Western Asset Funds, Inc

N-CSRS 1 dncsrs.htm WESTERN ASSET FUNDS, INC Western Asset Funds, Inc

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES


Investment Company Act file number		811-06110

Western Asset Funds, Inc.

Name of Registrant:

385 East Colorado Boulevard, Pasadena, CA 91101

Address of Principal Executive Offices:

Richard M. Wachterman, Esq.

Legg Mason & Co., LLC

100 Light Street

Baltimore, MD 21202

Name and address of agent for service:

Registrant’s telephone number, including area code: (410) 539-0000

Date of fiscal year end: 03/31/2009

Date of reporting period: 09/30/2008

Item 1.

Report to Shareholders.

Page 1 of 3

Western Asset Funds, Inc.

Western Asset Absolute Return Portfolio

Western Asset High Yield Portfolio

Western Asset Inflation Indexed Plus Bond Portfolio

Western Asset Intermediate Bond Portfolio

Western Asset Intermediate Plus Bond Portfolio

Western Asset Limited Duration Bond Portfolio

Western Asset Non-U.S. Opportunity Bond Portfolio

Semi-Annual Report to Shareholders

September 30, 2008

Semi-Annual Report to Shareholders

Expense Example

Western Asset Absolute Return Portfolio

As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution (12b-1) fees on Financial Intermediary Class shares, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.

Actual Expense

The first line for each class in the table below provides information about actual account values and actual expenses for each class. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account if your shares were held through the entire period. For the Institutional and Financial Intermediary Classes, the example is based on an investment of $1,000 invested on April 1, 2008 and held through September 30, 2008; for Institutional Select Class, the example is based on an investment of $1,000 invested on August 4, 2008 (commencement of operations) and held through September 30, 2008.

Hypothetical Examples for Comparison Purposes

The second line for each class in the table below provides information about hypothetical account values and hypothetical expenses based on the relevant class’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the class’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples for the relevant classes that appear in the shareholder reports of other funds. Because each example is intended to be comparable to the examples provided by other funds, it is based on a hypothetical investment of $1,000 invested on April 1, 2008 and held through September 30, 2008 for each class, even though the Institutional Select Class did not begin operations until August 4, 2008.


	Beginning Account Value 4/1/08			Ending Account Value 9/30/08		Expenses Paid^A During the Period 4/1/08 to 9/30/08
Institutional Class:
Actual	$	1,000.00		$	935.60	$	3.88
Hypothetical (5% return before expenses)		1,000.00			1,021.06		4.05
Institutional Select Class:
Actual	$	1,000.00	^B	$	963.30	$	1.27	^C
Hypothetical (5% return before expenses)		1,000.00			1,021.06		4.05
Financial Intermediary Class:
Actual	$	1,000.00		$	935.40	$	5.09
Hypothetical (5% return before expenses)		1,000.00			1,019.80		5.32

These calculations are based on expenses incurred from April 1, 2008 to September 30, 2008. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratios of 0.80% and 1.05% for the Institutional Class and the Financial Intermediary Class respectively, multiplied by the average values over the period, multiplied by the number of days in the most recent fiscal period (183), and divided by 365.

Beginning account value is as of August 4, 2008 (commencement of operations).

This calculation is based on expenses incurred from August 4, 2008 (commencement of operations) to September 30, 2008. The dollar amount shown as “Expenses Paid” is equal to the annualized expense ratio of 0.80% for the Institutional Select Class, multiplied by the average values over the period, multiplied by the number of days in the period (58) and divided by 365.

Semi-Annual Report to Shareholders

Performance Information

Western Asset Absolute Return Portfolio

The graphs compare the Fund’s total returns to that of two broad-based securities market indexes. The graphs illustrate the cumulative total return of an initial $1,000,000 investment in each of the Institutional Class and Financial Intermediary Class of the Fund, for the periods indicated. The lines for the Fund represent the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling securities. The lines representing the securities market indexes do not include any transaction costs associated with buying and selling securities in the indexes or other investment management or administrative expenses.

Due to the limited operating history of the Institutional Select Class, a performance graph is not presented. Institutional Select Class shares, which began operations on August 4, 2008, had a total return of -3.67% for the period ended September 30, 2008.

Total return measures investment performance in terms of appreciation or depreciation in the 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. Returns (and the graphs and tables found below) do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Average annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results.

Bonds are subject to a variety of risks, including interest rate, credit and inflation risk. Non-U.S. investments are subject to currency fluctuations, social, economic and political risk.

Growth of a $1,000,000 Investment—Institutional Class

The performance data quoted represent past performance and do not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information, please visit www.westernassetfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.

Indexreturns are for periods beginning June 30, 2006. Formerly: Lehman Aggregate Bond Index. The name change is a result of Barclay’s purchase of Lehman Brothers in September 2008.

Semi-Annual Report to Shareholders

Growth of a $1,000,000 Investment—Financial Intermediary Class

Indexreturns are for periods beginning August 31, 2006. Formerly: Lehman Aggregate Bond Index. The name change is a result of Barclay’s purchase of Lehman Brothers in September 2008.

Semi-Annual Report to Shareholders

Performance Information—Continued

Portfolio Composition (as of September 30, 2008)^C

Standard & Poor’s Debt Ratings^D

(as a percentage of the portfolio)

Maturity Schedule

(as a percentage of the portfolio)

The pie charts above represent the composition of the Fund’s portfolio as of September 30, 2008 and do not include derivatives such as Futures Contracts, Options Written, and Swaps. The Fund is actively managed. As a result, the composition of the portfolio holdings and sectors are subject to change at any time.

Source:Standard & Poor's.

Semi-Annual Report to Shareholders

Portfolio of Investments

Western Asset Absolute Return Portfolio

September 30, 2008 (Unaudited)


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES^†			VALUE

Long-Term Securities	113.9%

Corporate Bonds and Notes	30.1%

Airlines	0.2%
Continental Airlines Inc.		6.820%	5/1/18	$	60,915		$	52,082
Continental Airlines Inc.		6.703%	6/15/21		63,424			53,276
United Air Lines Inc.		7.032%	10/1/10		133,056			131,892
United Air Lines Inc.		7.186%	10/1/12		502,354			499,707
US Airways Pass-Through Trust		6.850%	1/30/18		314,007			273,186

								1,010,143

Auto Components	0.1%
Visteon Corp.		8.250%	8/1/10		179,000			148,570
Visteon Corp.		12.250%	12/31/16		462,000			277,200	^A

								425,770

Automobiles	N.M.
Ford Motor Co.		4.250%	12/15/36		80,000			52,700	^B


Beverages	0.1%
Dr. Pepper Snapple Group Inc. Senior Notes		6.820%	5/1/18		460,000			444,018	^A


Building Products	0.1%
Associated Materials Inc.		9.750%	4/15/12		365,000			359,525
Associated Materials Inc.		0.000%	3/1/14		155,000			99,975	^C
Masco Corp.		7.125%	8/15/13		50,000			50,195

								509,695

Capital Markets	2.7%
Credit Suisse Nassau		6.790%	10/29/09		620,000	RUB		23,495	^A,D
Credit Suisse Nassau		7.000%	10/27/11		210,000	RUB		7,488	^A,D
Goldman Sachs Capital II		5.793%	12/29/49		60,000			26,359	^C
Lehman Brothers Holdings Capital Trust VII		5.857%	11/29/49		100,000			10	^C,E
Lehman Brothers Holdings Inc.		5.625%	1/24/13		1,000,000			125,000	^E
Lehman Brothers Holdings Inc.		6.200%	9/26/14		320,000			40,000	^E
Lehman Brothers Holdings Inc.		6.750%	12/28/17		2,350,000			2,937	^E
Merrill Lynch and Co. Inc.		5.450%	2/5/13		3,490,000			3,143,865
Merrill Lynch and Co. Inc.		6.050%	5/16/16		1,980,000			1,615,563
Morgan Stanley		6.625%	4/1/18		2,160,000			1,429,469
The Bear Stearns Cos. Inc.		7.250%	2/1/18		3,560,000			3,426,055
The Goldman Sachs Group Inc.		6.150%	4/1/18		1,800,000			1,496,725

								11,336,966

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Absolute Return Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES^†		VALUE

Corporate Bonds and Notes—Continued

Commercial Banks	1.6%
HSBC Bank PLC		7.000%	11/1/11	$	294,268	$	260,597
HSBC Bank USA		7.000%	11/1/11		265,317		238,600	^A,F
HSBC Bank USA		7.000%	11/1/11		255,338		229,281	^A,F
HSBK Europe BV		9.250%	10/16/13		1,220,000		927,200	^A
Wachovia Corp.		5.625%	10/15/16		730,000		454,775
Wachovia Corp.		5.750%	2/1/18		6,120,000		4,591,151

							6,701,604

Communications Equipment	N.M.
EchoStar DBS Corp.		7.750%	5/31/15		245,000		207,638


Consumer Finance	3.6%
American Express Co.		6.800%	9/1/66		40,000		34,191	^C
American General Finance Corp.		6.900%	12/15/17		1,000,000		463,692
Caterpillar Financial Services Corp.		5.450%	4/15/18		500,000		447,319
Ford Motor Credit Co.		7.375%	10/28/09		4,090,000		3,288,221
Ford Motor Credit Co.		5.700%	1/15/10		270,000		206,776
Ford Motor Credit Co.		9.750%	9/15/10		2,000,000		1,434,166
Ford Motor Credit Co.		9.875%	8/10/11		3,700,000		2,552,589
Ford Motor Credit Co.		12.000%	5/15/15		1,610,000		1,228,609
GMAC LLC		5.850%	1/14/09		1,320,000		1,128,166
GMAC LLC		6.875%	9/15/11		2,700,000		1,204,705
GMAC LLC		6.000%	12/15/11		1,600,000		711,422
GMAC LLC		6.625%	5/15/12		1,500,000		635,052
GMAC LLC		8.000%	11/1/31		2,930,000		1,105,422
John Deere Capital Corp.		5.350%	4/3/18		800,000		725,234

							15,165,564

Containers and Packaging	N.M.
Graphic Packaging International Corp.		9.500%	8/15/13		150,000		135,750


Diversified Financial Services	3.2%
Air 2 US		8.027%	10/1/19		824,838		659,871	^A
BAC Capital Trust XIV		5.630%	12/31/49		40,000		20,699	^C
Citigroup Inc.		5.500%	2/15/17		5,570,000		4,272,858
Citigroup Inc.		6.875%	3/5/38		1,380,000		1,128,793
East Lane Re Ltd.		8.801%	5/6/11		300,000		300,299	^A,G
El Paso Performance-Linked		7.750%	7/15/11		340,000		344,295	^A
General Electric Capital Corp.		5.625%	5/1/18		2,800,000		2,366,773
General Electric Capital Corp.		6.375%	11/15/67		60,000		48,550	^C

Semi-Annual Report to Shareholders


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES^†		VALUE

Corporate Bonds and Notes—Continued

Diversified Financial Services—Continued
Glen Meadow Pass-Through Certificates		6.505%	2/12/67	$	100,000	$	78,500	^A,C
Kaupthing Bank Hf		7.625%	2/28/15		3,130,000		2,929,680	^A,H^,R
Leucadia National Corp.		8.125%	9/15/15		250,000		243,125
PHH Corp.		7.125%	3/1/13		110,000		100,285
TNK-BP Finance SA		7.875%	3/13/18		370,000		259,000	^A
Vanguard Health Holding Co. II LLC		9.000%	10/1/14		330,000		318,450
ZFS Finance USA Trust II		6.450%	12/15/65		500,000		360,004	^A,C

							13,431,182

Diversified Telecommunication Services	1.2%
AT&T Inc.		5.500%	2/1/18		2,930,000		2,609,224
Citizens Communications Co.		7.875%	1/15/27		490,000		367,500
Level 3 Financing Inc.		9.250%	11/1/14		500,000		377,500
Qwest Corp.		7.500%	10/1/14		190,000		164,350
Verizon Communications Inc.		6.100%	4/15/18		1,150,000		1,061,921
Windstream Corp.		8.625%	8/1/16		480,000		442,800

							5,023,295

Electric Utilities	1.4%
Energy Future Holdings Corp.		10.875%	11/1/17		20,000		18,050	^A
Energy Future Holdings Corp.		11.250%	11/1/17		4,810,000		4,064,450	^A,I
FirstEnergy Corp.		6.450%	11/15/11		1,870,000		1,878,920
FirstEnergy Corp.		7.375%	11/15/31		100,000		92,974

							6,054,394

Food and Staples Retailing	1.3%
CVS Corp.		9.350%	1/10/23		500,000		500,360	^A
CVS Corp.		5.298%	1/11/27		32,650		29,480	^A
CVS Lease Pass-Through Trust		5.880%	1/10/28		44,028		40,661	^A
CVS Lease Pass-Through Trust		6.036%	12/10/28		118,064		105,968	^A
Safeway Inc.		7.250%	2/1/31		1,360,000		1,382,488
The Kroger Co.		5.000%	4/15/13		1,620,000		1,546,598
The Kroger Co.		6.150%	1/15/20		1,100,000		1,008,473
Wal-Mart Stores Inc.		4.250%	4/15/13		1,060,000		1,040,392

							5,654,420

Food Products	0.1%
H.J. Heinz Co.		6.428%	12/1/08		100,000		100,175	^A
Sara Lee Corp.		6.250%	9/15/11		150,000		151,255

							251,430

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Absolute Return Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES^†		VALUE

Corporate Bonds and Notes—Continued

Gas Utilities	0.1%
Suburban Propane Partners LP		6.875%	12/15/13	$	600,000	$	531,000


Health Care Equipment and Supplies	0.1%
Advanced Medical Optics Inc.		7.500%	5/1/17		250,000		217,500


Health Care Providers and Services	3.2%
AmerisourceBergen Corp.		5.875%	9/15/15		50,000		45,161
Cardinal Health Inc.		5.800%	10/15/16		60,000		56,050
DaVita Inc.		6.625%	3/15/13		500,000		475,000
HCA Inc.		9.125%	11/15/14		10,000		9,725
HCA Inc.		6.500%	2/15/16		893,000		707,703
HCA Inc.		9.250%	11/15/16		910,000		884,975
HCA Inc.		9.625%	11/15/16		599,000		569,050	^I
Tenet Healthcare Corp.		6.375%	12/1/11		670,000		618,075
Tenet Healthcare Corp.		6.500%	6/1/12		380,000		351,500
Tenet Healthcare Corp.		9.875%	7/1/14		29,000		28,275
U.S. Oncology Holdings Inc.		8.334%	3/15/12		353,952		270,773	^G,I
UnitedHealth Group Inc.		4.875%	2/15/13		6,360,000		6,078,843
UnitedHealth Group Inc.		4.875%	4/1/13		940,000		897,449
UnitedHealth Group Inc.		6.000%	2/15/18		1,210,000		1,094,579
WellPoint Inc.		5.875%	6/15/17		1,470,000		1,360,705

							13,447,863

Hotels, Restaurants and Leisure	0.5%
Inn of the Mountain Gods Resort and Casino		12.000%	11/15/10		250,000		170,000
McDonald’s Corp.		5.350%	3/1/18		1,590,000		1,538,576
MGM MIRAGE		6.625%	7/15/15		140,000		97,300
River Rock Entertainment Authority		9.750%	11/1/11		220,000		202,400
Starwood Hotels and Resorts Worldwide Inc.		7.875%	5/1/12		50,000		49,597

							2,057,873

Household Durables	0.1%
Norcraft Cos.		9.000%	11/1/11		480,000		460,800


Independent Power Producers and Energy Traders	1.2%
Dynegy Holdings Inc.		7.750%	6/1/19		30,000		24,000
Edison Mission Energy		7.000%	5/15/17		190,000		171,000
Edison Mission Energy		7.200%	5/15/19		250,000		220,000
Edison Mission Energy		7.625%	5/15/27		90,000		72,900

Semi-Annual Report to Shareholders


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES^†		VALUE

Corporate Bonds and Notes—Continued

Independent Power Producers and Energy Traders—Continued
Mirant Mid Atlantic LLC		9.125%	6/30/17	$	849,801	$	920,046
NRG Energy Inc.		7.375%	2/1/16		250,000		225,000
The AES Corp.		7.750%	3/1/14		1,800,000		1,674,000
The AES Corp.		7.750%	10/15/15		300,000		272,250
The AES Corp.		8.000%	10/15/17		1,630,000		1,471,075

							5,050,271

Insurance	1.4%
Allstate Life Global Funding Trust		5.375%	4/30/13		440,000		424,751
American International Group Inc.		5.850%	1/16/18		4,420,000		2,218,606
ASIF Global Financing XIX		4.900%	1/17/13		1,400,000		1,149,475	^A
MetLife Inc.		6.400%	12/15/36		50,000		31,172
Metropolitan Life Global Funding I		5.125%	4/10/13		1,130,000		1,097,768	^A
Pacific Life Global Funding		5.150%	4/15/13		1,040,000		1,038,826	^A
The Travelers Cos. Inc.		6.250%	3/15/37		120,000		92,296	^C

							6,052,894

IT Services	0.1%
SunGard Data Systems Inc.		10.250%	8/15/15		250,000		216,875


Media	0.8%
Affinion Group Inc.		11.500%	10/15/15		430,000		399,900
Charter Communications Operating LLC		10.875%	9/15/14		160,000		155,200	^A
Comcast Corp.		6.500%	1/15/17		70,000		65,790
Comcast Corp.		5.700%	5/15/18		2,350,000		2,051,190
Dex Media West LLC		8.500%	8/15/10		425,000		375,063
EchoStar DBS Corp.		7.125%	2/1/16		300,000		240,750
Gannett Co. Inc.		6.375%	4/1/12		40,000		38,815
Idearc Inc.		8.000%	11/15/16		250,000		68,125
News America Inc.		6.650%	11/15/37		50,000		41,936
Viacom Inc.		5.750%	4/30/11		100,000		97,149

							3,533,918

Metals and Mining	1.1%
Freeport-McMoRan Copper & Gold Inc.		8.375%	4/1/17		1,910,000		1,881,350
GTL Trade Finance Inc.		7.250%	10/20/17		2,550,000		2,444,914	^A
Steel Dynamics Inc.		7.750%	4/15/16		410,000		364,900	^A

							4,691,164

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Absolute Return Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES^†			VALUE

Corporate Bonds and Notes—Continued

Multi-Utilities	0.5%
Dominion Resources Inc.		5.700%	9/17/12	$	2,170,000		$	2,149,103


Multiline Retail	0.1%
The Neiman-Marcus Group Inc.		10.375%	10/15/15		470,000			393,625


Oil, Gas and Consumable Fuels	4.4%
Anadarko Petroleum Corp.		3.219%	9/15/09		170,000			167,998	^G
Anadarko Petroleum Corp.		5.950%	9/15/16		540,000			496,322
Belden and Blake Corp.		8.750%	7/15/12		1,060,000			964,600
Chesapeake Energy Corp.		6.375%	6/15/15		400,000			357,000
Chesapeake Energy Corp.		6.500%	8/15/17		100,000			87,500
Chesapeake Energy Corp.		7.250%	12/15/18		45,000			41,400
Dynegy Roseton/Danskammer Pass Through Trust		7.670%	11/8/16		420,000			381,150
El Paso Corp.		7.000%	6/15/17		2,260,000			2,019,001
Energy Transfer Partners LP		6.700%	7/1/18		3,800,000			3,601,914
Exco Resources Inc.		7.250%	1/15/11		300,000			283,500
Gazprom		6.950%	8/6/09		5,470,000	RUB		210,764
KazMunaiGaz Exploration Production—GDR		8.375%	7/2/13		1,290,000			1,109,400	^A
Kinder Morgan Energy Partners LP		6.000%	2/1/17		1,000,000			906,477
Kinder Morgan Energy Partners LP		5.950%	2/15/18		4,570,000			4,070,686
Parker Drilling Co.		9.625%	10/1/13		180,000			174,600
Petrohawk Energy Corp.		9.125%	7/15/13		250,000			235,000
SandRidge Energy Inc.		8.625%	4/1/15		1,000,000			895,000	^A,I
SemGroup LP		8.750%	11/15/15		335,000			33,500	^A,E,H
VeraSun Energy Corp.		9.375%	6/1/17		250,000			98,750	^S
Whiting Petroleum Corp.		7.250%	5/1/12		160,000			148,400
XTO Energy Inc.		5.500%	6/15/18		2,688,000			2,376,023

								18,658,985

Pharmaceuticals	N.M.
Leiner Health Products Inc.		11.000%	6/1/12		250,000			12,500	^E,H


Real Estate Investment Trusts (REITs)	0.1%
Health Care Property Investors Inc.		6.450%	6/25/12		60,000			56,264
iStar Financial Inc.		5.850%	3/15/17		770,000			377,300

								433,564

Real Estate Management and Development	0.1%
Realogy Corp.		12.375%	4/15/15		755,000			256,700

