LM INSTITUTIONAL FUND ADVISORS II INC, 485BPOS, 2000-08-01

LM INSTITUTIONAL FUND ADVISORS II INC
485BPOS, 2000-08-01

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<PAGE>

As filed with the Securities and Exchange Commission on August 1, 2000
Registration Nos. 333-44423 and 811-8611

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM N-1A

REGISTRATION STATEMENT UNDER [X]
THE SECURITIES ACT OF 1933

Pre-Effective Amendment No. [_]
Post-Effective Amendment No. 6 [X]

REGISTRATION STATEMENT UNDER [X]
THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 7 [X]
(Check appropriate box or boxes)

LM Institutional Fund Advisors II, Inc.
(Exact name of registrant as specified in charter)

100 Light Street
Baltimore, Maryland 21202
(Address of principal executive offices)

Registrant's Telephone Number, Including Area Code: (410) 539-0000

Name and address
of agent for service: Copy to:
--------------------- --------

Charles A. Bacigalupo Bryan Chegwidden, Esq.
100 Light Street Ropes & Gray
Baltimore, Maryland 21202 One International Place
Boston, MA 02110

It is proposed that this filing will become effective (check appropriate box):

[X] Immediately upon filing pursuant to paragraph (b) of Rule 485
[_] On August 1, 2000 pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] On _____________ pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] On _____________ pursuant to paragraph (a)(2)

If appropriate, check the following box:

[_] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.

<PAGE>

Prospectus
August 1, 2000

This Prospectus describes the shares of a family of institutional mutual funds
managed by LM Institutional Advisors, Inc.

LM Institutional Fund Advisors I
Western Asset Government Money Market Portfolio
Western Asset Money Market Portfolio
Western Asset Intermediate Portfolio
Western Asset Intermediate Plus Portfolio
Western Asset Core Portfolio
Western Asset Core Plus Portfolio
Western Asset Inflation Indexed Bond Portfolio
Western Asset High Yield Portfolio
Western Asset Non-U.S. Fixed Income Portfolio
Western Asset Global Strategic Income Portfolio
Western Asset Enhanced Equity Portfolio

LM Institutional Fund Advisors II
LM Value Institutional Portfolio
LM Special Investment Institutional Portfolio
LM Total Return Institutional Portfolio
LM Balanced Institutional Portfolio
Batterymarch U.S. MidCapitalization Equity Portfolio
Batterymarch U.S. Small Capitalization Equity Portfolio
Batterymarch International Equity Portfolio
Batterymarch Emerging Markets Portfolio

These securities have not been approved or disapproved by the Securities and
Exchange Commission nor has the Securities and Exchange Commission passed upon
the accuracy or adequacy of this prospectus. Any representation to the contrary
is a criminal offense.

LM Institutional
Advisors Incorporated

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Table Of Contents

<TABLE>
<S> <C>
Prospectus Summary 3
Description of Each Portfolio, Its Investment Objective and Principal Investment Strategies 3
Principal Risks 15
Performance Information 19
Fees and Expenses 22
Management of the Portfolios 30
Purchase of Shares 32
Distribution Plans 34
Redemption of Shares 34
Exchange Privilege 35
Net Asset Value 35
Dividends and Distributions to Shareholders 36
Tax Information 37
Financial Highlights 37
Appendix A -- Prior Performance of LMIFA II Advisers' Other Accounts 43
</TABLE>

<PAGE>

Prospectus Summary

General

LM Institutional Fund Advisors I, Inc. ("LMIFA I") consists of the following
portfolios: Western Asset Government Money Market Portfolio, Western Asset Money
Market Portfolio, Western Asset Intermediate Portfolio, Western Asset
Intermediate Plus Portfolio, Western Asset Core Portfolio, Western Asset Core
Plus Portfolio, Western Asset Inflation Indexed Bond Portfolio, Western Asset
High Yield Portfolio, Western Asset Non-U.S. Fixed Income Portfolio, Western
Asset Global Strategic Income Portfolio and Western Asset Enhanced Equity
Portfolio. LM Institutional Fund Advisors II, Inc. ("LMIFA II") consists of the
following portfolios: LM Value Institutional Portfolio, LM Special Investment
Institutional Portfolio, LM Total Return Institutional Portfolio, LM Balanced
Institutional Portfolio, Batterymarch U.S. MidCapitalization Equity Portfolio,
Batterymarch U.S. Small Capitalization Equity Portfolio, Batterymarch
International Equity Portfolio and Batterymarch Emerging Markets Portfolio.

Manager and Advisers

LM Institutional Advisors, Inc. (the "Manager") serves as the investment manager
to each Portfolio. Legg Mason Funds Management Inc. ("LMFM"), Batterymarch
Financial Management, Inc. ("Batterymarch"), Western Asset Management Company
("Western Asset") and Western Asset Management Company Limited ("WAML") serve as
the investment advisers to the various Portfolios as noted below. LMFM,
Batterymarch, Western Asset and WAML are referred to as "Advisers."

Description Of Each Portfolio, Its Investment Objective And Principal Investment
Strategies

The investment objective and policies for each Portfolio are stated below. There
is no assurance a Portfolio will meet its objectives.

Western Asset Government Money Market Portfolio

Adviser: Western Asset
Objective: High current income consistent with liquidity and conservation of
principal

The Portfolio is a money market fund that seeks to maintain a net asset value of
$1.00 per share by investing in government money market instruments. To achieve
its objective, the Portfolio generally adheres to the following practices:

. It invests only in obligations of the U.S. Government and its agencies and
instrumentalities, repurchase agreements secured by such instruments and in
U.S. dollar-denominated debt obligations of "supranational organizations."
"Supranational organizations" are non-governmental entities designated or
supported by a government or governmental agency to promote economic
development, such as the European Community, the International Monetary
Fund, the United Nations and the World Bank.

. It generally buys instruments maturing in 397 days or less. It can also buy
certain variable and floating rate securities.

. It maintains a dollar-weighted average portfolio maturity of 90 days or
less.

. It may purchase or sell securities on a forward commitment basis.

. It may engage in reverse repurchase agreements and other borrowings as
permitted by applicable law.

Among the principal risks of investing in the Portfolio are Interest Rate Risk
and Credit Risk. Please see "Principal Risks" on pages 15 to 19 for a discussion
of these and other risks.

Western Asset Money Market Portfolio

Adviser: Western Asset
Objective: High current income consistent with liquidity and conservation of
principal

The Portfolio is a money market fund that seeks to maintain a net asset value of
$1.00 per share. To achieve its objective, the Portfolio generally adheres to
the following practices:

. It generally invests in money market instruments, such as:
- U.S. government obligations
- municipal obligations

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- instruments such as certificates of deposit, demand and time deposits,
savings shares and bankers' acceptances issued by domestic and foreign
banks and savings and loan institutions that have over $1 billion in
total assets or where the principal amount is insured by the Federal
Deposit Insurance Corporation
- repurchase agreements
- commercial paper and other short-term investments

. It invests only in "high quality" money market instruments. "High quality"
money market instruments are those that: (i) have received one of the two
highest ratings by two or more Nationally Recognized Statistical Rating
Organizations ("NRSRO"); (ii) receive one of the two highest ratings by one
NRSRO if only one has rated the security; or (iii) if unrated, are
determined by Western Asset to be of comparable quality.

. It may not invest more than 5% of its total assets in the "first tier"
securities of any one issuer (except for U.S. government obligations).
"First tier" securities are those that: (i) have been rated in the highest
rating category by two NRSROs; (ii) receive the highest rating by one NRSRO
if only one has rated the security; or (iii) if unrated, are determined by
Western Asset to be of comparable quality.

. It may not invest more than 1% of its total assets or $1 million (whichever
is greater) in the "second tier" securities of any one issuer. "Second
tier" securities are all "high quality" securities that are not "first
tier" securities.
. It may not invest more than 5% of its total assets in "second tier"
securities.
. It may invest only in U.S. dollar-denominated securities. These include
foreign investments denominated in U.S. dollars.
. It may engage in reverse repurchase agreements and make other borrowings.
. It generally buys money market securities maturing in 397 days or less. It
can also buy certain variable and floating rate securities.
. It may purchase or sell securities on a forward commitment basis.
. It maintains a dollar-weighted average portfolio maturity of 90 days or
less.

Among the principal risks of investing in the Portfolio are Interest Rate Risk
and Credit Risk. Please see "Principal Risks" on pages 15 to 19 for a discussion
of these and other risks.

Western Asset Intermediate Portfolio, Western Asset Intermediate Plus Portfolio,
Western Asset Core Portfolio, Western Asset Core Plus Portfolio
Advisers: Western Asset and WAML (non-U.S. portions of Intermediate Plus and
Core Plus Portfolios)
Objective: Maximize total return, consistent with prudent investment management
and liquidity needs, by investing to obtain the average duration specified for
each Portfolio

Each of these Portfolios invests in a portfolio of fixed income securities of
various maturities. To achieve their objectives, the Portfolios invest primarily
in:
. U.S. Government obligations
. mortgage- and other asset-backed securities
. U.S. dollar-denominated obligations of foreign governments, international
agencies or supranational organizations
. U.S. dollar-denominated fixed income securities of non-governmental
domestic or foreign issuers

In addition to the foregoing principal investment strategies, the Portfolios are
also permitted to:

. purchase other securities and instruments, including:
- preferred stocks
- structured notes
- municipal obligations
- convertible securities
- pay-in-kind securities and zero coupon bonds
- certificates of deposit, time deposits and bankers' acceptances issued
by domestic and foreign banks
- commercial paper and other short-term investments
. invest up to 25% of their total assets in the securities of foreign issuers
. buy or sell futures contracts and options for both hedging and non-hedging
purposes, including for purposes of enhancing returns
. buy or sell securities on a forward commitment basis
. lend their portfolio securities
. engage in foreign currency exchange transactions

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. engage in repurchase agreements and reverse repurchase agreements
. borrow money for temporary or emergency purposes

Each of the Portfolios may buy and sell investments relatively often, which
involves higher brokerage commissions and other expenses, and may increase taxes
payable by shareholders.

Each Portfolio in this group differs from the others in terms of its investment
policies regarding its target dollar weighted average duration, and the two
"Plus" Portfolios, the Intermediate Plus and Core Plus, differ from the other
Portfolios in terms of their policies with respect to U.S. dollar-denominated
securities and the credit quality of their investments. These differences are
summarized in the following table. "Duration" refers to the range within which
the dollar weighted average duration of a Portfolio is expected to fluctuate.
With respect to the Core and Core Plus Portfolios, the average duration is
expected to range within 20% of the duration of the domestic bond market as a
whole (normally four to six years, although this may vary) as measured by
Western Asset. "Foreign Currency Exposure" refers to whether a Portfolio
presently intends to limit its investments to U.S. dollar-denominated
securities. "Credit Quality" refers to the percentage of a Portfolio's net
assets that may be invested in debt securities that are rated, at the time of
purchase, below investment grade, but at least B or higher by an NRSRO or, if
unrated, determined by the Adviser to be of comparable quality. The continued
holding of securities downgraded below investment grade or, if unrated,
determined by the Adviser to be of comparable quality, will be evaluated by the
Adviser on a case by case basis.

<TABLE>
<CAPTION>
Portfolio Duration Foreign Currency Exposure Credit Quality
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate 2-4 Years U.S. Dollar-Denominated Only Currently Anticipates No
Securities Below Investment Grade

Intermediate Plus 2-4 Years The Portfolio may invest up to Up to 15%
20% of its total assets Below Investment Grade
in non-U.S. dollar denominated
securities.

Core Generally U.S. Dollar-Denominated Only Currently Anticipates
4-6 Years No Securities Below Investment
Grade

Core Plus Generally The Portfolio may invest up to Up to 15%
4-6 Years 20% of its total assets in Below Investment Grade
non-U.S. dollar-denominated
securities.
</TABLE>

Among the principal risks of investing in these Portfolios are Interest Rate
Risk, Credit Risk, Call Risk, Special Risks of Mortgage-Backed and Asset-Backed
Securities, Foreign Securities Risk, Borrowing Risk, Derivatives Risk and
Hedging Risk. In addition to those risks, Special Risks of High Yield
Securities, Liquidity Risk and Currency Risk are among the principal risks of
investing in the Intermediate Plus and Core Plus Portfolios. Please see
"Principal Risks" on pages 15 to 19 for a discussion of these and other risks.

Western Asset Inflation Indexed Bond Portfolio
Adviser: Western Asset
Objective: Maximize total return, consistent with preservation of capital

Under normal market conditions, the Portfolio invests at least 65% of its total
assets in inflation-indexed fixed income securities issued in the United States.
Inflation-indexed bonds are fixed income securities that are structured to
provide protection against inflation. The principal or interest components of an
inflation-indexed bond are adjusted periodically according to the general
movements of inflation in the country of issue. The U.S. Treasury currently
uses the Consumer Price Index for Urban Consumers, non-seasonally adjusted, as
its inflation measure.

The Adviser uses fundamental investment techniques to select issues. The
average modified duration of the Portfolio is expected to range within 3 years
of that of its benchmark, the Lehman Brothers Treasury Inflation Notes Index.
Although the Portfolio is expected to maintain an average credit quality of
AAA/Aaa, it may invest up to 35% of its net assets in securities rated below
AAA/Aaa but above BBB/Baa at the time of purchase or unrated securities of
comparable quality at the time of purchase. Consistent with its investment
objective, the Portfolio may invest in fixed income securities of any maturity.

To achieve its objective, the Portfolio may also invest in other securities or
instruments, including:

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. U.S. Government obligations
. corporate obligations ("Corporate obligations" include preferred stock,
convertible securities, zero coupon securities and pay-in-kind securities)
. foreign inflation-indexed securities
. preferred stocks
. non-U.S. debt issued in U.S. dollars or foreign currencies
. mortgage- and other asset-backed securities
. municipal obligations
. variable and floating rate debt securities
. commercial paper and other short-term investments
. certificates of deposit, fixed time deposits and bankers' acceptances
. loan participations and assignments
. structured notes
. repurchase agreements
. pay-in-kind securities and zero coupon bonds

The Portfolio may also:
. engage in reverse repurchase agreements
. borrow money for temporary or emergency purposes
. buy or sell futures contracts and options for both hedging and non-hedging
purposes, including for purposes of enhancing returns
. buy or sell foreign currencies, foreign currency options, or foreign
currency futures contracts and related options
. enter into foreign currency forward contracts for hedging and non-hedging
purposes, including for purposes of enhancing returns
. loan its portfolio securities
. buy or sell securities on a forward commitment basis

Among the principal risks of investing in the Portfolio are Interest Rate Risk,
Credit Risk, Market Risk, Derivatives Risk, Liquidity Risk, Foreign Securities
Risk, Currency Risk, Call Risk, Borrowing Risk, Special Risks of Mortgage-Backed
and Asset-Backed Securities and Hedging Risk. Please see "Principal Risks" on
pages 15 to 19 for a discussion of these and other risks.

Western Asset High Yield Portfolio
Adviser: Western Asset
Objective: Maximize total return, consistent with prudent investment management

Under normal market conditions, the Portfolio will invest at least 75% of its
total assets in U.S. dollar-denominated debt or fixed income securities that are
rated below investment grade at the time of purchase by one or more NRSROs or
are of a comparable quality as determined by Western Asset. These securities are
commonly known as "junk bonds" or "high yield bonds."

Western Asset expects that, under normal market conditions, all or substantially
all of the Portfolio's assets will be invested in such securities. In deciding
among the securities in which the Portfolio may invest, the Adviser takes into
account the credit quality, country of issue, interest rate, liquidity, maturity
and yield of a security as well as other factors, including the Portfolio's
duration and prevailing and anticipated market conditions. To achieve its
objective, the Portfolio may also make other investments, including:

. mortgage- and other asset-backed securities
. municipal obligations
. variable and floating rate debt securities
. commercial paper and other short-term investments
. corporate obligations
. common stocks and warrants
. certificates of deposit, fixed time deposits and bankers' acceptances
issued by domestic banks

The Portfolio is also permitted to:
. invest up to 25% of its total assets in foreign currency-denominated
foreign securities

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. buy or sell futures contracts and options for both hedging and non-hedging
purposes, including for purposes of enhancing returns
. engage in foreign currency exchange transactions
. lend its portfolio securities
. borrow money for temporary or emergency purposes
. buy or sell securities on a forward commitment basis
. engage in repurchase agreements and reverse repurchase agreements

The Portfolio may buy and sell investments relatively often, which involves
higher brokerage commissions and other expenses, and may increase taxes payable
by shareholders.

Among the principal risks of investing in the Portfolio are Interest Rate Risk,
Credit Risk, Call Risk, Special Risks of High Yield Securities, Special Risks of
Mortgage-Backed and Asset-Backed Securities, Market Risk, Foreign Securities
Risk, Liquidity Risk, Borrowing Risk, Emerging Markets Risk, Currency Risk,
Derivatives Risk and Hedging Risk. Please see "Principal Risks" on pages 15 to
19 for a discussion of these and other risks.

Western Asset Non-U.S. Fixed Income Portfolio
Adviser: WAML
Objective: Maximize total return, consistent with prudent investment management

Under normal market conditions, the Portfolio invests at least 75% of its total
assets in debt and fixed income securities denominated in major foreign
currencies. WAML anticipates that, under normal market conditions, all or
substantially all of the Portfolio's assets will be invested in securities of
foreign issuers and that these foreign issuers will represent at least three
foreign countries. Under current market conditions, the Portfolio expects that
substantially all of its currency risk will be hedged to U.S. dollars.

To achieve its objective, the Portfolio may invest in a variety of securities,
including:
. U.S. dollar-denominated or foreign currency-denominated obligations of
foreign governments, international agencies or supranational entities
. foreign currency exchange-related securities, including foreign currency
warrants
. U.S. Government obligations
. mortgage- and other asset-backed securities
. variable and floating rate debt securities
. commercial paper and other short-term investments
. corporate obligations
. certificates of deposit, fixed time deposits and bankers' acceptances
. loan participations and assignments
. indexed securities and structured notes
. repurchase agreements

The Portfolio may also:
. engage in reverse repurchase agreements
. borrow money for temporary or emergency purposes
. buy or sell futures contracts and options for both hedging
and non-hedging purposes, including for purposes of enhancing returns
. buy or sell foreign currencies, foreign currency options, or
foreign currency futures contracts and related options
. enter into foreign currency forward contracts for hedging
and non-hedging purposes, including for purposes of enhancing returns
. loan its portfolio securities

The Portfolio does not currently intend to invest in securities that are rated
at the time of purchase below investment grade, although it may do so if market
conditions are favorable. The Portfolio is "non-diversified" within the meaning
of the Investment Company Act. As a result, the value of its shares will be more
susceptible to any single economic, political or regulatory event than shares of
a diversified fund. For more information, see "Principal Risks--Non-
Diversification." WAML anticipates that from time to time over 25% of the
Portfolio's assets may be invested in securities of issuers located in a single
country. Because the Portfolio may concentrate a significant portion of its
investments in a single country or currency, it will be more susceptible to
factors adversely affecting such currency or issuers within that country than
would a more

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diversified portfolio of securities. The Portfolio may buy and sell investments
relatively often, which involves higher brokerage commissions and other
expenses, and may increase taxes payable by shareholders.

Among the principal risks of investing in the Portfolio are Interest Rate Risk,
Credit Risk, Call Risk, Special Risks of High Yield Securities, Special Risks of
Mortgage-Backed and Asset-Backed Securities, Market Risk, Foreign Securities
Risk, Emerging Markets Risk, Currency Risk, Borrowing Risk, Derivatives Risk,
Liquidity Risk and Hedging Risk. Please see "Principal Risks" on pages 15 to 19
for a discussion of these and other risks.

Western Asset Global Strategic Income Portfolio
Advisers: WAML (non-U.S. portion) and Western Asset (U.S. portion)
Objective: Income and capital appreciation

To achieve its investment objective, the Portfolio invests primarily in various
types of U.S. dollar-denominated and foreign currency-denominated fixed income
securities, including:

. U.S. and foreign corporate fixed income securities
. Debt obligations of corporate and governmental issuers in emerging market
countries (These include "Brady Bonds"; bonds issued as a result of a debt
restructuring plan; Eurobonds; domestic and international bonds issued
under the laws of a developing country; and emerging market loans.)
. sovereign debt obligations of developed nations, including those of the
United States
. debt obligations of "supranational organizations"
. mortgage- and other asset-backed securities

The Portfolio may invest in a variety of other securities, including:
. foreign currency exchange-related securities, including foreign currency
warrants
. variable and floating rate debt securities
. commercial paper and other short-term investments
. municipal obligations
. certificates of deposit, fixed time deposits and bankers' acceptances
. loan participations and assignments
. indexed securities and structured notes
. repurchase agreements

The Portfolio may invest up to 60% of its net assets in securities that are
rated at the time of purchase below investment grade or are of comparable
quality at the time of purchase as determined by WAML or Western Asset. These
securities are commonly known as "junk bonds" or "high yield bonds." The
Portfolio may buy and sell investments relatively often, which involves higher
brokerage commissions and other expenses, and may increase taxes payable by
shareholders.

The Portfolio may also:
. engage in reverse repurchase agreements
. borrow money for temporary or emergency purposes
. loan its portfolio securities
. buy or sell futures contracts and options for both hedging and non-hedging
purposes, including for purposes of enhancing returns
. buy or sell foreign currencies, foreign currency options, or foreign
currency futures contracts and related options
. enter into foreign currency forward contracts for hedging and non-hedging
purposes, including for purposes of enhancing returns

Under normal market conditions, the Portfolio will invest at least 80% of its
total assets in securities of issuers representing at least three countries (one
of which may be the U.S.) and at least 65% of its total assets in income
producing securities. Because the Portfolio may concentrate a significant
portion of its investments in a single country or currency, it will be more
susceptible to factors adversely affecting issuers within that country or
currency than would a more diversified portfolio of securities.

The Portfolio is "non-diversified" within the meaning of the Investment Company
Act. As a result, the value of its shares will be more susceptible to any single
economic, political or regulatory event than shares of a diversified fund. For
more information, see "Principal Risks--Non-Diversification."

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<PAGE>

Among the principal risks of investing in the Portfolio are Interest Rate Risk,
Credit Risk, Call Risk, Special Risks of High Yield Securities, Special Risks of
Mortgage-Backed and Asset-Backed Securities, Foreign Securities Risk, Emerging
Markets Risk, Currency Risk, Borrowing Risk, Derivatives Risk, Liquidity Risk
and Hedging Risk. Please see "Principal Risks" on pages 15 to 19 for a
discussion of these and other risks.

Western Asset Enhanced Equity Portfolio
Adviser: Western Asset
Objective: Long-term total return

The Portfolio's assets will be comprised of two components: an equity component
and a fixed income component.

. The equity component will generally maintain full exposure to the U.S.
equity market as represented by the S&P 500 Index (the "Index").
. The fixed income component will try to generate interest and gains in
excess of the Portfolio's expenses, including transaction costs related to
its investments.

The Portfolio expects that its performance will approximate that of the Index,
with the extent to which the Portfolio outperforms or underperforms the Index
depending largely, but not exclusively, on whether the fixed income component
has earned sufficient amounts to offset the Portfolio's expenses. Up to 10% of
the Portfolio's net assets may be invested in securities rated below investment
grade at the time of purchase or unrated securities of comparable quality at the
time of purchase (commonly known as "junk bonds" or "high yield bonds") and up
to 20% of its net assets may be invested in foreign securities. The Portfolio
may buy and sell investments relatively often, which involves higher brokerage
commissions and other expenses, and may increase taxes payable by shareholders.
The following information summarizes the investment practices of the Portfolio's
two components.

Equity Component

The Portfolio's equity component intends to invest primarily in stock index
futures, options on stock indexes, options on stock index futures and other
derivative instruments that are based on the Index ("S&P derivatives").

The equity component of the Portfolio adheres to the following practices:
. It may invest in any combination of (i) S&P derivatives and (ii) common
stocks that are registered in the Index ("S&P Stocks").
. It currently plans to invest predominantly, and likely exclusively, in S&P
derivatives.
. It will not be limited to purchasing S&P stocks in the same proportion as
such stocks are weighted in the Index.
. It will seek to remain invested in S&P stocks and S&P derivatives even when
the Index is declining.

The Index is composed of 500 selected common stocks, most of which are listed on
the New York Stock Exchange. Standard and Poor's ("S&P") chooses the stocks to
be included in the Index solely on a statistical basis. The weightings of stocks
in the Index are based on each stock's relative total market value, that is, its
market price per share times the number of shares out-standing. The Portfolio is
neither sponsored by nor affiliated with S&P.

Fixed Income Component

The fixed income component will invest primarily in the following types of fixed
income securities:
. U.S. Government obligations
. securities of non-governmental domestic or foreign issuers
. municipal securities
. mortgage- and other asset-backed securities
. preferred stocks
. obligations of foreign governments, international agencies or supranational
entities

The fixed income component may also take other actions, including:
. investing in certificates of deposit, time deposits and bankers'
acceptances issued by domestic and foreign banks
. investing in commercial paper and other short-term investments
. engaging in repurchase agreements, reverse repurchase agreements and other
borrowings
. purchasing or selling futures contracts and options
. engaging in foreign currency exchange transactions

<PAGE>

Among the principal risks of investing in the Portfolio are Market Risk,
Interest Rate Risk, Credit Risk, Call Risk, Special Risks of High Yield
Securities, Special Risks of Mortgage-Backed and Asset-Backed Securities,
Foreign Securities Risk, Emerging Markets Risk, Currency Risk, Borrowing Risk,
Derivatives Risk and Hedging Risk. Please see "Principal Risks" on pages 15 to
19 for a discussion of these and other risks.

LM Value Institutional Portfolio
Adviser: LMFM
Objective: Long-term growth of capital

The Portfolio invests primarily in equity securities (including common and
preferred stocks), and securities convertible into equity securities, that, in
the Adviser's opinion, offer the potential for capital growth. The Adviser
follows a value discipline in selecting securities, and therefore seeks to
purchase securities at large discounts to the Adviser's assessment of their
intrinsic value. Intrinsic value, according to the Adviser, is the value of the
company measured, to different extents depending on the type of company, on
factors such as, but not limited to, the discounted value of its projected
future free cash flows, the company's ability to earn returns on capital in
excess of its cost of capital, private market values of similar companies, the
value of its assets, and the costs to replicate its business. Qualitative
factors, such as an assessment of the company's products, competitive
positioning, strategy, industry economics and dynamics, regulatory frameworks
and more, are also important. Securities may be undervalued due to uncertainty
arising from the availability of accurate information, economic growth and
change, changes in competitive conditions, technological change, changes in
government policy or geo-political dynamics, and more. The Adviser takes a
long-term approach to investing, generally characterized by long holding periods
and low portfolio turnover. The Portfolio generally invests in companies with
market capitalizations greater than $5 billion, but may invest in companies of
any size.

The Adviser typically sells a security when, in the Adviser's assessment, the
security no longer appears to offer a long-term above average risk-adjusted rate
of return, when a more compelling investment opportunity is found, or when the
investment basis no longer applies.

The Portfolio may also invest in debt securities of companies having one or more
of the above characteristics. The Portfolio may invest up to 25% of its net
assets in long-term debt securities. Up to 10% of its total assets may be
invested in convertible and/or debt securities rated below investment grade,
i.e., not rated at least BBB by Standard & Poor's or Baa by Moody's Investors
Service, Inc. or, if unrated by those entities, deemed by the Adviser to be of
comparable quality. These bonds are commonly referred to as junk bonds.

For temporary purposes, or when cash is temporarily available, the Portfolio may
invest without limit in investment grade, short-term debt instruments, including
government, corporate and money market securities. The Portfolio may not achieve
its investment objective when so invested.

Among the principal risks of investing in the Portfolio are Market Risk,
Interest Rate Risk, Credit Risk, Call Risk, Special Risks of High Yield
Securities, Foreign Securities Risk, Borrowing Risk and Hedging Risk. Please see
"Principal Risks" on pages 15 to 19 for a discussion of these and other risks.

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LM Special Investment Institutional Portfolio
Adviser: LMFM
Objective: Capital appreciation

The Portfolio invests primarily in equity securities, and securities convertible
into equity securities, of companies whose market capitalizations are typically
classified as small to mid-sized. The Adviser defines small to mid-sized
companies as those below the top 500 U.S. companies in terms of market
capitalization. It also invests in "special situations" without regard to market
capitalization. Special situations are companies undergoing unusual or possibly
one-time developments that, in the opinion of the Adviser, make them attractive
for investment. Such developments may include actual or anticipated: sale or
termination of an unprofitable part of the company's business; change in the
company's management or in management's philosophy; change in the industry in
which the company operates; introduction of new products or technologies; or the
prospect or effect of acquisition or merger activities.

The Adviser follows a value discipline in selecting securities, and therefore
seeks to purchase securities at large discounts to the Adviser's assessment of
their intrinsic value. Intrinsic value, according to the Adviser, is the value
of the company measured, to different extents depending on the type of company,
on factors such as, but not limited to, the discounted value of its projected
future free cash flows, the company's ability to earn returns on capital in
excess of its cost of capital, private market values of similar companies, the
value of its assets, and the costs to replicate its business. Qualitative
factors, such as an assessment of the company's products, competitive
positioning, strategy, industry economics and dynamics, regulatory frameworks
and more, are also important. Securities may be undervalued due to uncertainty
arising from the availability of accurate information, economic growth and
change, changes in competitive conditions, technological change, changes in
government policy or geo-political dynamics, and more.

The Portfolio also invests in debt securities of companies having one or more of
the above characteristics. The Portfolio may invest up to 35% of its net assets
in debt securities rated below investment grade, i.e., rated below BBB/Baa (or,
if unrated, determined by the Adviser to be of comparable quality). These bonds
are commonly referred to as junk bonds. The Portfolio may invest up to 20% of
its total assets in securities of companies involved in actual or anticipated
reorganizations or restructurings.

For temporary defensive purposes, or when cash is temporarily available, the
Portfolio may invest without limit in investment grade, short-term debt
instruments, including government, corporate and money market securities. The
Portfolio may not achieve its investment objective when so invested.

LM Total Return Institutional Portfolio
Adviser: LMFM
Objective: Capital appreciation and current income in order to achieve an
attractive total investment return consistent with reasonable risk

The Portfolio invests primarily in securities that, in the Adviser's opinion,
offer the potential for long-term capital growth and attractive current income.
The Portfolio invests primarily in common stocks, debt securities, and
securities convertible into common stocks, but is not limited to these types of
securities. The Portfolio may invest in securities that do not pay current
income but do, in the Adviser's opinion, offer prospects for capital
appreciation and/or future income. The Adviser follows a value discipline in
selecting securities, and therefore seeks to purchase securities at large
discounts to the Adviser's assessment of their intrinsic value. Intrinsic value,
according to the Adviser, is the value of the company measured, to different
extents depending on the type of company, on factors such as, but not limited
to, the discounted value of its projected future free cash flows, the company's
ability to earn returns on capital in excess of its costs of capital, private
market values of similar companies, the value of its assets, and the costs to
replicate its business. Qualitative factors, such as an assessment of the
company's products, competitive positioning, strategy, industry economics and
dynamics, regulatory frameworks and more, are also important. Securities may be
undervalued due to uncertainty arising from the availability of

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accurate information, economic growth and change, changes in competitive
conditions, technological change, changes in government policy or geo-political
dynamics, and more. The Portfolio may invest in companies of any size.

The Adviser typically sells a security when, in the Adviser's assessment, the
security no longer appears to offer long-term attractive total returns at
reasonable risk, when a more compelling investment opportunity is found, or when
the investment basis no longer applies. The Portfolio may invest in money market
securities for temporary defensive purposes or when cash is temporarily
available. The Portfolio may not achieve its investment objective when so
invested. Consistent with the investment objective, the Portfolio may also
invest in debt securities when the Adviser believes the return on such
securities may equal or exceed the return on equity securities. The Portfolio
may invest in debt securities of any maturity of both foreign and domestic
issuers without regard to rating, and may invest its assets in debt securities
without regard to a percentage limit. The Adviser currently anticipates that
under normal market conditions the Portfolio will invest no more than 50% of its
total assets in intermediate-term and long-term debt securities and no more than
5% of its total assets in debt securities that are not investment grade quality
(commonly referred to as junk bonds).

Among the principal risks of investing in the Portfolio are Market Risk,
Interest Rate Risk, Credit Risk, Call Risk, Special Risks of High Yield
Securities, Liquidity Risk, Borrowing Risk, Foreign Securities Risk, Currency
Risk and Hedging Risk. Please see "Principal Risks" on pages 15 to 19 for a
discussion of these and other risks.

LM Balanced Institutional Portfolio
Adviser: LMFM
Objective: Long-term capital appreciation and current income

The Portfolio is a "fund of funds" which is comprised of two separate investment
components: an equity component and a fixed income component. The equity
component will consist solely of Institutional Class shares of the LM Value
Institutional Portfolio ("Value Institutional Portfolio"), a series of LM
Institutional Fund Advisors II, Inc., while the fixed income component will
consist solely of Institutional Class shares of the Western Asset Core Portfolio
("Core Portfolio"), a series of LM Institutional Fund Advisors I, Inc. The
investment objectives, principal investment strategies and related risks of the
Core Portfolio and the Value Institutional Portfolio are described elsewhere in
this Prospectus.

LMFM, the Portfolio's Adviser, will be responsible for allocating assets between
the two components. LMFM currently anticipates that under normal market
conditions approximately 60% of the Portfolio's total assets will be allocated
to the equity component and approximately 40% will be allocated to the fixed
income component. However, LMFM reserves the right to vary these percentages, as
it deems appropriate and market opportunities arise, subject to the limitation
that, under normal market conditions, at least 25% of the Portfolio's total
assets will be allocated to the fixed income component. For temporary defensive
purposes, the Portfolio may also hold cash or other short-term investments and
may not achieve its investment objective when so invested.

Batterymarch U.S. MidCapitalization Equity Portfolio
Adviser: Batterymarch
Objective: Long-term capital appreciation

Under normal market conditions, the Portfolio will invest at least 65% of its
total assets in equity securities of companies with medium market
capitalizations domiciled, or having their principal activities, in the United
States. The Adviser defines medium market capitalization companies as those with
market capitalizations similar, in its judgment, to the market capitalization of
companies in the Standard & Poor's MidCap 400 Index, determined at the time of
the Portfolio's investment. The S&P MidCap 400 Index is a market weighted
composite index of 400 stocks in the middle capitalization sector of the U.S.
equities market. A company that was a medium market capitalization company at
the time of the Portfolio's investment will continue to be treated as such for
purposes of the 65% test, even if its market capitalization is no longer similar
to that of companies in the S&P MidCap 400 Index.

Equity securities include common stock, preferred stock, securities convertible
into or exchangeable for common stock, rights and warrants to acquire such
securities and substantially similar forms of equity with comparable risk. The
Portfolio may also invest in securities of companies in the form of American
Depository Receipts, which are typically dollar-denominated instruments traded
on an exchange in the United States.

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within this model reflect a style neutral investment philosophy and are intended
to measure growth, value, fundamental expectations and technical indicators.

In addition to its principal investment strategies, the Portfolio may engage in
other transactions. For example, although the Portfolio expects to remain
substantially fully invested in equity securities, the Portfolio may invest in
debt or fixed income securities, cash and money market instruments, including
repurchase agreements. Under normal market conditions, up to 5% of the
Portfolio's total assets may be invested in fixed income securities rated below
investment grade or, if unrated, determined by the Adviser to be of comparable
quality. The Portfolio may also engage in reverse repurchase agreement
transactions and other borrowings, purchase restricted and illiquid securities,
lend its portfolio securities, invest in securities of other investment
companies, engage in foreign currency exchange transactions and engage in
futures and options transactions.

Among the principal risks of investing in the Portfolio are Market Risk,
Interest Rate Risk, Credit Risk, Borrowing Risk, Liquidity Risk, Derivatives
Risk, Foreign Securities Risk, Currency Risk, Special Risks of High Yield
Securities and Hedging Risk. Please see "Principal Risks" on pages 15 to 19 for
a discussion of these and other risks.

Batterymarch U.S. Small Capitalization Equity Portfolio
Adviser: Batterymarch
Objective: Long-term capital appreciation

Under normal market conditions, the Portfolio will invest at least 65% of its
total assets in equity securities of companies with small market capitalizations
domiciled, or having their principal activities, in the United States. The
Adviser defines small market capitalization companies as those whose market
capitalizations are similar, in its judgment, to the market capitalization of
companies in the Russell 2000 Index, determined at the time of the Portfolio's
investment. The Russell 2000 Index is a capitalization-weighted broad-based
index of 2000 small capitalization U.S. companies. A company that was a small
market capitalization company at the time of the Portfolio's investment will
continue to be treated as such for purposes of the 65% test, even if its market
capitalization is no longer similar to that of companies in the Russell 2000
Index.

The Adviser uses a bottom-up, quantitative stock selection process. The
cornerstone of this process is a proprietary stock selection model that ranks
the stocks in the Portfolio's investable universe by relative attractiveness on
a daily basis. The quantitative factors within this model reflect a style
neutral investment philosophy and are intended to measure growth, value,
fundamental expectations and technical indicators.

