UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-04254

Legg Mason Partners Income Trust

(Exact name of registrant as specified in charter)

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

(Address of principal executive offices) (Zip code)

Robert I. Frenkel, Esq.

Legg Mason & Co., LLC

100 First Stamford Place

Stamford, CT 06902

(Name and address of agent for service)

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

Date of fiscal year end: December 31

Date of reporting period: December 31, 2016

ITEM 1. REPORT TO STOCKHOLDERS.

The Annual Report to Stockholders is filed herewith.

Annual Report December 31, 2016

WESTERN ASSET

MORTGAGE BACKED

SECURITIES FUND

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

What’s inside
Letter from the president	II
Investment commentary	III
Fund overview	1
Fund at a glance	7
Fund expenses	8
Fund performance	10
Spread duration	12
Effective duration	13
Schedule of investments	14
Statement of assets and liabilities	26
Statement of operations	28
Statements of changes in net assets	29
Financial highlights	30
Notes to financial statements	36
Report of independent registered public accounting firm	57
Board approval of management and subadvisory agreements	58
Additional information	63

Fund objective

The Fund seeks high current return.

Letter from the president

Dear Shareholder,

We are pleased to provide the annual report of Western Asset Mortgage Backed Securities Fund for the twelve-month reporting period ended December 31, 2016. Please read on for a detailed look at prevailing economic and market conditions during the Fund’s reporting period and to learn how those conditions have affected Fund performance.

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

• Fund prices and performance,

• Market insights and commentaries from our portfolio managers, and

• A host of educational resources.

We look forward to helping you meet your financial goals.

Sincerely,

Jane Trust, CFA

President and Chief Executive Officer

January 31, 2017

II Western Asset Mortgage Backed Securities Fund

Investment commentary

Economic review

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

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

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

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

Sincerely,

Jane Trust, CFA

President and Chief Executive Officer

January 31, 2017

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

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

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

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

Western Asset Mortgage Backed Securities Fund III

Fund overview

Q. What is the Fund’s investment strategy?

A. The Fund seeks high current return. Under normal circumstances, the Fund invests at least 80% of its assets in mortgage-backed securities (“MBS”). MBS may be issued by government-sponsored entities such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and by agencies of the U.S. government, such as the Government National Mortgage Association (“Ginnie Mae”). MBS represent direct or indirect participations in, or are collateralized by and payable from, mortgage loans secured by real property. These securities may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities. The Fund may invest in government stripped MBS and other stripped securities. The Fund may invest in securities of any maturity or durationⁱ, and the securities may have fixed, floating or variable rates. The Fund may enter into dollar rolls, sometimes referred to as mortgage dollar rolls.

The Fund focuses on securities rated investment grade (that is securities rated in the Baa/BBB categories or above, or, if unrated, securities that we determined to be of comparable credit quality). The Fund may invest up to 20% of its assets in securities rated below investment grade, or, if unrated, securities that we determined to be below investment grade. Instead of, and/or in addition to, investing directly in particular securities, the Fund may use instruments such as derivatives and other synthetic instruments that are intended to provide economic exposure to securities or the issuer or to be used as a hedging technique. The Fund may also engage in a variety of transactions using derivatives in order to change the investment characteristics of its portfolio (such as shortening or lengthening duration) and for other purposes. The Fund may use one or more types of these instruments without limit. These instruments are taken into account when determining compliance with the Fund’s 80% policy.

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

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

A. The overall fixed income market experienced periods of volatility but generated positive results over the twelve-month reporting period ended December 31, 2016. The spread sectors (non-Treasuries) had a weak start to the reporting period, partially driven by concerns over moderating growth in China, low oil and other commodity prices, and uncertainties regarding future Federal Reserve Board (the “Fed”)ⁱⁱ monetary policy. However, from February through September 2016, the spread sectors largely

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 1

Fund overview (cont’d)

rallied after these concerns eased due to firmer energy prices and Chinese growth as well as a dovish pivot by the Fed. This rally occurred even as the market overcame several headwinds, including questions related to global monetary policy, implications of the U.K.’s referendum to leave the European Union (“Brexit”) and a number of geopolitical issues. Finally, U.S. Treasury yields moved sharply higher and most segments of the fixed income market generated weak results during the final three months of the year (yields and prices move in the opposite direction). This turnaround was triggered by expectations for improving economic growth and higher inflation due to potential fiscal stimulus from the Trump administration. In addition, for the first time in a year the Fed raised rates in December 2016. The U.S. central bank also indicated that it may institute more rate hikes in 2017 than it had previously projected.

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

Agency MBS generated a modest gain during the reporting period amid periods of heightened interest rate volatility. U.S. Treasury yields declined and agency MBS prices moved higher during the first half of the year (yields and prices move in the opposite direction). Also supporting agency MBS was overall solid demand from investors. Agency MBS then gave back a portion of their gains as the year progressed given sharply rising U.S. Treasury yields. During the twelve months ended December 31, 2016, the overall agency MBS market, as measured by the Bloomberg Barclays U.S. Mortgage-Backed Securities Index (the “Index”)^iv, returned 1.67%. Looking at the year more closely, within the Index, MBS GNMA 30 years returned 1.57%, MBS Conventional 30 years returned 1.76%, MBS GNMA 15 years gained 1.08% and MBS Index Conventional 15 years returned 1.50%. Other securitized sectors, including non-agency MBS commercial mortgage backed securities (“CMBS”) and asset-backed securities (“ABS”) outperformed agency MBS as their spreads tightened during the year.

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

A. A number of adjustments were made to the Fund during the reporting period. We reduced our exposure to agency collateralized mortgage obligations (“CMOs”) as their valuations became less compelling given spread tightening and we increased our agency pass-through exposure as they offered more attractive relative value. We pared the Fund’s allocation to non-agency MBS, largely driven by relative value trades within the sector. Elsewhere, we added to the Fund’s CMBS and ABS exposures as we felt they offered better values than agency MBS.

2 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

During the reporting period, we utilized Treasury futures and options, Eurodollar futures and interest rate swaps to manage the Fund’s duration and yield curve^v exposure. Overall, the use of these derivatives detracted from performance. Total return swaps, used to manage our MBS exposure, detracted from performance. Finally, the use of credit default swaps, including CMBS index swaps (“CMBX”), and CDS options on index swaps (“CDX”), which were used to hedge downside risk, overall detracted from performance.

Performance review

For the twelve months ended December 31, 2016, Class A shares of Western Asset Mortgage Backed Securities Fund, excluding sales charges, returned 1.23%. The Fund’s unmanaged benchmark, the Bloomberg Barclays U.S. Mortgage-Backed Securities Index, returned 1.67% for the same period. The Lipper U.S. Mortgage Funds Category Average¹ returned 2.01% over the same time frame.

Performance Snapshot as of December 31, 2016 (unaudited)
(excluding sales charges)	6 months			12 months
Western Asset Mortgage Backed Securities Fund:
Class 12		-0.75	%		1.50	%
Class A		-0.90	%		1.23	%
Class C		-1.35	%		0.42	%
Class C13		-1.11	%		0.78	%
Class I		-0.85	%		1.43	%
Class IS		-0.70	%		N/A	*
Bloomberg Barclays U.S. Mortgage-Backed Securities Index		-1.39	%		1.67	%
Lipper U.S. Mortgage Funds Category Average1		-1.01	%		2.01	%

The performance shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown above. Principal value, investment returns and yields will fluctuate and investors’ shares, when redeemed, may be worth more or less than their original cost. To obtain performance data current to the most recent month-end, please visit our website at www.leggmason.com/mutualfunds.

All share class returns assume the reinvestment of all distributions at net asset value and the deduction of all Fund expenses. Returns have not been adjusted to include sales charges that may apply or the

¹  Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the period ended December 31, 2016, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 123 funds for the six-month period and among the 121 funds for the twelve-month period in the Fund’s Lipper category, and excluding sales charges, if any.

²  Effective July 27, 2007, the Fund’s Class 1 shares were closed to all new purchases and incoming exchanges. Investors owning Class 1 shares on that date may continue to maintain their then-current Class 1 shares, but are no longer permitted to add to their Class 1 share positions (excluding reinvestment of dividends and distributions).

³  Class C1 shares are not available for purchase by new or existing investors (except for certain retirement plan programs authorized by the Fund’s distributor). Class C1 shares continue to be available for dividend reinvestment and incoming exchanges.

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 3

Fund overview (cont’d)

deduction of taxes that a shareholder would pay on Fund distributions. If sales charges were reflected, the performance quoted would be lower. Performance figures for periods shorter than one year represent cumulative figures and are not annualized.

The 30-Day SEC Yields for the period ended December 31, 2016 for Class 1, Class A, Class C, Class C1, Class I and Class IS shares were 2.47%, 2.05%, 1.38%, 1.76%, 2.39% and 2.48%, respectively. The 30-Day SEC Yield is subject to change and is based on the yield to maturity of the Fund’s investments over a 30-day period and not on the dividends paid by the Fund, which may differ.

* Performance of Class IS shares for the twelve-month period is not shown because the inception date for this share class was June 30, 2016.

Total Annual Operating Expenses (unaudited)

As of the Fund’s current prospectus dated May 1, 2016, the gross total annual fund operating expense ratios for Class 1, Class A, Class C, Class C1, Class I and Class IS shares were 0.68%, 0.94%, 1.63%, 1.40%, 0.65% and 0.55%, respectively.

Actual expenses may be higher. For example, expenses may be higher than those shown if average net assets decrease. Net assets are more likely to decrease and Fund expense ratios are more likely to increase when markets are volatile.

Q. What were the leading contributors to performance?

A. The largest contributor to the Fund’s relative performance during the reporting period was its out-of-benchmark allocations to securitized product, including non-agency MBS, ABS and CMBS, all of which outperformed the benchmark. As discussed, after a weak start to the year, spread sectors, including the Fund’s holdings in these three sectors, rallied for much of the remainder of the reporting period. Demand for these securities was typically strong as valuations were generally attractive and investors looked for incremental yield in the low interest rate environment. Further supporting the non-agency MBS market was negative net supply, improvements in the housing market and better collateral performance.

Q. What were the leading detractors from performance?

A. The largest detractor from relative performance for the period was our opportunistic use of credit hedges during the first quarter of 2016. These hedges were put in place to protect the Fund from an economic downturn. While they were initially beneficial as the credit market sold-off in January and early February 2016, they were then a headwind for results as the market started to rebound in mid-February 2016. We removed the credit hedge toward the end of March 2016 given signs of economic resiliency in the U.S.

The Fund maintained a long duration position as a hedge against our securitized exposure in the event of spread widening. This positioning was not rewarded as rates moved sharply higher during the second half of the year, especially after the November 2016 U.S. elections.

Elsewhere, positioning within agency MBS was a headwind for results. In particular, an overweight to lower coupon securities detracted from performance as they lagged the benchmark during the post-election sell-off.

4 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

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

Sincerely,

Western Asset Management Company

January 20, 2017

RISKS: Fixed-income securities are subject to interest rate, credit and market risks. As interest rates rise, bond prices fall, reducing the value of the Fund’s share price. To the extent that the Fund invests in asset-backed, mortgage-backed or mortgage-related securities, its exposure to prepayment and extension risks may be greater than investments in other fixed-income securities. High-yield (“junk”) bonds are generally subject to greater credit risks than higher grade bonds. The U.S. government guarantee of principal and interest payments applies only to underlying securities in the Fund’s portfolio, not the Fund’s shares. Please note that the Fund’s shares are not guaranteed by the U.S. government or its agencies. The Fund may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. The use of leverage may increase volatility and possibility of loss. Please see the Fund’s prospectus for a more complete discussion of these and other risks and the Fund’s investment strategies.

The mention of sector breakdowns is for informational purposes only and should not be construed as a recommendation to purchase or sell any securities. The information provided regarding such sectors is not a sufficient basis upon which to make an investment decision. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies discussed should consult their financial professional. Portfolio holdings are subject to change at any time and may not be representative of the portfolio managers’ current or future investments. The Fund’s top three sector holdings (as a percentage of net assets) as of December 31, 2016 were: Mortgage-Backed Securities (52.0%), Collateralized Mortgage Obligations (32.7%) and Asset-Backed Securities (9.6%). The Fund’s portfolio composition is subject to change at any time.

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

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

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 5

Fund overview (cont’d)

ⁱ  Duration is the measure of the price sensitivity of a fixed-income security to an interest rate change of 100 basis points. Calculation is based on the weighted average of the present values for all cash flows.

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

ⁱⁱⁱ  The Bloomberg Barclays U.S. Aggregate Index is a broad-based bond index comprised of government, corporate, mortgage- and asset-backed issues, rated investment grade or higher, and having at least one year to maturity.

^iv  The Bloomberg Barclays U.S. Mortgage-Backed Securities Index is an unmanaged index composed of agency mortgage-backed pass-through securities, both fixed-rate and hybrid adjustable rate mortgages, issued by the Government National Mortgage Association, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation.

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

6 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

Fund at a glance^†(unaudited)

Investment breakdown (%) as a percent of total investments

† The bar graph above represents the composition of the Fund’s investments as of December 31, 2016 and December 31, 2015 and does not include derivatives such as futures contracts and swap contracts. The Fund is actively managed. As a result, the composition of the Fund’s investments is subject to change at any time.

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 7

Fund expenses (unaudited)

Example

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

This example is based on an investment of $1,000 invested on July 1, 2016 and held for the six months ended December 31, 2016.

Actual expenses

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

Hypothetical example for comparison purposes

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

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

Based on actual total return1													Based on hypothetical total return1
	Actual Total Return Without Sales Charge2			Beginning Account Value		Ending Account Value		Annualized Expense Ratio			Expenses Paid During the Period3			Hypothetical Annualized Total Return			Beginning Account Value		Ending Account Value		Annualized Expense Ratio			Expenses Paid During the Period3
Class 1		-0.75	%	$	1,000.00	$	992.50		0.67	%	$	3.36	Class 1		5.00	%	$	1,000.00	$	1,021.77		0.67	%	$	3.40
Class A		-0.90			1,000.00		991.00		0.95			4.75	Class A		5.00			1,000.00		1,020.36		0.95			4.82
Class C		-1.35			1,000.00		986.50		1.69			8.44	Class C		5.00			1,000.00		1,016.64		1.69			8.57
Class C1		-1.11			1,000.00		988.90		1.38			6.90	Class C1		5.00			1,000.00		1,018.20		1.38			7.00
Class I		-0.85			1,000.00		991.50		0.69			3.45	Class I		5.00			1,000.00		1,021.67		0.69			3.51
Class IS		-0.70			1,000.00		993.00		0.57			2.86	Class IS		5.00			1,000.00		1,022.27		0.57			2.90

8 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

¹  For the six months ended December 31, 2016.

²  Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value and does not reflect the deduction of the applicable sales charge with respect to Class A shares or the applicable contingent deferred sales charge (“CDSC”) with respect to Class C and Class C1 shares. Total return is not annualized, as it may not be representative of the total return for the year. Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

³  Expenses (net of compensating balance arrangements, fee waivers and/or expense reimbursements) are equal to each class’ respective annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year (184), then divided by 366.

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 9

Fund performance (unaudited)

Average annual total returns
Without sales charges1	Class 1			Class A			Class C			Class C14			Class I			Class IS†
Twelve Months Ended 12/31/16		1.50	%		1.23	%		0.42	%		0.78	%		1.43	%		N/A
Five Years Ended 12/31/16		4.04			3.79			N/A			3.27			4.09			N/A
Ten Years Ended 12/31/16		5.11			4.87			N/A			4.28			5.17			N/A
Inception* through 12/31/16		—			—			2.50			—			—			-0.70	%
With sales charges2	Class 13			Class A			Class C			Class C14			Class I			Class IS†
Twelve Months Ended 12/31/16		1.50	%		-3.10	%		-0.56	%		-0.20	%		1.43	%		N/A
Five Years Ended 12/31/16		4.04			2.89			N/A			3.27			4.09			N/A
Ten Years Ended 12/31/16		4.38			4.41			N/A			4.28			5.17			N/A
Inception* through 12/31/16		—			—			2.50			—			—			-0.70	%

Cumulative total returns
Without sales charges1
Class 1 (12/31/06 through 12/31/16)	64.67	%
Class A (12/31/06 through 12/31/16)	60.87
Class C (Inception date of 8/1/12 through 12/31/16)	11.52
Class C14 (12/31/06 through 12/31/16)	52.02
Class I (12/31/06 through 12/31/16)	65.62
Class IS (6/30/16 through 12/31/16)	-0.70

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

† Not annualized.

¹  Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value and does not reflect the deduction of the applicable sales charge with respect to Class A shares or the applicable contingent deferred sales charge (“CDSC”) with respect to Class C shares and Class C1⁴ shares.

²  Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value. In addition, Class A shares reflect the deduction of the maximum initial sales charge of 4.25%. Class C shares and Class C1⁴ shares reflect the deduction of a 1.00% CDSC, which applies if shares are redeemed within one year from purchase payment.

³  Includes the effect of the 6.75% initial sales charge for periods prior to July 27, 2007. Effective July 27, 2007, Class 1 shares were closed to all purchases and incoming exchanges.