Semi-Annual Report to Shareholders


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES^†		VALUE

Corporate Bonds and Notes—Continued

Road and Rail	0.2%
Hertz Corp.		8.875%	1/1/14	$	200,000	$	172,500
Hertz Corp.		10.500%	1/1/16		530,000		442,550
Swift Transportation Co.		12.500%	5/15/17		120,000		39,600	^A

							654,650

Textiles, Apparel and Luxury Goods	N.M.
Oxford Industries Inc.		8.875%	6/1/11		200,000		180,750


Thrifts and Mortgage Finance	0.4%
Residential Capital LLC		8.500%	5/15/10		306,000		168,300	^A
Residential Capital LLC		9.625%	5/15/15		1,184,000		284,160	^A
Washington Mutual Inc.		5.250%	9/15/17		1,250,000		825,000	^E
Washington Mutual Inc.		7.250%	11/1/17		1,915,000		315,975	^E

							1,593,435

Trading Companies and Distributors	N.M.
Ashtead Capital Inc.		9.000%	8/15/16		200,000		172,000	^A


Transportation Infrastructure	0.1%
Hawker Beechcraft Acquisition Co.		8.875%	4/1/15		480,000		434,400	^I

Total Corporate Bonds and Notes (Cost—$159,494,371)							127,604,439
Asset-Backed Securities	6.1%

Fixed Rate Securities	0.6%
ABSC Manufactured Housing Contract 2004-CN1		8.400%	12/2/30		170,000		143,171	^A
Bombardier Capital Mortgage Securitization Corp. 2000-A A3		7.830%	6/15/30		1,713,865		1,102,926
Centex Home Equity 2003-B AF4		3.735%	2/25/32		142,664		127,837
Lehman XS Trust 2007-1 WF1		7.000%	1/25/37		1,584,135		864,839
Oakwood Mortgage Investors Inc. 1999-D A1		7.840%	11/15/29		300,339		251,843
Pegasus Aviation Lease Securitization 2000-1 A2		8.370%	3/25/30		390,000		163,865	^A

							2,654,481

Indexed Securities^G	5.4%
ACE Securities Corp. 2006-GP1 A		2.602%	2/25/31		619,347		513,620
Amortizing Residential Collateral Trust 2005-BC5 M1		3.507%	7/25/32		728,660		540,538

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Absolute Return Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES^†		VALUE

Asset-Backed Securities—Continued

Indexed Securities—Continued
Bear Stearns Asset-Backed Securities Trust 2006-SD2		3.407%	6/25/36	$	762,504	$	669,482
Carrington Mortgage Loan Trust 2006-NC4 A2		2.572%	10/25/36		1,450,000		1,324,986
Citigroup Mortgage Loan Trust Inc. 2006-SHL1 A1		2.672%	11/25/45		201,336		156,477	^A
Citigroup Mortgage Loan Trust Inc. 2007-SHL1 A		2.872%	11/25/46		539,912		364,811	^A
Countrywide Home Equity Loan Trust 2006-B 2A		2.658%	5/15/36		474,695		301,512
Fremont Home Loan Trust 2006-B 2A2		2.572%	8/25/36		2,573,983		2,398,147
GMAC Mortgage Corp. Loan Trust 2006-HE4 A1		3.277%	12/25/36		2,377,712		1,497,803
GSAA Home Equity Trust 2007-6 A4		2.772%	5/25/47		2,090,000		798,929
GSAMP Trust 2006-SEA1 A		2.772%	5/25/36		434,958		317,531	^A
GSRPM Mortgage Loan Trust 2006-2 A2		3.507%	9/25/36		611,341		421,846	^A
HSI Asset Securitization Corp. Trust 2007-NC1 A3		3.387%	4/25/37		2,740,000		1,467,105
IndyMac Seconds Asset Backed Trust A-A		2.523%	6/25/36		1,369,491		384,968
IXIS Real Estate Capital Trust 2005-HE4 A3		2.733%	2/25/36		1,300,000		1,209,475
Lehman XS Trust 2006-16N A4B		2.633%	11/25/46		769,305		312,138
Lehman XS Trust 2006-2N 1A1		2.732%	2/25/46		486,162		295,670
Lehman XS Trust 2006-GP3 2A2		2.692%	6/25/46		788,417		547,334
Lehman XS Trust 2007-2N 3A1		3.297%	2/25/37		2,800,191		2,549,282
MASTR Asset Backed Securities Trust 2006-FRE1 A2		2.513%	12/25/35		470,707		466,519
MASTR Second Lien Trust 2005-1 A		2.663%	9/25/35		428,969		347,468
MASTR Specialized Loan Trust 2006-3 A		2.732%	6/25/46		509,806		405,102	^A
MASTR Specialized Loan Trust 2007-1 A		2.842%	1/25/37		409,515		287,004	^A
Morgan Stanley Home Equity Loans 2007-1 A3		2.612%	12/25/36		2,720,000		1,596,483
Morgan Stanley Mortgage Loan Trust 2006-12XS		3.327%	10/25/36		401,967		385,428
Nelnet Student Loan Trust 2008-4 A4		4.280%	4/25/24		860,000		817,538
Option One Mortgage Loan Trust 2005-1 A4		3.607%	2/25/35		803,209		717,087
RAAC 2006-RP4 A		3.497%	1/25/46		748,576		522,713	^A
Structured Asset Securities Corp. 2007-BC4 A3		2.722%	11/25/37		1,286,029		1,141,452

							22,758,448

Stripped Securities	0.1%
First Franklin Mortgage Loan Asset-Backed Certificates 2006-FF5 2A5		0.000%	4/25/36		1,050,000		588,791	^J2

Semi-Annual Report to Shareholders


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES^†		VALUE

Asset-Backed Securities—Continued

Variable Rate Securities^F	N.M.
GSAMP Trust 2006-S3 A1		6.085%	5/25/36	$	365,096	$	60,031	^C

Total Asset-Backed Securities (Cost—$33,861,015)							26,061,751
Mortgage-Backed Securities	12.7%

Fixed Rate Securities	0.3%
Banc of America Funding Corp. 2006-8T2 A2		5.791%	10/25/36		512,786		497,695
BlackRock Capital Finance LP 1997-R1		7.750%	3/25/37		213,924		41,719	^A
IndyMac Manufactured Housing Contract A2-2		6.170%	12/25/11		601,929		566,688

							1,106,102

Indexed Securities^G	8.4%
American Home Mortgage Assets 2006-6 A1A		2.662%	12/25/46		328,272		199,277
American Home Mortgage Investment Trust 2005-4 5A		5.350%	11/25/45		888,246		591,331
Banc of America Mortgage Securities 2003-F 1A1		5.137%	7/25/33		33,720		33,770
Banc of America Mortgage Securities 2004-A 1A1		6.740%	2/25/34		73,960		72,022
Bear Stearns Adjustable Rate Mortgage Trust 2005-12 23A1		5.731%	2/25/36		3,118,668		2,374,157
Bear Stearns Alt-A Trust 2004-10 1A1		2.812%	9/25/34		227,910		179,254
Bear Stearns Alt-A Trust 2004-11 1A2		3.312%	11/25/34		155,715		100,808
Bear Stearns Alt-A Trust 2005-2 1A1		3.457%	3/25/35		68,612		42,210
Bear Stearns Mortgage Funding Trust 2006-AR5 1A1		2.632%	12/25/46		1,169,335		718,631
Citigroup Mortgage Loan Trust Inc. 2005-9 1A1		2.732%	11/25/35		627,295		404,550
Countrywide Alternative Loan Trust 2005-24 4A1		3.418%	7/20/35		778,506		516,918
Countrywide Alternative Loan Trust 2005-51 2A1		3.488%	11/20/35		483,572		308,770
Countrywide Alternative Loan Trust 2005-59 1A1		3.537%	11/20/35		664,458		423,851
Countrywide Alternative Loan Trust 2005-76 3A1		2.732%	1/25/46		501,619		322,273
Countrywide Alternative Loan Trust 2005-J12		2.742%	8/25/35		345,273		189,162
Countrywide Alternative Loan Trust 2006-OA10 4A3		3.477%	8/25/46		2,229,820		615,465

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Absolute Return Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES^†		VALUE

Mortgage-Backed Securities—Continued

Indexed Securities—Continued
Countrywide Alternative Loan Trust 2006-OA8 1A2		3.437%	7/25/46	$	728,022	$	304,611
Countrywide Alternative Loan Trust 2006-OA9 1A1		3.388%	7/20/46		1,294,621		785,137
Countrywide Home Loans 2001-HYB1 1A1		5.380%	6/19/31		32,099		32,066
Countrywide Home Loans 2003-60 1A1		4.721%	2/25/34		712,395		684,844
Countrywide Home Loans 2003-HYB1 1A1		6.790%	5/19/33		45,016		44,972
Countrywide Home Loans 2006-3 1A2		2.802%	3/25/36		571,241		239,710
Deutsche Mortgage Securities Inc. 2004-4 7AR2		2.922%	6/25/34		452,533		419,605
First Horizon Alternative Mortgage Securities 2005-AA12 1A1		5.912%	2/25/36		577,919		453,273
Greenpoint Mortgage Funding Trust 2006-AR2 1A2		3.457%	4/25/36		3,997,510		2,349,122
Greenpoint Mortgage Funding Trust 2006-AR3 3A1		3.437%	4/25/36		812,195		514,714
GSR Mortgage Loan Trust 2006-0A1 2A2		2.732%	8/25/46		709,035		212,238
Harborview Mortgage Loan Trust 2006-13 A		3.210%	11/19/46		620,100		395,207
Harborview Mortgage Loan Trust 2006-14 2A1A		3.180%	1/25/47		1,295,345		787,365
Harborview Mortgage Loan Trust 2007-7 2A1A		3.472%	11/25/47		1,640,911		1,000,956
Impac CMB Trust 2004-5 1A1		2.753%	10/25/34		305,084		226,618
Impac CMB Trust 2004-6 1A2		3.173%	10/25/34		427,971		314,905
Impac CMB Trust 2005-7 A1		2.653%	11/25/35		577,091		334,414
Impac Secured Assets Corp. 2004-3 1A4		2.872%	11/25/34		21,771		17,088
Impac Secured Assets Corp. 2005-2		2.713%	3/25/36		457,333		337,397
Lehman XS Trust 2006-GP2 1A1A		2.542%	6/25/46		328,663		308,084
Merit Securities Corp. 11PA B2		3.970%	9/28/32		45,771		31,725	^A
Merrill Lynch Mortgage Investors Trust 2004-A3 4A3		5.030%	5/25/34		1,363,103		1,202,554
Residential Accredit Loans Inc. 2007-Q01 A1		2.543%	2/25/47		3,498,523		2,167,229
Structured Adjustable Rate Mortgage Loan Trust 2004-7 A1		3.477%	6/25/34		24,466		19,762
Structured Adjustable Rate Mortgage Loan Trust 2005-19XS		2.713%	10/25/35		1,808,223		1,123,912
Structured Asset Mortgage Investments Inc. 2003-AR2 A1		2.868%	12/19/33		122,842		105,888
Structured Asset Mortgage Investments Inc. 2006-AR6		2.583%	7/25/46		2,155,293		1,364,927

Semi-Annual Report to Shareholders


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES^†		VALUE

Mortgage-Backed Securities—Continued

Indexed Securities—Continued
Structured Asset Mortgage Investments Inc. 2007-AR4 A1		2.593%	9/25/47	$	1,820,458	$	1,620,961
Structured Asset Securities Corp. 2002-08A 7A1		5.742%	5/25/32		109,114		105,132
Structured Asset Securities Corp. 2002-11A 1A1		5.890%	6/25/32		28,079		27,666
Structured Asset Securities Corp. 2002-16A 1A1		6.222%	8/25/32		250,605		250,402
Structured Asset Securities Corp. 2002-18A 1A1		6.423%	9/25/32		23,450		23,413
Structured Asset Securities Corp. 2004-NP1 A		2.872%	9/25/33		279,181		253,444	^A
Thornburg Mortgage Securities Trust 2004-1 I2A		2.843%	3/25/44		40,589		39,833
Thornburg Mortgage Securities Trust 2006-1		2.563%	1/25/46		703,235		698,381
WaMu Mortgage Pass-Through Certificates 2006-AR11 3A1A		3.775%	9/25/46		2,927,657		1,612,956
WaMu Mortgage Pass-Through Certificates 2006-AR2 A1A		3.795%	4/25/46		4,863,377		2,918,429
WaMu Mortgage Pass-Through Certificates 2006-AR3 A1A		3.825%	5/25/46		3,924,306		2,276,098
WaMu Mortgage Pass-Through Certificates 2006-AR4 DA		4.049%	6/25/46		2,099,224		1,301,847
WaMu Mortgage Pass-Through Certificates 2006-AR6 2A		3.815%	8/25/46		2,841,281		1,754,047

							35,753,381

Variable Rate Securities^F	4.0%
Adjustable Rate Mortgage Trust 2004-1 4A1		5.549%	1/25/35		4,845,716		4,021,944
Banc of America Funding Corp. 2006-D 6A1		5.992%	5/20/36		1,427,445		946,312
Bear Stearns Adjustable Rate Mortgage Trust 2004-12 1A1		6.477%	2/25/35		164,574		129,964
Bear Stearns Alt-A Trust 2003-5 2A1		5.000%	12/25/33		758,631		696,821
Bear Stearns Alt-A Trust 2005 -10 21A1		5.729%	1/25/36		532,789		357,588
BlackRock Capital Finance LP 1996-R1		9.584%	9/25/26		415,038		141,642
MASTR Adjustable Rate Mortgages Trust 2003-3 3A4		4.521%	9/25/33		2,330,981		2,126,589
Morgan Stanley Mortgage Loan Trust 2004-6AR		4.895%	8/25/34		127,662		102,859
Morgan Stanley Mortgage Loan Trust 2006-3AR 2A3		5.807%	3/25/36		684,684		438,880

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Absolute Return Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES^†		VALUE

Mortgage-Backed Securities—Continued

Variable Rate Securities—Continued
Nomura Asset Acceptance Corp. 2006-AF2 4A		6.539%	8/25/36	$	750,669	$	474,247
Sequoia Mortgage Trust 2007-4 4A1		6.035%	7/20/47		1,585,208		1,341,910
Structured Adjustable Rate Mortgage Loan Trust 2004-17 A1		4.566%	11/25/34		68,322		58,036
Structured Adjustable Rate Mortgage Loan Trust 2004-4 3A2		4.590%	4/25/34		1,158,327		1,034,236
Structured Adjustable Rate Mortgage Loan Trust 2005-20 4A1		5.941%	10/25/35		2,362,251		1,787,033
Thornburg Mortgage Securities Trust 2007-4 2A1		6.217%	9/25/37		1,655,735		1,415,300
Thornburg Mortgage Securities Trust 2007-4 3A1		6.216%	9/25/37		1,582,200		1,326,761
Wells Fargo Mortgage-Backed Securities Trust 2005-AR9 4A1		4.306%	5/25/35		714,930		667,197

							17,067,319

Total Mortgage-Backed Securities (Cost—$74,564,145)							53,926,802
Loan Participations and Assignments^G	11.0%

Aerospace and Defense	0.3%
Dubai Aerospace Enterprise, Term Loan, Tranche B2		6.550%	10/31/08		284,588		263,955
TransDigm Inc., Term Loan, Tranche B		5.210%	12/23/08		1,000,000		917,500

							1,181,455

Airlines	0.2%
Delta Air Lines Inc., Term Loan		5.719%	10/30/08		990,000		782,100


Auto Components	0.2%
Allison Transmission Inc., Term Loan, Tranche B		5.220% to 5.570%	12/10/08		976,371		803,065


Automobiles	0.2%
Chrysler Financial Services NA LLC, First Lien Term Loan		6.820%	12/15/08		990,000		665,033

Semi-Annual Report to Shareholders

% OF
NET ASSETS

RATE

MATURITY
DATE

PAR/
SHARES^†

VALUE

Loan Participations and Assignments—Continued

Commercial Services and Supplies

0.5%

Aramark Corp., Letter of Credit

5.025%

10/6/08

131,683

113,613

Aramark Corp., Term Loan, Tranche B

5.637%

12/31/08

2,072,776

1,788,346

1,901,959

Computers and Peripherals

0.4%

CCG, Term Loan, Tranche B

4.810% to 5.704%

11/28/08

885,000

805,350

SunGard Data Systems Inc., Term Loan, Tranche B

4.553%

11/10/08

980,025

849,559

1,654,909

Containers and Packaging

0.4%

Amscan Holdings Inc., Term Loan, Tranche B

5.045% to 5.461%

12/29/08

987,500

866,531

Graham Packaging Co. LP, Term Loan, Tranche B

4.750% to 6.063%

12/31/08

987,500

878,875

1,745,406

Distributors

0.1%

Keystone Automotive Industries Inc., Term Loan, Tranche B

5.987% to 6.929%

10/27/08

950,903

599,069

Diversified Consumer Services

0.2%

Thomson Medical Education, Term Loan, Tranche B

6.200%

10/31/08

992,500

808,888

Electric Utilities

0.2%

TXU, Term Loan, Tranche B2

5.989% to 7.262%

12/31/08

1,240,625

1,046,777

Energy Equipment and Services

0.2%

Brand Energy, Term Loan, Tranche B

6.063% to 7.063%

12/31/08

990,600

917,543

Health Care Providers and Services

1.3%

Community Health Systems Inc., Term Loan, Tranche B

5.060% to 5.973%

11/28/08

2,267,560

1,984,115

Community Health, Delayed Draw Term Loan

1.000%

12/31/08

116,009

101,508

Davita Inc., Term Loan, Tranche B1

3.970% to 5.270%

1/2/09

1,000,000

898,500

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Absolute Return Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES^†		VALUE

Loan Participations and Assignments—Continued

Health Care Providers and Services—Continued
HCA Inc., Term Loan, Tranche B		6.012%	12/31/08	$	985,000	$	862,080
IASIS Healthcare Corp., Delayed Draw Term Loan		5.704%	10/31/08		238,891		211,817
IASIS Healthcare Corp., Letter of Credit		5.704%	10/6/08		63,704		56,484
IASIS Healthcare Corp., Term Loan		5.704%	10/31/08		690,414		612,167
Sheridan Healthcare Inc., Term Loan, Tranche B		5.291% to 6.262%	12/31/08		990,000		871,200

							5,597,871

Hotels, Restaurants and Leisure	0.7%
Harrah’s Entertainment Inc., Term Loan B		5.800% to 6.762%	12/31/08		997,500		801,491
Las Vegas Sands LLC, Delayed Term Loan		5.520%	12/31/08		200,000		149,900
Las Vegas Sands LLC, Term Loan, Tranche B		5.520%	12/31/08		792,000		593,604
Quiznos LLC, First Lien Term Loan		5.813%	12/31/08		984,925		760,362
Wimar Opco LLC, Term Loan, Tranche B		8.250%	12/31/08		947,645		632,553

							2,937,910

Independent Power Producers and Energy Traders	0.3%
NRG Energy Inc., Term Loan		5.262%	12/31/08		1,271,287		1,113,789


IT Services	0.7%
First Data Corp., Term Loan B2		5.926% to 6.512%	12/31/08		3,344,725		2,851,378


Machinery	0.4%
Nacco Materials Handling Group, Term Loan		4.804% to 6.000%	11/17/08		984,925		787,940
Oshkosh Truck Corp., Term Loan, Tranche B		3.990% to 5.210%	12/8/08		932,500		799,619

							1,587,559

Semi-Annual Report to Shareholders


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES^†		VALUE

Loan Participations and Assignments—Continued

Media	2.1%
Cedar Fair LP, Term Loan, Tranche B		5.704%	10/31/08	$	980,000	$	846,475
Charter Communications Operating LLC, Term Loan		4.800%	10/30/08		995,000		787,709
Citadel Communication Group, Term Loan, Tranche B		4.095% to 5.395%	12/31/08		1,000,000		730,000
CSC Holdings Inc., Incremental Term Loan		4.569%	12/31/08		979,950		858,506
Idearc Inc., Term Loan, Tranche B		5.710% to 5.770%	12/31/08		985,000		570,315
Insight Midwest Holdings LLC, Term Loan, Tranche B		4.490%	10/2/08		675,000		614,587
Lodgenet Entertainment Corp., Term Loan, Tranche B		5.770%	12/31/08		982,000		838,382
Nielsen Finance LLC, Term Loan, Tranche B		4.803%	11/10/08		982,506		845,446
Tribune Co., Tranche B		5.786%	10/21/08		987,500		515,969
Univision Communications, Term Loan, Tranche B		5.049% to 6.250%	10/31/08		1,000,000		640,000
UPC Broadband Holding, Term Loan, Tranche N1		4.236%	10/1/08		2,000,000		1,776,000

							9,023,389

Metals and Mining	0.2%
Noranda Aluminum Acquisition Corp., Term Loan		4.559%	11/19/08		925,765		805,415


Multiline Retail	0.4%
Dollar General Corp., Term Loan, Tranche B		5.459% to 6.454%	10/31/08		1,000,000		875,714
Neiman Marcus Group Inc., Term Loan		4.565%	12/8/08		1,000,000		860,833

