UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-05812

Legg Mason Partners Premium Money Market Trust

(Exact name of registrant as specified in charter)

55 Water Street, New York, NY 10041

(Address of principal executive offices) (Zip code)

Robert I. Frenkel, Esq.

Legg Mason & Co., LLC

100 First Stamford Place

Stamford, CT 06902

(Name and address of agent for service)

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

Date of fiscal year end: August 31

Date of reporting period: August 31, 2011

ITEM 1. REPORT TO STOCKHOLDERS.

The Annual Report to Stockholders is filed herewith.

August 31, 2011

Annual Report

Western Asset

Premium

Liquid

Reserves

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

II Western Asset Premium Liquid Reserves

What’s inside
Letter from the chairman	II
Investment commentary	III
Fund overview	1
Portfolio at a glance—Liquid Reserves Portfolio	4
Fund expenses	5
Western Asset Premium Liquid Reserves
Statement of assets and liabilities	6
Statement of operations	7
Statements of changes in net assets	8
Financial highlights	9
Notes to financial statements	10
Report of independent registered public accounting firm	17
Additional information	18
Important tax information	24
Liquid Reserves Portfolio
Schedule of investments	25
Statement of assets and liabilities	32
Statement of operations	33
Statements of changes in net assets	34
Financial highlights	35
Notes to financial statements	36
Report of independent registered public accounting firm	42
Additional information	43

Fund objective

The Fund’s investment objective is to provide shareholders with liquidity and as high a level of current income as is consistent with preservation of capital.

Letter from the chairman

Dear Shareholder,

We are pleased to provide the annual report of Western Asset Premium Liquid Reserves for the twelve-month reporting period ended August 31, 2011. Please read on for a detailed look at prevailing economic and market conditions during the Fund’s reporting period and to learn how those conditions have affected Fund performance.

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

Ÿ Fund prices and performance,

Ÿ Market insights and commentaries from our portfolio managers, and

Ÿ A host of educational resources.

We look forward to helping you meet your financial goals.

Sincerely,

R. Jay Gerken, CFA

Chairman, President and Chief Executive Officer

September 30, 2011

Western Asset Premium Liquid Reserves III

Investment commentary

Economic review

Although the U.S. economy continued to grow over the twelve months ended August 31, 2011, the pace of the expansion was disappointing, which resulted in a significant shift in investor sentiment. Looking back, beginning in the fourth quarter of 2010, fears regarding moderating economic growth were replaced with optimism for a strengthening economy in 2011. However, as the reporting period progressed, weakening economic data, concerns related to the raising of the U.S. debt ceiling and the downgrading of U.S. government securities resulted in increased investor risk aversion. However, overall, investors who took on additional risk in their portfolios during the reporting period were generally rewarded.

U.S. gross domestic product (“GDP”)ⁱ growth, as reported by the U.S. Department of Commerce, has been less robust than during most other periods exiting a severe recession. Revised GDP growth was 2.3% during the fourth quarter of 2010 and 3.0% for calendar 2010 as a whole. The Commerce Department then reported that first and second quarter 2011 GDP growth were 0.4% and 1.3%, respectively. This moderation in growth during the first half of the calendar year was due to a variety of factors, including less robust export activity and a deceleration in consumer spending given higher oil and food prices.

Turning to the job market, while there was some improvement in early 2011, unemployment again moved higher from April through June. After being 9.0% or higher since April 2009, the unemployment rate fell to 8.9% in February and 8.8% in March 2011. The job market then weakened, as unemployment rose to 9.0% in April, 9.1% in May and 9.2% in June. The news was slightly better in July, with the unemployment rate easing back to 9.1%. While the rate held steady in August, the U.S. Department of Labor reported that there was zero net job growth during the month, the worst monthly result since September 2010. Additionally, as of the end of the reporting period, approximately fourteen million Americans looking for work had yet to find a job, and nearly 43% of these individuals have been out of work for more than six months.

The housing market continued to experience challenges during the reporting period. While existing-home sales moved somewhat higher toward the end of 2010 and in January 2011, according to the National Association of Realtors (“NAR”), existing-home sales declined a sharp 8.9% in February. After a 3.5% increase in March, existing-home sales fell 1.8% and 4.0% in April and May, respectively. Following a modest 0.6% increase in June, sales then fell 3.5% in July and moved 7.7% higher in August. At the end of August, the inventory of unsold homes was an 8.5 month supply at the current sales level, versus a 9.5 month supply in July. Existing-home prices were weak versus a year ago, with the NAR reporting that the median existing-home price for all housing types was $168,300 in August 2011, down 5.1% from August 2010.

Even the manufacturing sector, one of the stalwarts of the economy in recent years, softened toward the end of the reporting period. Based on the Institute for Supply Management’s PMIⁱⁱ, the manufacturing sector grew twenty-five consecutive months since it began expanding in August 2009 (a reading below 50 indicates a contraction, whereas a reading above 50 indicates an expansion). In January 2011, the manufacturing sector expanded at its fastest pace since May 2004, with a reading of 60.8 versus 58.5 for the previous month. Manufacturing activity remained strong during the next three months and was 60.4 in April. However, May’s reading fell to 53.5, partially attributed to supply disruptions triggered by the March earthquake

IV Western Asset Premium Liquid Reserves

Investment commentary (cont’d)

and tsunami in Japan. Manufacturing activity then moved modestly higher in June to 55.3, before falling to 50.9 in July and 50.6 in August — the latter being the worst reading in two years. In addition, only ten of the eighteen industries tracked by the Institute for Supply Management expanded in August.

Financial market overview

While stocks and lower-quality bonds generated strong results during the reporting period, there were several periods of heightened volatility and periodic sell-offs. These were triggered by a variety of factors, including concerns regarding the global economy, geopolitical unrest, the natural disasters in Japan and the ongoing European sovereign debt crisis. During those periods, investors tended to favor the relative safety of U.S. Treasury securities. However, in most cases these setbacks were only temporary and risk aversion was generally replaced with solid demand for riskier assets. One key exception was in July and August 2011, when concerns as to whether Congress would come to an agreement regarding the raising of the debt ceiling and Standard & Poor’s (“S&P”) downgrade of U.S. Treasuries from AAA to AA+ negatively impacted investor sentiment.

The Federal Reserve Board (“Fed”)ⁱⁱⁱ took a number of actions as it sought to meet its dual mandate of fostering maximum employment and price stability. In November 2010, the Fed announced a second round of quantitative easing (often referred to as “QE2”) to help stimulate the economy, entailing the purchase of $600 billion of long-term U.S. Treasury securities by the end of the second quarter of 2011.

In June, the Fed announced that QE2 would end on schedule at the end of the month. However, given ongoing strains in the economy, it made no overtures toward reversing any of its accommodative policies, and stated it would “maintain its existing policy of reinvesting principal payments from its securities holdings” rather than seeking to reduce the size of its balance sheet.

Also, as has been the case since December 2008, the Fed kept the federal funds rate^iv at a historically low range between zero and 0.25%. In addition, in August 2011, the Fed declared its intention to keep the federal funds rate between zero and 0.25% until mid-2013.

At its meeting in September 2011, after the end of the reporting period, the Fed announced its intention to purchase $400 billion of longer-term Treasury securities and to sell an equal amount of shorter-term Treasury securities by June 2012. The Fed said, “This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.”

Fixed-income market review

The spread sectors (non-Treasuries) began the reporting period on a positive note, as they rallied in September and October. Following a brief setback in the middle of November, triggered by the European sovereign debt crisis, most spread sectors then rallied through the end of April 2011. While the spread sectors generally posted positive results in May, they underperformed equal-duration^v Treasuries. Risk aversion then increased from June through August given a host of disappointing economic data, a further escalation of the European sovereign debt crisis and the S&P rating downgrade of U.S. sovereign debt.

Both short- and long-term Treasury yields fluctuated but, overall, moved lower during the twelve months ended August 31, 2011. When the period began, two- and ten-year Treasury yields were 0.47% and 2.47%, respectively. In the beginning of the reporting period, yields initially moved

Western Asset Premium Liquid Reserves V

higher given expectations for stronger growth in 2011 and the potential for rising inflation, with two- and ten-year Treasury yields peaking at 0.87% and 3.75%, respectively, in February 2011. Yields then declined during much of the remainder of the period due to disappointing economic data and several flights to quality. Two-year Treasuries hit their low for the reporting period of 0.19% on several occasions in August 2011. Ten-year Treasuries reached their reporting period trough of 2.07% on August 19, 2011. When the period ended on August 31, 2011, two-year Treasury yields were 0.20% and ten-year Treasury yields were 2.23%.

The yields available from money market securities remained extremely low during the reporting period given continued historically low short-term interest rates.

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

Sincerely,

R. Jay Gerken, CFA

Chairman, President and

Chief Executive Officer

September 30, 2011

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

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

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

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

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

^v  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.

Western Asset Premium Liquid Reserves 2011 Annual Report 1

Fund overview

Q. What is the Fund’s investment strategy?

A. The Fund seeks to provide shareholders with liquidity and as high a level of current income as is consistent with preservation of capital. The Fund invests in securities through an underlying mutual fund, Liquid Reserves Portfolio (the “Portfolio”), which has the same investment objective and strategies as the Fund. The Portfolio invests in high-quality, U.S. dollar-denominated short-term debt securities that, at the time of purchase, are rated by one or more rating agencies in the highest short-term rating category or, if not rated, are determined by the subadviser to be of equivalent quality.

The Portfolio may invest in all types of money market instruments, including bank obligations, commercial paper and asset-backed securities, structured investments, repurchase agreements and other short-term debt securities. These instruments may be issued or guaranteed by all types of issuers, including U.S. and foreign banks and other private issuers, the U.S. government or any of its agencies or instrumentalities, U.S. states and municipalities, or foreign governments. The Portfolio generally limits its investments in foreign securities to U.S. dollar-denominated obligations of issuers, including banks and foreign governments, located in the major industrialized countries, although with respect to bank obligations, the branches of the banks issuing the obligations may be located in The Bahamas or the Cayman Islands.

At Western Asset Management Company (“Western Asset”), the Fund’s and the Portfolio’s subadviser, we utilize a fixed-income team approach, with decisions derived from interaction among various investment management sector specialists. The sector teams are comprised of Western Asset’s senior portfolio 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. While the fixed-income market experienced periods of volatility during the twelve months ended August 31, 2011, investors who assumed greater risk were rewarded, as the spread sectors (non-Treasuries) generally outperformed U.S. Treasuries. Even though growth moderated as the reporting period progressed, the economy continued to expand and corporate profits were often better-than-expected. Also supporting the spread sectors was overall solid demand from investors seeking incremental yields given the low rates available from short-term fixed-income securities.