⁴  On August 1, 2012, Class C shares were reclassified as Class C1 shares.

* Inception dates for Class 1, A, C, C1, I and IS shares are September 12, 2000, November 6, 1992, August 1, 2012, February 4, 1993, February 7, 1996 and June 30, 2016, respectively.

10 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

Historical performance

Value of $10,000 invested in

Class A Shares of Western Asset Mortgage Backed Securities Fund vs. Bloomberg Barclays U.S. Mortgage-Backed Securities Index and Lipper U.S. Mortgage Funds Category Average† — December 2006 - December 2016

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

† Hypothetical illustration of $10,000 invested in Class A shares of Western Asset Mortgage Backed Securities Fund on December 31, 2006, assuming the deduction of the maximum initial sales charge of 4.25% at the time of investment for Class A shares and the reinvestment of all distributions, including returns of capital, if any, at net asset value through December 31, 2016. The hypothetical illustration also assumes a $10,000 investment in the Bloomberg Barclays U.S. Mortgage-Backed Securities Index and Lipper U.S. Mortgage Funds Category Average. The Bloomberg Barclays U.S. Mortgage-Backed Securities Index is an unmanaged index composed of agency mortgage-backed pass-through securities, both fixed-rate and hybrid adjustable-rate mortgages, issued by the Government National Mortgage Association, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation. The Lipper U.S. Mortgage Funds Category Average is composed of the Fund’s peer group of mutual funds. The Index is unmanaged and is not subject to the same management and trading expenses as a mutual fund. Please note that an investor cannot invest directly in an index. The performance of the Fund’s other classes may be greater or less than the Class A shares’ performance indicated on this chart, depending on whether greater or lesser sales charges and fees were incurred by shareholders investing in the other classes.

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 11

Spread duration (unaudited)

Economic exposure — December 31, 2016

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

ABS	— Asset-Backed Securities
Benchmark	— Bloomberg Barclays U.S. Mortgage-Backed Securities Index
MBS	— Mortgage-Backed Securities
WA MB	— Western Asset Mortgage Backed Securities Fund

12 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

Effective duration (unaudited)

Interest rate exposure — December 31, 2016

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

ABS	— Asset-Backed Securities
Benchmark	— Bloomberg Barclays U.S. Mortgage-Backed Securities Index
MBS	— Mortgage-Backed Securities
WA MB	— Western Asset Mortgage Backed Securities Fund

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 13

Schedule of investments

December 31, 2016

Western Asset Mortgage Backed Securities Fund

Security	Rate			Maturity Date		Face Amount		Value
Mortgage-Backed Securities — 52.0%
FHLMC — 15.3%
Federal Home Loan Mortgage Corp. (FHLMC), Gold		6.000	%		3/1/17	$	5,091	$	5,107
Federal Home Loan Mortgage Corp. (FHLMC), Gold		8.000	%		12/1/19-7/1/20		779		782
Federal Home Loan Mortgage Corp. (FHLMC), Gold		9.500	%		1/1/21		26,326		28,056
Federal Home Loan Mortgage Corp. (FHLMC), Gold		2.500	%		1/23/32		11,000,000		11,020,625	(a)
Federal Home Loan Mortgage Corp. (FHLMC), Gold		5.000	%		8/1/33		384,159		427,752
Federal Home Loan Mortgage Corp. (FHLMC), Gold		4.000	%		12/1/33-8/1/45		40,416,355		42,696,062
Federal Home Loan Mortgage Corp. (FHLMC), Gold		5.500	%		11/1/35		15,256		17,071
Federal Home Loan Mortgage Corp. (FHLMC), Gold		3.500	%		3/1/43		3,037,141		3,129,610
Federal Home Loan Mortgage Corp. (FHLMC), Gold		3.500	%		1/18/47		74,300,000		76,084,763	(a)
Total FHLMC									133,409,828
FNMA — 29.0%
Federal National Mortgage Association (FNMA)		5.000	%		2/1/18-12/1/18		53,053		54,321
Federal National Mortgage Association (FNMA)		8.500	%		8/1/19-10/1/30		92,175		104,037
Federal National Mortgage Association (FNMA)		10.500	%		8/1/20		1,118		1,157
Federal National Mortgage Association (FNMA)		7.500	%		8/1/29-4/1/32		268,451		295,030
Federal National Mortgage Association (FNMA)		2.500	%		1/23/32		91,000,000		91,151,072	(a)
Federal National Mortgage Association (FNMA)		4.000	%		9/1/33-12/1/45		46,738,139		49,503,170
Federal National Mortgage Association (FNMA)		4.500	%		3/1/38-10/1/45		20,615,540		22,236,254
Federal National Mortgage Association (FNMA)		3.500	%		9/1/42-1/1/46		50,125,306		51,468,174
Federal National Mortgage Association (FNMA)		3.000	%		2/1/43-4/1/43		16,837,535		16,837,997
Federal National Mortgage Association (FNMA)		3.500	%		1/18/47		20,000,000		20,500,001	(a)
Total FNMA									252,151,213
GNMA — 7.7%
Government National Mortgage Association (GNMA)		8.500	%		6/15/25		53,114		62,038
Government National Mortgage Association (GNMA)		7.500	%		4/15/29-9/15/31		139,538		147,619
Government National Mortgage Association (GNMA)		6.000	%		11/15/32		755,481		894,475
Government National Mortgage Association (GNMA)		5.000	%		4/15/40-5/15/40		1,699,258		1,869,151
Government National Mortgage Association (GNMA) II		3.000	%		2/20/46		8,904,970		9,032,142
Government National Mortgage Association (GNMA) II		3.000	%		1/24/47		50,400,000		51,034,921	(a)
Government National Mortgage Association (GNMA) II		1.695	%		8/20/58		97,168		98,676	(b)
Government National Mortgage Association (GNMA) II		2.337	%		6/20/60		3,914,293		4,089,060	(b)
Total GNMA									67,228,082
Total Mortgage-Backed Securities (Cost — $454,102,212)									452,789,123

See Notes to Financial Statements.

14 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

Western Asset Mortgage Backed Securities Fund

Security	Rate			Maturity Date		Face Amount/ Units		Value
Asset-Backed Securities — 9.6%
ACE Securities Corp., 2004-OP1 M1		1.536	%		4/25/34	$	862,022	$	810,543	(b)
Ameriquest Mortgage Securities Inc., 2002-C M1		4.131	%		11/25/32		2,125,616		2,045,051	(b)
Applebee’s/IHOP Funding LLC, 2014-1 A2		4.277	%		9/5/44		2,930,000		2,902,738	(c)
Argent Securities Inc., 2004-W6 AF		4.123	%		5/25/34		679,610		690,350
Conseco Financial Corp., 1997-4 M1		7.220	%		2/15/29		2,340,739		2,480,642	(b)
Countrywide Asset-Backed Certificates, 2002-S3 M1		4.800	%		5/25/32		15,559		15,833	(b)
Countrywide Asset-Backed Certificates, 2006-SD3 A1		1.086	%		7/25/36		476,359		397,473	(b)(c)
Countrywide Home Equity Loan Trust, 2006-E 2A		0.844	%		7/15/36		76,162		66,597	(b)
Credit-Based Asset Servicing and Securitization LLC, 2003-RP1 M1		2.306	%		3/25/33		3,227,175		3,085,495	(b)(c)
DRB Prime Student Loan Trust, 2015-B A1		2.492	%		10/27/31		2,597,065		2,645,817	(b)(c)
EMC Mortgage Loan Trust, 2006-A A1		1.034	%		12/25/42		615,428		595,281	(b)(c)
Encore Credit Receivables Trust, 2005-4 M5		1.242	%		1/25/36		1,840,000		1,205,158	(b)
Fremont Home Loan Trust, 2002-1 M1		2.006	%		8/25/33		2,566,373		2,407,589	(b)
GSAA Home Equity Trust, 2007-4 A2		0.792	%		3/25/37		2,343,170		1,282,780	(b)
GSAMP Trust, 2003-SEA A1		1.156	%		2/25/33		104,291		97,570	(b)
GSAMP Trust, 2004-SEA2 M2		2.006	%		3/25/34		6,405,249		4,528,473	(b)
Long Beach Mortgage Loan Trust, 2001-3 M1		1.581	%		9/25/31		501,649		473,829	(b)
MASTR Asset-Backed Securities Trust, 2006-FRE1 A4		1.046	%		12/25/35		1,800,064		1,624,784	(b)
Merlin Aviation Holdings DAC, 2016-1 A		4.500	%		12/15/32		4,010,000		3,884,531	(c)
Morgan Stanley ABS Capital I, 2002-HE3 M1		2.406	%		3/25/33		2,077,142		1,993,348	(b)
National Collegiate Student Loan Trust, 2006-1 A5		1.106	%		3/25/33		10,600,000		8,688,311	(b)
Nationstar HECM Loan Trust, 2015-2A M2		6.657	%		11/25/25		3,000,000		2,961,360	(c)
New Century Home Equity Loan Trust, 2003-B M2		3.231	%		11/25/33		7,172		7,053	(b)
RAAC Series, 2005-SP2 2A		1.056	%		6/25/44		2,129,979		1,777,968	(b)
RAAC Series, 2006-RP2 A		0.784	%		2/25/37		20,990		20,870	(b)(c)
RAAC Series, 2006-RP3 A		0.804	%		5/25/36		667,418		643,791	(b)(c)
Renaissance Home Equity Loan Trust, 2003-3 A		1.256	%		12/25/33		412,212		388,158	(b)
Residential Asset Securities Corp., 2004-KS9 AI5		5.330	%		10/25/34		1,834,530		1,546,622
Residential Asset Securities Corp., 2005-KS12 M1		1.196	%		1/25/36		1,870,000		1,814,816	(b)
SACO I Trust, 2006-4 A1		0.924	%		3/25/36		166,036		294,817	(b)
SACO I Trust, 2006-6 A		0.844	%		6/25/36		287,837		515,469	(b)
SLM Student Loan Trust, 2006-A A5		1.140	%		6/15/39		2,580,000		2,353,676	(b)
SMB Private Education Loan Trust, 2014-A C		4.500	%		9/15/45		7,560,000		7,094,433	(c)
SMB Private Education Loan Trust, 2014-A R		0.000	%		9/15/45		22,179		10,424,130	(c)(d)
SMB Private Education Loan Trust, 2015-C R		0.000	%		9/18/46		2,751		3,576,300	(c)(d)

See Notes to Financial Statements.

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 15

Schedule of investments (cont’d)

December 31, 2016

Western Asset Mortgage Backed Securities Fund

Security	Rate			Maturity Date		Face Amount/ Units		Value
Asset-Backed Securities — continued
Social Professional Loan Program LLC, 2014-A RC		0.000	%		7/14/24	$	2,500	$	4,779,412	(c)(d)
Social Professional Loan Program LLC, 2015-C R		0.000	%		8/25/36		600		3,525,000	(c)(d)
Structured Asset Securities Corp., 2006-ARS1 A1		0.812	%		2/25/36		1,421,551		92,836	(b)(c)
Truman Capital Mortgage Loan Trust, 2005-1 A		1.186	%		3/25/37		98,069		96,784	(b)(c)
Total Asset-Backed Securities (Cost — $81,302,509)									83,835,688
						Face Amount
Collateralized Mortgage Obligations — 32.7%
Adjustable Rate Mortgage Trust, 2005-11 5A1		1.026	%		2/25/36		480,403		381,038	(b)
American Home Mortgage Assets, 2006-3 3A12		0.946	%		10/25/46		1,033,659		823,162	(b)
Banc of America Commercial Mortgage Trust, 2007-2 AJ		5.810	%		4/10/49		1,240,000		1,183,718	(b)
Banc of America Funding Corp., 2005-B 3A1		0.792	%		4/20/35		935,538		893,995	(b)
Banc of America Funding Corp., 2015-R2 04A2		0.863	%		9/29/36		5,626,375		2,985,991	(b)(c)
Bank of America Merrill Lynch Large Loan Inc., 2014-INMZ MZB		9.183	%		12/15/19		3,500,000		3,397,569	(b)(c)
Bank of America Merrill Lynch Large Loan Inc., 2016-GG10 AJA		5.793	%		7/10/17		4,594,622		3,016,006	(b)(c)
BCAP LLC Trust, 2015-RR2 25A1		0.744	%		10/28/36		1,860,906		1,785,577	(b)(c)
CD Commercial Mortgage Trust, 2006-CD3 AJ		5.688	%		10/15/48		544,000		303,280
CD Commercial Mortgage Trust, 2007-CD4 AJ		5.398	%		12/11/49		3,930,388		3,426,316	(b)
CGBAM Commercial Mortgage Trust, 2016-IMC E		8.104	%		11/15/21		4,620,000		4,678,124	(b)(c)
Chevy Chase Mortgage Funding Corp., 2004-4A A1		0.986	%		10/25/35		2,636,628		2,348,886	(b)(c)
Citigroup Commercial Mortgage Trust, 2015-GC27 E		3.000	%		2/10/48		2,500,000		1,429,622	(c)
Commercial Mortgage Trust, 2013-CR12 E		5.083	%		10/10/46		380,000		269,304	(b)(c)
Commercial Mortgage Trust, 2015-CR25 E		4.547	%		8/10/48		3,000,000		1,926,495	(b)(c)
Commercial Mortgage Trust, 2015-CR25 F		4.547	%		8/10/48		1,400,000		655,395	(b)(c)
Connecticut Avenue Securities, 2013-C01 M2		6.006	%		10/25/23		3,110,000		3,431,310	(b)
Countrywide Alternative Loan Trust, 2004-6CB A		1.336	%		5/25/34		1,963,397		1,950,846	(b)
Countrywide Alternative Loan Trust, 2005-72 A1		1.026	%		1/25/36		47,552		39,555	(b)
Countrywide Alternative Loan Trust, 2005-IM1 A1		1.056	%		1/25/36		379,153		333,767	(b)
Countrywide Alternative Loan Trust, 2006-0A09 2A1B		0.939	%		7/20/46		218,524		114,567	(b)
Countrywide Alternative Loan Trust, 2007-23CB A4, IO		5.744	%		9/25/37		3,535,676		841,291	(b)
Countrywide Alternative Loan Trust, 2007-24 A2		37.163	%		10/25/37		1,619,729		3,034,160	(b)
Countrywide Alternative Loan Trust, 2007-24 A3, IO		6.194	%		10/25/37		4,355,282		1,190,145	(b)
Countrywide Alternative Loan Trust, 2007-J1 2A10		6.000	%		3/25/37		2,903,748		1,961,624
Countrywide Home Loans, 2004-16 1A3A		1.516	%		9/25/34		1,993,765		1,805,741	(b)
Countrywide Home Loans, 2004-R1 1AF		1.156	%		11/25/34		205,178		172,224	(b)(c)

See Notes to Financial Statements.