Among the principal risks of investing in the Portfolio are Market Risk,
Interest Rate Risk, Credit Risk, Borrowing Risk, Liquidity Risk, Derivatives
Risk, Special Risks of High Yield Securities and Hedging Risk. Please see
"Principal Risks" on pages 15 to 19 for a discussion of these and other risks.

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Batterymarch International Equity Portfolio
Adviser: Batterymarch
Objective: Long-term total return

Under normal market conditions, the Portfolio will invest substantially all of
its assets, but in any event at least 65% of its total assets, in non-U.S.
equity securities.

The primary focus of the Adviser is stock selection, with a secondary focus on
country allocation. The Adviser uses a bottom-up, quantitative stock selection
process for the developed markets portion of the Portfolio's investments. The
cornerstone of this process is a proprietary stock selection model that ranks
the 2,800 stocks in the Portfolio's investable universe by relative
attractiveness on a daily basis. The quantitative factors within this model are
intended to measure growth, value, fundamental expectations and technical
indicators (i.e., supply and demand).

Country allocation for the developed markets portion of the Portfolio is based
on rankings generated by the Adviser's proprietary country model. The Adviser
examines securities from over 20 international stock markets, with emphasis on
several of the largest: Japan, United Kingdom, France, Canada and Germany.

The Portfolio may invest up to 35% of its total assets in emerging market equity
securities. The Adviser's investment strategy for the emerging markets portion
of the Portfolio represents a distinctive combination of quantitative
methodology and traditional fundamental analysis. The emerging markets
allocation focuses on what the Adviser believes are higher-quality, dominant
companies, which the Adviser believes to have strong growth prospects and
reasonable valuations. Country allocation for the emerging markets portion of
the Portfolio also combines quantitative and fundamental approaches.

The Portfolio will normally be invested across a broad range of industries and
across a number of countries, consistent with the objective of maximum total
return. However, more than 25% of the Portfolio's total assets may be invested
in securities of issuers located in a single country, which is currently
expected to be the case with respect to both Japan and the United Kingdom.
Because the Portfolio may concentrate a significant portion of its investments
in a single country or currency, it will be more susceptible to factors
adversely affecting such currency or issuers within that country than would a
more diversified portfolio of securities.

The Portfolio may invest without limit in cash and money market instruments,
including repurchase agreements, in circumstances when cash is temporarily
available, or for temporary defensive purposes when the Adviser believes such
action is warranted by abnormal market or economic situations. The Portfolio may
not achieve its investment objectives when so invested. Up to 5% of the
Portfolio's total assets may be invested in fixed income securities rated below
investment grade or, if unrated, determined by the Adviser to be below
investment grade. The Adviser may also seek to enhance portfolio returns through
active currency hedging strategies, although there can be no assurances that
such strategies will be pursued or, if pursued, will be successful.

Among the principal risks of investing in the Portfolio are Market Risk, Foreign
Securities Risk, Emerging Markets Risk, Currency Risk, Interest Rate Risk,
Credit Risk, Call Risk, Special Risks of High Yield Securities, Borrowing Risk,
Derivatives Risk and Hedging Risk. Please see "Principal Risks" on pages 15 to
19 for a discussion of these and other risks.

Batterymarch Emerging Markets Portfolio
Adviser: Batterymarch
Objective: Long-term capital appreciation

Under normal market conditions, the Portfolio will invest substantially all of
its assets, but in any event at least 65% of its total assets, in equity
securities and convertible securities of emerging market issuers. Emerging
market countries are those countries having less fully developed economic and
political systems and include any country: (i) having an "emerging stock market"
or considered a "frontier market" as defined by the International Finance
Corporation; (ii) with low- to middle-income economies according to the
International Bank for Reconstruction and Development ("World Bank"); (iii)
listed in World Bank publications as developing; or (iv) included in the Morgan
Stanley Capital International (MSCI) Emerging Markets published index. Emerging
market equity securities include common stock, preferred stock, securities
convertible into common stock, rights and warrants to acquire such securities
and substantially similar forms of equity with comparable risk characteristics
that are: (1) publicly traded on emerging market stock exchanges, or whose
principal trading market is over-the-counter (i.e., off-exchange) in an emerging
market country; (2) securities denominated in any currency if issued by
companies to finance operations in an emerging market country; (3) securities of
companies that derive a substantial portion

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(i.e., in excess of 50%) of their total revenues from goods or services produced
in, or sales made in, emerging market countries; (4) securities of companies
organized under the laws of an emerging market country or region, which are
publicly traded in securities markets elsewhere; or (5) American depositary
receipts ("ADRs") (or similar instruments) with respect to the foregoing.

The Portfolio intends to invest in Asia, Latin America, the Indian Subcontinent,
Southern and Eastern Europe, the Middle East and Africa, although it may not
invest in all these markets at all times and may not invest in any particular
market when it deems investment in that country or region to be inadvisable.

More than 25% of the Portfolio's total assets may be invested in securities of
issuers located in a single country. Because the Portfolio may concentrate a
significant portion of its investments in a single country or currency, it will
be more susceptible to factors adversely affecting such currency or issuers
within that country than would a more diversified portfolio of securities.

The Adviser focuses on what the Adviser believes are higher-quality, dominant
emerging markets companies which the Adviser believes to have strong growth
prospects and reasonable valuations, selected from an investable universe of
approximately 1,000 stocks. The Adviser's emerging markets investment strategy
represents a distinctive combination of quantitative methodology and traditional
fundamental analysis. Traditional "on-the-ground" fundamental research is
combined by the Adviser with quantitative valuation disciplines in those markets
where reliable data is available. In determining country allocation, the Adviser
also merges quantitative and fundamental approaches.

The Portfolio may invest without limit in cash and money market instruments,
including repurchase agreements, in circumstances when cash is temporarily
available, or for temporary defensive purposes when the Adviser believes such
action is warranted by abnormal market or economic situations. The Portfolio may
not achieve its investment objective when so invested. Up to 10% of the
Portfolio's total assets may be invested in fixed income securities rated below
investment grade or, if unrated, determined by the Adviser to be below
investment grade (i.e., rated below BBB/Baa and commonly referred to as junk
bonds).

Principal Risks

In General

At any time, your investment in a mutual fund may be worth more or less than the
price you originally paid for it. You may lose money by investing in any of
these Portfolios because: (1) the value of the investments it owns changes,
sometimes rapidly and unpredictably; (2) the Portfolio is not successful in
reaching its goal because of its strategy or because it did not implement its
strategy properly; or (3) unforeseen occurrences in the securities markets
negatively affect the Portfolio.

An investment in the Western Asset Government Money Market and Western Asset
Money Market Portfolios is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Although these Portfolios seek to preserve the value of your investment
at $1.00 per share, it is possible to lose money by investing in these
Portfolios.

The following risks apply to the Portfolios. You should read this section
carefully before you invest in order to learn more about the Portfolio in which
you will invest.

Market Risk

Certain of the Portfolios may invest, directly or indirectly, their assets in
equity securities. Prices of equity securities generally fluctuate more than
those of other securities. A Portfolio may experience a substantial or complete
loss on an individual stock. Market risk may affect a single issuer, industry or
section of the economy or may affect the market as a whole. The Batterymarch
International Equity Portfolio and the Batterymarch Emerging Markets Portfolio
invest primarily in foreign equity securities. Foreign securities have
additional risks, see "Foreign Securities Risk" and "Currency Risk" below.

Securities of "small cap" companies, such as those in which the Batterymarch
U.S. Small Capitalization Equity Portfolio may invest, entail special risks.
Such companies often have limited operating histories and may have more
restricted product lines

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or more limited financial resources than larger, more established companies. For
these and other reasons, they may be more severely affected by economic
downturns or other adverse developments than are larger, more established
companies. Securities of "small cap" companies may be traded "over-the-counter"
and often trade less frequently and in more limited volume, may be subject to
greater volatility and may be more difficult to value than securities of larger,
more established companies. "Small cap" companies are often involved in actual
or anticipated reorganizations or restructurings, which involve special risks,
including difficulty in obtaining information as to the financial condition of
such companies. Market prices of such companies' securities may be subject to
sudden and erratic price volatility. The securities of "mid-sized" companies,
such as those in which the Batterymarch U.S. MidCapitalization Equity Portfolio
and the LM Special Investment Institutional Portfolio may invest, share many of
these same risks.

Foreign Securities Risk

Investments in foreign securities (including those denominated in U.S. dollars)
involve certain risks not typically associated with investments in domestic
issuers. The values of foreign securities are subject to economic and political
developments in the countries and regions where the companies operate or are
domiciled, or where the securities are traded, such as changes in economic or
monetary policies, and to changes in exchange rates. Values may also be affected
by restrictions on receiving the investment proceeds from a foreign country.

In general, less information is publicly available about foreign companies than
about U.S. companies. Foreign companies are generally not subject to the same
accounting, auditing and financial reporting standards as are U.S. companies.

Some securities issued by foreign governments or their subdivisions, agencies
and instrumentalities may not be backed by the full faith and credit of the
foreign government. Even where a security is backed by the full faith and credit
of a foreign government, it may be difficult for a Portfolio to pursue its
rights against a foreign government in that country's courts. Some foreign
governments have defaulted on principal and interest payments.

In addition, a Portfolio's investments in foreign securities may be subject to
the risk of nationalization or expropriation of assets, imposition of currency
exchange controls or restrictions on the repatriation of foreign currency,
confiscatory taxation, political or financial instability and adverse diplomatic
developments. Dividends or interest on, or proceeds from the sale of, foreign
securities may be subject to foreign withholding taxes, and special U.S. tax
considerations may apply.

Emerging Markets Risk

The risks of foreign investment are greater for investments in emerging markets.
Among others, these types of investments can include not only equity securities,
but also "Brady Bonds," bonds issued as a result of a debt restructuring plan,
Eurobonds, domestic and international bonds issued under the laws of a
developing country, emerging market loans and other debt instruments. Emerging
market countries typically have economic and political systems that are less
fully developed, and can be expected to be less stable than those of more
advanced countries. For example, the economies of such countries can be subject
to rapid and unpredictable rates of inflation or deflation. Low trading volumes
may result in a lack of liquidity and in price volatility. Emerging market
countries may have policies that restrict investment by foreigners, or that
prevent foreign investors from withdrawing their money at will.

Because some of the Portfolios may invest a significant amount of their total
assets in emerging market securities, investors should be able to tolerate
sudden and sometimes substantial fluctuations in the value of their investments.
An investment in any Portfolio that invests in emerging market securities, which
includes the Batterymarch Emerging Markets Portfolio, the Batterymarch
International Equity Portfolio, the Western Asset High Yield Portfolio, the
Western Asset Non-U.S. Fixed Income Portfolio and the Western Asset Global
Strategic Income Portfolio, should be considered speculative.

Currency Risk

Because certain Portfolios may invest in securities denominated in foreign
currencies, their value can be affected by changes in the rates of exchange
between those currencies and the U.S. dollar. Currency exchange rates can be
volatile and affected by, among other factors, the general economics of a
country, the actions of the U.S. and foreign governments or central banks, the
imposition of currency controls, and speculation. A security may be denominated
in a currency that is different from the currency where the issuer is domiciled.

In addition to the policies described elsewhere in this Prospectus, the
Portfolios may from time to time attempt to hedge a portion of their currency
risk, using a variety of techniques, including currency futures, forwards, or
options. However, these

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instruments may not always work as intended, and in certain cases a Portfolio
may be worse off than if it had not used a hedging instrument. For most emerging
market currencies, there are not suitable hedging instruments available. See
"Hedging Risk" below for more information.

Interest Rate Risk

Each Portfolio may be subject to interest rate risk, which is the possibility
that the market prices of the Portfolio's fixed income investments may decline
due to an increase in market interest rates. Generally, the longer the maturity
of a fixed-income security, the greater is the effect on its value when rates
increase.

Certain securities pay interest at variable or floating rates. Variable rate
securities reset at specified intervals, while floating rate securities reset
whenever there is a change in a specified index rate. In most cases, these reset
provisions reduce the effect of market interest rates on the value of the
security. However, some securities do not track the underlying index directly,
but reset based on formulas that can produce an effect similar to leveraging;
others may also provide for interest payments that vary inversely with market
rates. The market prices of these securities may fluctuate significantly when
interest rates change.

Credit Risk

A Portfolio is also subject to credit risk, i.e., the risk that an issuer of
securities will be unable to pay principal and interest when due, or that the
value of the security will suffer because investors believe the issuer is less
able to pay. This is broadly gauged by the credit ratings of the securities in
which a Portfolio invests. However, ratings are only the opinions of the
agencies issuing them and are not absolute guarantees as to quality. Not all
securities are rated.

Moody's Investors Service considers debt securities rated Baa to have
speculative characteristics. Debt securities rated below investment grade (i.e.,
securities rated below Baa/BBB) are deemed by the rating agencies to be
speculative and may involve major risk of exposure to adverse conditions. These
ratings may indicate that the securities are highly speculative and may be in
default or in danger of default as to principal and interest. Unrated securities
of comparable quality share these risks.

Not all U.S. government securities are backed by the full faith and credit of
the United States. Some securities, such as securities issued by Freddie Mac,
are backed only by the credit of the issuing agency or instrumentality.
Accordingly, there is a risk of default on these securities.

Call Risk

Many fixed income securities, especially those issued at high interest rates,
provide that the issuer may repay them early. Issuers often exercise this right
when interest rates are low. Accordingly, holders of callable securities may not
benefit fully from the increase in value that other fixed income securities
experience when rates decline. Furthermore, a Portfolio reinvests the proceeds
of the payoff at current yields, which are lower than those paid by the security
that was paid off.

Special Risks of High Yield Securities

Securities rated below Baa/BBB, commonly known as junk bonds or high yield
securities, have speculative characteristics. Accordingly, there is a greater
possibility that the issuers of these securities may be unable to make timely
payments of interest and principal and thus default. If this happens, or is
perceived as likely to happen, the values of these investments will usually be
more volatile. These securities may be less liquid than higher-rated securities,
which means a Portfolio may have difficulty selling them at times, and may have
to apply a greater degree of judgment in establishing a price. When a Portfolio
buys lower rated debt, the achievement of its goals depends more on the
Advisers' ability than would be the case if a Portfolio were buying investment
grade debt. Unrated securities of comparable quality share these risks.

Borrowing Risk

When a Portfolio is borrowing money or otherwise leveraging its portfolio, the
value of an investment in that Portfolio will be more volatile and all other
risks will tend to be compounded. This is because leverage tends to exaggerate
the effect of any increase or decrease in the value of a Portfolio's holdings.
Portfolios may take on borrowing risk or similar risks by using reverse
repurchase agreements, dollar rolls and other borrowings, by investing
collateral from loans of portfolio securities, through the use of when-issued,
delayed-delivery or forward commitment transactions or by using other
derivatives. The use of leverage may also cause a Portfolio to liquidate
positions when it may not be advantageous to do so to satisfy its obligations or
meet segregation requirements.

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Liquidity Risk

Liquidity risk exists when particular investments are difficult to sell. A
Portfolio may not be able to sell these illiquid investments at the best prices.
Investments in derivatives, foreign investments, restricted securities,
securities having small market capitalization, and securities having substantial
market and/or credit risk tend to involve greater liquidity risk.

Special Risks of Mortgage-Backed and Asset-Backed Securities

Mortgage-backed securities represent an interest in a pool of mortgages. When
market interest rates decline, many mortgages are refinanced, and mortgage-
backed securities are paid off earlier than expected. Prepayments may also occur
on a scheduled basis or due to foreclosure. The effect on a Portfolio's return
is similar to that discussed above for call risk.

When market interest rates increase, the market values of mortgage-backed
securities decline. At the same time, however, mortgage refinancings and
prepayments slow, which lengthens the effective maturities of these securities.
As a result, the negative effect of the rate increase on the market value of
mortgage-backed securities is usually more pronounced than it is for other types
of fixed income securities, potentially increasing the volatility of a
Portfolio.

Asset-backed securities are structured like mortgage-backed securities, but
instead of mortgage loans or interests in mortgage loans, the underlying assets
may include such items as motor vehicle installment sales or installment loan
contracts, leases of various types of real and personal property, and
receivables from credit card agreements. The ability of an issuer of asset-
backed securities to enforce its security interest in the underlying assets may
be limited. Asset-backed securities are subject to many of the same risks as
mortgage-backed securities.

Prepayments may cause losses on securities purchased at a premium. At times,
some of the mortgage-backed and asset-backed securities in which a Portfolio may
invest will have higher than market interest rates and therefore will be
purchased at a premium above their par value. Unscheduled prepayments, which are
made at par, will cause a Portfolio to experience a loss equal to any
unamortized premium.

Non-Diversification

The Western Asset Non-U.S. Fixed Income Portfolio and the Western Asset Global
Strategic Income Portfolio are non-diversified, meaning each may invest a
greater percentage of its total assets in securities of any one issuer, or may
invest in a smaller number of different issuers, than it could if it were a
"diversified" company under the Investment Company Act. When a Portfolio's
assets are invested in the securities of a limited number of issuers, or in a
limited number of countries or currencies, the value of its shares will be more
susceptible to any single economic, political or regulatory event than shares of
a more diversified fund.

Derivatives Risk

A Portfolio may engage in a variety of transactions using "derivatives," such as
futures, options, warrants and swaps. Derivatives are financial instruments
whose value depends upon, or is derived from, the value of something else, such
as one or more underlying investments, indexes or currencies. Derivatives may be
traded on organized exchanges, or in individually negotiated transactions with
other parties (these are known as "over the counter"). A Portfolio may use
derivatives both for hedging and non-hedging purposes, including for purposes of
enhancing returns. Although the Advisers have the flexibility to make use of
derivatives, they may choose not to for a variety of reasons, even under very
volatile market conditions.

Derivatives involve special risks and costs and may result in losses to a
Portfolio. The successful use of derivatives requires sophisticated management,
and a Portfolio will depend on the Adviser's ability to analyze and manage
derivatives transactions. The prices of derivatives may move in unexpected ways,
especially in abnormal market conditions. Some derivatives are "leveraged" and
therefore may magnify or otherwise increase investment losses to a Portfolio. A
Portfolio's use of derivatives may also increase the amount of taxes payable by
shareholders.

Other risks arise from the potential inability to terminate or sell derivatives
positions. A liquid secondary market may not always exist for a Portfolio's
derivatives positions at any time. In fact, many over-the-counter instruments
will not be liquid. Over-the-counter instruments also involve the risk that the
other party will not meet its obligations to a Portfolio.

Hedging Risk

18
<PAGE>

The decision as to whether and to what extent a Portfolio will engage in hedging
transactions to hedge against such risks as credit risk, currency risk and
market risk will depend on a number of factors, including prevailing market
conditions, the composition of the Portfolio and the availability of suitable
transactions. Accordingly, there can be no assurance that a Portfolio will
engage in hedging transactions at any given time or from time to time or that
any such strategies will be successful. Hedging transactions involve costs and
may result in losses.

Turnover

The length of time a Portfolio has held a particular security is not generally a
consideration in investment decisions. A change in the securities held by a
Portfolio is known as "portfolio turnover." As a result of a Portfolio's
investment policies, under certain market conditions a Portfolio's turnover rate
may be higher than that of other mutual funds. Portfolio turnover generally
involves some expense to a Portfolio, including brokerage commissions or dealer
mark-ups and other transaction costs on the sale of securities and reinvestment
in other securities. These transactions may result in realization of taxable
capital gains. Higher portfolio turnover rates, such as those above 100%, are
likely to result in higher brokerage commissions or other transactions costs and
could give rise to a greater amount of taxable capital gains.

Risks Associated with Other Policies the Portfolios May Pursue

In addition to the investment strategies described above, a Portfolio may also
make other types of investments, and therefore may be subject to other risks.
Some of these risks are described in each Portfolio's Statement of Additional
Information ("SAI"). The terms "debt" and "fixed income securities" are used in
this Prospectus interchangeably, and, where used, are not intended to be
limiting.

At times the Advisers may judge that market conditions make pursuing a
Portfolio's investment strategies inconsistent with the best interests of its
shareholders. The Advisers then may temporarily use alternative strategies that
are mainly designed to limit a Portfolio's losses. Although the Advisers have
the flexibility to use these strategies, they may choose not to for a variety of
reasons, even in very volatile market conditions. These strategies may cause a
Portfolio to miss out on investment opportunities, and may prevent a Portfolio
from achieving its goal. In addition, an Adviser may also keep a portion of a
Portfolio's assets in cash for temporary or defensive purposes, in order to meet
redemption requests or for investment purposes.

Except for the investment objective of each of the Western Asset Core, Western
Asset Intermediate and Western Asset Money Market Portfolios, the Directors may
change a Portfolio's investment objective, investment strategies and other
policies without shareholder approval.

Performance Information

The following information provides some indication of a Portfolio's risks. The
charts and tables show year-to-year changes in the performance of the
Institutional Class shares for the Western Asset Core, Western Asset
Intermediate, Western Asset Core Plus, Western Asset Non-U.S. Fixed Income, and
LM Value Institutional Portfolios. The tables following the charts compare each
Portfolio's performance to that of a broad measure of market performance. SEC
Rules do not require charts and tables for the other Portfolios or for the
Financial Intermediary Class shares. However, the performance for the Financial
Intermediary Class would be lower for each Portfolio since this Class has higher
expenses. Of course, a Portfolio's past performance is not an indication of
future performance.

19
<PAGE>

Western Asset Core Portfolio

Calendar-Year Total Returns+
Performance Chart:
1991: 18.02%
1992: 7.85%
1993: 13.86%
1994: -4.33%
1995: 20.97%
1996: 3.70%
1997: 10.17%
1998: 8.34%
1999: -1.69%

+Best quarter: Second quarter 1995: +6.91%
Worst quarter: First quarter 1994: -2.60%
More recent return information: January 1, 2000 - June 30, 2000: 4.81%

Average Annual Total Returns for periods ended December 31, 1999

<TABLE>
<CAPTION>
1 Year 5 Years Portfolio Inception
(September 4, 1990)
<S> <C> <C> <C>
Core Portfolio -1.69% 8.04% 8.58%
Salomon Broad Market Index* -0.83% 7.73% 7.99%**
</TABLE>

*The Salomon Brothers Broad Market Index is an unmanaged index that measures the
performance of the investment-grade universe of bonds issued in the United
States. The Index includes institutionally traded U.S. Treasury, government-
sponsored, mortgage and corporate securities. The Index does not incur fees and
expenses and cannot be purchased directly by investors.
**The average annual total return since inception shown for the Index is
calculated from August 31, 1990.

Western Asset Intermediate Portfolio

Calendar-Year Total Returns+
Performance Chart:

1995: 15.51%
1996: 4.69%
1997: 8.40%
1998: 7.71%
1999: 0.39%

+Best quarter: Second quarter 1995: +5.17%
Worst quarter: First quarter 1996: -0.61%
More recent return information: January 1, 2000 - June 30, 2000: 3.70%

Average Annual Total Returns for periods ended December 31, 1999

<TABLE>
<CAPTION>
1 Year 5 Years Portfolio Inception
(July 1, 1994)
<S> <C> <C> <C>
Intermediate Portfolio 0.39% 7.22% 6.65%
Lehman Intermediate Gov't/Corp Bond Index* 0.39% 7.10% 6.57%**
</TABLE>

*The Lehman Brothers Intermediate Gov't/Corp Bond Index is an unmanaged index
that measures the performance of intermediate (1-10 year) government and
corporate fixed-rate debt issues. The Index does not incur fees and expenses and
cannot be purchased directly by investors.
**The average annual total return since inception shown for the Index is
calculated from June 30, 1994.

Western Asset Core Plus Portfolio

20
<PAGE>

Calendar-Year Total Returns+
Performance Chart:
1999: -1.15%

+Best quarter: Second quarter 2000: +1.82%
Worst quarter: Second quarter 1999: -1.12%
More recent return information: January 1, 2000 - June 30, 2000: 3.96%

Average Annual Total Returns for periods ended December 31, 1999

1 Year Portfolio Inception
(July 8, 1998)
Core Plus Portfolio -1.15% 1.63%
Salomon Broad Market Index* -0.83% 2.45%**

Western Asset Non-U.S. Fixed Income Portfolio

Calendar-Year Total Returns+
Performance Chart:
1999: -1.78%

+Best quarter: Fourth quarter 1999: 1.10%
Worst quarter: Second quarter 2000: -1.29%
More recent return information: January 1, 2000 - June 30, 2000: 0.38%

Average Annual Total Returns for periods ended December 31, 1999
1 Year Portfolio Inception
(July 15, 1998)
Non-U.S. Portfolio -1.78% 3.14%
Salomon World Gov't ex-U.S. Index
(Hedged)* 2.88% 5.47%**

*The Salomon Brothers World Government ex-U.S. Index (Hedged) is an unmanaged
index that tracks debt issues traded in 14 world government bond markets. The
Index does not incur fees and expenses and cannot be purchased directly by
investors.
**The average annual total return since inception shown for the Index is
calculated from July 31, 1998.

21
<PAGE>

LM Value Institutional Portfolio

Calendar-Year Total Returns+
Performance Chart:
1999: 27.27%

+Best quarter: Fourth quarter 1999: 19.69%
Worst quarter: Third quarter 1999: -9.45%
More recent return information: January 1, 2000 - June 30, 2000: -2.43%

Average Annual Total Returns for periods ended December 31, 1999
1 Year Portfolio Inception
(September 22, 1998)
Value Institutional Portfolio 27.27% 52.02%
S&P 500 Index* 21.04% 35.97%**

*The S&P 500 Index is an unmanaged of 500 common stocks and is considered to be
a broad indicator of general market performance. The Index does not incur fees
and expenses and cannot be purchased directly by investors.
**The average annual total return since inception shown for the Index is
calculated from September 30, 1998.

Fees and Expenses

The following tables describe the fees and expenses that you may pay if you buy
and hold shares of a Portfolio.

Expenses are based on actual expenses for the fiscal year ended March 31, 2000
for the Western Asset Intermediate Portfolio, Western Asset Core Portfolio,
Western Asset Core Plus Portfolio, Western Asset Non-U.S. Fixed Income Portfolio
and LM Value Institutional Portfolio, reduced by expense waivers in effect
during the period, except for the information with respect to Western Asset Core
Plus Portfolio, which reflects a revised expense waiver recently adopted.
Expenses for the other Portfolios are based on estimated amounts for the current
fiscal year.

The examples below the tables are intended to help you compare the cost of
investing in a Portfolio with the cost of investing in other mutual funds. The
examples assume that you invest $10,000 in a Portfolio for the time periods
indicated and then redeem all of your shares at the end of those periods. The
examples also assume that your investment has a 5% return each year and that the
Portfolio's operating expenses remain the same. Your actual costs may be higher
or lower.

Western Asset Government Money Market Portfolio
<TABLE>
<CAPTION>
Institutional Class Financial Intermediary Class
<S> <C> <C>
Shareholder Fees
(Fees paid directly from your investment) None None

Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)

Management Fees 0.20% 0.20%
Distribution (12b-1) Fees* None 0.10%
Other Expenses 0.15% 0.15%
------ ------
Total Annual Fund Operating Expenses 0.35% 0.45%
Expense Reimbursement/Waiver (0.05%) (0.05%)
------ ------
Net Expenses** 0.30% 0.40%
====== ======

Examples
1 Year $ 36 $ 46
3 Years $ 113 $ 144

</TABLE>

22
<PAGE>

Western Asset Money Market Portfolio
<TABLE>
<CAPTION>
Institutional Class Financial Intermediary Class
<S> <C> <C>
Shareholder Fees
(Fees paid directly from your investment) None None

Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)

Examples
1 Year $ 36 $ 46
3 Years $ 113 $ 144

Western Asset Intermediate Portfolio
Institutional Class Financial Intermediary Class
Shareholder Fees
(Fees paid directly from your investment) None None

Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)

Management Fees 0.40% 0.40%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.08% 0.08%
------ ------
Total Annual Fund Operating Expenses 0.48% 0.73%
Expense Reimbursement/Waiver (0.03%) (0.03%)
------ ------
Net Expenses** 0.45% 0.70%
====== ======

Examples
1 Year $ 49 $ 75
3 Years $ 154 $ 233
5 Years $ 269 $ 406
10 Years $ 604 $ 906

Western Asset Intermediate Plus Portfolio
Institutional Class Financial Intermediary Class
Shareholder Fees
(Fees paid directly from your investment) None None
Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)
Management Fees 0.40% 0.40%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.15% 0.15%
------ ------
Total Annual Fund Operating Expenses 0.55% 0.80%
Expense Reimbursement/Waiver (0.10%) (0.10%)
------ ------
Net Expenses** 0.45% 0.70%
====== ======
</TABLE>

23
<PAGE>

<TABLE>
<S> <C> <C>
Examples
1 Year $ 56 $ 82
3 Years $ 176 $ 255

Western Asset Core Portfolio
Institutional Class Financial Intermediary Class
Shareholder Fees
(Fees paid directly from your investment) None None

Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)
Management Fees 0.45% 0.45%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.06% 0.06%
------ ------
Total Annual Fund Operating Expenses 0.51% 0.76%
Expense Reimbursement/Waiver (0.01%) (0.01%)
------ ------
Net Expenses** 0.50% 0.75%
====== ======

Examples
1 Year $ 52 $ 78
3 Years $ 164 $ 243
5 Years $ 285 $ 422
10 Years $ 640 $ 942

Western Asset Core Plus Portfolio
Institutional Class Financial Intermediary Class
Shareholder Fees
(Fees paid directly from your investment) None None

Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)

Management Fees 0.45% 0.45%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.20% 0.20%
------ ------
Total Annual Fund Operating Expenses 0.65% 0.90%
Expense Reimbursement/Waiver (0.20%) (0.20%)
------ ------
Net Expenses** 0.45% 0.70%
====== ======

Examples
1 Year $ 66 $ 92
3 Years $ 208 $ 287
5 Years $ 362 $ 498
10 Years $ 810 $1,108
</TABLE>

24
<PAGE>

<TABLE>
<CAPTION>
Western Asset Inflation Indexed Bond Portfolio
Institutional Class Financial Intermediary Class
<S> <C> <C>
Shareholder Fees
(Fees paid directly from your investment) None None

Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)

Management Fees 0.20% 0.20%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.15% 0.15%
------ ------
Total Annual Fund Operating Expenses 0.35% 0.60%
Expense Reimbursement/Waiver (0.10%) (0.10%)
------ ------
Net Expenses** 0.25% 0.50%
====== ======

Examples
1 Year $ 36 $ 61
3 Years $ 113 $ 192

Western Asset High Yield Portfolio
Institutional Class Financial Intermediary Class
Shareholder Fees
(Fees paid directly from your investment) None None

Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)

Management Fees 0.55% 0.55%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.15% 0.15%
------ ------
Total Annual Fund Operating Expenses 0.70% 0.95%
Expense Reimbursement/Waiver (0.15%) (0.15%)
------ ------
Net Expenses** 0.55% 0.80%
====== ======

Examples
1 Year $ 72 $ 97
3 Years $ 224 $ 303

Western Asset Non-U.S. Fixed Income Portfolio
Institutional Class Financial Intermediary Class
Shareholder Fees
(Fees paid directly from your investment) None None

Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)

Management Fees 0.45% 0.45%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.38% 0.38%
------ ------
Total Annual Fund Operating Expenses 0.83% 1.08%
Expense Reimbursement/Waiver (0.28%) (0.28%)
------ ------
Net Expenses** 0.55% 0.80%
====== ======
</TABLE>

25
<PAGE>

<TABLE>
<CAPTION>
<S> <C> <C>
Examples
1 Year $ 85 $ 110
3 Years $ 265 $ 343
5 Years $ 460 $ 595
10 Years $1,025 $1,317

Western Asset Global Strategic Income Portfolio
Institutional Class Financial Intermediary Class
Shareholder Fees
(Fees paid directly from your investment) None None

Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)

Management Fees 0.45% 0.45%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.40% 0.40%
------ ------
Total Annual Fund Operating Expenses 0.85% 1.10%
Expense Reimbursement/Waiver (0.05%) (0.05%)
------ ------
Net Expenses** 0.80% 1.05%
====== ======

Examples
1 Year $ 87 $ 112
3 Years $ 271 $ 350

Western Asset Enhanced Equity Portfolio
Institutional Class Financial Intermediary Class
Shareholder Fees
(Fees paid directly from your investment) None None

Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)

Management Fees 0.55% 0.55%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.20% 0.20%
------ ------
Total Annual Fund Operating Expenses 0.75% 1.00%
Expense Reimbursement/Waiver (0.10%) (0.10%)
------ ------
Net Expenses** 0.65% 0.90%
====== ======

Examples
1 Year $ 77 $ 102
3 Years $ 240 $ 318
</TABLE>

26
<PAGE>

<TABLE>
<CAPTION>
LM Value Institutional Portfolio
Institutional Class Financial Intermediary Class
<S> <C> <C>
Shareholder Fees
(Fees paid directly from your investment) None None

Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)

Management Fees 0.60% 0.60%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.15% 0.16%
------ ------
Total Annual Fund Operating Expenses 0.75% 1.01%
Expense Reimbursement/Waiver None (0.01%)
------ ------
Net Expenses** 0.75% 1.00%
====== ======

Examples
1 Year $ 77 $ 102
3 Years $ 240 $ 321
5 Years $ 417 $ 557
10 Years $ 930 $1,235

LM Special Investment Institutional Portfolio
Institutional Class Financial Intermediary Class
Shareholder Fees
(Fees paid directly from your investment) None None

Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)

Management Fees 0.60% 0.60%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.25% 0.25%
------ ------
Total Annual Fund Operating Expenses 0.85% 1.10%
Expense Reimbursement/Waiver (0.10%) (0.10%)
------ ------
Net Expenses** 0.75% 1.00%
====== ======

Examples
1 Year $ 77 $ 102
3 Years $ 261 $ 340

LM Total Return Institutional Portfolio
Institutional Class Financial Intermediary Class
Shareholder Fees
(Fees paid directly from your investment) None None

Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)

27
<PAGE>

<TABLE>
<CAPTION>
<S> <C> <C>
Examples
1 Year $ 77 $ 102
3 Years $ 261 $ 340

LM Balanced Institutional Portfolio
Institutional Class Financial Intermediary Class
Shareholder Fees
(Fees paid directly from your investment) None None

Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)

Management Fees 0.05% 0.05%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.25% 0.25%
----- -----
Total Annual Fund Operating Expenses** 0.30% 0.55%
Total Annual Expenses of Underlying Portfolios+ 0.65% 0.65%
----- -----
Total Expenses of Balanced Portfolio and Underlying Portfolios 0.95% 1.20%
===== =====

Examples
1 Year $ 97 $ 122
3 Years $ 303 $ 381

Batterymarch U.S. MidCapitalization Equity Portfolio
Institutional Class Financial Intermediary Class
Shareholder Fees
(Fees paid directly from your investment) None None

Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)

Management Fees 0.50% 0.50%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.25% 0.25%
----- -----
Total Annual Fund Operating Expenses** 0.75% 1.00%
===== =====

Examples
1 Year $ 77 $ 102
3 Years $ 240 $ 318

Batterymarch U.S. Small Capitalization Equity Portfolio
Institutional Class Financial Intermediary Class
Shareholder Fees
(Fees paid directly from your investment) None None

Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)

Management Fees 0.70% 0.70%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.25% 0.25%
----- -----
Total Annual Fund Operating Expenses** 0.95% 1.20%
===== =====
</TABLE>

28
<PAGE>

<TABLE>
<S> <C> <C>
Examples
1 Year $ 97 $ 122
3 Years $ 303 $ 381

Batterymarch International Equity Portfolio
Institutional Class Financial Intermediary Class
Shareholder Fees
(Fees paid directly from your investment) None None

Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)

Management Fees 0.65% 0.65%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.40% 0.40%
------ ------
Total Annual Fund Operating Expenses 1.05% 1.30%
Expense Reimbursement/Waiver (0.05%) (0.05%)
------ ------
Net Expenses** 1.00% 1.25%
====== ======

Examples
1 Year $ 102 $ 127
3 Years $ 329 $ 407

Batterymarch Emerging Markets Portfolio
Institutional Class Financial Intermediary Class
Shareholder Fees
(Fees paid directly from your investment) None None

Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)

Management Fees 0.65% 0.65%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.85% 0.85%
------ ------
Total Annual Fund Operating Expenses 1.50% 1.75%
Expense Reimbursement/Waiver (0.05%) (0.05%)
------ ------
Net Expenses** 1.45% 1.70%
====== ======

Examples
1 Year $ 148 $ 173
3 Years $ 469 $ 546
</TABLE>

*The 12b-1 fees shown in the tables reflect the amount to which the Directors
have currently limited payments under the Portfolios' Distribution Plans.
Pursuant to each Portfolio's Distribution Plan, the Directors may increase the
12b-1 fees to 0.40% of average net assets without shareholder approval.

**The Manager is contractually obligated to limit Portfolio expenses to the
level shown through August 1, 2001.

+Shareholders of the LM Balanced Institutional Portfolio ("Balanced Portfolio")
will indirectly bear the Balanced Portfolio's pro rata share of the operating
expenses incurred by the underlying Portfolios in which the Balanced Portfolio
invests. Consequently, the fees and corresponding examples for the Balanced
Portfolio include both the estimated fees of the Balanced Portfolio and a
composite of the fees of the Core Portfolio and the Value Institutional
Portfolio actually incurred in the last fiscal year. The Manager is
contractually obligated to limit the expenses of the underlying Portfolios
through August 1, 2001. For the purposes of calculating the effect of the fees
of the underlying Portfolios on Balanced Portfolio shareholders, it has been
assumed that LMFM will allocate 60% of the Balanced Portfolio's assets to the
Value Institutional Portfolio and 40% to the Core Portfolio. LMFM reserves the
right to vary the allocation of the Balanced Portfolio's assets, as it deems
appropriate, subject to certain limitations discussed earlier in this
Prospectus. The actual fees and expenses incurred directly and indirectly by
shareholders of the Balanced Portfolio may be higher or lower than those shown
above.

