Western Asset Income Fund

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: 811-02351

Name of Registrant: Western Asset Income Fund

Address of Principal Executive Offices: 385 East Colorado Boulevard, Pasadena, CA 91101

Name and address of agent for service:

Gregory B. McShea

385 East Colorado Boulevard

Pasadena, CA 91101

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

Date of fiscal year end: 12/31/2006

Date of reporting period: 06/30/2006


Item 1. Report to Shareholders.


 


 

Western Asset Income Fund

 

Semi-Annual Report to Shareholders

 

June 30, 2006

 



Semi-Annual Report to Shareholders

FUND HIGHLIGHTS

(Amounts in Thousands, except per share amounts) (Unaudited)

 

       Six Months Ended
June 30, 2006
     Year Ended
December 31, 2005

Net Asset Value

     $143,168      $147,737

Per Share

     $15.25      $15.73

Market Value Per Share

     $13.56      $14.14

Net Investment Income

     $4,233      $8,217

Per Share

     $0.45      $0.88

Dividends Paid:

             

Ordinary Income

     $4,037      $8,169

Per Share

     $0.43      $0.87

Long-Term Capital Gains

          $1,887

Per Share

          $0.20

 

The Fund

Western Asset Income Fund (the “Fund”) is a closed-end, diversified management investment company which seeks for its shareholders a high level of current income through investment in a diversified portfolio of debt securities. Substantially all of the net investment income is distributed to the shareholders. A Dividend Reinvestment Plan is available to those shareholders of record desiring it. The Fund’s common shares are listed on the New York Stock Exchange (“NYSE”) where they are traded under the symbol PAI, and price quotations can be found in publications under the abbreviation WstAssetIncoFd.

 

Investment Policies

The Fund’s investment policies provide that its portfolio must be invested as follows:

 

    At least 75% in debt securities rated within the four highest grades, and in government securities, bank debt, commercial paper, cash or cash equivalents.

 

    Up to 25% in other fixed income securities, convertible bonds, convertible preferred and preferred stock.

 

    Not more than 25% in securities restricted as to resale.

 

Dividend Reinvestment Plan and Optional Cash Investment Service

The Fund and Computershare Trust Company, N.A. (“Computershare” or the “Agent”), as the Transfer Agent and Registrar of the Fund, offer two convenient ways to add shares of the Fund to your account. First, the Fund offers to all shareholders a Dividend Reinvestment Plan (“Plan”). Under the Plan, cash distributions (e.g., dividends and capital gains) are automatically invested in shares of the Fund unless the shareholder elects otherwise. Second, the Fund offers to registered shareholders (those who own shares in their own name on the Fund’s records) the option to purchase additional whole and partial shares of the Fund through the Optional Cash Investment Service (“Optional Cash Investment Service”).

 

Dividend Reinvestment Plan

As a participant in the Dividend Reinvestment Plan, you will automatically receive your dividend or net capital gains distribution in newly issued shares of the Fund if the market price of a share on the date of the distribution is at or above the net asset value (“NAV”) of a Fund share. The number of shares to be issued to you will be determined by dividing the amount of the cash distribution to which you are entitled (net of any applicable withholding taxes) by the greater of the NAV per share on such date or 95% of the market price of a share on such date. If the market price of a share on such distribution date is below the NAV, the Agent will, as agent for the participants, buy shares of the Fund stock through a broker on the open market. The price per share of shares purchased for each participant’s account with respect to a particular dividend or other distribution will be the average price (including brokerage commissions, transfer taxes and any other costs of purchase) of all shares purchased with respect to that dividend or other distribution. All shares of common stock acquired on your behalf through the Plan will be automatically credited to an account maintained on the books of the Agent. Full and fractional shares will be voted by Computershare in accordance with your instructions.

 

1


Semi-Annual Report to Shareholders

FUND HIGHLIGHTS—Continued

 

Optional Cash Investment Service

Under the Optional Cash Investment Service (offered to registered shareholders only), funds received from shareholders for stock purchases will be pooled once per month. The Agent will then purchase shares of the Fund’s stock through a broker on the open market. For the purposes of making purchases, the Agent will commingle each participant’s funds with those of all participants in the Plan. The Agent will hold the total shares purchased for all participants in its name or the name of its nominee and will have no responsibility for the value of such shares after their purchase.

 

Beneficial shareholders (those who own shares held in a brokerage, bank or other financial institution account) are not eligible to participate in this option because there is no way to make payments through a broker, bank or nominee. A beneficial shareholder may, however, have his or her shares taken out of “street name” and re-register such shares in his or her own name, becoming a registered shareholder in order to participate. If you wish to do so, please contact your broker, bank or nominee.

 

Additional Information Regarding the Plan and the Optional Cash Investment Service

The Fund will pay all costs applicable to the Plan and Optional Cash Investment Service, with the exceptions noted below. Brokerage commissions, transfer taxes and any other costs of purchase or sale by the Agent under the Plan or Optional Cash Investment Service will be charged to participants. In the event the Fund determines to no longer pay such costs, the Agent will terminate the Plan and Optional Cash Investment Service and may, but is not obligated to, offer a new plan under which it would impose a direct service charge on participants.

 

All shares acquired through the Plan or the Optional Cash Investment Service receive voting rights and are eligible for any stock split, stock dividend, or other rights accruing to shareholders that the Board of Directors may declare.

 

You may terminate participation in the Plan or the Optional Cash Investment Service at any time by giving written notice to the Agent. Such termination will be effective prior to the record date next succeeding the receipt of such instructions or by a later date of termination specified in such instructions. Upon termination, a participant may request a certificate for the full shares credited to his or her account or may request the sale of all or part of such shares. If the participant instructs the Agent to sell the shares credited to the participant’s account, the Agent may accumulate such shares and those of any other terminating participants for purposes of such sale. Brokerage charges, transfer taxes, and any other costs of sale will be allocated pro rata among the selling participants. Any such sale may be made on any securities exchange where such shares are traded, in the over-the-counter market or in negotiated transactions, and may be subject to such terms of price, delivery, etc., as the Agent may agree to. Fractional shares credited to a terminating account will be paid for in cash at the current market price at the time of termination.

 

Dividends and other distributions invested in additional shares under the Plan are subject to income tax just as if they had been received in cash. After year end, dividends paid on the accumulated shares will be included in the Form 1099-DIV information return to the Internal Revenue Service and only one Form 1099-DIV will be sent to each participant each year.

 

Inquiries regarding the Plan and the Optional Cash Investment Service, as well as notices of termination, should be directed to Computershare Trust Company, N.A., P.O. Box 43010, Providence, RI 02940-3010—Investor Relations telephone number 1-866-290-4386.