16 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

Western Asset Mortgage Backed Securities Fund

Security	Rate			Maturity Date		Face Amount		Value
Collateralized Mortgage Obligations — continued
Countrywide Home Loans, 2006-R2 AF1		1.004	%		7/25/36	$	356,708	$	324,708	(b)(c)
Countrywide Home Loans Mortgage Pass-Through Trust, 2005-R1 1AF1		1.116	%		3/25/35		50,395		44,633	(b)(c)
Credit Suisse First Boston Mortgage Securities Corp., Whole Loan, 2002-10 2A1		7.500	%		5/25/32		302,578		323,485
Credit Suisse Mortgage Trust, 2006-C5 AJ		5.373	%		12/15/39		5,072,115		4,858,574
Credit Suisse Mortgage Trust, 2007-C5 AM		5.869	%		9/15/40		4,910,000		4,630,991	(b)
Credit Suisse Mortgage Trust, 2015-02R 7A3		2.584	%		8/27/36		2,309,462		2,307,970	(b)(c)
Credit Suisse Mortgage Trust, 2015-03R 1A1		0.762	%		7/29/37		971,040		918,007	(b)(c)
Credit Suisse Mortgage Trust, 2015-10R 3A2		1.363	%		10/27/46		4,111,000		3,408,451	(b)(c)
Credit Suisse Mortgage Trust, 2015-12R 2A1		1.034	%		11/30/37		6,745,843		6,393,187	(b)(c)
Credit Suisse Mortgage Trust, 2015-LHMZ		8.928	%		7/20/20		4,000,000		3,880,844	(c)
Credit Suisse Mortgage Trust, 2015-Town MZ		9.506	%		3/15/17		6,000,000		5,805,000	(c)
CSAIL Commercial Mortgage Trust, 2015-C4 F		3.500	%		11/15/48		1,600,000		967,717	(c)
CSAIL Commercial Mortgage Trust, 2015-C4 G		3.500	%		11/15/48		700,000		350,884	(c)
DBUBS Mortgage Trust, 2011-LC3A G		3.750	%		8/10/44		2,900,000		1,533,012	(c)
Federal Home Loan Mortgage Corp. (FHLMC), 2525 AM		4.500	%		4/15/32		121,832		131,426
Federal Home Loan Mortgage Corp. (FHLMC), 2638 DI, IO, PAC		5.000	%		5/15/23		11,772		109
Federal Home Loan Mortgage Corp. (FHLMC), 3027 AS, IO		5.446	%		5/15/29		109,243		16,014	(b)
Federal Home Loan Mortgage Corp. (FHLMC), 3265 SB, IO		5.436	%		1/15/37		106,516		17,477	(b)
Federal Home Loan Mortgage Corp. (FHLMC), 3397 GS REMIC IO		6.296	%		12/15/37		993,338		173,381	(b)
Federal Home Loan Mortgage Corp. (FHLMC), 3601 BI, IO		5.000	%		3/15/39		20,059		903
Federal Home Loan Mortgage Corp. (FHLMC), 3890 BE, PAC		5.000	%		7/15/41		5,000,000		5,540,066
Federal Home Loan Mortgage Corp. (FHLMC), 3947 SG, IO		5.246	%		10/15/41		1,464,211		246,104	(b)
Federal Home Loan Mortgage Corp. (FHLMC), 3960 SJ, IO		5.946	%		8/15/40		1,986,908		295,379	(b)
Federal Home Loan Mortgage Corp. (FHLMC), 3966 SA, IO		5.196	%		12/15/41		2,472,154		391,118	(b)
Federal Home Loan Mortgage Corp. (FHLMC), 4048 IK, IO		3.000	%		5/15/27		982,244		91,267
Federal Home Loan Mortgage Corp. (FHLMC), 4076 SW, IO		5.346	%		7/15/42		192,216		42,876	(b)
Federal Home Loan Mortgage Corp. (FHLMC), 4077 TO, PO		0.000	%		5/15/41		7,863,522		6,783,185
Federal Home Loan Mortgage Corp. (FHLMC), 4085, IO		3.000	%		6/15/27		3,886,497		347,321
Federal Home Loan Mortgage Corp. (FHLMC), 4092 AI, IO		3.000	%		9/15/31		6,859,461		692,985
Federal Home Loan Mortgage Corp. (FHLMC), 4114 LI, IO		3.500	%		10/15/32		7,594,913		1,063,055
Federal Home Loan Mortgage Corp. (FHLMC), 4139 EI, IO		3.000	%		9/15/31		14,374,890		1,456,349
Federal Home Loan Mortgage Corp. (FHLMC), 4144 GI, IO, PAC-1		3.000	%		12/15/32		4,959,592		628,309
Federal Home Loan Mortgage Corp. (FHLMC), 4147 IN, IO		3.500	%		12/15/32		6,477,975		909,706
Federal Home Loan Mortgage Corp. (FHLMC), 4151 AI, IO		3.000	%		1/15/33		16,579,346		2,205,109

See Notes to Financial Statements.

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 17

Schedule of investments (cont’d)

December 31, 2016

Western Asset Mortgage Backed Securities Fund

Security	Rate			Maturity Date		Face Amount		Value
Collateralized Mortgage Obligations — continued
Federal Home Loan Mortgage Corp. (FHLMC), 4170 PI, IO, PAC-1		3.000	%		1/15/33	$	9,046,682	$	1,057,465
Federal Home Loan Mortgage Corp. (FHLMC), 4203 PS, IO, PAC		5.546	%		9/15/42		2,453,062		427,515	(b)
Federal Home Loan Mortgage Corp. (FHLMC), 4210 Z		3.000	%		5/15/43		10,064,597		9,645,721
Federal Home Loan Mortgage Corp. (FHLMC), 4350 AS, IO		2.226	%		12/15/37		17,015,000		1,052,075	(b)
Federal Home Loan Mortgage Corp. (FHLMC) Reference REMIC, R007 ZA		6.000	%		5/15/36		1,478,360		1,662,177
Federal Home Loan Mortgage Corp. (FHLMC) STRIPS, 317 PO, PO		0.000	%		11/15/43		10,287,227		7,940,008
Federal Home Loan Mortgage Corp. (FHLMC) STRIPS, 328 S4, IO		2.077	%		2/15/38		5,309,377		391,849	(b)
Federal Home Loan Mortgage Corp. (FHLMC), Multi-Family Structured Pass-Through Certificates, K034 X3, IO		1.783	%		9/25/41		16,200,000		1,491,223	(b)
Federal Home Loan Mortgage Corp. (FHLMC), Multi-Family Structured Pass-Through Certificates, K714 X3, IO		1.851	%		1/25/42		21,598,714		1,324,444	(b)
Federal Home Loan Mortgage Corp. (FHLMC), Multi-Family Structured Pass-Through Certificates, KAIV X1, IO		1.321	%		6/25/21		29,584,050		1,330,670	(b)
Federal National Mortgage Association (FNMA), 2003-022, IO		6.000	%		4/25/33		181,320		44,132
Federal National Mortgage Association (FNMA), 2009-006 KZ		5.000	%		2/25/49		945,721		1,025,158
Federal National Mortgage Association (FNMA), 2009-059 LB		5.066	%		8/25/39		1,045,593		1,133,030	(b)
Federal National Mortgage Association (FNMA), 2009-074 TX, PAC		5.000	%		9/25/39		3,359,159		3,650,635
Federal National Mortgage Association (FNMA), 2010-002 AI, IO		5.500	%		2/25/40		1,008,996		187,886
Federal National Mortgage Association (FNMA), 2010-084 SK, IO		5.804	%		8/25/40		3,615,993		472,064	(b)
Federal National Mortgage Association (FNMA), 2010-110 AE		9.750	%		11/25/18		234,298		246,477
Federal National Mortgage Association (FNMA), 2010-150 SK, IO		5.774	%		1/25/41		1,935,157		329,158	(b)
Federal National Mortgage Association (FNMA), 2011-015 AB		9.750	%		8/25/19		153,033		160,855
Federal National Mortgage Association (FNMA), 2011-059 NZ		5.500	%		7/25/41		405,691		464,071
Federal National Mortgage Association (FNMA), 2011-099 KI, IO		4.500	%		12/25/25		1,278,925		110,909
Federal National Mortgage Association (FNMA), 2011-144 PT		11.546	%		1/25/38		973,143		1,180,556	(b)
Federal National Mortgage Association (FNMA), 2012-014 SL, IO		5.794	%		12/25/40		9,725,071		1,532,190	(b)
Federal National Mortgage Association (FNMA), 2012-028 B		6.500	%		6/25/39		1,238,475		1,366,666
Federal National Mortgage Association (FNMA), 2012-051 B		7.000	%		5/25/42		754,965		867,118
Federal National Mortgage Association (FNMA), 2012-070 IW, IO		3.000	%		2/25/27		2,836,872		252,282

See Notes to Financial Statements.

18 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

Western Asset Mortgage Backed Securities Fund

Security	Rate			Maturity Date		Face Amount		Value
Collateralized Mortgage Obligations — continued
Federal National Mortgage Association (FNMA), 2012-075 NS, IO		5.844	%		7/25/42	$	5,442,219	$	1,070,146	(b)
Federal National Mortgage Association (FNMA), 2012-123 BI, IO		3.500	%		11/25/32		3,466,567		524,995
Federal National Mortgage Association (FNMA), 2012-135 AI, IO		3.000	%		12/25/27		4,575,686		465,722
Federal National Mortgage Association (FNMA), 2012-148 IM, IO		3.000	%		1/25/28		17,604,872		1,718,785
Federal National Mortgage Association (FNMA), 2012-149 AI, IO		3.000	%		1/25/28		11,114,626		1,038,334
Federal National Mortgage Association (FNMA), 2013-009 BC		6.500	%		7/25/42		646,412		737,898
Federal National Mortgage Association (FNMA), 2013-009 CB		5.500	%		4/25/42		5,137,081		5,706,161
Federal National Mortgage Association (FNMA), 2013-010 JS, IO		5.394	%		2/25/43		1,026,386		227,238	(b)
Federal National Mortgage Association (FNMA), 2013-010 SJ, IO		5.394	%		2/25/43		997,756		187,971	(b)
Federal National Mortgage Association (FNMA), 2014-047 AI, IO		2.133	%		8/25/44		8,139,846		564,926	(b)
Federal National Mortgage Association (FNMA), 2014-047 IA, IO		1.985	%		8/25/44		7,384,217		487,025	(b)
Federal National Mortgage Association (FNMA), 2014-049 KS, IO		2.071	%		8/25/44		6,913,559		443,810	(b)
Federal National Mortgage Association (FNMA) — CAS, 2016-C04 1B		10.842	%		1/25/29		6,650,000		7,404,562	(b)(c)
Federal National Mortgage Association (FNMA) — CAS, 2016-C06 1B		9.842	%		4/25/29		6,490,000		6,712,529	(b)(c)
Federal National Mortgage Association (FNMA) STRIPS, 362 6, IO		5.000	%		8/25/35		2,471,673		468,211
Federal National Mortgage Association (FNMA) STRIPS, 364 13, IO		6.000	%		9/25/35		162,139		34,088
Federal National Mortgage Association (FNMA) STRIPS, 383 18, IO		5.500	%		1/25/38		199,939		39,641
Federal National Mortgage Association (FNMA) STRIPS, 383 20, IO		5.500	%		7/25/37		140,468		28,874
Federal National Mortgage Association (FNMA) STRIPS, 407 41, IO		6.000	%		1/25/38		118,259		24,965
Federal National Mortgage Association (FNMA) STRIPS, 407 42, IO		6.000	%		1/25/38		97,508		20,040
Federal National Mortgage Association (FNMA) STRIPS, 407 C10, IO		5.000	%		1/25/38		945,395		185,460
GE Capital Commercial Mortgage Corp., 2007-C1 AJ		5.677	%		12/10/49		6,000,000		3,849,444	(b)
Government National Mortgage Association (GNMA), 2002-057 FK		1.207	%		8/16/32		640,607		643,472	(b)

See Notes to Financial Statements.

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 19

Schedule of investments (cont’d)

December 31, 2016

Western Asset Mortgage Backed Securities Fund

Security	Rate			Maturity Date		Face Amount		Value
Collateralized Mortgage Obligations — continued
Government National Mortgage Association (GNMA), 2003-094 SD, IO		5.853	%		7/16/33	$	39,672	$	7,504	(b)
Government National Mortgage Association (GNMA), 2004-059 FP		1.007	%		8/16/34		1,132,676		1,135,358	(b)
Government National Mortgage Association (GNMA), 2004-081 SK, IO		5.493	%		10/16/34		1,339,488		225,143	(b)
Government National Mortgage Association (GNMA), 2007-017 IB, IO		5.511	%		4/20/37		7,344,399		1,248,314	(b)
Government National Mortgage Association (GNMA), 2007-045 QB, IO		5.861	%		7/20/37		1,281,290		151,553	(b)
Government National Mortgage Association (GNMA), 2009-H01 FA		1.889	%		11/20/59		1,534,302		1,552,858	(b)
Government National Mortgage Association (GNMA), 2010-004 SI, IO		5.393	%		11/16/34		3,058,460		462,003	(b)
Government National Mortgage Association (GNMA), 2010-031 GS, IO, PAC-1		5.761	%		3/20/39		70,717		6,646	(b)
Government National Mortgage Association (GNMA), 2010-042 BS, IO		5.741	%		4/20/40		19,834		3,075	(b)
Government National Mortgage Association (GNMA), 2010-059 LB, PAC-1		4.500	%		10/20/39		2,894,316		3,062,207
Government National Mortgage Association (GNMA), 2010-059 SM, IO		5.293	%		5/16/40		980,669		167,980	(b)
Government National Mortgage Association (GNMA), 2010-085 HS, IO, PAC		5.911	%		1/20/40		48,282		7,117	(b)
Government National Mortgage Association (GNMA), 2010-099 NI, IO, PAC-1		4.500	%		9/20/37		304,754		4,543
Government National Mortgage Association (GNMA), 2010-109 CI, IO, PAC-1		4.500	%		12/20/37		245,778		7,472
Government National Mortgage Association (GNMA), 2010-109 MI, IO, PAC-1		4.500	%		10/20/37		432,803		10,076
Government National Mortgage Association (GNMA), 2010-151 AI, IO		4.500	%		5/20/37		8,778,558		843,877
Government National Mortgage Association (GNMA), 2010-168 MI, IO, PAC		4.500	%		7/20/37		411,418		4,081
Government National Mortgage Association (GNMA), 2010-H02 FA		1.286	%		2/20/60		4,932,919		4,939,361	(b)
Government National Mortgage Association (GNMA), 2011-002 NS, IO, PAC		5.373	%		3/16/39		377,338		26,171	(b)
Government National Mortgage Association (GNMA), 2011-040 EI, IO		4.000	%		12/16/25		528,584		42,192
Government National Mortgage Association (GNMA), 2011-113 PQ		5.000	%		6/20/39		2,800,000		3,082,485

See Notes to Financial Statements.

20 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

Western Asset Mortgage Backed Securities Fund

Security	Rate			Maturity Date		Face Amount		Value
Collateralized Mortgage Obligations — continued
Government National Mortgage Association (GNMA), 2011-142 IO, IO		0.726	%		9/16/46	$	14,811,803	$	394,937	(b)
Government National Mortgage Association (GNMA), 2012-013 SK, IO		5.911	%		2/20/41		2,711,098		444,611	(b)
Government National Mortgage Association (GNMA), 2012-070 IO, IO		0.586	%		8/16/52		27,686,455		838,830	(b)
Government National Mortgage Association (GNMA), 2013-010 AI, IO		3.500	%		1/20/43		2,688,641		497,263
Government National Mortgage Association (GNMA), 2013-090 PI, IO, PAC-1		3.500	%		10/20/41		9,973,023		1,250,185
Government National Mortgage Association (GNMA), 2013-142 IO, IO		0.936	%		9/16/51		12,855,876		740,100	(b)
Government National Mortgage Association (GNMA), 2013-145 IO, IO		1.077	%		9/16/44		5,788,274		318,399	(b)
Government National Mortgage Association (GNMA), 2013-163, IO		1.158	%		2/16/46		19,816,768		1,227,444	(b)
Government National Mortgage Association (GNMA), 2014-016 IO, IO		0.862	%		6/16/55		9,214,196		423,829	(b)
Government National Mortgage Association (GNMA), 2014-050 IO, IO		0.919	%		9/16/55		5,602,615		321,177	(b)
Government National Mortgage Association (GNMA), 2014-091 SB, IO		4.893	%		6/16/44		3,588,919		554,008	(b)
Government National Mortgage Association (GNMA), 2015-073 IO, IO		0.859	%		11/16/55		9,461,982		588,701	(b)
Government National Mortgage Association (GNMA), 2015-167 OI, IO		4.000	%		4/16/45		7,847,853		1,623,728
Government National Mortgage Association (GNMA), 2016-051 NS, IO		5.311	%		4/20/46		6,526,640		1,263,585	(b)
Government National Mortgage Association (GNMA), 2016-087, IO, IO		1.008	%		8/16/58		27,001,260		2,151,568	(b)
Government National Mortgage Association (GNMA), 2016-118 ES, IO		5.361	%		9/20/46		5,352,088		1,192,210	(b)
GS Mortgage Securities Trust, 2006-GG8 AJ		5.622	%		11/10/39		411,000		354,986
GS Mortgage Securities Trust, 2013-GC14 F		4.765	%		8/10/46		540,000		381,391	(b)(c)
GS Mortgage Securities Trust, 2015-GS1 E		4.570	%		11/10/48		1,400,000		879,949	(b)(c)
GS Mortgage Securities Trust, 2015-GS1 F		4.570	%		11/10/48		700,000		387,572	(b)(c)
GS Mortgage Securities Trust, 2016-ICE2 E		9.038	%		2/15/33		2,750,000		2,810,314	(b)(c)
GSMPS Mortgage Loan Trust, 2004-4 2A1		3.506	%		6/25/34		1,640,976		1,559,762	(b)(c)
GSMPS Mortgage Loan Trust, 2006-RP1 1AF1		1.106	%		1/25/36		2,551,247		2,149,832	(b)(c)
GSMPS Mortgage Loan Trust, 2006-RP2 1AF1		1.156	%		4/25/36		2,426,481		2,019,887	(b)(c)
HarborView Mortgage Loan Trust, 2006-07 2A1A		0.909	%		9/19/46		453,681		329,279	(b)

See Notes to Financial Statements.