29
<PAGE>

Management of the Portfolios

General

LMIFA I and LMIFA II are open-end management investment companies comprised of a
variety of separate investment portfolios. LMIFA I was incorporated in Maryland
on May 16, 1990. LMIFA II was incorporated in Maryland on January 13, 1998.

Board of Directors

The business affairs of LMIFA I and LMIFA II are managed under the direction of
a Board of Directors for each corporation, and the Directors of each corporation
are responsible for generally overseeing the conduct of the relevant Portfolio's
business. Information about the Directors and executive officers may be found in
the relevant SAI.

Each Board of Directors has retained the Manager and the Advisers to manage the
Portfolios' affairs, furnish a continuing investment program for the Portfolios
and make investment decisions on their behalf, subject to such policies as the
Directors may determine.

Manager, Advisers and Portfolio Managers

The Portfolios are managed by the Manager. Each Portfolio pays the Manager a
monthly fee based on the average net assets of the Portfolio at the following
annual rates (shown prior to any waivers or reimbursements):

Annual Percentage
Portfolio of Average Net Assets
---------------------------------------------------------------
Western Asset Money Market Portfolio 0.20%
Western Asset Government Money Market Portfolio 0.20%
Western Asset Intermediate Portfolio 0.40%
Western Asset Intermediate Plus Portfolio 0.40%
Western Asset Core Portfolio 0.45%
Western Asset Core Plus Portfolio 0.45%
Western Asset Inflation Indexed Bond Portfolio 0.20%
Western Asset High Yield Portfolio 0.55%
Western Asset Non-U.S. Fixed Income Portfolio 0.45%
Western Asset Global Strategic Income Portfolio 0.45%
Western Asset Enhanced Equity Portfolio 0.55%
LM Value Institutional Portfolio 0.60%
LM Special Investment Institutional Portfolio 0.60%
LM Total Return Institutional Portfolio 0.60%
LM Balanced Institutional Portfolio 0.05%*
Batterymarch U.S. MidCapitalization Equity Portfolio 0.50%
Batterymarch U.S. Small Capitalization Equity Portfolio 0.70%
Batterymarch International Equity Portfolio 0.65%
Batterymarch Emerging Markets Portfolio 0.65%

*Does not include management fees attributable to the Portfolio's investment in
the Value Institutional and Core Portfolios. See "Fees and Expenses--LM Balanced
Institutional Portfolio" and the related notes for a description of these fees.

The Manager is a Maryland corporation formed on February 20, 1998 and is a
wholly owned subsidiary of Legg Mason, Inc., a financial services holding
company. The Manager acts as investment manager of only these investment company
portfolios. The Manager's address is 100 Light Street, Baltimore, Maryland
21202.

In order to assist in carrying out its investment advisory responsibilities, the
Manager has retained the Advisers to render advisory services to the Portfolios.
The Manager pays the fees of the Advisers.

30
<PAGE>

To the extent the Manager receives a management fee after taking into account
its contractual obligation to limit expenses as discussed in "Fees and Expenses"
above, the Manager will pay a Portfolio's Adviser the entire management fee it
receives from the Portfolio.

LMFM. LMFM, a wholly owned subsidiary of Legg Mason, Inc., acts as investment
----
adviser or manager to regulated investment companies. Total assets under
management by LMFM were approximately $18.0 billion as of June 30, 2000. On
August 1, 2000, LMFM replaced Legg Mason Fund Adviser, Inc. ("LMFA") as the
investment adviser for LM Value Institutional, LM Special Investment
Institutional, LM Total Return Institutional and LM Balanced Institutional
Portfolios. The advisory personnel who previously managed these portfolios as
employees of LMFA continue to do so as employees of LMFM. LMFM is newly
organized; however, its principal employees advised the Portfolios during their
association with LMFA. The address of LMFM is 100 Light Street, Baltimore,
Maryland 21202.

Batterymarch. Batterymarch, founded in 1969 and now a wholly owned subsidiary of
------------
Legg Mason, Inc., acts as investment adviser to institutional accounts, such as
corporate pension plans, mutual funds and endowment funds, as well as to
individual investors. Total assets under management by Batterymarch were
approximately $6.6 billion as of June 30, 2000. The address of Batterymarch is
200 Clarendon Street, Boston, Massachusetts 02116.

Western Asset. Western Asset, established in 1971 and now a wholly owned
-------------
subsidiary of Legg Mason, Inc., acts as investment adviser to institutional
accounts, such as corporate pension plans, mutual funds and endowment funds.
Total assets under management by Western Asset were approximately $60.3 billion
as of June 30, 2000. The address of Western Asset is 117 East Colorado
Boulevard, Pasadena, CA 91105.

WAML. WAML, a wholly owned subsidiary of Legg Mason, Inc., acts as investment
----
adviser to institutional accounts, such as corporate pension plans, mutual funds
and endowment funds. Total assets under management by WAML were approximately
$4.9 billion as of June 30, 2000. The address of WAML is 155 Bishopsgate,
London, England.

Expense Limitations

The Manager has, until August 1, 2001, contractually agreed to waive its fees
and/or reimburse each Portfolio to the extent a Portfolio's expenses (exclusive
of taxes, interest, deferred organization expenses, 12b-1 fees, brokerage and
extraordinary expenses) for any class exceed during that month the annual rate
set forth in the Fees and Expenses section. Any amounts waived or reimbursed in
a particular fiscal year will be subject to repayment by a Portfolio to the
Manager to the extent that from time to time during the next three fiscal years
the repayment will not cause a Portfolio's expenses to exceed the limit, if any,
agreed to by the Manager at that time.

Portfolio Managers

The names and business experience for each portfolio manager for the past five
years are set forth in the following chart.

<TABLE>
<CAPTION>
Portfolio Manager and Business Experience (past 5 years)
--------- ---------------------------------------------
<S> <C>

LM Value Institutional Portfolio Bill Miller is a portfolio manager and President
of LMFM. Mr. Miller has been employed by LMFM
as a portfolio manager since 1982.

LM Special Investment Institutional Portfolio Bill Miller (see above)

LM Total Return Institutional Portfolio Nancy T. Dennin is a portfolio manager and Senior
Vice President of LMFM. Ms. Dennin has been
employed by LMFM since 1985 and has served as a
portfolio manager or co-manager for over
seven years.

LM Balanced Institutional Portfolio Bill Miller (see above)
</TABLE>

31
<PAGE>

Neither Western Asset, WAML nor Batterymarch employs individual portfolio
managers to determine the investments of a Portfolio. Instead, the day-to-day
management of the various Portfolios' investments will be the responsibility of
the Western Asset Investment Strategy Group, the WAML Investment Strategy Group,
the Batterymarch Developed Markets (U.S.) team, the Batterymarch Developed
Markets (EAFE) team or the Batterymarch Emerging Markets team, as the case may
be.

Expenses

Each Portfolio pays its share of all expenses that are not assumed by the
Manager, the Adviser or other parties, including Directors', auditing, legal,
custodial, transfer agency and distribution fees (which are in turn allocated to
the Financial Intermediary Class of shares).

Purchase Of Shares

The Portfolios offer two classes of shares: Institutional Class and Financial
Intermediary Class. Shares in the Financial Intermediary Class bear a 12b-1 fee.
See "Distribution Plans" below for more information.

Initial Investment

Prior to or concurrent with the initial purchase of shares in any Portfolio,
each investor must open an account for that Portfolio by completing and signing
an Application and mailing it to LM Institutional Advisors, Inc. at the
following address: P.O. Box 17635, Baltimore, Maryland 21297-1635. The
Portfolios have established minimum investment criteria that vary depending upon
which class of shares you wish to purchase. For Institutional Class shares,
investors must have at least $50 million in investable assets and invest in the
aggregate at least $1 million in the Portfolios. For Financial Intermediary
Class shares, investors must have at least $30 million in investable assets and
invest in the aggregate at least $1 million in the Portfolios. The Portfolios
reserve the right to revise the minimum investment requirement and may waive it
at their sole discretion.

A purchase order, together with payment in one of the forms described in the
following paragraphs, received by Boston Financial Data Services (the "Transfer
Agent" or "BFDS") prior to the close of regular trading on the New York Stock
Exchange (ordinarily 4:00 p.m., Eastern time) ("close of the Exchange") will be
effected at that day's net asset value. An order received after the close of the
Exchange will generally be effected at the net asset value determined on the
next business day. However, orders received by certain retirement plans and
other financial intermediaries by the close of the Exchange and communicated to
the Transfer Agent by 9:00 a.m., Eastern time, on the following business day
will be effected at the net asset value determined on the prior business day.

Purchases of shares can be made by wiring federal funds to State Street Bank and
Trust Company. Purchases of shares of the Western Asset Money Market Portfolio
or the Western Asset Government Money Market Portfolio may ONLY be made by
federal funds wire. Before wiring federal funds, the investor must first
telephone the Portfolio at 1-888-425-6432 to receive instructions for wire
transfer. On the telephone, the following information will be required:
shareholder name; name of the per-son authorizing the transaction; shareholder
account number; name of the Portfolio and class of shares to be purchased;
amount being wired; and name of the wiring bank.

Funds should be wired through the Federal Reserve System to:
State Street Bank and Trust Company
ABA #011-000-028
DDA #99046096
LM Institutional Fund Advisors [insert name of Portfolio]
[Insert your account name and number]

The wire should state that the funds are for the purchase of shares of a
specific Portfolio and share class and include the account name and number.

With respect to the Western Asset Government Money Market Portfolio and Western
Asset Money Market Portfolio, if a purchase order for shares is received prior
to 12:00 noon, Eastern time, and payment in federal funds is received by the
Transfer Agent by the close of the federal funds wire on the day the purchase
order is received, dividends will accrue starting that day. If a purchase order
is received after 12:00 noon, Eastern time, and payment in federal funds is
received by the Transfer Agent by the close of the federal funds wire on the day
the purchase order is received, or as otherwise agreed to by

32
<PAGE>

the relevant Portfolio, the order will be effected at that day's net asset
value, but dividends will not begin to accrue until the following business day.

With respect to the Western Asset Intermediate Portfolio, Western Asset
Intermediate Plus Portfolio, Western Asset Core Portfolio, Western Asset Core
Plus Portfolio and Western Asset Inflation Indexed Bond Portfolio, dividends
will begin to accrue on the first business day following the day payment in
federal funds is received by the Transfer Agent.

Shares may also be purchased and paid for by the contribution of eligible
portfolio securities, subject in each case to approval by the Manager. Approval
will depend on, among other things, the nature and quality of the securities
offered and the current needs of the Portfolio in question. Securities offered
in payment for shares will be valued in the same way and at the same time the
Portfolio values its portfolio securities for purposes of determining net asset
value. (See "Net Asset Value" below.) Investors who wish to purchase Portfolio
shares through the contribution of securities should contact the Portfolio at 1-
888-425-6432 for instructions. Investors should also realize that at the time of
contribution they may be required to recognize a gain or loss for tax purposes
on securities contributed. The Portfolio has full discretion to reject any
securities offered as payment for shares.

As described below, each Portfolio may offer Financial Intermediary Class shares
that are offered primarily through financial intermediaries. Each Portfolio may
pay financial intermediaries for their services out of that class' assets
pursuant to the class' distribution plan or otherwise. Legg Mason and its
affiliates (including the Manager and the Advisers) may also from time to time,
at their own expense, make payments to financial intermediaries that sell shares
of the Portfolios or to other parties in connection with the sale of shares. If
investors effect transactions through a broker or agent, investors may be
charged a fee by that broker or agent.

Any shares purchased or received as a distribution will be credited directly to
the investor's account.

Additional Investments

Additional investments may be made at any time at the relevant net asset value
for that class by following the procedures outlined above. Investors should
always furnish a shareholder account number when making additional purchases.

Other Purchase Information

Purchases will be made in full and fractional shares. In the interest of economy
and convenience, certificates for shares will not be issued.

Each Portfolio and Legg Mason Wood Walker, Incorporated, the Portfolios'
Distributor ("LMWW"), reserves the right, in its sole discretion, to suspend the
offering of shares or to reject any purchase order, in whole or in part, when,
in the judgment of management, such suspension or rejection is in the best
interests of the Portfolio; to waive the minimum initial investment for certain
investors; and to redeem shares if information provided in the Application
should prove to be incorrect in any manner judged by a Portfolio to be material
(e.g., in a manner such as to render the shareholder ineligible to purchase
shares of a Portfolio). A Portfolio may suspend the offering of shares at any
time and resume it at any time thereafter.

Shares of the Portfolios may not be qualified or registered for sale in all
States. Prospective investors should inquire as to whether shares of a
particular Portfolio are available for offer and sale in their State of
residence. Shares of the Portfolio may not be offered or sold in any State
unless registered or qualified in that jurisdiction or unless an exemption from
registration or qualification is available.

Purchases and sales of Portfolio shares should be made for long-term investment
purposes only. Each Portfolio reserves the right to restrict purchases of shares
(including exchanges) when it determines that a pattern of frequent purchases
and sales made in response to short-term fluctuations in share price appears
evident.

Retirement Plans

Shares of the Portfolios are available for purchase by retirement plans,
including 401(k) plans, 403(b) plans and Individual Retirement Accounts
("IRAs"). The administrator of a plan or employee benefits office can provide
participants or employees with detailed information on how to participate in the
plan and how to elect a Portfolio as an investment option. Participants in a
retirement or savings plan may be permitted to elect different investment
options, alter the amounts contributed to the plan, or change how contributions
are allocated among investment options in accordance with the plan's specific
provisions.

33
<PAGE>

The plan administrator or employee benefits office should be consulted for
details. For questions about participant accounts, participants should contact
their employee benefits office, the plan administrator, or the organization that
provides recordkeeping services for the plan. Investors who purchase shares
through retirement plans should be aware that the plan administrator may
aggregate purchase and redemption orders of participants in the plan. Therefore,
there may be a delay between the time the investor places an order with the plan
administrator and the time the order is forwarded to the Transfer Agent for
execution.

Account Registration Changes

Changes in registration or account privileges may be made in writing to the
Portfolio. Signature guarantees may be required. See "Signature Guarantee"
below. All correspondence must include the account number and must be sent to:

LM Institutional Advisors, Inc.
P.O. Box 17635
Baltimore, Maryland 21297-1635

Distribution Plans

The Board of Directors has adopted Distribution Plans pursuant to Rule 12b-1
under the 1940 Act with respect to shares of the Financial Intermediary Class of
each Portfolio. Under the terms of each Plan, a Portfolio is permitted to pay,
out of the assets of the Financial Intermediary Class of the Portfolio, in an
amount up to 0.40% on an annual basis of the average daily net assets of that
class, LMWW, financial intermediaries and other parties that provide services in
connection with or are otherwise involved in the distribution of shares or
administration of plans or programs that use Portfolio shares as their funding
medium, and to reimburse certain other expenses and payments. Payments under the
Plans are currently limited to 0.25% (or 0.10% in the case of the Western Asset
Government Money Market Portfolio and the Western Asset Money Market Portfolio)
of average daily net assets. Because the fees are paid out of a Portfolio's
assets on an ongoing basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges. For
more information regarding the Plans and their terms, see the relevant SAI.

Redemption Of Shares

Portfolio shares may be redeemed through three methods: (1) by sending a written
request for redemption to LM Institutional Advisors, Inc. at P.O. Box 17635,
Baltimore, Maryland 21297-1635; (2) by calling the Portfolio at 1-888-425-6432;
or (3) by wire communication with the Transfer Agent. In each case, the investor
should first notify the Portfolio at 1-888-425-6432 of the intention to redeem.
No charge is made for redemptions. Shareholders who wish to be able to redeem by
telephone or wire communication must complete an authorization form in advance.
Redemptions over $10,000,000 may be initiated by telephone, but must be
confirmed in writing prior to processing.

Upon receipt of a request for redemption as described below (a request "in good
order") before the close of the Exchange on any day when the Exchange is open,
the Transfer Agent will redeem Portfolio shares at that day's net asset value
per share. Requests for redemption received by the Transfer Agent after the
close of the Exchange will be executed at the net asset value next determined.
However, orders received by certain retirement plans and other financial
intermediaries by the close of the Exchange and communicated to the Transfer
Agent by 9:00 a.m., Eastern time, on the following business day will be effected
at the net asset value determined on the prior business day. The Portfolios may
refuse to effect redemption requests during periods permitted by federal
securities laws.

Requests for redemption should indicate:

1) The number of shares or dollar amount to be redeemed and the
investor's shareholder account number;

2) The investor's name and the names of any co-owner of the account,
using exactly the same name or names used in establishing the account;

3) Proof of authorization to request redemption on behalf of any co-owner
of the account (please contact the Portfolio for further details); and

4) The name, address, and account number to which the redemption payment
should be sent.

<PAGE>

Payment of the redemption price normally will be made by wire one business day
after receipt of a redemption request in good order. However, each Portfolio
reserves the right to postpone the payment date when the Exchange is closed,
when trading is restricted, or during other periods as permitted by federal
securities laws, or to take up to seven days to make payment upon redemption if
the Portfolio involved could be adversely affected by immediate payment.
Redemption proceeds may also be paid in kind at the discretion of the Portfolio.
Shareholders who receive a redemption in kind may incur costs to dispose of such
securities. In addition, depending upon the circumstances, a shareholder may
incur additional tax liability upon the sale of securities received in a
redemption in kind.

Other supporting legal documents, such as copies of the trust instrument or
power of attorney, may be required from corporations or other organizations,
fiduciaries or persons other than the shareholder of record making the request
for redemption or repurchase. If you have a question concerning the sale or
redemption of shares, please contact the Portfolio by calling 1-888-425-6432.

Any Portfolio may elect to close any shareholder account when the current value
of the account is less than $1 million due to redemptions or exchanges by the
shareholder by redeeming all of the shares in the account and mailing the
proceeds to the investor. If a Portfolio elects to redeem the shares in an
account, the shareholder will be notified that the account is below $1 million
and will be allowed 30 days in which to make an additional investment in order
to avoid having the account closed. Shares will be redeemed at the net asset
value calculated on the day of redemption. Any Portfolio may change the $1
million minimum account balance from time to time without notice to
shareholders.

Signature Guarantee

When a signature guarantee is called for, the shareholder should have "Signature
Guaranteed" stamped under his or her signature and guaranteed by any of the
following entities: U.S. banks, foreign banks having a U.S. correspondent bank,
credit unions, savings associations, U.S. registered dealers and brokers,
municipal securities dealers and brokers, government securities dealers and
brokers, national securities exchanges, registered securities associations and
clearing agencies (each an "Eligible Guarantor Institution"). Each Portfolio and
its agents reserve the right to reject any signature guarantee pursuant to
written signature guarantee standards or procedures, which may be revised in the
future to permit them to reject signature guarantees from Eligible Guarantor
Institutions that do not, based on credit guidelines, satisfy such written
standards or procedures. Any Portfolio may change the signature guarantee
requirements from time to time without prior notice to shareholders.

Exchange Privilege

Shareholders in any Portfolio may exchange their shares for shares of the same
class of any of the other Portfolios, provided that the shares of that class are
being offered at the time of the proposed exchange. Investments by exchange
among any of the Portfolios are made at the per share net asset values next
determined after the order for exchange is received in good order.

The exchange privilege is not intended as a vehicle for short-term trading.
Excessive exchange activity may interfere with portfolio management and have an
adverse effect on all shareholders. In order to limit excessive exchange
activity and in other circumstances where a Portfolio believes doing so would be
in its best interest, the Portfolio reserves the right to revise or terminate
the exchange privilege without notice to the extent permitted by applicable law,
limit the amount or number of exchanges or reject any exchange. For further
information concerning the exchange privilege, or to make an exchange, please
contact the Portfolio at 1-888-425-6432.

Net Asset Value

Net asset value per share of each class of shares is determined daily for each
Portfolio as of the close of regular trading on the Exchange, on every day the
Exchange is open. The Exchange is normally closed on all national holidays and
Good Friday. To calculate each Portfolio's Institutional Class or Financial
Intermediary Class share price, the Portfolio's assets attributable to that
class of shares are valued and totaled, liabilities attributable to that class
of shares are subtracted, and the resulting net assets are divided by the number
of shares outstanding for that class.

Except for the Western Asset Money Market Portfolio and the Western Asset
Government Money Market Portfolio, portfolio securities and other assets for
which market quotations are readily available are valued at current market
value. Current market value means the last sale price of the day for a
comparable position, or, in the absence of any such sales, the mean between
representative bid and asked prices obtained from a quotation reporting system.
Securities with remaining maturities of 60 days or less are generally valued at
amortized cost. Fixed income securities, including those to be purchased under
firm

35
<PAGE>

commitment agreements, are normally valued on the basis of quotations obtained
from brokers and dealers or pricing services which take into account appropriate
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data. Certain fixed income securities for which daily market
quotations are not readily available may be valued with reference to fixed
income securities whose prices are more readily available and whose durations
are comparable to those of the securities being valued.

Other assets and securities for which no quotations are readily available are
valued at fair value as determined in good faith by the Directors or persons
acting at their direction. The values of foreign securities quoted in foreign
currencies are translated into U.S. dollars at current exchange rates or at such
other rates as the Directors or persons acting at their direction may determine
in computing net asset value. Because of time zone differences, foreign
exchanges and securities markets will usually be closed prior to the time of the
closing of the Exchange and values of foreign investments will be determined as
of the earlier closing of such exchanges and securities markets. However,
events affecting the values of such foreign securities may occasionally occur
between the earlier closings of such exchanges and securities market and the
closings of the Exchange that will not be reflected in the computation of the
net asset value. If an event materially affecting the value of such foreign
securities occurs during such period, then such securities will be valued at
fair value as determined in good faith by the Directors or persons acting at
their direction. In addition, if a Portfolio holds securities that are primarily
listed on foreign exchanges that trade on days when the Exchange is not open,
the net asset value of the Portfolio's shares may be subject to change on days
when shareholders will not be able to purchase or redeem the Portfolio's shares.

The Western Asset Money Market Portfolio and the Western Asset Government Money
Market Portfolio each attempts to maintain a per share net asset value of $1.00
by using the amortized cost method of valuation as permitted by SEC Rule 2a-7.
Neither Portfolio can guarantee that the net asset value will always remain at
$1.00 per share.

Dividends and Distributions to Shareholders

The Western Asset High Yield Portfolio, Western Asset Non-U.S. Fixed Income
Portfolio, Western Asset Global Strategic Income Portfolio, Western Asset
Enhanced Equity Portfolio and LM Total Return Institutional Portfolio declare
and pay dividends quarterly out of their net investment income, if available,
for that quarter.

The Western Asset Money Market Portfolio and Western Asset Government Money
Market Portfolio declare as a dividend at the close of regular trading on the
Exchange each business day, to shareholders of record as of 12:00 noon, Eastern
Time, that day, substantially all of their net investment income since the prior
business day's dividend.

The Western Asset Intermediate Portfolio, Western Asset Intermediate Plus
Portfolio, Western Asset Core Portfolio, Western Asset Core Plus Portfolio and
Western Asset Inflation Indexed Bond Portfolio declare as a dividend at the
close of regular trading on the Exchange each business day, to shareholders of
record as of the close of the Exchange that day, substantially all of their net
investment income since the prior business day's dividend.

The Western Asset Money Market Portfolio, Western Asset Government Money Market
Portfolio, Western Asset Intermediate Portfolio, Western Asset Intermediate Plus
Portfolio, Western Asset Core Portfolio, Western Asset Core Plus Portfolio and
Western Asset Inflation Indexed Bond Portfolio pay dividends monthly. Other than
the LM Total Return Institutional Portfolio, all LMIFA II Portfolios declare and
pay dividends annually out of their net investment income, if available, for
that year. Distributions of net realized capital gains are made annually.

Shareholders may elect to receive dividends and distributions in one of four
ways:
1) Receive both dividends and other distributions in shares of the same
class of the distributing Portfolio;
2) Receive dividends in cash and other distributions in shares of the
same class of the distributing Portfolio;
3) Receive dividends in shares of the same class of the distributing
Portfolio and other distributions in cash; or
4) Receive both dividends and other distributions in cash.

If no election is made, both dividends and other distributions are credited to a
shareholder's Portfolio account in shares (of the same class as the shares
already held) at the net asset value of the shares determined as of the close of
the Exchange on the reinvestment date.

For the Western Money Market Portfolio, Western Asset Government Money Market
Portfolio, Western Asset Intermediate Portfolio, Western Asset Intermediate Plus
Portfolio, Western Asset Core Portfolio, Western Asset Core Plus Portfolio and
Western Asset Inflation Indexed Bond Portfolio, reinvestment of dividends and
other distributions occurs on the payment date. A shareholder who redeems all
shares in the Western Asset Money Market Portfolio, Western Asset Government
Money

36
<PAGE>

Market Portfolio, Western Asset Intermediate Portfolio, Western Asset
Intermediate Plus Portfolio, Western Asset Core Portfolio, Western Asset Core
Plus Portfolio or Western Asset Inflation Indexed Bond Portfolio will receive
all dividends and other distributions declared for that monthly cycle prior to
the redemption date (i.e., all dividends and other distributions from the first
day of that monthly cycle, if invested on that first day, to the date of the
redemption). For the other Portfolios, reinvestment occurs on the ex-dividend
date. An election to receive dividends or other distributions in cash rather
than additional shares may be made by notifying the Portfolio in writing.

The Directors reserve the right to revise the dividend policy or postpone the
payment of dividends if warranted in their judgment due to unusual
circumstances, such as an unexpected large expense, loss or fluctuation in net
asset value.

Tax Information

Each Portfolio intends to qualify or continue to qualify as a "regulated
investment company" for federal income tax purposes and to meet all other
requirements necessary for it to be relieved of federal taxes on income and
gains it distributes to shareholders. Each Portfolio will distribute
substantially all its net investment income and net realized capital gains to
its shareholders on a current basis. Early each year, each Portfolio will notify
its shareholders of the amount and tax status of distributions paid during that
year.

Distributions from a Portfolio (whether paid in cash or reinvested in shares of
the Portfolio) will be taxable to shareholders (other than IRAs, other qualified
retirement plans and other tax-exempt investors) as ordinary income to the
extent derived from the Portfolio's investment income and net short-term gains.
Portfolio distributions of net capital gains (that is, the excess of net gains
from capital assets held for more than one year over net losses from capital
assets held for not more than one year) will be taxable as long-term capital
gain (generally at a 20% rate for non-corporate shareholders). If a dividend or
distribution is made shortly after a shareholder purchases shares in a
Portfolio, while in effect a return of capital to the shareholder, the dividend
or distribution is taxable as described above.

Special tax rules apply to investments through defined contributions plans and
other tax-qualified plans. Shareholders should consult their tax adviser to
determine the suitability of shares of a Portfolio as an investment through such
plans and the precise effect of an investment on their particular tax situation.

A Portfolio's investments in foreign securities may be subject to withholding
taxes at the source on dividend or interest payments. In that case, a
Portfolio's yield on those securities would be decreased. Shareholders may be
entitled to claim a credit or deduction with respect to foreign taxes. In
addition, a Portfolio's investments in foreign securities or foreign currencies
may increase or accelerate the Portfolio's recognition of ordinary income and
may affect the timing or amount of the Portfolio's distributions.

In addition to income tax on a Portfolio's distributions, any gain that results
if a shareholder (other than an IRA or other tax-exempt investor) sells or
exchanges its shares generally is subject to income tax.

The LM Balanced Institutional Portfolio's use of a "fund of funds" structure
could adversely affect the character, timing and amount of distributions to
shareholders.

Investments in certain debt obligations, including obligations issued at a
discount and inflation-indexed investments made by the Western Asset Inflation
Indexed Bond Portfolio, may cause the Portfolio to recognize taxable income in
excess of the cash generated by such obligations. Thus a Portfolio could be
required at times to liquidate other investments, including when it is not
advantageous to do so, in order to satisfy its distribution requirements.

The foregoing is a summary of certain federal income tax consequences of
investing in a Portfolio. Shareholders are urged to consult their tax advisers
with respect to the effects of this investment on their particular tax situation
(including possible liability for state and local taxes).

Financial Highlights

The financial highlights tables are intended to help you understand each
Portfolio's recent financial performance for the past five years or, if shorter,
since the inception of the Portfolio's operations. Certain information reflects
financial results for a single Portfolio share. The total returns represent the
rate that an investor would have earned or lost on an investment in the
Portfolios, assuming reinvestment of all dividends and distributions. This
information has been derived from the financial statements of LMIFA I and LMIFA
II, which have been audited by PricewaterhouseCoopers LLP and Ernst & Young LLP,

37
<PAGE>

respectively. Their reports and the Portfolios' financial statements are
included in the Portfolios' annual reports to shareholders, which are available
upon request.

38
<PAGE>

Financial Highlights
LM Institutional Fund Advisors I, Inc.

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.

<TABLE>
<CAPTION>
Investment Operations Distributions
--------------------------------------- ---------------------------------------
Net realized
and Unrealized
Gain (Loss) on
Investments, From
Net Asset Options, Futures Total From Net
Value, Net and Foreign From Net Realized
Beginning Investment Currency Investment Investment Gain on Total
of Period Income Transactions Operations Income Investments Distributions
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Western Asset Core
Portfolio
Institutional Class (A)
Years Ended March 31,
2000 $11.01 $0.67 I ($0.46) $0.21 ($0.80) ($0.03) ($0.83)
1999 11.59 0.64 I (0.01) 0.63 (0.65) (0.56) (1.21)
Nine Months Ended March
31, 1998 (B) 11.28 0.49 I 0.49 0.98 (0.53) (0.14) (0.67)
Years Ended June 30,
1997 11.05 0.70 I 0.19 0.89 (0.65) (0.01) (0.66)
1996 11.22 0.67 I (0.14) 0.53 (0.66) (0.04) (0.70)
1995 10.50 0.69 I 0.72 1.41 (0.69) - (0.69)
Financial Intermediary Class
Year Ended March 31, 2000
(E) $10.69 $0.45 J ($0.25) $0.20 ($0.49) - ($0.49)

Western Asset Core Plus
Portfolio
Years Ended March 31, 2000 $ 9.97 $0.55 K ($0.37) $0.18 ($0.67) - ($0.67)
1999 (F) 10.00 0.34 K (0.08) 0.26 (0.22) (0.07) (0.29)

Western Asset Intermediate
Portfolio
Institutional Class (A)
Years Ended March 31,
2000 $10.62 $0.63 L ($0.38) $0.25 ($0.78) - ($0.78)
1999 10.85 0.58 L 0.06 0.64 (0.57) (0.30) (0.87)
Nine Months Ended March
31, 1998 (B) 10.72 0.46 L 0.23 0.69 (0.46) (0.10) (0.56)
Years Ended June 30, 1997 10.48 0.55 L 0.30 0.85 (0.54) (0.07) (0.61)
1996 10.74 0.54 L (0.01) 0.53 (0.54) (0.25) (0.79)
1995 10.00 0.39 L 0.60 0.99 (0.24) (0.01) (0.25)
Financial Intermediary Class
Period Ended
November 30, 1999 (O) $10.61 $0.41 M ($0.33) $0.08 ($0.43) - ($0.43)
Year Ended March 31, 1999
(G) 10.60 0.12 M (0.11) 0.01 - - -

Western Asset Non-U.S
Fixed Income Portfolio
Years Ended March 31,
2000 $10.21 $0.49 N ($0.47) $0.02 ($0.50) ($0.14) ($0.64)
1999 (H) 10.00 0.30 N 0.31 0.61 (0.20) (0.20) (0.40)
</TABLE>

/A/ All per share figures for the Institutional Class reflect the 10 for 1
stock split effective May 29, 1998.
/B/ The Fund's year end changed from June 30 to March 31.
/C/ Not annualized
/D/ Annualized
/E/ For the period July 22, 1999 (commencement of operations) to March 31, 2000
/F/ For the period July 8, 1998 (commencement of operations) to March 31, 1999.
/G/ For the period January 7, 1999 (commencement of operations) to March 31,
1999.
/H/ For the period July 15, 1998 (commencement of operations) to March 31,
1999.
/I/ Net of advisory fees waived pursuant to a voluntary expense limitation of
0.50%. In the absence of this limitation, the ratio of expenses to average net
assets would have been 0.51%, 0.50% and 0.50% for the years ended March 31,
2000, 1999 and the nine months ended March 31, 1998, and 0.50%, 0.53% and 0.53%
for the years ended June 30, 1997, 1996 and 1995, respectively.
/J/ Net of advisory fees waived pursuant to a voluntary expense limitation of
0.75%. In the absence of this limitation, the ratio of expenses to average net
assets would have been 0.76% for the period July 22, 1999 (commencement of
operations) to March 31, 2000.

39
<PAGE>

<TABLE>
<CAPTION>
Ratios/Supplemental Data
--------------------------------------------------------------------
Net
Net Asset Investment Net Assets
Value, Expenses Income Portfolio End of
End of Total to Average to Average Turnover Period
Period Return Net Assets Net Assets Rate (in thousands)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$10.39 1.99% I 0.50% I 6.3% I 260.4% $649,038
11.01 5.61% I 0.50% I 5.7% I 484.3% 685,489
11.59 8.91% I,C 0.50% I,D 6.0% I,D 226.9% D 617,676

11.28 8.27% I 0.50% I 6.4% I 384.8% 508,353
11.05 4.86% I 0.50% I 6.3% I 266.0% 453,699
11.22 14.12% I 0.50% I 7.0% I 257.9% 336,774

$10.40 1.97% J,C 0.75% J,D 6.2% J,D 260.4% D $ 1,456

$ 9.48 1.95% K 0.50% K 6.2% K 315.9% $215,184
9.97 2.58% K,C 0.50% K,D 5.4% K,D 565.7% D 119,646

$10.09 2.49% L 0.45% L 6.3% L 440.8% $376,056
10.62 6.01% L 0.45% L 5.5% L 389.6% 314,534
10.85 6.59% L,C 0.45% L,D 5.8% L,D 401.4% D 293,531

10.72 8.32% L 0.45% L 6.3% L 419.3% 224,497
10.48 5.15% L 0.50% L 6.3% L 841.3% 66,079
10.74 10.08% L 0.50% L 6.1% L 764.5% 20,313

$10.26 0.81% M,C 0.70% M,D 5.9% M,D 471.8% D -
10.61 0.09% M,C 0.70% M,D 5.2% M,D 389.6% D 3,792

$ 9.59 0.57% N 0.55% 4.9% N 347.1% $ 62,526
10.21 5.81% N,D 0.55% N,D 4.1% N,D 388.0% D 65,358
</TABLE>

/K/ Net of advisory fees waived pursuant to a voluntary expense limitation of
0.50%. In the absence of this limitation, the ratio of expenses to average net
assets would have been 0.65% for the year ended March 31, 2000 and 0.65% for the
period July 8, 1998 (commencement of operations) to March 31, 1999.
/L/ Net of advisory fees waived pursuant to a voluntary expense limitation of
0.50% until August 5, 1996 and 0.45% thereafter. In the absence of this
limitation, the ratio of expenses to average net assets would have been 0.48%
for the years ended March 31, 2000 and 1999, respectively, 0.52% for the nine
months ended March 31, 1998, and 0.55%, 1.03% and 1.60% for the years ended June
30, 1997, 1996 and 1995, respectively.
/M/ Net of advisory fees waived pursuant to a voluntary expense limitation of
0.70%. In the absence of this limitation, the ratio of expenses to average net
assets would have been 0.74% for the period ending November 30, 1999
(liquidation of Financial Intermediary Class) and 0.73% for the period January
7, 1999 (commencement of operations) to March 31, 1999.
/N/ Net of advisory fees waived pursuant to a voluntary expense limitation of
0.55%. In the absence of this limitation, the ratio of expenses to average net
assets would have been 0.83% for the year ended March 31, 2000, and 0.85% for
the period July 15, 1998 (commencement of operations) to March 31, 1999.
/O/ Liquidation of Financial Intermediary Class of shares

40
<PAGE>

Financial Highlights
LM Institutional Fund Advisors II, Inc.