 

Schedule of Portfolio Holdings

The Fund files a complete schedule of its portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. You may obtain a free copy of the Fund’s Form N-Q by calling 1-800-799-4932 or by writing to the Fund, or you may obtain a copy of this report (and other information relating to the Fund) from the Securities and Exchange Commission’s (“SEC”) website (http://www.sec.gov). Additionally, the Fund’s Form N-Q can be viewed or copied at the SEC’s Public Reference Room in Washington D.C. Information about the operation of the Public Reference Room can be obtained by calling 1-202-551-8090.

 

Annual Certifications

In May 2006, the Fund submitted a CEO annual certification to the NYSE in which the Fund’s principal executive officer certified that he was not aware, as of the date of the certification, of any violation by the Fund of the NYSE’s Corporate Governance listing standards. In addition, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and related SEC rules, the Fund’s

 

2


Semi-Annual Report to Shareholders

 

principal executive and principal financial officers have made quarterly certifications, included in filings with the SEC on Forms N-CSR and N-Q, relating to, among other things, the Fund’s disclosure controls and procedures and internal control over financial reporting.

 

Proxy Voting

You may request a free description of the policies and procedures that the Fund uses to determine how proxies relating to the Fund’s portfolio securities are voted by calling 1-800-799-4932 or by writing to the Fund, or you may obtain a copy of these policies and procedures (and other information regarding the Fund) from the SEC’s web site (http://www.sec.gov). You may request a free report regarding how the Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 by calling 1-800-799-4932 or by writing to the Fund, or you may obtain a copy of this report (and other information relating to the Fund) from the SEC’s website (http://www.sec.gov).

 

Quarterly Comparison of Market Price and Net Asset Value (“NAV”), Discount or Premium to NAV and Average Daily Volume of Shares Traded

 

       Market
Price
     Net Asset
Value
     Premium/
(Discount)
    Average
Daily Volume
(Shares)

September 30, 2005

     $ 14.81      $ 15.93      (7.03 )%   9,734

December 31, 2005

       14.14        15.73      (10.11 )%   12,448

March 31, 2006

       14.20        15.55      (8.68 )%   8,235

June 30, 2006

       13.56        15.25      (11.08 )%   10,548

 

3


Semi-Annual Report to Shareholders

PORTFOLIO DIVERSIFICATION

June 30, 2006

 

 

LOGO

 

The pie chart and bar chart above represent the Fund’s assets as of June 30, 2006. The Fund’s portfolio is actively managed, and its portfolio composition, credit quality breakdown, and other portfolio characteristics will vary from time to time.

 


A   Ratings shown are expressed as a percentage of the portfolio. Standard & Poor’s Ratings Services provides capital markets with credit ratings for the evaluation and assessment of credit risk.
B   Expressed as a percentage of the portfolio.

 

4


Semi-Annual Report to Shareholders

PORTFOLIO OF INVESTMENTS

June 30, 2006 (Unaudited)

(Amounts in Thousands)

 

Western Asset Income Fund

 


 

     % OF
NET ASSETS
   RATE    MATURITY
DATE
   PAR/
SHARES
   VALUE  
                                

Long-Term Securities

   98.0%                          

Corporate Bonds and Notes

   73.3%                          

Aerospace/Defense

   0.2%                          

L-3 Communications Corp.

        7.63%    6/15/12    $ 275    $ 279  
                          


Auto Parts and Equipment

   0.4%                          

Johnson Controls, Inc.

        5.25%    1/15/11      560      546  
                          


Automotive

   3.7%                          

Ford Motor Company

        7.45%    7/16/31      3,550      2,565 A

General Motors Corporation

        8.25%    7/15/23      3,450      2,717 A
                          


                             5,282  
                          


Banking and Finance

   8.0%                          

Ford Motor Credit Company

        7.38%    10/28/09      4,425      4,091  

General Motors Acceptance Corporation

        6.13%    8/28/07      1,090      1,079  

General Motors Acceptance Corporation

        6.31%    11/30/07      110      106  

General Motors Acceptance Corporation

        5.63%    5/15/09      1,610      1,531  

HSBC Finance Capital Trust IX

        5.91%    11/30/35      1,350      1,288B  

HSBC Finance Corporation

        4.75%    4/15/10      1,790      1,727  

Residential Capital Corporation

        6.00%    2/22/11      1,480      1,434  

Wachovia Capital Trust III

        5.80%    3/15/42      200      194B  
                          


                             11,450  
                          


Banks

   2.2%                          

Bank of America Corporation

        7.80%    9/15/16      250      282  

BankAmerica Capital III

        5.64%    1/15/27      215      208 C

BB&T Capital Trust II

        6.75%    6/7/36      640      638  

Chase Capital II

        5.65%    2/1/27      725      697 C

RBS Capital Trust III

        5.51%    9/29/49      1,460      1,361 B
                          


                             3,186  
                          


Building Materials

   0.5%                          

American Standard, Inc.

        8.25%    6/1/09      500      527  

Nortek, Inc.

        8.50%    9/1/14      225      218  
                          


                             745  
                          


Cable

   1.6%                          

Comcast Corporation

        7.05%    3/15/33      160      162 A

Comcast Corporation

        6.45%    3/15/37      380      357  

Cox Communications, Inc.

        4.63%    1/15/10      510      486  

 

5


Semi-Annual Report to Shareholders

PORTFOLIO OF INVESTMENTS—Continued

 

Western Asset Income Fund—Continued

 


 

     % OF
NET ASSETS
   RATE    MATURITY
DATE
   PAR/
SHARES
   VALUE  
                                

Corporate Bonds and Notes—Continued

                              

Cable—Continued

                              

CSC Holdings Inc.

        7.25%    7/15/08    $ 700    $ 701  

TCI Communications, Inc.

        8.75%    8/1/15      160      183  

Tele-Communications, Inc.

        9.80%    2/1/12      375      433  
                          


                             2,322  
                          


Casino Resorts

   0.7%                          

Caesars Entertainment Inc.

        8.13%    5/15/11      250      263 A

Harrah’s Operating Company, Inc.

        5.50%    7/1/10      340      332  

Harrah’s Operating Company, Inc.

        5.75%    10/1/17      480      437  
                          


                             1,032  
                          


Chemicals

   0.6%                          

The Dow Chemical Company

        7.38%    11/1/29      800      889  
                          


Computer Services and Systems

   0.7%                          

Electronic Data Systems Corporation

        7.13%    10/15/09      600      619  

Electronic Data Systems Corporation

        7.45%    10/15/29      420      433 A
                          


                             1,052  
                          


Containers and Packaging

   0.1%                          

Graphic Packaging International Corp.

        9.50%    8/15/13      200      198 A
                          


Diversified Financial Services

   3.7%                          

AIG SunAmerica Global Financing VI

        6.30%    5/10/11      1,880      1,921 D

Beaver Valley Funding Corp.

