LEGG MASON INCOME TRUST INC, 485BPOS, 2000-04-26

LEGG MASON INCOME TRUST INC
485BPOS, 2000-04-26

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As filed with the Securities and Exchange Commission on April 26, 2000.

1933 Act File No. 33-12092
1940 Act File No. 811-5029

SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM N-lA
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No: [ ]
Post-Effective Amendment No: 31 [X]

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No: 30

LEGG MASON INCOME TRUST, 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

Copies to:

MARC R. DUFFY, ESQ. ARTHUR C. DELIBERT, ESQ.
Legg Mason Wood Walker, Incorporated Kirkpatrick & Lockhart LLP
100 Light Street 1800 Massachusetts Ave., N.W.
Baltimore, Maryland 21202 Second Floor
Name and Address of Agent for Service) Washington, D.C. 20036-1800

It is proposed that this filing will become effective:

[ ] immediately upon filing pursuant to Rule 485(b)
[X] on April 28, 2000 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[ ] on , pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] on , pursuant to Rule 485(a)(ii)

If appropriate, check the following box:

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

<PAGE>

Legg Mason Income Trust, Inc.

Contents of Registration Statement

This registration statement consists of the following papers and documents.

Cover Sheet

Table of Contents

Legg Mason U. S. Government Intermediate-Term Portfolio
Legg Mason Investment Grade Income Portfolio
Legg Mason High Yield Portfolio
Legg Mason U.S. Government Money Market Portfolio
Part A - Primary Class Shares Prospectus

Legg Mason U.S. Government Intermediate-Term Portfolio
Legg Mason Investment Grade Income Portfolio
Legg Mason High Yield Portfolio
Part A - Navigator Class Shares Prospectus

Part C - Other Information

Signature Page

Exhibits

<PAGE>

LEGG MASON
INCOME TRUST, INC.:
-------------------
LEGG MASON U.S. GOVERNMENT
INTERMEDIATE-TERM PORTFOLIO
LEGG MASON INVESTMENT GRADE INCOME
PORTFOLIO
LEGG MASON HIGH YIELD PORTFOLIO
LEGG MASON U.S. GOVERNMENT MONEY
MARKET PORTFOLIO

PRIMARY CLASS PROSPECTUS April 28, 2000

THE ART OF INVESTING(SM)

As with all mutual funds, the Securities and
Exchange Commission has not passed upon the
accuracy or adequacy of this prospectus, nor has
it approved or disapproved these securities. It is
a criminal offense to state otherwise.

<PAGE>

TABLE OF CONTENTS

About the funds:
- ---------------

xx Investment objectives and policies
xx Principal risks
xx Performance
xx Fees and expenses of the funds
xx Management

About your investment:
- ---------------------

xx How to invest
xx How to sell your shares
xx Account policies
xx Services for investors
xx Distributions and taxes
xx Financial highlights

<PAGE>

LEGG MASON INCOME TRUST, INC.
[GRAPHIC]
INVESTMENT OBJECTIVES AND POLICIES
----------------------------------

The Legg Mason Income Trust, Inc. offers four series: Legg Mason U.S. Government
Intermediate-Term Portfolio ("Government Intermediate"), Legg Mason Investment
Grade Income Portfolio ("Investment Grade"), Legg Mason High Yield Portfolio
("High Yield") and Legg Mason U.S. Government Money Market Portfolio
("Government Money Market").

Western Asset Management Company ("Western Asset" or "Adviser") is the funds'
investment adviser. Western Asset's approach in managing these four funds
revolves around an investment outlook developed by its Investment Strategy
Group, a team of senior professionals that meets at least twice a week to review
developments in the economy and the markets. Based on their consensus view of
the economic outlook for the following six months, this group arrives at a
recommended portfolio structure, including targets for duration, yield curve
exposure, and sector allocation. Western Asset's Portfolio Management Group
implements the strategy in a manner consistent with the investment policies of
each fund, using information on the relative credit strength, liquidity, issue
structure, event risk, covenant protection and market valuation of available
securities. Each fund is managed in accordance with the investment objective and
policies described below.

U. S. Government Intermediate-Term Portfolio

Investment objective: high current income consistent with prudent investment
risk and liquidity needs.

Principal investment strategies:

Under normal circumstances, the fund invests at least 75% of its total assets in
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, or repurchase agreements secured by such securities.
Investments in mortgage-related securities issued by governmental or
government-related entities are included in the 75% limitation.

The balance of the fund, up to 25% of its total assets, may be invested in
commercial paper and investment grade debt securities rated within one of the
four highest grades assigned by a nationally recognized statistical rating
organization ("NRSRO"), such as Standard & Poor's, Inc. ("S&P") or Moody's
Investors Service, Inc. ("Moody's"), or unrated securities judged by the Adviser
to be of comparable quality.

Although it can invest in securities of any maturity, the fund normally expects
to maintain a dollar-weighted average maturity of between three and ten years.

For temporary defensive purposes or pending investment, the fund may invest
without limit in cash and U.S. dollar denominated money market instruments,
including repurchase agreements, having shorter than usual maturities. If the
fund invests substantially in such instruments, the fund may not be pursuing its
principal investment strategies and the fund may not achieve its investment
objective.

<PAGE>

Investment Grade Income Portfolio

Investment objective: high level of current income through investment in a
diversified portfolio of debt securities.

Principal investment strategies:

The fund invests primarily in fixed-income securities that the Adviser considers
to be investment grade. Although the fund can invest in securities of any
maturity, it normally expects to maintain a dollar-weighted average maturity of
between five and twenty years.

The fund invests, under normal circumstances, at least 75% of its total assets
in the following types of investment grade fixed-income securities:

o debt securities that are rated at the time of purchase within the four
highest grades assigned by a NRSRO, or judged by the Adviser to be of
comparable quality;

o securities of, or guaranteed by, the U.S. Government, it agencies or
instrumentalities;

o commercial paper and other money market instruments that are rated A-1 or
A-2 by S&P or Prime-1 or Prime-2 by Moody's at the date of investment, or
if unrated by Moody's or S&P, judged by the Adviser to have investment
quality comparable to securities that may be purchased under the first
item above; bank certificates of deposit; and bankers' acceptances; and

o preferred stocks (including step down preferred securities) rated no lower
than Baa by Moody's or, if unrated by Moody's, judged by the Adviser to be
of comparable quality.

The remainder of the fund's assets, not in excess of 25% of its total assets,
may be invested in:

o debt securities of issuers that are rated at the time of purchase below
Moody's and S&P's four highest grades, but rated B or better by Moody's or
S&P, or if unrated by Moody's or S&P, judged by the Adviser to be of
comparable quality; and

o securities that may be convertible into or exchangeable for, or carry
warrants to purchase, common stock or other equity interests.

Securities purchased by the fund may be privately placed. For temporary
defensive purposes or pending investment, the fund may invest without limit in
cash or U. S. dollar denominated money market instruments, having shorter than
usual maturities. If the fund invests substantially in such instruments, the
fund may not be pursuing its principal investment strategies and the fund may
not achieve its investment objective.

<PAGE>

High Yield Portfolio

Investment objectives: high current income and, secondarily, capital
appreciation.

Principal investment strategies:

The Adviser, under normal circumstances, invests at least 65% of the fund's
total assets in high yield, fixed-income securities, including those commonly
known as "junk bonds." Such securities include, but are not limited to: foreign
and domestic debt securities of corporations and other issuers, preferred
stocks, convertible securities, zero coupon securities, deferred interest
securities, mortgage-backed securities, asset-backed securities, commercial
paper and obligations issued or guaranteed by foreign governments or any of
their respective political subdivisions, agencies or instrumentalities,
including repurchase agreements secured by such instruments. Most fixed-income
securities in which the fund invests are rated BBB or lower by S&P or Baa or
lower by Moody's, or are unrated but deemed by the Adviser to be of equivalent
quality.

The fund's remaining assets may be held in cash or money market instruments, or
invested in common stocks and other equity securities when these types of
investments are consistent with the objectives of the fund or are acquired as
part of a unit consisting of a combination of fixed-income securities and equity
investments. The remaining assets may also be invested in fixed-income
securities rated above BBB by S&P or Baa by Moody's, securities comparably rated
by another NRSRO, or deemed by the Adviser to be of equivalent quality.

The fund may invest up to 25% of its total assets in private placements and
securities which, though not registered at the time of their initial sale, are
issued with registration rights. This limitation does not apply to securities
purchased pursuant to Rule 144A.

The fund may invest up to 25% of its total assets in securities denominated in
foreign currencies, including securities of issuers based in emerging markets.

For temporary defensive purposes or pending investment, the fund may invest
without limit in cash or U.S. dollar denominated money market instruments,
having shorter than normal maturities. If the fund invests substantially in such
instruments, the fund may not be pursuing its principal investment strategies
and the fund may not achieve its investment objective.

<PAGE>

U. S. Government Money Market Portfolio

Investment objective: high current income consistent with liquidity and
conservation of principal.

Principal investment strategies:

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

o it invests only in U.S. Government obligations, repurchase agreements
secured by such instruments, and securities issued or guaranteed by
multi-national development banks of which the U.S. is a member, such as
the World Bank.

o it invests at least 65% of its total assets in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
in repurchase agreements secured by such securities.

o it buys money market securities maturing in 397 days or less. (It can also
buy certain variable and floating rate securities the Adviser believes
will act as though they have maturities of 397 days or less.)

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

o it buys only high-quality money market securities that the Adviser
determines to present minimal credit risk.

<PAGE>

[GRAPHIC] PRINCIPAL RISKS
---------------

In general:

There is no guarantee that any fund will achieve its objective. As with all
mutual funds, an investment in any of these funds is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
Although Government Money Market seeks to maintain a net asset value of $1.00
per share, there can be no assurance that the fund will always be able to do so;
investors can lose money by investing in the funds.

Debt securities:

Debt securities are subject to interest rate risk, which is the possibility that
the market prices of the fund's 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 change.

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 provide for interest payments that vary inversely with market rates.
The market prices of these securities may fluctuate significantly when interest
rates change.

Debt securities are 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 the fund invests. However, ratings are only the opinions of the
organizations issuing them and are not absolute guarantees as to quality.

Moody's considers debt securities rated Baa to have speculative characteristics.
Debt securities rated below Baa/BBB are deemed by the ratings agencies to be
speculative and may involve major risk of exposure to adverse conditions. High
Yield may invest in securities rated as low as C by Moody's or D by S&P. These
ratings indicate that the securities are highly speculative and may be in
default or in danger of default as to principal and interest. Therefore, High
Yield is subject to credit risk to a greater extent than the other funds.

Not all government securities are backed by the full faith and credit of the
United States. Some are backed only by the credit of the issuing agency or
instrumentality. Accordingly, there is at least a chance 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, the fund 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 are subject to greater fluctuations in value and
risk of loss of income and principal due to default by the issuer, than are
higher rated securities. These securities may be less liquid than higher-rated
securities, which means the fund may have difficulty selling them at times, and
may have to apply a greater degree of judgment in establishing a price. These
securities constitute the primary focus of High Yield. Investment Grade can
invest in these securities to a limited extent.

Special risks of mortgage-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. The effect on a
fund'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 refinancing slows, which
lengthens the effective maturities of these securities. As a result, the
negative effect of the rate increase on the market value of mortgage securities
is usually more pronounced than it is for other types of fixed-income
securities.

<PAGE>

Other risks:

The use of certain derivatives to hedge interest rate or other risks could
affect fund performance if the derivatives do not perform as expected.

The values of foreign securities are subject to economic and political
developments in the countries and regions where the companies operate, such as
changes in economic or monetary policies, and to changes in exchange rates. In
general, less information is publicly available about foreign companies than
about U.S. companies. Some foreign governments have defaulted on principal and
interest payments.

The investment strategies employed by the funds (except Government Money Market)
often involve high turnover rates. This results in higher trading costs and
could cause higher levels of realized capital gains.

<PAGE>

[GRAPHIC] PERFORMANCE
-----------

The information below provides an indication of the risks of investing in a fund
by showing changes in each fund's performance from year to year. Annual returns
assume reinvestment of dividends and distributions, if any. Historical
performance of a fund does not necessarily indicate what will happen in the
future. A fund's yield is its net income over a recent 30-day (or 7-day with
respect to a money market fund) period, expressed as an annualized rate of
return. For a fund's current yield, call toll-free 1-800-822-5544.

Government Intermediate -- Primary Class shares

YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%):

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----

9.10 14.40 6.26 6.64 -1.93 13.88 4.47 6.95 6.56 -0.48

DURING THE PAST TEN CALENDAR YEARS:

Quarter Ended Total Return
------------- ------------

Best quarter: June 30, 1995 4.76%
Worst quarter: March 31, 1994 -1.45%

In the following table, average annual total returns for the years ended
December 31, 1999, are compared with the Lehman Intermediate
Government/Corporate Index and Salomon Brothers Medium-Term
Treasury/Government-Sponsored Index.

1 Year 5 Years 10 Years
------ ------- --------

Government Intermediate -0.48% 6.18% 6.46%

Lehman Intermediate
Government/Corporate Index -2.15% 7.61% 7.65%

Salomon Brothers Medium-Term
Treasury/Government-Sponsored
Index 0.49% 6.95% 7.13%

The fund changed its comparative index from the Salomon Brothers Medium-Term
Treasury/Government-Sponsored Index to the Lehman Intermediate
Government/Corporate Index. While the duration of the two indices is similar,
the Lehman Intermediate Government/Corporate Index has broader sector exposure,
which is more representative of the fund's diversified holdings.

<PAGE>

Investment Grade -- Primary Class shares

YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%):

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----

5.80 16.00 6.77 11.22 -4.82 20.14 4.31 10.31 6.99 -0.91

DURING THE PAST TEN CALENDAR YEARS:

Quarter Ended Total Return
------------- ------------

Best quarter: June 30, 1995 6.25%
Worst quarter: March 31, 1994 -2.91%

In the following table, average annual total returns for the years ended
December 31, 1999, are compared with the Lehman Aggregate Index and the Salomon
Brothers Broad Investment-Grade Bond Index.

1 Year 5 Years 10 Years
------ ------- --------

Investment Grade -0.91% 7.94% 7.35%

Lehman Aggregate Index -0.82% 7.73% 7.70%

Salomon Brothers Broad
Investment-Grade Bond Index -0.83% 7.74% 7.75%

The fund changed its comparative index from the Salomon Brothers Broad
Investment-Grade Bond Index to the Lehman Aggregate Index. While these two
indices, the most commonly used for diversified core portfolios, have similar
duration and sector profiles, the use of the Lehman Aggregate Index as the
fund's comparative index is consistent with the indices used by other funds in
this prospectus.

<PAGE>

High Yield -- Primary Class shares

YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%):

1995 1996 1997 1998 1999
---- ---- ---- ---- ----

18.01 14.91 15.86 -1.79 8.82

DURING THE PAST FIVE CALENDAR YEARS:

Quarter Ended Total Return
------------- ------------

Best quarter: March 31, 1999 11.34%
Worst quarter: September 30, 1998 -9.52%

In the following table, average annual total returns for the years ended
December 31, 1999, are compared with the Lehman High Yield Index.

1 Year 5 Years Life of Class
------ ------- -------------

High Yield 8.82% 10.92% 8.62%(a)
Lehman High Yield Index 2.51% 9.31% 7.38%(b)

(a) February 1, 1994 (commencement of operations) to December 31, 1999.

(b) For the period February 28, 1994 to December 31, 1999.

<PAGE>

Government Money Market

YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%):

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
7.56 5.87 3.49 2.80 3.66 5.31 4.81 4.86 4.83 4.44

DURING THE PAST TEN CALENDAR YEARS:

Quarter Ended Total Return
------------- ------------

Best quarter: June 30, 1990 1.86%
Worst quarter: September 30, 1993 0.68%

AVERAGE ANNUAL TOTAL RETURNS FOR THE YEARS ENDED DECEMBER 31, 1999:

1 Year 5 Years 10 Years Life of Fund(a)
------ ------- -------- ---------------

Government Money Market 4.44% 4.85% 4.75% 5.08%

(a) January 31, 1989 (commencement of operations) to December 31, 1999.

<PAGE>

[GRAPHIC] FEES AND EXPENSES OF THE FUNDS
------------------------------

The table below describes the fees and expenses you will incur directly or
indirectly as an investor in a fund. Each fund pays operating expenses directly
out of its assets so they lower that fund's share price and dividends. Other
expenses include transfer agency, custody, professional and registration fees.
The funds have no sales charge but are subject to a 12b-1 fee. The funds charge
no redemption fees.

Annual Fund Operating Expenses
(expenses that are deducted from fund assets)
-------------------------------------------
Government
Government Investment High Money
Intermediate Grade Yield Market

Management fees 0.55%(a) 0.60%(a) 0.65% 0.50%

Distribution and/or
Service (12b-1) fees 0.50% 0.50% 0.50% 0.20%(b)

Other expenses 0.14% 0.21% 0.16% 0.13%
- -------------- ----- ------ ----- -----

Total Annual Fund
Operating Expenses 1.19%(a) 1.31%(a) 1.31% 0.83%(b)

(a) Legg Mason Fund Adviser, Inc., as manager, has voluntarily agreed to waive
fees so that Primary Class share expenses (exclusive of taxes, interest,
brokerage and extraordinary expenses) do not exceed an annual rate of 1.00%
of average daily net assets attributable to Primary Class shares during any
month for Government Intermediate or until its net assets reach $500
million, and for Investment Grade, or until its net assets reach $250
million. These voluntary waivers will continue through April 30, 2001, but
can be terminated at any time. With these waivers, management fees and total
annual fund operating expenses for the fiscal year ended December 31, 1999,
were 0.36% and 1.00%, for Government Intermediate and 0.29% and 1.00%, for
Investment Grade.

(b) Legg Mason has agreed to waive 0.10% of the 12b-1service fee indefinitely,
reducing total expenses from 0.83% to 0.73%.

<PAGE>

Example:

This example helps you compare the cost of investing in a fund with the cost of
investing in other mutual funds. Although your actual costs may be higher or
lower, you would pay the following expenses on a $10,000 investment in a fund,
assuming (1) a 5% return each year, (2) the fund's operating expenses remain the
same as shown in the table above, and (3) you redeem all of your shares at the
end of the time periods shown.

1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------

Government
Intermediate $121 $378 $654 $1,443

Investment Grade $133 $415 $718 $1,579

High Yield $133 $415 $718 $1,579

Government
Money Market $85 $265 $460 $1,025

Under the fee waiver arrangements described above, your costs for the one,
three, five and ten year periods would be: $102, $318, $552 and $1,225 for
Government Intermediate; $102, $318, $552 and $1,225 for Investment Grade; and
$75, $233, $406 and $906 for Government Money Market.

<PAGE>

[GRAPHIC] MANAGEMENT
----------

Management and Adviser:

Legg Mason Fund Adviser, Inc. ("LMFA"), 100 Light Street, Baltimore, Maryland
21202, is the funds' manager. LMFA is responsible for the non-investment affairs
of the funds, providing office space and administrative staff for the funds and
directing all matters related to the operation of the funds. LMFA acts as
adviser or manager to investment companies with aggregate assets under
management of approximately $18.2 billion as of December 31, 1999.

For it services, each fund paid the manager the following percentage of its
average daily net assets for the fiscal year ended December 31, 1999:

Government Intermediate 0.36%
Investment Grade 0.29%
High Yield 0.65%
Government Money Market 0.50%

Western Asset Management Company, 117 East Colorado Boulevard, Pasadena,
California 91105, is the funds' investment adviser. The Adviser is responsible
for the actual investment management of the funds, which includes making
investment decisions and placing orders to buy, sell or hold a particular
security. The Adviser acts as investment adviser to investment companies and
private accounts with aggregate assets of approximately $52.2 billion as of
December 31, 1999. An investment committee has been responsible for the
day-to-day management of each fund since its inception.

For its services during the fiscal year ended December 31, 1999, LMFA paid the
Adviser a fee, which is calculated daily and payable monthly, at annual rates of
each fund's average daily net assets as follows:

Government 0.20%, not to exceed the fee paid to LMFA
Intermediate (after any fee waivers)
------------ -----------------------

Investment Grade 0.24%, or 40% of the fee received by LMFA
---------------- -----------------------------------------

High Yield 0.50%, or 77% of the fee received by LMFA
---------- -----------------------------------------

Government
Money Market 0.15%, or 30% of the fee received by LMFA
------------ -----------------------------------------

<PAGE>

Distributor of the funds' shares:

Legg Mason Wood Walker, Incorporated ("Legg Mason"), 100 Light Street,
Baltimore, Maryland 21202, is the distributor of each fund's shares. Each fund
has adopted a plan under Rule 12b-1 that allows it to pay distribution fees
and/or shareholder service fees for the sale of its shares and for services
provided to shareholders.

Under each plan, Government Intermediate, Investment Grade and High Yield each
may pay Legg Mason an annual distribution fee equal to 0.25% of the fund's
average daily net assets and an annual service fee, equal to 0.25% of the fund's
average daily net assets attributable to Primary Class shares. Government Money
Market may pay Legg Mason an annual fee equal to 0.20% of its average daily net
assets. However, for Government Money Market, Legg Mason has agreed to waive
0.10% of the 12b-1 service fee indefinitely.

Because these fees are paid out of the funds' 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.

Legg Mason may enter into agreements with other brokers to sell Primary Class
shares of each fund. Legg Mason pays these brokers up to 90% of the distribution
and/or shareholder service fee that it receives from a fund for those sales.

Each class of shares may bear certain differing class specific expenses.
Salespersons and others entitled to receive compensation for selling or
servicing fund shares may receive more with respect to one class than another.

LMFA, the Adviser and Legg Mason are wholly owned subsidiaries of Legg Mason,
Inc., a financial services holding company.

<PAGE>

[icon] H O W T O I N V E S T

To open a regular account or a retirement account, contact a Legg Mason
Financial Advisor, Legg Mason Funds Investor Services ("FIS"), or another entity
that has entered into an agreement with Legg Mason to sell shares of the fund.
The minimum initial investment is $1,000 and the minimum for each purchase of
additional shares is $100.

Retirement accounts include traditional IRAs, spousal IRAs, Education IRAs, Roth
IRAs, simplified employee pension plans, savings incentive match plans for
employees and other qualified retirement plans. The investment amount for an
Education IRA is $500. Contact your financial adviser, FIS, or other entity
offering the funds to discuss which one might be appropriate for you.

Certain investment methods (for example, through certain retirement plans) may
be subject to lower minimum initial and additional investments. Arrangements may
also be made with some employers and financial institutions for regular
automatic monthly investments of $50 or more in shares of the fund. Contact your
financial adviser or FIS with any questions regarding your investment options.

Once your account is open, you may use the following methods to purchase shares
of the funds:

- --------------------------------------------------------------------------------
In Person Give your financial adviser a check for $100 or more
payable to the fund.
- --------------------------------------------------------------------------------
Mail Mail your check, payable to the fund, for $100 or more
to your financial adviser or to Legg Mason Funds
Investor Services at P.O. Box 17023, Baltimore, MD
21297-0356.
- --------------------------------------------------------------------------------
Telephone or Wire Call your financial adviser or FIS at 1-800-822-5544
to transfer available cash balances in your brokerage
account or to transfer money from your bank directly.
Wire transfers may be subject to a service charge by
your bank.
- --------------------------------------------------------------------------------
Internet or TeleFund FIS clients may purchase shares of the fund through
Legg Mason's Internet site at
http://www.leggmasonfunds.com or through a telephone
account management service "TeleFund" at
1-877-6-LMFUNDS.
- --------------------------------------------------------------------------------
Automatic Investments Arrangements may be made with some employers and
financial institutions for regular automatic monthly
investments of $50 or more in shares of the fund. You
may also reinvest dividends from certain unit
investment trusts in shares of the fund.
- --------------------------------------------------------------------------------
Future First Systematic Contact a Legg Mason Financial Advisor to enroll in
Investment Plan Legg Mason's Future First Systematic Investment Plan.
Under this plan, you may arrange for automatic monthly
investments in a fund of $50 or more. The transfer
agent will transfer funds monthly from your Legg Mason
account or from your checking/savings account to
purchase shares of the desired fund.
- --------------------------------------------------------------------------------

Investments made through entities other than Legg Mason may be subject to
transaction fees or other purchase conditions established by those entities. You
should consult their program literature for further information.

Navigator Class shares, which are not subject to a Rule 12b-1 fee, are offered
through a separate prospectus only to certain investors.

<PAGE>

For Government Intermediate, Investment Grade and High Yield:

Purchase orders received by your financial adviser, FIS or other authorized
entity before the close of the New York Stock Exchange ("Exchange") (normally
4:00 p.m., Eastern time), will be processed at the fund's net asset value as of
the close of the Exchange on that day. Orders received after the close of the
Exchange will be processed at the fund's net asset value as of the close of the
Exchange on the next day the Exchange is open. Payment must be made within three
business days to Legg Mason.

You will begin to earn dividends as of settlement date, which is normally the
third business day after your order is placed with a financial adviser.

For Government Money Market:

Purchase orders received in federal funds form, by either your Legg Mason
Financial Adviser, FIS or other authorized entity, on any day that the Exchange
is open will be processed as follows:

Shares will be purchased
If the purchase order at the net asset value Such shares will begin
is received determined on the to earn dividends on the
- --------------------- ------------------------ ------------------------

before 12:00 noon, same day same day
Eastern time

12:00 noon or after, same day next day
but before 4:00 p.m.,
Eastern time

4:00 p.m. or after,
Eastern time next day next day

If you do not make payment in federal funds, your order will be processed when
payment is converted into federal funds, which is usually completed in two days,
but may take up to ten days. Most bank wires are federal funds.

<PAGE>

[icon] H O W T O S E L L Y O U R S H A R E S

You may use any of the following methods to sell shares of the funds:

- --------------------------------------------------------------------------------
Telephone Call your financial adviser or FIS at 1-800-822-5544 or entity
offering a fund to request a redemption. Please have the
following information ready when you call: the name of the fund,
the number of shares (or dollar amount) to be redeemed and your
shareholder account number.

Proceeds will be credited to your brokerage account or a check
will be sent to you, at your direction, at no charge to you. Wire
requests will be subject to a fee of $12. Be sure that your
financial adviser has your bank account information on file.
- --------------------------------------------------------------------------------
Internet or FIS clients may request a redemption of fund shares through Legg
TeleFund Mason's Internet site at TeleFund http://www.leggmasonfunds.com
or through TeleFund at 1-877-6-LMFUNDS.
- --------------------------------------------------------------------------------
Mail Send a letter to the fund requesting redemption of your shares.
The letter should be signed by all of the owners of the account
and, for Government Intermediate, Investment Grade and High
Yield, their signatures guaranteed without qualification. For
Government Money Market, redemption requests for shares valued at
$10,000 or more or when the proceeds are to be paid to someone
other than the accountholder will require a signature guarantee.
You may obtain a signature guarantee from most banks or
securities dealers.
- --------------------------------------------------------------------------------
Checkwriting The fund offers free checkwriting service. You may write checks
(Governmment to anyone in amounts of $500 or more. The fund's transfer agent
Money Market will redeem sufficient shares from your account to pay the
only) checks. You will continue to earn dividends on your shares until
the check clears at the transfer agent. Please do not use your
checks to close your account.
- --------------------------------------------------------------------------------
Payment for Legg Mason has special redemption procedures for investors who
Securities wish to purchase stocks, bonds or other securities at Legg Mason.
Purchases at Once you've placed an order for securities, and have not
Legg Mason indicated any other payment method, fund shares will be redeemed
(Government on the settlement date for the amount due. Fund shares may also
Money Market be redeemed to cover debit balances in your brokerage account.
only)
- --------------------------------------------------------------------------------

The funds will follow reasonable procedures to ensure the validity of any
telephone or internet redemption request, such as requesting identifying
information from users or employing identification numbers. Unless you specify
that you do not wish to have telephone redemption privileges, you may be held
responsible for any fraudulent telephone order.

Fund shares will be sold at the next net asset value calculated after your
redemption request is received by your financial adviser, FIS, or other entity
offering the fund.

Redemption orders will be processed promptly. You will generally receive the
proceeds within a week. Normally, proceeds from redemption orders from
Government Money Market received before 11:00 a.m. Eastern time will be sent
that same day. Payment of the proceeds of redemptions of shares that were
recently purchased by check or acquired through reinvestment of distributions on
such shares may be delayed for up to 10 days from the purchase date in order to
allow for the check to clear.

Additional documentation may be required from corporations, executors,
partnerships, administrators, trustees or custodians.