While the spread sectors rallied during most of the reporting period, there were several occasions when investor risk aversion increased. These flights to quality were triggered by a number of events, including the sovereign debt crisis in Europe, concerns regarding the economy and inflation, geopolitical issues in the Middle East and Northern Africa and the tragedy in Japan. However, in most cases, risk aversion was fairly quickly replaced with a resumption of demand for riskier assets. One notable exception was toward the end of the period, as concerns regarding the raising of the U.S. debt ceiling and the subsequent Standard & Poor’s downgrade of U.S. sovereign debt caused investors to gravitate to the relative safety of U.S. Treasury securities.

The yields on two- and ten-year Treasuries began the fiscal year at 0.47% and 2.47%, respectively. Treasury yields fluctuated during the twelve-month reporting period given the aforementioned flights to quality, as well as uncertainties regarding Federal Reserve Board (“Fed”)ⁱ monetary policy.

2 Western Asset Premium Liquid Reserves 2011 Annual Report

Fund overview (cont’d)

During the fiscal year, two-year Treasury yields moved as high as 0.87% and as low as 0.19%, while ten-year Treasury yields rose as high as 3.75% and fell as low as 2.07%. On August 31, 2011, yields on two- and ten-year Treasuries were 0.20% and 2.23%, respectively.

Continued historically low short-term interest rates and the Fed’s intention to keep the federal funds rateⁱⁱ between zero and 0.25% until mid-2013 resulted in the yields available from money market securities remaining very low during the fiscal year.

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

A. Throughout much of the reporting period, we maintained a long average maturity to help lock in somewhat higher yields. Toward the end of the reporting period, conditions warranted a more cautious maturity stance. We decreased our exposure to Eurozone banks and maintained liquidity levels significantly above that which is required by the Securities and Exchange Commission’s rules governing liquidity of money market funds. We increased our exposure to institutions based in Northern Europe, Canada and Australia.

Performance review

As of August 31, 2011, the seven-day current yield for Western Asset Premium Liquid Reserves was 0.01% and the seven-day effective yield, which reflects compounding, was 0.01%.¹

Western Asset Premium Liquid Reserves Yields as of August 31, 2011 (unaudited)
Seven-Day Current Yield1	0.01	%
Seven-Day Effective Yield1	0.01	%

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. Yields will fluctuate. To obtain performance data current to the most recent month-end, please visit our website at www.leggmason.com/individualinvestors.

Absent fee waivers and/or expense reimbursements, the seven-day current yield and the seven-day effective yield would have been -0.12%.

The manager has voluntarily undertaken to limit Fund expenses in order to maintain a minimum yield. Such expense limitations may fluctuate daily and are voluntary and temporary and may be terminated by the manager at any time without notice.

An investment in the Fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

Q. What were the most significant factors affecting Fund performance?

A. Over the reporting period, the U.S. economic recovery remained modest and the exceptionally low interest rate environment helped to make conditions more challenging. Increased volatility and fragile financial conditions, at times, put pressure on funding costs and liquidity conditions. Against this backdrop, it was difficult for the Fund to generate incremental yield.

¹  The seven-day current yield reflects the amount of income generated by the investment during that seven-day period and assumes that the income is generated each week over a 365-day period. The yield is shown as a percentage of the investment. The seven-day effective yield is calculated similarly to the seven-day current yield but, when annualized, the income earned by an investment in the Fund is assumed to be reinvested. The effective yield typically will be slightly higher than the current yield because of the compounding effect of the assumed reinvestment.

Western Asset Premium Liquid Reserves 2011 Annual Report 3

Thank you for your investment in Western Asset Premium Liquid Reserves. As always, we appreciate that you have chosen us to manage your assets and we remain focused on seeking to achieve the Fund’s investment goals.

Sincerely,

Western Asset Management Company

September 20, 2011

RISKS: An investment in a money market fund is neither insured nor guaranteed by the FDIC or any other government agency. Although the Fund seeks to preserve the value of your investment at one dollar per share, it is still possible to lose money by investing in the Fund. Please see the Fund’s prospectus for a more complete discussion of these and other risks, and the Fund’s investment strategies.

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

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

ⁱ  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 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.

4 Western Asset Premium Liquid Reserves 2011 Annual Report

Portfolio at a glance^†(unaudited)

Liquid Reserves Portfolio

The Fund invests all of its investable assets in Liquid Reserves Portfolio, the investment breakdown of which is shown below.

Investment breakdown (%) as a percent of total investments

† The bar graph above represents the composition of the Portfolio’s investments as of August 31, 2011 and August 31, 2010. The Portfolio is actively managed. As a result, the composition of the Portfolio’s investments is subject to change at any time.

Western Asset Premium Liquid Reserves 2011 Annual Report 5

Fund expenses (unaudited)

Example

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

This example is based on an investment of $1,000 invested on March 1, 2011 and held for the six months ended August 31, 2011.

Actual expenses

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

Hypothetical example for comparison purposes

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

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

Based on actual total return1														Based on hypothetical total return1
Actual Total Return2		Beginning Account Value			Ending Account Value			Annualized Expense Ratio*†			Expenses Paid During the Period3				Hypothetical Annualized Total Return			Beginning Account Value		Ending Account Value			Annualized Expense Ratio*†			Expenses Paid During the Period3
	0.01%		$	1,000.00		$	1,000.10		0.32	%		$	1.61			5.00	%		$1,000.00		$	1,023.59		0.32	%		$	1.63

¹  For the six months ended August 31, 2011.

² Assumes the reinvestment of all distributions at net asset value. Total return is not annualized, as it may not be representative of the total return for the year. Performance figures may reflect 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 the Fund’s annualized expense ratio, multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year (184), then divided by 365.

* Includes the Fund’s share of Liquid Reserves Portfolio’s allocated expenses.

† In order to maintain a minimum yield, additional waivers were implemented.

6 Western Asset Premium Liquid Reserves 2011 Annual Report

Statement of assets and liabilities

August 31, 2011

Assets:
Investment in Liquid Reserves Portfolio, at value	$	434,907,724
Receivable for Fund shares sold		1,278
Prepaid expenses		20,008
Total Assets		434,929,010
Liabilities:
Service and/or distribution fees payable		35,639
Payable for Fund shares repurchased		25,043
Investment management fee payable		24,086
Distributions payable		1,608
Accrued expenses		30,977
Total Liabilities		117,353
Total Net Assets	$	434,811,657
Net Assets:
Par value (Note 3)	$	4,348
Paid-in capital in excess of par value		434,992,218
Undistributed net investment income		1,141
Accumulated net realized loss on investments		(186,050)
Total Net Assets	$	434,811,657
Shares Outstanding		434,809,009
Net Asset Value		$1.00

See Notes to Financial Statements.

Western Asset Premium Liquid Reserves 2011 Annual Report 7

Statement of operations

For the Year Ended August 31, 2011

Investment Income:
Income from Liquid Reserves Portfolio	$	1,666,752
Allocated waiver from Liquid Reserves Portfolio		33,526
Allocated expenses from Liquid Reserves Portfolio		(483,031)
Total Investment Income		1,217,247
Expenses:
Investment management fee (Note 2)		1,123,490
Service and/or distribution fees (Note 2)		449,396
Transfer agent fees		26,530
Registration fees		25,358
Audit and tax		21,441
Legal fees		15,822
Shareholder reports		11,910
Insurance		5,782
Trustees’ fees		4,353
Fund accounting fees		4,200
Miscellaneous expenses		1,942
Total Expenses		1,690,224
Less: Fee waivers and/or expense reimbursements (Note 2)		(526,311)
Net Expenses		1,163,913
Net Investment Income		53,334
Net Realized Gain on Investments from Liquid Reserves Portfolio		10,057
Increase in Net Assets from Operations	$	63,391

See Notes to Financial Statements.

8 Western Asset Premium Liquid Reserves 2011 Annual Report

Statements of changes in net assets

For the Years Ended August 31,	2011		2010
Operations:
Net investment income	$	53,334	$	71,144
Net realized gain		10,057		34,467
Increase in Net Assets From Operations		63,391		105,611
Distributions to Shareholders From (Note 1):
Net investment income		(53,334)		(71,144)
Decrease in Net Assets From Distributions to Shareholders		(53,334)		(71,144)
Fund Share Transactions (Note 3):
Net proceeds from sale of shares		3,946,204,165		5,780,152,374
Reinvestment of distributions		26,851		20,122
Cost of shares repurchased		(3,957,952,147)		(5,709,007,836)
Increase (Decrease) in Net Assets From Fund Share Transactions		(11,721,131)		71,164,660
Increase (Decrease) in Net Assets		(11,711,074)		71,199,127
Net Assets:
Beginning of year		446,522,731		375,323,604
End of year*	$	434,811,657	$	446,522,731
*   Includes undistributed net investment income of:		$1,141		—

See Notes to Financial Statements.

Western Asset Premium Liquid Reserves 2011 Annual Report 9

Financial highlights

For a share of beneficial interest outstanding throughout each year ended August 31:
	2011			2010			2009			2008			2007
Net asset value, beginning of year		$1.000			$1.000			$1.000			$1.000			$1.000
Income (loss) from operations:
Net investment income		0.000	1		0.000	1		0.012			0.036			0.050
Net realized and unrealized gain (loss)1		0.000			0.000			0.000			(0.000)			0.000
Total income from operations		0.000	1		0.000	1		0.012			0.036			0.050
Less distributions from:
Net investment income		(0.000)	1		(0.000)	1		(0.012)			(0.036)			(0.050)
Total distributions		(0.000)	1		(0.000)	1		(0.012)			(0.036)			(0.050)
Net asset value, end of year		$1.000			$1.000			$1.000			$1.000			$1.000
Total return2		0.01	%		0.02	%		1.24	%3		3.70	%3		5.09	%
Net assets, end of year (millions)		$435			$447			$375			$544			$494
Ratios to average net assets:
Gross expenses4		0.48	%		0.52	%5		0.54	%5		0.50	%		0.51	%6
Net expenses4,7,8		0.36	9		0.35	5,9		0.43	5		0.38			0.39	6
Net investment income		0.01			0.02			1.25			3.74			4.97

¹  Amount represents less than $0.0005 per share.