Investment Operations Distributions
----------------------------------------- ---------------------------------------
Net
Net Asset Net Realized & From Net Asset
Value, Net Unrealized Gain Total From From Net Realized Value,
Beginning Investment (Loss) On Investment Investment Gain on Total End of
of Period Income Investments Operations Income Investments Distributions Period
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LM Value Institutional
Portfolio
Institutional Class
Year Ended March 31, 2000 $15.85 $0.05 $ 1.17 $ 1.22 $(0.05) $(0.08) $ (0.13) $16.94
September 22, 1998(A) to
March 31, 1999 10.00 0.04 B 5.83 5.87 (0.02) - (0.02) 15.85

Financial Intermediary
Class
Year Ended March 31, 2000 $15.86 $0.02 C $ 1.15 $ 1.17 $(0.02) $(0.08) $ (0.10) $16.93
October 22, 1998(A) to
March 31, 1999 10.71 0.03 C 5.14 5.17 (0.02) - (0.02) 15.86

Batterymarch U.S. Small
Capitalization Equity
Portfolio
March 13, 2000(A) to March
31, 2000 $10.00 N.M. D $ (0.32) $(0.32) $ - $ - $ - $ 9.68
</TABLE>

/A/ Commencement of operations
/B/ Net of fees waived or reimbursements made by the Adviser in excess of a
voluntary expense limitation of 0.75% until July 31, 1999. If no fees had been
waived the annualized ratio of expenses to average daily net assets for the
period would have been 1.08%.
/C/ Net of fees waived or reimbursements made by the Adviser in excess of a
contractual expense limitation of 1.00% until August 1, 2000. If no fees had
been waived the annualized ratio of expenses to average daily net assets for the
year ended March 31, 2000 would have been 1.01% and for the period ended March
31, 1999 would have been 1.33%.
/D/ Net of fees waived and expenses reimbursed by the Manager pursuant to a
contractual expense limitation of 0.95% until August 1, 2000. If no fees had
been waived or expenses reimbursed by the Manager, the annualized ratio of
expenses to average daily net assets for the period would have been 5.70%.
/E/ Not annualized
/F/ Annualized
N.M. Not meaningful

41
<PAGE>

Net Investment
Expenses Income Ratios/Supplemental Data Net assets,
Total to Average to Average Portfolio End of Period
Return Net Assets Net Assets Turnover Rate (In Thousands)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
7.74% 0.75% 0.44% 23.1% $ 433,036
58.81% E 0.75% B, F 0.84% B, F 28.6% F 115,798

7.41% 1.00% C 0.22% C 23.1% $ 180,647
48.32% E 1.00% C, F 0.43% C, F 28.6% F 18,751

(3.20%) E 0.95% D, F 3.42% D, F N.M. $ 6,757
</TABLE>

42
<PAGE>

Appendix A: Prior Performance of LMIFA II Advisers' Other Accounts

Except in the case of the LM Balanced Institutional Portfolio, the Advisers of
LMIFA II have managed other client accounts that have investment objectives,
policies and strategies that are similar, but not necessarily identical, to
those of the Portfolios that they manage. In the case of the LM Balanced
Institutional Portfolio, each of the Portfolios in which that Portfolio invests
has prior performance. Representative investment performance for these accounts
is stated below. The investment performance is shown on an annual total return
basis, with returns for periods of less than one year not annualized, and on an
average annual total return basis. The performance information is provided
through June 30, 2000.

The prior performance information shown is in two categories and reflects the
performance of either: (1) composites of certain of the Adviser's separately
managed accounts and (2) SEC-registered, open-end investment companies. In each
case, the account or accounts have investment objectives, policies and
strategies substantially similar (although not necessarily identical) to those
of the relevant Portfolio and were managed throughout the periods shown using
investment styles and strategies substantially similar (although not necessarily
identical) to those of the relevant Portfolio, except in the case of the LM
Balanced Institutional Portfolio, where information is provided for each of the
equity and fixed income components. To the extent a composite of accounts is
shown, the composite includes all of the fully-discretionary, fee-paying
accounts managed by such Adviser during the periods shown using investment
objectives, policies and strategies substantially similar (although not
necessarily identical) to those of the relevant Portfolio.

The performance information for composites has been adjusted to give effect to
the Portfolios' estimated fees and expenses, before waivers and reimbursements,
for the Financial Intermediary Class shares as shown in the tables beginning on
page 22. The performance information for composites assumes reinvestment of all
dividends and proceeds from capital transactions and has been prepared in
accordance with the Performance Presentation Standards established by the
Association for Investment Management and Research ("AIMR standards"), except
for the deduction of estimated fees and expenses listed in the Fees and Expenses
tables as noted above. The performance results would be more favorable if they
had been adjusted for estimated fees and expenses of the Institutional Class
shares of the Portfolios. Accounts included in composites are generally not
subject to the diversification requirements, specific tax restrictions and
investment limitations imposed on each of the Portfolios by the Investment
Company Act of 1940 (the "1940 Act") or the Code. The performance results for
these accounts might have been adversely affected had the accounts been subject
to these requirements, restrictions and limitations.

Performance for SEC-registered, open-end investment companies is calculated
using the SEC's standardized total return formula, which is based upon the
change in value of an assumed initial investment of $10,000 from the beginning
through the end of a period and assumes reinvestment of all dividends and other
distributions. For periods of more than one year, the result is then annualized
and expressed as a percentage of the initial investment, and includes the effect
of operating expenses, including advisory fees. Information about the investment
objectives, policies, expenses and net assets of each of the investment
companies follows the performance information.

The method for calculating performance for the composites produces a different
result than if the performance were calculated using the SEC's method for
calculating the total return of an open-end investment company.

A Portfolio's expenses, timing of purchases and sales of portfolio securities,
timing and availability of cash flows, cash positions (which are typically
greater for open-end investment companies than for separate accounts), and
brokerage commissions are some of the factors that might cause performance
results of the Portfolio to vary from that of the composites and/or investment
companies shown. In particular, the large infusions of cash that are typically
associated with the commencement of operations of new mutual funds such as the
Portfolios, as well as differences in the amount of assets held by the
Portfolios as opposed to the accounts and/or investment companies shown below,
can affect the ability and the manner in which security positions are
accumulated or liquidated, and thus may cause a Portfolio's performance to vary
from that of the composites and/or investment companies shown below.

As noted above, the investment objectives, policies, styles and strategies of
each Portfolio are not necessarily identical to those of the relevant composites
and/or investment companies shown below. Again, for these and other reasons, the
performance of the Portfolios will vary from that of the composites and/or
investment companies.

Prior Performance of Accounts Similar to the LM Value Institutional Portfolio.

43
<PAGE>

The investment performance for the period from July 1, 1990 to June 30, 2000 of
all accounts managed by LMFM and Legg Mason Capital Management, Inc. ("LMCM"),
an affiliate of LMFM that shares investment personnel with LMFM, that have
investment objectives, policies and strategies that are substantially similar to
those of the Portfolio is shown below. The benchmark index to which the accounts
are compared is the S&P 500 Index. The S&P 500 Index is an unmanaged index
representing the performance of 500 companies selected by S&P. Although used as
a benchmark, the Index's performance may not be comparable to the accounts'
performance because, unlike the performance of the accounts, the Index's
performance has not been adjusted for any fees or expenses.

Yearly Total Return
Year Ended June 30, Account Performance S&P 500 Performance
2000 4.55% 7.24%
1999 42.41% 22.77%
1998 39.39% 30.16%
1997 53.32% 34.71%
1996 29.69% 26.00%
1995 28.64% 26.07%
1994 5.72% 1.41%
1993 14.94% 13.63%
1992 19.53% 13.41%
1991 -4.32% 7.39%

Average Annual Total Return
Period Ended June 30, 2000 Account Performance S&P 500 Performance
1 Year 4.55% 7.24%
3 Year 27.56% 19.66%
5 Year 32.78% 23.80%
10 Year 22.12% 17.80%

The number of accounts included in the composite has ranged from 1 to 12 over
the relevant period and the aggregate assets of the accounts has ranged from
$637 million to $14.2 billion over the period. One of the accounts included in
the composite is a registered investment company. In addition, all of the fully
discretionary accounts of LMCM with assets greater than $25 million are included
in the composite after a period of three months and after the account becomes
fully invested. Accounts included in the composite are generally not subject to
the diversification requirements, specific tax restrictions and investment
limitations imposed on the Portfolio by the 1940 Act or the Code. The
performance results for these accounts might have been adversely affected had
the accounts been subject to these requirements, restrictions and limitations.
These potential differences do not adversely affect the determination that the
accounts included in this composite are managed in a substantially similar
manner to the Portfolio.

The investment performance for the period from July 1, 1990 to June 30, 2000 for
the Primary Class shares of the Legg Mason Value Trust ("Value Trust"), which
has been advised by LMFM or LMFA since its inception, is shown below. Although
LMFM is newly organized, its principal employees advised the Value Trust during
their association with LMFA.

Yearly Total Return
Year Ended June 30, Account Performance S&P 500 Performance
2000 3.80% 7.24%
1999 41.65% 22.77%
1998 38.48% 30.16%
1997 52.16% 34.71%
1996 28.64% 26.00%
1995 27.59% 26.07%
1994 4.86% 1.41%
1993 13.95% 13.63%
1992 18.48% 13.41%
1991 -5.20% 7.39%

Average Annual Total Return
Period Ended June 30, 2000 Account Performance S&P 500 Performance
1 Year 3.80% 7.24%

44
<PAGE>

3 Year 26.75% 19.66%
5 Year 31.86% 23.80%
10 Year 21.17% 17.80%

Value Trust, which commenced operations on April 16, 1982, is a diversified
open-end investment company. Value Trust's investment objective is long-term
growth of capital. Value Trust invests primarily in equity securities that, in
the Adviser's opinion, offer the potential for capital growth. The Adviser
follows a value discipline in selecting securities, and therefore seeks to
purchase securities at large discounts to the Adviser's assessment of their
intrinsic value. Intrinsic value, according to the Adviser, is the value of the
company measured, to different extents depending on the type of company, on
factors such as, but not limited to, the discounted value of its projected
future free cash flows, the company's ability to earn returns on capital in
excess of its cost of capital, private market values of similar companies, the
value of its assets, and the costs to replicate the business. Qualitative
factors, such as an assessment of the company's products, competitive
positioning, strategy, industry economics and dynamics, regulatory frameworks
and more, are also important. Securities may be undervalued due to uncertainty
arising from the availability of accurate information, economic growth and
change, changes in competitive conditions, technological change, changes in
government policy or geo-political dynamics, and more. The Adviser takes a long-
term approach to investing, generally characterized by long holding periods and
low portfolio turnover. Value Trust generally invests in companies with market
capitalizations greater than $5 billion, but may invest in companies of any
size.

Value Trust may also invest in debt securities of companies having one or more
of the above characteristics. Value Trust may invest up to 25% of its net assets
in long-term debt securities. Up to 10% of its total assets may be invested in
debt securities rated below investment grade.

For temporary purposes, or when cash is temporarily available, Value Trust may
invest without limit in investment grade, short-term debt instruments, including
government, corporate and money market securities.

As of June 30, 2000, Value Trust had approximately $12.86 billion in assets. For
its fiscal year ended March 31, 2000, the Primary Class shares of Value Trust
had a total expense ratio of 1.68%.

THE PERFORMANCE INFORMATION DOES NOT REPRESENT THE PERFORMANCE OF THE PORTFOLIO,
WHICH HAS BEEN IN OPERATION ONLY SINCE SEPTEMBER 22, 1998. THE PERFORMANCE
INFORMATION SHOULD NOT BE CONSIDERED A PREDICTION OF FUTURE PERFORMANCE OF THE
PORTFOLIO. THE PORTFOLIO'S FUTURE PERFORMANCE MAY BE HIGHER OR LOWER THAN THAT
SHOWN.

The investment performance for the period September 22, 1998 (inception) to June
30, 2000 for the Institutional Class shares of the LM Value Institutional
Portfolio ("Value Institutional"), which has been advised by LMFM or LMFA since
its inception, is shown below.

Yearly Total Return
Year Ended June 30, Account Performance S&P 500 Performance
2000 5.75% 7.24%
1999 (Inception 9/22/98) 57.31% 36.33%*

Average Annual Total Return
Period Ended June 30, 2000 Account Performance S&P 500 Performance
1 Year 5.75% 7.24%
Inception (9/22/98) 33.26% 24.24%*

*Performance since inception for the Index is calculated from September 30,
1998.

The investment performance for the period October 22, 1998 (inception) to June
30, 2000 for the Financial Intermediary Class shares of Value Institutional is
shown below.

Yearly Total Return
Year Ended June 30, Account Performance S&P 500 Performance
2000 5.43% 7.24%
1999 (Inception 10/22/98) 46.85% 28.45%*

45
<PAGE>

Average Annual Total Return
Period Ended June 30, 2000 Account Performance S&P 500 Performance
1 Year 5.43% 7.24%
Inception (10/22/98) 29.51% 19.83%*

*Performance since inception for the Index is calculated from October 31, 1998.

Prior Performance of a Registered Investment Company Similar to the LM Special
Investment Institutional Portfolio.

The investment performance for the period from July 1, 1990 to June 30, 2000 for
the Primary Class shares the Legg Mason Special Investment Trust ("Special
Investment Trust") is shown below. LMFM or LMFA has served as the Adviser of
the Special Investment Trust since its inception. Although LMFM is newly
organized, its principal employees advised Special Investment Trust during their
association with LMFA. The benchmark index to which Special Investment Trust is
compared is the S&P 500 Index. The S&P 500 Index is an unmanaged index
representing the performance of 500 companies selected by S&P. Although used as
a benchmark, the Index's performance may not be comparable to Special Investment
Trust's performance since, unlike the performance of Special Investment Trust,
the Index's performance has not been adjusted for any fees or expenses.

Yearly Total Return
Year Ended June 30, Account Performance S&P 500 Performance
2000 10.96% 7.24%
1999 27.18% 22.77%
1998 22.29% 30.16%
1997 22.52% 34.17%
1996 25.89% 26.00%
1995 8.85% 26.07%
1994 4.97% 1.41%
1993 25.72% 13.63%
1992 12.34% 13.41%
1991 14.37% 7.39%

Average Annual Total Return
Period Ended June 30, 2000 Account Performance S&P 500 Performance
1 Year 10.96% 7.24%
3 Year 19.95% 19.66%
5 Year 21.63% 23.80%
10 Year 17.25% 17.80%

Special Investment Trust, which commenced operations on December 30, 1985, is a
diversified open-end investment company. Special Investment Trust's investment
objective is capital appreciation. Special Investment Trust invests primarily in
equity securities, and securities convertible into equity securities, of
companies whose market capitalizations are typically classified as small to mid-
sized. The Adviser defines small to mid-sized companies as those below the top
500 U.S. companies in terms of market capitalization. It also invests in
"special situations" without regard to market capitalization. Special situations
are securities undergoing unusual or possibly one-time developments that, in the
opinion of the Adviser, make them attractive for investment. Such developments
may include actual or anticipated: sale or termination of an unprofitable part
of the company's business; change in the company's management or in management's
philosophy; a basic change in the industry in which the company operates;
introduction of new products or technologies; or the prospect or effect of
acquisition or merger activities.

Special Investment Trust's Adviser follows a value discipline in selecting
securities, and therefore seeks to purchase securities at large discounts to the
Adviser's assessment of their intrinsic value. Intrinsic value, according to the
Adviser, is the value of the company measured, to different extents depending on
the type of company, on factors such as, but not limited to, the discounted
value of its projected future free cash flows, the company's ability to earn
returns on capital in excess of its cost of capital, private market values of
similar companies, the value of its assets, and the costs to replicate the
business. Qualitative factors, such as an assessment of the company's products,
competitive positioning, strategy, industry economics and dynamics, regulatory
frameworks and more, are also important. Securities may be undervalued due to
uncertainty arising from the availability of accurate information, economic
growth and change, changes in competitive conditions, technological change,
changes in government policy or geo-political dynamics, and more.

46
<PAGE>

Special Investment Trust also invests in debt securities of companies having one
or more of the above characteristics. Special Investment Trust may invest up to
35% of its net assets in debt securities rated below investment grade. Special
Investment Trust may invest up to 20% of its total assets in securities of
companies involved in actual or anticipated reorganizations or restructurings.

For temporary defensive purposes, or when cash is temporarily available, Special
Investment Trust may invest without limit in investment grade, short-term debt
instruments, including government, corporate and money market securities.

As of June 30, 2000, Special Investment Trust had approximately $2.6 billion in
assets. For its fiscal year ended March 31, 2000, the Primary Class shares of
Special Investment Trust had a total expense ratio of 1.80%.

THE PERFORMANCE INFORMATION DOES NOT REPRESENT THE PERFORMANCE OF THE PORTFOLIO,
WHICH HAS NOT YET COMMENCED OPERATIONS AND HAS NO PERFORMANCE RECORD OF ITS OWN.
THE PERFORMANCE INFORMATION SHOULD NOT BE CONSIDERED A PREDICTION OF FUTURE
PERFORMANCE OF THE PORTFOLIO. THE PORTFOLIO'S FUTURE PERFORMANCE MAY BE HIGHER
OR LOWER THAN THAT SHOWN.

Prior Performance of a Registered Investment Company Similar to the LM Total
Return Institutional Portfolio.

The investment performance for the period from July 1, 1990 to June 30, 2000 for
the Primary Class shares the Legg Mason Total Return Trust, Inc. ("Total Return
Trust") is shown below. LMFM or LMFA has served as Adviser to the Total Return
Trust. Although LMFM is newly organized, its employees advised Total Return
Trust during their association with LMFA. The benchmark index to which Total
Return Trust is compared is the S&P 500 Index. The S&P 500 Index is an unmanaged
index representing the performance of 500 companies selected by S&P. Although
used as a benchmark, the Index's performance may not be comparable to Total
Return Trust's performance since, unlike the performance of Total Return Trust,
the Index's performance has not been adjusted for any fees or expenses.

Yearly Total Return
Year Ended June 30, Account Performance S&P 500 Performance
2000 -15.06% 7.24%
1999 3.45% 22.77%
1998 23.31% 30.16%
1997 38.14% 34.71%
1996 23.28% 26.00%
1995 11.83% 26.07%
1994 4.69% 1.41%
1993 14.66% 13.63%
1992 25.09% 13.41%
1991 2.45% 7.39%

Average Annual Total Return
Period Ended June 30, 2000 Account Performance S&P 500 Performance
1 Year -15.06% 7.24%
3 Year 2.71% 19.66%
5 Year 13.03% 23.80%
10 Year 12.24% 17.80%

Total Return Trust, which commenced operations on November 21, 1985, is a
diversified open-end investment company. Total Return Trust's investment
objective is to obtain capital appreciation and current income in order to
achieve an attractive total investment return consistent with reasonable risk.
Total Return Trust invests primarily in securities that, in the Adviser's
opinion, offer the potential for long-term capital growth and attractive current
income. Total Return Trust invests primarily in common stocks, debt securities,
and securities convertible into common stocks, but is not limited to these types
of securities. Total Return Trust may invest in securities that do not pay
current income but do, in the Adviser's opinion, offer prospects for capital
appreciation and/or future income. The Adviser follows a value discipline in
selecting securities, and therefore seeks to purchase securities at large
discounts to the Adviser's assessment of their intrinsic value. Intrinsic value,
according to the Adviser, is the value of the company measured, to different
extents depending on the type of company, on factors such as, but not limited
to, the discounted value of its projected future free cash flows, the company's
ability to earn returns on capital in excess of its cost of capital, private
market values of similar companies, the value of its assets, and the costs to
replicate the

47
<PAGE>

business. Qualitative factors, such as an assessment of the company's products,
competitive positioning, strategy, industry economics and dynamics, regulatory
frameworks and more, are also important. Securities may be undervalued due to
uncertainty arising from the availability of accurate information, economic
growth and change, changes in competitive conditions, technological change,
changes in government policy or geo-political dynamics, and more. The Total
Return Trust may invest in companies of any size.

Total Return Trust may invest in money market securities for temporary defensive
purposes or when cash is temporarily available. Consistent with the investment
objective, Total Return Trust may also invest in debt securities when the
Adviser believes the return on certain debt securities may equal or exceed the
return on equity securities. Total Return Trust may invest in debt securities of
any maturity of both foreign and domestic issuers without regard to rating, and
may invest its assets in such securities without regard to a percentage limit.
The Adviser currently anticipates that under normal market conditions, the fund
will invest no more than 50% of its total assets in intermediate-term and long-
term debt securities and no more than 5% of its total assets in debt securities
not rated investment grade.

As of June 30, 2000 Total Return Trust had approximately $362.6 million in
assets. For its fiscal year ended March 31, 2000, the Primary Class shares of
Total Return Trust had a total expense ratio of 1.89%.

Prior Performance of the Underlying Portfolios of the LM Balanced Institutional
Portfolio.

The LM Balanced Institutional Portfolio is a Portfolio that invests its assets
in shares of Value Institutional and the Western Asset Core Portfolio ("Core").
The prior performance shown below is not that of the LM Balanced Institutional
Portfolio, but for Value Institutional and Core. The prior performance
information for Value Institutional and Core should not be considered a
substitute for the performance of the LM Balanced Institutional Portfolio. As
described elsewhere in the Prospectus, the LM Balanced Institutional Portfolio's
Adviser will allocate the assets of the Portfolio between Value Institutional
and Core in its discretion, and there can be no assurance that any particular
allocation will be achieved or maintained. The Balanced Portfolio will bear its
own expenses, which are not reflected in the prior performance shown in the
Prospectus. As the Balanced Portfolio may only invest in the Institutional Class
shares of the underlying Portfolios, the returns below do not reflect any 12b-1
fees.

The investment performance for the period September 22, 1998 (inception) to June
30, 2000 for the Institutional Class shares of Value Institutional, which has
been advised by LMFM or LMFA since its inception, is shown below.

Yearly Total Return

<TABLE>
<CAPTION>
Year Ended June 30, Account Performance S&P 500 Performance
<S> <C> <C>
2000 5.75% 7.24%
1999 (Inception 9/22/98) 57.31% 36.33%*
</TABLE>

<TABLE>
<CAPTION>
Average Annual Total Return
Period Ended June 30, 2000 Account Performance S&P 500 Performance
<S> <C> <C>
1 Year 5.75% 7.24%
Inception (9/22/98) 33.26% 24.24%*
</TABLE>

*Performance since inception shown for the Index is calculated from September
30, 1998.

For a description of Value Institutional, please see page 10 of the Prospectus.

As of June 30, 2000, Value Institutional had approximately $570.1 million in
assets. For its fiscal year ended March 31, 2000, the Institutional Class shares
of Value Institutional had a total expense ratio of 0.75%

The investment performance for the period September 4, 1990 (inception) to June
30, 2000 for the Institutional Class shares of Core, which has been advised by
Western Asset since its inception, is shown below.

48
<PAGE>

Yearly Total Return

<TABLE>
<CAPTION>
Year Ended June 30, Account Performance Salomon Broad Market Performance
<S> <C> <C>
2000 5.13% 4.51%
1999 1.99% 3.12%
1998 11.64% 10.59%
1997 8.27% 8.17%
1996 4.86% 4.95%
1995 14.10% 12.55%
1994 -0.88% -1.17%
1993 14.52% 11.98%
1992 15.61% 14.12%
1991 (Inception 9/4/90) 11.01% 10.72%*
</TABLE>

Average Annual Total Return

<TABLE>
<CAPTION>
Period Ended June 30, 2000, Account Performance Salomon Broad Market Performance
<S> <C> <C>
1 Year 5.13% 4.51%
3 Year 6.18% 6.02%
5 Year 6.33% 6.23%
Inception (9/4/90) 8.64% 7.99%*
</TABLE>

*Performance since inception shown for the Index is calculated from August 31,
1990.

For a description of Core, see page 4 of the Prospectus.

As of June 30, 2000, Core had approximately $652.1 million in assets. For its
fiscal year ended March 31, 2000, the Institutional Class shares of Core had a
total expense ratio of 0.50% (after fee waivers; 0.51% in the absense of such
waivers).

Prior Performance of Accounts Similar to the Batterymarch U.S. MidCapitalization
Equity Portfolio.

The investment performance for the period from December 1, 1998 to June 30, 2000
of all accounts managed by Batterymarch that have investment objectives,
policies and strategies that are substantially similar to those of the Portfolio
is shown below. December 1, 1998 represents the commencement of investment
activities for the initial account included in the Composite. The benchmark
index to which the accounts are compared is the S&P MidCap 400 Index ("S&P
400"). The S&P 400 is an unmanaged, market-weighted composite index of 400
stocks in the middle capitalization sector of the U.S. equities market. Although
used as a benchmark, the Index's performance may not be comparable to the
accounts' performance since, unlike the performance of the accounts, the Index's
performance has not been adjusted for any fees or expenses.

<TABLE>
<CAPTION>
Yearly Total Return
Year Ended June 30, Account Performance S&P MidCap 400 Performance
<S> <C> <C>
2000 25.34% 16.98%
1999 (Inception 12/1/98) 19.45% 19.78%*
</TABLE>

<TABLE>
<CAPTION>
Average Annual Total Return
Period Ended June 30, 2000 Account Performance S&P MidCap 400 Performance
<S> <C> <C>
1 Year 25.34% 16.98%
Inception (12/1/98) 29.03% 23.75%*
</TABLE>

49
<PAGE>

*Performance since inception shown for the Index is calculated from November 30,
1998.

The number of accounts included in the composite has ranged from 1 to 3 over the
relevant period and the aggregate assets of the accounts has ranged from $22
million to $98 million over the period. Accounts included in the composite are
generally not subject to the diversification requirements, specific tax
restrictions and investment limitations imposed on the Portfolio by the 1940 Act
or the Code. The performance results for these accounts might have been
adversely affected had the accounts been subject to these requirements,
restrictions and limitations. These potential differences do not adversely
affect the determination that the accounts included in this composite are
managed in a substantially similar manner to the Portfolio.

Prior Performance of Accounts Similar to the Batterymarch U.S. Small
Capitalization Equity Portfolio.

The investment performance for the period from October 1, 1993 to June 30, 2000
of all accounts managed by Batterymarch that have investment objectives,
policies and strategies that are substantially similar to those of the Portfolio
is shown below. October 1, 1993 represents the commencement of investment
activities for the initial account included in the composite. The benchmark
index to which the accounts are compared is the Russell 2000 Index ("Russell
2000"). The Russell 2000 is an unmanaged, capitalization-weighted, broad-based
index of 2,000 small capitalization U.S. companies. Although used as a
benchmark, the Index's performance may not be comparable to the accounts'
performance since, unlike the performance of the accounts, the Index's
performance has not been adjusted for any fees or expenses.

Yearly Total Return

<TABLE>
<CAPTION>
Year Ended June 30, Account Performance Russell 2000 Performance
<S> <C> <C>
2000 34.49% 14.32%
1999 13.88% 1.50%
1998 23.63% 16.51%
1997 26.96% 16.33%
1996 36.71% 23.89%
1995 22.90% 20.11%
1994 (Inception 10/1/93) -6.18% -4.05%*
</TABLE>

Average Annual Total Return

<TABLE>
<CAPTION>
Period Ended June 30, 2000 Account Performance Russell 2000 Performance
<S> <C> <C>
1 Year 34.49% 14.32%
3 Year 23.71% 10.57%
5 Year 26.87% 14.27%
Inception (10/1/93) 21.82% 12.73%*
</TABLE>

*Performance since inception shown for the Index is calculated from September
30, 1993.

The number of accounts included in the composite has ranged from 1 to 15
over the relevant period and the aggregate assets of the accounts has ranged
from $21 million to $181 million over the period. Accounts included in the
composite are generally not subject to the diversification requirements,
specific tax restrictions and investment limitations imposed on the Portfolio by
the 1940 Act or the Code. The performance results for these accounts might have
been adversely affected had the accounts been subject to these requirements,
restrictions and limitations. These potential differences do not adversely
affect the determination that the accounts included in this composite are
managed in a substantially similar manner to the Portfolio.

THE PERFORMANCE INFORMATION DOES NOT REPRESENT THE PERFORMANCE OF THE PORTFOLIO,
WHICH HAS BEEN IN OPERATION ONLY SINCE MARCH 13, 2000. THE PERFORMANCE
INFORMATION SHOULD NOT BE CONSIDERED A PREDICTION OF FUTURE PERFORMANCE OF THE
PORTFOLIO. THE PORTFOLIO'S FUTURE PERFORMANCE MAY BE HIGHER OR LOWER THAN THAT
SHOWN.

50
<PAGE>

The investment performance for the period March 13, 1999 (inception) to June 30,
2000 for the Institutional Class shares of the Batterymarch U.S. Small
Capitalization Equity Portfolio, which has been advised by Batterymarch since
its inception, is shown below.

Yearly Total Return

<TABLE>
<CAPTION>
Year Ended June 30, Account Performance Russell 2000 Performance
<S> <C> <C>
2000 (Inception 3/13/00) -1.00% -10.12%*
</TABLE>

*Performance since inception shown for the Index is calculated from February 29,
2000.

Prior Performance of Accounts Similar to the Batterymarch International Equity
Portfolio.

The investment performance for the period from July 1, 1990 to June 30, 2000 of
all accounts managed by Batterymarch that have investment objectives, policies
and strategies that are substantially similar to those of the Portfolio is shown
below. The benchmark index to which the accounts are compared is the MSCI Europe
Australia & Far East Index ("MSCI EAFE"). The MSCI EAFE is an unmanaged index
representing the performance of share prices of approximately 1100 companies
listed on stock exchanges around the world. Twenty countries are included in the
Index. Although used as a benchmark, the Index's performance may not be
comparable to the accounts' performance since, unlike the performance of the
accounts, the Index's performance has not been adjusted for any fees or
expenses.

<TABLE>
<CAPTION>
Yearly Total Return
Year Ended June 30, Account Performance MSCI EAFE Performance
<S> <C> <C>
2000 11.81% 17.44%
1999 -5.93% 7.92%
1998 11.72% 6.38%
1997 18.51% 13.16%
1996 14.24% 13.62%
1995 1.20% 1.95%
1994 17.32% 17.30%
1993 6.60% 20.70%
1992 8.26% -0.31%
1991 -15.96% -11.23%
</TABLE>

<TABLE>
<CAPTION>
Average Annual Total Return
Period Ended June 30, 2000 Account Performance MSCI EAFE Performance
<S> <C> <C>
1 Year 11.81% 17.44%
3 Year 5.71% 10.48%
5 Year 9.93% 11.63%
10 Year 6.44% 8.28%
</TABLE>

The number of accounts included in the composite has ranged from 4 to 11 over
the relevant period and the aggregate assets of the accounts has ranged from
$705 million to $1.4 billion over the period. One of the accounts included in
the composite is a registered investment company. Accounts included in the
composite are generally not subject to the diversification requirements,
specific tax restrictions and investment limitations imposed on the Portfolio by
the 1940 Act or the Code. The performance results for these accounts might have
been adversely affected had the accounts been subject to these requirements,
restrictions and limitations. These potential differences do not adversely
affect the determination that the accounts included in this composite are
managed in a substantially similar manner to the Portfolio.

The investment performance for the period from February 17, 1995 (inception) to
June 30, 2000 for the Primary Class shares the Legg Mason International Equity
Trust ("International Equity Trust"), which has been advised by Batterymarch
since its inception, is shown below.

<TABLE>
<CAPTION>
Yearly Total Return
Year Ended June 30, Account Performance MSCI EAFE Performance
<S> <C> <C>
2000 8.97% 17.44%
</TABLE>

51
<PAGE>

<TABLE>
<S> <C> <C>
1999 -7.03% 7.92%
1998 5.73% 6.38%
1997 18.74% 13.16%
1996 15.90% 13.62%
1995 (Inception 2/17/95) 4.00% 6.08%*

Average Annual Total Return
Period Ended June 30, 2000 Account Performance MSCI EAFE Performance
<S> <C> <C>
1 Year 8.97% 17.44%
3 Year 3.25% 10.48%
5 Year 8.07% 11.63%
Since Inception (2/17/95) 8.28% 12.31%*
</TABLE>

*Performance since inception shown for the Index is calculated from February 28,
1995.

International Equity Trust, which commenced operations on February 17, 1995, is
a diversified open-end investment company. International Equity Trust's
investment objective is maximum long-term total return. International Equity
Trust's Adviser currently intends to invest substantially all of the fund's
assets in non-U.S. equity securities. The primary focus of the Adviser is stock
selection, with a secondary focus on country allocation. The Adviser uses a
bottom-up, quantitative stock selection process for the developed markets
portion of the fund's portfolio. The cornerstone of this process is a
proprietary stock selection model that ranks the 2,800 stocks in the fund's
principal investable universe by relative attractiveness on a daily basis. The
quantitative factors within this model are intended to measure growth, value,
fundamental expectations and technical indicators (i.e., supply and demand).
Because the same quantitative factors are not effective across all markets due
to individual market characteristics, the Adviser adjusts the stock selection
model to include factors that its research indicates are effective, eliminating
factors that are not valid in a particular market. The Adviser runs the stock
selection model and re-balances the portfolio daily, purchasing all stocks
ranked "buys" by the model and selling all stocks ranked "sells." Stocks are
sold when the original reason for purchase no longer pertains, the fundamentals
have deteriorated or portfolio re-balancing warrants.

Country allocation for the developed markets portion of the fund is based on
rankings generated by the Adviser's proprietary country model. The Adviser
examines securities from over 20 international stock markets, with emphasis on
several of the largest: Japan, United Kingdom, France, Canada and Germany.
International Equity Trust may invest up to 35% of its total assets in emerging
market securities. The Adviser's investment strategy for the emerging markets
portion of the fund represents a distinctive combination of tested quantitative
methodology and traditional fundamental analysis. The emerging markets
allocation focuses on higher-quality, dominant companies that the adviser
believes to have strong growth prospects and reasonable evaluations. Country
allocation for the emerging markets portion of the portfolio also combines
quantitative and fundamental approaches.

International Equity Trust's investment portfolio will normally be diversified
across a broad range of industries and across a number of countries, consistent
with the objective of maximum total return. The Adviser may also seek to enhance
portfolio returns through active currency hedging strategies. More than 25% of
International Equity Trust's total assets may be denominated in a single
currency or invested in securities of issuers located in a single country.

When cash is temporarily available, or for temporary defensive purposes, when
the Adviser believes such action is warranted by abnormal market or economic
situations, International Equity Trust may invest without limit in cash and U.S.
dollar-denominated money market instruments, including repurchase agreements of
domestic issuers. Such securities will be rated investment grade or, if unrated,
will be determined by the fund's Adviser to be investment grade.

As of June 30, 2000, International Equity Trust had approximately $253.9 million
in assets. For its fiscal year ended December 31, 1999, the Primary Class shares
of International Equity Trust had a total expense ratio of 2.13%.

Prior Performance of Accounts Similar to the Batterymarch Emerging Markets
Portfolio.

52
<PAGE>

The investment performance for the period from January 1, 1994 to June 30, 2000
of all accounts managed by Batterymarch that have investment objectives,
policies and strategies that are substantially similar to those of the Portfolio
is shown below. January 1, 1994 represents the commencement of investment
activities for the initial account included in the composite. The benchmark
index to which the accounts are compared is the MSCI Emerging Markets Free Index
with Gross Dividends ("MSCI EMF"). The MSCI EMF is an unmanaged index
representing the performance of a market-weighted aggregate of 26 individual
emerging country indexes and takes into account local and market restrictions on
share ownership by foreigners. Although used as a benchmark, the Index's
performance may not be comparable to the accounts' performance since, unlike the
performance of the accounts, the Index's performance has not been adjusted for
any fees or expenses.

Yearly Total Return
Year Ended June 30, Account Performance MSCI EMF Performance
2000 30.09% 9.47%
1999 25.56% 28.71%
1998 -34.01% -39.08%
1997 19.99% 12.82%
1996 10.61% 8.47%
1995 -7.51% 0.01%
1994 (Inception 1/1/94) -10.82% -9.04%*

Average Annual Total Return
Period Ended June 30, 2000 Account Performance MSCI EMF Performance
1 Year 30.09% 9.47%
3 Year 2.67% -4.96%
5 Year 7.60% 0.99%
Since Inception (1/1/94) 2.17% -0.92%*

*Performance since inception shown for the Index is calculated from December 31,
1993.

The number of accounts included in the composite has ranged from 1 to 5 over the
relevant period and the aggregate assets of the accounts has ranged from $43
million to $1.2 billion over the period. One of the accounts included in the
composite is a registered investment company. Accounts included in the composite
are generally not subject to the diversification requirements, specific tax
restrictions and investment limitations imposed on the Portfolio by the 1940 Act
or the Code. The performance results for these accounts might have been
adversely affected had the accounts been subject to these requirements,
restrictions and limitations. These potential differences do not adversely
affect the determination that the accounts included in this composite are
managed in a substantially similar manner to the Portfolio.

The investment performance for the period from May 28, 1996 (inception) to June
30, 2000 for the Primary Class shares of the Legg Mason Emerging Markets Trust
("Emerging Markets Trust"), which has been advised by Batterymarch since its
inception, is shown below.

Yearly Total Return
Year Ended June 30, Account Performance MSCI EMF Performance
2000 28.82% 9.47%
1999 24.82% 28.71%
1998 -34.42% -39.08%
1997 27.41% 12.82%
1996 (Inception 5/28/96) 0.20% -0.45%*

Average Annual Total Return
Period Ended June 30, 2000 Account Performance MSCI EMF Performance
1 Year 28.82% 9.47%
3 Year 1.78% -4.96%
Since Inception (5/28/96) 7.70% -0.63%*

*Performance since inception shown for the Index is calculated from May 31,
1996.

53
<PAGE>

Emerging Markets Trust, which commenced operations on May 28, 1996, is a
diversified open-end investment company. Emerging Markets Trust's investment
objective is long-term capital appreciation. Emerging Markets Trust's Adviser
intends to invest substantially all of the fund's assets in equity securities
and convertible securities of emerging market issuers.

Emerging Markets Trust intends to invest in Asia, Latin America, the Indian
Subcontinent, Southern and Eastern Europe, the Middle East and Africa, although
it may not invest in all these markets at all times and may not invest in any
particular market when it deems investment in that country or region to be
inadvisable.