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 21

Schedule of investments (cont’d)

December 31, 2016

Western Asset Mortgage Backed Securities Fund

Security	Rate			Maturity Date		Face Amount		Value
Collateralized Mortgage Obligations — continued
Homebanc Mortgage Trust, 2004-2 A1		1.324	%		12/25/34	$	2,643,561	$	2,497,216	(b)
HSI Asset Loan Obligation Trust, 2006-2 1A8, IO		5.874	%		12/25/36		8,488,147		1,887,952	(b)
Hyatt Hotel Portfolio Trust, 2014-HYMZ M		6.929	%		11/15/19		2,000,000		2,030,066	(b)(c)
IMPAC CMB Trust, 2004-10 3A1		1.456	%		3/25/35		401,268		364,503	(b)
IMPAC CMB Trust, 2007-A A		1.006	%		5/25/37		741,870		679,984	(b)(c)
IMPAC Secured Assets Corp., 2005-2 A1		0.912	%		3/25/36		344,707		249,029	(b)
Indymac Index Mortgage Loan Trust, 2005-AR1 1A1		3.064	%		3/25/35		175,114		170,917	(b)
JPMorgan Chase Commercial Mortgage Securities Trust, 2006-CB16 AJ		5.623	%		5/12/45		779,794		672,377
JPMorgan Chase Commercial Mortgage Securities Trust, 2006-LDP9 AJ		5.411	%		5/15/47		5,530,000		3,954,475
JPMorgan Chase Commercial Mortgage Securities Trust, 2007-CB18 AJ		5.502	%		6/12/47		1,459,771		1,211,884	(b)
JPMorgan Chase Commercial Mortgage Securities Trust, 2007-CB19 AJ		5.713	%		2/12/49		4,200,000		3,421,950	(b)
JPMorgan Chase Commercial Mortgage Securities Trust, 2007-LD12 AJ		6.039	%		2/15/51		805,000		739,649	(b)
JPMorgan Chase Commercial Mortgage Securities Trust, 2007-LDPX AJ		5.503	%		1/15/49		6,290,000		2,486,963	(b)
JPMorgan Chase Commercial Mortgage Securities Trust, 2014-FL6 D		4.954	%		11/15/31		1,830,000		1,728,357	(b)(c)
Lehman Mortgage Trust, 2006-4 2A2, IO		6.516	%		8/25/36		5,495,012		1,756,609	(b)
MASTR Adjustable Rate Mortgages Trust, 2006-0A1 1A1		0.966	%		4/25/46		885,043		637,984	(b)
MASTR Adjustable Rate Mortgages Trust, 2007-3 12A1		0.956	%		5/25/47		235,853		182,907	(b)
MASTR Reperforming Loan Trust, 2006-2 1A1		4.513	%		5/25/36		679,593		613,870	(b)(c)
ML-CFC Commercial Mortgage Trust, 2007-5 AJFL		5.450	%		8/12/48		4,650,000		4,009,057	(b)(c)
Morgan Stanley Bank of America Merrill Lynch Trust, 2015-C21 E		3.012	%		3/15/48		1,090,000		614,647	(c)
Morgan Stanley Bank of America Merrill Lynch Trust, 2015-C25 E		4.529	%		10/15/48		3,000,000		1,919,247	(b)(c)
Morgan Stanley Bank of America Merrill Lynch Trust, 2015-C25 F		4.529	%		10/15/48		1,350,000		724,101	(b)(c)
Morgan Stanley Capital I Trust, 2007-IQ15 AJ		5.902	%		6/11/49		4,100,000		3,791,035	(b)
Morgan Stanley Capital I Trust, 2007-IQ16 AJ		6.095	%		12/12/49		750,000		690,542	(b)
Morgan Stanley Mortgage Loan Trust, 2004-6AR		3.320	%		8/25/34		151,627		150,081	(b)
Morgan Stanley Mortgage Loan Trust, 2006-8AR 1A2		0.826	%		6/25/36		46,437		19,907	(b)
Morgan Stanley Re-REMIC Trust, 2015-R6 1A1		0.852	%		7/26/45		1,518,203		1,428,258	(b)(c)
Motel 6 Trust, 2015-MTL6 F		5.000	%		2/5/30		2,520,000		2,439,179	(c)
Multifamily Trust, 2016-1 B		9.855	%		4/25/46		4,463,404		4,914,177	(b)(c)

See Notes to Financial Statements.

22 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

Western Asset Mortgage Backed Securities Fund

Security	Rate			Maturity Date		Face Amount		Value
Collateralized Mortgage Obligations — continued
Novastar Mortgage-Backed Notes, 2006-MTA1 2A1A		0.782	%		9/25/46	$	286,978	$	235,785	(b)
Prime Mortgage Trust, 2006-DR1 2A1		5.500	%		5/25/35		2,088,482		1,960,819	(c)
Provident Funding Mortgage Loan Trust, 2005-1 1A1		2.852	%		5/25/35		20,789		20,767	(b)
Residential Accredit Loans Inc., 2007-QO4 A1		0.956	%		5/25/47		1,391,895		1,170,267	(b)
Residential Accredit Loans Inc., 2007-QO4 A1A		0.946	%		5/25/47		1,114,936		936,508	(b)
Seasoned Credit Risk Transfer Trust, 2016-1 B, PO		0.000	%		9/25/55		9,342,000		282,362	(c)
Seasoned Credit Risk Transfer Trust, 2016-1 BIO, IO		0.733	%		9/25/55		21,955,000		856,025	(b)(c)
Seasoned Credit Risk Transfer Trust, 2016-1 XSIO, IO		0.075	%		9/25/55		93,426,000		423,593	(b)(c)
Structured Agency Credit Risk Debt Notes, 2015-HQ1 B		11.334	%		3/25/25		6,103,486		7,169,920	(b)
Structured Agency Credit Risk Debt Notes, 2016-DNA1 M2		3.656	%		7/25/28		2,120,000		2,183,375	(b)
Structured Agency Credit Risk Debt Notes, 2016-DNA2 B		11.084	%		10/25/28		2,410,000		2,724,292	(b)
Structured ARM Loan Trust, 2005-02 A2		1.006	%		2/25/35		228,769		198,200	(b)
Structured Asset Mortgage Investments Inc., 2006-AR6 1A1		0.936	%		7/25/46		224,041		186,317	(b)
Structured Asset Securities Corp., 2005-RF1 A		1.106	%		3/25/35		232,869		197,007	(b)(c)
Structured Asset Securities Corp., 2005-RF3 1A		1.106	%		6/25/35		340,647		290,246	(b)(c)
UBS-Barclays Commercial Mortgage Trust, 2012-C2 G		4.885	%		5/10/63		1,330,000		859,204	(b)(c)
UBS-Barclays Commercial Mortgage Trust, 2012-C2 H		4.885	%		5/10/63		2,340,000		1,064,305	(b)(c)
Washington Mutual Inc., Mortgage Pass-Through Certificates, 2005-AR17 A1A1		1.026	%		12/25/45		576,523		545,525	(b)
Washington Mutual Inc., Mortgage Pass-Through Certificates, 2005-AR19 A1A2		0.874	%		12/25/45		62,498		58,705	(b)
Washington Mutual Inc., Mortgage Pass-Through Certificates, 2006-AR07 2A		1.522	%		7/25/46		227,193		185,100	(b)
Washington Mutual Inc., Mortgage Pass-Through Certificates, Whole Loan, 2003-AR5 A7		2.834	%		6/25/33		93,870		94,899	(b)
Wells Fargo Commercial Mortgage Trust, 2013-LC12 E		3.500	%		7/15/46		460,000		297,817	(c)
Wells Fargo Commercial Mortgage Trust, 2015-C31 E		4.611	%		11/15/48		3,000,000		1,895,292	(b)(c)
Total Collateralized Mortgage Obligations (Cost — $284,198,027)									284,606,757
Total Investments before Short-Term Investments (Cost — $819,602,748)									821,231,568
Short-Term Investments — 33.1%
Certificates of Deposit — 8.6%
Bank of Montreal		0.750	%		1/20/17		15,000,000		15,000,000
DnB NOR Bank ASA		0.890	%		1/6/17		15,000,000		15,003,661
Mizuho Bank Ltd.		0.900	%		1/12/17		15,000,000		15,003,731
Norinchukin Bank		0.900	%		1/13/17		15,000,000		15,003,529
Sumitomo Mitsui Trust Bank Ltd.		0.730	%		1/30/17		15,000,000		15,000,000
Total Certificates of Deposit (Cost — $75,010,921)									75,010,921

See Notes to Financial Statements.

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 23

Schedule of investments (cont’d)

December 31, 2016

Western Asset Mortgage Backed Securities Fund

Security	Rate			Maturity Date		Face Amount		Value
Commercial Paper — 6.9%
Bank of Tokyo-Mitsubishi UFJ Ltd.		0.680	%		1/9/17	$	15,000,000	$	14,997,733	(e)
BNP Paribas NY Branch		0.700	%		1/17/17		15,000,000		14,995,333	(e)
DBS Bank Ltd.		0.691	%		1/12/17		15,000,000		14,996,838	(e)
Natixis NY		0.680	%		1/9/17		15,000,000		14,997,734	(e)
Total Commercial Paper (Cost — $59,987,638)									59,987,638
U.S. Government Agencies — 5.7%
Federal Home Loan Banks (FHLB), Discount Notes (Cost — $49,996,000)		0.360	%		1/9/17		50,000,000		49,996,000	(e)
Repurchase Agreements — 1.2%
Deutsche Bank Securities Inc. repurchase agreement dated 12/30/16; Proceeds at maturity — $10,000,489; (Fully collateralized by U.S. government obligations, 1.625% due 1/15/18; Market value — $10,200,000) (Cost — $10,000,000)		0.440	%		1/3/17		10,000,000		10,000,000
						Shares
Money Market Funds — 10.7%
State Street Institutional U.S. Government Money Market Fund, Premier Class (Cost — $93,442,732)		0.411	%				93,442,732		93,442,732
Total Short-Term Investments (Cost — $288,437,291)									288,437,291
Total Investments — 127.4% (Cost — $1,108,040,039#)									1,109,668,859
Liabilities in Excess of Other Assets — (27.4)%									(238,498,395	)
Total Net Assets — 100.0%								$	871,170,464

^(a)  This security is traded on a to-be-announced (“TBA”) basis. At December 31, 2016, the Fund held TBA securities with a total cost of $249,604,172 (See Note 1).

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

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

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

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

# Aggregate cost for federal income tax purposes is $1,115,629,172.

See Notes to Financial Statements.

24 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

Western Asset Mortgage Backed Securities Fund

Abbreviations used in this schedule:
ARM	— Adjustable Rate Mortgage
IO	— Interest Only
PAC	— Planned Amortization Class
PO	— Principal Only
REMIC	— Real Estate Mortgage Investment Conduit
Re-REMIC	— ReSecuritizations of Real Estate Mortgage Investment Conduit
STRIPS	— Separate Trading of Registered Interest and Principal Securities

See Notes to Financial Statements.

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 25

Statement of assets and liabilities

December 31, 2016

Assets:
Investments, at value (Cost — $1,108,040,039)	$	1,109,668,859
Foreign currency, at value (Cost — $228,176)		224,669
Cash		894,130
Receivable for securities sold		35,869,660
Receivable for Fund shares sold		6,507,713
Deposits with brokers for OTC swap contracts		3,040,666
Interest receivable		2,463,580
Deposits with brokers for open futures contracts		1,239,494
Deposits with brokers for TBA securities		640,000
Receivable from broker — variation margin on open futures contracts		274,258
Principal paydown receivable		90,056
Prepaid expenses		87,332
Other assets		16,362
Total Assets		1,161,016,779
Liabilities:
Payable for securities purchased		285,714,734
Payable for Fund shares repurchased		2,187,267
OTC swaps, at value		683,983
Investment management fee payable		361,790
Service and/or distribution fees payable		154,337
Distributions payable		152,250
Trustees’ fees payable		3,406
Accrued expenses		588,548
Total Liabilities		289,846,315
Total Net Assets	$	871,170,464
Net Assets:
Par value (Note 7)	$	830
Paid-in capital in excess of par value		887,749,980
Undistributed net investment income		2,770,652
Accumulated net realized loss on investments, futures contracts, written options, swap contracts and foreign currency transactions		(20,192,552)
Net unrealized appreciation on investments, futures contracts, swap contracts and foreign currencies		841,554
Total Net Assets	$	871,170,464

See Notes to Financial Statements.

26 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

Net Assets:
Class 1	$32,494,447
Class A	$548,470,069
Class C	$33,326,596
Class C1	$14,752,713
Class I	$236,449,012
Class IS	$5,677,627
Shares Outstanding:
Class 1	3,095,127
Class A	52,301,251
Class C	3,178,827
Class C1	1,405,365
Class I	22,445,483
Class IS	538,696
Net Asset Value:
Class 1 (and redemption price)	$10.50
Class A (and redemption price)	$10.49
Class C*	$10.48
Class C1*	$10.50
Class I (and redemption price)	$10.53
Class IS (and redemption price)	$10.54
Maximum Public Offering Price Per Share:
Class A (based on maximum initial sales charge of 4.25%)	$10.96

* Redemption price per share is NAV of Class C and Class C1 shares reduced by a 1.00% CDSC if shares are redeemed within one year from purchase payment (See Note 2).

See Notes to Financial Statements.

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 27

Statement of operations

For the Year Ended December 31, 2016

Investment Income:
Interest and distributions	$	34,904,159
Return of capital (Note 1(p))		(5,863,213)
Total Investment Income		29,040,946
Expenses:
Investment management fee (Note 2)		4,573,546
Service and/or distribution fees (Notes 2 and 5)		1,940,058
Transfer agent fees (Note 5)		1,241,746
Registration fees		118,503
Fund accounting fees		89,899
Legal fees		63,108
Shareholder reports		55,617
Audit and tax fees		51,406
Trustees’ fees		18,764
Insurance		11,755
Commitment fees (Note 8)		10,523
Custody fees		9,669
Miscellaneous expenses		30,047
Total Expenses		8,214,641
Net Investment Income		20,826,305
Realized and Unrealized Gain (Loss) on Investments, Futures Contracts Written Options, Swap Contracts and Foreign Currency Transactions (Notes 1, 3 and 4):
Net Realized Gain (Loss) From:
Investment transactions		(5,618,516)
Futures contracts		(1,955,036)
Written options		2,770,150
Swap contracts		(160,798)
Foreign currency transactions		(267)
Net Realized Loss		(4,964,467)
Change in Net Unrealized Appreciation (Depreciation) From:
Investments		(4,037,852)
Futures contracts		139,828
Swap contracts		(683,983)
Foreign currencies		(3,507)
Change in Net Unrealized Appreciation (Depreciation)		(4,585,514)
Net Loss on Investments, Futures Contracts, Written Options, Swap Contracts and Foreign Currency Transactions		(9,549,981)
Increase in Net Assets From Operations	$	11,276,324

See Notes to Financial Statements.

28 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

Statements of changes in net assets

For the Years Ended December 31,	2016		2015
Operations:
Net investment income	$	20,826,305	$	26,987,007
Net realized loss		(4,964,467)		(2,130,256)
Change in net unrealized appreciation (depreciation)		(4,585,514)		(11,815,480)
Increase in Net Assets From Operations		11,276,324		13,041,271
Distributions to Shareholders From (Notes 1 and 6):
Net investment income		(32,243,814)		(24,898,854)
Net realized gains		—		(1,561,182)
Decrease in Net Assets From Distributions to Shareholders		(32,243,814)		(26,460,036)
Fund Share Transactions (Note 7):
Net proceeds from sale of shares		439,101,797		374,577,634
Reinvestment of distributions		29,432,761		24,860,914
Cost of shares repurchased		(408,006,809)		(249,684,784)
Increase in Net Assets From Fund Share Transactions		60,527,749		149,753,764
Increase in Net Assets		39,560,259		136,334,999
Net Assets:
Beginning of year		831,610,205		695,275,206
End of year*	$	871,170,464	$	831,610,205
*Includes undistributed net investment income of:		$2,770,652		$6,255,218

See Notes to Financial Statements.

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 29

Financial highlights

For a share of each class of beneficial interest outstanding throughout each year ended December 31:
Class 1 Shares1	2016			2015			2014			2013			2012
Net asset value, beginning of year		$10.74			$10.91			$10.67			$10.89			$10.55
Income (loss) from operations:
Net investment income		0.27			0.43			0.39			0.39			0.34
Net realized and unrealized gain (loss)		(0.11)			(0.19)			0.32			(0.18)			0.48
Total income from operations		0.16			0.24			0.71			0.21			0.82
Less distributions from:
Net investment income		(0.40)			(0.39)			(0.44)			(0.43)			(0.36)
Net realized gains		—			(0.02)			(0.03)			—			(0.12)
Total distributions		(0.40)			(0.41)			(0.47)			(0.43)			(0.48)
Net asset value, end of year		$10.50			$10.74			$10.91			$10.67			$10.89
Total return2		1.50	%		2.25	%		6.72	%		1.95	%		7.94	%
Net assets, end of year (millions)		$32			$36			$39			$41			$46
Ratios to average net assets:
Gross expenses		0.68	%		0.68	%		0.71	%		0.71	%		0.78	%
Net expenses3		0.68			0.68			0.71			0.71			0.74	4
Net investment income		2.49			3.88			3.54			3.55			3.18
Portfolio turnover rate5		204	%		137	%		299	%		156	%		97	%

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

²  Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

³  As a result of an expense limitation arrangement, effective January 1, 2013, the ratio of total annual fund operating expenses for Class 1 shares did not exceed the ratio of total annual fund operating expenses for Class A shares. This expense limitation arrangement cannot be terminated prior to December 31, 2018 without the Board of Trustees’ consent. Prior to January 1, 2013, the ratio of total annual fund operating expenses for Class 1 shares did not exceed the ratio of total annual fund operating expenses for Class A shares less the 12b-1 differential of 0.25%.

