PROSPECTUS AND SAI OF WA INTERMEDIATE PLUS BOND PORTFOLIO DATED APRIL 30, 2010

EX-99.17B 8 dex9917b.htm PROSPECTUS AND SAI OF WA INTERMEDIATE PLUS BOND PORTFOLIO DATED APRIL 30, 2010 PROSPECTUS AND SAI OF WA INTERMEDIATE PLUS BOND PORTFOLIO DATED APRIL 30, 2010

Exhibit 17(b)

WESTERN ASSET FUNDS, INC.

SEPTEMBER 9, 2010

SUPPLEMENT TO SUMMARY PROSPECTUS, PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION, EACH DATED APRIL 30, 2010, OF

WESTERN ASSET INTERMEDIATE PLUS BOND PORTFOLIO

Summary Prospectus

The last sentence of the legend on the cover of the fund’s Summary Prospectus is deleted and replaced with the following:

The fund’s Prospectus, dated April 30, 2010, as supplemented on June 14, 2010, August 20, 2010 and September 9, 2010 and as may be amended or further supplemented, the fund’s statement of additional information, dated April 30, 2010, as supplemented on May 21, 2010, August 20, 2010 and September 9, 2010 and as may be amended or further supplemented, and the independent registered public accounting firm’s report and financial statements in the fund’s annual report to shareholders, dated December 31, 2009, are incorporated by reference into this Summary Prospectus.

Summary Prospectus, Prospectus and Statement of Additional Information

The Board of Directors of Western Asset Funds, Inc. (“Board”) has approved an Agreement and Plan of Reorganization (“Plan”) with respect to its series, Western Asset Intermediate Plus Bond Portfolio (“Fund”). Under the Plan, the Fund would be reorganized into Western Asset Intermediate Bond Portfolio (“WA Intermediate”), a series of Western Asset Funds, Inc.

The Plan is subject to the approval of shareholders of the Fund. If the Plan is approved, shareholders of the Fund will become shareholders of WA Intermediate. The Plan provides for Class I shareholders of the Fund to receive Class I shares of WA Intermediate equal in aggregate value to their Fund shares on the date of the reorganization. The Plan also provides for Class IS shareholders of the Fund to receive Class IS shares of WA Intermediate equal in aggregate value to their Fund shares on the date of the reorganization. The Fund would cease operations shortly thereafter. Under the Plan, the Board may terminate the proposed reorganization at any time prior to the closing date if, in the opinion of the Board, circumstances develop that make proceeding with the proposed reorganization inadvisable.

You may continue to buy and redeem shares of the Fund prior to the closing of the proposed reorganization. However, if the Plan is approved, sales of shares of the Fund as well as incoming exchanges are expected to be suspended approximately two days prior to the consummation of the proposed reorganization. Redemptions of shares will be allowed up until the consummation of the proposed reorganization.

A shareholder meeting date of December 10, 2010 has been set for shareholders of record of the Fund as of October 15, 2010 to vote on the Plan. If the Plan is approved, it is anticipated that the proposed reorganization will be consummated by the end of December 2010. It is expected that additional details about the proposed reorganization will be sent to shareholders in November 2010. Please read the proxy materials carefully, as they contain a fuller description of the Plan, the proposed reorganization, and WA Intermediate.

This supplement should be retained with your Prospectus for future reference.

WASX012924

WESTERN ASSET FUNDS, INC.

SUPPLEMENT DATED AUGUST 20, 2010

TO THE STATEMENT OF ADDITIONAL INFORMATION DATED APRIL 30, 2010 OF

WESTERN ASSET CORE BOND PORTFOLIO

WESTERN ASSET CORE PLUS BOND PORTFOLIO

The following replaces corresponding information in the Statement of Additional information under the section entitled “Management of the Funds” and the sub-sections thereunder entitled “Other Accounts Managed by Portfolio Managers”:

Other Accounts Managed By Portfolio Managers (as of December 31, 2009)

The table below identifies, for each named portfolio manager, the number of accounts (other than the fund with respect to which information is provided) for which the portfolio manager has day-to-day management responsibilities and the total assets in such accounts, within each of the following categories: registered investment companies, other pooled investment vehicles and other accounts. For each category, the number of accounts and total assets in the accounts where fees are based on performance are also indicated.

Data for other investment companies is shown based on the specific portfolio managers that are named in the disclosure documents for other investment companies. Data for private pooled investment vehicles and other separate accounts is reported based on Western Asset’s practice of naming a particular individual to maintain oversight responsibility for each account. Where the named individual has been assigned primary responsibility for oversight of a private pooled investment vehicle or separate account, that account has been allocated to that individual for disclosure purposes, but not other portfolio managers that may be involved in managing that account.


Type of Account	Number of Accounts Managed	Total Assets Managed		Number of Accounts Managed for which Advisory Fee is Performance-Based	Assets managed for which Advisory Fee is Performance- Based
S. Kenneth Leech As of December 31, 2009
Registered Investment Companies	100	$	170,731,748,244	0	$	0
Other pooled investment vehicle	229	$	107,675,203,132	6	$	1,110,254,296
Other accounts	832	$	190,201,806,337	93	$	24,235,576,277

Stephen A. Walsh As of December 31, 2009
Registered Investment Companies	100	$	170,731,748,244	0	$	0
Other pooled investment vehicle	229	$	107,675,203,132	6	$	1,110,254,296
Other accounts	832	$	190,201,806,337	93	$	24,235,576,277

Carl L. Eichstaedt As of December 31, 2009
Registered Investment Companies	23	$	10,624,420,106	0	$	0
Other pooled investment vehicle	3	$	161,287,294	—	$	—
Other accounts	64	$	15,325,146,919	5	$	1,455,076,868

Paul Wynn As of December 31, 2009
Registered Investment Companies	4	$	1,328,700,545	0	$	0
Other pooled investment vehicle	4	$	382,095,900	—	$	—
Other accounts	27	$	8,934,496,942	3	$	601,999,711


Type of Account	Number of Accounts Managed	Total Assets Managed		Number of Accounts Managed for which Advisory Fee is Performance-Based	Assets managed for which Advisory Fee is Performance- Based
Peter H. Stutz As of December 31, 2009
Registered Investment Companies	4	$	1,328,700,545	0	$	0
Other pooled investment vehicle	1	$	4,209,159	—	$	—
Other accounts	13	$	2,541,650,057	2	$	448,313,963

Michael C. Buchanan As of December 31, 2009
Registered Investment Companies	49	$	20,971,654,173	0	$	0
Other pooled investment vehicle	6	$	3,347,870,147	—		—
Other accounts	13	$	1,634,922,124	—		—

Mark S. Lindbloom As of December 31, 2009
Registered Investment Companies	27	$	13,385,865,274	0	$	0
Other pooled investment vehicle	3	$	117,911,817	—	$	—
Other accounts	48	$	14,871,791,907	4	$	2,939,637,667

Keith J. Gardner As of December 31, 2009
Registered Investment Companies	42	$	17,875,019,005	0	$	0
Other pooled investment vehicle	6	$	624,283,036	—		—
Other accounts	2	$	128,763,146	—		—

Andrea A. Mack As of December 31, 2009
Registered Investment Companies	4	$	817,973,282	0	$	0
Other pooled investment vehicle	1	$	26,846,368	—		—
Other accounts	14	$	2,151,641,437	—		—

Julian Scholnick As of December 31, 2009
Registered Investment Companies	2	$	535,115,875	0	$	0
Other pooled investment vehicle	8	$	1,286,260,732	—	$	—
Other accounts	63	$	8,431,277,914	2	$	518,351,799

Andres Sanchez-Balcazar As of December 31, 2009
Registered Investment Companies	6	$	1,699,990,241	0	$	0
Other pooled investment vehicle	17	$	1,136,915,968	—	$	—
Other accounts	12	$	3,761,946,514	3	$	1,394,799,490

Michael Pak As of December 31, 2009
Registered Investment Companies	2	$	535,115,875	0	$	0
Other pooled investment vehicle	3	$	274,407,221	—		—
Other accounts	8	$	5,404,062,806	—		—

WASX012891

WESTERN ASSET FUNDS, INC.

Western Asset Absolute Return Portfolio

Western Asset Core Bond Portfolio

Western Asset Core Plus Bond Portfolio

Western Asset Enhanced Equity Portfolio

Western Asset Global Strategic Income Portfolio

Western Asset High Yield Portfolio

Western Asset Inflation Indexed Plus Bond Portfolio

Western Asset Intermediate Bond Portfolio

Western Asset Intermediate Plus Bond Portfolio

Western Asset Limited Duration Bond Portfolio

Western Asset Non-U.S. Opportunity Bond Portfolio

SUPPLEMENT DATED JUNE 14, 2010

TO THE STATEMENT OF ADDITIONAL INFORMATION

DATED APRIL 30, 2010

The following table replaces, and to the extent inconsistent therewith, supersedes the similar table found in the funds’ Statement of Additional Information under the heading “Management of the Funds”:


Name, Year of Birth and Position with Corporation	Term of Office and Length of Time Served(1)	Principal Occupations During the Past 5 Years	Number of Funds In Fund Complex Overseen(2)	Other Directorships Held
Independent Directors
Ronald J. Arnault (1943) Director	Served since 1997	Retired.	13	None

Anita L. DeFrantz (1953) Director	Served since 1998	President (1987-present) and Director (1990-present) of LA84 (formerly Amateur Athletic Foundation of Los Angeles); President and Director of Kids in Sports (1994-present); Vice President, International Rowing Federation (1986-present); Member of the International Olympic Committee (1986-present).	13	OBN Holdings, Inc. (film, television and media company)

Avedick B. Poladian (1952) Director	Served since 2007	Executive Vice President and Chief Operating Officer of Lowe Enterprises, Inc. (real estate and hospitality firm) (2002-present); Partner, Arthur Andersen, LLP (1974-2002).	13	Occidental Petroleum Corporation Western Asset Mortgage Capital Corp. Public Storage

William E. B. Siart (1946) Director and Chairman	Served since 1997	Vice Chairman of The Getty Trust (2005-present); Chairman of Walt Disney Concert Hall, Inc. (1998-2006); Chairman of Excellent Education Development (2000-present).	13	None

Jaynie Miller Studenmund (1954) Director	Served since 2004	Chief Operating Officer of Overture Services, Inc. (online marketing firm) (2001-2004); President and Chief Operating Officer of Paymybills.com (2000-2001).	13	Orbitz Worldwide (global on-line travel company)


Name, Year of Birth and Position with Corporation	Term of Office and Length of Time Served(1)	Principal Occupations During the Past 5 Years	Number of Funds In Fund Complex Overseen(2)	Other Directorships Held
Interested Directors

R. Jay Gerken (1951) Director and President	Served as a Director since 2006 and as President since 2007(3)	Managing Director of Legg Mason & Co., LLC, Chairman, President and Chief Executive Officer of certain mutual funds associated with Legg Mason & Co., LLC or its affiliates (2005-present); President of Legg Mason Partners Fund Advisor, LLC (“LMPFA”) (2006-present); Chairman of Smith Barney Fund Management LLC and Citi Fund Management Inc. (2002-2005); Chairman, President and Chief Executive Officer of Travelers Investment Adviser, Inc. (2002-2005).	13	Trustee or Director of certain funds associated with Legg Mason & Co., LLC or its affiliates (consisting of funds with 146 portfolios).

Ronald L. Olson (1941) Director	Served since 2005(4)	Senior Partner of Munger, Tolles & Olson LLP (a law partnership) (1968-present).	13	Edison International, City National Corporation (financial services company), The Washington Post Company, and Berkshire Hathaway, Inc.
Officers(5)

Kaprel Ozsolak (1965) Principal Financial and Accounting Officer 55 Water Street New York, NY 10041	Served since 2010	Director of Legg Mason & Co. (since 2005); Chief Financial Officer of certain mutual funds associated with Legg Mason & Co. (since 2005); formerly, Treasurer of certain mutual funds associated with Legg Mason & Co. (2005 to 2010); formerly, Vice President at Citigroup Asset Management (“CAM”) (1996 to 2005); formerly, Chief Financial Officer and Treasurer of certain mutual funds associated with certain predecessor firms of Legg Mason & Co. (2004 to 2005); formerly, Controller of certain mutual funds associated with certain predecessor firms of Legg Mason & Co. (2002 to 2004)	N/A	N/A


Name, Year of Birth and Position with Corporation	Term of Office and Length of Time Served(1)	Principal Occupations During the Past 5 Years	Number of Funds In Fund Complex Overseen(2)	Other Directorships Held

Erin K. Morris (1966) Treasurer 100 International Drive Baltimore, MD 21202	Served since 2006	Vice President and Manager, Global Funds Administration, Legg Mason & Co., LLC (2005-present); Assistant Vice President of Legg Mason Wood Walker, Incorporated (2002-2005); Treasurer of Legg Mason Income Trust, Inc., Legg Mason Tax-Free Income Fund, Western Asset Income Fund and Western Asset Premier Bond Fund (2006-present); Assistant Treasurer, Legg Mason Partners Fund complex (2007-present), Western Asset/Claymore Inflation-Linked Securities & Income Fund (2003-present), Western Asset/Claymore Inflation-Linked Opportunities & Income Fund (2004-present); Assistant Treasurer, the Corporation, Western Asset Income Fund, Western Asset Premier Bond Fund, Legg Mason Income Trust, Inc. and Legg Mason Tax-Free Income Fund (2001-2006); Manager, Funds Accounting, Legg Mason Wood Walker, Incorporated (2000-2005).	N/A	N/A

Todd F. Kuehl (1968) Chief Compliance Officer 100 International Drive Baltimore, MD 21202	Served since 2007	Director, Legg Mason & Co., LLC (2006-present); Chief Compliance Officer of Legg Mason Private Portfolio Group (2009-present); Chief Compliance Officer of Western Asset/Claymore Inflation-Linked Securities & Income Fund, Western Asset/Claymore Inflation-Linked Opportunities & Income Fund, Western Asset Income Fund, Western Asset Premier Bond Fund (2007-present) and Barrett Growth Fund and Barrett Opportunity Fund (2006-2008); Branch Chief, Division of Investment Management, U.S. Securities and Exchange Commission (2002-2006).	N/A	N/A


Name, Year of Birth and Position with Corporation	Term of Office and Length of Time Served(1)	Principal Occupations During the Past 5 Years	Number of Funds In Fund Complex Overseen(2)	Other Directorships Held

Robert I. Frenkel (1954) Secretary and Chief Legal Officer 100 First Stamford Place Stamford, CT 06902	Served since 2009	Vice President and Deputy General Counsel of Legg Mason, Inc. (since 2007); Managing Director and General Counsel of Global Mutual Funds for Legg Mason & Co. (2005-present); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. (2003-present); formerly, Managing Director and General Counsel of Global Mutual Funds for CAM (2000 to 2005); formerly, Secretary of Citi Fund Management, Inc. (2001 to 2004).	N/A	N/A

(1)

Each officer holds office until his or her respective successor is chosen and qualified, or in each case until he or she sooner dies, resigns, is removed with or without cause or becomes disqualified. Each of the Directors of the Corporation holds office until his or her successor shall have been duly elected and shall qualify, subject to prior death, resignation, retirement, disqualification or removal from office and applicable law.

(2)

In addition to overseeing the eleven funds of the Corporation, each Director also serves as a Director of Western Asset Income Fund and a Trustee of Western Asset Premier Bond Fund (closed-end investment companies), which are considered part of the same Fund Complex as the Corporation. In addition, Mr. Gerken serves as Director/Trustee to 133 other portfolios associated with Legg Mason & Co., LLC or its affiliates. Legg Mason & Co., LLC is an affiliate of LMPFA and Western Asset.

(3)	Mr. Gerken is an “interested person” (as defined in section 2(a)(19) of the Investment Company Act of 1940, as amended (the “1940 Act”)) of each fund because of his positions with subsidiaries of, and ownership of shares of common stock of, Legg Mason, Inc., the parent company of Western Asset.

(4)	Mr. Olson is an “interested person” (as defined above) of each fund because his law firm has provided legal services to Western Asset.

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

WASX012710

WESTERN ASSET FUNDS, INC.

SUPPLEMENT DATED MAY 21, 2010 TO THE

STATEMENT OF ADDITIONAL INFORMATION OF THE FUNDS LISTED IN

SCHEDULE A

The following information replaces the text contained in the section of the Statement of Additional Information titled “Disclosure of Portfolio Holdings.”

Disclosure of Portfolio Holdings

The funds’ Board has adopted policies and procedures developed by the Manager with respect to the disclosure of a fund’s portfolio securities and any ongoing arrangements to make available information about the fund’s portfolio securities. The policy requires that consideration always be given as to whether disclosure of information about a fund’s portfolio holdings is in the best interests of the fund’s shareholders. As a consequence, any conflicts of interest between the interests of the fund’s shareholders and those of the Manager, the distributor or their affiliates in connection with the disclosure of portfolio holdings information would be addressed in a manner that places the interests of fund shareholders first.

The policy provides that information regarding a Portfolio’s portfolio holdings may be shared with the Manager, a fund’s Advisers and other affiliated parties involved in the management, administration or operations of the fund (referred to as fund-affiliated personnel).

Under the policy, a fund’s complete list of holdings (including the size of each position) may be made available to investors, potential investors, third parties and Legg Mason personnel that are not fund-affiliated personnel: (i) upon the filing of Form N-Q or Form N-CSR in accordance with SEC rules, provided that such filings are not made until 15 calendar days following the end of the period covered by the Form N-Q or Form N-CSR or (ii) no sooner than 15 days after month end, provided that such information has been made available through public disclosure at least one day previously. Typically, public disclosure is achieved by required filings with the SEC and/or posting the information to Legg Mason’s or the funds’ Internet site that is accessible by the public, or through public release by a third party vendor.

The policy also permits the release of limited portfolio holdings information to investors, potential investors, third parties and Legg Mason personnel that are not fund-affiliated personnel in other circumstances, including:

1. A fund’s top ten securities, current as of month-end, and the individual size of each such security position may be released at any time following month-end with simultaneous public disclosure.

2. A fund’s top ten securities positions (including the aggregate but not individual size of such positions) may be released at any time with simultaneous public disclosure.

3. A list of securities (that may include fund holdings together with other securities) followed by a portfolio manager (without position sizes or identification of particular funds) may be disclosed to sell-side brokers at any time for the purpose of obtaining research and/or market information from such brokers.

4. A trade in process may be discussed only with counterparties, potential counterparties and others involved in the transaction (i.e., brokers and custodians).

5. A fund’s sector weightings, yield and duration (for fixed income and money market funds), performance attribution (e.g., analysis of the fund’s out-performance or underperformance of its benchmark based on its portfolio holdings) and other summary and statistical information that does not include identification of specific portfolio holdings may be released, even if non-public, if such release is otherwise in accordance with the policy’s general principles.

6. A small number of a fund’s portfolio holdings (including information that the fund no longer holds a particular holding) may be released, but only if the release of the information could not reasonably be seen to interfere with current or future purchase or sales activities of the fund and is not contrary to law.

7. A fund’s portfolio holdings may be released on an as-needed basis to its legal counsel, counsel to its independent trustees and its independent public accounting firm, in required regulatory filings or otherwise to governmental agencies and authorities.

Under the policy, a fund may release portfolio holdings information on a regular basis to a custodian, sub-custodian, accounting agent, proxy voting provider, rating agency or other vendor or service provider for a legitimate business purpose, where the party receiving the information is under a duty of confidentiality, including a duty to prohibit the sharing of non-public information with unauthorized sources and trading upon non-public information. A fund may enter into other ongoing arrangements for the release of portfolio holdings information for a legitimate business purpose with a party who is subject to a confidentiality agreement and restrictions on trading upon non-public information. None of the funds, Legg Mason or any other affiliated party may receive compensation or any other consideration in connection with such arrangements. Ongoing arrangements to make available information about a fund’s portfolio securities will be reviewed at least annually by the fund’s board.

The approval of the funds’ Chief Compliance Officer, or designee, must be obtained before entering into any new ongoing arrangement or altering any existing ongoing arrangement to make available portfolio holdings information, or with respect to any exceptions from the policy. Any exceptions from the policy must be consistent with the purposes of the policy. Exceptions are considered on a case-by-case basis and are granted only after a thorough examination and consultation with the Manager’s legal department, as necessary. Exceptions from the policy are reported annually to the Board.

At the present time the funds have ongoing arrangements with the following parties to provide them with non-public portfolio holdings information:

Service Providers:

State Street Bank and Trust Company—Information is provided daily with no time lag.

PricewaterhouseCoopers LLP—Information is provided as needed with no time lag.

Ropes & Gray LLP—Information is provided with Board materials approximately four to six weeks after quarter-end and may be provided at other times as needed.

Paul Hastings, Janofsky & Walker, LLP—Information is provided with Board materials approximately four to six weeks after quarter-end and may be provided at other times as needed.

Other Third Parties:

Lipper Analytical Services Corporation—Information is provided quarterly with a time lag of six business days.

A.S.A.P. Advisor Services, Inc.—Information is provided quarterly with a time lag of eight to ten business days.

Callan Associates Inc.—Information is provided quarterly with a time lag of eight to ten business days.

Cambridge Associates LLC—Information is provided quarterly with a time lag of eight to ten business days.

eVestment Alliance—Information is provided quarterly with a time lag of eight to ten business days.

Informa Investment Solutions—Information is provided quarterly with a time lag of eight to ten business days.

Mercer LLC—Information is provided quarterly with a time lag of eight to ten business days.

Morningstar—Information is provided quarterly with a time lag of eight to ten business days.

Prima Capital—Information is provided quarterly with a time lag of eight to ten business days.

Rogerscasey—Information is provided quarterly with a time lag of eight to ten business days.

Wilshire Associates Inc.—Information is provided quarterly with a time lag of eight to ten business days.

DST Global Solutions Limited—Information is provided monthly with a time lag of six business days.

The funds’ portfolio holdings policy is designed to prevent sharing of portfolio information with third parties who have no legitimate business purpose for accessing the information. The policy may not be effective to limit access to portfolio holdings information in all circumstances, however. For example, an Adviser may manage accounts other than a fund that have investment objectives and strategies similar to those of the fund. Because these accounts may be similarly managed, portfolio holdings may be similar across the accounts. In that case, an

investor in another account may be able to infer the portfolio holdings of the fund from the portfolio holdings in the investor’s account.

* * *

SCHEDULE A


WESTERN ASSET FUNDS, INC		Date of SAI
Western Asset Absolute Return Portfolio		April 30, 2010
Western Asset Core Bond Portfolio		April 30, 2010
Western Asset Core Plus Bond Portfolio		April 30, 2010
Western Asset Enhanced Equity Portfolio (inactive)		April 30, 2010
Western Asset Global Strategic Income Portfolio (inactive)		April 30, 2010
Western Asset High Yield Portfolio		April 30, 2010
Western Asset Inflation Indexed Plus Bond Portfolio		April 30, 2010
Western Asset Intermediate Bond Portfolio		April 30, 2010
Western Asset Intermediate Plus Bond Portfolio		April 30, 2010
Western Asset Limited Duration Bond Portfolio		April 30, 2010
Western Asset Non-U.S. Opportunity Bond Portfolio		April 30, 2010

April 30, 2010

Exhibit 17(b)

Filed pursuant to Rule 497

File No. 33-34929

LOGO

Prospectus

Western Asset Funds, Inc.


Fund	Class	Ticker Symbol
Western Asset Absolute Return Portfolio	FI	WARIX
	I	WAARX
	IS	WAASX
Western Asset Core Bond Portfolio	FI	WAPIX
	I	WATFX
	IS	WACSX
Western Asset Core Plus Bond Portfolio	FI	WACIX
	I	WACPX
	IS	WAPSX
Western Asset Enhanced Equity Portfolio	FI	—
	I	—
	IS	—
Western Asset Global Strategic Income Portfolio	FI	—
	I	—
	IS	—
Western Asset High Yield Portfolio	FI	—
	I	WAHYX
	IS	WAHSX
Western Asset Inflation Indexed Plus Bond Portfolio	FI	WATPX
	I	WAIIX
	IS	WAFSX
Western Asset Intermediate Bond Portfolio	FI	—
	I	WATIX
	IS	WABSX
Western Asset Intermediate Plus Bond Portfolio	FI	—
	I	WAIPX
	IS	WAISX
Western Asset Limited Duration Bond Portfolio	FI	—
	I	WALDX
	IS	WALSX
Western Asset Non-U.S. Opportunity Bond Portfolio	FI	—
	I	WAFIX
	IS	—

The Securities and Exchange Commission has not approved or disapproved these securities or determined whether this Prospectus is accurate or complete. Any statement to the contrary is a crime.

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

Table of Contents

Western Asset Funds


Western Asset Absolute Return Portfolio
Investment objective		2
Fees and expenses of the fund		2
Principal investment strategies		3
Certain risks		4
Performance		6
Management		6
Other information		7
Western Asset Core Bond Portfolio
Investment objective		8
Fees and expenses of the fund		8
Principal investment strategies		9
Certain risks		9
Performance		11
Management		11
Other information		12
Western Asset Core Plus Bond Portfolio
Investment objective		13
Fees and expenses of the fund		13
Principal investment strategies		14
Certain risks		14
Performance		17
Management		17
Other information		18
Western Asset Enhanced Equity Portfolio
Investment objective		19
Fees and expenses of the fund		19
Principal investment strategies		20
Certain risks		20
Performance		23
Management		23
Other information		23
Western Asset Global Strategic Income Portfolio
Investment objective		24
Fees and expenses of the fund		24
Principal investment strategies		25
Certain risks		25
Performance		28
Management		28
Other information		28
Western Asset High Yield Portfolio
Investment objective		29
Fees and expenses of the fund		29
Principal investment strategies		30
Certain risks		30
Performance		33
Management		33
Other information		34

Table of Contents


Western Asset Inflation Indexed Plus Bond Portfolio
Investment objective		35
Fees and expenses of the fund		35
Principal investment strategies		36
Certain risks		36
Performance		39
Management		39
Other information		40
Western Asset Intermediate Bond Portfolio
Investment objective		41
Fees and expenses of the fund		41
Principal investment strategies		42
Certain risks		42
Performance		45
Management		45
Other information		45
Western Asset Intermediate Plus Bond Portfolio
Investment objective		46
Fees and expenses of the fund		46
Principal investment strategies		47
Certain risks		47
Performance		50
Management		50
Other information		51
Western Asset Limited Duration Bond Portfolio
Investment objective		52
Fees and expenses of the fund		52
Principal investment strategies		53
Certain risks		53
Performance		56
Management		56
Other information		57
Western Asset Non-U.S. Opportunity Bond Portfolio
Investment objective		58
Fees and expenses of the fund		58
Principal investment strategies		59
Certain risks		59
Performance		62
Management		62
Other information		62

Other information		63
Purchase and sale of fund shares		63
Tax information		63
Payments to broker/dealers and other financial intermediaries		63
More on the fund’s investment strategies, investments and risks		64
More on fund management		79
Choosing a class of shares to buy		85
Buying shares		86
Exchanging shares		87
Redeeming shares		87
Other things to know about transactions		89
Dividends, distributions and taxes		92
Share price		94
Financial highlights		95

Western Asset Absolute Return Portfolio


Contents
Investment objective		2
Fees and expenses of the fund		2
Principal investment strategies		3
Certain risks		4
Performance		6
Management		6
Other information		7

Investment objective

Maximize long-term total return.

Fees and expenses of the fund

The accompanying table describes the fees and expenses that you may pay if you buy and hold shares of the fund.


Shareholder fees (paid directly from your investment) (%)
	Class IS	Class I	Class FI
	None	None	None
Annual fund operating expenses (expenses that you pay each year as a percentage of the value of your investment) (%)
	Class IS	Class I	Class FI
Management fees	0.75	0.75	0.75
Distribution and service (12b-1) fees	None	None	0.25¹
Other expenses	0.09	0.10	0.42
Total annual fund operating expenses	0.84	0.85	1.42
Fees forgone and/or expenses reimbursed	(0.04)²	(0.05)²	(0.37)²
Total annual fund operating expenses after forgoing fees and reimbursing expenses	0.80	0.80	1.05

The 12b-1 fee shown in the table reflects the amount to which the Board of Directors (the “Board”) has currently limited payments under the fund’s Class FI Distribution Plan. Pursuant to the Class FI Distribution Plan, the Board may authorize payment of up to 0.40% of average net assets attributable to the fund’s Class FI shares without shareholder approval.

The manager has agreed to forgo fees and/or reimburse operating expenses (other than interest, taxes, extraordinary expenses, deferred organizational expenses and brokerage commissions) so that total annual operating expenses are not expected to exceed 0.80%, 0.80% and 1.05% for Class IS, I and FI shares, respectively. This arrangement cannot be terminated prior to April 30, 2011 without the Board’s consent. The manager is permitted to recapture amounts forgone or reimbursed to a class within three years after the day on which the manager earned the fee or incurred the expense if the class’s total annual operating expenses have fallen to a level below the lower of the limit described above or the limit then in effect.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes:

You invest $10,000 in the fund for the time periods indicated

Your investment has a 5% return each year and the fund’s operating expenses remain the same

You reinvest all distributions and dividends

Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Number of years you own your shares ($)	1 year	3 years	5 years	10 years
Class IS (with or without redemption at end of period)	82	264	462	1,034
Class I (with or without redemption at end of period)	82	266	466	1,043
Class FI (with or without redemption at end of period)	107	413	741	1,670

Portfolio turnover. The fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the example, affect the fund’s performance. During the most recent fiscal year, the fund’s portfolio turnover rate was 257.6% of the average value of its portfolio.


2		Western Asset Funds

Principal investment strategies

The fund has a flexible investment strategy and will invest in a variety of securities and instruments and use a variety of investment techniques in pursuing its objective. Under normal market conditions, the fund will invest at least 50% of its net assets in debt and fixed income securities rated at least Baa or BBB at the time of purchase by one or more Nationally Recognized Statistical Rating Organizations (“NRSROs”) or unrated securities of comparable quality at the time of purchase (as determined by a subadviser). These securities are known as “investment grade securities.”

The fund may also enter into various derivative transactions for both hedging and non-hedging purposes, including for purposes of enhancing returns. These derivative transactions include, but are not limited to, bond and interest rate futures, options on bonds, options on bond and interest rate futures, swaps, forwards, options on swaps, options on forwards and commodity and commodity index futures, options, swaps and structured notes.

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

The subadvisers use fundamental investment techniques to select issues. In deciding among the securities and instruments in which the fund may invest, the subadvisers may take into account the credit quality, country of issue, interest rate, liquidity, maturity and yield of a security or instrument as well as other factors, including the fund’s dollar-weighted average effective duration and prevailing or anticipated market conditions. Although the fund may invest in debt and fixed income securities of any maturity, under normal market conditions the dollar-weighted average effective duration of the fund, including futures positions, is expected to range within -5 to 10 years. Effective duration measures the expected sensitivity of market price to changes in interest rates, taking into account the effects of structural complexities (for example, some bonds can be prepaid by the issuer). Although the fund may invest in debt and fixed income securities of any credit quality, including securities that are in default, under normal market conditions it is expected that the fund will maintain a dollar-weighted average credit quality of portfolio holdings of at least Baa/BBB or their equivalent (as determined by the subadvisers).

In addition, under normal market conditions, at the time of purchase:

No more than 50% of the fund’s net assets may be invested in non-U.S. dollar denominated securities.

No more than 25% of the fund’s net assets may be invested in un-hedged non-U.S. dollar denominated securities.

No more than 25% of the fund’s net assets may be invested in non-U.S. dollar denominated securities that are not investment grade securities. Securities rated below investment grade are commonly known as “junk bonds” or “high yield securities.”

No more than 25% of the fund’s net assets may be invested in securities of non-U.S. issuers that are not investment grade securities.

No more than 50% of the fund’s net assets may be invested in a combination of non-U.S. dollar denominated securities, emerging market securities and securities that are not investment grade securities.

The fund is permitted to invest in securities issued or guaranteed by the government of the United States or any of the G-7 countries, including their agencies, instrumentalities and political sub-divisions, without limit; however, (i) no more than 10% of the fund’s net assets may be invested in securities issued or guaranteed by a single government that is a non-G-7 country, including its agencies, instrumentalities and sub-divisions; (ii) no more than 10% of the fund’s net assets may be invested in private mortgage-backed and asset-backed securities of a single issuer unless the collateral relating to such securities is credit-independent of the issuer and the security’s credit enhancement is independent of the issuer, in which case no more than 25% of the fund’s net assets may be invested in private mortgage-backed and asset-backed securities of such issuer; and (iii) other than as described above, no more than 5% of the fund’s net assets may be invested in the obligations of any single issuer.

The aggregate initial futures margin and options premiums required to establish commodity interest positions will not exceed 5% of the net assets of the fund, after taking into account unrealized profits and unrealized losses on any such positions; provided, however, that if an option is in-the-money at the time of purchase, the amount by which the option is in-the-money may be excluded in computing such 5%.


Western Asset Funds		3

Certain risks

There is no assurance that the fund will meet its investment objective.

Risk is inherent in all investing. The value of your investment in the fund, as well as the amount of return you receive on your investment, may fluctuate significantly. You may lose part or all of your investment in the fund or your investment may not perform as well as other similar investments. The following is a summary description of certain risks of investing in the fund.

Market and interest rate risk. The market prices of the fund’s securities may go up or down, sometimes rapidly or unpredictably, due to general market conditions, such as real or perceived adverse economic or political conditions, inflation, changes in interest rates, lack of liquidity in the bond markets or adverse investor sentiment. When market prices fall, the value of your investment will go down. The value of your investment may also go down when interest rates rise. A rise in rates tends to have a greater impact on the prices of longer term or duration securities. The recent financial crisis has caused a significant decline in the value and liquidity of many securities. In response to the crisis, the U.S. and other governments and the Federal Reserve and certain foreign central banks have taken steps to support financial markets. The withdrawal of this support could also negatively affect the value and liquidity of certain securities.

Credit risk. If an issuer or guarantor of a security held by the fund or a counterparty to a financial contract with the fund defaults or is downgraded, or if the value of the assets underlying a security declines, the value of your investment will typically decline. Junk bonds have a higher risk of default and are considered speculative. Subordinated securities will be disproportionately affected by a default or downgrade.

Derivatives risk. Using derivatives can increase fund losses and reduce opportunities for gains when market prices, interest rates or the derivative instruments themselves behave in a way not anticipated by the fund. Using derivatives also can have a leveraging effect and increase fund volatility. Derivatives may be difficult to sell, unwind or value, and the counterparty may default on its obligations to the fund.

Credit default swap contracts involve special risks and may result in losses to the fund. Credit default swaps may be illiquid and difficult to value, and they increase credit risk since the fund has exposure to both the issuer whose credit is the subject of the swap and the counterparty to the swap. Credit default swaps may be difficult to unwind or terminate, and it is possible that developments in the swap market, including potential government regulation, could adversely affect the fund.

Leveraging risk. The value of your investment may be more volatile if the fund borrows or uses derivatives or other investments that have a leveraging effect on the fund’s portfolio. Other risks also will be compounded. This is because leverage generally magnifies the effect of a change in the value of an asset and creates a risk of loss of value on a larger pool of assets than the fund would otherwise have had. The fund may also have to sell assets at inopportune times to satisfy its obligations.

Liquidity risk. Some securities held by the fund may be difficult to sell, or illiquid, particularly during times of market turmoil. Illiquid securities may also be difficult to value. If the fund is forced to sell an illiquid asset to meet redemption requests or other cash needs, the fund may be forced to sell at a loss.

Foreign securities and emerging market risk. Foreign securities are subject to a number of additional risks, including nationalization or expropriation of assets, imposition of currency controls or restrictions, confiscatory taxation, political or financial instability and other adverse economic or political developments. Lack of information and less market regulation also create increased risk. Risks are greater for investments in emerging markets. Emerging market countries tend to have economic, political and legal systems that are less fully developed and are less stable than those of more advanced countries. Low trading volumes may result in a lack of liquidity and in extreme price volatility.

Currency risk. The value of investments in securities denominated in foreign currencies increases or decreases as the rates of exchange between those currencies and the U.S. dollar change. Currency exchange rates can be volatile, and are affected by factors such as general economic conditions, the actions of the U.S. and foreign governments or central banks, the imposition of currency controls and speculation.

Risk of increase in expenses. Your actual costs of investing in the fund may be higher than the expenses shown in “Annual fund operating expenses” for a variety of reasons. For example, expense ratios may be higher than those shown if a fee limitation is changed or terminated or if average net assets decrease. Net assets are more likely to decrease and fund expense ratios are more likely to increase when markets are volatile.

Prepayment or call risk. Many issuers have a right to prepay their securities. If interest rates fall, an issuer


4		Western Asset Funds

may exercise this right. If this happens, the fund will be forced to reinvest prepayment proceeds at a time when yields on securities available in the market are lower than the yield on the prepaid security. The fund may also lose any premium it paid on the security.

Extension risk. If interest rates rise, repayments of fixed income securities may occur more slowly than anticipated by the market. This may drive the prices of these securities down because their interest rates are lower than the current interest rate and they remain outstanding longer.

Risk of investing in fewer issuers. To the extent the fund invests its assets in fewer issuers, the fund will be more susceptible to negative events affecting those issuers.

Valuation risk. The sales price the fund could receive for any particular portfolio investment may differ from the fund’s valuation of the investment, particularly for securities that trade in thin or volatile markets or that are valued using a fair value methodology. Investors who purchase or redeem fund shares on days when the fund is holding fair-valued securities may receive fewer shares or lower redemption proceeds than they would have received if the fund had not fair-valued the security or had used a different valuation methodology.

Cash management and defensive investing risk. Money market instruments or short-term debt securities held by the fund for cash management or defensive investing purposes can fluctuate in value. Like other fixed income securities, they are subject to risk, including market, interest rate and credit risk. If the fund holds cash uninvested it will be subject to the credit risk of the depository institution holding the cash. In that case the fund would not earn income on the cash and the fund’s yield would go down. If a significant amount of the fund’s assets are used for cash management or defensive investing purposes, it will be more difficult for the fund to achieve its objective.

Hedging risk. There can be no assurance that the fund will engage in hedging transactions at any given time, even under volatile market conditions, or that any hedging transactions the fund engages in will be successful. Hedging transactions involve costs and may reduce gains or result in losses.

Commodity risk. Investments in commodity-linked derivative instruments may subject the fund to greater volatility than investments in traditional securities. The value of commodity-linked derivative instruments may be affected by overall market movements, changes in interest rates or factors affecting a particular industry or commodity. The fund’s ability to gain exposure to commodities using derivatives, or other means, may be limited by tax considerations.

Special risks of high yield securities. Securities rated below investment grade, commonly referred to as junk bonds or high yield securities, have speculative characteristics. Accordingly, there is a greater possibility that the issuers of these securities may be unable to make timely payments of interest and principal and thus default. These securities typically entail greater potential price volatility, may be more susceptible to real or perceived adverse economic and competitive industry conditions and may be less liquid than higher-rated securities.

Special risks of mortgage-backed and asset-backed securities. Mortgage-backed securities represent an interest in a pool of mortgages. The rate of mortgage prepayments may lengthen the effective maturity of these securities at a time when their value has declined or shorten the effective maturity of these securities at a time their value has increased. Mortgage-backed securities are also subject to the risk that underlying borrowers will be unable to meet their obligations. Investments in asset-backed securities are subject to similar risks.

Portfolio selection risk. The value of your investment may decrease if the portfolio managers’ judgment about the quality, relative yield, value or market trends affecting a particular security, industry, sector or region, or about interest rates, is incorrect.

These and other risks are discussed in more detail later in this Prospectus or in the Statement of Additional Information (“SAI”).


Western Asset Funds		5

Performance

The accompanying bar chart and table provide some indication of the risks of investing in the fund. The bar chart shows changes in the fund’s performance from year to year for Class I shares. The table shows the average annual total returns of each class of the fund that has been in operation for at least one full calendar year and also compares the fund’s performance with the average annual total returns of an index or other benchmark. The fund makes updated performance information available at the fund’s website, http://www.leggmason.com/individualinvestors/products/mutual-funds/annualized_performance (select share class), or by calling Institutional Shareholder Services at 1-888-425-6432.

The fund’s past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.


Total returns (before taxes) (%)

		Best quarter (6/30/2009): 13.16 Worst quarter (12/31/2008): (8.30)


Average annual total returns (for periods ended December 31, 2009) (%)
	1 year	Since inception	Inception date

Class I
Return before taxes	32.89	6.15	07/06/2006
Return after taxes on distributions	30.25	3.84
Return after taxes on distributions and sale of fund shares	21.16	3.89

Other Classes (Return before taxes only)
Class IS¹	32.81	11.99	08/04/2008
Class FI²	32.55	5.47	09/06/2006
Barclays Capital U.S. Aggregate Index (reflects no deduction for fees, expenses or taxes)	5.93	6.73	07/06/2006
BofA Merrill Lynch Constant Maturity 3-Month LIBOR Index (reflects no deduction for fees, expenses or taxes)	0.99	3.76	07/06/2006

¹	For the period August 4, 2008 (commencement of operations) to December 31, 2009, the average annual total returns of the Barclays Capital U.S. Aggregate Index and the BofA Merrill Lynch Constant Maturity 3-Month LIBOR Index were 7.29% and 1.77%, respectively.

²	For the period September 6, 2006 (commencement of operations) to December 31, 2009, the average annual total returns of the Barclays Capital U.S. Aggregate Index and the BofA Merrill Lynch Constant Maturity 3-Month LIBOR Index were 6.16% and 3.65%, respectively.

Management

Investment manager: Legg Mason Partners Fund Advisor, LLC

Subadvisers: Western Asset Management Company, Western Asset Management Company Limited in London, Western Asset Management Company Pte. Ltd. in Singapore and Western Asset Management Company Ltd in Japan


6		Western Asset Funds

Portfolio managers: S. Kenneth Leech, Stephen A. Walsh, Michael C. Buchanan and Keith J. Gardner. Messrs. Leech, Walsh, Buchanan and Gardner have been portfolio managers for the fund since 2006. These portfolio managers work together with a broader investment management team.

Other information

For important information about purchase and sale of fund shares, tax information and information about financial intermediary compensation, please turn to “Other information” on page 63 of this Prospectus.


Western Asset Funds		7

Western Asset Core Bond Portfolio


Contents
Investment objective		8
Fees and expenses of the fund		8
Principal investment strategies		9
Certain risks		9
Performance		11
Management		11
Other information		12

Investment objective

Maximize total return, consistent with prudent investment management and liquidity needs, by investing to obtain the average duration specified below.

Fees and expenses of the fund

The accompanying table describes the fees and expenses that you may pay if you buy and hold shares of the fund.


Shareholder fees (paid directly from your investment) (%)
	Class IS	Class I	Class FI
	None	None	None
Annual fund operating expenses (expenses that you pay each year as a percentage of the value of your investment) (%)
	Class IS	Class I	Class FI
Management fees	0.41	0.41	0.41
Distribution and service (12b-1) fees	None	None	0.25¹
Other expenses	0.03	0.08	0.12
Total annual fund operating expenses	0.44	0.49	0.78
Fees forgone and/or expenses reimbursed	None²	None	(0.03)²
Total annual fund operating expenses after forgoing fees and reimbursing expenses	0.44	0.49	0.75

The manager has agreed to forgo fees and/or reimburse operating expenses (other than interest, taxes, extraordinary expenses, deferred organizational expenses and brokerage commissions) so that total annual operating expenses are not expected to exceed 0.50% and 0.75% for Class IS and FI shares, respectively. This arrangement cannot be terminated prior to April 30 , 2011 without the Board’s consent. The manager is permitted to recapture amounts forgone or reimbursed to a class within three years after the day on which the manager earned the fee or incurred the expense if the class’s total annual operating expenses have fallen to a level below the lower of the limit described above or the limit then in effect.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes:

You invest $10,000 in the fund for the time periods indicated

Your investment has a 5% return each year and the fund’s operating expenses remain the same

You reinvest all distributions and dividends

Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Number of years you own your shares ($)	1 year	3 years	5 years	10 years
Class IS (with or without redemption at end of period)	45	141	246	553
Class I (with or without redemption at end of period)	50	157	274	615
Class FI (with or without redemption at end of period)	77	247	431	964


8		Western Asset Funds

Principal investment strategies

The fund invests in a portfolio of fixed income securities of various maturities and, under normal market conditions, will invest at least 80% of its net assets in debt and fixed income securities. Although the fund may invest in debt and fixed income securities of any maturity, under normal market conditions the target dollar-weighted average modified duration for the fund is expected to range within 20% of the average duration of the domestic bond market as a whole as measured by Western Asset (generally, this range is 3–7 years). Modified duration measures the expected sensitivity of market price to changes in interest rates using a weighted average of time to receipt of cash flows for a bond.

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

Certain risks

There is no assurance that the fund will meet its investment objective.


Western Asset Funds		9

Certain risks cont’d

Prepayment or call risk. Many issuers have a right to prepay their securities. If interest rates fall, an issuer may exercise this right. If this happens, the fund will be forced to reinvest prepayment proceeds at a time when yields on securities available in the market are lower than the yield on the prepaid security. The fund may also lose any premium it paid on the security.

Risk of investing in fewer issuers. To the extent the fund invests its assets in fewer issuers, the fund will be more susceptible to negative events affecting those issuers.

These and other risks are discussed in more detail later in this Prospectus or in the SAI.


10		Western Asset Funds

Performance

The fund’s past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.


Total returns (before taxes) (%)

		Best quarter (6/30/2009): 12.99 Worst quarter (9/30/2008): (5.41)


Average annual total returns (for periods ended December 31, 2009) (%)
	1 year	5 years	10 years	Since inception	Inception date

Class I
Return before taxes	23.68	3.97	6.41
Return after taxes on distributions	21.29	2.02	4.22
Return after taxes on distributions and sale of fund shares	15.24	2.23	4.18

Other Classes (Return before taxes only)
Class IS¹	23.72	N/A	N/A	10.97	08/29/2008
Class FI	23.37	3.71	6.12
Barclays Capital U.S. Aggregate Index (reflects no deduction for fees, expenses or taxes)	5.93	4.97	6.33

¹	For the period August 29, 2008 (commencement of operations) to December 31, 2009, the average annual returns of the Barclays Capital U.S. Aggregate Index was 6.86%.

Management

Investment manager: Legg Mason Partners Fund Advisor, LLC

Subadviser: Western Asset Management Company

Portfolio managers: S. Kenneth Leech, Stephen A. Walsh, Mark S. Lindbloom, Edward A. Moody and Carl L. Eichstaedt. Messrs. Leech, Walsh and Moody have been portfolio managers for the fund since its inception. Mr. Lindbloom has been a portfolio manager for the fund since 2006. Mr. Eichstaedt has been a portfolio manager for the fund since 1994. These portfolio managers work together with a broader investment management team.


Western Asset Funds		11

Other information


12		Western Asset Funds

Western Asset Core Plus Bond Portfolio


Contents
Investment objective		13
Fees and expenses of the fund		13
Principal investment strategies		14
Certain risks		14
Performance		17
Management		17
Other information		18

Investment objective

Maximize total return, consistent with prudent investment management and liquidity needs, by investing to obtain the average duration specified below.

Fees and expenses of the fund

The accompanying table describes the fees and expenses that you may pay if you buy and hold shares of the fund.


Shareholder fees (paid directly from your investment) (%)
	Class IS	Class I	Class FI
	None	None	None
Annual fund operating expenses (expenses that you pay each year as a percentage of the value of your investment) (%)
	Class IS	Class I	Class FI
Management fees	0.40	0.40	0.40
Distribution and service (12b-1) fees	None	None	0.25¹
Other expenses	0.03	0.06	0.21
Total annual fund operating expenses	0.43	0.46	0.86
Fees forgone and/or expenses reimbursed	None²	None	(0.16)²
Total annual fund operating expenses after forgoing fees and reimbursing expenses	0.43	0.46	0.70

The manager has agreed to forgo fees and/or reimburse operating expenses (other than interest, taxes, extraordinary expenses, deferred organizational expenses and brokerage commissions) so that total annual operating expenses are not expected to exceed 0.45% and 0.70% for Class IS and FI shares, respectively. This arrangement cannot be terminated prior to April 30, 2011 without the Board’s consent. The manager is permitted to recapture amounts forgone or reimbursed to a class within three years after the day on which the manager earned the fee or incurred the expense if the class’s total annual operating expenses have fallen to a level below the lower of the limit described above or the limit then in effect.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes:

You invest $10,000 in the fund for the time periods indicated

Your investment has a 5% return each year and the fund’s operating expenses remain the same

You reinvest all distributions and dividends

Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Number of years you own your shares ($)	1 year	3 years	5 years	10 years
Class IS (with or without redemption at end of period)	44	138	241	543
Class I (with or without redemption at end of period)	47	147	257	578
Class FI (with or without redemption at end of period)	72	259	461	1,047


Western Asset Funds		13

Principal investment strategies

The fund invests in a portfolio of fixed income securities of various maturities and, under normal market conditions, will invest at least 80% of its net assets in debt and fixed income securities. Although the fund may invest in debt and fixed income securities of any maturity, under normal market conditions the target dollar-weighted average effective duration for the fund is expected to range within 30% of the average duration of the domestic bond market as a whole as measured by Western Asset (generally, this range is 2.5–7 years). Effective duration measures the expected sensitivity of market price to changes in interest rates, taking into account the effects of structural complexities (for example, some bonds can be prepaid by the issuer).

The fund may invest up to 20% of its total assets in non-U.S. dollar denominated securities. Up to 20% of the fund’s net assets may be invested in debt securities that are not rated Baa or BBB or above at the time of purchase by one or more Nationally Recognized Statistical Rating Organizations (“NRSROs”) but are rated at least B-/B3 or, if unrated, securities of comparable quality at the time of purchase (as determined by a subadviser). Securities rated Baa or BBB or above by one or more NRSROs or unrated securities of comparable quality are known as “investment grade securities.” Securities rated below investment grade are commonly known as “junk bonds” or “high yield securities.” The fund may invest up to 25% of its total assets in the securities of non-U.S. issuers.

Certain risks

There is no assurance that the fund will meet its investment objective.


14		Western Asset Funds

asset and creates a risk of loss of value on a larger pool of assets than the fund would otherwise have had. The fund may also have to sell assets at inopportune times to satisfy its obligations.

Risk of investing in fewer issuers. To the extent the fund invests its assets in fewer issuers, the fund will be more susceptible to negative events affecting those issuers.


Western Asset Funds		15

Certain risks cont’d

the fund holds an inflation-indexed security, the fund may earn less on the security than on a conventional bond.

These and other risks are discussed in more detail later in this Prospectus or in the SAI.


16		Western Asset Funds

Performance

The fund’s past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.


Total returns (before taxes) (%)

		Best quarter (6/30/2009): 11.18 Worst quarter (12/31/2008): (3.73)


Average annual total returns (for periods ended December 31, 2009) (%)
	1 year	5 years	10 years	Since inception	Inception date

Class I
Return before taxes	26.20	4.98	7.23
Return after taxes on distributions	22.94	2.87	4.87
Return after taxes on distributions and sale of fund shares	16.81	2.99	4.78

Other Classes (Return before taxes only)
Class IS¹	26.11	N/A	N/A	14.08	08/04/2008
Class FI²	25.78	4.69	N/A	5.95	01/08/2002
Barclays Capital U.S. Aggregate Index (reflects no deduction for fees, expenses or taxes)	5.93	4.97	6.33

¹	For the period August 4, 2008 (commencement of operations) to December 31, 2009, the average annual returns for the Barclays Capital U.S. Aggregate Index was 7.29%.

²	For the period January 8, 2002 (commencement of operations) to December 31, 2009, the average annual returns for the Barclays Capital U.S. Aggregate Index was 5.40%.

Management

Investment manager: Legg Mason Partners Fund Advisor, LLC

Portfolio managers: S. Kenneth Leech, Stephen A. Walsh, Mark S. Lindbloom, Edward A. Moody, Carl L. Eichstaedt, Michael C. Buchanan and Keith J. Gardner. Messrs. Leech, Walsh, Moody, Eichstaedt and


Western Asset Funds		17

Management cont’d

Gardner have been portfolio managers for the fund since its inception. Mr. Lindbloom has been a portfolio manager for the fund since 2006. Mr. Buchanan has been a portfolio manager for the fund since 2005. These portfolio managers work together with a broader investment management team.