<PAGE>

Redemptions made through entities other than Legg Mason may be subject to
transaction fees or other conditions established by those entities. You should
consult their program literature for further information.

Each fund has reserved the right under certain conditions to redeem its shares
in kind by distributing portfolio securities in payment for redemptions.

<PAGE>

[GRAPHIC] ACCOUNT POLICIES
----------------

Calculation of Net Asset Value:

For Government Intermediate, Investment Grade and High Yield:

Net asset value per Primary Class share is determined daily, as of the close of
the New York Stock Exchange, on every day the Exchange is open. The Exchange is
closed on all national holidays and Good Friday. To calculate each fund's
Primary Class share price, the fund's assets are valued and totaled, liabilities
are subtracted, and the resulting net assets are divided by the number of
Primary Class shares outstanding. Each fund's securities are valued on the basis
of market quotations or, lacking such quotations, at fair value as determined
under policies approved by the Board of Directors. Securities with remaining
maturities of 60 days or less are usually valued at amortized cost.

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

To the extent that a fund has portfolio securities that are primarily listed on
foreign exchanges that trade on days when the fund does not price its shares,
the net asset value of the fund may change on days when shareholders will not be
able to purchase or redeem the fund's shares.

For Government Money Market:

To calculate the fund's share price, the fund's assets are valued and totaled,
liabilities are subtracted, and the resulting net assets are divided by the
number of shares outstanding. The fund seeks to maintain a share price of $1.00
per share. The fund is priced twice a day, as of 12:00 noon, Eastern time, and
at the close of the Exchange (normally 4:00 p.m., Eastern time), on every day
the Exchange is open. Like most other money market funds, the fund normally
values its investments using the amortized cost method.

For each fund:

Fund shares may not be held in, or transferred to, an account with any firm that
does not have an agreement with Legg Mason or its affiliates.

If your account in a fund falls below $500, the fund may ask you to increase
your balance. If, after 60 days, your account is still below $500, the fund may
close your account and send you the proceeds. A fund will not redeem accounts
that fall below $500 solely as a result of a reduction in net asset value per
share.

Each fund reserves the right to:

- - Reject any order for shares or suspend the offering of shares for a period of
time.

- - Change its minimum investment amounts.

- - Delay sending out redemption proceeds for up to seven days. This generally
applies only in cases of very large redemptions or excessive trading or
during unusual market conditions. Each fund may delay redemptions beyond
seven days, or suspend redemptions, only as permitted by the SEC.

<PAGE>

[GRAPHIC] SERVICES FOR INVESTORS
----------------------

For further information regarding any of the services below, please contact your
financial adviser or other entity offering the funds for sale.

Confirmations and Account Statements:

Confirmations will be sent to you after each transaction involving Primary Class
shares of Government Intermediate, Investment Grade and High Yield (except a
reinvestment of dividends or capital gain distributions and purchases made
through the Future First Systematic Investment Plan or through automatic
investments).

Legg Mason or the entity through which you invest will send you account
statements monthly unless there has been no activity in the account. Legg Mason
will send you statements quarterly if there has been no activity in your
account, if you participate in the Future First Systematic Investment Plan, or
if you purchase shares through automatic investments.

Systematic Withdrawal Plan:

If you are purchasing or already own shares of a fund with a net asset value of
$5,000 or more, you may elect to make systematic withdrawals from the fund. The
minimum amount for each withdrawal is $50. You should not purchase shares of the
fund when you are participating in the Plan.

Exchange Privilege:

Primary Class shares of the funds may be exchanged for Primary Class shares of
any of the other Legg Mason funds, provided these funds are eligible for sale in
your state of residence. You can request an exchange in writing or by phone. Be
sure to read the current prospectus for any fund into which you are exchanging.

There is currently no fee for exchanges; however, you may be subject to a sales
charge when exchanging into a fund that has one. In addition, an exchange of a
fund's shares will be treated as a sale of the shares and any gain on the
transaction may be subject to tax.

Each fund reserves the right to:

- - terminate or limit the exchange privilege of any shareholder who makes more
than four exchanges from the fund in one calendar year.

- - terminate or modify the exchange privilege after 60 days' notice to
shareholders.

Premier Account Status (Government Money Market only):

Legg Mason offers a Premier Asset Management Account, which allows you to
combine your fund account with a preferred customer VISA Gold debit card, a Legg
Mason brokerage account with margin borrowing availability and unlimited
checkwriting with no minimum check amount. Other services include the ability to
automatically transfer free credit balances in your brokerage account to your
fund account and the automatic redemption of fund shares to offset debit
balances in your brokerage account. Legg Mason charges an annual fee for the
Premier Account, which is currently $85 for individuals and $100 for
corporations and businesses.

<PAGE>

[GRAPHIC] DISTRIBUTIONS AND TAXES
-----------------------

Government Intermediate, Investment Grade and Government Money Market declare
any dividends from their net investment income daily and pay them monthly. High
Yield declares and pays any such dividends monthly.

Government Intermediate, Investment Grade and High Yield declare and pay
dividends from net short-term capital gain and distributions of substantially
all net capital gain (the excess of any net long-term capital gain over net
short-term capital loss) and, in the case of High Yield, net realized gains from
foreign currency transactions after the end of the taxable year in which the
gain is realized. A second distribution of net capital gain may be necessary in
some years to avoid imposition of a federal excise tax.

Government Money Market does not expect to realize any capital gain or loss;
however, if the fund realizes any capital gains, it will pay them at least once
every twelve months.

Your dividends and distributions will be automatically reinvested in additional
Primary Class shares of the distributing fund unless you elect to receive your
dividends and/or distributions in cash. To change your election, you must notify
the fund at least 10 days before the next dividend and/or distribution is to be
paid. You may also request that your dividends and distributions be reinvested
in shares of another eligible Legg Mason fund.

If the postal or other delivery service is unable to deliver your distribution
check, your distribution option will automatically be converted to having all
dividends and distributions reinvested in fund shares. No interest will accrue
on amounts represented by uncashed distribution or redemption checks.

Fund dividends and distributions are taxable to most investors (other than
retirement plans and other tax-exempt investors) whether received in cash or
reinvested in additional Primary Class shares of the fund. Dividends from
investment company taxable income (which includes net investment income and net
short-term capital gains) are taxable as ordinary income. Distributions of a
fund's net capital gain, if any, will be taxable as long-term capital gain,
regardless of how long you have held your fund shares.

The sale or exchange of fund shares may result in a taxable gain or loss,
depending on whether the proceeds are more or less than the cost of your shares.

Each fund's dividend and interest income and gains realized from disposition of
foreign securities may be subject to income, withholding or other taxes imposed
by foreign countries and U.S. possessions.

A tax statement is sent to each investor at the end of each year detailing the
tax status of your distributions.

Each fund will withhold 31% of all dividends, capital gains distributions and
redemption proceeds payable to individuals and certain other non-corporate
shareholders who do not provide the fund with a valid taxpayer identification
number. Government Intermediate, Investment Grade and High Yield will also
withhold 31% of all dividends and capital gain distributions payable to
shareholders who are otherwise subject to backup withholding.

Because each investor's tax situation is different, please consult your tax
adviser about federal, state and local tax considerations.

<PAGE>

[GRAPHIC] FINANCIAL HIGHLIGHTS
--------------------

The financial highlights table is intended to help you understand each fund's
financial performance for the past 5 years. Total return represents the rate
that an investor would have earned (or lost) on an investment in a fund,
assuming reinvestment of all dividends and distributions. This information has
been audited by the funds' independent accountants, PricewaterhouseCoopers LLP,
whose report, along with the funds' financial statements, is incorporated by
reference into the Statement of Additional Information (see back cover) and is
included in the annual report. The annual report is available upon request by
calling toll-free 1-800-822-5544.

Investment Operations Distributions
--------------------- -------------

Net Realized
and Unrealized Net
Net Asset Net Gain (Loss) on In Excess From Net Asset
Years Value, Investment Investments, Total From From Net of Net Realized Value,
Ended Beginning Income Options Investment Investment Investment Gain on Total End of
Dec. 31, of Year (Loss) and Futures Operations Income Income Investments Distributions Year

U.S. Government Intermediate-Term Portfolio

1999 10.51 $.54A $ (.59) (0.05) $(.54) $--- $--- $(.54) $9.92
1998 10.40 .56A .11 .67 (.55) (0.01) --- (.56) 10.51
1997 10.31 .60A .09 .69 (.59) (0.01) --- (0.60) 10.40
1996 10.47 .61A (0.16) .45 (.60) (0.01) --- (.61) 10.31
1995 9.72 .57A 0.75 1.32 (0.57) --- --- (0.57) 10.47

Investment Grade Income Portfolio

1999 10.52 $ .61B $ (.71) (0.10) $ (.61) $--- ($0.03) $(.64) $9.78
1998 10.59 .60B 0.12 0.72 (0.60) --- (0.19) (.79) 10.52
1997 10.22 .65B .37 1.02 (.65) --- --- (.65) 10.59
1996 10.44 .64B (.22) .42 (.64) --- --- (.64) 10.22
1995 9.27 .65B 1.17 1.82 (0.65) --- --- (0.65) 10.44

High Yield Portfolio

1999 14.72 1.01 $ .29 1.30 ($1.05) $--- $-- (1.05) 14.97
1998 16.29 1.32 (1.56) (.24) (1.32) --- (0.01) (1.33) 14.72
1997 15.37 1.35 .99 2.34 (1.34) --- (0.08) (1.42) 16.29
1996 14.62 1.33 .76 2.09 (1.34) --- --- (1.34) 15.37
1995 13.57 1.29 1.05 2.34 (1.29) --- --- (1.29) 14.62

U.S. Government Money Market Portfolio

1999 $1.00 $ .04 $ Nil 0.04 $(.04) $--- $--- $(.04) $1.00
1998 1.00 0.05 (Nil) 0.05 (0.05) --- --- (0.05) 1.00
1997 1.00 .05 Nil .05 (.05) --- --- (.05) 1.00
1996 1.00 .05 Nil .05 (.05) --- --- (.05) 1.00
1995 1.00 0.05 Nil 0.05 (0.05) --- --- (0.05) 1.00

</TABLE>

A Net of fees waived by LMFA for expenses in excess of voluntary expense
limitations of: 0.9% until April 30, 1995; 0.95% until April 30, 1996; and
1.00% until May 1, 2000. If no fees had been waived by LMFA, the annualized
ratio of expenses to average daily net assets for each period would have
been as follows: 1999, 1.19%; 1998, 1.20%; 1997, 1.21%; 1996, 1.26%; and
1995, 1.24%.

B Net of fees waived by LMFA for expenses in excess of voluntary expense
limitations of: 0.85% until April 30, 1995; 0.9% until April 30, 1996; and
1.00% until May 1, 2000. If no fees had been waived by LMFA, the annualized
ratio of expenses to average daily net assets for each period would have
been as follows: 1999, 1.31%; 1998, 1.35%; 1997, 1.39%; 1996, 1.43%; and
1995, 1.38%.

<PAGE>

Ratios/Supplemental Data
------------------------

Net
Investment Net Assets,
Years Expenses Income (Loss) Portfolio End of
Ended Total to Average to Average Turnover Year
Dec. 31, Return Net Assets Net Assets Rate (in thousands)
- ------- ------ ---------- ------------ --------- ------------
U.S. Government Intermediate-Term Portfolio

1999 -0.48% 1.00%A 5.28%A 979% 298,207
1998 6.56% 1.00%A 5.30%A 356% 352,729
1997 6.95% 1.00%A 5.84%A 252% 300,952
1996 4.47% .98%A 5.91%A 354% 293,846
1995 13.88% .93%A 5.59%A 290% 231,886

Investment Grade Income Portfolio

1999 -0.91% 1.00%B 6.08%B 145% 183,615
1998 6.99% 1.00%B 5.68%B 279% 169,129
1997 10.31% 1.00%B 6.28%B 259% 122,100
1996 4.31% .97%B 6.42%B 383% 91,928
1995 20.14% .88%B 6.49%B 221% 85,633

High Yield Portfolio

1999 8.82% 1.31% 6.51% 83% 375,099
1998 -1.79% 1.30% 8.17% 107% 433,947
1997 15.86% 1.30% 8.60% 116% 382,143
1996 14.91% 1.35% 9.05% 77% 234,108
1995 18.01% 1.47% 9.28% 47% 108,417

U.S. Government Money Market Portfolio

1999 4.44% 0.73% 4.34% -- 379,994
1998 4.83% .75%I 4.73% -- 389,466
1997 4.86% 0.75% 4.77% -- 324,696
1996 4.81% 0.66% 4.71% -- 325,210
1995 5.31% 0.67% 5.17% -- 316,646

<PAGE>

Legg Mason Income Trust, Inc.
- ----------------------------

The following additional information about the funds is available
upon request and without charge:

Statement of Additional Information (SAI) - The SAI is filed with the Securities
and Exchange Commission (SEC) and is incorporated by reference into (is
considered part of) the prospectus. The SAI provides further information and
additional details about each fund and its policies.

Annual and Semi-Annual Reports - Additional information about each fund's
investments is available in the funds' annual and semi-annual reports to
shareholders. In the funds' annual report, you will find a discussion of the
market conditions and investment strategies that significantly affected each
fund's performance during its last fiscal year.

To request the SAI or any reports to shareholders, or to obtain more
information:

- - call toll-free 1-800-822-5544
- - visit us on the Internet via http://www.leggmasonfunds.com
- - write to us at: Legg Mason Wood Walker, Incorporated
100 Light Street, P.O. Box 1476
Baltimore, Maryland 21203-1476

Information about the funds, 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 Commission at
1-202-942-8090. Reports and other information about the funds are available on
the Edgar database on the SEC's Internet site at http://www.sec.gov. Investors
may also obtain this information, after paying a duplication fee, by electronic
request at the following e-mail address: [email protected] or by writing the
SEC's Public Reference Section, Washington, D.C. 20549- 0102.

LMF- SEC file number 811-5029

<PAGE>

NAVIGATOR TAXABLE INCOME FUNDS:
- ------------------------------
NAVIGATOR CLASS OF LEGG MASON U.S. GOVERNMENT
INTERMEDIATE-TERM PORTFOLIO
NAVIGATOR CLASS OF LEGG MASON INVESTMENT GRADE INCOME PORTFOLIO
NAVIGATOR CLASS OF LEGG MASON HIGH YIELD PORTFOLIO

NAVIGATOR CLASS PROSPECTUS April 28, 2000

[LOGO]

The Art of Investing (SM)

As with all mutual funds, the Securities and Exchange Commission
has not passed upon the accuracy or adequacy of this prospectus, nor
has it approved or disapproved these securities. It is a criminal
offense to state otherwise.

<PAGE>

T A B LE O F C O N T E N T S

A b o u t t h e f u n d s:

xx Investment Objectives

xx Principal Risks

xx Performance

xx Fees and Expenses of the funds

xx Management

A b o u t y o u r i n v e s t m e n t:

xx How to invest

xx How to sell your shares

xx Account policies

xx Services for investors

xx Distributions and taxes

xx Financial Highlights

<PAGE>

LEGG MASON INCOME TRUST, INC.
[GRAPHIC]
INVESTMENT OBJECTIVES
---------------------

The Legg Mason Income Trust, Inc. offers four series, three of
which are offered through this prospectus: Legg Mason U.S.
Government Intermediate-Term Portfolio ("Government Intermediate"),
Legg Mason Investment Grade Income Portfolio ("Investment Grade")
and Legg Mason High Yield Portfolio ("High Yield").

Western Asset Management Company ("Western Asset" or "Adviser") is
the funds' investment adviser. Western Asset's approach in managing
these four funds revolves around an investment outlook developed by
its Investment Strategy Group, a team of senior professionals that
meets at least twice a week to review developments in the economy
and the markets. Based on their consensus view of the economic
outlook for the following six months, this group arrives at a
recommended portfolio structure, including targets for duration,
yield curve exposure, and sector allocation. Western Asset's
Portfolio Management Group implements the strategy in a manner
consistent with the investment policies of each fund, using
information on the relative credit strength, liquidity, issue
structure, event risk, covenant protection and market valuation of
available securities. Each fund is managed in accordance with the
investment objective and policies described below.

U. S. Government Intermediate-Term Portfolio

Investment objective: high current income consistent with prudent
investment risk and liquidity needs.

Principal investment strategies:

Under normal circumstances, the fund invests at least 75% of its
total assets in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, or repurchase
agreements secured by such securities. Investments in
mortgage-related securities issued by governmental or
government-related entities are included in the 75% limitation.

The balance of the fund, up to 25% of its total assets, may be
invested in commercial paper and investment grade debt securities
rated within one of the four highest grades assigned by a
nationally recognized statistical rating organization ("NRSRO"),
such as Standard & Poor's, Inc. ("S&P") or Moody's Investors
Service, Inc. ("Moody's"), or unrated securities judged by the
Adviser to be of comparable quality.

Although it can invest in securities of any maturity, the fund
normally expects to maintain a dollar-weighted average maturity of
between three and ten years.

For temporary defensive purposes or pending investment, the fund
may invest without limit in cash and U.S. dollar denominated money
market instruments, including repurchase agreements, having shorter
than usual maturities. If the fund invests substantially in such
instruments, the fund may not be pursuing its principal investment
strategies and the fund may not achieve its investment objective.

<PAGE>

Investment Grade Income Portfolio

Investment objective: high level of current income through
investment in a diversified portfolio of debt securities.

Principal investment strategies:

The fund invests primarily in fixed-income securities that the
Adviser considers to be investment grade. Although the fund can
invest in securities of any maturity, it normally expects to
maintain a dollar-weighted average maturity of between five and
twenty years.

The fund invests, under normal circumstances, at least 75% of its
total assets in the following types of investment grade
fixed-income securities:

o debt securities that are rated at the time of purchase within the
four highest grades assigned by a NRSRO, or judged by the Adviser
to be of comparable quality;

o securities of, or guaranteed by, the U.S. Government, it agencies
or instrumentalities;

o commercial paper and other money market instruments that are
rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's at the
date of investment, or if unrated by Moody's or S&P, judged by
the Adviser to have investment quality comparable to securities
that may be purchased under the first item above; bank
certificates of deposit; and bankers' acceptances; and

o preferred stocks (including step down preferred securities) rated
no lower than Baa by Moody's or, if unrated by Moody's, judged by
the Adviser to be of comparable quality.

The remainder of the fund's assets, not in excess of 25% of its
total assets, may be invested in:

o debt securities of issuers that are rated at the time of purchase
below Moody's and S&P's four highest grades, but rated B or
better by Moody's or S&P, or if unrated by Moody's or S&P, judged
by the Adviser to be of comparable quality; and

o securities that may be convertible into or exchangeable for, or
carry warrants to purchase, common stock or other equity
interests.

Securities purchased by the fund may be privately placed. For
temporary defensive purposes or pending investment, the fund may
invest without limit in cash or U. S. dollar denominated money
market instruments, having shorter than usual maturities. If the
fund invests substantially in such instruments, the fund may not be
pursuing its principal investment strategies and the fund may not
achieve its investment objective.

<PAGE>

High Yield Portfolio

Investment objectives: high current income and, secondarily,
capital appreciation.

Principal investment strategies:

The Adviser, under normal circumstances, invests at least 65% of
the fund's total assets in high yield, fixed-income securities,
including those commonly known as "junk bonds." Such securities
include, but are not limited to: foreign and domestic debt
securities of corporations and other issuers, preferred stocks,
convertible securities, zero coupon securities, deferred interest
securities, mortgage-backed securities, asset-backed securities,
commercial paper and obligations issued or guaranteed by foreign
governments or any of their respective political subdivisions,
agencies or instrumentalities, including repurchase agreements
secured by such instruments. Most fixed-income securities in which
the fund invests are rated BBB or lower by S&P or Baa or lower by
Moody's, or are unrated but deemed by the Adviser to be of
equivalent quality.

The fund's remaining assets may be held in cash or money market
instruments, or invested in common stocks and other equity
securities when these types of investments are consistent with the
objectives of the fund or are acquired as part of a unit consisting
of a combination of fixed-income securities and equity investments.
The remaining assets may also be invested in fixed-income
securities rated above BBB by S&P or Baa by Moody's, securities
comparably rated by another NRSRO, or deemed by the Adviser to be
of equivalent quality.

The fund may invest up to 25% of its total assets in private
placements and securities which, though not registered at the time
of their initial sale, are issued with registration rights. This
limitation does not apply to securities purchased pursuant to Rule
144A.

The fund may invest up to 25% of its total assets in securities
denominated in foreign currencies, including securities of issuers
based in emerging markets.

For temporary defensive purposes or pending investment, the fund
may invest without limit in cash or U.S. dollar denominated money
market instruments, having shorter than normal maturities. If the
fund invests substantially in such instruments, the fund may not be
pursuing its principal investment strategies and the fund may not
achieve its investment objective.

<PAGE>

PRINCIPAL RISKS
---------------
[GRAPHIC]
In general:

Debt securities:

Debt securities are subject to interest rate risk, which is the
possibility that the market prices of the fund's 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 change.

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 provide for interest payments
that vary inversely with market rates. The market prices of these
securities may fluctuate significantly when interest rates change.

Debt securities are 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 the
fund invests. However, ratings are only the opinions of the
organizations issuing them and are not absolute guarantees as to
quality.

Moody's considers debt securities rated Baa to have speculative
characteristics. Debt securities rated below Baa/BBB are deemed by
the ratings agencies to be speculative and may involve major risk
of exposure to adverse conditions. High Yield may invest in
securities rated as low as C by Moody's or D by S&P. These ratings
indicate that the securities are highly speculative and may be in
default or in danger of default as to principal and interest.
Therefore, High Yield is subject to credit risk to a greater extent
than the other funds.

Not all government securities are backed by the full faith and
credit of the United States. Some are backed only by the credit of
the issuing agency or instrumentality. Accordingly, there is at
least a chance 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, the fund reinvests the
proceeds of the payoff at current yields, which are lower than
those paid by the security that was paid off.

<PAGE>

Special risks of high yield securities:

Securities rated below Baa/BBB are subject to greater fluctuations
in value and risk of loss of income and principal due to default by
the issuer, than are higher rated securities. These securities may
be less liquid than higher-rated securities, which means the fund
may have difficulty selling them at times, and may have to apply a
greater degree of judgment in establishing a price. These
securities constitute the primary focus of High Yield. Investment
Grade can invest in these securities to a limited extent.

Special risks of mortgage-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. The effect on a fund'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 refinancing slows, which lengthens the effective
maturities of these securities. As a result, the negative effect of
the rate increase on the market value of mortgage securities is
usually more pronounced than it is for other types of fixed-income
securities.

Other risks:

The use of certain derivatives to hedge interest rate or other
risks could affect fund performance if the derivatives do not
perform as expected.

The values of foreign securities are subject to economic and
political developments in the countries and regions where the
companies operate, such as changes in economic or monetary
policies, and to changes in exchange rates. In general, less
information is publicly available about foreign companies than
about U.S. companies. Some foreign governments have defaulted on
principal and interest payments.

The investment strategies employed by the funds often involve high
turnover rates. This results in higher trading costs and could
cause higher levels of realized capital gains.

<PAGE>

[GRAPHIC] PERFORMANCE
-----------

The information below provides an indication of the risks of investing in a fund
by showing changes in each fund's performance from year to year. Government
Intermediate, Investment Grade and High Yield currently offer two classes of
shares: Primary Class shares and Navigator Class shares. The returns presented
for High Yield are for Primary Class shares, which are not offered in this
prospectus. Navigator Class and Primary Class shares are invested in the same
portfolio of securities, and the annual returns for each class of shares would
differ only to the extent that the Navigator Class would pay lower expenses, and
therefore would have higher returns. Each class is subject to different
expenses. Annual returns assume reinvestment of dividends and distributions.
Historical performance of a fund does not necessarily indicate what will happen
in the future.

Government Intermediate -- Navigator Class shares

YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%):

1995 1996 1997 1998 1999
---- ---- ---- ---- ----

14.45 5.09 7.45 7.16 0.04

DURING THE PAST FIVE CALENDAR YEARS:

Quarter Ended Total Return
------------- ------------

Best quarter: March 31, 1999 5.65%
Worst quarter: June 30, 1999 1.00%

In the following table, average annual total returns for the years ended
December 31, 1999, are compared with the Lehman Intermediate
Government/Corporate Index and the Salomon Brothers Medium-Term
Treasury/Government Sponsored Index.

1 Year 5 Years Life of Class
------ ------- -------------

Government Intermediate-
Navigator Class 0.04% 6.74% 6.73%(a)

Lehman Intermediate
Government/Corporate Index -2.15% 7.61% 7.61%(b)

Salomon Brothers Medium-Term
Treasury/Government-Sponsored
Index 0.49% 6.95% .69%(b)

(a) December 1, 1994 (commencement of operations) to December 31, 1999.

(b) For the period November 30, 1994 to December 31, 1999.

<PAGE>

Investment Grade -- Navigator Class shares

YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%):

1996 1997 1998 1999
---- ---- ---- ----

4.88 10.95 7.57 -0.33

DURING THE PAST FOUR CALENDAR YEARS:

Quarter Ended Total Return
------------- ------------

Best quarter: June 30, 1997 4.18%

Worst quarter: March 31, 1996 1.41%

In the following table, average annual total returns for the years
ended December 31, 1999, are compared with the Lehman Aggregate
Index and the Salomon Brothers Broad Investment-Grade Bond Index.

1 Year Life of Class
------ -------------

Investment Grade Income Portfolio -0.33% 6.00% (a)

Lehman Aggregate Index -0.82% 5.45% (b)

Salomon Brothers Broad -0.83% 5.43% (b)
Investment-Grade Bond Index

The fund changed its comparative index from the Salomon Brothers
Broad Investment-Grade Bond Index to the Lehman Aggregate Index.
While these two indices, the most commonly used for diversified
core portfolios, have similar duration and sector profiles, the use
of the Lehman Aggregate Index as the fund's comparative index is
consistent with the indices used by other funds in this prospectus.

(a) December 1, 1995 (commencement of operations) to December 31,
1999.

(b) For the period November 30, 1995 to December 31, 1999.

<PAGE>

High Yield -- Primary Class shares

YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%):

1995 1996 1997 1998 1999
---- ---- ---- ---- ----

18.01 14.91 15.86 -1.79 8.82

DURING THE PAST FIVE CALENDAR YEARS:

Quarter Ended Total Return
------------- ------------

Best quarter: March 31, 1999 11.34%
Worst quarter: September 30, 1998 -9.52%

In the following table, average annual total returns as of December
31, 1999, are compared with the Lehman High Yield Index.

1 Year 5 Years Life of Class
------ ------- -------------

High Yield--Primary Class 8.82% 10.92% 8.62%(a)
Lehman High Yield Index 2.51% 9.31% 7.38%(b)

(a) February 1, 1994 (commencement of operations) to December 31,
1999.

(b) For the period February 28, 1994 to December 31, 1999.

<PAGE>

[GRAPHIC] FEES AND EXPENSES OF THE FUNDS
------------------------------

The table below describes the fees and expenses you will incur
directly or indirectly as an investor in a fund. Each fund pays
operating expenses directly out of its assets so they lower that
fund's share price and dividends. Other expenses include transfer
agency, custody, professional and registration fees. The funds have no
sales charge and are not subject to a 12b-1 fee. The funds charge no
redemption fees.

Annual Fund Operating Expenses
(expenses that are deducted from fund assets)
-------------------------------------------

Government Investment High
Intermediate Grade Yield

Management fees 0.55%(a) 0.60%(a) 0.65%

Other expenses 0.11% 0.17% 0.17%
-------------- ----- ----- -----

Total Annual Fund
Operating Expenses 0.66% 0.77% 0.82%

(a)Legg Mason Fund Adviser, Inc., as manager, has voluntarily agreed
to waive fees so that Navigator Class share expenses (exclusive of
taxes, interest, brokerage and extraordinary expenses) do not
exceed .50% of average daily net assets attributable to Navigator
Class shares during any month for Government Intermediate or until
its net assets reach $500 million, and for Investment Grade, or
until its net assets reach $250 million. These voluntary waivers
will continue through April 30, 2001, but can be terminated at any
time. With these waivers, management fees and total annual fund
operating expenses for the fiscal year ended December 31, 1999,
were 0.36% and 0.46% for Government Intermediate, and 0.29% and
0.42% for Investment Grade.

