tend to shift a fund’s investment exposure from one type of investment to another. For example, if a fund agrees to exchange payments in U.S. dollars for payments in foreign currency, the swap agreement would tend to decrease the fund’s exposure to U.S. interest rates and increase its exposure to foreign currency and interest rates. Caps and floors have an effect similar to buying or writing options.

The creditworthiness of firms with which a fund enters into swaps, caps, floors or collars will be monitored by its adviser. If a firm’s creditworthiness declines, the value of the agreement would be likely to decline, potentially resulting in losses. If a default occurs by the other party to such transaction, the fund will have contractual remedies pursuant to the agreements related to the transaction.

The net amount of the excess, if any, of a fund’s obligations over its entitlements with respect to each swap will be accrued on a daily basis and an amount of cash or liquid assets having an aggregate net asset value at least equal to the accrued excess will be maintained in an account with the fund’s custodian that satisfies the requirements of the 1940 Act. A fund will also establish and maintain such accounts with respect to its total obligations under any swaps that are not entered into on a net basis and with respect to any caps or floors that are written by the fund. The adviser and the funds believe that such obligations do not constitute senior securities under the 1940 Act and, accordingly, will not treat them as being subject to a fund’s borrowing or the restriction on senior securities. Each fund understands that the position of the SEC is that assets involved in swap transactions are illiquid and are, therefore, subject to the limitations on investing in illiquid investments. See “Illiquid and Restricted Investments.”

Investment Grade does not intend to engage in swaps with a value equaling over 10% of its total assets. In addition, no more than 5% of the funds’ assets can be exposed at any time through swaps with any one counterparty and each counterparty will have a minimum S&P rating of AA.

Yankee Bonds

Each fund may invest in Yankee dollar obligations, which are U.S. dollar denominated securities issued by foreign corporations and traded on U.S. markets. Although U.S. dollar denominated, Yankee dollar obligations may possess some of the same risks as those associated with the investment in foreign securities (see below).

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The following investment policies apply only to Limited Duration:

Loan Participations and Assignments

The fund may purchase an interest in loans originated by banks and other financial institutions. The fund’s policies limit the percentage of the fund’s assets that can be invested in the securities of any one issuer or in issuers primarily involved in one industry. Legal interpretations by the SEC staff may require the fund, in some instances, to treat both the lending bank and the borrower as “issuers” of a loan participation to the fund. In combination, the fund’s policies and the SEC staff’s interpretations may limit the amount the fund can invest in loan participations.

Although some of the loans in which the fund invests may be secured, there is no assurance that the collateral can be liquidated in particular cases, or that its liquidation value will be equal to the value of the debt. Borrowers that are in bankruptcy may pay only a small portion of the amount owed, if they are able to pay at all. Where the fund purchases a loan through an assignment, there is a possibility that the fund will, in the event the borrower is unable to pay the loan, become the owner of the collateral. This involves certain risks to the fund as a property owner.

Loans are often administered by a lead bank, which acts as agent for the lenders in dealing with the borrower. In asserting rights against the borrower, the fund may be dependent on the willingness of the lead bank to assert these rights, or upon a vote of all the lenders to authorize the action. Assets held by the lead bank for the benefit of the fund may be subject to claims of the lead bank’s creditors.

Foreign Securities

The fund may invest in U.S. dollar-denominated securities of foreign issuers. Investment in foreign securities presents certain risks, including those resulting from future political and economic developments and the possible imposition of currency exchange blockages or other foreign governmental laws or restrictions, reduced availability of public information concerning issuers, and the fact that foreign issuers are not generally subject to uniform accounting, auditing and financial reporting standards or other regulatory practices and requirements comparable to those applicable to domestic issuers. These risks are intensified when investing in countries with developing economies and securities markets, also known as “emerging markets.” Moreover, securities of many foreign issuers may be less liquid and their prices more volatile than those of comparable domestic issuers and transactions in foreign securities may be subject to less efficient settlement practices, including extended clearance and settlement periods. In addition, with respect to certain foreign countries, there is the possibility of expropriation, confiscatory taxation, withholding taxes and limitations on the use or removal of funds or other assets. Because the issuer likely conducts its business in the currency of its home country, these securities could be indirectly affected by fluctuation in currency exchange rates or currency revaluations even though the securities are denominated in U.S. dollars.

The costs associated with investment in foreign issuers, including withholding taxes, brokerage commissions and custodial fees, may be higher than those associated with investment in domestic issuers. In addition, foreign securities transactions may be subject to difficulties associated with the settlement of such transactions. Delays in settlement could result in temporary periods when assets of the fund are uninvested and no return can be earned thereon. The inability of the fund to make intended security purchases due to settlement problems could cause it to miss attractive investment opportunities. Inability to dispose of a portfolio security due to settlement problems could result in losses to the fund due to subsequent declines in value of the portfolio security or, if the fund has entered into a contract to sell the security, could result in liability to the purchaser.

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Currency Fluctuations

The fund may invest in the securities of foreign issuers that are denominated in foreign currencies and may temporarily hold uninvested cash in bank deposits in foreign currencies. The rate of exchange between the U.S. dollar and other currencies is determined by several factors, including the supply and demand for particular currencies, central bank efforts to support particular currencies, the relative movement of interest rates, the pace of business activity in the other countries and the U.S. and other economic and financial conditions affecting the world economy.

A decline in the value of any particular currency against the U.S. dollar will cause a decline in the U.S. dollar value of the fund’s holdings of securities and cash denominated in such currency and, therefore, will cause an overall decline in the fund’s net asset value and any net investment income and capital gains derived from such securities to be distributed in U.S. dollars to shareholders of the fund. Moreover, if the value of the foreign currencies in which the fund receives its income falls relative to the U.S. dollar between receipt of the income and its conversion to U.S. dollars, the fund may be required to liquidate securities in order to make distributions if it has insufficient cash in U.S. dollars to meet distribution requirements.

Foreign Currency Warrants

Foreign currency warrants entitle the holder to receive from their issuer an amount of cash (generally, for warrants issued in the United States, in U.S. dollars) that is calculated pursuant to a predetermined formula and based on the exchange rate between a specified foreign currency and the U.S. dollar as of the exercise date of the warrant. Foreign currency warrants generally are exercisable upon their issuance and expire as of a specified date and time. Foreign currency warrants have been issued in connection with U.S. dollar-denominated debt offerings by major corporate issuers in an attempt to reduce the foreign currency exchange risk that is inherent in the international fixed-income/debt marketplace. The formula used to determine the amount payable upon exercise of a foreign currency warrant may make the warrant worthless unless the applicable foreign currency exchange rate moves in a particular direction.

Foreign currency warrants are severable from the debt obligations with which they may be offered and may be listed on exchanges. Foreign currency warrants may be exercisable only in certain minimum amounts, and an investor wishing to exercise warrants who possesses less than the minimum number required for exercise may be required either to sell the warrants or to purchase additional warrants, thereby incurring additional transaction costs. In the case of any exercise of warrants, there may be a time delay between the time a holder of warrants gives instructions to exercise and the time the exchange rate relating to exercise is determined, during which time the exchange rate could change significantly, thereby affecting both the market and cash settlement values of the warrants being exercised.

The expiration date of the warrants may be accelerated if the warrants are delisted from an exchange or if their trading is suspended permanently, which would result in the loss of any remaining “time value” of the warrants (i.e., the difference between the current market value and the exercise value of the warrants) and, in the case where the warrants were “out-of-the-money,” in a total loss of the purchase price of the warrants. Warrants are generally unsecured obligations of their issuers and are not standardized foreign currency options issued by the Options Clearing Corporation (“OCC”). Unlike foreign currency options issued by OCC, the terms of foreign currency warrants generally will not be amended in the event of governmental or regulatory actions affecting exchange rates or in the event of the imposition of other regulatory controls affecting the international currency markets. The initial public offering price of foreign currency warrants is generally considerably in excess of the price that a commercial user of foreign currencies might pay in the interbank market for a comparable option involving significantly larger amounts of foreign currencies. Foreign currency warrants are subject to significant foreign exchange risk, including risks arising from complex political and economic factors.

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ADDITIONAL TAX INFORMATION

The following is a general summary of certain federal tax considerations affecting each fund and its shareholders. Investors are urged to consult their own tax advisers for more detailed information regarding any federal, state, local or foreign taxes that may apply to them.

General

For federal tax purposes, each fund is treated as a separate corporation. To continue to qualify for treatment as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (“Code”), a fund must distribute annually to its shareholders at least 90% of its investment company taxable income (generally, net investment income, the excess of net short-term capital gain over net long-term capital loss and any net gains from certain foreign currency transactions, all determined without regard to any deduction for dividends paid) (“Distribution Requirement”) and must meet several additional requirements. For each fund, these requirements include the following: (1) the fund must derive at least 90% of its gross income each taxable year from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of securities or foreign currencies, or other income (including gains from options, futures or forward currency contracts) derived with respect to its business of investing in securities or those currencies (“Income Requirement”); (2) at the close of each quarter of the fund’s taxable year, at least 50% of the value of its total assets must be represented by cash and cash items, U.S. Government securities, securities of other RICs and other securities, with those other securities limited, in respect of any one issuer, to an amount that does not exceed 5% of the value of the fund’s total assets and that does not represent more than 10% of the issuer’s outstanding voting securities; and (3) at the close of each quarter of the fund’s taxable year, not more than 25% of the value of its total assets may be invested in the securities (other than U.S. Government securities or the securities of other RICs) of any one issuer or the securities (other than the securities of other RICs) of two or more issuers the fund controls that are determined to be engaged in the same, similar or related trades or businesses.

By qualifying for treatment as a RIC, a fund (but not its shareholders) will be relieved of federal income tax on the part of its investment company taxable income and net capital gain (i.e., the excess of net long-term capital gain over net short-term capital loss) that it distributes to its shareholders. If any fund failed to qualify for that treatment for any taxable year, (1) it would be taxed at corporate rates on the full amount of its taxable income for that year without being able to deduct the distributions it makes to its shareholders and (2) the shareholders would treat all those distributions, including distributions of net capital gain, as dividends (taxable as ordinary income, except that, for individual shareholders, the part of those dividends that is “qualified dividend income” (as described in the Prospectus) is taxable as net capital gain, at a maximum federal income tax rate of 15%) to the extent of the fund’s earnings and profits. In addition, the fund could be required to recognize unrealized gains, pay substantial taxes and interest and make substantial distributions before requalifying for RIC treatment.

Each fund will be subject to a nondeductible 4% excise tax (“Excise Tax”) to the extent it fails to distribute by the end of any calendar year substantially all of its ordinary income for that year and capital gain net income for the one-year period ending on October 31 of that year, plus certain other amounts.

Dividends and Other Distributions and Redemptions of Shares

Dividends and other distributions a fund declares in October, November or December of any year that are payable to its shareholders of record on a date in one of those months will be deemed to have been paid by the fund and received by the shareholders on December 31 of that year if the fund pays the distributions during the following January. Accordingly, those distributions will be taxed to shareholders for the year in which that December 31 falls.

Dividendes from a fund’s investment company taxable income, wheter received in cash or additional fund shares, are generally taxable to its shareholders as ordinary income, to the extent of its earnings and profits. A portion of the dividends from each fund’s investment company taxable income may be eligible for (1) the 15% maximum rate of federal income tax applicable to “qualified dividend income” that individual shareholders receive in taxable years beginning before January 1, 2011 and (2) the dividends-received deduction allowed to corporations. The eligible portion for purposes of the 15% rate for any fund may not exceed the aggregate dividends the fund receives from most domestic corporations and certain foreign corporations, whereas only dividends the fund receives from domestic corporations are eligible for purposes of the dividends-received deduction. In addition, the availability of the 15% rate for individual shareholders and the dividends-received deduction allowed to corporations is subject to satisfaction by the fund, and the shareholder with respect to the shares on which the dividends are paid, of certain holding period and other restrictions. However, dividends a corporate shareholder receives and

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deducts pursuant to the dividends-received deduction are subject indirectly to the federal alternative minimum tax. A fund’s distributions of net capital gain (“capital gain distributions”) do not qualify for the dividends-received deduction.

If fund shares are sold at a loss after being held for six months or less, the loss will be treated as a long-term, instead of a short-term, capital loss to the extent of any capital gain distributions received on those shares. Investors also should be aware that if shares are purchased shortly before the record date for any dividend or other distribution, the investor will pay full price for the shares and receive some portion of the price back as a taxable distribution.

Capital gain distributions a fund makes that are attributable to any net capital gain it recognizes on sales or exchanges of capital assets through its last taxable year beginning before January 1, 2011, will be subject to federal income tax at a maximum rate of 15% for individual shareholders. In addition, any capital gain an individual shareholder realizes on a redemption before that date of his or her fund shares held for more than one year will qualify for that maximum rate. Furthermore, if shares of a fund are purchased within 30 days before or after a redemption of shares of that fund at a loss, all or a portion of that loss will not be deductible and will increase the basis of the newly purchased shares.

Financial Instruments

The use of financial instruments, such as writing (selling) and purchasing options and futures contracts, involves complex rules that will determine for income tax purposes the amount, character and timing of recognition of the gains and losses a fund realizes in connection therewith.

Some futures, foreign currency contracts and “non-equity” options (i.e., certain listed options, such as those on a “broad-based” securities index) in which a fund may invest will be subject to section 1256 of the Code (“section 1256 contracts”). Any section 1256 contracts a fund holds at the end of its taxable year, other than contracts with respect to which it has made a “mixed straddle election,” must be “marked-to-market” (that is, treated as having been sold for their fair market value) for federal income tax purposes, with the result that unrealized gains or losses will be treated as though they were realized. Sixty percent of any net gain or loss recognized on those deemed sales, and 60% of any net realized gain or loss from any actual sales of section 1256 contracts, will be treated as long-term capital gain or loss, and the balance will be treated as short-term capital gain or loss. These rules may operate to increase the amount a fund must distribute to satisfy the Distribution Requirement (i.e., with respect to the portion treated as short-term capital gain), which will be taxable to its shareholders as ordinary income, and to increase the net capital gain a fund recognizes, without in either case increasing the cash available to it. A fund may elect to exclude certain transactions from the operation of section 1256, although doing so may have the effect of increasing the relative proportion of net short-term capital gain (taxable as ordinary income) and thus increasing the amount of dividends it must distribute. Section 1256 contracts also may be marked-to-market for purposes of the Excise Tax.

When a covered call option written (sold) by a fund expires, it will realize a short-term capital gain equal to the amount of the premium it received for writing the option. When a fund terminates its obligations under such an option by entering into a closing transaction, it will realize a short-term capital gain (or loss), depending on whether the cost of the closing transaction is less than (or exceeds) the premium received when it wrote the option. When a covered call option written by a fund is exercised, it will be treated as having sold the underlying security, producing long-term or short-term capital gain or loss, depending on the holding period of the underlying security and whether the sum of the option price received upon the exercise plus the premium received when it wrote the option is more or less than the basis of the underlying security.

Code section 1092 (dealing with straddles) also may affect the taxation of financial instruments in which a fund may invest. That section defines a “straddle” as offsetting positions with respect to actively traded personal property; for these purposes, options, futures and foreign currency contracts are positions in personal property. Under section 1092, any loss from the disposition of a position in a straddle generally may be deducted only to the extent the loss exceeds the unrealized gain on the offsetting position(s) of the straddle. In addition, these rules may apply to postpone the recognition of loss that otherwise would be recognized under the mark-to-market rules discussed above. The regulations under section 1092 also provide certain “wash sale” rules, which apply to a transaction where a position is sold at a loss and a new

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offsetting position is acquired within a prescribed period, and “short sale” rules applicable to straddles. If a fund makes certain elections, the amount, character and timing of recognition of gains and losses from the affected straddle positions would be determined under rules that vary according to the elections made. Because only a few of the regulations implementing the straddle rules have been promulgated, the tax consequences to a fund of straddle transactions are not entirely clear.

If a fund has an “appreciated financial position”—generally, an interest (including an interest through an option, futures, foreign currency contract or short sale) with respect to any stock, debt instrument (other than “straight debt”) or partnership interest the fair market value of which exceeds its adjusted basis—and enters into a “constructive sale” of the position, the fund will be treated as having made an actual sale thereof, with the result that it will recognize gain at that time. A constructive sale generally consists of a short sale, an offsetting notional principal contract, a futures or foreign currency contract a fund or a related person enters into with respect to the same or substantially identical property. In addition, if the appreciated financial position is itself a short sale or such a contract, acquisition of the underlying property or substantially identical property will be deemed a constructive sale. The foregoing will not apply, however, to any fund’s transaction during any taxable year that otherwise would be treated as a constructive sale if the transaction is closed within 30 days after the end of that year and the fund holds the appreciated financial position unhedged for 60 days after that closing (i.e., at no time during that 60-day period is the fund’s risk of loss regarding that position reduced by reason of certain specified transactions with respect to substantially identical or related property, such as having an option to sell, being contractually obligated to sell, making a short sale or granting an option to buy substantially identical stock or securities).

Zero Coupon Bonds and Pay-In-Kind Securities

Each fund may acquire zero coupon bonds or other debt securities issued with original issue discount (“OID”) and/or Treasury Inflation-Indexed Securities (on which principal is adjusted based on changes in the Consumer Price Index). As a holder of those securities, a fund must include in its gross income the OID that accrues on those securities, and the amount of any principal increases on those Treasury securities, during the taxable year, even if it receives no corresponding payment on them during the year. Similarly, Limited Duration must include in its gross income securities it receives as “interest” on pay-in-kind securities. Because each fund annually must distribute substantially all of its investment company taxable income, including any accrued OID and other non-cash income, to satisfy the Distribution Requirement and avoid imposition of the Excise Tax, it may be required in a particular year to distribute as a dividend an amount that is greater than the total amount of cash it actually receives. Those distributions will be made from a fund’s cash assets or from the proceeds of sales of portfolio securities, if necessary. A fund may realize capital gains or losses from those sales, which would increase or decrease its investment company taxable income and/or net capital gain.

Foreign Taxes

Dividends and interest a fund receives, and gains it realizes, from foreign securities may be subject to income, withholding or other taxes imposed by foreign countries and U.S. possessions that would reduce the yield and/or total return on its securities. Tax conventions between certain countries and the United States may reduce or eliminate these taxes, however, and many foreign countries do not impose taxes on capital gains in respect of investments by foreign investors.

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ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

If your check to purchase shares is not honored by the institution on which it is drawn, you may be subject to extra charges in order to cover collection costs. These charges may be deducted from your shareholder account.

Future First (R) Systematic Investment Plan

The Future First (R) Systematic Investment Plan (“Future First”) is available to those Primary Class shareholders and current employees of Legg Mason and its subsidiaries, current and former Board Members of investment companies managed by Legg Mason affiliates, current and former board members of Legg Mason and the spouses and children of such persons who are Institutional Class shareholders of the fund and own shares directly with the funds. You should contact your financial adviser to determine if it offers similar services.

The Prospectus explains that Primary Class and select Institutional Class shareholders of a fund may buy additional shares through Future First. Under this plan you may arrange for automatic monthly investments in a fund of $50 or more by authorizing Boston Financial Data Services (“BFDS”), each fund’s transfer agent, to transfer funds each month from your checking/savings account, or another Legg Mason Fund to be used to buy additional shares. The appropriate fund will send you an account statement monthly. The transfer will also be reflected on your regular checking account statement. You may terminate Future First at any time without charge or penalty.

Systematic Withdrawal Plan

The Systematic Withdrawal Plan is available to those shareholders who own shares directly with the funds, excluding those shares held in individual retirement accounts (“IRAs”) or Coverdell Education Savings Accounts (“Coverdell ESAs”). You should contact your financial adviser to determine if it offers a similar service.

Primary Class Shareholders

Primary Class shareholders having an account with a net asset value of $5,000 or more may elect to make withdrawals of a minimum of $50 on a monthly basis. There are two ways to receive payment of proceeds of redemptions made through the Systematic Withdrawal Plan: (1) Check mailed by the funds' transfer agent—fund shares will be redeemed on the 25th of each month or the next business day and a check for the proceeds will be mailed within three business days; or (2) ACH to checking or savings account—redemptions of fund shares may occur on any business day of the month and the checking or savings account will be credited with the proceeds in approximately two business days. You may change the monthly amount to be paid to you without charge by notifying the appropriate fund. You may terminate the Systematic Withdrawal Plan at any time, without charge or penalty, by contacting the funds. Each fund, its transfer agent, and LMIS also reserve the right to modify or terminate the Systematic Withdrawal Plan at any time.

Institutional Class Shareholders

Certain shareholders of a fund’s Institutional Class shares with an initial net asset value of $1,000,000 or more may be eligible to participate in the Legg Mason Institutional Funds Systematic Withdrawal Plan. Receipt of payment of proceeds of redemptions made through the Systematic Withdrawal Plan will be wired through ACH to your checking or savings account—redemptions of fund shares may occur on any business day of the month and the checking or savings account will be credited with the proceeds in approximately two business days. Requests must be made in writing to Legg Mason Institutional Funds to participate in, change or discontinue the Systematic Withdrawal Plan. You may change the monthly amount to be paid to you or terminate the Systematic Withdrawal Plan at any time, without charge or penalty, by notifying Legg Mason Investor Services—Institutional. Each fund, its transfer agent, and Legg Mason Investor Services—Institutional also reserve the right to modify or terminate the Systematic Withdrawal Plan at any time.

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In General

The amounts paid to you each month are obtained by redeeming sufficient shares from your account to provide the withdrawal amount that you have specified.

Redemptions will be made at the net asset value per share determined as of the close of regular trading on the New York Stock Exchange (“Exchange”) (normally 4:00 p.m., Eastern time) on the day corresponding to the redemption option designated by the investor. If the Exchange is not open for business on that day, the shares will be redeemed at the per share net asset value determined as of the close of regular trading on the Exchange on the next day the Exchange is open. If the redemption option designated is the last day of the month and the Exchange is not open for business on that day, the shares will be redeemed at the per share net asset value determined as of the previous day the Exchange was open.

Withdrawal payments are treated as a sale of shares rather than as a dividend or other distribution. These payments are taxable to the extent that the total amount of the payments exceeds the tax basis of the shares sold. If the periodic withdrawals exceed reinvested dividends and other distributions, the amount of your original investment may be correspondingly reduced.

Ordinarily, you should not purchase additional shares of the fund in which you have an account if you maintain a Systematic Withdrawal Plan, because there are tax disadvantages associated with such purchases and withdrawals. No fund will knowingly accept purchase orders from you for additional shares if you maintain a Systematic Withdrawal Plan unless your purchase is equal to at least one year's scheduled withdrawals. In addition, shareholders who maintain a Systematic Withdrawal Plan may not make periodic investments under Future First.

Other Information Regarding Redemptions

Each fund reserves the right to modify or terminate the telephone, electronic or other redemption services, as applicable to that fund, described in the Prospectus and this SAI at any time.

The date of a payment for redemption may not be postponed for more than seven days, and the right of redemption may not be suspended by a fund or its distributor, except (i) for any periods during which the Exchange is closed (other than for customary weekend and holiday closings), (ii) when trading in markets a fund normally utilizes is restricted, or an emergency, as defined by rules and regulations of the SEC, exists, making disposal of that fund's investments or determination of its net asset value not reasonably practicable, or (iii) for such other periods as the SEC by regulation or order may permit for protection of a fund’s shareholders. In the case of any such suspension, you may either withdraw your request for redemption or receive payment based upon the net asset value next determined after the suspension is lifted.

Clients of certain financial intermediaries that maintain omnibus accounts with the funds’ transfer agent may obtain shares through those financial intermediaries. Such financial intermediaries may receive payments from the funds’ distributor for account servicing, and may receive payments from their clients for other services performed. Investors may be able to purchase shares from LMIS without receiving or paying for such other services.

Redemption In-Kind

Each fund reserves the right, under certain conditions, to honor any request for a redemption , or combination of requests from the same shareholder in any 90-day period, totaling at least $250,000 or 1% of the net assets of the fund, whichever is less, by making payment in whole or in part by securities valued in the same way as they would be valued for purposes of computing that fund’s net asset value per share. Because redemption in-kind may be used at times of unusual illiquidity in the markets, these valuation methods may include fair value estimations. If payment is made in securities, a shareholder should expect to incur brokerage expenses in converting those securities into cash and the market price of those securities will be subject to fluctuation until they are sold. Each fund does not redeem “in-kind” under normal circumstances, but would do so where the adviser determines that it would be in the best interests of that fund’s shareholders as a whole. A redemption in-kind may be considered the sale of securities by a fund to the party receiving the securities (except for tax purposes). Redemptions in-kind will not be done with LMIS or other affiliated persons of the fund except as permitted by SEC rules or orders, or other interpretive guidance from regulators.

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Shares Purchased and Redeemed Through Another Securities Dealer or Other Financial Intermediary

The funds have authorized one or more financial services institutions to receive on their behalf purchase and redemption orders. Such financial services institutions are authorized to designate plan administrator intermediaries to receive purchase and redemption orders on a fund’s behalf. A fund will be deemed to have received a purchase or redemption order when an authorized financial services institution or, if applicable, a financial services institution’s authorized designee, receives the order. Orders will be priced at that fund’s net asset value next computed after they are received by an authorized trust company or the financial services institution’s authorized designee and accepted by that fund.

Transferring Legg Mason Fund Shares to Another Securities Dealer or Other Financial Intermediary

You may transfer fund shares only to an account with another securities dealer or other financial intermediary that has entered into an agreement with the distributor or one of its affiliates with respect to the particular fund. Some dealers and intermediaries may have agreements with LMIS or one of its affiliates with respect to some Legg Mason Funds and not others. Depending on the dealer or intermediary to which you transfer the shares, certain shareholder services may not be available for the transferred shares. After the transfer, you may purchase additional fund shares. All future trading of particular fund shares, including exchanges, is subject to the rules of the dealer or intermediary and its continued agreement with the distributor that permits such trading.

You should contact your securities dealer, financial intermediary or the fund for further information on transferring fund shares.

VALUATION OF FUND SHARES

Pricing of fund shares will not be done on days when the Exchange is closed. The Exchange currently observes the following holidays: New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The methods used by the pricing service and the quality of the valuations so established are reviewed by the adviser under the general supervision of the Board of Directors.

Equity securities traded on national securities exchanges are normally valued at the last quoted sales price, except securities traded on The Nasdaq Stock Market, Inc. (“Nasdaq”) which are normally valued in accordance with the Nasdaq Official Closing Price. Over the counter securities are normally valued at the mean between the latest bid and asked prices. Fixed income securities are normally valued at the bid price. Premiums received on the sale of put and call options are included in the net asset value of each class, and the current market value of options sold by the fund will be subtracted from the net assets of each class.

Trading in securities on European and Far Eastern securities exchanges and over-the-counter markets is normally completed well before the close of the business day in New York. Foreign currency exchange rates are generally determined prior to the close of trading on the Exchange. Occasionally, events affecting the value of foreign investments and such exchange rates occur between the time at which they are determined and the close of trading on the Exchange. Such significant events can include changes in the price levels of securities markets, including the United States securities markets, occurring after the close of the foreign securities markets on which the securities trade. The use of fair value pricing by the fund is intended to eliminate pricing inaccuracies which can occur based on significant events occurring between the time of the closing of a foreign market on which securities trade and the time when the net asset value of the fund is calculated.

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In cases where securities are traded on more than one market, the securities are generally valued on the market considered by the adviser as the primary market.

Disclosure of Portfolio Holdings

The Board of Directors has adopted the following policy with respect to the disclosure of each fund’s portfolio holdings. The Board of Directors believes the policy is in the best interests of the funds and their shareholders and that it strikes an appropriate balance between the desire of investors for information about the funds’ portfolio holdings and the need to protect the funds from potentially harmful disclosures. The extent of these disclosures and when they will be made was reviewed and approved by the Board of Directors upon the recommendations of the adviser. The Board of Directors will be provided with reports regarding any determinations made by the Chief Legal Officer pursuant to the policy and any other material issues arising under the policy and can exercise oversight over the operation of the policy.

Policy. Except as described below, no portfolio holdings information of a fund shall be provided to any individual, investor, or other person or entity unless specifically authorized by the Chief Legal Officer or a person authorized by the Chief Legal Officer.

Public Disclosure of Portfolio Holdings. Each fund distributes complete portfolio holdings information to its shareholders through semi-annual and annual reports first mailed to shareholders within sixty days after period end. Such semi-annual and annual reports are also made available to the public through postings at the same time on the Legg Mason Funds’ website at www.leggmason.com/individualinvestors. Additionally, complete portfolio holdings information is filed with the SEC on Form N-Q for the first and third quarters of the funds’ fiscal year. The Corporation’s reports and its Form N-Q filings are available at the website of the SEC at http://www.sec.gov.

Complete portfolio holdings information may be provided to shareholders and other persons on a quarterly basis no sooner than 25 calendar days following the quarter-end, provided that such information has been made available to the public through a posting on the Legg Mason Funds website or by the filing of Form N-Q or Form N-CSR in accordance with SEC rules.

Partial information concerning each fund’s portfolio holdings (such as top ten holdings) may be provided to shareholders and other persons in fact sheets and other formats on a monthly or quarterly basis no sooner than 11 business days after quarter or month end, provided that such information has been made available to the public through postings on the Legg Mason Funds’ website at least one day previously.

Complete or partial portfolio holdings information may be included in responses to Requests for Proposal, Pitch Books or similar marketing materials, provided that such information is based only on the latest portfolio holdings information publicly available in accordance with the funds’ policy.

Non-Public Dissemination of Portfolio Holdings Information. From time to time it may be necessary to disclose portfolio holdings that are not publicly available, to certain third parties. Such entities may be provided with information more current than the latest publicly-available portfolio holdings only if the Chief Legal Officer determines that 1) more current information is necessary in order for the third party to complete its task, 2) the fund has a legitimate need for disclosing the information, and 3) the third party has agreed in writing (or is otherwise required by virtue of a written code of ethics, professional responsibility, governmental or SRO rules or fiduciary duty) to keep the information confidential, to use it only for the agreed-upon purpose(s), and not to trade securities on the basis of the information. No consideration may be received by any party for providing non-public portfolio holdings information to any third party, except consideration received by each fund in connection with the services being provided to it by the third party which receives the non-public information. The adviser and its affiliates shall not be deemed to have received consideration solely by the fact that services provided to each fund may result in sales of fund shares.

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At the present time, the Corporation has ongoing arrangements with the following parties to provide them with non-public portfolio holdings information:

Service Providers:

State Street Bank and Trust Company - Information is provided daily with no time lag.

PricewaterhouseCoopers LLP—Information is provided as needed with no time lag.

Kirkpatrick & Lockhart Preston Gates Ellis LLP—Information is provided with Board of Directors materials approximately four to six weeks after quarter-end and may be provided at other times as needed with no time lag.

Institutional Shareholder Services - Information is provided daily with no time lag.

Other Third Parties:

Lipper Analytical Services Corporation—Information is provided quarterly with a time lag of five business days.

FactSet Research Systems, Inc.—Information is provided daily with no time lag.

In all cases, the party receiving the information has agreed in writing (or is otherwise required by virtue of a written code of ethics, professional responsibility, governmental or SRO rules or fiduciary duty) to keep the information confidential, to use it only for the agreed-upon purpose(s) and not to trade securities on the basis of such information.

Additionally, each fund may occasionally reveal certain of its current portfolio holdings information to broker-dealers in connection with that broker-dealer executing securities transactions on behalf of the fund. In such a case, a fund does not enter into a formal confidentiality agreement with the broker-dealer but relies on the broker-dealer’s obligations based on statutes, rules, and fiduciary obligations, not to trade based on the information or otherwise use it improperly. The fund would not continue to conduct business with a broker-dealer whom the adviser believed was misusing the disclosed information.

The Board of Directors, officers, and certain LMIS employees, including funds’ accounting, legal, compliance, marketing, administrative personnel and members of certain LMIS committees or groups, have access to each fund’s portfolio holdings information prior to the time it is made public. All such persons are subject to a Code of Ethics that requires that portfolio holdings information be kept confidential and that they not trade securities on the basis of such information.

Each fund may also provide certain information (other than complete portfolio holdings) as set forth in paragraphs 1 and 2 below that is related to each fund’s portfolio holdings or derived from each fund’s portfolio holdings to individual and institutional shareholders, prospective shareholders, intermediaries working on behalf of these persons (including consultants and fiduciaries of 401(k) plans), and the media even if the information has not been made publicly available on the Legg Mason Funds’ website or in other published form, so long as the Chief Legal Officer determines that the fund has a legitimate business purpose for disclosing the information and the dissemination cannot reasonably be seen to give the recipient an advantage in trading fund shares or in any other way harm the fund or its shareholders.

1- A small number of portfolio holdings (including information that a fund no longer holds a particular security). However, information about a security may not be released if it could reasonably be seen to interfere with the current or future purchase or sale activities of the fund or is contrary to applicable law. In this respect, information about intended or ongoing transactions may not be released. However, such disclosure may not be made pursuant to ongoing arrangements with third parties to make such information available.

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2- General information about the portfolio holdings that cannot be used to determine the fund’s portfolio holdings or any portion thereof. This would include such characteristics of the fund as portfolio volatility, median capitalization, percentages of international and domestic securities, sector allocations, yields, performance attribution, types of bonds, term structure exposure, bond maturities, and duration.

The Chief Legal Officer may authorize another person to make the determinations required under this policy. If consistent with the best interests of the fund and its shareholders, such determinations (whether made by the Chief Legal Officer or his/her designee) do not necessarily need to be made each time the information is disclosed. For example, such determinations may be made with respect to general categories or information or a particular type of information disclosed to a particular third party or category of third party.

TAX-DEFERRED QUALIFIED PLANS—PRIMARY CLASS SHARES

Investors may invest in Primary Class shares of a fund through IRAs, simplified employee pension plans (“SEPs”), savings incentive match plans for employees (“SIMPLES”), other qualified retirement plans and Coverdell ESAs (collectively, “qualified plans”). In general, income earned through the investment of assets of qualified plans is not taxed to their beneficiaries until the income is distributed to those beneficiaries (or, in the case of Roth IRAs and Coverdell ESAs, not at all if certain conditions are satisfied). Investors who are considering establishing a qualified plan should consult their attorneys or other tax advisers with respect to individual tax questions. Please consult your financial adviser for further information with respect to these plans.

Individual Retirement Account—IRA

TRADITIONAL IRA. Certain Primary Class shareholders who receive compensation, including earnings from self-employment, may establish and make contributions to an IRA. Your IRA contributions can be tax-deductible if neither you nor your spouse is an active participant in a qualified employer or government retirement plan. If you or your spouse is an active participant in such a plan, your IRA contribution may be deductible, in whole or in part, depending on the amount of your and your spouse’s combined adjusted gross income. In addition, all earnings grow tax-deferred until withdrawn, at which point distributions are taxed as ordinary income to you, usually after age 59 1/2, when you may be in a lower tax bracket. Withdrawals made before age 59 1/2 are generally subject to a 10% penalty.

ROTH IRA. Unlike a traditional IRA, a Roth IRA is only available to individuals who meet certain “modified adjusted gross income” (MAGI) limitations. Under certain circumstances, a traditional IRA may be converted to a Roth IRA; these conversions are, however, subject to federal income tax.

Contributions to a Roth IRA are not deductible; however, earnings accumulate tax-free in a Roth IRA, and withdrawals of earnings are not subject to federal income tax if the account has been held for at least five years (or in the case of earnings attributable to a conversion of a traditional IRA, the conversion occurred more than five years before the withdrawal) and the account holder has reached age 59 1/2 (or certain other conditions apply).

Simplified Employee Pension Plan—SEP

LMIS makes available to corporate and other employers a SEP for investment in Primary Class shares of a fund.

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Savings Incentive Match Plan for Employees—SIMPLE

An employer with no more than 100 employees that does not maintain another qualified retirement plan may establish a SIMPLE, either as a plan using separate IRAs or as part of a Code section 401(k) plan. A SIMPLE, which is not subject to the complicated nondiscrimination rules that generally apply to other qualified retirement plans, allows certain employees to make elective contributions of up to certain amounts each year and requires the employer to make matching contributions of up to 3% of each such employee’s salary or a 2% non-elective contribution.

Coverdell Education Savings Account—Coverdell ESA

A Coverdell ESA provides a vehicle for saving for a child’s education. A Coverdell ESA may be established for the benefit of any minor, and any person whose MAGI does not exceed certain levels may contribute to a Coverdell ESA, subject to certain annual limits on contributions. Contributions are not deductible and may not be made after the beneficiary reaches age 18; however, earnings accumulate tax-free, and withdrawals are not subject to tax if used to pay the qualified education expenses of the beneficiary (or a qualified family member).

For further information regarding any of the above-qualified plans, including MAGI limitations, contact your financial adviser or Legg Mason Funds Investor Services at 1-800-822-5544.

Withholding

Withholding at the rate of 20% is required for federal income tax purposes on certain distributions (excluding, for example, certain periodic payments) from qualified retirement plans (except IRAs and SEPs), unless the recipient transfers the distribution directly to an “eligible retirement plan” (including an IRA or other qualified retirement plan) that accepts those distributions. Other distributions generally are subject to regular wage withholding or to withholding at the rate of 10% (depending on the type and amount of the distribution), unless the recipient elects not to have any withholding apply. Investors should consult their plan administrator or tax adviser for further information.

MANAGEMENT OF THE FUNDS

Under applicable law, the Board of Directors is responsible for management of the Corporation and provides broad oversight over its affairs. The Corporation’s officers manage the day-to-day operations of the Corporation under the general direction of the Board of Directors.

The standing committees of the Board of Directors include an Audit Committee, a Nominating Committee and an Independent Directors Committee. All directors who are not “interested persons” of the Corporation, as defined in the 1940 Act, are members of all three committees.

The Audit Committee meets at least twice a year with the Corporation’s independent registered public accounting firm and officers to consider issues relating to the accounting principles used by the Corporation, the auditor’s assessment of the adequacy of internal controls, the qualifications and fees of the independent registered public accounting firm, the scope of the audit services and any permissible non-audit services for which they are retained, the results of the audit and other matters. The Nominating Committee meets as necessary to review and nominate candidates for positions as directors, to fill vacancies on the Board of Directors, and to evaluate the performance of directors. The selection and nomination of candidates to serve as independent directors to the Corporation is committed to the discretion of the Corporation’s current directors who are not interested persons of the Corporation (“Independent Directors”). The Independent Directors Committee considers matters related to fund operations and oversees issues related to the independent directors. During the last fiscal year, the Audit Committee met four times, the Nominating Committee did not meet and the Independent Directors Committee met five times.

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The tables below provide information about the Corporation’s directors and officers, including biographical information about their business experience and information about their relationships with Legg Mason, Inc. and its affiliates. The mailing address of each director and officer is 100 Light Street, 32nd Floor, Baltimore, Maryland 21202, Attn: Fund Secretary. The Nominating Committee will accept recommendations for nominations from any source it deems appropriate. Shareholders may forward recommendations to the Fund Secretary at the above address.

INDEPENDENT DIRECTORS:

Name, (Year of Birth) and Position with Corporation	Term of Office and Length of Time Served (1)	Number of Funds in Fund Complex Overseen	Other Directorships
Hearn, Ruby P. (1940) Director	Since 2004	14	None
Lehman, Arnold L. (1944) Lead Independent Director	Since 1987	14	None
Masters, Robin J.W. (1955) Director	Since 2002	14	Director of Cheyne Ca International Limi (investment advisory Director/Trustee of L Mason Asian Funds pl Legg Mason Instituti Funds plc, Western As Fixed Income Funds plc Western Asset Deb Securities plc
McGovern, Jill E. (1944) Director	Since 1989	14	None
Mehlman, Arthur S. (1942) Director	Since 2002	Director/Trustee of all Legg Mason Funds consisting of 14 portfolios; Director/Trustee of the Royce Family of Funds consisting of 27 portfolios.	Director of Munici Mortgage & Equity,

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O’Brien, G. Peter (1945) Director	Since 2002	Director/Trustee of all Legg Mason Funds consisting of 14 portfolios; Director/ Trustee of the Royce Family of Funds consisting of 27 portfolios.	Director of Technol Investment Capital C
Rowan, S. Ford (1943) Director	Since 2002	14	None
Tarola, Robert M. (1950)	Since 2004	14	None

INTERESTED DIRECTORS:

Name, (Year of Birth) and Position with Corporation	Term of Office and Length of Time Served (1)	Number of Funds in Fund Complex Overseen	Other Directorships
Curley Jr., John F. (1939) Chairman and Director	Since 1987	14	None
Fetting, Mark R. (1954) President and Director	President since 2001 and Director since 2002	President and Director/Trustee of all Legg Mason Funds consisting of 14 portfolios; Director/Trustee of the Royce Family of Funds consisting of 27 portfolios.	None

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EXECUTIVE OFFICERS:

Name, (Year of Birth) and Position with Corporation	Term of Office and Length of Time Served (1)	Number of Funds in Fund Complex Overseen	Other Directorships
Karpinski, Marie K. (1949) Vice President and Chief Financial Officer	Since 1987	14	None
Merz, Gregory T. (1958) Vice President and Chief Legal Officer	Since 2003	14	None
Becker, Ted P. (1951) Vice President and Chief Compliance Officer	Since 2007	14	None
Wachterman, Richard M. (1947) Secretary	Since 2004	14	None
Morris, Erin K. (1966) Treasurer	Since 2006	3	None

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(1) Officers of the Corporation are elected to serve until their successors are elected and qualified. Directors of the Corporation serve a term of indefinite length until their resignation or removal and stand for re-election by shareholders only as and when required by the 1940 Act.

Mr. Curley and Mr. Fetting are considered to be interested persons, as defined in the 1940 Act, of the Corporation on the basis of their employment with the funds’ adviser or its affiliated entities (including the funds’ principal underwriter) and Legg Mason, Inc., the parent holding company of those entities, as well as their ownership of Legg Mason, Inc. stock.

The following table shows each director’s ownership of shares of the funds and of all the Legg Mason Funds served by the director as of December 31, 2006:

Name of Director	Dollar Range of Equity Securities in Legg Mason Growth Trust
INDEPENDENT DIRECTORS:
Hearn, Ruby P.	Limited Duration Portfolio	None
	Investment Grade Income Portfolio	None
Lehman, Arnold L.	Limited Duration Portfolio	None
	Investment Grade Income Portfolio	None
Masters, Robin J.W.	Limited Duration Portfolio	None
	Investment Grade Income Portfolio	None
McGovern, Jill E.	Limited Duration Portfolio	None
	Investment Grade Income Portfolio	None
Mehlman, Arthur S.	Limited Duration Portfolio	None
	Investment Grade Income Portfolio	None
O’Brien, G. Peter	Limited Duration Portfolio	None
	Investment Grade Income Portfolio	None
Rowan, S. Ford	Limited Duration Portfolio	$1-$10,000
	Investment Grade Income Portfolio	None
Tarola, Robert M.	Limited Duration Portfolio	None
	Investment Grade Income Portfolio	None
INTERESTED DIRECTORS:
Curley, John F., Jr.	Limited Duration Portfolio	$50,001-$100,000
	Investment Grade Income Portfolio	None
Fetting, Mark R.	Limited Duration Portfolio	None
	Investment Grade Income Portfolio	None

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The following table provides certain information relating to the compensation of the Corporation’s directors. None of the Legg Mason Funds has any retirement plan for its directors. However, each director may participate in a deferred compensation plan as discussed below.

Name of Person and Position	Aggregate Compensation from Corporation*			Total Compensation fr Legg Mason Funds**
INDEPENDENT DIRECTORS:
Hearn, Ruby P. –	$	14,674	****	$	116,250
Director
Lehman, Arnold L. –	$	17,080	****	$	134,250
Director
Masters, Robin J.W. –	$	14,674		$	115,000
Director
McGovern, Jill E. –	$	14,674	****	$	116,250
Director
Mehlman, Arthur S. –	$	16,012		$	126,250
Director
O’Brien, G. Peter –	$	14,674	****	$	115,000
Director
Rowan, S. Ford –	$	14,674		$	116,250
Director
Tarola, Robert M. –	$	14,674		$	115,000
Director
INTERESTED DIRECTORS:
Curley, John F., Jr. –
Chairman of the Board and Director		None			None
Fetting, Mark R. –		None			None
Director

* Represents compensation paid to the directors by Legg Mason Income T December 31, 2007.

** Represents aggregate compensation paid to each director during the calendar Legg Mason Funds. During that period there were 10 open-end investment comp Mason Funds, consisting of 14 portfolios.

*** Represents aggregate compensation paid to each director during the calendar Fund Complex. The Fund Complex includes the Legg Mason Funds and the 27 por

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**** The total amount of deferred compensation accrued by the Corporation (inclu amounts deferred) through the 2007 fiscal year for participating Directors Arnold L. Lehman, $13,254; Jill E. McGovern, $53,788; and G. Peter O’Brien,

Officers and directors who are interested persons of the Corporation, as defined in the 1940 Act, receive no salary or fees from the Corporation. For serving as a director/trustee of all of the Legg Mason mutual funds, each Independent Director receives an annual retainer of $75,000 and a fee of $7,500 for each regularly scheduled meeting he or she attends. Individual Directors may elect to defer all or a portion of their fees through deferred compensation plans. The Lead Independent Director receives additional compensation of $18,000 annually. The Chair of the Audit Committee receives additional compensation of $10,000 annually. The Co-Chairs of the Nominating Committee receive additional compensation of $5,000 in any year where the Committee is active. Independent Directors will also receive a fee of $3,750 or $1,250 for any special meeting they attend in person or by telephone, respectively. The Independent Directors review the level of director compensation periodically in order to determine if adjustments are appropriate. This review is conducted in consultation with the fund’s counsel and independent consultants, as appropriate. Changes in compensation will depend on, among other things, the number, type and size of funds in the complex, market changes in mutual fund director compensation, changes in the operational and regulatory environment, and changes in the oversight role played by the Independent Directors.

On March 31, 2008, the directors and officers of the Corporation beneficially owned in the aggregate less than 1% of any class of a fund’s outstanding shares.

On March 31, 2008, the following shareholders owned of record or beneficially 5% or more of a class of the outstanding shares of a fund. Unless otherwise indicated, each of the shareholders listed below may be contacted c/o Legg Mason Funds at 100 Light Street, 32nd Floor, Baltimore, Maryland 21202, Attn: Fund Secretary.

NAME AND ADDRESS	FUND/CLA
Citigroup Global Markets, Inc.	Limited Duration
House Account	- Primary Class
700 Red Brook
Owings Mills, MD 21117-5184
Citigroup Global Markets, Inc.	Limited Duration
333 West 34th Street	- Institutional Class
New York, NY 10001-2402
Nationwide Trust Co Custodian	Limited Duration
Legg Mason Profit Sharing and Plan	- Institutional Class
98 San Jacinto Blvd., Ste. 1100
Austin, TX 78701-4255
Citigroup Global Markets, Inc.	Investment Grade
House Account	- Primary Class
700 Red Brook
Owings Mills, MD 21117-5184
Citigroup Global Markets, Inc.	Investment Grade
333 West 34th Street	- Institutional Class
New York, NY 10001-2402
Nationwide Trust Co Custodian	Investment Grade
Legg Mason Profit Sharing and Plan	- Institutional Class
98 San Jacinto Blvd., Ste. 1100
Austin, TX 78701-4255

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THE FUNDS’ INVESTMENT ADVISER AND MANAGER

Legg Mason Fund Adviser, Inc. (“LMFA”), a Maryland corporation, 100 Light Street, Baltimore, Maryland 21202, is a wholly owned subsidiary of Legg Mason, Inc. (“Legg Mason”), a financial services holding company, which is also the parent of LMIS. LMFA serves as the manager for each fund under separate management agreements (each a “Management Agreement”). Each Management Agreement provides that, subject to overall direction by the Board of Directors, LMFA will manage the investment and other affairs of each fund. Under each Management Agreement, LMFA is responsible for managing the fund’s portfolio of securities and for making purchases and sales of securities consistent with the 1940 Act, the Internal Revenue Code and investment objectives and policies described in the Prospectus and this SAI.

LMFA is obligated to (a) furnish each fund with office space and executive and other personnel necessary for the operations of the fund; (b) supervise all aspects of each fund’s operations; (c) bear the expense of certain informational and purchase and redemption services to the fund’s shareholders; (d) arrange, but not pay for, the periodic updating of prospectuses and preparing proxy materials, tax returns and reports to shareholders and state and federal regulatory agencies; and (e) report regularly to the fund’s officers and directors. In addition, the manager and its affiliates pay all compensation of directors and officers of the fund who are officers, directors or employees of LMFA and/or its affiliates. Each fund pays all of its expenses which are not expressly assumed by LMFA. These expenses include, among others, interest expense, taxes, brokerage fees and commissions, expenses of preparing and printing prospectuses, statements of additional information, proxy statements and reports to shareholders and of distributing them to existing shareholders, custodian charges, transfer agency fees, distribution fees to LMIS, each fund’s distributor, compensation of the Independent Directors, legal and audit expenses, insurance expenses, shareholder meetings, proxy solicitations, expenses of registering and qualifying fund shares for sale under federal and state law, governmental fees and expenses incurred in connection with membership in investment company organizations. A fund also is liable for such nonrecurring expenses as may arise, including litigation to which the fund may be a party. A fund may also have an obligation to indemnify its directors and officers with respect to litigation.

LMFA has delegated the portfolio management functions for each fund to Western Asset Management Company (“Adviser”). The Adviser, located at 385 East Colorado Boulevard, Pasadena, CA 91101, is an affiliate of LMFA and serves as investment adviser to each fund under separate Investment Advisory Agreements (each an “Advisory Agreement”) between the Adviser and LMFA.

LMFA receives for its services a management fee, calculated daily and payable monthly, at annual rates of each fund’s average daily net assets according to the following:

Limited Duration	0.45	%
Investment Grade	0.60	%

Management fees are allocated among each class based on their pro rata share of fund assets.

LMFA has contractually agreed to waive fees or reimburse expenses so that Core Bond Primary Class share operating expenses (exclusive of taxes, interest, brokerage and extraordinary expenses) do not exceed an annual rate of 1.00% of average daily net assets attributable to Primary Class shares of the fund. This waiver will remain in effect until April 30, 2009. Core Bond has agreed to repay LMFA for reduced fees and reimbursed expenses provided that payment does not cause the Primary Class operating expenses to exceed 1.00% of its average net assets and the payment is made within three years after the year in which the manager earned the fee or incurred the expense.

LMFA has voluntarily agreed to waive its fees to the extent that Investment Grade total operating expenses attributable to Primary Class and Institutional Class shares (exclusive of taxes, interest, brokerage and extraordinary expenses) exceed during any month an annual rate of 1.00% and 0.50%, respectively, of the fund’s average daily net assets attributable to

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Primary Class and Institutional Class shares of the fund. These agreements will expire on April 30, 2009, unless extended by LMFA. These waivers are voluntary and may be terminated at any time, but they are expected to continue until April 30, 2009.

For the following fiscal years ended December 31, the funds incurred management fees of (prior to fees waived or reimbursed):

	2007		2006
Limited Duration	$	877,714	$	983,940
Investment Grade	$	2,601,692	$	2,399,805

For the following fiscal years ended December 31, the following management fees were waived by LMFA:

	2007		2006
Limited Duration	$	204,294	$	300,823
Investment Grade	$	829,032	$	956,188

Under each Management Agreement, each fund has the non-exclusive right to use the name “Legg Mason” until that Agreement is terminated or until the right is withdrawn in writing by LMFA.

Under each Advisory Agreement, the Adviser is responsible, subject to the general supervision of LMFA and the Board of Directors, for the actual management of a fund’s assets, including the responsibility for making decisions and placing orders to buy, sell or hold a particular security. For the Adviser’s services to each fund, LMFA (not the fund) pays the Adviser a fee, computed daily and payable monthly, equal to the following:

Fund
Limited Duration	0.20%, not (after a
Investment Grade	40% of t

Effective October 1, 1994, the Adviser agreed to waive payments by LMFA with respect to Limited Duration in excess of 0.20% annually of Limited Duration’s average daily net assets. This does not affect the fee paid by the fund.

For the fiscal years ended December 31, LMFA paid the following fees to the Adviser:

Fund	2007		2006
Limited Duration	$	673,420	$	683,117
Investment Grade	$	1,772,660	$	1,443,617

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Under each Advisory Agreement and Management Agreement, the Adviser and LMFA, respectively, will not be liable for any error of judgment or mistake of law or for any loss by a fund in connection with the performance of the Advisory Agreement or Management Agreement, except a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services or a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations or duties under the respective Agreement.

Each Advisory Agreement and Management Agreement terminates automatically upon assignment and is terminable at any time without penalty by vote of the Board of Directors, by vote of a majority of each fund’s outstanding voting securities, by LMFA or by the Adviser, on not less than 60 days’ notice to the respective fund and/or the other party(ies). Each Advisory Agreement terminates immediately upon any termination of the associated Management Agreement or upon the mutual written consent of the Adviser, LMFA and each fund.

Portfolio Managers

Limited Duration Bond. S. Kenneth Leech, Stephen A. Walsh and James J. Flick serve as portfolio managers to Limited Duration Bond. The tables below provide information regarding other accounts for which Messrs. Leech, Walsh and Flick have day-to-day management responsibility.

S. Kenneth Leech

As of December 31, 2007:

Type of Account	Number of Accounts Managed	Total Assets Managed		Number of for which Perfor
Registered Investment Companies	114	$	121,619,377,643
Other pooled investment vehicles	239	$	211,995,391,168
Other accounts	1069	$	300,567,840,634

Stephen A. Walsh

As of December 31, 2007:

Type of Account	Number of Accounts Managed	Total Assets Managed		Number of for which Perfor
Registered Investment Companies	114	$	121,619,377,643
Other pooled investment vehicles	239	$	211,995,391,168
Other accounts	1069	$	300,567,840,634

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James J. Flick

As of December 31, 2007:

Type of Account	Number of Accounts Managed	Total Assets Managed		Number of for which Perfor
Registered Investment Companies	5	$	915,404,177	None
Other pooled investment vehicle	13	$	5,183,066,565	None
Other accounts	87	$	38,549,171,165	8

As of December 31, 2007, Messrs. Leech, Walsh and Flick owned no shares of the fund.

Investment Grade Income. S. Kenneth Leech, Stephen A. Walsh and Jeffrey D. Van Schaick serve as portfolio managers to Investment Grade Income. The tables below provide information regarding other accounts for which they have day-to-day management responsibility.

Type of Account	Number of Accounts Managed	Total Assets Managed		Number of for which Perfor
Registered Investment Companies	114	$	121,619,377,643
Other pooled investment vehicles	239	$	211,995,391,168
Other accounts	1069	$	300,567,840,634

Stephen A. Walsh

As of December 31, 2007:

Type of Account	Number of Accounts Managed	Total Assets Managed		Number of for which Perfor
Registered Investment Companies	114	$	121,619,377,643
Other pooled investment vehicles	239	$	211,995,391,168
Other accounts	1069	$	300,567,840,634

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Jeffrey D. Van Schaick

As of December 31, 2007:

Type of Account	Number of Accounts Managed	Total Assets Managed		Number of for which Perfor
Registered Investment Companies	3	$	897,169,117	No
Other pooled investment vehicle	None	$	0	No
Other accounts	19	$	5,003,051,374	3

As of December 31, 2007, Messrs. Leech, Walsh and Van Schaik owned no shares of the fund.

The numbers above reflect the overall number of portfolios managed by Western Asset. Mr. Leech and Mr. Walsh are involved in the management of all the Firm’s portfolios, but they are not solely responsible for particular portfolios. Western’s investment discipline emphasizes a team approach that combines the efforts of groups of specialists working in different market sectors. The individuals that have been identified are responsible for overseeing implementation of the Firm’s overall investment ideas and coordinating the work of the various sector teams. This structure ensures that client portfolios benefit from a consensus that draws on the expertise of all team members.

Potential Conflicts of Interest

Potential conflicts of interest may arise in connection with the management of multiple accounts (including accounts managed in a personal capacity). These could include potential conflicts of interest related to the knowledge and timing of a fund’s trades, investment opportunities and broker selection. Portfolio managers may be privy to the size, timing and possible market impact of a fund’s trades.

It is possible that an investment opportunity may be suitable for both a fund and other accounts managed by a portfolio manager, but may not be available in sufficient quantities for both the fund and the other accounts to participate fully. Similarly, there may be limited opportunity to sell an investment held by a fund and another account. A conflict may arise where the portfolio manager may have an incentive to treat an account preferentially as compared to a fund because the account pays a performance-based fee or the portfolio manager, the Adviser or an affiliate has an interest in the account. The Adviser has adopted procedures for allocation of portfolio transactions and investment opportunities across multiple client accounts on a fair and equitable basis over time. All eligible accounts that can participate in a trade share the same price on a pro-rata allocation basis in an attempt to mitigate any conflict of interest. Trades are allocated among similarly managed accounts to maintain consistency of portfolio strategy, taking into account cash availability, investment restrictions and guidelines, and portfolio composition versus strategy.

With respect to securities transactions for the funds, the Adviser determines which broker or dealer to use to execute each order, consistent with its duty to seek best execution of the transaction. However, with respect to certain other accounts (such as pooled investment vehicles that are not registered investment companies and other accounts managed for organizations and individuals), the Advisers may be limited by the client with respect to the selection of brokers or dealers or may be instructed to direct trades through a particular broker or dealer. In these cases, trades for a fund in a particular security may be placed separately from, rather than aggregated with, such other accounts. Having separate transactions with respect to a security may temporarily affect the market price of the security or the execution of the transaction, or both, to the possible detriment of a fund or the other account(s) involved. Additionally, the management of multiple funds and/or other accounts may result in a portfolio manager devoting unequal time and attention to the management of each fund and/or other account.

It is theoretically possible that portfolio managers could use information to the advantage of other accounts they manage and to the possible detriment of a fund. For example, a portfolio manager could short sell a security for an account immediately prior to a fund’s sale of that security. To address this conflict, the Adviser has adopted procedures for reviewing and comparing selected trades of alternative investment accounts

45

(which may make directional trades such as short sales) with long only accounts (which include the funds) for timing and pattern related issues. Trading decisions for alternative investment and long only accounts may not be identical even though the same Portfolio Manager may manage both types of accounts. Whether the Adviser allocates a particular investment opportunity to only alternative investment accounts or to alternative investment and long only accounts will depend on the investment strategy being implemented. If, under the circumstances, an investment opportunity is appropriate for both its alternative investment and long only accounts, then it will be allocated to both on a pro-rata basis.

A portfolio manager may also face other potential conflicts of interest in managing a fund, and the description above is not a complete description of every conflict of interest that could be deemed to exist in managing both a fund and the other accounts listed above.

Compensation of Portfolio Managers

With respect to the compensation of the portfolio managers, Western’s compensation system assigns each employee a total compensation “target” and a respective cap, which are derived from annual market surveys that benchmark each role with their job function and peer universe. This method is designed to reward employees with total compensation reflective of the external market value of their skills, experience, and ability to produce desired results.

Standard compensation includes competitive base salaries, generous employee benefits, and a retirement plan.

In addition, employees are eligible for bonuses. These are structured to closely align the interests of employees with those of Western, and are determined by the professional’s job function and performance as measured by a formal review process. All bonuses are completely discretionary. One of the principal factors considered is a portfolio manager’s investment performance versus appropriate peer groups and benchmarks. Because portfolio managers are generally responsible for multiple accounts (including the fund) with similar investment strategies, they are compensated on the performance of the aggregate group of similar accounts, rather than a specific account. A smaller portion of a bonus payment is derived from factors that include client service, business development, length of service to Western, management or supervisory responsibilities, contributions to developing business strategy and overall contributions to Western’s business.

Finally, in order to attract and retain top talent, all professionals are eligible for additional incentives in recognition of outstanding performance. These are determined based upon the factors described above and include Legg Mason, Inc. stock options and long-term incentives that vest over a set period of time past the award date.

Code of Ethics

The funds, LMFA, the Adviser and LMIS each has adopted a code of ethics under Rule 17j-1 of the 1940 Act, which permits personnel covered by the code to invest in securities that may be purchased or held by a fund, but prohibits fraudulent, deceptive or manipulative conduct in connection with that personal investing. With respect to transactions in Legg Mason Funds, personnel covered by the code must hold fund shares purchased for at least sixty days, unless a specific waiver is granted by the person’s employer; and are prohibited from using their knowledge of the portfolio of a Legg Mason Fund to engage in any trade or short-term trading strategy involving that fund.

Proxy Voting

The Legg Mason funds have developed proxy voting procedures whereby, subject to Board of Directors oversight, the advisers and/or sub-advisers that actually manage the assets of the fund are delegated the responsibility for assessing and voting each fund’s proxies in accordance with their own proxy voting policies and procedures. These policies and procedures include specific provisions to determine when a conflict exists between the fund and its adviser and its affiliates. Copies of the proxy voting policies and procedures are attached to this SAI as Appendix B.

46

Information regarding how each fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge through www.leggmason.com/IndividualInvestors/documents/ shareholder_information/D3361-secincom.pdf or the SEC’s Internet site at http://www.sec.gov.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The portfolio turnover rate is computed by dividing the lesser of purchases or sales of securities for the period by the average value of portfolio securities for that period. Short-term securities are excluded from the calculation. For the following fiscal years ended December 31, each fund’s portfolio turnover rates were as follows:

Fund	2007		2006
Limited Duration*	287	%	237	%
Investment Grade	47	%	66	%

* The portfolio turnover for Limited Duration is dominated by three of the Adviser’s portfolio strategies. Mortgage to Treasury Basis trades account for approximately 70% of the portfolio turnover, while agency to Treasury Basis trades account for approximately 10%. Term structure or curve views roughly account for the remaining 20%.

The funds may sell fixed-income securities and buy similar securities to obtain yield and take advantage of market anomalies, a practice which increases the turnover rate. A high portfolio turnover rate will result in higher transaction costs paid by a fund. It may also increase the amount of net short-term capital gains, if any, realized by a fund. Variation in a fund’s portfolio turnover rate from year to year may be due to a fluctuating volume of shareholder purchase or redemption orders or market conditions.

Under each Advisory Agreement, the Adviser is responsible for the execution of portfolio transactions. Corporate and government debt securities are generally traded on the over-the-counter market on a “net” basis without a stated commission, through dealers acting for their own account and not as brokers. Prices paid to a dealer in debt securities generally include a “spread,” which is the difference between the price at which the dealer is willing to purchase and sell the specific security at the time, and includes the dealer’s normal profit. Some portfolio transactions may be executed through brokers acting as agent. In selecting brokers or dealers, the Adviser must seek the most favorable price (including the applicable dealer spread or brokerage commission) and execution for such transactions, subject to the possible payment, as described below, of higher brokerage commissions for agency transactions or spreads to broker-dealers who provide research and analysis. A fund may not always pay the lowest commission or spread available. Rather, in placing orders on behalf of a fund, the Adviser also takes into account other factors bearing on the overall quality of execution, such as size of the order, difficulty of execution, efficiency of the executing broker’s facilities (including the services described below) and any risk assumed by the executing broker. Furthermore, the lack of a centralized mechanism for reporting bids, offers and transaction prices in fixed- income securities can at times make it difficult for the Adviser to discover the best available price.

Consistent with the policy of most favorable price and execution, the Adviser may give consideration to research, statistical and other services furnished by broker-dealers to the Adviser for its use, may place orders with broker-dealers who provide supplemental investment and market research and securities and economic analysis, and may pay to these broker-dealers a higher brokerage commission than may be charged by other broker-dealers or a higher transaction fee on so-called “riskless principal” trades in certain Nasdaq securities. Such services include, without limitation, advice as to the value of securities; the advisability of investing in, purchasing, or selling securities; advice as to the availability of securities or of purchasers or sellers of securities; and the provision of analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy and the

47

performance of accounts. Such research and analysis may be useful to the Adviser in connection with services to clients other than the funds whose brokerage generated the service. On the other hand, research and analysis received by the Adviser from broker-dealers executing orders for clients other than the funds may be used for the fund’s benefit. The Adviser’s fee is not reduced by reason of its receiving such brokerage and research services.

Each fund may use brokerage firms affiliated with the funds’ investment adviser (“affiliated broker”) as its broker for agency transactions in listed and OTC securities at commission rates and under circumstances consistent with the policy of best execution. Commissions paid to affiliated brokers will not exceed “usual and customary brokerage commissions.” Rule 17e-1 under the 1940 Act defines “usual and customary” commissions to include amounts which are “reasonable and fair compared to the commission, fee or other remuneration received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time.” In the OTC market, a fund generally deals with responsible primary market-makers unless a more favorable execution can otherwise be obtained.

For the fiscal years ended December 31, the following funds paid commissions to broker-dealers who acted as agents in executing options and futures trades:

	2004			2006
Limited Duration*	$	82,015		$	51,860
Investment Grade	$	28,430	**	$	94,585	***

* The increase in commissions paid by Limited Duration during the past fiscal year relative to the two prior years was due to an increase in the volume and frequency of trades in the past year and by the effect of somewhat higher commission rates.

** The decrease in commissions paid by Investment Grade during the 2007 fiscal year relative to the prior year was due to a decrease in the volume and frequency of trades in that year and by the effect of somewhat lower commission rates.

*** The increase in commissions paid by Investment Grade during the 2006 fiscal year relative to the prior year was due to an increase in the volume and frequency of trades in the past year and by the effect of slightly higher commission rates.

For the fiscal years ended December 31, 2007, 2006 and 2005, no affiliated brokers received brokerage commissions from the funds.

Except as permitted by SEC rules or orders, no fund may buy securities from, or sell securities to, LMIS or its affiliated persons as principal, including so-called “riskless principal” trades. The Board of Directors has adopted procedures in conformity with Rule 10f-3 under the 1940 Act, whereby a fund may purchase securities that are offered in underwritings in which LMIS or any of its affiliated persons is a participant. These procedures, among other things, limit each fund’s investment in the amount of securities offered in an underwriting in which LMIS or any of its affiliated persons is a participant so that a fund together with all other registered investment companies having the same investment adviser and all private accounts controlled by the same investment adviser may not purchase more than 25% of the principal amount of the offering of such class. In addition, a fund may not purchase securities during the existence of an underwriting if LMIS is the sole underwriter of those securities. In no case in which a fund purchases securities in an underwriting in which LMIS or any affiliated person is a participant can the fund purchase the securities from LMIS or the affiliated person.

Section 11(a) of the Securities Exchange Act of 1934, as amended, prohibits LMIS from receiving compensation for executing transactions on an

48

exchange for its affiliates, such as the funds, unless the affiliate expressly consents by written contract. Each fund’s Advisory Agreement expressly provides such consent.

As of the close of the fiscal year ended December 31, 2007, the funds did not hold any securities of its regular broker-dealers or parent companies of such broker-dealers.

Investment decisions for each fund are made independently from those of other funds and accounts advised by LMFA and the Adviser. However, the same security may be held in the portfolios of more than one fund or account. When two or more accounts simultaneously engage in the purchase or sale of the same security, the prices and amounts will be equitably allocated to each account. In some cases, this procedure may adversely affect the price or quantity of the security available to a particular account. In other cases, however, an account’s ability to participate in large-volume transactions may produce better executions and prices.

THE FUNDS’ DISTRIBUTOR

LMIS acts as distributor of the funds’ shares pursuant to separate Distribution Agreements with each fund. Except as noted in the Prospectus, the Corporation’s shares are distributed in a continuous offering. Each Distribution Agreement obligates LMIS to promote the sale of fund shares and to pay certain expenses in connection with its distribution efforts, including expenses for the printing and distribution of prospectuses and periodic reports used in connection with the offering to prospective investors (after the prospectuses and reports have been prepared, set in type and mailed to existing shareholders at each fund’s expense) and for supplementary sales literature and advertising costs.

Under each Distribution Agreement, each fund has the non-exclusive right to use the name “Legg Mason” until that agreement is terminated, or until the right is withdrawn in writing by LMIS.

Each fund has adopted a Distribution and Shareholder Services Plan (“Plan”) for Primary Class shares which, among other things, permits the fund to pay LMIS fees for its services related to sales and distribution of Primary Class shares and for the provision of ongoing services to Primary Class shareholders. Payments are made only from assets attributable to Primary Class shares. Distribution activities for which such payments may be made include, but are not limited to, compensation to persons who engage in or support distribution and redemption of shares, printing of prospectuses and reports for persons other than existing shareholders, advertising, preparation and distribution of sales literature, overhead, travel and telephone expenses, all with respect to Primary Class shares only.

Amounts payable by a fund under a Plan need not be directly related to the expenses actually incurred by LMIS on behalf of the fund. Each Plan does not obligate a fund to reimburse LMIS for the actual expenses LMIS may incur in fulfilling its obligations under the Plan. Thus, even if LMIS’ actual expenses exceed the fee payable to LMIS at any given time, a fund will not be obligated to pay more than that fee. If LMIS’ expenses are less than the fee it receives, LMIS will retain the full amount of the fee.

The Plans were each adopted, as required by Rule 12b-1 under the 1940 Act, by a vote of the Board of Directors, including a majority of the Independent Directors who have no direct or indirect financial interest in the operation of any Plan or any Distribution Agreement (“12b-1 Directors”). In approving the establishment or continuation of each Plan, in accordance with the requirements of Rule 12b-1, the directors determined that there was a reasonable likelihood that each Plan would benefit the applicable fund and its Primary Class shareholders. The directors considered, among other things, the extent to which the potential benefits of each Plan to the fund’s Primary Class shareholders could offset the costs of each Plan; the likelihood that each Plan would succeed in producing such potential benefits; the merits of certain possible alternatives to each Plan; and the extent to which the retention of assets and additional sales of the fund’s Primary Class shares, as applicable, would be likely to maintain or increase the amount of compensation paid by that fund to LMFA.

In considering the costs of each Plan, the directors gave particular attention to the fact that any payments made by a fund to LMIS under a Plan would increase that fund’s level of expenses in the amount of such payments. Further, the directors recognized that LMFA and the Adviser would earn greater management fees if a fund’s assets were increased, because such fees are calculated as a percentage of a fund’s assets and thus would increase if net assets increase. The directors further recognized that there can be no assurance that any of the potential benefits described below would be achieved if the Plan was implemented.

49

Among the potential benefits of the Plans, the directors noted that the payment of commissions and service fees to LMIS for payment to securities brokers and their registered representatives could motivate them to improve their sales efforts with respect to each fund’s Primary Class shares and to maintain and enhance the level of services they provide to a fund’s Primary Class shareholders. These efforts, in turn, could lead to increased sales and reduced redemptions, eventually enabling a fund to achieve economies of scale and lower per share operating expenses. Any reduction in such expenses could serve to offset, at least in part, the additional expenses incurred by a fund in connection with its Plan. Furthermore, the investment management of a fund could be enhanced, as any net inflows of cash from new sales might enable its portfolio manager to take advantage of attractive investment opportunities, and the possible reduced redemptions could eliminate the potential need to liquidate attractive securities positions in order to raise the funds necessary to meet the redemption requests.

Each Plan will continue in effect only so long as it is approved at least annually by the vote of a majority of the Board of Directors, including a majority of the 12b-1 Directors, cast in person at a meeting called for the purpose of voting on that Plan. A Plan may be terminated with respect to each fund by a vote of a majority of the 12b-1 Directors or by vote of a majority of the outstanding voting Primary Class shares of that fund. Any change in a Plan that would materially increase the distribution costs to a fund requires shareholder approval; otherwise a Plan may be amended by the directors, including a majority of the 12b-1 Directors.

Rule 12b-1 requires that any person authorized to direct the disposition of monies paid or payable by a fund, pursuant to a Plan or any related agreement, shall provide to that fund’s Board of Directors, and the directors shall review, at least quarterly, a written report of the amounts so expended pursuant to that Plan and the purposes for which the expenditures were made.

As compensation for its services and expenses, LMIS receives annual distribution fees equal to 0.25% and annual service fees equal to 0.25% of each fund’s average daily net assets attributable to Primary Class shares in accordance with each Plan. The distribution and service fees are calculated daily and paid monthly.

For the fiscal year ended December 31, 2007, the funds incurred distribution and service fees with respect to Primary Class shares of:

Limited Duration	$	915,561
Investment Grade	$	2,020,330

All such fees were paid to LMIS, the funds Principal Underwriter as provided for in the underwriting agreement between LMIS and the funds and pursuant to each fund’s Plan.

For the fiscal year ended December 31, 2007, the following distribution and service fees were waived by LMIS with respect to Primary Class shares:

Limited Duration	$	141,796
Investment Grade	$	332,579

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CAPITAL STOCK INFORMATION

The Articles of Incorporation of the Corporation authorize issuance of 2,000,000,000 shares of common stock, par value $0.001 per share, and allow the Board of Directors to create additional series (or portfolios), each of which may issue separate classes of shares. Limited Duration and Investment Grade currently offer two classes of shares — Primary Class and Institutional Class shares. Each class represents interests in the same pool of assets.

Each share in a fund is entitled to one vote for the election of directors and any other matter submitted to a vote of fund shareholders. A separate vote is taken by a class of shares of a fund if a matter affects just that class. Fractional shares have fractional voting rights. Voting rights are not cumulative. All shares in the funds are fully paid and nonassessable and have no preemptive or conversion rights.

Shareholder meetings will not be held except where the 1940 Act requires a shareholder vote on certain matters (including the election of directors, approval of an advisory contract and certain amendments to each plan of distribution pursuant to Rule 12b-1), at the request of a majority of the shares entitled to vote as set forth in the Bylaws of the Corporation, or as the Board of Directors from time to time deems appropriate.

THE FUNDS’ CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING AGENT

State Street Bank and Trust Company (“State Street”), P.O. Box 1713, Boston, Massachusetts 02105, serves as custodian of each fund’s assets. BFDS, P.O. Box 953, Boston, Massachusetts 02103, as agent for State Street, serves as transfer and dividend-disbursing agent and administrator of various shareholder services. Shareholders who request a historical transcript of their account will be charged a fee based upon the number of years researched. Each fund reserves the right, upon 60 days’ prior written notice, to institute other charges on shareholders to cover a fund’s administrative costs.

THE CORPORATION’S LEGAL COUNSEL

Kirkpatrick & Lockhart Preston Gates Ellis LLP, 1601 K Street, N.W., Washington, D.C. 20006-1600, serves as counsel to the Corporation.

THE CORPORATION’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

PricewaterhouseCoopers LLP, 100 E. Pratt Street, Baltimore, MD 21202, serves as independent registered public accounting firm to the Corporation.

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FINANCIAL STATEMENTS

The Annual Report to Shareholders for the fiscal year ended December 31, 2007 contains the funds’ financial statements, accompanying notes and the report of PricewaterhouseCoopers LLP, the funds’ independent registered public accounting firm, all of which are hereby incorporated by reference herein.

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Appendix A

RATINGS OF SECURITIES

Description of Moody’s Investors Service, Inc. (“Moody’s”) Ratings:

Long-Term Debt Ratings

Aaa – Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as “gilt edge.” Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues an obligation rated Aaa is judged to be of the highest quality, with minimal credit risk.

Aa – Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than in Aaa securities. An obligation rated Aa is judged to be of high quality and are subject to very low credit risk. Obligations rated Aaa and Aa comprise what are generally known as high-grade bonds.

A – Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment some time in the future. An obligation rated A is considered upper-medium grade and are subject to low credit risk.

Baa – Bonds which are rated Baa are considered medium-grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. An obligation rated Baa is subject to moderate credit risk. Obligations rated Baa are considered medium grade and as such may possess certain speculative characteristics.

Ba – Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. An obligation rated Ba is judged to have speculative elements and is subject to substantial credit risk.

B – Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. An obligation rated B is considered speculative and is subject to high credit risk.

Caa – Bonds which are rated Caa are judged to be of poor standing and are subject to very high credit risk. Such issues may be in default or there may be present elements of danger with respect to principal or interest.

Ca – Bonds which are rated Ca represent obligations which are judged to be highly speculative in a high degree and are likely in, or very near, default, with some prospect for recovery of principal and interest. Such issues are often in default or have other marked shortcomings.

A-1

C – An obligation rated C is the lowest rated class of bonds and is typically in default, with little prospect for recovery of principal or interest.

Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category

Short-Term Debt Ratings

Prime-1 – Issuers with a Prime-1 (or supporting institutions) have a superior ability for repayment of short-term debt obligations.

Prime-2 – Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of short-term debt obligations.

Prime-3 – Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of short-term obligations.

Not Prime – Issuers (or supporting institutions) rated not prime do not fall within any of the Prime rating categories.

Description of Standard & Poor’s (“S&P”) Ratings:

Long-Term Issue Credit Ratings

AAA – An obligation rated AAA has the highest rating assigned by S&P. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong.

AA – An obligation rated AA differs from the highest rated obligations only in small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong.

A – An obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.

BBB – An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

Obligations rated BB, B, CCC, CC, and C are regarded as having significant speculative characteristics. BB indicates the least degree of speculation and C the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.

BB – An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

B – An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation.

CCC – An obligation rated CCC is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.

A-2

CC – An obligation rated CC is currently highly vulnerable to nonpayment.

C – The C rating may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken, but payments on this obligation are being continued.

D – An obligation rated D is in payment default. The D rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.

Plus (+) or minus (-)-The ratings from AA to CCC may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.

c – The ‘c’ subscript is used to provide additional information to investors that the bank may terminate its obligation to purchase tendered bonds if the long-term credit rating of the issuer is below an investment-grade level and/or the issuer’s bonds are deemed taxable.

p – The letter p indicates that the rating is provisional. A provisional rating assumes the successful completion of the project financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of or the risk of default upon failure of such completion. The investor should exercise his own judgment with respect to such likelihood and risk.

* – Continuance of ratings is contingent upon S&P’s receipt of an executed copy of the escrow agreement or closing documentation confirming investments and cash flows.

r – The r is attached to highlight derivatives, hybrids and certain other obligations that S&P believes may experience high volatility or high variability in expected returns as a result of noncredit risks. Examples of such obligations are securities whose principal or interest return is indexed to equities, commodities or other instruments. The absence of an ‘r’ symbol should not be taken as an indication that an obligation will exhibit no volatility or variability in total return.

N.R. Not rated.

Commercial Paper

A-1. – A short-term obligation rated ‘A-1’ is rated in the highest category by Standard & Poor’s. The obligor’s capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor’s capacity to meet its financial commitment on these obligations is extremely strong.

A-2. – A short-term obligation rated ‘A-2’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor’s capacity to meet its financial commitment on the obligation is satisfactory

A-3. – A short-term obligation rated ‘A-3’ exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

A-3

APPENDIX B

LEGG MASON FUNDS

PROXY VOTING POLICIES

(Revised 8/11/2004)

These policies are designed to address the rights and responsibility of the Legg Mason funds to ensure that proxies held by the funds are voted in the best interests of each respective fund. Some Legg Mason funds, particularly fixed-income funds, will rarely own securities that have corresponding voting rights. Other funds, however, own equity securities and these policies are designed to assure that proxies are voted in the best interests of the funds, to address potential conflicts of interest, and to keep proxy voting records.

1. Voting Proxies – Proxies solicited for items of business with respect to issuers whose voting securities are owned by a Legg Mason fund, if voted by the fund, must be voted in the best interests of the fund.

2. Proxy Voting Policies of Advisers to Legg Mason Funds – Each investment adviser and sub-adviser to a Legg Mason fund must have written proxy voting policies and procedures, including policies and procedures to address potential material conflicts between an adviser and its clients (including the fund). Each different adviser may have different proxy voting policies and procedures that are individually tailored to fit its respective businesses and investment styles.

3. Funds’ Proxy Voting Policies and Procedures – The investment advisers and sub-advisers to the Legg Mason funds are responsible for managing the assets of the fund or funds they manage, including voting proxies. In accordance with the procedures noted below, the Board of Directors/Trustees of the Legg Mason funds will initially and periodically review and approve the use of the advisers’ policies for the voting of the funds’ proxies. The policies and procedures that a fund will utilize with respect to proxy voting shall be the proxy voting policies and procedures of the adviser or sub-adviser that actually manages the assets of the fund. Each adviser or sub-adviser is responsible for maintaining all proxy voting records required to be established and maintained by the Legg Mason funds and shall provide such records to the funds upon request.

4. Annual Review – An adviser’s proxy voting policies and procedures must be initially reviewed and their use on behalf of a Legg Mason fund approved by the Board of Directors/Trustees. In addition, on an annual basis, each adviser must report any significant problems that arose during the year, any material conflicts, how such conflicts were addressed, and the total number of proxies voted during the previous year. Advisers should also be prepared to discuss any novel or controversial proxy votes during their semi-annual reports to the Board of Directors/Trustees and any votes that were made inconsistent with the adviser’s stated proxy voting policies and procedures.

5. Changes to Advisers’ Policies and Procedures – On an annual basis, any changes to an adviser’s proxy voting policies and procedures, as relevant to the funds, must be reported to the Board of Directors/Trustees, which shall review and, in its discretion, approve the use of such amended proxy voting policies and procedures.

B-1

Legg Mason Fund Adviser, Inc.

Proxy Voting Policy

LMFA delegates to each sub-adviser the responsibility for voting proxies for its funds, as applicable, to each sub-adviser through its contracts with each sub-adviser. Each sub-adviser may use its own proxy voting policies and procedures to vote proxies of the funds if the funds’ Board reviews and approves the use of those policies and procedures. Accordingly, LMFA does not expect to have proxy-voting responsibility for any of the funds.

Should LMFA become responsible for voting proxies for any reason, such as the inability of a sub-adviser to provide investment advisory services, LMFA shall utilize the proxy voting guidelines established by the most recent sub-adviser to vote proxies until a new sub-adviser is retained and the use of its proxy voting policies and procedures is authorized by the Board. In the case of a material conflict between the interests of LMFA (or its affiliates if such conflict is known to persons responsible for voting at LMFA) and any fund, the Board of Directors of LMFA shall consider how to address the conflict and/or how to vote the proxies. LMFA shall maintain records of all proxy votes in accordance with applicable securities laws and regulations.

LMFA shall be responsible for gathering relevant documents and records related to proxy voting from each sub-adviser and providing them to the funds as required for the funds to comply with applicable rules under the Investment Company Act of 1940. LMFA shall also be responsible for coordinating the provision of information to the Board with regard to the proxy voting policies and procedures of each sub-adviser, including the actual proxy voting policies and procedures of each sub-adviser, changes to such policies and procedures, and reports on the administration of such policies and procedures.

Questions regarding this policy should be referred to the Legal and Compliance Department of Legg Mason, Inc.

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Western Asset Management Company

Proxy Voting Policy

Background

An investment adviser is required to adopt and implement policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with fiduciary duties and SEC Rule 206(4)-6 under the Investment Advisers Act of 1940 (“Advisers Act”). The authority to vote the proxies of our clients is established through investment management agreements or comparable documents. In addition to SEC requirements governing advisers, long-standing fiduciary standards and responsibilities have been established for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the investment manager.

Policy

As a fixed income only manager, the occasion to vote proxies is very rare. However, the Firm has adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and SEC Rule 206(4)-6 under the Investment Advisers Act of 1940 (“Advisers Act”). In addition to SEC requirements governing advisers, our proxy voting policies reflect the long-standing fiduciary standards and responsibilities for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the Investment Manager.

While the guidelines included in the procedures are intended to provide a benchmark for voting standards, each vote is ultimately cast on a case-by-case basis, taking into consideration the Firm’s contractual obligations to our clients and all other relevant facts and circumstances at the time of the vote (such that these guidelines may be overridden to the extent the Firm deems appropriate).

In exercising its voting authority, Western Asset will not consult or enter into agreements with officers, directors or employees of Legg Mason Inc. or any of its affiliates (other than Western Asset Management Company Limited) regarding the voting of any securities owned by its clients.

Procedure

Responsibility and Oversight

The Western Asset Legal and Compliance Department (“Compliance Department”) is responsible for administering and overseeing the proxy voting process. The gathering of proxies is coordinated through the Corporate Actions area of Investment Support (“Corporate Actions”). Research analysts and portfolio managers are responsible for determining appropriate voting positions on each proxy utilizing any applicable guidelines contained in these procedures.

Client Authority

At account start-up, or upon amendment of an IMA, the applicable client IMA are similarly reviewed. If an agreement is silent on proxy voting, but contains an overall delegation of discretionary authority or if the account represents assets of an ERISA plan, Western Asset will assume responsibility for proxy voting. The Client Account Transition Team maintains a matrix of proxy voting authority.

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Proxy Gathering

Registered owners of record, client custodians, client banks and trustees (“Proxy Recipients”) that receive proxy materials on behalf of clients should forward them to Corporate Actions. Proxy Recipients for new clients (or, if Western Asset becomes aware that the applicable Proxy Recipient for an existing client has changed, the Proxy Recipient for the existing client) are notified at start-up of appropriate routing to Corporate Actions of proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. If Western Asset personnel other than Corporate Actions receive proxy materials, they should promptly forward the materials to Corporate Actions.

Proxy Voting

Once proxy materials are received by Corporate Actions, they are forwarded to the Legal and Compliance Department for coordination and the following actions:

a. Proxies are reviewed to determine accounts impacted.

b. Impacted accounts are checked to confirm Western Asset voting authority.

c. Legal and Compliance Department staff reviews proxy issues to determine any material conflicts of interest. (See conflicts of interest section of these procedures for further information on determining material conflicts of interest.)

d. If a material conflict of interest exists, (i) to the extent reasonably practicable and permitted by applicable law, the client is promptly notified, the conflict is disclosed and Western Asset obtains the client’s proxy voting instructions, and (ii) to the extent that it is not reasonably practicable or permitted by applicable law to notify the client and obtain such instructions (e.g., the client is a mutual fund or other commingled vehicle or is an ERISA plan client), Western Asset seeks voting instructions from an independent third party.

e. Legal and Compliance Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers determine votes on a case-by-case basis taking into account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, Western Asset may vote the same proxy differently for different clients. The analyst’s or portfolio manager’s basis for their decision is documented and maintained by the Legal and Compliance Department.

f. Legal and Compliance Department staff votes the proxy pursuant to the instructions received in (d) or (e) and returns the voted proxy as indicated in the proxy materials.

Timing

Western Asset personnel act in such a manner to ensure that, absent special circumstances, the proxy gathering and proxy voting steps noted above can be completed before the applicable deadline for returning proxy votes.

Recordkeeping

Western Asset maintains records of proxies voted pursuant to Section 204-2 of the Advisers Act and ERISA DOL Bulletin 94-2. These records include:

a. A copy of Western Asset’s policies and procedures.

b. Copies of proxy statements received regarding client securities.

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c. A copy of any document created by Western Asset that was material to making a decision how to vote proxies.

d. Each written client request for proxy voting records and Western Asset’s written response to both verbal and written client requests.

e. A proxy log including:

1. Issuer name;

2. Exchange ticker symbol of the issuer’s shares to be voted;

3. Council on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted;

4. A brief identification of the matter voted on;

5. Whether the matter was proposed by the issuer or by a shareholder of the issuer;

6. Whether a vote was cast on the matter;

7. A record of how the vote was cast; and

8. Whether the vote was cast for or against the recommendation of the issuer’s management team.

Records are maintained in an easily accessible place for five years, the first two in Western Asset’s offices.

Disclosure

Western Asset’s proxy policies are described in the firm’s Part II of Form ADV. Clients will be provided a copy of these policies and procedures upon request. In addition, upon request, clients may receive reports on how their proxies have been voted.

Conflicts of Interest

All proxies are reviewed by the Legal and Compliance Department for material conflicts of interest. Issues to be reviewed include, but are not limited to:

1. Whether Western (or, to the extent required to be considered by applicable law, its affiliates) manages assets for the company or an employee group of the company or otherwise has an interest in the company;

2. Whether Western or an officer or director of Western or the applicable portfolio manager or analyst responsible for recommending the proxy vote (together, “Voting Persons”) is a close relative of or has a personal or business relationship with an executive, director or person who is a candidate for director of the company or is a participant in a proxy contest; and

3. Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders.

Voting Guidelines

Western Asset’s substantive voting decisions turn on the particular facts and circumstances of each proxy vote and are evaluated by the designated research analyst or portfolio manager. The examples outlined below are meant as guidelines to aid in the decision making process.

Guidelines are grouped according to the types of proposals generally presented to shareholders. Part I deals with proposals which have been approved and are recommended by a company’s board of directors; Part II deals with proposals submitted by shareholders for inclusion in proxy statements; Part III addresses issues relating to voting shares of investment companies; and Part IV addresses unique considerations pertaining to foreign issuers.

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I. Board Approved Proposals

The vast majority of matters presented to shareholders for a vote involve proposals made by a company itself that have been approved and recommended by its board of directors. In view of the enhanced corporate governance practices currently being implemented in public companies, Western Asset generally votes in support of decisions reached by independent boards of directors. More specific guidelines related to certain board-approved proposals are as follows:

1. Matters relating to the Board of Directors

Western Asset votes proxies for the election of the company’s nominees for directors and for board-approved proposals on other matters relating to the board of directors with the following exceptions:

a. Votes are withheld for the entire board of directors if the board does not have a majority of independent directors or the board does not have nominating, audit and compensation committees composed solely of independent directors.

b. Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director.

c. Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences.

d. Votes are cast on a case-by-case basis in contested elections of directors.

2. Matters relating to Executive Compensation

Western Asset generally favors compensation programs that relate executive compensation to a company’s long-term performance. Votes are cast on a case-by-case basis on board-approved proposals relating to executive compensation, except as follows:

a. Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for stock option plans that will result in a minimal annual dilution.

b. Western Asset votes against stock option plans or proposals that permit replacing or repricing of underwater options.

c. Western Asset votes against stock option plans that permit issuance of options with an exercise price below the stock’s current market price.

d. Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for employee stock purchase plans that limit the discount for shares purchased under the plan to no more than 15% of their market value, have an offering period of 27 months or less and result in dilution of 10% or less.

3. Matters relating to Capitalization

The management of a company’s capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstances of each company. As a result, Western Asset votes on a case-by-case basis on board-approved proposals involving changes to a company’s capitalization except where Western Asset is otherwise withholding votes for the entire board of directors.

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a. Western Asset votes for proposals relating to the authorization of additional common stock.

b. Western Asset votes for proposals to effect stock splits (excluding reverse stock splits).

c. Western Asset votes for proposals authorizing share repurchase programs.

4. Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions

Western Asset votes these issues on a case-by-case basis on board-approved transactions.

5. Matters relating to Anti-Takeover Measures

Western Asset votes against board-approved proposals to adopt anti-takeover measures except as follows:

a. Western Asset votes on a case-by-case basis on proposals to ratify or approve shareholder rights plans.

b. Western Asset votes on a case-by-case basis on proposals to adopt fair price provisions.

6. Other Business Matters

Western Asset votes for board-approved proposals approving such routine business matters such as changing the company’s name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting.

a. Western Asset votes on a case-by-case basis on proposals to amend a company’s charter or bylaws.

b. Western Asset votes against authorization to transact other unidentified, substantive business at the meeting.

II. Shareholder Proposals

SEC regulations permit shareholders to submit proposals for inclusion in a company’s proxy statement. These proposals generally seek to change some aspect of a company’s corporate governance structure or to change some aspect of its business operations. Western Asset votes in accordance with the recommendation of the company’s board of directors on all shareholder proposals, except as follows:

1. Western Asset votes for shareholder proposals to require shareholder approval of shareholder rights plans.

2. Western Asset votes for shareholder proposals that are consistent with Western Asset’s proxy voting guidelines for board-approved proposals.

3. Western Asset votes on a case-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors.

III. Voting Shares of Investment Companies

Western Asset may utilize shares of open or closed-end investment companies to implement its investment strategies. Shareholder votes for investment companies that fall within the categories listed in Parts I and II above are voted in accordance with those guidelines.

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1. Western Asset votes on a case-by-case basis on proposals relating to changes in the investment objectives of an investment company taking into account the original intent of the fund and the role the fund plays in the clients’ portfolios.

2. Western Asset votes on a case-by-case basis all proposals that would result in increases in expenses (e.g., proposals to adopt 12b-1 plans, alter investment advisory arrangements or approve fund mergers) taking into account comparable expenses for similar funds and the services to be provided.

IV. Voting Shares of Foreign Issuers

In the event Western Asset is required to vote on securities held in non-U.S. issuers—i.e. issuers that are incorporated under the laws of a foreign jurisdiction and that are not listed on a U.S. securities exchange or the NASDAQ stock market, the following guidelines are used, which are premised on the existence of a sound corporate governance and disclosure framework. These guidelines, however, may not be appropriate under some circumstances for foreign issuers and therefore apply only where applicable.

1. Western Asset votes for shareholder proposals calling for a majority of the directors to be independent of management.

2. Western Asset votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees.

3. Western Asset votes for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of U.S. stock exchanges, and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated.

Western Asset votes on a case-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of a company’s outstanding common stock where shareholders do not have preemptive rights, or (2) the issuance of common stock in excess of 100% of a company’s outstanding common stock where shareholders have preemptive rights.

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EX-99.17(C)

Exhibit 17(c)

LEGG MASON PARTNERS INCOME TRUST

LEGG MASON PARTNERS EQUITY TRUST

LEGG MASON PARTNERS MONEY MARKET TRUST

SUPPLEMENT DATED MARCH 13, 2009 TO THE

PROSPECTUSES LISTED IN SCHEDULE A

Unless otherwise noted, effective at the close of business on April 3, 2009, the following supersedes and replaces any contrary information in the sections of the fund’s Prospectus entitled “Sales Charges”, “Buying Shares”, “Exchanging Shares” and “Redeeming Shares”.

•   Accumulation Privilege—allows you to combine the current value of shares of the fund with other shares of funds sold by the Distributor that are owned by:

•       you; or

•       your spouse, and children under the age of 21

with the dollar amount of your next purchase of Class A shares for purposes of calculating the initial sales charge.

Shares of money market funds sold by the Distributor acquired by exchange from other funds offered with a sales charge may be combined. Certain funds and classes of shares of other funds sold by the Distributor may not be combined until May 18, 2009. Please contact your Service Agent for additional information.

If you hold fund shares in accounts at two or more Service Agents, please contact your Service Agents to determine which shares may be combined.

Certain trustees and fiduciaries may be entitled to combine accounts in determining their sales charge.

•   Letter of Intent—allows you to purchase Class A shares of funds sold by the Distributor over a 13- month period and pay the same sales charge, if any, as if all shares had been purchased at once. At the time you enter into the letter of intent, you select your asset goal amount. Generally, purchases of shares of funds sold by the Distributor that are purchased during the 13-month period by:

•       you; or

•       your spouse, and children under the age of 21

are eligible for inclusion under the letter, based on the public offering price at the time of the purchase, and any capital appreciation on those shares. In addition, you can include towards your asset goal amount the current value of any eligible holdings.

If you hold shares of funds sold by the Distributor in accounts at two or more Service Agents, please contact your Service Agents to determine which shares may be credited toward your letter of intent asset goal.

Shares of money market funds sold by the Distributor acquired by exchange from other funds offered with a sales charge may be credited toward your letter of intent asset goal. Certain funds and certain classes of shares of other funds sold by the Distributor may not be credited toward your letter of intent asset goal until May 18, 2009. Please contact your Service Agent for additional information.

If you do not meet your asset goal amount, shares in the amount of any sales charges due, based on the amount of your actual purchases, will be redeemed from your account.

Prospectus Supplement 1

Buying shares, Exchanging shares, Redeeming shares

To buy, exchange or redeem shares directly through the fund, Investors should write to the fund at the following address:

Legg Mason Funds

P.O. Box 55214

Boston, MA 02205-8504

For more information or to obtain shareholder reports or the Statement of Additional Information (without charge), please call Funds Investor Services at 1-800-822-5544 or Institutional Shareholder Services at 1-888-425-6432 between 8:30 a.m. and 5:30 p.m. (Eastern Time).

Exchanging Shares

Except as described below, you may exchange shares of the fund for the same class of shares of other funds sold by the Distributor.

Shares of certain funds and certain classes of shares of other funds sold by the Distributor are not available for exchange until May 18, 2009.

Schedule A

Fund Name	Date of Prospectus
LEGG MASON PARTNERS EQUITY TRUST
Legg Mason Partners 130/30 U.S. Large Cap Equity Fund	February 28, 2009
Legg Mason Partners Aggressive Growth Fund	December 15, 2008
Legg Mason Partners All Cap Fund	August 8, 2008
Legg Mason Partners Appreciation Fund	April 28, 2008
Legg Mason Partners Capital and Income Fund	April 28, 2008
Legg Mason Partners Capital Fund	April 28, 2008
Legg Mason Partners Convertible Fund	November 7, 2008
Legg Mason Partners Diversified Large Cap Growth Fund	February 28, 2009
Legg Mason Partners Dividend Strategy Fund	February 28, 2009
Legg Mason Partners Emerging Markets Equity Fund	February 28, 2009
Legg Mason Partners Equity Fund	April 28, 2008
Legg Mason Partners Equity Income Builder Fund	February 28, 2009
Legg Mason Partners Financial Services Fund	July 20, 2008
Legg Mason Partners Fundamental Value Fund	January 28, 2009
Legg Mason Partners Global Equity Fund	April 28, 2008
Legg Mason Partners International All Cap Opportunity Fund	February 28, 2009
Legg Mason Partners Investors Value Fund	April 28, 2008
Legg Mason Partners Large Cap Growth Fund	April 1, 2008
Legg Mason Partners Lifestyle Allocation 30%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 50%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 70%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 85%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 100%	May 1, 2008
Legg Mason Partners Lifestyle Income Fund	May 1, 2008
Legg Mason Partners Mid Cap Core Fund	March 20, 2008
Legg Mason Partners Small Cap Core Fund	April 28, 2008
Legg Mason Partners Small Cap Growth Fund	April 28, 2008
Legg Mason Partners Small Cap Value Fund	January 28, 2009
Legg Mason Partners Social Awareness Fund	May 30, 2008
Legg Mason Partners Target Retirement 2015	September 2, 2008
Legg Mason Partners Target Retirement 2020	September 2, 2008
Legg Mason Partners Target Retirement 2025	September 2, 2008
Legg Mason Partners Target Retirement 2030	September 2, 2008
Legg Mason Partners Target Retirement 2035	September 2, 2008
Legg Mason Partners Target Retirement 2040	September 2, 2008
Legg Mason Partners Target Retirement 2045	September 2, 2008
Legg Mason Partners Target Retirement 2050	September 2, 2008
Legg Mason Partners Target Retirement Fund	September 2, 2008
Legg Mason Partners U.S. Large Cap Equity Fund	April 28, 2008

2 Prospectus Supplement

Fund Name	Date of Prospectus
LEGG MASON PARTNERS INCOME TRUST
Legg Mason Partners Adjustable Rate Income Fund	September 12, 2008
Legg Mason Partners California Municipals Fund	June 11, 2008
Legg Mason Partners Core Bond Fund	November 25, 2008
Legg Mason Partners Core Plus Bond Fund	November 25, 2008
Legg Mason Partners Strategic Income Fund	November 25, 2008
Legg Mason Partners Global High Yield Bond Fund	April 28, 2008
Legg Mason Partners Global Inflation Management Fund	February 28, 2009
Legg Mason Partners Government Securities Fund	April 28, 2008
Legg Mason Partners High Income Fund	November 25, 2008
Legg Mason Partners Intermediate Maturity California Municipals Fund	March 20, 2008
Legg Mason Partners Intermediate Maturity New York Municipals Fund	March 20, 2008
Legg Mason Partners Intermediate-Term Municipals Fund	July 20, 2008
Legg Mason Partners Corporate Bond Fund	April 28, 2008
Legg Mason Partners Managed Municipals Fund	June 11, 2008
Legg Mason Partners Massachusetts Municipals Fund	March 20, 2008
Legg Mason Partners Municipal High Income Fund	November 25, 2008
Legg Mason Partners New Jersey Municipals Fund	July 20, 2008
Legg Mason Partners New York Municipals Fund	July 20, 2008
Legg Mason Partners Oregon Municipals Fund	August 8, 2008
Legg Mason Partners Pennsylvania Municipals Fund	July 20, 2008
Legg Mason Partners Short Duration Municipal Income Fund	February 28, 2009
Legg Mason Partners Short-Term Bond Fund	April 28, 2008
Western Asset Emerging Markets Debt Portfolio	February 2, 2009
Western Asset Global High Yield Bond Portfolio	February 2, 2009
LEGG MASON PARTNERS MONEY MARKET TRUST
Western Asset AMT Tax Free Money Market Fund	September 16, 2008
Western Asset Money Market Fund	August 1, 2008
Western Asset Government Money Market Fund	August 1, 2008
Western Asset Municipal Money Market Fund	August 1, 2008
Western Asset California Municipal Money Market Fund	August 1, 2008
Western Asset Massachusetts Municipal Money Market Fund	August 1, 2008
Western Asset New York Municipal Money Market Fund	August 1, 2008
Western Asset Connecticut Money Market Fund Class A and Class I shares each a class of CitiSM Connecticut Tax Free Reserves	December 31, 2008

Prospectus Supplement 3

LEGG MASON PARTNERS INCOME TRUST LEGG MASON PARTNERS EQUITY TRUST SUPPLEMENT DATED FEBRUARY 27, 2009 TO THE PROSPECTUSES AND STATEMENTS OF ADDITIONAL INFORMATION OF THE FUNDS LISTED IN SCHEDULE A The following supplements information in the Prospectus and Statement of Additional Information concerning Letters of Intent: Effective February 27, 2009, purchases made within 90 days prior to the date of a Letter of Intent will no longer be considered eligible to be treated as purchases made under such letter for the purpose of receiving a reduced sales charge. Such purchases will continue to be credited toward your Letter of Intent asset goal. Investors who have entered into a Letter of Intent prior to the date of this supplement will continue to be eligible to treat such purchases as purchases made under the Letter of Intent. For more information and to determine which shares may be credited toward your Letter of Intent asset goal, please contact your Service Agent.
Schedule A
Fund Name	Date of Prospectus and SAI
LEGG MASON PARTNERS EQUITY TRUST
Legg Mason Partners Aggressive Growth Fund	December 15, 2008
Legg Mason Partners All Cap Fund	August 8, 2008
Legg Mason Partners Appreciation Fund	April 28, 2008
Legg Mason Partners Capital and Income Fund	April 28, 2008
Legg Mason Partners Capital Fund	April 28, 2008
Legg Mason Partners Convertible Fund	November 7, 2008
Legg Mason Partners Equity Fund	April 28, 2008
Legg Mason Partners Financial Services Fund	July 20, 2008
Legg Mason Partners Fundamental Value Fund	January 28, 2009
Legg Mason Partners Global Equity Fund	April 28, 2008
Legg Mason Partners Investors Value Fund	April 28, 2008
Legg Mason Partners Large Cap Growth Fund	April 28, 2008
Legg Mason Partners Lifestyle Allocation 30%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 50%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 70%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 85%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 100%	May 1, 2008
Legg Mason Partners Lifestyle Income Fund	May 1, 2008
Legg Mason Partners Mid Cap Core Fund	March 20, 2008
Legg Mason Partners Small Cap Core Fund	April 28, 2008
Legg Mason Partners Small Cap Growth Fund	April 28, 2008
Legg Mason Partners Small Cap Value Fund	January 28, 2009
Legg Mason Partners Social Awareness Fund	May 30, 2008
Legg Mason Partners Target Retirement 2015	September 2, 2008
Legg Mason Partners Target Retirement 2020	September 2, 2008
Legg Mason Partners Target Retirement 2025	September 2, 2008
Legg Mason Partners Target Retirement 2030	September 2, 2008
Legg Mason Partners Target Retirement 2035	September 2, 2008
Legg Mason Partners Target Retirement 2040	September 2, 2008
Legg Mason Partners Target Retirement 2045	September 2, 2008
Legg Mason Partners Target Retirement 2050	September 2, 2008
Legg Mason Partners Target Retirement Fund	September 2, 2008
Legg Mason Partners U.S. Large Cap Equity Fund	April 28, 2008
LEGG MASON PARTNERS INCOME TRUST
Legg Mason Partners Adjustable Rate Income Fund	September 12, 2008
Legg Mason Partners California Municipals Fund	June 11, 2008
Legg Mason Partners Core Bond Fund	November 25, 2008
Legg Mason Partners Core Plus Bond Fund	November 25, 2008
Legg Mason Partners Strategic Income Fund	November 25, 2008

Prospectus Supplement 1

Fund Name	Date of Prospectus and SAI
Legg Mason Partners Global High Yield Bond Fund	April 28, 2008
Legg Mason Partners Government Securities Fund	April 28, 2008
Legg Mason Partners High Income Fund	November 25, 2008
Legg Mason Partners Intermediate Maturity California Municipals Fund	March 20, 2008
Legg Mason Partners Intermediate Maturity New York Municipals Fund	March 20, 2008
Legg Mason Partners Intermediate-Term Municipals Fund	July 20, 2008
Legg Mason Partners Corporate Bond Fund	April 28, 2008
Legg Mason Partners Managed Municipals Fund	June 11, 2008
Legg Mason Partners Massachusetts Municipals Fund	March 20, 2008
Legg Mason Partners Municipal High Income Fund	November 25, 2008
Legg Mason Partners New Jersey Municipals Fund	July 20, 2008
Legg Mason Partners New York Municipals Fund	July 20, 2008
Legg Mason Partners Oregon Municipals Fund	August 8, 2008
Legg Mason Partners Pennsylvania Municipals Fund	July 20, 2008
Legg Mason Partners Short-Term Bond Fund	April 28, 2008
Western Asset Emerging Markets Debt Portfolio	February 2, 2009

2 Prospectus Supplement

LEGG MASON PARTNERS INCOME TRUST

SUPPLEMENT DATED FEBRUARY 13, 2009

TO THE PROSPECTUS DATED APRIL 28, 2008

OF THE

LEGG MASON PARTNERS CORPORATE BOND FUND

LEGG MASON PARTNERS GLOBAL INCOME FUND

The following replaces in its entirety the section of the Fund’s Prospectus entitled “Share Price”.

You may buy, exchange or redeem shares at their net asset value next determined after receipt of your request in good order, adjusted for any applicable sales charge. The fund’s net asset value per share is the value of its assets minus its liabilities divided by the number of shares outstanding. Net asset value is calculated separately for each class of shares. The fund calculates its net asset value(s) every day the NYSE is open. These calculations are done as of the close of regular trading on the NYSE (normally 4:00 p.m., Eastern time). If the NYSE closes early, the fund calculates its net asset value(s) as of the actual closing time. The NYSE is closed on certain holidays listed in the SAI.

The Board has approved procedures to be used to value the fund’s securities and other assets for the purposes of determining the fund’s net asset value. The valuation of the fund’s assets is generally determined in good faith in accordance with these procedures. The Board has delegated most valuation functions for the fund to the manager. The procedures adopted by the Board cover types of assets in addition to those described below.

For certain derivative securities that are traded on an exchange, the market price is usually the closing sale or official closing price on that exchange. Where a security is traded on more than one exchange (as is often the case overseas), the security is generally valued on the exchange considered by the manager to be the primary exchange. In the case of securities not traded on an exchange, or if exchange prices are not otherwise available, the market price is typically determined by independent third party pricing services approved by the fund’s Board that use a variety of techniques and methodologies.

The market price for debt obligations and certain derivative securities is generally the price supplied by an independent third party pricing service approved by the fund’s Board, which may use quotations from one or more brokers, a matrix, formula or other method that takes into consideration market indices, yield curves and other specific adjustments. Short-term debt obligations 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.

The fund generally values its securities based on market prices determined at the close of regular trading on the NYSE. The valuations of securities traded on foreign markets and certain fixed income securities will generally be determined as of the earlier closing time of the markets on which they primarily 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 2:00 p.m. Eastern time.

If independent third party pricing services are unable to supply a price, or if the price supplied is deemed by the manager to be unreliable, the market price may be determined using quotations received from one or more broker/dealers that make a market in the security. When such prices or quotations are not available, or when the manager believes that they are unreliable, the manager may price securities using fair value procedures approved by the Board. Because the fund may invest in securities of issuers located in emerging markets and securities rated below investment grade—some of which may be thinly-traded and for which market quotations may not be readily available or may be unreliable—the fund may use fair value procedures more frequently than funds that invest primarily in securities that are more widely traded. The fund may also use fair value procedures if the manager determines that a significant event has occurred between the time at which a market price is determined and the time at which the fund’s net asset value is calculated.

Prospectus Supplement 1

Valuing securities at fair value involves greater reliance on judgment than valuation of securities based on readily available market quotations. A fund that uses fair value procedures to price securities may value those securities higher or lower than another fund using market quotations or its own fair value methodologies to price the same securities. The valuation determined under the fair value procedures represent the amount determined in good faith that the fund might reasonably expect to receive upon the current sale of a security. However, there can be no assurance that the fund could obtain the fair value assigned to a security if it were to sell the security at approximately the time at which the fund determines its net asset value. Therefore, investors who purchase or redeem fund shares on days when the fund is holding fair-valued securities may receive a greater or lesser number of shares, or higher or lower redemption proceeds, than they would have received if the fund had not fair-valued the security or had used a different methodology.

The fund invests in securities that are listed on foreign exchanges that are open for trading on weekends and other days when the fund does not price its shares. Therefore, the value of the fund’s shares may change on days when you will not be able to purchase or redeem the fund’s shares.

In order to buy, redeem or exchange shares at a day’s price, you must place your order with your Service Agent or the transfer agent before the NYSE closes on that day. If the NYSE closes early on that day, you must place your order prior to the actual closing time.

It is the responsibility of the Service Agents to transmit all orders to buy, exchange or redeem shares to the transfer agent on a timely basis.

2 Prospectus Supplement

Supplement Dated September 2, 2008

to the Prospectus and Statement of Additional Information

Dated April 28, 2008

for Legg Mason Partners Income Trust

Legg Mason Partners Investment Grade Bond Fund

(the “Fund”)

Effective September 2, 2008, the name of the Fund is Legg Mason Partners Corporate Bond Fund. The Fund’s current investment objective, strategies and management remain unchanged.

Prospectus Supplement 1

PROSPECTUS

April 28, 2008

The Securities and Exchange Commission has not approved or disapproved these securities or determined whether this Prospectus is accurate or complete. Any statement to the contrary is a crime.

Legg Mason Partners Investment Grade Bond Fund

Class A, B, C, FI, R and I Shares

INVESTMENT PRODUCTS:

NOT FDIC INSURED

NO BANK GUARANTEE

MAY LOSE VALUE

LEGG MASON PARTNERS INCOME TRUST

SUPPLEMENT DATED APRIL 28, 2008 TO THE PROSPECTUS DATED APRIL 28, 2008

OF LEGG MASON PARTNERS INVESTMENT GRADE BOND FUND

Through June 30, 2008, please refer to the following chart for information concerning the minimum initial and additional investment amounts applicable to a purchase of fund shares:

Investment minimums

Minimum initial and additional investment amounts vary depending on the class of shares you buy and the nature of your investment.

Investment Minimum Initial/Additional Investment(1)
	Class A	Class B	Class C	Class FI	Class R	Class I (formerly Y)
General	$500/$50	$500/$50	$500/$50	n/a	n/a	n/a
IRAs and Uniform Gifts or Transfers to
Minor Accounts	$250/$50	$250/$50	$250/$50	n/a	n/a	n/a
SIMPLE IRAs	$1/$1	$1/$1	$1/$1	n/a	n/a	n/a
Systematic Investment Plans	$25/$25	$25/$25	$25/$25	n/a	n/a	n/a
Clients of Eligible Financial Intermediaries	$1/$1	n/a	n/a	None/None	n/a	None/None
Retirement Plans with omnibus accounts held on the books of the fund	n/a	n/a	None/None	None/None	None/None	None/None
Other Retirement Plans	$50/$50	$50/$50	$50/$50	n/a	n/a	n/a
Institutional Investors	$500/$50	$500/$50	$500/$50	n/a	n/a	$ 1 million/None

(1) Please refer to the section entitled “Retirement and institutional investors” for additional information regarding the investment minimum and eligibility requirements for Retirement Plans, Institutional Investors and Clients of Eligible Financial Intermediaries.

Prospectus 1

Effective July 1, 2008, the information shown above will no longer apply.

Instead, please refer to the section of the attached prospectus titled “Choosing a Class of Shares to Buy: Investment Minimums” for information concerning the minimum initial and additional investment amounts applicable to a purchase of fund shares.

Legg Mason Partners Investment Grade Bond Fund

Contents

Investments, risks and performance	2
More on the fund’s investments	7
Management	8
Choosing a class of shares to buy	10
Comparing the fund’s classes	12
Sales charges	12
More about contingent deferred sales charges	16
Retirement and institutional investors	16
Buying shares	18
Exchanging shares	19
Redeeming shares	20
Other things to know about transactions	20
Dividends, distributions and taxes	23
Share price	24
Financial highlights	25

As part of a number of initiatives launched in 2006 to restructure and streamline the Legg Mason Partners fund complex, the fund assumed the assets and liabilities of a predecessor fund with the same name effective April 16, 2007. Any information in this Prospectus relating to the fund prior to April 16, 2007 refers to the fund’s predecessor.

Investments, risks and performance

Investment objective

The fund seeks as high a level of current income as is consistent with prudent investment management and preservation of capital.

Principal investment strategies

Key investments

Under normal circumstances, the fund invests at least 80% of the value of its net assets, plus any borrowings for investment purposes, in “investment grade” fixed-income securities and related investments. These are securities rated by a national recognized statistical ratings organization within one of the top four ratings categories, or, if unrated, judged by the subadviser to be of comparable credit quality. The fund also may invest in U.S. Government securities and U.S. dollar denominated fixed-income securities of foreign issuers. The fund may invest in securities having any maturity.

Instead of investing directly in particular securities, the fund may gain exposure to a security or an issuer or a market by investing through the use of instruments such as derivatives, including credit default swaps, synthetic instruments and other instruments that are intended to provide similar economic exposure. The fund may use one or more types of such instruments to a substantial extent and even as its primary means of gaining investment exposures.

The fund may engage in a variety of transactions using derivatives, including but not limited to, options, swaps, including credit default swaps, and warrants. Derivatives are financial instruments whose value depends upon, or is derived from, the value of something else, such as one or more underlying investments, indexes or currencies. Derivatives may be used by the fund for any of the following purposes:

• As a hedging technique in an attempt to manage risk in the fund’s portfolio

• As a substitute for buying or selling securities

• As a cash flow management technique

• For purposes of enhancing returns

2 Prospectus

Using derivatives, especially for non-hedging purposes, may involve greater risks to the fund than investing directly in securities, particularly as these instruments may be very complex and may not behave in the manner anticipated by the fund.

Certain risks associated with the use of derivatives are discussed below. Such risks are magnified to the extent that a large portion of the fund’s assets are committed to derivatives in general or are invested in just one or a few types of derivatives.

The fund from time to time may sell protection on debt securities by entering into credit default swaps, a type of derivative transaction. In return for periodic payments, the fund is obligated to pay the counterparty if the bond which is the subject of the credit default swap defaults or is subject to a specified credit event. As the seller, the fund could be considered leveraged because, in addition to the investment exposure that it has on its assets, the fund is subject to investment exposure on the notional amount of the swap.

When the fund enters into derivative transactions, it may be required to segregate assets, or enter into offsetting positions, in accordance with applicable regulations. Such segregation will not limit the fund’s exposure to loss, however, and the fund will have investment risk with respect to both the derivative itself and the assets that have been segregated to cover the fund’s derivative exposure. Segregated assets cannot be sold by the fund unless they are replaced with other appropriate assets, and, as a result, the segregation of a large portion of a fund’s assets could impede portfolio management or the fund’s ability to meet redemption requests or other current obligations.

The fund’s subadviser may choose not to make use of derivatives for a variety of reasons. Should the subadviser choose to use derivatives, the fund will, in determining compliance with any percentage limitation or requirement regarding the use or investment of fund assets, take into account derivative positions that are intended to reduce or create exposure to the applicable category of investments, even if they are not effective to achieve the desired result.

Selection process

The portfolio managers emphasize individual bond selection while diversifying the fund’s investments across a range of issues, industries and maturity dates. In selecting individual corporate bonds for investment, the portfolio managers:

• Use fundamental credit analysis to estimate the relative value and attractiveness of various companies and bond issues

• Identify undervalued corporate bond issues and attempt to avoid issues that may be subject to credit downgrades

• Determine sector and maturity weightings based on intermediate and long-term assessments of the economic environment and interest rate outlook

The portfolio managers monitor the fund’s portfolio and make ongoing adjustments based on the relative values or maturities of individual corporate bonds or changes in the creditworthiness or overall investment merits of an issue.

Principal risks of investing in the fund

Investors could lose money on their investment in the fund, or the fund may not perform as well as other investments, as a result of risks such as:

• Interest rates rise, causing the prices of fixed income securities to decline and reducing the value of the fund’s portfolio. This is known as interest rate risk

• The issuer of a security owned by the fund defaults on its obligation to pay principal and/or interest, otherwise defaults or is perceived to be less creditworthy, the security’s credit rating is downgraded, or the credit quality or value of any underlying assets declines. Credit risk is broadly gauged by the credit ratings of the securities in which the fund invests. However, ratings are only the opinions of the companies issuing them and are not absolute guarantees as to quality

Prospectus 3

• Interest rates decline, causing the issuers of securities held by the fund to pay principal earlier than scheduled or exercise a right to call the securities, forcing the fund to reinvest in lower yielding securities. This is known as prepayment or call risk

• Rising interest rates result in slower than expected principal prepayments, which effectively lengthens the maturity of affected securities, making them more sensitive to interest rate changes and the fund’s share price more volatile. This is known as extension risk

• The portfolio managers’ judgment about interest rates or the attractiveness, value or income potential of a particular security proves incorrect

• The value of a security declines due to adverse factors affecting the bond markets generally, or the markets for certain types of securities or for securities relating to particular industries or sectors. This is sometimes referred to as market risk

• Derivatives involve special risks and costs and may result in losses to the fund. The fund’s use of certain derivatives may in some cases involve forms of financial leverage, which involves risk and may increase the volatility of the fund’s net asset value. Even a small investment in derivatives can have a disproportionate impact on the fund. Using derivatives can increase losses and reduce opportunities for gains when market prices, interest rates or currencies, or the derivative instruments themselves, behave in a way not anticipated by the fund. The other parties to certain derivative contracts present the same types of default risk as issuers of fixed income securities. Derivatives can also make the fund less liquid and harder to value, especially in changing markets

• Credit default swap contracts involve special risks and may result in losses to the fund. Credit default swaps may in some cases be illiquid, and they increase credit risk since the fund has exposure to both the issuer of the referenced obligation and the counterparty to the credit default swap. As there is no central exchange or market for credit default swap transactions, they may be difficult to trade or value, especially in the event of market disruptions. The swap market is a relatively new market and is largely unregulated. It is possible that developments in the swap market, including potential government regulation, could adversely affect the fund’s ability to terminate existing credit default swap agreements or to realize amounts to be received under such agreements

If, after purchase, the credit rating on a security is downgraded or the credit quality deteriorates, or if the maturity is extended, the fund’s portfolio managers will decide whether the security should be held or sold. Upon the occurrence of certain triggering events or defaults on a security held by the fund, or if an issuer of such a security has difficulty meeting its obligations, the fund may become the holder of a restructured security or of underlying assets. In that case, the fund may become the holder of securities or other assets that it could not otherwise purchase at a time when those assets may be difficult to sell or can be sold only at a loss.

The fund may invest in securities which are subordinated to more senior securities of the issuer, or which represent interests in pools of such subordinated securities. Subordinated securities will be disproportionately affected by a default or even a perceived decline in creditworthiness of the issuer.

Who may want to invest

The fund may be an appropriate investment if you:

• Are seeking a high level of current income consistent with investing in investment grade, long-term corporate bonds

• Wish to diversify your investment portfolio by adding an investment in corporate bonds

• Are willing to accept the risks of investing in the corporate bond market, including credit risk and interest rate risk

Performance information

The following shows summary performance information for the fund in a bar chart and an Average Annual Total Returns table. The information provides an indication of the risks of investing in the fund by showing changes in its performance from year to year and by showing how the fund’s average annual returns compare with the returns of broad-based securities market indices and a peer group average. The bar chart and the information

4 Prospectus

below show performance of the fund’s Class B shares, but do not reflect the impact of sales charges (loads). If they did, the returns would be lower than those shown. Unlike the bar chart, the performance for Class A, B, C and I (formerly Class Y) shares in the Average Annual Total Returns table reflects the impact of the maximum sales charge (load) applicable to the respective classes, and, where indicated, the performance for Class B shares reflects the impact of taxes paid on dividends and distributions and the redemption of shares at the end of the period. No performance information is presented for Class FI or Class R shares because no Class FI or Class R shares were outstanding prior to the date of this Prospectus. The returns of Class FI shares and Class R shares would differ from each other and those of other classes to the extent that those classes bear different expenses. The performance information shown below includes that of the fund’s predecessor. The fund’s past performance, before and after taxes, is not necessarily an indication of how the fund will perform in the future.

Total Return for Class B Shares

Highest and lowest quarter returns

(for periods shown in the bar chart):

Highest: 7.79% in 3^rd quarter 2002; Lowest: (4.91)% in 2^nd quarter 2004.

Average Annual Total Returns

(for periods ended December 31, 2007)

	1 Year		5 Years		10 Years		Inception Date
Class B
Return before taxes	(3.43	)%	2.85	%	4.34	%	01/04/82
Return after taxes on distributions(1)	(4.98	)%	1.22	%	2.35	%
Return after taxes on distributions and sale of fund shares(1)	(2.23	)%	1.53	%	2.52	%
Other Classes (Return before taxes only)
Class A(2)	(2.69	)%	2.72	%	4.45	%	11/06/92
Class C	(0.06	)%	3.01	%	4.38	%	02/26/93
Class I(3)	1.80	%	3.99	%	5.28	%	02/07/96
Lehman Brothers U.S. Credit Index(4)(8)	5.11	%	4.84	%	6.05	%	N/A
Citigroup Credit Index 10yr+(5)(8)	4.05	%	6.41	%	6.76	%	N/A
Lehman Brothers Long Term Credit Bond Index(6)(8)	3.60	%	6.08	%	6.58	%	N/A
Lipper Corporate Debt Funds A-Rated Average(7)(8)	4.47	%	4.11	%	5.08	%	N/A

(1) After-tax returns are calculated using the highest historical individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and the after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In some cases the return after taxes may exceed the return before taxes due to an assumed tax benefit from any losses on a sale of fund shares at the end of the measurement period. After-tax returns shown above are for Class B shares only. After-tax returns for other share classes will vary.

(2) On November 20, 2006, the maximum initial sales charge on Class A shares was reduced for sales made on and after that date. The average annual returns for Class A shares in the table have been calculated as if the reduced maximum initial sale charge had been in effect for the entire period.

(3) As of November 20, 2006, Class Y shares were renamed Class I shares.

(4) As of August 24, 2007, the fund’s benchmarks changed from the Citigroup Credit Index 10yr+ and the Lehman Brothers Long Term Credit Bond Index to the Lehman Brothers U.S. Credit Index. The Lehman Brothers U.S. Credit Index is a broad-based bond index composed of government and corporate issues, rated investment grade (rated Baa3/BBB- or higher), and having at least one year to maturity. The benchmarks were changed because the fund’s portfolio management team believes the Lehman Brothers U.S. Credit Index better reflects the composition of the fund’s portfolio and investment strategies.

Prospectus 5

(5) The Citigroup Credit Index 10+ is a broad-based unmanaged index of investment-grade corporate bonds with maturities of 10 years or more.

(6) The Lehman Brothers Long Term Credit Bond Index is a broad-based unmanaged index of investment-grade corporate bonds.

(7) The Lipper Corporate Debt Funds A-Rated Average is composed of mutual funds investing in corporate bonds and reflects deductions for fees and expenses. (8) It is not possible to invest directly in an index or an average. An index does not reflect deductions for fees, expenses or taxes. An average reflects fees and expenses but no deductions for sales charges or taxes.

Fee table

This table sets forth the fees and expenses you may pay if you invest in fund shares.

	Class A		Class B		Class C		Class FI*		Class R*		Class I(1)
Shareholder Fees
(paid directly from your investment)
Maximum sales charge (load) imposed on purchases (as a % of offering price)	4.25	%(2)	None		None		None		None		None
Maximum contingent deferred sales charge (load) (as a % of the lower of net asset value at purchase or redemption)	None	(2)	4.50	%	1.00	%	None		None		None
Annual Fund Operating Expenses
(paid by the fund as a % of net assets)
Management fees(3)	0.64	%	0.64	%	0.64	%	0.64	%	0.64	%	0.64	%
Distribution and service (12b-1) fees	0.25	%	0.75	%	0.70	%	0.25	%	0.50	%	None
Other expenses(4)(5)	0.21	%	0.41	%	0.46	%	0.17	%	0.17	%	0.02	%
Total annual fund operating expenses	1.10	%	1.80	%	1.80	%	1.06	%	1.31	%	0.66	%

Example

This example helps you compare the costs of investing in the fund with the costs of investing in other mutual funds. Your actual costs may be higher or lower. The example assumes:

• You invest $10,000 in the fund for the period shown

• Your investment has a 5% return each year — the assumption of a 5% return is required by the Securities and Exchange Commission (the “SEC”) for purposes of this example and is not a prediction of the fund’s future performance

• You reinvest all distributions and dividends without a sales charge

• The fund’s operating expenses (before fee waivers and/or expense reimbursements, if any) remain the same

Number of Years You Own Your Shares

	1 year		3 years		5 years		10 years
Class A (with or without redemption)	$	532	$	760	$	1,005	$	1,708
Class B (redemption at end of period)	$	633	$	867	$	1,075	$	1,932	(6)
Class B (no redemption)	$	183	$	567	$	975	$	1,932	(6)
Class C (redemption at end of period)	$	283	$	567	$	975	$	2,116
Class C (no redemption)	$	183	$	567	$	975	$	2,116
Class FI (with or without redemption)*	$	108	$	337	$	584	$	1,293
Class R (with or without redemption)*	$	133	$	414	$	717	$	1,578
Class I(1) (with or without redemption)	$	67	$	210	$	367	$	822

(1) As of November 20, 2006, Class Y shares were renamed Class I shares.

(2) You may buy Class A shares in amounts of $1,000,000 or more at net asset value (without an initial sales charge), but if you redeem those shares within 12 months of their purchase, you will pay a contingent deferred sales charge of 1.00%.

(3) The fund has a management fee schedule that reduces the management fee rate as assets increase as follows: 0.65% on assets up to and including $500 million and 0.60% on assets over $500 million.

(4) With respect to Class A, Class B, Class C, Class FI, Class R and Class I shares (as applicable), the fund may pay a fee for recordkeeping services performed for the share class. The recordkeeping fee for Class I shares is newly adopted and is not reflected in the “Other expenses” shown in the table above. As a result, the operating expenses of affected share classes may increase over time.

(5) The amount set forth under “Other expenses” for Class FI and R shares has been estimated for the current fiscal year based on the “Other expenses” of Class I shares.

(6) Assumes conversion to Class A shares approximately 8 years after purchase.

* The fund does not currently offer Class FI or Class R shares.

6 Prospectus

More on the fund’s investments

The fund’s investment objective and principal investment strategies are described under the section entitled “Investments, risks and performance” above. This section provides further information about the investment strategies that may be used by the fund.

The fund’s investment objective may be changed without shareholder approval.

Repurchase agreements

The fund may invest in repurchase agreements. A repurchase agreement is a transaction in which the seller of a security commits itself at the time of the sale to repurchase that security from a fund, as the buyer, at a mutually agreed upon time and price. The repurchase agreement thereby determines the yield during the purchaser’s holding period, while the seller’s obligation to repurchase is secured by the value of the underlying security.

Structured instruments

The fund may invest in various types of structured instruments, including securities that have demand, tender or put features, or interest rate reset features. Structured instruments may take the form of participation interests or receipts in underlying securities or other assets, and in some cases are backed by a financial institution serving as a liquidity provider. Some of these instruments may have an interest rate swap feature which substitutes a floating or variable interest rate for the fixed interest rate on an underlying security, and some may be asset-backed or mortgage-backed securities. Structured instruments are a type of derivative instrument and the payment and credit qualities of these instruments derive from the assets embedded in the structure.

Foreign securities

The fund may invest in U.S. dollar denominated securities of foreign issuers. Investments in these securities carries additional risks. These risks may include expropriation of assets, confiscatory taxation, withholding taxes on dividends and interest paid on fund investments, fluctuations in currency exchange rates, currency exchange controls and other limitations on the use or transfer of assets by the fund or issuers of securities, and political or social instability. In addition, foreign companies may not be subject to accounting standards or governmental supervision comparable to U.S. companies, and there may be less public information about their operations. Foreign markets may be less liquid and more volatile than United States markets. As a result, there may be rapid changes in the value of foreign securities. Non-U.S. markets also may offer less protection to investors such as the fund.

Defensive investing

The fund may depart from its principal investment strategies in response to adverse market, economic or political conditions by taking temporary defensive positions in any type of money market instruments and short-term debt securities or cash without regard to any percentage limitations. If the fund takes a temporary defensive position, it may be unable to achieve its investment objective.

Other investments

The fund also may use other strategies and invest in other securities that are described, along with their risks, in the fund’s Statement of Additional Information (the “SAI”). However, the fund might not use all of the strategies and techniques or invest in all of the types of securities described in this Prospectus or in the SAI. There also are many other factors, which are not described here, that could adversely affect your investment and that could prevent the fund from achieving its investment objective.

Prospectus 7

Percentage limitations and requirements

The fund’s compliance with its investment limitations and requirements is usually determined at the time of investment.

Portfolio holdings

The fund’s policies and procedures with respect to the disclosure of the fund’s portfolio securities are described in the SAI.

Management

Manager and subadviser

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the fund’s investment manager. LMPFA, with offices at 620 Eighth Avenue, New York, New York 10018, also serves as the investment manager of certain other Legg Mason-sponsored funds. LMPFA provides administrative and certain oversight services to the fund. As of December 31, 2007, LMPFA’s total assets under management were approximately $193 billion.

Western Asset Management Company (“Western Asset”) provides the day-to-day portfolio management of the fund, as subadviser. Western Asset, established in 1971, has offices at 385 East Colorado Boulevard, Pasadena, California 91101. Western Asset acts as investment adviser to institutional accounts, such as corporate pension plans, mutual funds and endowment funds. As of December 31, 2007, Western Asset’s total assets under management were approximately $457 billion.

LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. Legg Mason, whose principal executive offices are at 100 Light Street, Baltimore, Maryland 21202, is a global asset management company. As of December 31, 2007, Legg Mason’s asset management operations had aggregate assets under management of approximately $998 billion.

Portfolio managers

The fund is managed by a team of portfolio managers, sector specialists and other investment professionals led by S. Kenneth Leech, Stephen A. Walsh, and Jeffrey D. Van Schaick, Carl L. Eichstaedt, Edward A. Moody and Mark Lindbloom. The portfolio managers are responsible for the day-to-day portfolio management and oversight of the fund. Messrs. Leech, Walsh, Van Schaick, Eichstaedt and Moody are portfolio managers of Western Asset and have been employed by Western Asset for more than five years.

Mr. Lindbloom is a portfolio manager with Western Asset. Mr. Lindbloom joined Western Asset in 2006. Prior to this, Mr. Lindbloom was a Managing Director of Citigroup Asset Management and had been associated with its predecessor companies since 1986.

The SAI provides information about the compensation of the portfolio managers, other accounts they manage, and any fund shares held by the portfolio managers.

Management fee

For the fiscal year ended December 31, 2007, the fund paid a fee of 0.64% of the fund’s average daily net assets for management services.

A discussion regarding the basis for the Board’s approval of the fund’s management agreement and subadvisory agreement is available in the fund’s Annual Report dated December 31, 2007.

8 Prospectus

Distribution plan

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

The fund has adopted a shareholder services and distribution plan for its Class A, B, C, FI and R shares. Under the plan, the fund pays distribution and/or service fees. The plan provides for payments, based on annualized percentages of average daily net assets, of up to 0.25% for Class A shares; up to 0.75% for Class B shares; up to 0.70% for Class C shares; up to 0.25% for Class FI shares; and up to 0.50% for Class R shares. These fees are an ongoing expense and, over time, will increase the cost of your investment and may cost you more than other types of sales charges. Class I shares are not subject to any distribution and/or service fees.

In addition, the distributor may make payments for distribution and/or shareholder servicing activities out of its past profits and other available sources. The distributor also may make payments to dealers for marketing, promotional or related expenses. The amount of these payments is determined by the distributor and may be substantial. The manager or an affiliate may make similar payments under similar arrangements.

The payments described in the paragraph above are often referred to as “revenue sharing payments.” The recipients of such payments may include the fund’s distributor, affiliates of the manager, broker/dealers, financial institutions and other financial intermediaries through which investors may purchase shares of the fund. In some circumstances, such payments may create an incentive for an intermediary or its employees or associated persons to recommend or sell shares of the fund to you. Please contact your financial intermediary for details about revenue sharing payments it may receive.

Recent developments

On May 31, 2005, the SEC issued an order in connection with the settlement of an administrative proceeding against Smith Barney Fund Management LLC (“SBFM”), the then-investment adviser or manager to the fund, and Citigroup Global Markets Inc. (“CGMI”), a former distributor of the fund, relating to the appointment of an affiliated transfer agent for the Smith Barney family of mutual funds, including the fund (the “Affected Funds”).

The SEC order found that SBFM and CGMI willfully violated Section 206(1) of the Investment Advisers Act of 1940, as amended, and the rules promulgated thereunder (the “Advisers Act”). Specifically, the order found that SBFM and CGMI knowingly or recklessly failed to disclose to the boards of the Affected Funds in 1999 when proposing a new transfer agent arrangement with an affiliated transfer agent that: First Data Investors Services Group (“First Data”), the Affected Funds’ then-existing transfer agent, had offered to continue as transfer agent and do the same work for substantially less money than before; and that Citigroup Asset Management (“CAM”), the Citigroup business unit that, at the time, included the Affected Funds’ investment manager and other investment advisory companies, had entered into a side letter with First Data under which CAM agreed to recommend the appointment of First Data as sub-transfer agent to the affiliated transfer agent in exchange for, among other things, a guarantee by First Data of specified amounts of asset management and investment banking fees to CAM and CGMI. The order also found that SBFM and CGMI willfully violated Section 206(2) of the Advisers Act by virtue of the omissions discussed above and other misrepresentations and omissions in the materials provided to the Affected Funds’ boards, including the failure to make clear that the affiliated transfer agent would earn a high profit for performing limited functions while First Data continued to perform almost all of the transfer agent functions, and the suggestion that the proposed arrangement was in the Affected Funds’ best interests and that no viable alternatives existed.

SBFM and CGMI do not admit or deny any wrongdoing or liability. The settlement does not establish wrongdoing or liability for purposes of any other proceeding. The SEC censured SBFM and CGMI and ordered them to cease and desist from violations of Sections 206(1) and 206(2) of the Advisers Act. The order required Citigroup to pay $208.1 million, including $109 million in disgorgement of profits, $19.1 million in

Prospectus 9

interest, and a civil money penalty of $80 million. Approximately $24.4 million has already been paid to the Affected Funds, primarily through fee waivers. The remaining $183.7 million, including the penalty, has been paid to the U.S. Treasury and will be distributed pursuant to a plan submitted for the approval of the SEC. At this time, there is no certainty as to how the above-described proceeds of the settlement will be distributed, to whom such distributions will be made, the methodology by which such distributions will be allocated, and when such distributions will be made. The order also required that transfer agency fees received from the Affected Funds since December 1, 2004, less certain expenses, be placed in escrow and provided that a portion of such fees might be subsequently distributed in accordance with the terms of the order. On April 3, 2006, an aggregate amount of approximately $9 million held in escrow was distributed to the Affected Funds.

The order required SBFM to recommend a new transfer agent contract to the Affected Funds’ boards within 180 days of the entry of the order; if a Citigroup affiliate submitted a proposal to serve as transfer agent or sub-transfer agent, SBFM and CGMI would have been required, at their expense, to engage an independent monitor to oversee a competitive bidding process. On November 21, 2005, and within the specified timeframe, the Affected Funds’ Boards selected a new transfer agent for the Affected Funds. No Citigroup affiliate submitted a proposal to serve as transfer agent. Under the order, SBFM also must comply with an amended version of a vendor policy that Citigroup instituted in August 2004.

Although there can be no assurance, the manager does not believe that this matter will have a material adverse effect on the Affected Funds.

On December 1, 2005, Citigroup completed the sale of substantially all of its global asset management business, including SBFM, to Legg Mason.

Choosing a class of shares to buy

Individual investors can generally choose among three classes of shares: Classes A, B and C shares. Individual investors that held Class I (formerly Class Y) shares prior to November 20, 2006, may continue to invest in Class I shares. Institutional and retirement plan investors and clients of financial intermediaries should refer to “Retirement and institutional investors” below for a description of the classes available to them.

Each class has different sales charges and expenses, allowing you to choose the class that best meets your needs.

When choosing which class of shares to buy, you should consider:

• How much you plan to invest

• How long you expect to own the shares

• The expenses paid by each class detailed in the Fee table and Example at the front of this Prospectus

• Whether you qualify for any reduction or waiver of sales charges

If you are choosing between Class A and Class B shares, it will in almost all cases be the more economical choice for you to purchase Class A shares if you plan to purchase shares in an amount of $100,000 or more (whether in a single purchase or through aggregation of eligible holdings). This is because of the reduced sales charge available on larger investments of Class A shares and the lower ongoing expenses of Class A shares compared to Class B shares.

If you intend to invest for only a few years, the effect of Class B contingent deferred sales charges on redemptions made within five years of purchase, as well as the effect of higher expenses of that class, might make an investment in Class C more appropriate. There is no initial sales charge on Class C shares, and the contingent deferred sales charge does not apply to shares redeemed one year or more after purchase.

However, if you plan to invest a large amount and your investment horizon is five years or more, Class C shares might not be as advantageous as Class A shares. The annual distribution and service fees on Class C shares may cost you more over the longer term than the front-end sales charge you would have paid for larger purchases of Class A shares.

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You may buy shares:

• Through banks, brokers, dealers, insurance companies, investment advisers, financial consultants or advisors, mutual fund supermarkets and other financial intermediaries that have entered into an agreement with the distributor to sell shares of the fund (each called a “Service Agent”)

• Directly from the fund

Different types of shareholder services may be available to you under arrangements offered by different Service Agents. In addition, these services may vary depending on the share class in which you choose to invest. In making your decision regarding which share class to buy, please keep in mind that your Service Agent may receive different compensation depending on the share class in which you invest. Investors should consult with their Service Agents about comparative pricing of shareholder services available to them under each available share class, the compensation that will be received by their Service Agents in connection with each available share class, and other factors that may be relevant to the investor’s choice of share class in which to invest.

Not all classes of shares are available through each Service Agent. You should contact your Service Agent for further information about available share classes.

Investment minimums

Minimum initial and additional investment amounts vary depending on the class of shares you buy and the nature of your investment.

Investment Minimum Initial/Additional Investment(1)(2)
(effective July 1, 2008)
	Class A	Class B	Class C	Class FI	Class R	Class I (formerly Y)
General	$1,000/$50	$1,000/$50	$1,000/$50	n/a	n/a	n/a
Uniform Gifts or Transfers to Minor Accounts	$1,000/$50	$1,000/$50	$1,000/$50	n/a	n/a	n/a
IRAs	$250/$50	$250/$50	$250/$50	n/a	n/a	n/a
SIMPLE IRAs	None/None	None/None	None/None	n/a	n/a	n/a
Systematic Investment Plans	$50/$50	$50/$50	$50/$50	n/a	n/a	n/a
Clients of Eligible Financial Intermediaries	None/None	n/a	n/a	None/None	n/a	None/None
Retirement Plans with omnibus accounts held on the books of the fund	None/None(3)	n/a(4)	None/None	None/None	None/None	None/None
Other Retirement Plans	None/None	None/None	None/None	n/a	n/a	n/a
Institutional Investors	$1,000/$50	$1,000/$50	$1,000/$50	n/a	n/a	$ 1 million/None

(1) For information regarding investment minimums prior to July 1, 2008, please refer to the prospectus supplement at the front of this prospectus.

(2) Different minimums may apply to clients of certain service agents. Contact your service agent for more information. Refer to the section entitled “Retirement and institutional investors” for additional information regarding the investment minimum and eligibility requirements for Retirement Plans, Institutional Investors and Clients of Eligible Financial Intermediaries.

(3) Class A shares are not available to new Retirement Plan investors through a Service Agent if the Service Agent makes Class FI shares available.

(4) Retirement Plans that held Class B shares prior to December 1, 2006 are permitted to make additional investments in that class.

More information about the fund’s classes of shares is available through the Legg Mason Partners Funds’ website. You’ll find detailed information about sales charges and ways you can qualify for reduced or waived sales charges, including:

• The front-end sales charges that apply to the purchase of Class A shares

• The contingent deferred sales charges that apply to the redemption of Class B shares and Class C shares and certain Class A shares (redeemed within one year)

• Who qualifies for lower sales charges on Class A shares

• Who qualifies for a sales load waiver

To access the website, go to http://www.leggmason.com/individualinvestors and click on the name of the fund.

Prospectus 11

Comparing the fund’s classes

The following table compares key features of the fund’s classes. You should review the Fee table and Example at the front of this Prospectus carefully before choosing your share class. Your Service Agent can help you decide which class meets your goals. Your Service Agent may receive different compensation depending upon which class you choose. Please contact your Service Agent regarding the availability of Class FI or Class R shares.

	Class A	Class B	Class C	Class FI	Class R	Class I (formerly Y)
Key features	•   Initial sales charge •   You may qualify for reduction or waiver of initial sales charge •   Generally, lower annual expenses than Class B and Class C	•   No initial sales charge •   Contingent deferred sales charge declines over time •   Converts to Class A after approximately 8 years •   Generally, higher annual expenses than Class A	•   No initial sales charge •   Contingent deferred sales charge for only 1 year •   Does not convert to Class A •   Generally, higher annual expenses than Class A	•   No initial or contingent deferred sales charge •   Only offered to Clients of Eligible Financial Intermediaries and eligible Retirement Plans	•   No initial or contingent deferred sales charge •   Only offered to eligible Retirement Plans with omnibus accounts held on the books of the fund	•   No initial or contingent deferred sales charge •   Only offered to institutional and other eligible investors •   Generally, lower annual expenses than the other classes
Initial sales charge	Up to 4.25%; reduced or waived for large purchases and certain investors; no charge for purchases of $1,000,000 or more	None	None	None	None	None
Contingent deferred sales charge	1.00% on purchases of $1,000,000 or more if you redeem within 1 year of purchase; waived for certain investors	Up to 4.50% charged when you redeem shares. The charge is reduced over time and there is no contingent deferred sales charge after 5 years; waived for certain investors	1.00% if you redeem within 1 year of purchase; waived for certain investors	None	None	None
Annual distribution and/or service fees	0.25% of average daily net assets	0.75% of average daily net assets	0.70% of average daily net assets	0.25% of average daily net assets	0.50% of average daily net assets	None
Exchange Privilege(1)	Class A shares of most Legg Mason Partners Funds	Class B shares of most Legg Mason Partners Funds	Class C shares of most Legg Mason Partners Funds	Class FI shares of applicable Legg Mason Partners Funds	Class R shares of applicable Legg Mason Partners Funds	Class I shares of most Legg Mason Partners Funds

(1) Ask your Service Agent about the Legg Mason Partners Funds available for exchange.

Sales charges

Class A shares

You buy Class A shares at the offering price, which is the net asset value plus a sales charge. You pay a lower rate as the size of your investment increases to certain levels called breakpoints. You do not pay a sales charge on the fund’s distributions or dividends you reinvest in additional Class A shares.

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The table below shows the rate of sales charge you pay, depending on the amount you purchase. It also shows the amount of broker/dealer compensation that will be paid out of the sales charge if you buy shares from a Service Agent. For Class A shares sold by LMIS, LMIS will receive the sales charge imposed on purchases of Class A shares (or any contingent deferred sales charge paid on redemptions) and will retain the full amount of such sales charge. For Class A shares sold by PFS Investments Inc. (“PFS”) between December 1, 2007 through the close of business on May 31, 2008, PFS will receive the front-end sales charge imposed on purchases of Class A shares and will retain the full amount of such sales charge. LMIS will retain any contingent deferred sales charge paid on redemptions. Thereafter, PFS will receive the same level of compensation as other Service Agents. Service Agents will also receive a service fee payable on Class A shares at an annual rate of up to 0.25% of the average daily net assets represented by the Class A shares serviced by them.

Amount of purchase	Sales Charge as a % of offering price	Sales Charge as a % of net amount invested	Broker/ Dealer Commission as a % of offering price
Less than $100,000	4.25	4.44	4.00
$100,000 but less than $250,000	3.50	3.63	3.00
$250,000 but less than $500,000	2.50	2.56	2.00
$500,000 but less than $750,000	2.00	2.04	1.60
$750,000 but less than $1,000,000	1.50	1.52	1.20
$1,000,000 or more(1)	-0-	-0-	up to 1.00

(1) The distributor may pay a commission of up to 1.00% to a Service Agent for purchase amounts of $1,000,000 or more. In such cases, starting in the thirteenth month after purchase, the Service Agent will also receive an annual distribution/service fee of up to 0.25% of the average daily net assets represented by the Class A shares held by its clients. Prior to the thirteenth month, the distributor will retain this fee. Where the Service Agent does not receive the payment of this commission, the Service Agent will instead receive the annual distribution/service fee starting immediately after purchase. Please contact your Service Agent for more information.

Investments of $1,000,000 or more

You do not pay an initial sales charge when you buy $1,000,000 or more of Class A shares. However, if you redeem these Class A shares within one year of purchase, you will pay a contingent deferred sales charge of 1.00%.

Qualifying for a reduced Class A sales charge

There are several ways you can combine multiple purchases of Class A shares of Legg Mason Partners funds to take advantage of the breakpoints in the sales charge schedule. In order to take advantage of reductions in sales charges that may be available to you when you purchase fund shares, you must inform your Service Agent or the transfer agent if you are eligible for a letter of intent or a right of accumulation and if you own shares of other Legg Mason Partners funds that are eligible to be aggregated with your purchases. Certain records, such as account statements, may be necessary in order to verify your eligibility for reduced sales charges.

• Accumulation privilege – allows you to combine the current value of Class A shares of the fund with other shares of Legg Mason Partners funds that are owned by

• you, or

• your spouse and children under the age of 21

with the dollar amount of your next purchase of Class A shares for purposes of calculating the initial sales charge.

Shares of certain money market funds advised by the manager or its affiliates (other than money market fund shares acquired by exchange from other Legg Mason Partners funds offered with a sales charge), Legg Mason Partners S&P 500 Index Fund and Class O shares of Legg Mason Partners Equity Fund may not be combined.

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If you hold shares of Legg Mason Partners funds in accounts at two or more Service Agents, please contact your Service Agents to determine which shares may be combined.

Certain trustees and fiduciaries may be entitled to combine accounts in determining their sales charge.

• Letter of intent – allows you to purchase Class A shares of Legg Mason Partners funds over a 13-month period and pay the same sales charge on Class A shares, if any, as if all the shares had been purchased at once. At the time you enter into the letter of intent, you select your asset goal amount. Generally, purchases of Legg Mason Partners fund shares that are purchased during the 13-month period by

• you, or

• your spouse and children under the age of 21

are eligible for inclusion under the letter, based on the public offering price at the time of the purchase, and any capital appreciation on those shares. Purchases made 90 days prior to the 13-month period are also eligible to be treated as purchases made under the letter of intent. In addition, you can include towards your asset goal amount the current value of any eligible purchases that were made prior to the date of entering into the letter of intent and are still held.

Shares of certain money market funds advised by the manager or its affiliates (other than money market fund shares acquired by exchange from other Legg Mason Partners funds offered with a sales charge), Legg Mason Partners S&P 500 Index Fund and Class O shares of Legg Mason Partners Equity Fund may not be combined.

If you hold shares of Legg Mason Partners funds in accounts at two or more Service Agents, please contact your Service Agents to determine which shares may be credited toward your letter of intent asset goal.

If you do not meet your asset goal amount, shares in the amount of any sales charges due based on the amount of your actual purchases will be redeemed from your account.