⁴  Reflects fee waivers and/or expense reimbursements.

⁵  Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 832%, 464%, 1,031%, 549% and 229% for the years ended December 31, 2016, 2015, 2014, 2013 and 2012, respectively.

See Notes to Financial Statements.

30 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

For a share of each class of beneficial interest outstanding throughout each year ended December 31:
Class A Shares1	2016			2015			2014			2013			2012
Net asset value, beginning of year		$10.73			$10.90			$10.66			$10.88			$10.53
Income (loss) from operations:
Net investment income		0.24			0.40			0.36			0.37			0.32
Net realized and unrealized gain (loss)		(0.11)			(0.19)			0.32			(0.18)			0.49
Total income from operations		0.13			0.21			0.68			0.19			0.81
Less distributions from:
Net investment income		(0.37)			(0.36)			(0.41)			(0.41)			(0.34)
Net realized gains		—			(0.02)			(0.03)			—			(0.12)
Total distributions		(0.37)			(0.38)			(0.44)			(0.41)			(0.46)
Net asset value, end of year		$10.49			$10.73			$10.90			$10.66			$10.88
Total return2		1.23	%		1.98	%		6.46	%		1.71	%		7.77	%
Net assets, end of year (millions)		$548			$553			$466			$495			$500
Ratios to average net assets:
Gross expenses		0.95	%		0.94	%		0.95	%		0.94	%		0.99	%
Net expenses		0.95			0.94			0.95			0.94			0.99
Net investment income		2.23			3.64			3.31			3.35			2.94
Portfolio turnover rate3		204	%		137	%		299	%		156	%		97	%

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

²  Performance figures, exclusive of sales charges, may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

³  Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 832%, 464%, 1,031%, 549% and 229% for the years ended December 31, 2016, 2015, 2014, 2013 and 2012, respectively.

See Notes to Financial Statements.

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 31

Financial highlights (cont’d)

For a share of each class of beneficial interest outstanding throughout each year ended December 31, unless otherwise noted:
Class C Shares1	2016			2015			2014			2013			20122
Net asset value, beginning of year		$10.73			$10.90			$10.66			$10.88			$10.79
Income (loss) from operations:
Net investment income		0.16			0.32			0.27			0.29			0.11
Net realized and unrealized gain (loss)		(0.11)			(0.18)			0.33			(0.19)			0.19
Total income from operations		0.05			0.14			0.60			0.10			0.30
Less distributions from:
Net investment income		(0.30)			(0.29)			(0.33)			(0.32)			(0.11)
Net realized gains		—			(0.02)			(0.03)			—			(0.10)
Total distributions		(0.30)			(0.31)			(0.36)			(0.32)			(0.21)
Net asset value, end of year		$10.48			$10.73			$10.90			$10.66			$10.88
Total return3		0.42	%		1.28	%		5.74	%		0.84	%		2.83	%
Net assets, end of year (millions)		$33			$22			$8			$7			$4
Ratios to average net assets:
Gross expenses		1.66	%		1.63	%		1.73	%		1.73	%		1.54	%4
Net expenses5		1.66			1.63			1.73			1.70	6		1.54	4
Net investment income		1.48			2.96			2.53			2.69			2.46	4
Portfolio turnover rate7		204	%		137	%		299	%		156	%		97	%

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

²  For the period August 1, 2012 (inception date) to December 31, 2012.

³  Performance figures, exclusive of CDSC, may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

⁴  Annualized.

⁵  As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Class C shares did not exceed 1.75%. This expense limitation arrangement cannot be terminated prior to December 31, 2018 without the Board of Trustees’ consent.

⁶  Reflects fee waivers and/or expense reimbursements.

⁷  Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 832%, 464%, 1,031%, 549% and 229% for the years ended December 31, 2016, 2015, 2014, 2013 and 2012, respectively.

See Notes to Financial Statements.

32 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

For a share of each class of beneficial interest outstanding throughout each year ended December 31:
Class C1 Shares1,2	2016			2015			2014			2013			2012
Net asset value, beginning of year		$10.74			$10.91			$10.67			$10.89			$10.54
Income (loss) from operations:
Net investment income		0.19			0.35			0.30			0.31			0.25
Net realized and unrealized gain (loss)		(0.10)			(0.19)			0.33			(0.17)			0.49
Total income from operations		0.09			0.16			0.63			0.14			0.74
Less distributions from:
Net investment income		(0.33)			(0.31)			(0.36)			(0.36)			(0.27)
Net realized gains		—			(0.02)			(0.03)			—			(0.12)
Total distributions		(0.33)			(0.33)			(0.39)			(0.36)			(0.39)
Net asset value, end of year		$10.50			$10.74			$10.91			$10.67			$10.89
Total return3		0.78	%		1.52	%		5.89	%		1.24	%		7.10	%
Net assets, end of year (millions)		$15			$18			$23			$31			$44
Ratios to average net assets:
Gross expenses		1.40	%		1.40	%		1.49	%		1.43	%		1.62	%
Net expenses		1.40			1.40			1.49			1.43			1.62
Net investment income		1.80			3.14			2.77			2.79			2.28
Portfolio turnover rate4		204	%		137	%		299	%		156	%		97	%

¹  On August 1, 2012, Class C shares were reclassified as Class C1 shares.

²  Per share amounts have been calculated using the average shares method.

³  Performance figures, exclusive of CDSC, may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

⁴  Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 832%, 464%, 1,031%, 549% and 229% for the years ended December 31, 2016, 2015, 2014, 2013 and 2012, respectively.

See Notes to Financial Statements.

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 33

Financial highlights (cont’d)

For a share of each class of beneficial interest outstanding throughout each year ended December 31:
Class I Shares1	2016			2015			2014			2013			2012
Net asset value, beginning of year		$10.78			$10.95			$10.70			$10.93			$10.58
Income (loss) from operations:
Net investment income		0.27			0.43			0.39			0.45			0.36
Net realized and unrealized gain (loss)		(0.11)			(0.18)			0.34			(0.23)			0.48
Total income from operations		0.16			0.25			0.73			0.22			0.84
Less distributions from:
Net investment income		(0.41)			(0.40)			(0.45)			(0.45)			(0.37)
Net realized gains		—			(0.02)			(0.03)			—			(0.12)
Total distributions		(0.41)			(0.42)			(0.48)			(0.45)			(0.49)
Net asset value, end of year		$10.53			$10.78			$10.95			$10.70			$10.93
Total return2		1.43	%		2.28	%		6.90	%		1.97	%		8.06	%
Net assets, end of year (millions)		$236			$195			$149			$259			$20
Ratios to average net assets:
Gross expenses		0.66	%		0.65	%		0.63	%		0.61	%		0.70	%
Net expenses3		0.66			0.65			0.62	4		0.60	4		0.70	4
Net investment income		2.51			3.90			3.60			4.14			3.31
Portfolio turnover rate5		204	%		137	%		299	%		156	%		97	%

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

²  Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

³  As a result of an expense limitation arrangement, effective August 1, 2012, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Class I shares did not exceed 0.70%. This expense limitation arrangement cannot be terminated prior to December 31, 2018 without the Board of Trustees’ consent.

⁴  Reflects fee waivers and/or expense reimbursements.

⁵  Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 832%, 464%, 1,031%, 549% and 229% for the years ended December 31, 2016, 2015, 2014, 2013 and 2012, respectively.

See Notes to Financial Statements.

34 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

For a share of each class of beneficial interest outstanding throughout each year ended December 31, unless otherwise noted:
Class IS Shares	20161,2
Net asset value, beginning of period		$10.84
Income (loss) from operations:
Net investment income		0.09
Net realized and unrealized loss		(0.16)
Total loss from operations		(0.07)
Less distributions from:
Net investment income		(0.23)
Total distributions		(0.23)
Net asset value, end of period		$10.54
Total return3		(0.70)	%
Net assets, end of period (millions)		$6
Ratios to average net assets:
Gross expenses4		0.57	%
Net expenses4,5		0.57
Net investment income4		1.76
Portfolio turnover rate6,7		204	%

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

²  For the period June 30, 2016 (inception date) to December 31, 2016.

³  Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

⁴  Annualized.

⁵  As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Class IS shares did not exceed 0.60%. In addition, the ratio of total annual fund operating expenses for Class IS shares did not exceed the ratio of total annual fund operating expenses for Class I shares. These expense limitation arrangements cannot be terminated prior to December 31, 2018 without the Board of Trustees’ consent.

⁶  Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 832% for the year ended December 31, 2016.

⁷  For the year ended December 31, 2016.

See Notes to Financial Statements.

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 35

Notes to financial statements

1. Organization and significant accounting policies

Western Asset Mortgage Backed Securities Fund (the “Fund”) is a separate diversified investment series of Legg Mason Partners Income Trust (the “Trust”). The Trust, a Maryland statutory trust, is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company.

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

(a) Investment valuation. The valuations for fixed income securities (which may include, but are not limited to, corporate, government, municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) and certain derivative instruments are typically the prices supplied by independent third party pricing services, which may use market prices or broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar securities. Short-term fixed income securities that will mature in 60 days or less are valued at amortized cost, unless it is determined that using this method would not reflect an investment’s fair value. Investments in open-end funds are valued at the closing net asset value per share of each fund on the day of valuation. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. Equity securities for which market quotations are available are valued at the last reported sales price or official closing price on the primary market or exchange on which they trade. When the Fund holds securities or other assets that are denominated in a foreign currency, the Fund will normally use the currency exchange rates as of 4:00 p.m. (Eastern Time). If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers or at the transaction price if the security has recently been purchased and no value has yet been obtained from a pricing service or pricing broker. When reliable prices are not readily available, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund values these securities as determined in accordance with procedures approved by the Fund’s Board of Trustees.

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

36 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

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

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

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

The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.

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

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

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

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

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

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 37

Notes to financial statements (cont’d)

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

ASSETS
Description	Quoted Prices (Level 1)		Other Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Long-term investments†:
Mortgage-backed securities		—	$	452,789,123		—	$	452,789,123
Asset-backed securities		—		58,569,486	$	25,266,202		83,835,688
Collateralized mortgage obligations		—		278,801,757		5,805,000		284,606,757
Total long-term investments		—		790,160,366		31,071,202		821,231,568
Short-term investments†:
Certificates of deposit		—		75,010,921		—		75,010,921
Commercial paper		—		59,987,638		—		59,987,638
U.S. government agencies		—		49,996,000		—		49,996,000
Repurchase agreements		—		10,000,000		—		10,000,000
Money market funds	$	93,442,732		—		—		93,442,732
Total short-term investments		93,442,732		194,994,559		—		288,437,291
Total investments	$	93,442,732	$	985,154,925	$	31,071,202	$	1,109,668,859
Other financial instruments:
Futures contracts		108,672		—		—		108,672
Total	$	93,551,404	$	985,154,925	$	31,071,202	$	1,109,777,531
LIABILITIES
Description	Quoted Prices (Level 1)		Other Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Other financial instruments:
Futures contracts	$	208,448		—		—	$	208,448
OTC total return swaps		—	$	683,983		—		683,983
Total	$	208,448	$	683,983		—	$	892,431

† See Schedule of Investments for additional detailed categorizations.

38 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

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

Investments in Securities	Mortgage- Backed Securities		Asset- Backed Securities		Collateralized Mortgage Obligations		OTC Total Return Swaps			Total
Balance as of December 31, 2015	$	2,470,501	$	29,208,880	$	14,467,270	$	0	*	$	46,146,651
Accrued premiums/discounts		—		—		58,036		—			58,036
Realized gain (loss)1		—		—		(8,200)		16,277			8,077
Change in unrealized appreciation (depreciation)2		—		3,124,428		(280,163)		(683,983)			2,160,282
Purchases		—		—		—		—			—
Sales		(2,470,501)		(10,028,466)		(624,724)		(16,277)			(13,139,968)
Transfers into Level 33		—		2,961,360		—		—			2,961,360
Transfers out of Level 34		—		—		(7,807,219)		683,983			(7,123,236)
Balance as of December 31, 2016		—	$	25,266,202	$	5,805,000		—		$	31,071,202
Net change in unrealized appreciation (depreciation) for investments in securities still held at December 31, 20162		—	$	3,124,428	$	(142,907)		—		$	2,981,521

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

* Amount represents less than $1.

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

²  This amount is included in the change in net unrealized appreciation (depreciation) in the accompanying Statement of Operations. Change in unrealized appreciation (depreciation) includes net unrealized appreciation (depreciation) resulting from changes in investment values during the reporting period and the reversal of previously recorded unrealized appreciation (depreciation) when gains or losses are realized.

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

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

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

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 39

Notes to financial statements (cont’d)

the Fund seeks to assert its rights or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited.

(c) Futures contracts. The Fund uses futures contracts generally to gain exposure to, or hedge against, changes in interest rates or gain exposure to, or hedge against, changes in certain asset classes. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.

Upon entering into a futures contract, the Fund is required to deposit cash or cash equivalents with a broker in an amount equal to a certain percentage of the contract amount. This is known as the ‘‘initial margin’’ and subsequent payments (‘‘variation margin’’) are made or received by the Fund each day, depending on the daily fluctuation in the value of the contract. For certain futures, including foreign denominated futures, variation margin is not settled daily, but is recorded as a net variation margin payable or receivable. The daily changes in contract value are recorded as unrealized gains or losses in the Statement of Operations and the Fund recognizes a realized gain or loss when the contract is closed.

Futures contracts involve, to varying degrees, risk of loss in excess of the amounts reflected in the financial statements. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.

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

(e) Written options. When the Fund writes an option, an amount equal to the premium received by the Fund is recorded as a liability, the value of which is marked-to-market daily to reflect the current market value of the option written. If the option expires, the premium received is recorded as a realized gain. When a written call option is exercised, the difference between the premium received plus the option exercise price and the Fund’s basis in the underlying security (in the case of a covered written call option), or the cost to purchase the underlying security (in the case of an uncovered written call option), including brokerage commission, is recognized as a realized gain or loss. When a written put option is exercised, the amount of the premium received is subtracted from the cost of the security purchased by the Fund from the exercise of the written put option to form the Fund’s basis in the underlying security purchased. The writer or buyer of an option traded on an exchange can liquidate the position before the exercise of the option by entering into a closing transaction. The cost of a closing transaction is deducted from the original premium received resulting in a realized gain or loss to the Fund.

40 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

The risk in writing a covered call option is that the Fund may forego the opportunity of profit if the market price of the underlying security increases and the option is exercised. The risk in writing a put option is that the Fund may incur a loss if the market price of the underlying security decreases and the option is exercised. The risk in writing an uncovered call option is that the Fund is exposed to the risk of loss if the market price of the underlying security increases. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.

(f) Swap agreements. The Fund invests in swaps for the purpose of managing its exposure to interest rate, credit or market risk, or for other purposes. The use of swaps involves risks that are different from those associated with other portfolio transactions. Swap agreements are privately negotiated in the over-the-counter market and may be entered into as a bilateral contract (“OTC Swaps”) or centrally cleared (“Centrally Cleared Swaps”). Unlike Centrally Cleared Swaps, the Fund has credit exposure to the counterparties of OTC Swaps.

In a Centrally Cleared Swap, immediately following execution of the swap, the swap agreement is submitted to a clearinghouse or central counterparty (the “CCP”) and the CCP becomes the ultimate counterparty of the swap agreement. The Fund is required to interface with the CCP through a broker, acting in an agency capacity. All payments are settled with the CCP through the broker. Upon entering into a Centrally Cleared Swap, the Fund is required to deposit initial margin with the broker in the form of cash or securities.

Swap contracts are marked-to-market daily and changes in value are recorded as unrealized appreciation (depreciation). The daily change in valuation of Centrally Cleared Swaps, if any, is recorded as a receivable or payable for variation margin on the Statement of Assets and Liabilities. Gains or losses are realized upon termination of the swap agreement. Collateral, in the form of restricted cash or securities, may be required to be held in segregated accounts with the Fund’s custodian in compliance with the terms of the swap contracts. Securities posted as collateral for swap contracts are identified in the Schedule of Investments and restricted cash, if any, is identified on the Statement of Assets and Liabilities. Risks may exceed amounts recorded in the Statement of Assets and Liabilities. These risks include changes in the returns of the underlying instruments, failure of the counterparties to perform under the contracts’ terms, and the possible lack of liquidity with respect to the swap agreements.

OTC swap payments received or made at the beginning of the measurement period are reflected as a premium or deposit, respectively, on the Statement of Assets and Liabilities. These upfront payments are amortized over the life of the swap and are recognized as realized gain or loss in the Statement of Operations. Net periodic payments received or paid by the Fund are recognized as a realized gain or loss in the Statement of Operations.

The Fund’s maximum exposure in the event of a defined credit event on a credit default swap to sell protection is the notional amount. As of December 31, 2016, the Fund did not hold any credit default swaps to sell protection.

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 41

Notes to financial statements (cont’d)

For average notional amounts of swaps held during the year ended December 31, 2016, see Note 4.