<PAGE>

Example:

This example helps you compare the cost of investing in a fund with
the cost of investing in other mutual funds. Although your actual
costs may be higher or lower, you would pay the following expenses
on a $10,000 investment in a fund, assuming (1) a 5% return each
year, (2) the fund's operating expenses remain the same as shown in
the table above, and (3) you redeem all of your shares at the end
of the time periods shown. Actual returns may be higher or lower
than 5% per year.

1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Government
Intermediate $67 $211 $368 $ 822
Investment Grade $79 $246 $428 $ 954
High Yield $84 $262 $455 $1,014

Under the fee waiver arrangements described above, your costs for
the one, three, five and ten year periods would be: $51, $160, $280
and $628 for Government Intermediate, and $51, $160, $280, and $628
for Investment Grade.

<PAGE>

[icon] M A N A G E M E N T
-------------------

Management and Adviser:

Legg Mason Fund Adviser, Inc. ("LMFA"), 100 Light Street, Baltimore, Maryland
21202, is the manager of the funds. LMFA is responsible for the non-investment
affairs of the funds, providing office space and administrative staff for the
funds and directing all matters related to the operation of the funds.

LMFA acts as adviser or manager to investment companies with aggregate assets of
approximately $18.2 billion as of December 31, 1999.

For it services, each fund paid the manager the following percentage of its
average daily net assets during the fiscal year ended December 31, 1999:

Government Intermediate 0.36%
Investment Grade 0.29%
High Yield 0.65%

Western Asset Management Company, 117 East Colorado Boulevard Pasadena,
California 91105, is the funds' investment adviser. The adviser is responsible
for the actual investment management of the funds, which includes making
investment decisions and placing orders to buy, sell or hold a particular
security. The adviser acts as investment adviser to investment companies and
private accounts with aggregate assets of about $52.5 billion as of December 31,
1999. An investment committee has been responsible for the day-to-day management
of each fund since its inception.

- --------------------------------------------------------------------------------
Government Intermediate 0.20%, not to exceed the fee paid to LMFA (after
any fee waivers)
- --------------------------------------------------------------------------------
Investment Grade 0.24%, or 40% of the fee received by LMFA
- --------------------------------------------------------------------------------
High Yield 0.50%, or 77% of the fee received by LMFA
- --------------------------------------------------------------------------------

Distributor of the funds' shares:

Legg Mason Wood Walker, Incorporated ("Legg Mason"), 100 Light Street,
Baltimore, Maryland 21202, distributes the funds' shares under an Underwriting
Agreement. Each Underwriting Agreement obligates Legg Mason to pay certain
expenses for offering fund shares, including compensation to financial advisors,
the printing and distribution of prospectuses, statements of additional
information and shareholder reports (after these have been printed and mailed to
existing shareholders at the funds' expense), supplementary sales literature and
advertising materials.

Legg Mason and LMFA may pay non-affiliated entities out of their own assets to
support the distribution of Navigator Class shares and shareholder servicing.

LMFA, the Adviser, and Legg Mason are wholly owned subsidiaries of Legg Mason,
Inc., a financial services holding company.

<PAGE>

[icon] H O W T O I N V E S T

Navigator Shares are currently offered for sale only to:

o Institutional Clients of Legg Mason Trust, fsb, for which they exercise
discretionary investment management responsibility and accounts of the
customers with such Institutional Clients ("Customers").

o Qualified retirement plans managed on a discretionary basis and having
net assets of at least $200 million.

o Any qualified retirement plan having net assets of at least $300
million.

o Clients of Bartlett & Co. who, as of December 19, 1996, were
shareholders of Bartlett Short Term Bond Fund or Bartlett Fixed Income
Fund and for whom Bartlett acts as an ERISA fiduciary.

o Any qualified retirement plan of Legg Mason, Inc. or of any of its
affiliates.

o Certain institutions who were clients of Fairfield Group, Inc. as of
February 28, 1999, for investment of their own monies and monies for
which they act in a fiduciary capacity.

o Any open-end management investment company advised or managed by LMFA
or by any person controlling, controlled by, or under common control
with LMFA.

Eligible investors may purchase Navigator Shares through a brokerage account at
Legg Mason. The minimum initial investment is $50,000 and the minimum for each
purchase of additional shares is $100, except as noted below. Institutional
Clients may set different minimums for their Customers' investments in accounts
invested in Navigator Shares.

Customers of certain Institutional Clients that have omnibus accounts with the
funds' transfer agent can purchase shares through those Institutions. The
distributor may pay such Institutional Clients for account servicing.
Institutional Clients may charge their Customers for services provided in
connection with the purchase and redemption of shares. Information concerning
these services and any applicable charges will be provided by the Institutional
Clients. This Prospectus should by read by Customers in connection with any such
information received by Institutional Clients. Any such fees, charges or
requirements imposed by Institutional Clients will be in addition to the fees
and requirements of this Prospectus.

Certain institutions that have agreements with Legg Mason or the funds may be
authorized to accept purchase and redemption orders on their behalf. Once the
authorized institution accepts the order, you will receive the next determined
net asset value. You should consult with your institution to determine the time
by which it must receive your order to get that day's share price. It is the
institution's responsibility to transmit your order to the fund in a timely
fashion.

Purchase orders received by your financial adviser, FIS or other authorized
entity before the close of the New York Stock Exchange ("Exchange") (normally
4:00 p.m., Eastern time) will be processed at the fund's net asset value as of
the close of the Exchange on that day. Orders received after the close of the
Exchange will be processed at the fund's net asset value as of the close of the
Exchange on the next day. Payment must be made within three business days to the
selling organization.

You will begin to earn dividends as of settlement date, which is normally the
third business day after your order is placed.

<PAGE>

[icon] H O W T O S E L L Y O U R S H A R E S

To redeem your shares by telephone:

o Legg Mason clients may call 1-800-822-5544

Please have available the number of shares (or dollar amount) to be redeemed and
the account number.

The fund will follow reasonable procedures to ensure the validity of any
telephone redemption request, such as requesting identifying information from
callers or employing identification numbers. Unless you specify that you do not
wish to have telephone redemption privileges, you may be held responsible for
any fraudulent telephone order.

Customers of Institutional Clients may redeem only in accordance with
instructions and limitations pertaining to their account at the Institution.

Redemption orders received by Legg Mason before the close of the Exchange will
be transmitted to the funds' transfer agent. Your order will receive that day's
net asset value. Redemption orders received by Legg Mason after the close of the
Exchange will receive the closing net asset value on the next day the Exchange
is open.

Your order will be processed promptly and you will generally receive the
proceeds by mail to the name and address on the account registration within a
week. You may also have your telephone redemption requests paid by a direct wire
to a previously designated domestic commercial bank account

Payment of the proceeds of redemptions of shares that were recently purchased by
check or acquired through reinvestment of dividends on such shares may be
delayed for up to 10 days from the purchase date in order to allow for the check
to clear.

Each fund has reserved the right under certain conditions to redeem its shares
in kind by distributing portfolio securities in payment for redemption.

<PAGE>

[icon] A C C O U N T P O L I C I E S

Calculation of Net Asset Value:

Net asset value per Navigator Class share is determined daily as of the close of
the New York Stock Exchange on every day the Exchange is open. The Exchange is
normally closed on all national holidays and Good Friday. To calculate the
fund's Navigator Class share price, the fund's assets attributable to Navigator
Class shares are valued and totaled, liabilities attributable to Navigator Class
shares are subtracted, and the resulting net assets are divided by the number of
Navigator Class shares outstanding. Each fund's securities are valued on the
basis of market quotations or, lacking such quotations, at fair value as
determined under procedures established by the Board of Directors. Securities
with remaining maturities of 60 days or less are valued at amortized cost.

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

Other:

Fund shares may not be held in, or transferred to, an account with any firm that
does not have an agreement with Legg Mason or its affiliates.

Each fund reserves the right to:

o Reject any order for shares or suspend the offering of shares for a period
of time.

o Change its minimum investment amounts.

o Delay sending out redemption proceeds for up to seven days. This generally
applies only in cases of very large redemptions, excessive trading or
during unusual market conditions. Each fund may delay redemptions beyond
seven days, or suspend redemptions, only as permitted by the SEC.

<PAGE>

[icon] S E R V I C E S F O R I N V E S T O R S

Confirmations and Account Statements:

Confirmations will be sent to Institutional Clients after each transaction
involving Navigator Class shares which will include the total number of shares
being held in safekeeping by the transfer agent. The transfer agent will send
confirmations of each purchase and redemption transaction (except a reinvestment
of dividends or capital gain distributions). Beneficial ownership of shares by
Customer accounts will be recorded by the Institutional Client and reflected in
their regular account statements.

Exchange Privilege:

Navigator Class shares of a fund may be exchanged for Navigator Shares of any of
the other Legg Mason funds or the Legg Mason Cash Reserve Trust, provided these
funds are eligible for sale in your state of residence. You can request an
exchange in writing or by phone. Be sure to read the current prospectus for any
fund into which you are exchanging.

Each fund reserves the right to:

o Terminate or limit the exchange privilege of any shareholder who makes more
than four exchanges from a fund in one calendar year.

o Terminate or modify the exchange privilege after 60 days' notice to
shareholders.

Some Institutional Clients may not offer all of the Navigator Funds for
exchange.

<PAGE>

[icon] D I S T R I B U T I O N S A N D T A X E S

Government Intermediate and Investment Grade each declare any dividends from its
net investment income daily and pays them monthly. High Yield declares and pays
any dividends monthly.

Each fund declares and pays dividends from net short-term capital gain and
distributions of substantially all net capital gain (the excess of any net
long-term capital gain over net short-term capital loss) and, in the case of
High Yield, net realized gains from foreign currency transactions after the end
of the taxable year in which the gain is realized. A second distribution of net
capital gain may be necessary in some years to avoid imposition of a federal
excise tax.

Your dividends and other distributions will be automatically reinvested in
additional Navigator Class shares of the fund, unless you elect to receive them
in cash. To change your election, you must notify the fund at least 10 days
before the next dividend and/or other distribution is to be paid. You may also
request that your dividends and distributions be reinvested in Navigator Class
shares of another Legg Mason fund.

If the postal or other delivery service is unable to deliver your distribution
check, your distribution option will automatically be converted to having all
dividends and other distributions reinvested in fund shares. No interest will
accrue on amounts represented by uncashed distribution or redemption checks.

Fund dividends and other distributions are taxable to investors (other than
retirement plans and other tax-exempt investors) whether received in cash or
reinvested in additional Navigator Class shares of the fund. Dividends from
investment company taxable income (which includes net investment income and net
short-term capital gains) are taxable as ordinary income. Distributions of a
fund's net capital gain, if any, will be taxable as long-term capital gain,
regardless of how long you have held your fund shares.

The sale or exchange of fund shares may result in a taxable gain or loss,
depending on whether the proceeds are more or less than the cost of your shares.

Each fund's dividend and interest income, and gains realized from disposition of
foreign securities, may be subject to income, withholding or other taxes imposed
by foreign countries and U.S. possessions.

A tax statement is sent to you at the end of each year detailing the tax status
of your distributions.

Each fund will withhold 31% of all dividends, capital gain distributions and
redemption proceeds payable to individuals and certain other non-corporate
shareholders who do not provide the fund with a valid taxpayer identification
number. Each fund will also withhold 31% of all dividends and capital gain
distributions payable to shareholders who are otherwise subject to backup
withholding.

Because each investor's tax situation is different, please consult your tax
adviser about federal, state and local tax considerations.

<PAGE>

[icon] F I N A N C I A L H I G H L I G H T S

<TABLE>
<CAPTION>
Investment Operations Distributions
--------------------- -------------

Net Realized
and Unrealized
Net Asset Net Gain (Loss) on In Excess From Net Net Asset
Value, Investment Investments, Total From From Net of Net Realized Value,
Beginning Income Options Investment Investment Investment Gain on Total End of
of Year (Loss) and Futures Operations Income Income Investments Distributions Year
--------- ---------- ----------- ---------- ---------- -------- ----------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>

U.S. Government
Intermediate-Term
Portfolio
Years Ended Dec. 31,

1999 $10.51 $.59A ($0.59) $ --- $(.59) $--- $--- $(.59) $9.92
1998 10.40 .61A .11 .72 (.60) -0.01 --- (.61) 10.51
1997 10.31 .65A .09 .74 (.64) -0.01 --- (.65) 10.4
1996 10.47 .67A (.16) .51 (.66) -0.01 --- (.67 10.31
1995 9.72 .62A 0.75 1.37 -0.62 --- --- -0.62 10.47

Investment Grade
Income Portfolio
Years Ended Dec. 31,

1999 $10.52 $.66B ($0.70) $(.04) $(.66) $--- $(.03) $(.69) $9.79
1998 10.59 .66B .12 0.78 -0.66 --- -0.19 (.85) 10.52
1997 10.22 .71B .37 1.08 (.71) --- --- (.71) 10.59
1996 10.44 .70B (.22) .48 (.70) --- --- (.70) 10.22
1995C 10.32 .03B 0.12 0.15 -0.03 --- --- 0.03 10.44

High Yield Portfolio

Period From March 8
to Dec. 31, 1999 $15.98 $0.89 ($0.92) ($0.03) $(.98) $--- $--- $(.98) 14.97
Period Ended
January 28, 1999 14.67 0.08 0.72 0.8 $(.04) $--- $--- $(.04) 15.43
Period Ended
Dec. 31, 1998F 16.85 0.86 ($1.98) ($1.12) ($1.05) $--- ($0.01) ($1.06) 14.67

</TABLE>

A Net of fees waived by LMFA for expenses in excess of voluntary limitations
of: 0.4% until April 30, 1995; 0.45% until April 30, 1996; and 0.50% until
May 1, 1999. If no fees had been waived by LMFA, the annualized ratio of
expenses to average daily net assets for each period would have been as
follows: 1999, .66%; 1998, .65%; 1997, .66%; 1996, .69% and 1995, .74%.

B Net of fees waived by LMFA for expenses in excess of voluntary limitations
of: 0.4% until April 30, 1996, and 0.50% until May 1, 1999. If no fees had
been waived by LMFA, the annualized ratio of expenses to the average daily
net assets for each period would have been as follows: 1999, .77%; 1998,
.80%; 1997, .82%; 1996, .88%; and 1995, .82%.

C For the period December 1, 1995 (commencement of sale of Navigator Class
shares) to December 31, 1995.

D Not annualized.

E Annualized.

F For the period May 5, 1998 (commencement of sale of Navigator Class shares)
to December 31, 1998.

<PAGE>

Ratios/Supplemental Data
------------------------

Net
Investment
Expenses Income(Loss) Portfolio Net Assets,
Total to Average to Average Turnover End of Year
Return Net Assets Net Assets Rate (in thousands)
------ ---------- ---------- -------- ------------
U.S Government
Intermediate-Term
Portfolio
Years Ended Dec.31,

1999 0.0004 .47%A 5.84%A 979% 9,076
1998 0.0716 .46%A 5.85%A 356% 7,340
1997 0.0745 .45%A 6.40%A 252% 7,914
1996 0.0509 .42%A 6.47%A 354% 8,082
1995 0.1445 .44%A 6.08%A 290% 4,184

Investment Grade
Income Portfolio
Years Ended Dec.31,

1999 -0.33% .46%B 6.59%B 145% $238
1998 0.0757 .45%B 6.24%B 279% 255
1997 0.1095 .43%B 6.87%B 259% 252
1996 0.0488 .41%B 6.99%B 383% 243
1995C 1.42%D .40%B,E 6.73%B,E 221%E 249

High Yield Portfolio

Period From March 8
to Dec. 31, 1999 (.20)%D .82%E 7.19%E 78%E $673
Period Ended
January 28, 1999 5.47%D .81%E 7.17%E 116%E $ 0
Period Ended
Dec. 31, 1998F (6.91)%D .79%E 8.68%E 107%E $ 65

C For the period December 1, 1995 (commencement of sale of Navigator Class
shares) to December 31, 1995.

D Not annualized.

E Annualized.

F For the period May 5, 1998 (commencement of sale of Navigator Class shares)
to December 31, 1998.

<PAGE>

L e g g M a s o n I n c o m e T r u s t, I n c.

The following additional information about the funds is available upon request
and without charge:

Statement of Additional Information (SAI) - The SAI is filed with the Securities
and Exchange Commission (SEC) and is incorporated by reference into (is
considered part of) this prospectus. The SAI provides additional details about
each fund and its policies.

Annual and Semi-annual Reports - Additional information about each fund's
investments is available in the funds' annual and semi-annual reports to
shareholders. In the fund's annual report, you will find a discussion of the
market conditions and investment strategies that significantly affected the
fund's performance during its last fiscal year.

To request the SAI or any reports to shareholders, or to obtain more
information:

o call toll-free 1-800-822-5544
o visit us on the Internet via http://www.leggmasonfunds.com
o write to us at: Legg Mason Wood Walker, Incorporated
100 Light Street, P.O. Box 1476
Baltimore, Maryland 21203-1476

Information about the funds, 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 funds are available on
the EDGAR database on the SEC's Internet site at http://www.sec.gov. Investors
may also obtain this information, after paying a duplicating fee, by electronic
request at the following email address: [email protected] or by writing the
SEC's, Public Reference Section, Washington, D.C. 20549-0102.

SEC file number 811-5029

<PAGE>

LEGG MASON INCOME TRUST, INC.:
U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
INVESTMENT GRADE PORTFOLIO
HIGH YIELD PORTFOLIO
(Primary Class Shares and Navigator Class Shares)
AND
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION

April 28, 2000

This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus for Primary Class shares and the
Prospectus for Navigator Class shares, both dated April 28, 2000, which have
been filed with the Securities and Exchange Commission ("SEC"). The funds'
annual report is incorporated by reference into this Statement of Additional
Information. Copies of either the Prospectuses or the annual report are
available without charge by writing to or calling the funds' distributor, Legg
Mason Wood Walker, Incorporated ("Legg Mason") (address and telephone numbers
listed below).

Legg Mason Wood Walker,
Incorporated
- --------------------------------------------------------------------------------
100 Light Street
Baltimore, Maryland 21202
(410) 539-0000 (800) 822-5544

<PAGE>

Table of Contents

Page
----

Description Of The Funds..................................................3
Fund Policies.............................................................3
Investment Strategies And Risks...........................................6
Portfolio Turnover.......................................................25
Management Of The Funds..................................................25
Management Agreement.....................................................28
Investment Advisory Agreement............................................30
The Funds' Distributor...................................................31
Portfolio Transactions And Brokerage.....................................34
Additional Purchase And Redemption Information...........................35
Valuation Of Fund Shares.................................................39
Additional Tax Information...............................................40
Tax-Deferred Retirement Plans............................................44
Performance Information..................................................45
Capital Stock Information................................................52
The Funds' Custodian And Transfer And Dividend-Disbursing Agent..........52
The Corporation's Legal Counsel..........................................53
The Corporation's Independent Accountants................................53
Financial Statements.....................................................53
Appendix A...............................................................53

No person has been authorized to give any information or to
make any representations not contained in the prospectuses or this
Statement of Additional Information in connection with the
offerings made by the Prospectuses and, if given or made, such
information or representations must not be relied upon as having
been authorized by a fund or its distributor. The Prospectuses and
this Statement of Additional Information do not constitute
offerings by the funds or by the distributor in any jurisdiction
in which such offering may not lawfully be made.

<PAGE>

DESCRIPTION OF THE FUNDS

Legg Mason Income Trust, Inc. ("Corporation") is a diversified open-end
management investment company which was incorporated in Maryland on April 28,
1987. Legg Mason U.S. Government Intermediate-Term Portfolio, Legg Mason
Investment Grade Income Portfolio, Legg Mason High Yield Portfolio and Legg
Mason U.S. Government Money Market Portfolio are separate series of the
Corporation.

FUND POLICIES

Each fund has adopted certain fundamental investment limitations that
cannot be changed except by vote of a majority of each fund's outstanding voting
securities.

Government Intermediate and Investment Grade each may not:

1. Borrow money, except for temporary purposes in an aggregate amount not
to exceed 5% of the value of its total assets at the time of borrowing;

2. Invest more than 5% of its total assets (taken at market value) in
securities of any one issuer, other than the U.S. Government, its agencies and
instrumentalities, or buy more than 10% of the voting securities or more than
10% of all the securities of any issuer;

3. Mortgage, pledge or hypothecate any of its assets, except to
collateralize permitted borrowings up to 5% of the value of its total assets at
the time of borrowing; provided, that the deposit in escrow of underlying
securities in connection with the writing of call options is not deemed to be a
pledge; and provided further, that deposit of initial margin or the payment of
variation margin in connection with the purchase or sale of futures contracts or
of options on futures contracts shall not be deemed to constitute pledging
assets;

4. Purchase securities on "margin," except that each fund may make margin
deposits in connection with its use of options, interest rate futures contracts
and options on interest rate futures contracts;

5. Make short sales of securities unless at all times while a short
position is open the fund maintains a long position in the same security in an
amount at least equal thereto; provided, however, that the fund may purchase or
sell futures contracts, and may make initial and variation margin payments in
connection with purchases or sales of futures contracts or of options on futures
contracts;

6. Invest 25% or more of its total assets (taken at market value) in any
one industry;

7. Invest in securities issued by other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization or by
purchase in the open market of securities of closed-end investment companies
where no underwriter or dealer commission or profit, other than a customary
brokerage commission, is involved and only if immediately thereafter not more
than 10% of a fund's total assets (taken at market value) would be invested in
such securities;

8. Purchase or sell commodities and commodity contracts, except that each
fund may purchase or sell options, interest rate futures contracts and options
on interest rate futures contracts;

9. Underwrite the securities of other issuers, except to the extent that in
connection with the disposition of restricted securities or the purchase of
securities either directly from the issuer or from an underwriter for an issuer,
each fund may be deemed to be an underwriter;

3
<PAGE>

10. Make loans, except loans of portfolio securities and except to the
extent the purchase of a portion of an issue of publicly distributed notes,
bonds or other evidences of indebtedness or deposits with banks and other
financial institutions may be considered loans;

11. Purchase or sell real estate, except that each fund may invest in
securities collateralized by real estate or interests therein or in securities
issued by companies that invest in real estate or interests therein;

12. Purchase or sell interests in oil and gas or other mineral exploration
or development programs, or

13. Issue senior securities, except as permitted under the Investment
Company Act of 1940, as amended ("1940 Act").

High Yield may not:

1. Borrow money, except from banks or through reverse repurchase agreements
or dollar rolls for temporary purposes in an aggregate amount not to exceed 5%
of the value of its total assets at the time of borrowing;

2. Issue senior securities, except as permitted under the 1940 Act;

3. Engage in the business of underwriting the securities of other issuers
except insofar as the fund may be deemed an underwriter under the Securities Act
of 1933, as amended ("1933 Act"), in disposing of a portfolio security;

4. Buy or hold any real estate; provided, however, that instruments secured
by real estate or interests therein are not subject to this limitation;

5. With respect to 75% of its total assets, invest more than 5% of its
total assets (taken at market value) in securities of any one issuer, other than
the U.S. Government, its agencies and instrumentalities, or purchase more than
10% of the voting securities of any one issuer;

6. Purchase or sell any commodities or commodities contracts, except that
the fund may purchase or sell currencies, interest rate and currency futures
contracts, options on currencies, securities, and securities indexes and options
on interest rate and currency futures contracts, and may enter into swap
agreements;

7. Make loans, except loans of portfolio securities and except to the
extent the purchase of notes, bonds or other evidences of indebtedness, the
entry into repurchase agreements, or deposits with banks and other financial
institutions may be considered loans;

8. Purchase any security if, as a result thereof, 25% or more of its total
assets would be invested in the securities of issuers having their principal
business activities in the same industry. This limitation does not apply to
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements with respect thereto.

Government Money Market may not:

1. Borrow money, except for temporary purposes in an aggregate amount not
to exceed 5% of the value of its total assets at the time of borrowing.
(Although not a fundamental policy subject to shareholder approval, the fund
intends to repay any money borrowed before any additional portfolio securities
are purchased);

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<PAGE>

2. Mortgage, pledge or hypothecate any of its assets, except to
collateralize permitted borrowings up to 5% of the value of its total assets at
the time of borrowing;

3. Purchase securities on "margin" except that the fund may obtain such
credits as may be necessary for clearing the purchases and sales of securities;

4. Make short sales of securities unless at all times while a short
position is open the fund maintains a long position in the same security in an
amount at least equal thereto;

5. Purchase or sell commodities and commodity contracts;

6. Underwrite the securities of other issuers, except to the extent that in
connection with the disposition of restricted securities or the purchase of
securities either directly from the issuer or from an underwriter for an issuer,
the fund may be deemed to be an underwriter;

7. Make loans, except loans of portfolio securities and except to the
extent the purchase of a portion of an issue of publicly distributed notes,
bonds or other evidences of indebtedness, entry into repurchase agreements or
deposits with banks and other financial institutions may be considered loans;

8. Purchase or hold real estate, except that the fund may invest in
securities collateralized by real estate or interests therein;

9. Purchase or sell interests in oil and gas or other mineral exploration
or development programs;

10. Issue senior securities, except as permitted under the 1940 Act;

11. Purchase any security if, as a result thereof, 25% or more of its total
assets would be invested in the securities of issuers having their principal
business activities in the same industry. This limitation does not apply to
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities and repurchase agreements with respect thereto.

As noted above, the fundamental investment limitations of each fund, along
with its investment objective, may be changed by "the vote of a majority of the
outstanding voting securities" of the fund, a term defined in the 1940 Act to
mean the vote (1) of more than 50% of the outstanding shares of the fund or (2)
of 67% or more of the shares present at a shareholders' meeting if more than 50%
of the outstanding shares are represented at the meeting in person or by proxy,
whichever is less.

Except as otherwise stated, if a fundamental or non-fundamental percentage
limitation set forth in the Prospectus or this SAI is complied with at the time
an investment is made, a later increase or decrease in percentage resulting from
a change in the value of portfolio securities, in the asset value of a fund, or
in the number of securities an issuer has outstanding will not be considered to
be outside the limitation. Each fund will monitor the level of borrowing and
illiquid securities in its portfolio and will make necessary adjustments to
maintain required asset coverage and adequate liquidity.

Except as otherwise noted, each fund's investment policies and limitations
are non-fundamental and may be changed without a shareholder vote.

The following are some of the non-fundamental limitations which High Yield
currently observes. High Yield may not:

1. Buy securities on "margin," except for short-term credits necessary for
clearance of portfolio transactions and except that the fund may make margin
deposits in connection with the use of permitted currency futures contracts and
options on currency futures contracts;

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<PAGE>

2. Make short sales of securities or maintain a short position, except that
the fund may (a) make short sales and maintain short positions in connection
with its use of options, futures contracts and options on futures contracts and
(b) sell short "against the box" (the fund does not intend to make short sales
against the box in excess of 5% of its net assets during the coming year);

3. Hold more than 10% of the outstanding voting securities of any one
issuer.

INVESTMENT STRATEGIES AND RISKS

The following applies to all of the funds:

Yield Factors and Ratings
- -------------------------

Standard & Poor's ("S&P"), Moody's Investors Service, Inc. ("Moody's") and
other nationally recognized statistical rating organizations ("NRSROs") are
private services that provide ratings of the credit quality of obligations.
Investment grade bonds are generally considered to be those bonds rated at the
time of purchase within one of the four highest grades assigned by S&P or
Moody's. A fund may use these ratings in determining whether to purchase, sell
or hold a security. These ratings represent Moody's and S&P's opinions as to the
quality of the obligations which they undertake to rate. It should be
emphasized, however, that ratings are general and are not absolute standards of
quality. Consequently, obligations with the same maturity, interest rate and
rating may have different market prices. A description of the ratings assigned
to corporate debt obligations by S&P and Moody's is included in Appendix A.

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. Subsequent to its purchase by
a fund, an issue of obligations may cease to be rated or its rating may be
reduced below the minimum rating required for purchase by that fund. The Adviser
will consider such an event in determining whether a fund (other than Government
Money Market) should continue to hold the obligation, but is not required to
dispose of it. Government Money Market will consider disposing of the obligation
in accordance with Rule 2a-7 under the 1940 Act.

In addition to ratings assigned to individual bond issues, the Adviser will
analyze interest rate trends and developments that may affect individual
issuers, including factors such as liquidity, profitability and asset quality.
The yields on bonds and other debt securities in which a fund invests are
dependent on a variety of factors, including general money market conditions,
general conditions in the bond market, the financial condition of the issuer,
the size of the offering, the maturity of the obligation and its rating. There
may be a wide variation in the quality of bonds, both within a particular
classification and between classifications. A bond issuer's obligations are
subject to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of bond holders or other creditors of an issuer; litigation
or other conditions may also adversely affect the power or ability of bond
issuers to meet their obligations for the payment of interest and principal.