²  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  If the Portfolio had not entered into the Letter and Capital Support Agreements related to certain investments in structured securities, the total return would have been lower.

⁴  Includes the Fund’s share of Liquid Reserves Portfolio’s allocated expenses.

⁵  Included in the expense ratios is the Treasury Guarantee Program fees incurred by the Fund during the period. Without these fees, the gross and net expense ratios would have been 0.52% and 0.35%, respectively, for the year ended August 31, 2010, and 0.51% and 0.40%, respectively, for the year ended August 31, 2009.

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 not have changed.

⁷  As a result of an expense limitation arrangement, the ratio of expenses, other than brokerage, interest, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of the Fund did not exceed 0.45%. This expense limitation arrangement cannot be terminated prior to December 31, 2012 without the Board of Trustees’ consent. Prior to December 1, 2010, the expense limitation was 0.40%.

⁸  Reflects fee waivers and/or expense reimbursements.

⁹  In order to maintain a minimum yield, additional waivers were implemented.

See Notes to Financial Statements.

10 Western Asset Premium Liquid Reserves 2011 Annual Report

Notes to financial statements

1. Organization and significant accounting policies

Western Asset Premium Liquid Reserves (the “Fund”) is a separate diversified investment series of Legg Mason Partners Premium Money Market Trust (the “Trust”). The Trust, a Maryland statutory trust, is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. The Fund invests all of its investable assets in Liquid Reserves Portfolio (the “Portfolio”), a separate investment series of Master Portfolio Trust, that has the same investment objective as the Fund.

The financial statements of the Portfolio, including the schedule of investments, are contained elsewhere in this report and should be read in conjunction with the Fund’s financial statements.

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

(a) Investment valuation. The Fund records its investment in the Portfolio at value. The value of such investment in the Portfolio reflects the Fund’s proportionate interest (1.2% at August 31, 2011) in the net assets of the Portfolio.

The Fund has adopted Statement of Financial Accounting Standards Board Codification Topic 820 (“ASC Topic 820”). ASC Topic 820 disclosure and valuation of securities held by the Portfolio are discussed in Note 1(a) of the Portfolio’s Notes to Financial Statements, which are included elsewhere in this report.

(b) Investment income. The Fund earns income, net of Portfolio expenses, daily based on its investment in the Portfolio.

(c) Expenses. The Fund bears all costs of its operations other than expenses specifically assumed by the manager. Expenses incurred by the Trust with respect to any two or more funds in the series are allocated in proportion to the net assets of each fund, except when allocations of direct expenses to each fund can otherwise be made fairly. Expenses directly attributable to a fund are charged to that fund. The Fund’s share of the Portfolio’s expenses is charged against and reduces the amount of the Fund’s investment in the Portfolio.

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

(e) Credit and market risk. Investments in securities that are collateralized by residential real estate mortgages are subject to certain credit and liquidity risks. When

Western Asset Premium Liquid Reserves 2011 Annual Report 11

market conditions result in an increase in default rates of the underlying mortgages and foreclosure values of underlying real estate properties are materially below the outstanding amount of these underlying mortgages, collection of the full amount of accrued interest and principal on these investments may be doubtful. Such market conditions may significantly impair the value and liquidity of these investments and may result in a lack of correlation between their credit ratings and values.

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

However, due to the timing of when distributions are made by the Fund, the Fund may be subject to an excise tax of 4% of the amount by which 98% of the Fund’s annual taxable income and net realized gains exceed the distributions from such taxable income and realized gains for the calendar year. The Fund paid $1,141 of Federal excise taxes attributable to calendar year 2010. Under the recently enacted Regulated Investment Company Modernization Act of 2010, the minimum distribution requirement for capital gains that must be met in order to avoid the imposition of excise tax has been raised from 98% to 98.2% for calendar years beginning after December 22, 2010.

Management has analyzed the Fund’s uncertain tax positions taken on income tax returns for all open tax years and has concluded that as of August 31, 2011, no provision for income tax is required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by Internal Revenue Service and state departments of revenue.

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

	Undistributed Net Investment Income		Paid-in Capital
(a)	$	1,141	$	(1,141)

^(a)  Reclassifications are primarily due to a non-deductible excise tax paid by the Fund.

2. Investment management agreement and other transactions with affiliates

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s and the Portfolio’s investment manager. Western Asset Management Company (“Western Asset”) is the Fund’s and the Portfolio’s subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).

Under the investment management agreements, the Fund and the Portfolio each pay an investment management fee, calculated daily and paid monthly, at an annual

12 Western Asset Premium Liquid Reserves 2011 Annual Report

Notes to financial statements (cont’d)

rate of 0.25% and 0.10% of the Fund’s and the Portfolio’s average daily net assets, respectively.

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.

As a result of an expense limitation arrangement between the Fund and LMPFA, the ratio of expenses, other than brokerage, interest, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of the Fund did not exceed 0.45%. This expense limitation arrangement cannot be terminated prior to December 31, 2012 without the Board of Trustees’ consent. Prior to December 1, 2010, the expense limitation did not exceed 0.40%.

The investment manager has voluntarily undertaken to limit fund expenses in order to maintain a minimum yield. Such expense limitations may fluctuate daily and are voluntary and temporary and may be terminated by the investment manager at any time without notice.

During the year ended August 31, 2011, fees waived and/or expenses reimbursed amounted to $526,311.

The investment manager is permitted to recapture amounts previously waived or reimbursed to the Fund during the same fiscal year if the Fund’s total annual operating expenses have fallen to a level below the expense limitation (“expense cap”) in effect at the time the fees were earned or the expense incurred. In no case will the investment 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 expense cap or any other lower limit then in effect.

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

The Fund has adopted a service and/or Rule 12b-1 distribution plan and under that plan, the Fund pays a fee calculated at the annual rate not to exceed 0.10% of the Fund’s average daily net assets. The fee is calculated daily and paid monthly. For the year ended August 31, 2011, the service and/or distribution fees paid amounted to $449,396.

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

3. Shares of beneficial interest

At August 31, 2011, the Trust had an unlimited number of shares of beneficial interest authorized with a par value of $0.00001 per share.

Because the Fund has maintained a $1.00 net asset value per share from inception, the number of shares sold, shares issued on reinvestment of dividends declared, and shares repurchased, is equal to the dollar amount shown in the Statements of Changes in Net Assets for the corresponding Fund share transactions.

Western Asset Premium Liquid Reserves 2011 Annual Report 13

4. Income tax information and distributions to shareholders

Subsequent to the fiscal year end, the Fund has made the following distributions:

Record Date Payable Date
Daily 9/30/2011	$	0.000009

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

	2011		2010
Distributions Paid From:
Ordinary income	$	53,334	$	71,144

As of August 31, 2011, there were no significant differences between the book and the tax components of net assets.

5. Legal matters

Beginning in May 2004, class action lawsuits alleging violations of the federal securities laws were filed against Citigroup Global Markets Inc. (“CGM”), a former distributor of the Fund, and other affiliated funds (collectively, the “Funds”) and a number of its then affiliates, including 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 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.

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

14 Western Asset Premium Liquid Reserves 2011 Annual Report

Notes to financial statements (cont’d)

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, 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. The appeal was fully briefed and oral argument before the U.S. Court of Appeals for the Second Circuit took place on March 5, 2009. On June 9, 2011, the Court of Appeals issued a Summary Order affirming the District Court’s dismissal of all claims with the exception of Plaintiffs’ Section 36(b) claim as it relates to Transfer Agent fees paid to an affiliate of the Managers. The case has been remanded to the District Court for further proceedings in accordance with the Summary Order.

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

6. Other matters

On or about May 30, 2006, John Halebian, a purported shareholder of Western Asset New York Tax Free Money Market Fund (prior to May 31, 2010, the Fund was known as Western Asset / Citi^SM New York Tax Free Reserves, and prior to June 1, 2009, as 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 a derivative claim 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 (the “Derivative Claim”). In the claims brought on behalf of the putative class of shareholders, the plaintiff alleges that the independent trustees violated the proxy

Western Asset Premium Liquid Reserves 2011 Annual Report 15

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 “Putative Class Claims”). 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, 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 filed an appeal in the U.S. Court of Appeals for the Second Circuit. On December 29, 2009, the U.S. Court of Appeals for the Second Circuit reserved judgment after determining that the propriety of the district court’s dismissal depended upon an unsettled question of Massachusetts state law regarding the statute governing derivative proceedings was better addressed by a Massachusetts court and certified the question to the Massachusetts Supreme Judicial Court.

On August 23, 2010, the Massachusetts Supreme Judicial Court answered the certified question, concluding that a derivative action must be dismissed under applicable state law following a corporation’s independent determination, made in good faith and after reasonable inquiry, that maintenance of the derivative proceeding is not in the best interests of the corporation, regardless whether the derivative complaint has been filed before or after the corporation’s rejection of the shareholder’s demand.

On May 6, 2011, the U.S. Court of Appeals for the Second Circuit affirmed the district court’s dismissal of the Putative Class Claims. With regard to the Derivative Claim, to which the certified question related and as to which the district court granted a motion to dismiss, the Second Circuit vacated the district court’s judgment and remanded with instructions to the court to convert the motion to dismiss to a motion for summary judgment, and to rule on that motion, after further discovery should the court determine that such further discovery is warranted.

16 Western Asset Premium Liquid Reserves 2011 Annual Report

Notes to financial statements (cont’d)

7. Other tax information

On December 22, 2010, President Obama signed into law the Regulated Investment Company Modernization Act of 2010 (the “Act”). The Act updates certain tax rules applicable to regulated investment companies (“RICs”). The various provisions of the Act will generally be effective for RICs with taxable years beginning after December 22, 2010. Additional information regarding the impact of the Act on the Fund, if any, will be contained within the relevant sections of the notes to the financial statements for the fiscal year ending August 31, 2012.

Western Asset Premium Liquid Reserves 2011 Annual Report 17

Report of independent registered public accounting firm

The Board of Trustees and Shareholders

Legg Mason Partners Premium Money Market Trust:

We have audited the accompanying statement of assets and liabilities of Western Asset Premium Liquid Reserves, a series of Legg Mason Partners Premium Money Market Trust, as of August 31, 2011, 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 verification of investments owned as of August 31, 2011 by examination of the underlying Liquid Reserves Portfolio. 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 Western Asset Premium Liquid Reserves as of August 31, 2011, 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

October 17, 2011

18 Western Asset Premium Liquid Reserves

Additional information (unaudited)

Information about Trustees and Officers

The business and affairs of Western Asset Premium Liquid Reserves (the “Fund”) are conducted by management under the supervision and subject to the direction of its Board of Trustees. The business address of each Trustee is c/o R. Jay Gerken, 620 Eighth Avenue, New York, New York 10018. Information pertaining to the Trustees and officers of the Fund is set forth below.

