WESTERN ASSET TRUST INC
497, 1996-11-18
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                                                                      PROSPECTUS

[Western Asset Logo]

                           WESTERN ASSET TRUST, INC.
                             MONEY MARKET PORTFOLIO
                            SHORT DURATION PORTFOLIO
                           LIMITED DURATION PORTFOLIO
                             INTERMEDIATE PORTFOLIO
                                 CORE PORTFOLIO
                            LONG DURATION PORTFOLIO

       Western Asset Trust,  Inc.  ("Fund") is a no-load,  open-end,  management
investment company currently consisting of nine separate  professionally managed
investment  portfolios.  The six portfolios  described in this Prospectus -- the
Money Market Portfolio,  Short Duration  Portfolio,  Limited Duration Portfolio,
Intermediate   Portfolio,   Core   Portfolio   and   Long   Duration   Portfolio
(collectively,   "Portfolios")   --  are   intended   to  provide   pension  and
profit-sharing  plans, other employee benefit trusts,  endowments,  foundations,
other institutions and corporations, as well as high net worth individuals, with
access to the  professional  investment  management  services  of Western  Asset
Management  Company,  the investment  adviser to the Fund.  The Short  Duration,
Limited  Duration,  Intermediate,  Core and  Long  Duration  Portfolios  seek to
maximize  total  return,  consistent  with  prudent  investment  management  and
liquidity  needs,  by investing in a portfolio  of fixed income  securities  and
related  instruments  to achieve a  specified  average  duration.  Duration is a
measure of the expected  life of a fixed  income  security on a cash flow basis.
For any fixed income  security with  interest  payments  occurring  prior to the
payment of  principal,  duration is always less than  maturity.  The  Portfolios
described  in  this  Prospectus  are  diversified.  ALTHOUGH  THE  MONEY  MARKET
PORTFOLIO  WILL ATTEMPT TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE,
THERE CAN BE NO ASSURANCE  THAT IT WILL BE ABLE TO DO SO. AN  INVESTMENT  IN THE
MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.

       Of  the  six  portfolios  covered  by  this  Prospectus,  only  the  Core
Portfolio,  the Limited Duration  Portfolio and the Intermediate  Portfolio have
commenced operations.  Effective March 13, 1996, the Portfolio formerly known as
the  Intermediate  Duration  Portfolio  changed  its  name  to the  Intermediate
Portfolio, and the Portfolio formerly known as the Full Range Duration Portfolio
changed its name to the Core Portfolio.

       This Prospectus sets forth concisely the information  about the Fund that
a prospective  investor  ought to know before  investing.  It should be read and
retained for future reference.  A Statement of Additional  Information about the
Fund dated  October 30, 1996,  has been filed with the  Securities  and Exchange
Commission ("SEC") and, as amended from time to time, is incorporated  herein by
reference.  The Statement of Additional  Information is available without charge
upon request from Western Asset Trust, Inc., (818) 844-9400.

           THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
              THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
                SECURITIES COMMISSION NOR HAS THE SECURITIES AND
                  EXCHANGE COMMISSION OR ANY STATE SECURITIES
                     COMMISSION PASSED UPON THE ACCURACY OR
                        ADEQUACY OF THIS PROSPECTUS. ANY
                         REPRESENTATION TO THE CONTRARY
                             IS A CRIMINAL OFFENSE.

Dated: October 30, 1996


<PAGE>

WESTERN ASSET

                               TABLE OF CONTENTS

Prospectus Summary.........................................................   3
Investment Risks and Considerations........................................   4
Expense Information........................................................   7
Financial Highlights.......................................................   9
Investment Objectives and Policies.........................................  13
Description of Securities and Investment Techniques........................  17
Purchase of Shares.........................................................  30
Redemption of Shares.......................................................  31
Exchange Privilege.........................................................  33
How Net Asset Value is Determined..........................................  33
Dividends and Other Distributions..........................................  34
Federal Tax Treatment of Dividends and Other Distributions.................  34
Management of the Fund.....................................................  36
Other Information..........................................................  38
Appendix...................................................................  40

2

PROSPECTUS



<PAGE>

                                                                   WESTERN ASSET

                               PROSPECTUS SUMMARY

THE FUND

       Western Asset Trust, Inc. is a no-load,  open-end  management  investment
company that was organized as a Maryland  corporation  on May 16, 1990. The Fund
consists of nine separate  professionally  managed investment  Portfolios,  each
with its own  investment  objective and policies.  Six of those  portfolios  are
offered  through this Prospectus -- the Money Market  Portfolio,  Short Duration
Portfolio,  Limited Duration Portfolio,  Intermediate Portfolio,  Core Portfolio
and Long Duration Portfolio.  The Portfolios are designed to provide pension and
profit-sharing  plans, other employee benefit trusts,  endowments,  foundations,
other institutions and corporations, as well as high net worth individuals, with
access to the  professional  investment  management  services offered by Western
Asset  Management  Company,  the  investment  adviser  to the  Fund.  Of the six
Portfolios  covered by this  Prospectus,  only the Core  Portfolio,  the Limited
Duration Portfolio and the Intermediate Portfolio have commenced operations.

INVESTMENT OBJECTIVES

       MONEY  MARKET  PORTFOLIO - The  investment  objective of the Money Market
Portfolio  is to obtain  high  current  income  consistent  with  liquidity  and
conservation  of  principal.  This  Portfolio  seeks to attain its  objective by
investing  in  high  quality  money  market  instruments  considered  under  SEC
regulations  to have a  remaining  term to  maturity  of 397 days or less.  This
Portfolio will maintain a dollar-weighted average maturity of 90 days or less.

       TOTAL  RETURN  PORTFOLIOS  - The  investment  objective  of  each  of the
following  five  portfolios  ("Total  Return  Portfolios")  is to maximize total
return,  consistent with prudent  investment  management and liquidity needs, by
investing to obtain the average duration specified for that Portfolio.  Duration
is a measure of the  expected  life of a fixed  income  security  on a cash flow
basis.  Most debt obligations  provide interest  payments and a final payment at
maturity.  Some also have call  provisions  that  allow the issuer to redeem the
security at specified  dates prior to  maturity.  Duration  incorporates  yield,
coupon  interest  payments,  final  maturity  and  call  features  into a single
measure.  It is  therefore  considered a more  accurate  measure of a security's
expected life and  sensitivity  to interest rate changes than is the  security's
term to maturity.  See page 29 for a further  explanation of the term "duration"
and its application to various fixed income securities.

       Each Portfolio  seeks to achieve its objective by investing  primarily in
U.S.  dollar-denominated  fixed income and other debt securities of domestic and
foreign entities,  including corporate bonds, securities issued or guaranteed as
to   principal   and  interest  by  the  U.S.   Government,   its  agencies  and
instrumentalities  ("U.S. Government Securities"),  mortgage-related  securities
and  money  market   instruments.   The  Portfolios   differ  in  terms  of  the
dollar-weighted average duration of their respective portfolio securities and/or
in the proportion of their assets  invested in certain types of securities  and,
therefore,  their relative risk. See "Investment  Objectives and Policies," page
13.

                                                                               3

                                                                      PROSPECTUS


<PAGE>

WESTERN ASSET

                        DOLLAR-WEIGHTED
PORTFOLIO               AVERAGE DURATION
- ----------------------  -------------------------------------------------------
Short Duration          Six to fifteen months
Limited Duration        One to three years
Intermediate            Two to four years
Core                    Within (plus/minus) 20% of the average duration
                        of the domestic bond market as a whole,
                        as determined by the Adviser
Long Duration           At least eight years

       The average  duration of a Total Return  Portfolio  may be less than that
specified during periods of unusual  liquidity needs or immediately  following a
major infusion of cash.

       There can be no assurance that the investment  objective of any Portfolio
will  be  achieved.  Because  the  market  value  of each  of the  Total  Return
Portfolios'  investments will change, the net asset value per share of each such
Portfolio also will vary. The Money Market  Portfolio will attempt to maintain a
net asset value of $1.00 per share,  but there can be no assurance  this will be
achieved.

                      INVESTMENT RISKS AND CONSIDERATIONS

       All Portfolios may invest in U.S. Government Securities, some of which
may not be backed by the full  faith and  credit  of the  United  States.  While
principal  and  interest  payments on some  mortgage-related  securities  may be
guaranteed by the U.S. Government,  government agencies or other guarantors, the
market value of the securities is not guaranteed.  Events such as prepayments on
underlying   mortgage   loans  also  may   adversely   affect  the  return  from
mortgage-related securities.  Securities rated Baa by Moody's Investors Service,
Inc. ("Moody's") are deemed by that agency to have speculative characteristics.

       All  Portfolios  may  invest  in U.S.  dollar-denominated  securities  of
foreign issuers,  which are subject to additional risk factors not applicable to
securities of U.S. issuers,  including risks arising from confiscatory taxation,
taxes on  purchases  and sales,  interest  and dividend  income,  political  and
economic  developments  abroad and  differences  in the regulation of issuers or
securities  markets.  Securities of foreign  issuers may also be less liquid and
their prices more volatile than  securities  of U.S.  issuers.  The economy of a
foreign nation may be more or less favorable than the U.S. economy.

4

PROSPECTUS


<PAGE>

                                                                   WESTERN ASSET

       All Portfolios may invest in repurchase  agreements,  which entail a risk
of loss if the seller defaults on its obligations and the Portfolio  involved is
delayed or prevented  from  exercising  its rights to dispose of the  collateral
securities.  All of the Total Return  Portfolios  may purchase  securities  on a
when-issued  basis.  Securities  purchased on a when-issued basis may decline or
appreciate in market value prior to delivery.

       All of the Total Return Portfolios may use options,  futures contracts on
fixed income  instruments and options on such futures for hedging purposes or as
part of their investment  strategies.  Use of these instruments involves certain
costs  and  risks,  including  the risk that a  Portfolio  could not close out a
futures or option position when it would be most  advantageous to do so, and the
risk of an imperfect  correlation between the value of the security being hedged
and the value of the  particular  instrument.  See  "Investment  Objectives  and
Policies," page 13, and  "Description of Securities and Investment  Techniques,"
page 17.

       The Total  Return  Portfolios  are  intended  to have  different  average
durations.  When interest rates are falling, a Portfolio with a shorter duration
generally  will not generate as high a level of total return as a Portfolio with
a longer duration.  Conversely, when interest rates are rising, a Portfolio with
a  shorter  duration  will  generally  outperform  longer  duration  portfolios.
Assuming that long-term  interest rates are higher than short-term  rates (which
is commonly the case),  shorter duration portfolios  generally will not generate
as high a level of total  return as longer  duration  portfolios  when  interest
rates are flat. Shorter duration  portfolios are, however,  subject generally to
less fluctuation in their principal values as interest rates change.

INVESTMENT ADVISER AND FUND ADMINISTRATOR

       Western Asset Management Company serves as investment adviser ("Adviser")
to the Fund. Legg Mason Fund Adviser, Inc. serves as the Fund's administrator
("Administrator"). The Adviser renders investment advice to investment companies
that as of September 30, 1996 had approximately $3.7 billion aggregate assets
under management and private accounts totaling approximately $18.9 billion. The
Administrator also serves as investment adviser, manager or consultant to
investment companies with assets of approximately $6.0 billion as of the same
date. See "The Fund's Investment Adviser" and "The Fund's Administrator," page
36.

PURCHASE OF SHARES

       Shares of each  Portfolio  are offered  without a sales charge at the net
asset  value per share next  determined  after  receipt of a purchase  order and
payment in proper  form.  Each  investor  in any  Portfolio  must make a minimum
initial  investment  of  $1,000,000  in that  Portfolio.  After  such an initial
investment  has been made, an investor may invest  amounts of $10,000 or more in
that  Portfolio.  The  Fund  has no plan  under  Rule  12b-1  imposing  fees for
distribution expenses. See "Purchase of Shares," page 30.

                                                                               5

                                                                      PROSPECTUS

<PAGE>

WESTERN ASSET

REDEMPTION AND EXCHANGES

       Shares of each Portfolio may be redeemed  without charge at the net asset
value per share of the Portfolio next determined after receipt of the redemption
request in proper form.  Shares of any  Portfolio may be exchanged for shares of
any other Portfolio  described in this Prospectus on the basis of their relative
per share net asset values.  See  "Redemption of Shares," page 31, and "Exchange
Privilege," page 33.

DIVIDENDS AND OTHER DISTRIBUTIONS

       The Money Market Portfolio declares dividends daily and pays them
monthly. Each of the Total Return Portfolios declares and pays dividends
quarterly out of its net investment income. All dividends and other
distributions are automatically reinvested, unless cash payment is requested.
See "Dividends and Other Distributions" and "Federal Tax Treatment of Dividends
and Other Distributions," page 34.

CUSTODIAN AND TRANSFER AGENT

       State Street Bank and Trust Company ("State Street") serves as the Fund's
custodian,  and Boston  Financial Data  Services,  Inc.  ("BFDS")  serves as the
Fund's  transfer  agent and  dividend-disbursing  agent.  The Fund may  maintain
foreign securities and cash in the custody of certain eligible foreign banks and
securities depositories. See "The Fund's Custodian and Transfer Agent,"page 37.

6

PROSPECTUS

<PAGE>

                                                                   WESTERN ASSET

                              EXPENSE INFORMATION

       The  purpose  of  the   following   table  is  to  assist   investors  in
understanding  the various  costs and expenses  that they will bear  directly or
indirectly.  "Management  Fees" and  "Other  Expenses"  for the Core  Portfolio,
Intermediate  Portfolio and Limited  Duration  Portfolio are based on their fees
and expenses for the fiscal year ended June 30, 1996. For the other  Portfolios,
"Management  Fees"  are  based  on the  Fund's  current  contracts,  and  "Other
Expenses" are estimates for their initial year of operations.

SHAREHOLDER TRANSACTION EXPENSES

Sales load imposed on purchases                        None
Sales load imposed on reinvested distributions         None
Deferred Sales Load                                    None
Redemption fees                                        None
Exchange fees                                          None

ANNUAL FUND OPERATING EXPENSES(A):
(as a percentage of average net assets)

<TABLE>
<CAPTION>
                                                                                                 Money Market
                                                                 Limited                             and
                                    Core        Intermediate     Duration     Long Duration     Short Duration
                                  Portfolio      Portfolio       Portfolio      Portfolio         Portfolios
                                  ---------     ------------     --------     -------------     --------------
<S><C>
Management fees (after fee
  waivers)                            .37%            .00%          .00%            .25%              .20%
Other expenses (after expense
  reimbursement)                      .13%            .45%          .40%            .25%              .20%
                                  ---------     ------------     --------     -------------        -------
Total Fund Operating Expenses
  (after fee waivers and
  expense reimbursement)              .50%            .45%          .40%            .50%              .40%
                                  ---------     ------------     --------     -------------        -------
</TABLE>

- ------------------
(A) IF THE ADVISER AND THE  ADMINISTRATOR HAD NOT UNDERTAKEN TO LIMIT FUND
EXPENSES AS DESCRIBED ON THE FOLLOWING  PAGE,  THE  MANAGEMENT  FEES,  OTHER
EXPENSES AND TOTAL OPERATING  EXPENSES OF EACH FUND WOULD BE AS FOLLOWS:  FOR
CORE PORTFOLIO, 0.40%, 0.13% AND 0.53% OF AVERAGE NET ASSETS; FOR INTERMEDIATE
PORTFOLIO, 0.35%, 0.65% AND 1.00% OF AVERAGE NET ASSETS;  FOR LIMITED DURATION
PORTFOLIO,  0.30%, 0.50% AND 0.80% OF AVERAGE NET ASSETS; FOR LONG DURATION
PORTFOLIO, 0.40%, 0.25% AND 0.65% OF AVERAGE NET  ASSETS;  AND FOR THE MONEY
MARKET AND SHORT  DURATION PORTFOLIOS, 0.30%, 0.20% AND 0.50%, RESPECTIVELY, OF
AVERAGE NET ASSETS.


                                                                               7

                                                                      PROSPECTUS


<PAGE>

WESTERN ASSET

       The following example illustrates the expenses that an investor would pay
on a $1,000 investment over various time periods,  assuming (1) a 5% annual rate
of return and (2) redemption at the end of each time period.

                              1 Year       3 Years       5 Years       10 Years
                              ------       -------       -------       --------
Core Portfolio                  $5           $16           $28            $63
Intermediate Portfolio          $5           $14           $25            $57
Limited Duration Portfolio      $4           $13           $22            $51
Long Duration Portfolio         $5           $16           N/A            N/A
Money Market and
  Short Duration
  Portfolios                    $4           $13           N/A            N/A

       This  example  assumes that all  dividends  and other  distributions  are
reinvested  and that the  percentage  amounts listed under Annual Fund Operating
Expenses  remain the same over the time periods shown.  The above tables and the
assumption  in the  example of a $1,000  investment  and a 5% annual  return are
required by regulations  of the SEC applicable to all mutual funds.  THE ASSUMED
5% ANNUAL RETURN IS NOT A PREDICTION OF, AND DOES NOT REPRESENT, ANY PORTFOLIO'S
PROJECTED  OR ACTUAL  PERFORMANCE.  THE ABOVE  TABLES  SHOULD NOT BE  CONSIDERED
REPRESENTATIONS  OF PAST OR FUTURE  EXPENSES.  ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.  A Portfolio's  actual  expenses will depend upon,  among
other  things,  the  level of  average  net  assets,  the  levels  of sales  and
redemptions of shares, the extent to which a Portfolio incurs variable expenses,
such as transfer  agency  costs,  and whether  the Adviser  reimburses  all or a
portion  of the  Portfolio's  expenses  and/or  waives  all or a portion  of its
advisory and other fees.

8

PROSPECTUS

<PAGE>

                                                                   WESTERN ASSET

FEE WAIVERS

       Effective  September 12, 1996,  the  Adviser's  fee for the  Intermediate
Portfolio was changed to 0.35% of the Portfolio's  average daily net assets from
0.40%,  and the fee for the Limited  Duration  Portfolio was changed to 0.30% of
the Portfolio's  average daily net assets from 0.35%. The expense information in
the table of Annual Fund Operating Expenses has been restated to reflect current
fees. The Adviser has voluntarily agreed to waive its fees and/or reimburse each
Portfolio to the extent the Portfolio's expenses (exclusive of taxes,  interest,
brokerage and other transaction  expenses and any other extraordinary  expenses)
exceed during any month an annual rate of 0.50% of the Portfolio's average daily
net assets for such month for the Core and Long  Duration  Portfolios,  0.45% of
the  Portfolio's  average  daily net assets for such month for the  Intermediate
Portfolio,  and 0.40% of the Portfolio's average daily net assets for such month
for the Limited Duration,  Money Market and Short Duration Portfolios until June
30, 1997. For the Portfolios other than the Short Duration and Intermediate, the
Administrator  has  voluntarily  agreed to limit its annual fee to 0.05% of each
Portfolio's average daily net assets.  These agreements are voluntary and may be
terminated by the Adviser or the Administrator at any time.


                              FINANCIAL HIGHLIGHTS

       As of the date of this  Prospectus,  the Money  Market  Portfolio,  Short
Duration  Portfolio and Long Duration  Portfolio have not commenced  operations.
Accordingly, no condensed financial information with respect to those Portfolios
is included.

                              FINANCIAL HIGHLIGHTS
                                 CORE PORTFOLIO

       The financial  highlights for the years ended June 30, 1996,  1995, 1994,
1993 and 1992, and for the period September 4, 1990 (Commencement of Operations)
through June 30, 1991,  have been obtained from the financial  statements  which
have been audited by Price  Waterhouse LLP,  independent  accountants.  The Core
Portfolio's  financial  statements  for the year  ended June 30,  1996,  and the
unqualified  report of Price  Waterhouse  LLP thereon,  are included in the Core
Portfolio's 1996 Annual Report to Shareholders and are incorporated by reference
in the Statement of Additional Information.


                                                                               9

                                                                      PROSPECTUS



<PAGE>

WESTERN ASSET

<TABLE>
<CAPTION>
      YEARS ENDED JUNE 30,           1996       1995       1994       1993       1992       1991(A)
<S><C>
- --------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period                              $112.17    $105.02    $116.64    $112.04    $106.28    $100.00
                                    -------    -------    -------    -------    -------    -------
Net investment income(B)               6.70       6.82       5.64       6.57       6.90       6.66
Net realized and unrealized gain
  (loss) on investments, options
  and futures(C)                      (1.36)      7.19      (6.28)      8.71       8.72       4.28
                                    -------    -------    -------    -------    -------    -------
Total from investment operations       5.34      14.01      (0.64)     15.28      15.62      10.94
                                    -------    -------    -------    -------    -------    -------
Distributions to shareholders
from:
  Net investment income               (6.61)     (6.86)     (6.11)     (6.72)     (7.11)     (4.66)
  Net realized gain on
  investments                          (.44)        --      (4.87)     (3.96)     (2.75)        --
                                    -------    -------    -------    -------    -------    -------
Total distributions                   (7.05)     (6.86)    (10.98)    (10.68)     (9.86)     (4.66)
                                    -------    -------    -------    -------    -------    -------
Net asset value, end of period      $110.46    $112.17    $105.02    $116.64    $112.04    $106.28
                                    =======    =======    =======    =======    =======    =======
Total return                           4.86%     14.12%    (0.89)%     14.52%     15.61%     11.01%(D)
RATIOS/SUPPLEMENTAL DATA:
RATIOS TO AVERAGE NET ASSETS:
  Expenses(B)                          0.50%      0.50%      0.50%      0.50%      0.50%      0.65%(E)
  Net investment income(B)              6.3%       7.0%       6.0%       6.0%       6.7%       8.0%(E)
Portfolio turnover rate               266.0%    257.90%    272.49%    313.05%    299.65%    177.25%(E)
Net assets, end of period
  (in thousands)                    $453,699   $336,774   $205,959   $135,886    $92,892    $43,076
</TABLE>

- ------------------
(A) FOR THE PERIOD SEPTEMBER 4, 1990 (COMMENCEMENT OF OPERATIONS) TO JUNE 30,
1991.

(B) NET  OF  INVESTMENT  ADVISORY  FEES  WAIVED  PURSUANT  TO A  VOLUNTARY
EXPENSE LIMITATION  AS FOLLOWS:  0.65%  THROUGH JUNE 30, 1991;  0.50%
THEREAFTER  AND A VOLUNTARY  ADMINISTRATIVE  EXPENSE WAIVER OF 0.05%. PURSUANT
TO THIS LIMITATION, ADVISORY FEES OF $111,421,  $69,442,  $66,823, $71,911, AND
$128,262 WERE WAIVED FOR THE  YEARS  ENDED  JUNE 30,  1996,  1995,  1994,  1993
AND  JUNE 30,  1992, RESPECTIVELY.  ADDITIONALLY,  ADVISORY  FEES OF $54,697
REMAIN  WAIVED FROM THE PRIOR PERIOD ENDED JUNE 30, 1991. IN THE ABSENCE OF THIS
LIMITATION,  THE RATIO OF EXPENSES TO AVERAGE NET ASSETS  WOULD HAVE BEEN .53%
FOR THE YEARS ENDED JUNE 30,  1996 AND 1995,  .58% FOR THE YEAR  ENDED JUNE 30,
1994,  .57% FOR THE YEAR ENDED JUNE 30,  1993,  .70% FOR THE YEAR ENDED JUNE 30,
1992,  AND .81% FOR THE PERIOD  SEPTEMBER 4, 1990 TO JUNE 30, 1991.

(C) THE AMOUNT  PRESENTED IS CALCULATED PURSUANT  TO A  METHODOLOGY  PRESCRIBED
BY  THE  SEC  FOR A  SHARE  OUTSTANDING THROUGHOUT THE YEAR. THIS AMOUNT IS
INCONSISTENT WITH THE FUND'S AGGREGATE GAINS AND  LOSSES  BECAUSE OF THE TIMING
OF SALES AND  REDEMPTIONS  OF FUND  SHARES IN RELATION  TO  FLUCTUATING  MARKET
VALUES  FOR THE  INVESTMENT  PORTFOLIO.

(D) NOT ANNUALIZED.

(E) ANNUALIZED.

10

PROSPECTUS

<PAGE>

                                                                   WESTERN ASSET

                              FINANCIAL HIGHLIGHTS
                             INTERMEDIATE PORTFOLIO

       The financial  highlights for the years ended June 30, 1996 and 1995 have
been  obtained from the  financial  statements  which have been audited by Price
Waterhouse LLP, independent accountants.  The Intermediate Portfolio's financial
statements for the year ended June 30, 1996 and the unqualified  report of Price
Waterhouse LLP thereon, are included in the Intermediate Portfolio's 1996 Annual
Report to  Shareholders  and are  incorporated  by reference in the Statement of
Additional Information.

YEARS ENDED JUNE 30,                                          1996       1995
- -------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year                           $107.36    $100.00
                                                             -------    -------
Net investment income(A)                                        5.41       3.86
Net realized and unrealized gain (loss) on investments,
  options and futures(B)                                       (0.06)      6.02
                                                             -------    -------
Total from investment operations                                5.35       9.88
                                                             -------    -------
Distributions to shareholders from:
  Net investment income                                        (5.35)     (2.47)
  Net realized gain on investments                             (2.53)     (0.05)
                                                             -------    -------
Total distributions                                            (7.88)     (2.52)
                                                             -------    -------
Net asset value, end of year                                 $104.83    $107.36
                                                             =======    =======
Total return                                                    5.15%     10.08%

RATIOS/SUPPLEMENTAL DATA:
RATIOS TO AVERAGE NET ASSETS:
  Expenses(A)                                                   0.50%      0.50%
  Net investment income(A)                                      6.28%      6.11%
Portfolio turnover rate                                       841.89%    764.45%
Net assets, end of year (in thousands)                       $66,079    $20,313

- ------------------
(A) NET  OF  INVESTMENT  ADVISORY  FEES  WAIVED  PURSUANT  TO A  VOLUNTARY
EXPENSE LIMITATION  OF 0.50% UNTIL JUNE 30, 1996 AND 0.45%  UNTIL JUNE 30,
1997;  AND A VOLUNTARY  ADMINISTRATIVE  EXPENSE WAIVER OF 0.05%. PURSUANT TO
THIS LIMITATION, ADVISORY  FEES OF $130,938  AND $29,571 WERE WAIVED FOR THE
YEARS ENDED JUNE 30, 1996 AND 1995,  RESPECTIVELY.  IN THE ABSENCE OF THIS
LIMITATION,  THE RATIO OF EXPENSES  TO AVERAGE NET ASSETS  WOULD HAVE BEEN 1.03%
AND 1.60%,  RESPECTIVELY.

(B) THE AMOUNT PRESENTED IS CALCULATED PURSUANT TO A METHODOLOGY  PRESCRIBED BY
THE SEC FOR A SHARE  OUTSTANDING  THROUGHOUT THE YEAR.  THIS AMOUNT IS
INCONSISTENT WITH THE FUND'S  AGGREGATE  GAINS AND LOSSES  BECAUSE OF THE TIMING
OF SALES AND REDEMPTIONS  OF FUND  SHARES IN RELATION TO  FLUCTUATING  MARKET
VALUES FOR THE INVESTMENT PORTFOLIO.


                                                                              11

                                                                      PROSPECTUS

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WESTERN ASSET

                              FINANCIAL HIGHLIGHTS
                           LIMITED DURATION PORTFOLIO

       The  financial  highlights  for the period May 1, 1996  (commencement  of
operations)  to June 30, 1996 have been obtained  from the financial  statements
which have been audited by Price Waterhouse LLP,  independent  accountants.  The
Limited Duration Portfolio's  financial statements for the period ended June 30,
1996 and the unqualified report of Price Waterhouse LLP thereon, are included in
the Limited  Duration  Portfolio's  1996 Annual Report to  Shareholders  and are
incorporated by reference in the Statement of Additional Information.

PERIOD ENDED JUNE 30,                                     1996(A)
- ------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period                       $100.00
                                                           -------
Net investment income(B)                                      0.84
Net realized and unrealized loss on investments(C)           (0.08)
                                                           -------
Total from investment operations                              0.76
                                                           -------
Net asset value, end of period                             $100.76
                                                           =======
Total return(D)                                               0.76%

RATIOS/SUPPLEMENTAL DATA:
RATIOS TO AVERAGE NET ASSETS:
  Expenses(B)                                                 0.50%(E)
  Net investment income(B)                                    5.58%(E)
Portfolio turnover rate                                    1,042.0%(E)
Net assets, end of period (in thousands)                   $16,110

- ------------------
(A) FOR THE PERIOD MAY 1, 1996  (COMMENCEMENT OF OPERATIONS) TO JUNE 30, 1996.

(B) NET OF INVESTMENT ADVISORY FEES WAIVED PURSUANT TO A VOLUNTARY EXPENSE
LIMITATION OF 0.50%  UNTIL  JUNE 30,  1996 AND 0.40%  UNTIL  JUNE 30,  1997;
AND A  VOLUNTARY ADMINISTRATIVE  EXPENSE WAIVER OF 0.05%.  PURSUANT TO THIS
LIMITATION,  ADVISORY FEES OF $7,212 WERE WAIVED FOR THE PERIOD ENDED JUNE 30,
1996. IN THE ABSENCE OF THIS  LIMITATION,  THE RATIO OF EXPENSES  TO AVERAGE NET
ASSETS  WOULD HAVE BEEN 0.80%.

(C) THE AMOUNT PRESENTED IS CALCULATED PURSUANT TO A METHODOLOGY  PRESCRIBED BY
THE  SEC  FOR A  SHARE  OUTSTANDING  THROUGHOUT  THE  YEAR.  THIS  AMOUNT  IS
INCONSISTENT WITH THE FUND'S AGGREGATE GAINS AND LOSSES BECAUSE OF THE TIMING OF
SALES AND  REDEMPTIONS OF FUND SHARES IN RELATION TO  FLUCTUATING  MARKET VALUES
FOR THE INVESTMENT PORTFOLIO.

(D) NOT ANNUALIZED.

(E) ANNUALIZED.

12

PROSPECTUS

<PAGE>

                                                                   WESTERN ASSET

       Further  information  about the  performance of the Core  Portfolio,  the
Intermediate  Portfolio and the Limited Duration  Portfolio is contained in each
Portfolio's  1996 Annual Report to  Shareholders  which may be obtained from the
Adviser without charge.

                       INVESTMENT OBJECTIVES AND POLICIES

       The following describes the investment objective and policies of each
Portfolio.  The securities and investment  techniques  discussed in this section
are described in greater detail under the heading "Description of Securities and
Investment Techniques" and in the Statement of Additional Information.

MONEY MARKET PORTFOLIO

       The investment  objective of the Money Market Portfolio is to obtain high
current income  consistent  with liquidity and  conservation  of principal.  The
Portfolio  seeks to attain this  objective by  investing  in high quality  money
market  instruments,   which  include,   but  are  not  limited  to,  marketable
obligations  issued  or  guaranteed  by the U.S.  Government,  its  agencies  or
instrumentalities;  instruments  of domestic  and foreign  banks and savings and
loan  institutions  (such as certificates of deposit,  demand and time deposits,
savings  shares and  bankers'  acceptances)  provided  that the issuing  bank or
institution  has total  assets of over $1 billion at the time of purchase or the
principal  amount of the instrument is insured by the Federal Deposit  Insurance
Corporation;  commercial paper; and repurchase  agreements  involving any of the
above instruments.  A money market instrument is considered to be "high quality"
if it has  received  one of the two  highest  ratings by two or more  nationally
recognized statistical rating organizations  ("NRSROs") (or by one NRSRO if only
one has rated the security) or, if unrated, is determined by the Adviser, acting
pursuant  to  guidelines  established  by  the  Board  of  Directors,  to  be of
comparable  quality.  There can be no assurance that the Money Market  Portfolio
will meet its investment objective.

       The  Money  Market  Portfolio  will  not  purchase  instruments  having a
remaining  term to maturity of more than 397 days (except that the Portfolio may
enter  into  short-term  repurchase  agreements  involving  securities  that are
considered  under SEC  regulations  to have a term to  maturity of more than 397
days),  and will  maintain an average  maturity,  computed on a  dollar-weighted
basis,  of 90 days or less. It may purchase  securities on a when-issued  basis.
This Portfolio will invest only in U.S. dollar-denominated securities.

       SEC  regulations   divide  eligible  money  market  securities  into  two
categories.  "First  tier"  securities  are those  rated in the  highest  rating
category  by at  least  two  NRSROs  (or one  NRSRO if only  one has  rated  the
security) or, if unrated, determined by the Adviser to be of comparable quality.
"Second tier" securities are all other high quality securities. The Money Market
Portfolio  may not invest  more than five  percent of its total  assets in first
tier securities of any one issuer (other than a


                                                                              13

                                                                      PROSPECTUS


<PAGE>

WESTERN ASSET


security  issued  or  guaranteed  as to  principal  and  interest  by  the  U.S.
Government, its agencies or instrumentalities), except on a temporary basis. The
Portfolio  may not  invest  more than one  percent  of its total  assets,  or $1
million,  whichever is greater, in the second tier securities of any one issuer,
and may not invest  more than five  percent of its total  assets in second  tier
securities  generally.  Both the percentages and the quality standards set forth
in this paragraph are measured at the time a security is purchased. Purchases of
unrated securities and purchases of securities rated by only a single NRSRO must
be approved or ratified by the Fund's Board of Directors.

TOTAL RETURN PORTFOLIOS

       The  investment  objective of each of the Total Return  Portfolios  is to
maximize  total  return,  consistent  with  prudent  investment  management  and
liquidity needs, by investing to obtain the average duration  specified for that
Portfolio. "Total Return" includes interest from underlying securities,  capital
gains and  appreciation on the securities held in the Portfolio,  and gains from
the use of futures and options.  As set forth below, the Total Return Portfolios
differ  from one  another  primarily  in the  range of  duration  and/or  in the
proportion  of assets  invested in certain  types of  securities.  Duration is a
measure of the expected  life of a fixed  income  security on a cash flow basis.
Most debt obligations provide interest payments and a final payment at maturity.
Some also have call  provisions  that allow the issuer to redeem the security at
specified dates prior to maturity.  Duration incorporates yield, coupon interest
payments,  final  maturity  and  call  features  into a  single  measure.  It is
therefore  considered a more accurate measure of a security's  expected life and
sensitivity  to interest rate changes than is the  security's  term to maturity.
See page 29 for a further explanation of the term "duration" and its application
to various fixed income  securities.  There can be no assurance  that any of the
Total Return Portfolios will achieve their investment objectives.

       The Total Return  Portfolios  invest  primarily in the following types of
securities:  obligations  issued  or  guaranteed  by the  U.S.  Government,  its
agencies or instrumentalities;  U.S.  dollar-denominated fixed income securities
of  non-governmental  domestic or foreign issuers rated Baa or better by Moody's
or BBB or better by Standard & Poor's ("S&P"),  securities  comparably  rated by
another  NRSRO or, if unrated,  determined  by the  Adviser to be of  comparable
quality;  mortgage- and other asset-backed securities;  U.S.  dollar-denominated
obligations  of  foreign  governments  or  their   subdivisions,   agencies  and
instrumentalities,  international agencies or supranational  entities. The Total
Return Portfolios may also invest in certificates of deposit,  time deposits and
bankers'  acceptances  issued by domestic and foreign banks and  denominated  in
U.S.  dollars;  and may engage in repurchase  agreements and reverse  repurchase
agreements involving any of the foregoing.

       Each Total Return Portfolio is authorized to invest up to 25% of its
total assets in the securities of foreign issuers. However, each Portfolio
presently intends to limit such investments to securities denominated in U.S.
dollars. Each Total Return Portfolio may invest or hold up to 5% of its net
assets in debt securities that are rated below investment grade but rated B or
higher by Moody's or S&P. See

14

PROSPECTUS


<PAGE>

                                                                   WESTERN ASSET


the Appendix to the Statement of  Additional  Information  for a description  of
Moody's and S&P ratings applicable to fixed income securities.

       Each Total Return  Portfolio  may buy or sell futures  contracts on fixed
income instruments,  options on such futures contracts and options on securities
to hedge against changes in the value of securities  which the Portfolio owns or
anticipates  purchasing due to anticipated changes in interest rates. Each Total
Return Portfolio may use options on debt securities for non-hedging purposes, in
an effort to enhance income.

       The Total Return Portfolios also may purchase securities on a when-issued
basis and enter into forward commitments to purchase securities; lend securities
to brokers,  dealers and other financial institutions to earn income; and borrow
money for temporary or emergency  purposes.  See "When-Issued  Securities," page
25, for details on investment restrictions.

       In selecting securities for each Total Return Portfolio,  the Adviser may
utilize economic forecasting,  interest rate anticipation,  credit and call risk
analysis,  and other  security  selection  techniques.  The  proportion  of each
Portfolio's  assets  committed  to  investment  in  securities  with  particular
characteristics (such as maturity,  type and coupon rate) will vary based on the
Adviser's outlook for the U.S. and foreign economies,  the financial markets and
other factors.

       The compositions of the Total Return Portfolios are as follows:

       SHORT DURATION PORTFOLIO - invests in a portfolio with a dollar-weighted
average duration normally ranging between six and fifteen months. The total rate
of return for this Portfolio is expected to exhibit less volatility than that of
the other Total Return Portfolios because its average duration will be shorter.

       LIMITED   DURATION   PORTFOLIO   -  invests   in  a   portfolio   with  a
dollar-weighted  average duration  normally ranging between one and three years.
The total  rate of  return  for this  Portfolio  is  expected  to  exhibit  less
volatility  than  that of the  Intermediate  Duration,  Core  or  Long  Duration
Portfolios because its average duration will be shorter.


                                                                              15

                                                                      PROSPECTUS


<PAGE>

WESTERN ASSET

       INTERMEDIATE  PORTFOLIO - invests in a portfolio  with a  dollar-weighted
average duration  normally ranging between two and four years. The total rate of
return for this  Portfolio is expected to exhibit less  volatility  than that of
the Core or Long  Duration  Portfolios  because  its  average  duration  will be
shorter.

       CORE  PORTFOLIO - invests in a portfolio with a  dollar-weighted  average
duration  that will normally  stay within  (plus/minus)  20% of what the Adviser
believes to be the average  duration of the domestic bond market as a whole, but
may  have a  longer  or  shorter  duration  during  periods  of  unusual  market
conditions,  as judged by the  Adviser.  The Adviser  bases its  analysis of the
average  duration of the domestic  bond market on bond market  indices  which it
believes to be  representative.  The Adviser currently uses the Salomon Brothers
Broad  Investment-Grade  Bond Index for this purpose. As the average duration of
the  domestic  bond  market is  currently  about four and  one-half  years,  the
duration of this  Portfolio  is expected  to range  between  four and six years.
Portfolio  holdings will be  concentrated  in areas of the bond market (based on
quality, sector, coupon or maturity) which the Adviser believes to be relatively
undervalued.

       LONG DURATION  PORTFOLIO - invests in a portfolio with a  dollar-weighted
average duration that will normally be at least eight years. This Portfolio will
include  securities with limited  potential for call. To the extent that this is
accomplished through investment in U.S. Government Securities,  it will minimize
the Portfolio's credit risk but may also reduce its total return. The total rate
of return of this Portfolio is expected to exhibit more  volatility than that of
the other Total Return Portfolios,  due to the greater interest rate sensitivity
and credit risk normally associated with longer duration investments.

       The average duration of any Total Return Portfolio may be less than that
specified during periods of unusual liquidity needs or immediately following a
major infusion of cash.

INVESTMENT RESTRICTIONS

       The investment objective of each Portfolio may not be changed without the
affirmative vote of a majority of outstanding shares of the affected  Portfolio.
Except  for  the  investment  objectives  and  those  restrictions  or  policies
specifically  identified as "fundamental," the investment policies and practices
described in this Prospectus and in the Statement of Additional  Information may
be changed by the Fund's Board of Directors without shareholder approval.

       The  fundamental  restrictions  applicable  to all  Portfolios  include a
prohibition  on  investing  25% or more of total  assets  in the  securities  of
issuers in a particular  industry  (with the exception of  securities  issued or
guaranteed  by the  U.S.  Government,  its  agencies  or  instrumentalities  and
repurchase  agreements  with respect  thereto).  Investments by the Money Market
Portfolio in U.S. bank  instruments  are not  considered  investments in any one
industry,  and the Money  Market Fund may invest 25% or more of its total assets
in such instruments. For this purpose, the Fund considers U.S.

16

PROSPECTUS


<PAGE>

                                                                   WESTERN ASSET


branches of foreign banks to be U.S. banks if they are subject to substantially
the same regulation as domestic banks, and considers foreign branches of U.S.
banks to be U.S. banks if the domestic parent would be unconditionally liable in
the event that the foreign branch failed to pay on the instruments for any
reason. The Intermediate Portfolio generally maintains a dollar-weighted average
maturity ranging between three and ten years. However, the average maturity may
deviate from that range during periods of unusual liquidity needs or immediately
following a major infusion of cash. Additional fundamental and non-fundamental
investment restrictions are set forth in the Statement of Additional
Information.

              DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES

       The following describes in greater detail different types of securities
and investment techniques used by the individual Portfolios, as described in the
preceding section.