Securities Lending
- ------------------

Each fund may lend portfolio securities to brokers or dealers in corporate
or government securities (U.S. government securities only, with respect to
Government Intermediate and Government Money Market), banks or other recognized
institutional borrowers of 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 funds' custodian. During the
time the securities are on loan, the borrower will pay the fund an amount
equivalent to any interest paid on such securities, and the fund may invest the
cash collateral and earn income, or it may receive an agreed upon amount of
interest income from the borrower who has delivered equivalent collateral. When

6
<PAGE>

a fund loans a security to another party, it runs the risk that the other party
will default on its obligation, and that the value of the collateral will
decline before the fund can dispose of it.

These loans are subject to termination at the option of the fund or the
borrower. Each fund may pay reasonable 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. In the
event of the bankruptcy of the other party to a securities loan, a fund could
experience delays in recovering the securities lent. To the extent that, in the
meantime, the value of the collateral had decreased or the securities lent
increased, the fund could experience a loss.

Each fund will enter into securities loan transactions only with financial
institutions which the Adviser believes to present minimal risk of default
during the term of the loan. Each fund does not have the right to vote
securities on loan, but would terminate the loan and regain the right to vote if
that were considered important with respect to the investment. Each fund
presently does not intend to loan more than 5% of its portfolio securities at
any given time.

Repurchase Agreements
- ---------------------

Repurchase agreements are usually for periods of one week or less, but may
be for longer periods. Repurchase agreements maturing in more than seven days
may be considered illiquid. In a repurchase agreement, the securities are held
for each fund by a custodian bank as collateral until resold and are
supplemented by additional collateral if necessary to maintain a total value
equal to or in excess of the value of the repurchase agreement. A fund bears a
risk of loss in the event that the other party to a repurchase agreement
defaults on its obligations and the fund is delayed or prevented from exercising
its rights to dispose of the collateral securities. Each fund enters into
repurchase agreements only with financial institutions which the Adviser
believes present minimal risk of default during the term of the agreement. Each
fund currently intends to invest in repurchase agreements only when cash is
temporarily available or for temporary defensive purposes.

Reverse Repurchase Agreements
- -----------------------------

A reverse repurchase agreement is a portfolio management technique in which
a fund 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 fund agrees to repurchase the instrument at an agreed upon
time (normally within seven days) and price, including interest payment. Each
fund (other than Government Money Market) may also enter into dollar rolls, in
which a fund sells a fixed income security for delivery in the current month and
simultaneously contracts to repurchase a substantially similar security on a
specified future date. That fund would be compensated by the difference between
the current sales price and the forward price for the future purchase.

Each fund may engage in reverse repurchase agreements and (with the
exception of Government Money Market) dollar rolls as a means of raising cash to
satisfy redemption requests or for other temporary or emergency purposes without
the necessity of selling portfolio instruments. There is a risk that the
contraparty to either a reverse repurchase agreement or a dollar roll will be
unable or unwilling to complete the transaction as scheduled, which may result
in losses to a fund.

When a fund reinvests the proceeds of a reverse repurchase agreement in
other securities, any fluctuations in the market value of either the securities
transferred to another party or the securities in which the proceeds are
invested would affect the market value of that fund's assets. If a fund
reinvests the proceeds of the agreement at a rate lower than the cost of the
agreement, engaging in the agreement will lower that fund's yield. While
engaging in reverse repurchase agreements and dollar rolls, each fund will
maintain cash, U.S. Government securities (or other appropriate liquid
securities, with respect to Investment Grade and High Yield) in a segregated
account at its custodian bank with a value at least equal to that fund's
obligation under the agreements, adjusted daily.

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<PAGE>

Restrictions: The ability of a fund to engage in reverse repurchase agreements
and/or dollar rolls is subject to each fund's fundamental investment limitation
concerning borrowing, i.e., that borrowing may be for temporary purposes only
and in an amount not to exceed 5% of a fund's total assets.

Warrants
- --------

Although not a fundamental policy subject to shareholder vote, each fund
may not invest more than 5% of the value of its net assets, taken at the lower
of cost or market value, in warrants or invest more than 2% of the value of such
net assets in warrants not listed on the New York or American Stock Exchanges.
With respect to High Yield, this restriction does not apply to warrants attached
to, or sold as a unit with, other securities. For purposes of this restriction,
the term "warrants" does not include options on securities, stock or bond
indices, foreign currencies or futures contracts.

Mortgage-Related Securities
- ---------------------------

Mortgage-related securities represent an ownership interest in a pool of
residential mortgage loans. These securities are designed to provide monthly
payments of interest, and in most instances, principal to the investor. The
mortgagor's monthly payments to his/her lending institution are "passed-through"
to investors such as a fund. Most issuers or poolers provide guarantees of
payments, regardless of whether or not the mortgagor actually makes the payment.
The guarantees made by issuers or poolers are backed by various forms of credit,
insurance and collateral. They may not extend to the full amount of the pool.

Pools 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, a fund 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 which
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 majority of mortgage-related securities currently available are issued
by governmental or government-related organizations formed to increase the
availability of mortgage credit. The largest government-sponsored issuer of
mortgage-related securities is Government National Mortgage Association
("GNMA"). GNMA certificates ("GNMAs") are interests in pools of loans insured by
the Federal Housing Administration or by the Farmer's Home Administration
("FHA"), or guaranteed by the Veterans Administration ("VA"). Fannie Mae and
Freddie Mac each issue pass-through securities which are guaranteed as to
principal and interest by Fannie Mae and Freddie Mac, respectively.

The average life of mortgage-related securities varies with the maturities
and the nature of the underlying mortgage instruments. For example, GNMAs tend
to have a longer average life than FreddieMac participation certificates ("PCs")
because there is a tendency for the conventional and privately-insured mortgages
underlying Freddie Mac PCs to repay at faster rates than the FHA and VA loans
underlying GNMAs. In addition, the term of a security may be shortened by
unscheduled or early payments of principal and interest on the underlying
mortgages. The occurrence of mortgage prepayments is affected by various
factors, including the level of interest rates, general economic conditions, the
location and age of the mortgaged property and other social and demographic
conditions.

In determining the dollar-weighted average maturity of a fund's portfolio,
the Adviser will follow industry practice in assigning an average life to the
mortgage-related securities of the fund unless the interest rate on the

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<PAGE>

mortgages underlying such securities is such that a different prepayment rate is
likely. For example, where 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, the Adviser may deem it appropriate to change
the projected average life for a fund's mortgage-related security as a result of
fluctuations in market interest rates and other factors.

The average life of securities representing interests in pools of mortgage
loans is likely to be substantially less than the original maturity of the
mortgage pools as a result of prepayments or foreclosures of such mortgages.
Prepayments are passed through to the registered holder of the mortgage-related
security with the regular monthly payments of principal and interest, and have
the effect of reducing future payments. To the extent the mortgages underlying a
security representing an interest in a pool of mortgages are prepaid, a fund may
experience a loss (if the price at which the respective security was acquired by
the fund was at a premium over par, which represents the price at which the
security will be redeemed upon prepayment) or a gain (if the price at which the
respective security was acquired by the fund was at a discount from par). In
addition, prepayments of such securities held by a fund will reduce the share
price of the fund to the extent the market value of the securities at the time
of prepayment exceeds their par value, and will increase the share price of the
fund to the extent the par value of the securities exceeds their market value at
the time of prepayment. Prepayments may occur with greater frequency in periods
of declining mortgage rates because, among other reasons, it may be possible for
mortgagors to refinance their outstanding mortgages at lower interest rates.

Although the market for mortgage-related securities issued by private
organizations is becoming increasingly liquid, such securities may not be
readily marketable. Each fund will not purchase mortgage-related securities for
which there is no established market or any other investments which the Adviser
deems to be illiquid if, as a result, more than 15% (for Government Money
Market, more than 10%) of the value of the fund's net assets would be invested
in such illiquid securities and investments. Government-related organizations
which issue mortgage-related securities include GNMA, Fannie Mae and Freddie
Mac. Securities issued by GNMA and Fannie Mae are fully modified pass-through
securities, i.e., the timely payment of principal and interest is guaranteed by
the issuer. Freddie Mac securities are modified pass-through securities, i.e.,
the timely payment of interest is guaranteed by Freddie Mac, principal is passed
through as collected but payment thereof is guaranteed not later than one year
after it becomes payable.

Step Down Preferred Securities
- ------------------------------

Some of the securities purchased by Investment Grade and High Yield may
also include step down perpetual preferred securities. These securities are
issued by a real estate investment trust ("REIT") making a mortgage loan to a
single borrower. The dividend rate paid by these securities is initially
relatively high, but "steps down" yearly. The securities are subject to call if
the REIT suffers an unfavorable tax event and to tender by the REIT's equity
holders in the 10th year; both events could be on terms unfavorable to the
holder of the preferred securities. The value of these securities will be
affected by changes in the value of the underlying mortgage loan. The REIT is
not diversified, and the value of the mortgaged property may not cover its
obligations. Step down perpetual preferred securities are considered restricted
securities under the 1933 Act.

Asset-Backed Securities
- -----------------------

Asset-backed securities are structurally similar to mortgage-backed
securities, but are secured by an interest in a different type of receivable.
Asset-backed securities therefore present certain risks that are not presented
by mortgage-related debt securities or other securities in which a fund may
invest. Primarily, these securities do not have the benefit of the same security
interest in the related collateral.

Asset-backed securities represent direct or indirect participations in, or
are secured by and payable from, pools of assets such as motor vehicle
installment sales contracts, installment loan contracts, leases of various types

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<PAGE>

of real and personal property, and receivables from revolving credit agreements.
The value of such securities partly depends on loan repayments by individuals,
which may be adversely affected during general downturns in the economy. Like
mortgage-related securities, asset-backed securities are subject to the risk of
prepayment. The risk that recovery on repossessed collateral might be
unavailable or inadequate to support payments on asset-backed securities,
however, is greater than in the case of mortgage-backed securities.

Credit card receivables, for example, are generally unsecured 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. 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 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 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 has
not been tested.

The following applies only to Government Intermediate, Investment Grade and High
Yield unless otherwise stated:

Corporate Debt Securities
- -------------------------

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 be convertible into preferred or common equity,
or may be bought as part of a unit containing common stock. In selecting
corporate debt securities for a fund, the Adviser reviews and monitors the
creditworthiness of each issuer and issue. The Adviser also analyzes interest
rate trends and specific developments that it believes may affect individual
issuers.

Callable Debt Securities
- ------------------------

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 fund is called for redemption, that fund 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 fund's ability
to achieve its investment objectives.

Inflation-Indexed Securities
- ----------------------------

The funds may also invest in U.S. Treasury securities whose principal value
is adjusted daily in accordance with changes to the Consumer Price Index (also
known as "Treasury Inflation-Indexed Securities"). Interest is calculated on the
basis of the adjusted principal value on the payment date. The principal value
of inflation-indexed 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 fund holds the security, the fund may earn less on it than on a
conventional bond. Any increase in principal value is taxable in the year the
increase occurs, even though the 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 market prices of inflation-indexed securities
in the same manner as conventional bonds.

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<PAGE>

Convertible Securities
- ----------------------

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 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 ordinarily provide a stream
of income with generally higher yields than those of common stocks of the same
or similar issuers, but lower than the yield of non-convertible debt.
Convertible securities are usually subordinated to comparable-tier
non-convertible securities but rank senior to common stock in a corporation's
capital structure.

The value of a convertible security is a function of (i) its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (ii) its worth, at market
value, if converted into the underlying common stock. Convertible securities are
typically issued by smaller capitalized companies, whose stock prices may be
volatile. The price of a convertible security often reflects variations in the
price of the underlying common stock in a way that non-convertible debt does
not. 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, which may be less than the ultimate conversion value.

Many convertible securities are rated below investment grade or, if
unrated, are considered comparable quality.

Government Intermediate and Investment Grade do not intend to exercise
conversion rights for any convertible security they own and do not intend to
hold any security which has been subject to conversion.

Zero Coupon Bonds
- -----------------

Zero coupon bonds are debt obligations that make no fixed interest payments
but instead are issued at a significant discount from face value. Like other
debt securities, the market price can reflect a premium or discount, in addition
to the original issue discount, reflecting the market's judgment as to the
issuer's creditworthiness, the interest rate or other similar factors. The
original issue discount approximates the total amount of the interest the bonds
will accrue and compound over the period until maturity or the first interest
payment date at a rate of interest reflecting the market rate of the security at
the time of issuance. Because zero coupon bonds do not make periodic interest
payments, their prices can be very volatile when market interest rates change.

The original issue discount on zero coupon bonds must be included in a
fund's income ratably as it accrues. Accordingly, to continue to qualify for tax
treatment as a regulated investment company and to avoid a certain excise tax, a
fund may be required to distribute as a dividend an amount that is greater than
the total amount of cash it actually receives. See "Additional Tax Information."
These distributions must be made from a fund's cash assets or, if necessary,
from the proceeds of sales of portfolio securities. Such sales could occur at a
time which would be disadvantageous to that fund and then that fund would not
otherwise choose to dispose of the assets.

Trust Originated Preferred Securities
- -------------------------------------

The funds may also invest in trust originated preferred securities, a type
of security issued by financial institutions such as banks and insurance
companies. Trust originated preferred securities represent interests in a trust
formed by a financial institution. The trust sells preferred shares and invests
the proceeds in notes issued by the financial institution. These notes may be
subordinated and unsecured. Distributions on the trust originated preferred
securities match the interest payments on the notes; if no interest is paid on

11
<PAGE>

the notes, the trust will not make current payments on its preferred securities.
Trust originated preferred securities currently enjoy favorable tax treatment
for the issuers. If the tax characterization of these securities were to change
adversely, they could be redeemed by the issuers, which could result in a loss
to a fund. In addition, some trust originated preferred securities are
restricted securities available only to qualified institutional buyers under
Rule 144A.

Illiquid and Restricted Investments
- -----------------------------------

Each fund may invest up to 15% of its net assets in illiquid investments.
For this purpose, "illiquid investments" are those that cannot be disposed of
within seven days for approximately the price at which the fund values the
security. Illiquid investments include repurchase agreements with terms of
greater than seven days and restricted investments other than those the Adviser
has determined are liquid pursuant to guidelines established by the
Corporation's Board of Directors.

Restricted securities may be sold only in privately negotiated
transactions, pursuant to a registration statement filed under the 1933 Act or
pursuant to an exemption from registration, such as Rule 144 or Rule 144A. A
fund may be required to pay part or all of the costs of such registration, and a
considerable period may elapse between the time a decision is made to sell a
restricted security and the time the registration statement becomes effective.
Judgment plays a greater role in valuing illiquid securities than those for
which a more active market exists.

SEC regulations permit the sale of certain restricted securities to
qualified institutional buyers. The investment adviser to a fund, acting
pursuant to guidelines established by the Corporation's Board of Directors, may
determine that certain restricted securities qualified for trading on this newly
developing market are liquid. If the market does not develop as anticipated or
if qualified institutional buyers become uninterested for a time.

The assets used as cover for OTC options written by a fund will be
considered illiquid unless the OTC options are sold to qualified dealers who
agree that the fund may repurchase any OTC option it writes at a maximum price
to be calculated by a formula set forth in the option agreement. The cover for
an OTC option written subject to this procedure would be considered illiquid
only to the extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option.

Senior Securities
- -----------------

The 1940 Act prohibits the issuance of senior securities by a registered
open-end fund with one exception. A fund may borrow from banks provided that
immediately after any such borrowing there is an asset coverage of at least 300%
for all borrowings of the fund. Borrowing for temporary purposes only and in an
amount not exceeding 5% of the value of the total assets of a fund at the time
the borrowing is made is not deemed to be an issuance of a senior security.

There are various investment techniques which may give rise to an
obligation of a fund to pay in the future about which the SEC has stated it
would not raise senior security concerns, provided the fund maintains segregated
assets in an amount that covers the future payment obligation. Such investment
techniques include, among other things, when-issued securities, futures and
forward contracts, short-options positions, and repurchase agreements.

Municipal Obligations
- ---------------------

Municipal obligations include 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

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<PAGE>

a fund. 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 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.
Industrial development bonds ("IDBs") and private activity bonds ("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. In addition, certain
types of IDBs and 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.

Closed End Investment Companies
- -------------------------------

Each fund may invest up to 5% of its net assets in the securities of
closed-end investment companies. Such investments 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. Shares of many closed-end investment companies at times trade at
substantial discounts to their net asset value. A fund will invest in such
funds, when, in the Adviser's judgment, the potential benefits of such
investment justify the payment of any applicable premium or sales charge.

Private Placements
- ------------------

Each fund may acquire restricted securities in private placement
transactions, directly from the issuer or from security holders, frequently at
higher yields than comparable publicly traded securities. Privately-placed
securities can be sold by each fund only (1) pursuant to SEC Rule 144A or other
exemption; (2) in privately negotiated transactions to a limited number of
purchasers; or (3) in public offerings made pursuant to an effective
registration statement under the 1933 Act. Private or public sales of such
securities by a fund may involve significant delays and expense. Private sales
require negotiations with one or more purchasers and generally produce less
favorable prices than the sale of comparable unrestricted securities. Public
sales generally involve the time and expense of preparing and processing a
registration statement under the 1933 Act and may involve the payment of
underwriting commissions; accordingly, the proceeds may be less than the
proceeds from the sale of securities of the same class which are freely
marketable.

Restrictions: Restricted securities will not be purchased by either Government
Intermediate or Investment Grade if, as a result, more than 5% of that fund's
assets would consist of restricted securities.

The following information about futures and options applies to Government
Intermediate, Investment Grade and High Yield, as indicated:

Options, Futures and Other Strategies
- -------------------------------------

GENERAL. Each fund may invest in certain options, futures contracts
(sometimes referred to as "futures"), options on futures contracts, and High
Yield may also invest in forward currency contracts, swaps, caps, floors,
collars, indexed securities and other derivative instruments (collectively,
"Financial Instruments") to attempt to enhance its income or yield or to attempt
to hedge its investments. The strategies described below may be used in an
attempt to manage High Yield's foreign currency exposure (including exposure to
the Euro) as well as other risks of that fund's investments that can affect its
net asset value.

As an operating policy, each fund will only purchase or sell a particular
Financial Instrument if the fund is authorized to invest in the type of asset by
which the return on, or value of, the Financial Instrument is primarily
measured. Since High Yield is authorized to invest in foreign securities, it may
purchase and sell foreign currency and Euro derivatives.

13
<PAGE>

Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Financial Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held in a fund's portfolio. Thus, in a short hedge a fund takes a
position in a Financial Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged.

Conversely, a long hedge is a purchase or sale of a Financial Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the fund intends to acquire. Thus, in a
long hedge, a fund takes a position in a Financial Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. A long hedge is sometimes referred to as an
anticipatory hedge. In an anticipatory hedge transaction, a fund does not own a
corresponding security and, therefore, the transaction does not relate to a
security the fund owns. Rather, it relates to a security that the fund intends
to acquire. If a fund does not complete the hedge by purchasing the security it
anticipated purchasing, the effect on the fund's portfolio is the same as if the
transaction were entered into for speculative purposes.

Financial Instruments on securities generally are used to attempt to hedge
against price movements in one or more particular securities positions that a
fund owns or intends to acquire. Financial Instruments on indices, in contrast,
generally are used to attempt to hedge against price movements in market sectors
in which a fund has invested or expects to invest. Financial Instruments on debt
securities may be used to hedge either individual securities or broad debt
market sectors.

The use of Financial Instruments is subject to applicable regulations of
the SEC, the several exchanges upon which they are traded and the Commodity
Futures Trading Commission (the "CFTC"). In addition, a fund's ability to use
Financial Instruments may be limited by tax considerations. See "Additional Tax
Information."

With respect to High Yield, in addition to the instruments, strategies and
risks described below, the Adviser expects to discover additional opportunities
in connection with Financial Instruments and other similar or related
techniques. These new opportunities may become available as the Adviser develops
new techniques, as regulatory authorities broaden the range of permitted
transactions and as new Financial Instruments or other techniques are developed.
The Adviser may utilize these opportunities to the extent that they are
consistent with the fund's investment objective and permitted by its investment
limitations and applicable regulatory authorities. The fund might not use any of
these strategies, and there can be no assurance that any strategy used will
succeed. The fund's Prospectuses or this Statement of Additional Information
will be supplemented to the extent that new products or techniques involve
materially different risks than those described below or in the Prospectuses.

Special Risks. The use of Financial Instruments involves special
considerations and risks, certain of which are described below. In general,
these techniques may increase the volatility of a fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. Risks
pertaining to particular Financial Instruments are described in the sections
that follow.

(1) Successful use of most Financial Instruments depends upon the Adviser's
ability to predict movements of the overall securities, currency and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. There can be no assurance that any particular
strategy will succeed, and use of Financial Instruments could result in a loss,
regardless of whether the intent was to reduce risk or increase return.

(2) There might be imperfect correlation, or even no correlation, between
price movements of a Financial Instrument and price movements of the investments
being hedged. For example, if the value of a Financial Instrument used in a
short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being

14
<PAGE>

hedged, such as speculative or other pressures on the markets in which Financial
Instruments are traded. The effectiveness of hedges using Financial Instruments
on indices will depend on the degree of correlation between price movements in
the index and price movements in the securities being hedged.

Because there is a limited number of types of exchange-traded options and
futures contracts, it is likely that the standardized contracts available will
not match a fund's current or anticipated investments exactly. A fund may invest
in options and futures contracts based on securities with different issuers,
maturities or other characteristics from the securities in which it typically
invests, which involves a risk that the options or futures position will not
track the performance of the fund's other investments.

Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match a fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. A fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in a fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.

(3) If successful, the above-discussed strategies can reduce risk of loss
by wholly or partially offsetting the negative effect of unfavorable price
movements. However, such strategies can also reduce opportunity for gain by
offsetting the positive effect of favorable price movements. For example, if a
fund entered into a short hedge because the Adviser projected a decline in the
price of a security in the fund's portfolio, and the price of that security
increased instead, the gain from that increase might be wholly or partially
offset by a decline in the price of the Financial Instrument. Moreover, if the
price of the Financial Instrument declined by more than the increase in the
price of the security, the fund could suffer a loss. In either such case, the
fund would have been in a better position had it not attempted to hedge at all.

(4) As described below, a fund might be required to maintain assets as
"cover," maintain accounts or make margin payments when it takes positions in
Financial Instruments involving obligations to third parties (i.e., Financial
Instruments other than purchased options). If a fund were unable to close out
its positions in such Financial Instruments, it might be required to continue to
maintain such assets or accounts or make such payments until the position
expired or matured. These requirements might impair the fund's ability to sell a
portfolio security or make an investment at a time when it would otherwise be
favorable to do so, or require that the fund sell a portfolio security at a
disadvantageous time.

(5) A fund's ability to close out a position in a Financial Instrument
prior to expiration or maturity depends on the existence of a liquid secondary
market or, in the absence of such a market, the ability and willingness of the
other party to the transaction (the "counterparty") to enter into a transaction
closing out the position. Therefore, there is no assurance that any position can
be closed out at a time and price that is favorable to a fund.

COVER. Transactions using Financial Instruments, other than purchased
options, expose a fund to an obligation to another party. A fund will not enter
into any such transactions unless it owns either (1) an offsetting ("covering")
position in securities, currencies or other options, futures contracts or
forward contracts, or (2) cash and liquid assets with a value, marked-to-market
daily, sufficient to cover its potential obligations to the extent not covered
as provided in (1) above. Each fund will comply with SEC guidelines regarding
cover for these instruments and will, if the guidelines so require, set aside
cash or liquid assets in an account with its custodian in the prescribed amount
as determined daily.

<PAGE>

Assets used as cover or held in an account cannot be sold while the
position in the corresponding Financial Instrument is open, unless they are
replaced with other appropriate assets. As a result, the commitment of a large
portion of a fund's assets to cover in accounts could impede portfolio
management or a fund's ability to meet redemption requests or other current
obligations.

OPTIONS. A call option gives the purchaser the right to buy, and obligates
the writer to sell, the underlying investment at the agreed-upon price during
the option period. A put option gives the purchaser the right to sell, and
obligates the writer to buy, the underlying investment at the agreed-upon price
during the option period. Purchasers of options pay an amount, known as a
premium, to the option writer in exchange for the right under the option
contract.

The purchase of call options can serve as a long hedge, and the purchase of
put options can serve as a short hedge. Writing put or call options can enable a
fund to enhance income or yield by reason of the premiums paid by the purchasers
of such options. However, if the market price of the security underlying a put
option declines to less than the exercise price of the option, minus the premium
received, the fund would expect to suffer a loss.

Writing call options can serve as a limited short hedge, because declines
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security or currency
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the fund will be obligated to
sell the security or currency at less than its market value. If the call option
is an OTC option, the securities or other assets used as cover would be
considered illiquid to the extent described under "Illiquid and Restricted
Investments."

Writing put options can serve as a limited long hedge because increases in
the value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security or currency
depreciates to a price lower than the exercise price of the put option, it can
be expected that the put option will be exercised and the fund will be obligated
to purchase the security or currency at more than its market value. If the put
option is an OTC option, the securities or other assets used as cover would be
considered illiquid to the extent described under "Illiquid and Restricted
Investments."

The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options that expire unexercised have
no value.

A fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the fund to realize profits or
limit losses on an option position prior to its exercise or expiration.

A type of put that a fund may purchase is an "optional delivery standby
commitment," which is entered into by parties selling debt securities to the
fund. An optional delivery standby commitment gives the fund the right to sell
the security back to the seller on specified terms. This right is provided as an
inducement to purchase the security.

RISKS OF OPTIONS ON SECURITIES. Options offer large amounts of leverage,
which will result in a fund's net asset value being more sensitive to changes in
the value of the related instrument. A fund may purchase or write both
exchange-traded and OTC options. Exchange-traded options in the United States
are issued by a clearing organization affiliated with the exchange on which the
option is listed that, in effect, guarantees completion of every exchange-traded
option transaction. In contrast, OTC options are contracts between a fund and

16
<PAGE>

its counterparty (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when a fund purchases an OTC option, it relies on
the counterparty from whom it purchased the option to make or take delivery of
the underlying investment upon exercise of the option. Failure by the
counterparty to do so would result in the loss of any premium paid by a fund as
well as the loss of any expected benefit of the transaction.

A fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. However, there can be no
assurance that such a market will exist at any particular time. Closing
transactions can be made for OTC options only by negotiating directly with the
counterparty, or by a transaction in the secondary market if any such market
exists. There can be no assurance that a fund will in fact be able to close out
an OTC option position at a favorable price prior to expiration. In the event of
insolvency of the counterparty, a fund might be unable to close out an OTC
option position at any time prior to its expiration.

If a fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by a fund could cause material losses because the fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.

OPTIONS ON INDICES. Puts and calls on indices are similar to puts and calls
on securities or futures contracts except that all settlements are in cash and
gain or loss depends on changes in the index in question rather than on price
movements in individual securities or futures contracts. When a fund writes a
call on an index, it receives a premium and agrees that, prior to the expiration
date, the purchaser of the call, upon exercise of the call, will receive from
the fund an amount of cash if the closing level of the index upon which the call
is based is greater than the exercise price of the call. The amount of cash is
equal to the difference between the closing price of the index and the exercise
price of the call times a specified multiple ("multiplier"), which determines
the total dollar value for each point of such difference. When a fund buys a
call on an index, it pays a premium and has the same rights as to such call as
are indicated above. When a fund buys a put on an index, it pays a premium and
has the right, prior to the expiration date, to require the seller of the put,
upon the fund's exercise of the put, to deliver to the fund an amount of cash if
the closing level of the index upon which the put is based is less than the
exercise price of the put, which amount of cash is determined by the multiplier,
as described above for calls. When a fund writes a put on an index, it receives
a premium and the purchaser of the put has the right, prior to the expiration
date, to require the fund to deliver to it an amount of cash equal to the
difference between the closing level of the index and exercise price times the
multiplier if the closing level is less than the exercise price.

RISKS OF OPTIONS ON INDICEs. The risks of investment in options on indices
may be greater than options on securities. Because index options are settled in
cash, when a fund writes a call on an index it cannot provide in advance for its
potential settlement obligations by acquiring and holding the underlying
securities. A fund can offset some of the risk of writing a call index option by
holding a diversified portfolio of securities similar to those on which the
underlying index is based. However, a fund cannot, as a practical matter,
acquire and hold a portfolio containing exactly the same securities as underlie
the index and, as a result, bears a risk that the value of the securities held
will vary from the value of the index.