Other information


18		Western Asset Funds

Western Asset Enhanced Equity Portfolio


Contents
Investment objective		19
Fees and expenses of the fund		19
Principal investment strategies		20
Certain risks		20
Performance		23
Management		23
Other information		23

Investment objective

Long-term total return.

Fees and expenses of the fund

The accompanying table describes the fees and expenses that you may pay if you buy and hold shares of the fund.


Shareholder fees (paid directly from your investment) (%)
	Class IS	Class I	Class FI
	None	None	None
Annual fund operating expenses (expenses that you pay each year as a percentage of the value of your investment) (%)
	Class IS	Class I	Class FI
Management fees	0.55	0.55	0.55
Distribution and service (12b-1) fees	None	None	0.25¹
Other expenses²	0.20	0.20	0.20
Total annual fund operating expenses	0.75	0.75	1.00
Fees forgone and/or expenses reimbursed	(0.10)³	(0.10)⁴	(0.10)³
Total annual fund operating expenses after forgoing fees and reimbursing expenses	0.65	0.65	0.90

²	“Other expenses” are estimated amounts for the current fiscal year as this fund has not commenced operations as of the date of this Prospectus.

The manager has agreed to forgo fees and/or reimburse operating expenses (other than interest, taxes, extraordinary expenses, deferred organizational expenses and brokerage commissions) so that total annual operating expenses are not expected to exceed 0.65% and 0.90% for Class IS and FI shares, respectively. This arrangement cannot be terminated prior to April 30, 2011 without the Board’s consent. The manager is permitted to recapture amounts forgone or reimbursed to a class within three years after the day on which the manager earned the fee or incurred the expense if the class’s total annual operating expenses have fallen to a level below the lower of the limit described above or the limit then in effect.

⁴	With respect to Class I shares, the manager has contractually agreed to forgo fees and/or reimburse operating expenses at the rate shown. This arrangement cannot be terminated prior to April 30, 2011 without the Board’s consent.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes:

You invest $10,000 in the fund for the time periods indicated

Your investment has a 5% return each year and the fund’s operating expenses remain the same

You reinvest all distributions and dividends

Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Number of years you own your shares ($)	1 year	3 years
Class IS (with or without redemption at end of period)	77	240
Class I (with or without redemption at end of period)	77	240
Class FI (with or without redemption at end of period)	102	318

Portfolio turnover The fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the example, affect the fund’s performance. The fund has not commenced operations as of the date of this Prospectus, therefore it does not have a turnover rate to report for the most recent fiscal year.


Western Asset Funds		19

Principal investment strategies

The fund’s assets will be comprised of two components: an equity component and a fixed income component.

The equity component will generally maintain full exposure to the U.S. equity market as represented by the S&P 500 Index (the “Index”).

The fixed income component will attempt to generate interest and gains in excess of the fund’s expenses, including transaction costs related to its investments.

Under normal market conditions, the fund will invest substantially all of its net assets in S&P derivatives (as defined below), backed by a portfolio of fixed income securities.

The fund expects that its performance will approximate that of the Index, with the extent to which the fund outperforms or underperforms the Index depending largely, but not exclusively, on whether the fixed income component has earned sufficient amounts to offset the fund’s expenses. Up to 20% of its net assets may be invested in non-U.S. securities.

The following information summarizes the investment practices of the fund’s two components.

Equity Component

The fund’s equity component intends to invest primarily in stock index futures, options on stock indexes, options on stock index futures and other derivative instruments that are based on the Index (“S&P derivatives”).

The equity component of the fund adheres to the following practices:

It currently plans to invest predominantly, and likely exclusively, in S&P derivatives. It may also invest in common stocks that are included in the Index (“S&P Stocks”).

It will not be limited to purchasing S&P Stocks in the same proportion as such stocks are weighted in the Index.

It will seek to remain invested in S&P Stocks and S&P derivatives even when the Index is declining.

Fixed Income Component

The fixed income component will invest in a variety of fixed income securities and other instruments. Up to 10% of the fund’s net assets may be invested in securities not rated Baa or BBB or above at the time of purchase by one or more Nationally Recognized Statistical Rating Organizations (“NRSROs”) or unrated securities of comparable quality at the time of purchase (as determined by Western Asset). Securities rated Baa or BBB or above by one or more NRSROs or unrated securities of comparable quality are known as “investment grade securities.” Securities rated below investment grade are commonly known as “junk bonds” or “high yield securities.”

Certain risks

There is no assurance that the fund will meet its investment objective.


20		Western Asset Funds

support financial markets. The withdrawal of this support could also negatively affect the value and liquidity of certain securities.

Risk of investing in fewer issuers. To the extent the fund invests its assets in fewer issuers, the fund will be more susceptible to negative events affecting those issuers.


Western Asset Funds		21

Certain risks cont’d

fund shares on days when the fund is holding fair-valued securities may receive fewer shares or lower redemption proceeds than they would have received if the fund had not fair-valued the security or had used a different valuation methodology.

These and other risks are discussed in more detail later in this Prospectus or in the SAI.


22		Western Asset Funds

Performance

The fund has not commenced operations as of the date of this Prospectus.

Management

Investment manager: Legg Mason Partners Fund Advisor, LLC

Subadviser: Western Asset Management Company

Portfolio managers: Although this fund is not currently operational, S. Kenneth Leech and Stephen A. Walsh would be portfolio managers of the fund. These portfolio managers would work together with a broader investment management team.

Other information


Western Asset Funds		23

Western Asset Global Strategic Income Portfolio


Contents
Investment objective		24
Fees and expenses of the fund		24
Principal investment strategies		25
Certain risks		25
Performance		28
Management		28
Other information		28

Investment objective

Income and capital appreciation.

Fees and expenses of the fund

The accompanying table describes the fees and expenses that you may pay if you buy and hold shares of the fund.


Shareholder fees (paid directly from your investment) (%)
	Class IS	Class I	Class FI
	None	None	None
Annual fund operating expenses (expenses that you pay each year as a percentage of the value of your investment) (%)
	Class IS	Class I	Class FI
Management fees	0.45	0.45	0.45
Distribution and service (12b-1) fees	None	None	0.25¹
Other expenses²	0.40	0.40	0.40
Total annual fund operating expenses	0.85	0.85	1.10
Fees forgone and/or expenses reimbursed	(0.05)³	(0.05)⁴	(0.05)³
Total annual fund operating expenses after forgoing fees and reimbursing expenses	0.80	0.80	1.05

²	“Other expenses” are estimated amounts for the current fiscal year as this fund has not commenced operations as of the date of this Prospectus.

The manager has agreed to forgo fees and/or reimburse operating expenses (other than interest, taxes, extraordinary expenses, deferred organizational expenses and brokerage commissions) so that total annual operating expenses are not expected to exceed 0.80% and 1.05% for Class IS and FI shares, respectively. This arrangement cannot be terminated prior to April 30, 2011 without the Board’s consent. The manager is permitted to recapture amounts forgone or reimbursed to a class within three years after the day on which the manager earned the fee or incurred the expense if the class’s total annual operating expenses have fallen to a level below the lower of the limit described above or the limit then in effect.

⁴	With respect to Class I shares, the manager has contractually agreed to forgo fees and/or reimburse operating expenses at the rate shown. This arrangement cannot be terminated prior to April 30, 2011 without the Board’s consent.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes:

You invest $10,000 in the fund for the time periods indicated

Your investment has a 5% return each year and the fund’s operating expenses remain the same

You reinvest all distributions and dividends

Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Number of years you own your shares ($)	1 year	3 years
Class IS (with or without redemption at end of period)	87	271
Class I (with or without redemption at end of period)	87	271
Class FI (with or without redemption at end of period)	112	350

Portfolio turnover. The fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the example, affect the fund’s performance. The fund has not commenced operations as of the date of this Prospectus, therefore it does not have a portfolio turnover rate to report for the most recent fiscal year.


24		Western Asset Funds

Principal investment strategies

To achieve its investment objective, the fund invests primarily in various types of U.S. dollar denominated and non-U.S. dollar denominated fixed income securities.

The fund may invest up to 60% of its net assets in securities not rated Baa or BBB or above at the time of purchase by one or more Nationally Recognized Statistical Rating Organizations (“NRSROs”) or unrated securities of comparable quality at the time of purchase (as determined by the subadvisers). Securities rated Baa or BBB or above by one or more NRSROs or unrated securities of comparable quality are known as “investment grade securities.” Securities rated below investment grade are commonly known as “junk bonds” or “high yield securities.”

Under normal market conditions, the fund will invest at least 80% of its net assets in securities of issuers representing at least three countries (one of which may be the United States) and at least 65% of its net assets in income producing securities.

The fund is “non-diversified” within the meaning of the Investment Company Act of 1940. As a result, the value of its shares will be more susceptible to any single economic, political or regulatory event affecting one or a small number of issuers than shares of a diversified fund. Because the fund may concentrate a significant portion of its investments in a single country or currency, it will be more susceptible to factors adversely affecting such currency or issuers within that country than would a more diversified portfolio of securities.

Certain risks

There is no assurance that the fund will meet its investment objective.


Western Asset Funds		25

Certain risks cont’d

default swaps may be difficult to unwind or terminate, and it is possible that developments in the swap market, including potential government regulation, could adversely affect the fund.

Risk of investing in fewer issuers. The fund is classified as “non-diversified,” which means it may invest a larger percentage of its assets in a small number of issuers than a diversified fund. To the extent the fund invests its assets in fewer issuers, the fund will be more susceptible to negative events affecting those issuers.


26		Western Asset Funds

These and other risks are discussed in more detail later in this Prospectus or in the SAI.


Western Asset Funds		27

Performance

The fund has not commenced operations as of the date of this Prospectus.

Management

Investment manager: Legg Mason Partners Fund Advisor, LLC

Subadvisers: Western Asset Management Company and Western Asset Management Company Limited in London

Other information


28		Western Asset Funds

Western Asset High Yield Portfolio


Contents
Investment objective		29
Fees and expenses of the fund		29
Principal investment strategies		30
Certain risks		30
Performance		33
Management		33
Other information		34

Investment objective

Maximize total return, consistent with prudent investment management.

Fees and expenses of the fund

The accompanying table describes the fees and expenses that you may pay if you buy and hold shares of the fund.


Shareholder fees (paid directly from your investment) (%)
	Class IS	Class I	Class FI
	None	None	None
Annual fund operating expenses (expenses that you pay each year as a percentage of the value of your investment) (%)
	Class IS	Class I	Class FI
Management fees	0.55	0.55	0.55
Distribution and service (12b-1) fees	None	None	0.25¹
Other expenses	0.06	0.07	0.07²
Total annual fund operating expenses	0.61	0.62	0.87
Fees forgone and/or expenses reimbursed	None³	None	None³
Total annual fund operating expenses after forgoing fees and reimbursing expenses	0.61	0.62	0.87

²	“Other expenses” for Class FI shares are based on amounts for Class I shares because no Class FI shares were outstanding during the fund’s last fiscal year.

The manager has agreed to forgo fees and/or reimburse operating expenses (other than interest, taxes, extraordinary expenses, deferred organizational expenses and brokerage commissions) so that total annual operating expenses are not expected to exceed 0.65% and 0.90% for Class IS and FI shares, respectively. This arrangement cannot be terminated prior to April 30, 2011 without the Board’s consent. The manager is permitted to recapture amounts forgone or reimbursed to a class within three years after the day on which the manager earned the fee or incurred the expense if the class’s total annual operating expenses have fallen to a level below the lower of the limit described above or the limit then in effect.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes:

You invest $10,000 in the fund for the time periods indicated

Your investment has a 5% return each year and the fund’s operating expenses remain the same

You reinvest all distributions and dividends

Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Number of years you own your shares ($)	1 year	3 years	5 years	10 years
Class IS (with or without redemption at end of period)	62	195	340	762
Class I (with or without redemption at end of period)	63	198	345	774
Class FI (with or without redemption at end of period)	89	277	481	1,072


Western Asset Funds		29

Principal investment strategies

Under normal market conditions, the fund will invest at least 80% of its net assets in U.S. dollar denominated debt or fixed income securities that are rated below investment grade at the time of purchase by one or more Nationally Recognized Statistical Rating Organizations (“NRSROs”) or are of a comparable quality as determined by Western Asset. The fund considers these securities to be rated below investment grade. Securities rated below investment grade are commonly known as “junk bonds” or “high yield securities.”

In deciding among the securities in which the fund may invest, Western Asset takes into account the credit quality, country of issue, interest rate, liquidity, maturity and yield of a security as well as other factors, including the fund’s effective duration and prevailing and anticipated market conditions. Effective duration measures the expected sensitivity of market price to changes in interest rates, taking into account the effects of structural complexities (for example, some bonds can be prepaid by the issuer.) The fund is permitted to invest up to 20% of its total assets in non-U.S. dollar denominated non-U.S. securities.

Certain risks

There is no assurance that the fund will meet its investment objective.

Leveraging risk. The value of your investment may be more volatile if the fund borrows or uses derivatives or other investments that have a leverag-


30		Western Asset Funds

ing effect on the fund’s portfolio. Other risks also will be compounded. This is because leverage generally magnifies the effect of a change in the value of an asset and creates a risk of loss of value on a larger pool of assets than the fund would otherwise have had. The fund may also have to sell assets at inopportune times to satisfy its obligations.

Risk of investing in fewer issuers. To the extent the fund invests its assets in fewer issuers, the fund will be more susceptible to negative events affecting those issuers.


Western Asset Funds		31

Certain risks cont’d

the fund holds an inflation-indexed security, the fund may earn less on the security than on a conventional bond.

These and other risks are discussed in more detail later in this Prospectus or in the SAI.


32		Western Asset Funds

Performance

The fund’s past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.


Total returns (before taxes) (%)

		Best quarter (6/30/2009): 24.12 Worst quarter (12/31/2008): (21.83)


Average annual total returns (for periods ended December 31, 2009) (%)
	1 year	5 years	Since inception	Inception date

Class I
Return before taxes	56.73	4.98	7.27	09/28/2001
Return after taxes on distributions	50.00	1.49	3.84
Return after taxes on distributions and sale of fund shares	36.27	2.15	4.14

Other Class (Return before taxes only)
Class IS¹	56.74	N/A	9.87	08/04/2008
Barclays Capital U.S. High Yield —2% Issuer Cap Index (reflects no deduction for fees, expenses or taxes)	58.76	6.49	9.21	09/28/2001

¹	For the period August 4, 2008 (commencement of operations) to December 31, 2009, the average annual total return of the Barclays Capital U.S. High Yield —2% Issuer Cap Index was 14.57%.

The after-tax returns are shown only for Class I shares, are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown. After-tax returns for classes other than Class I will vary from returns shown for Class I. Returns for Class FI are not presented because it has not yet commenced operations. Returns for Class FI would be substantially similar to those shown except to the extent that Class FI has different expenses than Class I and Class IS shares.

Management

Investment manager: Legg Mason Partners Fund Advisor, LLC

Subadviser: Western Asset Management Company

Portfolio managers: S. Kenneth Leech, Stephen A. Walsh, Michael A. Buchanan and Keith J. Gardner. Messrs. Leech, Walsh and Gardner have been portfolio managers for the fund since its inception. Mr. Buchanan has been a portfolio manager for the fund since 2005. These portfolio managers work together with a broader investment management team.


Western Asset Funds		33

Other information


34		Western Asset Funds

Western Asset Inflation Indexed Plus Bond Portfolio


Contents
Investment objective		35
Fees and expenses of the fund		35
Principal investment strategies		36
Certain risks		36
Performance		39
Management		39
Other information		40

Investment objective

Maximize total return, consistent with preservation of capital.

Fees and expenses of the fund

The accompanying table describes the fees and expenses that you may pay if you buy and hold shares of the fund.


Shareholder fees (paid directly from your investment) (%)
	Class IS	Class I	Class FI
	None	None	None
Annual fund operating expenses (expenses that you pay each year as a percentage of the value of your investment) (%)
	Class IS	Class I	Class FI
Management fees	0.20	0.20	0.20
Distribution and service (12b-1) fees	None	None	0.25¹
Other expenses	0.08	0.12	0.34
Total annual fund operating expenses	0.28	0.32	0.79
Fees forgone and/or expenses reimbursed	(0.03)²	(0.02)³	(0.04)²
Total annual fund operating expenses after forgoing fees and reimbursing expenses	0.25	0.30	0.75

The manager has agreed to forgo fees and/or reimburse operating expenses (other than interest, taxes, extraordinary expenses, deferred organizational expenses and brokerage commissions) so that total annual operating expenses are not expected to exceed 0.25% and 0.75% for Class IS and FI shares, respectively. This arrangement cannot be terminated prior to April 30, 2011 without the Board’s consent. The manager is permitted to recapture amounts forgone or reimbursed to a class within three years after the day on which the manager earned the fee or incurred the expense if the class’s total annual operating expenses have fallen to a level below the lower of the limit described above or the limit then in effect.

³	With respect to Class I shares, the manager has contractually agreed to forgo fees and/or reimburse operating expenses at the rate shown. This arrangement cannot be terminated prior to April 30, 2011 without the Board’s consent.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes:

You invest $10,000 in the fund for the time periods indicated

Your investment has a 5% return each year and the fund’s operating expenses remain the same

You reinvest all distributions and dividends

Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Number of years you own your shares ($)	1 year	3 years	5 years	10 years
Class IS (with or without redemption at end of period)	26	87	154	352
Class I (with or without redemption at end of period)	31	101	178	403
Class FI (with or without redemption at end of period)	77	249	435	974


Western Asset Funds		35

Principal investment strategies

Under normal market conditions, the fund invests at least 80% of its net assets in inflation-indexed fixed income securities and at least 70% of its net assets in U.S. Treasury Inflation Protected Securities.

The subadvisers use fundamental investment techniques to select issues. Although the fund may invest in fixed income securities of any maturity, the target dollar-weighted average effective duration of the fund is expected to range within 3 years of that of its benchmark, the Barclays Capital U.S. TIPS Index. Therefore, the range within which the dollar-weighted average effective duration of the fund is expected to fluctuate is 6–12 years, although this may vary. Effective duration measures the expected sensitivity of market price to changes in interest rates, taking into account the effects of structural complexities (for example, some bonds can be prepaid by the issuer).

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

Although the fund is expected to maintain a dollar-weighted average credit quality of at least A/A, it may invest up to 30% of its net assets in securities rated below AAA/Aaa at the time of purchase or unrated securities of comparable quality at the time of purchase (as determined by the applicable subadviser), including securities rated below investment grade. The fund considers a security to be rated below investment grade if it is not rated Baa/BBB or above by at least one Nationally Recognized Statistical Rating Organization (“NRSRO”) or is unrated and of comparable quality as determined by the applicable subadviser. Securities rated below investment grade are commonly known as “junk bonds” or “high yield securities.”

In addition, under normal market conditions, at the time of purchase:

no more than 20% of the fund’s net assets may be invested in non-U.S. dollar denominated inflation-indexed securities

no more than 10% of the fund’s net assets may be invested in un-hedged non-U.S. dollar denominated securities

no more than 20% of the fund’s net assets may be invested in a combination of high yield securities, emerging market securities and loan participations and assignments

no more than 10% of the fund’s net assets may be invested in high yield securities

no more than 10% of the fund’s net assets may be invested in emerging market securities

no more than 10% of the fund’s net assets may be invested in loan participations and assignments

Certain risks

There is no assurance that the fund will meet its investment objective.


36		Western Asset Funds

Risk of investing in fewer issuers. To the extent the fund invests its assets in fewer issuers, the fund will be more susceptible to negative events affecting those issuers.


Western Asset Funds		37

Certain risks cont’d

if the fund had not fair-valued the security or had used a different valuation methodology.

These and other risks are discussed in more detail later in this Prospectus or in the SAI.


38		Western Asset Funds

Performance

The fund’s past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.


Total returns (before taxes) (%)

		Best quarter (9/30/2002): 8.00 Worst quarter (9/30/2008): (5.37)


Average annual total returns (for periods ended December 31, 2009) (%)
	1 year	5 years	Since inception	Inception date

Class I
Return before taxes	12.86	4.51	6.62	03/01/2001
Return after taxes on distributions	12.40	2.84	4.61
Return after taxes on distributions and sale of fund shares	8.34	2.88	4.52

Other Classes (Return before taxes only)
Class IS¹	12.99	N/A	11.39	12/18/2008
Class FI²	12.53	N/A	6.71	06/28/2007
Barclays Capital U.S. TIPS Index (reflects no deduction for fees, expenses or taxes)	11.41	4.63	6.76	03/01/2001

¹	For the period December 18, 2008 (commencement of operations) to December 31, 2009, the average annual total return of the Barclays Capital U.S. TIPS Index was 8.05%.

²	For the period June 28, 2007 (commencement of operations) to December 31, 2009, the average annual total return of the Barclays Capital U.S. TIPS Index was 7.56%.

Management

Investment manager: Legg Mason Partners Fund Advisor, LLC

Portfolio managers: S. Kenneth Leech, Stephen A. Walsh, Peter H. Stutz and Paul E. Wynn. Messrs. Leech, Walsh and Stutz have been portfolio managers for the fund since its inception. Mr. Wynn has been a portfolio manager for the fund since 2009. These portfolio managers work together with a broader investment management team.


Western Asset Funds		39

Management cont’d

Other information


40		Western Asset Funds

Western Asset Intermediate Bond Portfolio


Contents
Investment objective		41
Fees and expenses of the fund		41
Principal investment strategies		42
Certain risks		42
Performance		45
Management		45
Other information		45

Investment objective

Maximize total return, consistent with prudent investment management and liquidity needs, by investing to obtain the average duration specified below.

Fees and expenses of the fund

The accompanying table describes the fees and expenses that you may pay if you buy and hold shares of the fund.


Shareholder fees (paid directly from your investment) (%)
	Class IS	Class I	Class FI
	None	None	None
Annual fund operating expenses (expenses that you pay each year as a percentage of the value of your investment) (%)
	Class IS	Class I	Class FI
Management fees	0.40	0.40	0.40
Distribution and service (12b-1) fees	None	None	0.25¹
Other expenses	0.06	0.07	0.07²
Total annual fund operating expenses	0.46	0.47	0.72
Fees forgone and/or expenses reimbursed	(0.01)³	None	(0.02)³
Total annual fund operating expenses after forgoing fees and reimbursing expenses	0.45	0.47	0.70

²	“Other expenses” for Class FI shares are based on amounts for Class I shares because no Class FI shares were outstanding during the fund’s last fiscal year.

The manager has agreed to forgo fees and/or reimburse operating expenses (other than interest, taxes, extraordinary expenses, deferred organizational expenses and brokerage commissions) so that total annual operating expenses are not expected to exceed 0.45% and 0.70% for Class IS and FI shares, respectively. This arrangement cannot be terminated prior to April 30, 2011 without the Board’s consent. The manager is permitted to recapture amounts forgone or reimbursed to a class within three years after the day on which the manager earned the fee or incurred the expense if the class’s total annual operating expenses have fallen to a level below the lower of the limit described above or the limit then in effect.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes:

You invest $10,000 in the fund for the time periods indicated

Your investment has a 5% return each year and the fund’s operating expenses remain the same

You reinvest all distributions and dividends

Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Number of years you own your shares ($)	1 year	3 years	5 years	10 years
Class IS (with or without redemption at end of period)	46	146	256	577
Class I (with or without redemption at end of period)	48	151	263	593
Class FI (with or without redemption at end of period)	72	229	399	894


Western Asset Funds		41

Principal investment strategies

The fund invests in a portfolio of fixed income securities of various maturities and, under normal market conditions, will invest at least 80% of its net assets in debt and fixed income securities. Although the fund may invest in debt and fixed income securities of any maturity, under normal market conditions the target dollar-weighted average modified duration for the fund is expected to range within 20% of the duration of its benchmark, the Barclays Capital Intermediate U.S. Government/Credit Index (generally, this range is 2–5 years). Modified duration measures the expected sensitivity of market price to changes in interest rates using a weighted average of time to receipt of cash flows for a bond.

Certain risks

There is no assurance that the fund will meet its investment objective.


42		Western Asset Funds

be compounded. This is because leverage generally magnifies the effect of a change in the value of an asset and creates a risk of loss of value on a larger pool of assets than the fund would otherwise have had. The fund may also have to sell assets at inopportune times to satisfy its obligations.

Risk of investing in fewer issuers. To the extent the fund invests its assets in fewer issuers, the fund will be more susceptible to negative events affecting those issuers.


Western Asset Funds		43

Certain risks cont’d

their obligations. Investments in asset-backed securities are subject to similar risks.

These and other risks are discussed in more detail later in this Prospectus or in the SAI.


44		Western Asset Funds

Performance


Total returns (before taxes) (%)

		Best quarter (6/30/2009): 8.42 Worst quarter (9/30/2008): (4.09) .


Average annual total returns (for periods ended December 31, 2009) (%)
	1 year	5 years	10 years	Since inception	Inception date

Class I
Return before taxes	17.24	4.81	6.37
Return after taxes on distributions	14.89	2.94	4.21
Return after taxes on distributions and sale of fund shares	11.10	3.01	4.18

Other Classes (Return before taxes only)
Class IS¹	17.39	N/A	N/A	13.39	10/03/2008
Barclays Capital Intermediate U.S. Government/Credit Index (reflects no deduction for fees, expenses or taxes)	5.24	4.66	5.93

¹	For the period October 3, 2008 (commencement of operations) to December 31, 2009, the average annual returns of the Barclays Capital Intermediate U.S. Government/Credit Index was 7.63%.

Management

Investment manager: Legg Mason Partners Fund Advisor, LLC

Subadviser: Western Asset Management Company

Portfolio managers: S. Kenneth Leech, Stephen A. Walsh, Andrea A. Mack and Julien A. Scholnick. Messrs. Leech and Walsh have been portfolio managers for the fund since its inception. Ms. Mack and Mr. Scholnick have been portfolio managers for the fund since 2009. These portfolio managers work together with a broader investment management team.

Other information


Western Asset Funds		45

Western Asset Intermediate Plus Bond Portfolio


Contents
Investment objective		46
Fees and expenses of the fund		46
Principal investment strategies		47
Certain risks		47
Performance		50
Management		50
Other information		51

Investment objective

Maximize total return, consistent with prudent investment management and liquidity needs, by investing to obtain the average duration specified below.

Fees and expenses of the fund

The accompanying table describes the fees and expenses that you may pay if you buy and hold shares of the fund.


Shareholder fees (paid directly from your investment) (%)
	Class IS	Class I	Class FI
	None	None	None
Annual fund operating expenses (expenses that you pay each year as a percentage of the value of your investment) (%)
	Class IS	Class I	Class FI
Management fees	0.40	0.40	0.40
Distribution and service (12b-1) fees	None	None	0.25¹
Other expenses	0.36	0.28	0.28²
Total annual fund operating expenses	0.76	0.68	0.93
Fees forgone and/or expenses reimbursed	(0.31)³	(0.13)⁴	(0.23)³
Total annual fund operating expenses after forgoing fees and reimbursing expenses	0.45	0.55	0.70

²	“Other expenses” for Class FI shares are based on amounts for Class I shares because no Class FI shares were outstanding during the fund’s last fiscal year.

The manager has agreed to forgo fees and/or reimburse operating expenses (other than interest, taxes, extraordinary expenses, deferred organizational expenses and brokerage commissions) so that total annual operating expenses are not expected to exceed 0.45% and 0.70% for Class IS and FI shares, respectively. This arrangement cannot be terminated prior to April 30, 2011 without the Board’s consent. The manager is permitted to recapture amounts forgone or reimbursed to a class within three years after the day on which the manager earned the fee or incurred the expense if the class’s total annual operating expenses have fallen to a level below the lower of the limit described above or the limit then in effect.

⁴	With respect to Class I shares, the manager has contractually agreed to forgo fees and/or reimburse operating expenses at the rate shown. This arrangement cannot be terminated prior to April 30, 2011 without the Board’s consent.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes:

You invest $10,000 in the fund for the time periods indicated

Your investment has a 5% return each year and the fund’s operating expenses remain the same

You reinvest all distributions and dividends

Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Number of years you own your shares ($)	1 year	3 years	5 years	10 years
Class IS (with or without redemption at end of period)	46	212	392	914
Class I (with or without redemption at end of period)	56	205	366	836
Class FI (with or without redemption at end of period)	72	274	493	1,123


46		Western Asset Funds

Principal investment strategies

The fund invests in a portfolio of fixed income securities of various maturities and, under normal market conditions, will invest at least 80% of its net assets in debt and fixed income securities. Although the fund may invest in debt and fixed income securities of any maturity, under normal market conditions the target dollar-weighted average effective duration for the fund is expected to range within 20% of the duration of its benchmark, the Barclays Capital Intermediate U.S. Government/Credit Index (generally, this range is 2–5 years). Effective duration measures the expected sensitivity of market price to changes in interest rates, taking into account the effects of structural complexities (for example, some bonds can be prepaid by the issuer).

Certain risks

There is no assurance that the fund will meet its investment objective.


Western Asset Funds		47

Certain risks cont’d

swap market, including potential government regulation, could adversely affect the fund.

Risk of investing in fewer issuers. To the extent the fund invests its assets in fewer issuers, the fund will be more susceptible to negative events affecting those issuers.


48		Western Asset Funds

inflation. If nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation-indexed securities. The fund may also experience a loss on an inflation-indexed security if there is deflation. If inflation is lower than expected during the period the fund holds an inflation-indexed security, the fund may earn less on the security than on a conventional bond.

These and other risks are discussed in more detail later in this Prospectus or in the SAI.


Western Asset Funds		49

Performance

The fund’s past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.


Total returns (before taxes) (%)

		Best quarter (6/30/2009): 9.01 Worst quarter (9/30/2008): (4.70)


Average annual total returns (for periods ended December 31, 2009) (%)
	1 year	5 years	Since inception	Inception date

Class I
Return before taxes	19.84	4.89	4.70	04/01/2004
Return after taxes on distributions	18.00	3.05	2.95
Return after taxes on distributions and sale of fund shares	12.80	3.10	2.99

Other Classes (Return before taxes only)
Class IS¹	19.89	N/A	21.69	11/10/2008
Barclays Capital Intermediate U.S. Government/Credit Index (reflects no deduction for fees, expenses or taxes)	5.24	4.66	4.17	04/01/2004

¹	For the period November 10, 2008 (commencement of operations) to December 31, 2009, the average annual total return of the Barclays Capital Intermediate U.S. Government/Credit Index was 8.77%.

Management

Investment manager: Legg Mason Partners Fund Advisor, LLC

Subadvisers: Western Asset Management Company and Western Asset Management Company Limited in London

Portfolio managers: S. Kenneth Leech, Stephen A. Walsh, Michael C. Buchanan, Keith J. Gardner, and Julien A. Scholnick. Messrs. Leech, Walsh and Gardner have been portfolio managers for the fund since its


50		Western Asset Funds

inception. Mr. Buchanan has been a portfolio manager for the fund since 2005. Mr. Scholnick has been a portfolio manager for the fund since 2009. These portfolio managers work together with a broader investment management team.

Other information


Western Asset Funds		51

Western Asset Limited Duration Bond Portfolio


Contents
Investment objective		52
Fees and expenses of the fund		52
Principal investment strategies		53
Certain risks		53
Performance		56
Management		56
Other information		57

Investment objective

Maximize total return, consistent with prudent investment management and liquidity needs, by investing to obtain the average duration specified below.

Fees and expenses of the fund

The accompanying table describes the fees and expenses that you may pay if you buy and hold shares of the fund.


Shareholder fees (paid directly from your investment) (%)
	Class IS	Class I	Class FI
	None	None	None
Annual fund operating expenses (expenses that you pay each year as a percentage of the value of your investment) (%)
	Class IS	Class I	Class FI
Management fees	0.35	0.35	0.35
Distribution and service (12b-1) fees	None	None	0.25¹
Other expenses	0.30	0.29	0.29²
Total annual fund operating expenses	0.65	0.64	0.89
Fees forgone and/or expenses reimbursed	(0.25)³	(0.10)⁴	(0.24)³
Total annual fund operating expenses after forgoing fees and reimbursing expenses	0.40	0.54	0.65

²	“Other expenses” for Class FI shares are based on amounts for Class I shares because no Class FI shares were outstanding during the fund’s last fiscal year.

The manager has agreed to forgo fees and/or reimburse operating expenses (other than interest, taxes, extraordinary expenses, deferred organizational expenses and brokerage commissions) so that total annual operating expenses are not expected to exceed 0.40% and 0.65% for Class IS and FI shares, respectively. This arrangement cannot be terminated prior to April 30, 2011 without the Board’s consent. The manager is permitted to recapture amounts forgone or reimbursed to a class within three years after the day on which the manager earned the fee or incurred the expense if the class’s total annual operating expenses have fallen to a level below the lower of the limit described above or the limit then in effect.

⁴	With respect to Class I shares, the manager has contractually agreed to forgo fees and/or reimburse operating expenses at the rate shown. This arrangement cannot be terminated prior to April 30, 2011 without the Board’s consent.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes:

You invest $10,000 in the fund for the time periods indicated

Your investment has a 5% return each year and the fund’s operating expenses remain the same

You reinvest all distributions and dividends

Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Number of years you own your shares ($)	1 year	3 years	5 years	10 years
Class IS (with or without redemption at end of period)	41	182	337	787
Class I (with or without redemption at end of period)	55	194	346	788
Class FI (with or without redemption at end of period)	66	260	470	1,075


52		Western Asset Funds

Principal investment strategies

The fund invests in a portfolio of fixed income securities of various maturities and, under normal market conditions, will invest at least 80% of its net assets in debt and fixed income securities. Although the fund may invest in debt and fixed income securities of any maturity, under normal market conditions the target dollar-weighted average effective duration for the fund is expected to range within 25% of the duration of its benchmark, the Merrill Lynch 1-3 Year Treasury Index (generally, this range is 1–3 years). Effective duration measures the expected sensitivity of market price to changes in interest rates, taking into account the effects of structural complexities (for example, some bonds can be prepaid by the issuer).

Certain risks

There is no assurance that the fund will meet its investment objective.


Western Asset Funds		53

Certain risks cont’d

magnifies the effect of a change in the value of an asset and creates a risk of loss of value on a larger pool of assets than the fund would otherwise have had. The fund may also have to sell assets at inopportune times to satisfy its obligations.

Risk of investing in fewer issuers. To the extent the fund invests its assets in fewer issuers, the fund will be more susceptible to negative events affecting those issuers.


54		Western Asset Funds

risk that underlying borrowers will be unable to meet their obligations. Investments in asset-backed securities are subject to similar risks.

These and other risks are discussed in more detail later in this Prospectus or in the SAI.


Western Asset Funds		55

Performance

The fund’s past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.


Total returns (before taxes) (%)

		Best quarter (6/30/2009): 7.99 Worst quarter (9/30/2008): (4.87)


Average annual total returns (for periods ended December 31, 2009) (%)
	1 year	5 years	Since inception	Inception date

Class I
Return before taxes	16.38	1.83	1.86	10/01/2003
Return after taxes on distributions	14.86	0.32	0.50
Return after taxes on distributions and sale of fund shares	10.58	0.68	0.80

Other Classes (Return before taxes only)
Class IS¹	16.42	N/A	12.91	10/29/2008
BofA Merrill Lynch 1-3 Year Treasury Index (reflects no deduction for fees, expenses or taxes)	0.78	4.04	3.38	10/01/2003

¹	For the period October 29, 2008 (commencement of operations) to December 31, 2009, the average annual total return of the BofA Merrill Lynch 1-3 Year Treasury Index was 2.15%.

Management

Investment manager: Legg Mason Partners Fund Advisor, LLC

Subadviser: Western Asset Management Company

Portfolio managers: S. Kenneth Leech, Stephen A. Walsh, Andrea A. Mack, Julien A. Scholnick and Michael Y. Pak. Messrs. Leech and Walsh and Ms. Mack have been portfolio managers for the fund since its inception. Messrs. Scholnick and Pak have been portfolio managers for the fund since 2009. These portfolio managers work together with a broader investment management team.


56		Western Asset Funds

Other information


Western Asset Funds		57

Western Asset Non-U.S. Opportunity Bond Portfolio


Contents
Investment objective		58
Fees and expenses of the fund		58
Principal investment strategies		59
Certain risks		59
Performance		62
Management		62
Other information		62

Investment objective

Maximize total return, consistent with prudent investment management.

Fees and expenses of the fund

The accompanying table describes the fees and expenses that you may pay if you buy and hold shares of the fund.


Shareholder fees (paid directly from your investment) (%)
	Class IS	Class I	Class FI
	None	None	None
Annual fund operating expenses (expenses that you pay each year as a percentage of the value of your investment) (%)
	Class IS	Class I	Class FI
Management fees	0.45	0.45	0.45
Distribution and service (12b-1) fees	None	None	0.25¹
Other expenses	0.25²	0.25	0.25²
Total annual fund operating expenses	0.70	0.70	0.95
Fees forgone and/or expenses reimbursed	(0.15)³	(0.04)⁴	(0.15)³
Total annual fund operating expenses after forgoing fees and reimbursing expenses	0.55	0.66	0.80

²	“Other expenses” for Class IS and Class FI shares are based on amounts for Class I shares because no Class IS or Class FI shares were outstanding during the fund’s last fiscal year.

The manager has agreed to forgo fees and/or reimburse operating expenses (other than interest, taxes, extraordinary expenses, deferred organizational expenses and brokerage commissions) so that total annual operating expenses are not expected to exceed 0.55% and 0.80% for Class IS and FI shares, respectively. This arrangement cannot be terminated prior to April 30, 2011 without the Board’s consent. The manager is permitted to recapture amounts forgone or reimbursed to a class within three years after the day on which the manager earned the fee or incurred the expense if the class’s total annual operating expenses have fallen to a level below the lower of the limit described above or the limit then in effect.

⁴	With respect to Class I shares, the manager has contractually agreed to forgo fees and/or reimburse operating expenses at the rate shown. This arrangement cannot be terminated prior to April 30, 2011 without the Board’s consent.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes:

You invest $10,000 in the fund for the time periods indicated

Your investment has a 5% return each year and the fund’s operating expenses remain the same

You reinvest all distributions and dividends

Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Number of years you own your shares ($)	1 year	3 years	5 years	10 years
Class IS (with or without redemption at end of period)	56	209	375	856
Class I (with or without redemption at end of period)	67	220	386	866
Class FI (with or without redemption at end of period)	82	288	511	1,152


58		Western Asset Funds

Principal investment strategies

Under normal market conditions, the fund invests at least 80% of its net assets in debt and fixed income securities denominated in major non-U.S. currencies. The subadvisers anticipate that, under normal market conditions, all or substantially all of the fund’s assets will be invested in securities of non-U.S. issuers and that these non-U.S. issuers will represent at least three non-U.S. countries. Under current market conditions, the fund expects non-U.S. currency exposure to represent no more than 25% of its net assets.

The fund does not currently intend to invest in securities that are rated below investment grade (i.e., securities not rated Baa/BBB or above by at least one Nationally Recognized Statistical Rating Organization (“NRSRO”) or if unrated are of comparable quality as determined by a subadviser) at the time of purchase, although it may do so if market conditions are favorable. Securities rated below investment grade are commonly known as “junk bonds” or “high yield securities.”

The fund is “non-diversified” within the meaning of the Investment Company Act of 1940, as amended. As a result, the value of its shares will be more susceptible to any single economic, political or regulatory event affecting one or a small number of issuers than shares of a diversified fund. The subadvisers anticipate that from time to time over 25% of the fund’s assets may be invested in securities of issuers located in a single non-U.S. country. Because the fund may concentrate a significant portion of its investments in a single country or currency, it will be more susceptible to factors adversely affecting such currency or issuers within that country than would a more diversified portfolio of securities.

This fund is designed for Western Asset’s separate account clients to obtain non-U.S. exposure for a portion of their portfolio, and is managed by the subadvisers with this objective in mind, and therefore may not be appropriate for all investors.

Certain risks

There is no assurance that the fund will meet its investment objective.


Western Asset Funds		59

Certain risks cont’d

and the counterparty may default on its obligations to the fund.


60		Western Asset Funds

purposes, it will be more difficult for the fund to achieve its objective.

Special risks of high yield securities. Securities rated below investment grade, commonly referred to as junk bonds or high yield securities, have speculative

characteristics. Accordingly, there is a greater possibility that the issuers of these securities may be unable to make timely payments of interest and principal and thus default. These securities typically entail greater potential price volatility, may be more susceptible to real or perceived adverse economic and competitive industry conditions and may be less liquid than higher-rated securities.

These and other risks are discussed in more detail later in this Prospectus or in the SAI.


Western Asset Funds		61

Performance

The fund’s past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.


Total returns (before taxes) (%)

		Best quarter (9/30/2001): 8.71 Worst quarter (3/31/2009): (2.45)


Average annual total returns (for periods ended December 31, 2009) (%)
	1 year	5 years	10 years

Class I
Return before taxes	4.95	4.42	6.96
Return after taxes on distributions	4.84	2.09	4.58
Return after taxes on distributions and sale of fund shares	3.35	2.53	4.63
Citigroup World Government ex-U.S. Index (Hedged) (reflects no deduction for fees, expenses or taxes)	2.38	4.79	5.35

The after-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown. Returns for Class IS and Class FI are not presented because they have not yet commenced operations. Returns for Class IS and Class FI would be substantially similar to those shown except to the extent that such share classes have different expenses than Class I shares.

Management

Investment manager: Legg Mason Partners Fund Advisor, LLC

Subadvisers: Western Asset Management Company Limited in London, Western Asset Management Company Pte. Ltd. in Singapore and Western Asset Management Company Ltd in Japan

Portfolio managers: S. Kenneth Leech, Stephen A. Walsh and Andres Sanchez-Balcazar. Messrs. Leech and Walsh have been portfolio managers for the fund since its inception. Mr. Sanchez-Balcazar has been a portfolio manager for the fund since 2009. These portfolio managers work together with a broader investment management team.

Other information


62		Western Asset Funds

Other information

Purchase and sale of fund shares

You may purchase, redeem or exchange shares of the fund each day the New York Stock Exchange is open, at the fund’s net asset value determined after receipt of your request in good order.

The fund’s initial/subsequent investment minimums generally are as follows:


Investment minimum initial/additional investment ($)
	Class IS	Class I	Class FI
General	N/A	N/A	N/A
Uniform Gifts or Transfers to Minor Accounts	N/A	N/A	N/A
Systematic Investment Plans	N/A	N/A	N/A
Clients of Eligible Financial Intermediaries	None/None	None/None	None/None
Institutional Investors	1 Million/None	1 million/None	1 million/None

Your financial intermediary may impose different investment minimums.

For more information about how to purchase, redeem or exchange shares, and to learn which classes of shares are available to you, you should contact your financial intermediary, or, if you hold your shares or plan to purchase shares through the fund, you should contact the fund by phone (Institutional Shareholder Services at 1-888-425-6432) or by mail (Legg Mason Funds, c/o BFDS, P.O. Box 55214, Boston, MA 02205-8504).

Tax information

Each fund intends to make distributions that may be taxed as ordinary income or taxable gains.

Payments to broker/dealers and other financial intermediaries

Each fund’s related companies may pay broker/dealers or other financial intermediaries (such as a bank) for the sale of fund shares and related services. These payments create a conflict of interest by influencing your broker/dealer or other intermediary or its employees or associated persons to recommend the fund over another investment. Ask your financial adviser or visit your financial intermediary’s website for more information.


Western Asset Funds		63

More on the funds’ investment strategies, investments and risks

Western Asset Funds, Inc. (“Western Asset Funds”) consists of the following portfolios: Western Asset Absolute Return Portfolio (“Absolute Return”), Western Asset Core Bond Portfolio (“Core”), Western Asset Core Plus Bond Portfolio (“Core Plus”), Western Asset Enhanced Equity Portfolio (“Enhanced Equity”), Western Asset Global Strategic Income Portfolio (“Global Strategic Income”), Western Asset High Yield Portfolio (“High Yield”), Western Asset Inflation Indexed Plus Bond Portfolio (“Inflation Indexed”), Western Asset Intermediate Bond Portfolio (“Intermediate”), Western Asset Intermediate Plus Bond Portfolio (“Intermediate Plus”), Western Asset Limited Duration Bond Portfolio (“Limited Duration”), and Western Asset Non-U.S. Opportunity Bond Portfolio (“Non-U.S.”). As of the date of this prospectus, Enhanced Equity and Global Strategic Income have not commenced operations.

Except for the investment objective of each of Core and Intermediate, the Board of Directors (the “Board”) may change a fund’s investment objective, investment strategies and other policies without shareholder approval.

For purposes of the above limitations, Absolute Return, Core, Core Plus, Intermediate, Intermediate Plus, Limited Duration and Non-U.S. will consider an issuer to be a “non-U.S. issuer” if the issuer is a non-U.S. government (including any sub-division, agency or instrumentality of a non-U.S. government), a supranational entity or any other issuer (including corporate issuers) organized under the laws of a country outside of the United States and having a principal place of business outside of the United States. Each such fund will consider all other issuers to be “U.S. issuers.”

For purposes of their investment limitations described above, Absolute Return and Inflation Indexed will consider debt obligations of corporate and governmental issuers in emerging market countries (including “Brady Bonds”, bonds issued as a result of a debt restructuring plan, Eurobonds, domestic and international bonds issued under the laws of a developing country, and emerging market loans) to be “emerging market securities.” The funds consider a country to be an emerging market country if, at the time of investment, it is represented in the JP Morgan Emerging Markets Bond Index Global or categorized by the World Bank in its annual categorization as middle- or low-income.

Each fund will consider the entity that issues the security backed by the pool of assets supporting a mortgage-backed or asset-backed security to be the “issuer” for purposes of its investment limitations set forth above.

Maturity and duration

The dollar-weighted average duration of Absolute Return, Core, Core Plus, Inflation Indexed, Intermediate, Intermediate Plus and Limited Duration may fall outside of its expected range due to market movements. If this happens, the fund’s subadviser(s) will take action to bring the fund’s dollar-weighted average duration back within its expected range within a reasonable period of time.

Credit quality

The continued holding of a security downgraded below its rating at the time of purchase will be evaluated on a case by case basis. As a result, a fund may from time to time hold debt securities that are rated below investment grade in excess of the amounts described in its investment limitations. Securities rated below investment grade are commonly known as “junk bonds” or “high yield securities.” To the extent not addressed above, in the event that NRSROs assign different ratings to the same security, an applicable subadviser will determine which rating it believes best reflects the security’s quality and risk at that time. For purposes of any applicable credit quality limitations, each fund will consider a security rated Baa3/BBB- to be rated Baa/BBB. For purposes of its credit quality limitations, Inflation Indexed will consider a security rated A-/A3 to be rated A/A.

Derivatives

Each fund may engage in a variety of transactions using derivatives, such as futures, options, swaps and warrants, and may purchase other derivative instruments. Derivatives are financial instruments whose


64		Western Asset Funds

value depends upon, or is derived from, the value of something else, such as one or more underlying investments, indexes or currencies. Derivatives may be used by the fund for any of the following purposes:

As a hedging technique in an attempt to manage risk in the fund’s portfolio

As a substitute for buying or selling securities

As a cash flow management technique

As a means of enhancing returns

Each fund from time to time may sell protection on debt securities by entering into credit default swaps. In these transactions, a fund is generally required to pay the par (or other agreed-upon) value of a referenced debt security to the counterparty in the event of a default on or downgrade of the debt security and/or a similar credit event. In return, the fund receives from the counterparty a periodic stream of payments over the term of the contract. If no default occurs, the fund keeps the stream of payments and has no payment obligations. As the seller, a fund would effectively add leverage to its portfolio because, in addition to its net assets, the fund would be subject to investment exposure on the par (or other agreed-upon) value it had undertaken to pay. Credit default swaps may also be structured based on an index or the debt of a basket of issuers, rather than a single issuer, and may be customized with respect to the default event that triggers purchase or other factors (for example, a particular number of defaults within a basket, or defaults by a particular combination of issuers within the basket, may trigger a payment obligation).

Using derivatives, especially for non-hedging purposes, may involve greater risks to a fund than investing directly in securities, particularly as these instruments may be very complex and may not behave in the manner anticipated by the fund. Certain derivative transactions may have a leveraging effect on the fund.

Certain risks associated with the use of derivatives are discussed below. Risks are magnified to the extent that a large portion of a fund’s assets are committed to derivatives in general or are invested in just one or a few types of derivatives.

Use of derivatives or similar instruments may have different tax consequences for a fund than an investment in the underlying security, and such differences may affect the amount, timing and character of income distributed to shareholders, including the proportion of income consisting of exempt-interest dividends.

When a fund enters into derivative transactions, it may be required to segregate assets, or enter into offsetting positions, in accordance with applicable regulations. Such segregation will not limit the fund’s exposure to loss, however, and the fund will have investment risk with respect to both the derivative itself and the assets that have been segregated to cover the fund’s derivative exposure. If such segregated assets represent a large portion of the fund’s portfolio, this may impede portfolio management or the fund’s ability to meet redemption requests or other current obligations.

As noted above, instead of investing directly in particular securities, a fund may use derivatives such as futures contracts, synthetic instruments and other instruments that are intended to provide economic exposure to a security, an issuer, an index or basket of securities, or a market. The fund may use one or more types of these instruments to the extent consistent with its 80% policy.

A fund’s subadviser(s) may choose not to make use of derivatives.

Fixed income securities

Fixed income securities represent obligations of corporations, governments and other entities to repay money borrowed. Fixed income securities are commonly referred to as “debt,” “debt obligations,” “bonds” or “notes.” The issuer or borrower of the security usually pays a fixed, variable or floating rate of interest and repays the amount borrowed, usually at the maturity of the instrument. However, some fixed income securities, such as zero coupon bonds, do not pay current interest but are sold at a discount from their face values. Other debt instruments, such as certain mortgage-backed and other asset-backed


Western Asset Funds		65

More on the funds’ investment strategies, investments and risks cont’d

securities, make periodic payments of interest and/or principal. Some debt instruments are partially or fully secured by collateral supporting the payment of interest and principal. The terms “fixed income securities,” “debt,” “debt obligations,” “debt securities,” “corporate debt” and “bonds” are used in this Prospectus interchangeably, and, where used, are not intended to be limiting.

Variable and floating rate securities

Variable rate securities reset at specified intervals, while floating rate securities reset whenever there is a change in a specified index rate. In most cases, these reset provisions reduce the impact of changes in market interest rates on the value of the security. However, the value of these securities may decline if their interest rates do not rise as much, or as quickly, as interest rates in general. Conversely, floating rate securities will not generally increase in value if interest rates decline. A fund may also invest in inverse floating rate debt instruments (“inverse floaters”). An inverse floater may exhibit greater price volatility than a fixed rate obligation of similar credit quality.

Stripped securities

Certain fixed income securities, called stripped securities, may represent the right to receive either payments of principal (called “POs”) or payments of interest (called “IOs”) on underlying pools of mortgages or on government securities. The value of these types of instruments may change more drastically than debt securities that pay both principal and interest during periods of changing interest rates. Interest-only and principal-only mortgage-backed securities are especially sensitive to interest rate changes, which can affect not only their prices but can also change the prepayment assumptions about those investments and income flows a fund receives from them.

Corporate debt

Each fund may invest in corporate debt securities which are fixed income securities usually issued by businesses to finance their operations. Notes, bonds, debentures and commercial paper are the most common types of corporate debt securities, with the primary difference being their maturities and secured or unsecured status. Commercial paper has the shortest term and is usually unsecured. The broad category of corporate debt securities includes debt issued by U.S. or foreign companies of all kinds, including those with small-, mid- and large capitalizations. Corporate debt may be rated investment-grade or below investment grade and may carry variable or floating rates of interest. All of these types of securities are often generally referred to as corporate bonds.

Corporate loans

Each fund may invest in corporate loans. The primary risk in an investment in corporate loans is that borrowers may be unable to meet their interest and/or principal payment obligations. Loans in which a fund invests may be made to finance highly leveraged borrowers which may make such loans especially vulnerable to adverse changes in economic or market conditions. Corporate loans in which a fund may invest may be either collateralized or uncollateralized and senior or subordinate. Investments in uncollateralized and/or subordinate loans entail a greater risk of nonpayment than do investments in corporate loans that hold a more senior position in the borrower’s capital structure or are secured with collateral. In addition, corporate loans are generally subject to liquidity risk. Each fund may acquire an interest in corporate loans by purchasing participations in and assignments of portions of corporate loans from third parties or by investing in pools of loans, such as collateralized debt obligations as further described under “Mortgage-backed and asset-backed securities.”