More than 25% of Emerging Markets Trust's total assets may be denominated in a
single currency or invested in securities of issuers located in a single
country.

The Adviser focuses on higher-quality, dominant emerging markets companies that
the Adviser believes to have strong growth prospects and reasonable valuations,
selected from a principal investable universe of approximately 1,000 stocks. The
Adviser's emerging markets investment strategy represents a distinctive
combination of quantitative methodology and traditional fundamental analysis.
Traditional "on-the-ground" fundamental research is combined by the Adviser with
tested quantitative valuation disciplines in those markets where reliable data
is available. In determining country allocation, the Adviser also merges
quantitative and fundamental approaches. In markets with reliable historical
data, buy and sell decisions are driven by a combination of quantitative
valuations and the Adviser's fundamental opinions. Stocks are sold when the
original reason for purchase no longer pertains, the fundamentals have
deteriorated or portfolio re-balancing warrants.

When cash is temporarily available, or for temporary defensive purposes, when
the Adviser believes such action is warranted by abnormal market or economic
situations, the fund may invest without limit in cash and U.S. dollar-
denominated money market instruments, including repurchase agreements of
domestic issuers. Such securities will be rated investment grade or, if unrated,
will be determined by the adviser to be investment grade.

As of June 30, 2000, Emerging Markets Trust had approximately $118.5 million in
assets. For its fiscal year ended December 31, 1999, the Primary Class shares of
Emerging Markets Trust had a total expense ratio of 2.50% (after fee waivers;
2.75% in the absence of such waivers).

54
<PAGE>

LM Institutional Fund Advisors I
LM Institutional Fund Advisors II

Investment Manager
LM Institutional Advisors, Inc.
P.O. Box 17635
Baltimore, Maryland 21297-1635
1-888-425-6432

Custodian Transfer Agent
State Street Bank and Trust Co. Boston Financial Data Services
P.O. Box 1713 P.O. Box 953
Boston, Massachusetts 02105 Boston, Massachusetts 02103

Counsel
Ropes & Gray
One International Place
Boston, Massachusetts 02110

Independent Accountants Independent Auditors
For LMIFA I Portfolios: For LMIFA II Portfolios:
PricewaterhouseCoopers LLP Ernst & Young LLP
250 W. Pratt Street 2001 Market Street
Baltimore, Maryland 21201 Philadelphia, PA 19103

Distributors
For all Portfolios: For LMIFA I Portfolios:
Legg Mason Wood Walker, Incorporated Arroyo Seco, Inc.
100 Light Street P.O. Box 1476 117 East Colorado Boulevard
Baltimore, Maryland 21203-1476 Pasadena, California 91105

For investors who want more information about LM Institutional Fund Advisors I,
Inc. ("LMIFA I") and LM Institutional Fund Advisors II, Inc. ("LMIFA II"), the
following documents are available upon request.

Annual Reports
Annual and semi-annual reports provide additional information about the
Portfolios' investments. In the annual report, you will also find a discussion
of the market conditions and investment strategies that significantly affected
the performance of a Portfolio during the last fiscal year.

Statement of Additional Information
The SAI of each of LMIFA I and LMIFA II contains additional detailed information
about LMIFA I and LMIFA II and is incorporated by reference into (legally part
of) this prospectus.

Investors can receive free copies of these materials, request other information
about the Portfolios and make shareholder inquiries by calling 1-888-425-6432.

Information about the Portfolios, including the SAI, can be reviewed and copied
at the SEC's public reference room in Washington, D.C. Information on the
operation of the public reference room may be obtained by calling the SEC at 1-
202-942-8090. Reports and other information about the Portfolios are available
on the EDGAR database on the SEC's Internet site at http://www.sec.gov.
Investors may also make an electronic request at: [email protected] or write
to: SEC, Public Reference Section, Washington, D.C. 20549-0102. A fee will be
charged for making copies.

The Investment Company Act of 1940 file numbers for LMIFA I and LMIFA II are
811-06110 and 811-8611, respectively.

55
<PAGE>

LM INSTITUTIONAL FUND ADVISORS II, INC.

Statement of Additional Information
August 1, 2000

LM Institutional Fund Advisors II, Inc. (the "Fund") is a no-load, open-end
diversified management investment company. The Fund currently consists of eight
separate professionally managed investment portfolios, which are described in
this Statement of Additional Information ("SAI"). Each of these portfolios is
referred to herein as a "Portfolio."

This SAI is not a prospectus and should be read in conjunction with the
Prospectus for the Portfolios, dated August 1, 2000, which has been filed with
the Securities and Exchange Commission ("SEC"). Copies of the Portfolios'
Prospectus are available without charge from LM Institutional Advisors, Inc. at
1-888-425-6432.

<PAGE>

Table of Contents

<S> <C>
Definitions 3
Additional Information About Investment Limitations and Policies 3
Additional Information About Securities, Investment Techniques and Related Risks 4
Valuation of Portfolio Shares 21
Management of the Portfolios 21
Purchases and Redemptions 25
Exchange Privilege 25
Portfolio Transactions and Brokerage 25
Additional Tax Information 26
Other Information 28
Principal Holders of Securities 28
Performance Information 29
Financial Statements and Report of Independent Auditors 32

</TABLE>

2
<PAGE>

Definitions

"Adviser" means the investment advisory firm that manages a Portfolio's assets.
LMFM and Batterymarch are each Advisers.

"Batterymarch" means Batterymarch Financial Management, Inc., 200 Clarendon
Street, Boston, Massachusetts 02116. Batterymarch is the Adviser to the
Batterymarch Emerging Markets Portfolio, the Batterymarch U.S. MidCapitalization
Equity Portfolio, the Batterymarch U.S. Small Capitalization Equity Portfolio
and the Batterymarch International Equity Portfolio.

"Code" means the Internal Revenue Code of 1986, as amended.

"Distributor" means the party that is responsible for the distribution or sale
of the Fund's shares. Legg Mason is the Fund's Distributor.

"Exchange" means the New York Stock Exchange.

"Fundamental Investment Limitation" means an investment limitation of a
Portfolio that may be changed only with the affirmative vote of the lesser of
(a) more than 50% of the outstanding shares of the relevant Portfolio or (b) 67%
or more of the shares of the relevant Portfolio present at a shareholders'
meeting if more than 50% of the outstanding shares of that Portfolio are
represented at the meeting in person or by proxy. Only those policies or
limitations expressly designated as such are fundamental investment limitations.
All other policies and restrictions may be changed without shareholder approval.

"Independent Director" means a Director of the Fund who is not an "interested
person" (as defined in the 1940 Act) of the Fund.

"Legg Mason" means Legg Mason Wood Walker, Incorporated.

"LMFM" means Legg Mason Funds Management, Inc., 100 Light Street, Baltimore, MD
21202. LMFM is the Adviser to the LM Value Institutional Portfolio, the LM
Special Investment Institutional Portfolio, the LM Balanced Institutional
Portfolio and the LM Total Return Institutional Portfolio.

"Manager" means LM Institutional Advisors, Inc., 100 Light Street, Baltimore, MD
21202.

"1940 Act" means the Investment Company Act of 1940, as amended.

"NRSROs" means nationally recognized (or foreign) statistical rating
organizations, including Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's ("S&P").

"1999 Portfolios" means the Batterymarch U.S. MidCapitalization Equity
Portfolio, the Batterymarch U.S. Small Capitalization Equity Portfolio and the
LM Balanced Institutional Portfolio.

"Plans" means the Fund's Distribution and Shareholder Services Plans.

"SEC" means the Securities and Exchange Commission.

"12b-1 Director" means a Director of the Fund who is an Independent Director and
who has no direct or indirect financial interest in the operation of the Fund's
Plans or the Fund's Underwriting Agreement.

Additional Information About Investment Limitations and Policies

Each Portfolio has adopted certain fundamental investment limitations that are
set forth below.

Each Portfolio may:

(1) make loans, borrow money or issue senior securities to the fullest extent
permitted by the 1940 Act, the rules or regulations thereunder or
applicable orders of the SEC, as such statute, rules, regulations or orders
may be amended from time to time.

(2) not concentrate investments in a particular industry or group of industries
as concentration is defined under the 1940 Act, the rules or regulations
thereunder or applicable orders of the SEC, as such statute, rules,
regulations or orders may be amended from time to time. Securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements thereon will not be considered to represent an
industry.

3
<PAGE>

(3) underwrite securities to the fullest extent permitted by the 1940 Act, the
rules or regulations thereunder or applicable orders of the SEC, as such
statute, rules, regulations or orders may be amended from time to time.

(4) purchase or sell commodities, commodities contracts, futures contracts,
options, forward contracts or real estate to the fullest extent permitted
by the 1940 Act, the rules or regulations thereunder or applicable orders
of the SEC, as such statute, rules, regulations or orders may be amended
from time to time.

Additional Information

The fundamental investment limitations set forth above limit a Portfolio's
ability to engage in certain investment practices and purchase securities to the
extent permitted by, or consistent with, the 1940 Act. Relevant limitations of
the 1940 Act are described below, which are based either on the 1940 Act itself,
the rules or regulations thereunder, or interpretations promulgated by the SEC.
As such, these limitations of the 1940 Act are not "fundamental," that is, the
limitations will change as the statute, rules, regulations or interpretations
change, and no shareholder vote will be required or sought.

Fundamental Investment Restriction (1) Under the 1940 Act, a Portfolio may only
--------------------------------------
borrow up to one-third of the value of its total assets. Borrowing by a
Portfolio allows it to leverage its portfolio, which exposes it to certain
risks. Leveraging increases the effect of any increase or decrease in the value
of portfolio securities on a Portfolio's net asset value, and money borrowed
will be subject to interest costs (which may include commitment fees and/or the
cost of maintaining minimum average balances) which may or may not exceed the
return from the securities purchased with borrowed funds. A Portfolio may use
borrowed money for any purpose permitted by the 1940 Act.

The 1940 Act also restricts the ability of any mutual fund to lend. Under the
1940 Act, a Portfolio may only make loans if expressly permitted to do so by the
Portfolio's investment policies, and a Portfolio may not make loans to persons
who control or are under common control with the Portfolio. Thus, the 1940 Act
effectively prohibits a Portfolio from making loans to certain persons when
conflicts of interest or undue influence are most likely present. The Portfolios
may, however, make other loans which if made would expose shareholders to
additional risks, such as the failure of the other party to repay the loan.

The ability of a mutual fund to issue senior securities is severely
circumscribed by complex regulatory constraints under the 1940 Act that
restrict, for instance, the amount, timing, and form of senior securities that
may be issued. Certain portfolio management techniques such as the purchase of
securities on margin, short sales, or the writing of puts on portfolio
securities, may be considered senior securities unless appropriate steps are
taken to segregate a Portfolio's assets or otherwise cover its obligations.

Fundamental Investment Restriction (2) "Concentration" is interpreted under the
--------------------------------------
1940 Act to mean investment of 25% or more of a Portfolio's total assets in a
single industry. If a Portfolio were to "concentrate" its investments in a
particular industry, investors would be exposed to greater risks because the
Portfolio's performance would be largely dependent on that industry's
performance.

Fundamental Investment Restriction (3) The 1940 Act prohibits a diversified
--------------------------------------
mutual fund from underwriting securities in excess of 25% of its total assets.

Fundamental Investment Restriction (4) This restriction would permit investment
--------------------------------------
in commodities, commodities contracts (e.g., futures contracts or options),
forward contracts or real estate to the extent permitted under the 1940 Act.
However, it is unlikely that the Portfolios would make such investments, other
than the use of futures contracts, options, forward contracts and certain real
estate-related instruments as explained in the Prospectus and this Statement of
Additional Information. Each Portfolio, however, would like the ability to
consider using these investment techniques in the future. Commodities, as
opposed to commodity futures, represent the actual underlying bulk goods, such
as grains, metals and foodstuffs. Real estate-related instruments include real
estate investment trusts, commercial and residential mortgage-backed securities,
and real estate financings, and such instruments are generally sensitive to
factors such as changes in real estate values and property taxes, interest
rates, cash flow of underlying real estate assets, overbuilding, and the
management skill and creditworthiness of the issuer.

Additional Information About Securities, Investment Techniques and Related Risks

In addition to the principal investment strategies and the principal risks
described in the Prospectus, each Portfolio may employ other investment
practices and may be subject to other risks, some of which are described below.
Unless a strategy or policy described below is specifically prohibited by
applicable law or by the investment restrictions explained in the Fund's
Prospectus, or elsewhere in this Statement of Additional Information, a
Portfolio may engage in each of the practices listed below.

Foreign Securities

4
<PAGE>

Investing in the securities of issuers in any foreign country, or in securities
denominated in a foreign currency, involves special risks and considerations not
typically associated with investing in U.S. issuers or U.S. dollar-denominated
securities. These include risks resulting from differences in accounting,
auditing and financial reporting standards; lower liquidity than U.S.
securities; the possibility of nationalization, expropriation or confiscatory
taxation; adverse changes in investment or exchange control regulations (which
may include suspension of the ability to transfer currency out of a country);
and political instability. In many cases, there is less publicly available
information concerning foreign issuers than is available concerning U.S.
issuers. Additionally, purchases and sales of foreign securities and dividends
and interest payable on those securities may be subject to foreign taxes and tax
withholding. Foreign securities generally exhibit greater price volatility and a
greater risk of illiquidity.

To the extent a Portfolio purchases securities denominated in a foreign
currency, a change in the value of any such currency against the U.S. dollar
will result in a change in the U.S. dollar value of the Portfolio's assets and
the Portfolio's income available for distribution. In addition, a Portfolio is
required to compute and distribute its income in U.S. dollars. Therefore, if the
exchange rate for a foreign currency declines after a Portfolio's income has
been earned and translated into U.S. dollars (but before payment), the Portfolio
could be required to liquidate portfolio securities to make such distributions.
Similarly, if an exchange rate declines between the time a Portfolio incurs
expenses in U.S. dollars and the time such expenses are paid, the amount of such
currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in any such
currency of such expenses at the time they were incurred.

The relative performance of various countries' securities markets historically
has reflected wide variations relating to the unique characteristics of each
country's economy. Individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. Bank deposit insurance, if any, may be subject to
widely varying regulations and limits in foreign countries.

Foreign securities purchased by a Portfolio may be listed on foreign exchanges,
traded over-the-counter or purchased in private transactions. Transactions on
foreign exchanges are usually subject to mark-ups or commissions higher than
negotiated commissions on U.S. transactions. There is less government
supervision and regulation of exchanges and brokers in many foreign countries
than in the United States. Additional costs associated with an investment in
foreign securities may include higher custodial fees than apply to domestic
custodial arrangements and transaction costs of foreign currency conversions.

Certain of the foregoing risks may also apply to some extent to securities of
U.S. issuers that are denominated in foreign currencies or that are traded in
foreign markets, or to securities of U.S. issuers having significant foreign
operations.

Emerging Markets Issuers The risks of foreign investment, described above, are
------------------------
greater for investments in emerging market issuers, and such investments should
therefore be considered speculative. Debt securities of governmental and other
issuers in emerging market countries will typically be rated below investment
grade or be of comparable quality. For more information about lower-rated
securities, see "Debt and Fixed Income Securities --Lower-Rated Securities"
below.

Investors are strongly advised to consider carefully the special risks involved
in emerging markets, which are in addition to the usual risks of investing in
developed markets around the world. Emerging market countries may experience
substantial rates of inflation or deflation. Inflation, deflation and rapid
fluctuations in such rates have had, and may continue to have, very negative
effects on the economies and securities markets of certain emerging market
countries. While some emerging market countries have sought to develop a number
of corrective mechanisms to reduce inflation or deflation or mitigate their
effects, inflation and deflation may continue to have significant effects both
on emerging market countries and their securities markets. In addition, many of
the currencies of emerging market countries have experienced steady devaluations
relative to the U.S. dollar, and major devaluations have occurred in certain
countries.

Economies in emerging market countries generally are dependent heavily upon
international trade and, accordingly, have been and may continue to be affected
adversely by economic conditions, trade barriers, exchange controls, managed
adjustments in relative currency values and other protectionist measures imposed
or negotiated by the countries with which they trade.

Because of the high levels of foreign-denominated debt owed by many emerging
market countries, fluctuating exchange rates can significantly affect the debt
service obligations of those countries. This could, in turn, affect local
interest rates, profit margins and exports, which are a major source of foreign
exchange earnings. Hedging instruments are not typically available with respect
to investments in emerging market countries and, to the extent they are
available, the ongoing and indeterminate nature of the foregoing risks (and the
costs associated with hedging transactions) would make it virtually impossible
to hedge effectively against such risks.

To the extent an emerging market country faces a liquidity crisis with respect
to its foreign exchange reserves, it may increase restrictions on the outflow of
any foreign exchange. Repatriation is ultimately dependent on the ability of a
Portfolio to liquidate its investments and convert the local currency proceeds
obtained from such liquidation into U.S. dollars. Where this conversion must be
done through official channels (usually the central bank or certain authorized
commercial banks), the ability to obtain U.S. dollars is dependent on the supply
of such U.S. dollars through those channels and, if available, upon the
willingness of those channels to

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allocate those U.S. dollars to the Portfolio. In such a case, a Portfolio's
ability to obtain U.S. dollars may be adversely affected by any increased
restrictions imposed on the outflow of foreign exchange. If the Portfolio is
unable to repatriate any amounts due to exchange controls, it may be required to
accept an obligation payable at some future date by the central bank or other
governmental entity of the jurisdiction involved. If such conversion can legally
be done outside official channels, either directly or indirectly, a Portfolio's
ability to obtain U.S. dollars may not be affected as much by any increased
restrictions except to the extent of the price that may be required to be paid
for the U.S. dollars.

Many emerging market countries have little experience with the corporate form of
business organization, and may not have well-developed corporation and business
laws or concepts of fiduciary duty in the business context. The securities
markets of emerging market countries are substantially smaller, less developed,
less liquid and more volatile than the securities markets of the U.S. and other
more developed countries. Disclosure and regulatory standards in many respects
are less stringent than in the U.S. and other major markets. There also may be a
lower level of monitoring and regulation of an emerging market country's
securities markets and the activities of investors in such markets; enforcement
of existing regulations has been extremely limited.

Some emerging markets have different settlement and clearance procedures, which,
for example, may not call for delivery of a security to a Portfolio until well
after the Portfolio has paid for such security. In certain markets there have
been times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions. The
inability of a Portfolio to make intended securities purchases due to settlement
problems could cause that Portfolio to miss attractive investment opportunities.
Inability to dispose of a portfolio security caused by settlement problems could
result either in losses to the Portfolio due to subsequent declines in value of
the portfolio security or, if the Portfolio has entered into a contract to sell
the security, in possible liability to the purchaser.

The risk also exists that an emergency situation may arise in one or more
emerging market countries as a result of which trading of securities may cease
or may be substantially curtailed and prices for a Portfolio's portfolio
securities in such markets may not be readily available.

Sovereign Debt Securities Sovereign debt is subject to risks in addition to
-------------------------
those relating to foreign investments generally. As a sovereign entity, the
issuing government may be immune from lawsuits in the event of its failure or
refusal to pay the obligations when due. The debtor's willingness or ability to
repay in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
principal international lenders and the political constraints to which the
sovereign debtor may be subject. Sovereign debtors also may be dependent on
expected disbursements from foreign governments or multinational agencies, the
country's access to trade and other international credits, and the country's
balance of trade. Some emerging market sovereign debtors have in the past
rescheduled their debt payments or declared moratoria on payments, and similar
occurrences may happen in the future.

Depositary Receipts American Depositary Receipts, or "ADRs," are securities
-------------------
issued by a U.S. depositary (usually a bank) and represent a specified quantity
of underlying non-U.S. securities on deposit with a custodian bank as
collateral. A foreign issuer of the security underlying an ADR is generally not
subject to the same reporting requirements in the United States as a domestic
issuer. Accordingly, the information available to a U.S. investor will be
limited to the information the foreign issuer is required to disclose in its own
country and the market value of an ADR may not reflect undisclosed material
information concerning the issuer or the underlying security. ADRs may also be
subject to exchange rate risks if the underlying securities are denominated in
foreign currency. The Portfolios may also invest in similar non-U.S. instruments
issued by foreign banks or trust companies such as "GDRs" and "EDRs." For
purposes of its investment policies, each Portfolio will treat ADRs and similar
instruments as equivalent to investment in the underlying securities.

Options on Securities

Under an option contract, one party generally has the right to require the other
to buy or sell a specified amount of securities, units of an index, currencies
or futures contracts, and may exercise that right if the market price of the
underlying instrument moves in a direction advantageous to the holder of the
option. Options with respect to securities indices typically call for cash
settlement instead of delivery of the securities that comprise the index.

A Portfolio may purchase call options on securities for any purpose. For
example, a call option may be purchased by a Portfolio on a security that its
Adviser intends to include in the Portfolio's investment portfolio in order to
fix the cost of a future purchase. Call options also may be used as a means of
participating in an anticipated price increase of a security on a more limited
risk basis than would be possible if the security itself were purchased. In the
event of a decline in the price of the underlying security, use of this strategy
would serve to limit the Portfolio's potential loss to the option premium paid;
conversely, if the market price of the underlying security increases above the
exercise price and the Portfolio either sells or exercises the option, any
profit realized would be reduced by the premium.

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A Portfolio may purchase put options on securities for any purpose. For example,
a put option may be purchased by a Portfolio in order to hedge against a decline
in the market value of securities held in its portfolio. The put option enables
a Portfolio to sell the underlying security at the predetermined exercise price;
thus the potential for loss to the Portfolio below the exercise price is limited
to the option premium paid. If the market price of the underlying security is
higher than the exercise price of the put option, any profit the Portfolio
realizes on the sale of the security would be reduced by the premium paid for
the put option less any amount for which the put option may be sold.

A Portfolio may also write call and put options.

Futures Contracts and Options on Futures Contracts

A futures contract on a security or foreign currency is a bilateral agreement
pursuant to which one party agrees to make, and the other party agrees to
accept, delivery of the specified type of security or foreign currency called
for in the contract at a specified future time and at a specified price. A
Portfolio may, for example, purchase a futures contract on a security or foreign
currency when it intends to purchase securities or foreign currency but has not
yet done so. This strategy may minimize the effect of all or part of an increase
in the market price of the security or the relative value of the foreign
currency that a Portfolio intends to purchase in the future. A rise in the price
of the security or foreign currency prior to its purchase may either be offset
by an increase in the value of the futures contract purchased by a Portfolio or
avoided by taking delivery of the security or foreign currency under the futures
contract. Conversely, a fall in the market price of the underlying security or
foreign currency may result in a corresponding decrease in the value of the
futures position. A Portfolio may sell a futures contract on a security or
foreign currency, for example, in order to continue to receive the income from a
security or foreign currency, while endeavoring to avoid part or all of the
decline in the market value of that security that would accompany an increase in
interest rates.

Each Portfolio will limit its use of futures contracts and futures options to
hedging transactions or other circumstances permitted to registered investment
companies by regulatory authorities. For example, a Portfolio might use futures
contracts to attempt to hedge against anticipated changes in interest rates that
might adversely affect either the value of the Portfolio's securities or the
price of the securities that the Portfolio intends to purchase. A Portfolio's
hedging may include sales of futures contracts as an offset against the effect
of expected increases in interest rates, and purchases of futures contracts as
an offset against the effect of expected declines in interest rates.

Although other techniques could be used to reduce exposure to interest rate
fluctuations, a Portfolio may be able to hedge its exposure more effectively and
perhaps at a lower cost by using futures contracts and options on futures
contracts.

Futures contracts may also be used for non-hedging purposes, such as to simulate
full investment in underlying securities while retaining a cash balance for
Portfolio management purposes, as a substitute for direct investment in a
security, to facilitate trading, to reduce transaction costs, or to seek higher
investment returns when a futures contract or option is priced more attractively
than the underlying security or index.

A financial futures contract sale creates an obligation by the seller to deliver
the type of financial instrument called for in the contract in a specified
delivery month for a stated price. A financial futures contract purchase creates
an obligation by the purchaser to take delivery of the type of financial
instrument called for in the contract in a specified delivery month at a stated
price. The specific instruments delivered or taken, respectively, at settlement
date are not determined until on or near that date. The determination is made in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made. Futures contracts are traded in the United States only on
commodity exchanges or boards of trade -- known as "contract markets" --
approved for such trading by the Commodity Futures Trading Commission (the
"CFTC"), and must be executed through a futures commission merchant or brokerage
firm which is a member of the relevant contract market.

When a purchase or sale of a futures contract is made by a Portfolio, the
Portfolio is required to deposit with its custodian (or a broker, if legally
permitted) a specified amount of cash or U.S. Government securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract, which is returned to the Portfolio upon
termination of the contract, assuming all contractual obligations have been
satisfied. Under certain circumstances, such as during periods of high
volatility, a Portfolio may be required by an exchange to increase the level of
its initial margin payment. Additionally, initial margin requirements may be
increased generally in the future by regulatory action. Each Portfolio expects
to earn interest income on its initial margin deposits. A futures contract held
by a Portfolio is valued daily at the official settlement price of the exchange
on which it is traded. Each day the Portfolio pays or receives cash, called
"variation margin," equal to the daily change in value of the futures contract.
This process is known as "marking to market." Variation margin does not
represent a borrowing or loan by a Portfolio but is instead settlement between
the Portfolio and the broker of the amount one would owe the other if the
futures contract expired. In computing daily net asset value, each Portfolio
will mark to market its open futures positions.

A Portfolio is also required to deposit and maintain margin with respect to put
and call options on futures contracts written by it. Such

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<PAGE>

margin deposits will vary depending on the nature of the underlying futures
contract (and the related initial margin requirements) and the current market
value of the option and other futures positions held by the Portfolio.

Although some futures contracts call for making or taking delivery of the
underlying securities or currencies, generally those contracts are closed out
prior to delivery by offsetting purchases or sales of matching futures contracts
(involving the same currency or underlying security and delivery month). If an
offsetting purchase price is less than the original sale price, the Portfolio
realizes a gain, or if it is more, the Portfolio realizes a loss. If an
offsetting sale price is more than the original purchase price, the Portfolio
realizes a gain, or if it is less, the Portfolio realizes a loss. If the
Portfolio is unable to enter into a closing transaction, the amount of the
Portfolio's potential loss is unlimited. In general, 40% of the gain or loss
arising from the closing out of a futures contract traded on an exchange
approved by the CFTC is treated as short-term gain or loss, and 60% is treated
as long-term gain or loss. The Portfolio will also bear transaction costs for
each contract, which will be included in these calculations.

A Portfolio will not enter into futures contracts or option positions if,
immediately thereafter, the initial margin deposits plus premiums paid by it,
less the amount by which any such options positions are "in-the-money" at the
time of purchase, would exceed 5% of the fair market value of the Portfolio's
total assets. A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise price. A put
option is "in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.

A Portfolio may purchase and write call and put options on futures contracts it
may buy or sell and enter into closing transactions with respect to such options
to terminate existing positions. In return for the premium paid, options on
futures contracts give the purchaser the right to assume a position in a futures
contract at the specified option exercise price at any time during the period of
the option. The Portfolio may use options on futures contracts in lieu of
writing or buying options directly on the underlying securities or purchasing
and selling the underlying futures contracts. For example, to hedge against a
possible decrease in the value of its portfolio securities, a Portfolio may
purchase put options or write call options on futures contracts rather than
selling futures contracts. Similarly, a Portfolio may purchase call options or
write put options on futures contracts as a substitute for the purchase of
futures contracts to hedge against a possible increase in the price of
securities which the Portfolio expects to purchase. Such options generally
operate in the same manner as options purchased or written directly on the
underlying investments.

As with options on securities, the holder or writer of an option may terminate
his position by selling or purchasing an offsetting option. There is no
guarantee that such closing transactions can be effected.

An index futures contract is a contract to buy or sell units of an index at a
specified future date at a price agreed upon when the contract is made. Entering
into a contract to buy units of an index is commonly referred to as buying or
purchasing a contract or holding a long position in the index. Entering into a
contract to sell units of an index is commonly referred to as selling a contract
or holding a short position. A unit is the current value of the index. A
Portfolio may enter into stock index futures contracts, debt index futures
contracts, or other index futures contracts appropriate to its objective. A
Portfolio may also purchase and sell options on index futures contracts.

For example, the Standard & Poor's 500 Composite Stock Price Index ("S&P 500")
is composed of 500 selected common stocks, most of which are listed on the New
York Stock Exchange. The S&P 500 assigns relative weightings to the common
stocks included in the Index, and the value fluctuates with changes in the
market values of those common stocks. In the case of the S&P 500, contracts are
to buy or sell 500 units. Thus, if the value of the S&P 500 were $150, one
contract would be worth $75,000 (500 units x $150). The stock index futures
contract specifies that no delivery of the actual stocks making up the index
will take place. Instead, settlement in cash must occur upon the termination of
the contract, with the settlement being the difference between the contract
price and the actual level of the stock index at the expiration of the contract.
For example, if a Portfolio enters into a futures contract to buy 500 units of
the S&P 500 at a specified future date at a contract price of $150 and the S&P
500 is at $154 on that future date, the Portfolio will gain $2,000 (500 units x
gain of $4). If the Portfolio enters into a futures contract to sell 500 units
of the stock index at a specified future date at a contract price of $150 and
the S&P 500 is at $152 on that future date, the Portfolio will lose $1,000 (500
units x loss of $2).

The requirements for qualification as a regulated investment company also may
limit the extent to which a Portfolio may enter into futures or options on
futures. See "Additional Tax Information."

Risks Associated with Futures and Options

In considering the Portfolios' use of futures contracts and options, particular
note should be taken of the following:

(1) Positions in futures contracts and options may be closed out only on an
exchange or board of trade that provides a secondary market for such
futures contracts or options. Futures exchanges may limit the amount of
fluctuation permitted in certain futures contract and option prices during
a single trading day. The daily limit establishes the maximum amount that
the price of a futures contract or option may vary either up or down from
the previous day's settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract or
option subject to the limit, no more trades may be made on that day

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at a price beyond that limit. The daily limit governs only price movements
during a particular trading day and therefore does not limit potential
losses because the limit may work to prevent the liquidation of unfavorable
positions. For example, futures prices have occasionally moved to the daily
limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of positions and subjecting some
holders of futures contracts to substantial losses.

(2) The ability to establish and close out positions in either futures
contracts or exchange-listed options is also subject to the maintenance of
a liquid secondary market. Consequently, it may not be possible for a
Portfolio to close a position and, in the event of adverse price movements,
the Portfolio would have to make daily cash payments of variation margin
(except in the case of purchased options). However, in the event futures
contracts or options have been used to hedge portfolio securities, such
securities generally will not be sold until the contracts can be
terminated. In such circumstances, an increase in the price of the
securities, if any, may partially or completely offset losses on the
futures contract. However, there is no guarantee that the price of the
securities will, in fact, correlate with the price movements in the
contracts and thus provide an offset to losses on the contracts. The
inability to close out a futures or option position may also restrict the
Portfolio's ability to sell the underlying security or currency at a time
when the Adviser might otherwise do so.

(3) Successful use by a Portfolio of futures contracts and options will depend
upon its Adviser's ability to predict market movements, which may require
different skills and techniques than predicting changes in the prices of
individual securities. Moreover, futures contracts relate not to the
current level of the underlying instrument but to anticipated levels at
some point in the future. There is, in addition, the risk that movements in
the price of the futures contract or option will not correlate with
movements in the prices of the securities or currencies being hedged. If
the price of the securities or currencies being hedged has moved in a
favorable direction, this advantage may be partially offset by losses in
the futures or option position. In addition, if the Portfolio has
insufficient cash, it may have to sell assets from its investment portfolio
to meet daily variation margin requirements. Any such sale of assets may or
may not be made at prices that reflect the rising market; consequently, a
Portfolio may need to sell assets at a time when such sales are
disadvantageous to the Portfolio. If the price of the futures or option
contract moves more than the price of the underlying securities or
currencies, the Portfolio will experience either a loss or a gain on the
futures contract or option that may or may not be completely offset by
movements in the price of the securities or currencies that are the subject
of the hedge.

(4) The value of an option position will reflect, among other things, the
current market price of the underlying security, currency or futures
contract, the time remaining until expiration, the relationship of the
exercise price to the market price, the historical price volatility of the
underlying security, currency or futures contract and general market
conditions. For this reason, the successful use of options as a hedging
strategy depends upon the Adviser's ability to forecast the direction of
price fluctuations in the underlying market.

(5) In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between price movements in the futures and
options position and the securities or currencies being hedged, movements
in the prices of futures and options contracts may not correlate perfectly
with movements in the prices of the hedged securities or currencies due to
price distortions in the futures and options markets. There may be several
reasons unrelated to the value of the underlying securities or currencies
that cause this situation to occur. First, as noted above, all participants
in the futures market are subject to initial and variation margin
requirements. If, to avoid meeting additional margin deposit requirements
or for other reasons, investors choose to close a significant number of
futures contracts through offsetting transactions, distortions in the
normal price relationship between the securities or currencies and the
futures markets may occur. Second, because the margin deposit requirements
in the futures market are less onerous than margin requirements in the
securities market, there may be increased participation by speculators in
the futures market; such speculative activity in the futures market also
may cause temporary price distortions. Third, participants could make or
take delivery of the underlying securities or currencies instead of closing
out their contracts. As a result, a correct forecast of general market
trends may not result in successful hedging through the use of futures or
options contracts over the short term. In addition, activities of large
traders involving arbitrage and other investment strategies may result in
temporary price distortions.

(6) Options normally have expiration dates of up to nine months. The exercise
price of the options may be below, equal to or above the current market
value of the underlying security, currency or futures contract. Options
that expire unexercised have no value, and the Portfolio will realize a
loss in the amount paid and any transaction costs.

(7) Like options on securities, options on futures contracts have a limited
life. The ability to establish and close out options on futures will be
subject to the development and maintenance of liquid secondary markets on
the relevant exchanges or boards of trade. There can be no certainty that
liquid secondary markets for all options on futures contracts will develop.

(8) Purchasers of options on futures contracts pay a premium in cash at the
time of purchase. This amount and the transaction costs are all that is at
risk. Sellers of options on futures contracts, however, must post an
initial margin and are subject to additional margin calls that could be
substantial in the event of adverse price movements. In addition, although
the maximum amount at risk when the Portfolio purchases an option is the
premium paid for the option and the transaction costs, there may be
circumstances when the purchase of an option on a futures contract would
result in a loss to the Portfolio when the use of a futures contract

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would not, such as when there is no movement in the value of the securities
or currencies being hedged.

(9) A Portfolio's activities in the futures and options markets may result in a
higher portfolio turnover rate and additional transaction costs in the form
of added brokerage commissions; however, a Portfolio also may save on
commissions by using such contracts as a hedge rather than buying or
selling individual securities in anticipation or as a result of market
movements.

(10) A Portfolio may purchase and write both exchange-traded options and options
traded on the OTC market. Exchange markets for options on debt securities
exist but are relatively new, and the ability to establish and close out
positions on the exchanges is subject to the maintenance of a liquid
secondary market. Although the Portfolios intend to purchase or write only
those exchange-traded options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market will
exist for any particular option at any specific time. Closing transactions
may be effected with respect to options traded in the OTC markets only by
negotiating directly with the other party to the option contract, or in a
secondary market for the option if such market exists. OTC options are
considered illiquid by the SEC. Although the Portfolios will enter into OTC
options only with dealers which agree to enter into, and which are expected
to be capable of entering into, closing transactions with the Portfolios,
there can be no assurance that a Portfolio will be able to liquidate an OTC
option at a favorable price at any time prior to expiration. In the event
of insolvency of the counterparty, a Portfolio may be unable to liquidate
an OTC option. Accordingly, it may not be possible to effect closing
transactions with respect to certain options, with the result that the
Portfolio would have to exercise those options that it has purchased in
order to realize any profit. With respect to options written by a
Portfolio, the inability to enter into a closing transaction may result in
material losses to the Portfolio. For example, because a Portfolio must
maintain a covered position with respect to any call option it writes on a
security or futures contract the Portfolio may not sell the underlying
security or futures contract or invest any cash, U.S. Government securities
or short-term debt securities used as cover during the period it is
obligated under such option. This requirement may impair a Portfolio's
ability to sell a portfolio security or make an investment at a time when
such a sale or investment might be advantageous.

Additional Risks of Options on Securities, Futures Contracts and Options on
Futures Contracts Traded on Foreign Exchanges

Options on securities, options on currencies, futures contracts and options on
futures contracts may be traded on foreign exchanges. Such transactions may not
be regulated as effectively as similar transactions in the United States, may
not involve a clearing mechanism and related guarantees and are subject to the
risk of governmental actions affecting trading in, or the price of, foreign
securities. The value of such positions also could be adversely affected by (1)
other complex foreign political, legal and economic factors, (2) lesser
availability than in the United States of data on which to make trading
decisions, (3) delays in the Portfolios' ability to act upon economic events
occurring in foreign markets during non-business hours in the United States, (4)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the United States and (5) lesser trading volume.