U.S. GOVERNMENT SECURITIES

       Each Portfolio may purchase U.S. Government Securities, which include (1)
U.S. Treasury bills (maturity of one year or less), U.S. Treasury notes
(maturity of one to ten years) and U.S. Treasury bonds (maturities generally
greater than ten years) and (2) obligations issued or guaranteed by U.S.
Government agencies or instrumentalities which are supported by any of the
following: (a) the full faith and credit of the U.S. Government (such as
certificates of the Government National Mortgage Association ("GNMA")); (b) the
right of the issuer to borrow an amount limited to a specific line of credit
from the U.S. Government (such as obligations of the Federal Home Loan Banks);
(c) discretionary authority of the U.S. Government to purchase certain
obligations of agencies or instrumentalities (such as the Federal National
Mortgage Association ("FNMA")); or (d) only the credit of the instrumentality
(such as the Student Loan Marketing Association ("SLMA")). In the case of
obligations not backed by the full faith and credit of the United States, a
Portfolio must look principally to the agency or instrumentality issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States itself in the event the agency or
instrumentality does not meet its commitments.

MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES

       Mortgage-related securities represent an interest in a pool of mortgages
made by lenders such as commercial banks, savings and loan institutions,
mortgage bankers and others. Mortgage-related securities may be issued by
governmental, government-related entities or by non-governmental entities, and
provide monthly payments which consist of interest and, in most cases,
principal. In effect, these payments are a "pass-through" of the monthly
payments made by the individual borrowers on their residential mortgage loans,
net of any fees paid to the issuer or guarantor of such securities. Additional
payments to holders of mortgage-related securities are caused by repayments
resulting from


                                                                        17

                                                                PROSPECTUS

<PAGE>

WESTERN ASSET

the sale of the underlying residential property, refinancing or foreclosure, net
of fees or costs which may be incurred.

       As prepayment rates of individual pools of mortgage loans vary widely, it
is not possible to predict accurately the average life of a particular security.
The volume of prepayments of principal on a pool of mortgages underlying a
particular mortgage-related security will influence the yield of that security,
and the principal returned to a Portfolio may be reinvested in instruments whose
yield may be higher or lower than that which might have been obtained had such
prepayments not occurred. When interest rates are declining, such prepayments
usually increase, and reinvestments of such principal prepayments will be at a
lower rate than that on the original mortgage-related security. The rate of
prepayment may also be affected by general economic conditions, the location and
age of the mortgages, and other social and demographic conditions.

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

       Residential mortgage loans are also pooled by the Federal Home Loan
Mortgage Corporation ("FHLMC"), a corporate instrumentality of the U.S.
Government. The mortgage loans in FHLMC's portfolio are not government backed;
rather, the loans are either uninsured with loan-to-value ratios of 80% or less
or privately insured if the loan-to-value ratio exceeds 80%. FHLMC, not the U.S.
Government, guarantees the timely payment of interest and ultimate collection of
principal on FHLMC securities. FHLMC also now issues guaranteed mortgage
certificates, on which it guarantees semiannual interest payments and a
specified minimum annual payment of principal.

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

       PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES. Mortgage-related securities
offered by private issuers include pass-through securities comprised of pools of
residential mortgage loans; mortgage-backed bonds which are considered to be
debt obligations of the institution issuing the bonds and are


18

PROSPECTUS


<PAGE>
                                                                  WESTERN ASSET

collateralized by mortgage loans; and bonds and collateralized mortgage
obligations ("CMOs") which are collateralized by mortgage-related securities
issued by FHLMC, FNMA or GNMA or by pools of mortgages. Any Portfolio may
purchase privately issued mortgage-related securities.

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

       Mortgage-related securities created by non-governmental issuers generally
offer a higher rate of interest than government and government-related
securities because there are no direct or indirect government guarantees of
payment in the former securities. However, many issuers or servicers of
mortgage-related securities guarantee timely payment of interest and principal
on such securities. Timely payment of interest and principal may also be
supported by various forms of insurance, including individual loan, title, and
hazard policies on the mortgages in the pool, or by private guarantees of the
issuer of the mortgage-related securities. There can be no assurance that the
insurers will be able to meet their obligations under the relevant insurance
policies or that the private issuers will be able to meet their obligations
under the relevant guarantees. Such guarantees and insurance policies may not
cover the entire obligation. Where privately issued securities are
collateralized by securities issued by FHLMC, FNMA or GNMA, the timely payment
of interest and principal is supported by the government-related securities
collateralizing such obligations. The market for conventional pools is smaller
and less liquid than the market for the government and government-related
mortgage pools.

       ASSET-BACKED SECURITIES. Asset-backed securities refer to securities that
directly or indirectly represent a participation in, or are secured by and
payable from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property and receivables
from revolving credit (credit card) agreements. Such assets are securitized
through the use of trusts or special purpose corporations. Asset-backed
securities are backed by a pool of assets representing the obligations often of
a number of different parties. Payments of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit issued by a financial institution, usually unaffiliated with the trust or
the special purpose corporation. Certain of such securities may be illiquid, in
that there is not a ready market if a Portfolio wishes to resell the security.

       The principal of mortgage-backed and other asset-backed securities may be
prepaid at any time. As a result, if such securities are purchased at a premium,
a prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect. Conversely, if the securities are purchased at a discount, prepayments
faster than


                                                                            19

                                                                    PROSPECTUS

<PAGE>

WESTERN ASSET


expected will increase yield to maturity and prepayments slower than expected
will decrease it. Accelerated prepayments also reduce the certainty of the yield
because the Portfolio must reinvest the assets at the then-current rates.
Accelerated prepayments on securities purchased at a premium also impose a risk
of loss of principal because the premium may not have been fully amortized at
the time the principal is repaid in full.

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

       The Total Return Portfolios will invest only in high grade
mortgage-related (or other asset-backed) securities either (1) issued by U.S.
Government owned or sponsored corporations (currently GNMA, FHLMC and FNMA) or
(2) rated A or better by Moody's or by S&P or, if unrated, determined by the
Adviser to be of comparable quality. Investments by the Money Market Portfolio
are subject to the quality standards described on page 13.

NON-GOVERNMENTAL DEBT SECURITIES

       A Portfolio's investments in U.S. dollar-denominated debt securities of
domestic or foreign non-governmental issuers are limited to debt securities
(bonds, debentures, notes and other similar debt instruments) which meet the
minimum ratings criteria set forth for the Portfolio or which, if unrated, are
determined by the Adviser (acting, in the case of the Money Market Portfolio,
pursuant to guidelines adopted by the Board) to be of comparable quality.

       Securities rated Baa and BBB are the lowest which are considered
"investment grade" obligations. Moody's describes securities rated Baa as
"medium-grade" obligations; they are "neither highly protected nor poorly
secured ... [I]nterest 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." S&P describes securities rated BBB as "regarded as
having an adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity . . . than
in higher rated categories." Each Total Return Portfolio may invest or hold up
to 5% of its net assets in securities rated below investment grade, i.e., rated
below BBB or Baa, but rated B or better by Moody's or S&P, securities comparably
rated by another NRSRO or, if unrated, determined by the Adviser to be of
comparable quality. Such securities are described as "speculative" by Moody's
and S&P and may be subject to greater market fluctuations and greater risk of
loss of income or principal, including a greater possibility of default or
bankruptcy of the issuer of such securities, than


20

PROSPECTUS

<PAGE>
                                                                  WESTERN ASSET

are more highly rated debt securities. The Adviser seeks to minimize the risks
of investing in all securities through diversification, in-depth credit analysis
and attention to current developments in interest rates and market conditions.

       The Adviser monitors the ratings of securities held by the Portfolios and
the creditworthiness of their issuers. If the rating of a security in which a
Portfolio has invested falls below the minimum rating in which the Portfolio is
permitted to invest, the Portfolio will dispose of that security within a
reasonable time, having due regard for market conditions, tax implications and
other applicable factors.

       A debt security may be callable, i.e., subject to redemption at the
option of the issuer at a price established in the security's governing
instrument. If a debt security held by a Portfolio is called for redemption, the
Portfolio will be required to permit the issuer to redeem the security or sell
it to a third party. Either of these actions could have an adverse effect on a
Portfolio's ability to achieve its investment objective.

COMMERCIAL PAPER AND OTHER SHORT-TERM INSTRUMENTS

       Commercial paper represents short-term unsecured promissory notes issued
in bearer form by banks or bank holding companies, corporations and finance
companies. The commercial paper purchased by the Total Return Portfolios
consists of U.S. dollar-denominated obligations of domestic or foreign issuers
which, at the time of investment, are (1) rated P-1 or P-2 by Moody's, A-1 or
A-2 or better by S&P, or F-1 or F-2 by Fitch Investors Service, (2) issued or
guaranteed as to principal and interest by issuers or guarantors having an
existing debt security rating of A or better by Moody's or by S&P or (3) if
unrated, are determined to be of comparable quality by the Adviser. The Money
Market Portfolio adheres to the quality standards described on page 13.

       The Portfolios may purchase commercial paper issued pursuant to the
private placement exemption in Section 4(2) of the Securities Act of 1933.
Section 4(2) paper is restricted as to disposition under federal securities laws
in that any resale must similarly be made in an exempt transaction. The Fund may
or may not regard such securities as illiquid, depending on the circumstances of
each case. See "Restricted and Illiquid Securities," page 25.

       Any Portfolio may also invest in obligations (including certificates of
deposit, demand and time deposits and bankers' acceptances) of U.S. banks and
savings and loan institutions if the issuer has total assets in excess of $1
billion at the time of purchase or if the principal amount of the instrument is
insured by the Federal Deposit Insurance Corporation. A bankers' acceptance is a
time draft drawn on a commercial bank by a borrower, usually in connection with
an international commercial transaction. Time deposits are non-negotiable
deposits maintained in a banking institution for a specified period of time at a
specified interest rate. Certificates of deposit are negotiable short-term
obligations issued by banks against funds deposited in the issuing institution.
The interest rate on some


                                                                          21

                                                                  PROSPECTUS


<PAGE>

WESTERN ASSET


certificates of deposit is periodically adjusted prior to the stated maturity,
based upon a specified market rate. While domestic bank deposits are insured by
an agency of the U.S. Government, the Portfolios will generally assume positions
considerably in excess of the insurance limits.

PREFERRED STOCK

       Any of the Total Return Portfolios may purchase preferred stock as a
substitute for debt securities of the same issuer when, in the Adviser's
opinion, the preferred stock is more attractively priced in light of the risks
involved. Preferred stock pays dividends at a specified rate and has preference
over common stock in the payment of dividends and the liquidation of the
issuer's assets but is junior to the debt securities of the issuer in those same
respects. The market prices of preferred stocks are subject to changes in
interest rates and are more sensitive to changes in the issuer's
creditworthiness than are the prices of debt securities. Under ordinary
circumstances, preferred stock does not carry voting rights.

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

       The value of a convertible security is a function of (1) its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth, at market
value, if converted into the underlying common stock. The Portfolios have no
current intention of converting any convertible securities they may own into
equity or holding them as equity upon conversion, although they may do so for
temporary purposes. A convertible security may be subject to redemption at the
option of the issuer at a price established in the convertible security's
governing instrument. If a convertible security held by a Portfolio is called
for redemption, the Portfolio will be required to permit the issuer to redeem
the security, convert it into the underlying common stock or sell it to a third
party. Any of these actions could have an adverse effect on a Portfolio's
ability to achieve its investment objective. The Money Market Portfolio will not
invest in convertible securities.

22

PROSPECTUS


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                                                                   WESTERN ASSET

VARIABLE AND FLOATING RATE SECURITIES

       Any Portfolio may invest in variable and floating rate securities. These
securities provide for periodic adjustment in the interest rate paid on the
obligations. The terms of such obligations must provide that interest rates are
adjusted periodically based upon some appropriate interest index. The adjustment
intervals may be event-based (floating), and range from daily up to annually, or
may be regular (variable).

       The Adviser believes that the variable or floating rate of interest paid
on these securities may reduce the wide fluctuations in market value typical of
fixed-rate long-term securities. The Money Market Portfolio may invest in
variable and floating rate securities only if they comply with conditions
established by the SEC under which they are considered to have remaining
maturities of 397 days or less.

ZERO COUPON BONDS

       A zero coupon bond is a security that makes no fixed interest payments
but instead is sold at a deep discount from its face value. The bond is redeemed
at its face value on the specified maturity date. Zero coupon bonds may be
issued as such, or they may be created by a broker who strips the coupons from a
bond and separately sells the rights to receive principal and interest. The
prices of zero coupon bonds tend to fluctuate more in response to changes in
market interest rates than do the prices of interest-paying debt securities with
similar maturities. The Money Market Portfolio will not invest in zero coupon
bonds.

       A Portfolio investing in zero coupon bonds generally accrues income on
such securities prior to the receipt of cash payments. Since each Portfolio must
distribute substantially all of its income to shareholders to qualify as a
regulated investment company under federal income tax law, a Portfolio investing
in zero coupon bonds may have to dispose of other securities to generate the
cash necessary for the distribution of income attributable to its zero coupon
bonds.

REPURCHASE AGREEMENTS

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


                                                                            23

                                                                    PROSPECTUS


<PAGE>

WESTERN ASSET

Portfolio will enter into repurchase agreements only with financial institutions
which are deemed by the Adviser to present minimal risk of default during the
term of the agreement based on guidelines which are periodically reviewed by the
Board of Directors.

REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWING

       A reverse repurchase agreement is a portfolio management technique in
which a Portfolio temporarily transfers possession of a portfolio instrument to
another person, such as a financial institution or broker-dealer, in return for
cash. At the same time, the Portfolio agrees to repurchase the instrument at an
agreed upon time (normally within seven days) and price, including interest
payment.

       Any Portfolio may engage in reverse repurchase agreements and other
borrowing as a means of raising cash to satisfy redemption requests or for other
temporary or emergency purposes without selling portfolio instruments. While
engaging in reverse repurchase agreements, each Portfolio will maintain cash,
U.S. Government Securities or high-grade, liquid debt securities in a segregated
account at its custodian bank with a value at least equal to the Portfolio's
obligation under the agreements, adjusted daily. Reverse repurchase agreements
may expose a Portfolio to greater fluctuations in the value of its assets and
renders the segregated assets unavailable for sale or other disposition.

       Each Portfolio will limit its investments in reverse repurchase
agreements and other borrowing to no more than one-third of its total assets. To
avoid potential leveraging effects of such borrowing (including reverse
repurchase agreements), a Portfolio will not make investments while its
borrowing is in excess of 5% of its total assets.

LOANS OF PORTFOLIO SECURITIES

       A Total Return Portfolio may lend portfolio securities to brokers or
dealers in corporate or government securities, 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 Portfolio. During the time
securities are on loan, the borrower will pay the Portfolio an amount equivalent
to any dividends or interest paid on such securities, and the Portfolio may
invest the cash collateral and earn additional income, or it may receive an
agreed upon amount of interest income from the borrower who has delivered
equivalent collateral. These loans are subject to termination at the option of
the Portfolio or the borrower. A Portfolio may pay 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. No Portfolio presently expects to have on loan at any given time
securities totaling more than one-third of its net assets.


24

PROSPECTUS


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                                                                  WESTERN ASSET

WHEN-ISSUED SECURITIES

       Any Portfolio may enter into commitments to purchase U.S. Government
Securities or other securities on a when-issued basis. A Portfolio may purchase
when-issued securities because such securities are often the most efficiently
priced and have the best liquidity in the bond market. When a Portfolio
purchases securities on a when-issued basis, it assumes the risks of ownership
at the time of purchase, not at the time of receipt. However, the Portfolio does
not have to pay for the obligations until they are delivered to it. This is
normally seven to fifteen days later, but could be considerably longer in the
case of some mortgage-backed securities. Depending on market conditions, the
Portfolio's when-issued purchases could, but will not necessarily, cause its
share value to be more volatile, because they increase the amount by which the
Portfolio's total assets, including the value of the when-issued securities
which the Portfolio has contracted to purchase, exceed its net assets. The Fund
does not expect that any Portfolio's commitment to purchase when-issued
securities will at any time exceed, in the aggregate, 20% of that Portfolio's
total assets.

       To meet its payment obligation, each Portfolio will establish a
segregated account with its custodian, consisting of liquid assets, such as
cash, U.S. Government Securities or other appropriate high-grade debt
obligations, in an amount at least equal in value to that Portfolio's
commitments to purchase when-issued securities. If the value of these assets
declines, the involved Portfolio will place additional liquid assets in the
account on a daily basis so that the value of the assets in the account is equal
to the amount of such commitments.

RESTRICTED AND ILLIQUID SECURITIES

       Restricted securities are securities subject to legal or contractual
restrictions on their resale, such as private placements. Such restrictions
might prevent the sale of restricted securities at a time when the sale would
otherwise be desirable. No securities for which there is not a readily available
market ("illiquid assets") will be acquired by any Portfolio if such acquisition
would cause the aggregate value of illiquid assets to exceed 10% of the
Portfolio's net assets. Time deposits and repurchase agreements maturing in more
than seven days are also considered illiquid.

       Under SEC regulations, certain securities acquired through private
placements can be traded freely among qualified purchasers. The SEC has stated
that an investment company's board of directors, or its investment adviser
acting under authority delegated by the board, may determine that a security
eligible for trading under this rule is not "illiquid" for purposes of the limit
on the amount of a portfolio's net assets which may be invested in illiquid
assets. The Fund intends to rely on this rule, to the extent appropriate, to
deem specific securities acquired through private placement as not "illiquid."
The Board has delegated to the Adviser the responsibility for determining
whether a particular security eligible for trading under this rule is illiquid.
In making such determinations, the Adviser will consider the following factors
the Board has deemed relevant: the frequency of trades and quotes, the number of
dealers and potential purchasers, the existence of dealer undertakings to make a
market,


                                                                            25

                                                                    PROSPECTUS




<PAGE>

WESTERN ASSET

and the nature of the security and of marketplace trades. The Adviser's
consideration of these factors and determination that a particular security is
liquid remains subject to the Board's continuing oversight. The Board also
reviews at least annually the continuing appropriateness of these procedures.

       Investing in securities eligible for trading under this Rule could
adversely affect the liquidity of a Portfolio, if the newly-developing markets
among qualified purchasers for such securities do not develop as anticipated, or
if such purchasers become, for a time, uninterested in purchasing these
securities.

FOREIGN SECURITIES

       All of the Total Return Portfolios may invest directly in U.S.
dollar-denominated instruments of foreign issuers. These may include debt
securities (including preferred or preference stock) of non-governmental
issuers, certificates of deposit, fixed time deposits and bankers' acceptances
issued by foreign banks, and debt obligations of foreign governments or their
subdivisions, agencies and instrumentalities, international agencies and
supranational entities. Each of the Total Return Portfolios will limit its
investments in foreign securities to less than 25% of its total assets. The
Money Market Portfolio may also invest in such securities, but only if they meet
the other criteria for investment by that Portfolio. Some securities issued by
foreign governments or their subdivisions, agencies and instrumentalities may
not be backed by the full faith and credit of the foreign government. In
selecting foreign debt securities, each Portfolio will adhere to the same
quality standards as it does for domestic debt securities.

       The Portfolios will limit such investments to fixed income and other debt
securities of issuers based in developed countries (including countries in the
European Community, Canada, Japan, Australia, New Zealand and newly
industrialized countries, such as Singapore, Taiwan and South Korea). Investing
in the securities of issuers based in any foreign country nevertheless involves
special risks and considerations not typically associated with investing in U.S.
companies. These include risks resulting from differences in accounting,
auditing and financial reporting standards, which may be less rigorous than in
the U.S.; lower liquidity than U.S. fixed income or debt securities have; the
possibility of nationalization, expropriation or confiscatory taxation; adverse
changes in investment or exchange control regulations (which may include
suspension of the ability to transfer currency out of a country); and political
instability or general economic conditions which could affect U.S. investments
in foreign countries. There may be less publicly available information
concerning foreign issuers of securities held by the Portfolios than is
available concerning U.S. issuers. Additionally, purchases and sales of foreign
securities and dividends and interest payable on those securities may be subject
to foreign taxes; taxes may be withheld from dividend and interest payments on
those securities. Foreign securities often trade with less frequency and volume
than domestic securities and therefore may exhibit greater price volatility and
a greater risk of illiquidity. Additional costs associated with an investment in
foreign securities will generally include higher custodial fees than apply to
domestic custodial arrangements. The relative performance of various countries'
fixed income markets historically has


26

PROSPECTUS


<PAGE>
                                                               WESTERN ASSET

reflected wide variations relating to the unique characteristics of each
country's economy. Individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.

       Foreign securities purchased by the Portfolios may be listed on foreign
exchanges or traded over-the-counter. Transactions on foreign exchanges are
usually subject to fixed commissions which are generally higher than negotiated
commissions on U.S. transactions, although the Portfolios will endeavor to
obtain the best net results in effecting transactions. There is generally less
government supervision and regulation of exchanges and brokers in foreign
countries than in the United States.

OPTIONS AND FUTURES CONTRACTS

       The Total Return Portfolios may purchase and write call and put options
on securities, enter into futures contracts and use options on futures
contracts. A Portfolio may use these techniques to attempt to hedge against
changes in interest rates or securities prices or in other circumstances
permitted to a registered investment company by the Commodity Futures Trading
Commission ("CFTC").

       The Total Return Portfolios may purchase put options on securities to
protect holdings in an underlying or related security against a substantial
decline in market value. A Portfolio may purchase call options on securities to
protect against substantial increases in prices of securities the Portfolio
intends to purchase pending its ability to invest in such securities in an
orderly manner. A Portfolio may use options on debt securities in an attempt to
enhance income.

       Many options on debt securities are traded primarily on the
over-the-counter ("OTC") market. OTC options differ from exchange-traded options
in that the former are two-party contracts with price and other terms negotiated
between buyer and seller and generally do not have as much market liquidity as
exchange-traded options. Thus, when a Portfolio purchases an OTC option, it
relies on the dealer from which it has purchased the option to make or take
delivery of the securities underlying the option. Failure by the dealer to do so
would result in the loss of the premium paid by the Portfolio as well as the
loss of the expected benefit of the transaction. OTC options may be considered
"illiquid securities" for purposes of the Portfolios' investment limitations.

       Each Total Return Portfolio may also purchase and sell futures contracts
on fixed income instruments and may purchase and write put and call options on
such futures contracts. Most futures exchanges and boards of trade limit the
amount of fluctuation permitted in futures contract prices during a single day;
once the daily limit has been reached on a particular contract, no trades may be
made that day at a price beyond that limit. In addition, certain of these
instruments are relatively new and without a significant trading history. As a
result, there is no assurance that an active secondary market will develop or
continue to exist. Lack of a liquid market for any reason may prevent a
Portfolio from liquidating an unfavorable position, and the Portfolio would
remain obligated to meet margin


                                                                          27

                                                                  PROSPECTUS



<PAGE>

WESTERN ASSET

requirements until the position is closed. Purchase of such instruments for
which there is no liquid secondary market will be subject to the Portfolio's
investment limitation on "illiquid securities."

       A Portfolio may write a call or put option only if the option is
"covered." An option is covered if, so long as the Portfolio is obligated under
the option, it will own an offsetting position in the underlying security,
currency or futures contract, or a right to obtain the security, currency or
futures contract, or will maintain in a segregated account with the Fund's
custodian, marked to market daily, cash, receivables or high-grade liquid debt
securities with a value sufficient to cover its potential obligations.

       A Portfolio will incur brokerage fees and related transaction costs when
it purchases or sells futures contracts and premiums and transaction costs when
it buys options. When a Portfolio purchases or sells a futures contract, the
Portfolio is required to deposit with its custodian (or a broker, if legally
permitted) a specified amount of cash or U.S. Government Securities ("initial
margin"). A Portfolio will not enter into futures contract or commodities option
positions if, immediately thereafter, its initial margin deposits plus premiums
paid by it, less the amount by which any such options positions are
"in-the-money" at the time of purchase, would exceed 5% of the fair market value
of the Portfolio's total assets. If a Portfolio writes an option or sells a
futures contract and is not able to close out that position prior to settlement
date, the Portfolio may be required to deliver cash or securities substantially
in excess of these amounts. The Portfolios' ability to write put options on
futures, other than to effect closing transactions, may be restricted by the
CFTC.

       A Portfolio might not employ any of the strategies described above, and
there can be no assurance that any strategy used will succeed. A Portfolio's
ability to engage in these practices may be limited by market conditions, the
rules and regulations of the CFTC, tax considerations and certain other legal
considerations. Moreover, in the event that an anticipated change in the price
of the securities or currencies that are the subject of the strategy does not
occur, it may be that a Portfolio would have been in a better position had it
not used that strategy at all.

       The use of options and futures contracts involves certain investment
risks and transaction costs to which the Portfolios might not be subject if they
did not use such instruments. These risks include (1) dependence on the
Adviser's ability to predict movements in the prices of individual securities,
fluctuations in the general securities markets or in market sectors and
movements in interest rates; (2) imperfect correlation between movements in the
price of options, currencies, futures contracts, or options thereon and
movements in the price of the securities hedged or used for cover; (3) the fact
that skills and techniques needed to trade options, futures contracts and
options thereon are different from those needed to select the securities in
which the Portfolios invest; (4) lack of assurance that a liquid secondary
market will exist for any particular option, futures contract or option thereon
at any particular time; (5) possible impediments to effective portfolio
management or the ability to meet redemption requests or other current
obligations caused by the segregation of a large percentage of a Portfolio's
assets to cover its obligations; and (6) the possible need to defer closing out
certain options, futures contracts and options thereon in order to continue to
qualify for the beneficial tax treatment


28

PROSPECTUS



<PAGE>
                                                                 WESTERN ASSET

afforded "regulated investment companies" under the Internal Revenue Code of
1986, as amended ("Code") (see "Additional Tax Information" in the Statement of
Additional Information).

       New futures contracts, options thereon and other financial products and
risk management techniques continue to be developed. The Total Return Portfolios
may use these investments or techniques to the extent consistent with their
investment objectives and regulatory and federal tax considerations.

DURATION

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

       The durations of futures, options and options on futures are, in general,
closely related to the durations of the securities that underlie them.

CAPITAL APPRECIATION AND RISK

       The capital appreciation (or depreciation) of fixed income and other debt
securities is partially a function of changes in the current level of interest
rates. An increase in interest rates generally reduces the market value of
existing fixed income and other debt securities, while a decline in interest
rates generally increases the market value of such securities. When interest
rates are falling, a Portfolio with a shorter duration generally will not
generate as high a level of total return as a Portfolio with a longer duration.
Conversely, when interest rates are rising, a Portfolio with a shorter duration
will generally outperform longer duration portfolios. When interest rates are
flat, shorter duration portfolios generally will not generate as high a level of
total return as longer duration portfolios (assuming that long-term interest
rates are higher than short-term rates, which is commonly the case). Changes in
the creditworthiness, or the market's perception of the creditworthiness, of the
issuers of fixed income and other debt securities will also affect their prices.

PORTFOLIO TURNOVER

       The turnover rates of the Core Portfolio and the Intermediate Portfolio
for the fiscal year ended June 30, 1996 were 266.0% and 841.89%, respectively.
The annualized turnover rate of the Limited Duration Portfolio for the period
May 1, 1996 (commencement of operations) to June 30,



                                                                           29

                                                                   PROSPECTUS



<PAGE>

WESTERN ASSET


1996 was 1,042.0%. The Fund anticipates that the average turnover rate of each
of the other Total Return Portfolios will not exceed 300%. The portfolio
turnover rate is calculated by dividing the lesser of the Portfolio's annual
sales or purchases of portfolio securities (exclusive of purchases or sales of
securities whose maturities at the time of acquisition were one year or less) by
the monthly average value of the securities in the Portfolio during the year. A
Portfolio may frequently sell fixed income securities and buy ostensibly similar
securities to obtain a higher yield and take advantage of market anomalies, a
practice which will tend to increase the reported turnover rate of the
Portfolio. High turnover rates (100% or more) may result in increased
transaction costs and the realization of capital gains. Trading in fixed income
securities does not generally involve the payment of brokerage commissions, but
does involve indirect transaction costs. For more information on the taxation of
distributions from a Portfolio's capital gains, see "Federal Tax Treatment of
Dividends and Other Distributions," page 34. Each Portfolio will take these
considerations into account as part of its investment strategy.

                               PURCHASE OF SHARES

       Prior to or concurrent with the initial purchase of shares in any
Portfolio, each investor must open an account with the Fund for that Portfolio
by completing and signing an Account Application Form and mailing it to Western
Asset at the following address: 117 East Colorado Blvd., Pasadena, California
91105.

       An investor must make a minimum initial investment of $1,000,000 to open
an account in any Portfolio. Thereafter, the minimum investment for each
purchase of additional shares in that Portfolio is $10,000. The Fund reserves
the right to change these minimum amount requirements at its discretion.
Investors should always furnish a shareholder account number when making
additional purchases of shares of any Portfolio.

       Shares of each Portfolio are sold without a sales charge at the net asset
value next determined after a purchase order and payment in proper form are
received by Boston Financial Data Services, Inc. ("BFDS"), the Fund's transfer
and dividend-disbursing agent. Purchase orders that do not designate a Portfolio
will be returned to the investor.

       Purchases of shares can be made by wiring federal funds to BFDS. Before
wiring federal funds, the investor must first telephone the Fund at (818)
844-9400 to receive instructions for wire transfer. On the telephone, the
following information will be required: shareholder name; name of the person
authorizing the transaction; shareholder account number; name of the Portfolio
to be purchased; amount being wired; and name of the wiring bank.

       Funds should be wired through the Federal Reserve System to:

                  State Street Bank Boston
                  ABA#011-000-028
                  Western Asset Trust: [Insert Name of Portfolio and State
                    Street Bank's fund numbers*]
                    [Insert your account name and number]

         *THIS NUMBER CAN BE OBTAINED FROM WESTERN ASSET.


30

PROSPECTUS



<PAGE>
                                                                WESTERN ASSET

       The wire should state that the funds are for the purchase of shares of a
specific Portfolio and include the account name and number. Wires for purchase
of Money Market Portfolio shares must be received by BFDS prior to 12:00 noon,
Eastern time, in order to earn dividends on shares purchased that day.
       Federal funds purchases will be accepted only on days on which the Fund
and BFDS are open for business. The Fund is "open for business" on each day the
New York Stock Exchange ("Exchange") is open for trading and the Federal Reserve
Bank of Boston is open for business. The Exchange is closed on the following
holidays: New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day (observed), Labor Day, Thanksgiving and Christmas. The Federal
Reserve Bank of Boston observes the above holidays, except Good Friday, and also
observes Columbus Day and Veterans Day.
       Shares may also be purchased and paid for by the contribution of eligible
portfolio securities, subject in each case to approval by the Fund's Adviser.
Approval will depend on, among other things, the nature and quality of the
securities offered and the current needs of the Portfolio in question.
Securities offered in payment for shares will be valued in the same way and at
the same time the Fund values its portfolio securities for purposes of
determining net asset value. See "How Net Asset Value is Determined," page 33.
Investors who wish to purchase Fund shares through the contribution of
securities should contact the Fund at (818) 844-9400 for instructions. Investors
who purchase Fund shares through the contribution of securities should realize
that, although the Fund may under some circumstances distribute portfolio
securities rather than cash upon redemption, they are not likely to receive upon
redemption the same securities that they contributed upon purchase. Investors
should also realize that at the time of contribution they may be required to
recognize a gain or loss for tax purposes on securities contributed. The Adviser
has full discretion to reject any securities offered as payment for shares.
Investors may be charged a fee if they effect transactions through a broker or
agent.
       Any shares purchased or received as a distribution will be credited
directly to the investor's account. Certificates for shares will not be issued
unless specifically requested in writing. There is no charge for certificates.
Requests for certificates should be addressed to the Fund.
       The Fund reserves the right to reject any order for the purchase of
shares. In addition, the Fund may suspend the offering of shares at any time and
resume it at any time thereafter.

                              REDEMPTION OF SHARES

       Portfolio shares may be redeemed through three methods: (1) by sending a
written request for redemption to "Western Asset Trust, Inc., c/o Boston
Financial Data Services, P.O. Box 953, Boston, Massachusetts 02103"; (2) by
calling the Fund at (818) 844-9400; or (3) by wire communication with State
Street. In each case, the investor should first notify the Fund at (818)
844-9400 of the


                                                                          31

                                                                  PROSPECTUS





<PAGE>

WESTERN ASSET

intention to redeem. No charge is made for redemptions. Shareholders who wish to
be able to redeem by telephone or wire communication must complete an
authorization form in advance.

       Upon receipt of a request for redemption before the close of business of
the Exchange on any day when the Exchange is open, BFDS, as transfer agent for
the Fund, will redeem Portfolio shares at the net asset value per share next
determined. Requests for redemption received by the transfer agent after the
close of business on the Exchange will be executed at the net asset value next
determined on the next day that the Fund is open for business.

       Requests for redemption should indicate:

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

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

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

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

Shares may not be redeemed by telephone or wire if held in certificate form.
Contact the Fund at (818) 844-9400 for more information. The Fund reserves the
right to modify or terminate the redemption procedures upon notice to
shareholders.

       Payment of the redemption price normally will be made by wire the next
business day after receipt of a redemption request in good order. However, the
Fund reserves the right to postpone the payment date when the Exchange is
closed, when trading is restricted, or during other periods as permitted by
federal securities laws, or to take up to seven days to make payment upon
redemption if, in the judgment of the Adviser, the Portfolio involved could be
adversely affected by immediate payment. Shareholders who receive a redemption
in kind may incur costs to dispose of such securities. The proceeds of a
redemption or repurchase may be more or less than your original cost.

       Shareholders of some investment companies have experienced difficulty
contacting their funds by telephone during periods of intense market activity.
Shareholders who are unable to contact the Fund by telephone and wish to make a
redemption should follow the instructions for redeeming by mail or by wire.

       Other supporting legal documents, such as copies of the trust instrument
or power of attorney, may be required from corporations or other organizations,
fiduciaries or persons other than the


32

PROSPECTUS



<PAGE>
                                                                WESTERN ASSET

shareholder of record making the request for redemption or repurchase. If you
have a question concerning the sale or redemption of shares, please contact the
Fund or State Street.

       The Fund may elect to close any shareholder account with a current value
of less than $1,000,000 by redeeming all of the shares in the account and
mailing the proceeds to the investor. However, the Fund will not redeem accounts
that fall below $1,000,000 solely as a result of a reduction in net asset value
per share. If the Fund elects to redeem the shares in an account, the
shareholder will be notified that the account is below $1,000,000 and will be
allowed 60 days in which to make an additional investment in order to avoid
having the account closed. Shares will be redeemed at the net asset value
calculated on the day of redemption. Note that if an account is established with
only the minimum initial investment, any redemption from that account prior to
making an additional investment may result in the Fund electing to close that
account.

                               EXCHANGE PRIVILEGE

       Shareholders in any Portfolio described in this Prospectus may exchange
their shares for shares of any of the other Portfolios described herein,
provided that no account of the shareholder contains less than the minimum
required investment of $1,000,000 and that the other Portfolio is offering its
shares at the time of the proposed exchange. Investments by exchange among any
of the Portfolios are made at the per share net asset values next determined
after the order for exchange is received in good order. The Fund reserves the
right to revise or revoke the exchange privilege at its discretion. For further
information concerning the exchange privilege, or to make an exchange, please
contact the Fund at 117 East Colorado Blvd., Pasadena, CA 91105, telephone (818)
844-9400.

                       HOW NET ASSET VALUE IS DETERMINED

       Net asset value per share is determined daily for each Portfolio as of
the close of regular trading on the Exchange (normally 4:00 p.m., Eastern time),
on every day that the Exchange is open, by subtracting the Portfolio's
liabilities from its total assets and dividing the result by the number of
shares outstanding. Securities owned by any of the Total Return Portfolios for
which market quotations are readily available are valued at current market
value. Current market value means the last sale price of the day for a
comparable position, or, in the absence of any such sales, the last available
bid price. Where a security is traded on more than one market, the securities
are generally valued on the market considered by the Adviser to be the primary
market. Securities with remaining maturities of 60 days or less are valued at
amortized cost. All other securities owned by any of the Total Return Portfolios
are valued primarily on the basis of valuations furnished by a pricing service
which utilizes both dealer-supplied valuations and electronic data processing
techniques which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon quoted prices or exchange or
over-the-counter prices, since the Board of Directors believes that such
valuations reflect more accurately the fair value of such securities.


                                                                           33

                                                                   PROSPECTUS


<PAGE>

WESTERN ASSET

       The Money Market Portfolio attempts to maintain a per share net asset
value of $1.00 by using the amortized cost method of valuation. The Portfolio
cannot guarantee that net asset value will always remain at $1.00 per share. The
Money Market Portfolio will determine net asset value per share twice daily as
of 12:00 noon, Eastern time, and the close of regular trading on the Exchange
(normally 4:00 p.m., Eastern time), on every day that the Exchange is open.

                       DIVIDENDS AND OTHER DISTRIBUTIONS

       The Money Market Portfolio declares as a dividend at the close of the
Exchange each business day, to shareholders of record as of 12:00 noon that day,
substantially all of its net investment income since the prior day's dividend.
The Money Market Portfolio pays dividends monthly. Each of the Total Return
Portfolios declares and pays a dividend each quarter out of its net investment
income for that quarter.

       Dividends and other distributions paid by a Portfolio are automatically
reinvested in additional shares of that Portfolio, unless the investor requests
payments in cash. For the Money Market Portfolio, reinvestment of dividends and
other distributions occurs on the payment date. A shareholder who redeems all
shares in the Money Market Portfolio will receive all dividends and other
distributions declared for the month to the date of the redemption. For the
Total Return Portfolios, reinvestment occurs on the ex-dividend date.

       An election to receive dividends or other distributions in cash rather
than additional shares may be made by notifying in writing the Fund's transfer
and dividend-disbursing agent, Boston Financial Data Services, Inc., P.O. Box
953, Boston, Massachusetts 02103. The election must be received at least ten
days before the payment date in order to be effective for distributions paid as
of that date.

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

                  FEDERAL TAX TREATMENT OF DIVIDENDS AND OTHER
                                 DISTRIBUTIONS

       Each Portfolio is treated as a separate corporation for federal income
tax purposes. Each Portfolio intends to qualify or to continue to qualify as a
regulated investment company ("RIC") under the Code so that it will not be
subject to federal income tax on its investment company taxable income
(consisting generally of net investment income and net short-term capital gain,
if any) and net capital gain (the excess of net long-term capital gain over net
short-term capital loss), if any, that is distributed to its shareholders.


34

PROSPECTUS



<PAGE>
                                                                 WESTERN ASSET


       Dividends from a Portfolio's investment company taxable income (whether
paid in cash or reinvested in Portfolio shares) are taxable to its shareholders
(other than tax-exempt investors) as ordinary income to the extent of the
Portfolio's earnings and profits. Distributions of a Portfolio's net long-term
capital gain, when designated as such, whether paid in cash or reinvested in
Portfolio shares, are taxable to its shareholders as long-term capital gain,
regardless of how long shareholders have held their shares.

       A Portfolio will be subject to a nondeductible 4% excise tax to the
extent it does not 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.
Each Portfolio intends to make distributions in such amounts that will avoid
imposition of the excise tax.

       A distribution declared by a Portfolio in December of any year and
payable to shareholders of record on a date in that month will be deemed to have
been paid by the Portfolio and received by the shareholders on December 31 if
the distribution is paid by the Portfolio during the following January. Such a
distribution, therefore, will be taxable to shareholders for the year in which
that December 31 falls.

       Each Portfolio sends a notice to each shareholder following the end of
each calendar year specifying the amounts of all income dividends and capital
gain distributions paid (or deemed paid) during that year. Each Portfolio is
required to withhold 31% of all dividends, capital gain distributions and
redemption proceeds payable to any individuals and certain other noncorporate
shareholders who do not provide the Portfolio with a correct taxpayer
identification number. Each Portfolio also is required to withhold 31% of all
dividends and capital gain distributions paid to such shareholders who otherwise
are subject to backup withholding.

       A redemption of shares may result in taxable gain or loss to the
redeeming shareholder, depending on whether the redemption proceeds are more or
less than the shareholder's adjusted tax basis for the redeemed shares. Similar
tax consequences will result upon an exchange of shares of one Portfolio for
those of another.

       The requirements for qualification as a RIC may limit the extent to which
a Portfolio will be able to engage in transactions in options or futures
contracts.

       The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Portfolios and their shareholders; see
the Statement of Additional Information for a further discussion. In addition to
the federal tax considerations described above, which are applicable to any
investment in a Portfolio, there may be other federal, state or local tax
considerations applicable to a particular investor. Prospective shareholders are
urged to consult their tax advisers with respect to the effects of this
investment on their own tax situations.


                                                                            35

                                                                    PROSPECTUS




<PAGE>

WESTERN ASSET

                             MANAGEMENT OF THE FUND

THE FUND'S INVESTMENT ADVISER

       The business and affairs of the Fund are managed under the direction of
its Board of Directors. The Adviser, Western Asset Management Company, acts as
the portfolio manager for each Portfolio and is responsible for the actual
investment management of each Portfolio, including the responsibility for making
decisions and placing orders to buy, sell or hold a particular security.

       The Adviser renders investment advice to fourteen open-end investment
company portfolios and one closed-end investment company which together had
assets under management of approximately $3.7 billion as of September 30, 1996.
The Adviser also renders investment advice to private accounts with assets under
management of approximately $18.9 billion as of that date. The Adviser is a
subsidiary of Legg Mason, Inc., a financial services holding company, which is
also the parent of Legg Mason Fund Adviser, Inc. The address of the Adviser is
117 East Colorado Boulevard, Pasadena, California 91105.