Government securities

U.S. government securities are obligations of, or guaranteed by, the U.S. government, its agencies or government-sponsored entities. U.S. government securities include issues by non-governmental entities (like financial institutions) that carry direct guarantees from U.S. government agencies as part of government initiatives in response to the market crisis or otherwise. Although the U.S. government guarantees


66		Western Asset Funds

principal and interest payments on securities issued by the U.S. government and some of its agencies, such as securities issued by the Government National Mortgage Association (Ginnie Mae), this guarantee does not apply to losses resulting from declines in the market value of these securities.

Some of the U.S. government securities that a fund may hold are not guaranteed or backed by the full faith and credit of the U.S. government, such as those issued by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Although the U.S. government has recently provided financial support to Fannie Mae and Freddie Mac, there can be no assurance that it will support these or other government-sponsored enterprises in the future.

Sovereign debt

Each fund may invest in sovereign debt, including emerging market sovereign debt. Sovereign debt securities may include:

Fixed income securities issued or guaranteed by governments, governmental agencies or instrumentalities and their political subdivisions

Fixed income securities issued by government-owned, controlled or sponsored entities

Interests in entities organized and operated for the purpose of restructuring the investment characteristics of instruments issued by any of the above issuers

Brady Bonds, which are debt securities issued under the framework of the Brady Plan as a means for debtor nations to restructure their outstanding external indebtedness

Participations in loans between governments and financial institutions

Fixed income securities issued by supranational entities such as the World Bank or the European Economic Community. A supranational entity is a bank, commission or company established or financially supported by the national governments of one or more countries to promote reconstruction or development

Sovereign government and supranational debt involve many of the risks of foreign and emerging markets investments as well as the risk of debt moratorium, repudiation or renegotiation and the fund may be unable to enforce its rights against the issuers.

Mortgage-backed and asset-backed securities

Each fund may invest in mortgage-backed and asset-backed securities. Mortgage-backed securities may be issued by private issuers, by government-sponsored entities such as the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) or by agencies of the U.S. Government, such as the Government National Mortgage Association (Ginnie Mae). Mortgage-backed securities represent direct or indirect participations in, or are collateralized by and payable from, mortgage loans secured by real property.

Unlike mortgage-related securities issued or guaranteed by agencies of the U.S. Government or government-sponsored entities, mortgage-related securities issued by private issuers do not have a government or government-sponsored entity guarantee (but may have other credit enhancement), and may, and frequently do, have less favorable collateral, credit risk or other underwriting characteristics. Mortgage-backed securities are also particularly susceptible to prepayment and extension risks, because prepayments on the underlying mortgages tend to increase when interest rates fall and decrease when interest rates rise.

Asset-backed securities represent participations in, or are secured by and payable from, assets such as installment sales or loan contracts, leases, credit card receivables and other categories of receivables. Certain asset-backed securities present a heightened level of risk because, in the event of default, the liquidation value of the underlying assets may be inadequate to pay any unpaid principal or interest.


Western Asset Funds		67

More on the funds’ investment strategies, investments and risks cont’d

The value of mortgage-backed and asset-backed securities may be affected by changes in credit quality or value of the mortgage loans or other assets that support the securities. In addition, for mortgage-backed securities, when market conditions result in an increase in the default rates on the underlying mortgages and the foreclosure values of the underlying real estate are below the outstanding amount of the underlying mortgages, collection of the full amount of accrued interest and principal on these investments may be doubtful. For mortgage derivatives and structured securities that have embedded leverage features, small changes in interest or prepayment rates may cause large and sudden price movements. Mortgage derivatives can also become illiquid and hard to value in declining markets.

The fund may invest in collateralized mortgage obligations (“CMOs”) and collateralized debt obligations (“CDOs”), which include collateralized bond obligations (“CBOs”), collateralized loan obligations (“CLOs”) and other similarly structured securities.

CMOs are debt obligations collateralized by mortgage loans or mortgage pass-through securities. CMOs are a type of mortgage-backed security. Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac Certificates, but may also be collateralized by whole loans or private pass-throughs (referred to as “Mortgage Assets”). Payments of principal and of interest on the Mortgage Assets, and any reinvestment income thereon, provide the funds to pay debt service on the CMOs. In a CMO, a series of bonds or certificates is issued in multiple classes. Each class of CMOs, often referred to as a “tranche,” is issued at a specified fixed or floating coupon rate and has a stated maturity or final distribution date. Principal prepayments on the Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates. Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly or semi-annual basis. The principal of and interest on the Mortgage Assets may be allocated among the several classes of a series of a CMO in innumerable ways. As market conditions change, and particularly during periods of rapid or unanticipated changes in market interest rates, the attractiveness of the CMO classes and the ability of the structure to provide the anticipated investment characteristics may be significantly reduced. Such changes can result in volatility in the market value, and in some instances reduced liquidity, of the CMO class.

CDOs are a type of asset-backed security. A CBO is a trust or other special purpose entity which is typically backed by a diversified pool of fixed income securities (which may include high risk, below investment grade securities). A CLO is a trust or other special purpose entity that is typically collateralized by a pool of loans, which may include, among others, domestic and non-U.S. senior secured loans, senior unsecured loans, and subordinated corporate loans, including loans that may be rated below investment grade or equivalent unrated loans. Like CMOs, CDOs generally issue separate series or “tranches” which vary with respect to risk and yield. CDO tranches can experience substantial losses due to actual defaults, increased sensitivity to defaults due to collateral default and disappearance of subordinate tranches, market anticipation of defaults, as well as investor aversion to CDO securities as a class. Interest on certain tranches of a CDO may be paid in kind (paid in the form of obligations of the same type rather than cash), which involves continued exposure to default risk with respect to such payments.

Municipal securities

Municipal securities include general obligation bonds, revenue bonds, housing authority bonds, private activity bonds, industrial development bonds, residual interest bonds, tender option bonds, tax and revenue anticipation notes, bond anticipation notes, tax-exempt commercial paper, municipal leases, participation certificates and custodial receipts. General obligation bonds are backed by the full faith and credit of the issuing entity. Revenue bonds are typically used to fund public works projects, such as toll roads, airports and transportation facilities, that are expected to produce income sufficient to make the payments on the bonds, since they are not backed by the full taxing power of the municipality. Housing authority bonds are used primarily to fund low to middle income residential projects and may be backed by the payments made on the underlying mortgages. Tax and revenue anticipation notes are generally issued in order to finance short-term cash needs or, occasionally, to finance construction. Tax and revenue anticipation notes are expected to be repaid from taxes or designated revenues in the related fiscal period, and they may or


68		Western Asset Funds

may not be general obligations of the issuing entity. Bond anticipation notes are issued with the expectation that their principal and interest will be paid out of proceeds from renewal notes or bonds and may be issued to finance such items as land acquisition, facility acquisition and/or construction and capital improvement projects.

Foreign and emerging market securities

Each fund may invest its assets in securities of foreign issuers, including mortgage-backed securities and asset-backed securities issued by foreign entities. The value of a fund’s foreign securities may decline because of unfavorable government actions, political instability or the more limited availability of accurate information about foreign issuers. A fund may invest in foreign securities issued by issuers located in emerging market countries. To the extent a fund invests in these securities, the risks associated with investment in foreign issuers will generally be more pronounced.

Preferred stock and convertible securities

Each fund may invest in preferred stock and convertible securities. Preferred stock represents an interest in a company that generally entitles the holder to receive, in preference to the holders of common stock, dividends and a fixed share of the proceeds resulting from a liquidation of the company. Preferred stocks may pay fixed or adjustable rates of return. Convertible fixed income securities convert into shares of common stock of their issuer. Preferred stock and convertible fixed income securities share investment characteristics of both fixed income and equity securities. However, the value of these securities tends to vary more with fluctuations in the underlying common stock and less with fluctuations in interest rates and tends to exhibit greater volatility.

Equity securities

Although the funds invest principally in fixed income securities and related investments, a fund may from time to time invest in or receive equity securities and equity-like securities. Equity securities include warrants, rights, exchange traded and over-the-counter common stocks, baskets of equity securities such as exchange traded funds, depositary receipts, trust certificates, limited partnership interests, and shares of other investment companies and real estate investment trusts.

Equity securities represent an ownership interest in the issuing company. Holders of equity securities are not creditors of the company, and in the event of the liquidation of the company, would be entitled to their pro rata share of the company’s assets, if any, after creditors, including the holders of fixed income securities, and holders of any senior equity securities are paid. Equity securities generally have greater price volatility than fixed income securities.

Warrants and rights permit, but do not obligate, their holder to subscribe for other securities. Warrants and rights are subject to the same market risks as stocks, but may be more volatile in price. An investment in warrants or rights may be considered speculative. In addition, the value of a warrant or right does not necessarily change with the value of the underlying securities and a warrant or right ceases to have value if it is not exercised prior to its expiration date.

Securities of other investment companies

Each fund may invest in securities of other investment companies to the extent permitted under the 1940 Act. The return on investments in other registered investment companies will be reduced by the operating expenses, including investment advisory expenses, of such companies, and by any sales loads or other distribution and/or service fees or charges incurred in purchasing or selling shares of such companies, in addition to the fund’s own fees and expenses. As such, there is a layering of fees and expenses.

Credit downgrades and other credit events

Credit rating or credit quality of a security is determined at the time of purchase. If, after purchase, the credit rating on a security is downgraded or the credit quality deteriorates, or if the duration of a security is


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More on the funds’ investment strategies, investments and risks cont’d

extended, a fund’s portfolio managers will decide whether the security should be held or sold. Upon the occurrence of certain triggering events or defaults on a security held by a fund, or if an obligor of such a security has difficulty meeting its obligations, the fund may obtain a new or restructured security or underlying assets. In that case, the fund may become the holder of securities or other assets that it could not purchase or might not otherwise hold (for example, because they are of lower quality or are subordinated to other obligations of the issuer) at a time when those assets may be difficult to sell or can be sold only at a loss. In addition, a fund may incur expenses to protect the fund’s interest in securities experiencing these events.

Zero coupon bonds, pay-in-kind securities and deferred interest securities

Zero coupon securities pay no interest during the life of the obligation but trade at prices below their stated maturity value. Although these securities lock in a rate of return to maturity, they may be subject to greater fluctuations in market value than securities that pay interest periodically. However, zero coupon bonds are useful as a tool for managing duration. Pay-in-kind securities have characteristics similar to those of zero coupon securities, but interest on such securities may be paid in the form of obligations of the same type rather than cash. Deferred interest securities are obligations that generally provide for a period of delay before the regular payment of interest begins and are issued at a significant discount from face value.

When-issued securities, delayed delivery and forward commitment transactions

Each fund may purchase securities under arrangements (called when-issued, delayed delivery or forward commitment basis) where the securities will not be delivered or paid for immediately. The fund will set aside assets to pay for these securities at the time of the agreement. Such transactions involve a risk of loss if the value of the securities declines prior to the settlement date or if the assets set aside to pay for these securities decline in value prior to the settlement date. Therefore, these transactions may have a leveraging effect on a fund, making the value of an investment in the fund more volatile and increasing the fund’s overall investment exposure. Typically, no income accrues on securities a fund has committed to purchase prior to the time delivery of the securities is made, although the fund may earn income on securities it has segregated or “earmarked” to cover these positions.

Forward roll transactions

Each fund may engage in forward roll transactions (also referred to as mortgage dollar rolls). A forward roll transaction involves a forward commitment by the fund (see “When-issued securities, delayed delivery and forward commitment transactions” above). In general, in a forward roll transaction, the fund sells a mortgage security while simultaneously agreeing to repurchase a similar security from the same party (the counterparty) on a specified future date at a lower fixed price. A fund may enter into a forward roll transaction with the intention of entering into an offsetting transaction whereby, rather than accepting delivery of the security on the specified date, the fund sells the security and agrees to repurchase a similar security at a later time.

An obligation to repurchase securities on a specified future date involves a risk of loss if the value of the securities that the fund is obligated to purchase declines below the purchase price prior to the repurchase date. Forward roll transactions may have a leveraging effect on the fund, making the value of an investment in the fund more volatile and increasing the fund’s overall investment exposure.

Short-term investments

Each fund may invest in cash, money market instruments and short-term securities, including repurchase agreements, U.S. government securities, bank obligations and commercial paper. A repurchase agreement is a transaction in which a fund purchases a security from a seller, subject to the obligation of the seller to repurchase that security from the fund at a higher price. The repurchase agreement thereby determines the yield during the fund’s holding period, while the seller’s obligation to repurchase is secured by the value of the underlying security held by the fund.


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Borrowings and reverse repurchase agreements

Each fund may enter into borrowing transactions. Borrowing may make the value of an investment in the fund more volatile and increase the fund’s overall investment exposure. The fund may be required to liquidate portfolio securities at a time when it would be disadvantageous to do so in order to make payments with respect to any borrowings. Interest on any borrowings will be a fund expense and will reduce the value of the fund’s shares.

Each fund may enter into reverse repurchase agreements, which have characteristics like borrowings. In a reverse repurchase agreement, the fund sells securities to a counterparty, in return for cash, and the fund agrees to repurchase the securities at a later date and for a higher price, representing the cost to the fund for the cash received.

Securities lending

Each fund may lend its portfolio securities, provided that cash or equivalent collateral, equal to at least 100% of the market value of such securities, is continuously maintained by the counterparty with the fund. During the pendency of the transaction, the counterparty will pay the fund an amount equivalent to any dividends or interest paid on such securities, and the fund may invest the cash collateral and earn additional income, or it may receive an agreed upon amount of interest income from the counterparty who has delivered equivalent collateral.

Restricted and illiquid securities

Restricted securities are securities subject to legal or contractual restrictions on their resale. An “illiquid security” is any security which may not be sold or disposed of in the ordinary course of business within seven days at approximately the value at which the fund has valued the security. Such conditions might prevent the sale of such securities at a time when the sale would otherwise be desirable. A fund will not acquire “illiquid securities” if such acquisition would cause the aggregate value of illiquid securities to exceed 15% of the fund’s net assets. A fund may determine that some restricted securities can be more readily sold, for example to qualified institutional buyers pursuant to SEC Rule 144A, and therefore may treat certain such securities as “liquid” for purposes of limitations on the amount of illiquid securities it may own. Investing in these restricted securities could have the effect of increasing the fund’s illiquidity if qualified buyers become, for a time, uninterested in buying these securities. These securities may be difficult to value, and the fund may have difficulty disposing of such securities promptly. The fund does not consider non-U.S. securities to be restricted if they can be freely sold in the principal markets in which they are traded, even if they are not registered for sale in the United States.

Structured notes and indexed securities

Structured notes and indexed securities differ from other types of debt securities. The interest rate or principal amount payable at maturity may vary based on changes in one or more specified reference instruments, such as currencies, other securities, interest rates, commodities, indices or other financial indicators. The change in the principal amount payable with respect to, or the interest rate of, a structured note or indexed security may be a multiple of the percentage change (positive or negative) in the value of the underlying reference instrument(s).

Non-U.S. currency transactions

A fund may engage in a variety non-U.S. currency exchange transactions to protect against uncertainty in the level of future exchange rates or to enhance returns. Non-U.S. currency exchange transactions may take the form of options, futures (and options thereon), swaps, warrants, structured notes, forwards or spot (cash) transactions. The value of these non-U.S. currency transactions depends on the value of the underlying currency relative to the U.S. dollar.


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Inflation-indexed, inflation-protected and related securities

Inflation-indexed and inflation-protected securities are fixed-income securities that are structured to provide protection against inflation and whose principal value or coupon (interest payment) is periodically adjusted according to the rate of inflation. If the index measuring inflation falls, the principal value or coupon of these securities will be adjusted downward. Consequently, the interest payable on these securities will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is not guaranteed for inflation-indexed and inflation-protected securities. As a result, the adjusted principal value of the bond repaid at maturity may be less than the original principal.

Inflation-protected securities denominated in the U.S. dollar include U.S. Treasury Inflation Protected Securities (“U.S. TIPS”), as well as other bonds issued by U.S. and non-U.S. government agencies and instrumentalities or corporations and derivatives related to these securities. U.S. TIPS are inflation-protected securities issued by the U.S. Department of the Treasury and the principal amounts of U.S. TIPS are adjusted daily based upon changes in the rate of inflation (as currently represented by the non-seasonally adjusted Consumer Price Index for All Urban Consumers, calculated with a three-month lag). U.S. TIPS pay interest semi-annually, equal to a fixed percentage of the inflation-adjusted principal amount. The interest rate on these bonds is fixed at issuance, but over the life of the bond, this interest may be paid on an increasing or decreasing principal amount that has been adjusted for inflation. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed. The current market value of U.S. TIPS is not guaranteed and will fluctuate.

Defensive investing

Each fund may depart from its principal investment strategies in response to adverse market, economic or political conditions by taking temporary defensive positions and investing in any type of money market instruments and short-term debt securities or holding cash without regard to any percentage limitations. Although the subadviser(s) have the flexibility to take defensive positions, they may choose not to do so for a variety of reasons, even during volatile market conditions.

Other investments

Each fund may also use other strategies and invest in other securities that are described, along with their risks, in the SAI. However, the fund might not use all of the strategies and techniques or invest in all of the types of securities described in this Prospectus or in the SAI. New types of mortgage-backed and asset-backed securities, derivative instruments, hedging instruments and other securities or instruments are developed and marketed from time to time. Consistent with its investment limitations, a fund may invest in new types of securities and instruments.

Percentage and other limitations

Each fund’s compliance with its investment limitations and requirements is usually determined at the time of investment. If a percentage limitation is complied with at the time of an investment, any subsequent change in percentage resulting from a change in values or assets, or a change in credit quality, will not constitute a violation of that limitation.

More on fund management cont’d

rates for sub-accounting, recordkeeping and other services when the applicable fund determines that this is in the best interest of the fund and its shareholders. If investors effect transactions through a broker or agent, investors may be charged a fee by that broker or agent.

In addition, the distributor, the manager and/or their affiliates make payments for distribution, shareholder servicing, marketing and promotional activities and related expenses out of their profits and other available sources, including profits from their relationships with the funds. These payments are not reflected as additional expenses in the fee table contained in this Prospectus. The recipients of these payments may include the funds’ distributor and affiliates of the manager, as well as non-affiliated broker/dealers, insurance companies, financial institutions and other financial intermediaries through which investors may purchase shares of the funds, including your financial intermediary. The total amount of these payments is substantial, may be substantial to any given recipient and may exceed the costs and expenses incurred by the recipient for any fund-related marketing or shareholder servicing activities. The payments described in this paragraph are often referred to as “revenue sharing payments.” Revenue sharing arrangements are separately negotiated.

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

Expenses

Each fund pays its share of all expenses that are not assumed by the manager, the subadviser(s) or other parties, including Directors’, auditing, legal, custodial, transfer agency and distribution fees (which are in turn allocated to Class FI shares). The manager is responsible for the payment of any transfer agency fees in excess of 0.25% of the average daily net assets of a fund’s class of shares.

Turnover

The length of time a fund has held a particular security is not generally a consideration in investment decisions. A change in the securities held by a fund is known as “portfolio turnover.” As a result of a fund’s investment policies, under certain market conditions a fund’s turnover rate may be higher than that of other mutual funds. Fund turnover generally involves some expense to a fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestment in other securities. These transactions may result in realization of taxable capital gains. Higher portfolio turnover rates, such as those above 100%, are likely to result in higher trading costs or other transaction costs and could give rise to a greater amount of taxable capital gains, including short-term gains taxed upon distribution at ordinary income rates.


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Choosing a class of shares to buy

The funds offer three classes of shares: Class IS, Class I and Class FI. Class FI shares bear a 12b-1 fee. See “Distribution” above for more information.

Prior to or concurrent with the initial purchase of shares in any fund, each investor must open an account for that fund by completing and signing an application and sending it to:


U.S. Postal Service		Overnight Carrier Address
Legg Mason Funds		Legg Mason Funds
c/o BFDS		c/o BFDS
P.O. Box 55214		30 Dan Road
Boston, MA 02205-8504		Canton, MA 02021-2809

Shares of a fund are available to investors as follows:

Class I and Class FI shares of a fund are available for purchase by:

1—Institutional investors who make an initial investment of at least $1 million in the fund. Generally, Institutional investors are corporations, banks, trust companies, insurance companies, investment companies, foundations, endowment plans, defined benefit employee benefit plans and similar entities.

2—Retirement plans such as 401(k) retirement plans, 457 plans, employer-sponsored 403(b) plans, profit-sharing plans, and non-qualified deferred compensation plans. Retirement plans do not include defined benefit employee benefit plans, individual retirement vehicles, such as traditional and Roth individual retirement accounts, Coverdell education savings accounts, individual 403(b)(7) custodial accounts, Keogh plans, SEPs, SARSEPs, SIMPLE IRAs, or similar accounts.

3—Investors purchasing through financial intermediaries such as banks, brokers, dealers, insurance companies and other financial intermediaries that offer their clients the ability to purchase shares through investment programs such as fee-based advisory programs. Shareholders should contact their financial intermediary for information regarding the financial intermediary’s policies on purchasing, exchanging, and redeeming shares as well as initial and subsequent investment minimums and any fees associated with the purchase and redemption of shares. This Prospectus should be read by customers of the financial intermediaries in connection with any such information received from the financial intermediaries. Any fees, charges, or requirements imposed by financial intermediaries will be in addition to the fees and requirements of this Prospectus.

Class I shares of the funds may also be purchased by (i) current and former Board members of investment companies managed by affiliates of Legg Mason, Inc., (ii) current and former board members of Legg Mason, Inc., (iii) employees of Legg Mason, Inc. and (iv) in each case, the immediate families of such persons.

Class IS shares of a fund are available for purchase by institutional investors and retirement plans (each described above) that make an initial investment of at least $1 million in a fund. Class IS shares are available only to institutional investors and retirement plans that hold their shares in one account with that fund, which account is not subject to payment of recordkeeping or similar fees paid by the fund.


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Buying shares

A purchase order, together with payment in one of the forms described in the following paragraphs, received by Boston Financial Data Services (the “Transfer Agent” or “BFDS”) prior to the close of regular trading on the Exchange (ordinarily 4:00 p.m., Eastern time) (“close of the Exchange”) will be effected at that day’s net asset value. An order received after the close of the Exchange will generally be effected at the net asset value determined on the next business day. However, orders received by certain retirement plans and other financial intermediaries by the close of the Exchange and communicated to the Transfer Agent by 9:00 a.m., Eastern time, on the following business day will be effected at the net asset value determined on the prior business day.

Purchases of shares can be made by wiring federal funds to State Street Bank and Trust Company. Before wiring federal funds, the investor must first telephone the fund at 1-888-425-6432 to receive instructions for wire transfer. On the telephone, the following information will be required: shareholder name; name of the person authorizing the transaction; shareholder account number; name of the fund and class of shares to be purchased; amount being wired; and name of the wiring bank.

The wire should state that the funds are for the purchase of shares of a specific fund and share class and include the account name and number.

Shares may also be purchased and paid for by the contribution of eligible portfolio securities, subject in each case to approval by the manager. Approval will depend on, among other things, the nature and quality of the securities offered and the current needs of the fund in question. Securities offered in payment for shares will be valued in the same way and at the same time the fund values its portfolio securities for purposes of determining net asset value. See “Share price” below. Investors who wish to purchase fund shares through the contribution of securities should contact the fund at 1-888-425-6432 for instructions. Investors should also realize that at the time of contribution they may be required to recognize a gain or loss for tax purposes on securities contributed. The fund has full discretion to reject any securities offered as payment for shares.

Other purchase information

Purchases will be made in full and fractional shares.

Each fund and LMIS reserve the right, in their sole discretion, to request additional documents and information from investors in connection with purchase orders, and to redeem shares if information provided in the application should prove to be incorrect or incomplete in any manner judged by a fund to be material (e.g., in a manner such as to render the shareholder ineligible to purchase shares of a fund).

Shares of the funds may not be qualified or registered for sale in all States. Prospective investors should inquire as to whether shares of a particular fund are available for offer and sale in their State of residence. Shares of a fund may not be offered or sold in any State unless registered or qualified in that jurisdiction or unless an exemption from registration or qualification is available.

Retirement plans

Shares of the funds are available for purchase by retirement plans, including 401(k) plans and 403(b) plans. The administrator of a plan or employee benefits office can provide participants or employees with detailed information on how to participate in the plan and how to elect a fund as an investment option. Participants in a retirement or savings plan may be permitted to elect different investment options, alter the amounts contributed to the plan, or change how contributions are allocated among investment options in accordance with the plan’s specific provisions.

The plan administrator or employee benefits office should be consulted for details. For questions about participant accounts, participants should contact their employee benefits office, the plan administrator, or the organization that provides record-keeping services for the plan. Investors who purchase shares through retirement plans should be aware that the plan administrator may aggregate purchase and redemption orders of participants in the plan. Therefore, there may be a delay between the time the investor places an order with the plan administrator and the time the order is forwarded to the Transfer Agent for execution.


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Account registration changes

Changes in registration or account privileges may be made in writing to a fund. Signature guarantees may be required. See “Signature guarantee” below. All correspondence must include the account number and must be sent to:

U.S. Postal Service

Overnight Carrier Address

Legg Mason Funds

c/o BFDS

P.O. Box 55214

Boston, MA 02205-8504

Legg Mason Funds

c/o BFDS

30 Dan Road

Canton, MA 02021-2809

Significant investors

Certain investment companies may invest in the funds and may at times have substantial investments in one or more funds. These investment companies are referred to as “funds of funds” because they invest primarily in other investment companies.

From time to time, a fund may experience relatively large redemptions or investments due to transactions in fund shares by a fund of funds or other significant investor. The effects of these transactions could adversely affect a fund’s performance. In the event of such redemptions or investments, a fund could be required to sell securities or to invest cash at a time when it is not advantageous to do so. Such transactions may increase brokerage and/or other transaction costs of a fund. In addition, when a fund of funds or other investor owns a substantial portion of the shares of a fund, a large redemption by the fund of funds or other investor could cause the fund’s expenses to increase and could result in the fund becoming too small to be economically viable. Redemptions of fund shares could also accelerate the realization of taxable capital gains in the fund if sales of securities result in capital gains. The impact of these transactions is likely to be greater when a fund of funds or other significant investor purchases, redeems, or owns a substantial portion of a fund’s shares.

Exchanging shares

Shareholders in any fund may exchange their shares for shares of the same class of any of the other funds or, if the investor meets the applicable eligibility requirements for making an initial investment in the applicable share class, directly for shares of a different class of the same fund, provided, in each case, that the shares of that class are being offered at the time of the proposed exchange. Shareholders in any fund may also exchange their shares for the same class of shares of any other funds distributed by LMIS so long as the proposed exchange meets the eligibility requirements of the shares of the other fund. Investments by exchange are made at the per share net asset values next determined after the order for exchange is received in good order.

An exchange between funds is considered a sale and generally results in a capital gain or loss for federal income tax purposes. An exchange of shares of one class directly for shares of another class of the same fund generally should not be taxable for federal income tax purposes. You should talk to your tax advisor before making an exchange.

The exchange privilege is not intended as a vehicle for short-term trading. See “Frequent trading of fund shares” below. For further information concerning the exchange privilege, or to make an exchange, please contact the Legg Mason Institutional Services at 1-888-425-6432.

Redeeming shares

Fund shares may be redeemed through four methods: (1) by sending a written request for redemption to Legg Mason funds, P.O. Box 55214, Boston, MA 02205-8504; (2) by faxing a request to Legg Mason Investor Services—Institutional, c/o BFDS, at 1-781-796-3326; (3) by calling Legg Mason Institutional Services at 1-888-425-6432; or (4) by wire communication with the Transfer Agent. In each case, the investor should first notify Legg Mason Institutional Services at 1-888-425-6432 of the intention to redeem. No charge is


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Redeeming shares cont’d

made for redemptions. Shareholders who wish to be able to redeem by telephone or wire communication must complete an authorization form in advance. Redemptions over $10,000,000 may be initiated by telephone, but must be confirmed in writing prior to processing.

Upon receipt of a request for redemption as described below (a request “in good order”) before the close of the Exchange on any day when the Exchange is open, the Transfer Agent will redeem fund shares at that day’s net asset value per share. Requests for redemption received by the Transfer Agent after the close of the Exchange will be executed at the net asset value next determined. However, orders received by certain retirement plans and other financial intermediaries by the close of the Exchange and communicated to the Transfer Agent on the following business day will be effected at the net asset value determined on the prior business day. The funds may refuse to effect redemption requests during periods permitted by federal securities laws.

Requests for redemption should indicate:

1) The number of shares or dollar amount to be redeemed and the investor’s shareholder account number;

2) The investor’s name and the names of any co-owner of the account, using exactly the same name or names used in establishing the account, and, in some cases, signatures of the owners exactly how the account is registered;

3) Proof of authorization to request redemption on behalf of any co-owner of the account (please contact the fund for further details); and

4) The name, address, and account number to which the redemption payment should be sent.

Payment of the redemption price normally will be made by wire one business day after receipt of a redemption request in good order. However, each fund reserves the right to postpone the payment date when the Exchange is closed, when trading is restricted, or during other periods as permitted by federal securities laws, as well as to take up to seven days to make payment upon redemption if the fund involved could be adversely affected by immediate payment. Redemption proceeds may also be paid in-kind at the discretion of the fund. Shareholders who receive a redemption in-kind may incur costs to dispose of such securities. In addition, depending upon the circumstances, a shareholder may incur additional tax liability upon the sale of securities received in a redemption in kind.

Other supporting legal documents, such as copies of the trust instrument or power of attorney, may be required from corporations or other organizations, fiduciaries or persons other than the shareholder of record making the request for redemption or repurchase. If you have a question concerning the sale or redemption of shares, please contact Legg Mason Institutional Services by calling 1-888-425-6432.


88		Western Asset Funds

Other things to know about transactions

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

Name of the fund

Your account number

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

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

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

In certain circumstances, the signature of each owner exactly as the account is registered

The funds generally will not permit non-resident aliens with a non-U.S. address to establish an account. U.S. citizens with an APO/FPO address or an address in the United States (including its territories) and resident aliens with U.S. addresses are permitted to establish accounts with the funds. Subject to the requirements of local law, U.S. citizens residing in foreign countries are permitted to establish accounts with the funds.

In certain circumstances, such as during periods of market volatility, severe weather and emergencies, shareholders may experience difficulties placing exchange or redemption orders by telephone. In that case, shareholders should consider using the funds’ other exchange and redemption procedures described under “Redeeming shares.”

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

Each fund has the right to:

Suspend the offering of shares and resume it at any time thereafter

Waive or change minimum initial and additional investment amounts

Reject any purchase or exchange order, in whole or in part

Change, revoke or suspend the exchange privilege

Suspend telephone transactions

Signature guarantees

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

Instruct the transfer agent to send redemption proceeds to a bank other than what is on file

Adding new banking instructions currently not on file (or in some instances you may submit a blanket Letter of Indemnity renewable annually)

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

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

Changed your account registration or your address within 30 days

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

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

You can obtain a signature guarantee from most banks, dealers, brokers, credit unions and federal savings and loan institutions, but not from a notary public. Any fund may change the signature guarantee requirements from time to time without prior notice to shareholders.


Western Asset Funds		89

Other things to know about transactions cont’d

Anti-money laundering

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

Small account balances/Mandatory redemptions

Any fund may elect to close the shareholder account of a Retirement Plan holding Class IS shares or an institutional investor when the current value of the account is less than $1 million due to redemptions or exchanges by the shareholder by redeeming all of the shares in the account and mailing the proceeds to the investor. If a fund elects to redeem the shares in an account, the shareholder will be notified that the account is below $1 million and will be allowed 30 days in which to make an additional investment in order to avoid having the account closed. Shares will be redeemed at the net asset value calculated on the day of redemption. Any fund may change the $1 million minimum account balance from time to time without notice to shareholders.

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

For more information, please contact Institutional Shareholder Services.

Frequent trading of fund shares

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

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

Under the funds’ policies and procedures, the funds reserve the right to restrict or reject purchases of shares (including exchanges) without prior notice whenever a pattern of excessive trading by a shareholder is detected in funds distributed by LMIS. A committee established by the Manager administers the policy. The policy provides that the committee may take action, which may include using its best efforts to restrict a shareholder’s trading privileges in LMIS distributed funds, if that shareholder has engaged in one or more “Round Trips” across all LMIS distributed funds. However, the committee has the discretion to determine that action is not necessary if it is determined that the pattern of trading is not abusive or harmful. In making such a determination, the committee will consider, among other things, the nature of the shareholder’s account, the reason for the frequent trading, the amount of trading and the particular funds in which the


90		Western Asset Funds

trading has occurred. Additionally, the committee has the discretion to make inquiries or to take any action against a shareholder whose trading appears inconsistent with the frequent trading policy, regardless of the number of Round Trips. Examples of the types of actions the committee may take include heightened surveillance of a shareholder account, providing a written warning letter to an account holder, restricting the shareholder from purchasing additional shares in a fund altogether or imposing other restrictions (such as requiring purchase orders to be submitted by mail) that would deter the shareholder from trading frequently in the funds. The committee will generally follow a system of progressive deterrence, although it is not required to do so.

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

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

The funds have also adopted policies and procedures to prevent the selective release of information about the funds’ holdings, as such information may be used for market-timing and similar abusive practices.

The funds’ policies provide for ongoing assessment of the effectiveness of current policies and surveillance tools, and the Board reserves the right to modify these or adopt additional policies and restrictions in the future. Shareholders should be aware, however, that any surveillance techniques currently employed by the funds or other techniques that may be adopted in the future may not be effective, particularly where the trading takes place through certain types of omnibus accounts. Furthermore, a fund may not apply its policies consistently or uniformly, resulting in the risk that some shareholders may be able to engage in frequent trading while others will bear the costs and effects of that trading.

Although the funds will attempt to monitor shareholder transactions for certain patterns of frequent trading activity, there can be no assurance that all such trading activity can be identified, prevented or terminated. Monitoring of shareholder transactions may only occur in respect of shareholder transactions that exceed a certain transaction amount threshold, which may change from time to time. The funds reserve the right to refuse any client or reject any purchase order for shares (including exchanges) for any reason.

Share certificates

The funds do not issue share certificates. If you currently hold share certificates of a fund, the certificates will continue to be honored. If you would like to return your share certificates to a fund and hold your shares in uncertificated form, please contact Institutional Shareholder Services.

Record ownership

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


Western Asset Funds		91

Dividends, distributions and taxes

Enhanced Equity, Global Strategic Income and High Yield declare and pay dividends four times per year out of their available net investment income, if any. Non-U.S. declares and pays dividends annually out of its available net investment income, if any.

Absolute Return, Core, Core Plus, Inflation Indexed, Intermediate, Intermediate Plus and Limited Duration declare as a dividend at the close of regular trading on the Exchange each business day, to shareholders of record as of the close of the Exchange that day, substantially all of their net investment income since the prior business day’s dividend. Shares will begin to earn dividends on settlement date. Absolute Return, Core, Core Plus, Inflation Indexed, Intermediate, Intermediate Plus and Limited Duration pay dividends monthly. Distributions of net realized capital gains are made annually.

Shareholders may elect to receive dividends and distributions in one of four ways:

1) Receive both dividends and other distributions in shares of the same class of the distributing fund;

2) Receive dividends in cash and other distributions in shares of the same class of the distributing fund;

3) Receive dividends in shares of the same class of the distributing fund and other distributions in cash; or

4) Receive both dividends and other distributions in cash.

If no election is made, both dividends and other distributions are credited to a shareholder’s fund account in shares (of the same class as the shares already held) at the net asset value of the shares determined as of the close of the Exchange on the reinvestment date.

For Absolute Return, Core, Core Plus, Inflation Indexed, Intermediate, Intermediate Plus and Limited Duration, reinvestment of dividends and other distributions occurs on the payment date. A shareholder who redeems all shares in Absolute Return, Core, Core Plus, Inflation Indexed, Intermediate Bond, Intermediate Plus and Limited Duration will receive all dividends and other distributions declared for that monthly cycle prior to the redemption date (i.e., all dividends and other distributions from the first day of that monthly cycle, if invested on that first day, up to and including the date of the redemption). For the other funds, reinvestment occurs on the ex-dividend date. An election to receive dividends or other distributions in cash rather than additional shares may be made by notifying Legg Mason Institutional Services in writing.

The Directors reserve the right to revise the dividend policy or postpone the payment of dividends if warranted in their judgment due to unusual circumstances, such as an unexpected large expense, loss or fluctuation in net asset value.

Each fund intends to qualify or continue to qualify as a “regulated investment company” for federal income tax purposes and to meet all other requirements necessary for it to be relieved of federal taxes on income and gains it distributes in a timely manner to shareholders. A regulated investment company is not subject to tax at the corporate level on income and gains from investments that are timely distributed to shareholders. Each fund therefore intends to distribute substantially all of its net investment income and net realized capital gains to its shareholders on a current basis. A fund’s failure to qualify as a regulated investment company would result in corporate level taxation, and consequently, a reduction in income available for distribution to shareholders. Early each year, each fund will notify its shareholders of the amount and tax status of distributions paid during the prior year.

The following discussion assumes that a fund will qualify as a regulated investment company. This discussion is only a summary only of certain federal income tax consequences of investing in a fund.

Distributions from a fund (whether paid in cash or reinvested in shares of the fund) will generally be taxable to shareholders (other than qualified retirement plans and other tax-exempt investors) as ordinary income to the extent derived from the fund’s investment income and net short-term gains. Fund distributions of net capital gain (the excess of net gains from the sale of capital assets held by the fund for more than one year over net losses from the sale of capital assets held by the fund for one year or less) that are properly designated by the fund as capital gain dividends will generally be taxable to shareholders as long-term capital gains. Long-term capital gains rates applicable to most individual shareholders have been temporarily


92		Western Asset Funds

reduced for taxable years beginning before January 1, 2011—in general to 15%, with a 0% rate applying to taxpayers in the 10% and 15% ordinary income tax rate brackets. It is currently unclear whether Congress will extend the long-term capital gain rate reduction for taxable years beginning on or after January 1, 2011.

For taxable years beginning before January 1, 2011, distributions of investment income designated by the fund as derived from “qualified dividend income” will be taxable in the hands of individuals at the rates applicable to long-term capital gains, provided holding period and other requirements are met at both the shareholder and fund level. It is not expected that a significant portion of fund distributions will be derived from qualified dividend income.

Distributions are taxable to shareholders even if they are paid from income or gains earned by a fund before a shareholder’s investment (and thus were included in the price the shareholder paid for his or her shares).

Special tax rules apply to investments through defined contribution plans and other tax-qualified plans. Shareholders should consult their tax advisers to determine the suitability of shares of a fund as an investment through such plans and the precise effect of such an investment in their particular tax situations.

In addition to income tax on a fund’s distributions, any gain resulting from a sale of fund shares (other than by a qualified retirement plan or other tax-exempt investor) will generally be subject to federal income tax. An exchange between funds is considered a sale and generally results in a capital gain or loss for federal income tax purposes. An exchange of shares of one class directly for shares of another class of the same fund generally should not be taxable for federal income tax purposes. You should talk to your tax advisor before making an exchange.

Shareholders and prospective shareholders are urged to consult their tax advisers with respect to the effects of an investment in a fund in their particular tax situations (including possible liability for non-U.S., state, local and other taxes). Further information regarding taxes, including certain federal income tax consideration relevant to foreign persons, in is included in the Statement of Additional Information.


Western Asset Funds		93

Share price

Valuation of a fund’s securities and other assets is performed in accordance with procedures approved by the Board. These procedures delegate most valuation functions to the manager, which, in turn, uses independent third party pricing services approved by the funds’ Board. Under the procedures, assets are valued as follows:

The valuations for fixed income securities and certain derivative instruments are typically the prices supplied by independent third party pricing services, which may use market prices or broker/dealer quotations or a variety of fair valuation techniques and methodologies. Short-term fixed income securities that will mature in 60 days or less are valued at amortized cost, unless it is determined that using this method would not reflect an investment’s fair value.

Equity securities and certain derivative instruments that are traded on an exchange are valued at the closing price or, if that price is unavailable or deemed by the manager not representative of market value, the last sale price. Where a security is traded on more than one exchange (as is often the case overseas), the security is generally valued at the price on the exchange considered by the manager to be the primary exchange. In the case of securities not traded on an exchange, or if exchange prices are not otherwise available, the prices are typically determined by independent third party pricing services that use a variety of techniques and methodologies.

The valuations of securities traded on foreign markets and certain fixed income securities will generally be based on prices determined as of the earlier closing time of the markets on which they primarily trade, unless a significant event has occurred. When a fund holds securities or other assets that are denominated in a foreign currency, the fund will normally use the currency exchange rates as of 4:00 p.m. (Eastern time). Foreign markets are open for trading on weekends and other days when a fund does not price its shares. Therefore, the value of a fund’s shares may change on days when you will not be able to purchase or redeem the fund’s shares.

If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers. When such prices or quotations are not available, or when the manager believes that they are unreliable, the manager may price securities using fair value procedures approved by the Board. These procedures permit, among other things, the use of a matrix, formula or other method that takes into consideration market indices, yield curves and other specific adjustments to determine fair value. Fair value of a security is the amount as determined by the manager in good faith, that the fund might reasonably expect to receive upon a current sale of the security. A fund may also use fair value procedures if the manager determines that a significant event has occurred between the time at which a market price is determined and the time at which the fund’s net asset value is calculated.

Many factors may influence the price at which a fund could sell any particular portfolio investment. The sales price may well differ—higher or lower—from the fund’s last valuation, and such differences could be significant, particularly for securities that trade in relatively thin markets and/or markets that experience extreme volatility. Moreover, valuing securities using fair value methodologies involves greater reliance on judgment than valuing securities based on market quotations. A fund that uses fair value methodologies may value those securities higher or lower than another fund using market quotations or its own fair value methodologies to price the same securities. There can be no assurance that a fund could obtain the value assigned to a security if it were to sell the security at approximately the time at which the fund determines its net asset value. Investors who purchase or redeem fund shares on days when a fund is holding fair-valued securities may receive a greater or lesser number of shares, or higher or lower redemption proceeds, than they would have received if the fund had not fair-valued the security or had used a different methodology.


94		Western Asset Funds

Financial highlights

The financial highlights table is intended to help you understand the funds’ financial performance for the past five years or since inception of a class. Prior to April 23, 2010, Class IS, Class I and Class FI share were known as Institutional Select Class, Institutional Class and Financial Intermediary Class shares, respectively. This information has been audited by the funds’ independent registered public accounting firm, PricewaterhouseCoopers LLP, whose report, along with the funds’ financial statements, is incorporated by reference into the funds’ SAI (see back cover) and is included in the funds’ annual reports.

Western Asset Absolute Return Portfolio


Class FI:	Year ended December 31, 2009		Period ended December 31, 2008^A		Years ended March 31,
Class FI:	Year ended December 31, 2009		Period ended December 31, 2008^A		2008		2007^B
Net asset value, beginning of year	$7.82		$9.82		$10.23		$10.17
Investment operations:
Net investment income^C	.43		.35		.47		.27
Net realized and unrealized gain/(loss)	2.05		(1.69)		(.37)		.13
Total from investment operations	2.48		(1.34)		.10		.40
Distributions from:
Net investment income	(.51)		(.42)		(.46)		(.27)
Net realized gain on investments	—		(.24)		(.05)		(.07)
Total distributions	(.51)		(.66)		(.51)		(.34)
Net asset value, end of year	$9.79		$7.82		$9.82		$10.23
Total return^D	32.55	%	(14.31)	%	1.03	%	3.99	%
Ratios to average net assets:
Total expenses^E	1.42	%	1.38	%^F	1.31	%	85.97	%^F
Expenses net of waivers, if any^E	1.05		1.05	^F	1.06		1.18	^F
Expenses net of all reductions^E	1.05		1.05	^F	1.03		1.16	^F
Net investment income	4.7		5.5	^F	4.7		4.6	^F
Supplemental data:
Portfolio turnover rate	257.6	%	229.6	%^G	386.9	%	182.2	%^G
Net assets, end of year (in thousands)	$4,265		$813		$406		$17

^A	For the period April 1, 2008 to December 31, 2008.

^B	For the period September 6, 2006 (commencement of operations) to March 31, 2007.

^C	Computed using average daily shares outstanding.

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

Total expenses reflects operating expenses prior to any voluntary expense waivers and/or compensating balance credits. Expenses net of waivers reflects total expenses before compensating balance credits but net of any voluntary expense waivers. Expenses net of all reductions reflects expenses less any compensating balance credits and/or contractual expense waivers.

^F	Annualized.

^G	Not annualized.


Western Asset Funds		95

Financial highlights cont’d

Western Asset Absolute Return Portfolio


Class I:	Year ended December 31, 2009		Period ended December 31, 2008^A		Years ended March 31,
Class I:	Year ended December 31, 2009		Period ended December 31, 2008^A		2008		2007^B
Net asset value, beginning of year	$7.81		$9.82		$10.23		$10.00
Investment operations:
Net investment income^C	.46		.38		.49		.36
Net realized and unrealized gain/(loss)	2.03		(1.71)		(.36)		.29
Total from investment operations	2.49		(1.33)		.13		.65
Distributions from:
Net investment income	(.50)		(.44)		(.49)		(.35)
Net realized gain on investments	—		(.24)		(.05)		(.07)
Total distributions	(.50)		(.68)		(.54)		(.42)
Net asset value, end of year	$9.80		$7.81		$9.82		$10.23
Total return^D	32.89	%	(14.20)	%	1.31	%	6.63	%
Ratios to average net assets:
Total expenses^E	.85	%	.83	%^F	.84	%	1.09	%^F
Expenses net of waivers, if any^E	.80		.80	^F	.84		.93	^F
Expenses net of all reductions^E	.80		.80	^F	.83		.89	^F
Net investment income	5.2		5.5	^F	4.9		4.9	^F
Supplemental data:
Portfolio turnover rate	257.6	%	229.6	%^G	386.9	%	182.2	%^G
Net assets, end of year (in thousands)	$99,271		$152,349		$560,219		$371,239

^A	For the period April 1, 2008 to December 31, 2008.

^B	For the period July 6, 2006 (commencement of operations) to March 31, 2007.

^C	Computed using average daily shares outstanding.

^F	Annualized.

^G	Not annualized.


96		Western Asset Funds

Western Asset Absolute Return Portfolio


Class IS:	Year ended December 31, 2009		Period ended December 31, 2008^A
Net asset value, beginning of year	$7.82		$9.15
Investment operations:
Net investment income^B	.46		.20
Net realized and unrealized gain/(loss)	2.03		(1.26)
Total from investment operations	2.49		(1.06)
Distributions from:
Net investment income	(.52)		(.27)
Total distributions	(.52)		(.27)
Net asset value, end of year	$9.79		$7.82
Total return^C	32.81	%	(11.69)	%
Ratios to average net assets:
Total expenses^D	.84	%	.85	%^E
Expenses net of waivers, if any^D	.80		.80	^E
Expenses net of all reductions^D	.80		.80	^E
Net investment income	5.2		5.8	^E
Supplemental data:
Portfolio turnover rate	257.6	%	229.6	%^F
Net assets, end of year (in thousands)	$187,156		$161,094

^A	For the period August 4, 2008 (commencement of operations) to December 31, 2008.

^B	Computed using average daily shares outstanding.

^E	Annualized.

^F	Not annualized.


Western Asset Funds		97

Financial highlights cont’d

Western Asset Core Bond Portfolio


Class FI:	Year ended December 31, 2009		Period ended December 31, 2008^A		Years ended March 31,
Class FI:	Year ended December 31, 2009		Period ended December 31, 2008^A		2008		2007		2006		2005
Net asset value, beginning of year	$9.08		$10.54		$11.37		$11.05		$11.29		$11.81
Investment operations:
Net investment income	.45	^B	.40	^B	.56	^B	.51	^B	.47	^C	.38	^C
Net realized and unrealized gain/(loss)	1.61		(1.34)		(.79)		.35		(.22)		(.23)
Total from investment operations	2.06		(.94)		(.23)		.86		.25		.15
Distributions from:
Net investment income	(.52)		(.52)		(.55)		(.54)		(.49)		(.36)
Net realized gain on investments	—		—		(.05)		—		—	^D	(.31)
Total distributions	(.52)		(.52)		(.60)		(.54)		(.49)		(.67)
Net asset value, end of year	$10.62		$9.08		$10.54		$11.37		$11.05		$11.29
Total return^E	23.37	%	(9.06)	%	(2.12)	%	7.95	%	2.19	%	1.42	%
Ratios to average net assets:
Total expenses^F	.78	%	.77	%^G	.69	%	.72	%	.70	%	.72	%
Expenses net of waivers, if any^F	.75		.72	^G	.69		.72		.70		.72
Expenses net of all reductions^F	.75		.72	^G	.69		.72		.70		.72
Net investment income	4.7		5.3	^G	5.1		4.6		4.1		4.2
Supplemental data:
Portfolio turnover rate	220.8	%	140.8	%^H	455.0	%	431.7	%	540.4	%	407.2	%
Net assets, end of year (in thousands)	$1,199,219		$1,169,174		$1,627,400		$1,402,721		$360,819		$265,518

^A	For the period April 1, 2008 to December 31, 2008.

^B	Computed using average daily shares outstanding.

^C	Computed using SEC method.

^D	Amount less than $.01 per share.

^G	Annualized.

^H	Not annualized.


98		Western Asset Funds

Western Asset Core Bond Portfolio


Class I:	Year ended December 31, 2009		Period ended December 31, 2008^A		Years ended March 31,
Class I:	Year ended December 31, 2009		Period ended December 31, 2008^A		2008		2007		2006		2005
Net asset value, beginning of year	$9.08		$10.54		$11.37		$11.05		$11.29		$11.81
Investment operations:
Net investment income	.48	^B	.42	^B	.58	^B	.55	^B	.49	^C	.39	^C
Net realized and unrealized gain/(loss)	1.61		(1.34)		(.78)		.34		(.22)		(.21)
Total from investment operations	2.09		(.92)		(.20)		.89		.27		.18
Distributions from:
Net investment income	(.55)		(.54)		(.58)		(.57)		(.51)		(.39)
Net realized gain on investments	—		—		(.05)		—		—	^D	(.31)
Total distributions	(.55)		(.54)		(.63)		(.57)		(.51)		(.70)
Net asset value, end of year	$10.62		$9.08		$10.54		$11.37		$11.05		$11.29
Total return^E	23.68	%	(8.88)	%	(1.88)	%	8.23	%	2.46	%	1.68	%
Ratios to average net assets:
Total expenses^F	.49	%	.47	%^G	.44	%	.47	%	.45	%	.46	%
Expenses net of waivers, if any^F	.49		.47	^G	.44		.47		.45		.46
Expenses net of all reductions^F	.49		.47	^G	.44		.47		.45		.46
Net investment income	5.0		5.6	^G	5.3		4.9		4.3		3.4
Supplemental data:
Portfolio turnover rate	220.8	%	140.8	%^H	455.0	%	431.7	%	540.4	%	407.2	%
Net assets, end of year (in thousands)	$2,170,146		$2,558,597		$5,140,277		$4,975,052		$4,243,248		$3,277,782

^A	For the period April 1, 2008 to December 31, 2008.

^B	Computed using average daily shares outstanding.

^C	Computed using SEC method.

^D	Amount less than $.01 per share.

^G	Annualized.

^H	Not annualized.


Western Asset Funds		99

Financial highlights cont’d

Western Asset Core Bond Portfolio


Class IS:	Year ended December 31, 2009		Period ended December 31, 2008^A
Net asset value, beginning of year	$9.09		$10.11
Investment operations:
Net investment income^B	.48		.15
Net realized and unrealized gain/(loss)	1.61		(.87)
Total from investment operations	2.09		(.72)
Distributions from:
Net investment income	(.55)		(.30)
Total distributions	(.55)		(.30)
Net asset value, end of year	$10.63		$9.09
Total return^C	23.72	%	(7.08)	%
Ratios to Average Net Assets:
Total expenses^D	.44	%	.45	%^E
Expenses net of waivers, if any^D	.44		.45	^E
Expenses net of all reductions^D	.44		.45	^E
Net investment income	5.0		5.2	^E
Supplemental Data:
Portfolio turnover rate	220.8	%	140.8	%^F
Net assets, end of year (in thousands)	$247,070		$240,681

^A	For the period August 29, 2008 (commencement of operations) to December 31, 2008.

