PORTFOLIO MANAGERS’ COMMENTS

Western Asset Management Investment Strategy Group

Market Commentary, Fiscal Year Ended March 31, 2003

At one point in the past year (early October) it looked like we were living the “sum of all fears.” The economy was thought to be on the verge of deflation and/or a double-dip recession, short-term Treasury yields had plunged to levels not seen in over 40 years, credit spreads spiked to levels not seen since the Depression, equity prices had lost almost half of the value they held in early 2000, and a sharply contested war with Iraq seemed inevitable. Credit markets were rocked by a succession of corporate governance scandals, and defaults were many and huge. The mortgage market witnessed wave after wave of refinancings, at a pace once thought impossible, as mortgage interest rates fell 150 basis points.^A Real yields fell, giving Treasury Inflation-Protected Securities’ (“TIPS”) investors an impressive 18% return. Consumer price inflation rose from 1.5% to 3%, fueled by soaring oil prices, which in turn were driven by Middle East tensions and massive strikes in Venezuela. The dollar lost almost 20% of its value against other major currencies as investors’ confidence in the U.S. economy was deeply shaken. In the midst of almost unprecedented turmoil, the bond market delivered impressive returns. Credit spreads rebounded sharply in the second half of the fiscal year, as the market’s fears of catastrophe were allayed and as the Fed delivered another dose of monetary ease, cutting the Fed funds rate to 1.25%, and vowed to fight deflation tooth and nail should it rear its ugly head. As the dust settled, investment grade credits and emerging market bonds delivered total returns of 13.5%. High yield bonds recovered impressively toward the end, but earlier defaults and wider spreads limited total returns to only 4.3%. Mortgage-backed bonds did surprisingly well in light of the pace of refinancings, delivering returns that exceeded their initial coupon by about 150 basis points.

Performance Information

More specific information on the performance of each Fund can be found on the following pages.

The returns shown on the following pages are based on historical results and are not intended to indicate future performance. Total return measures investment performance in terms of appreciation or depreciation in a Fund’s net asset value per share, plus dividends and any capital gain distributions. It assumes that dividends and distributions were reinvested at the time they were paid. The investment return and principal value of an investment in each of these Funds will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Average annual returns tend to smooth out variations in a Fund’s return, so they differ from actual year-to-year results. No adjustment has been made for any income taxes payable by shareholders.

The following graphs and tables compare each Fund’s total returns against that of an appropriate broad-based securities market index. The lines illustrate the cumulative total return of an initial $1,000,000 investment for the periods indicated. The line for each Fund represents the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling securities. The line representing the securities market index does not include any transaction costs associated with buying and selling securities in the index or other investment management or administrative expenses.

^A 100 basis points = 1%.

1

PERFORMANCE INFORMATION

Western Asset Intermediate Portfolio

The impact of market conditions on the Fund’s performance was generally positive in the twelve months ended March 31, 2003, since Treasury yields fell significantly. Investment strategies produced mixed returns, as the Fund’s total return of 11.4% trailed that of its benchmark, the Lehman Intermediate Government/Credit Bond Index, which recorded a total return of 11.7%. A long duration posture held throughout the period benefited from lower interest rates, but this was largely offset by the steepening of the yield curve, which disadvantaged the Fund’s emphasis on longer maturities. A moderate exposure to Treasury Inflation-Protected Securities (“TIPS”) had a positive impact on returns as real yields fell. Moderate exposure to the mortgage-backed sector contributed to performance as spreads narrowed. Corporate overweighting benefited from tighter spreads, but our lower-quality bias suffered from weaker relative performance. Additionally, much of the benefit of tighter spreads was eroded by the impact of several negative credit events.

The graph and table do not reflect the deduction of taxes that a shareholder  would pay on Fund distributions or the redemption of Fund shares.

Past performance is not an indicator of future results.

^B A market value-weighted index that tracks the daily price, coupon, and total return performance of fixed-rate, publicly placed, dollar-denominated obligations. Issuers include the U.S. Treasury, U.S. government agencies, quasi-federal corporations, and corporations whose debt is guaranteed by the U.S. government, and have at least $100 million par amount outstanding and at least one year to maturity. Index returns are for periods beginning June 30, 1994. The index does not incur fees and expenses, and cannot be purchased directly by investors.

2

PERFORMANCE INFORMATION

Western Asset Core Portfolio

The impact of market conditions on the Fund’s performance was generally positive in the twelve months ended March 31, 2003, since Treasury yields fell significantly. Investment strategies produced mixed returns, as the Fund’s Institutional Class total return of 11.2% trailed that of its benchmark, the Lehman Aggregate Bond Index, which recorded a total return of 11.7%. The Fund’s Financial Intermediary Class recorded a total return of 10.8%. A long duration posture held throughout the period benefited from lower interest rates, but this was largely offset by the steepening of the yield curve, which disadvantaged the Fund’s emphasis on longer maturities. A moderate exposure to Treasury Inflation-Protected Securities (“TIPS”) had a positive impact on returns as real yields fell. Overweighting to the mortgage-backed sector also contributed to performance as spreads narrowed. Corporate overweighting benefited from tighter spreads, but our lower-quality bias suffered from weaker relative performance. Additionally, much of the benefit of tighter spreads was eroded by the impact of several negative credit events.

The graph and table do not reflect the deduction of taxes that a shareholder  would pay on Fund distributions or the redemption of Fund shares.

Past performance is not an indicator of future results.

^C A market value-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed rate, publicly placed, dollar-denominated, and nonconvertible investment grade debt issues with at least $100 million par amount outstanding and with at least one year to final maturity. The index does not incur fees and expenses, and cannot be purchased directly by investors. The Fund changed its comparative index from the Salomon Brothers Broad Market Index to the Lehman Aggregate Bond Index because the Fund’s investment adviser believes the Lehman Aggregate Bond Index reflects the Fund’s investment mandate more closely. The Salomon Brothers Broad Market Index is an unmanaged index that measures the performance of the investment-grade universe of bonds issued in the United States. The Index includes institutionally traded U.S. Treasury, government-sponsored, mortgage and corporate securities.

3

PERFORMANCE INFORMATION

Western Asset Core Portfolio (continued)

The graph and table do not reflect the deduction of taxes that a shareholder  would pay on Fund distributions or the redemption of Fund shares.

Past performance is not an indicator of future results.

^D A market value-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed rate, publicly placed, dollar-denominated, and nonconvertible investment grade debt issues with at least $100 million par amount outstanding and with at least one year to final maturity. Index returns are for periods beginning July 31, 1999. The index does not incur fees and expenses, and cannot be purchased directly by investors. The Fund changed its comparative index from the Salomon Brothers Broad Market Index to the Lehman Aggregate Bond Index because the Fund’s investment adviser believes the Lehman Aggregate Bond Index reflects the Fund’s investment mandate more closely. The Salomon Brothers Broad Market Index is an unmanaged index that measures the performance of the investment-grade universe of bonds issued in the United States. The Index includes institutionally traded U.S. Treasury, government-sponsored, mortgage and corporate securities.

4

PERFORMANCE INFORMATION

Western Asset Core Plus Portfolio

The impact of market conditions on the Fund’s performance was generally positive in the twelve months ended March 31, 2003, since Treasury yields fell significantly, although credit spreads experienced mixed results. Investment strategies produced mixed but generally positive returns, as the Fund’s Institutional Class total return of 11.8% edged out that of its benchmark, the Lehman Aggregate Bond Index, which recorded a total return of 11.7%. The Fund’s Financial Intermediary Class recorded a total return of 11.6%. A long duration posture held throughout the period benefited from lower interest rates, but this was largely offset by the steepening of the yield curve, which disadvantaged the Fund’s emphasis on longer maturities. Overweighting to the mortgage-backed sector contributed to performance as spreads narrowed. Corporate overweighting benefited from tighter spreads, but our lower quality bias suffered from weaker relative performance. Additionally, much of the benefit of tighter spreads was eroded by the impact of several negative credit events. A moderate exposure to Treasury Inflation-Protected Securities (“TIPS”) had a positive impact on returns as real yields fell. Emerging market debt exposure made a positive contribution to returns as high yields offset moderately wider spreads, and our exposure to Brazilian bonds benefited from strong relative performance. High yield exposure detracted from performance as spreads on balance widened. Non-dollar exposure was a modest positive, and our decision to leave some currency exposure unhedged was rewarded as the dollar weakened.

The graph and table do not reflect the deduction of taxes that a shareholder  would pay on Fund distributions or the redemption of Fund shares.

Past performance is not an indicator of future results.

^E A market value-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed rate, publicly placed, dollar-denominated, and nonconvertible investment grade debt issues with at least $100 million par amount outstanding and with at least one year to final maturity. Index returns are for periods beginning June 30, 1998. The index does not incur fees and expenses, and cannot be purchased directly by investors. The Fund changed its comparative index from the Salomon Brothers Broad Market Index to the Lehman Aggregate Bond Index because the Fund’s investment adviser believes the Lehman Aggregate Bond Index reflects the Fund’s investment mandate more closely. The Salomon Brothers Broad Market Index is an unmanaged index that measures the performance of the investment-grade universe of bonds issued in the United States. The Index includes institutionally traded U.S. Treasury, government-sponsored, mortgage and corporate securities.

5

PERFORMANCE INFORMATION

Western Asset Core Plus Portfolio (continued)

The graph and table do not reflect the deduction of taxes that a shareholder  would pay on Fund distributions or the redemption of Fund shares.

Past performance is not an indicator of future results.

^F A market value-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed rate, publicly placed, dollar-denominated, and nonconvertible investment grade debt issues with at least $100 million par amount outstanding and with at least one year to final maturity. Index returns are for periods beginning December 31, 2001. The index does not incur fees and expenses, and cannot be purchased directly by investors. The Fund changed its comparative index from the Salomon Brothers Broad Market Index to the Lehman Aggregate Bond Index because the Fund’s investment adviser believes the Lehman Aggregate Bond Index reflects the Fund’s investment mandate more closely. The Salomon Brothers Broad Market Index is an unmanaged index that measures the performance of the investment-grade universe of bonds issued in the United States. The Index includes institutionally traded U.S. Treasury, government-sponsored, mortgage and corporate securities.

6

PERFORMANCE INFORMATION

Western Asset Inflation Indexed Bond Portfolio

The impact of market conditions on the Fund’s performance was positive in the twelve months ended March 31, 2003, as real yields fell across the board and the rate of consumer price inflation, a source of Treasury Inflation-Protected Securities’ (“TIPS”) total returns, rose from 1.5% to 3%. With strategies producing mixed results, the Fund’s total return of 17.6% trailed that of its benchmark, the Lehman U.S. Treasury Inflation Notes Index, which recorded a total return of 18.1%. The Fund was nearly fully invested in TIPS throughout the period. The manager’s decision to hold a modestly long duration for most of the year added to returns as real yields fell, but this was more than offset by a decision to emphasize longer maturities in anticipation of a flatter real yield curve, since the curve steepened significantly over the course of the period as the decline in short-term real rates far outpaced the decline in long-term real rates.

The graph and table do not reflect the deduction of taxes that a shareholder  would pay on Fund distributions or the redemption of Fund shares.

Past performance is not an indicator of future results.

^G An unmanaged index that measures the performance of intermediate (1 to 10 year) U.S. Treasury inflation-protected securities. Index returns are for periods beginning February 28, 2001. The index does not incur fees and expenses, and cannot be purchased directly by investors.

7

PERFORMANCE INFORMATION

Western Asset High Yield Portfolio

For the twelve months ended March 31, 2003, the Lehman High Yield Index returned 4.3%, the Index’s best annual performance since March 1998. The Fund returned 2.2% for the period. The positive absolute return was attained despite the option-adjusted spread for the asset class widening from 627 basis points^H to 723 basis points over the period, according to Lehman. The sharp drop in Treasury rates was responsible for the drop in the high yield market’s yield-to-maturity dropping from 11.8% to 10.6% for the year. During the period from March 31, 2002 to June 30, 2002, the high yield sector returned -6.4%, including June, which was the sector’s worst performing month on record at -7.4%. Poor performance was driven by the flood of more than $64 billion in fallen angel supply (issues entering the index due to a downgrade below investment grade) and discoveries of corporate malfeasance at large corporations such as Qwest and WorldCom. From June 30, 2002 to September 30, 2002, the sector returned -2.9% due to negative investor sentiment bolstered by the ongoing slide in equity prices, continued massive supply of fallen angels, and approximately $1 billion in high yield mutual fund redemptions. During the second half of the fiscal year, September 30, 2002 to March 31, 2003, the market rallied sharply, trading up 14.9% as improving corporate earning outlooks, increasing mutual fund inflows and reduced new issue and fallen angel supply encouraged investors to add high yield risk to their portfolios. The Fund’s performance was hurt by an underweight position in a few outperforming industries (e.g., utilities, 5.8%; and consumer cyclical, 9.2%) and an overweight in a number of underperforming industries (e.g., health care, -1.4%; and wireline, -26.9%). Performance was enhanced by overweights to certain outperforming industries (e.g., capital goods, 14.8%; and media non-cable, 11.6%).

The graph and table do not reflect the deduction of taxes that a shareholder  would pay on Fund distributions or the redemption of Fund shares.

Past performance is not an indicator of future results.

^H 100 basis points = 1%.

^I A market value-weighted index that tracks the daily price-only, coupon, and total return performance of non-investment grade, fixed rate, publicly placed, dollar-denominated, and non-convertible debt registered with the U.S. Securities and Exchange Commission. Index returns are for periods beginning September 30, 2001. The index does not incur fees and expenses, and cannot be purchased directly by investors.

8

PERFORMANCE INFORMATION

Western Asset Non-U.S. Fixed Income Portfolio

Portfolio strategies produced positive results over the past year. The Fund’s total return in the twelve months ended March 31, 2003, was 19.3%, significantly exceeding its benchmark, the Salomon World Government ex-U.S. Index (Hedged), which returned 8.7%. The Fund employed three key strategies. First, there was a significant underweight to the Japanese market, which offered very low yields, in favor of a large overweight to European markets, which outperformed Japan as yields fell more significantly in Europe. Exposure was concentrated in bonds from continental European markets, Canada, Denmark, Sweden, Norway and the U.K.  Issues were mainly government, with a few select high grade non-government issues. Second, the Fund maintained a significant long duration position throughout the year, especially in short-dated securities, which benefited from interest rate cuts in Europe. Third, the Fund held some unhedged euro-denominated bonds, which benefited from significant appreciation of the euro currency versus the dollar.

The graph and table do not reflect the deduction of taxes that a shareholder  would pay on Fund distributions or the redemption of Fund shares.

Past performance is not an indicator of future results.

^J An index encompassing an all-inclusive universe of institutionally traded bonds, including all fixed rate bonds with remaining maturities of one year or longer and with amounts outstanding of at least the equivalent of $25 million USD. This Index excludes the U.S. and is currency-hedged as a means of achieving low-risk interest rate diversification. Index returns are for periods beginning June 30, 1998.

9

STATEMENT OF NET ASSETS

March 31, 2003

(Amounts in Thousands)

Western Asset Intermediate Portfolio

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Long-Term Securities	86.8%
Corporate Bonds and Notes	39.6%
Aerospace/Defense	2.2%
BAE Systems Holdings Inc.		6.400	%	12/15/11	$	4,250	$	4,422	A
Northrop Grumman Corporation		7.125	%	2/15/11		2,000		2,313
Systems 2001 Asset Trust		6.664	%	9/15/13		2,037		2,235	A
United Technologies Corporation		6.350	%	3/1/11		2,580		2,921
								11,891
Banking and Finance	1.9%
Boeing Capital Corporation		6.350	%	11/15/07		1,530		1,643
Ford Motor Credit Company		7.375	%	2/1/11		4,600		4,286
Household Finance Corporation		7.000	%	5/15/12		2,270		2,587
National Westminster Bank PLC		9.375	%	11/15/03		290		305
U.S. Bancorp		3.125	%	3/15/08		1,500		1,482
								10,303
Banks	3.0%
Bank of America Corporation		5.250	%	2/1/07		3,000		3,250
Bank of America Corporation		7.400	%	1/15/11		1,620		1,930
Bank of America Corporation		4.875	%	9/15/12		360		369
Bank One Corporation		6.000	%	8/1/08		4,370		4,878
Bayerische Landesbank Girozentrale NY		5.650	%	2/1/09		360		395
Wachovia Corporation		4.950	%	11/1/06		1,900		2,042
Wells Fargo Bank NA, San Francisco		6.450	%	2/1/11		3,000		3,433
								16,297
Cable	0.9%
TCI Communications, Inc.		8.000	%	8/1/05		220		240
TCI Communications, Inc.		7.610	%	10/4/05		3,060		3,262
Tele-Communications, Inc.		9.800	%	2/1/12		1,040		1,298
								4,800
Computer Services and Systems	0.4%
International Business Machines Corporation		4.750	%	11/29/12		1,900		1,952
Consumer Products	0.4%
Unilever Capital Corporation		7.125	%	11/1/10		1,980		2,342
Diversified Financial Services	1.9%
CIT Group Inc.		2.839	%	3/1/04		1,230		1,237	B,C
Citigroup Inc.		6.500	%	1/18/11		600		685
Citigroup Inc.		6.000	%	2/21/12		300		334
General Electric Capital Corporation		4.250	%	1/15/08		3,510		3,636	B
Washington Mutual, Inc.		4.375	%	1/15/08		2,350		2,424
Wells Fargo & Company		6.750	%	10/1/06		500		564
Wells Fargo & Company		6.375	%	8/1/11		1,000		1,136	B
								10,016

10

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Diversified Services	0.2%
Loews Corporation		3.125	%	9/15/07	$	1,240	$	1,138	D
Electric	2.0%
General Electric Company		5.000	%	2/1/13		3,790		3,876
Niagara Mohawk Power Corporation		8.875	%	5/15/07		2,100		2,499
Niagara Mohawk Power Corporation		7.750	%	10/1/08		2,150		2,544
Virginia Electric and Power Company		4.750	%	3/1/13		2,000		2,013
								10,932
Energy	3.6%
American Electric Power Company, Inc.		6.125	%	5/15/06		3,160		3,360	B
Dominion Resources, Inc.		5.700	%	9/17/12		350		367
DTE Energy Company		7.050	%	6/1/11		2,630		3,011	B
Duke Energy Corporation		6.250	%	1/15/12		1,330		1,409
Exelon Corporation		6.750	%	5/1/11		2,200		2,473
FirstEnergy Corp.		6.450	%	11/15/11		3,740		3,954
MidAmerican Energy Holdings Company		5.875	%	10/1/12		1,020		1,058
PECO Energy Company		5.950	%	11/1/11		325		355
Progress Energy, Inc.		5.850	%	10/30/08		1,250		1,359
Progress Energy, Inc.		7.100	%	3/1/11		1,650		1,856
								19,202
Environmental Services	0.7%
Waste Management, Inc.		6.375	%	12/1/03		600		612
Waste Management, Inc.		7.000	%	10/15/06		2,700		2,979
Waste Management, Inc.		6.375	%	11/15/12		200		213
								3,804
Food, Beverage and Tobacco	3.7%
Altria Group, Inc.		7.000	%	7/15/05		2,000		2,062
Altria Group, Inc.		6.375	%	2/1/06		1,810		1,885
Anheuser-Busch Companies, Inc.		4.625	%	2/1/15		1,350		1,360
Campbell Soup Company		5.000	%	12/3/12		1,500		1,544
Kellogg Company		6.600	%	4/1/11		2,760		3,146
Nabisco Incorporated		7.050	%	7/15/07		3,500		3,984
Pepsi Bottling Holdings Inc.		5.625	%	2/17/09		3,941		4,355	A
R.J. Reynolds Tobacco Holdings, Inc.		6.500	%	6/1/07		1,833		1,843
								20,179
Gas and Pipeline Utilities	0.6%
The Williams Companies, Inc.		8.125	%	3/15/12		3,800		3,325	A
Insurance	0.2%
Ace INA Holdings Inc.		8.200	%	8/15/04		1,090		1,173

11

STATEMENT OF NET ASSETS—Continued

Western Asset Intermediate Portfolio—Continued

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Investment Banking/Brokerage	3.2%
Credit Suisse First Boston USA		6.125	%	11/15/11	$	1,470	$	1,541
J.P. Morgan & Co. Incorporated		5.385	%	2/15/12		2,190		2,267	C
Lehman Brothers Holdings Inc.		8.250	%	6/15/07		1,500		1,777
Lehman Brothers Holdings Inc.		7.000	%	2/1/08		495		568
Lehman Brothers Inc.		6.500	%	4/15/08		3,120		3,526
Morgan Stanley		6.750	%	4/15/11		1,465		1,640
Morgan Stanley		6.600	%	4/1/12		590		658
Morgan Stanley		5.300	%	3/1/13		410		418
Salomon Smith Barney Holdings Inc.		6.250	%	5/15/03		300		302
Salomon Smith Barney Holdings Inc.		6.250	%	1/15/05		2,150		2,302
The Goldman Sachs Group, Inc.		6.875	%	1/15/11		2,100		2,394
								17,393
Investment Management	0.7%
Dryden Investor Trust		7.157	%	7/23/08		3,286		3,521	A
Machinery	0.2%
Caterpillar Inc.		7.250	%	9/15/09		900		1,068
Media	2.0%
Cox Enterprises, Inc.		8.000	%	2/15/07		1,150		1,293	A
News America Holdings Incorporated		9.250	%	2/1/13		1,000		1,269
News America Holdings Incorporated		8.500	%	2/23/25		2,680		2,888
Turner Broadcasting System, Inc.		8.375	%	7/1/13		2,740		3,125
Viacom Inc.		5.625	%	8/15/12		1,920		2,061
								10,636
Metals and Mining	0.2%
Alcoa Inc.		6.000	%	1/15/12		1,090		1,185	B
Oil and Gas	2.6%
Anadarko Petroleum Corporation		5.375	%	3/1/07		2,790		3,010
Apache Corporation		6.250	%	4/15/12		1,980		2,243
ConocoPhillips		6.375	%	3/30/09		2,000		2,264
ConocoPhillips		8.750	%	5/25/10		2,300		2,882
Sonat Inc.		7.625	%	7/15/11		4,880		3,855
								14,254
Paper and Forest Products	1.1%
MeadWestvaco Corporation		6.850	%	4/1/12		1,670		1,872
Weyerhaeuser Company		5.950	%	11/1/08		3,700		3,990
								5,862
Pharmaceuticals	0.2%
Bristol-Myers Squibb Company		5.750	%	10/1/11		1,200		1,287	B

12

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Retail	0.5%
Target Corporation		5.875	%	3/1/12	$	2,320	$	2,520
Special Purpose	4.1%
Bellsouth Capital Funding		7.750	%	2/15/10		2,500		3,007
ChevronTexaco Capital Company		3.500	%	9/17/07		939		958
DaimlerChrysler NA Holding Corp.		7.300	%	1/15/12		3,590		4,009	B
National Rural Utilities Cooperative Finance Corporation		7.250	%	3/1/12		1,500		1,744
Qwest Capital Funding, Inc.		5.875	%	8/3/04		2,200		1,991
Qwest Capital Funding, Inc.		7.250	%	2/15/11		545		414
Sprint Capital Corporation		8.375	%	3/15/12		2,190		2,332	B
Verizon Global Funding Corp.		6.875	%	6/15/12		5,500		6,278
Verizon Global Funding Corp.		0.000	%	5/15/21		2,310		1,354	D,E
								22,087
Telecommunications	1.3%
AT&T Corp.		7.800	%	11/15/11		1,100		1,184
Pacific Bell		6.125	%	2/15/08		3,500		3,905	B
WorldCom, Inc.—WorldCom Group		6.400	%	8/15/05		2,900		776	F
WorldCom, Inc.—WorldCom Group		7.500	%	5/15/11		4,560		1,220	F
								7,085
Telecommunications (Cellular/Wireless)	0.1%
AT&T Wireless Services Inc.		8.125	%	5/1/12		544		616
Transportation	1.7%
CSX Corporation		6.750	%	3/15/11		1,375		1,542
Delta Air Lines, Inc.		6.619	%	3/18/11		2,024		1,893
Delta Air Lines, Inc.		6.718	%	7/2/24		2,716		2,861
The Hertz Corporation		1.880	%	8/13/04		2,500		2,374	B,C
Union Pacific Corporation		7.250	%	11/1/08		250		292
								8,962
Total Corporate Bonds and Notes (Identified Cost—$208,998)								213,830
Asset-Backed Securities	5.3%
Fixed Rate Securities	3.5%
ARG Funding Corp. 1999-1A		6.020	%	5/20/05		3,760		3,846	A
Chevy Chase 1997-A		7.650	%	12/20/07		251		251
Chevy Chase Home Loan Trust 1996-1		7.150	%	5/15/15		152		157
Conseco Finance Securitizations Corp. 2001-1		6.990	%	7/1/32		2,600		2,336
Fleetwood Credit Corp. Grantor Trust 1994-B		6.750	%	3/15/10		757		757
Green Tree Financial Corporation 1994-6		8.900	%	1/15/20		2,600		2,722
Green Tree Recreational, Equipment and Consumer Trust 1998-C		6.700	%	2/15/14		7,000		7,341

13

STATEMENT OF NET ASSETS—Continued

Western Asset Intermediate Portfolio—Continued

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Asset-Backed Securities—Continued
Fixed Rate Securities—Continued
Guaranteed Export Certificates 1995-B		6.130	%	6/15/04	$	353	$	367
Lehman FHA Title I Loan Trust 1996-3		7.710	%	8/25/17		215		215
Mego Mortgage Home Loan Trust 1996-2		7.275	%	8/25/17		140		142
Merrill Lynch Mortgage Investors, Inc. 1990-F		9.650	%	9/15/10		615		615
PSC Grantor Trust 1998-1		6.290	%	6/8/05		119		119	A
								18,868
Indexed SecuritiesC	1.4%
IndyMac Home Equity Loan Asset-backed Trust 2001-A		1.565	%	3/25/31		4,437		4,439
Mesa 2002-1 Global Issuance Company Home Loan Asset Backed Notes		1.650	%	2/18/33		2,899		2,899	A
SLM Student Loan Trust 1998-2		1.854	%	4/25/07		7		7
								7,345
Stripped Securities	0.4%
ACA CDS 2002-1, Ltd.		5.484	%	7/15/08		7,600		1,201	G1
Oakwood Mortgage Investors Inc. 2001-C		6.000	%	5/15/08		6,460		1,210	G1
								2,411
Total Asset-Backed Securities (Identified Cost—$28,133)								28,624
Mortgage-Backed Securities	2.0%
Fixed Rate Securities	1.9%
Asset Securitization Corporation 1996-D2		6.920	%	2/14/29		953		1,022
Asset Securitization Corporation 1996-MD6		6.720	%	11/12/26		365		370
GMAC Commercial Mortgage Securities Inc. 1998-C1		6.700	%	5/15/30		1,000		1,116
Merrill Lynch Mortgage Investors, Inc. 1998-C1		6.310	%	11/15/26		1,021		1,083
Metropolitan Asset Funding, Inc. 1996-A		6.950	%	4/20/08		136		136
Morgan Stanley Capital I 1995-GAL1		7.950	%	8/15/27		2,650		2,951	A
Nomura Asset Securities Corporation 1996-MD5		7.120	%	4/13/39		1,500		1,672
Ocwen Residential MBS Corporation 1998-R1		7.000	%	10/25/40		1,582		1,610	A
								9,960
Stripped Securities	0.1%
CMC Securities Corporation III 1994-B		0.000	%	2/25/09		157		153	G2
FFCA Secured Lending Corporation 1997-1		0.866	%	2/18/22		10,489		294	A,G1
Securitized Asset Sales, Inc. 1995-6		0.000	%	12/25/10		57		57	G2
								504
Variable Rate SecuritiesH	N.M.
Housing Securities Inc. 1995-RP1		1.855	%	11/25/26		142		142	A
Resolution Trust Corporation 1995-2		7.025	%	5/25/29		68		68
Securitized Asset Sales, Inc. 1994-4		4.815	%	8/25/33		20		20
								230
Total Mortgage-Backed Securities (Identified Cost—$10,482)								10,694