The Statement of Additional Information includes additional information about Trustees and is available, without charge, upon request by calling the Fund at 1-877-721-1926 or 1-212-857-8181.

Independent Trustees†:
Elliott J. Berv
Year of birth	1943
Position(s) with Trust	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) (2000 to 2005)
Number of funds in fund complex overseen by Trustee	58
Other board memberships held by Trustee during past five years	World Affairs Council (since 2009); formerly, Board Member, American Identity Corp. (doing business as Morpheus Technologies) (biometric information management) (2001 to 2008); formerly, Director, Lapoint Industries (industrial filter company) (2002 to 2007); formerly, Director, Alzheimer’s Association (New England Chapter) (1998 to 2008)
A. Benton Cocanougher
Year of birth	1938
Position(s) with Trust	Trustee
Term of office1 and length of time served2	Since 1991
Principal occupation(s) during past five years	Retired; Dean Emeritus and Professor Emeritus, Texas A&M University (since 2008); Interim Dean, George Bush School of Government and Public Service, Texas A&M University (2009 to 2010); A.P. Wiley Professor, Texas A&M University (2001 to 2008); Interim Chancellor, Texas A&M University System (2003 to 2004); Dean of the Mays Business School, Texas A&M University (1987 to 2001)
Number of funds in fund complex overseen by Trustee	58
Other board memberships held by Trustee during past five years	Formerly, Director, First American Bank, Texas (1994 to 1999); formerly, Director, Randle Foods, Inc. (1991 to 1999); formerly, Director, Petrolon, Inc. (engine lubrication products) (1991 to 1994)

Western Asset Premium Liquid Reserves 19

Independent Trustees cont’d
Jane F. Dasher
Year of birth	1949
Position(s) with Trust	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) (since 1997)
Number of funds in fund complex overseen by Trustee	58
Other board memberships held by Trustee during past five years	None
Mark T. Finn
Year of birth	1943
Position(s) with Trust	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); Chairman, Chief Executive Officer and Owner, Vantage Consulting Group, Inc. (investment management) (since 1988); Principal/Member, Balvan Partners (investment management) (2002 to 2009)
Number of funds in fund complex overseen by Trustee	58
Other board memberships held by Trustee during past five years	None
Rainer Greeven
Year of birth	1936
Position(s) with Trust	Trustee
Term of office1 and length of time served2	Since 1994
Principal occupation(s) during past five years	Attorney, Rainer Greeven PC (since 1998); President and Director, 62nd Street East Corporation (real estate) (since 2002)
Number of funds in fund complex overseen by Trustee	58
Other board memberships held by Trustee during past five years	Avica, Ltd (industrial and real estate holding) (since 2002)
Stephen R. Gross
Year of birth	1947
Position(s) with Trust	Trustee
Term of office1 and length of time served2	Since 1986
Principal occupation(s) during past five years	Chairman, HLB Gross Collins, P.C. (accounting and consulting firm) (since 1974); Executive Director of Business Builders Team, LLC (since 2005); formerly, Managing Director, Fountainhead Ventures, L.L.C. (technology accelerator) (1998 to 2003)
Number of funds in fund complex overseen by Trustee	58
Other board memberships held by Trustee during past five years	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)

20 Western Asset Premium Liquid Reserves

Additional information (unaudited) (cont’d)

Information about Trustees and Officers

Independent Trustees cont’d
Richard E. Hanson, Jr.
Year of birth	1941
Position(s) with Trust	Trustee
Term of office1 and length of time served2	Since 1985
Principal occupation(s) during past five years	Retired; formerly Headmaster, The New Atlanta Jewish Community High School, Atlanta, Georgia (1996 to 2000)
Number of funds in fund complex overseen by Trustee	58
Other board memberships held by Trustee during past five years	None
Diana R. Harrington
Year of birth	1940
Position(s) with Trust	Trustee
Term of office1 and length of time served2	Since 1992
Principal occupation(s) during past five years	Babson Distinguished Professor of Finance, Babson College (since 1992)
Number of funds in fund complex overseen by Trustee	58
Other board memberships held by Trustee during past five years	None
Susan M. Heilbron
Year of birth	1945
Position(s) with Trust	Trustee
Term of office1 and length of time served2	Since 1994
Principal occupation(s) during past five years	Retired; formerly, President, Lacey & Heilbron (communications consulting) (1990 to 2002); formerly, General Counsel and Executive Vice President, The Trump Organization (1986 to 1990); formerly, Senior Vice President, New York State Urban Development Corporation (1984 to 1986)
Number of funds in fund complex overseen by Trustee	58
Other board memberships held by Trustee during past five years	Formerly, Director, Lincoln Savings Bank, FSB (1991 to 1994); formerly, Director, Trump Shuttle, Inc. (air transportation) (1989 to 1990); formerly, Director, Alexander’s Inc. (department store) (1987 to 1990)
Susan B. Kerley
Year of birth	1951
Position(s) with Trust	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 funds in fund complex overseen by Trustee	58
Other board memberships held by Trustee during past five years	Director and Trustee (since 1990) and Chairman (since 2005) of various series of MainStay Family of Funds (66 funds)

Western Asset Premium Liquid Reserves 21

Independent Trustees cont’d
Alan G. Merten
Year of birth	1941
Position(s) with Trust	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 funds in fund complex overseen by Trustee	58
Other board memberships held by Trustee during past five years	Director, Cardinal Financial Corporation (since 2006); Trustee, First Potomac Realty Trust (since 2005); formerly, Director, Xybernaut Corporation (information technology) (2004 to 2006); formerly, Director, Digital Net Holdings, Inc. (2003 to 2004); formerly, Director, Comshare, Inc. (information technology) (1985 to 2003)
R. Richardson Pettit
Year of birth	1942
Position(s) with Trust	Trustee
Term of office1 and length of time served2	Since 1990
Principal occupation(s) during past five years	Retired; formerly, Duncan Professor of Finance, University of Houston (1977 to 2006); previous academic or management positions include: University of Washington, University of Pennsylvania and Purdue University
Number of funds in fund complex overseen by Trustee	58
Other board memberships held by Trustee during past five years	None
Interested Trustee and Officer:
R. Jay Gerken3
Year of birth	1951
Position(s) with Trust	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 & Co., LLC (“Legg Mason & Co.”) (since 2005); Officer and Trustee/Director of 159 funds associated with Legg Mason Partners Fund Advisor, LLC (“LMPFA”) or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006); President and Chief Executive Officer (“CEO”) of LMPFA (since 2006); President and CEO of Smith Barney Fund Management LLC (“SBFM”) and Citi Fund Management, Inc. (“CFM”) (formerly registered investment advisers) (since 2002); formerly, Chairman, President and CEO, Travelers Investment Adviser Inc. (prior to 2005)
Number of funds in fund complex overseen by Trustee	159
Other board memberships held by Trustee during past five years	Former Trustee, Consulting Group Capital Markets Funds (11 funds) (prior to 2006)

22 Western Asset Premium Liquid Reserves

Additional information (unaudited) (cont’d)

Information about Trustees and Officers

Additional Officers:
Ted P. Becker Legg Mason 620 Eighth Avenue, New York, NY 10018
Year of birth	1951
Position(s) with Trust	Chief Compliance Officer
Term of office1 and length of time served2	Since 2007
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 of Legg Mason & Co. (since 2005); Chief Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006)
Vanessa A. Williams Legg Mason 100 First Stamford Place, Stamford, CT 06902
Year of birth	1979
Position(s) with Trust	Chief Anti-Money Laundering Compliance Officer and Identity Theft Prevention Officer
Term of office1 and length of time served2	Since 2011
Principal occupation(s) during past five years	Identity Theft Prevention Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011); Chief Anti-Money Laundering Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011); formerly, Assistant Vice President and Senior Compliance Officer of Legg Mason & Co. (2008-2011); formerly, Compliance Analyst of Legg Mason & Co. (2006 to 2008) and Legg Mason & Co. predecessors (prior to 2006)
Robert I. Frenkel Legg Mason 100 First Stamford Place, Stamford, CT 06902
Year of birth	1954
Position(s) with Trust	Secretary and Chief Legal Officer
Term of office1 and length of time served2	Since 2007
Principal occupation(s) during past five years	Vice President and Deputy General Counsel of Legg Mason (since 2006); Managing Director and General Counsel of Global Mutual Funds for Legg Mason & Co. (since 2006) and Legg Mason & Co. predecessors (since 1994); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006)

Western Asset Premium Liquid Reserves 23

Additional Officers cont’d
Thomas C. Mandia Legg Mason 100 First Stamford Place, Stamford, CT 06902
Year of birth	1962
Position(s) with Trust	Assistant Secretary
Term of office1 and length of time served2	Since 2007
Principal occupation(s) during past five years	Managing Director and Deputy General Counsel of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005); Secretary of LMPFA (since 2006); Assistant Secretary of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006); Secretary to SBFM and CFM (since 2002)
Kaprel Ozsolak Legg Mason 55 Water Street, New York, NY 10041
Year of birth	1965
Position(s) with Trust	Chief Financial Officer
Term of office1 and length of time served2	Since 2010
Principal occupation(s) during past five years	Director of Legg Mason & Co. (since 2005); Chief Financial Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2010) and Legg Mason & Co. predecessors (prior to 2005); formerly, Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (prior to 2010) and Legg Mason & Co. predecessors (prior to 2005); formerly, Controller of certain mutual funds associated with Legg Mason & Co. predecessors (prior to 2004)
Jeanne M. Kelly Legg Mason 620 Eighth Avenue, New York, NY 10018
Year of birth	1951
Position(s) with Trust	Senior Vice President
Term of office1 and length of time served2	Since 2007
Principal occupation(s) during past five years	Senior Vice President of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2007); Senior Vice President of LMPFA (since 2006); Managing Director of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005)

† Trustees who are not “interested persons” of the Fund within the meaning of section 2(a)(19) of the 1940 Act.