^B	Computed using average daily shares outstanding.

^E	Annualized.

^F	Not annualized.


100		Western Asset Funds

Western Asset Core Plus Bond Portfolio


Class FI:	Year ended December 31, 2009		Period ended December 31, 2008^A		Years ended March 31,
Class FI:	Year ended December 31, 2009		Period ended December 31, 2008^A		2008		2007		2006		2005
Net asset value, beginning of year	$8.66		$9.88		$10.56		$10.24		$10.52		$10.71
Investment operations:
Net investment income	.45	^B	.37	^B	.52	^B	.48	^B	.42	^C	.35	^C
Net realized and unrealized gain/(loss)	1.71		(1.17)		(.62)		.35		(.18)		.04
Total from investment operations	2.16		(.80)		(.10)		.83		.24		.39
Distributions from:
Net investment income	(.55)		(.42)		(.50)		(.51)		(.49)		(.33)
Net realized gain on investments	(.14)		—		(.08)		—	^D	(.03)		(.25)
Total distributions	(.69)		(.42)		(.58)		(.51)		(.52)		(.58)
Net asset value, end of year	$10.13		$8.66		$9.88		$10.56		$10.24		$10.52
Total return^E	25.78	%	(8.28)	%	(.97)	%	8.30	%	2.32	%	3.77	%
Ratios to average net assets:
Total expenses^F	.86	%	.77	%^G	.68	%	.69	%	.70	%	.70	%
Expenses net of waivers, if any^F	.70		.70	^G	.68		.69		.70		.70
Expenses net of all reductions^F	.70		.70	^G	.68		.69		.70		.70
Net investment income	4.9		5.2	^G	5.1		4.7		4.0		2.9
Supplemental data:
Portfolio turnover rate	201.7	%	124.4	%^H	488.2	%	448.6	%	549.4	%	586.1	%
Net assets, end of year (in thousands)	$757,048		$840,452		$1,215,985		$767,903		$503,217		$191,085

^A	For the period April 1, 2008 to December 31, 2008.

^B	Computed using average daily shares outstanding.

^C	Computed using SEC method.

^D	Amount less than $.01 per share.

^G	Annualized.

^H	Not annualized.


Western Asset Funds		101

Financial highlights cont’d

Western Asset Core Plus Bond Portfolio


Class I:	Year ended December 31, 2009		Period ended December 31, 2008^A		Years ended March 31,
Class I:	Year ended December 31, 2009		Period ended December 31, 2008^A		2008		2007		2006		2005
Net asset value, beginning of year	$8.66		$9.87		$10.55		$10.24		$10.52		$10.71
Investment operations:
Net investment income	.48	^B	.39	^B	.55	^B	.51	^B	.45	^C	.37	^C
Net realized and unrealized gain/(loss)	1.71		(1.17)		(.62)		.33		(.18)		.04
Total from investment operations	2.19		(.78)		(.07)		.84		.27		.41
Distributions from:
Net investment income	(.57)		(.43)		(.53)		(.53)		(.52)		(.35)
Net realized gain on investments	(.14)		—		(.08)		—	^D	(.03)		(.25)
Total distributions	(.71)		(.43)		(.61)		(.53)		(.55)		(.60)
Net asset value, end of year	$10.14		$8.66		$9.87		$10.55		$10.24		$10.52
Total return^E	26.20	%	(8.01)	%	(.72)	%	8.48	%	2.57	%	4.01	%
Ratios to average net assets:
Total expenses^F	.46	%	.46	%^G	.43	%	.44	%	.45	%	.45	%
Expenses net of waivers, if any^F	.46		.46	^G	.43		.44		.45		.45
Expenses net of all reductions^F	.46		.46	^G	.43		.44		.45		.45
Net investment income	5.2		5.5	^G	5.4		4.9		4.3		3.3
Supplemental data:
Portfolio turnover rate	201.7	%	124.4	%^H	488.2	%	448.6	%	549.4	%	586.1	%
Net assets, end of year (in thousands)	$5,466,554		$6,607,180		$12,943,882		$11,495,842		$6,896,815		$4,565,054

^A	For the period April 1, 2008 to December 31, 2008.

^B	Computed using average daily shares outstanding.

^C	Computed using SEC method.

^D	Amount less than $.01 per share.

^G	Annualized.

^H	Not annualized.


102		Western Asset Funds

Western Asset Core Plus Bond Portfolio


Class IS:	Year ended December 31, 2009		Period ended December 31, 2008^A
Net asset value, beginning of year	$8.66		$9.34
Investment operations:
Net investment income^B	.48		.20
Net realized and unrealized gain/(loss)	1.70		(.62)
Total from investment operations	2.18		(.42)
Distributions from:
Net investment income	(.57)		(.26)
Net realized gain on investments	(.14)		—
Total distributions	(.71)		(.26)
Net asset value, end of year	$10.13		$8.66
Total return^C	26.11	%	(4.54)	%
Ratios to Average Net Assets:
Total expenses^D	.43	%	.44	%^E
Expenses net of waivers, if any^D	.43		.44	^E
Expenses net of all reductions^D	.43		.44	^E
Net investment income	5.2		5.7	^E
Supplemental Data:
Portfolio turnover rate	201.7	%	124.4	%^F
Net assets, end of year (in thousands)	$1,835,921		$1,559,843

^A	For the period August 4, 2008 (commencement of operations) to December 31, 2008.

^B	Computed using average daily shares outstanding.

^E	Annualized.

^F	Not annualized.


Western Asset Funds		103

Financial highlights cont’d

Western Asset High Yield Portfolio


Class I:	Year ended December 31, 2009		Period ended December 31, 2008^A		Years ended March 31,
Class I:	Year ended December 31, 2009		Period ended December 31, 2008^A		2008		2007		2006		2005
Net asset value, beginning of year	$5.99		$9.30		$10.75		$10.34		$10.49		$10.28
Investment operations:
Net investment income	.92	^B	.66	^B	.83	^B	.80	^B	.76	^C	.61	^C
Net realized and unrealized gain/(loss)	2.32		(3.05)		(1.41)		.39		(.05)		.17
Total from investment operations	3.24		(2.39)		(.58)		1.19		.71		.78
Distributions from:
Net investment income	(.96)		(.92)		(.80)		(.78)		(.73)		(.57)
Net realized gain on investments	—		—		(.07)		—	^D	(.13)		—
Total distributions	(.96)		(.92)		(.87)		(.78)		(.86)		(.57)
Net asset value, end of year	$8.27		$5.99		$9.30		$10.75		$10.34		$10.49
Total return^E	56.73	%	(27.19)	%	(5.88)	%	12.14	%	7.30	%	7.81	%
Ratios to average net assets:
Total expenses^F	.62	%	.60	%^G	.59	%	.61	%	.62	%	.62	%
Expenses net of waivers, if any^F	.62		.60	^G	.59		.61		.62		.62
Expenses net of all reductions^F	.62		.60	^G	.58		.61		.62		.62
Net investment income	12.8		10.4	^G	8.3		7.8		7.8		7.0
Supplemental data:
Portfolio turnover rate	83.7	%	40.9	%^H	59.1	%	63.6	%	147.2	%	121.0	%
Net assets, end of year (in thousands)	$511,335		$439,446		$800,103		$879,323		$596,918		$414,417

^A	For the period April 1, 2008 to December 31, 2008.

^B	Computed using average daily shares outstanding.

^C	Computed using SEC method.

^D	Amount represents less than $.01 per share.

^G	Annualized.

^H	Not annualized.


104		Western Asset Funds

Western Asset High Yield Portfolio


Class IS:	Year ended December 31, 2009		Period ended December 31, 2008^A
Net asset value, beginning of year	$ 6.06		$ 8.86
Investment operations:
Net investment income^B	.94		.37
Net realized and unrealized gain/(loss)	2.34		(2.77)
Total from investment operations	3.28		(2.40)
Distributions from:
Net investment income	(.96)		(.40)
Total distributions	(.96)		(.40)
Net asset value, end of year	$8.38		$6.06
Total return^C	56.74	%	(27.16)	%
Ratios to average net assets:
Total expenses^D	.61	%	.60	%^E
Expenses net of waivers, if any^D	.61		.60	^E
Expenses net of all reductions^D	.61		.60	^E
Net investment income	12.8		12.4	^E
Supplemental data:
Portfolio turnover rate	83.7	%	40.9	%^F
Net assets, end of year (in thousands)	$107,301		$77,795

^A	For the period August 4, 2008 (commencement of operations) to December 31, 2008.

^B	Computed using average daily shares outstanding.

^E	Annualized.

^F	Not annualized.


Western Asset Funds		105

Financial highlights cont’d

Western Asset Inflation Indexed Plus Bond Portfolio


Class FI:	Year ended December 31, 2009		Period ended December 31, 2008^A		Period ended March 31, 2008^B
Net asset value, beginning of year	$9.51		$11.06		$10.02
Investment operations:
Net investment income^C	.14		.17		.35
Net realized and unrealized gain/(loss)	1.04		(1.06)		1.06
Total from investment operations	1.18		(.89)		1.41
Distributions from:
Net investment income	(.10)		(.46)		(.37)
Net realized gain on investments	—		(.20)		—
Total distributions	(.10)		(.66)		(.37)
Net asset value, end of year	$10.59		$9.51		$11.06
Total return^D	12.53	%	(8.47)	%	14.29	%
Ratios to average net assets:
Total expenses^E	.79	%	.77	%^F	.71	%^F
Expenses net of waivers, if any^E	.62		.52	^F	.48	^F
Expenses net of all reductions^E	.62		.52	^F	.48	^F
Net investment income	1.4		2.4	^F	4.1	^F
Supplemental data:
Portfolio turnover rate	41.1	%	74.4	%^G	141.7	%^G
Net assets, end of year (in thousands)	$301		$162		$36

^A	For the period April 1, 2008 to December 31, 2008.

^B	For the period June 28, 2007 (commencement of operations) to March 31, 2008.

^C	Computed using average daily shares outstanding.

^F	Annualized.

^G	Not annualized.


106		Western Asset Funds

Western Asset Inflation Indexed Plus Bond Portfolio


Class I:	Year ended December 31, 2009		Period ended December 31, 2008^A		Years ended March 31,
Class I:	Year ended December 31, 2009		Period ended December 31, 2008^A		2008		2007		2006		2005
Net asset value, beginning of year	$9.53		$11.08		$10.43		$10.25		$10.74		$11.24
Investment operations:
Net investment income	.11	^B	.44	^B	.61	^B	.39	^B	.54	^C	.42	^C
Net realized and unrealized gain/(loss)	1.11		(1.32)		.67		.20		(.38)		(.10)
Total from investment operations	1.22		(.88)		1.28		.59		.16		.32
Distributions from:
Net investment income	(.12)		(.47)		(.63)		(.41)		(.56)		(.42)
Net realized gain on investments	—		(.20)		—		—		(.09)		(.40)
Total distributions	(.12)		(.67)		(.63)		(.41)		(.65)		(.82)
Net asset value, end of year	$10.63		$9.53		$11.08		$10.43		$10.25		$10.74
Total return^D	12.86	%	(8.32)	%	12.77	%	5.89	%	1.44	%	3.27	%
Ratios to average net assets:
Total expenses^E	.32	%	.27	%^F	.27	%	.29	%	.27	%	.27	%
Expenses net of waivers, if any^E	.30		.25	^F	.25		.25		.25		.25
Expenses net of all reductions^E	.30		.25	^F	.25		.25		.25		.25
Net investment income	1.1		5.8	^F	5.8		3.8		5.0		3.8
Supplemental data:
Portfolio turnover rate	41.1	%	74.4	%^G	141.7	%	96.4	%	177.1	%	255.5	%
Net assets, end of year (in thousands)	$440,964		$469,959		$846,594		$644,236		$542,532		$461,746

^A	For the period April 1, 2008 to December 31, 2008.

^B	Computed using average daily shares outstanding.

^C	Computed using SEC method.

^F	Annualized.

^G	Not annualized.


Western Asset Funds		107

Financial highlights cont’d

Western Asset Inflation Indexed Plus Bond Portfolio


Class IS:	Year ended December 31, 2009		Period ended December 31, 2008^A
Net asset value, beginning of year	$9.53		$9.63
Investment operations:
Net investment income/(loss)^B	.18		(.03)
Net realized and unrealized gain/(loss)	1.05		(.07)
Total from investment operations	1.23		(.10)
Distributions from:
Net investment income	(.12)		—
Total distributions	(.12)		—
Net asset value, end of year	$10.64		$9.53
Total return^C	12.99	%	(1.04)	%
Ratios to average net assets:
Total expenses^D	.28	%	.24	%^E
Expenses net of waivers, if any^D	.25		.24	^E
Expenses net of all reductions^D	.25		.24	^E
Net investment income (loss)	1.8		(10.0)	^E
Supplemental data:
Portfolio turnover rate	41.1	%	74.4	%^F
Net assets, end of year (in thousands)	$23,463		$22,573

^A	For the period December 18, 2008 (commencement of operations) to December 31, 2008.

^B	Computed using average daily shares outstanding.

^E	Annualized.

^F	Not annualized.


108		Western Asset Funds

Western Asset Intermediate Bond Portfolio


Class I:	Year ended December 31, 2009		Period ended December 31, 2008^A		Years ended March 31,
Class I:	Year ended December 31, 2009		Period ended December 31, 2008^A		2008		2007		2006		2005
Net asset value, beginning of year	$9.32		$10.30		$10.43		$10.21		$10.51		$11.01
Investment operations:
Net investment income	.42	^B	.34	^B	.52	^B	.49	^B	.44	^C	.38	^C
Net realized and unrealized gain/(loss)	1.14		(.82)		(.14)		.22		(.20)		(.22)
Total from investment operations	1.56		(.48)		.38		.71		.24		.16
Distributions from:
Net investment income	(.42)		(.37)		(.51)		(.49)		(.44)		(.38)
Net realized gain on investments	(.15)		(.13)		—		—		(.10)		(.28)
Total distributions	(.57)		(.50)		(.51)		(.49)		(.54)		(.66)
Net asset value, end of year	$10.31		$9.32		$10.30		$10.43		$10.21		$10.51
Total return^D	17.24	%	(4.72)	%	3.77	%	7.17	%	2.37	%	1.66	%
Ratios to average net assets:
Total expenses^E	.47	%	.46	^F	.45	%	.46	%	.47	%	.46	%
Expenses net of waivers, if any^E	.47		.46	^F	.45	%	.45		.45		.45
Expenses net of all reductions^E	.47		.46	^F	.45	%	.45		.45		.45
Net investment income	4.2		4.6	^F	5.0	%	4.8		4.3		3.6
Supplemental data:
Portfolio turnover rate	174.7	%	164.7	%^G	239.0	%	244.1	%	266.1	%	215.7	%
Net assets, end of year (in thousands)	$422,610		$475,695		$706,873		$639,735		$739,492		$660,480

^A	For the period April 1, 2008 to December 31, 2008.

^B	Computed using average daily shares outstanding.

^C	Computed using SEC method.

^F	Annualized.

^G	Not annualized.


Western Asset Funds		109

Financial highlights cont’d

Western Asset Intermediate Bond Portfolio


Class IS:	Year ended December 31, 2009		Period ended December 31, 2008^A
Net asset value, beginning of year	$9.31		$9.49
Investment operations:
Net investment income^B	.42		.09
Net realized and unrealized gain/(loss)	1.15		(.13)
Total from investment operations	1.57		(.04)
Distributions from:
Net investment income	(.42)		(.14)
Net realized gain on investments	(.15)		—
Total distributions	(.57)		(.14)
Net asset value, end of year	$10.31		$9.31
Total return^C	17.39	%	(.41)	%
Ratios to average net assets:
Total expenses^D	.46	%	.46	%^E
Expenses net of waivers, if any^D	.45		.45	^E
Expenses net of all reductions^D	.45		.45	^E
Net investment income	4.2		4.5	^E
Supplemental data:
Portfolio turnover rate	174.7	%	164.7	%^F
Net assets, end of year (in thousands)	$60,112		$50,196

^A	For the period October 3, 2008 (commencement of operations) to December 31, 2008.

^B	Computed using average daily shares outstanding.

^E	Annualized.

^F	Not annualized.


110		Western Asset Funds

Western Asset Intermediate Plus Bond Portfolio


Class I:	Year ended December 31, 2009		Period ended December 31, 2008^A		Years ended March 31,
Class I:	Year ended December 31, 2009		Period ended December 31, 2008^A		2008		2007		2006		2005
Net asset value, beginning of year	$8.54		$9.67		$9.95		$9.74		$9.86		$10.00
Investment operations:
Net investment income	.42	^B	.32	^B	.49	^B	.45	^B	.40	^C	.32	^C
Net realized and unrealized gain/(loss)	1.24		(.81)		(.26)		.21		(.11)		(.14)
Total from investment operations	1.66		(.49)		.23		.66		.29		.18
Distributions from:
Net investment income	(.41)		(.40)		(.49)		(.45)		(.41)		(.32)
Net realized gain on investments	—		(.24)		(.02)		—		—		—
Total distributions	(.41)		(.64)		(.51)		(.45)		(.41)		(.32)
Net asset value, end of year	$9.79		$8.54		$9.67		$9.95		$9.74		$9.86
Total return^D	19.84	%	(5.37)	%	2.35	%	6.98	%	2.99	%	1.81	%
Ratios to average net assets:
Total expenses^E	.68	%	.64	%^F	.58	%	.63	%	.76	%	1.22	%
Expenses net of waivers, if any^E	.47		.49	^F	.45		.45		.45		.45
Expenses net of all reductions^E	.47		.49	^F	.45		.45		.45		.45
Net investment income	4.6		4.7	^F	5.0		4.6		4.1		3.1
Supplemental data:
Portfolio turnover rate	153.7	%	181.5	%^G	300.0	%	312.2	%	368.6	%	463.5	%
Net assets, end of year (in thousands)	$50,139		$70,093		$110,814		$86,822		$69,908		$40,637

^A	For the period April 1, 2008 to December 31, 2008.

^B	Computed using average daily shares outstanding.

^C	Computed using SEC method.

^F	Annualized.

^G	Not annualized.


Western Asset Funds		111

Financial highlights cont’d

Western Asset Intermediate Plus Bond Portfolio


Class IS:	Year ended December 31, 2009		Period ended December 31, 2008^A
Net asset value, beginning of year	$8.53		$ 8.31
Investment operations:
Net investment income^B	.42		.05
Net realized and unrealized gain	1.24		.31
Total from investment operations	1.66		.36
Distributions from:
Net investment income	(.41)		(.14)
Total distributions	(.41)		(.14)
Net asset value, end of year	$9.78		$8.53
Total return^C	19.89	%	4.32	%
Ratios to Average Net Assets:
Total expenses^D	.76	%	.63	%^E
Expenses net of waivers, if any^D	.45		.45	^E
Expenses net of all reductions^D	.45		.45	^E
Net investment income	4.6		4.6	^E
Supplemental Data:
Portfolio turnover rate	153.7	%	181.5	%^F
Net assets, end of year (in thousands)	$6,730		$7,057

^A	For the period November 10, 2008 (commencement of operations) to December 31, 2008.

^B	Computed using average daily shares outstanding.

^E	Annualized.

^F	Not annualized.


112		Western Asset Funds

Western Asset Limited Duration Bond Portfolio


Class I:	Year ended December 31, 2009		Period ended December 31, 2008^A		Years ended March 31,
Class I:	Year ended December 31, 2009		Period ended December 31, 2008^A		2008		2007		2006		2005
Net asset value, beginning of year	$7.87		$8.96		$9.88		$9.80		$9.89		$10.09
Investment operations:
Net investment income	.30	^B	.27	^B	.50	^B	.47	^B	.38	^C	.24	^C
Net realized and unrealized gain/(loss)	.97		(1.08)		(.94)		.08		(.09)		(.17)
Total from investment operations	1.27		(.81)		(.44)		.55		.29		.07
Distributions from:
Net investment income	(.32)		(.28)		(.43)		(.47)		(.38)		(.25)
Net realized gain on investments	—		—		—		—		—		(.02)
Return of capital	—		—		(.05)		—		—		—
Total distributions	(.32)		(.28)		(.48)		(.47)		(.38)		(.27)
Net asset value, end of year	$8.82		$7.87		$8.96		$9.88		$9.80		$9.89
Total return^D	16.38	%	(9.23)	%	(4.72)	%	5.73	%	3.01	%	.69	%
Ratios to average net assets:
Total expenses^E	.64	%	.58	%^F	.50	%	.58	%	.68	%	.73	%
Expenses net of waivers, if any^E	.43		.46	^F	.40		.40		.40		.40
Expenses net of all reductions^E	.43		.46	^F	.40		.40		.40		.40
Net investment income	3.7		4.2	^F	5.2		4.8		3.9		2.4
Supplemental data:
Portfolio turnover rate	167.7	%	261.3	%^G	312.1	%	270.5	%	244.7	%	231.5	%
Net assets, end of year (in thousands)	$34,048		$65,337		$103,487		$92,400		$74,143		$37,426

^A	For the period April 1, 2008 to December 31, 2008.

^B	Computed using average daily shares outstanding.

^C	Computed using SEC method.

^F	Annualized.

^G	Not annualized.


Western Asset Funds		113

Financial highlights cont’d

Western Asset Limited Duration Bond Portfolio


Class IS:	Year ended December 31, 2009			Period ended December 31, 2008^A
Net asset value, beginning of year	$	7.87		$	8.01
Investment operations:
Net investment income^B		.31			.05
Net realized and unrealized gain/(loss)		.96			(.13	)
Total from investment operations		1.27			(.08	)
Distributions from:
Net investment income		(.32	)		(.06	)
Total distributions		(.32	)		(.06	)
Net asset value, end of year	$	8.82		$	7.87
Total return^C		16.42	%		(.96	)%
Ratios to average net assets:
Total expenses^D		.65	%		.58	%^E
Expenses net of waivers, if any^D		.40			.41	^E
Expenses net of all reductions^D		.40			.40	^E
Net investment income		3.8			3.7	^E
Supplemental data:
Portfolio turnover rate		167.7	%		261.3	%^F
Net assets, end of year (in thousands)	$	22,037		$	13,274

^A	For the period October 29, 2008 (commencement of operations) to December 31, 2008

^B	Computed using average daily shares outstanding.

^E	Annualized.

^F	Not annualized.


114		Western Asset Funds

Western Asset Non-U.S. Opportunity Bond Portfolio


Class I:	Year ended December 31, 2009		Period ended December 31, 2008^A		Years ended March 31,
Class I:	Year ended December 31, 2009		Period ended December 31, 2008^A		2008		2007		2006		2005
Net asset value, beginning of year	$8.77		$9.93		$9.75		$9.59		$10.98		$10.52
Investment operations:
Net investment income	.23	^B	.24	^B	.37	^B	.36	^B	.64	^C	.19	^C
Net realized and unrealized gain/(loss)	.20		.21		(.16)		—	^D	(.07)		.57
Total from investment operations	.43		.45		.21		.36		.57		.76
Distributions from:
Net investment income	—		(1.61)		—		(.20)		(1.16)		(.29)
Net realized gain on investments	(.06)		—		(.03)		—		(.80)		(.01)
Total distributions	(.06)		(1.61)		(.03)		(.20)		(1.96)		(.30)
Net asset value, end of year	$9.14		$8.77		$9.93		$9.75		$9.59		$10.98
Total return^E	4.95	%	4.49	%	2.11	%	3.89	%	5.33	%	7.60	%
Ratios to average net assets:
Total expenses^F	.70	%	.62	%^G	.59	%	.64	%	.74	%	.68	%
Expenses net of waivers, if any^F	.66		.58	^G	.55		.55		.55		.55
Expenses net of all reductions^F	.66		.58	^G	.55		.55		.55		.55
Net investment income	2.7		3.2	^G	3.7		3.7		3.3		3.2
Supplemental data:
Portfolio turnover rate	87.2	%	52.2	%^H	68.4	%	117.9	%	140.1	%	40.8	%
Net assets, end of year (in thousands)	$80,305		$104,362		$205,654		$177,308		$90,421		$89,170

^A	For the period April 1, 2008 to December 31, 2008.

^B	Computed using average daily shares outstanding.

^C	Computed using SEC method

^D	Amount represents less than $.01 per share.

^G	Annualized.

^H	Not annualized.


Western Asset Funds		115

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

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

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

Information we receive from consumer reporting agencies.

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

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

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

Western Asset Funds, Inc.

You may visit the funds’ website at http://www.leggmason.com/individualinvestors/prospectuses.aspx for a free copy of a Prospectus, Statement of Additional Information (“SAI”) or an Annual or Semi-Annual Report.

Shareholder reports Additional information about the funds’ investments is available in the funds’ Annual and Semi-Annual Reports to shareholders. In the funds’ Annual Reports, you will find a discussion of the market conditions and investment strategies that significantly affected the funds’ performance during its last fiscal year.

The funds send only one report to a household if more than one account has the same last name and same address. Contact Institutional Shareholder Services if you do not want this policy to apply to you.

Statement of additional information The SAI provides more detailed information about the funds and is incorporated by reference into (is legally a part of) this Prospectus.

You can make inquiries about the funds or obtain shareholder reports or the SAI (without charge) by calling Institutional Shareholder Services at 1-888-425-6432, or by writing to the fund at 55 Water Street, New York, New York 10041.

Information about the funds (including the SAI) can be reviewed and copied at the Securities and Exchange Commission’s (the “SEC”) Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-202-551-8090. Reports and other information about the funds are available on the EDGAR Database on the SEC’s Internet site at http://www.sec.gov. Copies of this information may be obtained for a duplicating fee by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549.

If someone makes a statement about the funds that is not in this Prospectus, you should not rely upon that information. Neither the funds nor the distributor is offering to sell shares of a fund to any person to whom the fund may not lawfully sell its shares.

Investment Company Act

file no. 811-06110

FD03374ST 4/10

WESTERN ASSET FUNDS, INC.

Western Asset Absolute Return Portfolio, Western Asset Core Bond Portfolio,

Western Asset Core Plus Bond Portfolio, Western Asset Enhanced Equity Portfolio,

Western Asset Global Strategic Income Portfolio, Western Asset High Yield Portfolio,

Western Asset Inflation Indexed Plus Bond Portfolio, Western Asset Intermediate Bond Portfolio,

Western Asset Intermediate Plus Bond Portfolio, Western Asset Limited Duration Bond Portfolio, Western Asset Non-U.S. Opportunity Bond Portfolio

Class IS, Class I and Class FI Shares


Fund	Class	Ticker Symbol
Western Asset Absolute Return Portfolio	FI	WARIX
	I	WAARX
	IS	WAASX

Western Asset Core Bond Portfolio	FI	WAPIX
	I	WATFX
	IS	WACSX

Western Asset Core Plus Bond Portfolio	FI	WACIX
	I	WACPX
	IS	WAPSX

Western Asset Enhanced Equity Portfolio	FI	—
	I	—
	IS	—

Western Asset Global Strategic Income Portfolio	FI	—
	I	—
	IS	—

Western Asset High Yield Portfolio	FI	—
	I	WAHYX
	IS	WAHSX

Western Asset Inflation Indexed Plus Bond Portfolio	FI	WATPX
	I	WAIIX
	IS	WAFSX

Western Asset Intermediate Bond Portfolio	FI	—
	I	WATIX
	IS	WABSX

Western Asset Intermediate Plus Bond Portfolio	FI	—
	I	WAIPX
	IS	WAISX

Western Asset Limited Duration Bond Portfolio	FI	—
	I	WALDX
	IS	WALSX

Western Asset Non-U.S. Opportunity Bond Portfolio	FI	—
	I	WAFIX
	IS	—

Statement of Additional Information

April 30, 2010

Western Asset Funds, Inc. (the “Corporation”) is an open-end management investment company. The Corporation currently consists of eleven separate professionally managed investment portfolios, eleven of which are described in this Statement of Additional Information (“SAI”). Each of these portfolios is referred to herein as a “fund.”

This SAI is not a prospectus and should be read in conjunction with the Prospectus for the Portfolios, dated April 30, 2010, which has been filed with the Securities and Exchange Commission (“SEC”). Copies of the Portfolios’ Prospectus and annual and semi-annual reports are available without charge from Legg Mason Investor Services, LLC at 1-888-425-6432. Portions of the annual report are incorporated herein by reference, as specified herein.

Table of Contents


Definitions		3
Additional Information About Investment Limitations and Policies		4
Additional Information About Securities, Investment Techniques and Related Risks		8
Valuation of Fund Shares		37
Disclosure of Portfolio Holdings		37
Management of the Funds		39
Proxy Voting Policies and Procedures		63
Purchases and Redemptions		63
Exchange Privilege		64
Systematic Withdrawal Plan		65
Portfolio Transactions and Brokerage		65
Additional Tax Information		67
Other Information		76
Appendix A (Ratings of Securities)		Appendix A
Appendix B (Proxy Voting Policy)		Appendix B
Appendix C (Procedures for Shareholders to Submit Nominee Candidates)		Appendix C

Definitions

“Adviser” means the investment advisory firm that manages a fund’s assets. Western Asset, WAML, Western Singapore and Western Japan are each Advisers.

“Code” means the Internal Revenue Code of 1986, as amended.

“Corporation” means Western Asset Funds, Inc., a Maryland corporation.

“Distributor” means the party that is responsible for the distribution or sale of the Corporation’s shares. LMIS is the Corporation’s Distributor.

“Exchange” means the New York Stock Exchange.

“Fundamental Investment Limitation” means an investment limitation of a fund that may be changed only with the affirmative vote of the lesser of (a) more than 50% of the outstanding shares of the relevant fund or (b) 67% or more of the shares of the relevant fund present at a shareholders’ meeting if more than 50% of the outstanding shares of that fund are represented at the meeting in person or by proxy. Only those policies or limitations expressly designated as such are fundamental investment limitations. All other policies and restrictions may be changed without shareholder approval.

“Independent Director” means a Director of the Corporation who is not an “interested person” (as defined in the 1940 Act) of the Corporation.

“LMIS” means Legg Mason Investor Services, LLC.

“Manager” means Legg Mason Partners Fund Advisor, LLC, 620 Eighth Avenue, New York, NY 10018.

“1940 Act” means the Investment Company Act of 1940, as amended.

“NRSROs” means nationally recognized (or non-U.S.) statistical rating organizations, including Moody’s Investors Service, Inc. (“Moody’s”), Fitch Ratings and Standard & Poor’s (“S&P”).

“Plans” means the Corporation’s Distribution and Shareholder Services Plans.

“SEC” means the Securities and Exchange Commission.

“12b-1 Director” means a Director of the Corporation who is an Independent Director and who has no direct or indirect financial interest in the operation of the Corporation’s Plans or any agreements related to the Plans (including the Corporation’s Underwriting Agreement).

“WAML” means Western Asset Management Company Limited, 10 Exchange Place, London, England. WAML is the Adviser to the Western Asset Non-U.S. Opportunity Bond Portfolio and to the non-U.S. dollar denominated portion (if any) of each of the Western Asset Absolute Return Portfolio, the Western Asset Core Plus Bond Portfolio, the Western Asset Global Strategic Income Portfolio, the Western Asset Inflation Indexed Plus Bond Portfolio, the Western Asset Intermediate Plus Bond Portfolio and the Western Asset Limited Duration Bond Portfolio.

“Western Asset” means Western Asset Management Company, 385 East Colorado Boulevard, Pasadena, CA 91101. Western Asset is the Adviser to each fund other than the Western Asset Non-U.S. Opportunity Bond Portfolio.

“Western Singapore” means Western Asset Management Company Pte. Ltd. in Sinagpore, 1 George Street #23-01, Singapore 049145. Western Singapore is the Adviser to each of the Western Asset Core Plus Bond Portfolio, Western Asset Non-U.S. Opportunity Bond Portfolio, Western Asset Inflation Indexed Plus Bond Portfolio and Western Asset Absolute Return Portfolio.

“Western Japan” means Western Asset Management Company Ltd in Japan, 36F Shin-Marunouchi Building, 5-1 Marunouchi 1-Chrome Chiyoda-Ku, Tokyo 100-6536, Japan. Western Japan is the Adviser to each of the Western Asset Core Plus Bond Portfolio, Western Asset Non-U.S. Opportunity Bond Portfolio, Western Asset Inflation Indexed Plus Bond Portfolio and Western Asset Absolute Return Portfolio.

Additional Information about Investment Limitations and Policies

Each fund has adopted certain fundamental investment limitations that are set forth below.

The Western Asset Core Bond Portfolio may not:

(1)

Invest more than 5% of its total assets (taken at market value) in securities of any one issuer, or buy 10% or more of all the securities of any one issuer, except that up to 25% of the fund’s total assets may be invested without regard to this limitation, and provided that this limitation does not apply to securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities.

(2)

Invest 25% or more of its total assets (taken at market value) in any one industry, provided that this limitation does not apply to securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities, or repurchase agreements thereon; and provided further that, for purposes of this limitation, U.S. branches of foreign banks are considered U.S. banks if they are subject to substantially the same regulation as domestic banks, and foreign branches of U.S. banks are considered U.S. banks if the domestic parent would be unconditionally liable in the event that the foreign branch failed to pay on the instruments for any reason.

(3)

Underwrite securities of other issuers, except to the extent that, in connection with the disposition of portfolio securities, the fund may be deemed an underwriter under federal securities laws.

(4)

Purchase or sell real estate, provided that the fund may invest in securities secured by, or issued by companies that invest in, real estate or interests therein, including real estate investment trusts.

(5)

Invest in oil, gas or mineral-related programs or leases, provided that the fund may invest in securities issued by companies that engage in such activities.

In addition, the Western Asset Core Bond Portfolio may:

(6)

Purchase or sell commodities, commodity contracts, futures contracts, options, and forward contracts to the fullest extent permitted by the 1940 Act, the rules or regulations thereunder or applicable orders of the SEC, as such statute, rules regulations or orders may be amended from time to time.

(7)

Lend or borrow money or issue senior securities to the fullest extent permitted by the 1940 Act, the rules or regulations thereunder or applicable orders of the SEC, as such statute, rules, regulations or orders may be amended from time to time.

Other than the Western Asset Core Bond Portfolio, each fund may (except as noted below):

(1)

(2)

Not concentrate investments in a particular industry or group of industries as concentration is defined under the 1940 Act, the rules or regulations thereunder or applicable orders of the SEC, as such statute,

rules, regulations or orders may be amended from time to time. Securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities will not be considered to represent an industry. (This does not apply to Western Asset Intermediate Bond Portfolio.)

(3)

Underwrite securities to the fullest extent permitted by the 1940 Act, the rules or regulations thereunder or applicable orders of the SEC, as such statute, rules, regulations or orders may be amended from time to time. (This does not apply to Western Asset Intermediate Bond Portfolio.)

(4)

Purchase or sell commodities, commodities contracts, futures contracts, options, forward contracts or real estate to the fullest extent permitted by the 1940 Act, the rules or regulations thereunder or applicable orders of the SEC, as such statute, rules, regulations or orders may be amended from time to time.

In addition, the Western Asset Intermediate Bond Portfolio may not:

(5)

(6)

(7)

Underwrite securities of other issuers, except to the extent that, in connection with the disposition of portfolio securities, the fund may be deemed an underwriter under federal securities laws.

Additional Information

The foregoing fundamental limitations of each fund may be changed only by a “vote of a majority of the outstanding voting securities” of the fund, a term defined in the 1940 Act to mean the vote (1) of 67% or more of the shares present at a shareholders’ meeting if more than 50% of the outstanding shares are represented at the meeting in person or by proxy, or (2) of more than 50% of the outstanding shares of the fund, whichever is less. Unless otherwise stated, all policies and limitations of the funds other than the foregoing are non-fundamental and can be changed by the Corporation’s Board of Directors without shareholder approval.

With respect to fundamental investment limitations numbered (1) through (4) of each fund, other than the Western Asset Core Bond Portfolio, and fundamental investment limitations numbered (6) and (7) of the Western Asset Core Bond Portfolio, the fundamental investment limitations set forth above limit a fund’s ability to engage in certain investment practices and purchase securities or other instruments to the extent permitted by, or consistent with, the 1940 Act. Relevant limitations of the 1940 Act are described below. These limitations are based either on the 1940 Act itself, the rules or regulations thereunder or applicable orders of the SEC. In addition, interpretations and guidance provided by the SEC staff may be taken into account, where deemed appropriate by a fund, to determine if an investment practice or the purchase of securities or other instruments is permitted by the 1940 Act, the rules or regulations thereunder or applicable orders of the SEC. As such, these limitations of the 1940 Act will change as the statute, rules, regulations or orders (or, if applicable, interpretations) change, and no shareholder vote will be required or sought for such changes.

Fundamental Investment Restriction (1) (Restriction (7) for the Western Asset Core Bond Portfolio). Under the 1940 Act, a fund may only borrow up to one-third of the value of its total assets less liabilities (other than liabilities representing senior securities). Borrowing by a fund allows it to leverage its portfolio, which exposes it

to certain risks. Leveraging increases the effect of any increase or decrease in the value of portfolio securities on a fund’s net asset value, and money borrowed will be subject to interest costs (which may include commitment fees and/or the cost of maintaining minimum average balances) which may or may not exceed the return from the securities purchased with borrowed funds. A fund may use borrowed money for any purpose permitted by the 1940 Act.

The 1940 Act also restricts the ability of any mutual fund to lend. Under the 1940 Act, a fund may only make loans if expressly permitted to do so by the fund’s investment policies, and a fund may not make loans to persons who control or are under common control with the fund. Thus, the 1940 Act effectively prohibits a fund from making loans to certain persons when conflicts of interest or undue influence are most likely present. The funds may, however, make other loans which could expose shareholders to additional risks, such as the failure of the other party to repay the loan. Each fund retains the flexibility to make loans to the extent permitted by its investment policies.

The ability of a mutual fund to issue senior securities is severely circumscribed by complex regulatory constraints under the 1940 Act that restrict, for instance, the amount, timing, and form of senior securities that may be issued. Certain portfolio management techniques, such as reverse repurchase agreements, securities loans, credit default swaps, forward roll transactions, futures contracts, the purchase of securities on margin, short sales, the writing of options on portfolio securities, or certain other derivatives may be considered senior securities unless appropriate steps are taken to segregate a fund’s assets or otherwise cover its obligations. To the extent a fund covers its commitment under such instruments, including by segregation of liquid assets, entering into offsetting transactions or owning positions covering its obligations, such instruments will not be considered a “senior security” by the fund and therefore will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by the fund. Although this SAI describes certain permitted methods of segregating assets or otherwise “covering” such transactions for these purposes, such descriptions are not complete. The fund may cover such transactions using other methods currently or in the future permitted under the 1940 Act, the rules and regulations thereunder, or orders issued by the SEC thereunder. For these purposes, interpretations and guidance provided by the SEC staff may be taken into account when deemed appropriate by the fund.

Under the 1940 Act, a “senior security” does not include any promissory note or evidence of indebtedness where such loan is for temporary purposes only and in an amount not exceeding 5% of the value of the total assets of the issuer at the time the loan is made. A loan is presumed to be for temporary purposes if it is repaid within sixty days and is not extended or renewed.

Fundamental Investment Restriction (2). “Concentration” is interpreted under the 1940 Act to mean investment of 25% or more of a fund’s total assets in a single industry. If a fund were to “concentrate” its investments in a particular industry, investors would be exposed to greater risks because the fund’s performance would be largely dependent on that industry’s performance. None of the funds has reserved the right to concentrate in any industry. For purposes of this limitation, the funds do not consider certificates of deposit or banker’s acceptances issued by domestic branches of U.S. or non-U.S. banks to be in a single industry. If, in the future, these instruments are considered to be in the same industry, the funds reserve the freedom of action to concentrate in such an industry. Each fund’s industry concentration policy does not preclude it from focusing investments in issuers in a group of related industrial sectors (such as different types of technology issuers). This fundamental investment restriction does not apply to Western Asset Intermediate Bond Portfolio.

Fundamental Investment Restriction (3). The 1940 Act prohibits a diversified mutual fund from underwriting securities in excess of 25% of its total assets. This fundamental investment restriction does not apply to Western Asset Intermediate Bond Portfolio.

Fundamental Investment Restriction (4) (Restriction 6 for the Western Asset Core Bond Portfolio). This restriction would permit investment in commodities, commodities contracts (e.g., futures contracts or related

options), options, forward contracts or real estate to the extent permitted under the 1940 Act. However, it is unlikely that the funds would make such investments, other than the use of futures contracts or related options, options, forward contracts and certain real estate-related instruments as explained in the Prospectus and this SAI. Each fund, however, may consider using these investment techniques in the future. Commodities, as opposed to commodity futures, represent the actual underlying bulk goods, such as grains, metals and foodstuffs. Real estate-related instruments include real estate investment trusts, commercial and residential mortgage-backed securities, and real estate financings, and such instruments are generally sensitive to factors such as changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, overbuilding, and the management skill and creditworthiness of the issuer.

Unless otherwise indicated, all limitations applicable to a fund’s investments (as stated in the Prospectus or in this SAI) apply only at the time a transaction is entered into. For example, any subsequent change in a rating assigned by any NRSRO to a security (or, with respect to an unrated security, any subsequent change in an Adviser’s judgment of such security’s quality), or change in the percentage of a fund’s assets invested in certain securities or other instruments, or change in the average maturity or duration of the fund’s investment portfolio, resulting from market fluctuations or other changes in the fund’s total assets, will not require the fund to dispose of an investment. In the event that NRSROs assign different ratings to the same security, the Adviser will determine which rating it believes best reflects the security’s quality and risk at that time (which may be the higher of the several assigned ratings), except as described in the Prospectus. The terms “debt,” “bonds” and “fixed income securities” are used in this SAI interchangeably, and, where used, are not intended to be limiting.

Certain Non-Fundamental Investment Limitations

As a non-fundamental limitation, each of the Western Asset Core Bond, Western Asset Core Plus Bond, Western Asset Intermediate Bond, Western Asset Intermediate Plus Bond and Western Asset Limited Duration Bond Portfolios, under normal market conditions, will invest at least 80% of its net assets in debt and fixed income securities.

As a non-fundamental limitation, Western Asset Enhanced Equity Portfolio intends to: Under normal market conditions, invest substantially all of its net assets in S&P 500 derivatives, backed by a portfolio of fixed income securities.

As a non-fundamental limitation, Western Asset High Yield Portfolio intends to: Under normal market conditions, invest at least 80% of its net assets in U.S. dollar denominated debt or fixed income securities that are rated below investment grade at the time of purchase by one or more NRSROs or are of a comparable quality as determined by Western Asset.

As a non-fundamental limitation, Western Asset Inflation Indexed Plus Bond Portfolio intends to: Under normal market conditions, invest at least 80% of its net assets in inflation-indexed fixed income securities.

As a non-fundamental limitation, Western Asset Non-U.S. Opportunity Bond Portfolio intends to: Under normal market conditions, invest at least 80% of its net assets in debt and fixed income securities denominated in major non-U.S. currencies.

To the extent required by applicable law, each of the Core Bond, Core Plus Bond, High Yield, Inflation Indexed Plus Bond, Intermediate Bond, Intermediate Plus Bond, Limited Duration Bond and Non-U.S. Opportunity Bond Portfolios may not change its policy to invest at least 80% of its net assets in the type of securities noted above (“Name Investments”) unless it provides shareholders with at least 60 days’ written notice of such change. To the extent required by applicable law, the Enhanced Equity Portfolio may not change its policy to invest substantially all of its net assets in Name Investments unless it provides shareholders with at least 60 days’ written notice of such change. For purposes of these limitations only, net assets include the amount of any borrowing for investment purposes.

For purposes of the non-fundamental investment restrictions set forth above, a fund will consider an instrument, including a synthetic instrument, to be a Name Investment if, in the judgment of an Adviser, it has economic characteristics similar to a Name Investment. For example, a fund will consider an instrument, including a synthetic instrument, to be a fixed-income security if, in the judgment of an Adviser, it has economic characteristics similar to fixed-income securities. Such instruments would include, but are not limited to, futures contracts and related options, mortgage-related securities, asset-backed securities, reverse repurchase agreements, forward roll transactions and cash equivalents. In addition, a fund will consider repurchase agreements secured by obligations of the U.S. Government and its agencies and instrumentalities to be obligations of the U.S. Government and its agencies and instrumentalities for these purposes.

Additional Information about Securities, Investment Techniques and Related Risks

In addition to the principal investment strategies and the principal risks described in the Prospectus, each fund may employ other investment practices and may be subject to other risks, some of which are described below. Unless a strategy or policy described below is specifically prohibited by applicable law or by the investment restrictions explained in the Corporation’s Prospectus or elsewhere in this SAI, a Portfolio may engage in each of the practices listed below.

Non-U.S. Securities

Investing in the securities of issuers in any non-U.S. country, or in securities denominated in a non-U.S. currency, involves special risks and considerations not typically associated with investing in U.S. issuers or U.S. dollar denominated securities. These include risks resulting from differences in accounting, auditing and financial reporting standards; lower liquidity than U.S. securities; the possibility of nationalization, expropriation or confiscatory taxation; adverse changes in investment or exchange control regulations (which may include suspension of the ability to transfer currency out of a country); and political instability. In many cases, there is less publicly available information concerning non-U.S. issuers than is available concerning U.S. issuers. Additionally, purchases and sales of non-U.S. securities and dividends and interest payable on those securities may be subject to non-U.S. taxes and tax withholding. Non-U.S. securities generally exhibit greater price volatility and a greater risk of illiquidity.

To the extent a fund purchases securities denominated in a non-U.S. currency, a change in the value of any such currency against the U.S. dollar will result in a change in the U.S. dollar value of the fund’s assets and the fund’s income available for distribution. In addition, a fund is required to compute and distribute its income in U.S. dollars. Therefore, if the exchange rate for a non-U.S. currency declines after a fund’s income has been earned and translated into U.S. dollars (but before payment), the fund could be required to liquidate portfolio securities to make such distributions. Similarly, if an exchange rate declines between the time a fund incurs expenses in U.S. dollars and the time such expenses are paid, the amount of such currency required to be converted into U.S. dollars in order to pay such expenses in U.S. dollars will be greater than the equivalent amount in any such currency of such expenses at the time they were incurred.

The relative performance of various countries’ securities markets historically has reflected wide variations relating to the unique characteristics of each country’s economy. Individual non-U.S. economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position. Bank deposit insurance, if any, may be subject to widely varying regulations and limits in non-U.S. countries.

In general, non-U.S. securities purchased by a fund may be listed on non-U.S. exchanges, traded over-the-counter or purchased in private transactions. Transactions on non-U.S. exchanges are usually subject to mark-ups or commissions higher than negotiated commissions on U.S. transactions. There is less government supervision and regulation of exchanges and brokers in many non-U.S. countries than in the United States. Additional costs

associated with an investment in non-U.S. securities may include higher custodial fees than apply to domestic custodial arrangements and transaction costs of non-U.S. currency conversions.

Certain of the foregoing risks may also apply to some extent to securities of U.S. issuers that are denominated in non-U.S. currencies or that are traded in non-U.S. markets, or to securities of U.S. issuers having significant non-U.S. operations.

Emerging Market Issuers. The risks of non-U.S. investment, described above, are greater for investments in emerging market issuers, and such investments should therefore be considered speculative. Debt securities of governmental and other issuers in emerging market countries will typically be rated below investment grade or be of comparable quality. For more information about lower-rated securities, see “Debt and Fixed Income Securities — Lower-Rated Securities” below.

The funds consider a country to be an emerging market country if, at the time of investment, it is represented in the JP Morgan Emerging Markets Bond Index Global or categorized by the World Bank in its annual categorization as middle- or low-income. For purposes of their investment limitations, Western Asset Absolute Return Portfolio and Western Asset Inflation Indexed Plus Bond Portfolio will consider debt obligations of corporate and governmental issuers in emerging market countries (including “Brady Bonds”, bonds issued as a result of a debt restructuring plan, Eurobonds, domestic and international bonds issued under the laws of a developing country, and emerging market loans) to be “emerging market securities.”

Investors are strongly advised to consider carefully the special risks involved in emerging markets, which are in addition to the usual risks of investing in developed markets around the world. Emerging market countries may experience substantial rates of inflation or deflation. Inflation, deflation and rapid fluctuations in such rates have had, and may continue to have, very negative effects on the economies and securities markets of certain emerging market countries. While some emerging market countries have sought to develop a number of corrective mechanisms to reduce inflation or deflation or mitigate their effects, inflation and deflation may continue to have significant effects both on emerging market countries and their securities markets. In addition, many of the currencies of emerging market countries have experienced steady devaluations relative to the U.S. dollar, and major devaluations have occurred in certain countries.

Economies in emerging market countries generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely by economic conditions, trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade.

Because of the high levels of non-U.S. dollar denominated debt owed by many emerging market countries, fluctuating exchange rates can significantly affect the debt service obligations of those countries. This could, in turn, affect local interest rates, profit margins and exports, which are a major source of non-U.S. exchange earnings. Hedging instruments are not typically available with respect to investments in emerging market countries and, to the extent they are available, the ongoing and indeterminate nature of the foregoing risks (and the costs associated with hedging transactions) would make it virtually impossible to hedge effectively against such risks.

To the extent an emerging market country faces a liquidity crisis with respect to its non-U.S. exchange reserves, it may increase restrictions on the outflow of any non-U.S. exchange. Repatriation is ultimately dependent on the ability of a fund to liquidate its investments and convert the local currency proceeds obtained from such liquidation into U.S. dollars. Where this conversion must be done through official channels (usually the central bank or certain authorized commercial banks), the ability to obtain U.S. dollars is dependent on the supply of such U.S. dollars through those channels and, if available, upon the willingness of those channels to allocate those U.S. dollars to the fund. In such a case, a fund’s ability to obtain U.S. dollars may be adversely affected by any increased restrictions imposed on the outflow of non-U.S. exchange. If the fund is unable to repatriate any

amounts due to exchange controls, it may be required to accept an obligation payable at some future date by the central bank or other governmental entity of the jurisdiction involved. If such conversion can legally be done outside official channels, either directly or indirectly, a fund’s ability to obtain U.S. dollars may not be affected as much by any increased restrictions except to the extent of the price that may be required to be paid for the U.S. dollars.

Many emerging market countries have little experience with the corporate form of business organization, and may not have well-developed corporation and business laws or concepts of fiduciary duty in the business context. The securities markets of emerging market countries are substantially smaller, less developed, less liquid and more volatile than the securities markets of the U.S. and other more developed countries. Disclosure and regulatory standards in many respects are less stringent than in the U.S. and other major markets. There also may be a lower level of monitoring and regulation of an emerging market country’s securities markets and the activities of investors in such markets; enforcement of existing regulations has been extremely limited. Also, any change in the leadership or politics of emerging market countries, or the countries that exercise a significant influence over those countries, may halt the expansion of or reverse the liberalization of non-U.S. investment policies now occurring in some emerging market countries and adversely affect existing investment opportunities.

Some emerging markets have different settlement and clearance procedures, which, for example, may not call for delivery of a security to a fund until well after the fund has paid for such security. In certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. The inability of a fund to make intended securities purchases due to settlement problems could cause that fund to miss attractive investment opportunities. Inability to dispose of a portfolio security caused by settlement problems could result either in losses to the fund due to subsequent declines in value of the portfolio security or, if the fund has entered into a contract to sell the security, in possible liability to the purchaser.

The risk also exists that an emergency situation may arise in one or more emerging market countries as a result of which trading of securities may cease or may be substantially curtailed and prices for a fund’s portfolio securities in such markets may not be readily available.

Sovereign Debt Securities. Sovereign debt is subject to risks in addition to those relating to non-U.S. investments generally. As a sovereign entity, the issuing government may be immune from lawsuits in the event of its failure or refusal to pay the obligations when due. The debtor’s willingness or ability to repay in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its non-U.S. reserves, the availability of sufficient non-U.S. exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor’s policy toward principal international lenders and the political constraints to which the sovereign debtor may be subject. Sovereign debtors also may be dependent on expected disbursements from foreign governments or multinational agencies, the country’s access to trade and other international credits, and the country’s balance of trade. Some emerging market sovereign debtors have in the past rescheduled their debt payments or declared moratoria on payments, and similar occurrences may happen in the future. There is no bankruptcy proceeding by which sovereign debt on which governmental entities have defaulted may be collected in whole or in part.