Waivers for certain Class A investors

Class A initial sales charges are waived for certain types of investors, including:

• Employees of Service Agents having dealer, service or other selling agreements with the fund’s distributor

• Investors who redeemed Class A shares of a Legg Mason Partners fund in the past 60 days, if the investor’s Service Agent is notified

• Directors and officers of any Legg Mason-sponsored fund

• Employees of Legg Mason and its subsidiaries

• Investors investing through certain retirement plans

If you qualify for a waiver of the Class A initial sales charge, you must notify your Service Agent or the transfer agent at the time of purchase and provide sufficient information at the time of purchase to permit verification that the purchase qualifies for the initial sales charge waiver.

If you want to learn about additional waivers of Class A initial sales charges, contact your Service Agent, consult the SAI or access the Legg Mason Partners Funds’ website, http://www.leggmason.com/individual investors, and click on the name of the fund.

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Class B shares

You buy Class B shares at net asset value without paying an initial sales charge. However, if you redeem your Class B shares within 5 years of your original purchase payment, you will pay a contingent deferred sales charge. The contingent deferred sales charge decreases as the number of years since your purchase payment increases.

Year after purchase	1st		2nd		3rd		4th		5th		6th through 8th
Contingent deferred sales charge	4.5	%	4	%	3	%	2	%	1	%	0	%

LMIS will pay Service Agents selling Class B shares a commission of up to 4.00% of the purchase price of the Class B shares they sell, and LMIS will retain the contingent deferred sales charges. For Class B shares sold by PFS, PFS pays a commission of up to 4.00% of the purchase price of the Class B shares sold by its Agents and retains the contingent deferred sales charges paid upon certain redemptions. PFS will receive any service and distribution fees paid on all shares held by PFS clients. Service Agents also receive an annual distribution/service fee of up to 0.25% of the average daily net assets represented by the Class B shares serviced by them.

Class B conversion

After approximately 8 years, Class B shares automatically convert into Class A shares. This helps you because Class A shares have lower annual expenses. Your Class B shares will convert to Class A shares as follows:

Shares issued: At initial purchase	Shares issued: On reinvestment of dividends and distributions	Shares issued: Upon exchange from another Legg Mason Partners Fund
Approximately 8 years after the date of purchase	In same proportion as the number of Class B shares converting is to total Class B shares you own (excluding shares issued as dividends)	On the date the shares originally acquired would have converted into Class A shares

Class C shares

You buy Class C shares at net asset value without paying an initial sales charge. However, if you redeem your Class C shares within one year of purchase, you will pay a contingent deferred sales charge of 1.00%.

LMIS will generally pay Service Agents selling Class C shares a commission of up to 0.75% of the purchase price of the Class C shares they sell, and LMIS will retain the contingent deferred sales charges and an annual distribution/service fee of up to 0.70% of the average daily net assets represented by the Class C shares serviced by these Service Agents until the thirteenth month after purchase. Starting in the thirteenth month after purchase, these Service Agents will receive an annual distribution/service fee of up to 0.70% of the average daily net assets represented by the Class C shares serviced by them.

Class FI shares, Class R shares and Class I shares

Class FI, R and I shares are purchased at net asset value with no initial sales charge and no contingent deferred sales charge when redeemed. Service Agents will receive a distribution/service fee of up to 0.25% of the average daily net assets represented by the Class FI shares serviced by them, and up to 0.50% of the average daily net assets represented by the Class R shares serviced by them.

Prospectus 15

More about contingent deferred sales charges

The contingent deferred sales charge is based on the net asset value at the time of purchase or redemption, whichever is less, and therefore you do not pay a sales charge on amounts representing appreciation or depreciation.

In addition, you do not pay a contingent deferred sales charge:

• When you exchange shares for shares of another Legg Mason Partners fund

• On shares representing reinvested distributions and dividends

• On shares no longer subject to the contingent deferred sales charge

Each time you place a request to redeem shares, the fund will first redeem any shares in your account that are not subject to a contingent deferred sales charge and then the shares in your account that have been held the longest.

If you redeem shares of a Legg Mason Partners fund and pay a contingent deferred sales charge, you may, under certain circumstances, reinvest all or part of the redemption proceeds within 60 days and receive pro rata credit for any contingent deferred sales charge imposed on the prior redemption. Please contact your Service Agent for additional information.

The fund’s distributor receives contingent deferred sales charges as partial compensation for its expenses in selling shares, including the payment of compensation to your Service Agent.

Contingent deferred sales charge waivers

• The contingent deferred sales charge for each share class will generally be waived:

• On payments made through certain systematic withdrawal plans

• On certain distributions from a retirement plan

• For retirement plans with omnibus accounts held on the books of the fund

• For involuntary redemptions of small account balances

• For 12 months following the death or disability of a shareholder

If you want to learn more about additional waivers of contingent deferred sales charges, contact your Service Agent, consult the SAI or look at the Legg Mason Partners Funds’ website, http://www.leggmason.com/individualinvestors, and click on the name of the fund.

Retirement and institutional investors

Eligible Investors

Retirement Plans

Retirement Plans with omnibus accounts held on the books of the fund can generally choose among four classes of shares: Class C, Class FI, Class R and Class I shares.

Class A and B shares are no longer offered through Service Agents for Retirement Plans with omnibus accounts held on the books of the fund, with limited exceptions. Class A shares will cease to be available to new Retirement Plan investors through a Service Agent if the Service Agent makes Class FI shares available. Please see below for additional information.

“Retirement Plans” include 401(k) plans, 457 plans, employer-sponsored 403(b) plans, profit-sharing plans, non-qualified deferred compensation plans and other similar employer-sponsored retirement plans. Retirement Plans do not include individual retirement vehicles, such as traditional and Roth individual retirement accounts, Coverdell education savings accounts, individual 403(b)(7) custodial accounts, Keogh

16 Prospectus

plans, SEPs, SARSEPs, SIMPLE IRAs, or Section 529 savings accounts. Although Retirement Plans with omnibus accounts held on the books of the fund are not subject to minimum initial investment requirements for any of these share classes, certain investment minimums may be imposed by a financial intermediary.

Other Retirement Plan investors can generally choose among three classes of shares: Class A, Class B and Class C. “Other Retirement Plans” include Retirement Plans investing through brokerage accounts, and also include certain Retirement Plans with direct relationships to the fund that are neither Institutional Investors nor investing through omnibus accounts. Individual retirement vehicles, such as IRAs, may also choose among these share classes. Other Retirement Plans and individual retirement vehicles are treated like individual investors for purposes of determining sales charges and any applicable sale charge reductions or waivers.

Clients of Eligible Financial Intermediaries

Clients of Eligible Financial Intermediaries may generally choose between three classes of shares: Class A, Class FI and Class I. “Clients of Eligible Financial Intermediaries” are investors who invest in the fund through financial intermediaries that offer their clients fund shares through investment programs as authorized by LMIS. Such investment programs may include fee-based advisory account programs, and college savings vehicles such as Section 529 plans. The financial intermediary may impose separate investment minimums.

Institutional Investors

Institutional Investors may invest in Class I shares if they meet the $1,000,000 minimum initial investment requirement. Institutional Investors may also invest in Class A, B, and C shares, which have different investment minimums and fees and expenses. “Institutional Investors” generally include corporations, banks, insurance companies, foundations, retirement plans and other similar entities with direct relationships to the fund.

Class C — Retirement Plans

Retirement Plans with omnibus accounts held on the books of the fund may buy Class C shares without paying a contingent deferred sales charge. LMIS does not pay Service Agents selling Class C shares to retirement plans with omnibus accounts held on the books of the fund a commission on the purchase price of Class C shares sold by them. Instead, immediately after purchase, LMIS may pay such Service Agents an annual distribution/service fee of up to 0.70% of the average daily net assets represented by the Class C shares serviced by them.

Certain retirement plan programs with exchange features in effect prior to November 20, 2006, as approved by LMIS, will remain eligible for exchange from Class C shares to Class A shares in accordance with the program terms. Please read the SAI for more details.

Class FI shares

Class FI shares are offered to investors who invest in the fund through certain financial intermediary and retirement plan programs. LMIS may pay Service Agents selling Class FI shares an annual distribution/service fee of up to 0.25% starting immediately after purchase.

Class R

Class R shares are offered only to Retirement Plans with accounts held on the books of the fund (either at the plan level or at the level of the financial intermediary). LMIS may pay Service Agents selling Class R shares an annual distribution/service fee of up to 0.50% of the average daily net assets represented by the Class R shares serviced by them.

Prospectus 17

Class I shares

As of November 20, 2006, Class Y shares are renamed Class I shares. Class I shares are offered only to Institutional Investors who meet the $1,000,000 minimum initial investment requirement, clients of Financial Intermediaries, and other investors as authorized by LMIS. However, investors that held Class Y shares prior to November 20, 2006, will be permitted to make additional investments in Class I shares.

Class A and Class B — Retirement plans

Class A and Class B shares are no longer offered through Service Agents to Retirement Plans with omnibus accounts held on the books of the fund. However, certain Retirement Plans that held Class B shares prior to December 1, 2006 are permitted to make additional investments in that class. Certain existing programs for current and prospective Retirement Plan investors sponsored by financial intermediaries also remain eligible for Class A shares. Under these programs, the initial sales charge and contingent deferred sales charge for Class A shares is waived where:

• Such Retirement Plan’s recordkeeper offers only load-waived shares,

• Fund shares are held on the books of the fund through an omnibus account, and

• The Retirement Plan has more than 100 participants, or has total assets exceeding $1 million.

LMIS does not pay Service Agents selling Class A shares to Retirement Plans with a direct omnibus relationship with the fund a commission on the purchase price of Class A shares sold by them. However, for certain Retirement Plans that purchased shares at net asset value prior to November 20, 2006, LMIS may continue to pay Service Agents commissions of up to 1.00% of the purchase price of the Class A shares that are purchased with regular ongoing plan contributions. Please contact your Service Agent for more information.

Other considerations

Plan sponsors, plan fiduciaries and other financial intermediaries may choose to impose qualification requirements for plans that differ from the fund’s share class eligibility standards. In certain cases this could result in the selection of a share class with higher service and distribution related fees than otherwise would have been charged. The fund is not responsible for, and has no control over, the decision of any plan sponsor, plan fiduciary or financial intermediary to impose such differing requirements. Please consult with your plan sponsor, plan fiduciary or financial intermediary for more information about available share classes.

With respect to Class A, B, C, FI, R and I shares, as applicable, the fund may pay a fee for recordkeeping services performed for the share class.

Not all share classes may be made available by your Service Agent. Please contact your Service Agent for additional details.

Buying shares

Generally	You may buy shares at their net asset value next determined after receipt by your Service Agent or the transfer agent of your purchase request in good order, plus any applicable sales charge.
	The fund generally will not permit non-resident aliens with a non-U.S. address to establish an account. U.S. citizens with an APO/FPO address or an address in the U.S. (including its territories) and resident aliens with a U.S. address are permitted to establish an account with the funds. Subject to the requirements of local law, U.S. citizens residing in foreign countries are permitted to establish an account with the funds.
Through a Service Agent	You should contact your Service Agent to open a brokerage account and make arrangements to buy shares. You must provide the following information for your order to be processed:
	•   Class of shares being bought
	•   Dollar amount or number of shares being bought
	•   Account number (if existing account)
	Your Service Agent may charge an annual account maintenance fee.

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Through the fund	•   Investors should write to the fund at the following address:
	Legg Mason Partners Funds
	c/o PFPC Inc.
	P.O. Box 9699
	Providence, Rhode Island 02940-9699
	•   Enclose a check to pay for the shares. For initial purchases, complete and send an account application available upon request from Legg Mason Partners Shareholder Services at the number below
	•   Specify the name of the fund, the share class you wish to purchase and your account number (if existing account)
	•   For more information, please call Legg Mason Partners Shareholder Services at 800-451-2010
Through a systematic investment plan	You may authorize a Service Agent or the transfer agent to transfer funds automatically from (i) a regular bank account, (ii) cash held in a brokerage account opened with a Service Agent, or (iii) certain money market funds, in order to buy shares on a regular basis.
	•   Amounts transferred must be at least $25
	•   Amounts may be transferred monthly, every alternate month, quarterly, semi-annually or annually
	•   If you do not have sufficient funds in your account on a transfer date, your Service Agent or the transfer agent may charge you a fee
	For more information, please contact your Service Agent or Legg Mason Partners Shareholder Services or consult the SAI.
Exchanging shares
Generally	You may exchange shares at their net asset value next determined after receipt by your Service Agent or the transfer agent of your exchange request in good order.
Legg Mason Partners offers a distinctive family of funds tailored to help meet the varying needs of both large and small investors	You should contact your Service Agent to exchange into other Legg Mason Partners funds. Be sure to read the prospectus of the Legg Mason Partners fund into which you are exchanging. An exchange is a taxable transaction unless you are investing through a tax-qualified savings plan or account.
	•   If you bought shares through a Service Agent, you may exchange shares only for shares of the same class of certain other Legg Mason Partners funds made available for exchange by your Service Agent. Not all Legg Mason Partners funds made available for exchange by your Service Agent may offer all classes. Please contact your Service Agent for more information about the funds and classes that are available for exchange
	•   If you bought shares directly from the fund, you may exchange shares only for shares of the same class of another Legg Mason Partners fund other than shares of Legg Mason Partners S&P 500 Index Fund. Not all Legg Mason Partners funds offer all classes
	•   Not all Legg Mason Partners funds may be offered in your state of residence. Contact your Service Agent or the transfer agent for further information
	•   Exchanges of Class A, Class B and Class C shares are subject to minimum investment requirements (except for systematic investment plan exchanges), and all shares are subject to other requirements of the fund into which exchanges are made. Your shares will not be subject to an initial sales charge at the time of the exchange
	•   If you hold share certificates, the transfer agent must receive the certificates endorsed for transfer or with signed stock powers before the exchange is effective
	•   The fund may suspend or terminate your exchange privilege if you engage in an excessive pattern of exchanges
Sales charges	In most instances, your shares will not be subject to an initial sales charge or a contingent deferred sales charge at the time of the exchange.
	Your contingent deferred sales charge (if any) will continue to be measured from the date of your original purchase of shares subject to a contingent deferred sales charge, and you will be subject to the contingent deferred sales charge of the fund that you originally purchased.
By telephone	If you do not have a brokerage account with a Service Agent, you may be eligible to exchange shares through the fund. You must complete an authorization form to authorize telephone transfers. If eligible, you may make telephone exchanges on any day the New York Stock Exchange (“NYSE”) is open. Shareholders should call Legg Mason Partners Shareholder Services at 800-451-2010 between 8:30 a.m. and 4:00 p.m. (Eastern time).
	You can make telephone exchanges only between accounts that have identical registrations.
By mail	If you do not have a brokerage account, contact your Service Agent or write to the fund at the address on the following page.
Through a systemic exchange plan	You may be permitted to schedule exchanges of shares of any class of the fund for shares of the same class of other Legg Mason Partners funds.
	•   Exchanges may be made monthly, every alternate month, quarterly, semi-annually or annually
	•   A predetermined dollar amount of at least $25 per exchange is required
	For more information, please contact your Service Agent or Legg Mason Partners Shareholder Services or consult the SAI.

Prospectus 19

Redeeming shares

Generally	You may redeem shares at their net asset value next determined after receipt by your Service Agent or the transfer agent of your redemption request in good order, less any applicable contingent deferred sales charge.
	Contact your Service Agent to redeem shares of the fund.
	If you hold share certificates, the transfer agent must receive the certificates endorsed for transfer or with signed stock powers with a signature guarantee before you may redeem.
	If the shares are held by a fiduciary or corporation, other documents may be required.
	Your redemption proceeds will normally be sent within 3 business days after your request is received in good order, but in any event within 7 days. Your redemption proceeds may be delayed for up to 10 days if your purchase was made by check.
By mail	If you have a brokerage account with a Service Agent, your redemption proceeds will be sent to your Service Agent. In other cases, unless you direct otherwise, your redemption proceeds will be paid by check mailed to your address of record. For accounts held directly at the fund, send written requests to the fund at the following address:
	Legg Mason Partners Funds
	c/o PFPC Inc.
	P.O. Box 9699
	Providence, Rhode Island 02940-9699
	Your written request must provide the following:
	•   The name of the fund, the class of shares to be redeemed and your account number
	•   The dollar amount or number of shares to be redeemed
	•   Signature of each owner exactly as the account is registered
	•   Signature guarantees, as applicable
By telephone	If you do not have a brokerage account with a Service Agent, you may be eligible to redeem shares (except those held in certain retirement plans) in amounts up to $50,000 per day through the fund. You must complete an authorization form to authorize telephone redemptions. If eligible, you may request redemptions by telephone on any day the NYSE is open. Shareholders should call Legg Mason Partners Shareholder Services at 800-451-2010 between 8:30 a.m. and 4:00 p.m. (Eastern time).
	Your redemption proceeds can be sent by check to your address of record or by wire or electronic transfer (ACH) to a bank account designated on your authorization form. You must submit a new authorization form to change the bank account designated to receive wire or electronic transfers and you may be asked to provide certain other documents. The transfer agent may charge a fee on a wire or an electronic transfer (ACH).
Automatic cash withdrawal plans	You can arrange for the automatic redemption of a portion of your shares monthly, every alternate month, quarterly, semi-annually or annually. To qualify, you must own shares of the fund with a value of at least $10,000 ($5,000 for retirement plan accounts) and each automatic redemption must be at least $50. If your shares are subject to a contingent deferred sales charge, the sales charge will be waived if your automatic redemptions are equal to or less than 2% per month of your account balance on the date the withdrawals commence, up to a maximum of 12% in one year.
	The following conditions apply:
	•   Your shares must not be represented by certificates
	•   All dividends and distributions must be reinvested
	For more information, please contact your Service Agent or consult the SAI.

Other things to know about transactions

When you buy, exchange or redeem shares, your request must be in good order. This means you have provided the following information, without which your request may not be processed:

• Name of the fund

• Your account number

• Class of shares being bought, and if you own more than one class, the class of shares being exchanged or redeemed

• Dollar amount or number of shares being bought, exchanged or redeemed

• Signature of each owner exactly as the account is registered

20 Prospectus

The fund’s transfer agent or Legg Mason Partners Shareholder Services will employ reasonable procedures to confirm that any telephone exchange or redemption request is genuine, which may include recording calls, asking the caller to provide certain personal identification information, sending you a written confirmation or requiring other confirmation procedures from time to time. If these procedures are followed, neither the fund nor its agents will bear any liability for such transactions.

Signature guarantees

To be in good order, your redemption request must include a signature guarantee if you:

• Are redeeming over $50,000

• Are sending signed share certificates or stock powers to the transfer agent

• Instruct the transfer agent to mail the check to an address different from the one on your account registration

• Changed your account registration or your address within 30 days

• Want the check paid to someone other than the account owner(s)

• Are transferring the redemption proceeds to an account with a different registration

You can obtain a signature guarantee from most banks, dealers, brokers, credit unions and federal savings and loan institutions, but not from a notary public.

The fund has the right to:

• Suspend the offering of shares

• Waive or change minimum and additional investment amounts

• Reject any purchase or exchange order

• Change, revoke or suspend the exchange privilege

• Suspend telephone transactions

• Suspend or postpone redemptions of shares on any day when trading on the NYSE is restricted, or as otherwise permitted by the SEC

• Pay redemption proceeds by giving you securities. You may pay transaction costs to dispose of the securities

Small account balances/mandatory redemptions

If at any time the aggregate net asset value of the fund shares in your account is less than $500 for any reason (including solely due to declines in net asset value and/or failure to invest at least $500 within a reasonable period), the fund reserves the right to ask you to bring your account up to the applicable minimum investment amount as determined by your Service Agent. In such case, you shall be notified in writing and will have 60 days to make an additional investment to bring your account value up to the required level. If you choose not to do so within this 60 day period, the fund may close your account and send you the redemption proceeds. In the event your account is closed due to a failure to increase your balance to the minimum required amount, you will not be eligible to have your account subsequently reinstated without imposition of any sales charges that may apply to your new purchase. The fund may, with prior notice, change the minimum size of accounts subject to mandatory redemption, which may vary by class, or implement fees for small accounts.

Subject to applicable law, the fund, with prior notice, may adopt other policies from time to time requiring mandatory redemption of shares in certain circumstances upon prior notice to shareholders and prospective investors.

For more information, please contact your Service Agent or Legg Mason Partners Shareholder Services or consult the SAI.

Prospectus 21

Frequent purchases and redemptions of fund shares

Frequent purchases and redemptions of fund shares may interfere with the efficient management of the fund’s portfolio by its portfolio managers, increase portfolio transaction costs, and have a negative effect on the fund’s long-term shareholders. For example, in order to handle large flows of cash into and out of the fund, the portfolio managers may need to allocate more assets to cash or other short-term investments or sell securities, rather than maintaining full investment in securities selected to achieve the fund’s investment objective. Frequent trading may cause the fund to sell securities at less favorable prices. Transaction costs, such as brokerage commissions and market spreads, can detract from the fund’s performance. In addition, the return received by long-term shareholders may be reduced when trades by other shareholders are made in an effort to take advantage of certain pricing discrepancies, when, for example, it is believed that the fund’s share price, which is determined at the close of the NYSE on each trading day, does not accurately reflect the value of the fund’s portfolio securities. Funds investing in foreign securities have been particularly susceptible to this form of arbitrage, but other funds could also be affected.

Because of the potential harm to funds in the Legg Mason Partners funds complex and their long-term shareholders, the Board of the fund has approved policies and procedures that are intended to discourage and prevent excessive trading and market timing abuses through the use of various surveillance techniques. Under these policies and procedures, the fund may limit additional exchanges or purchases of fund shares by shareholders who are believed by the manager to be engaged in these abusive trading activities in the fund or in other funds within the fund complex. In the event that an exchange request is rejected, the shareholder may nonetheless redeem its shares. The intent of the policies and procedures is not to inhibit legitimate strategies, such as asset allocation, dollar cost averaging, or similar activities that may nonetheless result in frequent trading of fund shares.

Under the fund’s policies and procedures, the fund reserves the right to restrict or reject purchases of shares (including exchanges) without prior notice whenever a pattern of excessive trading by a shareholder is detected within the fund complex. A committee established by the manager administers the policy. The policy provides that the committee will use its best efforts to restrict a shareholder’s trading privileges in the Legg Mason Partners funds if that shareholder has engaged in a total of four or more “Round Trips” across all Legg Mason Partners funds during any rolling 12-month period. However, the committee has the discretion to determine that restricting a shareholder’s trading privileges is not necessary (or that a new limit on Round Trips should be established for the shareholder) if it is determined that the pattern of trading is not abusive or harmful. In making such a determination, the committee will consider, among other things, the nature of the shareholder’s account, the reason for the frequent trading, the amount of trading and the particular funds in which the trading has occurred. Additionally, the committee has the discretion to make inquiries or to take action against any shareholder whose trading appears inconsistent with the frequent trading policy. Examples of the types of actions the committee may take to deter excessive trading in a shareholder account include restricting the shareholder from purchasing additional shares in the fund altogether or imposing other restrictions (such as requiring purchase orders to be submitted by mail) that would deter the shareholder from trading frequently in the fund.

A “Round Trip” is defined as a purchase (including subscriptions and exchanges) into the fund followed by a sale (including redemptions and exchanges) of the same or a similar number of shares out of the fund within 30 days of such purchase. Purchases and sales of the fund’s shares pursuant to an automatic investment plan or similar program for periodic transactions are not considered in determining Round Trips. For purposes of these policies and procedures, the Legg Mason Partners funds complex also includes certain Western Asset funds and Barrett Opportunity Fund, but does not include money market funds in the fund complex.

The policies apply to any account, whether an individual account, accounts with financial intermediaries such as investment advisers, broker/dealers or retirement plan administrators, commonly called omnibus accounts, where the intermediary holds fund shares for a number of its customers in one account. The fund’s ability to monitor trading in omnibus accounts may, however, be severely limited due to the lack of access to an individual investor’s trading activity when orders are placed through these types of accounts. There may also be operational and technological limitations on the ability of the fund’s service providers to identify or terminate frequent trading activity within the various types of omnibus accounts. The fund’s distributor has entered into agreements with intermediaries requiring the intermediaries to, among other things, help identify frequent trading activity and to prohibit further purchases or exchanges by a shareholder identified as having engaged in frequent trading. These agreements took effect on October 16, 2007.

22 Prospectus

The fund’s policies also require personnel such as portfolio managers and investment staff to report any abnormal or otherwise suspicious investment activity, and prohibits short-term trades by such personnel for their own account in mutual funds managed by the manager and its affiliates, other than money market funds. The fund has also adopted policies and procedures to prevent the selective release of information about the fund’s portfolio holdings, as such information may be used for market-timing and similar abusive practices.

The fund’s policies provide for ongoing assessment of the effectiveness of current policies and surveillance tools, and the Board reserves the right to modify these or adopt additional policies and restrictions in the future. Shareholders should be aware, however, that any surveillance techniques currently employed by the fund or other techniques that may be adopted in the future may not be effective, particularly where the trading takes place through certain types of omnibus accounts. As noted above, if the fund is unable to detect and deter trading abuses, the fund’s performance, and its long-term shareholders, may be harmed. In addition, shareholders may be harmed by the extra costs and portfolio management inefficiencies that result from frequent trading of fund shares, even when the trading is not for abusive purposes. Furthermore, the fund may not apply its policies consistently or uniformly, resulting in the risk that some shareholders may be able to engage in frequent trading while others will bear the costs and effects of that trading. The fund will provide advance notice to shareholders and prospective investors of any specific restrictions on the trading of fund shares that the Board may adopt in the future.

Share certificates

The fund does not issue share certificates. If you currently hold share certificates of the fund, such certificates will continue to be honored. If you would like to return your share certificates to the fund and hold your shares in uncertificated form, please contact your Service Agent or Legg Mason Partners Shareholder Services.

Record ownership

If you hold shares through a Service Agent, your Service Agent may establish and maintain your account and be the shareholder of record. In the event that the fund holds a shareholder meeting, your Service Agent, as record holder, will vote your shares in accordance with your instructions. If you do not give your Service Agent voting instructions, your Service Agent may nonetheless, under certain circumstances, be entitled to vote your shares.

Dividends, distributions and taxes

Dividends and distributions

The fund generally pays dividends from its net investment income monthly and makes capital gain distributions, if any, once a year, typically in December. The fund may pay additional distributions and dividends at other times if necessary for the fund to avoid a federal tax. The fund expects distributions to be primarily from income. Capital gain distributions and dividends are reinvested in additional fund shares of the same class that you hold. You do not pay a sales charge on reinvested distributions or dividends. Alternatively, you can instruct your Service Agent or Legg Mason Partners Shareholder Services to have your distributions and/or dividends paid in cash. You can change your choice at any time to be effective as of the next distribution or dividend.

Taxes

The following discussion is very general. Because each shareholder’s circumstances are different and special tax rules may apply, you should consult your tax adviser about your investment in the fund.

Prospectus 23

In general, you will have to pay federal income taxes, as well as any state and local taxes, when you redeem shares, exchange shares or receive a distribution (whether paid in cash or reinvested in additional shares). Any tax liability that you owe as a result of any of these taxable events is your responsibility. The federal income tax treatment of redemptions, exchanges and distributions is summarized in the following table:

Transaction	Federal tax status
Redemption or exchange of shares	Usually capital gain or loss; long-term only if shares owned more than one year
Distributions of net capital gain (excess of net long-term capital gain over net short-term capital loss)	Long-term capital gain
Ordinary dividends (including distributions of net short-term capital gains)	Ordinary income

Distributions of net capital gain are taxable to you as long-term capital gain regardless of how long you have owned your shares. Distributions derived from interest on U.S. government securities (but not distributions of gain from the sale of such securities) may be exempt from state and local taxes. The fund does not expect a significant portion of fund distributions to be treated as qualified dividend income, which is taxed at reduced rates.

You may want to avoid buying shares when the fund is about to declare a capital gain distribution or a dividend, because it will be taxable to you even though it may effectively be a return of a portion of your investment.

After the end of the year, your Service Agent or the fund will provide you with information about the distributions and dividends you received and any redemptions of shares during the previous year. If you are neither a citizen nor a resident of the United States, the fund will withhold federal income tax at the rate of 30% (or such lower rate as may be determined in accordance with any applicable treaty) on ordinary dividends and other payments that are subject to such withholding.

If you do not provide the fund with your correct taxpayer identification number and any required certifications, you will be subject to backup withholding at the rate of 28% on your distributions, dividends, and redemption proceeds. Backup withholding will not, however, be applied to payments that have been subject to the 30% withholding tax applicable to shareholders who are neither citizens nor residents of the United States.

Share price

You may buy, exchange or redeem shares at their net asset value next determined after receipt of your request in good order, plus any applicable sales charge. The fund’s net asset value per share is the value of its assets minus its liabilities divided by the number of shares outstanding. Net asset value is calculated separately for each class of shares. The fund calculates its net asset value every day the NYSE is open. This calculation is done when regular trading closes on the NYSE (normally 4:00 p.m., Eastern time). The NYSE is closed on certain holidays listed in the SAI.

The Board has approved procedures to be used to value the fund’s securities for the purposes of determining the fund’s net asset value. The valuation of the securities of the fund is determined in good faith by or under the direction of the Board. The Board has delegated certain valuation functions for the fund to the manager.

The fund generally values its securities based on market prices determined at the close of regular trading on the NYSE. The market price for debt obligations is generally the price supplied by an independent third party pricing service approved by the Board, which may use a matrix, formula or other objective method that takes into consideration market indices, yield curves and other specific adjustments. Short-term debt obligations 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. If vendors are unable to supply a price, or if the price supplied is deemed by the manager to be unreliable, the market price may be determined using quotations received from one or more brokers/dealers that make a market in the security. When such prices or quotations are not available, or when the manager believes that they are unreliable, the manager may price securities using fair value procedures approved by the Board. The fund may also use fair value procedures if the manager determines that a significant event has occurred between the time at which a market price is determined and the time at which the fund’s net asset value is calculated. In particular, the value of foreign securities may be materially affected by events occurring after the close of the market on which they are valued, but before the fund prices its shares.

24 Prospectus

Valuing securities at fair value involves greater reliance on judgment than valuation of securities based on readily available market quotations. A fund that uses fair value to price securities may value those securities higher or lower than another fund using market quotations or its own fair value methodologies to price the same securities. There can be no assurance that the fund could obtain the fair value assigned to a security if it were to sell the security at approximately the time at which the fund determines its net asset value.

International markets may be open on days when U.S. markets are closed and the value of foreign securities owned by the fund could change on days when you cannot buy or redeem shares.

In order to buy, redeem or exchange shares at that day’s price, you must place your order with your Service Agent or the transfer agent before the NYSE closes. If the NYSE closes early, you must place your order prior to the actual closing time.

It is the responsibility of the Service Agents to transmit all orders to buy, exchange or redeem shares to the transfer agent on a timely basis.

Financial highlights

The financial highlights tables are intended to help you understand the performance of each class for the past five years. Certain information reflects financial results for a single share. Total return represents the rate that a shareholder would have earned (or lost) on a fund share assuming reinvestment of all dividends and distributions. The information in the following tables has been derived from the fund’s and the predecessor fund’s financial statements. Those financial statements have been audited by KPMG LLP, independent registered public accounting firm, whose report, along with the fund’s financial statements, is included in the annual report (available upon request). The financial information shown below for periods prior to April 16, 2007 is that of the fund’s predecessor. No information is presented for Class FI or Class R shares because no Class FI or Class R shares were outstanding for the periods shown.

For a Class A share of beneficial interest outstanding throughout each year ended December 31:

Class A Shares⁽¹⁾

	2007			2006(2)			2005(2)			2004(2)			2003(2)
Net Asset Value, Beginning of Year	$	12.16		$	12.42		$	12.88		$	12.92		$	12.88
Income (Loss) From Operations:
Net investment income		0.58			0.57			0.54			0.56			0.58
Net realized and unrealized gain (loss)		(0.38	)		(0.22	)		(0.31	)		0.25			0.08
Total Income From Operations		0.20			0.35			0.23			0.81			0.66
Less Distributions From:
Net investment income		(0.62	)		(0.61	)		(0.58	)		(0.62	)		(0.60	)
Net realized gains		—			—			(0.11	)		(0.23	)		(0.02	)
Total Distributions		(0.62	)		(0.61	)		(0.69	)		(0.85	)		(0.62	)
Net Asset Value, End of Year	$	11.74		$	12.16		$	12.42		$	12.88		$	12.92
Total Return(3)		1.63	%		3.03	%		1.82	%		6.47	%		5.22	%
Net Assets, End of Year (millions)	$	399		$	435		$	461		$	438		$	420
Ratios to Average Net Assets:
Gross expenses		1.10	%		1.08	%(5)		1.05	%		1.06	%		1.03	%
Net expenses		1.10	(4)		1.07	(5)(6)		1.05			1.05	(6)		1.03
Net investment income		4.87			4.78			4.24			4.37			4.45
Portfolio Turnover Rate		53	%		94	%		40	%		43	%		53	%

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

(2) For a share of capital stock outstanding for the periods prior to April 16, 2007.

(3) Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

(4) There was no impact to the expense ratio as a result of fees paid indirectly.

(5) Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios both would have been 1.06%.

(6) Reflects fee waivers and/or expense reimbursements.

Prospectus 25

For a Class B share of beneficial interest outstanding throughout each year ended December 31:

Class B Shares⁽¹⁾

	2007			2006(2)			2005(2)			2004(2)			2003(2)
Net Asset Value, Beginning of Year	$	12.13		$	12.39		$	12.85		$	12.89		$	12.86
Income (Loss) From Operations:
Net investment income		0.50			0.50			0.47			0.50			0.51
Net realized and unrealized gain (loss)		(0.39	)		(0.22	)		(0.31	)		0.24			0.08
Total Income From Operations		0.11			0.28			0.16			0.74			0.59
Less Distributions From:
Net investment income		(0.53	)		(0.54	)		(0.51	)		(0.55	)		(0.54	)
Net realized gains		—			—			(0.11	)		(0.23	)		(0.02	)
Total Distributions		(0.53	)		(0.54	)		(0.62	)		(0.78	)		(0.56	)
Net Asset Value, End of Year	$	11.71		$	12.13		$	12.39		$	12.85		$	12.89
Total Return(3)		0.91	%		2.36	%		1.27	%		5.94	%		4.65	%
Net Assets, End of Year (millions)	$	97		$	125		$	161		$	182		$	208
Ratios to Average Net Assets:
Gross expenses		1.80	%		1.72	%(5)		1.59	%		1.56	%		1.52	%
Net expenses		1.80	(4)		1.72	(5)(6)		1.59			1.55	(6)		1.52
Net investment income		4.16			4.13			3.70			3.87			3.94
Portfolio Turnover Rate		53	%		94	%		40	%		43	%		53	%

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

(2) For a share of capital stock outstanding for the periods prior to April 16, 2007.

(3) Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

(4) There was no impact to the expense ratio as a result of fees paid indirectly.

(5) Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would have been 1.71% and 1.70%, respectively.

(6) Reflects fee waivers and/or expense reimbursements.

For a Class C share of beneficial interest outstanding throughout each year ended December 31:

Class C Shares⁽¹⁾

	2007			2006(2)			2005(2)			2004(2)			2003(2)
Net Asset Value, Beginning of Year	$	12.09		$	12.35		$	12.81		$	12.87		$	12.83
Income (Loss) From Operations:
Net investment income		0.50			0.49			0.46			0.49			0.52
Net realized and unrealized gain (loss)		(0.39	)		(0.22	)		(0.30	)		0.24			0.08
Total Income From Operations		0.11			0.27			0.16			0.73			0.60
Less Distributions From:
Net investment income		(0.53	)		(0.53	)		(0.51	)		(0.56	)		(0.54	)
Net realized gains		—			—			(0.11	)		(0.23	)		(0.02	)
Total Distributions		(0.53	)		(0.53	)		(0.62	)		(0.79	)		(0.56	)
Net Asset Value, End of Year	$	11.67		$	12.09		$	12.35		$	12.81		$	12.87
Total Return(3)		0.91	%		2.34	%		1.24	%		5.86	%		4.80	%
Net Assets, End of Year (millions)	$	68		$	71		$	72		$	60		$	54
Ratios to Average Net Assets:
Gross expenses		1.80	%		1.76	%(5)		1.69	%		1.58	%		1.44	%
Net expenses		1.80	(4)		1.73	(5)(6)		1.69			1.57	(6)		1.44
Net investment income		4.18			4.12			3.61			3.85			4.02
Portfolio Turnover Rate		53	%		94	%		40	%		43	%		53	%

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

(2) For a share of capital stock outstanding for the periods prior to April 16, 2007.

(3) Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

(4) There was no impact to the expense ratio as a result of fees paid indirectly.

(5) Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would have been 1.74% and 1.72%, respectively.

(6) Reflects fee waivers and/or expense reimbursements.

26 Prospectus

For a Class I share of beneficial interest outstanding throughout each year ended December 31:

Class I Shares⁽¹⁾

	2007			2006(2)			2005(2)			2004(2)			2003(2)
Net Asset Value, Beginning of Year	$	12.16		$	12.41		$	12.87		$	12.91		$	12.87
Income (Loss) From Operations:
Net investment income		0.63			0.63			0.59			0.62			0.63
Net realized and unrealized gain (loss)		(0.41	)		(0.22	)		(0.31	)		0.24			0.08
Total Income From Operations		0.22			0.41			0.28			0.86			0.71
Less Distributions From:
Net investment income		(0.66	)		(0.66	)		(0.63	)		(0.67	)		(0.65	)
Net realized gains		—			—			(0.11	)		(0.23	)		(0.02	)
Total Distributions		(0.66	)		(0.66	)		(0.74	)		(0.90	)		(0.67	)
Net Asset Value, End of Year	$	11.72		$	12.16		$	12.41		$	12.87		$	12.91
Total Return(3)		1.80	%		3.54	%		2.23	%		6.87	%		5.62	%
Net Assets, End of Year (millions)	$	0	(4)	$	158		$	286		$	319		$	269
Ratios to Average Net Assets:
Gross expenses		0.66	%		0.65	%(6)		0.65	%		0.65	%		0.64	%
Net expenses		0.66	(5)		0.65	(6)(7)		0.65			0.64	(7)		0.64
Net investment income		5.13			5.22			4.63			4.79			4.84
Portfolio Turnover Rate		53	%		94	%		40	%		43	%		53	%

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

(2) For a share of capital stock outstanding for the periods prior to April 16, 2007.

(3) Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

(4) Amount represents less than $0.5 million.

(5) There was no impact to the expense ratio as a result of fees paid indirectly.

(6) Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios both would have been 0.64%.

(7) Reflects fee waivers and/or expense reimbursements.

Prospectus 27

Legg Mason Partners Funds Privacy Policy

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

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

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

• Information we receive from consumer reporting agencies.

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

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

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

[This page is not part of the prospectus.]

28 Prospectus

(Investment Company Act file no. 811-04254)

FD0233 4/08

Legg Mason Partners Investment Grade Bond Fund

You may visit the fund’s website at http://www.leggmason.com/individualinvestors for a free copy of a Prospectus, Statement of Additional Information (“SAI”) or an Annual or Semi-Annual Report.

Shareholder reports Additional information about the fund’s investments is available in the fund’s Annual and Semi-Annual Reports to shareholders. In the fund’s Annual Report, you will find a discussion of the market conditions and investment strategies that significantly affected the fund’s performance.

The fund sends only one report to a household if more than one account has the same last name and the same address. Contact your Service Agent or Legg Mason Partners Shareholder Services if you do not want this policy to apply to you.

Statement of additional information The SAI provides more detailed information about the fund and is incorporated by reference into (is legally a part of) this Prospectus.

You can make inquiries about the fund or obtain shareholder reports or the SAI (without charge) by contacting your Service Agent, by calling Legg Mason Partners Shareholder Services at 800-451-2010 (or for clients of a PFS Registered Representative, by calling Primerica Shareholder Services at 800-544-5445) or by writing to the fund at Legg Mason Partners Funds, 55 Water Street, New York, New York 10041.

Information about the fund (including the SAI) can be reviewed and copied at the Securities and Exchange Commission’s (the “SEC”) Public Reference Room in Washington, D.C. In addition, information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-202-551-8090. Reports and other information about the fund are available on the EDGAR Database on the SEC’s Internet site at http://www.sec.gov. Copies of this information may be obtained for a duplicating fee by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-0102.

If someone makes a statement about the fund that is not in this Prospectus, you should not rely upon that information. Neither the fund nor the distributor is offering to sell shares of the fund to any person to whom the fund may not lawfully sell its shares.

Prospectus 29

April 28, 2008

STATEMENT OF ADDITIONAL INFORMATION

LEGG MASON PARTNERS INCOME TRUST

LEGG MASON PARTNERS GOVERNMENT SECURITIES FUND

LEGG MASON PARTNERS INVESTMENT GRADE BOND FUND

55 Water Street

New York, New York 10041

1-800-451-2010

This Statement of Additional Information (the “SAI”) is not a prospectus and is meant to be read in conjunction with the current Prospectuses of Legg Mason Partners Investment Grade Bond Fund (“Investment Grade Bond Fund”) and Legg Mason Partners Government Securities Fund (“Government Securities Fund”) (collectively the “Funds”), each dated April 28, 2008, and is incorporated by reference in its entirety into the Prospectus of each Fund.

As part of a number of initiatives launched in 2006 to restructure and streamline the Legg Mason Partners fund complex, each Fund assumed the assets and liabilities of a predecessor fund with the same name. The Funds are now grouped for organizational and governance purposes with other Legg Mason Partners funds that are predominantly fixed-income-type funds, and each Fund is a series of Legg Mason Partners Income Trust (the “Trust”), a Maryland business trust. Any information contained in the SAI prior to April 16, 2007 is that of each Fund’s predecessor.

Additional information about each Fund’s investments is available in the Fund’s annual and semi-annual reports to shareholders. These reports contain financial statements that are incorporated herein by reference. Each Fund’s prospectus and copies of these reports may be obtained free of charge by contacting banks, brokers, dealers, insurance companies, investment advisers, financial consultants or advisors, mutual fund supermarkets and other financial intermediaries that have entered into an agreement with the Funds’ distributor to sell shares of the applicable Fund (each called a “Service Agent”), or by writing or calling the Fund at the address or telephone number set forth above. Legg Mason Investor Services, LLC (“LMIS”), a wholly-owned broker/dealer subsidiary of Legg Mason, Inc. (“Legg Mason”), serves as the Funds’ sole and exclusive distributor.

CONTENTS
Management	2
Investment Management and Other Services	14
Portfolio Manager Disclosure	26
Investment Objectives and Management Policies	31
Additional Risk Factors	52
Disclosure of Portfolio Holdings	55
Investment Policies	58
Purchase of Shares	61
Redemption of Shares	67
Valuation of Shares	69
Exchange Privilege	69
Taxes	70
Additional Information	77
Financial Statements	83
Appendix A Description of Ratings	A-1
Appendix B Western Asset Management Company Proxy Voting Policy	B-1

This Statement of Additional Information is NOT a Prospectus and is authorized for distribution to prospective investors only if preceded or accompanied by an effective Prospectus.

1

MANAGEMENT

The business affairs of the Funds are managed by or under the direction of the Board of Trustees of the Trust (the “Board”). The Board elects officers who are responsible for the day-to-day operations of each Fund and who execute policies authorized by the Board.

The Trustees, including the Trustees of the Funds who are not “interested persons” of the Funds (the “Independent Trustees”), as defined in the Investment Company Act of 1940, as amended (the “1940 Act”), and executive officers of the Funds, their years of birth, their principal occupations during at least the past five years (their titles may have varied during that period), the number of funds associated with Legg Mason the Trustees oversee, and other board memberships they hold are set forth below. The address of each Trustee is c/o R. Jay Gerken, 620 Eighth Avenue, New York, New York 10018.

The following information relates to the Trust’s current Board of Trustees.

Name and Year of Birth	Position(s) with Fund	Term of Office* and Length of Time Served**	Principal Occupation(s) During Past 5 Years	Number of Funds in Fund Complex Overseen by Trustee	Other Board Memberships Held by Trustee During Past Five Years
INDEPENDENT TRUSTEES:
Elliott J. Berv Born 1943	Trustee	Since 1989	President and Chief Executive Officer, Catalyst (consulting) (since 1984); Chief Executive Officer, Rocket City Enterprises (media) (2000 to 2005)	68	Board Member, American Identity Corp. (doing business as Morpheus Technologies) (biometric information management) (since 2001); Director, Lapoint Industries (industrial filter company) (since 2002); Director, Alzheimer’s Association (New England Chapter) (since 1998)

2

Name and Year of Birth	Position(s) with Fund	Term of Office* and Length of Time Served**	Principal Occupation(s) During Past 5 Years	Number of Funds in Fund Complex Overseen by Trustee	Other Board Memberships Held by Trustee During Past Five Years
A. Benton Cocanougher Born 1938	Trustee	Since 1991	Dean Emeritus and Professor, Texas A&M University (since 2004); former Interim Chancellor, Texas A&M University System (2003 to 2004); former Special Advisor to the President, Texas A&M University (2002 to 2003); former Dean and Professor of Marketing, College and Graduate School of Business of Texas A&M University (1987 to 2001)	68	None
Jane F. Dasher Born 1949	Trustee	Since 1999	Chief Financial Officer, Korsant Partners, LLC (a family investment company)	68	None

3

Name and Year of Birth	Position(s) with Fund	Term of Office* and Length of Time Served**	Principal Occupation(s) During Past 5 Years	Number of Funds in Fund Complex Overseen by Trustee	Other Board Memberships Held by Trustee During Past Five Years
Mark T. Finn Born 1943	Trustee	Since 1989	Adjunct Professor, College of William & Mary (since 2002); Principal/Member, Balvan Partners (investment management) (since 2002); Chairman, Chief Executive Officer and Owner, Vantage Consulting Group, Inc. (investment management) (since 1988); formerly, Vice Chairman and Chief Operating Officer, Lindner Asset Management Company (mutual fund company) (1999 to 2001); formerly, General Partner and Shareholder, Greenwich Ventures LLC (investment partnership) (1996 to 2001)	68	None
Rainer Greeven Born 1936	Trustee	Since 1994	Attorney, Rainer Greeven PC; President and Director, 62nd Street East Corporation (real estate) (since 2002)	68	None

4

Name and Year of Birth	Position(s) with Fund	Term of Office* and Length of Time Served**	Principal Occupation(s) During Past 5 Years	Number of Funds in Fund Complex Overseen by Trustee	Other Board Memberships Held by Trustee During Past Five Years
Stephen Randolph Gross Born 1947	Trustee	Since 1986	Chairman, HLB Gross Collins, P.C. (accounting and consulting firm) (since 1979); Treasurer, Coventry Limited, Inc. (Senior Living Facilities) (since 1985); formerly, Managing Director, Fountainhead Ventures, L.L.C. (technology accelerator) (1998 to 2003); formerly, Treasurer, Hank Aaron Enterprises (fast food franchise) (1985 to 2001); formerly, Partner, Capital Investment Advisory Partners (leverage buyout consulting) (2000 to 2002); formerly, Secretary, Carint N.A. (manufacturing) (1998 to 2002)	68	Director, Andersen Calhoun (assisted living) (since 1987); formerly, Director, United Telesis, Inc. (telecommunications) (1997 to 2002); formerly, Director, ebank Financial Services, Inc. (1997 to 2004)
Richard E. Hanson, Jr. Born 1941	Trustee	Since 1985	Retired; formerly, Headmaster, The New Atlanta Jewish Community High School, Atlanta, Georgia (1996 to 2000)	68	None
Diana R. Harrington Born 1940	Trustee	Since 1992	Professor, Babson College (since 1992)	68	None

5

Name and Year of Birth	Position(s) with Fund	Term of Office* and Length of Time Served**	Principal Occupation(s) During Past 5 Years	Number of Funds in Fund Complex Overseen by Trustee	Other Board Memberships Held by Trustee During Past Five Years
Susan M. Heilbron Born 1945	Trustee	Since 1994	Independent Consultant (since 2001); formerly, Owner, Lacey & Heilbron (communications consulting) (1993 to 2001)	68	None
Susan B. Kerley Born 1951	Trustee	Since 1992	Investment Consulting Partner, Strategic Management Advisers, LLC (investment consulting) (since 1990)	68	Chairman and Independent Board Member of Eclipse Fund, Inc. and Eclipse Funds (which trade as Mainstay Funds) (currently supervises 16 investment companies in the Fund complex) (since 1991)
Alan G. Merten Born 1941	Trustee	Since 1990	President, George Mason University (since 1996)	68	Trustee, First Potomac Realty Trust (since 2005); Director, Xybernaut Corporation (information technology) (2004 to 2006); Director, Digital Net Holdings, Inc. (2003 to 2004); Director, Comshare, Inc. (information technology) (1985 to 2003); Director, BTG, Inc. (information systems) (1997 to 2001); Director, Cardinal Financial Corporation (since November 2006)
R. Richardson Pettit Born 1942	Trustee	Since 1990	Formerly, Duncan Professor of Finance, University of Houston (1977 to 2006)	68	None

6

Name and Year of Birth	Position(s) with Fund	Term of Office* and Length of Time Served**	Principal Occupation(s) During Past 5 Years	Number of Funds in Fund Complex Overseen by Trustee	Other Board Memberships Held by Trustee During Past Five Years
INTERESTED TRUSTEE:
R. Jay Gerken, CFA† Born 1951	Trustee, President, Chairman and Chief Executive Officer	Since 2002	Managing Director, Legg Mason & Co., LLC (“Legg Mason & Co.”); Chairman of the Board and Trustee/Director of 152 funds associated with Legg Mason Partners Fund Advisor, LLC (“LMPFA”) and its affiliates; President, LMPFA (since 2006); Chairman, President and Chief Executive Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates; formerly, Chairman, Smith Barney Fund Management LLC (“SBFM”) and Citi Fund Management, Inc. (“CFM”) (2002 to 2005); formerly, Chairman, President and Chief Executive Officer, Travelers Investment Adviser Inc. (2002 to 2005)	137	Former Trustee, Consulting Group Capital Markets Funds (2002 to 2006)

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

** Indicates the earliest year in which the Trustee became a Board member for a fund in the Legg Mason Partners fund complex.

† Mr. Gerken is an “interested person,” as defined in the 1940 Act, because of his position with the manager and/or certain of its affiliates.

7

Name, Year of Birth and Address	Position(s) with Fund	Term of Office* and Length of Time Served**	Principal Occupation(s) During Past 5 Years
OFFICERS:
R. Jay Gerken, CFA Born 1951 620 Eighth Avenue New York, NY 10018	Chairman, President and Chief Executive Officer	Since 2002	Managing Director of Legg Mason & Co.; Chairman of the Board and Trustee/Director of 152 funds associated with LMPFA and its affiliates; President, LMPFA (since 2006); Chairman, President and Chief Executive Officer of certain mutual funds associated with Legg Mason & Co. or its affiliate; formerly, Chairman of SBFM and CFM (2002 to 2005); formerly, Chairman, President and Chief Executive Officer of Travelers Investment Adviser Inc. (2002 to 2005)
Ted P. Becker Born 1951 620 Eighth Avenue New York, NY 10018	Chief Compliance Officer	Since 2006	Director of Global Compliance at Legg Mason (2006 to present); Managing Director of Compliance at Legg Mason & Co. (2005 to present); Chief Compliance Officer with certain mutual funds associated with Legg Mason & Co. (since 2006); Chief Compliance Officer of LMPFA and certain affiliates; Managing Director of Compliance at Citigroup Asset Management (“CAM,” a group of affiliated investment advisers which included SBFM, Smith Barney Asset Management, CFM and other affiliated investment advisory entities) (2002 to 2005). Prior to 2002, Managing Director- Internal Audit & Risk Review at Citigroup Inc.
John Chiota Born 1968 300 First Stamford Place Stamford, CT 06902	Chief Anti- Money Laundering Compliance Officer	Since 2006	Vice President of Legg Mason & Co. (since 2005); Vice President at CAM (since 2004); Chief Anti-Money Laundering Compliance Officer of certain mutual funds associated with Legg Mason & Co. (since 2006). Prior to August 2004, Chief Anti-Money Laundering Compliance Officer of TD Waterhouse

8

Name, Year of Birth and Address	Position(s) with Fund	Term of Office* and Length of Time Served**	Principal Occupation(s) During Past 5 Years
Robert I. Frenkel Born 1954 300 First Stamford Place Stamford, CT 06902	Secretary and Chief Legal Officer	Since 2003	Managing Director and General Counsel of Global Mutual Funds for Legg Mason & Co. (since 2005); Managing Director and General Counsel of Global Mutual Funds for CAM (since 2000); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. (since 2003). Previously, Secretary of CFM (2001 to 2004)
Frances M. Guggino Born 1957 55 Water Street New York, NY 10041	Treasurer and Chief Financial Officer	Since 2004	Director of Legg Mason & Co. (since 2005); Director at CAM (1992 to 2005); Treasurer and/or Controller of certain funds associated with Legg Mason & Co. (since 2005); Treasurer and/or Controller of certain funds associated with CAM (1992 to 2005)
Thomas C. Mandia Born 1962 300 First Stamford Place Stamford, CT 06902	Assistant Secretary	Since 2000	Managing Director and Deputy General Counsel of Legg Mason & Co. (since 2005); Managing Director and Deputy General Counsel for CAM (since 1992); Assistant Secretary of certain mutual funds associated with Legg Mason & Co.
David Castano Born 1971 Legg Mason 55 Water Street New York, NY 10041	Controller	Since 2007	Controller of certain mutual funds associated with Legg Mason (since 2007). Previously, Assistant Treasurer of Lord Abbett mutual funds (2004 to 2006); Supervisor at UBS Global Asset Management (2003 to 2004). Prior to 2003, Accounting Manager at CAM.
Matthew Plastina Born 1970 Legg Mason 55 Water Street New York, NY 10041	Controller	Since 2007	Assistant Vice President of Legg Mason or its predecessor (since 1999); Controller of certain mutual funds associated with Legg Mason (since 2007). Previously, Assistant Controller of certain mutual funds associated with Legg Mason (2002 to 2007)

* Each 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.

** Indicates the earliest year in which the officer took office for any funds in the Legg Mason Partners fund complex.

Officers of the Funds receive no compensation from the Funds, although they may be reimbursed by the Funds for reasonable out-of-pocket travel expenses for attending Board meetings.

9

The Board has four standing Committees: the Audit Committee, Governance Committee, Investment and Performance Committee (referred to as the Performance Committee) and Pricing Committee. Each of the Audit, Governance and Performance Committees is composed of all of the Independent Trustees. The Pricing Committee is composed of the Chairman of the Board and one Independent Trustee.

The Audit Committee oversees, among other things, the scope of the funds’ audit, the funds’ accounting and financial reporting policies and practices and its internal controls. The primary purposes of the Board’s Audit Committee are to assist the Board in fulfilling its responsibility for oversight of the integrity of the accounting, auditing and financial reporting practices of the funds, and the qualifications and independence of the funds’ independent registered public accounting firm. The Audit Committee approves, and recommends to the Independent Trustees for their ratification, the selection, appointment, retention or termination of the funds’ independent registered public accounting firm and approves the compensation of the independent registered public accounting firm. The Audit Committee also approves all audit and permissible non-audit services provided to the funds by the independent registered public accounting firm and all permissible non-audit services provided by the funds’ independent registered public accounting firm to the manager and any affiliated service providers if the engagement relates directly to the funds’ operations and financial reporting.

The Governance Committee is responsible for, among other things, recommending candidates to fill vacancies on the Board. The Governance Committee may consider nominees recommended by a shareholder. Shareholders who wish to recommend a nominee should send recommendations to the Trust’s Secretary that include all information relating to such person that is required to be disclosed in solicitations of proxies for the election of Trustees. A recommendation must be accompanied by a written consent of the individual to stand for election if nominated by the Board and to serve if elected by the shareholders.

The Governance Committee also identifies potential nominees through its network of contacts and may also engage, if it deems appropriate, a professional search firm. The committee meets to discuss and consider such candidates’ qualifications and then chooses a candidate by majority vote. The committee does not have specific, minimum qualifications for nominees, nor has it established specific qualities or skills that it regards as necessary for one or more of the Trustees to possess (other than any qualities or skills that may be required by applicable law, regulation or listing standard). However, in evaluating a person as a potential nominee to serve as a Trustee, the Governance Committee may consider the following factors, among any others it may deem relevant:

• whether or not the person is an “interested person,” as defined in the 1940 Act, and whether the person is otherwise qualified under applicable laws and regulations to serve as a Trustee;

• whether or not the person has any relationships that might impair his or her independence, such as any business, financial or family relationships with fund management, the investment adviser, service providers or their affiliates;

• whether or not the person serves on boards of, or is otherwise affiliated with, competing financial service organizations or their related mutual fund complexes;

• whether or not the person is willing to serve, and willing and able to commit the time necessary for the performance of the duties of a Trustee;

• the contribution which the person can make to the Board (or, if the person has previously served as a Trustee, the contribution which the person made to the Board during his or her previous term of service), with consideration being given to the person’s business and professional experience, education and such other factors as the committee may consider relevant;

• the character and integrity of the person; and

• whether or not the selection and nomination of the person would be consistent with the requirements of the retirement policies of the Trust, as applicable.

10

The Performance Committee is charged with, among other things, reviewing investment performance. The Performance Committee also assists the Board in fulfilling its responsibility for the review and negotiation of the funds’ investment management and subadvisory arrangements.

The Pricing Committee is charged with determining the fair value prices for securities when required.

The Trust’s Board oversees all of the fixed-income-type funds in the fund complex. All members of the Board previously have served on predecessors to the Boards of Legg Mason Partners funds. The Board met 17 times during the funds’ last fiscal year. The Audit, Governance, Performance and Pricing Committees met four, four, four, and eight times during the funds’ last fiscal year.

The following table shows the amount of equity securities owned by the Trustees in each Fund and other investment companies in the fund complex supervised by the Trustees as of December 31, 2007.

Name of Trustee	Dollar Range of Equity Securities in Government Securities Fund	Dollar Range of Equity Securities in Investment Grade Bond Fund	Aggregate Dollar Range of Equity Securities in Registered Investment Companies Overseen by Trustee
Independent Trustees
Elliott J. Berv	None	None	None
A. Benton Cocanougher	None	None	Over $100,000
Jane F. Dasher	$1-$10,000	None	Over $100,000
Mark T. Finn	None	None	Over $100,000
Rainer Greeven	None	None	$10,001-$50,000
Stephen Randolph Gross	None	None	None
Richard E. Hanson, Jr.	None	None	Over $100,000
Diana R. Harrington	None	None	$10,001-$50,000
Susan M. Heilbron	None	None	$10,001-$50,000
Susan B. Kerley	None	None	Over $100,000
Alan G. Merten	None	None	Over $100,000
R. Richardson Pettit	None	None	Over $100,000
Interested Trustee
R. Jay Gerken	None	None	Over $100,000

As of December 31, 2007, none of the Independent Trustees or their immediate family members owned beneficially or of record any securities of the manager, subadviser or distributor of the Funds, or in a person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with the manager, subadviser or distributor of the Funds.

Information regarding compensation paid by each Fund to its Board is set forth below. The Independent Trustees receive a fee for each meeting of the Board and committee meetings attended and are reimbursed for all out-of-pocket expenses relating to attendance at such meetings. Mr. Gerken, an “interested person,” as defined in the 1940 Act, does not receive compensation from either Fund for his service as Trustee, but may be reimbursed for all out-of-pocket expenses relating to attendance at such meetings.

Each Fund pays a pro rata share of the Trustee fees based upon asset size. Each Fund currently pays each of the Trustees who is not a director, officer or employee of the manager or any of its affiliates its pro rata share of: an annual fee of $160,000, plus $20,000 for each regularly scheduled Board meeting attended in person, $2,500 for each Committee meeting attended in person, and $1,000 for certain telephonic Board and Committee meetings in which that Trustee participates. The lead Independent Trustee will receive an additional $25,000 per year and the Chairs of the Audit Committee and Nominating Committee will each receive an additional $15,000 per year.

11

Current Board

The current Trustees took office in April 2007. Information as to compensation paid to the current Trustees the fiscal year ended December 31, 2007 is shown on the following table:

Name	Aggregate Compensation for Fiscal Year Ended December 31, 2007				Total Pension or Retirement Benefits Paid as Part of Fund Expenses for Fiscal Year Ended December 31, 2007			Total Compensation from Fund Complex Paid to Trustee for Fiscal Year Ended December 31, 2007		Number of Portfolios in Fund Complex Overseen by Trustee for Fiscal Year Ended December 31, 2007
	Government Securities Fund		Investment Grade Bond Fund
Independent Trustees:
Elliott J. Berv	$	821	$	683		(1	)	$	506,630	68
A. Benton Cocanougher	$	916	$	762		(1	)	$	725,864	68
Jane F. Dasher	$	1,013	$	814	$	0		$	202,625	68
Mark T. Finn	$	821	$	683		(1	)	$	505,579	68
Rainer Greeven	$	821	$	683	$	0		$	188,500	68
Stephen Randolph Gross	$	874	$	727		(1	)	$	529,413	68
Richard E. Hanson, Jr.	$	821	$	683	$	0		$	160,500	68
Diana R. Harrington	$	867	$	721		(1	)	$	556,295	68
Susan M. Heilbron	$	821	$	683	$	0		$	190,500	68
Susan B. Kerley	$	825	$	686		(1	)	$	417,484	68
Alan G. Merten	$	821	$	683		(1	)	$	604,757	68
R. Richardson Pettit	$	813	$	676		(1	)	$	620,476	68
Interested Trustee:
R. Jay Gerken(2)	$	0	$	0	$	0		$	0	137

(1) Pursuant to prior retirement plans, certain Trustees are entitled to receive a total retirement benefit from the fund complex as follows: Mr. Berv: $307,130; Mr. Cocanougher: $503,114; Mr. Finn: $306,079; Mr. Gross: $318,788; Ms. Harrington: $348,670; Ms. Kerley: $217,984; Mr. Merten: $405,257; and Mr. Pettit: $424,976. A portion of these benefits that has been paid is included, on a pro rata basis, in the aggregate compensation paid by each fund shown above. In addition, each fund formerly overseen by these Trustees has paid a pro rata share (based upon asset size) of these benefits. Legg Mason or its affiliates have agreed to reimburse these funds an amount equal to 50% of these benefits.

(2) Mr. Gerken was not compensated for his services as a Trustee because of his affiliation with the manager.

Prior Board

Prior to April 2007, the Directors listed below served as the Board of Directors of the Funds. The following table shows the compensation paid to each former Director of the Funds during the fiscal year ended December 31, 2007 for service as a Director.

Name of Director	Aggregate Compensation from Government Securities Fund(2)		Aggregate Compensation from Investment Grade Bond Fund(2)
Independent Directors
Paul R. Ades	$	815	$	905
Dwight B. Crane(1)	$	3,538	$	5,659
Frank G. Hubbard	$	449	$	599
Jerome H. Miller	$	449	$	599
Ken Miller	$	429	$	583
Interested Director
R. Jay Gerken(3)	$	0	$	0

12

(1) Pursuant to a prior retirement plan, Mr. Crane received in a lump sum (calculated on a net present value basis), an aggregate benefit from the fund complex having a net present value equal to $444,643. A portion of this benefit payout is included, on a pro rata basis, in the aggregate compensation paid by each fund shown above. In addition, each fund no longer overseen by Mr. Crane has paid a pro rata share (based upon asset size) of the aggregate benefit to Mr. Crane. Legg Mason or its affiliates have agreed to reimburse these funds an amount equal to 50% of the benefits paid to Mr. Crane.

(2) Pursuant to prior retirement plans, Mr. Herbert Barg, a former Director, is entitled to receive a total retirement benefit from the fund complex of $392,886. Each fund no longer overseen by Mr. Barg has paid a pro rata share (based on asset size) of the benefit. Legg Mason or its affiliates have agreed to reimburse these funds an amount equal to 50% of these benefits.

(3) Mr. Gerken was not compensated for his service as a Director because of his affiliation with the manager.

None of the officers of the Trust received any compensation from the Trust during the fiscal year ended December 31, 2007.

As of April 2, 2008, the Trustees and officers of the Trust, as a group, owned less than 1% of the outstanding common stock of either Fund.

As of April 2, 2008, the following persons owned of record the amounts indicated of the shares of the classes of the Funds.

Name of Fund	Class	Name and Address	Percent
Government Securities Fund	1	PFPC Brokerage Services	100	%
		FBO Primerica Financial Services
		760 Moore Road
		King of Prussia PA 19406
	A	PFPC Brokerage Services	21.0	%
		FBO Primerica Financial Services
		760 Moore Road
		King of Prussia PA 19406
		CitiStreet Retirement Trust	13.5	%
		Citigroup Institutional Trust
		400 Atrium Dr
		Somerset, NJ 08873-4172
	B	PFPC Brokerage Services	50.9	%
		FBO Primerica Financial Services
		760 Moore Road
		King of Prussia PA 19406
	I	Citi Global Impact Funding Trust, Inc.	59.9	%
		Balanced Pool
		787 Seventh Avenue
		New York, NY 10019-6018
		Citi Global Impact Funding Trust, Inc.	28.4	%
		Conservative Pool
		787 Seventh Avenue
		New York, NY 10019-6018
		Virginia P Swindal	8.2	%
		Swindal International LLC
		PO Box 172597
		Tampa, FL 33672-0597
Investment Grade Bond Fund	B	PFPC Brokerage Services	65.9	%
		FBO Primerica Financial Services
		760 Moore Road
		King of Prussia PA 19406
	I	Terry Investments	73.2	%
		6312 Princeton Glendale Rd
		Hamilton, OH 45011-1297
		Terry Industries	26.7	%
		3212 Princeton Glendale Rd
		Hamilton, OH 45011-1297

13

INVESTMENT MANAGEMENT AND OTHER SERVICES

Manager

Legg Mason Partners Fund Advisor, LLC (“LMPFA” or the “manager”) serves as investment manager to each Fund pursuant to an investment management agreement (the “Management Agreement”). LMPFA, with offices at 620 Eighth Avenue, New York, New York 10018, also serves as the investment manager of certain other Legg Mason-sponsored funds. As of December 31, 2007, LMPFA’s total assets under management were approximately $193 billion. LMPFA is a wholly-owned subsidiary of Legg Mason. Legg Mason, whose principal executive offices are at 100 Light Street, Baltimore, Maryland 21202, is a global asset management company. As of December 31, 2007, Legg Mason’s asset management operation had aggregate assets under management of approximately $998 billion. LMPFA provides administrative and certain oversight services to the Funds.

Under each Management Agreement, subject to the supervision and direction of the Fund’s Board, the manager is delegated the responsibility of managing the Fund’s portfolio in accordance with the Fund’s stated investment objective and policies, making investment decisions for the Fund and placing orders to purchase and sell securities. The manager also performs administrative and management services necessary for the operation of the Fund, such as (i) supervising the overall administration of the Fund, including negotiation of contracts and fees with and the monitoring of performance and billings of the Fund’s transfer agent, shareholder servicing agents, custodian and other independent contractors or agents; (ii) providing certain compliance, fund accounting, regulatory reporting, and tax reporting services; (iii) preparing or participating in the preparation of Board materials, registration statements, proxy statements and reports and other communications to shareholders; (iv) maintaining the Fund’s existence, and (v) maintaining the registration and qualification of the Fund’s shares under federal and state laws.

Each Management Agreement will continue in effect from year to year provided such continuance is specifically approved at least annually (a) by the Fund’s Board or by a majority of the outstanding voting securities of the Fund (as defined in the 1940 Act), and (b) in either event, by a majority of the Independent Trustees with such Independent Trustees casting votes in person at a meeting called for such purpose.

Each Management Agreement provides that the manager may render services to others. The Management Agreement is terminable without penalty on not more than 60 days’ nor less than 30 days’ written notice by the Fund when authorized either by a vote of holders of shares representing a majority of the voting power of the outstanding voting securities of such Fund (as defined in the 1940 Act) or by a vote of a majority of the Trust’s Trustees, or by the manager on not less than 90 days’ written notice, and will automatically terminate in the event of its assignment (as defined in the 1940 Act). The Management Agreement provides that neither the manager nor its personnel shall be liable for any error of judgment or mistake of law or for any loss arising out of any investment or for any act or omission in the execution of security transactions for the Funds, except for willful misfeasance, bad faith or gross negligence or reckless disregard of its or their obligations and duties.

As compensation for its services under the Management Agreement rendered to each Fund, each Fund pays LMPFA a management fee computed daily and paid monthly at the annual rates of average daily net assets set forth below:

Fund	Average Daily Net Assets	Fee Rate (% of average daily net assets)
Investment Grade Bond Fund	First $500 million	0.65
	Over $500 million	0.60
Government Securities Fund	First $2 billion	0.55
	Next $2 billion	0.50
	Next $2 billion	0.45
	Next $2 billion	0.40
	Over $8 billion	0.35

14

For the period from December 1, 2005 through July 31, 2006, Smith Barney Fund Management LLC (“SBFM”) served as the Funds’ manager under the same fee schedule described above.

For the period December 1, 2005 through December 31, 2005 and for the period from January 1, 2006 to July 31, 2006, each Fund paid management fees to SBFM as follows:

Fund	Management Fees
	December 1, 2005 through December 31, 2005		January 1, 2006 through July 31, 2006*
Investment Grade Bond Fund	$	515,054	$	3,460,310
Government Securities Fund	$	294,582	$	1,908,385

* These amounts reflect fee waivers of $21,660 for Investment Grade Bond Fund and $13,458 for Government Securities Fund.

For the period from August 1, 2006 to December 31, 2006, each Fund paid management fees to LMPFA as follows:

Fund	Management Fees
Investment Grade Bond Fund	$	2,196,085
Government Securities Fund	$	1,327,108

For the fiscal year ended December 31, 2007, each Fund paid management fees to LMPFA as follows:

Fund	Gross Management Fees		Management Fees Waived			Net Management Fees (after waivers)
Investment Grade Bond Fund	$	4,426,880	$	0		$	4,426,880
Government Securities Fund	$	4,395,261	$	(1,477,459	)	$	2,917,802

Prior to December 1, 2005, SBFM served as investment manager and administrator to the Funds pursuant to separate investment advisory and administration agreements and received separate investment advisory and administrative fees.

As compensation for investment advisory services rendered to Government Securities Fund prior to December 1, 2005, the Fund paid SBFM a fee computed daily and paid monthly at the following annual rates of average daily net assets: 0.35% up to $2 billion; 0.30% on the next $2 billion; 0.25% on the next $2 billion; 0.20% on the next $2 billion; and 0.15% on net assets thereafter. As compensation for investment advisory services rendered to Investment Grade Bond Fund, prior to December 1, 2005, the Fund paid SBFM a fee computed daily and paid monthly at the following annual rates of average daily net assets: 0.45% up to $500 million and 0.42% on net assets thereafter.

For the fiscal years ended December 31, 2005 and 2006, the Funds accrued advisory fees as follows:

Fund	2005		2006
Investment Grade Bond Fund	$	4,416,683	5,678,055
Government Securities Fund	$	2,577,662	3,248,951

As compensation for administrative services rendered to Government Securities Fund, prior to December 1, 2005, SBFM received a fee computed daily and paid monthly at the annual rate of 0.20% of the value of the Fund’s average daily net assets. As compensation for administrative services rendered to Investment Grade Bond Fund, prior to December 1, 2005, SBFM received a fee computed daily and paid monthly at the annual rate of 0.20% of the value of the Fund’s average daily net assets up to and including $500 million and 0.18% on net assets in excess of $500 million.

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For the fiscal years ended December 31, 2005, each Fund paid administrative fees to SBFM as set forth below:

Fund	2005
Investment Grade Bond Fund	$	1,704,807
Government Securities Fund	$	1,304,617

Subadviser

Western Asset Management Company (“Western Asset” or the “subadviser”) serves as the subadviser to each Fund pursuant to a sub-advisory agreement between the manager and Western Asset (the “Sub-Advisory Agreement”). Western Asset, established in 1971, has offices at 385 East Colorado Boulevard, Pasadena, California 91101. Western Asset acts as investment adviser to institutional accounts, such as corporate pension plans, mutual funds and endowment funds. As of December 31, 2007, Western Asset’s total assets under management were approximately $457 billion. Western Asset is a wholly-owned subsidiary of Legg Mason.

Under each Sub-Advisory Agreement, subject to the supervision and direction of the Board and the manager, the subadviser will manage the Fund’s portfolio in accordance with the Fund’s stated investment objective(s) and policies, assist in supervising all aspects of the Fund’s operations, make investment decisions for the Fund, place orders to purchase and sell securities, and employ professional portfolio managers and securities analysts who provide research services to the Fund.

Each Sub-Advisory Agreement will continue in effect from year to year provided such continuance is specifically approved at least annually (a) by the Board or by a majority of the outstanding voting securities of the Fund (as defined in the 1940 Act), and (b) in either event, by a majority of the Independent Trustees with such Independent Trustees casting votes in person at a meeting called for such purpose. The Board or a majority of the outstanding voting securities of a Fund (as defined in the 1940 Act) may terminate the Sub-Advisory Agreement without penalty, in each case on not more than 60 days’ nor less than 30 days’ written notice to the subadviser. The subadviser may terminate the Sub-Advisory Agreement on 90 days’ written notice to the applicable Fund and the manager. The manager and the subadviser may terminate the Sub-Advisory Agreement upon their mutual written consent. Each Sub-Advisory Agreement will terminate automatically in the event of assignment (as defined in the 1940 Act) by the subadviser and shall not be assignable by the manager without the consent of the subadviser.

As compensation for its sub-advisory services, the manager will pay the subadviser a fee equal to 70% of the management fee paid to LMPFA, net of expense waivers and reimbursements. For the period from August 1, 2006 through December 31, 2006, the manager paid the subadviser sub-advisory fees of $1,537,260 and $928,975, with respect to Investment Grade Bond Fund and Government Securities Fund, respectively. For the fiscal year ended December 31, 2007, the manager paid the subadviser sub-advisory fees of $3,098,816 and $2,055,961, with respect to Investment Grade Bond Fund and Government Securities Fund, respectively.

Expenses

In addition to amounts payable under the Management Agreement and the Distribution Plan (as discussed below), each Fund is responsible for its own expenses, including, among other things: interest; taxes; governmental fees; voluntary assessments and other expenses incurred in connection with membership in investment company organizations; organization costs of the Fund; the cost (including brokerage commissions, transaction fees or charges, if any) in connection with the purchase or sale of the Funds’ securities and other investments and any losses in connection therewith; fees and expenses of custodians, transfer agents, registrars, independent pricing vendors or other agents; legal expenses; loan commitment fees; expenses relating to share certificates; expenses relating to the issuing and redemption or repurchase of the Funds’ shares and servicing shareholder accounts; expenses of registering and qualifying the Funds’ shares for sale under applicable federal

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and state law; expenses of preparing, setting in print, printing and distributing prospectuses and statements of additional information and any supplements thereto, reports, proxy statements, notices and dividends to the Funds’ shareholders; costs of stationery; website costs; costs of meetings of the Board or any committee thereof, meetings of shareholders and other meetings of the Funds; Board fees; audit fees; travel expenses of officers, members of the Board and employees of the Funds, if any; and the Funds’ pro rata portion of premiums on any fidelity bond and other insurance covering the Funds and their officers, Board members and employees; litigation expenses and any nonrecurring or extraordinary expenses as may arise, including, without limitation, those relating to actions, suits or proceedings to which the Funds are a party and the legal obligation which the Funds may have to indemnify the Funds’ Board members and officers with respect thereto.

Management may agree to waive fees and/or reimburse operating expenses for one or more classes of shares of either Fund, either through contractual or voluntary arrangements. Any such waivers and/or reimbursements are described in each Fund’s Prospectus. The contractual and voluntary fee waivers and/or reimbursements do not cover extraordinary expenses, such as (a) any expenses or charges related to litigation, derivative actions, demands related to litigation, regulatory or other government investigations and proceedings, “for cause” regulatory inspections and indemnification or advancement of related expenses or costs, to the extent any such expenses are considered extraordinary expenses for the purposes of fee disclosure in Form N-1A as the same may be amended from time to time; (b) transaction costs (such as brokerage commissions and dealer and underwriter spreads) and taxes; and (c) other extraordinary expenses as determined for the purposes of fee disclosure in Form N-1A, as the same may be amended from time to time. Without limiting the foregoing, extraordinary expenses are generally those that are unusual or expected to recur only infrequently, and may include such expenses, by way of illustration, as (i) expenses of the reorganization, restructuring, redomiciling or merger of a Fund or class or the acquisition of all or substantially all of the assets of another fund or class; (ii) expenses of holding, and soliciting proxies for, a meeting of shareholders of a Fund or class (except to the extent relating to routine items such as the election of Board members or the approval of the independent registered public accounting firm); and (iii) expenses of converting to a new custodian, transfer agent or other service provider, in each case to the extent any such expenses are considered extraordinary expenses for the purposes of fee disclosure in Form N-1A as the same may be amended from time to time.

Code of Ethics

Pursuant to Rule 17j-1 under the 1940 Act, the Funds, the manager, the subadviser and the distributor have adopted codes of ethics that permit their respective personnel to invest in securities for their own accounts, including securities that may be purchased or held by the Funds. All personnel must place the interests of clients first and avoid activities, interests and relationships that might interfere with the duty to make decisions in the best interests of the clients. All personal securities transactions by employees must adhere to the requirements of the codes and must be conducted in such a manner as to avoid any actual or potential conflict of interest, the appearance of such a conflict, or the abuse of an employee’s position of trust and responsibility.

Copies of the codes of ethics of the Funds, the manager, the subadviser and the distributor are on file with the SEC.

Proxy Voting Guidelines & Procedures

Although individual Trustees may not agree with particular policies or votes by the manager or subadviser, the Board has delegated proxy voting discretion to the manager and/or the subadviser, believing that the manager and/or the subadviser should be responsible for voting because it is a matter relating to the investment decision making process.

LMPFA delegates the responsibility for voting proxies for each Fund to the Fund’s subadviser through its contract with the subadviser. The subadviser will use its own proxy voting policies and procedures to vote proxies. Accordingly, LMPFA does not expect to have proxy-voting responsibility for the Funds. Should

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LMPFA become responsible for voting proxies for any reason, such as the inability of a subadviser to provide investment advisory services, LMPFA shall utilize the proxy voting guidelines established by the most recent subadviser to vote proxies until a new subadviser is retained. In the case of a material conflict between the interests of LMPFA (or its affiliates if such conflict is known to persons responsible for voting at LMPFA) and the Funds, the Board of Directors of LMPFA shall consider how to address the conflict and/or how to vote the proxies. LMPFA shall maintain records of all proxy votes in accordance with applicable securities laws and regulations, to the extent that LMPFA votes proxies. LMPFA shall be responsible for gathering relevant documents and records related to proxy voting from the subadviser and providing them to the Funds as required for the Funds to comply with applicable rules under the 1940 Act.

The subadviser’s Proxy Voting Policies and Procedures govern in determining how proxies relating to each Fund’s portfolio securities are voted and are attached as Appendix B to this SAI. Information regarding how each Fund voted proxies (if any) relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge (1) by calling 1-888-425-6432, (2) on the Fund’s website at http://www.leggmason.com/individualinvestors and (3) on the SEC’s website at http://www.sec.gov.

Custodian and Transfer Agent

State Street Bank and Trust Company (“State Street”), One Lincoln Street, Boston, Massachusetts 02111, serves as the custodian of each Fund. State Street, among other things, maintains a custody account or accounts in the name of each Fund; receives and delivers all assets for each Fund upon purchase and upon sale or maturity; collects and receives all income and other payments and distributions on account of the assets of each Fund; and makes disbursements on behalf of each Fund. State Street neither determines the Funds’ investment policies, nor decides which securities the Funds will buy or sell. For its services, State Street receives a monthly fee based upon the daily average market value of securities held in custody and also receives securities transaction charges, including out-of-pocket expenses. Each Fund may also periodically enter into arrangements with other qualified custodians with respect to certain types of securities or other transactions such as repurchase agreements or derivatives transactions. State Street may also act as each Fund’s securities lending agent and in that case would receive a share of the income generated by such activities.

PFPC Inc. (“PFPC” or “transfer agent”), located at 4400 Computer Drive, Westborough, Massachusetts 01581, serves as each Fund’s transfer agent. Under the transfer agency agreement, the transfer agent maintains the shareholder account records for each Fund, handles certain communications between shareholders and each Fund and distributes dividends and distributions payable by each Fund. For these services, the transfer agent receives a monthly fee computed on the basis of the number of shareholder accounts it maintains for each Fund during the month, and is reimbursed for out-of-pocket expenses.

Counsel

Bingham McCutchen LLP, 150 Federal Street, Boston, Massachusetts 02110, serves as counsel to the Funds.

Independent Registered Public Accounting Firm

KPMG LLP independent registered public accounting firm, located at 345 Park Avenue, New York, New York 10154, has been selected to audit and report upon each Fund’s financial statements and financial highlights for the fiscal year ending December 31, 2008.

Distributor

LMIS, a wholly-owned broker/dealer subsidiary of Legg Mason, located at 100 Light Street, Baltimore, Maryland 21202 serves as each Fund’s sole and exclusive distributor pursuant to a written agreement dated December 1, 2005, as amended (the “distribution agreements”).

LMIS received no commissions on the sale of fund shares and no contingent deferred sales charges on redemptions of fund shares were paid to LMIS for the fiscal years ended December 31, 2005, 2006 and 2007.

LMIS may be deemed to be an underwriter for purposes of the 1933 Act.

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Prior to December 1, 2007, Citigroup Global Markets Inc. (“CGMI”), an indirect subsidiary of Citigroup Inc., PFS Investments Inc. (“PFS”), served as distributors of the Fund along with LMIS.

The distributor’s obligation is an agency or “best efforts” arrangement under which the distributor is required to take and pay only for such shares of the fund as may be sold to the public. The distributor is not obligated to sell any stated number of shares. The distribution agreement is renewable from year to year if approved (a) by the Trustees or by a vote of a majority of the fund’s outstanding voting securities, and (b) by the affirmative vote of a majority of Trustees who are not parties to such agreement or interested persons, as defined in the 1940 Act, of any party by votes cast in person at a meeting called for such purpose. The distribution agreement provides that it will terminate if assigned, and that it may be terminated without penalty by either party on 60 days’ written notice.

In addition, the distributor may make payments for distribution and/or shareholder servicing activities out of its past profits and other available sources. The distributor may also make payments to dealers for marketing, promotional or related expenses. The amount of these payments is determined by the distributor and may be substantial. The manager or an affiliate may make similar payments under similar arrangements.

Services and Distribution Plan Arrangements

Each Fund has adopted an amended shareholder services and distribution plan (the “Distribution Plan”) pursuant to Rule l2b-1 under the 1940 Act with respect to its Class A, Class B, Class C, Class FI shares and Class R shares of each Fund. Under the Distribution Plan, each Fund pays service and distribution fees to LMIS for the services LMIS provides and expenses LMIS bears with respect to the distribution of Class A, Class B, Class C, Class FI shares and Class R shares and services LMIS provides to Class A, Class B, Class C, Class FI shares and Class R shareholders. The distributor will provide the Board with periodic reports of amounts expended under the Distribution Plan and the purposes for which such expenditures were made. Under the Distribution Plan, each Fund may pay monthly fees at an annual rate not to exceed 0.25% of the average daily net assets of the Fund attributable to that class in the case of Class A shares, not to exceed 0.75% of the average daily net assets of the fund attributable to that class in the case of Class B shares, not to exceed 0.70% of the average daily net assets of the Fund attributable to that class in the case of Class C shares, not to exceed 0.25% of the average daily net assets of the Fund attributable to that class in the case of Class FI shares and not to exceed 0.50% of the average daily net assets of the Fund attributable to that class in the case of Class R shares.

Fees under the Distribution Plan may be used to make payments to the distributor for distribution services, to Service Agents in respect of the sale of shares of each Fund, and to other parties in respect of the sale of shares of each Fund, and to make payments for advertising, marketing or other promotional activity, and payments for preparation, printing, and distribution of prospectuses, statements of additional information and reports for recipients other than regulators and existing shareholders. Each Fund also may make payments to the distributor, Service Agents and others for providing personal service or the maintenance of shareholder accounts. The amounts paid to each recipient may vary based upon certain factors, including, among other things, the levels of sales of Fund shares and/or shareholder services provided; provided, however, that the fees paid to a recipient with respect to a particular class that may be used to cover expenses primarily intended to result in the sale of shares of that class, or that may be used to cover expenses primarily intended for personal service and/or maintenance of shareholder accounts, may not exceed the maximum amounts, if any, as may from time to time be permitted for such services under Financial Industry Regulatory Authority (“FINRA”) Conduct Rule 2830 or any successor rule, in each case as amended or interpreted by FINRA.

The Distribution Plan also provides that the distributor and Service Agents may receive all or a portion of the sales charges paid by Class A, Class B, Class C, Class FI shares and Class R investors.

The Distribution Plan permits each Fund to pay fees to the distributor, Service Agents and others as compensation for their services, not as reimbursement for specific expenses incurred. Thus, even if their

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expenses exceed the fees provided for by the Distribution Plan, the Funds will not be obligated to pay more than those fees and, if their expenses are less than the fees paid to them, they will realize a profit. Each Fund may pay the fees to the distributor and others until the Distribution Plan or Distribution Agreement is terminated or not renewed. In that event, the distributor’s or other recipient’s expenses in excess of fees received or accrued through the termination date will be the distributor’s or other recipient’s sole responsibility and not obligations of the Fund. In their annual consideration of the continuation of the Distribution Plan for each Fund, the Trustees will review the Distribution Plan and the expenses for each class within the Fund separately.

The Distribution Plan also recognizes that various service providers to the Funds, such as the manager, may make payments for distribution related expenses out of their own resources, including past profits, or payments received from each Fund for other purposes, such as management fees, and that the Funds’ distributor or Service Agents may from time to time use their own resources for distribution-related services, in addition to the fees paid under the Distribution Plan. The Distribution Plan specifically provides that, to the extent that such payments might be deemed to be indirect financing of any activity primarily intended to result in the sale of shares of each Fund within the context of Rule 12b-1, then the payments are deemed to be authorized by the Distribution Plan, if permitted by law.

The Distribution Plan continues in effect if such continuance is specifically approved at least annually by vote of the Board, including a majority of the Independent Trustees who have no direct or indirect financial interest in the operation of the Distribution Plan. The Distribution Plan may not be amended to increase the amount of the service and distribution fees without shareholder approval, and all amendments of the Distribution Plan also must be approved by the Trustees, including all of the Independent Trustees, in the manner described above. The Distribution Plan may be terminated with respect to a class of each Fund at any time, without penalty, by vote of a majority of the Independent Trustees or by vote of a majority of the outstanding voting securities of such class of the Fund (as defined in the 1940 Act).

As contemplated by the Distribution Plan, the distributor acts as an agent of the Trust in connection with the offering of shares of each Fund pursuant to the Distribution Agreement.

Dealer reallowances are described in each Fund’s prospectus.

The following service and distribution fees were incurred by each Fund pursuant to the Distribution Plan in effect during the periods indicated:

	Fiscal Year Ended December 31, 2007		Fiscal Year Ended December 31, 2006		Fiscal Year Ended December 31, 2005
Investment Grade Bond Fund:
Class A	$	1,051,669	$	1,098,368	$	1,137,204
Class B	$	824,679	$	1,039,951	$	1,304,322
Class C	$	494,502	$	487,987	$	470,009
Government Securities Fund:
Class A	$	1,065,476	$	804,863	$	877,476
Class B	$	658,868	$	593,771	$	722,124
Class C	$	469,990	$	82,441	$	109,478

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Distribution expenses incurred by LMIS, CGMI and/or PFS for the fiscal year ended December 31, 2007, are set forth in the following tables:

LMIS

	Financial Consultant Compensation		Third Party Service Fees		Third Party Distribution Fee		Marketing and Advertising Expenses		Printing Expenses		Total
Investment Grade Bond Fund
A	$	0	$	376,416	$	0	$	0		N/A	$	376,416
B	$	100,263	$	55,257	$	26,757	$	25,075	$	0	$	207,352
C	$	159,148	$	58,922	$	0	$	92,175	$	28	$	310,273
Government Securities Fund
A	$	0	$	336,542	$	0	$	0		N/A	$	336,542
B	$	102,925	$	57,113	$	17,046	$	16,128	$	1,697	$	194,909
C	$	146,640	$	65,035	$	0	$	89,591	$	1,284	$	302,550

CGMI

	Financial Consultant Compensation		Third Party Service Fees	Branch Expenses		Marketing and Advertising Expenses	Printing Expenses	Total
Investment Grade Bond Fund
A	$	130,006	N/A	$	198,419	N/A	N/A	$	328,425
B	$	23,928	N/A	$	37,152	N/A	N/A	$	61,080
C	$	78,204	N/A	$	125,900	N/A	N/A	$	204,104
Government Securities Fund
A	$	191,639	N/A	$	311,976	N/A	N/A	$	503,615
B	$	22,609	N/A	$	38,055	N/A	N/A	$	60,664
C	$	83,932	N/A	$	131,490	N/A	N/A	$	215,422

PFS

	Financial Consultant Compensation		Third Party Service Fees	Branch Expenses		Marketing and Advertising Expenses		Printing Expenses	Total
Investment Grade Bond Fund
A	$	243,516	N/A	$	103,642	$	0	N/A	$	347,158
B	$	394,774	N/A	$	39,215	$	4,752	N/A	$	438,741
C		N/A	N/A		N/A		N/A	N/A		N/A
Government Securities Fund
A	$	140,791	N/A	$	51,198	$	0	N/A	$	191,989
B	$	243,487	N/A	$	18,110	$	2,081	N/A	$	263,678
C		N/A	N/A		N/A		N/A	N/A		N/A

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Initial Sales Charges

Commissions on Class A Shares. For the fiscal years ended December 31, 2005, 2006 and 2007, the aggregate dollar amounts of commissions paid to CGMI and LMIS on sales of Class A shares were as follows:

	Class A
Fund	Fiscal Year Ended 12/31/05		Fiscal Year Ended 12/31/06		Fiscal Year Ended 12/31/07
Investment Grade Bond Fund	$	118,187	$	41,749	$	33,316
Government Securities Fund	$	33,066	$	16,691	$	40,155

For the fiscal years ended December 31, 2005, 2006 and 2007, the aggregate dollar amounts of commissions paid to PFS on sales of Class A shares were as follows:

	Class A
Fund	Fiscal Year Ended 12/31/05		Fiscal Year Ended 12/31/06		Fiscal Year Ended 12/31/07
Investment Grade Bond Fund	$	1,172,223	$	827,110	$	559,726
Government Securities Fund	$	727,583	$	555,111	$	400,800

Commissions on Class 1 shares. For the fiscal years ended December 31, 2005, 2006 and 2007, the aggregate dollar amounts of commissions paid to PFS on sales of Class 1 shares were as follows:

	Class 1
Fund	Fiscal Year Ended 12/31/05		Fiscal Year Ended 12/31/06		Fiscal Year Ended 12/31/07
Government Securities Fund	$	61,639	$	56,937	$	29,587

Contingent Deferred Sales Charges

Class A Shares. For the fiscal years ended December 31, 2005, 2006 and 2007, the aggregate dollar amounts of contingent deferred sales charges paid to CGMI and LMIS on Class A shares were as follows:

	Class A Shares
Fund	Fiscal Year Ended 12/31/05		Fiscal Year Ended 12/31/06		Fiscal Year Ended 12/31/07
Investment Grade Bond Fund	$	6,706	$	1,057	$	478
Government Securities Fund	$	250	$	3,343	$	1,569

For the fiscal years ended December 31, 2005, 2006 and 2007, the aggregate dollar amounts of contingent deferred sales charges paid to PFS on Class A shares were as follows:

	Class A Shares
Fund	Fiscal Year Ended 12/31/05		Fiscal Year Ended 12/31/06		Fiscal Year Ended 12/31/07
Investment Grade Bond Fund	$	6,649	$	2,174	$	31
Government Securities Fund	$	7,897	$	2,168	$	53

For Class A shares sold by PFS between December 1, 2007 through the close of business on May 31, 2008, PFS will receive the front-end sales charge imposed on purchases of Class A shares and will retain the full amount of such sales charge. LMIS will retain any contingent deferred sales charge paid on redemptions. Thereafter, PFS will receive the same level of compensation as other Service Agents.

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Class B Shares. For the fiscal years ended December 31, 2005, 2006 and 2007, the aggregate dollar amounts of contingent deferred sales charges paid to CGMI and LMIS on Class B shares were as follows:

	Class B Shares
Fund	Fiscal Year Ended 12/31/05		Fiscal Year Ended 12/31/06		Fiscal Year Ended 12/31/07
Investment Grade Bond Fund	$	156,365	$	102,899	$	61,664
Government Securities Fund	$	85,174	$	34,401	$	53,588

For the fiscal years ended December 31, 2005, 2006 and 2007, the aggregate dollar amounts of contingent deferred sales charges paid to PFS on Class B shares were as follows:

	Class B Shares
Fund	Fiscal Year Ended 12/31/05		Fiscal Year Ended 12/31/06		Fiscal Year Ended 12/31/07
Investment Grade Bond Fund	$	227,293	$	198,619	$	130,898
Government Securities Fund	$	160,284	$	127,880	$	78,943

Class C Shares. For the fiscal years ended December 31, 2005, 2006 and 2007, the aggregate dollar amounts of contingent deferred sales charges paid to CGMI and LMIS on Class C shares were as follows:

	Class C Shares
Fund	Fiscal Year Ended 12/31/05		Fiscal Year Ended 12/31/06		Fiscal Year Ended 12/31/07
Investment Grade Bond Fund	$	2,138	$	2,659	$	1,531
Government Securities Fund	$	1,153	$	1,864	$	677

Portfolio Transactions

Subject to such policies as may be established by the Board from time to time, the Funds’ subadviser is primarily responsible for each Fund’s portfolio decisions and the placing of each Fund’s portfolio transactions.

Transactions on stock exchanges involve the payment of negotiated brokerage commissions. There is generally no stated commission in the case of securities traded in the over-the-counter market, but the price of those securities includes an undisclosed commission or mark-up. Over-the-counter purchases and sales are transacted directly with principal market makers except where it is believed that better prices and executions may be obtained elsewhere. The cost of securities purchased from underwriters includes an underwriting commission or concession, and the prices at which securities are purchased from and sold to dealers include a dealer’s mark-up or mark-down.

Pursuant to each Management Agreement and Sub-Advisory Agreement, the manager and the subadviser is authorized to place orders pursuant to its investment determinations for a Fund either directly with the issuer or with any broker or dealer, foreign currency dealer, futures commission merchant or others selected by it. The general policy of the subadviser in selecting brokers and dealers is to obtain the best results achievable in the context of a number of factors which are considered both in relation to individual trades and broader trading patterns, including the reliability of the broker/dealer, the competitiveness of the price and the commission, the research services received and whether the broker/dealer commits its own capital. In connection with the subadviser’s monitoring of its portfolio transactions for compliance with its policies, the subadviser utilizes both an internal committee and a third party service provider.

In connection with the selection of such brokers or dealers and the placing of such orders, subject to applicable law, brokers or dealers may be selected who also provide brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to the Funds and/or the other accounts

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over which the subadviser or its affiliates exercise investment discretion. The subadviser is authorized to pay a broker or dealer who provides such brokerage and research services a commission for executing a portfolio transaction for a Fund which is in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if the subadviser determines in good faith that such amount of commission is reasonable in relation to the value of the brokerage and research services provided by such broker or dealer. This determination may be viewed in terms of either that particular transaction or the overall responsibilities that the manager or the subadviser and its affiliates have with respect to accounts over which they exercise investment discretion. The subadviser may also have arrangements with brokers pursuant to which such brokers provide research services to the subadviser in exchange for a certain volume of brokerage transactions to be executed by such brokers. While the payment of higher commissions increases a Fund’s costs, neither the manager nor the subadviser believes that the receipt of such brokerage and research services significantly reduces its expenses as subadviser. Arrangements for the receipt of research services from brokers may create conflicts of interest.

Research services furnished to the manager or the subadviser by brokers who effect securities transactions for a Fund may be used by the manager or the subadviser in servicing other investment companies and accounts which it manages. Similarly, research services furnished to the manager or the subadviser by brokers who effect securities transactions for other investment companies and accounts which the subadviser manages may be used by the manager or the subadviser in servicing a Fund. Not all of these research services are used by the subadviser in managing any particular account, including the Funds. For the fiscal year ended December 31, 2007, neither Fund directed any brokerage transactions to brokers because of research services provided.

Each Fund contemplates that, consistent with the policy of obtaining the best net results, brokerage transactions may be conducted through “affiliated broker/dealers”, as defined in the 1940 Act. The Board on behalf of each Fund has adopted procedures in accordance with Rule 17e-1 promulgated under the 1940 Act to ensure that all brokerage commissions paid to such affiliates are reasonable and fair in the context of the market in which such affiliates operate.

Aggregate Brokerage Commissions Paid

For the fiscal years ended December 31, 2005, 2006 and 2007, the Funds paid aggregate brokerage commissions and brokerage commissions to CGMI as set out below:

Fund	Aggregate Brokerage Commissions Paid		Amount of Brokerage Commission Paid by the Fund to CGMI
Investment Grade Bond Fund
Year Ended December 31, 2005	$	0	$	0
Year Ended December 31, 2006	$	0	$	0
Year Ended December 31, 2007	$	0	$	0
Government Securities Fund
Year Ended December 31, 2005	$	0	$	0
Year Ended December 31, 2006	$	955	$	0
Year Ended December 31, 2007	$	12,090	$	0

As of December 1, 2005, LMIS became an underwriter of the Funds under the 1940 Act. For the period December 1, 2005 though December 31, 2006, and for fiscal year ended December 31, 2007, the Funds did not pay any brokerage commissions to LMIS or its affiliates.

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During the fiscal year ended December 31, 2007, each Fund purchased securities issued by the following regular broker/dealers of the Fund, which had the following values as of December 31, 2007.

Fund	Broker/Dealer	Value of Securities as of December 31, 2007
Investment Grade Bond Fund
	Merrill Lynch, Pierce, Fenner & Smith, Inc.	$	9,405,401
	JPMorgan Chase & Co.	$	9,295,553
	Lehman Brothers Inc.	$	8,429,390
	Morgan Stanley	$	7,246,201
	Goldman Sachs	$	5,720,703
	UBS Securities LLC	$	5,406,410
	Bear Stearns & Co., Inc.	$	2,716,604
Government Securities Fund
	Banc of America Securities LLC	$	3,968,061
	Lehman Brothers Inc.	$	3,757,917
	Morgan Stanley	$	1,359,656
	Bear Stearns & Co., Inc.	$	935,556

In certain instances there may be securities that are suitable as an investment for a Fund as well as for one or more of the subadviser’s other clients. Investment decisions for each Fund and for the subadviser’s other clients are made with a view to achieving their respective investment objectives. It may develop that a particular security is bought or sold for only one client even though it might be held by, or bought or sold for, other clients. Likewise, a particular security may be bought for one or more clients when one or more clients are selling the same security. Some simultaneous transactions are inevitable when several clients receive investment advice from the same investment adviser, particularly when the same security is suitable for the investment objectives of more than one client. When two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed to be equitable to each. It is recognized that in some cases this system could adversely affect the price of or the size of the position obtainable in a security for a Fund. When purchases or sales of the same security for a Fund and for other funds managed by the adviser occur contemporaneously, the purchase or sale orders may be aggregated in order to obtain any price advantages available to large volume purchases or sales.

Portfolio Turnover

For reporting purposes, a Fund’s portfolio turnover rate is calculated by dividing the lesser of purchases or sales of portfolio securities for the fiscal year by the monthly average of the value of the portfolio securities owned by the Fund during the fiscal year. In determining such portfolio turnover, all securities whose maturities at the time of acquisition were one year or less are excluded. A 100% portfolio turnover rate would occur, for example, if all of the securities in the Fund’s investment portfolio (other than short-term money market securities) were replaced once during the fiscal year. Portfolio turnover will not be a limiting factor should the subadviser deem it advisable to purchase or sell securities.

For the fiscal years ended December 31, 2006 and 2007, the portfolio turnover rates were as follows:

Fund	2006		2007
Investment Grade Bond Fund	94	%(1)	53	%
Government Securities Fund	266	%(1)	88	%

(1) The Fund’s portfolio turnover rate for the fiscal year ended December 31, 2006 was higher than normal primarily as a result of the change of portfolio managers and subsequent rebalancing of Fund assets.

In the event that portfolio turnover increases, this increase necessarily results in correspondingly greater transaction costs which must be paid by the Fund. To the extent portfolio trading results in realization of net short-term capital gains, shareholders will be taxed on such gains at ordinary tax rates (except shareholders who invest through IRAs and other retirement plans which are not taxed currently on accumulations in their accounts).

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PORTFOLIO MANAGER DISCLOSURE

Portfolio Managers

The following tables set forth information with respect to each Fund’s portfolio managers. Unless otherwise noted, all information is provided as of December 31, 2007.

Other Accounts Managed by Portfolio Managers

The table below identifies, for each portfolio manager, the number of accounts (other than the Fund with respect to which information is provided) for which the portfolio manager has day-to-day management responsibilities and the total assets in such accounts, within each of the following categories: registered investment companies, other pooled investment vehicles, and other accounts.

Fund	Portfolio Manager	Registered Investment Companies	Other Pooled Investment Vehicles	Other Accounts
Government Securities Fund	S. Kenneth Leech	114 registered investment companies with $121 billion in total assets under management	239 other pooled investment vehicles with $212 billion in assets under management	1,069 other accounts with $301 billion in total assets under management (with the advisory fee being based on performance for 95 of such accounts, which had approximately $32.7 billion in total assets)
	Stephen A. Walsh	114 registered investment companies with $121 billion in total assets under management	239 other pooled investment vehicles with $212 billion in assets under management	1,069 other accounts with $301 billion in total assets under management (with the advisory fee being based on performance for 95 of such accounts, which had approximately $32.7 billion in total assets)
	Mark S. Lindbloom	5 registered investment companies with $2 billion in total assets under management	3 other pooled investment vehicles with $242 million in assets under management	32 other accounts with $7 billion in total assets under management (with the advisory fee being based on performance for 4 of such accounts, which had approximately $1.3 billion in total assets)

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Fund	Portfolio Manager	Registered Investment Companies	Other Pooled Investment Vehicles	Other Accounts
	Michael C. Buchanan	14 registered investment companies with $7.8 billion in total assets under management	7 other pooled investment vehicles with $5.1 billion in total assets under management	12 other accounts with $816 million in total assets under management (with the advisory fee being based on performance for 1 of such accounts, which had approximately $90 million in total assets)
	Ronald D. Mass	1 registered investment company with $164 million in total assets under management	14 other pooled investment vehicles with $4.6 billion in total assets under management	No other managed accounts
Investment Grade Bond Fund	S. Kenneth Leech	114 registered investment companies with $121 billion in total assets under management	239 other pooled investment vehicles with $212 billion in assets under management	1,069 other accounts with $301 billion in total assets under management (with the advisory fee being based on performance for 95 of such accounts, which had approximately $32.7 billion in total assets)
	Stephen A. Walsh	114 registered investment companies with $121 billion in total assets under management	239 other pooled investment vehicles with $212 billion in assets under management	1,069 other accounts with $301 billion in total assets under management (with the advisory fee being based on performance for 95 of such accounts, which had approximately $32.7 billion in total assets)

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Fund	Portfolio Manager	Registered Investment Companies	Other Pooled Investment Vehicles	Other Accounts
	Jeffrey D. Van Schaick	3 registered investment companies with $768 million in total assets under management	2 other pooled investment vehicles with $372 million in assets under management	23 other accounts with $5 trillion in total assets under management (with the advisory fee being based on performance for 3 of such accounts, which had approximately $581 million in total assets)
	Carl. L. Eichstaedt	13 registered investment companies with $3.9 billion in total assets under management	6 other pooled investment vehicles with $1.8 billion in assets under management	98 other accounts with $20 billion in total assets under management (with the advisory fee being based on performance for 3 of such accounts, which had approximately $1 billion in total assets)
	Edward A. Moody	3 registered investment companies with $821 million in total assets under management	1 other pooled investment vehicles with $64 million in assets under management	88 other accounts with $17 billion in total assets under management (with the advisory fee being based on performance for 8 of such accounts, which had approximately $3.1 billion in total assets)
	Mark S. Lindbloom	6 registered investment companies with $2.7 billion in total assets under management	3 other pooled investment vehicles with $242 million in assets under management	32 other accounts with $7 billion in total assets under management (with the advisory fee being based on performance for 4 of such accounts, which had approximately $1.3 billion in total assets)

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Portfolio Manager Compensation

Western Asset’s compensation system assigns each employee a total compensation “target” and a respective cap, which are derived from annual market surveys that benchmark each role with its job function and peer universe. This method is designed to reward employees with total compensation reflective of the external market value of their skills, experience, and ability to produce desired results. Standard compensation includes competitive base salaries, generous employee benefits, and a retirement plan.

In addition, the subadviser’s employees are eligible for bonuses. These are structured to closely align the interests of employees with those of the subadviser, and are determined by the professional’s job function and pre-tax performance as measured by a formal review process. All bonuses are completely discretionary. One of the principal factors considered is a portfolio manager’s investment performance versus appropriate peer groups and benchmarks (e.g., a securities index and, with respect to a Fund, the benchmark set forth in the Fund’s Prospectus to which the Fund’s average annual total returns are compared or, if none, the benchmark set forth in the Fund’s annual report). Performance is reviewed on a 1, 3 and 5 year basis for compensation, with 3 years having the most emphasis. A subadviser may also measure a portfolio manager’s pre-tax investment performance against other benchmarks, as it determines appropriate. Because portfolio managers are generally responsible for multiple accounts (including the Funds) with similar investment strategies, they are generally compensated on the performance of the aggregate group of similar accounts, rather than a specific account, though relative performance against the stated benchmark and its applicable Lipper peer group is also considered. A smaller portion of a bonus payment is derived from factors that include client service, business development, length of service to the subadviser, management or supervisory responsibilities, contributions to developing business strategy and overall contributions to the subadviser’s business.

Finally, in order to attract and retain top talent, all professionals are eligible for additional incentives in recognition of outstanding performance. These were determined based upon the factors described above and include Legg Mason stock options and long-term incentives that vest over a set period of time past the award date.

Potential Conflicts of Interest

Potential conflicts of interest may arise when a Fund’s portfolio managers also have day-to-day management responsibilities with respect to one or more other funds or other accounts, as is the case for the portfolio managers listed in the table above.

The manager, the subadviser and each Fund have adopted compliance policies and procedures that are designed to address various conflicts of interest that may arise for the manager and the individuals that they employ. For example, the manager and the subadviser each seeks to minimize the effects of competing interests for the time and attention of portfolio managers by assigning portfolio managers to manage funds and accounts that share a similar investment style. The manager and the subadviser have also adopted trade allocation procedures that are designed to facilitate the fair allocation of limited investment opportunities among multiple funds and accounts. There is no guarantee, however, that the policies and procedures adopted by the manager, the subadviser and the Funds will be able to detect and/or prevent every situation in which an actual or potential conflict may appear. These potential conflicts include:

Allocation of Limited time and Attention. A portfolio manager who is responsible for managing multiple funds and/or accounts may devote unequal time and attention to the management of those funds and/or accounts. As a result, the portfolio manager may not be able to formulate as complete a strategy or identify equally attractive investment opportunities for each of those accounts as might be the case if he were to devote substantially more attention to the management of a single fund. The effects of this potential conflict may be more pronounced where funds and/or accounts overseen by a particular portfolio manager have different investment strategies.

Allocation of Limited Investment Opportunities. If a portfolio manager identifies a limited investment opportunity that may be suitable for multiple funds and/or accounts, the opportunity may be allocated among these several funds or accounts, which may limit a fund’s ability to take full advantage of the investment opportunity.

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Pursuit of Differing Strategies. At times, a portfolio manager may determine that an investment opportunity may be appropriate for only some of the funds and/or accounts for which he exercises investment responsibility, or may decide that certain of the funds and/or accounts should take differing positions with respect to a particular security. In these cases, the portfolio manager may place separate transactions for one or more funds or accounts which may affect the market price of the security or the execution of the transaction, or both, to the detriment or benefit of one or more other funds and/or accounts.

Selection of Brokers/Dealers. Portfolio managers may be able to select or influence the selection of the brokers and dealers that are used to execute securities transactions for the funds and/or accounts that they supervise. In addition to executing trades, some brokers and dealers provide portfolio managers with brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934), which may result in the payment of higher brokerage fees than might have otherwise been available. These services may be more beneficial to certain funds or accounts than to others. Although the payment of brokerage commissions is subject to the requirement that the portfolio managers determine in good faith that the commissions are reasonable in relation to the value of the brokerage and research services provided to a fund, a portfolio manager’s decision as to the selection of brokers and dealers could yield disproportionate costs and benefits among the funds and/or accounts that he manages. For this reason, the subadviser has formed a brokerage committee that reviews, among other things, the allocation of brokerage to broker/dealers, best execution and soft dollar usage.

Variation in Compensation. A conflict of interest may arise where the financial or other benefits available to the portfolio manager differ among the funds and/or accounts that he manages. If the structure of the investment manager’s management fee and/or the portfolio manager’s compensation differs among funds and/or accounts (such as where certain funds or accounts pay higher management fees or performance-based management fees), the portfolio manager might be motivated to help certain funds and/or accounts over others. The portfolio manager might be motivated to favor funds and/or accounts in which he has an interest or in which the investment manager and/or its affiliates have interests. Similarly, the desire to maintain assets under management or to enhance a portfolio manager’s performance record or to derive other rewards, financial or otherwise, could influence the portfolio manager in affording preferential treatment to those funds and/or accounts that could most significantly benefit the portfolio manager.

Related Business Opportunities. The investment manager or its affiliates may provide more services (such as distribution or recordkeeping) for some types of funds or accounts than for others. In such cases, a portfolio manager may benefit, either directly or indirectly, by devoting disproportionate attention to the management of funds and/or accounts that provide greater overall returns to the investment manager and its affiliates.

Portfolio Manager Securities Ownership

The table below identifies ownership of Fund securities as of December 31, 2007, by each portfolio manager.

Fund	Portfolio Manager	Dollar Range of Ownership of Securities
Government Securities Fund	S. Kenneth Leech	None
	Stephen A. Walsh	None
	Michael C. Buchanan	None
	Ronald D. Mass	None
	Mark S. Lindbloom	None
Investment Grade Bond Fund	S. Kenneth Leech	None
	Stephen A. Walsh	None
	Jeffrey D. Van Schaick	None
	Carl L. Eichstaedt	None
	Edward A. Moody	None
	Mark S. Lindbloom	None

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INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES

Each Fund’s Prospectus discusses the investment objective and the policies it employs to achieve such objective. The following discussion supplements the description of each Fund’s investment objective and management policies contained in its Prospectus.

Investment Objectives

Investment Grade Bond Fund seeks as high a level of current income as is consistent with prudent investment management and preservation of capital. Government Securities Fund seeks high current return.

Each Fund’s investment objective may be changed without shareholder approval.

Principal Investment Strategies

Under normal circumstances, Investment Grade Bond Fund invests at least 80% of the value of its net assets, plus any borrowings for investment purposes, in “investment grade” fixed-income securities and related investments. These are securities rated by a national recognized statistical ratings organization within one of the top four ratings categories, or, if unrated, judged by the subadviser to be of comparable credit quality. Investment Grade Bond Fund also may invest in U.S. Government securities and U.S. dollar denominated fixed-income securities of foreign issuers. Investment Grade Bond Fund may invest in securities having any maturity.

Under normal circumstances, Government Securities Fund invests at least 80% of the value of its net assets, plus any borrowings for investment purposes, in debt securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities and related investments. These securities include U.S. Treasury securities and mortgage-related securities. Mortgage-related securities issued by federal agencies or instrumentalities may be backed by the full faith and credit of the U.S. Treasury, by the right of the issuer to borrow from the U.S. Government or only by the credit of the issuer itself.

Government Securities Fund may also enter into mortgage dollar roll transactions where Government Securities Fund sells a mortgage-related security and simultaneously agrees to repurchase, at a future date, another mortgage-related security with the same interest rate and maturity date but generally backed by a different pool of mortgages. During the roll period, the fund foregoes principal and interest paid on the security it sold. The benefits from these transactions depend on the portfolio managers’ ability to forecast mortgage prepayment patterns on different mortgage pools. Government Securities Fund may lose money if the securities to be repurchased decline in value before the date of repurchase.

Additional Information

The Funds’ principal investment strategies are described above. The following provides additional information on these principal strategies and describes other investment strategies that may be used by the Funds.

Each Fund’s compliance with its investment restrictions and limitations is usually determined at the time of investment.

Fixed-Income Securities (Both Funds)

Corporate Debt Obligations. Corporate debt obligations are subject to the risk of an issuer’s inability to meet principal and/or interest payments on the obligations and may also be subject to price volatility due to such factors as market interest rates, market perception of the creditworthiness of the issuer and general market liquidity. Zero coupon securities are securities sold at a discount to par value and on which interest payments are not made during the life of the security.

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U.S. Government Securities. Securities issued or guaranteed by the United States government or one of its agencies, authorities or instrumentalities (“U.S. government securities”) in which the fund may invest include debt obligations of varying maturities issued by the United States Treasury or issued or guaranteed by an agency or instrumentality of the United States government, including the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, the Small Business Administration, the Government National Mortgage Association (“GNMA”), General Services Administration, Central Bank for Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, the Federal Home Loan Mortgage Corporation (“FHLMC”), Federal Intermediate Credit Banks, Federal Land Banks, the Federal National Mortgage Association (“FNMA”), Maritime Administration, Tennessee Valley Authority, District of Columbia Armory Board, Student Loan Marketing Association and Resolution Trust Company. Direct obligations of the United States Treasury include bills, certificates of indebtedness, notes and bonds which differ in their interest rates, maturities and dates of issuance. These instruments are direct obligations of the United States government and, as such, are backed by the full faith and credit of the United States. Because the United States government is not obligated by law to provide support to an instrumentality that it sponsors, the fund will not invest in obligations issued by an instrumentality of the United States government unless the subadviser determines that the instrumentality’s credit risk does not make its securities unsuitable for investment by the fund.

Mortgage-Related Securities. The Funds may invest in mortgage-related securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities, including those representing an undivided ownership interest in a pool of mortgage loans, e.g., GNMA, FNMA and FHLMC Certificates. Mortgage loans made by banks, savings and loan institutions, and other lenders are often assembled into pools, which are issued or guaranteed by an agency or instrumentality of the U.S. Government, though not necessarily by the U.S. Government itself. Interests in such pools are collectively referred to as “mortgage-related securities.”

Mortgage-related securities are characterized by monthly payments to the holder, reflecting the monthly payments made by the borrowers who received the underlying mortgage loans. The payments to the securityholders (such as the Funds), like the payments on the underlying loans, represent both principal and interest. Although the underlying mortgage loans are for specified periods of time, such as 20 or 30 years, the borrowers can, and typically do, pay them off sooner. Thus, the securityholders frequently receive prepayments of principal in addition to the principal which is part of the regular monthly payment. A borrower is more likely to prepay a mortgage which bears a relatively high rate of interest. This means that in times of declining interest rates, some of a Fund’s higher yielding securities might be converted to cash, and the Fund will be forced to accept lower interest rates when that cash is used to purchase additional securities. The increased likelihood of prepayment when interest rates decline also limits market price appreciation of mortgage-related securities. If a Fund buys mortgage-related securities at a premium, mortgage foreclosures or mortgage prepayments may result in a loss to the Fund of up to the amount of the premium paid since only timely payment of principal and interest is guaranteed.

GNMA is a wholly owned corporate instrumentality of the United States within the U.S. Department of Housing and Urban Development. GNMA’s principal programs involve its guarantees of privately issued securities backed by pools of mortgages. GNMA Certificates (“GNMA Certificates”) are mortgage-backed securities, which evidence an undivided interest in a pool of mortgage loans. GNMA Certificates differ from bonds in that principal is paid back monthly by the borrower over the term of the loan rather than returned in a lump sum at maturity. GNMA Certificates that the Funds purchase are the “modified pass-through” type. “Modified pass-through” GNMA Certificates entitle the holder to receive a share of all interest and principal payments paid and owed on the mortgage pool net of fees paid to the issuer and GNMA, regardless of whether or not the mortgagor actually makes the payment. The National Housing Act authorizes GNMA to guarantee the timely payment of principal and interest on securities backed by a pool of mortgages insured by the Federal Housing Administration (“FHA”) or the Farmers’ Home Administration (“FMHA”), or guaranteed by the Veterans Administration (“VA”). Once a pool of such mortgages is assembled and approved by GNMA, the GNMA guarantee is backed by the full faith and credit of the U.S. Government. GNMA is also empowered to borrow without limitation from the U.S. Treasury if necessary to make any payments required under its guarantee.

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The average life of a GNMA Certificate is likely to be substantially less than the original maturity of the mortgage pools underlying the securities. Prepayments of principal by mortgagors and mortgage foreclosures will usually result in the return of the greater part of principal investment long before maturity of the mortgages in the pool. A Fund normally will not distribute principal payments (whether regular or prepaid) to its shareholders. Rather, it will invest such payments in additional mortgage-related securities of the types described above or other U.S. Government securities. Interest received by a Fund will, however, be distributed to shareholders. Foreclosures impose no risk to principal investment because of the GNMA guarantee.

As prepayment rates of the individual mortgage pools vary widely, it is not possible to predict accurately the average life of a particular issue of GNMA Certificates. However, statistics published by the FHA indicate that the average life of single-family dwelling mortgages with 25- to 30-year maturities, the type of mortgages backing the vast majority of GNMA Certificates, is approximately 12 years. Therefore, it is customary to treat GNMA Certificates as 30-year mortgage-backed securities which prepay fully in the twelfth year.

Since the inception of the GNMA mortgage-backed securities program in 1970, the amount of GNMA Certificates outstanding has grown rapidly. The size of the market and the active participation in the secondary market by securities dealers and many types of investors make GNMA Certificates highly liquid instruments. Quotes for GNMA Certificates are readily available from securities dealers and depend on, among other things, the level of market rates, the Certificate’s coupon rate and the prepayment experience of the pool of mortgages backing each Certificate.

FHLMC was created in 1970 to promote development of a nationwide secondary market in conventional residential mortgages. FHLMC issues two types of mortgage pass-through securities, mortgage participation certificates (“PCs”) and guaranteed mortgage certificates (“GMCs”). PCs resemble GNMA Certificates in that each PC represents a pro rata share of all interest and principal payments made and owed on the underlying pool. Like GNMA Certificates, PCs are assumed to be prepaid fully in their twelfth year. FHLMC guarantees timely monthly payment of interest of PCs and the ultimate payment of principal.

GMCs also represent a pro rata interest in a pool of mortgages. However, these instruments pay interest semiannually and return principal once a year in guaranteed minimum payments. The expected average life of these securities is approximately 10 years.

FNMA was established in 1938 to create a secondary market in mortgages insured by the FHA. FNMA issues guaranteed mortgage pass-through certificates (“FNMA Certificates”). FNMA Certificates resemble GNMA Certificates in that each Certificate represents a pro rata share of all interest and principal payments made and owed on the underlying pool. FNMA guarantees timely payment of interest on FNMA Certificates and the full return of principal. Like GNMA Certificates, FNMA Certificates are assumed to be prepaid fully in their twelfth year.

The risks are greater with FHLMC and FNMA securities because, unlike GNMA securities, FHLMC and FNMA securities are not guaranteed by the full faith and credit of the U.S. Government.

Short-Term Investments. In certain circumstances the Funds may invest without limitation in all types of short-term money market instruments, including U.S. Government securities; certificates of deposit, time deposits and bankers’ acceptances issued by domestic banks (including their branches located outside the United States and subsidiaries located in Canada), domestic branches of foreign banks, savings and loan associations and similar institutions; high grade commercial paper; and repurchase agreements. To the extent a Fund is investing in short-term investments as a temporary defensive posture, the applicable Fund’s investment objective may not be achieved. Investment Grade Bond Fund may invest in negotiable bank certificates of deposit and bankers’ acceptances issued by domestic banks (but not their foreign branches) having total assets in excess of $1 billion.

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Commercial Paper. Commercial paper consists of short-term (usually 1 to 270 days) unsecured promissory notes issued by corporations in order to finance their current operations. A variable amount master demand note (which is a type of commercial paper) represents a direct borrowing arrangement involving periodically fluctuating rates of interest under a letter agreement between a commercial paper issuer and an institutional lender, such as a Fund, pursuant to which the lender may determine to invest varying amounts. Transfer of such notes is usually restricted by the issuer, and there is no secondary trading market for such notes. Each Fund, therefore, may only invest in a master demand note to the extent that the investment would not violate the Fund’s limits on restricted and illiquid securities. Investment Grade Bond Fund may invest only in commercial paper issued by domestic corporations rated in the highest two short-term ratings categories by a nationally recognized ratings organization, or, if unrated, issued by a corporation that has an outstanding debt issue rated in the highest two ratings categories by a nationally recognized statistical ratings organization (“NRSRO”).

Exchange Rate-Related Securities (Government Securities Fund). The Fund may invest up to 5% of its net assets in U.S. Government securities for which the principal repayment at maturity, while paid in U.S. dollars, is determined by reference to the exchange rate between the U.S. dollar and the currency of one or more foreign countries (“Exchange Rate-Related Securities”). The interest payable on these securities is denominated in U.S. dollars, is not subject to foreign currency risks and, in most cases, is paid at rates higher than most other U.S. Government securities in recognition of the foreign currency risk component of Exchange Rate-Related Securities.

Exchange Rate-Related Securities are issued in a variety of forms, depending on the structure of the principal repayment formula. The principal repayment formula may be structured so that the security holder will benefit if a particular foreign currency to which the security is linked is stable or appreciates against the U.S. dollar. In the alternative, the principal repayment formula may be structured so that the security holder benefits if the U.S. dollar is stable or appreciates against the linked foreign currency. Finally, the principal repayment formula can be a function of more than one currency and, therefore, be designed in either of the aforementioned forms or a combination of those forms.

Investments in Exchange Rate-Related Securities entail special risks. There is the possibility of significant changes in rates of exchange between the U.S. dollar and any foreign currency to which an Exchange Rate-Related Security is linked. If currency exchange rates do not move in the direction or to the extent anticipated at the time of purchase of the security, the amount of principal repaid at maturity might be significantly below the par value of the security, which might not be offset by the interest earned by the Fund over the term of the security. The rate of exchange between the U.S. dollar and other currencies is determined by the forces of supply and demand in the foreign exchange markets. These forces are affected by the international balance of payments and other economic and financial conditions, government intervention, speculation and other factors. The imposition or modification of foreign exchange controls by the United States or foreign governments or intervention by central banks also could affect exchange rates. Finally, there is no assurance that sufficient trading interest to create a liquid secondary market will exist for particular Exchange Rate-Related Securities due to conditions in the debt and foreign currency markets. Illiquidity in the forward foreign exchange market and the high volatility of the foreign exchange market may from time to time combine to make it difficult to sell an Exchange Rate-Related Security prior to maturity without incurring a significant price loss.

Zero Coupon Securities (Government Securities Fund). The Fund may invest in zero coupon bonds. A zero coupon bond pays no interest in cash to its holder during its life, although interest is accrued during that period. Its value to an investor consists of the difference between its face value at the time of maturity and the price for which it was acquired, which is generally an amount significantly less than its face value (sometimes referred to as a “deep discount” price). Because such securities usually trade at a deep discount, they will be subject to greater fluctuations of market value in response to changing interest rates than debt obligations of comparable maturities which make periodic distributions of interest. On the other hand, because there are no periodic interest payments to be reinvested prior to maturity, zero coupon securities eliminate reinvestment risk and lock in a rate of return to maturity.

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Mortgage Dollar Rolls (Both Funds)

In mortgage “dollar rolls” a fund sells mortgage-backed securities for delivery in the current month and simultaneously contracts to repurchase substantially similar (same type, coupon and maturity) securities on a specified future date. During the roll period, a fund foregoes principal and interest paid on the mortgage-backed securities. A fund is compensated by the difference between the current sales price and the lower forward price for the future purchase (often referred to as the “drop”) as well as by the interest earned on the cash proceeds of the initial sale. At the time a fund enters into a mortgage “dollar roll,” it will establish a segregated account with its custodian bank in which it will maintain cash, U.S. government securities or other liquid assets equal in value to its obligations in respect of dollar rolls or use other methods currently or in the future permitted under the 1940 Act, the rules and regulation thereunder, or orders issued by the SEC thereunder. Mortgage dollar rolls involve the risk that the market value of the securities the fund is obligated to repurchase under the agreement may decline below the repurchase price. In the event the buyer of securities under a mortgage dollar roll files for bankruptcy or becomes insolvent, a fund’s use of proceeds of the dollar roll may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the fund’s obligation to repurchase the securities.

Equity Securities (Investment Grade Bond Fund)

Common Stocks. Common stocks are shares of a corporation or other entity that entitle the holder to a pro rata share of the profits of the corporation, if any, without preference over any other shareholder or class of shareholders, including holders of the entity’s preferred stock and other senior equity. Common stock usually carries with it the right to vote and frequently an exclusive right to do so.

Preferred Stocks and Convertible Securities. Convertible debt securities and preferred stock entitle the holder to acquire the issuer’s stock by exchange or purchase for a predetermined rate. Convertible securities are subject both to the credit and interest rate risks associated with fixed-income securities and to the stock market risk associated with equity securities.

Warrants. Warrants acquired by the Fund entitle it to buy common stock from the issuer at a specified price and time. Warrants are subject to the same market risks as stocks, but may be more volatile in price. A Fund’s investment in warrants will not entitle it to receive dividends or exercise voting rights and will become worthless if the warrants cannot be profitably exercised before the expiration dates. Warrants acquired by the Fund in units or attached to securities will be deemed to be without value for purposes of this restriction. These limits are not fundamental policies of the Fund and may be changed by the Board of Trustees without shareholder approval.

REITs. Real estate investment trusts (“REITs”) are pooled investment vehicles that invest in real estate or real estate loans or interests. Investing in REITs involves risks similar to those associated with investing in equity securities of small capitalization companies. REITs are dependent upon management skills, are not diversified, and are subject to risks of project financing, default by borrowers, self-liquidation, and the possibility of failing to qualify for the exemption from taxation on distributed amounts under the Internal Revenue Code of 1986, as amended (the “Code”).

Derivative Instruments—Options, Futures and Other Strategies (Both Funds)

General. Each Fund may invest in certain options, futures contracts (sometimes referred to as “futures”), options on futures contracts, forward contracts, swaps, caps, floors, collars, indexed securities and other derivative instruments (collectively, “Financial Instruments”) to, among other things, attempt to hedge its investments or attempt to enhance its return or yield through non-hedging strategies.

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Except as otherwise provided in the Prospectus, this SAI or by applicable law, each Fund may purchase and sell any type of Financial Instrument.

The use of Financial Instruments is subject to applicable regulations of the SEC, the several exchanges upon which they are traded and the Commodity Futures Trading Commission. In addition, each Fund’s ability to use Financial Instruments may be limited by tax considerations.

Hedging strategies can be broadly categorized as “short hedges” and “long hedges.” A short hedge is a purchase or sale of a Financial Instrument intended partially or fully to offset potential declines in the value of one or more investments held in the Fund’s portfolio. Thus, in a short hedge the Fund takes a position in a Financial Instrument whose price is expected to move in the opposite direction of the price of the investment being hedged.

Conversely, a long hedge is a purchase or sale of a Financial Instrument intended partially or fully to offset potential increases in the acquisition cost of one or more investments that the Fund intends to acquire. Thus, in a long hedge, the Fund takes a position in a Financial Instrument whose price is expected to move in the same direction as the price of the prospective investment being hedged. A long hedge is sometimes referred to as an anticipatory hedge. In an anticipatory hedge transaction, the Fund does not own a corresponding security and, therefore, the transaction does not relate to the portfolio security that the Fund owns. Rather, it relates to a security that the Fund intends to acquire. If the Fund does not complete the hedge by purchasing the security it anticipated purchasing, the effect on the Fund’s portfolio is the same as if the transaction were entered into for speculative purposes.

Financial Instruments on securities generally are used to attempt to hedge against price movements in one or more particular securities positions that the Fund owns or intends to acquire. Financial Instruments on indices, in contrast, generally are used to attempt to hedge against price movements in market sectors in which the Fund has invested or expects to invest. Financial Instruments on debt securities generally are used to hedge either individual securities or broad debt market sectors.

In addition to the instruments, strategies and risks described below, the subadviser expects to discover additional opportunities in connection with Financial Instruments and other similar or related techniques. These new opportunities may become available as the subadviser develops new techniques, as regulatory authorities broaden the range of permitted transactions and as new Financial Instruments or other techniques are developed. The subadviser may utilize these opportunities to the extent that they are consistent with the Fund’s investment objective and permitted by its investment limitations and applicable regulatory authorities. The Fund might not use any of these strategies, and there can be no assurance that any strategy used will succeed.

Risks. The use of Financial Instruments involves special considerations and risks, certain of which are described below, and may result in losses to the Fund. In general, these techniques may increase the volatility of the Fund and may involve a small investment of cash relative to the magnitude of the risk assumed. Even a small investment in derivatives may magnify or otherwise increase investment losses to the Fund. The Fund’s use of derivatives may also increase the amount of taxes payable by shareholders.

Successful use of most Financial Instruments depends upon the subadviser’s ability to predict movements of the overall securities, currency and interest rate markets, which requires different skills than predicting changes in the prices of individual securities. The prices of derivatives may move in unexpected ways, especially in abnormal market conditions. There can be no assurance that any particular strategy will succeed, and use of Financial Instruments could result in a loss, regardless of whether the intent was to reduce risk or increase return.

The Fund might be required to maintain assets as “cover,” maintain segregated accounts or make margin payments when it takes positions in Financial Instruments involving obligations to third parties (i.e., Financial Instruments other than purchased options). If the Fund were unable to close out its positions in such Financial

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Instruments, it might be required to continue to maintain such assets or accounts or make such payments until the position expired or matured. These requirements might impair the Fund’s ability to sell a portfolio security or make an investment at a time when it would otherwise be favorable to do so, or require that the Fund sell a portfolio security at a disadvantageous time.

The Fund’s ability to close out a position in a Financial Instrument prior to expiration or maturity depends on the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of the other party to the transaction (the “counterparty”) to enter into a transaction closing out the position. Therefore, there is no assurance that any position can be closed out at a time and price that is favorable to the Fund.

Certain Risks Associated with Hedging Strategies. There might be imperfect correlation, or even no correlation, between price movements of a Financial Instrument and price movements of the investments being hedged. For example, if the value of a Financial Instrument used in a short hedge increased by less than the decline in value of the hedged investment, the hedge would not be fully successful. Such a lack of correlation might occur due to factors unrelated to the value of the investments being hedged, such as speculative or other pressures on the markets in which Financial Instruments are traded. The effectiveness of hedges using Financial Instruments on indices will depend on the degree of correlation between price movements in the index and price movements in the securities or other assets being hedged.

Because there are a limited number of types of exchange-traded Financial Instruments, it is likely that the standardized contracts available will not match the Fund’s current or anticipated investments exactly. The Fund may invest in Financial Instruments based on securities with different issuers, maturities or other characteristics from the securities in which it typically invests, which involves a risk that the position in Financial Instruments will not track the performance of the Fund’s other investments.

Prices of Financial Instruments can also diverge from the prices of their underlying instruments, even if the underlying instruments match the Fund’s portfolio investments well. Prices of Financial Instruments are affected by such factors as current and anticipated short-term interest rates, changes in volatility of the underlying instrument, and the time remaining until expiration of the contract, which may not affect security prices the same way. Imperfect correlation may also result from differing levels of demand in the markets for Financial Instruments and the securities markets, from structural differences in how Financial Instruments and securities are traded, or from imposition of daily price fluctuation limits or trading halts. The Fund may purchase or sell Financial Instruments with a greater or lesser value than the securities it wishes to hedge or intends to purchase in order to attempt to compensate for differences in volatility between the contract and the securities, although this may not be successful in all cases. If price changes in the Fund’s positions in Financial Instruments are poorly correlated with its other investments, the positions may fail to produce anticipated gains or result in losses that are not offset by gains in other investments.

If successful, the above-discussed strategies can reduce risk of loss by wholly or partially offsetting the negative effect of unfavorable price movements. However, such strategies can also reduce opportunity for gain by offsetting the positive effect of favorable price movements. For example, if the Fund entered into a short hedge because its subadviser projected a decline in the price of a security in the Fund’s portfolio, and the price of that security increased instead, the gain from that increase might be wholly or partially offset by a decline in the price of the Financial Instrument. Moreover, if the price of the Financial Instrument declined by more than the increase in the price of the security, the Fund could suffer a loss. In either such case, the Fund would have been in a better position had it not attempted to hedge at all.

Cover. Transactions using Financial Instruments, other than purchased options, expose the Fund to an obligation to another party. The Fund will comply with SEC guidelines regarding cover for these instruments and will, if the guidelines so require, segregate on its books cash or liquid assets in the prescribed amount as determined daily. The Fund may cover such transactions using other methods currently or as may be permitted in the future under the 1940 Act or orders issued by the SEC thereunder. For these purposes, interpretations and guidance provided by the SEC staff may be taken into account when deemed appropriate by the Fund.

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Assets used as cover cannot be sold while the position in the corresponding Financial Instrument is open, unless they are replaced with other appropriate assets. As a result, the commitment of a large portion of the Fund’s assets to cover in accounts could impede portfolio management or the Fund’s ability to meet redemption requests or other current obligations.

Options. A call option gives the purchaser the right to buy, and obligates the writer to sell, the underlying investment at the agreed-upon price during the option period. A put option gives the purchaser the right to sell, and obligates the writer to buy, the underlying investment at the agreed-upon price during the option period. Purchasers of options pay an amount, known as a premium, to the option writer in exchange for the right under the option contract.

The Fund may purchase call options for any purpose. For example, a call option may be purchased by the Fund as a long hedge. Call options also may be used as a means of participating in an anticipated price increase of a security on a more limited risk basis than would be possible if the security itself were purchased. In the event of a decline in the price of the underlying security, use of this strategy would serve to limit the Fund’s potential loss to the option premium paid; conversely, if the market price of the underlying security increases above the exercise price and the Fund either sells or exercises the option, any profit realized would be reduced by the premium.

The Fund may purchase put options for any purpose. For example, a put option may be purchased by the Fund as a short hedge. The put option enables the Fund to sell the underlying security at the predetermined exercise price; thus the potential for loss to the Fund below the exercise price is limited to the option premium paid. If the market price of the underlying security is higher than the exercise price of the put option, any profit the Fund realizes on the sale of the security would be reduced by the premium paid for the put option less any amount for which the put option may be sold.

Writing put or call options can enable the Fund to enhance income or yield by reason of the premiums paid by the purchasers of such options. However, the Fund may also suffer a loss as a result of writing options. For example, if the market price of the security underlying a put option declines to less than the exercise price of the option, minus the premium received, the Fund would suffer a loss.

Writing call options can serve as a limited short hedge, because declines in the value of the hedged investment would be offset to the extent of the premium received for writing the option. However, if the security or currency appreciates to a price higher than the exercise price of the call option, it can be expected that the option will be exercised and the Fund will be obligated to sell the security or currency at less than its market value. If the call option is an over the counter (“OTC”) option, the securities or other assets used as cover may be considered illiquid.

Writing put options can serve as a limited long hedge because increases in the value of the hedged investment would be offset to the extent of the premium received for writing the option. However, if the security or currency depreciates to a price lower than the exercise price of the put option, it can be expected that the put option will be exercised and the Fund will be obligated to purchase the security or currency at more than its market value. If the put option is an OTC option, the securities or other assets used as cover may be considered illiquid.

The value of an option position will reflect, among other things, the current market value of the underlying investment, the time remaining until expiration, the relationship of the exercise price to the market price of the underlying investment, the historical price volatility of the underlying investment and general market conditions.

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The Fund may effectively terminate its right or obligation under an option by entering into a closing transaction. For example, the Fund may terminate its obligation under a call or put option that it had written by purchasing an identical call or put option; this is known as a closing purchase transaction. Conversely, the Fund may terminate a position in a put or call option it had purchased by writing an identical put or call option; this is known as a closing sale transaction. Closing transactions permit the Fund to realize profits or limit losses on an option position prior to its exercise or expiration.

A type of put that the Fund may purchase is an “optional delivery standby commitment,” which is entered into by parties selling debt securities to the Fund. An optional delivery standby commitment gives the Fund the right to sell the security back to the seller on specified terms. This right is provided as an inducement to purchase the security.

Risks of Options on Securities. Options may result in the Fund’s net asset value being more sensitive to changes in the value of the related instrument. The Fund may purchase or write both exchange-traded and OTC options. Exchange-traded options in the United States are issued by a clearing organization affiliated with the exchange on which the option is listed that, in effect, guarantees completion of every exchange-traded option transaction. In contrast, OTC options are contracts between the Fund and its counterparty (usually a securities dealer or a bank) with no clearing organization guarantee. Thus, when the Fund purchases an OTC option, it relies on the counterparty from whom it purchased the option to make or take delivery of the underlying investment upon exercise of the option. Failure by the counterparty to do so would result in the loss of any premium paid by the Fund as well as the loss of any expected benefit of the transaction.

The Fund’s ability to establish and close out positions in exchange-listed options depends on the existence of a liquid market. However, there can be no assurance that such a market will exist at any particular time. Closing transactions can be made for OTC options only by negotiating directly with the counterparty, or by a transaction in the secondary market if any such market exists. There can be no assurance that the Fund will in fact be able to close out an OTC option position at a favorable price prior to expiration. In the event of insolvency of the counterparty, the Fund might be unable to close out an OTC option position at any time prior to its expiration, if at all.

If the Fund were unable to effect a closing transaction for an option it had purchased, due to the absence of a secondary market, the imposition of price limits or otherwise, it would have to exercise the option to realize any profit. The inability to enter into a closing purchase transaction for a covered call option written by the Fund could cause material losses because the Fund would be unable to sell the investment used as cover for the written option until the option expires or is exercised.

Options have varying expiration dates. The exercise price of the options may be below, equal to or above the current market value of the underlying security or other instrument. Options purchased by the Fund that expire unexercised have no value, and the Fund will realize a loss in the amount of the premium paid and any transaction costs. If an option written by the Fund expires unexercised, the Fund realizes a gain equal to the premium received at the time the option was written. Transaction costs must be included in these calculations.

Options on Indices. Puts and calls on indices are similar to puts and calls on securities or futures contracts except that all settlements are in cash and gain or loss depends on changes in the index in question rather than on price movements in individual securities or futures contracts. When the Fund writes a call on an index, it receives a premium and agrees that, prior to the expiration date, the purchaser of the call, upon exercise of the call, will receive from the Fund an amount of cash if the closing level of the index upon which the call is based is greater than the exercise price of the call. The amount of cash is equal to the difference between the closing price of the index and the exercise price of the call times a specified multiple (“multiplier”), which determines the total dollar value for each point of such difference. When the Fund buys a call on an index, it pays a premium and has the same rights as to such call as are indicated above. When the Fund buys a put on an index, it pays a premium and has the right, prior to the expiration date, to require the seller of the put, upon the Fund’s exercise of the put, to

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deliver to the Fund an amount of cash if the closing level of the index upon which the put is based is less than the exercise price of the put, which amount of cash is determined by the multiplier, as described above for calls. When the Fund writes a put on an index, it receives a premium and the purchaser of the put has the right, prior to the expiration date, to require the Fund to deliver to it an amount of cash equal to the difference between the closing level of the index and exercise price times the multiplier if the closing level is less than the exercise price.

Risks of Options on Indices. The risks of investment in options on indices may be greater than options on securities. Because index options are settled in cash, when the Fund writes a call on an index it cannot provide in advance for its potential settlement obligations by acquiring and holding the underlying securities. The Fund can offset some of the risk of writing a call index option by holding a diversified portfolio of securities similar to those on which the underlying index is based. However, the Fund cannot, as a practical matter, acquire and hold a portfolio containing exactly the same securities as underlie the index and, as a result, bears a risk that the value of the securities held will vary from the value of the index.

Even if the Fund could assemble a portfolio that exactly reproduced the composition of the underlying index, it still would not be fully covered from a risk standpoint because of the “timing risk” inherent in writing index options. When an index option is exercised, the amount of cash that the holder is entitled to receive is determined by the difference between the exercise price and the closing index level on the date when the option is exercised. As with other kinds of options, the Fund as the call writer will not learn that the Fund has been assigned until the next business day at the earliest. The time lag between exercise and notice of assignment poses no risk for the writer of a covered call on a specific underlying security, such as common stock, because there the writer’s obligation is to deliver the underlying security, not to pay its value as of a fixed time in the past. So long as the writer already owns the underlying security, it can satisfy its settlement obligations by simply delivering it, and the risk that its value may have declined since the exercise date is borne by the exercising holder. In contrast, even if the writer of an index call holds securities that exactly match the composition of the underlying index, it will not be able to satisfy its assignment obligations by delivering those securities against payment of the exercise price. Instead, it will be required to pay cash in an amount based on the closing index value on the exercise date. By the time it learns that it has been assigned, the index may have declined, with a corresponding decline in the value of its portfolio. This “timing risk” is an inherent limitation on the ability of index call writers to cover their risk exposure by holding securities positions.

If the Fund has purchased an index option and exercises it before the closing index value for that day is available, it runs the risk that the level of the underlying index may subsequently change. If such a change causes the exercised option to fall out-of-the-money, the Fund will be required to pay the difference between the closing index value and the exercise price of the option (times the applicable multiplier) to the assigned writer.

OTC Options. Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size, and strike price, the terms of OTC options (options not traded on exchanges) generally are established through negotiation with the other party to the option contract. While this type of arrangement allows the Fund great flexibility to tailor the option to its needs, OTC options generally involve greater risk than exchange-traded options, which are guaranteed by the clearing organization of the exchanges where they are traded. In addition, OTC options are considered illiquid by the SEC.

Generally, OTC non-U.S. currency options used by the Fund are European-style options. This means that the option is only exercisable immediately prior to its expiration. This is in contrast to American-style options, which are exercisable at any time prior to the expiration date of the option.

Futures Contracts and Options on Futures Contracts. A financial futures contract sale creates an obligation by the seller to deliver the type of Financial Instrument called for in the contract in a specified delivery month for a stated price. A financial futures contract purchase creates an obligation by the purchaser to take delivery of the type of Financial Instrument called for in the contract in a specified delivery month at a stated price. The Fund may invest in single security futures contracts to the extent permitted by applicable law. Options on futures give

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the purchaser the right to assume a position in a futures contract at the specified option exercise price at any time during the period of the option. The purchase of futures or call options on futures can serve as a long hedge, and the sale of futures or the purchase of put options on futures can serve as a short hedge. Writing call options on futures contracts can serve as a limited short hedge, using a strategy similar to that used for writing call options on securities or indices. Similarly, writing put options on futures contracts can serve as a limited long hedge. Futures contracts and options on futures contracts can also be purchased and sold to attempt to enhance income or yield. To the extent permitted by applicable law and the Fund’s investment policies, the Fund may also write call and put options on futures contracts that are not covered.

In addition, futures strategies can be used to manage the average duration of the Fund’s fixed-income portfolio. If the subadviser wishes to shorten the average duration of the Fund’s fixed-income portfolio, the Fund may sell a debt futures contract or a call option thereon, or purchase a put option on that futures contract. If the subadviser wishes to lengthen the average duration of the Fund’s fixed-income portfolio, the Fund may buy a debt futures contract or a call option thereon, or sell a put option thereon.

Futures contracts may also be used for non-hedging purposes, such as to simulate full investment in underlying securities while retaining a cash balance for portfolio management purposes, as a substitute for direct investment in a security, to facilitate trading, to reduce transaction costs, or to seek higher investment returns when a futures contract or option is priced more attractively than the underlying security or index.

No price is paid upon entering into a futures contract. Instead, at the inception of a futures contract the Fund is required to deposit “initial margin.” Margin must also be deposited when writing a call or put option on a futures contract, in accordance with applicable exchange rules. Unlike margin in securities transactions, initial margin on futures contracts does not represent a borrowing, but rather is in the nature of a performance bond or good-faith deposit that is returned to the Fund at the termination of the transaction if all contractual obligations have been satisfied. Under certain circumstances, such as periods of high volatility, the Fund may be required by an exchange to increase the level of its initial margin payment, and initial margin requirements might be increased generally in the future by regulatory action.

Subsequent “variation margin” payments are made to and from the futures broker daily as the value of the futures position varies, a process known as “marking-to-market.” Variation margin does not involve borrowing, but rather represents a daily settlement of the Fund’s obligations to or from a futures broker. When the Fund purchases an option on a futures contract, the premium paid plus transaction costs is all that is at risk. However, there may be circumstances when the purchase of an option on a futures contract would result in a loss to the Fund when the use of a futures contract would not, such as when there is no movement in the value of the securities or currencies being hedged. In contrast, when the Fund purchases or sells a futures contract or writes a call or put option thereon, it is subject to daily variation margin calls that could be substantial in the event of adverse price movements. If the Fund has insufficient cash to meet daily variation margin requirements, it might need to sell securities at a time when such sales are disadvantageous.

Although some futures and options on futures call for making or taking delivery of the underlying securities or currencies, generally those contracts are closed out prior to delivery by offsetting purchases or sales of matching futures or options (involving the same currency or underlying security and delivery month). If an offsetting purchase price is less than the original sale price, the Fund realizes a gain, or if it is more, the Fund realizes a loss. If an offsetting sale price is more than the original purchase price, the Fund realizes a gain, or if it is less, the Fund realizes a loss. The Fund will also bear transaction costs for each contract, which will be included in these calculations. Positions in futures and options on futures may be closed only on an exchange or board of trade that provides a secondary market. However, there can be no assurance that a liquid secondary market will exist for a particular contract at a particular time. In such event, it may not be possible to close a futures contract or options position.

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Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract or an option on a futures contract can vary from the previous day’s settlement price; once that limit is reached, no trades may be made that day at a price beyond the limit. Daily price limits do not limit potential losses because prices could move to the daily limit for several consecutive days with little or no trading, thereby preventing liquidation of unfavorable positions.

If the Fund were unable to liquidate a futures contract or an option on a futures position due to the absence of a liquid secondary market, the imposition of price limits or otherwise, it could incur substantial losses. The Fund would continue to be subject to market risk with respect to the position. In addition, except in the case of purchased options, the Fund would continue to be required to make daily variation margin payments and might be required to maintain the position being hedged by the future or option or to maintain cash or securities in a segregated account.

The Fund is operated by a person who has claimed an exclusion from the definition of the term “commodity pool operator” under the Commodity Exchange Act (the “CEA”), and, therefore, such person is not subject to registration or regulation as a pool operator under the CEA.

Risks of Futures Contracts and Options Thereon. The ordinary spreads between prices in the cash and futures markets (including the options on futures market), due to differences in the natures of those markets, are subject to the following factors, which may create distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions, which could distort the normal relationship between the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing distortion. Third, from the point of view of speculators, the deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions. Due to the possibility of distortion, a correct forecast of general interest rate, currency exchange rate or stock market trends by the subadviser may still not result in a successful transaction. Of course, the subadviser may be incorrect in its expectations as to the extent of various interest rate, currency exchange rate or stock market movements or the time span within which the movements take place.

Index Futures. The risk of imperfect correlation between movements in the price of index futures and movements in the price of the securities that are the subject of the hedge increases as the composition of the Fund’s portfolio diverges from the securities included in the applicable index. The price of the index futures may move more than or less than the price of the securities being hedged. If the price of the index futures moves less than the price of the securities that are the subject of the hedge, the hedge will not be fully effective, but if the price of the securities being hedged has moved in an unfavorable direction, the Fund would be in a better position than if it had not hedged at all. If the price of the securities being hedged has moved in a favorable direction, this advantage will be partially offset by the futures contract. If the price of the futures contract moves more than the price of the securities, the Fund will experience either a loss or a gain on the futures contract that will not be completely offset by movements in the price of the securities that are the subject of the hedge. To compensate for the imperfect correlation of movements in the price of the securities being hedged and movements in the price of the index futures, the Fund may buy or sell index futures in a greater dollar amount than the dollar amount of the securities being hedged if the historical volatility of the prices of such securities being hedged is more than the historical volatility of the prices of the securities included in the index. It is also possible that, where the Fund has sold index futures contracts to hedge against decline in the market, the market may advance and the value of the securities held in the Fund may decline. If this occurred, the Fund would lose money on the futures contract and also experience a decline in value of its portfolio securities. However, while this could occur for a very brief period or to a very small degree, over time the value of a diversified portfolio of securities will tend to move in the same direction as the market indices on which the futures contracts are based.