        9.00%    6/1/17      300      333  

Capital One Bank

        5.75%    9/15/10      310      309  

Capital One Bank

        6.50%    6/13/13      330      338  

Capital One Financial Corporation

        7.13%    8/1/08      90      92  

iStar Financial Inc.

        5.38%    4/15/10      230      225 A

iStar Financial Inc.

        6.00%    12/15/10      230      229  

Marsh & McLennan Companies, Inc.

        5.15%    9/15/10      90      87  

Marsh & McLennan Companies, Inc.

        5.88%    8/1/33      330      286  

Mizuho Preferred Capital Corp. LLC

        8.79%    12/29/49      110      116 B,D

ZFS Finance (USA) Trust I

        6.15%    12/15/65      750      719 A,B,D

ZFS Finance (USA) Trust II

        6.45%    12/15/65      690      631 A,B,D
                          


                             5,286  
                          


Drug and Grocery Store Chains

   0.4%                          

Safeway Inc.

        7.50%    9/15/09      500      522  
                          


 

6


Semi-Annual Report to Shareholders

 

 


 

     % OF
NET ASSETS
   RATE    MATURITY
DATE
   PAR/
SHARES
   VALUE  
                                

Corporate Bonds and Notes—Continued

                              

Electric

   2.1%                          

AEP Texas Central Company

        5.50%    2/15/13    $ 420    $ 405  

American Electric Power Company, Inc.

        5.25%    6/1/15      490      457  

Dominion Resources, Inc.

        5.13%    12/15/09      210      205  

Dominion Resources, Inc.

        5.15%    7/15/15      350      322  

FirstEnergy Corp.

        6.45%    11/15/11      60      61  

FirstEnergy Corp.

        7.38%    11/15/31      710      762  

System Energy Resources, Inc.

        4.88%    10/1/07      380      374  

Tampa Electric Company

        6.38%    8/15/12      145      148  

The AES Corporation

        9.50%    6/1/09      39      41  

The Cleveland Electric Illuminating Company

        5.65%    12/15/13      300      291  
                          


                             3,066  
                          


Energy

   5.5%                          

CenterPoint Energy, Inc.

        6.85%    6/1/15      1,150      1,183 A

DTE Energy Company

        6.38%    4/15/33      330      312 A

Exelon Corporation

        6.75%    5/1/11      1,500      1,550  

MidAmerican Energy Holdings Company

        5.88%    10/1/12      500      496  

Pacific Gas and Electric Company

        6.05%    3/1/34      1,890      1,784  

Peabody Energy Corporation

        6.88%    3/15/13      285      280  

Sempra Energy

        5.66%    5/21/08      635      635 C

TXU Corp.

        6.55%    11/15/34      520      457 A

TXU Energy Co.

        6.13%    3/15/08      500      501  

TXU Energy Co.

        7.00%    3/15/13      370      378  

Xcel Energy, Inc.

        7.00%    12/1/10      350      365  
                          


                             7,941  
                          


Environmental Services

   0.3%                          

Waste Management, Inc.

        7.38%    5/15/29      415      451  
                          


Food, Beverage and Tobacco

   1.9%                          

Altria Group, Inc.

        7.00%    11/4/13      305      322  

Altria Group, Inc.

        7.75%    1/15/27      340      381  

Domino’s, Inc.

        8.25%    7/1/11      200      208  

Reynolds American Inc.

        7.25%    6/1/12      1,360      1,333 A,D

Tyson Foods, Inc.

        7.00%    1/15/28      500      461 A
                          


                             2,705  
                          


Gas and Pipeline Utilities

   2.4%                          

Dynegy Holdings Inc.

        6.88%    4/1/11      1,300      1,228  

Dynegy Holdings Inc.

        8.75%    2/15/12      735      746  

 

7


Semi-Annual Report to Shareholders

PORTFOLIO OF INVESTMENTS—Continued

 

Western Asset Income Fund—Continued

 


 

     % OF
NET ASSETS
   RATE    MATURITY
DATE
   PAR/
SHARES
   VALUE  
                                

Corporate Bonds and Notes—Continued

                              

Gas and Pipeline Utilities—Continued

                              

The Williams Companies, Inc.

        7.50%    1/15/31    $ 102    $ 99  

The Williams Companies, Inc.

        8.75%    3/15/32      1,250      1,359  
                          


                             3,432  
                          


Health Care

   1.6%                          

Aetna Inc.

        5.75%    6/15/11      540      536  

Humana Inc.

        6.45%    6/1/16      220      218  

Tenet Healthcare Corporation

        6.38%    12/1/11      1,465      1,307 A

Tenet Healthcare Corporation

        6.88%    11/15/31      250      200  
                          


                             2,261  
                          


Homebuilding

   0.4%                          

D.R. Horton, Inc.

        5.25%    2/15/15      410      365  

Pulte Homes, Inc.

        6.25%    2/15/13      145      141  
                          


                             506  
                          


Insurance

   0.7%                          

American International Group, Inc.

        5.05%    10/1/15      180      168 D

Liberty Mutual Group

        5.75%    3/15/14      270      253 D

The St. Paul Travelers Companies, Inc.

        6.25%    6/20/16      310      309  

Willis Group North America

        5.13%    7/15/10      280      270  
                          


                             1,000  
                          


Investment Banking/Brokerage

   3.7%                          

J.P. Morgan Capital Trust II

        7.95%    2/1/27      150      157 A

Lehman Brothers Holdings Inc.

        5.00%    1/14/11      1,340      1,298  

Lehman Brothers Holdings Inc.

        5.50%    4/4/16      420      401  

Morgan Stanley

        5.05%    1/21/11      1,780      1,726  

Morgan Stanley

        4.75%    4/1/14      60      55  

The Goldman Sachs Group, Inc.

        6.35%    2/15/34      555      518  

UBS Preferred Funding Trust V

        6.24%    5/12/49      1,120      1,104 A,B
                          


                             5,259  
                          


Lodging/Hotels

   0.3%                          

Hilton Hotels Corporation

        7.63%    12/1/12      450      464  
                          


Machinery

   0.4%                          

Case New Holland Incorporated

        9.25%    8/1/11      475      500  
                          


 

8


Semi-Annual Report to Shareholders

 

 


 

     % OF
NET ASSETS
   RATE    MATURITY
DATE
   PAR/
SHARES
   VALUE  
                                

Corporate Bonds and Notes—Continued

                              

Media

   3.4%                          

AMFM Inc.

        8.00%    11/1/08    $ 210    $ 218  

Clear Channel Communications, Inc.

        5.50%    9/15/14      365      331  

Liberty Media Corporation

        7.88%    7/15/09      750      777  

Liberty Media Corporation

        8.50%    7/15/29      130      126  

Liberty Media Corporation

        8.25%    2/1/30      65      62 A

News America, Inc.

        6.55%    3/15/33      545      508 A

News America, Inc.