Depositary Receipts. American Depositary Receipts, or “ADRs,” are securities issued by a U.S. depositary (usually a bank) and represent a specified quantity of underlying non-U.S. securities on deposit with a custodian bank as collateral. A non-U.S. issuer of the security underlying an ADR is generally not subject to the same reporting requirements in the United States as a domestic issuer. Accordingly, the information available to a U.S. investor will be limited to the information the non-U.S. issuer is required to disclose in its own country and the market value of an ADR may not reflect undisclosed material information concerning the issuer or the underlying security. ADRs may also be subject to exchange rate risks if the underlying securities are denominated in a non-U.S. currency. The funds may also invest in similar non-U.S. instruments issued by non-U.S. banks or trust

companies such as “GDRs” and “EDRs.” EDRs are non-U.S. dollar denominated receipts similar to ADRs, are issued and traded in Europe and are publicly traded on exchanges or over-the-counter in the United States. GDRs may be offered privately in the United States and also trade in public or private markets in other countries. For purposes of its investment policies, each fund will treat ADRs and similar instruments as equivalent to investment in the underlying securities.

Options, Futures and Other Financial Instruments

General. Certain of the funds may invest in certain options, futures contracts (sometimes referred to as “futures”), options on futures contracts, forward contracts, swaps, caps, floors, collars, structured notes, indexed securities and other derivative instruments (collectively, “Financial Instruments”) to attempt to enhance their return or yield or to attempt to hedge their investments. Except as otherwise provided in the Prospectus or SAI or by applicable law, a fund may purchase and sell any type of Financial Instrument.

Hedging strategies can be broadly categorized as “short hedges” and “long hedges.” A short hedge is a purchase or sale of a Financial Instrument intended partially or fully to offset potential declines in the value of one or more investments held in a fund’s portfolio. Thus, in a short hedge a fund takes a position in a Financial Instrument whose price is expected to move in the opposite direction of the price of the investment being hedged.

Conversely, a long hedge is a purchase or sale of a Financial Instrument intended partially or fully to offset potential increases in the acquisition cost of one or more investments that a fund intends to acquire. Thus, in a long hedge, a fund takes a position in a Financial Instrument whose price is expected to move in the same direction as the price of the prospective investment being hedged. A long hedge is sometimes referred to as an anticipatory hedge. In an anticipatory hedge transaction, a fund does not own a corresponding security and, therefore, the transaction does not relate to a security the fund owns. Rather, it relates to a security that the fund intends to acquire. If the fund does not complete the hedge by purchasing the security it anticipated purchasing, the effect on the fund’s portfolio is the same as if the transaction were entered into for speculative purposes.

Financial Instruments on securities generally are used to attempt to hedge against price movements in one or more particular securities positions that a fund owns or intends to acquire. Financial Instruments on indices, in contrast, generally are used to attempt to hedge against price movements in market sectors in which a fund has invested or expects to invest. Financial Instruments on debt securities generally are used to hedge either individual securities or broad debt market sectors. Except as otherwise provided in the Prospectus or SAI or by applicable law, a fund may use Financial Instruments for any purpose, including non-hedging purposes.

The use of Financial Instruments is subject to applicable regulations of the SEC, the several exchanges upon which they are traded and the Commodity Futures Trading Commission (the “CFTC”). In addition, a fund’s ability to use Financial Instruments may be limited by tax considerations. See “Additional Tax Information.”

In addition to the instruments, strategies and risks described below, the Advisers expect to discover additional opportunities in connection with Financial Instruments and other similar or related techniques. These new opportunities may become available as the Advisers develop new techniques, as regulatory authorities broaden the range of permitted transactions and as new Financial Instruments or other techniques are developed. The Advisers may utilize these opportunities to the extent that they are consistent with a fund’s investment objective and permitted by its investment limitations and applicable regulatory authorities. A fund might not use any of these strategies, and there can be no assurance that any strategy used will succeed.

Special Risks. The use of Financial Instruments involves special considerations and risks, certain of which are described below. In general, these techniques may increase the volatility of a fund and may involve a small investment of cash relative to the magnitude of the risk assumed. Risks pertaining to particular Financial Instruments are described in the sections that follow.

(1)

Successful use of most Financial Instruments depends upon an Adviser’s ability to predict movements of the overall securities, currency and interest rate markets, which requires different skills than

predicting changes in the prices of individual securities. There can be no assurance that any particular strategy will succeed, and use of Financial Instruments could result in a loss, regardless of whether the intent was to reduce risk or increase return.

(2)

There might be imperfect correlation, or even no correlation, between price movements of a Financial Instrument and price movements of the investments or other economic measures (collectively, “Instruments”) being hedged. For example, if the value of a Financial Instrument used in a short hedge increased by less than the decline in value of the hedged Instrument, the hedge would not be fully successful. Such a lack of correlation might occur due to factors unrelated to the value of the Instrument being hedged, such as speculative or other pressures on the markets in which Financial Instruments are traded. The effectiveness of hedges using Financial Instruments on indices will depend on the degree of correlation between price movements in the index and price movements in the securities or other assets being hedged.

Because there are a limited number of types of exchange-traded Financial Instruments, it is likely that the standardized contracts available will not match a fund’s current or anticipated investments exactly. A fund may invest in Financial Instruments based on securities with different issuers, maturities or other characteristics from the securities in which it typically invests, which involves a risk that the position in Financial Instruments will not track the performance of the fund’s other investments.

Prices of Financial Instruments can also diverge from the prices of their underlying Instruments, even if the underlying Instruments match a fund’s investments well. Prices of Financial Instruments are affected by such factors as current and anticipated short-term interest rates, changes in volatility of the underlying Instrument, and the time remaining until expiration of the contract, which may not affect security prices the same way. Imperfect correlation may also result from differing levels of demand in the markets for Financial Instruments and the securities markets, from structural differences in how Financial Instruments and securities are traded, or from imposition of daily price fluctuation limits or trading halts. A fund may purchase or sell Financial Instruments with a greater or lesser value than the securities it wishes to hedge or intends to purchase in order to attempt to compensate for differences in volatility between the contract and the securities, although this may not be successful in all cases. If price changes in a fund’s positions in Financial Instruments are poorly correlated with its other investments, the positions may fail to produce anticipated gains or result in losses that are not offset by gains in other investments.

(3)

If successful, the above-discussed strategies can reduce risk of loss by wholly or partially offsetting the negative effect of unfavorable price movements. However, such strategies can also reduce opportunity for gain by offsetting the positive effect of favorable price movements. For example, if a fund entered into a short hedge because its Adviser projected a decline in the price of a security in the fund’s portfolio, and the price of that security increased instead, the gain from that increase might be wholly or partially offset by a decline in the price of the Financial Instrument. Moreover, if the price of the Financial Instrument declined by more than the increase in the price of the security, the fund could suffer a loss. In either such case, the fund would have been in a better position had it not attempted to hedge at all.

(4)

As described below, a fund might be required to maintain assets as “cover,” maintain segregated accounts or make margin payments when it takes positions in Financial Instruments involving obligations to third parties (i.e., Financial Instruments other than purchased options). If a fund were unable to close out its positions in such Financial Instruments, it might be required to continue to maintain such assets or accounts or make such payments until the position expired or matured. These requirements might impair a fund’s ability to sell a portfolio security or make an investment at a time when it would otherwise be favorable to do so, or require that the fund sell a portfolio security at a disadvantageous time.

(5)

A fund’s ability to close out a position in a Financial Instrument prior to expiration or maturity depends on the existence of a liquid secondary market or, in the absence of such a market, the ability and

willingness of the other party to the transaction (the “counterparty”) to enter into a transaction closing out the position. Therefore, there is no assurance that any position can be closed out at a time and price that is favorable to a fund.

(6)

Use of Financial Instruments by a fund could expose the fund to the effects of leverage, which could increase the fund’s exposure to market conditions and magnify potential losses.

Additional Risks of Financial Instruments Traded on Non-U.S. Exchanges. Financial Instruments may be traded on non-U.S. exchanges. Such transactions may not be regulated as effectively as similar transactions in the United States, may not involve a clearing mechanism and related guarantees and are subject to the risk of governmental actions affecting trading in, or the price of, non-U.S. securities. The value of such positions also could be adversely affected by (1) other complex non-U.S. political, legal and economic factors, (2) lesser availability than in the United States of data on which to make trading decisions, (3) delays in the funds’ ability to act upon economic events occurring in non-U.S. markets during non-business hours in the United States, (4) the imposition of different exercise and settlement terms and procedures and margin requirements than in the United States and (5) lesser trading volume.

Options. A call option gives the purchaser the right to buy, and obligates the writer to sell, the underlying Instrument at the agreed-upon price during the option period. A put option gives the purchaser the right to sell, and obligates the writer to buy, the underlying Instrument at the agreed-upon price during the option period. Purchasers of options pay an amount, known as a premium, to the option writer in exchange for the right under the option contract. The funds may purchase and sell both put options and call options on a variety of underlying Instruments, including, but not limited to, specific securities, securities indexes, futures contracts and foreign currencies.

Each fund can use both European-style or American-style options. A European-style option is only exercisable immediately prior to its expiration. This is in contrast to American-style options, which are exercisable at any time prior to the expiration date of the option.

A fund may purchase call options for any purpose. For example, a call option may be purchased by a fund as a long hedge. Call options also may be used as a means of participating in an anticipated price increase of an Instrument on a more limited risk basis than would be possible if the Instrument itself were purchased. In the event of a decline in the price of the underlying Instrument, use of this strategy would serve to limit the fund’s potential loss to the option premium paid; conversely, if the market price of the underlying Instrument increases above the exercise price and the fund either sells or exercises the option, any profit realized would be reduced by the premium.

A fund may purchase put options for any purpose. For example, a put option may be purchased by a fund as a short hedge. The put option enables a fund to sell the underlying Instrument at the predetermined exercise price; thus the potential for loss to the fund below the exercise price is limited to the option premium paid. If the market price of the underlying Instrument is higher than the exercise price of the put option, any profit the fund realizes on the sale of the Instrument would be reduced by the premium paid for the put option less any amount for which the put option may be sold.

Writing put or call options can enable a fund to enhance income or yield by reason of the premiums paid by the purchasers of such options. However, a fund may also suffer a loss as a result of writing options. For example, if the market price of the Instrument underlying a put option declines to less than the exercise price of the option, minus the premium received, a fund would suffer a loss.

Writing call options can serve as a limited short hedge, because declines in the value of the hedged Instrument would be offset to the extent of the premium received for writing the option. However, if the underlying Instrument appreciates to a price higher than the exercise price of the call option, it can be expected that the

option will be exercised and the fund will be obligated to sell the underlying Instrument at less than its market value.

Writing put options can serve as a limited long hedge because increases in the value of the hedged investment would be offset to the extent of the premium received for writing the option. However, if the underlying Instrument depreciates to a price lower than the exercise price of the put option, it can be expected that the put option will be exercised and the fund will be obligated to purchase the underlying Instrument at more than its market value.

The value of an option position will reflect, among other things, the current market value of the underlying Instrument, the time remaining until expiration, the relationship of the exercise price to the market price of the underlying Instrument, the historical price volatility of the underlying Instrument and general market conditions.

Each fund may effectively terminate its right or obligation under an option by entering into a closing transaction. For example, a fund may terminate its obligation under a call or put option that it had written by purchasing an identical call or put option; this is known as a closing purchase transaction. Conversely, a fund may terminate a position in a put or call option it had purchased by writing an identical put or call option; this is known as a closing sale transaction. Closing transactions permit a fund to realize profits or limit losses on an option position prior to its exercise or expiration.

A type of put that a fund may purchase is an “optional delivery standby commitment,” which is entered into by parties selling debt securities to the fund. An optional delivery standby commitment gives a fund the right to sell the security back to the seller on specified terms. This right is provided as an inducement to purchase the security.

Risks of Options. Options offer large amounts of leverage, which will result in a fund’s net asset value being more sensitive to changes in the value of the related instrument. Each fund may purchase or write both exchange-traded and OTC options. Exchange-traded options in the United States are issued by a clearing organization affiliated with the exchange on which the option is listed that, in effect, guarantees completion of every exchange-traded option transaction. In contrast, OTC options are contracts between a fund and its counterparty (usually a securities dealer or a bank) with no clearing organization guarantee. Thus, when a fund purchases an OTC option, it relies on the counterparty from whom it purchased the option to make or take delivery of the underlying investment upon exercise of the option. Failure by the counterparty to do so would result in the loss of any premium paid by a fund as well as the loss of any expected benefit of the transaction.

Each fund’s ability to establish and close out positions in exchange-listed options depends on the existence of a liquid market. However, there can be no assurance that such a market will exist at any particular time. Closing transactions can be made for OTC options only by negotiating directly with the counterparty, or by a transaction in the secondary market if any such market exists. There can be no assurance that a fund will in fact be able to close out an OTC option position at a favorable price prior to expiration. In the event of insolvency of the counterparty, a fund might be unable to close out an OTC option position at any time prior to its expiration, if at all.

If a fund were unable to effect a closing transaction for an option it had purchased, due to the absence of a secondary market, the imposition of price limits or otherwise, it would have to exercise the option to realize any profit. The inability to enter into a closing purchase transaction for a covered call option written by a fund could cause material losses because the fund would be unable to sell the investment used as cover for the written option until the option expires or is exercised.

Options have varying expiration dates. The exercise price of the options may be below, equal to or above the current market value of the underlying Instrument. Options purchased by a fund that expire unexercised have no value, and the fund will realize a loss in the amount of the premium paid and any transaction costs. If an option

written by a fund expires unexercised, the fund realizes a gain equal to the premium received at the time the option was written. Transaction costs must be included in these calculations.

Options on Indices. Puts and calls on indices are similar to puts and calls on other investments except that all settlements are in cash and gain or loss depends on changes in the index in question rather than on price movements in individual securities, futures contracts or other investments. When a fund writes a call on an index, it receives a premium and agrees that, prior to the expiration date, the purchaser of the call, upon exercise of the call, will receive from the fund an amount of cash if the closing level of the index upon which the call is based is greater than the exercise price of the call. The amount of cash is equal to the difference between the closing price of the index and the exercise price of the call times a specified multiple (“multiplier”), which determines the total dollar value for each point of such difference. When a fund buys a call on an index, it pays a premium and has the same rights as to such call as are indicated above. When a fund buys a put on an index, it pays a premium and has the right, prior to the expiration date, to require the seller of the put, upon the fund’s exercise of the put, to deliver to the fund an amount of cash if the closing level of the index upon which the put is based is less than the exercise price of the put, which amount of cash is determined by the multiplier, as described above for calls. When a fund writes a put on an index, it receives a premium and the purchaser of the put has the right, prior to the expiration date, to require the fund to deliver to it an amount of cash equal to the difference between the closing level of the index and exercise price times the multiplier if the closing level is less than the exercise price.

Risks of Options on Indices. The risks of investment in options on indices may be greater than options on securities, futures contracts or other investments. Because index options are settled in cash, when a fund writes a call on an index it cannot provide in advance for its potential settlement obligations by acquiring and holding the underlying Instruments. A fund can offset some of the risk of writing a call index option by holding a diversified portfolio of Instruments similar to those on which the underlying index is based. However, a fund cannot, as a practical matter, acquire and hold a portfolio containing exactly the same Instruments as underlie the index and, as a result, bears a risk that the value of the Instruments held will vary from the value of the index.

Even if a fund could assemble a portfolio that exactly reproduced the composition of the underlying index, it still would not be fully covered from a risk standpoint because of the “timing risk” inherent in writing index options. When an index option is exercised, the amount of cash that the holder is entitled to receive is determined by the difference between the exercise price and the closing index level on the date when the option is exercised. As with other kinds of options, a fund as the call writer will not learn that the fund has been assigned until the next business day at the earliest. The time lag between exercise and notice of assignment poses no risk for the writer of a covered call on a specific underlying Instrument, such as common stock, because there the writer’s obligation is to deliver the underlying Instrument, not to pay its value as of a fixed time in the past. So long as the writer already owns the underlying Instrument, it can satisfy its settlement obligations by simply delivering it, and the risk that its value may have declined since the exercise date is borne by the exercising holder. In contrast, even if the writer of an index call holds investments that exactly match the composition of the underlying index, it will not be able to satisfy its assignment obligations by delivering those Instruments against payment of the exercise price. Instead, it will be required to pay cash in an amount based on the closing index value on the exercise date. By the time it learns that it has been assigned, the index may have declined, with a corresponding decline in the value of its portfolio. This “timing risk” is an inherent limitation on the ability of index call writers to cover their risk exposure by holding Instrument positions.

If a fund has purchased an index option and exercises it before the closing index value for that day is available, it runs the risk that the level of the underlying index may subsequently change. If such a change causes the exercised option to fall out-of-the-money, a fund will be required to pay the difference between the closing index value and the exercise price of the option (times the applicable multiplier) to the assigned writer.

OTC Options. Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size, and strike price, the terms of OTC options (options not traded on exchanges) generally are established through negotiation with the other party to the option contract. While this type of

arrangement allows a fund great flexibility to tailor the option to its needs, OTC options generally involve greater risk than exchange-traded options, which are guaranteed by the clearing organization of the exchanges where they are traded. In addition, OTC options are considered illiquid by the SEC.

Futures Contracts and Options on Futures Contracts. A financial futures contract sale creates an obligation by the seller to deliver the type of Instrument called for in the contract in a specified delivery month for a stated price. A financial futures contract purchase creates an obligation by the purchaser to take delivery of the type of Instrument called for in the contract in a specified delivery month at a stated price. A fund may invest in single security futures contracts to the extent permitted by applicable law. Options on futures give the purchaser the right to assume a position in a futures contract at the specified option exercise price at any time during the period of the option. The purchase of futures or call options on futures can serve as a long hedge, and the sale of futures or the purchase of put options on futures can serve as a short hedge. Writing call options on futures contracts can serve as a limited short hedge, using a strategy similar to that used for writing call options on Instruments. Similarly, writing put options on futures contracts can serve as a limited long hedge. Futures contracts and options on futures contracts can also be purchased and sold to attempt to enhance income or yield. To the extent permitted by applicable law, a fund may also write call and put options on futures contracts that are not covered. The funds may invest in futures contracts and options thereon with respect to Instruments including, but not limited to, specific securities, securities indexes and currencies.

In addition, futures strategies can be used to manage the duration of a fund’s fixed-income portfolio. If an Adviser wishes to shorten the duration of a fund’s fixed-income portfolio, the fund may sell a debt futures contract or a call option thereon, or purchase a put option on that futures contract. If an Adviser wishes to lengthen the duration of a fund’s fixed-income portfolio, the fund may buy a debt futures contract or a call option thereon, or sell a put option thereon.

Futures contracts may also be used for non-hedging purposes, such as to simulate full investment in underlying Instrument while retaining a cash balance for portfolio management purposes, as a substitute for direct investment in the underlying Instrument, to facilitate trading, to reduce transaction costs, or to seek higher investment returns when a futures contract or option is priced more attractively than the underlying Instrument.

No price is paid upon entering into a futures contract. Instead, at the inception of a futures contract a fund is required to deposit “initial margin.” Margin must also be deposited when writing a call or put option on a futures contract, in accordance with applicable exchange rules. Unlike margin in securities transactions, initial margin on futures contracts does not represent a borrowing, but rather is in the nature of a performance bond or good-faith deposit that is returned to the fund at the termination of the transaction if all contractual obligations have been satisfied. Under certain circumstances, such as periods of high volatility, a fund may be required by an exchange to increase the level of its initial margin payment, and initial margin requirements might be increased generally in the future by regulatory action.

Subsequent “variation margin” payments are made to and from the futures broker daily as the value of the futures position varies, a process known as “marking-to-market.” Variation margin does not involve borrowing, but rather represents a daily settlement of a fund’s obligations to or from a futures broker. When a fund purchases an option on a futures contract, the premium paid plus transaction costs is all that is at risk. However, there may be circumstances when the purchase of an option on a futures contract would result in a loss to the fund when the use of a futures contract would not, such as when there is no movement in the value of the securities or currencies being hedged. In contrast, when a fund purchases or sells a futures contract or writes a call or put option thereon, it is subject to daily variation margin calls that could be substantial in the event of adverse price movements. If a fund has insufficient cash to meet daily variation margin requirements, it might need to sell securities at a time when such sales are disadvantageous.

Although some futures and options on futures call for making or taking delivery of the underlying Instrument, generally those contracts are closed out prior to delivery by offsetting purchases or sales of matching futures or

options (involving the same Instrument and delivery month). If an offsetting purchase price is less than the original sale price, the fund realizes a gain, or if it is more, the fund realizes a loss. If an offsetting sale price is more than the original purchase price, the fund realizes a gain, or if it is less, the fund realizes a loss. The fund will also bear transaction costs for each contract, which will be included in these calculations. Positions in futures and options on futures may be closed only on an exchange or board of trade that provides a secondary market. However, there can be no assurance that a liquid secondary market will exist for a particular contract at a particular time. In such event, it may not be possible to close a futures contract or options position.

Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract or an option on a futures contract can vary from the previous day’s settlement price; once that limit is reached, no trades may be made that day at a price beyond the limit. Daily price limits do not limit potential losses because prices could move to the daily limit for several consecutive days with little or no trading, thereby preventing liquidation of unfavorable positions.

If a fund were unable to liquidate a futures contract or an option on a futures position due to the absence of a liquid secondary market, the imposition of price limits or otherwise, it could incur substantial losses. The fund would continue to be subject to market risk with respect to the position. In addition, except in the case of purchased options, the fund would continue to be required to make daily variation margin payments and might be required to maintain the position being hedged by the future or option or to maintain cash or securities in a segregated account.

The funds are operated by a person who has claimed an exclusion from the definition of the term “commodity pool operator” under the Commodity Exchange Act (the “CEA”), and, therefore, such person is not subject to registration or regulation as a pool operator under the CEA.

Risks of Futures Contracts and Options Thereon. The ordinary spreads between prices in the cash and futures markets (including the options on futures market), due to differences in the natures of those markets, are subject to the following factors, which may create distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions, which could distort the normal relationship between the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing distortion. Third, from the point of view of speculators, the deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions. Due to the possibility of distortion, a correct forecast of general interest rate, currency exchange rate or stock market trends by an Adviser may still not result in a successful transaction. Of course, an Adviser may be incorrect in its expectations as to the extent of various interest rate, currency exchange rate, stock market or other movements or the time span within which the movements take place.

Congress, various exchanges and regulatory and self-regulatory authorities have undertaken reviews of options and futures trading in light of market volatility. Among the actions that have been taken or proposed to be taken are new limits and reporting requirements for speculative positions, new or more stringent daily price fluctuation limits for futures and options transactions, and increased margin requirements for various types of futures transactions. Additional measures are under active consideration and as a result there may be further actions that adversely affect the regulation of the instruments in which the funds invest.

Index Futures. The risk of imperfect correlation between movements in the price of index futures and movements in the price of the Instruments that are the subject of the hedge increases as the composition of a fund’s portfolio diverges from the Instruments included in the applicable index. The price of the index futures may move more than or less than the price of the Instruments being hedged. If the price of the index futures moves less than the price of the Instruments that are the subject of the hedge, the hedge will not be fully effective, but if the price of

the Instruments being hedged has moved in an unfavorable direction, a fund would be in a better position than if it had not hedged at all. If the price of the Instruments being hedged has moved in a favorable direction, this advantage will be partially offset by the futures contract. If the price of the futures contract moves more than the price of the Instruments, a fund will experience either a loss or a gain on the futures contract that will not be completely offset by movements in the price of the Instruments that are the subject of the hedge. To compensate for the imperfect correlation of movements in the price of the Instruments being hedged and movements in the price of the index futures, a fund may buy or sell index futures in a greater dollar amount than the dollar amount of the Instruments being hedged if the historical volatility of the prices of such Instruments being hedged is more than the historical volatility of the prices of the Instruments included in the index. It is also possible that, where a fund has sold index futures contracts to hedge against decline in the market, the market may advance and the value of the Instruments held in the fund may decline. If this occurred, the fund would lose money on the futures contract and also experience a decline in value of its portfolio Instruments. However, while this could occur for a very brief period or to a very small degree, over time the value of a diversified portfolio of Instruments will tend to move in the same direction as the market indices on which the futures contracts are based.

Where index futures are purchased to hedge against a possible increase in the price of Instruments before a fund is able to invest in them in an orderly fashion, it is possible that the market may decline instead. If the fund then concludes not to invest in them at that time because of concern as to possible further market decline or for other reasons, it will realize a loss on the futures contract that is not offset by a reduction in the price of the Instruments it had anticipated purchasing.

To the extent such instruments are permitted by applicable law, a fund may invest in security futures. Such investments are expected to be subject to risks similar to those of index future investing.

Non-U.S. Currency Hedging Strategies — Special Considerations. A fund may engage in a variety of non-U.S. currency exchange transactions to protect against uncertainty in the level of future exchange rates or to earn additional income. Such funds may use options and futures contracts relating to non-U.S. currencies as described above, and swaps, indexed notes and forward currency contracts, as described below, to attempt to hedge against movements in the values of the non-U.S. currencies in which that fund’s securities are denominated or to attempt to enhance income or yield. Currency hedges can protect against price movements in a security that a fund owns or intends to acquire that are attributable to changes in the value of the currency in which it is denominated. Such hedges do not, however, protect against price movements in the securities that are attributable to other causes.

A fund might seek to hedge against changes in the value of a particular currency when no Financial Instruments on that currency are available or such Financial Instruments are more expensive than certain other Financial Instruments. In such cases, the fund may seek to hedge against price movements in that currency by entering into transactions using Financial Instruments on another currency or a basket of currencies, the value of which the fund’s Adviser believes will have a high degree of correlation to the value of the currency being hedged. The risk that movements in the price of the Financial Instrument will not correlate perfectly with movements in the price of the currency subject to the hedging transaction is magnified when this strategy is used.

The value of Financial Instruments on non-U.S. currencies depends on the value of the underlying currency relative to the U.S. dollar. Because non-U.S. currency transactions occurring in the interbank market might involve substantially larger amounts than those involved in the use of such Financial Instruments, a fund could be disadvantaged by having to deal in the odd lot market (generally consisting of transactions of less than $1 million) for the underlying non-U.S. currencies at prices that are less favorable than for round lots.

There is no systematic reporting of last sale information for non-U.S. currencies or any regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis. Quotation information generally is representative of very large transactions in the interbank market and thus might not reflect odd-lot transactions where rates might be less favorable. The interbank market in non-U.S. currencies is a global, round-the-clock market. To the extent the U.S. options or futures markets are closed while the markets for

the underlying currencies remain open, significant price and rate movements might take place in the underlying markets that cannot be reflected in the markets for the Financial Instruments until they reopen.

Settlement of hedging transactions involving non-U.S. currencies might be required to take place within the country issuing the underlying currency. Thus, a fund might be required to accept or make delivery of the underlying non-U.S. currency in accordance with any U.S. or non-U.S. regulations regarding the maintenance of non-U.S. banking arrangements by U.S. residents and might be required to pay any fees, taxes and charges associated with such delivery assessed in the issuing country.

Options on non-U.S. currencies also have the other risks of using options inherent in options generally. See “Risks of Options” above.

Forward Currency Contracts. Certain of the funds may enter into forward currency contracts to purchase or sell non-U.S. currencies for a fixed amount of U.S. dollars or another non-U.S. currency. A forward currency contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days (term) from the date of the forward currency contract agreed upon by the parties, at a price set at the time of the forward currency contract. These forward currency contracts are traded directly between currency traders (usually large commercial banks) and their customers. Forward currency contracts may be used to attempt to hedge currency exposure or to enhance return or yield.

Such transactions may serve as long hedges; for example, a fund may purchase a forward currency contract to lock in the U.S. dollar price of a security denominated in a non-U.S. currency that the fund intends to acquire. Forward currency contract transactions may also serve as short hedges; for example, a fund may sell a forward currency contract to lock in the U.S. dollar equivalent of the proceeds from the anticipated sale of a security, dividend or interest payment denominated in a non-U.S. currency.

A fund may also use forward currency contracts to hedge against a decline in the value of existing investments denominated in non-U.S. currency. For example, if a fund owned securities denominated in euros, it could enter into a forward currency contract to sell euros in return for U.S. dollars to hedge against possible declines in the euro’s value. Such a hedge, sometimes referred to as a “position hedge,” would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. A fund could also hedge the position by selling another currency expected to perform similarly to the euro. This type of hedge, sometimes referred to as a “proxy hedge,” could offer advantages in terms of cost, yield or efficiency, but generally would not hedge currency exposure as effectively as a simple hedge into U.S. dollars. Proxy hedges may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated.

The cost to a fund of engaging in forward currency contracts varies with factors such as the currency involved, the length of the contract period and the market conditions then prevailing. Because forward currency contracts are usually entered into on a principal basis, no fees or commissions are involved. When a fund enters into a forward currency contract, it relies on the counterparty to make or take delivery of the underlying currency at the maturity of the contract. Failure by the counterparty to do so would result in the loss of any expected benefit of the transaction.

As is the case with futures contracts, parties to forward currency contracts can enter into offsetting closing transactions, similar to closing transactions on futures contracts, by selling or purchasing, respectively, an instrument identical to the instrument purchased or sold. Secondary markets generally do not exist for forward currency contracts, with the result that closing transactions generally can be made for forward currency contracts only by negotiating directly with the counterparty. Thus, there can be no assurance that a fund will in fact be able to close out a forward currency contract at a favorable price prior to maturity. In addition, in the event of insolvency of the counterparty, a fund might be unable to close out a forward currency contract at any time prior to maturity, if at all. In either event, a fund would continue to be subject to market risk with respect to the position, and would continue to be required to maintain the required cover.

The precise matching of forward currency contract amounts and the value of the securities involved generally will not be possible because the value of such securities, measured in the non-U.S. currency, will change after the forward currency contract has been established. Thus, a fund might need to purchase or sell non-U.S. currencies in the spot (cash) market to the extent such non-U.S. currencies are not covered by forward currency contracts. The projection of short-term currency market movements is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. In addition, although forward currency contracts limit the risk of loss due to a decline in the value of the hedged currencies, at the same time they limit any potential gain that might result should the value of the currencies increase.

Successful use of forward currency contracts depends on an Adviser’s skill in analyzing and predicting currency values. Forward currency contracts may substantially change a fund’s exposure to changes in currency exchange rates and could result in losses to the fund if currencies do not perform as the fund’s Adviser anticipates. There is no assurance that an Adviser’s use of forward currency contracts will be advantageous to the fund or that the Adviser will hedge at an appropriate time.

Combined Positions. A fund may purchase and write options in combination with each other, or in combination with other Financial Instruments, to adjust the risk and return characteristics of its overall position. For example, a fund may purchase a put option and write a call option on the same underlying instrument, in order to construct a combined position whose risk and return characteristics are similar to selling a futures contract. Another possible combined position would involve writing a call option at one strike price and buying a call option at a lower price, in order to reduce the risk of the written call option in the event of a substantial price increase. Because combined options positions involve multiple trades, they result in higher transaction costs and may be more difficult to open and close out.

Turnover. A fund’s Financial Instrument activities may affect its turnover rate and brokerage commission payments. For example, the exercise of calls or puts written by a fund, and the sale or purchase of futures contracts, may cause it to sell or purchase related investments, thus increasing its turnover rate. Once a fund has received an exercise notice on an option it has written, it cannot effect a closing transaction in order to terminate its obligation under the option and must deliver or receive the underlying securities at the exercise price. The exercise of puts purchased by a fund may also cause the sale of related investments, also increasing turnover; although such exercise is within the fund’s control, holding a protective put might cause it to sell the related investments for reasons that would not exist in the absence of the put. A fund will pay a brokerage commission each time it buys or sells a put or call or purchases or sells a futures contract. Such commissions may be higher than those that would apply to direct purchases or sales.

Swaps, Caps, Floors and Collars. Each fund may enter into swaps, caps, floors and collars to preserve a return or a spread on a particular investment or portion of its portfolio, to protect against any increase in the price of securities the fund anticipates purchasing at a later date or to attempt to enhance yield. A swap involves the exchange by a fund with another party of their respective commitments to pay or receive cash flows, e.g., an exchange of floating rate payments for fixed-rate payments. The purchase of a cap entitles the purchaser, to the extent that a specified index exceeds a predetermined value, to receive payments on a notional principal amount from the party selling the cap. The purchase of a floor entitles the purchaser, to the extent that a specified index falls below a predetermined value, to receive payments on a notional principal amount from the party selling the floor. A collar combines elements of a cap and a floor. The funds may engage in swap transactions, including, but not limited to, swap agreements on interest rates, security indexes, specific securities, credit and event-linked swaps and currency exchange rates. The funds may also enter into options on swap agreements.

Swap agreements, including caps, floors and collars, can be individually negotiated and structured to include exposure to a variety of different types of investments or market factors. Depending on their structure, swap agreements may increase or decrease the overall volatility of a fund’s investments and its share price and yield because, and to the extent, these agreements affect the fund’s exposure to long- or short-term interest rates (in the United States or abroad), non-U.S. currency values, mortgage-backed security values, corporate borrowing rates or other factors such as security prices, certain specified events, index values or inflation rates.

Swap agreements will tend to shift a fund’s investment exposure from one type of investment to another. For example, if a fund agrees to exchange payments in U.S. dollars for payments in non-U.S. currency, the swap agreement would tend to decrease the fund’s exposure to U.S. interest rates and increase its exposure to non-U.S. currency and interest rates. Caps and floors have an effect similar to buying or writing options.

If a counterparty’s creditworthiness declines, the value of the agreement would be likely to decline, potentially resulting in losses. If a default occurs by the other party to such transaction, the fund will have contractual remedies pursuant to the agreements related to the transaction, which may be limited by applicable law in the case of a counterparty’s insolvency.

The funds may enter into credit default swap contracts for investment purposes and to add leverage to their investment portfolios. As the seller in a credit default swap contract, a fund would be required to pay the par (or other agreed-upon) value of a referenced debt obligation to the counterparty in the event of a default by a third party, such as a U.S. or non-U.S. corporate issuer, on the debt obligation. In return, the fund would receive from the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no default occurs, the fund would keep the stream of payments and would have no payment obligations. As the seller, the fund would effectively add leverage to its portfolio because, in addition to its net assets, the fund would be subject to investment exposure on the notional amount of the swap.

A fund may also purchase credit default swap contracts in order to hedge against the risk of default of debt securities held in its portfolio, in which case the fund would function as the counterparty referenced in the preceding paragraph. This would involve the risk that the investment may expire worthless and would only generate income in the event of an actual default by the issuer of the underlying obligation (or, as applicable, a credit downgrade or other indication of financial instability). It would also involve credit risk — that the seller may fail to satisfy its payment obligations to the fund in the event of a default.

The net amount of the excess, if any, of a fund’s obligations over its entitlements with respect to each swap will be accrued on a daily basis, depending on whether a threshold amount (if any) is exceeded, and an amount of cash or liquid assets having an aggregate net asset value approximately equal to the accrued excess will be maintained as collateral.

Cover. Transactions using Financial Instruments, other than purchased options, and certain other transactions, such as reverse repurchase agreements and certain forward commitments (e.g., forward roll transactions) expose a fund to an obligation to another party. Each fund will comply with SEC guidelines regarding cover for these instruments and will, if the guidelines so require, segregate on its books cash or liquid assets in the prescribed amount as determined daily. In some cases, (e.g., with respect to futures and forwards that are contractually required to “cash-settle” and most swaps), a fund is permitted under relevant guidance from the SEC or SEC staff to set aside assets with respect to an investment transaction in the amount of its net (marked-to-market) obligations thereunder, rather than the full notional amount of the transaction. By setting aside assets equal only to its net obligations, a fund will have the ability to engage to a greater extent in transactions in Financial Instruments, which may increase the risks associated with such investments. Although this SAI describes certain permitted methods of segregating assets or otherwise “covering” such transactions for these purposes, such descriptions are not intended to be comprehensive. A fund may cover such transactions using other methods currently or in the future permitted under the 1940 Act, the rules and regulations thereunder, or orders issued by the SEC thereunder. For these purposes, interpretations and guidance provided by the SEC staff may be taken into account when deemed appropriate by a fund.

Assets used as cover cannot be sold while the position in the corresponding Financial Instrument is open, unless they are replaced with other appropriate assets. As a result, the commitment of a large portion of a fund’s assets to cover in accounts could impede portfolio management or the fund’s ability to meet redemption requests or other current obligations.

Preferred Stocks and Convertible Securities

A preferred stock pays dividends at a specified rate and has preference over common stock in the payment of dividends and the liquidation of an issuer’s assets but is junior to the debt securities of the issuer in those same respects. The market prices of preferred stocks are subject to changes in interest rates and are more sensitive to changes in an issuer’s creditworthiness than are the prices of debt securities. Shareholders of preferred stock may suffer a loss of value if dividends are not paid. Under ordinary circumstances, preferred stock does not carry voting rights.

A convertible security is a bond, debenture, note, preferred stock or other security that may be converted into or exchanged for a prescribed amount of common stock (or another equity security) of the same or a different issuer within a particular period of time at a specified price or formula. A convertible security entitles the holder to receive interest paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Before conversion, convertible securities have characteristics similar to nonconvertible debt securities in that they ordinarily provide a stream of income with generally higher yields than those of common stocks of the same or similar issuers.

Convertible securities are usually subordinated to comparable-tier nonconvertible securities but rank senior to common stock in a corporation’s capital structure.

The value of a convertible security is a function of (1) its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege and (2) its worth, at market value, if converted into the underlying common stock. A convertible security may be subject to redemption at the option of the issuer at a price established in the convertible security’s governing instrument. If a convertible security held by a fund is called for redemption, the fund will be required to (1) permit the issuer to redeem the security, (2) convert it into the underlying common stock or (3) sell it to a third party. Any of these actions could have an adverse effect on a fund’s ability to achieve its investment objective.

Debt and Fixed Income Securities

The funds may invest in a variety of debt and fixed income securities. These securities share three principal risks: First, the level of interest income generated by a fund’s fixed income investments may decline due to a decrease in market interest rates. Thus, when fixed income securities mature or are sold, they may be replaced by lower-yielding investments. Second, their values fluctuate with changes in interest rates. Thus, a decrease in interest rates will generally result in an increase in the value of a fund’s fixed income investments. Conversely, during periods of rising interest rates, the value of a fund’s fixed income investments will generally decline. The magnitude of these fluctuations will generally be greater when a fund’s duration or average maturity is longer. Changes in the value of portfolio securities will not affect interest income from those securities, but will be reflected in a fund’s net asset value. In addition, certain fixed income securities are subject to credit risk, which is the risk that an issuer of securities will be unable to pay principal and interest when due, or that the value of the security will suffer because investors believe the issuer is unable to pay. The most common types of these instruments, and the associated risks, are described below. Subject to its investment policies and applicable law, each of the funds may invest in these and other instruments.

U.S. Government Obligations. U.S. Government securities include (1) U.S. Treasury bills (maturity of one year or less), U.S. Treasury notes (maturity of one to ten years) and U.S. Treasury bonds (maturities generally greater than ten years); (2) obligations issued or guaranteed by U.S. Government agencies or instrumentalities which are supported by any of the following: (a) the full faith and credit of the U.S. Government (such as GNMA certificates); (b) the right of the issuer to borrow an amount limited to a specific line of credit from the U.S. Government (such as obligations of the Federal Home Loan Banks); (c) the discretionary authority of the U.S. Government to purchase certain obligations of agencies or instrumentalities (such as securities issued by the Federal National Mortgage Association (“Fannie Mae”)); or (d) only the credit of the instrumentality (such as

securities issued by the Federal Home Loan Mortgage Corporation (“Freddie Mac”)) and (3) obligations issued by non-governmental entities (like financial institutions) that carry direct guarantees from U.S. government agencies as part of government initiatives in response to the market crisis or otherwise. In the case of obligations not backed by the full faith and credit of the United States, a fund must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment and may not be able to assert a claim against the United States itself in the event the agency or instrumentality does not meet its commitments. Neither the U.S. Government nor any of its agencies or instrumentalities guarantees the market value of the securities they issue. Therefore, the market value of such securities will fluctuate in response to changes in interest rates.

Variable and floating rate securities. Variable and floating rate securities provide for a periodic adjustment in the interest rate paid on the obligations. The terms of such obligations provide that interest rates are adjusted periodically based upon an interest rate adjustment index as provided in the respective obligations. The adjustment intervals may be regular, and range from daily up to annually, or may be event based, such as based on a change in the prime rate.

Each fund may invest in floating rate debt instruments (“floaters”) and engage in credit spread trades. The interest rate on a floater is a variable rate which is tied to another interest rate, such as a corporate bond index or Treasury bill rate. The interest rate on a floater resets periodically, typically every six months. While, because of the interest rate reset feature, floaters provide the fund with a certain degree of protection against rising interest rates, the fund will participate in any declines in interest rates as well. A credit spread trade is an investment position relating to a difference in the prices or interest rates of two bonds or other securities or currencies, where the value of the investment position is determined by movements in the difference between the prices or interest rates, as the case may be, of the respective securities or currencies.

Each fund may also invest in inverse floating rate debt instruments (“inverse floaters”). The interest rate on an inverse floater resets in the opposite direction from the market rate of interest to which the inverse floater is indexed. An inverse floating rate security may exhibit greater price volatility than a fixed rate obligation of similar credit quality.

A floater may be considered to be leveraged to the extent that its interest rate varies by a magnitude that exceeds the magnitude of the change in the index rate of interest. The higher degree of leverage inherent in some floaters is associated with greater volatility in their market values.

With respect to purchasable variable and floating rate instruments, the Advisers will consider the earning power, cash flows and liquidity ratios of the issuers and guarantors of such instruments and, if the instruments are subject to a demand feature, will monitor their financial status to meet payment on demand. Such instruments may include variable amount master demand notes that permit the indebtedness thereunder to vary in addition to providing for periodic adjustments in the interest rate. The absence of an active secondary market with respect to particular variable and floating rate instruments could make it difficult for a fund to dispose of a variable or floating rate note if the issuer defaulted on its payment obligation or during periods that the fund is not entitled to exercise its demand rights, and the fund could, for these or other reasons, suffer a loss with respect to such instruments. In determining average-weighted portfolio maturity, an instrument will be deemed to have a maturity equal to either the period remaining until the next interest rate adjustment or the time the fund involved can recover payment of principal as specified in the instrument, depending on the type of instrument involved.

Inflation-Indexed Securities. Inflation indexed bonds are fixed income securities whose principal value or coupon (interest payment) is periodically adjusted according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that accrues inflation into the principal value of the bond. Most other issuers pay out the index-based accruals as part of a semiannual coupon. A fund may also invest in inflation-indexed securities with other structures or characteristics as such securities become available in the

market. It is currently expected that other types of inflation-indexed securities would have characteristics similar to those described below.

U.S. Treasury Inflation Protected Securities (“U.S. TIPS”) are fixed income securities issued by the U.S. Department of Treasury, the principal amounts of which are adjusted daily based upon changes in the rate of inflation (currently represented by the non-seasonally adjusted Consumer Price Index for All Urban Consumers (“CPI-U”), calculated with a three-month lag). The U.S. Department of Treasury issues U.S. TIPS in maturities of five, ten and thirty years. U.S. TIPS pay interest on a semi-annual basis, equal to a fixed percentage of the inflation-adjusted principal amount. The interest rate on these bonds is fixed at issuance, but over the life of the bond this interest may be paid on an increasing or decreasing principal value that has been adjusted for inflation.

Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed for U.S. TIPS, even during a period of deflation. However, because the principal amount of U.S. TIPS would be adjusted downward during a period of deflation, the funds will be subject to deflation risk with respect to their investments in these securities. In addition, the current market value of the bonds is not guaranteed, and will fluctuate. If a fund purchases U.S. TIPS in the secondary market whose principal values have been adjusted upward due to inflation since issuance, the fund may experience a loss if there is a subsequent period of deflation. A fund may also invest in other inflation-related bonds which may or may not provide a guarantee of principal. If a guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal amount.

The value of inflation-indexed bonds is expected to fluctuate in response to changes in real interest rates, which are in turn tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if inflation were to rise at a faster rate than nominal interest rates, real interest rates might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increased at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. Although the principal value of these securities declines in periods of deflation, holders at maturity receive no less than par. If inflation is lower than expected during the period a fund holds the security, the fund may earn less on the security than on a conventional bond. Any increase in principal value is taxable in the year the increase occurs, even though holders do not receive cash representing the increase at that time. As a result, a fund investing in inflation-indexed securities could be required at times to liquidate other investments, including when it is not advantageous to do so, in order to satisfy its distribution requirements as a regulated investment company and to eliminate any fund-level income tax liability under the Code.

While these securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities may not be protected to the extent that the increase is not reflected in the bond’s inflation measure.

The U.S. Treasury began issuing inflation-indexed bonds in 1997. Certain non-U.S. governments, such as the United Kingdom, Canada and Australia, have a longer history of issuing inflation indexed bonds, and there may be a more liquid market in certain of these countries for these securities. The funds may invest in inflation-indexed securities issued in any country.

The periodic adjustment of U.S. TIPS is currently tied to the CPI-U, which is calculated by the U.S. Department of Treasury. The CPI-U is a measurement of changes in the cost of living, made up of components such as housing, food, transportation and energy. Inflation-indexed bonds issued by a non-U.S. government are generally adjusted to reflect a comparable inflation index, calculated by that government. There can no assurance that the CPI-U or any non-U.S. inflation index will accurately measure the real rate of inflation in the prices of goods and services. In addition, there can be no assurance that the rate of inflation in a non-U.S. country will be correlated to the rate of inflation in the United States. The three-month lag in calculating the CPI-U for purposes of adjusting the principal value of U.S. TIPS may give rise to risks under certain circumstances.

Mortgage-Related Securities. Mortgage-related securities represent an interest in a pool of mortgages made by lenders such as commercial banks, savings and loan institutions, mortgage bankers and others. Mortgage-related securities may be issued by governmental, government-related or non-governmental entities, and provide regular payments which consist of interest and, in most cases, principal. In contrast, other forms of debt securities normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. In effect, payments on mortgage-related securities are a “pass-through” of the payments made by the individual borrowers on their mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments to holders of mortgage-related securities are caused by repayments resulting from the sale of the underlying property, refinancing or foreclosure, net of fees or costs that may be incurred.

As prepayment rates of individual pools of mortgage loans vary widely, it is not possible to predict accurately the average life of a particular security. Although mortgage-related securities are issued with stated maturities of up to forty years, unscheduled or early payments of principal and interest on the underlying mortgages may shorten considerably the securities’ effective maturities. The volume of prepayments of principal on a pool of mortgages underlying a particular mortgage-related security will influence the yield of that security, and the principal returned to a fund may be reinvested in instruments whose yield may be higher or lower than that which might have been obtained had such prepayments not occurred. When interest rates are declining, such prepayments usually increase, and reinvestments of such principal prepayments will be at a lower rate than that on the original mortgage-related security. An increase in mortgage prepayments could cause the fund to incur a loss on a mortgage-related security that was purchased at a premium. On the other hand, a decrease in the rate of prepayments, resulting from an increase in market interest rates or other causes, may extend the effective maturities of mortgage-related securities, increasing their sensitivity to changes in market interest rates and potentially increasing the volatility of a fund’s shares. The rate of prepayment may also be affected by general economic conditions, the location and age of the mortgages, and other social and demographic conditions. In determining the average maturity or duration of a mortgage-related security, a fund’s Adviser must apply certain assumptions and projections about the maturity and prepayment of such security; actual prepayment rates may differ. Because of prepayments, mortgage-related securities may have less potential for capital appreciation during periods of declining interest rates than other securities of comparable maturities, although they may have a similar risk of decline in market value during periods of rising interest rates.

Pools often consist of whole mortgage loans or participations in loans. The majority of these loans are made to purchasers of one- to four-family homes. The terms and characteristics of the mortgage instruments are generally uniform within a pool but may vary among pools. For example, in addition to fixed-rate, fixed-term mortgages, the funds may purchase pools of variable-rate mortgages, growing-equity mortgages, graduated-payment mortgages and other types.

All poolers apply standards for qualification to lending institutions that originate mortgages for the pools. Poolers also establish credit standards and underwriting criteria for individual mortgages included in the pools. In addition, many mortgages included in pools are insured through private mortgage insurance companies.

The average life of mortgage-related securities varies with the maturities and the nature of the underlying mortgage instruments. For example, securities issued by the Government National Mortgage Association (“GNMA”) tend to have a longer average life than participation certificates (“PCs”) issued by the Federal Home Loan Mortgage Corporation (“FHLMC”) because there is a tendency for the conventional and privately-insured mortgages underlying FHLMC PCs to repay at faster rates than the Federal Housing Administration and Veterans Administration loans underlying GNMAs. In addition, the term of a security may be shortened by unscheduled or early payments of principal and interest on the underlying mortgages. The occurrence of mortgage prepayments is affected by factors including the level of interest rates, general economic conditions, the location and age of the mortgage and other social and demographic conditions.

Yields on mortgage-related securities are typically quoted based on the maturity of the underlying instruments and the associated average life assumption. Actual prepayment experience may cause the yield to differ from the

yield expected on the basis of average life. Reinvestment of the prepayments may occur at higher or lower interest rates than the original investment, thus affecting the yield of the fund. The compounding effect from reinvestments of monthly payments received by each fund will increase the yield to shareholders compared to bonds that pay interest semi-annually.

Government Mortgage-Related Securities. GNMA is the principal federal government guarantor of mortgage-related securities. GNMA is a wholly owned U.S. Government corporation within the Department of Housing and Urban Development. GNMA pass-through securities are considered to have a relatively low risk of default in that (1) the underlying mortgage loan portfolio is comprised entirely of government-backed loans and (2) the timely payment of both principal and interest on the securities is guaranteed by the full faith and credit of the U.S. Government, regardless of whether they have been collected. GNMA pass-through securities are, however, subject to the same interest rate risk as comparable debt securities. Therefore, the effective maturity and market value of a fund’s GNMA securities can be expected to fluctuate in response to changes in interest rate levels.

Residential mortgage loans are also pooled by Freddie Mac, a corporate instrumentality of the U.S. Government. The mortgage loans in Freddie Mac’s portfolio are not government backed; Freddie Mac, not the U.S. Government, guarantees the timely payment of interest and ultimate collection of principal on Freddie Mac securities. Freddie Mac also issues guaranteed mortgage certificates, on which it guarantees semiannual interest payments and a specified minimum annual payment of principal.

Fannie Mae is a government-sponsored corporation owned entirely by private stockholders. It is subject to general regulation by the Secretary of Housing and Urban Development. Fannie Mae purchases residential mortgages from a list of approved seller/servicers, which include savings and loan associations, savings banks, commercial banks, credit unions and mortgage bankers. Pass-through securities issued by Fannie Mae are guaranteed as to timely payment of principal and interest only by Fannie Mae, not the U.S. Government.

Privately Issued Mortgage-Related Securities. Mortgage-related securities offered by private issuers include pass-through securities comprised of pools of residential mortgage loans; mortgage-backed bonds which are considered to be debt obligations of the institution issuing the bonds and are collateralized by mortgage loans; and bonds and collateralized mortgage obligations (“CMOs”) which are collateralized by mortgage-related securities issued by Freddie Mac, Fannie Mae or GNMA or by pools of mortgages.

CMOs are typically structured with classes or series that have different maturities and are generally retired in sequence. Each class of obligations receives periodic interest payments according to the coupon rate on the obligations. However, all monthly principal payments and any prepayments from the collateral pool are generally paid first to the “Class 1” holders. Thereafter, all payments of principal are generally allocated to the next most senior class of obligations until that class of obligations has been fully repaid. Although full payoff of each class of obligations is contractually required by a certain date, any or all classes of obligations may be paid off sooner than expected because of an increase in the payoff speed of the pool. Other allocation methods may be used. Payment of interest or principal on some classes or series of a CMO may be subject to contingencies or some classes or series may bear some or all of the risk of default on the underlying mortgages.

Mortgage-related securities created by non-governmental issuers generally offer a higher rate of interest than government and government-related securities because there are no direct or indirect government guarantees of payment in the former securities, resulting in higher risks. Where privately issued securities are collateralized by securities issued by Freddie Mac, Fannie Mae or GNMA, the timely payment of interest and principal is supported by the government-related securities collateralizing such obligations. The market for conventional pools is smaller and less liquid than the market for the government and government-related mortgage pools.