14

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
U.S. Government and Agency Obligations	25.8%
Fixed Rate Securities	18.2%
Fannie Mae		5.500	%	5/2/06	$	3,900	$	4,243
Fannie Mae		6.000	%	1/18/12		9,420		10,006	B
Fannie Mae		6.125	%	3/15/12		3,160		3,617	B
Federal Home Loan Bank		6.250	%	8/13/04		250		266
Federal Home Loan Bank		5.800	%	3/30/09		600		677
Freddie Mac		3.500	%	9/15/07		8,087		8,306
Freddie Mac		2.750	%	3/15/08		2,840		2,802	B
Freddie Mac		5.750	%	1/15/12		2,524		2,827	B
Freddie Mac		5.250	%	11/5/12		7,660		7,911
Overseas Private Investment Corporation		7.740	%	8/15/07		3,000		3,456
Tennessee Valley Authority		5.375	%	11/13/08		6,320		6,972
United States Treasury Bonds		8.875	%	8/15/17		3,000		4,397	B
United States Treasury Notes		4.375	%	5/15/07		980		1,052	B
United States Treasury Notes		6.625	%	5/15/07		2,290		2,661	B
United States Treasury Notes		3.000	%	2/15/08		22,120		22,379	B
United States Treasury Notes		4.375	%	8/15/12		9,260		9,680	B
United States Treasury Notes		4.000	%	11/15/12		1,205		1,223	B
United States Treasury Notes		3.875	%	2/15/13		5,490		5,513	B
								97,988
Indexed Securities	6.3%
United States Treasury Inflation-Protected Security		3.875	%	1/15/09		5,539		6,311	B,I
United States Treasury Inflation-Protected Security		3.000	%	7/15/12		17,965		19,548	I
United States Treasury Inflation-Protected Security		3.625	%	4/15/28		7,020		8,251	I
								34,110
Stripped Securities	1.3%
United States Treasury Bonds		0.000	%	11/15/27		26,200		7,140	B,G2
Total U.S. Government and Agency Obligations (Identified Cost—$133,766)								139,238
U.S. Government Agency Mortgage-Backed Securities	6.1%
Fixed Rate Securities	6.1%
Fannie Mae		7.000	%	4/1/08 to 7/1/28		9,192		9,737
Fannie Mae		7.250	%	1/15/10		200		243
Fannie Mae		6.000	%	7/1/13 to 6/1/28		775		805
Fannie Mae		6.500	%	6/1/14 to 8/1/29		2,664		2,793
Fannie Mae		8.000	%	9/1/15		332		356
Fannie Mae		9.500	%	4/1/21		178		200
Freddie Mac		8.500	%	7/1/06		7		7
Freddie Mac		7.760	%	5/1/12		104		111
Freddie Mac		6.500	%	6/1/13 to 11/1/15		345		365

15

STATEMENT OF NET ASSETS—Continued

Western Asset Intermediate Portfolio—Continued

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
U.S. Government Agency Mortgage-Backed Securities—Continued
Fixed Rate Securities—Continued
Freddie Mac		7.500	%	4/1/17	$	37	$	40
Freddie Mac		9.300	%	4/15/19		224		228
Freddie Mac		7.500	%	4/1/33		12,500		13,320	J
Government National Mortgage Association		9.500	%	9/15/05		60		65
Government National Mortgage Association		9.000	%	6/15/06		79		85
Government National Mortgage Association		7.000	%	2/15/28 to 12/15/28		357		378
Government National Mortgage Association		7.000	%	4/1/33		4,000		4,240	J
								32,973
Stripped Securities	N.M.
Fannie Mae		0.000	%	5/25/22		43		38	G2
Freddie Mac		10.000	%	3/1/21		37		9	G1
								47
Variable Rate SecuritiesH	N.M.
Fannie Mae		4.297	%	3/1/18		73		74
Freddie Mac		4.576	%	1/1/19		27		28
								102
Total U.S. Government Agency Mortgage- Backed Securities (Identified Cost—$32,391)								33,122
Yankee BondsK	7.7%
Banks	0.7%
Korea Development Bank		4.250	%	11/13/07		60		59
Royal Bank of Scotland Group plc		9.118	%	3/31/49		2,900		3,612	B
								3,671
Diversified Financial Services	0.5%
Pemex Finance Ltd.		7.800	%	2/15/13		2,400		2,725
Energy	N.M.
Korea Electric Power Corporation		7.750	%	4/1/13		130		155
Foreign Governments	1.9%
Argentine Republic		0.000	%	10/15/03		360		79	E,F
Quebec Province		6.125	%	1/22/11		3,800		4,317
United Mexican States		8.375	%	1/14/11		1,400		1,614
United Mexican States		11.500	%	5/15/26		3,180		4,412
								10,422

16

	% OF NET ASSETS	RATE		MATURITY DATE	PAR/ SHARES			VALUE
Yankee Bonds—Continued
Insurance	0.1%
XL Capital plc		6.500	%	1/15/12	$	700		$	767
Manufacturing (Diversified)	0.9%
Tyco International Group SA		1.790	%	7/30/03		1,850			1,818	C
Tyco International Group SA		5.800	%	8/1/06		3,030			2,894	B
Tyco International Group SA		7.000	%	6/15/28		60			54
Tyco International Group SA		6.875	%	1/15/29		120			110
									4,876
Oil and Gas	0.3%
Anderson Exploration Ltd.		6.750	%	3/15/11		1,250			1,378
Special Purpose	2.1%
BP Canada Finance Company		3.625	%	1/15/09		2,560			2,611
Diageo Capital Plc		3.375	%	3/20/08		2,090			2,090
General Motors Nova Scotia Finance Company		6.850	%	10/15/08		3,100			3,215
PDVSA Finance Ltd.		8.500	%	11/16/12		2,740			2,083
PDVSA Finance Ltd. 1998-1		7.400	%	8/15/16		290			197
Petrozuata Finance, Inc.		8.220	%	4/1/17		1,590			1,097	A
									11,293
Telecommunications	1.2%
British Telecommunications plc		8.375	%	12/15/10		4,130			5,016
Deutsche Telekom International Finance BV		8.500	%	6/15/10		1,300			1,526
									6,542
Total Yankee Bonds (Identified Cost—$39,842)									41,829
Preferred Stocks	0.3%
Home Ownership Funding Corporation		13.331	%			1	shs		360	A,L
Home Ownership Funding Corporation II		13.338	%			2			1,081	A,L
Total Preferred Stocks (Identified Cost—$1,942)									1,441
Total Long-Term Securities (Identified Cost—$455,554)									468,778
Investment of Proceeds From Securities Lending	17.1%
State Street Navigator Securities Lending Prime Portfolio						92,149	shs		92,149
Total Investment of Proceeds From Securities Lending (Identified Cost—$92,149)									92,149
Short-Term Securities	14.4%
U.S. Government and Agency Obligations	0.6%
Fannie Mae		0.000	%	10/22/03	$	3,400			3,377	E,M

17

STATEMENT OF NET ASSETS—Continued

Western Asset Intermediate Portfolio—Continued

	% OF NET ASSETS		PAR/ SHARES			VALUE
Short-Term Securities—Continued
Repurchase Agreements	13.8	%
Lehman Brothers, Inc. 1.32%, dated 3/31/03, to be repurchased at $29,379 on 4/1/03 (Collateral: $27,030 Freddie Mac bonds, 5.625%, due 3/15/11, value $29,966)			$	29,378		$	29,378
Merrill Lynch Government Securities, Inc. 1.33%, dated 3/31/03, to be repurchased at $45,002 on 4/1/03 (Collateral: $120,790 Resolution Funding Corp. principal-only security, due 1/15/21, value $45,900)				45,000			45,000
							74,378
Total Short-Term Securities (Identified Cost—$77,755)							77,755
Total Investments (Identified Cost—$625,458)	118.3	%					638,682
Payable for Securities Purchased	(3.3	)%					(17,565	)
Obligation to Return Collateral for Securities Loaned	(17.1	)%					(92,149	)
Other Assets Less Liabilities	2.1	%					10,906
Net assets consist of:
Accumulated paid-in capital applicable to 49,437 Institutional Class shares outstanding			$	516,809
Under/(Over) distributed net investment income				(34	)
Accumulated net realized gain/(loss) on investments, options, futures and swaps				11,567
Unrealized appreciation/(depreciation) of investments, options, futures and swaps				11,532
Net assets	100.0	%				$	539,874
Net asset value per share:
Institutional Class							$10.92

18

	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Futures Contracts PurchasedN
U.S. Treasury Note Futures	June 2003	337	$	(249	)
Futures Contracts WrittenN
U.S. Treasury Note Futures	June 2003	288	$	143

^A Rule 144a Security - A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities represent 6.2% of net assets.

^B All or a portion of these securities is on loan. See Note 4 to financial statements.

^C Indexed security - The rate of interest on this type of security is tied to the London Interbank Offered Rate (“LIBOR”), the Consumer Price Index (“CPI”), or the one-year Treasury Bill rate. The coupon rate is the rate as of March 31, 2003.

^D Convertible bond - Bond may be converted into common stock of the company.

^E Zero coupon bond - A bond with no periodic interest payments which is sold at such a discount as to produce a current yield to maturity.

^F Bond is in default at March 31, 2003.

^G Stripped security - Security with interest-only or principal-only payment streams, denoted by a 1 or 2, respectively. For interest-only securities, the amount shown as principal is the notional balance used to calculate the amount of interest due.

^H The coupon rates shown on variable rate securities are the rates at March 31, 2003. These rates vary with the weighted average coupon of the underlying loans.

^I Treasury Inflation-Protected Security - Treasury security whose principal value is adjusted daily in accordance with changes to the Consumer Price Index (“CPI”). Interest is calculated on the basis of the current adjusted principal value.

^J When-issued security - Security purchased on a delayed delivery basis. Final settlement amount and maturity date have not yet been announced.

^K Yankee Bond - A dollar-denominated bond issued in the U.S. by foreign entities.

^L Stepped coupon security - A security with a predetermined schedule of interest or dividend rate changes, at which time it begins to accrue interest or pay dividends.

^M Collateral to cover futures contracts.

^N Options and futures are described in more detail in the notes to financial statements.

N.M.—Not meaningful.

See notes to financial statements.

19

STATEMENT OF NET ASSETS

March 31, 2003

(Amounts in Thousands)

Western Asset Core Portfolio

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Long-Term Securities	93.9%
Corporate Bonds and Notes	26.5%
Aerospace/Defense	0.3%
Lockheed Martin Corporation		8.500	%	12/1/29	$	870	$	1,139
Systems 2001 Asset Trust		6.664	%	9/15/13		3,583		3,932	A
								5,071
Automotive	0.2%
Ford Motor Company		7.450	%	7/16/31		2,250		1,722
Ford Motor Company		7.400	%	11/1/46		730		546	B
								2,268
Banking and Finance	2.8%
Abbey National Capital Trust I		8.963	%	12/29/49		1,350		1,694	B
Bank One Capital III		8.750	%	9/1/30		4,000		5,253
Beneficial Corporation		6.750	%	7/20/04		200		210
Boeing Capital Corporation		7.375	%	9/27/10		3,240		3,579	B
Ford Motor Credit Company		6.875	%	2/1/06		790		776
Ford Motor Credit Company		5.800	%	1/12/09		1,110		993
Ford Motor Credit Company		7.375	%	10/28/09		4,580		4,330
Ford Motor Credit Company		7.875	%	6/15/10		1,630		1,559
Ford Motor Credit Company		7.375	%	2/1/11		1,825		1,701
Ford Motor Credit Company		7.250	%	10/25/11		7,180		6,589	B
General Motors Acceptance Corporation		7.625	%	6/15/04		100		105	B
General Motors Acceptance Corporation		7.250	%	3/2/11		2,220		2,245
General Motors Acceptance Corporation		0.000	%	6/15/15		14,900		5,529	C
Household Finance Corporation		7.875	%	3/1/07		2,800		3,222
Household Finance Corporation		8.000	%	7/15/10		690		816
Household Finance Corporation		7.000	%	5/15/12		700		798
Household Finance Corporation		6.375	%	11/27/12		440		482
U.S. Bancorp		3.125	%	3/15/08		1,300		1,284	B
								41,165
Banks	1.2%
Bank of America Corporation		5.250	%	2/1/07		3,200		3,467	B
Bank of America Corporation		7.400	%	1/15/11		1,500		1,787
Bank One Corporation		7.875	%	8/1/10		4,500		5,452
Bank One Corporation		5.900	%	11/15/11		2,000		2,190
Dresdner Funding Trust I		8.151	%	6/30/31		1,296		1,253	A
Firstar Bank NA		7.125	%	12/1/09		450		533
UBS Preferred Funding Trust I		8.622	%	10/29/49		1,850		2,261	B,D
Wells Fargo Bank NA, San Francisco		6.450	%	2/1/11		510		584
								17,527

20

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Cable	0.3%
Comcast Corporation		6.500	%	1/15/15	$	800	$	842
Continental Cablevision, Inc.		9.000	%	9/1/08		2,200		2,601
TCI Communications, Inc.		6.375	%	5/1/03		1,430		1,435
								4,878
Computer Services and Systems	0.1%
Electronic Data Systems Corporation		7.450	%	10/15/29		990		970
International Business Machines Corporation		5.250	%	12/1/03		100		103	B
								1,073
Consumer Products	0.1%
Unilever Capital Corporation		7.125	%	11/1/10		1,730		2,046
Diversified Financial Services	2.3%
CIT Group Inc.		5.750	%	9/25/07		2,390		2,464
Citigroup Inc.		6.000	%	2/21/12		6,140		6,833
Citigroup Inc.		5.625	%	8/27/12		1,930		2,069
Citigroup Inc.		6.625	%	6/15/32		4,170		4,576	B
General Electric Capital Corporation		6.810	%	11/3/03		200		206
General Electric Capital Corporation		6.000	%	6/15/12		2,310		2,519
General Electric Capital Corporation		6.750	%	3/15/32		10,740		12,097
SB Treasury Company LLC		9.400	%	12/29/49		2,930		3,064	A,D
Wells Fargo & Company		5.000	%	11/15/14		180		185
								34,013
Diversified Services	0.6%
Loews Corporation		7.625	%	6/1/23		5,459		5,586
Loews Corporation		7.000	%	10/15/23		3,000		3,018
								8,604
Electric	0.5%
Mirant Americas Generation LLC		9.125	%	5/1/31		820		390	B
Northern States Power Company		6.875	%	8/1/09		250		277
Oncor Electric Delivery Company		6.375	%	1/15/15		1,770		1,948	A
Oncor Electric Delivery Company		7.000	%	9/1/22		1,800		1,900
System Energy Resources, Inc.		7.430	%	1/15/11		2,081		2,199
The Detroit Edison Company		6.125	%	10/1/10		920		1,021
								7,735
Energy	0.8%
Dominion Resources, Inc.		4.125	%	2/15/08		950		960
Dominion Resources, Inc.		5.125	%	12/15/09		50		52
Dominion Resources, Inc.		5.700	%	9/17/12		1,520		1,593
Duke Energy Corporation		5.625	%	11/30/12		620		631
FirstEnergy Corp.		6.450	%	11/15/11		2,070		2,189
FirstEnergy Corp.		7.375	%	11/15/31		1,060		1,110

21

STATEMENT OF NET ASSETS—Continued

Western Asset Core Portfolio—Continued

	% OF NET ASSETS		RATE		MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Energy—Continued
Progress Energy, Inc.			7.100	%	3/1/11	$	3,170	$	3,567
TXU Corp.			6.375	%	6/15/06		2,000		2,060	B
									12,162
Environmental Services	2.2%
Waste Management, Inc.			6.375	%	12/1/03		2,547		2,598
Waste Management, Inc.			7.000	%	10/1/04		290		306
Waste Management, Inc.			7.125	%	10/1/07		1,330		1,476
Waste Management, Inc.			6.875	%	5/15/09		2,000		2,224
Waste Management, Inc.			7.375	%	8/1/10		9,999		11,291
Waste Management, Inc.			7.125	%	12/15/17		6,000		6,640
Waste Management, Inc.			7.000	%	7/15/28		2,130		2,210
Waste Management, Inc.			7.375	%	5/15/29		1,220		1,322
Waste Management, Inc.			7.750	%	5/15/32		4,000		4,557
									32,624
Food, Beverage and Tobacco	0.8%
Altria Group, Inc.			7.750	%	1/15/27		3,000		2,969
Nabisco Incorporated			6.375	%	2/1/05		4,250		4,564
R.J. Reynolds Tobacco Holdings, Inc.			7.875	%	5/15/09		3,240		3,405
Sara Lee Corporation			5.950	%	1/20/05		200		214
									11,152
Gas and Pipeline Utilities	1.9%
CMS Panhandle Holding Company			6.125	%	3/15/04		1,700		1,709
Dynegy Holdings Inc.			8.750	%	2/15/12		11,700		8,190	B
Southern Natural Gas Company			8.000	%	3/1/32		7,390		7,094
Tennessee Gas Pipeline Company			8.375	%	6/15/32		1,110		1,038
The Williams Companies, Inc.			8.125	%	3/15/12		3,730		3,264	A
The Williams Companies, Inc.			7.500	%	1/15/31		5,000		3,875
The Williams Companies, Inc.			8.750	%	3/15/32		3,240		2,721	A
									27,891
Health Care	0.3%
Tenet Healthcare Corporation			7.375	%	2/1/13		3,962		3,982
Insurance	N.M	.
Ace Capital Trust II			9.700	%	4/1/30		330		389
Investment Banking/Brokerage	1.1%
Credit Suisse First Boston USA			4.625	%	1/15/08		1,650		1,703
J.P. Morgan & Co. Incorporated			5.385	%	2/15/12		2,000		2,070	E
J.P. Morgan Chase & Co.			6.625	%	3/15/12		2,555		2,825
J.P. Morgan Chase & Co.			5.750	%	1/2/13		3,270		3,426
Lehman Brothers Holdings Inc.			1.780	%	7/6/04		5,000		5,013	E
Morgan Stanley			7.750	%	6/15/05		450		502
Salomon Smith Barney Holdings Inc.			6.625	%	11/15/03		200		207	B
									15,746

22

	% OF NET ASSETS	RATE	MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Investment Management	1.0%
Dryden Investor Trust		7.157%	7/23/08	$	13,606	$	14,578	A
Media	2.4%
AOL Time Warner Inc.		6.875%	5/1/12		4,000		4,261
AOL Time Warner Inc.		7.625%	4/15/31		5,420		5,752
AOL Time Warner Inc.		7.700%	5/1/32		8,160		8,739
Liberty Media Corporation		4.000%	11/15/29		2,550		1,450	F
Liberty Media Corporation		3.750%	2/15/30		2,440		1,333	F
News America Incorporated		7.625%	11/30/28		2,300		2,534	B
News America Incorporated		6.750%	1/9/38		4,250		4,677
Time Warner Inc.		6.850%	1/15/26		2,000		1,935
Time Warner Inc.		6.950%	1/15/28		2,500		2,446
Turner Broadcasting System, Inc.		7.400%	2/1/04		1,000		1,028
Viacom Inc.		5.625%	8/15/12		1,750		1,878	B
							36,033
Oil and Gas	2.0%
Anadarko Finance Company		6.750%	5/1/11		2,660		3,025
Apache Corporation		6.250%	4/15/12		1,320		1,495	B
Conoco Inc.		6.950%	4/15/29		5,240		5,937
ConocoPhillips		4.750%	10/15/12		800		809
El Paso Corporation		0.000%	2/28/21		10,660		3,944	C,F
El Paso Corporation		7.800%	8/1/31		160		115
El Paso Corporation		7.750%	1/15/32		9,610		6,871	B
El Paso Natural Gas Company		8.375%	6/15/32		3,610		3,303	A
Sonat Inc.		7.625%	7/15/11		5,000		3,950	B
							29,449
Paper and Forest Products	0.3%
MeadWestvaco Corporation		6.850%	4/1/12		2,080		2,332	B
Weyerhaeuser Company		6.750%	3/15/12		970		1,064
Weyerhaeuser Company		7.375%	3/15/32		1,050		1,147
							4,543
Pharmaceuticals	0.8%
Abbott Laboratories		5.125%	7/1/04		200		209
Bristol-Myers Squibb Company		5.750%	10/1/11		5,130		5,504
Merck & Co., Inc.		6.750%	9/19/05		1,000		1,109
Merck & Co., Inc.		6.400%	3/1/28		1,000		1,122	B
Merck & Co., Inc.		5.950%	12/1/28		4,400		4,676	B
							12,620
Real Estate	N.M.
Socgen Real Estate Co. LLC		7.640%	12/29/49		500		558	A

23

STATEMENT OF NET ASSETS—Continued

Western Asset Core Portfolio—Continued

	% OF NET ASSETS		RATE		MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Retail	N.M	.
Wal-Mart Stores, Inc.			5.450	%	8/1/06	$	150	$	164
Special Purpose	2.6%
Conoco Funding Company			6.350	%	10/15/11		1,370		1,549
Conoco Funding Company			7.250	%	10/15/31		730		859
DaimlerChrysler NA Holding Corp.			4.750	%	1/15/08		2,700		2,738
Devon Financing Corporation ULC			6.875	%	9/30/11		660		751
Qwest Capital Funding, Inc.			7.250	%	2/15/11		1,080		821
Qwest Capital Funding, Inc.			7.750	%	2/15/31		790		553
Sprint Capital Corporation			7.625	%	1/30/11		40		41
Sprint Capital Corporation			8.375	%	3/15/12		16,995		18,100
Texaco Capital Inc.			5.500	%	1/15/09		1,000		1,097	B
Texaco Capital Inc.			8.000	%	8/1/32		2,000		2,639
Verizon Global Funding Corp.			5.750	%	4/1/03		1,300		1,300	A,F
Verizon Global Funding Corp.			5.750	%	4/1/03		2,940		2,940	F
Verizon Global Funding Corp.			7.250	%	12/1/10		1,720		1,999
Verizon Global Funding Corp.			7.375	%	9/1/12		310		366	B
Verizon Global Funding Corp.			0.000	%	5/15/21		3,500		2,052	C,F
									37,805
Telecommunications	0.6%
AT&T Corp.			7.800	%	11/15/11		2,000		2,153
AT&T Corp.			8.500	%	11/15/31		1,280		1,376
Cox Communications, Inc.			7.875	%	8/15/09		640		756
GTE Hawaiian Telephone Company, Inc.			7.375	%	9/1/06		700		789
SBC Communications Inc.			5.875	%	8/15/12		810		884
WorldCom, Inc.—WorldCom Group			6.500	%	5/15/04		5,000		1,338	G
WorldCom, Inc.—WorldCom Group			8.250	%	5/15/10		2,010		538	B,G
WorldCom, Inc.—WorldCom Group			7.500	%	5/15/11		1,620		433	B,G
WorldCom, Inc.—WorldCom Group			8.250	%	5/15/31		940		251	G
									8,518
Transportation	1.3%
American Airlines, Inc.			7.858	%	10/1/11		190		167
Consolidated Rail Corporation			7.875	%	5/15/43		520		610
Delta Air Lines, Inc.			6.619	%	3/18/11		809		757
Delta Air Lines, Inc.			7.111	%	3/18/13		2,000		1,863
Delta Air Lines, Inc.			6.718	%	7/2/24		4,810		5,066
Southwest Airlines Co.			5.496	%	11/1/06		9,000		9,690
United Airlines, Inc.			7.783	%	1/1/14		2,539		1,750
									19,903
Total Corporate Bonds and Notes (Identified Cost—$384,523)									392,497

24

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Asset-Backed Securities	6.4%
Fixed Rate Securities	2.3%
Advanta Mortgage Loan Trust 1999-3		7.590	%	6/25/14	$	547	$	600
Chevy Chase 1997-A		7.650	%	12/20/07		756		756
Chevy Chase Spread Account Trust 1998-A		6.850	%	10/20/06		2,272		2,074	A
Conseco Finance Home Loan Trust 2000-E		7.570	%	5/15/22		1,932		2,016
Conseco Finance Securitizations Corp. 2000-4		7.730	%	5/1/32		2,700		2,826
Conseco Finance Securitizations Corp. 2000-5		7.960	%	2/1/32		4,700		4,466
Green Tree Financial Corporation 1996-5		8.100	%	7/15/27		1,015		239
Green Tree Home Improvement Loan Trust 1997-D		7.450	%	9/15/28		1,700		1,770
Green Tree Home Improvement Loan Trust 1998-F		7.430	%	10/15/20		4,210		4,479
Green Tree Recreational, Equipment and Consumer Trust 1998-A		6.710	%	5/15/29		953		1,005
Greenpoint Manufactured Housing 1999-5		7.080	%	2/15/18		1,623		1,627
Irwin Home Equity Loan Trust 2001-1		7.100	%	9/25/31		11,700		12,648
								34,506
Indexed SecuritiesE	3.9%
Ace Securities Corp. 2001-AQ1		1.565	%	4/25/31		586		585
Alpine Partners, L.P. 2000-1A		1.839	%	10/8/09		6,573		6,524	A
Amortizing Residential Collateral Trust 2002-BC1M		1.585	%	1/1/32		2,673		2,672
Asset Backed Funding Certificates 2002-SB1		1.735	%	4/25/18		7,595		7,607
Bayview Financial Acquisition Trust 2000-C		1.695	%	7/25/30		4,080		3,810	A
CDC Mortgage Capital Trust 2002-HE1		1.615	%	1/25/33		8,764		8,774
Centex Home Equity 2000-C		1.545	%	10/25/30		468		468
Centex Home Equity 2002-D		1.745	%	12/25/32		9,884		9,904
Chase Funding Loan Acquisition Trust 2001-AD1		1.535	%	12/25/15		151		151
Chase Funding Mortgage Loan Asset-Backed Certificates 2000-2		1.585	%	5/25/30		161		161
CIT Group Home Equity Loan Trust 2002-1		1.595	%	3/25/33		6,408		6,407
Conseco Finance 2002-B		1.510	%	5/15/33		2,007		2,007
Countrywide Asset-Backed Certificates 2001-BC2		1.555	%	7/25/31		893		891
Countrywide Asset-Backed Certificates 2002-S1		1.455	%	11/25/16		1,896		1,896
Long Beach Mortgage Loan Trust 2000-1		1.560	%	1/21/31		3,632		3,629
Morgan Stanley Dean Witter Capital I 2001-XLF		1.838	%	10/7/13		288		288	A
Residential Asset Mortgage Products, Inc. 2000-RS3		1.595	%	9/25/30		161		161
SLM Student Loan Trust 1998-2		1.854	%	4/25/07		15		15
Xerox Equipment Lease Owner Trust 2001-1		3.280	%	2/15/08		950		953	A
								56,903