Even if a fund could assemble a portfolio that exactly reproduced the
composition of the underlying index, it still would not be fully covered from a
risk standpoint because of the "timing risk" inherent in writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, a fund as the call writer will not learn that the fund
has been assigned until the next business day at the earliest. The time lag
between exercise and notice of assignment poses no risk for the writer of a
covered call on a specific underlying security, such as common stock, because
there the writer's obligation is to deliver the underlying security, not to pay
its value as of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply

17
<PAGE>

delivering it, and the risk that its value may have declined since the exercise
date is borne by the exercising holder. In contrast, even if the writer of an
index call holds securities that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering
those securities against payment of the exercise price. Instead, it will be
required to pay cash in an amount based on the closing index value on the
exercise date. By the time it learns that it has been assigned, the index may
have declined, with a corresponding decline in the value of its portfolio. This
"timing risk" is an inherent limitation on the ability of index call writers to
cover their risk exposure by holding securities positions.

If a fund has purchased an index option and exercises it before the closing
index value for that day is available, it runs the risk that the level of the
underlying index may subsequently change. If such a change causes the exercised
option to fall out-of-the-money, the fund will be required to pay the difference
between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer.

OTC OPTIONS. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size, and strike
price, the terms of OTC options (options not traded on exchanges) generally are
established through negotiation with the other party to the option contract.
While this type of arrangement allows a fund great flexibility to tailor the
option to its needs, OTC options generally involve greater risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.

Generally, OTC foreign currency options used by the fund are European-style
options. This means that the option is only exercisable immediately prior to its
expiration. This is in contrast to American-style options, which are exercisable
at any time prior to the expiration date of the option.

FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTs. The purchase of futures
or call options on futures can serve as a long hedge, and the sale of futures or
the purchase of put options on futures can serve as a short hedge. Writing call
options on futures contracts can serve as a limited short hedge, using a
strategy similar to that used for writing call options on securities or indices.
Similarly, writing put options on futures contracts can serve as a limited long
hedge. Futures contracts and options on futures contracts can also be purchased
and sold to attempt to enhance income or yield.

In addition, futures strategies can be used to manage the average duration
of a fund's fixed-income portfolio. If the Adviser wishes to shorten the average
duration of a fund's fixed-income portfolio, the fund may sell a debt futures
contract or a call option thereon, or purchase a put option on that futures
contract. If the Adviser wishes to lengthen the average duration of a fund's
fixed-income portfolio, the fund may buy a debt futures contract or a call
option thereon, or sell a put option thereon.

No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a fund is required to deposit "initial margin"
in an amount generally equal to 10% or less of the contract value. Margin must
also be deposited when writing a call or put option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, a fund may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.

Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of a fund's obligations to or from a futures
broker. When a fund purchases an option on a futures contract, the premium paid
plus transaction costs is all that is at risk. In contrast, when a fund

18
<PAGE>

purchases or sells a futures contract or writes a call or put option thereon, it
is subject to daily variation margin calls that could be substantial in the
event of adverse price movements. If a fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.

Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
However, there can be no assurance that a liquid secondary market will exist for
a particular contract at a particular time. In such event, it may not be
possible to close a futures contract or options position.

Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a futures contract or an option on a futures
contract can vary from the previous day's settlement price; once that limit is
reached, no trades may be made that day at a price beyond the limit. Daily price
limits do not limit potential losses because prices could move to the daily
limit for several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.

If a fund were unable to liquidate a futures contract or an option on a
futures position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. A fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, a fund would continue to be required to
make daily variation margin payments and might be required to maintain the
position being hedged by the future or option or to maintain cash or securities
in a segregated account.

RISKS OF FUTURES CONTRACTS AND OPTIONS THEREON. The ordinary spreads
between prices in the cash and futures markets (including the options on futures
market), due to differences in the natures of those markets, are subject to the
following factors, which may create distortions. First, all participants in the
futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the cash and futures markets. Second, the liquidity
of the futures market depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent participants
decide to make or take delivery, liquidity in the futures market could be
reduced, thus producing distortion. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of general
interest rate, currency exchange rate or stock market trends by the Adviser may
still not result in a successful transaction. The Adviser may be incorrect in
its expectations as to the extent of various interest rate, currency exchange
rate or stock market movements or the time span within which the movements take
place.

INDEX FUTURES -- High Yield only. The risk of imperfect correlation between
movements in the price of an index future and movements in the price of the
securities that are the subject of the hedge increases as the composition of the
fund's portfolio diverges from the securities included in the applicable index.
The price of the index futures may move more than or less than the price of the
securities being hedged. If the price of the index futures moves less than the
price of the securities that are the subject of the hedge, the hedge will not be
fully effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
securities, the fund will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the index futures, the fund may buy or sell index
futures in a greater dollar amount than the dollar amount of the securities
being hedged if the historical volatility of the prices of such securities being

19
<PAGE>

hedged is more than the historical volatility of the prices of the securities
included in the index. It is also possible that, where the fund has sold index
futures contracts to hedge against decline in the market, the market may advance
and the value of the securities held in the portfolio may decline. If this
occurred, the fund would lose money on the futures contract and also experience
a decline in value of its portfolio securities. However, while this could occur
for a very brief period or to a very small degree, over time the value of a
diversified portfolio of securities will tend to move in the same direction as
the market indices on which the futures contracts are based.

Where index futures are purchased to hedge against a possible increase in
the price of securities before the fund is able to invest in them in an orderly
fashion, it is possible that the market may decline instead. If the fund then
concludes not to invest in them at that time because of concern as to possible
further market decline or for other reasons, it will realize a loss on the
futures contract that is not offset by a reduction in the price of the
securities it had anticipated purchasing.

To the extent that each fund enters into futures contracts, options on
futures contracts and/or options on foreign currencies traded on a
CFTC-regulated exchange, in each case that are not for bona fide hedging
purposes (as defined by the CFTC), the aggregate initial margin and premiums
required to establish these positions (excluding the amount by which options are
"in-the-money" at the time of purchase) may not exceed 5% of the liquidation
value of the fund's portfolio, after taking into account unrealized profits and
unrealized losses on any contracts the fund has entered into. (In general, a
call option on a futures contract is "in-the-money" if the value of the
underlying futures contract exceeds the strike, i.e., exercise, price of the
call; a put option on a futures contract is "in-the-money" if the value of the
underlying futures contract is exceeded by the strike price of the put.) This
policy does not limit to 5% the percentage of a fund's assets that are at risk
in futures contracts, options on futures contracts and currency options.

Foreign Currency Hedging Strategies -- Special Considerations -- High Yield
only. The fund may use options and futures contracts on foreign currencies
(including the Euro), as described above, and forward currency contracts, as
described below, to attempt to hedge against movements in the values of the
foreign currencies in which the fund's securities are denominated or to attempt
to enhance income or yield. Currency hedges can protect against price movements
in a security that the fund owns or intends to acquire that are attributable to
changes in the value of the currency in which it is denominated. Such hedges do
not, however, protect against price movements in the securities that are
attributable to other causes.

The fund might seek to hedge against changes in the value of a particular
currency when no Financial Instruments on that currency are available or such
Financial Instruments are more expensive than certain other Financial
Instruments. In such cases, the fund may seek to hedge against price movements
in that currency by entering into transactions using Financial Instruments on
another currency or a basket of currencies, the value of which the Adviser
believes will have a high degree of positive correlation to the value of the
currency being hedged. The risk that movements in the price of the Financial
Instrument will not correlate perfectly with movements in the price of the
currency subject to the hedging transaction is magnified when this strategy is
used.

The value of Financial Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Financial
Instruments, the fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.

There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation

20
<PAGE>

information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Financial Instruments until they reopen.

Settlement of hedging transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the fund might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.

FORWARD CURRENCY CONTRACTS -- High Yield only. The fund may enter into
forward currency contracts to purchase or sell foreign currencies for a fixed
amount of U.S. dollars or another foreign currency. A forward currency contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days (term) from the date of the forward
currency contract agreed upon by the parties, at a price set at the time of the
forward currency contract. These forward currency contracts are traded directly
between currency traders (usually large commercial banks) and their customers.

Such transactions may serve as long hedges; for example, the fund may
purchase a forward currency contract to lock in the U.S. dollar price of a
security denominated in a foreign currency that the fund intends to acquire.
Forward currency contract transactions may also serve as short hedges; for
example, the fund may sell a forward currency contract to lock in the U.S.
dollar equivalent of the proceeds from the anticipated sale of a security,
dividend or interest payment denominated in a foreign currency.

The fund may also use forward currency contracts to hedge against a decline
in the value of existing investments denominated in foreign currency. For
example, if the fund owned securities denominated in Euros, it could enter into
a forward currency contract to sell Euros in return for U.S. dollars to hedge
against possible declines in the Euro's value. Such a hedge, sometimes referred
to as a "position hedge," would tend to offset both positive and negative
currency fluctuations, but would not offset changes in security values caused by
other factors. The fund could also hedge the position by selling another
currency expected to perform similarly to the Euro. This type of hedge,
sometimes referred to as a "proxy hedge," could offer advantages in terms of
cost, yield or efficiency, but generally would not hedge currency exposure as
effectively as a simple hedge into U.S. dollars. Proxy hedges may result in
losses if the currency used to hedge does not perform similarly to the currency
in which the hedged securities are denominated.

The fund also may use forward currency contracts to attempt to enhance
income or yield. The fund could use forward currency contracts to increase its
exposure to foreign currencies that the Adviser believes might rise in value
relative to the U.S. dollar, or shift its exposure to foreign currency
fluctuations from one country to another. For example, if the fund owned
securities denominated in a foreign currency and the Adviser believed that
currency would decline relative to another currency, it might enter into a
forward currency contract to sell an appropriate amount of the first foreign
currency, with payment to be made in the second foreign currency.

The cost to the fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When the fund enters into a forward currency contract, it relies on the
counterparty to make or take delivery of the underlying currency at the maturity
of the contract. Failure by the counterparty to do so would result in the loss
of any expected benefit of the transaction.

21
<PAGE>

As is the case with futures contracts, purchasers and sellers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures contracts, by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can be
no assurance that the fund will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the counterparty, the fund might be unable to close out a forward
currency contract at any time prior to maturity. In either event, the fund would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in securities denominated in the
foreign currency or to maintain cash or liquid assets in an account.

The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the forward
currency contract has been established. Thus, the fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward currency contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.

Successful use of forward currency contracts depends on the Adviser's skill
in analyzing and predicting currency values. Forward currency contracts may
substantially change the fund's exposure to changes in currency exchange rates
and could result in losses to the fund if currencies do not perform as the
Adviser anticipates. There is no assurance that the Adviser's use of forward
currency contracts will be advantageous to the fund or that the Adviser will
hedge at an appropriate time.

COMBINED POSITIONS. A fund may purchase and write options in combination
with each other, or in combination with futures or forward contracts, to adjust
the risk and return characteristics of its overall position. For example, a fund
may purchase a put option and write a call option on the same underlying
instrument, in order to construct a combined position whose risk and return
characteristics are similar to selling a futures contract. Another possible
combined position would involve writing a call option at one strike price and
buying a call option at a lower price, in order to reduce the risk of the
written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.

TURNOVER. Each fund's options and futures activities may affect its
turnover rate and brokerage commission payments. The exercise of calls or puts
written by a fund, and the sale or purchase of futures contracts, may cause it
to sell or purchase related investments, thus increasing its turnover rate. Once
a fund has received an exercise notice on an option it has written, it cannot
effect a closing transaction in order to terminate its obligation under the
option and must deliver or receive the underlying securities at the exercise
price. The exercise of puts purchased by a fund may also cause the sale of
related investments, also increasing turnover; although such exercise is within
the fund's control, holding a protective put might cause it to sell the related
investments for reasons that would not exist in the absence of the put. The fund
will pay a brokerage commission each time it buys or sells a put or call or
purchases or sells a futures contract. Such commissions may be higher than those
that would apply to direct purchases or sales.

SWAPS, CAPS, FLOORS, COLLARS -- High Yield only. The fund may enter into
swaps, caps, floors, and collars to preserve a return or a spread on a
particular investment or portion of its portfolio, to protect against any
increase in the price of securities the fund anticipates purchasing at a later
date or to attempt to enhance yield. A swap involves the exchange by the fund
with another party of their respective commitments to pay or receive cash flows,
e.g., an exchange of floating rate payments for fixed-rate payments. The
purchase of a cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined value, to receive payments on a notional principal
amount from the party selling the cap. The purchase of a floor entitles the

22
<PAGE>

purchaser, to the extent that a specified index falls below a predetermined
value, to receive payments on a notional principal amount from the party selling
the floor. A collar combines elements of buying a cap and selling a floor.

Swap agreements, including caps, floors, and collars, can be individually
negotiated and structured to include exposure to a variety of different types of
investments or market factors. Depending on their structure, swap agreements may
increase or decrease the overall volatility of the fund's investments and its
share price and yield because, and to the extent, these agreements affect the
fund's exposure to long- or short-term interest rates (in the United States or
abroad), foreign currency values, mortgage-backed security values, corporate
borrowing rates or other factors such as security prices or inflation rates.

Swap agreements will tend to shift the fund's investment exposure from one
type of investment to another. For example, if the fund agrees to exchange
payments in U.S. dollars for payments in foreign currency, the swap agreement
would tend to decrease the fund's exposure to U.S. interest rates and increase
its exposure to foreign currency and interest rates. Caps and floors have an
effect similar to buying or writing options.

The creditworthiness of firms with which the fund enters into swaps, caps,
floors, or collars will be monitored by the Adviser. If a firm's
creditworthiness declines, the value of the agreement would be likely to
decline, potentially resulting in losses. If a default occurs by the other party
to such transaction, the fund will have contractual remedies pursuant to the
agreements related to the transaction.

The net amount of the excess, if any, of the fund's obligations over its
entitlements with respect to each swap will be accrued on a daily basis and an
amount of cash or liquid assets having an aggregate net asset value at least
equal to the accrued excess will be maintained in an account with the fund's
custodian that satisfies the requirements of the 1940 Act. The fund will also
establish and maintain such accounts with respect to its total obligations under
any swaps that are not entered into on a net basis and with respect to any caps
or floors that are written by the fund. The Adviser and the fund believe that
such obligations do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to the fund's borrowing
restrictions. The fund understands that the position of the SEC is that assets
involved in swap transactions are illiquid and are, therefore, subject to the
limitations on investing in illiquid investments. See "Illiquid and Restricted
Investments."

The following investment policies apply only to High Yield:

Foreign Securities
- ------------------

The fund may invest in foreign securities. Investment in foreign securities
presents certain risks, including those resulting from fluctuations in currency
exchange rates, revaluation of currencies, future political and economic
developments and the possible imposition of currency exchange blockages or other
foreign governmental laws or restrictions, reduced availability of public
information concerning issuers, and the fact that foreign issuers are not
generally subject to uniform accounting, auditing and financial reporting
standards or other regulatory practices and requirements comparable to those
applicable to domestic issuers. These risks are intensified when investing in
countries with developing economies and securities markets, also known as
"emerging markets." Moreover, securities of many foreign issuers may be less
liquid and their prices more volatile than those of comparable domestic issuers.
In addition, with respect to certain foreign countries, there is the possibility
of expropriation, confiscatory taxation, withholding taxes and limitations on
the use or removal of funds or other assets.

The costs associated with investment in foreign issuers, including
withholding taxes, brokerage commissions and custodial fees, are higher than
those associated with investment in domestic issuers. In addition, foreign
securities transactions may be subject to difficulties associated with the
settlement of such transactions. Delays in settlement could result in temporary
periods when assets of a fund are uninvested and no return is earned thereon.

23
<PAGE>

The inability of the fund to make intended security purchases due to settlement
problems could cause it to miss attractive investment opportunities. Inability
to dispose of a portfolio security due to settlement problems could result in
losses to the fund due to subsequent declines in value of the portfolio security
or, if the fund has entered into a contract to sell the security, could result
in liability to the purchaser.

Currency Fluctuations
- ---------------------

The fund, may invest in the securities of foreign issuers which are
denominated in foreign currencies and may temporarily hold uninvested cash in
bank deposits in foreign currencies. The rate of exchange between the U.S.
dollar and other currencies is determined by several factors, including the
supply and demand for particular currencies, central bank efforts to support
particular currencies, the relative movement of interest rates and pace of
business activity in the other countries and the U.S., and other economic and
financial conditions affecting the world economy.

A decline in the value of any particular currency against the U.S. dollar
will cause a decline in the U.S. dollar value of the fund's holdings of
securities and cash denominated in such currency and, therefore, will cause an
overall decline in the fund's net asset value and any net investment income and
capital gains derived from such securities to be distributed in U.S. dollars to
shareholders of the fund. Moreover, if the value of the foreign currencies in
which the fund receives its income falls relative to the U.S. dollar between
receipt of the income and the making of fund distributions, the fund may be
required to liquidate securities in order to make distributions if the fund has
insufficient cash in U.S. dollars to meet distribution requirements.

Loan Participations and Assignments
- -----------------------------------

The fund may purchase an interest in loans originated by banks and other
financial institutions. Policies of the fund limit the percentage of the fund's
assets that can be invested in the securities of any one issuer, or in issuers
primarily involved in one industry. Legal interpretations by the SEC staff may
require the fund, in some instances, to treat both the lending bank and the
borrower as "issuers" of a loan participation by the fund. In combination, the
fund's policies and the SEC staff's interpretations may limit the amount the
fund can invest in loan participations.

Although some of the loans in which the fund invests may be secured, there
is no assurance that the collateral can be liquidated in particular cases, or
that its liquidation value will be equal to the value of the debt. Borrowers
that are in bankruptcy may pay only a small portion of the amount owed, if they
are able to pay at all. Where the fund purchases a loan through an assignment,
there is a possibility that the fund will, in the event the borrower is unable
to pay the loan, become the owner of the collateral. This involves certain risks
to the fund as a property owner.

Loans are often administered by a lead bank, which acts as agent for the
lenders in dealing with the borrower. In asserting rights against the borrower,
the fund may be dependent on the willingness of the lead bank to assert these
rights, or upon a vote of all the lenders to authorize the action. Assets held
by the lead bank for the benefit of the fund may be subject to claims of the
lead bank's creditors.

Foreign Currency Warrants
- -------------------------

Foreign currency warrants entitle the holder to receive from their issuer
an amount of cash (generally, for warrants issued in the United States, in U.S.
dollars) that is calculated pursuant to a predetermined formula and based on the
exchange rate between a specified foreign currency and the U.S. dollar as of the
exercise date of the warrant. Foreign currency warrants generally are
exercisable upon their issuance and expire as of a specified date and time.
Foreign currency warrants have been issued in connection with U.S.
dollar-denominated debt offerings by major corporate issuers in an attempt to
reduce the foreign currency exchange risk that is inherent in the international
fixed income/debt marketplace. The formula used to determine the amount payable

24
<PAGE>

upon exercise of a foreign currency warrant may make the warrant worthless
unless the applicable foreign currency exchange rate moves in a particular
direction.

Foreign currency warrants are severable from the debt obligations with
which they may be offered and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required either to sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised.

The expiration date of the warrants may be accelerated if the warrants are
delisted from an exchange or if their trading is suspended permanently, which
would result in the loss of any remaining "time value" of the warrants (i.e.,
the difference between the current market value and the exercise value of the
warrants) and, in the case where the warrants were "out-of-the-money," in a
total loss of the purchase price of the warrants. Warrants are generally
unsecured obligations of their issuers and are not standardized foreign currency
options issued by the Options Clearing Corporation ("OCC"). Unlike foreign
currency options issued by OCC, the terms of foreign currency warrants generally
will not be amended in the event of governmental or regulatory actions affecting
exchange rates or in the event of the imposition of other regulatory controls
affecting the international currency markets. The initial public offering price
of foreign currency warrants is generally considerably in excess of the price
that a commercial user of foreign currencies might pay in the interbank market
for a comparable option involving significantly larger amounts of foreign
currencies. Foreign currency warrants are subject to significant foreign
exchange risk, including risks arising from complex political and economic
factors.

PORTFOLIO TURNOVER

The portfolio turnover rate is computed by dividing the lesser of purchases
or sales of securities for the period by the average value of portfolio
securities for that period. Short-term securities are excluded from the
calculation. For the years ended December 31, each fund's (other than Government
Money Market's) portfolio turnover rates were as follows:

Fund: 1999 1998
- ---- ---- ----

Government Intermediate 979% 356%
Investment Grade 145% 279%
High Yield 83% 107%

Each fund anticipates that its annual portfolio turnover rate may exceed
300%. The funds may sell fixed-income securities and buy similar securities to
obtain yield and take advantage of market anomalies, a practice which increases
the turnover rate. A portfolio turnover rate over 100% will result in higher
transaction costs paid by a fund. It may also increase the amount of net
short-term capital gains, if any, realized by a fund.

MANAGEMENT OF THE FUNDS

The Corporation's officers are responsible for the operation of the funds
under the direction of the Board of Directors. The officers and directors of the
Corporation, their date of birth and their principal occupations during the past
five years are set forth below. An asterisk (*) indicates those officers and/or
directors who are interested persons of the Corporation as defined by the 1940
Act. The business address of each officer and director is 100 Light Street,
Baltimore, Maryland 21202, unless otherwise indicated.

25
<PAGE>

JOHN F. CURLEY, JR.*, [07/24/39] Chairman of the Board and Director;
President and/or Chairman of the Board and Director/Trustee of all Legg Mason
retail funds. Retired: Vice Chairman and Director of Legg Mason Wood Walker,
Inc. and Legg Mason, Inc. Formerly: Director of Legg Mason Fund Adviser, Inc.
and Western Asset Management Company (each a registered investment adviser);
Officer and/or Director of various other affiliates of Legg Mason, Inc.

EDMUND J. CASHMAN, JR.*, [08/31/36] Vice Chairman and Director; Senior
Executive Vice President and Director of Legg Mason Wood Walker, Inc.; Officer
and/or Director of various other affiliates of Legg Mason, Inc.; President and
Director of Legg Mason Tax Exempt Trust, Inc. and Legg Mason Tax-Free Income
Funds; Trustee of Legg Mason Cash Reserve Trust.

ARNOLD L. LEHMAN, [07/18/44], Director; 200 Eastern Parkway, Brooklyn, NY.
Director, The Brooklyn Museum of Art; Director/Trustee of all Legg Mason retail
funds. Formerly: Director, Baltimore Museum of Art.

JILL E. McGOVERN, [08/29/44], Director; 400 Seventh St., NW, Washington,
DC. Chief Executive Officer of the Marrow Foundation; Director/Trustee of all
Legg Mason retail funds. Formerly: Executive Director of the Baltimore
International Festival (January 1991 - March 1993); and Senior Assistant to the
President of The Johns Hopkins University (1986 - 1991).

RICHARD G. GILMORE [6/9/27], Director; 10310 Tamo Shanter Place, Bradenton,
Florida. Independent Consultant. Director of CSS Industries, Inc. (diversified
holding company whose subsidiaries are engaged in the manufacture and sale of
decorative paper products, business forms, and specialty metal packaging);
Director of PECO Energy Company (formerly Philadelphia Electric Company);
Director/Trustee of all Legg Mason retail funds. Formerly: Senior Vice President
and Chief Financial Officer of Philadelphia Electric Company (now PECO Energy
Company); Executive Vice President and Treasurer, Girard Bank, and Vice
President of its parent holding company the Girard Company; and Director of
Finance, City of Philadelphia.

T.A. RODGERS [10/22/34], Director; 2901 Boston Street, Baltimore, Maryland.
Principal, T.A. Rodgers & Associates (management consulting). Director/Trustee
of all Legg Mason retail funds. Formerly: Director and Vice President of
Corporate Development, Polk Audio, Inc. (manufacturer of audio components).

The executive officers of the Corporation, other than those who also serve
as directors, are:

EDWARD A. TABER, III,* [08/25/43], President; Senior Executive Vice
President of Legg Mason, Inc. and Legg Mason Wood Walker, Inc.; Chairman and
Director of Legg Mason Fund Adviser, Inc. and Director of Western Asset
Management Company (each a registered investment adviser); President and/or
Director/Trustee of all Legg Mason retail funds except Legg Mason Tax Exempt
Trust. Formerly: Executive Vice President of T. Rowe Price-Fleming
International, Inc. (1986-1992) and Director of the Taxable Income Division at
T. Rowe Price Associates, Inc. (1973-1992).

MARIE K. KARPINSKI*, [01/01/49] Vice President and Treasurer; Treasurer of
Legg Mason Fund Adviser, Inc.; Vice President and Treasurer of all Legg Mason
retail funds; Vice President of Legg Mason.

PATRICIA A. MAXEY*, [7/10/67], Secretary, employee of Legg Mason, Inc.
since November 1999. Formerly: employee of Select Appointments International
(1998-1999) and Fidelity Investments (1995-1997).

BRIAN M. EAKES*, [12/9/69] Assistant Treasurer and Assistant Secretary;
employee of Legg Mason, Inc. since July 1995. Formerly: Senior Associate - Audit
of Coopers & Lybrand L.L.P. (Aug. 1992 - June 1995).

26
<PAGE>

Officers and directors of the fund who are "interested persons" of the
fund, as defined in the 1940 Act, receive no salary or fees from the fund.
Independent directors of the fund receive an annual retainer and a per meeting
fee based on average net assets of each fund at December 31 of the previous
year.

The Nominating Committee of the Board of Directors is responsible for the
selection and nomination of disinterested directors. The Committee is composed
of Messrs. Gilmore, Lehman, Rodgers, and Dr. McGovern.

On April 7, 2000, the directors and officers of the Corporation
beneficially owned, in the aggregate, less than 1% of each fund's outstanding
Shares.

On March 31, 2000, the following entities owned 5% or more of the funds'
outstanding shares:

Name of Fund Name of Shareholder Shareholder Address % of Ownership
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>

Government Money Market George E Thomsen & Hugh P. One Charles Street 6.99%
McCormick Baltimore, MD 21201

High Yield--Navigator Northland Mission Inc. PO Box 7 100.00%
Shares Pound, WI 54161

Government Legg Mason Wood Walker, Inc. PO Box 1476 79.36%
Intermediate-Term Defferred Comp Navigator US Gov Baltimore, MD 21203-1476
Navigator Shares c/o Brian Becker LM Profit SH PL

IBAK & Co. PO Box 1700 17.25%
102 South Clinton
Iowa City, IA 52240

Investment Grade Income Legg Mason Trust, fsb PO Box 1476 50.00%
Lorraine Coolick TTEE Baltimore, MD 21203
Lorraine Coolick Revocable

Legg Mason Trust, fsb PO Box 1476 50.00%
Allan Cook TTEE Baltimore, MD 21203
Allan Cook Revocable

</TABLE>
27
<PAGE>

The following table provides certain information relating to the
compensation of the Corporation's directors for the fiscal year ended December
31, 1999. None of the Legg Mason funds has any retirement plan for its
directors.

- --------------------------------------------------------------------------------
Aggregate Total Compensation From
Compensation Funds and Fund Complex
Name of Person and Position From Funds* Paid to Directors**
- --------------------------------------------------------------------------------
John F. Curley, Jr. -
Chairman of the Board and Director None None
- --------------------------------------------------------------------------------
Edmund J. Cashman, Jr.
Vice Chairman and Director None None
- --------------------------------------------------------------------------------
Richard G. Gilmore -
Director $8,400 $41,100
- --------------------------------------------------------------------------------
Arnold L. Lehman -
Director $8,400 $41,100
- --------------------------------------------------------------------------------
Jill E. McGovern -
Director $8,400 $41,100
- --------------------------------------------------------------------------------
T.A. Rodgers -
Director $8,400 $41,100
- --------------------------------------------------------------------------------

* Represents compensation paid to the directors during the fiscal year ending
December 31, 1999.

** Represents aggregate compensation paid to each director during the calendar
year ended December 31, 1999. There are twelve open-end investment companies in
the Legg Mason complex (with a total of twenty-four funds).