Certain private mortgage pools are organized in such a way that the SEC staff considers them to be closed-end investment companies. Each fund’s investment in such pools may be constrained by federal statute, which restricts investments in the shares of other investment companies.

The private mortgage-related securities in which the funds may invest include non-U.S. mortgage pass-through securities (“Non-U.S. Pass-Throughs”), which are structurally similar to the pass-through instruments described above. Such securities are issued by originators of and investors in mortgage loans, including savings and loan associations, mortgage bankers, commercial banks, investment bankers, specialized financial institutions and special purpose subsidiaries of the foregoing. Non-U.S. Pass-Throughs usually are backed by a pool of fixed rate or adjustable-rate mortgage loans. Certain Non-U.S. Pass-Throughs in which the funds invest typically are not guaranteed by an entity having the credit status of GNMA, but generally utilize various types of credit enhancement.

Asset-Backed Securities. Asset-backed securities refer to securities that directly or indirectly represent a participation in, or are secured by and payable from, assets such as motor vehicle installment sales, installment loan contracts, leases of various types of real and personal property and receivables from revolving credit (credit card) agreements.

Such assets are generally securitized through the use of trusts or special purpose corporations. Asset-backed securities are backed by a pool of assets representing the obligations often of a number of different parties. Certain of such securities may be illiquid.

The principal on asset-backed securities, like that on mortgage-backed securities, may be prepaid at any time. As a result, if such securities are purchased at a premium, a prepayment rate that is faster than expected will reduce yield to maturity, while a prepayment rate that is slower than expected will have the opposite effect. Conversely, if the securities are purchased at a discount, prepayments faster than expected will increase yield to maturity and prepayments slower than expected will decrease it. Accelerated prepayments also reduce the certainty of the yield because the fund must reinvest the assets at the then-current rates. Accelerated prepayments on securities purchased at a premium also impose a risk of loss of principal. On the other hand, a decrease in the rate of prepayments may extend the effective maturities of the securities, increasing their sensitivity to changes in market interest rates and potentially increasing the volatility of a fund’s shares. The rate of prepayment may also be affected by general economic conditions and other social and demographic conditions.

Each type of asset-backed security also entails unique risks depending on the type of assets involved and the legal structure used. For example, credit card receivables are generally unsecured obligations of the credit card holder and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. There have also been proposals to cap the interest rate that a credit card issuer may charge. In some transactions, the value of the asset-backed security is dependent on the performance of a third party acting as credit enhancer or servicer. Furthermore, in some transactions (such as those involving the securitization of vehicle loans or leases) it may be administratively burdensome to perfect the interest in the underlying collateral, and the underlying collateral may become damaged or stolen.

Most issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have a proper security interest in all of the obligations backing such receivables. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on these securities. The market experience in asset-backed securities is limited; therefore, the market’s ability to sustain liquidity through all phases of the market cycle is not certain.

Municipal Obligations. Municipal obligations include obligations issued to obtain funds for various public purposes, including constructing a wide range of public facilities, such as bridges, highways, housing, hospitals, mass transportation, schools and streets. Other public purposes for which municipal obligations may be issued include the refunding of outstanding obligations, the obtaining of funds for general operating expenses and the making of loans to other public institutions and facilities. In addition, certain types of industrial development

bonds (“IDBs”) and private activity bonds (“PABs”) are issued by or on behalf of public authorities to finance various privately operated facilities, including certain pollution control facilities, convention or trade show facilities, and airport, mass transit, port or parking facilities.

Municipal obligations also include short-term tax anticipation notes, bond anticipation notes, revenue anticipation notes and other forms of short-term debt obligations. Such notes may be issued with a short-term maturity in anticipation of the receipt of tax payments, the proceeds of bond placements or other revenues. Municipal obligations also include municipal lease obligations and certificates of participation. Municipal lease obligations, which are issued by state and local governments to acquire land, equipment and facilities, typically are not fully backed by the municipality’s credit, and, if funds are not appropriated for the following year’s lease payments, a lease may terminate, with the possibility of default on the lease obligation and significant loss to the fund. Certificates of participation are participations in municipal lease obligations or installment sales contracts. Each certificate represents a proportionate interest in or right to the payments made.

The two principal classifications of municipal obligations are “general obligation” and “revenue” bonds. “General obligation” bonds are secured by the issuer’s pledge of its faith, credit and taxing power. “Revenue” bonds are payable only from the revenues derived from a particular facility or class of facilities or from the proceeds of a special excise tax or other specific revenue source such as the corporate user of the facility being financed. IDBs and PABs are usually revenue bonds and are not payable from the unrestricted revenues of the issuer. The credit quality of IDBs and PABs is usually directly related to the credit standing of the corporate user of the facilities.

The ability of state, county or local governments to meet their obligations will depend primarily on the availability of tax and other revenues to those governments and on their fiscal conditions generally. The amounts of tax and other revenues available to governmental issuers may be affected from time to time by economic, political and demographic conditions within or outside of the particular state. In addition, constitutional or statutory restrictions may limit a government’s power to raise revenues or increase taxes.

The availability of federal, state and local aid to issuers of municipal securities may also affect their ability to meet their obligations. Payments of principal and interest on revenue bonds will depend on the economic condition of the facility or specific revenue source from whose revenues the payments will be made. The facility’s economic status, in turn, could be affected by economic, political and demographic conditions affecting the particular state.

Collateralized Debt Obligations. The funds may invest in collateralized debt obligations (“CDOs”), which include collateralized bond obligations (“CBOs”), collateralized loan obligations (“CLOs”) and other similarly structured securities. CDOs are types of asset-backed securities. A CBO is a trust or other special purpose entity (“SPE”) which is typically backed by a diversified pool of fixed income securities (which may include high risk, below investment grade securities). A CLO is a trust or other SPE that is typically collateralized by a pool of loans, which may include, among others, domestic and non-U.S. senior secured loans, senior unsecured loans, and subordinate corporate loans, including loans that may be rated below investment grade or equivalent unrated loans. Although certain CDOs may receive credit enhancement in the form of a senior-subordinate structure, over-collateralization or bond insurance, such enhancement may not always be present, and may fail to protect a fund against the risk of loss on default of the collateral. Certain CDOs may use derivatives contracts to create “synthetic” exposure to assets rather than holding such assets directly, which entails the risks of derivative instruments described elsewhere in this SAI. CDOs may charge management fees and administrative expenses, which are in addition to those of a fund.

For both CBOs and CLOs, the cashflows from the SPE are split into two or more portions, called tranches, varying in risk and yield. The riskiest portion is the “equity” tranche, which bears the first loss from defaults from the bonds or loans in the SPE and serves to protect the other, more senior tranches from default (though such protection is not complete). Since it is partially protected from defaults, a senior tranche from a CBO or

CLO typically has higher ratings and lower yields than its underlying securities, and may be rated investment grade. Despite the protection from the equity tranche, CBO or CLO tranches can experience substantial losses due to actual defaults, increased sensitivity to defaults due to collateral default and disappearance of protecting tranches, market anticipation of defaults, as well as investor aversion to CBO or CLO securities as a class. Interest on certain tranches of a CDO may be paid in kind (paid in the form of obligations of the same type rather than cash), which involves continued exposure to default risk with respect to such payments.

The risks of an investment in a CDO depend largely on the type of the collateral securities and the class of the CDO in which a fund invests. Normally, CBOs, CLOs and other CDOs are privately offered and sold, and thus, are not registered under the securities laws. As a result, investments in CDOs may be characterized by a fund as illiquid securities. However, an active dealer market may exist for CDOs, allowing a CDO to qualify for Rule 144A transactions. In addition to the normal risks associated with fixed income securities discussed elsewhere in this SAI and the Prospectus (e.g., interest rate risk and credit risk), CDOs carry additional risks including, but not limited to: (i) the possibility that distributions from collateral securities will not be adequate to make interest or other payments; (ii) the quality of the collateral may decline in value or default; (iii) a fund may invest in tranches of CDOs that are subordinate to other tranches; (iv) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the issuer or unexpected investment results; and (v) the CDO’s manager may perform poorly or defalcate.

Corporate Debt Securities. A fund may invest in debt securities (i.e., bonds, debentures, notes and other similar debt instruments) of domestic or non-U.S. non-governmental issuers which meet the minimum credit quality criteria, if any, set forth for the fund. Corporate debt securities may pay fixed or variable rates of interest, or interest at a rate contingent upon some other factor, such as the price of some commodity. These securities may include warrants, may be convertible into preferred or common equity, or may be bought as part of a unit containing common stock.

Lower-Rated Securities. Non-investment grade securities are described as “speculative” by Moody’s and S&P and may be subject to greater market fluctuations and greater risk of loss of income or principal, including a greater possibility of default or bankruptcy of the issuer of such securities, than are more highly rated debt securities. Such securities are commonly referred to as “junk bonds.” A fund’s Adviser seeks to minimize the risks of investing in all securities through diversification, in-depth credit analysis and attention to current developments in interest rates and market conditions and will monitor the ratings of securities held by the funds and the creditworthiness of their issuers. If the rating of a security in which a fund has invested falls below the minimum rating in which the fund is permitted to invest, the fund will either dispose of that security within a reasonable time or hold the security for so long as the fund’s Adviser determines appropriate for that fund, having due regard for market conditions, tax implications and other applicable factors.

A lower-rated debt security may be callable, i.e., subject to redemption at the option of the issuer at a price established in the security’s governing instrument. If a debt security held by a fund is called for redemption, the fund will be required to permit the issuer to redeem the security or sell it to a third party. Either of these actions could have an adverse effect on a fund’s ability to achieve its investment objective because, for example, the fund may be able to reinvest the proceeds only in securities with lower yields or may receive a price upon sale that is lower than it would have received in the absence of the redemption. If a fund experiences unexpected net redemptions, it may be forced to sell its higher-rated securities, resulting in a decline in the overall credit quality of the fund’s investment portfolio and increasing the exposure of the fund to the risks of lower-rated securities.

At certain times in the past, the prices of many lower-rated securities declined, indicating concerns that issuers of such securities might experience financial difficulties. At those times, the yields on lower-rated securities rose dramatically, reflecting the risk that holders of such securities could lose a substantial portion of their value as a result of the issuers’ financial restructuring or default. There can be no assurance that such declines will not recur.

The ratings of Moody’s, S&P or other NRSROs represent the opinions of those agencies as to the quality of the debt securities that they rate. Such ratings are relative and subjective, and are not absolute standards of quality. Unrated debt securities are not necessarily of lower quality than rated securities, but they may not be attractive to as many buyers. Each fund’s Adviser will consider a security’s quality and credit rating when determining whether such security is an appropriate investment. Subject to its investment objective, policies and applicable law, a fund may purchase a security with the lowest rating.

The market for lower-rated securities may be thinner and less active than that for higher-rated securities, which can adversely affect the prices at which these securities can be sold, and may make it difficult for a fund to obtain market quotations daily. If market quotations are not available, these securities will be valued by a method that the Advisers or their affiliates (acting under authority of the Board of Directors) believe accurately reflects fair market value. Judgment may play a greater role in valuing lower-rated debt securities than is the case with respect to securities for which a broader range of dealer quotations and last-sale information is available. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may also decrease the values and liquidity of lower-rated securities, especially in a thinly traded market.

Although the prices of lower-rated bonds are generally less sensitive to interest rate changes than are higher-rated bonds, the prices of lower-rated bonds may be more sensitive to adverse economic changes and developments regarding the individual issuer. Although the market for lower-rated debt securities is not new, and the market has previously weathered economic downturns, there has been in recent years a substantial increase in the use of such securities to fund corporate acquisitions and restructurings. Accordingly, the past performance of the market for such securities may not be an accurate indication of its performance during future economic downturns or periods of rising interest rates. When economic conditions appear to be deteriorating, medium- to lower-rated securities may decline in value due to heightened concern over credit quality, regardless of the prevailing interest rates. Investors should carefully consider the relative risks of investing in high yield securities and understand that such securities are not generally meant for short-term investing.

Adverse economic developments can disrupt the market for lower-rated securities and severely affect the ability of issuers, especially highly leveraged issuers, to service their debt obligations or to repay their obligations upon maturity, which may lead to a higher incidence of default on such securities. Lower-rated securities are especially affected by adverse changes in the industries in which the issuers are engaged and by changes in the financial condition of the issuers. Highly leveraged issuers may also experience financial stress during periods of rising interest rates. In addition, the secondary market for lower-rated securities, which is concentrated in relatively few market makers, may not be as liquid as the secondary market for more highly rated securities. As a result, a fund could find it more difficult to sell these securities or may be able to sell the securities only at prices lower than if such securities were widely traded.

Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities (“SMBS”) are derivative multi-class mortgage securities. SMBS may be issued by agencies or instrumentalities of the U.S. Government, or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose entities of the foregoing.

SMBS are created by separating bonds into their principal and interest components and selling each piece separately (commonly referred to as IOs and POs). The yield to maturity on an IO or PO class of stripped mortgage-backed securities is extremely sensitive not only to changes in prevailing interest rates but also to the rate of principal payments (including prepayments) on the underlying assets. A rapid rate of principal prepayments may have a measurably adverse effect on a fund’s yield to maturity to the extent it invests in IOs. If the assets underlying the IOs experience greater than anticipated prepayments of principal, the fund may fail to recoup fully its initial investment in these securities. Conversely, POs tend to increase in value if prepayments are greater than anticipated and decline if prepayments are slower than anticipated. The secondary market for stripped securities may be more volatile and less liquid than that for other securities, potentially limiting the fund’s ability to buy or sell those securities at any particular time.

Although SMBS are purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers, these securities were developed fairly recently. As a result, established trading markets have not yet developed and, accordingly, these securities may be deemed illiquid.

Zero Coupon and Pay-In-Kind Securities. A zero coupon bond is a security that makes no fixed interest payments but instead is sold at a discount from its face value. The bond is redeemed at its face value on the specified maturity date. Zero coupon bonds may be issued as such, or they may be created by a broker who strips the coupons from a bond and separately sells the rights to receive principal and interest. The prices of zero coupon bonds tend to fluctuate more in response to changes in market interest rates than do the prices of interest-paying debt securities with similar maturities. A fund investing in zero coupon bonds generally accrues income on such securities prior to the receipt of cash payments. Since each fund must distribute substantially all of its income to shareholders to qualify as a regulated investment company under federal income tax law, to the extent that a fund invests in zero coupon bonds, it may have to dispose of other securities, including at times when it may be disadvantageous to do so, to generate the cash necessary for the distribution of income attributable to its zero coupon bonds. Pay-in-kind securities have characteristics similar to those of zero coupon securities, but interest on such securities may be paid in the form of obligations of the same type rather than cash.

Commercial Paper and Other Short-Term Investments

Each of the funds may invest or hold cash or other short-term investments, including commercial paper. Commercial paper represents short-term unsecured promissory notes issued in bearer form by banks or bank holding companies, corporations and finance companies. The funds may purchase commercial paper issued pursuant to the private placement exemption in Section 4(2) of the Securities Act of 1933. Section 4(2) paper is restricted as to disposition under federal securities laws in that any resale must similarly be made in an exempt transaction. The funds may or may not regard such securities as illiquid, depending on the circumstances of each case.

Any fund may also invest in obligations (including certificates of deposit, demand and time deposits and bankers’ acceptances) of banks and savings and loan institutions. While domestic bank deposits may be insured by an agency of the U.S. Government, the funds would generally assume positions considerably in excess of the insurance limits.

Loan Participations and Assignments

The purchase of loan participations and assignments entails special risks. A fund’s ability to receive payments of principal and interest and other amounts in connection with loan participations and assignments will depend primarily on the financial condition of the borrower. The failure by the fund to receive scheduled interest or principal payments on a loan participation or assignment would adversely affect the income of the fund and would likely reduce the value of its assets. Because loan participations are not generally rated by independent credit rating agencies, a decision by a fund to invest in a particular loan participation will depend almost exclusively on its Adviser’s credit analysis of the borrower and lender. In addition to the other risks associated with investments in debt securities, participations and assignments involve the additional risk that the insolvency of any financial institution interposed between the fund and the borrower could delay or prevent the flow of payments from the borrower on the underlying loan. A fund may have limited rights to enforce the terms of the underlying loan, and the liquidity of loan participations and assignments may be limited.

A fund will assume the credit risk of both the borrower and the lender that is selling any participation that the fund invests in. In the event of the insolvency of the lender selling the participation, the fund may be treated as a general creditor of the lender and my not benefit from any set-off between the lender and borrower.

The borrower of a loan in which a fund holds a participation interest may, either at its own election or pursuant to terms of the loan documentation, prepay amounts of the loan from time to time. There is no assurance that the fund will be able to reinvest the proceeds of any loan prepayment at the same interest rate or on the same terms as those of the original loan participation.

Corporate loans in which a fund may purchase a loan participation or assignment are made generally to finance internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs, and other corporate activities. The highly leveraged capital structure of the borrowers in certain of these transactions may make such loans especially vulnerable to adverse changes in economic or market conditions.

Certain of the loan participations or assignments acquired by a fund may involve unfunded commitments of the lenders or revolving credit facilities under which a borrower may from time to time borrow and repay amounts up to the maximum amount of the facility. In such cases, the fund would have an obligation to advance its portion of such additional borrowings upon the terms specified in the loan documentation.

Indexed Securities and Structured Notes

The values of indexed securities and structured notes are linked to currencies, other securities, interest rates, commodities, indices or other financial indicators (“reference instruments”). These instruments differ from other types of debt securities in several respects. The interest rate or principal amount payable at maturity may vary based on changes in one or more specified reference instruments, such as a floating interest rate compared with a fixed interest rate or the currency exchange rates between two currencies (neither of which need be the currency in which the instrument is denominated). An indexed security or structured note may be positively or negatively indexed; that is, its value or interest rate may increase or decrease if the value of the reference instrument increases. Further, the change in the principal amount payable with respect to, or the interest rate of, an indexed security or structured note may be a multiple of the percentage change (positive or negative) in the value of the underlying reference instrument(s).

Investment in indexed securities and structured notes involves certain risks, including the credit risk of the issuer and the normal risks of price changes in response to changes in interest rates. Further, in the case of certain indexed securities or structured notes, a decline in the reference instrument may cause the interest rate to be reduced to zero, and any further declines in the reference instrument may then reduce the principal amount payable on maturity. Finally, these securities may be less liquid than other types of securities, and may be more volatile than their underlying reference instruments.

Forward Commitments

Each fund may enter into commitments to purchase securities on a “forward commitment” basis, including purchases on a “when-issued” basis or a “to be announced” basis. When such transactions are negotiated, certain terms may be fixed at the time the commitment is made, but delivery and payment for the securities takes place at a later date. Such securities are often the most efficiently priced and have the best liquidity in the bond market. During the period between a commitment and settlement, no payment is made by the purchaser for the securities purchased and, thus, no interest accrues to the purchaser from the transaction. In a “to be announced” transaction, a fund commits to purchase securities for which all specific information is not yet known at the time of the trade, particularly the exact face amount in forward commitment mortgage-backed securities transactions.

A fund may sell the securities subject to a forward commitment purchase, which may result in a gain or loss. When a fund purchases securities on a forward commitment basis, it assumes the risks of ownership, including the risk of price fluctuation, at the time of purchase, not at the time of receipt. Purchases of forward commitment securities also involve a risk of loss if the seller fails to deliver after the value of the securities has risen. Depending on market conditions, a fund’s forward commitment purchases could cause its net asset value to be more volatile.

Each fund may also enter into a forward commitment to sell securities it owns. The use of forward commitments enables a fund to hedge against anticipated changes in interest rates and prices. In a forward sale, a fund does not participate in gains or losses on the security occurring after the commitment date. Forward commitments to sell securities also involve a risk of loss if the seller fails to take delivery after the value of the securities has declined.

Forward commitment transactions involve additional risks similar to those associated with investments in options and futures contracts. See “Risks of Futures Contracts and Options Thereon.”

Restricted and Illiquid Securities

Restricted securities are securities subject to legal or contractual restrictions on their resale, such as private placements. Such restrictions might prevent the sale of restricted securities at a time when the sale would otherwise be desirable. To the extent required by applicable law and SEC guidance, no securities for which there is not a readily available market (“illiquid securities”) will be acquired by any fund if such acquisition would cause the aggregate value of illiquid securities to exceed 15% of the fund’s net assets. An illiquid security is any security which may not be sold or disposed of in the ordinary course of business within seven days at approximately the value at which the fund has valued the security.

Under SEC regulations, certain securities acquired through private placements can be traded freely among qualified purchasers. The SEC has stated that an investment company’s board of directors, or its investment adviser acting under authority delegated by the board, may determine that a security eligible for trading under this rule is “liquid.” The funds intend to rely on this rule, to the extent appropriate, to deem specific securities acquired through private placement as “liquid.” The Board has delegated to a fund’s Adviser the responsibility for determining whether a particular security eligible for trading under this rule is “liquid.” Investing in these restricted securities could have the effect of increasing a fund’s illiquidity if qualified purchasers become, for a time, uninterested in buying these securities.

Restricted securities may be sold only (1) pursuant to SEC Rule 144A or another exemption, (2) in privately negotiated transactions or (3) in public offerings with respect to which a registration statement is in effect under the Securities Act of 1933, as amended. Rule 144A securities, although not registered in the U.S., may be sold to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended. As noted above, each fund’s Adviser, acting pursuant to guidelines established by the Board of Directors, may determine that some Rule 144A securities are liquid for purposes of limitations on the amount of illiquid investments a fund may own. Where registration is required, a fund may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the fund may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the fund might obtain a less favorable price than prevailed when it decided to sell.

Illiquid securities may be difficult to value, and a fund may have difficulty disposing of such securities promptly. The funds do not consider non-U.S. securities to be restricted if they can be freely sold in the principal markets in which they are traded, even if they are not registered for sale in the U.S.

Equity Securities

The funds may directly or indirectly invest their assets in equity securities. Among other risks, prices of equity securities generally fluctuate more than those of other securities. The funds may experience a substantial or complete loss on an individual stock. These risks may affect a single issuer, industry, or section of the economy or may affect the market as a whole.

Securities of Other Investment Companies

Investments in other investment companies may involve the payment of substantial premiums above the net asset value of such issuers’ portfolio securities, and the total return on such investments will be reduced by the operating expenses and fees of such investment companies, including advisory fees. These fees would be in addition to any fees paid by a fund. The funds may invest in both closed-end and open-end investment companies.

Reverse Repurchase Agreements and Forward Roll Transactions

A reverse repurchase agreement is a portfolio management technique in which a fund temporarily transfers possession of a portfolio instrument to another person, such as a financial institution or broker-dealer, in return for cash. At the same time, the fund agrees to repurchase the instrument at an agreed upon time (normally within seven days) and price, including an interest payment. While engaging in reverse repurchase agreements, each fund will cover its commitment under these instruments by the segregation of liquid assets or by entering into offsetting transactions or owning positions covering its obligations. Reverse repurchase agreements may expose a fund to greater fluctuations in the value of its assets and render the segregated assets unavailable for sale or other disposition. Reverse repurchase agreements have characteristics like borrowings.

The funds may also enter into forward roll transactions in which a fund sells a fixed income security for delivery in the current month and simultaneously contracts to purchase substantially similar (same type, coupon and maturity) securities at an agreed upon future time. By engaging in the forward roll transaction the fund forgoes principal and interest paid on the security that is sold, but receives the difference between the current sales price and the forward price for the future purchase. The fund would also be able to earn interest on the income that is received from the initial sale.

The obligation to purchase securities on a specified future date involves the risk that the market value of the securities that a fund is obligated to purchase may decline below the purchase price. In addition, in the event the other party to the transaction files for bankruptcy, becomes insolvent or defaults on its obligation, a fund may be adversely affected.

Borrowing

A fund may use borrowed money for any purpose permitted by the 1940 Act. Borrowing by a fund allows it to leverage its portfolio, which exposes it to certain risks. The value of an investment in that fund will be more volatile and all other risks will tend to be compounded.

The 1940 Act requires a fund to maintain continuous asset coverage (that is, total assets less liabilities other than the borrowing and other senior securities) of at least 300% of the amount borrowed. If the asset coverage should decline below 300% as a result of market fluctuations or for other reasons, a fund may be required to sell some of its holdings within three days to reduce the debt and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time. Borrowing may increase the effect on net asset value of any increase or decrease in the market value of the fund. See “Additional Information” on page 2 for circumstances under which certain investment transactions will not be deemed to be borrowings.

Money borrowed will be subject to interest costs, which may or may not be recovered by appreciation of the securities purchased. A fund also may be required to maintain minimum average balances in connection with such borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate. The funds may enter into reverse repurchase agreements and forward roll transactions as a method of borrowing.

Recent Market Events

The fixed-income markets are experiencing a period of extreme volatility which has negatively impacted market liquidity conditions. Initially, the concerns on the part of market participants were focused on the sub-prime segment of the mortgage-backed securities market. However, these concerns have since expanded to include a broad range of mortgage-and asset-backed and other fixed income securities (including those rated investment grade), the U.S. and international credit and interbank money markets generally, and a wide range of financial institutions and markets, asset classes and sectors. As a result, fixed income instruments are experiencing liquidity issues, increased price volatility, credit downgrades, and increased credit spreads and risk of default. Securities that are less liquid are more difficult to value and may be hard to dispose of. Domestic and

international equity markets have also been experiencing heightened volatility and turmoil, with issuers that have exposure to the real estate, mortgage and credit markets particularly affected. During times of market turmoil, investors tend to look to the safety of securities issued or backed by the U.S. Treasury, causing the prices of these securities to rise, and the yield to decline. These events and the continuing market upheavals may have an adverse effect on the funds.

Loans of Portfolio Securities

A fund may lend its portfolio securities, provided that cash or equivalent collateral, equal to at least 100% of the market value of such securities, is continuously maintained by the other party with the fund. During the pendency of the transaction, the other party will pay the fund an amount equivalent to any dividends or interest paid on such securities, and the fund may invest the cash collateral and earn additional income, or it may receive an agreed upon amount of interest income from the other party who has delivered equivalent collateral. These transactions are subject to termination at the option of the fund or the other party. A fund may pay administrative and custodial fees in connection with these transactions and may pay a negotiated portion of the interest earned on the cash or equivalent collateral to the other party or placing agent or broker. Although voting rights or rights to consent with respect to the relevant securities generally pass to the other party, each fund will make arrangements to vote or consent with respect to a material event affecting such securities. SEC guidance currently states that a fund may loan securities equal in value to no more than one third of its total asset value, including collateral received in connection with such transactions (at market value computed at the time of the transaction). The risks in lending portfolio securities include possible delay in recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. A fund runs the risk that the counterparty to a loan transaction will default on its obligation and that the value of the collateral received may decline before the fund can dispose of it. Subject to the foregoing, loans of fund securities are effectively borrowings by a fund and have economic characteristics similar to reverse repurchase agreements.

Duration

For the simplest fixed income securities, duration indicates the average time at which the security’s cash flows are to be received. For simple fixed income securities with interest payments occurring prior to the payment of principal, duration is always less than maturity. For example, a current coupon bullet bond with a maturity of 3.5 years will have a duration of approximately three years. In general, the lower the stated or coupon rate of interest of a fixed income security, the closer its duration will be to its final maturity; conversely, the higher the stated or coupon rate of interest of a fixed income security, the shorter its duration will be compared to its final maturity.

The definition of duration becomes more complex when fixed income securities with features like floating coupon payments, optionality, and structuring are evaluated. More generally, effective duration is the expected change in the percentage price of the security with respect to a change in the security’s own yield. (“Effective” means that optionality and other complex features are taken into account. When there are no complex features then effective duration equals the simple duration defined in the previous paragraph.) A security with an effective duration of 3.5 years, for example, will tend to go down in price by 35 basis points (100 basis points = 1%) if its yield goes up by 10 basis points. Floating rate securities may have final maturities of ten or more years, but their durations will tend to be very short (or, in some circumstances, negative). Many mortgage pass-through securities may have stated final maturities of 30 years, but current prepayment rates may have a large influence on the pass-through’s response to changes in yield. In these situations, an Adviser may consider other analytical techniques that seek to incorporate the security’s additional features into the determination of its response to changes in its yield.

Diversification

Each fund, other than the Western Asset Non-U.S. Opportunity Bond Portfolio and the Western Asset Global Strategic Income Portfolio, intends to remain diversified, as “diversified” is defined under the 1940 Act. In general, a fund is “diversified” under the 1940 Act if at least 75% of the value of its total assets is represented by (i) cash, cash items, government securities and securities of other investment companies and (ii) securities limited in respect of any one issuer to 5% or less of the value of the total assets of the fund and 10% or less of the outstanding voting securities of such issuer. The value of the shares of a non-diversified fund will be more

susceptible to any single economic, political or regulatory event affecting one or a small number of issuers than shares of a diversified fund.

Portfolio Turnover

The length of time a fund has held a particular security is not generally a consideration in investment decisions. A change in the securities held by a fund is known as “portfolio turnover.” As a result of a fund’s investment policies, under certain market conditions a fund’s portfolio turnover rate may be higher than that of other mutual funds. Portfolio turnover generally involves some expense to a fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestment in other securities. These transactions may result in realization of taxable capital gains. Higher portfolio turnover rates, such as those above 100%, are likely to result in higher brokerage commissions or other transactions costs and could give rise to a greater amount of taxable capital gains.

Alternative Investment Strategies

At times a fund’s Adviser may judge that conditions in the securities markets make pursuing the fund’s typical investment strategy inconsistent with the best interests of its shareholders. At such times, the Adviser may temporarily use alternative strategies, primarily designed to reduce fluctuations in the value of the fund’s assets. In implementing these defensive strategies, a fund may invest without limit in securities that the Adviser believes present less risk to a fund, including equity securities, debt and fixed income securities, preferred stocks, U.S. Government and agency obligations, cash or money market instruments, or in other securities the Adviser considers consistent with such defensive strategies, such as, but not limited to, options, futures, warrants or swaps. As a result of these strategies, the funds may invest up to 100% of their assets in securities of U.S. issuers. During periods on which such strategies are used, the duration of a fund may diverge from the duration range for that fund disclosed in the Prospectus. It is impossible to predict when, or for how long, a fund will use these alternative strategies. As a result of using these alternative strategies, a fund may not achieve its investment objective.

New Investment Products

New types of mortgage-backed and asset-backed securities, derivative instruments, hedging instruments and other securities or instruments are developed and marketed from time to time. Consistent with its investment limitations, each fund expects to invest in those new types of securities and instruments that its Adviser believes may assist the fund in achieving its investment objective.

Generally, the foregoing is not intended to limit a fund’s investment flexibility, unless such a limitation is expressly stated, and therefore will be construed by the fund as broadly as possible. Statements concerning what a fund may do are not intended to limit other any activity. The funds maintain the flexibility to use the investments described above for any purpose consistent with applicable law and any express limitations in the SAI or the Prospectus.

Investment Policies

The investment objective of each of the Western Asset Core Bond Portfolio and the Western Asset Intermediate Bond Portfolio is “fundamental.” Except for investment policies designated as fundamental in the Prospectus or this SAI, the investment policies described in the Prospectus and in this SAI are not fundamental policies. Changes to fundamental investment policies require shareholder approval; the Directors may change any non-fundamental investment policy without shareholder approval.

Ratings of Debt Obligations

Moody’s, S&P and other NRSROs are private organizations that provide ratings of the credit quality of debt obligations. A fund may consider these ratings in determining whether to purchase, sell or hold a security. Ratings are not absolute assurances of quality. Consequently, securities with the same maturity, interest rate and

rating may have different market prices. Credit rating agencies attempt to evaluate the safety of principal and interest payments and do not evaluate the risks of fluctuations in market value. Also, rating agencies may fail to make timely changes in credit ratings in response to subsequent events, so that an issuer’s current financial condition may be better or worse than the rating indicates. Credit rating agencies receive fees from rated issuers in connection with the issuance of ratings.

Fund of Funds Investments, Other Significant Investors

From time to time, a fund may experience relatively large redemptions or investments due to transactions in fund shares by a fund of funds or other significant investor, including rebalancings of the assets of a fund of funds invested in the fund. The effects of these transactions could adversely affect a fund’s performance. In the event of such redemptions or investments, a fund could be required to sell securities or to invest cash at a time when it is not advantageous to do so. Such transactions may increase brokerage and/or other transaction costs of a fund. In addition, when a fund of funds or other investor owns a substantial portion of the shares of a fund, a large redemption by the fund of funds could cause the fund’s expenses to increase and could result in the fund becoming too small to be economically viable. Redemptions of fund shares could also accelerate the realization of taxable capital gains in the fund if sales of securities result in capital gains. The impact of these transactions is likely to be greater when a fund of funds or other significant investor purchases, redeems, or owns a substantial portion of a fund’s shares.

The Manager and each Adviser may be subject to potential conflicts of interest in connection with fund of funds investments in the funds due to their affiliation with the fund of funds’ investment adviser. For example, the Manager or an Adviser could have the incentive to permit a fund of funds to become a more significant shareholder (with the potential to cause greater disruption) than would be permitted for an unaffiliated investor. Investments by affiliated fund of funds may also give rise to conflicts in connection with the voting of fund shares. The Manager an Adviser and/or its advisory affiliates intend to seek to address these potential conflicts of interest in the best interests of the funds’ shareholders, although there can be no assurance that such efforts will be successful. The Manager and each Adviser will consider how to minimize potential adverse impacts of fund of funds investments, and may take such actions as each deems appropriate to address potential adverse impacts, including redemption of shares in-kind, rather than in cash. Additionally, the Corporation’s Board of Directors receives regular reports regarding fund of fund investments in the funds.

Valuation of Fund Shares

As described in the Prospectus, the net asset value of a fund share is determined daily for each class as of the close of regular trading on the Exchange, on every day the Exchange is open, by dividing the value of the total assets attributable to that class, less liabilities attributable to that class, by the number of shares of that class outstanding. Pricing will not be done on days when the Exchange is closed. The Exchange currently observes the following holidays: New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.

Disclosure of Portfolio Holdings

consequence, any conflicts of interest between the interests of the fund’s shareholders and those of the Manager, the distributor or their affiliates in connection with the disclosure of portfolio holdings information would be addressed in a manner that places the interests of fund shareholders first.

1. A fund’s top ten securities, current as of month-end, and the individual size of each such security position may be released at any time following month-end with simultaneous public disclosure.

2. A fund’s top ten securities positions (including the aggregate but not individual size of such positions) may be released at any time with simultaneous public disclosure.

4. A trade in process may be discussed only with counterparties, potential counterparties and others involved in the transaction (i.e., brokers and custodians).

arrangements to make available information about a fund’s portfolio securities will be reviewed at least annually by the fund’s board.

At the present time the funds have ongoing arrangements with the following parties to provide them with non-public portfolio holdings information:

Service Providers:

State Street Bank and Trust Company—Information is provided daily with no time lag.

PricewaterhouseCoopers LLP—Information is provided as needed with no time lag.

Ropes & Gray LLP—Information is provided with Board materials approximately four to six weeks after quarter-end and may be provided at other times as needed.

Paul Hastings, Janofsky & Walker, LLP—Information is provided with Board materials approximately four to six weeks after quarter-end and may be provided at other times as needed.

Other Third Parties:

Lipper Analytical Services Corporation—Information is provided quarterly with a time lag of five business days.

Management of the Funds

The business of the funds is managed under the general direction of the Corporation’s Board of Directors. Subject to the general supervision of the Board of Directors, the Manager is responsible for managing, either directly or through others hired for these purposes, the investment activities of the funds and the funds’ business affairs and other administrative matters.

The table below provides information about each of the Corporation’s Directors and officers, including biographical information about their business experience and information about their relationships with Legg Mason, Inc. and its affiliates. The mailing address of each Director and officer is 385 East Colorado Boulevard, Pasadena, CA 91101, unless otherwise indicated.


Name, Year of Birth and Position with Corporation	Term of Office and Length of Time Served(1)	Principal Occupations During the Past 5 Years	Number of Funds In Fund Complex Overseen(2)	Other Directorships Held
		Independent Directors
Ronald J. Arnault (1943) Director	Served since 1997	Retired.	13	None

Anita L. DeFrantz (1953) Director	Served since 1998	President (1987-present) and Director (1990-present) of LA84 (formerly Amateur Athletic Foundation of Los Angeles); President and Director of Kids in Sports (1994-present); Vice President, International Rowing Federation (1986-present); Member of the International Olympic Committee (1986-present).	13	OBN Holdings, Inc. (film, television and media company)

Avedick B. Poladian (1952) Director	Served since 2007	Executive Vice President and Chief Operating Officer of Lowe Enterprises, Inc. (real estate and hospitality firm) (2002-present); Partner, Arthur Andersen, LLP (1974-2002).	13	Occidental Petroleum Corporation Western Asset Mortgage Capital Corp. Public Storage

William E. B. Siart (1947) Director and Chairman	Served since 1997	Vice Chairman of The Getty Trust (2005–present); Chairman of Walt Disney Concert Hall, Inc. (1998-2006); Chairman of Excellent Education Development (2000-present).	13	None

Jaynie Miller Studenmund (1954) Director	Served since 2004	Chief Operating Officer of Overture Services, Inc. (online marketing firm) (2001-2004); President and Chief Operating Officer of Paymybills.com (2000-2001).	13	Orbitz Worldwide (global on-line travel company)


Name, Year of Birth and Position with Corporation	Term of Office and Length of Time Served(1)	Principal Occupations During the Past 5 Years	Number of Funds In Fund Complex Overseen(2)	Other Directorships Held
		Interested Directors
R. Jay Gerken (1951) Director and President	Served as a Director since 2006 and as President since 2007(3)	Managing Director of Legg Mason & Co., LLC, Chairman, President and Chief Executive Officer of certain mutual funds associated with Legg Mason & Co., LLC or its affiliates (2005-present); President of Legg Mason Partners Fund Advisor, LLC (“LMPFA”) (2006-present); Chairman of Smith Barney Fund Management LLC and Citi Fund Management Inc. (2002-2005); Chairman, President and Chief Executive Officer of Travelers Investment Adviser, Inc. (2002-2005).	13	Trustee or Director of certain funds associated with Legg Mason & Co., LLC or its affiliates (consisting of funds with 146 portfolios).

Ronald L. Olson (1941) Director	Served since 2005(4)	Senior Partner of Munger, Tolles & Olson LLP (a law partnership) (1968-present).	13	Edison International, City National Corporation (financial services company), The Washington Post Company, and Berkshire Hathaway, Inc.

		Officers(5)
Susanne D. Wilson (1962) Vice President 100 International Drive Baltimore, MD 21202	Served since 1998	Vice President of Legg Mason & Co., LLC (2005-present); Vice President of Legg Mason Wood Walker, Incorporated (1998-2005).	N/A	N/A

Frances M. Guggino (1957) Principal Financial and Accounting Officer 55 Water Street New York, NY 10041	Served since 2009	Director of Legg Mason & Co. (since 2005); Director at Citigroup Asset Management (“CAM”) (1992 to 2005); Treasurer and/or Controller of certain funds associated with Legg Mason & Co. (since 2005); Treasurer and/or Controller of certain funds associated with CAM (1992 to 2005)	N/A	N/A

Name, Year of Birth and
Position with Corporation

Term of
Office and
Length of Time
Served(1)

Principal Occupations
During the Past 5 Years

Number of
Funds In
Fund
Complex
Overseen(2)

Other
Directorships
Held

Erin K. Morris

(1966)

Treasurer

100 International Drive Baltimore, MD 21202

Served since 2006

Vice President and Manager, Global Funds Adminsistration, Legg Mason & Co., LLC (2005-present); Assistant Vice President of Legg Mason Wood Walker, Incorporated (2002-2005); Treasurer of Legg Mason Income Trust, Inc., Legg Mason Tax-Free Income Fund, Western Asset Income Fund and Western Asset Premier Bond Fund (2006-present); Assistant Treasurer, Legg Mason Partners Fund complex (2007-present), Western Asset/Claymore Inflation-Linked Securities & Income Fund (2003-present), Western Asset/Claymore Inflation-Linked Opportunities & Income Fund (2004-present); Assistant Treasurer, the Corporation, Western Asset Income Fund, Western Asset Premier Bond Fund, Legg Mason Income Trust, Inc. and Legg Mason Tax-Free Income Fund (2001-2006); Manager, Funds Accounting, Legg Mason Wood Walker, Incorporated (2000-2005).

N/A


Name, Year of Birth and Position with Corporation	Term of Office and Length of Time Served(1)	Principal Occupations During the Past 5 Years	Number of Funds In Fund Complex Overseen(2)	Other Directorships Held
Todd F. Kuehl (1968) Chief Compliance Officer 100 International Drive Baltimore, MD 21202	Served since 2007	Director, Legg Mason & Co., LLC (2006-present); Chief Compliance Officer of Legg Mason Private Portfolio Group (2009-present); Chief Compliance Officer of Western Asset/Claymore Inflation-Linked Securities & Income Fund, Western Asset/Claymore Inflation-Linked Opportunities & Income Fund, Western Asset Income Fund, Western Asset Premier Bond Fund (2007-present) and Barrett Growth Fund and Barrett Opportunity Fund (2006-2008); Branch Chief, Division of Investment Management, U.S. Securities and Exchange Commission (2002-2006).	N/A	N/A

Robert I. Frenkel (1954) Secretary and Chief Legal Officer 100 First Stamford Place Stamford, CT 06902	Served since 2009	Managing Director and General Counsel of Global Mutual Funds for Legg Mason & Co. (2005-present); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. (2003-present); formerly, Managing Director and General Counsel of Global Mutual Funds for CAM (2000 to 2005); formerly, Secretary of CFM (2001 to 2004).	N/A	N/A

(1)

(2)

(3)	Mr. Gerken is an “interested person” (as defined in section 2(a)(19) of the Investment Company Act of 1940, as amended (the “1940 Act”)) of each fund because of his positions with subsidiaries of, and ownership of shares of common stock of, Legg Mason, Inc., the parent company of Western Asset.

(4)	Mr. Olson is an “interested person” (as defined above) of each fund because his law firm has provided legal services to Western Asset.

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

The Board believes that each Director’s experience, qualifications, attributes or skills on an individual basis and in combination with those of the other Directors lead to the conclusion that the Board possesses the requisite skills and attributes. The Board believes that the Directors’ ability to review, critically evaluate, question and discuss information provided to them, to interact effectively with the Manager, the Advisers, other service providers, counsel and independent auditors, and to exercise effective business judgment in the performance of their duties, support this conclusion. The Board also has considered the following experience, qualifications, attributes and/or skills, among others, of its members in reaching its conclusion: his or her character and integrity; such person’s length of service as a board member of the Corporation; such person’s willingness to serve and willingness and ability to commit the time necessary to perform the duties of a Director; as to each Director other than Mr. Gerken and Mr. Olson, his or her status as not being an “interested person” (as defined in the 1940 Act) of the funds; and, as to Mr. Gerken, his status as a representative of Legg Mason. In addition, the following specific experience, qualifications, attributes and/or skills apply as to each Director: Mr. Arnault, business, accounting and finance expertise and experience as a chief financial officer, board member and/or executive officer of various businesses; Ms. DeFrantz, business expertise and experience as a president, board member and/or executive officer of various businesses and non-profit and other organizations; Mr. Poladian, business, finance and accounting expertise and experience as a board member of various businesses and/or as a partner of a multi-national accounting firm; Mr. Siart, business and finance expertise and experience as a president, chairman, chief executive officer and/or board member of various businesses and non-profit and other organizations; Ms. Studenmund, business and finance expertise and experience as a president, board member and/or chief operating officer of various businesses; Mr. Olson, business and legal expertise and experience as a senior partner of a law firm and/or board member of various businesses and non-profit and other organizations; and Mr. Gerken, investment management experience as an executive and portfolio manager and leadership roles within Legg Mason and affiliated entities. References to the qualifications, attributes and skills of Directors are pursuant to requirements of the Securities and Exchange Commission, do not constitute holding out of the Board or any Director as having any special expertise or experience, and shall not impose any greater responsibility or liability on any such person or on the Board by reason thereof.

The Board is responsible for overseeing the management and operations of the funds. William E.B. Siart serves as Chairman of the Board. Mr. Siart is not an interested person of any of the funds. Independent Directors constitute more than 70% of the Board.

The Board has three standing committees: the Audit Committee, the Executive and Contracts Committee and the Governance and Nominating Committee. Each of the Audit, Governance and Nominating and Executive and Contracts Committees is chaired by an Independent Director and is composed entirely of Independent Directors. Where deemed appropriate, the Board constitutes ad hoc committees.

The Executive and Contracts Committee, which consists of Messrs. Siart, Arnault and Poladian and Ms. DeFrantz and Ms. Studenmund, may meet from time to time between Board meetings in order to consider appropriate matters and to review the various contractual arrangements between the Corporation and its affiliated persons.

The Audit Committee, which consists of Messrs. Arnault, Poladian and Siart and Ms. Studenmund provides oversight with respect to the accounting and financial reporting and compliance policies and practices of the funds and, among other things, considers the selection of an independent registered public accounting firm for the funds and the scope of the audit and approves all services proposed to be performed by the independent

registered public accounting firm on behalf of the funds and, under certain circumstances, the Advisers and certain affiliates.

The Governance and Nominating Committee, which consists of Messrs. Siart, Arnault and Poladian and Mses. DeFrantz and Studenmund, meets to select nominees for election as Directors of the Corporation and consider other matters of Board policy, including to review and make recommendations to the Board with respect to the compensation of the Independent Directors. It is the policy of the Governance and Nominating Committee to consider nominees recommended by shareholders. The procedures by which shareholders can submit nominee recommendations to the Governance and Nominating Committee are set forth in Appendix C to this SAI.

During the fiscal year ended December 31, 2009, the Board of Directors met seven times, the Executive and Contracts Committee met three times, the Governance and Nominating Committee met two times and the Audit Committee met six times.

The Board has determined that its leadership structure is appropriate given the business and nature of the funds. In connection with its determination, the Board considered that the Chairman of the Board is an Independent Director. The Chairman of the Board can play an important role in setting the agenda of the Board and also serves as a key point person for dealings between management and the other Independent Directors. The Independent Directors believe that the Chairman’s independence facilitates meaningful dialogue between fund management and the Independent Directors. The Board also considered that the chairperson of each Board committee is an Independent Director, which yields similar benefits with respect to the functions and activities of the various Board committees (e.g., each committee’s chairperson works with the Manager and other service providers to set agendas for the meetings of the applicable Board committees). As noted above, through the committees the Independent Directors consider and address important matters involving the funds, including those presenting conflicts or potential conflicts of interest for management. The Independent Directors also regularly meet outside the presence of management and are advised by independent legal counsel. The Board has determined that its committees help ensure that the funds have effective and independent governance and oversight. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the Independent Directors from management, including the Advisers. The Board reviews its structure on an annual basis.

As an integral part of its responsibility for oversight of each fund in the interests of shareholders, the Board oversees risk management of the funds’ investment programs and business affairs. The function of the Board with respect to risk management is one of oversight not active involvement in, or coordination of, day-to-day risk management activities for the Fund. The Board has emphasized to the Manager and Advisers the importance of maintaining vigorous risk management. The Board exercises oversight of the risk management process primarily through the Audit Committee and Executive and Contracts Committee, and through oversight by the Board itself.

The funds face a number of risks, such as investment risk, counterparty risk, valuation risk, reputational risk, risk of operational failure or lack of business continuity, and legal, compliance and regulatory risk. Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the funds. Under the overall supervision of the Board or the applicable Committee, the funds, the Manager, the Advisers, and the affiliates of the Manager and the Advisers, or other service providers to the funds employ a variety of processes, procedures and controls to identify various of those possible events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Different processes, procedures and controls are employed with respect to different types of risks. Various personnel, including the funds’ and the Manager’s CCO and the Manager’s chief risk officer, as well as various personnel of the Advisers and other service providers such as the funds’ independent accountants, report to the Audit Committee, Executive and Contracts Committee and/or to the Board with respect to various aspects of risk management, as well as events and circumstances that have arisen and responses thereto. These reports and other similar reports received by the Directors as to risk management matters are typically summaries of the relevant information. The Board

recognizes that not all risks that may affect the funds can be identified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the funds’ goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness.

As of December 31, 2009, no Director who is an Independent Director of the Corporation, and no such Director’s family members, had beneficial or record ownership in securities of an investment adviser or principal underwriter of the Corporation, or an entity (other than a registered investment company) directly or indirectly controlling, controlled by, or under common control with an investment adviser or principal underwriter of the Corporation.

The following table states the dollar range of equity securities beneficially owned as of December 31, 2009 by each Director of the Corporation in any fund and, on an aggregate basis, in any registered investment companies overseen or to be overseen by the Director in the same “family of investment companies.”


Name of Director	Dollar Range of Equity Securities in the Corporation	Aggregate Dollar Range of Equity Securities in All Registered Investment Companies Overseen by Nominee in Family of Investment Companies
Independent Directors
Ronald J. Arnault	None	$10,001 - $50,000
Anita L. DeFrantz	None	$10,001 - $50,000
Avedick B. Poladian	None	None
William E. B. Siart	None	$50,001 - $100,000
Jaynie Miller Studenmund	None	None

Interested Directors
R. Jay Gerken	Over $100,000*	Over $100,000
Ronald L. Olson	None	$10,001 - $50,000

*	Represents beneficial ownership of equity securities in Western Asset Core Plus Bond Portfolio only.

Each Director of the Corporation who is not an “interested person” (as defined in the 1940 Act) of the Corporation, the Manager or an Adviser receives an aggregate fee of $70,000 annually for serving on the combined Board of Directors/Trustees of the Corporation, Western Asset Income Fund and Western Asset Premier Bond Fund. Each Director also receives a fee of $7,500 and related expenses for each meeting of the Board or of a committee attended in-person and a fee of $2,500 for participating in each telephonic meeting. The Chairman of the Board and the Chairman of the Audit Committee each receive an additional $25,000 per year for serving in such capacities. Each member of the Audit Committee receives a fee of $6,000 for serving as a member of the Audit Committee. Other committee members receive $3,000 for serving as a member of each committee upon which they serve. Committee members also receive a fee of $2,500 for participating in each telephonic committee meeting. All such fees are allocated among the Corporation, Western Asset Income Fund and Western Asset Premier Bond Fund according to each such investment company’s average annual net assets. Mr. Olson receives from Western Asset an aggregate fee of $70,000 annually for serving on the combined Board of Directors/Trustees of the Corporation, Western Asset Income Fund and Western Asset Premier Bond Fund, as well as a fee of $7,500 and related expenses for each meeting of the Board attended in-person and a fee of $2,500 for participating in each telephonic meeting.

The following table provides certain information relating to the compensation of the Corporation’s Directors. The Corporation does not have a pension or retirement plan for its Directors.


Name of Person and Position	Aggregate Compensation From the Corporation*		Total Compensation from the Corporation and Fund Complex Paid to Directors**
Independent Directors
Ronald J. Arnault — Director	$	144,549	$	153,750
Anita L. DeFrantz — Director	$	109,521	$	113,500
Avedick B. Poladian — Director	$	124,544	$	133,750
William E.B. Siart — Chairman and Director	$	149,954	$	159,500
Jaynie Miller Studenmund — Director	$	125,284	$	134,500

Interested Directors
R. Jay Gerken — Director and President		None		None
Ronald L. Olson — Director		None		None

*	Represents compensation paid to the Directors for the fiscal year ended December 31, 2009.

Represents aggregate compensation paid to each Director during the calendar year ended December 31, 2009 for serving as a Director of the Corporation and as a Director of Western Asset Income Fund and as a Trustee of Western Asset Premier Bond Fund, both closed-end investment companies advised by Western Asset.

The Corporation has no employees. Its officers are compensated by an Adviser or LMIS or one of their affiliates.

On March 31, 2010, the Directors and officers of the Corporation beneficially owned in the aggregate less than 1% of any class of a fund’s outstanding shares.