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Where index futures are purchased to hedge against a possible increase in the price of securities before the Fund is able to invest in them in an orderly fashion, it is possible that the market may decline instead. If the Fund then concludes not to invest in them at that time because of concern as to possible further market decline or for other reasons, it will realize a loss on the futures contract that is not offset by a reduction in the price of the securities it had anticipated purchasing.

To the extent such instruments are permitted by applicable law and the Fund’s investment policies, the Fund may invest in security futures. Such investments are expected to be subject to risks similar to those of index future investing.

Non-U.S. Currency Hedging Strategies—Special Considerations. The Fund may invest in securities that are denominated in non-U.S. currencies and may engage in a variety of non-U.S. currency exchange transactions to protect against uncertainty in the level of future exchange rates or to earn additional income. The Fund may use options and futures contracts, swaps and indexed notes relating to non-U.S. currencies as described above and forward currency contracts, as described below, to attempt to hedge against movements in the values of the non-U.S. currencies in which the Fund’s securities are denominated or to attempt to enhance income or yield. Currency hedges can protect against price movements in a security that the Fund owns or intends to acquire that are attributable to changes in the value of the currency in which it is denominated. Such hedges do not, however, protect against price movements in the securities that are attributable to other causes.

The Fund might seek to hedge against changes in the value of a particular currency when no Financial Instruments on that currency are available or such Financial Instruments are more expensive than certain other Financial Instruments. In such cases, the Fund may seek to hedge against price movements in that currency by entering into transactions using Financial Instruments on another currency or a basket of currencies, the value of which the Fund’s subadviser believes will have a high degree of correlation to the value of the currency being hedged. The risk that movements in the price of the Financial Instrument will not correlate perfectly with movements in the price of the currency subject to the hedging transaction is magnified when this strategy is used.

The value of Financial Instruments on non-U.S. currencies depends on the value of the underlying currency relative to the U.S. dollar. Because non-U.S. currency transactions occurring in the interbank market might involve substantially larger amounts than those involved in the use of such Financial Instruments, the Fund could be disadvantaged by having to deal in the odd lot market (generally consisting of transactions of less than $1 million) for the underlying non-U.S. currencies at prices that are less favorable than for round lots.

There is no systematic reporting of last sale information for non-U.S. currencies or any regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis. Quotation information generally is representative of very large transactions in the interbank market and thus might not reflect odd-lot transactions where rates might be less favorable. The interbank market in non-U.S. currencies is a global, round-the-clock market. To the extent the U.S. options or futures markets are closed while the markets for the underlying currencies remain open, significant price and rate movements might take place in the underlying markets that cannot be reflected in the markets for the Financial Instruments until they reopen.

Settlement of hedging transactions involving non-U.S. currencies might be required to take place within the country issuing the underlying currency. Thus, the Fund might be required to accept or make delivery of the underlying non-U.S. currency in accordance with any U.S. or non-U.S. regulations regarding the maintenance of non-U.S. banking arrangements by U.S. residents and might be required to pay any fees, taxes and charges associated with such delivery assessed in the issuing country.

Options on non-U.S. currencies also have the risks of options on securities. See “Risks of Options on Securities” above.

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Forward Currency Contracts. The Fund may enter into forward currency contracts to purchase or sell non-U.S. currencies for a fixed amount of U.S. dollars or another non-U.S. currency. A forward currency contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days (term) from the date of the forward currency contract agreed upon by the parties, at a price set at the time of the forward currency contract. These forward currency contracts are traded directly between currency traders (usually large commercial banks) and their customers. Forward currency contracts may be used to attempt to hedge currency exposure or to enhance return or yield.

Such transactions may serve as long hedges; for example, the Fund may purchase a forward currency contract to lock in the U.S. dollar price of a security denominated in a non-U.S. currency that the Fund intends to acquire. Forward currency contract transactions may also serve as short hedges; for example, the Fund may sell a forward currency contract to lock in the U.S. dollar equivalent of the proceeds from the anticipated sale of a security, dividend or interest payment denominated in a non-U.S. currency.

The Fund may also use forward currency contracts to hedge against a decline in the value of existing investments denominated in non-U.S. currency. For example, if the Fund owned securities denominated in euros, it could enter into a forward currency contract to sell euros in return for U.S. dollars to hedge against possible declines in the euro’s value. Such a hedge, sometimes referred to as a “position hedge,” would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. The Fund could also hedge the position by selling another currency expected to perform similarly to the Euro. This type of hedge, sometimes referred to as a “proxy hedge,” could offer advantages in terms of cost, yield or efficiency, but generally would not hedge currency exposure as effectively as a simple hedge into U.S. dollars. Proxy hedges may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated.

The cost to the Fund of engaging in forward currency contracts varies with factors such as the currency involved, the length of the contract period and the market conditions then prevailing. Because forward currency contracts are usually entered into on a principal basis, no fees or commissions are involved. When the Fund enters into a forward currency contract, it relies on the counterparty to make or take delivery of the underlying currency at the maturity of the contract. Failure by the counterparty to do so would result in the loss of any expected benefit of the transaction.

As is the case with futures contracts, parties to forward currency contracts can enter into offsetting closing transactions, similar to closing transactions on futures contracts, by selling or purchasing, respectively, an instrument identical to the instrument purchased or sold. Secondary markets generally do not exist for forward currency contracts, with the result that closing transactions generally can be made for forward currency contracts only by negotiating directly with the counterparty. Thus, there can be no assurance that the Fund will in fact be able to close out a forward currency contract at a favorable price prior to maturity. In addition, in the event of insolvency of the counterparty, the Fund might be unable to close out a forward currency contract at any time prior to maturity, if at all. In either event, the Fund would continue to be subject to market risk with respect to the position, and would continue to be required to maintain the required cover.

The precise matching of forward currency contract amounts and the value of the securities involved generally will not be possible because the value of such securities, measured in the non-U.S. currency, will change after the forward currency contract has been established. Thus, the Fund might need to purchase or sell non-U.S. currencies in the spot (cash) market to the extent such non-U.S. currencies are not covered by forward currency contracts. The projection of short-term currency market movements is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. In addition, although forward currency contracts limit the risk of loss due to a decline in the value of the hedged currencies, at the same time they limit any potential gain that might result should the value of the currencies increase.

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Successful use of forward currency contracts depends on the subadviser’s skill in analyzing and predicting currency values. Forward currency contracts may substantially change the Fund’s exposure to changes in currency exchange rates and could result in losses to the Fund if currencies do not perform as the Fund’s subadviser anticipates. There is no assurance that the subadviser’s use of forward currency contracts will be advantageous to the Fund or that the subadviser will hedge at an appropriate time.

Combined Positions. The Fund may purchase and write options in combination with each other, or in combination with other Financial Instruments, to adjust the risk and return characteristics of its overall position. For example, the Fund may purchase a put option and write a call option on the same underlying instrument, in order to construct a combined position whose risk and return characteristics are similar to selling a futures contract. Another possible combined position would involve writing a call option at one strike price and buying a call option at a lower price, in order to reduce the risk of the written call option in the event of a substantial price increase. Because combined options positions involve multiple trades, they result in higher transaction costs and may be more difficult to open and close out.

Turnover. The Fund’s options and futures activities may affect its turnover rate and brokerage commission payments. The exercise of calls or puts written by the Fund, and the sale or purchase of futures contracts, may cause it to sell or purchase related investments, thus increasing its turnover rate. Once the Fund has received an exercise notice on an option it has written, it cannot effect a closing transaction in order to terminate its obligation under the option and must deliver or receive the underlying securities at the exercise price. The exercise of puts purchased by the Fund may also cause the sale of related investments, also increasing turnover; although such exercise is within the Fund’s control, holding a protective put might cause it to sell the related investments for reasons that would not exist in the absence of the put. The Fund will pay a brokerage commission each time it buys or sells a put or call or purchases or sells a futures contract. Such commissions may be higher than those that would apply to direct purchases or sales.

Swaps, Caps, Floors and Collars. The Fund may enter into swaps, caps, floors and collars to preserve a return or a spread on a particular investment or portion of its portfolio, to protect against any increase in the price of securities the Fund anticipates purchasing at a later date or to attempt to enhance yield. A swap involves the exchange by the Fund with another party of their respective commitments to pay or receive cash flows, e.g., an exchange of floating rate payments for fixed-rate payments. The purchase of a cap entitles the purchaser, to the extent that a specified index exceeds a predetermined value, to receive payments on a notional principal amount from the party selling the cap. The purchase of a floor entitles the purchaser, to the extent that a specified index falls below a predetermined value, to receive payments on a notional principal amount from the party selling the floor. A collar combines elements of a cap and a floor.

Swap agreements, including caps, floors and collars, can be individually negotiated and structured to include exposure to a variety of different types of investments or market factors. Depending on their structure, swap agreements may increase or decrease the overall volatility of the Fund’s investments and its share price and yield because, and to the extent, these agreements affect the Fund’s exposure to long- or short-term interest rates, non-U.S. currency values, mortgage-backed security values, corporate borrowing rates or other factors such as security prices or inflation rates.

Swap agreements will tend to shift the Fund’s investment exposure from one type of investment to another. Caps and floors have an effect similar to buying or writing options.

If a counterparty’s creditworthiness declines, the value of the agreement would be likely to decline, potentially resulting in losses. If a default occurs by the other party to such transaction, the Fund will have contractual remedies pursuant to the agreements related to the transaction, which may be limited by applicable law in the case of a counterparty’s insolvency.

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The Fund may enter into credit default swap contracts for investment purposes. As the seller in a credit default swap contract, the Fund would be required to pay the par (or other agreed-upon) value of a referenced debt obligation to the counterparty in the event of a default by a third party, such as a U.S. or non-U.S. corporate issuer, on the debt obligation. In return, the Fund would receive from the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no default occurs, the Fund would keep the stream of payments and would have no payment obligations. As the seller, the Fund would be subject to investment exposure on the notional amount of the swap which may be significantly larger than the Fund’s cost to enter into the credit default swap.

The Fund may also purchase credit default swap contracts in order to hedge against the risk of default of debt securities held in its portfolio, in which case the Fund would function as the counterparty referenced in the preceding paragraph. This would involve the risk that the investment may expire worthless and would only generate income in the event of an actual default by the issuer of the underlying obligation (or, as applicable, a credit downgrade or other indication of financial instability). It would also involve credit risk—that the seller may fail to satisfy its payment obligations to the Fund in the event of a default.

The net amount of the excess, if any, of the Fund’s obligations over its entitlements with respect to each swap will be accrued on a daily basis, depending on whether a threshold amount (if any) is exceeded, and an amount of cash or liquid assets having an aggregate net asset value approximately equal to the accrued excess will be maintained as collateral. The Fund will also maintain collateral with respect to its total obligations under any swaps that are not entered into on a net basis, and will maintain collateral as required by SEC guidelines from time to time with respect to caps and floors written by the Fund

Flexibility. Generally, the foregoing is not intended to limit the Fund’s investment flexibility, unless such a limitation is expressly stated, and therefore will be construed by the Fund as broadly as possible. Statements concerning what the Fund may do are not intended to limit other any activity. The Fund maintain the flexibility to use Financial Instruments for any purpose consistent with applicable law and any express limitations in the SAI or the Prospectus.

Other Practices (Both Funds)

Securities of Foreign Issuers. Investments in securities of foreign entities and securities denominated in foreign currencies involve risks not typically involved in domestic investments, including fluctuations in foreign exchange rates, future foreign political and economic developments, and the possible imposition of exchange controls or other foreign or United States governmental laws or restrictions applicable to such investments. Since each Fund may invest in securities denominated or quoted in currencies other than the U.S. dollar, changes in foreign currency exchange rates may affect the value of investments in the portfolio and the accrued income and unrealized appreciation or depreciation of investments. Changes in foreign currency rates relative to the U.S. dollar will affect the U.S. dollar value of the Fund’s assets denominated in that currency and the Fund’s yield on such assets.

Each Fund may also purchase foreign securities in the form of American Depositary Receipts (“ADRs”). ADRs are publicly traded on exchanges or over-the-counter in the United States and are issued through “sponsored” or “unsponsored” arrangements. In a sponsored ADR arrangement, the foreign issuer assumes the obligation to pay some or all of the depositary’s transaction fees, whereas under an unsponsored arrangement, the foreign issuer assumes no obligation and the depositary’s transaction fees are paid by the ADR holders. In addition, less information is available in the United States about an unsponsored ADR than about a sponsored ADR, and the financial information about a company may not be as reliable for an unsponsored ADR as it is for a sponsored ADR. Each Fund may invest in ADRs through both sponsored and unsponsored arrangements.

Investment Grade Bond Fund also may purchase foreign securities in the form of Yankee obligations. Yankee obligations are dollar denominated obligations (bonds) issued in the U.S. capital markets by foreign

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issuers. Yankee obligations are subject to certain sovereign risks, such as the risk that a foreign government might prevent dollar denominated funds from flowing across its border. As compared with obligations issued in the United States, Yankee obligations normally carry a higher interest rate but are less actively traded.

With respect to certain foreign countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could affect investment in those countries. There may be less publicly available information about a foreign security than about a United States security, and foreign entities may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those of United States entities. In addition, certain foreign investments made by the Fund may be subject to foreign withholding taxes, which would reduce the Fund’s total return on such investments and the amounts available for distributions by the Fund to its shareholders. Foreign financial markets, while growing in volume, have, for the most part, substantially less volume than United States markets, and securities of many foreign companies are less liquid and their prices more volatile than securities of comparable domestic companies.

The foreign markets also have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions making it difficult to conduct such transactions. Delays in settlement could result in temporary periods when assets of a Fund are not invested and no return is earned thereon. The inability of each Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of portfolio securities due to settlement problems could result either in losses to the Fund due to subsequent declines in value of the portfolio security or, if the Fund has entered into a contract to sell the security, could result in possible liability to the purchaser. Costs associated with transactions in foreign securities, including custodial costs and foreign brokerage commissions, are generally higher than with transactions in United States securities. In addition, each Fund will incur cost in connection with conversions between various currencies. There is generally less government supervision and regulation of exchanges, financial institutions and issuers in foreign countries than there are in the United States. These risks may be intensified in the case of investments in developing or emerging markets. Finally, in the event of a default on any such foreign debt obligations, it may be more difficult for a Fund to obtain or to enforce a judgment against the issuers of such securities.

A developing country generally is considered to be a country that is in the initial stages of its industrialization cycle. Investing in the equity and fixed-income markets of developing countries involves exposure to economic structures that are generally less diverse and mature, and to political systems that can be expected to have less stability, than those of developed countries. Historical experience indicates that the markets of developing countries have been more volatile than the markets of the more mature economies of developed countries; however, such markets often have provided higher rates of return to investors.

Forward Commitments. The Funds may purchase or sell securities on a “when-issued” or “delayed delivery” basis (“Forward Commitments” or “Firm Commitment Agreements”). These transactions occur when securities are purchased or sold by a Fund with payment and delivery taking place in the future, frequently a month or more after such transactions. The price is fixed on the date of the commitment, and the seller continues to accrue interest on the securities covered by the Forward Commitment until delivery and payment take place. At the time of settlement, the market value of the securities may be more or less than the purchase or sale price.

Each Fund maintains in a segregated account (which is marked to market daily) with the Fund’s custodian either the security covered by the Forward Commitment or appropriate securities as required by the 1940 Act (which may have maturities which are longer than the term of the Forward Commitment) in an aggregate amount equal to the amount of its commitment as long as the obligation to sell continues. By entering into a Forward Commitment sale transaction, the Fund forgoes or reduces the potential for both gain and loss in the security which is being hedged by the Forward Commitment sale.

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A Fund may either settle a Forward Commitment by taking delivery of the securities or may either resell or repurchase a Forward Commitment on or before the settlement date, in which event the Fund may reinvest the proceeds in another Forward Commitment. A Fund’s use of Forward Commitments may increase its overall investment exposure and thus its potential for gain or loss. When engaging in Forward Commitments, the Fund relies on the other party to complete the transaction; should the other party fail to do so, the Fund might lose a purchase or sale opportunity that could be more advantageous than alternative opportunities at the time of the failure.

Repurchase Agreements. Each Fund may enter into repurchase agreements with broker/dealers or domestic banks. The Trustees will review on a continuing basis those institutions which enter into a repurchase agreement with the Funds. A repurchase agreement is a short-term investment in which the purchaser (i.e., a Fund) acquires ownership of a debt security and the seller agrees to repurchase the obligation at a future time and set price, usually not more than seven days from the date of purchase, thereby determining the yield during the purchaser’s holding period. Repurchase agreements are collateralized by the underlying debt securities and may be considered to be loans under the 1940 Act. The Funds will make payment for such securities only upon physical delivery or evidence of book entry transfer to the account of a custodian or bank acting as agent. The seller under a repurchase agreement is required to maintain the value of the underlying securities marked to market daily at not less than the repurchase price. The underlying securities (normally securities of the U.S. Government, or its agencies and instrumentalities), may have maturity dates exceeding one year. The Fund does not bear the risk of a decline in value of the underlying security unless the seller defaults under its repurchase obligation. In the event of a bankruptcy or other default of a seller of a repurchase agreement, the Fund could experience both delays in liquidating the underlying securities and loss including: (a) possible decline in the value of the underlying security while the Fund seeks to enforce its rights thereto, (b) possible lack of access to income on the underlying security during this period, and (c) expenses of enforcing its rights.

For the purpose of investing in repurchase agreements, the subadviser may aggregate the cash that certain Funds advised or subadvised by the manager or its affiliates would otherwise invest separately into a joint account. The cash in the joint account is then invested in repurchase agreements and the Funds that contributed to the joint account share pro rata in the net revenue generated. The subadviser believes that the joint account produces efficiencies and economies of scale that may contribute to reduced transaction costs, higher returns, higher quality investments and greater diversity of investments for a Fund than would be available to a Fund investing separately. The manner in which the joint account is managed is subject to conditions set forth in an SEC exemptive order authorizing this practice, which conditions are designed to ensure the fair administration of the joint account and to protect the amounts in that account.

Pursuant to an exemptive order issued by the SEC, each Fund, along with other affiliated entities managed by the manager, may transfer uninvested cash balances into one or more joint repurchase accounts. These balances are invested in one or more repurchase agreements, secured by U.S. government securities. Securities that are collateral for repurchase agreements are financial assets subject to the Fund’s entitlement orders through its securities account at its custodian bank until the agreements mature. Each joint repurchase agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal; however, in the event of default by the other party to the agreement, retention or sale of the collateral may be subject to legal proceedings.

Reverse Repurchase Agreements. Each Fund may enter into reverse repurchase agreements with broker/dealers and other financial institutions. Such agreements involve the sale of portfolio securities with an agreement to repurchase the securities at an agreed-upon price, date and interest payments and are considered to be borrowings by the Fund and are subject to the borrowing limitations set forth under “Investment Restrictions.” The securities purchased with the funds obtained from the agreement and securities collateralizing the agreement will have maturity dates no later than the repayment date. Generally, the effect of such a transaction is that a Fund can recover all or most of the cash invested in the portfolio securities involved during the term of the reverse repurchase agreement, while in many cases it will be able to keep some of the interest income associated with those securities. Such transactions are only advantageous if the Fund has an opportunity to earn a greater rate of interest on the cash derived from the transaction than the interest cost of obtaining that cash.

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Opportunities to realize earnings from the use of the proceeds equal to or greater than the interest required to be paid may not always be available, and the Fund intends to use the reverse repurchase technique only when the subadviser believes it will be advantageous to the Fund. The use of reverse repurchase agreements may exaggerate any interim increase or decrease in the value of the Fund’s assets. The Fund’s custodian bank will maintain a separate account for the Fund with securities having a value equal to or greater than such commitments.

Short Sales Against the Box. Each Fund may from time to time make short sales of securities it owns or has the right to acquire through conversion or exchange of other securities it owns. A short sale is “against the box” to the extent that the Fund contemporaneously owns or has the right to obtain at no added cost securities identical to those sold short. In a short sale, a Fund does not immediately deliver the securities sold and does not receive the proceeds from the sale. The Fund is said to have a short position in the securities sold until it delivers the securities sold, at which time it receives the proceeds of the sale. Each Fund may not make short sales or maintain a short position if to do so would cause more than 25% of its total assets, taken at market value, to be held as collateral for such sales.

To secure its obligation to deliver the securities sold short, a Fund will deposit in escrow in a separate account with its custodian an equal amount of the securities sold short or securities convertible into or exchangeable for such securities. The Fund may close out a short position by purchasing and delivering an equal amount of the securities sold short, rather than by delivering securities already held by the Fund, because the Fund may want to continue to receive interest and dividend payments on securities in its portfolio that are convertible into the securities sold short.

Borrowing. The funds may borrow in certain circumstances. As discussed under “Investment Policies,” below, the 1940 Act permits a fund to borrow money in amounts of up to one-third of the fund’s total assets from banks for any purpose, and to borrow up to 5% of the fund’s total assets from banks or other lenders for temporary purposes. To limit the risks attendant to borrowing, the 1940 Act requires a fund to maintain at all times an “asset coverage” of at least 300% of the amount of its borrowings.

The SEC takes the position that transactions that have a leveraging effect on the capital structure of a fund or are economically equivalent to borrowing, including, among others, engaging in mortgage dollar rolls, can be viewed as constituting a form of borrowing and therefore senior securities of the fund for purposes of the 1940 Act. Such a transaction will not be considered to constitute the issuance of a “senior security” by a fund and will not be subject to the 300% asset coverage requirement described above, if the fund establishes a segregated account with its custodian bank in which it maintains cash, U.S. government securities or other liquid assets equal in value to its obligations in respect of the transaction, or uses other methods permitted under the 1940 Act, the rules and regulations thereunder, or orders issued by the SEC thereunder, to “cover” the transaction.

Borrowing and other transactions used for leverage may cause the value of a fund’s shares to be more volatile than if the fund did not borrow or engage in such transactions. This is because leverage tends to magnify the effect of any increase or decrease in the value of the fund’s portfolio holdings. Leverage thus creates an opportunity for greater gains, but also greater losses. To repay such obligations, the fund may have to sell securities at a time and at a price that is unfavorable to the fund. There also are costs associated with engaging in leverage, and these costs would offset and could eliminate a fund’s net investment income in any given period.

Leverage (Government Securities Fund). The Fund may borrow from banks, on a secured or unsecured basis, up to 25% of the value of its assets. If the Fund borrows and uses the proceeds to make additional investments, income and appreciation from such investments will improve its performance if they exceed the associated borrowing costs but impair its performance if they are less than such borrowing costs. To the extent

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the income or other gain derived from securities purchased with borrowed funds exceed the interest or dividends the Fund will have to pay in respect thereof, the Fund’s net income or other gain will be greater than if leverage had not been used. Conversely, if the income or other gain from the incremental assets is not sufficient to cover the cost of leverage, the net income or other gain of the Fund will be less than if leverage had not been used. If the amount of income from the incremental securities is insufficient to cover the cost of borrowing, securities might have to be liquidated to obtain required funds. Depending on market or other conditions, such liquidations could be disadvantageous to the Fund.

The Fund is required to maintain continuous asset coverage of 300% with respect to such borrowings, and to sell (within three days) sufficient portfolio holdings to restore such coverage, if it should decline to less than 300% due to market fluctuations or otherwise, even if disadvantageous from an investment standpoint. Leveraging will exaggerate the effect of any increase or decrease in the value of portfolio securities on the Fund’s net asset value, and money borrowed will be subject to interest costs (which may include commitment fees and/or the cost of maintaining minimum average balances) which may or may not exceed the interest and option premiums received from the securities purchased with borrowed funds.

Lending Portfolio Securities. Consistent with applicable regulatory requirements, each Fund has the ability to lend securities from its portfolio to brokers, dealers and other financial organizations. A Fund will not lend its portfolio securities to Legg Mason or its affiliates unless it has applied for and received specific authority to do so from the SEC. Loans of portfolio securities will be collateralized by cash, letters of credit or U.S. Government securities in an amount at least equal to the current market value of the loaned securities.

In lending its securities, a Fund can increase its income by continuing to receive interest on the loaned securities as well as by either investing the cash collateral in short-term instruments or obtaining yield in the form of interest paid by the borrower when U.S. government securities are used as collateral. Requirements of the SEC, which may be subject to further modifications, currently provide that the following conditions must be met whenever a Fund’s portfolio securities are loaned: (a) the Fund must receive at least 100% cash collateral or equivalent securities from the borrower; (b) the borrower must increase such collateral whenever the market value of the securities loaned rises above the level of such collateral; (c) the Fund must be able to terminate the loan at any time; (d) the Fund must receive reasonable interest on the loan, as well as an amount equal to dividends, interest or other distributions on the loaned securities, and any increase in market value; (e) the Fund may pay only reasonable custodian fees in connection with the loan; and (f) voting rights on the loaned securities may pass to the borrower; provided, however, that if a material event adversely affecting the investment in the loaned securities occurs, the Fund must terminate the loan and regain the right to vote the securities. The risks in lending portfolio securities, as with other extensions of secured credit, consist of possible delay in receiving additional collateral or in the recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. Loans will be made to firms deemed by the subadviser to be of good standing and will not be made unless, in the judgment of the subadviser, the consideration to be earned from such loans would justify the risk. From time to time, a Fund may return to the borrower and/or a third party, which is unaffiliated with the Fund, Legg Mason, of which the manager is a wholly-owned subsidiary, or CGMI, one of the Fund’s distributors, and which is acting as a “finder,” a part of the interest earned from the investment of collateral received for securities loaned. Payments received by a Fund in lieu of any dividends paid on the loaned securities will not be treated as “qualified dividend income” for purposes of determining what portion of the Fund’s dividends received by individuals may be taxed at the rates generally applicable to long-term capital gains (see “Taxes” below).

Credit Quality. In the event that a security is rated by different agencies and receives different ratings from these agencies, the Fund will treat the security as being rated in the highest rating category received from an agency. Credit rating criteria is applied at the time the Fund purchases a security and the fund may choose not to sell securities that are downgraded below investment grade after their purchases. The Fund’s credit standards also apply to counterparties to over-the-counter derivatives contracts. The subadviser in its reasonable judgment will determine what rating to assign to unrated securities.

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Temporary Investments. Each Fund may depart from its principal investment strategies in response to adverse market, economic or political conditions by taking temporary defensive positions in any type of money market instruments and short-term debt securities or cash without regard to any percentage limitations. If the Fund takes a temporary defensive position, it may be unable to achieve its investment objectives.

Other Investments. In addition to the foregoing, the Fund may investment in instruments that exist or that may develop in the future if the manager or the subadviser, as applicable, believe such instruments to be commensurate with appropriate risk assumption and pursuit of the Fund’s investment objectives.

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ADDITIONAL RISK FACTORS

General. Investors should realize that risk of loss is inherent in the ownership of any securities and that each Fund’s net asset value will fluctuate, reflecting fluctuations in the market value of its portfolio positions.

Fixed-Income Securities. Investments in fixed-income securities may subject the Funds to risks, including the following.

When interest rates decline, the market value of fixed-income securities tends to increase. Conversely, when interest rates increase, the market value of fixed-income securities tends to decline. The volatility of a security’s market value will differ depending upon the security’s duration, the issuer and the type of instrument.

Investments in fixed-income securities are subject to the risk that the issuer of the security could default on its obligations, causing a Fund to sustain losses on such investments. A default could impact both interest and principal payments.

Fixed-income securities may be subject to both call risk and extension risk. Call risk exists when the issuer may exercise its right to pay principal on an obligation earlier than scheduled, which would cause cash flows to be returned earlier than expected. This typically results when interest rates have declined, and a Fund will suffer from having to reinvest in lower yielding securities. Extension risk exists when the issuer may exercise its right to pay principal on an obligation later than scheduled, which would cause cash flows to be returned later than expected. This typically results when interest rates have increased, and a Fund will suffer from the inability to invest in higher yielding securities.

If the credit rating on a security is downgraded or the credit quality deteriorates after purchase by a Fund, or if the maturity of a security is extended after purchase by a Fund, the Fund’s portfolio managers will decide whether the security should be held or sold. Certain securities may provide, upon the occurrence of certain triggering events or defaults, for the investors to become the holders of the underlying assets. In that case the Fund may become the holder of securities that it could not otherwise purchase, based on its investment strategies or its investment restrictions and limitations, at a time when such securities may be difficult to dispose of because of adverse market conditions.

Lower Rated and Below Investment Grade Fixed-Income Securities. Securities which are rated BBB by the Standard & Poor’s Division of The McGraw-Hill Companies, Inc. (“S&P”) or Baa by Moody’s Investors Service, Inc. (“Moody’s”) are generally regarded as having adequate capacity to pay interest and repay principal, but may have some speculative characteristics. Securities rated below Baa by Moody’s or BBB by S&P have speculative characteristics, including the possibility of default or bankruptcy of the issuers of such securities, market price volatility based upon interest rate sensitivity, questionable creditworthiness and relative liquidity of the secondary trading market. Because high yield bonds have been found to be more sensitive to adverse economic changes or individual corporate developments and less sensitive to interest rate changes than higher-rated investments, an economic downturn could disrupt the market for high yield bonds and adversely affect the value of outstanding bonds and the ability of issuers to repay principal and interest. In addition, in a declining interest rate market, issuers of high yield bonds may exercise redemption or call provisions, which may force a Fund, to the extent it owns such securities, to replace those securities with lower yielding securities. This could result in a decreased return.

Subsequent to its purchase by a Fund, an issue of securities may cease to be rated or its rating may be reduced below the minimum required for purchase by the Fund. In addition, it is possible that Moody’s, S&P and other rating agencies might not timely change their ratings of a particular issue to reflect subsequent events.

Foreign Securities. Investments in securities of foreign issuers involve certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include fluctuations in foreign exchange rates, future political and economic developments, and the possible imposition of exchange controls or other foreign

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governmental laws or restrictions. Changes in foreign currency exchange rates will, to the extent a Fund does not adequately hedge against such fluctuations, affect the value of securities in its portfolio and the unrealized appreciation or depreciation of investments so far as U.S. investors are concerned. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those countries.

There may be less publicly available information about a foreign company than about a U.S. company, and foreign companies may not be subject to accounting, auditing, and financial reporting standards and requirements comparable to or as uniform as those of U.S. companies. Foreign securities markets, while growing in volume, have, for the most part, substantially less volume than U.S. markets, and securities of many foreign companies are less liquid and their prices more volatile than securities of comparable U.S. companies. Transaction costs on foreign securities markets are generally higher than in the U.S. There is generally less government supervision and regulation of exchanges, brokers and issuers than there is in the U.S. A Fund might have greater difficulty taking appropriate legal action in foreign courts. Dividend and interest income from foreign securities will generally be subject to withholding taxes by the country in which the issuer is located and may not be recoverable by the Fund or the investors. Capital gains are also subject to taxation in some foreign countries.

Currency Risks. The U.S. dollar value of securities denominated in a foreign currency will vary with changes in currency exchange rates, which can be volatile. Accordingly, changes in the value of the currency in which a Fund’s investments are denominated relative to the U.S. dollar will affect the Fund’s net asset value. Exchange rates are generally affected by the forces of supply and demand in the international currency markets, the relative merits of investing in different countries and the intervention or failure to intervene of U.S. or foreign governments and central banks. However, currency exchange rates may fluctuate based on factors intrinsic to a country’s economy. Some emerging market countries also may have managed currencies, which are not free floating against the U.S. dollar. In addition, emerging markets are subject to the risk of restrictions upon the free conversion of their currencies into other currencies. Any devaluations relative to the U.S. dollar in the currencies in which a Fund’s securities are quoted would reduce the Fund’s net asset value per share.

Securities of Emerging Market Countries. An emerging market country shall mean any country, which at the time of investment, is represented in the JP Morgan EMBI Global Index or is categorized by the World Bank in its annual categorization as middle- or low-income. The JP Morgan EMBI Global Index country and regional composition currently includes 27 countries, including Argentina, Brazil, Mexico, South Korea, Russia, Venezuela, Philippines, Poland, Malaysia, Panama, Bulgaria, Nigeria, China, Ecuador, Peru, Colombia, Morocco, Greece, Turkey, Hungary, Croatia, Lebanon, South Africa, Algeria, Thailand, Chile and Cote d’Ivoire. The World Bank’s list of countries categorized as low- or middle-income includes a total of 152 counties in its index, including the 27 countries included in the JP Morgan EMBI Global Index. Investing in the equity and fixed-income markets of developing countries involves exposure to economic structures that are generally less diverse and mature, and to political systems that can be expected to have less stability, than those of developed countries. Historical experience indicates that the market of developing countries have been more volatile than the markets of the more mature economies of developed countries; however, such markets often have provided higher rates of return to investors.

One or more of the risks discussed above could affect adversely the economy of a emerging market or a Fund’s investments in such a market. In Eastern Europe, for example, upon the accession to power of Communist regimes in the past, the governments of a number of Eastern European countries expropriated a large amount of property. The claims of many property owners may remain unsettled. There can be no assurance that any investments that a Fund might make in such emerging markets would not be expropriated, nationalized or otherwise confiscated at some time in the future. In such an event, the Fund could lose its entire investment in the market involved. Moreover, changes in the leadership or policies of such markets could halt the expansion or reverse the liberalization of foreign investment policies now occurring in certain of these markets and adversely affect existing investment opportunities.

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Many of a Fund’s investments in the securities of emerging markets may be unrated or rated below investment grade. Securities rated below investment grade (and comparable unrated securities) are the equivalent of high yield, high risk bonds, commonly known as “junk bonds.” Such securities are regarded as predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal in accordance with the terms of the obligations and involve major risk exposure to adverse business, financial, economic, or political conditions.

Derivative Instruments. In accordance with its investment policies, each Fund may invest in certain derivative instruments which are securities or contracts that provide for payments based on or “derived” from the performance of an underlying asset, index or other economic benchmark. Essentially, a derivative instrument is a financial arrangement or a contract between two parties. Transactions in derivative instruments can be, but are not necessarily, riskier than investments in conventional stocks, bonds and money market instruments. A derivative instrument is more accurately viewed as a way of reallocating risk among different parties or substituting one type of risk for another. Every investment by a Fund, including an investment in conventional securities, reflects an implicit prediction about future changes in the value of that investment. Every Fund investment also involves a risk that the portfolio manager’s expectations will be wrong. Transactions in derivative instruments often enable a Fund to take investment positions that more precisely reflect the portfolio manager’s expectations concerning the future performance of the various investments available to the Fund. Derivative instruments can be a legitimate and often cost-effective method of accomplishing the same investment goals as could be achieved through other investment in conventional securities.

Derivative contracts include options, Futures Contracts, forward contracts, forward commitment and when-issued securities transactions, forward foreign currency exchange contracts and interest rate, mortgage and currency swaps.

Each derivative instrument purchased for a Fund’s portfolio is reviewed and analyzed by the Fund’s portfolio managers to assess the risk and reward of such instrument in relation to the Fund’s portfolio investment strategy. The decision to invest in derivative instruments or conventional securities is made by measuring the respective instrument’s ability to provide value to the Fund and its shareholders.

Credit risk: The issuer of the instrument may default on its obligation to pay interest and principal.

Recent market events. The fixed-income markets are experiencing a period of extreme volatility which has negatively impacted market liquidity conditions. Initially, the concerns on the part of market participants were focused on the subprime segment of the mortgage-backed securities market. However, these concerns have since expanded to include a broad range of mortgage-and asset-backed and other fixed income securities, including those rated investment grade, the U.S. and international credit and interbank money markets generally, and a wide range of financial institutions and markets, asset classes and sectors. As a result, fixed income instruments are experiencing liquidity issues, increased price volatility, credit downgrades, and increased likelihood of default. Securities that are less liquid are more difficult to value and may be hard to dispose of. Domestic and international equity markets have also been experiencing heightened volatility and turmoil, with issuers that have exposure to the real estate, mortgage and credit markets particularly affected. During times of market turmoil, investors tend to look to the safety of securities issued or backed by the U.S. Treasury, causing the prices of these securities to rise, and the yield to decline. These events and the continuing market upheavals may have an adverse effect on the Funds.

Other Risks. In the event of a shortage of the underlying securities deliverable on exercise of an option, the Options Clearing Corporation has the authority to permit other, generally comparable, securities to be delivered in fulfillment of option exercise obligations. If the Options Clearing Corporation exercises its discretionary authority to allow such other securities to be delivered, it may also adjust the exercise prices of the affected options by setting different prices at which otherwise ineligible securities may be delivered. As an alternative to permitting such substitute deliveries, the Options Clearing Corporation may impose special exercise settlement procedures.

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The hours of trading for options on U.S. Government securities may not conform to the hours during which the underlying securities are traded. To the extent that the options markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying markets that cannot be reflected in the options markets.

Options are traded on exchanges on only a limited number of U.S. Government securities, and exchange regulations limit the maximum number of options which may be written or purchased by a single investor or a group of investors acting in concert. The Trust and other clients advised by affiliates of CGMI may be deemed to constitute a group for these purposes. In light of these limits, the Board may determine at any time to restrict or terminate the public offering of the Fund’s shares (including through exchanges from the other Funds).

Exchange markets in options on U.S. Government securities are a relatively new and untested concept. It is impossible to predict the amount of trading interest that may exist in such options, and there can be no assurance that viable exchange markets will develop or continue.

DISCLOSURE OF PORTFOLIO HOLDINGS

For funds in the Legg Mason Partners family of funds, each fund’s board of trustees has adopted policies and procedures developed by LMPFA with respect to the disclosure of the funds’ portfolio securities and any ongoing arrangements to make available information about each fund’s portfolio securities. The policy requires that consideration always be given as to whether disclosure of information about any fund’s portfolio holdings is in the best interests of such fund’s shareholders, and that any conflicts of interest between the interests of the fund’s shareholders and those of LMPFA, the funds’ distributors or their affiliates, be addressed in a manner that places the interests of fund shareholders first. The policy provides that information regarding a fund’s portfolio holdings may not be shared with non-Legg Mason employees, with investors or potential investors (whether individual or institutional), or with third parties unless it is done for legitimate fund business purposes and in accordance with the policy.

LMPFA’s policy generally provides for the release of details of securities positions once they are considered “stale.” Data is considered stale 25 calendar days following quarter-end for funds other than money market funds, and 25 calendar days following month-end with respect to money market funds. LMPFA believes that this passage of time prevents a third party from benefiting from an investment decision made by a fund that has not been fully reflected by the market.

Under the policy, a fund’s complete list of holdings (including the size of each position) may be made available to investors, potential investors, third parties and non-Legg Mason employees with simultaneous public disclosure at least 25 days after calendar quarter end, except in the case of a money market fund’s holdings, which may be released with simultaneous public disclosure at least 25 days after month end. Typically, simultaneous public disclosure is achieved by the filing of Form N-Q or Form N-CSR in accordance with SEC rules, provided that such filings may not be made until 25 days following quarter-end and/or posting the information to a Legg Mason or the funds’ Internet site that is accessible by the public, or through public release by a third party vendor.

The policy permits the release of limited portfolio holdings information that is not yet considered stale in a number of situations, including:

1. A fund’s top ten securities, current as of month-end, and the individual size of each such security position may be released at any time following month-end with simultaneous public disclosure.

2. A fund’s top ten securities positions (including the aggregate but not individual size of such positions) may be released at any time with simultaneous public disclosure.

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3. A list of securities (that may include fund holdings together with other securities) followed by a portfolio manager (without position sizes or identification of particular funds) may be disclosed to sell-side brokers at any time for the purpose of obtaining research and/or market information from such brokers.

4. A trade in process may be discussed only with counterparties, potential counterparties and others involved in the transaction (i.e., brokers and custodians).

5. A fund’s sector weightings, yield and duration (for fixed income funds), performance attribution (e.g. analysis of the fund’s out-performance or underperformance of its benchmark based on its portfolio holdings) and other summary and statistical information that does not include identification of specific portfolio holdings may be released, even if non-public, if such release is otherwise in accordance with the policy’s general principles.

6. A fund’s portfolio holdings may be released on an as-needed basis to its legal counsel, counsel to its Independent Trustees and its independent public accounting firm, in required regulatory filings or otherwise to governmental agencies and authorities.

Under the policy, if information about a fund’s portfolio holdings is released pursuant to an ongoing arrangement with any party, a fund must have a legitimate business purpose for the release of the information, and either party receiving the information must be under a duty of confidentiality, or the release of non-public information must be subject to trading restrictions and confidential treatment to prohibit the entity from sharing with an unauthorized source or trading upon any non-public information provided. Neither a fund, nor Legg Mason nor any other affiliated person may receive compensation or any other consideration in connection with such arrangements. Ongoing arrangements to make available information about a fund’s portfolio securities will be reviewed at least annually by a fund’s board of trustees.

The approval of a fund’s Chief Compliance Officer, or designee, must be obtained before entering into any new ongoing arrangement or altering any existing ongoing arrangement to make available portfolio holdings information, or with respect to any exceptions to the policy. Any exceptions to the policy must be consistent with the purposes of the policy. Exceptions are considered on a case-by-case basis and are granted only after a thorough examination and consultation with LMPFA’s legal department, as necessary. Exceptions to the policies are reported annually to the fund’s board of trustees.

Currently, the Funds typically disclose their complete portfolio holdings approximately 25 days after calendar quarter-end on Legg Mason’s website, http://www.leggmason.com/individualinvestors.

Set forth below is a list, as of August 31, 2007, of those parties with whom LMPFA, on behalf of the Funds, has authorized ongoing arrangements that include the release of portfolio holdings information, the frequency of the release under such arrangements, and the length of the lag, if any, between the date of the information and the date on which the information is disclosed. The parties identified below as recipients are service providers, fund rating agencies, consultants and analysts.

Recipient	Frequency	Delay Before Dissemination
State Street Bank & Trust Co. (Fund Custodian and Accounting Agent)	Daily	None
Institutional Shareholder Services (Proxy voting services)	As necessary	None
Bloomberg	Quarterly	25 Days after Quarter End
Lipper	Quarterly	25 Days after Quarter End
S&P	Quarterly	25 Days after Quarter End
Morningstar	Quarterly	25 Days after Quarter End

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Recipient	Frequency	Delay Before Dissemination
Vestek	Daily	None
Factset	Daily	None
The Bank of New York	Daily	None
Thomson	Semi-annually	None
Dataware	Daily	None
ITG	Daily	None

Portfolio holdings information for a Fund may also be released from time to time pursuant to ongoing arrangements with the following parties:

Recipient	Frequency	Delay Before Dissemination
Baseline	Daily	None
Frank Russell	Monthly	1 Day
Callan	Quarterly	25 Days after Quarter End
Mercer	Quarterly	25 Days after Quarter End
eVestment Alliance	Quarterly	25 Days after Quarter End
CRA RogersCasey	Quarterly	25 Days after Quarter End
Cambridge Associates	Quarterly	25 Days after Quarter End
Marco Consulting	Quarterly	25 Days after Quarter End
Wilshire	Quarterly	25 Days after Quarter End
Informa Investment Services (Efron)	Quarterly	25 Days after Quarter End
CheckFree (Mobius)	Quarterly	25 Days after Quarter End
Nelsons Information	Quarterly	25 Days after Quarter End
Investor Tools	Daily	None
Advent	Daily	None
BARRA	Daily	None
Plexus	Quarterly (Calendar)	Sent 1-3 business days following the end of a Quarter
Elkins/McSherry	Quarterly (Calendar)	Sent 1-3 business days following the end of a Quarter
Quantitative Services Group	Daily	None
AMBAC	Daily	None
Deutsche Bank	Monthly	6-8 business days
Fitch	Monthly	6-8 business days
Liberty Hampshire	Weekly and Month End	None
Sun Trust	Weekly and Month End	None
New England Pension Consultants	Quarterly	25 Days after Quarter End
Evaluation Associates	Quarterly	25 Days after Quarter End
Watson Wyatt	Quarterly	25 Days after Quarter End
S&P (Rating Agency)	Weekly Tuesday Night*	1 business day*
Moody’s (Rating Agency)	Monthly*	6-8 business days*
Electra Information Systems	Daily	None
SunGard	Daily	None

* For a money market fund, the frequency of the release of information to this recipient may be weekly and there may be no delay in the release of the information.

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INVESTMENT POLICIES

Each Fund has adopted the fundamental and non-fundamental investment policies below for the protection of shareholders. Fundamental investment policies of a Fund may not be changed without the vote of a majority of the outstanding shares of the Fund, defined under the 1940 Act as the lesser of (a) 67% or more of the voting power present at a Fund meeting, if the holders of more than 50% of the voting power of the Fund are present in person or represented by proxy or (b) more than 50% of the voting power of the Fund.

If any percentage restriction described below is complied with at the time of an investment, a later increase or decrease in percentage resulting from a change in values or assets will not be considered a violation of such restriction.

Fundamental Investment Policies

Each Fund’s revised fundamental investment policies are as follows:

1. The Fund may not borrow money except as permitted by (i) the 1940 Act, as amended, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

2. The Fund may not engage in the business of underwriting the securities of other issuers except as permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

3. The Fund may lend money or other assets to the extent permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

4. The Fund may not issue senior securities except as permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

5. The Fund may not purchase or sell real estate except as permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

6. The Fund may purchase or sell commodities or contracts related to commodities to the extent permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

7. Except as permitted by exemptive or other relief or permission from the SEC, SEC staff or other authority with appropriate jurisdiction, the Fund may not make any investment if, as a result, the Fund’s investments will be concentrated in one industry.

With respect to the fundamental policy relating to borrowing money set forth in (1) above, the 1940 Act permits a fund to borrow money in amounts of up to one-third of the fund’s total assets from banks for any purpose, and to borrow up to 5% of the fund’s total assets from banks or other lenders for temporary purposes. To limit the risks attendant to borrowing, the 1940 Act requires a fund to maintain at all times an “asset coverage” of at least 300% of the amount of its borrowings. Asset coverage means the ratio that the value of a fund’s total assets, minus liabilities other than borrowings, bears to the aggregate amount of all borrowings. Certain trading practices and investments, such as reverse repurchase agreements, may be considered to be borrowings and thus subject to the 1940 Act restrictions. Borrowing money to increase portfolio holdings is known as “leveraging.” Borrowing, especially when used for leverage, may cause the value of a fund’s shares to

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be more volatile than if the fund did not borrow. This is because borrowing tends to magnify the effect of any increase or decrease in the value of the fund’s portfolio holdings. Borrowed money thus creates an opportunity for greater gains, but also greater losses. To repay borrowings, a fund may have to sell securities at a time and at a price that is unfavorable to the fund. There also are costs associated with borrowing money, and these costs would offset and could eliminate a fund’s net investment income in any given period. Currently Investment Grade Bond Fund does not contemplate borrowing money for leverage, but if it does so, it will not likely do so to a substantial degree. The policy in (1) above will be interpreted to permit the Funds to engage in trading practices and investments that may be considered to be borrowing to the extent permitted by the 1940 Act. Short-term credits necessary for the settlement of securities transactions and arrangements with respect to securities lending will not be considered to be borrowings under the policy. Practices and investments that may involve leverage but are not considered to be borrowings are not subject to the policy.

With respect to the fundamental policy relating to underwriting set forth in (2) above, the 1940 Act does not prohibit a fund from engaging in the underwriting business or from underwriting the securities of other issuers; in fact, the 1940 Act permits a fund to have underwriting commitments of up to 25% of its assets under certain circumstances. Those circumstances currently are that the amount of the fund’s underwriting commitments, when added to the value of the fund’s investments in issuers where the fund owns more than 10% of the outstanding voting securities of those issuers, cannot exceed the 25% cap. A fund engaging in transactions involving the acquisition or disposition of portfolio securities may be considered to be an underwriter under the Securities Act of 1933, as amended (the “1933 Act”). Under the 1933 Act, an underwriter may be liable for material omissions or misstatements in an issuer’s registration statement or prospectus. Securities purchased from an issuer and not registered for sale under the 1933 Act are considered restricted securities. There may be a limited market for these securities. If these securities are registered under the 1933 Act, they may then be eligible for sale but participating in the sale may subject the seller to underwriter liability. These risks could apply to a fund investing in restricted securities. Although it is not believed that the application of the 1933 Act provisions described above would cause a fund to be engaged in the business of underwriting, the policy in (2) above will be interpreted not to prevent the Funds from engaging in transactions involving the acquisition or disposition of portfolio securities, regardless of whether the Funds may be considered to be an underwriter under the 1933 Act.

With respect to the fundamental policy relating to lending set forth in (3) above, the 1940 Act does not prohibit a fund from making loans; however, SEC staff interpretations currently prohibit funds from lending more than one-third of their total assets, except through the purchase of debt obligations or the use of repurchase agreements. (A repurchase agreement is an agreement to purchase a security, coupled with an agreement to sell that security back to the original seller on an agreed-upon date at a price that reflects current interest rates. The SEC frequently treats repurchase agreements as loans.) While lending securities may be a source of income to a fund, as with other extensions of credit, there are risks of delay in recovery or even loss of rights in the underlying securities should the borrower fail financially. However, loans would be made only when a fund’s manager or subadviser believes the income justifies the attendant risks. A fund also will be permitted by this policy to make loans of money, including to other funds. A fund would have to obtain exemptive relief from the SEC to make loans to other funds. The policy in (3) above will be interpreted not to prevent the Funds from purchasing or investing in debt obligations and loans. In addition, collateral arrangements with respect to options, forward currency and futures transactions and other derivative instruments, as well as delays in the settlement of securities transactions, will not be considered loans.

With respect to the fundamental policy relating to issuing senior securities set forth in (4) above, “senior securities” are defined as fund obligations that have a priority over the fund’s shares with respect to the payment of dividends or the distribution of fund assets. The 1940 Act prohibits a fund from issuing senior securities except that the fund may borrow money in amounts of up to one-third of the fund’s total assets from banks for any purpose. A fund also may borrow up to 5% of the fund’s total assets from banks or other lenders for temporary purposes, and these borrowings are not considered senior securities. The issuance of senior securities by a fund can increase the speculative character of the fund’s outstanding shares through leveraging. Leveraging of a fund’s portfolio through the issuance of senior securities magnifies the potential for gain or loss on monies,

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because even though the fund’s net assets remain the same, the total risk to investors is increased to the extent of the fund’s gross assets. The policy in (4) above will be interpreted not to prevent collateral arrangements with respect to swaps, options, forward or futures contracts or other derivatives, or the posting of initial or variation margin.

With respect to the fundamental policy relating to real estate set forth in (5) above, the 1940 Act does not prohibit a fund from owning real estate; however, a fund is limited in the amount of illiquid assets it may purchase. Investing in real estate may involve risks, including that real estate is generally considered illiquid and may be difficult to value and sell. Owners of real estate may be subject to various liabilities, including environmental liabilities. To the extent that investments in real estate are considered illiquid, the current SEC staff position generally limits a fund’s purchases of illiquid securities to 15% of net assets. The policy in (5) above will be interpreted not to prevent the Funds from investing in real estate-related companies, companies whose businesses consist in whole or in part of investing in real estate, instruments (like mortgages) that are secured by real estate or interests therein, or real estate investment trust securities.

With respect to the fundamental policy relating to commodities set forth in (6) above, the 1940 Act does not prohibit a fund from owning commodities, whether physical commodities and contracts related to physical commodities (such as oil or grains and related futures contracts), or financial commodities and contracts related to financial commodities (such as currencies and, possibly, currency futures). However, a fund is limited in the amount of illiquid assets it may purchase. To the extent that investments in commodities are considered illiquid, the current SEC staff position generally limits a fund’s purchases of illiquid securities to 15% of net assets. If a fund were to invest in a physical commodity or a physical commodity-related instrument, the fund would be subject to the additional risks of the particular physical commodity and its related market. The value of commodities and commodity-related instruments may be extremely volatile and may be affected either directly or indirectly by a variety of factors. There also may be storage charges and risks of loss associated with physical commodities. The policy in (6) above will be interpreted to permit investments in exchange traded funds that invest in physical and/or financial commodities.

With respect to the fundamental policy relating to concentration set forth in (7) above, the 1940 Act does not define what constitutes “concentration” in an industry. The SEC staff has taken the position that investment of 25% or more of a fund’s total assets in one or more issuers conducting their principal activities in the same industry or group of industries constitutes concentration. It is possible that interpretations of concentration could change in the future. A fund that invests a significant percentage of its total assets in a single industry may be particularly susceptible to adverse events affecting that industry and may be more risky than a fund that does not concentrate in an industry. The policy in (7) above will be interpreted to refer to concentration as that term may be interpreted from time to time. The policy also will be interpreted to permit investment without limit in the following: securities of the U.S. government and its agencies or instrumentalities; securities of state, territory, possession or municipal governments and their authorities, agencies, instrumentalities or political subdivisions; securities of foreign governments; and repurchase agreements collateralized by any such obligations. Accordingly, issuers of the foregoing securities will not be considered to be members of any industry. There also will be no limit on investment in issuers domiciled in a single jurisdiction or country. The policy also will be interpreted to give broad authority to a fund as to how to classify issuers within or among industries.

Each Fund’s fundamental policies are written and will be interpreted broadly. For example, the policies will be interpreted to refer to the 1940 Act and the related rules as they are in effect from time to time, and to interpretations and modifications of or relating to the 1940 Act by the SEC and others as they are given from time to time. When a policy provides that an investment practice may be conducted as permitted by the 1940 Act, the policy will be interpreted to mean either that the 1940 Act expressly permits the practice or that the 1940 Act does not prohibit the practice.

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Non-Fundamental Investment Policies

Under the non-fundamental investment policies adopted by the Funds, the Funds may not:

1. Invest in oil, gas or other mineral exploration or development programs.

2. Make investments in securities for the purpose of exercising control over or management of the issuer.

3. Purchase any securities on margin (except for such short-term credits as are necessary for the clearance of purchases and sales of portfolio securities) or sell any securities short (except “against the box”). For purposes of this restriction, the deposit or payment by the Fund of underlying securities and other assets in escrow and collateral agreements with respect to initial or maintenance margin in connection with Futures Contracts and related options and options on securities, indices or similar items is not considered to be the purchase of a security on margin.

4. Purchase or otherwise acquire any security if, as a result, more than 15% of its net assets would be invested in securities that are illiquid.

5. Restriction Applicable to Investment Grade Bond Fund. The Fund may not write, purchase or sell puts, calls, straddles, spreads or any combinations thereof.

Diversification

Each Fund is currently classified as a diversified fund under the 1940 Act. This means that a Fund may not purchase securities of an issuer (other than obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities) if, with respect to 75% of its total assets, (a) more than 5% of the Fund’s total assets would be invested in securities of that issuer, or (b) the Fund would hold more than 10% of the outstanding voting securities of that issuer. With respect to the remaining 25% of its total assets, a Fund can invest more than 5% of its assets in one issuer. Under the 1940 Act, the Funds cannot change their classifications from diversified to non-diversified without shareholder approval.

PURCHASE OF SHARES

General

Investors may purchase shares from a Service Agent. In addition, certain investors, including retirement plans purchasing through certain Service Agents, may purchase shares directly from the Funds. When purchasing shares of a Fund, investors must specify whether the purchase is for Class A, B, C, FI, R or I* shares. The Government Securities Fund’s Class 1 Shares are closed to all new purchases and incoming exchanges. Investors who owned Class 1 shares on July 27, 2007 are permitted to continue to maintain their Class 1 shares, but are no longer be permitted to add to their Class 1 share positions (excluding reinvestment of dividends and distributions). Service Agents may charge their customers an annual account maintenance fee in connection with a brokerage account through which an investor purchases or holds shares. Accounts held directly through the transfer agent are not subject to a maintenance fee.

For additional information regarding applicable investment minimums and eligibility requirements, please see each Fund’s Prospectus.

There are no minimum investment requirements for purchases of Class A shares by: (i) current and retired board members of Legg Mason, (ii) current and retired board members of any fund advised by LMPFA (such board members, together with board members of Legg Mason, are referred to herein as “Board Members”), (iii) current employees of Legg Mason and its subsidiaries, (iv) the “immediate families” of such persons (“immediate families” are such person’s spouse, including the surviving spouse of a deceased Board Member,

* As of November 20, 2006, Class Y Shares were renamed Class I Shares.

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and children under the age of 21) and (v) a pension, profit-sharing or other benefit plan for the benefit of such persons. Each Fund reserves the right to waive or change minimums, to decline any order to purchase its shares and to suspend the offering of shares from time to time.

Share certificates for the fund will not be issued. If you currently hold share certificates of the fund, such certificates will continue to be honored.

Purchase orders received by a Fund or a Service Agent prior to the close of regular trading on the NYSE on any day the Fund calculates its net asset value are priced according to the net asset value determined on that day (the “trade date”). Orders received by a Service Agent prior to the close of regular trading on the NYSE on any day the Fund calculates its net asset value are priced according to the net asset value determined on that day, provided the order is received by the Fund’s agent prior to its close of business. Payment must be made with the purchase order.

Systematic Investment Plan. Shareholders may make additions to their accounts at any time by purchasing shares through a service known as the Systematic Investment Plan. Under the Systematic Investment Plan, a distributor or the transfer agent is authorized through preauthorized transfers that meet the applicable minimum on a monthly, quarterly, every alternate month, semi-annual or annual basis to charge the shareholder’s account held with a bank or other financial institution as indicated by the shareholder, to provide for systematic additions to the shareholder’s Fund account. A shareholder who has insufficient funds to complete the transfer may be charged a fee by the distributor or the transfer agent. Additional information is available from a Fund or a Service Agent.

Sales Charge Alternatives

The following classes of shares are available for purchase. See each Fund’s Prospectus for a discussion of who is eligible to purchase certain classes and of factors to consider in selecting which class of shares to purchase.

Class A Shares. Class A shares are sold to investors at the public offering price, which is the net asset value plus an initial sales charge, as described in each Fund’s Prospectus.

Members of the selling group may receive a portion of the sales charge as described in each Fund’s Prospectus and may be deemed to be underwriters of a Fund as defined in the 1933 Act. Sales charges are calculated based on the aggregate of purchases of Class A shares of a Fund made at one time by any “person,” which includes an individual and his or her spouse and children under the age of 21, or a trustee or other fiduciary of a single trust estate or single fiduciary account. For additional information regarding sales charge reductions, see “Sales Charge Waivers and Reductions” below.

Purchases of Class A shares of $1,000,000 or more will be made at net asset value without any initial sales charge, but will be subject to a contingent deferred sales charge of 1.00% on redemptions made within 12 months of purchase. The contingent deferred sales charge is waived in the same circumstances in which the contingent deferred sales charge applicable to Class B and C shares is waived. See “Contingent Deferred Sales Charge Provisions” and “Waivers of Contingent Deferred Sales Charge” below.

Class B and C Shares. Class B and C shares are sold without an initial sales charge but are subject to a contingent deferred sales charge payable upon certain redemptions. See “Contingent Deferred Sales Charge Provisions.”

Class FI, R and 1 Shares. Class FI, R and 1 shares are sold at net asset value with no initial sales charge and no contingent deferred sales charge upon redemption.

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Sales Charge Waivers and Reductions

Initial Sales Charge Waivers. Purchases of Class A shares may be made at net asset value without an initial sales charge in the following circumstances:

(a) sales to (i) current and retired Board Members, (ii) current employees of Legg Mason and its subsidiaries, (iii) the “immediate families” of such persons (“immediate families” are such person’s spouse, including the surviving spouse of a deceased Board Member, and children under the age of 21) and (iv) a pension, profit-sharing or other benefit plan for the benefit of such persons;

(b) sales to any employees of Service Agents having dealer, service or other selling agreements with a Fund’s distributor or otherwise having an arrangement with any such Service Agent with respect to sales of Fund shares, and by the immediate families of such persons or by a pension, profit-sharing or other benefit plan for the benefit of such persons (providing the purchase is made for investment purposes and such securities will not be resold except through redemption or repurchase);

(c) offers of Class A shares to any other investment company to effect the combination of such company with a Fund by merger, acquisition of assets or otherwise;

(d) purchases by shareholders who have redeemed Class A shares in the Fund (or Class A shares of another Legg Mason Partners Fund that is offered with a sales charge) and who wish to reinvest their redemption proceeds in a Fund, provided the reinvestment is made within 60 calendar days of the redemption;

(e) purchases by accounts managed by registered investment advisory subsidiaries of Citigroup;

(f) purchases by certain separate accounts used to fund unregistered variable annuity contracts; and

(g) purchases by investors participating in “wrap fee” or asset allocation programs or other fee-based arrangements sponsored by broker/dealers and other financial institutions that have entered into agreements with LMIS.

In order to obtain such discounts, the purchaser must provide sufficient information at the time of purchase to permit verification that the purchase qualifies for the elimination of the sales charge.

Accumulation Privilege—Please see each Fund’s Prospectus for information regarding accumulation privileges.

Letter of Intent—helps you take advantage of breakpoints in Class A sales charges. You may purchase Class A shares of Legg Mason Partners Funds over a 13-month period and pay the same sales charge, if any, as if all shares had been purchased at once. You have a choice of 5 Asset Level Goal amounts, as follows:

(1) $100,000	(4) $750,000
(2) $250,000	(5) $1,000,000
(3) $500,000

Each time you make a Class A purchase under a Letter of Intent, you will be entitled to the sales charge that is applicable to the amount of your Asset Level Goal. For example, if your Asset Level Goal is $100,000, any Class A investments you make under a Letter of Intent would be subject to the sales charge of the specific fund you are investing in for purchases of $100,000. Sales charges and breakpoints vary among the Legg Mason Partners Funds.

When you enter into a Letter of Intent, you agree to purchase in Eligible Accounts over a thirteen (13) month period Eligible Fund Purchases in an amount equal to the Asset Level Goal you have selected, less

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any Eligible Prior Purchases. For this purpose, shares are valued at the public offering price (including any sales charge paid) calculated as of the date of purchase, plus any appreciation in the value of the shares as of the date of calculation, except for Eligible Prior Purchases, which are valued at current value as of the date of calculation. Your commitment will be met if at any time during the 13-month period the value, as so determined, of eligible holdings is at least equal to your Asset Level Goal. All reinvested dividends and distributions on shares acquired under the Letter will be credited towards your Asset Level Goal. You may include any Eligible Fund Purchases towards the Letter, including shares of classes other than Class A shares. However, a Letter of Intent will not entitle you to a reduction in the sales charge payable on any shares other than Class A shares, and if the shares are subject to a contingent deferred sales charge, you will still be subject to that contingent deferred sales charge with respect to those shares. You must make reference to the Letter of Intent each time you make a purchase under the Letter.

Eligible Fund Purchases. Generally, any shares of a Legg Mason Partners Fund may be credited towards your Asset Level Goal. Shares of certain money market funds advised by the manager or its affiliates (except for money market fund shares acquired by exchange from other Legg Mason Partners Funds offered with a sales charge), Legg Mason Partners S&P 500 Index Fund and Class O shares of Legg Mason Partners Equity Fund, Inc. are not eligible.

This list may change from time to time. Investors should check with their Service Agent to see which funds may be eligible.

Eligible Accounts. Purchases may be made through any account in your name, or in the name of your spouse or your children under the age of 21. You may need to provide certain records, such as account statements, in order to verify your eligibility for reduced sales charges. Contact your Service Agent to see which accounts may be credited toward your Asset Level Goal.

Eligible Prior Purchases. You may also credit towards your Asset Level Goal any Eligible Fund Purchases made in Eligible Accounts at any time prior to entering into the Letter of Intent that have not been sold or redeemed, based on the current price of those shares as of the date of calculation.

Purchase made 90 days prior to the 13-month period are also eligible to be treated as purchases made under the Letter of Intent. Any Eligible Fund Purchases in Eligible Accounts made during that period will count towards your Goal Asset Level and will also be eligible for the lower sales charge applicable to your Asset Level Goal. You will be credited by way of additional shares at the current offering price for the difference between (a) the aggregate sales charges actually paid for those eligible shares and (b) the aggregate applicable sales charges for your Asset Level Goal.

Increasing the Amount of the Letter. You may at any time increase your Asset Level Goal. You must, however, contact your Service Agent, or if you purchase your shares directly through PFPC, contact PFPC, prior to making any purchases in an amount in excess of your current Asset Level Goal. Upon such an increase, you will be credited by way of additional shares at the then current offering price for the difference between: (a) the aggregate sales charges actually paid for shares already purchased under the Letter and (b) the aggregate applicable sales charges for the increased Asset Level Goal. The 13-month period during which the Asset Level Goal must be achieved will remain unchanged.

Sales and Exchanges. Shares acquired pursuant to a Letter of Intent, other than Escrowed Shares as defined below, may be redeemed or exchanged at any time, although any shares that are redeemed prior to meeting your Asset Level Goal will no longer count towards meeting your Asset Level Goal. However, complete liquidation of purchases made under a Letter of Intent prior to meeting the Asset Level Goal will result in the cancellation of the Letter of Intent. See “Failure to Meet Asset Level Goal” below. Exchanges in accordance with a Fund’s Prospectus are permitted, and shares so exchanged will continue to count towards your Asset Level Goal, as long as the exchange results in an Eligible Fund Purchase.

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Cancellation of Letter. You may cancel a Letter of Intent by notifying your Service Agent in writing, or if you purchase your shares directly through PFPC, by notifying PFPC in writing. The Letter will be automatically cancelled if all shares are sold or redeemed as set forth above. See “Failure to Meet Asset Level Goal” below.

Escrowed Shares. Shares equal in value to five percent (5%) of your Asset Level Goal as of the date your Letter of Intent (or the date of any increase in the amount of the Letter) is accepted, will be held in escrow during the term of your Letter of Intent. The Escrowed Shares will be included in the total shares owned as reflected in your account statement and any dividends and capital gains distributions applicable to the Escrowed Shares will be credited to your account and counted towards your Asset Level Goal or paid in cash upon request. The Escrowed Shares will be released from escrow if all the terms of your Letter of Intent are met.

Failure to Meet Asset Level Goal. If the total assets under your Letter of Intent within its 13-month term are less than your Asset Level Goal or you elect to liquidate all of your holdings or cancel the Letter of Intent before reaching your Asset Level Goal, you will be liable for the difference between: (a) the sales charge actually paid and (b) the sales charge that would have applied if you had not entered into the Letter of Intent. You may, however, be entitled to any breakpoints that would have been available to you under the accumulation privilege. An appropriate number of shares in your account will be redeemed to realize the amount due. For these purposes, by entering into a Letter of Intent, you irrevocably appoint your Service Agent, or if you purchase your shares directly through PFPC, PFPC, as your attorney-in-fact for the purposes of holding the Escrowed Shares and surrendering shares in your account for redemption. If there are insufficient assets in your account, you will be liable for the difference. Any Escrowed Shares remaining after such redemption will be released to your account.

Contingent Deferred Sales Charge Provisions

“Contingent deferred sales charge shares” are: (a) Class B shares; (b) Class C shares; and (c) Class A shares that were purchased without an initial sales charge but are subject to a contingent deferred sales charge. A contingent deferred sales charge may be imposed on certain redemptions of these shares.

Any applicable contingent deferred sales charge will be assessed on the net asset value at the time of purchase or redemption, whichever is less.

Class C shares and Class A shares that are contingent deferred sales charge shares are subject to a 1.00% contingent deferred sales charge if redeemed within 12 months of purchase. In circumstances in which the contingent deferred sales charge is imposed on Class B shares, the amount of the charge will depend on the number of years since the shareholder made the purchase payment from which the amount is being redeemed, as further described in the Fund’s Prospectus. Solely for purposes of determining the number of years since a purchase payment, all purchase payments made during a month will be aggregated and deemed to have been made on the last day of the preceding statement month.

Class B shares will convert automatically to Class A shares approximately eight years after the date on which they were purchased and thereafter will no longer be subject to any distribution fees. There will also be converted at that time in such proportion of Class B dividend shares (Class B shares that were acquired through the reinvestment of dividends and distributions) owned by the shareholders as the total number of his or her Class B shares converting at the time bears to the total number of outstanding Class B shares (other than Class B dividend shares) owned by the shareholder.

In determining the applicability of any contingent deferred sales charge, it will be assumed that a redemption is made first of shares representing capital appreciation, next of shares representing the reinvestment of dividends and capital gain distributions, next of shares that are not subject to the contingent deferred sales charge and finally of other shares held by the shareholder for the longest period of time. The length of time that contingent deferred sales charge shares acquired through an exchange have been held will be calculated from the date the shares exchanged were initially acquired in one of the other Legg Mason Partners funds. For federal

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income tax purposes, the amount of the contingent deferred sales charge will reduce the gain or increase the loss, as the case may be, on the amount realized on redemption. The Funds’ distributor receives contingent deferred sales charges in partial consideration for its expenses in selling shares.

Waivers of Contingent Deferred Sales Charge

The contingent deferred sales charge will be waived on: (a) exchanges (see “Exchange Privilege”); (b) automatic cash withdrawals in amounts equal to or less than 2.00% per month of the shareholder’s account balance at the time the withdrawals commence, up to a maximum of 12.00% in one year (see “Automatic Cash Withdrawal Plan”); (c) redemptions of shares within 12 months following the death or disability (as defined in the Code) of the shareholder; (d) mandatory post-retirement distributions from retirement plans or IRAs commencing on or after attainment of age 70 ¹/2 (except that shareholders who purchased shares subject to a contingent deferred sales charge prior to May 23, 2005 will be “grandfathered” and will be eligible to obtain the waiver at age 59 ¹/ 2 by demonstrating such eligibility at the time of redemption); (e) involuntary redemptions; (f) redemptions of shares to effect a combination of a Fund with any investment company by merger, acquisition of assets or otherwise; (g) tax-free returns of an excess contribution to any retirement plan; and (h) certain redemptions of shares of a Fund in connection with lump-sum or other distributions made by eligible retirement plans or redemption of shares by participants in certain “wrap fee” or asset allocation programs sponsored by broker/dealers and other financial institutions that have entered into agreements with the distributor or the manager.

As of November 20, 2006, the contingent deferred sales charge is waived on new Class C shares purchased by retirement plan omnibus accounts held on the books of a Fund.

A shareholder who has redeemed shares from other Legg Mason Partners funds may, under certain circumstances, reinvest all or part of the redemption proceeds within 60 days and receive pro rata credit for any contingent deferred sales charge imposed on the prior redemption.

Contingent deferred sales charge waivers will be granted subject to confirmation by the a distributor or the transfer agent of the shareholder’s status or holdings, as the case may be.

Grandfathered Retirement Program with Exchange Features

Certain retirement plan programs authorized prior to November 20, 2006 (collectively, the “Grandfathered Retirement Program”), to offer eligible retirement plan investors the opportunity to exchange all of their Class C shares for Class A shares of an applicable Legg Mason Partners Fund are permitted to maintain such share class exchange feature for current and prospective retirement plan investors.

Under the Grandfathered Retirement Program, Class C shares of Investment Grade Bond Fund may be purchased by plans investing less than $3 million. Class C shares are eligible for exchange into Class A shares not later than eight years after the plan joins the program. They are eligible for exchange in the following circumstances:

If a participating plan’s total Class C holdings in all non-money market Legg Mason Partners Funds equal at least $3,000,000 at the end of the fifth year after the date the participating plan enrolled in the Grandfathered Retirement Program, the participating plan will be offered the opportunity to exchange all of its Class C shares for Class A shares of Investment Grade Bond Fund. Such participating plans will be notified of the pending exchange in writing within 30 days after the fifth anniversary of the enrollment date and, unless the exchange offer has been rejected in writing, the exchange will occur on or about the 90th day after the fifth anniversary date. If the participating plan does not qualify for the five-year exchange to Class A shares, a review of the participating plan’s holdings will be performed each quarter until either the participating plan qualifies or the end of the eighth year.

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Any participating plan that has not previously qualified for an exchange into Class A shares will be offered the opportunity to exchange all of its Class C shares for Class A shares of Investment Grade Bond Fund regardless of asset size at the end of the eighth year after the date the participating plan enrolled in the Grandfathered Retirement Program. Such plans will be notified of the pending exchange in writing approximately 60 days before the eighth anniversary of the enrollment date and, unless the exchange has been rejected in writing, the exchange will occur on or about the eighth anniversary date. Once an exchange has occurred, a participating plan will not be eligible to acquire additional Class C shares, but instead may acquire Class A shares of Investment Grade Bond Fund. Any Class C shares not converted will continue to be subject to the distribution fee.

For further information regarding this Program, contact your Service Agent or the transfer agent. Participating plans that enrolled in the Grandfathered Retirement Program prior to June 2, 2003 should contact the transfer agent for information regarding Class C exchange privileges applicable to their plan.

Determination of Public Offering Price

Each Fund offers its shares on a continuous basis. The public offering price for each class of shares of a Fund is equal to the net asset value per share at the time of purchase, plus for Class A and 1 shares an initial sales charge based on the aggregate amount of the investment. A contingent deferred sales charge, however, is imposed on certain redemptions of Class A, B and C shares.

Set forth below is an example of the method of computing the offering price of Class A and Class 1 shares of the Funds based on the net asset value of a share of the applicable Fund as of December 31, 2007.

Government Securities Fund
Class A (based on a net asset value of $9.58 and a maximum initial sales charge of 4.25%)	$	10.01
Class 1 (based on a net asset value of $9.59 and a maximum initial sales charge of 6.75%)	$	10.28
Investment Grade Bond Fund
Class A (based on a net asset value of $11.74 and a maximum initial sales charge of 4.25%)	$	12.26

REDEMPTION OF SHARES

The right of redemption may be suspended or the date of payment postponed (a) for any period during which the New York Stock Exchange (“NYSE”) is closed (other than for customary weekend and holiday closings), (b) when trading in the markets a Fund normally utilizes is restricted, or an emergency exists, as determined by the SEC, so that disposal of the Fund’s investments or determination of net asset value is not reasonably practicable or (c) for such other periods as the SEC by order may permit for protection of a Fund’s shareholders.

If the shares to be redeemed were issued in certificate form, the certificates must be endorsed for transfer (or be accompanied by an endorsed stock power) and must be submitted to PFPC together with the redemption request. Any signature appearing on a share certificate, stock power or written redemption request in excess of $50,000 must be guaranteed by an eligible guarantor institution such as a domestic bank, savings and loan institution, domestic credit union, member bank of the Federal Reserve System or member firm of a national securities exchange. Written redemption requests of $50,000 or less do not require a signature guarantee unless more than one such redemption request is made in any 10-day period. Redemption proceeds will be mailed to an investor’s address of record. The transfer agent may require additional supporting documents for redemptions made by corporations, executors, administrators, trustees or guardians. A redemption request will not be deemed properly received until the transfer agent receives all required documents in proper form.

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If a shareholder holds shares in more than one class, any request for redemption must specify the class being redeemed. In the event of a failure to specify which class, or if the investor owns fewer shares of the class than specified, the redemption request will be delayed until the transfer agent receives further instructions. The redemption proceeds will be remitted on or before the seventh business day following receipt of proper tender, except on any days on which the NYSE is closed or as permitted under the 1940 Act, in extraordinary circumstances. Redemption proceeds for shares purchased by check, other than a certified or official bank check, will be remitted upon clearance of the check, which may take up to ten (10) days. Each Service Agent is responsible for transmitting promptly orders for its customers.

The Service Agent may charge you a fee for executing your order. The amount and applicability of such a fee is determined and disclosed to its customers by each Service Agent.

The Funds no longer issue share certificates. Outstanding share certificates will continue to be honored. If you hold share certificates, it will take longer to exchange or redeem shares.

Additional Information Regarding Telephone Redemption and Exchange Program. Neither Fund nor any of its agents will be liable for following instructions communicated by telephone that are reasonably believed to be genuine. Each Fund and its agents will employ procedures designed to verify the identity of the caller and legitimacy of instructions (for example, a shareholder’s name and account number will be required and phone calls may be recorded). Each Fund reserves the right to suspend, modify or discontinue the telephone redemption and exchange program or to impose a charge for this service at any time following at least seven (7) days’ prior notice to shareholders.

Automatic Cash Withdrawal Plan

An automatic cash withdrawal plan (the “Withdrawal Plan”) is available to shareholders as described in the Prospectuses. To the extent withdrawals under the Withdrawal Plan exceed dividends, distributions and appreciation of a shareholder’s investment in a Fund, there will be a reduction in the value of the shareholder’s investment, and continued withdrawal payments may reduce the shareholder’s investment and ultimately exhaust it. Withdrawal payments should not be considered as income from investment in a Fund. Furthermore, as it generally would not be advantageous to a shareholder to make additional investments in a Fund at the same time he or she is participating in the Withdrawal Plan, purchases by such shareholder in amounts of less than $5,000 ordinarily will not be permitted. The Withdrawal Plan will be carried over on exchanges between Funds or classes of a Fund. All dividends and distributions on shares in the Withdrawal Plan are reinvested automatically at net asset value in additional shares of a Fund.

Shareholders who wish to participate in the Withdrawal Plan and who hold their shares in certificate form must deposit their share certificates with the transfer agent as agent for Withdrawal Plan members. For additional information shareholders should contact their Service Agent. A shareholder who purchases shares directly through the transfer agent may continue to do so and applications for participation in the Withdrawal Plan must be received by the transfer agent no later than the eighth day of the month to be eligible for participation beginning with that month’s withdrawal.

Distributions in Kind

If the Board determines that it would be detrimental to the best interests of the remaining shareholders to make a redemption payment wholly in cash, a Fund may pay, in accordance with SEC rules, any portion of a redemption in excess of the lesser of $250,000 or 1.00% of such Fund’s net assets by a distribution in kind of Fund securities in lieu of cash. If a redemption is paid in portfolio securities, such securities will be valued in accordance with the procedures described under “Share price” in the Fund’s Prospectus. Securities issued as a distribution in kind may incur brokerage commissions when shareholders subsequently sell those securities.

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VALUATION OF SHARES

The net asset value per share of each Fund’s classes is calculated on each day, Monday through Friday, except days on which the NYSE is closed. The NYSE currently is scheduled to be closed on New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas, and on the preceding Friday or subsequent Monday when one of these holidays falls on a Saturday or Sunday, respectively. Because of the differences in distribution fees and class-specific expenses, the per share net asset value of each class will differ. Please see the Prospectuses for a description of the procedures used by each Fund in valuing its assets.

EXCHANGE PRIVILEGE

The exchange privilege enables shareholders to acquire shares of the same class in a fund with different investment objectives when they believe that a shift between funds is an appropriate investment decision. This privilege is available to shareholders residing in any state in which the fund shares being acquired may legally be sold. Prior to any exchange, the shareholder should obtain and review a copy of the current prospectus of each fund into which an exchange is being considered. Prospectuses may be obtained from a Service Agent.

Upon receipt of proper instructions and all necessary supporting documents, shares submitted for exchange are redeemed at the then-current net asset value, and the proceeds are immediately invested in shares of the fund being acquired at that fund’s then current net asset value. The distributors reserve the right to reject any exchange request. The exchange privilege may be modified or terminated at any time after written notice to shareholders.

Class A, FI, R and 1 Exchanges. Class A, FI, R and 1 shareholders of a Fund who wish to exchange all or a portion of their shares for shares of the respective class in another fund may do so without imposition of any charge.

Class B Exchanges. Class B shares of a Fund may be exchanged for other Class B shares without a contingent deferred sales charge. Upon an exchange, the new Class B shares will be deemed to have been purchased on the same date as the Class B shares of the Fund that have been exchanged.

Class C Exchanges. Class C shares of a Fund may be exchanged for other Class C shares without a contingent deferred sales charge. Upon an exchange, the new Class C shares will be deemed to have been purchased on the same date as the Class C shares of the Fund that have been exchanged.

Certain retirement plan programs with exchange features in effect prior to November 20, 2006, as approved by LMIS, will remain eligible for exchange from Class C shares to Class A shares in accordance with the program terms. See “Grandfathered Retirement Program with Exchange Features” for additional information.

Additional Information Regarding the Exchange Privilege

During times of drastic economic or market conditions, a Fund may suspend the exchange privilege temporarily without notice and treat exchange requests based on their separate components—redemption orders with a simultaneous request to purchase the other fund’s shares. In such a case, the redemption request would be processed at the Fund’s next determined net asset value but the purchase order would be effective only at the net asset value next determined after the fund being purchased formally accepts the order, which may result in the purchase being delayed.

Certain shareholders may be able to exchange shares by telephone. See each Fund’s Prospectus for additional information. Exchanges will be processed at the net asset value next determined. Redemption procedures discussed above are also applicable for exchanging shares, and exchanges will be made upon receipt of all supporting documents in proper form. If the account registration of the shares of the fund being acquired is identical to the registration of the shares of the Fund exchanged, no signature guarantee is required.

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This exchange privilege may be modified or terminated at any time, and is available only in those jurisdictions where such exchanges legally may be made. Before making any exchange, shareholders should contact the transfer agent or, if they hold Fund shares through a Service Agent, their Service Agent to obtain more information and prospectuses of the funds to be acquired through the exchange. An exchange is treated as a sale of the shares exchanged and could result in taxable gain or loss to the shareholder making the exchange.

TAXES

The following is a summary of certain material U.S. federal income tax considerations regarding the purchase, ownership and disposition of shares of a Fund. This summary does not address all of the potential U.S. federal income tax consequences that may be applicable to the Funds or to all categories of investors, some of which may be subject to special tax rules. Current and prospective shareholders are urged to consult their own tax advisers with respect to the specific federal, state, local and foreign tax consequences of investing in the Funds. The summary is based on the laws in effect on the date of this SAI and existing judicial and administrative interpretations thereof, all of which are subject to change, possibly with retroactive effect.

The Funds and Their Investments

Each Fund will be treated as a separate taxpayer for U.S. federal income tax purposes. Each Fund has elected to be treated, and intends to qualify each year as a regulated investment company or “RIC” under the Code. To so qualify, a Fund must, among other things: (a) derive at least 90% of its gross income in each taxable year from dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of stock or securities or foreign currencies, or other income (including, but not limited to, gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies, and net income derived from interests in “qualified publicly traded partnerships” (i.e., partnerships that are traded on an established securities market or tradable on a secondary market, other than partnerships that derive 90% of their income from interest, dividends, capital gains, and other traditional permitted mutual fund income); and (b) diversify its holdings so that, at the end of each quarter of the Fund’s taxable year, (i) at least 50% of the market value of the Fund’s assets is represented by cash, securities of other regulated investment companies, U.S. Government securities and other securities, with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of the Fund’s assets and not greater than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its assets is invested in the securities (other than U.S. Government securities or securities of other regulated investment companies) of any one issuer, in the securities (other than securities of other regulated investment companies) of any two or more issuers that the Fund controls and that are determined to be engaged in the same or similar trades or businesses or related trades or businesses, or in the securities of one or more qualified publicly traded partnerships.

A Fund’s investments in partnerships, if any, including in qualified publicly traded partnerships, may result in that Fund’s being subject to state, local or foreign income, franchise or withholding tax liabilities.

As a regulated investment company, a Fund will not be subject to U.S. federal income tax on the portion of its taxable investment income and capital gains that it distributes to its shareholders, provided that it satisfies a minimum distribution requirement. To satisfy the minimum distribution requirement, a Fund must distribute to its shareholders at least the sum of (i) 90% of its “investment company taxable income” (i.e., generally, the taxable income of the regulated investment company other than its net capital gain, plus or minus certain other adjustments), and (ii) 90% of its net tax-exempt income for the taxable year. Each Fund will be subject to income tax at regular corporate tax rates on any taxable income or gains that it does not distribute to its shareholders.

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The Code imposes a 4% nondeductible excise tax on each Fund to the extent it does not distribute by the end of any calendar year at least the sum of (i) 98% of its ordinary income for that year and (ii) 98% of its capital gain net income (both long-term and short-term) for the one-year period ending, as a general rule, on October 31 of that year. For this purpose, however, any ordinary income or capital gain net income retained by a Fund that is subject to corporate income tax will be considered to have been distributed by year-end. In addition, the minimum amounts that must be distributed in any year to avoid the excise tax will be increased or decreased to reflect any underdistribution or overdistribution, as the case may be, from the previous year. Each Fund anticipates that it will pay such dividends and will make such distributions as are necessary in order to avoid the application of this excise tax.

If, in any taxable year, a Fund fails to qualify as a regulated investment company under the Code or fails to meet the distribution requirement, it will be taxed in the same manner as an ordinary corporation and distributions to its shareholders will not be deductible by the Fund in computing its taxable income. In addition, in the event of a failure to qualify, the Fund’s distributions, including any distributions of net long-term capital gains, will be taxable to shareholders as dividend income to the extent of the Fund’s current and accumulated earnings and profits. Such dividends will be eligible, subject to any generally applicable limitations, (i) to be treated as qualified dividend income in the case of shareholders taxed as individuals and (ii) for the dividends received deduction in the case of corporate shareholders. Moreover, if a Fund fails to qualify as a regulated investment company in any year, it must pay out its earnings and profits accumulated in that year in order to qualify again as a regulated investment company. If a Fund failed to qualify as a regulated investment company for a period greater than two taxable years, the Fund may be required to recognize any net built-in gains with respect to certain of its assets (i.e., the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized with respect to such assets if the Fund had been liquidated) in order to qualify as a regulated investment company in a subsequent year.

On December 31, 2007, the unused capital loss carryforwards of Government Securities Fund were $44,811,763. For U.S. federal income tax purposes, this amount is available to be applied against future capital gains of the Fund, if any, that are realized prior to the expiration of the applicable carryforwards. The carryforwards expire on December 31 of the year indicated:

Year of Expiration	Amount
12/31/2008	$	(16,358,450	)
12/31/2010	$	(777,138	)
12/31/2011	$	(420,494	)
12/31/2012	$	(3,973,198	)
12/31/2013	$	(9,167,305	)
12/31/2014	$	(12,232,572	)
12/31/2015	$	(1,882,606	)
	$	(44,811,763	)

On December 31, 2007, the unused capital loss carryforwards of Investment Grade Bond Fund were $16,152,630. These carryforwards will expire on December 31 of the year indicated:

Year of Expiration	Amount
12/31/2014	$	(13,489,887	)
12/31/2015	$	(2,662,743	)
	$	(16,152,630	)

Government Securities Fund may invest in zero coupon securities having an original issue discount (that is, the discount represented by the excess of the stated redemption price at maturity over the issue price). Each year,

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each Fund will be required to accrue as income a portion of this original issue discount even though the Fund will receive no cash payment of interest with respect to these securities. In addition, if the Fund acquires a security after its initial issuance at a discount that resulted from fluctuations in prevailing interest rates (“market discount”), the Fund may elect to include in income each year a portion of this market discount. Therefore, a Fund may be required in some years to distribute an amount greater than the total cash income the Fund actually receives. In order to make the required distribution in such a year, a Fund may be required to borrow cash or to liquidate securities.

A Fund’s transactions in foreign currencies, forward contracts, options and futures contracts (including options and futures contracts on foreign currencies), if any, will be subject to special provisions of the Code (including provisions relating to “hedging transactions” and “straddles”) that, among other things, may affect the character of gains and losses realized by a Fund (i.e., may affect whether gains or losses are ordinary or capital), accelerate recognition of income to a Fund and defer Fund losses. These rules could therefore affect the character, amount and timing of distributions to shareholders. These provisions also (a) will require a Fund to mark-to-market certain types of the positions in its portfolio (i.e., treat them as if they were closed out at the end of each year) and (b) may cause a Fund to recognize income prior to the receipt of cash with which to pay dividends or make distributions in amounts necessary to satisfy the distribution requirements for avoiding income and excise taxes. In order to distribute this income and avoid a tax at the Fund level, a Fund may be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss. Each Fund will monitor its transactions, will make the appropriate tax elections and will make the appropriate entries in its books and records when it acquires any foreign currency, forward contract, option, futures contract or hedged investment in order to mitigate the effect of these rules and prevent disqualification of a Fund as a regulated investment company.

A Fund’s investment in so-called “section 1256 contracts,” such as regulated futures contracts, most foreign currency forward contracts traded in the interbank market, and options on most stock indices, are subject to special tax rules. All section 1256 contracts held by a Fund at the end of its taxable year are required to be marked to their market value, and any unrealized gain or loss on those positions will be included in the Fund’s taxable income as if each position had been sold for its fair market value at the end of the taxable year. The resulting gain or loss will be combined with any gain or loss realized by the Fund from positions in section 1256 contracts closed during the taxable year. Provided such positions were held as capital assets and were not part of a “hedging transaction” or part of a “straddle,” 60% of the resulting net gain or loss will be treated as long-term capital gain or loss, and 40% of such net gain or loss will be treated as short-term capital gain or loss, regardless of the period of time the positions were actually held by the Fund.

In general, gain or loss on a short sale is recognized when a Fund closes the sale by delivering the borrowed property to the lender, not when the borrowed property is sold. Gain or loss from a short sale is generally considered as capital gain or loss to the extent that the property used to close the short sale constitutes a capital asset in the Fund’s hands. Except with respect to certain situations where the property used by a Fund to close a short sale has a long-term holding period on the date of the short sale, special rules would generally treat the gains on short sales as short-term capital gains. These rules may also terminate the running of the holding period of “substantially identical property” held by the Fund. Moreover, a loss on a short sale will be treated as a long-term capital loss if, on the date of the short sale, “substantially identical property” has been held by the Fund for more than one year. In general, a Fund will not be permitted to deduct payments made to reimburse the lender of securities for dividends paid on borrowed stock if the short sale is closed on or before the 45th day after the short sale is entered into.

As a result of entering into swap contracts, a Fund may make or receive periodic net payments. A Fund may also make or receive a payment when a swap is terminated prior to maturity through an assignment of the swap or other closing transaction. Periodic net payments will generally constitute ordinary income or deductions, while termination of a swap will generally result in capital gain or loss (which will be a long-term capital gain or loss if the Fund has been a party to the swap for more than one year).

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A Fund may be required to treat amounts as taxable income or gain, subject to the distribution requirements referred to above, even though no corresponding amounts of cash are received concurrently, as a result of (1) mark-to-market rules, constructive sale rules or rules applicable to PFICs (as defined below) or partnerships or trusts in which the Fund invests or to certain options, futures or forward contracts, or “appreciated financial positions” or (2) the inability to obtain cash distributions or other amounts due to currency controls or restrictions on repatriation imposed by a foreign country with respect to the Fund’s investments (including through depositary receipts) in issuers in such country or (3) tax rules applicable to debt obligations acquired with “original issue discount,” including zero-coupon or deferred payment bonds and pay-in-kind debt obligations, or to market discount if an election is made with respect to such market discount. In order to distribute this income and avoid a tax at the Fund level, the Fund might be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss. A Fund might also meet the distribution requirements by borrowing the necessary cash, thereby incurring interest expenses.

Foreign Investments. Dividends or other income (including, in some cases, capital gains) received by a Fund from investments in foreign securities may be subject to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes in some cases. The Funds do not expect to be eligible to elect to treat any foreign taxes they pay as paid by their respective shareholders, who therefore will not be entitled to credits or deductions for such taxes on their own tax returns. Foreign taxes paid by a Fund will reduce the return from its investments.

Under Section 988 of the Code, gains or losses attributable to fluctuations in exchange rates between the time a Fund accrues income or receivables or expenses or other liabilities denominated in a foreign currency and the time the Fund actually collects such income or pays such liabilities are generally treated as ordinary income or ordinary loss. Similarly, gains or losses on foreign currency, foreign currency forward contracts, certain foreign currency options or futures contracts and the disposition of debt securities denominated in foreign currency, to the extent attributable to fluctuations in exchange rates between the acquisition and disposition dates, are also treated as ordinary income or loss.

Passive Foreign Investment Companies. If a Fund purchases shares in certain foreign investment entities, called “passive foreign investment companies” (“PFICs”) and does not make certain elections, it may be subject to U.S. federal income tax on a portion of any “excess distribution” or gain from the disposition of such shares even if such income is distributed as a taxable dividend by the Fund to its shareholders. Additional charges in the nature of interest may be imposed on the Fund in respect of deferred taxes arising from such distributions or gains.

If a Fund were to invest in a PFIC and elect to treat the PFIC as a “qualified electing fund” under the Code, in lieu of the foregoing requirements, the Fund might be required to include in income each year a portion of the ordinary earnings and net capital gains of the qualified electing fund, even if not distributed to the Fund, and such amounts would be subject to the 90% and excise tax distribution requirements described above. In order to distribute this income and avoid a tax at the Fund level, the applicable Fund might be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss. In order to make this election, the Fund would be required to obtain certain annual information from the PFICs in which it invests, which may be difficult or impossible to obtain.

Alternatively, a Fund may make a mark-to-market election that will result in the Fund being treated as if it had sold and repurchased its PFIC stock at the end of each year. In such case, the Fund would report any such gains as ordinary income and would deduct any such losses as ordinary losses to the extent of previously recognized gains. The election must be made separately for each PFIC owned by the Fund and, once made, would be effective for all subsequent taxable years, unless revoked with the consent of the Internal Revenue Service (the “IRS”). By making the election, a Fund could potentially ameliorate the adverse tax consequences with respect to its ownership of shares in a PFIC, but in any particular year may be required to recognize income in excess of the distributions it receives from PFICs and its proceeds from dispositions of PFIC stock. The Fund

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may have to distribute such excess income and gain to satisfy the 90% distribution requirement and to avoid imposition of the 4% excise tax. In order to distribute this income and avoid a tax at the Fund level, the applicable Fund might be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss.

Each Fund will make the appropriate tax elections, if possible, and take any additional steps that are necessary to mitigate the effect of these rules.

Taxation of U.S. Shareholders

Dividends and Distributions. Dividends and other distributions by the Fund are generally treated under the Code as received by the shareholders at the time the dividend or distribution is made. However, if any dividend or distribution is declared by the Fund in October, November or December of any calendar year and payable to shareholders of record on a specified date in such a month but actually paid during the following January, such dividend or distribution shall be deemed to have been received by each shareholder on December 31 of the calendar year in which it was declared and to have been paid by the Fund not later than such date.

Each Fund intends to distribute annually to its shareholders substantially all of its investment company taxable income, and any net realized long-term capital gains in excess of net realized short-term capital losses (including any capital loss carryovers). However, if a Fund retains for investment an amount equal to all or a portion of its net long-term capital gains in excess of its net short-term capital losses (including any capital loss carryovers), it will be subject to a corporate tax (currently at a maximum rate of 35%) on the amount retained. In that event, the Fund will designate such retained amounts as undistributed capital gains in a notice to its shareholders who (a) will be required to include in income for U.S. federal income tax purposes, as long-term capital gains, their proportionate shares of the undistributed amount, (b) will be entitled to credit their proportionate shares of the 35% tax paid by the Fund on the undistributed amount against their U.S. federal income tax liabilities, if any, and to claim refunds to the extent their credits exceed their liabilities, if any, and (c) will be entitled to increase their tax basis, for U.S. federal income tax purposes, in their shares by an amount equal to 65% of the amount of undistributed capital gains included in the shareholder’s income. Organizations or persons not subject to U.S. federal income tax on such capital gains will be entitled to a refund of their pro rata share of such taxes paid by the Fund upon timely filing appropriate returns or claims for refund with the IRS.

Dividends of net investment income and distributions of net realized short-term capital gains are taxable to a shareholder as ordinary income, whether paid in cash or in shares. Distributions of net realized long-term capital gains, if any, that a Fund designates as capital gain dividends are taxable as long-term capital gains, whether paid in cash or in shares and regardless of how long a shareholder has held shares of the Fund.

Special rules apply, however, to certain dividends paid to individuals. Certain dividends, with respect to taxable years beginning on or before December 31, 2010, may be subject to tax at the rates generally applicable to long-term capital gains for individuals (currently at a maximum rate of 15%), provided that the individual receiving the dividends satisfies certain holding period and other requirements. Dividends subject to these special rules are not actually treated as capital gains, however, and thus are not included in the computation of an individual’s net capital gain and generally cannot be used to offset capital losses. The long-term capital gains rates will apply to: (i) 100% of the dividends paid by a Fund to an individual in a particular taxable year if 95% or more of the Fund’s gross income (ignoring gains attributable to the sale of stocks and securities except to the extent net short-term capital gain from such sales exceeds net long-term capital loss from such sales) in that taxable year is attributable to “qualified dividend income” received by the Fund; or (ii) the portion of the dividends paid by the Fund to an individual in a particular taxable year that is attributable to qualified dividend income received by the Fund in that taxable year if such qualified dividend income accounts for less than 95% of the Fund’s gross income (ignoring gains attributable to the sale of stocks and securities except to the extent net short-term capital gain from such sales exceeds net long-term capital loss from such sales) for that taxable year. For this purpose, “qualified dividend income” generally means income from dividends received by a Fund from

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U.S. corporations and qualified foreign corporations, provided that the Fund satisfies certain holding period requirements in respect of the stock of such corporations and has not hedged its position in the stock in certain ways. However, qualified dividend income does not include any dividends received from tax exempt corporations. Also, dividends received by a Fund from a real estate investment trust or another regulated investment company generally are qualified dividend income only to the extent the dividend distributions are made out of qualified dividend income received by such real estate investment trust or other regulated investment company. In the case of securities lending transactions, payments in lieu of dividends are not qualified dividend income. If a shareholder elects to treat Fund dividends as investment income for purposes of the limitation on the deductibility of investment interest, such dividends would not be qualified dividend income.

We will send you information after the end of each year setting forth the amount of dividends paid by us that are eligible for the reduced rates.

If an individual receives a dividend qualifying for the long-term capital gains rates and such dividend constitutes an “extraordinary dividend,” and the individual subsequently recognizes a loss on the sale or exchange of stock in respect of which the extraordinary dividend was paid, then the loss will be long-term capital loss to the extent of such extraordinary dividend. An “extraordinary dividend” on common stock for this purpose is generally a dividend (i) in an amount greater than or equal to 10% of the taxpayer’s tax basis (or trading value) in a share of stock, aggregating dividends with ex-dividend dates within an 85-day period or (ii) in an amount greater than 20% of the taxpayer’s tax basis (or trading value) in a share of stock, aggregating dividends with ex-dividend dates within a 365-day period.

Dividends paid by a Fund that are attributable to dividends received by the Fund from domestic corporations may qualify for the federal dividends-received deduction for corporations.

Distributions in excess of a Fund’s current and accumulated earnings and profits will, as to each shareholder, be treated as a tax-free return of capital to the extent of a shareholder’s basis in his shares of the Fund, and as a capital gain thereafter (if the shareholder holds his shares of the Fund as capital assets). Shareholders receiving dividends or distributions in the form of additional shares should be treated for U.S. federal income tax purposes as receiving a distribution in an amount equal to the amount of money that the shareholders receiving cash dividends or distributions will receive, and should have a cost basis in the shares received equal to such amount.

Investors considering buying shares of a Fund just prior to a dividend or capital gain distribution should be aware that, although the price of shares just purchased at that time may reflect the amount of the forthcoming distribution, such dividend or distribution may nevertheless be taxable to them. If the Fund is the holder of record of any stock on the record date for any dividends payable with respect to such stock, such dividends will be included in the Fund’s gross income not as of the date received but as of the later of (a) the date such stock became ex-dividend with respect to such dividends (i.e., the date on which a buyer of the stock would not be entitled to receive the declared, but unpaid, dividends) or (b) the date the Fund acquired such stock. Accordingly, in order to satisfy its income distribution requirements, a Fund may be required to pay dividends based on anticipated earnings, and shareholders may receive dividends in an earlier year than would otherwise be the case.

Under current law, the Funds serve to block unrelated business taxable income (“UBTI”) from being realized by their tax-exempt shareholders. Notwithstanding the foregoing, a tax-exempt shareholder could realize UBTI by virtue of its investment in a Fund if shares in the Fund constitute “debt-financed property” in the hands of the tax-exempt shareholder within the meaning of Code Section 514(b). Certain types of income received by a Fund from real estate investment trusts (“REITs”), real estate mortgage investment conduits (“REMICs”), taxable mortgage pools or other investments may cause the Fund to designate some or all of its distributions as “excess inclusion income.” To Fund shareholders such excess inclusion income might (1) constitute taxable income, as UBTI for those shareholders who would otherwise be tax-exempt such as individual retirement accounts, 401(k) accounts, Keogh plans, pension plans and certain charitable entities; (2) not be offset against net

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operating losses for tax purposes; (3) not be eligible for reduced U.S. withholding for non-U.S. shareholders even from tax treaty countries; and (4) cause a Fund to be subject to tax if certain “disqualified organizations” as defined by the Code are Fund shareholders.

Sales of Shares. Upon the sale or exchange of his shares, a shareholder will realize a taxable gain or loss equal to the difference between the amount realized and his or her basis in the shares. A redemption of shares by a Fund will be treated as a sale for this purpose. Such gain or loss will be treated as capital gain or loss, if the shares are capital assets in the shareholder’s hands, and will be long-term capital gain or loss if the shares are held for more than one year and short-term capital gain or loss if the shares are held for one year or less. Any loss realized on a sale or exchange will be disallowed to the extent the shares disposed of are replaced, including replacement through the reinvesting of dividends and capital gains distributions in the Fund, within a 61-day period beginning 30 days before and ending 30 days after the disposition of the shares. In such a case, the basis of the shares acquired will be increased to reflect the disallowed loss. Any loss realized by a shareholder on the sale of Fund shares held by the shareholder for six months or less will be treated for U.S. federal income tax purposes as a long-term capital loss to the extent of any distributions or deemed distributions of long-term capital gains received by the shareholder (including amounts credited to the shareholder as undistributed capital gains) with respect to such shares.

If a shareholder incurs a sales charge in acquiring shares of a Fund and disposes of those shares within 90 days, and then acquires shares in a mutual fund for which the otherwise applicable sales charge is reduced by reason of a reinvestment right (e.g., an exchange privilege), the original sales charge will not be taken into account in computing gain or loss on the original shares to the extent the subsequent sales charge is reduced. Instead, the disregarded portion of the original sales charge will be added to the tax basis of the newly acquired shares. Furthermore, the same rule also applies to a disposition of the newly acquired shares made within 90 days of the second acquisition. This provision prevents a shareholder from immediately deducting the sales charge by shifting his or her investment within a family of mutual funds.

Backup Withholding. A Fund may be required to apply backup withholding at the rate of 28% on taxable dividends, distributions and redemption proceeds payable to non-corporate shareholders who fail to provide the Fund with their correct taxpayer identification number or to make required certifications, or who have been notified by the IRS that they are subject to backup withholding. Backup withholding is not an additional tax and any amount withheld may be credited against a shareholder’s U.S. federal income tax liabilities. Backup withholding will not be applied to payments that have already been subject to the 30% withholding tax described below under “Taxation of Non-U.S. Shareholders.”

Notices. Shareholders will receive, if appropriate, various written notices after the close of a Fund’s taxable year regarding the U.S. federal income tax status of certain dividends, distributions and deemed distributions that were paid (or that are treated as having been paid) by the Fund to its shareholders during the preceding taxable year.

If a shareholder recognizes a loss with respect to a Fund’s shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a regulated investment company are not excepted. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.

Other Taxation

Dividends, distributions and redemption proceeds may also be subject to additional state, local and foreign taxes depending on each shareholder’s particular situation. Certain states exempt dividends from mutual funds primarily invested in U.S. Government securities from state income taxes. Consult your own tax adviser for restrictions and details.

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Taxation of Non-U.S. Shareholders

Ordinary dividends and certain other payments made by each Fund to non-U.S. shareholders are generally subject to withholding tax at a 30% rate (or such lower rate as may be determined in accordance with any applicable treaty). In order to obtain a reduced rate of withholding, a non-U.S. shareholder will be required to provide an IRS Form W-8BEN certifying its entitlement to benefits under a treaty. The withholding tax does not apply to regular dividends paid to a non-U.S. shareholder who provides a Form W-8ECI, certifying that the dividends are effectively connected with the non-U.S. shareholder’s conduct of a trade or business within the United States. Instead, the effectively connected dividends will be subject to regular U.S. income tax as if the non-U.S. shareholder were a U.S. shareholder. A non-U.S. corporation receiving effectively connected dividends may also be subject to additional “branch profits tax” imposed at a rate of 30% (or a lower treaty rate). A non-U.S. shareholder who fails to provide an IRS Form W-8BEN or other applicable form may be subject to backup withholding at the appropriate rate.

In general, United States federal withholding tax will not apply to any gain or income realized by a non-U.S. shareholder in respect of any distributions of the excess of net long-term capital gains over net short-term capital losses, exempt-interest dividends, or upon the sale or other disposition of shares of the Funds.

Special rules apply to foreign persons who receive distributions from a Fund that are attributable to gain from “U.S. real property interests” (“USRPIs”). The Code defines USRPIs to include direct holdings of U.S. real property and any interest (other than an interest solely as a creditor) in domestic corporations that are “U.S. real property holding corporations” during a certain time period. The Code defines a U.S. real property holding corporation as any corporation if the fair market value of its USRPIs equals or exceeds 50% of the total fair market value of its USRPIs, its interests in real property located outside of the U.S., and any other of its assets used or held for use in a trade or business. For this purpose, an interest in a foreign corporation may be a USRPI. The Fund does not expect to be a U.S. real property holding corporation. If the Fund were to be classified as a U.S. real property holding corporation (or if it would be so classified, were it not for certain exceptions), then certain distributions by the Fund to foreign shareholders would be subject to U.S. federal withholding tax, and foreign shareholders might be required to file U.S. federal income tax returns to report distributions received from the Fund.

The foregoing is only a summary of certain material U.S. federal income tax consequences affecting the Funds and their shareholders. Current and prospective shareholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in a Fund.

ADDITIONAL INFORMATION

The Trust. The certificate of trust to establish Legg Mason Partners Income Trust (referred to in this section as the trust) was filed with the state of Maryland on October 4, 2006. On April 16, 2007, the Funds were redomiciled as series of the trust. Prior to the date hereof, the Funds were series of Legg Mason Partners Income Funds, a Massachusetts business trust. Prior to reorganization of the Funds as series of Legg Mason Partners Income Funds, the Funds were series of Legg Mason Partners Investment Funds, Inc., a Maryland corporation.

The Funds are series of the trust, a Maryland business trust. A Maryland business trust is an unincorporated business association that is established under, and governed by, Maryland law. Maryland law provides a statutory framework for the powers, duties, rights and obligations of the board (referred to in this section as the trustees) and shareholders of the trust, while the more specific powers, duties, rights and obligations of the trustees and the shareholders are determined by the trustees as set forth in the trust’s declaration of trust (referred to in this section as the declaration). Some of the more significant provisions of the declaration are described below.

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Shareholder Voting. The declaration provides for shareholder voting as required by the 1940 Act or other applicable laws but otherwise permits, consistent with Maryland law, actions by the trustees without seeking the consent of shareholders. The trustees may, without shareholder approval, amend the declaration or authorize the merger or consolidation of the trust into another trust or entity, reorganize the trust, or any series or class into another trust or entity or a series or class of another entity, sell all or substantially all of the assets of the trust or any series or class to another entity, or a series or class of another entity, or terminate the trust or any series or class.

The Funds are not required to hold an annual meeting of shareholders, but each Fund will call special meetings of shareholders whenever required by the 1940 Act or by the terms of the declaration. The declaration provides for “dollar-weighted voting” which means that a shareholder’s voting power is determined, not by the number of shares he or she owns, but by the dollar value of those shares determined on the record date. All shareholders of all series and classes of the trust vote together, except where required by the 1940 Act to vote separately by series or by class, or when the trustees have determined that a matter affects only the interests of one or more series or classes of shares.

Election and Removal of Trustees. The declaration provides that the trustees may establish the number of trustees and that vacancies on the board may be filled by the remaining trustees, except when election of trustees by the shareholders is required under the 1940 Act. Trustees are then elected by a plurality of votes cast by shareholders at a meeting at which a quorum is present. The declaration also provides that a mandatory retirement age may be set by action of two-thirds of the trustees and that trustees may be removed, with or without cause, by a vote of shareholders holding two-thirds of the voting power of the trust, or by a vote of two-thirds of the remaining trustees. The provisions of the declaration relating to the election and removal of trustees may not be amended without the approval of two-thirds of the trustees.

Amendments to the Declaration. The trustees are authorized to amend the declaration without the vote of shareholders, but no amendment may be made that impairs the exemption from personal liability granted in the declaration to persons who are or have been shareholders, trustees, officers or employees of the trust or that limit the rights to indemnification or insurance provided in the declaration with respect to actions or omissions of persons entitled to indemnification under the declaration prior to the amendment.

Issuance and Redemption of Shares. Each Fund may issue an unlimited number of shares for such consideration and on such terms as the trustees may determine. Shareholders are not entitled to any appraisal, preemptive, conversion, exchange or similar rights, except as the trustees may determine. Each Fund may involuntarily redeem a shareholder’s shares upon certain conditions as may be determined by the trustees, including, for example, if the shareholder fails to provide the Fund with identification required by law, or if the Fund is unable to verify the information received from the shareholder. Additionally, as discussed below, shares may be redeemed in connection with the closing of small accounts.

Disclosure of Shareholder Holdings. The declaration specifically requires shareholders, upon demand, to disclose to their Fund information with respect to the direct and indirect ownership of shares in order to comply with various laws or regulations, and the Funds may disclose such ownership if required by law or regulation.

Small Accounts. The declaration provides that the Funds may close out a shareholder’s account by redeeming all of the shares in the account if the account falls below a minimum account size (which may vary by class) that may be set by the trustees from time to time. Alternately, the declaration permits the Funds to assess a fee for small accounts (which may vary by class) and redeem shares in the account to cover such fees, or convert the shares into another share class that is geared to smaller accounts.

Series and Classes. The declaration provides that the trustees may establish series and classes in addition to those currently established and to determine the rights and preferences, limitations and restrictions, including qualifications for ownership, conversion and exchange features, minimum purchase and account size, expenses

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and charges, and other features of the series and classes. The trustees may change any of those features, terminate any series or class, combine series with other series in the trust, combine one or more classes of a series with another class in that series or convert the shares of one class into another class.

Each share of a Fund, as a series of the trust, represents an interest in the Fund only and not in the assets of any other series of the trust.

Shareholder, Trustee and Officer Liability. The declaration provides that shareholders are not personally liable for the obligations of their Fund and requires the Funds to indemnify a shareholder against any loss or expense arising from any such liability. In addition, the Funds will assume the defense of any claim against a shareholder for personal liability at the request of the shareholder. The declaration further provides that a trustee acting in his or her capacity of trustee is not personally liable to any person other than the trust or its shareholders, for any act, omission, or obligation of the trust. Further, a trustee is held to the same standard of conduct as a director of a Maryland corporation. This requires that a trustee perform his or her duties in good faith and in a manner he or she reasonably believes to be in the best interests of the trust or a series thereof, and with the care that an ordinarily prudent person in a like position would use under similar circumstances. The declaration also permits the limitation of a trustee’s liability to the full extent provided under Maryland law. Under current Maryland law, a trustee is liable to the trust or its shareholders for monetary damages only (a) to the extent that it is proved that he or she actually received an improper benefit or profit in money, property, or services or (b) to the extent that a judgment or other final adjudication adverse to the trustee is entered in a proceeding based on a finding in the proceeding that the trustee’s action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. The declaration requires the trust to indemnify any persons who are or who have been trustees, officers or employees of the trust for any liability for actions or failure to act except to the extent prohibited by applicable federal law. In making any determination as to whether any person is entitled to the advancement of expenses in connection with a claim for which indemnification is sought, such person is entitled to a rebuttable presumption that he or she did not engage in conduct for which indemnification is not available.

The declaration provides that any trustee who serves as chair of the board or of a committee of the board, lead independent trustee, or audit committee financial expert, or in any other similar capacity will not be subject to any greater standard of care or liability because of such position.

Derivative Actions. The declaration provides a detailed process for the bringing of derivative actions by shareholders in order to permit legitimate inquiries and claims while avoiding the time, expense, distraction, and other harm that can be caused to the Funds or the shareholders as a result of spurious shareholder demands and derivative actions. Prior to bringing a derivative action, a demand by three unrelated shareholders must first be made on a Fund’s trustees. The declaration details various information, certifications, undertakings and acknowledgements that must be included in the demand. Following receipt of the demand, the trustees have a period of 90 days, which may be extended by an additional 60 days, to consider the demand. If a majority of the trustees who are considered independent for the purposes of considering the demand determine that maintaining the suit would not be in the best interests of the Fund, the trustees are required to reject the demand and the complaining shareholders may not proceed with the derivative action unless the shareholders are able to sustain the burden of proof to a court that the decision of the trustees not to pursue the requested action was not a good faith exercise of their business judgment on behalf of the Fund. The declaration further provides that shareholders owning shares representing at least 5% of the voting power of the affected Fund must join in bringing the derivative action. If a demand is rejected, the complaining shareholders will be responsible for the costs and expenses (including attorneys’ fees) incurred by the Fund in connection with the consideration of the demand, if in the judgment of the independent trustees, the demand was made without reasonable cause or for an improper purpose. If a derivative action is brought in violation of the declaration, the shareholders bringing the action may be responsible for the Fund’s costs, including attorneys’ fees.

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The declaration further provides that the Funds shall be responsible for payment of attorneys’ fees and legal expenses incurred by a complaining shareholder only if required by law, and any attorneys’ fees that a Fund is obligated to pay shall be calculated using reasonable hourly rates. The declaration also requires that actions by shareholders against the Funds be brought only in federal court in Baltimore, Maryland, or if not permitted to be brought in federal court, then in state court in Baltimore, Maryland, and that the right to jury trial be waived to the full extent permitted by law.

Annual and Semi-Annual Reports

Each Fund sends its shareholders a semi-annual report and an audited annual report, which include listings of investment securities held by the Fund at the end of the period covered. In an effort to reduce the Fund’s printing and mailing costs, each Fund consolidates the mailing of its semi-annual and annual reports by household. This consolidation means that a household having multiple accounts with the identical address of record will receive a single copy of each report. In addition, each Fund also consolidates the mailing of its Prospectus so that a shareholder having multiple accounts (that is, individual, IRA and/or Self-Employed Retirement Plan accounts) will receive a single Prospectus annually. Shareholders who do not want this consolidation to apply to their accounts should contact their Service Agent or the transfer agent.

Legal Matters

Beginning in June 2004, class action lawsuits alleging violations of the federal securities laws were filed against CGMI and a number of its then affiliates, including SBFM, which were then investment adviser or manager to certain of the Funds (the “Managers”), substantially all of the mutual funds then managed by the Managers (the “Defendant Funds”), and Board Members of the Defendant Funds (collectively, the “Defendants”). The complaints alleged, among other things, that CGMI created various undisclosed incentives for its brokers to sell Smith Barney and Salomon Brothers funds. In addition, according to the complaints, the Managers caused the Defendant Funds to pay excessive brokerage commissions to CGMI for steering clients towards proprietary funds. The complaints also alleged that the defendants breached their fiduciary duty to the Defendant Funds by improperly charging Rule 12b-1 fees and by drawing on fund assets to make undisclosed payments of soft dollars and excessive brokerage commissions. The complaints also alleged that the Defendant Funds failed to adequately disclose certain of the allegedly wrongful conduct. The complaints sought injunctive relief and compensatory and punitive damages, rescission of the Defendant Funds’ contracts with the Managers, recovery of all fees paid to the Managers pursuant to such contracts and an award of attorneys’ fees and litigation expenses.

On December 15, 2004, a consolidated amended complaint (the “Complaint”) was filed alleging substantially similar causes of action. On May 27, 2005, all of the Defendants filed motions to dismiss the Complaint. On July 26, 2006, the court issued a decision and order (1) finding that plaintiffs lacked standing to sue on behalf of the shareholders of the Defendant Funds in which none of the plaintiffs had invested, including Legg Mason Partners Short Duration Municipal Income Fund, and dismissing those Defendant Funds from the case (although stating that they could be brought back into the case if standing as to them could be established), and (2) other than one stayed claim, dismissing all of the causes of action against the remaining Defendants, with prejudice, except for the cause of action under Section 36(b) of the 1940 Act, which the court granted plaintiffs leave to replead as a derivative claim.

On October 16, 2006, plaintiffs filed their Second Consolidated Amended Complaint (“Second Amended Complaint”) which alleges derivative claims on behalf of nine funds identified in the Second Amended Complaint, under Section 36(b) of the 1940 Act, against Citigroup Asset Management, Salomon Brothers Asset Management Inc., SBFM and CGMI as investment advisers to the identified funds, as well as CGMI as a distributor for the identified funds (collectively, the “Second Amended Complaint Defendants”). The Fund was not identified in the Second Amended Complaint. The Second Amended Complaint alleges no claims against any of the Funds or any of their Board Members. Under Section 36(b), the Second Amended Complaint alleges similar facts and seeks similar relief against the Second Amended Complaint Defendants as the Complaint.

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The Defendants filed a motion to dismiss the Second Amended Complaint. On December 3, 2007, the Court granted the Defendants’ motion to dismiss, with prejudice. On January 2, 2008, the plaintiffs filed a notice of appeal to the Second Circuit Court of Appeals.

Additional lawsuits arising out of these circumstances and presenting similar allegations and requests for relief may be filed against the Defendant Funds in the future.

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On May 31, 2005, the SEC issued an order in connection with the settlement of an administrative proceeding against SBFM, the then-investment adviser or manager to the fund and CGMI, a former distributor of the funds, relating to the appointment of an affiliated transfer agent for the Smith Barney family of mutual funds, including the fund (the “Affected Funds”).

The SEC order found that SBFM and CGMI willfully violated Section 206(1) of the Investment Advisers Act of 1940, as amended, and the rules promulgated thereunder (the “Advisers Act”). Specifically, the order found that SBFM and CGMI knowingly or recklessly failed to disclose to the boards of the Affected Funds in 1999 when proposing a new transfer agent arrangement with an affiliated transfer agent that: First Data Investors Services Group (“First Data”), the Affected Funds’ then-existing transfer agent, had offered to continue as transfer agent and do the same work for substantially less money than before; and that Citigroup Asset Management (“CAM”), the Citigroup business unit that, at the time, included the Affected Funds’ investment manager and other investment advisory companies, had entered into a side letter with First Data under which CAM agreed to recommend the appointment of First Data as sub-transfer agent to the affiliated transfer agent in exchange for, among other things, a guarantee by First Data of specified amounts of asset management and investment banking fees to CAM and CGMI. The order also found that SBFM and CGMI willfully violated Section 206(2) of the Advisers Act by virtue of the omissions discussed above and other misrepresentations and omissions in the materials provided to the Affected Funds’ boards, including the failure to make clear that the affiliated transfer agent would earn a high profit for performing limited functions while First Data continued to perform almost all of the transfer agent functions, and the suggestion that the proposed arrangement was in the Affected Funds’ best interests and that no viable alternatives existed. SBFM and CGMI do not admit or deny any wrongdoing or liability. The settlement does not establish wrongdoing or liability for purposes of any other proceeding.

The SEC censured SBFM and CGMI and ordered them to cease and desist from violations of Sections 206(1) and 206 (2) of the Advisers Act. The order required Citigroup to pay $208.1 million, including $109 million in disgorgement of profits, $19.1 million in interest, and a civil money penalty of $80 million. Approximately $24.4 million has already been paid to the Affected Funds, primarily through fee waivers. The remaining $183.7 million, including the penalty, has been paid to the U.S. Treasury and will be distributed pursuant to a plan submitted for the approval of the SEC. At this time, there is no certainty as to how the above- described proceeds of the settlement will be distributed, to whom such distributions will be made, the methodology by which such distributions will be allocated, and when such distributions will be made. The order also required that transfer agency fees received from the Affected Funds since December 1, 2004, less certain expenses, be placed in escrow and provided that a portion of such fees might be subsequently distributed in accordance with the terms of the order. On April 3, 2006, an aggregate amount of approximately $9 million held in escrow was distributed to the Affected Funds.

The order required SBFM to recommend a new transfer agent contract to the Fund boards within 180 days of the entry of the order; if a Citigroup affiliate submitted a proposal to serve as transfer agent or sub-transfer agent, SBFM and CGMI would have been required, at their expense, to engage an independent monitor to oversee a competitive bidding process. On November 21, 2005, and within the specified timeframe, the Affected Funds’ Boards selected a new transfer agent for the Affected Fund. No Citigroup affiliate submitted a proposal to serve as transfer agent. Under the order, SBFM also must comply with an amended version of a vendor policy that Citigroup instituted in August 2004.

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Although there can be no assurance, the manager does not believe that this matter will have a material adverse effect on the Affected Funds.

On December 1, 2005, Citigroup completed the sale of substantially all of its global asset management business, including SBFM, to Legg Mason.

***

Beginning in August 2005, five class action lawsuits alleging violations of federal securities laws and state law were filed against CGMI and SBFM (collectively, the “Defendants”) based on the May 31, 2005 settlement order issued against the Defendants by the SEC as described in above. The complaints seek injunctive relief and compensatory and punitive damages, removal of SBFM as the investment manager for the Smith Barney family of funds, rescission of the Funds’ management and other contracts with SBFM, recovery of all fees paid to SBFM pursuant to such contracts, and an award of attorneys’ fees and litigation expenses. The five actions were subsequently consolidated, and a consolidated complaint was filed.

On September 26, 2007, the United States District Court for the Southern District of New York issued an order dismissing the consolidated complaint, and judgment was later entered. An appeal has been filed and is pending before the U.S. Court of Appeals for the Second Circuit.

***

As previously disclosed, on September 16, 2005, the staff of the SEC informed SBFM and Salomon Brothers Asset Management Inc (“SBAM”) that the staff was considering recommending administrative proceedings against SBFM and SBAM for alleged violations of Section 19(a) and 34(b) of the Investment Company Act (and related Rule 19a-1). On September 27, 2007, SBFM and SBAM, without admitting or denying any findings therein, consented to the entry of an order by the SEC relating to the disclosure by certain closed-end funds previously managed by SBFM or SBAM of the sources of distributions paid by the funds between 2001 and 2004. Each of SBFM and SBAM agreed to pay a fine of $450,000, for which it was indemnified by Citigroup, its former parent. It is not expected that this matter will adversely impact the fund or its current manager.

***

On or about May 30, 2006, John Halebian, a purported shareholder of Citi New York Tax Free Reserves, a series of Legg Mason Partners Money Market Trust, formerly a series of CitiFunds Trust III (the “Subject Trust”), filed a complaint in the United States District Court for the Southern District of New York against the independent trustees of the Subject Trust (Elliot J. Berv, Donald M. Carlton, A. Benton Cocanougher, Mark T. Finn, Stephen Randolph Gross, Diana R. Harrington, Susan B. Kerley, Alan G. Merten and R. Richardson Pettit). The Subject Trust is also named in the complaint as a nominal defendant.

The complaint alleges both derivative claims on behalf of the Subject Trust and class claims on behalf of a putative class of shareholders of the Subject Trust in connection with the 2005 sale of Citigroup’s asset management business to Legg Mason and the related approval of new investment advisory agreements by the trustees and shareholders. In the derivative claim, the plaintiff alleges, among other things, that the independent trustees breached their fiduciary duty to the Subject Trust and its shareholders by failing to negotiate lower fees or seek competing bids from other qualified investment advisers in connection with Citigroup’s sale to Legg Mason. In the claims brought on behalf of the putative class of shareholders, the plaintiff alleges that the independent trustees violated the proxy solicitation requirements of the 1940 Act, and breached their fiduciary duty to shareholders, by virtue of the voting procedures, including “echo voting,” used to obtain approval of the new investment advisory agreements and statements made in a proxy statement regarding those voting procedures. The plaintiff alleges that the proxy statement was misleading because it failed to disclose that the voting procedures violated the 1940 Act. The relief sought includes an award of damages, rescission of the advisory agreement, and an award of costs and attorney fees.

82

In advance of filing the complaint, Mr. Halebian’s lawyers made written demand for relief on the board of the Subject Trust, and the board’s independent trustees formed a demand review committee to investigate the matters raised in the demand, and subsequently in the complaint, and recommend a course of action to the board. The committee, after a thorough review, has determined that the independent trustees did not breach their fiduciary duties as alleged by Mr. Halebian, and that the action demanded by Mr. Halebian would not be in the best interests of the Subject Trust. The board of the Subject Trust (the trustee who is an “interested person” of the Subject Trust, within the meaning of the 1940 Act, having recused himself from the matter), after receiving and considering the committee’s report and based upon the findings of the committee, subsequently also has so determined and, adopting the recommendation of the committee, has directed counsel to move to dismiss Mr. Halebian’s complaint. A motion to dismiss was filed on October 23, 2006. Opposition papers were filed on or about December 7, 2006. The complaint was dismissed on July 31, 2007. Mr. Halebian filed an appeal in the U.S. Court of Appeals for the Second Circuit. The appeal is pending.

***

The foregoing speaks only as of the date of this SAI. Additional lawsuits presenting allegations and requests for relief arising out of or in connection with any of the foregoing matters may be filed against these and related parties in the future.

FINANCIAL STATEMENTS

The audited financial statements of each Fund (Statement of Assets and Liabilities as of December 31, 2007, Statement of Operations for the year ended December 31, 2007, Statements of Changes in Net Assets for each of the years in the two-year period ended December 31, 2007, Financial Highlights for each of the years in the five-year period ended December 31, 2007, and Notes to Financial Statements along with the Report of Independent Registered Public Accounting Firm, each of which is included in the annual report to shareholders), are incorporated by reference into this SAI (Filed on March 6, 2008; Accession Number for Government Securities Fund 0001193125-08-048664 and Accession Number for Investment Grade Bond Fund 0001193125-08-048638).

83

APPENDIX A

DESCRIPTION OF RATINGS

The ratings of Moody’s Investors Service, Inc., Standard & Poor’s Ratings Group and Fitch Ratings represent their opinions as to the quality of various debt obligations. It should be emphasized, however, that ratings are not absolute standards of quality. Consequently, debt obligations with the same maturity, coupon and rating may have different yields while debt obligations of the same maturity and coupon with different ratings may have the same yield. As described by the rating agencies, ratings are generally given to securities at the time of issuances. While the rating agencies may from time to time revise such ratings, they undertake no obligation to do so.

Description of Moody’s Investors Service, Inc.’s Long-Term Obligation Ratings:

Moody’s long-term obligation ratings are opinions of the relative credit risk of fixed-income obligations with an original maturity of one year or more. They address the possibility that a financial obligation will not be honored as promised. Such ratings reflect both the likelihood of default and any financial loss suffered in the event of default.

Aaa—Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk. Aa—Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.

A—Obligations rated A are considered upper-medium grade and are subject to low credit risk.

Baa—Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics.

Ba—Obligations rated Ba are judged to have speculative elements and are subject to substantial credit risk.

B—Obligations rated B are considered speculative and are subject to high credit risk.

Caa—Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk.

Ca—Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.

C—Obligations rated C are the lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest.

Note: Moody’s appends numerical modifiers “1”, “2” and “3” to each generic rating classification from “Aa” through “Caa.” The modifier “1” indicates that the obligation ranks in the higher end of its generic rating category; the modifier “2” indicates a mid-range ranking; and the modifier “3” indicates a ranking in the lower end of that generic rating category.

Description of Moody’s Investors Service, Inc.’s US Municipal and Tax Exempt Ratings:

Municipal Ratings are opinions of the investment quality of issuers and issues in the US municipal and tax-exempt markets. As such, these ratings incorporate Moody’s assessment of the default probability and loss severity of these issuers and issues. The default and loss content for Moody’s municipal long-term rating scale differs from Moody’s general long-term rating scale. (Please refer to Corporate Equivalent Ratings under Policies and Procedures.)

A-1

Municipal Ratings are based upon the analysis of four primary factors relating to municipal finance: economy, debt, finances, and administration/management strategies. Each of the factors is evaluated individually and for its effect on the other factors in the context of the municipality’s ability to repay its debt.

Municipal Long-Term Rating Definitions:

Aaa—Issuers or issues rated Aaa demonstrate the strongest creditworthiness relative to other US municipal or tax-exempt issuers or issues.

Aa—Issuers or issues rated Aa demonstrate very strong creditworthiness relative to other US municipal or tax-exempt issuers or issues.

A—Issuers or issues rated A present above-average creditworthiness relative to other US municipal or tax-exempt issuers or issues.

Baa—Issuers or issues rated Baa represent average creditworthiness relative to other US municipal or tax-exempt issuers or issues.

Ba—Issuers or issues rated Ba demonstrate below-average creditworthiness relative to other US municipal or tax-exempt issuers or issues.

B—Issuers or issues rated B demonstrate weak creditworthiness relative to other US municipal or tax- exempt issuers or issues.

Caa—Issuers or issues rated Caa demonstrate very weak creditworthiness relative to other US municipal or tax-exempt issuers or issues.

Ca—Issuers or issues rated Ca demonstrate extremely weak creditworthiness relative to other US municipal or tax-exempt issuers or issues.

C—Issuers or issues rated C demonstrate the weakest creditworthiness relative to other US municipal or tax-exempt issuers or issues.

Note: Moody’s appends numerical modifiers “1”, “2” and “3” to each generic rating classification from “Aa” through “Caa.” The modifier “1” indicates that the obligation ranks in the higher end of its generic rating category; the modifier “2” indicates a mid-range ranking; and the modifier “3” indicates a ranking in the lower end of that generic rating category.

Description of Moody’s Investors Service, Inc.’s US Municipal Short-Term Debt And Demand Obligation Ratings:

There are three rating categories for short-term municipal obligations that are considered investment grade. These ratings are designated as Municipal Investment Grade (“MIG”) and are divided into three levels—”MIG 1” through “MIG 3.” In addition, those short-term obligations that are of speculative quality are designated “SG,” or speculative grade. MIG ratings expire at the maturity of the obligation.

MIG 1—This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.

MIG 2—This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.

MIG 3—This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.

A-2

SG—This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.

Description of Moody’s Investors Service, Inc.’s Demand Obligation Ratings:

In the case of variable rate demand obligations (“VRDOs”), a two-component rating is assigned; a long or short-term debt rating and a demand obligation rating. The first element represents Moody’s evaluation of the degree of risk associated with scheduled principal and interest payments. The second element represents Moody’s evaluation of the degree of risk associated with the ability to receive purchase price upon demand (“demand feature”), using a variation of the MIG rating scale, the Variable Municipal Investment Grade or VMIG rating. When either the long- or short-term aspect of a VRDO is not rated, that piece is designated NR, e.g., Aaa/NR or NR/VMIG 1. VMIG rating expirations are a function of each issue’s specific structural or credit features.

VMIG 1—This designation denotes superior credit quality. Excellent protection is afforded by the superior short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.

VMIG 2—This designation denotes strong credit quality. Good protection is afforded by the strong short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.

VMIG 3—This designation denotes acceptable credit quality. Adequate protection is afforded by the satisfactory short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.

SG—This designation denotes speculative-grade credit quality. Demand features rated in this category may be supported by a liquidity provider that does not have an investment grade short-term rating or may lack the structural and/or legal protections necessary to ensure the timely payment of purchase price upon demand.

Description of Moody’s Investors Service, Inc.’s Short-Term Prime Ratings:

Moody’s short-term ratings are opinions of the ability of issuers to honor short-term financial obligations. Ratings may be assigned to issuers, short-term programs or to individual short-term debt instruments. Such obligations generally have an original maturity not exceeding thirteen months, unless explicitly noted.

P-1—Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.

P-2—Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.

P-3—Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.

NP—Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.

Note: Canadian issuers rated P-1 or P-2 have their short-term ratings enhanced by the senior-most long-term rating of the issuer, its guarantor or support-provider.

A-3

Description of Standard & Poor’s Ratings Group’s Long-Term Issue Credit Ratings:

Issue credit ratings are based, in varying degrees, on the following considerations: (1) likelihood of payment—capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation; (2) nature of and provisions of the obligation; and (3) protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors’ rights.

The issue rating definitions are expressed in terms of default risk. As such, they pertain to senior obligations of an entity. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. (Such differentiation applies when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.) Accordingly, in the case of junior debt, the rating may not conform exactly with the category definition.

AAA—An obligation rated ‘AAA’ has the highest rating assigned by Standard & Poor’s. The obligor’s capacity to meet its financial commitments on the obligation is extremely strong.

AA—An obligation rated ‘AA’ differs from the highest-rated obligations only to a small degree. The obligor’s capacity to meet its financial obligations is very strong.

A—An obligation rated ‘A’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.

BBB—An obligation rated ‘BBB’ exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

BB, B, CCC, CC, and C—Obligations rated ‘BB’, ‘B’, ‘CCC’, ‘CC’, and ‘C’ are regarded as having significant speculative characteristics. ‘BB’ indicates the least degree of speculation and ‘C’ the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.

BB—An obligation rated ‘BB’ is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions, which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

B—An obligation rated ‘B’ is more vulnerable to nonpayment than obligations rated ‘BB’, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation.

CCC—An obligation rated ‘CCC’ is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.

CC—An obligation rated ‘CC’ is currently highly vulnerable to nonpayment.

C—A subordinated debt or preferred stock obligation rated ‘C’ is currently highly vulnerable to nonpayment. The ‘C’ rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. A ‘C’ also will be assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that is currently paying.

A-4

D—An obligation rated ‘D’ is in payment default. The ‘D’ rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor’s believes that such payments will be made during such grace period. The ‘D’ rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.

Plus (+) or Minus (–): The ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (–) sign to show relative standing within the major rating categories.

N.R.: This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poor’s does not rate a particular obligation as a matter of policy.

Active Qualifiers (Currently applied and/or outstanding)

i: This subscript is used for issues in which the credit factors, terms, or both, that determine the likelihood of receipt of payment of interest are different from the credit factors, terms or both that determine the likelihood of receipt of principal on the obligation. The ‘i’ subscript indicates that the rating addresses the interest portion of the obligation only. The ‘i’ subscript will always be used in conjunction with the ‘p’ subscript, which addresses likelihood of receipt of principal. For example, a rated obligation could be assigned ratings of “AAAp NRi” indicating that the principal portion is rated “AAA” and the interest portion of the obligation is not rated.

L: Ratings qualified with ‘L’ apply only to amounts invested up to federal deposit insurance limits.

p: This subscript is used for issues in which the credit factors, the terms, or both, that determine the likelihood of receipt of payment of principal are different from the credit factors, terms or both that determine the likelihood of receipt of interest on the obligation. The ‘p’ subscript indicates that the rating addresses the principal portion of the obligation only. The ‘p’ subscript will always be used in conjunction with the ‘i’ subscript, which addresses likelihood of receipt of interest. For example, a rated obligation could be assigned ratings of “AAAp NRi” indicating that the principal portion is rated “AAA” and the interest portion of the obligation is not rated.

pi: Ratings with a ‘pi’ subscript are based on an analysis of an issuer’s published financial information, as well as additional information in the public domain. They do not, however, reflect in-depth meetings with an issuer’s management and are therefore based on less comprehensive information than ratings without a ‘pi’ subscript. Ratings with a ‘pi’ subscript are reviewed annually based on a new year’s financial statements, but may be reviewed on an interim basis if a major event occurs that may affect the issuer’s credit quality.

pr: The letters ‘pr’ indicate that the rating is provisional. A provisional rating assumes the successful completion of the project financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful, timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of or the risk of default upon failure of such completion. The investor should exercise his own judgment with respect to such likelihood and risk.

preliminary: Preliminary ratings are assigned to issues, including financial programs, in the following circumstances. Preliminary ratings may be assigned to obligations, most commonly structured and project finance issues, pending receipt of final documentation and legal opinions. Assignment of a final rating is conditional on the receipt and approval by Standard & Poor’s of appropriate documentation. Changes in the information provided to Standard & Poor’s could result in the assignment of a different rating. In addition, Standard & Poor’s reserves the right not to issue a final rating. Preliminary ratings are assigned to Rule 415 Shelf Registrations. As specific issues, with defined terms, are offered from the master registration, a final rating may be assigned to them in accordance with Standard & Poor’s policies. The final rating may differ from the preliminary rating.

A-5

t: This symbol indicates termination structures that are designed to honor their contracts to full maturity or, should certain events occur, to terminate and cash settle all their contracts before their final maturity date.

Local Currency and Foreign Currency Risks: Country risk considerations are a standard part of Standard & Poor’s analysis for credit ratings on any issuer or issue. Currency of repayment is a key factor in this analysis. An obligor’s capacity to repay foreign currency obligations may be lower than its capacity to repay obligations in its local currency due to the sovereign government’s own relatively lower capacity to repay external versus domestic debt. These sovereign risk considerations are incorporated in the debt ratings assigned to specific issues. Foreign currency issuer ratings are also distinguished from local currency issuer ratings to identify those instances where sovereign risks make them different for the same issuer.

Description of Standard & Poor’s Ratings Group’s Ratings of Notes:

A Standard & Poor’s U.S. municipal note rating reflects the liquidity factors and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:

—Amortization schedule—the larger the final maturity relative to other maturities, the more likely it will be treated as a note; and

—Source of payment—the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.

Note rating symbols are as follows:

SP-1—Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.

SP-2—Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.

SP-3—Speculative capacity to pay principal and interest.

Description of Standard & Poor’s Ratings Group’s Short-Term Issue Credit Ratings:

A-1—Short-term obligation rated “A-1” is rated in the highest category by Standard & Poor’s. The obligor’s capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor’s capacity to meet its financial commitments is extremely strong.

A-2—Short-term obligation rated “A-2” is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor’s capacity to meet its financial commitment on the obligation is satisfactory.

A-3—Short-term obligation rated “A-3” exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

B—A short-term obligation rated ‘B’ is regarded as having significant speculative characteristics. Ratings of ‘B-1’, ‘B-2’, and ‘B-3’ may be assigned to indicate finer distinctions within the ‘B’ category. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

A-6

B-1—A short-term obligation rated ‘B-1’ is regarded as having significant speculative characteristics, but the obligor has a relatively stronger capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.

B-2—A short-term obligation rated ‘B-2’ is regarded as having significant speculative characteristics, and the obligor has an average speculative-grade capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.

B-3—A short-term obligation rated ‘B-3’ is regarded as having significant speculative characteristics, and the obligor has a relatively weaker capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.

C—A short-term obligation rated ‘C’ is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.

D—A short-term obligation rated ‘D’ is in payment default. The ‘D’ rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor’s believes that such payments will be made during such grace period. The ‘D’ rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.

Active Qualifiers (Currently applied and/or outstanding)

i: This subscript is used for issues in which the credit factors, terms, or both, that determine the likelihood of receipt of payment of interest are different from the credit factors, terms or both that determine the likelihood of receipt of principal on the obligation. The ‘i’ subscript indicates that the rating addresses the interest portion of the obligation only. The ‘i’ subscript will always be used in conjunction with the ‘p’ subscript, which addresses likelihood of receipt of principal. For example, a rated obligation could be assigned ratings of “AAAp NRi” indicating that the principal portion is rated “AAA” and the interest portion of the obligation is not rated.

L: Ratings qualified with ‘L’ apply only to amounts invested up to federal deposit insurance limits.

p: This subscript is used for issues in which the credit factors, the terms, or both, that determine the likelihood of receipt of payment of principal are different from the credit factors, terms or both that determine the likelihood of receipt of interest on the obligation. The ‘p’ subscript indicates that the rating addresses the principal portion of the obligation only. The ‘p’ subscript will always be used in conjunction with the ‘i’ subscript, which addresses likelihood of receipt of interest. For example, a rated obligation could be assigned ratings of “AAAp NRi” indicating that the principal portion is rated “AAA” and the interest portion of the obligation is not rated.

pi: Ratings with a ‘pi’ subscript are based on an analysis of an issuer’s published financial information, as well as additional information in the public domain. They do not, however, reflect in-depth meetings with an issuer’s management and are therefore based on less comprehensive information than ratings without a ‘pi’ subscript. Ratings with a ‘pi’ subscript are reviewed annually based on a new year’s financial statements, but may be reviewed on an interim basis if a major event occurs that may affect the issuer’s credit quality.

pr: The letters ‘pr’ indicate that the rating is provisional. A provisional rating assumes the successful completion of the project financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful, timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of or the risk of default upon failure of such completion. The investor should exercise his own judgment with respect to such likelihood and risk.

A-7

preliminary: Preliminary ratings are assigned to issues, including financial programs, in the following circumstances. Preliminary ratings may be assigned to obligations, most commonly structured and project finance issues, pending receipt of final documentation and legal opinions. Assignment of a final rating is conditional on the receipt and approval by Standard & Poor’s of appropriate documentation. Changes in the information provided to Standard & Poor’s could result in the assignment of a different rating. In addition, Standard & Poor’s reserves the right not to issue a final rating. Preliminary ratings are assigned to Rule 415 Shelf Registrations. As specific issues, with defined terms, are offered from the master registration, a final rating may be assigned to them in accordance with Standard & Poor’s policies. The final rating may differ from the preliminary rating.

t: This symbol indicates termination structures that are designed to honor their contracts to full maturity or, should certain events occur, to terminate and cash settle all their contracts before their final maturity date. Local Currency and Foreign Currency Risks: Country risk considerations are a standard part of Standard & Poor’s analysis for credit ratings on any issuer or issue. Currency of repayment is a key factor in this analysis. An obligor’s capacity to repay foreign currency obligations may be lower than its capacity to repay obligations in its local currency due to the sovereign government’s own relatively lower capacity to repay external versus domestic debt. These sovereign risk considerations are incorporated in the debt ratings assigned to specific issues. Foreign currency issuer ratings are also distinguished from local currency issuer ratings to identify those instances where sovereign risks make them different for the same issuer.

Description of Standard & Poor’s Ratings Group’s Ratings of Commercial Paper:

A Standard & Poor’s commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Ratings are graded into several categories, ranging from “A” for the highest-quality obligations to “D” for the lowest. These categories are as follows:

A-1—This designation indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus sign (+) designation.

A-2—Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated ‘A-1’.

A-3—Issues carrying this designation have an adequate capacity for timely payment. They are, however, more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations.

B—Issues rated ‘B’ are regarded as having only speculative capacity for timely payment. C—This rating is assigned to short-term debt obligations with a doubtful capacity for payment.

D—Debt rated ‘D’ is in payment default. The ‘D’ rating category is used when interest payments of principal payments are not made on the date due, even if the applicable grace period has not expired, unless Standard & Poor’s believes such payments will be made during such grace period.

Description of Standard & Poor’s Ratings Group’s Dual Ratings:

Standard & Poor’s assigns “dual” ratings to all debt issues that have a put option or demand feature as part of their structure.

The first rating addresses the likelihood of repayment of principal and interest as due, and the second rating addresses only the demand feature. The long-term debt rating symbols are used for bonds to denote the long-term maturity and the commercial paper rating symbols for the put option (for example, “AAA/A-1+”). With short- term demand debt, Standard & Poor’s note rating symbols are used with the commercial paper rating symbols (for example, “SP-1+/A-1+”).

A-8

Description of Fitch Ratings International Long-Term Credit Ratings:

International Long-Term Credit Ratings (“LTCR”) may also be referred to as “Long-Term Ratings.” When assigned to most issuers, it is used as a benchmark measure of probability of default and is formally described as an Issuer Default Rating (IDR). The major exception is within Public Finance, where IDRs will not be assigned as market convention has always focused on timeliness and does not draw analytical distinctions between issuers and their underlying obligations. When applied to issues or securities, the LTCR may be higher or lower than the issuer rating (IDR) to reflect relative differences in recovery expectations. The following rating scale applies to foreign currency and local currency ratings.

Investment Grade

AAA—Highest credit quality. “AAA” ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.

AA—Very high credit quality. “AA” ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.

A—High credit quality. “A” ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.

BBB—Good credit quality. “BBB” ratings indicate that there is currently expectations of low credit risk. The capacity for payment of financial commitments is considered adequate, but adverse changes in circumstances and economic conditions are more likely to impair this capacity. This is the lowest investment-grade category.

Speculative Grade

BB—Speculative. “BB” ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade.

B—Highly speculative. For issuers and performing obligations, ‘B’ ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment. For individual obligations, ‘B’ ratings may indicate distressed or defaulted obligations with potential for extremely high recoveries. Such obligations would possess a Recovery Rating of ‘R1’ (outstanding).

CCC—For issuers and performing obligations, default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic conditions. For individual obligations, may indicate distressed or defaulted obligations with potential for average to superior levels of recovery. Differences in credit quality may be denoted by plus/minus distinctions. Such obligations typically would possess a Recovery Rating of ‘R2’ (superior), or ‘R3’ (good) or ‘R4’ (average).

CC—For issuers and performing obligations, default of some kind appears probable. For individual obligations, may indicate distressed or defaulted obligations with a Recovery Rating of ‘R4’ (average) or ‘R5’ (below average).

C—For issuers and performing obligations, default is imminent. For individual obligations, may indicate distressed or defaulted obligations with potential for below-average to poor recoveries. Such obligations would possess a Recovery Rating of ‘R6’ (poor).

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RD—Indicates an entity that has failed to make due payments (within the applicable grace period) on some but not all material financial obligations, but continues to honor other classes of obligations.

D—Indicates an entity or sovereign that has defaulted on all of its financial obligations. Default generally is defined as one of the following: (i) failure of an obligor to make timely payment of principal and/or interest under the contractual terms of any financial obligation; (ii) the bankruptcy filings, administration, receivership, liquidation or other winding-up or cessation of business of an obligor; or (iii) the distressed or other coercive exchange of an obligation, where creditors were offered securities with diminished structural or economic terms compared with the existing obligation.

Default ratings are not assigned prospectively; within this context, non-payment on an instrument that contains a deferral feature or grace period will not be considered a default until after the expiration of the deferral or grace period.

Issuers will be rated ‘D’ upon a default. Defaulted and distressed obligations typically are rated along the continuum of ‘C’ to ‘B’ ratings categories, depending upon their recovery prospects and other relevant characteristics. Additionally, in structured finance transactions, where analysis indicates that an instrument is irrevocably impaired such that it is not expected to meet pay interest and/or principal in full in accordance with the terms of the obligation’s documentation during the life of the transaction, but where no payment default in accordance with the terms of the documentation is imminent, the obligation may be rated in the ‘B’ or ‘CCC-C’ categories.

Default is determined by reference to the terms of the obligations’ documentation. Fitch will assign default ratings where it has reasonably determined that payment has not been made on a material obligation in accordance with the requirements of the obligation’s documentation, or where it believes that default ratings consistent with Fitch’s published definition of default are the most appropriate ratings to assign.

Description of Fitch Ratings International Short-Term Credit Ratings:

International Short-Term Credit Ratings may also be referred to as “Short-Term Ratings.” The following ratings scale applies to foreign currency and local currency ratings. A short-term rating has a time horizon of less than 13 months for most obligations, or up to three years for U.S. public finance, in line with industry standards, to reflect unique characteristics of bond, tax, and revenue anticipation notes that are commonly issued with terms up to three years. Short-term ratings thus places greater emphasis on the liquidity necessary to meet financial commitments in a timely manner.

F1—Highest credit quality. Indicates the strongest capacity for timely payment of financial commitments; may have an added “+” to denote any exceptionally strong credit feature.

F2—Good credit quality. A satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.

F3—Fair credit quality. The capacity for timely payment of financial commitments is adequate; however, near-term adverse changes could result in a reduction to non-investment grade.

B—Speculative. Minimal capacity for timely payment of financial commitments, plus vulnerability to near-term adverse changes in financial and economic conditions.

C—High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon a sustained, favorable business and economic environment.

D—Default. Indicates an entity or sovereign that has defaulted on all of its financial obligations.

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Notes to Fitch Ratings International Long-Term and Short-Term Credit Ratings:

The modifiers “+” or “-” may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the ‘AAA’ Long-term rating category, to categories below ‘CCC’, or to Short-term ratings other than ‘F1’. (The +/- modifiers are only used to denote issues within the CCC category, whereas issuers are only rated CCC without the use of modifiers.)

Rating Watch: Ratings are placed on Rating Watch to notify investors that there is a reasonable probability of a rating change and the likely direction of such change. These are designated as “Positive”, indicating a potential upgrade, “Negative”, for a potential downgrade, or “Evolving”, if ratings may be raised, lowered or maintained. Rating Watch is typically resolved over a relatively short period.