MANAGEMENT AGREEMENT

Legg Mason Fund Adviser, Inc., ("LMFA") 100 Light Street, Baltimore,
Maryland 21202, a Maryland corporation, serves as the manager for each fund
under separate management agreements (each a "Management Agreement"). Each
Management Agreement provides that, subject to overall direction by the Board of
Directors, LMFA will manage the investment and other affairs of each fund. Under
each Management Agreement, LMFA is responsible for managing the fund's portfolio
of securities and for making purchases and sales of securities consistent with
the investment objectives and policies described in each fund's Prospectus and
this Statement of Additional Information. LMFA also is obligated to (a) furnish
each fund with office space and executive and other personnel necessary for the
operations of the fund; (b) supervise all aspects of each fund's operations; (c)
bear the expense of certain informational and purchase and redemption services
to the fund's shareholders; (d) arrange, but not pay for, the periodic updating
of prospectuses, proxy material, tax returns and reports to shareholders and
state and federal regulatory agencies; and (e) report regularly to the
Corporation's officers and directors. In addition, the manager and its
affiliates pay all compensation of directors and officers of the Corporation who
are officers, directors or employees of LMFA and/or its affiliates. Each fund
pays all of its expenses which are not expressly assumed by LMFA. These expenses
include, among others, interest expense, taxes, brokerage fees and commissions,
expenses of preparing and printing prospectuses, proxy statements and reports to
shareholders and of distributing them to existing shareholders, custodian
charges, transfer agency fees, distribution fees to Legg Mason, Inc. ("Legg
Mason"), each fund's distributor, compensation of the independent directors,
legal and audit expenses, insurance expense, shareholder meetings, proxy
solicitations, expenses of registering and qualifying fund shares for sale under
federal and state law, governmental fees and expenses incurred in connection
with membership in investment company organizations. A fund also is liable for
such nonrecurring expenses as may arise, including litigation to which the fund
may be a party. A fund may also have an obligation to indemnify its directors

28
<PAGE>

and officers with respect to litigation. LMFA has delegated the portfolio
management functions for each fund to the Adviser, Western Asset Management
Company.

LMFA receives for its services a management fee, calculated daily and
payable monthly, at annual rates of each fund's average daily net assets
according to the following:

Management Fee:
--------------
Government Intermediate 0.55%
Investment Grade 0.60%
High Yield 0.65%
Government Money Market 0.50%

LMFA has agreed to waive its fees and reimburse Government Intermediate and
Investment Grade if and to the extent either fund's expenses (exclusive of
taxes, interest, brokerage and extraordinary expenses) exceed during any month
annual rates of the fund's average daily net assets for such month, or certain
asset levels are achieved, whichever occurs first, in accordance with the
following schedule:

Government Intermediate:

Primary Class Shares

Rate Expiration Date Asset Level
---- --------------- -----------
1.00% April 30, 2001 $500 million
1.00% August 1, 1999 $500 million
0.95% April 30, 1996 $400 million
0.90% April 30, 1995 $400 million
0.90% October 31, 1994 $400 million

Navigator Class Shares

Rate Expiration Date Asset Level
---- --------------- -----------
0.50% April 30, 2001 $500 million
0.50% August 1, 1999 $500 million
0.45% April 30, 1996 $400 million
0.40% April 30, 1995 $400 million

For the years ended December 31, 1999, 1998, and 1997, LMFA received
management fees of $1,874,812, $1,836,004, and $1,646,268, respectively (prior
to fees waived of $647,663, $668,052, and $638,030, respectively), for
Government Intermediate.

Investment Grade:

Primary Class Shares

Rate Expiration Date Asset Level
---- --------------- -----------
1.00% April 30, 2001 $250 million
1.00% August 1, 1999 $250 million
0.90% April 30, 1996 $100 million
0.85% April 30, 1995 $100 million
0.85% October 31, 1994 $100 million

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<PAGE>

Navigator Class Shares

Rate Expiration Date Asset Level
---- --------------- -----------
0.50% April 30, 2001 $250 million
0.50% August 1, 1999 $250 million
0.40% April 30, 1995 $100 million

For the years ended December 31, 1999, 1998, and 1997, LMFA received
management fees of $1,097,921, $858,091, and $609,203, respectively (prior to
fees waived of $567,269, $500,620, and $395,225, respectively), for Investment
Grade.

For the years ended December 31, 1999, 1998, and 1997, High Yield paid
management fees of $2,798,889, $3,035,999, and $1,989,139.

During the fiscal years ended December 31, 1999, 1998, and 1997, Government
Money Market paid management fees of $2,044,546, $1,784,853, and $1,670,048.

Under each Management Agreement, LMFA will not be liable for any error of
judgment or mistake of law or for any loss suffered by a fund in connection with
the performance of the respective Management Agreement, except a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation for
services or losses resulting from willful misfeasance, bad faith or gross
negligence in the performance of its duties or from reckless disregard of its
obligations or duties thereunder.

Each Management Agreement terminates automatically upon assignment and is
terminable at any time without penalty by vote of the Corporation's Board of
Directors, by vote of a majority of the outstanding voting securities of that
fund or by the manager, on not less than 60 days' written notice to the other
party, and may be terminated immediately upon the mutual written consent of LMFA
and the respective fund.

Each fund pays all of its expenses which are not expressly assumed by LMFA.
These expenses include, among others, interest expense, taxes, brokerage fees
and commissions, 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, distribution fees to the funds' distributor, compensation of the
independent directors, legal, accounting and audit expenses, insurance expenses,
expenses of registering and qualifying shares of each fund for sale under
federal and state law, governmental fees and expenses incurred in connection
with membership in investment company organizations. Each fund also is liable
for such nonrecurring expenses as may arise, including litigation to which a
fund may be a party. Each fund may also have an obligation to indemnify the
directors and officers of the Corporation with respect to any such litigation.

Under each Management Agreement, each fund has the non-exclusive right to
use the name "Legg Mason" until that Agreement is terminated, or until the right
is withdrawn in writing by LMFA.

LMFA is a wholly owned subsidiary of Legg Mason.

INVESTMENT ADVISORY AGREEMENT

The Adviser, Western Asset Management Company, 117 East Colorado Boulevard,
Pasadena, CA 91105, a wholly owned subsidiary of Legg Mason, serves as
investment adviser to each fund under separate Investment Advisory Agreements
between the Adviser and LMFA (each an "Advisory Agreement").

Under each Advisory Agreement, the Adviser is responsible, subject to the
general supervision of the manager and the Corporation's Board of Directors, for
the actual management of the fund's assets, including the responsibility for

30
<PAGE>

making decisions and placing orders to buy, sell or hold a particular security.
For the Adviser's services to each fund, LMFA (not the fund) pays the Adviser a
fee, computed daily and payable monthly, at an annual rate of the fee received
by LMFA equal to the following:

Fund Advisory Fee:
- ---- ------------
Government Intermediate 20%*
Investment Grade 40%
Government Money Market 30%
High Yield 77%

* Effective October 1, 1994, the Adviser agreed to waive payments by LMFA with
respect to Government Intermediate in excess of 0.20% annually of Government
Intermediate's average daily net assets. This does not affect the fee paid by
the fund.

For the fiscal years ended December 31, 1999, 1998, and 1997, LMFA paid the
following fees to the Adviser on behalf of the funds:

Fund: 1999 1998 1997
- ---- ---- ---- ----
Government Intermediate $681,750 $667,638 $598,643
Investment Grade $212,261 $142,988 $85,591
High Yield $2,152,992 $2,337,719 $1,530,286
Government Money Market $613,364 $535,456 $501,014

Under each Advisory Agreement, the Adviser will not be liable for any error
of judgment or mistake of law or for any loss suffered by LMFA or by a fund in
connection with the performance of the Advisory Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or 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.

Each Advisory Agreement terminates automatically upon assignment and is
terminable at any time without penalty by vote of the Corporation's Board of
Directors, by vote of a majority of each fund's outstanding voting securities,
by LMFA or by the Adviser, on not less than 60 days' notice to the respective
fund and/or the other party(ies). Each Advisory Agreement terminates immediately
upon any termination of the associated Management Agreement or upon the mutual
written consent of the Adviser, LMFA and each fund.

To mitigate the possibility that a fund will be affected by personal
trading of employees, the Corporation, LMFA and the Adviser have adopted
policies that restrict securities trading in the personal accounts of portfolio
managers and others who normally come into advance possession of information on
portfolio transactions. These policies comply, in all material respects, with
the recommendations of the Investment Company Institute.

THE FUNDS' DISTRIBUTOR

Legg Mason Wood Walker, Incorporated ("Distributor"), 100 Light Street,
Baltimore, Maryland, acts as distributor of each fund's shares pursuant to an
Underwriting Agreement with the Corporation. The Underwriting Agreement
obligates Legg Mason to promote the sale of fund shares and to pay certain
expenses in connection with its distribution efforts, including the printing and
distribution of prospectuses and periodic reports used in connection with the
offering to prospective investors (after the prospectuses and reports have been
prepared, set in type and mailed to existing shareholders at each fund's
expense) and for supplementary sales literature and advertising costs.

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<PAGE>

Under the Underwriting Agreement, each fund has the non-exclusive right to
use the name "Legg Mason" until that agreement is terminated, or until the right
is withdrawn by Legg Mason.

The Corporation has adopted a Distribution and Shareholder Services Plan
("Plan") on behalf of each fund which, among other things, permits the fund to
pay Legg Mason fees for its services related to sales and distribution of
Primary Class shares and for the provision of ongoing services to Primary Class
shareholders. Payments are made only from assets attributable to Primary Class
shares. 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.

Each Plan was adopted, as required by Rule 12b-1 under the 1940 Act, by a
vote of the Board of Directors, including a majority of the directors who are
not "interested persons" of the Corporation as that term is defined in the 1940
Act and who have no direct or indirect financial interest in the operation of
the Plan or the Underwriting Agreement ("12b-1 directors"). In approving the
continuance of each Plan, in accordance with the requirements of Rule 12b-1, the
directors determined that there was a reasonable likelihood that the Plan would
continue to benefit each fund and its present and future Primary Class
shareholders. The directors considered, among other things, the extent to which
the potential benefits of each Plan to the fund's shareholders could offset the
costs of the Plan; the likelihood that the Plan would succeed in producing such
potential benefits; the merits of certain possible alternatives to the Plan; and
the extent to which the retention of assets and additional sales of the fund's
Primary Class shares, as applicable, would be likely to maintain or increase the
amount of compensation paid by the fund to LMFA.

In considering the costs of each Plan, the directors gave particular
attention to the fact that any payments made by a fund to Legg Mason under the
Plan would increase that fund's level of expenses in the amount of such
payments. Further, the directors recognized that LMFA would earn greater
management fees if the fund's assets were increased, because such fees are
calculated as a percentage of the fund's assets and thus would increase if net
assets increase. The directors further recognized that there can be no assurance
that any of the potential benefits described below would be achieved if the Plan
was implemented.

Among the potential benefits of each Plan, the directors noted that the
payment of commissions and service fees to Legg Mason and its investment
executives could motivate them to improve their sales efforts with respect to
each fund's Primary Class shares and to maintain and enhance the level of
services they provide to a fund's shareholders. These efforts, in turn, could
lead to increased sales and reduced redemptions, eventually enabling a fund 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 a fund in connection with its Plan. Furthermore, the
investment management of a 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.

The Plan continues 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 with respect to each
fund by vote of a majority of the 12b-1 directors, or by vote of a majority of
the outstanding voting Primary Class securities of a fund. Any change in the
Plan that would materially increase the distribution cost to a fund requires
Primary Class shareholder approval. Otherwise, the Plan may be amended by the
directors, including a majority of the 12b-1 directors, as previously described.

Rule 12b-1 requires that any person authorized to direct the disposition of
monies paid or payable by a fund, pursuant to the Plan or any related agreement,
shall provide to the Corporation's Board of Directors, and the directors shall

32
<PAGE>

review, at least quarterly, a written report of the amounts so expended and the
purposes for which the expenditures were made. Rule 12b-1 also provides that a
fund may rely on that Rule only if, while the Plan is in effect, the nomination
and selection of the Corporation's independent directors is committed to the
discretion of such independent directors.

As compensation for its services and expenses, Legg Mason receives from the
Corporation annual distribution and service fees each equivalent to 0.25% of
each fund's average daily net assets (other than Government Money Market which
has a fee of 0.10%) attributable to Primary Class shares in accordance with each
Plan. The distribution and service fees are calculated daily and paid monthly.
For the fiscal years ended December 31, 1999, 1998, and 1997, each fund paid
distribution and/or service fees to Legg Mason, pursuant to the Plans from
assets attributable to Primary Class shares as follows:

Government Intermediate paid $1,662,487, $1,628,986, and $1,459,883,
respectively; Investment Grade paid $913,715, $713,744, and $506,442,
respectively; and High Yield paid $2,150,228, $2,328,481, and $1,523,715,
respectively.

Pursuant to its Plan, Government Money Market is authorized to pay Legg
Mason distribution and service fees not to exceed an annual rate of 0.20% of its
average daily net assets. Legg Mason has agreed that it will not request payment
of more than 0.10% annually from the fund indefinitely. For the years ended
December 31, 1999, 1998 and 1997, Government Money Market paid $408,909,
$356,971 and $326,047, respectively, to Legg Mason.

For the year ended December 31, 1999, Legg Mason incurred the following
expenses with respect to Primary Class shares of each fund:

Government Investment Government
Intermediate Grade High Yield Money Market
------------ ---------- ---------- ------------

Compensation to $1,512,000 $785,000 $2,258,000 $729,000
sales personnel

Printing and mailing
of prospectuses to
prospective
shareholders 81,000 140,000 189,000 90,000

Advertising 139,000 311,000 396,000 215,000

Other 170,000 124,000 376,000 84,000

Total expenses $1,901,000 $1,359,000 $3,218,000 $1,117,000

The foregoing are estimated. The figures for "Other" include allocations of
overhead amounts using methods believed by Legg Mason to be reasonable.

Legg Mason does not receive any compensation from the funds for its
activities in selling Navigator Class shares.

33
<PAGE>

PORTFOLIO TRANSACTIONS AND BROKERAGE

Under each Advisory Agreement, the Adviser is responsible for the execution
of portfolio transactions. Corporate and government debt securities are
generally traded on the over-the-counter market on a "net" basis without a
stated commission, through dealers acting for their own account and not as
brokers. Prices paid to a dealer in debt securities generally include a
"spread," which is the difference between the price at which the dealer is
willing to purchase and sell the specific security at the time, and includes the
dealer's normal profit. Some portfolio transactions may be executed through
brokers acting as agent. In selecting brokers or dealers, the Adviser must seek
the most favorable price (including the applicable dealer spread or brokerage
commission) and execution for such transactions, subject to the possible payment
as described below of higher brokerage commissions for agency transactions or
spreads to broker-dealers who provide research and analysis. A fund may not
always pay the lowest commission or spread available. Rather, in placing orders
on behalf of a fund, the Adviser also takes into account such factors as size of
the order, difficulty of execution, efficiency of the executing broker's
facilities (including the services described below) and any risk assumed by the
executing broker. Furthermore, the lack of a centralized mechanism for reporting
bids, offers and transaction prices in fixed income securities can at times make
it difficult for the adviser to discover the best available price.

Consistent with the policy of most favorable price and execution, the
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 broker-dealers who provide supplemental investment and market research and
securities and economic analysis, and may, for agency transactions, pay to these
broker-dealers a higher brokerage commission than may be charged by other
broker-dealers. Such services include, without limitation, advice as to the
value of securities; the advisability of investing in, purchasing, or selling
securities; advice as to the availability of securities or of purchasers or
sellers of securities; and furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy and the
performance of accounts. Such research and analysis may be useful to the Adviser
in connection with services to clients other than the funds whose brokerage
generated the service. On the other hand, research and analysis received by the
Adviser from broker-dealers executing orders for clients other than the funds
may be used for the fund's benefit. The Adviser's fee is not reduced by reason
of its receiving such brokerage and research services. For the years ended
December 31, the following funds paid commissions to broker-dealers who acted as
agents in executing options and futures trades.

Fund: 1999 1998 1997
- ---- ---- ---- ----
Government Intermediate $217,845 $86,235 $85,935
Investment Grade $ 42,053 $60,600 $51,240

Each fund may use Legg Mason 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. Commissions paid to Legg Mason
will not exceed "usual and customary brokerage commissions." Rule 17e-1 under
the 1940 Act defines "usual and customary" commissions to include amounts which
are "reasonable and fair compared to the commission, fee or other remuneration
received by other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time." In the OTC market, a fund generally deals with
responsible primary market-makers unless a more favorable execution can
otherwise be obtained.

Except as permitted by SEC rules or orders, no fund may buy securities
from, or sell securities to, Legg Mason or its affiliated persons as principal.
The Corporation's Board of Directors has adopted procedures in conformity with
Rule 10f-3 under the 1940 Act whereby a fund may purchase securities that are
offered in underwritings in which Legg Mason or any of its affiliated persons is
a participant.

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<PAGE>

Investment decisions for each fund are made independently from those of
other funds and accounts advised by the Adviser. 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 large-volume transactions may produce better executions and
prices.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

Government Intermediate, Investment Grade and High Yield each offer two
classes of shares, known as Primary Class shares and Navigator Class shares.
Other classes of shares may be offered in the future. Primary Class shares are
available from Legg Mason, certain of its affiliates, and unaffiliated entities
having an agreement with Legg Mason. Navigator Class shares are available only
to: Institutional Clients of Legg Mason Trust Company for which they exercise
discretionary investment management responsibility and accounts of the customers
with such Institutional Clients; qualified retirement plans managed on a
discretionary basis and having net assets of at least $200 million; any
qualified retirement plan having net assets of at least $300 million; clients of
Bartlett & Co., who as of December 19, 1996, were shareholders of Bartlett
Short-Term Bond Fund or Bartlett Fixed Income Fund and for whom Bartlett acts as
ERISA fiduciary; shareholders of Class Y shares of Bartlett Europe Fund or
Bartlett Financial Services Fund on October 5, 1999; any qualified retirement
plan of Legg Mason, Inc., or of any of its affiliates; any open-end management
investment company advised or managed by Legg Mason Fund Adviser, Inc. or by any
person controlling, controlled by, or under common control with LMFA. Navigator
Class shares may not be purchased by individuals directly, but Institutional
Clients may purchase shares for Customer Accounts maintained for individuals.
Primary Class shares are available to all other investors. Government Money
Market offers only one class of shares which corresponds to the Primary Class of
other Legg Mason funds.

Future First Systematic Investment Plan and Transfer of Funds from Financial
Institutions
- --------------------------------------------------------------------------------

If you invest in Primary Class shares, the Prospectus for those explains
that you may buy additional Primary Class shares through the Future First
Systematic Investment Plan. Under this plan you may arrange for automatic
monthly investments in Primary Class shares of $50 or more by authorizing Boston
Financial Data Services ("BFDS"), the funds' transfer agent, to transfer funds
to be used to buy Primary Class shares at the per share net asset value
determined on the day the funds are sent to your bank. You will receive a
quarterly account statement. You may terminate the Future First Systematic
Investment Plan at any time without charge or penalty. Forms to enroll in the
Future First Systematic Investment Plan are available from any Legg Mason or
affiliated office.

Investors in Primary Class shares and Legg Mason employees investing in
Navigator Class shares may also buy shares through a plan permitting transfers
of funds from a financial institution. Certain financial institutions may allow
the investor, on a pre-authorized basis, to have $50 or more automatically
transferred monthly for investment in shares of a fund to:

Legg Mason Wood Walker, Incorporated
Funds Processing
P.O. Box 1476
Baltimore, Maryland 21203-1476

If the investor's check is not honored by the institution it is drawn on,
the investor may be subject to extra charges in order to cover collection costs.
These charges may be deducted from the investor's shareholder account.

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<PAGE>

Systematic Withdrawal Plan
- --------------------------

Investors in Primary Class shares and Legg Mason Employees investing in
Navigator Class shares with a net asset value of $5,000 or more, may elect to
make systematic withdrawals of a minimum of $50 on a monthly basis. The amounts
paid to you each month are obtained by redeeming sufficient shares from your
account to provide the withdrawal amount that you have specified. The Systematic
Withdrawal Plan is not currently available for shares held in an Individual
Retirement Account, Simplified Employee Pension Plan, Savings Incentive Match
Plan for Employees or other qualified retirement plan. You may change the
monthly amount to be paid to you without charge not more than once a year by
notifying Legg Mason or the affiliate with which you have an account.
Redemptions will be made at the net asset value per share of the appropriate
class determined as of the close of regular trading on the New York Stock
Exchange ("Exchange") (normally 4:00 p.m., eastern time) on the first day of
each month. If the Exchange is not open for business on that day, the shares
will be redeemed at the per share net asset value determined as of the close of
regular trading on the Exchange on the preceding business day. The check for the
withdrawal payment will usually be mailed to you on the next business day
following redemption. If you elect to participate in the Systematic Withdrawal
Plan, dividends and other distributions on all shares in your Primary Class
shares and Navigator Class shares account must be automatically reinvested in
the respective class of shares. You may terminate the Systematic Withdrawal Plan
at any time without charge or penalty. Each fund, its transfer agent, and Legg
Mason also reserve the right to modify or terminate the Systematic Withdrawal
Plan at any time.

Withdrawal payments are treated as proceeds from a sale of shares rather
than as a dividend or other distribution. These payments are taxable to the
extent they exceed the tax basis of the shares sold. If the periodic withdrawals
exceed reinvested dividends and other distributions, the amount of your original
investment may be correspondingly reduced.

Ordinarily, you should not purchase additional shares of a fund in
which you have an account if you maintain a Systematic Withdrawal Plan, because
you may incur tax liabilities in connection with such withdrawals. Each fund
will not knowingly accept purchase orders from you for additional shares if you
maintain a Systematic Withdrawal Plan unless your purchase is equal to at least
one year's scheduled withdrawals. In addition, if you maintain a Systematic
Withdrawal Plan you may not make periodic investments under the Future First
Systematic Investment Plan.

The following information applies only to Government Money Market:

Conversion to Federal Funds
- ---------------------------

A cash deposit made after the daily cashiering deadline of the Legg Mason
office in which the deposit is made will be credited to your Legg Mason
brokerage account ("Brokerage Account") on the next business day following the
day of deposit, and the resulting free credit balance will be invested on the
second business day following the day of receipt.

Legg Mason Premier Asset Management Account/VISA Account
- --------------------------------------------------------

Shareholders of the fund who have cash or negotiable securities (including
Government Money Market shares) valued at $20,000 or more in accounts with Legg
Mason may subscribe to Legg Mason's Premier Asset Management Account
("Premier"). This program provides a direct link between a shareholder's
Government Money Market account and his or her Brokerage Account. Premier
provides shareholders with a convenient method to invest in the fund through
their Brokerage Account, which includes automatic daily investment of free
credit balances of $100 or more and automatic weekly investment of free credit
balances of less than $100 into your designated money market fund.

Premier is a comprehensive financial service which combines a shareholder's
fund account, a preferred customer VISA Gold debit card, a Legg Mason Brokerage

36
<PAGE>

Account and unlimited checkwriting with no minimum check amount. Premier is
offered as an exclusive preferred customer service for shareholders of certain
Legg Mason funds.

The VISA Gold debit card may be used to purchase merchandise or services
from merchants honoring VISA or to obtain cash advances (which a bank may limit
to $5,000 or less, per account per day) from any bank honoring VISA.

Checks, VISA charges and cash advances are posted to the shareholder's
margin account and create automatic same day redemptions if shares are available
in the fund. If fund shares have been exhausted, the debits will remain in the
margin account, reducing the cash available. The shareholder will receive one
consolidated monthly statement which details all fund transactions, securities
activity, check writing activity and VISA Gold purchases and cash advances.

BancOne Columbus ("BancOne"), 757 Carolyn Avenue, Columbus, Ohio 43271, is
the fund's agent for processing payment of VISA Gold debit card charges and
clearance of checks written on the Premier Account. Shareholders are subject to
BancOne's rules and regulations governing VISA accounts, including the right of
BancOne not to honor VISA drafts in amounts exceeding the authorization limit of
the shareholder's account at the time the VISA draft is presented for payment.
The authorization limit is determined daily by taking the shareholder's fund
account balance and subtracting (1) all shares purchased by other than federal
funds wired within 15 days; (2) all shares for which certificates have been
issued; and (3) any previously authorized VISA transaction.

Preferred Customer Card Services
- --------------------------------

Unlike some other investment programs which offer the VISA card privilege,
Premier also includes travel/accident insurance at no added cost when
shareholders purchase travel tickets with their Premier VISA Gold debit card.
Coverage is provided through VISA and extends up to $250,000.

If a VISA Gold debit card is lost or stolen, the shareholder should report
the loss immediately by contacting Legg Mason directly between the hours of 8:30
a.m. and 5:00 p.m., or BancOne collect after hours at 1-614-248-4242. Those
shareholders who subscribe to the Premier VISA account privilege may be liable
for the unauthorized use of their VISA Gold debit card in amounts up to $50.

Legg Mason is responsible for all Premier VISA Gold debit card inquiries as
well as billing and account resolutions. Simply call Legg Mason Premier Client
Services directly between 8:30 a.m. and 5:00 p.m., Eastern time, at
1-800-253-0454 or 1-410-528-2066 with your account inquiries.

Automatic Purchases of Fund Shares
- ----------------------------------

For shareholders participating in the Premier program who sell shares held
in their Brokerage Account, any free credit balances of $100 or more resulting
from any such sale will automatically be invested in shares of the fund on the
same business day the proceeds of sale are credited to the Brokerage Account.
Free credit balances of less than $100 will be invested in fund shares weekly.

Free credit balances arising from sales of Brokerage Account shares for
cash (i.e., same day settlement), redemption of debt securities, dividend and
interest payments and cash deposits of $100 or more will be invested
automatically in fund shares on the next business day following the day the
transaction is credited to the Brokerage Account.

Fund shares will receive the next dividend declared following purchase
(normally 12:00 noon, Eastern time, on the following business day). A purchase
order will not become effective until cash in the form of federal funds is
received by the fund.

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<PAGE>

How to Open a Premier Account
- -----------------------------

To subscribe to Premier services, clients must contact Legg Mason to
execute both a Premier Agreement with Legg Mason and a VISA Account Application
with BancOne. Legg Mason charges a fee for the Premier service, which is
currently $85 per year for individuals and $100 per year for businesses and
corporations. Legg Mason reserves the right to alter or waive the conditions
upon which a Premier Account may be opened. Both Legg Mason and BancOne reserve
the right to terminate or modify any shareholder's Premier services at their
discretion.

You may request Premier Account Status by filling out the Premier Asset
Management Account Agreement and Check Application which can be obtained from
your Financial Advisor or Service Provider. You will receive your VISA Gold
debit card (if applicable) from BancOne. The Premier VISA Gold debit card may be
used at over 8 million locations, including 23,000 ATMs, in 24 countries around
the world. Premier checks will be sent to you directly. There is no limit to the
number of checks you may write against your Premier account.

Shareholders should be aware that the various features of the Premier
program are intended to provide easy access to assets in their accounts and that
the Premier Account is not a bank account. Additional information about the
Premier program is available by calling your Financial Advisor or Service
Provider or Legg Mason's Premier Client Services.

Other Information Regarding Redemption
- --------------------------------------

You may request Government Money Market's checkwriting service by sending a
written request to Legg Mason. State Street will supply you with checks which
can be drawn on an account of Government Money Market maintained with State
Street. When honoring a check presented for payment, the fund will cause State
Street to redeem exactly enough full and fractional shares from your account to
cover the amount of the check. Canceled checks will be returned to you.

Check redemption is subject to State Street's rules and regulations
governing checking accounts. Checks should not be used to close a Government
Money Market account because when the check is written you will not know the
exact value of the account, including accrued dividends, on the day the check
clears. Persons obtaining certificates for their shares may not use the
checkwriting service.

For all of the funds:

Each Fund reserves the right to modify or terminate the check, wire,
telephone or VISA Gold card redemption services, as applicable, described in the
Prospectus and this Statement of Additional Information at any time.

The date of payment for redemption may not be postponed for more than seven
days, and the right of redemption may not be suspended by a fund or its
distributor except (i) for any period during which the Exchange is closed (other
than for customary weekend and holiday closings), (ii) when trading in markets a
fund normally utilizes is restricted, or an emergency, as defined by rules and
regulations of the SEC, exists, making disposal of that fund's investments or
determination of its net asset value not reasonably practicable, or (iii) for
such other periods as the SEC by regulation or order may permit for protection
of a fund's shareholders. In the case of any such suspension, you may either
withdraw your request for redemption or receive payment based upon the net asset
value next determined after the suspension is lifted.