Cover for Hedging Strategies

Each Portfolio will comply with guidelines established by the SEC with respect
to coverage of hedging strategies by mutual funds, and, if the guidelines so
require, will set aside cash or liquid securities in a segregated account with
its custodian in the amount prescribed, as marked to market daily. Securities,
options or futures positions used for cover and securities held in a segregated
account cannot be sold or closed out while the hedging strategy is outstanding,
unless they are replaced with similar assets. As a result, there is a
possibility that the use of cover or segregation involving a large percentage of
a Portfolio's assets could impede portfolio management or a Portfolio's ability
to meet redemption requests or other current obligations.

Foreign Currency Exchange Transactions

Each Portfolio that may invest in securities that are denominated in foreign
currencies may engage in a variety of foreign currency exchange transactions to
protect against uncertainty in the level of future exchange rates. These
transactions may be engaged in connection with the purchase and sale of
portfolio securities ("transaction hedging") and to protect the value of
specific portfolio positions ("position hedging").

A Portfolio may engage in transaction hedging to protect against a change in the
foreign currency exchange rates between the date on which the Portfolio
contracts to purchase or sell the security and the settlement date, or to "lock
in" the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. A Portfolio may purchase or sell a foreign currency on a spot (or
cash) basis at the prevailing spot rate. If conditions warrant, for transaction
hedging purposes, a Portfolio may also enter into contracts to purchase or sell
foreign currencies at a future date ("forward contracts") and may purchase and
sell foreign currency futures contracts. A foreign currency forward contract is
a negotiated agreement to exchange currency at a future time at a rate or rates
that may be higher or lower than the spot rate. Foreign currency futures
contracts are standardized exchange-traded contracts and have margin
requirements. Each Portfolio may also purchase, sell and write exchange-listed
and over-the-counter call and put options on foreign currency futures contracts
and on foreign currencies.

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A Portfolio may engage in "position hedging" to protect against a decline in the
value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in the value of the
currency in which securities the Portfolio intends to buy are denominated).

For position hedging purposes, each Portfolio may purchase, sell or write
foreign currency futures contracts, foreign currency forward contracts, and
options on exchanges or over-the-counter markets. In connection with position
hedging, a Portfolio may also purchase or sell foreign currency on a spot basis.

A Portfolio's currency hedging transactions may call for the delivery of one
foreign currency in exchange for another foreign currency and may at times
involve currencies other than those in which its portfolio securities are then
denominated. "Cross hedging" activities will be used when a Portfolio's Adviser
believes that such transactions provide significant hedging opportunities for
the Portfolio. Cross hedging transactions by a Portfolio involve the further
risk of imperfect correlation between changes in the values of the currencies to
which such transactions relate and changes in the values of such currencies and
of the currency or other asset or liability which is the subject of the hedge.

The decision as to whether and to what extent a Portfolio will engage in foreign
currency exchange transactions will depend on a number of factors, including
prevailing market conditions, the composition of a Portfolio's investments and
the availability of suitable transactions. Accordingly, there can be no
assurance that a Portfolio will engage in foreign currency exchange transactions
at any given time or from time to time.

For a further discussion of the risks associated with purchasing and selling
futures contracts and options, see "Risks Associated with Futures and Options"
above. A Portfolio may also use other foreign currency exchange instruments and
techniques when available and deemed appropriate by its Adviser.

Preferred Stocks and Convertible Securities

A preferred stock pays dividends at a specified rate and has preference over
common stock in the payment of dividends and the liquidation of an issuer's
assets but is junior to the debt securities of the issuer in those same
respects. The market prices of preferred stocks are subject to changes in
interest rates and are more sensitive to changes in an issuer's creditworthiness
than are the prices of debt securities. Shareholders of preferred stock may
suffer a loss of value if dividends are not paid. Under ordinary circumstances,
preferred stock does not carry voting rights.

A convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock (or another equity security) of the same or a different issuer
within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest paid or accrued on
debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Before conversion, convertible
securities have characteristics similar to nonconvertible debt securities in
that they ordinarily provide a stream of income with generally higher yields
than those of common stocks of the same or similar issuers. Convertible
securities are usually subordinated to comparable-tier nonconvertible securities
but rank senior to common stock in a corporation's capital structure.

The value of a convertible security is a function of (1) its yield in comparison
with the yields of other securities of comparable maturity and quality that do
not have a conversion privilege and (2) its worth, at market value, if converted
into the underlying common stock. A convertible security may be subject to
redemption at the option of the issuer at a price established in the convertible
security's governing instrument. If a convertible security held by a Portfolio
is called for redemption, the Portfolio will be required to (1) permit the
issuer to redeem the security, (2) convert it into the underlying common stock
or (3) sell it to a third party. Any of these actions could have an adverse
effect on a Portfolio's ability to achieve its investment objective.

Debt and Fixed Income Securities

The Portfolios may invest in a variety of debt and fixed income securities.
These securities share one principal risk: their values fluctuate with changes
in interest rates. Thus, a decrease in interest rates will generally result in
an increase in the value of a Portfolio's fixed income investments. Conversely,
during periods of rising interest rates, the value of a Portfolio's fixed income
investments will generally decline. The magnitude of these fluctuations will
generally be greater when a Portfolio's duration or average maturity is longer.
Changes in the value of portfolio securities will not affect interest income
from those securities, but will be reflected in a Portfolio's net asset value.
The most common types of these instruments, and the associated risks, are
described below. Subject to its investment policies and applicable law, each of
the Portfolios may invest in these and other instruments.

U.S. Government Obligations U.S. Government securities include (1) U.S. Treasury
---------------------------
bills (maturity of one year or less), U.S. Treasury notes (maturity of one to
ten years) and U.S. Treasury bonds (maturities generally greater than ten years)
and (2) obligations issued or guaranteed by U.S. Government agencies or
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Government (such as GNMA certificates); (b) the
right of the issuer to borrow an amount limited to a specific line of credit

11
<PAGE>

from the U.S. Government (such as obligations of the Federal Home Loan Banks);
(c) the discretionary authority of the U.S. Government to purchase certain
obligations of agencies or instrumentalities (such as securities issued by
Fannie Mae); or (d) only the credit of the instrumentality (such as securities
issued by Freddie Mac). In the case of obligations not backed by the full faith
and credit of the United States, a Portfolio must look principally to the agency
or instrumentality issuing or guaranteeing the obligation for ultimate repayment
and may not be able to assert a claim against the United States itself in the
event the agency or instrumentality does not meet its commitments. Neither the
U.S. Government nor any of its agencies or instrumentalities guarantees the
market value of the securities they issue. Therefore, the market value of such
securities will fluctuate in response to changes in interest rates.

Inflation-Indexed Securities The Portfolios may also invest in inflation-indexed
----------------------------
U.S. Treasury securities (also known as "Treasury Inflation-Protection
Securities"). Currently, the principal value of Treasury Inflation-Protection
Securities is adjusted daily in accordance with changes in the Consumer Price
Index, while interest is calculated on the basis of the adjusted principal value
on the payment date. The principal value of these securities declines in periods
of deflation, but holders at maturity receive no less than par. If inflation is
lower than expected during the period a Portfolio holds the security, the
Portfolio may earn less on the security than on a conventional bond. Any
increase in principal value is taxable in the year the increase occurs, even
though holders do not receive cash representing the increase at that time.
Changes in market interest rates from causes other than inflation will likely
affect the price of these securities in the same manner as more traditional
obligations.

Mortgage-Related Securities Mortgage-related securities represent an interest in
---------------------------
a pool of mortgages made by lenders such as commercial banks, savings and loan
institutions, mortgage bankers and others. Mortgage-related securities may be
issued by governmental, government-related or non-governmental entities, and
provide regular payments which consist of interest and, in most cases,
principal. In contrast, other forms of debt securities normally provide for
periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. In effect, payments on mortgage-related
securities are a "pass-through" of the payments made by the individual borrowers
on their mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments to holders of mortgage-related securities are
caused by repayments resulting from the sale of the underlying property,
refinancing or foreclosure, net of fees or costs that may be incurred.

As prepayment rates of individual pools of mortgage loans vary widely, it is not
possible to predict accurately the average life of a particular security.
Although mortgage-related securities are issued with stated maturities of up to
forty years, unscheduled or early payments of principal and interest on the
underlying mortgages may shorten considerably the securities' effective
maturities. The volume of prepayments of principal on a pool of mortgages
underlying a particular mortgage-related security will influence the yield of
that security, and the principal returned to a Portfolio may be reinvested in
instruments whose yield may be higher or lower than that which might have been
obtained had such prepayments not occurred. When interest rates are declining,
such prepayments usually increase, and reinvestments of such principal
prepayments will be at a lower rate than that on the original mortgage-related
security. An increase in mortgage prepayments could cause the Portfolio to incur
a loss on a mortgage-related security that was purchased at a premium. On the
other hand, a decrease in the rate of prepayments, resulting from an increase in
market interest rates or other causes, may extend the effective maturities of
mortgage-related securities, increasing their sensitivity to changes in market
interest rates and potentially increasing the volatility of a Portfolio's
shares. The rate of prepayment may also be affected by general economic
conditions, the location and age of the mortgages, and other social and
demographic conditions. In determining the average maturity or duration of a
mortgage-related security, a Portfolio's Adviser must apply certain assumptions
and projections about the maturity and prepayment of such security; actual
prepayment rates may differ. Because of prepayments, mortgage-related securities
may have less potential for capital appreciation during periods of declining
interest rates than other securities of comparable maturities, although they may
have a similar risk of decline in market value during periods of rising interest
rates.

Most issuers or poolers provide guarantees of payments, regardless of whether
the mortgagor actually makes the payment. The guarantees made by issuers or
poolers are often backed by various forms of credit, insurance and collateral,
although these may be in amounts less than the full obligation of the pool to
its shareholders.

Pools often consist of whole mortgage loans or participations in loans. The
majority of these loans are made to purchasers of one- to four-family homes. The
terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. For example, in addition to fixed-rate,
fixed-term mortgages, the Portfolios may purchase pools of variable-rate
mortgages, growing-equity mortgages, graduated-payment mortgages and other
types.

All poolers apply standards for qualification to lending institutions that
originate mortgages for the pools. Poolers also establish credit standards and
underwriting criteria for individual mortgages included in the pools. In
addition, many mortgages included in pools are insured through private mortgage
insurance companies.

The average life of mortgage-related securities varies with the maturities and
the nature of the underlying mortgage instruments. For example, securities
issued by the Government National Mortgage Association ("GNMA") tend to have a
longer average life than participation certificates ("PCs") issued by the
Federal Home Loan Mortgage Corporation ("FHLMC") because there is a tendency for
the conventional and privately-insured mortgages underlying FHLMC PCs to repay
at faster rates than the Federal Housing Administration and Veterans
Administration loans underlying GNMAs. In addition, the term of a security may
be shortened by

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<PAGE>

unscheduled or early payments of principal and interest on the underlying
mortgages. The occurrence of mortgage prepayments is affected by factors
including the level of interest rates, general economic conditions, the location
and age of the mortgage and other social and demographic conditions.

In determining the dollar-weighted average maturity of a Portfolio, the
Portfolio's Adviser will follow industry practice in assigning an average life
to the mortgage-related securities held by each Portfolio unless the interest
rate on the mortgages underlying the securities is such that a different
prepayment rate is likely. For example, if a GNMA has a high interest rate
relative to the market, that GNMA is likely to have a shorter overall maturity
than a GNMA with a market rate coupon. Moreover, an Adviser may deem it
appropriate to change the projected average life for a Portfolio's mortgage-
related securities as a result of fluctuations in market interest rates and
other factors.

Yields on mortgage-related securities are typically quoted based on the maturity
of the underlying instruments and the associated average life assumption. Actual
prepayment experience may cause the yield to differ from the yield expected on
the basis of average life. Reinvestment of the prepayments may occur at higher
or lower interest rates than the original investment, thus affecting the yield
of the Portfolio. The compounding effect from reinvestments of monthly payments
received by each Portfolio will increase the yield to shareholders compared to
bonds that pay interest semi-annually.

Government Mortgage-Related Securities GNMA is the principal federal government
--------------------------------------
guarantor of mortgage-related securities. GNMA is a wholly owned U.S. Government
corporation within the Department of Housing and Urban Development. GNMA pass-
through securities are considered to have a relatively low risk of default in
that (1) the underlying mortgage loan portfolio is comprised entirely of
government-backed loans, and (2) the timely payment of both principal and
interest on the securities is guaranteed by the full faith and credit of the
U.S. Government, regardless of whether they have been collected. GNMA pass-
through securities are, however, subject to the same market risk as comparable
debt securities. Therefore, the effective maturity and market value of a
Portfolio's GNMA securities can be expected to fluctuate in response to changes
in interest rate levels.

Residential mortgage loans are also pooled by Freddie Mac, a corporate
instrumentality of the U.S. Government. The mortgage loans in Freddie Mac's
portfolio are not government backed; Freddie Mac, not the U.S. Government,
guarantees the timely payment of interest and ultimate collection of principal
on Freddie Mac securities. Freddie Mac also issues guaranteed mortgage
certificates, on which it guarantees semiannual interest payments and a
specified minimum annual payment of principal.

Fannie Mae is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. Fannie Mae purchases residential mortgages from a list of
approved seller/servicers, which include savings and loan associations, savings
banks, commercial banks, credit unions and mortgage bankers. Pass-through
securities issued by Fannie Mae are guaranteed as to timely payment of principal
and interest only by Fannie Mae, not the U.S. Government.

Privately Issued Mortgage-Related Securities Mortgage-related securities offered
--------------------------------------------
by private issuers include pass-through securities comprised of pools of
residential mortgage loans; mortgage-backed bonds which are considered to be
debt obligations of the institution issuing the bonds and are collateralized by
mortgage loans; and bonds and collateralized mortgage obligations ("CMOs") which
are collateralized by mortgage-related securities issued by Freddie Mac, Fannie
Mae or GNMA or by pools of mortgages.

CMOs are typically structured with classes or series that have different
maturities and are generally retired in sequence. Each class of obligations
receives periodic interest payments according to the coupon rate on the
obligations. However, all monthly principal payments and any prepayments from
the collateral pool are generally paid first to the "Class 1" holders.
Thereafter, all payments of principal are generally allocated to the next most
senior class of obligations until that class of obligations has been fully
repaid. Although full payoff of each class of obligations is contractually
required by a certain date, any or all classes of obligations may be paid off
sooner than expected because of an increase in the payoff speed of the pool.
Other allocation methods may be used. Payment of interest or principal on some
classes or series of a CMO may be subject to contingencies or some classes or
series may bear some or all of the risk of default on the underlying mortgages.

Mortgage-related securities created by non-governmental issuers generally offer
a higher rate of interest than government and government-related securities
because there are no direct or indirect government guarantees of payment in the
former securities, resulting in higher risks. Where privately issued securities
are collateralized by securities issued by Freddie Mac, Fannie Mae or GNMA, the
timely payment of interest and principal is supported by the government-related
securities collateralizing such obligations. The market for conventional pools
is smaller and less liquid than the market for the government and government-
related mortgage pools.

Certain private mortgage pools are organized in such a way that the SEC staff
considers them to be closed-end investment companies. Each Portfolio's
investment in such pools is constrained by federal statute, which restricts
investments in the shares of other

13
<PAGE>

investment companies.

The private mortgage-related securities in which the Portfolios may invest
include foreign mortgage pass-through securities ("Foreign Pass-Throughs"),
which are structurally similar to the pass-through instruments described above.
Such securities are issued by originators of and investors in mortgage loans,
including savings and loan associations, mortgage bankers, commercial banks,
investment bankers, specialized financial institutions and special purpose
subsidiaries of the foregoing. Foreign Pass-Throughs usually are backed by a
pool of fixed rate or adjustable-rate mortgage loans. Certain Foreign Pass-
Throughs in which the Portfolios invest typically are not guaranteed by an
entity having the credit status of GNMA, but generally utilize various types of
credit enhancement.

Asset-Backed Securities Asset-backed securities refer to securities that
-----------------------
directly or indirectly represent a participation in, or are secured by and
payable from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property and receivables
from revolving credit (credit card) agreements.

Such assets are securitized through the use of trusts or special purpose
corporations. Asset-backed securities are backed by a pool of assets
representing the obligations often of a number of different parties. Certain of
such securities may be illiquid.

The principal on asset-backed securities, like that on mortgage-backed
securities, may be prepaid at any time. As a result, if such securities are
purchased at a premium, a prepayment rate that is faster than expected will
reduce yield to maturity, while a prepayment rate that is slower than expected
will have the opposite effect. Conversely, if the securities are purchased at a
discount, prepayments faster than expected will increase yield to maturity and
prepayments slower than expected will decrease it. Accelerated prepayments also
reduce the certainty of the yield because the Portfolio must reinvest the assets
at the then-current rates. Accelerated prepayments on securities purchased at a
premium also impose a risk of loss of principal. On the other hand, a decrease
in the rate of prepayments may extend the effective maturities of the
securities, increasing their sensitivity to changes in market interest rates and
potentially increasing the volatility of a Portfolio's shares. The rate of
prepayment may also be affected by general economic conditions and other social
and demographic conditions.

Each type of asset-backed security also entails unique risks depending on the
type of assets involved and the legal structure used. For example, credit card
receivables are generally unsecured obligations of the credit card holder and
the debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due.
There have also been proposals to cap the interest rate that a credit card
issuer may charge. In some transactions, the value of the asset-backed security
is dependent on the performance of a third party acting as credit enhancer or
servicer. Furthermore, in some transactions (such as those involving the
securitization of vehicle loans or leases) it may be administratively burdensome
to perfect the interest in the underlying collateral, and the underlying
collateral may become damaged or stolen. Most issuers of automobile receivables
permit the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in all of the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Because asset-backed securities are relatively new, the market experience in
these securities is limited and the market's ability to sustain liquidity
through all phases of the market cycle is not certain.

Municipal Obligations Municipal obligations include obligations issued to obtain
---------------------
funds for various public purposes, including constructing a wide range of public
facilities, such as bridges, highways, housing, hospitals, mass transportation,
schools and streets. Other public purposes for which municipal obligations may
be issued include the refunding of outstanding obligations, the obtaining of
funds for general operating expenses and the making of loans to other public
institutions and facilities. In addition, certain types of industrial
development bonds ("IDBs") and private activity bonds ("PABs") are issued by or
on behalf of public authorities to finance various privately operated
facilities, including certain pollution control facilities, convention or trade
show facilities, and airport, mass transit, port or parking facilities.

Municipal obligations also include short-term tax anticipation notes, bond
anticipation notes, revenue anticipation notes and other forms of short-term
debt obligations. Such notes may be issued with a short-term maturity in
anticipation of the receipt of tax payments, the proceeds of bond placements or
other revenues. Municipal obligations also include municipal lease obligations
and certificates of participation. Municipal lease obligations, which are issued
by state and local governments to acquire land, equipment and facilities,
typically are not fully backed by the municipality's credit, and, if funds are
not appropriated for the following year's lease payments, a lease may terminate,
with the possibility of default on the lease obligation and significant loss to
the Portfolio. Certificates of participation are participations in municipal
lease obligations or installment sales contracts. Each certificate represents a
proportionate interest in or right to the payments made.

The two principal classifications of municipal obligations are "general
obligation" and "revenue" bonds. "General obligation" bonds are secured by the
issuer's pledge of its faith, credit and taxing power. "Revenue" bonds are
payable only from the revenues derived

14
<PAGE>

from a particular facility or class of facilities or from the proceeds of a
special excise tax or other specific revenue source such as the corporate user
of the facility being financed. IDBs and PABs are usually revenue bonds and are
not payable from the unrestricted revenues of the issuer. The credit quality of
IDBs and PABs is usually directly related to the credit standing of the
corporate user of the facilities.

The ability of state, county or local governments to meet their obligations will
depend primarily on the availability of tax and other revenues to those
governments and on their fiscal conditions generally. The amounts of tax and
other revenues available to governmental issuers may be affected from time to
time by economic, political and demographic conditions within or outside of the
particular state. In addition, constitutional or statutory restrictions may
limit a government's power to raise revenues or increase taxes. The availability
of federal, state and local aid to issuers of municipal securities may also
affect their ability to meet their obligations. Payments of principal and
interest on revenue bonds will depend on the economic condition of the facility
or specific revenue source from whose revenues the payments will be made. The
facility's economic status, in turn, could be affected by economic, political
and demographic conditions affecting the particular state.

Corporate Debt Securities A Portfolio may invest in debt securities (i.e.,
-------------------------
bonds, debentures, notes and other similar debt instruments) of domestic or
foreign non-governmental issuers which meet the minimum credit quality criteria,
if any, set forth for the Portfolio. Corporate debt securities may pay fixed or
variable rates of interest, or interest at a rate contingent upon some other
factor, such as the price of some commodity. These securities may include
warrants, may be convertible into preferred or common equity, or may be bought
as part of a unit containing common stock.

Lower-Rated Securities Non-investment grade securities, i.e., securities rated
----------------------
below Baa by Moody's or BBB by S&P or comparable ratings of other NRSROs or
unrated securities of comparable quality, are described as "speculative" by
Moody's and S&P and may be subject to greater market fluctuations and greater
risk of loss of income or principal, including a greater possibility of default
or bankruptcy of the issuer of such securities, than are more highly rated debt
securities. Such securities are commonly referred to as "junk bonds." A
Portfolio's Adviser seeks to minimize the risks of investing in all securities
through diversification, in-depth credit analysis and attention to current
developments in interest rates and market conditions and will monitor the
ratings of securities held by the Portfolios and the creditworthiness of their
issuers. If the rating of a security in which a Portfolio has invested falls
below the minimum rating in which the Portfolio is permitted to invest, the
Portfolio will either dispose of that security within a reasonable time or hold
the security for so long as the Portfolio's Adviser determines appropriate for
that Portfolio, having due regard for market conditions, tax implications and
other applicable factors.

A debt security may be callable, i.e., subject to redemption at the option of
the issuer at a price established in the security's governing instrument. If a
debt security held by a Portfolio is called for redemption, the Portfolio will
be required to permit the issuer to redeem the security or sell it to a third
party. Either of these actions could have an adverse effect on a Portfolio's
ability to achieve its investment objective because, for example, the Portfolio
may be able to reinvest the proceeds only in securities with lower yields or may
receive a price upon sale that is lower than it would have received in the
absence of the redemption.

The market for lower-rated securities has expanded rapidly in recent years. This
growth has paralleled a long economic expansion. At certain times in the past,
the prices of many lower-rated securities declined, indicating concerns that
issuers of such securities might experience financial difficulties. At those
times, the yields on lower-rated securities rose dramatically, reflecting the
risk that holders of such securities could lose a substantial portion of their
value as a result of the issuers' financial restructuring or default. There can
be no assurance that such declines will not recur.

The ratings of Moody's and S&P represent the opinions of those agencies as to
the quality of the debt securities that they rate. Such ratings are relative and
subjective, and are not absolute standards of quality. Unrated debt securities
are not necessarily of lower quality than rated securities, but they may not be
attractive to as many buyers. If securities are rated investment grade by one
rating organization and below investment grade by the other, a Portfolio's
investment adviser may rely on the rating that it believes is more accurate.
Each Portfolio's Adviser will consider a security's quality and credit rating
when determining whether such security is an appropriate investment. Subject to
its investment objective, policies and applicable law, a Portfolio may purchase
a security with the lowest rating.

Where one of the NRSROs has assigned an investment grade rating to an instrument
and others have given it a lower rating, the Portfolios may consider the
instrument to be investment grade. The market for lower-rated securities may be
thinner and less active than that for higher-rated securities, which can
adversely affect the prices at which these securities can be sold, and may make
it difficult for a Portfolio to obtain market quotations daily. If market
quotations are not available, these securities will be valued by a method that
the Portfolios' Boards of Directors believe accurately reflects fair market
value. Judgment may play a greater role in valuing lower-rated debt securities
than is the case with respect to securities for which a broader range of dealer
quotations and last-sale information is available. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may also
decrease the values and liquidity of lower-rated securities, especially in a
thinly traded market.

Although the prices of lower-rated bonds are generally less sensitive to
interest rate changes than are higher-rated bonds, the prices of

15
<PAGE>

lower-rated bonds may be more sensitive to adverse economic changes and
developments regarding the individual issuer. Although the market for lower-
rated debt securities is not new, and the market has previously weathered
economic downturns, there has been in recent years a substantial increase in the
use of such securities to fund corporate acquisitions and restructurings.
Accordingly, the past performance of the market for such securities may not be
an accurate indication of its performance during future economic downturns or
periods of rising interest rates. When economic conditions appear to be
deteriorating, medium- to lower-rated securities may decline in value due to
heightened concern over credit quality, regardless of the prevailing interest
rates. Investors should carefully consider the relative risks of investing in
high yield securities and understand that such securities are not generally
meant for short-term investing.

Adverse economic developments can disrupt the market for lower-rated securities,
and severely affect the ability of issuers, especially highly leveraged issuers,
to service their debt obligations or to repay their obligations upon maturity,
which may lead to a higher incidence of default on such securities. Lower-rated
securities are especially affected by adverse changes in the industries in which
the issuers are engaged and by changes in the financial condition of the
issuers. Highly leveraged issuers may also experience financial stress during
periods of rising interest rates. In addition, the secondary market for lower-
rated securities, which is concentrated in relatively few market makers, may not
be as liquid as the secondary market for more highly rated securities. As a
result, a Portfolio could find it more difficult to sell these securities or may
be able to sell the securities only at prices lower than if such securities were
widely traded. Therefore, prices realized upon the sale of such lower rated or
unrated securities, under these circumstances, may be less than the prices used
in calculating a Portfolio's net asset value.

Lower-rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls an obligation for redemption, the Portfolio may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If a Portfolio experiences unexpected net
redemptions, it may be forced to sell its higher-rated securities, resulting in
a decline in the overall credit quality of the Portfolio's investment portfolio
and increasing the exposure of the Portfolio to the risks of lower-rated
securities.

Stripped Securities Stripped securities are created by separating bonds into
-------------------
their principal and interest components and selling each piece separately
(commonly referred to as IOs and POs). The yield to maturity on an IO or PO
class of stripped mortgage-backed securities is extremely sensitive not only to
changes in prevailing interest rates but also to the rate of principal payments
(including prepayments) on the underlying assets. A rapid rate of principal
prepayments may have a measurably adverse effect on a Portfolio's yield to
maturity to the extent it invests in IOs. If the assets underlying the IOs
experience greater than anticipated prepayments of principal, the Portfolio may
fail to recoup fully its initial investment in these securities. Conversely, POs
tend to increase in value if prepayments are greater than anticipated and
decline if prepayments are slower than anticipated. The secondary market for
stripped mortgage-backed securities may be more volatile and less liquid than
that for other mortgage-backed securities, potentially limiting a Portfolio's
ability to buy or sell those securities at any particular time.

Zero Coupon and Pay-In-Kind Securities A zero coupon bond is a security that
--------------------------------------
makes no fixed interest payments but instead is sold at a discount from its face
value. The bond is redeemed at its face value on the specified maturity date.
Zero coupon bonds may be issued as such, or they may be created by a broker who
strips the coupons from a bond and separately sells the rights to receive
principal and interest. The prices of zero coupon bonds tend to fluctuate more
in response to changes in market interest rates than do the prices of interest-
paying debt securities with similar maturities. A Portfolio investing in zero
coupon bonds generally accrues income on such securities prior to the receipt of
cash payments. Since each Portfolio must distribute substantially all of its
income to shareholders to qualify as a regulated investment company under
federal income tax law, a Portfolio investing in zero coupon bonds may have to
dispose of other securities, including at times when it may be disadvantageous
to do so, to generate the cash necessary for the distribution of income
attributable to its zero coupon bonds. Pay-in-kind securities have
characteristics similar to those of zero coupon securities, but interest on such
securities may be paid in the form of obligations of the same type rather than
cash.

Commercial Paper and Other Short-Term Investments

Each of the Portfolios may invest or hold cash or other short-term investments,
including commercial paper. Commercial paper represents short-term unsecured
promissory notes issued in bearer form by banks or bank holding companies,
corporations and finance companies. The Portfolios may purchase commercial paper
issued pursuant to the private placement exemption in Section 4(2) of the
Securities Act of 1933. Section 4(2) paper is restricted as to disposition under
federal securities laws in that any resale must similarly be made in an exempt
transaction. The Portfolios may or may not regard such securities as illiquid,
depending on the circumstances of each case.

Any Portfolio may also invest in obligations (including certificates of deposit,
demand and time deposits and bankers' acceptances) of U.S. banks and savings and
loan institutions. While domestic bank deposits are insured by an agency of the
U.S. Government, the Portfolios will generally assume positions considerably in
excess of the insurance limits.

Loan Participations and Assignments

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<PAGE>

The purchase of loan participations and assignments entails special risks. A
Portfolio's ability to receive payments of principal and interest and other
amounts in connection with loan participations and assignments will depend
primarily on the financial condition of the borrower. The failure by the
Portfolio to receive scheduled interest or principal payments on a loan
participation or assignment would adversely affect the income of the Portfolio
and would likely reduce the value of its assets. Because loan participations are
not generally rated by independent credit rating agencies, a decision by a
Portfolio to invest in a particular loan participation will depend almost
exclusively on its Adviser's credit analysis of the borrower. In addition to the
other risks associated with investments in debt securities, participations and
assignments involve the additional risk that the insolvency of any financial
institution interposed between the Portfolio and the borrower could delay or
prevent the flow of payments from the borrower on the underlying loan. A
Portfolio may have limited rights to enforce the terms of the underlying loan,
and the liquidity of loan participations and assignments may be limited.

The borrower of a loan in which a Portfolio holds a participation interest may,
either at its own election or pursuant to terms of the loan documentation,
prepay amounts of the loan from time to time. There is no assurance that the
Portfolio will be able to reinvest the proceeds of any loan prepayment at the
same interest rate or on the same terms as those of the original loan
participation.

Corporate loans in which a Portfolio may purchase a loan participation or
assignment are made generally to finance internal growth, mergers, acquisitions,
stock repurchases, leveraged buy-outs, and other corporate activities. The
highly leveraged capital structure of the borrowers in certain of these
transactions may make such loans especially vulnerable to adverse changes in
economic or market conditions.

Certain of the loan participations or assignments acquired by a Portfolio may
involve unfunded commitments of the lenders or revolving credit facilities under
which a borrower may from time to time borrow and repay amounts up to the
maximum amount of the facility. In such cases, the Portfolio would have an
obligation to advance its portion of such additional borrowings upon the terms
specified in the loan documentation.

Indexed Securities and Structured Notes

The values of indexed securities and structured notes are linked to currencies,
other securities, interest rates, commodities, indices or other financial
indicators ("reference instruments"). These instruments differ from other types
of debt securities in several respects. The interest rate or principal amount
payable at maturity may vary based on changes in one or more specified reference
instruments, such as a floating interest rate compared with a fixed interest
rate or the currency exchange rates between two currencies (neither of which
need be the currency in which the instrument is denominated). An indexed
security or structured note may be positively or negatively indexed; that is,
its value or interest rate may increase or decrease if the value of the
reference instrument increases. Further, the change in the principal amount
payable with respect to, or the interest rate of, an indexed security or
structured note may be a multiple of the percentage change (positive or
negative) in the value of the underlying reference instrument(s).

Investment in indexed securities and structured notes involves certain risks,
including the credit risk of the issuer and the normal risks of price changes in
response to changes in interest rates. Further, in the case of certain indexed
securities or structured notes, a decline in the reference instrument may cause
the interest rate to be reduced to zero, and any further declines in the
reference instrument may then reduce the principal amount payable on maturity.
Finally, these securities may be less liquid than other types of securities, and
may be more volatile than their underlying reference instruments.

Forward Commitments

Each Portfolio may enter into commitments to purchase securities on a "forward
commitment" basis, including purchases on a "when-issued" basis or a "to be
announced" basis. When such transactions are negotiated, certain terms may be
fixed at the time the commitment is made, but delivery and payment for the
securities takes place at a later date. Such securities are often the most
efficiently priced and have the best liquidity in the bond market. During the
period between a commitment and settlement, no payment is made by the purchaser
for the securities purchased and, thus, no interest accrues to the purchaser
from the transaction. In a "to be announced" transaction, a Portfolio commits to
purchase securities for which all specific information is not yet known at the
time of the trade, particularly the exact face amount in forward commitment
mortgage-backed securities transactions.

A Portfolio may sell the securities subject to a forward commitment purchase,
which may result in a gain or loss. When a Portfolio purchases securities on a
forward commitment basis, it assumes the risks of ownership, including the risk
of price fluctuation, at the time of purchase, not at the time of receipt.
Purchases of forward commitment securities also involve a risk of loss if the
seller fails to deliver after the value of the securities has risen. Depending
on market conditions, a Portfolio's forward commitment purchases could cause its
net asset value to be more volatile.

Each Portfolio may also enter into a forward commitment to sell securities it
owns and will generally do so only with the intention of actually delivering the
securities. The use of forward commitments enables a Portfolio to hedge against
anticipated changes in interest rates and prices. In a forward sale, a Portfolio
does not participate in gains or losses on the security occurring after the
commitment date. Forward commitments to sell securities also involve a risk of
loss if the seller fails to take delivery after the value of the

17
<PAGE>

securities has declined.

Forward commitment transactions involve additional risks similar to those
associated with investments in options and futures contracts. See "Risks
Associated with Futures and Options Contracts."

Restricted and Illiquid Securities

Restricted securities are securities subject to legal or contractual
restrictions on their resale, such as private placements. Such restrictions
might prevent the sale of restricted securities at a time when the sale would
otherwise be desirable. No securities for which there is not a readily available
market ("illiquid securities") will be acquired by any Portfolio if such
acquisition would cause the aggregate value of illiquid securities to exceed 15%
of the Portfolio's net assets.

Under SEC regulations, certain securities acquired through private placements
can be traded freely among qualified purchasers. The SEC has stated that an
investment company's board of directors, or its investment adviser acting under
authority delegated by the board, may determine that a security eligible for
trading under this rule is "liquid." The Portfolios intend to rely on this rule,
to the extent appropriate, to deem specific securities acquired through private
placement as "liquid." The Boards have delegated to a Portfolio's Adviser the
responsibility for determining whether a particular security eligible for
trading under this rule is "liquid." Investing in these restricted securities
could have the effect of increasing a Portfolio's illiquidity if qualified
purchasers become, for a time, uninterested in buying these securities.

Restricted securities may be sold only (1) pursuant to SEC Rule 144A or other
exemption, (2) in privately negotiated transactions or (3) in public offerings
with respect to which a registration statement is in effect under the Securities
Act of 1933, as amended. Rule 144A securities, although not registered in the
U.S., may be sold to qualified institutional buyers in accordance with Rule 144A
under the Securities Act of 1933, as amended. Each Portfolio's Adviser, acting
pursuant to guidelines established by its Board of Directors, may determine that
some Rule 144A securities are liquid for purposes of limitations on the amount
of illiquid investments a Portfolio may own. Where registration is required, a
Portfolio may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Portfolio may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Portfolio might obtain a less favorable price than prevailed
when it decided to sell.

Illiquid securities may be difficult to value, and a Portfolio may have
difficulty disposing of such securities promptly. The Portfolios do not consider
foreign securities to be restricted if they can be freely sold in the principal
markets in which they are traded, even if they are not registered for sale in
the U.S.

Securities of Other Investment Companies

Investments in other investment companies may involve the payment of substantial
premiums above the net asset value of such issuers' portfolio securities, and
the total return on such investments will be reduced by the operating expenses
and fees of such investment companies, including advisory fees. The Portfolios
may invest in both closed-end and open-end investment companies. The LM
Balanced Institutional Portfolio intends to invest solely in the shares of two
open-end investment companies as described in the Prospectus.

Repurchase Agreements

A repurchase agreement is an agreement under which securities are acquired from
a securities dealer or bank subject to resale at an agreed upon price and date.
The securities are held by a Portfolio as collateral until retransferred and
will be supplemented by additional collateral if necessary to maintain a total
market value equal to or in excess of the value of the repurchase agreement. The
Portfolio bears a risk of loss in the event that the other party to a repurchase
agreement defaults on its obligations and the Portfolio is delayed or prevented
from exercising its rights to dispose of the collateral securities. A Portfolio
also bears the risk that the proceeds from any sale of collateral will be less
than the repurchase price. Repurchase Agreements may be viewed as a loan by a
Portfolio.

Reverse Repurchase Agreements and Other Borrowing

A reverse repurchase agreement is a portfolio management technique in which a
Portfolio temporarily transfers possession of a portfolio instrument to another
person, such as a financial institution or broker-dealer, in return for cash. At
the same time, the Portfolio agrees to repurchase the instrument at an agreed
upon time (normally within seven days) and price, including an interest payment.
While engaging in reverse repurchase agreements, each Portfolio will maintain
cash or securities in a segregated account at its custodian bank with a value at
least equal to the Portfolio's obligation under the agreements, adjusted daily.
Reverse repurchase agreements may expose a Portfolio to greater fluctuations in
the value of its assets and renders the segregated assets unavailable for sale
or other disposition. Reverse repurchase agreements may be viewed as a borrowing
by a Portfolio.

18
<PAGE>

The Portfolios may also enter into dollar roll transactions in which a Portfolio
sells a fixed income security for delivery in the current month and
simultaneously contracts to purchase substantially similar (same type, coupon
and maturity) securities at an agreed upon future time. By engaging in the
dollar roll transaction the Portfolio forgoes principal and interest paid on the
security that is sold, but receives the difference between the current sales
price and the forward price for the future purchase. The Portfolio would also be
able to earn interest on the income that is received from the initial sale.