25

STATEMENT OF NET ASSETS—Continued

Western Asset Core Portfolio—Continued

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Asset-Backed Securities—Continued
Stripped Securities	0.2%
Bayview Financial Acquisition Trust 2002-AA		7.150	%	7/25/04	$	3,559	$	203	A,H1
Bayview Financial Acquisition Trust 2002-FA		14.000	%	6/25/05		320		53	A,H1
Diversified REIT Trust 1999-1A		0.542	%	3/18/11		98,781		2,269	H1
								2,525
Total Asset-Backed Securities (Identified Cost—$93,145)								93,934
Mortgage-Backed Securities	5.4%
Fixed Rate Securities	3.6%
Asset Securitization Corporation 1996-D2		6.920	%	2/14/29		6,180		6,630
CAPCO America Securitization Corporation 1998-D7		6.260	%	10/15/30		3,000		3,359
Commercial Mortgage Acceptance Corporation 1997-ML1		6.570	%	12/15/30		1,000		1,106
Commercial Mortgage Asset Trust 1999-C1		6.640	%	1/17/32		600		686
Criimi Mae Commercial Mortgage Trust 1998-C1		7.000	%	6/2/33		7,838		8,612	A
Deutsche Mortgage and Asset Receiving Corporation 1998-C1		6.538	%	6/15/31		17,000		18,704
GS Mortgage Securities Corporation II 2001-L1BA		6.213	%	2/10/16		1,013		1,089	A
LB-UBS Commercial Mortgage Trust 2000-C3		7.950	%	1/15/10		3,300		3,993
Merrill Lynch Mortgage Investors, Inc. 1996-C2		6.960	%	11/21/28		1,358		1,492
Nomura Asset Securities Corporation 1996-MD5		7.120	%	4/13/39		4,500		5,017
Nomura Asset Securities Corporation 1996-MD5A		7.070	%	4/13/39		1,857		1,957
								52,645
Indexed SecuritiesE	1.7%
CS First Boston Mortgage Securities Corporation 2001-TFLA		1.730	%	12/15/11		2,456		2,453	A
Impac CMB Trust 2001-1		1.585	%	7/25/31		4,550		4,547
J.P. Morgan Chase Commercial Mortgage Securities Corp. 2001-FL1A		1.540	%	7/13/13		4,724		4,724	A
J.P. Morgan Commercial Mortgage Finance Corporation 2000-FL1		1.560	%	4/15/10		328		328	A
Medallion Trust 2000-1G		1.610	%	7/12/31		516		516
Medallion Trust 2000-2G		1.479	%	12/18/31		3,662		3,661
Medallion Trust 2003-1G		1.476	%	12/21/33		7,980		7,945
Salomon Brothers Mortgage Securities VII, Inc. 1999-NC5		1.795	%	1/25/30		314		314
Washington Mutual 2000-1		1.595	%	6/25/24		72		71
								24,559

26

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Mortgage-Backed Securities—Continued
Stripped Securities	0.1%
FFCA Secured Lending Corporation 1999-1A		1.746	%	9/18/25	$	13,908	$	681	A,H1
LB-UBS Commercial Mortgage Trust 2001-C3		0.987	%	6/15/36		19,725		1,132	A,H1
Structured Mortgage Asset Residential Trust 1991-3		2,500.000	%	8/25/22		0.01		.0007	H1
Structured Mortgage Asset Residential Trust 1991-8		0.193	%	1/25/23		997		1	H1
								1,814
Total Mortgage-Backed Securities (Identified Cost—$75,506)								79,018
U.S. Government and Agency Obligations	14.4%
Fixed Rate Securities	5.1%
Fannie Mae		5.375	%	11/15/11		840		916	B
Fannie Mae		7.250	%	5/15/30		3,580		4,532
Federal Home Loan Bank		7.250	%	2/15/07		100		117
Federal Home Loan Bank		5.750	%	8/15/11		4,460		4,969
Tennessee Valley Authority		6.750	%	11/1/25		2,560		3,023
Tennessee Valley Authority		7.125	%	5/1/30		2,450		3,057	B
United States Treasury Bonds		11.125	%	8/15/03		530		550
United States Treasury Bonds		5.250	%	11/15/28		41,000		42,736	B
United States Treasury Bonds		5.375	%	2/15/31		9,830		10,633	B
United States Treasury Notes		3.875	%	2/15/13		4,980		5,001	B
								75,534
Indexed Securities	6.9%
United States Treasury Inflation-Protected Security		3.625	%	4/15/28		16,253		19,103	B,I
United States Treasury Inflation-Protected Security		3.875	%	4/15/29		67,849		83,412	B,I
United States Treasury Inflation-Protected Security		3.375	%	4/15/32		307		357	I
								102,872
Stripped Securities	2.4%
United States Treasury Bonds		0.000	%	2/15/25		35,270		11,043	B,H2
United States Treasury Bonds		0.000	%	8/15/27		1,630		446	H2
United States Treasury Bonds		0.000	%	11/15/27		85,940		23,422	B,H2
								34,911
Total U.S. Government and Agency Obligations (Identified Cost—$200,543)								213,317

27

STATEMENT OF NET ASSETS—Continued

Western Asset Core Portfolio—Continued

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
U.S. Government Agency Mortgage-Backed Securities	34.9%
Fixed Rate Securities	34.8%
Fannie Mae		7.000	%	9/1/07 to 7/1/32	$	54,350	$	57,365
Fannie Mae		8.000	%	5/1/15		85		92
Fannie Mae		7.500	%	6/1/25 to 7/1/29		4,430		4,733
Fannie Mae		6.000	%	1/1/26 to 2/1/32		4,436		4,610
Fannie Mae		6.500	%	7/1/28 to 5/1/32		38,529		40,236
Fannie Mae		5.000	%	4/1/18		78,540		80,651	J
Fannie Mae		5.500	%	4/1/18		4,280		4,439	J
Fannie Mae		6.000	%	4/1/18		6,100		6,378	J
Fannie Mae		7.000	%	4/1/33		1,100		1,159	J
Freddie Mac		6.750	%	5/1/04		3		3
Freddie Mac		7.500	%	4/1/06		12		13
Freddie Mac		9.750	%	7/1/08		69		75
Freddie Mac		5.500	%	12/1/13 to 2/1/14		1,982		2,068
Freddie Mac		9.300	%	4/15/19		431		439
Freddie Mac		7.000	%	4/1/24 to 5/1/32		26,259		27,686
Freddie Mac		6.000	%	2/1/29 to 5/1/29		1,005		1,044
Freddie Mac		6.500	%	6/1/32		3,985		4,157
Government National Mortgage Association		10.250	%	6/15/03		1		1
Government National Mortgage Association		10.000	%	11/15/09		1		1
Government National Mortgage Association		8.000	%	10/15/16 to 7/15/17		893		984
Government National Mortgage Association		7.500	%	10/15/22 to 9/15/29		2,738		2,933
Government National Mortgage Association		7.000	%	6/15/23 to 12/15/28		2,600		2,772
Government National Mortgage Association		6.500	%	10/15/23 to 9/15/28		2,542		2,681
Government National Mortgage Association		6.000	%	11/15/28 to 12/15/28		1,135		1,188
Government National Mortgage Association		5.500	%	4/1/33		600		616	J
Government National Mortgage Association		6.000	%	4/1/33		131,350		136,973	J
Government National Mortgage Association		6.500	%	4/1/33		125,400		131,631	J
Government National Mortgage Association		7.000	%	4/1/33		200		212	J
Government National Mortgage Association		7.500	%	4/1/33		400		427	J
								515,567

28

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
U.S. Government Agency Mortgage-Backed Securities—Continued
Stripped Securities	0.1%
Fannie Mae		9.500	%	2/1/17	$	47	$	11	H1
Fannie Mae		1,009.500	%	2/25/20		0.03		1	H1
Fannie Mae		1,009.250	%	8/25/21		2		43	H1
Fannie Mae		0.000	%	5/25/22		432		384	H2
Financing Corporation		0.000	%	4/5/19		1,150		480	H2
Freddie Mac		10.000	%	3/1/21		404		98	H1
Freddie Mac		0.000	%	7/15/22		63		60	H2
								1,077
Total U.S. Government Agency Mortgage- Backed Securities (Identified Cost—$510,100)								516,644
Yankee BondsK	5.9%
Banks	0.2%
Korea Development Bank		4.250	%	11/13/07		860		850	B
Royal Bank of Scotland Group plc		8.817	%	3/31/49		870		972
								1,822
Electric	0.5%
Hydro-Quebec		6.300	%	5/11/11		800		915
Hydro-Quebec		8.050	%	7/7/24		4,895		6,435
								7,350
Energy	0.3%
Korea Electric Power Corporation		7.750	%	4/1/13		3,750		4,465
Foreign Governments	1.0%
Argentine Republic		0.000	%	10/15/03		690		152	C,G
Quebec Province		5.500	%	4/11/06		200		218	B
Quebec Province		7.125	%	2/9/24		530		634
Quebec Province		7.500	%	9/15/29		435		550
United Mexican States		8.375	%	1/14/11		1,720		1,982
United Mexican States		11.500	%	5/15/26		7,790		10,809	B
								14,345
Insurance	0.2%
Atlas Reinsurance PLC		3.765	%	1/7/05		250		252	A,E
Korea Deposit Insurance Corp.		2.500	%	12/11/05		3,160		3,409	F
								3,661
Manufacturing (Diversified)	2.2%
Tyco International Group SA		1.790	%	7/30/03		2,140		2,103	E
Tyco International Group SA		5.875	%	11/1/04		900		891
Tyco International Group SA		6.125	%	1/15/09		200		188	B
Tyco International Group SA		6.750	%	2/15/11		230		220

29

STATEMENT OF NET ASSETS—Continued

Western Asset Core Portfolio—Continued

	% OF NET ASSETS		RATE		MATURITY DATE	PAR/ SHARES			VALUE
Yankee Bonds—Continued
Manufacturing (Diversified)—Continued
Tyco International Group SA			6.375	%	10/15/11	$	1,230		$	1,150	B
Tyco International Group SA			7.000	%	6/15/28		920			837	B
Tyco International Group SA			6.875	%	1/15/29		30,530			27,935	B
										33,324
Oil and Gas	0.3%
Anderson Exploration Ltd.			6.750	%	3/15/11		690			761
Petroliam Nasional Berhad			7.625	%	10/15/26		300			311	A
YPF Sociedad Anonima			7.750	%	8/27/07		3,250			3,096
										4,168
Special Purpose	0.8%
CVRD Finance LTD.			2.026	%	10/15/07		3,163			3,132	A,E
PDVSA Finance Ltd.			8.500	%	11/16/12		2,050			1,558
PDVSA Finance Ltd. 1998-1			7.400	%	8/15/16		230			156
Petronas Capital Ltd.			7.875	%	5/22/22		1,340			1,435	A
Petrozuata Finance, Inc.			8.220	%	4/1/17		6,390			4,409	A
Redwood Capital II Ltd.			4.290	%	1/28/04		700			698	A,E
										11,388
Telecommunications	0.4%
British Telecommunications plc			8.375	%	12/15/10		1,755			2,132
British Telecommunications plc			8.875	%	12/15/30		880			1,129
Deutsche Telekom International Finance BV			9.250	%	6/1/32		2,620			3,393
										6,654
Total Yankee Bonds (Identified Cost—$80,924)										87,177
Preferred Stocks	0.4%
Home Ownership Funding Corporation			13.331	%			6	shs		3,346	A,D
Home Ownership Funding Corporation II			13.338	%			5			3,002	A,D
Total Preferred Stocks (Identified Cost—$9,045)										6,348
Total Long-Term Securities (Identified Cost—$1,353,786)										1,388,935
Investment of Proceeds From Securities Lending	12.9%
State Street Navigator Securities Lending Prime Portfolio							190,109	shs		190,109
Total Investment of Proceeds From Securities Lending (Identified Cost—$190,109)										190,109
Short-Term Securities	28.9%
U.S. Government and Agency Obligations	1.0%
Fannie Mae			0.000	%	10/22/03	$	15,600			15,492	C,L
Options PurchasedM	N.M	.
Eurodollar Futures Put, June 2003, Strike Price $96.00							1,074	N		7

30

	% OF NET ASSETS		PAR/ SHARES			VALUE
Short-Term Securities—Continued
Eurodollar Futures Put, December 2003, Strike Price $95.50			$	42	N	$	0.2
U.S. Treasury Note Futures Call, April 2003, Strike Price $99.84				7,170,000	N		41
U.S. Treasury Note Futures Call, April 2003, Strike Price $99.86				7,140,000	N		64
							112
Repurchase Agreements	27.9	%
Lehman Brothers, Inc. 1.32%, dated 3/31/03, to be repurchased at $112,682 on 4/1/03 (Collateral: $288,390 Resolution Funding Corp. principal-only securities, due 4/15/15 to 10/15/20, value $114,932)				112,678			112,678
Merrill Lynch Government Securities, Inc. 1.33%, dated 3/31/03, to be repurchased at $300,011 on 4/1/03 (Collateral: $63,000 Financing Corp. principal-only securities, due 10/6/17 to 2/8/18, value $29,119; $156,335 Resolution Funding Corp. principal-only securities, due 10/15/06 to 4/15/30, value $82,852; $50,000 Federal Home Loan Bank bonds, 6%, due 10/24/17, value $52,683; $141,240 Freddie Mac notes, 2.375%, due 4/15/06, value $143,156)				300,000			300,000
							412,678
Total Short-Term Securities (Identified Cost—$428,415)							428,282
Total Investments (Identified Cost—$1,972,310)	135.7	%					2,007,326
Payable for Securities Purchased	(25.3	%)					(373,991	)
Obligation to Return Collateral for Securities Loaned	(12.9	)%					(190,109	)
Other Assets Less Liabilities	2.5	%					36,325
Net assets consist of:
Accumulated paid-in capital applicable to:
121,025 Institutional Class shares outstanding			$	1,347,924
6,836 Financial Intermediary Class shares outstanding				77,471
Under/(Over) distributed net investment income				755
Accumulated net realized gain/(loss) on investments, options, futures and swaps				19,854
Unrealized appreciation/(depreciation) of investments, options, futures and swaps				33,547
Net assets	100.0	%				$	1,479,551
Net asset value per share:
Institutional Class							$11.57
Financial Intermediary Class							$11.57

31

STATEMENT OF NET ASSETS—Continued

Western Asset Core Portfolio—Continued

	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Futures Contracts PurchasedM
U.S. Treasury Note Futures	June 2003	1,297	$	(294	)
Futures Contracts WrittenM
Eurodollar Futures	December 2003	217	$	(138	)
Eurodollar Futures	March 2004	500		(227	)
U.S. Treasury Bond Futures	June 2003	170		20
U.S. Treasury Note Futures	June 2003	243		(229	)
			$	(574	)
Options WrittenM
Eurodollar Futures Call, Strike Price $98.00	December 2003	674	$	(845	)
Fannie Mae Futures Call, Strike Price $101.61	April 2003	15,790,000		22
Fannie Mae Futures Call, Strike Price $101.60	April 2003	15,790,000		2
U.S. Treasury Bond Futures Call, Strike Price $116.00	June 2003	100		(38	)
U.S. Treasury Bond Futures Call, Strike Price $118.00	June 2003	220		165
U.S. Treasury Bond Futures Put, Strike Price $102.00	June 2003	88		111
U.S. Treasury Bond Futures Put, Strike Price $108.00	June 2003	482		237
U.S. Treasury Bond Futures Put, Strike Price $112.00	June 2003	301		(74	)
U.S. Treasury Note Futures Call, Strike Price $115.00	June 2003	366		102
U.S. Treasury Note Futures Call, Strike Price $116.00	June 2003	1,001		(105	)
U.S. Treasury Note Futures Call, Strike Price $118.00	June 2003	1,226		522
U.S. Treasury Note Futures Put, Strike Price $108.00	June 2003	1,031		765
U.S. Treasury Note Futures Put, Strike Price $109.50	June 2003	381		74
U.S. Treasury Note Futures Put, Strike Price $110.00	June 2003	512		217
			$	1,155

^A Rule 144a Security – A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities represent 5.8% of net assets.

^B All or a portion of these securities is on loan. See Note 4 to the financial statements.

^C Zero coupon bond – A bond with no periodic interest payments which is sold at such a discount as to produce a current yield to maturity.

^D Stepped coupon security – A security with a predetermined schedule of interest or dividend rate changes, at which time it begins to accrue interest or pay dividends.

^E Indexed security – The rate of interest on this type of security is tied to the London Interbank Offered Rate (“LIBOR”), the Consumer Price Index (“CPI”), or the one-year Treasury Bill rate. The coupon rates are the rates as of March 31, 2003.

^F Convertible bond – Bond may be converted into common stock of the company.

^G Bond is in default at March 31, 2003.

^H Stripped security – Security with interest-only or principal-only payment streams, denoted by a 1 or 2, respectively. For interest-only securities, the amount shown as principal is the notional balance used to calculate the amount of interest due.

^I Treasury Inflation-Protected Security – Treasury security whose principal value is adjusted daily in accordance with changes in the Consumer Price Index (“CPI”). Interest is calculated on the basis of the current adjusted principal value.

^J When-issued security – Security purchased on a delayed delivery basis. Final settlement amount and maturity date have not yet been announced.

^K Yankee Bond – A dollar-denominated bond issued in the U.S. by foreign entities.

^L Collateral to cover futures contracts.

^M Options and futures are described in more detail in the notes to financial statements.

^N Represents actual number of contracts.

N.M.—Not meaningful.

See notes to financial statements.

32

STATEMENT OF NET ASSETS

March 31, 2003

(Amounts in Thousands)

Western Asset Core Plus Portfolio

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Long-Term Securities	93.0%
Corporate Bonds and Notes	24.2%
Aerospace/Defense	0.5%
Lockheed Martin Corporation		7.650	%	5/1/16	$	2,900	$	3,580
Lockheed Martin Corporation		8.500	%	12/1/29		760		995
Systems 2001 Asset Trust		6.664	%	9/15/13		3,525		3,868	A
The Boeing Company		6.625	%	2/15/38		1,510		1,483
								9,926
Auto Parts and Equipment	0.1%
American Axle & Manufacturing Inc.		9.750	%	3/1/09		695		747
Cummins Inc.		6.450	%	3/1/05		210		211
Cummins Inc.		9.500	%	12/1/10		119		123	A
Cummins Inc.		7.125	%	3/1/28		480		396
Lear Corporation		7.960	%	5/15/05		137		143
Lear Corporation		8.110	%	5/15/09		920		996
								2,616
Automotive	0.1%
Ford Motor Company		7.450	%	7/16/31		3,040		2,327
Banking and Finance	2.0%
Bank One Capital III		8.750	%	9/1/30		1,400		1,839
Boeing Capital Corporation		5.800	%	1/15/13		1,990		1,979
Ford Motor Credit Company		5.750	%	2/23/04		480		484
Ford Motor Credit Company		6.875	%	2/1/06		790		776
Ford Motor Credit Company		5.800	%	1/12/09		1,150		1,029
Ford Motor Credit Company		7.375	%	10/28/09		390		369
Ford Motor Credit Company		7.875	%	6/15/10		4,090		3,911
Ford Motor Credit Company		7.375	%	2/1/11		3,375		3,145
Ford Motor Credit Company		7.250	%	10/25/11		11,410		10,471
General Motors Acceptance Corporation		6.750	%	1/15/06		3,730		3,883
General Motors Acceptance Corporation		7.250	%	3/2/11		1,400		1,415
General Motors Acceptance Corporation		0.000	%	12/1/12		2,090		974	B
Household Finance Corporation		7.200	%	7/15/06		3,750		4,195
Household Finance Corporation		6.375	%	8/1/10		1,000		1,081
Household Finance Corporation		7.000	%	5/15/12		160		182
Household Finance Corporation		6.375	%	11/27/12		510		559
U.S. Bancorp		3.125	%	3/15/08		1,590		1,571
								37,863

33

STATEMENT OF NET ASSETS—Continued

Western Asset Core Plus Portfolio—Continued

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Banks	1.0%
Bank of America Corporation		5.250	%	2/1/07	$	400	$	433
Bank of America Corporation		7.400	%	1/15/11		2,980		3,551
Bank of America Corporation		6.250	%	4/15/12		3,520		3,948
Bank One Corporation		4.125	%	9/1/07		2,780		2,886
Bank One Corporation		5.900	%	11/15/11		2,000		2,190
Dresdner Funding Trust I		8.151	%	6/30/31		165		159	A
Firstar Bank NA		7.125	%	12/1/09		350		415
UBS Preferred Funding Trust I		8.622	%	10/29/49		1,910		2,335	C
Wells Fargo Bank NA, San Francisco		6.450	%	2/1/11		2,020		2,312
								18,229
Building Materials	0.1%
American Standard, Inc.		7.375	%	4/15/05		647		678
American Standard, Inc.		7.375	%	2/1/08		424		456
American Standard, Inc.		8.250	%	6/1/09		108		118
American Standard, Inc.		7.625	%	2/15/10		241		263
Nortek Holdings, Inc.		9.250	%	3/15/07		313		322
Nortek Holdings, Inc.		8.875	%	8/1/08		470		487
								2,324
Cable	0.3%
Comcast Cable Communications, Inc.		6.750	%	1/30/11		680		733
Comcast Corporation		6.500	%	1/15/15		1,940		2,042
Continental Cablevision, Inc.		9.000	%	9/1/08		1,060		1,253
Cox Communications, Inc.		0.425	%	4/19/20		230		110	D
CSC Holdings Inc.		7.875	%	2/15/18		260		255
CSC Holdings Inc.		7.625	%	7/15/18		45		44
EchoStar DBS Corporation		9.125	%	1/15/09		584		638
EchoStar DBS Corporation		9.375	%	2/1/09		583		621
TCI Communications, Inc.		6.375	%	5/1/03		80		81
								5,777
Casino Resorts	0.2%
Harrah’s Operating Company, Inc.		7.875	%	12/15/05		1,449		1,551
ITT Corporation		6.750	%	11/15/05		80		81
MGM MIRAGE		9.750	%	6/1/07		660		726
MGM MIRAGE		8.375	%	2/1/11		542		580
Mirage Resorts, Incorporated		6.625	%	2/1/05		28		29
Park Place Entertainment Corporation		7.875	%	12/15/05		980		1,007
Park Place Entertainment Corporation		8.125	%	5/15/11		100		103
Station Casinos, Inc.		9.875	%	7/1/10		74		81
								4,158

34

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Chemicals	0.3%
E.I. du Pont de Nemours and Company		6.500	%	1/15/28	$	50	$	56
FMC Corporation		10.250	%	11/1/09		295		324	A
Georgia Gulf Corporation		10.375	%	11/1/07		35		38
IMC Global Inc.		10.875	%	6/1/08		585		638
IMC Global Inc.		11.250	%	6/1/11		132		143
MacDermid, Incorporated		9.125	%	7/15/11		1,067		1,174
The Dow Chemical Company		5.250	%	5/14/04		2,100		2,161
The Dow Chemical Company		7.375	%	11/1/29		1,030		1,069
								5,603
Coal	0.1%
Peabody Energy Corporation		8.875	%	5/15/08		1,224		1,282
Peabody Energy Corporation		9.625	%	5/15/08		180		189
Peabody Energy Corporation		6.875	%	3/15/13		860		871	A
								2,342
Computer Services and Systems	0.2%
Electronic Data Systems Corporation		7.450	%	10/15/29		2,060		2,019
Unisys Corporation		7.250	%	1/15/05		554		574
Unisys Corporation		6.875	%	3/15/10		86		87
								2,680
Containers and Packaging	0.1%
Ball Corporation		6.875	%	12/15/12		938		967	A
Packaging Corp. of America		9.625	%	4/1/09		550		595
								1,562
Diversified Financial Services	2.1%
Associates Corporation of North America		1.600	%	5/8/03		600		600	E
CIT Group Inc.		5.750	%	9/25/07		2,840		2,928
Citigroup Inc.		5.000	%	3/6/07		4,000		4,297
Citigroup Inc.		6.000	%	2/21/12		1,900		2,114
Citigroup Inc.		5.625	%	8/27/12		600		643
Citigroup Inc.		6.625	%	6/15/32		9,040		9,920
General Electric Capital Corporation		6.000	%	6/15/12		2,450		2,672
General Electric Capital Corporation		6.750	%	3/15/32		9,830		11,072
IBJ Preferred Capital Corp. LLC		8.790	%	12/29/49		3,380		3,092	A,C
SB Treasury Company LLC		9.400	%	12/29/49		360		376	A,C
Wells Fargo & Company		5.000	%	11/15/14		730		749
								38,463
Diversified Services	0.8%
Loews Corporation		3.125	%	9/15/07		12,000		11,010	D
Loews Corporation		7.625	%	6/1/23		1,500		1,535
Loews Corporation		7.000	%	10/15/23		3,150		3,168
								15,713

35

STATEMENT OF NET ASSETS—Continued

Western Asset Core Plus Portfolio—Continued

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Electric	0.6%
Calpine Corporation		8.250	%	8/15/05	$	470	$	310
Calpine Corporation		7.750	%	4/15/09		38		21
Calpine Corporation		8.625	%	8/15/10		180		100
Calpine Corporation		8.500	%	2/15/11		2,708		1,517
General Electric Company		5.000	%	2/1/13		920		941
Mirant Americas Generation LLC		9.125	%	5/1/31		1,200		570
Niagara Mohawk Power Corporation		7.750	%	10/1/08		500		591
Niagara Mohawk Power Corporation		8.500	%	7/1/10		1,600		1,656	C
Oncor Electric Delivery Company		6.375	%	1/15/15		660		727	A
Oncor Electric Delivery Company		7.000	%	9/1/22		650		686
Orion Power Holdings, Inc.		12.000	%	5/1/10		1,047		953
Pacific Gas and Electric Company		7.250	%	8/1/26		1,000		973
Southern California Edison Company		8.000	%	2/15/07		563		602	A
System Energy Resources, Inc.		7.430	%	1/15/11		92		97
The AES Corporation		10.000	%	12/12/05		946		960	A
The AES Corporation		9.500	%	6/1/09		1,096		940
The AES Corporation		9.375	%	9/15/10		244		205
								11,849
Electronics	0.1%
L-3 Communications Corp.		7.625	%	6/15/12		845		896
Energy	0.5%
Dominion Resources, Inc.		4.125	%	2/15/08		460		465
Dominion Resources, Inc.		5.125	%	12/15/09		1,240		1,282
Dominion Resources, Inc.		5.700	%	9/17/12		1,340		1,405
FirstEnergy Corp.		6.450	%	11/15/11		2,090		2,209
FirstEnergy Corp.		7.375	%	11/15/31		970		1,016
TXU Corp.		6.375	%	6/15/06		2,540		2,616
								8,993
Environmental Services	1.6%
Allied Waste North America Incorporated		8.875	%	4/1/08		1,337		1,416
Allied Waste North America Incorporated		8.500	%	12/1/08		375		394
Safety-Kleen Corp.		9.250	%	5/15/09		85		3	F
Waste Management, Inc.		6.375	%	12/1/03		1,030		1,050
Waste Management, Inc.		7.000	%	10/1/04		120		127
Waste Management, Inc.		7.000	%	10/15/06		2,545		2,808
Waste Management, Inc.		7.125	%	10/1/07		1,060		1,177
Waste Management, Inc.		6.875	%	5/15/09		8,000		8,897
Waste Management, Inc.		7.375	%	8/1/10		6,985		7,887
Waste Management, Inc.		7.125	%	12/15/17		500		553
Waste Management, Inc.		7.000	%	7/15/28		4,040		4,191
Waste Management, Inc.		7.375	%	5/15/29		80		87
Waste Management, Inc.		7.750	%	5/15/32		1,000		1,139
								29,729