							1,736,547

Oil, Gas and Consumable Fuels	0.4%
Alpha Natural Resources, Term Loan B		5.563%	12/31/08		941,919		885,404
Ashmore Energy, Term Loan		5.801%	10/1/08		95,952		87,316
Ashmore Energy, Term Loan		6.762%	12/30/08		874,714		795,990

							1,768,710

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Absolute Return Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES^†		VALUE

Loan Participations and Assignments—Continued

Paper and Forest Products	0.2%
Georgia-Pacific Corp., First Lien Term Loan		4.219% to 4.567%	12/31/08	$	942,354	$	829,762


Personal Products	0.4%
Bausch and Lomb Inc., Term Loan, Tranche B		7.012%	12/31/08		1,595,197		1,472,234
Bausch and Lomb Inc., Term Loan, Tranche B		7.012%	12/31/08		396,795		366,209

							1,838,443

Road and Rail	0.1%
Swift Transportation, Term Loan		6.063%	11/3/08		883,721		568,233


Semiconductors and Semiconductor Equipment	0.4%
Freescale Semiconductor, Term Loan, Tranche B		4.236%	10/1/08		982,500		790,913
Sensata Technologies, Term Loan, Tranche B		4.543%	10/29/08		980,000		815,237

							1,606,150

Specialty Retail	0.2%
Michaels Stores Inc., Term Loan B		4.750% to 6.000%	10/31/08		987,437		721,182


Wireless Telecommunication Services	0.3%
ALLTEL Corp., Term Loan B2		5.316%	12/17/08		1,491,234		1,433,216

Total Loan Participations and Assignments (Cost—$54,924,957)							46,525,758
U.S. Government and Agency Obligations	2.4%

Fixed Rate Securities	0.2%
Fannie Mae		5.250%	8/1/12		620,000		627,167	^S

Semi-Annual Report to Shareholders


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES^†		VALUE

U.S. Government and Agency Obligations—Continued

Treasury Inflation-Protected Securities^K	2.2%
United States Treasury Inflation-Protected Security		2.500%	7/15/16	$	2,123,550	$	2,173,487
United States Treasury Inflation-Protected Security		2.375%	1/15/17		4,558,499		4,596,964
United States Treasury Inflation-Protected Security		2.000%	1/15/26		110,806		101,171
United States Treasury Inflation-Protected Security		2.375%	1/15/27		2,715,470		2,626,155

							9,497,777

Total U.S. Government and Agency Obligations (Cost—$9,864,754)							10,124,944
U.S. Government Agency Mortgage-Backed Securities	44.6%

Fixed Rate Securities	32.2%
Fannie Mae		5.500%	6/1/33 to 8/1/38		14,497,167		14,499,582	^S
Fannie Mae		5.000%	4/1/35 to 7/1/38		16,578,649		16,184,886	^S
Fannie Mae		5.000%	12/1/38		15,700,000		15,297,688	^L,S
Fannie Mae		5.500%	12/1/38		31,200,000		31,112,266	^L,S
Fannie Mae		6.000%	12/1/38		18,600,000		18,838,303	^L,S
Freddie Mac		5.500%	12/1/37		28,099,522		27,974,143	^S
Freddie Mac		6.000%	12/1/37		2,531,690		2,565,230	^S
Freddie Mac		5.500%	12/1/38		1,300,000		1,293,094	^L,S
Freddie Mac		6.000%	12/1/38		8,800,000		8,907,254	^L,S

							136,672,446

Indexed Securities^G	12.4%
Fannie Mae		5.874%	6/1/36		1,492,596		1,523,402	^S
Fannie Mae		6.419%	1/1/37		4,017,941		4,075,318	^S
Fannie Mae		6.213%	4/1/37		3,431,610		3,455,701	^S
Fannie Mae		5.855%	8/1/37		16,085,176		16,103,254	^S
Freddie Mac		5.981%	6/1/36		1,697,124		1,729,375	^S
Freddie Mac		6.479%	9/1/36		533,667		551,251	^S
Freddie Mac		6.145%	12/1/36		4,426,402		4,553,599	^S
Freddie Mac		5.880%	2/1/37		984,963		1,004,532	^S
Freddie Mac		5.885%	5/1/37		2,916,348		2,968,855	^S
Freddie Mac		5.939%	5/1/37		426,095		435,675	^S
Freddie Mac		6.027%	5/1/37		7,653,440		7,834,612	^S

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Absolute Return Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES^†		VALUE

U.S. Government Agency Mortgage-Backed Securities—Continued

Indexed Securities—Continued
Freddie Mac		5.953%	8/1/37	$	1,818,944	$	1,870,333	^S
Freddie Mac		6.209%	9/1/37		6,308,824		6,441,319	^S

							52,547,226

Total U.S. Government Agency Mortgage-Backed Securities (Cost—$190,097,897)							189,219,672
Yankee Bonds^M	4.3%

Commercial Banks	2.1%
Glitnir Banki Hf		6.375%	9/25/12		680,000		515,197	^A,R
Glitnir Banki Hf		6.693%	6/15/16		1,810,000		958,196	^A,C,R
Glitnir Banki Hf		7.451%	9/14/49		100,000		51,445	^A,C,R
HBOS Capital Funding LP		6.071%	6/30/49		230,000		148,714	^A,C
HSBK Europe BV		7.250%	5/3/17		1,480,000		888,000	^A
ICICI Bank Ltd.		6.375%	4/30/22		1,422,000		981,507	^A,C
ICICI Bank Ltd.		6.375%	4/30/22		590,000		447,969	^A,C
Kaupthing Bank Hf		7.125%	5/19/16		240,000		146,133	^A,R
Landsbanki Islands Hf		6.100%	8/25/11		2,190,000		1,856,200	^A,R
Natixis		10.000%	4/29/49		1,300,000		1,254,500	^A,C
Shinsei Finance Cayman Ltd.		6.418%	1/29/49		300,000		125,792	^A,C
TuranAlem Finance BV		8.250%	1/22/37		1,330,000		744,800	^A
TuranAlem Finance BV		8.250%	1/22/37		1,390,000		778,400	^A

							8,896,853

Diversified Financial Services	0.3%
TNK-BP Finance SA		7.500%	7/18/16		550,000		385,000	^A
TNK-BP Finance SA		7.500%	7/18/16		781,000		546,700	^A
TNK-BP Finance SA		6.625%	3/20/17		200,000		130,000	^A
TNK-BP Finance SA		6.625%	3/20/17		342,000		222,300	^A

							1,284,000

Diversified Telecommunication Services	0.3%
NTL Cable PLC		9.125%	8/15/16		340,000		284,750
VIP Finance Ireland Ltd		8.375%	4/30/13		940,000		747,364	^A
Wind Acquisition Finance SA		10.750%	12/1/15		300,000		294,000	^A

							1,326,114

Semi-Annual Report to Shareholders


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES^†			VALUE

Yankee Bonds—Continued

Energy Equipment and Services	0.1%
Compagnie Generale de Geophysique-Veritas		7.750%	5/15/17	$	250,000		$	237,500


Food and Staples Retailing	0.7%
Delhaize Group		6.500%	6/15/17		3,014,000			2,854,731


Metals and Mining	0.7%
Evraz Group SA		8.875%	4/24/13		1,170,000			889,200	^A
Novelis Inc.		7.250%	2/15/15		440,000			382,800
Vale Overseas Ltd.		6.875%	11/21/36		1,356,000			1,206,985
Vedanta Resources PLC		8.750%	1/15/14		630,000			561,834	^A

								3,040,819

Oil, Gas and Consumable Fuels	N.M.
Teekay Shipping Corp.		8.875%	7/15/11		140,000			141,400


Paper and Forest Products	0.1%
Abitibi-Consolidated Co. of Canada		15.500%	7/15/10		137,000			96,585	^A
Abitibi-Consolidated Co. of Canada		13.750%	4/1/11		500,000			497,500	^A

								594,085

Total Yankee Bonds (Cost—$24,016,223)								18,375,502
Foreign Government Obligations	2.7%
Brazil Notas do Tesouro Nacional Series B		6.000%	5/15/17		616,000	BRL		486,059
Brazil Notas do Tesouro Nacional Series F		10.000%	1/1/12		713,000	BRL		340,894
Commonwealth of Australia		4.000%	8/20/20		1,730,000	AUD		2,266,924	^N
Federative Republic of Brazil		10.000%	1/1/10		1	BRL		485
Federative Republic of Brazil		10.000%	7/1/10		4,452	BRL		2,169,678
Federative Republic of Brazil		6.000%	5/15/15		591	BRL		466,270	^N
Government of Indonesia		10.250%	7/15/27		10,665,000,000	IDR		882,857
Kingdom of Sweden Inflation-Protected Notes		3.500%	12/1/28		15,000,000	SEK		3,260,142	^N
Thailand Government Bond		4.250%	3/13/13		22,000,000	THB		651,446
United Kingdom Treasury Gilt		1.250%	11/22/55		388,636	GBP		874,303	^N

Total Foreign Government Obligations (Cost—$11,575,443)								11,399,058

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Absolute Return Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES^†			VALUE

Preferred Stocks	N.M.
Fannie Mae		7.000%			1,900	shs	$	5,320	^G,S

Total Preferred Stocks (Cost—$101,080)								5,320

Total Long-Term Securities (Cost—$558,499,885)								483,243,246
Short-Term Securities	2.5%

U.S. Government and Agency Obligations	0.7%
Fannie Mae		0.000%	12/15/08	$	2,838,000			2,823,219	^O,P,S
Fannie Mae		0.000%	12/22/08		225,000			223,719	^O,P,S

								3,046,938

Foreign Government Obligations	1.7%
Bank Negara Islamic Notes		0.000%	10/7/08		240,000	MYR		69,678	^O
Bank Negara Islamic Notes		0.000%	10/28/08		112,000	MYR		32,451	^O
Bank Negara Islamic Notes		0.000%	11/27/08		128,000	MYR		36,988	^O
Bank Negara Islamic Notes		0.000%	11/27/08		20,000	MYR		5,780	^O
Bank Negara Malaysia Monetary Notes		0.000%	10/7/08		560,000	MYR		162,581	^O
Bank Negara Malaysia Monetary Notes		0.000%	10/7/08		759,000	MYR		220,353	^O
Bank Negara Malaysia Monetary Notes		0.000%	10/7/08		737,000	MYR		213,968	^O
Bank Negara Malaysia Monetary Notes		0.000%	10/21/08		83,000	MYR		24,067	^O
Bank Negara Malaysia Monetary Notes		0.000%	10/21/08		167,000	MYR		48,420	^O
Bank Negara Malaysia Monetary Notes		0.000%	10/21/08		1,106,000	MYR		319,303	^O
Bank Negara Malaysia Monetary Notes		0.000%	11/13/08		1,081,000	MYR		312,748	^O
Bank Negara Malaysia Monetary Notes		0.000%	11/25/08		821,000	MYR		237,250	^O
Bank Negara Malaysia Monetary Notes		0.000%	12/30/08		183,000	MYR		52,719	^O
Bank Negara Malaysia Monetary Notes		0.000%	2/17/09		600,000	MYR		171,625	^O
Egypt Treasury Bills		0.000%	10/28/08		4,175,000	EGP		760,299	^O
Egypt Treasury Bills		0.000%	11/11/08		10,350,000	EGP		1,881,142	^O
Egypt Treasury Bills		0.000%	11/11/08		925,000	EGP		168,121	^O
Egypt Treasury Bills		0.000%	3/3/09		900,000	EGP		155,830	^O
Egypt Treasury Bills		0.000%	3/17/09		2,300,000	EGP		396,168	^O
Egypt Treasury Bills		0.000%	3/24/09		12,775,000	EGP		2,195,078	^O

								7,464,569

Options Purchased^Q	0.1%
Barclays Swaption Put, December 2008, Strike Price $1.60					3,200,000	^T		54,400
Barclays Swaption Put, January 2009, Strike Price $4.93					8,050,000	^T		119,577
Barclays Swaption Put, November 2008, Strike Price $1.50					1,900,000	^T		30,020

Semi-Annual Report to Shareholders


		PAR/ SHARES^†		VALUE

Short-Term Securities—Continued

Options Purchased—Continued
Barclays Swaption Put, November 2008, Strike Price $1.50		1,600,000	^T	$	25,280
Barclays Swaption Put, October 2008, Strike Price $1.40		900,000	^T		13,680
Barclays Swaption Put, October 2008, Strike Price $1.50		3,200,000	^T		40,000
Eurodollar Futures Put, November 2008, Strike Price $96.38		105	^T		28,875
U.S. Treasury Note Futures Call, December 2008, Strike Price $116.50		3	^T		3,703
UBS Warburg LLC Swaption Call, March 2009, Strike Price $3.62		3,600,000	^T		24,615

					340,150

Total Short-Term Securities (Cost—$10,982,735)					10,851,657
Total Investments (Cost—$569,482,620)^U	116.4%				494,094,903
Other Assets Less Liabilities	(16.4)%				(69,765,108	)


Net Assets	100.0%			$	424,329,795


	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Futures Contracts Purchased^Q
Eurodollar Futures	December 2008	249	$	(278,258	)
Eurodollar Futures	March 2009	620		(184,225	)
German Federal Republic Bond Futures	December 2008	46		(6,148	)
German Federal Republic Bond Futures	December 2008	77		105,627
LIBOR Futures	March 2009	86		224,974
U.S. Treasury Note Futures	December 2008	445		90,630
U.S. Treasury Note Futures	December 2008	7		8,856

			$	(38,544	)

Futures Contracts Written^Q
U.S. Treasury Bond Futures	December 2008	30	$	(345	)
U.S. Treasury Note Futures	December 2008	762		1,324,588

			$	1,324,243

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Absolute Return Portfolio—Continued


	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Options Written^Q
Barclays Swaption Call, Strike Price $1.60	October 2008	6,000,000	$	12,000
Barclays Swaption Call, Strike Price $1.60	November 2008	2,200,000		330
Barclays Swaption Call, Strike Price $4.95	October 2013	4,770,000		—
Barclays Swaption Put, Strike Price $1.60	October 2008	6,000,000		(38,700	)
Barclays Swaption Put, Strike Price $1.60	November 2008	2,200,000		(16,060	)
Barclays Swaption Put, Strike Price $1.65	October 2008	1,800,000		(8,460	)
Barclays Swaption Put, Strike Price $1.73	October 2008	3,700,000		(28,490	)
Barclays Swaption Put, Strike Price $1.75	November 2008	3,200,000		(24,000	)
Barclays Swaption Put, Strike Price $2.10	December 2008	6,400,000		(31,360	)
Barclays Swaption Put, Strike Price $4.00	January 2009	32,200,000		99,273
Barclays Swaption Put, Strike Price $4.95	October 2013	4,770,000		—
Credit Suisse First Boston Swaption Call, Strike Price $0.91	November 2008	490,000		1,265
Credit Suisse First Boston Swaption Call, Strike Price $0.91	November 2008	245,000		447
Credit Suisse First Boston Swaption Put, Strike Price $0.91	November 2008	490,000		(957	)
Credit Suisse First Boston Swaption Put, Strike Price $0.91	November 2008	245,000		(516	)
Eurodollar Futures Call, Strike Price $97.50	March 2009	286		6,370
Eurodollar Futures Call, Strike Price $97.63	March 2009	254		40,005
Eurodollar Futures Put, Strike Price $96.75	March 2009	244		(50,020	)
JP Morgan Swaption Call, Strike Price $0.91	November 2008	245,000		1,563
JP Morgan Swaption Call, Strike Price $0.91	November 2008	490,000		4,840
JP Morgan Swaption Put, Strike Price $0.91	November 2008	245,000		(1,532	)
JP Morgan Swaption Put, Strike Price $0.91	November 2008	490,000		(4,205	)
U.S. Treasury Note Futures Call, Strike Price $114.00	October 2008	290		(39,966	)
U.S. Treasury Note Futures Call, Strike Price $117.50	November 2008	100		(14,562	)
U.S. Treasury Note Futures Call, Strike Price $120.00	November 2008	49		30,036
U.S. Treasury Note Futures Put, Strike Price $110.00	October 2008	290		16,675
U.S. Treasury Note Futures Put, Strike Price $114.00	November 2008	52		(5,854	)
UBS Warburg LLC Swaption Call, Strike Price $4.16	December 2008	7,200,000		21,196

			$	(30,682	)

N.M. Not Meaningful.

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, which the Fund’s investment adviser has determined to be liquid, represent 8.78% of net assets.

Convertible Security – Security may be converted into the issuer’s common stock.

Stepped Coupon Security – A security with a predetermined schedule of interest or dividend rate changes at which time it begins to accrue interest or pay dividends according to the predetermined schedule.

Semi-Annual Report to Shareholders

Credit Linked Security – The rates of interest earned on these securities are tied to the credit rating assigned by Standard & Poor’s Rating Service and/or Moody’s Investors Services.

Bond is in default as of September 30, 2008.

The coupon rates shown on variable rate securities are the rates at September 30, 2008. These rates vary with the weighted average coupon of the underlying loans.

Indexed Security – The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”), the Euro Interbank Offered Rate (“EURIBOR”) Index, the Consumer Price Index (“CPI”), the one-year Treasury Bill Rate or the ten-year Japanese Government Bond Rate. The coupon rates are the rates as of September 30, 2008.

Illiquid security valued at fair value under the procedures approved by the Board of Directors. At September 30, 2008, the market value for these securities was $2,975,680.

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

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.

Treasury Inflation-Protected Security –Treasury security whose principal value is adjusted daily in accordance with changes to the Consumer Price Index for All Urban Consumers. Interest is calculated on the basis of the current adjusted principal value.

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

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

Inflation-Protected Security – Security whose principal value is adjusted daily or monthly in accordance with changes to the relevant country’s Consumer Price Index or its equivalent used as an inflation proxy. Interest is calculated on the basis of the current adjusted principal value.

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.

All or a portion of this security is collateral to cover futures and options contracts written.

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

Bond is in default subsequent to September 30, 2008.

On September 7, 2008, the Federal Housing Finance Agency placed Fannie Mae and Freddie Mac into conservatorship.

Par represents actual number of contracts.

Aggregate cost for federal income tax purposes is substantially the same as book cost. At September 30, 2008, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were substantially as follows:


Gross unrealized appreciation	$	1,937,203
Gross unrealized depreciation		(77,324,920	)

Net unrealized depreciation	$	(75,387,717	)

^†

Securities are denominated in U.S. Dollars, unless otherwise noted.

AUD—Australian Dollar

BRL—Brazilian Real

EGP—Egyptian Pound

EUR—Euro

GBP—British Pound

IDR—Indonesian Rupiah

MYR—Malaysian Ringgit

RUB—Russian Ruble

SEK—Swedish Krona

THB—Thailand Baht

See notes to financial statements.

Semi-Annual Report to Shareholders

Statement of Assets and Liabilities

Western Asset Absolute Return Portfolio

September 30, 2008 (Unaudited)


Assets:
Investment securities at market value (Cost—$558,499,885)			$	483,243,246
Short-term securities at value (Cost—$10,982,735)				10,851,657
Cash				4,472,369
Foreign currency at value (Cost—$1,305,373)				1,246,224
Receivable for securities sold				53,818,742
Interest receivable				6,122,295
Restricted cash pledged for swaps				2,800,000
Unrealized appreciation of forward foreign currency contracts				2,450,499
Deposits with brokers for open futures contracts				981,154
Futures variation margin receivable				793,865
Receivable for fund shares sold				79,884

Total assets				566,859,935


Liabilities:
Payable for securities purchased	$	129,772,129
Payable for fund shares repurchased		5,832,286
Swap contracts at value		3,315,864
Options written (Proceeds—$1,965,185)		1,995,867
Amount payable for open swaps		891,479
Accrued management fee		292,084
Income distribution payable		172,180
Unrealized depreciation of forward foreign currency contracts		130,466
Accrued distribution fees		164
Accrued expenses		127,621

Total liabilities				142,530,140


Net Assets			$	424,329,795


Net assets consist of:
Accumulated paid-in-capital			$	499,611,468
Undistributed net investment income				2,004,334
Accumulated net realized loss on investments, options, futures, swaps and foreign currency transactions				(2,149,619	)
Net unrealized depreciation on investments, options, futures, swaps and foreign currency translations				(75,136,388	)


Net Assets			$	424,329,795


Net Asset Value Per Share:
Institutional Class (25,432,331 shares outstanding)				$8.73
Institutional Select Class (23,030,216 shares outstanding)				$8.74
Financial Intermediary Class (114,723 shares outstanding)				$8.74

See notes to financial statements.