Credit default swaps

The Fund enters into credit default swap (“CDS”) contracts for investment purposes, to manage its credit risk or to add leverage. CDS agreements involve one party making a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party, typically corporate or sovereign issuers, on a specified obligation, or in the event of a write-down, principal shortfall, interest shortfall or default of all or part of the referenced entities comprising a credit index. The Fund may use a CDS to provide protection against defaults of the issuers (i.e., to reduce risk where the Fund has exposure to an issuer) or to take an active long or short position with respect to the likelihood of a particular issuer’s default. As a seller of protection, the Fund generally receives an upfront payment or a stream of payments throughout the term of the swap provided that there is no credit event. If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the maximum potential amount of future payments (undiscounted) that the Fund could be required to make under a credit default swap agreement would be an amount equal to the notional amount of the agreement. These amounts of potential payments will be partially offset by any recovery of values from the respective referenced obligations. As a seller of protection, the Fund effectively adds leverage to its portfolio because, in addition to its total net assets, the Fund is subject to investment exposure on the notional amount of the swap. As a buyer of protection, the Fund generally receives an amount up to the notional value of the swap if a credit event occurs.

Implied spreads are the theoretical prices a lender receives for credit default protection. When spreads rise, market perceived credit risk rises and when spreads fall, market perceived credit risk falls. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to enter into the agreement. Wider credit spreads and decreasing market values, when compared to the notional amount of the swap, represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement. Credit spreads utilized in determining the period end market value of credit default swap agreements on corporate or sovereign issues are disclosed in the Notes to Financial Statements and serve as an indicator of the current status of the payment/performance risk and represent the likelihood or risk of default for credit derivatives. For credit default swap agreements on asset-backed securities and credit indices, the quoted market prices and resulting values, particularly in relation to the notional amount of the contract as well as the annual payment rate, serve as an indication of the current status of the payment/performance risk.

The Fund’s maximum risk of loss from counterparty risk, as the protection buyer, is the fair value of the contract (this risk is mitigated by the posting of collateral by the counterparty to the Fund to cover the Fund’s exposure to the counterparty). As the protection seller, the

42 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

Fund’s maximum risk is the notional amount of the contract. Credit default swaps are considered to have credit risk-related contingent features since they require payment by the protection seller to the protection buyer upon the occurrence of a defined credit event.

Entering into a CDS agreement involves, to varying degrees, elements of credit, market and documentation risk in excess of the related amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreement may default on its obligation to perform or disagree as to the meaning of the contractual terms in the agreement, and that there will be unfavorable changes in net interest rates.

Interest rate swaps

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

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

Total return swaps

The Fund enters into total return swaps for investment purposes. Total return swaps are agreements to exchange the return generated by one instrument for the return generated by another instrument. For example, the agreement to pay a predetermined or fixed interest rate in exchange for a market-linked return based on a notional amount. To the extent the total return of a referenced index or instrument exceeds the offsetting interest obligation, the Fund will receive a payment from the counterparty. To the extent it is less, the Fund will make a payment to the counterparty.

(g) Swaptions. The Fund purchases or writes swaption contracts to manage exposure to fluctuations in interest rates or to enhance yield. The Fund may also purchase and write swaptions to manage exposure to an underlying instrument. Swaption contracts written by the Fund represent an option that gives the purchaser the right, but not the obligation, to enter into a previously agreed upon swap contract at a future date. Swaption contracts purchased by the Fund represent an option that gives the Fund the right, but not the obligation, to enter into a previously agreed upon swap contract at a future date.

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 43

Notes to financial statements (cont’d)

When the Fund writes a swaption, an amount equal to the premium received by the Fund is recorded as a liability, the value of which is marked-to-market daily to reflect the current market value of the swaption written. If the swaption expires, the Fund realizes a gain equal to the amount of the premium received.

When the Fund purchases a swaption, an amount equal to the premium paid by the Fund is recorded as an investment on the Statement of Assets and Liabilities, the value of which is marked-to-market daily to reflect the current market value of the swaption purchased. If the swaption expires, the Fund realizes a loss equal to the amount of the premium paid.

Swaptions are marked-to-market daily based upon quotations from market makers. Changes in the value of the swaption are reported as unrealized gains or losses in the Statement of Operations.

(h) Securities traded on a to-be-announced basis. The Fund may trade securities on a to-be-announced (“TBA”) basis. In a TBA transaction, the Fund commits to purchasing or selling securities which have not yet been issued by the issuer and for which specific information, such as the face amount, maturity date and underlying pool of investments in U.S. government agency mortgage pass-through securities, is not announced. Securities purchased on a TBA basis are not settled until they are delivered to the Fund. Beginning on the date the Fund enters into a TBA transaction, cash, U.S. government securities or other liquid high-grade debt obligations are segregated in an amount equal in value to the purchase price of the TBA security. These securities are subject to market fluctuations and their current value is determined in the same manner as for other securities. At December 31, 2016, the Fund held collateral received for TBA securities from Normura Securities International Inc. in the amount of $247,967.

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

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

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

(j) Stripped securities. The Fund may invest in ‘‘Stripped Securities,’’ a term used collectively for components, or strips, of fixed income securities. Stripped Securities can be

44 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

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

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

(k) Credit and market risk. Investments in securities that are collateralized by real estate mortgages are subject to certain credit and liquidity risks. When market conditions result in an increase in default rates of the underlying mortgages and the foreclosure values of underlying real estate properties are materially below the outstanding amount of these underlying mortgages, collection of the full amount of accrued interest and principal on these investments may be doubtful. Such market conditions may significantly impair the value and liquidity of these investments and may result in a lack of correlation between their credit ratings and values.

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

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

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

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 45

Notes to financial statements (cont’d)

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

(m) Foreign investment risks. The Fund’s investments in foreign securities may involve risks not present in domestic investments. Since securities may be denominated in foreign currencies, may require settlement in foreign currencies or pay interest or dividends in foreign currencies, changes in the relationship of these foreign currencies to the U.S. dollar can significantly affect the value of the investments and earnings of the Fund. Foreign investments may also subject the Fund to foreign government exchange restrictions, expropriation, taxation or other political, social or economic developments, all of which affect the market and/or credit risk of the investments.

(n) Counterparty risk and credit-risk-related contingent features of derivative instruments. The Fund may invest in certain securities or engage in other transactions, where the Fund is exposed to counterparty credit risk in addition to broader market risks. The Fund may invest in securities of issuers, which may also be considered counterparties as trading partners in other transactions. This may increase the risk of loss in the event of default or bankruptcy by the counterparty or if the counterparty otherwise fails to meet its contractual obligations. The Fund’s subadviser attempts to mitigate counterparty risk by (i) periodically assessing the creditworthiness of its trading partners, (ii) monitoring and/or limiting the amount of its net exposure to each individual counterparty based on its assessment and (iii) requiring collateral from the counterparty for certain transactions. Market events and changes in overall economic conditions may impact the assessment of such counterparty risk by the subadviser. In addition, declines in the values of underlying collateral received may expose the Fund to increased risk of loss.

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

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

Absent an event of default by the counterparty or a termination of the agreement, the terms of the master agreements do not result in an offset of reported amounts of financial assets

46 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

and financial liabilities in the Statement of Assets and Liabilities across transactions between the Fund and the applicable counterparty. The enforceability of the right to offset may vary by jurisdiction.

As of December 31, 2016, the Fund held OTC total return swaps with credit related contingent features which had a liability position of $683,983. If a contingent feature in the master agreements would have been triggered, the Fund would have been required to pay this amount to its derivatives counterparties. As of December 31, 2016, the Fund had posted with its counterparties cash and/or securities as collateral to cover the net liability of these derivatives amounting to $3,040,666, which could be used to reduce the required payment.

(o) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Paydown gains and losses on mortgage and asset-backed securities are recorded as adjustments to interest income. Dividend income is recorded on the ex-dividend date. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults or a credit event occurs that impacts the issuer, the Fund may halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default or credit event.

(p) Partnership accounting policy. The Fund records its pro rata share of the income (loss) and capital gains (losses), to the extent of distributions it has received, allocated from the underlying partnerships and accordingly adjusts the cost basis of the underlying partnerships for return of capital. These amounts are included in the Fund’s Statement of Operations.

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

(r) Share class accounting. Investment income, common expenses and realized/unrealized gains (losses) on investments are allocated to the various classes of the Fund on the basis of daily net assets of each class. Fees relating to a specific class are charged directly to that share class.

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

(t) Federal and other taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986 (the “Code”), as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute its taxable income and net realized gains, if any, to shareholders in accordance

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 47

Notes to financial statements (cont’d)

with timing requirements imposed by the Code. Therefore, no federal or state income tax provision is required in the Fund’s financial statements.

Management has analyzed the Fund’s tax positions taken on income tax returns for all open tax years and has concluded that as of December 31, 2016, no provision for income tax is required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.

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

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

	Undistributed Net Investment Income		Accumulated Net Realized Loss		Paid-in Capital
(a)	$	(4,000,000)		—	$	4,000,000
(b)		11,932,943	$	(11,932,943)		—

^(a)  Reclassifications are due to distributions paid in connection with the redemption of Fund shares from prior year.

^(b)  Reclassifications are due to foreign currency transactions treated as ordinary income for tax purposes, losses from mortgage backed securities treated as capital losses for tax purposes, book/tax difference in the treatment of partnership investments and book/tax differences in the treatment of swap contracts.

2. Investment management agreement and other transactions with affiliates

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

Under the investment management agreement, the Fund pays an investment management fee, calculated daily and paid monthly, in accordance with the following breakpoint schedule:

Average Daily Net Assets	Annual Rate
First $4 billion		0.500	%
Next $2 billion		0.450
Next $2 billion		0.400
Over $8 billion		0.350

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

As a result of expense limitation arrangements between the Fund and LMPFA, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary

48 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

expenses and acquired fund fees and expenses, to average net assets of Class C, Class I and Class IS shares did not exceed 1.75%, 0.70% and 0.60%, respectively. In addition, the ratio of total annual fund operating expenses for Class IS shares did not exceed the ratio of total annual fund operating expenses for Class I shares and the ratio of total annual fund operating expenses of Class 1 shares did not exceed the ratio of total annual fund operating expenses for Class A shares. These expense limitation arrangements cannot be terminated prior to December 31, 2018 without the Board of Trustees’ consent.

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

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

There is a maximum initial sales charge of 4.25% for Class A shares. There was a contingent deferred sales charge (“CDSC”) of 4.50% on Class B shares, which applied if redemption occurred within 12 months from purchase payment. This CDSC declined by 0.50% the first year after purchase payment and thereafter by 1.00% per year until no CDSC is incurred. Class C shares and Class C1 shares have a 1.00% CDSC, which applies if redemption occurs within 12 months from purchase payment. In certain cases, Class A shares have a 1.00% CDSC, which applies if redemption occurs within 18 months from purchase payment. This CDSC only applies to those purchases of Class A shares, which, when combined with current holdings of other shares of funds sold by LMIS, equal or exceed $1,000,000 in the aggregate. These purchases do not incur an initial sales charge.

For the year ended December 31, 2016, LMIS and its affiliates retained sales charges of $264,072 on sales of the Fund’s Class A shares. In addition, for the year ended December 31, 2016, CDSCs paid to LMIS and its affiliates were:

	Class A		Class B1		Class C
CDSCs	$	6,992	$	145	$	15,843

¹  On April 29, 2016, the Fund converted its Class B shares into Class A shares.

The Fund had adopted an unfunded, non-qualified deferred compensation plan (the “Plan”) which allowed non-interested trustees (“Independent Trustees”) to defer the receipt of all or a portion of their fees earned until a later date specified by the Independent Trustees. The deferred balances are reported in the Statement of Assets and Liabilities under Trustees’ fees payable and are considered a general obligation of the Fund and any payments made pursuant to the Plan will be made from the Fund’s general assets. The Plan was terminated effective January 1, 2007. This change had no effect on fees previously deferred. As of December 31, 2016, the Fund had accrued $582 as deferred compensation payable.

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 49

Notes to financial statements (cont’d)

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

3. Investments

During the year ended December 31, 2016, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) and U.S. Government & Agency Obligations were as follows:

	Investments		U.S. Government & Agency Obligations
Purchases	$	112,392,997	$	7,436,010,746
Sales		229,957,374		7,299,886,497

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

Gross unrealized appreciation	$	19,808,399
Gross unrealized depreciation		(25,768,712)
Net unrealized depreciation	$	(5,960,313)

At December 31, 2016, the Fund had the following open futures contracts:

	Number of Contracts		Expiration Date		Basis Value		Market Value		Unrealized Appreciation (Depreciation)
Contracts to Buy:
U.S. Treasury 5-Year Notes		447		3/17	$	52,500,836	$	52,595,836	$	95,000
U.S. Treasury 10-Year Notes		362		3/17		45,157,630		44,989,813		(167,817)
U.S. Treasury Ultra 10-Year Ultra Notes		139		3/17		18,675,319		18,634,688		(40,631)
										(113,448)
Contracts to Sell:
U.S. Treasury 2-Year Notes		62		3/17		13,448,297		13,434,625		13,672
Net unrealized depreciation on open futures contracts									$	(99,776)

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

	Number of Contracts/ Notional Amount		Premiums
Written options, outstanding as of December 31, 2015		—		—
Options written		1,014,521,150	$	4,722,144
Options closed		(2,874)		(1,125,353)
Options exercised		—		—
Options expired		(1,014,518,276)		(3,596,791)
Written options, outstanding as of December 31, 2016		—		—

50 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

At December 31, 2016, the Fund had the following open swap contracts:

OTC TOTAL RETURN SWAPS

Swap Counterparty

Notional Amount*

Termination Date

Periodic Payments Made by the Fund

Periodic Payments Received by the Fund†

Upfront Premiums Paid (Received)

Unrealized Depreciation

Credit Suisse

19,246,194

EUR

4/20/20

EURIBOR quarterly

Credit Suisse European Mortgage Capital, 2015-1HWA A, 2.750%(a), due 4/20/20, quarterly

—

$

(683,983)

(b)

* Notional amount denominated in U.S. dollar, unless otherwise noted.

† Periodic payments made/received by the Fund are based on the total return of the referenced entity.

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

^(b)  Swap contract is valued in good faith in accordance with procedures approved by the Board of Trustees (See Note 1).

Abbreviation used in this table:
	EUR — Euro

4. Derivative instruments and hedging activities

Below is a table, grouped by derivative type, that provides information about the fair value and the location of derivatives within the Statement of Assets and Liabilities at December 31, 2016.

ASSET DERIVATIVES1
	Interest Rate Risk
Futures contracts2	$	108,672

LIABILITY DERIVATIVES1
	Interest Rate Risk		Credit Risk		Total
Futures contracts2	$	208,448		—	$	208,448
OTC swap contracts3		—	$	683,983		683,983
Total	$	208,448	$	683,983	$	892,431

¹  Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation (depreciation) and for liability derivatives is payables/net unrealized appreciation (depreciation).

²  Includes cumulative appreciation (depreciation) of futures contracts as reported in the footnotes. Only variation margin is reported within the receivables and/or payables on the Statement of Assets and Liabilities.

³  Values include premiums paid (received) on swap contracts which are shown separately in the Statement of Assets and Liabilities.

The following tables provide information about the effect of derivatives and hedging activities on the Fund’s Statement of Operations for the year ended December 31, 2016. The first table provides additional detail about the amounts and sources of gains (losses) realized on derivatives during the period. The second table provides additional information about the change in unrealized appreciation (depreciation) resulting from the Fund’s derivatives and hedging activities during the period.

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 51

Notes to financial statements (cont’d)

AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED
	Interest Rate Risk		Credit Risk		Equity Risk		Total
Purchased options1	$	(1,240,083)	$	(3,559,788)	$	(2,401,402)	$	(7,201,273)
Written options		579,167		1,315,151		875,832		2,770,150
Futures contracts		(1,955,036)		—		—		(1,955,036)
Swap contracts		1,666,114		(1,826,912)		—		(160,798)
Total	$	(949,838)	$	(4,071,549)	$	(1,525,570)	$	(6,546,957)

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

CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED
	Interest Rate Risk		Credit Risk		Total
Futures contracts	$	139,828		—	$	139,828
Swap contracts		—	$	(683,983)		(683,983)
Total	$	139,828	$	(683,983)	$	(544,155)

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

	Average Market Value
Purchased options†	$	342,644
Written options†		129,732
Futures contracts (to buy)		109,084,305
Futures contracts (to sell)		36,897,958
	Average Notional Balance
Credit default swap contracts (to buy protection)†	$	7,007,692
Total return swap contracts		64,095,626

† At December 31, 2016, there were no open positions held in this derivative.

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

	Gross Amount of Derivative Assets in the Statement of Assets and Liabilities1		Collateral Received		Net Amount
Futures contracts2	$	274,258		—	$	274,258

52 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

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

	Gross Amount of Derivative Liabilities in the Statement of Assets and Liabilities1		Collateral Pledged3,4		Net Amount
OTC swap contracts	$	683,983	$	(683,983)		—

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

²  Amount represents the current day’s variation margin as reported in the Statement of Assets and Liabilities. It differs from the cumulative appreciation (depreciation) presented in the previous table.