36

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Food, Beverage and Tobacco	1.0%
Altria Group, Inc.		7.750	%	1/15/27	$	6,250	$	6,186
Bestfoods		5.600	%	10/15/97		900		814
Constellation Brands, Inc.		8.000	%	2/15/08		626		660
Constellation Brands, Inc.		8.500	%	3/1/09		301		318
Nabisco Incorporated		7.550	%	6/15/15		3,460		4,215
R.J. Reynolds Tobacco Holdings, Inc.		7.750	%	5/15/06		1,080		1,136
R.J. Reynolds Tobacco Holdings, Inc.		6.500	%	6/1/07		590		593
R.J. Reynolds Tobacco Holdings, Inc.		7.875	%	5/15/09		730		767
R.J. Reynolds Tobacco Holdings, Inc.		7.250	%	6/1/12		3,000		2,986
Smithfield Foods, Inc.		8.000	%	10/15/09		385		393
								18,068
Gaming	0.1%
Horseshoe Gaming Holding Corp.		8.625	%	5/15/09		90		95
International Game Technology		8.375	%	5/15/09		404		482
Mohegan Tribal Gaming Authority		8.125	%	1/1/06		100		105
Mohegan Tribal Gaming Authority		8.750	%	1/1/09		251		264
Mohegan Tribal Gaming Authority		8.375	%	7/1/11		380		397
								1,343
Gas and Pipeline Utilities	1.5%
CMS Panhandle Holding Company		7.000	%	7/15/29		300		287
Dynegy Holdings Inc.		8.750	%	2/15/12		6,640		4,648
Southern Natural Gas Company		8.000	%	3/1/32		11,940		11,462
The Williams Companies, Inc.		7.500	%	1/15/31		2,730		2,116
The Williams Companies, Inc.		7.750	%	6/15/31		530		411
The Williams Companies, Inc.		8.750	%	3/15/32		11,630		9,769	A
								28,693
Health Care	0.3%
Coventry Health Care, Inc.		8.125	%	2/15/12		283		302
Tenet Healthcare Corporation		7.375	%	2/1/13		4,669		4,692
								4,994
Homebuilding	0.1%
Beazer Homes USA, Inc.		8.375	%	4/15/12		372		390
Lennar Corporation		9.950	%	5/1/10		232		269
Pulte Homes, Inc.		7.875	%	8/1/11		182		208
Schuler Homes, Inc.		9.375	%	7/15/09		239		257
The Ryland Group, Inc.		8.000	%	8/15/06		239		251
The Ryland Group, Inc.		8.250	%	4/1/08		100		102
The Ryland Group, Inc.		9.750	%	9/1/10		64		72
								1,549
Insurance	0.1%
Ace Capital Trust II		9.700	%	4/1/30		190		224
Willis Corroon Corporation		9.000	%	2/1/09		700		747
								971

37

STATEMENT OF NET ASSETS—Continued

Western Asset Core Plus Portfolio—Continued

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Investment Banking/Brokerage	1.3%
Credit Suisse First Boston USA		4.625	%	1/15/08	$	2,670	$	2,755
J.P. Morgan Capital Trust II		7.950	%	2/1/27		20		22
J.P. Morgan Chase & Co.		6.625	%	3/15/12		4,510		4,988
J.P. Morgan Chase & Co.		5.750	%	1/2/13		4,410		4,620
Lehman Brothers Holdings Inc.		6.125	%	7/15/03		480		487
Lehman Brothers Holdings Inc.		1.829	%	10/2/03		2,000		2,003	E
Lehman Brothers Holdings Inc.		6.625	%	4/1/04		340		357
Lehman Brothers Holdings Inc.		4.000	%	1/22/08		1,740		1,776
Lehman Brothers Holdings Inc.		7.000	%	2/1/08		160		184
Morgan Stanley		6.600	%	4/1/12		2,050		2,289
Morgan Stanley		5.300	%	3/1/13		1,450		1,477
The Goldman Sachs Group, Inc.		6.600	%	1/15/12		2,720		3,038
								23,996
Investment Management	0.1%
Dryden Investor Trust		7.157	%	7/23/08		1,789		1,917	A
Lodging/Hotels	N.M.
Extended Stay America, Inc.		9.875	%	6/15/11		150		147
Host Marriott Corporation		7.875	%	8/1/08		520		489
Host Marriott Corporation		8.450	%	12/1/08		88		85
								721
Machinery	N.M.
AGCO Corporation		9.500	%	5/1/08		125		135
Grant Prideco, Inc.		9.000	%	12/15/09		114		122	A
Terex Corporation		8.875	%	4/1/08		263		258
Terex Corporation		10.375	%	4/1/11		185		192
								707
Media	1.9%
AMFM Inc.		8.000	%	11/1/08		710		802
AOL Time Warner Inc.		6.875	%	5/1/12		5,470		5,827
AOL Time Warner Inc.		7.625	%	4/15/31		440		467
AOL Time Warner Inc.		7.700	%	5/1/32		15,640		16,750
Emmis Communications Corporation		8.125	%	3/15/09		101		105
Lamar Media Corporation		7.250	%	1/1/13		319		331	A
Liberty Media Corporation		3.750	%	2/15/30		1,290		705	D
News America Holdings Incorporated		7.750	%	1/20/24		1,840		2,048
News America Holdings Incorporated		7.750	%	2/1/24		60		67
News America Holdings Incorporated		8.150	%	10/17/36		100		116
News America Holdings Incorporated		8.250	%	10/17/96		1,100		1,162
News America Incorporated		7.300	%	4/30/28		70		74
News America Incorporated		7.280	%	6/30/28		875		928

38

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Media—Continued
News America Incorporated		7.625	%	11/30/28	$	2,965	$	3,267
News America Incorporated		6.750	%	1/9/38		200		220
Viacom Inc.		5.625	%	8/15/12		2,050		2,200
								35,069
Medical Care Facilities	0.2%
HCA Inc.		6.870	%	9/15/03		150		152
HCA Inc.		6.910	%	6/15/05		342		362
HCA Inc.		7.125	%	6/1/06		540		579
HCA Inc.		7.250	%	5/20/08		314		346
HCA Inc.		8.750	%	9/1/10		366		430
HCA Inc.		6.300	%	10/1/12		3		3
Manor Care, Inc.		7.500	%	6/15/06		867		898
Manor Care, Inc.		8.000	%	3/1/08		153		161
								2,931
Medical Products	0.1%
Fresenius Medical Care Capital Trust II		7.875	%	2/1/08		3		287	G
Fresenius Medical Care Capital Trust IV		7.875	%	6/15/11		500		508
								795
Oil and Gas	1.6%
Anadarko Finance Company		6.750	%	5/1/11		1,520		1,729
Apache Corporation		6.250	%	4/15/12		1,320		1,495
Chesapeake Energy Corporation		8.125	%	4/1/11		156		164
Chesapeake Energy Corporation		7.500	%	9/15/13		392		401	A
Conoco Inc.		6.950	%	4/15/29		1,090		1,235
ConocoPhillips		8.750	%	5/25/10		3,100		3,884
ConocoPhillips		4.750	%	10/15/12		1,170		1,183
ConocoPhillips		5.900	%	10/15/32		10		10
El Paso Corporation		0.000	%	2/28/21		6,770		2,505	B,D
El Paso Corporation		7.750	%	1/15/32		13,280		9,495
El Paso Natural Gas Company		8.375	%	6/15/32		1,310		1,198	A
Forest Oil Corporation		8.000	%	12/15/11		200		208
Forest Oil Corporation		7.750	%	5/1/14		350		352
Ocean Energy, Inc.		8.375	%	7/1/08		705		742
Parker & Parsley Petroleum Company		8.875	%	4/15/05		232		247
Parker & Parsley Petroleum Company		8.250	%	8/15/07		330		367
Pioneer Natural Resources Company		9.625	%	4/1/10		421		502
Pioneer Natural Resources Company		7.500	%	4/15/12		94		104
Sonat Inc.		7.625	%	7/15/11		3,000		2,370
Vintage Petroleum, Inc.		7.875	%	5/15/11		340		343
Vintage Petroleum, Inc.		8.250	%	5/1/12		441		469
Westport Resources Corporation		8.250	%	11/1/11		83		89
Westport Resources Corporation		8.250	%	11/1/11		123		131	A

39

STATEMENT OF NET ASSETS—Continued

Western Asset Core Plus Portfolio—Continued

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Oil and Gas—Continued
XTO Energy, Inc.		8.750	%	11/1/09	$	323	$	338
XTO Energy, Inc.		7.500	%	4/15/12		259		278
								29,839
Paper and Forest Products	0.5%
Georgia-Pacific Corp.		8.875	%	2/1/10		245		254	A
Georgia-Pacific Corp.		9.500	%	12/1/11		621		615
Georgia-Pacific Corp.		9.375	%	2/1/13		280		295	A
Georgia-Pacific Corp.		8.875	%	5/15/31		57		49
MeadWestvaco Corporation		6.850	%	4/1/12		2,190		2,455
Weyerhaeuser Company		6.750	%	3/15/12		1,910		2,094
Weyerhaeuser Company		7.375	%	3/15/32		3,650		3,988
								9,750
Pharmaceuticals	0.3%
AmerisourceBergen Corporation		8.125	%	9/1/08		636		687
Bristol-Myers Squibb Company		5.750	%	10/1/11		4,290		4,603
Omnicare, Inc.		8.125	%	3/15/11		590		634
								5,924
Real Estate	N.M.
Ventas Realty, Limited Partnership		8.750	%	5/1/09		470		496
Ventas Realty, Limited Partnership		9.000	%	5/1/12		70		75
								571
Restaurants	N.M.
Yum! Brands, Inc.		7.450	%	5/15/05		315		337
Yum! Brands, Inc.		8.500	%	4/15/06		165		180
								517
Retail	0.1%
American Greetings Corporation		6.100	%	8/1/28		596		572
J.C. Penney Company, Inc.		8.000	%	3/1/10		188		195
J.C. Penney Company, Inc.		7.400	%	4/1/37		748		763
The Gap, Inc.		6.900	%	9/15/07		612		632
								2,162
Special Purpose	3.0%
Air 2 US Series A		8.027	%	10/1/19		298		151	A
Conoco Funding Company		6.350	%	10/15/11		2,010		2,273
Conoco Funding Company		7.250	%	10/15/31		1,670		1,966
DaimlerChrysler NA Holding Corp.		4.750	%	1/15/08		100		101
DaimlerChrysler NA Holding Corp.		7.300	%	1/15/12		2,690		3,004
Devon Financing Corporation ULC		6.875	%	9/30/11		2,630		2,993
JP Morgan Hydi BB		7.550	%	11/15/07		5,000		5,156	A,I
Moore North America Finance		7.875	%	1/15/11		159		165	A
Sprint Capital Corporation		7.625	%	1/30/11		190		195

40

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Special Purpose—Continued
Sprint Capital Corporation		8.375	%	3/15/12	$	16,610	$	17,689
TCI Communications Financing III		9.650	%	3/31/27		1,480		1,607
Texaco Capital Inc.		5.500	%	1/15/09		1,600		1,756
Texaco Capital Inc.		8.000	%	8/1/32		1,250		1,649
Unilever Capital Corporation		7.125	%	11/1/10		1,450		1,715
Verizon Global Funding Corp.		5.750	%	4/1/03		4,150		4,150	A,D
Verizon Global Funding Corp.		5.750	%	4/1/03		2,210		2,210	D
Verizon Global Funding Corp.		7.375	%	9/1/12		3,500		4,134
Verizon Global Funding Corp.		0.000	%	5/15/21		3,740		2,193	B,D
Zurich Capital Trust I		8.376	%	6/1/37		2,550		2,275	A
								55,382
Steel (Producers)	0.1%
AK Steel Corporation		7.875	%	2/15/09		936		861
AK Steel Corporation		7.750	%	6/15/12		132		121
								982
Technology Services	N.M.
SPX Corporation		7.500	%	1/1/13		374		397
Telecommunications	0.4%
AT&T Corp.		8.000	%	11/15/31		1,470		1,580
Insight Midwest, L.P.		10.500	%	11/1/10		153		163
PanAmSat Corporation		6.375	%	1/15/08		306		304
PanAmSat Corporation		8.500	%	2/1/12		524		540
Qwest Corporation		7.200	%	11/1/04		750		746
Qwest Corporation		6.875	%	9/15/33		750		634
SBC Communications Inc.		5.875	%	8/15/12		930		1,016
WorldCom, Inc. – WorldCom Group		7.550	%	4/1/04		1,250		334	F
WorldCom, Inc. – WorldCom Group		8.250	%	5/15/10		1,000		267	F
WorldCom, Inc. – WorldCom Group		7.500	%	5/15/11		2,100		562	F
WorldCom, Inc. – WorldCom Group		8.250	%	5/15/31		6,660		1,782	F
								7,928
Telecommunications (Cellular/Wireless)	0.2%
AT&T Wireless Services Inc.		7.350	%	3/1/06		3,000		3,300
Nextel Communications, Inc.		9.375	%	11/15/09		290		305
								3,605
Toys	N.M.
Hasbro, Inc.		5.600	%	11/1/05		602		603

41

STATEMENT OF NET ASSETS—Continued

Western Asset Core Plus Portfolio—Continued

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Transportation	0.6%
American Airlines, Inc.		7.858	%	10/1/11	$	160	$	140
Avis Group Holdings, Inc.		11.000	%	5/1/09		1,108		1,237
Consolidated Rail Corporation		7.875	%	5/15/43		210		246
CSX Corporation		6.250	%	10/15/08		570		634
CSX Corporation		7.900	%	5/1/17		500		618
Delta Air Lines, Inc.		6.619	%	3/18/11		3,723		3,482
Delta Air Lines, Inc.		6.718	%	7/2/24		2,641		2,782
Kansas City Southern Railway		9.500	%	10/1/08		279		311
Union Pacific Corporation		7.125	%	2/1/28		2,000		2,293
								11,743
Total Corporate Bonds and Notes (Identified Cost—$444,442)								452,207
Asset-Backed Securities	6.7%
Fixed Rate Securities	1.7%
BankAmerica Manufactured Housing Contracts 1998-2		7.930	%	12/10/25		5,000		1,500
Bear Stearns Asset Backed Securities, Inc. 2001-A		5.290	%	6/15/16		507		509
Chevy Chase Home Loan Trust 1996-1		7.150	%	5/15/15		23		24
Conseco Finance Securitizations Corp. 2000-4		7.730	%	5/1/32		3,200		3,349
Conseco Finance Securitizations Corp. 2000-5		7.470	%	2/1/32		2,900		3,035
Conseco Finance Securitizations Corp. 2001-1		6.990	%	7/1/32		5,500		4,941
Contimortgage Home Equity Loan Trust 1997-4		7.330	%	10/15/28		1,576		914
Continental Auto Receivables Owner Trust 2000-B		6.880	%	9/15/04		232		234	A
Green Tree Financial Corporation 1992-2		9.150	%	1/15/18		697		566
Green Tree Financial Corporation 1993-2		8.000	%	7/15/18		1,300		1,232
Green Tree Financial Corporation 1996-5		8.100	%	7/15/27		6,135		1,442
Green Tree Home Improvement Loan Trust 1996-A		7.400	%	2/15/26		1,523		990
Green Tree Home Improvement Loan Trust 1997-D		7.450	%	9/15/28		1,500		1,562
Greenpoint Manufactured Housing 1999-5		7.080	%	2/15/18		1,007		1,010
Lehman ABS Manufactured Housing Contract, 2001-B		4.350	%	5/15/14		4,500		4,560
Lehman ABS Manufactured Housing Contract, 2001-B		6.467	%	8/15/28		5,000		4,791
Pegasus Aviation Lease Securitization 2000-1		8.370	%	3/25/30		2,300		1,256	A
								31,915

42

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Asset-Backed Securities—Continued
Indexed SecuritiesE	4.8%
AFC Home Equity Loan Trust 2002-2		1.605	%	6/25/30	$	3,515	$	3,507
Alpine Partners, L.P. 2000-1A		1.839	%	10/8/09		640		635	A
Americredit Automobile Receivables Trust 2002-A		1.472	%	7/12/05		2,754		2,754
Asset Backed Securities Corporation Home Equity Loan Trust 2001-HE3		1.550	%	11/15/31		6,923		6,920
Bayview Financial Aquisition Trust 2001-DA		1.685	%	11/25/31		620		621	A
CDC Mortgage Capital Trust 2002-HE1		1.615	%	1/25/33		8,356		8,366
CDC Mortgage Capital Trust 2003-HE1		1.640	%	8/25/33		3,300		3,300
Centex Home Equity 2000-C		1.545	%	10/25/30		1,009		1,007
Centex Home Equity 2002-D		1.745	%	12/25/32		10,195		10,215
Chase Funding Loan Acquisition Trust 2001-AD1		1.535	%	12/25/15		275		275
Chase Funding Mortgage Loan Asset-Backed Certificates 2000-2		1.585	%	5/25/30		15		15
Citibank Credit Card Issuance Trust 2002-C1		2.339	%	2/9/09		1,920		1,911
Conseco Finance 2000-A		1.560	%	2/15/31		952		949
Conseco Finance 2000-C		1.650	%	12/15/29		110		110
Countrywide Asset-Backed Certificates 2001-BC2		1.555	%	7/25/31		858		856
Countrywide Asset-Backed Certificates 2003-1		1.645	%	6/25/33		9,363		9,361
Fannie Mae Grantor Trust Series 2002-T15		1.505	%	11/26/32		11,662		11,595
Green Tree Recreational, Equipment & Consumer Trust 1997-D		1.430	%	3/15/29		5		5
Hanareum International Funding Ltd. 1A		1.530	%	12/14/11		1,181		1,179	A
Household Home Equity Loan Trust 2002-1		1.654	%	12/22/31		4,496		4,500
Household Home Equity Loan Trust 2002-3		1.734	%	7/20/32		1,391		1,391
Korea Asset Funding Ltd. 2000-1A		3.350	%	2/10/09		366		364	A
Nextcard Credit Card Master Note Trust 2001-1A		1.580	%	4/16/07		587		588	A
Option One Mortgage Loan Trust 2000-2		1.595	%	6/25/30		547		543
Provident Bank Home Equity Loan Trust 2000-2		1.575	%	8/25/31		2,031		2,026
Providian Gateway Master Trust 2002-B		1.980	%	6/15/09		14,740		14,672	A
Salomon Brothers Mortgage Securities VII 1999-AQ1		1.625	%	4/25/29		69		68
SLM Student Loan Trust 1998-2		1.854	%	4/25/07		4		4
Southern Pacific Secured Assets Corporation 1998-2		1.475	%	7/25/29		143		143
Wachovia Asset Securitization, Inc. 2002-HE1		1.675	%	9/27/32		2,130		2,129
Xerox Equipment Lease Owner Trust 2001-1		3.280	%	2/15/08		200		201	A
								90,210

43

STATEMENT OF NET ASSETS—Continued

Western Asset Core Plus Portfolio—Continued

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Asset-Backed Securities—Continued
Stripped Securities	0.2%
Diversified REIT Trust 2000-1		0.772	%	3/8/10	$	16,000	$	513	A,H1
Oakwood Mortgage Investors Inc. 2001-E		6.000	%	11/15/09		5,991		1,285	H1
Truman Capital Mortgage Loan Trust 2002-2		7.600	%	11/25/03		30,401		925A,H1
								2,723
Total Asset-Backed Securities (Identified Cost—$126,191)								124,848
Mortgage-Backed Securities	4.0%
Fixed Rate Securities	2.1%
Asset Securitization Corporation 1996-D2		6.920	%	2/14/29		6,937		7,442
Blackrock Capital Finance L.P. 1997-R3		7.220	%	11/25/28		325		333	A
CBA Mortgage Corporation 1993-C1		6.720	%	12/25/03		1,700		1,703	A
Commercial Capital Access One, Inc. 2		12.000	%	11/15/27		2,385		1,698
Commercial Mortgage Acceptance Corporation 1997-ML1		6.570	%	12/15/30		3,500		3,872
Commercial Mortgage Asset Trust 1999-C2		7.546	%	1/17/10		330		390
Criimi Mae Commercial Mortgage Trust 1998-C1		7.000	%	6/2/33		680		747	A
Enterprise Mortgage Acceptance Company 1998-1		6.110	%	1/15/25		1,427		1,424	A
FFCA Secured Lending Corporation 1999-1A		6.370	%	9/18/25		210		223	A
GMAC Commercial Mortgage Securities Inc. 1998-C1		6.700	%	5/15/30		10,800		12,050
J.P. Morgan Commercial Mortgage Finance Corporation 1999-C8		7.400	%	7/15/31		2,000		2,326
Nomura Asset Securities Corporation 1996-MD5		7.120	%	4/13/39		1,590		1,773
Structured Asset Securities Corporation 1996-CFL		7.750	%	2/25/28		5,000		5,751
								39,732
Indexed SecuritiesE	1.9%
Banc of America Large Loan 2002-FL1A		1.702	%	11/6/14		8,859		8,857	A
Bear Stearns Commercial Mortgage Securities, Inc. 2002-Home		1.900	%	12/3/13		4,710		4,707	A
COMM 2001-FL4A		1.520	%	4/15/13		5,184		5,179	A
CS First Boston Mortgage Securities Corporation 2001-TFLA		1.730	%	12/15/11		3,138		3,134	A
Impac CMB Trust 2002-1		1.625	%	3/25/32		6,766		6,766
J.P. Morgan Commercial Mortgage Finance Corporation 2000-FL1		1.560	%	4/15/10		445		445	A
Lehman Brothers Floating Rate Commercial Mortgage Trust 2001-LLFA		1.510	%	8/16/13		3,452		3,452	A
Medallion Trust 2000-2G		1.479	%	12/18/31		1,268		1,267
Salomon Brothers Mortgage Securities VII, Inc. 1999-NC5		1.795	%	1/25/30		467		468

44

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Mortgage-Backed Securities—Continued
Indexed Securities—Continued
Sequoia Mortgage Trust 4		1.661	%	4/22/25	$	52	$	51
Washington Mutual 2000-1		1.595	%	6/25/24		208		206
Westpac Securitisation Trust 1999-1G		1.540	%	5/19/30		275		275
								34,807
Stripped Securities	N.M.
Countrywide Funding Corp 1993-1		0.000	%	10/25/23		25		25	H2
FFCA Secured Lending Corporation 1999-1A		1.746	%	9/18/25		848		41	A,H1
GMAC Commercial Mortgage Security Inc. 1999-CTL1		0.942	%	12/15/16		2,514		52	A,H1
LB-UBS Commercial Mortgage Trust 2001-C3		0.987	%	6/15/36		5,523		317	A,H1
Securitized Asset Sales, Inc. 1994-4		4.815	%	8/25/33		280		279	H1
								714
Total Mortgage-Backed Securities (Identified Cost—$72,846)								75,253
U.S. Government and Agency Obligations	12.5%
Fixed Rate Securities	3.3%
Fannie Mae		6.375	%	6/15/09		715		830
Fannie Mae		6.625	%	11/15/10		2,860		3,377
Fannie Mae		5.375	%	11/15/11		710		775
Federal Home Loan Bank		5.875	%	11/15/07		750		843
Freddie Mac		5.250	%	1/15/06		210		228
Tennessee Valley Authority		6.750	%	11/1/25		1,670		1,972
Tennessee Valley Authority		7.125	%	5/1/30		840		1,048
United States Treasury Bonds		11.875	%	11/15/03		730		778
United States Treasury Bonds		6.750	%	8/15/26		1,600		2,000
United States Treasury Bonds		5.250	%	11/15/28		26,120		27,226
United States Treasury Bonds		6.250	%	5/15/30		980		1,170
United States Treasury Bonds		5.375	%	2/15/31		18,630		20,152
United States Treasury Notes		1.625	%	1/31/05		360		361
								60,760
Indexed Securities	7.6%
United States Treasury Inflation-Protected Security		3.625	%	4/15/28		28,823		33,875J
United States Treasury Inflation-Protected Security		3.875	%	4/15/29		84,814		104,268	J
United States Treasury Inflation-Protected Security		3.375	%	4/15/32		3,265		3,802	J
								141,945

45

STATEMENT OF NET ASSETS—Continued

Western Asset Core Plus Portfolio—Continued

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
U.S. Government and Agency Obligations—Continued
Stripped Securities	1.6%
United States Treasury Bonds		0.000	%	2/15/25	$	38,350	$	12,008	H2
United States Treasury Bonds		0.000	%	8/15/27		1,520		416	H2
United States Treasury Bonds		0.000	%	11/15/27		63,020		17,175	H2
								29,599
Total U.S. Government and Agency Obligations (Identified Cost—$218,255)								232,304
U.S. Government Agency Mortgage-Backed Securities	30.4%
Fixed Rate Securities	30.4%
Fannie Mae		6.500	%	5/1/14 to 6/1/32		23,820		24,871
Fannie Mae		9.500	%	11/1/21		6		7
Fannie Mae		6.000	%	3/1/28 to 7/1/32		11,485		11,923
Fannie Mae		7.000	%	8/1/29 to 7/1/32		38,454		40,557
Fannie Mae		7.500	%	11/1/29		182		194
Fannie Mae		4.500	%	4/1/18		50,000		50,641	K
Fannie Mae		5.000	%	4/1/18		74,040		76,030	K
Fannie Mae		5.500	%	4/1/18		21,580		22,383	K
Fannie Mae		6.000	%	4/1/18		5,600		5,855	K
Fannie Mae		6.500	%	4/1/18		33,100		34,596	K
Fannie Mae		7.000	%	4/1/18		500		527	K
Freddie Mac		5.500	%	12/1/13		407		424
Freddie Mac		7.000	%	10/1/16 to 4/1/32		14,389		15,164
Freddie Mac		6.500	%	7/1/29 to 6/1/32		26,788		27,948
Government National Mortgage Association		9.500	%	1/15/06 to 12/15/10		94		103
Government National Mortgage Association		7.500	%	3/15/23 to 9/15/31		1,979		2,122
Government National Mortgage Association		7.000	%	7/15/23 to 7/15/31		7,124		7,579
Government National Mortgage Association		6.500	%	8/15/28 to 6/15/32		4,169		4,386
Government National Mortgage Association		8.000	%	12/15/30 to 1/15/31		434		470
Government National Mortgage Association		6.000	%	4/1/33		112,220		117,024	K
Government National Mortgage Association		6.500	%	4/1/33		118,500		124,388	K
								567,192