Semi-Annual Report to Shareholders

Statement of Operations

Western Asset Absolute Return Portfolio

For the Six Months Ended September 30, 2008 (Unaudited)


Investment Income:
Interest	$	16,208,720
Dividends		3,325

Total income				$	16,212,045
Expenses:
Management fees		1,960,451
Distribution fees:
Financial Intermediary Class		622
Audit and legal fees		77,971
Custodian fees		70,099
Directors’ fees and expenses		9,295
Registration fees		20,000
Reports to shareholders:
Institutional Class		5,651
Institutional Select Class		590
Financial Intermediary Class		13
Transfer agent and shareholder servicing expense:
Institutional Class		9,282
Institutional Select Class		150
Financial Intermediary Class		647
Other expenses		20,743

		2,175,514
Less: Fees waived		(84,126	)
Compensating balance credits		(76	)

Net expenses					2,091,312

Net Investment Income					14,120,733
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) on:
Investments		1,408,392
Options		1,463,143
Futures		(3,939,035	)
Swaps		210,863
Foreign currency transactions		(1,475,862	)

					(2,332,499	)
Change in unrealized appreciation/(depreciation) of:
Investments, options, futures, swaps and foreign currency translations		(45,095,675	)
Assets and liabilities denominated in foreign currency		6,363

					(45,089,312	)

Net Realized and Unrealized Loss on Investments					(47,421,811	)

Change in Net Assets Resulting From Operations				$	(33,301,078	)

See notes to financial statements.

Semi-Annual Report to Shareholders

Statement of Changes in Net Assets

Western Asset Absolute Return Portfolio


	FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2008			FOR THE YEAR ENDED MARCH 31, 2008
Change in Net Assets:	(Unaudited)
Net investment income	$	14,120,733		$	23,988,721

Net realized gain/(loss)		(2,332,499	)		15,106,897

Change in unrealized appreciation/(depreciation)		(45,089,312	)		(31,265,829	)

Change in net assets resulting from operations		(33,301,078	)		7,829,789

Distributions to shareholders from:
Net investment income:
Institutional Class		(11,949,683	)		(23,789,518	)
Institutional Select Class		(1,736,642	)		N/A
Financial Intermediary Class		(12,430	)		(4,728	)

Net realized gain on investments:
Institutional Class		(12,841,702	)		(2,180,665	)
Financial Intermediary Class		(9,321	)		(163	)

Change in net assets from fund share transactions:
Institutional Class		(287,821,743	)		207,117,247
Institutional Select Class		210,709,868			N/A
Financial Intermediary Class		667,943			396,921

Change in net assets		(136,294,788	)		189,368,883

Net Assets:
Beginning of period		560,624,583			371,255,700


End of period	$	424,329,795		$	560,624,583


Undistributed net investment income	$	2,004,334		$	1,582,356

N/A—Not applicable.

See notes to financial statements.

Semi-Annual Report to Shareholders

Financial Highlights

Western Asset Absolute Return Portfolio

For a share of each class of capital stock outstanding:

Institutional Class:


	SIX MONTHS ENDED SEPTEMBER 30, 2008			YEARS ENDED MARCH 31,
	SIX MONTHS ENDED SEPTEMBER 30, 2008			2008			2007^A
	(Unaudited)
Net asset value, beginning of period	$	9.82		$	10.23		$	10.00

Investment operations:
Net investment income^B		.26			.49			.36
Net realized and unrealized gain/(loss)		(.86	)		(.36	)		.29

Total from investment operations		(.60	)		.13			.65

Distributions from:
Net investment income		(.25	)		(.49	)		(.35	)
Net realized gain on investments		(.24	)		(.05	)		(.07	)

Total distributions		(.49	)		(.54	)		(.42	)

Net asset value, end of period	$	8.73		$	9.82		$	10.23

Total return		(6.44	)%^C		1.31	%		6.63	%^C

Ratios to Average Net Assets:^D
Total expenses		.83	%^E		.84	%		1.09	%^E
Expenses net of waivers, if any		.80	%^E		.84	%		.93	%^E
Expenses net of all reductions		.80	%^E		.83	%		.89	%^E
Net investment income		5.4	%^E		4.9	%		4.9	%^E

Supplemental Data:
Portfolio turnover rate		166.6	%^C		386.9	%		182.2	%
Net assets, end of period (in thousands)	$	222,141		$	560,219		$	371,239

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

Computed using average daily shares outstanding.

Not annualized.

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

Annualized.

See notes to financial statements.

Semi-Annual Report to Shareholders

Financial Highlights

Western Asset Absolute Return Portfolio

For a share of each class of capital stock outstanding:

Institutional Select Class:


	PERIOD ENDED SEPTEMBER 30, 2008^F
	(Unaudited)
Net asset value, beginning of period	$	9.15

Investment operations:
Net investment income^B		.08
Net realized and unrealized loss		(.41	)

Total from investment operations		(.33	)

Distributions from:
Net investment income		(.08	)

Total distributions		(.08	)

Net asset value, end of period	$	8.74

Total return		(3.67	)%^C

Ratios to Average Net Assets:^D
Total expenses		.85	%^E
Expenses net of waivers, if any		.80	%^E
Expenses net of all reductions		.80	%^E
Net investment income		5.6	%^E

Supplemental Data:
Portfolio turnover rate		166.6	%^C
Net assets, end of period (in thousands)	$	201,186

For the period August 4, 2008 (commencement of operations) to September 30, 2008.

See notes to financial statements.

Semi-Annual Report to Shareholders

Financial Highlights

Western Asset Absolute Return Portfolio

For a share of each class of capital stock outstanding:

Financial Intermediary Class:


	SIX MONTHS ENDED SEPTEMBER 30, 2008			YEARS ENDED MARCH 31,
	SIX MONTHS ENDED SEPTEMBER 30, 2008			2008			2007^G
	(Unaudited)
Net asset value, beginning of period	$	9.82		$	10.23		$	10.17

Investment operations:
Net investment income^B		.24			.47			.27
Net realized and unrealized gain/(loss)		(.84	)		(.37	)		.13

Total from investment operations		(.60	)		.10			.40

Distributions from:
Net investment income		(.24	)		(.46	)		(.27	)
Net realized gain on investments		(.24	)		(.05	)		(.07	)

Total distributions		(.48	)		(.51	)		(.34	)

Net asset value, end of period	$	8.74		$	9.82		$	10.23

Total return		(6.46	)%^C		1.03	%		3.99	%^C

Ratios to Average Net Assets:^D
Total expenses		1.37	%^E		1.31	%		85.97	%^E
Expenses net of waivers, if any		1.05	%^E		1.06	%		1.18	%^E
Expenses net of all reductions		1.05	%^E		1.03	%		1.16	%^E
Net investment income		5.2	%^E		4.7	%		4.6	%^E

Supplemental Data:
Portfolio turnover rate		166.6	%^C		386.9	%		182.2	%
Net assets, end of period (in thousands)	$	1,003		$	406		$	17

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

See notes to financial statements.

Semi-Annual Report to Shareholders

Expense Example

Western Asset High Yield Portfolio

As a shareholder of the Fund, you incur ongoing costs, including management fees and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.

Actual Expenses

The first line for each class in the table below provides information about actual account values and actual expenses for the Fund. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account if your shares were held through the entire period. For Institutional Class, the example is based on an investment of $1,000 invested on April 1, 2008 and held through September 30, 2008; for Institutional Select Class, the example is based on an investment of $1,000 invested on August 4, 2008 (commencement of operations) and held through September 30, 2008.

Hypothetical Example for Comparison Purposes

The second line for each class in the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Class’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples that appear in the shareholder reports of other funds. Because each example is intended to be comparable to the examples provided by other funds, it is based on a hypothetical investment of $1,000 invested on April 1, 2008 and held through September 30, 2008 for each class, even though the Institutional Select Class did not begin operations until August 4, 2008.


	Beginning Account Value 4/1/08			Ending Account Value 9/30/08		Expenses Paid^A During the Period 4/1/08 to 9/30/08
Institutional Class:
Actual	$	1,000.00		$	931.40	$	2.86
Hypothetical (5% return before expenses)		1,000.00			1,022.11		2.99
Institutional Select Class:
Actual	$	1,000.00	^B	$	932.30	$	0.88	^C
Hypothetical (5% return before expenses)		1,000.00			1,022.21		2.89

Thesecalculations are based on expenses incurred from April 1, 2008 to September 30, 2008. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio of 0.59% for the Institutional Class, multiplied by the average value over the period, multiplied by the number of days in the most recent half-year (183), and divided by 365.

Beginning account value is as of August 4, 2008 (commencement of operations).

This calculation is based on expenses incurred from August 4, 2008 (commencement of operations) to September 30, 2008. The dollar amount shown as “Expenses Paid” is equal to the annualized expense ratio of 0.57% for the Institutional Select Class, multiplied by the average values over the period, multiplied by the number of days in the period (58) and divided by 365.

Semi-Annual Report to Shareholders

Performance Information

Western Asset High Yield Portfolio

The graph compares the Fund’s total returns to that of two appropriate broad-based securities market indexes. The lines illustrate the cumulative total return of an initial $1,000,000 investment for the periods indicated. The line for the 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 lines representing the securities market indexes do not include any transaction costs associated with buying and selling securities in the indexes or other investment management or administrative expenses.

Total return measures investment performance in terms of appreciation or depreciation in the 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. Returns (and the graph and table found below) do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Average annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results.

Bonds are subject to a variety of risks, including interest rate, credit and inflation risks. Non-U.S. investments are subject to currency fluctuations, social, economic, and political risk.

Growth of a $1,000,000 Investment—Institutional Class

Indexreturns are for periods beginning September 30, 2001. Formerly: Lehman Aggregate Bond Index. The name change is a result of Barclay’s purchase of Lehman Brothers in September 2008.

Semi-Annual Report to Shareholders

Performance Information—Continued

Portfolio Composition (as of September 30, 2008)^B

Standard & Poor’s Debt Ratings^C (as a percentage of the portfolio)

LOGO

Maturity Schedule (as a percentage of the portfolio)

LOGO

Source:Standard & Poor's.

Preferred stocks do not have defined maturity dates.

Semi-Annual Report to Shareholders

Portfolio of Investments

Western Asset High Yield Portfolio

September 30, 2008 (Unaudited)


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE

Long-Term Securities	93.7%

Corporate Bonds and Notes	80.4%

Aerospace and Defense	1.5%
BE Aerospace Inc.		8.500%	7/1/18	$	1,860,000	$	1,804,200
DRS Technologies Inc.		6.625%	2/1/16		1,355,000		1,368,550
DRS Technologies Inc.		7.625%	2/1/18		1,500,000		1,567,500
DynCorp International Inc.		9.500%	2/15/13		3,140,000		3,085,050	^A
Sequa Corp.		11.750%	12/1/15		1,420,000		1,192,800	^A
Sequa Corp.		13.500%	12/1/15		1,467,925		1,233,057	^A,B

							10,251,157

Airlines	1.7%
Continental Airlines Inc.		7.339%	4/19/14		1,455,000		1,083,975
Continental Airlines Inc.		8.388%	11/1/20		684,494		540,750
DAE Aviation Holdings Inc.		11.250%	8/1/15		6,150,000		5,719,500	^A
Delta Air Lines Inc.		8.954%	8/10/14		1,994,220		1,455,781
United Air Lines Inc.		7.032%	10/1/10		687,311		681,297
United Air Lines Inc.		7.186%	10/1/12		1,971,608		1,961,220

							11,442,523

Auto Components	1.1%
Allison Transmission		11.000%	11/1/15		460,000		400,200	^A
Allison Transmission		11.250%	11/1/15		2,130,000		1,746,600	^A,B
Visteon Corp.		8.250%	8/1/10		3,542,000		2,939,860
Visteon Corp.		12.250%	12/31/16		4,546,000		2,727,600	^A

							7,814,260

Automobiles	1.4%
Ford Motor Co.		7.450%	7/16/31		3,400,000		1,462,000
General Motors Corp.		7.200%	1/15/11		3,280,000		1,927,000
General Motors Corp.		8.250%	7/15/23		1,475,000		578,938
General Motors Corp.		8.375%	7/15/33		14,315,000		5,726,000

							9,693,938

Beverages	0.1%
Constellation Brands Inc.		7.250%	9/1/16		1,100,000		1,012,000


Building Products	1.7%
Associated Materials Inc.		9.750%	4/15/12		2,400,000		2,364,000
Associated Materials Inc.		0.000%	3/1/14		7,295,000		4,705,275	^C
Nortek Inc.		10.000%	12/1/13		2,890,000		2,543,200	^A
NTK Holdings Inc.		0.000%	3/1/14		4,965,000		2,134,950	^C

							11,747,425

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset High Yield Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE

Corporate Bonds and Notes—Continued

Capital Markets	0.2%
Morgan Stanley		3.875%	1/15/09	$	1,790,000	$	1,646,832


Chemicals	0.7%
ARCO Chemical Co.		9.800%	2/1/20		80,000		48,000
Georgia Gulf Corp.		10.750%	10/15/16		6,125,000		2,756,250
Huntsman International LLC		7.875%	11/15/14		2,120,000		1,823,200
Westlake Chemical Corp.		6.625%	1/15/16		547,000		464,950

							5,092,400

Commercial Services and Supplies	1.5%
Interface Inc.		10.375%	2/1/10		3,454,000		3,523,080
Rental Service Corp.		9.500%	12/1/14		4,570,000		3,461,775
US Investigations Services Inc.		10.500%	11/1/15		360,000		320,400	^A
US Investigations Services Inc.		11.750%	5/1/16		4,130,000		3,386,600	^A

							10,691,855

Communications Equipment	0.1%
EchoStar DBS Corp.		7.750%	5/31/15		1,065,000		902,588


Consumer Finance	4.5%
AmeriCredit Corp.		8.500%	7/1/15		4,305,000		3,594,675
Ford Motor Credit Co.		8.625%	11/1/10		1,310,000		928,947
Ford Motor Credit Co.		7.241%	4/15/12		2,605,000		2,408,343	^D
Ford Motor Credit Co.		12.000%	5/15/15		20,835,000		15,899,418
GMAC LLC		8.000%	11/1/31		11,850,000		4,470,733
SLM Corp.		8.450%	6/15/18		5,360,000		3,644,800

							30,946,916

Containers and Packaging	1.4%
Berry Plastics Holding Corp.		10.250%	3/1/16		1,200,000		792,000
Graham Packaging Co. Inc.		9.875%	10/15/14		1,576,000		1,371,120
Graphic Packaging International Corp.		9.500%	8/15/13		2,635,000		2,384,675
Greif Inc.		6.750%	2/1/17		1,690,000		1,630,850
Plastipak Holdings Inc.		8.500%	12/15/15		845,000		714,025	^A
Rock-Tenn Co.		9.250%	3/15/16		1,470,000		1,492,050	^A
Solo Cup Co.		8.500%	2/15/14		1,825,000		1,460,000

							9,844,720

Distributors	0.3%
Keystone Automotive Operations Inc.		9.750%	11/1/13		4,480,000		2,374,400

Semi-Annual Report to Shareholders


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE

Corporate Bonds and Notes—Continued

Diversified Consumer Services	0.7%
Education Management LLC		10.250%	6/1/16	$	4,115,000	$	3,292,000
Service Corp. International		7.625%	10/1/18		575,000		514,625
Service Corp. International		7.500%	4/1/27		1,487,000		1,137,555

							4,944,180

Diversified Financial Services	3.8%
AAC Group Holding Corp.		0.000%	10/1/12		5,510,000		5,454,900	^A,C
Capmark Financial Group Inc.		5.875%	5/10/12		1,710,000		852,425	^E
CCM Merger Inc.		8.000%	8/1/13		3,400,000		2,762,500	^A
Citigroup Inc.		8.400%	4/29/49		3,270,000		2,225,758	^C
DI Finance LLC		9.500%	2/15/13		5,680,000		5,566,400
El Paso Performance-Linked		7.750%	7/15/11		155,000		156,958	^A
Hexion US Finance Corp/Hexion Nova Scotia Finance ULC		7.304%	11/15/14		1,110,000		799,200	^D
Leucadia National Corp.		8.125%	9/15/15		2,340,000		2,275,650
Leucadia National Corp.		7.125%	3/15/17		550,000		500,500
TNK-BP Finance SA		7.875%	3/13/18		910,000		637,000	^A
Vanguard Health Holding Co. I LLC		0.000%	10/1/15		590,000		510,350	^C
Vanguard Health Holding Co. II LLC		9.000%	10/1/14		4,904,000		4,732,360

							26,474,001

Diversified Telecommunication Services	3.5%
Cincinnati Bell Inc.		6.300%	12/1/28		3,160,000		2,243,600
Citizens Communications Co.		7.875%	1/15/27		2,085,000		1,563,750
Citizens Communications Co.		7.050%	10/1/46		380,000		216,600
Hawaiian Telcom Communications Inc.		9.750%	5/1/13		73,000		14,600
Hawaiian Telcom Communications Inc.		12.500%	5/1/15		1,460,000		204,400
Intelsat Corp.		9.250%	8/15/14		4,500,000		4,207,500	^A
Level 3 Financing Inc.		9.250%	11/1/14		3,985,000		3,008,675
Level 3 Financing Inc.		6.845%	2/15/15		1,605,000		1,083,375	^D
MetroPCS Wireless Inc.		9.250%	11/1/14		1,315,000		1,229,525
Qwest Communications International Inc.		6.304%	2/15/09		240,000		237,000	^D
Qwest Communications International Inc.		7.250%	2/15/11		2,652,000		2,512,770
Qwest Communications International Inc.		7.500%	2/15/14		3,262,000		2,821,630
Windstream Corp.		8.625%	8/1/16		5,120,000		4,723,200

							24,066,625

Electric Utilities	4.4%
Elwood Energy LLC		8.159%	7/5/26		2,442,610		2,238,197
Energy Future Holdings Corp.		11.250%	11/1/17		29,310,000		24,766,950	^A,B
IPALCO Enterprises Inc.		8.625%	11/14/11		240,000		241,200	^E

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset High Yield Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE

Corporate Bonds and Notes—Continued

Electric Utilities—Continued
Texas Competitive Electrics Holdings Co. LLC		10.500%	11/1/16	$	3,470,000	$	2,940,825	^A,B

							30,187,172

Energy Equipment and Services	1.3%
Atlas Pipeline Partners LP		8.750%	6/15/18		2,930,000		2,754,200	^A
Complete Production Services Inc.		8.000%	12/15/16		1,940,000		1,843,000
Key Energy Services Inc.		8.375%	12/1/14		2,260,000		2,169,600
Pride International Inc.		7.375%	7/15/14		1,975,000		1,886,125

							8,652,925

Food and Staples Retailing	0.1%
Stater Brothers Holding Inc.		7.750%	4/15/15		560,000		523,600


Food Products	0.6%
Dole Food Co. Inc.		8.625%	5/1/09		360,000		343,800
Dole Food Co. Inc.		7.250%	6/15/10		4,350,000		3,828,000
Dole Food Co. Inc.		8.875%	3/15/11		165,000		138,600

							4,310,400

Gas Utilities	0.7%
Suburban Propane Partners LP		6.875%	12/15/13		5,685,000		5,031,225


Health Care Equipment and Supplies	0.7%
Advanced Medical Optics Inc.		7.500%	5/1/17		2,320,000		2,018,400
Biomet Inc.		10.375%	10/15/17		1,060,000		1,049,400	^B
Biomet Inc.		11.625%	10/15/17		1,610,000		1,618,050
Fresenius Medical Care Capital Trust IV		7.875%	6/15/11		150,000		151,500

							4,837,350

Health Care Providers and Services	5.0%
CRC Health Corp.		10.750%	2/1/16		4,595,000		3,538,150
DaVita Inc.		6.625%	3/15/13		1,700,000		1,615,000
DaVita Inc.		7.250%	3/15/15		2,345,000		2,227,750
HCA Inc.		9.000%	12/15/14		56,000		50,837
HCA Inc.		6.375%	1/15/15		2,405,000		1,893,937
HCA Inc.		9.250%	11/15/16		1,630,000		1,585,175
HCA Inc.		9.625%	11/15/16		6,495,000		6,170,250	^B
HCA Inc.		7.500%	12/15/23		170,000		124,534
HCA Inc.		7.690%	6/15/25		1,870,000		1,389,859
IASIS Healthcare LLC		8.750%	6/15/14		450,000		425,250
Tenet Healthcare Corp.		6.375%	12/1/11		2,455,000		2,264,737

Semi-Annual Report to Shareholders


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE

Corporate Bonds and Notes—Continued

Health Care Providers and Services—Continued
Tenet Healthcare Corp.		6.500%	6/1/12	$	2,030,000	$	1,877,750
Tenet Healthcare Corp.		7.375%	2/1/13		1,365,000		1,242,150
Tenet Healthcare Corp.		9.875%	7/1/14		2,185,000		2,130,375
Tenet Healthcare Corp.		9.250%	2/1/15		2,380,000		2,249,100
U.S. Oncology Holdings Inc.		8.334%	3/15/12		5,309,291		4,061,608	^B,D
Universal Hospital Services Inc.		6.303%	6/1/15		940,000		827,200	^D
Universal Hospital Services Inc.		8.500%	6/1/15		1,135,000		1,058,387	^B