       The portfolio manager for the Core Portfolio is Kent Engel, who is
primarily responsible for the day-to-day management of that Portfolio. Mr. Engel
has been portfolio manager since the Portfolio commenced operations. He has been
Director and Chief Investment Officer of Western Asset Management Company since
1969. He is also Vice-President and Portfolio Manager of Pacific American Income
Shares, Inc. The portfolio manager for the Intermediate Portfolio and the
Limited Duration Portfolio is Stephen A. Walsh. Mr. Walsh has been portfolio
manager of the Intermediate and Limited Duration Portfolios since the Portfolios
commenced operations. He has been a Director and Senior Portfolio Manager of
Western Asset Management Company since 1991. Prior to joining Western Asset
Management Company, Mr. Walsh was a Portfolio Manager and Trader for Security
Pacific Investment Managers, Inc. from 1988 to 1991. Portfolio managers have not
been appointed for the other Portfolios, which have not commenced operations
(i.e., first begun to invest their assets in accordance with their investment
objectives) as of the date of this Prospectus.

THE FUND'S ADMINISTRATOR

       Legg Mason Fund Adviser, Inc., the Administrator, serves as the Fund's
administrator. The Administrator manages the non-investment affairs of the Fund,
directs matters related to the operation of the Fund and provides office space
and administrative staff for the Fund. The Administrator acts as manager,
investment adviser or consultant to seventeen open-end investment companies and
to one close-end investment company. These funds had aggregate assets under
management of about $6.0 billion as of September 30, 1996.

36

PROSPECTUS


<PAGE>
                                                               WESTERN ASSET


MANAGEMENT AND OTHER EXPENSES

       The Core and Long Duration Portfolios each pay the Adviser a fee,
computed daily and payable monthly, at an annual rate equal to 0.40% of the
Portfolio's average daily net assets. The Money Market, Short Duration and
Limited Duration Portfolios each pay the Adviser a fee, computed daily and
payable monthly, at an annual rate equal to 0.30% of the Portfolio's average
daily net assets. The Intermediate Portfolio pays the Adviser a fee, computed
daily and payable monthly, at an annual rate equal to 0.35% of the Portfolio's
average daily net assets. The Core, Limited Duration, Long Duration and Money
Market Portfolios each pay the Administrator a fee, calculated daily and payable
monthly, at an annual rate equal to 0.10% of the Portfolio's average daily net
assets and the Intermediate and Short Duration Portfolios each pay the
Administrator a fee, calculated daily and payable monthly, at an annual rate
equal to 0.05% of the Portfolio's average daily net assets. Each Portfolio pays
all its other expenses which are not assumed by the Administrator or the
Adviser. The Adviser and the Administrator have agreed to waive their fees or
reimburse the Portfolios to the extent the Portfolio's expenses exceed certain
levels. These agreements are voluntary and may be terminated by the Adviser or
the Administrator at any time. See "Expense Information," page 7.

THE FUND'S DISTRIBUTORS

       Legg Mason Wood Walker, Incorporated ("Legg Mason") is authorized to
distribute the Fund's shares. Legg Mason or its affiliates is obligated to pay
all expenses in connection with the offering of Fund shares, including any
compensation to its investment brokers, the printing and distribution of
prospectuses, statements of additional information and periodic reports used in
connection with the offering to prospective investors, after the prospectuses
and statements of additional information have been prepared, set in type and
mailed to existing shareholders at the Fund's expense, and for supplementary
sales literature and advertising costs. Legg Mason receives no direct
compensation from the Fund for these expenses.

       Arroyo Seco, Inc. ("Arroyo Seco"), a wholly owned subsidiary of the
Adviser, is also authorized to offer the Fund's shares for sale to its
customers. The Fund makes no payments to Arroyo Seco in connection with the
offer or sale of the Fund's shares, and Arroyo Seco does not collect any
commissions or other fees from customers in connection with the offer or sale of
the Fund's shares.

THE FUND'S CUSTODIAN AND TRANSFER AGENT

       State Street serves as the custodian of the Fund's assets and BFDS serves
as its transfer and dividend-disbursing agent. The duties of State Street and
BFDS include processing requests for the purchase, exchange or redemption of
shares and performing other administrative services on behalf of the Fund. The
Fund may maintain foreign securities and cash in the custody of certain eligible
foreign banks and securities depositaries. No assurance can be given that the
Board of Directors' appraisal of



                                                                           37

                                                                   PROSPECTUS



<PAGE>

WESTERN ASSET



the risks in connection with foreign custodial arrangements will always be
correct or that expropriation, nationalization, freezes or confiscation of Fund
assets will not occur.
                               OTHER INFORMATION

SHARES OF THE FUND

       The Fund has authorized capital of a total of five billion shares of
common stock at par value $0.001. The Money Market Portfolio has authorized
capital of one billion shares; each of the Total Return Portfolios has an
initial authorized capital of 100 million shares. The Fund's remaining
authorized shares include three billion one hundred million shares allocated to
portfolios of the Fund not covered by this Prospectus, and four hundred million
shares not allocated to any portfolio. All shares are the same class, and each
share is entitled to one vote on any matter submitted to a shareholder vote.
Fractional shares have fractional voting rights. Voting rights are not
cumulative. Voting on matters pertinent only to a particular Portfolio, such as
the adoption of an investment advisory contract for that Portfolio, is limited
to that Portfolio's shareholders. All shares of the Fund are fully paid and
nonassessable and have no preemptive or conversion rights.

       Although the Fund does not intend to hold annual shareholder meetings, it
will hold a special meeting of shareholders when the Investment Company Act of
1940 (the "1940 Act") requires a shareholder vote on certain matters (including
the election of directors or approval of an advisory contract). The Fund will
also call a special meeting of shareholders at the request of 25% or more of the
shares entitled to vote thereat, or at the request of 10% of the shareholders
for the purpose of considering the removal of one or more directors.
Shareholders wishing to call such a meeting should submit a written request to
the Fund at 117 East Colorado Blvd., Pasadena, California 91105, stating the
purpose of the proposed meeting and the matters to be acted upon.

       As of October 17, 1996, ND Workers Compensation may be deemed to
"control" the Core Portfolio; Harn Industries may be deemed to "control" the
Intermediate Portfolio; and Western Michigan University may be deemed to
"control" the Limited Duration Portfolio, as that term is defined in the 1940
Act. Prior to the initial public offering of a Portfolio's shares, the Adviser
will be the sole shareholder of each Portfolio and is thus a controlling person,
as that term is defined in the 1940 Act, of each Portfolio.

CONFIRMATIONS AND REPORTS

       BFDS will send confirmations showing all purchases and redemptions of
shares made, and all dividends and other distributions paid, during the previous
month. Reports will be sent to shareholders at least semiannually showing the
Fund's investments and other information. Shareholders will

38

PROSPECTUS


<PAGE>
                                                               WESTERN ASSET



also receive each year an annual report containing financial statements audited
by the Fund's independent accountants.

       Shareholder inquiries should be addressed to: Western Asset Trust, Inc.,
117 East Colorado Blvd., Pasadena, California 91105.

PERFORMANCE INFORMATION

       From time to time, the Money Market Portfolio may present its yield,
including a compound effective yield, in marketing materials or reports to
shareholders. That Portfolio's yield is derived from the income generated by an
investment in the Portfolio over a stated seven-day period. This income is
"annualized," meaning that the average daily net income generated by the
investment during that week is assumed to be generated each day over a 365-day
period, and is shown as a percentage of the investment. The "effective yield" is
calculated similarly but assumes that the income earned by an investment is
reinvested. The Money Market Portfolio's "effective yield" will be slightly
higher than its "yield" because of the compounding effect of this assumed
reinvestment.

       Each of the Total Return Portfolios may quote its total return in
marketing materials or in reports or other communications to shareholders. A
mutual fund's "total return" is a measurement of the overall change in value,
including changes in share price and assuming reinvestment of dividends and
capital gain distributions, of an investment in the fund. "Cumulative total
return" shows a fund's performance over a specific period of time. "Average
annual total return" is the average annual compounded return that would have
produced the same cumulative total return if the fund's performance had been
constant over the entire period. Because average annual returns tend to smooth
out variations in a fund's return, they differ from actual year-by-year results.

       Investors should consider all performance information in light of a
Portfolio's investment objectives and policies, characteristics of the Portfolio
and the existing market conditions during the time period related to the
performance information. Performance information is based on historical
performance and should not be viewed as representative of the Portfolio's future
performance. The investment return and principal value of an investment in a
Portfolio will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.

       Performance information for a Portfolio may also be compared to various
unmanaged indices, such as the Salomon Brothers Broad Investment-Grade Bond
Index, the Salomon Brothers Medium-Term Investment-Grade Bond Index and the
Salomon Brothers Long-Term Investment-Grade Bond Index, as well as reports and
indices of investment company performance prepared by Lipper Analytical
Services, and other entities or organizations which track the performance of
investment companies or investment advisers. Indices of securities prices rather
than of managed investment products (e.g., Lipper) generally do not reflect
deductions for administrative and management costs and expenses.


                                                                           39

                                                                   PROSPECTUS


<PAGE>

WESTERN ASSET


                                    APPENDIX

The Fund may use the following options and futures contracts:

       OPTIONS ON DEBT SECURITIES - A call option is a short-term contract
pursuant to which the purchaser of the option, in return for a premium, has the
right to buy the security underlying the option at a specified price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation, upon exercise of the option during the option term,
to deliver the underlying security against payment of the exercise price. A put
option is a similar contract that gives its purchaser, in return for a premium,
the right to sell the underlying security at a specified price during the option
term. The writer of the put option, who receives the premium, has the
obligation, upon exercise of the option during the option term, to buy the
underlying security at the exercise price.

       INTEREST RATE FUTURES CONTRACTS - Interest rate futures contracts are
bilateral agreements pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of a specified type of debt security at a
specified future time and at a specified price. Although such futures contracts
by their terms call for actual delivery or acceptance of debt securities, in
most cases the contracts are closed out before the settlement date without the
making or taking of delivery.

       OPTIONS ON FUTURES CONTRACTS - Options on futures contracts are similar
to options on securities, except that an option on a futures contract gives the
purchaser the right, in return for the premium, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security, at a
specified price at any time during the option term. Upon exercise of the option,
the delivery of the futures position to the holder of the option will be
accompanied by delivery of the accumulated balance that represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
future. The writer of an option, upon exercise, will assume a short position in
the case of a call and a long position in the case of a put.

October 30, 1996

40

PROSPECTUS

<PAGE>

WESTERN ASSET


                               INVESTMENT ADVISER

                              [Western Asset Logo]


                          117 East Colorado Boulevard
                               Pasadena, CA 91105

                ADMINISTRATOR       Legg Mason Fund Adviser, Inc.
                                    111 South Calvert Street
                                    Baltimore, MD 21202
                 DISTRIBUTORS       Legg Mason Wood Walker, Incorporated
                                    111 South Calvert Street
                                    Baltimore, MD 21202
                                    Arroyo Seco, Inc.
                                    117 East Colorado Boulevard
                                    Pasadena, CA 91105
                    CUSTODIAN       State Street Bank & Trust Company
                                    P.O. Box 1790
                                    Boston, MA 02105
               TRANSFER AGENT       Boston Financial Data Services, Inc.
                                    P.O. Box 953
                                    Boston, MA 02103
      INDEPENDENT ACCOUNTANTS       Price Waterhouse LLP
                                    7 St. Paul Street
                                    Baltimore, MD 21202
                      COUNSEL       Munger, Tolles & Olson
                                    355 South Grand Avenue
                                    Los Angeles, CA 90071


PROSPECTUS


<PAGE>

Prospectus

                           WESTERN ASSET TRUST, INC.
                         Corporate Securities Portfolio
                         Mortgage Securities Portfolio
                       International Securities Portfolio


         Western Asset Trust, Inc. ("Fund") is a no-load,  open-end,  management
investment company currently consisting of nine separate  professionally managed
investment  portfolios.  The  three  portfolios  described  in  this  prospectus
("Portfolios")  are offered only to clients of Western Asset Management  Company
("Western Asset") and its affiliates. Western Asset serves as investment adviser
to the  Corporate  Securities  and  Mortgage  Securities  Portfolios  ("Domestic
Portfolios")  and  to the  International  Securities  Portfolio  ("International
Portfolio").  Each Portfolio seeks maximum total return, consistent with prudent
investment  management,  by  investing  primarily  in  securities  of the  types
specified  for  that   Portfolio.   The  Domestic   Portfolios  are  diversified
Portfolios. The International Portfolio is non-diversified.

         This Prospectus  sets forth  concisely the  information  about the Fund
that a prospective  investor ought to know before  investing.  It should be read
and retained for future reference.  A Statement of Additional  Information about
the Fund dated October 30, 1996, has been filed with the Securities and Exchange
Commission ("SEC") and, as amended from time to time, is incorporated  herein by
reference.  The Statement of Additional  Information is available without charge
upon request from Western Asset Trust, Inc., (818) 844-9400.

           THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
              THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
                SECURITIES COMMISSION NOR HAS THE SECURITIES AND
                  EXCHANGE COMMISSION OR ANY STATE SECURITIES
                     COMMISSION PASSED UPON THE ACCURACY OR
                       ADEQUACY OF THIS PROSPECTUS.  ANY
                         REPRESENTATION TO THE CONTRARY
                             IS A CRIMINAL OFFENSE.


Dated: October 30, 1996



<PAGE>



                               TABLE OF CONTENTS

                                                              Page

Prospectus Summary                                              1

Expense Information                                             3

Financial Highlights                                            5

Investment Objectives and Policies                              7

Description of Securities and Investment Techniques             9

Purchase of Shares                                             22

Redemption of Shares                                           22

How Net Asset Value is Determined                              23

Dividends and Other Distributions                              24

Federal Tax Treatment of Dividends and Other Distributions     24

Management of the Fund                                         25

Other Information                                              28

Appendix                                                       30


<PAGE>



                               PROSPECTUS SUMMARY


THE FUND

         Western Asset Trust, Inc. is a no-load,  open-end management investment
company that was organized as a Maryland  corporation  on May 16, 1990. The Fund
consists of nine separate  professionally  managed investment  Portfolios,  each
with its own investment  objective and policies.  The three Portfolios described
in this prospectus are available only to clients maintaining  separately managed
accounts with Western Asset or its affiliates.

INVESTMENT OBJECTIVES

         The investment objective of each Portfolio is to maximize total return,
consistent  with  prudent  investment  management,  by  investing  primarily  in
securities of the type specified for that  Portfolio.  The Portfolios  differ in
the  proportion  of their  assets  invested  in  certain  types of fixed  income
securities and, therefore,  their relative risk. See "Investment  Objectives and
Policies," page 7.

         The Corporate  Securities  Portfolio  seeks to achieve its objective by
investing  at least 75% of its  total  assets  in U.S.  dollar-denominated  debt
securities of  non-governmental  domestic issuers rated Baa or better by Moody's
Investors Service Inc. ("Moody's") or BBB or better by Standard & Poor's ("S&P")
or, if unrated,  judged by Western  Asset to be of comparable  quality.  Western
Asset expects  that,  under normal  circumstances,  this  Portfolio  will invest
substantially all of its assets in such securities.

         The Mortgage  Securities  Portfolio  seeks to achieve its  objective by
investing at least 75% of its total assets in mortgage-related  securities.  The
mortgage-related  securities  purchased  by this  Portfolio  must be either  (1)
issued or guaranteed as to principal  and interest by the U.S.  Government,  its
agencies or instrumentalities or (2) rated A or better by Moody's or A or better
by S&P or, if  unrated,  judged by Western  Asset to be of  comparable  quality.
Western Asset anticipates that, under normal circumstances, substantially all of
this Portfolio's assets will be invested in mortgage-related securities.

         The International  Securities  Portfolio seeks to achieve its objective
by investing at least 75% of its total assets in debt or fixed-income securities
denominated in major foreign  currencies and in baskets of currencies (which may
include U.S. and foreign  currencies).  Western Asset  anticipates  that,  under
normal  circumstances,  substantially  all of this  Portfolio's  assets  will be
invested in  securities  of foreign  issuers.  Under normal  circumstances,  the
Portfolio's   assets  will  be  invested  in  securities   of  foreign   issuers
representing at least three foreign countries.

         There  can  be  no  assurance  that  any  Portfolio  will  achieve  its
investment objective.  Because the market value of each Portfolio's  investments
will change, the net asset value per share of each Portfolio also will vary.

INVESTMENT RISKS AND CONSIDERATIONS

         All Portfolios may invest in U.S. Government securities,  some of which
may not be backed by the full  faith and  credit  of the  United  States.  While
principal  and  interest  payments  on  government  securities,  including  some
mortgage-related securities, may be guaranteed by the U.S.

                                       1

<PAGE>



Government,  government  agencies or other  guarantors,  the market value of the
securities is not guaranteed.  Events such as prepayments on underlying mortgage
loans also may  adversely  affect the return from  mortgage-related  securities.
Stripped  mortgage-backed  securities generally are more sensitive to changes in
prepayment   and  interest   rates  than   traditional   debt   securities   and
mortgage-backed  securities.  Securities rated Baa by Moody's are deemed by that
agency to have speculative characteristics.

         The  International  Portfolio  may  invest  in  securities  of  foreign
issuers,   including  foreign  governments,   which  are  generally  subject  to
additional risk factors not applicable to securities of U.S. issuers,  including
risks arising from changes in currency  exchange rates,  confiscatory  taxation,
taxes on purchases,  sales, interest and dividend income, political and economic
developments  abroad and  differences in the regulation of issuers or securities
markets.  Securities of foreign issuers may also be less liquid and their prices
more volatile than securities of U.S.  issuers.  The economy of a foreign nation
may be more or less favorable than the U.S. economy.

         The International Portfolio is "non-diversified"  within the meaning of
the Investment Company Act of 1940 (the "Investment  Company Act" or the "Act").
Accordingly,  the  International  Portfolio  may be more  susceptible  to  risks
associated with economic, political or regulatory issues in a particular country
or group of countries than would a diversified Portfolio.

         All Portfolios may invest in repurchase agreements, which entail a risk
of loss if the seller defaults on its obligations and the Portfolio  involved is
delayed or prevented  from  exercising  its rights to dispose of the  collateral
securities.  All  Portfolios  may purchase  securities on a  when-issued  basis.
Securities  purchased on a when-issued basis may decline or appreciate in market
value prior to delivery.

         All of the Portfolios may use options, futures contracts and options on
futures  for  hedging  purposes  and may use  options  to  enhance  income.  The
International  Portfolio may also use forward currency contracts for hedging and
income  purposes.  Use of these  instruments  involves  certain costs and risks,
including  the risk that a  Portfolio  could  not close out a futures  or option
position  when  it  would  be most  advantageous  to do so,  and the  risk of an
imperfect  correlation  between the value of the  security  being hedged and the
value of the particular derivative  instrument.  See "Investment  Objectives and
Policies," page 7, and  "Description  of Securities and Investment  Techniques,"
page 9.


INVESTMENT ADVISER AND FUND ADMINISTRATOR

         Western  Asset serves as investment  adviser to all of the  Portfolios.
Legg   Mason   Fund   Adviser,   Inc.   serves  as  the   Fund's   administrator
("Administrator").   Western  Asset  renders  investment  advice  to  registered
investment  company portfolios that, as of September 30, 1996, had approximately
$3.7 billion in aggregate assets under management and private accounts  totaling
approximately  $18.9  billion.  The  Administrator  also  serves  as  investment
adviser,  manager or consultant to seventeen investment companies with assets of
approximately $6.0 billion as of that date. See "The Fund's Investment Adviser,"
page 25, and "The Fund's Administrator," page 26.

PURCHASE OF SHARES

         Shares of each Portfolio are offered without a sales charge at the net
asset value per share of the Portfolio next determined after receipt of a
purchase order and payment in proper form.  The

                                       2

<PAGE>



Fund has no plan under Rule 12b-1 imposing fees for distribution  expenses.  See
"Purchase of Shares," page 22.

REDEMPTION OF SHARES

         Shares of each Portfolio may be redeemed without charge at the net
asset value per share of the Portfolio next determined after receipt of a
redemption request in proper form.  See "Redemption of Shares," page 22.

DIVIDENDS AND OTHER DISTRIBUTIONS

         Each Portfolio will declare and pay dividends  quarterly out of its net
investment income. Each will also make an annual distribution of any net capital
gain (the excess of long-term  capital gain over short-term  capital loss),  net
short-term capital gain, and, in the case of the International Portfolio,  gains
from  certain  foreign  currency  transactions.   The  Portfolios  may  make  an
additional  distribution  if  necessary  to  avoid a 4%  excise  tax on  certain
undistributed  income and capital gain.  All  dividends and other  distributions
will  be  automatically  reinvested,  unless  cash  payment  is  requested.  See
"Dividends and Other Distributions," and "Federal Tax Treatment of Dividends and
Other Distributions," page 24.

                              EXPENSE INFORMATION

         The  purpose  of  the  following  table  is  to  assist   investors  in
understanding  the various  costs and expenses  that they will bear  directly or
indirectly.  "Management  Fees"  and  "Other  Expenses"  for  the  International
Securities  Portfolio  are based on its fees and  expenses  for the fiscal  year
ended June 30, 1996. For the other  Portfolios,  "Management  Fees" are based on
the Fund's  current  contracts,  and "Other  Expenses"  are  estimates for their
initial year of operations.

Shareholder Transaction Expenses*

Sales load imposed on purchases                         None
Sales load imposed on reinvested distributions          None
Deferred sales load                                     None
Redemption fees                                         None
Exchange fees                                           None


Annual Fund Operating Expenses(A):
(as a percentage of average net assets)

                                          Domestic       International
                                         Portfolios         Portfolio

Management fees (after fee waivers)          .150%           .075%
Other expenses (after expense
     reimbursement)                          .100%           .181%
Total Fund Operating Expenses
     (after fee waivers and expense
     reimbursement)                          .250%           .256%



                                       3

<PAGE>


- ------------------
(A) The expenses of the  Portfolios  for the current fiscal year have been
reduced by voluntary fee waivers and reimbursement agreements of Western Asset.
See "Fee Waivers,"  below.  If the Adviser and the  Administrator  had not
undertaken to limit Fund expenses,  the management  fees, other expenses and
total  operating expenses of each Fund would be as follows: for each of the
Domestic Portfolios, 0.175%,  0.100% and  0.275% of average  net assets;  and
for the  International Portfolio,  0.475%,  0.181% and 0.656% of average net
assets. The Portfolios are offered only to clients of Western Asset, who are
required to pay separate fees for advisory  services  provided by Western  Asset
based on the amount of assets under management.  However, such fees are not
charged against assets invested in the Portfolios.


The following  example  illustrates the expenses that an investor would pay on a
$1,000  investment  over various  time periods  assuming (1) a 5% annual rate of
return and (2) redemption at the end of each time period.

                        1 Year    3 Years   5 Years   10 Years
Domestic Portfolios       $3        $8        N/A        N/A
International Portfolio   $3        $8        $14        $33

         This example  assumes that all  dividends and other  distributions  are
reinvested  and that the  percentage  amounts listed under Annual Fund Operating
Expenses  remain the same over the time periods shown.  The above tables and the
assumptions  in the example of a $1,000  investment  and a 5% annual  return are
required by regulations  of the SEC applicable to all mutual funds.  The assumed
5% annual return is not a prediction of, and does not represent, any Portfolio's
projected  or actual  performance.  The above  tables  should not be  considered
representations  of past or future  expenses.  Actual expenses may be greater or
less than those shown.  A Portfolio's  actual  expenses will depend upon,  among
other  things,  the  level of  average  net  assets,  the  levels  of sales  and
redemptions of shares, the extent to which a Portfolio incurs variable expenses,
such as transfer agency costs, and whether a Portfolio's  adviser reimburses all
or a portion of the  Portfolio's  expenses and/or waives all or a portion of its
advisory and other fees.  See "Fee Waivers"  below,  for a description of annual
operating expenses before any fee waiver or reimbursement.

FEE WAIVERS

         Western  Asset has  voluntarily  undertaken  to waive  its fees  and/or
reimburse  each  Domestic  Portfolio  to  the  extent  a  Portfolio's   expenses
(exclusive of taxes, interest,  brokerage and other transaction expenses and any
extraordinary  expenses)  exceed  during  any month an  annual  rate of 0.25% of
average  daily net assets for such  month.  Western  Asset has also  voluntarily
undertaken  to waive fees and/or  reimburse the  International  Portfolio to the
extent that Portfolio's  expenses (exclusive of taxes,  interest,  brokerage and
other  transaction  expenses and any  extraordinary  expenses) exceed during any
month an annual rate of 0.85% of average daily net assets for such month.  These
waiver and reimbursement agreements are in effect to June 30, 1997. In addition,
Western Asset has voluntarily waived for calendar year 1996 its fee for services
to the  International  Portfolio  under its management  agreement,  other than a
portion of such fee equal to the fee paid by Western Asset to the  Administrator
for services to the International Portfolio under the administration  agreement.
See "Management and Other Expenses," page 26. These agreements are voluntary and
may be terminated by Western Asset at any time.


                                       4

<PAGE>


                              FINANCIAL HIGHLIGHTS
                       INTERNATIONAL SECURITIES PORTFOLIO

         The financial  highlights for the period January 7, 1993  (Commencement
of Operations)  through June 30, 1993 and for each of the three years ended June
30, 1994, 1995 and 1996, have been obtained from the financial  statements which
have  been  audited  by  Price  Waterhouse  LLP, independent  accountants.  The
International Portfolio's financial statements for the year ended June 30, 1996,
and  the  report  of  Price   Waterhouse  LLP thereon,   are  included  in  the
International   Portfolio's   1996  Annual Report  to   Shareholders   and  are
incorporated by reference in the Statement of Additional Information. The Annual
Report is available to  shareholders without  charge by calling  Western  Asset
Management  Company at (818) 584-4300.  Investors should understand that all the
following  information should be read in conjunction with such audited financial
statements and related notes.

         The Domestic Portfolios have not commenced operations.  Accordingly, no
condensed financial  information with respect to those portfolios is included in
the following  table.  The Statements of Assets and Liabilities for the Domestic
Portfolios as of June 30, 1996 and related  notes,  audited by Price  Waterhouse
LLP,  independent  accountants,  and the report of Price Waterhouse LLP thereon,
are included in the Statement of Additional Information, which is available upon
request.


<TABLE>
<CAPTION>


Years Ended June 30,                                  1996            1995            1994          1993(A)
- ------------------------------------------------- -------------  -------------  -------------- ---------------
<S><C>
Per Share Operating Performance:
  Net asset value, beginning of period                   $92.10         $93.76         $105.53         $100.00

  Net investment income(B)                                 5.78           6.29            6.94            3.21
  Net realized and unrealized gain (loss)
  on investments and forward currency
  contracts and currency translations(C)                   3.56         (1.04)          (7.36)            2.59
  Total from investment operations                         9.34           5.25          (0.42)            5.80
  Distributions to shareholders from:
   Net investment income                                 (6.28)         (0.63)          (8.64)          (0.27)
   Net realized capital gain                                 --             --          (2.71)              --
   Tax return of capital                                     --         (6.28)              --              --
  Total distributions                                    (6.28)         (6.91)         (11.35)          (0.27)
  Net asset value, end of period                         $95.16         $92.10          $93.76         $105.53

  Total return(D)                                        10.36%          6.03%         (1.14)%           5.81%

</TABLE>

                                       5

<PAGE>

<TABLE>
<CAPTION>

Years Ended June 30,                                   1996           1995            1994          1993(A)
- ------------------------------------------------- -------------  -------------  -------------- ---------------
<S><C>
Ratios/Supplemental Data:
  Ratios to average net assets:

   Expenses(B)                                            0.26%          0.28%           0.30%        0.45%(E)
   Net investment income(B)                               6.02%          5.67%           5.53%        6.08%(E)

  Portfolio turnover rate                               348.40%        355.03%         571.18%      249.94%(E)
  Net assets, end of period (in
   thousands)                                          $220,096       $178,334        $106,806       $93,288

</TABLE>

(A) For the period January 7, 1993 (commencement of operations) to June 30,
1993.

(B) Net of voluntary waiver of investment  advisory fees. Pursuant to this
waiver, advisory fees of $970,680,  $480,824,  $572,322 and $136,356 were waived
for the years  ended  June  30,  1996,  1995,  1994  and  the  period  January
7,  1993 (commencement  of  operations)  to June 30, 1993. In the absence of
this waiver, the ratio of  expenses to average  net assets  would have been
0.66%,  0.68% and 0.70% for the years ended June 30, 1996, 1995 and 1994, and
0.85% for the period January 7, 1993  (commencement  of  operations)  to June
30,  1993.

(C) The amount presented is calculated  pursuant to a  methodology  prescribed
by the SEC for a share  outstanding  throughout the year.  This amount is
inconsistent  with the Fund's aggregate gains and losses because of the timing
of sales and redemptions of Fund shares in  relation  to  fluctuating  market
values for the  investment portfolio.

(D) Not annualized for periods of less than a full year.

(E) Annualized

                                       6

<PAGE>



                       INVESTMENT OBJECTIVES AND POLICIES

         The investment objective of each Portfolio is to maximize total return,
consistent  with  prudent  investment  management,  by  investing  primarily  in
securities of the types specified below for each  respective  Portfolio.  "Total
return"  includes  interest  from  underlying  securities,   capital  gains  and
appreciation on the securities held in the Portfolio,  and gains from the use of
futures  and  options  and,  in the case of the  International  Portfolio,  from
favorable  changes in foreign  currency  exchange rates. As set forth below, the
Portfolios  differ  from one  another  primarily  in the  proportion  of  assets
invested in certain types of fixed income securities.

         The  MORTGAGE  SECURITIES  PORTFOLIO  invests at least 75% of its total
assets  in U.S.  dollar-denominated,  mortgage-related  securities  of  domestic
issuers.  The  mortgage-related  securities  purchased by this Portfolio must be
either  (1)  issued or  guaranteed  as to  principal  and  interest  by the U.S.
Government,  its  agencies  or  instrumentalities  or (2)  rated A or  better by
Moody's or A or better by S&P or, if unrated,  judged by Western  Asset to be of
comparable quality. Western Asset expects that, under normal circumstances, this
Portfolio will invest substantially all of its assets in such securities.

         The CORPORATE  SECURITIES  PORTFOLIO  invests at least 75% of its total
assets in U.S.  dollar-denominated debt securities of non-governmental  domestic
issuers  rated Baa or better by Moody's or BBB or better by S&P or, if  unrated,
judged by Western Asset to be of comparable quality. Western Asset expects that,
under normal circumstances,  this Portfolio will invest substantially all of its
assets in such  securities.  Securities  rated Baa by Moody's are deemed by that
agency to have speculative characteristics.

         The  INTERNATIONAL  SECURITIES  PORTFOLIO  invests  at least 75% of its
total  assets in  securities  denominated  in major  foreign  currencies  and in
baskets of currencies (which may include U.S. and foreign  currencies),  such as
the European  Currency Unit, or "ECU," or as they may further  develop.  Western
Asset  anticipates that, under normal  circumstances,  substantially all of this
Portfolio's  assets will be invested in securities of foreign  issuers.  Western
Asset  will  manage  the   investments   of  the  Portfolio   across   different
international bond markets so that, under normal circumstances,  the Portfolio's
assets will be invested in securities of foreign  issuers  representing at least
three foreign countries. The adviser will select the Portfolio's foreign country
and currency  composition  based on its evaluation of relative  interest  rates,
inflation rates, exchange rates, monetary and fiscal policies, trade and current
account balances, and any other specific factors the adviser believes relevant.

INVESTMENT POLICIES

         In selecting  securities  for each  Portfolio,  the adviser may utilize
economic forecasting, interest rate anticipation, credit and call risk analysis,
and other security  selection  techniques.  The  proportion of each  Portfolio's
assets  committed to investment in securities  with  particular  characteristics
(such as  maturity,  type,  and coupon  rate)  will vary based on its  adviser's
outlook for the U.S. economy (and, in the case of the  International  Portfolio,
foreign  economies),  the  financial  markets,  and other  factors.  There is no
assurance that any Portfolio will achieve its investment objective.

         Within the limits described above, the Portfolios may invest in the
following types of securities:  obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities; U.S. dollar-denominated debt
securities of domestic issuers rated Baa or better


                                       7

<PAGE>

by Moody's or BBB or better by S&P or, if  unrated,  judged by the adviser to be
of comparable quality; mortgage- and other asset-backed securities; variable and
floating rate debt securities;  high quality commercial  paper;  and corporate
obligations  (including  preferred stock, convertible  securities,  zero coupon
securities and pay-in-kind  securities) rated Baa or higher by Moody's or BBB or
higher by S&P, issued by domestic entities and denominated in U.S.  dollars,  or
unrated  securities  judged  by the  adviser  to  be  of  comparable   quality;
certificates of deposit,  fixed time deposits and bankers' acceptances issued by
domestic  banks and denominated  in U.S.  dollars;  and  repurchase  agreements
collateralized  by any security in which it may invest.  The Portfolios may also
engage in reverse repurchase agreements and dollar roll transactions.

         The International Portfolio may invest in the above types of securities
whether denominated in U.S. dollars or foreign currencies, and whether issued by
domestic or foreign issuers.  It may also invest in U.S.  dollar-denominated  or
foreign  currency-denominated   obligations  of  foreign  governments  or  their
subdivisions,  agencies and  instrumentalities,  international agencies (such as
the World Bank) or supranational entities; and foreign currency exchange-related
securities,  including foreign currency warrants.  In evaluating the credit risk
of a foreign debt security, the International Portfolio may use ratings assigned
by rating agencies recognized in the primary market for those securities.

         The International Portfolio is "non-diversified"  within the meaning of
the Investment Company Act. Accordingly,  the International Portfolio may invest
a greater  percentage of its total assets in securities of a particular  foreign
issuer, or may invest in a smaller number of different foreign issuers,  than it
would  if it were a  "diversified"  company  under  the Act.  The  International
Portfolio may be more susceptible to risks  associated with economic,  political
or regulatory issues in a particular  country or group of countries than would a
diversified portfolio.

         The  Portfolios  may also buy or sell interest rate futures  contracts,
options on interest rate futures  contracts and options on debt  securities  and
bond  indices  to hedge  against  changes in the value of  securities  which the
Portfolio owns or anticipates  purchasing due to anticipated changes in interest
rates.  The Portfolios may also use options on debt  securities for  non-hedging
purposes, in an effort to enhance income. The International Portfolio may buy or
sell foreign  currencies,  foreign currency options, or foreign currency futures
and related options,  and may enter into foreign currency forward  contracts for
the  purpose  of  hedging  against  foreign   exchange  risk  arising  from  the
Portfolio's  investment or anticipated  investment in securities  denominated in
foreign  currencies.  The  International  Portfolio  also may enter into foreign
currency  forward  contracts  and  buy or sell  foreign  currencies  or  foreign
currency  options for purposes of  increasing  exposure to a particular  foreign
currency or to shift exposure to foreign currency  fluctuations from one country
to another. See "Options and Futures; Forward Currency Exchange Contracts," page
18 and  "Risks  of  Futures,  Options  and  Forward  Contracts,"  page 20.  Each
Portfolio may purchase  securities on a when-issued basis and enter into forward
commitments to purchase securities;  lend its securities to brokers, dealers and
other financial  institutions to earn income;  and borrow money for temporary or
emergency purposes. See "When-Issued Securities," page 17.

         See "Description of Securities and Investment  Techniques,"  below, and
the Statement of Additional  Information  for a  description  of securities  and
investment  techniques listed above and restrictions  generally  applicable to a
Portfolio's  investment in or use of them.  See the Appendix to the Statement of
Additional Information for a description of Moody's and S&P's ratings applicable
to fixed-income securities.



                                       8

<PAGE>

INVESTMENT RESTRICTIONS

         The investment  objective of each Portfolio may not be changed  without
the  affirmative  vote of a majority  of  outstanding  shares (as defined in the
Investment  Company Act) of the affected  Portfolio.  Except for the  investment
objectives  and  those  restrictions  or  policies  specifically  identified  as
"fundamental,"  the  investment   policies  and  practices   described  in  this
Prospectus and in the Statement of Additional  Information may be changed by the
Fund's Board of Directors without shareholder approval.

         The  fundamental  restrictions  applicable to all Portfolios  include a
prohibition  on  investing  25% or more of total  assets  in the  securities  of
issuers in a particular  industry  (with the exception of  securities  issued or
guaranteed  by the  U.S.  Government,  its  agencies  or  instrumentalities  and
repurchase  agreements with respect thereto).  However,  the Mortgage Securities
Portfolio  will under  normal  circumstances  invest  more than 25% of its total
assets in mortgage-backed and other asset-backed securities (including, for this
purpose, securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities,  and repurchase agreements with respect thereto). Investments
in those  securities  involve  special risks.  See  "Mortgage-Related  and Other
Asset-Backed  Securities," below. The Mortgage Securities  Portfolio's policy of
so  concentrating  its  investments has the effect of increasing its exposure to
those risks and might cause the value of its  securities to fluctuate  more than
would otherwise be the case.

         Additional fundamental and non-fundamental  investment restrictions are
set forth in the Statement of Additional Information.

              DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES

         The following describes in greater detail different types of securities
and investment techniques used by the individual Portfolios, as described in the
preceding section.

U.S. GOVERNMENT SECURITIES

         Each Portfolio may purchase U.S. Government  securities,  which include
(1) U.S.  Treasury  bills  (maturity of one year or less),  U.S.  Treasury notes
(maturity of one to ten years) and U.S.  Treasury  bonds  (maturities  generally
greater  than ten  years)  and (2)  obligations  issued  or  guaranteed  by U.S.
Government  agencies  or  instrumentalities  which are  supported  by any of the
following:  (a) the  full  faith  and  credit  of the U.S.  Government  (such as
certificates of the Government National Mortgage Association ("GNMA"));  (b) the
right of the issuer to borrow an amount  limited  to a  specific  line of credit
from the U.S.  Government  (such as obligations of the Federal Home Loan Banks);
(c)  discretionary   authority  of  the  U.S.  Government  to  purchase  certain
obligations  of agencies  or  instrumentalities  (such as the  Federal  National
Mortgage  Association  ("FNMA"));  or (d) only the credit of the instrumentality
(such as the Student Loan Marketing Association). In the case of obligations not
backed by the full faith and credit of the United States,  a Portfolio must look
principally  to the  agency  or  instrumentality  issuing  or  guaranteeing  the
obligation for ultimate  repayment and may not be able to assert a claim against
the United  States  itself in the event the agency or  instrumentality  does not
meet its commitments.

MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES

         Mortgage-related  securities  represent interests in pools of mortgages
made by  lenders  such as  commercial  banks,  savings  and  loan  institutions,
mortgage  bankers  and  others.  Mortgage-


                                       9

<PAGE>

related  securities  may be  issued by governmental or government-related
entities or by non-governmental entities such as banks,  savings and loan
institutions,  private mortgage insurance companies, mortgage bankers and other
secondary market issuers.



         Mortgage-related  securities  provide monthly payments which consist of
interest  and,  in most  cases,  principal.  In  effect,  these  payments  are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential  mortgage loans,  net of any fees paid to the issuer or guarantor of
such securities.  Additional payments to holders of mortgage-related  securities
are caused by repayments  resulting from the sale of the underlying  residential
property,  refinancing  or  foreclosure,  net of  fees  or  costs  which  may be
incurred.

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

         Residential  mortgage  loans are also pooled by the  Federal  Home Loan
Mortgage  Corporation  ("FHLMC"),  a  corporate   instrumentality  of  the  U.S.
Government.  The mortgage loans in FHLMC's Portfolio are not government  backed;
rather, the loans are either uninsured with loan-to-value  ratios of 80% or less
or privately insured if the loan-to-value ratio exceeds 80%. FHLMC, not the U.S.
Government, guarantees the timely payment of interest and ultimate collection of
principal on FHLMC participation certificates.  FHLMC also now issues guaranteed
mortgage certificates,  on which it guarantees semi-annual interest payments and
a specified minimum annual payment of principal.

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

         PRIVATELY   ISSUED   MORTGAGE-RELATED   SECURITIES.    Mortgage-related
securities offered by private issuers include pass-through  securities comprised
of  pools  of  residential  mortgage  loans;  mortgage-backed  bonds  which  are
considered to be debt  obligations of the institution  issuing the bonds and are
collateralized  by  mortgage  loans;  and  bonds  and  collateralized   mortgage
obligations  ("CMOs") which are  collateralized by  mortgage-related  securities
issued  by  FHLMC,  FNMA or GNMA or by pools of  mortgages.  Any  Portfolio  may
purchase privately issued mortgage-related securities.

         CMOs are  typically  structured  with  classes  or  series  which  have
different  maturities and are generally retired in sequence.  In the most common
arrangement,  each class of  obligations  receives  periodic  interest  payments
according to the coupon rate on the obligations.  However, all monthly principal
payments and any prepayments from the collateral pool are paid first to the


                                       10

<PAGE>

"Class 1" holders.  Thereafter,  all payments of principal  are allocated to the
next most senior class of obligations  until that class of obligations  has been
fully repaid. Although full payoff of each class of obligations is contractually
required by a certain date,  any or all classes of  obligations  may be paid off
sooner than  expected  because of an  increase in the payoff  speed of the pool.
Other allocation methods may be used.