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

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

³  Mr. Gerken is an “interested person” of the Fund, as defined in the 1940 Act, because of his position with LMPFA and/or certain of its affiliates.

24 Western Asset Premium Liquid Reserves

Important tax information (unaudited)

The following information is provided with respect to the distributions paid during the taxable year ended August 31, 2011:

Record date:	Daily	Daily
Payable date:	September 2010 through December 2010	January 2011 through August 2011
Interest from federal obligations	2.10%	3.59%

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

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

A portion of the ordinary income distributions paid monthly by the Fund represent Qualified Net Interest Income and Qualified Short-Term Gain eligible for exemption from U.S. withholding tax for nonresident aliens and foreign corporations.

Record date:	Daily		Daily		Daily
Payable date:	September 2010 — January 2011		February 2011 — July 2011		August 2011
Qualified net interest income and qualified short-term gain	75.00	%	60.00	%	30.00	%

Please retain this information for your records.

Liquid Reserves Portfolio 2011 Annual Report 25

Schedule of investments

August 31, 2011

Liquid Reserves Portfolio

Security	Rate			Maturity Date	Face Amount		Value
Short-Term Investments — 100.3%
Bank Notes — 1.1%
Bank of America N.A.		0.370	%	9/9/11	$	325,000,000	$	325,000,000
JPMorgan Chase Bank N.A.		0.280	%	5/18/12		100,000,000		100,000,000	(a)
Total Bank Notes								425,000,000
Certificates of Deposit — 27.7%
Bank of Montreal Chicago		0.070	%	9/2/11		250,000,000		250,000,000
Bank of Montreal Chicago		0.250	%	11/22/11		520,000,000		520,000,000
Bank of Nova Scotia		0.250	%	11/16/11		275,000,000		275,000,000
Bank of Nova Scotia		0.300	%	2/10/12		250,000,000		250,000,000
Bank of Nova Scotia		0.286	%	5/7/12		300,000,000		300,000,000	(a)
Bank of Nova Scotia		0.450	%	6/11/12		25,000,000		25,037,130	(a)
Barclays Bank PLC		0.672	%	1/19/12		270,000,000		270,000,000	(a)
Barclays Bank PLC		0.420	%	3/12/12		272,000,000		272,000,000
Barclays Bank PLC		0.420	%	3/12/12		210,000,000		210,000,000
BNP Paribas Finance Inc.		0.470	%	11/1/11		5,000,000		5,000,422
BNP Paribas NY Branch		0.557	%	11/15/11		115,000,000		115,000,000	(a)
BNP Paribas NY Branch		0.380	%	11/23/11		200,000,000		200,000,000
Branch Banking & Trust Co.		0.250	%	11/4/11		100,000,000		100,000,000
Canadian Imperial Bank		0.310	%	2/17/12		325,000,000		325,000,000	(a)
Citibank N.A.		0.170	%	9/22/11		250,000,000		250,000,000
Credit Agricole Corporate and Investment Bank		0.665	%	10/7/11		125,000,000		125,000,000	(a)
Credit Agricole Corporate and Investment Bank		0.470	%	11/1/11		15,000,000		15,001,267
Credit Suisse NY		0.319	%	2/7/12		210,000,000		210,000,000	(a)
Credit Suisse NY		0.296	%	3/30/12		250,000,000		250,000,000	(a)
Deutsche Bank AG NY		0.390	%	9/28/11		100,000,000		100,000,000
Deutsche Bank AG NY		0.548	%	2/21/12		125,000,000		125,000,000	(a)
Lloyds TSB Bank PLC		0.470	%	9/15/11		38,100,000		38,100,147
Lloyds TSB Bank PLC		0.390	%	1/25/12		125,000,000		125,000,000
Nordea Bank Finland PLC		0.230	%	12/15/11		125,000,000		125,000,000
Nordea Bank Finland PLC		0.310	%	1/17/12		200,000,000		200,000,000
Royal Bank of Canada		0.280	%	9/12/11		348,250,000		348,250,000	(a)
Royal Bank of Canada		0.350	%	2/21/12		150,000,000		150,000,000
Royal Bank of Canada		0.256	%	7/9/12		275,000,000		275,000,000	(a)
Royal Bank of Scotland		0.490	%	1/20/12		130,000,000		130,000,000
Skandinaviska Enskilda Banken AB		0.320	%	9/29/11		5,000,000		5,000,039
Societe Generale NY		0.753	%	1/30/12		250,000,000		250,000,000	(a)
Societe Generale NY		0.672	%	5/9/12		200,000,000		200,000,000	(a)

See Notes to Financial Statements.

26 Liquid Reserves Portfolio 2011 Annual Report

Schedule of investments (cont’d)

August 31, 2011

Liquid Reserves Portfolio

Security	Rate			Maturity Date	Face Amount		Value
Certificates of Deposit — continued
Standard Chartered Bank NY		0.385	%	10/11/11	$	200,000,000	$	200,001,109
Standard Chartered Bank NY		0.280	%	1/5/12		123,000,000		123,004,299
Standard Chartered Bank NY		0.320	%	1/23/12		125,000,000		125,000,000
Standard Chartered Bank NY		0.390	%	1/27/12		100,000,000		100,000,000
Standard Chartered Bank NY		0.446	%	4/6/12		171,000,000		171,000,000	(a)
State Street Bank & Trust Co.		0.140	%	10/3/11		500,000,000		500,000,000
Sumitomo Mitsui Banking Corp.		0.130	%	9/1/11		688,000,000		688,000,000
Sumitomo Mitsui Banking Corp.		0.150	%	9/7/11		500,000,000		500,000,000
Svenska Handelsbanken AB		0.330	%	9/30/11		200,000,000		200,000,000
Svenska Handelsbanken AB		0.295	%	10/28/11		106,750,000		106,752,528
Svenska Handelsbanken NY		0.310	%	1/18/12		125,000,000		125,000,000
Svenska Handelsbanken NY		0.380	%	2/3/12		100,000,000		100,000,000
Toronto Dominion Bank NY		0.287	%	1/12/12		250,000,000		250,000,000	(a)
Toronto Dominion Bank NY		0.350	%	2/23/12		450,000,000		450,000,000
UBS AG Stamford Branch		0.280	%	12/12/11		100,000,000		100,000,000
UBS AG Stamford Branch		0.345	%	1/27/12		250,000,000		250,005,130
UBS AG Stamford CT		0.621	%	9/28/11		125,000,000		125,000,000	(a)
UBS AG Stamford CT		0.426	%	4/5/12		380,000,000		380,000,000	(a)
Total Certificates of Deposit								10,532,152,071
Certificates of Deposit (Euro) — 2.5%
HSBC Bank PLC		0.350	%	2/13/12		425,000,000		425,009,723
ING Bank		0.450	%	9/9/11		100,000,000		100,000,000
ING Bank		0.600	%	10/20/11		285,000,000		285,003,862
National Australia Bank Ltd.		0.340	%	9/26/11		150,000,000		150,000,000
Total Certificates of Deposit (Euro)								960,013,585
Commercial Paper — 31.4%
ANZ National International Ltd.		0.343	%	10/11/11		300,000,000		300,000,000	(a)(b)
ASB Finance Ltd.		0.385	%	9/23/11		101,000,000		101,000,000	(a)(b)
ASB Finance Ltd.		0.347	%	3/15/12		100,000,000		99,997,308	(a)(b)
ASB Finance Ltd.		0.357	%	5/24/12		125,000,000		125,000,000	(a)(b)
Australia & New Zealand Banking Group Ltd.		0.300	%	9/7/11		15,000,000		14,999,250	(b)(c)
Australia & New Zealand Banking Group Ltd.		0.300	%	9/26/11		100,000,000		99,979,167	(b)(c)
Australia & New Zealand Banking Group Ltd.		0.240	%	12/16/11		100,000,000		99,929,334	(b)(c)
Australia & New Zealand Banking Group Ltd.		0.240	%	12/27/11		145,675,000		145,561,374	(b)(c)
Barclays U.S. Funding LLC		0.100	%	9/1/11		325,000,000		325,000,000	(c)
Barclays U.S. Funding LLC		0.100	%	9/1/11		100,000,000		100,000,000	(c)
Barclays U.S. Funding LLC		0.350	%	11/21/11		100,000,000		99,921,250	(c)

See Notes to Financial Statements.

Liquid Reserves Portfolio 2011 Annual Report 27

Liquid Reserves Portfolio

Security	Rate			Maturity Date	Face Amount		Value
Commercial Paper — continued
BNZ International Funding Ltd.		0.220	%	10/14/11	$	100,000,000	$	99,973,722	(b)(c)
BNZ International Funding Ltd.		0.346	%	11/10/11		130,000,000		129,997,495	(a)(b)
BNZ International Funding Ltd.		0.371	%	1/9/12		67,850,000		67,759,345	(b)(c)
BNZ International Funding Ltd.		0.371	%	1/18/12		97,000,000		96,861,425	(b)(c)
BNZ International Funding Ltd.		0.461	%	2/21/12		100,000,000		99,778,945	(b)(c)
BNZ International Funding Ltd.		0.451	%	2/22/12		150,000,000		149,673,750	(b)(c)
BP Capital Markets PLC		0.351	%	1/10/12		96,000,000		95,877,733	(b)(c)
Caisse D’Amortissement de la Dette Sociale		0.200	%	9/20/11		16,400,000		16,398,269	(b)(c)
Caisse D’Amortissement de la Dette Sociale		0.275	%	11/28/11		400,000,000		399,732,333	(b)(c)
Caisse D’Amortissement de la Dette Sociale		0.270	%	1/13/12		175,000,000		174,824,125	(b)(c)
Caisse D’Amortissement de la Dette Sociale		0.011	%	5/25/12		165,000,000		164,986,659	(a)(b)(c)
Commerzbank U.S. Finance		0.320	%	10/7/11		10,000,000		9,996,800	(c)
Commerzbank U.S. Finance		0.481	%	10/13/11		300,000,000		299,832,000	(c)
Commerzbank U.S. Finance		0.421	%	10/26/11		40,000,000		39,974,333	(c)
Commerzbank U.S. Finance		0.451	%	10/28/11		250,000,000		249,821,875	(c)
Commerzbank U.S. Finance		0.411	%	11/4/11		200,000,000		199,854,222	(c)
Commonwealth Bank of Australia		0.240	%	11/14/11		10,000,000		9,995,067	(b)(c)
Commonwealth Bank of Australia		0.300	%	12/8/11		150,000,000		150,000,000	(a)(b)
Commonwealth Bank of Australia		0.376	%	2/6/12		145,000,000		144,761,354	(b)(c)
Commonwealth Bank of Australia		0.279	%	6/8/12		100,000,000		100,000,000	(b)
Credit Agricole N.A. Inc.		0.381	%	11/7/11		100,000,000		99,929,278	(c)
Credit Suisse NY		0.250	%	1/11/12		250,000,000		249,770,833	(c)
Credit Suisse NY		0.310	%	1/27/12		150,000,000		149,808,833	(c)
Danske Corp.		0.004	%	9/21/11		100,000,000		99,976,945	(b)(c)
Danske Corp.		0.391	%	9/21/11		98,000,000		97,978,767	(b)(c)
DnB NOR Bank ASA		0.300	%	10/3/11		196,950,000		196,897,480	(b)(c)
DnB NOR Bank ASA		0.346	%	10/28/11		250,000,000		250,000,000	(a)(b)
DnB NOR Bank ASA		0.290	%	11/21/11		275,000,000		274,820,563	(b)(c)
DnB NOR Bank ASA		0.291	%	4/2/12		75,000,000		75,000,000	(a)(b)
General Electric Co.		0.060	%	9/2/11		400,000,000		399,999,333	(c)
General Electric Co.		0.001	%	9/8/11		400,000,000		399,995,335	(c)
Lloyds TSB Bank PLC		0.451	%	9/16/11		700,000,000		699,868,750	(c)
Lloyds TSB Bank PLC		0.411	%	10/27/11		4,250,000		4,247,289	(c)
Natexis Banques Populaires U.S.		0.461	%	10/14/11		300,000,000		299,835,166	(c)
Natexis Banques Populaires U.S.		0.461	%	1/3/12		225,000,000		224,643,500	(c)
Nordea North America Inc.		0.260	%	11/7/11		5,000,000		4,997,581	(c)
Nordea North America Inc.		0.220	%	12/12/11		200,000,000		199,875,333	(c)