The obligation to purchase securities on a specified future date involves the
risk that the market value of the securities that a Portfolio is obligated to
purchase may decline below the purchase price. In addition, in the event the
other party to the transaction files for bankruptcy, becomes insolvent or
defaults on its obligation, a Portfolio may be adversely affected.

Each Portfolio will limit its investments in reverse repurchase agreements and
other borrowing (including dollar roll transactions) to no more than one-third
of its total assets. To avoid potential leveraging effects of such borrowing, a
Portfolio will not make investments while its borrowing (including reverse
repurchase agreements but excluding dollar rolls) is in excess of 5% of its
total assets. To avoid potential leveraging effects of dollar rolls, each
Portfolio will segregate assets as required by the 1940 Act.

The 1940 Act requires a Portfolio to maintain continuous asset coverage (that
is, total assets including borrowings, less liabilities exclusive of borrowings)
of at least 300% of the amount borrowed. If the asset coverage should decline
below 300% as a result of market fluctuations or for other reasons, a Portfolio
may be required to sell some of its holdings within three days to reduce the
debt and restore the 300% asset coverage, even though it may be disadvantageous
from an investment standpoint to sell securities at that time. Borrowing may
increase the effect on net asset value of any increase or decrease in the market
value of the Portfolio.

Money borrowed will be subject to interest costs, which may or may not be
recovered by appreciation of the securities purchased. A Portfolio also may be
required to maintain minimum average balances in connection with such borrowing
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements would increase the cost of borrowing over the stated interest
rate. The Portfolios may enter into reverse repurchase agreements and dollar
roll transactions as a method of borrowing.

Loans of Portfolio Securities

A Portfolio may lend its portfolio securities, provided that cash or equivalent
collateral, equal to at least 100% of the market value of the securities loaned,
is continuously maintained by the borrower with the Portfolio. During the time
securities are on loan, the borrower will pay the Portfolio an amount equivalent
to any dividends or interest paid on such securities, and the Portfolio may
invest the cash collateral and earn additional income, or it may receive an
agreed upon amount of interest income from the borrower who has delivered
equivalent collateral. These loans are subject to termination at the option of
the Portfolio or the borrower. A Portfolio may pay administrative and custodial
fees in connection with a loan and may pay a negotiated portion of the interest
earned on the cash or equivalent collateral to the borrower or placing broker.
No Portfolio presently expects to have on loan at any given time securities
totaling more than one-third of its net assets. A Portfolio runs the risk that
the counterparty to a loan transaction will default on its obligation and that
the value of the collateral received may decline before the Portfolio can
dispose of it.

Duration

Duration is a measure of the expected life of a fixed income security on a cash
flow basis. Duration takes the time intervals over which the interest and
principal payments are scheduled and weights each by the present values of the
cash to be received at the corresponding future point in time. For any fixed
income security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. For example, a current coupon
bond with a maturity of 3.5 years will have a duration of approximately three
years. In general, the lower the stated or coupon rate of interest of a fixed
income security, the longer its duration; conversely, the higher the stated or
coupon rate of interest of a fixed income security, the shorter its duration.

There may be circumstances under which even duration calculations do not
properly reflect the interest rate exposure of a security. For example, floating
variable rate securities may have final maturities of ten or more years;
however, their interest exposure corresponds to the frequency of the coupon
reset. Similarly, many mortgage pass-through securities may have stated final
maturities of 30 years, but current prepayment rates are more critical in
determining the security's interest rate exposure. In these situations, the
Adviser may consider other analytical techniques that incorporate the economic
life of a security into its determination of interest rate exposure.

Diversification

Each Portfolio intends to remain diversified, as "diversified" is defined under
the 1940 Act. In general, a Portfolio is "diversified" under the 1940 Act if at
least 75% of the value of its total assets is represented by (i) cash, cash
items, government securities and securities of other investment companies and
(ii) securities limited in respect of any one issuer to 5% or less of the value
of the total assets of the Portfolio and 10% or less of the outstanding voting
securities of such issuer. The value of the shares of a non-diversified
Portfolio will be more susceptible to any single economic, political or
regulatory

19
<PAGE>

event than shares of a diversified fund.

Portfolio Turnover

The length of time a Portfolio has held a particular security is not generally a
consideration in investment decisions. A change in the securities held by a
Portfolio is known as "portfolio turnover." As a result of a Portfolio's
investment policies, under certain market conditions a Portfolio's portfolio
turnover rate may be higher than that of other mutual funds. Portfolio turnover
generally involves some expense to a Portfolio, including brokerage commissions
or dealer mark-ups and other transaction costs on the sale of securities and
reinvestment in other securities. These transactions may result in realization
of taxable capital gains. Higher portfolio turnover rates, such as those above
100%, are likely to result in higher brokerage commissions or other transactions
costs and could give rise to a greater amount of taxable capital gains.

Alternative Investment Strategies

At times a Portfolio's Adviser may judge that conditions in the securities
markets make pursuing the Portfolio's typical investment strategy inconsistent
with the best interests of its shareholders. At such times, the Adviser may
temporarily use alternative strategies, primarily designed to reduce
fluctuations in the value of the Portfolio's assets. In implementing these
defensive strategies, a Portfolio may invest without limit in securities that
the Adviser believes present less risk to a Portfolio, including equity
securities, debt and fixed income securities, preferred stocks, U.S. Government
and agency obligations, cash or money market instruments, or in other securities
the Adviser considers consistent with such defensive strategies, such as, but
not limited to, options, futures, warrants or swaps. As a result of these
strategies, the Batterymarch Emerging Markets Portfolio and the Batterymarch
International Equity Portfolio may invest up to 100% of their assets in
securities of U.S. issuers. It is impossible to predict when, or for how long, a
Portfolio will use these alternative strategies. As a result of using these
alternative strategies, a Portfolio may not achieve its investment objective.

New Investment Products

New types of mortgage-backed and asset-backed securities, derivative instruments
and hedging instruments are developed and marketed from time to time. Consistent
with its investment limitations, each Portfolio expects to invest in those new
types of securities and instruments that its Adviser believes may assist the
Portfolio in achieving its investment objective.

Investment Policies

Except for investment policies designated as fundamental in this Prospectus or
the SAI, the investment policies described in this Prospectus and in the SAI are
not fundamental policies. Changes to fundamental investment policies require
shareholder approval; the Directors may change any non-fundamental investment
policy without shareholder approval.

Ratings of Debt Obligations

Moody's, S&P and NRSROs are private organizations that provide ratings of the
credit quality of debt obligations. A Portfolio may consider these ratings in
determining whether to purchase, sell or hold a security. Ratings are not
absolute assurances of quality. Consequently, securities with the same maturity,
interest rate and rating may have different market prices. Credit rating
agencies attempt to evaluate the safety of principal and interest payments and
do not evaluate the risks of fluctuations in market value. Also, rating agencies
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or worse
than the rating indicates.

REITs

REITs pool investors' funds for investment primarily in income producing real
estate or real estate related loans or interests. Under the Code, a REIT is not
taxed on income it distributes to its shareholders if it complies with several
requirements relating to its organization, ownership, assets, and income and a
requirement that it generally distribute to its shareholders at least 95% of its
taxable income (other than net capital gains) for each taxable year. REITs can
generally be classified as Equity REITs, Mortgage REITs, and Hybrid REITs.
Equity REITs, which invest the majority of their assets directly in real
property, derive their income primarily from rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs, which invest the majority of their assets in real estate
mortgages, derive their income primarily from interest payments. Hybrid REITs
combine the characteristics of both Equity REITs and Mortgage REITs.

While a Portfolio will not generally invest in real estate directly, it may be
subject to risks similar to those associated with the direct ownership of real
estate. These risks include declines in the value of real estate, risks related
to general and local economic conditions, dependency on management skill, heavy
cash flow dependency, possible lack of availability of mortgage funds,
overbuilding, extended vacancies of properties, increased competition, increases
in property taxes and operating expenses, changes in zoning laws,

20
<PAGE>

losses due to costs resulting from the clean-up of environmental problems,
liability to third parties for damages resulting from environmental problems,
casualty or condemnation losses, limitations on rents, changes in neighborhood
values and in the appeal of properties to tenants and changes in interest rates.

In addition to these risks, REITs may be affected by changes in the value of the
underlying property owned by the trusts, or by the quality of any credit they
extend. Further, REITs are dependent upon management skills and generally may
not be diversified. REITs are also subject to heavy cash flow dependency,
defaults by borrowers and self-liquidation. In addition, REITs could possibly
fail to qualify for tax-free pass-through of income under the Code or to
maintain their exemptions from registration under the 1940 Act. The above
factors may also adversely affect a borrower's or a lessee's ability to meet its
obligations to the REIT. In the event of a default by a borrower or lessee, the
REIT may experience delays in enforcing its rights as a mortgagee or lessor and
may incur substantial costs associated with protecting its investments. In
addition to the foregoing risks, certain "special purpose" REITs in which a
Portfolio invests may invest their assets in specific real estate sectors, such
as hotel REITs, nursing home REITs or warehouse REITs, and are therefore subject
to the risks associated with adverse developments in any such sectors.

Valuation of Portfolio Shares

Net asset value of a Portfolio share is determined daily for each class as of
the close of regular trading on the Exchange, on every day the Exchange is open,
by dividing the value of the total assets attributable to that class, less
liabilities attributable to that class, by the number of shares of that class
outstanding. Pricing will not be done on days when the Exchange is closed. The
Exchange currently observes the following holidays: New Year's Day, President's
Day, Martin Luther King, Jr. Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day.

As described in the Prospectus, securities for which market quotations are
readily available are valued at current market value. Securities traded on an
exchange or the Nasdaq Stock Market are normally valued at last sale prices.
Other OTC securities, and securities traded on exchanges for which there is no
sale on a particular day (including debt securities), are valued at the mean of
the latest closing bid and asked prices. Securities with remaining maturities
of 60 days of less are valued at amortized cost. Securities and other assets
quoted in foreign currencies will be valued in U.S. dollars based on the
currency exchange rates prevailing at the time of the valuation. All other
securities are valued at fair value as determined by or under the direction of
the Board of Directors. The Portfolios may also use fair value pricing instead
of market quotations to value securities if, because of special circumstances,
the Portfolio believes it would more accurately reflect the price it could
realize on a current sale of the securities. Premiums received on the sale of
call options are included in the net asset value of each class, and the current
market value of options sold by a Portfolio will be subtracted from net assets
of each class.

Management of the Portfolios

Directors and Officers

The Fund's officers are responsible for the operation of the Fund under the
direction of its Board of Directors. The officers and Directors of the Fund and
their principal occupations during the past five years are set forth below. An
asterisk (*) indicates Interested Directors.

The business address of each officer and Director is 100 Light Street,
Baltimore, Maryland 21202, unless otherwise indicated.

Catherine H. Bray, 43 (1), Director; Portfolio Manager, T. Rowe Price, June
1989-May 1996.

*Edmund J. Cashman, 62, Director; Senior Executive Vice President and Director
of Legg Mason, Inc.; Officer and/or Director of various other affiliates of Legg
Mason, Inc.; President or Vice Chairman of the Board and Director/Trustee of
four Legg Mason funds.

Emmett J. Rice, 80 (1), Director; Governor, Federal Reserve Central Bank, June
1979-February 1987; Director, Jardine-Fleming China Region Fund, July 1992-
present; Director, Albermarle Corporation and Tredegar Industries, Inc.

*Edward A. Taber III, 56, Chairman, Director and President; Senior Executive
Vice President and Head of Asset Management, Legg Mason, Inc.; Senior Vice
President of Legg Mason; Chairman and Director of LM Institutional Advisors,
Inc.; Director of Legg Mason Fund Adviser, Inc., Legg Mason Funds Management,
Inc., Western Asset, WAML, Bartlett & Co., Batterymarch Financial Management,
Inc., Gray, Seifert & Co., Inc. (investment adviser), GSH & Co. Inc. (investment
adviser holding company). President and/or Director/Trustee of LM Institutional
Fund Advisors I, Inc. and all Legg Mason retail funds except Legg Mason Tax
Exempt Trust. Formerly director of Taxable Fixed Income Division of T. Rowe
Price Associates, Inc.

Robert M. Tarola, 50 (1), Director; Chief Financial Officer, W.R. Grace, 1999-
present; Senior Vice President and Chief Financial

21
<PAGE>

Officer, Helix Health, Inc., July 1996-1999; Partner, Price Waterhouse LLP, May
1974-June 1996.

Linda R. Taylor, 54 (1), Director.

Marie K. Karpinski, 51, Vice President and Treasurer; Vice President and
Treasurer of all Legg Mason retail funds (open-end investment companies), 1986-
present; Vice President and Treasurer of LM Institutional Fund Advisors I, Inc.;
Assistant Treasurer of Pacific American Income Shares, Inc. (closed-end
investment company), 1988-present; Treasurer of Legg Mason Fund Adviser, Inc.,
March 1986-present; Vice-President of Legg Mason, 1992-present; Assistant Vice-
President of Legg Mason, 1989-1992.

(1) Member of the Audit Committee of the Board. The Audit Committee meets with
the Fund's independent accountants to review the financial statements of the
Fund, the arrangements for special and annual audits, the adequacy of internal
controls, the Fund's periodic reporting process, material contracts entered into
by the Fund, the services provided by the accountants, any proposed changes in
accounting practices or principles, the independence of the accountants; and to
report on such matters to the Board.

Officers and Directors of the Fund who are affiliated persons of the Manager,
the Advisers or Legg Mason receive no salary or fees from the Fund. Each
Independent Director receives an annual retainer of $3,000 per operational
Portfolio and a per meeting fee of $3,000 per operational Portfolio.

The following table provides certain information relating to the compensation of
the Fund's Directors and senior executive officers for the fiscal year ended
March 31, 2000.

<TABLE>
<CAPTION>
Aggregate Compensation from the
Name and Position Total Compensation from the Fund* Fund and Complex Paid to Directors**
----------------- --------------------------------- ------------------------------------
<S> <C> <C>

Catherine H. Bray, Director $13,750 $13,750

Edmund J. Cashman, Director -- --

Emmett J. Rice, Director $13,750 $13,750

Edward A. Taber III, Director and President -- --

Robert M. Tarola, Director $13,750 $13,750

Linda R. Taylor, Director $13,750 $13,750
</TABLE>

*Represents fees paid to each person during the fiscal year ended March 31,
2000.

**Represents aggregate compensation paid to each person during the fiscal year
ended March 31, 2000. LM Institutional Fund Advisors I, Inc., an open-end
investment company that offers eleven separate portfolios, is also part of the
Fund Complex.

Manager

The Manager, a wholly owned subsidiary of Legg Mason, Inc., a financial services
holding company, serves as investment manager to the Portfolios of the Fund
under separate Investment Management Agreements dated June 3, 1998 (other than
the 1999 Portfolios, which are dated November 1, 1999) between the Manager and
the Fund (the "Management Agreements").

Under the Management Agreement, the Manager is responsible, subject to the
general supervision of the Fund's Board of Directors, for the actual management
of the Fund's assets, including the responsibility for making decisions and
placing orders to buy, sell or hold a particular security, consistent with the
investment objectives and policies described in the Prospectus and this
Statement of Additional Information. The Manager also is responsible for the
compensation of Directors and officers of the Fund who are employees of the
Manager or its affiliates. The Manager receives for its services a fee as
described in the Prospectus. As noted below, the Manager has delegated
responsibility for the selection of the Fund's investments to the Advisers.

Each Portfolio pays all of its other expenses that are not assumed by the
Manager. These expenses include, among others, expenses of preparing and
printing prospectuses, statements of additional information, proxy statements
and reports and of distributing them to existing shareholders, custodian
charges, transfer agency fees, organizational expenses, compensation of the
Directors who are not "interested persons" of the Manager, or its affiliates, as
that term is defined in the 1940 Act, legal and audit expenses, insurance
expenses, expenses of registering and qualifying shares of the Portfolios for
sale under federal and state law, Rule 12b-1 fees, governmental fees, expenses
incurred in connection with membership in investment company organizations,
interest expense, taxes

22
<PAGE>

and brokerage fees and commissions. The Portfolios also are liable for such
nonrecurring expenses as may arise, including litigation to which a Portfolio or
the Fund may be a party. The Fund may also have an obligation to indemnify its
Directors and officers with respect to litigation.

Under the Management Agreement, the Manager will not be liable for any error of
judgment or mistake of law or for any loss suffered by the Portfolios in
connection with the performance of the Management Agreement, except a loss
resulting from willful misfeasance, bad faith or gross negligence on its part in
the performance of its duties or from reckless disregard by it of its
obligations or duties thereunder.

The Management Agreement terminates automatically upon assignment and is
terminable with respect to any Portfolio at any time without penalty by vote of
the Fund's Board of Directors, by vote of a majority of that Portfolio's
outstanding voting securities, or by the Manager, on not less than 60 days'
notice to the Fund, and may be terminated immediately upon the mutual written
consent of the Manager and the Fund.

For the fiscal year ended March 31, 2000 and the fiscal period ended March 31,
1999, the Manager received $1,945,541 (net of fees waived of $0) and $62,027
(net of fees waived of $78,094), respectively, for the LM Value Institutional
Portfolio. For the fiscal period ended March 31, 2000, the Manager received $0
(net of fees waived of $630) for the Batterymarch U.S. Small Capitalization
Equity Portfolio.

Advisers

LMFM LMFM, a wholly owned subsidiary of Legg Mason, Inc., serves as Adviser to
----
the LM Value Institutional Portfolio, the LM Special Investment Institutional
Portfolio, the LM Balanced Institutional Portfolio and the LM Total Return
Institutional Portfolio under separate Investment Advisory Agreements dated
December 28, 1999 (other than the LM Balanced Institutional Portfolio, which is
dated November 1, 1999) between LMFM and the Manager (the "LMFM Advisory
Agreements").

Under the LMFM Advisory Agreement, LMFM is responsible, subject to the general
supervision of the Fund's Board of Directors and the Manager, for the actual
management of the Portfolios' assets, including the responsibility for making
decisions and placing orders to buy, sell or hold a particular security,
consistent with the investment objectives and policies described in the
Prospectus and this Statement of Additional Information. LMFM receives from the
Manager for its services an advisory fee as described in the Prospectus.

Under the LMFM Advisory Agreement, LMFM will not be liable for any error of
judgment or mistake of law or for any loss suffered by the Portfolios in
connection with the performance of the LMFM Advisory Agreement, except a loss
resulting from willful misfeasance, bad faith or gross negligence on its part in
the performance of its duties or from reckless disregard by it of its
obligations or duties thereunder.

The LMFM Advisory Agreement terminates automatically upon assignment and is
terminable with respect to any Portfolio at any time without penalty by vote of
the Fund's Board of Directors, by vote of a majority of that Portfolio's
outstanding voting securities, or by LMFM, on not less than 60 days' notice, and
may be terminated immediately upon the mutual written consent of the parties.

Batterymarch Batterymarch, a wholly owned subsidiary of Legg Mason, Inc., serves
------------
as the Adviser to the Batterymarch Emerging Markets Portfolio and the
Batterymarch International Equity Portfolio under separate Investment Advisory
Agreements dated December 28, 1999 and to the Batterymarch U.S.
MidCapitalization Equity Portfolio and Batterymarch U.S. Small Capitalization
Equity Portfolio under separate Investment Advisory Agreements dated November 1,
1999 (the "Batterymarch Advisory Agreement").

Under the Batterymarch Advisory Agreement, Batterymarch is responsible, subject
to the general supervision of the Fund's Board of Directors and the Manager, for
the actual management of the Portfolios' assets, including the responsibility
for making decisions and placing orders to buy, sell or hold a particular
security, consistent with the investment objectives and policies described in
the Prospectus and this Statement of Additional Information. Batterymarch also
is responsible for the compensation of Directors and officers of the Fund who
are employees of Batterymarch or its affiliates. Batterymarch receives from the
Manager for its services to the Portfolios' an advisory fee as described in the
Prospectus.

Under the Batterymarch Advisory Agreement, Batterymarch will not be liable for
any error of judgment or mistake of law or for any loss suffered by the
Portfolios in connection with the performance of the Batterymarch Advisory
Agreement, except a loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations or duties thereunder.

The Batterymarch Advisory Agreement terminates automatically upon assignment and
is terminable with respect to any Portfolio at any time without penalty by vote
of the Fund's Board of Directors, by vote of a majority of that Portfolio's
outstanding voting securities, or by Batterymarch, on not less than 60 days'
notice, and may be terminated immediately upon the mutual written consent

23
<PAGE>

of the parties.

Distributor

Legg Mason, 100 Light Street, P.O. Box 1476, Baltimore, MD 21203-1476, acts as
distributor of the Fund's shares pursuant to an Underwriting Agreement with the
Fund dated June 3, 1998 (the "Underwriting Agreement").

Legg Mason is not obligated to sell any specific amount of Fund shares and
receives no compensation pursuant to the Underwriting Agreement. Except as noted
in the Prospectus, the Fund's shares are distributed in a continuous offering.
The Underwriting Agreement is terminable with respect to any Portfolio without
penalty, at any time, by vote of a majority of the Fund's Independent Directors,
or by vote of the holders of a majority of the shares of that Portfolio, or by
Legg Mason upon 60 days' notice to the Fund.

Legg Mason pays certain expenses in connection with the offering of shares of
each Portfolio, including any compensation to its financial advisors, the
printing and distribution of prospectuses, SAIs and periodic reports used in
connection with the offering to prospective investors, and expenses relating to
any supplementary sales literature or advertising. The Portfolios bear the
expenses of preparing, setting in type and mailing the prospectuses, SAIs and
periodic reports to existing shareholders.

The Fund has adopted a Plan for each Portfolio which, among other things,
permits the Fund to pay Legg Mason fees for its services related to sales and
distribution of Financial Intermediary Class shares and the provision of ongoing
services to Financial Intermediary Class shareholders by Legg Mason or other
parties. Payments are made only from assets attributable to Financial
Intermediary Class shares. Under the Plan, the aggregate fees may not exceed an
annual rate of 0.40% of each Portfolio's average daily net assets attributable
to Financial Intermediary Class shares. Payments under the Plan are currently
limited to 0.25% of average daily net assets. The Board of Directors may
increase the limit up to 0.40% of average daily net assets as provided by the
Plan without obtaining shareholder approval. Distribution activities for which
such payments may be made include, but are not limited to, compensation to
persons who engage in or support distribution and redemption of shares, printing
of prospectuses and reports for persons other than existing shareholders,
advertising, preparation and distribution of sales literature, overhead, travel
and telephone expenses, all with respect to Financial Intermediary Class shares
only. Legg Mason may pay all or a portion of the fee to its investment
executives.

The Plan will continue in effect only so long as it is approved at least
annually by the vote of a majority of the Board of Directors, including a
majority of the 12b-1 Directors, cast in person at a meeting called for the
purpose of voting on the Plan. The Plan may be terminated by a vote of a
majority of the 12b-1 Directors or by a vote of a majority of the outstanding
voting securities of the Financial Intermediary Class shares. Any change in the
Plan that would materially increase the distribution cost to a Portfolio
requires shareholder approval; otherwise the Plan may be amended by the
Directors, including a majority of the 12b-1 Directors, as previously described.

In accordance with Rule 12b-1, the Plan provides that Legg Mason will submit to
the Fund's Board of Directors, and the Directors will review, at least
quarterly, a written report of any amounts expended pursuant to the Plan and the
purposes for which expenditures were made. In addition, as long as the Plan is
in effect, the selection and nomination of the Independent Directors will be
committed to the discretion of such Independent Directors.

There are certain anticipated benefits to shareholders of the Fund that may
result from the Plan. For example, the payment of service fees will provide an
incentive to maintain and enhance the level of services provided to each
Portfolio's Financial Intermediary shareholders. These efforts, in turn, could
lead to increased sales and reduced redemptions, eventually enabling each
Portfolio to achieve economies of scale and lower per share operating expenses.
Any reduction in such expenses would serve to offset, at least in part, the
additional expenses incurred by each Portfolio in connection with its Plan.
Furthermore, the investment management of each Fund could be enhanced, as net
inflows of cash from new sales might enable its portfolio manager to take
advantage of attractive investment opportunities, and reduced redemptions could
eliminate the potential need to liquidate attractive securities positions in
order to raise the funds necessary to meet the redemption requests.

Those persons listed in "Management of the Portfolios -- Directors and Officers"
as holding positions with Legg Mason may be deemed to have an interest in the
operation of the Plan. No director of the Fund who is not an interested person
of the Fund has an interest in the operation of the Plan.

For the fiscal year ended March 31, 2000, the LM Value Institutional Portfolio
paid Legg Mason $199,857 in distribution and service fees under the Plan from
assets attributable to Financial Intermediary Class shares. The Plan pays a
fixed fee rate to Legg Mason each month. Legg Mason, in turn, generally uses
the entire amount of this compensation to pay distribution expenses, including
amounts paid to third parties.

During the year ended March 31, 2000, Legg Mason incurred the following expenses
with respect to Financial Intermediary Class shares:

24
<PAGE>

LM Value Institutional
----------------------
Advertising, printing and mailing
prospectuses to prospective shareholders --

Compensation to underwriters --

Compensation to broker-dealers $139,834

Compensation to sales personnel --
Interest, carrying or other financial charges --

Other --

Total Expenses $139,834

Purchases and Redemptions

The Fund reserves the right to modify the mail, telephone or wire redemption
services or to terminate the telephone or wire redemption services described in
the Prospectus at any time without prior notice to shareholders. The Fund also
reserves the right to suspend or postpone redemptions (1) for any period during
which the Exchange is closed (other than for customary weekend and holiday
closings), (2) when trading in markets the Fund normally utilizes is restricted
or an emergency, as defined by rules and regulations of the SEC, exists, making
disposal of the Fund's investments or determination of its net asset value not
reasonably practicable, or (3) for such other periods as the SEC by regulation
or order may permit for the protection of the Fund's shareholders. In the case
of any such suspension, an investor may either withdraw the request for
redemption or receive payment based upon the net asset value next determined
after the suspension is lifted.

In consideration of the best interests of the remaining shareholders, the Fund
reserves the right to pay any redemption price in whole or in part by a
distribution in kind of readily marketable securities held by a Portfolio in
lieu of cash. If shares are redeemed in kind, however, the redeeming shareholder
should expect to incur transaction costs upon the disposition of the securities
received in the distribution.

Exchange Privilege

Shareholders in any of the Portfolios are entitled to exchange their shares for
shares of the other Portfolios of the Fund or of the portfolios of LM
Institutional Fund Advisors I, Inc., provided that such shares are eligible for
sale in the shareholder's state of residence, and are being offered at the time.

When a shareholder decides to exchange shares of a Portfolio, the Fund's
transfer agent will redeem shares of the Portfolio and invest the proceeds in
shares of the Portfolio selected. Redemptions of shares of the Portfolio will be
made at their net asset value determined on the same day that the request is
received in proper order, if received before the close of regular trading on the
Exchange. If the request is received by the transfer agent after such close of
regular trading, shares will be redeemed at their net asset value determined as
of the close of the Exchange on the next day the Exchange is open.

There is no charge for the exchange privilege and no sales charge imposed on an
exchange, but the Portfolios reserve the right to modify or terminate the
exchange privilege at any time. For more information concerning the exchange
privilege, or to make an exchange, please contact the Portfolios.

Portfolio Transactions and Brokerage

Under the various Management Agreements and Advisory Agreements, the Manager and
the Advisers are responsible for the execution of the Portfolios' transactions.
Each Portfolio's Adviser places all orders for the purchase and the sale of
portfolio investments with brokers or dealers selected by it in its discretion.
Transactions on stock exchanges and other agency transactions involve the
payment by the Portfolio of brokerage commissions. There is generally no stated
commission in the case of securities, such as U.S. Government securities, traded
in the over-the-counter markets, but the price paid by the Fund usually includes
an undisclosed dealer commission or markup. In selecting brokers or dealers, the
Advisers must seek the most favorable price (including the applicable dealer
spread) and execution for such transactions, subject to the possible payment as
described below of higher brokerage commissions or spreads to brokers or dealers
who provide research and analysis. The Portfolios may not always pay the lowest
commission or spread available. Rather, in placing orders on behalf of the
Portfolios, the Advisers will also take into account such factors as size of the
order, difficulty of execution, efficiency of the executing broker's or dealer's
facilities (including the

25
<PAGE>

services described below) and any risk assumed by the executing broker or
dealer.

Consistent with the policy of obtaining most favorable price and execution, an
Adviser may give consideration to research, statistical and other services
furnished by brokers or dealers to the Adviser for its use, may place orders
with brokers or dealers who provide supplemental investment and market research
and securities and economic analysis, and may pay to those brokers or dealers a
higher brokerage commission or spread than may be charged by other brokers or
dealers. Such research, analysis and other services may be useful to an Adviser
in connection with services to clients other than the Portfolios. An Adviser's
fee is not reduced by reason of its receiving such brokerage and research
services.

The Adviser may also consider sales of shares of the Portfolio (or other
portfolios or other funds managed by it or its affiliates, to the extent
permitted by applicable law) in selecting broker-dealers to execute Portfolio
transactions. The Portfolios may use Legg Mason, among others, as broker for
agency transactions in listed and over-the-counter securities at commission
rates and under circumstances consistent with the policy of best execution. In
the prior three fiscal years, the Portfolios did not use Legg Mason as a broker.

Some securities considered by an Adviser for purchase by a Portfolio may also be
appropriate for other clients served by the Adviser. To the extent the
Portfolio and such other clients purchase the same security, transactions in
such security will be allocated among the Portfolio and such other clients in a
manner considered fair and reasonable by the Adviser.

The Portfolios may not buy securities from, or sell securities to, an Adviser or
its affiliated persons as principal, except as permitted by the rules and
regulations of the SEC. Subject to certain conditions, the Portfolios may
purchase securities that are offered in underwritings in which an affiliate of
an Adviser is a participant, although the Portfolios may not make such purchases
directly from such affiliate.

The Advisers will select brokers to execute portfolio transactions. In the over-
the-counter market, the Portfolios generally will deal with responsible primary
market-makers unless a more favorable execution can otherwise be obtained.

Investment decisions for the Portfolios are made independently from those of
other funds and accounts advised by the Advisers. However, the same security may
be held in the portfolios of more than one fund or account. When two or more
accounts simultaneously engage in the purchase or sale of the same security, the
prices and amounts will be equitably allocated to each account. In some cases,
this procedure may adversely affect the price or quantity of the security
available to a particular account. In other cases, however, an account's ability
to participate in larger volume transactions may produce better executions and
prices. During the fiscal year ended March 31, 2000 and the fiscal period ended
March 31, 1999, the LM Value Institutional Portfolio paid $0 and $0,
respectively, in brokerage commissions on transactions. During the fiscal period
ended March 31, 2000, the Batterymarch U.S. Small Capitalization Equity
Portfolio paid $0 in brokerage commissions on transactions. No brokerage
commissions were paid by any Portfolio to affiliated persons.

Codes of Ethics

The Fund, the Manager, Legg Mason, LMFM and Batterymarch have adopted codes of
ethics under Rule 17j-1 of the 1940 Act. These codes of ethics permit personnel
subject to the codes to invest in securities, including securities that may be
purchased or held by the Fund.

Additional Tax Information

General Requirements for "Pass-Through" Treatment

In order to qualify or continue to qualify for treatment as a regulated
investment company ("RIC") under Subchapter M of the Code, each Portfolio must
distribute annually to its shareholders at least 90% of its investment company
taxable income (consisting generally of net investment income and net short-term
capital gain, if any) and must meet several additional requirements. With
respect to each Portfolio, these requirements include the following: (1) the
Portfolio must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of securities or other income (including but not
limited to gains from options or futures) derived with respect to its business
of investing in securities; (2) at the close of each quarter of the Portfolio's
taxable year, at least 50% of the value of its total assets must be represented
by cash and cash items, U.S. Government securities, securities of other
regulated investment companies and other securities, with those other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Portfolio's total assets and not more than 10% of the
outstanding voting securities of such issuer; and (3) at the close of each
quarter of the Portfolio's taxable year, not more than 25% of its total assets
may be invested in securities (other than U.S. Government securities and
securities of other regulated investment companies) of any one issuer and two or
more issuers which the Portfolio controls and which are engaged in the same,
similar, or related trades or businesses. By so qualifying, each Portfolio will
not be subject to federal income taxes to the extent that its net investment
income, net realized short-term capital gains and net realized long-term capital
gains are distributed to shareholders.

26
<PAGE>

If a Portfolio failed to qualify as a regulated investment company accorded
special tax treatment in any taxable year, the Portfolio would be subject to tax
on its taxable income at corporate rates, and all distributions from earnings
and profits, including any distributions of net long-term capital gains, would
be taxable to shareholders as ordinary income. In addition, the Portfolio could
be required to recognize unrealized gains, pay substantial taxes and interest
and make substantial distributions before re-qualifying as a regulated
investment company that is accorded special tax treatment.

If a Portfolio fails to distribute in a calendar year substantially all of its
ordinary income for such year and substantially all of its capital gain net
income for the one-year period ending October 31 (or later if the Portfolio is
permitted or so elects), plus any retained amount from the prior year, the
Portfolio will be subject to a 4% excise tax on the undistributed amounts. A
distribution declared by a Portfolio in October, November or December of any
year and payable to shareholders of record on a date in such months will be
deemed to have been paid by the Portfolio and received by the shareholders on
December 31 if the distribution is paid by the Portfolio during the following
January. Such a distribution, therefore, will be taxable to shareholders for the
year in which that December 31 falls. Each Portfolio intends generally to make
distributions sufficient to avoid imposition of the 4% excise tax.

Original Issue Discount

A Portfolio may purchase debt securities issued with original issue discount.
Original issue discount that accrues in a taxable year will be treated as income
earned by the Portfolio and therefore an equivalent amount must be distributed
to satisfy the distribution requirement and avoid imposition of the 4% excise
tax. Because the original issue discount earned by a Portfolio in a taxable year
may not be represented by cash income, the Portfolio may have to dispose of
other securities and use the proceeds thereof to make distributions in amounts
necessary to satisfy those distribution requirements. A Portfolio may realize
capital gains or losses from such dispositions, which would increase or decrease
the Portfolio's investment company taxable income and/or net capital gain.

Miscellaneous

Dividends and distributions on a Portfolio's shares are generally subject to
federal income tax as described in the Prospectus to the extent they do not
exceed the Portfolio's realized income and gains, even though such dividends and
distributions may economically represent a return of a particular shareholder's
investment. Such distributions are likely to occur in respect of shares
purchased at a time when a Portfolio's net asset value reflects gains that are
either unrealized, or realized but not distributed. Such realized gains may be
required to be distributed even when a Portfolio's net asset value also reflects
unrealized losses.

The LM Balanced Institutional Portfolio will not be able to offset gains
realized by the Core Portfolio against losses realized by the Value
Institutional Portfolio, and vice-versa. The "fund-of-funds" structure could
therefore affect the amount, timing and character of distributions to
shareholders of the LM Balanced Institutional Portfolio.

Depending on the LM Balanced Institutional Portfolio's percentage ownership in
the Core Portfolio and the Value Institutional Portfolio, a redemption by the LM
Balanced Institutional Portfolio of either Core Portfolio or Value Institutional
Portfolio shares may cause the LM Balanced Institutional Portfolio to be treated
as not receiving capital gain income on the amount by which the distribution
exceeds the LM Balanced Institutional Portfolio's tax basis in the shares of the
Core Portfolio or Value Institutional Portfolio, as the case may be, but instead
to be treated as receiving a dividend taxable as ordinary income on the full
amount of the distribution. This could cause shareholders of the LM Balanced
Institutional Portfolio to recognize higher amounts of ordinary income than if
the shareholders had held the shares of the Core Portfolio and Value
Institutional Portfolio directly.

If a Portfolio invests in shares of preferred stock or otherwise holds dividend-
paying securities as a result of exercising a conversion privilege, a portion of
the dividends from the Portfolio's investment company taxable income (whether
paid in cash or reinvested in additional shares) may be eligible for the
dividends-received deduction allowed to corporations that meet certain holding
period requirements. The eligible portion may not exceed the aggregate dividends
received by the Portfolio from U.S. corporations. However, dividends received by
a corporate shareholder and deducted by it pursuant to the dividends-received
deduction are subject indirectly to the alternative minimum tax.

If shares of any Portfolio are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those shares.

To the extent distributions consist of interest from securities of the U.S.
Government and certain of its agencies and instrumentalities, they may be exempt
from state and local income taxes. Interest from obligations that are merely
guaranteed by the U.S. Government or one of its agencies, such as mortgage
participation certificates guaranteed by GNMA, generally is not entitled to this
exemption. Although there is no assurance that any such state and local
exemptions will be available, shareholders will be advised of the portion of
Portfolio distributions that might qualify for such an exemption.

Dividends and interest received by a Portfolio, and gains realized by a
Portfolio on foreign securities, may be subject to income,

27
<PAGE>

withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on the Portfolio's securities. Tax conventions
between certain countries and the United States may reduce or eliminate these
foreign taxes, however, and foreign countries generally do not impose taxes on
capital gains in respect of investments by foreign investors.