        6.20%    12/15/34      35      32  

Readers Digest Association, Inc.

        6.50%    3/1/11      300      290  

Time Warner Entertainment Company, L.P.

        8.38%    7/15/33      680      769  

Time Warner Inc.

        9.13%    1/15/13      240      274  

Time Warner Inc.

        7.70%    5/1/32      885      962  

Viacom Inc.

        5.63%    8/15/12      520      508  
                          


                             4,857  
                          


Medical Care Facilities

   2.0%                          

Coventry Health Care, Inc.

        5.88%    1/15/12      400      384  

HCA, Inc.

        5.25%    11/6/08      105      102  

HCA, Inc.

        7.88%    2/1/11      250      256  

HCA, Inc.

        6.30%    10/1/12      180      169  

HCA, Inc.

        6.25%    2/15/13      930      869  

HCA, Inc.

        5.75%    3/15/14      65      58  

Health Care REIT, Inc.

        8.00%    9/12/12      370      398  

Health Care REIT, Inc.

        5.88%    5/15/15      130      124  

Universal Health Services, Inc.

        7.13%    6/30/16      520      522  
                          


                             2,882  
                          


Oil and Gas

   6.5%                          

Amerada Hess Corporation

        7.88%    10/1/29      1,450      1,618  

Conoco Inc.

        6.95%    4/15/29      90      98  

ConocoPhillips

        4.75%    10/15/12      200      190 A

Devon Energy Corporation

        7.95%    4/15/32      350      403  

El Paso Corporation

        7.63%    8/16/07      300      303 A

El Paso Corporation

        7.80%    8/1/31      2,000      1,943 A

Kerr-McGee Corporation

        7.88%    9/15/31      1,315      1,484  

Occidental Petroleum Corporation

        6.75%    1/15/12      500      526 A

Ocean Energy Inc.

        4.38%    10/1/07      430      423  

Panhandle Eastern Pipe Line Company

        4.80%    8/15/08      445      434  

Pemex Project Funding Master Trust

        6.63%    6/15/35      1,150      1,041 D

 

9


Semi-Annual Report to Shareholders

PORTFOLIO OF INVESTMENTS—Continued

 

Western Asset Income Fund—Continued

 


 

     % OF
NET ASSETS
   RATE    MATURITY
DATE
   PAR/
SHARES
   VALUE  
                                

Corporate Bonds and Notes—Continued

                              

Oil and Gas—Continued

                              

Valero Energy Corporation

        6.88%    4/15/12    $ 215    $ 223  

XTO Energy, Inc.

        6.25%    4/15/13      560      560  
                          


                             9,246  
                          


Paper and Forest Products

   1.5%                          

Georgia-Pacific Corp.

        9.50%    12/1/11      325      340  

Georgia-Pacific Corp.

        7.38%    12/1/25      250      226  

Weyerhaeuser Company

        6.75%    3/15/12      995      1,016  

Weyerhaeuser Company

        7.38%    3/15/32      540      547  
                          


                             2,129  
                          


Photo Equipment and Supplies

   0.5%                          

Eastman Kodak Company

        3.63%    5/15/08      375      355  

Eastman Kodak Company

        7.25%    11/15/13      345      332 A
                          


                             687  
                          


Real Estate

   0.2%                          

Forest City Enterprises, Inc.

        7.63%    6/1/15      225      226  

Socgen Real Estate Co. LLC

        7.64%    12/29/49      80      82 B,D
                          


                             308  
                          


Retail

   0.3%                          

May Department Stores Company

        5.75%    7/15/14      400      388  
                          


Special Purpose

   12.5%                          

Ahold Finance USA, Inc.

        8.25%    7/15/10      355      370 A

ASIF Global Financing XIX

        4.90%    1/17/13      410      388 D

DaimlerChrysler NA Holding Corporation

        5.78%    9/10/07      1,570      1,574 C

DaimlerChrysler NA Holding Corporation

        7.30%    1/15/12      415      432  

DaimlerChrysler NA Holding Corporation

        6.50%    11/15/13      160      160  

Deutsche Bank Capital Funding Trust VII

        5.63%    1/19/49      670      621B,D  

Duke Capital Corporation

        6.25%    2/15/13      1,200      1,212 A

ILFC E-Capital Trust I

        5.90%    12/21/65      720      702 A,B,D

PNPP II Funding Corporation

        9.12%    5/30/16      2,398      2,694 A

Qwest Capital Funding, Inc.

        7.25%    2/15/11      1,150      1,118  

Rabobank Capital Funding Trust II

        5.26%    12/31/49      115      108 B,D

Rabobank Capital Funding Trust III

        5.25%    12/29/49      1,145      1,049 B,D

Sithe Independence Funding Corporation

        9.00%    12/30/13      1,500      1,618  

Sprint Capital Corporation

        8.75%    3/15/32      1,830      2,207  

 

10


Semi-Annual Report to Shareholders

 

 


 

     % OF
NET ASSETS
   RATE    MATURITY
DATE
   PAR/
SHARES
   VALUE  
                                

Corporate Bonds and Notes—Continued

                              

Special Purpose—Continued

                              

TCI Communications Financing III

        9.65%    3/31/27    $ 3,000    $ 3,199  

Verizon Global Funding Corp.

        5.85%    9/15/35      570      496  
                          


                             17,948  
                          


Telecommunications

   2.8%                          

AT&T Corp.

        8.00%    11/15/31      440      505  

BellSouth Corporation

        4.75%    11/15/12      320      297  

Embarq Corporation

        6.74%    6/1/13      350      349  

Embarq Corporation

        7.08%    6/1/16      540      537  

Emmis Operating Company

        6.88%    5/15/12      250      245  

Qwest Communications International Inc.

        7.50%    2/15/14      850      829  

Qwest Corporation

        6.88%    9/15/33      1,000      865  

Verizon New York Inc.

        6.88%    4/1/12      340      344  
                          


                             3,971  
                          


Telecommunications (Cellular/Wireless)

   1.2%                          

AT&T Wireless Services, Inc.

        7.50%    5/1/07      500      507 A

AT&T Wireless Services, Inc.

        8.13%    5/1/12      155      171  

AT&T Wireless Services, Inc.

        8.75%    3/1/31      475      582  

Motorola, Inc.

        7.63%    11/15/10      56      60  

Nextel Communications, Inc.

        5.95%    3/15/14      88      85  

Nextel Communications, Inc.

        7.38%    8/1/15      285      290  
                          


                             1,695  
                          


Transportation

   0.3%                          

Continental Airlines, Inc.

        7.26%    3/15/20      226      232  

Continental Airlines, Inc.

        6.55%    8/2/20      177      175  

Delta Air Lines, Inc.

