<strong>Annual</strong> <strong>Report</strong> <strong>to</strong> ShareholdersNotes <strong>to</strong> Financial Statements—ContinuedSwap Counterparty(Reference Entity):Credit Suisse First Bos<strong>to</strong>n USA(New Century Home EquityLoan Trust 2005-1 M9, 1-MonthLIBOR + 205 bp, due 3/25/35)Termination DatePeriodicPaymentsMade by theFund‡ Notional Amount (2) Market ValueMarch 25, 2035 2.18%MonthlyUpfrontPremiumsPaid/(Received)UnrealizedAppreciation/Depreciation$18,390 $17,312 $— $ 17,312Credit Suisse First Bos<strong>to</strong>n USA(Novastar Home Equity Loan2005-1 B2, 1-Month LIBOR +135 bp, due 6/25/35)Credit Suisse First Bos<strong>to</strong>n USA(Novastar Home Equity Loan2005-4 B3, 1-Month LIBOR +195 bp, due 6/25/35)Credit Suisse First Bos<strong>to</strong>n USA(Park Place Securities Inc. 2005-WCH1 M8, 1-Month LIBOR +155bp, due 1/25/36)Credit Suisse First Bos<strong>to</strong>n USA(Park Place Securities, Inc. 2005-WCH1 M9, 1-Month LIBOR +250 bp, due 1/25/36)Credit Suisse First Bos<strong>to</strong>n USA(People's Choice Home LoanSecurities Trust 2004-1 M6, 1-Month LIBOR + 230bp, due6/25/34)Credit Suisse First Bos<strong>to</strong>n USA(People's Choice Home LoanSecurities Trust 2005-1 B3, 1-Month LIBOR + 260bp, due1/25/35)Credit Suisse First Bos<strong>to</strong>n USA(People's Choice Home LoanSecurities Trust 2005-1, 1-MonthLIBOR + 165bp, due 1/25/35)June 25, 2035 1.28%MonthlyJune 25, 2035 2.05%MonthlyJanuary 25, 2036 1.36%MonthlyJanuary 25, 2036 2.18%MonthlyJune 25, 2034 1.37%QuarterlyJanuary 25, 2035 2.05%MonthlyJanuary 25, 2035 1.28%Monthly43,000 37,194 — 37,19443,000 36,329 — 36,32943,000 40,892 — 40,89241,462 39,550 — 39,55035,714 34,071 — 34,07133,714 32,528 — 32,52843,000 41,102 — 41,102Net unrealized appreciation on buys of credit default swaps on corporate issues $904,09740
<strong>Annual</strong> <strong>Report</strong> <strong>to</strong> Shareholders(1) If the Fund is a seller of protection <strong>and</strong> a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i)pay <strong>to</strong> the buyer of protection an amount equal <strong>to</strong> the notional amount of the swap <strong>and</strong> take delivery of the referenced obligation or underlyingsecurities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal <strong>to</strong> the notional amount of theswap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.(2) The maximum potential amount the Fund could be required <strong>to</strong> make as a seller of credit protection or receive as a buyer of credit protection if acredit event occurs as defined under the terms of that particular swap agreement.(3) The quoted market prices <strong>and</strong> resulting values for credit default swap agreements on asset-backed securities <strong>and</strong> credit indices serve as anindica<strong>to</strong>r of the current status of the payment/performance risk <strong>and</strong> represent the likelihood of an expected liability (or profit) for the creditderivative should the notional amount of the swap agreement have been closed/sold as of the period end. Decreasing market values whencompared <strong>to</strong> the notional amount of the swap, represent a deterioration of the referenced entity’s credit soundness <strong>and</strong> a greater likelihood or riskof default or other credit event occurring as defined under the terms of the agreement.(4) If the Fund is a buyer of protection <strong>and</strong> a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either(i) receive from the seller of protection an amount equal <strong>to</strong> the notional amount of the swap <strong>and</strong> deliver the underlying securities comprising thereferenced index or (ii) receive a net settlement amount in the form of cash or securities equal <strong>to</strong> the notional amount of the swap less the recoveryvalue of the underlying securities comprising the referenced index.