See Notes to Financial Statements.

28 Liquid Reserves Portfolio 2011 Annual Report

Schedule of investments (cont’d)

August 31, 2011

Liquid Reserves Portfolio

Security	Rate			Maturity Date	Face Amount		Value
Commercial Paper — continued
Nordea North America Inc.		0.310	%	1/20/12	$	54,000,000	$	53,934,435	(c)
NRW Bank		0.220	%	12/14/11		100,000,000		99,936,445	(b)(c)
Rabobank USA Finance Corp.		0.220	%	12/9/11		100,000,000		99,939,500	(c)
Reckitt Benckiser Treasury		0.441	%	10/5/11		50,987,000		50,965,812	(b)(c)
Reckitt Benckiser Treasury		0.441	%	10/6/11		34,500,000		34,485,242	(b)(c)
Reckitt Benckiser Treasury		0.441	%	10/7/11		50,000,000		49,978,000	(b)(c)
Reckitt Benckiser Treasury		0.441	%	10/11/11		75,000,000		74,963,333	(b)(c)
Reckitt Benckiser Treasury		0.411	%	1/9/12		100,000,000		99,851,945	(b)(c)
Reckitt Benckiser Treasury		0.401	%	2/9/12		98,000,000		97,824,689	(b)(c)
Reckitt Benckiser Treasury		0.431	%	3/6/12		96,440,000		96,224,590	(b)(c)
Royal Bank of Scotland		0.003	%	11/9/11		100,000,000		99,940,583	(c)
Royal Bank of Scotland		0.531	%	2/6/12		500,000,000		498,836,944	(c)
Sanofi-Aventis SA		0.003	%	9/14/11		116,630,000		116,615,680	(b)(c)
Sanofi-Aventis SA		0.320	%	9/14/11		6,800,000		6,799,214	(b)(c)
Sanofi-Aventis SA		0.350	%	10/18/11		3,950,000		3,948,195	(b)(c)
Skandinaviska Enskilda Banken AG		0.536	%	9/23/11		200,000,000		199,934,611	(b)(c)
Skandinaviska Enskilda Banken AG		0.501	%	10/11/11		100,000,000		99,944,444	(b)(c)
Skandinaviska Enskilda Banken AG		0.431	%	11/1/11		10,000,000		9,992,714	(b)(c)
Skandinaviska Enskilda Banken AG		0.406	%	12/7/11		250,000,000		249,727,188	(b)(c)
Skandinaviska Enskilda Banken AG		0.406	%	12/8/11		197,500,000		197,282,256	(b)(c)
Skandinaviska Enskilda Banken AG		0.401	%	12/19/11		125,000,000		124,848,611	(b)(c)
Standard Chartered Bank		0.522	%	11/10/11		115,000,000		114,883,722	(b)(c)
Svenska Handlesbanken AB		0.300	%	11/15/11		141,300,000		141,211,688	(b)(c)
Swedbank		0.200	%	9/1/11		15,000,000		15,000,000	(c)
Swedbank		0.396	%	12/1/11		125,000,000		124,875,191	(c)
Swedbank		0.396	%	12/5/11		100,000,000		99,895,764	(c)
Swedbank		0.441	%	12/16/11		150,000,000		149,805,666	(c)
Swedbank		0.421	%	1/6/12		142,800,000		142,588,418	(c)
Swedbank		0.004	%	1/9/12		100,000,000		99,851,944	(c)
Swedbank		0.411	%	1/9/12		50,000,000		49,925,972	(c)
Swedbank		0.421	%	1/20/12		100,000,000		99,835,500	(c)
Toronto Dominion Holdings		0.331	%	9/9/11		148,700,000		148,689,095	(b)(c)
UBS Finance Delaware LLC		0.315	%	9/1/11		10,000,000		10,000,000	(c)
Westpac Banking Corp.		0.280	%	1/6/12		40,000,000		39,960,489	(b)(c)
Westpac Banking Corp.		0.280	%	1/9/12		49,163,000		49,113,291	(b)(c)
Westpac Banking Corp.		0.361	%	2/3/12		348,000,000		347,460,600	(b)(c)
Total Commercial Paper								11,938,203,892

See Notes to Financial Statements.

Liquid Reserves Portfolio 2011 Annual Report 29

Liquid Reserves Portfolio

Security	Rate			Maturity Date	Face Amount		Value
Corporate Bonds & Notes — 5.5%
Commonwealth Bank of Australia		0.402	%	6/27/12	$	100,000,000	$	100,000,000	(a)(b)
ING Bank NV		0.766	%	2/2/12		164,500,000		164,500,000	(a)(b)
JPMorgan Chase Bank N.A.		0.253	%	1/20/12		362,000,000		362,000,000	(a)
Metropolitan Life Global Funding I		0.374	%	7/6/12		200,000,000		200,000,000	(a)(b)
New York Life Global Funding		0.252	%	12/1/11		100,000,000		100,000,000	(a)(b)
Nordea Bank AB		0.933	%	3/16/12		300,000,000		300,000,000	(a)(b)
Rabobank Nederland		0.307	%	10/17/11		132,500,000		132,500,000	(a)(b)
Rabobank Nederland		0.430	%	9/14/12		225,000,000		225,000,000	(a)(b)
Svenska Handelsbanken AB		0.372	%	2/10/12		150,000,000		150,000,000	(a)(b)
Westpac Banking Corp.		0.403	%	11/28/11		105,000,000		105,000,000	(a)
Westpac Banking Corp.		0.005	%	5/7/12		250,000,000		249,995,007	(a)(b)(c)
Total Corporate Bonds & Notes								2,088,995,007
FDIC Backed Bonds & Notes — 0.5%
Barclays Bank PLC, Senior Notes		1.162	%	12/19/11		100,000,000		100,278,148	(a)
Royal Bank of Scotland PLC, Senior Notes		0.871	%	12/2/11		100,000,000		100,165,501	(a)
Total FDIC Backed Bonds & Notes								200,443,649
Medium-Term Notes — 0.8%
American Honda Finance		0.302	%	12/8/11		250,000,000		250,000,000	(a)(b)
Rabobank Nederland		0.396	%	9/28/11		50,000,000		50,008,259	(a)(b)
Total Medium-Term Notes								300,008,259
Time Deposits — 19.0%
Bank of America N.A.		0.010	%	9/1/11		380,280,000		380,280,000
Bank of America Toronto		0.040	%	9/1/11		500,000,000		500,000,000
Bank of Montreal		0.030	%	9/1/11		100,000,000		100,000,000
Bank of Nova Scotia		0.070	%	9/1/11		450,000,000		450,000,000	(b)
Bank of Tokyo Mitsubishi		0.080	%	9/1/11		850,000,000		850,000,000
CBIC Grand Cayman		0.030	%	9/1/11		200,000,000		200,000,000
Citibank Canada Toronto Branch		0.110	%	9/1/11		300,000,000		300,000,000
Citibank Nassau		0.100	%	9/1/11		500,000,000		500,000,000
DnB NOR Bank ASA		0.090	%	9/1/11		500,000,000		500,000,000
Lloyds TSB Bank PLC		0.090	%	9/1/11		405,000,000		405,000,000
National Australia Bank Grand Cayman		0.060	%	9/1/11		500,000,000		500,000,000
National Bank of Canada		0.040	%	9/1/11		495,477,000		495,477,000
Royal Bank of Canada NY		0.040	%	9/1/11		525,000,000		525,000,000
Royal Bank of Scotland Cayman		0.100	%	9/1/11		551,893,000		551,893,000
Svenska Handelsbanken Grand Cayman		0.090	%	9/1/11		475,000,000		475,000,000
Swedbank Grand Cayman		0.100	%	9/1/11		505,000,000		505,000,000
Total Time Deposits								7,237,650,000

See Notes to Financial Statements.