        7.57%    5/18/12      40      40  
                          


                             447  
                          


Total Corporate Bonds and Notes
(Identified Cost—$105,439)

                           104,932  

U.S. Government and Agency Obligations

   1.5%                          

United States Treasury Bonds

        5.38%    2/15/31      6      6 A

United States Treasury Notes

        4.88%    4/30/08      139      138 A

United States Treasury Notes

        4.50%    2/15/09      1,105      1,088 A

United States Treasury Notes

        4.38%    12/15/10      150      146 A

United States Treasury Notes

        4.88%    5/31/11      750      742 A
                          


Total U.S. Government and Agency Obligations
(Identified Cost—$2,139)

                           2,120  

 

11


Semi-Annual Report to Shareholders

PORTFOLIO OF INVESTMENTS—Continued

 

Western Asset Income Fund—Continued

 


 

     % OF
NET ASSETS
   RATE    MATURITY
DATE
   PAR/
SHARES
   VALUE  
                                

U.S. Government Agency Mortgage-Backed Securities

   N.M.                          

Fannie Mae

        11.50%    11/1/2017    $ 8    $ 9  

Freddie Mac

        10.25%    5/1/2009      13      13  
                          


Total U.S. Government Agency Mortgage-
Backed Securities
(Identified Cost—$21)

                           22  

Yankee BondsF

   23.2%                          

Aerospace/Defense

   0.3%                          

Systems 2001 Asset Trust

        6.66%    9/15/13      445      458 D
                          


Banking and Finance

   2.4%                          

AIFUL CORPORATION

        5.00%    8/10/10      995      946 D

Corporacion Andina de Fomento

        5.46%    1/26/07      470      470 C

HBOS Capital Funding LP

        6.07%    6/30/49      560      546 A,B,D

HBOS Treasury Services plc

        4.00%    9/15/09      420      400 D

Mizuho Financial Group, Inc.

        5.79%    4/15/14      1,100      1,077 D
                          


                             3,439  
                          


Banks

   3.5%                          

Glitnir Banki hf

        6.69%    6/15/16      680      676 B,D

Kaupthing Bank Hf

        5.76%    4/12/11      540      540  

Kaupthing Bank Hf

        7.13%    5/19/16      1,250      1,251 D

RSHB Capital SA

        7.18%    5/16/13      1,340      1,328 A,D

Shinsei Finance Cayman Ltd.

        6.42%    1/29/49      1,100      1,033 B,D

Sumitomo Mitsui Banking Corporation

        5.63%    7/29/49      270      252 B,D
                          


                             5,080  
                          


Cable

   0.2%                          

British Sky Broadcasting Group plc

        6.88%    2/23/09      330      338 A
                          


Electric

   0.6%                          

Empresa Nacional de Electricidad S.A.

        8.35%    8/1/13      750      807  
                          


Foreign Governments

   5.1%                          

Federative Republic of Brazil

        12.25%    3/6/30      690      1,012  

Federative Republic of Brazil

        11.00%    8/17/40      340      422 A

Quebec Province

        7.22%    7/22/36      650      849  

Republic of Colombia

        11.75%    2/25/20      183      241  

Republic of Panama

        7.13%    1/29/26      400      386 A

Republic of Panama

        9.38%    4/1/29      23      27 A

Republic of Panama

        6.70%    1/26/36      141      129  

Russian Federation

        5.00%    3/31/30      750      798 B

 

12


Semi-Annual Report to Shareholders

 

 


 

     % OF
NET ASSETS
   RATE    MATURITY
DATE
   PAR/
SHARES
   VALUE  
                                

Yankee BondsContinued

                              

Foreign Governments—Continued

                              

United Mexican States

        5.63%    1/15/17    $ 62    $ 58 A

United Mexican States

        11.50%    5/15/26      960      1,416 A

United Mexican States

        8.30%    8/15/31      340      393  

United Mexican States

        7.50%    4/8/33      1,423      1,512  
                          


                             7,243  
                          


Insurance

   0.6%                          

Axa

        8.60%    12/15/30      550      655  

XL Capital Ltd.

        5.25%    9/15/14      250      230  
                          


                             885  
                          


Manufacturing (Diversified)

   1.0%                          

Tyco International Group SA

        6.38%    10/15/11      1,450      1,479  
                          


Metals and Minerals

   0.7%                          

Vale Overseas Limited

        6.25%    1/11/16      1,102      1,050  
                          


Oil and Gas

   1.3%                          

Gazprom—ADR

        9.63%    3/1/13      50      57 D

Gazprom

        9.63%    3/1/13      20      23  

Petrobras International Finance Company (PIFCO)

        9.75%    7/6/11      345      390  

Petroliam Nasional Berhad

        7.63%    10/15/26      1,260      1,426 D
                          


                             1,896  
                          


Special Purpose

   4.3%                          

Conoco Funding Company

        6.35%    10/15/11      470      484  

Deutsche Telekom International Finance BV

        5.75%    3/23/16      160      151  

Deutsche Telekom International Finance BV

        8.25%    6/15/30      500      577  

Molson Coors Capital Finance ULC

        4.85%    9/22/10      480      462  

Petrozuata Finance, Inc.

        8.22%    4/1/17      3,205      3,013 D

Resona Preferred Global Securities

        7.19%    12/29/49      1,035      1,038 B,D

UFJ Finance Aruba AEC

        6.75%    7/15/13      355      370  
                          


                             6,095  
                          


Telecommunications

   2.3%                          

British Telecommunications plc

        8.88%    12/15/30      330      406  

France Telecom SA

        8.50%    3/1/31      560      674  

Koninklijke (Royal) KPN NV

        8.38%    10/1/30      240      258  

Tele Norte Leste Participacoes S.A.

        8.00%    12/18/13      410      426  

Telecom Italia Capital S.p.A.

        5.25%    11/15/13      750      693  

 

13


Semi-Annual Report to Shareholders

PORTFOLIO OF INVESTMENTS—Continued

 

Western Asset Income Fund—Continued

 


 

     % OF
NET ASSETS
   RATE    MATURITY
DATE
   PAR/
SHARES
    VALUE  
                                 

Yankee BondsContinued

                               

Telecommunications—Continued

                               

Telecom Italia Capital S.p.A.

        4.95%    9/30/14    $ 695     $ 622  

Telus Corporation

        7.50%    6/1/07      250       254  
                           


                              3,333  
                           


Telecommunications (Cellular/Wireless)

   0.2%                           

Rogers Wireless Communications Inc.