         Mortgage-related   securities  created  by   non-governmental   issuers
generally offer a higher rate of interest than government and government-related
securities  because  there are no direct or indirect  government  guarantees  of
payment in the former securities,  resulting in higher risks.  Timely payment of
interest and principal may be supported by various forms of insurance, including
individual loan,  title, and hazard policies on the mortgages in the pool, or by
private guarantees of the issuer of the mortgage-related  securities.  There can
be no assurance that the insurers will be able to meet their  obligations  under
the relevant insurance policies or that the private issuers will be able to meet
their  obligations under the relevant  guarantees.  Such guarantees and policies
often  do not  cover  the  full  amount  of the  pool.  Where  privately  issued
securities are  collateralized  by securities issued by FHLMC, FNMA or GNMA, the
timely payment of interest and principal is supported by the  government-related
securities  collateralizing  such  obligations.  The market for private pools is
smaller   and   less   liquid   than  the   market   for  the   government   and
government-related mortgage pools.

         STRIPPED MORTGAGE-BACKED SECURITIES.  These securities are interests in
a pool of mortgage assets that receive  interest and principal  distributions in
different  proportions  from that received by the underlying  pool.  They may be
issued by agencies or  instrumentalities  of the U.S.  government  or by private
mortgage  lenders.  Stripped  mortgage-backed   securities  generally  are  more
sensitive to changes in  prepayment  and interest  rates and the market for such
securities is less liquid than is the case for  traditional  debt securities and
mortgage-backed securities.

         Some  stripped   mortgage-backed   securities   receive  only  interest
payments.  The yield on such  securities  is extremely  sensitive to the rate of
principal payments  (including  prepayments) on the underlying  mortgage assets,
and a rapid  rate of  repayment  may  have a  material  adverse  effect  on such
securities'  yield to maturity.  If the underlying  mortgage  assets  experience
greater than  anticipated  prepayments  of principal,  the Portfolio may fail to
recoup fully its initial investment in these securities,  even if they are rated
high quality.  When  interest rate are  declining,  such  principal  prepayments
usually increase,  and reinvestments of such principal  prepayments will be at a
lower rate than that on the original mortgage-related security.

         ASSET-BACKED  SECURITIES.  Asset-backed  securities refer to securities
that directly or indirectly  represent a participation in, or are secured by and
payable from, assets such as motor vehicle  installment sales,  installment loan
contracts, leases of various types of real and personal property and receivables
from  revolving  credit  (credit  card)   agreements.   Such  assets  are  being
securitized  through  the  use  of  trusts  and  special  purpose  corporations.
Asset-backed  securities are backed by a pool of assets often  representing  the
obligations of a number of different parties. Payments of principal and interest
may be  guaranteed  up to certain  amounts  and for a certain  time  period by a
letter of credit issued by a financial  institution,  usually  unaffiliated with
the trust or corporation.  Certain of such  securities may be illiquid,  in that
there is not a ready market if a Portfolio wishes to resell the security.

         PREPAYMENT  RISK.  The  principal  of most  mortgage-backed  and  other
asset-backed  securities  may be  prepaid  at any  time.  As a  result,  if such
securities  are  purchased at a premium,  a prepayment  rate that is faster than
expected will reduce yield to maturity, while a prepayment rate


                                       11

<PAGE>


that is slower than expected will have the opposite effect.  Conversely,  if the
securities are purchased at a discount,  prepayments  faster than expected will
increase yield to maturity and  prepayments  slower than expected will decrease
it. Accelerated  prepayments also reduce the certainty of the yield because the
Portfolio  must  reinvest  the  assets at the  then-current  rates.  Accelerated
prepayments  on securities  purchased at a premium also impose a risk of loss of
principal  because the premium may not have been fully amortized at the time the
principal is repaid in full. When interest rates are declining, such prepayments
usually increase,  and reinvestments of such principal  prepayments will be at a
lower  rate than that on the  original mortgage-related  security.  The rate of
prepayment may also be affected by general economic conditions, the location and
age of the mortgages, and other social and demographic conditions.

         New types of mortgage-backed  and asset-backed  securities,  derivative
securities and hedging instruments are developed and marketed from time to time.
Consistent  with their  respective  investment  policies  and  limitations,  the
Portfolios  expect to invest in those new types of  securities  and  instruments
that  the  adviser  believes  may  assist  the  Portfolios  in  achieving  their
investment objectives.

         The Portfolios will invest in  mortgage-related  or other  asset-backed
securities  only if they are either (1) issued or guaranteed as to principal and
interest by the U.S. Government,  its agencies or  instrumentalities  (currently
GNMA,  FHLMC and FNMA) or (2) rated A or better by Moody's or A or better by S&P
or, if unrated, judged by the adviser to be of comparable quality.

NON-GOVERNMENTAL DEBT SECURITIES

         Each   Portfolio  may  invest  in  investment   grade   corporate  debt
obligations.  Each Portfolio's  adviser seeks to minimize the risks of investing
in  all  securities  through  diversification,   in-depth  credit  analysis  and
attention to current developments in interest rates and market conditions.

         Securities  rated  Baa  and BBB are the  lowest  which  are  considered
"investment  grade"  obligations.  Moody's  describes  securities  rated  Baa as
"medium-grade"  obligations;  they are  "neither  highly  protected  nor  poorly
secured ... [I]nterest  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." S&P  describes  securities  rated BBB as "regarded as
having an adequate  capacity to pay  interest  and repay  principal.  Whereas it
normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity . . . than
in higher rated categories."

         Western Asset monitors the ratings of securities held by the Portfolios
and the  creditworthiness of their issuers. If the rating of a security in which
a Portfolio has invested  falls below the minimum  rating in which the Portfolio
is permitted to invest,  the Portfolio  will dispose of that  security  within a
reasonable time, having due regard for market  conditions,  tax implications and
other applicable  factors.  An issue given different ratings by different rating
agencies is evaluated by the adviser to determine which is most appropriate. The
Portfolios   will  not  hold  more  than  5%  of  their  net   assets  in  below
investment-grade 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 Portfolio is called for redemption, the
Portfolio will be required to permit the issuer to redeem the security or


                                       12

<PAGE>


sell it to a third party.  Either of these actions could have an adverse  effect
on a Portfolio's ability to achieve its investment objective.

FOREIGN SECURITIES

         The    International    Portfolio   may   invest   directly   in   U.S.
dollar-denominated   or  foreign   currency-denominated   foreign   fixed-income
securities   (including  preferred  or  preference  stock)  of  non-governmental
issuers,  certificates of deposit,  fixed time deposits and bankers' acceptances
issued by foreign banks,  and debt  obligations of foreign  governments or their
subdivisions,   agencies  and  instrumentalities,   international  agencies  and
supranational  entities.  Some securities issued by foreign governments or their
subdivisions, agencies and instrumentalities may not be backed by the full faith
and credit of the foreign government.

         The International Portfolio will limit its foreign investments to fixed
income  and other  debt  securities  of  issuers  based in  developed  countries
(including,  but not limited to,  countries in the European  Community,  Canada,
Japan,  Australia,  New  Zealand  and newly  industrialized  countries,  such as
Singapore,  Taiwan and South Korea).  Investing in the  securities of issuers in
any foreign country  nevertheless  involves special risks and considerations not
typically  associated  with  investing in U.S.  companies.  These  include risks
resulting  from  differences  in  accounting,  auditing and financial  reporting
standards;  lower  liquidity  than U.S.  fixed  income or debt  securities;  the
possibility of nationalization,  expropriation or confiscatory taxation; adverse
changes in  investment  or  exchange  control  regulations  (which  may  include
suspension of the ability to transfer currency out of a country);  and political
instability which could affect U.S. investments in foreign countries.  There may
be less publicly available information  concerning foreign issuers of securities
held by the Portfolios than is available concerning U.S. issuers.  Additionally,
purchases and sales of foreign  securities and dividends and interest payable on
those  securities  may be subject to foreign  taxes;  taxes may be withheld from
dividend and interest  payments on those  securities.  Foreign  securities often
trade with less frequency and volume than domestic  securities and therefore may
exhibit greater price  volatility and a greater risk of illiquidity.  Additional
costs associated with an investment in foreign securities will generally include
higher  custodial  fees  than  apply  to  domestic  custodial  arrangements  and
transaction costs of foreign currency  conversions.  Changes in foreign exchange
rates  also  will  affect  the  value of  securities  denominated  or  quoted in
currencies  other than the U.S.  dollar.  The  relative  performance  of various
countries'  fixed income  markets  historically  has reflected  wide  variations
relating to the unique  characteristics  of each country's  economy.  Individual
foreign  economies may differ  favorably or unfavorably from the U.S. economy in
such respects as growth of gross national  product,  rate of inflation,  capital
reinvestment,  resource  self-sufficiency and balance of payments position. Bank
deposit insurance regulations and limits may vary widely in foreign countries.

         Foreign  securities  purchased by the  International  Portfolio  may be
listed on foreign exchanges or traded over-the-counter.  Transactions on foreign
exchanges are usually subject to mark-ups or commissions  higher than negotiated
commissions on U.S. transactions, although the Portfolio will endeavor to obtain
the best  net  results  in  effecting  transactions.  There  is  generally  less
government  supervision  and  regulation  of  exchanges  and  brokers in foreign
countries than in the United States.

         It is anticipated that over 25% of the International Portfolio's assets
may be invested in  securities  of  Japanese  issuers,  and that over 25% of the
Portfolio's assets may be invested in securities of German issuers. Such issuers
may include the foreign  governments of these countries and their  subdivisions,
agencies, and instrumentalities, and also non-governmental


                                       13

<PAGE>

issuers.  Whether the  International  Portfolio  will  concentrate  in  foreign
governmental issuers or other issuers of these countries will depend on relative
market and economic  circumstances  from time to time. Among such  circumstances
are the relative performance of these and other countries' fixed income markets,
expectations  as to  future  relative  performance  of those  markets,  relative
foreign exchange rates, relative economic performance and expectations for these
and other foreign countries,  and similar investment factors.  The International
Portfolio will  concentrate in these countries when such  circumstances  suggest
the potential of a relative higher return from such concentration.

         The  investment of a substantial  amount of the  Portfolio's  assets in
securities of issuers from these two countries raises special considerations for
investors  in addition to the  considerations  generally  applicable  to foreign
securities described above.


         Japan  currently  has the second  largest  GNP in the world.  While the
Japanese economy has grown  substantially over the last three decades,  with its
growth rate averaging  over 5% in the 1970s and 1980s,  the growth rate in Japan
has slowed substantially this decade. The economy is currently recovering from a
recession  and the Bank of Japan  continues  to  maintain a very loose  monetary
policy. The official discount rate has been at .50 percent since September 1995.
A series of fiscal packages have also been implemented in an effort to stimulate
the economy.

         Germany  currently has the third  largest GNP in the world.  It too has
grown  substantially  over the past few decades.  Reunification  with the former
East  Germany  put  considerable  pressures  on  monetary  policy and  financial
markets.  Deficits are now being brought back into line and inflation has fallen
to impressive  levels.  Following a period of economic  contraction,  the German
economy is now  recovering,  although  growth is not expected to accelerate  too
rapidly.  Interest rates have been steadily lowered in order to provide stimulus
for the economy.

COMMERCIAL PAPER AND OTHER SHORT-TERM INSTRUMENTS

         Commercial  paper  represents  short-term  unsecured  promissory  notes
issued in  bearer  form by banks or bank  holding  companies,  corporations  and
finance companies.  The commercial paper purchased by the Portfolios consists of
U.S. dollar-denominated or foreign currency-denominated  obligations of domestic
or foreign issuers which, at the time of investment,  is (1) rated P-1 or P-2 by
Moody's,  A-1 or A-2 or better by S&P, or F-1 or F-2 by Fitch Investors Service,
(2) issued or  guaranteed  as to principal and interest by issuers or guarantors
having an existing debt  security  rating of A or better by Moody's or by S&P or
(3) if  unrated,  are judged to be of  comparable  quality  by that  Portfolio's
adviser.

         The Portfolios  may purchase  commercial  paper issued  pursuant to the
private  placement  exemption  in Section  4(2) of the  Securities  Act of 1933.
Section 4(2) paper is restricted as to disposition under the federal  securities
laws in that any resale must  similarly  be made in an exempt  transaction.  The
Fund  may or may not  regard  such  securities  as  illiquid,  depending  on the
circumstances of each case. See "Restricted and Illiquid Securities," page 18.

         Any Portfolio may also invest in obligations (including certificates of
deposit,  demand and time deposits and bankers'  acceptances)  of U.S. banks and
savings  and loan  institutions  if the issuer has total  assets in excess of $1
billion at the time of purchase or if the principal  amount of the instrument is
insured by the Federal Deposit Insurance Corporation. A bankers' acceptance is a
time draft drawn on a commercial bank by a borrower,  usually in connection with
an  international  commercial  transaction.  Time  deposits  are  non-negotiable
deposits maintained in a



                                       14

<PAGE>

banking institution for a specified period of time at a specified interest rate.
Certificates of deposit are negotiable  short-term obligations  issued by banks
against funds  deposited in the issuing institution.  The interest rate on some
certificates of deposit is periodically adjusted prior to the stated  maturity,
based upon a specified  market rate. While domestic bank deposits are insured by
an agency of the U.S. Government, the Portfolios will generally assume positions
considerably in excess of the insurance limits.

PREFERRED STOCK

         Any of the Portfolios may purchase  preferred stock as a substitute for
debt  securities  of the same issuer  when,  in the opinion of that  Portfolio's
adviser,  the preferred stock is more attractively  priced in light of the risks
involved.  Preferred  stock pays dividends at a specified rate and generally has
preference  over common stock in the payment of dividends and the liquidation of
the issuer's  assets but is junior to the debt securities of the issuer in those
same  respects.  Unlike  interest



payments  on debt  securities,  dividends  on preferred stock are generally
payable at the discretion of the issuer's board of directors,  although
preferred shareholders may have certain rights if dividends are not paid.
Shareholders may suffer a loss of value if dividends are not paid, and generally
have no legal recourse  against the issuer.  The market prices of preferred
stocks are subject to changes in interest rates and are more sensitive to
changes  in the  issuer's  creditworthiness  than  are  the  prices  of debt
securities. Under ordinary circumstances,  preferred stock does not carry voting
rights.

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  on  non-convertible   debt.
Convertible    securities   are   usually    subordinated   to   comparable-tier
nonconvertible  securities  but rank senior to common  stock in a  corporation's
capital structure.

         The value of a  convertible  security is a function of (1) its yield in
comparison  with the  yields of other  securities  of  comparable  maturity  and
quality that do not have a  conversion  privilege  and (2) its worth,  at market
value, if converted into the underlying common stock. Convertible securities are
typically  issued by smaller  capitalized  companies  whose stock  prices may be
volatile.  The price of a convertible security often reflects such variations in
the price of the underlying common stock in a way that non-convertible debt does
not. The  Portfolios  have no current  intention of converting  any  convertible
securities  they may own into equity or holding them as equity upon  conversion,
although they may do so for temporary  purposes.  A convertible  security may be
subject to redemption at the option of the issuer at a price  established in the
convertible security's governing instrument. If a convertible security held by a
Portfolio is called for redemption, the Portfolio will be required to permit the
issuer to redeem the security,  convert it into the  underlying  common stock or
sell it to a third party. Any of these actions could have an adverse effect on a
Portfolio's ability to achieve its investment objective.

                                       15

<PAGE>


VARIABLE AND FLOATING RATE SECURITIES

         Any  Portfolio  may invest in variable  and floating  rate  securities.
These  securities  provide for periodic  adjustment in the interest rate paid on
the obligations.  The terms of such obligations must provide that interest rates
are  adjusted  periodically  based upon some  appropriate  interest  index.  The
adjustment intervals may be event-based  (floating),  and range from daily up to
annually,  or may be regular (variable).  The adviser believes that the variable
or  floating  rate of  interest  paid on these  securities  may  reduce the wide
fluctuations  in market value typical of fixed-rate  long-term  securities.  The
yield  available on floating  rate  securities  is  typically  less than that on
fixed-rate notes of similar maturity issued by the same company.

ZERO COUPON AND PAY-IN-KIND BONDS

         A zero coupon bond is a security that makes no fixed interest  payments
but instead is sold at a deep discount from its face value. The bond is redeemed
at its face value on the  specified  maturity  date.  Zero  coupon  bonds may be
issued as such, or they may be created by a broker who strips the coupons from a
bond and separately sells the rights to receive principal and interest. Pay-
in-kind  securities  pay  interest  in the  form of  additional  securities,
thereby adding additional debt to the issuer's balance sheet. The prices of both
types of bonds tend to fluctuate more in response to changes in market  interest
rates than do the prices of debt  securities with similar  maturities,  that pay
interest in cash.

         A Portfolio  investing in zero coupon or  pay-in-kind  bonds  generally
accrues income on such securities  prior to the receipt of cash payments.  Since
each Portfolio must distribute  substantially  all of its income to shareholders
to qualify  for  pass-through  treatment  under the federal  income tax laws,  a
Portfolio  investing  in such bonds may have to dispose of other  securities  to
generate the cash necessary for the  distribution of income  attributable to its
zero coupon or  pay-in-kind  bonds.  Such  disposal  could occur at a time which
would be  disadvantageous  to the  Portfolio  and when the  Portfolio  would not
otherwise choose to dispose of the assets.

REPURCHASE AGREEMENTS

         A repurchase agreement is an agreement under which a Portfolio acquires
either U.S. Government obligations or high-quality liquid debt securities from a
securities  dealer or bank  subject to resale at an agreed  upon price and date.
The securities are held by the Portfolio as collateral until  retransferred  and
will be supplemented  by additional  collateral if necessary to maintain a total
market value equal to or in excess of the value of the repurchase agreement. The
Portfolio  bears a risk that the  proceeds  from any sale of  collateral  upon a
default in the obligation to repurchase will be less than the repurchase  price.
A  Portfolio  also bears a risk that the other party to a  repurchase  agreement
will default on its  obligations  and the Portfolio will be delayed or prevented
from exercising its rights to dispose of the collateral securities.  A Portfolio
will enter into repurchase agreements only with financial institutions which are
deemed by its adviser to present  minimal risk of default during the term of the
agreement based on guidelines  which are  periodically  reviewed by the Board of
Directors.

REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWING

         A reverse repurchase  agreement is a portfolio  management technique in
which a Portfolio  temporarily transfers possession of a portfolio instrument to
another person, such as a financial institution or broker-dealer,  in return for
cash. At the same time, the Portfolio agrees to repurchase


                                       16

<PAGE>


the  instrument at an agreed upon time  (normally  within seven days) and price,
including  interest payment.  A Portfolio may also enter into dollar rolls,  in
which the  Portfolio sells a fixed income  security for delivery in the current
month and simultaneously  contracts to repurchase  substantially  similar (same
type, coupon and maturity)  securities on a specified  future date.  During the
roll period,  the  Portfolio  would forgo  principal  and interest  paid on such
securities.  The Portfolio  would be compensated  by the difference  between the
current sales price and the forward price for the future purchase, as well as by
the interest earned on the proceeds of the initial sale.

         Any Portfolio may engage in reverse repurchase agreements, dollar rolls
and other borrowing as a means of raising cash to satisfy redemption requests or
for other temporary or emergency purposes without selling portfolio instruments.
While engaging in reverse repurchase agreements and dollar rolls, each Portfolio
will  maintain  cash,  U.S.  Government  securities or  high-grade,  liquid debt
securities in a segregated  account at its custodian  bank with a value at least
equal to the Portfolio's obligation under the agreements, adjusted daily.

         Reverse  repurchase  agreements and dollar rolls may expose a Portfolio
to greater fluctuations in value of its assets and renders the segregated assets
unavailable for sale or other disposition. To avoid potential leveraging effects
of borrowing  (including  reverse  repurchase agreements and dollar  rolls),  a
Portfolio will not purchase  securities  while such borrowing is in excess of 5%
of its total  assets.  Each  Portfolio  will limit its borrowing to no more than
one-third of its total assets.

LOANS OF PORTFOLIO SECURITIES

         Any  Portfolio may lend  portfolio  securities to brokers or dealers in
corporate or  government  securities,  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 Portfolio. During the time securities are on
loan, the borrower will pay the Portfolio an amount  equivalent to any dividends
or  interest  paid on such  securities,  and the  Portfolio  may invest the cash
collateral and earn additional  income,  or it may receive an agreed upon amount
of interest  income from the borrower who has delivered  equivalent  collateral.
These loans are subject to  termination  at the option of the  Portfolio  or the
borrower.  A Portfolio may pay 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.  No
Portfolio  presently  expects  to  have on loan  at any  given  time  securities
totaling more than one-third of its net asset value.

WHEN-ISSUED SECURITIES

         Any Portfolio may enter into  commitments  to purchase U.S.  Government
securities or other securities on a when-issued  basis. A Portfolio may purchase
when-issued  securities  because such securities are often the most  efficiently
priced  and  have the  best  liquidity  in the  bond  market.  When a  Portfolio
purchases  securities on a when-issued  basis, it assumes the risks of ownership
at the time of purchase, not at the time of receipt. However, the Portfolio does
not have to pay for the  obligations  until they are  delivered  to it.  This is
normally seven to 15 days later, but could be considerably longer in the case of
some mortgage-backed securities. Depending on market conditions, the Portfolio's
when-issued purchases could, but will not necessarily,  cause its share value to
be more  volatile,  because they  increase  the amount by which the  Portfolio's
total  assets,  including  the  value of the  when-issued  securities  which the
Portfolio has contracted to purchase,  exceed its net assets.  The Fund does not
expect that any Portfolio's commitment to purchase

                                       17

<PAGE>

when-issued  securities will at any time exceed,  in the aggregate,  20% of that
Portfolio's total assets.

         To meet  its  payment  obligation,  each  Portfolio  will  establish  a
segregated account with its custodian and maintain liquid assets,  such as cash,
U.S. Government securities or other appropriate high-grade debt obligations,  in
an amount at least equal in value to that  Portfolio's  commitments  to purchase
when-issued  securities.  If the value of these  assets  declines,  the involved
Portfolio will place additional liquid assets in the account on a daily basis so
that the  value of the  assets  in the  account  is equal to the  amount of such
commitments.

RESTRICTED AND ILLIQUID SECURITIES

         Restricted  securities are  securities  subject to legal or contractual
restrictions  on their resale,  such as private  placements.  Such  restrictions
might  prevent  the sale of  restricted  securities  at a time when  sale  would
otherwise be desirable. No securities for which there is not a readily available
market ("illiquid assets") will be acquired by any Portfolio if such acquisition
would  cause  the  aggregate  value of  illiquid  assets  to  exceed  10% of the
Portfolio's net assets. Time deposits and repurchase agreements maturing in more
than seven days are also considered illiquid.

         Under SEC  regulations,  certain  securities  acquired  through private
placements can be traded freely among qualified  purchasers.  The SEC has stated
that an investment  company's  board of  directors,  or its  investment  adviser
acting under  authority  delegated by the board,  may determine  that a security
eligible for trading under this rule is not "illiquid" for purposes of the limit
on the amount of a  portfolio's  net assets  which may be  invested  in illiquid
assets.  The Fund intends to rely on this rule,  to the extent  appropriate,  to
deem specific  securities  acquired through private placement as not "illiquid."
The Board has  delegated  to the  adviser  the  responsibility  for  determining
whether a particular  security eligible for trading under this rule is illiquid.
In making such  determinations,  the adviser will consider the following factors
the Board has deemed relevant: the frequency of trades and quotes, the number of
dealers and potential purchasers, the existence of dealer undertakings to make a
market, and the nature of the security and of marketplace  trades. The adviser's
consideration of these factors and determination  that a particular  security is
liquid  remains  subject to the  Board's  continuing  oversight.  The Board also
reviews at least annually the continuing appropriateness of these procedures.

         Investing  in  securities  eligible  for trading  under this Rule could
adversely affect the liquidity of a Portfolio,  if the newly-developing  markets
among qualified purchasers for such securities do not develop as anticipated, or
if  such  purchasers  become,  for a  time,  uninterested  in  purchasing  these
securities.

OPTIONS AND FUTURES; FORWARD CURRENCY EXCHANGE CONTRACTS

         The  Portfolios  may use  options to attempt to enhance  income and may
also use options and futures contracts for hedging  purposes.  The International
Portfolio may also use forward  currency  contracts  for hedging  purposes or to
attempt to enhance income.

         The  Portfolios  may  purchase  and sell call and put  options  on bond
indices and on  securities  in which the  Portfolio is  authorized to invest for
hedging purposes or to enhance income. The Portfolios may also purchase and sell
interest rate and bond index futures  contracts and options  thereon for hedging
purposes. In addition, the Portfolios may purchase and sell covered straddles on
options on  securities  or bond  indices or on  options on futures  contract  on
securities or bond

                                       18

<PAGE>


indices.  The  International  Portfolio  may  also  purchase and  sell  covered
straddles on currency options or on options on currency futures.

         The International  Portfolio may enter into forward currency  contracts
for the  purchase  or sale of a specified  currency  at a specified  future date
either with respect to specified  transactions  or with respect to its portfolio
positions.  For  example,  when  Western  Asset  anticipates  making a  currency
exchange transaction in connection with the purchase or sale of a security,  the
International  Portfolio  may enter into a forward  contract in order to set the
exchange rate at which the transaction will be made. The International Portfolio
may enter  into a  forward  contract  to sell an  amount  of a foreign  currency
approximating the value of some or all of its security positions  denominated in
such currency.  It may also engage in  cross-hedging by using a forward contract
in one  currency  to hedge  against  fluctuations  in the  value  of  securities
denominated  in a  different  currency.  The  purpose of these  contracts  is to
minimize  the risk to the  Portfolio  from adverse  changes in the  relationship
between two currencies.

         The International Portfolio may also purchase and sell foreign currency
futures  contracts,  options thereon and options on foreign  currencies to hedge
against the risk of  fluctuations  in the market value of foreign  securities it
holds or intends to purchase,  resulting from changes in foreign exchange rates.
The Portfolio may also purchase and sell options on foreign  currencies  and use
forward currency contracts to enhance income.

         Many  options  on  debt   securities   are  traded   primarily  on  the
over-the-counter ("OTC") market. OTC options differ from exchange-traded options
in that the former are two-party contracts with price and other terms negotiated
between buyer and seller and  generally do not have as much market  liquidity as
exchange-traded  options.  Thus,  when a Portfolio  purchases an OTC option,  it
relies on the  dealer  from  which it has  purchased  the option to make or take
delivery of the securities underlying the option. Failure by the dealer to do so
would  result in the loss of the premium  paid by the  Portfolio  as well as the
loss of the expected benefit of the  transaction.  OTC options may be considered
"illiquid  securities" for purposes of the Portfolios'  investment  limitations.
Currency  options  traded on U.S. or other  exchanges may be subject to position
limits  which may limit the ability of a Portfolio  to reduce  foreign  currency
risk using such options.

         Most  futures  exchanges  and  boards  of trade  limit  the  amount  of
fluctuation  permitted in futures  contract prices during a single day; once the
daily limit has been  reached on a  particular  contract,  no trades may be made
that day at a price beyond that limit. In addition, certain of these instruments
are relatively new and without a significant trading history. As a result, there
is no  assurance  that an active  secondary  market will  develop or continue to
exist.  Lack of a liquid  market  for any reason may  prevent a  Portfolio  from
liquidating an unfavorable position, and the Portfolio would remain obligated to
meet  margin  requirements  until  the  position  is  closed.  Purchase  of such
instruments for which there is no liquid secondary market will be subject to the
Portfolio's investment limitation on "illiquid securities."

         Each Portfolio will establish  segregated accounts or maintain covering
positions when engaging in the above  strategies,  to the extent required by the
SEC and staff positions.  A Portfolio may write a call or put option only if the
option is  "covered."  A call option is covered if, so long as the  Portfolio is
obligated under the option, it will own an offsetting position in the underlying
security,  currency  or futures  contract,  or a right to obtain  the  security,
currency or futures contract. A put option is covered if the Portfolio maintains
in a segregated account with the Fund's custodian,  cash, or liquid high-quality
debt securities,  with a value sufficient to cover its potential obligations, as
marked to market daily.

                                       19

<PAGE>


         A Portfolio  will incur  brokerage fees and related  transaction  costs
when it purchases or sells futures  contracts and premiums and transaction costs
when it buys options.  When a Portfolio  purchases or sells a futures  contract,
the Portfolio is required to deposit with its custodian (or a broker, if legally
permitted) a specified amount of cash or U.S.  Government  securities  ("initial
margin").  A Portfolio  will not enter into  futures  contracts  or  commodities
option positions if,  immediately  thereafter,  its initial margin deposits plus
premiums  paid by it, less the amount by which any such  options  positions  are
"in-the-money" at the time of purchase, would exceed 5% of the fair market value
of the  Portfolio's  total  assets.  If a Portfolio  writes an option or sells a
futures  contract and is not able to close out that position prior to settlement
date, the Portfolio may be required to deliver cash or securities  substantially
in excess of these amounts.

         The Fund might not employ any of the strategies  described  above,  and
there can be no assurance  that any strategy  used will  succeed.  A Portfolio's
ability to engage in these  practices may be limited by market  conditions,  the
rules  and  regulations  of  the  Commodity  Futures  Trading  Commission,   tax
considerations and certain other legal  considerations.  Moreover,  in the event
that an anticipated change in the price of the securities or currencies that are
the subject of the  strategy  does not occur,  it may be that a Portfolio  would
have been in a better position had it not used that strategy at all.

RISKS OF FUTURES, OPTIONS AND FORWARD CONTRACTS

         The use of options,  futures and forward  currency  exchange  contracts
involves certain  investment risks and transaction costs to which the Portfolios
might not be subject if they did not use such  instruments.  These risks include
(1)  dependence on the adviser's  ability to predict  movements in the prices of
individual  securities,  fluctuations  in the general  securities  markets or in
market  sectors  and  movements  in interest  rates and  currency  markets;  (2)
imperfect  correlation  between  movements in the price of options,  currencies,
futures  contracts,  forward currency exchange  contracts or options thereon and
movements in the price of the securities or currencies hedged or used for cover;
(3) the fact  that  skills  and  techniques  needed  to trade  options,  futures
contracts and options thereon or to use forward currency exchange  contracts are
different  from those needed to select the  securities  in which the  Portfolios
invest;  (4) lack of assurance that a liquid secondary market will exist for any
particular  option,  futures  contract or option thereon at any particular time;
(5) the  possibility  that  the use of cover or  segregation  involving  a large
percentage  of a  Portfolio's  assets could impede  portfolio  management or the
Portfolio's ability to meet redemption requests or other short-term obligations;
and  (6) the  possible  need to  defer  closing  out  certain  options,  futures
contracts and options thereon in order to continue to qualify for the beneficial
tax  treatment  afforded  "regulated  investment  companies"  under the Internal
Revenue Code of 1986, as amended  ("Code") (see  "Additional Tax Information" in
the  Statement  of  Additional  Information).  The use of  options  and  forward
contracts for  speculative  purposes,  i.e., to enhance  income or to increase a
Portfolio's exposure to a particular security or foreign currency,  subjects the
Portfolio to additional  risk. The use of futures or forward  contracts to hedge
an anticipated purchase (other than a when-issued or delayed delivery purchase),
also subjects the  Portfolio to additional  risk until the purchase is completed
or the position is closed out.  Although the Portfolio  generally will not enter
into  such  anticipatory  hedges  without  the  expectation  of  completing  the
transaction,  it is only required to complete 75% of them. If the transaction is
not  completed,  the  risk  of the  anticipatory  hedge  is the  same  as if the
Portfolio had entered into the transaction for speculative purposes.

         The  Statement  of  Additional  Information  contains  a more  detailed
description of futures, options and forward strategies.

                                       20

<PAGE>


         New futures contracts, options thereon and other financial products and
risk  management  techniques  continue to be developed.  The  Portfolios may use
these  investments or techniques to the extent  consistent with their investment
objectives and regulatory and federal tax considerations.

FOREIGN CURRENCY EXCHANGE-RELATED SECURITIES

         The International  Portfolio may purchase various fixed income and debt
securities,  the return on which may be linked or indexed to  relative  exchange
rates  between the U.S.  dollar and a foreign  currency or currencies or between
foreign  currencies.  Western  Asset will base its decision for the Portfolio to
invest in any such  securities  on the same general  criteria  applicable to the
adviser's  decision for the  Portfolio  to invest in any fixed income  security,
including the Portfolio's minimum ratings and investment quality criteria,  with
the additional  element of foreign currency  exchange rate exposure added to the
adviser's analysis of interest rates and other factors.

CAPITAL APPRECIATION AND RISK

         The capital  appreciation  (or  depreciation) of fixed income and other
debt  securities  is  partially a function  of changes in the  current  level of
interest rates. An increase in interest rates generally reduces the market value
of existing fixed income and other debt securities,  while a decline in interest
rates  generally  increases the market value of such  securities.  When interest
rates are  falling,  a  Portfolio  with a shorter  maturity  generally  will not
generate as high a level of total return as a portfolio with a longer  maturity.
Conversely,  when interest rates are rising, a Portfolio with a shorter maturity
will generally  outperform longer maturity  portfolios.  When interest rates are
flat, shorter duration Portfolios generally will not generate as high a level of
total return as longer  maturity  portfolios  (assuming that long-term  interest
rates are higher than short-term rates, which is commonly the case).

         Changes in the  creditworthiness,  or the  market's  perception  of the
creditworthiness,  of the issuers of fixed income and other debt securities will
also  affect  their  prices.  The  market  value of  securities  denominated  in
currencies  other than the U.S. dollar will be affected  further by movements in
foreign  currency  exchange  rates that may result in  overall  appreciation  or
depreciation  of a security  regardless of the movement of interest rates in its
trading market.

PORTFOLIO TURNOVER

         The turnover  rate of the  International  Portfolio for the fiscal year
ended June 30, 1996 was 348.40%.  The Fund anticipates that the average turnover
rate of each Domestic  Portfolio  will not exceed 300%.  The portfolio  turnover
rate is  calculated  by dividing the lesser of the  Portfolio's  annual sales or
purchases of portfolio securities (exclusive of purchases or sales of securities
whose  maturities  at the  time of  acquisition  were  one  year or less) by the
average  market  value of the  securities  in the  Portfolio  during the year. A
Portfolio may frequently sell fixed income securities and buy ostensibly similar
securities to obtain yield and take advantage of changes in securities prices, a
practice  which  will  tend  to  increase  the  reported  turnover  rate  of the
Portfolio. The International Portfolio's turnover rate for the fiscal year ended
June 30, 1996 reflects the volatile nature of international  securities  markets
during such period.  High turnover  rates (100% or more) may result in increased
transaction costs and the realization of capital gains.  Trading in fixed income
securities does not generally involve the payment of brokerage commissions,  but
does involve indirect transaction costs. For more information on the taxation of
distributions  from a Portfolio's  capital gains,  see "Federal Tax Treatment of
Dividends and Other Distributions." Each Portfolio will take these possibilities
into account as part of its investment strategy.

                                       21

<PAGE>


                               PURCHASE OF SHARES

         Shares of the  Portfolios  described in this  Prospectus  are available
only  to  clients  maintaining  separate  accounts  with  Western  Asset  or its
affiliates, which will place all purchase orders for shares of the Portfolios on
behalf of such clients. Shares of each Portfolio are sold at the net asset value
next  determined  after a purchase  order in proper  form and payment in federal
funds are received by Boston Financial Data Services,  Inc. ("BFDS"), the Fund's
transfer and  dividend-disbursing  agent.  There is no sales charge.  Concurrent
with the initial purchase of shares in any Portfolio, Western Asset will open an
account with that Portfolio in the name of the client.

          Federal  funds  purchases  will be accepted  only on days on which the
Fund and BFDS are open for business. The Fund is "open for business" on each day
the New York Stock Exchange ("Exchange") is open for trading. In past years, the
Exchange has observed the following holidays:  New Year's Day,  Presidents' Day,
Good  Friday,  Memorial  Day,  Independence  Day,  Labor Day,  Thanksgiving  and
Christmas.

         Shares  may  also be  purchased  and paid  for by the  contribution  of
eligible  portfolio  securities,  subject  in  each  case  to  approval  by  the
Portfolio's adviser. Approval will depend on, among other things, the nature and
quality of the  securities  offered and the current  needs of the  Portfolio  in
question.  Securities  offered in payment  for shares will be valued in the same
way and at the same time the Fund values its portfolio  securities  for purposes
of determining net asset value.  See "How Net Asset Value is  Determined,"  page
23.  Investors  who wish to purchase  Fund shares  through the contribution  of
securities should contact the Fund at (818) 844-9400 for instructions. Investors
who purchase Fund shares through the  contribution of securities  should realize
that,  although  the Fund may  under  some circumstances  distribute  portfolio
securities rather than cash upon redemption, they are not likely to receive upon
redemption the same securities that they  contributed  upon purchase.  Investors
should also  realize  that at the time of  contribution  they may be required to
recognize  a gain or loss for  tax  purposes  on  securities  contributed.  The
Portfolio's  adviser will have full discretion to reject any securities  offered
as payment for shares.

         Certificates  for  shares  will  not  be  issued  unless   specifically
requested  in  writing.  There  is no  charge  for  certificates.  Requests  for
certificates should be addressed to the Fund.

         The Fund  reserves  the right to reject any order for the  purchase  of
shares. In addition, the Fund may suspend the offering of shares at any time and
resume it at any time thereafter.

                              REDEMPTION OF SHARES

         Subject  to the  terms  of each  private  account  client's  investment
management agreement with Western Asset Management Company, Portfolio shares may
be  redeemed  through  three  methods:  (1) by  sending  a written  request  for
redemption to Western Asset Trust, Inc., 117 East Colorado Boulevard,  Pasadena,
California  91105;  (2) by calling  the Fund at (818)  844-9400;  or (3) by wire
communication with BFDS. No charge is made for redemptions.

         Upon receipt of a request for  redemption  before the close of business
of the Exchange on any day when the Exchange is open,  BFDS,  as transfer  agent
for the Fund,  will  redeem  Portfolio  shares at the net asset  value per share
determined as of the close of the Exchange on that day.  Requests for redemption
received by the transfer  agent after the close of business on the Exchange will
be executed at the net asset value determined as of the close of the Exchange on
its next trading day.

                                       22

<PAGE>



         Requests for redemption should indicate:

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

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

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

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

         Shares may not be redeemed by telephone or wire if held in  certificate
form.  Contact the Fund for more  information.  The Fund  reserves  the right to
modify or terminate the redemption procedures upon notice to shareholders.

         Payment of the redemption  price normally will be made by wire the next
business day after receipt of a redemption request in good order.  However,  the
Fund  reserves  the right to  postpone  the  payment  date when the  Exchange is
closed,  when trading is  restricted,  or during  other  periods as permitted by
federal  securities  laws,  or to take up to  seven  days to make  payment  upon
redemption if, in the judgment of the adviser,  the Portfolio  involved could be
adversely  affected by immediate payment.  Share prices will fluctuate,  and the
proceeds of a redemption  or  repurchase  may be more or less than your original
cost.

         Shareholders of some investment  companies have experienced  difficulty
contacting  their funds by telephone  during periods of intense market activity.
Shareholders  who are unable to contact the Fund by telephone and wish to make a
redemption should follow the instructions for redeeming by mail or by wire.

         Other  supporting  legal  documents,   such  as  copies  of  the  trust
instrument  or power of attorney,  may be required  from  corporations  or other
organizations,  fiduciaries  or  persons  other than the  shareholder  of record
making  the  request  for  redemption  or  repurchase.  If you  have a  question
concerning  the sale or redemption of shares,  please  contact the Fund or State
Street.

                       HOW NET ASSET VALUE IS DETERMINED

         Net asset value per share is determined for each Portfolio  daily as of
the close of regular trading on the Exchange (normally 4:00 p.m., Eastern Time),
on every day that the Exchange is open, by subtracting a Portfolio's liabilities
from  its  total  assets  and  dividing  the  result  by the  number  of  shares
outstanding.  Portfolio  securities are valued on the basis of market quotations
or at fair value as  determined  under the  guidance of the Board of  Directors.
Most  securities  held by the Portfolios are valued at fair value,  primarily on
the basis of  valuations  furnished by a pricing  service  which  utilizes  both
dealer-supplied  valuations and electronic data processing techniques which take
into account appropriate factors such as  institutional-size  trading in similar
groups of securities,  yield,  quality,  coupon rate,  maturity,  type of issue,
trading  characteristics and other data.  Securities for which market quotations
are  readily  available  are  valued  at the  last  sale  price of the day for a
comparable  position,  or, in the absence of any such sales,  the last available
bid price for

                                       23

<PAGE>


a comparable position. 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.  Securities with remaining
maturities of 60 days or less are valued at amortized  cost.  The International
Portfolio  values its  foreign  securities  in U.S.  dollars on the basis of the
then-prevailing exchange rates.

                       DIVIDENDS AND OTHER DISTRIBUTIONS

         Each Portfolio  declares and pays a dividend  following the end of each
calendar  quarter out of its net investment  income for that quarter.  Each will
also  make an  annual  distribution  of any net  capital  gain  (the  excess  of
long-term  capital gain over short-term  capital loss),  net short-term  capital
gain,  and,  in the case of the  International  Portfolio,  gains  from  certain
foreign   currency   transactions.   The   Portfolios  may  make  an  additional
distribution  if  necessary  to avoid a 4% excise tax on  certain  undistributed
income  and  capital  gain.  Dividends  paid by a  Portfolio  are  automatically
reinvested in additional shares of that Portfolio,  unless the investor requests
payments in cash.