30 Liquid Reserves Portfolio 2011 Annual Report

Schedule of investments (cont’d)

August 31, 2011

Liquid Reserves Portfolio

Security	Rate			Maturity Date	Face Amount		Value
U.S. Government Agencies — 2.3%
Federal Farm Credit Bank (FFCB), Notes		0.500	%	5/2/12	$	15,000,000	$	15,028,933	(a)
Federal Home Loan Bank (FHLB), Notes		0.490	%	9/21/12		130,000,000		130,000,000
Federal Home Loan Bank (FHLB), Notes		0.280	%	2/25/13		225,000,000		225,000,000	(a)
Federal Home Loan Mortgage Corp. (FHLMC), Discount Notes		0.110	%	11/8/11		25,000,000		24,994,806	(c)
Federal Home Loan Mortgage Corp. (FHLMC), Discount Notes		0.131	%	12/12/11		25,000,000		24,990,721	(c)
Federal National Mortgage Association (FNMA), Discount Notes		0.150	%	10/17/11		200,000,000		199,961,667	(c)
Federal National Mortgage Association (FNMA), Discount Notes		0.140	%	12/14/11		20,000,000		19,991,911	(c)
Federal National Mortgage Association (FNMA), Notes		0.209	%	7/26/12		140,000,000		139,993,738	(a)
Federal National Mortgage Association (FNMA), Notes		0.280	%	11/23/12		100,000,000		100,074,482	(a)
Total U.S. Government Agencies								880,036,258
U.S. Treasury Bills — 0.4%
U.S. Treasury Bills		0.100	%	11/25/11		150,000,000		149,964,584	(c)
U.S. Treasury Notes — 2.5%
U.S. Treasury Notes		4.500	%	9/30/11		375,000,000		376,252,031
U.S. Treasury Notes		1.375	%	2/15/12		204,490,000		205,442,031
U.S. Treasury Notes		4.500	%	4/30/12		10,000,000		10,283,670
U.S. Treasury Notes		0.625	%	6/30/12		100,000,000		100,337,662
U.S. Treasury Notes		1.750	%	8/15/12		250,000,000		253,584,636
Total U.S. Treasury Notes								945,900,030
Repurchase Agreements — 6.6%
Barclays Capital Inc. tri-party repurchase agreement dated 8/31/11; Proceeds at maturity - $2,000,001,667; (Fully collateralized by various U.S. government obligations, 0.500% to 2.375% due 5/31/13 to 6/30/18; Market value — $2,040,000,001)		0.030	%	9/1/11		2,000,000,000		2,000,000,000
RBS Securities Inc. tri-party repurchase agreement dated 8/31/11; Proceeds at maturity - $500,000,972; (Fully collateralized by various U.S. government and agency obligations, 0.000% to 2.750% due 11/02/11 to 12/29/20; Market value — $510,001,410)		0.070	%	9/1/11		500,000,000		500,000,000
Total Repurchase Agreements								2,500,000,000
Total Investments — 100.3 % (Cost — $38,158,367,335#)								38,158,367,335
Liabilities in Excess of Other Assets — (0.3)%								(118,150,185	)
Total Net Assets — 100.0%							$	38,040,217,150

See Notes to Financial Statements.

Liquid Reserves Portfolio 2011 Annual Report 31

Liquid Reserves Portfolio

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

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

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

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

See Notes to Financial Statements.

32 Liquid Reserves Portfolio 2011 Annual Report

Statement of assets and liabilities

August 31, 2011

Assets:
Investments, at value	$	38,158,367,335
Cash		341
Interest receivable		15,376,565
Total Assets		38,173,744,241
Liabilities:
Payable for securities purchased		130,000,000
Investment management fee payable		2,887,758
Accrued expenses		639,333
Total Liabilities		133,527,091
Total Net Assets	$	38,040,217,150
Represented by:
Paid-in-Capital	$	38,040,217,150

See Notes to Financial Statements.

Liquid Reserves Portfolio 2011 Annual Report 33

Statement of operations

For the Year Ended August 31, 2011

Investment Income:
Interest	$	124,610,828
Expenses:
Investment management fee (Note 2)		34,074,673
Fund accounting fees		1,238,248
Trustees’ fees		590,279
Legal fees		510,872
Custody fees		149,500
Audit and tax		43,501
Miscellaneous expenses		40,929
Total Expenses		36,648,002
Less: Fee waivers and/or expense reimbursements (Note 2)		(2,573,328)
Net Expenses		34,074,674
Net Investment Income		90,536,154
Net Realized Gain on Investments		4,318,278
Increase in Net Assets From Operations	$	94,854,432

See Notes to Financial Statements.

34 Liquid Reserves Portfolio 2011 Annual Report

Statements of changes in net assets

For the Years Ended August 31,	2011		2010
Operations:
Net investment income	$	90,536,154	$	103,057,554
Net realized gain		4,318,278		3,445,207
Increase in Net Assets From Operations		94,854,432		106,502,761
Capital Transactions:
Proceeds from contributions		97,486,330,777		82,457,700,824
Value of withdrawals		(95,216,376,506)		(81,686,180,340)
Increase in Net Assets From Capital Transactions		2,269,954,271		771,520,484
Increase in Net Assets		2,364,808,703		878,023,245
Net Assets:
Beginning of year		35,675,408,447		34,797,385,202
End of year	$	38,040,217,150	$	35,675,408,447

See Notes to Financial Statements.

Liquid Reserves Portfolio 2011 Annual Report 35

Financial highlights

For the years ended August 31:
	2011			2010			2009			2008			2007
Net assets, end of year (millions)		$38,040			$35,675			$34,797			$54,372			$50,645
Total return1		0.27	%		0.28	%		1.57	%2		4.00	%2		5.40	%
Ratios to average net assets:
Gross expenses		0.11	%		0.10	%		0.11	%		0.11	%		0.10	%3
Net expenses4,5,6		0.10			0.10			0.10			0.08			0.09	3
Net investment income		0.27			0.27			1.67			3.97			5.26

¹  Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

²  If the Portfolio had not entered into the Letter and Capital Support Agreements related to certain investments in structured securities, the total return would have been lower.

³  Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Portfolio during the period. Without these fees, the gross and net expense ratios would have been the same.

⁴  As a result of a voluntary expense limitation, the ratio of expenses, other than brokerage, interest, taxes and extraordinary expenses and acquired fund fees and expenses, to average net assets of the Portfolio will not exceed 0.10%.

⁵  Reflects fee waivers and/or expense reimbursements.

⁶  The impact of compensating balance arrangements, if any, was less than 0.01%.

See Notes to Financial Statements.

36 Liquid Reserves Portfolio 2011 Annual Report

Notes to financial statements

1. Organization and significant accounting policies

Liquid Reserves Portfolio (the “Portfolio”) is a separate diversified investment series of Master Portfolio Trust (the “Trust”). The Trust, a Maryland statutory trust, is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. The Declaration of Trust permits the Trustees to issue beneficial interests in the Portfolio. At August 31, 2011, all investors in the Portfolio were funds advised or administered by the manager of the Portfolio and/or its affiliates.

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

(a) Investment valuation. In accordance with Rule 2a-7 under the 1940 Act, money market instruments are valued at amortized cost, which approximates market value. This method involves valuing portfolio securities at their cost and thereafter assuming a constant amortization to maturity of any discount or premium. The Portfolio’s use of amortized cost is subject to its compliance with certain conditions as specified by Rule 2a-7 under the 1940 Act.

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

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

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

Ÿ Level 3 — significant unobservable inputs (including the Portfolio’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 Portfolio uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.

Liquid Reserves Portfolio 2011 Annual Report 37

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

ASSETS
Description	Quoted Prices (Level 1)		Other Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Short-term investments†		—	$	38,158,367,335		—	$	38,158,367,335

† See Schedule of Investments for additional detailed categorizations.

(b) Repurchase agreements. The Portfolio may enter into repurchase agreements with institutions that its investment adviser has determined are creditworthy. Each repurchase agreement is recorded at cost. Under the terms of a typical repurchase agreement, the Portfolio acquires a debt security subject to an obligation of the seller to repurchase, and of the Portfolio to resell, the security at an agreed-upon price and time, thereby determining the yield during the Portfolio’s holding period. When entering into repurchase agreements, it is the Portfolio’s policy that its custodian or a third party custodian, acting on the Portfolio’s behalf, take possession of the underlying collateral securities, the market value of which, at all times, at least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction maturity exceeds one business day, the value of the collateral is marked-to-market and measured against the value of the agreement in an effort to ensure the adequacy of the collateral.

If the counterparty defaults, the Portfolio generally has the right to use the collateral to satisfy the terms of the repurchase transaction. However, if the market value of the collateral declines during the period in which the Portfolio seeks to assert its rights or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Portfolio may be delayed or limited.

(c) Interest income and expenses. Interest income consists of interest accrued and discount earned (including both original issue and market discount adjusted for amortization of premium) on the investments of the Portfolio. Expenses of the Portfolio are accrued daily. The Portfolio bears all costs of its operations other than expenses specifically assumed by the manager.

(d) Method of allocation. Net investment income of the Portfolio is allocated pro rata, based on respective ownership interests, among the Fund and other investors in the Portfolio (the “Holders”) at the time of such determination. Gross realized gains and/or losses of the Portfolio are allocated to the Holders in a manner such that, the net asset values per share of each Holder, after each such allocation is closer to the total of all Holders’ net asset values divided by the aggregate number of shares outstanding for all Holders.

(e) Credit and market risk. Investments in securities that are collateralized by residential real estate mortgages are subject to certain credit and liquidity risks. When market conditions result in an increase in default rates of the underlying mortgages and foreclosure values of underlying real estate properties are materially below the outstanding amount of these underlying mortgages, collection of the full amount of

38 Liquid Reserves Portfolio 2011 Annual Report

Notes to financial statements (cont’d)

accrued interest and principal on these investments may be doubtful. Such market conditions may significantly impair the value and liquidity of these investments and may result in a lack of correlation between their credit ratings and values.

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

(g) Income taxes. The Portfolio is classified as a partnership for federal income tax purposes. As such, each investor in the Portfolio is treated as owner of its proportionate share of the net assets, income, expenses and realized gains and losses of the Portfolio. Therefore, no federal income tax provision is required. It is intended that the Portfolio’s assets will be managed so an investor in the Portfolio can satisfy the requirements of Subchapter M of the Internal Revenue Code.

Management has analyzed the Portfolio’s uncertain tax positions taken on income tax returns for all open tax years and has concluded that as of August 31, 2011, no provision for income tax is required in the Portfolio’s financial statements. The Portfolio’s federal and state income tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by Internal Revenue Service and state departments of revenue.

(h) Other. Purchases, maturities and sales of money market instruments are accounted for on the date of the transaction. Realized gains and losses are calculated on the identified cost basis.

2. Investment management agreement and other transactions with affiliates

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Portfolio’s investment manager and Western Asset Management Company (“Western Asset”) is the Portfolio’s subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).

Under the investment management agreement, the Portfolio pays an investment management fee, calculated daily and paid monthly, at an annual rate of 0.10% of the Portfolio’s average daily net assets.