46

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
U.S. Government Agency Mortgage-Backed Securities—Continued
Stripped Securities	N.M.
Financing Corporation		0.000	%	11/30/17	$	1,250	$	574	H2
Financing Corporation		0.000	%	4/5/19		320		134	H2
								708
Total U.S. Government Agency Mortgage- Backed Securities (Identified Cost — $562,389)								567,900
Yankee BondsL	9.4%
Banks	N.M.
Korea Development Bank		4.250	%	11/13/07		200		198
Royal Bank of Scotland Group plc		8.817	%	3/31/49		230		257
								455
Cable	0.1%
British Sky Broadcasting Group plc		7.300	%	10/15/06		770		824
British Sky Broadcasting Group plc		6.875	%	2/23/09		656		702
Rogers Cable Inc.		7.875	%	5/1/12		687		701
Rogers Communications, Inc.		9.125	%	1/15/06		150		152
								2,379
Chemicals	N.M.
Avecia Group PLC		11.000	%	7/1/09		225		191
Diversified Financial Services	N.M.
Pemex Finance Ltd.		9.030	%	2/15/11		10		12
Electric	0.1%
Hydro-Quebec		6.300	%	5/11/11		2,380		2,723
Electronics	N.M.
Flextronics International Ltd.		9.875	%	7/1/10		644		714
Energy	N.M.
Korea Electric Power Corporation		7.750	%	4/1/13		410		488
Entertainment	N.M.
Alliance Atlantis Communications Inc.		13.000	%	12/15/09		57		64
Foreign Governments	4.9%
Argentine Republic		0.000	%	10/15/03		10		2	B,F
Federative Republic of Brazil		2.625	%	4/15/09		1,346		1,060	E
Federative Republic of Brazil		14.500	%	10/15/09		2,400		2,430
Federative Republic of Brazil		12.000	%	4/15/10		3,240		2,940
Federative Republic of Brazil		2.625	%	4/15/12		1,810		1,201	E

47

STATEMENT OF NET ASSETS—Continued

Western Asset Core Plus Portfolio—Continued

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Yankee Bonds—Continued
Foreign Governments—Continued
Federative Republic of Brazil		2.625	%	4/15/12	$	1,490	$	989	E
Federative Republic of Brazil		8.000	%	4/15/14		2,069		1,645
Federative Republic of Brazil		8.000	%	4/15/14		15,590		12,394
Federative Republic of Brazil		11.000	%	8/17/40		6,796		5,131
Quebec Province		7.125	%	2/9/24		1,670		2,000
Quebec Province		7.500	%	9/15/29		686		867
Republic of Bulgaria		8.250	%	1/15/15		6,820		7,672	A
Republic of Colombia		10.500	%	7/9/10		2,910		3,070
Republic of Colombia		11.750	%	2/25/20		2,785		3,043
Republic of Panama		9.625	%	2/8/11		2,733		3,088
Republic of Panama		9.375	%	7/23/12		2,300		2,541
Republic of Panama		5.000	%	7/17/14		409		365	C
Republic of Panama		10.750	%	5/15/20		1,747		2,027
Republic of Peru		5.000	%	3/7/17		9,062		7,703	C
Republic of Peru		5.000	%	3/7/17		58		49	A,C
Republic of the Philippines		9.875	%	1/15/19		7,930		7,653
Republic of the Philippines		10.625	%	3/16/25		240		239
Russian Federation		8.250	%	3/31/10		2,010		2,221
Russian Federation		5.000	%	3/31/30		2,850		2,471	C
United Mexican States		8.375	%	1/14/11		2,450		2,824
United Mexican States		11.500	%	5/15/26		11,360		15,762
								91,387
Insurance	0.3%
Atlas Reinsurance PLC		3.765	%	1/7/05		250		252	A,E
Korea Deposit Insurance Corp.		2.500	%	12/11/05		3,300		3,560	D
PRIME Capital Hurricane Ltd.		7.890	%	1/7/04		270		274	A,E
Residential Reinsurance LTD		6.239	%	6/1/05		850		859	A,E
								4,945
Manufacturing (Diversified)	1.9%
Tyco International Group SA		1.790	%	7/30/03		610		599	E
Tyco International Group SA		6.125	%	11/1/08		100		94
Tyco International Group SA		6.125	%	1/15/09		220		207
Tyco International Group SA		6.750	%	2/15/11		240		229
Tyco International Group SA		6.375	%	10/15/11		5,580		5,217
Tyco International Group SA		7.000	%	6/15/28		5,145		4,682
Tyco International Group SA		6.875	%	1/15/29		25,830		23,635
								34,663
Media	0.1%
Shaw Communications Inc.		8.250	%	4/11/10		630		649
Shaw Communications Inc.		7.200	%	12/15/11		395		387
								1,036

48

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Yankee Bonds—Continued
Oil and Gas	0.2%
Anderson Exploration Ltd.		6.750	%	3/15/11	$	480	$	529
Petroliam Nasional Berhad		7.625	%	10/15/26		1,790		1,857	A
Western Oil Sands Inc.		8.375	%	5/1/12		474		493
YPF Sociedad Anonima		7.750	%	8/27/07		1,000		953
								3,832
Paper and Forest Products	0.1%
Abitibi-Consolidated Inc.		8.550	%	8/1/10		636		698
Abitibi-Consolidated Inc.		8.500	%	8/1/29		67		68
Cascades Inc.		7.250	%	2/15/13		504		524	A
Tembec Industries, Inc.		8.500	%	2/1/11		314		322
Tembec Industries, Inc.		7.750	%	3/15/12		180		177
								1,789
Pharmaceuticals	N.M.
Biovail Corporation		7.875	%	4/1/10		310		323
Services	N.M.
Compagnie Generale de Geophysique SA		10.625	%	11/15/07		136		127
Special Purpose	1.2%
Arcel Finance Limited		5.984	%	2/1/09		10,100		10,747	A
Diageo Capital Plc		6.625	%	6/24/04		1,400		1,486
General Motors Nova Scotia Finance Company		6.850	%	10/15/08		1,550		1,608
PDVSA Finance Ltd.		8.500	%	11/16/12		2,150		1,634
PDVSA Finance Ltd. 1998-1		7.400	%	8/15/16		230		156
PDVSA Finance Ltd. 1999-K		9.950	%	2/15/20		60		45
Petrozuata Finance, Inc.		8.220	%	4/1/17		9,150		6,314
Redwood Capital II Ltd.		4.290	%	1/28/04		600		598	A,E
								22,588
Telecommunications	0.4%
British Telecommunications plc		8.125	%	12/15/10		1,075		1,306
British Telecommunications plc		8.625	%	12/15/30		520		667
Deutsche Telekom International Finance BV		9.250	%	6/1/32		1,800		2,331
Telefonica de Argentina S.A.		11.875	%	11/1/04		3,000		2,460
								6,764
Transportation	0.1%
Teekay Shipping Corporation		8.875	%	7/15/11		1,198		1,284
Total Yankee Bonds (Identified Cost—$164,440)								175,764

49

STATEMENT OF NET ASSETS—Continued

Western Asset Core Plus Portfolio—Continued

	% OF NET ASSETS	RATE		MATURITY DATE	PAR/ SHARES			VALUE
Foreign Government Obligations	5.6%
Fixed Rate Securities	5.6%
Canadian Government		5.750	%	6/1/29	$	11,260	M	$	7,860
Federal Republic of Germany		3.750	%	1/4/09		29,000	N		32,114
Federal Republic of Germany		5.000	%	1/4/12		17,775	N		20,817
Federal Republic of Germany		5.500	%	1/4/31		19,540	N		23,436
Italian Republic		6.000	%	5/1/31		15,800	N		19,944
Statens Bostadsfinansier		5.500	%	3/15/06		8,500	O		1,038
Total Foreign Government Obligations (Identified Cost—$91,264)									105,209
Foreign Corporate Bonds	0.1%
Banking and Finance	0.1%
AB Spintab		5.750	%	6/15/05		9,200	O		1,127
Total Foreign Corporate Bonds (Identified Cost—$932)									1,127
Preferred Stocks	0.1%
Home Ownership Funding Corporation		13.331	%			0.3	shs		180	A,C
Home Ownership Funding Corporation II		13.338	%			1			540	A,C
Total Preferred Stocks (Identified Cost—$971)									720
Options PurchasedP	N.M.
BellSouth Telecommunications Inc. Call, July 2006, Strike Price $97.72						500	Q		17
International Business Machines Corporation Call, July 2006, Strike Price $99.90						500	Q		17
Total Options Purchased (Identified Cost—$18)									34
Total Long-Term Securities (Identified Cost—$1,681,748)									1,735,366
Short-Term Securities	20.8%
U.S. Government and Agency Obligations	1.0%
Fannie Mae		0.000	%	10/22/03	$	18,000			17,875	B,R

50

	% OF NET ASSETS	PAR		VALUE
Short-Term Securities—Continued
Options PurchasedP	0.2%
Bundesobligation Call, June 2003, Strike Price EUR 110.50		89	Q	$	417
Bundesobligation Call, June 2003, Strike Price EUR 112.25		664	Q		355
Canadian Dollar Futures Call, May 2003, Strike Price CAD 68.00		65	Q		47
Euribor Futures Call, June 2003, Strike Price EUR 97.25		1,534	Q		1,317
Euribor Futures Call, September 2003, Strike Price EUR 94.50		64	Q		569
Euribor Futures Call, December 2003, Strike Price EUR 94.75		205	Q		1,665
Eurodollar Futures Put, June 2003, Strike Price $96.00		1,221	Q		8
Eurodollar Futures Put, December 2003, Strike Price $95.50		48	Q		0
Japanese Yen Futures Put, June 2003, Strike Price $82.50		45	Q		30
Sterling Futures Call, June 2003, Strike Price GBP 96.50		567	Q		213
U.S. Treasury Note Futures Call, April 2003, Strike Price $99.84		10,020,000	Q		56
U.S. Treasury Note Futures Call, April 2003, Strike Price $99.86		7,680,000	Q		69
					4,746

51

STATEMENT OF NET ASSETS—Continued

Western Asset Core Plus Portfolio—Continued

	% OF NET ASSETS		PAR			VALUE
Short-Term Securities—Continued
Repurchase Agreements	19.6	%
Lehman Brothers, Inc. 1.32%, dated 3/31/03, to be repurchased at $166,592 on 4/1/03 (Collateral: $143,717 Fannie Mae notes, 5.25% to 6.625%, due 4/15/07 to 10/15/07, value $169,917)			$	166,586		$	166,586
Merrill Lynch Government Securities, Inc. 1.33%, dated 3/31/03, to be repurchased at $200,007 on 4/1/03 (Collateral: $383,510 Resolution Funding Corp. principal-only security, due 4/15/08 to 1/15/30, value $167,115; $43,670 Financing Corp. principal-only security, due 8/3/18, value $19,215; $43,085 U.S. Treasury interest-only security, 8.75%, due 5/15/20, value $17,665)				200,000			200,000
							366,586
Total Short-Term Securities (Identified Cost—$388,976)							389,207
Total Investments (Identified Cost—$2,070,724)	113.8	%					2,124,573
Payable for Securities Purchased	(25.5	)%					(476,805	)
Receivable for Fund Shares Sold	10.5	%					196,377
Other Assets Less Liabilities	1.2	%					22,843
Net assets consist of:
Accumulated paid-in capital applicable to:     179,472 Institutional Class shares outstanding			$	1,801,575
36 Financial Intermediary Class shares outstanding				359
Under/(Over) distributed net investment income				(5,860	)
Accumulated net realized gain/(loss) on investments, options, futures, swaps and currency transactions				18,076
Unrealized appreciation/(depreciation) of investments, options, futures, swaps and currency translations				52,838
Net assets	100.0	%				$	1,866,988
Net asset value per share:
Institutional Class							$10.40
Financial Intermediary Class							$10.40

52

	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Futures Contracts PurchasedP
Bankers Acceptance Futures	December 2003	200	$	(47	)
Canadian Dollar Futures	June 2003	173		106
Euribor Futures	December 2003	500		706
Euribor Futures	March 2004	1,050		723
Sterling Futures	March 2004	600		436
U.S. Treasury Bond Futures	June 2003	87		(3	)
U.S. Treasury Note Futures	June 2003	304		(16	)
			$	1,905
Futures Contracts WrittenP
Eurodollar Futures	December 2003	100	$	(14	)
U.S. Treasury Note Futures	June 2003	47		3
Japanese Yen Futures	June 2003	160		(91	)
			$	(102	)
Options WrittenP
Eurodollar Futures Call, Strike Price $98.00	December 2003	802	$	(1,005	)
Fannie Mae Futures Call, Strike Price $101.60	April 2003	22,080,000		31
Fannie Mae Futures Call, Strike Price $101.61	April 2003	17,040,000		3
Japanese Yen Call, Strike Price $87.00	June 2003	40		18
Japanese Yen Put, Strike Price $83.50	June 2003	117		36
U.S. Treasury Bond Futures Call, Strike Price $116.00	May 2003	116		(44	)
U.S. Treasury Bond Futures Call, Strike Price $118.00	May 2003	247		185
U.S. Treasury Bond Futures Put, Strike Price $102.00	May 2003	104		131
U.S. Treasury Bond Futures Put, Strike Price $108.00	May 2003	574		280
U.S. Treasury Bond Futures Put, Strike Price $112.00	May 2003	345		(85	)
U.S. Treasury Note Futures Call, Strike Price $115.00	May 2003	414		115
U.S. Treasury Note Futures Call, Strike Price $116.00	May 2003	1,178		(124	)
U.S. Treasury Note Futures Call, Strike Price $118.00	May 2003	1,450		614
U.S. Treasury Note Futures Put, Strike Price $108.00	May 2003	1,211		899
U.S. Treasury Note Futures Put, Strike Price $109.50	May 2003	472		92
U.S. Treasury Note Futures Put, Strike Price $110.00	May 2003	603		256
			$	1,402

^A Rule 144a Security – A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities represent 6.1% of net assets.

^B Zero coupon bond – A bond with no periodic interest payments which is sold at such a discount as to produce a current yield to maturity.

^C Stepped coupon security – A security with a predetermined schedule of interest or dividend rate changes, at which time it begins to accrue interest or pay dividends.

^D Convertible bond – Bond may be converted into common stock of the company.

^E Indexed security – The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”), the Consumer Price Index (“CPI”), or the one-year Treasury Bill rate. The coupon rates are the rates as of March 31, 2003.

^F Bond is in default at March 31, 2003.

^G Unit – A security which consists of a bond and warrants to purchase the stock of the issue.

^H Stripped security – Security with interest-only or principal-only payment streams, denoted by a 1 or 2, respectively. For interest-only securities, the amount shown as principal is the notional balance used to calculate the amount of interest due.

^I High Yield Index-Linked Certificate of Deposit – A certificate of deposit combined with an assumption of credit risk of 50 specified obligations.

53

STATEMENT OF NET ASSETS—Continued

Western Asset Core Plus Portfolio—Continued

^J Treasury Inflation-Protected Security – Treasury security whose principal value is adjusted daily in accordance with changes in the Consumer Price Index (“CPI”). Interest is calculated on the basis of the current adjusted principal value.

^K When-issued security – Security purchased on a delayed delivery basis. Final settlement amount and maturity date have not yet been announced.

^L Yankee Bond – A dollar-denominated bond issued in the U.S. by foreign entities.

^M Denominated in Canadian dollar.

^N Denominated in euro currency.

^O Denominated in Swedish Krona

^P Options and futures are described in more detail in the notes to financial statements.

^Q Represents actual number of contracts.

^R Collateral to cover futures contracts.

N.M.—Not meaningful.

See notes to financial statements.

54

STATEMENT OF NET ASSETS

March 31, 2003

(Amounts in Thousands)

Western Asset Inflation Indexed Bond Portfolio

	% OF NET ASSETS	RATE		MATURITY DATE	PAR			VALUE
Long-Term Securities	98.8%
Corporate Bonds and Notes	1.0%
J.P. Morgan & Co. Incorporated		5.385	%	2/15/12	$	2,690		$	2,785A
Total Corporate Bonds (Identified Cost—$2,617)									2,785
U.S. Government and Agency Obligations	97.8%
Indexed Securities	97.8%
United States Treasury Inflation-Protected Security		3.375	%	1/15/07		20,319			22,357	B
United States Treasury Inflation-Protected Security		3.625	%	1/15/08		43,756			48,972	B
United States Treasury Inflation-Protected Security		3.875	%	1/15/09		33,721			38,420	B
United States Treasury Inflation-Protected Security		4.250	%	1/15/10		22,223			25,987	B
United States Treasury Inflation-Protected Security		3.500	%	1/15/11		21,973			24,671	B
United States Treasury Inflation-Protected Security		3.375	%	1/15/12		11,654			13,034	B
United States Treasury Inflation-Protected Security		3.000	%	7/15/12		6,325			6,883	B
United States Treasury Inflation-Protected Security		3.625	%	4/15/28		31,013			36,450	B
United States Treasury Inflation-Protected Security		3.875	%	4/15/29		49,310			60,621	B
United States Treasury Inflation-Protected Security		3.375	%	4/15/32		5,721			6,662	B
Total U.S. Government and Agency Obligations (Identified Cost—$264,729)									284,057
Total Long-Term Securities (Identified Cost—$267,346)									286,842
Short-Term Securities	0.3%
U.S. Government and Agency Obligations	0.3%
Fannie Mae		0.000	%	10/22/03		900			894	C,D
Options PurchasedE	N.M.
U.S. Treasury Note Futures Put, May 2003, Strike Price $114.00						45	F		24
Total Short-Term Securities (Identified Cost—$929)									918
Total Investments (Identified Cost—$268,275)	99.1%								287,760
Other Assets Less Liabilities	0.9%								2,546
Net assets consist of:
Accumulated paid-in capital applicable to 26,481 Institutional Class shares outstanding					$	269,485
Accumulated net realized gain/(loss) on investments, options, futures and swaps						1,397
Unrealized appreciation/(depreciation) of investments, options, futures and swaps						19,424
Net assets	100.0%							$	290,306
Net asset value per share:
Institutional Class									$10.96

55

STATEMENT OF NET ASSETS—Continued

Western Asset Inflation Indexed Bond Portfolio—Continued

	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Options WrittenE
Eurodollar Futures Call, Strike Price $98.00	December 2003	86	$	(73	)
U.S. Treasury Note Futures Put, Strike Price $112.00	May 2003	40		15
			$	(58	)

^A Indexed security – The rate of interest earned on this security is tied to the Consumer Price Index (“CPI”). The coupon rate is the rate as of March 31, 2003.

^B Treasury Inflation-Protected Security – Treasury security whose principal value is adjusted daily in accordance with changes in the Consumer Price Index (“CPI”). Interest is calculated on the basis of the current adjusted principal value.

^C Collateral to cover options contracts written.

^D Zero coupon bond – A bond with no perodic interest payments which is sold at such a discount as to produce a current yield to maturity.

^E Options and futures are described in more detail in the notes to financial statements.

^F Represents actual number of contracts.

N.M. — Not meaningful.

See notes to financial statements.

56

STATEMENT OF NET ASSETS

March 31, 2003

(Amounts in Thousands)

Western Asset High Yield Portfolio

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Long-Term Securities	95.1%
Corporate Bonds and Notes	83.9%
Advertising	0.3%
Vertis Inc.		10.875	%	6/15/09	$	400	$	413	A
Animal Hospitals	0.5%
Vicar Operating, Inc.		9.875	%	12/1/09		740		810
Apparel	1.2%
Russell Corporation		9.250	%	5/1/10		756		817
The William Carter Company		10.875	%	8/15/11		900		1,001
								1,818
Auto Parts and Equipment	3.1%
American Axle & Manufacturing Inc.		9.750	%	3/1/09		1,504		1,617
Cummins Inc.		6.450	%	3/1/05		30		30
Cummins Inc.		9.500	%	12/1/10		1,401		1,443	A
Holley Performance Products Inc.		12.250	%	9/15/07		344		130
Lear Corporation		7.960	%	5/15/05		69		72
Lear Corporation		8.110	%	5/15/09		540		585
TRW Automotive		9.375	%	2/15/13		284		284	A
TRW Automotive		11.000	%	2/15/13		452		451	A
								4,612
Automotive	0.8%
Asbury Automotive Group Inc.		9.000	%	6/15/12		1,387		1,182
Building Materials	1.5%
American Standard, Inc.		7.375	%	4/15/05		115		121
American Standard, Inc.		7.375	%	2/1/08		31		33
American Standard, Inc.		8.250	%	6/1/09		16		17
American Standard, Inc.		7.625	%	2/15/10		31		34
Collins & Aikman Floor Cover		9.750	%	2/15/10		917		885
Nortek Holdings, Inc.		9.125	%	9/1/07		260		268
Nortek Holdings, Inc.		8.875	%	8/1/08		789		817
								2,175
Cable	3.1%
Charter Communications Holdings, LLC		0.000	%	4/1/11		1,910		774	B
Charter Communications Holdings, LLC		0.000	%	1/15/12		1,429		407	B
CSC Holdings Inc.		7.625	%	4/1/11		310		311
EchoStar DBS Corporation		10.375	%	10/1/07		220		242
EchoStar DBS Corporation		9.125	%	1/15/09		1,038		1,134
EchoStar DBS Corporation		9.375	%	2/1/09		1,020		1,086
Insight Communications Company, Inc.		0.000	%	2/15/11		1,064		755	B
								4,709

57

STATEMENT OF NET ASSETS—Continued

Western Asset High Yield Portfolio—Continued

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Casino Resorts	3.5%
Harrah’s Operating Company, Inc.		7.875	%	12/15/05	$	1,441	$	1,542
Mandalay Resort Group		9.250	%	12/1/05		117		122
Mandalay Resort Group		9.500	%	8/1/08		127		139
Mandalay Resort Group		9.375	%	2/15/10		243		255
MGM MIRAGE		9.750	%	6/1/07		396		435
MGM MIRAGE		8.500	%	9/15/10		145		160
MGM MIRAGE		8.375	%	2/1/11		126		135
Mirage Resorts, Incorporated		7.250	%	10/15/06		398		415
Park Place Entertainment Corporation		7.875	%	12/15/05		75		77
Park Place Entertainment Corporation		8.500	%	11/15/06		370		392
Park Place Entertainment Corporation		9.375	%	2/15/07		220		236
Park Place Entertainment Corporation		8.875	%	9/15/08		132		140
Station Casinos, Inc.		9.875	%	7/1/10		718		788
Wynn Las Vegas LLC		12.000	%	11/1/10		353		369
								5,205
Chemicals	4.5%
FMC Corporation		10.250	%	11/1/09		466		513	A
Georgia Gulf Corporation		10.375	%	11/1/07		765		826
Huntsman International Holdings LLC		0.000	%	12/31/09		3,280		820	C
Huntsman International LLC		9.875	%	3/1/09		733		781
IMC Global Inc.		10.875	%	6/1/08		491		535
IMC Global Inc.		11.250	%	6/1/11		58		63
Lyondell Chemical Company		9.625	%	5/1/07		512		512
Lyondell Chemical Company		9.875	%	5/1/07		105		105
Lyondell Chemical Company		9.500	%	12/15/08		450		436
Lyondell Chemical Company		9.500	%	12/15/08		276		268	A
MacDermid, Incorporated		9.125	%	7/15/11		791		870
Millennium America Inc.		7.000	%	11/15/06		121		119
Millennium America Inc.		9.250	%	6/15/08		908		981
								6,829
Coal	1.7%
Peabody Energy Corporation		8.875	%	5/15/08		1,049		1,099
Peabody Energy Corporation		9.625	%	5/15/08		667		701
Peabody Energy Corporation		6.875	%	3/15/13		746		755	A
								2,555
Commercial Services and Supplies	0.5%
Weight Watchers International, Inc.		13.000	%	10/1/09		708		814
Computer Services and Systems	0.4%
Unisys Corporation		7.250	%	1/15/05		173		179
Unisys Corporation		6.875	%	3/15/10		366		370
								549

58

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Containers and Packaging	2.3%
Ball Corporation		6.875	%	12/15/12	$	643	$	663	A
Graphic Packaging Corporation		8.625	%	2/15/12		722		736
Packaging Corp. of America		9.625	%	4/1/09		150		162
Plastipak Holdings Inc.		10.750	%	9/1/11		472		489
Riverwood International Corporation		10.625	%	8/1/07		40		42
Riverwood International Corporation		10.875	%	4/1/08		749		775
Smurfit-Stone Container Corporation		8.250	%	10/1/12		481		515
								3,382
Electric	4.1%
Calpine Corporation		8.750	%	7/15/07		500		290
Calpine Corporation		7.750	%	4/15/09		40		22
Calpine Corporation		8.625	%	8/15/10		1,885		1,046
Calpine Corporation		8.500	%	2/15/11		24		14
Orion Power Holdings, Inc.		12.000	%	5/1/10		1,355		1,233
Southern California Edison Company		8.000	%	2/15/07		760		813	A
The AES Corporation		10.000	%	12/12/05		955		969	A
The AES Corporation		8.500	%	11/1/07		341		232
The AES Corporation		9.500	%	6/1/09		1,548		1,327
The AES Corporation		9.375	%	9/15/10		39		33
The AES Corporation		8.875	%	2/15/11		90		74
								6,053
Electronics	1.8%
Amkor Technology, Inc.		9.250	%	5/1/06		988		968
Fairchild Semiconductor International, Inc.		10.375	%	10/1/07		11		12
L-3 Communications Corp.		7.625	%	6/15/12		1,016		1,077
ON Semiconductor Corporation		12.000	%	5/15/08		754		712
								2,769
Energy	0.6%
CMS Energy Corporation		6.750	%	1/15/04		750		713
Illinois Power Co.		11.500	%	12/15/10		241		254	A
								967
Entertainment	0.4%
Regal Cinemas, Inc.		9.375	%	2/1/12		593		645
Environmental Services	1.9%
Allied Waste North America Incorporated		8.500	%	12/1/08		2,087		2,194
National Waterworks Incorporated		10.500	%	12/1/12		545		589	A
Safety-Kleen Corp.		9.250	%	5/15/09		1,418		48	D
								2,831

59

STATEMENT OF NET ASSETS—Continued

Western Asset High Yield Portfolio—Continued

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Food, Beverage and Tobacco	1.8%
Cott Beverages Incorporated		8.000	%	12/15/11	$	786	$	833
DIMON Incorporated		8.875	%	6/1/06		16		17
DIMON Incorporated		9.625	%	10/15/11		949		1,039
Smithfield Foods, Inc.		8.000	%	10/15/09		770		785
								2,674
Gaming	2.4%
Argosy Gaming Company		9.000	%	9/1/11		663		704
Boyd Gaming Corporation		9.250	%	10/1/03		517		530
Boyd Gaming Corporation		7.750	%	12/15/12		511		515	A
Horseshoe Gaming Holding Corp.		8.625	%	5/15/09		966		1,019
International Game Technology		8.375	%	5/15/09		125		149
Mohegan Tribal Gaming Authority		8.125	%	1/1/06		70		74
Mohegan Tribal Gaming Authority		8.750	%	1/1/09		637		670
								3,661
Gas and Pipeline Utilities	4.8%
ANR Pipeline, Inc.		8.875	%	3/15/10		243		257	A
ANR Pipeline, Inc.		9.625	%	11/1/21		304		327
Dynegy Holdings Inc.		8.750	%	2/15/12		603		422
Northwest Pipelines Corporation		8.125	%	3/1/10		210		219	A
Plains All American Pipelines		7.750	%	10/15/12		662		712
Southern Natural Gas Company		8.875	%	3/15/10		325		343	A
Southern Natural Gas Company		8.000	%	3/1/32		1,848		1,774
The Williams Companies, Inc.		9.250	%	3/15/04		505		496
The Williams Companies, Inc.		7.500	%	1/15/31		284		220
The Williams Companies, Inc.		8.125	%	3/15/12		958		838A
The Williams Companies, Inc.		8.750	%	3/15/32		678		570	A
Transcontinental Gas Pipeline Corporation		7.000	%	8/15/11		272		260
Transcontinental Gas Pipeline Corporation		8.875	%	7/15/12		698		740
								7,178
Health Care	1.4%
Extendicare Health Services, Inc.		9.350	%	12/15/07		639		517
Extendicare Health Services, Inc.		9.500	%	7/1/10		231		229
Rotech Healthcare Inc.		9.500	%	4/1/12		641		631	A
Tenet Healthcare Corporation		5.000	%	7/1/07		279		267
Tenet Healthcare Corporation		7.375	%	2/1/13		499		502
								2,146
Homebuilding	1.0%
Lennar Corporation		9.950	%	5/1/10		172		200
Schuler Homes, Inc.		9.375	%	7/15/09		307		331
Schuler Homes, Inc.		10.500	%	7/15/11		430		468
The Ryland Group, Inc.		8.000	%	8/15/06		40		42
The Ryland Group, Inc.		9.750	%	9/1/10		438		491
								1,532