Rating Outlook: An Outlook indicates the direction a rating is likely to move over a one to two-year period. Outlooks may be positive, stable or negative. A positive or negative Rating Outlook does not imply a rating change is inevitable. Similarly, ratings for which outlooks are ‘stable’ could be upgraded or downgraded before an outlook moves to positive or negative if circumstances warrant such an action. Occasionally, Fitch Ratings may be unable to identify the fundamental trend. In these cases, the Rating Outlook may be described as evolving.

Program ratings (such as the those assigned to MTN shelf registrations) relate only to standard issues made under the program concerned; it should not be assumed that these ratings apply to every issue made under the program. In particular, in the case of non-standard issues, i.e. those that are linked to the credit of a third party or linked to the performance of an index, ratings of these issues may deviate from the applicable program rating.

Variable rate demand obligations and other securities which contain a short-term ‘put’ or other similar demand feature will have a dual rating, such as AAA/F1+. The first rating reflects the ability to meet long-term principal and interest payments, whereas the second rating reflects the ability to honor the demand feature in full and on time.

Interest Only: Interest Only ratings are assigned to interest strips. These ratings do not address the possibility that a security holder might fail to recover some or all of its initial investment due to voluntary or involuntary principal repayments.

Principal Only: Principal Only ratings address the likelihood that a security holder will receive their initial principal investment either before or by the scheduled maturity date.

Rate of Return: Ratings also may be assigned to gauge the likelihood of an investor receiving a certain predetermined internal rate of return without regard to the precise timing of any cash flows.

‘PIF’: Paid-in -Full; denotes a security that is paid-in-full, matured, called, or refinanced.

‘NR’ indicates that Fitch Ratings does not rate the issuer or issue in question.

‘Withdrawn’: A rating is withdrawn when Fitch Ratings deems the amount of information available to be inadequate for rating purposes, or when an obligation matures, is called, or refinanced, or for any other reason Fitch Ratings deems sufficient.

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APPENDIX B

Western Asset Management Company Proxy Voting Policy

Background

An investment adviser is required to adopt and implement policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with fiduciary duties and SEC Rule 206(4)-6 under the Investment Advisers Act of 1940 (“Advisers Act”). The authority to vote the proxies of our clients is established through investment management agreements or comparable documents. In addition to SEC requirements governing advisers, long-standing fiduciary standards and responsibilities have been established for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the investment manager.

Policy

As a fixed-income only manager, the occasion to vote proxies is very rare. However, the Firm has adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and SEC Rule 206(4)-6 under the Investment Advisers Act of 1940 (“Advisers Act”). In addition to SEC requirements governing advisers, our proxy voting policies reflect the long-standing fiduciary standards and responsibilities for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the Investment Manager.

While the guidelines included in the procedures are intended to provide a benchmark for voting standards, each vote is ultimately cast on a case-by-case basis, taking into consideration the Firm’s contractual obligations to our clients and all other relevant facts and circumstances at the time of the vote (such that these guidelines may be overridden to the extent the Firm deems appropriate).

In exercising its voting authority, Western Asset will not consult or enter into agreements with officers, directors or employees of Legg Mason Inc. or any of its affiliates (other than Western Asset Management Company Limited) regarding the voting of any securities owned by its clients.

Procedure

Responsibility and Oversight

The Western Asset Legal and Compliance Department (“Compliance Department”) is responsible for administering and overseeing the proxy voting process. The gathering of proxies is coordinated through the Corporate Actions area of Investment Support (“Corporate Actions”). Research analysts and portfolio managers are responsible for determining appropriate voting positions on each proxy utilizing any applicable guidelines contained in these procedures.

Client Authority

At account start-up, or upon amendment of an IMA, the applicable client IMA are similarly reviewed. If an agreement is silent on proxy voting, but contains an overall delegation of discretionary authority or if the account represents assets of an ERISA plan, Western Asset will assume responsibility for proxy voting. The Client Account Transition Team maintains a matrix of proxy voting authority.

Proxy Gathering

Registered owners of record, client custodians, client banks and trustees (“Proxy Recipients”) that receive proxy materials on behalf of clients should forward them to Corporate Actions. Proxy Recipients for new clients

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(or, if Western Asset becomes aware that the applicable Proxy Recipient for an existing client has changed, the Proxy Recipient for the existing client) are notified at start-up of appropriate routing to Corporate Actions of proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. If Western Asset personnel other than Corporate Actions receive proxy materials, they should promptly forward the materials to Corporate Actions.

Proxy Voting

Once proxy materials are received by Corporate Actions, they are forwarded to the Legal and Compliance Department for coordination and the following actions:

a. Proxies are reviewed to determine accounts impacted.

b. Impacted accounts are checked to confirm Western Asset voting authority.

c. Legal and Compliance Department staff reviews proxy issues to determine any material conflicts of interest. (See conflicts of interest section of these procedures for further information on determining material conflicts of interest.)

d. If a material conflict of interest exists, (i) to the extent reasonably practicable and permitted by applicable law, the client is promptly notified, the conflict is disclosed and Western Asset obtains the client’s proxy voting instructions, and (ii) to the extent that it is not reasonably practicable or permitted by applicable law to notify the client and obtain such instructions (e.g., the client is a mutual fund or other commingled vehicle or is an ERISA plan client), Western Asset seeks voting instructions from an independent third party.

e. Legal and Compliance Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers determine votes on a case-by-case basis taking into account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, Western Asset may vote the same proxy differently for different clients. The analyst’s or portfolio manager’s basis for their decision is documented and maintained by the Legal and Compliance Department.

f. Legal and Compliance Department staff votes the proxy pursuant to the instructions received in (d) or (e) and returns the voted proxy as indicated in the proxy materials.

Timing

Western Asset personnel act in such a manner to ensure that, absent special circumstances, the proxy gathering and proxy voting steps noted above can be completed before the applicable deadline for returning proxy votes.

Recordkeeping

Western Asset maintains records of proxies voted pursuant to Section 204-2 of the Advisers Act and ERISA DOL Bulletin 94-2. These records include:

a. A copy of Western Asset’s policies and procedures.

b. Copies of proxy statements received regarding client securities.

c. A copy of any document created by Western Asset that was material to making a decision how to vote proxies.

d. Each written client request for proxy voting records and Western Asset’s written response to both verbal and written client requests.

B-2

e. A proxy log including:

1. Issuer name;

2. Exchange ticker symbol of the issuer’s shares to be voted;

3. Council on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted;

4. A brief identification of the matter voted on;

5. Whether the matter was proposed by the issuer or by a shareholder of the issuer;

6. Whether a vote was cast on the matter;

7. A record of how the vote was cast; and

8. Whether the vote was cast for or against the recommendation of the issuer’s management team.

Records are maintained in an easily accessible place for five years, the first two in Western Asset’s offices.

Disclosure

Western Asset’s proxy policies are described in the firm’s Part II of Form ADV. Clients will be provided a copy of these policies and procedures upon request. In addition, upon request, clients may receive reports on how their proxies have been voted.

Conflicts of Interest

All proxies are reviewed by the Legal and Compliance Department for material conflicts of interest. Issues to be reviewed include, but are not limited to:

1. Whether Western (or, to the extent required to be considered by applicable law, its affiliates) manages assets for the company or an employee group of the company or otherwise has an interest in the company;

2. Whether Western or an officer or director of Western or the applicable portfolio manager or analyst responsible for recommending the proxy vote (together, “Voting Persons”) is a close relative of or has a personal or business relationship with an executive, director or person who is a candidate for director of the company or is a participant in a proxy contest; and

3. Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders.

Voting Guidelines

Western Asset’s substantive voting decisions turn on the particular facts and circumstances of each proxy vote and are evaluated by the designated research analyst or portfolio manager. The examples outlined below are meant as guidelines to aid in the decision making process.

Guidelines are grouped according to the types of proposals generally presented to shareholders. Part I deals with proposals which have been approved and are recommended by a company’s board of directors; Part II deals with proposals submitted by shareholders for inclusion in proxy statements; Part III addresses issues relating to voting shares of investment companies; and Part IV addresses unique considerations pertaining to foreign issuers.

I. Board Approved Proposals

The vast majority of matters presented to shareholders for a vote involve proposals made by a company itself that have been approved and recommended by its board of directors. In view of the enhanced corporate

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governance practices currently being implemented in public companies, Western Asset generally votes in support of decisions reached by independent boards of directors. More specific guidelines related to certain board-approved proposals are as follows:

1. Matters relating to the Board of Directors

Western Asset votes proxies for the election of the company’s nominees for directors and for board-approved proposals on other matters relating to the board of directors with the following exceptions:

a. Votes are withheld for the entire board of directors if the board does not have a majority of independent directors or the board does not have nominating, audit and compensation committees composed solely of independent directors.

b. Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director.

c. Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences.

d. Votes are cast on a case-by-case basis in contested elections of directors.

2. Matters relating to Executive Compensation

Western Asset generally favors compensation programs that relate executive compensation to a company’s long-term performance. Votes are cast on a case-by-case basis on board-approved proposals relating to executive compensation, except as follows:

a. Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for stock option plans that will result in a minimal annual dilution.

b. Western Asset votes against stock option plans or proposals that permit replacing or repricing of underwater options.

c. Western Asset votes against stock option plans that permit issuance of options with an exercise price below the stock’s current market price.

d. Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for employee stock purchase plans that limit the discount for shares purchased under the plan to no more than 15% of their market value, have an offering period of 27 months or less and result in dilution of 10% or less.

3. Matters relating to Capitalization

The management of a company’s capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstances of each company. As a result, Western Asset votes on a case-by-case basis on board-approved proposals involving changes to a company’s capitalization except where Western Asset is otherwise withholding votes for the entire board of directors.

a. Western Asset votes for proposals relating to the authorization of additional common stock.

b. Western Asset votes for proposals to effect stock splits (excluding reverse stock splits).

c. Western Asset votes for proposals authorizing share repurchase programs.

4. Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions

Western Asset votes these issues on a case-by-case basis on board-approved transactions.

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5. Matters relating to Anti-Takeover Measures

Western Asset votes against board-approved proposals to adopt anti-takeover measures except as follows:

a. Western Asset votes on a case-by-case basis on proposals to ratify or approve shareholder rights plans.

b. Western Asset votes on a case-by-case basis on proposals to adopt fair price provisions.

6. Other Business Matters

Western Asset votes for board-approved proposals approving such routine business matters such as changing the company’s name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting.

a. Western Asset votes on a case-by-case basis on proposals to amend a company’s charter or bylaws.

b. Western Asset votes against authorization to transact other unidentified, substantive business at the meeting.

II. Shareholder Proposals

SEC regulations permit shareholders to submit proposals for inclusion in a company’s proxy statement. These proposals generally seek to change some aspect of a company’s corporate governance structure or to change some aspect of its business operations. Western Asset votes in accordance with the recommendation of the company’s board of directors on all shareholder proposals, except as follows:

1. Western Asset votes for shareholder proposals to require shareholder approval of shareholder rights plans.

2. Western Asset votes for shareholder proposals that are consistent with Western Asset’s proxy voting guidelines for board-approved proposals.

3. Western Asset votes on a case-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors.

III. Voting Shares of Investment Companies

Western Asset may utilize shares of open or closed-end investment companies to implement its investment strategies. Shareholder votes for investment companies that fall within the categories listed in Parts I and II above are voted in accordance with those guidelines.

1. Western Asset votes on a case-by-case basis on proposals relating to changes in the investment objectives of an investment company taking into account the original intent of the fund and the role the fund plays in the clients’ portfolios.

2. Western Asset votes on a case-by-case basis all proposals that would result in increases in expenses (e.g., proposals to adopt 12b-1 plans, alter investment advisory arrangements or approve fund mergers) taking into account comparable expenses for similar funds and the services to be provided.

IV. Voting Shares of Foreign Issuers

In the event Western Asset is required to vote on securities held in non-U.S. issuers—i.e. issuers that are incorporated under the laws of a foreign jurisdiction and that are not listed on a U.S. securities exchange or the NASDAQ stock market, the following guidelines are used, which are premised on the existence of a sound corporate governance and disclosure framework. These guidelines, however, may not be appropriate under some circumstances for foreign issuers and therefore apply only where applicable.

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1. Western Asset votes for shareholder proposals calling for a majority of the directors to be independent of management.

2. Western Asset votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees.

3. Western Asset votes for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of U.S. stock exchanges, and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated.

4. Western Asset votes on a case-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of a company’s outstanding common stock where shareholders do not have preemptive rights, or (2) the issuance of common stock in excess of 100% of a company’s outstanding common stock where shareholders have preemptive rights.

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Supplement to SAI dated 05/20/2008

SUPPLEMENT DATED MAY 20, 2008

TO THE STATEMENT OF ADDITIONAL INFORMATION

OF EACH FUND INDICATED BELOW

The following supplements, and replaces any contrary information in, the Statement of Additional Information of each fund listed in the Appendix to this supplement.

Effective January 1, 2008, the manager is permitted to recapture amounts previously voluntarily forgone or reimbursed by the manager to the fund during the same fiscal year if the fund’s total annual operating expenses have fallen to a level below the voluntary fee waiver/reimbursement (“expense cap”) shown in the fee table of the fund’s prospectus. In no case will the manager recapture any amount that would result, on any particular fund business day, in the fund’s total annual operating expenses exceeding the expense cap. The Board has been apprised of the expense cap and recapture arrangement.

Appendix

Fund Name	Date of Statement of Additional Information
Legg Mason Partners Equity Trust
Legg Mason Partners Aggressive Growth Fund	December 20, 2007
Legg Mason Partners All Cap Fund	August 28, 2007
Legg Mason Partners Appreciation Fund	April 28, 2008
Legg Mason Partners Capital and Income Fund	April 28, 2008
Legg Mason Partners Capital Fund	April 28, 2008
Legg Mason Partners Classic Values Fund	March 28, 2008
Legg Mason Partners Convertible Fund	November 1, 2007
Legg Mason Partners Diversified Large Cap Growth Fund	February 20, 2008
Legg Mason Partners Dividend Strategy Fund	February 20, 2008
Legg Mason Partners Emerging Markets Equity Fund	February 20, 2008
Legg Mason Partners Equity Fund	April 28, 2008
Legg Mason Partners Financial Services Fund	July 27, 2007
Legg Mason Partners Fundamental Value Fund	January 29, 2008
Legg Mason Partners Global Equity Fund	April 28, 2008
Legg Mason Partners International All Cap Opportunity Fund	February 28, 2008
Legg Mason Partners Investors Value Fund	April 28, 2008
Legg Mason Partners Large Cap Growth Fund	April 1, 2008
Legg Mason Partners Lifestyle Allocation 30%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 50%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 70%	May 1, 2008

Fund Name	Date of Statement of Additional Information
Legg Mason Partners Lifestyle Allocation 85%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 100%	May 1, 2008
Legg Mason Partners Lifestyle Income Fund	May 1, 2008
Legg Mason Partners Mid Cap Core Fund	March 20, 2008
Legg Mason Partners S&P 500 Index Fund	April 28, 2008
Legg Mason Partners Small Cap Core Fund	April 28, 2008
Legg Mason Partners Small Cap Growth Fund	April 28, 2008
Legg Mason Partners Small Cap Value Fund	January 29, 2008
Legg Mason Partners Social Awareness Fund	April 16, 2007, as supplemented January 7, 2008
Legg Mason Partners U.S. Large Cap Equity Fund	April 28, 2008
Legg Mason Partners 130/30 U.S. Large Cap Equity Fund	November 7, 2007
Legg Mason Partners Income Trust
Legg Mason Partners Adjustable Rate Income Fund	September 28, 2007
Legg Mason Partners California Municipals Fund	June 28, 2007
Legg Mason Partners Core Bond Fund	December 1, 2007
Legg Mason Partners Core Plus Bond Fund	December 1, 2007
Legg Mason Partners Diversified Strategic Income Fund	December 1, 2007
Legg Mason Partners Global High Yield Bond Fund	April 28, 2008
Legg Mason Partners Global Income Fund	September 21, 2007
Legg Mason Partners Government Securities Fund	April 28, 2008
Legg Mason Partners High Income Fund	December 1, 2007
Legg Mason Partners Inflation Management Fund	February 20, 2008
Legg Mason Partners Intermediate Maturity California Municipals Fund	March 20, 2008
Legg Mason Partners Intermediate Maturity New York Municipals Fund	March 20, 2008
Legg Mason Partners Intermediate-Term Municipals Fund	July 27, 2007
Legg Mason Partners Investment Grade Bond Fund	April 28, 2008
Legg Mason Partners Managed Municipals Fund	June 28, 2007
Legg Mason Partners Massachusetts Municipals Fund	March 20, 2008
Legg Mason Partners Municipal High Income Fund	December 1, 2007
Legg Mason Partners New Jersey Municipals Fund	July 27, 2007
Legg Mason Partners New York Municipals Fund	July 27, 2007
Legg Mason Partners Oregon Municipals Fund	August 28, 2007
Legg Mason Partners Pennsylvania Municipals Fund	July 27, 2007
Legg Mason Partners Short Duration Municipal Income Fund	February 20, 2008
Legg Mason Partners Short/Intermediate U.S. Government Fund	April 28, 2008
Legg Mason Partners Short-Term Investment Grade Bond Fund	April 28, 2008
Western Asset Emerging Markets Debt Portfolio	June 28, 2007
Western Asset Global High Yield Bond Portfolio	June 28, 2007

Fund Name	Date of Statement of Additional Information
Legg Mason Partners Money Market Trust
Citi California Tax Free Reserves1	December 7, 2007
Citi Cash Reserves1	December 7, 2007
Citi Connecticut Tax Free Reserves1	December 7, 2007
Citi New York Tax Free Reserves1	December 7, 2007
Citi Tax Free Reserves1	December 7, 2007
Citi U.S. Treasury Reserves1	December 7, 2007
Western Asset Money Market Fund	April 28, 2008
Western Asset Government Money Market Fund	April 28, 2008
Western Asset Municipal Money Market Fund	July 27, 2007
Western Asset California Municipal Money Market Fund	July 27, 2007
Western Asset Massachusetts Municipal Money Market Fund	July 27, 2007
Western Asset New York Municipal Money Market Fund	July 27, 2007
Legg Mason Partners Institutional Trust
Citi Institutional Cash Reserves1	December 7, 2007
Citi Institutional Enhanced Income Fund1	December 7, 2007
Citi Institutional Liquid Reserves1	December 7, 2007
Citi Institutional Tax Free Reserves1	December 7, 2007
Citi Institutional U.S. Treasury Reserves1	December 7, 2007
Western Asset Institutional Government Money Market Fund	September 28, 2007, restated April 18, 2008
Western Asset Institutional Money Market Fund	September 28, 2007, restated April 18, 2008
Western Asset Institutional Municipal Money Market Fund	September 28, 2007, restated April 18, 2008
Legg Mason Partners Premium Money Market Trust
Citi Premium Liquid Reserves1	December 7, 2007
Citi Premium U.S. Treasury Reserves1	December 7, 2007

¹ “Citi” is a service mark of Citigroup, licensed for use by Legg Mason as the name of funds. Legg Mason and its affiliates, as well as the fund’s investment manager, are not affiliated with Citigroup. Investments in the fund are not bank deposits or obligations of Citibank.

FDXX011036

Supplement to SAI dated 09/02/2008

Supplement Dated September 2, 2008

to the Prospectus and Statement of Additional Information

Dated April 28, 2008

for

Legg Mason Partners Income Trust

Legg Mason Partners Investment Grade Bond Fund

(the “Fund”)

Effective September 2, 2008, the name of the Fund is Legg Mason Partners Corporate Bond Fund. The Fund’s current investment objective, strategies and management remain unchanged.

FDXX011269

Supplement to SAI dated 10/01/2008

LEGG MASON PARTNERS INCOME TRUST

LEGG MASON PARTNERS MONEY MARKET TRUST

LEGG MASON PARTNERS EQUITY TRUST

SUPPLEMENT DATED OCTOBER 1, 2008

TO THE STATEMENT OF ADDITIONAL INFORMATION

OF THE FUNDS LISTED IN SCHEDULE A

The following information supplements the “Purchase of Shares” section of each Statement of Additional Information:

The following persons are eligible to purchase Class I shares of the fund: 1) Current employees of the fund’s manager and its affiliates; 2) current and former board members of investment companies managed by affiliates of Legg Mason; 3) current and former board members of Legg Mason; and 4) the immediate families of such persons. Immediate families are such person’s spouse, including the surviving spouse of a deceased board member, and children under the age of 21. For such investors, the minimum initial investment is $1,000 and the minimum for each purchase of additional shares is $50.

Schedule A

Fund	Statement of Additional Information Date
LEGG MASON PARTNERS INCOME TRUST
LEGG MASON PARTNERS ADJUSTABLE RATE INCOME FUND	September 12, 2008
LEGG MASON PARTNERS CALIFORNIA MUNICIPALS FUND	June 11, 2008
LEGG MASON PARTNERS DIVERSIFIED STRATEGIC INCOME FUND	December 1, 2007
LEGG MASON PARTNERS GOVERNMENT SECURITIES FUND	April 28, 2008

Fund	Statement of Additional Information Date
LEGG MASON PARTNERS INTERMEDIATE MATURITY CALIFORNIA MUNICIPALS FUND	March 20, 2008
LEGG MASON PARTNERS INTERMEDIATE MATURITY NEW YORK MUNICIPALS FUND	March 20, 2008
LEGG MASON PARTNERS INTERMEDIATE-TERM MUNICIPALS FUND	July 20, 2008
LEGG MASON PARTNERS CORPORATE BOND FUND	April 28, 2008
LEGG MASON PARTNERS MANAGED MUNICIPALS FUND	June 11, 2008
LEGG MASON PARTNERS MASSACHUSETTS MUNICIPALS FUND	March 20, 2008
LEGG MASON PARTNERS MUNICIPAL HIGH INCOME FUND	December 1, 2007
LEGG MASON PARTNERS NEW JERSEY MUNICIPALS FUND	July 20, 2008
LEGG MASON PARTNERS NEW YORK MUNICIPALS FUND	July 20, 2008
LEGG MASON PARTNERS OREGON MUNICIPALS FUND	August 8, 2008
LEGG MASON PARTNERS PENNSYLVANIA MUNICIPALS FUND	July 20, 2008
LEGG MASON PARTNERS SHORT DURATION MUNICIPAL INCOME FUND	February 20, 2008
WESTERN ASSET EMERGING MARKETS DEBT PORTFOLIO	June 11, 2008
WESTERN ASSET GLOBAL HIGH YIELD BOND PORTFOLIO	June 11, 2008

Fund	Statement of Additional Information Date
LEGG MASON PARTNERS MONEY MARKET TRUST
WESTERN ASSET MONEY MARKET FUND	August 1, 2008
WESTERN ASSET GOVERNMENT MONEY MARKET FUND	August 1, 2008
WESTERN ASSET MUNICIPAL MONEY MARKET FUND	August 1, 2008
WESTERN ASSET CALIFORNIA MUNICIPAL MONEY MARKET FUND	August 1, 2008
WESTERN ASSET MASSACHUSETTS MUNICIPAL MONEY MARKET FUND	August 1, 2008
WESTERN ASSET NEW YORK MUNICIPAL MONEY MARKET FUND	August 1, 2008
WESTERN ASSET AMT TAX FREE MONEY MARKET FUND	September 16, 2008
WESTERN ASSET CONNECTICUT MONEY MARKET—CLASS I (A SHARE CLASS OF CITI CONNECTICUT TAX FREE RESERVES*)	December 7, 2007
LEGG MASON PARTNERS EQUITY TRUST
LEGG MASON PARTNERS AGGRESSIVE GROWTH FUND
	December 20, 2007, as revised
	July 9, 2008
LEGG MASON PARTNERS ALL CAP FUND	August 8, 2008
LEGG MASON PARTNERS APPRECIATION FUND	April 28, 2008
LEGG MASON PARTNERS CAPITAL AND INCOME FUND	April 28, 2008
LEGG MASON PARTNERS CAPITAL FUND	April 28, 2008
LEGG MASON PARTNERS CONVERTIBLE FUND	November 1, 2007
LEGG MASON PARTNERS DIVERSIFIED LARGE CAP GROWTH FUND	February 20, 2008

Fund	Statement of Additional Information Date
LEGG MASON PARTNERS DIVIDEND STRATEGY FUND	February 20, 2008
LEGG MASON PARTNERS EMERGING MARKETS EQUITY FUND	February 20, 2008
LEGG MASON PARTNERS EQUITY FUND	April 28, 2008
LEGG MASON PARTNERS EQUITY INCOME BUILDER FUND	September 2, 2008
LEGG MASON PARTNERS FINANCIAL SERVICES FUND	July 20, 2008
LEGG MASON PARTNERS FUNDAMENTAL VALUE FUND
	January 28, 2008, as revised
	July 9, 2008
LEGG MASON PARTNERS GLOBAL EQUITY FUND	April 28, 2008
LEGG MASON PARTNERS INTERNATIONAL ALL CAP OPPORTUNITY FUND
	February 28, 2008 as revised
	July 9, 2008
LEGG MASON PARTNERS INVESTORS VALUE FUND	April 28, 2008
LEGG MASON PARTNERS LARGE CAP GROWTH FUND
	April 1, 2008 as revised
	July 9, 2008
LEGG MASON PARTNERS LIFESTYLE ALLOCATION 30%	May 1, 2008
LEGG MASON PARTNERS LIFESTYLE ALLOCATION 50%	May 1, 2008
LEGG MASON PARTNERS LIFESTYLE ALLOCATION 70%	May 1, 2008
LEGG MASON PARTNERS LIFESTYLE ALLOCATION 85%	May 1, 2008

Fund	Statement of Additional Information Date
LEGG MASON PARTNERS LIFESTYLE ALLOCATION 100%	May 1, 2008
LEGG MASON PARTNERS LIFESTYLE INCOME FUND	May 1, 2008
LEGG MASON PARTNERS MID CAP CORE FUND
	March 20, 2008, as revised
	July 9, 2008
LEGG MASON PARTNERS SMALL CAP CORE FUND	April 28, 2008
LEGG MASON PARTNERS SMALL CAP GROWTH FUND	April 28, 2008
LEGG MASON PARTNERS SMALL CAP VALUE FUND	January 29, 2008
LEGG MASON PARTNERS SOCIAL AWARENESS FUND	May 30, 2008
LEGG MASON PARTNERS 130/30 U.S. LARGE CAP EQUITY FUND	November 7, 2007
LEGG MASON PARTNERS TARGET RETIREMENT 2015	September 2, 2008
LEGG MASON PARTNERS TARGET RETIREMENT 2020	September 2, 2008
LEGG MASON PARTNERS TARGET RETIREMENT 2025	September 2, 2008
LEGG MASON PARTNERS TARGET RETIREMENT 2030	September 2, 2008
LEGG MASON PARTNERS TARGET RETIREMENT 2035	September 2, 2008
LEGG MASON PARTNERS TARGET RETIREMENT 2040	September 2, 2008
LEGG MASON PARTNERS TARGET RETIREMENT 2045	September 2, 2008

Fund	Statement of Additional Information Date
LEGG MASON PARTNERS TARGET RETIREMENT 2050	September 2, 2008
LEGG MASON PARTNERS TARGET RETIREMENT FUND	September 2, 2008

* Citi is a service mark of Citigroup, licensed for use by Legg Mason as the name of funds. Legg Mason and its affiliates, as well as the fund’s investment manager, are not affiliated with Citigroup. Investments in the fund are not bank deposits or obligations of Citibank.

FDXX011352

Supplement to SAI dated 02/27/2009

LEGG MASON PARTNERS INCOME TRUST

LEGG MASON PARTNERS EQUITY TRUST

SUPPLEMENT DATED FEBRUARY 27, 2009 TO THE PROSPECTUSES AND STATEMENTS OF ADDITIONAL INFORMATION OF THE FUNDS LISTED IN SCHEDULE A

The following supplements information in the Prospectus and Statement of Additional Information concerning Letters of Intent:

Effective February 27, 2009, purchases made within 90 days prior to the date of a Letter of Intent will no longer be considered eligible to be treated as purchases made under such letter for the purpose of receiving a reduced sales charge. Such purchases will continue to be credited toward your Letter of Intent asset goal.

Investors who have entered into a Letter of Intent prior to the date of this supplement will continue to be eligible to treat such purchases as purchases made under the Letter of Intent.

For more information and to determine which shares may be credited toward your Letter of Intent asset goal, please contact your Service Agent.

Schedule A

Fund Name	Date of Prospectus and SAI
LEGG MASON PARTNERS EQUITY TRUST
Legg Mason Partners Aggressive Growth Fund	December 15, 2008
Legg Mason Partners All Cap Fund	August 8, 2008
Legg Mason Partners Appreciation Fund	April 28, 2008
Legg Mason Partners Capital and Income Fund	April 28, 2008
Legg Mason Partners Capital Fund	April 28, 2008
Legg Mason Partners Convertible Fund	November 7, 2008
Legg Mason Partners Equity Fund	April 28, 2008
Legg Mason Partners Financial Services Fund	July 20, 2008
Legg Mason Partners Fundamental Value Fund	January 28, 2009
Legg Mason Partners Global Equity Fund	April 28, 2008

Fund Name	Date of Prospectus and SAI
Legg Mason Partners Investors Value Fund	April 28, 2008
Legg Mason Partners Large Cap Growth Fund	April 28, 2008
Legg Mason Partners Lifestyle Allocation 30%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 50%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 70%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 85%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 100%	May 1, 2008
Legg Mason Partners Lifestyle Income Fund	May 1, 2008
Legg Mason Partners Mid Cap Core Fund	March 20, 2008
Legg Mason Partners Small Cap Core Fund	April 28, 2008
Legg Mason Partners Small Cap Growth Fund	April 28, 2008
Legg Mason Partners Small Cap Value Fund	January 28, 2009
Legg Mason Partners Social Awareness Fund	May 30, 2008
Legg Mason Partners Target Retirement 2015	September 2, 2008
Legg Mason Partners Target Retirement 2020	September 2, 2008
Legg Mason Partners Target Retirement 2025	September 2, 2008
Legg Mason Partners Target Retirement 2030	September 2, 2008
Legg Mason Partners Target Retirement 2035	September 2, 2008
Legg Mason Partners Target Retirement 2040	September 2, 2008
Legg Mason Partners Target Retirement 2045	September 2, 2008
Legg Mason Partners Target Retirement 2050	September 2, 2008
Legg Mason Partners Target Retirement Fund	September 2, 2008
Legg Mason Partners U.S. Large Cap Equity Fund	April 28, 2008
LEGG MASON PARTNERS INCOME TRUST
Legg Mason Partners Adjustable Rate Income Fund	September 12, 2008
Legg Mason Partners California Municipals Fund	June 11, 2008
Legg Mason Partners Core Bond Fund	November 25, 2008
Legg Mason Partners Core Plus Bond Fund	November 25, 2008
Legg Mason Partners Strategic Income Fund	November 25, 2008
Legg Mason Partners Global High Yield Bond Fund	April 28, 2008
Legg Mason Partners Government Securities Fund	April 28, 2008

Fund Name	Date of Prospectus and SAI
Legg Mason Partners High Income Fund	November 25, 2008
Legg Mason Partners Intermediate Maturity California Municipals Fund	March 20, 2008
Legg Mason Partners Intermediate Maturity New York Municipals Fund	March 20, 2008
Legg Mason Partners Intermediate-Term Municipals Fund	July 20, 2008
Legg Mason Partners Corporate Bond Fund	April 28, 2008
Legg Mason Partners Managed Municipals Fund	June 11, 2008
Legg Mason Partners Massachusetts Municipals Fund	March 20, 2008
Legg Mason Partners Municipal High Income Fund	November 25, 2008
Legg Mason Partners New Jersey Municipals Fund	July 20, 2008
Legg Mason Partners New York Municipals Fund	July 20, 2008
Legg Mason Partners Oregon Municipals Fund	August 8, 2008
Legg Mason Partners Pennsylvania Municipals Fund	July 20, 2008
Legg Mason Partners Short-Term Bond Fund	April 28, 2008
Western Asset Emerging Markets Debt Portfolio	February 2, 2009

FD XX011632

Supplement to SAI dated 03/13/2009

LEGG MASON PARTNERS INCOME TRUST

LEGG MASON PARTNERS MONEY MARKET TRUST

SUPPLEMENT DATED MARCH 13, 2009

TO THE STATEMENTS OF ADDITIONAL INFORMATION

OF THE FUNDS

LISTED IN SCHEDULE A BELOW

Unless otherwise noted, effective at the close of business on April 3, 2009, the following supersedes and replaces any contrary information in the fund’s Statement of Additional Information”.

Letter of Intent—helps you take advantage of breakpoints in Class A sales charges. You may purchase Class A shares of funds sold by the Distributor over a 13-month period and pay the same sales charge, if any, as if all shares had been purchased at once. You have a choice of five Asset Level Goal amounts, as follows:

(1) $100,000

(2) $250,000

(3) $500,000

(4) $750,000

(5) $1,000,000

Each time you make a Class A purchase under a Letter of Intent, you will be entitled to pay the sales charge that is applicable to the amount of your Asset Level Goal. For example, if your Asset Level Goal is $100,000, any Class A investments you make under a Letter of Intent would be subject to the sales charge of the specific fund you are investing in for purchases of $100,000. Sales charges and breakpoints vary among the funds sold by the Distributor.

When you enter into a Letter of Intent, you agree to purchase in Eligible Accounts over a thirteen (13) month period Eligible Fund Purchases in an amount equal to the Asset Level Goal you have selected, less any Eligible Prior Purchases. For this purpose, shares are valued at the public offering price (including any sales charge paid) calculated as of the date of purchase, plus any appreciation in the value of the shares as of the date of calculation, except for Eligible Prior Purchases, which are valued at current value as of the date of calculation. Your commitment will be met if at any time during

the 13-month period the value, as so determined, of eligible holdings is at least equal to your Asset Level Goal. All reinvested dividends and distributions on shares acquired under the Letter will be credited towards your Asset Level Goal. You may include any Eligible Fund Purchases towards the Letter, including shares of classes other than Class A shares. However, a Letter of Intent will not entitle you to a reduction in the sales charge payable on any shares other than Class A shares, and if the shares are subject to a contingent deferred sales charge, you will still be subject to that contingent deferred sales charge with respect to those shares. You must make reference to the Letter of Intent each time you make a purchase under the Letter.

Eligible Fund Purchases. Generally, any shares of a fund sold by the Distributor may be credited towards your Asset Level Goal. Shares of money market funds sold by the Distributor acquired by exchange from other funds offered with a sales charge may be credited toward your letter of intent asset goal. Certain funds and certain classes of shares of other funds sold by the Distributor may not be credited toward your letter of intent asset goal until May 18, 2009.

This list may change from time to time. Investors should check with their Service Agent to see which funds may be eligible.

Eligible Accounts. Purchases may be made through any account in your name, or in the name of your spouse or your children under the age of 21. You may need to provide certain records, such as account statements, in order to verify your eligibility for reduced sales charges. Contact your Service Agent to see which accounts may be credited toward your Asset Level Goal.

Eligible Prior Purchases. You may also credit towards your Asset Level Goal any Eligible Fund Purchases made in Eligible Accounts at any time prior to entering into the Letter of Intent that have not been sold or redeemed, based on the current price of those shares as of the date of calculation.

Increasing the Amount of the Letter. You may at any time increase your Asset Level Goal. You must, however, contact your Service Agent, or if you purchase your shares directly through the transfer agent, contact the transfer agent, prior to making any purchases in an amount in excess of your current Asset Level Goal. Upon such an increase, you will be credited by way of

2

additional shares at the then current offering price for the difference between: (a) the aggregate sales charges actually paid for shares already purchased under the Letter of intent and (b) the aggregate applicable sales charges for the increased Asset Level Goal. The 13-month period during which the Asset Level Goal must be achieved will remain unchanged.

Sales and Exchanges. Shares acquired pursuant to a Letter of Intent, other than Escrowed Shares as defined below, may be redeemed or exchanged at any time, although any shares that are redeemed prior to meeting your Asset Level Goal will no longer count towards meeting your Asset Level Goal. However, complete liquidation of purchases made under a Letter of Intent prior to meeting the Asset Level Goal will result in the cancellation of the Letter. See “Failure to Meet Asset Level Goal” below. Exchanges in accordance with the fund’s prospectus are permitted, and shares so exchanged will continue to count towards your Asset Level Goal, as long as the exchange results in an Eligible Fund Purchase.

Cancellation of Letter of Intent. You may cancel a Letter of Intent by notifying your Service Agent in writing, or if you purchase your shares directly through the transfer agent, by notifying the transfer agent in writing. The Letter will be automatically cancelled if all shares are sold or redeemed as set forth above. See “Failure to Meet Asset Level Goal” below.

Escrowed Shares. Shares equal in value to five percent (5%) of your Asset Level Goal as of the date your Letter of Intent (or the date of any increase in the amount of the Letter) is accepted, will be held in escrow during the term of your Letter. The Escrowed Shares will be included in the total shares owned as reflected in your account statement and any dividends and capital gains distributions applicable to the Escrowed Shares will be credited to your account and counted towards your Asset Level Goal or paid in cash upon request. The Escrowed Shares will be released from escrow if all the terms of your Letter are met.

Failure to Meet Asset Level Goal. If the total assets under your Letter of Intent within its 13-month term are less than your Asset Level Goal whether because you made insufficient Eligible Fund Purchases, redeemed all of your holdings or cancelled the Letter before reaching your Asset Level Goal, you will be liable for the difference between: (a) the sales charge actually paid and (b) the sales charge that would have applied if you had not entered into the Letter. You may, however, be entitled to any breakpoints that would have

3

been available to you under the accumulation privilege. An appropriate number of shares in your account will be redeemed to realize the amount due. For these purposes, by entering into a Letter of Intent, you irrevocably appoint your Service Agent, or if you purchase your shares directly through the transfer agent, the transfer agent, as your attorney-in-fact for the purposes of holding the Escrowed Shares and surrendering shares in your account for redemption. If there are insufficient assets in your account, you will be liable for the difference. Any Escrowed Shares remaining after such redemption will be released to your account.

Transfer Agent

Boston Financial Data Services, Inc. (the “transfer agent”), located at 2 Heritage Drive, North Quincy, Massachusetts 02171, serves as the fund’s transfer agent. Under the transfer agency agreement, the transfer agent maintains the shareholder account records for the fund, handles certain communications between shareholders and the fund and distributes dividends and distributions payable by the fund. For these services, the transfer agent receives a monthly fee computed on the basis of the number of shareholder accounts it maintains for the fund during the month, and is reimbursed for out-of-pocket expenses.

Schedule A

Fund Name	Date of Statement of Additional Information
LEGG MASON PARTNERS INCOME TRUST
Legg Mason Partners Adjustable Rate Income Fund	September 12, 2008
Legg Mason Partners California Municipals Fund	June 11, 2008
Legg Mason Partners Core Bond Fund	November 25, 2008
Legg Mason Partners Core Plus Bond Fund	November 25, 2008
Legg Mason Partners Strategic Income Fund	November 25, 2008
Legg Mason Partners Global High Yield Bond Fund	April 28, 2008
Legg Mason Partners Global Inflation Management Fund	February 28, 2009
Legg Mason Partners Government Securities Fund	April 28, 2008

4

Fund Name	Date of Statement of Additional Information
Legg Mason Partners High Income Fund	November 25, 2008
Legg Mason Partners Intermediate Maturity California Municipals Fund	March 20, 2008
Legg Mason Partners Intermediate Maturity New York Municipals Fund	March 20, 2008
Legg Mason Partners Intermediate-Term Municipals Fund	July 20, 2008
Legg Mason Partners Corporate Bond Fund	April 28, 2008
Legg Mason Partners Managed Municipals Fund	June 11, 2008
Legg Mason Partners Massachusetts Municipals Fund	March 20, 2008
Legg Mason Partners Municipal High Income Fund	November 25, 2008
Legg Mason Partners New Jersey Municipals Fund	July 20, 2008
Legg Mason Partners New York Municipals Fund	July 20, 2008
Legg Mason Partners Oregon Municipals Fund	August 8, 2008
Legg Mason Partners Pennsylvania Municipals Fund	July 20, 2008
Legg Mason Partners Short Duration Municipal Income Fund	February 28, 2009
Legg Mason Partners Short-Term Bond Fund	April 28, 2008
Western Asset Emerging Markets Debt Portfolio	February 2, 2009
Western Asset Global High Yield Bond Portfolio	February 2, 2009
LEGG MASON PARTNERS MONEY MARKET TRUST
Western Asset AMT Tax Free Money Market Fund	September 16, 2008
Western Asset Money Market Fund	August 1, 2008
Western Asset Government Money Market Fund	August 1, 2008
Western Asset Municipal Money Market Fund	August 1, 2008
Western Asset California Municipal Money Market Fund	August 1, 2008

5

Fund Name	Date of Statement of Additional Information
Western Asset Massachusetts Municipal Money Market Fund	August 1, 2008
Western Asset New York Municipal Money Market Fund	August 1, 2008
Western Asset Connecticut Money Market Fund Class A and Class I shares each a class of CitiSM Connecticut Tax Free Reserves	December 31, 2008

6

EX-99.17(D)

Exhibit 17(d)

LEGG MASON PARTNERS INCOME TRUST

LEGG MASON PARTNERS EQUITY TRUST

LEGG MASON PARTNERS MONEY MARKET TRUST

SUPPLEMENT DATED MARCH 13, 2009 TO THE

PROSPECTUSES LISTED IN SCHEDULE A

Unless otherwise noted, effective at the close of business on April 3, 2009, the following supersedes and replaces any contrary information in the sections of the fund’s Prospectus entitled “Sales Charges”, “Buying Shares”, “Exchanging Shares” and “Redeeming Shares”.

•       Accumulation Privilege—allows you to combine the current value of shares of the fund with other shares of funds sold by the Distributor that are owned by:

•     you; or

•     your spouse, and children under the age of 21

with the dollar amount of your next purchase of Class A shares for purposes of calculating the initial sales charge.

Shares of money market funds sold by the Distributor acquired by exchange from other funds offered with a sales charge may be combined. Certain funds and classes of shares of other funds sold by the Distributor may not be combined until May 18, 2009. Please contact your Service Agent for additional information.

If you hold fund shares in accounts at two or more Service Agents, please contact your Service Agents to determine which shares may be combined.

Certain trustees and fiduciaries may be entitled to combine accounts in determining their sales charge.

•       Letter of Intent—allows you to purchase Class A shares of funds sold by the Distributor over a 13-month period and pay the same sales charge, if any, as if all shares had been purchased at once. At the time you enter into the letter of intent, you select your asset goal amount. Generally, purchases of shares of funds sold by the Distributor that are purchased during the 13-month period by:

•     you; or

•     your spouse, and children under the age of 21

are eligible for inclusion under the letter, based on the public offering price at the time of the purchase, and any capital appreciation on those shares. In addition, you can include towards your asset goal amount the current value of any eligible holdings.

If you hold shares of funds sold by the Distributor in accounts at two or more Service Agents, please contact your Service Agents to determine which shares may be credited toward your letter of intent asset goal.

Shares of money market funds sold by the Distributor acquired by exchange from other funds offered with a sales charge may be credited toward your letter of intent asset goal. Certain funds and certain classes of shares of other funds sold by the Distributor may not be credited toward your letter of intent asset goal until May 18, 2009. Please contact your Service Agent for additional information.

If you do not meet your asset goal amount, shares in the amount of any sales charges due, based on the amount of your actual purchases, will be redeemed from your account.

Prospectus Supplement 1

Buying shares, Exchanging shares, Redeeming shares

To buy, exchange or redeem shares directly through the fund, Investors should write to the fund at the following address:

Legg Mason Funds

P.O. Box 55214

Boston, MA 02205-8504

For more information or to obtain shareholder reports or the Statement of Additional Information (without charge), please call Funds Investor Services at 1-800-822-5544 or Institutional Shareholder Services at 1-888-425-6432 between 8:30 a.m. and 5:30 p.m. (Eastern Time).

Exchanging Shares

Except as described below, you may exchange shares of the fund for the same class of shares of other funds sold by the Distributor.

Shares of certain funds and certain classes of shares of other funds sold by the Distributor are not available for exchange until May 18, 2009.

Schedule A

Fund Name	Date of Prospectus
LEGG MASON PARTNERS EQUITY TRUST
Legg Mason Partners 130/30 U.S. Large Cap Equity Fund	February 28, 2009
Legg Mason Partners Aggressive Growth Fund	December 15, 2008
Legg Mason Partners All Cap Fund	August 8, 2008
Legg Mason Partners Appreciation Fund	April 28, 2008
Legg Mason Partners Capital and Income Fund	April 28, 2008
Legg Mason Partners Capital Fund	April 28, 2008
Legg Mason Partners Convertible Fund	November 7, 2008
Legg Mason Partners Diversified Large Cap Growth Fund	February 28, 2009
Legg Mason Partners Dividend Strategy Fund	February 28, 2009
Legg Mason Partners Emerging Markets Equity Fund	February 28, 2009
Legg Mason Partners Equity Fund	April 28, 2008
Legg Mason Partners Equity Income Builder Fund	February 28, 2009
Legg Mason Partners Financial Services Fund	July 20, 2008
Legg Mason Partners Fundamental Value Fund	January 28, 2009
Legg Mason Partners Global Equity Fund	April 28, 2008
Legg Mason Partners International All Cap Opportunity Fund	February 28, 2009
Legg Mason Partners Investors Value Fund	April 28, 2008
Legg Mason Partners Large Cap Growth Fund	April 1, 2008
Legg Mason Partners Lifestyle Allocation 30%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 50%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 70%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 85%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 100%	May 1, 2008
Legg Mason Partners Lifestyle Income Fund	May 1, 2008
Legg Mason Partners Mid Cap Core Fund	March 20, 2008
Legg Mason Partners Small Cap Core Fund	April 28, 2008
Legg Mason Partners Small Cap Growth Fund	April 28, 2008
Legg Mason Partners Small Cap Value Fund	January 28, 2009
Legg Mason Partners Social Awareness Fund	May 30, 2008
Legg Mason Partners Target Retirement 2015	September 2, 2008
Legg Mason Partners Target Retirement 2020	September 2, 2008
Legg Mason Partners Target Retirement 2025	September 2, 2008
Legg Mason Partners Target Retirement 2030	September 2, 2008
Legg Mason Partners Target Retirement 2035	September 2, 2008
Legg Mason Partners Target Retirement 2040	September 2, 2008
Legg Mason Partners Target Retirement 2045	September 2, 2008
Legg Mason Partners Target Retirement 2050	September 2, 2008
Legg Mason Partners Target Retirement Fund	September 2, 2008
Legg Mason Partners U.S. Large Cap Equity Fund	April 28, 2008

2 Prospectus Supplement

Fund Name	Date of Prospectus
LEGG MASON PARTNERS INCOME TRUST
Legg Mason Partners Adjustable Rate Income Fund	September 12, 2008
Legg Mason Partners California Municipals Fund	June 11, 2008
Legg Mason Partners Core Bond Fund	November 25, 2008
Legg Mason Partners Core Plus Bond Fund	November 25, 2008
Legg Mason Partners Strategic Income Fund	November 25, 2008
Legg Mason Partners Global High Yield Bond Fund	April 28, 2008
Legg Mason Partners Global Inflation Management Fund	February 28, 2009
Legg Mason Partners Government Securities Fund	April 28, 2008
Legg Mason Partners High Income Fund	November 25, 2008
Legg Mason Partners Intermediate Maturity California Municipals Fund	March 20, 2008
Legg Mason Partners Intermediate Maturity New York Municipals Fund	March 20, 2008
Legg Mason Partners Intermediate-Term Municipals Fund	July 20, 2008
Legg Mason Partners Corporate Bond Fund	April 28, 2008
Legg Mason Partners Managed Municipals Fund	June 11, 2008
Legg Mason Partners Massachusetts Municipals Fund	March 20, 2008
Legg Mason Partners Municipal High Income Fund	November 25, 2008
Legg Mason Partners New Jersey Municipals Fund	July 20, 2008
Legg Mason Partners New York Municipals Fund	July 20, 2008
Legg Mason Partners Oregon Municipals Fund	August 8, 2008
Legg Mason Partners Pennsylvania Municipals Fund	July 20, 2008
Legg Mason Partners Short Duration Municipal Income Fund	February 28, 2009
Legg Mason Partners Short-Term Bond Fund	April 28, 2008
Western Asset Emerging Markets Debt Portfolio	February 2, 2009
Western Asset Global High Yield Bond Portfolio	February 2, 2009
LEGG MASON PARTNERS MONEY MARKET TRUST
Western Asset AMT Tax Free Money Market Fund	September 16, 2008
Western Asset Money Market Fund	August 1, 2008
Western Asset Government Money Market Fund	August 1, 2008
Western Asset Municipal Money Market Fund	August 1, 2008
Western Asset California Municipal Money Market Fund	August 1, 2008
Western Asset Massachusetts Municipal Money Market Fund	August 1, 2008
Western Asset New York Municipal Money Market Fund	August 1, 2008
Western Asset Connecticut Money Market Fund Class A and Class I shares each a class of CitiSM Connecticut Tax Free Reserves	December 31, 2008

FDXX011683

Prospectus Supplement 3

LEGG MASON PARTNERS INCOME TRUST

LEGG MASON PARTNERS EQUITY TRUST

SUPPLEMENT DATED FEBRUARY 27, 2009 TO THE PROSPECTUSES AND

STATEMENTS OF ADDITIONAL INFORMATION OF THE FUNDS LISTED IN SCHEDULE A

The following supplements information in the Prospectus and Statement of Additional Information concerning Letters of Intent:

Effective February 27, 2009, purchases made within 90 days prior to the date of a Letter of Intent will no longer be considered eligible to be treated as purchases made under such letter for the purpose of receiving a reduced sales charge. Such purchases will continue to be credited toward your Letter of Intent asset goal.

Investors who have entered into a Letter of Intent prior to the date of this supplement will continue to be eligible to treat such purchases as purchases made under the Letter of Intent.

For more information and to determine which shares may be credited toward your Letter of Intent asset goal, please contact your Service Agent.

Schedule A

Fund Name	Date of Prospectus and SAI
LEGG MASON PARTNERS EQUITY TRUST
Legg Mason Partners Aggressive Growth Fund	December 15, 2008
Legg Mason Partners All Cap Fund	August 8, 2008
Legg Mason Partners Appreciation Fund	April 28, 2008
Legg Mason Partners Capital and Income Fund	April 28, 2008
Legg Mason Partners Capital Fund	April 28, 2008
Legg Mason Partners Convertible Fund	November 7, 2008
Legg Mason Partners Equity Fund	April 28, 2008
Legg Mason Partners Financial Services Fund	July 20, 2008
Legg Mason Partners Fundamental Value Fund	January 28, 2009
Legg Mason Partners Global Equity Fund	April 28, 2008
Legg Mason Partners Investors Value Fund	April 28, 2008
Legg Mason Partners Large Cap Growth Fund	April 28, 2008
Legg Mason Partners Lifestyle Allocation 30%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 50%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 70%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 85%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 100%	May 1, 2008
Legg Mason Partners Lifestyle Income Fund	May 1, 2008
Legg Mason Partners Mid Cap Core Fund	March 20, 2008
Legg Mason Partners Small Cap Core Fund	April 28, 2008
Legg Mason Partners Small Cap Growth Fund	April 28, 2008
Legg Mason Partners Small Cap Value Fund	January 28, 2009
Legg Mason Partners Social Awareness Fund	May 30, 2008
Legg Mason Partners Target Retirement 2015	September 2, 2008
Legg Mason Partners Target Retirement 2020	September 2, 2008
Legg Mason Partners Target Retirement 2025	September 2, 2008
Legg Mason Partners Target Retirement 2030	September 2, 2008
Legg Mason Partners Target Retirement 2035	September 2, 2008
Legg Mason Partners Target Retirement 2040	September 2, 2008
Legg Mason Partners Target Retirement 2045	September 2, 2008
Legg Mason Partners Target Retirement 2050	September 2, 2008
Legg Mason Partners Target Retirement Fund	September 2, 2008
Legg Mason Partners U.S. Large Cap Equity Fund	April 28, 2008
LEGG MASON PARTNERS INCOME TRUST
Legg Mason Partners Adjustable Rate Income Fund	September 12, 2008
Legg Mason Partners California Municipals Fund	June 11, 2008
Legg Mason Partners Core Bond Fund	November 25, 2008
Legg Mason Partners Core Plus Bond Fund	November 25, 2008
Legg Mason Partners Strategic Income Fund	November 25, 2008

Prospectus Supplement 1

Fund Name	Date of Prospectus and SAI
Legg Mason Partners Global High Yield Bond Fund	April 28, 2008
Legg Mason Partners Government Securities Fund	April 28, 2008
Legg Mason Partners High Income Fund	November 25, 2008
Legg Mason Partners Intermediate Maturity California Municipals Fund	March 20, 2008
Legg Mason Partners Intermediate Maturity New York Municipals Fund	March 20, 2008
Legg Mason Partners Intermediate-Term Municipals Fund	July 20, 2008
Legg Mason Partners Corporate Bond Fund	April 28, 2008
Legg Mason Partners Managed Municipals Fund	June 11, 2008
Legg Mason Partners Massachusetts Municipals Fund	March 20, 2008
Legg Mason Partners Municipal High Income Fund	November 25, 2008
Legg Mason Partners New Jersey Municipals Fund	July 20, 2008
Legg Mason Partners New York Municipals Fund	July 20, 2008
Legg Mason Partners Oregon Municipals Fund	August 8, 2008
Legg Mason Partners Pennsylvania Municipals Fund	July 20, 2008
Legg Mason Partners Short-Term Bond Fund	April 28, 2008
Western Asset Emerging Markets Debt Portfolio	February 2, 2009

FD XX011632

2 Prospectus Supplement

LEGG MASON PARTNERS INCOME TRUST

SUPPLEMENT DATED FEBRUARY 13, 2009

TO THE PROSPECTUS DATED APRIL 28, 2008

OF THE

LEGG MASON PARTNERS SHORT-TERM BOND FUND

The following replaces in its entirety the section of the Fund’s Prospectus entitled “Share Price”.

You may buy, exchange or redeem shares at their net asset value next determined after receipt of your request in good order, adjusted for any applicable sales charge. The fund’s net asset value per share is the value of its assets minus its liabilities divided by the number of shares outstanding. Net asset value is calculated separately for each class of shares. The fund calculates its net asset value(s) every day the NYSE is open. These calculations are done as of the close of regular trading on the NYSE (normally 4:00 p.m., Eastern time). If the NYSE closes early, the fund calculates its net asset value(s) as of the actual closing time. The NYSE is closed on certain holidays listed in the SAI.

The Board has approved procedures to be used to value the fund’s securities and other assets for the purposes of determining the fund’s net asset value. The valuation of the fund’s assets is generally determined in good faith in accordance with these procedures. The Board has delegated most valuation functions for the fund to the manager. The procedures adopted by the Board cover types of assets in addition to those described below.

For equity securities and certain derivative securities that are traded on an exchange, the market price is usually the closing sale or official closing price on that exchange. Where a security is traded on more than one exchange (as is often the case overseas), the security is generally valued on the exchange considered by the manager to be the primary exchange. In the case of securities not traded on an exchange, or if exchange prices are not otherwise available, the market price is typically determined by independent third party pricing services approved by the fund’s Board that use a variety of techniques and methodologies.

The market price for debt obligations and certain derivative securities is generally the price supplied by an independent third party pricing service approved by the fund’s Board, which may use quotations from one or more brokers, a matrix, formula or other method that takes into consideration market indices, yield curves and other specific adjustments. Short-term debt obligations 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.

The fund generally values its securities based on market prices determined at the close of regular trading on the NYSE. The valuations of securities traded on foreign markets and certain fixed income securities will generally be determined as of the earlier closing time of the markets on which they primarily 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 2:00 p.m. Eastern time.

If independent third party pricing services are unable to supply a price, or if the price supplied is deemed by the manager to be unreliable, the market price may be determined using quotations received from one or more broker/dealers that make a market in the security. When such prices or quotations are not available, or when the manager believes that they are unreliable, the manager may price securities using fair value procedures approved by the Board. The fund may also use fair value procedures if the manager determines that a significant event has occurred between the time at which a market price is determined and the time at which the fund’s net asset value is calculated.

Valuing securities at fair value involves greater reliance on judgment than valuation of securities based on readily available market quotations. A fund that uses fair value procedures to price securities may value those securities higher or lower than another fund using market quotations or its own fair value methodologies to price the same securities. The valuation determined under the fair value procedures represent the amount determined in good faith that the fund might reasonably expect to receive upon the

Prospectus Supplement 1

current sale of a security. However, there can be no assurance that the fund could obtain the fair value assigned to a security if it were to sell the security at approximately the time at which the fund determines its net asset value. Therefore, investors who purchase or redeem fund shares on days when the fund is holding fair-valued securities may receive a greater or lesser number of shares, or higher or lower redemption proceeds, than they would have received if the fund had not fair-valued the security or had used a different methodology.

The fund invests in securities that are listed on foreign exchanges that are open for trading on weekends and other days when the fund does not price its shares. Therefore, the value of the fund’s shares may change on days when you will not be able to purchase or redeem the fund’s shares.

In order to buy, redeem or exchange shares at a day’s price, you must place your order with your Service Agent or the transfer agent before the NYSE closes on that day. If the NYSE closes early on that day, you must place your order prior to the actual closing time.

It is the responsibility of the Service Agents to transmit all orders to buy, exchange or redeem shares to the transfer agent on a timely basis.

FDXX 011638

2 Prospectus Supplement

Supplement Dated September 2, 2008

to the Prospectus and Statement of Additional Information

Dated April 28, 2008

for Legg Mason Partners Income Trust

Legg Mason Partners Short-Term Investment Grade Bond Fund

(the “Fund”)

Effective September 2, 2008, the name of the Fund is Legg Mason Partners Short-Term Bond Fund. The Fund’s current investment objective, strategies and management remain unchanged.

FDXX011268

Prospectus Supplement 1

LEGG MASON PARTNERS EQUITY TRUST LEGG MASON PARTNERS INCOME TRUST LEGG MASON PARTNERS INSTITUTIONAL TRUST SUPPLEMENT DATED AUGUST 11, 2008 TO THE PROSPECTUSES AND STATEMENTS OF ADDITIONAL INFORMATION OF THE FUNDS INDICATED BELOW The following replaces any contrary information in the Prospectus and Statement of Additional Information of each fund. 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 2:00 p.m. Eastern time in valuing such securities or assets.
Fund Name	Date of Current Prospectus
Legg Mason Partners Equity Trust
Legg Mason Partners 130/30 U.S. Large Cap Equity Fund	November 7, 2007
Legg Mason Partners Aggressive Growth Fund	December 20, 2007
Legg Mason Partners All Cap Fund	August 28, 2007
Legg Mason Partners Appreciation Fund	April 28, 2008
Legg Mason Partners Capital and Income Fund	April 28, 2008
Legg Mason Partners Capital Fund	April 28, 2008
Legg Mason Partners Convertible Fund	November 1, 2007
Legg Mason Partners Diversified Large Cap Growth Fund	February 20, 2008
Legg Mason Partners Dividend Strategy Fund	February 20, 2008
Legg Mason Partners Emerging Markets Equity Fund	February 20, 2008
Legg Mason Partners Equity Fund	April 28, 2008
Legg Mason Partners Financial Services Fund	July 20, 2008
Legg Mason Partners Fundamental Value Fund	January 29, 2008
Legg Mason Partners Global Equity Fund	April 28, 2008
Legg Mason Partners International All Cap Opportunity Fund	February 28, 2008
Legg Mason Partners Investors Value Fund	April 28, 2008
Legg Mason Partners Large Cap Growth Fund	April 1, 2008
Legg Mason Partners Lifestyle Allocation 100%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 30%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 50%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 70%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 85%	May 1, 2008
Legg Mason Partners Lifestyle Income Fund	May 1, 2008
Legg Mason Partners Mid Cap Core Fund	March 20, 2008
Legg Mason Partners Small Cap Core Fund	April 28, 2008
Legg Mason Partners Small Cap Growth Fund	April 28, 2008
Legg Mason Partners Small Cap Value Fund	January 29, 2008
Legg Mason Partners Social Awareness Fund	May 30, 2008
Legg Mason Partners S & P 500 Index Fund	April 28, 2008
Legg Mason Partners Income Trust
Legg Mason Partners Core Bond Fund	December 1, 2007
Legg Mason Partners Core Plus Bond Fund	December 1, 2007
Legg Mason Partners Diversified Strategic Income Fund	December 1, 2007
Legg Mason Partners Global High Yield Bond Fund	April 28, 2008
Legg Mason Partners Global Income Fund	April 28, 2008
Legg Mason Partners High Income Fund	December 1, 2008
Legg Mason Partners Inflation Management Fund	February 20, 2008
Legg Mason Partners Short-Term Investment Grade Bond Fund	April 28, 2008
Western Asset Emerging Markets Debt Portfolio	February 20, 2008
Western Asset Global High Yield Bond Portfolio	April 28, 2008
Legg Mason Partners Institutional Trust
SMASh Series C Fund	February 20, 2008 as Amended April 10, 2008
SMASh Series EC Fund	February 20, 2008 as Amended April 10, 2008
SMASh Series M Fund	February 20, 2008 as Amended April 10, 2008
SMASh Series MEC Fund	February 20, 2008 as Amended April 10, 2008

Prospectus Supplement 1

PROSPECTUS April 28, 2008 The Securities and Exchange Commission has not approved or disapproved these securities or determined whether this Prospectus is accurate or complete. Any statement to the contrary is a crime. Legg Mason Partners Short-Term Investment Grade Bond Fund Class A, B, C, R and I Shares INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE
LEGG MASON PARTNERS INCOME TRUST SUPPLEMENT DATED APRIL 28, 2008 TO THE PROSPECTUS DATED APRIL 28, 2008 OF LEGG MASON PARTNERS SHORT-TERM INVESTMENT GRADE BOND FUND Through June 30, 2008, please refer to the following chart for information concerning the minimum initial and additional investment amounts applicable to a purchase of fund shares: Investment minimums Minimum initial and additional investment amounts vary depending on the class of shares you buy and the nature of your investment.
	Investment Minimum Initial/Additional Investment(1)
	Class A		Class B (exchange purchases only)		Class C		Class R	Class I (formerly Y)
General	$	500/$50	$	500/$50	$	500/$50	n/a		n/a
IRAs and Uniform Gifts or Transfers to Minor Accounts	$	250/$50	$	250/$50	$	250/$50	n/a		n/a
SIMPLE IRAs	$	1/$1	$	1/$1	$	1/$1	n/a		n/a
Systematic Investment Plans	$	25/$25	$	25/$25	$	25/$25	n/a		n/a
Clients of Eligible Financial
Intermediaries	$	1/$1		n/a		n/a	n/a		None/None
Retirement Plans with omnibus accounts held on the books of the fund		None/None		n/a		None/None	None/None		None/None
Other Retirement Plans	$	50/$50	$	50/$50	$	50/$50	n/a		n/a
Institutional Investors	$	500/$50	$	500/$50	$	500/$50	n/a	$	1 million/None

(1) Please refer to the section entitled “Retirement and institutional investors” for additional information regarding the investment minimum and eligibility requirements for Retirement Plans, Institutional Investors and Clients of Eligible Financial Intermediaries.

Prospectus 1

Effective July 1, 2008, the information shown above will no longer apply. Instead, please refer to the section of the attached prospectus titled “Choosing a class of shares to buy: Investment minimums” for information concerning the minimum initial and additional investment amounts applicable to a purchase of fund shares.

Legg Mason Partners Short-Term Investment Grade Bond Fund

Contents
Investments, risks and performance	2
More on the fund’s investments	7
Management	10
Choosing a class of shares to buy	12
Comparing the fund’s classes	13
Sales charges	14
More about contingent deferred sales charges	17
Retirement and institutional investors	18
Buying shares	19
Exchanging shares	20
Redeeming shares	21
Other things to know about transactions	22
Distributions, dividends and taxes	24
Share price	25
Financial highlights	26

As part of a number of initiatives launched in 2006 to restructure and streamline the Legg Mason Partners fund complex, the fund assumed the assets and liabilities of a predecessor fund with the same name effective April 16, 2007. Any information in this Prospectus relating to the fund prior to April 16, 2007 refers to the fund’s predecessor.

Investments, risks and performance

Investment objective

The fund seeks current income, preservation of capital and liquidity.

Principal investment strategies

Key investments

Under normal market conditions the fund will invest at least 80% of its net assets, plus any borrowings for investment purposes, in “investment grade” fixed-income securities and in related investments. These are securities rated at the time of purchase by a nationally recognized statistical ratings organization within one of the top four categories, or, if unrated, judged by the subadviser to be of comparable credit quality. Securities in which the fund invests include corporate debt securities, bank obligations, mortgage- and asset-backed securities and securities issued by the U.S. government and its agencies and instrumentalities. Securities rated in the lowest category of investment grade (BBB or Baa) are deemed to have speculative characteristics. The fund may also invest in U.S. dollar denominated fixed-income securities of foreign issuers. The fund normally maintains a dollar-weighted average portfolio maturity of not more than three years.

Instead of investing directly in particular securities, the fund may gain exposure to a security or an issuer or a market by investing through the use of instruments such as derivatives, including credit default swaps, synthetic instruments and other instruments that are intended to provide similar economic exposure. The fund may use one or more types of such instruments to a substantial extent and even as its primary means of gaining investment exposures.

The fund may engage in a variety of transactions using derivatives, including but not limited to, options, swaps, including credit default swaps, and warrants. Derivatives are financial instruments whose value depends upon, or is derived from, the value of something else, such as one or more underlying investments, indexes or currencies. Derivatives may be used by the fund for any of the following purposes:

• As a hedging technique in an attempt to manage risk in the fund’s portfolio

2 Prospectus

• As a substitute for buying or selling securities

• As a cash flow management technique

• For purposes of enhancing returns

Using derivatives, especially for non-hedging purposes, may involve greater risks to the fund than investing directly in securities, particularly as these instruments may be very complex and may not behave in the manner anticipated by the fund.

Certain risks associated with the use of derivatives are discussed below. Such risks are magnified to the extent that a large portion of the fund’s assets are committed to derivatives in general or are invested in just one or a few types of derivatives.

The fund from time to time may sell protection on debt securities by entering into credit default swaps, a type of derivative transaction. In return for periodic payments, the fund is obligated to pay the counterparty if the bond which is the subject of the credit default swap defaults or is subject to a specified credit event. As the seller, the fund could be considered leveraged because, in addition to the investment exposure that it has on its assets, the fund is subject to investment exposure on the notional amount of the swap.

When the fund enters into derivative transactions, it may be required to segregate assets, or enter into offsetting positions, in accordance with applicable regulations. Such segregation will not limit the fund’s exposure to loss, however, and the fund will have investment risk with respect to both the derivative itself and the assets that have been segregated to cover the fund’s derivative exposure. Segregated assets cannot be sold by the fund unless they are replaced with other appropriate assets, and, as a result, the segregation of a large portion of a fund’s assets could impede portfolio management or the fund’s ability to meet redemption requests or other current obligations.

The fund’s subadviser may choose not to make use of derivatives for a variety of reasons. Should the subadviser choose to use derivatives, the fund will, in determining compliance with any percentage limitation or requirement regarding the use or investment of fund assets, take into account derivative positions that are intended to reduce or create exposure to the applicable category of investments, even if they are not effective to achieve the desired result.

Selection process

The portfolio managers focus on minimizing fluctuations in the fund’s net asset value by identifying short-term fixed-income securities the portfolio managers believe are undervalued and that offer better protection of capital given current interest rate and market conditions. In selecting individual securities for investment, the portfolio managers:

• Monitor the spreads between U.S. Treasury and government agency or instrumentality issuers and purchase agency and instrumentality issues that they believe will provide a yield advantage

• Determine sector and maturity weightings based on assessments of the economic environment and relative value factors based on interest rate outlook

• Measure the potential impact of supply/demand imbalances, yield curve shifts and changing prepayment patterns to identify individual securities that balance potential return and risk

• Use research to uncover inefficient sectors of the government securities and mortgage markets and adjust portfolio positions to take advantage of new information

Principal risks of investing in the fund

Investors could lose money on their investment in the fund, or the fund may not perform as well as other investments, as a result of risks such as:

• Interest rates increase, causing the prices of fixed income securities to decline, reducing the value of the fund’s portfolio. This is known as interest rate risk. The fund has less sensitivity to changes in interest rates than a fund investing in securities with intermediate- or long-term maturities

Prospectus 3

• Interest rates decline, causing the issuers of securities held by the fund to prepay principal earlier than scheduled or exercise a right to call the securities, forcing the fund to reinvest in lower yielding securities. This is known as prepayment or call risk

• The issuer of a security owned by the fund defaults on its obligation to pay principal and/or interest, otherwise defaults or is perceived to be less creditworthy, the security’s credit rating is downgraded, or the credit quality or value of any underlying assets declines. Credit risk is broadly gauged by the credit ratings of the securities in which the fund invests. However, ratings are only the opinions of the companies issuing them and are not absolute guarantees as to quality

• During periods of rising interest rates, lower than expected principal payments extend the average life of fixed-income securities held by the fund, locking in below-market interest rates and reducing the value of these securities. This is known as extension risk

• The portfolio managers’ judgment about interest rates or the attractiveness, value or income potential of a particular security proves incorrect

• The value of a security declines due to adverse factors affecting the bond markets generally, or the markets for certain types of securities or for securities relating to particular industries or sectors. This is sometimes referred to as market risk

• Derivatives involve special risks and costs and may result in losses to the fund. The fund’s use of certain derivatives may in some cases involve forms of financial leverage, which involves risk and may increase the volatility of the fund’s net asset value. Even a small investment in derivatives can have a disproportionate impact on the fund. Using derivatives can increase losses and reduce opportunities for gains when market prices, interest rates or currencies, or the derivative instruments themselves, behave in a way not anticipated by the fund. The other parties to certain derivative contracts present the same types of default risk as issuers of fixed income securities. Derivatives can also make the fund less liquid and harder to value, especially in changing markets

• Credit default swap contracts involve special risks and may result in losses to the fund. Credit default swaps may in some cases be illiquid, and they increase credit risk since the fund has exposure to both the issuer of the referenced obligation and the counterparty to the credit default swap. As there is no central exchange or market for credit default swap transactions, they may be difficult to trade or value, especially in the event of market disruptions. The swap market is a relatively new market and is largely unregulated. It is possible that developments in the swap market, including potential government regulation, could adversely affect the fund’s ability to terminate existing credit default swap agreements or to realize amounts to be received under such agreements.

In the event that a security is rated by different agencies and receives different ratings from these agencies, the fund will treat the security as being rated in the highest rating category received from an agency. If, after purchase, the credit rating on a security is downgraded or the credit quality deteriorates, or if the maturity is extended, the fund’s portfolio managers will decide whether the security should be held or sold. Upon the occurrence of certain triggering events or defaults on a security held by the fund, or if an issuer of such a security has difficulty meeting its obligations, the fund may become the holder of a restructured security or of underlying assets. In that case, the fund may become the holder of securities or other assets that it could not otherwise purchase at a time when those assets may be difficult to sell or can be sold only at a loss.

The fund may invest in securities which are subordinated to more senior securities of the issuer, or which represent interests in pools of such subordinated securities. Subordinated securities will be disproportionately affected by a default or even a perceived decline in creditworthiness of the issuer.

The fund invests in short-term fixed income securities. As a result, the amount of income paid to you by the fund may go up or down depending on day-to-day variations in short-term interest rates. Investing in investment grade, short-term instruments may result in a lower yield (the income on your investment) than investing in lower quality or longer-term instruments.

4 Prospectus

Who may want to invest

The fund may be an appropriate investment if you:

• Are seeking current income while minimizing fluctuations in the value of your investment

• Currently have exposure to stock markets and wish to diversify your investment portfolio by adding an investment in a fund that invests in investment grade fixed-income securities

• Are seeking a higher level of current income than typically offered by money market funds although with greater risk of fluctuation of principal

Performance information

The following shows summary performance information for the fund in a bar chart and an Average Annual Total Returns table. The information provides an indication of the risks of investing in the fund by showing changes in its performance from year to year and by showing how the fund’s average annual returns compare with the returns of a broad-based securities market index. The bar chart and the information below show performance of the fund’s Class A shares, but do not reflect the impact of sales charges (loads). If they did, the returns would be lower than those shown. Unlike the bar chart, the performance for Class A, B, C and I (formerly Class Y) shares in the Average Annual Total Returns table reflects the impact of the maximum sales charge (load) applicable to the respective classes and, where indicated, the performance for Class A shares reflects the impact of taxes paid on distributions and dividends and the redemption of shares at the end of the period. No performance information is presented for Class R shares because no Class R shares were outstanding prior to the date of this Prospectus. The returns of Class R shares would differ from those of other classes to the extent that those classes bear different expenses. The performance information shown below includes that of the fund’s predecessor. The fund’s past performance, before and after taxes, is not necessarily an indication of how the fund will perform in the future.

Total Return for Class A Shares

Highest and Lowest Quarterly Returns:

(for the periods shown in the bar chart)

Highest: 3.23% in 3^rd quarter 1998; Lowest: (1.46)% in 2^nd quarter 2004.

Prospectus 5

Average Annual Total Returns

(for periods ended December 31, 2007)

	1 Year		5 Years		10 Years		Since Inception		Inception Date
Class A(1)
Return before taxes	(1.38	)%	1.53	%	3.60	%	n/a		n/a
Return after taxes on distributions(2)	(2.99	)%	0.32	%	2.05	%	n/a		n/a
Return after taxes on distributions and sale of fund shares(2)	(0.90	)%	0.61	%	2.13	%	n/a		n/a
Other Classes
(Return before taxes only)
Class B	(4.37	)%	n/a		n/a		1.38	%	1/13/03
Class C	0.34	%	1.48	%	n/a		1.80	%	8/5/02
Class I(3)	1.63	%	2.43	%	4.29	%	n/a		n/a
Citigroup Treasury/Government Sponsored/Credit 1-3 Year Index(4)(5)	6.84	%	3.41	%	5.04	%	n/a		n/a
Citigroup Treasury/Government Sponsored/Credit 1-5 Year Index(4)(5)	7.30	%	3.67	%	5.40	%	n/a		n/a

(1) On November 20, 2006, the maximum initial sales charge on Class A shares was increased for sales made on and after that date. The average annual returns for Class A shares in the table have been calculated as if the increased maximum initial sales charge had been in effect for the entire period.

(2) After-tax returns are calculated using the highest historical individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and the after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In some cases the return after taxes may exceed the return before taxes due to an assumed tax benefit from any losses on a sale of fund shares at the end of the measurement period. After-tax returns shown above are for Class A shares only. After-tax returns for other share classes will vary.

(3) As of November 20, 2006, Class Y shares were renamed Class I shares.

(4) The Citigroup Treasury/Government Sponsored/Credit 1-3 Year Index and the Citigroup Treasury/Government Sponsored/Credit 1-5 Year Index are broad-based indexes of short-term U.S. Treasury and corporate debt securities. An index does not reflect deductions for fees, expenses or taxes. It is not possible to invest directly in an index.

(5) As of April 28, 2008, the fund’s benchmark changed from the Citigroup Treasury/Government Sponsored/Credit 1-5 year Index to the Citigroup Treasury/Government Sponsored /Credit 1-3 Year Index (“1-3 Year Index”). The benchmark was changed because the fund’s portfolio management team believes that the 1-3 Year Index better reflects the composition of the fund’s portfolio and investment strategies.

Fee table

This table sets forth the fees and expenses you may pay if you invest in fund shares.

	Class A		Class B		Class C		Class R*		Class I(1)
Shareholder Fees
(paid directly from your investment)
Maximum sales charge (load) imposed on purchases
(as a % of offering price)	2.25	%	None		None		None		None
Maximum contingent deferred sales charge (load)
(as a % of the lower of net asset value at purchase or redemption)	None	(2)	5.00	%(3)	None		None		None
Annual Fund Operating Expenses
(paid by the fund as a % of net assets)
Management fees	0.45	%	0.45	%	0.45	%	0.45	%	0.45	%
Distribution and service (12b-1) fees	0.25	%	0.75	%	0.75	%	0.50	%	None
Other expenses(4)(5)	0.20	%	0.25	%	0.36	%	0.22	%	0.07	%
Total annual fund operating expenses	0.90	%	1.45	%	1.56	%	1.17	%	0.52	%

Example

This example helps you compare the costs of investing in the fund with the costs of investing in other mutual funds. Your actual costs may be higher or lower. The example assumes:

• You invest $10,000 in the fund for the period shown

• Your investment has a 5% return each year — the assumption of a 5% return is required by the Securities and Exchange Commission (the “SEC”) for purposes of this example and is not a prediction of the fund’s future performance

• You reinvest all distributions and dividends without a sales charge

• The fund’s operating expenses (before fee waivers and/or expense reimbursements, if any) remain the same

6 Prospectus

Number of Years You Own Your Shares

	1 year		3 years		5 years		10 years
Class A (with or without redemption)	$	315	$	505	$	711	$	1,307
Class B (redemption at end of period)	$	648	$	759	$	893	$	1,586	(6)
Class B (no redemption)	$	148	$	459	$	793	$	1,586	(6)
Class C (with or without redemption)	$	159	$	493	$	851	$	1,857
Class R (with or without redemption)*	$	119	$	372	$	644	$	1,420
Class I (with or without redemption)(1)	$	53	$	167	$	291	$	652

(1) Class I Shares are closed to all new purchases and incoming exchanges. As of November 20, 2006, Class Y shares were renamed Class I shares.

(2) You may buy Class A shares in amounts of $500,000 or more at net asset value (without an initial sales charge), but if you redeem those shares within 12 months of their purchase, you will pay a contingent deferred sales charge of 0.50%.

(3) Class B shares of the fund may only be acquired through exchange and may be subject to the contingent deferred sales charge of the fund you originally purchased, up to a maximum of 5.00%.

(4) With respect to Class A, Class B, Class C, Class R and Class I shares (as applicable), the fund may pay a fee for recordkeeping services performed for the share class. The recordkeeping fee for Class I shares is newly adopted and is not reflected in the “Other expenses” shown in the table above. As a result, the operating expenses of affected share classes may increase over time.

(5) The amount set forth under “Other expenses” for Class R shares has been estimated for the current fiscal year based on “Other expenses” of Class I shares.

(6) Assumes conversion to Class A shares approximately 8 years after purchase.

* The fund does not currently offer Class R shares.

More on the fund’s investments

The fund’s investment objective and principal investment strategies are described under the section entitled “Investments, risks and performance”. This section provides further information about the investment strategies that may be used by the fund.

The fund’s investment objective may be changed without shareholder approval.

Debt obligations

Subject to its particular investment policies, the fund may invest to some extent in debt obligations, which are securities used by issuers to borrow money. Debt obligations include bonds, notes (including structured notes), debentures, commercial paper and other money market instruments issued by banks, corporations, local, state and national governments and instrumentalities, both U.S. and foreign, and supranational entities, mortgage-related and asset-backed securities, convertible securities, and loan participations and assignments. Debt obligations may be fixed-income securities, or have various types of payment and reset terms or features, including adjustable rate, zero coupon, contingent, deferred, payment in kind and auction rate features. Certain types of debt obligations are described below.

Mortgage-backed and asset-backed securities

The fund may invest in mortgage-backed and asset-backed securities. Mortgage-backed securities may be issued by private companies including government related entities such as Fannie Mae or Freddie Mac or by agencies of the U.S. government and represent direct or indirect participations in, or are collateralized by and payable from, mortgage loans secured by real property. Unlike mortgage-related securities issued or guaranteed by the U.S. government or its agencies and instrumentalities, mortgage-related securities issued by private issuers do not have a government or government-sponsored entity guarantee (but may have other credit enhancement), and may, and frequently do, have less favorable collateral, credit risk or other underwriting characteristics. Asset-backed securities represent participations in, or are secured by and payable from, assets such as installment sales or loan contracts, leases, credit card receivables and other categories of receivables. Certain asset-backed securities present a heightened level of risk because, in the event of default, the liquidation value of the underlying assets may be inadequate to pay any unpaid principal or interest or may be nonexistent.

Prospectus 7

For mortgage derivatives and structured securities that have embedded leverage features, small changes in interest or prepayment rates may cause large and sudden price movements. Mortgage derivatives can also become illiquid and hard to value in declining markets.

Collateralized mortgage obligations

The fund may invest in collateralized mortgage obligations (“CMOs”). CMOs are debt obligations collateralized by mortgage loans or mortgage pass-through securities. Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac Certificates, but also may be collateralized by whole loans or private pass-throughs (such collateral collectively hereinafter referred to as “Mortgage Assets”). Payments of principal and of interest on the Mortgage Assets, and any reinvestment income thereon, provide the funds to pay debt service on the CMOs. In a CMO, a series of bonds or certificates is issued in multiple classes. Each class of CMOs, often referred to as a “tranche”, is issued at a specified fixed or floating coupon rate and has a stated maturity or final distribution date. Principal prepayments on the Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates. Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly or semi-annual basis. The principal of and interest on the Mortgage Assets may be allocated among the several classes of a series of a CMO in innumerable ways. As market conditions change, and particularly during periods of rapid or unanticipated changes in market interest rates, the attractiveness of the CMO classes and the ability of the structure to provide the anticipated investment characteristics may be significantly reduced. Such changes can result in volatility in the market value, and in some instances reduced liquidity, of the CMO class.

Mortgage Dollar Rolls

In a dollar roll transaction, the fund sells a fixed-income security for delivery in the current month and simultaneously contracts to purchase a substantially similar (same type, coupon and maturity) security at an agreed upon future time. By engaging in a dollar roll transaction, the fund forgoes principal and interest paid on the security that is sold, but receives the difference between the current sales price and the forward price for the future purchase. The fund would be able to invest the proceeds of the securities sold. Dollar roll transactions may result in a form of leverage that increases the fund’s sensitivity to interest rate changes and may increase the overall risk of investment in the fund.

Repurchase agreements

The fund may invest in repurchase agreements. A repurchase agreement is a transaction in which the seller of a security commits itself at the time of the sale to repurchase that security from a fund, as the buyer, at a mutually agreed upon time and price. The repurchase agreement thereby determines the yield during the purchaser’s holding period, while the seller’s obligation to repurchase is secured by the value of the underlying security.

Structured instruments

The fund may invest in various types of structured instruments, including securities that have demand, tender or put features, or interest rate reset features. Structured instruments may take the form of participation interests or receipts in underlying securities or other assets, and in some cases are backed by a financial institution serving as a liquidity provider. Some of these instruments may have an interest rate swap feature which substitutes a floating or variable interest rate for the fixed interest rate on an underlying security, and some may be asset-backed or mortgage-backed securities. Structured instruments are a type of derivative instrument and the payment and credit qualities of these instruments derive from the assets embedded in the structure.

Variable and floating rate debt securities

Debt securities in which the fund may invest include variable and floating rate debt securities. Variable rate securities reset at specified intervals, while floating rate securities reset whenever there is a change in a specified index rate. In most cases, these reset provisions reduce the effect of market interest rates on the

8 Prospectus

value of the security, but mean that declines in market interest rates are reflected more quickly in the fund’s holdings than they would be if the fund held fixed rate securities. However, some securities do not track the underlying index directly, but reset based on formulas that can produce an effect similar to leveraging; others may provide for interest payments that vary inversely with market rates. The market prices of these securities may fluctuate significantly when interest rates change.

Foreign securities

The fund may invest in U.S. dollar denominated securities of foreign issuers. Investment in these securities carries additional risks. These risks may include expropriation of assets, confiscatory taxation, withholding taxes on dividends and interest paid on fund investments, fluctuations in currency exchange rates, currency exchange controls and other limitations on the use or transfer of assets by the fund or issuers of securities, and political or social instability. In addition, foreign companies may not be subject to accounting standards or governmental supervision comparable to U.S. companies, and there may be less public information about their operations. Foreign markets may be less liquid and more volatile than United States markets. As a result, there may be rapid changes in the value of foreign securities. Non-U.S. markets also may offer less protection to investors such as the fund.

Yankee obligations

The fund may invest in Yankee obligations, including Yankee obligations of foreign banks. Yankee obligations are U.S. dollar denominated obligations issued in the U.S. capital markets by foreign issuers. To a limited extent, Yankee obligations are subject to certain sovereign risks.

When-issued securities

The fund may purchase securities under arrangements (called when-issued or forward delivery basis) where the securities will not be delivered immediately. The fund will set aside the assets to pay for these securities at the time of the agreement.

Certificates of deposit and other short-term investments

The fund may invest in commercial paper and other short-term investments, including certificates of deposit and bankers’ acceptances.

Portfolio turnover

The fund may experience a high portfolio turnover resulting in greater expenses to the fund, including transaction costs, which may reduce the fund’s performance. Active trading of securities may also increase taxable short-term capital gains and losses, which may affect the taxes paid by shareholders.

Defensive investing

The fund may depart from its principal investment strategies in response to adverse market, economic or political conditions by taking temporary defensive positions in any type of money market instruments and short-term debt securities or cash without regard to any percentage limitations. If the fund takes a temporary defensive position, it may be unable to achieve its investment objective.

Other investments

The fund may also use other strategies and invest in other securities that are described, along with their risks, in the Statement of Additional Information (“SAI”). However, the fund might not use all of the strategies and techniques or invest in all of the types of securities described in this Prospectus or in the SAI. There are also many other factors, which are not described here, that could adversely affect your investment and that could prevent the fund from achieving its investment objective.

Prospectus 9

Percentage limitations and requirements

The fund’s compliance with its investment limitations and requirements is usually determined at the time of investment.

Portfolio holdings

The fund’s policies and procedures with respect to the disclosure of the fund’s portfolio securities are described in the SAI.

Management

Manager and subadviser

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the fund’s investment manager. LMPFA, with offices at 620 Eighth Avenue, New York, New York 10018, also serves as the investment manager of certain other Legg Mason-sponsored funds. LMPFA provides administrative and certain oversight services to the fund. As of December 31, 2007, LMPFA’s total assets under management were approximately $193 billion.

Western Asset Management Company (“Western Asset”) provides the day-to-day portfolio management of the fund as subadviser. Western Asset, established in 1971, has offices at 385 East Colorado Boulevard, Pasadena, California 91101. Western Asset acts as investment adviser to institutional accounts, such as corporate pension plans, mutual funds and endowment funds. As of December 31, 2007, Western Asset’s total assets under management were approximately $457 billion.

LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. Legg Mason, whose principal executive offices are at 100 Light Street, Baltimore, Maryland 21202, is a global asset management company. As of December 31, 2007, Legg Mason’s asset management operations had aggregate assets under management of approximately $998 billion.

Portfolio managers

The fund is managed by a team of portfolio managers, sector specialists and other investment professionals. This team is led by S. Kenneth Leech, Stephen A. Walsh, James J. Flick, Andrea A. Mack and Michael C. Buchanan and is responsible for overseeing the day-to-day operation of the fund. Mr. Leech is a portfolio manager with Western Asset and has been employed as portfolio manager for Western Asset for at least the past five years. Mr. Walsh is a portfolio manager with Western Asset and has been employed as portfolio manager for Western Asset for at least the past five years. Mr. Flick is a portfolio manager with Western Asset and has been employed as a portfolio manager for Western Asset for at least the past five years. Ms. Mack is a portfolio manager with Western Asset and has been employed as a portfolio manager for Western Asset for at least the past five years. Mr. Buchanan is a portfolio manager with Western Asset. Mr. Buchanan joined Western Asset in 2005. Prior to this, Mr. Buchanan was a Managing Director with Credit Suisse Asset Management, beginning in 2003. Mr. Buchanan also was Executive Vice President, Portfolio Manager with Janus Capital Management in 2003.

The SAI provides additional information about the compensation of the portfolio managers, other accounts managed by the portfolio managers and any fund shares held by the portfolio managers.

Management fee

For the fiscal year ended December 31, 2007, the fund paid a fee, after waivers and reimbursements, of 0.45% of the fund’s average daily net assets for management services.

A discussion regarding the basis for the Board’s approval of the fund’s management agreement and subadvisory agreement is available in the fund’s Annual Report for the fiscal year ended December 31, 2007.

10 Prospectus

Distribution plan

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

The fund has adopted a shareholder services and distribution plan for each of its Class A, Class B, Class C and Class R shares. Under the plan, the fund pays distribution and/or service fees. The plan provides for payments, based on annualized percentages of average daily net assets, of up to 0.25% for Class A shares; up to 0.75% for Class B shares; up to 0.75% for Class C shares; and up to 0.50% for Class R shares. These fees are an ongoing expense and, over time, will increase the cost of your investment and may cost you more than other types of sales charges. Class I shares are not subject to any distribution and/or service fees.

In addition, the distributor may make payments for distribution and/or shareholder servicing activities out of its past profits and other available sources. The distributor may also make payments to dealers for marketing, promotional or related expenses. The amount of these payments is determined by the distributor and may be substantial. The manager or an affiliate may make similar payments under similar arrangements.

The payments described in the paragraph above are often referred to as “revenue sharing payments.” The recipients of such payments may include the fund’s distributors, affiliates of the manager, broker/dealers, financial institutions and other financial intermediaries through which investors may purchase shares of the fund. In some circumstances, such payments may create an incentive for an intermediary or its employees or associated persons to recommend or sell shares of the fund to you. Please contact your financial intermediary for details about revenue sharing payments it may receive.

Recent developments

On May 31, 2005, the SEC issued an order in connection with the settlement of an administrative proceeding against Smith Barney Fund Management LLC (“SBFM”), the then-investment adviser or manager of the fund, and Citigroup Global Markets Inc. (“CGMI”), a former distributor of the fund, relating to the appointment of an affiliated transfer agent for the Smith Barney family of mutual funds, including the fund (the “Affected Funds”).

The SEC order found that SBFM and CGMI willfully violated Section 206(1) of the Investment Advisers Act of 1940, as amended, and the rules promulgated thereunder (the “Advisers Act”). Specifically, the order found that SBFM and CGMI knowingly or recklessly failed to disclose to the boards of the Affected Funds in 1999 when proposing a new transfer agent arrangement with an affiliated transfer agent that: First Data Investors Services Group (“First Data”), the Affected Funds’ then-existing transfer agent, had offered to continue as transfer agent and do the same work for substantially less money than before; and that Citigroup Asset Management (“CAM”), the Citigroup business unit that, at the time, included the Affected Funds’ investment manager and other investment advisory companies, had entered into a side letter with First Data under which CAM agreed to recommend the appointment of First Data as sub-transfer agent to the affiliated transfer agent in exchange for, among other things, a guarantee by First Data of specified amounts of asset management and investment banking fees to CAM and CGMI. The order also found that SBFM and CGMI willfully violated Section 206(2) of the Advisers Act by virtue of the omissions discussed above and other misrepresentations and omissions in the materials provided to the Affected Funds’ boards, including the failure to make clear that the affiliated transfer agent would earn a high profit for performing limited functions while First Data continued to perform almost all of the transfer agent functions, and the suggestion that the proposed arrangement was in the Affected Funds’ best interests and that no viable alternatives existed.

SBFM and CGMI do not admit or deny any wrongdoing or liability. The settlement does not establish wrongdoing or liability for purposes of any other proceeding. The SEC censured SBFM and CGMI and ordered them to cease and desist from violations of Sections 206(1) and 206(2) of the Advisers Act. The order required Citigroup to pay $208.1 million, including $109 million in disgorgement of profits, $19.1 million in interest, and a civil money penalty of $80 million. Approximately $24.4 million has already been paid to the

Prospectus 11

Affected Funds, primarily through fee waivers. The remaining $183.7 million, including the penalty, has been paid to the U.S. Treasury and will be distributed pursuant to a plan submitted for the approval of the SEC. At this time, there is no certainty as to how the above-described proceeds of the settlement will be distributed, to whom such distributions will be made, the methodology by which such distributions will be allocated, and when such distributions will be made. The order also required that transfer agency fees received from the Affected Funds since December 1, 2004, less certain expenses, be placed in escrow and provided that a portion of such fees might be subsequently distributed in accordance with the terms of the order. On April 3, 2006, an aggregate amount of approximately $9 million held in escrow was distributed to the Affected Funds.

The order required SBFM to recommend a new transfer agent contract to the Affected Funds’ boards within 180 days of the entry of the order; if a Citigroup affiliate submitted a proposal to serve as transfer agent or sub-transfer agent, SBFM and CGMI would have been required, at their expense, to engage an independent monitor to oversee a competitive bidding process. On November 21, 2005, and within the specified timeframe, the Affected Funds’ Boards selected a new transfer agent for the Affected Funds. No Citigroup affiliate submitted a proposal to serve as transfer agent. Under the order, SBFM also must comply with an amended version of a vendor policy that Citigroup instituted in August 2004.

Although there can be no assurance, the manager does not believe that this matter will have a material adverse effect on the Affected Funds.

On December 1, 2005, Citigroup completed the sale of substantially all of its global asset management business, including SBFM, to Legg Mason.

Choosing a class of shares to buy

Individual investors can generally choose between two classes of shares: Classes A and C shares. Class B shares are only available through exchange purchases. The fund’s Class I Shares are closed to new investors. Investors who owned Class I shares on October 17, 2007 are permitted to make additional investments in Class I shares. Institutional and retirement plan investors and clients of financial intermediaries should refer to “Retirement and institutional investors” below for a description of the classes available to them. Each class has different sales charges and expenses, allowing you to choose the class that best meets your needs.

When choosing which class of shares to buy, you should consider:

• How much you plan to invest

• How long you expect to own the shares

• The expenses paid by each class detailed in the Fee table and Example at the front of this Prospectus

• Whether you qualify for any reduction or waiver of sales charges

If you plan to invest a large amount and your investment horizon is five years or more, Class C shares might not be as advantageous as Class A shares. The annual distribution and service fees on Class C shares may cost you more over the longer term than the front-end sales charge you would have paid for larger purchases of Class A shares.

You may buy shares:

• Through banks, brokers, dealers, insurance companies, investment advisers, financial consultants or advisors, mutual fund supermarkets and other financial intermediaries that have entered into an agreement with the distributor to sell shares of the fund (each called a “Service Agent”)

• Directly from the fund

Different types of shareholder services may be available to you under arrangements offered by different Service Agents. In addition, these services may vary depending on the share class in which you choose to invest. In making your decision regarding which share class to buy, please keep in mind that your Service

12 Prospectus

Agent may receive different compensation depending on the share class in which you invest. Investors should consult with their Service Agents about comparative pricing of shareholder services available to them under each available share class, the compensation that will be received by their Service Agents in connection with each available share class, and other factors that may be relevant to the investor’s choice of share class in which to invest.

Not all classes of shares are available through each Service Agent. You should contact your Service Agent for further information about available share classes.

Investment minimums

Minimum initial and additional investment amounts vary depending on the class of shares you buy and the nature of your investment.

	Investment Minimum Initial/Additional Investment(1)(2) (effective July 1, 2008)
	Class A		Class B (exchange purchases only)		Class C		Class R	Class I (formerly Y)
General	$	1,000/$50	$	1,000/$50	$	1,000/$50	n/a		n/a
Uniform Gifts or Transfers to Minor Accounts	$	1,000/$50	$	1,000/$50	$	1,000/$50	n/a		n/a
IRAs	$	250/$50	$	250/$50	$	250/$50	n/a		n/a
SIMPLE IRAs		None/None		None/None		None/None	n/a		n/a
Systematic Investment Plans	$	50/$50	$	50/$50	$	50/$50	n/a		n/a
Clients of Eligible Financial Intermediaries		None/None		n/a		n/a	n/a		None/None
Retirement Plans with omnibus accounts held on the books of the fund		None/None		n/a		None/None	None/None		None/None
Other Retirement Plans		None/None		None/None		None/None	n/a		n/a
Institutional Investors	$	1,000/$50	$	1,000/$50	$	1,000/$50	n/a	$	1 million/None

(1) For information regarding investment minimums prior to July 1, 2008, please refer to the prospectus supplement at the front of this prospectus.

(2) Different minimums may apply to clients of certain service agents. Contact your service agent for more information. Refer to the section entitled “Retirement and institutional investors” for additional information regarding the investment minimum and eligibility requirements for Retirement Plans, Institutional Investors and Clients of Eligible Financial Intermediaries.

More information about the fund’s classes of shares is available through the Legg Mason Partners Funds’ website. You’ll find detailed information about sales charges and ways you can qualify for reduced or waived sales charges, including:

• The front-end sales charges that apply to the purchase of Class A shares

• The contingent deferred sales charges that apply to the redemption of Class B shares and certain Class A shares (redeemed within one year)

• Who qualifies for lower sales charges on Class A shares

• Who qualifies for a sales load waiver

To access the website, go to http://www.leggmason.com/individualinvestors and click on the name of the fund.

Comparing the fund’s classes

The following table compares key features of the fund’s classes. You should review the Fee table and Example at the front of this Prospectus carefully before choosing your share class. Your Service Agent can help you decide which class meets your goals. Your Service Agent may receive different compensation depending upon which class you choose. Please contact your Service Agent regarding the availability of Class R shares.

Prospectus 13

	Class A	Class B	Class C	Class R	Class I(2) (formerly Y)
Key features	•   Initial sales charge •   You may qualify for reduction or waiver of initial sales charge •   Generally lower annual expenses than Class B and Class C	•   Available only in exchange from another fund •   No initial sales charge •   Contingent deferred sales charge declines over time •   Converts to Class A after approximately 8 years •   Generally higher annual expenses than Class A	•   No initial or contingent deferred sales charge •   Does not convert to Class A •   Generally higher annual expenses than Class A	•   No initial or contingent deferred sales charge •   Only offered to eligible Retirement Plans with omnibus accounts held on the books of the fund	•   No initial or contingent deferred sales charge •   Only offered to institutional and other eligible investors •   Generally lower expenses than the other classes
Initial sales charge	Up to 2.25%; reduced or waived for large purchases and certain investors. No charge for purchases of $500,000 or more	None	None	None	None
Contingent deferred sales charge	0.50% on purchases of $500,000 or more if you redeem within 1 year of purchase; waived for certain investors	Up to 5.00% charged when you redeem shares, based on the schedule of the fund that you originally purchased. The charge is reduced over time and there is no contingent deferred sales charge after 5 years; waived for certain investors	None	None	None
Annual distribution and/or service fees	0.25% of average daily net assets	0.75% of average daily net assets	0.75% of average daily net assets	0.50% of average daily net assets	None
Exchange privilege(1)	Class A shares of most Legg Mason Partners Funds	Class B shares of most Legg Mason Partners Funds	Class C shares of most Legg Mason Partners Funds	Class R shares of applicable Legg Mason Partners Funds	Class I shares of most Legg Mason Partners Funds

(1) Ask your Service Agent about the Legg Mason Partners Funds available for exchange.

(2) The fund’s Class I Shares are closed to new investors. Investors who owned Class I shares on October 17, 2007 are permitted to continue to add to their Class I positions.

Sales charges

Class A shares

You buy Class A shares at the offering price, which is the net asset value plus a sales charge. You pay a lower rate as the size of your investment increases to certain levels called breakpoints. You do not pay a sales charge on the fund’s distributions or dividends you reinvest in additional Class A shares.

The table below shows the rate of sales charge you pay, depending on the amount you purchase. It also shows the amount of broker/dealer compensation that will be paid out of the sales charge if you buy shares from a Service Agent. For Class A shares sold directly by LMIS, LMIS will receive the sales charge imposed on purchases of Class A shares (or any contingent deferred sales charge paid on redemptions) and will retain the full amount of such sales charge. Service Agents will also receive a service fee payable on Class A shares at an annual rate of up to 0.25% of the average daily net assets represented by the Class A shares serviced by them.

14 Prospectus

Amount of investment	Sales Charge as % of offering price	Sales Charge as % of net amount invested	Broker/Dealer Commission as a % of offering price
Less than $100,000	2.25	2.30	2.00
$100,000 but less than $250,000	1.50	1.52	1.25
$250,000 but less than $500,000	1.25	1.27	1.00
$500,000 or more(1)	-0-	-0-	up to 0.50

(1) The distributor may pay a commission of up to 0.50% to a Service Agent for purchase amounts of $500,000 or more. In such cases, starting in the thirteenth month after purchase, the Service Agent will also receive an annual distribution/service fee of up to 0.25% of the average daily net assets represented by the Class A shares held by its clients. Prior to the thirteenth month, the distributor will retain this fee. Where the Service Agent does not receive the payment of this commission, the Service Agent will instead receive the annual distribution/service fee starting immediately after purchase. Please contact your Service Agent for more information.

Investments of $500,000 or more

You do not pay an initial sales charge when you buy $500,000 or more of Class A shares. However, if you redeem these Class A shares within one year of purchase, you will pay a contingent deferred sales charge of 0.50%.

Qualifying for a reduced Class A sales charge

There are several ways you can combine multiple purchases of Class A shares of Legg Mason Partners funds to take advantage of the breakpoints in the sales charge schedule. In order to take advantage of reductions in sales charges that may be available to you when you purchase fund shares, you must inform your Service Agent or Legg Mason Partners Shareholder Services if you are eligible for a letter of intent or a right of accumulation and if you own shares of other Legg Mason Partners funds that are eligible to be aggregated with your purchases. Certain records, such as account statements, may be necessary in order to verify your eligibility for reduced sales charges.

• Accumulation privilege – allows you to combine the current value of Class A shares of the fund with other shares of Legg Mason Partners funds that are owned by

• you, or

• your spouse and children under the age of 21 with the dollar amount of your next purchase of Class A shares for purposes of calculating the initial sales charge.

Shares of certain money market funds advised by the manager or its affiliates (other than money market fund shares acquired by exchange from other Legg Mason Partners funds offered with a sales charge), Legg Mason Partners S&P 500 Index Fund and Class O shares of Legg Mason Partners Equity Fund may not be combined.

If you hold shares of Legg Mason Partners funds in accounts at two or more Service Agents, please contact your Service Agents to determine which shares may be combined.

Certain trustees and fiduciaries may be entitled to combine accounts in determining their sales charge.

• Letter of intent – allows you to purchase Class A shares of Legg Mason Partners funds over a 13-month period and pay the same sales charge on Class A shares, if any, as if all the shares had been purchased at once. At the time you enter into the letter of intent, you select your asset goal amount. Generally, purchases of Legg Mason Partners fund shares that are purchased during the 13-month period by

• you, or

• your spouse and children under the age of 21 are eligible for inclusion under the letter, based on the public offering price at the time of the purchase, and any capital appreciation on those shares. Purchases made 90 days prior to the 13-month period are also eligible to be treated as purchases made under the letter of intent. In addition, you can include towards your asset goal amount the current value of any eligible purchases that were made prior to the date of entering into the letter of intent and are still held.

Prospectus 15

Shares of certain money market funds advised by the manager or its affiliates (other than money market fund shares acquired by exchange from other Legg Mason Partners funds offered with a sales charge), Legg Mason Partners S&P 500 Index Fund and Class O shares of Legg Mason Partners Equity Fund may not be credited toward your letter of intent asset goal.

If you hold shares of Legg Mason Partners funds in accounts at two or more Service Agents, please contact your Service Agents to determine which shares may be credited toward your letter of intent asset goal.

If you do not meet your asset goal amount, shares in the amount of any sales charges due based on the amount of your actual purchases will be redeemed from your account.

Waivers for certain Class A investors

Class A initial sales charges are waived for certain types of investors, including:

• Employees of Service Agents having dealer, service or other selling agreements with the fund’s distributors

• Investors who redeemed Class A shares of a Legg Mason Partners fund in the past 60 days, if the investor’s Service Agent is notified

• Directors and officers of any Legg Mason-sponsored fund

• Employees of Legg Mason and its subsidiaries

• Investors investing through certain retirement plans

If you qualify for a waiver of the Class A initial sales charge, you must notify your Service Agent or Legg Mason Partners Shareholder Services at the time of purchase and provide sufficient information at the time of purchase to permit verification that the purchase qualifies for the initial sales charge waiver.

If you want to learn about additional waivers of Class A initial sales charges, contact your Service Agent, consult the SAI or access the Legg Mason Partners Funds’ website, http://www.leggmason.com/individualinvestors, and click on the name of the fund.

Class B shares

Class B shares, which are available only through exchanges of Class B shares of other Legg Mason Partners Funds, are purchased at net asset value without paying an initial sales charge. However, if you redeem your Class B shares within 5 years of your original purchase payment, you will pay a contingent deferred sales charge. The contingent deferred sales charge decreases as the number of years since your purchase payment increases.

Year after purchase	1st		2nd		3rd		4th		5th		6th through 8th
Contingent deferred sales charge	Up to 5.00	%	4	%	3	%	2	%	1	%	0	%

For Class B shares Service Agents receive an annual distribution/service fee of up to 0.25% of the average daily net assets represented by the Class B shares serviced by them.

Class B conversion

After approximately 8 years, Class B shares automatically convert into Class A shares. This helps you because Class A shares have lower annual expenses. Your Class B shares will convert to Class A shares as follows:

Shares issued: At initial purchase	Shares issued: On reinvestment of dividends and distributions	Shares issued: Upon exchange from another Legg Mason Partners Fund
Approximately 8 years after the date of purchase payment	In same proportion as the number of Class B shares converting is to total Class B shares you own (excluding shares issued as dividends)	On the date the shares originally acquired would have converted into Class A shares

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Class C shares

You buy Class C shares at net asset value with no initial sales charge and no contingent deferred sales charge when redeeming. However, if you exchange Class C shares that were not subject to a contingent deferred sales charge when initially purchased for Class C shares of a fund that impose a contingent deferred sales charge, your contingent deferred sales charge will be measured from the date of your exchange.

LMIS will generally pay Service Agents selling Class C shares an annual fee of up to 0.75% of the purchase price of the Class C shares they sell.

Class R and I shares

Class R and I shares are purchased at net asset value with no initial sales charge and no contingent deferred sales charge when redeemed. Service Agents will receive a distribution/service fee of up to 0.50% of the average daily net assets represented by the Class R shares serviced by them. Class I Shares are closed to new investors. Investors who owned Class I shares on October 17, 2007 are permitted to make additional investments in Class I shares.

More about contingent deferred sales charges

The contingent deferred sales charge is based on the net asset value at the time of purchase or redemption, whichever is less, and therefore you do not pay a sales charge on amounts representing appreciation or depreciation.

In addition, you do not pay a contingent deferred sales charge:

• When you exchange shares for shares of another Legg Mason Partners fund

• On shares representing reinvested distributions and dividends

• On shares no longer subject to the contingent deferred sales charge

Each time you place a request to redeem shares, the fund will first redeem any shares in your account that are not subject to a contingent deferred sales charge and then the shares in your account that have been held the longest.

If you redeemed shares of a Legg Mason Partners fund and paid a contingent deferred sales charge, you may, under certain circumstances, reinvest all or part of the redemption proceeds within 60 days and receive pro rata credit for any contingent deferred sales charge imposed on the prior redemption. Please contact your Service Agent for additional information.

The fund’s distributor receives contingent deferred sales charges as partial compensation for its expenses in selling shares, including the payment of compensation to your Service Agent.

Contingent deferred sales charge waiver

The contingent deferred sales charge for each share class will generally be waived:

• On payments made through certain systematic withdrawal plans

• On certain distributions from a retirement plan

• For retirement plans with omnibus accounts held on the books of the fund

• For involuntary redemptions of small account balances

• For 12 months following the death or disability of a shareholder

If you want to learn more about additional waivers of contingent deferred sales charges, contact your Service Agent, consult the SAI or look at the Legg Mason Partners Funds’ website, http://www.leggmason.com/individualinvestors, and click on the name of the fund.

Prospectus 17

Retirement and institutional investors

Eligible Investors

Retirement Plans

Retirement Plans with omnibus accounts held on the books of the fund can generally choose among two classes of shares: Class C and Class R shares.

Class A and B shares are no longer offered through Service Agents for Retirement Plans with omnibus accounts held on the books of the fund, with limited exceptions.

“Retirement Plans” include 401(k) plans, 457 plans, employer-sponsored 403(b) plans, profit-sharing plans, non-qualified deferred compensation plans and other similar employer-sponsored retirement plans. Retirement Plans do not include individual retirement vehicles, such as traditional and Roth individual retirement accounts, Coverdell education savings accounts, individual 403(b)(7) custodial accounts, Keogh plans, SEPs, SARSEPs, SIMPLE IRAs, or Section 529 savings accounts.

Other Retirement Plan investors can generally choose among three classes of shares: Class A, Class B, and Class C. “Other Retirement Plans” include Retirement Plans investing through brokerage accounts, and also include certain Retirement Plans with direct relationships to the fund that are neither Institutional Investors nor investing through omnibus accounts. Individual retirement vehicles, such as IRAs, may also choose among three share classes. Other Retirement Plans and individual retirement vehicles are treated like individual investors for purposes of determining sales charges and any applicable sales charge reductions or waivers.

Clients of Eligible Financial Intermediaries

Clients of Eligible Financial Intermediaries may invest in Class A shares. “Clients of Eligible Financial Intermediaries” are investors who invest in the fund through financial intermediaries that offer their clients fund shares through investment programs as authorized by LMIS. Such investment programs may include fee-based advisory or brokerage account programs, and college savings vehicles such as Section 529 plans. The financial intermediary may impose separate investment minimums.

Institutional Investors

Institutional investors owning Class I shares on October 17, 2007 are permitted to continue to add to their Class I positions. Institutional Investors may also invest in Class A and C shares, which have different investment minimums and fees and expenses. “Institutional Investors” generally include corporations, banks, insurance companies, foundations, retirement plans and other similar entities with direct relationships to the fund.

Class C — Retirement Plans

Retirement Plans with omnibus accounts held on the books of the fund may buy Class C shares without paying a contingent deferred sales charge. LMIS does not pay Service Agents selling Class C shares to retirement plans with omnibus accounts held on the books of the fund a commission on the purchase price of Class C shares sold by them. Instead, immediately after purchase, LMIS may pay these Service Agents an annual fee of up to 0.75% of the average daily net assets represented by the Class C shares serviced by them.

Class R

Class R shares are offered only to Retirement Plans with accounts held on the books of the fund (either at the plan level or at the level of the financial intermediary). LMIS may pay Service Agents selling Class R shares an annual distribution/service fee of up to 0.50% of the average daily net assets represented by the Class R shares serviced by them.

18 Prospectus

Class I shares

Class I Shares are closed to new investors. Investors who owned Class I shares on October 17, 2007 are permitted to make additional investments in Class I shares.

Class A and Class B — Retirement Plans

Class A and Class B shares are no longer offered through Service Agents to Retirement Plans with omnibus accounts held on the books of the fund. However, certain Retirement Plans that held Class B shares prior to December 1, 2006 are permitted to make additional investments in that class. Certain existing programs for current and prospective Retirement Plan investors sponsored by financial intermediaries also remain eligible for Class A shares. Under these programs, the initial sales charge and contingent deferred sales charge for Class A shares is waived where:

• Such Retirement Plan’s record keeper offers only load-waived shares,

• Fund shares are held on the books of the fund through an omnibus account, and

• The Retirement Plan has more than 100 participants, or has total assets exceeding $1 million.

LMIS does not pay Service Agents selling Class A shares to Retirement Plans with a direct omnibus relationship with the fund a commission on the purchase price of Class A shares sold by them. However, for certain Retirement Plans that purchased shares at net asset value prior to November 20, 2006, LMIS may continue to pay Service Agents commissions of up to 0.50% of the purchase price of the Class A shares that are purchased with regular ongoing plan contributions. Please contact your Service Agent for more information.

Other considerations

Plan sponsors, plan fiduciaries and other financial intermediaries may choose to impose qualification requirements for plans that differ from the fund’s share class eligibility standards. In certain cases this could result in the selection of a share class with higher service and distribution-related fees than otherwise would have been charged. The fund is not responsible for, and has no control over, the decision of any plan sponsor, plan fiduciary or financial intermediary to impose such differing requirements. Please consult with your plan sponsor, plan fiduciary or financial intermediary for more information about available share classes.

With respect to Class A, Class B, Class C and Class R shares, as applicable, the fund may pay a fee for recordkeeping services performed for the share class.

Not all share classes may be made available by your Service Agent. Please contact your Service Agent for additional details.

Buying shares

Generally	You may buy shares at their net asset value next determined after receipt by your Service Agent or the transfer agent of your purchase request in good order, plus any applicable sales charges.
	The fund generally will not permit non-resident aliens with a non-U.S. address to establish an account. U.S. citizens with an APO/FPO address or an address in the U.S. (including its territories) and resident aliens with a U.S. address are permitted to establish an account with the funds. Subject to the requirements of local law, U.S. citizens residing in foreign countries are permitted to establish an account with the funds.
Through a Service Agent	You should contact your Service Agent to open a brokerage account and make arrangements to buy shares. You must provide the following information for your order to be processed:
	•        Class of shares being bought
	•        Dollar amount or number of shares being bought
	•        Account number (if existing account)
	Your Service Agent may charge an annual account maintenance fee.

Prospectus 19

Through the fund	•        Investors should write to the fund at the following address:
	Legg Mason Partners Funds
	c/o PFPC Inc.
	P.O. Box 9699
	Providence, Rhode Island 02940-9699
	•        Enclose a check to pay for the shares. For initial purchases, complete and send an account application available upon request from Legg Mason Partners Shareholder Services at the number below
	•        Specify the name of the fund, the share class you wish to purchase and your account number (if existing account)
	•        For more information, please call Legg Mason Partners Shareholder Services at 800-451-2010
Through a systematic investment plan	You may authorize your Service Agent or the transfer agent to transfer funds automatically from (i) a regular bank account, (ii) cash held in a brokerage account with a Service Agent, or (iii) certain money market funds, in order to buy shares on a regular basis.
	•        Amounts transferred must meet the applicable minimum (see “Investment Minimum”)
	•        Amounts may be transferred monthly, every alternate month, quarterly, semi-annually or annually
	•        If you do not have sufficient funds in your account on a transfer date, your Service Agent or the transfer agent may charge you a fee
	For more information, please contact your Service Agent or Legg Mason Partners Shareholder Services or consult the SAI.

Exchanging shares

Generally	You may exchange shares at their net asset value next determined after receipt by your Service Agent or the transfer agent of your exchange request in good order, plus any applicable sales charge.
Legg Mason Partners offers a distinctive family of funds tailored to help meet the varying needs of both large and small investors	You should contact your Service Agent to exchange into other Legg Mason Partners funds. Be sure to read the prospectus of the Legg Mason Partners fund into which you are exchanging. An exchange is a taxable transaction, unless you are investing through a tax-qualified savings plan or account.
	•        If you bought shares through a Service Agent, you may exchange shares only for shares of the same class of certain other Legg Mason Partners funds made available for exchange by your Service Agent. Not all Legg Mason Partners funds made available for exchange by your Service Agent may offer all classes. Please contact your Service Agent for more information about the funds and classes that are available for exchange
	•        If you bought shares directly from the fund, you may exchange shares only for shares of the same class of another Legg Mason Partners fund other than shares of Legg Mason Partners S&P 500 Index Fund. Not all Legg Mason Partners funds offer all classes
	•        Not all Legg Mason Partners funds may be offered in your state of residence. Contact your Service Agent or the transfer agent for further information
	•        Exchanges of Class A, B and C shares are subject to minimum investment requirements (except for systematic investment plan exchanges) and all shares are subject to the other requirements of the fund into which exchanges are made
	•        If you hold share certificates, the transfer agent must receive the certificates endorsed for transfer or with signed stock powers before the exchange is effective
	•        The fund may suspend or terminate your exchange privilege if you engage in an excessive pattern of exchanges
Sales charges	In most instances, your shares will not be subject to an initial sales charge or a contingent deferred sales charge at the time of the exchange.
	Your contingent deferred sales charge (if any) will continue to be measured from the date of your original purchase of shares subject to a contingent deferred sales charge and you will be subject to the contingent deferred sales charge of the fund that you originally purchased. However, if you exchange Class C shares of the fund for Class C shares of a Legg Mason Partners equity or a fixed-income fund other than a short- or intermediate-term fixed-income fund, you will be subject to the contingent deferred sales charge of the fund into which you exchange and your contingent deferred sales charge will be measured from the date of your exchange.
By telephone	If you do not have a brokerage account with a Service Agent, you may be eligible to exchange shares through the fund. You must complete an authorization form to authorize telephone transfers. If eligible, you may make telephone exchanges on any day the New York Stock Exchange (“NYSE”) is open. Shareholders should call Legg Mason Partners Shareholder Services at 800-451-2010 between 8:30 a.m. and 4:00 p.m. (Eastern time).
	You can make telephone exchanges only between accounts that have identical registrations.
By mail	If you do not have a brokerage account, contact your Service Agent or write to the fund at the address on the following page.

20 Prospectus

Through a systematic exchange plan	You may be permitted to schedule exchanges of shares of any class of the fund for shares of the same class of other Legg Mason Partners funds.
	•        Exchanges may be made monthly, every alternate month, quarterly, semi-annually or annually
	•        A predetermined dollar amount that meets at least the investment minimum for Systematic Investment Plans per exchange is required (see “Investment Minimum”)
	For more information, please contact your Service Agent or Legg Mason Partners Shareholder Services.

Redeeming shares

Generally	You may redeem shares at their net asset value next determined after receipt by your Service Agent or the transfer agent of your redemption request in good order, less any applicable contingent deferred sales charge.
	Contact your Service Agent to redeem shares of the fund.
	If you hold share certificates, the transfer agent must receive the certificates endorsed for transfer or with signed stock powers with a signature guarantee before you may redeem.
	If the shares are held by a fiduciary or corporation, other documents may be required.
	Your redemption proceeds will normally be sent within 3 business days after your request is received in good order, but in any event within 7 days. Your redemption proceeds may be delayed for up to 10 days if your purchase was made by check.
	If you have a brokerage account with a Service Agent, your redemption proceeds will be sent to your Service Agent. In other cases, unless you direct otherwise, your redemption proceeds will be paid by check mailed to your address of record.
By mail	For accounts held directly at the fund, send written requests to the fund at the following address:
	Legg Mason Partners Funds
	c/o PFPC Inc.
	P.O. Box 9699
	Providence, Rhode Island 02940-9699
	Your written request must provide the following:
	•        The name of the fund, the class of shares to be redeemed and your account number
	•        The dollar amount or number of shares to be redeemed
	•        Signature of each owner exactly as the account is registered
	•        Signature guarantees, as applicable
By telephone	If you do not have a brokerage account with a Service Agent, you may be eligible to redeem shares (except those held in certain retirement plans) in amounts up to $50,000 per day through the fund. You must complete an authorization form to authorize telephone redemptions. If eligible, you may request redemptions by telephone on any day the NYSE is open. Shareholders should call Legg Mason Partners Shareholder Services at 800-451-2010 between 8:30 a.m. and 4:00 p.m. (Eastern time).
	Your redemption proceeds can be sent by check to your address of record or by wire or electronic transfer (ACH) to a bank account designated on your authorization form. You must submit a new authorization form to change the bank account designated to receive wire or electronic transfers and you may be asked to provide certain other documents. The transfer agent may charge a fee on a wire or an electronic transfer (ACH).
Automatic cash withdrawal plans	You can arrange for the automatic redemption of a portion of your shares monthly, every alternate month, quarterly, semi-annually or annually. To qualify, you must own shares of the fund with a value of at least $10,000 ($5,000 for retirement plan accounts) and each automatic redemption must be at least $50. If your shares are subject to a contingent deferred sales charge, the sales charge will be waived if your automatic redemptions are equal to or less 2% per month of your account balance on the date the withdrawals commence, up to a maximum of 12% in one year.
	The following conditions apply:
	•        Your shares must not be represented by certificates
	•        All dividends and distributions must be reinvested
	For more information, please contact your Service Agent or consult the SAI.

Prospectus 21

Other things to know about transactions

When you buy, exchange or redeem shares, your request must be in good order. This means you have provided the following information, without which your request may not be processed:

• Name of the fund

• Your account number

• Class of shares being bought, and if you own more than one class, the class of shares being exchanged or redeemed

• Dollar amount or number of shares being bought, exchanged or redeemed

• Signature of each owner exactly as the account is registered

The transfer agent or Legg Mason Partners Shareholder Services will employ reasonable procedures to confirm that any telephone exchange or redemption request is genuine, which may include recording calls, asking the caller to provide certain personal identification information, sending you a written confirmation or requiring other confirmation procedures from time to time. If these procedures are followed, neither the fund nor its agents will bear any liability for such transactions.

Signature guarantees

To be in good order, your redemption request must include a signature guarantee if you:

• Are redeeming over $50,000

• Are sending signed share certificates or stock powers to the transfer agent

• Instruct the transfer agent to mail the check to an address different from the one on your account registration

• Changed your account registration or your address within 30 days

• Want the check paid to someone other than the account owner(s)

• Are transferring the redemption proceeds to an account with a different registration

You can obtain a signature guarantee from most banks, dealers, brokers, credit unions and federal savings and loan institutions, but not from a notary public.

The fund has the right to:

• Suspend the offering of shares

• Waive or change minimum and additional investment amounts

• Reject any purchase or exchange order

• Change, revoke or suspend the exchange privilege

• Suspend telephone transactions

• Suspend or postpone redemptions of shares on any day when trading on the NYSE is restricted, or as otherwise permitted by the SEC

• Pay redemption proceeds by giving you securities. You may pay transaction costs to dispose of the securities

Small account balances/mandatory redemptions

If at any time the aggregate net asset value of the fund shares in your account is less than $500 for any reason (including solely due to declines in net asset value and/or failure to invest at least $500 within a reasonable period), the fund reserves the right to ask you to bring your account up to the applicable minimum investment amount as determined by your Service Agent. In such case, you shall be notified in writing and will have 60 days to make an additional investment to bring your account value up to the required level. If you choose not to do so within this 60-day period, the fund may close your account and send you the redemption proceeds. In the event your account is closed due to a failure to increase your balance to the minimum required amount, you will not be eligible to have your account subsequently reinstated without imposition of any sales charges that may apply to your new purchase. The fund may, with prior notice, change the minimum size of accounts subject to mandatory redemption, which may vary by class, or implement fees for small accounts.

22 Prospectus

Subject to applicable law, the fund may, with prior notice, adopt other policies from time to time requiring mandatory redemption of shares in certain circumstances.

For more information, please contact your Service Agent or Legg Mason Partners Shareholder Services or consult the SAI.

Frequent purchases and redemptions of fund shares

Frequent purchases and redemptions of fund shares may interfere with the efficient management of the fund’s portfolio by its portfolio managers, increase portfolio transaction costs, and have a negative effect on the fund’s long-term shareholders. For example, in order to handle large flows of cash into and out of the fund, the portfolio managers may need to allocate more assets to cash or other short-term investments or sell securities, rather than maintaining full investment in securities selected to achieve the fund’s investment objective. Frequent trading may cause the fund to sell securities at less favorable prices. Transaction costs, such as brokerage commissions and market spreads, can detract from the fund’s performance. In addition, the return received by long-term shareholders may be reduced when trades by other shareholders are made in an effort to take advantage of certain pricing discrepancies, when, for example, it is believed that the fund’s share price, which is determined at the close of the NYSE on each trading day, does not accurately reflect the value of the fund’s portfolio securities. Funds investing in foreign securities have been particularly susceptible to this form of arbitrage, but other funds could also be affected.

Because of the potential harm to funds in the Legg Mason Partners funds complex and their long-term shareholders, the Board of the fund has approved policies and procedures that are intended to discourage and prevent excessive trading and market timing abuses through the use of various surveillance techniques. Under these policies and procedures, the fund may limit additional exchanges or purchases of fund shares by shareholders who are believed by the manager to be engaged in these abusive trading activities in the fund or in other funds within the fund complex. In the event that an exchange request is rejected, the shareholder may nonetheless redeem its shares. The intent of the policies and procedures is not to inhibit legitimate strategies, such as asset allocation, dollar cost averaging, or similar activities that may nonetheless result in frequent trading of fund shares.

Under the fund’s policies and procedures, the fund reserves the right to restrict or reject purchases of shares (including exchanges) without prior notice whenever a pattern of excessive trading by a shareholder is detected within the fund complex. A committee established by the manager administers the policy. The policy provides that the committee will use its best efforts to restrict a shareholder’s trading privileges in the Legg Mason Partners funds if that shareholder has engaged in a total of four or more “Round Trips” across all Legg Mason Partners funds during any rolling 12-month period. However, the committee has the discretion to determine that restricting a shareholder’s trading privileges is not necessary (or that a new limit on Round Trips should be established for the shareholder) if it is determined that the pattern of trading is not abusive or harmful. In making such a determination, the committee will consider, among other things, the nature of the shareholder’s account, the reason for the frequent trading, the amount of trading and the particular funds in which the trading has occurred. Additionally, the committee has the discretion to make inquiries or to take action against any shareholder whose trading appears inconsistent with the frequent trading policy. Examples of the types of actions the committee may take to deter excessive trading in a shareholder account include restricting the shareholder from purchasing additional shares in the fund altogether or imposing other restrictions (such as requiring purchase orders to be submitted by mail) that would deter the shareholder from trading frequently in the fund.

A “Round Trip” is defined as a purchase (including subscriptions and exchanges) into the fund followed by a sale (including redemptions and exchanges) of the same or a similar number of shares out of the fund within 30 days of such purchase. Purchases and sales of the fund’s shares pursuant to an automatic investment plan or similar program for periodic transactions are not considered in determining Round Trips. For purposes of these policies and procedures, the Legg Mason Partners funds complex also includes certain Western Asset funds and Barrett Opportunity Fund, but does not include money market funds in the fund complex.

Prospectus 23

The policies apply to any account, whether an individual account, accounts with financial intermediaries such as investment advisers, broker/dealers or retirement plan administrators, commonly called omnibus accounts, where the intermediary holds fund shares for a number of its customers in one account. The fund’s ability to monitor trading in omnibus accounts may, however, be severely limited due to the lack of access to an individual investor’s trading activity when orders are placed through these types of accounts. There may also be operational and technological limitations on the ability of the fund’s service providers to identify or terminate frequent trading activity within the various types of omnibus accounts. The fund’s distributor has entered into agreements with intermediaries requiring the intermediaries to, among other things, help identify frequent trading activity and to prohibit further purchases or exchanges by a shareholder identified as having engaged in frequent trading. These agreements took effect on October 16, 2007.

The fund’s policies also require personnel such as portfolio managers and investment staff to report any abnormal or otherwise suspicious investment activity, and prohibits short-term trades by such personnel for their own account in mutual funds managed by the manager and its affiliates, other than money market funds. The fund has also adopted policies and procedures to prevent the selective release of information about the fund’s portfolio holdings, as such information may be used for market-timing and similar abusive practices.

The fund’s policies provide for ongoing assessment of the effectiveness of current policies and surveillance tools, and the Board reserves the right to modify these or adopt additional policies and restrictions in the future. Shareholders should be aware, however, that any surveillance techniques currently employed by the fund or other techniques that may be adopted in the future may not be effective, particularly where the trading takes place through certain types of omnibus accounts. As noted above, if the fund is unable to detect and deter trading abuses, the fund’s performance, and its long-term shareholders, may be harmed. In addition, shareholders may be harmed by the extra costs and portfolio management inefficiencies that result from frequent trading of fund shares, even when the trading is not for abusive purposes. Furthermore, the fund may not apply its policies consistently or uniformly, resulting in the risk that some shareholders may be able to engage in frequent trading while others will bear the costs and effects of that trading. The fund will provide advance notice to shareholders and prospective investors of any specific restrictions on the trading of fund shares that the Board may adopt in the future.

Share certificates

The fund does not issue share certificates. If you currently hold share certificates of the fund, such certificates will continue to be honored. If you would like to return your share certificates to the fund and hold your shares in uncertificated form, please contact your Service Agent or Legg Mason Partners Shareholder Services.

Record ownership

If you hold shares through a Service Agent, your Service Agent may establish and maintain your account and be the shareholder of record. In the event that the fund holds a shareholder meeting, your Service Agent, as record holder, will vote your shares in accordance with your instructions. If you do not give your Service Agent voting instructions, your Service Agent may nonetheless, under certain circumstances, be entitled to vote your shares.

Distributions, dividends and taxes

Dividends and distributions

The fund generally pays dividends monthly and makes capital gain distributions, if any, once a year, typically in December. The fund may pay additional distributions and dividends at other times if necessary for the fund to avoid a federal tax. The fund expects distributions to be primarily from income. You do not pay a sales charge on reinvested distributions or dividends. Alternatively, you can instruct your Service Agent or Legg Mason Partners Shareholder Services to have your distributions and/or dividends paid in cash. You can change your choice at any time to be effective as of the next distribution or dividend.

24 Prospectus

Taxes

The following discussion is very general. Because each shareholder’s circumstances are different and special tax rules may apply, you should consult your tax adviser about your investment in the fund.

In general, you will have to pay federal income taxes, as well as any state and local taxes, when you redeem shares, exchange shares or receive a distribution (whether paid in cash or reinvested in additional shares). Any tax liability that you owe as a result of any of these taxable events is your responsibility. The federal income tax treatment of redemptions, exchanges and distributions is summarized in the following table:

Transaction	Federal tax status
Redemption or exchange of shares	Usually capital gain or loss; long-term only if shares owned more than one year
Distributions of net capital gain (excess of net long-term capital gain over net short-term capital loss)	Long-term capital gain
Ordinary dividends (including distributions of net short-term capital gain)	Ordinary income

Distributions of net capital gain are taxable to you as long-term capital gain regardless of how long you have owned your shares. Distributions derived from interest on U.S. government securities (but not distributions of gain from the sale of such securities) may be exempt from state and local taxes. The fund does not expect a significant portion of its distributions to be treated as qualified dividend income, which is taxed at reduced rates.

You may want to avoid buying shares when the fund is about to declare a capital gain distribution or a dividend, because it will be taxable to you even though it may effectively be a return of a portion of your investment.

After the end of the year, your Service Agent or the fund will provide you with information about the distributions and dividends you received and any redemptions of shares during the previous year. If you are neither a citizen nor a resident of the United States, the fund will withhold federal income tax at the rate of 30% (or such lower rate as may be determined in accordance with any applicable treaty) on ordinary dividends and other payments that are subject to such withholding.

If you do not provide the fund with your correct taxpayer identification number and any required certifications, you will be subject to backup withholding at the rate of 28% on your distributions, dividends, and redemption proceeds. Backup withholding will not, however, be applied to payments that have been subject to the 30% withholding tax applicable to shareholders who are neither citizens nor residents of the United States.

Share price

You may buy, exchange or redeem shares at their net asset value next determined after receipt of your request in good order, plus any applicable sales charge. The fund’s net asset value per share is the value of its assets minus its liabilities divided by the number of shares outstanding. Net asset value is calculated separately for each class of shares. The fund calculates its net asset value every day the NYSE is open. This calculation is done when regular trading closes on the NYSE (normally 4:00 p.m., Eastern time). The NYSE is closed on certain holidays listed in the SAI.

The Board has approved procedures to be used to value the fund’s securities for the purposes of determining the fund’s net asset value. The valuation of the securities of the fund is determined in good faith by or under the direction of the Board. The Board has delegated certain valuation functions for the fund to the manager.

The fund generally values its securities based on market prices determined at the close of regular trading on the NYSE. The fund’s currency valuations, if any, are done as of when the London Stock Exchange closes, which is usually at 12 noon Eastern time, as the manager believes that these valuations typically reflect the largest trading volume in the foreign currency markets. A material change in the value of currency during the period between the close of the London Stock Exchange and the calculation of the fund’s net asset value on the same date is considered a significant event, as described below, in response to which the fund may

Prospectus 25

use fair valuation procedures to value the affected investments. The market price for debt obligations is generally the price supplied by an independent third party pricing service approved by the fund’s board, which may use a matrix, formula or other objective method that takes into consideration market indices, yield curves and other specific adjustments. Short-term debt obligations 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. If vendors are unable to supply a price, or if the price supplied is deemed by the manager to be unreliable, the market price may be determined using quotations received from one or more brokers/dealers that make a market in the security. When such prices or quotations are not available, or when the manager believes that they are unreliable, the manager may price securities using fair value procedures approved by the Board. The fund may also use fair value procedures if the manager determines that a significant event has occurred between the time at which a market price is determined and the time at which the fund’s net asset value is calculated. In particular, the value of foreign securities may be materially affected by events occurring after the close of the market on which they are valued, but before the fund prices its shares.

Valuing securities at fair value involves greater reliance on judgment than valuation of securities based on readily available market quotations. A fund that uses fair value to price securities may value those securities higher or lower than another fund using market quotations or its own fair value methodologies to price the same securities. There can be no assurance that the fund could obtain the fair value assigned to a security if it were to sell the security at approximately the time at which the fund determines its net asset value.

In order to buy, redeem or exchange shares at that day’s price, you must place your order with your Service Agent or the transfer agent before the NYSE closes. If the NYSE closes early, you must place your order prior to the actual closing time.

It is the responsibility of the Service Agents to transmit all orders to buy, exchange or redeem shares to Legg Mason Partners Shareholder Services on a timely basis.

Financial highlights

The financial highlights tables are intended to help you understand the performance of each class for the past five years (or since inception if less than five years). Certain information reflects financial results for a single share. Total return represents the rate that a shareholder would have earned (or lost) on a fund share assuming reinvestment of all dividends and distributions. The information in the following tables has been derived from the fund’s and the predecessor fund’s financial statements. Those financial statements have been audited by KPMG LLP, independent registered public accounting firm, whose report, along with the fund’s financial statements, is included in the annual report (available upon request). As of April 29, 2004, Class L shares of the fund were renamed Class C shares. As of November 20, 2006, Class Y shares were renamed Class I shares. The financial information shown below for periods prior to April 16, 2007 that of the fund’s predecessor. No information is presented for Class R shares because no Class R shares were outstanding for the periods shown.

For a Class A share of beneficial interest outstanding throughout each year ended December 31:

Class A Shares⁽¹⁾

	2007			2006(2)			2005(2)			2004(2)			2003(2)
Net Asset Value, Beginning of Year	$	4.13		$	4.14		$	4.20		$	4.25		$	4.28
Income (Loss) From Operations:
Net investment income		0.19			0.14			0.11			0.10			0.10
Net realized and unrealized gain (loss)		(0.15	)		0.02			(0.05	)		(0.04	)		(0.01	)
Total Income From Operations		0.04			0.16			0.06			0.06			0.09
Less Distributions From:
Net investment income		(0.19	)		(0.17	)		(0.12	)		(0.11	)		(0.12	)
Total Distributions		(0.19	)		(0.17	)		(0.12	)		(0.11	)		(0.12	)
Net Asset Value, End of Year	$	3.98		$	4.13		$	4.14		$	4.20		$	4.25
Total Return(3)		1.00	%		3.98	%		1.44	%		1.45	%		2.16	%
Net Assets, End of Year (millions)	$	58		$	70		$	83		$	91		$	91

26 Prospectus

	2007		2006(2)		2005(2)		2004(2)		2003(2)
Ratios to Average Net Assets:
Gross expenses	0.90	%	0.86	%(5)	0.88	%	0.88	%	0.87	%
Net expenses	0.90	(4)	0.84	(5)(6)	0.88		0.88	(6)	0.87
Net investment income	4.54		3.52		2.72		2.32		2.44
Portfolio Turnover Rate	81	%(7)	124	%(7)	49	%	34	%(7)	56	%

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

(2) Represents a share of capital stock outstanding prior to April 16, 2007.

(3) Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

(4) There was no impact to the expense ratio as a result of fees paid indirectly.

(5) Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would have been 0.85% and 0.83%, respectively.

(6) Reflects fee waives and/or expense reimbursements.

(7) Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 372%, 270% and 51% for the years ended December 31, 2007, 2006 and 2004, respectively.

For a Class B share of beneficial interest outstanding throughout the year ended December 31, unless otherwise noted:

Class B Shares⁽¹⁾

	2007			2006(2)			2005(2)			2004(2)			2003(2)(3)
Net Asset Value, Beginning of Period	$	4.13		$	4.14		$	4.19		$	4.25		$	4.26
Income (Loss) From Operations:
Net investment income		0.16			0.12			0.09			0.08			0.07
Net realized and unrealized gain (loss)		(0.14	)		0.02			(0.04	)		(0.05	)		0.02
Total Income From Operations		0.02			0.14			0.05			0.03			0.09
Less Distributions From:
Net investment income		(0.17	)		(0.15	)		(0.10	)		(0.09	)		(0.10	)
Total Distributions		(0.17	)		(0.15	)		(0.10	)		(0.09	)		(0.10	)
Net Asset Value, End of Period	$	3.98		$	4.13		$	4.14		$	4.19		$	4.25
Total Return(4)		0.45	%		3.39	%		1.16	%		0.71	%		2.04	%
Net Assets, End of Period (millions)	$	2		$	3		$	4		$	6		$	3
Ratios to Average Net Assets:
Gross expenses		1.45	%		1.42	%(6)		1.40	%		1.39	%		1.42	%(7)
Net expenses		1.45	(5)		1.41	(6)(8)		1.40			1.38	(8)		1.42	(7)
Net investment income		3.97			2.95			2.19			1.80			1.84	(7)
Portfolio Turnover Rate		81	%(9)		124	%(9)		49	%		34	%(9)		56	%

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

(2) Represents a share of capital stock outstanding prior to April 16, 2007.

(3) For the period January 13, 2003 (inception date) to December 31, 2003.

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

(5) There was no impact to the expense ratio as a result of fees paid indirectly.

(6) Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would both have been 1.41%.

(7) Annualized.

(8) Reflects fee waivers and/or expense reimbursements.

(9) Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 372%, 270% and 51% for the years ended December 31, 2007, 2006 and 2004, respectively.

For a Class C share of beneficial interest outstanding throughout each year ended December 31, unless otherwise noted:

Class C Shares⁽¹⁾

	2007			2006(2)		2005(2)			2004(2)			2003(2)
Net Asset Value, Beginning of Year	$	4.14		$	4.15	$	4.20		$	4.26		$	4.28
Income (Loss) From Operations:
Net investment income		0.16			0.12		0.09			0.08			0.08
Net realized and unrealized gain (loss)		(0.14	)		0.02		(0.04	)		(0.05	)		0.00	(3)
Total Income From Operations		0.02			0.14		0.05			0.03			0.08

Prospectus 27

	2007			2006(2)			2005(2)			2004(2)			2003(2)
Less Distributions From:
Net investment income		(0.17	)		(0.15	)		(0.10	)		(0.09	)		(0.10	)
Total Distributions		(0.17	)		(0.15	)		(0.10	)		(0.09	)		(0.10	)
Net Asset Value, End of Year	$	3.99		$	4.14		$	4.15		$	4.20		$	4.26
Total Return(4)		0.34	%		3.39	%		1.14	%		0.67	%		1.88	%
Net Assets, End of Year (millions)	$	7		$	9		$	13		$	24		$	26
Ratios to Average Net Assets:
Gross expenses		1.56	%		1.46	%(6)		1.41	%		1.41	%		1.39	%
Net expenses		1.56	(5)		1.42	(6)(7)		1.41			1.41	(7)		1.39
Net investment income		3.86			2.92			2.15			1.77			1.85
Portfolio Turnover Rate		81	%(8)		124	%(8)		49	%		34	%(8)		56	%

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

(2) Represents a share of capital stock outstanding prior to April 16, 2007.

(3) Amount represents less than $0.01 per share.

(4) Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

(5) There was no impact to the expense ratio as a result of fees paid indirectly.

(6) Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would have been 1.45% and 1.41%, respectively.

(7) Reflects fee waivers and/or expense reimbursements. (8) Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 372%, 270% and 51% for the years ended December 31, 2007, 2006 and 2004, respectively.

For a Class I share of beneficial interest outstanding throughout each year ended December 31:

Class I Shares⁽¹⁾

	2007			2006(2)			2005(2)			2004(2)			2003(2)
Net Asset Value, Beginning of Year	$	4.13		$	4.14		$	4.20		$	4.26		$	4.28
Income (Loss) From Operations:
Net investment income		0.20			0.16			0.13			0.11			0.12
Net realized and unrealized gain (loss)		(0.13	)		0.02			(0.05	)		(0.04	)		(0.00	)(3)
Total Income From Operations		0.07			0.18			0.08			0.07			0.12
Less Distributions From:
Net investment income		(0.21	)		(0.19	)		(0.14	)		(0.13	)		(0.14	)
Total Distributions		(0.21	)		(0.19	)		(0.14	)		(0.13	)		(0.14	)
Net Asset Value, End of Year	$	3.99		$	4.13		$	4.14		$	4.20		$	4.26
Total Return(4)		1.63	%		4.34	%		1.83	%		1.61	%		2.78	%
Net Assets, End of Year (millions)	$	212		$	302		$	256		$	251		$	201
Ratios to Average Net Assets:
Gross expenses		0.52	%		0.50	%(6)		0.50	%		0.49	%		0.50	%
Net expenses		0.52	(5)		0.49	(6)(7)		0.50			0.49	(7)		0.50
Net investment income		4.89			3.87			3.09			2.69			2.79
Portfolio Turnover Rate		81	%(8)		124	%(8)		49	%		34	%(8)		56	%

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

(2) Represents a share of capital stock outstanding prior to April 16, 2007.

(3) Amount represents less than $0.01 per share.

(4) Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

(5) There was no impact to the expense ratio as a result of fees paid indirectly.

(6) Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would have been 0.49% and 0.48%, respectively.

(7) Reflects fee waivers and/or expense reimbursements.

(8) Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 372%, 270% and 51% for the years ended December 31, 2007, 2006 and 2004, respectively.

28 Prospectus

Legg Mason Partners Funds Privacy Policy

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

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

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

• Information we receive from consumer reporting agencies.

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

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

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

[This page is not part of the Prospectus.]

Prospectus 29

(Investment Company Act file no. 811-4254)

FD02319 4/08

Legg Mason Partners Short-Term Investment Grade Bond Fund

You may visit the fund’s web site at http://www.leggmason.com/individualinvestors for a free copy of a Prospectus, Statement of Additional Information (“SAI”) or an Annual or Semi-Annual Report.

Shareholder reports Additional information about the fund’s investments is available in the fund’s Annual and Semi-Annual Reports to shareholders. In the fund’s Annual Report, you will find a discussion of the market conditions and investment strategies that significantly affected the fund’s performance.

The fund sends only one report to a household if more than one account has the same last name and same address. Contact your Service Agent or Legg Mason Partners Shareholder Services if you do not want this policy to apply to you.

Statement of additional information The SAI provides more detailed information about the fund and is incorporated by reference into (is legally a part of) this Prospectus.

You can make inquiries about the fund or obtain shareholder reports or the SAI (without charge) by contacting your Service Agent, by calling Legg Mason Partners Shareholder Services at 800-451-2010, or by writing to the fund at 55 Water Street, New York, New York 10041.

Information about the fund (including the SAI) can be reviewed and copied at the Securities and Exchange Commission’s (the “SEC”) Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-202-551-8090. Reports and other information about the fund are available on the EDGAR Database on the SEC’s Internet site at http://www.sec.gov. Copies of this information may be obtained for a duplicating fee by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-0102.

If someone makes a statement about the fund that is not in this Prospectus, you should not rely upon that information. Neither the fund nor the distributor is offering to sell shares of the fund to any person to whom the fund may not lawfully sell its shares.

30 Prospectus

April 28, 2008

STATEMENT OF ADDITIONAL INFORMATION

LEGG MASON PARTNERS INCOME TRUST

LEGG MASON PARTNERS SHORT-TERM INVESTMENT GRADE BOND FUND

55 Water Street

New York, New York 10041

(800) 451-2010

This Statement of Additional Information (“SAI”) is not a prospectus and is intended to be read with the current Prospectus of Legg Mason Partners Short-Term Investment Grade Bond Fund (the “Fund”), dated April 28, 2008, as amended and/or supplemented from time to time, and is incorporated by reference into the Prospectus.

As part of a number of initiatives launched in 2006 to restructure and streamline the Legg Mason Partners fund complex, the Fund assumed the assets and liabilities of a predecessor fund with the same name. The Fund is now grouped for organizational and governance purposes with other Legg Mason Partners funds that are predominantly fixed-income-type funds, and is a series of Legg Mason Partners Income Trust (the “Trust”), a Maryland business trust. Any information contained in this SAI prior to April 16, 2007 is that of the Fund’s predecessor.

Additional information about the Fund’s investments is available in the Fund’s annual and semi-annual reports to shareholders. These reports contain financial statements that are incorporated herein by reference. The Fund’s prospectus and copies of these reports may be obtained free of charge by contacting banks, brokers, dealers, insurance companies, investment advisers, financial consultants or advisors, mutual fund supermarkets and other financial intermediaries that have entered into an agreement with the Fund’s distributor to sell shares of the Fund (each called a “Service Agent”), or by writing or calling the Fund at the address or telephone number set forth above. Legg Mason Investor Services, LLC (“LMIS”), a wholly-owned broker/dealer subsidiary of Legg Mason, Inc. (“Legg Mason”), serves as the Fund’s sole and exclusive distributor.

TABLE OF CONTENTS

	Page
Investment Objectives And Management Policies	2
Portfolio Transactions	18
Disclosure Of Portfolio Holdings	20
Investment Policies	22
Management	26
Dividends And Distributions	38
Taxes	38
Purchase And Redemption Of Shares	45
Redemption Of Shares	50
Valuation Of Shares	52
Exchange Privilege	52
Investment Management And Other Services	53
Portfolio Manager Disclosure	57
Additional Information About The Fund	62
Financial Statements	69
Appendix A Description Of Ratings	A-1
Appendix B Western Asset Management Company Proxy Voting Policy	B-1

This Statement of Additional Information is NOT a Prospectus and is authorized for distribution to prospective investors only if preceded or accompanied by an effective Prospectus.

1

INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES

The Fund’s Prospectus describes its investment objective and policies. The following discussion supplements the description of the Fund’s investment policies in its Prospectus.

Investment Objective

The Fund’s objective is to seek current income, preservation of capital and liquidity.

The Fund’s investment objective may be changed without shareholder approval.

Principal Investment Strategies

Under normal market conditions the Fund will invest at least 80% of its net assets, plus any borrowings for investment purposes, in “investment grade” fixed-income securities and in related investments. These are securities rated at the time of purchase by a nationally recognized statistical ratings organization (“NSRO”) within one of the top four categories, or, if unrated, judged by the subadviser to be of comparable credit quality. Securities in which the Fund invests include corporate debt securities, bank obligations, mortgage- and asset-backed securities and securities issued by the U.S. government and its agencies and instrumentalities. Securities rated in the lowest category of investment grade (BBB or Baa) are deemed to have speculative characteristics. The Fund may also invest in U.S. dollar denominated fixed-income securities of foreign issuers. The Fund normally maintains dollar-weighted average portfolio maturity of not more than three years.

Additional Information

The principal investment strategies of the Fund are described above. The following provides additional information about these principal strategies and describes other investment strategies that may be used by the Fund.

The Fund’s compliance with its investment restrictions and limitations is usually determined at the time of investment.

Fixed Income Securities

Credit Quality. The Fund may invest in investment grade bonds, i.e., U.S. government securities or bonds rated, at the time of purchase, in the four highest ratings categories by an NRSRO, such as those rated Aaa, Aa, A and Baa by Moody’s or AAA, AA, A and BBB by S&P. Obligations rated in the lowest of the top four rating categories (such as Baa by Moody’s or BBB by S&P) may have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments, including a greater possibility of default or bankruptcy of the issuer, than is the case with higher grade bonds. In the event that a security is rated by different agencies and receives different ratings from these agencies, the Fund will treat the security as being rated in the highest rating category received from an agency. Credit rating criteria is applied at the time the Fund purchases a security and the fund may choose not to sell securities that are downgraded below investment grade after their purchases. The Fund’s credit standards also apply to counterparties to over-the-counter derivatives contracts. The subadviser in its reasonable judgment will determine what rating to assign to unrated securities. In addition, it is possible that Moody’s, S&P and other NRSROs might not timely change their ratings of a particular issue to reflect subsequent events. None of these events will require the sale of the securities by the Fund, although the subadviser will consider these events in determining whether the Fund should continue to hold the securities.