         An election to receive dividends or other  distributions in cash rather
than  additional  shares may be made by notifying BFDS in writing.  The election
must be  received  at least  ten days  before  the  payment  date in order to be
effective for distributions paid as of that date.

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

           FEDERAL TAX TREATMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS

         Each Portfolio is treated as a separate  corporation for federal income
tax purposes.  Each Domestic Portfolio intends to qualify, and the International
Portfolio  intends to  continue to qualify,  as a regulated  investment  company
("RIC")  under the Code so that it will not be subject to federal  income tax on
that part of its investment company taxable income (consisting  generally of net
investment income, net gains from certain foreign currency  transactions and net
short-term  capital  gain,  if any) and any net capital  gain (the excess of net
long-term capital gain over net short-term  capital loss) that is distributed to
its shareholders.

         Dividends from a Portfolio's investment company taxable income (whether
paid in cash or reinvested in Portfolio  shares) are taxable to its shareholders
(other  than  tax-exempt  investors)  as  ordinary  income to the  extent of the
Portfolio's  earnings and profits.  Distributions  of a Portfolio's  net capital
gain, when  designated as such,  whether paid in cash or reinvested in Portfolio
shares, are taxable to its shareholders as long-term capital gain, regardless of
how long they have held their shares.

         A  Portfolio  will be subject to a  nondeductible  4% excise tax to the
extent it does not 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.
Each  Portfolio  intends  to make  distributions  in  amounts  that  will  avoid
imposition of the excise tax.

         Each Portfolio sends a notice to each of its shareholders following the
end of each calendar  year  specifying  the amounts of all income  dividends and
capital  gain  distributions  paid (or  deemed  paid)  during  that  year.  Each
Portfolio is required to withhold 31% of all dividends, capital gain

                                       24

<PAGE>


distributions  and redemption  proceeds  payable to any  individuals and certain
other noncorporate  shareholders who do not provide the Portfolio with a correct
taxpayer   identification   number  or  who  otherwise  are  subject  to  backup
withholding.

         A  redemption  of  shares  may  result in  taxable  gain or loss to the
redeeming shareholder,  depending on whether the redemption proceeds are more or
less than the shareholder's adjusted basis for the redeemed shares.

         The  requirements  for  qualification  as a RIC may limit the extent to
which a Portfolio  will be able to engage in  transactions  in options,  futures
contracts or forward contracts.

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

         If more than 50% of the value of the  International  Portfolio's  total
assets at the close of its  taxable  year  consists  of  securities  of  foreign
corporations,  the  Portfolio  will be  eligible  to, and  expects  to,  file an
election  with the  Internal  Revenue  Service  that  will  enable  its  taxable
shareholders,  in effect,  to receive the benefit of the foreign tax credit with
respect to certain foreign and U.S. possessions income taxes that may be paid by
the Portfolio. Pursuant to the election, the Portfolio will treat those taxes as
dividends paid to its  shareholders and each shareholder will be required to (1)
include  in  gross  income,  and  treat  as  paid  by  him  or  her,  his or her
proportionate  share of those taxes, (2) treat his or her share of those taxes
and any dividend paid by the Portfolio  that  represents  income from foreign or
U.S.  possessions  sources as his or her own income  from those  sources and (3)
either  deduct  the  taxes deemed  paid by him or her in  computing  his or her
taxable income or, alternatively,  use the foregoing information in calculating
the foreign tax credit  against his or her federal  income tax.  Not all foreign
taxes may be deductible or creditable, however, because the Portfolio may invest
in securities of companies  that are located in countries  that impose taxes for
which a  federal  income  tax  deduction  or  credit  is not  available.  If the
Portfolio  makes the  described  election,  it will  report to its  shareholders
shortly  after each  taxable  year their  respective  shares of the  Portfolio's
income  from  sources  within,  and taxes paid to,  foreign  countries  and U.S.
possessions.  There can be no assurance,  however,  that the  Portfolio  will be
eligible to make such an election.

         The  foregoing is only a summary of some of the  important  federal tax
considerations  generally affecting the Portfolios and their  shareholders;  see
the Statement of Additional Information for a further discussion. In addition to
the federal tax  considerations  described  above,  which are  applicable to any
investment  in a  Portfolio,  there  may be other  federal,  state or local  tax
considerations applicable to a particular investor. Prospective shareholders are
urged to  consult  their  tax  advisers  with  respect  to the  effects  of this
investment on their own tax situations.

                             MANAGEMENT OF THE FUND

THE FUND'S INVESTMENT ADVISER

         The business and affairs of the Fund are managed under the direction of
its Board of Directors.  Pursuant to an investment  advisory and  administration
agreement with the Fund

                                       25

<PAGE>

("Advisory  Agreement"),  which was approved by the Fund's  Board of  Directors,
Western Asset serves as investment  adviser and portfolio manager for all of the
Portfolios and is responsible  for the day-to-day  investment  management of the
assets of the Portfolios,  including the responsibility for making decisions and
placing orders to buy, sell or hold a particular security.

         Western Asset renders investment advice to fourteen open-end investment
company  portfolios  and one  closed-end  investment  company which together had
assets under management of approximately  $3.7 billion as of September 30, 1996.
Western  Asset also renders  investment  advice to private  accounts  with fixed
income assets under management of  approximately  $18.9 billion as of that date.
Western Asset is a subsidiary of Legg Mason,  Inc., a financial services holding
company,  which is also the parent of Legg Mason Fund Adviser,  Inc. The address
of Western Asset is 117 East Colorado Boulevard, Pasadena, California 91105.

         Western Asset's International  Investment Strategy Group is responsible
for the day-to-day management of the International Portfolio. The Group has held
such responsibility since December 31, 1994.

         Portfolio managers have not been appointed for the Domestic Portfolios,
which have not commenced  operations (i.e. first begun to invest their assets in
accordance with their investment objectives) as of the date of this Prospectus.

THE FUND'S ADMINISTRATOR

         Legg Mason Fund Adviser, Inc., the Administrator,  serves as the Fund's
administrator,  pursuant to administration  agreements with Western Asset, which
were approved by the Fund's Board of Directors ("Administration Agreement"). The
Administrator  manages the  non-investment affairs of the Fund, directs matters
related  to  the   operation  of  the  Fund and   provides   office  space  and
administrative staff for the Fund. The Administrator acts as manager, investment
adviser or consultant to nine other open-end  investment  companies with a total
of seventeen  portfolios and to one closed-end  investment company.  These funds
had aggregate  assets under management of about $6.0 billion as of September 30,
1996.  The  Administrator's address  is 111 South  Calvert  Street,  Baltimore,
Maryland 21202.

MANAGEMENT AND OTHER EXPENSES

         For  services  under its  management  agreement,  each of the  Domestic
Portfolios pays Western Asset a fee,  computed daily and payable monthly,  at an
annual rate equal to .175% of the Portfolio's average daily net assets, of which
 .150%  is  retained  as a  management  fee and  .025%  is paid  pursuant  to the
Administration  Agreement.  For services  under its  management  agreement,  the
International  Portfolio is obligated to pay Western Asset a fee, computed daily
and payable monthly, at an annual rate equal to .475% of the Portfolio's average
daily net assets. However,  Western Asset has waived a portion of such fees. See
"Expense Limitation," page 27. For services under the Administration Agreements,
Western Asset (not the Fund) pays the Administrator a fee,  calculated daily and
payable  monthly,  at an annual  rate  equal to .025% of the  average  daily net
assets of each  Domestic  Portfolio,  and an annual rate of .075% of the average
net assets of the International Portfolio.

         Each Portfolio pays all its other expenses which are not assumed by its
adviser or the Administrator.  These expenses include, among others, expenses of
preparing and printing prospectuses, statements of additional information, proxy
statements and reports and of distributing

                                       26

<PAGE>


them  to  existing  shareholders, custodian  charges,  transfer  agency  fees,
organizational  expenses, compensation of the directors who are not "interested
persons" of the adviser, Administrator or Distributor as that term is defined in
the  Investment  Company Act,  legal and audit  expenses,  insurance  expenses,
expenses of registering and  qualifying  shares of the Portfolio for sale under
federal and state law, distribution fees,  governmental fees, expenses incurred
in connection  with membership in investment  company  organizations,  interest
expense,  taxes and brokerage  fees and  commissions.  The  Portfolios  also are
liable for such nonrecurring  expenses as may arise,  including  litigation  to
which a Portfolio  or the  Fund may be a  party.  The  Fund  may  also  have an
obligation to indemnify its directors and officers with respect to litigation.

         EXPENSE  LIMITATION.  Western Asset has voluntarily agreed to waive its
fees or reimburse each of the Domestic  Portfolios to the extent the Portfolio's
expenses (exclusive of taxes, interest, brokerage and other transaction expenses
and any  extraordinary  expenses)  exceed during any month an annual  percentage
rate equal to .25% of the  Portfolio's  average  daily net  assets,  and Western
Asset has  voluntarily  agreed to waive its fees or reimburse the  International
Portfolio to the extent that Portfolio's expenses (exclusive of taxes, interest,
brokerage and other transaction expenses and any extraordinary  expenses) exceed
during any month an annual  percentage  rate  equal to .85% of that  Portfolio's
average  daily net assets.  These  waiver and  reimbursement  agreements  are in
effect until June 30, 1997. In addition,  Western Asset has  voluntarily  waived
for  calendar  year  1996  all of its  fees for  services  to the  International
Portfolio  under its  management  agreement,  other than the portion of such fee
equal to the fee paid by Western Asset to the  Administrator  (at an annual rate
of .075% of average  net assets) for  services  to the  International  Portfolio
under the Administration Agreement.

         A Portfolio  may  reimburse  its adviser for fees  foregone or expenses
reimbursed by them pursuant to the expense limitation if expenses fall below the
limit prior to the end of the fiscal year.

THE FUND'S DISTRIBUTOR

         Legg Mason Wood Walker,  Incorporated  ("Distributor") is authorized to
distribute the Portfolios' shares pursuant to an underwriting agreement with the
Fund which was  approved by the Board of Directors  ("Underwriting  Agreement").
The Distributor or its affiliates is obligated to pay all expenses in connection
with the offering of Fund shares,  including any  compensation to its investment
brokers, the printing and distribution of prospectuses, statements of additional
information  and  periodic  reports  used in  connection  with the  offering  to
prospective  investors,  after the  prospectuses  and  statements  of additional
information have been prepared,  set in type and mailed to existing shareholders
at the Fund's expense,  and for  supplementary  sales literature and advertising
costs. The Distributor  receives no direct  compensation from the Fund for these
expenses. The Distributor is a wholly owned subsidiary of Legg Mason, Inc.

         Arroyo Seco Inc.  ("Arroyo  Seco"),  a wholly owned  subsidiary  of the
Adviser,  is  also  authorized  to  offer  the  Fund's  shares  for  sale to its
customers.  The Fund makes no  payments to Arroyo  Seco in  connection  with the
offer or sale of the  Fund's  shares,  and  Arroyo  Seco  does not  collect  any
commissions or other fees from customers in connection with the offer or sale of
the Fund's shares.

                                       27

<PAGE>


THE FUND'S CUSTODIAN AND TRANSFER AGENT

         State  Street  Bank  and  Trust  Company  ("State  Street")  serves  as
custodian  of the  Fund's  assets  and BFDS  serves  as its  transfer  agent and
dividend  disbursing  agent.  The  duties  of  State  Street  and  BFDS  include
processing  requests for the  purchase or  redemption  of shares and  performing
other administrative services on behalf of the Fund.

         Pursuant to rules adopted under Section 17(f) of the Investment Company
Act, the International Portfolio may maintain foreign securities and cash in the
custody of certain eligible foreign banks and securities depositories. Selection
of these  foreign  custodial  institutions  is made by the Board of Directors in
accordance  with SEC rules.  The Board of  Directors  will  consider a number of
factors,  including,  but not limited to, the relationship of the institution to
State Street,  the reliability and financial  stability of the institution,  the
ability of the institution to capably perform  custodial  services for the Fund,
the  reputation of the  institution  in its national  market,  the political and
economic stability of the countries in which the sub-custodians  will be located
and risks of potential  nationalization  or  expropriation  of Fund  assets.  No
assurance  can be given that the Board of  Directors'  appraisal of the risks in
connection with foreign  custodial  arrangements  will always be correct or that
expropriation, nationalization, freezes, or confiscation of Fund assets will not
occur.


                               OTHER INFORMATION

DESCRIPTION OF THE FUND

         The Fund may establish  additional  Portfolios in the future.  The Fund
has authorized  capital of a total of five billion shares of common stock at par
value $0.001. Each of the Portfolios  described herein has an initial authorized
capital of one billion shares.  All shares are the same class, and each share is
entitled to one vote on any matter submitted to a shareholder  vote.  Fractional
shares have fractional voting rights.  Voting rights are not cumulative.  Voting
on matters pertinent only to a particular Portfolio,  such as the adoption of an
investment advisory contract for that Portfolio,  is limited to that Portfolio's
shareholders.  All shares of the Fund are fully paid and  nonassessable and have
no preemptive or conversion rights.


         Although the Fund does not intend to hold annual shareholder  meetings,
it will hold a special meeting of shareholders  when the Investment  Company Act
requires a  shareholder  vote on certain  matters  (including  the  election  of
directors  or  approval  of an  advisory  contract).  The Fund  will also call a
special  meeting  of  shareholders  at the  request of 25% or more of the shares
entitled to vote  thereat,  or, as required by the Act, at the request of 10% of
the  shareholders  for the  purpose of  considering  the  removal of one or more
directors.  Shareholders  wishing to call such a meeting should submit a written
request to the Fund at 117 East  Colorado  Blvd.,  Pasadena,  California  91105,
stating the purpose of the proposed meeting and the matters to be acted upon.

         Prior to the initial  public  offering  of a  Portfolio's  shares,  the
Adviser will be the sole shareholder of each Portfolio and is thus a controlling
person, as that term is defined in the 1940 Act, of each Portfolio.

                                       28

<PAGE>


CONFIRMATIONS AND REPORTS

         BFDS will send to each  shareholder or its agent monthly  confirmations
showing all  purchases  and  redemptions  of shares made,  and all dividends and
other  distributions  paid,  during the previous month.  Reports will be sent to
shareholders  or  their  agents  at  least   semiannually   showing  the  Fund's
investments  and  other  information.  Shareholders  or their  agents  will also
receive each year an annual report containing  financial  statements  audited by
the Fund's independent accountants.

         Shareholder inquiries should be addressed to "Western Asset Trust,
Inc., 117 East Colorado Blvd., Pasadena, California 91105."

PERFORMANCE INFORMATION

         From  time to time,  each  Portfolio  may  quote  its  total  return in
marketing  materials or in reports or other  communications  to shareholders.  A
mutual fund's "total  return" is a measurement  of the overall  change in value,
including  changes in share price and assuming  reinvestment  of  dividends  and
capital gain  distributions,  of an  investment in the fund.  "Cumulative  total
return"  shows a fund's  performance  over a specific  period of time.  "Average
annual total  return" is the average  annual  compounded  return that would have
produced the same  cumulative  total return if the fund's  performance  had been
constant over the entire period.  Because  average annual returns tend to smooth
out variations in a fund's return, they differ from actual year-by-year results.

         Investors  should  consider all  performance  information in light of a
Portfolio's investment objectives and policies, characteristics of the Portfolio
and the existing market conditions during the time period indicated. Performance
information is based on historical  performance only and should not be viewed as
representative of the Portfolio's future performance.  The investment return and
principal  value of an  investment  in a  Portfolio  will  fluctuate  so that an
investor's shares, when redeemed,  may be worth more or less than their original
cost.

         Performance  information  for a  Portfolio  may be  compared to various
unmanaged  indices,  such as the Salomon  Brothers  Corporate Index, the Salomon
Brothers Mortgage Index and the Salomon Brothers World Government Bond Index (Ex
U.S.). Such indices of securities prices generally do not reflect deductions for
administrative and management costs and expenses.

                                       29

<PAGE>



                                    APPENDIX

         The Fund may use the following hedging instruments:

         Options on Debt Securities and Foreign  Currencies - A call option is a
short-term contract pursuant to which the purchaser of the option, in return for
a premium,  has the right to buy the security or currency  underlying the option
at a specified  price at any time  during the term of the option.  The writer of
the call option, who receives the premium, has the obligation,  upon exercise of
the option  during the  option  term,  to deliver  the  underlying  security  or
currency  against  payment  of the  exercise  price.  A put  option is a similar
contract that gives its  purchaser,  in return for a premium,  the right to sell
the underlying security or currency at a specified price during the option term.
The writer of the put option, who receives the premium, has the obligation, upon
exercise of the option during the option term, to buy the underlying security or
currency at the exercise price.

         Interest Rate and Foreign  Currency  Futures  Contracts - Interest rate
and foreign  currency  futures  contracts are bilateral  agreements  pursuant to
which one party agrees to make,  and the other party agrees to accept,  delivery
of a specified type of debt security or currency at a specified  future time and
at a specified  price.  Although such futures  contracts by their terms call for
actual delivery or acceptance of debt securities or currency,  in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery.

         Options on Futures Contracts - Options on futures contracts are similar
to  options  on  securities  or  currency,  except  that an  option on a futures
contract gives the purchaser the right,  in return for the premium,  to assume a
position in a futures  contract  (a long  position if the option is a call and a
short  position  if the  option is a put),  rather  than to  purchase  or sell a
security or currency,  at a specified  price at any time during the option term.
Upon exercise of the option,  the delivery of the futures position to the holder
of the option will be  accompanied by delivery of the  accumulated  balance that
represents the amount by which the market price of the futures contract exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the future. The writer of an option, upon exercise, will assume
a short position in the case of a call and a long position in the case of a put.

         Forward Currency  Contracts - A forward currency  contract  involves an
obligation to purchase or sell a specific  currency at a specified  future date,
which may be any fixed number of days from the contract  date agreed upon by the
parties, at a price set at the time the contract is entered into.

                                       30

<PAGE>


Investment Adviser
         Western Asset Management Company
         117 East Colorado Boulevard
         Pasadena, CA  91105

Administrator
         Legg Mason Fund Adviser, Inc.
         111 South Calvert Street
         Baltimore, MD  21202

Distributors
         Legg Mason Wood Walker, Inc.
         111 South Calvert Street
         Baltimore, MD 21202

         Arroyo Seco, Inc.
         117 East Colorado Boulevard
         Pasadena, CA 91105

Custodian
         State Street Bank & Trust Company
         P.O. Box 1790
         Boston, MA  02105

Transfer Agent
         Boston Financial Data Services, Inc
         P.O. Box 953
         Boston, MA  02103

Independent Accountants
         Price Waterhouse LLP
         7 St. Paul Street
         Baltimore, MD  21202

Legal Counsel
         Munger, Tolles & Olson
         355 South Grand Avenue, 35th Floor
         Los Angeles, CA 90071-1560


Prospectus

October 30, 1996


<PAGE>


                           WESTERN ASSET TRUST, INC.
                         Corporate Securities Portfolio
                         Mortgage Securities Portfolio
                       International Securities Portfolio

                      STATEMENT OF ADDITIONAL INFORMATION


         Western Asset Trust,  Inc. ("Fund") is a no-load,  open-end  management
investment company currently consisting of nine separate  professionally managed
investment portfolios.  Each of the three Portfolios described in this Statement
of Additional Information  ("Portfolios") seeks maximum total return, consistent
with prudent investment  management by investing  primarily in securities of the
types  specified  for that  Portfolio.  The  Portfolios  differ from one another
primarily in the  proportion of assets  invested in certain types of securities.
Also, the Corporate  Securities and Mortgage  Securities  Portfolios  ("Domestic
Portfolios")  are  diversified   Portfolios.   The  International  Portfolio  is
non-diversified.

         This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus for the Portfolios, dated October 30,
1996, which has been filed with the Securities and Exchange  Commission ("SEC").
Copies of the Fund's  Prospectus  are available  without charge from the Fund at
(818) 844-9400.



Dated: October 30, 1996


<PAGE>

                               TABLE OF CONTENTS


                                                                       Page


Additional Information About Investment Limitations and Policies         3

Valuation of Portfolio Shares                                           21

Management of the Fund                                                  21

Principal Holders of Securities                                         27

Purchases and Redemptions                                               28

Portfolio Transactions and Brokerage                                    29

Additional Tax Information                                              30

Other Information                                                       32

Financial Statements                                                    34

Appendix A - Ratings of Securities                                      A-1

                                       2

<PAGE>

        ADDITIONAL INFORMATION ABOUT INVESTMENT LIMITATIONS AND POLICIES


         In addition to the investment  objective of each Portfolio described in
the Prospectus,  the Fund has adopted certain fundamental investment limitations
for each  Portfolio  that  cannot be changed  except by vote of the holders of a
majority of the  outstanding  voting  securities of the affected  Portfolio.  No
Portfolio may:

         1. Borrow money or issue senior securities, except that a Portfolio may
borrow from banks or enter into reverse repurchase  agreements and dollar rolls,
provided that,  immediately  after such borrowing,  the total amount borrowed by
the Portfolio,  including reverse  repurchase  agreements and dollar rolls, does
not exceed 33 1/3% of its total  assets  (including  the amount  borrowed)  less
liabilities (other than the borrowings); and provided further that any Portfolio
may enter into transactions in options,  futures, options on futures and forward
foreign currency contracts;

         2. Mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness,  any securities owned or held by the Portfolio,  except as may
be  necessary  in  connection  with  permitted  borrowings,  provided  that this
limitation  does not  prohibit  escrow,  collateral  or margin  arrangements  in
connection with the Portfolio's use of options,  futures  contracts,  options on
futures contracts,  forward foreign currency contracts,  when-issued securities,
reverse repurchase agreements, dollar rolls, or similar investment techniques;

         3. Invest more than 5% of its total assets  (taken at market  value) in
securities  of any one issuer,  or buy 10% or more of all the  securities of any
one issuer,  except that up to 25% of a Domestic Portfolio's total assets and up
to 50% of the  International  Portfolio's  total assets may be invested  without
regard to this  limitation,  and provided that this limitation does not apply to
securities  issued  or  guaranteed  by the U.S.  Government,  its  agencies  and
instrumentalities;

         4. Purchase  securities  on  margin,  except  for  short-term  credits
necessary  for clearance of Portfolio  transactions  and except that a Portfolio
may  make  margin  deposits  in  connection  with  its use of  options,  futures
contracts, options on futures contracts and forward foreign currency contracts;

         5. Invest 25% or more of its total  assets  (taken at market  value) in
any one  industry,  provided that this  limitation  does not apply to securities
issued or guaranteed by the U.S. Government,  its agencies or instrumentalities,
or repurchase  agreements thereon.  The Mortgage Securities Portfolio will under
normal circumstances invest more than 25% of its total assets in mortgage-backed
and other  asset-backed  securities  (including,  for this  purpose,  securities
issued or guaranteed by the U.S. Government, its agencies and instrumentalities,
and repurchase agreements with respect thereto);

         6. Purchase or sell commodities or commodity  contracts,  except that a
Portfolio may purchase or sell futures on securities  and bond indices,  options
on the foregoing,  and options on securities  and bond indices;  and except that
the  International  Securities  Portfolio  may also  purchase  and sell  foreign
currencies,  forward foreign currency contracts,  options and futures on foreign
currencies and options on such futures;

         7. Underwrite securities of other issuers, except to the extent that,
in connection with the disposition of portfolio securities, a Portfolio may be
deemed an underwriter under the federal securities laws;

                                       3

<PAGE>



         8. Make loans,  except loans of portfolio  securities and except to the
extent that the  purchase of an issue of debt  securities,  other  evidences  of
indebtedness  or deposits  with banks and other  financial  institutions  may be
considered loans;

         9.  Purchase or sell real estate or  interests  in real estate  limited
partnerships,  provided that a Portfolio may invest in securities secured by, or
issued by companies that invest in, real estate or interests therein,  including
real estate investment trusts; or

         10. Invest in oil, gas or mineral-related  programs or leases, provided
that a Portfolio  may invest in  securities  issued by companies  that engage in
such activities.

         The  foregoing  investment  limitations  cannot be changed  without the
affirmative vote of the lesser of (1) more than 50% of the outstanding shares of
the  affected  Portfolio  or (2)  67% or  more  of the  shares  of the  affected
Portfolio present at a shareholders' meeting if more than 50% of the outstanding
shares of that  Portfolio are  represented at the meeting in person or by proxy.
Except  with  respect  to  investment  limitation  number  1,  if  a  percentage
restriction is adhered to at the time of an investment or  transaction,  a later
increase  or  decrease  in  percentage  resulting  from a change in the value of
portfolio  securities  or  amount  of  total  assets  will not be  considered  a
violation of any of the foregoing limitations.

         Except as otherwise specified,  the investment limitations and policies
which follow may be changed by the Fund's Board of Directors without shareholder
approval.

Ratings of Debt Obligations

         Moody's Investors Service, Inc. ("Moody's"),  Standard & Poor's ("S&P")
and other  nationally  recognized or foreign  statistical  rating  organizations
("SROs") are private organizations that provide ratings of the credit quality of
debt  obligations.  A  description  of the ratings  assigned to  corporate  debt
obligations  by Moody's and S&P is  included  in  Appendix  A. A  Portfolio  may
consider  these  ratings  in  determining  whether to  purchase,  sell or hold a
security.  Ratings  are  not  absolute  assurances  of  quality.   Consequently,
securities  with the same maturity,  interest rate and rating may have different
market  prices.  Credit  rating  agencies  attempt  to  evaluate  the  safety of
principal and interest payments and do not evaluate the risks of fluctuations in
market value.  Also,  rating  agencies may fail to make timely changes in credit
ratings in response to subsequent  events, so that an issuer's current financial
condition  may be better or worse than the rating  indicates.  Subsequent to its
purchase by a  Portfolio,  an issue of  securities  may cease to be rated or its
rating may be reduced  below the minimum  rating  required  for  purchase by the
Portfolio.  Western Asset Management Company ("Western  Asset"),  adviser to the
Portfolios,  will  consider such an event in  determining  whether the Portfolio
should continue to hold the obligation.

Mortgage-Related Securities

         Mortgage-related securities represent participations in, or are secured
by and payable from,  mortgage loans secured by real property.  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 the  Portfolios.  Many
issuers or poolers  provide  guarantees  of payments,  regardless of whether the
mortgagor  actually  makes the  payment.  These  guarantees  are often backed by
various forms of credit,  insurance  and  collateral,  although  these may be in
amounts less than the full obligation of the pool to its shareholders.

                                       4

<PAGE>



         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.  In addition to  fixed-rate,  fixed-term
mortgages,  the  Portfolios  may  purchase  pools  of  variable-rate  mortgages,
growing-equity mortgages, graduated-payment mortgages and other types.

         All poolers apply standards for  qualification to lending  institutions
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  average  life  of  mortgage-related  securities  varies  with  the
maturities and the nature of the underlying mortgage  instruments.  For example,
securities issued by the Government National Mortgage Association ("GNMAs") tend
to have a longer average life than participation  certificates ("PCs") issued by
the Federal Home Loan Mortgage Corporation ("FHLMC") because there is a tendency
for the conventional  and  privately-insured  mortgages  underlying FHLMC PCs to
repay at faster  rates than the  Federal  Housing  Administration  and  Veterans
Administration  loans underlying GNMAs. In addition,  the term of a security may
be shortened by  unscheduled  or early payments of principal and interest on the
underlying  mortgages.  The  occurrence of mortgage  prepayments  is affected by
factors including the level of interest rates, general economic conditions,  the
location and age of the mortgage and other social and demographic conditions.

         Yields on mortgage-related securities are typically quoted based on the
maturity  of  the  underlying   instruments  and  the  associated  average  life
assumption.  Actual prepayment experience may cause the yield to differ from the
yield  expected  on the basis of  average  life.  The  compounding  effect  from
reinvestments of monthly  payments  received by each Portfolio will increase the
yield to shareholders compared to bonds that pay interest semi-annually.

Private Mortgage-Related Securities

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

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

Asset-Backed Securities

         Asset-backed securities are structurally similar to mortgage-backed
securities, but are secured by interests in a different type of receivable.
Asset-backed securities therefore present


                                       5

<PAGE>



certain  risks that are not  presented by  mortgage-related  debt  securities or
other  securities in which the Fund may invest.  Primarily,  these securities do
not have the benefit of the same  security  interest in the related  collateral.
Credit card receivables 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
related  automobile  receivables.  In  addition,  because of the large number of
vehicles involved in a typical issuance and technical  requirements  under state
laws,  the trustee for the holders of the  automobile  receivables  may not have
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.

Non-Governmental Fixed Income and Other Debt Securities

         A  Portfolio's  investments  in  U.S.   dollar-denominated  or  foreign
currency-denominated  fixed income and other debt securities of non-governmental
domestic or foreign issuers are limited to fixed income or other debt securities
(bonds, debentures,  notes and other similar instruments) which meet the minimum
ratings criteria set forth for the Portfolio or, if unrated,  are judged by that
Portfolio's  adviser to be of  comparable  quality to fixed income or other debt
securities in which the  Portfolio  may invest.  The rate of return or return of
principal on some  obligations may be linked or indexed to the level of exchange
rates between the U.S. dollar and a foreign currency or currencies.

         Where one rating  organization  has assigned an investment grade rating
to an instrument and others have given it a lower rating,  the Fund may consider
the instrument to be investment grade. The market for lower-rated securities may
be thinner  and less  active than that for  higher-rated  securities,  which can
adversely  affect the prices at which these securities can be sold, and may make
it  difficult  for a Portfolio  to obtain  market  quotations  daily.  If market
quotations are not available,  these  securities will be valued by a method that
the Fund's Board of Directors  believes  accurately  reflects fair market value.
Judgment may play a greater role in valuing  lower-rated debt securities than is
the case  with  respect  to  securities  for  which a  broader  range of  dealer
quotations and last-sale information are available.

         Although the prices of  lower-rated  bonds are generally less sensitive
to interest rate changes than are higher-rated  bonds, the prices of lower-rated
bonds  may be more  sensitive  to  adverse  economic  changes  and  developments
regarding  the  individual  issuer.  Although  the market for  lower-rated  debt
securities  is not  new,  and  the  market  has  previously  weathered  economic
downturns,  there has been in recent years a substantial  increase in the use of
such securities to fund corporate acquisitions and restructurings.  Accordingly,
the past  performance  of the market for such  securities may not be an accurate
indication of its  performance  during future  economic  downturns or periods of
rising interest rates.

Bank Obligations

         Bank   obligations   in  which  the   Portfolios   may  invest  include
certificates  of deposit,  bankers'  acceptances and time deposits in U.S. banks
(including foreign branches) which have more than



                                       6

<PAGE>


$1  billion in total  assets at the time of  investment  and are  members of the
Federal  Reserve  System or are examined by the  Comptroller  of the Currency or
whose  deposits  are insured by the Federal  Deposit  Insurance  Corporation.  A
Portfolio  also may invest in  certificates  of  deposit  of  savings  and loan
associations  (federally or state chartered and federally  insured) having total
assets in excess of $1 billion.

         The  International  Portfolio may invest in  obligations of domestic or
foreign branches of foreign banks and foreign branches of domestic banks.  These
investments  involve risks that are different from  investments in securities of
domestic  branches of domestic  banks.  These risks  include  seizure of foreign
deposits,   currency  controls,   interest  limitations  or  other  governmental
restrictions which might affect the payment of principal or interest on the bank
obligations held by the Portfolio.

         The  International  Portfolio  limits its  investments  in foreign bank
obligations   to  U.S.   dollar-denominated   or  foreign   currency-denominated
obligations of foreign banks (including U.S. branches of foreign banks) which at
the time of  investment  (1) have more than $10 billion,  or the  equivalent  in
other  currencies,  in total  assets;  (2) have  branches or  agencies  (limited
purpose  offices which do not offer all banking  services) in the United States;
and (3) are judged by Western Asset to be of comparable  quality to  obligations
of U.S. banks in which the  Portfolios may invest.  Subject to the limitation on
concentration  of less than 25% of the  Portfolio's  assets in the securities of
issuers in a particular  industry,  there is no  limitation on the amount of the
International Portfolio's assets which may be invested in obligations of foreign
banks  which  meet the  conditions  set  forth  herein.  Foreign  banks  are not
generally   subject   to   examination   by  any  U.S.   Government   agency  or
instrumentality.

Restricted and Illiquid Securities

         Each  Portfolio is  authorized to invest up to 10% of its net assets in
securities for which no readily available market exists,  which for this purpose
includes, among other things,  repurchase agreements maturing in more than seven
days,  OTC options and  securities  used as cover for such  options.  Restricted
securities  may be sold only (1)  pursuant to SEC Rule 144A or other  exemption,
(2) in privately negotiated transactions or (3) in public offerings with respect
to which a registration statement is in effect under the Securities Act of 1933.
Such securities may include those that are subject to restrictions  contained in
the securities laws of other countries. Securities that are freely marketable in
the  country  where  they  are  principally  traded,  but  would  not be  freely
marketable in the United  States,  will not be subject to this 10% limit.  Where
registration is required, a Portfolio may be obligated to pay all or part of the
registration  expenses and a considerable  period may elapse between the time of
the  decision  to sell and the time the  Portfolio  may be  permitted  to sell a
security under an effective  registration  statement.  If, during such a period,
adverse market  conditions  were to develop,  the Portfolio  might obtain a less
favorable price than prevailed when it decided to sell.

Reverse Repurchase Agreements and Other Borrowing

         Each  Portfolio  may borrow for temporary or emergency  purposes.  This
borrowing  may be  unsecured.  The  Investment  Company Act of 1940 ("1940 Act")
requires a Portfolio  to maintain  continuous  asset  coverage  (that is,  total
assets including  borrowings,  less  liabilities  exclusive of borrowings) of at
least 300% of the amount  borrowed.  If the asset coverage  should decline below
300% as a result of market fluctuations or for other reasons, a Portfolio may be
required to sell some of its holdings  within three days  (exclusive  of Sundays
and holidays) to reduce the debt and


                                       7

<PAGE>




restore the 300% asset coverage,  even though it may be disadvantageous  from an
investment  standpoint to sell securities at that time. Borrowing may exaggerate
the effect on net asset value of any increase or decrease in the market value of
the  Portfolio.  To avoid the potential  leveraging  effects  of a  Portfolio's
borrowings, a Portfolio will not make investments while borrowings are in excess
of 5% of the  Portfolio's assets.  Money  borrowed  will be subject to interest
costs  which  may or may not be  recovered  by  appreciation  of the  securities
purchased. A Portfolio also may be required to maintain minimum average balances
in  connection  with  such  borrowing  or to pay a  commitment  or other  fee to
maintain a line of credit;  either of these requirements would increase the cost
of  borrowing  over the stated  interest rate.  For  purposes of its  borrowing
limitation and policies,  the Fund considers reverse repurchase agreements to be
borrowing.

Short Sales

         The Portfolios do not currently intend to sell securities short,  other
than through the use of futures and options as described in the  Prospectus.  No
Portfolio is permitted to engage in short sales unless it  simultaneously  owns,
or has the right to acquire,  securities  identical  in kind and amount to those
sold short.

Sovereign Debt

         Investments in debt securities issued by foreign  governments and their
political subdivisions or agencies ("Sovereign Debt") involve special risks. The
issuer of the debt or the governmental authorities that control the repayment of
the debt may be unable or unwilling to repay principal  and/or interest when due
in accordance with the terms of such debt, and the  International  Portfolio may
have limited legal recourse in the event of a default.

         Sovereign Debt differs from debt obligations issued by private entities
in that,  generally,  remedies for defaults must be pursued in the courts of the
defaulting party.  Legal recourse is therefore  somewhat  diminished.  Political
conditions, especially a sovereign entity's willingness to meet the terms of its
debt  obligations,  are of  considerable  significance.  Also,  there  can be no
assurance that the holders of commercial  bank debt issued by the same sovereign
entity may not contest payments to the holders of Sovereign Debt in the event of
default under commercial bank loan agreements.

         A sovereign  debtor's  willingness  or ability to repay  principal  and
interest due in a timely  manner may be affected by,  among other  factors,  its
cash flow situation,  the extent of its foreign  reserves,  the  availability of
sufficient  foreign  exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal  international lenders and the political constraints to which a
sovereign  debtor  may be  subject.  Increased  protectionism  on the  part of a
country's trading partners, or political changes in those countries,  could also
adversely  affect its  exports.  Such events  could  diminish a country's  trade
account surplus, if any, or the credit standing of a particular local government
or agency.

         The  occurrence  of political,  social or diplomatic  changes in one or
more  of the  countries  issuing  Sovereign  Debt  could  adversely  affect  the
International Portfolio's investments. Political changes or a deterioration of a
country's  domestic  economy or balance of trade may affect the  willingness  of
countries to service their Sovereign Debt. While Western Asset intends to manage
investments in a manner that will minimize the exposure to such risks, there can
be no assurance that adverse  political  changes will not cause the Portfolio to
suffer a loss of interest or principal on any of its holdings.

                                       8

<PAGE>


Options and Futures

         In pursuing their individual  investment objectives the Portfolios may,
as described in the  Prospectus,  purchase and sell (write) both put options and
call options on securities and bond indices, may enter into futures contracts on
fixed  income  instruments  and may  purchase  and sell  options on such futures
contracts  ("futures  options") for hedging  purposes or in other  circumstances
permitted by the Commodity Futures Trading  Commission  ("CFTC") as part of each
Portfolios'  investment strategy. In addition,  the International  Portfolio may
purchase  and sell put and call  options on foreign  currencies,  may enter into
futures  contracts on foreign  currencies  and purchase and sell options on such
futures  contracts.  If other types of options,  futures contracts or options on
futures are traded in the  future,  a  Portfolio  may also use those  investment
strategies.

Options on Securities

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

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

         A Portfolio may write covered call options on securities in which it is
authorized  to invest.  Because it can be  expected  that a call  option will be
exercised if the market value of the  underlying  security  increases to a level
greater than the exercise price, a Portfolio might write covered call options on
securities  generally when its adviser believes that the premium received by the
Portfolio  will  exceed the extent to which the market  price of the  underlying
security  will exceed the  exercise  price.  The strategy may be used to provide
limited protection against a decrease in the market price of the security, in an
amount  equal to the  premium  received  for  writing  the call  option less any
transaction  costs.  Thus, in the event that the market price of the  underlying
security  held by the  Portfolio  declines,  the amount of such  decline will be
offset wholly or in part by the amount of the premium received by the Portfolio.
If, however, there is an increase in the market price of the underlying security
and the  option is  exercised,  the  Portfolio  would be  obligated  to sell the
security at less than its market value.  The Portfolio would give up the ability
to sell the  portfolio  securities  used to cover the call option while the call
option was outstanding. Such securities would also be considered illiquid in the
case of over-the-counter  ("OTC") options written by a Portfolio,  and therefore
subject to a  Portfolio's  limitation  on  investing no more than 10% of its net
assets in illiquid  securities.  In addition, a Portfolio could lose the ability
to participate in an increase in the value of such securities above the exercise
price of the call option because such an increase would likely

                                       9

<PAGE>

be offset by an increase  in cost of closing  out the call  option (or could be
negated if the buyer  chose to exercise  the call  option at an  exercise  price
below the securities' current market value).

         A Portfolio may purchase put and call options and write covered put and
call  options on bond  indices in much the same  manner as  securities  options,
except that bond index options may serve as a hedge against overall fluctuations
in the debt  securities  markets (or a market  sector)  rather than  anticipated
increases  or  decreases  in the value of a  particular  security.  A bond index
assigns a value to the  securities  included  in the index and  fluctuates  with
changes in such values. Settlements of bond index options are effected with cash
payments and do not involve the delivery of securities. Thus, upon settlement of
a bond index  option,  the purchaser  will realize, and the writer will pay, an
amount based on the difference  between the exercise price and the closing price
of the bond index.  The  effectiveness  of hedging techniques  using bond index
options  will  depend on the extent to which price movements  in the bond index
selected correlate with price movements of the securities in which the Portfolio
invests.

         A Portfolio  may purchase and write  covered  straddles on  securities,
currencies or bond indices. A long straddle is a combination of a call and a put
option  purchased on the same  security  where the exercise  price of the put is
less than or equal to the exercise  price of the call.  A Portfolio  would enter
into a long straddle  when its adviser  believes that it is likely that interest
rates or currency  exchange  rates will be more volatile  during the term of the
options than the option pricing implies.  A short straddle is a combination of a
call and a put written on the same security  where the exercise price of the put
is less than or equal to the exercise price of the call and where the same issue
of security or currency  is  considered  cover for both the put and the call.  A
Portfolio would enter into a short straddle when its adviser believes that it is
unlikely  that  interest  rates or currency  exchange  rates will be as volatile
during the term of the options as the option pricing implies.  In such case, the
Portfolio  will set aside cash and/or  liquid,  high grade debt  securities in a
segregated account with its custodian equivalent in value to the amount, if any,
by which the put is  in-the-money,  that is,  the  amount by which the  exercise
price of the put exceeds the current market value of the underlying security.

Foreign Currency Options and Related Risks.