60

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Insurance	1.0%
Willis Corroon Corporation		9.000	%	2/1/09	$	1,398	$	1,492
Lodging/Hotels	1.8%
Extended Stay America, Inc.		9.150	%	3/15/08		547		535
Extended Stay America, Inc.		9.875	%	6/15/11		538		528
Felcore Lodging LP		9.500	%	9/15/08		368		337
Hilton Hotels Corporation		7.950	%	4/15/07		109		113
Hilton Hotels Corporation		7.625	%	5/15/08		409		418
Host Marriott Corporation		7.875	%	8/1/05		177		174
Host Marriott Corporation		9.250	%	10/1/07		135		134
MeriStar Hospitality Corporation		9.000	%	1/15/08		245		209
MeriStar Hospitality Corporation		9.125	%	1/15/11		232		195
								2,643
Machinery	3.5%
AGCO Corporation		9.500	%	5/1/08		835		904
Grant Prideco, Inc.		9.000	%	12/15/09		692		739	A
Joy Global Inc.		8.750	%	3/15/12		737		774
NMHG Holdings Co.		10.000	%	5/15/09		954		1,016
Terex Corporation		8.875	%	4/1/08		250		246
Terex Corporation		10.375	%	4/1/11		183		189
Terex Corporation		9.250	%	7/15/11		1,450		1,435
								5,303
Manufacturing (Diversified)	1.3%
Atrium Companies, Inc.		10.500	%	5/1/09		705		732
Hexcel Corporation		9.875	%	10/1/08		456		475	A
Interface, Inc.		7.300	%	4/1/08		411		323
Interface, Inc.		10.375	%	2/1/10		426		370
								1,900
Media	2.4%
AMFM Inc.		8.000	%	11/1/08		653		737
Brill Media Company, LLC		12.000	%	12/15/07		1,000		395	D
Clear Channel Communications, Inc.		7.875	%	6/15/05		325		358
Emmis Communications Corporation		8.125	%	3/15/09		455		474
Garden State Newspapers, Inc.		8.750	%	10/1/09		369		378
Paxson Communications Corporation		10.750	%	7/15/08		320		347
Paxson Communications Corporation		0.000	%	1/15/09		672		538	B
Sinclair Broadcast Group, Inc.		8.750	%	12/15/11		310		330
								3,557

61

STATEMENT OF NET ASSETS—Continued

Western Asset High Yield Portfolio—Continued

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Medical Care Facilities	1.8%
HCA Inc.		6.870	%	9/15/03	$	381	$	387
HCA Inc.		6.300	%	10/1/12		766		787
Health Care REIT, Inc.		8.000	%	9/12/12		628		645
Triad Hospitals, Inc		8.750	%	5/1/09		780		843
								2,662
Medical Products	1.2%
Alaris Medical Systems Inc.		11.625	%	12/1/06		390		448
Fisher Scientific International Inc.		8.125	%	5/1/12		160		170	A
Fresenius Medical Care Capital Trust II		7.875	%	2/1/08		1,207		1,243	E
								1,861
Medical Services	0.6%
AmeriPath, Inc.		10.500	%	4/1/13		740		762	A
AmerisourceBergen Corporation		8.125	%	9/1/08		139		150
								912
Mining	0.3%
Better Minerals & Aggregates Company		13.000	%	9/15/09		895		322
Kaiser Aluminum & Chemical		12.750	%	2/1/05		1,780		71	D
								393
Oil and Gas	5.1%
Amerigas Partners LP		8.875	%	5/20/11		260		275
Amerigas Partners LP		8.875	%	5/20/11		312		331	A
Chesapeake Energy Corporation		8.375	%	11/1/08		64		68
Chesapeake Energy Corporation		9.000	%	8/15/12		616		668
El Paso CGP Co.		6.375	%	2/1/09		211		168
El Paso CGP Co.		7.750	%	6/15/10		1,415		1,153
El Paso Energy Partners		8.500	%	6/1/11		214		218
El Paso Energy Partners		10.625	%	12/1/12		494		546	A
Magnum Hunter Resources, Inc.		10.000	%	6/1/07		309		320
Magnum Hunter Resources, Inc.		9.600	%	3/15/12		338		362
Mission Resources Corporation		10.875	%	4/1/07		529		317
Ocean Energy, Inc.		8.375	%	7/1/08		642		676
Parker & Parsley Petroleum Company		8.875	%	4/15/05		105		112
Pioneer Natural Resources Company		9.625	%	4/1/10		397		473
Pioneer Natural Resources Company		7.500	%	4/15/12		481		531
Vintage Petroleum, Inc.		7.875	%	5/15/11		522		527
Vintage Petroleum, Inc.		8.250	%	5/1/12		110		117
Westport Resources Corporation		8.250	%	11/1/11		448		478
Westport Resources Corporation		8.250	%	11/1/11		226		242	A
								7,582

62

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Paper and Forest Products	2.3%
Appleton Papers Inc.		12.500	%	12/15/08	$	748	$	843
Georgia-Pacific Corp.		7.500	%	5/15/06		275		266
Georgia-Pacific Corp.		8.875	%	2/1/10		133		138	A
Georgia-Pacific Corp.		9.500	%	12/1/11		768		760
Georgia-Pacific Corp.		9.375	%	2/1/13		153		162	A
Georgia-Pacific Corp.		8.250	%	3/1/23		169		135
Georgia-Pacific Corp.		8.875	%	5/15/31		1,266		1,076
								3,380
Publishing	2.2%
American Media Operations, Inc.		10.250	%	5/1/09		735		794
Dex Media East LLC		9.875	%	11/15/09		483		544	A
Dex Media East LLC		12.125	%	11/15/12		550		641	A
Hollinger International Publishing		9.000	%	12/15/10		631		667	A
Houghton Mifflin Company		8.250	%	2/1/11		195		209	A
Sun Media Corporation		7.625	%	2/15/13		452		474	A
								3,329
Real Estate	0.5%
Ventas Realty, Limited Partnership		8.750	%	5/1/09		516		545
Ventas Realty, Limited Partnership		9.000	%	5/1/12		192		206
								751
Restaurants	0.5%
Yum! Brands, Inc.		7.450	%	5/15/05		649		694
Yum! Brands, Inc.		8.500	%	4/15/06		63		69
								763
Retail	2.7%
American Greetings Corporation		6.100	%	8/1/28		365		350
Backsaver Acquisition Corp.		9.250	%	5/31/08		137		36	F,G,H
Dillard’s, Inc.		6.430	%	8/1/04		343		345
J.C. Penney Company, Inc.		8.000	%	3/1/10		1,019		1,055
J.C. Penney Company, Inc.		7.400	%	4/1/37		177		180
Relax The Back Acquisition Corp.		9.250	%	5/31/08		59		15	F,G,H
Samsonite Corporation		10.750	%	6/15/08		494		434
The Gap, Inc.		5.625	%	5/1/03		777		778
The Gap, Inc.		8.150	%	12/15/05		585		646
The Gap, Inc.		6.900	%	9/15/07		190		196
								4,035
Retailers	0.2%
Hollywood Entertainment Corporation		9.625	%	3/15/11		349		364

63

STATEMENT OF NET ASSETS—Continued

Western Asset High Yield Portfolio—Continued

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Corporate Bonds and Notes—Continued
Special Purpose	3.4%
American Tower Escrow Corporation		0.000	%	8/1/08	$	738	$	487	C
H & E Equipment Services LLC		11.125	%	6/15/12		1,125		858
Moore North America Finance		7.875	%	1/15/11		285		295	A
PCA LLC/PCA Finance Corporation		11.875	%	8/1/09		394		410
Qwest Capital Funding, Inc.		7.000	%	8/3/09		1,106		840
Qwest Capital Funding, Inc.		6.875	%	7/15/28		1,401		981
Terra Capital Inc.		12.875	%	10/15/08		93		99
UCAR Finance Inc.		10.250	%	2/15/12		1,181		1,051
								5,021
Steel (Producers)	0.7%
AK Steel Corporation		7.875	%	2/15/09		1,159		1,066
Technology Services	0.5%
SPX Corporation		7.500	%	1/1/13		745		792
Telecommunications	4.8%
FairPoint Communications, Inc.		11.875	%	3/1/10		521		547	A
Insight Midwest, L.P.		9.750	%	10/1/09		659		680
Insight Midwest, L.P.		10.500	%	11/1/10		42		45
PanAmSat Corporation		6.375	%	1/15/08		317		315
PanAmSat Corporation		8.500	%	2/1/12		1,201		1,237
Qwest Communications International Inc.		7.500	%	11/1/08		418		361
Qwest Corporation		6.875	%	9/15/33		1,613		1,363
Qwest Services Corporation		13.500	%	12/15/10		1,720		1,815	A
Ubiquitel Operating Company		0.000	%	5/15/10		195		49	A,B,C
WorldCom, Inc.—WorldCom Group		7.875	%	5/15/03		1,375		368	D
WorldCom, Inc.—WorldCom Group		8.250	%	5/15/31		1,559		417	D
								7,197
Telecommunications (Cellular/Wireless)	1.9%
Nextel Communications, Inc.		9.750	%	10/31/07		1,500		1,553
Nextel Communications, Inc.		9.375	%	11/15/09		349		366
Nextel Communications, Inc.		5.250	%	1/15/10		183		157	I
Rural Cellular Corporation		9.750	%	1/15/10		1,010		730
								2,806
Transportation	1.6%
Avis Group Holdings, Inc.		11.000	%	5/1/09		962		1,074
Delta Air Lines, Inc.		7.900	%	12/15/09		218		113
Delta Air Lines, Inc.		8.300	%	12/15/29		354		161
Kansas City Southern Railway		9.500	%	10/1/08		999		1,114
								2,462
Total Corporate Bonds and Notes (Identified Cost—$126,417)								125,780

64

	% OF NET ASSETS	RATE		MATURITY DATE	PAR		VALUE
Yankee BondsJ	9.3%
Cable	0.8%
British Sky Broadcasting Group plc		7.300	%	10/15/06	$	374	$	400
British Sky Broadcasting Group plc		8.200	%	7/15/09		17		19
Rogers Cable Inc.		7.875	%	5/1/12		92		94
Rogers Cablesystems Limited		10.000	%	12/1/07		250		263
Rogers Communications, Inc.		8.875	%	7/15/07		425		434
								1,210
Chemicals	0.3%
Avecia Group PLC		11.000	%	7/1/09		549		467
Containers and Packaging (Metal and Glass)	0.4%
Crown European Holdings SA		10.875	%	3/1/13		568		574	A
Electronics	N.M.
Flextronics International Ltd.		9.875	%	7/1/10		42		47
Entertainment	0.3%
Alliance Atlantis Communications Inc.		13.000	%	12/15/09		353		396
Manufacturing (Diversified)	1.8%
Tyco International Group SA		5.875	%	11/1/04		290		287
Tyco International Group SA		6.750	%	2/15/11		126		120
Tyco International Group SA		6.375	%	10/15/11		1,845		1,725
Tyco International Group SA		7.000	%	6/15/28		316		288
Tyco International Group SA		6.875	%	1/15/29		305		279
								2,699
Media	0.2%
Shaw Communications Inc.		8.250	%	4/11/10		224		231
Office Equipment and Supplies	0.6%
Xerox Capital Europe Plc		5.875	%	5/15/04		871		862
Oil and Gas	0.1%
Western Oil Sands Inc.		8.375	%	5/1/12		161		167
Paper and Forest Products	1.1%
Abitibi-Consolidated Inc.		8.550	%	8/1/10		719		789
Cascades Inc.		7.250	%	2/15/13		770		801	A
								1,590
Pharmaceuticals	0.5%
Biovail Corporation		7.875	%	4/1/10		731		762

65

STATEMENT OF NET ASSETS—Continued

Western Asset High Yield Portfolio—Continued

	% OF NET ASSETS	RATE		MATURITY DATE	PAR/ SHARES			VALUE
Yankee Bonds—Continued
Services	0.5%
Compagnie Generale de Geophysique SA		10.625	%	11/15/07	$	885		$	828
Special Purpose	1.5%
Calpine Canada Energy Finance		8.500	%	5/1/08		1,310			753
MDP Acquisitions PLC		9.625	%	10/1/12		868			915	A
Yell Finance BV		10.750	%	8/1/11		570			635
									2,303
Telecommunications (Cellular/Wireless)	0.4%
Rogers Wireless Communications Inc.		9.625	%	5/1/11		516			550
Transportation	0.8%
Teekay Shipping Corporation		8.875	%	7/15/11		1,115			1,194
Total Yankee Bonds (Identified Cost—$13,695)									13,880
Common Stocks	N.M.
Engineering and Construction	N.M.
Washington Group International, Inc.						3	shs		60
Total Common Stocks (Identified Cost—$52)									60
Preferred Stocks	1.9%
Cable	0.9%
Cablevision Systems New York Group		11.125	%			9			920
Cablevision Systems New York Group		11.750	%			5			463
									1,383
Diversified Financial Services	0.6%
Sinclair Capital Corporation		11.625	%			8			810
Industrial Conglomerates	N.M.
High Voltage Engineering Corporation		12.500	%			0.238			2
Media	0.4%
Paxson Communications Corporation		13.250	%			0.082			634
Telecommunications	N.M.
Intermedia Communications, Inc.		13.500	%			1			7	G
Total Preferred Stocks (Identified Cost—$3,027)									2,836
Warrants	N.M.
Horizon PCS, Inc.						1	wts		0	K
Next Generation Network, Inc.						3			0	K
Washington Group International, Series A						2			0	K
Washington Group International, Series B						2			1	K
Washington Group International, Series C						1			0	K
Total Warrants (Identified Cost—$27)									1
Total Long-Term Securities (Identified Cost—$143,218)									142,557

66

	% OF NET ASSETS	PAR			VALUE
Short-Term Securities	4.7%
Repurchase Agreements	4.7%
Lehman Brothers, Inc. 1.32%, dated 3/31/03, to be repurchased at $7,082 on 4/1/03 (Collateral: $7,082 Federal Home Loan Bank bonds, 2.875% due 2/21/18, value, $7,224)		$	7,082		$	7,082
Total Short-Term Securities (Identified Cost—$7,082)						7,082
Total Investments (Identified Cost—$150,300)	99.8%					149,639
Other Assets Less Liabilities	0.2%					298
Net assets consist of:
Accumulated paid-in capital applicable to 15,687 Institutional Class shares outstanding		$	155,917
Under/(Over) distributed net investment income			4,906
Accumulated net realized gain/(loss) on investments			(10,225	)
Unrealized appreciation/(depreciation) of investments			(661	)
Net assets	100.0%				$	149,937
Net asset value per share:
Institutional Class						$9.56

^A Rule 144a Security – A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities represent 14.6% of net assets.

^B Stepped coupon security – A security with a predetermined schedule of interest or dividend rate changes, at which time it begins to accrue interest or pay dividends.

^C Zero coupon bond – A bond with no periodic interest payments which is sold at such a discount as to produce a current yield to maturity.

^D Bond is in default at March 31, 2003.

^E Unit – A security which consists of a bond and warrants to purchase the stock of the issuer.

^F Private placement.

^G Pay-in-Kind (“PIK”) security – A bond in which interest during the initial few years is paid in additional PIK securities rather than in cash.

^H Illiquid security valued at fair value under procedures adopted by the Board of Directors.

^I Convertible security – Security may be converted into common stock of the company.

^J Yankee Bond – A dollar-denominated bond issued in the U.S. by foreign entities.

^K Non-income producing.

N.M.—Not meaningful.

See notes to financial statements.

67

STATEMENT OF NET ASSETS

March 31, 2003

(Amounts in Thousands)

Western Asset Non-U.S. Fixed Income Portfolio

	% OF NET ASSETS	RATE		MATURITY DATE	PARA	VALUE
Long-Term Securities	95.3%
British Sterling	2.6%
Corporate Bonds and Notes	1.1%
Halifax plc		6.375	%	4/3/08	200	$	343
Landesbank Hessen-Thueringen Girozentrale		5.375	%	3/7/12	200		330
							673
Government Obligations	1.5%
United Kingdom of Great Britain and Northern Ireland		5.750	%	12/7/09	275		475
United Kingdom of Great Britain and Northern Ireland		6.000	%	12/7/28	200		385
							860
Total British Sterling							1,533
Canadian Dollar	5.7%
Government Obligations	5.7%
Canadian Government		5.750	%	6/1/29	4,800		3,350
Danish Krone	6.8%
Corporate Bonds and Notes	1.3%
Realkredit Danmark A/S		5.000	%	10/1/35	2,912		412
Unikredit Realkredit		6.000	%	7/1/29	2,403		361
							773
Government Obligations	5.5%
Kingdom of Denmark		5.000	%	11/15/13	21,000		3,260
Total Danish Krone							4,033
Euro	62.1%
Corporate Bonds and Notes	13.3%
Caisse de Refinancement L’ Habitat		4.200	%	4/25/11	2,000		2,198
CAM International		5.750	%	4/3/12	400		450
Bank Nederlandse Gemeenten NV		5.625	%	10/25/10	1,850		2,236
Bank of Scotland		5.125	%	12/5/13	545		628
Kreditanstalt fuer Wiederaufbau		5.250	%	1/4/10	1,800		2,140
ING Verzekeringen NV		6.250	%	6/21/21	190		208
							7,860
U.S. Government and Agency Obligations	1.9%
Freddie Mac		5.750	%	9/15/10	900		1,096
Government Obligations	46.9%
Federal Republic of Germany		3.750	%	1/4/09	2,550		2,824
Federal Republic of Germany		5.500	%	1/4/31	2,250		2,698

68

	% OF NET ASSETS	RATE		MATURITY DATE	PARA		VALUE
Euro—Continued
Government Obligations—Continued
Finland Republic		5.375	%	7/4/13	3,500		$	4,183
French Republic		5.750	%	10/25/32	1,750			2,178
Hellenic Republic		6.500	%	10/22/19	1,750			2,264
Italian Republic		6.000	%	5/1/31	5,500			6,943
Kingdom of Belgium		5.500	%	3/28/28	1,950			2,315
Kingdom of Spain		5.750	%	7/30/32	1,750			2,171
Kingdom of the Netherlands		5.500	%	1/15/28	1,750			2,094
								27,670
Total Euro								36,626
Norwegian Krone	4.3%
Government Obligations	4.3%
Kingdom of Norway		6.000	%	5/16/11	17,700			2,555
Swedish Krona	13.8%
Corporate Bonds and Notes	3.7%
AB Spintab		5.750	%	6/15/05	18,000			2,206
Government Obligations	10.1%
Kingdom of Sweden		5.500	%	10/8/12	25,000			3,147
Statens Bostadsfinansier		5.500	%	3/15/06	22,900			2,798
								5,945
Total Swedish Krona								8,151
Total Long-Term Securities (Identified Cost—$47,445)								56,248
Short-Term Securities	3.2%
Options PurchasedB	1.3%
Bundesobligation Call, June 2003, Strike Price EUR 110.50					35	C		164
Bundesobligation Call, June 2003, Strike Price EUR 112.25					325	C		174
Euribor Futures Call, September 2003, Strike Price EUR 94.50					45	C		400
								738

69

STATEMENT OF NET ASSETS—Continued

Western Asset Non-U.S. Fixed Income Portfolio—Continued

	% OF NET ASSETS		PARA			VALUE
Short-Term Securities—Continued
Repurchase Agreements	1.9	%
Lehman Brothers, Inc. 1.32%, dated 3/31/03, to be repurchased at $1,136 on 4/1/03 (Collateral: $1,160 Federal Home Loan Bank bonds, 2.875%, due 2/21/18, value $1,159)			$	1,136		$	1,136
Total Short-Term Securities (Identified Cost—$1,983)							1,874
Total Investments (Identified Cost—$49,428)	98.5	%					58,122
Other Assets Less Liabilities	1.5	%					904
Net assets consist of:
Accumulated paid-in capital applicable to 5,411 Institutional Class shares outstanding			$	54,092
Under/(Over) distributed net investment income				(3,673	)
Accumulated net realized gain/(loss) on investments, options, futures and currency transactions				531
Unrealized appreciation/(depreciation) of investments, options, futures and currency translations				8,076
Net assets	100.0	%				$	59,026
Net asset value per share:
Institutional Class							$10.91

	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Futures Contracts PurchasedB
Eurobobl Futures	June 2003	39	$	(35	)

^A Securities are grouped by the currencies in which they were issued, and the par amounts are also in the issuance currency.

^B Options and futures are described in more detail in the notes to financial statements.

^C Represents actual number of contracts.

See notes to financial statements.

70

STATEMENTS OF OPERATIONS

(Amounts in Thousands)

	YEAR ENDED MARCH 31, 2003
	WESTERN ASSET INTERMEDIATE PORTFOLIO			WESTERN ASSET CORE PORTFOLIO			WESTERN ASSET CORE PLUS PORTFOLIO			WESTERN ASSET INFLATION INDEXED BOND PORTFOLIO			WESTERN ASSET HIGH YIELD PORTFOLIO			WESTERN ASSET NON-U.S. FIXED INCOME PORTFOLIO
Investment Income:
Interest	$	32,054		$	63,220		$	74,166		$	12,618		$	14,989		$	2,832
Dividends		386			1,174			165			—			578			—
Total income		32,440			64,394			74,331			12,618			15,567			2,832
Expenses:
Advisory fee		2,400			5,191			5,824			503			794			257
Distribution and service fees:
Financial Intermediary Class		N/A			54			1			N/A			N/A			N/A
Transfer agent and shareholder servicing expense:
Institutional Class		39			72			75			22			14			16
Financial Intermediary Class		N/A			4			N/A			N/A			N/A			N/A
Audit and legal fees		43			75			115			41			31			32
Custodian fees		145			409			635			84			92			139
Directors' fees and expenses		28			47			56			11			9			7
Registration fees		15			63			92			13			17			9
Reports to shareholders		10			14			16			3			7			3
Other expenses		20			37			40			7			5			3
		2,700			5,966			6,854			684			969			466
Less fees (waived)/recaptured		—			20			(723	)		(55	)		(175	)		(152	)
Total expenses, net of waivers		2,700			5,986			6,131			629			794			314
Net Investment Income		29,740			58,408			68,200			11,989			14,773			2,518
Net Realized and Unrealized Gain/(Loss) on Investments:
Realized gain/(loss) on:
Investments		20,116			37,152			35,049			4,754			(9,702	)		1,389
Options		(839	)		8,892			11,446			79			—			416
Futures		(542	)		(26,801	)		(22,802	)		407			—			—
Foreign currency transactions		N/A			N/A			(5,679	)		—			—			(4,813	)
Swaps		1,902			2,960			1,466			—			—			—
		20,637			22,203			19,480			5,240			(9,702	)		(3,008	)
Change in unrealized gain/(loss) on:
Investments, options, futures, swaps and foreign currency transactions		15,410			45,929			65,816			21,652			(2,170	)		9,852
Assets and liabilities denominated in foreign currency		N/A			N/A			(70	)		—			—			(12	)
		15,410			45,929			65,746			21,652			(2,170	)		9,840
Net Realized and Unrealized Gain/(Loss) on Investments		36,047			68,132			85,226			26,892			(11,872	)		6,832
Change in Net Assets Resulting From Operations	$	65,787		$	126,540		$	153,426		$	38,881		$	2,901		$	9,350

N/A—Not applicable.

See notes to financial statements.

71

STATEMENTS OF CHANGES IN NET ASSETS

(Amounts in Thousands)

	WESTERN ASSET INTERMEDIATE PORTFOLIO						WESTERN ASSET CORE PORTFOLIO
	YEARS ENDED						YEARS ENDED
	3/31/03			3/31/02			3/31/03			3/31/02
Change in Net Assets:
Net investment income	$	29,740		$	29,875		$	58,408		$	49,255
Net realized gain/(loss) on investments, options, futures, swaps and foreign currency transactions		20,637			5,531			22,203			23,891
Change in unrealized appreciation/(depreciation) of investments, options, futures, swaps and assets and liabilities denominated in foreign currencies		15,410			(15,551	)		45,929			(23,760	)
Change in net assets resulting from operations		65,787			19,855			126,540			49,386
Distributions to shareholders:
From net investment income:
Institutional Class		(29,740	)		(29,884	)		(57,541	)		(48,731	)
Financial Intermediary Class		N/A			N/A			(866	)		(92	)
From net realized gain on investments:
Institutional Class		(5,142	)		(7,678	)		(8,232	)		(10,466	)
Financial Intermediary Class		N/A			N/A			(30	)		(21	)
Change in net assets from Fund share transactions:
Institutional Class		(119,227	)		188,081			370,610			154,985
Financial Intermediary Class		N/A			N/A			75,641			26
Change in net assets		(88,322	)		170,374			506,122			145,087
Net Assets:
Beginning of year		628,196			457,822			973,429			828,342
End of year	$	539,874		$	628,196		$	1,479,551		$	973,429
Under/(Over) distributed net investment income	$	(34	)	$	(397	)	$	755		$	(403	)

^A For the period September 28, 2001 (commencement of operations) to March 31, 2002.

N/A—Not applicable.

See notes to financial statements.

72

WESTERN ASSET CORE PLUS PORTFOLIO						WESTERN ASSET INFLATION INDEXED BOND PORTFOLIO						WESTERN ASSET HIGH YIELD PORTFOLIO						WESTERN ASSET NON-U.S. FIXED INCOME PORTFOLIO
YEARS ENDED						YEARS ENDED						YEARS ENDED						YEARS ENDED
3/31/03			3/31/02			3/31/03			3/31/02			3/31/03			3/31/02A			3/31/03			3/31/02
$	68,200		$	38,127		$	11,989		$	1,371		$	14,773		$	7,717		$	2,518		$	3,024
	19,480			17,321			5,240			40			(9,702	)		(523	)		(3,008	)		3,739
	65,746			(19,828	)		21,652			(2,206	)		(2,170	)		1,509			9,840			(4,076	)
	153,426			35,620			38,881			(795	)		2,901			8,703			9,350			2,687
	(68,241	)		(37,772	)		(11,989	)		(1,371	)		(14,132	)		(3,452	)		(636	)		(3,741	)
	(15	)		(2	)		N/A			N/A			N/A			N/A			N/A			N/A
	(12,750	)		(17,685	)		(3,799	)		(84	)		—			—			—			—
	(3	)		—			N/A			N/A			N/A			N/A			N/A			N/A
	802,545			567,055			56,578			200,907			8,439			147,478			2,825			(44,844	)
	118			241			N/A			N/A			N/A			N/A			N/A			N/A
	875,080			547,457			79,671			198,657			(2,792	)		152,729			11,539			(45,898	)
	991,908			444,451			210,635			11,978			152,729			—			47,487			93,385
$	1,866,988		$	991,908		$	290,306		$	210,635		$	149,937		$	152,729		$	59,026		$	47,487
$	(5,860	)	$	(364	)	$	—		$	—		$	4,906		$	4,265		$	(3,673	)	$	(742	)

73

FINANCIAL HIGHLIGHTS

Contained below is per share operating performance data for a share of common stock outstanding throughout each period shown, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information in the financial statements.