							34,732,049

Hotels, Restaurants and Leisure	4.2%
Boyd Gaming Corp.		6.750%	4/15/14		690,000		495,075
Boyd Gaming Corp.		7.125%	2/1/16		430,000		297,775
Buffets Inc.		12.500%	11/1/14		4,105,000		41,050	^F
Caesars Entertainment Inc.		8.125%	5/15/11		2,675,000		1,578,250
Carrols Corp.		9.000%	1/15/13		450,000		324,000
Denny’s Holdings Inc.		10.000%	10/1/12		1,710,000		1,556,100
El Pollo Loco Inc.		11.750%	11/15/13		2,521,000		2,407,555
Fontainebleau Las Vegas Holdings LLC/Fontainebleau Las Vegas Capital Corp.		10.250%	6/15/15		1,625,000		455,000	^A
Harrah’s Operating Co. Inc.		10.750%	2/1/16		1,800,000		918,000	^A
Indianapolis Downs LLC and Capital Corp.		11.000%	11/1/12		2,520,000		1,713,600	^A
Indianapolis Downs LLC and Capital Corp.		15.500%	11/1/13		3,233,791		2,207,062	^A,B
Inn of the Mountain Gods Resort and Casino		12.000%	11/15/10		5,810,000		3,950,800
Mandalay Resort Group		9.375%	2/15/10		58,000		53,360
MGM MIRAGE		8.500%	9/15/10		85,000		78,200
MGM MIRAGE		8.375%	2/1/11		1,750,000		1,430,625
MGM MIRAGE		6.750%	9/1/12		125,000		97,813
MGM MIRAGE		7.500%	6/1/16		1,850,000		1,350,500
Quapaw Downstream Development		12.000%	10/15/15		2,320,000		1,682,000	^A
Sbarro Inc.		10.375%	2/1/15		2,895,000		1,983,075
Snoqualmie Entertainment Authority		6.875%	2/1/14		3,075,000		2,214,000	^A,D
Station Casinos Inc.		6.000%	4/1/12		2,470,000		1,383,200
Station Casinos Inc.		7.750%	8/15/16		2,930,000		1,589,525
Station Casinos Inc.		6.625%	3/15/18		995,000		263,675
The Choctaw Resort Development Enterprise		7.250%	11/15/19		331,000		248,250	^A
Turning Stone Casino Resort Enterprise		9.125%	9/15/14		995,000		905,450	^A

							29,223,940

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset High Yield Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE

Corporate Bonds and Notes—Continued

Household Durables	1.8%
American Greetings Corp.		7.375%	6/1/16	$	260,000	$	236,600
Jarden Corp.		7.500%	5/1/17		515,000		428,737
K Hovnanian Enterprises Inc.		11.500%	5/1/13		4,700,000		4,606,000	^A
Norcraft Cos.		9.000%	11/1/11		6,100,000		5,856,000
Norcraft Holdings LP		9.750%	9/1/12		1,270,000		1,143,000

							12,270,337

Household Products	0.2%
Visant Holding Corp.		8.750%	12/1/13		1,395,000		1,279,913


Independent Power Producers and Energy Traders	4.4%
Dynegy Holdings Inc.		7.750%	6/1/19		5,040,000		4,032,000
Edison Mission Energy		7.750%	6/15/16		2,190,000		2,058,600
Edison Mission Energy		7.200%	5/15/19		1,410,000		1,240,800
Edison Mission Energy		7.625%	5/15/27		2,595,000		2,101,950
Mirant Mid Atlantic LLC		10.060%	12/30/28		2,654,952		2,993,459
Mirant North America LLC		7.375%	12/31/13		1,240,000		1,165,600
NRG Energy Inc.		7.250%	2/1/14		860,000		797,650
NRG Energy Inc.		7.375%	2/1/16		6,010,000		5,409,000
NRG Energy Inc.		7.375%	1/15/17		3,045,000		2,770,950
The AES Corp.		9.375%	9/15/10		200,000		200,000
The AES Corp.		8.750%	5/15/13		1,152,000		1,157,760	^A
The AES Corp.		8.000%	10/15/17		4,820,000		4,350,050
The AES Corp.		8.000%	6/1/20		2,630,000		2,301,250	^A

							30,579,069

Insurance	0.1%
American International Group Inc.		8.175%	5/15/58		5,090,000		815,387	^A,C


Internet and Catalog Retail	0.3%
Expedia Inc.		8.500%	7/1/16		255,000		229,500	^A
Ticketmaster		10.750%	8/1/16		1,700,000		1,598,000	^A

							1,827,500

IT Services	1.2%
Ceridian Corp.		11.250%	11/15/15		370,000		305,250	^A
Ceridian Corp.		12.250%	11/15/15		2,325,000		1,894,875	^A,B
First Data Corp.		9.875%	9/24/15		2,570,000		2,341,167	^A
SunGard Data Systems Inc.		10.250%	8/15/15		3,960,000		3,435,300

							7,976,592

Semi-Annual Report to Shareholders


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE

Corporate Bonds and Notes—Continued

Machinery	0.2%
American Railcar Industries Inc.		7.500%	3/1/14	$	1,250,000	$	1,106,250


Marine	0.1%
Horizon Lines Inc.		4.250%	8/15/12		1,000,000		753,750	^G


Media	6.0%
Affinion Group Inc.		10.125%	10/15/13		555,000		521,700
Affinion Group Inc.		11.500%	10/15/15		4,985,000		4,636,050
Cablevision Systems Corp.		8.000%	4/15/12		1,100,000		1,034,000
CCH I Holdings LLC		11.000%	10/1/15		14,364,000		9,480,240
CCH II Holdings LLC		10.250%	10/1/13		1,070,000		898,800
Charter Communications Holdings LLC		11.750%	5/15/11		1,120,000		649,600
Charter Communications Holdings LLC		12.125%	1/15/12		1,345,000		800,275
Charter Communications Operating LLC		10.875%	9/15/14		5,420,000		5,257,400	^A
CMP Susquehanna Corp.		9.875%	5/15/14		2,145,000		1,201,200
CSC Holdings Inc.		8.125%	7/15/09		325,000		321,750
CSC Holdings Inc.		6.750%	4/15/12		2,180,000		1,997,425
CSC Holdings Inc.		8.500%	6/15/15		1,460,000		1,355,975	^A
Dex Media Inc.		0.000%	11/15/13		275,000		126,500	^C
Dex Media Inc.		0.000%	11/15/13		145,000		66,700	^C
Dex Media West LLC		9.875%	8/15/13		105,000		65,100
DirecTV Holdings LLC		8.375%	3/15/13		1,110,000		1,096,125
EchoStar DBS Corp.		6.625%	10/1/14		1,080,000		866,700
Idearc Inc.		8.000%	11/15/16		7,110,000		1,937,475
R.H. Donnelley Corp.		6.875%	1/15/13		5,305,000		2,068,950
R.H. Donnelley Corp.		6.875%	1/15/13		1,650,000		643,500
R.H. Donnelley Corp.		11.750%	5/15/15		960,000		585,600	^A
TL Acquisitions Inc.		10.500%	1/15/15		3,545,000		2,800,550	^A
TL Acquisitions Inc.		0.000%	7/15/15		3,145,000		2,107,150	^A,C
Virgin Media Inc.		6.500%	11/15/16		940,000		595,725	^A,G

							41,114,490

Metals and Mining	2.6%
Freeport-McMoRan Copper & Gold Inc.		8.375%	4/1/17		3,460,000		3,408,100
Metals USA Holdings Corp.		8.791%	7/1/12		2,615,000		2,092,000	^B,D
Metals USA Inc.		11.125%	12/1/15		3,880,000		3,724,800
Noranda Aluminium Holding Corp.		8.578%	11/15/14		4,490,000		2,963,400	^B,D
Ryerson Inc.		12.000%	11/1/15		6,665,000		5,665,250	^A

							17,853,550

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset High Yield Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE

Corporate Bonds and Notes—Continued

Multiline Retail	1.6%
Dollar General Corp.		11.875%	7/15/17	$	4,010,000	$	3,709,250	^B
The Neiman-Marcus Group Inc.		9.000%	10/15/15		6,880,000		5,762,000	^B
The Neiman-Marcus Group Inc.		10.375%	10/15/15		25,000		20,937
The Neiman-Marcus Group Inc.		7.125%	6/1/28		2,010,000		1,457,250

							10,949,437

Oil, Gas and Consumable Fuels	9.7%
ANR Pipeline Inc.		9.625%	11/1/21		1,364,000		1,650,870
Belden and Blake Corp.		8.750%	7/15/12		9,340,000		8,499,400
Chesapeake Energy Corp.		6.375%	6/15/15		2,065,000		1,843,013
Chesapeake Energy Corp.		6.500%	8/15/17		1,485,000		1,299,375
Chesapeake Energy Corp.		6.250%	1/15/18		2,515,000		2,150,325
Chesapeake Energy Corp.		7.250%	12/15/18		2,985,000		2,746,200
El Paso Corp.		7.750%	6/15/10		1,568,000		1,586,043
El Paso Corp.		7.875%	6/15/12		350,000		344,450
El Paso Corp.		7.800%	8/1/31		4,790,000		4,035,656
El Paso Corp.		7.750%	1/15/32		205,000		171,575
El Paso Natural Gas Co.		8.375%	6/15/32		1,600,000		1,532,723
Enterprise Products Operating LP		8.375%	8/1/66		3,165,000		2,933,860	^C
Exco Resources Inc.		7.250%	1/15/11		4,048,000		3,825,360
Inergy LP		8.250%	3/1/16		760,000		699,200
International Coal Group Inc.		10.250%	7/15/14		4,260,000		3,802,050
Mariner Energy Inc.		7.500%	4/15/13		1,210,000		1,070,850
Mariner Energy Inc.		8.000%	5/15/17		1,405,000		1,187,225
MarkWest Energy Partners LP		8.750%	4/15/18		1,750,000		1,662,500
Parallel Petroleum Corp.		10.250%	8/1/14		2,345,000		2,110,500
Parker Drilling Co.		9.625%	10/1/13		936,000		907,920
Petrohawk Energy Corp.		9.125%	7/15/13		1,970,000		1,851,800
Petrohawk Energy Corp.		7.875%	6/1/15		550,000		478,500	^A
Quicksilver Resources Inc.		8.250%	8/1/15		2,020,000		1,848,300
SandRidge Energy Inc.		8.000%	6/1/18		7,460,000		6,415,600	^A
SemGroup LP		8.750%	11/15/15		5,875,000		587,500	^A,F,H
Sonat Inc.		7.625%	7/15/11		95,000		96,143
Southwestern Energy Co.		7.500%	2/1/18		2,310,000		2,240,700	^A
Stone Energy Corp.		8.250%	12/15/11		310,000		288,300
Stone Energy Corp.		6.750%	12/15/14		1,635,000		1,267,125
Targa Resources Partners LP		8.250%	7/1/16		590,000		507,400	^A
The Williams Cos. Inc.		7.500%	1/15/31		970,000		882,681
Transcontinental Gas Pipe Line Corp.		8.875%	7/15/12		1,060,000		1,151,334
VeraSun Energy Corp.		9.375%	6/1/17		3,755,000		1,483,225	^L

Semi-Annual Report to Shareholders


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE

Corporate Bonds and Notes—Continued

Oil, Gas and Consumable Fuels—Continued
W&T Offshore Inc.		8.250%	6/15/14	$	2,380,000	$	1,904,000	^A
Whiting Petroleum Corp.		7.250%	5/1/12		195,000		180,863
Whiting Petroleum Corp.		7.000%	2/1/14		2,350,000		1,997,500

							67,240,066

Paper and Forest Products	1.7%
Appleton Papers Inc.		8.125%	6/15/11		650,000		570,375
Appleton Papers Inc.		9.750%	6/15/14		4,025,000		3,089,187
NewPage Corp.		9.051%	5/1/12		5,715,000		5,114,925	^D
Newpage Holding Corp.		9.986%	11/1/13		1,737,984		1,538,116	^B,D
Verso Paper Holdings LLC		11.375%	8/1/16		1,710,000		1,385,100

							11,697,703

Pharmaceuticals	0.1%
Leiner Health Products Inc.		11.000%	6/1/12		9,460,000		473,000	^F,H


Real Estate Investment Trusts (REITs)	0.1%
Ventas Inc.		9.000%	5/1/12		762,000		794,385


Real Estate Management and Development	0.6%
Ashton Woods USA LLC		9.500%	10/1/15		2,160,000		972,000	^L
Forest City Enterprises Inc.		7.625%	6/1/15		465,000		372,000
Realogy Corp.		10.500%	4/15/14		630,000		277,200
Realogy Corp.		11.000%	4/15/14		3,520,000		1,346,400	^B
Realogy Corp.		12.375%	4/15/15		3,325,000		1,130,500

							4,098,100

Road and Rail	1.6%
Hertz Corp.		10.500%	1/1/16		8,355,000		6,976,425
Kansas City Southern Railway		7.500%	6/15/09		2,115,000		2,115,000
Swift Transportation Co.		10.554%	5/15/15		3,460,000		1,072,600	^A,D
Swift Transportation Co.		12.500%	5/15/17		2,550,000		841,500	^A

							11,005,525

Semiconductors and Semiconductor Equipment	0.1%
Freescale Semiconductor Inc.		8.875%	12/15/14		300,000		207,000
Freescale Semiconductor Inc.		9.125%	12/15/14		600,000		378,000	^B

							585,000

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset High Yield Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE

Corporate Bonds and Notes—Continued

Software	0.3%
Activant Solutions Inc.		9.500%	5/1/16	$	3,130,000	$	2,316,200


Specialty Retail	1.0%
ACE Hardware Corp.		9.125%	6/1/16		1,205,000		1,030,275	^A
AutoNation Inc.		4.791%	4/15/13		980,000		825,650	^D
Blockbuster Inc.		9.000%	9/1/12		2,920,000		2,087,800
Eye Care Centers of America Inc.		10.750%	2/15/15		1,000,000		1,035,000
Michaels Stores Inc.		10.000%	11/1/14		2,170,000		1,367,100
Michaels Stores Inc.		11.375%	11/1/16		1,230,000		581,175

							6,927,000

Textiles, Apparel and Luxury Goods	0.2%
Oxford Industries Inc.		8.875%	6/1/11		1,152,000		1,041,120


Thrifts and Mortgage Finance	0.7%
Countrywide Financial Corp.		1.252%	4/15/37		1,315,000		1,288,700	^D,G
Residential Capital LLC		8.500%	5/15/10		3,922,000		2,157,100	^A
Residential Capital LLC		9.625%	5/15/15		4,360,000		1,046,400	^A

							4,492,200

Tobacco	0.9%
Alliance One International Inc.		8.500%	5/15/12		2,190,000		2,025,750
Alliance One International Inc.		11.000%	5/15/12		2,950,000		2,891,000
Reynolds American Inc.		6.500%	7/15/10		1,330,000		1,382,830

							6,299,580

Trading Companies and Distributors	1.7%
Ashtead Capital Inc.		9.000%	8/15/16		3,451,000		2,967,860	^A
H&E Equipment Services Inc.		8.375%	7/15/16		4,540,000		3,359,600
Penhall International Corp.		12.000%	8/1/14		7,515,000		5,185,350	^A

							11,512,810

Transportation Infrastructure	0.8%
Hawker Beechcraft Acquisition Co.		8.875%	4/1/15		5,975,000		5,407,375	^B
Hawker Beechcraft Acquisition Co.		9.750%	4/1/17		305,000		272,975

							5,680,350

Wireless Telecommunication Services	1.2%
ALLTEL Communications Inc.		10.375%	12/1/17		2,570,000		2,929,800	^A,B
iPCS Inc.		4.926%	5/1/13		1,175,000		957,625	^D
Sprint Capital Corp.		8.375%	3/15/12		380,000		342,000

Semi-Annual Report to Shareholders


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE

Corporate Bonds and Notes—Continued

Wireless Telecommunication Services—Continued
Sprint Capital Corp.		6.875%	11/15/28	$	5,640,000	$	3,778,800

							8,008,225

Total Corporate Bonds and Notes (Cost—$698,929,636)							555,142,020
Mortgage-Backed Securities	0.3%

Fixed Rate Securities	N.M.
Ocwen Residential Mortgage Corp. 1998-R1		7.000%	10/25/40		40,760		897	^H


Indexed Securities^D	0.3%
Lehman XS Trust 2007-14H A22		3.607%	7/25/47		7,060,000		1,694,400


Variable Rate Securities^I	N.M.
BlackRock Capital Finance LP 1996-R1		9.586%	9/25/26		675,791		230,631

Total Mortgage-Backed Securities (Cost—$2,381,677)							1,925,928
Yankee Bonds^J	9.5%

Biotechnology	N.M.
FMC Finance III SA		6.875%	7/15/17		10,000		9,625


Chemicals	0.7%
Methanex Corp.		8.750%	8/15/12		2,507,000		2,582,210
Montell Finance Co. BV		8.100%	3/15/27		4,995,000		2,247,750	^A
Sensata Technologies BV		8.000%	5/1/14		430,000		363,350

							5,193,310

Commercial Banks	0.4%
ATF Capital BV		9.250%	2/21/14		1,105,000		817,700	^A
TuranAlem Finance BV		8.250%	1/22/37		1,720,000		963,200	^A
TuranAlem Finance BV		8.250%	1/22/37		1,585,000		887,600	^A

							2,668,500

Containers and Packaging	0.3%
Smurfit Capital Funding PLC		7.500%	11/20/25		2,225,000		1,846,750


Diversified Financial Services	0.7%
Basell AF SCA		8.375%	8/15/15		1,413,000		664,110	^A
Petroplus Finance Ltd.		6.750%	5/1/14		1,110,000		937,950	^A
Petroplus Finance Ltd.		7.000%	5/1/17		2,065,000		1,713,950	^A

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset High Yield Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE

Yankee Bonds—Continued

Diversified Financial Services—Continued
TNK-BP Finance SA		7.875%	3/13/18	$	1,904,000	$	1,361,360	^A

							4,677,370

Diversified Telecommunication Services	1.9%
Intelsat Bermuda Ltd.		9.500%	6/15/16		2,805,000		2,608,650	^A
Nordic Telephone Co. Holdings ApS		8.875%	5/1/16		4,305,000		3,917,550	^A
NTL Cable PLC		9.125%	8/15/16		6,680,000		5,594,500
Wind Acquisition Finance SA		10.750%	12/1/15		1,100,000		1,078,000	^A

							13,198,700

Energy Equipment and Services	0.3%
Compagnie Generale de Geophysique-Veritas		7.500%	5/15/15		1,950,000		1,862,250


Foreign Government	0.1%
Russian Federation		7.500%	3/31/30		865,106		885,652	^A


Media	0.5%
Sun Media Corp.		7.625%	2/15/13		3,880,000		3,569,600


Metals and Mining	0.6%
Novelis Inc.		7.250%	2/15/15		5,125,000		4,458,750


Oil, Gas and Consumable Fuels	1.0%
Corral Finans AB		7.791%	4/15/10		2,732,813		2,227,243	^A,B,D
OPTI Canada Inc.		7.875%	12/15/14		880,000		778,800
Teekay Shipping Corp.		8.875%	7/15/11		3,652,000		3,688,520

							6,694,563

Paper and Forest Products	1.4%
Abitibi-Consolidated Co. of Canada		15.500%	7/15/10		5,757,000		4,058,685	^A
Abitibi-Consolidated Co. of Canada		13.750%	4/1/11		5,860,000		5,830,700	^A

							9,889,385

Road and Rail	0.8%
Grupo Transportacion Ferroviaria Mexicana SA de CV		9.375%	5/1/12		2,120,000		2,162,400
Grupo Transportacion Ferroviaria Mexicana SA de CV		7.625%	12/1/13		1,915,000		1,828,825

Semi-Annual Report to Shareholders


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES			VALUE

Yankee Bonds—Continued

Road and Rail—Continued
Kansas City Southern de Mexico SA de CV		7.375%	6/1/14	$	1,380,000		$	1,317,900

								5,309,125

Semiconductors and Semiconductor Equipment	0.2%
NXP BV/NXP Funding LLC		5.541%	10/15/13		970,000			640,200	^D
NXP BV/NXP Funding LLC		7.875%	10/15/14		1,165,000			780,550

								1,420,750

Wireless Telecommunication Services	0.6%
True Move Co. Ltd.		10.750%	12/16/13		5,505,000			3,715,875	^A
True Move Co. Ltd.		10.750%	12/16/13		865,000			609,958	^A

								4,325,833

Total Yankee Bonds (Cost—$78,926,811)								66,010,163
Preferred Stocks	0.9%
Bank of America Corp.		7.250%			5,400	shs		4,525,200
Citigroup Inc.		6.500%			41,400			1,697,400
ION Media Networks Inc.		12.000%			7			2,800

Total Preferred Stocks (Cost—$7,578,029)								6,225,400
Loan Participations and Assignments^D	2.6%

Auto Components	0.5%
Allison Transmission Inc., Term Loan, Tranche B		5.22 to 5.570%	12/10/08	$	4,149,577			3,413,027


Containers and Packaging	0.4%
Berry Plastics Holding Corp., Term Loan		9.041%	10/7/08		4,795,052			2,637,278


Diversified Telecommunication Services	0.5%
Wind Acquisition Holdings Finance SA, PIK Loan		10.035%	10/20/08		4,203,374			3,698,969


Independent Power Producers and Energy Traders	0.2%
Dynegy Holdings Inc., Letter of Credit		5.210%	10/31/08		1,201,524			1,021,296
Dynegy Holdings Inc., Term Loan		5.210%	10/31/08		790,511			671,934

								1,693,230

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset High Yield Portfolio—Continued

% OF
NET ASSETS

RATE

MATURITY
DATE

PAR/
SHARES^†

VALUE

Loan Participations and Assignments—Continued

Media

0.3%

Newsday LLC, Term Loan

9.750%

1/15/09

2,000,000

1,900,000

Oil, Gas and Consumable Fuels

0.6%

Turbo Bet Ltd., Term Loan

14.500%

11/13/08

4,264,312

4,093,740

Paper and Forest Products

0.1%

Verso Paper Holdings LLC, Term Loan

10.012%

1/2/09

672,000

537,600

Total Loan Participations and Assignments
(Cost—$20,904,854)

17,973,844

Total Long-Term Securities
(Cost—$808,721,007)

647,277,355

Short-Term Securities

7.9%

Foreign Government Obligations

0.9%

Egypt Treasury Bills

0.000%

11/4/08

18,250,000

EGP

3,321,144

Egypt Treasury Bills

0.000%

11/11/08

17,725,000

EGP

3,221,570

6,542,714

Repurchase Agreement

7.0%

Goldman Sachs & Company
1.00%, dated 9/30/08, to be repurchased at $48,181,338 on 10/1/08 (Collateral: $38,090,000 Tennessee Valley Authority bond, 7.125%, due 5/1/30, value $49,136,100)

48,180,000

Total Short-Term Securities
(Cost—$54,700,005)

54,722,714

Total Investments (Cost — $863,421,012)^M

101.6%

702,000,069

Other Assets Less Liabilities

(1.6)%

(11,360,894

)

Net Assets

100.0%

690,639,175

N.M. Not Meaningful.