‡ Percentage shown is an annual percentage rate.4. Common Shares:Of the 11,474,540 shares of common s<strong>to</strong>ck outst<strong>and</strong>ing at December 31, 2008, <strong>Western</strong> <strong>Asset</strong> owns 11,975 shares.5. Preferred Shares:There are 2,880 shares of Auction Market Preferred Shares (“Preferred Shares”) authorized. The Preferred Shares have rights asset forth in the Fund’s Agreement <strong>and</strong> Declaration of Trust, as amended <strong>to</strong> date, <strong>and</strong> its Bylaws, as amended <strong>to</strong> date (the“Bylaws”), or as otherwise determined by the Trustees. The 2,880 Preferred Shares outst<strong>and</strong>ing consist of two series, 1,440 sharesof Series M <strong>and</strong> 1,440 shares of Series W. The Preferred Shares have a liquidation value of $25,000 per share, plus any accumulatedbut unpaid dividends whether or not earned or declared.Dividends on the Series M <strong>and</strong> Series W Preferred Shares are cumulative <strong>and</strong> are paid at a rate typically reset every seven <strong>and</strong>twenty-eight days, respectively, based on the results of an auction. Dividend rates ranged from 0.15% <strong>to</strong> 5.60% between January 1,2008 <strong>to</strong> December 31, 2008. Under the <strong>Investment</strong> Company Act of 1940, the Fund may not declare dividends or make other distributionson common shares or purchase any such shares if, at the time of the declaration, distribution or purchase, asset coveragewith respect <strong>to</strong> the outst<strong>and</strong>ing Preferred Shares would be less than 200%.The Preferred Shares are redeemable at the option of the Fund, in whole or in part, on the second business day precedingany dividend payment date at $25,000 per share plus any accumulated but unpaid dividends. The Preferred Shares are also subject<strong>to</strong> m<strong>and</strong>a<strong>to</strong>ry redemption at $25,000 per share plus any accumulated but unpaid dividends, whether or not earned or declared, ifcertain requirements relating <strong>to</strong> the composition of the assets <strong>and</strong> liabilities of the Fund as set forth in the Bylaws are not satisfied.Preferred shareholders, who are entitled <strong>to</strong> one vote per Preferred Share, generally vote as a single class with the commonshareholders, but will vote separately as a class (<strong>and</strong>, in certain circumstances, vote separately by series) with respect <strong>to</strong> certainmatters set forth in the Bylaws. The preferred shareholders are entitled <strong>to</strong> elect two Trustees of the Fund.6. Transactions with Affiliates:The Fund has a management agreement with <strong>Western</strong> <strong>Asset</strong> Management Company (“<strong>Western</strong> <strong>Asset</strong>”). Pursuant <strong>to</strong> the termsof the management agreement, the Fund pays <strong>Western</strong> <strong>Asset</strong> an annual fee, payable monthly, in an amount equal <strong>to</strong> 0.55% of theaverage weekly value of the Fund’s <strong>to</strong>tal managed assets. “Total managed assets” means the <strong>to</strong>tal assets of the Fund (including anyassets attributable <strong>to</strong> leverage) minus accrued liabilities. The liquidation preference of any Preferred Shares outst<strong>and</strong>ing is not considereda liability. Pursuant <strong>to</strong> a Portfolio Management Agreement between <strong>Western</strong> <strong>Asset</strong> <strong>and</strong> <strong>Western</strong> <strong>Asset</strong> ManagementCompany Limited (“WAML”), <strong>Western</strong> <strong>Asset</strong> pays a portion of the fees it receives from the Fund <strong>to</strong> WAML at an annual rate of0.425% of the average weekly value of the Fund’s <strong>to</strong>tal managed assets that WAML manages. <strong>Western</strong> <strong>Asset</strong> <strong>and</strong> WAML are whollyowned subsidiaries of Legg Mason, Inc.41
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