			INVESTMENT OPERATIONS
	NET ASSET VALUE, BEGINNING OF PERIOD		NET INVESTMENT INCOME		NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS, OPTIONS, FUTURES, SWAPS, AND FOREIGN CURRENCY TRANSACTIONS			TOTAL FROM INVESTMENT OPERATIONS
Western Asset Intermediate Portfolio
—Institutional Class
Years Ended March 31,
2003	$	10.39	$	.53	$	.62		$	1.15
2002		10.65		.57A		(.13	)		.44
2001		10.09		.68A		.56			1.24
2000		10.62		.63A		(.38	)		.25
1999		10.85		.58A		.06			.64
—Financial Intermediary Class
Period Ended November 30, 1999B	$	10.61	$	.41C	$	(.33	)	$	.08
Year Ended March 31, 1999F		10.60		.12C		(.11	)		.01
Western Asset Core Portfolio
—Institutional Class
Years Ended March 31,
2003	$	11.01	$	.55	$	.65		$	1.20
2002		11.09		.62G		.05			.67
2001		10.39		.73G		.70			1.43
2000		11.01		.67G		(.46	)		.21
1999		11.59		.64G		(.01	)		.63
—Financial Intermediary Class
Years Ended March 31,
2003	$	11.02	$	.53	$	.63		$	1.16
2002		11.10		.59H		.06			.65
2001		10.40		.70H		.70			1.40
2000I		10.69		.45H		(.25	)		.20
Western Asset Core Plus Portfolio
—Institutional Class
Years Ended March 31,
2003	$	9.88	$	.51J	$	.62		$	1.13
2002		10.07		.56J,K		.06K			.62
2001		9.48		.66J		.59			1.25
2000		9.97		.55J		(.37	)		.18
1999L		10.00		.34J		(.08	)		.26
—Financial Intermediary Class
Years Ended March 31,
2003	$	9.87	$	.48M	$	.63		$	1.11
2002N		10.04		.11K,M		(.17	)K		(.06	)

74

DISTRIBUTIONS											RATIOS/SUPPLEMENTAL DATA
FROM NET INVESTMENT INCOME			FROM NET REALIZED GAIN ON INVESTMENTS			TOTAL DISTRIBUTIONS			NET ASSET VALUE, END OF PERIOD		TOTAL RETURN	EXPENSES TO AVERAGE NET ASSETS	NET INVESTMENT INCOME TO AVERAGE NET ASSETS	PORTFOLIO TURNOVER RATE		NET ASSETS, END OF PERIOD (IN THOUSANDS)
$	(.53	)	$	(.09	)	$	(.62	)	$	10.92	11.37%	.45%	5.0%	238.5%		$	539,874
	(.57	)		(.13	)		(.70	)		10.39	4.20%A	.45%A	5.3%A	274.8%			628,196
	(.68	)		—			(.68	)		10.65	12.79%A	.45%A	6.6%A	328.4%			457,822
	(.78	)		—			(.78	)		10.09	2.49%A	.45%A	6.3%A	440.8%			376,056
	(.57	)		(.30	)		(.87	)		10.62	6.01%A	.45%A	5.5%A	389.6%			314,534
$	(.43	)	$	—		$	(.43	)	$	10.26	.81%C,D	.70%C,E	5.9%C,E	440.8%		$	—
	—			—			—			10.61	.09%C,D	.70%C,E	5.2%C,E	389.6%			3,792
$	(.55	)	$	(.09	)	$	(.64	)	$	11.57	11.19%	.49%	4.9%	438.6%		$	1,400,431
	(.62	)		(.13	)		(.75	)		11.01	6.14%G	.50%G	5.6%G	595.2%			971,544
	(.73	)		—			(.73	)		11.09	14.37%G	.50%G	6.8%G	387.2%			826,459
	(.80	)		(.03	)		(.83	)		10.39	1.99%G	.50%G	6.3%G	260.4%			649,038
	(.65	)		(.56	)		(1.21	)		11.01	5.61%G	.50%G	5.7%G	484.3%			685,489
$	(.52	)	$	(.09	)	$	(.61	)	$	11.57	10.80%	.75%	4.1%	438.6%		$	79,120
	(.60	)		(.13	)		(.73	)		11.02	5.88%H	.75%H	5.3%H	595.2%			1,885
	(.70	)		—			(.70	)		11.10	13.96%H	.75%H	6.6%H	387.2%			1,883
	(.49	)		—			(.49	)		10.40	1.97%D,H	.75%E,H	6.2%E,H	260.4%			1,456
$	(.51	)	$	(.10	)	$	(.61	)	$	10.40	11.78%J	.45%J	5.0%J	422.6%		$	1,866,619
	(.54	)		(.27	)		(.81	)		9.88	6.34%J	.45%J	5.3%J	590.7%			991,673
	(.66	)		—			(.66	)		10.07	13.73%J	.46%J	6.8%J	432.8%			444,451
	(.67	)		—			(.67	)		9.48	1.95%J	.50%J	6.2%J	315.9%			215,184
	(.22	)		(.07	)		(.29	)		9.97	2.58%D,J	.50%J	5.4%E,J	565.7%	E		119,646
$	(.48	)	$	(.10	)	$	(.58	)	$	10.40	11.57%M	.70%M	4.8%M	422.6%		$	369
	(.11	)		—			(.11	)		9.87	(.57)%D,M	.70%E,M	5.3%E,M	590.7%	E		235

75

FINANCIAL HIGHLIGHTS—Continued

			INVESTMENT OPERATIONS
	NET ASSET VALUE, BEGINNING OF PERIOD		NET INVESTMENT INCOME		NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS, OPTIONS, FUTURES, SWAPS AND FOREIGN CURRENCY TRANSACTIONS			TOTAL FROM INVESTMENT OPERATIONS
Western Asset Inflation Indexed Bond Portfolio
—Institutional Class
Years Ended March 31,
2003	$	9.92	$	.51O	$	1.19		$	1.70
2002		9.98		.41K,O		.01K			.42
2001P		10.00		.08O		(.02	)		.06
Western Asset High Yield Portfolio
—Institutional Class
Years Ended March 31,
2003	$	10.36	$	.96Q	$	(.82	)	$	.14
2002R		10.00		.53Q		.07			.60
Western Asset Non-U.S. Fixed Income Portfolio
—Institutional Class
Years Ended March 31,
2003	$	9.25	$	.47S	$	1.30		$	1.77
2002		9.25		—K,S		.46K			.46
2001		9.59		.59S		(.05	)		.54
2000		10.21		.49S		(.47	)		.02
1999T		10.00		.30S		.31			.61

^A Net of advisory fees waived by the adviser pursuant to a voluntary expense limitation of 0.45%. If no fees had been waived by the adviser, the annualized ratio of expenses to average net assets would have been as follows: for the years ended March 31, 2002, 0.47%; 2001, 0.47%; 2000, 0.48%; and 1999, 0.48%.

^B Liquidation of Financial Intermediary Class shares.

^C Net of advisory fees waived by the adviser pursuant to a voluntary expense limitation of 0.70%. If no fees had been waived by the adviser, the annualized ratio of expenses to average net assets would have been as follows: for the period ending November 30, 1999 (liquidation of Financial Intermediary Class shares), 0.74%; and for the period January 7, 1999 (commencement of operations) to March 31, 1999, 0.73%.

^D Not annualized.

^E Annualized.

^F For the period January 7, 1999 (commencement of operations) to March 31, 1999.

^G Net of advisory fees waived by the adviser pursuant to a voluntary expense limitation of 0.50%. If no fees had been waived by the adviser, the annualized ratio of expenses to average net assets would have been as follows: for the years ended March 31, 2002, 0.52%; 2001, 0.53%; 2000, 0.51%, and 1999, 0.50%.

^H Net of advisory fees waived by the adviser pursuant to a voluntary expense limitation of 0.75%. If no fees had been waived by the adviser, the annualized ratio of expenses to average net assets would have been as follows: for the years ended March 31, 2002, 0.77%; and 2001, 0.78%; and for the period July 22, 1999 (commencement of operations) to March 31, 2000, 0.76%.

^I For the period July 22, 1999 (commencement of operations) to March 31, 2000.

^J Net of advisory fees waived by the adviser pursuant to a voluntary expense limitation of 0.50% to June 30, 2000, and 0.45% thereafter. If no fees had been waived by the adviser, the annualized ratio of expenses to average net assets would have been as follows: for the years ended March 31, 2003, 0.50%; 2002, 0.54%; 2001, 0.57%; and 2000, 0.65%; and for the period July 8, 1998 (commencement of operations) to March 31, 1999, 0.65%.

^K The amount presented is calculated pursuant to a methodology prescribed by the Securities and Exchange Commission for a share outstanding throughout the period. This amount is inconsistent with the Fund's aggregate gains and losses because of the timing of sales and redemptions of Fund shares in relation to fluctuating market values for the investment portfolio.

^L For the period July 8, 1998 (commencement of operations) to March 31, 1999.

76

DISTRIBUTIONS											RATIOS/SUPPLEMENTAL DATA
FROM NET INVESTMENT INCOME			FROM NET REALIZED GAIN ON INVESTMENTS			TOTAL DISTRIBUTIONS			NET ASSET VALUE, END OF PERIOD		TOTAL RETURN	EXPENSES TO AVERAGE NET ASSETS	NET INVESTMENT INCOME TO AVERAGE NET ASSETS	PORTFOLIO TURNOVER RATE	NET ASSETS END OF YEAR (IN THOUSANDS)
$	(.51	)	$	(.15	)	$	(.66	)	$	10.96	17.62%O	.25%O	4.8%O	75.4%	$	290,306
	(.41	)		(.07	)		(.48	)		9.92	4.28%O	.25%O	5.0%O	79.5%		210,635
	(.08	)		—			(.08	)		9.98	.55%D,O	.25%E,O	8.9%E,O	—		11,978
$	(.94	)	$	—		$	(.94	)	$	9.56	2.22%Q	.55%Q	10.2%Q	110.1%	$	149,937
	(.24	)		—			(.24	)		10.36	6.02%D,Q	.55%E,Q	10.4%E,Q	51.8%E		152,729
$	(.11	)	$	—		$	(.11	)	$	10.91	19.26%S	.55%S	4.4%S	187.5%	$	59,026
	(.46	)		—			(.46	)		9.25	5.21%S	.55%S	4.5%S	307.6%		47,487
	(.88	)		—			(.88	)		9.25	6.31%S	.55%S	5.6%S	263.4%		93,385
	(.50	)		(.14	)		(.64	)		9.59	.57%S	.55%S	4.9%S	347.1%		62,526
	(.20	)		(.20	)		(.40	)		10.21	5.81%D,S	.55%E,S	4.1%E,S	388.0%E		65,358

^M Net of advisory fees waived by the adviser pursuant to a voluntary expense limitation of 0.70%. If no fees had been waived by the adviser, the annualized ratio of expenses to average net assets would have been as follows: for the year ended March 31, 2003, 0.75%; and for the period January 8, 2002 (commencement of operations) to March 31, 2002, 0.75%.

^N For the period January 8, 2002 (commencement of operations) to March 31, 2002.

^O Net of advisory fees waived by the adviser pursuant to a voluntary expense limitation of 0.25%. If no fees had been waived by the adviser, the annualized ratio of expenses to average net assets would have been as follows: for the years ended March 31, 2003, 0.27%; and 2002, 0.67%; and for the period March 1, 2001 (commencement of operations) to March 31, 2001, 2.03%.

^P For the period March 1, 2001 (commencement of operations) to March 31, 2001.

^Q Net of advisory fees waived by the adviser pursuant to a voluntary expense limitation of 0.55%. If no fees had been waived by the adviser, the annualized ratio of expenses to average net assets would have been as follows: for the year ended March 31, 2003, 0.67%; and for the period September 28, 2001 (commencement of operations) to March 31, 2002, 0.75%.

^R For the period September 28, 2001 (commencement of operations) to March 31, 2002.

^S Net of advisory fees waived by the adviser pursuant to a voluntary expense limitation of 0.55%. If no fees had been waived by the adviser, the annualized ratio of expenses to average net assets would have been as follows: for the years ended March 31, 2003, 0.82%; 2002, 0.82%; 2001, 0.85; and 2000, 0.83%; and for the period July 15, 1998 (commencement of operations) to March 31, 1999, 0.85%.

^T For the period July 15, 1998 (commencement of operations) to March 31, 1999.

See notes to financial statements.

77

NOTES TO FINANCIAL STATEMENTS

(Amounts in Thousands)

1. Significant Accounting Policies:

Western Asset Funds, Inc. (“Corporation”), consisting of Western Asset Intermediate Portfolio (“Intermediate”), Western Asset Core Portfolio (“Core”), Western Asset Core Plus Portfolio (“Core Plus”), Western Asset Inflation Indexed Bond Portfolio (“Inflation Indexed”), Western Asset High Yield Portfolio (“High Yield”) and Western Asset Non-U.S. Fixed Income Portfolio (“Non-U.S.”) (individually a “Fund”, collectively the “Funds”), is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company with the exception of Non-U.S., which is non-diversified. Effective May 31, 2001, the Corporation changed its name to Western Asset Funds, Inc. from LM Institutional Fund Advisors I, Inc.

Each Fund offers two classes of shares: Institutional Class and Financial Intermediary Class. Shares in the Financial Intermediary Class bear a distribution fee. The Financial Intermediary Classes of Intermediate, Core and Core Plus commenced operations on January 7, 1999, July 22, 1999, and January 8, 2002, respectively. The Financial Intermediary Class shares of Intermediate were redeemed on November 30, 1999. The Financial Intermediary Classes of Inflation Indexed, High Yield, and Non-U.S. are not active. The income and expenses of each of the Funds are allocated proportionately to the two classes of shares based on daily net assets, except for Rule 12b-1 distribution fees, which are charged only on the Financial Intermediary Class shares.

Preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from these estimates. The following is a summary of significant accounting policies followed by the Funds in the preparation of their financial statements:

Security Valuation

Securities owned by the Funds for which market quotations are readily available are valued at current market value. Securities for which market quotations are not readily available are fair valued by the Board of Directors or the Funds’ Valuation Committee pursuant to procedures adopted by the Board. In determining fair value, the Board of Directors or the Funds’ Valuation Committee consider all relevant qualitative and quantitative factors available. These factors are subject to change over time and are reviewed periodically. The values assigned to fair value investments are based on available information and do not necessarily represent amounts that might ultimately be realized, since such amounts depend on future developments inherent in long-term investments. Further, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market of the investments existed, and the differences could be material. At March 31, 2003, $51, or 0.03%, of High Yield’s net assets were fair valued in accordance with the procedures adopted by the Board of Directors. Securities with remaining maturities of 60 days or less are generally valued at amortized cost by each Fund.

With respect to Core Plus, High Yield, Inflation Indexed and Non-U.S., where a security is traded on more than one market, which may include foreign markets, the securities are generally valued on the market considered by the Funds’ adviser to be the primary market. The Funds will value their foreign securities in U.S. dollars on the basis of the then-prevailing exchange rates.

Security Transactions

Security transactions are recorded on the trade date. Realized gains and losses from security transactions are reported on an identified cost basis for both financial reporting and federal income tax purposes. At March 31, 2003, receivables for securities sold and payables for securities purchased for each Fund were as follows:

	Receivable for Securities Sold		Payable for Securities Purchased
Intermediate	$	4,771	$	17,565
Core		3,282		373,991
Core Plus		3,287		476,805
Inflation Indexed		—		—
High Yield		1,486		4,715
Non-U.S.		1,418		2,120

78

For the year ended March 31, 2003, investment transactions (excluding short-term investments) were as follows:

	Purchases				Proceeds From Sales
	U.S. Gov’t Securities		Other		U.S. Gov’t Securities		Other
Intermediate	$	937,683	$	315,652	$	958,217	$	392,809
Core		4,961,293		726,014		4,854,550		647,700
Core Plus		5,599,445		1,021,836		5,322,326		735,944
Inflation Indexed		226,249		5,111		180,945		2,500
High Yield		1,545		153,650		1,545		148,377
Non-U.S.		—		98,752		—		99,978

Foreign Currency Translation

Assets and liabilities initially expressed in non-U.S. currencies are translated into U.S. dollars at the current rate of exchange. Purchases and sales of securities and income and expenses are translated into U.S. dollars at the prevailing market rates on the dates of such transactions. The effects of changes in non-U.S. currency exchange rates on investment securities and other assets and liabilities are included with the net realized and unrealized gain or loss on investment securities.

Repurchase Agreements

The Funds may engage in repurchase agreement transactions. Under the terms of a typical repurchase agreement, a fund takes possession of an underlying debt obligation subject to an obligation of the seller to repurchase, and a fund to resell, the obligation at an agreed-upon price and time, thereby determining the yield during a fund’s holding period. This arrangement results in a fixed rate of return that is not subject to market fluctuations during the fund’s holding period. The value of the collateral is at all times at least equal to the total amount of the repurchase obligation, including interest. In the event of counterparty default, a fund has the right to use the collateral to satisfy the terms of the repurchase agreement. However, there could be potential loss to the fund in the event the fund is delayed or prevented from exercising its right to dispose of the collateral securities, including the risk of a possible decline in the value of the collateral securities during the period while the fund seeks to assert its rights. The Funds’ investment advisers review the value of the collateral and the creditworthiness of those banks and dealers with which the Funds enter into repurchase agreements to evaluate potential risks.

Options, Futures and Swap Agreements

The current market value of a traded option is the last sale price or, in the absence of a sale, the mean between the closing bid and asked price. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. Futures contracts are marked-to-market on a daily basis. As a contract’s value fluctuates, payments known as variation margin are made or received by the Funds each day, depending on the daily fluctuation in the value of the contract. The daily changes in contract value are recorded as unrealized gains or losses, and the Fund recognizes a gain or loss when the contract is closed. Swap agreements are priced daily based upon quotations from brokers and the change, if any, is recorded as unrealized appreciation or depreciation.

Investment Income and Distributions to Shareholders

Dividend income and distributions to shareholders are allocated at the class level and are recorded on the ex-dividend date. Dividends from net investment income are declared daily and paid monthly for each Fund except High Yield and Non-U.S., which declare and pay dividends quarterly. Net capital gain distributions, which are calculated at the Fund level, are declared and paid  after the end of the tax year in which the gain is realized. Distributions are determined in accordance with federal income tax regulations, which may differ from those determined in accordance with accounting principles generally accepted in the United States of America; accordingly, periodic reclassifications are made within the Funds’ capital accounts to reflect income and gains available for distribution under federal income tax regulations. At March 31, 2003, accrued dividends payable were as follows: Intermediate $67, Core, $322, Core Plus, $1,200, Inflation Indexed, $305, High Yield, $0, and Non-U.S., $0. Interest income and expenses are recorded on the accrual basis. Bond discounts and premiums are amortized and included in interest income for financial reporting and federal income tax purposes.

2. Federal Income Taxes:

No provision for federal income or excise taxes is required since each Fund intends to continue to qualify as a regulated investment company and distribute substantially all of its taxable income and capital gains to its shareholders. Because federal

79

NOTES TO FINANCIAL STATEMENTS—Continued

(Amounts in Thousands)

income tax regulations differ from accounting principles generally accepted in the United States, income and capital gains distributions determined in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Accordingly, the character of distributions and composition of net assets for tax purposes differ from those reflected in the accompanying financial statements.

Distributions during the years ended March 31, 2003 and 2002, were characterized as follows for tax purposes:

	Intermediate				Core
	2003		2002		2003		2002
Ordinary income	$	31,385	$	35,790	$	60,987	$	56,084
Long-term capital gains		3,497		1,772		5,682		3,226
Total distributions	$	34,882	$	37,562	$	66,669	$	59,310
	Core Plus				Inflation Indexed
	2003		2002		2003		2002
Ordinary income	$	74,122	$	52,257	$	15,685	$	1,455
Long-term capital gains		6,887		3,202		103		—
Total distributions	$	81,009	$	55,459	$	15,788	$	1,455
	High Yield				Non-U.S.
	2003		2002		2003		2002
Ordinary income	$	14,132	$	3,452	$	636	$	3,741
Long-term capital gains		—		—		—		—
Total distributions	$	14,132	$	3,452	$	636	$	3,741

Pursuant to federal income tax regulations applicable to investment companies, the Funds have elected to treat net capital losses realized between November 1 and March 31 of each year (“post-October loss”) as occurring on the first day of the following tax year. For the year ended March 31, 2003, realized capital losses reflected in the accompanying financial statements, as shown in the table below, will not be recognized for federal income tax purposes until the fiscal year ending March 31, 2004.

The tax-basis components of net assets at March 31, 2003, were as follows:

	INTERMEDIATE			CORE			CORE PLUS			INFLATION INDEXED			HIGH YIELD			NON-U.S.
Unrealized appreciation	$	23,101		$	60,643		$	80,547		$	19,529		$	8,253		$	10,113
Unrealized depreciation		(11,443	)		(28,540	)		(30,076	)		(90	)		(8,079	)		(1,345	)
Net unrealized appreciation/(depreciation)		11,658			32,103			50,471			19,439			174			8,768
Undistributed ordinary income		6,366			22,375			24,316			1,539			3,710			1,745
Undistributed long-term capital gain		5,107			—			—			148			—			—
Capital loss carryforwards		—			—			—			—			(7,167	)		—
Post-October and other losses		—			—			(8,533	)		—			(2,697	)		(5,579	)
Paid-in capital		516,743			1,425,073			1,800,734			269,180			155,917			54,092
Net assets	$	539,874		$	1,479,551		$	1,866,988		$	290,306		$	149,937		$	59,026

The Funds intend to retain realized capital gains that may be offset against available capital loss carryforwards for federal income tax purposes. As of March 31, 2003, High Yield had a capital loss carryforward of $444 and $6,723, which expire in 2010 and 2011, respectively; there were no capital loss carryforwards for Intermediate, Core, Core Plus, Inflation Indexed and Non-U.S., respectively.

For financial reporting purposes, capital accounts and distributions to shareholders are adjusted to reflect the tax character of permanent book/tax differences. For the year ended March 31, 2003, the Funds recorded the following permanent

80

reclassifications, which primarily relate to various tax adjustments. Results of operations and net assets were not affected by these  reclassifications.

	INTERMEDIATE			CORE			CORE PLUS			INFLATION INDEXED		HIGH YIELD		NON-U.S.
Undistributed net investment income	$	363		$	1,157		$	(5,440	)	$	—	$	—	$	(4,813	)
Accumulated net realized gain/(loss)		(363	)		(1,157	)		5,440			—		—		4,813

At March 31, 2003, the cost of investments for federal income tax purposes was as follows:

Intermediate	$	625,332
Core		1,973,754
Core Plus		2,073,091
Inflation Indexed		268,261
High Yield		149,464
Non-U.S.		48,735

3. Financial Instruments:

Forward Currency Exchange Contracts

As part of their investment programs, Core Plus, Inflation Indexed, High Yield and Non-U.S. may utilize forward currency exchange contracts. The nature and risks of these financial instruments and the reasons for using them are set forth more fully in the Corporation’s prospectus and statement of additional information.

Forward foreign currency contracts are marked-to-market daily using forward foreign currency exchange rates supplied by an independent pricing service. The change in a contract’s market value is recorded by the Funds as an unrealized gain or loss. When the contract is closed or delivery is taken, the Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.

The use of forward foreign currency exchange contracts does not eliminate fluctuations in the underlying prices of the Funds’ securities, but it does establish a rate of exchange that can be achieved in the future. These forward foreign currency contracts involve market risk in excess of amounts reflected in the financial statements. Although forward foreign currency contracts used for hedging purposes limit the risk of loss due to a decline in the value of the hedged currency, they also limit any potential gain that might result should the value of the currency increase. In addition, the Funds could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts.

81

NOTES TO FINANCIAL STATEMENTS—Continued

(Amounts in Thousands)

At March 31, 2003, open forward currency exchange contracts were as follows:

Core Plus

SETTLEMENT DATE	CONTRACT TO				UNREALIZED GAIN/(LOSS)
	RECEIVEA		DELIVERA
5/20/03	USD	94,187	EUR	88,008	$	(1,582	)
5/20/03	EUR	4,812	USD	5,237		(1	)
5/20/03	USD	2,060	SEK	17,729		(26	)
					$	(1,609	)

Non-U.S.

SETTLEMENT DATE	CONTRACT TO				UNREALIZED GAIN/(LOSS)
	RECEIVEA		DELIVERA
5/20/03	CAD	10,545	USD	6,862	$	295
5/20/03	USD	3,482	CAD	5,114		11
5/20/03	USD	773	DKK	5,382		(17	)
5/20/03	EUR	4,200	USD	4,599		(28	)
5/20/03	USD	39,010	EUR	36,505		(715	)
5/20/03	USD	1,753	GBP	1,087		42
5/20/03	NOK	25,186	USD	3,608		(165	)
5/20/03	USD	3,179	NOK	22,416		115
5/20/03	USD	7,986	SEK	68,733		(103	)
					$	(565	)

Options and Futures

As part of their investment programs, the Funds may utilize options and futures. Options may be written (sold) or purchased by the Funds. When a Fund purchases a put or call option, the premium paid is recorded as an investment and its value is marked-to-market daily. When a Fund writes a put or call option, an amount equal to the premium received by the Fund is recorded as a liability and its value is marked-to-market daily.

When options, whether written or purchased, expire, are exercised or are closed (by entering into a closing purchase or sale transaction), the Fund realizes a gain or loss as described in the chart below:

Purchased option:	Impact on the Fund:
The option expires	Realize a loss in the amount of the cost of the option.
The option is closed through a closing sale transaction	Realize a gain or loss depending on whether the proceeds from the closing sale transaction are greater or less than the cost of the option.
The Fund exercises a call option	The cost of the security purchased through the exercise of the option will be increased by the premium originally paid to purchase the option.
The Fund exercises a put option	Realize a gain or loss from the sale of the underlying security. The proceeds of that sale will be reduced by the premium originally paid to purchase the put option.

^A Definitions of currency abbreviations:

CAD—Canadian dollar

DKK—Danish krona

EUR—Euro

GBP—British pound

NOK—Norwegian krone

SEK—Swedish krona

USD—United States dollar

82

Written option:	Impact on the Fund:
The option expires	Realize a gain equal to the amount of the premium received.
The option is closed through a closing purchase transaction	Realize a gain or loss without regard to any unrealized gain or loss on the underlying security and eliminate the option liability. The Fund will realize a loss in this transaction if the cost of the closing purchase exceeds the premium received when the option was written.
A written call option is exercised by the option purchaser	Realize a gain or loss from the sale of the underlying security. The proceeds of that sale will be increased by the premium originally received when the option was written.
A written put option is exercised by the option purchaser	The amount of the premium originally received will reduce the cost of the security that the Fund purchased when the option was exercised.