Each fund reserves the right, under certain conditions, to honor any
request for redemption by making payment in whole or in part by securities
valued in the same way as they would be valued for purposes of computing that
fund's net asset value per share. If payment is made in securities, a

38
<PAGE>

shareholder should expect to incur brokerage expenses in converting those
securities into cash and will be subject to fluctuation in the market price of
those securities until they are sold. Each fund does not redeem "in kind" under
normal circumstances, but would do so where the Adviser determines that it would
be in the best interests of that fund's shareholders as a whole.

Clients of certain institutions that maintain omnibus accounts with the
funds' transfer agent may obtain shares through those institutions. Such
institutions may receive payments from the funds' distributor for account
servicing, and may receive payments from their clients for other services
performed. Investors can purchase shares from Legg Mason without receiving or
paying for such other services.

VALUATION OF FUND SHARES

For Government Intermediate, Investment Grade and High Yield:

Net asset value of a fund share is determined daily for each class as of
the close of the Exchange, on every day the Exchange is open, by subtracting
liabilities attributable to that class, from total assets attributable to that
class, and dividing the result 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, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. When market quotations for
institutional size positions are readily available portfolio securities are
valued based upon market quotations. Where such market quotations are not
readily available, securities are valued based upon appraisals received from a
pricing service using a computerized matrix system or based upon appraisals
derived from information concerning the security or similar securities received
from recognized dealers in those securities. The methods used by the pricing
service and the quality of the valuations so established are reviewed by the
Adviser under the general supervision of the Corporation's Board of Directors.
The amortized cost method of valuation is used with respect to obligations with
60 days or less remaining to maturity unless the Adviser determines that this
does not represent fair value. All other assets are valued at fair value as
determined in good faith, by or under the direction of the Corporation's Board
of Directors. Premiums received on the sale of put and call options are included
in net asset value of each class, and the current market value of options sold
by the fund will be subtracted from net assets of each class.

For Government Money Market:

Government Money Market attempts to stabilize the value of a share at
$1.00. Net asset value will not be calculated on days when the Exchange is
closed.

USE OF THE AMORTIZED COST METHOD The directors have determined that the
interests of shareholders are best served by using the amortized cost method for
determining the value of portfolio instruments. Under this method, portfolio
instruments are valued at the acquisition cost, as adjusted for amortization of
premium or accumulation of discount, rather than at current market value. The
Board of Directors continually assesses the appropriateness of this method of
valuation.

The fund's use of the amortized cost method of valuing portfolio
instruments depends on its compliance with Rule 2a-7 under the 1940 Act. Under
that Rule, the directors must establish procedures reasonably designed to
stabilize the net asset value per share, as computed for purposes of
distribution and redemption, at $1.00 per share, taking into account current
market conditions and the fund's investment objective.

MONITORING PROCEDURES The fund's procedures include monitoring the
relationship between the amortized cost value per share and the net asset value
per share based upon available indications of market value. If there is a
difference of more than 0.50% between the two, the directors will take any steps
they consider appropriate (such as shortening the dollar-weighted average

39
<PAGE>

portfolio maturity) to minimize any material dilution or other unfair results
arising from differences between the two methods of determining net asset value.

INVESTMENT RESTRICTIONS Rule 2a-7 requires the fund to limit its
investments to instruments that, (i) in the opinion of the Adviser, present
minimal credit risk and (ii) (a) are rated in one of the two highest rating
categories by at least two NRSROs (or one, if only one NRSRO has rated the
security) or, (b) if unrated, are determined to be of comparable quality by the
Adviser, all pursuant to procedures determined by the Board of Directors
("Eligible Securities"). The fund may invest no more than 5% of its total assets
in securities that are Eligible Securities but have not been rated in the
highest short-term ratings category by at least two NRSROs (or by one NRSRO, if
only one NRSRO has assigned the obligation a short-term rating) or, if the
obligations are unrated, determined by the Adviser to be of comparable quality
("Second Tier Securities"). In addition, the fund will not invest more than 1%
of its total assets or $1 million (whichever is greater) in the Second Tier
Securities of a single issuer. The Rule requires the fund to maintain a
dollar-weighted average portfolio maturity appropriate to the objective of
maintaining a stable net asset value of $1.00 per share and in any event not
more than 90 days. In addition, under the Rule, no instrument with a remaining
maturity (as defined in the Rule) of more than 397 days can be purchased by the
fund; except that the fund may hold securities with remaining maturities greater
than 397 days as collateral for repurchase agreements and other collateralized
transactions of short duration. SEC rules permit the fund to treat certain
long-term variable or floating rate instruments as having a maturity equal to
the time remaining until the next reset of the interest rate or until the
principal can be recovered through a demand.

Should the disposition of a portfolio security result in a dollar-weighted
average portfolio maturity of more than 90 days, the fund will invest its
available cash to reduce the average maturity to 90 days or less as soon as
possible.

It is the fund's usual practice to hold portfolio securities to maturity
and realize par, unless the Adviser determines that sale or other disposition is
appropriate in light of the fund's investment objective. Under the amortized
cost method of valuation, neither the amount of daily income nor the net asset
value is affected by any unrealized appreciation or depreciation of the
portfolio.

In periods of declining interest rates, the indicated daily yield on shares
of the fund, computed by dividing the annualized daily income on the fund's
investment portfolio by the net asset value computed as above, may tend to be
higher than a similar computation made by using a method of valuation based upon
market prices and estimates.

In periods of rising interest rates, the indicated daily yield on shares of
the fund computed the same way may tend to be lower than a similar computation
made by using a method of calculation based upon market prices and estimates.

ADDITIONAL TAX INFORMATION

The following is a general summary of certain federal tax considerations
affecting each fund and its shareholders. Investors are urged to consult their
own tax advisers for more detailed information regarding any federal, state,
local or foreign taxes that may apply to them.

GENERAL For federal tax purposes, each fund is treated as a separate
corporation. To continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code of 1986, as amended ("Code"), a
fund must distribute annually to its shareholders at least 90% of its investment
company taxable income (generally, net investment income, any net short-term
capital gain and, in the case of High Yield, any net gains from certain foreign
currency transactions) ("Distribution Requirement") and must meet several
additional requirements. For each fund, these requirements include the
following: (1) The fund 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, in the case of
High Yield, foreign currencies), or other income (including gains from options
or futures contracts (or, in the case of High Yield, forward contracts)) derived

40
<PAGE>

with respect to its business of investing in securities (or, in the case of High
Yield, those currencies)("Income Requirement"); (2) at the close of each quarter
of a fund'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 RICs 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
fund's total assets and does not represent more than 10% of the issuer's
outstanding voting securities; and (3) at the close of each quarter of the
fund's taxable year, not more than 25% of the value of its total assets may be
invested in the securities (other than U.S. government securities or the
securities of other RICs) of any one issuer.

By qualifying for treatment as a RIC, a fund (but not its shareholders)
will be relieved of federal income tax on the part of its investment company
taxable income and net capital gain (i.e., the excess of net long-term capital
gain over net short-term capital loss) that it distributes to its shareholders.
If any fund failed to qualify for that treatment for any taxable year, (1) it
would be taxed at corporate rates on the full amount of its taxable income for
that year without being able to deduct the distributions it makes to its
shareholders and (2) the shareholders would treat all those distributions,
including distributions of net capital gain as dividends (that is, ordinary
income) to the extent of the fund's earnings and profits. In addition, the fund
could be required to recognize unrealized gains, pay substantial taxes and
interest and make substantial distributions before requalifying for RIC
treatment.

Each fund will be subject to a nondeductible 4% excise tax ("Excise Tax")
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts. For this and other purposes, dividends and other distributions
declared by a fund in December of any year and payable to its shareholders of
record on a date in that month will be deemed to have been paid by that fund and
received by the shareholders on December 31 of that year if the fund pays the
distributions during the following January. Accordingly, those dividends and
other distributions will be taxed to the shareholders for the year in which that
December 31 falls.

The following applies only to Government Intermediate, Investment Grade and High
Yield:

If fund shares are sold at a loss after being held for six months or less,
the loss will be treated as a long-term, instead of a short-term, capital loss
to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any dividend or other distribution, the investor will pay full
price for the shares and receive some portion of the price back as a taxable
distribution.

Dividends and interest received by a fund, and gains realized thereby, may
be subject to income, withholding or other taxes imposed by foreign countries
and U.S. possessions that would reduce the yield and/or total return on its
securities. Tax conventions between certain countries and the United States may
reduce or eliminate these foreign taxes, however, and many foreign countries do
not impose taxes on capital gains in respect of investments by foreign
investors.

HEDGING INSTRUMENTS The use of hedging strategies, such as writing
(selling) and purchasing options and futures contracts and, in the case of High
Yield, entering into forward contracts, involves complex rules that will
determine for income tax purposes the amount, character and timing of
recognition of the gains and losses a fund realizes in connection therewith.
Gains from High Yield's disposition of foreign currencies (except certain gains
that may be excluded by future regulations), and gains from options, futures
and, in the case of High Yield, forward contracts derived by a fund with respect
to its business of investing in securities (or, in the case of High Yield,
foreign currencies) will qualify as permissible income under the Income
Requirement.

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<PAGE>

Certain futures and foreign currency contracts in which a fund may invest
will be subject to section 1256 of the Code ("section 1256 contracts"). Section
1256 contracts held by a fund at the end of its taxable year, other than section
1256 contracts that are part of a "mixed straddle" with respect to which the
fund has made an election not to have the following rules apply, must be
"marked-to-market" (that is, treated as having been sold for their fair market
value) for federal income tax purposes, with the result that unrealized gains or
losses will be treated as though they were realized. Sixty percent of any net
gain or loss recognized on these deemed sales, and 60% of any net realized gain
or loss from any actual sales of section 1256 contracts, will be treated as
long-term capital gain or loss, and the balance will be treated as short-term
capital gain or loss. These rules may operate to increase the amount a fund must
distribute to satisfy the Distribution Requirement (i.e., with respect to the
portion treated as short-term capital gain), which will be taxable to its
shareholders as ordinary income, and to increase the net capital gain a fund
recognizes without in either case increasing the cash available to the fund.
Section 1256 contracts also may be marked-to-market for purposes of the Excise
Tax.

When a covered call option written (sold) by a fund expires, it will
realize a short-term capital gain equal to the amount of the premium it received
for writing the option. When a fund terminates its obligations under such an
option by entering into a closing transaction, it will realize a short-term
capital gain (or loss), depending on whether the cost of the closing transaction
is less than (or exceeds) the premium received when it wrote the option. When a
covered call option written by a fund is exercised, it will be treated as having
sold the underlying security, producing long-term or short-term capital gain or
loss, depending on the holding period of the underlying security and whether the
sum of the option price received on the exercise plus the premium received when
it wrote the option is more or less than the basis of the underlying security.

Code section 1092 (dealing with straddles) also may affect the taxation of
options, futures and forward contracts in which a fund may invest. That section
defines a "straddle" as offsetting positions with respect to actively traded
personal property; for these purposes, options, futures and forward contracts
are personal property. Under that section, any loss from the disposition of a
position in a straddle generally may be deducted only to the extent the loss
exceeds the unrealized gain on the offsetting positions(s) of the straddle. In
addition, these rules may postpone the recognition of loss that otherwise would
be recognized under the mark-to-market rules discussed above. The regulations
under section 1092 also provide certain "wash sale" rules, which apply to
transactions where a position is sold at a loss and a new offsetting position is
acquired within a prescribed period, and "short sale" rules applicable to
straddles. If a fund makes certain elections, the amount, character and timing
of the recognition of gains and losses from the affected straddle positions
would be determined under rules that vary according to the elections made.
Because only a few of the regulations implementing the straddle rules have been
promulgated, the tax consequences to a fund of straddle transactions are not
entirely clear.

If a fund has an "appreciated financial position" -- generally, an interest
(including an interest through an option, futures or forward contract or short
sale) with respect to any stock, debt instrument (other than "straight debt") or
partnership interest the fair market value of which exceeds its adjusted basis
- -- and enters into a "constructive sale" of the position, the fund will be
treated as having made an actual sale thereof, with the result that gain will be
recognized at that time. A constructive sale generally consists of a short sale,
an offsetting notional principal contract or futures or forward contract entered
into by a fund or a related person with respect to the same or substantially
identical property. In addition, if the appreciated financial position is itself
a short sale or such a contract, acquisition of the underlying property or
substantially identical property will be deemed a constructive sale. The
foregoing will not apply, however, to any transaction of a fund during any
taxable year that otherwise would be treated as a constructive sale if the
transaction is closed within 30 days after the end of that year and the fund
holds the appreciated financial position unhedged for 60 days after that closing
(i.e., at no time during that 60-day period is the fund's risk of loss regarding
that position reduced by reason of certain specified transactions with respect
to substantially identical or related property, such as having an option to
sell, being contractually obligated to sell, making a short sale or granting an
option to buy substantially identical stock or securities).

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<PAGE>

ZERO COUPON AND PAY-IN-KIND BONDS Each fund may acquire zero coupon bonds
or other debt securities issued with original issue discount. As a holder of
those securities, a fund must include in its income the original issue discount
that accrues on the securities during the taxable year, even if it receives no
corresponding payment on the securities during the year. Similarly, High Yield
must include in its gross income securities it receives as "interest" on
pay-in-kind securities. Because each fund annually must distribute substantially
all of its investment company taxable income, including any earned original
issue discount and other non-cash income, to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax, it may be required in a
particular year to distribute as a dividend an amount that is greater than the
total amount of cash it actually receives. Those distributions will be made from
a fund's cash assets or from the proceeds of sales of portfolio securities, if
necessary. A fund may realize capital gains or losses from those sales, which
would increase or decrease its investment company taxable income and/or net
capital gain.

The following information applies only to High Yield:

PASSIVE FOREIGN INVESTMENT COMPANIES The fund may invest in the stock of
"passive foreign investment companies" ("PFICs"). A PFIC is any foreign
corporation (with certain exceptions) that, in general, meets either of the
following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, the fund will be subject to
federal income tax on a portion of any "excess distribution" received on the
stock of a PFIC or of any gain on disposition of that stock (collectively "PFIC
income"), plus interest thereon, even if the fund distributes the PFIC income as
a taxable dividend to its shareholders. The balance of the PFIC income will be
included in the fund's investment company taxable income and, accordingly, will
not be taxable to it to the extent it distributes that income to its
shareholders.

If the fund invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the fund would be required to include in income each year its pro
rata share of the QEF's annual ordinary earnings and net capital gain -- which
the fund probably would have to distribute to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax -- even if the QEF did not
distribute those earnings and gain to the fund. In most instances it will be
very difficult, if not impossible, to make this election because of certain
requirements thereof.

The fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of the stock over the
fund's adjusted basis therein as of the end of that year. Pursuant to the
election, the fund also may deduct (as an ordinary, not capital, loss) the
excess, if any, of its adjusted basis in PFIC stock over the fair market value
thereof as of the taxable year-end, but only to the extent of any net
mark-to-market gains with respect to that stock included in income by the fund
for prior taxable years under the election (and under regulations proposed in
1992 that provided a similar election with respect to the stock of certain
PFICs). The fund's adjusted basis in each PFIC's stock subject to the election
would be adjusted to reflect the amounts of income included and deductions taken
thereunder.

FOREIGN CURRENCIES Gains or losses (1) from the disposition of foreign
currencies, including forward contracts, (2) on the disposition of a debt
security denominated in a foreign currency that are attributable to fluctuations
in the value of the foreign currency between the dates of acquisition and
disposition of the security, and (3) that are attributable to fluctuations in
exchange rates between the time the fund accrues dividends, interest or other
receivables or expenses or other liabilities denominated in a foreign currency
and the time the fund actually collects the receivables or pays the liabilities,
generally will be treated as ordinary income or loss. These gains or losses,
referred to under the Code as "section 988" gains or losses, will increase or
decrease the amount of the fund's investment company taxable income to be
distributed to its shareholders as ordinary income, rather than affecting the
amount of its net capital gain.

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<PAGE>

MISCELLANEOUS If the fund invests in shares of common stock or preferred
stock or otherwise holds dividend-paying securities as a result of exercising a
conversion privilege, a portion of the dividends from its investment company
taxable income (whether paid in cash or reinvested in additional fund shares)
may be eligible for the dividends-received deduction allowed to corporations.
The eligible portion may not exceed the aggregate dividends received by the fund
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 federal alternative minimum tax.

TAX-DEFERRED RETIREMENT PLANS

Investors may invest in Primary Class shares of a fund through IRAs and
through SEPs, SIMPLEs and other qualified retirement plans (collectively,
"qualified plans"). In general, income earned through the investment of assets
of qualified plans is not taxed to their beneficiaries until the income is
distributed to them. Investors who are considering establishing a qualified plan
should consult their attorneys or other tax advisers with respect to individual
tax questions. Please contact your Financial Advisor or other entity offering
the funds for further information with respect to these plans.

Individual Retirement Accounts -- IRAs
- --------------------------------------

TRADITIONAL IRA. Certain investors may obtain tax advantages by
establishing an IRA. Specifically, except as noted below, if neither you nor
your spouse is an active participant in a qualified employer or government
retirement plan, or if either you or your spouse is an active participant in
such plan and your adjusted gross income does not exceed a certain level, each
of you may deduct cash contributions made to an IRA in an amount for each
taxable year not exceeding the lesser of 100% of your earned income or $2,000.
However, a married investor who is not an active participant in such a plan and
files a joint income tax return with his or her spouse (and their combined
adjusted gross income does not exceed $150,000) is not affected by the spouse's
active participant status. In addition, if your spouse is not employed and you
file a joint return, you may establish a separate IRA for your spouse and
contribute up to a total of $4,000 to the two IRAs, provided that the
contribution to either does not exceed $2,000. If your employer's plan qualifies
as a SIMPLE, permits voluntary contributions and meets certain requirements, you
may make voluntary contributions to that plan that are treated as deductible IRA
contributions.

Even if you are not in one of the categories described in the preceding
paragraph, you may find it advantageous to invest in Primary Class shares of a
fund through nondeductible IRA contributions, up to certain limits, because all
dividends and other distributions on your Primary Class shares are then not
immediately taxable to you or the IRA; they become taxable only when distributed
to you. To avoid penalties, your interest in an IRA must be distributed, or
start to be distributed, to you not later than April 1 following the calendar
year in which you attain age 70 1/2. Distributions made before age 59 1/2, in
addition to being taxable, generally are subject to a penalty equal to 10% of
the distribution, except in the case of death or disability or where the
distribution is rolled over into another qualified plan or certain other
situations.

ROTH IRA. A shareholder whose adjusted gross income (or combined adjusted
gross income with his or her spouse) does not exceed certain levels may
establish and contribute up to $2,000 per tax year to a Roth IRA. In addition,
for a shareholder whose adjusted gross income does not exceed $100,000 (or is
not married filing a separate return), certain distributions from traditional
IRAs may be rolled over to a Roth IRA and any of the shareholder's traditional
IRAs may be converted to a Roth IRA; these rollover distributions and
conversions are, however, subject to federal income tax.

Contributions to a Roth IRA are not deductible; however, earnings
accumulate tax-free in a Roth IRA, and withdrawals of earnings are not subject
to federal income tax if the account has been held for at least five years (or
in the case of earnings attributable to rollover contributions from or

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<PAGE>

conversions of a traditional IRA, the rollover or conversion occurred more than
five years before the withdrawal) and the account holder has reached age 59 1/2
(or certain other conditions apply).

EDUCATION IRA. Although not technically for retirement savings, an
Education IRA provides a vehicle for saving for a child's higher education. An
Education IRA may be established for the benefit of any minor, and any person
whose adjusted gross income does not exceed certain levels may contribute to an
Education IRA, provided that no more than $500 may be contributed for any year
to Education IRAs for the same beneficiary. Contributions are not deductible and
may not be made after the beneficiary reaches age 18; however, earnings
accumulate tax-free, and withdrawals are not subject to tax if used to pay the
qualified higher education expenses of the beneficiary (or a qualified family
member).

Simplified Employee Pension Plan - SEP
- --------------------------------------

Legg Mason also makes available to corporate and other employers a SEP for
investment in Primary Class shares of a fund.

Savings Incentive Match Plan for Employees - SIMPLE
- ---------------------------------------------------

An employer with no more than 100 employees that does not maintain another
qualified plan instead may establish a SIMPLE either as separate IRAs or as part
of a Code section 401(k) plan. A SIMPLE, which is not subject to the complicated
nondiscrimination rules that generally apply to other qualified plans, will
allow certain employees to make elective contributions of up to $6,000 per year
and will require the employer to make either matching contributions up to 3% of
each such employee's salary or a 2% nonelective contribution.

Withholding at the rate of 20% is required for federal income tax purposes
on certain distributions (excluding, for example, certain periodic payments)
from the foregoing plans (except IRAs and SEPs), unless the recipient transfers
the distribution directly to an "eligible retirement plan" (including IRAs and
other qualified plans) that accepts those distributions. Other distributions
generally are subject to regular wage withholding or to withholding at the rate
of 10% (depending on the type and amount of the distribution), unless the
recipient elects not to have any withholding apply. Investors in Primary Class
shares should consult their plan administrator or tax adviser for further
information.

PERFORMANCE INFORMATION

For Government Intermediate, Investment Grade and High Yield:

TOTAL RETURN CALCULATIONS Average annual total return quotes used in a
fund's advertising and other promotional materials ("performance
advertisements") are calculated separately for each class according to the
following formula:

P(1+T)n = ERV

where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of that period.

Under the foregoing formula, the time periods used in performance
advertisements will be based on rolling calendar quarters, updated at least to
the last day of the most recent quarter prior to submission of the performance
advertisements for publication. Total return, or "T" in the formula above, is
computed by finding the average annual change in the value of an initial $1,000

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<PAGE>

investment over the period. In calculating the ending redeemable value, all
dividends and other distributions by a fund are assumed to have been reinvested
at net asset value on the reinvestment dates during the period.

YIELD Yields used in a fund's performance advertisements for each Class of
Shares are calculated by dividing a fund's net investment income for a 30-day
period ("Period") attributable to that Class, by the average number of shares in
that Class entitled to receive dividends during the Period, and expressing the
result as an annualized percentage (assuming semi-annual compounding) of the
maximum offering price per share at the end of the Period. Yield quotations are
calculated according to the following formula:

Yield = 2 [(a-b + 1)6 - 1]
--------
cd

where: a = interest earned during the Period
b = expenses accrued for the Period (net of reimbursements)
c = the average daily number of shares outstanding during the
Period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the Period.

Except as noted below, in determining interest earned during the Period
(variable "a" in the above formula), a fund calculates interest earned on each
debt obligation held by it during the Period by (1) computing the obligation's
yield to maturity based on the market value of the obligation (including actual
accrued interest) on the last business day of the Period or, if the obligation
was purchased during the Period, the purchase price plus accrued interest and
(2) dividing the yield to maturity by 360, and multiplying the resulting
quotient by the market value of the obligation (including actual accrued
interest). Once interest earned is calculated in this fashion for each debt
obligation held by the fund, interest earned during the Period is then
determined by totaling the interest earned on all debt obligations. For the
purposes of these calculations, the maturity of an obligation with one or more
call provisions is assumed to be the next call date on which the obligation
reasonably can be expected to be called or, if none, the maturity date.

With respect to the treatment of discount and premium on mortgage-backed
and other asset-backed obligations that are expected to be subject to monthly
payments of principal and interest ("paydowns"): (1) a fund accounts for gain or
loss attributable to actual paydowns as an increase or decrease to interest
income during the period and (2) a fund accrues the discount and amortizes the
premium on the remaining obligation, based on the cost of the obligation, to the
weighted average maturity date or, if weighted average maturity information is
not available, to the remaining term of the obligation.

The yield for Primary Class shares of Government Intermediate, Investment
Grade and High Yield for the 30-day period ended December 31, 1999 was 5.48%,
6.60% and 8.77%, respectively. The 30-day yield for Navigator Class shares of
Government Intermediate, Investment Grade and High Yield for the same period was
6.02%, 7.12% and 9.28%, respectively. Yields of Government Intermediate and
Investment Grade would have been lower if Legg Mason Fund Adviser, Inc.
("Manager") had not waived a portion of those funds' expenses.

For Government Money Market:

YIELD The current annualized yield for the fund is based upon a seven-day
period and is computed by determining the net change in the value of a
hypothetical account in the fund. The net change in the value of the account
includes the value of dividends and of additional shares purchased with
dividends, but does not include realized gains and losses or unrealized
appreciation and depreciation. In addition, the fund may use a compound
effective annualized yield quotation which is calculated as prescribed by SEC
regulations, by adding one to the base period return (calculated as described
above), raising the sum to a power equal to 365 divided by 7, and subtracting
one.

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<PAGE>

The fund's yield 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 yield does not
provide a basis for determining future yields. The fact that the fund's current
yield will fluctuate and that shareholders' principal is not guaranteed or
insured should be considered in comparing the fund's yield with yields on
fixed-income investments, such as insured savings certificates. In comparing the
yield of the fund to other investment vehicles, consideration should be given to
the investment policies of each, including the types of investments owned,
lengths of maturities of the portfolio, the method used to compute the yield and
whether there are any special charges that may reduce the yield.

Other Information
- -----------------

In performance advertisements each fund may compare the total return of a
class of shares with data published by Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Wiesenberger Investment
Companies Service ("Wiesenberger"), Value Line or Morningstar Mutual Funds
("Morningstar"), or with the performance of U.S. Treasury securities of various
maturities, recognized stock, bond and other indexes, including (but not limited
to) the Salomon Brothers Bond Index, Shearson Lehman Bond Index, Shearson Lehman
Government/Corporate Bond Index, the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), the Dow Jones Industrial Average ("Dow Jones"), and changes
in the Consumer Price Index as published by the U.S. Department of Commerce.

Each fund also may refer in such materials to mutual fund performance
rankings and other data, such as comparative asset, expense and fee levels with
funds having similar investment objectives, published by Lipper, CDA,
Wiesenberger or Morningstar. Performance advertisements also may refer to
discussions of a Class of a fund and comparative mutual fund data and ratings
reported in independent periodicals, including (but not limited to) THE WALL
STREET JOURNAL, MONEY Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD,
BARRON'S, FORTUNE and THE NEW YORK TIMES.

Each fund invests primarily in the fixed-income securities described in its
Prospectus. High Yield might invest in equity securities included in the S&P 500
or the Dow Jones indices among others. Comparison with such indices is intended
to show how an investment in a class of shares behaved as compared to indices
that are often taken as a measure of performance of the equity market as a
whole. The indices, like the total return of a class of shares, assume
reinvestment of all dividends and other distributions. They do not take account
of the costs or the tax consequences of investing.

Each fund may include discussions or illustrations of the effects of
compounding in performance advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on an investment in a fund are
reinvested in additional shares, any future income or capital appreciation of
the fund would increase the value, not only of the original fund investment, but
also of the additional shares received through reinvestment. As a result, the
value of the fund investment would increase more quickly than if dividends or
other distributions had been paid in cash.

Each fund may also compare the performance of a Class of shares with the
performance of bank certificates of deposit (CDs) as measured by the CDA
Investment Technologies, Inc. Certificate of Deposit Index and the Bank Rate
Monitor National Index. In comparing the performance of a Class to CD
performance, investors should keep in mind that bank CDs are insured in whole or
in part by an agency of the U.S. Government and offer fixed principal and fixed
or variable rates of interest, and that bank CD yields may vary. Fund shares are
not insured or guaranteed by the U.S. Government and returns and net asset value
will fluctuate. The securities held by a fund generally have longer maturities
than most CDs and may reflect interest rate fluctuations for longer-term
securities. An investment in each fund involves greater risks than an investment
in certificates of deposit.

Fund advertisements may reference the history of the distributor and its
affiliates, the education, experience, investment philosophy and strategy of the
portfolio manager, and the fact that the portfolio manager engages in certain

47
<PAGE>

approaches to investing. Advertisements may also describe techniques the Adviser
employs in selecting among the sectors of the fixed-income market [and adjusting
average portfolio maturity]. In particular, the advertisements may focus on the
technique of "value investing." With value investing, the Adviser invests in
those securities it believes to be undervalued in relation to the long-term
earning power or asset value of their issuers. Securities may be undervalued
because of many factors, including market decline, poor economic conditions,
tax-loss selling or actual or anticipated unfavorable developments affecting the
issuer of the security.

In advertising, each fund 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 fund may use other recognized
sources as they become available.

Each fund may use data prepared by independent third parties such as
Ibbotson Associates and Frontier Analytics to compare the returns of various
capital markets and to show the value of a hypothetical investment in a capital
market. Typically, different indices are used to calculate the performance of
common stocks, corporate and government bonds and Treasury bills.