        6.38%    3/1/14      300       286  
                           


Transportation

   0.3%                           

Qantas Airways Limited

        6.05%    4/15/16      370       358 D
                           


Utilities

   0.4%                           

United Utilities plc

        5.38%    2/1/19      580       525 A
                           


Total Yankee Bonds (Identified Cost—$32,588)

                            33,272  

Total Long-Term Securities
(Identified Cost—$140,187)

                            140,346  

Investment of Collateral from Securities Lending

   17.5%                           

State Street Navigator Securities Lending Prime Portfolio

   17.5%                24,956  shs     24,956  
                           


Total Investment of Collateral from Securities Lending (Identified Cost—$24,956)

                               

Short-Term Securities

   0.4%                           

Repurchase Agreements

   0.4%                           

Goldman, Sachs & Company
5.21%, dated 6/30/06, to be repurchased at
$591 on 7/3/06 (Collateral: $520 Freddie Mac bonds,
6.75%, due 3/15/31, value $606)

                  $ 591       591  
                           


Total Short-Term Securities
(Identified Cost—$591)

                            591  

Total Investments
(Identified Cost—$165,734)

   115.9%                        165,893  

Obligation to Return Collateral For Securities Loaned

   (17.5)%                        (24,956 )

Other Assets Less Liabilities

   1.6%                        2,231  
    
                    


Net Assets

   100.0%                      $ 143,168  
                           


                                 
A   All or a portion of this security is on loan. See Note 3 to the financial statements.
B   Stepped Coupon Security – A security with a predetermined schedule of interest or dividend rate changes, at which time it begins to accrue interest or pay dividends.
C   Indexed Security – The rate of interest earned on this security is tied to the London Interbank Offered Rate (“LIBOR”). The coupon rate is the rate as of June 30, 2006.
D   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 16.1% of net assets.
E   The coupon rates shown on variable rate securities are the rates at June 30, 2006. The rates vary with the weighted average coupon of the underlying loans.
F   Yankee Bond – A dollar-denominated bond issued in the U.S. by foreign entities.

N.M.—Not meaningful.

See notes to financial statements.

 

14


Semi-Annual Report to Shareholders

STATEMENT OF ASSETS AND LIABILITIES

June 30, 2006 (Unaudited)

(Amounts in Thousands)

 

Western Asset Income Fund

 


 

Assets:

             

Investment securities at market value (Identified Cost—$165,143)A

          $ 165,302

Short-term securities at market value (Identified Cost—$591)

            591

Cash

            5

Interest receivable

            2,538

Other assets

            14
           

Total Assets

            168,450
           

Liabilities:

             

Payable for securities purchased

   $ 55       

Accrued management fee

     59       

Obligation to return collateral for securities loaned

     24,956       

Accrued expenses

     212       
    

      

Total Liabilities

            25,282
           

Net Assets Applicable to Common Shareholders

          $ 143,168
           

Summary of Stockholders’ Equity:

             

Common stock, par value $.01 per share: 20,000 authorized shares;
9,389 issued and outstanding shares

          $ 94

Additional paid-in capital

            141,896

Undistributed net investment income

            419

Undistributed net realized gain on investments

            600

Unrealized appreciation/(depreciation) of investments

            159
           

Net assets applicable to outstanding common stock

          $ 143,168
           

Net asset value per common share ($143,168 ÷ 9,389 common shares issued and outstanding)

          $ 15.25
           

               
A   Market value of securities on loan is $24,445.

 

See notes to financial statements.

 

15


Semi-Annual Report to Shareholders

STATEMENT OF OPERATIONS

For the Six Months Ended June 30, 2006 (Unaudited)

(Amounts in Thousands)

 

Western Asset Income Fund

 


 

Investment Income:

        

Interest income

   $ 4,811  
    


Expenses:

        

Advisory fees

     383  

Custodian fees

     29  

Audit and legal fees

     74  

Directors’ fees and expenses

     8  

Registration fees

     11  

Reports to shareholders

     39  

Taxes, other than federal income taxes

     12  

Transfer agent and shareholder serving expense

     20  

Other

     14  
    


       590  

Less: Fees waived

     (12 )
    


Total expenses, net of waivers

     578  
    


Net Investment Income

     4,233  
    


Realized and Unrealized Gain/(Loss) on Investments:

        

Net realized loss on investments

     (47 )

Unrealized appreciation/(depreciation) of investments

     (4,718 )
    


Net Realized and Unrealized Gain/(Loss) on Investments

     (4,765 )
    


Change in Net Assets Resulting From Operations

   $ (532 )
    


          

 

See notes to financial statements.

 

16


Semi-Annual Report to Shareholders

STATEMENT OF CHANGES IN NET ASSETS

(Amounts in Thousands)

 

Western Asset Income Fund

 

     FOR THE SIX
MONTHS ENDED
JUNE 30, 2006
    FOR THE
YEAR ENDED
DECEMBER 31, 2005
 
Operations:    (Unaudited)         

Net investment income

   $ 4,233     $ 8,217  

Net realized gain/(loss) on investments

     (47 )     907  

Increase/(decrease) in unrealized appreciation of investments

     (4,718 )     (4,620 )
    


 


Change in net assets resulting from operations

     (532 )     4,504  
    


 


Distributions to shareholders from:

                

Net investment income

     (4,037 )     (8,169 )

Net realized gain on investments

           (1,887 )
    


 


Total increase/(decrease)

     (4,569 )     (5,552 )
    


 


Net Assets:

                

Beginning of period

     147,737       153,289  
    


 


End of period

   $ 143,168     $ 147,737  
    


 


Undistributed net investment income

   $ 419     $ 223  
    


 


                  

 

See notes to financial statements.

 

17


Semi-Annual Report to Shareholders

FINANCIAL HIGHLIGHTS

 

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

 

     SIX MONTHS
ENDED
JUNE 30, 2006
    FOR THE YEARS ENDED DECEMBER 31,

 
       2005     2004     2003     2002     2001  
Per Share Operating Performance:    (Unaudited)                                     

Net asset value, beginning of period

   $ 15.73     $ 16.33     $ 16.52     $ 15.04     $ 15.12     $ 14.84  
    


 


 


 


 


 


Net investment income

     .45       .88       .94       .92       1.00       1.03  

Net realized and unrealized gain/(loss) on investments

     (.50 )     (.41 )     .32       1.54       (.08 )     .31  
    


 


 


 


 


 


Total from investment operations

     (.05 )     .47       1.26       2.46       .92       1.34  
    


 


 


 


 


 


Distributions paid from:

                                                

Net investment income

     (.43 )     (.87 )     (.93 )     (.98 )     (1.00 )     (1.06 )

Net realized gain on investments

           (.20 )     (.52 )                  
    


 


 


 


 


 


Total distributions

     (.43 )     (1.07 )     (1.45 )     (.98 )     (1.00 )     (1.06 )
    


 


 


 


 


 


Net asset value, end of period

   $ 15.25     $ 15.73     $ 16.33     $ 16.52     $ 15.04     $ 15.12  
    


 


 


 


 


 


Market value per share, end of period

   $ 13.56     $ 14.14     $ 15.44     $ 15.35     $ 14.35     $ 14.56  
    


 