If at the end of a Portfolio's fiscal year, more than 50% of the value of its
total assets represents securities of foreign corporations, the Portfolio may
make an election to treat any foreign taxes paid by it as paid by its
shareholders. In this case, shareholders who are U.S. citizens, U.S.
corporations and, in some cases, U.S. residents generally will be required to
include in U.S. taxable income their pro rata share of such taxes, but may then
generally be entitled to claim a foreign tax credit or deduction (but not both)
for their share of such taxes. A shareholder's ability to claim a foreign tax
credit or deduction in respect of foreign taxes paid by a Portfolio may be
subject to certain limitations (including a holding period requirement,
applicable to both a Portfolio and its shareholders, imposed by the Code).

A Portfolio's transactions in foreign currencies and hedging activities may give
rise to ordinary income or loss to the extent such income or loss results from
fluctuations in value of the foreign currency concerned. In addition, such
activities will likely produce a difference between book income and taxable
income. This difference may cause a portion of a Portfolio's income
distributions to constitute a return of capital for tax purposes or require a
Portfolio to make distributions exceeding book income to qualify as a regulated
investment company for tax purposes.

Investment in an entity that qualifies as a "passive foreign investment company"
under the Code could subject a Portfolio to a U.S. federal income tax or other
charge on certain "excess distributions" with respect to the investment, and on
the proceeds from disposition of the investment. A Portfolio may make an
election to mark the gains (and to a limited extent losses) in such investments
"to the market" as though it had sold and repurchased its holdings in those
passive foreign investment companies on the last day of the Portfolio's taxable
year.

Other Information

LMIFA II was incorporated in Maryland on January 13, 1998. Each Portfolio is an
open-end, diversified investment management company. The Directors of LMIFA II
may, without shareholder approval, create, in addition to the Portfolios, other
series of shares representing separate investment portfolios. Any such series
may be divided without shareholder approval into two or more classes of shares
having such terms as the Directors may determine. Establishment and offering of
additional portfolios or classes of shares of a portfolio will not alter the
rights of the Fund's shareholders. The rights of the Fund's shareholders cannot
be modified by other than a majority vote.

LMIFA II has a total of 10 billion shares of common stock at par value $0.001.
Each share has one vote, with fractional shares voting proportionally. Voting on
matters pertinent only to a particular Portfolio, such as the adoption of an
investment advisory contract for that Portfolio, is limited to that Portfolio's
shareholders. Shares of all classes of a Portfolio will vote together as a
single class except when otherwise required by law or as determined by the
Directors. Shares are freely transferable, are entitled to dividends as declared
by the Directors, and, if a Portfolio were liquidated, would receive the net
assets of that Portfolio. Voting rights are not cumulative, and all shares of
the Portfolios are fully paid, redeemable and nonassessable and have no
conversion rights. Shares do not have preemptive rights or subscription rights.

Although no Portfolio intends to hold annual shareholder meetings, it will hold
a special meeting of shareholders when the Investment Company Act of 1940 (the
"1940 Act") requires a shareholder vote on certain matters (including the
election of Directors in certain cases or approval of an advisory contract).

Principal Holders of Securities

% of Ownership Type of
Name and Address June 30, 2000 Ownership
---------------- ------------- ---------

Institutional Class

Charles Schwab & Co., Inc. 26.36% Record
Special Custody Account
Benefit of Customers

28
<PAGE>

101 Montgomery Street
San Francisco, CA 94104-4122

Northern Trust Company, Custodian 6.51% Beneficial
Christel Dehaan
P.O. Box 92956
Chicago, IL 60675-2956

Financial Intermediary Class

Fidelity Investments Institutional Operations Co. Inc. 13.32% Record
As Agent for Certain Employee Benefit Plans
100 Magellan Way
Covington, KY 41015-1999

Set forth below is a table which contains the name, address and percentage of
ownership of each person who is known by the Fund to own beneficially and/or of
record five percent or more of the outstanding shares of the Batterymarch U.S.
Small Capitalization Equity Portfolio as of June 30, 2000:
<TABLE>
<CAPTION>
% of Ownership Type of
Name and Address June 30, 2000 Ownership
---------------- -------------- ---------
<S> <C> <C>
Institutional Class

State Street Bank & Trust 44.16% Beneficial and Record
The Emily Hall Tremaine Foundation
100 Myrtle Street
North Quincy, MA 02171-1753

Riggs Bank, Trustee 20.35% Beneficial and Record
The Corcoran Gallery of Art
808 17th Street, NW
Washington, DC 20006-3910

Chase Manhattan Bank, TTEE 17.83% Beneficial and Record
Princess House Inc. Retirement Plan Trust
4 New York Plaza, 2nd Floor
New York, NY 10004-2413

Wendell & Co. c/o The Bank of New York 9.49% Record
P.O. Box 1066
Wall Street Station
New York, NY 10268-1066

Turtle & Co. 8.17% Record
P.O. Box 9427
Boston, MA 02209-9427
</TABLE>

The Emily Hall Tremaine Foundation may be deemed to control the Batterymarch
U.S. Small Capitalization Portfolio, because it beneficially owns more than 25%
of the outstanding voting securities of such portfolio. The Officers and
Directors of the Portfolios own in the aggregate less than 1% of the outstanding
shares of each Portfolio.

The Manager owns 100% of the LM Special Investment Institutional Portfolio, LM
Total Return Institutional Portfolio, LM Balanced Institutional Portfolio,
Batterymarch U.S. MidCapitalization Equity Portfolio, Batterymarch International
Equity Portfolio and Batterymarch Emerging Markets Portfolio. The Manager may
be deemed to control each such Portfolio because it owns more than 25% of the
outstanding voting securities of such Portfolio.

Performance Information

Each Portfolio may, from time to time, include its total return in marketing
materials or reports to shareholders or prospective

29
<PAGE>

investors. Quotations of average annual total return for a class of shares of a
Portfolio will be expressed in terms of the average annual compounded rate of
return of a hypothetical investment in that class of shares over periods of one,
five and ten years (up to the life of the class), calculated pursuant to the
following formula: P (1 + T)(exponent n) = ERV (where P = a hypothetical initial
payment of $1,000, T = the average annual total return, n = number of years, and
ERV = the ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period). All total return figures reflect the deduction of a
proportional share of Portfolio expenses on an annual basis and assume that all
dividends and other distributions are reinvested when paid. The performance of
each class of a Portfolio will differ because each class is subject to different
expenses.

The LM Value Institutional Portfolio's total returns as of March 31, 2000 were
as follows:

Average
Cumulative Annual
Total Return Total Return
One Year
Institutional Class 7.74% 7.74%
Financial Intermediary Class 7.41% 7.41%

Life of Portfolio(A)
Institutional Class 71.10% 42.27%
Financial Intermediary Class 59.31% 38.15%

(A) Portfolio's inception - September 22, 1998 (Institutional Class) and October
22, 1998 (Financial Intermediary Class).

The Batterymarch U.S. Small Capitalization Equity Portfolio's total returns as
of March 31, 2000 were as follows:

Average
Cumulative Annual
Total Return Total Return
Life of Portfolio(A)
Institutional Class -3.20% N/A

(A) Portfolio's inception - March 13, 2000 (Institutional Class).

Each Portfolio's performance may fluctuate daily depending upon such factors as
the average maturity of its securities, changes in investments, changes in
interest rates and variations in operating expenses. Therefore, current
performance does not provide a basis for determining future performance. The
fact that a Portfolio's performance will fluctuate and that shareholders'
principal is not guaranteed or insured should be considered in comparing the
Portfolio's performance with the performance of other investments.

From time to time each Portfolio may compare the performance of a class of
shares in advertising and sales literature to the performance of other
investment companies, groups of investment companies or various market indices.
One such market index is the S&P 500, a widely recognized, unmanaged index
composed of the capitalization-weighted average of the prices of 500 of the
largest publicly traded stocks in the U.S. The S&P 500 includes reinvestment of
all dividends. It does not take into account the costs of investing or the tax
consequences of distributions. The Portfolios invest in many securities that are
not included in the S&P 500.

Each Portfolio may also cite rankings and ratings, and compare the return of a
class of shares with data published by Lipper Analytical Services, Inc., CDA
Investment Technologies, Inc., Wiesenberger Investment Company Services, Value
Line, Morningstar, and other services or publications that monitor, compare
and/or rank the performance of investment companies. Each Portfolio may also
refer in such materials to mutual fund performance rankings, ratings,
comparisons with funds having similar investment objectives, and other mutual
funds reported in independent periodicals, including, but not limited to,
Financial World, Money Magazine, Forbes, Business Week, Barron's, Fortune, The
Kiplinger Letters, The Wall Street Journal, and The New York Times.

Each Portfolio may compare the investment return of a class of shares to the
return on certificates of deposit and other forms of bank deposits, and may
quote from organizations that track the rates offered on such deposits. Bank
deposits are insured by an agency of the federal government up to specified
limits. In contrast, Portfolio shares are not insured, the value of Portfolio
shares may fluctuate, and an investor's shares, when redeemed, may be worth more
or less than the investor originally paid for them. Unlike the interest paid on
many certificates of deposit, which remains at a specified rate for a specified
period of time, the return of each class of shares will vary.

Portfolio advertisements may reference the history of Legg Mason, Inc. and its
affiliates, the education and experience of the portfolio manager, and the fact
that the portfolio manager engages in a particular style of investing (e.g.,
growth or value).

30
<PAGE>

In advertising, each Portfolio may illustrate hypothetical investment plans
designed to help investors meet long-term financial goals, such as saving for a
child's college education or for retirement. Sources such as the Internal
Revenue Service, the Social Security Administration, the Consumer Price Index
and Chase Global Data and Research may supply data concerning interest rates,
college tuitions, the rate of inflation, Social Security benefits, mortality
statistics and other relevant information. Each Portfolio may use other
recognized sources as they become available.

Each Portfolio may use data prepared by Ibbotson Associates of Chicago, Illinois
("Ibbotson") to compare the returns of various capital markets and to show the
value of a hypothetical investment in a capital market. Ibbotson relies on
different indices to calculate the performance of common stocks, corporate and
government bonds and Treasury bills.

Each Portfolio may illustrate and compare the historical volatility of different
portfolio compositions where the performance of stocks is represented by the
performance of an appropriate market index, such as the S&P 500, and the
performance of bonds is represented by a nationally recognized bond index, such
as the Lehman Brothers Long-Term Government Bond Index or the Lehman Brothers
Aggregate Bond Index.

Each Portfolio may also include in advertising biographical information on key
investment and managerial personnel.

Each Portfolio may advertise examples of the potential benefits of periodic
investment plans, such as dollar cost averaging, a long-term investment
technique designed to lower average cost per share. Under such a plan, an
investor invests in a mutual fund at regular intervals a fixed dollar amount
thereby purchasing more shares when prices are low and fewer shares when prices
are high. Although such a plan does not guarantee profit or guard against loss
in declining markets, the average cost per share could be lower than if a fixed
number of shares were purchased at the same intervals. Investors should consider
their ability to purchase shares through low price levels.

Each Portfolio may discuss Legg Mason, Inc.'s tradition of service. Since 1899,
Legg Mason, Inc. and its affiliated companies have helped investors meet their
specific investment goals and have provided a full spectrum of financial
services. Legg Mason, Inc. affiliates serve as investment advisers for private
accounts and mutual funds with assets of more than $110 billion as of March 31,
2000.

In advertising, each Portfolio may discuss the advantages of saving through tax-
deferred retirement plans or accounts, including the advantages and
disadvantages of "rolling over" a distribution from a retirement plan into an
IRA, factors to consider in determining whether you qualify for such a rollover,
and the other options available. These discussions may include graphs or other
illustrations that compare the growth of a hypothetical tax-deferred investment
to the after-tax growth of a taxable investment.

Custodian, Transfer Agent and Dividend-Disbursing Agent

State Street Bank and Trust Company ("State Street"), P.O. Box 1790, Boston,
Massachusetts 02105, serves as custodian of the Fund's assets. As such, State
Street holds in safekeeping certificated securities and cash belonging to the
Fund and, in such capacity, is the registered owner of securities in book-entry
form belonging to the Fund. Upon instruction, State Street receives and
delivers cash and securities of the Fund in connection with Portfolio
transactions and collects all dividends and other distributions made with
respect to a Portfolio's securities. State Street also maintains certain
accounts and records of the Fund. State Street also calculates the total net
asset value, total net income and net asset value per share of each Portfolio on
a daily basis (and as otherwise may be required by the 1940 Act) and performs
certain accounting services for all Portfolios of the Fund.

Boston Financial Data Services, Inc., P.O. Box 953, Boston, Massachusetts 02103,
serves as transfer and dividend-disbursing agent and administrator of various
shareholder services. Shareholders who request an historical transcript of their
account will be charged a fee based upon the number of years researched. The
Fund reserves the right, upon 60 days' written notice, to make other charges to
investors to cover administrative costs.

Independent Auditors

Ernst & Young, LLP, 2001 Market Street, Philadelphia, Pennsylvania 19103, has
been selected to serve as the Fund's independent auditors. Ernst & Young LLP
conducts an annual audit of the Fund, assists in the preparation of each
Portfolio's federal and state income tax returns and consults with the Fund as
to matters of accounting and federal and state income taxation. The financial
highlights included in the Prospectus and incorporated by reference into and
included in this Statement of Additional Information and the financial
statements incorporated by reference into this Statement of Additional
Information have been so included and incorporated in reliance upon the report
of Ernst & Young LLP, given on their authority as experts in auditing and
accounting.

Legal Counsel

31
<PAGE>

Ropes & Gray, Boston, MA, serves as legal counsel to the Fund.

Financial Statements

The report of independent auditors, financial statements and financial
highlights for the fiscal year ended March 31, 2000 for the LM Value
Institutional and Batterymarch U.S. Small Capitalization Equity Portfolios
included in the Portfolios' Annual Reports are hereby incorporated by reference
into this Statement of Additional Information.

The audited Statement of Assets and Liabilities as of March 31, 2000 for the LM
Special Investment Institutional Portfolio, LM Total Return Institutional
Portfolio, Batterymarch International Equity Portfolio and Batterymarch Emerging
Markets Portfolio and the Report of Independent Auditors related thereto, are
shown on the following pages.

32
<PAGE>

LM Institution Fund Advisors II, Inc.
Statement of Assets and Liabilities
March 31, 2000

<TABLE>
<CAPTION>
LM Special
Investment Batterymarch Batterymarch LM Total Return
Institutional Emerging International Institutional
Portfolio Markets Equity Portfolio Portfolio
Portfolio
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:

Cash $15,000 $15,000 $15,000 $15,000
--------------------------------------------------------------------------------

Net Assets $15,000 $15,000 $15,000 $15,000
================================================================================

Offering and redemption price per
share; 1,500 shares Institutional
Class outstanding for each
Portfolio (10,000,000,000 shares
authorized; $.001 par value) $ 10.00 $ 10.00 $ 10.00 $ 10.00
================================================================================
</TABLE>

See accompanying Notes to Statement of Assets and Liabilities.

LM Institutional Fund Advisors II, Inc.
Notes to Statement of Assets and Liabilities
March 31, 2000

A. LM Institutional Fund Advisors II, Inc. (the "Corporation"), consisting of
the LM Value Institutional Portfolio, LM Special Investment Institutional
Portfolio, LM Total Return Institutional Portfolio, LM Balanced Institutional
Portfolio, Batterymarch U.S. MidCapitalization Equity Portfolio, Batterymarch
U.S. Small Capitalization Equity Portfolio, Batterymarch International Equity
Portfolio and Batterymarch Emerging Markets Portfolio, is registered under
the Investment Company Act of 1940, as amended, as an open-end management
investment company. These financial statements and related notes pertain to
the LM Special Investment Institutional Portfolio, Batterymarch Emerging
Markets Portfolio, Batterymarch International Equity Portfolio, and LM Total
Return Institutional Portfolio (the "Portfolios"). The Portfolios have had no
operations other than those matters related to their organization and
registration. LM Institutional Advisors, Inc. ("LMIA"), a wholly owned
subsidiary of Legg Mason, Inc. (a financial services holding company), has
provided the initial capital for the Portfolios by purchasing 1,500 shares of
each at $10.00 per share. Such shares were acquired for investment and can be
disposed of only by redemption. Legg Mason Wood Walker, Incorporated ("Legg
Mason"), a wholly owned subsidiary of Legg Mason, Inc. and a member of the
New York Stock Exchange, acts as the distributor of the Portfolios' shares.

B. Costs incurred in connection with the organization of the Corporation were
borne by LMIA. Costs to be incurred by the Portfolios in connection with the
offering of their shares will be deferred and will be amortized over a one
year period beginning on the date each Portfolio commences operations.

33
<PAGE>

Report of Independent Auditors

To the Shareholders and Board of Directors
LM Institutional Fund Advisors II, Inc.

We have audited the accompanying statement of assets and liabilities of LM
Institutional Fund Advisors II, Inc., (the "Fund") (LM Special Investment
Institutional Portfolio, Batterymarch Emerging Markets Portfolio, Batterymarch
International Equity Portfolio, and LM Total Return Institutional Portfolio (the
"Portfolios")) as of March 31, 2000. This statement of assets and liabilities is
the responsibility of the Fund's management. Our responsibility is to express an
opinion on this statement of assets and liabilities based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the statement of assets and
liabilities is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement of
assets and liabilities. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of each of the
respective Portfolios of LM Institutional Fund Advisors II, Inc. at March 31,
2000, in conformity with accounting principles generally accepted in the United
States.

Ernst & Young LLP
Philadelphia, Pennsylvania
July 25, 2000

34
<PAGE>

PART C. OTHER INFORMATION
Item 23. Exhibits
(a) (1) Articles of Amendment and Restatement -- (1)
(2) Articles Supplementary -- (1)
(3) Articles of Amendment -- filed herewith
(4) Articles Supplementary -- filed herewith

(b) Bylaws -- (1)

(d) (1) Investment Management Agreement
(i) LM Value Institutional -- (1)
(ii) LM Special Investment Institutional -- (1)
(iii) LM Total Return Institutional - (1)
(iv) Batterymarch Emerging Markets -- (1)
(v) Batterymarch International Equity -- (1)
(vi) LM Balanced Institutional -- (3)
(vii) Batterymarch U.S. MidCapitalization Equity -- (3)
(viii) Batterymarch U.S. Small Capitalization Equity -- (3)

(2) Investment Advisory Agreement
(i) LM Value Institutional -- filed herewith
(ii) LM Special Investment Institutional -- filed herewith
(iii) LM Total Return Institutional-- filed herewith
(iv) Batterymarch Emerging Markets -- filed herewith
(v) Batterymarch International Equity -- filed herewith
(vi) LM Balanced Institutional -- (3)
(vii) Batterymarch U.S. MidCapitalization Equity -- (3)
(viii) Batterymarch U.S. Small Capitalization Equity -- (3)

(e) (1) Underwriting Agreement -- (1)
(2) Amendment to Underwriting Agreement -- filed herewith

(f) Bonus or profit sharing contracts -- none

(g) (1) Custodian Agreement -- (2)
(2) Amendment to Custodian Agreement -- filed herewith

(h) (1) Transfer Agent agreement - (2)
(2) Amendment to Transfer Agent Agreement -- filed herewith

(i) Opinion of counsel -- (1) and (3)

(j) Other opinions, appraisals, rulings and consents -- filed
herewith

(k) Financial statements omitted from Item 22 -- not applicable

(l) Agreement for providing initial capital -- none

(m) Plan pursuant to Rule 12b-1
(1) LM Value Institutional -- (1)
(2) LM Special Investment Institutional -- (1)
(3) LM Total Return Institutional -- (1)
<PAGE>

(4) Batterymarch Emerging Markets -- (1)
(5) Batterymarch International Equity -- (1)
(6) LM Balanced Institutional -- (3)
(7) Batterymarch U.S. MidCapitalization Equity -- (3)
(8) Batterymarch U.S. Small Capitalization Equity -- (3)

(n) (1) Multiple Class (Rule 18f-3) Plan -- filed herewith

(o) Power of Attorney -- (1)

(p) Code of Ethics
(1) The Fund, Manager, LMFM and LMWW -- filed herewith
(2) Batterymarch -- filed herewith

(1) Incorporated herein by reference to corresponding Exhibit of Pre-
Effective Amendment No. 1 to the Registration Statement, SEC File No. 333-
44423, filed June 5, 1998.

(2) Incorporated herein by reference to corresponding exhibit of Post-
Effective Amendment No. 2 to the Registration Statement, SEC File No. 333-
44423, filed June 2, 1999.

(3) Incorporated herein by reference to corresponding exhibit of Post-
Effective Amendment No. 5 to the Registration Statement, SEC File No. 333-
44423, filed October 1, 1999.

Item 24. Persons Controlled by or under Common Control with Registrant
None

Item 25. Indemnification
This Item is incorporated by reference to Item 25 of Part C of Post-
Effective Amendment No. 5 to the Registration Statement, SEC File No. 333-
44423 filed October 1, 1999.

Item 26. Business and Other Connections of Investment Adviser

I. LM Institutional Advisors, Inc. ("LMIA") is the manager for all
Portfolios in LMIFA II. LMIA's business is summarized under the
caption "Manager, Advisers and Portfolio Managers" in the Prospectus
constituting Part A of this Registration Statement, which summary is
incorporated herein by reference. Other business, profession, vocation
or employment of a substantial nature in which each director or
officer of LMIA is or has been, at any time during the past two fiscal
years, engaged for his own account or in the capacity of director,
officer, employee, partner or trustee is as follows:

<TABLE>
<CAPTION>
Name Position with LMIA Business and Other Connections
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Andrew J. Bowden Vice President Vice President and Deputy
General Counsel, LMWW

Thomas J. Hirschmann President None

Marie K. Karpinski Vice President and Treasurer None

Jennifer W. Murphy Director Senior Vice President, COO,
CFO and Director, LMFM
Senior Vice President, COO,
CFO and Director, LMFA
COO, LMM
</TABLE>

<PAGE>

<TABLE>
<S> <C> <C>
Edward A. Taber, III Chairman and Director Director, LMFM
Director, LMFA
Sr. Exec. V.P./Head of Investment
Management, Legg Mason, Inc.
Director and Sr. Executive V.P., LMWW
Director, Batterymarch
Director, Bartlett
Director, Brandywine
Director, Gray, Seifert
Director, Howard Weil
Director, LMCM
Director, LMT
Director, WAML

Thomas C. Merchant Secretary None
</TABLE>

II. Legg Mason Funds Management, Inc. ("LMFM") is the investment adviser for
the LM Value Institutional Portfolio, LM Special Investment Institutional
Portfolio, LM Total Return Institutional Portfolio and LM Balanced
Institutional Portfolio. LMFM's business is summarized under the caption
"Manager, Advisers and Portfolio Managers" in the Prospectus constituting
Part A of this Registration Statement, which summary is incorporated herein
by reference. Other business, profession, vocation or employment of a
substantial nature in which each director or officer of LMFM is or has
been, at any time during the past two fiscal years, engaged for his own
account or in the capacity of director, officer, employee, partner or
trustee is as follows:

Business and
Name Position with LMFM Other Connections
------------------------------------------------------------------------------------------------
<S> <C> <C>
Nancy T. Dennin Senior Vice President Senior Vice President, LMFA

Robert G. Hagstrom, Jr. Senior Vice President Senior Vice President, LMFA

Raymond A. Mason Chairman and Director Chairman and Director, LMFA
Chairman, President, and CEO, Legg
Mason, Inc.
Chairman and CEO, LMWW
Director, Batterymarch
Director, Howard Weil
Director, Gray, Seifert
Director, Brandywine
Director, Berkshire
Director, Bartlett
Director, LMRE
Director, LMCM
Director, WAML
Director, Western Asset

William H. Miller III President, CEO, and President, CEO, and Director, LMFA
Director Director, LMIA
Director, LMCM
Managing Member, LMM

Jennifer W. Murphy Senior Vice President, COO, Senior Vice President, COO, CFO
CFO, and Director and Director, LMFA
COO, LMM
</TABLE>

<PAGE>

<TABLE>
<S> <C> <C>
David E. Nelson Senior Vice President Senior Vice President, LMFA

Lisa O'Dell Rapuano Vice President Senior Vice President, LMFA

Timothy C. Scheve Director Director, LMFA
Executive V.P., Legg Mason, Inc.
Director, Executive V.P. and
Treasurer, LMWW
Director, LMCM
Director, LMT
Director, WAML
Director, Western Asset

Edward A. Taber III Director Director, LMFA
Sr. Exec. V.P./Head of Investment
Management, Legg Mason, Inc.
Director and Sr. Executive
V.P., LMWW
Director and Chairman, LMIA
Director, Batterymarch
Director, Bartlett
Director, Brandywine
Director, Gray, Seifert
Director, Howard Weil
Director, LMCM
Director, LMT
Director, WAML
Director, Western Asset
</TABLE>

III. Batterymarch Financial Management, Inc. ("Batterymarch") is the adviser to
the Batterymarch U.S. MidCapitalization Equity Portfolio, Batterymarch U.S.
Small Capitalization Equity Portfolio, Batterymarch International Equity
Portfolio and Batterymarch Emerging Markets Portfolio. Batterymarch's business
is summarized under the caption "Manager, Advisers and Portfolio Managers" in
the Prospectus constituting Part A of this Registration Statement, which summary
is incorporated herein by reference. Other business, profession, vocation or
employment of a substantial nature in which each director or officer of
Batterymarch is or has been, at any time during the past two fiscal years,
engaged for his own account or in the capacity of director, officer, employee,
partner or trustee is as follows:

<TABLE>
<CAPTION>
Business and
Name Position with Batterymarch Other Connections
------------------------------------------------------------------------
<S> <C> <C>
Raymond A. Mason Director Chairman and Director, LMFM
Chairman and Director, LMFA
Chairman, President, and CEO, Legg
Mason, Inc.
Chairman and CEO, LMWW
Director, Howard Weil
Director, Gray, Seifert
Director, LMCM
Director, WAML
</TABLE>

<PAGE>

<TABLE>
<S> <C> <C>
Director, Western Asset

Edward A. Taber III Director Director, LMFM
Director, LMFA
Sr. Exec. V.P./Head of Investment
Management, Legg Mason, Inc.
Director and Sr. Executive
V.P., LMWW
Director and Chairman, LMIA
Director, Bartlett
Director, Brandywine
Director, Gray, Seifert
Director, Howard Weil
Director, LMCM
Director, LMT
Director, WAML
Director, Western Asset

Elisabeth N. Spector Director Director, Brandywine
Senior Vice President, Legg Mason, Inc.
Director, Gray, Seifert
Director, WAML
Director, Western Asset

Tania Zouikin Chairman, CEO and Director None

Francis X. Tracy President, CFO, Treasurer, Director, Brandywine
Secretary and Director

Philip E. Channen Assistant Secretary None

Margaret J. Coughlan Assistant Treasurer None
</TABLE>

Addresses for Item 26
---------------------
Bartlett & Co. ("Bartlett")
36 East Fourth Street
Cincinnati, OH 45202

Berkshire Asset Management, Inc. ("Berkshire")
46 Public Square, Suite 700
Wilkes-Barre, PA 18701

Brandywine Asset Management, Inc. ("Brandywine")
Three Christina Centre, Suite 1200
201 North Walnut Street
Wilmington, DE 19801

Gray, Seifert & Co., Inc. ("Gray, Seifert")
380 Madison Avenue
New York, NY 10017

Howard, Weil, Labouisse, Friedrichs, Inc. ("Howard Weil")
1100 Poydras Street

<PAGE>

New Orleans, LA 70163

Legg Mason Capital Management, Inc. ("LMCM")
100 Light Street
Baltimore, MD 21202

Legg Mason Fund Adviser, Inc. ("LMFA")
100 Light Street
Baltimore, MD 21202

Legg Mason, Inc.
100 Light Street
Baltimore, MD 21202

Legg Mason Real Estate Services, Inc. ("LMRE")
Mellon Bank Center, 12/th/ Floor
1735 Market Street
Philadelphia, PA 19103

Legg Mason Trust, fsb ("LMT")
100 Light Street
Baltimore, MD 21202

Legg Mason Wood Walker, Incorporated ("LMWW")
100 Light Street
Baltimore, MD 21202

LMM LLC ("LMM")
100 Light Street
Baltimore, MD 21202

Western Asset Management Company ("Western Asset")
117 East Colorado Boulevard
Pasadena, CA 91105

Western Asset Management Company Limited ("WAML")
155 Bishopsgate
London EC2M 3XG
England

Item 27. Principal Underwriters
---------------

The following lists each investment company for which LMWW acts as underwriter.

(a) Legg Mason Cash Reserve Trust
Legg Mason Income Trust, Inc.
Legg Mason Tax-Free Income Fund
Legg Mason Value Trust, Inc.
Legg Mason Total Return Trust, Inc.
Legg Mason Special Investment Trust, Inc.
Legg Mason Focus Trust, Inc.
Legg Mason Global Trust, Inc.
Legg Mason Investors Trust, Inc.

<PAGE>

Legg Mason Light Street Trust, Inc.
Legg Mason Investment Trust, Inc.
LM Institutional Fund Advisors I, Inc.
LM Institutional Fund Advisors II, Inc.

(b) The following table sets forth information concerning each director and
officer of the Registrant's principal underwriter, Legg Mason Wood Walker,
Incorporated ("LMWW").

<TABLE>
<CAPTION>
Name and Principal Business Position and Offices with Positions and Offices
Address* Underwriter - LMWW with Registrant
------------------------------------------------------------------------------------------
<S> <C> <C>
Raymond A. Mason Chairman of the Board and Director None

James W. Brinkley President, Chief Operating Officer None
and Director

Edmund J. Cashman, Jr. Senior Executive Vice President and Director
Director

Richard J. Himelfarb Senior Executive Vice President and None
Director

Edward A. Taber III Senior Executive Vice President Director

Robert G. Donovan Executive Vice President None

Robert A. Frank Executive Vice President None

Robert G. Sabelhaus Executive Vice President None

Timothy C. Scheve Executive Vice President and None
Treasurer and Director

Manoochehr Abbaei Senior Vice President None

Charles A. Bacigalupo Senior Vice President and Secretary None

F. Barry Bilson Senior Vice President None

D. Stuart Bowers Senior Vice President None

W. William Brab Senior Vice President None

Deepak Chowdhury Senior Vice President None

Thomas M. Daly, Jr. Senior Vice President None

Jeffrey W. Durkee Senior Vice President None

Harry M. Ford, Jr. Senior Vice President None

Dennis A. Green Senior Vice President None

Thomas E. Hill Senior Vice President None
218 N. Washington Street
</TABLE>

<PAGE>

Suite 31
Easton, MD 21601

Arnold S. Hoffman Senior Vice President None
1735 Market Street
Philadelphia, PA 19103

Carl Hohnbaum Senior Vice President None
2500 CNG Tower
625 Liberty Avenue
Pittsburgh, PA 15222

William B. Jones, Jr. Senior Vice President None
1747 Pennsylvania Avenue, N.W.
Washington, D.C. 20006

Laura L. Lange Senior Vice President None

Horace M. Lowman, Jr. Senior Vice President and Asst. None
Secretary

Marvin H. McIntyre Senior Vice President None
1747 Pennsylvania Avenue, N.W.
Washington, D.C. 20006

Thomas P. Mulroy Senior Vice President None

Jonathan M. Pearl Senior Vice President None

Mark I. Preston Senior Vice President None

Robert F. Price Senior Vice President and General None
Counsel

Thomas L. Souders Senior Vice President and Chief None
Financial Officer

Elisabeth N. Spector Senior Vice President None

Joseph A. Sullivan Senior Vice President None

Richard L. Baker Vice President None

William H. Bass, Jr. Vice President None

Nathan S. Betnun Vice President None

John C. Boblitz Vice President None

Andrew J. Bowden Vice President and Deputy General None
Counsel

Edwin J. Bradley, Jr. Vice President None

<PAGE>

Carol A. Brown Vice President None

Scott R. Cousino Vice President None

Thomas W. Cullen Vice President None

Charles J. Daley, Jr. Vice President and Controller None

Norman C. Frost, Jr. Vice President None

James E. Furletti Vice President None
Legg Mason Center
Suite 200
600 Washington Avenue
Towson, MD 21204-3712

John R. Gilner Vice President None

Daniel R. Greller Vice President None

Richard A. Jacobs Vice President None

C. Gregory Kallmyer Vice President None
56 West Main Street
Newark, DE 19702

Kurt A. Lalomia Vice President None

Edward W. Lister, Jr. Vice President None

Theresa McGuire Vice President None

Julia A. McNeal Vice President None

Gregory B. McShea Vice President None

Edward P. Meehan Vice President None
12021 Sunset Hills Road
Suite 100
Reston, VA 20190

Thomas C. Merchant Vice President and Assistant None
General Counsel

Paul Metzger Vice President None

Mark C. Micklem Vice President None
1747 Pennsylvania Ave., N.W.
Washington, DC 20006

John A. Moag, Jr. Vice President None

Hance V. Myers, III Vice President None
1100 Poydras St.

<PAGE>

New Orleans, LA 70163

Ann O'Shea Vice President None

Robert E. Patterson Vice President and Deputy General None
Counsel

Gerard F. Petrik, Jr. Vice President None

Douglas F. Pollard Vice President None

Judith L. Ritchie Vice President None

Thomas E. Robinson Vice President None

Theresa M. Romano Vice President None

James A. Rowan Vice President None
1747 Pennsylvania Avenue, N.W.
Washington, D.C. 20006

Douglas M. Schmidt Vice President None

B. Andrew Schmucker Vice President None
1735 Market Street
Philadelphia, PA 19103

Robert W. Schnakenberg Vice President None

Henry V. Sciortino Vice President None
1735 Market St.
Philadelphia, PA 19103

Chris A. Scitti Vice President None

Eugene B. Shephard Vice President None
1111 Bagby St.
Houston, TX 77002-2510

Lawrence D. Shubnell Vice President None

Jane Soybelman Vice President None

Alexsander M. Stewart Vice President None

L. Kay Strohecker Vice President None

Joseph E. Timmins III Vice President None

Joyce Ulrich Vice President None

William A. Verch Vice President None

Sheila M. Vidmar Vice President and Deputy General None

<PAGE>

Counsel

Lewis T. Yeager Vice President None

Carol Converso-Burton Assistant Vice President None

Diana L. Deems Assistant Vice President and None
Assistant Controller

Ronald N. McKenna Assistant Vice President None

Suzanne E. Peluso Assistant Vice President None

Lauri F. Smith Assistant Vice President None

Janet B. Straver Assistant Vice President None

Leslee Stahl Assistant Secretary None

*All addresses are 100 Light Street, Baltimore, Maryland 21202, unless otherwise
indicated.

(c) The Registrant has no principal underwriter which is not an affiliated
person of the Registrant or an affiliated person of such an affiliated person.

Item 28. Location of Accounts and Records
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105

Item 29. Management Services -- none

Item 30. Undertakings -- none
<PAGE>

SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant, LM Institutional Fund Advisors II, Inc.,
certifies that it meets all of the requirements for effectiveness of this
Registration Statement under rule 485(b) under the Securities Act and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Baltimore and State of
Maryland, on the 28th day of July, 2000.

LM INSTITUTIONAL FUND ADVISORS II, INC.
By: /s/ Marie K. Karpinski
-----------------------------
Marie K. Karpinski
Vice President

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.

Signature Title Date
/s/ Edward A. Taber, III President and July 28, 2000
-----------------------------
Edward A. Taber, III* Director

/s/ Catherine H. Bray Director July 28, 2000
-----------------------------
Catherine H. Bray*

/s/ Edmund J. Cashman, Jr. Director July 28, 2000
-----------------------------
Edmund J. Cashman, Jr.*

/s/ Emmett J. Rice Director July 28, 2000
-----------------------------
Emmett J. Rice*

/s/ Robert M. Tarola Director July 28, 2000
-----------------------------
Robert M. Tarola*

/s/ Linda R. Taylor Director July 28, 2000
-----------------------------
Linda R. Taylor*

/s/ Marie K. Karpinski Vice President July 28, 2000
-----------------------------
Marie K. Karpinski and Treasurer

*By: /s/ Marie K. Karpinski
------------------------
Marie K. Karpinski
Attorney-in Fact Pursuant to Powers of Attorney Filed previously and for
Herself
<PAGE>

Exhibit Index
-------------
Exhibit 23(a)(3) -- Articles of Amendment
Exhibit 23(a)(4) -- Articles Supplementary
Exhibit 23(d)(2) -- Investment Advisory Agreements
Exhibit 23(d)(2)(i) LM Value Institutional
Exhibit 23(d)(2)(ii) LM Special Investment Institutional
Exhibit 23(d)(2)(iii) LM Total Return Institutional
Exhibit 23(d)(2)(iv) Batterymarch Emerging Markets
Exhibit 23(d)(2)(v) Batterymarch International Equity
Exhibit 23(e)(2) -- Amendment to Underwriting Agreement
Exhibit 23(g)(2) -- Amendment to Custodian Agreement
Exhibit 23(h)(2) -- Amendment to Transfer Agent Agreement
Exhibit 23(j) -- Other opinions, appraisals, rulings and consents
Exhibit 23(n)(1) -- Multiple Class (Rule 18f-3) Plan
Exhibit 23(p) -- Code of Ethics
Exhibit 23(p)(1) -- The Fund, Manager, LMFM and LMWW
Exhibit 23(p)(2) -- Batterymarch