Each fund 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.

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

Each fund 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 fund may discuss Legg Mason's tradition of service. Since 1899, Legg
Mason and its affiliated companies have helped investors meet their specific
investment goals and have provided a full spectrum of financial services. Legg
Mason affiliates serve as investment advisors to private accounts and mutual
funds with approximately $104.2 billion in assets as of December 31, 1999.

In advertising, each fund 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.

A fund may depict in advertising and sales literature the historical
performance of the securities in which that fund may invest over periods
reflecting a variety of market or economic conditions whether alone or in
comparison with alternative investments, performance indexes of those
investments or economic indicators. A fund may also describe its portfolio
holdings and depict its size, the number and make-up of its shareholder base and
other descriptive factors concerning that fund.

48
<PAGE>

The following tables show the value, as of the end of each fiscal year, of
a hypothetical investment of $10,000 ($15,000 for High Yield) made in each fund
at commencement of operations of each class of fund shares. The tables assume
that all dividends and other distributions are reinvested in each respective
fund. They include the effect of all charges and fees applicable to the
respective class of shares the fund has paid. (There are no fees for investing
or reinvesting in the funds, and there are no redemption fees.) They do not
include the effect of any income taxes that an investor would have to pay on
distributions.

Government Intermediate:

Primary Class Shares

Value of Original Shares Value of Shares
Plus Shares Obtained Acquired Through
through Reinvestment of Reinvestment of
Fiscal Year Capital Gain Distributions Income Dividends Total Value
- ------------------------------------------------------------------------------
1987* $9,920 $302 $10,222
1988 9,800 1,080 10,880
1989 10,210 2,062 12,272
1990 10,301 3,081 13,382
1991 11,087 4,217 15,304
1992 11,180 5,081 16,261
1993 11,607 5,735 17,342
1994 10,829 6,179 17,008
1995 11,652 7,716 19,368
1996 11,474 8,760 20,234
1997 11,574 10,067 21,641
1998 11,696 11,364 23,060
1999 $11,040 $11,910 $22,950

*August 7, 1987 (commencement of operations) to December 31, 1987.

49
<PAGE>

Navigator Class Shares

*December 1, 1994 (commencement of operations) to December 31, 1994.

With respect to Primary Class shares, if the investor had not reinvested
dividends and other distributions, the total value of the hypothetical
investment as of December 31, 1999 would have been $9,920 and the investor would
have received a total of $8,650 in distributions. With respect to Navigator
Class shares, if the investor had not reinvested dividends and other
distributions, the total value of the hypothetical investment as of December 31,
1998 would have been $10,206, and the investor would have received a total of
$3,288 in distributions. Returns would have been lower if the Manager had not
waived certain fees during the fiscal years 1987 through 1999.

Investment Grade:

Primary Class Shares

Value of Original Shares Value of Shares
Plus Shares Obtained Acquired Through
through Reinvestment of Reinvestment of
Fiscal Year Capital Gain Distributions Income Dividends Total Value
- ------------------------------------------------------------------------------
1987* $9,940 $320 $10,260
1988 9,908 1,137 11,045
1989 10,319 2,158 12,477
1990 10,046 3,154 13,200
1991 10,835 4,476 15,311
1992 10,893 5,456 16,349
1993 11,940 6,244 18,184
1994 10,717 6,590 17,307
1995 12,069 8,724 20,793
1996 11,815 9,874 21,689
1997 12,243 11,682 23,925
1998 12,601 12,996 25,597
1999 11,790 13,574 25,364

*August 7, 1987 (commencement of operations) to December 31, 1987.

50
<PAGE>

Navigator Class Shares

1995* $10,116 $ 26 $10,142
1996 9,903 735 10,638
1997 10,261 1,541 11,802
1998 10,411 2,285 12,696
1999 9,727 2,927 12,654

*December 1, 1995 (commencement of operations) to December 31, 1995.

With respect to Primary Class shares, if the investor had not reinvested
dividends and other distributions, the total value of the hypothetical
investment as of December 31, 1999 would have been $9,780, and the investor
would have received a total of $9,784 in distributions. With respect to
Navigator Class shares, if the investor had not reinvested dividends and other
distributions, the total value of the hypothetical investment as of December 31,
1998 would have been $9,486, and the investor would have received a total of
$2,879 in distributions. Returns would have been lower if the Manager had not
waived certain fees during the fiscal years 1987 through 1999.

High Yield:

Primary Class Shares:

1994* $13,560 $1,006 $14,566
1995 14,620 2,570 17,190
1996 15,370 4,383 19,753
1997 16,405 6,480 22,885
1998 14,802 7,613 22,415
1999 15,094 9,364 24,458

*February 1, 1994 (commencement of operations) to December 31, 1994.

51
<PAGE>

With respect to Primary Class shares, the investor had not reinvested
dividends and other distributions, the total value of the hypothetical
investment as of December 31, 1999 would have been $14,970, and the investor
would have received a total of $7,441 in distributions.

Navigator Class Shares:

*May 5, 1998 (commencement of operations) to December 31, 1998.

With respect to Navigator class shares, the investor had not reinvested
dividends and other distributions, the total value of the hypothetical
investment as of December 31, 1999 would have been $13,326, and the investor
would have received a total of $1,853 in distributions.

CAPITAL STOCK INFORMATION

The Articles of Incorporation authorize the Corporation to issue one
billion shares of common stock, par value $0.001 per share, and to create
additional series (or portfolios), each of which may issue separate classes of
shares. Government Intermediate, Investment Grade and High Yield currently offer
two classes of shares -- Primary Class shares and Navigator Class shares. The
two classes of each fund represent interests in the same pool of assets of that
fund. A separate vote is taken by a class of shares of a fund if a matter
affects just that class. Each class may bear certain differing class-specific
expenses.

Shareholder meetings will not be held except where the Investment Company
Act of 1940 requires a shareholder vote on certain matters (including the
election of directors, approval of an advisory contract, and certain amendments
to the plan of distribution pursuant to Rule 12b-1) at the request of 25% or
more of the shares entitled to vote as set forth in the bylaws of Legg Mason
Income Trust, Inc., or as the Board of Directors from time to time deems
appropriate.

Shareholders of the funds are entitled to one vote per share and fractional
votes for fractional shares held. Voting rights are not cumulative. All shares
of the funds are fully paid and nonassessable and have no preemptive or
conversion rights.

THE FUNDS' CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING AGENT

State Street Bank and Trust Company ("State Street"), P.O. Box 1713,
Boston, Massachusetts 02105, serves as custodian of each fund's assets. Boston
Financial Data Services, P.O. Box 953, Boston, Massachusetts 02103, as agent for
State Street, serves as transfer and dividend-disbursing agent, and
administrator of various shareholder services. BFDS has contracted with Legg
Mason for the latter to assist it with certain of its duties as transfer agent,
for which BFDS compensates Legg Mason. Shareholders who request an historical
transcript of their account will be charged a fee based upon the number of years
researched. Each fund reserves the right, upon 60 days' written notice, to make
other charges to investors to cover administrative costs.

52
<PAGE>

THE CORPORATION'S LEGAL COUNSEL

Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W., Washington,
D.C. 20036-1800, serves as counsel to the Corporation.

THE CORPORATION'S INDEPENDENT ACCOUNTANTS

PricewaterhouseCoopers LLP, 250 W. Pratt Street, Baltimore, MD 21201,
serves as the Corporation's independent accountants.

FINANCIAL STATEMENTS

The Statement of Net Assets as of December 31, 1999; the Statement of
Operations for the year ended December 31, 1999; the Statement of Changes in Net
Assets for the years ended December 31, 1999 and 1998; the Financial Highlights
for the periods presented; the Notes to Financial Statements and the Report of
the Independent Accountants, all of which are included in each fund's Annual
Report to Shareholders for the year ended December 31, 1999, are hereby
incorporated by reference in this Statement of Additional Information.

<PAGE>

Appendix A

RATINGS OF SECURITIES

Description of Moody's Investors Service, Inc. ("Moody's") corporate bond
ratings:
- --------------------------------------------------------------------------------

Aaa-Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

Aa -Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.

A-Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.

Baa-Bonds which are rated Baa are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Ba-Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

B- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

Caa-Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

Ca- Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.

C-Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

Description of Standard & Poor's ("S&P") corporate bond ratings:
- ---------------------------------------------------------------

AAA-An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.

AA -An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.

54
<PAGE>

A-An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.

BBB-An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation. Obligations rated BB, B, CCC, CC, and C are regarded as
having significant speculative characteristics. BB indicates the least degree of
speculation and C the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.

BB-An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.

B-An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.

CCC-An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.

CC-An obligation rated CC is currently highly vulnerable to nonpayment.

C-A subordinated debt or preferred stock obligation rated C is currently
highly vulnerable to nonpayment. The C rating may be used to cover a situation
where a bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued. A C also will be assigned to a
preferred stock issue in arrears on dividends or sinking fund payments but that
is currently paying.

D-An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.

Plus (+) or minus (-)-The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

r-This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk-such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.

N.R.-This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular obligation as a matter of policy.

55
<PAGE>

Description Of Moody's Preferred Stock Ratings
- ----------------------------------------------

aaa: An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.

aa: An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance the earnings
and asset protection will remain relatively well maintained in the foreseeable
future.

a: An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the "aaa"
and "aa" classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.

baa: An issue which is rated "baa" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.

ba: An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.

Description Of Moody's Short-Term Debt Ratings
- ----------------------------------------------

PRIME-1: Issuers (or supporting institutions) rated Prime-1 (P-1) have a
superior capacity for repayment of short-term debt obligations. P-1 repayment
capacity will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.

PRIME-2: Issuers (or supporting institutions) rated Prime-2 (P-2) have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.

Description Of S&P's Commercial Paper Ratings
- ---------------------------------------------

A-1

A short-term obligation rated `A-1' is rated in the highest category by S&P. The
obligor's capacity to meet its financial commitment on the obligation is strong.
Within this category, certain obligations are designated with a plus sign (+).
This indicates that the obligor's capacity to meet its financial commitment on
these obligations is extremely strong.

A-2

A short-term obligation rated `A-2' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.

A-3

A short-term obligation rated `A-3' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.

<PAGE>

Legg Mason Income Trust, Inc.

Part C. Other Information

Item 23. Exhibits

(A) (a) Articles of Incorporation (4)
(b) Articles Supplementary (4)
(c) Articles Supplementary (4)
(d) Articles Supplementary (4)
(e) Articles Supplementary (4)

(B) (a) Amended By-Laws (4)
(b) Amendment to By-Laws (4)

(D) (a) Management Agreement

(i) U.S. Government Intermediate-Term Portfolio (4)
(ii) Investment Grade Income Portfolio (4)
(iii) U.S. Government Money Market Portfolio (4)
(iv) High Yield Portfolio (4)

(b) Investment Advisory Agreement

(i) U.S. Government Intermediate-Term Portfolio (4)
(ii) Investment Grade Income Portfolio (4)
(iii) U.S. Government Money Market Portfolio (4)
(iv) High Yield Portfolio (4)

(E) Underwriting Agreement

(a)(i) U.S. Government Intermediate-Term and Investment
Grade Income Portfolios(4)
(ii) U.S. Government Intermediate-Term and Investment
Grade Income Portfolios (3)

(b)(i) U.S. Government Money Market Portfolio (4)
(ii) U.S. Government Money Market Portfolio (3)

(d) (i) High Yield Portfolio (4)
(ii) High Yield Portfolio (3)

(F) Bonus, profit sharing or pension plans - none

(G) Custodian Agreement (4)

(H) (i) Transfer Agency and Service Agreement (4)
(ii) Credit Agreement (6)
(iii) Amendment to Credit Agreement (7)
(iv) Amendment to Credit Agreement dated as of March 17, 2000(8)

<PAGE>

(I) Opinion and Consent of Counsel - filed herewith

(J) Consent of Independent Accountants -- filed herewith

(K) Financial statements omitted from Item 23 - none

(L) Agreements for providing initial capital (4)

(M) Plan pursuant to Rule 12b-1
(a)(i) Investment Grade Income and U.S. Government
Intermediate-Term Portfolios (4)
(ii) Investment Grade Income and U.S. Government
Intermediate-Term Portfolios (3)
(b)(i) U.S. Government Money Market Portfolio (4)
(ii) U.S. Government Money Market Portfolio (3)
(c)(i) High Yield Portfolio (4)
(ii) High Yield Portfolio (3)

(N) Financial Data Schedules -- none

(O) Plan Pursuant to Rule 18f-3 -- none

(P) Code of ethics for the fund, its investment advisers, and its
principal underwriter (8)

(1) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 24 to the Registration Statement, SEC File No. 33-12092, filed May
1, 1996.

(2) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 8 to the Registration Statement, SEC File No. 33-12092, filed
April 28, 1991.

(3) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 25 to the Registration Statement, SEC File No. 33-12092, filed
February 28, 1997.

(4) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 26 to the Registration Statement, SEC File No. 33-12092, and Filed
April 30, 1997.

(5) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 35 to the Registration Statement of Legg Mason Cash Reserve Trust,
SEC File No. 2-62218, Filed December 31, 1997.

(6) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 13 to the Registration Statement of Legg Mason Global Trust, Inc.,
SEC File No. 33-56672, filed April 30, 1998.

(7) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 29 to the Registration Statement, SEC File No. 33-12092, filed
March 4, 1999.

<PAGE>

(8) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 2 to the Registration Statement of Legg Mason Investment Trust,
Inc., SEC File No. 333-88715 filed on March 28, 2000.

Item 24. Persons Controlled By or Under Common Control with Registrant

None

Item 25. Indemnification

This item is incorporated by reference to Item 27 of Part C of
Post-Effective Amendment No. 25 to the Registration Statement, SEC File No.
33-12092 filed February 28, 1997.

Item 26. Business and Connections of Manager and Investment Adviser

Legg Mason Fund Adviser, Inc. ("LMFA"), 100 Light Street, Baltimore,
Maryland 21202, the Registrant's manager, is a registered investment adviser
incorporated on January 20, 1982. LMFA is engaged primarily in the investment
advisory business. Information as to the officers and directors of LMFA is
included in its Form ADV that was most recently amended on November 9, 1999, and
is on file with the Securities and Exchange Commission (Registration No.
801-16958) and is incorporated herein by reference.

Western Asset Management Company ("Western"), 117 East Colorado
Boulevard, Pasadena, California 91105-1938, the Registrant's investment adviser,
is a registered investment adviser incorporated on October 5, 1971. Western is
engaged primarily in the investment advisory business. Information as to the
officers and directors of Western is included in its Form ADV that was most
recently amended on June 22, 1999 and is on file with the Securities and
Exchange Commission (Registration No. 801-08162) and is incorporated herein by
reference.

Item 27. Principal Underwriters

(a) Legg Mason Cash Reserve Trust
Legg Mason Tax-Exempt 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.
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").

<PAGE>

Position and Offices Positions and
Name and Principal with Underwriter - Offices with
Business Address* LMWW Registrant

- --------------------------------------------------------------------------------

Raymond A. Mason Chairman of the None
Board and Director

James W. Brinkley President, Chief None
Operating Officer
and Director

Edmund J. Cashman, Jr. Senior Executive None
Vice President and
Director

Richard J. Himelfarb Senior Executive None
Vice President and
Director

Edward A. Taber III Senior Executive Director
Vice President

Robert G. Donovan Executive Vice None
President

Robert A. Frank Executive Vice None
President

Robert G. Sabelhaus Executive Vice None
President

Timothy C. Scheve Executive Vice None
President and
Treasurer and
Director

Manoochehr Abbaei Senior Vice President None

Charles A. Bacigalupo Senior Vice None
President and
Secretary

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

<PAGE>
Position and Offices Positions and
Name and Principal with Underwriter - Offices with
Business Address* LMWW Registrant

- --------------------------------------------------------------------------------

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
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

Theodore S. Kaplan Senior Vice President None

Laura L. Lange Senior Vice President None

Horace M. Lowman, Jr. Senior Vice None
President and Asst.
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 None
President

<PAGE>

Position and Offices Positions and
Name and Principal with Underwriter - Offices with
Business Address* LMWW Registrant

- --------------------------------------------------------------------------------

Mark I. Preston Senior Vice President None

Robert F. Price Senior Vice None
President and
General Counsel

Thomas L. Souders Senior Vice None
President and Chief
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 None
Deputy General
Counsel

Edwin J. Bradley, Jr. Vice President None

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 None
Controller

Norman C. Frost, Jr. Vice President None

James E. Furletti Vice President None

John R. Gilner Vice President None

Daniel R. Greller Vice President None

Richard A. Jacobs Vice President None

<PAGE>
Position and Offices Positions and
Name and Principal with Underwriter - Offices with
Business Address* LMWW Registrant

- --------------------------------------------------------------------------------

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 None
Assistant 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.
New Orleans, LA 70163

Ann O'Shea Vice President None

Robert E. Patterson Vice President and None
Deputy General
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

<PAGE>
Position and Offices Positions and
Name and Principal with Underwriter - Offices with
Business Address* LMWW Registrant

- --------------------------------------------------------------------------------

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 None
Deputy General
Counsel

Lewis T. Yeager Vice President None

Carol Converso-Burton Assistant Vice None
President

<PAGE>

Position and Offices Positions and
Name and Principal with Underwriter - Offices with
Business Address* LMWW Registrant

- --------------------------------------------------------------------------------

Diana L. Deems Assistant Vice None
President and
Assistant Controller

Ronald N. McKenna Assistant Vice None
President

Suzanne E. Peluso Assistant Vice None
President

Lauri F. Smith Assistant Vice None
President

Janet B. Straver Assistant Vice None
President

Leslee Stahl Assistant Secretary None

* All addresses are 100 Light Street, Baltimore, Maryland 21202, unless
otherwise indicated.

(c) The Registrant has no principal underwriter who 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 and Legg Mason Fund Adviser, Inc.
P.O. Box 1713 100 Light Street
Boston, Massachusetts 02105 Baltimore, Maryland 21202

Item 29. Management Services
None

Item 30. Undertakings
None

<PAGE>

SIGNATURE PAGE

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Legg Mason Income Trust, Inc.,
certifies that it meets all the requirements for effectiveness of this
Post-Effective Amendment No. 31 to its Registration Statement under Rule 485(b)
under the Securities Act of 1933, and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Baltimore and State of Maryland, on the 26th day of
April, 2000.

LEGG MASON INCOME TRUST, INC.

By: /s/ Marie K. Karpinski
Marie K. Karpinski
Vice President and Treasurer

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 31 to the Registrant's Registration Statement has
been signed below by the following persons in the capacities and on the dates
indicated:

Signature Title Date
- --------- ----- ----

/s/ John F. Curley, Jr.* Chairman of the Board April 26, 2000
John F. Curley, Jr. and Director

/s/Edmund J. Cashman, Jr.* Vice Chairman of the April 26, 2000
Edmund J. Cashman, Jr. Board and Director

/s/Edward A. Taber, III* President April 26, 2000
Edward A. Taber, III

/s/Richard G. Gilmore* Director April 26, 2000
Richard G. Gilmore*

/s/Arnold L. Lehman* Director April 26, 2000
Arnold L. Lehman*

/s/Jill E. McGovern* Director April 26, 2000
Jill E. McGovern

/s/T.A. Rodgers* Director April 26, 2000
T.A. Rodgers

/s/Marie K. Karpinski Vice President April 26, 2000
Marie K. Karpinski and Treasurer

*Signatures affixed by Marc R. Duffy pursuant to Power of Attorney, dated
November 12, 1999, a copy of which is filed herewith.

<PAGE>

POWER OF ATTORNEY

I, the undersigned Director/Trustee of one or more of the following investment
companies (as set forth in the companies' Registration Statements on form N-1A):

LEGG MASON CASH RESERVE TRUST LEGG MASON VALUE TRUST, INC.
LEGG MASON INCOME TRUST, INC. LEGG MASON TOTAL RETURN TRUST, INC.
LEGG MASON GLOBAL TRUST, INC. LEGG MASON SPECIAL INVESTMENT TRUST, INC.
LEGG MASON TAX EXEMPT TRUST, INC. LEGG MASON INVESTORS TRUST, INC.
LEGG MASON TAX-FREE INCOME FUND LEGG MASON LIGHT STREET TRUST, INC.
LEGG MASON FOCUS TRUST, INC. LEGG MASON INVESTMENT TRUST, INC.

plus any other investment company for which Legg Mason Fund Adviser, Inc. acts
as investment adviser or manager and for which the undersigned individual serves
as Director/Trustee hereby severally constitute and appoint each of MARIE K.
KARPINSKI, MARC R. DUFFY, ANDREW J. BOWDEN, ARTHUR J. BROWN and ARTHUR C.
DELIBERT my true and lawful attorney-in-fact, with full power of substitution,
and with full power to sign for me and in my name in the appropriate capacity
and only for those above-listed companies for which I serve as Director/Trustee,
any Registration Statements on Form N-lA, all Pre-Effective Amendments to any
Registration Statements of the Funds, any and all subsequent Post-Effective
Amendments to said Registration Statements, and any and all supplements or other
instruments in connection therewith, to file the same with the Securities and
Exchange Commission and the securities regulators of appropriate states and
territories, and generally to do all such things in my name and behalf in
connection therewith as said attorney-in-fact deems necessary or appropriate, to
comply with the provisions of the Securities Act of 1933 and the Investment
Company Act of 1940, all related requirements of the Securities and Exchange
Commission and all requirements of appropriate states and territories. I hereby
ratify and confirm all that said attorney-in-fact or their substitutes may do or
cause to be done by virtue hereof.

WITNESS my hand on the date set forth below.

SIGNATURE DATE
- --------- ----

/s/ Edmund J. Cashman, Jr. November 12, 1999
- --------------------------
Edmund J. Cashman, Jr.

/s/ John F. Curley, Jr. November 12, 1999
- -----------------------
John F. Curley, Jr.

/s/ Richard G. Gilmore November 12, 1999
- ----------------------
Richard G. Gilmore

/s/ Arnold L. Lehman November 12, 1999
- --------------------
Arnold L. Lehman

/s/ Raymond A. Mason November 12, 1999
- --------------------
Raymond A. Mason

/s/ Jill E. McGovern November 12, 1999
- --------------------
Jill E. McGovern

/s/ Jennifer W. Murphy November 12, 1999
- ----------------------
Jennifer W. Murphy

/s/ G. Peter O'Brien November 12, 1999
- --------------------
G. Peter O'Brien

/s/ T. A. Rodgers November 12, 1999
- ------------------
T. A. Rodgers

/s/ Edward A. Taber, III November 12, 1999
- ------------------------
Edward A. Taber, III

<PAGE>
Exhibits

(A) (a) Articles of Incorporation (4)
(b) Articles Supplementary (4)
(c) Articles Supplementary (4)
(d) Articles Supplementary (4)
(e) Articles Supplementary (4)
(B) (a) Amended By-Laws (4)
(b) Amendment to By-Laws (4)
(C) Specimen Security -- not applicable
(D) (a) Management Agreement
(i) U.S. Government Intermediate-Term Portfolio (4)
(ii) Investment Grade Income Portfolio (4)
(iii) U.S. Government Money Market Portfolio (4)
(iv) High Yield Portfolio (4)
(b) Investment Advisory Agreement
(i) U.S. Government Intermediate-Term Portfolio (4)
(ii) Investment Grade Income Portfolio (4)
(iii) U.S. Government Money Market Portfolio (4)
(iv) High Yield Portfolio (4)
(E) Underwriting Agreement
(a)(i) U.S. Government Intermediate-Term and Investment
Grade Income Portfolios(4)
(ii) U.S. Government Intermediate-Term and Investment
Grade Income Portfolios (3)
(b)(i) U.S. Government Money Market Portfolio (4)
(ii) U.S. Government Money Market Portfolio (3)
(c) Dealer Contract with respect to Navigator Shares (1)
(d) (i) High Yield Portfolio (4)
(ii) High Yield Portfolio (3)
(F) Bonus, profit sharing or pension plans - none
(G) Custodian Agreement (4)
(H) (i) Transfer Agency and Service Agreement (4)
(ii) Credit Agreement (6)
(iii) Amendment to Credit Agreement (7)
(iv) Amendment to Credit Agreement dated as of March 17, 2000 (8)
(I) Opinion and Consent of Counsel - filed herewith
(J) Consent of Independent Accountants -- filed herewith
(K) Financial statements omitted from Item 23 - none
(L) Agreements for providing initial capital (4)
(M) Plan pursuant to Rule 12b-1
(a)(i) Investment Grade Income and U.S. Government
Intermediate-Term Portfolios (4)
(ii) Investment Grade Income and U.S. Government
Intermediate-Term Portfolios (3)
(b)(i) U.S. Government Money Market Portfolio (4)
(ii) U.S. Government Money Market Portfolio (3)
(c)(i) High Yield Portfolio (4)
(ii) High Yield Portfolio (3)
(N) Financial Data Schedules -- none
(O) Plan Pursuant to Rule 18f-3 -- none
(P) Code of ethics for the fund, its investment advisers, and its principal
underwriter (8)

(1) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 24 to the Registration Statement, SEC File No. 33-12092, filed
May 1, 1996.
(2) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 8 to the Registration Statement, SEC File No. 33-12092, filed
April 28, 1991.
(3) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 25 to the Registration Statement, SEC File No. 33-12092, filed
February 28, 1997.
(4) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 26 to the Registration Statement, SEC File No. 33-12092, and
Filed April 30, 1997.
(5) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 35 to the Registration Statement of Legg Mason Cash Reserve
Trust, SEC File No. 2-62218, Filed December 31, 1997.
(6) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 13 to the Registration Statement of Legg Mason Global Trust,
Inc., SEC File No. 33-56672, filed April 30, 1998.
(7) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 29 to the Registration Statement, SEC File No. 33-12092, filed
March 4, 1999.
(8) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 2 to the Registration Statement of Legg Mason Investment
Trust, Inc., SEC File No. 333-88715 filed on March 28, 2000.

Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
2nd Floor
Washington, DC 20036

ARTHUR C. DELIBERT
(202) 778-9042
[email protected]

April 25, 2000

Legg Mason Income Trust, Inc.
100 Light Street
Baltimore, MD 21202

Dear Sir or Madam:

Legg Mason Income Trust, Inc. (the "Corporation") is a corporation
organized under the laws of the State of Maryland by Articles of Incorporation
dated April 28, 1987. You have requested our opinion as to certain matters
regarding the issuance of certain Shares of the Corporation. As used in this
letter, the term "Shares" means the Primary Class and Navigator Class shares of
common stock of the Legg Mason U.S. Government Intermediate-Term Portfolio, Legg
Mason Investment Grade Income Portfolio, and Legg Mason High Yield Portfolio and
shares of common stock of the Legg Mason U.S. Government Money Market Portfolio
series of the Corporation issued during the time that Post-Effective Amendment
No. 31 to the Corporation's Registration Statement is effective. This opinion
terminates with respect to any class or series of the Corporation on the earlier
of May 1, 2001 or the effective date of a registration statement that purports
to register shares of the same class or series set forth herein.

We have, as counsel, participated in various corporate and other
matters relating to the Corporation. We have examined certified copies of the
Articles of Incorporation and By-Laws, the minutes of meetings of the directors
and other documents relating to the organization and operation of the
Corporation, and we are generally familiar with its business affairs. Based upon
the foregoing, it is our opinion that, when sold in accordance with the
Corporation's Articles of Incorporation, By-Laws and the terms contemplated by
Post-Effective Amendment No. 31 to the Corporation's Registration Statement, the
Shares will have been legally issued, fully paid and nonassessable by the
Corporation.

We hereby consent to the filing of this opinion in connection with
Post-Effective Amendment No. 31 to the Corporation's Registration Statement on
Form N-1A (File No. 33-12092) being filed with the Securities and Exchange
Commission. We also consent to the reference to our firm in the Statement of
Additional Information filed as part of the Registration Statement.

Sincerely,

KIRKPATRICK & LOCKHART LLP

/s/ Kirkpatrick & Lockhart LLP

Consent of Independent Accountants

We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 31 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated February 10 2000, relating to the financial
statements and financial highlights which appear in the December 31, 1999 Annual
Report to Shareholders of Legg Mason Income Trust, Inc., also incorporated by
reference into the Registration Statement. We also consent to the references to
us under the heading "Financial Highlights" in the Prospectus and under the
heading "The Fund's Independent Accountants" in the Statement of Additional
Information.

/s/PricewaterhouseCoopers LLP
Baltimore, Maryland
April 21, 2000