         The  International  Portfolio may purchase and write (sell)  options on
foreign  currencies in order to hedge against the risk of foreign  exchange rate
fluctuation  on foreign  securities  the Portfolio  holds or which it intends to
purchase.  For  example,  if the  Portfolio  enters  into a contract to purchase
securities  denominated  in a foreign  currency,  it could  effectively  fix the
maximum U.S.  dollar cost of the  securities by purchasing  call options on that
foreign currency.  Similarly,  if the Portfolio held securities denominated in a
foreign currency and anticipated a decline in the value of that currency against
the U.S.  dollar,  it could hedge  against  such a decline by  purchasing  a put
option on the currency  involved.  The purchase of an option on foreign currency
may be used to hedge against  fluctuations  in exchange rates  although,  in the
event of exchange rate movements  adverse to the  Portfolio's  position,  it may
forfeit the entire  amount of the premium plus  related  transaction  costs.  In
addition, the Portfolio may purchase call options on foreign currency to enhance
income when its adviser  anticipates that the currency will appreciate in value,
but the  securities  denominated  in that  currency  do not  present  attractive
investment opportunities.

         If the International Portfolio writes an option on foreign currency, it
will constitute only a partial hedge, up to the amount of the premium  received,
and the  Portfolio  could be required to purchase or sell foreign  currencies at
disadvantageous  exchange rates, thereby incurring losses. The Portfolio may use
options on currency to cross-hedge, which involves writing or purchasing

                                       10

<PAGE>


options on one  currency  to  hedge  against  changes  in  exchange  rates of a
different, but related, currency.

         The  International  Portfolio's  ability  to  establish  and  close out
positions on such options is subject to the  maintenance  of a liquid  secondary
market.  Although many options on foreign  currencies are exchange  trades,  the
majority are traded on the OTC market.  The Portfolio will not purchase or write
such  options  unless,  in the opinion of its  adviser,  the market for them has
developed sufficiently. The Portfolio may use foreign currency options traded on
a  commodities  exchange  only for hedging  purposes  or in other  circumstances
permitted by the CFTC.  There can be no assurance that a liquid secondary market
will exist for a particular option at any specific time. In addition, options on
foreign  currencies are affected by all of those factors that influence  foreign
exchange rates and investments generally.  These OTC options also involve credit
risks which may not be present in the case of exchange-traded currency options.

Futures Contracts and Options on Futures Contracts

         Each  Portfolio  will limit its use of futures  contracts  and  futures
options to hedging  transactions or other circumstances  permitted by regulatory
authorities.  For example, a Portfolio might use futures contracts to attempt to
hedge against  anticipated changes in interest rates that might adversely affect
either the value of the  Portfolio's  securities or the price of the  securities
which the Portfolio intends to purchase. A Portfolio's hedging may include sales
of futures  contracts as an offset  against the effect of expected  increases in
interest  rates,  and  purchases of futures  contracts as an offset  against the
effect of expected  declines in interest rates.  Although other techniques could
be used to reduce  exposure to interest  rate  fluctuations,  a Portfolio may be
able to hedge its exposure more effectively and perhaps at a lower cost by using
futures contracts and options on futures contracts.

         The  International  Portfolio  may also purchase call or put options on
foreign  currency  futures  contracts to obtain a fixed foreign exchange rate at
limited risk.  The  Portfolio  may purchase a call option on a foreign  currency
futures  contract  to hedge  against a rise in the foreign  exchange  rate while
intending  to  invest  in  a  foreign   security  of  the  same  currency.   The
International  Portfolio  may purchase put options on foreign  currency  futures
contracts as a partial hedge against a decline in the foreign  exchange rates or
the value of its foreign  portfolio  securities.  The Portfolio may write a call
option on a foreign  currency  futures  contract as a partial  hedge against the
effects of declining foreign exchange rates on the value of foreign securities.

          A Portfolio also may use futures contracts on fixed income instruments
and options  thereon to hedge its investment  portfolio  against  changes in the
general level of interest rates. A futures contract on a fixed income instrument
is a bilateral  agreement  pursuant to which one party  agrees to make,  and the
other party  agrees to accept,  delivery of the  specified  type of fixed income
security  called  for  in the  contract  at a  specified  future  time  and at a
specified  price. A Portfolio may purchase a futures  contract on a fixed income
security  when it intends to purchase  fixed income  securities  but has not yet
done so. This  strategy may minimize the effect of all or part of an increase in
the  market  price of the fixed  income  security  that a  Portfolio  intends to
purchase in the future.  A rise in the price of the fixed income  security prior
to its purchase may be either  offset by an increase in the value of the futures
contract  purchased  by a Portfolio  or avoided by taking  delivery of the fixed
income securities under the futures contract.  Conversely,  a fall in the market
price of the  underlying  fixed income  security  may result in a  corresponding
decrease in the value of the futures  position.  A Portfolio  may sell a futures
contract on a fixed  income  security in order to continue to receive the income
from a fixed income security, while endeavoring to avoid part or

                                       11

<PAGE>


all of the decline in the market value of that security that would  accompany an
increase in interest rates.

         A Portfolio  may purchase a call option on a futures  contract to hedge
against a market advance in fixed income securities which the Portfolio plans to
acquire at a future date. The purchase of a call option on a futures contract is
analogous  to the  purchase  of a call  option  on an  individual  fixed  income
security  which can be used as a  temporary  substitute  for a  position  in the
security  itself.  A Portfolio  also may write  covered  call options on futures
contracts  as a partial  hedge  against a decline  in the price of fixed  income
securities held in the Portfolio's investment portfolio, or purchase put options
on futures  contracts in order to hedge  against a decline in the value of fixed
income securities held in the Portfolio's  investment portfolio. A Portfolio may
write a covered put option as a partial anticipatory hedge.


         A Portfolio may sell bond index futures  contracts in anticipation of a
general market or market sector decline that could  adversely  affect the market
value of its  investments.  To the  extent  that a  portion  of the  Portfolio's
investments  correlate with a given index, the sale of futures contracts on that
index could reduce the risks  associated  with a market decline and thus provide
an alternative to the  liquidation of securities  positions.  For example,  if a
Portfolio  correctly  anticipates a general  market decline and sells bond index
futures to hedge  against  this risk,  the gain in the futures  position  should
offset some or all of the decline in the value of the portfolio. A Portfolio may
purchase bond index futures  contracts if a significant  market or market sector
advance is anticipated.  Such a purchase of a futures  contract would serve as a
temporary substitute for the purchase of individual debt securities,  which debt
securities  may then be  purchased  in an orderly  fashion.  This  strategy  may
minimize  the  effect  of all or part of an  increase  in the  market  price  of
securities  that  the  Fund  intends  to  purchase.  A rise in the  price of the
securities should be partly or wholly offset by gains in the futures position.

         As in the  case of a  purchase  of a bond  index  futures  contract,  a
Portfolio may purchase a call option on a bond index  futures  contract to hedge
against a market advance in securities  that the Portfolio plans to acquire at a
future date. A Portfolio  may write covered put options on bond index futures as
a partial  anticipatory  hedge and may write  covered call options on bond index
futures as a partial  hedge against a decline in the prices of bonds held in its
portfolio.  This is analogous to writing  covered call options on securities.  A
Portfolio  also may purchase put options on bond index  futures  contracts.  The
purchase of put options on bond index  futures  contracts  is  analogous  to the
purchase of  protective  put options on individual  securities  where a level of
protection is sought below which no  additional  economic loss would be incurred
by the Portfolio.

         The  International   Portfolio  may  also  purchase  and  sell  futures
contracts  on a foreign  currency.  The  Portfolio  may sell a foreign  currency
futures  contract to hedge against  possible  variations in the exchange rate of
the  foreign  currency  in  relation  to  the  U.S.  dollar.  In  addition,  the
International  Portfolio may sell a foreign  currency  futures contract when the
adviser  anticipates a general  weakening of the foreign currency  exchange rate
that  could  adversely  affect  the  market  values of the  Portfolio's  foreign
securities  holdings.  In this  case,  the  sale  of  futures  contracts  on the
underlying  currency  may  reduce  the risk to the  Portfolio  caused by foreign
currency variations and, by so doing,  provide an alternative to the liquidation
of securities  positions in the Portfolio and resulting  transaction costs. When
the adviser  anticipates a  significant  foreign  exchange  rate increase  while
intending to invest in a foreign currency,  the Portfolio may purchase a foreign
currency  futures  contract to hedge  against a rise in foreign  exchange  rates
pending completion of the anticipated  transaction.  Such a purchase would serve
as a temporary measure to protect the

                                       12

<PAGE>


Portfolio against any rise in the foreign exchange rate which may add additional
costs to acquiring the foreign security position.

         The  International  Portfolio  may also purchase call or put options on
foreign  currency  futures  contracts to obtain a fixed foreign exchange rate at
limited risk.  The Portfolio may purchase a call option or write a put option on
a foreign  currency  futures  contract  to hedge  against a rise in the  foreign
exchange  rate  while  intending  to invest in a  foreign  security  of the same
currency.  The  Portfolio may purchase put options on foreign  currency  futures
contracts as a partial hedge against a decline in the foreign  exchange rates or
the value of its foreign portfolio  securities.  It may also write a call option
on a foreign currency futures contract as a partial hedge against the effects of
declining foreign exchange rates on the value of foreign securities.

         A Portfolio may also write put options on interest rate,  bond index or
foreign  currency  futures  contracts  while, at the same time,  purchasing call
options  on the same  interest  rate,  bond index or  foreign currency  futures
contract in order  synthetically to create a long interest rate, bond or foreign
currency futures contract position. The options will have the same strike prices
and  expiration  dates.  A Portfolio  will engage in this strategy only when its
adviser  believes it is more  advantageous to the Portfolio to do so as compared
to purchasing the futures contract.

         A Portfolio may also  purchase and write covered  straddles on interest
rate,  foreign  currency or bond index futures  contracts.  A long straddle is a
combination of a call and a put purchased on the same futures contract where the
exercise  price of the put  option is less than the  exercise  price of the call
option. A Portfolio would enter into a long straddle when it believes that it is
likely  that  interest  rates or foreign  currency  exchange  rates will be more
volatile during the term of the options than the option pricing implies. A short
straddle is a combination of a call and put written on the same futures contract
where the exercise  price of the put option is less than the  exercise  price of
the call option and where the same  security or futures  contract is  considered
"cover"  for both the put and the call.  A  Portfolio  would  enter into a short
straddle when it believes  that it is unlikely  that  interest  rates or foreign
currency  exchange  rates will be as volatile  during the term of the options as
the option  pricing  implies.  In such case,  the Portfolio  will set aside cash
and/or  liquid,  high grade debt  securities  in a  segregated  account with its
custodian  equal  in  value  to  the  amount,  if  any,  by  which  the  put  is
"in-the-money",  that is,  the  amount  by which the  exercise  price of the put
exceeds the current market value of the underlying futures contract.

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

                                       13

<PAGE>


expired.  In computing daily net asset value, each Portfolio will mark to market
its open futures positions.

         A  Portfolio  is also  required  to deposit  and  maintain  margin with
respect to put and call options on futures  contracts written by it. Such margin
deposits will vary  depending on the nature of the underlying  futures  contract
(and the related initial margin  requirements),  the current market value of the
option and other futures positions held by the Portfolio.

         Although some futures  contracts call for making or taking  delivery of
the underlying  securities,  generally  those  contracts are closed out prior to
delivery  by  offsetting  purchases  or  sales  of  matching  futures  contracts
(involving the same currency or underlying  security and delivery month).  If an
offsetting  purchase  price is less than the original sale price,  the Portfolio
realizes  a gain,  or if it is  more,  the  Portfolio  realizes  a  loss.  If an
offsetting sale price is more than the original  purchase  price,  the Portfolio
realizes a gain, or if it is less, the Portfolio  realizes a loss. The Portfolio
will also bear  transaction  costs for each  contract  which will be included in
these calculations.

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

         The requirements for qualification as a regulated investment company
also may limit the extent to which a Portfolio may engage in transactions in
futures, options on futures or forward contracts.  See "Taxation."

Risks Associated with Futures and Options

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

         (1)  Positions  in  futures  contracts  may be  closed  out  only on an
exchange or board of trade which  provides a secondary  market for such  futures
contracts.  Futures  exchanges may limit the amount of fluctuation  permitted in
certain  futures  contract  prices during a single  trading day. The daily limit
establishes  the maximum  amount that the price of a futures  contract  may vary
either up or down from the  previous  day's  settlement  price at the end of the
current  trading  session.  Once the daily  limit has been  reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond  that  limit.  The daily  limit  governs  only price  movements  during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For example,
futures  prices  have  occasionally   moved  to  the  daily  limit  for  several
consecutive  trading days with little or no trading,  thereby  preventing prompt
liquidation  of positions and  subjecting  some holders of futures  contracts to
substantial losses.

         (2) The ability to establish and close out positions in either  futures
contracts or  exchange-listed  options is also subject to the  maintenance  of a
liquid secondary market.

                                       14

<PAGE>


Consequently, it may not be possible for a Portfolio to close a position and, in
the event of adverse price  movements,  the  Portfolio would have to make daily
cash  payments of variation  margin  (except in the case of purchased  options).
However,  in the event  futures  contracts  or options  have been used to hedge
portfolio  securities,  such securities will not be sold until the contracts can
be  terminated.  In  such  circumstances, an  increase  in  the  price  of  the
securities,  if any, may  partially or completely  offset losses on the futures
contract.  However, there is no guarantee that the price of the securities will,
in fact, correlate with the price movements in the contracts and thus provide an
offset to losses on the contracts.

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

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

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

                                       15

<PAGE>


instead of closing  out their  contracts. As a result,  a correct  forecast  of
general  market trends may not result in successful  hedging  through the use of
futures contracts over the short term. In addition,  activities of large traders
in both the  futures  and  securities markets  involving  arbitrage  and  other
investment strategies may result in temporary price distortions.

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

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

         (8) Purchasers of options on futures contracts pay a premium in cash at
the time of purchase.  This amount and the transaction  costs are all that is at
risk.  Sellers of options on futures  contracts,  however,  must post an initial
margin and are subject to additional  margin calls which could be substantial in
the event of adverse price movements.  In addition,  although the maximum amount
at risk when the  Portfolio  purchases  an option  is the  premium  paid for the
option and the transaction costs, there may be circumstances when the purchase
of an option on a futures contract would result in a loss to the Portfolio when
the use of a futures contract  would not,  such as when there is no movement in
the value of the securities or currencies being hedged.

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

         (10) A Portfolio  may purchase and write both  exchange-traded  options
and  options  traded on the OTC  market.  Exchange  markets  for options on debt
securities and foreign  currencies exist but are relatively new, and the ability
to  establish  and  close out  positions  on the  exchanges  is  subject  to the
maintenance of a liquid  secondary  market.  Although the  Portfolios  intend to
purchase or write only those exchange-traded  options for which there appears to
be an active  secondary  market,  there is no assurance that a liquid  secondary
market  will  exist for any  particular  option at any  specific  time.  Closing
transactions  may be effected with respect to options  traded in the OTC markets
(currently  the  primary  markets  for  options on debt  securities  and foreign
currencies)  only by  negotiating  directly  with the other  party to the option
contract,  or in a  secondary  market  for the  option  if such  market  exists.
Although the  Portfolios  will enter into OTC options  only with  dealers  which
agree to enter into,  and which are  expected  to be capable of  entering  into,
closing  transactions  with the  Portfolios,  there can be no  assurance  that a
Portfolio  will be able to liquidate  an OTC option at a favorable  price at any
time prior to  expiration.  In the event of  insolvency of the  contra-party,  a
Portfolio may be unable to liquidate an OTC option.  Accordingly,  it may not be
possible to effect closing  transactions  with respect to certain options,  with
the result that the Portfolio  would have to exercise those options which it has
purchased in order to realize any profit.  With respect to options  written by a
Portfolio,  the  inability  to enter  into a closing  transaction  may result in
material losses to the Portfolio. For example, because a Portfolio must maintain
a covered  position  with  respect to any call  option it writes on a  security,
futures contract

                                       16

<PAGE>


or  currency,  the  Portfolio  may not sell  the  underlying security,  futures
contract or currency or invest any cash,  U.S.  Government securities or liquid
high  quality  debt  securities  used as cover during the period it is obligated
under such option.  This requirement may impair a Portfolio's  ability to sell a
portfolio  security  or  make  an  investment  at a time  when  such  a sale  or
investment might be advantageous.

         (11) Bond index options are settled exclusively in cash. If a Portfolio
writes a call  option on an index,  the  Portfolio  will not know in advance the
difference,  if any, between the closing value of the index on the exercise date
and the  exercise  price of the call  option  itself  and thus will not know the
amount of cash payable upon  settlement.  In addition,  a holder of a bond index
option who exercises it before the closing index value for that day is available
runs the risk that the level of the underlying index may subsequently change.

Special Risks Related to Foreign Currency Futures Contracts and Options on Such
Contracts and Options on Foreign Currencies

         Buyers and sellers of foreign currency futures contracts are subject to
the same risks that apply to the use of futures  generally.  In addition,  there
are risks associated with foreign currency futures  contracts and their use as a
hedging device similar to those  associated  with options on foreign  currencies
described below. Further, settlement of a foreign currency futures contract must
occur within the country  issuing the underlying  currency.  Thus, the Portfolio
must accept or make delivery of the  underlying  foreign  currency in accordance
with any U.S. or foreign  restrictions or regulations  regarding the maintenance
of foreign banking arrangements by U.S. residents and may be required to pay any
fees,  taxes or charges  associated  with such delivery that are assessed in the
issuing country.

         Options on foreign  currency  futures  contracts  may  involve  certain
additional  risks.  Trading  options on foreign  currency  futures  contracts is
relatively new. The ability to establish and close out positions on such options
is subject to the maintenance of a liquid secondary market. To reduce this risk,
the  Portfolio  will not purchase or write options on foreign  currency  futures
contracts unless and until, in the opinion of Western Asset, the market for such
options  has  developed  sufficiently  that the  risks in  connection  with such
options are not greater than the risks in connection  with  transactions  in the
underlying foreign currency futures contracts.  Compared to the purchase or sale
of foreign  currency futures  contracts,  the purchase of call or put options on
futures  contracts  involves less  potential  risk to the Portfolio  because the
maximum  amount at risk is the  premium  paid for the option  (plus  transaction
costs).  However,  there may be circumstances when the purchase of a call or put
option on a futures  contract  would result in a loss,  such as when there is no
movement in the price of the underlying  currency or futures contract,  when the
purchase of the underlying futures contract would not result in a loss.

         The value of a foreign  currency  option  depends upon the value of the
underlying  currency relative to the U.S. dollar. As a result,  the price of the
option  position may vary with changes in the value of either or both currencies
and may have no  relationship  to the investment  merits of a foreign  security.
Because foreign currency transactions  occurring in the interbank market involve
substantially  larger  amounts  than  those that may be  involved  in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
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.

                                       17

<PAGE>


         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
information available is generally  representative of very large transactions in
the interbank market and thus may not reflect  relatively  smaller  transactions
(i.e.,  less than $1 million) where rates may be less  favorable.  The interbank
market in foreign currencies is a global, around-the-clock market. To the extent
that the U.S.  options  markets are closed while the markets for the  underlying
currencies  remain open,  significant price and rate movements may take place in
the  underlying  markets that cannot be reflected in the options  markets  until
they reopen.

Additional Risks of Options on Securities, Futures Contracts, Options on Futures
and Forward Currency Exchange Contracts and Options Thereon Traded on Foreign
Exchanges

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

Cover for Strategies Involving Options, Futures and Forward Contracts

         A  Portfolio  will  not  use  leverage  in its  hedging  strategies.  A
Portfolio will not enter into an options,  futures or forward currency  strategy
that exposes it to an  obligation  to another party unless it owns either (1) an
offsetting  ("covering")  position in  securities,  currencies or other options,
futures or forward  contracts or (2) cash,  receivables  and liquid high quality
debt securities with a value sufficient to cover its potential  obligations.  In
the  case of  transactions  entered  into as a  hedge,  a  Portfolio  will  hold
securities,  currencies or other options,  futures or forward currency positions
whose values are expected to offset ("cover") its obligations  under the hedging
strategies.  Each Portfolio will comply with  guidelines  established by the SEC
with  respect to  coverage  of these  strategies  by mutual  funds,  and, if the
guidelines  so  require,  will set aside cash  and/or  liquid,  high-grade  debt
securities in a segregated  account with its custodian in the amount prescribed,
as marked to market  daily.  Securities,  currencies or other options or futures
positions used for cover and securities  held in a segregated  account cannot be
sold or closed out while the strategy is  outstanding,  unless they are replaced
with similar assets.  As a result,  there is a possibility that the use of cover
or segregation involving a large percentage of a Portfolio's assets could impede
portfolio  management or a Portfolio's  ability to meet  redemption  requests or
other current obligations.

Forward Currency Exchange Contracts

         The International Portfolio may use forward currency exchange contracts
to hedge against uncertainty in the level of future exchange rates or to enhance
income.

         The  International  Portfolio may enter into forward currency  exchange
contracts with respect to specific transactions. For example, when the Portfolio
anticipates purchasing or selling a

                                       18

<PAGE>


security  denominated in a foreign currency, or when it anticipates the receipt
in a foreign  currency of dividend  or interest  payments on a security  that it
holds,  the  Portfolio  may desire to "lock-in"  the U.S.  dollar  price of the
security or the U.S. dollar equivalent of such payment,  as the case may be, by
entering into a forward contract for the purchase or sale, for a fixed amount of
U.S. dollars or foreign currency,  of the amount of foreign currency involved in
the underlying transaction. The Portfolio will thereby attempt to protect itself
against a possible loss  resulting  from an adverse  change in the  relationship
between the currency  exchange rates during the period between the date on which
the security is purchased or sold, or on which the payment is declared,  and the
date on which such payments are made or received.

         The  International  Portfolio  also may use forward  currency  exchange
contracts  to lock in the U.S.  dollar  value  of its  portfolio  positions,  to
increase the  Portfolio's  exposure to foreign  currencies  that  Western  Asset
believes  may  rise in  value  relative  to the  U.S.  dollar  or to  shift  the
Portfolio's  exposure  to  foreign  currency  fluctuations  from one  country to
another.  For  example,  when  the  adviser  believes  that  the  currency  of a
particular foreign country may suffer a substantial decline relative to the U.S.
dollar or another  currency,  it may enter into a forward  contract  to sell the
amount of the former foreign currency  approximating the value of some or all of
the  Portfolio's  securities   denominated  in  such  foreign  currency.   These
investment practices generally are referred to as "cross-currency  hedging" when
two foreign currencies is involved.

         The precise  matching of the forward  contract  amount and the value of
the securities  involved will not generally be possible because the future value
of such securities in foreign  currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures.  Accordingly,  it may be necessary  for
the Portfolio to purchase  additional  foreign currency on the spot (i.e., cash)
market  (and bear the  expense  of such  purchase)  if the  market  value of the
security is less than the amount of foreign  currency the Portfolio is obligated
to deliver and if a decision is made to sell the security  and make  delivery of
the foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market  value  exceeds  the  amount of foreign  currency  the  Portfolio  is
obligated to deliver.

         The  projection of short-term  currency  market  movements is extremely
difficult,  and the  successful  execution of a short-term  hedging  strategy is
highly uncertain.  Forward contracts involve the risk that anticipated  currency
movements  will not be  accurately  predicted,  causing the Portfolio to sustain
losses on these contracts and transaction costs. The International Portfolio may
enter into forward  contracts or maintain a net exposure to such  contracts only
if (1) the  consummation  of the  contracts  would not obligate the Portfolio to
deliver  an  amount of  foreign  currency  in excess of the value of the  Fund's
portfolio  securities  or other assets  denominated  in that currency or (2) the
Portfolio maintains cash, U.S. Government securities or liquid,  high-grade debt
securities in a segregated  account with the Fund's custodian,  marked to market
daily,  in an amount  not less than the value of the  Portfolio's  total  assets
committed to the  consummation  of the  contract.  Under  normal  circumstances,
consideration  of the prospect for currency  parities will be incorporated  into
the longer term investment decisions made with regard to overall diversification
strategies.  However,  the Portfolio's  adviser believes that it is important to
have the  flexibility  to enter into such forward  contracts  when it determines
that the best interests of the Portfolio will be served.

         At or before the  maturity  date of a forward  contract  requiring  the
International  Portfolio  to sell a currency,  the  Portfolio  may either sell a
portfolio security and use the sale proceeds to make delivery of the currency or
retain the security and offset its contractual obligation to deliver the


                                       19

<PAGE>


currency by purchasing a second  contract  pursuant to which the Portfolio  will
obtain,  on the same maturity  date,  the same amount of the currency that it is
obligated to deliver.  Similarly, the Portfolio may close out a forward contract
requiring it to purchase a specified currency by entering into a second contract
entitling it to sell the same amount of the same  currency on the maturity  date
of the first contract. The Portfolio would realize a gain or loss as a result of
entering into such an offsetting  forward contract under either  circumstance to
the extent the exchange  rate or rates  between the  currencies  involved  moved
between the execution dates of the first contract and the offsetting contract.

         The  cost  to  the  International  Portfolio  of  engaging  in  forward
contracts varies with factors such as the currencies involved, the length of the
contract  period and the market  conditions  then  prevailing.  Because  forward
contracts are usually entered into on a principal  basis, no fees or commissions
are involved.  The use of forward  contracts does not eliminate  fluctuations in
the  prices of the  underlying  securities  the  Portfolio  owns or  intends  to
acquire,  but it does fix a rate of exchange in advance.  In addition,  although
forward  contracts  limit the risk of loss due to a decline  in the value of the
hedged  currencies,  at the same time they limit any  potential  gain that might
result should the value of the currencies increase.

         Although the  International  Portfolio values its assets daily in terms
of U.S.  dollars,  it does  not  intend  to  convert  its  holdings  of  foreign
currencies into U.S. dollars on a daily basis. The Portfolio may convert foreign
currency  from  time to time,  and  investors  should  be aware of the  costs of
currency  conversion.  Although foreign exchange dealers do not charge a fee for
conversion,  they do realize a profit based on the difference between the prices
at which they are buying and  selling  various  currencies.  Thus,  a dealer may
offer to sell a foreign  currency to the Portfolio at one rate, while offering a
lesser rate of exchange  should the Portfolio  desire to resell that currency to
the dealer.

Foreign Currency Exchange-Related Securities and 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) which 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 which is inherent in the international
fixed income/debt marketplace.  The formula used to determine the amount payable
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.

                                       20

<PAGE>


         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.

                         VALUATION OF PORTFOLIO SHARES

         As described in the Prospectus,  securities for which market quotations
are readily available are valued at current market value.  Securities are valued
at the last sale price for a comparable  position on the day the  securities are
being valued or, lacking any sales on such day, at the last available bid price.
In cases where securities are traded on more than one market, the securities are
generally valued on the market considered by the adviser as the primary market.

         All  investments  valued in foreign  currency  are valued daily in U.S.
dollars on the basis of the foreign  currency  exchange  rate  prevailing at the
time such valuation is determined. Foreign currency exchange rates are generally
determined  prior  to the  close of  trading  on the New  York  Stock  Exchange.
Occasionally,  events  affecting  the  value  of  foreign  investments  and such
exchange rates occur between the time at which they are determined and the close
of trading on the Exchange. Such investments will be valued at their fair value,
as determined in good faith by or under the direction of the Board of Directors.
Foreign currency exchange transactions of a Portfolio occurring on a spot basis
are valued at the spot rate for purchasing or selling currency prevailing on the
foreign exchange market.

                             MANAGEMENT OF THE FUND

Directors and Officers

         The Fund's officers are responsible for the operation of the Fund under
the direction of the Board of Directors.  The officers and directors of the Fund
and their principal  occupations during the past five years are set forth below.
An asterisk (*) indicates directors who are "interested  persons" of the Fund as
defined in the 1940 Act.  The address of each  officer and  director is 117 East
Colorado Blvd., Pasadena, CA 91105.

         William G.  McGagh,  [67] (1)(2)  Chairman  of the Board and  Director;
Consultant,   McGagh  Associates  (corporate  financial   consulting),   January
1989-present; Director of Pacific American Income Shares, Inc.; formerly: Senior
Vice-President,  Chief  Financial  Officer and Director of Northrop  Corporation
(military aircraft).

                                       21

<PAGE>

         Norman  Barker,  Jr.,  [74]  Director;   Director  of  American  Health
Properties (real estate investment trust),  Southern  California Edison Company,
SPI  Pharmaceuticals,  Inc.,  ICN  Pharmaceutical,  Inc.,  and  TCW  Convertible
Securities Fund, Inc. (management investment company); formerly: Chairman of the
Board of First Interstate Bancorp.

         Dr. Richard C. Gilman, [73] (1) (2) Director; President Emeritus of
Occidental College, 1988- present; Director of Pacific American Income Shares,
Inc.; formerly:  President and Chief Executive Officer of Occidental College.

         Gordon L. Hough, [77] (1) Director; Director of Pacific American Income
Shares, Inc., Ameron, Inc. (construction products) and the Chronicle Publishing
Company; formerly: Director of First Interstate Bank.

         *W. Curtis Livingston, III, [53] (1) President and Director; President,
Director  and Chief  Executive  Officer  of  Western  Asset  Management  Company
(investment management firm), December 1980-present; President, Pacific American
Income Shares, Inc.

         *Ronald L. Olson, [55] (2) (3) Director; Senior Partner, Munger, Tolles
& Olson (a law partnership); Director of Pacific American Income Shares, Inc.

         *Louis A. Simpson, [59] (4) Director; President and CEO Capital
Operations of Government Employees Insurance Company (GEICO Corporation) since
May 1993; Vice Chairman of GEICO (1985-1993); Senior Vice President and Chief
Investment Officer of GEICO (1979-1985).  Director of Pacific American Income
Shares, Inc., Potomac Electric Power Company, Potomac Capital Investment
Corporation, and Salomon Inc.  Formerly: President and CEO of Western Asset
Management Company.

         Donna E. Barnes, [36] Secretary; Secretary, Pacific American Income
Shares, Inc., since April 1996; Compliance Officer of Western Asset Management
Company, 1991 - present. Formerly: Assistant Secretary of the Fund and Pacific
American Income Shares, Inc., 1993-1996.

         Carl L. Eichstaedt,  [36] Vice President;  Portfolio Manager of Western
Asset Management Company since 1994; formerly: Senior partner, Portfolio Manager
of  Harris  Investment  Management,  1993-1994;  Portfolio  Manager  of  Pacific
Investment  Management  Company,  1992- 1993;  Director Fixed Income of Security
Pacific  Investment  Managers,   1990-1992;   and  Vice  President  of  Chemical
Securities, Inc., 1986-1990.

         Kent S.  Engel,  [49]  Vice-President;  Director  and Chief  Investment
Officer of Western Asset Management  Company,  1969-present;  Vice-President and
Portfolio Manager of Pacific American Income Shares, Inc.

         Keith J. Gardner, [39] Vice President; Portfolio Manager of Western
Asset Management Company since 1994; formerly: Senior Portfolio Manager of Legg
Mason, Inc., 1992-1994; Portfolio Manager of T. Rowe Price Associates, Inc.,
1985-1992.

         Scott F. Grannis, [47] Vice President;  Director and Economist, Western
Asset Management Company, 1989 - present;  Director,  Supershares Services Corp.
(investment  company  services);   formerly:   Vice-President,   Leland  O'Brien
Rubinstein (investment advisory firm), 1986-89.

                                       22

<PAGE>

         Ilene S. Harker,  [41] Vice President;  Director of Administration  and
Controls,  Western  Asset  Management  Company,  1978-present;  Vice  President,
Pacific  American Income Shares,  Inc.,  since April 1996;  Formerly:  Assistant
Secretary of the Fund and  Secretary,  Pacific  American  Income  Shares,  Inc.,
1993-1996.

         James W. Hirschmann,  III, [36] Vice-President;  Director of Marketing,
Western Asset Management Company, April 1989-present;  formerly:  Vice-President
and Director of Marketing,  Financial Trust  Corporation (bank holding company),
January 1988 - April 1989; Vice-President of Marketing, Atalanta/Sosnoff Capital
(investment management company), January 1986 - January 1988.

         Marie K. Karpinski,  [47] Vice-President and Treasurer;  Vice-President
and  Treasurer  of fifteen  Legg Mason funds  (open-end  investment  companies);
Secretary/Treasurer   of  Worldwide  Value  Fund,  Inc.  (closed-end  investment
company);   Assistant   Treasurer  of  Pacific  American  Income  Shares,   Inc.
(closed-end  investment  company);  Treasurer of Legg Mason Fund Adviser,  Inc.,
March  1986-present;  Vice-President of Legg Mason Wood Walker,  Inc.,  February
1992 present;  Assistant  Vice-President of Legg Mason Wood Walker,  Inc., March
1989- February 1992.

         Randolph L. Kohn, [49] Vice-President; Director of Client Services,
Western Asset Management Company, 1984-present.

         S.  Kenneth   Leech,   [42]   Vice-President;   Director  of  Portfolio
Management, Western Asset Management Company, May 1990-present; formerly: Senior
Trader of  Greenwich  Capital,  1988- 1990;  Fixed  Income  Manager of The First
Boston Corporation (holding company; stock and bond dealers), 1985-1987.

         Edward A. Moody, [46] Vice-President; Director and Portfolio Manager,
Western Asset Management Company.

         Joseph L. Orlando, [36] Vice-President;  Marketing Executive of Western
Asset Management Company; formerly: Regional Manager of T. Rowe Price Associates
(investment management firm), January 1988 - July 1992.

         Steven  T.  Saruwatari,  [31]  Assistant  Treasurer;  Senior  Financial
Officer,  Western Asset Management  Company;  formerly:  Controller-Finance  for
LaSalle Paper Company/Spicers Paper, Inc. (distributor of fine printing papers),
June   1991-November   1994;   and  Senior   Auditor  for  Coopers  and  Lybrand
(international public accounting firm), September 1988 - May 1991.

         Stephen A. Walsh, [37] Vice-President: Director and Portfolio Manager,
Western Asset Management Company; formerly: Portfolio Manager and Trader of
Security Pacific Investment Managers, Inc. (investment management company),
1989-1991; Portfolio Manager of Atlantic Richfield Company (petroleum company),
1981-1988.

- --------------------
(1) Member of the Executive  Committee of the Board.  When the full Board is not
in session,  the  Executive  Committee  may  exercise all the powers held by the
Board in the  management  of the  business  and  affairs of the Fund that may be
lawfully  exercised  by the full Board,  except the power to declare a dividend,
authorize the issuance of stock,  recommend to stockholders any matter requiring
stockholders'  approval,  amend the  By-Laws,  or  approve  any  merger or share
exchange which does not require shareholder approval.

                                       23

<PAGE>


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

         The Fund has no nominating or compensation committee.

(3) Mr. Olson is an interested person because the law firm in which he is a
partner has provided certain services to the Fund and its investment adviser.

(4) Because Mr. Simpson is a Director of Salomon Inc., the parent company of a
registered broker-dealer, Mr. Simpson may be an interested person.

         Officers and  directors of the Fund who are  affiliated  persons of the
investment adviser,  Administrator or Distributor receive no salary or fees from
the Fund. Independent directors of the Fund receive a fee of $2,000 annually for
serving as a director,  and a fee of $500 per  Portfolio for each meeting of the
Board of  Directors  attended  by him.  The  Chairman  of the Board  receives an
additional $1,000 per year for serving in that capacity.

         The  following  table  provides  certain  information  relating  to the
compensation  of the Fund's  directors  and senior  executive  officers  for the
fiscal year ended June 30, 1996.

COMPENSATION TABLE


<TABLE>
<CAPTION>

                                                                Total Compensation From
                                     Aggregate Compensation     Fund and Fund Complex Paid
Name of Person and Position          From the Fund*             to Directors**
<S><C>
William G. McGagh -
Chairman of the Board and
Director                             $10,000                     $18,400
Dr. Richard C. Gilman - Director     $ 8,500                     $16,500
Gordon L. Hough - Director           $ 9,000                     $17,400
Ronald L. Olson - Director           $ 6,500                     $13,600
W. Curtis Livingston, III -
President and Director                  None                        None
Norman Barker, Jr. - Director        $ 8,000                     $18,400
Louis A. Simpson - Director          $ 6,500                     $14,000
Ilene S. Harker - Vice President        None                        None
Marie K. Karpinski - Vice
President and Treasurer                 None                        None
</TABLE>

*  Represents  fees paid to each director  during the fiscal year ended June 30,
   1996.

** Represents aggregate compensation paid to each director during the calendar
   year ended December 31, 1995.

                                       24

<PAGE>


The Portfolios' Investment Adviser

         Western Asset Management Company ("Western  Asset"),  117 East Colorado
Boulevard,  Pasadena,  CA 91105,  serves as investment adviser to the Corporate,
Mortgage and International  Securities  Portfolios under an investment  advisory
and administration  agreement dated June 30, 1992, between Western Asset and the
Fund ("Advisory Agreement").

         The  Advisory  Agreement  was most  recently  approved  by the Board of
Directors,  including  a  majority  of the  directors  who are  not  "interested
persons"  (as  defined  in the 1940  Act) of the  Fund,  the  advisers  or their
affiliates,  on April 11, 1996. Under the Advisory  Agreement,  Western Asset is
responsible,  subject  to  the  general  supervision  of  the  Fund's  Board  of
Directors, for the actual management of the assets of the Portfolios,  including
the  responsibility for making decisions and placing orders to buy, sell or hold
a particular  security,  consistent with the investment  objectives and policies
described  in the  Portfolios'  Prospectus  and  this  Statement  of  Additional
Information. Western Asset is also responsible for the compensation of directors
and officers of the Fund who are employees of Western Asset or its affiliates.

         Western  Asset  receives  for its  services to the Fund an advisory fee
calculated daily and payable  monthly,  at an annual rate equal to .175% of each
Domestic  Portfolio's  average  daily net assets and .475% of the  International
Portfolio's average daily net assets. For the International  Portfolio,  Western
Asset  received  $970,680  (prior to fees waived of $970,680) for the year ended
June 30, 1996,  $480,824  (prior to fees waived of $480,824)  for the year ended
June 30, 1995 and $572,322 (prior to fees waived of $572,322) for the year ended
June 30, 1994.

         Each  Portfolio pays all of its other expenses which are not assumed by
the adviser or the Administrator. These expenses include, among others, expenses
of preparing and printing  prospectuses,  statements of additional  information,
proxy statements and reports and of distributing them to existing  shareholders,
custodian charges, transfer agency fees,  organizational expenses,  compensation
of the directors who are not "interested persons" of the adviser, Administrator
or Distributor,  as that  term is  defined  in the 1940  Act,  legal  and audit
expenses,  insurance expenses,  expenses of registering and qualifying shares of
the  Portfolio  for  sale  under  federal  and  state  law,  distribution  fees,
governmental fees, expenses incurred in connection with membership in investment
company   organizations,   interest  expense,   taxes  and  brokerage  fees  and
commissions.  The Portfolios also are liable for such  nonrecurring  expenses as
may arise, including litigation to which a Portfolio or the Fund may be a party.
The Fund may also have an  obligation  to indemnify  its  directors and officers
with respect to litigation.

         Under the Advisory Agreement,  Western Asset will not be liable for any
error of  judgment  or  mistake of law or for any loss  suffered  by the 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.

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

                                       25

<PAGE>


The Fund's Administrator

         Legg Mason Fund  Adviser,  Inc.  ("Administrator"),  111 South  Calvert
Street,  Baltimore,  MD 21202,  serves as the  administrator  for the Fund under
Administration   Agreements   with   Western   Asset   dated   June   30,   1992
("Administration  Agreements"). The Administration Agreements were most recently
approved by the Fund's Board of Directors, including a majority of the directors
who are not  "interested  persons" (as defined in the 1940 Act) of the Fund, the
Administrator or its affiliates on April 11, 1996.

         Under the Administration  Agreements, the Administrator is obligated to
provide the  Portfolios  with  office  space and  certain  officers,  to oversee
accounting  and  recordkeeping  services  provided by the Fund's  custodian  and
transfer and dividend-disbursing  agent, and to provide shareholder services not
provided by the Fund's transfer and dividend disbursing agent.

         The   Administrator   receives   for  its   services  to  the  Fund  an
administrative  fee,  calculated  daily and payable  monthly,  at an annual rate
equal to 0.025% of each of the Domestic Portfolio's average daily net assets and
0.075% of the International  Portfolio's average daily net assets. For the years
ended June 30, 1996, 1995 and 1994, the  Administrator  received  administrative
fees  from the  International  Portfolio  of  $182,007,  $90,158  and  $107,311,
respectively.

The Fund's Distributor

         Legg Mason Wood Walker,  Incorporated ("Legg Mason"), 111 South Calvert
Street,  Baltimore,  MD 21202,  acts as a distributor  of the shares of the Fund
pursuant  to an  Underwriting  Agreement  with the Fund dated  August  24,  1990
("Underwriting  Agreement").  This  Agreement was most recently  approved by the
Fund's Board of  Directors,  including a majority of the  directors  who are not
"interested persons" (as defined in the 1940 Act) of the Fund, Legg Mason or its
affiliates, on April 11, 1996.

         Legg Mason is not obligated to sell any specific  amount of Fund shares
and  receives  no  compensation  pursuant  to the  Underwriting  Agreement.  The
Underwriting  Agreement  is  terminable  with respect to any  Portfolio  without
penalty,  at any  time,  by  vote  of a  majority  of the  Fund's  disinterested
directors,  or by  vote of the  holders  of a  majority  of the  shares  of that
Portfolio, or by Legg Mason upon 60 days' notice to the Fund.