³  Gross amounts are not offset in the Statement of Assets and Liabilities.

⁴  In some instances, the actual collateral received and/or pledged may be more than the amount shown here due to overcollateralization.

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

The Fund has adopted a Rule 12b-1 shareholder services and distribution plan and under that plan the Fund pays service and/or distribution fees with respect to its Class A, Class B, Class C and Class C1 shares calculated at the annual rate of 0.25%, 0.75%, 1.00% and 0.70% of the average daily net assets of each class, respectively. Service and/or distribution fees are accrued daily and paid monthly.

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

	Service and/or Distribution Fees		Transfer Agent Fees
Class 1		—	$	44,760
Class A	$	1,470,851		851,981
Class B1		16,999		13,066
Class C		333,496		35,715
Class C1		118,712		25,643
Class I		—		270,548
Class IS2		—		33
Total	$	1,940,058	$	1,241,746

¹  On April 29, 2016, the Fund converted its Class B shares into Class A shares.

²  For the period June 30, 2016 (inception date) to December 31, 2016.

6. Distributions to shareholders by class

	Year Ended December 31, 2016		Year Ended December 31, 2015
Net Investment Income:
Class 1	$	1,293,789	$	1,353,457
Class A		20,465,887		16,609,456
Class B1		51,395		221,053
Class C		932,682		353,965
Class C1		510,128		586,244
Class I		8,891,808		5,774,679
Class IS2		98,125		—
Total	$	32,243,814	$	24,898,854

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 53

Notes to financial statements (cont’d)

	Year Ended December 31, 2016		Year Ended December 31, 2015
Net Realized Gains:
Class 1		—	$	80,896
Class A		—		1,046,868
Class B1		—		18,706
Class C		—		23,909
Class C1		—		43,961
Class I		—		346,842
Class IS2		—		—
Total		—	$	1,561,182

¹  On April 29, 2016, the Fund converted its Class B shares into Class A shares.

²  For the period June 30, 2016 (inception date) to December 31, 2016.

7. Shares of beneficial interest

At December 31, 2016, the Trust had an unlimited number of shares of beneficial interest authorized with a par value of $0.00001 per share. The Fund has the ability to issue multiple classes of shares. Each class of shares represents an identical interest and has the same rights, except that each class bears certain direct expenses, including those specifically related to the distribution of its shares.

Transactions in shares of each class were as follows:

	Year Ended December 31, 2016				Year Ended December 31, 2015
	Shares		Amount		Shares		Amount
Class 1
Shares sold		—		—		—		—
Shares issued on reinvestment		120,702	$	1,293,789		130,897	$	1,434,353
Shares repurchased		(371,337)		(3,982,465)		(376,672)		(4,134,639)
Net decrease		(250,635)	$	(2,688,676)		(245,775)	$	(2,700,286)
Class A
Shares sold		18,560,589	$	199,504,379		18,827,769	$	206,006,951
Shares issued on reinvestment		1,845,701		19,757,787		1,568,698		17,155,192
Shares repurchased		(19,633,365)		(210,373,434)		(11,621,223)		(127,264,181)
Net increase		772,925	$	8,888,732		8,775,244	$	95,897,962
Class B1
Shares sold		9,881	$	106,705		37,112	$	407,318
Shares issued on reinvestment		4,493		48,372		21,588		236,443
Shares repurchased		(686,575)		(7,375,860)		(342,913)		(3,766,865)
Net decrease		(672,201)	$	(7,220,783)		(284,213)	$	(3,123,104)
Class C
Shares sold		1,905,047	$	20,483,988		1,555,612	$	16,973,886
Shares issued on reinvestment		76,298		815,751		28,998		316,047
Shares repurchased		(887,886)		(9,460,966)		(265,563)		(2,903,217)
Net increase		1,093,459	$	11,838,773		1,319,047	$	14,386,716

54 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

	Year Ended December 31, 2016						Year Ended December 31, 2015
	Shares			Amount			Shares		Amount
Class C1
Shares sold		126,316		$	1,358,074			129,227	$	1,418,311
Shares issued on reinvestment		44,100			472,537			53,336		584,266
Shares repurchased		(474,025)			(5,081,857)			(562,031)		(6,172,452)
Net decrease		(303,609)		$	(3,251,246)			(379,468)	$	(4,169,875)
Class I
Shares sold		19,648,564		$	211,217,843			13,617,409	$	149,771,168
Shares issued on reinvestment		645,817			6,946,400			467,323		5,134,613
Shares repurchased		(15,911,570)			(171,012,772)			(9,581,952)		(105,443,430)
Net increase		4,382,811		$	47,151,471			4,502,780	$	49,462,351
Class IS
Shares sold		597,835	2	$	6,430,808	2		—		—
Shares issued on reinvestment		9,178	2		98,125	2		—		—
Shares repurchased		(68,317)	2		(719,455)	2		—		—
Net increase		538,696	2	$	5,809,478	2		—		—

¹  On April 29, 2016, the Fund converted 121,526 Class B shares into 121,955 Class A shares, valued at $1,308,581. These amounts are reflected in the Class A shares sold and Class B shares repurchased, respectively.

²  For the period June 30, 2016 (inception date) to December 31, 2016.

8. Redemption facility

The Fund and certain other participating funds within Legg Mason Partners Income Trust, Legg Mason Partners Institutional Trust, Legg Mason Partners Variable Income Trust, and Master Portfolio Trust (the “Participating Funds”), have available an unsecured revolving credit facility (the “Redemption Facility”) from the lenders and The Bank of New York Mellon (“BNY Mellon”), as administrative agent for the lenders. The Redemption Facility is to be used for temporary or emergency purposes as an additional source of liquidity to fund redemptions of shares. Under the agreement, BNY Mellon provides a 364-day revolving credit facility, in the aggregate amount of $220 million. Unless renewed, the agreement will terminate on November 20, 2017. Any borrowings under the Redemption Facility will bear interest at current market rates as set forth in the credit agreement. The annual commitment fee to maintain the Redemption Facility is 0.10% and is incurred on the unused portion of the facility and is allocated to all Participating Funds pro rata based on net assets. For the year ended December 31, 2016, the Fund incurred a commitment fee in the amount of $10,523. The Fund did not utilize the Redemption Facility during the year ended December 31, 2016.

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 55

Notes to financial statements (cont’d)

9. Income tax information and distributions to shareholders

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

	2016		2015
Distributions paid from:
Ordinary income	$	32,243,814	$	25,013,057
Net long-term capital gains		—		1,446,979
Total distributions paid	$	32,243,814	$	26,460,036

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

Undistributed ordinary income — net	$	2,162,309
Deferred capital losses*		(12,704,263)
Other book/tax temporary differences(a)		709,187
Unrealized appreciation (depreciation)(b)		(6,747,579)
Total accumulated earnings (losses) — net	$	(16,580,346)

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

^(a)  Other book/tax temporary differences are attributable to the realization for tax purposes of unrealized gains (losses) on certain futures and foreign currency contracts and book/tax differences in the timing of the deductibility of various expenses.

^(b)  The difference between book-basis and tax-basis unrealized appreciation (depreciation) is attributable to the tax deferral of losses on wash sales, the difference between the book and tax cost of investments in partnerships and other book/tax basis adjustments.

10. Recent accounting pronouncement

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

56 Western Asset Mortgage Backed Securities Fund 2016 Annual Report

Report of independent registered public

accounting firm

The Board of Trustees and Shareholders

Legg Mason Partners Income Trust:

We have audited the accompanying statement of assets and liabilities of Western Asset Mortgage Backed Securities Fund (the “Fund”), a series of Legg Mason Partners Income Trust, including the schedule of investments, as of December 31, 2016, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2016, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Western Asset Mortgage Backed Securities Fund as of December 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.

New York, New York

February 21, 2017

Western Asset Mortgage Backed Securities Fund 2016 Annual Report 57

Board approval of management and

subadvisory agreements (unaudited)

At an in-person meeting of the Board of Trustees of Legg Mason Partners Income Trust (the “Trust”) held on November 7-8, 2016, the Board, including the Trustees who are not considered to be “interested persons” of the Trust (the “Independent Trustees”) under the Investment Company Act of 1940, as amended (the “1940 Act”), approved for an annual period the continuation of the management agreement (the “Management Agreement”) between the Trust and Legg Mason Partners Fund Advisor, LLC (the “Manager”) with respect to Western Asset Mortgage Backed Securities Fund, a series of the Trust (the “Fund”), and the sub-advisory agreement (the “Sub-Advisory Agreement”) between the Manager and Western Asset Management Company (the “Subadviser”), an affiliate of the Manager, with respect to the Fund.

Background

The Board received extensive information in advance of the meeting from the Manager to assist it in its consideration of the Management Agreement and the Sub-Advisory Agreement and was given the opportunity to ask questions and request additional information from management. Throughout the prior year the Board had met with representatives of the Manager and the Subadviser, and had received information relevant to the renewal of the Management Agreement and the Sub-Advisory Agreement. In addition, prior to the meeting the Independent Trustees met with their independent legal counsel to discuss and consider the information provided by management and submitted questions to management, and they considered the responses provided. The Board received and considered a variety of information about the Manager and the Subadviser, as well as the management and sub-advisory arrangements for the Fund and other funds overseen by the Board, certain portions of which are discussed below. The information received and considered by the Board both in conjunction with the November meeting and throughout the year was both written and oral.

The information provided and presentations made to the Board encompassed the Fund and all funds for which the Board has responsibility. The discussion below covers both the advisory and the administrative functions being rendered by the Manager, both of which functions are encompassed by the Management Agreement, as well as the advisory functions rendered by the Subadviser pursuant to the Sub-Advisory Agreement.

Board approval of management agreement and sub-advisory agreement

The Independent Trustees were advised by separate independent legal counsel throughout the process. Prior to voting, the Independent Trustees received a memorandum from their independent legal counsel discussing the legal standards for their consideration of the proposed continuation of the Management Agreement and the Sub-Advisory Agreement. The Independent Trustees also reviewed the proposed continuation of the Management Agreement and the Sub-Advisory Agreement in private sessions with their independent legal counsel at which no representatives of the Manager and Subadviser were present. The Independent Trustees considered the Management Agreement and the Sub-Advisory Agreement separately in the course of their review. In doing so, they noted the respective roles of the Manager and the Subadviser in providing services to the Fund.

58 Western Asset Mortgage Backed Securities Fund

In approving the Management Agreement and Sub-Advisory Agreement, the Board, including the Independent Trustees, considered a variety of factors, including those factors discussed below. No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve the Management Agreement and the Sub-Advisory Agreement. Each Trustee may have attributed different weight to the various factors in evaluating the Management Agreement and the Sub-Advisory Agreement.

After considering all relevant factors and information, the Board, exercising its business judgment, determined that the continuation of the Management Agreement and Sub-Advisory Agreement was in the best interests of the Fund’s shareholders and approved the continuation of each such agreement for another year.

Nature, extent and quality of the services under the management agreement and sub-advisory agreement

The Board received and considered information regarding the nature, extent and quality of services provided to the Fund by the Manager and the Subadviser under the Management Agreement and the Sub-Advisory Agreement, respectively, during the past year. The Board noted information received at regular meetings throughout the year related to the services rendered by the Manager in its management of the Fund’s affairs and the Manager’s role in coordinating the activities of the Fund’s other service providers. The Board’s evaluation of the services provided by the Manager and the Subadviser took into account the Board’s knowledge gained as Trustees of funds in the Legg Mason fund complex, including knowledge gained regarding the scope and quality of the investment management and other capabilities of the Manager and the Subadviser, and the quality of the Manager’s administrative and other services. The Board observed that the scope of services provided by the Manager and the Subadviser, and of the undertakings required of the Manager and Subadviser in connection with those services, including maintaining and monitoring their own and the Fund’s compliance programs, liquidity management programs and cybersecurity programs, had expanded over time as a result of regulatory, market and other developments. The Board also noted that on a regular basis it received and reviewed information from the Manager and the Subadviser regarding the Fund’s compliance policies and procedures established pursuant to Rule 38a-1 under the 1940 Act. The Board also considered the risks associated with the Fund borne by the Manager and its affiliates (such as entrepreneurial, operational, reputational, litigation and regulatory risk), as well as the Manager’s and the Subadviser’s risk management processes.

The Board reviewed the qualifications, backgrounds and responsibilities of the Manager’s and the Subadviser’s senior personnel and the team of investment professionals primarily responsible for the day-to-day portfolio management of the Fund. The Board also considered, based on its knowledge of the Manager and its affiliates, the financial resources of Legg Mason, Inc., the parent organization of the Manager and the Subadviser. The Board recognized the importance of having a fund manager with significant resources.

Western Asset Mortgage Backed Securities Fund 59

Board approval of management and

subadvisory agreements (unaudited) (cont’d)

The Board considered the division of responsibilities between the Manager and the Subadviser and the oversight provided by the Manager. The Board also considered the policies and practices of the Manager and the Subadviser regarding the selection of brokers and dealers and the execution of portfolio transactions. In addition, management also periodically reported to the Board on, among other things, its business plans and any organizational changes.

The Board received and considered performance information for the Fund as well as for a group of funds (the “Performance Universe”) selected by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent provider of investment company data. The Board was provided with a description of the methodology Broadridge used to determine the similarity of the Fund with the funds included in the Performance Universe. It was noted that while the Board found the Broadridge data generally useful they recognized its limitations, including in particular that the data may vary depending on the end date selected and that the results of the performance comparisons may vary depending on the selection of the peer group. The Board also noted that it had received and discussed with management information throughout the year at periodic intervals comparing the Fund’s performance against its benchmark and against the Fund’s peers. In addition, the Board considered the Fund’s performance in light of overall financial market conditions.

The information comparing the Fund’s performance to that of its Performance Universe, consisting of all retail and institutional funds classified as U.S. mortgage funds by Broadridge, showed, among other data, that the Fund’s performance for the 1- and 3-year periods ended June 30, 2016 was below the median, and its performance for the 5- and 10-year periods ended June 30, 2016 was above the median. The Board noted the explanations from the Manager and the Subadviser concerning the Fund’s relative performance versus the peer group for the various periods.

The Board concluded that, overall, the nature, extent and quality of services provided (and expected to be provided), including performance, under the Management Agreement and the Sub-Advisory Agreement were sufficient for renewal.

Management fees and expense ratios

The Board reviewed and considered the contractual management fee (the “Contractual Management Fee”) and the actual management fees paid by the Fund to the Manager (the “Actual Management Fee”) in light of the nature, extent and quality of the management and sub-advisory services provided by the Manager and the Subadviser. The Board also considered that fee waiver and/or expense reimbursement arrangements are currently in place for the Fund. The Board also noted that the compensation paid to the Subadviser is the responsibility and expense of the Manager, not the Fund.

In addition, the Board received and considered information provided by Broadridge comparing the Contractual Management Fee and the Actual Management Fee and the Fund’s total actual expenses with those of funds in both the relevant expense group and a broader

60 Western Asset Mortgage Backed Securities Fund

group of funds, each selected by Broadridge. The Board also reviewed information regarding fees charged by the Manager to other U.S. clients investing primarily in an asset class similar to that of the Fund, including, where applicable, separate accounts.

The Manager reviewed with the Board the differences in services provided to these different types of accounts, noting that the Fund is provided with certain administrative services, office facilities, and Fund officers (including the Fund’s chief executive, chief financial and chief compliance officers), and that the Manager coordinates and oversees the provision of services to the Fund by other Fund service providers. The Board considered the fee comparisons in light of the differences in management of these different types of accounts.

The Board considered the overall management fee, the fees of the Subadviser and the amount of the management fee retained by the Manager after payment of the subadvisory fee in each case in light of the services rendered for those amounts. The Board also received an analysis of complex-wide management fees provided by the Manager, which, among other things, set out a framework of fees based on asset classes.

The information comparing the Fund’s Contractual and Actual Management Fees as well as its actual total expense ratio to its expense group, consisting of a group of retail front-end load funds (including the Fund) classified as U.S. mortgage funds and chosen by Broadridge to be comparable to the Fund, showed that the Fund’s Contractual Management Fee was approximately equivalent to the median and the Actual Management Fee was above the median. The Board noted that the Fund’s actual total expense ratio was above the median. The Board took into account management’s discussion of the Fund’s expenses. The Board also considered that the current limitation on the Fund’s expenses is expected to continue through December 2018.

Taking all of the above into consideration, as well as the factors identified below, the Board determined that the management fee and the subadvisory fee for the Fund were reasonable in light of the nature, extent and quality of the services provided to the Fund under the Management Agreement and the Sub-Advisory Agreement.

Manager profitability

The Board received and considered an analysis of the profitability of the Manager and its affiliates in providing services to the Fund. The Board also received profitability information with respect to the Legg Mason fund complex as a whole. In addition, the Board received information with respect to the Manager’s allocation methodologies used in preparing this profitability data. It was noted that the allocation methodologies had been reviewed by an outside consultant. The profitability of the Manager and its affiliates was considered by the Board not excessive in light of the nature, extent and quality of the services provided to the Fund.