If the credit rating on a security is downgraded or the credit quality deteriorates after purchase by the Fund, or if the maturity of a security is extended after purchase by a Fund, the Fund’s portfolio managers will decide whether the security should be held or sold. Certain securities may provide, upon the occurrence of certain triggering events or defaults, for the investors to become the holders of the underlying assets. In that case the

2

Fund may become the holder of securities that it could not otherwise purchase, based on its investment strategies or its investment restrictions and limitations, at a time when such securities may be difficult to dispose of because of adverse market conditions.

U.S. Government Securities. Securities issued or guaranteed by the United States government or one of its agencies, authorities or instrumentalities (“U.S. government securities”) in which the fund may invest include debt obligations of varying maturities issued by the United States Treasury or issued or guaranteed by an agency or instrumentality of the United States government, including the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, the Small Business Administration, the Government National Mortgage Association (“GNMA”), General Services Administration, Central Bank for Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, the Federal Home Loan Mortgage Corporation (“FHLMC”), Federal Intermediate Credit Banks, Federal Land Banks, the Federal National Mortgage Association (“FNMA”), Maritime Administration, Tennessee Valley Authority, District of Columbia Armory Board, Student Loan Marketing Association and Resolution Trust Company. Direct obligations of the United States Treasury include bills, certificates of indebtedness, notes and bonds which differ in their interest rates, maturities and dates of issuance. These instruments are direct obligations of the United States government and, as such, are backed by the full faith and credit of the United States. Because the United States government is not obligated by law to provide support to an instrumentality that it sponsors, the fund will not invest in obligations issued by an instrumentality of the United States government unless the subadviser determines that the instrumentality’s credit risk does not make its securities unsuitable for investment by the fund.

GNMA Securities. GNMA Certificates are debt securities issued by a mortgage banker or other mortgagee representing an interest in a pool of mortgages insured by the Federal Housing Administration or the Farmers Home Administration or guaranteed by the Veterans Administration. The National Housing Act provides that the full faith and credit of the United States is pledged to the timely payment of principal and interest by GNMA of amounts due on these GNMA Certificates. Scheduled payments of principal and interest are made each month to holders of GNMA Certificates (such as a fund). Unscheduled prepayments of mortgages are passed through to holders of GNMA Certificates at par with the regular monthly payments of principal and interest, which have the effect of reducing future payments on such Certificates and either increasing or decreasing the yield realized by the fund, depending on the cost of the underlying Certificate and its market value at the time of prepayment. The income portions of monthly payments received by the Fund will be included in its net investment income. The average life of GNMA Certificates varies with the maturities of the underlying mortgages (with maximum maturities of 30 years) but is likely to be substantially less than the original maturity of the mortgage pools underlying the securities as the result of prepayments, refinancing of such mortgages or foreclosure.

GNMA Certificates have historically involved no credit risk; however, due to fluctuations in interest rates, the market value of such securities will vary during the period of a shareholder’s investment in the Fund. Prepayments and scheduled payments of principal will be reinvested by the Fund in then available GNMA Certificates which may bear interest at a rate lower or higher than the Certificate from which the payment was received. As with other debt securities, the price of GNMA Certificates is likely to decrease in times of rising interest rates; however, in periods of falling interest rates, the potential for prepayment may reduce the general upward price increase of GNMA Certificates that might otherwise occur. If the Fund buys GNMA Certificates at a premium, mortgage foreclosures or prepayments may result in a loss to the Fund of up to the amount of the premium paid, since only timely payment of principal and interest is guaranteed.

Zero Coupon Bonds. The Fund may invest in zero-coupon debt securities, which may be subject to greater volatility than other types of debt securities. Because zero-coupon securities do not make interest payments, such securities may fall more dramatically when interest rates rise than securities paying out interest on a current basis. However, when interest rates fall, zero-coupon securities may rise more rapidly in value because the securities have locked-in a particular rate of reinvestment that becomes more attractive the further rates fall.

Mortgage-Backed Securities. Mortgage-backed securities are either issued by U.S. government agencies or instrumentalities or, if privately issued, collateralized by mortgages that are insured, guaranteed or otherwise

3

backed by the U.S. government or its agencies or instrumentalities. These agencies and instrumentalities include GNMA, FNMA and FHLMC. Privately-issued mortgage securities are typically issued by private originators of, or investors in, mortgage loans, including mortgage bankers, commercial banks, investment banks, savings and loan associations and special purpose subsidiaries of the above institutions.

Mortgage-backed securities represent participation interests in pools of adjustable and fixed rate mortgage loans. Unlike conventional debt obligations, mortgage-backed securities provide monthly payments derived from the monthly interest and principal payments (including any prepayments) made by the individual borrowers on the pooled mortgage loans.

The mortgage loans underlying mortgage-backed securities are generally subject to a greater rate of principal prepayments in a declining interest rate environment and to a lesser rate of principal prepayments in an increasing interest rate environment. Faster or slower than expected prepayments may reduce the value of mortgage-backed securities in the Fund. Therefore, under certain interest and prepayment rate scenarios, the Fund may fail to recover the full amount of its investment in mortgage-backed securities, notwithstanding any direct or indirect governmental or agency guarantee.

Since faster than expected prepayments must usually be invested in lower yielding securities, mortgage-backed securities are less effective than conventional bonds at “locking in” a specified interest rate. Conversely, in a rising interest rate environment, a declining prepayment rate will extend the average life of many mortgage-backed securities. This possibility is often referred to as extension risk. Extending the average life of a mortgage-backed security increases the risk of depreciation due to future increases in market interest rates.

The Fund’s investments in mortgage-backed securities may include conventional mortgage pass-through securities, stripped mortgage-backed securities (SMBS) and certain classes of multiple class collateralized mortgage obligations (CMOs). Examples of SMBS include interest only and principal only securities. Senior CMO classes will typically have priority over residual CMO classes as to the receipt of principal and/or interest payments on the underlying mortgages.

The CMO classes in which the Fund may invest include sequential and parallel pay CMOs, including planned amortization class (PAC) and target amortization class (TAC) securities. The Fund may also invest in the floating rate mortgage-backed securities listed under “Structured Mortgage-Backed Securities.”

Structured Mortgage-Backed Securities. The Fund may invest in structured mortgage-backed securities. The interest rate or, in some cases, the principal payable at the maturity of a structured security may change positively or inversely in relation to one or more interest rates, financial indices or other financial indicators (“reference prices”). A structured security may be leveraged to the extent that the magnitude of any change in the interest rate or principal payable on a structured security is a multiple of the change in the reference price. Thus, structured securities may decline in value due to adverse market changes in reference prices.

The structured securities purchased by the Fund may include interest only (IO) and principal only (PO) securities, floating rate securities linked to the Cost of Funds Index (COFI floaters), other “lagging rate” floating rate securities, floating rate securities that are subject to a maximum interest rate (“capped floaters”), leveraged floating rate securities (“super floaters”), leveraged inverse floating rate securities (“inverse floaters”), leveraged or super IOs and POs, inverse IOs, dual index floaters and range floaters.

Mortgage Dollar Rolls. The Fund may invest in mortgage dollar roll transactions. A mortgage dollar roll transaction is a transaction where the Fund sells a mortgage related security and simultaneously agrees to repurchase, at a future date, another mortgage related security with the same interest rate and maturity date, but generally backed by a different pool of mortgages. The benefits from these transactions depend on the subadviser’s ability to forecast mortgage prepayment patterns on different mortgage pools. The Fund may lose money if the securities to be repurchased decline in value before the date of repurchase.

4

Risks of Mortgage-Backed Securities. Many mortgage-backed and structured securities are considered to be derivative instruments. Different types of derivative securities are subject to different combinations of prepayment, extension, interest rate and/or other market risks. Conventional mortgage pass-through securities and sequential pay CMOs are subject to all of these risks, but are typically not leveraged. PACs, TACs and other senior classes of sequential and parallel pay CMOs involve less exposure to prepayment, extension and interest rate risk than other mortgage-backed securities, provided that prepayment rates remain within expected prepayment ranges or “collars.”

The risk of early prepayments is the primary risk associated with mortgage IOs, super floaters and other leveraged floating rate mortgage-backed securities. The primary risks associated with COFI floaters, other “lagging rate” floaters, capped floaters, inverse floaters, POs and leveraged inverse IOs are the potential extension of average life and/or depreciation due to rising interest rates. The residual classes of CMOs are subject to both prepayment and extension risk.

Other types of floating rate derivative debt securities present more complex types of interest rate risks. For example, range floaters are subject to the risk that the coupon will be reduced to below market rates if a designated interest rate floats outside of a specified interest rate band or collar. Dual index or yield curve floaters are subject to depreciation in the event of an unfavorable change in the spread between two designated interest rates.

In addition to the interest rate, prepayment and extension risks described above, the risks associated with transactions in these securities may include: (1) leverage and volatility risk and (2) liquidity and valuation risk. Derivative securities may sometimes increase or leverage the Fund exposure to a particular market risk. Leverage enhances the price volatility of derivative securities held by the Fund.

Some derivative securities are not readily marketable or may become illiquid under adverse market conditions. For thinly traded derivative securities, the only source of price quotations may be the selling dealer.

Equity Securities

Common Stock. Common stock is an interest in a company, limited liability company, or similar entity that entitles the holder to a share in the profits of the company, in the form of dividends, and the proceeds from a sale or liquidation of the company. The interests of common shareholders are the most junior in a corporate structure. This means that in the event of the bankruptcy of the company, its creditors and any holders of a preferred class of equity securities are paid before the common stockholders are entitled to receive anything. However, any assets of the company exceeding the amount owed to creditors or preferred shareholders are shared pro-rata among the common stockholders. Common stockholders normally have voting control of the company and are entitled to vote on the election of directors and certain fundamental corporate actions.

Preferred Stock. Preferred stocks are equity securities, but they have many characteristics of fixed income securities. Their similarities to fixed income securities generally cause preferred stocks to trade more like debt instruments than common stocks. Thus, the value of preferred stocks reflects the credit risk of the company and the dividend yield on the preferred stocks compared to prevailing interest rates. Preferred stock is entitled to receive dividends before any dividend is paid to the holders of common stock. The dividend may be at a fixed or variable dividend payment rate, may be payable on fixed dates or at times determined by the company and may be payable in cash, additional shares of preferred stock or other securities.

Many preferred stocks are redeemable at the option of the company after a certain date. Holders of preferred stock are also entitled to receive a payment upon the sale or liquidation of a company before any payment is made to the company’s common stockholders. However, preferred stock is an equity security and, therefore, is junior in priority of payment in the event of a bankruptcy to the company’s creditors, including holders of the company’s debt securities. This junior ranking to creditors makes preferred stock riskier in some respects than fixed income securities.

5

Convertible Securities. Convertible securities are preferred stocks or fixed-income securities that are convertible at the option of the holder, or in some circumstances at the option of the issuing company, at a stated exchange rate or formula into the company’s common stock or other equity securities. At the time a company sells the convertible securities, the conversion price is normally higher than the market price of the common stock. Convertible securities rank senior to common stocks in an issuer’s capital structure and consequently may be of higher quality and entail less risk than the issuer’s common stock.

A holder of convertible securities will generally receive interest or dividends at a rate lower than comparable debt securities, but the holder has the potential for additional gain if the market value of the common stock exceeds the conversion price. When the market price of the common stock is below the conversion price, convertible securities tend to trade like fixed-income securities. If the market price of the common stock is higher than the conversion price, convertible securities tend to trade like the common stock.

Warrants and Stock Purchase Rights. Warrants and stock purchase rights are securities permitting, but not obligating, their holder to purchase other securities, normally the issuer’s common stock. Stock purchase rights are frequently issued as a dividend to a company’s stockholders and represent the right to purchase a fixed number of shares at a fixed or formula price. The price may reflect a discount to the market price. Warrants are generally sold by a company or issuer together with fixed-income securities and represent the right to a fixed number of shares of common stock or other securities at a fixed or formula price. The exercise price is normally higher than the market price at the time the company sells the warrant.

Warrants and stock purchase rights do not carry with them the right to receive dividends on or to vote the securities that they entitle their holders to purchase. They also do not entitle the holder to share in the assets of the company in a liquidation. The rights to purchase common stock or other securities conferred by a warrant or stock purchase right can only be exercised on specific dates or for a specific period. Trading in these instruments is affected both by the relationship of the exercise price to the current market price of the common stock or other securities and also by the period remaining until the right or warrant expires. An investment in warrants and stock purchase rights may be considered more speculative than other types of equity investments. A warrant or stock purchase right expires worthless if it is not exercised on or prior to its expiration date.

Real Estate Investment Trusts (REITs). REITs are pooled investment vehicles that invest primarily in income producing real estate or real estate related loans or interests. REITs are generally classified as equity REITs, mortgage REITs or a combination of equity and mortgage REITs. Equity REITs invest most of their assets directly in real property and derive income primarily from the collection of rents. Equity REITs can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs invest most of their assets in real estate mortgages and derive income primarily from the collection of interest payments. REITs are not taxed on income distributed to shareholders if they comply with the applicable requirements of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund will indirectly bear its proportionate share of any management and other expenses paid by REITs in which it invests in addition to the expenses paid by the Fund.

Investing in REITs involves certain unique risks in addition to those risks associated with investing in the real estate industry in general. An equity REIT may be affected by changes in the value of the underlying properties owned by the REIT. A mortgage REIT may be affected by changes in interest rates and the ability of the issuers of its fund mortgages to prepay their obligations. REITs are dependent upon the skills of the REITs’ managers and are not diversified. REITs are generally dependent upon maintaining cash flow to repay borrowings and to make distributions to shareholders and are subject to the risk of default by lessees or borrowers. REITs whose underlying assets are concentrated in properties used by a particular industry, such as health care, are also subject to risks associated with that industry.

REITs (especially mortgage REITs) are also subject to interest rate risks. When interest rates decline, the value of a REIT’s investment in fixed rate obligations can be expected to rise. Conversely, when interest rates rise, the value of a REIT’s investment in fixed rate obligations can be expected to decline. If the REIT invests in

6

adjustable rate mortgage loans, yields on a REIT’s investments in such loans will gradually align themselves to reflect changes in market interest rates. This causes the value of these investments to fluctuate less dramatically in response to interest rate fluctuations than would investments in fixed rate obligations.

REITs may have limited financial resources, may trade less frequently and in a limited volume and may be subject to more abrupt or erratic price movements than larger company securities. Historically, REITs have been more volatile in price than the larger capitalization stocks included in the S&P 500.

Derivative Instruments-Options, Futures and Other Strategies

General. The Fund may invest in certain options, futures contracts (sometimes referred to as “futures”), options on futures contracts, forward contracts, swaps, caps, floors, collars, indexed securities and other derivative instruments (collectively, “Financial Instruments”) to, among other things, attempt to hedge its investments or attempt to enhance its return or yield through non-hedging strategies. Except as otherwise provided in the Prospectus, this SAI or by applicable law, the Fund may purchase and sell any type of Financial Instrument.

The use of Financial Instruments is subject to applicable regulations of the SEC, the several exchanges upon which they are traded and the Commodity Futures Trading Commission. In addition, the Fund’s ability to use Financial Instruments may be limited by tax considerations.

Hedging strategies can be broadly categorized as “short hedges” and “long hedges.” A short hedge is a purchase or sale of a Financial Instrument intended partially or fully to offset potential declines in the value of one or more investments held in the Fund’s portfolio. Thus, in a short hedge the Fund takes a position in a Financial Instrument whose price is expected to move in the opposite direction of the price of the investment being hedged.

Conversely, a long hedge is a purchase or sale of a Financial Instrument intended partially or fully to offset potential increases in the acquisition cost of one or more investments that the Fund intends to acquire. Thus, in a long hedge, the Fund takes a position in a Financial Instrument whose price is expected to move in the same direction as the price of the prospective investment being hedged. A long hedge is sometimes referred to as an anticipatory hedge. In an anticipatory hedge transaction, the Fund does not own a corresponding security and, therefore, the transaction does not relate to the portfolio security that the Fund owns. Rather, it relates to a security that the Fund intends to acquire. If the Fund does not complete the hedge by purchasing the security it anticipated purchasing, the effect on the Fund’s portfolio is the same as if the transaction were entered into for speculative purposes.

Financial Instruments on securities generally are used to attempt to hedge against price movements in one or more particular securities positions that the Fund owns or intends to acquire. Financial Instruments on indices, in contrast, generally are used to attempt to hedge against price movements in market sectors in which the Fund has invested or expects to invest. Financial Instruments on debt securities generally are used to hedge either individual securities or broad debt market sectors.

In addition to the instruments, strategies and risks described below, the subadviser expects to discover additional opportunities in connection with Financial Instruments and other similar or related techniques. These new opportunities may become available as the subadviser develops new techniques, as regulatory authorities broaden the range of permitted transactions and as new Financial Instruments or other techniques are developed. The subadviser may utilize these opportunities to the extent that they are consistent with the Fund’s investment objective and permitted by its investment limitations and applicable regulatory authorities. The Fund might not use any of these strategies, and there can be no assurance that any strategy used will succeed.

Risks. The use of Financial Instruments involves special considerations and risks, certain of which are described below, and may result in losses to the Fund. In general, these techniques may increase the volatility of

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the Fund and may involve a small investment of cash relative to the magnitude of the risk assumed. Even a small investment in derivatives may magnify or otherwise increase investment losses to the Fund. The Fund’s use of derivatives may also increase the amount of taxes payable by shareholders.

Successful use of most Financial Instruments depends upon the subadviser’s ability to predict movements of the overall securities, currency and interest rate markets, which requires different skills than predicting changes in the prices of individual securities. The prices of derivatives may move in unexpected ways, especially in abnormal market conditions. There can be no assurance that any particular strategy will succeed, and use of Financial Instruments could result in a loss, regardless of whether the intent was to reduce risk or increase return.

The Fund might be required to maintain assets as “cover,” maintain segregated accounts or make margin payments when it takes positions in Financial Instruments involving obligations to third parties (i.e., Financial Instruments other than purchased options). If the Fund were unable to close out its positions in such Financial Instruments, it might be required to continue to maintain such assets or accounts or make such payments until the position expired or matured. These requirements might impair the Fund’s ability to sell a portfolio security or make an investment at a time when it would otherwise be favorable to do so, or require that the Fund sell a portfolio security at a disadvantageous time.

The Fund’s ability to close out a position in a Financial Instrument prior to expiration or maturity depends on the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of the other party to the transaction (the “counterparty”) to enter into a transaction closing out the position. Therefore, there is no assurance that any position can be closed out at a time and price that is favorable to the Fund.

Certain Risks Associated with Hedging Strategies. There might be imperfect correlation, or even no correlation, between price movements of a Financial Instrument and price movements of the investments being hedged. For example, if the value of a Financial Instrument used in a short hedge increased by less than the decline in value of the hedged investment, the hedge would not be fully successful. Such a lack of correlation might occur due to factors unrelated to the value of the investments being hedged, such as speculative or other pressures on the markets in which Financial Instruments are traded. The effectiveness of hedges using Financial Instruments on indices will depend on the degree of correlation between price movements in the index and price movements in the securities or other assets being hedged.

Because there are a limited number of types of exchange-traded Financial Instruments, it is likely that the standardized contracts available will not match the Fund’s current or anticipated investments exactly. The Fund may invest in Financial Instruments based on securities with different issuers, maturities or other characteristics from the securities in which it typically invests, which involves a risk that the position in Financial Instruments will not track the performance of the Fund’s other investments.

Prices of Financial Instruments can also diverge from the prices of their underlying instruments, even if the underlying instruments match the Fund’s portfolio investments well. Prices of Financial Instruments are affected by such factors as current and anticipated short-term interest rates, changes in volatility of the underlying instrument, and the time remaining until expiration of the contract, which may not affect security prices the same way. Imperfect correlation may also result from differing levels of demand in the markets for Financial Instruments and the securities markets, from structural differences in how Financial Instruments and securities are traded, or from imposition of daily price fluctuation limits or trading halts. The Fund may purchase or sell Financial Instruments with a greater or lesser value than the securities it wishes to hedge or intends to purchase in order to attempt to compensate for differences in volatility between the contract and the securities, although this may not be successful in all cases. If price changes in the Fund’s positions in Financial Instruments are poorly correlated with its other investments, the positions may fail to produce anticipated gains or result in losses that are not offset by gains in other investments.

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If successful, the above-discussed strategies can reduce risk of loss by wholly or partially offsetting the negative effect of unfavorable price movements. However, such strategies can also reduce opportunity for gain by offsetting the positive effect of favorable price movements. For example, if the Fund entered into a short hedge because its subadviser projected a decline in the price of a security in the Fund’s portfolio, and the price of that security increased instead, the gain from that increase might be wholly or partially offset by a decline in the price of the Financial Instrument. Moreover, if the price of the Financial Instrument declined by more than the increase in the price of the security, the Fund could suffer a loss. In either such case, the Fund would have been in a better position had it not attempted to hedge at all.

Cover. Transactions using Financial Instruments, other than purchased options, expose the Fund to an obligation to another party. The Fund will comply with SEC guidelines regarding cover for these instruments and will, if the guidelines so require, segregate on its books cash or liquid assets in the prescribed amount as determined daily. The Fund may cover such transactions using other methods currently or as may be permitted in the future under the 1940 Act or orders issued by the SEC thereunder. For these purposes, interpretations and guidance provided by the SEC staff may be taken into account when deemed appropriate by the Fund.

Assets used as cover cannot be sold while the position in the corresponding Financial Instrument is open, unless they are replaced with other appropriate assets. As a result, the commitment of a large portion of the Fund’s assets to cover in accounts could impede portfolio management or the Fund’s ability to meet redemption requests or other current obligations.

Options. A call option gives the purchaser the right to buy, and obligates the writer to sell, the underlying investment at the agreed-upon price during the option period. A put option gives the purchaser the right to sell, and obligates the writer to buy, the underlying investment at the agreed-upon price during the option period. Purchasers of options pay an amount, known as a premium, to the option writer in exchange for the right under the option contract.

The Fund may purchase call options for any purpose. For example, a call option may be purchased by the Fund as a long hedge. Call options also may be used as a means of participating in an anticipated price increase of a security on a more limited risk basis than would be possible if the security itself were purchased. In the event of a decline in the price of the underlying security, use of this strategy would serve to limit the Fund’s potential loss to the option premium paid; conversely, if the market price of the underlying security increases above the exercise price and the Fund either sells or exercises the option, any profit realized would be reduced by the premium.

The Fund may purchase put options for any purpose. For example, a put option may be purchased by the Fund as a short hedge. The put option enables the Fund to sell the underlying security at the predetermined exercise price; thus the potential for loss to the Fund below the exercise price is limited to the option premium paid. If the market price of the underlying security is higher than the exercise price of the put option, any profit the Fund realizes on the sale of the security would be reduced by the premium paid for the put option less any amount for which the put option may be sold.

Writing put or call options can enable the Fund to enhance income or yield by reason of the premiums paid by the purchasers of such options. However, the Fund may also suffer a loss as a result of writing options. For example, if the market price of the security underlying a put option declines to less than the exercise price of the option, minus the premium received, the Fund would suffer a loss.

Writing call options can serve as a limited short hedge, because declines in the value of the hedged investment would be offset to the extent of the premium received for writing the option. However, if the security or currency appreciates to a price higher than the exercise price of the call option, it can be expected that the option will be exercised and the Fund will be obligated to sell the security or currency at less than its market value. If the call option is an over the counter (“OTC”) option, the securities or other assets used as cover may be considered illiquid.

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Writing put options can serve as a limited long hedge because increases in the value of the hedged investment would be offset to the extent of the premium received for writing the option. However, if the security or currency depreciates to a price lower than the exercise price of the put option, it can be expected that the put option will be exercised and the Fund will be obligated to purchase the security or currency at more than its market value. If the put option is an OTC option, the securities or other assets used as cover may be considered illiquid.

The value of an option position will reflect, among other things, the current market value of the underlying investment, the time remaining until expiration, the relationship of the exercise price to the market price of the underlying investment, the historical price volatility of the underlying investment and general market conditions.

The Fund may effectively terminate its right or obligation under an option by entering into a closing transaction. For example, the Fund may terminate its obligation under a call or put option that it had written by purchasing an identical call or put option; this is known as a closing purchase transaction. Conversely, the Fund may terminate a position in a put or call option it had purchased by writing an identical put or call option; this is known as a closing sale transaction. Closing transactions permit the Fund to realize profits or limit losses on an option position prior to its exercise or expiration.

A type of put that the Fund may purchase is an “optional delivery standby commitment,” which is entered into by parties selling debt securities to the Fund. An optional delivery standby commitment gives the Fund the right to sell the security back to the seller on specified terms. This right is provided as an inducement to purchase the security.

Risks of Options on Securities. Options may result in the Fund’s net asset value being more sensitive to changes in the value of the related instrument. The Fund may purchase or write both exchange-traded and OTC options. Exchange-traded options in the United States are issued by a clearing organization affiliated with the exchange on which the option is listed that, in effect, guarantees completion of every exchange-traded option transaction. In contrast, OTC options are contracts between the Fund and its counterparty (usually a securities dealer or a bank) with no clearing organization guarantee. Thus, when the Fund purchases an OTC option, it relies on the counterparty from whom it purchased the option to make or take delivery of the underlying investment upon exercise of the option. Failure by the counterparty to do so would result in the loss of any premium paid by the Fund as well as the loss of any expected benefit of the transaction.

The Fund’s ability to establish and close out positions in exchange-listed options depends on the existence of a liquid market. However, there can be no assurance that such a market will exist at any particular time. Closing transactions can be made for OTC options only by negotiating directly with the counterparty, or by a transaction in the secondary market if any such market exists. There can be no assurance that the Fund will in fact be able to close out an OTC option position at a favorable price prior to expiration. In the event of insolvency of the counterparty, the Fund might be unable to close out an OTC option position at any time prior to its expiration, if at all.

If the Fund were unable to effect a closing transaction for an option it had purchased, due to the absence of a secondary market, the imposition of price limits or otherwise, it would have to exercise the option to realize any profit. The inability to enter into a closing purchase transaction for a covered call option written by the Fund could cause material losses because the Fund would be unable to sell the investment used as cover for the written option until the option expires or is exercised.

Options have varying expiration dates. The exercise price of the options may be below, equal to or above the current market value of the underlying security or other instrument. Options purchased by the Fund that expire unexercised have no value, and the Fund will realize a loss in the amount of the premium paid and any transaction costs. If an option written by the Fund expires unexercised, the Fund realizes a gain equal to the premium received at the time the option was written. Transaction costs must be included in these calculations.

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Options on Indices. Puts and calls on indices are similar to puts and calls on securities or futures contracts except that all settlements are in cash and gain or loss depends on changes in the index in question rather than on price movements in individual securities or futures contracts. When the Fund writes a call on an index, it receives a premium and agrees that, prior to the expiration date, the purchaser of the call, upon exercise of the call, will receive from the Fund an amount of cash if the closing level of the index upon which the call is based is greater than the exercise price of the call. The amount of cash is equal to the difference between the closing price of the index and the exercise price of the call times a specified multiple (“multiplier”), which determines the total dollar value for each point of such difference. When the Fund buys a call on an index, it pays a premium and has the same rights as to such call as are indicated above. When the Fund buys a put on an index, it pays a premium and has the right, prior to the expiration date, to require the seller of the put, upon the Fund’s exercise of the put, to deliver to the Fund an amount of cash if the closing level of the index upon which the put is based is less than the exercise price of the put, which amount of cash is determined by the multiplier, as described above for calls. When the Fund writes a put on an index, it receives a premium and the purchaser of the put has the right, prior to the expiration date, to require the Fund to deliver to it an amount of cash equal to the difference between the closing level of the index and exercise price times the multiplier if the closing level is less than the exercise price.

Risks of Options on Indices. The risks of investment in options on indices may be greater than options on securities. Because index options are settled in cash, when the Fund writes a call on an index it cannot provide in advance for its potential settlement obligations by acquiring and holding the underlying securities. The Fund can offset some of the risk of writing a call index option by holding a diversified portfolio of securities similar to those on which the underlying index is based. However, the Fund cannot, as a practical matter, acquire and hold a portfolio containing exactly the same securities as underlie the index and, as a result, bears a risk that the value of the securities held will vary from the value of the index.

Even if the Fund could assemble a portfolio that exactly reproduced the composition of the underlying index, it still would not be fully covered from a risk standpoint because of the “timing risk” inherent in writing index options. When an index option is exercised, the amount of cash that the holder is entitled to receive is determined by the difference between the exercise price and the closing index level on the date when the option is exercised. As with other kinds of options, the Fund as the call writer will not learn that the Fund has been assigned until the next business day at the earliest. The time lag between exercise and notice of assignment poses no risk for the writer of a covered call on a specific underlying security, such as common stock, because there the writer’s obligation is to deliver the underlying security, not to pay its value as of a fixed time in the past. So long as the writer already owns the underlying security, it can satisfy its settlement obligations by simply delivering it, and the risk that its value may have declined since the exercise date is borne by the exercising holder. In contrast, even if the writer of an index call holds securities that exactly match the composition of the underlying index, it will not be able to satisfy its assignment obligations by delivering those securities against payment of the exercise price. Instead, it will be required to pay cash in an amount based on the closing index value on the exercise date. By the time it learns that it has been assigned, the index may have declined, with a corresponding decline in the value of its portfolio. This “timing risk” is an inherent limitation on the ability of index call writers to cover their risk exposure by holding securities positions.

If the Fund has purchased an index option and exercises it before the closing index value for that day is available, it runs the risk that the level of the underlying index may subsequently change. If such a change causes the exercised option to fall out-of-the-money, the fund will be required to pay the difference between the closing index value and the exercise price of the option (times the applicable multiplier) to the assigned writer.

OTC Options. Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size, and strike price, the terms of OTC options (options not traded on exchanges) generally are established through negotiation with the other party to the option contract. While this type of arrangement allows the Fund great flexibility to tailor the option to its needs, OTC options generally involve greater risk than exchange-traded options, which are guaranteed by the clearing organization of the exchanges where they are traded. In addition, OTC options are considered illiquid by the SEC.

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Futures Contracts and Options on Futures Contracts. A financial futures contract sale creates an obligation by the seller to deliver the type of Financial Instrument called for in the contract in a specified delivery month for a stated price. A financial futures contract purchase creates an obligation by the purchaser to take delivery of the type of Financial Instrument called for in the contract in a specified delivery month at a stated price. The Fund may invest in single security futures contracts to the extent permitted by applicable law. Options on futures give the purchaser the right to assume a position in a futures contract at the specified option exercise price at any time during the period of the option. The purchase of futures or call options on futures can serve as a long hedge, and the sale of futures or the purchase of put options on futures can serve as a short hedge. Writing call options on futures contracts can serve as a limited short hedge, using a strategy similar to that used for writing call options on securities or indices. Similarly, writing put options on futures contracts can serve as a limited long hedge. Futures contracts and options on futures contracts can also be purchased and sold to attempt to enhance income or yield. To the extent permitted by applicable law and the Fund’s investment policies, the Fund may also write call and put options on futures contracts that are not covered.

In addition, futures strategies can be used to manage the average duration of the Fund’s fixed-income portfolio. If the subadviser wishes to shorten the average duration of the Fund’s fixed-income portfolio, the Fund may sell a debt futures contract or a call option thereon, or purchase a put option on that futures contract. If the subadviser wishes to lengthen the average duration of the Fund’s fixed-income portfolio, the Fund may buy a debt futures contract or a call option thereon, or sell a put option thereon.

Futures contracts may also be used for non-hedging purposes, such as to simulate full investment in underlying securities while retaining a cash balance for portfolio management purposes, as a substitute for direct investment in a security, to facilitate trading, to reduce transaction costs, or to seek higher investment returns when a futures contract or option is priced more attractively than the underlying security or index.

No price is paid upon entering into a futures contract. Instead, at the inception of a futures contract the Fund is required to deposit “initial margin.” Margin must also be deposited when writing a call or put option on a futures contract, in accordance with applicable exchange rules. Unlike margin in securities transactions, initial margin on futures contracts does not represent a borrowing, but rather is in the nature of a performance bond or good-faith deposit that is returned to the Fund at the termination of the transaction if all contractual obligations have been satisfied. Under certain circumstances, such as periods of high volatility, the Fund may be required by an exchange to increase the level of its initial margin payment, and initial margin requirements might be increased generally in the future by regulatory action.

Subsequent “variation margin” payments are made to and from the futures broker daily as the value of the futures position varies, a process known as “marking-to-market.” Variation margin does not involve borrowing, but rather represents a daily settlement of the Fund’s obligations to or from a futures broker. When the Fund purchases an option on a futures contract, the premium paid plus transaction costs is all that is at risk. However, there may be circumstances when the purchase of an option on a futures contract would result in a loss to the Fund when the use of a futures contract would not, such as when there is no movement in the value of the securities or currencies being hedged. In contrast, when the Fund purchases or sells a futures contract or writes a call or put option thereon, it is subject to daily variation margin calls that could be substantial in the event of adverse price movements. If the Fund has insufficient cash to meet daily variation margin requirements, it might need to sell securities at a time when such sales are disadvantageous.

Although some futures and options on futures call for making or taking delivery of the underlying securities or currencies, generally those contracts are closed out prior to delivery by offsetting purchases or sales of matching futures or options (involving the same currency or underlying security and delivery month). If an offsetting purchase price is less than the original sale price, the Fund realizes a gain, or if it is more, the Fund realizes a loss. If an offsetting sale price is more than the original purchase price, the Fund realizes a gain, or if it is less, the Fund realizes a loss. The Fund will also bear transaction costs for each contract, which will be included in these calculations. Positions in futures and options on futures may be closed only on an exchange or

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board of trade that provides a secondary market. However, there can be no assurance that a liquid secondary market will exist for a particular contract at a particular time. In such event, it may not be possible to close a futures contract or options position.

Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract or an option on a futures contract can vary from the previous day’s settlement price; once that limit is reached, no trades may be made that day at a price beyond the limit. Daily price limits do not limit potential losses because prices could move to the daily limit for several consecutive days with little or no trading, thereby preventing liquidation of unfavorable positions.

If the Fund were unable to liquidate a futures contract or an option on a futures position due to the absence of a liquid secondary market, the imposition of price limits or otherwise, it could incur substantial losses. The Fund would continue to be subject to market risk with respect to the position. In addition, except in the case of purchased options, the Fund would continue to be required to make daily variation margin payments and might be required to maintain the position being hedged by the future or option or to maintain cash or securities in a segregated account.

The Fund is operated by a person who has claimed an exclusion from the definition of the term “commodity pool operator” under the Commodity Exchange Act (the “CEA”), and, therefore, such person is not subject to registration or regulation as a pool operator under the CEA.

Risks of Futures Contracts and Options Thereon. The ordinary spreads between prices in the cash and futures markets (including the options on futures market), due to differences in the natures of those markets, are subject to the following factors, which may create distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions, which could distort the normal relationship between the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing distortion. Third, from the point of view of speculators, the deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions. Due to the possibility of distortion, a correct forecast of general interest rate, currency exchange rate or stock market trends by the subadviser may still not result in a successful transaction. Of course, the subadviser may be incorrect in its expectations as to the extent of various interest rate, currency exchange rate or stock market movements or the time span within which the movements take place.

Index Futures. The risk of imperfect correlation between movements in the price of index futures and movements in the price of the securities that are the subject of the hedge increases as the composition of the Fund’s portfolio diverges from the securities included in the applicable index. The price of the index futures may move more than or less than the price of the securities being hedged. If the price of the index futures moves less than the price of the securities that are the subject of the hedge, the hedge will not be fully effective, but if the price of the securities being hedged has moved in an unfavorable direction, the Fund would be in a better position than if it had not hedged at all. If the price of the securities being hedged has moved in a favorable direction, this advantage will be partially offset by the futures contract. If the price of the futures contract moves more than the price of the securities, the Fund will experience either a loss or a gain on the futures contract that will not be completely offset by movements in the price of the securities that are the subject of the hedge. To compensate for the imperfect correlation of movements in the price of the securities being hedged and movements in the price of the index futures, the Fund may buy or sell index futures in a greater dollar amount than the dollar amount of the securities being hedged if the historical volatility of the prices of such securities being hedged is more than the historical volatility of the prices of the securities included in the index. It is also possible that, where the Fund has sold index futures contracts to hedge against decline in the market, the market may advance and the value of the securities held in the Fund may decline. If this occurred, the Fund would lose money on the futures contract and

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also experience a decline in value of its portfolio securities. However, while this could occur for a very brief period or to a very small degree, over time the value of a diversified portfolio of securities will tend to move in the same direction as the market indices on which the futures contracts are based.

Where index futures are purchased to hedge against a possible increase in the price of securities before the Fund is able to invest in them in an orderly fashion, it is possible that the market may decline instead. If the Fund then concludes not to invest in them at that time because of concern as to possible further market decline or for other reasons, it will realize a loss on the futures contract that is not offset by a reduction in the price of the securities it had anticipated purchasing.

To the extent such instruments are permitted by applicable law and the Fund’s investment policies, the Fund may invest in security futures. Such investments are expected to be subject to risks similar to those of index future investing.

Combined Positions. The Fund may purchase and write options in combination with each other, or in combination with other Financial Instruments, to adjust the risk and return characteristics of its overall position. For example, the Fund may purchase a put option and write a call option on the same underlying instrument, in order to construct a combined position whose risk and return characteristics are similar to selling a futures contract. Another possible combined position would involve writing a call option at one strike price and buying a call option at a lower price, in order to reduce the risk of the written call option in the event of a substantial price increase. Because combined options positions involve multiple trades, they result in higher transaction costs and may be more difficult to open and close out.

Turnover. The Fund’s options and futures activities may affect its turnover rate and brokerage commission payments. The exercise of calls or puts written by the Fund, and the sale or purchase of futures contracts, may cause it to sell or purchase related investments, thus increasing its turnover rate. Once the Fund has received an exercise notice on an option it has written, it cannot effect a closing transaction in order to terminate its obligation under the option and must deliver or receive the underlying securities at the exercise price. The exercise of puts purchased by the Fund may also cause the sale of related investments, also increasing turnover; although such exercise is within the Fund’s control, holding a protective put might cause it to sell the related investments for reasons that would not exist in the absence of the put. The Fund will pay a brokerage commission each time it buys or sells a put or call or purchases or sells a futures contract. Such commissions may be higher than those that would apply to direct purchases or sales.

Swaps, Caps, Floors and Collars. The Fund may enter into swaps, caps, floors and collars to preserve a return or a spread on a particular investment or portion of its portfolio, to protect against any increase in the price of securities the Fund anticipates purchasing at a later date or to attempt to enhance yield. A swap involves the exchange by the Fund with another party of their respective commitments to pay or receive cash flows, e.g., an exchange of floating rate payments for fixed-rate payments. The purchase of a cap entitles the purchaser, to the extent that a specified index exceeds a predetermined value, to receive payments on a notional principal amount from the party selling the cap. The purchase of a floor entitles the purchaser, to the extent that a specified index falls below a predetermined value, to receive payments on a notional principal amount from the party selling the floor. A collar combines elements of a cap and a floor.

Swap agreements, including caps, floors and collars, can be individually negotiated and structured to include exposure to a variety of different types of investments or market factors. Depending on their structure, swap agreements may increase or decrease the overall volatility of the Fund’s investments and its share price and yield because, and to the extent, these agreements affect the Fund’s exposure to long- or short-term interest rates, mortgage-backed security values, corporate borrowing rates or other factors such as security prices or inflation rates.

Swap agreements will tend to shift the Fund’s investment exposure from one type of investment to another. Caps and floors have an effect similar to buying or writing options.

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If a counterparty’s creditworthiness declines, the value of the agreement would be likely to decline, potentially resulting in losses. If a default occurs by the other party to such transaction, the Fund will have contractual remedies pursuant to the agreements related to the transaction, which may be limited by applicable law in the case of a counterparty’s insolvency.

The Fund may enter into credit default swap contracts for investment purposes. As the seller in a credit default swap contract, the Fund would be required to pay the par (or other agreed-upon) value of a referenced debt obligation to the counterparty in the event of a default by a third party, such as a U.S. corporate issuer, on the debt obligation. In return, the Fund would receive from the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no default occurs, the Fund would keep the stream of payments and would have no payment obligations. As the seller, the Fund would be subject to investment exposure on the notional amount of the swap which may be significantly larger than the Fund’s cost to enter into the credit default swap.

The Fund may also purchase credit default swap contracts in order to hedge against the risk of default of debt securities held in its portfolio, in which case the Fund would function as the counterparty referenced in the preceding paragraph. This would involve the risk that the investment may expire worthless and would only generate income in the event of an actual default by the issuer of the underlying obligation (or, as applicable, a credit downgrade or other indication of financial instability). It would also involve credit risk—that the seller may fail to satisfy its payment obligations to the Fund in the event of a default.

The net amount of the excess, if any, of the Fund’s obligations over its entitlements with respect to each swap will be accrued on a daily basis, depending on whether a threshold amount (if any) is exceeded, and an amount of cash or liquid assets having an aggregate net asset value approximately equal to the accrued excess will be maintained as collateral. The Fund will also maintain collateral with respect to its total obligations under any swaps that are not entered into on a net basis, and will maintain collateral as required by SEC guidelines from time to time with respect to caps and floors written by the Fund.

Flexibility. Generally, the foregoing is not intended to limit the Fund’s investment flexibility, unless such a limitation is expressly stated, and therefore will be construed by the Fund as broadly as possible. Statements concerning what the Fund may do are not intended to limit other any activity. The Fund maintain the flexibility to use Financial Instruments for any purpose consistent with applicable law and any express limitations in the SAI or the Prospectus.

Other Transactions, Policies and Risks

Repurchase and Reverse Repurchase Agreements. The Fund may enter into repurchase agreements, wherein the seller agrees to repurchase a security from the Fund at an agreed-upon future date, normally the next business day. The resale price is greater than the purchase price, which reflects the agreed-upon rate of return for the period the Fund holds the security and which is not related to the coupon rate on the purchased security. The Fund requires continual maintenance of the market value of the collateral in amounts at least equal to the resale price; thus risk is limited to the ability of the seller to pay the agreed-upon amount on the delivery date. If the seller defaults, however, realization upon the collateral by the Fund may be delayed or limited or the Fund might incur a loss if the value of the collateral securing the repurchase agreement declines and might incur disposition costs in connection with liquidating the collateral. The Fund will enter into repurchase agreements only with broker/dealers or other financial institutions that are deemed creditworthy by the subadviser under guidelines approved by the Fund’s Board. It is the policy of the Fund not to invest in repurchase agreements that do not mature within seven days if any such investment and any other illiquid assets held by the Fund amount to more than 15% of the Fund’s total assets.

Reverse repurchase agreements involve the sale of the Fund’s securities with an agreement to repurchase the securities at an agreed-upon price, date and interest payment and have the characteristics of borrowing. Since the

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proceeds of borrowings under reverse repurchase agreements are invested, this would introduce the speculative factor known as “leverage.” The securities purchased with the funds obtained from the agreement and securities collateralizing the agreement will have maturity dates no later than the repayment date. Generally the effect of such a transaction is that the Fund can recover all or most of the cash invested in the Fund’s securities involved during the term of the reverse repurchase agreement, while in many cases it will be able to keep some of the interest income associated with those securities. Such transactions are advantageous only if the Fund has an opportunity to earn a greater rate of interest on the cash derived from the transaction than the interest cost of obtaining that cash. Opportunities to realize earnings from the use of the proceeds equal to or greater than the interest required to be paid may not always be available, and the Fund intends to use the reverse repurchase technique only when the subadviser believes it will be advantageous to the Fund. The use of reverse repurchase agreements may exaggerate any interim increase or decrease in the value of the Fund’s assets. The Fund’s custodian bank will maintain a separate account for the Fund with securities having a value equal to or greater than such commitments.

Pursuant to an exemption order issued by the Securities and Exchange Commission (the “SEC”), the Fund, along with other affiliated entities managed by the subadvisers, may transfer uninvested cash balances into one or more joint repurchase accounts. These balances are invested in one or more repurchase agreements, secured by U.S. government securities as collateral. Securities used as collateral for repurchase agreements are financial assets subject to the Fund’s entitlement orders through its securities account at its custodian bank until the agreements mature. Each joint repurchase agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal; however, in the event of default by the other party to the agreement, retention or sale of the collateral may be subject to legal proceedings.

Securities Lending. Consistent with applicable regulatory requirements, the Fund may seek to increase its net investment income by lending its securities, provided such loans are callable at any time and are continuously secured by cash or U.S. government securities equal to or no less than the market value, determined daily, of the securities loaned. The Fund will receive amounts equal to dividends or interest on the securities loaned. It will also earn income for having made the loan because cash collateral pursuant to these loans will be invested in short-term money market instruments. In connection with lending of securities the Fund may pay reasonable finders, administrative and custodial fees. Where voting or consent rights with respect to loaned securities pass to the borrower, management will follow the policy of calling the loan, in whole or in part as may be appropriate, to permit the exercise of such voting or consent rights if the issues involved have a material effect on the Fund’s investment in the securities loaned. Apart from lending its securities and acquiring debt securities of a type customarily purchased by financial institutions, the Fund will not make loans to other persons. The risks in lending Fund securities, as with other extensions of secured credit, consist of possible delay in receiving additional collateral or in the recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. Loans will only be made to borrowers whom the subadviser deems to be of good standing and will not be made unless, in the judgment of the subadviser, the interest to be earned from such loans would justify the risk from time to time. The Fund may return to the borrower and/or a third party, which is unaffiliated with the Fund or the subadviser and is acting as a “finder,” a part of the interest earned from the investment of collateral received for securities loaned. Generally, the borrower will be required to make payments to the Fund in lieu of any dividends the Fund would have otherwise received had it not loaned the shares to the borrower. Any such payments, however, will not be treated as “qualified dividend income” for purposes of determining what portion of the Fund’s regular dividends (as defined below) received by individuals may be taxed at the rates generally applicable to long-term capital gains (see “TAXES”).

Short-Term Trading. The Fund may, to a limited degree, engage in short-term trading to attempt to take advantage of short-term market variations, or may dispose of a Fund security prior to its maturity if the subadviser believes such disposition is advisable or that the Fund needs to generate cash to satisfy redemptions. As the portfolio turnover rate increases, so will the Fund’s dealer mark-ups and other transaction-related expenses. Investors should realize that risk of loss is inherent in the ownership of any securities and that shares of the Fund will fluctuate with the market value of its securities.

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When-Issued, Delayed Delivery and Forward Commitment Investments. The Fund may purchase or sell securities on a when-issued, delayed delivery or forward commitment basis. Such transactions arise when securities are purchased or sold by the Fund with payment and delivery taking place in the future in order to secure what is considered to be an advantageous price and yield to the Fund at the time of entering into the transaction. Purchasing such securities involves the risk of loss if the value of the securities declines prior to settlement date. The sale of securities for delayed delivery involves the risk that the prices available in the market on the delivery date may be greater than those obtained in the sale transaction. The Fund’s custodian will maintain, in a segregated account on behalf of the Fund, cash, U.S. government securities or other liquid securities that have a value equal to or greater than the Fund’s purchase commitments; the custodian will likewise segregate securities sold on a delayed basis.

Temporary Investments. Under unusual economic or market conditions as determined by its subadviser, the Fund may depart from its investment goals and invest without limitation in all types of money market instruments and short-term debt securities, including U.S. government securities; certificates of deposit, time deposits and bankers’ acceptances issued by domestic banks (including their branches located outside the United States and subsidiaries located in Canada), domestic branches of foreign banks, savings and loan associations and similar institutions; investment grade commercial paper; and repurchase agreements. To the extent the Fund is investing in short-term investments as a temporary defensive strategy, the Fund’s investment objective may not be achieved.

Restricted and Illiquid Securities. The Fund may purchase securities that are not registered under the Securities Act of 1933, as amended (“1933 Act”) or that are subject to other restrictions on their resale (“restricted securities”). These securities may be resold only in privately negotiated transactions and may not be publicly offered and sold until they are registered under the 1933 Act. Restricted securities tend to sell at a lower price than would be available if they were not restricted. Although it may be possible to eliminate restrictions on resale by registering securities under the 1933 Act, this would involve extra costs to the Fund and the possibility that the securities might go down in value before the Fund was able to sell them. Restricted securities can also be difficult to value accurately.

Restricted securities are subject to the Fund’s investment restriction on illiquid investments, unless they are commercial paper offered in accordance with section 4(2) of the 1933 Act or securities eligible for resale in reliance on rule 144A under the 1933 Act. Section 4(2) commercial paper and rule 144A securities will not be subject to the Fund’s investment restriction on illiquid investments if the subadviser determines, in accordance with policies and procedures adopted by the Board, that these securities are in fact liquid. These policies and procedures require the subadviser to consider, among other things, (1) the frequency of trades and quotes for the security, (2) the number of dealers willing to sell the security, (3) the number of potential purchasers, (4) dealer undertakings to make a market in the security, (5) the nature of the security and (6) the time needed to dispose of the security. To the extent that liquid section 4(2) commercial paper or rule 144A securities held by the Fund become temporarily illiquid, due to the lack of sufficient qualified institutional buyers or market or other conditions, the percentage of assets invested in illiquid assets would increase.

Any security that was liquid when acquired by the Fund may later become illiquid, especially during adverse market conditions for that type of security. A perceived loss of liquidity may further reduce the value of securities in declining markets. The Fund may be forced to sell less liquid securities at a substantial loss if it receives a high volume of redemption requests.

The Fund may invest in Yankee obligations, including Yankee obligations of foreign banks. Yankee obligations are dollar denominated obligations issued in the U.S. capital markets by foreign issuers. Yankee obligations are subject to certain sovereign risks. One such risk is the possibility that a foreign government might prevent dollar-denominated funds from flowing across its borders. Other risks include: adverse political and economic developments in a foreign country; the extent and quality of government regulation of financial markets and institutions; the imposition of foreign withholding taxes; and expropriation or nationalization of foreign issuers.

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Recent market events. The fixed-income markets are experiencing a period of extreme volatility which has negatively impacted market liquidity conditions. Initially, the concerns on the part of market participants were focused on the subprime segment of the mortgage-backed securities market. However, these concerns have since expanded to include a broad range of mortgage-and asset-backed and other fixed income securities, including those rated investment grade, the U.S. and international credit and interbank money markets generally, and a wide range of financial institutions and markets, asset classes and sectors. As a result, fixed income instruments are experiencing liquidity issues, increased price volatility, credit downgrades, and increased likelihood of default. Securities that are less liquid are more difficult to value and may be hard to dispose of. Domestic and international equity markets have also been experiencing heightened volatility and turmoil, with issuers that have exposure to the real estate, mortgage and credit markets particularly affected. During times of market turmoil, investors tend to look to the safety of securities issued or backed by the U.S. Treasury, causing the prices of these securities to rise, and the yield to decline. These events and the continuing market upheavals may have an adverse effect on the Fund.

PORTFOLIO TRANSACTIONS

Subject to such policies as may be established by the Board from time to time, the Fund’s subadviser is primarily responsible for the Fund’s portfolio decisions and the placing of the Fund’s portfolio transactions.

Transactions on stock exchanges involve the payment of negotiated brokerage commissions. There is generally no stated commission in the case of securities traded in the over-the-counter market, but the price of those securities includes an undisclosed commission or mark-up. Over-the-counter purchases and sales are transacted directly with principal market makers except where it is believed that better prices and executions may be obtained elsewhere. The cost of securities purchased from underwriters includes an underwriting commission or concession, and the prices at which securities are purchased from and sold to dealers include a dealer’s mark-up or mark-down.

Pursuant to the Sub-Advisory Agreement, the subadviser is authorized to place orders pursuant to its investment determinations for the Fund either directly with the issuer or with any broker or dealer, foreign currency dealer, futures commission merchant or others selected by it. The general policy of the subadviser in selecting brokers and dealers is to obtain the best results achievable in the context of a number of factors which are considered both in relation to individual trades and broader trading patterns, including the reliability of the broker/dealer, the competitiveness of the price and the commission, the research services received and whether the broker/dealer commits its own capital.

In connection with the selection of such brokers or dealers and the placing of such orders, subject to applicable law, brokers or dealers may be selected that also provide brokerage and research services (as those terms are defined in Section 28 (e) of the Securities Exchange Act of 1934) to the Fund and/or the other accounts over which a subadviser or its affiliates exercise investment discretion. The subadviser is authorized to pay a broker or dealer who provides such brokerage and research services a commission for executing a portfolio transaction for the Fund which is in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if the subadviser determines in good faith that such amount of commission is reasonable in relation to the value of the brokerage and research services provided by such broker or dealer. This determination may be viewed in terms of either that particular transaction or the overall responsibilities that the subadviser and its affiliates have with respect to accounts over which it exercises investment discretion. The subadviser may also have arrangements with brokers pursuant to which such brokers provide research services to the subadviser in exchange for a certain volume of brokerage transactions to be executed by such brokers. While the payment of higher commissions increases the Fund’s costs, the subadviser does not believe that the receipt of such brokerage and research services significantly reduces its expenses as subadviser. Arrangements for the receipt of research services from brokers may create conflicts of interest.

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Research services furnished to the subadviser by brokers who effect securities transactions for the Fund may be used by the subadviser in servicing other investment companies and accounts which it manages. Similarly, research services furnished to the subadviser by brokers who effect securities transactions for other investment companies and accounts which the subadviser manages may be used by the subadviser in servicing the Fund. Not all of these research services are used by the subadviser in managing any particular account, including the Fund. For the fiscal year ended December 31, 2004, 2005 and 2006, the Fund paid no commissions to brokers.

The Fund contemplates that, consistent with the policy of obtaining the best net results, brokerage transactions may be conducted through “affiliated broker/dealers,” as defined in the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund’s Board has adopted procedures in accordance with Rule 17e-1 promulgated under the 1940 Act to ensure that all brokerage commissions paid to such affiliates are reasonable and fair in the context of the market in which such affiliates operate.

As of December 1, 2005, LMIS became an underwriter of the Fund under the 1940 Act. For the period December 1, 2005 through December 31, 2006, the Fund did not pay any brokerage commissions to LMIS or its affiliates. For the fiscal year end December 31, 2007 the Fund paid $4,540 in brokerage commissions.

During the fiscal year ended December 31, 2007, the Fund did not purchase securities issued by regular broker/dealers of the Fund.

In certain instances there may be securities that are suitable as an investment for the Fund as well as for one or more of the subadviser’s other clients. Investment decisions for the Fund and for the subadviser’s other clients are made with a view to achieving their respective investment objectives. It may develop that a particular security is bought or sold for only one client even though it might be held by, or bought or sold for, other clients. Likewise, a particular security may be bought for one or more clients when one or more clients are selling the same security. Some simultaneous transactions are inevitable when several clients receive investment advice from the same investment adviser, particularly when the same security is suitable for the investment objectives of more than one client. When two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed to be equitable to each. It is recognized that in some cases this system could adversely affect the price of or the size of the position obtainable in a security for the Fund. When purchases or sales of the same security for a Fund and for other funds managed by an adviser occur contemporaneously, the purchase or sale orders may be aggregated in order to obtain any price advantages available to large volume purchases or sales.

Portfolio Turnover

For reporting purposes, the Fund’s turnover rate is calculated by dividing the lesser of purchases or sales of the Fund’s portfolio securities for the fiscal year by the monthly average of the value of the portfolio securities owned by the Fund during the fiscal year. In determining such portfolio turnover, all securities whose maturities at the time of acquisition were one year or less are excluded. A 100% portfolio turnover rate would occur, for example, if all of the securities in the Fund (other than short-term money market securities) were replaced once during the fiscal year. Portfolio turnover will not be a limiting factor should the subadviser deem it advisable to purchase or sell securities.

For the fiscal years ended December 31, 2006 and 2007, the portfolio turnover rates were as follows:

2006	2007
124%*	81	%*

* Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 270% and 372% for the years ended December 31, 2006 and 2007, respectively.

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In the event that portfolio turnover increases, this increase necessarily results in correspondingly greater transaction costs which must be paid by the Fund. To the extent portfolio trading results in realization of net short-term capital gains, shareholders will be taxed on such gains at ordinary tax rates (except shareholders who invest through IRAs and other retirement plans which are not taxed currently on accumulations in their accounts).

DISCLOSURE OF PORTFOLIO HOLDINGS

For funds in the Legg Mason Partners family of funds, each fund’s board of trustees has adopted policies and procedures developed by LMPFA with respect to the disclosure of the funds’ portfolio securities and any ongoing arrangements to make available information about each fund’s portfolio securities. The policy requires that consideration always be given as to whether disclosure of information about any fund’s portfolio holdings is in the best interests of such fund’s shareholders, and that any conflicts of interest between the interests of the fund’s shareholders and those of LMPFA, the funds’ distributors or their affiliates, be addressed in a manner that places the interests of fund shareholders first. The policy provides that information regarding a fund’s portfolio holdings may not be shared with non-Legg Mason employees, with investors or potential investors (whether individual or institutional), or with third parties unless it is done for legitimate fund business purposes and in accordance with the policy.

LMPFA’s policy generally provides for the release of details of securities positions once they are considered “stale.” Data is considered stale 25 calendar days following quarter-end for funds other than money market funds, and 25 calendar days following month-end with respect to money market funds. LMPFA believes that this passage of time prevents a third party from benefiting from an investment decision made by a fund that has not been fully reflected by the market.

Under the policy, a fund’s complete list of holdings (including the size of each position) may be made available to investors, potential investors, third parties and non-Legg Mason employees with simultaneous public disclosure at least 25 days after calendar quarter end, except in the case of a money market fund’s holdings, which may be released with simultaneous public disclosure at least 25 days after month end. Typically, simultaneous public disclosure is achieved by the filing of Form N-Q or Form N-CSR in accordance with SEC rules, provided that such filings may not be made until 25 days following quarter-end and/or posting the information to LMPFA or the funds’ Internet site that is accessible by the public, or through public release by a third party vendor.

The policy permits the release of limited portfolio holdings information that is not yet considered stale in a number of situations, including:

1. A fund’s top ten securities, current as of month-end, and the individual size of each such security position may be released at any time following month-end with simultaneous public disclosure.

2. A fund’s top ten securities positions (including the aggregate but not individual size of such positions) may be released at any time with simultaneous public disclosure.

3. A list of securities (that may include fund holdings together with other securities) followed by a portfolio manager (without position sizes or identification of particular funds) may be disclosed to sell-side brokers at any time for the purpose of obtaining research and/or market information from such brokers.

4. A trade in process may be discussed only with counterparties, potential counterparties and others involved in the transaction (i.e., brokers and custodians).

5. A fund’s sector weightings, yield and duration (for fixed income funds), performance attribution (e.g. analysis of the fund’s out-performance or underperformance of its benchmark based on its portfolio

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holdings) and other summary and statistical information that does not include identification of specific portfolio holdings may be released, even if non-public, if such release is otherwise in accordance with the policy’s general principles.

6. A fund’s portfolio holdings may be released on an as-needed basis to its legal counsel, counsel to its Independent Trustees and its independent public accounting firm, in required regulatory filings or otherwise to governmental agencies and authorities.

Under the policy, if information about a fund’s portfolio holdings is released pursuant to an ongoing arrangement with any party, a fund must have a legitimate business purpose for the release of the information, and either party receiving the information must be under a duty of confidentiality, or the release of non-public information must be subject to trading restrictions and confidential treatment to prohibit the entity from sharing with an unauthorized source or trading upon any non-public information provided. Neither a fund, nor Legg Mason nor any other affiliated person may receive compensation or any other consideration in connection with such arrangements. Ongoing arrangements to make available information about a fund’s portfolio securities will be reviewed at least annually by a fund’s board of trustees.

The approval of a fund’s Chief Compliance Officer, or designee, must be obtained before entering into any new ongoing arrangement or altering any existing ongoing arrangement to make available portfolio holdings information, or with respect to any exceptions to the policy. Any exceptions to the policy must be consistent with the purposes of the policy. Exceptions are considered on a case-by-case basis and are granted only after a thorough examination and consultation with LMPFA’s legal department, as necessary. Exceptions to the policies are reported annually to the fund’s board of trustees.

Currently, the Funds typically disclose their complete portfolio holdings approximately 25 days after calendar quarter-end on Legg Mason’s website, http://www.leggmason.com/individualinvestors.

Set forth below is a list, as of August 31, 2007, of those parties with whom LMPFA, on behalf of the Funds, has authorized ongoing arrangements that include the release of portfolio holdings information, the frequency of the release under such arrangements, and the length of the lag, if any, between the date of the information and the date on which the information is disclosed. The parties identified below as recipients are service providers, fund rating agencies, consultants and analysts.

Recipient	Frequency	Delay Before Dissemination
State Street Bank & Trust Co. (Fund Custodian and Accounting Agent)
	Daily	None
Institutional Shareholder Services (Proxy voting services)
	As necessary	None
Bloomberg	Quarterly	25 Days after Quarter End
Lipper	Quarterly	25 Days after Quarter End
S&P	Quarterly	25 Days after Quarter End
Morningstar	Quarterly	25 Days after Quarter End
Vestek	Daily	None
Factset	Daily	None
The Bank of New York	Daily	None
Thomson	Semi-annually	None
Dataware	Daily	None
ITG	Daily	None

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Portfolio holdings information for a Fund may also be released from time to time pursuant to ongoing arrangements with the following parties:

Recipient	Frequency	Delay Before Dissemination
Baseline	Daily	None
Frank Russell	Monthly	1 Day
Callan	Quarterly	25 Days after Quarter End
Mercer	Quarterly	25 Days after Quarter End
eVestment Alliance	Quarterly	25 Days after Quarter End
CRA RogersCasey	Quarterly	25 Days after Quarter End
Cambridge Associates	Quarterly	25 Days after Quarter End
Marco Consulting	Quarterly	25 Days after Quarter End
Wilshire	Quarterly	25 Days after Quarter End
Informa Investment Services (Efron)
	Quarterly	25 Days after Quarter End
CheckFree (Mobius)	Quarterly	25 Days after Quarter End
Nelsons Information	Quarterly	25 Days after Quarter End
Investor Tools	Daily	None
Advent	Daily	None
BARRA	Daily	None
Plexus	Quarterly (Calendar)	Sent 1-3 business days following the
		end of a Quarter
Elkins/McSherry	Quarterly (Calendar)	Sent 1-3 business days following the
		end of a Quarter
Quantitative Services Group	Daily	None
AMBAC	Daily	None
Deutsche Bank	Monthly	6-8 business days
Fitch	Monthly	6-8 business days
Liberty Hampshire	Weekly and Month End	None
Sun Trust	Weekly and Month End	None
New England Pension Consultants	Quarterly	25 Days after Quarter End
Evaluation Associates	Quarterly	25 Days after Quarter End
Watson Wyatt	Quarterly	25 Days after Quarter End
S&P (Rating Agency)	Weekly Tuesday Night*	1 business day*
Moody’s (Rating Agency)	Monthly*	6-8 business days*
Electra Information Systems	Daily	None
SunGard	Daily	None

* For a money market fund, the frequency of the release of information to this recipient may be weekly and there may be no delay in the release of the information.

INVESTMENT POLICIES

The Fund has adopted the fundamental and non-fundamental investment policies below for the protection of shareholders. Fundamental investment policies may not be changed without the vote of a majority of the outstanding shares of the Fund, defined under the 1940 Act as the lesser of (a) 67% or more of the voting power present at a Fund meeting, if the holders of more than 50% of the voting power of the Fund are present in person or represented by proxy or (b) more than 50% of the voting power of the Fund.

If any percentage restriction described below is complied with at the time of an investment, a later increase or decrease in percentage resulting from a change in values or assets will not constitute a violation of such restriction.

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Fundamental Investment Policies

The Fund’s revised fundamental policies are as follows:

1. The Fund may not borrow money except as permitted by (i) the 1940 Act, as amended, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

2. The Fund may not engage in the business of underwriting the securities of other issuers except as permitted by (i) the 1940 Act, as amended, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

3. The Fund may lend money or other assets to the extent permitted by (i) the 1940 Act, as amended, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

4. The Fund may not issue senior securities except as permitted by (i) the 1940 Act, as amended, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

5. The Fund may not purchase or sell real estate except as permitted by (i) the 1940 Act, as amended, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

6. The Fund may purchase or sell commodities or contracts related to commodities to the extent permitted by (i) the 1940 Act, as amended, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

7. Except as otherwise permitted by exemptive or other relief or permission from the SEC, SEC staff or other authority with appropriate jurisdiction, the Fund may make any investment if, as a result, the Fund’s investments will be concentrated in any one industry.

With respect to the fundamental policy relating to borrowing money set forth in (1) above, the 1940 Act permits a fund to borrow money in amounts of up to one-third of the fund’s total assets from banks for any purpose, and to borrow up to 5% of the fund’s total assets from banks or other lenders for temporary purposes. To limit the risks attendant to borrowing, the 1940 Act requires the fund to maintain at all times an “asset coverage” of at least 300% of the amount of its borrowings. Asset coverage means the ratio that the value of the fund’s total assets, minus liabilities other than borrowings, bears to the aggregate amount of all borrowings. Certain trading practices and investments, such as reverse repurchase agreements, may be considered to be borrowings and thus subject to the 1940 Act restrictions. Borrowing money to increase portfolio holdings is known as “leveraging.” Borrowing, especially when used for leverage, may cause the value of a fund’s shares to be more volatile than if the fund did not borrow. This is because borrowing tends to magnify the effect of any increase or decrease in the value of the fund’s portfolio holdings. Borrowed money thus creates an opportunity for greater gains, but also greater losses. To repay borrowings, the fund may have to sell securities at a time and at a price that is unfavorable to the fund. There also are costs associated with borrowing money, and these costs would offset and could eliminate a fund’s net investment income in any given period. Currently the Fund does not contemplate borrowing money for leverage, but if the Fund does so, it will not likely do so to a substantial degree. The policy in (1) above will be interpreted to permit the Fund to engage in trading practices and investments that may be considered to be borrowing to the extent permitted by the 1940 Act. Short-term credits necessary for the settlement of securities transactions and arrangements with respect to securities lending will not be considered to be borrowings under the policy. Practices and investments that may involve leverage but are not considered to be borrowings are not subject to the policy.

With respect to the fundamental policy relating to underwriting set forth in (2) above, the 1940 Act does not prohibit a fund from engaging in the underwriting business or from underwriting the securities of other issuers; in fact,

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the 1940 Act permits a fund to have underwriting commitments of up to 25% of its assets under certain circumstances. Those circumstances currently are that the amount of the fund’s underwriting commitments, when added to the value of the fund’s investments in issuers where the fund owns more than 10% of the outstanding voting securities of those issuers, cannot exceed the 25% cap. A fund engaging in transactions involving the acquisition or disposition of portfolio securities may be considered to be an underwriter under the Securities Act of 1933, as amended (the “1933 Act”). Under the 1933 Act, an underwriter may be liable for material omissions or misstatements in an issuer’s registration statement or prospectus. Securities purchased from an issuer and not registered for sale under the 1933 Act are considered restricted securities. There may be a limited market for these securities. If these securities are registered under the 1933 Act, they may then be eligible for sale but participating in the sale may subject the seller to underwriter liability. These risks could apply to a fund investing in restricted securities. Although it is not believed that the application of the 1933 Act provisions described above would cause the Fund to be engaged in the business of underwriting, the policy in (2) above will be interpreted not to prevent the Fund from engaging in transactions involving the acquisition or disposition of portfolio securities, regardless of whether the Fund may be considered to be an underwriter under the 1933 Act.

With respect to the fundamental policy relating to lending set forth in (3) above, the 1940 Act does not prohibit a fund from making loans; however, SEC staff interpretations currently prohibit funds from lending more than one-third of their total assets, except through the purchase of debt obligations or the use of repurchase agreements. (A repurchase agreement is an agreement to purchase a security, coupled with an agreement to sell that security back to the original seller on an agreed-upon date at a price that reflects current interest rates. The SEC frequently treats repurchase agreements as loans.) While lending securities may be a source of income to a fund, as with other extensions of credit, there are risks of delay in recovery or even loss of rights in the underlying securities should the borrower fail financially. However, loans would be made only when a fund’s manager or subadviser believes the income justifies the attendant risks. A fund also will be permitted by this policy to make loans of money, including to other funds. A fund would have to obtain exemptive relief from the SEC to make loans to other funds. The policy in (3) above will be interpreted not to prevent the Fund from purchasing or investing in debt obligations and loans. In addition, collateral arrangements with respect to options, forward currency and futures transactions and other derivative instruments, as well as delays in the settlement of securities transactions, will not be considered loans.

With respect to the fundamental policy relating to issuing senior securities set forth in (4) above, “senior securities” are defined as fund obligations that have a priority over the fund’s shares with respect to the payment of dividends or the distribution of fund assets. The 1940 Act prohibits a fund from issuing senior securities except that the fund may borrow money in amounts of up to one-third of the fund’s total assets from banks for any purpose. A fund also may borrow up to 5% of the fund’s total assets from banks or other lenders for temporary purposes, and these borrowings are not considered senior securities. The issuance of senior securities by a fund can increase the speculative character of the fund’s outstanding shares through leveraging. Leveraging of a fund’s portfolio through the issuance of senior securities magnifies the potential for gain or loss on monies, because even though the fund’s net assets remain the same, the total risk to investors is increased to the extent of the fund’s gross assets. The policy in (4) above will be interpreted not to prevent collateral arrangements with respect to swaps, options, forward or futures contracts or other derivatives, or the posting of initial or variation margin.

With respect to the fundamental policy relating to real estate set forth in (5) above, the 1940 Act does not prohibit a fund from owning real estate; however, a fund is limited in the amount of illiquid assets it may purchase. Investing in real estate may involve risks, including that real estate is generally considered illiquid and may be difficult to value and sell. Owners of real estate may be subject to various liabilities, including environmental liabilities. To the extent that investments in real estate are considered illiquid, the current SEC staff position generally limits a fund’s purchases of illiquid securities to 15% of net assets. The policy in (5) above will be interpreted not to prevent the Fund from investing in real estate-related companies, companies whose businesses consist in whole or in part of investing in real estate, instruments (like mortgages) that are secured by real estate or interests therein, or real estate investment trust securities.

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With respect to the fundamental policy relating to commodities set forth in (6) above, the 1940 Act does not prohibit a fund from owning commodities, whether physical commodities and contracts related to physical commodities (such as oil or grains and related futures contracts), or financial commodities and contracts related to financial commodities (such as currencies and, possibly, currency futures). However, a fund is limited in the amount of illiquid assets it may purchase. To the extent that investments in commodities are considered illiquid, the current SEC staff position generally limits a fund’s purchases of illiquid securities to 15% of net assets. If a fund were to invest in a physical commodity or a physical commodity-related instrument, the fund would be subject to the additional risks of the particular physical commodity and its related market. The value of commodities and commodity-related instruments may be extremely volatile and may be affected either directly or indirectly by a variety of factors. There also may be storage charges and risks of loss associated with physical commodities. The policy in (6) above will be interpreted to permit investments in exchange traded funds that invest in physical and/or financial commodities.

With respect to the fundamental policy relating to concentration set forth in (7) above, the 1940 Act does not define what constitutes “concentration” in an industry. The SEC staff has taken the position that investment of 25% or more of a fund’s total assets in one or more issuers conducting their principal activities in the same industry or group of industries constitutes concentration. It is possible that interpretations of concentration could change in the future. A fund that invests a significant percentage of its total assets in a single industry may be particularly susceptible to adverse events affecting that industry and may be more risky than a fund that does not concentrate in an industry. The policy in (7) above will be interpreted to refer to concentration as that term may be interpreted from time to time. The policy also will be interpreted to permit investment without limit in the following: securities of the U.S. government and its agencies or instrumentalities; securities of state, territory, possession or municipal governments and their authorities, agencies, instrumentalities or political subdivisions; securities of foreign governments; and repurchase agreements collateralized by any such obligations. Accordingly, issuers of the foregoing securities will not be considered to be members of any industry. There also will be no limit on investment in issuers domiciled in a single jurisdiction or country. The policy also will be interpreted to give broad authority to the Fund as to how to classify issuers within or among industries.

The Fund’s fundamental policies are written and will be interpreted broadly. For example, the policies will be interpreted to refer to the 1940 Act and the related rules as they are in effect from time to time, and to interpretations and modifications of or relating to the 1940 Act by the SEC and others as they are given from time to time. When a policy provides that an investment practice may be conducted as permitted by the 1940 Act, the policy will be interpreted to mean either that the 1940 Act expressly permits the practice or that the 1940 Act does not prohibit the practice.

Non-Fundamental Investment Policies

Under the non-fundamental investment policies adopted by the Fund, the Fund may not:

1. Purchase any securities on margin (except for such short-term credits as are necessary for the clearance of purchases and sales of portfolio securities) or sell any securities short (except “against the box”). For purposes of this restriction, the deposit or payment by the Fund of underlying securities and other assets in escrow and collateral agreements with respect to initial or maintenance margin in connection with futures contracts and related options and options on securities, indexes or similar items is not considered to be the purchase of a security on margin;

2. Invest in securities of another investment company except as permitted by Section 12(d)(1) of the 1940 Act or as part of a merger, consolidation, or acquisition; or

3. Purchase or otherwise acquire any security if, as a result, more than 15% of its net assets would be invested in securities that are illiquid.

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Diversification

The Fund is currently classified as a diversified fund under the 1940 Act. This means that the Fund may not purchase securities of an issuer (other than obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities) if, with respect to 75% of its total assets, (a) more than 5% of the Fund’s total assets would be invested in securities of that issuer, or (b) the Fund would hold more than 10% of the outstanding voting securities of that issuer. With respect to the remaining 25% of its total assets, the Fund can invest more than 5% of its assets in one issuer. Under the 1940 Act, the Fund cannot change its classification from diversified to non-diversified without shareholder approval.

MANAGEMENT

The business affairs of the Fund are managed by or under the direction of the Board of Trustees of the Trust (the “Board”). The Board elects officers who are responsible for the day-to-day operations of the Fund and who execute policies authorized by the Board.

The Trustees, including the Trustees of the Fund who are not “interested persons” of the Fund (the “Independent Trustees”), as defined in the 1940 Act, and executive officers of the Fund, their years of birth, their principal occupations during at least the past five years (their titles may have varied during that period), the number of funds associated with Legg Mason the Trustees oversee, and other board memberships they hold are set forth below. The address of each Trustee is c/o R. Jay Gerken, 620 Eighth Avenue, New York, New York 10019.

The following information relates to the Trust’s current Board of Trustees:

Name and Year of Birth	Position(s) with Fund	Term of Office* and Length of Time Served**	Principal Occupation(s) During Past 5 Years	Number of Funds in Fund Complex Overseen by Trustee	Other Board Memberships Held by Trustee During Past Five Years
INDEPENDENT TRUSTEES:
Elliott J. Berv Born 1943	Trustee	Since 1989	President and Chief Executive Officer, Catalyst (consulting) (since 1984); Chief Executive Officer, Rocket City Enterprises (media) (2000 to 2005)	68	Board Member, American Identity Corp. (doing business as Morpheus Technologies) (biometric information management) (since 2001); Director, Lapoint Industries (industrial filter company) (since 2002); Director, Alzheimer’s Association (New England Chapter) (since 1998)

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Name and Year of Birth	Position(s) with Fund	Term of Office* and Length of Time Served**	Principal Occupation(s) During Past 5 Years	Number of Funds in Fund Complex Overseen by Trustee	Other Board Memberships Held by Trustee During Past Five Years
A. Benton Cocanougher Born 1938	Trustee	Since 1991	Dean Emeritus and Professor, Texas A&M University (since 2004); former Interim Chancellor, Texas A&M University System (2003 to 2004); former Special Advisor to the President, Texas A&M University (2002 to 2003); former Dean and Professor of Marketing, College and Graduate School of Business of Texas A&M University (1987 to 2001)	68	None
Jane F. Dasher Born 1949	Trustee	Since 1999	Chief Financial Officer, Korsant Partners, LLC (a family investment company)	68	None

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Name and Year of Birth	Position(s) with Fund	Term of Office* and Length of Time Served**	Principal Occupation(s) During Past 5 Years	Number of Funds in Fund Complex Overseen by Trustee	Other Board Memberships Held by Trustee During Past Five Years
Mark T. Finn Born 1943	Trustee	Since 1989	Adjunct Professor, College of William & Mary (since 2002); Principal/Member, Balvan Partners (investment management) (since 2002); Chairman, Chief Executive Officer and Owner, Vantage Consulting Group, Inc. (investment management) (since 1988); formerly, Vice Chairman and Chief Operating Officer, Lindner Asset Management Company (mutual fund company) (1999 to 2001); formerly, General Partner and Shareholder, Greenwich Ventures LLC (investment partnership) (1996 to 2001)	68	None
Rainer Greeven Born 1936	Trustee	Since 1994	Attorney, Rainer Greeven PC; President and Director, 62nd Street East Corporation (real estate) (since 2002)	68	None

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Name and Year of Birth	Position(s) with Fund	Term of Office* and Length of Time Served**	Principal Occupation(s) During Past 5 Years	Number of Funds in Fund Complex Overseen by Trustee	Other Board Memberships Held by Trustee During Past Five Years
Stephen Randolph Gross Born 1947	Trustee	Since 1986	Chairman, HLB Gross Collins, P.C. (accounting and consulting firm) (since 1979); Treasurer, Coventry Limited, Inc. (Senior Living Facilities) (since 1985); formerly, Managing Director, Fountainhead Ventures, L.L.C. (technology accelerator) (1998 to 2003); formerly, Treasurer, Hank Aaron Enterprises (fast food franchise) (1985 to 2001); formerly, Partner, Capital Investment Advisory Partners (leverage buyout consulting) (2000 to 2002); formerly, Secretary, Carint N.A. (manufacturing) (1998 to 2002)	68	Director, Andersen Calhoun (assisted living) (since 1987); formerly, Director, United Telesis, Inc. (telecommunications) (1997 to 2002); formerly, Director, ebank Financial Services, Inc. (1997 to 2004)
Richard E. Hanson, Jr. Born 1941	Trustee	Since 1985	Retired; formerly, Headmaster, The New Atlanta Jewish Community High School, Atlanta, Georgia (1996 to 2000)	68	None
Diana R. Harrington Born 1940	Trustee	Since 1992	Professor, Babson College (since 1992)	68	None
Susan M. Heilbron Born 1945	Trustee	Since 1994	Independent Consultant (since 2001); formerly, Owner, Lacey & Heilbron (communications consulting) (1993 to 2001)	68	None

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Name and Year of Birth	Position(s) with Fund	Term of Office* and Length of Time Served**	Principal Occupation(s) During Past 5 Years	Number of Funds in Fund Complex Overseen by Trustee	Other Board Memberships Held by Trustee During Past Five Years
Susan B. Kerley Born 1951	Trustee	Since 1992	Investment Consulting Partner, Strategic Management Advisers, LLC (investment consulting) (since 1990)	68	Chairman and Independent Board Member of Eclipse Fund, Inc. and Eclipse Funds (which trade as Mainstay Funds) (currently supervises 16 investment companies in the fund complex) (since 1991)
Alan G. Merten Born 1941	Trustee	Since 1990	President, George Mason University (since 1996)	68	Trustee, First Potomac Realty Trust (since 2005); Director, Xybernaut Corporation (information technology) (2004 to 2006); Director, Digital Net Holdings, Inc. (2003 to 2004); Director, Comshare, Inc. (information technology) (1985 to 2003); Director, BTG, Inc. (information systems) (1997 to 2001); Director, Cardinal Financial Corporation (since November 2006)
R. Richardson Pettit Born 1942	Trustee	Since 1990	Formerly, Duncan Professor of Finance, University of Houston (1977 to 2006)	68	None

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Name and Year of Birth	Position(s) with Fund	Term of Office* and Length of Time Served**	Principal Occupation(s) During Past 5 Years	Number of Funds in Fund Complex Overseen by Trustee	Other Board Memberships Held by Trustee During Past Five Years
INTERESTED TRUSTEE:
R. Jay Gerken, CFA† Born 1951	Trustee, President, Chairman and Chief Executive Officer	Since 2002	Managing Director, Legg Mason & Co., LLC (“Legg Mason & Co.”); Chairman of the Board and Trustee/Director of 152 funds associated with LMPFA and its affiliates; President, LMPFA (since 2006); Chairman, President and Chief Executive Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates; formerly, Chairman, Smith Barney Fund Management LLC (“SBFM”) and Citi Fund Management, Inc. (“CFM”) (2002 to 2005); formerly, Chairman, President and Chief Executive Officer, Travelers Investment Adviser Inc. (2002 to 2005)	137	Former Trustee, Consulting Group Capital Markets Funds (2002 to 2006)

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

** Indicates the earliest year in which the Trustee became a Board member for a fund in the Legg Mason Partners fund complex.

† Mr. Gerken is an “interested person,” as defined in the 1940 Act, because of his position with the manager and/or certain of its affiliates.

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Name, Year of Birth and Address	Position(s) with Fund	Term of Office* and Length of Time Served**	Principal Occupation(s) During Past 5 Years
OFFICERS:
R. Jay Gerken, CFA Born 1951 620 Eighth Avenue New York, NY 10018	Chairman, President and Chief Executive Officer	Since 2002	Managing Director of Legg Mason & Co.; Chairman of the Board and Trustee/Director of 152 funds associated with LMPFA and its affiliates; President, LMPFA (since 2006); Chairman, President and Chief Executive Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates; formerly, Chairman of SBFM and CFM (2002 to 2005); formerly Chairman, President and Chief Executive Officer of Travelers Investment Adviser Inc. (2002 to 2005)
Ted P. Becker Born 1951 620 Eighth Avenue New York, NY 10018	Chief Compliance Officer	Since 2006	Director of Global Compliance at Legg Mason, Inc. (2006 to present); Managing Director of Compliance at Legg Mason & Co (2005 to present); Chief Compliance Officer with certain mutual funds associated with Legg Mason & Co. (since 2006); Chief Compliance Officer of LMPFA and certain affiliates; Managing Director of Compliance at Citigroup Asset Management (“CAM,” a group of affiliated investment advisers, which included SBFM, Smith Barney Asset Management and CFM and other affiliated investment advisory entities) (2002 to 2005). Prior to 2002, Managing Director-Internal Audit & Risk Review at Citigroup Inc.
John Chiota Born 1968 300 First Stamford Place Stamford, CT 06902	Chief Anti-Money Laundering Compliance Officer	Since 2006	Vice President of Legg Mason & Co. (since 2005); Vice President at CAM (since 2004); Chief Anti-Money Laundering Compliance Officer of certain mutual funds associated with Legg Mason & Co. (since 2006). Prior to August 2004, Chief Anti-Money Laundering Compliance Officer of TD Waterhouse.

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Name, Year of Birth and Address	Position(s) with Fund	Term of Office* and Length of Time Served**	Principal Occupation(s) During Past 5 Years
Robert I. Frenkel Born 1954 300 First Stamford Place Stamford, CT 06902	Secretary and Chief Legal Officer	Since 2003	Managing Director and General Counsel of Global Mutual Funds for Legg Mason & Co. (since 2005); Managing Director and General Counsel at Global Mutual Funds for CAM (since 2000); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. (since 2003). Previously, Secretary of CFM (2001 to 2004).
Frances M. Guggino Born 1957 55 Water Street New York, NY 10041	Treasurer and Chief Financial Officer	Since 2004	Director of Legg Mason & Co. (since 2005); Director at CAM (1992 to 2005); Treasurer and/or Controller of certain funds associated with Legg Mason & Co. (since 2005); Treasurer and/or Controller of certain funds associated with CAM (1992 to 2005)
Thomas C. Mandia Born 1962 300 First Stamford Place Stamford, CT 06902	Assistant Secretary	Since 2000	Managing Director and Deputy General Counsel of Legg Mason & Co. (since 2005); Managing Director and Deputy General Counsel for CAM (since 1992); Assistant Secretary of certain mutual funds associated with Legg Mason & Co.
David Castano Born 1971 Legg Mason 55 Water Street New York, NY 10041	Controller	Since 2007	Controller of certain mutual funds associated with Legg Mason (since 2007). Previously, Assistant Treasurer of Lord Abbett mutual funds (2004 to 2006); Supervisor at UBS Global Asset Management (2003 to 2004). Prior to 2003, Accounting Manager at CAM.
Matthew Plastina Born 1970 Legg Mason 55 Water Street New York, NY 10041	Controller	Since 2007	Assistant Vice President of Legg Mason or its predecessor (since 1999); Controller of certain mutual funds associated with Legg Mason (since 2007). Previously, Assistant Controller of certain mutual funds associated with Legg Mason (2002 to 2007)

* Each 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.

** Indicates the earliest year in which the officer took office for any funds in the Legg Mason Partners fund complex.

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Officers of the Fund receive no compensation from the Fund, although they may be reimbursed by the Fund for reasonable out-of-pocket travel expenses for attending Board meetings.

The Board has four standing Committees: the Audit Committee, Governance Committee, Investment and Performance Committee (referred to as the Performance Committee) and Pricing Committee. Each of the Audit, Governance and Performance Committees is composed of all of the Independent Trustees. The Pricing Committee is composed of the Chairman of the Board and one Independent Trustee.

The Audit Committee oversees, among other things, the scope of the funds’ audit, the funds’ accounting and financial reporting policies and practices and its internal controls. The primary purposes of the Board’s Audit Committee are to assist the Board in fulfilling its responsibility for oversight of the integrity of the accounting, auditing and financial reporting practices of the funds, and the qualifications and independence of the funds’ independent registered public accounting firm. The Audit Committee approves, and recommends to the Independent Trustees for their ratification, the selection, appointment, retention or termination of the funds’ independent registered public accounting firm and approves the compensation of the independent registered public accounting firm. The Audit Committee also approves all audit and permissible non-audit services provided to the funds by the independent registered public accounting firm and all permissible non-audit services provided by the funds’ independent registered public accounting firm to the manager and any affiliated service providers if the engagement relates directly to the funds’ operations and financial reporting.

The Governance Committee is responsible for, among other things, recommending candidates to fill vacancies on the Board. The Governance Committee may consider nominees recommended by a shareholder. Shareholders who wish to recommend a nominee should send recommendations to the Trust’s Secretary that include all information relating to such person that is required to be disclosed in solicitations of proxies for the election of Trustees. A recommendation must be accompanied by a written consent of the individual to stand for election if nominated by the Board and to serve if elected by the shareholders.

The Governance Committee also identifies potential nominees through its network of contacts and may also engage, if it deems appropriate, a professional search firm. The committee meets to discuss and consider such candidates’ qualifications and then chooses a candidate by majority vote. The committee does not have specific, minimum qualifications for nominees, nor has it established specific qualities or skills that it regards as necessary for one or more of the Trustees to possess (other than any qualities or skills that may be required by applicable law, regulation or listing standard). However, in evaluating a person as a potential nominee to serve as a Trustee, the Governance Committee may consider the following factors, among any others it may deem relevant:

• whether or not the person is an “interested person,” as defined in the 1940 Act, and whether the person is otherwise qualified under applicable laws and regulations to serve as a Trustee;

• whether or not the person has any relationships that might impair his or her independence, such as any business, financial or family relationships with fund management, the investment adviser, service providers or their affiliates;

• whether or not the person serves on boards of, or is otherwise affiliated with, competing financial service organizations or their related mutual fund complexes;

• whether or not the person is willing to serve, and willing and able to commit the time necessary for the performance of the duties of a Trustee;

• the contribution which the person can make to the Board (or, if the person has previously served as a Trustee, the contribution which the person made to the Board during his or her previous term of service), with consideration being given to the person’s business and professional experience, education and such other factors as the committee may consider relevant;

• the character and integrity of the person; and

• whether or not the selection and nomination of the person would be consistent with the requirements of the retirement policies of the Trust, as applicable.

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The Performance Committee is charged with, among other things, reviewing investment performance. The Performance Committee also assists the Board in fulfilling its responsibility for the review and negotiation of the funds’ investment management and subadvisory arrangements.

The Pricing Committee is charged with determining the fair value prices for securities when required.

The Trust’s Board oversees all of the fixed-income-type funds in the fund complex. All members of the Board previously have served on predecessors to the Boards of Legg Mason Partners funds. The Board met 17 times during the funds’ last fiscal year. The Audit, Governance, Performance and Pricing Committees met four, four, four, and eight times during the funds’ last fiscal year.

The following table shows the amount of equity securities owned by the Trustees in the Fund and other investment companies in the fund complex supervised by the Trustees as of December 31, 2007.

Name of Trustee	Dollar Range of Equity Securities in the Fund	Aggregate Dollar Range of Equity Securities In Registered Investment Companies Overseen by Trustee
Independent Trustees
Elliott J. Berv	None	None
A. Benton Cocanougher	None	Over $100,000
Jane F. Dasher	$1-$10,000	Over $100,000
Mark T. Finn	None	Over $100,000
Rainer Greeven	None	$10,001-$50,000
Stephen Randolph Gross	None	None
Richard E. Hanson, Jr.	None	Over $100,000
Diana R. Harrington	None	$10,001-$50,000
Susan M. Heilbron	None	$10,001-$50,000
Susan B. Kerley	None	Over $100,000
Alan G. Merten	None	Over $100,000
R. Richardson Pettit	None	Over $100,000
Interested Trustee
R. Jay Gerken	None	Over $100,000

As of December 31, 2007, none of the Independent Trustees or their immediate family members owned beneficially or of record any securities of the manager, subadviser or distributor of the Fund, or in a person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with the manager, subadviser or distributor of the Fund.

Information regarding compensation paid by the Fund to its recently elected Board and to its prior Board is set forth below. The Independent Trustees receive a fee for each meeting of the Fund’s Board and committee meetings attended and are reimbursed for all out-of-pocket expenses relating to attendance at such meetings. Mr. Gerken, an “interested person,” as defined in the 1940 Act, does not receive compensation from the Fund for his service as Trustee, but may be reimbursed for all out-of-pocket expenses relating to attendance at such meetings.

The Fund pays a pro rata share of the Trustee fees based upon asset size. The Fund currently pays each of the Trustees who is not a director, officer or employee of the manager or any of its affiliates its pro rata share of: an annual fee of $160,000, plus $20,000 for each regularly scheduled Board meeting attended in person, $2,500 for each Committee meeting attended in person, and $1,000 for certain telephonic Board and Committee meetings in which that Trustee participates. The lead Independent Trustee will receive an additional $25,000 per year and the Chairs of the Audit Committee and Performance Committee will each receive an additional $15,000 per year.

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Current Board

The current Trustees took office in April 2007. Information as to compensation paid to the current Trustees for the fiscal year ended December 31, 2007 is shown on the following table:

Name	Aggregate Compensation from the Fund for Fiscal Year Ended December 31, 2007		Total Pension or Retirement Benefits Paid as Part of Fund Expenses for Fiscal Year Ended December 31, 2007			Total Compensation from Fund Complex Paid to Trustee for Fiscal Year Ended December 31, 2007		Number of Portfolios in Fund Complex Overseen by Trustee for Fiscal Year Ended December 31, 2007
Independent Trustees:
Elliott J. Berv	$	344			(1)	$	506,630	68
A. Benton Cocanougher	$	385			(1)	$	725,864	68
Jane F. Dasher	$	580	$	0		$	202,625	68
Mark T. Finn	$	344			(1)	$	505,579	68
Rainer Greeven	$	344	$	0		$	188,500	68
Stephen Randolph Gross	$	367			(1)	$	529.413	68
Richard E. Hanson, Jr.	$	432	$	0		$	160,500	68
Diana R. Harrington	$	364			(1)	$	556,295	68
Susan M. Heilbron	$	344	$	0		$	190,500	68
Susan B. Kerley	$	346			(1)	$	417,484	68
Alan G. Merten	$	344			(1)	$	604,757	68
R. Richardson Pettit	$	341			(1)	$	620,476	68
Interested Trustee:
R. Jay Gerken(2)	$	0	$	0		$	0	137

⁽¹⁾ Pursuant to prior retirement plans, certain Trustees are entitled to receive a total retirement benefit from the fund complex as follows: Mr. Berv: $307,130; Mr. Cocanougher: $503,114; Mr. Finn: $306,079; Mr. Gross: $318,788; Ms. Harrington: $348,670; Ms. Kerley: $217,984; Mr. Merten: $405,257; and Mr. Pettit: $424,976. A portion of these benefits that has been paid is included, on a pro rata basis, in the aggregate compensation paid by the Fund shown above. In addition, each fund formerly overseen by these Trustees has paid a pro rata share (based upon asset size) of these benefits. Legg Mason or its affiliates have agreed to reimburse these funds an amount equal to 50% of these benefits.

⁽²⁾ Mr. Gerken was not compensated for his services as a Trustee because of his affiliation with the manager.

Prior Board

Prior to April 2007, the Directors listed below served as the Board of Directors of the Fund. The following table shows the compensation paid to each former Director of the Fund during the fiscal year ended December 31, 2007 for service as a Director.

Name of Director	Aggregate Compensation from the Fund for Fiscal Year Ended 12/31/07(2)
Independent Directors
Lee Abraham(1)	$	540
Jane Dasher	$	476
Donald R. Foley(1)	$	433
Richard E. Hanson, Jr.	$	432
Paul Hardin(1)	$	2,605
Roderick C. Rasmussen(1)	$	340
John P. Toolan(1)	$	2,710

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Name of Director	Aggregate Compensation from the Fund for Fiscal Year Ended 12/31/07(2)
Interested Director
R. Jay Gerken(3)	$	0

⁽¹⁾ Pursuant to prior retirement plans, certain former Directors are entitled to receive a total retirement benefit from the fund complex as follows: Lee Abraham: $288,607; Donald Foley: $245,580; Paul Hardin: $539,396; Roderick Rasmussen: $288,607; and John Toolan: $288,607. A portion of these benefits that has been paid is included, on a pro rata basis, in the aggregate compensation paid by the Fund shown above. In addition, each fund formerly overseen by these Directors has paid a pro rata share (based upon asset size) of these benefits. Legg Mason or its affiliates have agreed to reimburse these funds an amount equal to 50% of these benefits.

⁽²⁾ Pursuant to a prior retirement plan, Allan Bloostein received in a lump sum (calculated on a net present value basis), an aggregate benefit from the fund complex having a net present value equal to $439,878. Each fund no longer overseen by Mr. Bloostein has paid a pro rata share (based upon asset size) of the aggregate benefit to Mr. Bloostein. Legg Mason or its affiliates have agreed to reimburse these funds an amount equal to 50% of the benefits paid to Mr. Bloostein.

⁽³⁾ Mr. Gerken was not compensated for his service as Director because of his affiliation with the manager.

None of the officers of the Trust received any compensation from the Trust during the fiscal year ended December 31, 2007.

As of April 2, 2008, the Trustees and officers of the Fund as a group owned less than 1% of the outstanding shares of the Fund.

As of April 2, 2008, the following persons owned of record the amounts indicated of the shares of the following classes of the Fund:

Class	Shareholder	Percent Ownership
A	CitiStreet Retirment Trust Account CitiGroup Institutional Trust 400 Atrium Dr Somerset, NJ 08873-4172	51.2	%
B	John Rountree, Joanie Misley, Stephen Silk & Timothy Lien 27001 Country Club Circle El Macero, CA 95618-1048	7.5	%
	Morgan Stanley & Co. Inc Harborside Finanacial Center Plaza Two 2nd Floor Jersey City, New Jersey 07311	7.4	%
	Stephen H. Chanson CGM IRA Rollover Custodian 23 Halifax Dr Monroe Township, NJ 08831-1970	6.1	%
	Rita Glaser CGM IRA Rollover Custodian 2470 Tanglewood Road Decatur, GA 30033-2017	5.5	%
	Bernice Freeman 190 Amherst Avenue Colonia, NJ 07067-2518 Columbus, Ohio 43215-7512	5.1	%

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Class	Shareholder	Percent Ownership
I	State of Colorado College Portfolio 6 Scholars Choice College Saving Prg 125 Broad St. New York, NY 10004-2400	33.4	%
	State of Colorado College Portfolio 7 Scholars Choice College Saving Prg 125 Broad St. New York, NY 10004-2400	24.7	%
	State of Colorado College Portfolio 4 Scholars Choice College Saving Prg 125 Broad St. New York, NY 10004-2400	22.1	%
	State of Colorado College Portfolio 5 Scholars Choice College Saving Prg 125 Broad St. New York, NY 10004-2400	18.2	%

DIVIDENDS AND DISTRIBUTIONS

Dividends and Distributions. The policy of the Fund is to declare and pay dividends monthly. Dividends from net realized capital gains, if any, will be distributed annually. The Fund may also pay additional dividends shortly before December 31 from certain amounts of undistributed ordinary income and capital gains in order to avoid a federal excise tax liability. If a shareholder does not otherwise instruct, exempt-interest dividends and capital gain distributions will be reinvested automatically in additional shares of the same class at net asset value, with no additional sales charge or deferred sales charge.

The per share amounts of the exempt-interest dividends on Class B and Class C shares may be lower than on Class A, Class I and Class R shares, mainly as a result of the distribution fees applicable to Class B and Class C shares. Similarly, the per share amounts of exempt-interest dividends on Class A shares may be lower than on Class I shares, as a result of the service fee attributable to Class A shares. Capital gain distributions, if any, will be the same across all classes of Fund shares (A, B, C, I and R).

TAXES

The following is a summary of certain material U.S. federal income tax considerations regarding the purchase, ownership and disposition of shares of the Fund. This summary does not address all of the potential U.S. federal income tax consequences that may be applicable to the Fund or to all categories of investors, some of which may be subject to special tax rules. Current and prospective shareholders are urged to consult their own tax adviser with respect to the specific federal, state, local and foreign tax consequences of investing in a portfolio of the Fund. The summary is based on the laws in effect on the date of this SAI and existing judicial and administrative interpretations thereof, all of which are subject to change, possibly with retroactive effect.

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The Fund and its Investments

The Fund will be treated as a separate taxpayer for U.S. federal income tax purposes. The Fund has elected to be treated, and intends to qualify each year, as a regulated investment company or “RIC” under the Code. To so qualify, the Fund must, among other things: (a) derive at least 90% of its gross income in each taxable year from dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of stock or securities or foreign currencies, or other income (including, but not limited to, gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies, and net income derived from interests in “qualified publicly traded partnerships” (i.e., partnerships that are traded on an established securities market or tradable on a secondary market, other than partnerships that derive 90% of their income from interest, dividends, capital gains, and other traditional permitted mutual fund income); and (b) diversify its holdings so that, at the end of each quarter of the Fund’s taxable year, (i) at least 50% of the market value of the Fund’s assets is represented by cash, securities of other regulated investment companies, U.S. government securities and other securities, with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of the Fund’s assets and not greater than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its assets is invested in the securities (other than U.S. government securities or securities of other regulated investment companies) of any one issuer, in the securities (other than the securities of other regulated investment companies) of any two or more issuers that the Fund controls and that are determined to be engaged in the same or similar trades or businesses or related trades or businesses, or in the securities of one or more qualified publicly traded partnerships.

The Fund’s investments in partnerships, if any, including in qualified publicly traded partnerships, may result in the Fund’s being subject to state, local or foreign income, franchise or withholding tax liabilities.

As a regulated investment company, the Fund will not be subject to U.S. federal income tax on the portion of its taxable investment income and capital gains that it distributes to its shareholders, provided that it satisfies a minimum distribution requirement. To satisfy the minimum distribution requirement, the Fund must distribute to its shareholders at least the sum of (i) 90% of its “investment company taxable income” (i.e., generally, the taxable income of the regulated investment company other than its net capital gain, plus or minus certain other adjustments), and (ii) 90% of its net tax-exempt income for the taxable year. The Fund will be subject to income tax at regular corporate tax rates on any taxable income or gains that it does not distribute to its shareholders.

On December 31, 2007, the unused capital loss carryforwards of the Fund were approximately as follows: $10,320,178. For U.S. federal income tax purposes, these amounts are available to be applied against future capital gains, if any, realized by the applicable fund prior to the expiration of the carryforwards. The carryforwards expire as follows:

December 31,
2008		2009	2010	2011	2012		2013		2014		2015
$	800,922	—	—	—	$	1,003,745	$	1,462,683	$	6,746,682	$	306,146

The Code imposes a 4% nondeductible excise tax on the Fund to the extent the Fund does not distribute by the end of any calendar year at least the sum of (i) 98% of its ordinary income for that year and (ii) 98% of its capital gain net income (both long-term and short-term) for the one-year period ending, as a general rule, on October 31 of that year. For this purpose, however, any ordinary income or capital gain net income retained by the Fund that is subject to corporate income tax will be considered to have been distributed by year-end. In addition, the minimum amounts that must be distributed in any year to avoid the excise tax will be increased or decreased to reflect any underdistribution or overdistribution, as the case may be, from the previous year. The Fund anticipates that it will pay such dividends and will make such distributions as are necessary in order to avoid the application of this excise tax.

If, in any taxable year, the Fund fails to qualify as a regulated investment company under the Code or fails to meet the distribution requirement, it will be taxed in the same manner as an ordinary corporation and

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distributions to its shareholders will not be deductible by the Fund in computing its taxable income. In addition, in the event of a failure to qualify, the Fund’s distributions, including any distributions of net long-term capital gains, will be taxable to shareholders as dividend income to the extent of the Fund’s current and accumulated earnings and profits. Such dividends will be eligible, subject to any generally applicable limitations, (i) to be treated as qualified dividend income in the case of shareholders taxed as individuals and (ii) for the dividends received deduction in the case of corporate shareholders. Moreover, if the Fund fails to qualify as a regulated investment company in any year, it must pay out its earnings and profits accumulated in that year in order to qualify again as a regulated investment company. If the Fund failed to qualify as a regulated investment company for a period greater than two taxable years, the Fund may be required to recognize any net built-in gains with respect to certain of its assets (i.e., the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized with respect to such assets if the fund had been liquidated) in order to qualify as a regulated investment company in a subsequent year.

The Fund may invest in “zero coupon” securities having an original issue discount (that is, the discount represented by the excess of the stated redemption price at maturity over the issue price). Each year, the Fund will be required to accrue as income a portion of this original issue discount even though the Fund will receive no cash payment of interest with respect to these securities. In addition, if the Fund acquires a security after its initial issuance at a discount that resulted from fluctuations in prevailing interest rates (“market discount”), the Fund may elect to include in income each year a portion of this market discount. Therefore, the Fund may be required in some years to distribute an amount greater than the total cash income the Fund actually receives. In order to make the required distribution in such a year, the Fund may be required to borrow cash or to liquidate securities.

The Fund’s transactions in foreign currencies, forward contracts, options and futures contracts (including options and futures contracts on foreign currencies), to the extent permitted, will be subject to special provisions of the Code (including provisions relating to “hedging transactions” and “straddles”) that, among other things, may affect the character of gains and losses realized by the Fund (i.e., may affect whether gains or losses are ordinary or capital), accelerate recognition of income to the Fund and defer Fund losses. These rules could therefore affect the character, amount and timing of distributions to shareholders. These provisions also (a) will require the Fund to mark-to-market certain types of the positions in its fund (i.e., treat them as if they were closed out at the end of each year) and (b) may cause the Fund to recognize income prior to the receipt of cash with which to pay dividends or make distributions in amounts necessary to satisfy the distribution requirements for avoiding income and excise taxes. In order to distribute this income and avoid a tax on the Fund, the Fund might be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss. The Fund will monitor its transactions, will make the appropriate tax elections and will make the appropriate entries in its books and records when it acquires any foreign currency, forward contract, option, futures contract or hedged investment in order to mitigate the effect of these rules and prevent disqualification of the Fund as a regulated investment company.

The Fund’s investments in so-called “section 1256 contracts,” such as regulated futures contracts, most foreign currency forward contracts traded in the interbank market and options on most stock indices, are subject to special tax rules. All section 1256 contracts held by the Fund at the end of its taxable year are required to be marked to their market value, and any unrealized gain or loss on those positions will be included in the Fund’s income as if each position had been sold for its fair market value at the end of the taxable year. The resulting gain or loss will be combined with any gain or loss realized by the Fund from positions in section 1256 contracts closed during the taxable year. Provided such positions were held as capital assets and were not part of a “hedging transaction” or part of a “straddle,” 60% of the resulting net gain or loss will be treated as long-term capital gain or loss, and 40% of such net gain or loss will be treated as short-term capital gain or loss, regardless of the period of time the positions were actually held by the Fund.

As a result of entering into swap contracts, the Fund may make or receive periodic net payments. The Fund may also make or receive a payment when a swap is terminated prior to maturity through an assignment of the swap or other closing transaction. Periodic net payments will generally constitute ordinary income or deductions,

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while termination of a swap will generally result in capital gain or loss (which will be a long-term capital gain or loss if the Fund has been a party to the swap for more than one year). The tax treatment of many types of credit default swaps is uncertain.

The Fund may be required to treat amounts as taxable income or gain, subject to the distribution requirements referred to above, even though no corresponding amounts of cash are received concurrently, as a result of (1) mark-to-market rules, constructive sale rules or rules applicable to PFICs (as defined below) or partnerships or trusts in which the Fund invests or to certain options, futures or forward contracts, or “appreciated financial positions” or (2) the inability to obtain cash distributions or other amounts due to currency controls or restrictions on repatriation imposed by a foreign country with respect to the Fund’s investments (including through depositary receipts) in issuers in such country or (3) tax rules applicable to debt obligations acquired with “original issue discount,” including zero-coupon or deferred payment bonds and pay-in-kind debt obligations, or to market discount if an election is made with respect to such market discount. In order to distribute this income and avoid a tax on the Fund, the Fund might be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss. The Fund might also meet the distribution requirements by borrowing the necessary cash, thereby incurring interest expenses.

Foreign Investments. Dividends or other income (including, in some cases, capital gains) received by the Fund from investments in foreign securities may be subject to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes in some cases. The Fund does not expect to be eligible to elect to pass through foreign taxes to its shareholders, who therefore will not be entitled to credits or deductions for such taxes on their own tax returns for foreign taxes paid by the Fund. Foreign taxes paid by the Fund will reduce the return from its investments.

Under Section 988 of the Code, gains or losses attributable to fluctuations in exchange rates between the time the Fund accrues income or receivables or expenses or other liabilities denominated in a foreign currency and the time the Fund actually collects such income or pays such liabilities are generally treated as ordinary income or ordinary loss. Similarly, gains or losses on foreign currency, foreign currency forward contracts, certain foreign currency options or futures contracts and the disposition of debt securities denominated in foreign currency, to the extent attributable to fluctuations in exchange rates between the acquisition and disposition dates, are also treated as ordinary income or loss.

Passive Foreign Investment Companies. If the Fund purchases shares in certain foreign investment entities, called “passive foreign investment companies” (“PFICs”), and does not make certain elections, it may be subject to U.S. federal income tax on a portion of any “excess distribution” or gain from the disposition of such shares even if such income is distributed as a taxable dividend by the Fund to its shareholders. Additional charges in the nature of interest may be imposed on the Fund in respect of deferred taxes arising from such distributions or gains.

If the Fund were to invest in a PFIC and elect to treat the PFIC as a “qualified electing fund” under the Code, in lieu of the foregoing requirements, the Fund might be required to include in income each year a portion of the ordinary earnings and net capital gains of the qualified electing Fund, even if not distributed to the Fund, and such amounts would be subject to the 90% and excise tax distribution requirements described above. In order to distribute this income and avoid a tax on the Fund, the Fund might be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss. In order to make this election, the Fund would be required to obtain certain annual information from the PFICs in which it invests, which may be difficult or impossible to obtain.

Alternatively, the Fund may make a mark-to-market election that will result in the Fund being treated as if it had sold and repurchased all of the PFIC stock at the end of each year. In such case, the Fund would report any such gains as ordinary income and would deduct any such losses as ordinary losses to the extent of previously

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recognized gains. The election must be made separately for each PFIC owned by the Fund and, once made, would be effective for all subsequent taxable years of the Fund, unless revoked with the consent of the Internal Revenue Service (the “IRS”). By making the election, the Fund could potentially ameliorate the adverse tax consequences with respect to its ownership of shares in a PFIC, but in any particular year may be required to recognize income in excess of the distributions it receives from PFICs and its proceeds from dispositions of PFIC stock. The Fund may have to distribute such excess income and gain to satisfy the 90% distribution requirement and to avoid imposition of the 4% excise tax. Dividends of net investment income and distributions of net realized short-term capital gains are taxable to a shareholder as ordinary income, whether paid in cash or in shares.

The Fund will make the appropriate tax elections, if possible, and take any additional steps that are necessary to mitigate the effect of these rules.

Taxation of U.S. Shareholders

Dividends and Distributions. Dividends and other distributions by the Fund are generally treated under the Code as received by the shareholders at the time the dividend or distribution is made. However, if any dividend or distribution is declared by the Fund in October, November or December of any calendar year and payable to shareholders of record on a specified date in such a month but actually paid during the following January, such dividend or distribution shall be deemed to have been received by each shareholder on December 31 of the calendar year in which it was declared and to have been paid by the Fund not later than such date.

The Fund intends to distribute annually to its shareholders substantially all of its investment company taxable income, and any net realized long-term capital gains in excess of net realized short-term capital losses (including any capital loss carryovers). However, if the Fund retains for investment an amount equal to all or a portion of its net long- term capital gains in excess of its net short-term capital losses (including any capital loss carryovers), it will be subject to a corporate tax (currently at a maximum rate of 35%) on the amount retained. In that event, the Fund will designate such retained amounts as undistributed capital gains in a notice to its shareholders who (a) will be required to include in income for U.S. federal income tax purposes, as long-term capital gains, their proportionate shares of the undistributed amount, (b) will be entitled to credit their proportionate shares of the 35% tax paid by the Fund on the undistributed amount against their U.S. federal

42

income tax liabilities, if any, and to claim refunds to the extent their credits exceed their liabilities, if any, and (c) will be entitled to increase their tax basis, for U.S. federal income tax purposes, in their shares by an amount equal to 65% of the amount of undistributed capital gains included in the shareholder’s income. Organizations or persons not subject to U.S. federal income tax on such capital gains will be entitled to a refund of their pro rata share of such taxes paid by the Fund upon timely filing appropriate returns or claims for refund with the IRS.

Dividends paid by the Fund that are attributable to dividends received by the Fund from domestic corporations may qualify for the federal dividends-received deduction for corporations. Distributions of net realized long-term capital gains, if any, that the Fund designates as capital gain dividends are taxable as long-term capital gains, whether paid in cash or in shares and regardless of how long a shareholder has held shares of the fund.

Special rules apply, however, to certain dividends paid to individuals. Certain dividends, with respect to taxable years beginning on or before December 31, 2010, may be subject to tax at the rates generally applicable to long-term capital gains for individuals (currently at a maximum rate of 15%), provided that the individual receiving the dividends satisfies certain holding period and other requirements. Dividends subject to these special rules are not actually treated as capital gains, however, and thus are not included in the computation of an individual’s net capital gain and generally cannot be used to offset capital losses. The long-term capital gains rates will apply to: (i) 100% of the dividends paid by the Fund to an individual in a particular taxable year if 95% or more of the Fund’s gross income (ignoring gains attributable to the sale of stocks and securities except to the extent net short-term capital gain from such sales exceeds net long-term capital loss from such sales) in that taxable year is attributable to “qualified dividend income” received by the Fund; or (ii) the portion of the dividends paid by the Fund to an individual in a particular taxable year that is attributable to qualified dividend income received by the Fund in that taxable year if such qualified dividend income accounts for less than 95% of the Fund’s gross income (ignoring gains attributable to the sale of stocks and securities except to the extent net short-term capital gain from such sales exceeds net long-term capital loss from such sales) for that taxable year. For this purpose, “qualified dividend income” generally means income from dividends received by the Fund from U.S. corporations and qualified foreign corporations, provided that the Fund satisfies certain holding period requirements in respect of the stock of such corporations and has not hedged its position in the stock in certain ways. However, qualified dividend income does not include any dividends received from tax-exempt corporations. Also, dividends received by the Fund from a real estate investment trust or another regulated investment company generally are qualified dividend income only to the extent the dividend distributions are made out of qualified dividend income received by such a real estate investment trust or other regulated investment company. In the case of securities lending transactions, payments in lieu of dividends are not qualified dividend income. If a shareholder elects to treat Fund dividends as investment income for purposes of the limitation on the deductibility of investment interest, such dividends would not be a qualified dividend income.

We will send you information after the end of each year setting forth the amount of dividends paid by us that are eligible for the reduced rates.

If an individual receives a dividend qualifying for the long-term capital gains rates and such dividend constitutes an “extraordinary dividend,” and the individual subsequently recognizes a loss on the sale or exchange of stock in respect of which the extraordinary dividend was paid, then the loss will be long-term capital loss to the extent of such extraordinary dividend. An “extraordinary dividend” on common stock for this purpose is generally a dividend (i) in an amount greater than or equal to 10% of the taxpayer’s tax basis (or trading value) in a share of stock, aggregating dividends with ex-dividend dates within an 85-day period or (ii) in an amount greater than 20% of the taxpayer’s tax basis (or trading value) in a share of stock, aggregating dividends with ex-dividend dates within a 365-day period.

Dividends paid by the Fund that are attributable to dividends received by the Fund from domestic corporations may qualify for the federal dividends received deduction for corporations.

Distributions in excess of the Fund’s current and accumulated earnings and profits will, as to each shareholder, be treated as a tax-free return of capital, to the extent of the shareholder’s basis in his shares of the Fund, and as a capital gain thereafter (if the shareholder holds his shares of the Fund as capital assets).

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Shareholders receiving dividends or distributions in the form of additional shares should be treated for U.S. federal income tax purposes as receiving a distribution in an amount equal to the amount of money that the shareholders receiving cash dividends or distributions will receive, and should have a cost basis in the shares received equal to such amounts.

Investors considering buying shares just prior to a dividend or capital gain distribution should be aware that, although the price of shares just purchased at that time may reflect the amount of the forthcoming distribution, such dividend or distribution may nevertheless be taxable to them.

If the Fund is the holder of record of any stock on the record date for any dividends payable with respect to such stock, such dividends will be included in the Fund’s gross income not as of the date received but as of the later of (a) the date such stock became ex-dividend with respect to such dividends (i.e., the date on which a buyer of the stock would not be entitled to receive the declared, but unpaid, dividends) or (b) the date the Fund acquired such stock. Accordingly, in order to satisfy its income distribution requirements, the Fund may be required to pay dividends based on anticipated earnings, and shareholders may receive dividends in an earlier year than would otherwise be the case.

Sales of Shares. Upon the sale or exchange of his shares, a shareholder will realize a taxable gain or loss equal to the difference between the amount realized and his basis in his shares. A redemption of shares will be treated as a sale for this purpose. Such gain or loss will be treated as capital gain or loss if the shares are capital assets in the shareholder’s hands, and will be long-term capital gain or loss if the shares are held for more than one year and short-term capital gain or loss if the shares are held for one year or less. Any loss realized on a sale or exchange will be disallowed to the extent the shares disposed of are replaced, including replacement through the reinvesting of dividends and capital gains distributions in the Fund, within a 61-day period beginning 30 days before and ending 30 days after the disposition of the shares. In such a case, the basis of the shares acquired will be increased to reflect the disallowed loss. Any loss realized by a shareholder on the sale of Fund shares held by the shareholder for six months or less will be treated for U.S. federal income tax purposes as a long-term capital loss to the extent of any distributions or deemed distributions of long-term capital gains received by the shareholder (including amounts credited to the shareholder as undistributed capital gains) with respect to such shares.

If a shareholder incurs a sales charge in acquiring shares of the Fund, disposes of those shares within 90 days and then acquires shares in a mutual fund for which the otherwise applicable sales charge is reduced by reason of a reinvestment right (e.g., an exchange privilege), the original sales charge will not be taken into account in computing gain or loss on the original shares to the extent the subsequent sales charge is reduced. Instead, the disregarded portion of the original sales charge will be added to the tax basis of the newly acquired shares. Furthermore, the same rule also applies to a disposition of the newly acquired shares made within 90 days of the second acquisition. This provision prevents a shareholder from immediately deducting the sales charge by shifting his or her investment within a family of mutual funds.

Backup Withholding. The Fund may be required in certain circumstances to apply backup withholding at the rate of 28% on taxable dividends, distributions and redemption proceeds payable to non-corporate shareholders who fail to provide the fund with their correct taxpayer identification number or to make required certifications, or who have been notified by the IRS that they are subject to backup withholding. Backup withholding is not an additional tax and any amount withheld may be credited against a shareholder’s U.S. federal income tax liability. Backup withholding will not be applied to payments that have already been subject to the 30% withholding tax described below under “Taxation of Non-U.S. Shareholders.”

Notices. Shareholders will receive, if appropriate, various written notices after the close of the Fund’s taxable year regarding the U.S. federal income tax status of certain dividends, distributions and deemed distributions that were paid (or that are treated as having been paid) by the Fund to its shareholders during the preceding taxable year.

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If a shareholder recognizes a loss with respect to the Fund’s shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a regulated investment company are not excepted. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.

Other Taxes

Dividends, distributions and redemption proceeds may also be subject to additional state, local and foreign taxes depending on each shareholder’s particular situation.

Taxation of Non-U.S. Shareholders

Ordinary dividends and certain other payments made by the Fund to non-U.S. shareholders are generally subject to withholding tax at a 30% rate (or such lower rate as may be determined in accordance with an applicable treaty). In order to obtain a reduced rate of withholding, a non-U.S. shareholder will be required to provide an IRS Form W-8BEN certifying its entitlement to benefits under a treaty. The withholding tax does not apply to regular dividends paid to a non-U.S. shareholder who provides a Form W-8ECI, certifying that the dividends are effectively connected with the non-U.S. shareholder’s conduct of a trade or business within the United States. Instead, the effectively connected dividends will be subject to regular U.S. income tax as if the non-U.S. shareholder were a U.S. shareholder. A non-U.S. corporation receiving effectively connected dividends may also be subject to additional “branch profits tax” imposed at a rate of 30% (or a lower treaty rate). A non-U.S. shareholder who fails to provide an IRS Form W-8BEN or other applicable form may be subject to backup withholding at the appropriate rate.

In general, United States federal withholding tax will not apply to any gain or income realized by a non-U.S. shareholder in respect of any distributions of the excess of net long-term capital gains over net short-term capital losses, exempt-interest dividends, or upon the sale or other disposition of shares of the Fund.

Special rules apply to foreign persons who receive distributions from the Fund that are attributable to gain from “U.S. real property interests” (“USRPIs”). The Code defines USRPIs to include direct holdings of U.S. real property and any interest (other than an interest solely as a creditor) in domestic corporations that are “U.S. real property holding corporations” during a certain time period. The Code defines a U.S. real property holding corporation as any corporation if the fair market value of its USRPIs equals or exceeds 50% of the total fair market value of its USRPIs, its interests in real property located outside of the U.S., and any other of its assets used or held for use in a trade or business. For this purpose, an interest in a foreign corporation may be a USRPI. The Fund does not expect to be a U.S. real property holding corporation. If the Fund were to be classified as a U.S. real property holding corporation (or if it would be so classified, were it not for certain exceptions), then certain distributions by the Fund to foreign shareholders would be subject to U.S. federal withholding tax, and foreign shareholders might be required to file U.S. federal income tax returns to report distributions received from the Fund.

The foregoing is only a summary of certain material U.S. federal income tax consequences affecting the Fund and its shareholders. Current and prospective shareholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Fund.

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PURCHASE AND REDEMPTION OF SHARES

Purchase of Shares

Detailed information about the purchase, redemption and exchange of Fund shares appears in the Prospectus.

General

Investors may purchase shares from a Service Agent. In addition, certain investors, including retirement plans purchasing through certain Service Agents, may purchase shares directly from the Fund. When purchasing shares of the Fund, investors must specify whether the purchase is for Class A, B, C, or R shares. Class B shares of the Fund can only be acquired by exchange with another Legg Mason Partners Fund. Service Agents may charge their customers an annual account maintenance fee in connection with a brokerage account through which an investor purchases or holds shares. The Fund’s Class I Shares are closed to all new purchases and incoming exchanges. Investors who owned Class I shares on October 17, 2007 are permitted to continue to maintain their Class I shares, but are no longer be permitted to add to their Class I share positions (excluding reinvestment of dividends and distributions). Accounts held directly with the transfer agent are not subject to a maintenance fee.

For additional information regarding applicable investment minimums and eligibility requirements, please see the Fund’s prospectus.

There are no minimum investment requirements for purchases of Class A shares by: (i) current and retired board members of Legg Mason, (ii) current and retired board members of any fund advised by LMPFA (such board members, together with board members of Legg Mason, are referred to herein as “Board Members”), (iii) current employees of Legg Mason and its subsidiaries, (iv) the “immediate families” of such persons (“immediate families” are such person’s spouse, including the surviving spouse of a deceased Board Member, and children under the age of 21) and (v) a pension, profit-sharing or other benefit plan for the benefit of such persons. The Fund reserves the right to waive or change minimums, to decline any order to purchase its shares and to suspend the offering of shares from time to time.

Share certificates for the fund will not be issued. If you currently hold share certificates of the fund, such certificates will continue to be honored.

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Purchase orders received by the Fund or a Service Agent prior to the close of regular trading on the NYSE on any day the Fund calculates its net asset value are priced according to the net asset value determined on that day (the “trade date”). Orders received by a Service Agent prior to the close of regular trading on the NYSE on any day the Fund calculates its net asset value are priced according to the net asset value determined on that day, provided the order is received by the Fund’s agent prior to its close of business. Payment must be made with the purchase order.

Systematic Investment Plan. Shareholders may make additions to their accounts at any time by purchasing shares through a service known as the Systematic Investment Plan. Under the Systematic Investment Plan, a distributor or the transfer agent is authorized through preauthorized transfers that meet the applicable minimum on a monthly, quarterly, every alternate month, semi-annual or annual basis to charge the shareholder’s account held with a bank or other financial institution as indicated by the shareholder, to provide for systematic additions to the shareholder’s account. A shareholder who has insufficient funds to complete the transfer may be charged a fee by the distributor or the transfer agent. Additional information is available from the Fund or a Service Agent.

Sales Charge Alternatives

The following classes of shares are available for purchase. See the Prospectus for a discussion of who is eligible to purchase certain classes and of factors to consider in selecting which class of shares to purchase.

Class A Shares. Class A shares are sold to investors at the public offering price, which is the net asset value plus an initial sales charge, as described in the Fund’s Prospectus.

Members of the selling group may receive a portion of the sales charge as described in the Prospectus and may be deemed to be an underwriter of the Fund as defined in the 1933 Act. Sales charges are calculated based on the aggregate of purchases of Class A shares of a fund made at one time by any “person,” which includes an individual and his or her spouse and children under the age of 21, or a trustee or other fiduciary of a single trust estate or single fiduciary account. For additional information regarding sales charge reductions, see “Sales Charge Waivers and Reductions” below.

The maximum initial sales charge on Class A shares will increase for shares purchased on or after November 20, 2006. Purchases of Class A shares of $500,000 or more will be made at net asset value without any initial sales charge, but will be subject to a contingent deferred sales charge of 0.50% on redemptions made within 12 months of purchase. The contingent deferred sales charge is waived in the same circumstances in which the contingent deferred sales charge applicable to Class B and Class C shares is waived. See “Contingent Deferred Sales Charge Provisions” and “Waivers of Contingent Deferred Sales Charge” below.

Class B Shares. Class B shares are sold without an initial sales charge but are subject to a contingent deferred sales charge payable upon certain redemptions. See “Contingent Deferred Sales Charge Provisions.”

Class C Shares. Class C shares are sold without an initial sales charge and are not subject to contingent deferred sales charges.

Class R Shares. Class R shares are sold at net asset value with no initial sales charge and no contingent deferred sales charge upon redemption.

Sales Charge Waivers and Reductions

Initial Sales Charge Waivers. Purchases of Class A shares may be made at net asset value without an initial sales charge in the following circumstances:

(a) sales to (i) current and retired Board Members, (ii) current employees of Legg Mason and its subsidiaries, (iii) the “immediate families” of such persons (“immediate families” are such person’s spouse, including the surviving spouse of a deceased Board Member, and children under the age of 21) and (iv) a pension, profit-sharing or other benefit plan for the benefit of such persons;

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(b) sales to any employees of Service Agents having dealer, service or other selling agreements with the Fund’s distributor or otherwise having an arrangement with any such Service Agent with respect to sales of the Fund’s shares, and by the immediate families of such persons or by a pension, profit-sharing or other benefit plan for the benefit of such persons (providing the purchase is made for investment purposes and such securities will not be resold except through redemption or repurchase);

(c) offers of Class A shares to any other investment company to effect the combination of such company with the Fund by merger, acquisition of assets or otherwise;

(d) purchases by shareholders who have redeemed Class A shares in the Fund (or Class A shares of another Legg Mason Partners Fund that is offered with a sales charge) and who wish to reinvest their redemption proceeds in the Fund, provided the reinvestment is made within 60 calendar days of the redemption;

(e) purchases by accounts managed by registered investment advisory subsidiaries of Citigroup Inc. (“Citigroup”);

(f) purchases by certain separate accounts used to fund unregistered variable annuity contracts; and

(g) purchases by investors participating in “wrap fee” or asset allocation programs or other fee-based arrangements sponsored by broker/dealers and other financial institutions that have entered into agreements with LMIS.

In order to obtain such discounts, the purchaser must provide sufficient information at the time of purchase to permit verification that the purchase qualifies for the elimination of the sales charge. Changes to initial sales charge breakpoints are set forth in the Fund’s Prospectus.

Accumulation Privilege—Please see the Fund’s Prospectus for information regarding accumulation privileges.

Letter of Intent—helps you take advantage of breakpoints in Class A sales charges. You may purchase Class A shares of Legg Mason Partners funds over a 13-month period and pay the same sales charge, if any, as if all shares had been purchased at once. You have a choice of three Asset Level Goal amounts, as follows:

(1) $100,000

(2) $250,000

(3) $500,000

Each time you make a Class A purchase under a Letter of Intent, you will be entitled to the sales charge that is applicable to the amount of your Asset Level Goal. For example, if your Asset Level Goal is $100,000, any Class A investments you make under a Letter of Intent would be subject to the sales charge of the specific fund you are investing in for purchases of $100,000. Sales charges and breakpoints vary among the Legg Mason Partners Funds.

When you enter into a Letter of Intent, you agree to purchase in Eligible Accounts over a thirteen (13) month period Eligible Fund Purchases in an amount equal to the Asset Level Goal you have selected, less any Eligible Prior Purchases. For this purpose, shares are valued at the public offering price (including any sales charge paid) calculated as of the date of purchase, plus any appreciation in the value of the shares as of the date of calculation, except for Eligible Prior Purchases, which are valued at current value as of the date of calculation. Your commitment will be met if at any time during the 13-month period the value, as so determined, of eligible holdings is at least equal to your Asset Level Goal. All reinvested dividends and distributions on shares acquired under the Letter will be credited towards your Asset Level Goal. You may include any Eligible Fund Purchases towards the Letter, including shares of classes other than Class A shares. However, a Letter of Intent will not

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entitle you to a reduction in the sales charge payable on any shares other than Class A shares, and if the shares are subject to a contingent deferred sales charge, you will still be subject to that contingent deferred sales charge with respect to those shares. You must make reference to the Letter of Intent each time you make a purchase under the Letter.

Eligible Fund Purchases. Generally, any shares of a Legg Mason Partners Fund may be credited towards your Asset Level Goal. Shares of certain money market funds advised by the manager or its affiliates (except for money market fund shares acquired by exchange from other Legg Mason Partners Funds offered with a sales charge), Legg Mason Partners S&P 500 Index Fund and Class O shares of Legg Mason Partners Equity Fund, Inc. are not eligible.

This list may change from time to time. Investors should check with their Service Agent to see which funds may be eligible.

Eligible Accounts. Purchases may be made through any account in your name, or in the name of your spouse or your children under the age of 21. You may need to provide certain records, such as account statements, in order to verify your eligibility for reduced sales charges. Contact your Service Agent to see which accounts may be credited toward your Asset Level Goal.

Eligible Prior Purchases. You may also credit towards your Asset Level Goal any Eligible Fund Purchases made in Eligible Accounts at any time prior to entering into the Letter of Intent that have not been sold or redeemed, based on the current price of those shares as of the date of calculation.

You may establish a date for a Letter of Intent that is up to ninety (90) calendar days prior to the date you enter into the Letter. Any Eligible Fund Purchases in Eligible Accounts made during that period will count towards your Asset Level Goal and will also be eligible for the lower sales charge applicable to your Asset Level Goal. You will be credited by way of additional shares at the current offering price for the difference between (a) the aggregate sales charges actually paid for those eligible shares and (b) the aggregate applicable sales charges for your Asset Level Goal.

Increasing the Amount of the Letter. You may at any time increase your Asset Level Goal. You must, however, contact your Service Agent, or if you purchase your shares directly through PFPC, contact PFPC prior to making any purchases in an amount in excess of your current Asset Level Goal. Upon such an increase, you will be credited by way of additional shares at the then current offering price for the difference between: (a) the aggregate sales charges actually paid for shares already purchased under the Letter and (b) the aggregate applicable sales charges for the increased Asset Level Goal. The 13-month period during which the Asset Level Goal must be achieved will remain unchanged.

Sales and Exchanges. Shares acquired pursuant to a Letter of Intent, other than Escrowed Shares as defined below, may be redeemed or exchanged at any time, although any shares that are redeemed prior to meeting your Asset Level Goal will no longer count towards meeting your Asset Level Goal. However, complete liquidation of purchases made under a Letter of Intent prior to meeting the Asset Level Goal will result in the cancellation of the Letter of Intent. See “Failure to Meet Asset Level Goal” below. Exchanges in accordance with the Fund’s Prospectus are permitted, and shares so exchanged will continue to count towards your Asset Level Goal, as long as the exchange results in an Eligible Fund Purchase.

Cancellation of Letter. You may cancel a Letter of Intent by notifying your Service Agent in writing, or if you purchase your shares directly through PFPC, by notifying PFPC in writing. The Letter will be automatically cancelled if all shares are sold or redeemed as set forth above. See “Failure to Meet Asset Level Goal” below.

Escrowed Shares. Shares equal in value to five percent (5%) of your Asset Level Goal as of the date your Letter (or the date of any increase in the amount of the Letter of Intent) is accepted, will be held in escrow during

49

the term of your Letter of Intent. The Escrowed Shares will be included in the total shares owned as reflected in your account statement, and any dividends and capital gains distributions applicable to the Escrowed Shares will be credited to your account and counted towards your Asset Level Goal or paid in cash upon request. The Escrowed Shares will be released from escrow if all the terms of your Letter of Intent are met.

Failure to Meet Asset Level Goal. If the total assets under your Letter of Intent within its 13-month term are less than your Asset Level Goal or you elect to liquidate all of your holdings or cancel the Letter of Intent before reaching your Asset Level Goal, you will be liable for the difference between: (a) the sales charge actually paid and (b) the sales charge that would have applied if you had not entered into the Letter of Intent. You may, however, be entitled to any breakpoints that would have been available to you under the accumulation privilege. An appropriate number of shares in your account will be redeemed to realize the amount due. For these purposes, by entering into a Letter of Intent, you irrevocably appoint your Service Agent, or if you purchase your shares directly through PFPC, PFPC, as your attorney-in-fact for the purposes of holding the Escrowed Shares and surrendering shares in your account for redemption. If there are insufficient assets in your account, you will be liable for the difference. Any Escrowed Shares remaining after such redemption will be released to your account.

Contingent Deferred Sales Charge Provisions

“Contingent deferred sales charge shares” are: (a) Class B shares and (b) Class A shares that were purchased without an initial sales charge but are subject to a contingent deferred sales charge. A contingent deferred sales charge may be imposed on certain redemptions of these shares.

Any applicable contingent deferred sales charge will be assessed on the net asset value at the time of purchase or redemption, whichever is less.

Class A shares that are contingent deferred sales charge shares are subject to a contingent deferred sales charge if redeemed within 12 months of purchase. In circumstances in which the contingent deferred sales charge is imposed on Class B shares, the amount of the charge will depend on the number of years since the shareholder made the purchase payment from which the amount is being redeemed, as further described in the Fund’s Prospectus. Solely for purposes of determining the number of years since a purchase payment, all purchase payments made during a month will be aggregated and deemed to have been made on the last day of the preceding statement month.

Class B shares will convert automatically to Class A shares approximately eight years after the date on which they were purchased and thereafter will no longer be subject to any distribution fees. There will also be converted at that time such proportion of Class B dividend shares (Class B shares that were acquired through the reinvestment of dividends and distributions) owned by the shareholders as the total number of his or her Class B shares converting at the time bears to the total number of outstanding Class B shares (other than Class B dividend shares) owned by the shareholder.

In determining the applicability of any contingent deferred sales charge, it will be assumed that a redemption is made first of shares representing capital appreciation, next of shares representing the reinvestment of dividends and capital gain distributions, next of shares that are not subject to the contingent deferred sales charge and finally of other shares held by the shareholder for the longest period of time. The length of time that contingent deferred sales charge shares acquired through an exchange have been held will be calculated from the date the shares exchanged were initially acquired in one of the other Legg Mason Partners Funds. For federal income tax purposes, the amount of the contingent deferred sales charge will reduce the gain or increase the loss, as the case may be, on the amount realized on redemption. The Fund’s distributor receives contingent deferred sales charges in partial consideration for its expenses in selling shares.

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Waivers of Contingent Deferred Sales Charge

The contingent deferred sales charge will be waived on: (a) exchanges (see “Exchange Privilege”); (b) automatic cash withdrawals in amounts equal to or less than 2.00% per month of the shareholder’s account balance at the time the withdrawals commence, up to a maximum of 12.00% in one year (see “Automatic Cash Withdrawal Plan”); (c) redemptions of shares within 12 months following the death or disability (as defined in the Code) of the shareholder; (d) mandatory post-retirement distributions from retirement plans or IRAs commencing on or after attainment of age 70 ¹/2 (except that shareholders who purchased shares subject to a contingent deferred sales charge prior to May 23, 2005 will be “grandfathered” and will be eligible to obtain the waiver at age 59 ¹/2 by demonstrating such eligibility at the time of redemption); (e) involuntary redemptions; (f) redemptions of shares to effect a combination of the Fund with any investment company by merger, acquisition of assets or otherwise; (g) tax-free returns of an excess contribution to any retirement plan; and (h) certain redemptions of shares of the Fund in connection with lump-sum or other distributions made by eligible retirement plans or redemption of shares by participants in certain “wrap fee” or asset allocation programs sponsored by broker/dealers and other financial institutions that have entered into agreements with the distributor or the manager.

A shareholder who has redeemed shares from other Legg Mason Partners Funds may, under certain circumstances, reinvest all or part of the redemption proceeds within 60 days and receive pro rata credit for any contingent deferred sales charge imposed on the prior redemption.

Contingent deferred sales charge waivers will be granted subject to confirmation by the distributor or the transfer agent of the shareholder’s status or holdings, as the case may be.

Determination of Public Offering Price

The Fund offers shares on a continuous basis. The public offering price for each class of shares of the Fund is equal to the net asset value per share at the time of purchase, plus for Class A shares an initial sales charge based on the aggregate amount of the investment. A contingent deferred sales charge, however, is imposed on certain redemptions of Class A and B shares of the Fund.

Set forth below is an example of the method of computing the offering price of the Class A shares of the Fund based on the net asset value of a share of the Fund as of December 31, 2007.

Class A (based on a net asset value of $3.98 and a maximum initial sales charge of 2.25%) $ 4.07

REDEMPTION OF SHARES

The right of redemption of shares of the Fund may be suspended or the date of payment postponed (a) for any period during which the New York Stock Exchange (the “NYSE”) is closed (other than for customary weekend and holiday closings), (b) when trading in the markets the Fund normally utilizes is restricted, or an emergency exists, as determined by the SEC, so that disposal of the Fund’s investments or determination of its net asset value is not reasonably practicable or (c) for any other periods as the SEC by order may permit for the protection of the Fund’s shareholders.

If the shares to be redeemed were issued in certificate form, the certificates must be endorsed for transfer (or be accompanied by an endorsed stock power) and must be submitted to PFPC together with the redemption request. Any signature appearing on a share certificate, stock power or written redemption request in excess of $50,000 must be guaranteed by an eligible guarantor institution such as a domestic bank, savings and loan institution, domestic credit union, member bank of the Federal Reserve System or member firm of a national securities exchange. Written redemption requests of $50,000 or less do not require a signature guarantee unless more than one such redemption request is made in any 10-day period. Redemption proceeds will be mailed to an

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investor’s address of record. The transfer agent may require additional supporting documents for redemptions made by corporations, executors, administrators, trustees or guardians. A redemption request will not be deemed properly received until the transfer agent receives all required documents in proper form.

If a shareholder holds shares in more than one class, any request for redemption must specify the class being redeemed. In the event of a failure to specify which class, or if the investor owns fewer shares of the class than specified, the redemption request will be delayed until the transfer agent receives further instructions. The redemption proceeds will be remitted on or before the seventh business day following receipt of proper tender, except on any days on which the NYSE is closed or as permitted under the 1940 Act, in extraordinary circumstances. Redemption proceeds will normally be sent within 3 days after your request is received in good order, but in any event within 7 days. However, if you recently purchased your shares by check, your redemption proceeds may be delayed for up to an additional 8 days to make certain your check has cleared. Each Service Agent is responsible for transmitting promptly orders for its customers.

The Service Agent may charge you a fee for executing your order. The amount and applicability of such a fee is determined and disclosed to its customers by each Service Agent.

The Fund no longer issues share certificates. Outstanding share certificates will continue to be honored. If you hold share certificates, it will take longer to exchange or redeem shares.

Additional Information Regarding Telephone Redemption and Exchange Program. Neither the Fund nor its agents will be liable for following instructions communicated by telephone that are reasonably believed to be genuine. The Fund and its agents will employ procedures designed to verify the identity of the caller and legitimacy of instructions (for example, a shareholder’s name and account number will be required and phone calls may be recorded). The Fund reserves the right to suspend, modify or discontinue the telephone redemption and exchange program or to impose a charge for this service at any time following at least seven (7) days’ prior notice to shareholders.

Automatic Cash Withdrawal Plan

An automatic cash withdrawal plan (the “Withdrawal Plan”) is available to shareholders as described in the Prospectus. To the extent withdrawals under the Withdrawal Plan exceed dividends, distributions and appreciation of a shareholder’s investment in the Fund, there will be a reduction in the value of the shareholder’s investment, and continued withdrawal payments may reduce the shareholder’s investment and ultimately exhaust it. Withdrawal payments should not be considered as income from investment in Fund. Furthermore, as it generally would not be advantageous to a shareholder to make additional investments in the Fund at the same time he or she is participating in the Withdrawal Plan, purchases by such shareholder in amounts of less than $5,000 ordinarily will not be permitted. The Withdrawal Plan will be carried over on exchanges between funds or classes of the Fund. All dividends and distributions on shares in the Withdrawal Plan are reinvested automatically at net asset value in additional shares of the Fund.

Shareholders who wish to participate in the Withdrawal Plan and who hold their shares in certificate form must deposit their share certificates with the transfer agent as agent for Withdrawal Plan members. For additional information shareholders should contact their Service Agent. A shareholder who purchases shares directly through the transfer agent may continue to do so and applications for participation in the Withdrawal Plan must be received by the transfer agent no later than the eighth day of the month to be eligible for participation beginning with that month’s withdrawal.

Distributions in Kind

If the Board determines that it would be detrimental to the best interests of the remaining shareholders to make a redemption payment wholly in cash, the Fund may pay, in accordance with SEC rules, any portion of a

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redemption in excess of the lesser of $250,000 or 1.00% of the Fund’s net assets by a distribution in kind of Fund securities in lieu of cash. If a redemption is paid in Fund securities, such securities will be valued in accordance with the procedures described under “Share price” in the Fund’s Prospectus. Securities issued as a distribution in kind may incur brokerage commissions when shareholders subsequently sell those securities.

VALUATION OF SHARES

The net asset value per share of the Fund’s classes is calculated on each day, Monday through Friday, except days on which the NYSE is closed. The NYSE currently is scheduled to be closed on New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas, and on the preceding Friday or subsequent Monday when one of these holidays falls on a Saturday or Sunday, respectively. Because of the differences in distribution fees and class-specific expenses, the per share net asset value of each class will differ. Please see the Fund’s Prospectus for a description of the procedures used by the Fund in valuing its assets.

EXCHANGE PRIVILEGE

The exchange privilege enables shareholders to acquire shares of the same class in a fund with different investment objectives when they believe that a shift between funds is an appropriate investment decision. This privilege is available to shareholders residing in any state in which the fund shares being acquired may legally be sold. Prior to any exchange, the shareholder should obtain and review a copy of the current prospectus of each fund into which an exchange is being considered. Prospectuses may be obtained from a Service Agent.

Upon receipt of proper instructions and all necessary supporting documents, shares submitted for exchange are redeemed at the then-current net asset value, and the proceeds are immediately invested in shares of the fund being acquired at that fund’s then current net asset value. The distributors reserve the right to reject any exchange request. The exchange privilege may be modified or terminated at any time after written notice to shareholders.

Class A and Class R Exchanges. Class A and Class R shareholders of the Fund who wish to exchange all or a portion of their shares for shares of the respective class in another fund may do so without imposition of any charge.

Class B Exchanges. Class B shares of the Fund may be exchanged for other Class B shares without a contingent deferred sales charge. Upon an exchange, the new Class B shares will be deemed to have been purchased on the same date as the Class B shares of the fund that have been exchanged.

Class B shares of the Fund, which may be acquired only through an exchange with another Legg Mason Partners Fund, are subject upon redemption to the highest contingent deferred sales charge (if any) of the shares from which the exchange or any preceding exchange was made.

Class C Exchanges. Class C shares of the Fund may be exchanged for other Class C shares without a contingent deferred sales charge. Upon an exchange, the new Class C shares will be deemed to have been purchased on the same date as the Class C shares of the fund that have been exchanged. Upon exchange for Class C Shares of a Legg Mason-sponsored equity or long-term fixed-income fund, the investor will be subject to the contingent deferred sales charge of that fund and the contingent deferred sales charge will be measured from the date of exchange.

Additional Information Regarding the Exchange Privilege

During times of drastic economic or market conditions, the Fund may suspend the exchange privilege temporarily without notice and treat exchange requests based on their separate components—redemption orders

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with a simultaneous request to purchase the other fund’s shares. In such a case, the redemption request would be processed at the Fund’s next determined net asset value but the purchase order would be effective only at the net asset value next determined after the fund being purchased formally accepts the order, which may result in the purchase being delayed.

Certain shareholders may be able to exchange shares by telephone. See the Fund’s Prospectus for additional information. Exchanges will be processed at the net asset value next determined. Redemption procedures discussed above are also applicable for exchanging shares, and exchanges will be made upon receipt of all supporting documents in proper form. If the account registration of the shares of the fund being acquired is identical to the registration of the shares of the fund exchanged, no signature guarantee is required.

This exchange privilege may be modified or terminated at any time, and is available only in those jurisdictions where such exchanges legally may be made. Before making any exchange, shareholders should contact the transfer agent or, if they hold Fund shares through a Service Agent, their Service Agent to obtain more information and prospectuses of the funds to be acquired through the exchange. An exchange is treated as a sale of the shares exchanged and could result in taxable gain or loss to the shareholder making the exchange.

INVESTMENT MANAGEMENT AND OTHER SERVICES

Manager

LMPFA serves as investment manager to the Fund pursuant to an investment management agreement (the “Management Agreement”). LMPFA, with offices at 620 Eighth Avenue, New York, New York 10019, also serves as the investment manager of certain other Legg Mason-sponsored funds. As of December 31, 2007, LMPFA’s total assets under management were approximately $193 billion. LMPFA is a wholly-owned subsidiary of Legg Mason. Legg Mason, whose principal executive offices are at 100 Light Street, Baltimore, Maryland 21202, is a global asset management company. As of December 31, 2007, Legg Mason’s asset management operation had aggregate assets under management of approximately $998 billion. LMPFA provides administrative and certain oversight services to the Fund.

Under the Management Agreement, subject to the supervision and direction of the Fund’s Board, the manager is delegated the responsibility of managing the Fund’s portfolio in accordance with the Fund’s stated investment objective and policies, making investment decisions for the Fund and placing orders to purchase and sell securities. The manager also performs administrative and management services necessary for the operation of the Fund, such as (i) supervising the overall administration of the Fund, including negotiation of contracts and fees with and the monitoring of performance and billings of the Fund’s transfer agent, shareholder servicing agents, custodian and other independent contractors or agents; (ii) providing certain compliance, fund accounting, regulatory reporting, and tax reporting services; (iii) preparing or participating in the preparation of Board materials, registration statements, proxy statements and reports and other communications to shareholders; (iv) maintaining the Fund’s existence, and (v) maintaining the registration and qualification of the Fund’s shares under federal and state laws.

The Management Agreement will continue in effect from year to year provided such continuance is specifically approved at least annually (a) by the Fund’s Board or by a majority of the outstanding voting securities of the Fund (as defined in the 1940 Act), and (b) in either event, by a majority of the Independent Trustees with such Independent Trustees casting votes in person at a meeting called for such purpose.

The Management Agreement provides that the manager may render services to others. Each Management Agreement is terminable without penalty on not more than 60 days’ nor less than 30 days’ written notice by the Fund when authorized either by a vote of holders of shares representing a majority of the voting power of the outstanding voting securities of the Fund (as defined in the 1940 Act) or by a vote of a majority of the Fund’s

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Trustees, or by the manager on not less than 90 days’ written notice, and will automatically terminate in the event of its assignment (as defined in the 1940 Act). Each Management Agreement provides that neither the manager nor its personnel shall be liable for any error of judgment or mistake of law or for any loss arising out of any investment or for any act or omission in the execution of security transactions for the Fund, except for willful misfeasance, bad faith or gross negligence or reckless disregard of its or their obligations and duties.

For the period from December 1, 2005 through July 31, 2006, Smith Barney Fund Management LLC (“SBFM”) served as the Fund’s manager under the same fee schedule described above.

For the fiscal year ended December 31, 2005 and for the period from January 1, 2006 to July 31, 2006, the Fund paid management fees to SBFM of $1,593,561 and $965,586*, respectively.

For the period from August 1, 2006 through December 31, 2006 and for the fiscal year ended December 31, 2007, the Fund paid management fees to LMPFA of $719,177** and $1,580,624, respectively.

* Reflects a waiver of $11,572 of investment management fees.

** Reflects a waiver of $122 of investment management fees.

The management fee for the Fund is calculated at the annual rate of 0.45% of the Fund’s average daily net assets.

Subadviser

Western Asset Management Company (“Western Asset”) serves as the subadviser to the Fund pursuant to a Sub-Advisory Agreement between the manager and Western Asset (the “Sub-Advisory Agreement”). Western Asset, established in 1971, has offices at 385 East Colorado Boulevard, Pasadena, California 91101. Western Asset acts as investment adviser to institutional accounts, such as corporate pension plans, mutual funds and endowment funds. As of December 31, 2007, Western Asset’s total assets under management were approximately $457 billion. Western Asset is a wholly-owned subsidiary of Legg Mason.

Under the Sub-Advisory Agreement, subject to the supervision and direction of the Board and the manager, the subadviser will manage the Fund’s portfolio (or allocated portion thereof) in accordance with the Fund’s stated investment objective(s) and policies, assist in supervising all aspects of the Fund’s operations, make investment decisions for the Fund, place orders to purchase and sell securities, and employ professional portfolio managers and securities analysts who provide research services to the Fund.

The Sub-Advisory Agreement will continue in effect from year to year provided such continuance is specifically approved at least annually (a) by the Board or by a majority of the outstanding voting securities of the Fund (as defined in the 1940 Act), and (b) in either event, by a majority of the Independent Trustees with such Independent Trustees casting votes in person at a meeting called for such purpose. The Board or a majority of the outstanding voting securities of the Fund (as defined in the 1940 Act) may terminate the Sub-Advisory Agreement without penalty, in each case on not more than 60 days’ nor less than 30 days’ written notice to the subadviser. The subadviser may terminate the Sub-Advisory Agreement on 90 days’ written notice to the Fund and the manager. The manager and the subadviser may terminate the Sub-Advisory Agreement upon their mutual written consent. The Sub-Advisory Agreement will terminate automatically in the event of assignment (as defined in the 1940 Act) by the subadviser and shall not be assignable by the manager without the consent of the subadviser.