The following chart contains the name, address and percentage of ownership of each person who is known by the Corporation to own beneficially and/or of record five percent or more of the outstanding Class IS shares of the Western Asset Absolute Return Portfolio as of March 31, 2010:


Name and Address		% Owned
Legg Mason Partners Lifestyle Series Inc. 70%, 620 8^th Ave, New York, NY 10018-1618		23.30
Legg Mason Partners Lifestyle Series Inc. 50%, 620 8^th Ave, New York, NY 10018-1618		18.64
Legg Mason Partners Lifestyle Series Inc. 85%, 620 8^th Ave, New York, NY 10018-1618		16.58
National Financial Services Corp., 200 Liberty St, New York, NY 10281-1003		9.62
Legg Mason Partners Variable Lifestyle 50%, 620 8^th Ave, New York, NY 10018-1618		8.01
Legg Mason Partners Lifestyle Series Inc. 30%, 620 8^th Ave, New York, NY 10018-1618		7.40
Colorado School of Mines Foundation, 923 16^th St, PO Box 4005 Golden, CO 80401-0005		5.78

The following chart contains the name, address and percentage of ownership of each person who is known by the Corporation to own beneficially and/or of record five percent or more of the outstanding Class I shares of the Western Asset Absolute Return Portfolio as of March 31, 2010:


Name and Address		% Owned
State Street Bank fbo Boston Medical Ctr, 200 Newport Ave, North Quincy, MA 02171-2102		16.16
National Financial Services Corp., 200 Liberty St, New York, NY 10281-1003		13.09
SEI Private Trust Co., c/o State Street Bank, One Freedom Valley Dr., Oaks, PA 19456		12.75
The Scripps Research Institute, 10550 North Torrey Pines Rd., Lajolla, CA 92037-1000		9.72
Ohio Wesleyan University, 61 S. Sandusky St., Delaware, OH 43015-2398		9.53
State Street Bank, fbo The Association of Graduates USMA, 200 Newport Ave., North Quincy, MA 02171-2102		9.09
MLPF&S for the sole benefit of its customers, 4800 Deer Lake Dr East, Jacksonville, FL 32246-6484		5.68

The following chart contains the name, address and percentage of ownership of each person who is known by the Corporation to own beneficially and/or of record five percent or more of the outstanding Class FI shares of the Western Asset Absolute Return Portfolio as of March 31, 2010:


Name and Address		% Owned
National Financial Services Corp. for the exclusive benefit of our Customers, 200 Liberty St, New York, NY 10281-1003		100.00


Name and Address		% Owned
District of Columbia Annuitants, Health and Life Insurance Employer Contribution Trust Fund, 1275 K Street, N.W. Ste. 600, Washington, D.C. 20005-4064		41.97
Newspaper and Mail Deliverers Publishers Pension Fund, 24-16 Queens Plaza South, Ste. 204, Long Island City, NY 11101-4620		21.17
Mac & Co., P.O. Box 3198, Pittsburgh, PA 15230-3198		14.40
Colorado School of Mines Foundation, 923 16^th St, PO Box 4005 Golden, CO 80401-0005		7.30

The following chart contains the name, address and percentage of ownership of each person who is known by the Corporation to own beneficially and/or of record five percent or more of the outstanding Class I shares of the Western Asset Core Bond Portfolio as of March 31, 2010:


Name and Address		% Owned
Bank of America, N.A., ttee B of A 401k for Legacy Fleet Plan, 700 Louisiana St, Houston, TX 77002-2700		15.50
National Financial Services Corp., 200 Liberty St, New York, NY 10281-1003		15.14
Bost & Co., Virginia College Savings Vest, P.O. Box 3198, Pittsburgh, PA 15230-3198		12.63
First Clearing, LLC, Special Custody Account, 2601 Market St, St. Louis, MO 63103-2523		6.99
State Street Bank & Trust Co. ttee Sun Micro Systems, Inc., 105 Rosemont Rd, Westwood, MA 02090-2318		6.57
The Northern Trust Co. fbo USAA Savings & Inv Plan, P.O. Box 92994, Chicago, IL 60675-0001		6.41
Bank of America, N.A. ttee Bank of America 401k Plan, 700 Louisiana St, Houston, TX 77002-2700		5.67

The following chart contains the name, address and percentage of ownership of each person who is known by the Corporation to own beneficially and/or of record five percent or more of the outstanding Class FI shares of the Western Asset Core Bond Portfolio as of March 31, 2010:


Name and Address		% Owned
National Financial Services Corp., 200 Liberty St, New York, NY 10281-1003		78.54


Name and Address		% Owned
State of Colorado CollegeInvest Fixed Income Portfolio, Scholars Choice College Savings Program, 620 8^th Ave, New York, NY 10018-1618		14.53
National Financial Services Corp., 200 Liberty St, New York, NY 10281-1003		10.58

The following chart contains the name, address and percentage of ownership of each person who is known by the Corporation to own beneficially and/or of record five percent or more of the outstanding Class I shares of the Western Asset Core Plus Bond Portfolio as of March 31, 2010:


Name and Address		% Owned
National Financial Services Corp., 200 Liberty St, New York, NY 10281-1003		13.33
Citigroup Global Markets Inc., 333 West 34^th St, New York, NY 10001-2402		9.76
Mac & Co., P.O. Box 3198, Pittsburgh, PA 15230-3198		5.75

The following chart contains the name, address and percentage of ownership of each person who is known by the Corporation to own beneficially and/or of record five percent or more of the outstanding Class FI shares of the Western Asset Core Plus Bond Portfolio as of March 31, 2010:


Name and Address		% Owned
National Financial Services Corp., 200 Liberty St, New York, NY 10281-1003		59.28
Morgan Stanley & Co., Inc., Harborside Financial Center, Plaza Two, Jersey City, NJ 07311		21.57
Charles Schwab & Co., Inc., Special Custody Account, 101 Montgomery St, San Francisco, CA 94104-4151		8.44


Name and Address		% Owned
Legg Mason Partners Lifestyle Series Inc. 85%, 620 8^th Ave, New York, NY 10018-1618		26.00
Legg Mason Partners Lifestyle Series Inc. 70%, 620 8^th Ave, New York, NY 10018-1618		21.28
Legg Mason Partners Lifestyle Series Inc. 50%, 620 8^th Ave, New York, NY 10018-1618		18.88
Legg Mason Partners Lifestyle Series Inc. 30%, 620 8^th Ave, New York, NY 10018-1618		9.39
Legg Mason Partners Variable Lifestyle 50%, 620 8^th Ave, New York, NY 10018-1618		8.17
Legg Mason Partners Lifestyle Series Inc. Income Fund, 620 8^th Ave, New York, NY 10018-1618		5.36

The following chart contains the name, address and percentage of ownership of each person who is known by the Corporation to own beneficially and/or of record five percent or more of the outstanding Class I shares of the Western Asset High Yield Portfolio as of March 31, 2010:


Name and Address		% Owned
Investment Management Board, 500 Virginia St., Charleston, WV 25301-2177		22.28
Pershing, LLC, 1 Pershing Plz, Jersey City, NJ 07399-0001		20.90
State Street Bank & Trust Co, Citigroup 401k, 105 Rosemont Rd, Westwood MA 02090-2318		13.27
Catholic Health Initiatives Operating Investment Partnership, 1999 Broadway, Denver, CO 80202-5073		10.55
Mellon Trust, fbo Kansas Public Retirement System, 135 Santilli Hwy., Everett, MA 02149-1950		8.70
National Financial Services Corp., 200 Liberty St, New York, NY 10281-1003		6.57


Name and Address		% Owned
Bradley University, 1501 W. Bradley Ave., Peoria, IL 61625-0003		55.00
JP Morgan Chase Bank as ttee for Hess Corp Employee Savings Plan, 4 New York Plaza, New York, NY 10004-2413		24.04
Mac & Co., P.O. Box 3198, 525 William Penn Place, Pittsburgh, PA 15230-3198		13.73

The following chart contains the name, address and percentage of ownership of each person who is known by the Corporation to own beneficially and/or of record five percent or more of the outstanding Class I shares of the Western Asset Inflation Indexed Plus Bond Portfolio as of March 31, 2010:


Name and Address		% Owned
State Street Bank & Trust Co, Elevator Constructors Retirement Plan, 200 Claredon St, Boston, MA 02116-5021		19.87
National Financial Services Corp., 200 Liberty St, New York, NY 10281-1003		12.47
Nationwide Trust Company, P.O. Box 182029, Columbus, OH 43218-2029		5.79

The following chart contains the name, address and percentage of ownership of each person who is known by the Corporation to own beneficially and/or of record five percent or more of the outstanding Class FI shares of the Western Asset Inflation Indexed Plus Bond Portfolio as of March 31, 2010:


Name and Address		% Owned
Suntrust Bank ttee, fbo The CF Sauer Co. 401k, c/o Fascore LLC, 8515 E Orchard Rd., Greenwood Village, CO 80111-5002		79.84
National Financial Services Corp., 200 Liberty St, New York, NY 10281-1003		16.29


Name and Address		% Owned
National Bank of Indianapolis, fbo NBI, fbo Hendricks Deprec, 107 N Pennsylvania St., ste. 600, Indianapolis, IN 46204-2420		40.49
SEI Private Trust Company, One Freedom Valley Dr, Oaks, PA 19456-9989		29.21
University of Kansas Hospital Authority, Mailstop #3011, 3901 Rainbow Blvd., Kansas City, KS 66103-2937		12.71
UA Local 125 Health & Welfare Fund, 1837 16^th Ave. S.W., Cedar Rapids, IA 52404-1755		12.47

The following chart contains the name, address and percentage of ownership of each person who is known by the Corporation to own beneficially and/or of record five percent or more of the outstanding Class I shares of the Western Asset Intermediate Bond Portfolio as of March 31, 2010:


Name and Address		% Owned
National Financial Services LLC, 200 Liberty St., New York, NY 10281-1003		17.76
Sheldon and Co. fbo Grand Valley State University Trust, P.O. Box 94984, Cleveland, OH 44104-4984		10.53
Sheet Metal Workers’ International Association Strike Fund, 1750 New York Ave., N.W. 6^th Fl, Washington, D.C. 20006-5301		7.72


Name and Address		% Owned
Houston Ballet Foundation, 1921 West Bell St., Houston, TX 77019-4813		100.00

The following chart contains the name, address and percentage of ownership of each person who is known by the Corporation to own beneficially and/or of record five percent or more of the outstanding Class I shares of the Western Asset Intermediate Plus Bond Portfolio as of March 31, 2010:


Name and Address		% Owned
IBEW Local Union 124, 305 E. 103rd Ter., Kansas City, MO 64114-4760		44.67
Teamsters Union Local 52 Pension Fund, 6511 Eastland Rd, Brook Park, OH 44142-1342		16.43
Camtru LLC, 1411 Third St., 4^th Fl., Port Huron, MI 48060-5480		14.28
Comerica Bank, c/o Village of Beverly Hills, P.O. Box 75000, Detroit, MI 48275-0001		9.18
Dingle & Co., 411 Lafayette Blvd., Detroit, MI 48226-3120		6.05


Name and Address		% Owned
University of Kansas Hospital, 3901 Rainbow Blvd, Kansas City, KS 66103-2937		70.12
IUOE Local 399 Health and Welfare Trust, 763 W Jackson Blvd, Chicago, IL 60661-5411		29.88

The following chart contains the name, address and percentage of ownership of each person who is known by the Corporation to own beneficially and/or of record five percent or more of the outstanding Class I shares of the Western Asset Limited Duration Bond Portfolio as of March 31, 2010:


Name and Address		% Owned
Line Construction Retiree Benefit Fund, 2000 Springer Dr., Lombard, IL 60148-7019		37.00
Chicago Public Library Foundation, 20 N. Michigan Ave., Chicago, IL 60602-4811		14.81
SEI Private Trust Company, One Freedom Valley Dr, Oaks, PA 19456-9989		14.58
Wells Fargo Bank N.A., fbo Harrison Hospital, P.O. Box 1533, Minneapolis, MN 55480-1533		6.78
Plumbers Local Union No 1, Trade Education Fund, 158-29 George Meany Blvd, Howard Beach, NY 11414-3137		5.87
National Financial Services LLC, 200 Liberty St., New York, NY 10281-1003		5.63

The following chart contains the name, address and percentage of ownership of each person who is known by the Corporation to own beneficially and/or of record five percent or more of the outstanding Class I shares of the Western Asset Non-U.S. Opportunity Bond Portfolio as of March 31, 2010:


Name and Address		% Owned
National Financial Services LLC, 200 Liberty St., New York, NY 10281-1003		16.93
Mitra & Co., c/o Marshall & Ilsley Trust Co. N.A., 11270 W. Park Pl., ste. 400, Milwaukee, WI 53224-3638		10.91
Charles Schwab & Co., Inc., Special Custody Account, 101 Montgomery St, San Francisco, CA 94104-4151		10.12
American Institute of Physics, 1 Physics Ellipse, College Park, MD 20740-3841		7.47
Wells Fargo Bank N.A., fbo Engelstad Family Foundation, P.O. Box 1533, Minneapolis, MN 55480-1533		7.01
Wells Fargo Bank N.A., fbo Minnesota Masonic Char Fd, P.O. Box 1533, Minneapolis, MN 55480-1533		5.69
Nationwide Trust Co., c/o IPO Portfolio Accounting, P.O. Box 182029, Columbus, OH 43218-2029		5.22

The IBEW Local Union No. 124 Health and Welfare Fund may be deemed to control the Western Asset Inflation Indexed Plus Bond Portfolio because it beneficially owns more than 25% of the outstanding voting securities of such Portfolio. The University of Kansas Hospital Authority may be deemed to control the Western Asset Limited Duration Bond Portfolio because it beneficially owns more than 25% of the outstanding voting securities of such Portfolio. Western Asset owns 100% of the Global Strategic Income and Enhanced Equity Portfolios. Western Asset may be deemed to control each such fund because it owns more than 25% of the outstanding voting securities of such fund.

It may not be possible for matters subject to a vote of a majority of the outstanding voting securities of a fund to be approved without the affirmative vote of such “controlling” shareholders, and it may be possible for such matters to be approved by such shareholders without the affirmative vote of any other shareholders.

Manager

The Manager, a wholly owned subsidiary of Legg Mason, Inc., a financial services holding company, serves as investment manager to the funds of the Corporation under separate Investment Management Agreements between the Manager and the Corporation dated, except with respect to the Western Asset Limited Duration Bond Portfolio and the Western Asset Absolute Return Portfolio, December 31, 2001 (collectively, the “Management Agreement”). With respect to the Western Asset Limited Duration Bond Portfolio and the Western Asset Absolute Return Portfolio, the Investment Management Agreements are dated September 29, 2003 and June 30, 2006, respectively. Effective October 1, 2009, Legg Mason Partners Funds Advisor, LLC (“LMPFA”) replaced Legg Mason Fund Adviser, Inc. (“LMFA”) as investment manager of each fund. References to the “Manager” with respect to time periods prior to October 1, 2009 are references to LMFA (e.g., Management fees paid to the “Manager” prior to October 1, 2009). Each of LMFA and LMPFA are wholly-owned subsidiaries of Legg Mason, Inc., a financial services holding company.

LMPFA is a Delaware limited liability company formed on April 6, 2006. LMPFA’s address is 620 Eighth Avenue, New York, NY 10018.

Under the Management Agreement, the Manager is responsible, subject to the general supervision of the Corporation’s Board of Directors, for the management of the Corporation’s assets, including the responsibility for making decisions and placing orders to buy, sell or hold a particular security, consistent with the investment objectives and policies described in the Prospectus and this SAI. As indicated below, certain of these responsibilities have been delegated to Western Asset and the other Advisers. The Manager also is responsible for the compensation of Directors and officers of the Corporation who are employees of the Manager or its affiliates. The Manager receives for its services a fee as described in the Prospectus. As noted below, the Manager has delegated responsibility for the selection of the Corporation’s investments to the Advisers.

Each fund pays all of its other expenses that are not assumed by the Manager. These expenses include, among others, expenses of preparing and printing prospectuses, statements of additional information, proxy statements and reports and of distributing them to existing shareholders, custodian charges, transfer agency fees, organizational expenses, compensation of the Independent Directors, legal and audit expenses, insurance expenses, expenses of registering and qualifying shares of the funds for sale under federal and state law, Rule 12b-1 fees, governmental fees, expenses incurred in connection with membership in investment company organizations, interest expense, taxes and brokerage fees and commissions. The funds also are liable for such nonrecurring expenses as may arise, including litigation to which a fund or the Corporation may be a party. The Corporation may also have an obligation to indemnify its Directors and officers with respect to litigation.

Under the Management Agreement, the Manager will not be liable for any error of judgment or mistake of law or for any loss suffered by the funds in connection with the performance of the Management Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations or duties thereunder.

The Management Agreement terminates automatically upon assignment and is terminable with respect to any fund at any time without penalty by vote of the Corporation’s Board of Directors, by vote of a majority of that fund’s outstanding voting securities, or by the Manager, on not more than 60 days’ notice to the Corporation (not less than 60 days’ written notice, in the case of the Western Asset Limited Duration Bond Portfolio and the Western Asset Absolute Return Portfolio), and may be terminated immediately upon the mutual written consent of the Manager and the Corporation.

For the following fiscal periods, the funds paid to the Manager management fees (prior to fees forgone or expenses reimbursed) of:


Fund	2009		2008*		2008**		2007**
Western Asset Absolute Return Portfolio	$	2,109,744	$	2,620,299	$	3,666,577	$	873,942	***
Western Asset Core Bond Portfolio	$	14,437,236	$	17,693,084	$	27,807,910	$	21,846,261
Western Asset Core Plus Bond Portfolio	$	32,822,162	$	37,570,426	$	55,764,726	$	37,693,113
Western Asset High Yield Portfolio	$	3,320,448	$	2,882,854	$	5,035,782	$	3,758,051
Western Asset Inflation Indexed Plus Bond Portfolio	$	960,333	$	1,178,419	$	1,450,226	$	1,159,643
Western Asset Intermediate Bond Portfolio	$	2,034,099	$	1,961,709	$	2,835,468	$	2,569,081
Western Asset Intermediate Plus Bond Portfolio	$	285,481	$	287,933	$	404,576	$	338,762
Western Asset Limited Duration Bond Portfolio	$	220,333	$	261,435	$	372,082	$	289,571
Western Asset Non-U.S. Opportunity Bond Portfolio	$	398,232	$	595,948	$	805,725	$	597,806

*	Period from April 1, 2008 to December 31, 2008.

**	Prior to April 1, 2008, the Portfolios’ fiscal year ended March 31.

***	For the period of July 6, 2006 (commencement of operations) to March 31, 2007.

For the following fiscal periods, the following management fees were forgone by the Manager (recouped by the Manager from Absolute Return Portfolio and Intermediate Bond Portfolio pursuant to the funds’ obligations to repay the Manager for fees forgone/expensed reimbursed by the Manager during the prior three years pursuant to prior expense limitations with respect to the funds):


Fund	2009		2008*		2008**			2007**
Western Asset Absolute Return Portfolio	$	98,169	$	125,586	$	(189,589	)	$	189,597	***
Western Asset Core Bond Portfolio	$	0	$	0	$	0		$	0
Western Asset Core Plus Bond Portfolio	$	0	$	0	$	0		$	0
Western Asset High Yield Portfolio	$	0	$	0	$	0		$	0
Western Asset Inflation Indexed Plus Bond Portfolio	$	3,055	$	88,815	$	151,019		$	214,206
Western Asset Intermediate Bond Portfolio	$	0	$	1,131	($	28,475	)	$	90,772
Western Asset Intermediate Plus Bond Portfolio	$	150,468	$	98,759	$	124,716		$	153,531
Western Asset Limited Duration Bond Portfolio	$	124,270	$	87,362	$	101,940		$	149,011
Western Asset Non-U.S. Opportunity Bond Portfolio	$	6,759	$	48,260	$	63,146		$	124,580

*	Period from April 1, 2008 to December 31, 2008.

**	Prior to April 1, 2008, the Portfolios’ fiscal year ended March 31.

***	For the period of July 6, 2006 (commencement of operations) to March 31, 2007.

Advisers

Western Asset. Western Asset, a wholly owned subsidiary of Legg Mason, Inc., serves as Adviser to the Western Asset Absolute Return Portfolio, the Western Asset Core Bond Portfolio, the Western Asset Core Plus Bond Portfolio, the Western Asset Enhanced Equity Portfolio, the Western Asset Global Strategic Income Portfolio, the Western Asset High Yield Portfolio, the Western Asset Inflation Indexed Plus Bond Portfolio, the Western Asset Intermediate Bond Portfolio, the Western Asset Intermediate Plus Bond Portfolio and the Western Asset Limited Duration Bond Portfolio under separate Investment Advisory Agreements between Western Asset and the Manager (collectively, the “Western Asset Advisory Agreement”).

Under the Western Asset Advisory Agreement, Western Asset is responsible, subject to the general supervision of the Corporation’s Board of Directors and the Manager, for the actual management of the funds’ assets, including the responsibility for making decisions and placing orders to buy, sell or hold a particular security, consistent with the investment objectives and policies described in the Prospectus and this Statement of Additional Information. Western Asset receives from the Manager for its services an advisory fee as described in the Prospectus.

Under the Western Asset Advisory Agreement, Western Asset will not be liable for any error of judgment or mistake of law or for any loss suffered by the funds in connection with the performance of the Western Asset Advisory Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations or duties thereunder.

The Western Asset Advisory Agreement terminates automatically upon assignment and is terminable with respect to any fund at any time without penalty by vote of the Corporation’s Board of Directors, by vote of a majority of that fund’s outstanding voting securities, or by Western Asset, on not more than 60 days’ notice (not less than 60 days’ written notice, in the case of the Western Asset Limited Duration Bond Portfolio and the Western Asset Absolute Return Portfolio), and may be terminated immediately upon the mutual written consent of the parties.

WAML. WAML, a wholly owned subsidiary of Legg Mason, Inc., serves as Adviser to the Western Asset Non-U.S. Opportunity Bond Portfolio, the Western Asset Absolute Return Portfolio, the Western Asset Core Plus Bond Portfolio, the Western Asset Global Strategic Income Portfolio, the Western Asset Intermediate Plus Bond Portfolio, and, to the extent that the Manager requests that WAML provide the Western Asset Limited Duration Bond Portfolio with investment advisory services, the Western Asset Limited Duration Bond Portfolio under separate Investment Advisory Agreements between the Manager and WAML (collectively, the “WAML Advisory Agreement”). It is currently expected that the Manager would request that WAML provide such services to the Western Asset Limited Duration Bond Portfolio in the event that the fund’s investment policies are amended to allow investments in non-U.S. dollar denominated securities.

Under the WAML Advisory Agreement, WAML shall as requested by the Manager regularly provide a fund with investment research, advice, management and supervision and shall furnish a continuous investment program for the fund consistent with the investment objectives, restrictions and policies described in the Prospectus and this Statement of Additional Information. WAML receives from the Manager for its services to the fund an advisory fee as described in the Prospectus.

Under the WAML Advisory Agreement, WAML will not be liable for any error of judgment or mistake of law or for any loss suffered by the fund in connection with the performance of the WAML Advisory Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations or duties thereunder.

The WAML Advisory Agreement terminates automatically upon assignment and is terminable at any time without penalty by vote of the Corporation’s Board of Directors, by vote of a majority of the fund’s outstanding

voting securities, or by WAML, on not more than 60 days’ notice (not less than 60 days’ written notice, in the case of the Western Asset Limited Duration Bond Portfolio), and may be terminated immediately upon the mutual written consent of the parties.

Western Singapore. Western Singapore, a wholly owned subsidiary of Legg Mason, Inc., serves as Adviser to the Western Asset Core Plus Bond Portfolio, the Western Asset Non-U.S. Opportunity Bond Portfolio, the Western Asset Inflation Indexed Plus Bond Portfolio and the Western Asset Absolute Return Portfolio under separate Investment Advisory Agreements between the Manager and Western Singapore (collectively, the “Western Singapore Advisory Agreement”).

Under the Western Singapore Advisory Agreement, Western Singapore shall as requested by the Manager regularly provide a fund with investment research, advice, management and supervision and shall furnish a continuous investment program for the fund consistent with the investment objectives, restrictions and policies described in the Prospectus and this Statement of Additional Information. Western Singapore receives from the Manager for its services to the fund an advisory fee as described in the Prospectus.

Under the Western Singapore Advisory Agreement, Western Singapore will not be liable for any error of judgment or mistake of law or for any loss suffered by a fund in connection with the performance of the Western Singapore Advisory Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations or duties thereunder.

The Western Singapore Advisory Agreement terminates automatically upon assignment and is terminable at any time without penalty by vote of the Corporation’s Board of Directors, by vote of a majority of the fund’s outstanding voting securities, or by Western Singapore, on not more than 60 days’ notice, and may be terminated immediately upon the mutual written consent of the parties.

Western Japan. Western Japan, a wholly owned subsidiary of Legg Mason, Inc., serves as Adviser to the Western Asset Core Plus Bond Portfolio, the Western Asset Non-U.S. Opportunity Bond Portfolio, the Western Asset Inflation Indexed Plus Bond Portfolio and the Western Asset Absolute Return Portfolio under separate Investment Advisory Agreements between the Manager and Western Japan (collectively, the “Western Japan Advisory Agreement”).

Under the Western Japan Advisory Agreement, Western Japan shall as requested by the Manager regularly provide a fund with investment research, advice, management and supervision and shall furnish a continuous investment program for the fund consistent with the investment objectives, restrictions and policies described in the Prospectus and this Statement of Additional Information. Western Japan receives from the Manager for its services to the fund an advisory fee as described in the Prospectus.

Under the Western Japan Advisory Agreement, Western Japan will not be liable for any error of judgment or mistake of law or for any loss suffered by a fund in connection with the performance of the Western Japan Advisory Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations or duties thereunder.

The Western Japan Advisory Agreement terminates automatically upon assignment and is terminable at any time without penalty by vote of the Corporation’s Board of Directors, by vote of a majority of the fund’s outstanding voting securities, or by Western Japan, on not more than 60 days’ notice, and may be terminated immediately upon the mutual written consent of the parties.

Singapore generally manages Asian (other than Japan) fixed-income mandates. Each office provides services relating to relevant portions of Western Asset’s broader portfolios as appropriate.

Western Asset, Western Asset Japan and Western Asset Singapore undertake investment-related activities including investment management, research and analysis, and securities settlement.

Other Accounts Managed By Portfolio Managers (as of December 31, 2009)


Type of Account	Number of Accounts Managed	Total Assets Managed		Number of Accounts Managed for which Advisory Fee is Performance-Based	Assets managed for which Advisory Fee is Performance-Based
S. Kenneth Leech
As of December 31, 2009
Registered Investment Companies	100	$	170,731,748,244	0	$	0
Other pooled investment vehicle	229	$	107,675,203,132	6	$	1,110,254,296
Other accounts	832	$	190,201,806,337	93	$	24,235,576,277

Stephen A. Walsh
As of December 31, 2009
Registered Investment Companies	100	$	170,731,748,244	0	$	0
Other pooled investment vehicle	229	$	107,675,203,132	6	$	1,110,254,296
Other accounts	832	$	190,201,806,337	93	$	24,235,576,277

Carl L. Eichstaedt
As of December 31, 2009
Registered Investment Companies	23	$	10,624,420,106	0	$	0
Other pooled investment vehicle	3	$	161,287,294	—		—
Other accounts	64	$	15,325,146,919	5	$	1,455,076,868

Paul Wynn
As of December 31, 2009
Registered Investment Companies	4	$	1,328,700,545	0	$	0
Other pooled investment vehicle	4	$	382,095,900	—		—
Other accounts	27	$	8,934,496,942	3	$	601,999,711

Peter H. Stutz
As of December 31, 2009
Registered Investment Companies	4	$	1,328,700,545	0	$	0
Other pooled investment vehicle	1	$	4,209,159	—		—
Other accounts	13	$	2,541,650,057	2	$	448,313,963


Type of Account	Number of Accounts Managed	Total Assets Managed		Number of Accounts Managed for which Advisory Fee is Performance-Based	Assets managed for which Advisory Fee is Performance-Based
Michael C. Buchanan
As of December 31, 2009
Registered Investment Companies	49	$	20,971,654,173	0	$	0
Other pooled investment vehicle	6	$	3,347,870,147	—		—
Other accounts	13	$	1,634,922,124	—		—

Mark S. Lindbloom
As of December 31, 2009
Registered Investment Companies	27	$	13,385,865,274	0	$	0
Other pooled investment vehicle	3	$	117,911,817	—		—
Other accounts	48	$	14,871,791,907	4	$	2,939,637,667

Edward A. Moody
As of December 31, 2009
Registered Investment Companies	23	$	10,624,420,106	0	$	0
Other pooled investment vehicle	—		—	—		—
Other accounts	51	$	9,449,129,664	6	$	2,090,867,314

Keith J. Gardner
As of December 31, 2009
Registered Investment Companies	42	$	17,875,019,005	0	$	0
Other pooled investment vehicle	6	$	624,283,036	—		—
Other accounts	2	$	128,763,146	—		—

Andrea A. Mack
As of December 31, 2009
Registered Investment Companies	4	$	817,973,282	0	$	0
Other pooled investment vehicle	1	$	26,846,368	—		—
Other accounts	14	$	2,151,641,437	—		—

Julien Scholnick
As of December 31, 2009
Registered Investment Companies	2	$	535,115,875	0	$	0
Other pooled investment vehicle	8	$	1,286,260,732	—		—
Other accounts	63	$	8,431,277,914	2	$	518,351,799

Andres Sanchez-Balcazar
As of December 31, 2009
Registered Investment Companies	6	$	1,699,990,241	0	$	0
Other pooled investment vehicle	17	$	1,136,915,968	—		—
Other accounts	12	$	3,761,946,514	3	$	1,394,799,490

Michael Pak
As of December 31, 2009
Registered Investment Companies	2	$	535,115,875	0	$	0
Other pooled investment vehicle	3	$	274,407,221	—		—
Other accounts	8	$	5,404,062,806	—		—

Potential Conflicts of Interest

Potential conflicts of interest may arise in connection with the management of multiple accounts (including accounts managed in a personal capacity). These could include potential conflicts of interest related to the

knowledge and timing of a fund’s trades, investment opportunities and broker selection. Portfolio managers may be privy to the size, timing and possible market impact of a fund’s trades.

It is possible that an investment opportunity may be suitable for both a fund and other accounts managed by a portfolio manager, but may not be available in sufficient quantities for both the fund and the other accounts to participate fully. Similarly, there may be limited opportunity to sell an investment held by a fund and another account. A conflict may arise where the portfolio manager may have an incentive to treat an account preferentially as compared to a fund because the account pays a performance-based fee or the portfolio manager, the Advisers or an affiliate has an interest in the account. The Advisers have adopted procedures for allocation of portfolio transactions and investment opportunities across multiple client accounts on a fair and equitable basis over time. All eligible accounts that can participate in a trade share the same price on a pro-rata allocation basis in an attempt to mitigate any conflict of interest. Trades are allocated among similarly managed accounts to maintain consistency of portfolio strategy, taking into account cash availability, investment restrictions and guidelines, and portfolio composition versus strategy.

With respect to securities transactions for the funds, the Advisers determine which broker or dealer to use to execute each order, consistent with their duty to seek best execution of the transaction. However, with respect to certain other accounts (such as pooled investment vehicles that are not registered investment companies and other accounts managed for organizations and individuals), the Advisers may be limited by the client with respect to the selection of brokers or dealers or may be instructed to direct trades through a particular broker or dealer. In these cases, trades for a fund in a particular security may be placed separately from, rather than aggregated with, such other accounts. Having separate transactions with respect to a security may temporarily affect the market price of the security or the execution of the transaction, or both, to the possible detriment of a fund or the other account(s) involved. Additionally, the management of multiple funds and/or other accounts may result in a portfolio manager devoting unequal time and attention to the management of each fund and/or other account.

It is theoretically possible that portfolio managers could use information to the advantage of other accounts they manage and to the possible detriment of a fund. For example, a portfolio manager could short sell a security for an account immediately prior to a fund’s sale of that security. To address this conflict, the Advisers have adopted procedures for reviewing and comparing selected trades of alternative investment accounts (which may make directional trades such as short sales) with long only accounts (which include the funds) for timing and pattern related issues. Trading decisions for alternative investment and long only accounts may not be identical even though the same Portfolio Manager may manage both types of accounts. Whether the Adviser allocates a particular investment opportunity to only alternative investment accounts or to alternative investment and long only accounts will depend on the investment strategy being implemented. If, under the circumstances, an investment opportunity is appropriate for both its alternative investment and long only accounts, then it will be allocated to both on a pro-rata basis.

A portfolio manager may also face other potential conflicts of interest in managing a fund, and the description above is not a complete description of every conflict of interest that could be deemed to exist in managing both a fund and the other accounts listed above.

Compensation of Portfolio Managers

With respect to the compensation of portfolio managers, each Adviser’s compensation system assigns each employee a total compensation range, which is derived from annual market surveys that benchmark each role with its job function and peer universe. This method is designed to reward employees with total compensation reflective of the external market value of their skills, experience and ability to produce desired results. Standard compensation includes competitive base salaries, generous employee benefits and a retirement plan.

In addition, each Adviser’s employees are eligible for bonuses. These are structured to closely align the interests of employees with those of the Adviser, and are determined by the professional’s job function and pre-tax

performance as measured by a formal review process. All bonuses are completely discretionary. The principal factor considered is a portfolio manager’s investment performance versus appropriate peer groups and benchmarks (e.g., a securities index and with respect to a fund, the benchmark set forth in the fund’s Prospectus to which the fund’s average annual total returns are compared or, if none, the benchmark set forth in the fund’s annual report). Performance is reviewed on a 1, 3 and 5 year basis for compensation — with 3 and 5 years having a larger emphasis. A subadviser may also measure a portfolio manager’s pre-tax investment performance against other benchmarks, as it determines appropriate. Because portfolio managers are generally responsible for multiple accounts (including the funds) with similar investment strategies, they are generally compensated on the performance of the aggregate group of similar accounts, rather than a specific account. Other factors that may be considered when making bonus decisions include client service, business development, length of service to the Adviser, management or supervisory responsibilities, contributions to developing business strategy and overall contributions to the subadviser’s business.

Finally, in order to attract and retain top talent, all professionals are eligible for additional incentives in recognition of outstanding performance. These are determined based upon the factors described above and include Legg Mason stock options and long-term incentives that vest over a set period of time past the award date.

Portfolio Manager Ownership of Fund Securities

None of the portfolio managers named above owned shares of the fund(s) for which they are jointly and primarily responsible as of December 31, 2009.

Distributor

LMIS, 100 International Drive, P.O. Box 1476, Baltimore, MD 21203-1476, acts as a distributor of the shares of the Corporation pursuant to a Distributor Agreement with the Corporation dated December 1, 2005 (the “Underwriting Agreement”).

LMIS is not obligated to sell any specific number of the Corporation’s shares and receives no compensation pursuant to the Underwriting Agreement. Except as noted in the Prospectus, the Corporation’s shares are distributed in a continuous offering. The Underwriting Agreement is terminable with respect to any fund without penalty, at any time, by vote of a majority of the Corporation’s Independent Directors, or by vote of the holders of a majority of the shares of that fund, or by LMIS upon 60 days’ notice to the Corporation.

LMIS pays certain expenses in connection with the offering of shares of each fund, including any compensation to its financial advisors, the printing and distribution of prospectuses, SAIs and periodic reports used in connection with the offering to prospective investors, and expenses relating to any supplementary sales literature or advertising. The funds bear the expenses of preparing, setting in type and mailing the prospectuses, SAIs and periodic reports to existing shareholders.

The Corporation has adopted a Plan for each fund which, among other things, permits the Corporation to pay LMIS fees for its services related to sales and distribution of Class FI shares and the provision of ongoing services to Class FI shareholders by LMIS or other parties. Payments are made only from assets attributable to Class FI shares. Under the Plan, the aggregate fees may not exceed an annual rate of 0.40% (currently limited to 0.25%) of each fund’s average daily net assets attributable to Class FI shares. Distribution activities for which such payments may be made include, but are not limited to, compensation to persons who engage in or support distribution and redemption of shares, printing of prospectuses and reports for persons other than existing shareholders, advertising, preparation and distribution of sales literature, overhead, travel and telephone expenses, all with respect to Class FI shares only. LMIS may pay all or a portion of the fee to its investment executives.

The Plan will continue in effect only so long as it is approved at least annually by the vote of a majority of the Board of Directors, including a majority of the 12b-1 Directors, cast in person at a meeting called for the purpose

of voting on the Plan. The Plan may be terminated by a vote of a majority of the 12b-1 Directors or by a vote of a majority of the outstanding voting securities of the Class FI of the fund in question. Any change in the Plan that would materially increase the distribution cost to a fund requires shareholder approval; otherwise, the Plan may be amended by the Directors, including a majority of the 12b-1 Directors, as previously described.

In accordance with Rule 12b-1, the Plan provides that LMIS will submit to the Corporation’s Board of Directors, and the Directors will review, at least quarterly, a written report of any amounts expended pursuant to the Plan and the purposes for which expenditures were made. In addition, as long as the Plan is in effect, the selection and nomination of the Independent Directors will be committed to the discretion of such Independent Directors.

There are certain anticipated benefits to shareholders of the Corporation that may result from the Plan. For example, the payment of service fees will provide an incentive to maintain and enhance the level of services provided to each fund’s Financial Intermediary shareholders. These efforts, in turn, could lead to increased sales and reduced redemptions, eventually enabling each fund to achieve economies of scale and lower per share operating expenses. Any reduction in such expenses would serve to offset, at least in part, the additional expenses incurred by each fund in connection with its Plan. Furthermore, the investment management of each fund could be enhanced, as net inflows of cash from new sales might enable its Adviser(s) to take advantage of attractive investment opportunities, and reduced redemptions could eliminate the potential need to liquidate attractive securities positions in order to raise the funds necessary to meet the redemption requests.

Those persons listed in “Management of the Funds” as holding positions with LMIS may be deemed to have an interest in the operation of the Plan. No Independent Director of the Corporation has an interest in the operation of the Plan.

For the fiscal year ended December 31, 2009, the funds incurred the following distribution and service fees with respect to the Class FI shares of the Western Asset Absolute Return, Western Asset Core Bond, Western Asset Core Plus Bond Portfolios and Western Asset Inflation Indexed Plus Bond Portfolio:


Western Asset Absolute Return Portfolio	$	3,384
Western Asset Core Bond Portfolio	$	2,800,092
Western Asset Core Plus Bond Portfolio	$	1,707,060
Western Asset Inflation Indexed Plus Bond Portfolio	$	556

No other fund had Class FI shares outstanding during the fiscal year ended December 31, 2009.

The Plan pays a fixed fee rate to LMIS each month. LMIS, in turn, generally uses the entire amount of this compensation to pay distribution expenses, including amounts paid to third parties.

Certain funds owned, as of December 31, 2009, securities issued by “regular broker-dealers” of such funds, as that term is defined in Rule 10b-1 under the 1940 Act, or by the parents of regular broker-dealers. The value of such securities held by each such fund as of December 31, 2009 is set forth in the tables below.

Western Asset Absolute Return Portfolio


Broker	Value of Securities
Merrill Lynch & Co., Inc.	$	6,586,000
Morgan Stanley	$	3,748,000
Goldman Sachs & Co.	$	1,973,000
Banc of America Securities LLC	$	992,000
Credit Suisse Securities LLC	$	251,000
Deutsche Bank Securities, Inc.	$	202,000

Western Asset Core Bond Portfolio


Broker	Value of Securities
JPMorgan Chase & Co.	$	78,380,000
Credit Suisse Securities LLC	$	38,959,000
UBS Securities LLC	$	27,874,000
Merrill Lynch Pierce Fenner & Smith, Inc.	$	23,885,000
Banc of America Securities LLC	$	22,658,000
Morgan Stanley	$	16,667,000
Goldman Sachs & Co.	$	10,744,000
Deutsche Bank Securities, Inc.	$	9,558,000
Barclays Capital, Inc.	$	7,018,000

Western Asset Core Plus Bond Portfolio


Broker	Value of Securities
Merrill Lynch Pierce Fenner & Smith, Inc.	$	103,396,000
JPMorgan Chase & Co.	$	70,986,000
Morgan Stanley	$	65,870,000
Banc of America Securities LLC	$	31,706,000
Deutsche Bank Securities, Inc.	$	20,476,000
Credit Suisse Securities LLC	$	20,379,000
Barclays Capital, Inc.	$	16,115,000
UBS Securities LLC	$	9,968,000
Goldman Sachs & Co.	$	7,700,000

Western Asset High Yield Portfolio


Broker	Value of Securities
Banc of America Securities LLC	$	5,118,000
JPMorgan Chase & Co.	$	3,053,000

Western Asset Inflation Indexed Plus Bond Portfolio


Broker	Value of Securities
JPMorgan Chase & Co.	$	4,394,000
Banc of America Securities LLC	$	2,185,000
Credit Suisse Securities LLC	$	326,000

Western Asset Intermediate Bond Portfolio


Broker	Value of Securities
Goldman Sachs & Co.	$	5,663,000
Merrill Lynch Pierce Fenner & Smith, Inc.	$	5,639,000
JPMorgan Chase & Co.	$	3,624,000
Morgan Stanley	$	3,543,000
Barclays Capital, Inc.	$	2,590,000
Banc of America Securities LLC	$	2,418,000
Credit Suisse Securities LLC	$	1,249,000
BNP Paribas Securities Corp.	$	696,000

Western Asset Intermediate Plus Bond Portfolio


Broker	Value of Securities
Banc of America Securities LLC	$	772,000
Goldman Sachs & Co.	$	581,000
JPMorgan Chase & Co.	$	578,000
Morgan Stanley	$	519,000
Barclays Capital, Inc.	$	305,000
Merrill Lynch Pierce Fenner & Smith, Inc.	$	293,000
BNP Paribas Securities Corp.	$	99,000

Western Asset Limited Duration Bond Portfolio


Broker	Value of Securities
Banc of America Securities LLC	$	1,485,000
Merrill Lynch Pierce Fenner & Smith, Inc.	$	661,000
Goldman Sachs & Co.	$	569,000
Deutsche Bank Securities, Inc.	$	327,000
Barclays Capital, Inc.	$	287,000
Morgan Stanley	$	270,000
JPMorgan Chase & Co.	$	206,000
UBS Securities LLC	$	179,000
BNP Paribas Securities Corp.	$	99,000

Western Asset Non-US Opportunity Bond Portfolio


Broker	Value of Securities
Goldman Sachs & Co.	$	809,000
Banc of America Securities LLC	$	644,000
Barclays Capital, Inc.	$	597,000
UBS Securities LLC	$	312,000
Merrill Lynch Pierce Fenner & Smith, Inc.	$	155,000

Proxy Voting Policies and Procedures

The Directors of the Corporation have adopted the proxy voting policy of Western Asset (the “Policy”) as the Proxy Voting Policies and Procedures of each fund. The Policy governs in determining how proxies relating to a fund’s portfolio securities are voted. A copy of the Policy is attached as Appendix B to this SAI. Information regarding how a fund voted proxies (if any) relating to portfolio securities during the most recent twelve month period ended June 30 is available without charge (1) by calling 1-888-425-6432 and (2) on the SEC’s website at http://www.sec.gov.

Purchases and Redemptions

The funds’ shares are sold at net asset value without any sales charge. The Corporation reserves the right to modify the mail, telephone or wire redemption services described in the Prospectus at any time without prior notice to shareholders. The Corporation may also terminate the telephone or wire redemption services described in the Prospectus at any time upon 60 days’ notice to shareholders. The Corporation also reserves the right to suspend or postpone redemptions (1) for any period during which the Exchange is closed (other than for

customary weekend and holiday closings), (2) when trading in markets the Corporation normally utilizes is restricted or an emergency, as defined by rules and regulations of the SEC, exists, making disposal of the Corporation’s investments or determination of its net asset value not reasonably practicable, or (3) for such other periods as the SEC by regulation or order may permit for the protection of the Corporation’s shareholders. In the case of any such suspension, an investor may either withdraw the request for redemption or receive payment based upon the net asset value next determined after the suspension is lifted.

In consideration of the best interests of the non-redeeming shareholders, the Corporation reserves the right to pay any redemption price in whole or in part by a distribution in kind of readily marketable securities held by a fund in lieu of cash. If shares are redeemed in kind, however, the redeeming shareholder should expect to incur transaction costs upon the disposition of the securities received in the distribution.

Pursuant to an investment policy approved by the Board, Class I shares of the funds may also be purchased by (i) current and former Board members of investment companies managed by affiliates of Legg Mason, Inc., (ii) current and former board members of Legg Mason, Inc., (iii) employees of Legg Mason, Inc. and (iv) in each case, the immediate families of such persons. The Corporation reserves the right to waive or reduce the minimum initial investment from time to time in its discretion, in whole or in part, with respect to these and other investors.

Shareholder Servicing Payments

Funds may make payments to financial intermediaries that sell Class I or Class FI shares of the funds or to other parties in connection with the sale (Class FI only) or servicing of such shares. Such payments may relate to, without limitation, personal services rendered to shareholders of the funds and the maintenance of shareholder accounts, including compensation to, and expenses of, financial intermediaries (including retirement plans, their service providers and their sponsors who provide services to plan participants) who aid in the processing of purchase or redemption requests or the processing of dividend payments, who provide information periodically to shareholders showing their positions in a fund’s shares, who forward communications from the funds to shareholders, who render ongoing advice concerning the suitability of particular investment opportunities offered by the Corporation in light of the shareholders’ needs, who respond to inquiries from shareholders relating to such services, or who train personnel in the provision of such services. Salespersons and others entitled to receive compensation for selling (Class FI only) or servicing fund shares may receive greater compensation with respect to one class of shares than the other.

Exchange Privilege

When a shareholder decides to exchange shares of a fund for shares of the same class of another fund, the Corporation’s transfer agent will redeem shares of the fund and invest the proceeds in shares of the fund selected. When a shareholder decides to exchange shares of a fund for shares of a different class of the same fund, the Corporation’s transfer agent will simultaneously exchange the shareholder’s existing shares for shares of the new class. Redemptions and exchanges of shares of the fund will be made at their net asset value determined on the same day that the request is received in proper order, if received before the close of regular trading on the Exchange. If the request is received by the transfer agent after such close of regular trading, shares will be redeemed or exchanged at their net asset value determined as of the close of the Exchange on the next day the Exchange is open.

There is no charge for the exchange privilege and no sales charge imposed on an exchange, but the funds reserve the right to modify or terminate the exchange privilege at any time. For more information concerning the exchange privilege, or to make an exchange, please contact Legg Mason Funds.

Systematic Withdrawal Plan

Shareholders with an initial net asset value of $1,000,000 or more are eligible to participate in the Systematic Withdrawal Plan. The amounts paid to you each month are obtained by redeeming sufficient shares from your account to provide the withdrawal amount that you have specified. Receipt of payment of proceeds or redemptions made through the Systematic Withdrawal Plan will be wired through ACH to your checking or savings account — redemptions of fund shares may occur on any business day of the month and the checking or savings account will generally be credited with the proceeds in approximately two business days.

Redemptions will be made at the net asset value per share determined as of the close of regular trading on the Exchange (normally 4:00 p.m., Eastern time) on the day corresponding to the redemption option designated by the investor. If the Exchange is not open for business on that day, the shares will be redeemed at the per share net asset value determined as of the close of regular trading on the Exchange on the next day the Exchange is open. If the redemption option designated is the last day of the month and the Exchange is not open for business on that day, the shares will be redeemed at the per share net asset value determined as of the previous day the Exchange was open. Requests must be made in writing to Legg Mason Funds to participate in, change or discontinue the Systematic Withdrawal Plan. You may change the monthly amount to be paid to you or terminate the Systematic Withdrawal Plan at any time without charge or penalty by notifying Legg Mason Institutional Services. Each fund, its transfer agent, and Legg Mason Funds also reserve the right to modify or terminate the Systematic Withdrawal Plan at any time.

Withdrawal payments are treated as a sale of shares rather than as a dividend or other distribution. These payments are taxable to the extent that the total amount of the payments exceeds the tax basis of the shares sold. If the periodic withdrawals exceed reinvested dividends and other distributions, the amount of your original investment may be correspondingly reduced.

Ordinarily, it may not be in your interest to purchase additional shares of a fund if you maintain a Systematic Withdrawal Plan, because there are tax disadvantages associated with such purchases and withdrawals.

Portfolio Transactions and Brokerage

The portfolio turnover rate is computed by dividing the lesser of purchases or sales of securities for the period by the average value of portfolio securities for that period. Short-term securities are excluded from the calculation.

For the following fiscal periods, the portfolio turnover rates of each operative fund were as follows:


Fund	2009		2008*		2008**
Western Asset Absolute Return Portfolio	257.6	%	229.6	%	386.9	%
Western Asset Core Bond Portfolio	220.8	%	140.8	%	455.0	%
Western Asset Core Plus Bond Portfolio	201.7	%	124.4	%	488.2	%
Western Asset High Yield Portfolio	83.7	%	40.9	%	59.1	%
Western Asset Inflation Indexed Plus Bond Portfolio	41.1	%	74.4	%	141.7	%
Western Asset Intermediate Bond Portfolio	174.7	%	164.7	%	239.0	%
Western Asset Intermediate Plus Bond Portfolio	153.7	%	181.5	%	300.0	%
Western Asset Limited Duration Bond Portfolio	167.7	%	261.3	%	312.1	%
Western Asset Non-U.S. Opportunity Bond Portfolio	87.2	%	52.2	%	68.4	%

*	Period from April 1, 2008 to December 31, 2008. Not annualized.

**	Prior to April 1, 2008 the Portfolios’ fiscal year ended March 31.

High portfolio turnover rates are likely to result in higher brokerage commissions or other transaction costs and could give rise to a greater amount of taxable capital gains.

Under the various Management Agreements and Advisory Agreements, the Manager and the Advisers are responsible for the execution of the funds’ transactions. Each fund’s Adviser places all orders for the purchase and the sale of portfolio investments with brokers or dealers selected by it in its discretion. Transactions on stock exchanges and other agency transactions involve the payment by the fund of brokerage commissions. There is generally no stated commission in the case of securities, such as U.S. Government securities, traded in the over-the-counter markets, but the price paid by the Corporation usually includes an undisclosed dealer commission or markup. In selecting brokers or dealers, the Advisers must seek the most favorable price (including the applicable dealer spread) and execution for such transactions. The funds may not always pay the lowest commission or spread available. Rather, in placing orders on behalf of the funds, the Advisers will also take into account such factors as size of the order, difficulty of execution, efficiency of the executing broker’s or dealer’s facilities and any risk assumed by the executing broker or dealer.

It is the current policy of the Advisers not to give consideration to research, statistical and other non-execution services (except as described below) furnished by brokers or dealers to the Advisers in selecting broker dealers to execute fund transactions (commonly known as “soft dollar” commission arrangements). However, an Adviser may receive research or statistical information from brokers or dealers with whom it executes trades.

The funds may use LMIS, among others, as broker for agency transactions in listed and over-the-counter securities at commission rates and under circumstances consistent with the policy of best execution. In the prior three fiscal years, the funds did not use LMIS or any other affiliated person as a broker.

Some securities considered by an Adviser for purchase by a fund may also be appropriate for other clients served by the Adviser. To the extent the fund and such other clients purchase the same security, transactions in such security will be allocated among the fund and such other clients in a manner considered fair and reasonable by the Adviser.

The funds may not buy securities from, or sell securities to, an Adviser or its affiliated persons as principal, except as permitted by the rules and regulations of the SEC or interpretations of the SEC staff. Subject to certain conditions, the funds may purchase securities that are offered in underwritings in which an affiliate of an Adviser is a participant, although the Portfolios may not make such purchases directly from such affiliate.

The Advisers will select brokers to execute portfolio transactions. In the over-the-counter market, the Portfolios generally will deal with responsible primary market makers unless a more favorable execution can otherwise be obtained.

Investment decisions for the funds are made independently from those of other funds and accounts advised by the Advisers. However, the same security may be held in the portfolios of more than one fund or account. When two or more accounts simultaneously engage in the purchase or sale of the same security, the prices and amounts will be equitably allocated to each account. In some cases, this procedure may adversely affect the price or quantity of the security available to a particular account. In other cases, however, an account’s ability to participate in larger volume transactions may produce better executions and prices. Depending on investment objectives, applicable law, governing documents, current holdings, cash availability, and other factors, the Advisers or their affiliates may sell or recommend the sale of a particular security for certain accounts and buy or recommend the purchase of such security for other accounts, and accordingly, transactions for the funds may not be consistent with transactions in other accounts or with the Advisers’ investment recommendations.

Western Asset’s Broker Review Committee periodically reviews the funds’ approved broker lists, broker allocation and execution to ensure that they are consistent with the funds’ stated policy.