Western Asset Mortgage Backed Securities Fund 61

Board approval of management and

subadvisory agreements (unaudited) (cont’d)

Economies of scale

The Board received and discussed information concerning whether the Manager realizes economies of scale as the Fund’s assets grow. The Board noted that the Manager had previously agreed to institute breakpoints in the Fund’s Contractual Management Fee, reflecting the potential for reducing the Contractual Management Fee as the Fund grows. The Board considered whether the breakpoint fee structure was a reasonable means of sharing any economies of scale or other efficiencies that might accrue from increases in the Fund’s asset levels. The Board noted that the Fund had not reached the specified asset level at which a breakpoint to its Contractual Management Fee would be triggered.

The Board determined that the management fee structure for the Fund, including breakpoints, was reasonable.

Other benefits to the manager and the subadviser

The Board considered other benefits received by the Manager, the Subadviser and their affiliates as a result of their relationship with the Fund, including the opportunity to offer additional products and services to Fund shareholders.

In light of the costs of providing investment management and other services to the Fund and the ongoing commitment of the Manager and the Subadviser to the Fund, the Board considered that the ancillary benefits that the Manager and its affiliates received were reasonable.

62 Western Asset Mortgage Backed Securities Fund

Additional information (unaudited)

Information about Trustees and Officers

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

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

Independent Trustees†:
Elliott J. Berv
Year of birth	1943
Position(s) with Trust	Trustee and Chairman
Term of office1 and length of time served2	Since 1989 (Chairman of the Board since 2016)
Principal occupation(s) during past five years	President and Chief Executive Officer, Catalyst (consulting) (since 1984); formerly, Chief Executive Officer, Rocket City Enterprises (media) (2000 to 2005)
Number of funds in fund complex overseen by Trustee	50
Other board memberships held by Trustee during past five years	None
Jane F. Dasher
Year of birth	1949
Position(s) with Trust	Trustee
Term of office1 and length of time served2	Since 1999
Principal occupation(s) during past five years	Chief Financial Officer, Long Light Capital, LLC, formerly known as Korsant Partners, LLC (a family investment company) (since 1997)
Number of funds in fund complex overseen by Trustee	50
Other board memberships held by Trustee during past five years	None
Mark T. Finn
Year of birth	1943
Position(s) with Trust	Trustee
Term of office1 and length of time served2	Since 1989
Principal occupation(s) during past five years	Adjunct Professor, College of William & Mary (since 2002); Chairman, Chief Executive Officer and Owner, Vantage Consulting Group, Inc. (investment management) (since 1988); formerly, Principal/Member, Balvan Partners (investment management) (2002 to 2009)
Number of funds in fund complex overseen by Trustee	50
Other board memberships held by Trustee during past five years	None

Western Asset Mortgage Backed Securities Fund 63

Additional information (unaudited) (cont’d)

Information about Trustees and Officers

Independent Trustees cont’d
Stephen R. Gross
Year of birth	1947
Position(s) with Trust	Trustee
Term of office1 and length of time served2	Since 1986
Principal occupation(s) during past five years	Chairman Emeritus (since 2011) and formerly, Chairman, HLB Gross Collins, P.C. (accounting and consulting firm) (1974 to 2011); Executive Director of Business Builders Team, LLC (since 2005); Principal, Gross Consulting Group, LLC (since 2011); CEO, Gross Capital Partners, LLC (since 2011); CEO, Trusted CFO Solutions, LLC (since 2011)
Number of funds in fund complex overseen by Trustee	50
Other board memberships held by Trustee during past five years	None
Richard E. Hanson, Jr.
Year of birth	1941
Position(s) with Trust	Trustee
Term of office1 and length of time served2	Since 1985
Principal occupation(s) during past five years	Retired; formerly, Headmaster, The New Atlanta Jewish Community High School, Atlanta, Georgia (1996 to 2000)
Number of funds in fund complex overseen by Trustee	50
Other board memberships held by Trustee during past five years	None
Diana R. Harrington
Year of birth	1940
Position(s) with Trust	Trustee
Term of office1 and length of time served2	Since 1992
Principal occupation(s) during past five years	Babson Distinguished Professor of Finance, Babson College (since 1992)
Number of funds in fund complex overseen by Trustee	50
Other board memberships held by Trustee during past five years	None
Susan M. Heilbron
Year of birth	1945
Position(s) with Trust	Trustee
Term of office1 and length of time served2	Since 1994
Principal occupation(s) during past five years	Retired; formerly, President, Lacey & Heilbron (communications consulting) (1990 to 2002); General Counsel and Executive Vice President, The Trump Organization (1986 to 1990); Senior Vice President, New York State Urban Development Corporation (1984 to 1986); Associate, Cravath, Swaine & Moore (1980 to 1984) and (1977 to 1979)
Number of funds in fund complex overseen by Trustee	50
Other board memberships held by Trustee during past five years	Formerly, Director, Lincoln Savings Bank, FSB (1991 to 1994); Director, Trump Shuttle, Inc. (air transportation) (1989 to 1990); Director, Alexander’s Inc. (department store) (1987 to 1990)

64 Western Asset Mortgage Backed Securities Fund

Independent Trustees cont’d
Susan B. Kerley
Year of birth	1951
Position(s) with Trust	Trustee
Term of office1 and length of time served2	Since 1992
Principal occupation(s) during past five years	Investment Consulting Partner, Strategic Management Advisors, LLC (investment consulting) (since 1990)
Number of funds in fund complex overseen by Trustee	50
Other board memberships held by Trustee during past five years	Director and Trustee (since 1990) and formerly, Chairman (2005 to 2012) of various series of MainStay Family of Funds (66 funds); Investment Company Institute (ICI) Board of Governors (2006 to 2014); ICI Executive Committee (2011 to 2014); Chairman of the Independent Directors Council (2012 to 2014)
Alan G. Merten
Year of birth	1941
Position(s) with Trust	Trustee
Term of office1 and length of time served2	Since 1990
Principal occupation(s) during past five years	President Emeritus (since 2012) and formerly, President, George Mason University (1996 to 2012)
Number of funds in fund complex overseen by Trustee	50
Other board memberships held by Trustee during past five years	Director Emeritus (since 2012) and formerly, Director, Cardinal Financial Corporation (2006 to 2012); Trustee, First Potomac Realty Trust (since 2005); formerly, Director, DeVry Inc. (educational services) (2012 to 2016); Director, Xybernaut Corporation (information technology) (2004 to 2006); Director, Digital Net Holdings, Inc. (2003 to 2004); Director, Comshare, Inc. (information technology) (1985 to 2003)
R. Richardson Pettit
Year of birth	1942
Position(s) with Trust	Trustee
Term of office1 and length of time served2	Since 1990
Principal occupation(s) during past five years	Retired; Duncan Professor of Finance Emeritus, University of Houston (1977 to 2006); previous academic or management positions include: University of Washington, University of Pennsylvania and Purdue University
Number of funds in fund complex overseen by Trustee	50
Other board memberships held by Trustee during past five years	None

Western Asset Mortgage Backed Securities Fund 65

Additional information (unaudited) (cont’d)

Information about Trustees and Officers

Interested Trustee and Officer:
Jane Trust, CFA3
Year of birth	1962
Position(s) with Trust	Trustee, President, and Chief Executive Officer
Term of office1 and length of time served2	Since 2015
Principal occupation(s) during past five years	Managing Director of Legg Mason & Co., LLC (“Legg Mason & Co.”) (since 2016); Officer and/or Trustee/Director of 156 funds associated with Legg Mason Partners Fund Advisor, LLC (“LMPFA”) or its affiliates (since 2015); President and Chief Executive Officer of LMPFA (since 2015); formerly, Senior Vice President of LMPFA (2015); Director of ClearBridge, LLC (formerly, Legg Mason Capital Management, LLC) (2007 to 2014); Managing Director of Legg Mason Investment Counsel & Trust Co. (2000 to 2007)
Number of funds in fund complex overseen by Trustee	149
Other board memberships held by Trustee during past five years	None
Additional Officers:
Ted P. Becker Legg Mason 620 Eighth Avenue, 49th Floor, New York, NY 10018
Year of birth	1951
Position(s) with Trust	Chief Compliance Officer
Term of office1 and length of time served2	Since 2007
Principal occupation(s) during past five years	Director of Global Compliance at Legg Mason (since 2006); Chief Compliance Officer of LMPFA (since 2006); Managing Director of Compliance of Legg Mason & Co. (since 2005); Chief Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006)
Susan Kerr Legg Mason 620 Eighth Avenue, 49th Floor, New York, NY 10018
Year of birth	1949
Position(s) with Trust	Chief Anti-Money Laundering Compliance Officer
Term of office1 and length of time served2	Since 2013
Principal occupation(s) during past five years	Assistant Vice President of Legg Mason & Co. and Legg Mason Investor Services, LLC (“LMIS”) (since 2010); Chief Anti-Money Laundering Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2013) and Anti-Money Laundering Compliance Officer of LMIS (since 2012); Senior Compliance Officer of LMIS (since 2011); formerly, AML Consultant, DTCC (2010); AML Consultant, Rabobank Netherlands, (2009); First Vice President, Director of Marketing & Advertising Compliance and Manager of Communications Review Group at Citigroup Inc. (1996 to 2008)

66 Western Asset Mortgage Backed Securities Fund

Additional Officers cont’d
Jenna Bailey Legg Mason 100 First Stamford Place, 6th Floor, Stamford, CT 06902
Year of birth	1978
Position(s) with Trust	Identity Theft Prevention Officer
Term of office1 and length of time served2	Since 2015
Principal occupation(s) during past five years	Identity Theft Prevention Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2015); Compliance Officer of Legg Mason & Co. (since 2013); Assistant Vice President of Legg Mason & Co. (since 2011); formerly, Associate Compliance Officer of Legg Mason & Co. (2011 to 2013); Risk Manager of U.S. Distribution of Legg Mason & Co. (2007 to 2011)
Robert I. Frenkel Legg Mason 100 First Stamford Place, 6th Floor, Stamford, CT 06902
Year of birth	1954
Position(s) with Trust	Secretary and Chief Legal Officer
Term of office1 and length of time served2	Since 2007
Principal occupation(s) during past five years	Vice President and Deputy General Counsel of Legg Mason (since 2006); Managing Director and General Counsel — U.S. Mutual Funds for Legg Mason & Co. (since 2006) and Legg Mason & Co. predecessors (since 1994); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006)
Thomas C. Mandia Legg Mason 100 First Stamford Place, 6th Floor, Stamford, CT 06902
Year of birth	1962
Position(s) with Trust	Assistant Secretary
Term of office1 and length of time served2	Since 2007
Principal occupation(s) during past five years	Managing Director and Deputy General Counsel of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005); Secretary of LMPFA (since 2006); Assistant Secretary of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006); Secretary of LM Asset Services, LLC (“LMAS”) (since 2002) and Legg Mason Fund Asset Management, Inc. (“LMFAM”) (since 2013) (formerly registered investment advisers)

Western Asset Mortgage Backed Securities Fund 67

Additional information (unaudited) (cont’d)

Information about Trustees and Officers

Additional Officers cont’d
Richard F. Sennett Legg Mason 100 International Drive, 7th Floor, Baltimore, MD 21202
Year of birth	1970
Position(s) with Trust	Principal Financial Officer and Treasurer
Term of office1 and length of time served2	Since 2011 and since 2017
Principal occupation(s) during past five years	Principal Financial Officer and Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011 and since 2013); Managing Director of Legg Mason & Co. and Senior Manager of the Treasury Policy group for Legg Mason & Co.’s Global Fiduciary Platform (since 2011); formerly, Chief Accountant within the SEC’s Division of Investment Management (2007 to 2011); Assistant Chief Accountant within the SEC’s Division of Investment Management (2002 to 2007)
Jeanne M. Kelly Legg Mason 620 Eighth Avenue, 49th Floor, New York, NY 10018
Year of birth	1951
Position(s) with Trust	Senior Vice President
Term of office1 and length of time served2	Since 2007
Principal occupation(s) during past five years	Senior Vice President of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2007); Senior Vice President of LMPFA (since 2006); President and Chief Executive Officer of LMAS and LMFAM (since 2015); Managing Director of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005); formerly, Senior Vice President of LMFAM (2013 to 2015)

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

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

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

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

68 Western Asset Mortgage Backed Securities Fund

Western Asset

Mortgage Backed Securities Fund

Trustees

Elliott J. Berv

Chairman

Jane F. Dasher

Mark T. Finn

Stephen R. Gross

Richard E. Hanson, Jr.

Diana R. Harrington

Susan M. Heilbron

Susan B. Kerley

Alan G. Merten

R. Richardson Pettit

Jane Trust

Investment manager

Legg Mason Partners Fund Advisor, LLC

Subadviser

Western Asset Management Company

Distributor

Legg Mason Investor Services, LLC

Custodian

State Street Bank and Trust Company

Transfer agent

BNY Mellon Investment

Servicing (US) Inc.

4400 Computer Drive

Westborough, MA 01581

Independent registered public accounting firm

KPMG LLP

345 Park Avenue

New York, NY 10154

Western Asset Mortgage Backed Securities Fund

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

Western Asset Mortgage Backed Securities Fund

Legg Mason Funds

620 Eighth Avenue, 49^th Floor

New York, NY 10018

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

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

This report is submitted for the general information of the shareholders of Western Asset Mortgage Backed Securities Fund. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by a current prospectus.

Investors should consider the Fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information about the Fund. Please read the prospectus carefully before investing.

www.leggmason.com

© 2017 Legg Mason Investor Services, LLC

Member FINRA, SIPC

Legg Mason Funds Privacy and Security Notice

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

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

The Type of Nonpublic Personal Information the Funds Collect About You

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

• Personal information included on applications or other forms;

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

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

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

How the Funds Use Nonpublic Personal Information About You

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

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

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

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

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

NOT PART OF THE ANNUAL REPORT

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

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

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

Keeping You Informed of the Funds’ Privacy and Security Practices

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

The Funds’ Security Practices

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

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

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

NOT PART OF THE ANNUAL REPORT

www.leggmason.com

© 2017 Legg Mason Investor Services, LLC Member FINRA, SIPC

FD0316 2/17 SR17-2995

ITEM 2. CODE OF ETHICS.

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

ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.

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

ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

a) Audit Fees. The aggregate fees billed in the last two fiscal years ending December 31, 2015 and December 31, 2016 (the “Reporting Periods”) for professional services rendered by the Registrant’s principal accountant (the “Auditor”) for the audit of the Registrant’s annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $177,188 in 2015 and $175,895 in 2016.

b) Audit-Related Fees. The aggregate fees billed in the Reporting Period for assurance and related services by the Auditor that are reasonably related to the performance of the Registrant’s financial statements were $0 in 2015 and $0 in 2016.

(c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning (“Tax Services”) were $14,750 in 2015 and $14,910 in 2016. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, and (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held.

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

d) All Other Fees. There was no other fee billed in the Reporting Periods for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) for the Item for the Legg Mason Partners Income Trust.

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

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

(1) The Charter for the Audit Committee (the “Committee”) of the Board of each registered investment company (the “Fund”) advised by LMPFA or one of their affiliates (each, an “Adviser”) requires that the Committee shall approve (a) all audit and permissible non-audit

services to be provided to the Fund and (b) all permissible non-audit services to be provided by the Fund’s independent auditors to the Adviser and any Covered Service Providers if the engagement relates directly to the operations and financial reporting of the Fund. The Committee may implement policies and procedures by which such services are approved other than by the full Committee.

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

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

(2) For the Legg Mason Partners Income Trust, the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees were 100% and 100% for 2015 and 2016; Tax Fees were 100% and 100% for 2015 and 2016; and Other Fees were 100% and 100% for 2015 and 2016.

(f) N/A

(g) Non-audit fees billed by the Auditor for services rendered to Legg Mason Partners Income Trust, LMPFA and any entity controlling, controlled by, or under common control with LMPFA that provides ongoing services to Legg Mason Partners Income Trust during the reporting period were $0 in 2016.

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

ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.

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

Elliott J. Berv

Jane F. Dasher

Mark T. Finn

Stephen R. Gross

Richard E. Hanson, Jr.

Diana R. Harrington

Susan M. Heilbron

Susan B. Kerley

Alan G. Merten

R. Richardson Pettit

b) Not applicable

ITEM 6. SCHEDULE OF INVESTMENTS.

Included herein under Item 1.

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

Not applicable.

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

Not applicable.

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

Not applicable.

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

Not applicable.

ITEM 11. CONTROLS AND PROCEDURES.

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

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

ITEM 12. EXHIBITS.

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

Exhibit 99.CODE ETH

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

Exhibit 99.CERT

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

Exhibit 99.906CERT

SIGNATURES

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

Legg Mason Partners Income Trust

By:	/s/ Jane Trust
	Jane Trust
	Chief Executive Officer
Date:	February 24, 2017

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

By:	/s/ Jane Trust
	Jane Trust
	Chief Executive Officer
Date:	February 24, 2017
By:	/s/ Richard F. Sennett
	Richard F. Sennett
	Principal Financial Officer
Date:	February 24, 2017