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

Semi-Annual Report to Shareholders

Credit Linked Security – The rates of interest earned on these securities are tied to the credit rating assigned by Standard & Poor’s Rating Service and/or Moody’s Investors Services.

Bond is in default as of September 30, 2008.

Convertible Security – Security may be converted into the issuer’s common stock.

Illiquid security valued at fair value under the procedures approved by the Board of Directors.

The coupon rates shown on variable rate securities are the rates at September 30, 2008. These rates vary with the weighted average coupon of the underlying loans.

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

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.

Bond is in default subsequent to September 30, 2008.


Gross unrealized appreciation	$	1,796,416
Gross unrealized depreciation		(163,217,359	)

Net unrealized depreciation	$	(161,420,943	)

†

Securities are denominated in U.S. Dollars, unless otherwise noted.

EGP—Egyptian Pound

See notes to financial statements.

Semi-Annual Report to Shareholders

Statement of Assets and Liabilities

Western Asset High Yield Portfolio

September 30, 2008 (Unaudited)


Assets:
Investment securities at market value (Cost—$808,721,007)			$	647,277,355
Short-term securities at value (Cost—$54,700,005)				54,722,714
Interest receivable				22,095,011
Receivable for securities sold				4,056,825
Receivable for fund shares sold				255,748
Restricted cash pledged as collateral for swaps				200,000

Total assets				728,607,653


Liabilities:
Cash overdraft	$	27,521,812
Payable for securities purchased		9,464,211
Swap contracts at value		441,156
Accrued management fee		332,923
Payable for fund shares repurchased		109,757
Accrued expenses		98,619

Total liabilities				37,968,478


Net Assets			$	690,639,175


Net assets consist of:
Accumulated paid-in-capital			$	872,037,617
Undistributed net investment income				18,806,732
Accumulated net realized loss on investments options and swaps				(38,643,075	)
Net unrealized depreciation on investments, swaps and foreign currency translations				(161,562,099	)


Net Assets			$	690,639,175


Net Asset Value Per Share:
Institutional Class (70,612,042 shares outstanding)				$8.26
Institutional Select Class (12,970,719 shares outstanding)				$8.26

See notes to financial statements.

Semi-Annual Report to Shareholders

Statement of Operations

Western Asset High Yield Portfolio

For the Six Months Ended September 30, 2008 (Unaudited)


Investment Income:
Interest	$	38,108,437
Dividends		298,125

Total income				$	38,406,562
Expenses:
Management fees		2,134,984
Audit and legal fees		60,708
Custodian fees		55,079
Directors’ fees and expenses		11,554
Registration fees		5,871
Reports to shareholders:
Institutional Class		738
Institutional Select Class		9
Transfer agent and shareholder servicing expense:
Institutional Class		8,070
Institutional Select Class		320
Other expenses		17,956

		2,295,289
Less: Compensating Balance Credits		(759	)

Net expenses					2,294,530

Net Investment Income					36,112,032
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) on:
Investments		(19,258,896	)
Options		137,750
Swaps		280,109

					(18,841,037	)
Change in unrealized appreciation/(depreciation) of:
Investments and swaps		(67,539,051	)
Assets and liabilities denominated in foreign currency		3,769

					(67,535,282	)

Net Realized and Unrealized Loss on Investments					(86,376,319	)

Change in Net Assets Resulting From Operations				$	(50,264,287	)

See notes to financial statements.

Semi-Annual Report to Shareholders

Statement of Changes in Net Assets

Western Asset High Yield Portfolio


	FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2008			FOR THE YEAR ENDED MARCH 31, 2008
Change in Net Assets:	(Unaudited)
Net investment income	$	36,112,032		$	75,936,400

Net realized loss		(18,841,037	)		(17,433,816	)

Change in unrealized appreciation/(depreciation)		(67,535,282	)		(113,737,089	)

Change in net assets resulting from operations		(50,264,287	)		(55,234,505	)

Distributions to shareholders from:
Net investment income:
Institutional Class		(36,733,092	)		(73,407,062	)
Institutional Select Class		—			N/A

Net realized gain on investments:
Institutional Class		—			(5,888,441	)
Institutional Select Class		—			N/A

Change in net assets from fund share transactions:
Institutional Class		(137,400,727	)		55,309,962
Institutional Select Class		114,934,383			N/A

Change in net assets		(109,463,723	)		(79,220,046	)

Net Assets:
Beginning of period		800,102,898			879,322,944


End of period	$	690,639,175		$	800,102,898


Undistributed net investment income	$	18,806,732		$	19,427,792

N/A—Not applicable.

See notes to financial statements.

Semi-Annual Report to Shareholders

Financial Highlights

Western Asset High Yield Portfolio

For a share of each class of capital stock outstanding:

Institutional Class:


	SIX MONTHS ENDED SEPTEMBER 30, 2008			YEARS ENDED MARCH 31,
	SIX MONTHS ENDED SEPTEMBER 30, 2008			2008			2007			2006			2005			2004
	(Unaudited)
Net asset value, beginning of period	$	9.30		$	10.75		$	10.34		$	10.49		$	10.28		$	9.56

Investment operations:
Net investment income		.43	^A		.83	^A		.80	^A		.76	^B		.61	^B		.78	^B
Net realized and unrealized gain/(loss)		(1.02	)		(1.41	)		.39			(.05	)		.17			.89

Total from investment operations		(.59	)		(.58	)		1.19			.71			.78			1.67

Distributions from:
Net investment income		(.45	)		(.80	)		(.78	)		(.73	)		(.57	)		(.95	)
Net realized gain on investments		—			(.07	)		—	^C		(.13	)		—			—

Total distributions		(.45	)		(.87	)		(.78	)		(.86	)		(.57	)		(.95	)

Net asset value, end of period	$	8.26		$	9.30		$	10.75		$	10.34		$	10.49		$	10.28

Total return		(6.86	)%^D		(5.88	)%		12.14	%		7.30	%		7.81	%		18.27	%

Ratios to Average Net Assets:^E
Total expenses		.59	%^F		.59	%		.61	%		.62	%		.62	%		.67	%
Expenses net of waivers, if any		.59	%^F		.59	%		.61	%		.62	%		.62	%		.58	%
Expenses net of all reductions		.59	%^F		.58	%		.61	%		.62	%		.62	%		.58	%
Net investment income		9.3	%^F		8.3	%		7.8	%		7.8	%		7.0	%		7.9	%

Supplemental Data:
Portfolio turnover rate		30.3	%^D		59.1	%		63.6	%		147.2	%		121.0	%		116.0	%
Net assets, end of period (in thousands)	$	583,500		$	800,103		$	879,323		$	596,918		$	414,417		$	189,458

Computed using average daily shares outstanding.

Computed using SEC method.

Amount less than $.01 per share.

Not annualized.

Annualized.

See notes to financial statements.

Semi-Annual Report to Shareholders

Financial Highlights

Western Asset High Yield Portfolio

For a share of each class of capital stock outstanding:

Institutional Select Class:


	PERIOD ENDED SEPTEMBER 30, 2008^G
	(Unaudited)
Net asset value, beginning of period	$	8.86

Investment operations:
Net investment income^C		.14
Net realized and unrealized loss		(.74	)

Total from investment operations		(.60	)

Net asset value, end of period	$	8.26

Total return		(6.77	)%^D

Ratios to Average Net Assets:^E
Total expenses		.57	%^F
Expenses net of waivers, if any		.57	%^F
Expenses net of all reductions		.57	%^F
Net investment income		10.0	%^F

Supplemental Data:
Portfolio turnover rate		30.3	%^D
Net assets, end of period (in thousands)	$	107,139

For the period August 4, 2008 (commencement of operations) to September 30, 2008.

See notes to financial statements.

Semi-Annual Report to Shareholders

Expense Example

Western Asset Inflation Indexed Plus Bond Portfolio

As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution fees on Financial Intermediary Class shares, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested on April 1, 2008, and held through September 30, 2008.

Actual Expenses

Hypothetical Example for Comparison Purposes


	Beginning Account Value 4/1/08		Ending Account Value 9/30/08		Expenses Paid^A During the Period 4/1/08 to 9/30/08
Institutional Class:
Actual	$	1,000.00	$	937.80	$	1.21
Hypothetical (5% return before expenses)		1,000.00		1,023.82		1.27
Financial Intermediary Class:
Actual	$	1,000.00	$	936.20	$	2.33
Hypothetical (5% return before expenses)		1,000.00		1,022.66		2.43

Thesecalculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratios of 0.25% and 0.48% for the Institutional and Financial Intermediary Class, respectively, multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (183), and divided by 365.

Semi-Annual Report to Shareholders

Performance Information

Western Asset Inflation Indexed Plus Bond Portfolio

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

Total return measures investment performance in terms of appreciation or depreciation in the 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. Returns (and the graph and table found below) do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Average annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results.

Bonds are subject to a variety of risks, including interest rate, credit and inflation risk.

Growth of a $1,000,000 Investment—Institutional Class

Since-inception indexreturns are for periods beginning February 28, 2001. Formerly: Lehman U.S. Treasury Inflation Notes Index. The name change is a result of Barclays’ purchase of Lehman Brothers in September 2008.

Semi-Annual Report to Shareholders

Growth of a $1,000,000 Investment—Financial Intermediary Class

Since-inception indexreturns are for periods beginning June 30, 2007. Formerly: Lehman U.S. Treasury Inflation Notes Index. The name change is a result of Barclays’ purchase of Lehman Brothers in September 2008.

Semi-Annual Report to Shareholders

Performance Information—Continued

Portfolio Composition (as of September 30, 2008)^C

Standard & Poor’s Debt Ratings^D

(as a percentage of the portfolio)

Maturity Schedule (as a percentage of the portfolio)

LOGO

Source:Standard & Poor's.

Preferred stocks do not have defined maturity dates.

Semi-Annual Report to Shareholders

Portfolio of Investments

Western Asset Inflation Indexed Plus Bond Portfolio

September 30, 2008 (Unaudited)


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES^†		VALUE

Long-Term Securities	100.3%

Corporate Bonds and Notes	2.5%

Consumer Finance	0.5%
SLM Corp.		6.302%	2/1/10	$	1,600,000	$	1,324,689	^A
SLM Corp.		5.375%	1/15/13		2,775,000		1,817,625	^B
SLM Corp.		5.375%	5/15/14		1,580,000		979,600	^B

							4,121,914

Diversified Financial Services	1.3%
Bank of America Corp.		8.000%	12/29/49		3,550,000		2,811,128	^C
J.P. Morgan and Co. Inc.		5.886%	2/15/12		2,690,000		2,689,785	^A
JPMorgan Chase and Co.		7.900%	12/31/49		4,140,000		3,485,383	^C
TNK-BP Finance SA		7.875%	3/13/18		2,350,000		1,645,000	^D

							10,631,296

Electric Utilities	0.4%
Energy Future Holdings Corp.		10.875%	11/1/17		20,000		18,050	^D
Energy Future Holdings Corp.		11.250%	11/1/17		3,830,000		3,236,350	^D,E

							3,254,400

Oil, Gas and Consumable Fuels	0.2%
The Williams Cos. Inc.		8.750%	3/15/32		1,900,000		1,948,184


Thrifts and Mortgage Finance	0.1%
Residential Capital LLC		9.625%	5/15/15		2,800,000		672,000	^D

Total Corporate Bonds and Notes (Cost—$25,910,074)							20,627,794
Asset-Backed Securities	0.2%

Fixed Rate Securities	0.1%
Bayview Financial Acquisition Trust 2007-A 1A1		6.129%	5/28/37		772,743		719,878


Indexed Securities^A	0.1%
Bear Stearns Asset Backed Securities Inc. 2003-ABF1		2.842%	2/25/34		181,278		143,679
Chase Funding Mortgage Loan Asset-Backed Certificates 2002-4		3.212%	10/25/32		122,923		112,016
Countrywide Asset-Backed Certificates 2002-1		3.032%	8/25/32		36,939		31,325
EMC Mortgage Loan Trust 2003-B		3.022%	11/25/41		411,241		381,121	^D

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Inflation Indexed Plus Bond Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES^†		VALUE

Asset-Backed Securities—Continued

Indexed Securities—Continued
GSRPM Mortgage Loan Trust 2003-2		3.172%	6/25/33	$	219,654	$	212,616
Residential Asset Mortgage Products Inc. 2003-RS2		3.152%	3/25/33		40,296		22,223

							902,980

Total Asset-Backed Securities (Cost—$1,747,210)							1,622,858
Mortgage-Backed Securities	0.1%

Indexed Securities^A	0.1%
Credit Suisse First Boston Mortgage Securities Corp. 2001-28		3.122%	11/25/31		591,614		532,208
Crusade Global Trust 2003-2		3.066%	9/18/34		571,365		541,257	^F
Sequoia Mortgage Trust 2004-4 A		3.142%	5/20/34		108,468		87,391

Total Mortgage-Backed Securities (Cost—$1,243,475)							1,160,856
U.S. Government and Agency Obligations	88.0%

Treasury Inflation-Protected Securities^G	88.0%
United States Treasury Inflation-Protected Security		0.875%	4/15/10		49,871,834		48,991,297
United States Treasury Inflation-Protected Security		3.500%	1/15/11		42,413,070		44,106,284
United States Treasury Inflation-Protected Security		2.375%	4/15/11		32,730,615		33,103,941	^B
United States Treasury Inflation-Protected Security		3.000%	7/15/12		40,535,854		42,192,108	^B
United States Treasury Inflation-Protected Security		1.875%	7/15/13		37,754,968		37,642,873	^B
United States Treasury Inflation-Protected Security		2.000%	1/15/14		33,588,573		33,520,354	^B
United States Treasury Inflation-Protected Security		1.625%	1/15/15		84,275,011		82,056,218
United States Treasury Inflation-Protected Security		1.875%	7/15/15		64,751,210		63,744,523	^B
United States Treasury Inflation-Protected Security		2.000%	1/15/16		61,752,184		61,004,427	^B
United States Treasury Inflation-Protected Security		2.625%	7/15/17		25,467,120		26,227,161	^B

Semi-Annual Report to Shareholders


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES^†		VALUE

U.S. Government and Agency Obligations—Continued

Treasury Inflation-Protected Securities—Continued
United States Treasury Inflation-Protected Security		1.625%	1/15/18	$	23,966,477	$	22,700,760	^B
United States Treasury Inflation-Protected Security		2.000%	1/15/26		100,911,024		92,136,508	^B
United States Treasury Inflation-Protected Security		1.750%	1/15/28		59,847,958		52,212,675	^B
United States Treasury Inflation-Protected Security		3.625%	4/15/28		40,778,903		46,914,863	^B
United States Treasury Inflation-Protected Security		3.875%	4/15/29		48,909,968		58,489,426	^B

Total U.S. Government and Agency Obligations (Cost—$771,345,202)							745,043,418
U.S. Government Agency Mortgage-Backed Securities	5.2%

Fixed Rate Securities	5.2%
Fannie Mae		5.000%	12/1/38		45,200,000		44,041,750	^H,N
Freddie Mac		6.000%	12/1/37		87,300		88,456	^N

Total U.S. Government Agency Mortgage-Backed Securities (Cost—$43,985,587)							44,130,206
Yankee Bonds^F	1.0%

Commercial Banks	0.4%
Glitnir Banki Hf		6.693%	6/15/16		1,760,000		931,726	^C,D^,M
Kaupthing Bank Hf		7.125%	5/19/16		2,940,000		1,790,125	^D^,M
RSHB Capital SA		6.299%	5/15/17		1,500,000		1,070,850	^D

							3,792,701

Foreign Government	0.4%
Russian Federation		7.500%	3/31/30		3,320,435		3,399,295	^C


Metals and Mining	0.2%
Vale Overseas Ltd.		6.875%	11/21/36		1,463,000		1,302,227

Total Yankee Bonds (Cost—$11,238,179)							8,494,223

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Inflation Indexed Plus Bond Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES^†			VALUE

Foreign Government Obligations	2.5%
Brazil Notas do Tesouro Nacional Series B		6.000%	5/15/17		3,575,000	BRL	$	2,820,877	^I
France Government Bond OAT		3.150%	7/25/32		9,554,644	EUR		15,409,610	^I
Kingdom of Sweden Inflation-Protected Notes		3.500%	12/1/28		14,480,000	SEK		3,147,124	^I

Total Foreign Government Obligations (Cost—$22,202,157)								21,377,611
Preferred Stocks	0.8%
Citigroup Inc.		8.125%			299,000	shs		4,933,500	^B
Fannie Mae		8.250%			346,900			756,242	^B,N
Freddie Mac		8.375%			418,300			681,829	^B,C,N

Total Preferred Stocks (Cost—$26,790,105)								6,371,571

Total Long-Term Securities (Cost—$904,461,989)								848,828,537
Investment of Collateral From Securities Lending	24.9%
State Street Navigator Securities Lending Prime Portfolio					210,877,064			210,877,064

Total Investment of Collateral From Securities Lending (Cost—$210,877,064)								210,877,064
Short-Term Securities	3.7%

U.S. Government and Agency Obligations	0.1%
Fannie Mae		0.000%	1/20/09	$	400,000			396,509	^J,N
Federal Home Loan Bank		0.000%	1/20/09		400,000			396,510	^J
Freddie Mac		0.000%	1/23/09		400,000			396,415	^J,N

								1,189,434

Repurchase Agreement	3.6%
Goldman Sachs & Company 1.00%, dated 9/30/08, to be repurchased at $30,439,846 on 10/1/08 (Collateral: $24,065,000 Tennessee Valley Authority, 7.125%, due 5/1/30, value $31,043,850)					30,439,000			30,439,000

Total Short-Term Securities (Cost—$31,630,561)								31,628,434
Total Investments (Cost—$1,146,969,614)^K	128.9%							1,091,334,035
Obligation to Return Collateral from Securities Lending	(24.9)%							(210,877,064	)
Other Assets Less Liabilities	(4.0)%							(33,938,340	)


Net Assets	100.0%						$	846,518,631

Semi-Annual Report to Shareholders


	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Options Written^L
Eurodollar Futures Call, Strike Price $97.50	October 2008	116	$	28,478
Eurodollar Futures Put, Strike Price $96.88	October 2008	116		(88,972	)
U.S. Treasury Note Futures Call, Strike Price $115.00	October 2008	172		104,577
U.S. Treasury Note Futures Put, Strike Price $112.00	October 2008	172		(99,891	)

			$	(55,808	)

All or a portion of this security is on loan.

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

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

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

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.


Gross unrealized appreciation	$	2,127,115
Gross unrealized depreciation		(57,762,694	)

Net unrealized depreciation	$	(55,635,579	)

Options are described in more detail in the notes to financial statements.

Bond is in default subsequent to September 30, 2008.

On September 7, 2008, the Federal Housing Finance Agency placed Fannie Mae and Freddie Mac into conservatorship.

^†

Securities are denominated in U.S. Dollars, unless otherwise noted.

BRL—Brazilian Real

EUR—Euro

SEK—Swedish Krona

See notes to financial statements.