LMPFA provides administrative and certain oversight services to the Portfolio. LMPFA delegates to the subadviser the day-to-day portfolio management of the Portfolio. For its services, LMPFA pays Western Asset 70% of the net management fee it receives from the Portfolio.

During the year ended August 31, 2011, the Portfolio had a voluntary expense limitation in place of 0.10% of the Portfolio’s average daily net assets. This arrangement may be reduced or terminated under certain circumstances.

During the year ended August 31, 2011, fees waived and/or expenses reimbursed amounted to $2,573,328.

The investment manager is permitted to recapture amounts previously waived or reimbursed to the Portfolio during the same fiscal year if the Portfolio’s total annual

Liquid Reserves Portfolio 2011 Annual Report 39

operating expenses have fallen to a level below the expense limitation (“expense cap”) in effect at the time the fees were earned or the expense incurred. In no case will the investment manager recapture any amount that would result, on any particular business day of the Portfolio, in the Portfolio’s total annual operating expenses exceeding the expense cap or any other lower limit then in effect.

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

3. Derivative instruments and hedging activities

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

During the year ended August 31, 2011, the Portfolio did not invest in derivative instruments and does not have any intention to do so in the future.

4. Legal matters

Beginning in May 2004, class action lawsuits alleging violations of the federal securities laws were filed against Citigroup Global Markets Inc. (“CGM”), a former distributor of the Fund, and other affiliated funds (collectively, the “Funds”) and a number of its then affiliates, including 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 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.

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

40 Liquid Reserves Portfolio 2011 Annual Report

Notes to financial statements (cont’d)

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, 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. The appeal was fully briefed and oral argument before the U.S. Court of Appeals for the Second Circuit took place on March 5, 2009. On June 9, 2011, the Court of Appeals issued a Summary Order affirming the District Court’s dismissal of all claims with the exception of Plaintiffs’ Section 36(b) claim as it relates to Transfer Agent fees paid to an affiliate of the Managers. The case has been remanded to the District Court for further proceedings in accordance with the Summary Order.

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

5. Other matters

On or about May 30, 2006, John Halebian, a purported shareholder of Western Asset New York Tax Free Money Market Fund (prior to May 31, 2010, the Fund was known as Western Asset / Citi^SM New York Tax Free Reserves, and prior to June 1, 2009, as 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 a derivative claim 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 (the “Derivative Claim”). In the claims brought on behalf of the putative class

Liquid Reserves Portfolio 2011 Annual Report 41

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 “Putative Class Claims”). 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, 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 filed an appeal in the U.S. Court of Appeals for the Second Circuit. On December 29, 2009, the U.S. Court of Appeals for the Second Circuit reserved judgment after determining that the propriety of the district court’s dismissal depended upon an unsettled question of Massachusetts state law regarding the statute governing derivative proceedings was better addressed by a Massachusetts court and certified the question to the Massachusetts Supreme Judicial Court.

On August 23, 2010, the Massachusetts Supreme Judicial Court answered the certified question, concluding that a derivative action must be dismissed under applicable state law following a corporation’s independent determination, made in good faith and after reasonable inquiry, that maintenance of the derivative proceeding is not in the best interests of the corporation, regardless whether the derivative complaint has been filed before or after the corporation’s rejection of the shareholder’s demand.

On May 6, 2011, the U.S. Court of Appeals for the Second Circuit affirmed the district court’s dismissal of the Putative Class Claims. With regard to the Derivative Claim, to which the certified question related and as to which the district court granted a motion to dismiss, the Second Circuit vacated the district court’s judgment and remanded with instructions to the court to convert the motion to dismiss to a motion for summary judgment, and to rule on that motion, after further discovery should the court determine that such further discovery is warranted.

42 Liquid Reserves Portfolio 2011 Annual Report

Report of independent registered public accounting firm

The Board of Trustees and Investors

Master Portfolio Trust:

We have audited the accompanying statement of assets and liabilities of Liquid Reserves Portfolio, a series of Master Portfolio Trust, including the schedule of investments as of August 31, 2011, 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 Portfolio’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 August 31, 2011, by correspondence with the custodian and brokers or by other 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 Liquid Reserves Portfolio as of August 31, 2011, 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

October 17, 2011

Liquid Reserves Portfolio 43

Additional information (unaudited)

The Trustees and Officers of the Fund also serve as the Trustees and Officers of the Portfolio. Information about the Trustees and Officers of the Fund can be found on pages 18 through 23 of this report.

Western Asset

Premium Liquid Reserves

Trustees

Elliott J. Berv

A. Benton Cocanougher

Jane F. Dasher

Mark T. Finn

R. Jay Gerken

Chairman

Rainer Greeven

Stephen R. Gross

Richard E. Hanson, Jr.

Diana R. Harrington

Susan M. Heilbron

Susan B. Kerley

Alan G. Merten

R. Richardson Pettit

Investment manager

Legg Mason Partners Fund Advisor, LLC

Subadviser

Western Asset Management Company

Distributor

Legg Mason Investor Services, LLC

Custodian

State Street Bank and Trust Company

Transfer agent

Boston Financial Data Services, Inc.

2000 Crown Colony Drive

Quincy, MA 02169

Independent registered public accounting firm

KPMG LLP

345 Park Avenue

New York, NY 10154

Western Asset Premium Liquid Reserves

The Fund is a separate investment series of Legg Mason Partners Premium Money Market Trust, a Maryland statutory trust.

Western Asset Premium Liquid Reserves

Legg Mason Funds

55 Water Street

New York, NY 10041

The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s website at www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington D.C., and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. To obtain information on Form N-Q, shareholders can call the Fund at 1-877-721-1926 or 1-212-857-8181.

Information on how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling the Fund at 1-877-721-1926 or 1-212-857-8181, (2) on the Fund’s website at www.leggmason.com/individualinvestors and (3) on the SEC’s website at www.sec.gov.

This report is submitted for the general information of the shareholders of Western Asset Premium Liquid Reserves. 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 objective, 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

©2011 Legg Mason Investor Services, LLC

Member FINRA, SIPC

Legg Mason Funds Privacy and Security Notice

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

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

The Type of Nonpublic Personal Information the Funds Collect About You

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

Ÿ Personal information included on applications or other forms;

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

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

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

How the Funds Use Nonpublic Personal Information About You

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

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

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

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

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

NOT PART OF THE ANNUAL REPORT

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

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

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

Keeping You Informed of the Funds’ Privacy and Security Practices

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

The Funds’ Security Practices

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

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

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

Revised April 2011

NOT PART OF THE ANNUAL REPORT

www.leggmason.com/individualinvestors

©2011 Legg Mason Investor Services, LLC Member FINRA, SIPC

FDXX010348 10/11 SR11-1488

ITEM 2. CODE OF ETHICS.

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

ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.

The Board of Trustees of the registrant has determined that Stephen R. Gross the Chairman of the Board’s Audit Committee and Jane F. Dasher, possess the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as “audit committee financial experts,” and have designated Mr. Gross and Ms. Dasher as the Audit Committee’s financial experts. Mr. Gross and Ms. Dasher are “independent” Trustees pursuant to paragraph (a) (2) of Item 3 to Form N-CSR.

ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

a) Audit Fees. The aggregate fees billed in the last two fiscal years ending August 31, 2010 and August 31, 2011 (the “Reporting Periods”) for professional services rendered by the Registrant’s principal accountant (the “Auditor”) for the audit of the Registrant’s annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $34,900in 2010 and $70,400 in 2011.

b) Audit-Related Fees. The aggregate fees billed in the Reporting Period for assurance and related services by the Auditor that are reasonably related to the performance of the Registrant’s financial statements were $10,000 in 2010 and $0 in 2011. These services consisted of procedures performed in connection with the Re-domiciliation of the various reviews of Prospectus supplements, and consent issuances related to the N-1A filings for the Legg Mason Partners Premium Money Market Trust.

In addition, there were no Audit-Related Fees billed in the Reporting Period for assurance and related services by the Auditor to the Registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the Legg Mason Partners Premium Money Market Trust (“service affiliates”), that were reasonably related to the performance of the annual audit of the service affiliates. Accordingly, there were no such fees that required pre-approval by the Audit Committee for the Reporting Periods.

c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning (“Tax Services”) were $5,600 in 2010 and $5,600 in 2011. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, and (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held.

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

d) All Other Fees. There were no other fees billed in the Reporting Periods for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) of this Item for the Legg Mason Partners Premium Money Market Trust.

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

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

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

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

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

(2) For the Legg Mason Partners Premium Money Market Trust, the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees were 100% and 100% for 2010 and 2011; Tax Fees were 100% and 100% for 2010 and 2011; and Other Fees were 100% and 100% for 2010 and 2011.

(f) N/A

(g) Non-audit fees billed by the Auditor for services rendered to Legg Mason Partners Premium Money Market Trust, LMPFA and any entity controlling, controlled by, or under common control with LMPFA that provides ongoing services to Legg Mason Partners Premium Money Market Trust during the reporting period were $0 in 2011.

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

ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.

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

Elliott J. Berv

A. Benton Cocanougher

Jane F. Dasher

Mark T. Finn

Rainer Greeven

Stephen R. Gross

Richard E. Hanson, Jr.

Diana R. Harrington

Susan M. Heilbron

Susan B. Kerley

Alan G. Merten

R. Richardson Pettit

b) Not applicable.

ITEM 6. SCHEDULE OF INVESTMENTS.

Included herein under Item 1.

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

Not applicable.

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

Not applicable.

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

Not applicable.

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

Not applicable.

ITEM 11. CONTROLS AND PROCEDURES.

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

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

ITEM 12. EXHIBITS.

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

Exhibit 99.CODE ETH

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

Exhibit 99.CERT

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

Exhibit 99.906CERT

SIGNATURES

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

Legg Mason Partners Premium Money Market Trust
By:	/s/ R. Jay Gerken
	(R. Jay Gerken)
	Chief Executive Officer of
	Legg Mason Partners Premium Money Market Trust
Date:	October 27, 2011

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

By:	/s/ R. Jay Gerken
	(R. Jay Gerken)
	Chief Executive Officer of
	Legg Mason Partners Premium Money Market Trust
Date:	October 27, 2011
By:	/s/ Kaprel Ozsolk
	(Kaprel Ozsolak)
	Chief Financial Officer
	Legg Mason Partners Premium Money Market Trust
Date:	October 27, 2011