As compensation for its sub-advisory services under each Sub-Advisory Agreement, the manager will pay the subadviser a fee for the Fund equal to 70% of the management fee paid by the Fund to LMPFA, net of expense waivers and reimbursements. For the period from August 1, 2006 through December 31, 2006, the manager paid the subadviser sub-advisory fees of $495,324. For the fiscal year ended December 31, 2007, the manager paid the subadviser sub-advisory fees of $1,106,436.

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Expenses

In addition to amounts payable under the Management Agreement and the Distribution Plan (as discussed below), the Fund is responsible for its own expenses, including, among other things: interest; taxes; governmental fees; voluntary assessments and other expenses incurred in connection with membership in investment company organizations; organization costs of the Fund; the cost (including brokerage commissions, transaction fees or charges, if any) in connection with the purchase or sale of the Fund’s securities and other investments and any losses in connection therewith; fees and expenses of custodians, transfer agents, registrars, independent pricing vendors or other agents; legal expenses; loan commitment fees; expenses relating to share certificates; expenses relating to the issuing and redemption or repurchase of the Fund’s shares and servicing shareholder accounts; expenses of registering and qualifying the Fund’s shares for sale under applicable federal and state law; expenses of preparing, setting in print, printing and distributing prospectuses and statements of additional information and any supplements thereto, reports, proxy statements, notices and dividends to the Fund’s shareholders; costs of stationery; website costs; costs of meetings of the Board or any committee thereof, meetings of shareholders and other meetings of the Fund; Board fees; audit fees; travel expenses of officers, members of the Board and employees of the Fund, if any; and the Fund’s pro rata portion of premiums on any fidelity bond and other insurance covering the Fund and its officers, Board members and employees; litigation expenses and any nonrecurring or extraordinary expenses as may arise, including, without limitation, those relating to actions, suits or proceedings to which the Fund is a party and the legal obligation which the Fund may have to indemnify the Fund’s Board members and officers with respect thereto.

Management may agree to waive fees and/or reimburse operating expenses for one or more classes of shares of the Fund, either through contractual or voluntary arrangements. Any such waivers and/or reimbursements are described in the Fund’s Prospectus. The contractual and voluntary fee waivers and/or reimbursements do not cover extraordinary expenses, such as (a) any expenses or charges related to litigation, derivative actions, demands related to litigation, regulatory or other government investigations and proceedings, “for cause” regulatory inspections and indemnification or advancement of related expenses or costs, to the extent any such expenses are considered extraordinary expenses for the purposes of fee disclosure in Form N-1A as the same may be amended from time to time; (b) transaction costs (such as brokerage commissions and dealer and underwriter spreads) and taxes; and (c) other extraordinary expenses as determined for the purposes of fee disclosure in Form N-1A, as the same may be amended from time to time. Without limiting the foregoing, extraordinary expenses are generally those that are unusual or expected to recur only infrequently, and may include such expenses, by way of illustration, as (i) expenses of the reorganization, restructuring, redomiciling or merger of the Fund or class or the acquisition of all or substantially all of the assets of another fund or class; (ii) expenses of holding, and soliciting proxies for, a meeting of shareholders of the Fund or class (except to the extent relating to routine items such as the election of Board members or the approval of the independent registered public accounting firm); and (iii) expenses of converting to a new custodian, transfer agent or other service provider, in each case to the extent any such expenses are considered extraordinary expenses for the purposes of fee disclosure in Form N-1A as the same may be amended from time to time.

Codes of Ethics

Pursuant to Rule 17j-1 of the 1940 Act, the Fund, the manager, subadviser and distributor have adopted codes of ethics that permit personnel to invest in securities for their own accounts, including securities that may be purchased or held by the Fund. All personnel must place the interests of clients first and avoid activities, interests and relationships that might interfere with the duty to make decisions in the best interests of the clients. All personal securities transactions by employees must adhere to the requirements of the codes and must be conducted in such a manner as to avoid any actual or potential conflict of interest, the appearance of such a conflict, or the abuse of an employee’s position of trust and responsibility.

A copy of the code of ethics for the Fund, the manager, subadviser and distributor are on file with the SEC.

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Proxy Voting Guidelines and Procedures

Although individual Trustees may not agree with particular policies or votes by the manager or subadviser, the Board has delegated proxy voting discretion to the manager and/or the subadviser, believing that the manager and/or the subadviser should be responsible for voting because it is a matter relating to the investment decision-making process.

LMPFA delegates the responsibility for voting proxies for the Fund to the subadviser through its contract with the subadviser. The subadviser will use its own proxy voting policies and procedures to vote proxies. Accordingly, LMPFA does not expect to have proxy-voting responsibility for the Fund. Should LMPFA become responsible for voting proxies for any reason, such as the inability of a subadviser to provide investment advisory services, LMPFA shall utilize the proxy voting guidelines established by the most recent subadviser to vote proxies until a new subadviser is retained. In the case of a material conflict between the interests of LMPFA (or its affiliates if such conflict is known to persons responsible for voting at LMPFA) and the Fund, the Board of Directors of LMPFA shall consider how to address the conflict and/or how to vote the proxies. LMPFA shall maintain records of all proxy votes in accordance with applicable securities laws and regulations, to the extent that LMPFA votes proxies. LMPFA shall be responsible for gathering relevant documents and records related to proxy voting from the subadviser and providing them to the Fund as required for the Fund to comply with applicable rules under the 1940 Act.

The subadviser’s Proxy Voting Policies and Procedures govern in determining how proxies relating to the Fund’s portfolio securities are voted and are attached as Appendix B to this SAI. Information regarding how the Fund voted proxies (if any) relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge (1) by calling 1-888-425-6432, (2) on the Fund’s website at http://www.leggmason.com/individualinvestors and (3) on the SEC’s website at http://www.sec.gov.

Custodian and Transfer Agent

State Street Bank and Trust Company (“State Street”), One Lincoln Street, Boston, Massachusetts 02111 (“State Street”), serves as the custodian of the Fund. State Street, among other things, maintains a custody account or accounts in the name of the Fund; receives and delivers all assets for the Fund upon purchase and upon sale or maturity; collects and receives all income and other payments and distributions on account of the assets of the Fund; and makes disbursements on behalf of the Fund. The Custodian neither determines the Fund’s investment policies, nor decides which securities the Fund will buy or sell. For its services, the custodian receives a monthly fee based upon the daily average market value of securities held in custody and also receives securities transaction charges, including out-of-pocket expenses. The Fund may also periodically enter into arrangements with other qualified custodians with respect to certain types of securities or other transactions such as repurchase agreements or derivatives transactions. State Street may also act as the Fund’s securities lending agent and in that case would receive a share of the income generated by such activities.

PFPC Inc. (“PFPC” or “transfer agent”), located at 4400 Computer Drive, Westborough, Massachusetts 01581, serves as transfer agent. The transfer agent maintains the shareholder account records for the Fund, handles certain communications between shareholders and the Fund and distributes dividends and distributions payable by the Fund. For these services, the transfer agent receives a monthly fee computed on the basis of the number of shareholder accounts it maintains for the Fund during the month, and is reimbursed for out-of-pocket expenses.

Counsel

Bingham McCutchen LLP, 150 Federal Street, Boston, Massachusetts 02110, serves as counsel to the Fund.

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Independent Registered Public Accounting Firm

KPMG LLP, independent registered public accounting firm, located at 345 Park Avenue, New York, New York 10154, has been selected to audit and report upon the fund’s financial statements and financial highlights for the fiscal year ending December 31, 2008.

PORTFOLIO MANAGER DISCLOSURE

Portfolio Managers

The following tables set forth certain additional information with respect to the portfolio managers for the Fund. Unless noted otherwise, all information is provided as of December 31, 2007.

Other Accounts Managed by Portfolio Managers

The table below identifies, for each portfolio manager, the number of accounts (other than the Fund) for which he has day-to-day management responsibilities and the total assets in such accounts, within each of the following categories: registered investment companies, other pooled investment vehicles, and other accounts. For each category, the number of accounts and total assets in the accounts where fees are based on performance is also indicated.

Portfolio Manager(s)	Registered Investment Companies	Other Pooled Investment Vehicles	Other Accounts
S. Kenneth Leech*	114 registered investment companies with $121 billion in total assets under management	239 other pooled investment vehicle with $211 billion in assets under management	1,069 other accounts with $300 billion in total assets under management
Stephen A. Walsh*	114 registered investment companies with $121 billion in total assets under management	239 other pooled investment vehicle with $211 billion in assets under management	1,069 other accounts with $300 billion in total assets under management
James J. Flick**	5 registered investment companies with $816 million in total assets under management	13 other pooled investment vehicle with $5 billion in assets under management	86 other accounts with $37 billion in total assets under management
Andrea A. Mack	1 registered investment companies with $8 million in total assets under management	No other pooled investment vehicles	18 other accounts with $6 billion in total assets under management
Michael C. Buchanan	14 registered investment companies with $7 billion in total assets under management	7 other pooled investment vehicles with $5 billion in assets under management	12 other accounts with $816 million in total assets under management (with the advisory fee being based on performance for 1 of such accounts, which had approximately $90 million in total assets)

* 95 other accounts with assets of $32 billion have advisory fees based on performance of the accounts.

** 95 other accounts with assets of $32 billion had advisory fees based on performance of the accounts.

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Portfolio Manager Compensation

Western Asset’s compensation system assigns each employee a total compensation “target” and a respective cap, which are derived from annual market surveys that benchmark each role with its job function and peer universe. This method is designed to reward employees with total compensation reflective of the external market value of their skills, experience, and ability to produce desired results. Standard compensation includes competitive base salaries, generous employee benefits, and a retirement plan.

In addition, the subadviser’s employees are eligible for bonuses. These are structured to closely align the interests of employees with those of the subadviser, and are determined by the professional’s job function and pre-tax performance as measured by a formal review process. All bonuses are completely discretionary. One of the principal factors considered is a portfolio manager’s investment performance versus appropriate peer groups and benchmarks (e.g., a securities index and, with respect to the Fund, the benchmark set forth in the Fund’s Prospectus to which the Fund’s average annual total returns are compared or, if none, the benchmark set forth in the Fund’s annual report). Performance is reviewed on a 1, 3 and 5 year basis for compensation, with 3 years having the most emphasis. A subadviser may also measure a portfolio manager’s pre-tax investment performance against other benchmarks, as it determines appropriate. Because portfolio managers are generally responsible for multiple accounts (including the Fund) with similar investment strategies, they are generally compensated on the performance of the aggregate group of similar accounts, rather than a specific account, though relative performance against the stated benchmark and its applicable Lipper peer group is also considered. A smaller portion of a bonus payment is derived from factors that include client service, business development, length of service to the subadviser, management or supervisory responsibilities, contributions to developing business strategy and overall contributions to the subadviser’s business.

Finally, in order to attract and retain top talent, all professionals are eligible for additional incentives in recognition of outstanding performance. These were determined based upon the factors described above and include Legg Mason stock options and long-term incentives that vest over a set period of time past the award date.

Potential Conflicts of Interest

Potential conflicts of interest may arise when the Fund’s portfolio managers also have day-to-day management responsibilities with respect to one or more other funds or other accounts, as is the case for the portfolio managers listed in the table above.

The manager, the subadviser and the Fund have adopted compliance policies and procedures that are designed to address various conflicts of interest that may arise for the manager and the individuals that they employ. For example, the manager and the subadviser each seek to minimize the effects of competing interests for the time and attention of portfolio managers by assigning portfolio managers to manage funds and accounts that share a similar investment style. The manager and the subadviser have also adopted trade allocation procedures that are designed to facilitate the fair allocation of limited investment opportunities among multiple funds and accounts. There is no guarantee, however, that the policies and procedures adopted by the manager, the subadviser and the Fund will be able to detect and/or prevent every situation in which an actual or potential conflict may appear.

These potential conflicts include:

Allocation of Limited Time and Attention. A portfolio manager who is responsible for managing multiple funds and/or accounts may devote unequal time and attention to the management of those funds and/or accounts. As a result, the portfolio manager may not be able to formulate as complete a strategy or identify equally attractive investment opportunities for each of those accounts as might be the case if he or she were to devote substantially more attention to the management of a single fund. The effects of this potential conflict may be more pronounced where funds and/or accounts overseen by a particular portfolio manager have different investment strategies.

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Allocation of Limited Investment Opportunities. If a portfolio manager identifies a limited investment opportunity that may be suitable for multiple funds and/or accounts, the opportunity may be allocated among these several funds or accounts, which may limit a fund’s ability to take full advantage of the investment opportunity.

Pursuit of Differing Strategies. At times, a portfolio manager may determine that an investment opportunity may be appropriate for only some of the funds and/or accounts for which he exercises investment responsibility, or may decide that certain of the funds and/or accounts should take differing positions with respect to a particular security. In these cases, the portfolio manager may place separate transactions for one or more funds or accounts which may affect the market price of the security or the execution of the transaction, or both, to the detriment or benefit of one or more other funds and/or accounts.

Selection of Brokers/Dealers. Portfolio managers may be able to select or influence the selection of the brokers and dealers that are used to execute securities transactions for the funds and/or account that they supervise. In addition to executing trades, some brokers and dealers provide portfolio managers with brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934), which may result in the payment of higher brokerage fees than might have otherwise been available. These services may be more beneficial to certain funds or accounts than to others. Although the payment of brokerage commissions is subject to the requirement that the portfolio manager determine in good faith that the commissions are reasonable in relation to the value of the brokerage and research services provided to the Fund, a portfolio manager’s decision as to the selection of brokers and dealers could yield disproportionate costs and benefits among the funds and/or accounts that he manages.

Variation in Compensation. A conflict of interest may arise where the financial or other benefits available to the portfolio manager differ among the funds and/or accounts that he or she manages. If the structure of the investment manager’s management fee and/or the portfolio manager’s compensation differs among funds and/or accounts (such as where certain funds or accounts pay higher management fees or performance-based management fees), the portfolio manager might be motivated to help certain funds and/or accounts over others. The portfolio manager might be motivated to favor funds and/or accounts in which he or she has an interest or in which the investment manager and/or its affiliates have interests. Similarly, the desire to maintain assets under management or to enhance the portfolio manager’s performance record or to derive other rewards, financial or otherwise, could influence the portfolio manager in affording preferential treatment to those funds and/or accounts that could most significantly benefit the portfolio manager.

Related Business Opportunities. The investment manager or its affiliates may provide more services (such as distribution or recordkeeping) for some types of funds or accounts than for others. In such cases, a portfolio manager may benefit, either directly or indirectly, by devoting disproportionate attention to the management of funds and/or accounts that provide greater overall returns to the investment manager and its affiliates.

Portfolio Manager Securities Ownership

The table below identifies ownership of Fund securities by each portfolio manager as of December 31, 2007.

Portfolio Manager	Dollar Range of Ownership of Securities
S. Kenneth Leech	None
Stephen A Walsh	None
James J. Flick	None
Andrea A. Mack	None
Michael C. Buchanan	None

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Distributor

LMIS, a wholly-owned broker/dealer subsidiary of Legg Mason, located at 100 Light Street, Baltimore, Maryland 21202, serves as the Fund’s sole and exclusive distributor pursuant to a written agreement dated December 1, 2005, as amended (the “distribution agreements”).

LMIS received no commissions on the sale of fund shares and no contingent deferred sales charges on redemptions of fund shares were paid to LMIS for the fiscal years ended December 31, 2005, 2006 and 2007.

LMIS may be deemed to be an underwriter for purposes of the 1933 Act.

Prior to December 1, 2007, Citigroup Global Markets Inc. (“CGMI”), an indirect subsidiary of Citigroup Inc., served as co-distributor of the Fund along with LMIS.

The distributor’s obligation is an agency or “best efforts” arrangement under which the distributor is required to take and pay only for such shares of the fund as may be sold to the public. The distributor is not obligated to sell any stated number of shares. The distribution agreement is renewable from year to year if approved (a) by the Trustees or by a vote of a majority of the fund’s outstanding voting securities, and (b) by the affirmative vote of a majority of Trustees who are not parties to such agreement or interested persons, as defined in the 1940 Act, of any party by votes cast in person at a meeting called for such purpose. The distribution agreement provides that it will terminate if assigned, and that it may be terminated without penalty by either party on 60 days’ written notice.

Initial Sales Charges on Class A Shares

For the fiscal years ended December 31, 2005, 2006 and 2007, the aggregate dollar amounts of commissions received by CGMI on sale of Class A shares were as follows:

Fiscal Year Ended 12/31/05		Fiscal Year Ended 12/31/06		Fiscal Year Ended 12/31/07
$	23,000	$	100	$	970

Contingent Deferred Sales Charges

For the fiscal years ended December 31, 2005, 2006 and 2007, the contingent deferred sales charges paid to LMIS on redemptions of the Fund’s shares were as follows:

Class A Shares
2005		2006			2007
$	13,000	$	0	*	$	19,800
Class B Shares
2005		2006			2007
$	7,000	$	6,000		$	4,100

* Amount represents less than $1,000.

Services and Distribution Plan Arrangements

The Trust has adopted an amended shareholder services and distribution plan (the “Distribution Plan”) pursuant to Rule l2b-1 under the 1940 Act with respect to its Class A, Class C, and Class R shares of each Fund. Under the Distribution Plan, each Fund pays service and distribution fees to LMIS for the services LMIS

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provides and expenses LMIS bears with respect to the distribution of Class A, Class B, Class C and Class R shares and services LMIS provides to Class A, Class B, Class C and Class R shareholders. The distributor will provide the Board with periodic reports of amounts expended under the Distribution Plan and the purposes for which such expenditures were made. Under the Distribution Plan, each Fund may pay monthly fees at an annual rate not to exceed 0.25% of the average daily net assets of the Fund attributable to that class in the case of Class A shares, not to exceed 0.75% of the average daily net assets of the Fund attributable to that class in the case of Class B shares, not to exceed 0.75% of the average daily net assets of the Fund attributable to that class in the case of Class C shares and not to exceed 0.50% of the average daily net assets of the Fund attributable to that class in the case of Class R shares.

Fees under the Distribution Plan may be used to make payments to the distributor for distribution services, to Service Agents in respect of the sale of shares of each Fund, and to other parties in respect of the sale of shares of each Fund, and to make payments for advertising, marketing or other promotional activity, and payments for preparation, printing, and distribution of prospectuses, statements of additional information and reports for recipients other than regulators and existing shareholders. Each Fund also may make payments to the distributor, Service Agents and others for providing personal service or the maintenance of shareholder accounts. The amounts paid to each recipient may vary based upon certain factors, including, among other things, the levels of sales of Fund shares and/or shareholder services provided; provided, however, that the fees paid to a recipient with respect to a particular class that may be used to cover expenses primarily intended to result in the sale of shares of that class, or that may be used to cover expenses primarily intended for personal service and/or maintenance of shareholder accounts, may not exceed the maximum amounts, if any, as may from time to time be permitted for such services under Financial Industry Regulatory Authority (“FINRA”) Conduct Rule 2830 or any successor rule, in each case as amended or interpreted by FINRA.

The Distribution Plan also provides that the distributor and Service Agents may receive all or a portion of the sales charges paid by Class A, Class B, Class C and Class R investors.

The Distribution Plan permits each Fund to pay fees to the distributor, Service Agents and others as compensation for their services, not as reimbursement for specific expenses incurred. Thus, even if their expenses exceed the fees provided for by the Distribution Plan, the Funds will not be obligated to pay more than those fees and, if their expenses are less than the fees paid to them, they will realize a profit. Each Fund may pay the fees to the distributor and others until the Distribution Plan or Distribution Agreement is terminated or not renewed. In that event, the distributor’s or other recipient’s expenses in excess of fees received or accrued through the termination date will be the distributor’s or other recipient’s sole responsibility and not obligations of the Fund. In their annual consideration of the continuation of the Distribution Plan for each Fund, the Trustees will review the Distribution Plan and the expenses for each class within the Fund separately.

The Distribution Plan also recognizes that various service providers to the Funds, such as the manager, may make payments for distribution related expenses out of their own resources, including past profits, or payments received from each Fund for other purposes, such as management fees, and that the Funds’ distributor or Service Agents may from time to time use their own resources for distribution-related services, in addition to the fees paid under the Distribution Plan. The Distribution Plan specifically provides that, to the extent that such payments might be deemed to be indirect financing of any activity primarily intended to result in the sale of shares of each Fund within the context of Rule 12b-1, then the payments are deemed to be authorized by the Distribution Plan, if permitted by law.

Under its terms, the Distribution Plan continues in effect for one year and thereafter for successive annual periods, provided such continuance is specifically approved at least annually by vote of the Board, including a majority of the Independent Trustees who have no direct or indirect financial interest in the operation of the Distribution Plan. The Distribution Plan may not be amended to increase the amount of the service and distribution fees without shareholder approval, and all amendments of the Distribution Plan also must be approved by the Trustees, including all of the Independent Trustees, in the manner described above. The Distribution Plan may be terminated with respect to a class of each Fund at any time, without penalty, by vote of a majority of the Independent Trustees or by vote of a majority of the outstanding voting securities of such class of the Fund (as defined in the 1940 Act).

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As contemplated by the Distribution Plan, the distributor acts as an agent of the Trust in connection with the offering of shares of the Fund pursuant to the Distribution Agreement.

The following service and distribution fees were incurred by the Fund pursuant to the Distribution Plan in effect during the periods indicated:

	Fiscal Year Ended December 31, 2007		Fiscal Year Ended December 31, 2006		Fiscal Year Ended December 31, 2005
Class A	$	148,184	$	193,275	$	221,430
Class B	$	20,363	$	29,326	$	38,273
Class C	$	59,184	$	80,188	$	130,229
Class I		N/A		N/A		N/A

For the fiscal year ended December 31, 2007, distribution expenses incurred by LMIS and CGMI for advertising, printing and mailing prospectuses, support services and overhead expenses, payments to their financial advisers or registered representatives and for accruals for interest on expenses incurred in the distribution of the Fund’s shares are set forth in the following tables:

LMIS

					Branch Operation Expenses		Marketing Distribution Expenses
	Financial Advisor Expenses		Third Party Service Fees						Printing Expenses
Class A	$	0	$	58,755	$	0	$	0	N/A
Class B	$	5,995	$	2,298	$	0	$	0	N/A
Class C	$	281	$	14,562	$	0	$	2,762	N/A
Class I	$	0	$	0	$	0		N/A	N/A

CGMI

				Branch Operation Expenses		Marketing Distribution Expenses
	Financial Advisor Expenses		Third Party Service Fees				Printing Expenses
Class A	$	41,893	N/A	$	62,565	N/A	N/A
Class B	$	1,749	N/A	$	2,684	N/A	N/A
Class C	$	17,966	N/A	$	26,132	N/A	N/A
Class I	$	0	N/A	$	0	N/A	N/A

Dealer reallowances are described in the Prospectus.

ADDITIONAL INFORMATION ABOUT THE FUND

The Trust.

The certificate of trust to establish Legg Mason Partners Income Trust (referred to in this section as the trust) was filed with the State of Maryland on October 4, 2006. On April 16, 2007, the Fund was redomiciled as a series of the trust. Prior to the date hereof, the Fund was a series of Legg Mason Partners Income Funds, a Massachusetts business trust. Prior to the reorganization of the Fund as a series of Legg Mason Partners Income Funds, the Fund was a series of Legg Mason Partners Funds, Inc., a Maryland corporation.

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The Fund is a series of the trust, a Maryland business trust. A Maryland business trust is an unincorporated business association that is established under, and governed by, Maryland law. Maryland law provides a statutory framework for the powers, duties, rights and obligations of the Board (referred to in this section as the trustees) and shareholders of the trust, while the more specific powers, duties, rights and obligations of the trustees and the shareholders are determined by the trustees as set forth in the trust’s declaration of trust (referred to in this section as the declaration). Some of the more significant provisions of the declaration are described below.

Shareholder Voting.

The declaration provides for shareholder voting as required by the 1940 Act or other applicable laws but otherwise permits, consistent with Maryland law, actions by the trustees without seeking the consent of shareholders. The trustees may, without shareholder approval, amend the declaration or authorize the merger or consolidation of the trust into another trust or entity, reorganize the trust, or any series or class into another trust or entity or a series or class of another entity, sell all or substantially all of the assets of the trust or any series or class to another entity, or a series or class of another entity, or terminate the trust or any series or class.

The Fund is not required to hold an annual meeting of shareholders, but the Fund will call special meetings of shareholders whenever required by the 1940 Act or by the terms of the declaration. The declaration provides for “dollar-weighted voting” which means that a shareholder’s voting power is determined, not by the number of shares he or she owns, but by the dollar value of those shares determined on the record date. All shareholders of all series and classes of the trust vote together, except where required by the 1940 Act to vote separately by series or by class, or when the trustees have determined that a matter affects only the interests of one or more series or classes of shares.

Election and Removal of Trustees.

The declaration provides that the trustees may establish the number of trustees and that vacancies on the board may be filled by the remaining trustees, except when election of trustees by the shareholders is required under the 1940 Act. Trustees are then elected by a plurality of votes cast by shareholders at a meeting at which a quorum is present. The declaration also provides that a mandatory retirement age may be set by action of two-thirds of the trustees and that trustees may be removed, with or without cause, by a vote of shareholders holding two-thirds of the voting power of the trust, or by a vote of two-thirds of the remaining trustees. The provisions of the declaration relating to the election and removal of trustees may not be amended without the approval of two-thirds of the trustees.

Amendments to the Declaration.

The trustees are authorized to amend the declaration without the vote of shareholders, but no amendment may be made that impairs the exemption from personal liability granted in the declaration to persons who are or have been shareholders, trustees, officers or, employees of the trust or that limit the rights to indemnification or insurance provided in the declaration with respect to actions or omissions of persons entitled to indemnification under the declaration prior to the amendment.

Issuance and Redemption of Shares.

The Fund may issue an unlimited number of shares for such consideration and on such terms as the trustees may determine. Shareholders are not entitled to any appraisal, preemptive, conversion, exchange or similar rights, except as the trustees may determine. The Fund may involuntarily redeem a shareholder’s shares upon certain conditions as may be determined by the trustees, including, for example, if the shareholder fails to provide the Fund with identification required by law, or if the fund is unable to verify the information received from the shareholder. Additionally, as discussed below, shares may be redeemed in connection with the closing of small accounts.

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Disclosure of Shareholder Holdings.

The declaration specifically requires shareholders, upon demand, to disclose to the Fund information with respect to the direct and indirect ownership of shares in order to comply with various laws or regulations, and the Fund may disclose such ownership if required by law or regulation.

Small Accounts.

The declaration provides that the Fund may close out a shareholder’s account by redeeming all of the shares in the account if the account falls below a minimum account size (which may vary by class) that may be set by the trustees from time to time. Alternately, the declaration permits the Fund to assess a fee for small accounts (which may vary by class) and redeem shares in the account to cover such fees, or convert the shares into another share class that is geared to smaller accounts.

Series and Classes.

The declaration provides that the trustees may establish series and classes in addition to those currently established and to determine the rights and preferences, limitations and restrictions, including qualifications for ownership, conversion and exchange features, minimum purchase and account size, expenses and charges, and other features of the series and classes. The trustees may change any of those features, terminate any series or class, combine series with other series in the trust, combine one or more classes of a series with another class in that series or convert the shares of one class into another class.

Each share of the Fund, as a series of the trust, represents an interest in the Fund only and not in the assets of any other series of the trust.

Shareholder, Trustee and Officer Liability.

The declaration provides that shareholders are not personally liable for the obligations of the Fund and requires the Fund to indemnify a shareholder against any loss or expense arising from any such liability. In addition, the Fund will assume the defense of any claim against a shareholder for personal liability at the request of the shareholder. The declaration further provides that a trustee acting in his or her capacity of trustee is not personally liable to any person other than the trust or its shareholders, for any act, omission, or obligation of the trust. Further, a trustee is held to the same standard of conduct as a director of a Maryland corporation. This requires that a trustee perform his or her duties in good faith and in a manner he or she reasonably believes to be in the best interests of the trust or a series thereof, and with the care that an ordinarily prudent person in a like position would use under similar circumstances. The declaration also permits the limitation of a trustee’s liability to the full extent provided under Maryland law. Under current Maryland law, a trustee is liable to the trust or its shareholders for monetary damages only (a) to the extent that it is proved that he or she actually received an improper benefit or profit in money, property, or services or (b) to the extent that a judgment or other final adjudication adverse to the trustee is entered in a proceeding based on a finding in the proceeding that the trustee’s action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. The declaration requires the trust to indemnify any persons who are or who have been trustees, officers or employees of the trust for any liability for actions or failure to act except to the extent prohibited by applicable federal law. In making any determination as to whether any person is entitled to the advancement of expenses in connection with a claim for which indemnification is sought, such person is entitled to a rebuttable presumption that he or she did not engage in conduct for which indemnification is not available.

The declaration provides that any trustee who serves as chair of the board or of a committee of the board, lead independent trustee, or audit committee financial expert, or in any other similar capacity will not be subject to any greater standard of care or liability because of such position.

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Derivative Actions.

The declaration provides a detailed process for the bringing of derivative actions by shareholders in order to permit legitimate inquiries and claims while avoiding the time, expense, distraction, and other harm that can be caused to the Fund or its shareholders as a result of spurious shareholder demands and derivative actions. Prior to bringing a derivative action, a demand by three unrelated shareholders must first be made on the Fund’s trustees. The declaration details various information, certifications, undertakings and acknowledgements that must be included in the demand. Following receipt of the demand, the trustees have a period of 90 days, which may be extended by an additional 60 days, to consider the demand. If a majority of the trustees who are considered independent for the purposes of considering the demand determine that maintaining the suit would not be in the best interests of the Fund, the trustees are required to reject the demand and the complaining shareholders may not proceed with the derivative action unless the shareholders are able to sustain the burden of proof to a court that the decision of the trustees not to pursue the requested action was not a good faith exercise of their business judgment on behalf of the Fund. The declaration further provides that shareholders owning shares representing at least 5% of the voting power of the affected Fund must join in bringing the derivative action. If a demand is rejected, the complaining shareholders will be responsible for the costs and expenses (including attorneys’ fees) incurred by the Fund in connection with the consideration of the demand, if in the judgment of the independent trustees, the demand was made without reasonable cause or for an improper purpose. If a derivative action is brought in violation of the declaration, the shareholders bringing the action may be responsible for the Fund’s costs, including attorneys’ fees.

The declaration further provides that the Fund shall be responsible for payment of attorneys’ fees and legal expenses incurred by a complaining shareholder only if required by law, and any attorneys’ fees that the Fund is obligated to pay shall be calculated using reasonable hourly rates. The declaration also requires that actions by shareholders against the Fund be brought only in federal court in Baltimore, Maryland, or if not permitted to be brought in federal court, then in state court in Baltimore, Maryland, and that the right to jury trial be waived to the full extent permitted by law.

Annual and Semi-Annual Reports

The Fund sends its shareholders a semi-annual report and an audited annual report, which include listings of investment securities held by the Fund at the end of the period covered. In an effort to reduce the Fund’s printing and mailing costs, the Fund consolidates the mailing of its semi-annual and annual reports by household. This consolidation means that a household having multiple accounts with the identical address of record will receive a single copy of each report. In addition, the Fund also consolidates the mailing of its Prospectus so that a shareholder having multiple accounts (that is, individual, IRA and/or Self-Employed Retirement Plan accounts) will receive a single Prospectus annually. Shareholders who do not want this consolidation to apply to their accounts should contact their Service Agent or the transfer agent.

Legal Matters

Beginning in June 2004, class action lawsuits alleging violations of the federal securities laws were filed against CGMI and a number of its then affiliates, including SBFM, which were then investment adviser or manager to certain of the Funds (the “Managers”), substantially all of the mutual funds then managed by the Managers (the “Defendant Funds”), and Board Members of the Defendant Funds (collectively, the “Defendants”). The complaints alleged, among other things, that CGMI created various undisclosed incentives for its brokers to sell Smith Barney and Salomon Brothers funds. In addition, according to the complaints, the Managers caused the Defendant Funds to pay excessive brokerage commissions to CGMI for steering clients towards proprietary funds. The complaints also alleged that the defendants breached their fiduciary duty to the Defendant Funds by improperly charging Rule 12b-1 fees and by drawing on fund assets to make undisclosed payments of soft dollars and excessive brokerage commissions. The complaints also alleged that the Defendant Funds failed to adequately disclose certain of the allegedly wrongful conduct. The complaints sought injunctive relief and compensatory and punitive damages, rescission of the Defendant Funds’ contracts with the Managers, recovery of all fees paid to the Managers pursuant to such contracts and an award of attorneys’ fees and litigation expenses.

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On December 15, 2004, a consolidated amended complaint (the “Complaint”) was filed alleging substantially similar causes of action. On May 27, 2005, all of the Defendants filed motions to dismiss the Complaint. On July 26, 2006, the court issued a decision and order (1) finding that plaintiffs lacked standing to sue on behalf of the shareholders of the Defendant Funds in which none of the plaintiffs had invested, including Legg Mason Partners Short Duration Municipal Income Fund, and dismissing those Defendant Funds from the case (although stating that they could be brought back into the case if standing as to them could be established), and (2) other than one stayed claim, dismissing all of the causes of action against the remaining Defendants, with prejudice, except for the cause of action under Section 36(b) of the 1940 Act, which the court granted plaintiffs leave to replead as a derivative claim.

On October 16, 2006, plaintiffs filed their Second Consolidated Amended Complaint (“Second Amended Complaint”) which alleges derivative claims on behalf of nine funds identified in the Second Amended Complaint, under Section 36(b) of the 1940 Act, against Citigroup Asset Management, Salomon Brothers Asset Management Inc., SBFM and CGMI as investment advisers to the identified funds, as well as CGMI as a distributor for the identified funds (collectively, the “Second Amended Complaint Defendants”). The Fund was not identified in the Second Amended Complaint. The Second Amended Complaint alleges no claims against any of the Funds or any of their Board Members. Under Section 36(b), the Second Amended Complaint alleges similar facts and seeks similar relief against the Second Amended Complaint Defendants as the Complaint.

The Defendants filed a motion to dismiss the Second Amended Complaint. On December 3, 2007, the Court granted the Defendants’ motion to dismiss, with prejudice. On January 2, 2008, the plaintiffs filed a notice of appeal to the Second Circuit Court of Appeals.

Additional lawsuits arising out of these circumstances and presenting similar allegations and requests for relief may be filed against the Defendant Funds in the future.

***

On May 31, 2005, the SEC issued an order in connection with the settlement of an administrative proceeding against SBFM, the then-investment adviser or manager to the fund and CGMI, a former distributor of the funds, relating to the appointment of an affiliated transfer agent for the Smith Barney family of mutual funds, including the fund (the “Affected Funds”).

The SEC order found that SBFM and CGMI willfully violated Section 206(1) of the Investment Advisers Act of 1940, as amended, and the rules promulgated thereunder (the “Advisers Act”). Specifically, the order found that SBFM and CGMI knowingly or recklessly failed to disclose to the boards of the Affected Funds in 1999 when proposing a new transfer agent arrangement with an affiliated transfer agent that: First Data Investors Services Group (“First Data”), the Affected Funds’ then-existing transfer agent, had offered to continue as transfer agent and do the same work for substantially less money than before; and that Citigroup Asset Management (“CAM”), the Citigroup business unit that, at the time, included the Affected Funds’ investment manager and other investment advisory companies, had entered into a side letter with First Data under which CAM agreed to recommend the appointment of First Data as sub-transfer agent to the affiliated transfer agent in exchange for, among other things, a guarantee by First Data of specified amounts of asset management and investment banking fees to CAM and CGMI. The order also found that SBFM and CGMI willfully violated Section 206(2) of the Advisers Act by virtue of the omissions discussed above and other misrepresentations and omissions in the materials provided to the Affected Funds’ boards, including the failure to make clear that the affiliated transfer agent would earn a high profit for performing limited functions while First Data continued to perform almost all of the transfer agent functions, and the suggestion that the proposed arrangement was in the Affected Funds’ best interests and that no viable alternatives existed. SBFM and CGMI do not admit or deny any wrongdoing or liability. The settlement does not establish wrongdoing or liability for purposes of any other proceeding.

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The SEC censured SBFM and CGMI and ordered them to cease and desist from violations of Sections 206(1) and 206 (2) of the Advisers Act. The order required Citigroup to pay $208.1 million, including $109 million in disgorgement of profits, $19.1 million in interest, and a civil money penalty of $80 million. Approximately $24.4 million has already been paid to the Affected Funds, primarily through fee waivers. The remaining $183.7 million, including the penalty, has been paid to the U.S. Treasury and will be distributed pursuant to a plan submitted for the approval of the SEC. At this time, there is no certainty as to how the above-described proceeds of the settlement will be distributed, to whom such distributions will be made, the methodology by which such distributions will be allocated, and when such distributions will be made. The order also required that transfer agency fees received from the Affected Funds since December 1, 2004, less certain expenses, be placed in escrow and provided that a portion of such fees might be subsequently distributed in accordance with the terms of the order. On April 3, 2006, an aggregate amount of approximately $9 million held in escrow was distributed to the Affected Funds.

The order required SBFM to recommend a new transfer agent contract to the Fund boards within 180 days of the entry of the order; if a Citigroup affiliate submitted a proposal to serve as transfer agent or sub-transfer agent, SBFM and CGMI would have been required, at their expense, to engage an independent monitor to oversee a competitive bidding process. On November 21, 2005, and within the specified timeframe, the Affected Funds’ Boards selected a new transfer agent for the Affected Fund. No Citigroup affiliate submitted a proposal to serve as transfer agent. Under the order, SBFM also must comply with an amended version of a vendor policy that Citigroup instituted in August 2004.

Although there can be no assurance, the manager does not believe that this matter will have a material adverse effect on the Affected Funds.

On December 1, 2005, Citigroup completed the sale of substantially all of its global asset management business, including SBFM, to Legg Mason.

***

Beginning in August 2005, five class action lawsuits alleging violations of federal securities laws and state law were filed against CGMI and SBFM (collectively, the “Defendants”) based on the May 31, 2005 settlement order issued against the Defendants by the SEC as described in above. The complaints seek injunctive relief and compensatory and punitive damages, removal of SBFM as the investment manager for the Smith Barney family of funds, rescission of the Funds’ management and other contracts with SBFM, recovery of all fees paid to SBFM pursuant to such contracts, and an award of attorneys’ fees and litigation expenses. The five actions were subsequently consolidated, and a consolidated complaint was filed.

On September 26, 2007, the United States District Court for the Southern District of New York issued an order dismissing the consolidated complaint, and judgment was later entered. An appeal has been filed and is pending before the U.S. Court of Appeals for the Second Circuit.

***

As previously disclosed, on September 16, 2005, the staff of the SEC informed SBFM and Salomon Brothers Asset Management Inc (“SBAM”) that the staff was considering recommending administrative proceedings against SBFM and SBAM for alleged violations of Section 19(a) and 34(b) of the Investment Company Act (and related Rule 19a-1). On September 27, 2007, SBFM and SBAM, without admitting or denying any findings therein, consented to the entry of an order by the SEC relating to the disclosure by certain

68

closed-end funds previously managed by SBFM or SBAM of the sources of distributions paid by the funds between 2001 and 2004. Each of SBFM and SBAM agreed to pay a fine of $450,000, for which it was indemnified by Citigroup, its former parent. It is not expected that this matter will adversely impact the fund or its current manager.

***

On or about May 30, 2006, John Halebian, a purported shareholder of Citi New York Tax Free Reserves, a series of Legg Mason Partners Money Market Trust, formerly a series of CitiFunds Trust III (the “Subject Trust”), filed a complaint in the United States District Court for the Southern District of New York against the independent trustees of the Subject Trust (Elliot J. Berv, Donald M. Carlton, A. Benton Cocanougher, Mark T. Finn, Stephen Randolph Gross, Diana R. Harrington, Susan B. Kerley, Alan G. Merten and R. Richardson Pettit). The Subject Trust is also named in the complaint as a nominal defendant.

The complaint alleges both derivative claims on behalf of the Subject Trust and class claims on behalf of a putative class of shareholders of the Subject Trust in connection with the 2005 sale of Citigroup’s asset management business to Legg Mason and the related approval of new investment advisory agreements by the trustees and shareholders. In the derivative claim, the plaintiff alleges, among other things, that the independent trustees breached their fiduciary duty to the Subject Trust and its shareholders by failing to negotiate lower fees or seek competing bids from other qualified investment advisers in connection with Citigroup’s sale to Legg Mason. In the claims brought on behalf of the putative class of shareholders, the plaintiff alleges that the independent trustees violated the proxy solicitation requirements of the 1940 Act, and breached their fiduciary duty to shareholders, by virtue of the voting procedures, including “echo voting,” used to obtain approval of the new investment advisory agreements and statements made in a proxy statement regarding those voting procedures. The plaintiff alleges that the proxy statement was misleading because it failed to disclose that the voting procedures violated the 1940 Act. The relief sought includes an award of damages, rescission of the advisory agreement, and an award of costs and attorney fees.

In advance of filing the complaint, Mr. Halebian’s lawyers made written demand for relief on the board of the Subject Trust, and the board’s independent trustees formed a demand review committee to investigate the matters raised in the demand, and subsequently in the complaint, and recommend a course of action to the board. The committee, after a thorough review, has determined that the independent trustees did not breach their fiduciary duties as alleged by Mr. Halebian, and that the action demanded by Mr. Halebian would not be in the best interests of the Subject Trust. The board of the Subject Trust (the trustee who is an “interested person” of the Subject Trust, within the meaning of the 1940 Act, having recused himself from the matter), after receiving and considering the committee’s report and based upon the findings of the committee, subsequently also has so determined and, adopting the recommendation of the committee, has directed counsel to move to dismiss Mr. Halebian’s complaint. A motion to dismiss was filed on October 23, 2006. Opposition papers were filed on or about December 7, 2006. The complaint was dismissed on July 31, 2007. Mr. Halebian filed an appeal in the U.S. Court of Appeals for the Second Circuit. The appeal is pending.

***

The foregoing speaks only as of the date of this SAI. Additional lawsuits presenting allegations and requests for relief arising out of or in connection with any of the foregoing matters may be filed against these and related parties in the future.

69

FINANCIAL STATEMENTS

The audited financial statements of the Fund (Statement of Assets and Liabilities as of December 31, 2007, Statement of Operations for the year ended December 31, 2007, Statements of Changes in Net Assets for each of the years in the two-year period ended December 31, 2007, Financial Highlights for each of the years in the five-year period ended December 31, 2007, and Notes to Financial Statements along with the Report of Independent Registered Public Accounting Firm, each of which is included in the annual report to shareholders), are incorporated by reference into this SAI filed on March 6, 2008; Accession Number 0001193125-08-048789.

70

APPENDIX A

Description of Ratings

The ratings of Moody’s Investors Service, Inc., Standard & Poor’s Ratings Group and Fitch Ratings represent their opinions as to the quality of various debt obligations. It should be emphasized, however, that ratings are not absolute standards of quality. Consequently, debt obligations with the same maturity, coupon and rating may have different yields while debt obligations of the same maturity and coupon with different ratings may have the same yield. As described by the rating agencies, ratings are generally given to securities at the time of issuances. While the rating agencies may from time to time revise such ratings, they undertake no obligation to do so.

Description of Moody’s Investors Service, Inc.’s Long-Term Obligation Ratings:

Moody’s long-term obligation ratings are opinions of the relative credit risk of fixed-income obligations with an original maturity of one year or more. They address the possibility that a financial obligation will not be honored as promised. Such ratings reflect both the likelihood of default and any financial loss suffered in the event of default.

Aaa—Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk.

Aa—Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.

A—Obligations rated A are considered upper-medium grade and are subject to low credit risk.

Baa—Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics.

Ba—Obligations rated Ba are judged to have speculative elements and are subject to substantial credit risk.

B—Obligations rated B are considered speculative and are subject to high credit risk.

Caa—Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk.

Ca—Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.

C—Obligations rated C are the lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest.

Note: Moody’s appends numerical modifiers “1”, “2” and “3” to each generic rating classification from “Aa” through “Caa.” The modifier “1” indicates that the obligation ranks in the higher end of its generic rating category; the modifier “2” indicates a mid-range ranking; and the modifier “3” indicates a ranking in the lower end of that generic rating category.

Description of Moody’s Investors Service, Inc.’s US Municipal and Tax Exempt Ratings:

Municipal Ratings are opinions of the investment quality of issuers and issues in the US municipal and tax-exempt markets. As such, these ratings incorporate Moody’s assessment of the default probability and loss severity of these issuers and issues. The default and loss content for Moody’s municipal long-term rating scale differs from Moody’s general long-term rating scale. (Please refer to Corporate Equivalent Ratings under Policies and Procedures.)

A-1

Municipal Ratings are based upon the analysis of four primary factors relating to municipal finance: economy, debt, finances, and administration/management strategies. Each of the factors is evaluated individually and for its effect on the other factors in the context of the municipality’s ability to repay its debt.

Municipal Long-Term Rating Definitions:

Aaa—Issuers or issues rated Aaa demonstrate the strongest creditworthiness relative to other US municipal or tax-exempt issuers or issues.

Aa—Issuers or issues rated Aa demonstrate very strong creditworthiness relative to other US municipal or tax-exempt issuers or issues.

A—Issuers or issues rated A present above-average creditworthiness relative to other US municipal or tax-exempt issuers or issues.

Baa—Issuers or issues rated Baa represent average creditworthiness relative to other US municipal or tax-exempt issuers or issues.

Ba—Issuers or issues rated Ba demonstrate below-average creditworthiness relative to other US municipal or tax-exempt issuers or issues.

B—Issuers or issues rated B demonstrate weak creditworthiness relative to other US municipal or tax-exempt issuers or issues.

Caa—Issuers or issues rated Caa demonstrate very weak creditworthiness relative to other US municipal or tax-exempt issuers or issues.

Ca—Issuers or issues rated Ca demonstrate extremely weak creditworthiness relative to other US municipal or tax-exempt issuers or issues.

C—Issuers or issues rated C demonstrate the weakest creditworthiness relative to other US municipal or tax-exempt issuers or issues.

Note: Moody’s appends numerical modifiers “1”, “2” and “3” to each generic rating classification from “Aa” through “Caa.” The modifier “1” indicates that the obligation ranks in the higher end of its generic rating category; the modifier “2” indicates a mid-range ranking; and the modifier “3” indicates a ranking in the lower end of that generic rating category.

Description of Moody’s Investors Service, Inc.’s US Municipal Short-Term Debt And Demand Obligation Ratings:

There are three rating categories for short-term municipal obligations that are considered investment grade. These ratings are designated as Municipal Investment Grade (“MIG”) and are divided into three levels—“MIG 1” through “MIG 3.” In addition, those short-term obligations that are of speculative quality are designated “SG,” or speculative grade. MIG ratings expire at the maturity of the obligation.

MIG 1—This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.

MIG 2—This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.

MIG 3—This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.

A-2

SG—This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.

Description of Moody’s Investors Service, Inc.’s Demand Obligation Ratings:

In the case of variable rate demand obligations (“VRDOs”), a two-component rating is assigned; a long or short-term debt rating and a demand obligation rating. The first element represents Moody’s evaluation of the degree of risk associated with scheduled principal and interest payments. The second element represents Moody’s evaluation of the degree of risk associated with the ability to receive purchase price upon demand (“demand feature”), using a variation of the MIG rating scale, the Variable Municipal Investment Grade or VMIG rating. When either the long- or short-term aspect of a VRDO is not rated, that piece is designated NR, e.g., Aaa/NR or NR/VMIG 1. VMIG rating expirations are a function of each issue’s specific structural or credit features.

VMIG 1—This designation denotes superior credit quality. Excellent protection is afforded by the superior short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.

VMIG 2—This designation denotes strong credit quality. Good protection is afforded by the strong short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.

VMIG 3—This designation denotes acceptable credit quality. Adequate protection is afforded by the satisfactory short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.

SG—This designation denotes speculative-grade credit quality. Demand features rated in this category may be supported by a liquidity provider that does not have an investment grade short-term rating or may lack the structural and/or legal protections necessary to ensure the timely payment of purchase price upon demand.

Description of Moody’s Investors Service, Inc.’s Short-Term Prime Ratings:

Moody’s short-term ratings are opinions of the ability of issuers to honor short-term financial obligations. Ratings may be assigned to issuers, short-term programs or to individual short-term debt instruments. Such obligations generally have an original maturity not exceeding thirteen months, unless explicitly noted.

P-1—Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.

P-2—Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.

P-3—Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.

NP—Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.

Note: Canadian issuers rated P-1 or P-2 have their short-term ratings enhanced by the senior-most long-term rating of the issuer, its guarantor or support-provider.

A-3

Description of Standard & Poor’s Ratings Group’s Long-Term Issue Credit Ratings:

Issue credit ratings are based, in varying degrees, on the following considerations: (1) likelihood of payment—capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation; (2) nature of and provisions of the obligation; and (3) protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors’ rights.

The issue rating definitions are expressed in terms of default risk. As such, they pertain to senior obligations of an entity. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. (Such differentiation applies when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.) Accordingly, in the case of junior debt, the rating may not conform exactly with the category definition.

AAA—An obligation rated “AAA” has the highest rating assigned by Standard & Poor’s. The obligor’s capacity to meet its financial commitments on the obligation is extremely strong.

AA—An obligation rated “AA” differs from the highest-rated obligations only to a small degree. The obligor’s capacity to meet its financial obligations is very strong.

A—An obligation rated “A” is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.

BBB—An obligation rated “BBB” exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

BB, B, CCC, CC, and C—Obligations rated “BB”, “B”, “CCC”, “CC”, and “C” are regarded as having significant speculative characteristics. “BB” indicates the least degree of speculation and “C” the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.

BB—An obligation rated “BB” is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions, which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

B—An obligation rated “B” is more vulnerable to nonpayment than obligations rated “BB”, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation.

CCC—An obligation rated “CCC” is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.

CC—An obligation rated “CC” is currently highly vulnerable to nonpayment.

C—A subordinated debt or preferred stock obligation rated “C” is currently highly vulnerable to nonpayment. The “C” rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. A “C” also will be assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that is currently paying.

A-4

D—An obligation rated “D” is in payment default. The “D” rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor’s believes that such payments will be made during such grace period. The “D” rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.

Plus (+) or Minus (–): The ratings from “AA” to “CCC” may be modified by the addition of a plus (+) or minus (–) sign to show relative standing within the major rating categories.

N.R.: This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poor’s does not rate a particular obligation as a matter of policy.

Active Qualifiers (Currently applied and/or outstanding)

i: This subscript is used for issues in which the credit factors, terms, or both, that determine the likelihood of receipt of payment of interest are different from the credit factors, terms or both that determine the likelihood of receipt of principal on the obligation. The “i” subscript indicates that the rating addresses the interest portion of the obligation only. The “i” subscript will always be used in conjunction with the “p” subscript, which addresses likelihood of receipt of principal. For example, a rated obligation could be assigned ratings of “AAAp NRi” indicating that the principal portion is rated “AAA” and the interest portion of the obligation is not rated.

L: Ratings qualified with “L” apply only to amounts invested up to federal deposit insurance limits.

p: This subscript is used for issues in which the credit factors, the terms, or both, that determine the likelihood of receipt of payment of principal are different from the credit factors, terms or both that determine the likelihood of receipt of interest on the obligation. The “p” subscript indicates that the rating addresses the principal portion of the obligation only. The “p” subscript will always be used in conjunction with the “i” subscript, which addresses likelihood of receipt of interest. For example, a rated obligation could be assigned ratings of “AAAp NRi” indicating that the principal portion is rated “AAA” and the interest portion of the obligation is not rated.

pi: Ratings with a “pi” subscript are based on an analysis of an issuer’s published financial information, as well as additional information in the public domain. They do not, however, reflect in-depth meetings with an issuer’s management and are therefore based on less comprehensive information than ratings without a “pi” subscript. Ratings with a “pi” subscript are reviewed annually based on a new year’s financial statements, but may be reviewed on an interim basis if a major event occurs that may affect the issuer’s credit quality.

pr: The letters “pr” indicate that the rating is provisional. A provisional rating assumes the successful completion of the project financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful, timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of or the risk of default upon failure of such completion. The investor should exercise his own judgment with respect to such likelihood and risk.

preliminary: Preliminary ratings are assigned to issues, including financial programs, in the following circumstances. Preliminary ratings may be assigned to obligations, most commonly structured and project finance issues, pending receipt of final documentation and legal opinions. Assignment of a final rating is conditional on the receipt and approval by Standard & Poor’s of appropriate documentation. Changes in the information provided to Standard & Poor’s could result in the assignment of a different rating. In addition, Standard & Poor’s reserves the right not to issue a final rating. Preliminary ratings are assigned to Rule 415 Shelf Registrations. As specific issues, with defined terms, are offered from the master registration, a final rating may be assigned to them in accordance with Standard & Poor’s policies. The final rating may differ from the preliminary rating.

A-5

t: This symbol indicates termination structures that are designed to honor their contracts to full maturity or, should certain events occur, to terminate and cash settle all their contracts before their final maturity date.

Local Currency and Foreign Currency Risks: Country risk considerations are a standard part of Standard & Poor’s analysis for credit ratings on any issuer or issue. Currency of repayment is a key factor in this analysis. An obligor’s capacity to repay foreign currency obligations may be lower than its capacity to repay obligations in its local currency due to the sovereign government’s own relatively lower capacity to repay external versus domestic debt. These sovereign risk considerations are incorporated in the debt ratings assigned to specific issues. Foreign currency issuer ratings are also distinguished from local currency issuer ratings to identify those instances where sovereign risks make them different for the same issuer.

Description of Standard & Poor’s Ratings Group’s Ratings of Notes:

A Standard & Poor’s U.S. municipal note rating reflects the liquidity factors and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:

—Amortization schedule—the larger the final maturity relative to other maturities, the more likely it will be treated as a note; and

—Source of payment—the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.

Note rating symbols are as follows:

SP-1—Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.

SP-2—Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.

SP-3—Speculative capacity to pay principal and interest.

Description of Standard & Poor’s Ratings Group’s Short-Term Issue Credit Ratings:

A-1—Short-term obligation rated “A-1” is rated in the highest category by Standard & Poor’s. The obligor’s capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor’s capacity to meet its financial commitments is extremely strong.

A-2—Short-term obligation rated “A-2” is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor’s capacity to meet its financial commitment on the obligation is satisfactory.

A-3—Short-term obligation rated “A-3” exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

B—A short-term obligation rated “B” is regarded as having significant speculative characteristics. Ratings of “B-1”, “B-2”, and “B-3” may be assigned to indicate finer distinctions within the “B” category. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

A-6

B-1—A short-term obligation rated “B-1” is regarded as having significant speculative characteristics, but the obligor has a relatively stronger capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.

B-2—A short-term obligation rated “B-2” is regarded as having significant speculative characteristics, and the obligor has an average speculative-grade capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.

B-3—A short-term obligation rated “B-3” is regarded as having significant speculative characteristics, and the obligor has a relatively weaker capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.

C—A short-term obligation rated “C” is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.

D—A short-term obligation rated “D” is in payment default. The “D” rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor’s believes that such payments will be made during such grace period. The “D” rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.

Active Qualifiers (Currently applied and/or outstanding)

i: This subscript is used for issues in which the credit factors, terms, or both, that determine the likelihood of receipt of payment of interest are different from the credit factors, terms or both that determine the likelihood of receipt of principal on the obligation. The “i” subscript indicates that the rating addresses the interest portion of the obligation only. The “i” subscript will always be used in conjunction with the “p” subscript, which addresses likelihood of receipt of principal. For example, a rated obligation could be assigned ratings of “AAAp NRi” indicating that the principal portion is rated “AAA” and the interest portion of the obligation is not rated.

L: Ratings qualified with “L” apply only to amounts invested up to federal deposit insurance limits.

p: This subscript is used for issues in which the credit factors, the terms, or both, that determine the likelihood of receipt of payment of principal are different from the credit factors, terms or both that determine the likelihood of receipt of interest on the obligation. The “p” subscript indicates that the rating addresses the principal portion of the obligation only. The “p” subscript will always be used in conjunction with the “i” subscript, which addresses likelihood of receipt of interest. For example, a rated obligation could be assigned ratings of “AAAp NRi” indicating that the principal portion is rated “AAA” and the interest portion of the obligation is not rated.

pi: Ratings with a “pi” subscript are based on an analysis of an issuer’s published financial information, as well as additional information in the public domain. They do not, however, reflect in-depth meetings with an issuer’s management and are therefore based on less comprehensive information than ratings without a “pi” subscript. Ratings with a “pi” subscript are reviewed annually based on a new year’s financial statements, but may be reviewed on an interim basis if a major event occurs that may affect the issuer’s credit quality.

pr: The letters “pr” indicate that the rating is provisional. A provisional rating assumes the successful completion of the project financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful, timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of or the risk of default upon failure of such completion. The investor should exercise his own judgment with respect to such likelihood and risk.

A-7

preliminary: Preliminary ratings are assigned to issues, including financial programs, in the following circumstances. Preliminary ratings may be assigned to obligations, most commonly structured and project finance issues, pending receipt of final documentation and legal opinions. Assignment of a final rating is conditional on the receipt and approval by Standard & Poor’s of appropriate documentation. Changes in the information provided to Standard & Poor’s could result in the assignment of a different rating. In addition, Standard & Poor’s reserves the right not to issue a final rating. Preliminary ratings are assigned to Rule 415 Shelf Registrations. As specific issues, with defined terms, are offered from the master registration, a final rating may be assigned to them in accordance with Standard & Poor’s policies. The final rating may differ from the preliminary rating.

t: This symbol indicates termination structures that are designed to honor their contracts to full maturity or, should certain events occur, to terminate and cash settle all their contracts before their final maturity date. Local Currency and Foreign Currency Risks: Country risk considerations are a standard part of Standard & Poor’s analysis for credit ratings on any issuer or issue. Currency of repayment is a key factor in this analysis. An obligor’s capacity to repay foreign currency obligations may be lower than its capacity to repay obligations in its local currency due to the sovereign government’s own relatively lower capacity to repay external versus domestic debt. These sovereign risk considerations are incorporated in the debt ratings assigned to specific issues. Foreign currency issuer ratings are also distinguished from local currency issuer ratings to identify those instances where sovereign risks make them different for the same issuer.

Description of Standard & Poor’s Ratings Group’s Ratings of Commercial Paper:

A Standard & Poor commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Ratings are graded into several categories, ranging from “A” for the highest-quality obligations to “D” for the lowest. These categories are as follows:

A-1—This designation indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus sign (+) designation.

A-2—Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated “A-1”.

A-3—Issues carrying this designation have an adequate capacity for timely payment. They are, however, more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations.

B—Issues rated “B” are regarded as having only speculative capacity for timely payment.

C—This rating is assigned to short-term debt obligations with a doubtful capacity for payment.

D—Debt rated “D” is in payment default. The “D” rating category is used when interest payments of principal payments are not made on the date due, even if the applicable grace period has not expired, unless Standard & Poor’s believes such payments will be made during such grace period.

Description of Standard & Poor’s Ratings Group’s Dual Ratings:

Standard & Poor’s assigns “dual” ratings to all debt issues that have a put option or demand feature as part of their structure.

The first rating addresses the likelihood of repayment of principal and interest as due, and the second rating addresses only the demand feature. The long-term debt rating symbols are used for bonds to denote the long-term maturity and the commercial paper rating symbols for the put option (for example, “AAA/A-1+”). With short-term demand debt, Standard & Poor’s note rating symbols are used with the commercial paper rating symbols (for example, “SP-1+/A-1+”).

A-8

Description of Fitch Ratings International Long-Term Credit Ratings:

International Long-Term Credit Ratings (“LTCR”) may also be referred to as “Long-Term Ratings.” When assigned to most issuers, it is used as a benchmark measure of probability of default and is formally described as an Issuer Default Rating (IDR). The major exception is within Public Finance, where IDRs will not be assigned as market convention has always focused on timeliness and does not draw analytical distinctions between issuers and their underlying obligations. When applied to issues or securities, the LTCR may be higher or lower than the issuer rating (IDR) to reflect relative differences in recovery expectations. The following rating scale applies to foreign currency and local currency ratings.

Investment Grade

AAA—Highest credit quality. “AAA” ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.

AA—Very high credit quality. “AA” ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.

A—High credit quality. “A” ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.

BBB—Good credit quality. “BBB” ratings indicate that there is currently expectations of low credit risk. The capacity for payment of financial commitments is considered adequate, but adverse changes in circumstances and economic conditions are more likely to impair this capacity. This is the lowest investment-grade category.

Speculative Grade

BB—Speculative. “BB” ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade.

B—Highly speculative. For issuers and performing obligations, “B” ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment. For individual obligations, “B” ratings may indicate distressed or defaulted obligations with potential for extremely high recoveries. Such obligations would possess a Recovery Rating of “R1” (outstanding).

CCC—For issuers and performing obligations, default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic conditions. For individual obligations, may indicate distressed or defaulted obligations with potential for average to superior levels of recovery. Differences in credit quality may be denoted by plus/minus distinctions. Such obligations typically would possess a Recovery Rating of “R2” (superior), or “R3” (good) or “R4” (average).

CC—For issuers and performing obligations, default of some kind appears probable. For individual obligations, may indicate distressed or defaulted obligations with a Recovery Rating of “R4” (average) or “R5” (below average).

C—For issuers and performing obligations, default is imminent. For individual obligations, may indicate distressed or defaulted obligations with potential for below-average to poor recoveries. Such obligations would possess a Recovery Rating of “R6” (poor).

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RD—Indicates an entity that has failed to make due payments (within the applicable grace period) on some but not all material financial obligations, but continues to honor other classes of obligations.

D—Indicates an entity or sovereign that has defaulted on all of its financial obligations. Default generally is defined as one of the following: (i) failure of an obligor to make timely payment of principal and/or interest under the contractual terms of any financial obligation; (ii) the bankruptcy filings, administration, receivership, liquidation or other winding-up or cessation of business of an obligor; or (iii) the distressed or other coercive exchange of an obligation, where creditors were offered securities with diminished structural or economic terms compared with the existing obligation.

Default ratings are not assigned prospectively; within this context, non-payment on an instrument that contains a deferral feature or grace period will not be considered a default until after the expiration of the deferral or grace period.

Issuers will be rated “D” upon a default. Defaulted and distressed obligations typically are rated along the continuum of “C” to “B” ratings categories, depending upon their recovery prospects and other relevant characteristics. Additionally, in structured finance transactions, where analysis indicates that an instrument is irrevocably impaired such that it is not expected to meet pay interest and/or principal in full in accordance with the terms of the obligation’s documentation during the life of the transaction, but where no payment default in accordance with the terms of the documentation is imminent, the obligation may be rated in the “B” or “CCC-C” categories.

Default is determined by reference to the terms of the obligations’ documentation. Fitch will assign default ratings where it has reasonably determined that payment has not been made on a material obligation in accordance with the requirements of the obligation’s documentation, or where it believes that default ratings consistent with Fitch’s published definition of default are the most appropriate ratings to assign.

Description of Fitch Ratings International Short-Term Credit Ratings:

International Short-Term Credit Ratings may also be referred to as “Short-Term Ratings.” The following ratings scale applies to foreign currency and local currency ratings. A short-term rating has a time horizon of less than 13 months for most obligations, or up to three years for U.S. public finance, in line with industry standards, to reflect unique characteristics of bond, tax, and revenue anticipation notes that are commonly issued with terms up to three years. Short-term ratings thus places greater emphasis on the liquidity necessary to meet financial commitments in a timely manner.

F1—Highest credit quality. Indicates the strongest capacity for timely payment of financial commitments; may have an added “+” to denote any exceptionally strong credit feature.

F2—Good credit quality. A satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.

F3—Fair credit quality. The capacity for timely payment of financial commitments is adequate; however, near-term adverse changes could result in a reduction to non-investment grade.

B—Speculative. Minimal capacity for timely payment of financial commitments, plus vulnerability to near-term adverse changes in financial and economic conditions.

C—High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon a sustained, favorable business and economic environment.

D—Default. Indicates an entity or sovereign that has defaulted on all of its financial obligations.

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Notes to Fitch Ratings International Long-Term and Short-Term Credit Ratings:

The modifiers “+” or “-” may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the “AAA” Long-term rating category, to categories below “CCC”, or to Short-term ratings other than “F1”. (The +/- modifiers are only used to denote issues within the CCC category, whereas issuers are only rated CCC without the use of modifiers.)

Rating Watch: Ratings are placed on Rating Watch to notify investors that there is a reasonable probability of a rating change and the likely direction of such change. These are designated as “Positive”, indicating a potential upgrade, “Negative”, for a potential downgrade, or “Evolving”, if ratings may be raised, lowered or maintained. Rating Watch is typically resolved over a relatively short period.

Rating Outlook: An Outlook indicates the direction a rating is likely to move over a one to two-year period. Outlooks may be positive, stable or negative. A positive or negative Rating Outlook does not imply a rating change is inevitable. Similarly, ratings for which outlooks are ‘stable’ could be upgraded or downgraded before an outlook moves to positive or negative if circumstances warrant such an action. Occasionally, Fitch Ratings may be unable to identify the fundamental trend. In these cases, the Rating Outlook may be described as evolving.

Program ratings (such as the those assigned to MTN shelf registrations) relate only to standard issues made under the program concerned; it should not be assumed that these ratings apply to every issue made under the program. In particular, in the case of non-standard issues, i.e. those that are linked to the credit of a third party or linked to the performance of an index, ratings of these issues may deviate from the applicable program rating.

Variable rate demand obligations and other securities which contain a short-term ‘put’ or other similar demand feature will have a dual rating, such as AAA/F1+. The first rating reflects the ability to meet long-term principal and interest payments, whereas the second rating reflects the ability to honor the demand feature in full and on time.

Interest Only: Interest Only ratings are assigned to interest strips. These ratings do not address the possibility that a security holder might fail to recover some or all of its initial investment due to voluntary or involuntary principal repayments.

Principal Only: Principal Only ratings address the likelihood that a security holder will receive their initial principal investment either before or by the scheduled maturity date.

Rate of Return: Ratings also may be assigned to gauge the likelihood of an investor receiving a certain predetermined internal rate of return without regard to the precise timing of any cash flows.

“PIF”: Paid-in -Full; denotes a security that is paid-in-full, matured, called, or refinanced.

“NR” indicates that Fitch Ratings does not rate the issuer or issue in question.

“Withdrawn”: A rating is withdrawn when Fitch Ratings deems the amount of information available to be inadequate for rating purposes, or when an obligation matures, is called, or refinanced, or for any other reason Fitch Ratings deems sufficient.

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APPENDIX B

Western Asset Management Company Proxy Voting Policy

BACKGROUND

An investment adviser is required to adopt and implement policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with fiduciary duties and SEC Rule 206(4)-6 under the Investment Advisers Act of 1940 (“Advisers Act”). The authority to vote the proxies of our clients is established through investment management agreements or comparable documents. In addition to SEC requirements governing advisers, long-standing fiduciary standards and responsibilities have been established for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the investment manager.

POLICY

As a fixed income only manager, the occasion to vote proxies is very rare. However, the Firm has adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and SEC Rule 206(4)-6 under the Investment Advisers Act of 1940 (“Advisers Act”). In addition to SEC requirements governing advisers, our proxy voting policies reflect the long-standing fiduciary standards and responsibilities for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the Investment Manager.

While the guidelines included in the procedures are intended to provide a benchmark for voting standards, each vote is ultimately cast on a case-by-case basis, taking into consideration the Firm’s contractual obligations to our clients and all other relevant facts and circumstances at the time of the vote (such that these guidelines may be overridden to the extent the Firm deems appropriate).

In exercising its voting authority, Western Asset will not consult or enter into agreements with officers, directors or employees of Legg Mason Inc. or any of its affiliates (other than Western Asset Management Company Limited) regarding the voting of any securities owned by its clients.

PROCEDURE

Responsibility and Oversight

The Western Asset Legal and Compliance Department (“Compliance Department”) is responsible for administering and overseeing the proxy voting process. The gathering of proxies is coordinated through the Corporate Actions area of Investment Support (“Corporate Actions”). Research analysts and portfolio managers are responsible for determining appropriate voting positions on each proxy utilizing any applicable guidelines contained in these procedures.

Client Authority

At account start-up, or upon amendment of an IMA, the applicable client IMA are similarly reviewed. If an agreement is silent on proxy voting, but contains an overall delegation of discretionary authority or if the account represents assets of an ERISA plan, Western Asset will assume responsibility for proxy voting. The Client Account Transition Team maintains a matrix of proxy voting authority.

Proxy Gathering

Registered owners of record, client custodians, client banks and trustees (“Proxy Recipients”) that receive proxy materials on behalf of clients should forward them to Corporate Actions. Proxy Recipients for new clients (or, if

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Western Asset becomes aware that the applicable Proxy Recipient for an existing client has changed, the Proxy Recipient for the existing client) are notified at start-up of appropriate routing to Corporate Actions of proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. If Western Asset personnel other than Corporate Actions receive proxy materials, they should promptly forward the materials to Corporate Actions.

Proxy Voting

Once proxy materials are received by Corporate Actions, they are forwarded to the Legal and Compliance Department for coordination and the following actions:

a. Proxies are reviewed to determine accounts impacted.

b. Impacted accounts are checked to confirm Western Asset voting authority.

c. Legal and Compliance Department staff reviews proxy issues to determine any material conflicts of interest. (See conflicts of interest section of these procedures for further information on determining material conflicts of interest.)

d. If a material conflict of interest exists, (i) to the extent reasonably practicable and permitted by applicable law, the client is promptly notified, the conflict is disclosed and Western Asset obtains the client’s proxy voting instructions, and (ii) to the extent that it is not reasonably practicable or permitted by applicable law to notify the client and obtain such instructions (e.g., the client is a mutual fund or other commingled vehicle or is an ERISA plan client), Western Asset seeks voting instructions from an independent third party.

e. Legal and Compliance Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers determine votes on a case-by-case basis taking into account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, Western Asset may vote the same proxy differently for different clients. The analyst’s or portfolio manager’s basis for their decision is documented and maintained by the Legal and Compliance Department.

f. Legal and Compliance Department staff votes the proxy pursuant to the instructions received in (d) or (e) and returns the voted proxy as indicated in the proxy materials.

Timing

Western Asset personnel act in such a manner to ensure that, absent special circumstances, the proxy gathering and proxy voting steps noted above can be completed before the applicable deadline for returning proxy votes.

Recordkeeping

Western Asset maintains records of proxies voted pursuant to Section 204-2 of the Advisers Act and ERISA DOL Bulletin 94-2. These records include:

a. A copy of Western Asset’s policies and procedures.

b. Copies of proxy statements received regarding client securities.

c. A copy of any document created by Western Asset that was material to making a decision how to vote proxies.

d. Each written client request for proxy voting records and Western Asset’s written response to both verbal and written client requests.

e. A proxy log including:

1. Issuer name;

2. Exchange ticker symbol of the issuer’s shares to be voted;

B-2

3. Council on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted;

4. A brief identification of the matter voted on;

5. Whether the matter was proposed by the issuer or by a shareholder of the issuer;

6. Whether a vote was cast on the matter;

7. A record of how the vote was cast; and

8. Whether the vote was cast for or against the recommendation of the issuer’s management team.

Records are maintained in an easily accessible place for five years, the first two in Western Asset’s offices.

Disclosure

Western Asset’s proxy policies are described in the firm’s Part II of Form ADV. Clients will be provided a copy of these policies and procedures upon request. In addition, upon request, clients may receive reports on how their proxies have been voted.

Conflicts of Interest

All proxies are reviewed by the Legal and Compliance Department for material conflicts of interest. Issues to be reviewed include, but are not limited to:

1. Whether Western (or, to the extent required to be considered by applicable law, its affiliates) manages assets for the company or an employee group of the company or otherwise has an interest in the company;

2. Whether Western or an officer or director of Western or the applicable portfolio manager or analyst responsible for recommending the proxy vote (together, “Voting Persons”) is a close relative of or has a personal or business relationship with an executive, director or person who is a candidate for director of the company or is a participant in a proxy contest; and

3. Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders.

Voting Guidelines

Western Asset’s substantive voting decisions turn on the particular facts and circumstances of each proxy vote and are evaluated by the designated research analyst or portfolio manager. The examples outlined below are meant as guidelines to aid in the decision making process.

Guidelines are grouped according to the types of proposals generally presented to shareholders. Part I deals with proposals which have been approved and are recommended by a company’s board of directors; Part II deals with proposals submitted by shareholders for inclusion in proxy statements; Part III addresses issues relating to voting shares of investment companies; and Part IV addresses unique considerations pertaining to foreign issuers.

I. Board Approved Proposals

The vast majority of matters presented to shareholders for a vote involve proposals made by a company itself that have been approved and recommended by its board of directors. In view of the enhanced corporate governance practices currently being implemented in public companies, Western Asset generally votes in support of decisions reached by independent boards of directors. More specific guidelines related to certain board-approved proposals are as follows:

1. Matters relating to the Board of Directors

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Western Asset votes proxies for the election of the company’s nominees for directors and for board-approved proposals on other matters relating to the board of directors with the following exceptions:

a. Votes are withheld for the entire board of directors if the board does not have a majority of independent directors or the board does not have nominating, audit and compensation committees composed solely of independent directors.

b. Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director.

c. Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences.

d. Votes are cast on a case-by-case basis in contested elections of directors.

2. Matters relating to Executive Compensation

Western Asset generally favors compensation programs that relate executive compensation to a company’s long-term performance. Votes are cast on a case-by-case basis on board-approved proposals relating to executive compensation, except as follows:

a. Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for stock option plans that will result in a minimal annual dilution.

b. Western Asset votes against stock option plans or proposals that permit replacing or repricing of underwater options.

c. Western Asset votes against stock option plans that permit issuance of options with an exercise price below the stock’s current market price.

d. Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for employee stock purchase plans that limit the discount for shares purchased under the plan to no more than 15% of their market value, have an offering period of 27 months or less and result in dilution of 10% or less.

3. Matters relating to Capitalization

The management of a company’s capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstances of each company. As a result, Western Asset votes on a case-by-case basis on board-approved proposals involving changes to a company’s capitalization except where Western Asset is otherwise withholding votes for the entire board of directors.

a. Western Asset votes for proposals relating to the authorization of additional common stock.

b. Western Asset votes for proposals to effect stock splits (excluding reverse stock splits).

c. Western Asset votes for proposals authorizing share repurchase programs.

4. Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions

Western Asset votes these issues on a case-by-case basis on board-approved transactions.

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5. Matters relating to Anti-Takeover Measures

Western Asset votes against board-approved proposals to adopt anti-takeover measures except as follows:

a. Western Asset votes on a case-by-case basis on proposals to ratify or approve shareholder rights plans.

b. Western Asset votes on a case-by-case basis on proposals to adopt fair price provisions.

6. Other Business Matters

Western Asset votes for board-approved proposals approving such routine business matters such as changing the company’s name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting.

a. Western Asset votes on a case-by-case basis on proposals to amend a company’s charter or bylaws.

b. Western Asset votes against authorization to transact other unidentified, substantive business at the meeting.

II. Shareholder Proposals

SEC regulations permit shareholders to submit proposals for inclusion in a company’s proxy statement. These proposals generally seek to change some aspect of a company’s corporate governance structure or to change some aspect of its business operations. Western Asset votes in accordance with the recommendation of the company’s board of directors on all shareholder proposals, except as follows:

1. Western Asset votes for shareholder proposals to require shareholder approval of shareholder rights plans.

2. Western Asset votes for shareholder proposals that are consistent with Western Asset’s proxy voting guidelines for board-approved proposals.

3. Western Asset votes on a case-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors.

III. Voting Shares of Investment Companies

Western Asset may utilize shares of open or closed-end investment companies to implement its investment strategies. Shareholder votes for investment companies that fall within the categories listed in Parts I and II above are voted in accordance with those guidelines.

1. Western Asset votes on a case-by-case basis on proposals relating to changes in the investment objectives of an investment company taking into account the original intent of the fund and the role the fund plays in the clients’ portfolios.

2. Western Asset votes on a case-by-case basis all proposals that would result in increases in expenses (e.g., proposals to adopt 12b-1 plans, alter investment advisory arrangements or approve fund mergers) taking into account comparable expenses for similar funds and the services to be provided.

IV. Voting Shares of Foreign Issuers

In the event Western Asset is required to vote on securities held in non-U.S. issuers—i.e. issuers that are incorporated under the laws of a foreign jurisdiction and that are not listed on a U.S. securities exchange or the NASDAQ stock market, the following guidelines are used, which are premised on the existence of a sound corporate governance and disclosure framework. These guidelines, however, may not be appropriate under some circumstances for foreign issuers and therefore apply only where applicable.

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1. Western Asset votes for shareholder proposals calling for a majority of the directors to be independent of management.

2. Western Asset votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees.

3. Western Asset votes for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of U.S. stock exchanges, and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated.

4. Western Asset votes on a case-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of a company’s outstanding common stock where shareholders do not have preemptive rights, or (2) the issuance of common stock in excess of 100% of a company’s outstanding common stock where shareholders have preemptive rights.

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PROSPECTUS

April 28, 2008

The Securities and Exchange Commission has not approved or disapproved these securities or determined whether this Prospectus is accurate or complete. Any statement to the contrary is a crime.

Legg Mason Partners Investment Grade Bond Fund

Class A, B, C, FI, R and I Shares

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

Supplement to SAI dated 05/20/2008

SUPPLEMENT DATED MAY 20, 2008

TO THE STATEMENT OF ADDITIONAL INFORMATION

OF EACH FUND INDICATED BELOW

The following supplements, and replaces any contrary information in, the Statement of Additional Information of each fund listed in the Appendix to this supplement.

Effective January 1, 2008, the manager is permitted to recapture amounts previously voluntarily forgone or reimbursed by the manager to the fund during the same fiscal year if the fund’s total annual operating expenses have fallen to a level below the voluntary fee waiver/reimbursement (“expense cap”) shown in the fee table of the fund’s prospectus. In no case will the manager recapture any amount that would result, on any particular fund business day, in the fund’s total annual operating expenses exceeding the expense cap. The Board has been apprised of the expense cap and recapture arrangement.

Appendix

Fund Name	Date of Statement of Additional Information
Legg Mason Partners Equity Trust
Legg Mason Partners Aggressive Growth Fund	December 20, 2007
Legg Mason Partners All Cap Fund	August 28, 2007
Legg Mason Partners Appreciation Fund	April 28, 2008
Legg Mason Partners Capital and Income Fund	April 28, 2008
Legg Mason Partners Capital Fund	April 28, 2008
Legg Mason Partners Classic Values Fund	March 28, 2008
Legg Mason Partners Convertible Fund	November 1, 2007
Legg Mason Partners Diversified Large Cap Growth Fund	February 20, 2008
Legg Mason Partners Dividend Strategy Fund	February 20, 2008
Legg Mason Partners Emerging Markets Equity Fund	February 20, 2008
Legg Mason Partners Equity Fund	April 28, 2008
Legg Mason Partners Financial Services Fund	July 27, 2007
Legg Mason Partners Fundamental Value Fund	January 29, 2008
Legg Mason Partners Global Equity Fund	April 28, 2008
Legg Mason Partners International All Cap Opportunity Fund	February 28, 2008
Legg Mason Partners Investors Value Fund	April 28, 2008
Legg Mason Partners Large Cap Growth Fund	April 1, 2008
Legg Mason Partners Lifestyle Allocation 30%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 50%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 70%	May 1, 2008

Fund Name	Date of Statement of Additional Information
Legg Mason Partners Lifestyle Allocation 85%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 100%	May 1, 2008
Legg Mason Partners Lifestyle Income Fund	May 1, 2008
Legg Mason Partners Mid Cap Core Fund	March 20, 2008
Legg Mason Partners S&P 500 Index Fund	April 28, 2008
Legg Mason Partners Small Cap Core Fund	April 28, 2008
Legg Mason Partners Small Cap Growth Fund	April 28, 2008
Legg Mason Partners Small Cap Value Fund	January 29, 2008
Legg Mason Partners Social Awareness Fund	April 16, 2007, as supplemented January 7, 2008
Legg Mason Partners U.S. Large Cap Equity Fund	April 28, 2008
Legg Mason Partners 130/30 U.S. Large Cap Equity Fund	November 7, 2007
Legg Mason Partners Income Trust
Legg Mason Partners Adjustable Rate Income Fund	September 28, 2007
Legg Mason Partners California Municipals Fund	June 28, 2007
Legg Mason Partners Core Bond Fund	December 1, 2007
Legg Mason Partners Core Plus Bond Fund	December 1, 2007
Legg Mason Partners Diversified Strategic Income Fund	December 1, 2007
Legg Mason Partners Global High Yield Bond Fund	April 28, 2008
Legg Mason Partners Global Income Fund	September 21, 2007
Legg Mason Partners Government Securities Fund	April 28, 2008
Legg Mason Partners High Income Fund	December 1, 2007
Legg Mason Partners Inflation Management Fund	February 20, 2008
Legg Mason Partners Intermediate Maturity California Municipals Fund	March 20, 2008
Legg Mason Partners Intermediate Maturity New York Municipals Fund	March 20, 2008
Legg Mason Partners Intermediate-Term Municipals Fund	July 27, 2007
Legg Mason Partners Investment Grade Bond Fund	April 28, 2008
Legg Mason Partners Managed Municipals Fund	June 28, 2007
Legg Mason Partners Massachusetts Municipals Fund	March 20, 2008
Legg Mason Partners Municipal High Income Fund	December 1, 2007
Legg Mason Partners New Jersey Municipals Fund	July 27, 2007
Legg Mason Partners New York Municipals Fund	July 27, 2007
Legg Mason Partners Oregon Municipals Fund	August 28, 2007
Legg Mason Partners Pennsylvania Municipals Fund	July 27, 2007
Legg Mason Partners Short Duration Municipal Income Fund	February 20, 2008
Legg Mason Partners Short/Intermediate U.S. Government Fund	April 28, 2008
Legg Mason Partners Short-Term Investment Grade Bond Fund	April 28, 2008
Western Asset Emerging Markets Debt Portfolio	June 28, 2007
Western Asset Global High Yield Bond Portfolio	June 28, 2007

Fund Name	Date of Statement of Additional Information
Legg Mason Partners Money Market Trust
Citi California Tax Free Reserves1	December 7, 2007
Citi Cash Reserves1	December 7, 2007
Citi Connecticut Tax Free Reserves1	December 7, 2007
Citi New York Tax Free Reserves1	December 7, 2007
Citi Tax Free Reserves1	December 7, 2007
Citi U.S. Treasury Reserves1	December 7, 2007
Western Asset Money Market Fund	April 28, 2008
Western Asset Government Money Market Fund	April 28, 2008
Western Asset Municipal Money Market Fund	July 27, 2007
Western Asset California Municipal Money Market Fund	July 27, 2007
Western Asset Massachusetts Municipal Money Market Fund	July 27, 2007
Western Asset New York Municipal Money Market Fund	July 27, 2007
Legg Mason Partners Institutional Trust
Citi Institutional Cash Reserves1	December 7, 2007
Citi Institutional Enhanced Income Fund1	December 7, 2007
Citi Institutional Liquid Reserves1	December 7, 2007
Citi Institutional Tax Free Reserves1	December 7, 2007
Citi Institutional U.S. Treasury Reserves1	December 7, 2007
Western Asset Institutional Government Money Market Fund	September 28, 2007, restated April 18, 2008
Western Asset Institutional Money Market Fund	September 28, 2007, restated April 18, 2008
Western Asset Institutional Municipal Money Market Fund	September 28, 2007, restated April 18, 2008
Legg Mason Partners Premium Money Market Trust
Citi Premium Liquid Reserves1	December 7, 2007
Citi Premium U.S. Treasury Reserves1	December 7, 2007

¹ “Citi” is a service mark of Citigroup, licensed for use by Legg Mason as the name of funds. Legg Mason and its affiliates, as well as the fund’s investment manager, are not affiliated with Citigroup. Investments in the fund are not bank deposits or obligations of Citibank.

Supplement to SAI dated 08/11/2008

LEGG MASON PARTNERS EQUITY TRUST

LEGG MASON PARTNERS INCOME TRUST

LEGG MASON PARTNERS INSTITUTIONAL TRUST

SUPPLEMENT DATED AUGUST 11, 2008

TO THE

PROSPECTUSES

AND STATEMENTS OF ADDITIONAL INFORMATION

OF THE

FUNDS INDICATED BELOW

The following replaces any contrary information in the Prospectus and Statement of Additional Information of each fund.

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 2:00 p.m. Eastern time in valuing such securities or assets.

Fund Name	Date of Current Prospectus
Legg Mason Partners Equity Trust
Legg Mason Partners 130/30 U.S. Large Cap Equity Fund	November 7, 2007
Legg Mason Partners Aggressive Growth Fund	December 20, 2007
Legg Mason Partners All Cap Fund	August 28, 2007
Legg Mason Partners Appreciation Fund	April 28, 2008
Legg Mason Partners Capital and Income Fund	April 28, 2008
Legg Mason Partners Capital Fund	April 28, 2008
Legg Mason Partners Convertible Fund	November 1, 2007
Legg Mason Partners Diversified Large Cap Growth Fund	February 20, 2008
Legg Mason Partners Dividend Strategy Fund	February 20, 2008
Legg Mason Partners Emerging Markets Equity Fund	February 20, 2008
Legg Mason Partners Equity Fund	April 28, 2008
Legg Mason Partners Financial Services Fund	July 20, 2008

Fund Name	Date of Current Prospectus
Legg Mason Partners Fundamental Value Fund	January 29, 2008
Legg Mason Partners Global Equity Fund	April 28, 2008
Legg Mason Partners International All Cap Opportunity Fund	February 28, 2008
Legg Mason Partners Investors Value Fund	April 28, 2008
Legg Mason Partners Large Cap Growth Fund	April 1, 2008
Legg Mason Partners Lifestyle Allocation 100%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 30%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 50%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 70%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 85%	May 1, 2008
Legg Mason Partners Lifestyle Income Fund	May 1, 2008
Legg Mason Partners Mid Cap Core Fund	March 20, 2008
Legg Mason Partners Small Cap Core Fund	April 28, 2008
Legg Mason Partners Small Cap Growth Fund	April 28, 2008
Legg Mason Partners Small Cap Value Fund	January 29, 2008
Legg Mason Partners Social Awareness Fund	May 30, 2008
Legg Mason Partners S & P 500 Index Fund	April 28, 2008
Legg Mason Partners Income Trust
Legg Mason Partners Core Bond Fund	December 1, 2007
Legg Mason Partners Core Plus Bond Fund	December 1, 2007
Legg Mason Partners Diversified Strategic Income Fund	December 1, 2007
Legg Mason Partners Global High Yield Bond Fund	April 28, 2008
Legg Mason Partners Global Income Fund	April 28, 2008
Legg Mason Partners High Income Fund	December 1, 2008
Legg Mason Partners Inflation Management Fund	February 20, 2008
Legg Mason Partners Short-Term Investment Grade Bond Fund	April 28, 2008
Western Asset Emerging Markets Debt Portfolio	February 20, 2008
Western Asset Global High Yield Bond Portfolio	April 28, 2008
Legg Mason Partners Institutional Trust
SMASh Series C Fund	February 20, 2008 as Amended April 10, 2008
SMASh Series EC Fund	February 20, 2008 as Amended April 10, 2008
SMASh Series M Fund	February 20, 2008 as Amended April 10, 2008
SMASh Series MEC Fund	February 20, 2008 as Amended April 10, 2008

Supplement to SAI dated 09/02/2008

Supplement Dated September 2, 2008

to the Prospectus and Statement of Additional Information

Dated April 28, 2008

for

Legg Mason Partners Income Trust

Legg Mason Partners Short-Term Investment Grade Bond Fund

(the “Fund”)

Effective September 2, 2008, the name of the Fund is Legg Mason Partners Short-Term Bond Fund. The Fund’s current investment objective, strategies and management remain unchanged.

Supplement to SAI dated 02/27/2009

LEGG MASON PARTNERS INCOME TRUST

LEGG MASON PARTNERS EQUITY TRUST

SUPPLEMENT DATED FEBRUARY 27, 2009 TO THE PROSPECTUSES AND STATEMENTS OF ADDITIONAL INFORMATION OF THE FUNDS LISTED IN SCHEDULE A

The following supplements information in the Prospectus and Statement of Additional Information concerning Letters of Intent:

Effective February 27, 2009, purchases made within 90 days prior to the date of a Letter of Intent will no longer be considered eligible to be treated as purchases made under such letter for the purpose of receiving a reduced sales charge. Such purchases will continue to be credited toward your Letter of Intent asset goal.

Investors who have entered into a Letter of Intent prior to the date of this supplement will continue to be eligible to treat such purchases as purchases made under the Letter of Intent.

For more information and to determine which shares may be credited toward your Letter of Intent asset goal, please contact your Service Agent.

Schedule A

Fund Name	Date of Prospectus and SAI
LEGG MASON PARTNERS EQUITY TRUST
Legg Mason Partners Aggressive Growth Fund	December 15, 2008
Legg Mason Partners All Cap Fund	August 8, 2008
Legg Mason Partners Appreciation Fund	April 28, 2008
Legg Mason Partners Capital and Income Fund	April 28, 2008
Legg Mason Partners Capital Fund	April 28, 2008
Legg Mason Partners Convertible Fund	November 7, 2008
Legg Mason Partners Equity Fund	April 28, 2008
Legg Mason Partners Financial Services Fund	July 20, 2008
Legg Mason Partners Fundamental Value Fund	January 28, 2009
Legg Mason Partners Global Equity Fund	April 28, 2008

Fund Name	Date of Prospectus and SAI
Legg Mason Partners Investors Value Fund	April 28, 2008
Legg Mason Partners Large Cap Growth Fund	April 28, 2008
Legg Mason Partners Lifestyle Allocation 30%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 50%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 70%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 85%	May 1, 2008
Legg Mason Partners Lifestyle Allocation 100%	May 1, 2008
Legg Mason Partners Lifestyle Income Fund	May 1, 2008
Legg Mason Partners Mid Cap Core Fund	March 20, 2008
Legg Mason Partners Small Cap Core Fund	April 28, 2008
Legg Mason Partners Small Cap Growth Fund	April 28, 2008
Legg Mason Partners Small Cap Value Fund	January 28, 2009
Legg Mason Partners Social Awareness Fund	May 30, 2008
Legg Mason Partners Target Retirement 2015	September 2, 2008
Legg Mason Partners Target Retirement 2020	September 2, 2008
Legg Mason Partners Target Retirement 2025	September 2, 2008
Legg Mason Partners Target Retirement 2030	September 2, 2008
Legg Mason Partners Target Retirement 2035	September 2, 2008
Legg Mason Partners Target Retirement 2040	September 2, 2008
Legg Mason Partners Target Retirement 2045	September 2, 2008
Legg Mason Partners Target Retirement 2050	September 2, 2008
Legg Mason Partners Target Retirement Fund	September 2, 2008
Legg Mason Partners U.S. Large Cap Equity Fund	April 28, 2008
LEGG MASON PARTNERS INCOME TRUST
Legg Mason Partners Adjustable Rate Income Fund	September 12, 2008
Legg Mason Partners California Municipals Fund	June 11, 2008
Legg Mason Partners Core Bond Fund	November 25, 2008
Legg Mason Partners Core Plus Bond Fund	November 25, 2008
Legg Mason Partners Strategic Income Fund	November 25, 2008
Legg Mason Partners Global High Yield Bond Fund	April 28, 2008
Legg Mason Partners Government Securities Fund	April 28, 2008

Fund Name	Date of Prospectus and SAI
Legg Mason Partners High Income Fund	November 25, 2008
Legg Mason Partners Intermediate Maturity California Municipals Fund	March 20, 2008
Legg Mason Partners Intermediate Maturity New York Municipals Fund	March 20, 2008
Legg Mason Partners Intermediate-Term Municipals Fund	July 20, 2008
Legg Mason Partners Corporate Bond Fund	April 28, 2008
Legg Mason Partners Managed Municipals Fund	June 11, 2008
Legg Mason Partners Massachusetts Municipals Fund	March 20, 2008
Legg Mason Partners Municipal High Income Fund	November 25, 2008
Legg Mason Partners New Jersey Municipals Fund	July 20, 2008
Legg Mason Partners New York Municipals Fund	July 20, 2008
Legg Mason Partners Oregon Municipals Fund	August 8, 2008
Legg Mason Partners Pennsylvania Municipals Fund	July 20, 2008
Legg Mason Partners Short-Term Bond Fund	April 28, 2008
Western Asset Emerging Markets Debt Portfolio	February 2, 2009

Supplement to SAI dated 03/13/2009

LEGG MASON PARTNERS INCOME TRUST

LEGG MASON PARTNERS MONEY MARKET TRUST

SUPPLEMENT DATED MARCH 13, 2009

TO THE STATEMENTS OF ADDITIONAL INFORMATION

OF THE FUNDS

LISTED IN SCHEDULE A BELOW

Unless otherwise noted, effective at the close of business on April 3, 2009, the following supersedes and replaces any contrary information in the fund’s Statement of Additional Information”.

Letter of Intent—helps you take advantage of breakpoints in Class A sales charges. You may purchase Class A shares of funds sold by the Distributor over a 13-month period and pay the same sales charge, if any, as if all shares had been purchased at once. You have a choice of five Asset Level Goal amounts, as follows:

(1) $100,000

(2) $250,000

(3) $500,000

(4) $750,000

(5) $1,000,000

Each time you make a Class A purchase under a Letter of Intent, you will be entitled to pay the sales charge that is applicable to the amount of your Asset Level Goal. For example, if your Asset Level Goal is $100,000, any Class A investments you make under a Letter of Intent would be subject to the sales charge of the specific fund you are investing in for purchases of $100,000. Sales charges and breakpoints vary among the funds sold by the Distributor.

When you enter into a Letter of Intent, you agree to purchase in Eligible Accounts over a thirteen (13) month period Eligible Fund Purchases in an amount equal to the Asset Level Goal you have selected, less any Eligible Prior Purchases. For this purpose, shares are valued at the public offering price (including any sales charge paid) calculated as of the date of purchase, plus any appreciation in the value of the shares as of the date of calculation, except for Eligible Prior Purchases, which are valued at current value as of the date of calculation. Your commitment will be met if at any time during

the 13-month period the value, as so determined, of eligible holdings is at least equal to your Asset Level Goal. All reinvested dividends and distributions on shares acquired under the Letter will be credited towards your Asset Level Goal. You may include any Eligible Fund Purchases towards the Letter, including shares of classes other than Class A shares. However, a Letter of Intent will not entitle you to a reduction in the sales charge payable on any shares other than Class A shares, and if the shares are subject to a contingent deferred sales charge, you will still be subject to that contingent deferred sales charge with respect to those shares. You must make reference to the Letter of Intent each time you make a purchase under the Letter.

Eligible Fund Purchases. Generally, any shares of a fund sold by the Distributor may be credited towards your Asset Level Goal. Shares of money market funds sold by the Distributor acquired by exchange from other funds offered with a sales charge may be credited toward your letter of intent asset goal. Certain funds and certain classes of shares of other funds sold by the Distributor may not be credited toward your letter of intent asset goal until May 18, 2009.

This list may change from time to time. Investors should check with their Service Agent to see which funds may be eligible.

Eligible Accounts. Purchases may be made through any account in your name, or in the name of your spouse or your children under the age of 21. You may need to provide certain records, such as account statements, in order to verify your eligibility for reduced sales charges. Contact your Service Agent to see which accounts may be credited toward your Asset Level Goal.

Eligible Prior Purchases. You may also credit towards your Asset Level Goal any Eligible Fund Purchases made in Eligible Accounts at any time prior to entering into the Letter of Intent that have not been sold or redeemed, based on the current price of those shares as of the date of calculation.

Increasing the Amount of the Letter. You may at any time increase your Asset Level Goal. You must, however, contact your Service Agent, or if you purchase your shares directly through the transfer agent, contact the transfer agent, prior to making any purchases in an amount in excess of your current Asset Level Goal. Upon such an increase, you will be credited by way of

2

additional shares at the then current offering price for the difference between: (a) the aggregate sales charges actually paid for shares already purchased under the Letter of intent and (b) the aggregate applicable sales charges for the increased Asset Level Goal. The 13-month period during which the Asset Level Goal must be achieved will remain unchanged.

Sales and Exchanges. Shares acquired pursuant to a Letter of Intent, other than Escrowed Shares as defined below, may be redeemed or exchanged at any time, although any shares that are redeemed prior to meeting your Asset Level Goal will no longer count towards meeting your Asset Level Goal. However, complete liquidation of purchases made under a Letter of Intent prior to meeting the Asset Level Goal will result in the cancellation of the Letter. See “Failure to Meet Asset Level Goal” below. Exchanges in accordance with the fund’s prospectus are permitted, and shares so exchanged will continue to count towards your Asset Level Goal, as long as the exchange results in an Eligible Fund Purchase.

Cancellation of Letter of Intent. You may cancel a Letter of Intent by notifying your Service Agent in writing, or if you purchase your shares directly through the transfer agent, by notifying the transfer agent in writing. The Letter will be automatically cancelled if all shares are sold or redeemed as set forth above. See “Failure to Meet Asset Level Goal” below.

Escrowed Shares. Shares equal in value to five percent (5%) of your Asset Level Goal as of the date your Letter of Intent (or the date of any increase in the amount of the Letter) is accepted, will be held in escrow during the term of your Letter. The Escrowed Shares will be included in the total shares owned as reflected in your account statement and any dividends and capital gains distributions applicable to the Escrowed Shares will be credited to your account and counted towards your Asset Level Goal or paid in cash upon request. The Escrowed Shares will be released from escrow if all the terms of your Letter are met.

Failure to Meet Asset Level Goal. If the total assets under your Letter of Intent within its 13-month term are less than your Asset Level Goal whether because you made insufficient Eligible Fund Purchases, redeemed all of your holdings or cancelled the Letter before reaching your Asset Level Goal, you will be liable for the difference between: (a) the sales charge actually paid and (b) the sales charge that would have applied if you had not entered into the Letter. You may, however, be entitled to any breakpoints that would have

3

been available to you under the accumulation privilege. An appropriate number of shares in your account will be redeemed to realize the amount due. For these purposes, by entering into a Letter of Intent, you irrevocably appoint your Service Agent, or if you purchase your shares directly through the transfer agent, the transfer agent, as your attorney-in-fact for the purposes of holding the Escrowed Shares and surrendering shares in your account for redemption. If there are insufficient assets in your account, you will be liable for the difference. Any Escrowed Shares remaining after such redemption will be released to your account.

Transfer Agent

Boston Financial Data Services, Inc. (the “transfer agent”), located at 2 Heritage Drive, North Quincy, Massachusetts 02171, serves as the fund’s transfer agent. Under the transfer agency agreement, the transfer agent maintains the shareholder account records for the fund, handles certain communications between shareholders and the fund and distributes dividends and distributions payable by the fund. For these services, the transfer agent receives a monthly fee computed on the basis of the number of shareholder accounts it maintains for the fund during the month, and is reimbursed for out-of-pocket expenses.

Schedule A

Fund Name	Date of Statement of Additional Information
LEGG MASON PARTNERS INCOME TRUST
Legg Mason Partners Adjustable Rate Income Fund	September 12, 2008
Legg Mason Partners California Municipals Fund	June 11, 2008
Legg Mason Partners Core Bond Fund	November 25, 2008
Legg Mason Partners Core Plus Bond Fund	November 25, 2008
Legg Mason Partners Strategic Income Fund	November 25, 2008
Legg Mason Partners Global High Yield Bond Fund	April 28, 2008
Legg Mason Partners Global Inflation Management Fund	February 28, 2009
Legg Mason Partners Government Securities Fund	April 28, 2008

4

Fund Name	Date of Statement of Additional Information
Legg Mason Partners High Income Fund	November 25, 2008
Legg Mason Partners Intermediate Maturity California Municipals Fund	March 20, 2008
Legg Mason Partners Intermediate Maturity New York Municipals Fund	March 20, 2008
Legg Mason Partners Intermediate-Term Municipals Fund	July 20, 2008
Legg Mason Partners Corporate Bond Fund	April 28, 2008
Legg Mason Partners Managed Municipals Fund	June 11, 2008
Legg Mason Partners Massachusetts Municipals Fund	March 20, 2008
Legg Mason Partners Municipal High Income Fund	November 25, 2008
Legg Mason Partners New Jersey Municipals Fund	July 20, 2008
Legg Mason Partners New York Municipals Fund	July 20, 2008
Legg Mason Partners Oregon Municipals Fund	August 8, 2008
Legg Mason Partners Pennsylvania Municipals Fund	July 20, 2008
Legg Mason Partners Short Duration Municipal Income Fund	February 28, 2009
Legg Mason Partners Short-Term Bond Fund	April 28, 2008
Western Asset Emerging Markets Debt Portfolio	February 2, 2009
Western Asset Global High Yield Bond Portfolio	February 2, 2009
LEGG MASON PARTNERS MONEY MARKET TRUST
Western Asset AMT Tax Free Money Market Fund	September 16, 2008
Western Asset Money Market Fund	August 1, 2008
Western Asset Government Money Market Fund	August 1, 2008
Western Asset Municipal Money Market Fund	August 1, 2008
Western Asset California Municipal Money Market Fund	August 1, 2008

5

Fund Name	Date of Statement of Additional Information
Western Asset Massachusetts Municipal Money Market Fund	August 1, 2008
Western Asset New York Municipal Money Market Fund	August 1, 2008
Western Asset Connecticut Money Market Fund Class A and Class I shares each a class of CitiSM Connecticut Tax Free Reserves	December 31, 2008

6

EX-99.17(E)

Exhibit 17(e)

Annual Report to Shareholders 1

To Our Shareholders,

We are pleased to provide you with Legg Mason Income Trust’s annual report for the year ended December 31, 2008, combining reports for the Legg Mason Investment Grade Income Portfolio and Legg Mason Limited Duration Bond Portfolio.

The following table summarizes key statistics for the Primary Class of each portfolio, as of December 31, 2008:

	SEC YieldA		Average Life	Net Asset Value Per Share
Investment Grade	12.29	%	11.74 years	$	6.96
Limited Duration	6.92	%	4.96 years	$	7.95

^A SEC yields reported are for the 30 days ended December 31, 2008. Yields are subject to change at any time.

For the year ended December 31, 2008, total returns for the Primary Class of shares of the Investment Grade Income and Limited Duration Portfolios were -26.19% and -16.52%, respectively. Total returns for the Institutional Class of shares of the Investment Grade Income and Limited Duration Portfolios were -25.71% and -16.09%, respectively.

The performance data quoted represent past performance and do not guarantee future results. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information, please visit www.leggmason.com/individualinvestors. The investment return and principal value of the Funds will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.

Information about each Fund’s performance over longer periods of time is shown in the respective Performance Information sections within this report. For more information about the Funds’ share classes included in this report, please contact your financial advisor.

PricewaterhouseCoopers LLP, the Funds’ independent registered public accounting firm, has completed its annual examination of the Funds, and audited financial statements for the fiscal year ended December 31, 2008 are included in this report.

Many Primary Class shareholders invest regularly in Fund shares on a dollar cost averaging basis. Most do so by authorizing automatic, monthly transfers of $50 or more from their bank checking or brokerage accounts. Dollar cost averaging is a convenient and sensible way to invest, as it encourages continued purchases over time regardless of fluctuating price levels. Of course, it does not ensure a profit nor protect against declines in the value of your investment. Your financial advisor will be happy to help you establish a dollar cost averaging account should you wish to do so.

2 Annual Report to Shareholders

This is my first letter to you as Chairman of the Funds. In November, the Funds’ Board of Directors elected David Odenath as President and me as Chairman of the Board of Directors of the Funds. At that meeting, Jack Curley, who served as Chairman of all the Legg Mason Funds, retired after many years of exemplary service. Jack embodied the finest qualities of a good chairman; he was ethical, hard-working and perceptive. He had a deep understanding of mutual fund issues and always acted in the shareholders’ best interests. I have big shoes to fill and I will work hard to do so. We wish Jack all the best and thank him for his many years of service.

On behalf of the Board and the entire team at Legg Mason, we appreciate your support.

Sincerely,

Mark R. Fetting	David Odenath
Chairman	President

February 27, 2009

Annual Report to Shareholders 3

Management’s Discussion of Fund Performance

Legg Mason Investment Grade Income Portfolio

Total returns for the Fund for various periods ended December 31, 2008 are presented below, along with those of comparative indices:

			Average Annual Total Returns
	One Year		Five Years		Ten Years		Since InceptionA
Investment Grade:
Primary Class	–26.19	%	–2.92	%	+1.86	%	+5.39	%
Institutional Class	–25.71	%	–2.41	%	+2.40	%	+3.65	%
Barclays Capital U.S. Credit Bond IndexB	–3.08	%	+2.65	%	+4.85	%	+7.41	%
Lipper Corporate Debt Funds BBB Rated
Category AverageC	–9.44	%	+1.05	%	+3.61	%	+6.28	%

The performance data quoted represent past performance and do not guarantee future results. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information for the Primary and Institutional Classes, please visit www.leggmason.com/individualinvestors. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.

The gross expense ratios for the Primary and Institutional Classes were 1.30% and 0.74%, respectively, as indicated in the Fund’s most current prospectus dated May 1, 2008 and do not reflect fee waivers or reimbursements. These expenses include management fees, 12b-1 distribution and service fees and other expenses.

The net expense ratios for the Primary and Institutional Classes were 1.00%, and 0.50%, respectively, as indicated in the Fund’s prospectus dated May 1, 2008 and reflect voluntary fee waivers and/or reimbursements, which are currently expected to continue until April 30, 2009, but which may be reduced or terminated at any time.

For the 12 months ended December 31, 2008, Primary Class shares of Legg Mason Investment Grade Income Portfolio returned -26.19%. The Fund’s unmanaged benchmark, the Barclays Capital U.S. Credit Bond Index (the “Index”), returned -3.08% for the same period. The Lipper Corporate Debt Funds BBB Rated Category Average returned -9.44% over the same time frame.

4 Annual Report to Shareholders

Issue selection had a negative impact on relative performance due, in large part, to 19 of the portfolio’s 20 largest overweights underperforming. Sub-sector allocation also had a negative impact on relative performance due, in large part, to the portfolio’s overweights in basic Industry, Financials and Energy, which returned - -10.07%, -8.37% and -5.84%, respectively, as well as underweights to Non-Corporates, Consumer Noncyclicals and Capital Goods, which returned 6.68%, 4.12% and -1.27%, respectively. In addition, credit quality allocation had a negative impact on relative performance. This was due to the portfolio’s overweight to BBB-rated issues, which returned -8.67%, and an underweight to AAA-rated issues, which returned 8.15%.

Western Asset Management Company

January 20, 2009

^A The inception date of the Primary Class is August 7, 1987. The inception date of the Institutional Class is December 1, 1995. Index returns are for periods beginning July 31, 1987. Although it is not possible to invest in an index, it is possible to purchase investment vehicles designed to track the performance of certain indices.

^B The Barclays Capital (formerly Lehman Brothers) U.S. Credit Bond Index is an index composed of corporate and non-corporate debt issues that are investment grade (rated Baa3/BBB- or higher).

^C Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. The Lipper Corporate Debt Funds BBB Rated Category Average is comprised of the Fund’s peer group of mutual funds.

Annual Report to Shareholders 5

Expense Example

Legg Mason Investment Grade Income Portfolio

As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution and service (12b-1) fees on Primary Class shares; and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Each example is based on an investment of $1,000 invested on July 1, 2008, and held through December 31, 2008. The ending values assume dividends were reinvested at the time they were paid.

Actual Expenses

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

Hypothetical Example for Comparison Purposes

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

	Beginning Account Value 7/1/08		Ending Account Value 12/31/08		Expenses PaidA During the Period 7/1/08 to 12/31/08
Primary Class:
Actual	$	1,000.00	$	761.30	$	4.43
Hypothetical (5% return before expenses)		1,000.00		1,020.11		5.08
Institutional Class:
Actual	$	1,000.00	$	764.40	$	2.22
Hypothetical (5% return before expenses)		1,000.00		1,022.62		2.54

^A These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratios of 1.00%, and .50% for the Primary Class and Institutional Class, respectively, multiplied by the average values over the period, multiplied by the number of days in the most recent fiscal half-year (184), and divided by 366.

6 Annual Report to Shareholders

Performance Information

Legg Mason investment Grade Income Portfolio

The graphs on the following pages compare the Fund’s total returns to that of a closely matched broad-based securities market index. The graphs illustrate the cumulative total return of an initial $10,000 investment in Primary Class shares of the Fund and an initial $1,000,000 investment in Institutional Class shares of the Fund for the periods indicated. The lines for the Fund represent the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling securities. The lines representing the securities market index do not take into account any transaction costs associated with buying and selling portfolio securities in the index or other administrative expenses.

Total return measures investment performance in terms of appreciation or depreciation in a fund’s net asset value per share, plus dividends and any capital gain distributions. Both the Fund’s results and the index’s results assume reinvestment of all dividends and distributions at the time they were paid. Average annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results.

Annual Report to Shareholders 7

Growth of a $10,000 Investment — Primary Class

Periods Ended December 31, 2008

	Cumulative Total Return		Average Annual Total Return
One Year	-26.19	%	-26.19	%
Five Years	-13.78	%	-2.92	%
Ten Years	+20.21	%	+1.86	%

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

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

^A This index consists of publicly issued US corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements. To qualify, bonds must be SEC-registered. The index includes both corporate (industrial, utility and finance) and non-corporate (sovereign, supranational, foreign agency, and foreign local government) sectors. Formerly: Lehman Credit Bond Index. The name change is a result of Barclays’ purchase of Lehman Brothers in September 2008.

8 Annual Report to Shareholders

Performance Information — Continued

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

Periods Ended December 31, 2008

	Cumulative Total Return		Average Annual Total Return
One Year	-25.71	%	-25.71	%
Five Years	-11.46	%	-2.41	%
Ten Years	+26.71	%	+2.40	%

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

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

Annual Report to Shareholders 9

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

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

Maturity Schedule (as a percentage of the portfolio)

^B The Fund is actively managed. As a result, the composition of its portfolio holdings and sectors is subject to change at any time. The charts do not include derivatives such as Futures Contracts and Options Written.

^C Standard & Poor’s Ratings Service provides capital markets with credit ratings for the evaluation and assessment of credit risk. These ratings are the opinions of S&P and not absolute measures of quality or guarantees of performance.

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

10 Annual Report to Shareholders

Performance Information — Continued

Legg Mason Investment Grade

Spread Duration

December 31, 2008

Economic Exposure

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

EM	— Emerging Markets
LCBI	— Barclays U.S. Capital Credit Bond Index
HY	— High Yield
IG Credit	— Investment Grade Credit
ABS	— Asset Backed Securities

Annual Report to Shareholders 11

Legg Mason Investment Grade

Effective Duration

December 31, 2008

Interest Rate Exposure

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

EM	— Emerging Markets
LCBI	— Barclays U.S. Capital Credit Bond Index
HY	— High Yield
IG Credit	— Investment Grade Credit
ABS	— Asset Backed Securities

12 Annual Report to Shareholders

Portfolio of Investments

Investment Grade Income Portfolio

December 31, 2008

	Rate		Maturity Date	Par/Shares		Value
Long-Term Securities — 97.3%
Corporate Bonds and Notes — 76.6%
Aerospace and Defense — 1.1%
L-3 Communications Corp.	7.625	%	6/15/12	$	1,000,000	$	977,500
United Technologies Corp.	6.125	%	2/1/19		200,000		213,979
United Technologies Corp.	5.400	%	5/1/35		1,140,000		1,074,344
							2,265,823
Airlines — 0.2%
Continental Airlines Inc.	6.545	%	2/2/19		149,004		119,203
Continental Airlines Inc.	7.256	%	3/15/20		427,062		328,838
							448,041
Automobiles — 1.1%
DaimlerChrysler NA Holding Corp.	8.500	%	1/18/31		600,000		438,733
Ford Motor Co.	7.450	%	7/16/31		1,975,000		553,000
Ford Motor Co.	8.900	%	1/15/32		370,000		88,800
General Motors Corp.	8.250	%	7/15/23		650,000		107,250
General Motors Corp.	8.375	%	7/15/33		6,190,000		1,083,250
							2,271,033
Beverages — 0.3%
Foster’s Finance Corp.	4.875	%	10/1/14		840,000		721,875	A
Building Products — N.M.
American Standard Inc.	8.250	%	6/1/09		37,000		37,225
American Standard Inc.	7.625	%	2/15/10		5,000		5,000
							42,225
Capital Markets — 5.0%
BankAmerica Capital III	5.323	%	1/15/27		585,000		310,192	B
Goldman Sachs Capital II	5.793	%	12/29/49		2,755,000		1,059,085	C
Lehman Brothers Holdings Capital Trust VII	5.857	%	11/29/49		3,100,000		310	C,D
Lehman Brothers Holdings Inc.	6.500	%	7/19/17		2,000,000		200	D
Merrill Lynch and Co. Inc.	6.050	%	8/15/12		540,000		532,753

Annual Report to Shareholders 13

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Capital Markets — Continued
Merrill Lynch and Co. Inc.	5.700	%	5/2/17	$	2,400,000	$	2,126,294
Merrill Lynch and Co. Inc.	6.400	%	8/28/17		1,210,000		1,212,259
Merrill Lynch and Co. Inc.	6.110	%	1/29/37		910,000		818,022
Morgan Stanley	5.050	%	1/21/11		400,000		384,198
Morgan Stanley	5.250	%	11/2/12		750,000		682,106
Morgan Stanley	4.750	%	4/1/14		65,000		49,523
Morgan Stanley	6.625	%	4/1/18		1,050,000		921,154
The Bear Stearns Cos. Inc.	6.400	%	10/2/17		440,000		457,238
The Bear Stearns Cos. Inc.	7.250	%	2/1/18		590,000		646,555
The Goldman Sachs Group Inc.	6.345	%	2/15/34		2,025,000		1,469,449
							10,669,338
Chemicals — 0.4%
The Dow Chemical Co.	7.375	%	11/1/29		800,000		753,422
Commercial Banks — 7.4%
CBA Capital Trust I	5.805	%	6/30/49		3,510,000		2,356,509	A
Comerica Capital Trust II	6.576	%	2/20/37		990,000		397,436	C
KeyBank NA	5.800	%	7/1/14		5,000		4,401
Rabobank Capital Funding Trust II	5.260	%	12/31/49		320,000		169,290	A,C
Rabobank Capital Funding Trust III	5.254	%	10/21/49		3,120,000		1,710,612	A,C
RBS Capital Trust III	5.512	%	9/30/49		4,020,000		1,607,027	C
SunTrust Bank	5.000	%	9/1/15		770,000		712,265
SunTrust Capital VIII	6.100	%	12/15/36		1,550,000		1,091,216	C
SunTrust Preferred Capital I	5.853	%	12/15/49		1,100,000		594,000	C
UnionBanCal Corp.	5.250	%	12/16/13		785,000		668,696
Wachovia Capital Trust III	5.800	%	3/15/42		2,580,000		1,522,200	C
Wachovia Corp.	5.625	%	10/15/16		2,000,000		1,826,994
Wachovia Corp.	5.750	%	6/15/17		580,000		577,298

14 Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Commercial Banks — Continued
Wells Fargo Capital X	5.950	%	12/15/36	$	1,260,000	$	1,079,880
Wells Fargo Capital XIII	7.700	%	12/29/49		1,500,000		1,237,966	C
							15,555,790
Commercial Services and Supplies — 0.3%
Waste Management Inc.	7.375	%	5/15/29		690,000		588,889
Consumer Finance — 7.1%
American Express Co.	6.800	%	9/1/66		3,930,000		2,034,368	C
Capital One Financial Corp.	6.750	%	9/15/17		670,000		648,945
Ford Motor Credit Co.	7.375	%	2/1/11		2,390,000		1,817,504
Ford Motor Credit Co.	7.246	%	6/15/11		6,828,000		4,506,480	B
GMAC LLC	7.500	%	12/31/13		2,687,000		1,961,510	A
GMAC LLC	0.000	%	6/15/15		40,000		6,753	E
GMAC LLC	8.000	%	12/31/18		348,000		174,000	A
GMAC LLC	8.000	%	11/1/31		2,465,000		1,465,171	A
Nelnet Inc.	7.400	%	9/29/36		1,310,000		392,796	C
SLM Corp.	5.000	%	10/1/13		1,400,000		1,001,728
SLM Corp.	8.450	%	6/15/18		1,290,000		1,019,901
							15,029,156
Diversified Financial Services — 10.9%
AGFC Capital Trust I	6.000	%	1/15/67		860,000		205,408	A,C
AIG SunAmerica Global Financing VI	6.300	%	5/10/11		5,170,000		4,445,528	A
BAC Capital Trust XI	6.625	%	5/23/36		1,000,000		924,062
BAC Capital Trust XIV	5.630	%	3/15/49		2,730,000		1,093,791	C
Bank of America Corp.	8.000	%	12/29/49		1,540,000		1,107,703	C
Beaver Valley II Funding	9.000	%	6/1/17		996,000		933,740
Capital One Bank	6.500	%	6/13/13		690,000		614,865
Capmark Financial Group Inc.	5.875	%	5/10/12		1,000,000		340,991
Chase Capital II	3.693	%	2/1/27		1,980,000		1,034,411	B
Citigroup Capital XXI	8.300	%	12/21/57		970,000		748,100	C

Annual Report to Shareholders 15

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Diversified Financial Services — Continued
Citigroup Inc.	6.125	%	8/25/36	$	1,000,000	$	895,795
Citigroup Inc.	8.400	%	4/29/49		375,000		247,609	C
General Electric Capital Corp.	6.750	%	3/15/32		5,000		5,316
General Electric Capital Corp.	6.375	%	11/15/67		2,040,000		1,282,281	C
Glen Meadow Pass-Through Certificates	6.505	%	2/12/67		860,000		384,500	A,C
HSBC Finance Capital Trust IX	5.911	%	11/30/35		2,500,000		1,046,010	C
HSBC Finance Corp.	5.500	%	1/19/16		1,260,000		1,196,623
ILFC E-Capital Trust II	6.250	%	12/21/65		2,320,000		968,862	A,C
JPMorgan Chase and Co.	4.891	%	9/1/15		1,035,000		1,039,958	C
JPMorgan Chase and Co.	6.125	%	6/27/17		325,000		319,840
TNK-BP Finance SA	7.875	%	3/13/18		310,000		155,000	A
UBS Preferred Funding
Trust V	6.243	%	5/15/49		3,030,000		1,654,756	C
ZFS Finance USA Trust II	6.450	%	12/15/65		4,990,000		2,330,574	A,C
							22,975,723
Diversified Telecommunication Services — 2.5%
AT&T Corp.	8.000	%	11/15/31		1,200,000		1,507,362
AT&T Inc.	5.100	%	9/15/14		760,000		747,070
AT&T Inc.	5.600	%	5/15/18		500,000		509,072
Embarq Corp.	7.082	%	6/1/16		930,000		716,100
Verizon Global Funding Corp.	7.750	%	6/15/32		375,000		414,695
Verizon Global Funding Corp.	5.850	%	9/15/35		1,350,000		1,343,182
							5,237,481
Electric Utilities — 4.1%
Commonwealth Edison Co.	5.800	%	3/15/18		1,590,000		1,437,055
Energy Future Holdings Corp.	10.875	%	11/1/17		130,000		92,300	A

16 Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Electric Utilities — Continued
Energy Future Holdings Corp.	11.250	%	11/1/17	$	2,930,000	$	1,421,050	A,F
FirstEnergy Corp.	7.375	%	11/15/31		2,565,000		2,426,531
Pacific Gas and Electric Co.	6.050	%	3/1/34		1,900,000		2,017,912
The Cleveland Electric Illuminating Co.	7.880	%	11/1/17		850,000		873,182
The Detroit Edison Co.	5.200	%	10/15/12		310,000		305,836
							8,573,866
Energy Equipment and Services — 1.1%
CenterPoint Energy Resources Corp.	7.875	%	4/1/13		1,010,000		935,557
EEB International Ltd.	8.750	%	10/31/14		790,000		732,725	A
Pride International Inc.	7.375	%	7/15/14		800,000		744,000
							2,412,282
Food and Staples Retailing — 0.6%
Safeway Inc.	6.250	%	3/15/14		120,000		120,622
The Kroger Co.	8.000	%	9/15/29		1,000,000		1,129,665
							1,250,287
Food Products — 0.8%
Ahold Finance USA Inc.	8.250	%	7/15/10		960,000		954,796
Tyson Foods Inc.	7.850	%	4/1/16		1,040,000		769,600	G
							1,724,396
Gas Utilities — 0.2%
Southern Natural Gas Co.	5.900	%	4/1/17		480,000		380,380	A
Health Care Equipment and Supplies — 0.3%
Hospira Inc.	6.050	%	3/30/17		840,000		682,263
Health Care Providers and Services — 5.5%
Cardinal Health Inc.	5.800	%	10/15/16		1,100,000		995,146
Coventry Health Care Inc.	5.950	%	3/15/17		1,150,000		599,544

Annual Report to Shareholders 17

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Health Care Providers and Services — Continued
HCA Inc.	6.300	%	10/1/12	$	1,790,000	$	1,261,950
HCA Inc.	6.250	%	2/15/13		2,130,000		1,331,250
HCA Inc.	5.750	%	3/15/14		150,000		90,750
HCA Inc.	9.125	%	11/15/14		1,100,000		1,020,250
HCA Inc.	9.250	%	11/15/16		1,380,000		1,266,150
Humana Inc.	6.450	%	6/1/16		600,000		474,388
Quest Diagnostics Inc.	5.125	%	11/1/10		565,000		548,435
UnitedHealth Group Inc.	6.000	%	11/15/17		1,610,000		1,439,234
Universal Health Services Inc.	7.125	%	6/30/16		1,450,000		1,251,536
WellPoint Inc.	5.875	%	6/15/17		1,560,000		1,419,810
							11,698,443
Independent Power Producers and Energy Traders — 1.2%
Dynegy Holdings Inc.	8.750	%	2/15/12		1,690,000		1,487,200
TXU Corp.	6.500	%	11/15/24		2,730,000		965,841
							2,453,041
Industrial Conglomerates — 0.7%
Tyco International Ltd. / Tyco International Finance SA	6.875	%	1/15/21		2,051,000		1,585,983
Insurance — 4.3%
Ace Ina Holdings Inc.	5.700	%	2/15/17		410,000		367,624
Allstate Corp.	6.500	%	5/15/57		1,450,000		815,348	C
American International Group Inc.	6.250	%	3/15/37		230,000		85,968
ASIF Global Financing XIX	4.900	%	1/17/13		90,000		72,247	A
Everest Reinsurance Holdings Inc.	6.600	%	5/15/37		760,000		310,177	C
Hartford Financial Services Group Inc.	8.125	%	6/15/38		825,000		434,362	C
Liberty Mutual Group	5.750	%	3/15/14		720,000		465,436	A

18 Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Insurance — Continued
Liberty Mutual Group	7.800	%	3/15/37	$	810,000	$	363,489	A
MetLife Inc.	6.400	%	12/15/36		3,325,000		1,995,000	C
Prudential Financial Inc.	8.875	%	6/15/38		910,000		586,249	C
The Chubb Corp.	6.375	%	3/29/37		910,000		564,375	C
The Travelers Cos. Inc.	6.250	%	3/15/37		1,790,000		1,172,516	C
The Travelers Cos. Inc.	6.250	%	6/15/37		710,000		682,644
Willis North America Inc.	5.125	%	7/15/10		760,000		620,424
Willis North America Inc.	5.625	%	7/15/15		660,000		483,125
							9,018,984
IT Services — 0.3%
Electronic Data Systems Corp.	7.450	%	10/15/29		570,000		617,492
Leisure Equipment and Products — 0.6%
Eastman Kodak Co.	7.250	%	11/15/13		500,000		322,500
Hasbro Inc.	6.300	%	9/15/17		970,000		917,177	I
							1,239,677
Media — 3.7%
Clear Channel Communications Inc.	4.400	%	5/15/11		1,210,000		296,450
Clear Channel Communications Inc.	5.500	%	9/15/14		500,000		60,000
Comcast Cable Holdings LLC	7.125	%	2/15/28		180,000		170,225
Comcast Corp.	6.950	%	8/15/37		1,800,000		1,895,494
Comcast Corp.	6.400	%	5/15/38		750,000		748,247
News America Inc.	6.550	%	3/15/33		1,495,000		1,340,365
Omnicom Group Inc.	0.000	%	7/1/38		300,000		271,125	E,J
Time Warner Entertainment Co. LP	8.375	%	7/15/33		505,000		509,610
Time Warner Inc.	6.875	%	5/1/12		500,000		480,348

Annual Report to Shareholders 19

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Media — Continued
Time Warner Inc.	9.125	%	1/15/13	$	1,130,000	$	1,119,837
Time Warner Inc.	7.700	%	5/1/32		1,015,000		1,016,251
							7,907,952
Metals and Mining — 2.8%
Alcoa Inc.	6.000	%	7/15/13		260,000		235,088
Freeport-McMoRan Copper & Gold Inc.	8.375	%	4/1/17		4,520,000		3,706,400
GTL Trade Finance Inc.	7.250	%	10/20/17		2,232,000		1,872,335	A
							5,813,823
Multi-Utilities — 0.1%
DTE Energy Co.	6.350	%	6/1/16		270,000		241,970
Multiline Retail — 0.9%
Federated Retail Holdings Inc.	5.350	%	3/15/12		435,000		323,106
Macy’s Retail Holdings Inc.	5.875	%	1/15/13		1,000,000		703,762
May Department Stores Co.	5.750	%	7/15/14		1,070,000		678,875
May Department Stores Co.	6.650	%	7/15/24		490,000		268,965
							1,974,708
Oil, Gas and Consumable Fuels — 8.1%
DCP Midstream LLC	6.750	%	9/15/37		1,830,000		1,381,123	A
Devon Financing Corp. ULC	7.875	%	9/30/31		560,000		616,618
Duke Capital LLC	6.250	%	2/15/13		340,000		323,508
El Paso Corp.	7.800	%	8/1/31		1,660,000		1,081,495
El Paso Corp.	7.750	%	1/15/32		340,000		220,701
EOG Resources Inc.	5.875	%	9/15/17		1,100,000		1,116,708
Hess Corp.	7.875	%	10/1/29		2,970,000		2,851,146
KazMunaiGaz Exploration Production — GDR	8.375	%	7/2/13		910,000		709,800	A
Kerr-McGee Corp.	6.950	%	7/1/24		390,000		341,971

20 Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Oil, Gas and Consumable Fuels — Continued
Kinder Morgan Energy Partners LP	7.125	%	3/15/12	$	1,430,000	$	1,381,097
Pemex Project Funding Master Trust	6.625	%	6/15/35		3,624,000		3,067,716
Pemex Project Funding Master Trust	6.625	%	6/15/35		260,000		220,090	A
Tennessee Gas Pipeline Co.	8.375	%	6/15/32		1,000,000		862,891
The Williams Cos. Inc.	7.625	%	7/15/19		2,000,000		1,562,500
Valero Energy Corp.	6.875	%	4/15/12		390,000		392,196
XTO Energy Inc.	6.100	%	4/1/36		1,270,000		1,054,538
							17,184,098
Paper and Forest Products — 0.4%
Weyerhaeuser Co.	6.750	%	3/15/12		870,000		778,780
Pharmaceuticals — 0.2%
Wyeth	5.950	%	4/1/37		440,000		488,526
Real Estate Investment Trusts (REITs) — 1.0%
Health Care REIT Inc.	5.875	%	5/15/15		1,440,000		994,228
iStar Financial Inc.	5.375	%	4/15/10		10,000		4,600
iStar Financial Inc.	5.950	%	10/15/13		3,610,000		1,137,150
							2,135,978
Road and Rail — 0.2%
Burlington Northern Rail Road Co.	7.330	%	6/23/10		38,638		39,302
Norfolk Southern Corp.	7.875	%	5/15/43		348,000		345,415
							384,717
Thrifts and Mortgage Finance — 0.7%
BB&T Capital Trust II	6.750	%	6/7/36		1,750,000		1,397,525

Annual Report to Shareholders 21

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Tobacco — 1.1%
Philip Morris International Inc.	6.875	%	3/17/14	$	1,120,000	$	1,176,995
Reynolds American Inc.	7.875	%	5/15/09		860,000		851,561
Reynolds American Inc.	7.625	%	6/1/16		270,000		224,859
							2,253,415
Wireless Telecommunication Services — 1.4%
New Cingular Wireless Services Inc.	8.750	%	3/1/31		980,000		1,225,084
Nextel Communications Inc.	5.950	%	3/15/14		469,000		196,980
Nextel Communications Inc.	7.375	%	8/1/15		1,600,000		672,000
Sprint Capital Corp.	8.375	%	3/15/12		360,000		288,000
Sprint Capital Corp.	6.900	%	5/1/19		920,000		653,200
							3,035,264
Total Corporate Bonds and Notes (Cost — $230,142,996)							161,792,646
Mortgage-Backed Securities — 1.0%
Variable Rate SecuritiesI —1.0%
Thornburg Mortgage Securities Trust 2007-4 2A1	6.216	%	9/25/37		1,384,327		980,405
Thornburg Mortgage Securities Trust 2007-4 3A1	6.203	%	9/25/37		1,317,919		1,011,128
Total Mortgage-Backed Securities (Cost — $2,678,761)							1,991,533
U.S. Government Agency Mortgage-Backed Securities — N.M.
Indexed SecuritiesB — N.M.
Freddie Mac	5.111	%	9/1/24		45,677		45,493	J
Total U.S. Government Agency Mortgage-Backed Securities (Cost — $45,717)							45,493

22 Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Yankee BondsK — 19.6%
Commercial Banks — 9.1%
AES El Salvador Trust	6.750	%	2/1/16	$	2,080,000	$	1,482,628	A
ATF Capital BV	9.250	%	2/21/14		2,280,000		1,482,000	A
Banco Mercantil del Norte SA	6.135	%	10/13/16		2,030,000		1,300,398	A,C
Barclays Bank PLC	7.434	%	9/29/49		2,750,000		1,390,345	A,C
Barclays Bank PLC	7.700	%	12/31/49		840,000		555,458	A,C
BOI Capital Funding	5.571	%	2/1/49		2,000,000		439,614	A,C
Glitnir Banki Hf	6.330	%	7/28/11		1,100,000		52,250	A,D
Glitnir Banki Hf	6.693	%	6/15/16		1,900,000		285	A,C,D
Glitnir Banki Hf	7.451	%	12/14/49		700,000		105	A,C,D
HBOS Capital Funding LP	6.071	%	6/30/49		1,490,000		551,078	A,C
HSBC Capital Funding LP	4.610	%	6/27/49		760,000		411,836	A,C
HSBK Europe BV	7.250	%	5/3/17		1,640,000		885,600	A
ICICI Bank Ltd.	6.375	%	4/30/22		702,000		368,629	A,C
ICICI Bank Ltd.	6.375	%	4/30/22		170,000		89,610	A,C
Kaupthing Bank Hf	5.750	%	10/4/11		1,340,000		80,400	A,D
Kaupthing Bank Hf	7.625	%	2/28/15		1,700,000		102,000	A,D,L
Kaupthing Bank Hf	7.125	%	5/19/16		3,585,000		26,887	A,D
Landsbanki Islands Hf	7.431	%	12/31/49		2,250,000		337	A,C,D
Mizuho Financial Group	5.790	%	4/15/14		3,565,000		3,165,695	A
Natixis	10.000	%	4/29/49		1,270,000		589,166	A,C
Resona Preferred Global Securities	7.191	%	7/30/49		2,520,000		1,199,742	A,C
Royal Bank of Scotland Group PLC	7.640	%	3/31/49		200,000		79,657	C
RSHB Capital SA	7.175	%	5/16/13		2,040,000		1,479,000	A
RSHB Capital SA	7.125	%	1/14/14		1,700,000		1,139,000	A
RSHB Capital SA	6.299	%	5/15/17		570,000		324,900	A
Shinsei Finance Cayman Ltd.	6.418	%	7/20/49		3,385,000		707,979	A,C

Annual Report to Shareholders 23

	Rate		Maturity Date	Par/Shares		Value
Yankee Bonds — Continued
Commercial Banks — Continued
Sumitomo Mitsui Banking Corp.	5.625	%	10/15/49	$	730,000	$	540,618	A,C
TuranAlem Finance BV	8.250	%	1/22/37		1,709,000		734,870	A
TuranAlem Finance BV	8.250	%	1/22/37		300,000		129,000	A
							19,309,087
Consumer Finance — 0.5%
Aiful Corp.	6.000	%	12/12/11		2,165,000		876,907	A
HSBC Holdings PLC	5.250	%	12/12/12		105,000		105,497
							982,404
Diversified Financial Services — 1.2%
Lukoil International
Finance BV	6.356	%	6/7/17		982,000		599,020	A
Petroplus Finance Ltd.	7.000	%	5/1/17		750,000		457,500	A
SMFG Preferred Capital	6.078	%	1/29/49		230,000		155,165	A,C
TNK-BP Finance SA	7.500	%	7/18/16		870,000		452,400	A
TNK-BP Finance SA	6.625	%	3/20/17		100,000		48,000	A
UFJ Finance Aruba AEC	6.750	%	7/15/13		920,000		899,206
							2,611,291
Diversified Telecommunication Services — 2.8%
British Telecommunications PLC	9.125	%	12/15/30		420,000		446,435	H
Deutsche Telekom International Finance BV	8.750	%	6/15/30		1,400,000		1,726,399	H
Deutsche Telekom International Finance BV	9.250	%	6/1/32		670,000		852,670	H
Telecom Italia Capital	7.200	%	7/18/36		2,070,000		1,593,900
Telefonica Emisiones S.A.U.	7.045	%	6/20/36		800,000		873,225
VIP Finance Ireland Ltd	8.375	%	4/30/13		680,000		435,200	A
							5,927,829
Food and Staples Retailing — 0.4%
Delhaize Group	6.500	%	6/15/17		860,000		780,875

24 Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Yankee Bonds — Continued
Gas Utilities — 0.2%
Intergas Finance BV	6.375	%	5/14/17	$	850,000	$	493,000	A
Insurance — 0.5%
Axa	8.600	%	12/15/30		1,630,000		1,067,288
Metals and Mining — 1.1%
Evraz Group SA	8.875	%	4/24/13		540,000		275,400	A
Vale Overseas Ltd.	6.875	%	11/21/36		2,178,000		1,976,971
							2,252,371
Oil, Gas and Consumable Fuels — 2.9%
Anadarko Finance Co.	6.750	%	5/1/11		10,000		10,004
Anadarko Finance Co.	7.500	%	5/1/31		3,860,000		3,413,309
Gazprom	6.212	%	11/22/16		1,439,000		949,740	A
Gazprom	6.510	%	3/7/22		1,160,000		690,200	A
Petrobras International Finance Co.	5.875	%	3/1/18		1,280,000		1,150,720
							6,213,973
Wireless Telecommunication Services — 0.9%
America Movil SA de CV	5.625	%	11/15/17		1,070,000		951,261
Rogers Wireless Inc.	6.375	%	3/1/14		1,000,000		950,598
							1,901,859
Total Yankee Bonds (Cost — $75,931,825)							41,539,977
Preferred Stocks — 0.1%
Fannie Mae	8.250	%			35,925shs		29,818	C,J
Freddie Mac	8.375	%			244,245		95,255	C,J
Preferred Blocker Inc.	9.000	%			616		154,000	A
Total Preferred Stocks (Cost — $4,615,075)							279,073
Total Long-Term Securities (Cost — $313,414,374)							205,648,722

Annual Report to Shareholders 25

	Rate		Maturity Date	Par/Shares		Value
Short-Term Securities — 0.1%
U.S. Government and Agency Obligations — 0.1%
Fannie Mae	0.000	%	5/18/09	$	300,000	$	299,716	E,J
Total Short-Term Securities (Cost — $299,600)							299,716
Total Investments — 97.4% (Cost — $313,713,974)N							205,948,438
Other Assets Less Liabilities — 2.6%							5,433,523
Net Assets — 100.0%						$	211,381,961

26 Annual Report to Shareholders

Portfolio of Investments — Continued

Investment Grade Income Portfolio — Continued

	Expiration	Actual Contracts	Appreciation/ (Depreciation)
Futures Contracts PurchasedO
Eurodollar Futures	March 2009	265	$	1,290,075
U.S. Treasury Bond Futures	March 2009	1		13,440
U.S. Treasury Note Futures	March 2009	291		944,295
			$	2,247,810
Futures Contracts WrittenO
U.S. Treasury Note Futures	March 2009	245	$	(1,909,795	)

N. M. Not Meaningful.

^A Rule 144a Security — A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold under that rule except to qualified institutional buyers. These securities, which the Fund’s investment adviser has determined to be liquid, represent 23.45% of net assets.

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

^C Stepped Coupon Security — A security with a predetermined schedule of interest or dividend rate changes at which time it begins to accrue interest or pay dividends according to the predetermined schedule.

^D Bond is currently in default.

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

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

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

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

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

^J On September 7, 2008, the Federal Housing Finance Agency placed Fannie Mae and Freddie Mac into Conservatorship.

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

^L Illiquid security valued at fair value under the procedures approved by the Board of Directors.

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

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

Gross unrealized appreciation	$	1,259,425
Gross unrealized depreciation		(109,029,768	)
Net unrealized depreciation	$	(107,770,343	)

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

See notes to financial statements.

Annual Report to Shareholders 27

Statement of Assets and Liabilities

Investment Grade Income Portfolio

December 31, 2008

Assets:
Investment securities at market value (Cost – $313,414,374)			$	205,648,722
Short-term securities at value (Cost – $299,600)				299,716
Cash				108,092
Receivable for securities sold				6,270,550
Interest and dividends receivable				4,645,644
Receivable for fund shares sold				328,220
Futures variation margin receivable				207,765
Other assets				1,226
Total assets				217,509,935
Liabilities:
Payable for securities purchased	$	3,833,796
Payable for fund shares repurchased		2,059,799
Accrued distribution and service fees		104,877
Accrued management fee		6,124
Accrued expenses		123,378
Total liabilities				6,127,974
Net Assets			$	211,381,961
Net assets consist of:
Accumulated paid-in-capital			$	334,821,684
Undistributed net investment income				216,024
Accumulated net realized loss on investments and futures				(16,228,226	)
Net unrealized depreciation on investments and futures				(107,427,521	)
Net Assets			$	211,381,961
Net Asset Value Per Share:
Primary Class (28,922,278 shares outstanding)			$	6.96
Institutional Class (1,427,647 shares outstanding)			$	6.97

See notes to financial statements.

28 Annual Report to Shareholders

Statement of Operations

Investment Grade Income Portfolio

For the Year Ended December 31, 2008

Investment Income:
Interest	$	25,454,461
Dividends		119,560
Total income				$	25,574,021
Expenses:
Management fees		1,973,193
Distribution and service fees:
Primary Class		1,569,891
Audit and legal fees		70,459
Custodian fees		52,417
Directors’ fees and expenses		64,022
Registration fees		38,064
Reports to shareholders:
Primary Class		77,779
Institutional Class		3,718
Transfer agent and shareholder servicing expense:
Primary Class		237,022
Institutional Class		20,055
Other expenses		50,696
		4,157,316
Less: Fees waived		(942,422	)
Compensating balance credits		(676	)
Net expenses					3,214,218
Net Investment Income					22,359,803
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) on:
Investments		(15,718,934	)
Futures		238,839
					(15,480,095	)
Change in unrealized appreciation/(depreciation) of investments and futures					(97,822,130	)
Net Realized and Unrealized Loss on Investments					(113,302,225	)
Change in Net Assets Resulting From Operations				$	(90,942,422	)

See notes to financial statements.

Annual Report to Shareholders 29

Statement of Changes in Net Assets

Investment Grade Income Portfolio

	For the Years Ended December 31,
	2008			2007
Change in Net Assets:
Net investment income	$	22,359,803		$	23,270,259
Net realized loss		(15,480,095	)		(636,366	)
Change in unrealized appreciation/(depreciation)		(97,822,130	)		(14,426,794	)
Change in net assets resulting from operations		(90,942,422	)		8,207,099
Distributions to shareholders from:
Net investment income:
Primary Class		(21,039,955	)		(21,444,590	)
Institutional Class		(1,065,882	)		(1,750,021	)
Net realized gain on investments:
Primary Class		—			(1,197,499	)
Institutional Class		—			(46,104	)
Change in net assets from fund share transactions:
Primary Class		(76,519,144	)		(3,651,630	)
Institutional Class		(33,416,476	)		37,490,814
Change in net assets		(222,983,879	)		17,608,069
Net Assets:
Beginning of year		434,365,840			416,757,771
End of year	$	211,381,961		$	434,365,840
Undistributed/(Overdistributed) net investment income	$	216,024		$	(38,830	)

See notes to financial statements.

30 Annual Report to Shareholders

Financial Highlights

Investment Grade Income Portfolio

For a share of each class of capital stock outstanding:

Primary Class:

	Years Ended December 31,
	2008			2007			2006			2005			2004
Net asset value, beginning of year	$	10.11		$	10.49		$	10.40		$	10.81		$	10.88
Investment operations:
Net investment income		.61	A		.55	A		.51	A		.49			.49
Net realized and unrealized gain/(loss)		(3.16	)		(.35	)		.09			(.31	)		.18
Total from investment operations		(2.55	)		.20			.60			.18			.67
Distributions from:
Net investment income		(.60	)		(.55	)		(.51	)		(.49	)		(.49	)
Net realized gain on investments		—			(.03	)		—	B		(.10	)		(.25	)
Total distributions		(.60	)		(.58	)		(.51	)		(.59	)		(.74	)
Net asset value, end of year	$	6.96		$	10.11		$	10.49		$	10.40		$	10.81
Total return		(26.19	)%		1.93	%		6.01	%		1.69	%		6.29	%
Ratios to Average Net Assets:C
Total expenses		1.28	%		1.28	%		1.33	%		1.30	%		1.27	%
Expenses net of waivers, if any		1.00	%		1.00	%		1.00	%		1.00	%		1.00	%
Expenses net of all reductions		1.00	%		1.00	%		1.00	%		1.00	%		1.00	%
Net investment income		6.78	%		5.32	%		4.98	%		4.64	%		4.47	%
Supplemental Data:
Portfolio turnover rate		15.3	%		47.2	%		65.7	%		51.1	%		74.9	%
Net assets, end of year (in thousands)	$	201,437		$	386,094		$	404,864		$	366,329		$	403,361

^A Computed using average daily shares outstanding.

^B Amount less than $.01 per share.

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

See notes to financial statements.

Annual Report to Shareholders 31

Financial Highlights

Investment Grade Income Portfolio

For a share of each class of capital stock outstanding:

Institutional Class:

	Years Ended December 31,
	2008			2007			2006			2005			2004
Net asset value, beginning of year	$	10.11		$	10.49		$	10.41		$	10.82		$	10.89
Investment operations:
Net investment income		.65	A		.61	A		.56	A		.55			.54
Net realized and unrealized gain/(loss)		(3.14	)		(.36	)		.08			(.31	)		.17
Total from investment operations		(2.49	)		.25			.64			.24			.71
Distributions from:
Net investment income		(.65	)		(.60	)		(.56	)		(.55	)		(.53	)
Net realized gain on investments		—			(.03	)		—	B		(.10	)		(.25	)
Total distributions		(.65	)		(.63	)		(.56	)		(.65	)		(.78	)
Net asset value, end of year	$	6.97		$	10.11		$	10.49		$	10.41		$	10.82
Total return		(25.71	)%		2.44	%		6.45	%		2.27	%		6.85	%
Ratios to Average Net Assets:C
Total expenses		.85	%		.74	%		.74	%		.74	%		.74	%
Expenses net of waivers, if any		.50	%		.50	%		.50	%		.44	%		.47	%
Expenses net of all reductions		.50	%		.50	%		.50	%		.44	%		.47	%
Net investment income		7.24	%		5.95	%		5.47	%		5.26	%		5.02	%
Supplemental Data:
Portfolio turnover rate		15.3	%		47.2	%		65.7	%		51.1	%		74.9	%
Net assets, end of year (in thousands)	$	9,945		$	48,272		$	11,894		$	20,441		$	10,216

See notes to financial statements.

32 Annual Report to Shareholders

Management’s Discussion of Fund Performance

Legg Mason Limited Duration Bond Portfolio

Total returns for the Fund for various periods ended December 31, 2008 are presented below, along with those of comparative indices:

	One Year		Average Annual Total Returns
			Five Years		Ten Years		Since InceptionA
Limited Duration Bond Portfolio:B
Primary Class	–16.52	%	–1.58	%	+1.54	%	+4.73	%
Institutional Class	–16.09	%	–1.10	%	+2.07	%	+3.87	%
Merrill Lynch 1-3 Year Treasury IndexC	+6.61	%	+4.06	%	+4.71	%	+6.07	%
Lipper Short-Intermediate Investment Grade
Debt Funds Category AverageD	–2.82	%	+1.80	%	+3.78	%	+5.93	%

The performance data quoted represent past performance and do not guarantee future results. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information for the Primary and Institutional Classes, please visit www.legg-mason.com/individualinvestors. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.

The gross expense ratios for the Primary and Institutional Classes were 1.18% and 0.72%, respectively, as indicated in the Fund’s most current prospectus dated May 1, 2008 and do not reflect fee waivers or reimbursements. These expenses include management fees, 12b-1 distribution and service fees and other expenses.

The net expense ratios for the Primary and Institutional Classes were 1.00% and 0.50%, respectively, as indicated in the Fund’s prospectus dated May 1, 2008 and reflect contractual fee waivers and/or reimbursements. As a result of contractual expense limitations, the ratio of expenses, other than interest, brokerage, taxes and extraordinary expenses, to average net assets will not exceed 1.00% for Primary Class shares and 0.50% for Institutional Class shares until April 30, 2009.

Strategies produced predominantly negative results over the past 12 months. Our tactically-driven duration^E posture and yield curve^F strategy contributed to performance as bond yields rallied over the year and the yield curve steepened. An emphasis on lower-quality credits and select financial issues was also a large detractor from performance as spreads soared in the wake of the subprime lending crisis, deteriorating

Annual Report to Shareholders 33

liquidity conditions and slowing economic growth. Spreads widened to new all-time highs in mid-March, before partially recovering in April and May. These gains were given back later in the period, however, on deteriorating investor sentiment and poor earnings. The high-yield sector performed poorly on news of more ratings downgrades, rising defaults, and a volatile and declining stock market. A large overweight exposure to the mortgage-backed sector also detracted from performance as volatility remained high and negative housing news continued to damage market sentiment. We had diversified into a number of non-agency mortgage-backed issues that were particularly impacted and further detracted from performance due to a lack of liquidity, rising defaults and uncertainty in that marketplace.

Western Asset Management Company

January 20, 2009

^A The inception date of the Primary Class is August 7, 1987. The inception date of the Institutional Class is December 1, 1994. Index returns are for periods beginning July 31, 1987. Although it is not possible to invest in an index, it is possible to purchase investment vehicles designed to track the performance of certain indices.

^B Prior to August 31, 2004, the Fund was known as Legg Mason U.S. Government Intermediate-Term Portfolio and followed a policy of investing at least 80% of its assets in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities, or repurchase agreements secured by such investments, with a dollar-weighted average portfolio maturity between three and ten years. The Fund’s performance prior to such change might have been better or worse had the Fund been managed in accordance with its current objective, policies and strategies.

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

^D Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. The Lipper Short-Intermediate Investment Grade Debt Funds Category Average is comprised of the Fund’s peer group of mutual funds.

^E 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.

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

34 Annual Report to Shareholders

Expense Example

Legg Mason Limited Duration Bond Portfolio

As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution and service (12b-1) fees on Primary Class shares; and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Each example is based on an investment of $1,000 invested on July 1, 2008, and held through December 31, 2008. The ending values assume dividends were reinvested at the time they were paid.

Actual Expenses

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

Hypothetical Example for Comparison Purposes

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

	Beginning Account Value 7/1/08		Ending Account Value 12/31/08		Expenses PaidA During the Period 7/1/08 to 12/31/08
Primary Class:
Actual	$	1,000.00	$	861.50	$	4.68
Hypothetical (5% return before expenses)		1,000.00		1,020.11		5.08
Institutional Class:
Actual	$	1,000.00	$	863.70	$	2.34
Hypothetical (5% return before expenses)		1,000.00		1,022.62		2.54

^A These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratios of 1.00% and 0.50% for the Primary Class and Institutional Class respectively, multiplied by the average values over the period, multiplied by the number of days in the most recent fiscal half-year (184), and divided by 366.