The risk associated with purchasing options is limited to the premium originally paid. Options written by a Fund involve, to varying degrees, risk of loss in excess of the option value reflected in the statement of net assets. The risk in writing a covered call option is that a Fund may forgo 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 a Fund may incur a loss if the market price of the underlying security decreases and the option is exercised. In addition, there is the risk a Fund may not be able to enter into a closing transaction because of an illiquid secondary market or, for over-the-counter options, because of the counterparty’s inability or unwillingness to perform. The nature and risks of these financial instruments and the reasons for using them are set forth more fully in the Corporation’s prospectus and statement of additional information.

Activity in written call and put options during the year ended March 31, 2003, was as follows:

	CALLS					PUTS
Intermediate	CONTRACTS*		PREMIUMS			CONTRACTS*		PREMIUMS
Options outstanding at March 31, 2002	158		$	86		220		$	230
Options written	1,919			1,098		2,459			1,218
Options closed	(2,077	)		(1,184	)	(2,134	)		(1,169	)
Options expired	—			—		(545	)		(279	)
Options exercised	—			—		—			—
Options outstanding at March 31, 2003	—		$	—		—		$	—

	CALLS					PUTS
Core	CONTRACTS*		PREMIUMS			CONTRACTS*		PREMIUMS
Options outstanding at March 31, 2002	4,707		$	3,342		1,863		$	1,434
Options written	31,597,744			15,364		18,293			15,949
Options closed	(12,281	)		(11,037	)	(12,054	)		(12,368	)
Options expired	(2,682	)		(1,601	)	(4,627	)		(2,378	)
Options exercised	(3,901	)		(3,247	)	(680	)		(372	)
Options outstanding at March 31, 2003	31,583,587		$	2,821		2,795		$	2,265

	CALLS					PUTS
Core Plus	CONTRACTS*		PREMIUMS			CONTRACTS*		PREMIUMS
Options outstanding at March 31, 2002	7,405,624		$	3,721		1,811		$	1,387
Options written	39,140,319			17,797		21,101			18,567
Options closed	(13,679	)		(12,067	)	(13,588	)		(14,103	)
Options expired	(7,402,961	)		(1,982	)	(5,089	)		(2,579	)
Options exercised	(5,056	)		(4,104	)	(809	)		(450	)
Options outstanding at March 31, 2003	39,124,247		$	3,365		3,426		$	2,822

* Actual number of contracts

83

NOTES TO FINANCIAL STATEMENTS—Continued

(Amounts in Thousands)

	CALLS					PUTS
Inflation Indexed	CONTRACTS*		PREMIUMS			CONTRACTS*		PREMIUMS
Options outstanding at March 31, 2002	—		$	—		—		$	—
Options written	265			265		140			76
Options closed	(179	)		(176	)	(100	)		(55	)
Options expired	—			—		—			—
Options exercised	—			—		—			—
Options outstanding at March 31, 2003	86		$	89		40		$	21

	CALLS			PUTS
Non-U.S.	CONTRACTS*	PREMIUMS		CONTRACTS*		PREMIUMS
Options outstanding at March 31, 2002	—	$	—	—		$	—
Options written	—		—	7,250,000			102
Options closed	—		—	—			—
Options expired	—		—	(7,250,000	)		(102	)
Options exercised	—		—	—			—
Options outstanding at March 31, 2003	—	$	—	—		$	—

Upon entering into a futures contract, the Funds are required to deposit with the broker cash or cash equivalents in an amount equal to a certain percentage of the contract amount. This is known as the “initial margin.” Subsequent payments (“variation margin”) are made or received by the Fund each day, depending on the daily fluctuation in the value of the contract. For Non-U.S. and foreign denominated futures held in Core Plus, payment is not sent daily, but is recorded as a net payable or receivable by the Fund to or from the futures broker, which holds cash collateral from the Fund. The daily changes in contract value are recorded as unrealized gains or losses and each Fund recognizes a realized gain or loss when the contract is closed. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded.

The Funds enter into futures contracts in connection with their interest rate management strategy. Futures contracts involve, to varying degrees, risk of loss in excess of the amounts reflected in the financial statements. The change in value of the futures contracts primarily corresponds with the value of their underlying instruments, which may not correlate with changes in interest rates. In addition, there is a risk that a Fund may not be able to enter into a closing transaction because of an illiquid secondary market. The nature and risks of these financial instruments and the reasons for using them are set forth more fully in the Corporation’s prospectus and statement of additional information.

The open futures positions and related appreciation or depreciation at March 31, 2003, are listed at the end of each Fund’s statement of net assets.

Swap Agreements

The use of swaps involves risks that are different from those associated with ordinary portfolio securities transactions. Swap agreements may be considered to be illiquid. Although a Fund will not enter into any swap agreement unless the adviser believes that the other party to the transaction is creditworthy, a Fund does bear the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of the agreement counterparty. The nature and risks of these financial instruments and the reasons for using them are set forth more fully in the Corporation’s prospectus and statement of additional information.

The Funds may invest in different types of swap agreements. Currently, the Funds hold interest rate swap contracts and credit default swap contracts (denoted in the table below by a superscript 1 or 2, respectively). Interest rate swap contracts involve the exchange of commitments to pay and receive interest based on a notional principal amount. Credit default swap contracts represent the exchange of commitments to provide a level of credit protection for a commitment to receive interest at a fixed rate based on the potential risk of default of the relevant underlying issuer. The relevant underlying issuer for credit default swap contracts is listed in a parenthetical reference following the agreement counterparty.

84

The following is a summary of open swap contracts outstanding at March 31, 2003.

Intermediate:

AGREEMENT WITH:	TERMINATION DATE	THE FUND AGREES TO PAY	THE FUND WILL RECEIVE	CONTRACT NOTIONAL AMOUNT	UNREALIZED APPRECIATION/ (DEPRECIATION)
Goldman Sachs & Co.	December 4, 2012	4.67769% Semi-Annually	3-Month LIBORB Quarterly	$  9,0001	$   (357)
Lehman Brothers (Dynegy Holdings, 8.75%, due 2/15/12)	April 23, 2007	Specified amount upon credit event noticeC	3.00% Quarterly	2,2002	(1,210)
Merrill Lynch (Dynegy Holdings, 6.875%, due 4/1/11)	May 15, 2003	Specified amount upon credit event noticeC	3.50% Quarterly	8002	(19)
				$12,000	$(1,586)
Core:
AGREEMENT WITH:	TERMINATION DATE	THE FUND AGREES TO PAY	THE FUND WILL RECEIVE	CONTRACT NOTIONAL AMOUNT	UNREALIZED APPRECIATION/ (DEPRECIATION)
Deutsche Bank (Dynegy Holdings, 8.75%, due 2/15/12)	May 1, 2007	Specified amount upon credit event noticeC	5.25% Quarterly	$  3,3402	$(1,002)
Goldman Sachs & Co.	December 4, 2012	4.67769% Semi-Annually	3-Month LIBORB Quarterly	19,0001	(754)
				$22,340	$(1,756)
Core Plus:
AGREEMENT WITH:	TERMINATION DATE	THE FUND AGREES TO PAY	THE FUND WILL RECEIVE	CONTRACT NOTIONAL AMOUNT	UNREALIZED APPRECIATION/ (DEPRECIATION)
Deutsche Bank (Dynegy Holdings, 8.75%, due 2/15/12)	April 23, 2007	Specified amount upon credit event noticeC	2.95% Quarterly	$  2,2502	$   (675)
Deutsche Bank (Dynegy Holdings, 8.75%, due 2/15/12)	May 1, 2007	Specified amount upon credit event noticeC	5.25% Quarterly	3,4602	(1,038)
Goldman Sachs & Co.	December 4, 2012	4.67769% Semi-Annually	3-Month LIBORB Quarterly	22,0001	(873)
Merrill Lynch (Verizon Global Funding Corp., 0%, due 5/15/21)	June 15, 2004	Specified amount upon credit event noticeD	0.75% Quarterly	2,5002	(3)
				$30,210	$(2,589)

^B London Interbank Offered Rate.

^C Fund will pay $1,000,000 upon bankrupty or failure to make a scheduled interest payment; $10,000,000 upon default.

^D Fund will pay $1,000,000 upon bankruptcy or failure to make a scheduled interest payment.

85

NOTES TO FINANCIAL STATEMENTS—Continued

(Amounts in Thousands)

Inflation Indexed:
AGREEMENT WITH:	TERMINATION DATE	THE FUND AGREES TO PAY	THE FUND WILL RECEIVE	CONTRACT NOTIONAL AMOUNT	UNREALIZED APPRECIATION/ (DEPRECIATION)
Merrill Lynch (Verizon Global Funding Corp., 0%, due 5/15/21)	June 15, 2004	Specified amount upon credit event noticeD	0.75% Quarterly	$2,5002	$(3)
				$2,500	$(3)

4. Securities Loaned:

Each Fund may lend its securities to approved brokers to earn additional income and will receive cash and U.S. government securities as collateral against the loans. Cash collateral received is invested in a money market pooled account by each Fund’s lending agent. Collateral is maintained over the life of the loan in an amount not less than 100% of the value of the loaned  securities.

At March 31, 2003, the market value of securities on loan to broker-dealers was $89,024 and $175,399 for Intermediate and Core, respectively. Cash collateral received was $92,149 and $190,109 for Intermediate and Core, respectively. Such collateral is in the possession of each Fund’s custodian. The cash was invested in the State Street Navigator Securities Lending Prime Portfolio and is included in each Fund’s statement of net assets. As with other extensions of credit, each Fund may bear the risk of delay in recovery should the borrower of the securities fail financially.

5. Transactions With Affiliates:

Each Fund has a management agreement with Legg Mason Fund Adviser, Inc. (“LMFA”). Western Asset Management Company (“Western Asset”) is the investment adviser to Intermediate, Core, Core Plus, Inflation Indexed and High Yield. Western Asset Management Company Limited (“WAML”) is the investment adviser to Non-U.S. and shares advisory responsibilities with Western Asset for Core Plus. Pursuant to their respective agreements, LMFA provides the Funds with management and administrative services for which each Fund pays a fee, computed daily and payable monthly, at annual rates of each Fund’s average daily net assets as follows: 0.40% for Intermediate; ranging from 0.45% of the first $500 million to 0.40% over $1 billion for Core and Core Plus; 0.20% for Inflation Indexed; 0.55% for High Yield; and 0.45% for Non-U.S. LMFA pays Western Asset a fee, computed daily and payable monthly, at an annual rate of 0.55% of average daily net assets for High Yield, 0.40% of average daily net assets for Intermediate, 0.20% of average daily net assets for Inflation Indexed Bond, and ranging from 0.45% of the first $500 million of average daily net assets of Core to 0.40% of the average daily net assets of Core over $1 billion. With respect to Core Plus, LMFA pays to Western Asset and WAML a fee, computed daily and payable monthly, at an annual rate ranging from 0.45% of the first $500 million of average daily net assets of Core Plus to 0.40% of the average daily net assets of Core Plus over $1 billion. Such fee is paid to Western Asset and WAML in proportion to the percentage of the net assets of Core Plus managed by Western Asset and WAML, respectively. LMFA pays WAML a fee, computed daily and payable monthly, at an annual rate of 0.45% of average daily net assets for Non-U.S. At March 31, 2003, $189, $515, $515, $43, $56, and $11 was due to LMFA for Intermediate, Core, Core Plus, Inflation Indexed, High Yield and Non-U.S., respectively. LMFA, Western Asset and WAML have voluntarily agreed to waive their fees and reimburse the Funds to the extent each Fund’s expenses (exclusive of taxes, interest, brokerage and extraordinary expenses) exceed during any month annual rates of each Fund’s average daily net assets as follows for Institutional Class: 0.45% for Intermediate, 0.50% for Core; 0.45% for Core Plus; 0.25% for Inflation Indexed, 0.55% for High Yield and 0.55% for Non-U.S.; and for Financial Intermediary Class: 0.70% for Intermediate, 0.75% for Core, and 0.70% for Core Plus. Western Asset and WAML have also agreed to waive their advisory fees (which are paid by LMFA, and not the Funds) in corresponding amounts.

Legg Mason Wood Walker, Incorporated (“LMWW”), a member of the New York Stock Exchange, serves as distributor of the Funds’ shares. LMWW receives from each Fund an annual distribution fee of 0.25% of the average daily net assets of the Financial Intermediary Class of each Fund, computed daily and payable monthly. At March 31, 2003, $15 was due to LMWW from Core.

LMFA, Western Asset, WAML and LMWW are wholly owned subsidiaries of Legg Mason, Inc.

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6. Fund Share Transactions:

At March 31, 2003, there were 13.1 billion shares of common stock of the Corporation authorized at $.001 par value. Transactions in Fund shares were as follows:

	SOLD			REINVESTMENT OF DIVIDENDS			REPURCHASED					NET CHANGE
	SHARES	AMOUNT		SHARES	AMOUNT		SHARES		AMOUNT			SHARES		AMOUNT
Intermediate
Institutional Class
Year Ended Mar. 31, 2003	16,609	$	178,235	3,004	$	32,131	(30,621	)	$	(329,593	)	(11,008	)	$	(119,227	)
Year Ended Mar. 31, 2002	25,934		277,655	2,932		31,193	(11,393	)		(120,767	)	17,473			188,081
Core
Institutional Class
Year Ended Mar. 31, 2003	63,347	$	715,929	5,789	$	64,840	(36,378	)	$	(410,159	)	32,758		$	370,610
Year Ended Mar. 31, 2002	29,633		333,443	4,988		55,956	(20,878	)		(234,414	)	13,743			154,985
Financial Intermediary Class
Year Ended Mar. 31, 2003	7,268	$	82,500	79	$	903	(682	)	$	(7,762	)	6,665		$	75,641
Year Ended Mar. 31, 2002	63		712	10		113	(72	)		(799	)	1			26
Core Plus
Institutional Class
Year Ended Mar. 31, 2003	95,998	$	972,861	6,485	$	65,336	(23,407	)	$	(235,652	)	79,076		$	802,545
Year Ended Mar. 31, 2002	63,580		641,272	4,624		46,337	(11,950	)		(120,554	)	56,254			567,055
Financial Intermediary Class
Year Ended Mar. 31, 2003	11	$	110	2	$	17	(1	)	$	(9	)	12		$	118
Year Ended Mar. 31, 2002E	24		239	—		2	—			—		24			241
Inflation Indexed
Institutional Class
Year Ended Mar. 31, 2003	5,334	$	57,156	1,405	$	14,773	(1,490	)	$	(15,351	)	5,249		$	56,578
Year Ended Mar. 31, 2002	19,944		200,029	88		878	—			—		20,032			200,907
High Yield
Institutional Class
Year Ended Mar. 31, 2003	1,438	$	12,957	1,564	$	14,132	(2,054	)	$	(18,650	)	948		$	8,439
Year Ended Mar. 31, 2002F	14,418		144,182	336		3,452	(15	)		(156	)	14,739			147,478
Non-U.S.
Institutional Class
Year Ended Mar. 31, 2003	3,383	$	34,089	64	$	636	(3,171	)	$	(31,900	)	276		$	2,825
Year Ended Mar. 31, 2002	1,694		15,760	418		3,741	(7,070	)		(64,345	)	(4,958	)		(44,844	)

^E For the period January 8, 2002 (commencement of operations) to March 31, 2002.

^F For the period September 28, 2001 (commencement of operations) to March 31, 2002.

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of Western Asset Funds, Inc. and Shareholders of Western Asset Intermediate Portfolio, Western Asset Core Portfolio, Western Asset Core Plus Portfolio, Western Asset Inflation Indexed Bond Portfolio, Western Asset High Yield Portfolio and Western Asset Non-U.S. Fixed Income Portfolio:

In our opinion, the accompanying statements of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Western Asset Intermediate Portfolio, Western Asset Core Portfolio, Western Asset Core Plus Portfolio, Western Asset Inflation Indexed Bond Portfolio, Western Asset High Yield Portfolio and Western Asset Non-U.S. Fixed Income Portfolio (six of the Portfolios comprising Western Asset Funds, Inc., hereafter referred to as the “Funds”) at March 31, 2003, the results of each of their operations, the changes in each of their net assets and the financial highlights for each of the fiscal periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at March 31, 2003, by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Baltimore, Maryland

May 22, 2003

88

DIRECTORS AND OFFICERS

The table below provides information about each of the Corporation’s directors and officers, including biographical information about their business experience and information about their relationships with Western Asset Management Company and its affiliates. Unless otherwise noted, the mailing address of each director and officer is 117 East Colorado Boulevard, Pasadena, California 91105.

Name and Age	Position(s) Held With Company	Term of Office and Length of Time ServedA	Number of Portfolios Overseen in the Fund ComplexB	Other Directorships Held	Principal Occupation(s) During the Past Five Years
Independent Directors:
William G. McGagh Age 73	Chairman and Director	Since 1990	13	None	Consultant, McGagh Associates (corporate financial consulting), since 1989; Chairman of the Board of the John Tracy Clinic; Chairman of the Board of the Los Angeles Orthopedic Hospital. Formerly: Senior Vice President, Chief Financial Officer and Director of Northrup Grumman Corporation (defense, aerospace and cyberspace products).
Ronald J. Arnault Age 59	Director	Since 1997	13	None	Retired (1996), Executive Vice President, Chief Financial Officer and Director of Atlantic Richfield Company.
John E. Bryson Age 59	Director	Since 1998	13	The Boeing Company and The Walt Disney Company.	Chairman and CEO, Edison International (since 1990); Chairman of Southern California Edison Company (1990-1999 and 2003-present); CEO of Southern California Edison Company (1990-1999).
Anita L. DeFrantz Age 50	Director	Since 1998	13	None	President (since 1987) and Director (since 1990), American Athletic Foundation of Los Angeles; President and Director, Kids in Sports (since 1994); Vice President and Director, International Rowing Foundation (since 1997); Member, International Olympic Committee (“IOC”) (since 1986); member, IOC Executive Board (1992-2001); Member, U.S. Olympic Committee (“USOC”) (since 1976); member, USOC Executive Board (since 1977).
William E.B. Siart Age 56	Director	Since 1997	13	Sybron Dental Specialties, Inc.	Chairman, Walt Disney Concert Hall, Inc., since 1998; Chairman, since 2000, President and Chief Executive Officer (1998-2000), Excellent Education Development. Formerly: Chairman and Chief Executive Officer, First Interstate Bancorp.
Louis A. Simpson Age 66	Director	Since 1994	13	Comcast Corp. and ResMed Inc.	President and CEO, Capital Operations of GEICO Corporation (since 1993). Formerly: President and CEO of Western Asset (1977-1979).

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Directors and Officers—Continued

Name and Age	Position(s) Held With Company	Term of Office and Length of Time ServedA	Number of Portfolios Overseen in the Fund ComplexB	Other Directorships Held	Principal Occupation(s) During the Past Five Years
Interested Directors:
Ronald L. OlsonC Age 61	Director	Since 1990	13	Edison International, City National Corporation and Berkshire Hathaway Inc.	Senior Partner, Munger, Tolles & Olson (a law partnership); Chairman of the Board of Trustees of RAND Corporation (nonprofit institution).
Edward A. Taber IIID Age 58 100 Light Street Baltimore, MD 21203	Director	Since 1998	11	None	Senior Executive Vice President, Legg Mason, Inc.; Senior Executive Vice President of LMWW; Director of LMFA, Legg Mason Funds Management, Inc., Western Asset, WAML, Bartlett & Co., Batterymarch Financial Management, Inc., Gray, Seifert & Co., Inc., and GSH & Co. Formerly: Director and Head of Taxable Fixed Income Division, T. Rowe Price Associates (1973-1992).
Officers:
James W. Hirschmann III Age 42	President	Since 1999	N/A	N/A	Director, President, and CEO, Western Asset (March 1999 to present); Member, Board of Directors of Medical Simulation Corporation; Member, Board of Trustees of Widener College; President, Pacific American Income Shares, Inc. and Western Asset Premier Bond Fund. Formerly: Vice President of the Corporation (1990-1999); Director of WAML (1996-1999); Director of Marketing, Western Asset (1989-1998); Vice President and Director of Marketing, Financial Trust Corporation (bank holding company) (1988-1989); Vice President of Marketing, Atlanta/Sosnoff Capital (investment management company) (1986-1988).
Scott F. Grannis Age 53	Vice President	Since 1990	N/A	N/A	Chief Economist, Western Asset (1989 to present); Vice President of Pacific American Income Shares, Inc. Formerly: Vice President, Leland O’Brien Rubinstein (investment advisory firm) (1986-1989); Senior Economist, Claremont Economics Institute (1980-1986).
Ilene S. Harker Age 48	Vice President	Since 1990	N/A	N/A	Head of Enterprise Risk, Western Asset (2003 to present); Vice President, Pacific American Income Shares, Inc. (since April 1996) and Western Asset Premier Bond Fund (since December 2001). Formerly: Director of Compliance and Controls, Western Asset (1978-2003).
Gavin L. James Age 40	Vice President	Since 2001	N/A	N/A	Director of Global Client Service and Marketing, Western Asset (since 1998). Formerly: Senior Portfolio Manager, J.P. Morgan Investment Management (1990-1998).

90

Directors and Officers—Continued

Name and Age	Position(s) Held With Company	Term of Office and Length of Time ServedA	Number of Portfolios Overseen in the Fund ComplexB	Other Directorships Held	Principal Occupation(s) During the Past Five Years
S. Kenneth Leech Age 48	Vice President	Since 1990	N/A	N/A	Chief Investment Officer, Western Asset (1998 to present); Vice President, Pacific American Income Shares, Inc. and Western Asset Premier Bond Fund. Formerly: Director of Portfolio Management, Western Asset (1990-1998); Senior Trader, Greenwich Capital (1988-1990); Fixed Income Manager of The First Boston Corporation (holding company; stock and bond dealers) (1980-1987); Portfolio Manager of National Bank of Detroit (1977-1980).
Detlev S. Schlichter Age 38 155 Bishopsgate London, England EC2N3TY	Vice President	Since 2001	N/A	N/A	Portfolio Manager, WAML (since 2001). Formerly: Director of European Bond Team, Merrill Lynch Investment Managers (1998-2001); Vice President, J.P. Morgan & Co. (1990-1998).
Stephen A. Walsh Age 44	Vice President	Since 1994	N/A	N/A	Deputy Chief Investment Officer, Western Asset (2000 to present); Vice President, Pacific American Income Shares, Inc. Formerly: Director of Portfolio Management, Western Asset (1998-2000); Senior Portfolio Manager, Western Asset (1991-2000); Portfolio Manager and Trader, Security Pacific Investment Managers, Inc. (investment management company) (1989-1991); Portfolio Manager of Atlantic Richfield Company (1981-1988).
Susanne D. Wilson Age 40 100 Light Street Baltimore, MD 21203	Vice President	Since 1998	N/A	N/A	Vice President, LMWW (1998 to present). Formerly: Manager of Legg Mason mutual fund operations (1989-1998); Retirement Specialist, T. Rowe Price Associates (1983-1989).
Marie K. Karpinski Age 54 100 Light Street Baltimore, MD 21203	Vice President and Treasurer	Since 1990	N/A	N/A	Vice President, LMWW (1992 to present); Vice President and Treasurer of all Legg Mason retail funds (open-end investment companies) (1986 to present); Vice President and Treasurer of Legg Mason Charles Street Trust, Inc. (open-end investment company); Treasurer and Principal Financial and Accounting Officer of Pacific American Income Shares, Inc. and Western Asset Premier Bond Fund (2001 to present). Formerly: Assistant Treasurer of Pacific American Income Shares, Inc. (1988-2001).

91

Directors and Officers—Continued

Name and Age	Position(s) Held With Company	Term of Office and Length of Time ServedA	Number of Portfolios Overseen in the Fund ComplexB	Other Directorships Held	Principal Occupation(s) During the Past Five Years
Lisa G. Mrozek Age 40	Secretary	Since 1999	N/A	N/A	Senior Compliance Officer, Western Asset; Secretary of Pacific American Income Shares, Inc. and Western Asset Premier Bond Fund. President of the Board of Directors of California Dollars for Scholars; Member of the Board of Trustees of Scholarship America. Formerly: Assistant Vice President, Fund Business Management, Capital Research and Management Company (an investment management firm) (1990-1999).
Erin K. Morris Age 36 100 Light Street Baltimore, MD 21203	Assistant Treasurer	Since 2001	N/A	N/A	Assistant Vice President of LMWW (2002 to present); Assistant Treasurer (2001 to present) of: Legg Mason Income Trust, Inc., Legg Mason Cash Reserve Trust, Legg Mason Tax Exempt Trust, Inc., Legg Mason Tax-Free Income Fund, Pacific American Income Shares, Inc. and Western Asset Premier Bond Fund; Manager, Funds Accounting, Legg Mason (2000 to present). Formerly: Assistant Manager, Funds Accounting, LMWW (1993-2000).

^A Officers of the Corporation serve one-year terms, subject to annual reappointment by the Board of Directors. Directors of the Corporation serve a term of indefinite length until their successors are elected and qualified and generally stand for re-election by shareholders only as and when required by the Investment Company Act of 1940, as amended.

^B Each Director, other than Mr. Taber, also serves as a Trustee for Western Asset Premier Bond Fund (closed-end investment company) and a Director of Pacific American Income Shares, Inc. (closed-end investment company), which are considered part of the same Fund Complex as the Corporation.

^C Because Mr. Olson’s law firm provides legal services to Western Asset Management Company and Western Asset Management Company Limited, Mr. Olson is an “interested person” of the Corporation, as defined in the Investment Company Act of 1940, as amended.

^D Mr. Taber is considered to be an interested person, as defined above, of the Corporation on the basis of his employment with affiliated entities of the Corporation’s investment adviser (including the Corporation’s principal underwriter).

ADDITIONAL INFORMATION ABOUT THE CORPORATION’S DIRECTORS AND

OFFICERS IS CONTAINED IN THE STATEMENT OF ADDITIONAL INFORMATION,

AVAILABLE WITHOUT CHARGE UPON REQUEST BY CALLING 1-888-425-6432.

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Western Asset Funds, Inc.

Investment Manager

LM Institutional Advisers, Inc.

P.O. Box 17635

Baltimore, Maryland 21297-1635

Investment Advisers

Western Asset Management Company

117 East Colorado Boulevard

Pasadena, California 91105

Western Asset Management Company Limited

155 Bishopgate

London, England EC2N3TY

Transfer and Shareholder Servicing Agent

Boston Financial Data Services

66 Brooks Drive

Braintree, Massachusetts 02184

Custodian

State Street Bank & Trust Company

P.O Box 1031

Boston, Massachusetts 02103

Counsel

Ropes & Gray LLP

One International Place

Boston, Massachusetts 02110

Independent Accountants

PricewaterhouseCoopers LLP

250 West Pratt Street

Baltimore, Maryland 21201

This report is not to be distributed unless preceded or accompanied by a prospectus.

Legg Mason Wood Walker, Inc., Distributor