         Arroyo  Seco,  Inc.  ("Arroyo  Seco"),  117  East  Colorado  Boulevard,
Pasadena, CA 91105, a wholly owned subsidiary of the Adviser, is also authorized
to offer the Fund's  shares for sale to its  customers  pursuant to an Agreement
dated November 9, 1995. This Agreement was most recently  approved by the Fund's
Board  of  Directors,  including  a  majority  of  the  directors  who  are  not
"interested  persons" (as defined in the 1940 Act) of the Fund, Arroyo Seco, the
Adviser or their affiliates, on September 12, 1996.

         The Fund makes no payments to Arroyo Seco in connection  with the offer
or sale of the Fund's shares,  and Arroyo Seco does not collect any  commissions
or other fees from customers in connection  with the offer or sale of the Fund's
shares. Arroyo Seco is not obligated to sell any specific amount of Fund shares.
The Agreement is terminable without penalty,  at any time, by vote of a majority
of the Fund's directors, a majority of the Fund's disinterested  directors, or a
majority  of the  Fund's  outstanding  shares,  or by Arroyo  Seco upon 60 days'
notice to the Fund.

                                       26

<PAGE>


Expense Limitations

         Western  Asset has  agreed to waive its fees or  reimburse  each of the
Corporate  and  Mortgage  Portfolios  to  the  extent  a  Portfolio's   expenses
(exclusive of taxes, interest,  brokerage and other transaction expenses and any
extraordinary  expenses) exceed during any month an annual percentage rate equal
to .25% of the Portfolio's average daily net assets. Western Asset has agreed to
waive its fees or  reimburse  the  International  Portfolio  to the  extent  the
Portfolio's  expenses  (exclusive  of  taxes,  interest,   brokerage  and  other
transaction expenses and any extraordinary  expenses) exceed during any month an
annual  percentage  rate  equal to .85% of the  Portfolio's  average  daily  net
assets.  These voluntary expense  limitations are in effect to June 30, 1997. In
addition, Western Asset has voluntarily waived for calendar year 1996 all of its
fees for services to the International Portfolio under its management agreement,
other than the portion of such fee equal to the fee paid by Western Asset to the
Administrator (at an annual rate of .075% of average net assets) for services to
the International Portfolio under the Administration Agreement.

                        PRINCIPAL HOLDERS OF SECURITIES

         Set  forth  below is a table  which  contains  the  name,  address  and
percentage  of  ownership  of  each  person  who is  known  by the  Fund  to own
beneficially five percent or more of the outstanding shares of the International
Portfolio as of October 17, 1996:


      Name and Address                      % of Ownership
                                                 As of
                                           October 17, 1996

AT&T                                           12.01%
One Oak Way, Room 3ED146
Berkeley Heights, N.J. 07922

FPL Group, Inc.                                 6.66%
FPL Group Pension Plan
11770 U.S. Highway One
North Palm Beach, FL  33408

Lockheed Corporation                            8.23%
Salaried Pension Fixed Income
4500 Park Granada Boulevard
Calabasas, CA 91399-0222

Annuity Board of the Southern                   6.53%
Baptist Convention
2401 Cedar Springs
Dallas, Texas  75221-2190

Ameritech Blazerhold & Co.                      9.15%
1 Enterprise Dr. W2A
North Quincy, MA 02171-2126

Northwest Airlines                              8.20%
5101 Northwest Drive
St. Paul, MN 55111-3034

IBM Retirement Fund                            10.79%
3001 Summer Street
Stanford, CT 06905

                                       27

<PAGE>


     The following chart contains the name,  address and percentage of ownership
of each person who is known by the Fund to own of record five percent or more of
the outstanding shares of the International Portfolio as of October 17, 1996:


     Name and Address                                % of Ownership
                                                          As of
                                                     October 17, 1996

Northern Trust Company                                    24.13%
10 S. LaSalle Street
Chicago,  IL  60675

Bankers Trust Company of California, N.A.                 14.69%
Arco Finance Station
Los Angeles,  CA  90071

State Street Bank & Trust Company                          9.45%
One Heritage Drive
North Quincy, MA 02171

Chase Manhattan Bank                                      10.79%
Chase Metrotech Center
Brooklyn, NY 11245

Ameritech Blazerhold & Co.                                 9.15%
1 Enterprise Dr. W2A
North Quincy, MA 02171-2126

Boston Safe Deposit & Trust                               14.26%
Cabot Road
Medford, MA 02155


                           PURCHASES AND REDEMPTIONS

         The Fund reserves the right to modify or terminate the mail,  telephone
or wire  redemption  services  described in the Prospectus at any time. The Fund
also  reserves the right to suspend or postpone  redemptions  (1) for any period
during which the New York Stock Exchange  ("Exchange") is closed (other than for
customary  weekend and holiday  closings),  (2) when trading in markets the Fund
normally  utilizes  is  restricted  or an  emergency,  as  defined  by rules and
regulations of the SEC,  exists,  making  disposal of the Fund's  investments or
determination of its net asset value not reasonably practicable, or (3) for such
other periods as the SEC by regulation or order may permit for protection of the
Fund's shareholders.  In the case of any such suspension, an investor may either
withdraw the request for redemption or receive  payment based upon the net asset
value next determined after the suspension is lifted.

         The Fund agrees to redeem shares of each Portfolio solely in cash up to
the lesser of $250,000  or 1% of the  Portfolio's  net assets  during any 90-day
period for any one  shareholder.  In  consideration of the best interests of the
remaining shareholders,  the Fund reserves the right to pay any redemption price
exceeding this amount in whole or in part by a  distribution  in kind of readily
marketable securities held by a Portfolio in lieu of cash. It is highly unlikely
that shares

                                       28

<PAGE>

would ever be redeemed in kind.  If shares are  redeemed in kind, however,  the
redeeming  shareholder  should  expect  to  incur  transaction costs  upon  the
disposition of the securities received in the distribution.


                      PORTFOLIO TRANSACTIONS AND BROKERAGE

         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 June 30, 1996 and 1995, the  International
Portfolio's portfolio turnover rates were 348.40% and 355.03%, respectively.

         Under the  Advisory  Agreement,  the  adviser  is  responsible  for the
execution of that Portfolio's  portfolio  transactions.  In selecting brokers or
dealers,  the  adviser  must  seek  the  most  favorable  price  (including  the
applicable  dealer spread) and execution for such  transactions,  subject to the
possible payment as described below of higher  brokerage  commissions or spreads
to brokers or dealers who provide research and analysis. The Fund may not always
pay the lowest  commission or spread  available.  Rather,  in placing  orders on
behalf of the Fund, the adviser will also take into account such factors as size
of the order,  difficulty of execution,  efficiency of the executing broker's or
dealer's  facilities  (including  the  services  described  below)  and any risk
assumed by the executing broker or dealer.

         Consistent  with the  policy  of  obtaining  most  favorable  price and
execution, the adviser may give consideration to research, statistical and other
services  furnished  by  broker-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  pay  to  those
broker-dealers  a higher  brokerage  commission or spread than may be charged by
other broker-dealers.  In selecting a broker, the adviser may consider that such
research,  analysis and other  services may be useful to it in  connection  with
services to clients other than the Fund.  The adviser's  fees are not reduced by
reason of its receiving such brokerage and research services.

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

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

         Investment  decisions for the 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 larger volume  transactions may produce better  executions and
prices.  For the year ended June 30,  1996,  the  International  Portfolio  paid
$9,685 in brokerage commissions on futures and options transactions.

                                       29

<PAGE>


For the years ended June 30, 1995 and 1994, the International  Portfolio paid no
brokerage commissions.

                           ADDITIONAL TAX INFORMATION

General

         In order to continue to qualify for treatment as a regulated investment
company  ("RIC") under the Internal  Revenue Code of 1986, as amended  ("Code"),
each Portfolio must distribute  annually to its shareholders at least 90% of its
investment  company  taxable  income  (consisting  generally  of net  investment
income, net gains from certain foreign currency  transactions and net short-term
capital  gain,  if any)  ("Distribution  Requirement")  and  must  meet  several
additional  requirements.  With respect to each  Portfolio,  these  requirements
include the  following:  (1) the Portfolio must derive at least 90% of its gross
income each  taxable year from  dividends,  interest,  payments  with respect to
securities  loans and gains from the sale or other  disposition of securities or
foreign  currencies,  or other income (including gains from options,  futures or
forward  contracts)  derived  with  respect  to its  business  of  investing  in
securities or those currencies  ("Income  Requirement");  (2) the Portfolio must
derive  less than 30% of its gross  income  each  taxable  year from the sale or
other  disposition  of securities,  or any of the following,  that were held for
less than three months: options,  futures or forward contracts (other than those
on foreign  currencies),  or foreign currencies (or options,  futures or forward
contracts  thereon) that are not directly  related to the Portfolio's  principal
business of  investing  in  securities  (or options and futures  with respect to
securities) ("Short-Short Limitation");  (3) at the close of each quarter of the
Portfolio's  taxable year, at least 50% of the value of its total assets must be
represented  by cash  and cash  items,  U.S.  Government  securities  and  other
securities,  with those other securities  limited, in respect of any one issuer,
to an amount  that does not  exceed  5% of the  value of the  Portfolio's  total
assets;  and (4) at the close of each quarter of the  Portfolio's  taxable year,
not more than 25% of its total assets may be invested in securities  (other than
U.S. Government securities) of any one issuer.

         A  distribution  declared  by a  Portfolio  in December of any year and
payable to shareholders of record on a date in that month will be deemed to have
been paid by the  Portfolio and received by the  shareholders  on December 31 if
the distribution is paid by the Portfolio during the following  January.  Such a
distribution,  therefore,  will be taxable to shareholders for the year in which
that December 31 falls.

Hedging Transactions

         The use of hedging and option  income  strategies,  such as writing and
purchasing  options and futures  contracts and entering into forward  contracts,
involves complex rules that will determine for income tax purposes the character
and timing of  recognition of the income  received in connection  therewith by a
Portfolio.  Income from foreign  currencies (except certain gains therefrom that
may be excluded by future regulations), and income from transactions in options,
futures  and  forward  contracts  derived  by a  Portfolio  with  respect to its
business of  investing  in  securities  or foreign  currencies,  will qualify as
permissible  income  under the  Income  Requirement.  However,  income  from the
disposition  of  options  and  futures  contracts  (other  than those on foreign
currencies)  will be subject to the Short-Short  Limitation if they are held for
less than three months.  Income from the disposition of foreign currencies,  and
options,  futures  and forward  contracts  on foreign  currencies,  that are not
directly related to a Portfolio's  principal business of investing in securities
(or options and futures with respect to securities)  also will be subject to the
Short-Short Limitation if they are held for less than three months.

                                       30

<PAGE>


         If a Portfolio satisfies certain requirements, any increase in value on
a position that is part of a  "designated  hedge" will be offset by any decrease
in value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining  whether the Portfolio satisfies
the Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross  income for  purposes of that  Limitation.  Each
Portfolio  intends  that,  when it engages in  hedging  transactions,  they will
qualify for this treatment, but at the present time it is not clear whether this
treatment will be available for all of each Portfolio's hedging transactions. To
the extent this treatment is not  available,  a Portfolio may be forced to defer
the closing out of certain options and futures contracts beyond the time when it
otherwise  would be advantageous to do so, in order for the Portfolio to qualify
as a RIC.

Foreign Securities

         The International Portfolio may invest in the stock of "passive foreign
investment  companies"  ("PFICs").  A PFIC is a  foreign  corporation  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,  a
RIC that  holds  stock of a PFIC will be  subject  to  federal  income  tax on a
portion of any  "excess  distribution"  received  on the stock or of any gain on
disposition of the stock  (collectively  "PFIC income"),  plus interest thereon,
even if the RIC  distributes  the  PFIC  income  as a  taxable  dividend  to its
shareholders.  The  balance of the PFIC  income  will be  included  in the RIC's
investment company taxable income and, accordingly, will not be taxable to it to
the extent that income is distributed to its shareholders.

         If the  International  Portfolio  invests in a PFIC and elects to treat
the PFIC as a "qualified  electing  fund," then in lieu of the foregoing tax and
interest  obligation,  the Portfolio would be required to include in income each
year its pro  rata  share  of the  qualified  electing  fund's  annual  ordinary
earnings and net capital gain (the excess of net long-term capital gain over net
short-term  capital loss) -- which would have to be  distributed  because of the
Distribution  Requirement and to avoid  imposition of the 4% excise tax referred
to in the Prospectus -- even if those earnings and gain were not received by the
Fund. In most instances it will be very difficult,  if not  impossible,  to make
this election because of certain requirements thereof.

Original Issue Discount

         A Portfolio  may purchase zero coupon or other debt  securities  issued
with original issue discount.  Original issue discount that accrues in a taxable
year must be included in a Portfolio's income and therefore an equivalent amount
must be distributed to satisfy the Distribution Requirement and avoid imposition
of the 4% excise tax.  Because the original issue discount earned by a Portfolio
in a taxable year may not be represented by cash income,  the Portfolio may have
to  dispose  of  other  securities  and use the  proceeds  thereof  to make  the
necessary  distributions.  A Portfolio may realize  capital gains or losses from
those dispositions,  which would increase or decrease the Portfolio's investment
company taxable income and/or net capital gain. In addition,  any such gains may
be realized on the  disposition  of securities  held for less than three months.
Because  of  the  Short-Short  Limitation,  any  such  gains  would  reduce  the
Portfolio's ability to sell other securities (and certain options, futures, and,
with  respect to the  International  Portfolio,  forward  contracts  and foreign
currencies)  held for less than three  months  that it might wish to sell in the
ordinary course of its portfolio management.

                                       31

<PAGE>


Miscellaneous

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

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

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

                               OTHER INFORMATION

         The Fund is a Maryland  corporation,  incorporated on May 16, 1990. The
capitalization  of the Fund consists of five billion shares of common stock with
a par value of $0.001 each. The Fund has six Portfolios in addition to the three
Portfolios  described  herein.  The Board of Directors may establish  additional
Portfolios (with different  investment  objectives and fundamental  policies) at
any time in the future. Establishment and offering of additional Portfolios will
not alter the rights of the Fund's shareholders.  When issued,  shares are fully
paid,  non-assessable,  redeemable and freely  transferable.  Shares do not have
preemptive rights or subscription  rights.  In liquidation of a Portfolio,  each
shareholder  is  entitled to receive his or her pro rata share of the net assets
of that Portfolio.

Performance Information

         The Fund  may,  from  time to time,  include  the  total  return of its
Portfolios  in marketing  materials or reports to  shareholders  or  prospective
investors.  Quotations  of average  annual total return for a Portfolio  will be
expressed  in  terms  of the  average  annual  compounded  rate of  return  of a
hypothetical investment in the Portfolio over periods of one, five and ten years
(up to the life of the Portfolio), calculated pursuant to the following formula:
P (1 + T)n = ERV (where P = a hypothetical  initial  payment of $1,000,  T = the
average  annual  total  return,  n =  number  of  years,  and  ERV = the  ending
redeemable  value of a hypothetical  $1,000 payment made at the beginning of the
period).  All total return figures reflect the deduction of a proportional share
of Portfolio expenses on an annual basis and assume that all dividends and other
distributions are reinvested when paid.

                                       32

<PAGE>


The  International  Securities  Portfolio's  returns as of June 30, 1996 were as
follows:
                                                             Average
                                        Cumulative            Annual
                                       Total Return        Total Return
One Year                                 10.36%              10.36%
Life of Fund(A)                          22.42%               5.98%

(A) Fund's inception January 7, 1993.


     The Fund's  performance  may fluctuate daily depending upon such factors as
the  average  maturity of its  securities,  changes in  investments,  changes in
interest  rates  and  variations  in  operating  expenses.   Therefore,  current
performance  does not provide a basis for determining  future  performance.  The
fact that the Fund's performance will fluctuate and that shareholders' principal
is not  guaranteed  or insured  should be  considered  in  comparing  the Fund's
performance with the performance on fixed-income  investments.  In comparing the
performance of the Fund to other investment vehicles,  consideration should also
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
performance and whether there are any special charges that may reduce the yield.


Custodian, Transfer Agent and Dividend-Disbursing Agent

     State Street Bank and Trust Company,  P.O. Box 1790, Boston,  Massachusetts
02105, serves as custodian of the Fund's assets. Boston Financial Data Services,
Inc., P.O. Box 953, Boston, MA 02103, serves as transfer and dividend-disbursing
agent and  administrator  of  various  shareholder  services.  Shareholders  who
request an historical  transcript of their  accounts will be charged a fee based
upon the number of years researched.  The Fund reserves the right, upon 60 days'
written  notice,  to make other  charges to  investors  to cover  administrative
costs.

Independent Accountants

     Price  Waterhouse LLP, 7 St. Paul Street,  Baltimore,  Maryland 21202,  has
been  selected  by the Board of  Directors  to serve as the  Fund's  independent
accountants.

Legal Counsel

     Munger,  Tolles & Olson,  355 South Grand Avenue,  Los Angeles,  California
90071, serves as legal counsel to the Fund.


                                       33

<PAGE>


                              FINANCIAL STATEMENTS

     The  Statement  of  Assets  and  Liabilities  as of June  30,  1996 for the
Corporate  Securities  Portfolio,  and Mortgage  Securities  Portfolio,  and the
Report of Independent  Accountants  related thereto,  are shown on the following
pages. As of June 30, 1996, neither the Corporate  Securities  Portfolio nor the
Mortgage  Securities  Portfolio had commenced  operations  (i.e.  first begun to
invest its assets in accordance with its investment objectives). Accordingly, no
financial  statements  other than such Statement of Assets and Liabilities  have
been prepared.

     The International Portfolio's Portfolio of Investments as of June 30, 1996,
the Statement of Assets and  Liabilities  as of June 30, 1996,  the Statement of
Operations  for the year ended June 30,  1996,  the  Statement of Changes in Net
Assets for the years ended June 30, 1996 and 1995; and the Financial  Highlights
for the same periods,  the Notes to Financial  Statements and the related Report
of the Independent  Accountants,  all of which are included in the International
Portfolio's report for the year ended June 30, 1996, are hereby  incorporated by
reference in this Statement of Additional Information.


                                       34

<PAGE>



                           WESTERN ASSET TRUST, INC.
                      STATEMENTS OF ASSETS AND LIABILITIES
                                 JUNE 30, 1996

<TABLE>
<CAPTION>

                                                                       Corporate      Mortgage
                                                                       Securities     Securities
                                                                       Portfolio      Portfolio
<S><C>
Assets
   Cash                                                                $ 1,000        $ 1,000
   Deferred organization and initial offering costs                     16,000         16,000
Total assets                                                            17,000         17,000

Liabilities
   Accrued organization expenses and initial offering costs             16,000         16,000
Total liabilities                                                       16,000         16,000

Net Assets-Offering  and  redemption  price of $100.00 per
  share with 10 shares each outstanding of the Corporate
  Securities and Mortgage Securities Portfolios
  (5,000,000,000 shares par value $.001 per share authorized)          $ 1,000        $ 1,000

</TABLE>


                 NOTES TO STATEMENTS OF ASSETS AND LIABILITIES

   A. Western Asset Trust, Inc.  ("Corporation")  was organized on May 16, 1990.
The   Corporate   Securities   Portfolio  and  Mortgage   Securities   Portfolio
("Portfolios")  constitute  two of the nine  portfolios  established  under  the
Corporation at June 30, 1996. The Portfolios  have had no operations  other than
those matters related to their  organization  and  registration as an investment
company under the  Investment  Company Act of 1940 and the sale of their shares.
Western Asset Management Company ("Western Asset"), a wholly owned subsidiary of
Legg Mason,  Inc. (a  financial  services  holding  company),  has  provided the
initial capital for the Portfolios by purchasing 10 shares each of the Corporate
Securities  Portfolio  and Mortgage  Securities  Portfolio at $100.00 per share.
Such  shares  were  acquired  for  investment  and  can be  disposed  of only by
redemption. Legg Mason Wood Walker,  Incorporated,  a wholly owned subsidiary of
Legg Mason,  Inc. and a member of the New York Stock Exchange,  and Arroyo Seco,
Inc., a wholly owned  subsidiary of Western Asset,  act as  distributors  of the
Portfolios' shares.

   B.  Deferred  organization  and initial  offering  costs  represent  expenses
incurred in connection with the Portfolios'  organization  and will be amortized
on a straight line basis over five years  commencing  on the  effective  date of
each  Portfolio's  initial  sale of shares to the public.  The  Portfolios  have
agreed to reimburse Western Asset for organization  expenses advanced by Western
Asset. The advances are repayable on demand but must be fully repaid within five
years from the  commencement  of  operations.  The proceeds  realized by Western
Asset or any holder thereof upon redemption  during the  amortization  period of
any  of  the  shares   constituting   initial  capital  will  be  reduced  by  a
proportionate  amount of unamortized  deferred  organization  expenses which the
number of initial  shares  redeemed  bears to the number of initial  shares then
outstanding.

                                       35

<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Shareholders
of Western Asset Trust, Inc.

In our opinion,  the accompanying  statements of assets and liabilities  present
fairly, in all material respects,  the financial position of Western Asset Trust
Long Duration  Portfolio,  Short  Duration  Portfolio,  Money Market  Portfolio,
Corporate  Securities  Portfolio and Mortgage Securities  Portfolio (five of the
nine  portfolios  comprising  Western  Asset Trust,  Inc.) at June 30, 1996,  in
conformity  with  generally  accepted  accounting  principles.  These  financial
statements are the responsibility of the Trust's management;  our responsibility
is to express an opinion on these financial  statements based on our audits.  We
conducted our audits of these financial  statements in accordance with generally
accepted auditing standards which require that we plan and perform the audits to
obtain reasonable  assurance about whether the financial  statements are free of
material  misstatement.  An audit included examining,  on a test basis, evidence
supporting the amounts and  disclosures in the financial  statements,  assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.


/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP


Baltimore, Maryland
August 30, 1996


<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 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 risks appear somewhat larger than in Aaa securities.

   A-Bonds which are rated A possess many  favorable  investment  attributes and
are to be considered 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 sometime 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  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 maintenance of other
terms of the contract over any long period of time may be small.

Description of Standard & Poor's corporate bond ratings:

   AAA-This is the highest rating assigned by Standard & Poor's to an obligation
and indicates an extremely strong capacity to pay principal and interest.

   AA-Bonds rated AA also qualify as high-quality debt obligations.  Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.

   A-Bonds  rated  A have a  strong  capacity  to pay  principal  and  interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.


                                      A-1

<PAGE>



   BBB-Bonds  rated  BBB are  regarded  as having an  adequate  capacity  to pay
principal  and  interest.  Whereas they  normally  exhibit  adequate  protection
parameters,  adverse  economic  conditions  or changing  circumstances  are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.

   BB, B, CCC,  CC-Bonds  rated BB, B, CCC and CC are regarded,  on balance,  as
predominately  speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective  characteristics,  these
are  outweighed  by  large  uncertainties  or major  risk  exposure  to  adverse
conditions.

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 stock.

   aa-An issue which is rated "aa" is considered a high-grade  preferred  stock.
This rating  indicates  that there is a reasonable  assurance  that 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  promissory  obligations.  P-1
repayment  capacity  will  normally  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 capacity for repayment of short-term  promissory  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,  will be more
subject to variation.  Capitalization characteristics,  while still appropriate,
may be more  affected by  external  conditions.  Ample  alternate  liquidity  is
maintained.


                                      A-2

<PAGE>


Description of Standard & Poor's Commercial Paper Ratings

   A. Issues  assigned  this highest  rating are regarded as having the greatest
capacity for timely  payment.  Issues in this category are  delineated  with the
numbers 1, 2, and 3 to indicate the relative degree of safety.

   A-1. This  designation  indicates that the degree of safety  regarding timely
payment is either  overwhelming  or very  strong.  Those  issues  determined  to
possess  overwhelming  safety  characteristics  are denoted with a plus (+) sign
designation.

   A-2.  Capacity for timely payment on issues with this  designation is strong.
However,  the  relative  degree  of  safety  is not as high  as for  the  issues
designated "A-1".

                                      A-3

<PAGE>

                           WESTERN ASSET TRUST, INC.
                             Money Market Portfolio
                            Short Duration Portfolio
                           Limited Duration Portfolio
                             Intermediate Portfolio
                                 Core Portfolio
                            Long Duration Portfolio

                      STATEMENT OF ADDITIONAL INFORMATION

         Western Asset Trust,  Inc. ("Fund") is a no-load,  open-end  management
investment company currently consisting of nine separate  professionally managed
investment  portfolios.  The  six  portfolios  described  in this  Statement  of
Additional Information are -- Money Market Portfolio,  Short Duration Portfolio,
Limited  Duration  Portfolio,  Intermediate  Portfolio,  Core Portfolio and Long
Duration Portfolio  (collectively,  "Portfolios").  The Portfolios  described in
this Statement of Additional Information are diversified.

         Effective  March  13,  1996,  the  Portfolio   formerly  known  as  the
"Intermediate   Duration  Portfolio"  changed  its  name  to  the  "Intermediate
Portfolio,"  and the  Portfolio  formerly  known  as the  "Full  Range  Duration
Portfolio" changed its name to the "Core Portfolio."

         The investment  objective of the Money Market Portfolio is to seek high
current income  consistent  with liquidity and  conservation  of principal.  The
investment  objective  of all other  Portfolios  is to  maximize  total  return,
consistent with prudent investment  management and liquidity needs, by investing
to obtain the average  duration  specified for that Portfolio.  These Portfolios
differ  from one  another  primarily  in the  proportion  of assets  invested in
certain types of securities and in their normal duration.

         This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus for the Fund, dated October 30, 1996,
which has been filed with the Securities and Exchange Commission ("SEC"). Copies
of the Fund's  Prospectus are available without charge from Western Asset Trust,
Inc., (818) 844-9400.

Dated: October 30, 1996


<PAGE>

                               TABLE OF CONTENTS


                                                                         Page


Additional Information About Investment Limitations and Policies           3

Valuation of Portfolio Shares                                             14

Management of the Fund                                                    16

Purchases and Redemptions                                                 22

Exchange Privilege                                                        22

Portfolio Transactions and Brokerage                                      23

Additional Tax Information                                                24

Other Information                                                         25

Principal Holders of Securities                                           26

Financial Statements                                                      31

Appendix A - Ratings of Securities                                       A-1


                                       2

<PAGE>

        ADDITIONAL INFORMATION ABOUT INVESTMENT LIMITATIONS AND POLICIES


         In addition to the investment  objective of each Portfolio described in
the Prospectus,  the Fund has adopted certain fundamental investment limitations
for each  Portfolio  that  cannot be changed  except by vote of the holders of a
majority of the outstanding voting securities of the affected Portfolio.
No Portfolio may:

         (1) Borrow  money or issue senior  securities,  except that a Portfolio
may borrow  from banks or enter into  reverse  repurchase  agreements,  provided
that,  immediately  after  such  borrowing,  the total  amount  borrowed  by the
Portfolio,  including reverse repurchase agreements,  does not exceed 33 1/3% of
its total assets  (including the amount borrowed) less  liabilities  (other than
the  borrowings);  and  provided  further  that any  Portfolio  may  enter  into
transactions  in  options,  futures,  options on  futures  and  forward  foreign
currency  contracts  as  described  in the  Prospectus  and  this  Statement  of
Additional Information;

         (2)  Mortgage,  pledge,  hypothecate  or in  any  manner  transfer,  as
security for indebtedness, any securities owned or held by the Portfolio, except
as may be necessary in connection with permitted borrowings,  provided that this
limitation  does not  prohibit  escrow,  collateral  or margin  arrangements  in
connection with the Portfolio's use of options,  futures  contracts,  options on
futures contracts, forward foreign currency contracts, when-issued securities or
reverse repurchase agreements;

         (3) Invest more than 5% of its total assets  (taken at market value) in
securities  of any one issuer,  or buy 10% or more of all the  securities of any
one issuer,  except that up to 25% of a Portfolio's total assets may be invested
without regard to this  limitation,  and provided that this  limitation does not
apply to securities  issued or guaranteed by the U.S.  Government,  its agencies
and instrumentalities;

         (4)  Purchase  securities  on  margin,  except for  short-term  credits
necessary  for clearance of portfolio  transactions  and except that a Portfolio
may  make  margin  deposits  in  connection  with  its use of  options,  futures
contracts, options on futures contracts and forward foreign currency contracts;

         (5) Invest 25% or more of its total assets  (taken at market  value) in
any one  industry,  provided that this  limitation  does not apply to securities
issued or guaranteed by the U.S. Government,  its agencies or instrumentalities,
or repurchase  agreements thereon;  and provided further that investments by the
Money Market Portfolio in U.S. bank instruments  (such as bankers'  acceptances,
certificates  of deposits and time or demand  deposits)  shall not be considered
investments  in any one  industry  for  purposes of this  policy;  and  provided
further that, for purposes of this  limitation,  U.S.  branches of foreign banks
are  considered  U.S.  banks  if they  are  subject  to  substantially  the same
regulation as domestic banks,  and foreign branches of U.S. banks are considered
U.S. banks if the domestic parent would be  unconditionally  liable in the event
that the foreign branch failed to pay on the instruments for any reason;

         (6) Purchase or sell commodities or commodity contracts,  except that a
Portfolio may purchase or sell futures on fixed income  instruments  and foreign
currencies and options thereon, may engage in transactions in foreign currencies
and may purchase or sell options on  securities  and on foreign  currencies  and
forward foreign currency contracts;

         (7) Underwrite securities of other issuers,  except to the extent that,
in connection with the disposition of portfolio  securities,  a Portfolio may be
deemed an underwriter under federal securities laws;

                                       3

<PAGE>



         (8) Make loans, except loans of portfolio  securities and except to the
extent that 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;

         (9) Purchase or sell real estate,  provided that a Portfolio may invest
in securities  secured by, or issued by companies that invest in, real estate or
interests therein, including real estate investment trusts; or

         (10) Invest in oil, gas or mineral-related programs or leases, provided
that a Portfolio  may invest in  securities  issued by companies  that engage in
such activities.

         The  foregoing  investment  limitations  cannot be changed  without the
affirmative vote of the lesser of (a) more than 50% of the outstanding shares of
the  affected  Portfolio  or (b)  67% or  more  of the  shares  of the  affected
Portfolio present at a shareholders' meeting if more than 50% of the outstanding
shares of that  Portfolio are  represented at the meeting in person or by proxy.
Except  with  respect to  investment  limitation  number  (1),  if a  percentage
restriction is adhered to at the time of an investment or  transaction,  a later
increase  or  decrease  in  percentage  resulting  from a change in the value of
portfolio  securities  or  amount  of  total  assets  will not be  considered  a
violation of any of the foregoing limitations.

         Except as otherwise specified,  the investment limitations and policies
described  below  may be  changed  by the  Fund's  Board  of  Directors  without
shareholder approval.

Ratings of Debt Obligations

         Moody's Investors Service,  Inc. ("Moody's),  Standard & Poor's Ratings
Group  ("S&P") and other  nationally  recognized or foreign  statistical  rating
organizations  ("SROs") are private  organizations  that provide  ratings of the
credit quality of debt  obligations.  A description  of the ratings  assigned to
corporate  debt  obligations  by Moody's  and S&P is  included  in Appendix A. A
Portfolio may consider these ratings in determining whether to purchase, sell or
hold a security.  Ratings are not absolute assurances of quality.  Consequently,
securities  with the same maturity,  interest rate and rating may have different
market  prices.  Credit  rating  agencies  attempt  to  evaluate  the  safety of
principal and interest payments and do not evaluate the risks of fluctuations in
market value.  Also,  rating  agencies may fail to make timely changes in credit
ratings in response to subsequent  events, so that an issuer's current financial
condition may be better or worse than the rating indicates.

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

         Pools 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

                                       4

<PAGE>



to  fixed-rate,  fixed-term  mortgages,  the  Portfolios  may purchase  pools of
variable-rate mortgages,  growing-equity mortgages,  graduated-payment mortgages
and other types.

         All poolers apply standards for  qualification to lending  institutions
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  average  life  of  mortgage-related  securities  varies  with  the
maturities and the nature of the underlying mortgage  instruments.  For example,
securities issued by the Government National Mortgage  Association ("GNMA") tend
to have a longer average life than participation  certificates ("PCs") issued by
the Federal Home Loan Mortgage Corporation ("FHLMC") because there is a tendency
for the conventional  and  privately-insured  mortgages  underlying FHLMC PCs to
repay at faster  rates than the  Federal  Housing  Administration  and  Veterans
Administration  loans underlying GNMAs. In addition,  the term of a security may
be shortened by  unscheduled  or early payments of principal and interest on the
underlying  mortgages.  The  occurrence of mortgage  prepayments  is affected by
factors including the level of interest rates, general economic conditions,  the
location and age of the mortgage and other social and demographic conditions.

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

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

Private Mortgage-Related Securities

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

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

                                       5

<PAGE>



Asset-Backed Securities

         Asset-backed  securities are  structurally  similar to  mortgage-backed
securities,  but are secured by  interests  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 the Fund may
invest. Primarily, these securities do not have the benefit of the same security
interest  in the  related  collateral.  Credit card  receivables  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  related  automobile
receivables.  In addition, because of the large number of vehicles involved in a
typical  issuance and technical  requirements  under state laws, the trustee for
the holders of the automobile  receivables may not have 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.

Non-Governmental Fixed Income and Other Debt Securities

         A Portfolio's investments in U.S.  dollar-denominated  fixed income and
other debt  securities  of  non-governmental  domestic  or foreign  issuers  are
limited to fixed income or other debt securities (bonds,  debentures,  notes and
other similar instruments) which meet the minimum ratings criteria set forth for
the Portfolio or, if unrated,  are determined by the Adviser to be of comparable
quality to fixed  income or other debt  securities  in which the  Portfolio  may
invest.

         Each of the Portfolios  (except the Money Market  Portfolio) may invest
up to 5% of its net assets in debt securities of  non-governmental  issuers that
are below  investment  grade but are rated B or higher by Moody's or S&P.  Where
one of the SRO's has assigned an investment  grade rating to an  instrument  and
others have given it a lower rating,  the Fund may consider the instrument to be
investment  grade for purposes of the 5% limitation.  The market for lower-rated
securities may be thinner and less active than that for higher-rated securities,
which can adversely affect the prices at which these securities can be sold, and
may make it difficult  for a Portfolio to obtain  market  quotations  daily.  If
market quotations are not available, these securities will be valued by a method
that the Fund's  Board of Directors  believes  accurately  reflects  fair market
value.  Judgment may play a greater role in valuing  lower-rated debt securities
than is the case with respect to securities  for which a broader range of dealer
quotations and last-sale information are available.

         Although the prices of  lower-rated  bonds are generally less sensitive
to interest rate changes than are higher-rated  bonds, the prices of lower-rated
bonds  may be more  sensitive  to  adverse  economic  changes  and  developments
regarding  the  individual  issuer.  Although  the market for  lower-rated  debt
securities  is not  new,  and  the  market  has  previously  weathered  economic
downturns,  there has been in recent years a substantial  increase in the use of
such securities to fund corporate acquisitions and restructurings.  Accordingly,
the past  performance  of the market for such  securities may not be an accurate
indication of its  performance  during future  economic  downturns or periods of
rising interest rates.

                                       6

<PAGE>



Bank Obligations

         Bank   obligations   in  which  the   Portfolios   may  invest  include
certificates  of deposit,  bankers'  acceptances and time deposits in U.S. banks
(including  foreign branches) which have more than $1 billion in total assets at
the time of  investment  and are  members of the Federal  Reserve  System or are
examined by the Comptroller of the Currency or whose deposits are insured by the
Federal  Deposit  Insurance   Corporation.   A  Portfolio  also  may  invest  in
certificates  of deposit of savings and loan  associations  (federally  or state
chartered and federally insured) having total assets in excess of $1 billion.

         Each Portfolio  limits its  investments in foreign bank  obligations to
U.S. dollar-denominated obligations of foreign banks (including U.S. branches of
foreign  banks) which at the time of investment  (1) have more than $10 billion,
or the  equivalent in other  currencies,  in total assets;  (2) have branches or
agencies  (limited  purpose offices which do not offer all banking  services) in
the United  States;  and (3) are  determined  by the Adviser to be of comparable
quality to obligations of U.S. banks in which the Portfolios may invest. Subject
to the limitation on concentration  of no more than 25% of a Portfolio's  assets
in the  securities of issuers in a particular  industry and the  limitations  on
foreign securities and securities  denominated in foreign currency,  there is no
limitation  on the  amount of a  Portfolio's  assets  which may be  invested  in
obligations of foreign banks which meet the conditions set forth herein,  except
for the Money Market Portfolio, which may invest only in U.S. dollar-denominated
instruments.  As noted in the  Prospectus,  the Total Return  Portfolios have no
present intention of investing in securities  denominated in foreign currencies.
Foreign banks are not generally  subject to examination  by any U.S.  Government
agency or instrumentality.

Restricted and Illiquid Securities

         Each  Portfolio is  authorized to invest up to 10% of its net assets in
securities for which no readily available market exists,  which for this purpose
includes, among other things,  repurchase agreements maturing in more than seven
days.  Restricted  securities  may be sold only (1) pursuant to SEC Rule 144A or
other  exemption,  (2) in  privately  negotiated  transactions  or (3) in public
offerings with respect to which a registration  statement is in effect under the
Securities  Act of 1933.  Such  securities  include  those  that are  subject to
restrictions  contained in the securities  laws of other  countries.  Securities
that are freely marketable in the country where they are principally traded, but
would not be freely marketable in the United States, will not be subject to this
10% limit. Where  registration is required,  a Portfolio may be obligated to pay
all or part of the  registration  expenses and a considerable  period may elapse
between  the time of the  decision  to sell and the  time the  Portfolio  may be
permitted to sell a security  under an  effective  registration  statement.  If,
during such a period,  adverse market conditions were to develop,  the Portfolio
might obtain a less favorable price than prevailed when it decided to sell.

Reverse Repurchase Agreements and Other Borrowing

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

                                       7

<PAGE>



To avoid  the  potential  leveraging  effects  of a  Portfolio's  borrowings,  a
Portfolio will not make investments  while borrowings are in excess of 5% of the
Portfolio's  assets.  Money borrowed will be subject to interest costs which may
or may not be recovered by appreciation of the securities purchased. A Portfolio
also may be required to maintain  minimum  average  balances in connection  with
such borrowing or to pay a commitment or other fee to maintain a line of credit;
either of these  requirements  would  increase  the cost of  borrowing  over the
stated  interest  rate.  The  Portfolios  may  enter  into  reverse   repurchase
agreements as a method of borrowing.

Securities of Foreign Issuers

         Each of the Total Return  Portfolios  is authorized to invest up to 25%
of its total assets in U.S.  dollar-denominated or foreign  currency-denominated
securities  of  foreign  issuers,  but each  currently  intends  to  limit  such
investments to U.S.  dollar-denominated  securities. In addition to the risks of
foreign  securities  described  in  the  Prospectus,  investment  in  securities
denominated in foreign currencies would involve the additional risk that changes
in foreign  exchange rates will affect the value of the securities.  A Portfolio
investing  in such  securities  would be  subject  to the  transaction  costs of
foreign currency conversion.

Short Sales

         The Portfolios do not currently intend to sell securities short,  other
than through the use of futures and options as described in the  Prospectus.  No
Portfolio is permitted to engage in short sales unless it  simultaneously  owns,
or has the right to acquire,  securities  identical  in kind and amount to those
sold short.

Options and Futures

         In pursuing their individual  investment  objectives,  the Total Return
Portfolios may, as described in the  Prospectus,  purchase and sell (write) both
put options and call options on securities,  may enter into futures contracts on
fixed  income  instruments  and may  purchase  and sell  options on such futures
contracts  ("futures  options") for hedging  purposes or in other  circumstances
permitted to a registered  investment  company by the Commodity  Futures Trading
Commission ("CFTC") as part of each Portfolios'  investment  strategy.  If other
types of  options,  futures  contracts  or options on futures  are traded in the
future, a Portfolio may also use those investments.

         Each of the Total Return  Portfolios is also authorized to purchase and
sell put and call options on foreign currencies, enter into futures contracts on
foreign  currencies and may purchase and sell options on such futures contracts.
A Portfolio  may use these  techniques  to attempt to hedge  against  changes in
foreign  currency  exchange  rates  or in  other  circumstances  permitted  to a
registered  investment  company by the CFTC. Each of the Total Return Portfolios
also is authorized to enter into forward foreign  currency  contracts in amounts
approximating the value of some or all of the Portfolio's  securities  positions
(or  anticipated  positions)  denominated  in the  currency  being sold to hedge
against changes in the value of that currency  relative to the U.S.  dollar,  to
increase the Portfolio's exposure to a currency the Adviser believes may rise in
value  relative  to the U.S.  dollar,  or to shift the  Portfolio's  exposure to
foreign currency fluctuations from one currency to another. A Portfolio will not
engage in these  techniques  unless it owns or  intends to  purchase  securities
denominated in a foreign currency,  which the Portfolios do not currently intend
to do.