Annual Report to Shareholders 35

Performance Information

Legg Mason Limited Duration Bond Portfolio

The graphs on the following pages compare the Fund’s total returns to that of a closely matched broad-based securities market index. The lines illustrate the cumulative total return of an initial $10,000 investment in Primary Class shares and an initial $1,000,000 investment in Institutional Class shares of the Fund, for the periods indicated. The lines for the Fund represent the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling securities. The lines representing the securities market index do not take into account any transaction costs associated with buying and selling portfolio securities in the index or other administrative expenses.

Total return measures investment performance in terms of appreciation or depreciation in a fund’s net asset value per share, plus dividends and any capital gain distributions. Both the Fund’s results and the index’s results assume reinvestment of all dividends and distributions at the time they were paid. Average annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results.

36 Annual Report to Shareholders

Performance Information — Continued

Growth of a $10,000 Investment — Primary Class

Periods Ended December 31, 2008

	Cumulative Total Return		Average Annual Total Return
One Year	–16.52	%	–16.52	%
Five Years	–7.65	%	–1.58	%
Ten Years	+16.55	%	+1.54	%

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

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

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

Annual Report to Shareholders 37

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

Periods Ended December 31, 2008

	Cumulative Total Return		Average Annual Total Return
One Year	–16.09	%	–16.09	%
Five Years	–5.36	%	–1.10	%
Ten Years	+22.72	%	+2.07	%

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

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

38 Annual Report to Shareholders

Performance Information — Continued

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

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

Maturity Schedule (as a percentage of the portfolio)

^B The Fund is actively managed. As a result, the composition of its portfolio holdings and sectors is subject to change at any time. The charts do not include derivatives such as Futures Contracts, Options Written.

^C Standard & Poor’s Ratings Service provides capital markets with credit ratings for the evaluation and assessment of credit risk. These ratings are the opinions of S&P and not absolute measures of quality or guarantees of performance.

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

Annual Report to Shareholders 39

Legg Mason Limited Duration

Spread Duration

December 31, 2008

Economic Exposure

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

ABS	— Asset Backed Securities
LCBI	— Barclays U.S. Capital Credit Bond Index
CMBS	— Commercial Mortgage Backed Securities
HY	— High Yield
IG Credit	— Investment Grade Credit
MBS	— Mortgage Backed Securities

40 Annual Report to Shareholders

Performance Information — Continued

Legg Mason Limited Duration

Effective Duration

December 31, 2008

Interest Rate Exposure

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

ABS	— Asset Backed Securities
LCBI	— Barclays U.S. Capital Credit Bond Index
CMBS	— Commercial Mortgage Backed Securities
HY	— High Yield
IG Credit	— Investment Grade Credit
MBS	— Mortgage Backed Securities

Annual Report to Shareholders 41

Portfolio of Investments

Limited Duration Bond Portfolio

December 31, 2008

	Rate		Maturity Date	Par/Shares		Value
Long-Term Securities — 94.7%
Corporate Bonds and Notes — 30.3%
Aerospace and Defense — 0.4%
United Technologies Corp.	5.375	%	12/15/17	$	410,000	$	414,467
Airlines — 1.5%
Continental Airlines Inc.	7.056	%	9/15/09		70,000		67,200
Continental Airlines Inc.	6.900	%	1/2/18		435,955		348,764
Continental Airlines Inc.	6.545	%	2/2/19		387,411		309,929
Continental Airlines Inc.	6.703	%	6/15/21		286,978		215,233
Northwest Airlines Inc.	2.968	%	5/20/14		845,819		592,074	A
							1,533,200
Capital Markets — 2.9%
Goldman Sachs Capital II	5.793	%	12/29/49		2,080,000		799,600	B
Lehman Brothers Holdings Capital Trust VII	5.857	%	11/29/49		970,000		97	C
Lehman Brothers Holdings Inc.	6.500	%	7/19/17		340,000		34	C
Merrill Lynch and Co. Inc.	6.050	%	8/15/12		700,000		690,605
Merrill Lynch and Co. Inc.	6.150	%	4/25/13		720,000		713,440
Morgan Stanley	6.600	%	4/1/12		330,000		319,041
The Bear Stearns Cos. Inc.	6.400	%	10/2/17		200,000		207,836
The Goldman Sachs Group Inc.	6.600	%	1/15/12		350,000		345,333
							3,075,986
Chemicals — 0.1%
The Dow Chemical Co.	5.700	%	5/15/18		90,000		79,957
Commercial Banks — 4.1%
HSBC Bank PLC	7.333	%	7/20/12		1,000,000		505,000	A,D
HSBC Bank PLC	7.468	%	8/20/12		70,000		37,569	A
Keycorp	2.646	%	12/15/10		1,900,000		1,906,975	A
SunTrust Capital VIII	6.100	%	12/15/36		120,000		84,481	B

42 Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Commercial Banks — Continued
Wachovia Capital Trust III	5.800	%	8/29/49	$	1,960,000	$	1,156,400	B
Wells Fargo Capital X	5.950	%	12/15/36		300,000		257,114	B
Wells Fargo Capital XIII	7.700	%	12/29/49		350,000		288,859	B
							4,236,398
Commercial Services and Supplies — 0.6%
Waste Management Inc.	7.375	%	8/1/10		650,000		658,702
Consumer Finance — 3.3%
American Express Bank FSB	3.150	%	12/9/11		1,900,000		1,915,126
American Express Co.	6.800	%	9/1/66		600,000		310,591	B
GMAC LLC	7.500	%	12/31/13		8,530,000		622,690	D
Nelnet Inc.	7.400	%	9/29/36		380,000		113,941	B
SLM Corp.	8.450	%	6/15/18		590,000		466,466
							3,428,814
Diversified Financial Services — 3.9%
AGFC Capital Trust I	6.000	%	1/15/67		860,000		205,409	B,D
Capmark Financial Group Inc.	5.875	%	5/10/12		400,000		136,396	E
General Electric Capital Corp.	3.116	%	12/9/11		2,000,000		2,033,960	A
General Electric Capital Corp.	6.375	%	11/15/67		675,000		424,284	B
IBM International Group Capital LLC	5.050	%	10/22/12		950,000		991,261
ZFS Finance USA Trust III	3.146	%	12/15/65		970,000		293,425	A,D
							4,084,735
Diversified Telecommunication Services — 0.4% Qwest Corp.	7.875	%	9/1/11		230,000		211,600
Verizon Communications Inc.	8.750	%	11/1/18		150,000		175,983
							387,583

Annual Report to Shareholders 43

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Electric Utilities — 0.5%
Pacific Gas and Electric Co.	4.800	%	3/1/14	$	500,000	$	491,028
Food and Staples Retailing — 0.5%
Wal-Mart Stores Inc.	5.800	%	2/15/18		500,000		553,275
Health Care Equipment and Supplies — 0.4%
Hospira Inc.	5.550	%	3/30/12		500,000		473,734
Health Care Providers and Services — 0.2%
Quest Diagnostics Inc.	5.125	%	11/1/10		180,000		174,723
IT Services — 1.0%
Electronic Data Systems Corp.	7.125	%	10/15/09		1,000,000		1,016,625
Leisure Equipment and Products — 0.1%
Eastman Kodak Co.	7.250	%	11/15/13		110,000		70,950
Media — 2.7%
Clear Channel Communications Inc.	4.250	%	5/15/09		1,100,000		968,000
Comcast Cable Communications Inc.	6.875	%	6/15/09		600,000		602,811
The Walt Disney Co.	4.700	%	12/1/12		280,000		288,171
Time Warner Cable Inc.	8.250	%	2/14/14		180,000		182,604
Time Warner Inc.	5.500	%	11/15/11		830,000		779,880
							2,821,466
Multi-Utilities — 0.3%
Dominion Resources Inc.	8.875	%	1/15/19		300,000		323,517

44 Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Multiline Retail — 0.2%
Federated Retail Holdings Inc.	5.350	%	3/15/12	$	330,000	$	245,115
Office Electronics — 0.3% Xerox Corp.	5.500	%	5/15/12		330,000		276,556
Oil, Gas and Consumable Fuels — 4.0%
Apache Corp.	6.250	%	4/15/12		520,000		544,573
Devon Financing Corp. ULC	6.875	%	9/30/11		350,000		353,206
El Paso Natural Gas Co.	5.950	%	4/15/17		590,000		468,827
Energy Transfer Partners LP	9.700	%	3/15/19		120,000		123,649
Hess Corp.	6.650	%	8/15/11		510,000		509,798
Kinder Morgan Energy Partners LP	6.750	%	3/15/11		810,000		787,839
Occidental Petroleum Corp.	7.000	%	11/1/13		690,000		753,097
Pemex Project Funding Master Trust	2.820	%	12/3/12		252,000		210,420	A,D
XTO Energy Inc.	5.650	%	4/1/16		440,000		403,686
							4,155,095
Real Estate Investment Trusts (REITs) — 1.0%iStar Financial Inc.	2.336	%	9/15/09		1,330,000		758,100	A
iStar Financial Inc.	5.650	%	9/15/11		1,000,000		320,000
							1,078,100
Thrifts and Mortgage Finance — 1.1%
Countrywide Financial Corp.	1.686	%	3/24/09		610,000		605,037	A
Countrywide Financial Corp.	5.800	%	6/7/12		600,000		584,792
							1,189,829

Annual Report to Shareholders 45

	Rate		Maturity Date	Par/Shares		Value
Corporate Bonds and Notes — Continued
Tobacco — 0.4%
Philip Morris International Inc.	4.875	%	5/16/13	$	400,000	$	401,145
Wireless Telecommunication Services — 0.4%
Sprint Capital Corp.	6.375	%	5/1/09		30,000		29,813
Vodafone Group PLC	5.350	%	2/27/12		450,000		444,262
							474,075
Total Corporate Bonds and Notes (Cost — $40,031,782)							31,645,075
Asset-Backed Securities — 8.9%
Fixed Rate Securities — 2.0%
Countryplace Manufactured Housing Contract Trust 2007-1 A1	5.484	%	7/15/37		60,601		59,721	B,D
Drive Auto Receivables Trust 2006-1 A4	5.540	%	12/16/13		900,000		828,314	D
Prestige Auto Receivables Trust 2005-1A	4.370	%	6/16/12		438,340		401,513	D
Structured Asset Securities Corp. 2003-AL1	3.357	%	4/25/31		478,526		377,103	D
Wells Fargo Financial Auto Owner Trust 2005-A A4	4.280	%	5/15/12		386,844		376,557
							2,043,208
Indexed SecuritiesA — 6.3%
Asset Backed Funding Certificates 2002-WF2	1.596	%	5/25/32		221,263		198,550
Asset Backed Funding Certificates 2004-OPT2 M1	1.021	%	8/25/33		400,000		241,869
Bear Stearns Asset Backed Securities Inc. 2004-1	0.991	%	6/25/34		1,972,585		1,069,411
Citigroup Mortgage Loan Trust Inc. 2007-SHL1 A	0.871	%	11/25/46		1,467,646		549,046	D

46 Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Asset-Backed Securities — Continued
Indexed Securities — Continued
Countrywide Asset-Backed Certificates 2007-13 2A1	1.371	%	10/25/47	$	907,779	$	668,420
Countrywide Home Equity Loan Trust 2004-O	1.475	%	2/15/34		366,545		107,312
Lehman XS Trust 2005-5N 3A1A	0.771	%	11/25/35		1,317,094		613,016
Long Beach Mortgage Loan Trust 2006-A A1	0.561	%	5/25/36		1,006,369		58,636
Nelnet Student Loan Trust 2008-4 A4	5.015	%	4/25/24		1,600,000		1,296,214
RAAC Series 2005-RP1	0.811	%	7/25/37		178,386		174,929	D
Securitized Asset Backed Receivables LLC 2006- FR3 A2	0.611	%	5/25/36		621,451		540,711
Specialty Underwriting & Residential Finance Trust 2001-BC4 M1	1.071	%	11/25/34		530,000		325,517
Structured Asset Securities Corp. 2007-BC3 1A2	0.611	%	5/25/47		800,000		412,669
WaMu Asset-Backed Certificates 2007-HE1 2A3	0.621	%	1/25/37		800,000		268,435
							6,524,735
Variable Rate SecuritiesF — 0.6%
Green Tree 2008-MH1 A1	7.000	%	4/25/38		780,195		682,670	D
Total Asset-Backed Securities (Cost — $14,921,115)							9,250,613
Mortgage-Backed Securities — 20.7% Fixed Rate Securities — 2.0%
Residential Asset Mortgage Products Inc. 2005-SL1	8.000	%	5/25/32		1,041,429		732,581

Annual Report to Shareholders 47

	Rate		Maturity Date	Par/Shares		Value
Mortgage-Backed Securities — Continued
Fixed Rate Securities — Continued
Washington Mutual MSC Mortgage Pass-Through Certificates Series 2004- RA1	7.000	%	3/25/34	$	1,566,516	$	1,401,543
							2,134,124
Indexed SecuritiesA — 14.0%
Banc of America Mortgage Securities 2005-F	5.007	%	7/25/35		1,761,326		1,280,469
Bayview Commercial Asset Trust 2005-2A A2	0.821	%	8/25/35		533,354		418,596	D
Bear Stearns Alt-A Trust 2007-1 1A1	0.631	%	1/25/47		1,631,573		579,559
Bear Stearns ARM Trust 2004-10	5.042	%	1/25/35		264,284		194,066
Countrywide Alternative Loan Trust 2005-59 1A1	1.783	%	11/20/35		1,235,349		617,526
Countrywide Alternative Loan Trust 2006-0A2 A5	0.738	%	5/20/46		1,568,191		569,763
Countrywide Alternative Loan Trust 2007-AL1 A1	0.721	%	6/25/37		420,396		158,856
CS First Boston Mortgage Securities Corp. 2004-AR5 7A2	4.604	%	6/25/34		527,332		386,775
First Horizon Alternative Mortgage Securities 2006-FA8 1A8	0.841	%	2/25/37		362,665		108,541
Greenpoint Mortgage Funding Trust 2006-AR7 1A1B	0.591	%	12/25/46		610,570		335,654
Harborview Mortgage Loan Trust 2004-8 3A2	0.981	%	11/29/34		357,275		169,827
HomeBanc Mortgage Trust 2004-2 A1	0.841	%	12/25/34		786,465		508,172

48 Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Mortgage-Backed Securities — Continued
Indexed Securities — Continued
HomeBanc Mortgage Trust 2005-1 A1	0.721	%	3/25/35	$	1,239,679	$	707,101
Impac CMB Trust 2004-6 1A2	1.251	%	10/25/34		244,977		123,738
IndyMac Inda Mortgage Loan Trust 2007-AR7 1A1	6.217	%	11/25/37		791,512		487,959
JPMorgan Mortgage Trust 2004-A1 1A1	4.347	%	10/25/33		1,856,649		1,302,015
JPMorgan Mortgage Trust 2004-A1 1A1	4.794	%	2/25/34		547,110		412,238
MASTR Adjustable Rate Mortgages Trust 2004-13	3.788	%	11/21/34		3,000,000		1,920,062
MASTR Adjustable Rate Mortgages Trust 2006-OA2 1A1	3.279	%	12/25/46		980,303		200,015
MASTR Specialized Loan Trust 2006-01 A	0.771	%	12/25/35		431,459		344,687	D
Sequoia Mortgage Trust 2003-2 A2	4.859	%	6/20/33		304,377		235,676
Structured Asset Mortgage Investments Inc. 2006-AR2 A1	0.701	%	2/25/36		682,314		283,188
Structured Asset Mortgage Investments Inc. 2006-AR7 A1A	0.681	%	8/25/36		1,188,246		472,072
WaMu Alternative Mortgage Pass-Through Certificates 2006-AR01 A1B	0.791	%	2/25/36		1,174,807		285,050
WaMu Mortgage Pass Through Certificates 2003-AR8 A	4.282	%	8/25/33		411,330		306,816

Annual Report to Shareholders 49

	Rate		Maturity Date	Par/Shares		Value
Mortgage-Backed Securities — Continued
Indexed Securities — Continued
WaMu Mortgage Pass-Through Certificates 2003-AR10	4.672	%	10/25/33	$	1,968,483	$	1,621,598
WaMu Mortgage Pass-Through Certificates 2004-AR08 A1	1.858	%	6/25/44		461,208		264,002
WaMu Mortgage Pass-Through Certificates 2006-AR4 DA	3.449	%	6/25/46		789,543		252,654
							14,546,675
Variable Rate SecuritiesF — 4.7%
Banc of America Funding Corp. 2004-B	5.258	%	12/20/34		294,739		178,855
Chase Mortgage Finance Corp. 2007-A1 2A3	4.137	%	2/25/37		725,927		569,865
Citigroup Mortgage Loan Trust Inc. 2007-AR4 2A1A	5.471	%	3/25/37		1,752,320		980,230
Citigroup Mortgage Loan Trust Inc. 2007-AR8 1A1A	5.727	%	8/25/47		895,649		470,656
Countrywide Alternative Loan Trust 2004-33 1A1	6.249	%	12/25/34		162,469		92,400
Countrywide Alternative Loan Trust 2004-33 2A1	5.395	%	12/25/34		113,503		53,086
JPMorgan Mortgage Trust 2006-A2 5A1	5.152	%	11/25/33		288,250		217,346
Nomura Asset Acceptance Corp. 2004-AR4 1A1	4.889	%	12/25/34		921,399		540,587
Prime Mortgage Trust 2005-2	7.399	%	10/25/32		823,219		572,395

50 Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Mortgage-Backed Securities — Continued
Variable Rate SecuritiesF — Continued
Structured Adjustable Rate Mortgage Loan Trust 2005-12 3A1	5.677	%	6/25/35	$	598,525	$	409,751
WaMu Mortgage Pass-Through Certificates 2004- AR14 A1	4.255	%	1/25/35		1,146,103		789,619
							4,874,790
Total Mortgage-Backed Securities (Cost — $36,153,703)							21,555,589
U.S. Government and Agency Obligations — 8.1%
Treasury Inflation-Protected SecuritiesG — 8.1%
United States Treasury Inflation-Protected Security	0.875	%	4/15/10		8,268,011		7,770,641
United States Treasury Inflation-Protected Security	3.875	%	4/15/29		527,136		651,054	H
Total U.S. Government and Agency Obligations (Cost — $8,801,098)							8,421,695
U.S. Government Agency Mortgage-Backed Securities — 15.4%
Fixed Rate Securities — 10.2%
Fannie Mae	8.500	%	6/1/10 to 8/1/11		705		727	I
Fannie Mae	6.500	%	7/1/13 to 10/1/32		928,836		966,807	I
Fannie Mae	9.500	%	7/1/14		2,846		2,940	I
Fannie Mae	11.000	%	12/1/15		15,320		16,966	I
Fannie Mae	12.500	%	1/1/18		19,334		22,902	I
Fannie Mae	9.000	%	11/1/21		62,679		67,236	I
Fannie Mae	7.000	%	12/1/26 to 1/1/33		3,275,562		3,465,906	I
Fannie Mae	6.000	%	11/1/27 to 7/1/38		291,349		300,239	I
Fannie Mae	5.000	%	6/1/35		962,288		984,432	I
Fannie Mae	5.500	%	4/1/36		1,475,953		1,483,534	I
Fannie Mae	6.000	%	12/1/38		600,000		617,625	I,J
Freddie Mac	9.750	%	11/1/09		18		18	I
Freddie Mac	9.000	%	1/1/17 to 1/1/21		56,528		59,740	I
Freddie Mac	8.500	%	6/1/21		1,563		1,672	I

Annual Report to Shareholders 51

	Rate		Maturity Date	Par/Shares		Value
U.S. Government Agency Mortgage-Backed Securities — Continued
Fixed Rate Securities — Continued
Freddie Mac	8.000	%	2/1/31	$	169,159	$	180,352	I
Freddie Mac	7.000	%	4/1/32		1,161,813		1,220,985	I
Freddie Mac	5.000	%	11/1/35		153,795		157,382	I
Government National Mortgage Association	6.000	%	5/15/14 to 11/15/28		154,980		162,380
Government National Mortgage Association	9.000	%	6/15/22 to 9/15/22		1,449		1,551
Government National Mortgage Association	6.000	%	12/1/38		900,000		927,843	J
							10,641,237
Indexed SecuritiesA — 4.8%
Fannie Mae	4.341	%	10/1/34		660,950		663,231	I
Fannie Mae	4.329	%	1/1/35		877,318		848,628	I
Fannie Mae	4.795	%	2/1/35		467,434		472,978	I
Fannie Mae	4.961	%	3/1/35		3,021,454		3,049,118	I
							5,033,955
Stripped Securities — 0.4%
Government National Mortgage Association	7.438	%	6/16/26		1,354,626		214,244	K,L1
Government National Mortgage Association	7.488	%	8/16/26		938,143		145,429	K,L1
							359,673
Total U.S. Government Agency Mortgage-Backed Securities (Cost — $16,351,516)							16,034,865
Yankee BondsM — 11.1%
Beverages — 0.3%
Diageo Capital PLC	5.200	%	1/30/13		350,000		344,407
Capital Markets — 0.9%
Deutsche Bank AG	6.000	%	9/1/17		900,000		954,948

52 Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

	Rate		Maturity Date	Par/Shares		Value
Yankee Bonds — 11.1%
Commercial Banks — 1.0%
Glitnir Banki Hf	5.815	%	1/21/11	$	1,550,000	$	73,625	A,C,D
Glitnir Banki Hf	6.693	%	6/15/16		50,000		8	B,C,D
HSBC Bank PLC	7.718	%	8/20/12		70,000		37,905	A
Kaupthing Bank Hf	4.958	%	1/15/10		190,000		11,400	A,C,D
Kaupthing Bank Hf	5.750	%	10/4/11		420,000		25,200	C,D
Kaupthing Bank Hf	7.625	%	2/28/15		330,000		19,800	C,D,K
Landsbanki Islands Hf	6.100	%	8/25/11		620,000		10,850	C,D
Landsbanki Islands Hf	7.431	%	12/31/49		240,000		36	B,C,D
Resona Preferred Global Securities	7.191	%	12/29/49		830,000		395,153	B,D
Shinsei Finance Cayman Ltd.	6.418	%	1/29/49		640,000		133,857	B,D
TuranAlem Finance BV	5.434	%	1/22/09		320,000		300,800	A,D
							988,834
Diversified Financial Services — 1.8%
Aiful Corp.	5.000	%	8/10/10		1,280,000		703,743	D
MUFG Capital Finance 1 Ltd.	6.346	%	7/29/49		600,000		418,034	B
TNK-BP Finance SA	6.875	%	7/18/11		1,090,000		795,700	D
							1,917,477
Diversified Telecommunication Services — 3.0%
British Telecommunications PLC	8.625	%	12/15/10		520,000		534,924	E
Deutsche Telekom International Finance BV	8.500	%	6/15/10		650,000		669,548	E
France Telecom SA	7.750	%	3/1/11		570,000		599,813
Koninklijke (Royal) KPN NV	8.000	%	10/1/10		680,000		686,258
Telefonica Emisiones S.A.U.	3.356	%	2/4/13		790,000		633,733	A
							3,124,276
Health Care Equipment and Supplies — 0.5%
Baxter Finco BV	4.750	%	10/15/10		520,000		518,530

Annual Report to Shareholders 53

	Rate		Maturity Date	Par/Shares		Value
Yankee Bonds — 11.1%
Industrial Conglomerates — 1.4%
Tyco International Group SA	6.375	%	10/15/11	$	1,480,000	$	1,454,757
Insurance — 0.4%
Merna Reinsurance Ltd.	3.218	%	7/7/10		400,000		361,160	A,D
Metals and Mining — 1.0%
Vale Overseas Ltd.	6.250	%	1/23/17		1,130,000		1,065,364
Oil, Gas and Consumable Fuels — 0.8%
Anadarko Finance Co.	6.750	%	5/1/11		870,000		870,311
Total Yankee Bonds (Cost — $17,154,505)							11,619,864
Preferred Stocks — 0.2%
Fannie Mae	8.250	%			15,950shs		13,238	B,I
Freddie Mac	8.375	%			21,700		8,463	B,I
Home Ownership Funding Corp.	1.000	%			500		49,275	D,F
Home Ownership Funding Corp. II	1.000	%			1,400		137,970	D,F
Total Preferred Stocks (Cost — $2,478,698)							208,946
Total Long-Term Securities (Cost — $135,892,417)							98,736,647
Short-Term Securities — 3.1%
U.S. Government and Agency Obligations — 3.1%
Fannie Mae	0.000	%	5/18/09	$	806,000		805,239	I,N
Federal Home Loan Bank	0.000	%	3/26/09		2,500,000		2,499,598	N
							3,304,837

54 Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

	Rate	Maturity Date	Par/Shares		Value
Short-Term Securities — Continued
Options PurchasedO — N.M.
U.S. Treasury Note Futures Put, February 2009, Strike Price $85.00			59	P	$	922
Total Short-Term Securities (Cost — $3,306,190)						3,305,759
Total Investments — 97.8% (Cost — $139,198,607)Q						102,042,406
Other Assets Less Liabilities — 2.2%						2,246,605
Net Assets — 100.0%					$	104,289,011

Annual Report to Shareholders 55

	Expiration	Actual Contracts	Appreciation/ (Depreciation)
Futures Contracts PurchasedO
Eurodollar Futures	March 2009	190	$	931,575
Eurodollar Futures	June 2009	174		950,493
Eurodollar Futures	September 2009	66		421,933
Eurodollar Futures	September 2010	16		(4,368	)
U.S. Treasury Note Futures	March 2009	83		183,030
U.S. Treasury Note Futures	March 2009	319		775,967
			$	3,258,630
Futures Contracts WrittenO
U.S. Treasury Bond Futures	March 2009	62	$	(797,013	)
U.S. Treasury Note Futures	March 2009	100		(320,203	)
			$	(1,117,216	)
Options WrittenO
Eurodollar Futures Call, Strike Price $97.63	September 2009	66	$	(142,917	)
Eurodollar Futures Call, Strike Price $98.25	March 2009	124		(156,845	)
U.S. Treasury Note Futures Call, Strike Price $117.00	February 2009	32		(49,410	)
U.S. Treasury Note Futures Call, Strike Price $118.00	February 2009	65		(475,216	)
U.S. Treasury Note Futures Put, Strike Price $110.00	February 2009	65		79,175
			$	(745,213	)

N.M. Not Meaningful.

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

56 Annual Report to Shareholders

Portfolio of Investments — Continued

Limited Duration Bond Portfolio — Continued

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

^C Bond is currently in default.

^D Rule 144a Security — A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold under that rule except to qualified institutional buyers. These securities, which the Fund’s investment adviser has determined to be liquid, represent 8.33% of net assets.

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

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

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

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

^I On September 7, 2008, the Federal Housing Finance Agency placed Fannie Mae and Freddie Mac into Conservatorship.

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

^K Illiquid security valued at fair value under the procedures approved by the Board of Directors.

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

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

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

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

^P Par represents actual number of contracts.

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

Gross unrealized appreciation	$	730,253
Gross unrealized depreciation		(37,890,175	)
Net unrealized depreciation	$	(37,159,922	)

See notes to financial statements.

Annual Report to Shareholders 57

Statement of Assets and Liabilities

Limited Duration Bond Portfolio

December 31, 2008

Assets:
Investment securities at market value (Cost – $135,892,417)			$	98,736,647
Short-term securities at value (Cost – $3,306,190)				3,305,759
Cash				3,640,491
Receivable for securities sold				2,822,973
Interest receivable				886,608
Receivable for fund shares sold				369,404
Futures variation margin receivable				96,108
Other assets				11,324
Total assets				109,869,314
Liabilities:
Payable for securities purchased	$	3,796,501
Options written (Proceeds – $299,403)		1,044,616
Payable for fund shares repurchased		570,713
Accrued management fees		53,123
Accrued distribution and service fees		24,802
Payable for Lehman settlements		2,281
Accrued expenses		88,267
Total liabilities				5,580,303
Net Assets			$	104,289,011
Net assets consist of:
Accumulated paid-in-capital			$	150,880,774
Overdistributed net investment income				(200,722	)
Accumulated net realized loss on investments, options and futures				(10,631,041	)
Net unrealized depreciation of investments, options and futures				(35,760,000	)
Net Assets			$	104,289,011
Net Asset Value Per Share:
Primary Class (12,143,287 shares outstanding)			$	7.95
Institutional Class (970,198 shares outstanding)			$	7.95

See notes to financial statements.

58 Annual Report to Shareholders

Statement of Operations

Limited Duration Bond Portfolio

For the Year Ended December 31, 2008

Investment Income:
Interest	$	7,587,066
Dividends		66,748
Total income				$	7,653,814
Expenses:
Management fees		660,803
Distribution and service fees:
Primary Class		683,571
Audit and legal fees		61,376
Custodian fees		39,473
Directors’ fees and expenses		56,778
Registration fees		34,278
Reports to shareholders:
Primary Class		43,159
Institutional Class		436
Transfer agent and shareholder servicing expense:
Primary Class		104,014
Institutional Class		17,591
Other expenses		39,489
		1,740,968
Less: Fees waived		(322,885	)
Compensating balance credits		(299	)
Net expenses					1,417,784
Net Investment Income					6,236,030
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) on:
Investments		(2,069,499	)
Options		239,961
Futures		745,695
					(1,083,843	)
Change in unrealized appreciation/(depreciation) of investments, options and futures					(29,246,464	)
Net Realized and Unrealized Loss on Investments					(30,330,307	)
Change in Net Assets Resulting From Operations				$	(24,094,277	)

See notes to financial statements.

Annual Report to Shareholders 59

Statement of Changes in Net Assets

Limited Duration Bond Portfolio

	For the Years Ended December 31,
	2008			2007
Change in Net Assets:
Net investment income	$	6,236,030		$	8,863,309
Net realized loss		(1,083,843	)		(1,850,541	)
Change in unrealized appreciation/(depreciation)		(29,246,464	)		(2,874,447	)
Change in net assets resulting from operations		(24,094,277	)		4,138,321
Distributions to shareholders from:
Net investment income:
Primary Class		(6,092,645	)		(8,257,858	)
Institutional Class		(503,244	)		(597,941	)
Change in net assets from fund share transactions:
Primary Class		(42,218,056	)		(20,301,062	)
Institutional Class		(1,186,880	)		467,488
Change in net assets		(74,095,102	)		(24,551,052	)
Net Assets:
Beginning of year		178,384,113			202,935,165
End of year	$	104,289,011		$	178,384,113
(Overdistributed)/Undistributed net investment income	$	(200,722	)	$	75,612

See notes to financial statements.

60 Annual Report to Shareholders

Financial Highlights

Limited Duration Bond Portfolio

For a share of each class of capital stock outstanding:

Primary Class:

	Years Ended December 31,
	2008			2007			2006			2005			2004
Net asset value, beginning of year	$	9.97		$	10.22		$	10.20		$	10.36		$	10.54
Investment operations:
Net investment income		.39	A		.46	A		.42	A		.33			.29
Net realized and unrealized gain/(loss)		(1.99	)		(.25	)		.02			(.14	)		(.09	)
Total from investment operations		(1.60	)		.21			.44			.19			.20
Distributions from:
Net investment income		(.42	)		(.46	)		(.42	)		(.35	)		(.37	)
Net realized gain on investments		—			—			—			—			(.01	)
Total distributions		(.42	)		(.46	)		(.42	)		(.35	)		(.38	)
Net asset value, end of year	$	7.95		$	9.97		$	10.22		$	10.20		$	10.36
Total return		(16.52	)%		2.05	%		4.46	%		1.83	%		1.89	%
Ratios to Average Net Assets:B
Total expenses		1.22	%		1.18	%		1.21	%		1.15	%		1.21	%
Expenses net of waivers, if any		1.00	%		1.00	%		1.00	%		1.00	%		1.00	%
Expenses net of all reductions		1.00	%		1.00	%		1.00	%		1.00	%		1.00	%
Net investment income		4.21	%		4.51	%		4.10	%		3.21	%		2.81	%
Supplemental Data:
Portfolio turnover rate		224.1	%		286.8	%		237.2	%		81.6	%		238.0	%
Net assets, end of year (in thousands)	$	96,574		$	167,195		$	191,883		$	219,497		$	274,606

^A Computed using average daily shares outstanding.

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

See notes to financial statements.

Annual Report to Shareholders 61

Institutional Class:

	Years Ended December 31,
	2008			2007			2006			2005			2004
Net asset value, beginning of year	$	9.97		$	10.22		$	10.20		$	10.37		$	10.55
Investment operations:
Net investment income		.43	A		.51	A		.47	A		.40			.35
Net realized and unrealized gain/(loss)		(1.99	)		(.25	)		.03			(.17	)		(.10	)
Total from investment operations		(1.56	)		.26			.50			.23			.25
Distributions from:
Net investment income		(.46	)		(.51	)		(.48	)		(.40	)		(.42	)
Net realized gain on investments		—			—			—			—			(.01	)
Total distributions		(.46	)		(.51	)		(.48	)		(.40	)		(.43	)
Net asset value, end of year	$	7.95		$	9.97		$	10.22		$	10.20		$	10.37
Total return		(16.09	)%		2.56	%		4.98	%		2.29	%		2.41	%
Ratios to Average Net Assets:B
Total expenses		.77	%		.72	%		.64	%		.62	%		.70	%
Expenses net of waivers, if any		.50	%		.50	%		.50	%		.46	%		.48	%
Expenses net of all reductions		.50	%		.50	%		.50	%		.46	%		.48	%
Net investment income		4.71	%		5.02	%		4.58	%		3.85	%		3.22	%
Supplemental Data:
Portfolio turnover rate		224.1	%		286.8	%		237.2	%		81.6	%		238.0	%
Net assets, end of year (in thousands)	$	7,715		$	11,189		$	11,052		$	18,213		$	9,546

See notes to financial statements.

62 Annual Report to Shareholders

Notes to Financial Statements

Legg Mason Income Trust, Inc.

1. Organization and Significant Accounting Policies:

Legg Mason Income Trust, Inc. (“Corporation”), consisting of the Investment Grade Income Portfolio (“Investment Grade”), and the Limited Duration Bond Portfolio (“Limited Duration”) (each a “Fund”), is registered under the Investment Company Act of 1940 (“1940 Act”), as amended, as an open-end, diversified investment company.

Investment Grade and Limited Duration each consist of two classes of shares: Primary Class and Institutional Class. The income and expenses of each of these Funds are allocated proportionately to the two classes of shares based on daily net assets, except for Rule 12b-1 distribution fees, which are charged only on Primary Class shares, and transfer agent and shareholder servicing expenses, which are determined separately for each class.

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

Investment Valuation

The Funds’ securities are valued under policies approved by and under the general oversight of the Board of Directors. Effective January 1, 2008, the Funds adopted Statement of Financial Accounting Standards No. 157 (FAS 157). FAS 157 establishes a single definition of fair value, creates a three-tier hierarchy as a framework for reporting methods of measuring fair value based on inputs used to value the Fund’s investments, and requires additional disclosure about fair value. The hierarchy of inputs is summarized below.

• 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)

Debt securities are valued at the last quoted bid prices provided by an independent pricing service that are based on transactions in debt obligations, quotations from bond dealers, market transactions in comparable securities and various other relationships between securities. Equity securities for which market quotations are available are valued at the last sale price or official closing price on the primary market or exchange

Annual Report to Shareholders 63

on which they trade. Publicly traded foreign government debt securities are typically traded internationally in the over-the-counter market and are valued at the bid price as of the close of business of that market. When prices are not readily available, or are determined not to reflect fair value, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before a Fund calculates its net asset value, the Fund may value these securities at fair value as determined in accordance with the procedures approved by the Corporation’s Board of Directors.

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

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

Legg Mason Investment Grade

	December 31, 2008		Quoted Prices (Level 1)		Other Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Investments in Securities	$	205,948,438	$	125,073	$	205,721,365	$	102,000
Other Financial Instruments*		338,015		338,015		—		—
Total	$	206,286,453	$	463,088	$	205,721,365	$	102,000

* Other financial instruments include written options and futures.

The following is a reconciliation between the beginning and ending balances of investments in which significant unobservable inputs (Level 3) were used in determining fair value:

	Investments
	in Securities
Balance as of December 31, 2007	$	—
Net purchases (sales)		1,425,316
Accrued Premiums/Discounts		18,353
Change in unrealized appreciation (depreciation)		(1,341,669	)
Balance as of December 31, 2008	$	102,000

64 Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

Legg Mason Limited Duration

	December 31, 2008		Quoted Prices (Level 1)		Other Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Investments in Securities	$	102,042,406	$	22,624	$	101,812,737	$	207,045
Other Financial Instruments*		1,396,201		1,396,201		—		—
Total	$	103,438,607	$	1,418,825	$	101,812,737	$	207,045

* Other financial instruments include written options and futures.

The following is a reconciliation between the beginning and ending balances of investments in which significant unobservable inputs (Level 3) were used in determining fair value:

	Investments in Securities
Balance as of December 31, 2007	$	—
Net purchases (sales)		276,362
Accrued Premiums/Discounts		2,874
Change in unrealized appreciation (depreciation)		(259,436	)
Transfers in and/or out of Level 3		187,245
Balance as of December 31, 2008	$	207,045

Security Transactions

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

For the year ended December 31, 2008, security transactions (excluding short-term investments) were as follows:

	Purchases				Proceeds From Sales
	US Gov’t. Securities		Other		US Gov’t. Securities		Other
Investment Grade	$	2,866,213	$	46,676,554	$	6,785,808	$	140,558,131
Limited Duration	$	299,437,104	$	16,701,924	$	334,855,525	$	21,184,677

Annual Report to Shareholders 65

Repurchase Agreements

Each Fund may enter into repurchase agreements with institutions that its investment adviser has determined are creditworthy. Each repurchase agreement is recorded at cost. Under the terms of a typical repurchase agreement, a fund takes possession of an underlying debt obligation subject to an obligation of the seller to repurchase, and of the fund to resell, the obligation at an agreed-upon price and time, thereby determining the yield during a fund’s holding period. When entering into repurchase agreements, it is each Fund’s policy that its custodian acting on the Fund’s behalf, or a third party custodian 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 exceeds one business day, the value of the collateral is marked to market daily in an effort to ensure the adequacy of the collateral. If the counterparty defaults, a Fund generally has the right to use the collateral to satisfy the terms of the repurchase transaction. However, if the market value of the collateral declines during the period in which a Fund seeks to assert its rights or if bankruptcy proceedings are commenced with respect to the seller of the security, realization on the collateral by a Fund may be delayed or limited.

Options and Futures

The current market value of an exchange traded option is the last sale price or, in the absence of a sale, the price obtained by reference to broker-dealer quotations. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. Futures contracts are marked-to-market on a daily basis. As the contract’s value fluctuates, payments known as variation margin are made or received by each Fund each day, depending on the daily fluctuation in the value of the contract. The daily changes in contract value are recorded as unrealized gains or losses, and a Fund recognizes a gain or loss when the contract is closed.

Investment Income and Distributions to Shareholders

Interest income and expenses are recorded on the accrual basis. Bond premiums and discounts are amortized for financial reporting and federal income tax purposes. Dividend income and distributions to shareholders are allocated at the class level and are recorded on the ex-dividend date. Dividends from net investment income are declared daily and paid monthly for each Fund. Net capital gain distributions, which are calculated at the Fund level, are declared and paid annually in December, to the extent necessary in order to comply with federal excise tax regulations. Distributions are determined in accordance with federal income tax regulations, which may differ from those determined in accordance with accounting principles generally accepted in the United States of America; accordingly, periodic reclassifications are made within the Funds’ capital accounts to reflect income and gains available for distribution under federal income tax regulations.

66 Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

Compensating Balance Credits

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

Credit and Market Risk

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

Other

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

2. Federal Income Taxes:

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

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

Annual Report to Shareholders 67

Reclassifications:

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

Fund			Overdistributed/ Undistributed Net Investment Income		Accumulated Net Realized Loss			Paid-in Capital
Investment Grade	(a	)	$	888	$	(888	)		—
Limited Duration Bond	(a	)		83,525		(83,525	)		—
	(b	)		—		3,082,149		$	(3,082,149	)

^(a) Reclassifications are primarily due to losses from mortgage-backed securities treated as capital losses for tax purposes.

^(b) Reclassifications are primarily due to the expiration of a capital loss carryover.

Distributions to Shareholders:

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

Record Date	Investment Grade
Payable Date	Primary Class		Institutional Class
Daily 1/30/2009	$	0.044651	$	0.048341
Record Date	Limited Duration Bond
Payable Date	Primary Class		Institutional Class
Daily 1/30/2009	$	0.013374	$	0.021312

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

	Investment Grade		Limited Duration Bond
Distributions paid from:
Ordinary Income	$	22,105,837	$	6,595,889

68 Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

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

	Investment Grade		Limited Duration Bond
Distributions paid from:
Ordinary Income	$	23,195,204	$	8,855,799
Net Long-term Capital Gains		1,243,010		—
Total Distributions Paid	$	24,438,214	$	8,855,799

Accumulated Earnings on a Tax Basis:

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

				Limited Duration
	Investment Grade			Bond
Undistributed ordinary income-net	$	837,810		$	12,722
Capital loss carry forward(*)		(5,674,653	)		(8,058,382	)
Other book/tax temporary differences		(11,170,552	)(a)		(2,782,382	)(c)
Unrealized appreciation/(depreciation)		(107,432,328	)(b)		(35,763,721	)(b)
Total accumulated earnings/(losses)-net	$	(123,439,723	)	$	(46,591,763	)

(*) During the taxable year ended December 31, 2008, the following fund utilized the indicated amount of its capital loss carryovers available from a previous year:

Limited Duration Bond $  750,785

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

Year of Expiration	Investment Grade			Limited Duration Bond
12/31/2012	$	—		$	(4,535,866	)
12/31/2013		—			(554,986	)
12/31/2014		—			(1,406,678	)
12/31/2015		(750,316	)		(1,560,852	)
12/31/2016		(4,924,337	)		—
	$	(5,674,653	)	$	(8,058,382	)

These amounts will be available to offset any future taxable capital gains.

^(a) Other book/tax temporary differences are attributable primarily to the realization for tax purposes of unrealized losses on certain futures contracts, the deferral of post-October capital losses for tax purposes, difference between book/tax accrual of interest income on securities in default and book/tax differences in the timing of the deductibility of various expenses.

Annual Report to Shareholders 69

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

^(c) Other book/tax temporary differences are attributable primarily to the tax deferral of losses on straddles, the realization for tax purposes of unrealized gains on certain futures contracts, the deferral of post- October capital losses for tax purposes, differences between book/tax accrual of interest income on securities in default and book/tax differences in the timing of the deductibility of various expenses.

Tax Cost of investments:

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

Investment Grade	$	313,718,781
Limited Duration Bond		139,202,328

3. Financial Instruments:

Options and Futures

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

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

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

70 Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

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

The risk associated with purchasing options is limited to the premium originally paid. Options written by a Fund involve, to varying degrees, risk of loss in excess of the option value reflected in the statement of net assets. The most commonly realized risk in writing a covered call option is that a Fund may forgo the opportunity to profit if the market price of the underlying security increases and the option is exercised. The most commonly realized risk in writing a put option is that a Fund may incur a loss if the market price of the underlying security decreases and the option is exercised. In addition, there is the risk a Fund may not be able to enter into a closing transaction because of an illiquid secondary market or, for over-the-counter options, because of the counterparty’s inability or unwillingness to perform.

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

Limited Duration:	Actual Contracts		Premiums
Options outstanding at December 31, 2007	128		$	80,610
Options written	1,120			642,897
Options closed	(745	)		(342,859	)
Options expired	(33	)		(12,773	)
Options exercised	(118	)		(68,472	)
Options outstanding at December 31, 2008	352		$	299,403

Annual Report to Shareholders 71

Upon entering into a futures contract, each Fund is required to deposit with the broker cash or cash equivalents in an amount equal to a certain percentage of the contract amount. This is known as the “initial margin.” Subsequent payments (“variation margin”) are made or received by the Fund each day, depending on the daily fluctuation in the value of the contract. The daily changes in contract value are recorded as unrealized gains or losses. The Fund realizes a gain or loss when the contract is closed. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded.

The Funds enter into futures contracts as a hedge against anticipated changes in interest rates. There are several risks in connection with the use of futures contracts as a hedging device. Futures contracts involve, to varying degrees, risk of loss in excess of the amounts reflected in the financial statements. The change in the value of futures contracts primarily corresponds with the value of their underlying instruments, which may not correlate with the change in the value of the hedged instruments. In addition, there is the risk that a Fund may not be able to enter into a closing transaction because of an illiquid secondary market.

The open futures positions and related appreciation or depreciation at December 31, 2008 are listed at the end of each Fund’s portfolio of investments.

Swap Agreements

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

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

72 Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

payments will be partially offset by any recovery of values from the respective referenced obligations. As a seller of protection, the Fund effectively adds leverage to its portfolio because, in addition to its total net assets, the Fund would be subject to investment exposure on the notional amount of the swap. As a buyer of protection, the Fund generally receives an amount up to the notional value of the swap if a credit event occurs.

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

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

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

Swaps are marked to market daily, and changes in value are recorded as unrealized appreciation/(depreciation). Gains or losses are realized upon termination of the swap agreement. Periodic payments and premiums received or made by a Fund are recorded in the accompanying Statements of Operations as realized gains or losses, respectively.

Annual Report to Shareholders 73

Collateral, in the form of restricted cash or securities, may be required to be held in segregated accounts with the Funds’ custodian in compliance with swap contracts. Risks may exceed amounts recognized on the statements of assets and liabilities. These risks include changes in the returns of the underlying instruments, failure of the counter-parties to perform under the contracts’ terms, and the possible lack of liquidity with respect to the swap agreements.

As of December 31, 2008, the Funds held no Swaps.

4. Transactions With Affiliates:

Each Fund has an investment management agreement with Legg Mason Fund Adviser, Inc. (“LMFA”). Pursuant to their respective agreements, LMFA provides the Funds with management and administrative services for which each Fund pays a fee, computed daily and payable monthly, at annual rates of each Fund’s average daily net assets shown in the table below. LMFA has contractually agreed to waive its fees to the extent Limited Duration’s expenses (exclusive of taxes, interest, brokerage and extraordinary expenses) exceed during any month certain annual rates of the Fund’s average daily net assets. These contractual expense limitations are due to expire on April 30, 2009. LMFA has voluntarily agreed to waive fees to the extent that Investment Grade’s expenses (exclusive of taxes, interest, brokerage and extraordinary expenses) exceed during any month certain annual rates. This voluntary waiver is currently expected to continue until April 30, 2009, but may be terminated at any time. Pursuant to an agreement approved by the Board, Limited Duration agreed to repay LMFA for waived fees and reimbursed expenses provided that payment does not cause operating expenses to exceed 1.00% of the Primary Class’s average net assets and 0.50% of the Institutional Class’s average net assets and the payment is made within three years after the year in which LMFA earned the fee or incurred the expense. The following chart shows annual rates of management fees, expense limits, and management fees waived, for each Fund:

Fund	Management Fee		Expense Limitation		Year Ended December 31, 2008 Management Fees Waived			Maximum Amount Subject to Recapture
Investment Grade
— Primary Class	0.60	%	1.00	%	$	(738,099	)	$	2,422,595
— Institutional Class	0.60	%	0.50	%		(34,995	)		135,719
Limited Duration
— Primary Class	0.45	%	1.00	%	$	(187,628	)	$	659,385
— Institutional Class	0.45	%	0.50	%		(13,904	)		47,263

Western Asset Management Company (“Adviser”) serves as investment adviser to the Funds. The Adviser is responsible for the actual investment activity of each Fund.

74 Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

LMFA pays the Adviser a fee, computed daily and payable monthly, at an annual rate of 40% of the management fee received by LMFA for Investment Grade. For Limited Duration, LMFA pays the Adviser a fee, computed daily and payable monthly, of 0.20% of the Fund’s average daily net assets, not to exceed the fee received by LMFA after any fee waivers.

Legg Mason Investor Services, LLC (“LMIS”) serves as distributor of the Funds. LMIS receives an annual distribution fee and an annual service fee based on each Fund’s Primary Class’s average daily net assets, computed daily and payable monthly as shown in the table below. For the year ended December 31, 2008, LMIS waived $152,873 and $108,020 of the distribution and service fees for Investment Grade and Limited Duration, respectively.

Fund	Distribution Fee		Service Fee
Investment Grade	0.25	%	0.25	%
Limited Duration	0.25	%	0.25	%

LMFA, the Adviser, and LMIS are corporate affiliates and wholly owned subsidiaries of Legg Mason, Inc.

Under a Deferred Compensation Plan (“Plan”), directors may elect to defer receipt of all or a specified portion of their compensation. A participating director may select one or more funds in which his or her deferred director’s fees will be deemed to be invested. Deferred amounts remain in the funds until distributed in accordance with the Plan.

5. Line of Credit:

The Funds, along with certain other Legg Mason Funds, participate in a $400 million line of credit (“Credit Agreement”) to be used for temporary or emergency purposes. Pursuant to the Credit Agreement, each participating fund is liable only for principal and interest payments related to borrowings made by that fund. Borrowings under the Credit Agreement bear interest at a rate equal to the prevailing federal funds rate plus the federal funds rate margin. The Funds did not utilize the line of credit during the year ended December 31, 2008.

Annual Report to Shareholders 75

6. Fund Share Transactions:

At December 31, 2008, there were 100,000,000 shares authorized at $.001 par value for each of the Primary and Financial Intermediary Classes of Investment Grade and Limited Duration, and 50,000,000 shares authorized at $.001 par value for each of their Institutional Classes. Share transactions for the Funds were as follows: Investment Grade Income Portfolio

	Year Ended					Year Ended
	December 31, 2008					December 31, 2007
	Shares		Amount			Shares		Amount
Primary Class
Shares sold	5,602,244		$	51,251,221		10,373,591		$	107,619,637
Shares issued on reinvestment	2,367,708			20,528,846		1,914,513			19,726,308
Shares repurchased	(17,235,188	)		(148,299,211	)	(12,697,523	)		(130,997,575	)
Net Decrease	(9,265,236	)	$	(76,519,144	)	(409,419	)	$	(3,651,630	)
Institutional Class
Shares sold	697,516		$	5,974,142		4,021,567		$	41,398,237
Shares issued on reinvestment	119,333			1,033,284		173,253			1,772,017
Shares repurchased	(4,162,393	)		(40,423,902	)	(555,055	)		(5,679,440	)
Net Increase (Decrease)	(3,345,544	)	$	(33,416,476	)	3,639,765		$	37,490,814

Limited Duration Bond Portfolio

	Year Ended					Year Ended
	December 31, 2008					December 31, 2007
	Shares		Amount			Shares		Amount
Primary Class
Shares sold	2,349,770		$	21,834,372		2,517,235		$	25,588,486
Shares issued on reinvestment	660,072			6,003,189		751,053			7,616,464
Shares repurchased	(7,637,193	)		(70,055,617	)	(5,274,330	)		(53,506,012	)
Net Decrease	(4,627,351	)	$	(42,218,056	)	(2,006,042	)	$	(20,301,062	)
Institutional Class
Shares sold	694,527		$	6,452,975		570,046		$	5,775,650
Shares issued on reinvestment	55,370			501,071		44,813			454,047
Shares repurchased	(901,485	)		(8,140,926	)	(574,158	)		(5,762,209	)
Net Increase (Decrease)	(151,588	)	$	(1,186,880	)	40,701		$	467,488

76 Annual Report to Shareholders

Notes to Financial Statements — Continued

Legg Mason Income Trust, Inc. — Continued

7. Recent Accounting Pronouncements

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

Annual Report to Shareholders 77

Report of Independent Registered Public Accounting Firm

To the Board of Directors of Legg Mason Income Trust, Inc. and to the Shareholders of Investment Grade Income Portfolio and Limited Duration Bond Portfolio:

In our opinion, the accompanying statements of assets and liabilities, including the portfolios of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Investment Grade Income Portfolio and Limited Duration Bond Portfolio (two of the Portfolios comprising Legg Mason Income Trust, Inc., the “Funds”) at December 31, 2008, the results of their operations, the changes in their 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 Funds’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2008 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Baltimore, Maryland

February 27, 2009

78 Annual Report to Shareholders

Important Tax Information (Unaudited)

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

	Limited Duration Bond
Record Date: Payable Date:	Daily Monthly
Ordinary Income:
Qualified Dividend Income for Individuals	0.80	%

The following information is provided for shareholders who are not residents of the United States:

	Investment		Limited Duration
	Grade		Bond
Record Date:	Daily		Daily
Payable Date:	Monthly		Monthly
Qualified Interest Income	79.13	%	88.77	%

Please retain this information for your records.

Annual Report to Shareholders 79

Directors and Officers

The table below provides information about the Corporation’s directors and officers, including biographical information about their business experience and information about their relationships with Legg Mason, Inc. and its affiliates. The mailing address of each director and officer is 100 Light Street, Attn: Fund Secretary c/o Legal and Compliance Department, 32nd Floor, Baltimore, Maryland 21202.

Name, (Year of Birth) and Position with Corporation	Term of Office and Length of Time ServedA	Number of Funds in Fund Complex Overseen	Other Directorships Held	Principal Occupation(s) During the Past Five Years
INDEPENDENT DIRECTORS:B
Hearn,Ruby P. (1940) Director	Since 2004	14	None	Senior Vice President Emerita of The Robert Wood Johnson Foundation (non-profit) since 2001. Formerly: Senior Vice President of The Robert Wood Johnson Foundation (1996- 2001).
Lehman, Arnold L. (1944) Lead Independent Director	Since 1987	14	None	Director of the Brooklyn Museum since 1997; Trustee of American Federation of Arts since 1998. Formerly: Director of The Baltimore Museum of Art (1979-1997).
Masters, Robin J.W. (1955) Director	Since 2002	14	Director of Cheyne Capital International Limited (investment advisory firm). Director/Trustee of Legg Mason Asian Funds plc, Legg Mason Institutional Funds plc, Western Asset Fixed Income Funds plc, and Western Asset Debt Securities plc.	Retired. Formerly: Chief Investment Officer of ACE Limited (insurance) (1986-2000).

80 Annual Report to Shareholders

Directors and Officers — Continued

Name, (Year of Birth) and Position with Corporation	Term of Office and Length of Time ServedA	Number of Funds in Fund Complex Overseen	Other Directorships Held	Principal Occupation(s) During the Past Five Years
McGovern, Jill E. (1944) Director	Since 1989	14	None	Senior Consultant, American Institute for Contemporary German Studies (AICGS) since 2007. Formerly: Chief Executive Officer of The Marrow Foundation (non-profit) (1993- 2007); Executive Director of the Baltimore International Festival (1991-1993); Senior Assistant to the President of The Johns Hopkins University (1986-1990).
Mehlman, Arthur S. (1942) Director	Since 2002	Director/ Trustee of all Legg Mason Funds consisting of 14 portfolios; Director/ Trustee of the Royce Family of Funds consisting of 28 portfolios.	Director of Municipal Mortgage & Equity, LLC.	Retired. Formerly: Partner, KPMG LLP (international accounting firm) (1972-2002).
O’Brien, G. Peter (1945) Director	Since 2002	Director/ Trustee of all Legg Mason Funds consisting of 14 portfolios; Director/ Trustee of the Royce Family of Funds consisting of 28 portfolios.	Director of Technology Investment Capital Corp.	Retired. Trustee Emeritus of Colgate University; Board Member, Hill House, Inc. (residential home care); Board Member, Bridges School (pre-school). Formerly: Managing Director, Equity Capital Markets Group of Merrill Lynch & Co. (1971-1999).
Rowan, S. Ford (1943) Director	Since 2002	14	None	Chairman, National Center for Critical Incident Analysis, National Defense University, since 2004; Professional Lecturer in Organizational Sciences, The George Washington University, since 2008. Formerly: Consultant, Rowan & Blewitt Inc. (management consulting) (1984- 2007).

Annual Report to Shareholders 81

Name, (Year of Birth) and Position with Corporation	Term of Office and Length of Time ServedA	Number of Funds in Fund Complex Overseen	Other Directorships Held	Principal Occupation(s) During the Past Five Years
Tarola, Robert M. (1950) Director	Since 2004	14	TeleTech Holdings, Inc. (business process outsourcing)	President of Right Advisory, LLC (corporate finance and governance consulting) since 2008; Formerly: Senior Vice President and Chief Financial Officer of W. R. Grace & Co. (specialty chemicals and materials) (1999- 2008), and of MedStar Health, Inc. (hospitals and healthcare) (1996 to 1999); Partner, PriceWaterhouse LLP (accounting and auditing) from (1984 to 1996)
INTERESTED DIRECTORS:C
Fetting, Mark R. (1954) Chairman and Director	Director since 2002 and Chairman since 2008.	Chairman and Director/ Trustee of all Legg Mason Funds consisting of 14 portfolios; Director/ Trustee of the Royce Family of Funds consisting of 28 portfolios.	None	President, CEO, Chairman of Legg Mason, Inc. and Chairman of Legg Mason Funds since 2008. Formerly: President of all Legg Mason Funds (2001- 2008). Senior Executive Vice President of Legg Mason, Inc., Director and/or officer of various Legg Mason, Inc. affiliates (2000-2008). Division President and Senior Officer of Prudential Financial Group, Inc. and related companies, including fund boards and consulting services to subsidiary companies (1991- 2000); Partner, Greenwich Associates (financial consulting); Vice President, T. Rowe Price Group, Inc.

82 Annual Report to Shareholders

Directors and Officers — Continued

Name, (Year of Birth) and Position with Corporation	Term of Office and Length of Time ServedA	Number of Funds in Fund Complex Overseen	Other Directorships Held	Principal Occupation(s) During the Past Five Years
Odenath, David R. 1957 President and Director	Since 2008	14	None	Senior Executive Vice President of Legg Mason, Inc. and President of Legg Mason Funds since 2008. Formerly: President of Prudential Annuities (since August 2002); Executive Vice President (since May 2003) of American Skandia Investment Services, Inc; Chief Executive Officer and Director (since May 2003) of American Skandia Life Assurance Corporation, American Skandia Information Services and Technology Corporation and Skandia U.S. Inc; President, Chief Executive Officer and Director (since May 2003) of American Skandia Marketing, Inc.; Formerly President, Chief Executive Officer, Chief Operating Officer and Officer- In-Charge (1999-2003) of PI; Senior Vice President (since June 1999) of Prudential; formerly Senior Vice President (August 1993- May 1999) of Paine Webber Group, Inc.

Annual Report to Shareholders 83

Name, (Year of Birth) and Position with Corporation	Term of Office and Length of Time ServedA	Number of Funds in Fund Complex Overseen	Other Directorships Held	Principal Occupation(s) During the Past Five Years
EXECUTIVE OFFICERS:
Karpinski, Marie K. (1949) Vice President and Chief Financial Officer	Since 1987	14	None	Vice President and Chief Financial Officer of all Legg Mason Funds. Vice President and Treasurer of Legg Mason Fund Adviser, Inc.; Vice President and Principal Financial and Accounting Officer of Western Asset Funds, Inc., Western Asset Income Fund and Western Asset Premier Bond Fund; Treasurer and Principal Financial and Accounting Officer of Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund (2003-present), and Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund 2 (2004-present).
Merz, Gregory T. (1958) Vice President and Chief Legal Officer	Since 2003	14	None	Vice President and Deputy General Counsel of Legg Mason, Inc. since 2003. Formerly: Associate General Counsel, Fidelity Investments (1993- 2002).

84 Annual Report to Shareholders

Directors and Officers — Continued

Name, (Year of Birth) and Position with Corporation	Term of Office and Length of Time ServedA	Number of Funds in Fund Complex Overseen	Other Directorships Held	Principal Occupation(s) During the Past Five Years
Becker, Ted P. (1951) Vice President and Chief Compliance Officer	Since 2007	14	None	Director of Global Compliance at Legg Mason (2006 to present); Managing Director of Compliance at Legg Mason & Co. (2005 to present); Chief Compliance Officer with certain mutual funds associated with Legg Mason & Co. (since 2006); Chief Compliance Officer of Legg Mason Partners Fund Adviser and certain affiliates; Managing Director of Compliance at Citigroup Asset Management (2002 to 2005). Prior to 2002, Managing Director- Internal Audit & Risk Review at Citigroup Inc.
Wachterman, Richard M. (1947) Secretary	Since 2004	14	None	Associate General Counsel of Legg Mason, Inc. since 2004. Formerly: Managing Director, Victory Capital Management, Inc. (investment management) (1993- 2003).

Annual Report to Shareholders 85

Name, (Year of Birth) and Position with Corporation	Term of Office and Length of Time ServedA	Number of Funds in Fund Complex Overseen	Other Directorships Held	Principal Occupation(s) During the Past Five Years
Morris, Erin K. (1966) Treasurer	Since 2006	3	None	Vice President and Manager, Global Funds Administration, Legg Mason & Co., LLC (2005-present); Assistant Vice President of Legg Mason Wood Walker, Incorporated (2002- 2005); Treasurer of Legg Mason Income Trust, Inc., Legg Mason Tax- Free Income Fund, Western Asset Income Fund, Western Asset Premier Bond Fund and Western Asset Funds, Inc. (2006-present); Assistant Treasurer, Legg Mason Partners Fund fixed income complex (2007-present). Western Asset/Claymore Inflation-Linked Securities & Income Fund (2003-present); Western Asset/Claymore Inflation-Linked Opportunities & Income Fund (2004-present); Assistant Treasurer, the Corporation, Western Asset Income Fund, Western Asset Premier Bond Fund, Legg Mason Income Trust, Inc. and Legg Mason Tax-Free Income Fund (2001- 2006): Manager, Funds Accounting, Legg Mason Wood Walker, Incorporated (2000- 2005).

86 Annual Report to Shareholders

Directors and Officers — Continued

ADDITIONAL INFORMATION ABOUT THE CORPORATION’S DIRECTORS AND OFFICERS IS CONTAINED IN

THE STATEMENT OF ADDITIONAL INFORMATION, AVAILABLE WITHOUT CHARGE UPON REQUEST BY

CALLING 1-800-822-5544 OR ON THE SECURITIES AND EXCHANGE COMMISSION WEBSITE

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

^A Directors of the Corporation serve a term of indefinite length until their retirement, in accordance with the Board’s retirement policy, resignation or removal and stand for re-election by shareholders only as and when required by the 1940 Act. Officers of the Corporation are elected annually to serve until their successors are elected and qualified.

^B Each of the Independent Directors serves on the standing committees of the Board of Directors, which include the Audit Committee (chair: Arthur Mehlman), the Nominating Committee (co-chairs: Peter O’Brien and Jill McGovern), and the Independent Directors Committee (chair: Arnold Lehman).

^C Mr. Fetting and Mr. Odenath are considered to be interested persons, as defined in the 1940 Act, of the Corporation on the basis of their employment with the Funds’ adviser or their affiliated entities (including the Funds’ principal underwriter) or Legg Mason, Inc., the parent holding company of those entities, as well as their ownership of Legg Mason, Inc. stock.

^D Officers of the Corporation are interested persons (as defined in the 1940 Act).

Annual Report to Shareholders 87

Board Consideration of Legg Mason Income Trust, Inc.’s Investment Advisory Agreements and Management Agreements

At its November 2008 meeting, the Board of Directors (the “Board”), including all of the Independent Directors, approved the continuation of the Management Agreements between Legg Mason Fund Adviser, Inc. (the “Manager”) and Legg Mason Income Trust, Inc., on behalf of Legg Mason Limited Duration Bond Portfolio and Legg Mason Investment Grade Income Portfolio (each, a “Fund”), and the Investment Advisory Agreements between the Manager and Western Asset Management Company (the “Adviser”) for each Fund (each an “Agreement”). In voting to approve the continuation of each Agreement, the Board considered whether continuance would be in the best interest of the relevant Fund and its shareholders, an evaluation largely based on the nature and quality of the services provided under each Agreement and the overall fairness of each Agreement to the relevant Fund. In considering each Agreement, the Board did not identify any single factor or item of information as all-important or controlling. Based on its evaluation of all material factors, including those described below, the Board concluded that the terms of each Agreement are reasonable and fair and that the continuation of each Agreement is in the best interest of the relevant Fund and its shareholders.

Prior to the Board action, the Independent Directors met as a committee, together with experienced 1940 Act counsel, to consider their recommendation as to continuance of each Agreement. As part of the process to consider each Agreement, legal counsel to each Fund requested certain information from the Manager and the Adviser on behalf of the Independent Directors, and in response, the Manager and the Adviser provided extensive reports that addressed specific factors designed to inform the Board’s consideration of each Agreement. Counsel also provided the Independent Directors and the Board with a memorandum detailing their responsibilities pertaining to the continuance of each Agreement.

In addition to the November meeting, the Independent Directors met in executive session in October 2008, at which time they reviewed and analyzed materials relating to each Agreement. The Independent Directors also retained independent consultants to assist them in their review and analysis of each Agreement. The Board meets at least another three times per year in order to oversee the Legg Mason Funds, including meetings at which the portfolio managers of each Fund or others make presentations and discuss performance, compliance and other applicable issues. The Board also drew upon its long association with the Manager, the Adviser and their personnel and the Board members’ familiarity with their culture and the manner in which the management entities have sought to strengthen and enhance themselves.

88 Annual Report to Shareholders

With respect to the nature, scope and quality of the services provided, the Board considered the experience and commitment of the Manager’s and the Adviser’s personnel and their efforts to build and support a strong service team. The Board also considered the nature and quality of the Adviser’s investment process. In assessing performance, the Board compared the returns of each Fund to the average of an appropriate Lipper category, a specified benchmark index and a peer group of investment companies pursuing similar strategies, all over multiple time periods. The Board considered very carefully each Fund’s performance and discussed with the Manager and the Adviser steps that the Manager and the Adviser had taken, or intended to take, to improve performance. The Board considered whether a reduction in assets under management would adversely affect the resources available to the Manager and the Adviser. The Board also considered the level of service provided by the Manager to each Fund, including oversight of the transfer agent and the custodian and preparation of regulatory filings. The Board considered the Adviser’s procedures for executing portfolio transactions for each Fund. The Board also reviewed the Adviser’s policies and procedures for the selection of brokers and dealers and on obtaining research from brokers.

In determining whether the terms of each Agreement are reasonable and fair, the Board considered the terms and fee structure of each Agreement. In that connection, the Board considered the costs to the Manager and the Adviser in providing services to each Fund and profitability for the Manager and its affiliates from their overall association with each Fund. The Board reviewed information about the advisory fee schedule and overall expense ratio of each Fund and comparable fee schedules and expense ratios of a peer group of funds. In considering whether any economies of scale experienced by the Manager in providing services to each Fund were shared with that Fund, the Board noted that, while each Fund’s advisory fee structure does not provide for a reduction of payments, the current fees appear fair and reasonable in relation to the present asset size of each Fund and the Manager has contractually agreed to waive fees for Legg Mason Limited Duration Bond Portfolio and has voluntarily waived fees for Legg Mason Investment Grade Income Portfolio. The Board also compared the advisory fee schedule for each Fund to the advisory fees charged by the Manager and the Adviser to its other accounts managed in a similar style. In that connection, the Board considered the differences in the level of services provided and the differences in responsibility of the Manager and the Adviser to each Fund and to the other accounts. Finally, the Board considered other benefits accruing to the Manager, the Adviser and their affiliates by virtue of their relationship to each Fund.

After an evaluation of all material factors, including those in the foregoing discussion, the Board concluded that the continuation of each Agreement is in the best interest of the relevant Fund.

Fund Information

Investment Manager

Legg Mason Fund Adviser, Inc.

Baltimore, MD

Investment Adviser

Western Asset Management Company

Pasadena, CA

Board of Directors

Mark R. Fetting, Chairman

David R. Odenath, President

Dr. Ruby P. Hearn

Arnold L. Lehman

Robin J.W. Masters

Dr. Jill E. McGovern

Arthur S. Mehlman

G. Peter O’Brien

S. Ford Rowan

Robert M. Tarola

Officers

Marie K. Karpinski, Vice President and Chief Financial Officer

Gregory T. Merz, Vice President and Chief Legal Officer

Ted P. Becker, Vice President and Chief Compliance Officer

Erin K. Morris, Treasurer

Susan C. Curry, Assistant Treasurer

Richard M. Wachterman, Secretary

Peter J. Ciliberti, Assistant Secretary

Transfer and Shareholder Servicing Agent

Boston Financial Data Services

Braintree, MA

Custodian

State Street Bank & Trust Company

Boston, MA

Counsel

K&L Gates LLP

Washington, DC

Independent Registered Public Accounting Firm

PricewaterhouseCoopers LLP

Baltimore, MD

About the Legg Mason Funds

Equity Funds American Leading Companies Trust Classic Valuation Fund Growth Trust Special Investment Trust US Small- Capitalization Value Trust Value Trust	Legg Mason, Inc., based in Baltimore, Maryland, has built its reputation, at least in part, on the success of the Legg Mason Funds, introduced in 1979. The primary purpose of our funds is to enable investors to diversify their portfolios across various asset classes and, consequently, enjoy the stability and growth prospects generally associated with diversification.
Specialty Fund Opportunity Trust	The success of our funds is contingent on the experience, discipline, and acumen of our fund managers. We believe the quality of our managers is crucial to investment success. Unlike many firms, which focus on a particular asset class or the fluctuations of the market, at Legg Mason we focus on providing a collection of top-notch managers in all the major asset classes.
Global Funds Emerging Markets Trust International Equity Trust Taxable Bond Funds Investment Grade Income Portfolio Limited Duration Bond Portfolio	Information about the policies and procedures that each Fund uses to determine how to vote proxies relating to its portfolio securities is contained in the Statement of Additional Information, available without charge upon request by calling 1-800-822-5544 or on the Securities and Exchange Commission’s (“SEC”) website (http://www.sec.gov). Information regarding how each Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is also available on the SEC’s website or through the Legg Mason Funds’ website at www.leggmason.com/individualinvestors.
Tax-Free Bond Fund Maryland Tax-Free Income Trust	Each Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. You may obtain a free copy of each Fund’s portfolio holdings as filed on Form N-Q, by contacting each Fund at the appropriate phone number, address or website listed below. Additionally, each Fund’s Form N-Q is available on the SEC’s website (http://www.sec.gov) or may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information about the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.

This report must be preceded or accompanied by a free prospectus. Investors should consider each Fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information about each Fund. For a free prospectus for these or any other Legg Mason Fund, visit www.leggmason.comindividualinvestors. Please read the prospectus carefully before investing.

Legg Mason Funds	Legg Mason Investor Services — Institutional
For Primary, R Class Shareholders	For FI, I and IS Class Shareholders
c/o BFDS	c/o BFDS
P.O. Box 55214	P.O. Box 8037
Boston, MA 02205-8504	Boston, MA 02206-8037
800-822-5544	888-425-6432
www.leggmason.com/individualinvestors	www.lminstitutionalfunds.com

Legg Mason Investor Services, LLC, Distributor
A Legg Mason, Inc. subsidiary

EX-99.17(F)

Exhibit 17(f)

ANNUAL REPORT / DECEMBER 31, 2008

Legg Mason Partners

Corporate Bond Fund

Managed by WESTERN ASSET

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

Fund objective

The Fund seeks as high a level of current income as is consistent with prudent investment management and preservation of capital.

What’s inside

Letter from the chairman	I
Fund overview	1
Fund at a glance	6
Fund expenses	7
Fund performance	9
Historical performance	10
Schedule of investments	11
Statement of assets and liabilities	21
Statement of operations	22
Statements of changes in net assets	23
Financial highlights	24
Notes to financial statements	28
Report of independent registered public accounting firm	41
Board approval of management and subadvisory agreements	42
Additional information	47

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s investment manager and Western Asset Management Company (“Western Asset”) is the Fund’s subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc.

Letter from the chairman

R. Jay Gerken, CFA

Chairman, President and Chief Executive Officer

Dear Shareholder,

The U.S. economy weakened significantly during the 12-month reporting period ended December 31, 2008. Looking back, U.S. gross domestic product (“GDP”)i contracted 0.2% in the fourth quarter of 2007. This was due to continued weakness in the housing market, an ongoing credit crunch and soaring oil and food prices. The economy then expanded 0.9% and 2.8% during the first and second quarters of 2008, respectively. Contributing to this rebound were rising exports that were buoyed by a weakening U.S. dollar. In addition, consumer spending accelerated, aided by the government’s tax rebate program. However, the dollar’s rally and the end of the rebate program, combined with other strains on the economy, caused GDP to take a step backward during the second half of 2008. According to the U.S. Department of Commerce, third quarter 2008 GDP declined 0.5% and its advance estimate for fourth quarter GDP decline was 3.8%, the latter being the worst quarterly reading since 1982.

While there were increasing signs that the U.S. was headed for a recession, the speculation ended in December 2008. At that time, the National Bureau of Economic Research (“NBER”) — which has the final say on when one begins and ends — announced that a recession had begun in December 2007. The NBER determined that a recession had already started using its definition, which is based on “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income and other indicators.”

Regardless of how one defines a recession, it felt like we were in the midst of an economic contraction for much of 2008. Consumer spending, which represents approximately two-thirds of GDP, has been disappointing. According to the International Council of Shopping Centers, retail sales rose a tepid 1% in 2008, the weakest level in at least 38 years. In terms of the job market, the U.S. Department of Labor reported that payroll employment declined in each of the 12 months of 2008. During 2008 as a whole, 2.6 million jobs were lost, the largest annual decline since World War II ended in 1945. In addition, at the end of 2008, the unemployment rate had risen to 7.2%, its highest level since January 1993.

Legg Mason Partners Corporate Bond Fund|    I

Letter from the chairman continued

Ongoing issues related to the housing and subprime mortgage markets and seizing credit markets prompted the Federal Reserve Board (“Fed”)ⁱⁱ to take aggressive and, in some cases, unprecedented actions. When 2008 began, the federal funds rateⁱⁱⁱ was 4.25%. This was quickly brought down to 3.00% by the end of January 2008, on the back of two Fed rate cuts. The Fed continued to lower the federal funds rate to 2.00% by the end of April 2008, but then left rates on hold for several months. This was due to growing inflationary pressures as a result of soaring oil and commodity prices, coupled with the sagging U.S. dollar. However, as inflation receded along with oil prices and the global financial crisis escalated, the Fed cut rates twice in October to 1.00%. Then, in mid-December 2008, it reduced the federal funds rate to a range of zero to 0.25%, an historic low. In conjunction with its December meeting, the Fed stated that it “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”

In addition to the interest rate cuts, the Fed took several actions to improve liquidity in the credit markets. In March 2008, it established a new lending program allowing certain brokerage firms, known as primary dealers, to also borrow from its discount window. Also in March, the Fed played a major role in facilitating the purchase of Bear Stearns by JPMorgan Chase. In mid-September 2008, it announced an $85 billion rescue plan for ailing AIG and pumped $70 billion into the financial system as Lehman Brothers’ bankruptcy and mounting troubles at other financial firms roiled the markets.

The U.S. Department of the Treasury has also taken an active role in attempting to stabilize the financial system, as it orchestrated the government’s takeover of mortgage giants Fannie Mae and Freddie Mac in September 2008. In addition, on October 3, 2008, the Treasury’s $700 billion Troubled Asset Relief Program (“TARP”) was approved by Congress and signed into law by President Bush. As part of TARP, the Treasury had planned to purchase bad loans and other troubled financial assets. However, in November 2008, Treasury Secretary Paulson said, “Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending.”

During the 12-month reporting period ended December 31, 2008, both short- and long-term Treasury yields experienced periods of extreme volatility. Investors were initially focused on the subprime segment of the mortgage-backed market. These concerns broadened, however, to include a wide range of financial institutions and markets. As a result, other fixed-income instruments also experienced increased price volatility. This unrest

II|    Legg Mason Partners Corporate Bond Fund

triggered several “flights to quality,” causing Treasury yields to move lower (and their prices higher), while riskier segments of the market saw their yields move higher (and their prices lower). This was particularly true toward the end of the reporting period, as the turmoil in the financial markets and sharply falling stock prices caused investors to flee securities that were perceived to be risky, even high-quality corporate bonds and high-grade municipal bonds. On several occasions, the yield available from short-term Treasuries fell to nearly zero, as investors were essentially willing to forgo any return potential in order to access the relative safety of government-backed securities. During the 12 months ended December 31, 2008, two-year Treasury yields fell from 3.05% to 0.76%. Over the same time frame, 10-year Treasury yields moved from 4.04% to 2.25%. Looking at the 12-month period as a whole, the overall bond market, as measured by the Barclays Capital U.S. Aggregate Index^iv, returned 5.24%.

Periods of increased investor risk aversion caused the high-yield bond market to produce extremely poor results over the 12 months ended December 31, 2008. While the asset class modestly rallied on several occasions, it was not enough to overcome numerous flights to quality. In particular, seizing credit markets, coupled with fears of a global recession and rising corporate bond default rates, sent high-yield bond prices sharply lower in September, October and November 2008. During those three months, the Citigroup High Yield Market Index^v (the “Index”) returned -8.01%, -15.34% and -9.75%, respectively. Over the 12 months ended December 31, 2008, the Index returned -25.91%.

Special shareholder notice

Effective September 2, 2008, the name of the Fund changed from Legg Mason Partners Investment Grade Bond Fund to Legg Mason Partners Corporate Bond Fund. The Fund’s current investment objective, strategies and management remain unchanged.

A special note regarding increased market volatility

In recent months, we have experienced a series of events that have impacted the financial markets and created concerns among both novice and seasoned investors alike. In particular, we have witnessed the failure and consolidation of several storied financial institutions, periods of heightened market volatility, and aggressive actions by the U.S. federal government to steady the financial markets and restore investor confidence. While we hope that the worst is over in terms of the issues surrounding the credit and housing crises, it is likely that the fallout will continue to impact the financial markets and the U.S. economy well into 2009.

Like all asset management firms, Legg Mason has not been immune to these difficult and, in some ways, unprecedented times. However, today’s challenges have only strengthened our resolve to do everything we can to

Legg Mason Partners Corporate Bond Fund|    III

Letter from the chairman continued

help you reach your financial goals. Now, as always, we remain committed to providing you with excellent service and a full spectrum of investment choices. And rest assured, we will continue to work hard to ensure that our investment managers make every effort to deliver strong long-term results. We also remain committed to supplementing the support you receive from your financial advisor. One way we accomplish this is through our enhanced website, www.leggmason.com/individualinvestors. Here you can gain immediate access to many special features to help guide you through difficult times, including:

• Fund prices and performance,

• Market insights and commentaries from our portfolio managers, and

• A host of educational resources.

During periods of market unrest, it is especially important to work closely with your financial advisor and remember that reaching one’s investment goals unfolds over time and through multiple market cycles. Time and again, history has shown that, over the long run, the markets have eventually recovered and grown.

Information about your fund

As you may be aware, several issues in the mutual fund industry have come under the scrutiny of federal and state regulators. Affiliates of the Fund’s manager have, in recent years, received requests for information from various government regulators regarding market timing, late trading, fees, and other mutual fund issues in connection with various investigations. The regulators appear to be examining, among other things, the Fund’s response to market timing and shareholder exchange activity, including compliance with prospectus disclosure related to these subjects. The Fund is not in a position to predict the outcome of these requests and investigations.

Please read on for a more detailed look at prevailing economic and market conditions during the Fund’s reporting period and to learn how those conditions have affected Fund performance.

Important information with regard to recent regulatory developments that may affect the Fund is contained in the Notes to Financial Statements included in this report.

IV|    Legg Mason Partners Corporate Bond Fund

As always, thank you for your confidence in our stewardship of your assets. We look forward to helping you meet your financial goals.

Sincerely,

R. Jay Gerken, CFA

Chairman, President and Chief Executive Officer

January 30, 2009

All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.

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

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

^iv The Barclays Capital (formerly Lehman Brothers) 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.

^v The Citigroup High Yield Market Index is a broad-based unmanaged index of high-yield securities.

Legg Mason Partners Corporate Bond Fund|    V

Fund overview

Q. What is the Fund’s investment strategy?

A. The Fund seeks as high a level of current income as is consistent with prudent investment management and preservation of capital.

Under normal circumstances, the Fund invests at least 80% of the value of its net assets, plus any borrowings for investment purposes, in investment grade fixed-income securities and related investments. These are securities rated by a national recognized statistical ratings organization within one of the top four ratings categories, or, if unrated, judged by Western Asset Management Company (“Western Asset”), the Fund’s subadviser, to be of comparable credit quality. The Fund also may invest in U.S. Government securities and U.S. dollar-denominated fixed-income securities of foreign issuers. The Fund may invest in securities having any maturity.

At Western Asset, 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 managers, 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. During the fiscal year, the U.S. bond market experienced periods of increased volatility. Changing perceptions regarding the economy, inflation and future Federal Reserve Board (“Fed”)ⁱ monetary policy caused bond prices to fluctuate. Two- and 10-year Treasury yields began the reporting period at 3.05% and 4.04%, respectively. Treasury yields moved lower — and their prices moved higher — during the first quarter of 2008, as concerns regarding the subprime mortgage market and a severe credit crunch caused a “flight to quality.” During this period, investors were drawn to the relative safety of Treasuries, while increased risk aversion caused other segments of the bond market to falter.

Treasury yields then moved higher in April, May and early June 2008, as the economy performed better than expected and inflation moved higher. Over this period, riskier fixed-income asset classes, such as high-yield bonds and emerging market debt, rallied. However, the credit crunch resumed in mid-June, resulting in another flight to quality. Investors’ risk aversion then intensified from September through November given the severe disruptions in the global financial markets. During this time, virtually every asset class, with the exception of short-term Treasuries, performed poorly. At the end of the fiscal year, two- and 10-year Treasury yields were 0.76% and 2.25%, respectively.

Legg Mason Partners Corporate Bond Fund 2008 Annual Report|    1

Fund overview continued

Aided by the strong performance in the Treasury market, the overall bond market, as measured by the Barclays Capital U.S. Aggregate Indexⁱⁱ, gained 5.24% during the 12 months ended December 31, 2008. In contrast, riskier fixed-income asset classes, such as high-yield bonds, performed poorly, as the Citigroup High Yield Market Indexⁱⁱⁱ returned - -25.91% over the same period.

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

A. We are committed to a relative value approach to the credit markets, grounded in exhaustive fundamental credit analysis. This approach is the cornerstone of our investment decision process and is followed regardless of market conditions. This process is designed to identify market opportunities and position the portfolio accordingly. As corporate bond spreads widened throughout the reporting period, we reduced the portfolio’s cash and U.S. Treasury positions in favor of an increased exposure to Financials. Although this detracted from performance over the reporting period, we feel that spreads should begin to tighten as the markets respond to the many programs initiated by the Fed and the U.S. Department of the Treasury, as well as the anticipated stimulus program advanced by the new administration.

Performance review

For the 12 months ended December 31, 2008, Class A shares of Legg Mason Partners Corporate Bond Fund, excluding sales charges, returned -23.11%. The Fund’s unmanaged benchmark, the Barclays Capital U.S. Credit Index^iv, returned -3.08% for the same period. The Lipper Corporate Debt Funds A-Rated Category Average1 returned -5.88% over the same time frame.

¹ Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the 12-month period ended December 31, 2008, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 171 funds in the Fund’s Lipper category, and excluding sales charges.

2|    Legg Mason Partners Corporate Bond Fund 2008 Annual Report

PERFORMANCE SNAPSHOT as of December 31, 2008 (excluding sales charges) (unaudited)

	6 MONTHS		12 MONTHS
Corporate Bond Fund — Class A Shares	-20.58	%	-23.11	%
Barclays Capital U.S. Credit Index	-2.61	%	-3.08	%
Lipper Corporate Debt Funds A-Rated Category Average1	-5.19	%	-5.88	%

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

Excluding sales charges, Class B shares returned -20.81%, Class C shares returned -20.94% and Class I shares returned -20.33% over the six months ended December 31, 2008. Excluding sales charges, Class B shares returned -23.60%, Class C shares returned -23.67% and Class I shares returned -22.72% over the 12 months ended December 31, 2008. All share class returns assume the reinvestment of all distributions, including returns of capital, if any, at net asset value and the deduction of all Fund expenses. Returns have not been adjusted to include sales charges that may apply when shares are purchased or the deduction of taxes that a shareholder would pay on Fund distributions.

The 30-Day SEC Yields for the period ended December 31, 2008 for Class A, B, C and I shares were 8.91%, 8.67%, 8.64% and 9.71%, respectively. The 30-Day SEC Yield is the average annualized net investment income per share for the 30-day period indicated and is subject to change.

TOTAL ANNUAL OPERATING EXPENSES (unaudited)

As of the Fund’s most current prospectus dated April 28, 2008, the gross total operating expense ratios for Class A, Class B, Class C and Class I shares were 1.10%, 1.80%, 1.80% and 0.66%, respectively.

Q. What were the leading contributors to performance?

A. During the reporting period, an underweight to the basic industry sector, which returned -8.02%, and an underweight to the Consumer Cyclicals² sector, which returned -3.82%, aided the Fund’s relative performance. An overweight to the Communications³ sector, which returned -2.07% and, in particular, to Media — Cable, which returned -0.23%, also aided the Fund’s relative results.

Q. What were the leading detractors from performance?

A. The Fund’s subordinated financial debt positions hurt its relative performance during the reporting period. In particular, an overweight to Tier 1 bank issues, which returned -33.79%, detracted from performance.

¹ Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the period ended December 31, 2008, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 173 funds for the six-month period and among the 171 funds for the 12-month period in the Fund’s Lipper category, and excluding sales charges.

² Consumer Cyclicals consists of the following industries: Automotive, Entertainment, Gaming, Home Construction, Lodging, Retailers, Restaurants, Textiles and other consumer services.

³ Communications consists of the following industries: Media — Cable, Media — Noncable and Telecommunications.

Legg Mason Partners Corporate Bond Fund 2008 Annual Report|    3

Fund overview continued

The Fund held five issuers which defaulted during the period. These issuers included Glitnir Banki HF, Kaupthing Bank HF, Landsbanki Islands HF, Washington Mutual and Lehman Brothers. Recovery in each case was significantly below cost. The Fund had a significant overweight to American International Group Inc., which received government loans as it works to sell assets and repay creditors. American International Group Inc. bonds suffered significant losses during the period. In addition, the Fund held positions in Fannie Mae and Freddie Mac preferred stock which experienced significant losses when the government suspended the dividends indefinitely. An overweight to BBB-rated securities, which returned -8.67%, and an underweight to AA-rated securities, which returned 2.74%, also detracted from the Fund’s relative performance.

Q. Were there any significant changes to the Fund during the reporting period?

A. Other than the decrease in cash and U.S. Treasury positions and increased exposure to Financials discussed earlier, there were no significant changes to the Fund during the reporting period.

Thank you for your investment in Legg Mason Partners Corporate 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 20, 2009

4|    Legg Mason Partners Corporate Bond Fund 2008 Annual Report

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

Portfolio holdings and breakdowns are as of December 31, 2008 and are subject to change and may not be representative of the portfolio managers’ current or future investments. Please refer to pages 11 through 20 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. The Fund’s top five sector holdings (as a percentage of net assets) as of December 31, 2008 were: Financials (37.8%), Energy (10.6%), Telecommunication Services (10.2%), Consumer Discretionary (8.8%) and Health Care (6.2%). The Fund’s portfolio composition is subject to change at any time.

RISKS: Keep in mind, the Fund is subject to interest rate and credit risks and fluctuations in share price as interest rates rise and fall. As interest rates rise, bond prices fall, reducing the value of the Fund’s share price. The Fund may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on the Fund. Please see the Fund’s prospectus for more information on these and other risks.

All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.

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

ⁱⁱ The Barclays Capital (formerly Lehman Brothers) 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.

ⁱⁱⁱ The Citigroup High Yield Market Index is a broad-based unmanaged index of high-yield securities.

^iv The Barclays Capital (formerly Lehman Brothers) U.S. Credit Index is an index composed of corporate and non-corporate debt issues that are investment grade (rated Baa3/BBB- or higher).

Legg Mason Partners Corporate Bond Fund 2008 Annual Report|    5

Fund at a glance (unaudited)

INVESTMENT BREAKDOWN (%) As a percent of total investments — December 31, 2008

6|    Legg Mason Partners Corporate Bond Fund 2008 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; distribution and/or service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.

This example is based on an investment of $1,000 invested on July 1, 2008 and held for the six months ended December 31, 2008.

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”.

BASED ON ACTUAL TOTAL RETURN¹

	ACTUAL TOTAL RETURN WITHOUT SALES CHARGES2		BEGINNING ACCOUNT VALUE		ENDING ACCOUNT VALUE		ANNUALIZED EXPENSE RATIO		EXPENSES PAID DURING THE PERIOD3
Class A	(20.58	)%	$	1,000.00	$	794.20	1.16	%	$	5.23
Class B	(20.81	)		1,000.00		791.90	1.81			8.15
Class C	(20.94	)		1,000.00		790.60	1.96			8.82
Class I	(20.33	)		1,000.00		796.70	0.69			3.12

¹ For the six months ended December 31, 2008.

² 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 charges (“CDSC”) with respect to Class B and C shares. Total return is not annualized, as it may not be representative of the total return for the year. Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

³ Expenses 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, then divided by 366.

Legg Mason Partners Corporate Bond Fund 2008 Annual Report|    7

Fund expenses (unaudited) continued

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 HYPOTHETICAL TOTAL RETURN¹

	HYPOTHETICAL ANNUALIZED TOTAL RETURN		BEGINNING ACCOUNT VALUE		ENDING ACCOUNT VALUE		ANNUALIZED EXPENSE RATIO		EXPENSES PAID DURING THE PERIOD2
Class A	5.00	%	$	1,000.00	$	1,019.30	1.16	%	$	5.89
Class B	5.00			1,000.00		1,016.04	1.81			9.17
Class C	5.00			1,000.00		1,015.28	1.96			9.93
Class I	5.00			1,000.00		1,021.67	0.69			3.51

¹ For the six months ended December 31, 2008.

² Expenses 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, then divided by 366.

8|    Legg Mason Partners Corporate Bond Fund 2008 Annual Report

Fund performance (unaudited)

AVERAGE ANNUAL TOTAL RETURNS¹

	WITHOUT SALES CHARGES2
	CLASS A		CLASS B		CLASS C		CLASS I
Twelve Months Ended 12/31/08	(23.11	)%	(23.60	)%	(23.67	)%	(22.72	)%
Five Years Ended 12/31/08	(2.69	)	(3.28	)	(3.32	)	(2.31	)
Ten Years Ended 12/31/08	1.38		0.82		0.83		1.76

	WITH SALES CHARGES3
	CLASS A		CLASS B		CLASS C		CLASS I
Twelve Months Ended 12/31/08	(26.37	)%	(26.84	)%	(24.39	)%	(22.72	)%
Five Years Ended 12/31/08	(3.52	)	(3.42	)	(3.32	)	(2.31	)
Ten Years Ended 12/31/08	0.94		0.82		0.83		1.76

CUMULATIVE TOTAL RETURNS¹

	WITHOUT SALES CHARGES2
Class A (12/31/98 through 12/31/08)	14.66	%
Class B (12/31/98 through 12/31/08)	8.50
Class C (12/31/98 through 12/31/08)	8.63
Class I (12/31/98 through 12/31/08)	19.02

¹ 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 fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower.

² 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 CDSC with respect to Class B and C shares.

³ 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 B shares reflect the deduction of a 4.50% CDSC, which applies if shares are redeemed within one year from purchase payment. This CDSC declines by 0.50% the first year after purchase and thereafter by 1.00% per year until no CDSC is incurred. Class C shares also reflect the deduction of a 1.00% CDSC, which applies if shares are redeemed within the first year of purchase payment.

Legg Mason Partners Corporate Bond Fund 2008 Annual Report|    9

Historical performance (unaudited)

VALUE OF $10,000 INVESTED IN CLASS B SHARES OF LEGG MASON PARTNERS CORPORATE BOND

FUND VS. BARCLAYS CAPITAL U.S. CREDIT INDEX AND LIPPER CORPORATE DEBT FUNDS A-RATED

CATEGORY AVERAGE† — December 1998 - December 2008

† Hypothetical illustration of $10,000 invested in Class B shares of Legg Mason Partners Corporate Bond Fund on December 31, 1998, assuming the reinvestment of all distributions, including returns of capital, if any, at net asset value through December 31, 2008. The Barclays Capital U.S. Credit Index is an index composed of corporate and non-corporate debt issues that are investment grade (rated Baa3/BBB- or higher). 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 Lipper Corporate Debt Funds A-Rated Category Average is composed of the Fund’s peer group of mutual funds. The performance of the Fund’s other classes may be greater or less than the performance of Class B shares indicated on this chart, depending on whether higher or lower sales charges and fees were incurred by shareholders investing in the other classes.

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 fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower.

10|    Legg Mason Partners Corporate Bond Fund 2008 Annual Report

Schedule of investments

December 31, 2008

LEGG MASON PARTNERS CORPORATE BOND FUND

FACE AMOUNT	SECURITY	VALUE
CORPORATE BONDS & NOTES — 93.4%
CONSUMER DISCRETIONARY — 8.7%
	Automobiles — 0.6%
$3,850,000	Ford Motor Co., Notes, 7.450% due 7/16/31	$	1,097,250
6,560,000	General Motors Corp., Senior Debentures, 8.375% due 7/15/33		1,180,800
	Total Automobiles		2,278,050
	Leisure Equipment & Products — 0.3%
1,300,000	Hasbro Inc., Senior Notes, 6.300% due 9/15/17		1,231,215
	Media — 6.9%
	Comcast Corp.:
4,030,000	6.400% due 5/15/38		4,033,837
926,000	Notes, 6.450% due 3/15/37		924,455
4,235,000	Senior Notes, 6.500% due 1/15/17		4,189,414
3,850,000	News America Holdings Inc., Senior Debentures, 8.500% due 2/23/25		3,797,101
1,910,000	News America Inc., Notes, 6.150% due 3/1/37		1,787,808
2,289,000	Rogers Cable Inc., Senior Secured Second Priority Notes, 6.250% due 6/15/13		2,193,070
780,000	Time Warner Cable Inc., Senior Notes, 8.750% due 2/14/19		849,564
3,850,000	Time Warner Cos. Inc., Debentures, 7.570% due 2/1/24		3,718,553
1,563,000	Time Warner Entertainment Co., LP, Senior Notes, 8.375% due 7/15/33		1,581,379
601,000	Time Warner Inc., Senior Debentures, 7.700% due 5/1/32		603,364
1,070,000	Viacom Inc., Senior Notes, 8.625% due 8/1/12		875,620
	Total Media		24,554,165
	Multiline Retail — 0.9%
	Macy’s Retail Holdings Inc.:
1,350,000	5.875% due 1/15/13		950,860
3,965,000	6.650% due 7/15/24		2,180,413
	Total Multiline Retail		3,131,273
	TOTAL CONSUMER DISCRETIONARY		31,194,703
CONSUMER STAPLES — 5.0%
	Beverages — 1.9%
5,486,000	Diageo Capital PLC, Notes, 4.850% due 5/15/18		4,858,385
910,000	Dr. Pepper Snapple Group Inc., Senior Notes, 6.820% due 5/1/18(a)		899,106
770,000	PepsiCo Inc., 7.900% due 11/1/18		945,435
	Total Beverages		6,702,926
	Food & Staples Retailing — 2.0%
1,186,000	Delhaize Group, 6.500% due 6/15/17		1,078,571
2,887,000	Kroger Co., Senior Notes, 6.750% due 4/15/12		2,916,133

See Notes to Financial Statements.

Legg Mason Partners Corporate Bond Fund 2008 Annual Report|    11

Schedule of investments continued

December 31, 2008

LEGG MASON PARTNERS CORPORATE BOND FUND

FACE AMOUNT	SECURITY	VALUE
	Food & Staples Retailing — 2.0% continued
$3,100,000	Safeway Inc., Senior Notes, 6.350% due 8/15/17	$	3,069,958
	Total Food & Staples Retailing		7,064,662
	Food Products — 0.3%
1,360,000	Tyson Foods Inc., Senior Notes, 7.850% due 4/1/16		1,013,200
	Tobacco — 0.8%
1,740,000	Philip Morris International Inc., Senior Notes, 6.875% due 3/17/14		1,830,536
1,540,000	Reynolds American Inc., 7.625% due 6/1/16		1,284,240
	Total Tobacco		3,114,776
	TOTAL CONSUMER STAPLES		17,895,564
ENERGY — 10.6%
	Energy Equipment & Services — 0.7%
685,000	Southern Natural Gas Co., Notes, 5.900% due 4/1/17(a)		546,258
2,160,000	Transocean Inc., Senior Notes, 5.250% due 3/15/13		2,008,042
	Total Energy Equipment & Services		2,554,300
	Oil, Gas & Consumable Fuels — 9.9%
6,361,000	Anadarko Finance Co., Senior Notes, 7.500% due 5/1/31		5,639,065
1,016,000	Apache Corp., Senior Notes, 6.000% due 1/15/37		988,467
1,710,000	DCP Midstream LLC, Senior Notes, 6.750% due 9/15/37(a)		1,293,962
2,040,000	Devon Financing Corp. ULC, Debentures, 7.875% due 9/30/31		2,252,474
580,000	Energy Transfer Partners LP, Senior Notes, 9.700% due 3/15/19		598,603
1,730,000	EOG Resources Inc., Senior Notes, 5.875% due 9/15/17		1,759,247
	Gazprom, Loan Participation Notes:		1,126,510
1,694,000	6.212% due 11/22/16 (a)
878,000	Senior Notes, 6.510% due 3/7/22(a)		526,800
354,000	Hess Corp., Notes, 7.875% due 10/1/29		340,679
1,070,000	Intergas Finance BV, Bonds, 6.375% due 5/14/17(a)		625,950
2,470,000	KazMunaiGaz Finance Sub B.V., Senior Notes, 8.375% due 7/2/13(a)		1,938,950
	Kinder Morgan Energy Partners LP:
2,040,000	Medium-Term Notes, 6.950% due 1/15/38		1,654,318
770,000	Senior Notes, 7.125% due 3/15/12		744,187
1,270,000	LUKOIL International Finance BV, 6.356% due 6/7/17(a)		781,050
	Pemex Project Funding Master Trust:
210,000	6.625% due 6/15/35(a)		178,815
8,975,000	Senior Bonds, 6.625% due 6/15/35		7,608,556
1,207,000	Petrobras International Finance Co., 5.875% due 3/1/18		1,091,128
2,479,000	Petroplus Finance Ltd., Senior Notes, 7.000% due 5/1/17(a)		1,524,585
3,388,000	Valero Energy Corp., Notes, 4.750% due 6/15/13		3,116,042
1,860,000	XTO Energy Inc., Senior Notes, 6.100% due 4/1/36		1,549,055
	Total Oil, Gas & Consumable Fuels		35,338,443
	TOTAL ENERGY		37,892,743

See Notes to Financial Statements.

12|    Legg Mason Partners Corporate Bond Fund 2008 Annual Report

LEGG MASON PARTNERS CORPORATE BOND FUND

FACE AMOUNT		SECURITY	VALUE
	FINANCIALS — 37.7%
		Capital Markets — 5.8%
$	700,000	Bear Stearns Co. Inc., Senior Notes, 7.250% due 2/1/18	$	768,389
	3,680,000	Goldman Sachs Capital II, Junior Subordinated Bonds, 5.793% due 6/1/12(b)(c)		1,415,542
	1,120,000	Goldman Sachs Group Inc., Senior Notes, 6.150% due 4/1/18		1,078,137
		Kaupthing Bank HF:
	1,963,000	Senior Notes, 5.750% due 10/4/11(a)(d)		127,595
	3,927,000	Subordinated Notes, 7.125% due 5/19/16(a)(d)		49,088
	4,812,000	Lehman Brothers Holdings Capital Trust VII, Medium-Term Notes, 5.857% due 5/31/12(b)(c)(d)		481
	1,321,000	Lehman Brothers Holdings Inc., Subordinated Notes, 6.500% due 7/19/17(d)		132
		Merrill Lynch & Co. Inc.:
	2,670,000	Senior Notes, 6.400% due 8/28/17		2,679,382
		Subordinated Notes:
	5,790,000	5.700% due 5/2/17		5,137,884
	1,309,000	6.110% due 1/29/37		1,180,404
		Morgan Stanley:
	1,750,000	6.625% due 4/1/18		1,537,793
	4,210,000	Senior Notes, 5.250% due 11/2/12		3,832,102
	5,606,000	UBS Preferred Funding Trust, Subordinated Notes,
		6.243% due 5/15/16(b)(c)		3,065,394
		Total Capital Markets		20,872,323
		Commercial Banks — 11.9%
	3,280,000	ATF Capital BV, Senior Notes, 9.250% due 2/21/14(a)		2,148,400
	2,820,000	BAC Capital Trust XI, Notes, 6.625% due 5/23/36		2,613,697
	3,700,000	BAC Capital Trust XIV, Junior Subordinated Notes, 5.630% due 3/15/12(b)(c)		1,483,293
	3,026,000	Banco Mercantil del Norte SA, Subordinated Bonds, 6.135% due 10/13/16(a)(b)		1,953,555
		Barclays Bank PLC:		762,085
	1,150,000	7.700% due 4/25/18(a)(b)(c)
	3,680,000	Junior Subordinated Bonds, 7.434% due 12/15/17(a)(b)(c)		1,862,926
	1,232,000	Comerica Capital Trust II, Capital Securities, 6.576% due 2/20/37(b)		495,370
		Glitnir Banki HF:
	1,963,000	Notes, 6.330% due 7/28/11(a)(d)		103,058
	3,758,000	Subordinated Bonds, 7.451% due 9/14/16(a)(b)(c)(d)		19,354
	2,857,000	Subordinated Notes, 6.693% due 6/15/16(a)(b)(d)		14,714
	2,472,000	HSBK Europe BV, 7.250% due 5/3/17(a)		1,347,240

See Notes to Financial Statements.

Legg Mason Partners Corporate Bond Fund 2008 Annual Report|    13

Schedule of investments continued

December 31, 2008

LEGG MASON PARTNERS CORPORATE BOND FUND

FACE AMOUNT		SECURITY	VALUE
		Commercial Banks — 11.9% continued
		ICICI Bank Ltd., Subordinated Bonds:
$	735,000	6.375% due 4/30/22(a)(b)	$	386,987
	438,000	6.375% due 4/30/22(a)(b)		231,279
	1,980,000	Landsbanki Islands HF, 7.431% due 10/19/17(a)(b)(c)(d)		10,197
	1,760,000	Natixis, 10.000% due 4/30/18(a)(b)(c)		817,430
	7,323,000	RBS Capital Trust III, Subordinated Notes, 5.512% due 9/30/14(b)(c)		2,930,298
	3,974,000	Resona Preferred Global Securities Cayman Ltd., Bonds, 7.191% due 7/30/15(a)(b)(c)		1,893,846
	300,000	Royal Bank of Scotland Group PLC, Junior Subordinated Notes, Medium-Term Notes, 7.640% due 9/29/17(b)(c)		119,619
		RSHB Capital, Loan Participation Notes:
	1,863,000	7.175% due 5/16/13(a)		1,359,990
	5,400,000	7.125% due 1/14/14(a)		3,645,000
	5,272,000	Shinsei Finance Cayman Ltd., Junior Subordinated Bonds, 6.418% due 7/20/16(a)(b)(c)		1,103,493
	366,000	SunTrust Bank, Subordinated Notes, 5.450% due 12/1/17		340,891
	2,256,000	SunTrust Capital, Trust Preferred Securities, 6.100% due 12/15/36(b)		1,592,533
	1,420,000	SunTrust Preferred Capital I, 5.853% due 12/15/11(b)(c)		767,242
		TuranAlem Finance BV, Bonds:
	1,948,000	8.250% due 1/22/37(a)		847,380
	423,000	8.250% due 1/22/37(a)		182,948
	4,090,000	Wachovia Capital Trust III, Bank Guaranteed,
		5.800% due 3/15/11(b)(c)		2,414,163
		Wachovia Corp.:
	1,124,000	Senior Notes, 5.750% due 6/15/17		1,120,613
	3,811,000	Subordinated Notes, 5.625% due 10/15/16		3,486,665
	1,809,000	Wells Fargo Capital X, Capital Securities, 5.950% due 12/15/36		1,555,235
	6,010,000	Wells Fargo Capital XIII, Medium-Term Notes, 7.700% due 3/26/13(b)(c)		4,964,332
		Total Commercial Banks		42,573,833
		Consumer Finance — 4.3%
	3,449,000	Aiful Corp., Notes, 6.000% due 12/12/11(a)		1,397,721
		American Express Co.:
	710,000	7.000% due 3/19/18		719,121
	5,159,000	Subordinated Debentures, 6.800% due 9/1/66(b)		2,673,832
	1,000,000	Capital One Financial Corp., Senior Notes, 6.750% due 9/15/17		970,137
	2,600,000	Ford Motor Credit Co., Senior Notes, 12.000% due 5/15/15		1,943,492
		GMAC LLC:
	2,158,000	7.500% due 12/31/13(a)		1,607,710
	710,000	8.000% due 12/31/18(a)		365,650
	2,379,000	8.000% due 11/1/31(a)		1,416,647

See Notes to Financial Statements.

14|    Legg Mason Partners Corporate Bond Fund 2008 Annual Report

LEGG MASON PARTNERS CORPORATE BOND FUND

FACE AMOUNT		SECURITY	VALUE
		Consumer Finance — 4.3% continued
	$1,902,000	Nelnet Inc., Notes, 7.400% due 9/29/36(b)	$	570,553
		SLM Corp.:
		Medium-Term Notes:
	3,325,000	5.000% due 10/1/13		2,381,435
	454,000	5.050% due 11/14/14		302,482
	816,000	5.625% due 8/1/33		496,274
	540,000	Senior Notes, 8.450% due 6/15/18		427,570
		Total Consumer Finance		15,272,624
		Diversified Financial Services — 10.4%
	3,734,000	AES El Salvador Trust, Senior Notes, 6.750% due 2/1/16(a)		2,680,273
	1,752,000	AGFC Capital Trust I, 6.000% due 1/15/67(a)(b)		418,859
	2,342,000	Capital One Bank, Notes, 5.750% due 9/15/10		2,273,967
	1,417,000	Capmark Financial Group Inc., 5.875% due 5/10/12		483,465
		Citigroup Inc.:
	750,000	Junior Subordinated Notes, Preferred Securities, 8.400% due 4/30/18(b)(c)		496,155
	4,730,000	Notes, 6.875% due 3/5/38		5,400,388
		General Electric Capital Corp.:
	270,000	Medium-Term Notes, 6.750% due 3/15/32		287,933
	50,000	Senior Notes, Medium-Term Notes, 6.150% due 8/1/37		50,299
	2,400,000	Subordinated Debentures, 6.375% due 11/15/67(b)		1,510,791
	1,240,000	Glen Meadow Pass-Through Certificates, 6.505% due 2/12/67(a)(b)		555,076
	2,695,000	Goldman Sachs Capital I, Capital Securities, 6.345% due 2/15/34		1,960,739
	1,933,000	ILFC E-Capital Trust II, Bonds, 6.250% due 12/21/65(a)(b)		808,135
		International Lease Finance Corp.:
	1,320,000	6.375% due 3/25/13		897,425
	5,351,000	Notes, 5.875% due 5/1/13		3,575,442
		JPMorgan Chase & Co., Subordinated Notes:
	2,782,000	6.625% due 3/15/12		2,851,906
	6,176,000	6.125% due 6/27/17		6,087,844
	1,263,000	MUFG Capital Finance 1 Ltd., Preferred Securities, 6.346% due 7/25/16(b)(c)		881,156
	2,194,000	SMFG Preferred Capital, Bonds, 6.078% due 1/25/17(a)(b)(c)		1,491,108
		TNK-BP Finance SA:
	1,394,000	Bonds, 7.500% due 7/18/16(a)		731,850
	1,170,000	Senior Notes, 7.875% due 3/13/18(a)		590,850
	7,238,000	ZFS Finance USA Trust II, Bonds, 6.450% due 12/15/65(a)(b)		3,384,503
		Total Diversified Financial Services		37,418,164

See Notes to Financial Statements.

Legg Mason Partners Corporate Bond Fund 2008 Annual Report|    15

Schedule of investments continued

December 31, 2008

LEGG MASON PARTNERS CORPORATE BOND FUND

FACE AMOUNT	SECURITY	VALUE
	Insurance — 3.9%
$1,078,000	ACE INA Holdings Inc., Senior Notes, 5.700% due 2/15/17	$	968,099
1,771,000	Allstate Corp., 6.500% due 5/15/57(b)		998,006
2,064,000	American International Group Inc., Junior Subordinated Debentures, 6.250% due 3/15/37		772,658
1,301,000	Chubb Corp., Junior Subordinated Notes, 6.375% due 3/29/67(b)		808,002
1,063,000	Everest Reinsurance Holdings Inc., 6.600% due 5/15/37(b)		434,359
	Hartford Financial Services Group Inc.:
550,000	6.300% due 3/15/18		417,722
500,000	8.125% due 6/15/38(b)		263,588
1,240,000	Liberty Mutual Group, Junior Subordinated Bonds, 7.800% due 3/15/37(a)		557,271
4,027,000	MetLife Inc., Junior Subordinated Debentures, 6.400% due 12/15/36		2,421,785
	Prudential Financial Inc.:
1,670,000	5.150% due 1/15/13		1,357,633
1,410,000	8.875% due 6/15/38(b)		909,577
4,066,000	Travelers Cos. Inc., Junior Subordinated Debentures, 6.250% due 3/15/37(b)		2,667,174
1,709,000	Willis North America Inc., Senior Notes, 5.625% due 7/15/15		1,252,584
	Total Insurance		13,828,458
	Real Estate Investment Trusts (REITs) — 0.3%
3,715,000	iStar Financial Inc., Senior Notes, 5.150% due 3/1/12		1,170,868
	Thrifts & Mortgage Finance — 1.1%
4,110,000	Countrywide Financial Corp., Medium-Term Notes, 5.800% due 6/7/12		4,008,878
	TOTAL FINANCIALS		135,145,148
HEALTH CARE — 6.2%
	Health Care Equipment & Supplies — 0.5%
872,000	Baxter International Inc., Senior Notes, 5.900% due 9/1/16		944,592
1,209,000	Hospira Inc., Senior Notes, 6.050% due 3/30/17		983,472
	Total Health Care Equipment & Supplies		1,928,064
	Health Care Providers & Services — 5.7%
2,695,000	Aetna Inc., Senior Notes, 6.000% due 6/15/16		2,482,292
1,671,000	Cardinal Health Inc., Senior Notes, 5.800% due 10/15/16		1,514,009
3,303,000	HCA Inc., Senior Notes, 6.500% due 2/15/16		2,047,860
3,657,000	Humana Inc., Senior Notes, 6.300% due 8/1/18		2,744,132
1,432,000	Quest Diagnostic Inc., Senior Notes, 5.125% due 11/1/10		1,390,607
5,236,000	UnitedHealth Group Inc., Senior Notes, 5.000% due 8/15/14		4,822,157
2,603,000	Universal Health Services Inc., Notes, 7.125% due 6/30/16		2,249,825
3,380,000	WellPoint Health Networks Inc., Notes, 6.375% due 1/15/12		3,259,794
	Total Health Care Providers & Services		20,510,676
	TOTAL HEALTH CARE		22,438,740

See Notes to Financial Statements.

16|    Legg Mason Partners Corporate Bond Fund 2008 Annual Report

LEGG MASON PARTNERS CORPORATE BOND FUND

FACE AMOUNT	SECURITY	VALUE
INDUSTRIALS — 3.5%
	Building Products — 0.8%
$3,159,000	GTL Trade Finance Inc., 7.250% due 10/20/17(a)	$	2,654,015
	Commercial Services & Supplies — 0.4%
1,717,000	Waste Management Inc., Senior Notes, 7.750% due 5/15/32		1,540,022
	Industrial Conglomerates — 1.5%
	Tyco International Group SA:
40,000	Notes, 6.125% due 1/15/09		39,948
120,000	Senior Notes, 6.375% due 10/15/11		118,027
4,000,000	Tyco International Ltd./Tyco International Finance SA, Senior Bonds, 6.875% due 1/15/21		3,098,844
2,370,000	United Technologies Corp., Senior Notes, 5.400% due 5/1/35		2,241,110
	Total Industrial Conglomerates		5,497,929
	Road & Rail — 0.8%
2,988,000	Union Pacific Corp., Debentures, 6.625% due 2/1/29		2,836,451
	TOTAL INDUSTRIALS		12,528,417
INFORMATION TECHNOLOGY — 0.5%
	IT Services — 0.5%
1,540,000	Electronic Data Systems Corp., Notes, 7.450% due 10/15/29		1,672,865
MATERIALS — 4.8%
	Chemicals — 0.5%
830,000	Dow Chemical Co., 5.700% due 5/15/18		738,667
950,000	PPG Industries Inc., 5.750% due 3/15/13		940,352
	Total Chemicals		1,679,019
	Metals & Mining — 3.8%
1,570,000	Alcoa Inc., Notes, 6.000% due 7/15/13		1,420,928
1,000,000	Barrick Gold Financeco LLC, Senior Notes, 6.125% due 9/15/13		949,160
7,469,000	Freeport-McMoRan Copper & Gold Inc., Senior Notes, 8.375% due 4/1/17		6,133,065
4,999,000	Vale Overseas Ltd., Notes, 6.875% due 11/21/36		4,550,090
1,220,000	Vedanta Resources PLC, Senior Notes, 8.750% due 1/15/14(a)		738,100
	Total Metals & Mining		13,791,343
	Paper & Forest Products — 0.5%
1,979,000	Weyerhaeuser Co., Senior Notes, 6.750% due 3/15/12		1,772,725
	TOTAL MATERIALS		17,243,087
TELECOMMUNICATION SERVICES — 10.2%
	Diversified Telecommunication Services — 7.6%
1,633,000	AT&T Corp., Senior Notes, 8.000% due 11/15/31		2,057,288
2,730,000	AT&T Inc., 5.600% due 5/15/18		2,784,567
1,155,000	British Telecommunications PLC, Bonds, 9.125% due 12/15/30		1,230,699

See Notes to Financial Statements.

Legg Mason Partners Corporate Bond Fund 2008 Annual Report|    17

Schedule of investments continued

December 31, 2008

LEGG MASON PARTNERS CORPORATE BOND FUND

FACE AMOUNT	SECURITY	VALUE
	Diversified Telecommunication Services — 7.6% continued
$4,478,000	Deutsche Telekom International Finance, Senior Notes, 5.750% due 3/23/16	$	4,292,718
	Embarq Corp.:
2,718,000	Notes, 7.995% due 6/1/36		1,838,466
1,886,000	Senior Notes, 6.738% due 6/1/13		1,595,118
1,247,000	France Telecom SA, Notes, 8.500% due 3/1/31		1,569,977
	Koninklijke KPN NV, Senior Notes:
1,109,000	8.000% due 10/1/10		1,119,653
1,380,000	8.375% due 10/1/30		1,562,837
1,848,000	SBC Communications Inc., Notes, 5.100% due 9/15/14		1,818,776
3,850,000	Telecom Italia Capital SpA, Senior Notes, 6.000% due 9/30/34		2,663,542
2,695,000	Telefonica Emisiones SAU, Senior Notes, 7.045% due 6/20/36		2,951,028
	Verizon Global Funding Corp., Senior Notes:
1,540,000	7.750% due 6/15/32		1,707,846
144,000	5.850% due 9/15/35		143,754
	Total Diversified Telecommunication Services		27,336,269
	Wireless Telecommunication Services — 2.6%
1,740,000	America Movil SAB de CV, Senior Notes, 5.625% due 11/15/17		1,555,611
2,830,000	New Cingular Wireless Services Inc., Senior Notes, 8.750% due 3/1/31		3,547,453
	Sprint Capital Corp.:
1,320,000	Global Notes, 6.900% due 5/1/19		938,740
	Senior Notes:
1,540,000	8.375% due 3/15/12		1,232,804
3,000,000	8.750% due 3/15/32		2,028,813
	Total Wireless Telecommunication Services		9,303,421
	TOTAL TELECOMMUNICATION SERVICES		36,639,690
UTILITIES — 6.2%
	Electric Utilities — 4.4%
	Commonwealth Edison Co.:
390,000	5.800% due 3/15/18		353,092
1,040,000	6.450% due 1/15/38		932,617
1,040,000	EEB International Ltd., Senior Bonds, 8.750% due 10/31/14(a)		969,800
	FirstEnergy Corp., Notes:
583,000	6.450% due 11/15/11		551,435
5,883,000	7.375% due 11/15/31		5,580,267
	Pacific Gas & Electric Co.:
2,605,000	First Mortgage Bonds, 6.050% due 3/1/34		2,775,823
500,000	Senior Notes, 8.250% due 10/15/18		601,781

See Notes to Financial Statements.

18|    Legg Mason Partners Corporate Bond Fund 2008 Annual Report

LEGG MASON PARTNERS CORPORATE BOND FUND

FACE AMOUNT	SECURITY	VALUE
	Electric Utilities — 4.4% continued
$3,080,000	Progress Energy Inc., Senior Notes, 7.750% due 3/1/31	$	3,091,858
720,000	Virginia Electric and Power Co., Senior Notes, 8.875% due 11/15/38		913,990
	Total Electric Utilities		15,770,663
	Gas Utilities — 0.9%
3,657,000	AGL Capital Corp., Senior Notes, 4.950% due 1/15/15		3,224,373
	Independent Power Producers & Energy Traders — 0.9%
	Energy Future Holdings, Senior Notes:
10,000	10.875% due 11/1/17(a)		7,150
3,160,000	11.250% due 11/1/17(a)(e)		1,548,400
	TXU Corp., Senior Notes:
38,000	5.550% due 11/15/14		17,945
3,349,000	6.500% due 11/15/24		1,201,581
1,043,000	6.550% due 11/15/34		357,323
	Total Independent Power Producers & Energy Traders		3,132,399
	TOTAL UTILITIES		22,127,435
	TOTAL CORPORATE BONDS & NOTES (Cost — $462,402,130)		334,778,392
CONVERTIBLE BOND & NOTE — 0.1%
CONSUMER DISCRETIONARY — 0.1%
	Media — 0.1%
490,000	Omnicom Group Inc., Senior Notes, zero coupon bond to yield 0.551% due 7/1/38 (Cost — $416,643)		445,287
COLLATERALIZED MORTGAGE OBLIGATIONS — 0.8%
	Thornburg Mortgage Securities Trust:
1,781,631	6.201% due 9/25/37(b)		1,369,061
1,866,509	6.208% due 9/25/37(b)		1,326,488
	TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost — $3,615,444)		2,695,549
U.S. GOVERNMENT & AGENCY OBLIGATION — 1.0%
	U.S. Government Obligations — 1.0%
2,955,000	U.S. Treasury Notes, 3.750% due 11/15/18 (Cost — $3,382,963)		3,346,074
SHARES
PREFERRED STOCKS — 0.1%
FINANCIALS — 0.1%
	Consumer Finance — 0.1%
594	Preferred Blocker Inc., 9.000%(a) *		178,200

See Notes to Financial Statements.

Legg Mason Partners Corporate Bond Fund 2008 Annual Report|    19

Schedule of investments continued

December 31, 2008

LEGG MASON PARTNERS CORPORATE BOND FUND

SHARES	SECURITY	VALUE
	Thrifts & Mortgage Finance — 0.0%
351,225	Federal Home Loan Mortgage Corp. (FHLMC), 8.375%(b)(f)*	$	136,978
46,575	Federal National Mortgage Association (FNMA), 8.250%(b)(f)*		38,657
	Total Thrifts & Mortgage Finance		175,635
	TOTAL PREFERRED STOCKS (Cost — $6,326,005)		353,835
	TOTAL INVESTMENTS BEFORE SHORT-TERM INVESTMENTS (Cost — $476,143,185)		341,619,137
FACE AMOUNT
SHORT-TERM INVESTMENTS — 2.0%
	U.S. Government & Agency Obligation — 0.2%
$ 863,000	Federal National Mortgage Association (FNMA), Discount Notes, 0.351% due 5/18/09(f)(g)(h) (Cost — $861,851)		862,266
	Repurchase Agreement — 1.8%
6,351,000	Morgan Stanley tri-party repurchase agreement dated 12/31/08, 0.020% due 1/2/09; Proceeds at maturity — $6,351,007; (Fully collateralized by U.S. government agency obligation, 0.000% due 10/15/20; Market value — $6,478,474) (Cost — $6,351,000)		6,351,000
	TOTAL SHORT-TERM INVESTMENTS (Cost — $7,212,851)		7,213,266
	TOTAL INVESTMENTS — 97.4% (Cost — $483,356,036#)		348,832,403
	Other Assets in Excess of Liabilities — 2.6%		9,464,509
	TOTAL NET ASSETS — 100.0%	$	358,296,912

* Non-income producing security.

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

^(b) Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2008.

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

^(d) Security is currently in default.

^(e) Payment-in-kind security for which part of the income earned may be paid as additional principal.

^(f) On September 7, 2008, the Federal Housing Finance Agency placed Fannie Mae and Freddie Mac into conservatorship.

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

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

# Aggregate cost for federal income tax purposes is $485,613,488.

Abbreviation used in this schedule:

GMAC —General Motors Acceptance Corp.

See Notes to Financial Statements.

20|    Legg Mason Partners Corporate Bond Fund 2008 Annual Report

Statement of assets and liabilities

December 31, 2008

ASSETS:
Investments, at value (Cost — $483,356,036)	$	348,832,403
Cash		2,190,454
Interest receivable		7,302,267
Receivable for Fund shares sold		2,323,972
Receivable from broker — variation margin on open futures contracts		671,250
Prepaid expenses		44,582
Total Assets		361,364,928
LIABILITIES:
Payable for Fund shares repurchased		2,242,321
Investment management fee payable		186,490
Distribution fees payable		110,669
Distributions payable		66,830
Trustees’ fees payable		6,541
Accrued expenses		455,165
Total Liabilities		3,068,016
TOTAL NET ASSETS	$	358,296,912
NET ASSETS:
Par value (Note 6)	$	425
Paid-in capital in excess of par value		541,285,512
Overdistributed net investment income		(135,260	)
Accumulated net realized loss on investments and futures contracts		(46,385,225	)
Net unrealized depreciation on investments and futures contracts		(136,468,540	)
TOTAL NET ASSETS	$	358,296,912
Shares Outstanding:
Class A		30,228,959
Class B		6,620,662
Class C		5,434,260
Class I		248,396
Net Asset Value:
Class A (and redemption price)	$	8.43
Class B*	$	8.41
Class C*	$	8.38
Class I (and redemption price)	$	8.42
Maximum Public Offering Price Per Share:
Class A (based on maximum initial sales charge of 4.25%)	$	8.80

^* Redemption price per share is NAV of Class B and C shares reduced by a 4.50% and 1.00% CDSC, respectively, if shares are redeemed within one year from purchase payment (See Note 2).

See Notes to Financial Statements.

Legg Mason Partners Corporate Bond Fund 2008 Annual Report|    21

Statement of operations

For the Year Ended December 31, 2008

INVESTMENT INCOME:
Interest	$	35,628,753
Dividends		154,806
Total Investment Income		35,783,559
EXPENSES:
Investment management fee (Note 2)		3,049,059
Distribution fees (Notes 2 and 4)		1,823,393
Transfer agent fees (Note 4)		1,157,859
Shareholder reports (Note 4)		235,648
Registration fees		63,423
Legal fees		55,660
Audit and tax		33,894
Insurance		12,374
Trustees’ fees		7,737
Custody fees		4,183
Miscellaneous expenses		7,941
Total Expenses		6,451,171
Less: Fees paid indirectly (Note 1)		(123	)
Net Expenses		6,451,048
NET INVESTMENT INCOME		29,332,511
REALIZED AND UNREALIZED LOSS ON INVESTMENTS AND FUTURES CONTRACTS (NOTES 1 AND 3):
Net Realized Loss From:
Investment transactions		(20,555,840	)
Futures contracts		(3,926,284	)
Net Realized Loss		(24,482,124	)
Change in Net Unrealized Appreciation/Depreciation From:
Investments		(120,742,763	)
Futures contracts		(1,995,103	)
Change in Net Unrealized Appreciation/Depreciation		(122,737,866	)
NET LOSS ON INVESTMENTS AND FUTURES CONTRACTS		(147,219,990	)
DECREASE IN NET ASSETS FROM OPERATIONS	$	(117,887,479	)

See Notes to Financial Statements.

22|    Legg Mason Partners Corporate Bond Fund 2008 Annual Report

Statements of changes in net assets

FOR THE YEARS ENDED DECEMBER 31,	2008			2007
OPERATIONS:
Net investment income	$	29,332,511		$	32,873,812
Net realized loss		(24,482,124	)		(5,151,787	)
Change in net unrealized appreciation/depreciation		(122,737,866	)		(17,914,676	)
Increase (Decrease) in Net Assets From Operations		(117,887,479	)		9,807,349
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTES 1 AND 5):
Net investment income		(30,240,701	)		(34,706,691	)
Decrease in Net Assets From Distributions to Shareholders		(30,240,701	)		(34,706,691	)
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares		59,764,873			122,230,013
Reinvestment of distributions		27,423,612			26,571,050
Cost of shares repurchased		(145,133,600	)		(348,998,710	)
Decrease in Net Assets From Fund Share Transactions		(57,945,115	)		(200,197,647	)
DECREASE IN NET ASSETS		(206,073,295	)		(225,096,989	)
NET ASSETS:
Beginning of year		564,370,207			789,467,196
End of year*	$	358,296,912		$	564,370,207
*   Includes (overdistributed) and undistributed net investment income, respectively, of:	$	(135,260	)	$	9,541

See Notes to Financial Statements.

Legg Mason Partners Corporate Bond Fund 2008 Annual Report|    23

Financial highlights

FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR

ENDED DECEMBER 31:

CLASS A SHARES1	2008			2007			20062			20052			20042
NET ASSET VALUE, BEGINNING OF YEAR	$	11.74		$	12.16		$	12.42		$	12.88		$	12.92
INCOME (LOSS) FROM OPERATIONS:
Net investment income		0.67			0.58			0.57			0.54			0.56
Net realized and unrealized gain (loss)		(3.29	)		(0.38	)		(0.22	)		(0.31	)		0.25
Total income (loss) from operations		(2.62	)		0.20			0.35			0.23			0.81
LESS DISTRIBUTIONS FROM:
Net investment income		(0.69	)		(0.62	)		(0.61	)		(0.58	)		(0.62	)
Net realized gains		—			—			—			(0.11	)		(0.23	)
Total distributions		(0.69	)		(0.62	)		(0.61	)		(0.69	)		(0.85	)
NET ASSET VALUE, END OF YEAR	$	8.43		$	11.74		$	12.16		$	12.42		$	12.88
Total return3		(23.11	)%		1.63	%		3.03	%		1.82	%		6.47	%
NET ASSETS, END OF YEAR (MILLIONS)	$	255		$	399		$	435		$	461		$	438
RATIOS TO AVERAGE NET ASSETS:
Gross expenses		1.17	%		1.10	%		1.08	%4		1.05	%		1.06	%
Net expenses		1.17	5		1.10	5		1.07	4,6		1.05			1.05	6
Net investment income		6.43			4.87			4.78			4.24			4.37
PORTFOLIO TURNOVER RATE		25	%		53	%		94	%		40	%		43	%

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

² Represents a share of capital stock outstanding prior to April 16, 2007.

³ Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

⁴ Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would both have been 1.06%.

⁵ The impact to the expense ratio was less than 0.01% as a result of fees paid indirectly.

⁶ Reflects fee waivers and/or expense reimbursements.

See Notes to Financial Statements.

24|    Legg Mason Partners Corporate Bond Fund 2008 Annual Report

FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR

ENDED DECEMBER 31:

CLASS B SHARES1	2008			2007			20062			20052			20042
NET ASSET VALUE, BEGINNING OF YEAR	$	11.71		$	12.13		$	12.39		$	12.85		$	12.89
INCOME (LOSS) FROM OPERATIONS:
Net investment income		0.60			0.50			0.50			0.47			0.50
Net realized and unrealized gain (loss)		(3.28	)		(0.39	)		(0.22	)		(0.31	)		0.24
Total income (loss) from operations		(2.68	)		0.11			0.28			0.16			0.74
LESS DISTRIBUTIONS FROM:
Net investment income		(0.62	)		(0.53	)		(0.54	)		(0.51	)		(0.55	)
Net realized gains		—			—			—			(0.11	)		(0.23	)
Total distributions		(0.62	)		(0.53	)		(0.54	)		(0.62	)		(0.78	)
NET ASSET VALUE, END OF YEAR	$	8.41		$	11.71		$	12.13		$	12.39		$	12.85
Total return3		(23.60	)%		0.91	%		2.36	%		1.27	%		5.94	%
NET ASSETS, END OF YEAR (MILLIONS)	$	56		$	97		$	125		$	161		$	182
RATIOS TO AVERAGE NET ASSETS:
Gross expenses		1.84	%		1.80	%		1.72	%4		1.59	%		1.56	%
Net expenses		1.84	5		1.80	5		1.72	4,6		1.59			1.55	6
Net investment income		5.76			4.16			4.13			3.70			3.87
PORTFOLIO TURNOVER RATE		25	%		53	%		94	%		40	%		43	%

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

² Represents a share of capital stock outstanding prior to April 16, 2007.

³ Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

⁴ Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would have been 1.71% and 1.70%, respectively.

⁵ The impact to the expense ratio was less than 0.01% as a result of fees paid indirectly.

⁶ Reflects fee waivers and/or expense reimbursements.

See Notes to Financial Statements.

Legg Mason Partners Corporate Bond Fund 2008 Annual Report|    25

Financial highlights continued

FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR

ENDED DECEMBER 31:

CLASS C SHARES1	2008			2007			20062			20052			20042
NET ASSET VALUE, BEGINNING OF YEAR	$	11.67		$	12.09		$	12.35		$	12.81		$	12.87
INCOME (LOSS) FROM OPERATIONS:
Net investment income		0.59			0.50			0.49			0.46			0.49
Net realized and unrealized gain (loss)		(3.27	)		(0.39	)		(0.22	)		(0.30	)		0.24
Total income (loss) from operations		(2.68	)		0.11			0.27			0.16			0.73
LESS DISTRIBUTIONS FROM:
Net investment income		(0.61	)		(0.53	)		(0.53	)		(0.51	)		(0.56	)
Net realized gains		—			—			—			(0.11	)		(0.23	)
Total distributions		(0.61	)		(0.53	)		(0.53	)		(0.62	)		(0.79	)
NET ASSET VALUE, END OF YEAR	$	8.38		$	11.67		$	12.09		$	12.35		$	12.81
Total return3		(23.67	)%		0.91	%		2.34	%		1.24	%		5.86	%
NET ASSETS, END OF YEAR (MILLIONS)	$	45		$	68		$	71		$	72		$	60
RATIOS TO AVERAGE NET ASSETS:
Gross expenses		1.89	%		1.80	%		1.76	%4		1.69	%		1.58	%
Net expenses		1.89	5		1.80	5		1.73	4,6		1.69			1.57	6
Net investment income		5.73			4.18			4.12			3.61			3.85
PORTFOLIO TURNOVER RATE		25	%		53	%		94	%		40	%		43	%

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

² Represents a share of capital stock outstanding prior to April 16, 2007.

³ Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

⁴ Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would have been 1.74% and 1.72%, respectively.

⁵ The impact to the expense ratio was less than 0.01% as a result of fees paid indirectly.

⁶ Reflects fee waivers and/or expense reimbursements.

See Notes to Financial Statements.

26|    Legg Mason Partners Corporate Bond Fund 2008 Annual Report

FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR

ENDED DECEMBER 31:

CLASS I SHARES1	2008			2007			20062			20052			20042
NET ASSET VALUE, BEGINNING OF YEAR	$	11.72		$	12.16		$	12.41		$	12.87		$	12.91
INCOME (LOSS) FROM OPERATIONS:
Net investment income		0.68			0.63			0.63			0.59			0.62
Net realized and unrealized gain (loss)		(3.24	)		(0.41	)		(0.22	)		(0.31	)		0.24
Total income (loss) from operations		(2.56	)		0.22			0.41			0.28			0.86
LESS DISTRIBUTIONS FROM:
Net investment income		(0.74	)		(0.66	)		(0.66	)		(0.63	)		(0.67	)
Net realized gains		—			—			—			(0.11	)		(0.23	)
Total distributions		(0.74	)		(0.66	)		(0.66	)		(0.74	)		(0.90	)
NET ASSET VALUE, END OF YEAR	$	8.42		$	11.72		$	12.16		$	12.41		$	12.87
Total return3		(22.72	)%		1.80	%		3.54	%		2.23	%		6.87	%
NET ASSETS, END OF YEAR (MILLIONS)	$	2		$	0	4	$	158		$	286		$	319
RATIOS TO AVERAGE NET ASSETS:
Gross expenses		0.75	%		0.66	%		0.65	%5		0.65	%		0.65	%
Net expenses		0.75	6		0.66	6		0.65	5,7		0.65			0.64	7
Net investment income		6.80			5.13			5.22			4.63			4.79
PORTFOLIO TURNOVER RATE		25	%		53	%		94	%		40	%		43	%

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

² Represents a share of capital stock outstanding prior to April 16, 2007.

³ Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

⁴ Amount represents less than $0.5 million.

⁵ Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would both have been 0.64%.

⁶ The impact to the expense ratio was less than 0.01% as a result of fees paid indirectly.

⁷ Reflects fee waivers and/or expense reimbursements.

See Notes to Financial Statements.

Legg Mason Partners Corporate Bond Fund 2008 Annual Report|    27

Notes to financial statements

1. Organization and significant accounting policies

Legg Mason Partners Corporate Bond Fund (formerly known as Legg Mason Partners Investment Grade Bond Fund) (the “Fund”) is a separate diversified series of Legg Mason Partners Income Trust (the “Trust”). The Trust, a Maryland business trust, 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.

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

Effective January 1, 2008, the Fund adopted Statement of Financial Accounting Standards No. 157 (“FAS 157”). FAS 157 establishes a single definition of fair value, creates a three-tier hierarchy as a framework for measuring fair value based on inputs used to value the Fund’s investments, and requires additional disclosure about fair value. The hierarchy of inputs is summarized below.

• 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)

28|    Legg Mason Partners Corporate Bond Fund 2008 Annual Report

The inputs or methodology used for valuing 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 carried at fair value:

	DECEMBER 31, 2008			QUOTED PRICES (LEVEL 1)			OTHER SIGNIFICANT OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)
Investments in securities	$	348,832,403		$	175,635		$	348,656,768	—
Other financial instruments*		(1,944,907	)		(1,944,907	)		—	—
Total	$	346,887,496		$	(1,769,272	)	$	348,656,768	—

* Other financial instruments may include written options, futures, swaps and forward contracts.

(b) Repurchase agreements. When entering into repurchase agreements, it is the Fund’s policy that its custodian or a third party custodian 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 exceeds one business day, the value of the collateral is marked-to-market to ensure the adequacy of the collateral. If the seller defaults, and the market value of the collateral declines 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) Financial futures contracts. The Fund may enter into financial futures contracts, as a hedging technique in an attempt to manage risk in the Fund’s portfolio, as a substitute for buying or selling securities, as a cash flow management technique, or for purposes of enhancing returns. Upon entering into a financial futures contract, the Fund is required to deposit cash or securities as initial margin, equal in value to a certain percentage of the contract amount (initial margin deposit). Additional securities are also segregated up to the current market value of the financial futures contracts. Subsequent payments, known as “variation margin,” are made or received by the Fund each day, depending on the daily fluctuations in the value of the underlying financial instruments. For foreign currency denominated futures contracts, variation margins are not settled daily. The Fund recognizes an unrealized gain or loss equal to the fluctuation in the value. When the financial futures contracts are closed, a realized gain or loss is recognized equal to the difference between the proceeds from (or cost of) the closing transactions and the Fund’s basis in the contracts.

The risks associated with entering into financial futures contracts include the possibility that a change in the value of the contract may not correlate with the changes in the value of the underlying financial instruments. In addition,

Legg Mason Partners Corporate Bond Fund 2008 Annual Report|    29

Notes to financial statements continued

investing in financial futures contracts involves the risk that the Fund could lose more than the initial margin deposit and subsequent payments required for a futures transaction. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts.

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

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

(e) Credit and market risk. Investments in securities (such as those issued by Structured Investment Vehicles, or SIVs) which are collateralized by residential real estate mortgages are subject to certain credit and liquidity risks. When market conditions result in an increase in default rates of the underlying mortgages and the foreclosure values of underlying real estate properties are materially below the outstanding amount of these underlying mortgages, collection of the full amount of accrued interest and principal on these investments may be doubtful. Such market conditions may significantly impair the value and liquidity of these investments may result in a lack of correlation between their credit ratings and values.

(f) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults on an expected interest payment, the Fund’s policy is to generally halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default.

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

30|    Legg Mason Partners Corporate Bond Fund 2008 Annual Report

(h) Class accounting. Investment income, common expenses and realized/unrealized gain (loss) 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 class.

(i) Fees paid indirectly. The Fund’s custody fees are reduced according to a fee arrangement, which provides for a reduction based on the level of cash deposited with the custodian by the Fund. If material, the amount is shown as a reduction of expenses on the Statement of Operations.

(j) 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, as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute substantially all of its taxable income and net realized gains, if any, to shareholders each year. Therefore, no federal income tax provision is required in the Fund’s financial statements.

Management has analyzed the Fund’s tax positions taken on federal income tax returns for all open tax years and has concluded that as of December 31, 2008, no provision for income tax would be 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.

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

	OVERDISTRIBUTED NET INVESTMENT INCOME		ACCUMULATED NET REALIZED LOSS
(a)	$	763,389	$	(763,389	)

(a) Reclassifications are primarily due to differences between book and tax amortization of premium on fixed income securities.

2. Investment management agreement and other transactions with affiliates

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s investment manager and Western Asset Management Company (“Western Asset”) is the Fund’s subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).

Legg Mason Partners Corporate Bond Fund 2008 Annual Report|    31

Notes to financial statements continued

Under the investment management agreement, the Fund pays an investment management fee, calculated daily and paid monthly, at an annual rate of the Fund’s average daily net assets in accordance with the following breakpoint schedule:

AVERAGE DAILY NET ASSETS	ANNUAL RATE
First $500 million	0.65	%
Over $500 million	0.60

LMPFA provides administrative and certain oversight services to the Fund. LMPFA delegates to the subadviser the day-to-day portfolio management of the Fund. For its services, LMPFA pays Western Asset 70% of the net management fee it receives from the Fund.

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 4.50% on Class B shares, which applies if redemption occurs within one year from purchase payment. This CDSC declines by 0.50% the first year after purchase payment and thereafter by 1.00% per year until no CDSC is incurred. Class C shares have a 1.00% CDSC, which applies if redemption occurs within one year from purchase payment. In certain cases, Class A shares have a 1.00% CDSC, which applies if redemption occurs within one year from purchase payment. This CDSC only applies to those purchases of Class A shares, which, when combined with current holdings of Class A shares, equal or exceed $1,000,000 in the aggregate. These purchases do not incur an initial sales charge.

For the year ended December 31, 2008, LMIS and its affiliates received sales charges of approximately $38,000 on sales of the Fund’s Class A shares. In addition, for the year ended December 31, 2008, CDSCs paid to LMIS and its affiliates were approximately:

	CLASS A			CLASS B		CLASS C
CDSCs	$	0	*	$	36,000	$	5,000

^* Amount represents less than $1,000.

Certain officers and one Trustee of the Trust are employees of Legg Mason or its affiliates and do not receive compensation from the Trust.

32|    Legg Mason Partners Corporate Bond Fund 2008 Annual Report

3. Investments

During the year ended December 31, 2008, the aggregate cost of purchases and proceeds from sales of investments and U.S. Government & Agency Obligations (excluding short-term investments) were as follows:

	INVESTMENTS		U.S. GOVERNMENT & AGENCY OBLIGATIONS
Purchases	$	95,006,692	$	20,326,480
Sales		155,337,553		32,213,601

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

Gross unrealized appreciation	$	3,332,976
Gross unrealized depreciation		(140,114,061	)
Net unrealized depreciation	$	(136,781,085	)

At December 31, 2008, the Fund had the following open futures contracts:

	NUMBER OF CONTRACTS	EXPIRATION DATE	BASIS VALUE		MARKET VALUE		UNREALIZED GAIN (LOSS)
Contracts to Buy:
90-Day Eurodollar	435	3/09	$	105,352,800	$	107,597,250	$	2,244,450
U.S. Treasury 5-Year Notes	126	3/09		14,554,778		15,000,891		446,113
								2,690,563
Contracts to Sell:
U.S. Treasury 30-Year Bonds	7	3/09	$	864,742	$	966,328	$	(101,586	)
U.S. Treasury 10-Year Notes	476	3/09		55,323,116		59,857,000		(4,533,884	)
								(4,635,470	)
Net unrealized loss on open futures contracts							$	(1,944,907	)

4. Class specific expenses, waivers and/or reimbursements

The Fund has adopted a Rule 12b-1 distribution plan and under that plan the Fund pays a service fee with respect to its Class A, B and C shares calculated at the annual rate of 0.25% of the average daily net assets of each respective class. The Fund also pays a distribution fee with respect to its Class B and C shares calculated at the annual rate of 0.50% and 0.45% of the average daily net assets of each class, respectively. Distribution fees are accrued daily and paid monthly.

Legg Mason Partners Corporate Bond Fund 2008 Annual Report|    33

Notes to financial statements continued

For the year ended December 31, 2008, class specific expenses were as follows:

	DISTRIBUTION FEES		TRANSFER AGENT FEES		SHAREHOLDER REPORTS EXPENSES
Class A	$	837,211	$	586,516	$	207,636
Class B		584,727		292,306		19,248
Class C		401,455		278,944		8,761
Class I		—		93		3
Total	$	1,823,393	$	1,157,859	$	235,648

5. Distributions to shareholders by class

	YEAR ENDED DECEMBER 31, 2008		YEAR ENDED DECEMBER 31, 2007
Net Investment Income:
Class A	$	22,195,920	$	21,592,144
Class B		4,636,599		4,862,742
Class C		3,397,525		3,138,399
Class I		10,657		5,113,406
Total	$	30,240,701	$	34,706,691

6. Shares of beneficial interest

At December 31, 2008, the Trust had an unlimited number of shares of beneficial interest authorized with a par value of $0.00001 per share. The Fund has the ability to issue multiple classes of shares. Each share of a class represents an identical interest and has the same rights, except that each class bears certain direct expenses, including those specifically related to the distribution of its shares. Prior to April 16, 2007, the company had 10 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, 2008					YEAR ENDED DECEMBER 31, 2007
	SHARES		AMOUNT			SHARES		AMOUNT
Class A
Shares sold	3,410,897		$	34,109,645		5,297,436		$	63,684,687
Shares issued on reinvestment	2,004,439			20,145,514		1,573,540			18,846,853
Shares repurchased	(9,168,800	)		(92,624,352	)	(8,624,713	)		(103,537,538	)
Net decrease	(3,753,464	)	$	(38,369,193	)	(1,753,737	)	$	(21,005,998	)
Class B
Shares sold	583,870		$	6,127,875		738,196		$	8,843,172
Shares issued on reinvestment	421,720			4,239,620		352,813			4,217,348
Shares repurchased	(2,654,613	)		(27,177,631	)	(3,149,875	)		(37,738,628	)
Net decrease	(1,649,023	)	$	(16,810,136	)	(2,058,866	)	$	(24,678,108	)

34|    Legg Mason Partners Corporate Bond Fund 2008 Annual Report

	YEAR ENDED DECEMBER 31, 2008					YEAR ENDED DECEMBER 31, 2007
	SHARES		AMOUNT			SHARES		AMOUNT
Class C
Shares sold	1,743,949		$	17,532,345		1,903,815		$	22,730,914
Shares issued on reinvestment	304,244			3,030,395		224,849			2,676,662
Shares repurchased	(2,462,791	)		(25,184,663	)	(2,172,469	)		(25,889,557	)
Net decrease	(414,598	)	$	(4,621,923	)	(43,805	)	$	(481,981	)
Class I
Shares sold	237,144		$	1,995,008		2,226,474		$	26,971,240
Shares issued on reinvestment	813			8,083		69,650			830,187
Shares repurchased	(13,213	)		(146,954	)	(15,309,864	)		(181,832,987	)
Net increase (decrease)	224,744		$	1,856,137		(13,013,740	)	$	(154,031,560	)

7. Income tax information and distributions to shareholders

Subsequent to the fiscal year end, the Fund has made the following distributions:

RECORD DATE PAYABLE DATE	CLASS A		CLASS B		CLASS C		CLASS I
Daily 1/30/2009	$	0.052289	$	0.046353	$	0.046521	$	0.056184

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

	2008		2007
Distributions Paid From:
Ordinary income	$	30,240,701	$	34,706,691

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

Undistributed ordinary income — net	$	406,031
Capital loss carryforward*		(30,394,718	)
Other book/tax temporary differences(a)		(14,274,346	)
Unrealized appreciation/(depreciation)(b)		(138,725,992	)
Total accumulated earnings/(losses) — net	$	(182,989,025	)

^* As of December 31, 2008, the Fund had the following net capital loss carryforwards remaining:

YEAR OF EXPIRATION	AMOUNT
12/31/2014	$	(13,489,887	)
12/31/2015		(2,662,743	)
12/31/2016		(14,242,088	)
	$	(30,394,718	)

These amounts will be available to offset any future taxable capital gains.

^(a) Other book/tax temporary differences are attributable primarily to the realization for tax purposes of unrealized losses on certain futures contracts, the deferral of post-October capital losses for tax purposes, interest accrued for tax purposes on defaulted securities and book/tax differences in the timing of the deductibility of various expenses.

Legg Mason Partners Corporate Bond Fund 2008 Annual Report|    35

Notes to financial statements continued

^(b) The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to the tax deferral of losses on wash sales and the difference between book and tax amortization methods for premiums on fixed income securities.

8. Regulatory matters

On May 31, 2005, the U.S. Securities and Exchange Commission (“SEC”) issued an order in connection with the settlement of an administrative proceeding against Smith Barney Fund Management LLC (“SBFM”), a wholly-owned subsidiary of Legg Mason and the then investment adviser or manager to the Fund, and Citigroup Global Markets, Inc. (“CGM”), a former distributor of the Fund, relating to the appointment of an affiliated transfer agent for the Smith Barney family of mutual funds, including the Fund (the “Affected Funds”).

The SEC order found that SBFM and CGM willfully violated Section 206(1) of the Investment Advisers Act of 1940, as amended, and the rules promulgated thereunder (the “Advisers Act”). Specifically, the order found that SBFM and CGM knowingly or recklessly failed to disclose to the boards of the Affected Funds in 1999 when proposing a new transfer agent arrangement with an affiliated transfer agent that: First Data Investors Services Group (“First Data”), the Affected Funds’ then-existing transfer agent, had offered to continue as transfer agent and do the same work for substantially less money than before; and that Citigroup Asset Management (“CAM”), the Citigroup business unit that, at the time, included the Affected Funds’ investment manager and other investment advisory companies, had entered into a side letter with First Data under which CAM agreed to recommend the appointment of First Data as subtransfer agent to the affiliated transfer agent in exchange, among other things, for a guarantee by First Data of specified amounts of asset management and investment banking fees to CAM and CGM. The order also found that SBFM and CGM willfully violated Section 206(2) of the Advisers Act by virtue of the omissions discussed above and other misrepresentations and omissions in the materials provided to the Affected Funds’ boards, including the failure to make clear that the affiliated transfer agent would earn a high profit for performing limited functions while First Data continued to perform almost all of the transfer agent functions, and the suggestion that the proposed arrangement was in the Affected Funds’ best interests and that no viable alternatives existed.