Semi-Annual Report to Shareholders

Statement of Assets and Liabilities

Western Asset Inflation Indexed Plus Bond Portfolio

September 30, 2008 (Unaudited)


Assets:
Investment securities at market value (Cost—$1,115,339,053)			$	1,059,705,601	^A
Short-term securities at value (Cost—$31,630,561)				31,628,434
Foreign currency at value (Cost—$787,588)				704,006
Receivable for securities sold				10,623,344
Unrealized appreciation of forward foreign currency contracts				9,366,855
Restricted cash pledged for swaps				8,200,000
Interest receivable				5,978,099
Receivable for fund shares sold				984,072
Deposits with brokers for open futures contracts				722,580

Total assets				1,127,912,991


Liabilities:
Obligation to return collateral for securities loaned	$	210,877,064
Payable for securities purchased		54,520,938
Swap contracts at value		11,899,511
Unrealized depreciation of forward foreign currency contracts		2,303,379
Payable for fund shares repurchased		728,143
Options written (Proceeds—$282,867)		338,675
Income distribution payable		288,900
Accrued management fee		148,080
Cash overdraft		128,053
Accrued distribution fees		34
Accrued expenses		161,583

Total liabilities				281,394,360


Net Assets			$	846,518,631


Net assets consist of:
Accumulated paid-in-capital			$	907,278,072
Undistributed net investment income				3,923,445
Accumulated net realized loss on investments, options, futures, swaps and foreign currency transactions				(4,792,861	)
Net unrealized depreciation on investments, options, swaps and foreign currency translations				(59,890,025	)


Net Assets			$	846,518,631


Net Asset Value Per Share:
Institutional Class (86,836,039 shares outstanding)				$9.75
Financial Intermediary Class (16,671 shares outstanding)				$9.73

The market value of securities on loan is $208,540,911.

See notes to financial statements.

Semi-Annual Report to Shareholders

Statement of Operations

Western Asset Inflation Indexed Plus Bond Portfolio

For the Six Months Ended September 30, 2008 (Unaudited)


Investment Income:
Interest	$	39,115,574
Dividends		880,358
Income from securities lending		581,981

Total income				$	40,577,913
Expenses:
Management fees		879,528
Distribution and service fees:
Financial Intermediary Class		98
Audit and legal fees		57,346
Custodian fees		56,025
Directors’ fees and expenses		11,921
Registration fees		13,029
Reports to shareholders:
Institutional Class		6,465
Financial Intermediary Class		1
Transfer agent and shareholder servicing expense:
Institutional Class		98,426
Financial Intermediary Class		92
Other expenses		19,975

		1,142,906
Less: Fees waived		(59,193	)

Net expenses					1,083,713

Net Investment Income					39,494,200
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) on:
Investments		61,332
Options		281,293
Futures		411,442
Swaps		1,082,888
Foreign currency transactions		(3,638,191	)

					(1,801,236	)
Change in unrealized appreciation/(depreciation) of:
Investments, options, swaps and foreign currency translations		(94,259,305	)
Assets and liabilities denominated in foreign currency		(38,384	)

					(94,297,689	)

Net Realized and Unrealized Loss on Investments					(96,098,925	)

Change in Net Assets Resulting From Operations				$	(56,604,725	)

See notes to financial statements.

Semi-Annual Report to Shareholders

Statement of Changes in Net Assets

Western Asset Inflation Indexed Plus Bond Portfolio


	FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2008			FOR THE YEAR ENDED MARCH 31, 2008
Change in Net Assets:	(Unaudited)
Net investment income	$	39,494,200		$	42,360,024

Net realized gain/(loss)		(1,801,236	)		19,288,128

Change in unrealized appreciation/(depreciation)		(94,297,689	)		29,251,587

Change in net assets resulting from operations		(56,604,725	)		90,899,739

Distributions to shareholders from:
Net investment income:
Institutional Class		(39,345,086	)		(42,554,324	)
Financial Intermediary Class		(3,533	)		(1,115	)

Net realized gain on investments:
Institutional Class		(15,894,794	)		—
Financial Intermediary Class		(667	)		—

Change in net assets from fund share transactions:
Institutional Class		111,597,253			154,011,663
Financial Intermediary Class		139,813			37,906

Change in net assets		(111,739	)		202,393,869

Net Assets:
Beginning of period		846,630,370			644,236,501


End of period	$	846,518,631		$	846,630,370


Undistributed net investment income	$	3,923,445		$	3,777,864

See notes to financial statements.

Semi-Annual Report to Shareholders

Financial Highlights

Western Asset Inflation Indexed Plus Bond Portfolio

For a share of each class of capital stock outstanding:

Institutional Class:


	SIX MONTHS ENDED SEPTEMBER 30, 2008			YEARS ENDED MARCH 31,
	SIX MONTHS ENDED SEPTEMBER 30, 2008			2008			2007			2006			2005			2004
	(Unaudited)
Net asset value, beginning of period	$	11.08		$	10.43		$	10.25		$	10.74		$	11.24		$	10.96

Investment operations:
Net investment income		.47	^A		.61	^A		.39	^A		.54	^B		.42	^B		.37	^B
Net realized and unrealized gain/(loss)		(1.13	)		.67			.20			(.38	)		(.10	)		.71

Total from investment operations		(.66	)		1.28			.59			.16			.32			1.08

Distributions from:
Net investment income		(.47	)		(.63	)		(.41	)		(.56	)		(.42	)		(.37	)
Net realized gain on investments		(.20	)		—			—			(.09	)		(.40	)		(.43	)

Total distributions		(.67	)		(.63	)		(.41	)		(.65	)		(.82	)		(.80	)

Net asset value, end of period	$	9.75		$	11.08		$	10.43		$	10.25		$	10.74		$	11.24

Total return		(6.22	)%^C		12.77	%		5.89	%		1.44	%		3.27	%		10.33	%

Ratios to Average Net Assets:^D
Total expenses		.26	%^E		.27	%		.29	%		.27	%		.27	%		.27	%
Expenses net of waivers, if any		.25	%^E		.25	%		.25	%		.25	%		.25	%		.25	%
Expenses net of all reductions		.25	%^E		.25	%		.25	%		.25	%		.25	%		.25	%
Net investment income		9.0	%^E		5.8	%		3.8	%		5.0	%		3.8	%		3.4	%

Supplemental Data:
Portfolio turnover rate		36.2	%^C		141.7	%		96.4	%		177.1	%		255.5	%		281.8	%
Net assets, end of period (in thousands)	$	846,357		$	846,594		$	644,236		$	542,532		$	461,746		$	346,379

Computed using average daily shares outstanding.

Computed using SEC method.

Not annualized.

Annualized.

See notes to financial statements.

Semi-Annual Report to Shareholders

Financial Highlights—Continued

Western Asset Inflation Indexed Plus Bond Portfolio—Continued

Financial Intermediary Class:


	SIX MONTHS ENDED SEPTEMBER 30, 2008			PERIOD ENDED MARCH 31, 2008^E
	(Unaudited)
Net asset value, beginning of period	$	11.06		$	10.02

Investment operations:
Net investment income		.47	^A		.35	^A
Net realized and unrealized gain/(loss)		(1.15	)		1.06

Total from investment operations		(.68	)		1.41

Distributions from:
Net investment income		(.45	)		(.37	)
Net realized gain on investments		(.20	)		—

Total distributions		(.65	)		(.37	)

Net asset value, end of period	$	9.73		$	11.06

Total return		(6.38	)%^B		14.29	%^B

Ratios to Average Net Assets:^C
Total expenses		.73	%^D		.71	%^D
Expenses net of waivers, if any		.48	%^D		.48	%^D
Expenses net of all reductions		.48	%^D		.48	%^D
Net investment income		9.1	%^D		4.1	%^D

Supplemental Data:
Portfolio turnover rate		36.2	%^B		141.7	%^B
Net assets, end of period (in thousands)	$	162		$	36

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

See notes to financial statements.

Semi-Annual Report to Shareholders

Expense Example

Western Asset Intermediate Bond Portfolio

As a shareholder of the Fund, you incur ongoing costs, including management fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested on April 1, 2008, and held through September 30, 2008.

Actual Expenses

The first line in the table below provides information about actual account values and actual expenses for the Fund. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account if your shares were held through the entire period.

Hypothetical Example for Comparison Purposes

The second line in the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.


	Beginning Account Value 4/1/08		Ending Account Value 9/30/08		Expenses Paid^A During the Period 4/1/08 to 9/30/08
Institutional Class:
Actual	$	1,000.00	$	955.20	$	2.21
Hypothetical (5% return before expenses)		1,000.00		1,022.81		2.28

Thesecalculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio of 0.45% multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (183), and divided by 365.

Semi-Annual Report to Shareholders

Performance Information

Western Asset Intermediate Bond Portfolio

The graph compares the Fund’s total returns to that of an appropriate broad-based securities market index. The line illustrates the cumulative total return of an initial $1,000,000 investment for the periods indicated. The line for the 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.

Total return measures investment performance in terms of appreciation or depreciation in the 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. Returns (and the graph and table found below) do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Average annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results.

Bonds are subject to a variety of risks, including interest rate, credit, and inflation risk.

Growth of a $1,000,000 Investment—Institutional Class

Formerly: Lehman Brothers Intermediate U.S. Government/Credit Index. The name change is a result of Barclays’ purchase of Lehman Brothers in September 2008.

Semi-Annual Report to Shareholders

Portfolio Composition (as of September 30, 2008)^B

Standard & Poor’s Debt Ratings^C (as a percentage of the portfolio)

Maturity Schedule (as a percentage of the portfolio)

Source:Standard & Poor's.

Preferred stocks do not have defined maturity dates.

Semi-Annual Report to Shareholders

Portfolio of Investments

Western Asset Intermediate Bond Portfolio

September 30, 2008 (Unaudited)


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE

Long-Term Securities	79.7%

Corporate Bonds and Notes	27.9%

Aerospace and Defense	0.2%
United Technologies Corp.		6.350%	3/1/11	$	1,037,000	$	1,097,225


Airlines	0.5%
Continental Airlines Inc.		6.545%	2/2/19		965,547		820,716
Delta Air Lines Inc.		6.619%	9/18/12		1,165,229		1,106,967
US Airways Pass-Through Trust		6.850%	1/30/18		1,422,298		1,237,399

							3,165,082

Automobiles	0.5%
DaimlerChrysler NA Holding Corp.		6.500%	11/15/13		2,390,000		2,332,358
Ford Motor Co.		7.450%	7/16/31		1,159,000		498,370	^A
General Motors Corp.		8.375%	7/15/33		1,198,000		479,200	^A

							3,309,928

Capital Markets	2.3%
Goldman Sachs Capital II		5.793%	12/29/49		6,510,000		2,859,908	^B
Goldman Sachs Capital III		3.581%	9/29/49		2,590,000		915,228	^C
Lehman Brothers Holdings Capital Trust VII		5.857%	12/31/49		6,200,000		620	^B,D
Lehman Brothers Holdings E-Capital Trust I		3.589%	8/19/65		360,000		36	^C,D
Lehman Brothers Holdings Inc.		5.625%	1/24/13		600,000		75,000	^D
Lehman Brothers Holdings Inc.		6.500%	7/19/17		30,000		38	^D
Merrill Lynch and Co. Inc.		3.014%	2/5/10		480,000		455,229	^C
Merrill Lynch and Co. Inc.		5.700%	5/2/17		2,500,000		2,046,288
Merrill Lynch and Co. Inc.		6.875%	4/25/18		1,420,000		1,256,345
Morgan Stanley		5.550%	4/27/17		2,340,000		1,450,636
The Bear Stearns Cos. Inc.		6.400%	10/2/17		3,590,000		3,352,690
The Bear Stearns Cos. Inc.		7.250%	2/1/18		1,840,000		1,770,770

							14,182,788

Chemicals	0.9%
The Dow Chemical Co.		6.000%	10/1/12		4,850,000		4,904,752
The Dow Chemical Co.		5.700%	5/15/18		540,000		497,440

							5,402,192

Commercial Banks	1.3%
Comerica Capital Trust II		6.576%	2/20/37		960,000		441,003	^B
SunTrust Capital VIII		6.100%	12/15/36		550,000		338,960	^B
Wachovia Capital Trust III		5.800%	3/15/42		8,668,000		3,640,560	^B
Wells Fargo Capital X		5.950%	12/15/36		4,310,000		3,552,892

							7,973,415

Semi-Annual Report to Shareholders


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE

Corporate Bonds and Notes—Continued

Consumer Finance	2.7%
American Express Co.		6.800%	9/1/66	$	6,590,000	$	5,633,033	^B
GMAC LLC		6.750%	12/1/14		1,556,000		597,215
Nelnet Inc.		7.400%	9/29/36		1,850,000		1,249,434	^B
SLM Corp.		8.450%	6/15/18		3,700,000		2,516,000
Toyota Motor Credit Corp.		2.060%	8/5/09		7,000,000		6,997,074	^C

							16,992,756

Diversified Financial Services	3.0%
AGFC Capital Trust I		6.000%	1/15/67		4,380,000		1,176,503	^B,E
BAC Capital Trust XIV		5.630%	12/31/49		50,000		25,874	^B
Bank of America Corp.		8.000%	12/29/49		1,420,000		1,124,451	^B
Capmark Financial Group Inc.		5.875%	5/10/12		2,500,000		1,246,235	^F
General Electric Capital Corp.		5.625%	5/1/18		2,000,000		1,690,552
General Electric Capital Corp.		6.375%	11/15/67		2,855,000		2,310,186	^B
Glen Meadow Pass-Through Certificates		6.505%	2/12/67		3,260,000		2,559,100	^B,E
ILFC E-Capital Trust I		5.900%	12/21/65		250,000		75,363	^B,E
JPMorgan Chase Capital XXII		6.450%	2/2/37		2,600,000		1,883,812	^B
Kaupthing Bank Hf		7.625%	2/28/15		1,590,000		1,488,240	^E,G^,^R
Private Export Funding Corp.		3.550%	4/15/13		1,640,000		1,593,275
TNK-BP Finance SA		6.125%	3/20/12		210,000		165,900	^E
TNK-BP Finance SA		7.500%	3/13/13		720,000		568,800	^E
ZFS Finance USA Trust II		6.450%	12/15/65		2,060,000		1,483,214	^B,E
ZFS Finance USA Trust III		3.969%	12/15/65		1,570,000		1,411,226	^C,E

							18,802,731

Diversified Telecommunication Services	1.2%
Embarq Corp.		7.082%	6/1/16		1,880,000		1,523,627
Qwest Corp.		8.875%	3/15/12		1,510,000		1,479,800
Verizon Global Funding Corp.		7.250%	12/1/10		4,051,000		4,215,430

							7,218,857

Electric Utilities	0.7%
Duke Energy Corp.		6.250%	1/15/12		1,078,000		1,109,823
Duke Energy Corp.		5.625%	11/30/12		729,000		738,331	^A
Exelon Corp.		6.750%	5/1/11		2,269,000		2,286,063
FirstEnergy Corp.		7.375%	11/15/31		140,000		130,164
Pacific Gas and Electric Co.		4.800%	3/1/14		70,000		65,932

							4,330,313

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Bond Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE

Corporate Bonds and Notes—Continued

Food and Staples Retailing	0.5%
Safeway Inc.		6.500%	3/1/11	$	760,000	$	783,127
The Kroger Co.		6.200%	6/15/12		883,000		891,651
Wal-Mart Stores Inc.		4.250%	4/15/13		930,000		912,797
Wal-Mart Stores Inc.		5.800%	2/15/18		360,000		351,688

							2,939,263

Health Care Equipment and Supplies	0.3%
Baxter International Inc.		5.900%	9/1/16		500,000		501,889
Hospira Inc.		5.550%	3/30/12		1,700,000		1,699,065

							2,200,954

Health Care Providers and Services	0.8%
HCA Inc.		8.750%	9/1/10		822,000		809,670
Quest Diagnostics Inc.		7.500%	7/12/11		2,220,000		2,358,071
Universal Health Services Inc.		6.750%	11/15/11		1,720,000		1,820,661
WellPoint Inc.		5.875%	6/15/17		100,000		92,565

							5,080,967

Independent Power Producers and Energy Traders	0.3%
TXU Corp.		5.550%	11/15/14		2,480,000		1,850,717


Insurance	1.4%
Allstate Life Global Funding Trust		5.375%	4/30/13		1,900,000		1,834,154
American International Group Inc.		5.850%	1/16/18		250,000		125,487
American International Group Inc.		8.250%	8/15/18		500,000		290,486	^E
Genworth Life Insurance Co.		5.875%	5/3/13		1,520,000		1,405,681	^E
MetLife Capital Trust IV		7.875%	12/15/37		3,100,000		2,124,523	^B,E
MetLife Inc.		6.400%	12/15/36		70,000		43,640	^B
Metropolitan Life Global Funding I		5.125%	4/10/13		1,190,000		1,156,056	^E
The Travelers Cos. Inc.		6.250%	3/15/37		2,370,000		1,822,848	^B

							8,802,875

Media	1.0%
Comcast Corp.		6.500%	1/15/17		3,400,000		3,195,503
News America Inc.		6.650%	11/15/37		70,000		58,711
Time Warner Inc.		5.500%	11/15/11		70,000		67,201
Time Warner Inc.		6.875%	5/1/12		1,288,000		1,277,047
Turner Broadcasting System Inc.		8.375%	7/1/13		1,483,000		1,530,988
Viacom Inc.		5.750%	4/30/11		410,000		398,311

							6,527,761

Semi-Annual Report to Shareholders


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE

Corporate Bonds and Notes—Continued

Metals and Mining	0.2%
Alcoa Inc.		6.000%	7/15/13	$	1,230,000	$	1,206,890


Multi-Utilities	0.4%
Dominion Resources Inc.		4.750%	12/15/10		50,000		49,755
Dominion Resources Inc.		5.700%	9/17/12		1,596,000		1,580,631
MidAmerican Energy Holdings Co.		5.875%	10/1/12		827,000		819,739

							2,450,125

Multiline Retail	0.4%
Federated Retail Holdings Inc.		5.350%	3/15/12		1,050,000		966,935
JC Penney Corp. Inc.		5.750%	2/15/18		610,000		512,473
May Department Stores Co.		5.750%	7/15/14		1,470,000		1,275,488

							2,754,896

Office Electronics	0.3%
Xerox Corp.		5.500%	5/15/12		2,240,000		2,135,706


Oil, Gas and Consumable Fuels	5.0%
Anadarko Petroleum Corp.		5.950%	9/15/16		3,200,000		2,941,168
ConocoPhillips		5.200%	5/15/18		2,450,000		2,286,090
Hess Corp.		6.650%	8/15/11		5,468,000		5,467,913
KazMunaiGaz Exploration Production—GDR		8.375%	7/2/13		1,720,000		1,479,200	^E
Kinder Morgan Energy Partners LP		6.000%	2/1/17		3,700,000		3,353,965	^A
Occidental Petroleum Corp.		6.750%	1/15/12		1,310,000		1,412,139
Pemex Project Funding Master Trust		5.750%	3/1/18		190,000		179,797	^E
Sonat Inc.		7.625%	7/15/11		3,954,000		4,001,586
The Williams Cos. Inc.		7.125%	9/1/11		600,000		591,000
The Williams Cos. Inc.		8.125%	3/15/12		1,540,000		1,555,893	^A
The Williams Cos. Inc.		7.875%	9/1/21		720,000		720,000
The Williams Cos. Inc.		7.500%	1/15/31		310,000		282,094
The Williams Cos. Inc.		7.750%	6/15/31		750,000		700,927
The Williams Cos. Inc.		8.750%	3/15/32		2,040,000		2,091,734
XTO Energy Inc.		7.500%	4/15/12		859,000		899,608
XTO Energy Inc.		6.250%	4/15/13		1,645,000		1,646,232
XTO Energy Inc.		5.750%	12/15/13		200,000		192,004
XTO Energy Inc.		5.650%	4/1/16		1,682,000		1,571,656

							31,373,006

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Bond Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE

Corporate Bonds and Notes—Continued

Paper and Forest Products	0.3%
Willamette Industries Inc.		7.125%	7/22/13	$	1,839,000	$	1,879,377


Pharmaceuticals	0.3%
GlaxoSmithKline Capital Inc.		5.650%	5/15/18		1,690,000		1,604,523


Real Estate Investment Trusts (REITs)	0.4%
iStar Financial Inc.		5.500%	6/15/12		3,980,000		2,029,800
iStar Financial Inc.		5.950%	10/15/13		1,400,000		728,000

							2,757,800

Thrifts and Mortgage Finance	1.6%
Countrywide Financial Corp.		3.418%	3/24/09		1,170,000		1,142,051	^A,C
Countrywide Financial Corp.		5.800%	6/7/12		4,400,000		3,716,944
Residential Capital LLC		6.111%	11/21/08		5,130,000		4,360,500	^C
Residential Capital LLC		5.889%	4/17/09		1,300,000		598,000	^C
Washington Mutual Inc.		4.625%	4/1/14		1,710,000		282,150	^D
Washington Mutual Inc.		7.250%	11/1/17		1,110,000		183,150	^A,D