 


 


 


 


Total Return:

                                                

Based on net asset value per share

     (0.39 )%A     3.00 %     8.50 %     17.13 %     6.35 %     9.45 %

Based on market value per share

     (1.16 )%A     (1.49 )%     10.41 %     14.07 %     5.38 %     15.86 %

Ratios To Average Net Assets:

                                                

Total expenses

     .82 %B     .81 %     .78 %     .95 %     .81 %     .79 %

Net expensesC

     .80 %B     .79 %     .76 %     .94 %     .80 %     .77 %

Net investment income

     5.85 %B     5.48 %     5.71 %     5.78 %     6.75 %     6.66 %

Supplemental Data:

                                                

Portfolio turnover rate

     26 %A     80 %     81 %     47 %     43 %     116 %

Net assets at end of period (in thousands)

   $ 143,168     $ 147,737     $ 153,289     $ 155,139     $ 141,238     $ 141,932  
                                                  
A   Not annualized
B   Annualized
C   This ratio reflects expenses net of voluntary expense waivers.

 

See notes to financial statements.

 

18


Semi-Annual Report to Shareholders

NOTES TO FINANCIAL STATEMENTS

(Amounts in Thousands) (Unaudited)

 

1. Significant Accounting Policies:

Western Asset Income Fund (“Fund”) is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as a closed-end diversified investment company.

 

The Fund’s primary investment objective is to provide current income for its shareholders. Capital appreciation, when consistent with current income, is a secondary investment objective.

 

The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements:

 

Security Valuation

The Fund’s securities are valued on the basis of readily available market quotations or, lacking such quotations, at fair value as determined under policies approved by and under the general oversight of the Board of Directors. In determining fair value, all relevant qualitative and quantitative factors available are considered. These factors are subject to change over time and are reviewed periodically. The Fund may use fair value pricing instead of market quotations to value one or more securities if the Fund believes that, because of special circumstances, doing so would more accurately reflect the prices the Fund would expect to realize on the current sale of those securities. Further, because of the inherent uncertainty of valuation, those estimated values may differ significantly from quoted or published values or from the values that would have been used had a ready market for the investments existed, and the differences could be material.

 

With respect to the Fund, where a security is traded on more than one market, which may include foreign markets, the securities are generally valued on the market considered by the Fund’s adviser to be the primary market. The Fund will value its foreign securities in U.S. dollars on the basis of the then-prevailing exchange rates.

 

Security Transactions

Security transactions are accounted for as of the trade date. Realized gains and losses from security transactions are reported on an identified cost basis for both financial reporting and federal income tax purposes.

 

Purchases and sales of securities other than short-term and U.S. government securities for the six months ended June 30, 2006, aggregated $28,801 and $21,918, respectively. Purchases and sales of U.S. government securities for the six months ended June 30, 2006, were $8,530 and $15,108, respectively.

 

Foreign Currency Translation

Assets and liabilities initially expressed in non-U.S. currencies are translated into U.S. dollars using currency exchange rates determined prior to the close of trading on the New York Stock Exchange, usually at 2:00 p.m. Eastern time. Purchases and sales of securities and income and expenses are translated into U.S. dollars at the prevailing market rates on the dates of such transactions. The effects of changes in non-U.S. currency exchange rates on investment securities and other assets and liabilities are included with the net realized and unrealized gain or loss on foreign currency transactions.

 

Repurchase Agreements

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

 

19


Semi-Annual Report to Shareholders

NOTES TO FINANCIAL STATEMENTS—Continued

 

Distributions to Common Shareholders

Investment income and distributions to shareholders are recorded on the ex-dividend date. Dividends from net investment income are declared and paid monthly. Net capital gain distributions are declared and paid after the end of the tax year in which the gain is realized. An additional distribution may be made in December to the extent necessary in order to comply with federal excise tax requirements. Distributions are determined in accordance with federal income tax regulations, which may differ from those determined in accordance with accounting principles generally accepted in the United States of America; accordingly, periodic reclassifications are made within the Fund’s capital accounts to reflect income and gains available for distribution under federal income tax regulations. Interest income and expenses are recorded on the accrual basis. Bond discounts and premiums are amortized and included in interest income for financial reporting and federal income tax purposes.

 

Compensating Balance Credits

The Fund has an arrangement with its custodian bank, whereby a portion of the custodian’s fee is paid indirectly by credits earned on the Fund’s cash on deposit with the bank. This deposit arrangement is an alternative to purchasing overnight investments.

 

Use of Estimates

The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from these estimates.

 

Other

In the normal course of business, the Fund enters into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is dependent upon claims that may be made against the Fund in the future and, therefore, cannot be estimated; however, based on experience, the risk of material loss from such claims is considered remote.

 

2. Federal Income Taxes:

No provision for federal income or excise taxes is required since the Fund intends to continue to qualify as a regulated investment company and distribute substantially all of its taxable income and capital gain to its shareholders. Because federal income tax regulations differ from accounting principles generally accepted in the United States of America, income and capital gain distributions determined in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Accordingly, the character of distributions and composition of net assets for tax purposes may differ from those reflected in the accompanying financial statements.

 

The Fund intends to retain realized capital gains that may be offset against available capital loss carryforwards for federal income tax purposes. As of June 30, 2006, the Fund has no capital loss carryforwards.

 

3. Forward Currency Exchange Contracts:

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

 

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

 

At June 30, 2006, there were no open forward foreign currency exchange contracts.

 

20


Semi-Annual Report to Shareholders

 

4. Common Shares (share amounts not in thousands)

Of the 9,389,431 shares of common stock outstanding at June 30, 2006, the Adviser owns 213,100 shares.

 

5. Securities Lending:

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

 

6. Transactions With Affiliates and Certain Other Parties:

The Fund has entered into an Investment Advisory Agreement with Western Asset Management Company (“Adviser”), which is a wholly owned subsidiary of Legg Mason, Inc., pursuant to which the Adviser provides investment advice and administrative services to the Fund. In return for its services, the Fund pays the Adviser a monthly fee at an annual rate of 0.70% of the average monthly net assets of the Fund up to $60,000 and 0.40% of such net assets in excess of $60,000. If expenses (including the Adviser’s fee but excluding interest, taxes, brokerage fees, the expenses of any offering by the Fund of its securities, and extraordinary expenses beyond the control of the Fund) borne by the Fund in any fiscal year exceed 1.5% of average net assets up to $30,000 and 1% of average net assets over $30,000, the Adviser has contractually agreed to reimburse the Fund for any excess. No expense reimbursement is due for the six months ended June 30, 2006.

 

Western Asset Management Company Limited (“WAML”) provides the Fund with investment research, advice, management and supervision and a continuous investment program for the Fund’s portfolio of non-dollar securities consistent with the Fund’s investment objectives and policies. As compensation, the Adviser pays WAML a fee based on the pro rata assets of the Fund managed by WAML during the month.