SBFM and CGM do not admit or deny any wrongdoing or liability. The settlement does not establish wrongdoing or liability for purposes of any other proceeding. The SEC censured SBFM and CGM and ordered them to cease and desist from violations of Sections 206(1) and 206(2) of the Advisers Act. The order required Citigroup to pay $208.1 million, including $109 million in disgorgement of profits, $19.1 million in interest, and a civil money penalty of $80 million. Approximately $24.4 million has already been paid to the Affected Funds, primarily through fee waivers. The remaining $183.7 million, including the penalty, has been paid to the U.S. Treasury and will be distributed pursuant to a plan submitted for the approval of the SEC. At this time, there is no

36|    Legg Mason Partners Corporate Bond Fund 2008 Annual Report

certainty as to how the above-described proceeds of the settlement will be distributed, to whom such distributions will be made, the methodology by which such distributions will be allocated, and when such distributions will be made. The order also required that transfer agency fees received from the Affected Funds since December 1, 2004, less certain expenses, be placed in escrow and provided that a portion of such fees might be subsequently distributed in accordance with the terms of the order. On April 3, 2006, an aggregate amount of approximately $9 million held in escrow was distributed to the Affected Funds.

The order required SBFM to recommend a new transfer agent contract to the Affected Funds’ boards within 180 days of the entry of the order; if a Citigroup affiliate submitted a proposal to serve as transfer agent or sub-transfer agent, SBFM and CGM would have been required, at their expense, to engage an independent monitor to oversee a competitive bidding process. On November 21, 2005, and within the specified timeframe, the Affected Funds’ boards selected a new transfer agent for the Affected Funds. No Citigroup affiliate submitted a proposal to serve as transfer agent. Under the order, SBFM also must comply with an amended version of a vendor policy that Citigroup instituted in August 2004.

Although there can be no assurance, the manager does not believe that this matter will have a material adverse effect on the Affected Funds. On December 1, 2005, Citigroup completed the sale of substantially all of its global asset management business, including SBFM, to Legg Mason.

9. Legal matters

Beginning in June 2004, class action lawsuits alleging violations of the federal securities laws were filed against CGM, a former distributor of the Fund and other affiliated funds (collectively, the “Funds”) and a number of its then affiliates, including SBFM and Salomon Brothers Asset Management Inc. (“SBAM”), which were then investment adviser or manager to certain of the Funds (the “Managers”), substantially all of the mutual funds then managed by the Managers (the “Defendant Funds”), and Board members of the Defendant Funds (collectively, the “Defendants”). The complaints alleged, among other things, that CGM created various undisclosed incentives for its brokers to sell Smith Barney and Salomon Brothers funds. In addition, according to the complaints, the Managers caused the Defendant Funds to pay excessive brokerage commissions to CGM for steering clients towards proprietary funds. The complaints also alleged that the Defendants breached their fiduciary duty to the Defendant Funds by improperly charging Rule 12b-1 fees and by drawing on fund assets to make undisclosed payments of soft dollars and excessive brokerage commissions. The complaints also alleged that the Defendant Funds failed to adequately disclose certain of the allegedly wrongful conduct. The complaints sought injunctive relief and compensatory and punitive damages, rescission of the Defendant Funds’ contracts with the Managers, recovery of all fees paid to the Managers pursuant to such contracts and an award of attorneys’ fees and litigation expenses.

Legg Mason Partners Corporate Bond Fund 2008 Annual Report|    37

Notes to financial statements continued

On December 15, 2004, a consolidated amended complaint (the “Complaint”) was filed alleging substantially similar causes of action. On May 27, 2005, all of the Defendants filed motions to dismiss the Complaint. On July 26, 2006, the court issued a decision and order (1) finding that plaintiffs lacked standing to sue on behalf of the shareholders of the Funds in which none of the plaintiffs had invested and dismissing those Funds from the case (although stating that they could be brought back into the case if standing as to them could be established), and (2) other than one stayed claim, dismissing all of the causes of action against the remaining Defendants, with prejudice, except for the cause of action under Section 36(b) of the 1940 Act, which the court granted plaintiffs leave to repeal as a derivative claim.

On October 16, 2006, plaintiffs filed their Second Consolidated Amended Complaint (“Second Amended Complaint”) which alleges derivative claims on behalf of nine funds identified in the Second Amended Complaint, under Section 36(b) of the 1940 Act, against CAM, SBAM and SBFM as investment advisers to the identified funds, as well as CGM as a distributor for the identified funds (collectively, the “Second Amended Complaint Defendants”). The Fund was not identified in the Second Amended Complaint. The Second Amended Complaint alleges no claims against any of the funds or any of their Board Members. Under Section 36(b), the Second Amended Complaint alleges similar facts and seeks similar relief against the Second Amended Complaint Defendants as the Complaint.

On December 3, 2007, the court granted the Defendants’ motion to dismiss, with prejudice. On January 2, 2008, the plaintiffs filed a notice of appeal to the Second Circuit Court of Appeals.

Additional lawsuits arising out of these circumstances and presenting similar allegations and requests for relief may be filed in the future.

* * *

Beginning in August 2005, five class action lawsuits alleging violations of federal securities laws and state law were filed against CGM and SBFM, (collectively, the “Defendants”) based on the May 31, 2005 settlement order issued against the Defendants by the SEC as described in Note 8. The complaints seek injunctive relief and compensatory and punitive damages, removal of SBFM as the investment manager for the Smith Barney family of funds, rescission of the funds’ management and other contracts with SBFM, recovery of all fees paid to SBFM pursuant to such contracts, and an award of attorneys’ fees and litigation expenses. The five actions were subsequently consolidated, and a consolidated complaint was filed.

On September 26, 2007, the United States District Court for the Southern District of New York issued an order dismissing the consolidated complaint, and judgement was later entered. An appeal has been filed and is pending before the U.S. Court of Appeals for the Second Circuit.

38|    Legg Mason Partners Corporate Bond Fund 2008 Annual Report

10. Other matters

On or about May 30, 2006, John Halebian, a purported shareholder of CitiSM New York Tax Free Reserves, a series of Legg Mason Partners Money Market Trust, formerly a series of CitiFunds Trust III (the “Subject Trust”), filed a complaint in the United States District Court for the Southern District of New York against the independent trustees of the Subject Trust (Elliott J. Berv, Donald M. Carlton, A. Benton Cocanougher, Mark T. Finn, Stephen Randolph Gross, Diana R. Harrington, Susan B. Kerley, Alan G. Merten and R. Richardson Pettit).

The Subject Trust is also named in the complaint as a nominal defendant. The complaint alleges both derivative claims on behalf of the Subject Trust and class claims on behalf of a putative class of shareholders of the Subject Trust in connection with the 2005 sale of Citigroup’s asset management business to Legg Mason and the related approval of new investment advisory agreements by the trustees and shareholders. In the derivative claim, the plaintiff alleges, among other things, that the independent trustees breached their fiduciary duty to the Subject Trust and its shareholders by failing to negotiate lower fees or seek competing bids from other qualified investment advisers in connection with Citigroup’s sale to Legg Mason. In the claims brought on behalf of the putative class of shareholders, the plaintiff alleges that the independent trustees violated the proxy solicitation requirements of the 1940 Act, and breached their fiduciary duty to shareholders, by virtue of the voting procedures, including “echo voting,” used to obtain approval of the new investment advisory agreements and statements made in a proxy statement regarding those voting procedures. The plaintiff alleges that the proxy statement was misleading because it failed to disclose that the voting procedures violated the 1940 Act. The relief sought includes an award of damages, rescission of the advisory agreement, and an award of costs and attorney fees.

In advance of filing the complaint, Mr. Halebian’s lawyers made written demand for relief on the Board of the Subject Trust, and the Board’s independent trustees formed a demand review committee to investigate the matters raised in the demand, and subsequently in the complaint, and recommend a course of action to the Board. The committee, after a thorough review, determined that the independent trustees did not breach their fiduciary duties as alleged by Mr. Halebian, and that the action demanded by Mr. Halebian would not be in the best interests of the Subject Trust. The Board of the Subject Trust (the trustee who is an “interested person” of the Subject Trust, within the meaning of the 1940 Act, having recused himself from the matter), after receiving and considering the committee’s report and based upon the findings of the committee, subsequently also determined and,

Legg Mason Partners Corporate Bond Fund 2008 Annual Report|    39

Notes to financial statements continued

adopting the recommendation of the committee, directed counsel to move to dismiss Mr. Halebian’s complaint. A motion to dismiss was filed on October 23, 2006. Opposition papers were filed on or about December 7, 2006. The complaint was dismissed on July 31, 2007. Mr. Halebian has filed an appeal in the U.S. Court of Appeals for the Second Circuit. The appeal is pending.

11. Recent accounting pronouncement

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

40|    Legg Mason Partners Corporate Bond Fund 2008 Annual Report

Report of independent registered public accounting firm

The Board of Trustees and Shareholders

Legg Mason Partners Income Trust:

We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Legg Mason Partners Corporate Bond Fund (formerly Legg Mason Partners Investment Grade Bond Fund), a series of Legg Mason Partners Income Trust, as of December 31, 2008, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits 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 and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2008, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Legg Mason Partners Corporate Bond Fund as of December 31, 2008, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.

New York, New York

February 24, 2009

Legg Mason Partners Corporate Bond Fund 2008 Annual Report|    41

Board approval of management and subadvisory agreements

(unaudited)

At a meeting of the Board of Trustees of Legg Mason Partners Income Trust (the “Trust”) held on November 10-11, 2008, the Board, including the Trustees who are not considered to be “interested persons” of the Trust (the “Independent Trustees”) under the Investment Company Act of 1940, as amended (the “1940 Act”), approved for an annual period the continuation of the management agreement (the “Management Agreement”) between the Trust and Legg Mason Partners Fund Advisor, LLC (the “Manager”) with respect to the Legg Mason Partners Corporate Bond Fund, a series of the Trust (the “Fund”), and the sub-advisory agreement (the “Sub-Advisory Agreement”) between the Manager and Western Asset Management Company (the “Subadviser”), an affiliate of the Manager, with respect to the Fund.

Background

The Board received information in advance of the meeting from the Manager to assist it in its consideration of the Management Agreement and the Sub-Advisory Agreement and was given the opportunity to ask questions and request additional information from management. In addition, the Independent Trustees submitted questions to management before the meeting and considered the responses provided by management during the meeting. The Board received and considered a variety of information about the Manager and the Subadviser, as well as the management and sub-advisory arrangements for the Fund and other funds overseen by the Board, certain portions of which are discussed below. The presentation made to the Board encompassed the Fund and all funds for which the Board has responsibility. The discussion below covers both the advisory and the administrative functions being rendered by the Manager, both of which functions are encompassed by the Management Agreement, as well as the advisory functions rendered by the Subadviser pursuant to the Sub-Advisory Agreement.

Board approval of management agreement and sub-advisory agreement

The Independent Trustees were advised by separate independent legal counsel throughout the process. Prior to voting, the Independent Trustees received a memorandum from their independent legal counsel discussing the legal standards for their consideration of the proposed continuation of the Management Agreement and the Sub-Advisory Agreement. The Independent Trustees also discussed the proposed continuation of the Management Agreement and the Sub-Advisory Agreement in private sessions with their independent legal counsel at which no representatives of the Manager were present. In approving the Management Agreement and Sub-Advisory Agreement, the Board, including the Independent Trustees, considered a variety of factors, including those factors discussed below. No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve the Management Agreement and the Sub-Advisory Agreement, and each Trustee may have attributed different weight to the various factors.

42|    Legg Mason Partners Corporate Bond Fund

Nature, extent and quality of the services under the management agreement and sub-advisory agreement

The Board received and considered information regarding the nature, extent and quality of services provided to the Fund by the Manager and the Subadviser under the Management Agreement and the Sub-Advisory Agreement, respectively, during the past year. The Board noted information received at regular meetings throughout the year related to the services rendered by the Manager in its management of the Fund’s affairs and the Manager’s role in coordinating the activities of the Fund’s other service providers. The Board’s evaluation of the services provided by the Manager and the Subadviser took into account the Board’s knowledge and familiarity gained as Trustees of funds in the Legg Mason Partners fund complex, including the scope and quality of the investment management and other capabilities of the Manager and the Subadviser, and the quality of the Manager’s administrative and other services. The Board observed that the scope of services provided by the Manager and the Subadviser had continued to expand as a result of regulatory, market and other developments, including maintaining and monitoring their own and the Fund’s expanded compliance programs. The Board also noted that on a regular basis it received and reviewed information from the Manager and the Subadviser regarding the Fund’s compliance policies and procedures established pursuant to Rule 38a-1 under the 1940 Act.

The Board reviewed the qualifications, backgrounds and responsibilities of the Fund’s senior personnel and the portfolio management team primarily responsible for the day-to-day portfolio management of the Fund. The Board also considered, based on its knowledge of the Manager and its affiliates, the financial resources of Legg Mason, Inc., the parent organization of the Manager and the Subadviser.

The Board considered the division of responsibilities between the Manager and the Subadviser and the oversight provided by the Manager. The Board also considered the Manager’s and the Subadviser’s brokerage policies and practices. In addition, management also reported to the Board on, among other things, its business plans and organizational changes. The Board concluded that, overall, the nature, extent and quality of services provided (and expected to be provided) under the Management Agreement and the Sub-Advisory Agreement were satisfactory.

Fund performance

The Board received and considered performance information for the Fund as well as for a group of funds (the “Performance Universe”) selected by Lipper, Inc. (“Lipper”), an independent provider of investment company data. The Board was provided with a description of the methodology Lipper used to determine the similarity of the Fund with the funds included in the Performance Universe. The Board also noted that it had received and discussed with management information throughout the year at periodic intervals comparing the Fund’s performance against its benchmark and against the Fund’s peers. In addition, the Board considered the Fund’s performance in light of overall financial market conditions.

Legg Mason Partners Corporate Bond Fund|    43

Board approval of management and subadvisory agreements

(unaudited) continued

The information comparing the Fund’s performance to that of its Performance Universe, consisting of all retail and institutional funds classified as A-rated corporate debt funds by Lipper, showed, among other data, that the Fund’s performance for the 1-, 3- and 5-year periods ended June 30, 2008 was below the median. The Board noted the explanations from the Manager concerning the underperformance versus the peer group.

Based on its review, which included careful consideration of all of the factors noted above, the Board concluded that it will continue to evaluate the Fund’s performance and any actions taken by the Manager to continue to improve performance.

Management fees and expense ratios

The Board reviewed and considered the contractual management fee (the “Contractual Management Fee”) and the actual fees paid by the Fund to the Manager (the “Actual Management Fee”) in light of the nature, extent and quality of the management and sub-advisory services provided by the Manager and the Subadviser. In addition, the Board noted that the compensation paid to the Subadviser is paid by the Manager, not the Fund, and, accordingly, that the retention of the Subadviser does not increase the fees or expenses otherwise incurred by the Fund’s shareholders.

In addition, the Board received and considered information comparing the Contractual Management Fee and the Actual Management Fee and the Fund’s total actual expenses with those of funds in both the relevant expense group and a broader group of funds, each selected and provided by Lipper. The Board also reviewed information regarding fees charged by the Manager to other U.S. clients investing primarily in an asset class similar to that of the Fund, including, where applicable, separate accounts.

The Manager reviewed with the Board the differences in the scope of services provided to the Fund and to these other clients, noting that the Fund is provided with administrative services (including services related to the preparation and maintenance of the Fund’s registration statement and shareholder reports, as well as calculation of the Fund’s net asset value on a daily basis), office facilities, Fund officers (including the Fund’s chief executive, chief financial and chief compliance officers), and that the Manager coordinates and oversees the provision of services to the Fund by other Fund service providers. The Board considered the fee comparisons in light of the differences required to manage these different types of accounts. The Board also considered and discussed information about the Subadviser’s fees, including the amount of the management fees retained by the Manager after payment of the subadvisory fee. The Board also received an analysis of complex-wide management fees provided by the Manager, which, among other things, set out a framework of fees based on asset classes.

44|    Legg Mason Partners Corporate Bond Fund

The information comparing the Fund’s Contractual and Actual Management Fees as well as its actual total expense ratio to its Expense Group, consisting of a group of retail front-end load funds (including the Fund) classified as A-rated corporate debt funds and chosen by Lipper to be comparable to the Fund, showed that the Fund’s Contractual Management Fee and Actual Management Fee were above the median. The Board noted that the Fund’s actual total expense ratio was above the median. The Board took into account management’s discussion of the Fund’s expenses.

Taking all of the above into consideration, the Board determined that the management fee and the subadvisory fees for the Fund were reasonable in light of the nature, extent and quality of the services provided to the Fund under the Management Agreement and the Sub-Advisory Agreement.

Manager profitability

The Board received and considered an analysis of the profitability of the Manager and its affiliates in providing services to the Fund. The Board also received profitability information with respect to the Legg Mason Partners fund complex as a whole. In addition, the Board received information with respect to the Manager’s allocation methodologies used in preparing this profitability data. It was noted that the allocation methodologies had been reviewed by an outside consultant the year before. The profitability of the Manager and its affiliates was considered by the Board not excessive in light of the nature, extent and quality of the services provided to the Fund and the type of fund it represented.

Economies of scale

The Board received and discussed information concerning whether the Manager realizes economies of scale as the Fund’s assets grow. The Board noted that the Manager had previously agreed to institute breakpoints in the Fund’s Contractual Management Fee, reflecting the potential for reducing the Contractual Management Fee as the Fund grows. The Board considered whether the breakpoint fee structure was a reasonable means of sharing any economies of scale or other efficiencies that might accrue from increases in the Fund’s asset levels. The Board noted that the Fund had not reached the specified asset level at which a breakpoint to its Contractual Management Fee would be triggered.

The Board determined that the management fee structure for the Fund, including breakpoints, was reasonable.

Legg Mason Partners Corporate Bond Fund|    45

Board approval of management and subadvisory agreements

(unaudited) continued

Other benefits to the manager and the subadviser

The Board considered other benefits received by the Manager, the Subadviser and their affiliates as a result of their relationship with the Fund, including the opportunity to offer additional products and services to Fund shareholders.

In light of the costs of providing investment management and other services to the Fund and the ongoing commitment of the Manager and the Subadviser to the Fund, the Board considered that the ancillary benefits that the Manager and its affiliates received were reasonable.

* * *

In light of all of the foregoing, the Board determined that the continuation of each of the Management Agreement and Sub-Advisory Agreement would be in the best interests of the Fund’s shareholders and approved the continuation of such agreements for another year.

46|    Legg Mason Partners Corporate Bond Fund

Additional information (unaudited)

Information about Trustees and Officers

The business and affairs of Legg Mason Partners Corporate Bond Fund (formerly known as Investment Grade Bond Fund) (the “Fund”) are managed under the direction of the Board of Trustees. Information pertaining to the Trustees and Officers of the Fund is set forth below. The Statement of Additional Information includes additional information about the Trustees and is available, without charge, upon request by calling Legg Mason Partners Shareholder Services at 1-800-451-2010.

NON-INTERESTED TRUSTEES

ELLIOTT J. BERV
c/o R. Jay Gerken, CFA, Legg Mason & Co., LLC (“Legg Mason”)
620 Eighth Avenue New York, NY 10018
Birth year	1943
Position(s) held with Fund1	Trustee
Term of office1 and length of time served2	Since 1989
Principal occupation(s) during past five years	President and Chief Executive Officer, Catalyst (consulting) (since 1984); formerly, Chief Executive Officer, Rocket City Enterprises (media) (from 2000 to 2005)
Number of portfolios in fund complex overseen by Trustee	67
Other board memberships held by Trustee	Board Member, American Identity Corp. (doing business as Morpheus Technologies) (biometric information management) (since 2001)
A. BENTON COCANOUGHER
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1938
Position(s) held with Fund	Trustee
Term of office1 and length of time served2	Since 1991
Principal occupation(s) during past five years	Dean Emeritus and Professor, Texas A&M University (since 2004); Formerly, Interim Chancellor, Texas A&M University System (from 2003 to 2004); formerly, Special Advisor to the President, Texas A&M University (from 2002 to 2003)
Number of portfolios in fund complex overseen by Trustee	67
Other board memberships held by Trustee	None

Legg Mason Partners Corporate Bond Fund|    47

Additional information (unaudited) continued

Information about Trustees and Officers

JANE F. DASHER
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1949
Position(s) held with Fund1	Trustee
Term of office1 and length of time served2	Since 1999
Principal occupation(s) during past five years	Chief Financial Officer, Korsant Partners, LLC (a family investment company)
Number of portfolios in fund complex overseen by Trustee	67
Other board memberships held by Trustee	None
MARK T. FINN
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1943
Position(s) held with Fund1	Trustee
Term of office1 and length of time served2	Since 1989
Principal occupation(s) during past five years	Adjunct Professor, College of William & Mary (since 2002); Principal/ Member Balvan Partners (investment management) (since 2002); Chairman, Chief Executive Officer and Owner, Vantage Consulting Group, Inc. (investment management) (since 1988)
Number of portfolios in fund complex overseen by Trustee	67
Other board memberships held by Trustee	None
RAINER GREEVEN
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1936
Position(s) held with Fund	Trustee
Term of office1 and length of time served2	Since 1994
Principal occupation(s) during past five years	Attorney, Rainer Greeven PC; President and Director, 62nd Street East Corporation (real estate) (since 2002)
Number of portfolios in fund complex overseen by Trustee	67
Other board memberships held by Trustee	None

48|    Legg Mason Partners Corporate Bond Fund

STEPHEN R. GROSS
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1947
Position(s) held with Fund1	Trustee
Term of office1 and length of time served2	Since 1986
Principal occupation(s) during past five years	Chairman, HLB Gross Collins, PC (accounting and consulting firm) (since 1979); Treasurer, Coventry Limited, Inc. (Senior Living Facilities) (since 1985); formerly, Managing Director, Fountainhead Ventures, LLC (technology accelerator) (from 1998 to 2003)
Number of portfolios in fund complex overseen by Trustee	67
Other board memberships held by Trustee	Director, Andersen Calhoun (assisted living) (since 1987); formerly, Director, ebank Financial Services, Inc. (from 1997 to 2004)
RICHARD E. HANSON, JR.
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1941
Position(s) held with Fund1	Trustee
Term of office1 and length of time served2	Since 1985
Principal occupation(s) during past five years	Retired
Number of portfolios in fund complex overseen by Trustee	67
Other board memberships held by Trustee	None
DIANA R. HARRINGTON
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1940
Position(s) held with Fund1	Trustee
Term of office1 and length of time served2	Since 1992
Principal occupation(s) during past five years	Professor, Babson College (since 1992)
Number of portfolios in fund complex overseen by Trustee	67
Other board memberships held by Trustee	None

Legg Mason Partners Corporate Bond Fund|    49

Additional information (unaudited) continued

Information about Trustees and Officers

SUSAN M. HEILBRON
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1945
Position(s) held with Fund1	Trustee
Term of office1 and length of time served2	Since 1994
Principal occupation(s) during past five years	Independent Consultant (since 2001)
Number of portfolios in fund complex over- seen by Trustee	67
Other board member- ships held by Trustee	None
SUSAN B. KERLEY
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1951
Position(s) held with Fund1	Trustee
Term of office1 and length of time served2	Since 1992
Principal occupation(s) during past five years	Investment Consulting Partner, Strategic Management Advisors, LLC (investment consulting) (since 1990)
Number of portfolios in fund complex over- seen by Trustee	67
Other board member- ships held by Trustee	Chairman (since 2005) and Trustee (since 2000), Eclipse Funds (3 funds); Chairman (since 2005) and Director (since 1990), Eclipse Funds Inc. (23 funds); Chairman and Director, ICAP Funds, Inc. (4 funds) (since 2006); Chairman and Trustee, The MainStay Funds (21 funds) (since 2007); and Chairman and Director, MainStay VP Series Fund, Inc. (24 funds) (since 2007)
ALAN G. MERTEN
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1941
Position(s) held with Fund1	Trustee
Term of office1 and length of time served2	Since 1990
Principal occupation(s) during past five years	President, George Mason University (since 1996)
Number of portfolios in fund complex over- seen by Trustee	67
Other board member- ships held by Trustee	Director of Cardinal Financial Corporation (since 2006); Trustee, First Potomac Realty Trust (since 2005); formerly, Director, Xybernaut Corporation (information technology) (from 2004 to 2006); formerly Director, Digital Net Holdings, Inc. (from 2003 to 2004); formerly, Director, Comshare, Inc. (information technology) (from 1985 to 2003)

50|    Legg Mason Partners Corporate Bond Fund

R. RICHARDSON PETTIT
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1942
Position(s) held with Fund1	Trustee
Term of office1 and length of time served2	Since 1990
Principal occupation(s) during past five years	Formerly, Duncan Professor of Finance, University of Houston (from 1977 to 2006)
Number of portfolios in fund complex over- seen by Trustee	67
Other board member- ships held by Trustee	None
INTERESTED TRUSTEE
R. JAY GERKEN, CFA3
Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1951
Position(s) held with Fund1	Trustee President, Chairman, and Chief Executive Officer
Term of office1 and length of time served2	Since 2002
Principal occupation(s) during past five years	Managing Director of Legg Mason; Chairman of the Board and Trustee/ Director of 159 funds associated with Legg Mason Partners Fund Advisor, LLC (“LMPFA”) and its affiliates; President LMPFA (since 2006); Chairman, President and Chief Executive Officer of certain mutual funds associated with Legg Mason and its affiliates; formerly, Chairman, Smith Barney Fund Management LLC (“SBFM”) and Citi Fund Management Inc. (“CFM”) (2002 to 2005); formerly Chairman, President and Chief Executive Officer of Travelers Investment Adviser, Inc. (“TIA”) (2002 to 2005)
Number of portfolios in fund complex over- seen by Trustee	146
Other board member- ships held by Trustee	Trustee, Consulting Group Capital Markets Funds (from 2002 to 2006)
OFFICERS
FRANCES M. GUGGINO
Legg Mason
55 Water Street New York, NY 10041
Birth year	1957
Position(s) held with Fund1	Chief Financial Officer and Treasurer
Term of office1 and length of time served2	Since 2004
Principal occupation(s) during past five years	Director of Legg Mason; Chief Financial Officer and Treasurer of certain mutual funds associated with Legg Mason; formerly, Controller of certain mutual funds associated with Citigroup Asset Management (“CAM”) (from 1999 to 2004)

Legg Mason Partners Corporate Bond Fund|    51

Additional information (unaudited) continued

Information about Trustees and Officers

TED P. BECKER
Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1951
Position(s) held with Fund1	Chief Compliance Officer
Term of office1 and length of time served2	Since 2006
Principal occupation(s) during past five years	Director of Global Compliance at Legg Mason (since 2006); Chief Compliance Officer of LMPFA (since 2006); Managing Director of Compliance at Legg Mason (since 2005); Chief Compliance Officer with certain mutual funds associated with Legg Mason, LMPFA and certain affiliates (since 2006); formerly, Managing Director of Compliance at CAM or its predecessor (from 2002 to 2005)
JOHN CHIOTA
Legg Mason
100 First Stamford Place Stamford, CT 06902
Birth year	1968
Position(s) held with Fund1	Chief Anti-Money Laundering Compliance Officer/Identity Theft Prevention Officer
Term of office1 and length of time served2	Since 2006/2008
Principal occupation(s) during past five years	Identity Theft Prevention Officer of certain mutual funds associated with Legg Mason & Co. (since 2008); Chief Anti-Money Laundering Compliance Officer of certain mutual funds associated with Legg Mason & Co. (since 2006); Vice President of Legg Mason & Co. (since 2005); Vice President at CAM (since 2004); Prior to August 2004, Chief Anti-Money Laundering Compliance Officer of TD Waterhouse
ROBERT I. FRENKEL
Legg Mason
100 First Stamford Place Stamford, CT 06902
Birth year	1954
Position(s) held with Fund	Secretary and Chief Legal Officer
Term of office1 and length of time served2	Since 2003
Principal occupation(s) during past five years	Managing Director and General Counsel of Global Mutual Funds for Legg Mason and its predecessors (since 1994); Secretary and Chief Legal Officer of mutual funds associated with Legg Mason (since 2003); formerly, Secretary of CFM (from 2001 to 2004)
THOMAS C. MANDIA
Legg Mason
100 First Stamford Place Stamford, CT 06902
Birth year	1962
Position(s) held with Fund1	Assistant Secretary
Term of office1 and length of time served2	Since 2000
Principal occupation(s) during past five years	Managing Director and Deputy Counsel of Legg Mason (since 2005); Managing Director and Deputy General Counsel for CAM (from 1992 to 2005)

52|    Legg Mason Partners Corporate Bond Fund

DAVID CASTANO
Legg Mason
55 Water Street New York, NY 10041
Birth year	1971
Position(s) held with Fund1	Controller
Term of office1 and length of time served2	Since 2007
Principal occupation(s) during past five years	Vice President of Legg Mason (since 2008); Controller of certain mutual funds associated with Legg Mason (since 2007); formerly, Assistant Treasurer of Lord Abbett mutual funds (from 2004 to 2006); Supervisor at UBS Global Asset Management (from 2003 to 2004); Accounting Manager at CAM (prior to 2003)
MATTHEW PLASTINA
Legg Mason
55 Water Street New York, NY 10041
Birth year	1970
Position(s) held with Fund1	Controller
Term of office1 and length of time served2	Since 2007
Principal occupation(s) during past five years	Vice President of Legg Mason (since 2008); Assistant Vice President of Legg Mason or its predecessor (since 1999); Controller of certain mutual funds associated with Legg Mason (since 2007); formerly, Assistant Controller of certain mutual funds associated with Legg Mason and its predecessors (from 2002 to 2007)

¹ Each Trustee and Officer serves until his or her 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 Trustee or Officer became a Board Member or Officer, as applicable, for a fund in the Legg Mason Partners funds complex.

³ Mr. Gerken is an “interested person” of the Fund as defined in the 1940 Act, because Mr. Gerken is an officer of LMPFA and certain of its affiliates.

Legg Mason Partners Corporate Bond Fund|    53

Legg Mason Partners Corporate Bond Fund

Trustees	Distributor
Elliott J. Berv	Legg Mason Investor Services, LLC
A. Benton Cocanougher
Jane F. Dasher	Custodian
Mark T. Finn	State Street Bank and Trust Company
R. Jay Gerken, CFA
Chairman
Rainer Greeven	Transfer agent
Stephen R. Gross	PNC Global Investment Servicing
Richard E. Hanson, Jr.	4400 Computer Drive
Diana R. Harrington	Westborough, Massachusetts 01581
Susan M. Heilbron
Susan B. Kerley
Alan G. Merten	Independent registered public accounting firm
R. Richardson Pettit	KPMG LLP
	345 Park Avenue
Investment manager	New York, New York 10154
Legg Mason Partners Fund
Advisor, LLC
Subadviser
Western Asset Management Company

Legg Mason Partners Corporate Bond Fund

The Fund is a separate investment series of Legg Mason Partners Income Trust, a Maryland business trust.

LEGG MASON PARTNERS CORPORATE BOND FUND

Legg Mason Partners Funds

55 Water Street

New York, New York 10041

The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s website at www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C., and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. To obtain information on Form N-Q from the Fund, shareholders can call Legg Mason Partners Shareholder Services at 1-800-451-2010.

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 1-800-451-2010, (2) on the Fund’s website at www.leggmason.com/individualinvestors and (3) on the SEC’s website at www.sec.gov.

This report is submitted for the general information of the shareholders of Legg Mason Partners Corporate Bond Fund. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by a current prospectus.

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

www.leggmason.com/individualinvestors

^© 2009 Legg Mason Investor Services, LLC

Member FINRA, SIPC

BUILT TO WIN^SM

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

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

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

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

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

* Ranked ninth-largest money manager in the world, according to Pensions of Investments, May 26, 2008, based on 12/31/07 worldwide assets under management.

www.leggmason.com/individualinvestors

^©2009 Legg Mason Investor Services, LLC Member FINRA, SIPC

FDO0317 2/09 SR09-756

NOT PART OF THE ANNUAL REPORT

Terms of Use

EX-99.17(G)

Exhibit 17(g)

ANNUAL REPORT / DECEMBER 31, 2008

Legg Mason Partners

Short-Term

Bond Fund

Managed by WESTERN ASSET

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

Fund objective

The Fund seeks current income, preservation of capital and liquidity.

What’s inside

Letter from the chairman	I
Fund overview	1
Fund at a glance	6
Fund expenses	7
Fund performance	9
Historical performance	10
Schedule of investments	11
Statement of assets and liabilities	21
Statement of operations	23
Statements of changes in net assets	24
Financial highlights	25
Notes to financial statements	29
Report of independent registered public accounting firm	46
Board approval of management and subadvisory agreements	47
Additional information	52
Important tax information	59

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s investment manager and Western Asset Management Company (“Western Asset”) is the Fund’s subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc.

Letter from the chairman

R. Jay Gerken, CFA

Chairman, President and Chief Executive Officer

Dear Shareholder,

The U.S. economy weakened significantly during the 12-month reporting period ended December 31, 2008. Looking back, U.S. gross domestic product (“GDP”)ⁱ contracted 0.2% in the fourth quarter of 2007. This was due to continued weakness in the housing market, an ongoing credit crunch and soaring oil and food prices. The economy then expanded 0.9% and 2.8% during the first and second quarters of 2008, respectively. Contributing to this rebound were rising exports that were buoyed by a weakening U.S. dollar. In addition, consumer spending accelerated, aided by the government’s tax rebate program. However, the dollar’s rally and the end of the rebate program, combined with other strains on the economy, caused GDP to take a step backward during the second half of 2008. According to the U.S. Department of Commerce, third quarter 2008 GDP declined 0.5% and its advance estimate for fourth quarter GDP decline was 3.8%, the latter being the worst quarterly reading since 1982.

While there were increasing signs that the U.S. was headed for a recession, the speculation ended in December 2008. At that time, the National Bureau of Economic Research (“NBER”) — which has the final say on when one begins and ends — announced that a recession had begun in December 2007. The NBER determined that a recession had already started using its definition, which is based on “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income and other indicators.”

Regardless of how one defines a recession, it felt like we were in the midst of an economic contraction for much of 2008. Consumer spending, which represents approximately two-thirds of GDP, has been disappointing. According to the International Council of Shopping Centers, retail sales rose a tepid 1% in 2008, the weakest level in at least 38 years. In terms of the job market, the U.S. Department of Labor reported that payroll employment declined in each of the 12 months of 2008. During 2008 as a whole, 2.6 million jobs were lost, the largest annual decline since World War II ended in 1945. In addition, at the end of 2008, the unemployment rate had risen to 7.2%, its highest level since January 1993.

Ongoing issues related to the housing and subprime mortgage markets and seizing credit markets prompted the Federal Reserve Board (“Fed”)ⁱⁱ to take

Legg Mason Partners Short-Term Bond Fund|    I

Letter from the chairman continued

aggressive and, in some cases, unprecedented actions. When 2008 began, the federal funds rateⁱⁱⁱ was 4.25%. This was quickly brought down to 3.00% by the end of January 2008, on the back of two Fed rate cuts. The Fed continued to lower the federal funds rate to 2.00% by the end of April 2008, but then left rates on hold for several months. This was due to growing inflationary pressures as a result of soaring oil and commodity prices, coupled with the sagging U.S. dollar. However, as inflation receded along with oil prices and the global financial crisis escalated, the Fed cut rates twice in October to 1.00%. Then, in mid-December 2008, it reduced the federal funds rate to a range of zero to 0.25%, an historic low. In conjunction with its December meeting, the Fed stated that it “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”

In addition to the interest rate cuts, the Fed took several actions to improve liquidity in the credit markets. In March 2008, it established a new lending program allowing certain brokerage firms, known as primary dealers, to also borrow from its discount window. Also in March, the Fed played a major role in facilitating the purchase of Bear Stearns by JPMorgan Chase. In mid-September 2008, it announced an $85 billion rescue plan for ailing AIG and pumped $70 billion into the financial system as Lehman Brothers’ bankruptcy and mounting troubles at other financial firms roiled the markets.

The U.S. Department of the Treasury has also taken an active role in attempting to stabilize the financial system, as it orchestrated the government’s takeover of mortgage giants Fannie Mae and Freddie Mac in September 2008. In addition, on October 3, 2008, the Treasury’s $700 billion Troubled Asset Relief Program (“TARP”) was approved by Congress and signed into law by President Bush. As part of TARP, the Treasury had planned to purchase bad loans and other troubled financial assets. However, in November 2008, Treasury Secretary Paulson said, “Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending.”

During the 12-month reporting period ended December 31, 2008, both short- and long-term Treasury yields experienced periods of extreme volatility. Investors were initially focused on the subprime segment of the mortgage-backed market. These concerns broadened, however, to include a wide range of financial institutions and markets. As a result, other fixed-income instruments also experienced increased price volatility. This unrest triggered several “flights to quality,” causing Treasury yields to move lower (and their prices higher), while riskier segments of the market saw their yields move higher (and their prices lower). This was particularly true toward the end of the reporting period, as the turmoil in the financial

II|    Legg Mason Partners Short-Term Bond Fund

markets and sharply falling stock prices caused investors to flee securities that were perceived to be risky, even high-quality corporate bonds and high-grade municipal bonds. On several occasions, the yield available from short-term Treasuries fell to nearly zero, as investors were essentially willing to forgo any return potential in order to access the relative safety of government-backed securities. During the 12 months ended December 31, 2008, two-year Treasury yields fell from 3.05% to 0.76%. Over the same time frame, 10-year Treasury yields moved from 4.04% to 2.25%. Looking at the 12-month period as a whole, the overall bond market, as measured by the Barclays Capital U.S. Aggregate Index^iv, returned 5.24%.

Special shareholder notice

Effective September 2, 2008, the name of the Fund changed from Legg Mason Partners Short-Term Investment Grade Bond Fund to Legg Mason Partners Short-Term Bond Fund. The Fund’s current investment objective, strategies and management remain unchanged.

A special note regarding increased market volatility

In recent months, we have experienced a series of events that have impacted the financial markets and created concerns among both novice and seasoned investors alike. In particular, we have witnessed the failure and consolidation of several storied financial institutions, periods of heightened market volatility, and aggressive actions by the U.S. federal government to steady the financial markets and restore investor confidence. While we hope that the worst is over in terms of the issues surrounding the credit and housing crises, it is likely that the fallout will continue to impact the financial markets and the U.S. economy well into 2009.

Like all asset management firms, Legg Mason has not been immune to these difficult and, in some ways, unprecedented times. However, today’s challenges have only strengthened our resolve to do everything we can to help you reach your financial goals. Now, as always, we remain committed to providing you with excellent service and a full spectrum of investment choices. And rest assured, we will continue to work hard to ensure that our investment managers make every effort to deliver strong long-term results.

We also remain committed to supplementing the support you receive from your financial advisor. One way we accomplish this is through our enhanced website, www.leggmason.com/individualinvestors. Here you can gain immediate access to many special features to help guide you through difficult times, including:

• Fund prices and performance,

• Market insights and commentaries from our portfolio managers, and

• A host of educational resources.

Legg Mason Partners Short-Term Bond Fund|    III

Letter from the chairman continued

During periods of market unrest, it is especially important to work closely with your financial advisor and remember that reaching one’s investment goals unfolds over time and through multiple market cycles. Time and again, history has shown that, over the long run, the markets have eventually recovered and grown.

Information about your fund

As you may be aware, several issues in the mutual fund industry have come under the scrutiny of federal and state regulators. Affiliates of the Fund’s manager have, in recent years, received requests for information from various government regulators regarding market timing, late trading, fees, and other mutual fund issues in connection with various investigations. The regulators appear to be examining, among other things, the Fund’s response to market timing and shareholder exchange activity, including compliance with prospectus disclosure related to these subjects. The Fund is not in a position to predict the outcome of these requests and investigations.

Please read on for a more detailed look at prevailing economic and market conditions during the Fund’s reporting period and to learn how those conditions have affected Fund performance.

Important information with regard to recent regulatory developments that may affect the Fund is contained in the Notes to Financial Statements included in this report.

As always, thank you for your confidence in our stewardship of your assets. We look forward to helping you meet your financial goals.

Sincerely,

R. Jay Gerken, CFA

Chairman, President and Chief Executive Officer

January 30, 2009

All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.

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

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

^iv The Barclays Capital (formerly Lehman Brothers) 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.

IV|    Legg Mason Partners Short-Term Bond Fund

Fund overview

Q. What is the Fund’s investment strategy?

A. The Fund seeks current income, preservation of capital and liquidity. Under normal market conditions the Fund will invest at least 80% of its net assets, plus any borrowings for investment purposes, in investment grade fixed-income securities and in related investments. These are securities rated at the time of purchase by a nationally recognized statistical ratings organization within one of the top four categories, or, if unrated, judged by Western Asset Management Company (“Western Asset”), the Fund’s subadviser, to be of comparable credit quality.

Securities in which the Fund invests include corporate debt securities, bank obligations, mortgage- and asset-backed securities and securities issued by the U.S. government and its agencies and instrumentalities. The Fund may also invest in U.S. dollar-denominated fixed-income securities of foreign issuers. The Fund normally maintains a dollar-weighted average portfolio maturity of not more than three years.

At Western Asset, 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 managers, 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. During the fiscal year, the U.S. bond market experienced periods of increased volatility. Changing perceptions regarding the economy, inflation and future Federal Reserve Board (“Fed”)ⁱ monetary policy caused bond prices to fluctuate. Two- and 10-year Treasury yields began the reporting period at 3.05% and 4.04%, respectively. Treasury yields moved lower — and their prices moved higher — during the first quarter of 2008, as concerns regarding the subprime mortgage market and a severe credit crunch caused a “flight to quality.” During this period, investors were drawn to the relative safety of Treasuries, while increased risk aversion caused other segments of the bond market to falter.

Treasury yields then moved higher in April, May and early June 2008, as the economy performed better than expected and inflation moved higher. Over this period, riskier fixed-income asset classes, such as high-yield bonds and emerging market debt, rallied. However, the credit crunch resumed in mid-June, resulting in another flight to quality. Investors’ risk aversion then intensified from September through November given the severe disruptions in the global financial markets. During this time, virtually every asset class,

Legg Mason Partners Short-Term Bond Fund 2008 Annual Report|    1

Fund overview continued

with the exception of short-term Treasuries, performed poorly. At the end of the fiscal year, two- and 10-year Treasury yields were 0.76% and 2.25%, respectively. Aided by the strong performance in the Treasury market, the overall bond market, as measured by the Barclays Capital U.S. Aggregate Indexⁱⁱ, gained 5.24% during the 12 months ended December 31, 2008.

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

A. Market conditions were challenging during the 12-month reporting period, which affected the Fund’s performance. Many asset prices remained well below their fundamental value as a result of market fears. We underestimated the degree to which the entire financial superstructure would decline. Despite the difficult market environment, we believed that our focus on spread sectors, such as agency pass-through mortgages and corporate bonds, was still valid. As a result, at the beginning of the second quarter we shifted approximately 12-13% exposure to governmental agency bonds from pass-through and structured mortgages because it became advantageous to take delivery of the mortgage pools rather than roll the to-be-announced (“TBA”) securities forward, and agency bonds were relatively inexpensive. We also increased our exposure to U.S. Treasury Inflation-Protected Securities (“TIPS”)ⁱⁱⁱ in September because their relative value was attractive.

Performance review

For the 12 months ended December 31, 2008, Class A shares of Legg Mason Partners Short-Term Bond Fund, excluding sales charges, returned -12.39%. The Fund’s unmanaged benchmark, the Citigroup Treasury/Government Sponsored/Credit 1-3 Year Index^iv, and its former unmanaged benchmark, the Citigroup Treasury/Government Sponsored/Credit 1-5 Year Index^v, returned 5.07 % and 5.30%, respectively, for the same period. The Lipper Short Investment Grade Debt Funds Category Average¹ returned -5.77% over the same time frame.

¹ Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the 12-month period ended December 31, 2008, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 260 funds in the Fund’s Lipper category, and excluding sales charges.

2|    Legg Mason Partners Short-Term Bond Fund 2008 Annual Report

PERFORMANCE SNAPSHOT as of December 31, 2008 (excluding sales charges) (unaudited)

	6 MONTHS		12 MONTHS
Short-Term Bond Fund — Class A Shares	-9.67	%	-12.39	%
Citigroup Treasury/Government Sponsored/Credit 1-3 Year Index	2.87	%	5.07	%
Citigroup Treasury/Government Sponsored/Credit 1-5 Year Index	3.36	%	5.30	%
Lipper Short Investment Grade Debt Funds Category Average1	-5.26	%	-5.77	%

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

Excluding sales charges, Class B shares returned -9.94%, Class C shares returned -9.96% and Class I shares returned -9.43% over the six months ended December 31, 2008. Excluding sales charges, Class B shares returned -12.90%, Class C shares returned -13.15% and Class I shares returned -12.16% over the 12 months ended December 31, 2008. All share class returns assume the reinvestment of all distributions, including returns of capital, if any, at net asset value and the deduction of all Fund expenses. Returns have not been adjusted to include sales charges that may apply when shares are purchased or the deduction of taxes that a shareholder would pay on Fund distributions. Performance figures reflect expense reimbursements and/or fee waivers, without which the performance would have been lower.

The 30-Day SEC Yields for the period ended December 31, 2008 for Class A, B, C and I shares were 5.55%, 4.72%, 5.19% and 6.25%, respectively. The 30-Day SEC Yield is the average annualized net investment income per share for the 30-day period indicated and is subject to change.

TOTAL ANNUAL OPERATING EXPENSES (unaudited)

As of the Fund’s most current prospectus dated April 28, 2008, the gross total operating expense ratios for Class A, Class B, Class C and Class I shares were 0.90%, 1.45%, 1.56% and 0.52%, respectively.

Q. What were the leading contributors to performance?

A. Our tactical duration^vi posture, which shifted throughout the year depending on the market environment and our views of rates at the time, contributed to performance, as well as our yield curve^vii steepening strategy, which had a bias toward the less than one year part of the curve and the three to four year part of the curve. At times, our duration posture ranged from -0.5 years relative to the benchmark to +0.45 years, but, in general, the duration position exceeded the benchmark by 0.2 to 0.3 years. The resulting effect was a positive contribution to performance because rates fell over the year and the curve steepened slightly with the less than one year part of the curve declining the most.

¹ Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the period ended December 31, 2008, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 265 funds for the six-month period and among the 260 funds for the 12-month period in the Fund’s Lipper category, and excluding sales charges.

Legg Mason Partners Short-Term Bond Fund 2008 Annual Report|    3

Fund overview continued

Q. What were the leading detractors from performance?

A. A large overweight exposure to the mortgage-backed sector detracted from relative performance as volatility remained high and negative housing news damaged market sentiment. Specifically, we had diversified into a number of non-agency structured issues that were particularly impacted due to a lack of liquidity, rising defaults and uncertainty in that marketplace, which resulted in these positions being the largest detractors from performance for the portfolio. An overweight to Fannie Mae and Freddie Mac agency mortgage-backed securities also detracted from relative performance. An emphasis on high-yield credits, specifically select Financials issues, was the second largest detractor as spreads soared in the wake of the subprime lending crisis, deteriorating liquidity conditions and slowing economic growth. In particular, Residential Capital (RESCAP), the failed Icelandic banks (Glitnir, Kaupthing and Landsbanki), and the bankrupt Lehman Brothers all severely detracted from performance during the period. Investment grade credit holdings with an emphasis on Financials represented the third largest sector detractor on both an absolute and relative basis, due in part to the failure of American International Group Inc. and struggling financial firms Goldman Sachs and iStar Financial Inc.

Q. Were there any significant changes to the Fund during the reporting period?

A. There were no significant changes to the Fund during the reporting period.

Thank you for your investment in Legg Mason Partners Short-Term 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 20, 2009

4|    Legg Mason Partners Short-Term Bond Fund 2008 Annual Report

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

Portfolio holdings and breakdowns are as of December 31, 2008 and are subject to change and may not be representative of the portfolio managers’ current or future investments. Please refer to pages 11 through 20 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. The Fund’s top five sector holdings (as a percentage of net assets) as of December 31, 2008 were: Corporate Bonds & Notes (36.3%), U.S. Government & Agency Obligations (20.3%), Collateralized Mortgage Obligations (15.4%), Mortgage-Backed Securities (13.9%) and Asset-Backed Securities (6.1%). The Fund’s portfolio composition is subject to change at any time.

RISKS: Investments in bonds are subject to interest rate and credit risks. As interest rates rise, bond prices fall, reducing the value of the Fund’s share price. The Fund’s investments may be subject to prepayment risks. The Fund may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. Please see the Fund’s prospectus for more information on these and other risks.

All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.

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

ⁱⁱ The Barclays Capital (formerly Lehman Brothers) 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.

ⁱⁱⁱ U.S. Treasury Inflation-Protected Securities (“TIPS”) are inflation-indexed securities issued by the U.S. Treasury in 5-year, 10-year and 20-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.

^iv The Citigroup Treasury/Government Sponsored/Credit 1-3 Year Index is a broad-based index of short-term U.S. Treasury and corporate debt securities.

^v The Citigroup Treasury/Government Sponsored/Credit 1-5 Year Index is a broad measure of the performance of short-term U.S. Treasury and corporate fixed-income securities.

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

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

Legg Mason Partners Short-Term Bond Fund 2008 Annual Report|    5

Fund at a glance (unaudited)

INVESTMENT BREAKDOWN (%) As a percent of total investments — December 31, 2008

6|    Legg Mason Partners Short-Term Bond Fund 2008 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; distribution and/or service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.

This example is based on an investment of $1,000 invested on July 1, 2008 and held for the six months ended December 31, 2008.

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”.

BASED ON ACTUAL TOTAL RETURN¹

	ACTUAL TOTAL RETURN WITHOUT SALES CHARGES2		BEGINNING ACCOUNT VALUE		ENDING ACCOUNT VALUE		ANNUALIZED EXPENSE RATIO		EXPENSES PAID DURING THE PERIOD3
Class A	(9.67	)%	$	1,000.00	$	903.30	1.02	%	$	4.88
Class B	(9.94	)		1,000.00		900.60	1.61			7.69
Class C	(9.96	)		1,000.00		900.40	1.66			7.93
Class I	(9.43	)		1,000.00		905.70	0.49			2.35

¹ For the six months ended December 31, 2008.

² 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 B shares. Total return is not annualized, as it may not be representative of the total return for the year. Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

³ Expenses (net of 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, then divided by 366.

Legg Mason Partners Short-Term Bond Fund 2008 Annual Report|    7

Fund expenses (unaudited) continued

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 HYPOTHETICAL TOTAL RETURN¹

	HYPOTHETICAL ANNUALIZED TOTAL RETURN		BEGINNING ACCOUNT VALUE		ENDING ACCOUNT VALUE		ANNUALIZED EXPENSE RATIO		EXPENSES PAID DURING THE PERIOD2
Class A	5.00	%	$	1,000.00	$	1,020.01	1.02	%	$	5.18
Class B	5.00			1,000.00		1,017.04	1.61			8.16
Class C	5.00			1,000.00		1,016.79	1.66			8.42
Class I	5.00			1,000.00		1,022.67	0.49			2.49

¹ For the six months ended December 31, 2008.

² Expenses (net of 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, then divided by 366.

8|    Legg Mason Partners Short-Term Bond Fund 2008 Annual Report

Fund performance (unaudited)

AVERAGE ANNUAL TOTAL RETURNS¹

	WITHOUT SALES CHARGES2
	CLASS A		CLASS B		CLASS C		CLASS I
Twelve Months Ended 12/31/08	(12.39	)%	(12.90	)%	(13.15	)%	(12.16	)%
Five Years Ended 12/31/08	(1.09	)	(1.62	)	(1.71	)	(0.74	)
Ten Years Ended 12/31/08	1.86		N/A		N/A		2.29
Inception* through 12/31/08	3.46		(1.02	)	(0.69	)	2.99
	WITH SALES CHARGES3
	CLASS A		CLASS B		CLASS C		CLASS I
Twelve Months Ended 12/31/08	(14.33	)%	(17.09	)%	(13.15	)%	(12.16	)%
Five Years Ended 12/31/08	(1.54	)	(1.79	)	(1.71	)	(0.74	)
Ten Years Ended 12/31/08	1.62		N/A		N/A		2.29
Inception* through 12/31/08	3.32		(1.02	)	(0.69	)	2.99

CUMULATIVE TOTAL RETURNS1

	WITHOUT SALES CHARGES2
Class A (12/31/98 through 12/31/08)	20.27	%
Class B (Inception date of 1/13/03 through 12/31/08)	(5.96	)
Class C (Inception date of 8/5/02 through 12/31/08)	(4.35	)
Class I (12/31/98 through 12/31/08)	25.47

¹ 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 fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower.

² 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 CDSC with respect to Class B shares.

³ 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 2.25%; Class B shares reflect the deduction of a 5.00% CDSC, which applies if shares are redeemed within one year from purchase payment. This CDSC declines by 1.00% per year until no CDSC is incurred.

* Inception dates for Class A, B, C and I shares are November 11, 1991, January 13, 2003, August 5, 2002 and February 7, 1996, respectively.

Legg Mason Partners Short-Term Bond Fund 2008 Annual Report|    9

Historical performance (unaudited)

VALUE OF $10,000 INVESTED IN CLASS A SHARES OF LEGG MASON PARTNERS SHORT-TERM BOND FUND VS. CITIGROUP TREASURY/GOVERNMENT SPONSORED/CREDIT 1-3 YEAR INDEX AND CITIGROUP TREASURY/GOVERNMENT SPONSORED/CREDIT 1-5 YEAR INDEX† -

December 1998 - December 2008

† Hypothetical illustration of $10,000 invested in Class A shares of Legg Mason Partners Short-Term Bond Fund on December 31, 1998, assuming the deduction of the maximum initial sales charge of 2.25% at the time of investment and the reinvestment of all distributions, including returns of capital, if any, at net asset value through December 31, 2008. The Citigroup Treasury/Government Sponsored/Credit 1-3 Year Index is a broad-based index of short-term U.S. Treasury and corporate debt securities. The Citigroup Treasury/Government Sponsored/Credit 1-5 Year Index is a broad measure of the performance of short-term U.S. Treasury and corporate fixed-income securities. The Indexes are unmanaged and not subject to the same management and trading expenses of a mutual fund. Please note that an investor cannot directly invest in an index. The performance of the Fund’s other classes may be greater or less than Class A 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.

‡ Effective April 28, 2008, the Fund’s benchmark changed from the Citigroup Treasury/Government Sponsored/Credit 1-5 Year Index to the Citigroup Treasury/Government Sponsored/Credit 1-3 Year Index. The benchmark was changed to better reflect the composition of the Fund’s portfolio and investment strategies.

All figures represent past performance and are not a guarantee of future results. The 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 fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower.

10|    Legg Mason Partners Short-Term Bond Fund 2008 Annual Report

Schedule of investments

December 31, 2008

LEGG MASON PARTNERS SHORT-TERM BOND FUND

FACE AMOUNT		SECURITY	VALUE
	CORPORATE BONDS & NOTES — 36.3%
	CONSUMER DISCRETIONARY — 3.9%
		Media — 3.7%
$	2,400,000	Clear Channel Communications Inc., Senior Notes, 4.250% due 5/15/09	$	2,124,000
	1,500,000	Comcast Cable Communications, 6.875% due 6/15/09		1,507,191
	1,600,000	Comcast Cable Communications Inc., Senior Notes, 6.750% due 1/30/11		1,606,848
	1,000,000	News America Holdings Inc., 9.250% due 2/1/13		1,077,652
	370,000	Time Warner Cable Inc., Senior Notes, 8.250% due 2/14/14		375,739
	1,020,000	Time Warner Inc., 5.500% due 11/15/11		959,024
	620,000	Walt Disney Co., Senior Notes, 4.700% due 12/1/12		638,659
		Total Media		8,289,113
		Multiline Retail — 0.2%
	660,000	Federated Retail Holdings Inc., 5.350% due 3/15/12		490,564
		TOTAL CONSUMER DISCRETIONARY		8,779,677
	CONSUMER STAPLES — 0.7%
		Beverages — 0.4%
	830,000	Diageo Capital PLC, 5.200% due 1/30/13		817,474
		Tobacco — 0.3%
	700,000	Philip Morris International Inc., 4.875% due 5/16/13		702,687
		TOTAL CONSUMER STAPLES		1,520,161
	ENERGY — 6.3%
		Oil, Gas & Consumable Fuels — 6.3%
	1,440,000	Amerada Hess Corp., Senior Notes, 6.650% due 8/15/11		1,440,279
	2,000,000	Anadarko Finance Co., Senior Notes, 6.750% due 5/1/11		2,001,774
	1,300,000	Apache Corp., Notes, 6.250% due 4/15/12		1,362,438
	1,000,000	ConocoPhillips, 4.750% due 10/15/12		997,574
	1,000,000	Devon Financing Corp. ULC, Notes, 6.875% due 9/30/11		1,009,782
	1,000,000	Duke Capital LLC, Senior Notes, 6.250% due 2/15/13		952,338
	1,170,000	El Paso Natural Gas Co., Senior Notes, 5.950% due 4/15/17		935,557
	250,000	Energy Transfer Partners LP, Senior Notes, 9.700% due 3/15/19		258,018
	890,000	Enterprise Products Operating LP, Senior Notes, 9.750% due 1/31/14		907,170
	1,700,000	Kinder Morgan Energy Partners LP, Notes, 6.750% due 3/15/11		1,654,314
	1,430,000	Occidental Petroleum Corp., Senior Notes, 7.000% due 11/1/13		1,562,371
	479,000	Pemex Project Funding Master Trust, Senior Notes, 2.820% due 12/3/12(a)(b)		402,360
	1,000,000	XTO Energy Inc., Senior Notes, 5.650% due 4/1/16		918,793
		TOTAL ENERGY		14,402,768

See Notes to Financial Statements.

Legg Mason Partners Short-Term Bond Fund 2008 Annual Report|    11

Schedule of investments continued

December 31, 2008

LEGG MASON PARTNERS SHORT-TERM BOND FUND

FACE AMOUNT		SECURITY	VALUE
	FINANCIALS — 13.4%
		Capital Markets — 3.1%
$	1,540,000	Bear Stearns Co. Inc., Senior Notes, 6.400% due 10/2/17	$	1,603,009
	3,500,000	Goldman Sachs Capital II, Junior Subordinated Bonds, 5.793% due 6/1/12(a)(c)		1,346,303
	480,000	Goldman Sachs Group Inc., 6.600% due 1/15/12		473,918
		Kaupthing Bank HF, Senior Notes:
	1,700,000	5.750% due 10/4/11(b)(d)		110,500
	560,000	7.625% due 2/28/15(b)(d)(e)(f)		33,600
	1,650,000	Lehman Brothers Holdings Capital Trust VII, Medium-Term Notes, 5.857% due 5/31/12(a)(c)(d)		165
	470,000	Lehman Brothers Holdings Inc., Subordinated Notes, 6.500% due 7/19/17(d)		47
		Merrill Lynch & Co. Inc.:
		Medium-Term Notes:
	1,000,000	4.250% due 2/8/10		977,697
	1,210,000	6.150% due 4/25/13		1,200,094
	1,000,000	Senior Notes, 6.050% due 8/15/12		987,367
	460,000	Morgan Stanley, Notes, 6.600% due 4/1/12		445,041
		Total Capital Markets		7,177,741
		Commercial Banks — 4.0%
		Glitnir Banki HF:
	2,000,000	Notes, 4.859% due 1/21/11(a)(b)(d)		105,000
	300,000	Subordinated Notes, 6.693% due 6/15/16(a)(b)(d)		1,545
		Landsbanki Islands HF:
	350,000	7.431% due 10/19/17(a)(b)(c)(d)		1,803
	1,100,000	Senior Notes, 6.100% due 8/25/11(b)(d)		24,750
	1,460,000	Resona Preferred Global Securities Cayman Ltd., Bonds, 7.191% due 7/30/15(a)(b)(c)		695,776
	2,130,000	Royal Bank of Scotland PLC, Senior Notes, 3.000% due 12/9/11(b)		2,178,847
	1,050,000	RSHB Capital, Loan Participation Notes, 6.299% due 5/15/17(b)		603,750
	1,140,000	Shinsei Finance Cayman Ltd., Junior Subordinated Bonds, 6.418% due 7/20/16(a)(b)(c)		238,616
	230,000	SunTrust Capital, Trust Preferred Securities, 6.100% due 12/15/36(a)		162,359
	610,000	TuranAlem Finance BV, Bonds, 5.434% due 1/22/09(a)(b)		574,162
	700,000	VTB Capital SA, Loan Participation Notes, 4.559% due 11/2/09(a)(b)		622,390
	3,100,000	Wachovia Capital Trust III, Bank Guaranteed, 5.800% due 3/15/11(a)(c)		1,829,806
	600,000	Wells Fargo Capital X, Capital Securities, 5.950% due 12/15/36		515,833

See Notes to Financial Statements.

12|    Legg Mason Partners Short-Term Bond Fund 2008 Annual Report

LEGG MASON PARTNERS SHORT-TERM BOND FUND

FACE AMOUNT		SECURITY	VALUE
		Commercial Banks — 4.0% continued
$	1,970,000	Wells Fargo Capital XIII, Medium-Term Notes, 7.700% due 3/26/13(a)(c)	$	1,627,244
		Total Commercial Banks		9,181,881
		Consumer Finance — 1.3%
	1,500,000	American Express Co., Subordinated Debentures, 6.800% due 9/1/66(a)		777,428
		GMAC LLC:
	2,195,000	7.500% due 12/31/13(b)		1,635,275
	487,000	8.000% due 12/31/18(b)		250,805
	790,000	Nelnet Inc., Notes, 7.400% due 9/29/36(a)		236,980
		Total Consumer Finance		2,900,488
		Diversified Financial Services — 4.7%
	1,400,000	AGFC Capital Trust I, 6.000% due 1/15/67(a)(b)		334,705
	1,300,000	Aiful Corp., Notes, 5.000% due 8/10/10(b)		714,960
	890,000	Bank of America Corp., Notes, Preferred Securities, 8.000% due 1/30/18(a)(c)		641,085
	800,000	Capmark Financial Group Inc., 5.875% due 5/10/12		272,951
	1,150,000	Countrywide Home Loans Inc., Unsecured Notes, 6.250% due 4/15/09		1,150,319
		General Electric Capital Corp.:
	400,000	Senior Notes, 5.625% due 5/1/18		403,624
	1,050,000	Subordinated Debentures, 6.375% due 11/15/67(a)		660,971
	1,700,000	IBM International Group Capital LLC, Senior Notes, 5.050% due 10/22/12		1,775,364
	270,000	ILFC E-Capital Trust I, 5.900% due 12/21/65(a)(b)		86,566
	580,000	International Lease Finance Corp., Medium-Term Notes, 5.169% due 7/13/12(a)		364,608
	1,060,000	JPMorgan Chase Bank N.A., Medium-Term Notes, 5.085% due 2/11/11(a)(f)		886,197
	850,000	Merna Reinsurance Ltd., Subordinated Notes, 3.209% due 7/7/10(a)(b)		767,465
	1,000,000	MUFG Capital Finance 1 Ltd., Preferred Securities, 6.346% due 7/25/16(a)(c)		697,669
		TNK-BP Finance SA:
	1,850,000	6.875% due 7/18/11(b)		1,359,750
	100,000	Notes, 6.125% due 3/20/12(b)		64,500
	1,420,000	ZFS Finance USA Trust I, 3.146% due 12/15/65(a)(b)		431,325
		Total Diversified Financial Services		10,612,059
		Real Estate Investment Trusts (REITs) — 0.3%
	2,090,000	iStar Financial Inc., 5.650% due 9/15/11		669,111
		TOTAL FINANCIALS		30,541,280

See Notes to Financial Statements.

Legg Mason Partners Short-Term Bond Fund 2008 Annual Report|    13

Schedule of investments continued

December 31, 2008

LEGG MASON PARTNERS SHORT-TERM BOND FUND

FACE AMOUNT		SECURITY	VALUE
	HEALTH CARE — 1.5%
		Health Care Equipment & Supplies — 0.8%
$	810,000	Baxter FinCo BV, 4.750% due 10/15/10	$	808,051
	1,100,000	Hospira Inc., Senior Notes, 5.550% due 3/30/12		1,042,968
		Total Health Care Equipment & Supplies		1,851,019
		Health Care Providers & Services — 0.7%
	1,000,000	Quest Diagnostic Inc., Senior Notes, 5.125% due 11/1/10		971,094
	510,000	UnitedHealth Group Inc., 4.875% due 2/15/13		476,581
		Total Health Care Providers & Services		1,447,675
		TOTAL HEALTH CARE		3,298,694
	INDUSTRIALS — 2.3%
		Aerospace & Defense — 0.4%
	950,000	United Technologies Corp., Senior Notes, 5.375% due 12/15/17		962,044
		Air Freight & Logistics — 0.2%
	520,000	United Parcel Service Inc., 4.500% due 1/15/13		536,894
		Airlines — 0.8%
		Continental Airlines Inc., Pass-Through Certificates:
	130,000	7.056% due 9/15/09		124,800
	784,720	6.900% due 1/2/18		627,776
	715,220	6.545% due 2/2/19		572,176
	521,246	6.703% due 6/15/21		390,934
	111,465	Northwest Airlines Inc., Pass-Through Certificates, 3.445% due 5/20/14(a)		78,025
		Total Airlines		1,793,711
		Industrial Conglomerates — 0.9%
	2,000,000	Tyco International Group SA, Senior Notes, 6.375% due 10/15/11		1,967,118
		TOTAL INDUSTRIALS		5,259,767
	INFORMATION TECHNOLOGY — 0.8%
		IT Services — 0.8%
	1,900,000	Electronic Data Systems Corp., Notes, 7.125% due 10/15/09		1,931,951
	MATERIALS — 0.9%
		Metals & Mining — 0.9%
	2,070,000	Vale Overseas Ltd., Notes, 6.250% due 1/23/17		1,956,771
		Paper & Forest Products — 0.0%
	80,000	Weyerhaeuser Co., Senior Notes, 6.750% due 3/15/12		71,662
		TOTAL MATERIALS		2,028,433
	TELECOMMUNICATION SERVICES — 5.0%
		Diversified Telecommunication Services — 4.2%
	1,300,000	Deutsche Telekom International Finance BV, 8.500% due 6/15/10		1,339,547
	1,500,000	France Telecom SA, Notes, 7.750% due 3/1/11		1,579,237

See Notes to Financial Statements.

14|    Legg Mason Partners Short-Term Bond Fund 2008 Annual Report

LEGG MASON PARTNERS SHORT-TERM BOND FUND

FACE AMOUNT	SECURITY	VALUE
	Diversified Telecommunication Services — 4.2% continued
$1,300,000	Koninklijke KPN NV, Senior Notes, 8.000% due 10/1/10	$	1,312,488
1,400,000	New England Telephone & Telegraph Co., Notes, 5.875% due 4/15/09		1,400,036
970,000	Qwest Corp., Senior Notes, 7.875% due 9/1/11		897,250
1,500,000	Telecom Italia Capital SA, 3.673% due 2/1/11(a)		1,186,895
1,700,000	Telefonica Emisiones SAU, 3.356% due 2/4/13(a)		1,365,306
290,000	Verizon Communications Inc., Senior Notes, 8.750% due 11/1/18		340,816
	Total Diversified Telecommunication Services		9,421,575
	Wireless Telecommunication Services — 0.8%
1,290,000	Sprint Capital Corp., Senior Notes, 8.375% due 3/15/12		1,032,673
870,000	Vodafone Group PLC, 5.350% due 2/27/12		859,520
	Total Wireless Telecommunication Services		1,892,193
	TOTAL TELECOMMUNICATION SERVICES		11,313,768
UTILITIES — 1.5%
	Electric Utilities — 0.9%
1,580,000	FirstEnergy Corp., Notes, 6.450% due 11/15/11		1,494,454
600,000	Pacific Gas & Electric Co., 4.800% due 3/1/14		589,897
	Total Electric Utilities		2,084,351
	Multi-Utilities — 0.6%
1,300,000	Dominion Resources Inc., Notes, 4.750% due 12/15/10		1,286,012
	TOTAL UTILITIES		3,370,363
	TOTAL CORPORATE BONDS & NOTES (Cost — $106,006,238)		82,446,862
ASSET-BACKED SECURITIES — 6.1%
FINANCIALS — 6.1%
	Automobiles — 0.9%
1,500,000	Drive Auto Receivables Trust, 5.540% due 12/16/13(b)		1,382,391
676,978	Wells Fargo Financial Auto Owner Trust, 4.280% due 5/15/12		659,343
	Total Automobiles		2,041,734
	Home Equity — 4.2%
620,000	Ameriquest Mortgage Securities Inc., 0.801% due 1/25/36(a)		371,508
	Countrywide Asset-Backed Certificates:
299,524	4.800% due 5/25/32(a)		234,374
1,318,025	1.371% due 10/25/47(a)		973,307
1,446,726	Countrywide Home Equity Loan Trust, 1.745% due 11/15/28(a)(f)		761,652
1,531,846	Green Tree, 7.000% due 4/25/38(a)(b)		1,340,365
1,323,171	GSAMP Trust, 0.771% due 12/25/36(a)(b)		701,281
	GSRPM Mortgage Loan Trust:
1,834,687	0.771% due 3/25/35(a)(b)		1,256,760
2,379,490	0.871% due 3/25/37(a)(b)		1,570,464

See Notes to Financial Statements.

Legg Mason Partners Short-Term Bond Fund 2008 Annual Report|    15

Schedule of investments continued

December 31, 2008

LEGG MASON PARTNERS SHORT-TERM BOND FUND

FACE AMOUNT		SECURITY	VALUE
		Home Equity — 4.2% continued
		Long Beach Mortgage Loan Trust:
$	67,328	0.611% due 11/25/35(a)	$	66,235
	2,052,993	0.561% due 5/25/36(a)		119,802
	1,945,472	RAAC Series, 0.761% due 5/25/46(a)(b)		680,915
	1,292,462	SACO I Trust, 0.621% due 4/25/36(a)		253,068
	1,218,821	Small Business Administration, 4.830% due 9/25/18(a)		1,256,209
		Total Home Equity		9,585,940
		Student Loan — 1.0%
	2,790,000	Nelnet Student Loan Trust, 5.015% due 4/25/24(a)		2,267,025
		TOTAL ASSET-BACKED SECURITIES (Cost — $22,240,542)		13,894,699
	COLLATERALIZED MORTGAGE OBLIGATIONS — 15.4%
		American Home Mortgage Investment Trust:
	2,250,164	5.294% due 6/25/45(a)		1,058,861
	1,465,328	0.761% due 11/25/45(a)		704,103
		Banc of America Funding Corp.:
	678,788	4.517% due 3/20/35(a)		480,797
	1,499,550	0.678% due 5/20/36(a)		1,006,069
	2,586,460	5.830% due 6/20/36(a)		1,350,933
		Banc of America Mortgage Securities:
	175,092	5.560% due 9/25/32(a)		175,003
	747,067	5.540% due 4/25/33(a)		499,137
	1,673,039	4.000% due 4/25/34		1,604,063
	751,412	4.564% due 6/25/34(a)		495,023
	800,031	Bayview Commercial Asset Trust, 0.821% due 8/25/35(a)(b)(f)		627,894
	675,975	Bear Stearns Alt-A Trust, 5.199% due 9/25/34(a)		378,163
	1,836,945	CBA Commercial Small Balance Commercial Mortgage, 0.721% due 6/25/38(a)(b)(f)		993,181
		Countrywide Alternative Loan Trust:
	2,416,986	0.851% due 11/20/35(a)		710,507
	739,760	0.781% due 11/25/35(a)		343,161
	2,150,170	0.661% due 7/25/46(a)		889,450
	392,538	Countrywide Asset-Backed Certificates, 0.751% due 7/25/35(a)		332,113
	243,830	Countrywide Home Loan, Mortgage Pass-Through Trust, Whole Loan, 5.999% due 5/19/33(a)		210,745
	977,197	Countrywide Home Loan, Mortgage Pass-Through Trust, 6.406% due 11/25/34(a)		477,801
		Countrywide Home Loans:
	2,187,453	4.000% due 3/25/33		1,891,713
	139,823	5.616% due 11/19/33(a)		135,992

See Notes to Financial Statements.

16|    Legg Mason Partners Short-Term Bond Fund 2008 Annual Report

LEGG MASON PARTNERS SHORT-TERM BOND FUND

FACE AMOUNT		SECURITY	VALUE
$	745,402	CS First Boston Mortgage Securities Corp., 4.604% due 6/25/34(a)	$	547,846
	502,591	Downey Savings and Loan Association Mortgage Loan Trust, 0.831% due 3/19/45(a)		244,199
		Federal Home Loan Mortgage Corp. (FHLMC):
	304,579	4.500% due 4/15/32(g)		303,923
	329,934	Structured Pass-Through Securities, 6.500% due 9/25/43(a)(g)		338,030
	1,443,518	Federal National Mortgage Association (FNMA), 5.633% due 4/25/45(a)(g)		1,312,302
	1,882,687	First Horizon Mortgage Pass-Through Trust, 6.250% due 2/25/35(a)		1,383,521
	698,107	Greenpoint Mortgage Funding Trust, 0.701% due 9/25/35(a)		287,597
	1,659,869	GSMPS Mortgage Loan Trust, 0.821% due 9/25/35(a)(b)		1,305,845
	617,402	Indymac Index Mortgage Loan Trust, 0.831% due 1/25/35(a)		320,687
	412,495	JP Morgan Mortgage Trust, 5.152% due 11/25/33(a)		311,662
	2,029,484	Luminent Mortgage Trust, 0.671% due 2/25/46(a)		828,772
		MASTR:
	303,246	Adjustable Rate Mortgages Trust, 6.485% due 12/25/33(a)		247,178
		Asset Securitization Trust:
	320,197	4.375% due 5/25/33		276,592
	839,421	5.000% due 2/25/34		770,859
		Merrill Lynch Mortgage Investors Inc.:
	1,684,360	5.268% due 3/25/33(a)		1,269,305
	92,018	5.416% due 9/25/33(a)		86,174
	1,355,926	New York Mortgage Trust Inc., 0.801% due 8/25/35(a)		1,013,065
	1,312,038	Nomura Asset Acceptance Corp., 4.889% due 12/25/34(a)		772,189
		Structured Adjustable Rate Mortgage Loan Trust:
	730,647	5.345% due 1/25/35(a)		382,689
	948,621	5.060% due 7/25/35(a)		570,671
		Structured ARM Loan Trust:
	497,552	3.640% due 4/25/34(a)		277,093
	484,633	0.876% due 6/25/34(a)		264,191
	820,939	5.189% due 3/25/35(a)(f)		378,580
		Structured Asset Securities Corp.:
	2,316,200	6.500% due 3/25/32		1,608,715
	227,186	5.118% due 5/25/32(a)		207,456
	252,753	5.341% due 6/25/32(a)		110,536
	363,015	5.060% due 8/25/32(a)		360,520
	1,463,768	4.260% due 3/25/34(a)		939,060
	128,216	5.160% due 5/25/34(a)		56,859
	1,466,009	5.786% due 6/25/35(a)(b)(f)		1,026,452

See Notes to Financial Statements.

Legg Mason Partners Short-Term Bond Fund 2008 Annual Report|    17

Schedule of investments continued

December 31, 2008

LEGG MASON PARTNERS SHORT-TERM BOND FUND

FACE AMOUNT		SECURITY	VALUE
		Washington Mutual Inc.:
$	687,801	0.761% due 7/25/45(a)	$	320,488
	815,251	0.791% due 7/25/45(a)		335,934
	592,529	Washington Mutual Mortgage Pass-Through Certificates, Whole Loan, 4.562% due 6/25/33(a)		533,030
	1,959,765	Washington Mutual Pass-Through Certificates, 0.751% due 11/25/45(a)		965,780
		Wells Fargo Mortgage Backed Securities Trust:
	533,184	5.318% due 7/25/34(a)		240,003
	361,535	PAC, 4.500% due 6/25/33		358,988
		TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost — $55,552,037)		34,921,500
	MORTGAGE-BACKED SECURITIES — 13.9%
		FHLMC — 1.2%
	2,600,000	Federal Home Loan Mortgage Corp. (FHLMC), 6.000% due 1/13/39(g)(h)		2,678,405
		FNMA — 12.7%
		Federal National Mortgage Association (FNMA):
	34,279	5.060% due 5/1/32(a)(g)		34,586
	115,496	5.115% due 8/1/32(a)(g)		114,650
	420,005	5.983% due 12/1/32(a)(g)		414,951
	606,535	4.567% due 1/1/33(a)(g)		606,181
	1,597,350	4.512% due 6/1/33(a)(g)		1,601,387
	1,461,448	3.864% due 5/1/34(a)(g)		1,483,523
	2,840,358	4.038% due 5/1/35(a)(g)		2,859,833
	4,635,656	5.000% due 6/1/35 - 7/1/38(g)		4,742,123
	539,541	6.000% due 10/1/37 - 7/1/38(g)		556,103
	15,150,000	5.000% due 1/13/39(g)(h)		15,469,574
	1,000,000	6.000% due 1/13/39(g)(h)		1,029,531
		Total FNMA		28,912,442
		TOTAL MORTGAGE-BACKED SECURITIES (Cost — $31,076,941)		31,590,847
	SOVEREIGN BOND — 0.1%
		Russia — 0.1%
	215,600	Russian Federation, 7.500% due 3/31/30(b)
		(Cost — $230,548)		190,194
	U.S. GOVERNMENT & AGENCY OBLIGATIONS — 20.3%
		U.S. Government Agencies — 20.3%
		Federal Home Loan Bank (FHLB):
	14,000,000	4.089% due 1/8/09(a)		14,003,444
	6,000,000	5.000% due 2/20/09		6,037,662

See Notes to Financial Statements.

18|    Legg Mason Partners Short-Term Bond Fund 2008 Annual Report

LEGG MASON PARTNERS SHORT-TERM BOND FUND

FACE AMOUNT		SECURITY	VALUE
		U.S. Government Agencies — 20.3% continued
		Federal Home Loan Mortgage Corp. (FHLMC):
$	6,000,000	4.750% due 3/5/09(g)	$	6,044,664
	800,000	5.000% due 10/18/10(g)		852,054
	1,940,000	2.750% due 4/11/11(g)		1,989,555
		Notes:
	15,300,000	0.514% due 10/19/09(a)(g)		15,279,834
	710,000	5.125% due 8/23/10(g)		756,418
	1,163,428	Federal National Mortgage Association (FNMA), Six Month LIBOR, 4.660% due 4/1/33(a)(g)		1,158,733
		TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (Cost — $45,972,147)		46,122,364
	U.S. TREASURY INFLATION PROTECTED SECURITIES — 2.8%
	1,041,094	U.S. Treasury Bonds, Inflation Indexed, 3.875% due 4/15/29(i)		1,286,158
	5,512,007	U.S. Treasury Notes, Inflation Indexed, 0.875% due 4/15/10(i)		5,182,152
		TOTAL U.S. TREASURY INFLATION PROTECTED SECURITIES (Cost — $6,660,007)		6,468,310
SHARES
	PREFERRED STOCKS — 0.0%
	FINANCIALS — 0.0%
		Thrifts & Mortgage Finance — 0.0%
	31,375	Federal Home Loan Mortgage Corp. (FHLMC), 8.375%(a)(g)*		12,236
	22,400	Federal National Mortgage Association (FNMA), 8.250%(a)(g)*		18,592
		TOTAL PREFERRED STOCKS (Cost — $1,344,375)		30,828
		TOTAL INVESTMENTS BEFORE SHORT-TERM INVESTMENTS (Cost — $269,082,835)		215,665,604
FACE AMOUNT
	SHORT-TERM INVESTMENTS — 12.4%
		U.S. Government Agencies — 10.2%
$	10,000,000	Federal Home Loan Bank (FHLB), Discount Notes, 1.207% due 5/20/09(j)		9,991,370
		Federal National Mortgage Association (FNMA), Discount Notes:
	11,700,000	2.733% due 1/5/09(g)(j)		11,696,490
	2,000	0.651% due 1/27/09(g)(i)(j)		1,999
	1,621,000	0.200% - 0.351% due 5/18/09(g)(i)(j)		1,619,622
		Total U.S. Government Agencies (Cost — $23,271,001)		23,309,481

See Notes to Financial Statements.

Legg Mason Partners Short-Term Bond Fund 2008 Annual Report|    19

Schedule of investments continued

December 31, 2008

LEGG MASON PARTNERS SHORT-TERM BOND FUND

FACE AMOUNT	SECURITY	VALUE
	Repurchase Agreement — 2.2%
$5,002,000	Morgan Stanley tri-party repurchase agreement dated 12/31/08, 0.020% due 1/2/09; Proceeds at maturity — $5,002,006; (Fully collateralized by U.S. government agency obligation, 2.265% due 4/14/09; Market value — $5,155,155) (Cost — $5,002,000)	$	5,002,000
	TOTAL SHORT-TERM INVESTMENTS (Cost — $28,273,001)		28,311,481
	TOTAL INVESTMENTS — 107.3% (Cost — $297,355,836#)		243,977,085
	Liabilities in Excess of Other Assets — (7.3)%		(16,648,541	)
	TOTAL NET ASSETS — 100.0%	$	227,328,544

^* Non-income producing security.

^(a) Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2008.

^(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 Trustees, unless otherwise noted.

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

^(d) Security is currently in default.

^(e) Illiquid security.

^(f) Security is valued in good faith at fair value by or under the direction of the Board of Trustees (See Note 1).

^(g) On September 7, 2008, the Federal Housing Finance Agency placed Fannie Mae and Freddie Mac into Conservatorship.

^(h) This security is traded on a to-be-announced (“TBA”) basis (See Note 1).

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

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

^# Aggregate cost for federal income tax purposes is $298,135,260.

Abbreviations used in this schedule:
ARM	—	Adjustable Rate Mortgage
GMAC	—	General Motors Acceptance Corp.
GSAMP	—	Goldman Sachs Alternative Mortgage Products
LIBOR	—	London Interbank Offered Rate
MASTR	—	Mortgage Asset Securitization Transactions Inc.
PAC	—	Planned Amortization Class

SCHEDULE OF WRITTEN OPTIONS

CONTRACTS	SECURITY	EXPIRATION DATE	STRIKE PRICE		VALUE
170	Eurodollar Futures, Call	3/16/09	$	98.25	$	308,125
35	Eurodollar Futures, Call	9/14/09		97.63		103,031
64	U.S. Treasury Notes 5-Year Futures, Call	2/20/09		117.00		168,500
134	U.S. Treasury Notes 10-Year Futures, Call	2/20/09		118.00		1,099,219
134	U.S. Treasury Notes 10-Year Futures, Put	2/20/09		110.00		16,750
	TOTAL WRITTEN OPTIONS
	(Premiums received — $488,716)				$	1,695,625

See Notes to Financial Statements.

20|    Legg Mason Partners Short-Term Bond Fund 2008 Annual Report

Statement of assets and liabilities

December 31, 2008

ASSETS:
Investments, at value (Cost — $297,355,836)	$	243,977,085
Cash		1,553,166
Receivable for securities sold		5,904,218
Deposits for open swap contracts		5,600,000
Interest receivable		2,103,261
Receivable for Fund shares sold		352,704
Interest receivable for open swap contracts		195
Prepaid expenses		36,337
Total Assets		259,526,966
LIABILITIES:
Payable for securities purchased		24,767,867
Unrealized depreciation on swaps		4,846,300
Written options, at value (premiums received $488,716)		1,695,625
Payable to broker — variation margin on open futures contracts		398,825
Payable for Fund shares repurchased		232,732
Investment management fee payable		85,977
Premium received for open swaps		32,749
Distribution fees payable		17,859
Trustees’ fees payable		14,358
Distributions payable		9,256
Accrued expenses		96,874
Total Liabilities		32,198,422
TOTAL NET ASSETS	$	227,328,544
NET ASSETS:
Par value (Note 6)	$	680
Paid-in capital in excess of par value		294,149,336
Undistributed net investment income		53,956
Accumulated net realized loss on investments, futures contracts, written options and swap contracts		(15,768,547	)
Net unrealized depreciation on investments, futures contracts, written options and swap contracts		(51,106,881	)
TOTAL NET ASSETS	$	227,328,544

See Notes to Financial Statements.

Legg Mason Partners Short-Term Bond Fund 2008 Annual Report|    21

Statement of assets and liabilities continued

December 31, 2008

Shares Outstanding:
Class A		11,794,748
Class B		388,873
Class C		1,517,310
Class I		54,337,425
Net Asset Value:
Class A (and redemption price)	$	3.34
Class B1	$	3.34
Class C (and redemption price)	$	3.34
Class I (and redemption price)	$	3.34
Maximum Public Offering Price Per Share:
Class A (based on maximum initial sales charge of 2.25%)	$	3.42

¹ Redemption price per share is NAV of Class B shares reduced by a 5.00% CDSC if shares are redeemed within one year from purchase payment (See Note 2).

See Notes to Financial Statements.

22|    Legg Mason Partners Short-Term Bond Fund 2008 Annual Report

Statement of operations

For the Year Ended December 31, 2008

INVESTMENT INCOME:
Interest		$	13,429,759
Dividends			74,805
Total Investment Income			13,504,564
EXPENSES:
Investment management fee (Note 2)			1,192,742
Distribution fees (Notes 2 and 4)			175,762
Transfer agent fees (Note 4)			86,431
Shareholder reports (Note 4)			73,927
Registration fees			42,621
Audit and tax			26,405
Legal fees			23,890
Insurance			11,918
Trustees’ fees			5,345
Custody fees			5,255
Miscellaneous expenses			10,963
Total Expenses			1,655,259
Less:	Fee waivers and/or expense reimbursements (Note 4)		(5,808	)
	Fees paid indirectly (Note 1)		(141	)
Net Expenses			1,649,310
NET INVESTMENT INCOME			11,855,254
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FUTURES CONTRACTS, WRITTEN OPTIONS AND SWAP CONTRACTS (NOTES 1 AND 3):
Net Realized Gain (Loss) From:
Investment transactions			(4,576,007	)
Futures contracts			193,731
Written options			485,579
Swap contracts			(70,208	)
Net Realized Loss			(3,966,905	)
Change in Net Unrealized Appreciation/Depreciation From:
Investments			(43,924,746	)
Futures contracts			8,114,272
Written options			(1,068,578	)
Swap contracts			(4,846,300	)
Change in Net Unrealized Appreciation/Depreciation			(41,725,352	)
NET LOSS ON INVESTMENTS, FUTURES CONTRACTS, WRITTEN OPTIONS AND SWAP CONTRACTS			(45,692,257	)
DECREASE IN NET ASSETS FROM OPERATIONS		$	(33,837,003	)

See Notes to Financial Statements.

Legg Mason Partners Short-Term Bond Fund 2008 Annual Report|    23

Statements of changes in net assets

FOR THE YEARS ENDED DECEMBER 31,	2008			2007
OPERATIONS:
Net investment income	$	11,855,254		$	16,842,033
Net realized loss		(3,966,905	)		(135,884	)
Change in net unrealized appreciation/depreciation		(41,725,352	)		(10,631,954	)
Increase (Decrease) in Net Assets From Operations		(33,837,003	)		6,074,195
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTES 1 AND 5):
Net investment income		(12,332,235	)		(17,414,180	)
Decrease in Net Assets From Distributions to Shareholders		(12,332,235	)		(17,414,180	)
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares		78,672,893			106,605,513
Reinvestment of distributions		12,150,538			10,022,951
Cost of shares repurchased		(95,980,667	)		(210,953,342	)
Decrease in Net Assets From Fund Share Transactions		(5,157,236	)		(94,324,878	)
DECREASE IN NET ASSETS		(51,326,474	)		(105,664,863	)
NET ASSETS:
Beginning of year		278,655,018			384,319,881
End of year*	$	227,328,544		$	278,655,018
* Includes undistributed net investment income of:	$	53,956		$	14,818

See Notes to Financial Statements.

24|    Legg Mason Partners Short-Term Bond Fund 2008 Annual Report

Financial highlights

FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR ENDED DECEMBER 31:

CLASS A SHARES1	2008			2007			20062			20052			20042
NET ASSET VALUE, BEGINNING OF YEAR	$	3.98		$	4.13		$	4.14		$	4.20		$	4.25
INCOME (LOSS) FROM OPERATIONS:
Net investment income		0.15			0.19			0.14			0.11			0.10
Net realized and unrealized gain (loss)		(0.63	)		(0.15	)		0.02			(0.05	)		(0.04	)
Total income (loss) from operations		(0.48	)		0.04			0.16			0.06			0.06
LESS DISTRIBUTIONS FROM:
Net investment income		(0.16	)		(0.19	)		(0.17	)		(0.12	)		(0.11	)
Total distributions		(0.16	)		(0.19	)		(0.17	)		(0.12	)		(0.11	)
NET ASSET VALUE, END OF YEAR	$	3.34		$	3.98		$	4.13		$	4.14		$	4.20
Total return3		(12.39	)%		1.00	%		3.98	%		1.44	%		1.45	%
NET ASSETS, END OF YEAR (MILLIONS)	$	39		$	58		$	70		$	83		$	91
RATIOS TO AVERAGE NET ASSETS:
Gross expenses		1.02	%		0.90	%		0.86	%4		0.88	%		0.88	%
Net expenses		1.01	5,6		0.90	5		0.84	4,6		0.88			0.88	6
Net investment income		4.09			4.54			3.52			2.72			2.32
PORTFOLIO TURNOVER RATE		46	%7		81	%7		124	%7		49	%		34	%7

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

² Represents a share of capital stock outstanding prior to April 16, 2007.

³ Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

⁴ Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would have been 0.85% and 0.83%, respectively.

⁵ The impact to the expense ratio was less than 0.01% as a result of fees paid indirectly.

⁶ Reflects fee waivers and/or expense reimbursements.

⁷ Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 291%, 372%, 270% and 51% for the years ended December 31, 2008, 2007, 2006 and 2004, respectively.

See Notes to Financial Statements.

Legg Mason Partners Short-Term Bond Fund 2008 Annual Report|    25

Financial highlights continued

FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR ENDED DECEMBER 31:

CLASS B SHARES1	2008			2007			20062			20052			20042
NET ASSET VALUE, BEGINNING OF YEAR	$	3.98		$	4.13		$	4.14		$	4.19		$	4.25
INCOME (LOSS) FROM OPERATIONS:
Net investment income		0.13			0.16			0.12			0.09			0.08
Net realized and unrealized gain (loss)		(0.63	)		(0.14	)		0.02			(0.04	)		(0.05	)
Total income (loss) from operations		(0.50	)		0.02			0.14			0.05			0.03
LESS DISTRIBUTIONS FROM:
Net investment income		(0.14	)		(0.17	)		(0.15	)		(0.10	)		(0.09	)
Total distributions		(0.14	)		(0.17	)		(0.15	)		(0.10	)		(0.09	)
NET ASSET VALUE, END OF YEAR	$	3.34		$	3.98		$	4.13		$	4.14		$	4.19
Total return3		(12.90	)%		0.45	%		3.39	%		1.16	%		0.71	%
NET ASSETS, END OF YEAR (MILLIONS)	$	1		$	2		$	3		$	4		$	6
RATIOS TO AVERAGE NET ASSETS:
Gross expenses		1.58	%		1.45	%		1.42	%4		1.40	%		1.39	%
Net expenses		1.58	5		1.45	5		1.41	4,6		1.40			1.38	6
Net investment income		3.53			3.97			2.95			2.19			1.80
PORTFOLIO TURNOVER RATE		46	%7		81	%7		124	%7		49	%		34	%7

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

² Represents a share of capital stock outstanding prior to April 16, 2007.

³ Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

⁴ Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would both have been 1.41%.

⁵ The impact to the expense ratio was less than 0.01% as a result of fees paid indirectly.

⁶ Reflects fee waivers and/or expense reimbursements.

⁷ Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 291%, 372%, 270% and 51% for the years ended December 31, 2008, 2007, 2006 and 2004, respectively.

See Notes to Financial Statements.

26|    Legg Mason Partners Short-Term Bond Fund 2008 Annual Report

FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR ENDED DECEMBER 31:

CLASS C SHARES1	2008			2007			20062			20052			20042
NET ASSET VALUE, BEGINNING OF YEAR	$	3.99		$	4.14		$	4.15		$	4.20		$	4.26
INCOME (LOSS) FROM OPERATIONS:
Net investment income		0.13			0.16			0.12			0.09			0.08
Net realized and unrealized gain (loss)		(0.64	)		(0.14	)		0.02			(0.04	)		(0.05	)
Total income (loss) from operations		(0.51	)		0.02			0.14			0.05			0.03
LESS DISTRIBUTIONS FROM:
Net investment income		(0.14	)		(0.17	)		(0.15	)		(0.10	)		(0.09	)
Total distributions		(0.14	)		(0.17	)		(0.15	)		(0.10	)		(0.09	)
NET ASSET VALUE, END OF YEAR	$	3.34		$	3.99		$	4.14		$	4.15		$	4.20
Total return3		(13.15	)%		0.34	%		3.39	%		1.14	%		0.67	%
NET ASSETS, END OF YEAR (MILLIONS)	$	5		$	7		$	9		$	13		$	24
RATIOS TO AVERAGE NET ASSETS:
Gross expenses		1.63	%		1.56	%		1.46	%4		1.41	%		1.41	%
Net expenses		1.63	5		1.56	5		1.42	4,6		1.41			1.41	6
Net investment income		3.47			3.86			2.92			2.15			1.77
PORTFOLIO TURNOVER RATE		46	%7		81	%7		124	%7		49	%		34	%7

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

² Represents a share of capital stock outstanding prior to April 16, 2007.

³ Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

⁴ Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would have been 1.45% and 1.41%, respectively.

⁵ The impact to the expense ratio was less than 0.01% as a result of fees paid indirectly.

⁶ Reflects fee waivers and/or expense reimbursements.

⁷ Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 291%, 372%, 270% and 51% for the years ended December 31, 2008, 2007, 2006 and 2004, respectively.

See Notes to Financial Statements.

Legg Mason Partners Short-Term Bond Fund 2008 Annual Report|    27

Financial highlights continued

FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR ENDED DECEMBER 31:

CLASS I SHARES1	2008			2007			20062			20052			20042
NET ASSET VALUE, BEGINNING OF YEAR	$	3.99		$	4.13		$	4.14		$	4.20		$	4.26
INCOME (LOSS) FROM OPERATIONS:
Net investment income		0.17			0.20			0.16			0.13			0.11
Net realized and unrealized gain (loss)		(0.64	)		(0.13	)		0.02			(0.05	)		(0.04	)
Total income (loss) from operations		(0.47	)		0.07			0.18			0.08			0.07
LESS DISTRIBUTIONS FROM:
Net investment income		(0.18	)		(0.21	)		(0.19	)		(0.14	)		(0.13	)
Total distributions		(0.18	)		(0.21	)		(0.19	)		(0.14	)		(0.13	)
NET ASSET VALUE, END OF YEAR	$	3.34		$	3.99		$	4.13		$	4.14		$	4.20
Total return3		(12.16	)%		1.63	%		4.34	%		1.83	%		1.61	%
NET ASSETS, END OF YEAR (MILLIONS)	$	182		$	212		$	302		$	256		$	251
RATIOS TO AVERAGE NET ASSETS:
Gross expenses		0.50	%		0.52	%		0.50	%4		0.50	%		0.49	%
Net expenses		0.50	5		0.52	5		0.49	4,6		0.50			0.49	6
Net investment income		4.60			4.89			3.87			3.09			2.69
PORTFOLIO TURNOVER RATE		46	%7		81	%7		124	%7		49	%		34	%7

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

² Represents a share of capital stock outstanding prior to April 16, 2007.

³ Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

⁴ Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would have been 0.49% and 0.48%, respectively.

⁵ The impact to the expense ratio was less than 0.01% as a result of fees paid indirectly.

⁶ Reflects fee waivers and/or expense reimbursements.

⁷ Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 291%, 372%, 270% and 51% for the years ended December 31, 2008, 2007, 2006 and 2004, respectively.

See Notes to Financial Statements.

28|    Legg Mason Partners Short-Term Bond Fund 2008 Annual Report

Notes to financial statements

1. Organization and significant accounting policies

Legg Mason Partners Short-Term Bond Fund, (formerly known as Legg Mason Partners Short-Term Investment Grade Bond Fund) (the “Fund”) is a separate diversified investment series of Legg Mason Partners Income Trust (the “Trust”). The Trust, a Maryland business trust, 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.

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

Effective January 1, 2008, the Fund adopted Statement of Financial Accounting Standards No. 157 (“FAS 157”). FAS 157 establishes a single definition of fair value, creates a three-tier hierarchy as a framework for measuring fair value based on inputs used to value the Fund’s investments, and requires additional disclosure about fair value. The hierarchy of inputs is summarized below.

• 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.)

Legg Mason Partners Short-Term Bond Fund 2008 Annual Report|    29

Notes to financial statements continued

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

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

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

	DECEMBER 31, 2008		QUOTED PRICES (LEVEL 1)		OTHER SIGNIFICANT OBSERVABLE INPUTS (LEVEL 2)			SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)
Investments in securities	$	243,977,085	$	30,828	$	242,919,476		$	1,026,781
Other financial instruments*		1,783,154		6,629,454		(4,846,300	)		—
Total	$	245,760,239	$	6,660,282	$	238,073,176		$	1,026,781

* Other financial instruments may include written options, futures, swaps and forward contracts.

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

	INVESTMENTS IN SECURITIES
Balance as of December 31, 2007		—
Accrued premiums/discounts	$	1,542
Realized gain (loss)		—
Change in unrealized appreciation (depreciation)		9,658
Net purchases (sales)		—
Transfers in and/or out of Level 3		1,015,581
Balance as of December 31, 2008	$	1,026,781

(b) Repurchase agreements. When entering into repurchase agreements, it is the Fund’s policy that its custodian or a third party custodian 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 exceeds one business day, the value of the collateral is marked-to-market to ensure the adequacy of the collateral. If the seller defaults, and the market value of the collateral declines 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) Financial futures contracts. The Fund may enter into financial futures contracts typically, but not necessarily, to hedge against the economic impact of adverse changes in the market value of portfolio securities due to change in interest rates, as a substitute for buying or selling securities or as a cash flow

30|    Legg Mason Partners Short-Term Bond Fund 2008 Annual Report

management technique. Upon entering into a financial futures contract, the Fund is required to deposit cash or securities as initial margin, equal in value to a certain percentage of the contract amount (initial margin deposit). Additional securities are also segregated up to the current market value of the financial futures contracts. Subsequent payments, known as “variation margin,” are made or received by the Fund each day, depending on the daily fluctuations in the value of the underlying financial instruments. For foreign currency denominated futures contracts, variation margins are not settled daily. The Fund recognizes an unrealized gain or loss equal to the fluctuation in the value. When the financial futures contracts are closed, a realized gain or loss is recognized equal to the difference between the proceeds from (or cost of) the closing transactions and the Fund’s basis in the contracts.

The risks associated with entering into financial futures contracts include the possibility that a change in the value of the contract may not correlate with the changes in the value of the underlying financial instruments. In addition, investing in financial futures contracts involves the risk that the Fund could lose more than the initial margin deposit and subsequent payments required for a futures transaction. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts.

(d) 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 Fund realizes a gain from investments equal to the amount of the premium received. When a written call option is exercised, the difference between the premium received plus the option exercise price and the Fund’s basis in the underlying security (in the case of a covered written call option), or the cost to purchase the underlying security (in the case of an uncovered written call option), including brokerage commission, is treated as a realized gain or loss. When a written put option is exercised, the amount of the premium received is subtracted from the cost of the security purchased by the Fund from the exercise of the written put option to form the Fund’s basis in the underlying security purchased. The writer or buyer of an option traded on an exchange can liquidate the position before the exercise of the option by entering into a closing transaction. The cost of a closing transaction is deducted from the original premium received resulting in a realized gain or loss to the Fund.

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

Legg Mason Partners Short-Term Bond Fund 2008 Annual Report|    31

Notes to financial statements continued

(e) Mortgage dollar rolls. The Fund may enter into dollar rolls in which the Fund sells mortgage-backed securities for delivery in the current month, realizing a gain or loss, and simultaneously contracts to repurchase substantially similar (same type, coupon and maturity) securities to settle on a specified future date. During the roll period, the Fund forgoes interest paid on the securities. The Fund maintains a segregated account, the dollar value of which is at least equal to its obligations with respect to dollar rolls.

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

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

(f) Securities traded on a to-be-announced basis. The Fund may trade securities on a TBA basis. In a TBA transaction, the Fund commits to purchasing or selling securities which have not yet been issued by the issuer and for which specific information is not known, such as the face amount and maturity date and the underlying pool of investments in U.S. government agency mortgage pass-through securities. Securities purchased on a TBA basis are not settled until they are delivered to the Fund, normally 15 to 45 days after purchase. Beginning on the date the Fund enters into a TBA transaction, cash, U.S. government securities or other liquid high-grade debt obligations are segregated in an amount equal in value to the purchase price of the TBA security. These securities are subject to market fluctuations and their current value is determined in the same manner as for other securities.

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

The Fund assumes the credit risk of the borrower, the lender that is selling the participation and any other persons interpositioned between the Fund and the borrower. In the event of the insolvency of the lender selling the participation,

32|    Legg Mason Partners Short-Term Bond Fund 2008 Annual Report

the Fund may be treated as a general creditor of the lender and may not benefit from any set-off between the lender and the borrower.

(h) Swap contracts. Swaps involve the exchange by the Fund with another party of the respective amounts payable with respect to a notional principal amount related to one or more indices or securities. The Fund may enter into these transactions to preserve a return or spread on a particular investment or portion of its assets, as a duration management technique, or to protect against any increase in the price of securities the Fund anticipates purchasing at a later date. The Fund may also use these transactions for speculative purposes, such as to obtain the price performance of a security without actually purchasing the security in circumstances where, for example, the subject security is illiquid, is unavailable for direct investment or available only on less attractive terms.

Swaps are marked-to-market daily based upon quotations from market makers and the change in value, if any, is recorded as an unrealized gain or loss in the Statement of Operations. Net receipts or payments of interest are recorded as realized gains or losses, respectively.

Swaps have risks associated with them, including possible default by the counterparty to the transaction, illiquidity and, where swaps are used as hedges, the risk that the use of a swap could result in losses greater than if the swap had not been employed.

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

Legg Mason Partners Short-Term Bond Fund 2008 Annual Report|    33

Notes to financial statements continued

As a buyer of protection, the Fund generally receives an amount up to the notional value of the swap if a credit event occurs.

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

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

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

(j) Credit and market risk. Investments in structured securities (such as those issued by Structured Investment Vehicles, or SIVs) which are collateralized by residential real estate mortgages are subject to certain credit and liquidity risks. When market conditions result in an increase in default rates of the underlying mortgages and the foreclosure values of underlying real estate properties are materially below the outstanding amount of these underlying mortgages, collection of the full amount of accrued interest and principal on these investments may be doubtful. Such market conditions may significantly impair the value and liquidity of these investments may result in a lack of correlation between their credit ratings and values.

34|    Legg Mason Partners Short-Term Bond Fund 2008 Annual Report

(k) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults on an expected interest payment, the Fund’s policy is to generally halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default.

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

(m) Class accounting. Investment income, common expenses and realized/unrealized gain (loss) 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 class.

(n) Fees paid indirectly. The Fund’s custody fees are reduced according to a fee arrangement, which provides for a reduction based on the level of cash deposited with the custodian by the Fund. If material, the amount is shown as a reduction of expenses on the Statement of Operations.

(o) 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, as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute substantially all of its taxable income and net realized gains, if any, to shareholders each year. Therefore, no federal income tax provision is required in the Fund’s financial statements.

Management has analyzed the Fund’s tax positions taken on federal income tax returns for all open tax years and has concluded that as of December 31, 2008, no provision for income tax would be 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.

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

	UNDISTRIBUTED NET INVESTMENT INCOME		ACCUMULATED NET REALIZED LOSS
(a)	$	516,119	$	(516,119	)

(a) Reclassifications are primarily due to differences between book and tax amortization of premium on fixed income securities, loss from mortgage backed securities treated as capital losses for tax purposes and book/tax differences in the treatment of swap contracts.

Legg Mason Partners Short-Term Bond Fund 2008 Annual Report|    35

Notes to financial statements continued

2. Investment management agreement and other transactions with affiliates

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s investment manager and Western Asset Management Company (“Western Asset”) is the Fund’s subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).

Under the investment management agreement, the Fund pays an investment management fee, calculated daily and paid monthly, at an annual rate of 0.45% of the Fund’s average daily net assets.

LMPFA provides administrative and certain oversight services to the Fund. LMPFA delegates to the subadviser the day-to-day portfolio management of the Fund. For its services, LMPFA pays Western Asset 70% of the net management fee it receives from the Fund.

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 2.25% for Class A shares. There is a contingent deferred sales charge (“CDSC”) of 5.00% on Class B shares, which applies if redemption occurs within one year from purchase payment. This CDSC declines by 1.00% per year until no CDSC is incurred. In certain cases, Class A shares have a 0.50% CDSC, which applies if redemption occurs within one year from purchase payment. This CDSC only applies to those purchases of Class A shares, which, when combined with current holdings of Class A shares, equal or exceed $500,000 in the aggregate. These purchases do not incur an initial sales charge.

For the year ended December 31, 2008, LMIS and its affiliates received sales charges of approximately $200 on sales of the Fund’s Class A shares. In addition, for the year ended December 31, 2008, CDSCs paid to LMIS and its affiliates were approximately:

	CLASS B		CLASS C
CDSCs	$	2,000	$	100

The Fund had adopted an unfunded, non-qualified deferred compensation plan (the “Plan”) which allows non-interested trustees (“Trustees”) to defer the receipt of all or a portion of the trustees’ fees earned until a later date specified by the Trustees. The deferred balances are reported in the Statement of Operations under Trustees’ fees and are considered a general obligation of the Fund and any payments made pursuant to the Plan will be made from the Fund’s general assets. The plan was terminated effective January 1, 2006. This change will have no effect on fees previously deferred. As of December 31, 2008, the Fund had accrued $10,507 as deferred compensation payable.

36|    Legg Mason Partners Short-Term Bond Fund 2008 Annual Report

Certain officers and one Trustee of the Trust are employees of Legg Mason or its affiliates and do not receive compensation from the Trust.

3. Investments

During the year ended December 31, 2008, 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	$	30,891,168	$	756,800,517
Sales		21,264,390		782,662,969

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

Gross unrealized appreciation	$	1,439,802
Gross unrealized depreciation		(55,597,977	)
Net unrealized depreciation	$	(54,158,175	)

At December 31, 2008, the Fund had the following open futures contracts:

	NUMBER OF CONTRACTS	EXPIRATION DATE	BASIS VALUE		MARKET VALUE		UNREALIZED GAIN (LOSS)
Contracts to Buy:
Eurodollar	239	3/09	$	58,149,483	$	59,116,650	$	967,167
Eurodollar	884	6/09		213,637,545		218,502,700		4,865,155
Eurodollar	35	9/09		8,398,688		8,640,188		241,500
Eurodollar	66	9/10		16,200,534		16,182,375		(18,159	)
U.S. 2-Year Treasury Notes	233	3/09		50,219,877		50,808,563		588,686
U.S. 5-Year Treasury Notes	534	3/09		61,881,540		63,575,203		1,693,663
U.S. 10-Year Treasury Notes	6	3/09		767,433		754,500		(12,933	)
Net unrealized gain on open futures contracts							$	8,325,079

During the year ended December 31, 2008, written option transactions for the Fund were as follows:

	NUMBER OF CONTRACTS		PREMIUMS RECEIVED
Written options, outstanding December 31, 2007	188		$	118,294
Options written	1,887			1,108,043
Options closed	(1,353	)		(663,240	)
Options expired	(185	)		(74,381	)
Written options, outstanding December 31, 2008	537		$	488,716

At December 31, 2008, the Fund held TBA securities with a total cost of $18,955,586.

Legg Mason Partners Short-Term Bond Fund 2008 Annual Report|    37

Notes to financial statements continued

At December 31, 2008, the Fund had the following open swap contracts:

SWAP COUNTERPARTY (REFERENCE ENTITY)	NOTIONAL AMOUNT		TERMINATION DATE	PERIODIC PAYMENTS MADE BY THE FUND†		PERIODIC PAYMENTS RECEIVED BY THE FUND†	UNREALIZED DEPRECIATION
Interest Rate Swaps:
Morgan Stanley & Co Inc.	$	21,020,000	3/18/16	4.400	%	3-month LIBOR	$	(2,508,310)
Barclay’s Capital Inc.		13,470,000	3/18/19	4.250	%	3-month LIBOR		(2,193,374)
							$	(4,701,684)

† Percentage shown is an annual percentage rate.

CREDIT DEFAULT SWAP ON CREDIT INDICES — SELL PROTECTION⁽¹⁾

SWAP COUNTERPARTY (REFERENCE ENTITY)	NOTIONAL AMOUNT(2)		TERMINATION DATE	PERIODIC PAYMENTS RECEIVED BY THE FUND(3)	MARKET VALUE(4)			UPFRONT PREMIUMS PAID/ (RECEIVED)			UNREALIZED DEPRECIATION
Credit Suisse First Boston Inc. (ABX.HE.AAA. 06-1 Index)	$	1,059,438	7/25/45	0.180% monthly	$	(211,888	)	$	(67,272	)	$	(144,616	)
Net unrealized depreciation on sales of credits default swaps on credit indices											$	(144,616	)

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

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

⁽³⁾ Percentage shown is an annual percentage rate.

⁽⁴⁾ The quoted market prices and resulting values for credit default swap agreements on asset-backed securities and credit indices serve as an indicator of the current status of the payment/performance risk and represent the likelihood of an expected liability (or profit) for the credit derivative should the notional amount of the swap agreement been closed/sold as of the period end. Decreasing market values when compared to the notional amount of the swap, represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

4. Class specific expenses

The Fund has adopted a Rule 12b-1 distribution plan and under that plan the Fund pays a service fee with respect to its Class A, B and C shares calculated at the annual rate of 0.25% of the average daily net assets of each respective class. The Fund also pays a distribution fee with respect to its Class B and C shares calculated at the annual rate of 0.50% of the average daily net assets of each respective class. Distribution fees are accrued daily and paid monthly.

38|    Legg Mason Partners Short-Term Bond Fund 2008 Annual Report

For the year ended December 31, 2008, class specific expenses were as follows:

	DISTRIBUTION FEES			TRANSFER AGENT FEES		SHAREHOLDER REPORTS EXPENSES
Class A	$	121,395	(a)	$	84,179	$	48,099
Class B		12,618			599		4,942
Class C		41,749			1,452		19,709
Class I		—			201		1,177
Total	$	175,762		$	86,431	$	73,927

(a) LMIS has agreed to reimburse the Fund for any amount which exceeds the payments made by the Fund with respect to the distribution plan for Class A shares over the cumulative unreimbursed amounts spent by LMIS in performing their services under the distribution plan. During the year ended December 31, 2008, LMIS reimbursed $5,808 to the Fund’s Class A.

5. Distributions to shareholders by class

	YEAR ENDED DECEMBER 31, 2008		YEAR ENDED DECEMBER 31, 2007
Net Investment Income:
Class A	$	2,071,011	$	3,086,136
Class B		62,341		112,287
Class C		203,787		317,645
Class I		9,995,096		13,898,112
Total	$	12,332,235	$	17,414,180

6. Shares of beneficial interest

At December 31, 2008, the Trust had an unlimited number of shares of beneficial interest authorized with a par value of $0.00001 per share. The Fund has the ability to issue multiple classes of shares. Each share of a class represents an identical interest and has the same rights, except that each class bears certain direct expenses, including those specifically related to the distribution of its shares. Prior to April 16, 2007, the Company had 2 billion shares of capital stock authorized with a par value of $0.01 per share.

Transactions in shares of each class were as follows:

	YEAR ENDED DECEMBER 31, 2008					YEAR ENDED DECEMBER 31, 2007
	SHARES		AMOUNT			SHARES		AMOUNT
Class A
Shares sold	1,055,825		$	3,848,097		1,834,968		$	7,508,139
Shares issued on reinvestment	527,993			1,948,344		694,160			2,835,556
Shares repurchased	(4,271,058	)		(15,883,324	)	(5,098,478	)		(20,804,168	)
Net decrease	(2,687,240	)	$	(10,086,883	)	(2,569,350	)	$	(10,460,473	)

Legg Mason Partners Short-Term Bond Fund 2008 Annual Report|    39

Notes to financial statements continued

	YEAR ENDED DECEMBER 31, 2008					YEAR ENDED DECEMBER 31, 2007
	SHARES		AMOUNT			SHARES		AMOUNT
Class B
Shares sold	98,639		$	359,291		80,258		$	328,451
Shares issued on reinvestment	13,778			50,695		20,609			84,187
Shares repurchased	(274,134	)		(1,026,534	)	(395,329	)		(1,621,625	)
Net decrease	(161,717	)	$	(616,548	)	(294,462	)	$	(1,208,987	)
Class C
Shares sold	600,477		$	2,157,219		389,549		$	1,604,706
Shares issued on reinvestment	45,832			167,426		57,196			234,107
Shares repurchased	(759,907	)		(2,787,152	)	(974,986	)		(3,997,273	)
Net decrease	(113,598	)	$	(462,507	)	(528,241	)	$	(2,158,460	)
Class I
Shares sold	19,293,749		$	72,308,286		23,688,205		$	97,164,217
Shares issued on reinvestment	2,712,883			9,984,073		1,694,833			6,869,101
Shares repurchased	(20,919,943	)		(76,283,657	)	(45,069,451	)		(184,530,276	)
Net increase (decrease)	1,086,689		$	6,008,702		(19,686,413	)	$	(80,496,958	)

7. Income tax information and distributions to shareholders

Subsequent to the fiscal year end, the Fund has made the following distributions:

RECORD DATE PAYABLE DATE	CLASS A		CLASS B		CLASS C
Daily
01/31/2009	$	0.008104	$	0.006075	$	0.006337

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

	2008		2007
Distributions Paid From:
Ordinary income	$	12,332,235	$	17,414,180
As of December 31, 2008, the components of accumulated earnings on a tax basis were as follows:
Undistributed ordinary income — net			$	199,676
Capital loss carryforward*				(7,870,952	)
Other book/tax temporary differences(a)				(7,263,891	)
Unrealized appreciation/(depreciation)(b)				(51,886,305	)
Total accumulated earnings/(losses) — net			$	(66,821,472	)

40|    Legg Mason Partners Short-Term Bond Fund 2008 Annual Report

* During the taxable year ended December 31, 2008, the Fund utilized $2,449,227 of its capital loss carryover available from prior years. As of December 31, 2008, the Fund had the following net capital loss carryforwards remaining:

YEAR OF EXPIRATION	AMOUNT
12/31/2013	$	(818,123	)
12/31/2014		(6,746,682	)
12/31/2015		(306,147	)
	$	(7,870,952	)

These amounts will be available to offset any future taxable capital gains.

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

(b) The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to the tax deferral of losses on wash sales and the difference between book and tax amortization methods for premiums on fixed income securities.

8. Regulatory matters

On May 31, 2005, the U.S. Securities and Exchange Commission (“SEC”) issued an order in connection with the settlement of an administrative proceeding against Smith Barney Fund Management LLC (“SBFM”), a wholly-owned subsidiary of Legg Mason and the then investment adviser or manager to the Fund, and Citigroup Global Markets Inc. (“CGM”), a former distributor of the Fund, relating to the appointment of an affiliated transfer agent for the Smith Barney family of mutual funds, including the Fund (the “Affected Funds”).

The SEC order found that SBFM and CGM willfully violated Section 206(1) of the Investment Advisers Act of 1940, as amended, and the rules promulgated there under (the “Advisers Act”). Specifically, the order found that SBFM and CGM knowingly or recklessly failed to disclose to the boards of the Affected Funds in 1999 when proposing a new transfer agent arrangement with an affiliated transfer agent: that First Data Investors Services Group (“First Data”), the Affected Funds’ then-existing transfer agent, had offered to continue as transfer agent and do the same work for substantially less money than before; and that Citigroup Asset Management (“CAM”), the Citigroup business unit that, at the time, included the Affected Funds’ investment manager and other investment advisory companies, had entered into a side letter with First Data under which CAM agreed to recommend the appointment of First Data as sub-transfer agent to the affiliated transfer agent in exchange, among other things, for a guarantee by First Data of specified amounts of asset management and investment banking fees to CAM and CGM. The order also found that SBFM and CGM willfully violated Section 206(2) of the Advisers Act by virtue of the omissions discussed above and other misrepresentations and omissions in the materials provided to the Affected Funds’ boards, including the failure to make clear that the affiliated transfer agent would earn a high profit for performing limited functions while First Data continued to perform almost all of the transfer agent functions, and the suggestion that the proposed arrangement was in the Affected Funds’ best interests and that no viable alternatives existed.

Legg Mason Partners Short-Term Bond Fund 2008 Annual Report|    41

Notes to financial statements continued

SBFM and CGM do not admit or deny any wrongdoing or liability. The settlement does not establish wrongdoing or liability for purposes of any other proceeding. The SEC censured SBFM and CGM and ordered them to cease and desist from violations of Sections 206(1) and 206(2) of the Advisers Act. The order required Citigroup to pay $208.1 million, including $109 million in disgorgement of profits, $19.1 million in interest, and a civil money penalty of $80 million. Approximately $24.4 million has already been paid to the Affected Funds, primarily through fee waivers. The remaining $183.7 million, including the penalty, has been paid to the U.S. Treasury and will be distributed pursuant to a plan submitted for the approval of the SEC. At this time, there is no certainty as to how the above-described proceeds of the settlement will be distributed, to whom such distributions will be made, the methodology by which such distributions will be allocated, and when such distributions will be made. The order also required that transfer agency fees received from the Affected Funds since December 1, 2004, less certain expenses, be placed in escrow and provided that a portion of such fees might be subsequently distributed in accordance with the terms of the order. On April 3, 2006, an aggregate amount of approximately $9 million held in escrow was distributed to the Affected Funds.

The order required SBFM to recommend a new transfer agent contract to the Affected Funds’ boards within 180 days of the entry of the order; if a Citigroup affiliate submitted a proposal to serve as transfer agent or sub-transfer agent, SBFM and CGM would have been required, at their expense, to engage an independent monitor to oversee a competitive bidding process. On November 21, 2005, and within the specified timeframe, the Affected Funds’ boards selected a new transfer agent for the Affected Funds. No Citigroup affiliate submitted a proposal to serve as transfer agent. Under the order, SBFM also must comply with an amended version of a vendor policy that Citigroup instituted in August 2004.

Although there can be no assurance, the manager does not believe that this matter will have a material adverse effect on the Affected Funds.

On December 1, 2005, Citigroup completed the sale of substantially all of its global asset management business, including SBFM, to Legg Mason.

9. Legal matters

Beginning in June 2004, class action lawsuits alleging violations of the federal securities laws were filed against CGM, a former distributor of the Fund, and other affiliated funds (collectively, the “Funds”) and a number of its then affiliates, including SBFM and Salomon Brothers Asset Management Inc (“SBAM”), which were then investment adviser or manager to certain of the Funds (the “Managers”), substantially all of the mutual funds then managed by the Managers (the “Defendant Funds”), and Board members of the Defendant Funds (collectively, the “Defendants”). The complaints alleged, among other things, that CGM created various undisclosed incentives for its brokers to sell

42|    Legg Mason Partners Short-Term Bond Fund 2008 Annual Report

Smith Barney and Salomon Brothers funds. In addition, according to the complaints, the Managers caused the Defendant Funds to pay excessive brokerage commissions to CGM for steering clients towards proprietary funds. The complaints also alleged that the Defendants breached their fiduciary duty to the Defendant Funds by improperly charging Rule 12b-1 fees and by drawing on fund assets to make undisclosed payments of soft dollars and excessive brokerage commissions. The complaints also alleged that the Defendant Funds failed to adequately disclose certain of the allegedly wrongful conduct. The complaints sought injunctive relief and compensatory and punitive damages, rescission of the Defendant Funds’ contracts with the Managers, recovery of all fees paid to the Managers pursuant to such contracts and an award of attorneys’ fees and litigation expenses.

On December 15, 2004, a consolidated amended complaint (the “Complaint”) was filed alleging substantially similar causes of action. On May 27, 2005, all of the Defendants filed motions to dismiss the Complaint. On July 26, 2006, the court issued a decision and order (1) finding that plaintiffs lacked standing to sue on behalf of the shareholders of the Funds in which none of the plaintiffs had invested and dismissing those Funds from the case (although stating that they could be brought back into the case if standing as to them could be established), and (2) other than one stayed claim, dismissing all of the causes of action against the remaining Defendants, with prejudice, except for the cause of action under Section 36(b) of the 1940 Act, which the court granted plaintiffs leave to repeal as a derivative claim.

On October 16, 2006, plaintiffs filed their Second Consolidated Amended Complaint (“Second Amended Complaint”) which alleges derivative claims on behalf of nine funds identified in the Second Amended Complaint, under Section 36(b) of the 1940 Act, against CAM, SBAM and SBFM as investment advisers to the identified funds, as well as CGM as a distributor for the identified funds (collectively, the “Second Amended Complaint Defendants”). The Fund was not identified in the Second Amended Complaint. The Second Amended Complaint alleges no claims against any of the funds or any of their Board Members. Under Section 36(b), the Second Amended Complaint alleges similar facts and seeks similar relief against the Second Amended Complaint Defendants as the Complaint.

On December 3, 2007, the court granted the Defendants’ motion to dismiss, with prejudice. On January 2, 2008, the plaintiffs filed a notice of appeal to the Second Circuit Court of Appeals.

Additional lawsuits arising out of these circumstances and presenting similar allegations and requests for relief may be filed in the future.

* * *

Legg Mason Partners Short-Term Bond Fund 2008 Annual Report|    43

Notes to financial statements continued

Beginning in August 2005, five class action lawsuits alleging violations of federal securities laws and state law were filed against CGM and SBFM, (collectively, the “Defendants”) based on the May 31, 2005 settlement order issued against the Defendants by the SEC as described in Note 8. The complaints seek injunctive relief and compensatory and punitive damages, removal of SBFM as the investment manager for the Smith Barney family of funds, rescission of the funds’ management and other contracts with SBFM, recovery of all fees paid to SBFM pursuant to such contracts, and an award of attorneys’ fees and litigation expenses. The five actions were subsequently consolidated, and a consolidated complaint was filed.

On September 26, 2007, the United States District Court for the Southern District of New York issued an order dismissing the consolidated complaint, and judgment was later entered. An appeal has been filed and is pending before the U.S. Court of Appeals for the Second Circuit.

10. Other matters

On or about May 30, 2006, John Halebian, a purported shareholder of Citi^SM New York Tax Free Reserves, a series of Legg Mason Partners Money Market Trust, formerly a series of CitiFunds Trust III (the “Subject Trust”), filed a complaint in the United States District Court for the Southern District of New York against the independent trustees of the Subject Trust (Elliott J. Berv, Donald M. Carlton, A. Benton Cocanougher, Mark T. Finn, Stephen Randolph Gross, Diana R. Harrington, Susan B. Kerley, Alan G. Merten and R. Richardson Pettit).

The Subject Trust is also named in the complaint as a nominal defendant. The complaint alleges both derivative claims on behalf of the Subject Trust and class claims on behalf of a putative class of shareholders of the Subject Trust in connection with the 2005 sale of Citigroup’s asset management business to Legg Mason and the related approval of new investment advisory agreements by the trustees and shareholders. In the derivative claim, the plaintiff alleges, among other things, that the independent trustees breached their fiduciary duty to the Subject Trust and its shareholders by failing to negotiate lower fees or seek competing bids from other qualified investment advisers in connection with Citigroup’s sale to Legg Mason. In the claims brought on behalf of the putative class of shareholders, the plaintiff alleges that the independent trustees violated the proxy solicitation requirements of the 1940 Act, and breached their fiduciary duty to shareholders, by virtue of the voting procedures, including “echo voting,” used to obtain approval of the new investment advisory agreements and statements made in a proxy statement regarding those voting procedures. The plaintiff alleges that the proxy statement was misleading because it failed to disclose that the voting procedures violated the 1940 Act. The relief sought includes an award of damages, rescission of the advisory agreement, and an award of costs and attorney fees.

44|    Legg Mason Partners Short-Term Bond Fund 2008 Annual Report

In advance of filing the complaint, Mr. Halebian’s lawyers made written demand for relief on the Board of the Subject Trust, and the Board’s independent trustees formed a demand review committee to investigate the matters raised in the demand, and subsequently in the complaint, and recommend a course of action to the Board. The committee, after a thorough review, determined that the independent trustees did not breach their fiduciary duties as alleged by Mr. Halebian, and that the action demanded by Mr. Halebian would not be in the best interests of the Subject Trust. The Board of the Subject Trust (the trustee who is an “interested person” of the Subject Trust, within the meaning of the 1940 Act, having recused himself from the matter), after receiving and considering the committee’s report and based upon the findings of the committee, subsequently also determined and, adopting the recommendation of the committee, directed counsel to move to dismiss Mr. Halebian’s complaint. A motion to dismiss was filed on October 23, 2006. Opposition papers were filed on or about December 7, 2006. The complaint was dismissed on July 31, 2007. Mr. Halebian has filed an appeal in the U.S. Court of Appeals for the Second Circuit. The appeal is pending.

11. Recent accounting pronouncement

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

Legg Mason Partners Short-Term Bond Fund 2008 Annual Report|    45

Report of independent registered public accounting firm

The Board of Trustees and Shareholders

Legg Mason Partners Income Trust:

We have audited the accompanying statement of assets and liabilities, including the schedule of investments, and schedule of written options, of Legg Mason Partners Short-Term Bond Fund (formerly Legg Mason Partners Short-Term Investment Grade Bond Fund), a series of Legg Mason Partners Income Trust, as of December 31, 2008, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits 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 and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2008, by correspondence with the custodian and brokers or other by appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Legg Mason Partners Short-Term Bond Fund as of December 31, 2008, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.

New York, New York

February 24, 2009

46|    Legg Mason Partners Short-Term Bond Fund 2008 Annual Report

Board approval of management and subadvisory agreements

(unaudited)

At a meeting of the Board of Trustees of Legg Mason Partners Income Trust (the “Trust”) held on November 10-11, 2008, the Board, including the Trustees who are not considered to be “interested persons” of the Trust (the “Independent Trustees”) under the Investment Company Act of 1940, as amended (the “1940 Act”), approved for an annual period the continuation of the management agreement (the “Management Agreement”) between the Trust and Legg Mason Partners Fund Advisor, LLC (the “Manager”) with respect to the Legg Mason Partners Short-Term Bond Fund, a series of the Trust (the “Fund”), and the sub-advisory agreement (the “Sub-Advisory Agreement”) between the Manager and Western Asset Management Company (the “Subadviser”), an affiliate of the Manager, with respect to the Fund.

Background

The Board received information in advance of the meeting from the Manager to assist it in its consideration of the Management Agreement and the Sub-Advisory Agreement and was given the opportunity to ask questions and request additional information from management. In addition, the Independent Trustees submitted questions to management before the Meeting and considered the responses provided by management during the Meeting. The Board received and considered a variety of information about the Manager and the Subadviser, as well as the management and sub-advisory arrangements for the Fund and other funds overseen by the Board, certain portions of which are discussed below. The presentation made to the Board encompassed the Fund and all funds for which the Board has responsibility. The discussion below covers both the advisory and the administrative functions being rendered by the Manager, both of which functions are encompassed by the Management Agreement, as well as the advisory functions rendered by the Subadviser pursuant to the Sub-Advisory Agreement.

Board approval of management agreement and sub-advisory agreement

The Independent Trustees were advised by separate independent legal counsel throughout the process. Prior to voting, the Independent Trustees received a memorandum from their independent legal counsel discussing the legal standards for their consideration of the proposed continuation of the Management Agreement and the Sub-Advisory Agreement. The Independent Trustees also discussed the proposed continuation of the Management Agreement and the Sub-Advisory Agreement in private sessions with their independent legal counsel at which no representatives of the Manager were present. In approving the Management Agreement and Sub-Advisory Agreement, the Board, including the Independent Trustees, considered a variety of factors, including those factors discussed below. No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve the Management Agreement and the Sub-Advisory Agreement, and each Trustee may have attributed different weight to the various factors.

Legg Mason Partners Short-Term Bond Fund|    47

Board approval of management and subadvisory agreements

(unaudited) continued

Nature, extent and quality of the services under the management agreement and sub-advisory agreement

The Board received and considered information regarding the nature, extent and quality of services provided to the Fund by the Manager and the Subadviser under the Management Agreement and the Sub-Advisory Agreement, respectively, during the past year. The Board noted information received at regular meetings throughout the year related to the services rendered by the Manager in its management of the Fund’s affairs and the Manager’s role in coordinating the activities of the Fund’s other service providers. The Board’s evaluation of the services provided by the Manager and the Subadviser took into account the Board’s knowledge and familiarity gained as Trustees of funds in the Legg Mason Partners fund complex, including the scope and quality of the investment management and other capabilities of the Manager and the Subadviser, and the quality of the Manager’s administrative and other services. The Board observed that the scope of services provided by the Manager and the Subadviser had continued to expand as a result of regulatory, market and other developments, including maintaining and monitoring their own and the Fund’s expanded compliance programs. The Board also noted that on a regular basis it received and reviewed information from the Manager and the Subadviser regarding the Fund’s compliance policies and procedures established pursuant to Rule 38a-1 under the 1940 Act.

The Board reviewed the qualifications, backgrounds and responsibilities of the Fund’s senior personnel and the portfolio management team primarily responsible for the day-to-day portfolio management of the Fund. The Board also considered, based on its knowledge of the Manager and its affiliates, the financial resources of Legg Mason, Inc., the parent organization of the Manager and the Subadviser.

The Board considered the division of responsibilities between the Manager and the Subadviser and the oversight provided by the Manager. The Board also considered the Manager’s and the Subadviser’s brokerage policies and practices. In addition, management also reported to the Board on, among other things, its business plans and organizational changes. The Board concluded that, overall, the nature, extent and quality of services provided (and expected to be provided) under the Management Agreement and the Sub-Advisory Agreement were satisfactory.

Fund performance

The Board received and considered performance information for the Fund as well as for a group of funds (the “Performance Universe”) selected by Lipper, Inc. (“Lipper”), an independent provider of investment company data. The Board was provided with a description of the methodology Lipper used to determine the similarity of the Fund with the funds included in the Performance Universe. The Board also noted that it had received and discussed with management information throughout the year at periodic intervals comparing the Fund’s performance against its benchmark and against the Fund’s peers. In addition, the Board considered the Fund’s performance in light of overall financial market conditions.

48|    Legg Mason Partners Short-Term Bond Fund

The information comparing the Fund’s performance to that of its Performance Universe, consisting of all retail and institutional funds classified as short investment-grade debt funds by Lipper, showed, among other data, that the Fund’s performance for the 1-, 3- and 5-year periods ended June 30, 2008 was below the median. The Board noted the explanations from the Manager concerning the underperformance versus the peer group.

Based on its review, which included careful consideration of all of the factors noted above, the Board concluded that it will continue to evaluate the Fund’s performance and any actions taken by the Manager to continue to improve performance.

Management fees and expense ratios

The Board reviewed and considered the contractual management fee (the “Contractual Management Fee”) and the actual fees paid by the Fund to the Manager (the “Actual Management Fee”) in light of the nature, extent and quality of the management and sub-advisory services provided by the Manager and the Subadviser. In addition, the Board noted that the compensation paid to the Subadviser is paid by the Manager, not the Fund, and, accordingly, that the retention of the Subadviser does not increase the fees or expenses otherwise incurred by the Fund’s shareholders.

In addition, the Board received and considered information comparing the Contractual Management Fee and the Actual Management Fee and the Fund’s total actual expenses with those of funds in both the relevant expense group and a broader group of funds, each selected and provided by Lipper. The Board also reviewed information regarding fees charged by the Manager to other U.S. clients investing primarily in an asset class similar to that of the Fund, including, where applicable, separate accounts.

The Manager reviewed with the Board the differences in the scope of services provided to the Fund and to these other clients, noting that the Fund is provided with administrative services (including services related to the preparation and maintenance of the Fund’s registration statement and shareholder reports, as well as calculation of the Fund’s net asset value on a daily basis), office facilities, Fund officers (including the Fund’s chief executive, chief financial and chief compliance officers), and that the Manager coordinates and oversees the provision of services to the Fund by other Fund service providers. The Board considered the fee comparisons in light of the differences required to manage these different types of accounts. The Board also considered and discussed information about the Subadviser’s fees, including the amount of the management fees retained by the Manager after payment of the subadvisory fee. The Board also received an analysis of complex-wide management fees provided by the Manager, which, among other things, set out a framework of fees based on asset classes.

Legg Mason Partners Short-Term Bond Fund|    49

Board approval of management and subadvisory agreements

(unaudited) continued

The information comparing the Fund’s Contractual and Actual Management Fees as well as its actual total expense ratio to its Expense Group, consisting of a group of retail front-end load funds (including the Fund) classified as short investment-grade debt funds and chosen by Lipper to be comparable to the Fund, showed that the Fund’s Contractual Management Fee was at the median and Actual Management Fee was above the median. The Board noted that the Fund’s actual total expense ratio was slightly above the median.

Taking all of the above into consideration, the Board determined that the management fee and the subadvisory fees for the Fund were reasonable in light of the nature, extent and quality of the services provided to the Fund under the Management Agreement and the Sub-Advisory Agreement.

Manager profitability

The Board received and considered an analysis of the profitability of the Manager and its affiliates in providing services to the Fund. The Board also received profitability information with respect to the Legg Mason Partners fund complex as a whole. In addition, the Board received information with respect to the Manager’s allocation methodologies used in preparing this profitability data. It was noted that the allocation methodologies had been reviewed by an outside consultant the year before. The profitability of the Manager and its affiliates was considered by the Board not excessive in light of the nature, extent and quality of the services provided to the Fund and the type of fund it represented.

Economies of scale

The Board received and discussed information concerning whether the Manager realizes economies of scale as the Fund’s assets grow.

The Board determined that the management fee structure for the Fund was reasonable.

Other benefits to the manager and the subadviser

The Board considered other benefits received by the Manager, the Subadviser and their affiliates as a result of their relationship with the Fund, including the opportunity to offer additional products and services to Fund shareholders.

50|    Legg Mason Partners Short-Term Bond Fund

In light of the costs of providing investment management and other services to the Fund and the ongoing commitment of the Manager and the Subadviser to the Fund, the Board considered that the ancillary benefits that the Manager and its affiliates received were reasonable.

* * *

In light of all of the foregoing, the Board determined that the continuation of each of the Management Agreement and Sub-Advisory Agreement would be in the best interests of the Fund’s shareholders and approved the continuation of such agreements for another year.

Legg Mason Partners Short-Term Bond Fund|    51

Additional information (unaudited)

Information about Trustees and Officers

The business and affairs of Legg Mason Partners Short-Term Bond Fund (formerly known as Legg Mason Partners Short-Term Investment Grade Bond Fund) (the “Fund”) are managed under the direction of the Board of Trustees. Information pertaining to the Trustees and Officers of the Trust is set forth below. The Statement of Additional Information includes additional information about Trustees and is available, without charge, upon request by calling Shareholder Services at 1-800-451-2010.

NON-INTERESTED TRUSTEES

ELLIOTT J. BERV
c/o R. Jay Gerken, CFA, Legg Mason & Co., LLC (“Legg Mason”)
620 Eighth Avenue New York, NY 10018
Birth year	1943
Position(s) held with Fund1	Trustee
Term of office1 and length of time served2	Since 1989
Principal occupation(s) during past five years	President and Chief Executive Officer, Catalyst (consulting) (since 1984); formerly, Chief Executive Officer, Rocket City Enterprises (media) (from 2000 to 2005)
Number of portfolios in fund complex overseen by Trustee	67
Other board memberships held by Trustee	Board Member, American Identity Corp. (doing business as Morpheus Technologies) (biometric information management) (since 2001)
A. BENTON COCANOUGHER c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1938
Position(s) held with Fund1	Trustee
Term of office1 and length of time served2	Since 1991
Principal occupation(s) during past five years	Dean Emeritus and Professor, Texas A&M University (since 2004); formerly, Interim Chancellor, Texas A&M University System (from 2003 to 2004); formerly, Special Advisor to the President, Texas A&M University (from 2002 to 2003)
Number of portfolios in fund complex overseen by Trustee	67
Other board memberships held by Trustee	None

52|    Legg Mason Partners Short-Term Bond Fund

JANE F. DASHER
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1949
Position(s) held with Fund1	Trustee
Term of office1 and length of time served2	Since 1999
Principal occupation(s) during past five years	Chief Financial Officer, Korsant Partners, LLC (a family investment company)
Number of portfolios in fund complex overseen by Trustee	67
Other board memberships held by Trustee	None
MARK T. FINN
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1943
Position(s) held with Fund1	Trustee
Term of office1 and length of time served2	Since 1989
Principal occupation(s) during past five years	Adjunct Professor, College of William & Mary (since 2002); Principal/ Member Balvan Partners (investment management) (since 2002); Chairman, Chief Executive Officer and Owner, Vantage Consulting Group, Inc. (investment management) (since 1988)
Number of portfolios in fund complex overseen by Trustee	67
Other board memberships held by Trustee	None
RAINER GREEVEN
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1936
Position(s) held with Fund1	Trustee
Term of office1 and length of time served2	Since 1994
Principal occupation(s) during past five years	Attorney, Rainer Greeven PC; President and Director, 62nd Street East Corporation (real estate) (since 2002)
Number of portfolios in fund complex overseen by Trustee	67
Other board memberships held by Trustee	None

Legg Mason Partners Short-Term Bond Fund|    53

Additional information (unaudited) continued

Information about Trustees and Officers

STEPHEN R. GROSS
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1947
Position(s) held with Fund1	Trustee
Term of office1 and length of time served2	Since 1986
Principal occupation(s) during past five years	Chairman, HLB Gross Collins, PC (accounting and consulting firm) (since 1979); Treasurer, Coventry Limited, Inc. (Senior Living Facilities) (since 1985); formerly, Managing Director, Fountainhead Ventures, LLC (technology accelerator) (from 1998 to 2003)
Number of portfolios in fund complex overseen by Trustee	67
Other board memberships held by Trustee	Director, Andersen Calhoun (assisted living) (since 1987); formerly, Director, ebank Financial Services, Inc. (from 1997 to 2004)
RICHARD E. HANSON, JR.
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1941
Position(s) held with Fund1	Trustee
Term of office1 and length of time served2	Since 1985
Principal occupation(s) during past five years	Retired
Number of portfolios in fund complex overseen by Trustee	67
Other board memberships held by Trustee	None
DIANA R. HARRINGTON
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1940
Position(s) held with Fund1	Trustee
Term of office1 and length of time served2	Since 1992
Principal occupation(s) during past five years	Professor, Babson College (since 1992)
Number of portfolios in fund complex overseen by Trustee	67
Other board memberships held by Trustee	None

54|    Legg Mason Partners Short-Term Bond Fund

SUSAN M. HEILBRON
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1945
Position(s) held with Fund1	Trustee
Term of office1 and length of time served2	Since 1994
Principal occupation(s) during past five years	Independent Consultant (since 2001)
Number of portfolios in fund complex over- seen by Trustee	67
Other board member- ships held by Trustee	None
SUSAN B. KERLEY
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1951
Position(s) held with Fund1	Trustee
Term of office1 and length of time served2	Since 1992
Principal occupation(s) during past five years	Investment Consulting Partner, Strategic Management Advisors, LLC (investment consulting) (since 1990)
Number of portfolios in fund complex over- seen by Trustee	67
Other board member- ships held by Trustee	Chairman (since 2005) and Trustee (since 2000), Eclipse Funds (3 funds); Chairman (since 2005) and Director (since 1990), Eclipse Funds Inc. (23 funds); Chairman and Director, ICAP Funds, Inc. (4 funds) (since 2006); Chairman and Trustee, The MainStay Funds (21 funds) (since 2007); and Chairman and Director, MainStay VP Series Fund, Inc. (24 funds) (since 2007)
ALAN G. MERTEN
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1941
Position(s) held with Fund1	Trustee
Term of office1 and length of time served2	Since 1990
Principal occupation(s) during past five years	President, George Mason University (since 1996)
Number of portfolios in fund complex over- seen by Trustee	67
Other board member- ships held by Trustee	Director of Cardinal Financial Corporation (since 2006); Trustee, First Potomac Realty Trust (since 2005); formerly, Director, Xybernaut Corporation (information technology) (from 2004 to 2006); formerly Director, Digital Net Holdings, Inc. (from 2003 to 2004); formerly, Director, Comshare, Inc. (information technology) (from 1985 to 2003)

Legg Mason Partners Short-Term Bond Fund|    55

Additional information (unaudited) continued

Information about Trustees and Officers

R. RICHARDSON PETTIT
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1942
Position(s) held with Fund1	Trustee
Term of office1 and length of time served2	Since 1990
Principal occupation(s) during past five years	Formerly, Duncan Professor of Finance, University of Houston (from 1977 to 2006)
Number of portfolios in fund complex over- seen by Trustee	67
Other board member- ships held by Trustee	None
INTERESTED TRUSTEE
R. JAY GERKEN, CFA3
Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1951
Position(s) held with Fund1	Trustee, President, Chairman and Chief Executive Officer
Term of office1 and length of time served2	Since 2002
Principal occupation(s) during past five years	Managing Director of Legg Mason; Chairman of the Board and Trustee/ Director of 159 funds associated with Legg Mason Partners Fund Advisor, LLC (“LMPFA”) and its affiliates; President LMPFA (since 2006); Chairman, President and Chief Executive Officer of certain mutual funds associated with Legg Mason and its affiliates; formerly, Chairman, Smith Barney Fund Management LLC (“SBFM”) and Citi Fund Management Inc. (“CFM”) (2002 to 2005); formerly Chairman, President and Chief Executive Officer of Travelers Investment Adviser, Inc. (“TIA”) (from 2002 to 2005)
Number of portfolios in fund complex over- seen by Trustee	146
Other board member- ships held by Trustee	Trustee, Consulting Group Capital Market Funds (from 2002 to 2006)
OFFICERS
FRANCES M. GUGGINO
Legg Mason
55 Water Street New York, NY 10041
Birth year	1957
Position(s) held with Fund1	Chief Financial Officer and Treasurer
Term of office1 and length of time served2	Since 2004
Principal occupation(s) during past five years	Director of Legg Mason; Chief Financial Officer and Treasurer of certain mutual funds associated with Legg Mason; formerly, Controller of certain mutual funds associated with Citigroup Asset Management (“CAM”) (from 1999 to 2004)

56|    Legg Mason Partners Short-Term Bond Fund

TED P. BECKER
Legg Mason
620 Eighth Avenue New York, NY 10018
Birth year	1951
Position(s) held with Fund1	Chief Compliance Officer
Term of office1 and length of time served2	Since 2006
Principal occupation(s) during past five years	Director of Global Compliance at Legg Mason (since 2006); Chief Compliance Officer of LMPFA (since 2006); Managing Director of Compliance at Legg Mason (since 2005); Chief Compliance Officer with certain mutual funds associated with Legg Mason, LMPFA and certain affiliates (since 2006); formerly, Managing Director of Compliance at CAM or its predecessor (from 2002 to 2005)
JOHN CHIOTA
Legg Mason
100 First Stamford Place Stamford, CT 06902
Birth year	1968
Position(s) held with Fund1	Chief Anti-Money Laundering Compliance Officer/Identity Theft Prevention Officer
Term of office1 and length of time served2	Since 2006/2008
Principal occupation(s) during past five years	Identity Theft Prevention Officer with certain mutual funds associated with Legg Mason or its affiliates (since 2008); Chief Anti-Money Laundering Compliance Officer with certain mutual funds associated with Legg Mason or its affiliates (since 2006); Vice President of Legg Mason or its predecessor (since 2004); Prior to August 2004, Chief AML Compliance Officer with TD Waterhouse
ROBERT I. FRENKEL
Legg Mason
100 First Stamford Place Stamford, CT 06902
Birth year	1954
Position(s) held with Fund1	Secretary and Chief Legal Officer
Term of office1 and length of time served2	Since 2003
Principal occupation(s) during past five years	Managing Director and General Counsel of Global Mutual Funds for Legg Mason and its predecessors (since 1994); Secretary and Chief Legal Officer of mutual funds associated with Legg Mason (since 2003); formerly, Secretary of CFM (from 2001 to 2004)
THOMAS C. MANDIA
Legg Mason
100 First Stamford Place Stamford, CT 06902
Birth year	1962
Position(s) held with Fund1	Assistant Secretary
Term of office1 and length of time served2	Since 2000
Principal occupation(s) during past 5 years	Managing Director and Deputy Counsel of Legg Mason (since 2005); Managing Director and Deputy General Counsel for CAM (from 1992 to 2005)

Legg Mason Partners Short-Term Bond Fund|    57

Additional information (unaudited) continued

Information about Trustees and Officers

DAVID CASTANO
Legg Mason
55 Water Street New York, NY 10041
Birth year	1971
Position(s) held with Fund1	Controller
Term of office1 and length of time served2	Since 2007
Principal occupation(s) during past 5 years	Vice President of Legg Mason (since 2008); Controller of certain mutual funds associated with Legg Mason (since 2007); formerly, Assistant Treasurer of Lord Abbett mutual funds (from 2004 to 2006); Supervisor at UBS Global Asset Management (from 2003 to 2004); Accounting Manager at CAM (prior to 2003)
MATTHEW PLASTINA
Legg Mason
55 Water Street New York, NY 10041
Birth year	1970
Position(s) held with Fund1	Controller
Term of office1 and length of time served2	Since 2007
Principal occupation(s) during past 5 years	Vice President of Legg Mason (since 2008); Assistant Vice President of Legg Mason or its predecessor (since 1999); Controller of certain mutual funds associated with Legg Mason (since 2007); formerly, Assistant Controller of certain mutual funds associated with Legg Mason and its predecessors (from 2002 to 2007)

¹ Each Trustee and Officer serves until his or her 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 Trustee or Officer became a Board Member or Officer, as applicable, for a fund in the Legg Mason Partners funds complex.

³ Mr. Gerken is an “interested person” of the Fund as defined in the 1940 Act, because Mr. Gerken is an officer of LMPFA and certain of its affiliates.

58    Legg Mason Partners Short-Term Bond Fund

Important tax information (unaudited)

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

Record date:	Daily
Payable date:	Monthly
Interest from Federal obligations	7.17	%

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

Please retain this information for your records.

Legg Mason Partners Short-Term Bond Fund|    59

Legg Mason Partners Short-Term

Bond Fund

Trustees	Distributor
Elliott J. Berv	Legg Mason Investor Services, LLC
A. Benton Cocanougher
Jane F. Dasher
Mark T. Finn	Custodian
R. Jay Gerken, CFA	State Street Bank and Trust Company
Chairman
Rainer Greeven	Transfer agent
Stephen R. Gross	PNC Global Investment Servicing
Richard E. Hanson, Jr.	4400 Computer Drive
Diana R. Harrington	Westborough,
Susan M. Heilbron	Massachusetts 01581
Susan B. Kerley
Alan G. Merten
R. Richardson Pettit
	Independent registered public accounting firm
Investment manager	KPMG LLP
Legg Mason Partners Fund Advisor, LLC	345 Park Avenue
	New York, New York 10154
Subadviser
Western Asset Management Company

Legg Mason Partners Short-Term Bond Fund

The Fund is a separate investment series of Legg Mason Partners Income Trust, a Maryland business trust.

LEGG MASON PARTNERS SHORT-TERM BOND FUND

Legg Mason Partners Funds

55 Water Street

New York, New York 10041

The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s website at www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C., and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. To obtain information on Form N-Q from the Fund, shareholders can call Legg Mason Partners Shareholder Services at 1-800-451-2010.

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 1-800-451-2010, (2) on the Fund’s website at www.leggmason.com/individualinvestors and (3) on the SEC’s website at www.sec.gov.

This report is submitted for the general information of the shareholders of Legg Mason Partners Short-Term Bond Fund. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by a current prospectus.

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

www.leggmason.com/individualinvestors

^©2009 Legg Mason Investor Services, LLC

Member FINRA, SIPC

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

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

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

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

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

* Ranked ninth-largest money manager in the world, according to Pensions & Investments May 26, 2008 based on 12/31/07 worldwide assets under management.

www.leggmason.com/individualinvestors

^©2009 Legg Mason Investor Services, LLC Member FINRA, SIPC

FD0834 2/09 SR09-754

NOT PART OF THE ANNUAL REPORT

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