							10,282,795

Tobacco	0.5%
Philip Morris International Inc.		5.650%	5/16/18		3,300,000		3,050,302


Wireless Telecommunication Services	0.9%
New Cingular Wireless Services Inc.		8.125%	5/1/12		3,000,000		3,199,740
Sprint Capital Corp.		8.375%	3/15/12		2,669,000		2,402,100
Vodafone Group PLC		5.350%	2/27/12		70,000		68,770

							5,670,610

Total Corporate Bonds and Notes (Cost—$219,833,123)							175,043,854
Asset-Backed Securities	2.2%

Fixed Rate Securities	0.2%
ABFS Mortgage Loan Trust 2002-3		4.263%	9/15/33		37,060		36,084
Conseco Finance Securitizations Corp. 2000-4		8.310%	5/1/32		579,085		436,998
Green Tree Financial Corp. 1994-6		8.900%	1/15/20		279,833		280,500
UCFC Home Equity Loan 1998-D		6.905%	4/15/30		618,201		582,553

							1,336,135

Semi-Annual Report to Shareholders


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE

Asset-Backed Securities—Continued

Indexed Securities^C	1.8%
AFC Home Equity Loan Trust 2003-3		3.557%	10/25/30	$	706,174	$	400,522	^E
Bear Stearns Asset Backed Securities Trust 2007-HE6 1A1		4.457%	6/25/37		2,458,364		2,119,110
Countrywide Asset-Backed Certificates 2002-BC1		3.867%	4/25/32		340,687		252,681
Countrywide Asset-Backed Certificates 2005-6 M1		3.697%	12/25/35		1,950,000		1,503,086
Indymac Home Equity Loan Asset-Backed Trust 2001-A		3.467%	3/25/31		218,691		189,187
Long Beach Mortgage Loan Trust 2005-WL3 2A2A		3.347%	11/25/35		439,010		435,257
MSDWCC Heloc Trust 2003-1		3.477%	11/25/15		527,287		451,975
Nelnet Student Loan Trust 2008-4 A4		4.280%	4/25/24		1,140,000		1,083,713
Washington Mutual Master Note Trust 2006-A3A A3		2.518%	9/16/13		5,180,000		4,629,077	^E

							11,064,608

Variable Rate Securities^H	0.2%
Green Tree Financial Corp. 2008-A2		1.000%	3/1/38		2,170,000		1,586,812

Total Asset-Backed Securities (Cost—$15,238,394)							13,987,555
Mortgage-Backed Securities	7.2%

Fixed Rate Securities	2.0%
CS First Boston Mortgage Securities Corp. 2005-9 3A1		6.000%	10/25/35		1,825,999		1,555,624
Fannie Mae Grantor Trust 2002-T3		5.763%	12/25/11		3,663,449		3,760,357
Prime Mortgage Trust 2006-DR1 2A2		6.000%	11/25/36		1,822,327		1,535,128	^E
Residential Asset Securitization Trust 2003-A14		4.750%	2/25/19		2,597,328		1,978,792
Virginia Housing Development Mortgage Bonds Pass-Through Certificates 2006		6.000%	6/25/34		3,929,177		3,929,492

							12,759,393

Indexed Securities^C	3.3%
Bayview Commercial Asset Trust 2005-1A A2		3.557%	4/25/35		1,380,264		1,157,182	^E
Bear Stearns Structured Products Inc. 2007-R11 A1A		3.807%	9/27/37		1,828,578		1,824,114	^E

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Bond Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE

Asset-Backed Securities—Continued

Indexed Securities—Continued
Citigroup Mortgage Loan Trust Inc. 2005-11 A3		4.900%	12/25/35	$	2,593,358	$	2,265,373
Countrywide Home Loans 2003-49		3.697%	10/25/33		467,233		456,606
First Horizon Mortgage Pass-Through Trust 2003-AR2 2A1		4.428%	7/25/33		1,192,159		1,171,445
GMAC Mortgage Corp. Loan Trust 2005-AR5 3A1		5.068%	9/19/35		1,288,364		1,194,802
IndyMac Inda Mortgage Loan Trust 2007-AR7 1A1		6.250%	11/25/37		2,983,859		2,470,037
MASTR Adjustable Rate Mortgages Trust 2004-13		3.788%	11/21/34		6,815,190		5,523,603
Structured Asset Mortgage Investments Inc. 2004-AR8 A1		3.370%	5/19/35		1,709,985		1,173,853
Wells Fargo Mortgage-Backed Securities Trust 2004-S		3.621%	9/25/34		3,525,000		3,490,107

							20,727,122

Variable Rate Securities^H	1.9%
Banc of America Funding Corp. 2005-B		5.093%	4/20/35		1,764,579		1,465,895
Bear Stearns Alt-A Trust 2005-2		4.695%	4/25/35		1,398,625		1,184,301
Citigroup Mortgage Loan Trust Inc. 2005-8 1A1A		5.302%	10/25/35		1,565,188		1,369,023
Countrywide Home Loans 2004-20		5.459%	9/25/34		476,049		368,612
Merrill Lynch Mortgage Investors Inc. 2005-A2		4.487%	2/25/35		1,415,095		1,145,287
Merrill Lynch Mortgage Investors Trust 2004-A1 2A1		4.659%	2/25/34		2,004,974		1,860,611
MLCC Mortgage Investors Inc. 2005-1 2A1		4.952%	4/25/35		650,727		585,208
MLCC Mortgage Investors Inc. 2005-1 2A2		4.952%	4/25/35		2,025,023		1,748,361
SACO I Trust 2007-VA1 A		8.964%	6/25/21		1,781,373		1,839,721	^E
WaMu Mortgage Pass-Through Certificates 2004-AR11		4.548%	10/25/34		305,073		274,585

							11,841,604

Total Mortgage-Backed Securities (Cost—$49,746,940)							45,328,119
U.S. Government and Agency Obligations	14.1%

Fixed Rate Securities	12.3%
Fannie Mae		7.250%	1/15/10		162,000		170,289	^A,S
Farmer Mac		4.875%	4/4/12		2,561,000		2,646,235

Semi-Annual Report to Shareholders


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE

U.S. Government and Agency Obligations—Continued

Fixed Rate Securities—Continued
Farmer Mac		5.125%	4/19/17	$	2,800,000	$	2,860,681	^E
Federal Home Loan Bank		3.625%	9/16/11		10,930,000		10,932,044	^A
Federal Home Loan Bank		5.500%	7/15/36		130,000		136,674
Freddie Mac		3.750%	6/28/13		17,680,000		17,542,627	^A,S
Freddie Mac		5.600%	10/17/13		400,000		400,521	^S
Tennessee Valley Authority		5.625%	1/18/11		373,000		391,937
Tennessee Valley Authority		6.790%	5/23/12		2,747,000		3,015,096
Tennessee Valley Authority		5.980%	4/1/36		70,000		78,516
United States Treasury Bonds		8.875%	8/15/17		10,000		13,690
United States Treasury Notes		4.000%	8/31/09		6,900,000		7,029,913	^A
United States Treasury Notes		4.625%	10/31/11		9,850,000		10,506,414	^A
United States Treasury Notes		4.625%	7/31/12		8,690,000		9,310,518	^A
United States Treasury Notes		4.125%	8/31/12		5,980,000		6,302,824	^A
United States Treasury Notes		4.250%	11/15/17		5,880,000		6,094,067	^A

							77,432,046

Treasury Inflation-Protected Securities^I	1.8%
United States Treasury Inflation-Protected Security		2.000%	1/15/14		1,064,075		1,061,913	^A
United States Treasury Inflation-Protected Security		1.875%	7/15/15		1,394,116		1,372,442	^A
United States Treasury Inflation-Protected Security		2.000%	1/15/16		1,557,932		1,539,067	^A
United States Treasury Inflation-Protected Security		2.500%	7/15/16		794,970		813,665	^A
United States Treasury Inflation-Protected Security		2.625%	7/15/17		1,825,144		1,879,613	^A
United States Treasury Inflation-Protected Security		2.375%	1/15/25		1,603,087		1,553,241	^A
United States Treasury Inflation-Protected Security		2.000%	1/15/26		1,020,523		931,786	^A
United States Treasury Inflation-Protected Security		2.375%	1/15/27		65,433		63,281	^A
United States Treasury Inflation-Protected Security		1.750%	1/15/28		2,036,746		1,776,902	^A

							10,991,910

Total U.S. Government and Agency Obligations (Cost—$88,035,674)							88,423,956

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Bond Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE

U.S. Government Agency Mortgage-Backed Securities	18.9%

Fixed Rate Securities	16.3%
Fannie Mae		6.500%	6/1/14 to 9/1/37	$	1,577,324	$	1,620,276	^S
Fannie Mae		8.000%	9/1/15		31,041		32,443	^S
Fannie Mae		9.500%	4/15/21		28,534		31,659	^S
Fannie Mae		5.000%	6/1/35 to 2/1/36		12,193,391		11,903,290	^S
Fannie Mae		6.000%	10/1/36 to 10/1/37		18,632,289		18,893,348	^S
Fannie Mae		5.500%	7/1/38		3,886,132		3,878,293	^S
Fannie Mae		5.000%	12/1/38		30,370,000		29,591,769	^J,S
Fannie Mae		5.500%	12/1/38		1,500,000		1,495,782	^J,S
Freddie Mac		6.500%	6/1/13 to 11/1/15		39,611		41,248	^S
Freddie Mac		7.500%	4/1/17		1,292		1,339	^S
Freddie Mac		9.300%	4/15/19		37,921		40,292	^S
Freddie Mac		5.000%	11/1/35		432,936		422,400	^S
Freddie Mac		5.500%	7/1/38		25,099,998		24,986,620	^S
Freddie Mac		5.000%	12/1/38		491,000		478,264	^J,S
Freddie Mac		5.500%	12/1/38		900,000		895,219	^J,S
Freddie Mac		6.000%	12/1/38		100,000		101,219	^J,S
Government National Mortgage Association		5.000%	12/1/38		8,100,000		7,943,062	^J
Government National Mortgage Association		6.000%	12/1/38		100,000		101,469	^J

							102,457,992

Indexed Securities^C	2.6%
Fannie Mae		5.200%	3/1/18		17,399		17,330	^S
Fannie Mae		4.346%	11/1/34		444,027		444,651	^S
Fannie Mae		4.223%	12/1/34		657,266		660,356	^S
Fannie Mae		4.852%	1/1/35		2,952,177		3,002,169	^S
Fannie Mae		3.790%	3/1/35		807,044		807,854	^S
Fannie Mae		4.756%	4/1/35		765,198		768,859	^S
Fannie Mae		5.745%	9/1/37		5,370,402		5,468,084	^S
Freddie Mac		5.644%	1/1/19		7,459		7,537	^S
Freddie Mac		4.345%	12/1/34		248,085		249,030	^S
Freddie Mac		4.467%	12/1/34		1,203,846		1,216,595	^S
Freddie Mac		4.102%	1/1/35		246,239		248,390	^S
Freddie Mac		4.138%	1/1/35		399,739		401,872	^S
Freddie Mac		4.682%	7/1/35		2,854,424		2,865,325	^S

							16,158,052

Semi-Annual Report to Shareholders


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE

U.S. Government Agency Mortgage-Backed Securities—Continued

Stripped Securities	N.M.
Fannie Mae		0.000%	5/25/22	$	4,358	$	3,810	^K2,M,S
Freddie Mac		10.000%	3/1/21		3,849		860	^K1,S

							4,670

Total U.S. Government Agency Mortgage-Backed Securities (Cost—$118,221,696)							118,620,714
Yankee Bonds^L	9.3%

Aerospace and Defense	0.2%
Systems 2001 Asset Trust		6.664%	9/15/13		984,148		1,028,366	^E


Commercial Banks	4.1%
Barclays Bank PLC		7.434%	9/29/49		390,000		317,583	^B,E
Barclays Bank PLC		7.700%	12/31/49		900,000		790,893	^B,E
Glitnir Banki Hf		3.226%	1/21/11		4,430,000		3,370,836	^C,E^,R
Glitnir Banki Hf		3.625%	7/28/11		120,000		94,846	^C,E^,R
Glitnir Banki Hf		3.255%	1/18/12		100,000		76,114	^C,E^,R
Glitnir Banki Hf		6.375%	9/25/12		1,980,000		1,500,131	^E^,R
Glitnir Banki Hf		6.693%	6/15/16		910,000		481,745	^B,E^,R
HBOS Treasury Services PLC		4.000%	9/15/09		1,240,000		1,221,177	^E
Kaupthing Bank Hf		5.750%	10/4/11		4,090,000		3,251,018	^E^,R
Landsbanki Islands Hf		6.100%	8/25/11		2,330,000		1,974,861	^E^,R
Landsbanki Islands Hf		7.431%	12/31/49		1,830,000		1,011,469	^A,B,E^,R
Resona Preferred Global Securities		7.191%	12/29/49		4,640,000		3,444,694	^B,E
Royal Bank of Scotland Group PLC		9.118%	3/31/49		2,431,000		2,357,292
RSHB Capital SA		6.299%	5/15/17		270,000		192,753	^E
Santander Issuances		5.805%	6/20/16		1,030,000		988,285	^B,E
Shinsei Finance Cayman Ltd.		6.418%	1/29/49		4,565,000		1,914,141	^B,E
TuranAlem Finance BV		4.166%	1/22/09		970,000		873,000	^C,E
VTB Capital SA for Vneshtorgbank		4.491%	11/2/09		1,850,000		1,665,000	^C,E

							25,525,838

Diversified Financial Services	1.2%
Aiful Corp.		5.000%	8/10/10		3,491,000		2,711,809	^E
MUFG Capital Finance 1 Ltd.		6.346%	7/29/49		3,402,000		2,574,664	^B
TNK-BP Finance SA		6.875%	7/18/11		2,783,000		2,393,380	^E

							7,679,853

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Bond Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES			VALUE

Yankee Bonds—Continued

Diversified Telecommunication Services	1.9%
Deutsche Telekom International Finance BV		8.000%	6/15/10	$	70,000		$	72,666	^F
Deutsche Telekom International Finance BV		5.750%	3/23/16		1,800,000			1,605,654	^A
France Telecom SA		7.750%	3/1/11		2,428,000			2,548,162
Telecom Italia Capital SpA		5.250%	10/1/15		1,400,000			1,165,360
Telecom Italia Capital SpA		6.999%	6/4/18		2,000,000			1,795,300
Telefonica Emisiones S.A.U.		3.121%	2/4/13		5,230,000			4,889,108	^C

								12,076,250

Energy Equipment and Services	0.3%
Transocean Inc.		5.250%	3/15/13		1,670,000			1,622,538


Foreign Government	N.M.
Russian Federation		7.500%	3/31/30		17,457			17,872	^E


Industrial Conglomerates	0.4%
Tyco International Group SA		6.000%	11/15/13		2,358,000			2,310,581


Insurance	0.2%
Merna Reinsurance Ltd.		5.512%	6/30/12		1,300,000			1,243,060	^C,E


Metals and Mining	0.5%
Vale Overseas Ltd.		6.250%	1/23/17		3,560,000			3,326,606


Oil, Gas and Consumable Fuels	0.4%
Anadarko Finance Co.		6.750%	5/1/11		720,000			736,844
Gazprom		6.212%	11/22/16		1,710,000			1,352,199	^E
Gazprom		6.510%	3/7/22		940,000			676,800	^E

								2,765,843

Wireless Telecommunication Services	0.1%
America Movil SA de CV		5.625%	11/15/17		680,000			637,055

Total Yankee Bonds (Cost—$70,624,913)								58,233,862
Preferred Stocks	0.1%
Fannie Mae		8.250%			61,925	shs		134,997	^A,S
Freddie Mac		8.375%			84,900			138,387	^A,S

Semi-Annual Report to Shareholders


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES			VALUE

Preferred Stocks—Continued
Home Ownership Funding Corp.		1.000%			600	shs	$	94,967	^E
Home Ownership Funding Corp. II		1.000%			1,800			282,695	^E

Total Preferred Stocks (Cost—$5,612,735)								651,046

Total Long-Term Securities (Cost—$567,313,475)								500,289,106
Investment of Collateral From Securities Lending	17.7%
State Street Navigator Securities Lending Prime Portfolio					110,606,736			110,606,736

Total Investment of Collateral From Securities Lending (Cost—$110,606,736)								110,606,736
Short-Term Securities	23.2%

U.S. Government and Agency Obligations	16.9%
Fannie Mae		0.000%	12/15/08	$	3,778,000			3,758,324	^M,N,S
Fannie Mae		0.000%	1/20/09		38,600,000			38,263,177	^A,M,S
Federal Home Loan Bank		0.000%	1/2/09		20,700,000			20,548,662	^M
Federal Home Loan Bank		0.000%	1/15/09		43,600,000			43,236,681	^M
Freddie Mac		0.000%	12/15/08		380,000			378,021	^M,N,S

								106,184,865

Options Purchased^O	0.1%
Barclays Swaption Put, December 2008, Strike Price $1.40					5,100,000	^P		108,120
Barclays Swaption Put, December 2008, Strike Price $1.45					4,100,000	^P		82,000
Credit Suisse First Boston Swaption Put, December 2008, Strike Price $1.55					4,400,000	^P		78,760
JP Morgan Swaption Put, December 2008, Strike Price $1.55					11,300,000	^P		202,270

								471,150

Repurchase Agreements	6.2%
Goldman, Sachs & Company 1.00%, dated 9/30/08, to be repurchased at $34,027,945 on 10/1/08 (Collateral: $26,900,000 Tennessee Valley Authority, 7.125% due 5/1/30, value $34,701,000)					34,027,000			34,027,000

Semi-Annual Report to Shareholders

Portfolio of Investments—Continued

Western Asset Intermediate Bond Portfolio—Continued


	% OF NET ASSETS	RATE	MATURITY DATE	PAR/ SHARES		VALUE

Short-Term Securities—Continued

Repurchase Agreements—Continued
Morgan Stanley 1.15%, dated 9/30/08, to be repurchased at $4,526,145 on 10/1/08 (Collateral: $4,625,000 Freddie Mac Notes, 3.375% due 3/5/10, value $4,616,518)				$	4,526,000	$	4,526,000

							38,553,000

Total Short-Term Securities (Cost—$145,297,683)							145,209,015
Total Investments (Cost—$823,217,894)^Q	120.6%						756,104,857
Obligation to Return Collateral From Securities Lending	(17.7)%						(110,606,736	)
Other Assets Less Liabilities	(2.9)%						(18,319,816	)


Net Assets	100.0%					$	627,178,305


	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Futures Contracts Purchased^O
Eurodollar Futures	December 2008	92	$	(115,610	)
Eurodollar Futures	March 2009	1,264		189,767
Eurodollar Futures	June 2009	16		34,145
Eurodollar Futures	September 2009	16		36,145
U.S. Treasury Note Futures	December 2008	560		(538,605	)
U.S. Treasury Note Futures	December 2008	474		230,642

			$	(163,516	)

Futures Contracts Written^O
U.S. Treasury Note Futures	December 2008	180	$	283,426

Options Written^O
Barclays Swaption Put, Strike Price $1.97	December 2008	10,200,000	$	(19,380	)
Barclays Swaption Put, Strike Price $2.05	December 2008	8,200,000		81,180
Credit Suisse First Boston Swaption Put, Strike Price $2.05	December 2008	8,800,000		(35,200	)
Eurodollar Futures Call, Strike Price $97.63	September 2009	16		2,020
Eurodollar Futures Put, Strike Price $96.63	March 2009	447		(29,139	)
JP Morgan Swaption Put, Strike Price $2.05	December 2008	22,600,000		(67,800	)

Semi-Annual Report to Shareholders


	EXPIRATION	ACTUAL CONTRACTS	APPRECIATION/ (DEPRECIATION)
Options Written^O—Continued
U.S. Treasury Bond Futures Call, Strike Price $118.00	November 2008	91	$	(44,531	)
U.S. Treasury Note Futures Call, Strike Price $114.00	October 2008	117		(13,906	)
U.S. Treasury Note Futures Call, Strike Price $115.50	November 2008	209		(16,889	)
U.S. Treasury Note Futures Call, Strike Price $117.00	November 2008	211		(92,383	)
U.S. Treasury Note Futures Call, Strike Price $118.00	November 2008	119		44,960
U.S. Treasury Note Futures Call, Strike Price $120.00	November 2008	176		(6,380	)
U.S. Treasury Note Futures Put, Strike Price $109.50	November 2008	209		(22,029	)
U.S. Treasury Note Futures Put, Strike Price $110.00	October 2008	117		853
U.S. Treasury Note Futures Put, Strike Price $111.00	November 2008	114		(12,805	)
U.S. Treasury Note Futures Put, Strike Price $112.00	November 2008	91		(20,362	)
U.S. Treasury Note Futures Put, Strike Price $112.00	November 2008	119		(69,392	)

			$	(321,183	)

N.M.—Not Meaningful.

All or a portion of this security is on loan.

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 September 30, 2008.