 

Under the terms of an Administrative Services Agreement among the Fund, the Adviser, and Legg Mason Fund Adviser, Inc. (“Administrator”), the Adviser (not the Fund) pays the Administrator a monthly fee of $3, an annual rate of $36.

 

7. Director Compensation (amounts are not in thousands):

Effective February 2006, each Director of the Fund who is not an “interested person” (as defined in the 1940 Act) of the Fund, Western Asset or WAML receives an aggregate fee of $60,000 annually for serving on the combined Board of Directors/Trustees of the Fund, Western Asset Funds, Inc. and Western Asset Premier Bond Fund. Each Director also receives a fee of $7,500 and related expenses for each meeting of the Board attended in-person and a fee of $2,500 for participating in each telephonic meeting. The Chairman of the Board and the Chairman of the Audit Committee each receive an additional $25,000 per year for serving in such capacities. Each member of the Audit Committee receives a fee of $5,000 for serving as a member of the Audit Committee. Other committee members receive $2,500 for serving as a member of each committee upon which they serve. Committee members also receive a fee of $2,500 for participating in each telephonic committee meeting. All such fees are allocated among the Fund, Western Asset Funds, Inc. and Western Asset Premier Bond Fund according to each such investment company’s average annual net assets. Mr. Olson receives from Western Asset an aggregate fee of $60,000 annually for serving on the combined Board of Directors/Trustees of the Fund, Western Asset Funds, Inc. and Western Asset Premier Bond Fund, as well as a fee of $7,500 and related expenses for each meeting of the Board attended in-person and a fee of $2,500 for participating in each telephonic meeting.

 

21


Semi-Annual Report to Shareholders

NOTES TO FINANCIAL STATEMENTS—Continued

 

8. Shareholder Meeting Results:

The Fund’s annual meeting of shareholders was held on May 9, 2006. Of the 9,389 common shares outstanding, the following shares were voted at the meeting:

 

       For

            Withheld

Election of Directors:

                    

Ronald J. Arnault

     7,725             169

Anita L. DeFrantz

     7,682             213

Ronald L. Olson

     7,690             205

William E.B. Siart

     7,716             179

Louis A. Simpson

     7,715             180

Jaynie Miller Studenmund

     7,687             208
       For

     Against

     Abstain

Approval of amendment to the Fund’s Certificate of Incorporation
to add an exculpatory provision

     7,390      368      136

 

Although an amendment to the Fund’s Certificate of Incorporation was approved by stockholders of the Fund, the amendment has not been filed with the State of Delaware and has not yet become effective because it is believed that the amendment, as currently worded, would not be consistent with the Investment Company Act of 1940, as amended.

 

22


Western Asset Income Fund

 

The Board of Directors

William E. B. Siart, Chairman

Ronald J. Arnault

Anita L. DeFrantz

Ronald L. Olson

Louis A. Simpson

Jaynie Miller Studenmund

 

Officers

James W. Hirschmann, President

D. Daniel Fleet, Vice President

S. Kenneth Leech, Vice President

Stephen A. Walsh, Vice President

Marie K. Karpinski, Principal Financial and Accounting Officer

Amy M. Olmert, Chief Compliance Officer

Erin K. Morris, Treasurer

Lisa G. Mrozek, Secretary

 

Investment Advisers

Western Asset Management Company

385 East Colorado Boulevard

Pasadena, CA 91101

 

Western Asset Management Company Limited

10 Exchange Place

London, England EC2A2EN

 

Custodian

State Street Bank & Trust Company

P.O. Box 1031

Boston, MA 02103

 

Counsel

Ropes & Gray LLP

45 Rockefeller Plaza

New York, NY 10111

 

Independent Registered Public Accounting Firm

PricewaterhouseCoopers LLP

250 West Pratt Street

Baltimore, MD 21201

 

Transfer Agent

Computershare Trust Company, N.A.

P.O. Box 43010

Providence, RI 02940-3010

Western Asset Income Fund

P.O. Box 983

Pasadena, California 91105

 

In accordance with Section 23(c) of the Investment Company Act of 1940, the Fund hereby gives notice that it may, from time to time, repurchase its shares in the open market at the option of the Board of Directors, and on such terms as the Board of Directors shall determine.

 

PACAM-SAR-06


Item 2. Code of Ethics.

Not applicable for semi-annual reports.

Item 3. Audit Committee Financial Expert.

Not applicable for semi-annual reports.

Item 4. Principal Accountant Fees and Services.

Not applicable for semi-annual reports.

Item 5. Audit Committee of Listed Registrants.

Not applicable for semi-annual reports.

Item 6. Schedule of Investments

The schedule of investments in securities of unaffiliated issuers is included as part of the report to shareholders filed under Item 1 of this Form.

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

Not applicable for semi-annual reports.

Item 8. Portfolio Managers of Closed-End Management Investment Companies.

Not applicable for semi-annual reports.

Item 9. Purchases of Equity Securities by Closed-End Management Investment Companies and Affiliated Purchasers.

Not applicable.

Item 10. Submission of Matters to a Vote of Security Holders.

There have been no material changes to the procedures by which shareholders may recommend nominees to the Registrant’s Board of Directors that have been implemented since the Registrant last provided disclosure in response to the requirements of this Item 10.

Item 11. Controls and Procedures.

(a) The Registrant’s principal executive and principal financial officers have concluded, based on their evaluation of the Registrant’s disclosure controls and procedures as of a date within 90 days of the filing date of this report, that the Registrant’s disclosure controls and procedures are reasonably designed to ensure that information required to be disclosed by the Registrant on Form N-CSR is recorded, processed, summarized and reported within the required time periods in the SEC’s rules and forms and that information required to be disclosed by the Registrant in the reports that it files or submits on Form N-CSR is accumulated and communicated to the Registrant’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

(b) There were no changes in the Registrant’s internal control over financial reporting during the Registrant’s second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

Item 12. Exhibits.

(a) (1) Not applicable for semi-annual reports.

(a) (2) Certifications pursuant to Rule 30a-2(a) under the Investment Company Act of 1940 – filed as an exhibit hereto.

(a) (3) Not applicable.

(b) Certifications pursuant to Rule 30a-2(b) under the Investment Company Act of 1940 – filed as an exhibit hereto.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Western Asset Income Fund
By:  

/s/ James W. Hirschmann

James W. Hirschmann
President
Western Asset Income Fund
Date:  

August 24, 2006

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

 

By:  

/s/ James W. Hirschmann

James W. Hirschmann
President
Western Asset Income Fund
Date:  

August 24, 2006

By:  

/s/ Marie K. Karpinski

Marie K. Karpinski
Principal Financial and Accounting Officer
Western Asset Income Fund
Date:  

August 21, 2006