For the following fiscal periods, the following funds paid commissions in the following amounts to broker-dealers and futures commission merchants who acted as agents in executing options and futures trades:


	2009		2008*		2008**		2007**
Western Asset Absolute Return Portfolio	$	82,540	$	140,774	$	189,929	$	69,249	***
Western Asset Core Bond Portfolio	$	937,986	$	1,221,135	$	4,193,905	$	2,501,110
Western Asset Core Plus Bond Portfolio	$	2,172,072	$	3,468,249	$	10,490,765	$	4,809,801
Western Asset High Yield Portfolio		None		None		None		None
Western Asset Inflation Indexed Plus Bond Portfolio	$	18,060	$	40,990	$	81,793	$	54,095
Western Asset Intermediate Bond Portfolio	$	167,707	$	126,185	$	133,740	$	142,230
Western Asset Intermediate Plus Bond Portfolio	$	27,375	$	28,011	$	27,919	$	22,513
Western Asset Limited Duration Bond Portfolio	$	11,926	$	32,210	$	41,345	$	31,110
Western Asset Non-U.S. Opportunity Bond Portfolio	$	68,230	$	115,823	$	90,655	$	36,244

*	Period from April 1, 2008 to December 31, 2008.

**	Prior to April 1, 2008 the Portfolios’ fiscal year ended March 31.

***	For the period of July 6, 2006 (commencement of operations) to March 31, 2007.

The commissions listed in the table above do not include mark-ups or commissions paid by the Portfolios with respect to purchases of securities traded in the over-the-counter markets. If such amounts were included, the amounts disclosed in the table would be substantially higher.

Codes of Ethics

The Corporation, the Manager, LMIS and each Adviser have adopted codes of ethics under Rule 17j-1 of the 1940 Act. These codes of ethics permit personnel subject to the codes to invest in securities, including securities that may be purchased or held by the Corporation.

Additional Tax Information

The following discussion of U.S. federal income tax consequences of an investment in a fund is based on the Code, U.S. Treasury regulations, and other applicable authority, all as of the date of this SAI. These authorities are subject to change by legislative or administrative action, possibly with retroactive effect. The following discussion is only a summary of some of the important U.S. federal tax considerations generally applicable to investments in a fund. There may be other tax considerations applicable to particular shareholders. Shareholders should consult their own tax advisors regarding their particular situations and the possible application of foreign, state and local tax laws.

On December 31, 2009, the unused capital loss carryforwards for Western Asset Absolute Return Portfolio was as follows $14,536,176. For federal income tax purposes, these amounts are available to be applied against future capital gains, if any, that are realized prior to the expiration of the applicable carryforwards. Of these capital loss carryforwards $1,073,088 expire in 2016 and $13,463,088 expire in 2017.

On December 31, 2009, the unused capital loss carryforwards for Western Asset Core Bond Portfolio was as follows $369,226,813. For federal income tax purposes, these amounts are available to be applied against future capital gains, if any, that are realized prior to the expiration of the applicable carryforwards. Of these capital loss carryforwards $84,734,017 expire in 2015, $33,885,094 expire in 2016 and $250,607,702 expire in 2017.

On December 31, 2009, the unused capital loss carryforwards for Western Asset Core Plus Bond Portfolio was as follows $625,371,745. For federal income tax purposes, these amounts are available to be applied against future capital gains, if any, that are realized prior to the expiration of the applicable carryforwards. Of these capital loss carryforwards $625,371,745 expire in 2017.

On December 31, 2009, the unused capital loss carryforwards for Western Asset High Yield Portfolio was as follows $133,165,665. For federal income tax purposes, these amounts are available to be applied against future capital gains, if any, that are realized prior to the expiration of the applicable carryforwards. Of these capital loss carryforwards $49,747,397 expire in 2016 and $83,418,268 expire in 2017.

On December 31, 2009, the unused capital loss carryforwards for Western Asset Inflation Indexed Plus Bond Portfolio was as follows $14,862,554. For federal income tax purposes, these amounts are available to be applied against future capital gains, if any, that are realized prior to the expiration of the applicable carryforwards. Of these capital loss carryforwards $6,600,414 expire in 2016 and $8,262,140 expire in 2017.

On December 31, 2009, the unused capital loss carryforwards for Western Asset Intermediate Bond Portfolio was as follows $2,434,470. For federal income tax purposes, these amounts are available to be applied against future capital gains, if any, that are realized prior to the expiration of the applicable carryforwards. Of these capital loss carryforwards $2,434,470 expire in 2017.

On December 31, 2009, the unused capital loss carryforwards for Western Asset Intermediate Plus Bond Portfolio was as follows $924,264. For federal income tax purposes, these amounts are available to be applied against future capital gains, if any, that are realized prior to the expiration of the applicable carryforwards. Of these capital loss carryforwards $924,264 expire in 2017.

On December 31, 2009, the unused capital loss carryforwards for Western Asset Limited Duration Bond Portfolio was as follows $9,047,525. For federal income tax purposes, these amounts are available to be applied against future capital gains, if any, that are realized prior to the expiration of the applicable carryforwards. Of these capital loss carryforwards $234,847 expire in 2013, $394,050 expire in 2014, $34,113 expire in 2015, $5,768,220 expire in 2016 and $2,616,295 expire in 2017.

On December 31, 2009, Western Asset Non-U.S. Opportunity Bond Portfolio did not have any unused capital loss carryforwards.

General Requirements for “Pass-through” Treatment

The funds intend to elect to be treated and qualify each year as regulated investment companies (“RICs”) under Subchapter M of the Code. In order to qualify for treatment as a RIC, each fund must, among other things:

(a)

derive at least 90% of its gross income for each taxable year from (i) dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including but not limited to gains from options, futures, or forward contracts) derived with respect to its business of investing in such stock, securities, or currencies, and (ii) net income derived from interests in “qualified publicly traded partnerships” (as defined below);

(b)

diversify its holdings so that, at the end of each quarter of the fund’s taxable year, (i) at least 50% of the value of the fund’s total assets is represented by cash and cash items, U.S. Government securities, securities of other regulated investment companies, and other securities limited in respect of any one issuer to a value not greater than 5% of the value of the fund’s total assets and not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of the fund’s total assets is invested (x) in the securities (other than those of the U.S. Government or other regulated investment companies) of any one issuer or of two or more issuers that the fund controls and that are engaged in the same, similar, or related trades or businesses, or (y) in the securities of one or more qualified publicly traded partnerships (as defined below); and

(c)

distribute with respect to each taxable year at least 90% of the sum of its investment company taxable income (as that term is defined in the Code without regard to the deduction for dividends paid — generally, taxable ordinary income and the excess, if any, of net short-term capital gains over net long-term capital losses) and net tax-exempt interest income, for such year.

In general, for purposes of the 90% gross income requirement described in paragraph (a) above, income derived from a partnership will be treated as qualifying income only to the extent such income is attributable to items of income of the partnership which would be qualifying income if realized by the fund. However, 100% of the net income derived from an interest in a “qualified publicly traded partnership” (defined as a partnership (x) the interests in which are traded on an established securities market or readily tradable on a secondary market or the substantial equivalent thereof, (y) that is treated as a partnership for federal income tax purposes because it meets the passive income requirement under Code section 7704(c)(2), and (z) that derives less than 90% of its income from the qualifying income described in section (a)(i) above) will be treated as qualifying income. In addition, although in general the passive loss rules of the Code do not apply to regulated investment companies, such rules do apply to a regulated investment company with respect to items attributable to an interest in a qualified publicly traded partnership.

For purposes of the diversification test in paragraph (b) above, the term “outstanding voting securities of such issuer” will include the equity securities of a qualified publicly traded partnership. Also for purposes of the diversification test in paragraph (b) above, identification of the issuer (or, in some cases, issuers) of certain fund investments will depend on the terms and conditions of the investment. In some cases, identification of the issuer (or issuers) is uncertain under current law, and an adverse determination or future guidance by the Internal Revenue Service (“IRS”) with respect to the identity of the issuer for a particular type of investment may adversely affect a fund’s ability to meet the diversification test.

If a fund qualifies as a regulated investment company that is accorded special tax treatment, the fund will not be subject to federal income tax on income distributed in a timely manner to its shareholders in the form of dividends (including Capital Gain Dividends, as defined below).

If a fund were to fail to qualify as a regulated investment company accorded special tax treatment in any taxable year, the fund would be subject to tax on its taxable income at corporate rates, and all distributions from earnings and profits, including any distributions of net tax-exempt income and net long-term capital gains, would be taxable to shareholders as dividend income. Some portions of such distributions may be eligible for the dividends received deduction in the case of corporate shareholders and may be eligible to be treated as “qualified dividend income” in the case of shareholders taxed as individuals, provided, in both cases, the shareholder meets certain holding period and other requirements in respect of the fund’s shares (as described below). In addition, the fund could be required to recognize unrealized gains, pay substantial taxes and interest and make substantial distributions before re-qualifying as a regulated investment company that is accorded special tax treatment.

If a fund fails to distribute in a calendar year at least 98% of its ordinary income for such year and at least 98% of its capital gain net income for the one-year period ending October 31, plus any retained amount from the prior year, the fund will be subject to a 4% excise tax on the undistributed amounts. For these purposes, a fund will be treated as having distributed any amount on which it has been subject to corporate income tax in the taxable year ending with the calendar year. A distribution declared by a fund in October, November or December of any year and payable to shareholders of record on a date in such months will be deemed to have been paid by the fund and received by the shareholders on December 31 of the year in which the distribution is declared if the distribution is paid by the fund during the following January. Such a distribution, therefore, will be taxable to shareholders for the year in which that December 31 falls. Each fund intends generally to make distributions sufficient to avoid imposition of the 4% excise tax, although there can be no assurance that it will be able to do so.

Certain of the funds may be treated as personal holding companies for federal income tax purposes. A fund that is a personal holding company would for each taxable year be subject to a 15% personal holding company tax on

any undistributed personal holding company income, as defined in Section 545 of the Code. Each fund that qualifies as a personal holding company intends to distribute all or substantially all of its personal holding company income with respect to each taxable year. For these purposes, a personal holding company may elect to treat certain dividends paid before the 15th day of the third month following the close of the taxable year as having been paid during the prior taxable year.

Each fund intends to distribute at least annually to its shareholders all or substantially all of its investment company taxable income (computed without regard to the dividends-paid deduction) and may distribute its net capital gain. Investment company taxable income that is retained by a fund will be subject to tax at regular corporate rates. A fund may also retain for investment its net capital gain. If a fund retains any net capital gain, it will be subject to tax at regular corporate rates on the amount retained, but may designate the retained amount as undistributed capital gains in a notice to its shareholders who (i) will be required to include in income for federal income tax purposes, as long-term capital gain, their respective shares of such undistributed amount, and (ii) will be entitled to credit their proportionate shares of the tax paid by the fund on such undistributed amount against their federal income tax liabilities, if any, and to claim refunds to the extent the credit exceeds such liabilities. For federal income tax purposes, the tax basis of shares owned by a shareholder of the fund will be increased by an amount equal to the difference between the amount of undistributed capital gains included in the shareholder’s gross income and the tax deemed paid by the shareholder under clause (ii) of the preceding sentence.

In determining its net capital gain for Capital Gain Dividend purposes, a regulated investment company generally must treat any net capital loss or any net long-term capital loss incurred after October 31 as if it had been incurred in the succeeding year. Treasury regulations permit a regulated investment company, in determining its taxable income, to elect to treat all or part of any net capital loss, any net long-term capital loss or any foreign currency loss incurred after October 31 as if it had been incurred in the succeeding year.

Capital losses in excess of capital gains (“net capital losses”) are not permitted to be deducted against a fund’s net investment income. A fund may carry net capital losses forward for up to eight years and use them to offset capital gains realized during that period. All net capital losses carried forward are treated as short-term capital losses, and will offset any short-term capital gains before offsetting any long-term capital gains. A fund’s ability to use net capital loss carryovers to offset gains may be subject to limitations. See the most recent annual shareholder report for each fund’s capital loss carryovers as of the end of its most recently ended fiscal year.

Distributions

Distributions are taxable whether shareholders receive them in cash or reinvest them in additional shares. A shareholder whose distributions are reinvested in shares will be treated as having received a dividend equal to the fair market value of the new shares issued.

Dividends and distributions on a fund’s shares are generally subject to federal income tax as described herein to the extent they do not exceed the fund’s realized income and gains, even though such dividends and distributions may economically represent a return of a particular shareholder’s investment (and thus were included in the price the shareholder paid for his or her shares). Such distributions are likely to occur in respect of shares purchased at a time when a fund’s net asset value reflects either unrealized gains or income and gains that have been realized but not distributed. Realized gains may be required to be distributed even when a fund’s net asset value also reflects unrealized losses.

For federal income tax purposes, distributions of investment income are generally taxable as ordinary income. Taxes on distributions of capital gains are determined by how long a fund owned the investments that generated them, rather than how long a shareholder has owned his or her shares. Distributions of net capital gains from the sale of investments that a fund owned for more than one year and that are properly designated by the fund as capital gain dividends (“Capital Gain Dividends”) will be taxable as long-term capital gains. Distributions from capital gains are generally made after applying any available capital loss carryovers. Long-term capital gain rates

applicable to individuals have been temporarily reduced — in general, to 15% with a 0% rate applying to taxpayers in the 10% and 15% rate brackets — for taxable years beginning before January 1, 2011. It is currently unclear whether Congress will extend the long-term capital gain rate reduction for taxable years beginning on or after January 1, 2011. Distributions of gains from the sale of investments that a fund owned for one year or less will be taxable as ordinary income.

For taxable years beginning before January 1, 2011, distributions designated by a fund as “qualified dividend income” and received by a shareholder taxed as an individual will be taxed at the rates applicable to long-term capital gain. In order for some portion of the dividends received by a fund shareholder to be qualified dividend income, the fund must meet holding period and other requirements with respect to some portion of the dividend-paying stocks in its portfolio and the shareholder must meet holding period and other requirements with respect to the fund’s shares. To the extent that a fund makes a distribution of income received by the fund in lieu of dividends (a “substitute payment”) with respect to securities on loan pursuant to a securities lending transaction, such income will not constitute qualified dividend income and thus will not be eligible for taxation at the rates applicable to long-term capital gain. It is not expected that a significant portion of distributions from the funds will be derived from qualified dividend income, and it is currently unclear whether Congress will extend the special tax treatment of qualified dividend income for taxable years beginning on or after January 1, 2011.

If a fund makes a distribution to its shareholders in excess of its current and accumulated “earnings and profits” in any taxable year, the excess distribution will be treated as a return of capital to the extent of a shareholder’s tax basis in his or her shares, and thereafter as capital gain. A return of capital is not taxable, but it reduces a shareholder’s tax basis in his or her shares, thus reducing any loss or increasing any gain on a subsequent taxable disposition of shares by such shareholder.

If a fund invests in shares of preferred stock or otherwise holds dividend-paying securities, for example as a result of exercising a conversion privilege, a portion of the dividends paid by the fund from its investment company taxable income (whether paid in cash or reinvested in additional shares) may be eligible for the dividends-received deduction allowed to corporations that meet certain holding period requirements. The eligible portion may not exceed the aggregate dividends received by the fund from U.S. corporations; however, dividends received by a corporate shareholder and deducted by it pursuant to the dividends-received deduction are subject indirectly to the alternative minimum tax. A dividend received by a fund will not be treated as a qualifying dividend (1) if the stock on which the dividend is paid is considered to be “debt-financed” (generally, acquired with borrowed funds), (2) if it has been received with respect to any share of stock that the fund has held for less than 46 days during the 91-day period beginning on the date which is 45 days before the date on which such share becomes ex-dividend with respect to such dividend (91 days during the 181-day period beginning 90 days before such date in the case of certain preferred stock) or (3) to the extent that the fund is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property. Moreover, the dividends received deduction may be disallowed or reduced (1) if the corporate shareholder fails to satisfy the foregoing requirements with respect to its shares of the fund or (2) otherwise by application of the Code.

To the extent distributions consist of interest from securities of the U.S. Government and certain of its agencies and instrumentalities, they may be exempt from state and local income taxes. Interest from obligations that are merely guaranteed by the U.S. Government or one of its agencies, such as mortgage participation certificates guaranteed by GNMA, generally is not entitled to this exemption. Although there is no assurance that any such state and local exemptions will be available, shareholders will be advised of the portion of fund distributions that might qualify for such an exemption.

Federal tax information with respect to distributions for each calendar year will be furnished to each shareholder early in the succeeding year.

Sale or Redemption of Shares

Upon the disposition of shares of a fund (whether by redemption, sale or exchange), a shareholder may realize gain or loss. In general, any gain or loss realized upon a taxable disposition of shares will be treated as long-term capital gain or loss if the shareholder has held the shares for more than 12 months. Otherwise, the gain or loss on the taxable disposition of fund shares will generally be treated as short-term capital gain or loss. As noted above, long-term capital gains realized before January 1, 2011 will generally be taxed at a rate of 15% to non-corporate shareholders (or at a 0% rate in the case of non-corporate shareholders in the 10% or 15% tax brackets). If shares of any fund are sold at a loss after being held for six months or less, the loss will be treated as long-term, instead of short-term, capital loss to the extent of any Capital Gain Dividends received on those shares. All or a portion of any loss realized upon a taxable disposition of fund shares will be disallowed if substantially identical shares are purchased within 30 days before or after the disposition. In such a case, the basis of the newly purchased shares will be adjusted to reflect the disallowed loss.

Original Issue Discount

A fund may purchase debt securities with original issue discount (“OID”), market discount or acquisition discount. Some debt obligations with a fixed maturity date of more than one year from the date of issuance (and all zero-coupon debt obligations with a fixed maturity date of more than one year from the date of issuance) that are acquired by a fund will be treated as debt obligations that are issued with OID. Generally, the amount of the OID is treated as interest income and is included in taxable income (and accordingly required to be distributed by a fund) over the term of the debt security, even though payment of that amount is not received until a later time, usually when the debt security matures. Periodic adjustments for inflation in the principal value of inflation-indexed bonds also may be treated as OID that is includible in the fund’s gross income on a current basis.

Some debt obligations with a fixed maturity date of one year or less from the date of issuance that are acquired by a fund may be treated as having acquisition discount or OID. Generally, the fund will be required to include the acquisition discount or OID in income over the term of the debt security, even though payment of that amount is not received until a later time, usually when the debt security matures. A fund may make one or more of the elections applicable to debt obligations having acquisition discount or OID, which could affect the character and timing of recognition of income from such debt obligations.

Some debt obligations with a fixed maturity date of more than one year from the date of issuance that are acquired by a fund in the secondary market may be treated as having market discount. Generally, any gain recognized on the disposition of, and any partial payment of principal on, a debt security having market discount is treated as ordinary income to the extent the gain, or principal payment, does not exceed the “accrued market discount” on such debt security. Market discount generally accrues in equal daily installments. A fund may make one or more of the elections applicable to debt obligations having market discount, which could affect the character and timing of recognition of income from such debt obligations.

Because the OID, market discount, or acquisition discount earned by a fund in a taxable year may exceed the total amount of cash interest the fund receives from the relevant debt obligations, the fund may have to dispose of other securities and use the proceeds thereof to make distributions in amounts necessary to satisfy distribution requirements. A fund may realize capital gains or losses from such dispositions, which would increase or decrease the fund’s investment company taxable income and/or net capital gain. In the event the fund realizes net capital gains from such transactions, its shareholders may receive a larger Capital Gain Dividends than they would in the absence of such transactions.

In addition, payment-in-kind securities will give rise to income which is required to be distributed and is taxable even though the fund holding the security receives no interest payment in cash on the security during the year.

Options, Futures, Forward Contracts and Swap Agreements

A fund’s transactions in options, futures contracts, hedging transactions, forward contracts, straddles and non-U.S. currencies will be subject to special tax rules (including mark-to-market, constructive sale, straddle, wash sale and short sale rules), the effect of which may be to accelerate income to the fund, defer losses to the fund, cause adjustments in the holding periods of the fund’s securities, convert long-term capital gains into short-term capital gains and convert short-term capital losses into long-term capital losses. These rules could therefore affect the amount, timing and character of distributions to shareholders.

As noted above, certain of a fund’s hedging activities (including its transactions, if any, in foreign currencies or foreign currency-denominated instruments) are likely to produce a difference between its book income and its taxable income. If the fund’s book income exceeds its taxable income, the distribution (if any) of such excess generally will be treated as (i) a dividend to the extent of the fund’s remaining earnings and profits (including earnings and profits arising from tax-exempt income), (ii) thereafter, as a return of capital to the extent of the recipient’s basis in its shares, and (iii) thereafter, as gain from the sale or exchange of a capital asset. If a fund’s book income is less than taxable income, it could be required to make distributions exceeding book income to qualify as a regulated investment company that is accorded special tax treatment.

A fund may seek exposure to commodities through a variety of investments, direct or indirect, which may affect the amount, timing and character of distributions to shareholders, The means by which a fund seeks exposure to commodities, both directly and indirectly, including through derivatives, may be limited by the fund’s intention to qualify as a regulated investment company under the Code.

High Yield Obligations

Some funds may invest to a significant extent in debt obligations that are in the lowest rating categories or are unrated, including debt obligations of issuers not currently paying interest or that are in default. Investments in debt obligations that are at risk of or in default present special tax issues for a fund. Tax rules are not entirely clear about issues such as when a fund may cease to accrue interest, OID or market discount, when and to what extent deductions may be taken for bad debts or worthless securities and how payments received on obligations in default should be allocated between principal and income. These and other related issues will be addressed by each fund when, as and if it invests in such securities, in order to seek to ensure that it distributes sufficient income to preserve its status as a regulated investment company and does not become subject to U.S. federal income or excise tax.

For funds investing in high yield obligations, a portion of the interest paid or accrued on such obligations may not (and interest paid on debt obligations, if any, that are considered for tax purposes to be payable in the equity of the issuer or a related party will not) be deductible to the issuer. If a portion of the interest paid or accrued on certain high yield discount obligations is not deductible by the issuer, that portion will be treated as a dividend for purposes of the corporate dividends received deduction. In such cases, if the issuer of the high yield discount obligations is a domestic corporation, dividend payments by the fund may be eligible for the dividends received deduction to the extent of the deemed dividend portion of such accrued interest.

Foreign Currencies

A fund’s transactions in non-U.S. currencies, non-U.S. denominated debt obligations and hedging activities may give rise to ordinary income or loss to the extent such income or loss results from fluctuations in the value of the non-U.S. currency concerned. In addition, such activities may produce a difference between book income and taxable income. This difference may cause a portion of a fund’s income distributions to constitute a return of capital for tax purposes or require a fund to make distributions exceeding book income to qualify as a regulated investment company for tax purposes.

Foreign Taxation

Dividends and interest received by a fund, and gains realized by a fund on non-U.S. securities, may be subject to income, withholding or other taxes imposed by non-U.S. countries and U.S. possessions that would reduce the yield on those securities. Tax conventions between certain countries and the United States may reduce or eliminate these non-U.S. taxes.

If at the end of a fund’s fiscal year securities of non-U.S. corporations represent more than 50% of the value of its total assets, the fund may make an election to treat any non-U.S. taxes paid by it as paid by its shareholders. In this case, shareholders who are U.S. citizens, U.S. corporations or, in some cases, U.S. residents generally will be required to include in U.S. taxable income their pro rata share of such taxes, but may then be entitled to claim a foreign tax credit or deduction (but not both) for their share of such taxes. A shareholder’s ability to claim a foreign tax credit or deduction in respect of non-U.S. taxes paid by a fund may be subject to certain limitations (including a holding period requirement, applicable to both a fund and its shareholders, imposed by the Code), which may result in the shareholders not receiving a full credit or deduction for the amount of such taxes. Shareholders who do not itemize on their U.S. federal income tax returns may claim a credit (but not a deduction) for such foreign taxes. Even if a fund is eligible to make the election to treat non-U.S. taxes paid by it as paid by its shareholders, the fund may choose not to do so.

Passive Foreign Investment Companies

Equity investments by a fund in certain “passive foreign investment companies” (“PFICs”) could potentially subject the fund to a U.S. federal income tax or other charges (including interest charges) on the distributions received from a PFIC or on proceeds received from the disposition of shares in a PFIC. This tax cannot be eliminated by making distributions to fund shareholders. However, a fund may make an election to avoid the imposition of that tax. For example, the fund may in certain cases elect to treat a PFIC as a “qualified electing fund” (a “QEF election”), in which case the fund will be required to include in its income its share of the company’s income and net capital gains annually, regardless of whether it receives any distribution from the company. The fund also may make an election to mark the gains (and to a limited extent losses) in a PFIC “to the market” as though it had sold and repurchased its holdings in the PFIC on the last day of the fund’s taxable year. Such gains and losses are treated as ordinary income and loss. The QEF and mark-to-market elections may accelerate the recognition of income (without the receipt of cash) and increase the amount required to be distributed by the fund to avoid taxation. Making either of these elections therefore may require a fund to liquidate other investments (including when it is not advantageous to do so) to meet its distribution requirement, which also may accelerate the recognition of gain and affect the fund’s total return. Dividends paid by PFICs will not be eligible to be treated as “qualified dividend income.”

Tax-Exempt Shareholders

Income of a fund that would be unrelated business taxable income (“UBTI”) if earned directly by a tax-exempt entity will not generally be attributed as UBTI to a tax-exempt shareholder of the fund. Notwithstanding this “blocking” effect, a tax-exempt shareholder could realize UBTI by virtue of its investment in a fund if its fund shares constitute debt-financed property in the hands of the tax-exempt shareholder within the meaning of Code Section 514(b).

In addition, special tax consequences apply to charitable remainder trusts (“CRTs”) that invest in regulated investment companies that invest directly or indirectly in residual interests in real estate mortgage investment conduits or in taxable mortgage pools. Under legislation enacted in December 2006, a charitable remainder trust, as defined in section 664 of the Code, that realizes UBTI for a taxable year must pay an excise tax annually of an amount equal to such UBTI. Under IRS guidance issued in October 2006, a CRT will not recognize UBTI as a result of investing in a fund that recognizes “excess inclusion income.” Rather, if at any time during any taxable year a CRT (or one of certain other tax-exempt shareholders, such as the United States, a state or political

subdivision, or an agency or instrumentality thereof, and certain energy cooperatives) is a record holder of a share in a fund that recognizes “excess inclusion income,” then a fund will be subject to a tax on that portion of its “excess inclusion income” for the taxable year that is allocable to such shareholders at the highest federal corporate income tax rate. The extent to which this IRS guidance remains applicable in light of the December 2006 legislation is unclear. To the extent permitted under the 1940 Act, each fund may elect to specially allocate any such tax to the applicable CRT, or other shareholder, and thus reduce such shareholder’s distributions for the year by the amount of the tax that relates to such shareholder’s interest in the fund. The funds have not yet determined whether such an election will be made. CRTs are urged to consult their tax advisors concerning the consequences of investing in a fund.

Foreign Shareholders

In general, dividends (other than Capital Gain Dividends) paid to a shareholder that is not a “United States person” within the meaning of the Code (such a shareholder, a “foreign person”) are subject to withholding of U.S. federal income tax at a rate of 30% (or lower applicable treaty rate) even if they are funded by income or gains (such as portfolio interest, short-term capital gains, or foreign-source dividend and interest income) that, if paid to a foreign shareholder directly, would not be subject to withholding. Distributions properly designated as Capital Gain Dividends generally are not subject to withholding of U.S. federal income tax.

Effective for taxable years of the funds beginning before January 1, 2010, the funds generally were not be required to withhold any amounts with respect to properly designated distributions of (i) U.S.-source interest income that would not be subject to U.S. federal income tax if earned directly by a foreign person and (ii) net short-term capital gains in excess of net long-term capital losses. Pending legislation proposes to extend the exemption from withholding for interest-related dividends and short-term capital gain dividends for one additional year, i.e., for dividends with respect to taxable years beginning on or after January 1, 2010 but before January 1, 2011. As of the date of this SAI, it is unclear whether such legislation will be enacted, and, if enacted, what the terms of the extension will be.

Even if the exemptions from withholding for interest-related and short-term capital gain dividends are extended, each fund may, depending on the circumstances, make such designations with respect to all, some or none of its potentially eligible dividends and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. In the case of shares held through an intermediary, the intermediary may withhold even if a fund makes a designation with respect to a payment. Foreign persons should contact their intermediaries regarding the application of these rules to their accounts.

A beneficial holder of shares who or which is a foreign person is not, in general, subject to U.S. federal income tax on gains (and is not allowed a deduction for losses) realized on the sale of shares of a fund or on Capital Gain Dividends unless (i) such gain or dividend is effectively connected with the conduct of a trade or business carried on by such holder within the United States or (ii) in the case of an individual holder, the holder is present in the United States for a period or periods aggregating 183 days or more during the year of the sale or the receipt of the Capital Gain Dividend and certain other conditions are met.

If a shareholder is eligible for the benefits of a tax treaty, any effectively connected income or gain will generally be subject to U.S. federal income tax on a net basis only if it is also attributable to a permanent establishment maintained by the shareholder in the United States. Foreign investors in a fund should consult their tax advisers in this regard.

In order to qualify for any exemptions from withholding described above or for lower withholding tax rates under income tax treaties, or to establish an exemption from backup withholding, a foreign person must comply with special certification and filing requirements relating to its non-US status (including, in general, furnishing an IRS Form W-8BEN or substitute form). Foreign investors in the Fund should consult their tax advisers regarding these certification requirements.

A beneficial holder of shares who is a foreign person may be subject to state and local tax and to the U.S. federal estate tax in addition to the federal tax on income referred to above.

Backup Withholding

The funds generally are required to withhold and remit to the U.S. Treasury a percentage of the taxable dividends and other distributions paid to and proceeds of share sales, exchanges, or redemptions made by any individual shareholder who fails to properly furnish a fund with a correct taxpayer identification number (TIN), who has under-reported dividends or interest income, or who fails to certify to the fund that he or she is not subject to such withholding. The backup withholding tax rate is 28% for amounts paid through December 31, 2010 and the backup withholding tax rate will be 31% for amounts paid after December 31, 2010. Corporate shareholders and certain other shareholders specified in the Code generally are exempt from such backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholder’s U.S. federal income tax liability, provided the appropriate information is furnished to the IRS. Foreign investors in a fund should consult their tax advisers in this regard.

Tax Shelter Reporting Regulations

Under U.S. Treasury regulations, if a shareholder recognizes a loss with respect to a fund’s shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a regulated investment company are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all regulated investment companies. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.

Other Taxation

The foregoing discussion of U.S. federal income tax consequences is based on the Code, existing U.S. Treasury regulations, and other applicable authority, as of the date of this Statement of Additional Information. These authorities are subject to change by legislative or administrative action, possibly with retroactive effect. The foregoing discussion is only a summary of some of the important U.S. federal tax considerations generally applicable to investments in the fund. There may be other tax considerations applicable to particular shareholders. Shareholders should consult their own tax advisers regarding their particular situations and the possible application of foreign, state and local tax laws.

Other Information

Western Asset Funds, Inc. was incorporated in Maryland on May 16, 1990. Prior to May 31, 2001, Western Asset Funds, Inc. was known as “LM Institutional Fund Advisors I, Inc.” and prior to May 29, 1998, was known as “Western Asset Trust, Inc.” Each fund is an open-end, diversified management investment company, except for Western Asset Non-U.S. Opportunity Bond Portfolio and Western Asset Global Strategic Income Portfolio, which are non-diversified companies. The Directors of Western Asset Funds, Inc. may, without shareholder approval, create, in addition to the funds, other series of shares representing separate investment funds. Any such series may be divided without shareholder approval into two or more classes of shares having such terms as the Directors may determine. Establishment and offering of additional funds or classes of shares of a fund will not alter the rights of the Corporation’s shareholders.

Western Asset Funds, Inc. is authorized to issue a total of 21.15 billion shares of common stock at par value $0.001. Each share has one vote, with fractional shares voting proportionally. Voting on matters pertinent only to a particular fund, such as the adoption of an investment advisory contract for that fund, is limited to that fund’s shareholders. Shares of all classes of a fund will vote together as a single class except when otherwise required by law or as determined by the Directors. Shares are freely transferable, are entitled to dividends as declared by the Directors, and, if a fund were liquidated, would receive the net assets of that fund. Voting rights are not cumulative, and all shares of the funds are fully paid, redeemable and nonassessable and have no conversion rights. Shares do not have preemptive rights or subscription rights.

Although no fund intends to hold annual shareholder meetings, it will hold a special meeting of shareholders when the 1940 Act requires a shareholder vote on certain matters (including the election of Directors or approval of an advisory contract) in certain cases.

Prior to May 21, 1998, the Western Asset Core Portfolio was known as the Core Portfolio and the Western Asset Intermediate Portfolio was known as the Intermediate Portfolio. Prior to August 1, 2003, the Western Asset Core Bond Portfolio was known as the Western Asset Core Portfolio; the Western Asset Core Plus Bond Portfolio was known as the Western Asset Core Plus Portfolio; the Western Asset Intermediate Bond Portfolio was known as the Western Asset Intermediate Portfolio; the Western Asset Intermediate Plus Bond Portfolio was known as the Western Asset Intermediate Plus Portfolio; the Western Asset Non-U.S. Opportunity Bond Portfolio was known as the Western Asset Non-U.S. Fixed Income Portfolio; and the Western Asset Inflation Indexed Plus Bond Portfolio was known as the Western Asset Inflation Indexed Bond Portfolio.

Custodian, Transfer Agent and Dividend-Disbursing Agent

State Street Bank and Trust Company (“State Street”), P.O. Box 1790, Boston, MA 02105, serves as custodian of the Corporation’s assets. As such, State Street holds in safekeeping certificated securities and cash belonging to the Corporation and, in such capacity, is the registered owner of securities in book-entry form belonging to the Corporation. Upon instruction, State Street receives and delivers cash and securities of the Corporation in connection with fund transactions and collects all dividends and other distributions made with respect to a fund’s securities. State Street also maintains certain accounts and records of the Corporation. State Street also calculates the total net asset value, total net income and net asset value per share of each fund on a daily basis (and as otherwise may be required by the 1940 Act) and performs certain accounting services for all funds of the Corporation.

Boston Financial Data Services, Inc., P.O. Box 953, Quincy, MA 02171, serves as transfer and dividend-disbursing agent and administrator of various shareholder services pursuant to a delegation of such duties from State Street. Shareholders who request a historical transcript of their account will be charged a fee based upon the number of years researched. The Corporation reserves the right, upon 60 days’ written notice, to make other charges to investors to cover administrative costs. The Manager is responsible for the payment of any transfer agency fees in excess of 0.25% of the average daily net assets of a fund’s class of shares.

Independent Registered Public Accounting Firm

The financial statements and financial highlights for each fund of the Corporation incorporated by reference in this SAI by reference to the Annual Report for the fiscal year ended December 31, 2009 have been so incorporated in reliance on the report of PricewaterhouseCoopers LLP, 100 E. Pratt Street, Suite 1900, Baltimore, MD 21202, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

Legal Counsel

Ropes & Gray LLP, New York, New York, serves as legal counsel to the Corporation.

Appendix A: Ratings of Securities

Description of Moody’s Investors Service, Inc. (“Moody’s”) Ratings:

Long-Term Debt Ratings

Aaa — Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk.

Aa — Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.

A — Obligations rated A are considered upper-medium grade and are subject to low credit risk.

Baa — Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics.

Ba — Obligations rated Ba are judged to have speculative elements and are subject to substantial credit risk.

B — Obligations rated B are considered speculative and are subject to high credit risk.

Caa — Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk.

Ca — Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.

C — Obligations rated C are the lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest.

Modifiers: Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.

Short-Term Debt Ratings

Prime-1 — Issuers with a Prime-1 (or supporting institutions) have a superior ability for repayment of short-term debt obligations.

Prime-2 — Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of short-term debt obligations.

Prime-3 — Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of short-term obligations.

Not Prime — Issuers (or supporting institutions) rated not prime do not fall within any of the Prime rating categories.

Description of Standard & Poor’s (“S&P”) Ratings:

Long-Term Issue Credit Ratings

AAA — An obligation rated AAA has the highest rating assigned by S&P. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong.

Appendix A

AA — An obligation rated AA differs from the highest rated obligations only to a small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong.

A — An obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.

BBB — An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

Obligations rated BB, B, CCC, CC, and C are regarded as having significant speculative characteristics. BB indicates the least degree of speculation and C the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.

BB — An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

B — An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation.

CCC — An obligation rated CCC is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.

CC — An obligation rated CC is currently highly vulnerable to nonpayment.

C — A ‘C’ rating is assigned to obligations that are currently highly vulnerable to nonpayment, obligations that have payment arrearages allowed by the terms of the documents, or obligations of an issuer that is the subject of a bankruptcy petition or similar action which have not experienced a payment default. Among others, the ‘C’ rating may be assigned to subordinated debt, preferred stock or other obligations on which cash payments have been suspended in accordance with the instrument’s terms.

D — An obligation rated ‘D’ is in payment default. The ‘D’ rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor’s believes that such payments will be made during such grace period. The ‘D’ rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.

Plus (+) or minus (-) — The ratings from AA to CCC may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.

pr — The letters pr indicates that the rating is provisional. A provisional rating assumes the successful completion of the project financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of or the risk of default upon failure of such completion. The investor should exercise his own judgment with respect to such likelihood and risk.

NR Not rated.

Appendix A

Commercial Paper

A-1. — A short-term obligation rated ‘A-1’ is rated in the highest category by Standard & Poor’s. The obligor’s capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor’s capacity to meet its financial commitment on these obligations is extremely strong.

A-2. — A short-term obligation rated ‘A-2’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor’s capacity to meet its financial commitment on the obligation is satisfactory

A-3. — A short-term obligation rated ‘A-3’ exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

Appendix A

Appendix B: Proxy Voting Policy

POLICY

As a fixed income only manager, the occasion to vote proxies is very rare. However, the Firm has adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and SEC Rule 206(4)-6 under the Investment Advisers Act of 1940 (“Advisers Act”). In addition to SEC requirements governing advisers, our proxy voting policies reflect the long-standing fiduciary standards and responsibilities for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the Investment Manager.

While the guidelines included in the procedures are intended to provide a benchmark for voting standards, each vote is ultimately cast on a case-by-case basis, taking into consideration the Firm’s contractual obligations to our clients and all other relevant facts and circumstances at the time of the vote (such that these guidelines may be overridden to the extent the Firm deems appropriate).

In exercising its voting authority, Western Asset will not consult or enter into agreements with officers, directors or employees of Legg Mason Inc. or any of its affiliates (other than Western Asset Management Company Limited, Western Asset Management Company Ltd. and Western Asset Management Company Pte. Ltd.) regarding the voting of any securities owned by its clients.

PROCEDURE

Responsibility and Oversight

The Western Asset Legal and Compliance Department (“Compliance Department”) is responsible for administering and overseeing the proxy voting process. The gathering of proxies is coordinated through the Corporate Actions area of Investment Support (“Corporate Actions”). Research analysts and portfolio managers are responsible for determining appropriate voting positions on each proxy utilizing any applicable guidelines contained in these procedures.

Client Authority

The Investment Management Agreement for each client is reviewed at account start-up for proxy voting instructions. If an agreement is silent on proxy voting, but contains an overall delegation of discretionary authority or if the account represents assets of an ERISA plan, Western Asset will assume responsibility for proxy voting. The Legal and Compliance Department maintains a matrix of proxy voting authority.

Proxy Gathering

Registered owners of record, client custodians, client banks and trustees (“Proxy Recipients”) that receive proxy materials on behalf of clients should forward them to Corporate Actions. Proxy Recipients for new clients (or, if Western Asset becomes aware that the applicable Proxy Recipient for an existing client has changed, the Proxy Recipient for the existing client) are notified at start-up of appropriate routing to Corporate Actions of proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. If Western Asset personnel other than Corporate Actions receive proxy materials, they should promptly forward the materials to Corporate Actions.

Proxy Voting

Once proxy materials are received by Corporate Actions, they are forwarded to the Legal and Compliance Department for coordination and the following actions:

a. Proxies are reviewed to determine accounts impacted.

Appendix B

b. Impacted accounts are checked to confirm Western Asset voting authority.

c. Legal and Compliance Department staff reviews proxy issues to determine any material conflicts of interest. (See conflicts of interest section of these procedures for further information on determining material conflicts of interest.)

d. If a material conflict of interest exists, (i) to the extent reasonably practicable and permitted by applicable law, the client is promptly notified, the conflict is disclosed and Western Asset obtains the client’s proxy voting instructions, and (ii) to the extent that it is not reasonably practicable or permitted by applicable law to notify the client and obtain such instructions (e.g., the client is a mutual fund or other commingled vehicle or is an ERISA plan client), Western Asset seeks voting instructions from an independent third party.

e. Legal and Compliance Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers determine votes on a case-by-case basis taking into account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, Western Asset may vote the same proxy differently for different clients. The analyst’s or portfolio manager’s basis for their decision is documented and maintained by the Legal and Compliance Department.

f. Legal and Compliance Department staff votes the proxy pursuant to the instructions received in (d) or (e) and returns the voted proxy as indicated in the proxy materials.

Timing

Western Asset personnel act in such a manner to ensure that, absent special circumstances, the proxy gathering and proxy voting steps noted above can be completed before the applicable deadline for returning proxy votes.

Recordkeeping

Western Asset maintains records of proxies voted pursuant to Section 204-2 of the Advisers Act and ERISA DOL Bulletin 94-2. These records include:

a. A copy of Western Asset’s policies and procedures.

b. Copies of proxy statements received regarding client securities.

c. A copy of any document created by Western Asset that was material to making a decision how to vote proxies.

d. Each written client request for proxy voting records and Western Asset’s written response to both verbal and written client requests.

e. A proxy log including:

1. Issuer name;

2. Exchange ticker symbol of the issuer’s shares to be voted;

3. Council on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted;

4. A brief identification of the matter voted on;

5. Whether the matter was proposed by the issuer or by a shareholder of the issuer;

6. Whether a vote was cast on the matter;

7. A record of how the vote was cast; and

Appendix B

8. Whether the vote was cast for or against the recommendation of the issuer’s management team.

Records are maintained in an easily accessible place for five years, the first two in Western Asset’s offices.

Disclosure

Western Asset’s proxy policies are described in the firm’s Part II of Form ADV. Clients will be provided a copy of these policies and procedures upon request. In addition, upon request, clients may receive reports on how their proxies have been voted.

Conflicts of Interest

All proxies are reviewed by the Legal and Compliance Department for material conflicts of interest. Issues to be reviewed include, but are not limited to:

1. Whether Western (or, to the extent required to be considered by applicable law, its affiliates) manages assets for the company or an employee group of the company or otherwise has an interest in the company;

2. Whether Western or an officer or director of Western or the applicable portfolio manager or analyst responsible for recommending the proxy vote (together, “Voting Persons”) is a close relative of or has a personal or business relationship with an executive, director or person who is a candidate for director of the company or is a participant in a proxy contest; and

3. Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders.

Voting Guidelines

Western Asset’s substantive voting decisions turn on the particular facts and circumstances of each proxy vote and are evaluated by the designated research analyst or portfolio manager. The examples outlined below are meant as guidelines to aid in the decision making process.

Guidelines are grouped according to the types of proposals generally presented to shareholders. Part I deals with proposals which have been approved and are recommended by a company’s board of directors; Part II deals with proposals submitted by shareholders for inclusion in proxy statements; Part III addresses issues relating to voting shares of investment companies; and Part IV addresses unique considerations pertaining to foreign issuers.

I. Board Approved Proposals

The vast majority of matters presented to shareholders for a vote involve proposals made by a company itself that have been approved and recommended by its board of directors. In view of the enhanced corporate governance practices currently being implemented in public companies, Western Asset generally votes in support of decisions reached by independent boards of directors. More specific guidelines related to certain board-approved proposals are as follows:

1. Matters relating to the Board of Directors

Western Asset votes proxies for the election of the company’s nominees for directors and for board-approved proposals on other matters relating to the board of directors with the following exceptions:

a. Votes are withheld for the entire board of directors if the board does not have a majority of independent directors or the board does not have nominating, audit and compensation committees composed solely of independent directors.

Appendix B

b. Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director.

c. Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences.

d. Votes are cast on a case-by-case basis in contested elections of directors.

2. Matters relating to Executive Compensation

Western Asset generally favors compensation programs that relate executive compensation to a company’s long-term performance. Votes are cast on a case-by-case basis on board-approved proposals relating to executive compensation, except as follows:

a. Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for stock option plans that will result in a minimal annual dilution.

b. Western Asset votes against stock option plans or proposals that permit replacing or repricing of underwater options.

c. Western Asset votes against stock option plans that permit issuance of options with an exercise price below the stock’s current market price.

d. Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for employee stock purchase plans that limit the discount for shares purchased under the plan to no more than 15% of their market value, have an offering period of 27 months or less and result in dilution of 10% or less.

3. Matters relating to Capitalization

The management of a company’s capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstances of each company. As a result, Western Asset votes on a case-by-case basis on board-approved proposals involving changes to a company’s capitalization except where Western Asset is otherwise withholding votes for the entire board of directors.

a. Western Asset votes for proposals relating to the authorization of additional common stock.

b. Western Asset votes for proposals to effect stock splits (excluding reverse stock splits).

c. Western Asset votes for proposals authorizing share repurchase programs.

4. Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions

Western Asset votes these issues on a case-by-case basis on board-approved transactions.

5. Matters relating to Anti-Takeover Measures

Western Asset votes against board-approved proposals to adopt anti-takeover measures except as follows:

a. Western Asset votes on a case-by-case basis on proposals to ratify or approve shareholder rights plans.

b. Western Asset votes on a case-by-case basis on proposals to adopt fair price provisions.

6. Other Business Matters

Western Asset votes for board-approved proposals approving such routine business matters such as changing the company’s name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting.

a. Western Asset votes on a case-by-case basis on proposals to amend a company’s charter or bylaws.

Appendix B

b. Western Asset votes against authorization to transact other unidentified, substantive business at the meeting.

II. Shareholder Proposals

SEC regulations permit shareholders to submit proposals for inclusion in a company’s proxy statement. These proposals generally seek to change some aspect of a company’s corporate governance structure or to change some aspect of its business operations. Western Asset votes in accordance with the recommendation of the company’s board of directors on all shareholder proposals, except as follows:

1. Western Asset votes for shareholder proposals to require shareholder approval of shareholder rights plans.

2. Western Asset votes for shareholder proposals that are consistent with Western Asset’s proxy voting guidelines for board-approved proposals.

3. Western Asset votes on a case-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors.

III. Voting Shares of Investment Companies

Western Asset may utilize shares of open or closed-end investment companies to implement its investment strategies. Shareholder votes for investment companies that fall within the categories listed in Parts I and II above are voted in accordance with those guidelines.

1. Western Asset votes on a case-by-case basis on proposals relating to changes in the investment objectives of an investment company taking into account the original intent of the fund and the role the fund plays in the clients’ portfolios.

2. Western Asset votes on a case-by-case basis all proposals that would result in increases in expenses (e.g., proposals to adopt 12b-1 plans, alter investment advisory arrangements or approve fund mergers) taking into account comparable expenses for similar funds and the services to be provided.

IV. Voting Shares of Foreign Issuers

In the event Western Asset is required to vote on securities held in non-U.S. issuers – i.e. issuers that are incorporated under the laws of a foreign jurisdiction and that are not listed on a U.S. securities exchange or the NASDAQ stock market, the following guidelines are used, which are premised on the existence of a sound corporate governance and disclosure framework. These guidelines, however, may not be appropriate under some circumstances for foreign issuers and therefore apply only where applicable.

1. Western Asset votes for shareholder proposals calling for a majority of the directors to be independent of management.

2. Western Asset votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees.

3. Western Asset votes for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of U.S. stock exchanges, and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated.

4. Western Asset votes on a case-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of a company’s outstanding common stock where shareholders do not have preemptive rights, or (2) the issuance of common stock in excess of 100% of a company’s outstanding common stock where shareholders have preemptive rights.

Appendix B

Appendix C: Procedures for Shareholders to Submit Nominee Candidates

A Western Asset Funds, Inc. (“Fund”) shareholder must follow the following procedures in order to properly submit a nominee recommendation for the Governance and Nominating Committee’s consideration.

The shareholder must submit any such recommendation (a “Shareholder Recommendation”) in writing to the Fund, to the attention of the Secretary, at the address of the principal executive offices of the Fund.

The Shareholder Recommendation must be delivered to or mailed and received at the principal executive offices of the Fund not less than one hundred and twenty (120) calendar days nor more than one hundred and thirty-five (135) calendar days prior to the date of the Board or shareholder meeting at which the nominee would be elected.

The Shareholder Recommendation must include: (i) a statement in writing setting forth (A) the name, age, date of birth, business address, residence address and nationality of the person recommended by the shareholder (the “candidate”); (B) the class or series and number of all shares of the Fund owned of record or beneficially by the candidate, as reported to such shareholder by the candidate; (C) any other information regarding the candidate called for with respect to director nominees by paragraphs (a), (d), (e) and (f) of Item 401 of Regulation S-K or paragraph (b) of Item 22 of Rule 14a-101 (Schedule 14A) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), adopted by the Securities and Exchange Commission (or the corresponding provisions of any regulation or rule subsequently adopted by the Securities and Exchange Commission or any successor agency applicable to the Fund); (D) any other information regarding the candidate that would be required to be disclosed if the candidate were a nominee in a proxy statement or other filing required to be made in connection with solicitation of proxies for election of Trustees or directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder; and (E) whether the recommending shareholder believes that the candidate is or will be an “interested person” of the Fund (as defined in the Investment Company Act of 1940, as amended) and, if not an “interested person,” information regarding the candidate that will be sufficient for the Fund to make such determination; (ii) the written and signed consent of the candidate to be named as a nominee and to serve as a Trustee if elected; (iii) the recommending shareholder’s name as it appears on the Fund’s books; (iv) the class or series and number of all shares of the Fund owned beneficially and of record by the recommending shareholder; and (v) a description of all arrangements or understandings between the recommending shareholder and the candidate and any other person or persons (including their names) pursuant to which the recommendation is being made by the recommending shareholder. In addition, the Governance and Nominating Committee may require the candidate to furnish such other information as it may reasonably require or deem necessary to determine the eligibility of such candidate to serve on the Board.

Appendix C


Fund		Fee rate (%)
Western Asset Absolute Return Portfolio		0.75
Western Asset Core Bond Portfolio		0.41
Western Asset Core Plus Bond Portfolio		0.40
Western Asset Enhanced Equity Portfolio		0.55
Western Asset Global Strategic Income Portfolio		0.45
Western Asset High Yield Portfolio		0.55
Western Asset Inflation Indexed Plus Bond Portfolio		0.20
Western Asset Intermediate Bond Portfolio		0.40
Western Asset Intermediate Plus Bond Portfolio		0.40
Western Asset Limited Duration Bond Portfolio		0.35
Western Asset Non-U.S. Opportunity Bond Portfolio		0.45


Fund	Class IS Expense Limit (%)	Class FI Expense Limit (%)
Western Asset Absolute Return Portfolio	0.80	1.05
Western Asset Core Bond Portfolio	0.50	0.75
Western Asset Core Plus Bond Portfolio	0.45	0.70
Western Asset Enhanced Equity Portfolio	0.65	0.90
Western Asset Global Strategic Income Portfolio	0.80	1.05
Western Asset High Yield Portfolio	0.65	0.90
Western Asset Inflation Indexed Plus Bond Portfolio	0.25	0.75
Western Asset Intermediate Bond Portfolio	0.45	0.70
Western Asset Intermediate Plus Bond Portfolio	0.45	0.70
Western Asset Limited Duration Bond Portfolio	0.40	0.65
Western Asset Non-U.S. Opportunity Bond Portfolio	0.55	0.80


Fund		Annual Rate of Waiver/Reimbursement (%)
Western Asset Core Bond Portfolio		None
Western Asset Core Plus Bond Portfolio		None
Western Asset Enhanced Equity Portfolio		0.10
Western Asset Global Strategic Income Portfolio		0.05
Western Asset High Yield Portfolio		None
Western Asset Inflation Indexed Plus Bond Portfolio		0.02
Western Asset Intermediate Bond Portfolio		None
Western Asset Intermediate Plus Bond Portfolio		0.13
Western Asset Limited Duration Bond Portfolio		0.10
Western Asset Non-U.S. Opportunity Bond Portfolio		0.04