                                       8

<PAGE>



Options on Securities

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

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

         A Portfolio may write covered call options on securities in which it is
authorized  to invest.  Because it can be  expected  that a call  option will be
exercised if the market value of the  underlying  security  increases to a level
greater than the exercise  price, a Portfolio will write covered call options on
securities  generally when the Adviser believes that the premium received by the
Portfolio,  plus anticipated  appreciation in the market price of the underlying
security up to the exercise price of the option,  will be greater than the total
appreciation  in the price of the security.  The strategy may be used to provide
limited protection against a decrease in the market price of the security, in an
amount  equal to the  premium  received  for  writing  the call  option less any
transaction  costs.  Thus, in the event that the market price of the  underlying
security  held by the  Portfolio  declines,  the amount of such  decline will be
offset wholly or in part by the amount of the premium received by the Portfolio.
If, however, there is an increase in the market price of the underlying security
and the  option is  exercised,  the  Portfolio  would be  obligated  to sell the
security at less than its market value.  The Portfolio would give up the ability
to sell the  portfolio  securities  used to cover the call option while the call
option was outstanding. Such securities would also be considered illiquid in the
case of over-the-counter  ("OTC") options written by a Portfolio,  and therefore
subject to a  Portfolio's  limitation on investing no more than 10% of its total
assets in illiquid  securities.  In addition, a Portfolio could lose the ability
to participate in an increase in the value of such securities above the exercise
price of the call option  because such an increase  would likely be offset by an
increase  in cost of  closing  out the call  option  (or could be negated if the
buyer  chose  to  exercise  the call  option  at an  exercise  price  below  the
securities' current market value).

Futures Contracts and Options on Futures Contracts

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

                                       9

<PAGE>



exposure more effectively and perhaps at a lower cost by using futures contracts
and options on futures contracts.

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

         A Portfolio  may purchase a call option on a futures  contract to hedge
against a market advance in fixed income securities which the Portfolio plans to
acquire at a future date. The purchase of a call option on a futures contract is
analogous  to the  purchase  of a call  option  on an  individual  fixed  income
security  which can be used as a  temporary  substitute  for a  position  in the
security  itself.  A Portfolio  also may write  covered  call options on futures
contracts  as a partial  hedge  against a decline  in the price of fixed  income
securities held in the Portfolio's investment portfolio, or purchase put options
on futures  contracts in order to hedge  against a decline in the value of fixed
income securities held in the Portfolio's  investment portfolio. A Portfolio may
write a covered put option as a partial anticipatory hedge.

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

         A  Portfolio  is also  required  to deposit  and  maintain  margin with
respect to put and call options on futures  contracts written by it. Such margin
deposits will vary  depending on the nature of the underlying  futures  contract
(and the related initial margin  requirements),  the current market value of the
option and other futures positions held by the Portfolio.

                                       10

<PAGE>



         Although some futures  contracts call for making or taking  delivery of
the underlying  securities,  generally  those  contracts are closed out prior to
delivery  by  offsetting  purchases  or  sales  of  matching  futures  contracts
(involving the same currency or underlying  security and delivery month).  If an
offsetting  purchase  price is less than the original sale price,  the Portfolio
realizes  a gain,  or if it is  more,  the  Portfolio  realizes  a  loss.  If an
offsetting sale price is more than the original  purchase  price,  the Portfolio
realizes a gain, or if it is less, the Portfolio  realizes a loss. The Portfolio
will also bear  transaction  costs for each  contract  which will be included in
these calculations.

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

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

Risks Associated with Futures and Options

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

         (1)  Positions  in  futures  contracts  may be  closed  out  only on an
exchange or board of trade which  provides a secondary  market for such  futures
contracts.  Futures  exchanges may limit the amount of fluctuation  permitted in
certain  futures  contract  prices during a single  trading day. The daily limit
establishes  the maximum  amount that the price of a futures  contract  may vary
either up or down from the  previous  day's  settlement  price at the end of the
current  trading  session.  Once the daily  limit has been  reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond  that  limit.  The daily  limit  governs  only price  movements  during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For example,
futures  prices  have  occasionally   moved  to  the  daily  limit  for  several
consecutive  trading days with little or no trading,  thereby  preventing prompt
liquidation  of positions and  subjecting  some holders of futures  contracts to
substantial losses.

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

         (3) Successful use by a Portfolio of futures contracts and options will
depend upon the Adviser's  ability to predict  movements in the direction of the
overall securities and interest rate markets, which may require different skills
and techniques than predicting  changes in the prices of individual  securities.
Moreover,  futures  contracts  relate not to the current level of the underlying
instrument but to anticipated  levels at some point in the future.  There is, in
addition, the risk that

                                       11

<PAGE>



movements in the price of the futures contract will not correlate with movements
in the prices of the  securities  being hedged.  If the price of the  securities
being hedged has moved in a favorable direction, this advantage may be partially
offset by losses in the futures  position.  In addition,  if the  Portfolio  has
insufficient  cash, it may have to sell assets from its investment  portfolio to
meet daily variation margin requirements. Any such sale of assets may or may not
be made at prices that reflect the rising market;  consequently, a Portfolio may
need to sell  assets  at a time  when  such  sales  are  disadvantageous  to the
Portfolio. If the price of the futures contract moves more than the price of the
underlying securities,  the Portfolio will experience either a loss or a gain on
the futures  contract that may or may not be  completely  offset by movements in
the price of the securities that are the subject of the hedge.

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

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

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

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

         (8) Purchasers of options on futures contracts pay a premium in cash at
the time of purchase.  This amount and the transaction  costs are all that is at
risk.  Sellers of options on futures  contracts,  however,  must post an initial
margin and are subject to additional  margin calls which could be substantial in
the event of adverse price movements. In addition, although the maximum amount

                                       12

<PAGE>



at risk when the  Portfolio  purchases  an option  is the  premium  paid for the
option and the transaction  costs,  there may be circumstances when the purchase
of an option on a futures  contract would result in a loss to the Portfolio when
the use of a futures  contract  would not,  such as when there is no movement in
the value of the securities being hedged.

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

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

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

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

Cover for Hedging Strategies

         A  Portfolio  will not use  leverage in its  hedging  strategies.  Each
Portfolio  will comply with  guidelines  established  by the SEC with respect to
coverage  of hedging  strategies  by mutual  funds,  and, if the  guidelines  so
require,  will set aside cash and/or  liquid,  high-grade  debt  securities in a
segregated

                                       13

<PAGE>



account with its custodian in the amount prescribed,  as marked to market daily.
Securities, options or futures positions used for cover and securities held in a
segregated  account  cannot be sold or closed out while the hedging  strategy is
outstanding, unless they are replaced with similar assets. As a result, there is
a possibility that the use of cover or segregation  involving a large percentage
of a  Portfolio's  assets could impede  portfolio  management  or a  Portfolio's
ability to meet redemption requests or other current obligations.

Duration

         Traditionally,  a fixed income  security's term to maturity was used to
evaluate the  sensitivity of the security's  price to changes in interest rates.
Duration is a measure of the expected life of a fixed income  security on a cash
flow basis,  that was  developed as a more  precise  method of  evaluating  such
sensitivity.  A security's  term to maturity  measures only the time until final
payment of the security,  and does not take into account the pattern of payments
made prior to maturity.  Duration  takes time  intervals over which the interest
and principal  payments are scheduled and weights each by the present  values of
the cash to be received at the corresponding future point in time.

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


                         VALUATION OF PORTFOLIO SHARES

         As described in the  Prospectus,  securities  owned by any of the Total
Return  Portfolios for which market  quotations are readily available are valued
at  current  market  value.  Securities  are valued at the last sale price for a
comparable  position on the day the  securities are being valued or, lacking any
sales on such day, at the last  available bid price.  In cases where  securities
are traded on more than one market,  the securities are generally  valued on the
market considered by the Adviser as the primary market.

         Occasionally,  events affecting the value of foreign  investments occur
between  the time at which they are  determined  and the close of trading on the
New York Stock  Exchange  ("Exchange"),  which events will not be reflected in a
computation of a Portfolio's  net asset value on that day. If events  materially
affecting  the value of such  investments  occur  during such time  period,  the
investments will be valued at their fair value as determined in good faith by or
under the direction of the Board of Directors.

Use of the Amortized Cost Method

         The Board of Directors has decided that the best method for determining
the value of securities  held by the Money Market  Portfolio is amortized  cost.
Under this  method,  portfolio  instruments  are valued at  acquisition  cost as
adjusted  for  amortization  of premium or accrual of  discount  rather  than at
current market value. The Board of Directors continually assesses this method of
valuation and recommends changes where necessary to assure that the Money Market
Portfolio's  investments  are valued at their fair value as  determined  in good
faith by or under the direction of the directors.

                                       14

<PAGE>



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

         Under Rule 2a-7,  the Money  Market  Portfolio is permitted to purchase
instruments  which are  subject to demand  features or standby  commitments.  As
defined by the Rule,  a demand  feature  entitles  the  Portfolio to receive the
principal  amount of the instrument  from the issuer or a third party (1) at any
time,  on no  more  than 30  days'  notice  or (2) at  specified  intervals  not
exceeding 397 days, and upon no more than 30 days' notice. A standby  commitment
entitles the Portfolio to achieve same day settlement and to receive an exercise
price equal to the  amortized  cost of the  underlying  instrument  plus accrued
interest at the time of exercise.

         Although  demand  features and standby  commitments are techniques that
are defined as "puts" under Rule 2a-7,  the Portfolio  does not consider them to
be "puts"  as that term is used in the  Fund's  investment  limitations.  Demand
features and standby  commitments  are features  which  enhance an  instrument's
liquidity,  while the investment limitation limiting "puts" is designed to limit
the  purchase  and sale of put and call  options to certain  purposes and is not
designed to prohibit the Fund from using  techniques which enhance the liquidity
of portfolio instruments.

Monitoring Procedures

         The Board of Directors'  procedures include monitoring the relationship
between the amortized cost value per share and a net asset value per share based
upon  available  indications  of market value.  The Board will take any steps it
considers appropriate if there is a difference of more than 0.5% between the two
(such as  redeeming in kind or  shortening  the average  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 Money Market  Portfolio to limit its investments
to  instruments  that present  minimal credit risk, in the opinion of the Board,
and are of high  quality.  The Rule also  requires  the  Portfolio to maintain a
dollar-weighted  average  portfolio  maturity  of not more  than 90 days that is
appropriate  to the  objective of  maintaining a stable net asset value of $1.00
per share.  In  addition,  no  instrument  considered  under SEC rules to have a
remaining maturity of more than 397 days can be purchased by the Portfolio.  The
Portfolio  may  hold  securities  with  maturities  greater  than  397  days  as
collateral for repurchase  agreements and other  collateralized  transactions of
short  duration.  Should the  disposition  of a portfolio  security  result in a
dollar-weighted  average portfolio  maturity of more than 90 days, the Portfolio
will invest its available cash to reduce the average maturity to 90 days or less
as soon as possible.

         It is the Money Market  Portfolio'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  Portfolio'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.


                                       15

<PAGE>



         In periods of declining  interest  rates,  the indicated daily yield on
shares of the Money Market  Portfolio  computed by dividing the annualized daily
income on the 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  Portfolio  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.

                             MANAGEMENT OF THE FUND

Directors and Officers

         The Fund's officers are responsible for the operation of the Fund under
the direction of the Board of Directors.  The officers and directors of the Fund
and their principal  occupations during the past five years are set forth below.
An asterisk (*) indicates directors who are "interested  persons" of the Fund as
defined in the 1940 Act.  The address of each  officer and  director is 117 East
Colorado Blvd., Pasadena, CA 91105.

         William G.  McGagh,  [67] (1)(2)  Chairman  of the Board and  Director;
Consultant,   McGagh  Associates  (corporate  financial   consulting),   January
1989-present; Director of Pacific American Income Shares, Inc.; formerly: Senior
Vice-President,  Chief  Financial  Officer and Director of Northrop  Corporation
(military aircraft).

         Norman  Barker,  Jr.,  [74]  Director;   Director  of  American  Health
Properties (real estate investment trust),  Southern  California Edison Company,
SPI  Pharmaceuticals,  Inc.,  ICN  Pharmaceutical,  Inc.,  and  TCW  Convertible
Securities Fund, Inc. (management investment company); formerly: Chairman of the
Board of First Interstate Bancorp.

         Dr. Richard C. Gilman, [73] (1) (2) Director; President Emeritus of
Occidental College, 1988- present; Director of Pacific American Income Shares,
Inc.; formerly:  President and Chief Executive Officer of Occidental College.

         Gordon L. Hough, [77] (1) Director; Director of Pacific American Income
Shares, Inc., Ameron, Inc. (construction products) and the Chronicle Publishing
Company; formerly: Director of First Interstate Bank.

         *W. Curtis Livingston, III, [53] (1) President and Director; President,
Director and Chief Executive Officer of Western Asset Management Company
(investment management firm), December 1980-present; President, Pacific American
Income Shares, Inc.

         *Ronald L. Olson, [55] (2) (3) Director; Senior Partner, Munger, Tolles
& Olson (a law partnership); Director of Pacific American Income Shares, Inc.

         *Louis A. Simpson, [59] (4) Director; President and CEO Capital
Operations of Government Employees Insurance Company (GEICO Corporation) since
May 1993; Vice Chairman of GEICO (1985- 1993); Senior Vice President and Chief
Investment Officer of GEICO (1979-1985).  Director of Pacific American Income
Shares, Inc., Potomac Electric Power Company, Potomac Capital Investment
Corporation, and Salomon Inc.  Formerly: President and CEO of Western Asset
Management Company.


                                       16

<PAGE>



         Donna E. Barnes, [36] Secretary; Secretary, Pacific American Income
Shares, Inc., since April 1996; Compliance Officer of Western Asset Management
Company, 1991 - present.  Formerly: Assistant Secretary of the Fund and Pacific
American Income Shares, Inc., 1993-1996.

         Carl L. Eichstaedt,  [36] Vice President;  Portfolio Manager of Western
Asset Management Company since 1994; formerly: Senior partner, Portfolio Manager
of  Harris  Investment  Management,  1993-1994;  Portfolio  Manager  of  Pacific
Investment  Management  Company,  1992-1993;  Director  Fixed Income of Security
Pacific  Investment  Managers,   1990-1992;   and  Vice  President  of  Chemical
Securities, Inc., 1986-1990.

         Kent S.  Engel,  [49]  Vice-President;  Director  and Chief  Investment
Officer of Western Asset Management  Company,  1969-present;  Vice-President and
Portfolio Manager of Pacific American Income Shares, Inc.

         Keith J. Gardner, [39] Vice President; Portfolio Manager of Western
Asset Management Company since 1994; formerly: Senior Portfolio Manager of Legg
Mason, Inc., 1992-1994; Portfolio Manager of T. Rowe Price Associates, Inc.,
1985-1992.

         Scott F. Grannis, [47] Vice President;  Director and Economist, Western
Asset Management Company, 1989 - present;  Director,  Supershares Services Corp.
(investment  company  services);   formerly:   Vice-President,   Leland  O'Brien
Rubinstein (investment advisory firm), 1986-89.

         Ilene S. Harker,  [41] Vice President;  Director of Administration  and
Controls,  Western  Asset  Management  Company,  1978-present;  Vice  President,
Pacific  American Income Shares,  Inc.,  since April 1996;  Formerly:  Assistant
Secretary of the Fund and Secretary of Pacific  American  Income  Shares,  Inc.,
1993-1996.

         James W. Hirschmann,  III, [36] Vice-President;  Director of Marketing,
Western Asset Management Company, April 1989-present;  formerly:  Vice-President
and Director of Marketing,  Financial Trust  Corporation (bank holding company),
January 1988 - April 1989; Vice-President of Marketing, Atalanta/Sosnoff Capital
(investment management company), January 1986 - January 1988.

         Marie K. Karpinski,  [47] Vice-President and Treasurer;  Vice-President
and  Treasurer  of fifteen  Legg Mason funds  (open-end  investment  companies);
Secretary/Treasurer   of  Worldwide  Value  Fund,  Inc.  (closed-end  investment
company);   Assistant   Treasurer  of  Pacific  American  Income  Shares,   Inc.
(closed-end  investment  company);  Treasurer of Legg Mason Fund Adviser,  Inc.,
March  1986-present;  Vice-President of Legg Mason Wood Walker,  Inc.,  February
1992 - present;  Assistant Vice-President of Legg Mason Wood Walker, Inc., March
1989- February 1992.

         Randolph L. Kohn, [49] Vice-President; Director of Client Services,
Western Asset Management Company, 1984-present.

         S. Kenneth Leech, [42] Vice-President; Director of Portfolio
Management, Western Asset Management Company, May 1990-present; formerly:
Senior Trader of Greenwich Capital, 1988-1990; Fixed Income Manager of The First
Boston Corporation (holding company; stock and bond dealers), 1985-1987.

         Edward A. Moody, [46] Vice-President; Director and Portfolio Manager,
Western Asset Management Company.


                                       17

<PAGE>



         Joseph L. Orlando, [36] Vice-President;  Marketing Executive of Western
Asset Management Company; formerly: Regional Manager of T. Rowe Price Associates
(investment management firm), January 1988 - July 1992.

         Steven  T.  Saruwatari,  [31]  Assistant  Treasurer;  Senior  Financial
Officer,  Western Asset Management  Company;  formerly:  Controller-Finance  for
LaSalle Paper Company/Spicers Paper, Inc. (distributor of fine printing papers),
June   1991-November   1994;   and  Senior   Auditor  for  Coopers  and  Lybrand
(international public accounting firm), September 1988 - May 1991.

         Stephen A. Walsh, [37] Vice-President: Director and Portfolio Manager,
Western Asset Management Company; formerly: Portfolio Manager and Trader of
Security Pacific Investment Managers, Inc. (investment management company),
1989-1991.

- --------------------
(1) Member of the Executive  Committee of the Board.  When the full Board is not
in session,  the  Executive  Committee  may  exercise all the powers held by the
Board in the  management  of the  business  and  affairs of the Fund that may be
lawfully exercised by the full Board, except the power to declare a dividend, to
authorize  the  issuance  of stock,  to  recommend  to  stockholders  any matter
requiring stockholders' approval, to amend the By-Laws, or to approve any merger
or share exchange which does not require shareholder approval.

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

         The Fund has no nominating or compensation committee.

(3) Mr. Olson may be deemed an interested person because the law firm in which
he is a partner has provided certain services to the Fund and its investment
adviser.

(4) Because Mr. Simpson is a Director of Salomon Inc., the parent company of a
registered broker-dealer, Mr. Simpson may be an interested person.

         Officers and  directors of the Fund who are  affiliated  persons of the
Adviser,  Administrator or Distributor  receive no salary or fees from the Fund.
Non-affiliated  directors  of the Fund  receive  a fee of  $2,000  annually  for
serving as a director,  and a fee of $500 and related expenses per Portfolio for
each  meeting of the Board of  Directors  attended by them.  The Chairman of the
Board receives an additional $1,000 per year for serving in that capacity.

         The  following  table  provides  certain  information  relating  to the
compensation  of the Fund's  directors  and senior  executive  officers  for the
fiscal year ended June 30, 1996.

                                       18

<PAGE>



COMPENSATION TABLE

<TABLE>
<CAPTION>


                                                                          Total Compensation From Fund
                                       Aggregate Compensation From the    and Fund Complex Paid to
Name of Person and Position            Fund*                              Directors**
<S><C>
William G. McGagh -
Chairman of the Board and
Director                               $10,000                               $18,400

Dr. Richard C. Gilman - Director       $ 8,500                               $16,500

Gordon L. Hough - Director             $ 9,000                               $17,400

Ronald L. Olson - Director             $ 6,500                               $13,600

W. Curtis Livingston, III - President
and Director                              None                                  None

Norman Barker, Jr. - Director          $ 8,000                               $18,400

Louis A. Simpson - Director            $ 6,500                               $14,000

Ilene S. Harker - Vice President          None                                  None

Marie K. Karpinski - Vice President
and Treasurer                             None                                  None

</TABLE>

*  Represents  fees paid to each director  during the fiscal year ended June 30,
   1996.

** Represents aggregate compensation paid to each director during the calendar
   year ended December 31, 1995.

The Fund's Investment Adviser

         Western  Asset  Management  Company  ("Adviser"),   117  East  Colorado
Boulevard, Pasadena, CA 91105, serves as investment adviser to the Fund under an
Investment Advisory Agreement dated August 24, 1990, and amended effective as of
the date hereof,  between the Adviser and the Fund covering the Portfolios other
than the Intermediate and Short Duration Portfolios,  and an Investment Advisory
Agreement dated February 10, 1994, and amended  effective as of the date hereof,
between the Adviser and the Fund covering the  Intermediate  and Short  Duration
Portfolios (together, the "Advisory Agreement"). The Advisory Agreement was most
recently  approved  by the  Board of  Directors,  including  a  majority  of the
directors who are not  "interested  persons" (as defined in the 1940 Act) of the
Fund, the Adviser or its affiliates, on April 11, 1996.

         Under the Advisory  Agreement,  the Adviser is responsible,  subject to
the  general  supervision  of the  Fund's  Board of  Directors,  for the  actual
management  of the  Fund's  assets,  including  the  responsibility  for  making
decisions  and  placing  orders  to buy,  sell or  hold a  particular  security,
consistent with the investment  objectives and policies  described in the Fund's
Prospectus  and this  Statement of Additional  Information.  The Adviser also is
responsible  for the  compensation of directors and officers of the Fund who are
employees  of the  Adviser  or its  affiliates.  The  Adviser  receives  for its
services to the Fund an advisory fee calculated daily and payable monthly, at an
annual  rate equal to 0.40% of the Core and Long  Duration  Portfolio's  average
daily  net  assets;  0.35% of the  Intermediate  Portfolio's  average  daily net
assets;  and 0.30% of the Limited  Duration,  Short  Duration  and Money  Market
Portfolio's  average  daily net assets.  Effective  as of the date  hereof,  the
advisory fee for the Intermediate  and Limited  Duration  Portfolios was changed
from 0.40% of average daily net assets to

                                       19

<PAGE>



0.35% and 0.30%, respectively, of average daily net assets, although the Adviser
had previously, effective as of March 13, 1996, waived a portion of its fees for
those  Portfolios so that the advisory fees for those  Portfolios were 0.35% and
0.30%, respectively, of average daily net assets.

         For the Core Portfolio,  the Adviser received $1,548,346 (prior to fees
waived of $111,421)  for the year ended June 30, 1996,  $963,008  (prior to fees
waived of $69,442) for the year ended June 30, 1995 and $732,397  (prior to fees
waived of  $158,373)  for the year ended  June 30,  1994.  For the  Intermediate
Portfolio,  the Adviser received $130,938 (prior to fees waived of $130,938) for
the year ended June 30, 1996 and $29,571  (prior to fees waived of $29,571)  for
the year ended June 30, 1995. For the Limited  Duration  Portfolio,  the Adviser
received  $7,212  (prior to fees  waived of  $7,212)  for the period May 1, 1996
(commencement of operations) to June 30, 1996.

         Each  Portfolio pays all of its other expenses which are not assumed by
the Adviser or the Administrator. These expenses include, among others, expenses
of preparing and printing  prospectuses,  statements of additional  information,
proxy statements and reports and of distributing them to existing  shareholders,
custodian charges, transfer agency fees,  organizational expenses,  compensation
of the directors who are not "interested persons" of the Adviser,  Administrator
or  Distributor,  as that  term is  defined  in the 1940  Act,  legal  and audit
expenses,  insurance expenses,  expenses of registering and qualifying shares of
the  Portfolio  for  sale  under  federal  and  state  law,  distribution  fees,
governmental fees, expenses incurred in connection with membership in investment
company   organizations,   interest  expense,   taxes  and  brokerage  fees  and
commissions.  The Portfolios also are liable for such  nonrecurring  expenses as
may arise, including litigation to which a Portfolio or the Fund may be a party.
The Fund may also have an  obligation  to indemnify  its  directors and officers
with respect to litigation.

         Under the  Advisory  Agreement,  the Adviser will not be liable for any
error of  judgment  or  mistake of law or for any loss  suffered  by the 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.

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

The Fund's Administrator

         Legg Mason Fund  Adviser,  Inc.  ("Administrator"),  111 South  Calvert
Street,  Baltimore,  MD 21202, serves as the administrator for the Fund under an
Administration  Agreement  with the Fund dated  August  24,  1990  covering  the
Portfolios  other than the Intermediate  and Short Duration  Portfolios,  and an
Administration  Agreement  with the Fund dated  February  10, 1994  covering the
Intermediate  and  Short  Duration  Portfolios  (together,  the  "Administration
Agreement").  The  Administration  Agreement was most recently approved on April
11, 1995 by the Fund's Board of Directors, including a majority of the directors
who  are  not  "interested  persons"  of  the  Fund,  the  Administrator  or its
affiliates.


                                       20

<PAGE>



         Under the Administration  Agreement,  the Administrator is obligated to
provide the Fund with office space and certain officers,  to oversee  accounting
and  recordkeeping  services  provided by the Fund's  custodian and transfer and
dividend-disbursing  agent,  and to provide  certain  shareholder  services  not
provided by the Fund's transfer and dividend-disbursing agent.

         For  the  Core,  Long  Duration,  Limited  Duration  and  Money  Market
Portfolios,  the  Administrator  receives  for  its  services  to  the  Fund  an
administrative  fee,  calculated  daily and payable  monthly,  at an annual rate
equal to 0.10% of the  Portfolio's  average daily net assets.  Effective July 1,
1991, the Administrator  voluntarily  agreed to limit its annual fee to 0.05% of
the Portfolio's average daily net assets. This agreement is voluntary and may be
terminated  at any time.  For services to the Short  Duration  and  Intermediate
Portfolios,  the  Administrator  receives a fee,  calculated  daily and  payable
monthly, at an annual rate equal to 0.05% of those Portfolio's average daily net
assets.  For the Core Portfolio,  the  Administrator  received fees of $193,547,
$120,376  and  $183,100  for the  years  ended  June 30,  1996,  1995 and  1994,
respectively.  For the  Intermediate  Portfolio,  the  Administrator  waived all
administrative  fees for the year ended June 30, 1996  and1995.  For the Limited
Duration  Portfolio,  the  Administrator  received fees of $1,202 (prior to fees
waived of $69) for the period May 1, 1996  (commencement  of operations) to June
30, 1996.

The Fund's Distributor

         Legg Mason Wood Walker,  Incorporated ("Legg Mason"), 111 South Calvert
Street,  Baltimore,  MD 21202,  acts as a distributor  of the shares of the Fund
pursuant  to an  Underwriting  Agreement  with the Fund dated  August  24,  1990
("Underwriting  Agreement").  This  Agreement was most recently  approved by the
Fund's Board of  Directors,  including a majority of the  directors  who are not
"interested persons" (as defined in the 1940 Act) of the Fund, Legg Mason or its
affiliates, on April 11, 1996.

         Legg Mason is not obligated to sell any specific  amount of Fund shares
and  receives  no  compensation  pursuant  to the  Underwriting  Agreement.  The
Underwriting  Agreement  is  terminable  with respect to any  Portfolio  without
penalty,  at any  time,  by  vote  of a  majority  of the  Fund's  disinterested
directors,  or by  vote of the  holders  of a  majority  of the  shares  of that
Portfolio, or by Legg Mason upon 60 days' notice to the Fund.

         Arroyo  Seco,  Inc.  ("Arroyo  Seco"),  117  East  Colorado  Boulevard,
Pasadena, CA 91105, a wholly owned subsidiary of the Adviser, is also authorized
to offer the Fund's  shares for sale to its  customers  pursuant to an Agreement
dated November 9, 1995. This Agreement was most recently  approved by the Fund's
Board  of  Directors,  including  a  majority  of  the  directors  who  are  not
"interested  persons" (as defined in the 1940 Act) of the Fund, Arroyo Seco, the
Adviser or their affiliates, on September 12, 1996.

         The Fund makes no payments to Arroyo Seco in connection  with the offer
or sale of the Fund's shares,  and Arroyo Seco does not collect any  commissions
or other fees from customers in connection  with the offer or sale of the Fund's
shares. Arroyo Seco is not obligated to sell any specific amount of Fund shares.
The Agreement is terminable without penalty,  at any time, by vote of a majority
of the Fund's directors, a majority of the Fund's disinterested  directors, or a
majority  of the  Fund's  outstanding  shares,  or by Arroyo  Seco upon 60 days'
notice to the Fund.

Expense Limitations

         The Adviser has voluntarily  agreed to waive its fees and/or  reimburse
each  Portfolio  to the extent the  Portfolio's  expenses  (exclusive  of taxes,
interest, brokerage and other transaction expenses

                                       21

<PAGE>



and any  other  extraordinary  expenses)  exceed  during  any  month  an  annual
percentage rate equal to 0.50% of the  Portfolio's  average daily net assets for
such month for the Core and Long Duration  Portfolios,  0.45% of the Portfolio's
average  daily net  assets for such month for the  Intermediate  Portfolio,  and
0.40% of the  Portfolio's  average daily net assets for such month for the Money
Market,  Limited  Duration and Short Duration  Portfolios.  These agreements are
voluntary and may be terminated at any time.

         A Portfolio  may  reimburse  its Adviser for fees  foregone or expenses
reimbursed  by it pursuant to the expense  limitation if expenses fall below the
limit prior to the end of the fiscal year.

                           PURCHASES AND REDEMPTIONS

         The Fund reserves the right to modify or terminate the mail,  telephone
or wire  redemption  services  described in the Prospectus at any time. The Fund
also  reserves the right to suspend or postpone  redemptions  (1) for any period
during  which the  Exchange  is closed  (other  than for  customary  weekend and
holiday  closings),  (2) when trading in markets the Fund  normally  utilizes is
restricted  or an  emergency,  as defined by rules and  regulations  of the SEC,
exists,  making disposal of the Fund's  investments or  determination of its net
asset value not reasonably practicable, or (3) for such other periods as the SEC
by regulation or order may permit for the protection of the Fund's shareholders.
In the case of any such suspension,  an investor may either withdraw the request
for redemption or receive payment based upon the net asset value next determined
after the suspension is lifted.

         The Fund agrees to redeem shares of each Portfolio solely in cash up to
the lesser of $250,000  or 1% of the  Portfolio's  net assets  during any 90-day
period for any one  shareholder.  In  consideration of the best interests of the
remaining shareholders,  the Fund reserves the right to pay any redemption price
exceeding this amount in whole or in part by a  distribution  in kind of readily
marketable securities held by a Portfolio in lieu of cash. It is highly unlikely
that  shares  would ever be redeemed  in kind.  If shares are  redeemed in kind,
however, the redeeming shareholder should expect to incur transaction costs upon
the disposition of the securities received in the distribution.

                               EXCHANGE PRIVILEGE

         Shareholders  in any of the  Portfolios  are entitled to exchange their
shares for  shares of the other  Portfolios,  provided  that the shares of those
Portfolios are eligible for sale in the  shareholder's  state of residence,  and
are being offered at the time.

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

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



                                       22

<PAGE>



                      PORTFOLIO TRANSACTIONS AND BROKERAGE

         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  June  30,  1996  and  1995,  the  Core
Portfolio's portfolio turnover rates were 266.0% and 257.9%,  respectively.  For
the years ended June 30, 1996 and 1995, the Intermediate  Portfolio's  portfolio
turnover  rate were 841.89% and 764.45%,  respectively.  For the year ended June
30,  1996,  the  Limited  Duration  Portfolio's  annualized  turnover  rate  was
1,042.0%.

         Under the  Advisory  Agreement,  the  Adviser  is  responsible  for the
execution of the Fund's portfolio transactions. In selecting brokers or dealers,
the Adviser must seek the most favorable price (including the applicable  dealer
spread) and execution for such transactions,  subject to the possible payment as
described below of higher brokerage commissions or spreads to brokers or dealers
who  provide  research  and  analysis.  The Fund may not  always  pay the lowest
commission or spread available. Rather, in placing orders on behalf of the Fund,
the  Adviser  will also take into  account  such  factors  as size of the order,
difficulty  of  execution,  efficiency  of the  executing  broker's  or dealer's
facilities  (including the services described below) and any risk assumed by the
executing broker or dealer.

         Consistent  with the  policy  of  obtaining  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 brokers or dealers who provide  supplemental  investment  and market
research and securities and economic  analysis,  and may pay to those brokers or
dealers a higher  brokerage  commission  or spread  than may be charged by other
brokers or dealers. Such research,  analysis and other services may be useful to
the Adviser in  connection  with  services to clients  other than the Fund.  The
Adviser's  fee is not  reduced by reason of its  receiving  such  brokerage  and
research services.

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

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

         Investment  decisions for the 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 larger volume  transactions may produce better  executions and
prices.  For the years ended June 30, 1996,  1995 and 1994,  the Core  Portfolio
paid $97,148,  $59,330 and $59,750,  respectively  in brokerage  commissions  on
futures and options transactions. For the year ended June 30, 1996 and 1995, the
Intermediate  Portfolio  paid  $11,655 and  $5,970,  respectively  in  brokerage
commissions  on futures  and options  transactions.  For the year ended June 30,
1996, the Limited Duration Portfolio paid no brokerage commissions. No brokerage
commissions were paid by any Portfolio to affiliated persons.

                                       23

<PAGE>





                           ADDITIONAL TAX INFORMATION

General Requirements for "Pass-Through" Treatment

         In order to continue to qualify for treatment as a regulated investment
company  ("RIC") under the Internal  Revenue Code of 1986, as amended  ("Code"),
each Portfolio must distribute  annually to its shareholders at least 90% of its
investment company taxable income (consisting generally of net investment income
and net short-term capital gain, if any)  ("Distribution  Requirement") and must
meet several  additional  requirements.  With respect to each  Portfolio,  these
requirements  include the following:  (1) the Portfolio must derive at least 90%
of its gross income each taxable year from  dividends,  interest,  payments with
respect  to  securities  loans and gains from the sale or other  disposition  of
securities  or other income  (including  gains from options or futures ) derived
with respect to its business of investing in securities ("Income  Requirement");
(2) the  Portfolio  must derive less than 30% of its gross  income each  taxable
year from the sale or other  disposition of securities,  options or futures that
were held for less than  three  months  ("Short-Short  Limitation");  (3) at the
close of each quarter of the Portfolio's taxable year, at least 50% of the value
of its total assets must be represented by cash and cash items, U.S.  Government
securities and other securities, with those other securities limited, in respect
of any one  issuer,  to an amount  that  does not  exceed 5% of the value of the
Portfolio's  total  assets;  and  (4)  at  the  close  of  each  quarter  of the
Portfolio's  taxable year, not more than 25% of its total assets may be invested
in securities (other than U.S. Government securities) of any one issuer.

         A  distribution  declared  by a  Portfolio  in December of any year and
payable to shareholders of record on a date in that month will be deemed to have
been paid by the  Portfolio and received by the  shareholders  on December 31 if
the distribution is paid by the Portfolio during the following  January.  Such a
distribution,  therefore,  will be taxable to shareholders for the year in which
that December 31 falls.

Hedging Transactions

         The use of hedging  strategies,  such as writing and purchasing options
and futures contracts, involves complex rules that will determine for income tax
purposes  the  character  and timing of  recognition  of the income  received in
connection  therewith by a Portfolio.  Income from  transactions  in options and
futures  derived by a Portfolio  with  respect to its  business of  investing in
securities  will qualify as  permissible  income  under the Income  Requirement.
However,  income from the  disposition of options and futures  contracts will be
subject  to the  Short-Short  Limitation  if they are held for less  than  three
months.

         If a Portfolio satisfied certain requirements, any increase in value on
a position that is part of a  "designated  hedge" will be offset by any decrease
in value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining  whether the Portfolio satisfies
the Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross  income for  purposes of that  Limitation.  Each
Portfolio  intends  that,  when it engages in hedging  strategies,  the  hedging
transactions will qualify for this treatment,  but at the present time it is not
clear  whether  this  treatment  will be available  for all of each  Portfolio's
hedging transactions. To the extent this treatment is not available, a Portfolio
may be forced to defer the closing out of certain options and futures  contracts
beyond the time when it otherwise  would be  advantageous to do so, in order for
the Portfolio to continue to qualify as a RIC.

                                       24

<PAGE>



Original Issue Discount

         A Portfolio may purchase  debt  securities  issued with original  issue
discount. Original issue discount that accrues in a taxable year will be treated
as income earned by the  Portfolio  and  therefore an equivalent  amount must be
distributed to satisfy the distribution  requirement and avoid imposition of the
4% excise tax.  Because the original issue  discount  earned by a Portfolio in a
taxable year may not be  represented  by cash income,  the Portfolio may have to
dispose of other securities and use the proceeds  thereof to make  distributions
in amounts necessary to satisfy those distribution requirements. A Portfolio may
realize capital gains or losses from such dispositions,  which would increase or
decrease the  Portfolio's  investment  company taxable income and/or net capital
gain.  In  addition,  any such  gains  may be  realized  on the  disposition  of
securities  held  for  less  than  three  months.  Because  of  the  Short-Short
Limitation,  any such gains would reduce the  Portfolio's  ability to sell other
securities  (and options and  futures),  held for less than three months that it
might wish to sell in the ordinary course of its portfolio management.

Miscellaneous

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

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

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

                               OTHER INFORMATION

         The Fund is a Maryland  corporation,  incorporated on May 16, 1990. The
capitalization  of the Fund consists of five billion shares of common stock with
a par value of $0.001 each.  Three Portfolios of the Fund, not described in this
Statement of Additional Information, are sold only to private account clients of
the Adviser.  The Board of Directors may establish  additional  portfolios (with
different  investment  objectives and  fundamental  policies) at any time in the
future.  Establishment and offering of additional  portfolios will not alter the
rights  of  the  Fund's  shareholders.  When  issued,  shares  are  fully  paid,
non-assessable,   redeemable  and  freely  transferable.   Shares  do  not  have
preemptive rights or subscription  rights.  In liquidation of a Portfolio,  each
shareholder  is  entitled to receive his or her pro rata share of the net assets
of that Portfolio.



                                       25

<PAGE>



                        PRINCIPAL HOLDERS OF SECURITIES

         Set  forth  below is a table  which  contains  the  name,  address  and
percentage  of  ownership  of  each  person  who is  known  by the  Fund  to own
beneficially  five  percent  or  more  of the  outstanding  shares  of the  Core
Portfolio as of October 17, 1996:


   Name and Address                                     % of Ownership
                                                             As of
                                                        October 17, 1996

BHP Copper-Group                                               6.79%
7400 N. Oracle Road
Suite 200
Tucson,  AZ  85704

ND Workers Compensation                                       25.93%
1930 Burnt Boat Drive
Bismark, ND 58501

Newspaper and Mail Deliverers' Publishers' Pension Fund        6.53%
41-18 27th Street
Long Island City, NY 11101-3825

Houghton Mifflin Company Pension Plan                          5.15%
222 Berkeley Street
Boston,  MA  02116-3764

Thompson Consumer Electronics, Inc.                            6.77%
600 North Sherman Drive
Indianapolis,  IN  46201-2598

         The  following  chart  contains  the name,  address and  percentage  of
ownership  of each person who is known by the Fund to own of record five percent
or more of the outstanding shares of the Core Portfolio as of October 17, 1996:



   Name and Address                                     % of Ownership
                                                             As of
                                                        October 17, 1996



Northern Trust Company                                       30.45%
50 S. LaSalle Street
Chicago,  IL  60675

Mellon Bank N.A.                                              6.79%
One Mellon Bank Center
Room 151-0545
Pittsburgh,  PA  15258-0001

State Street Bank & Trust Company                            10.86%
Solomon Willard Bldg.
Enterprise Drive
North Quincy,  MA  02171

Newspaper and Mail Deliverers' Publishers' Pension Fund       6.53%
41-18 27th Street
Long Island City, NY 11101-3825


                                       26

<PAGE>


   Name and Address                                     % of Ownership
                                                             As of
                                                        October 17, 1996

Aquarium & Co.                                                5.15%
P.O. Box 1992
Boston, MA 02105


         Set  forth  below is a table  which  contains  the  name,  address  and
percentage  of  ownership  of  each  person  who is  known  by the  Fund  to own
beneficially five percent or more of the outstanding  shares of the Intermediate
Portfolio as of October 17, 1996:



   Name and Address                                     % of Ownership
                                                             As of
                                                        October 17, 1996


Harvard Industries Inc.                                      11.52%
2502 N. Rocky Point Drive
Tampa, FL 33607

Allergan Inc.                                                19.13%
2525 Dupont Drive
P.O. Box 19534
Irvine, CA 92713-9354

Community Hospital of Anderson & Madison County               5.73%
1515 North Madison Ave.
Anderson, IN 46011

Sun Microsystems                                              5.13%
901 San Antonio Road
Palo Alto, CA 94303

Harn Industries                                              25.57%
P.O. Box 554
Milwaukee, WI 53201

MA Hanna Master Trust                                        22.19%
200 Public Square
Cleveland, OH 44114-2301



         The  following  chart  contains  the name,  address and  percentage  of
ownership  of each person who is known by the Fund to own of record five percent
or more of the outstanding  shares of the  Intermediate  Portfolio as of October
17, 1996:



                                       27

<PAGE>



   Name and Address                                     % of Ownership
                                                             As of
                                                        October 17, 1996



Continental Trust Co.                                         5.13%
231 South LaSalle Street
Chicago, IL 60697

Marshall & Ilsley Trust Co.                                  25.57%
1000 N. Water Street
Milwaukee, WI 53202

First Union National Bank                                    12.52%
401 S. Tryon Street
Charlotte, NC 28202

Mellon Bank, N.A.                                            19.13%
Mutual Funds
P.O. Box 320
Pittsburgh, PA 15230-0320

Northern Trust Company                                       22.19%
50 LaSalle Street
Chicago, IL 60675

Key Trust                                                     5.73%
P.O. Box 94870
Cleveland, OH 44101

         Set  forth  below is a table  which  contains  the  name,  address  and
percentage  of  ownership  of  each  person  who is  known  by the  Fund  to own
beneficially  five  percent  or more of the  outstanding  shares of the  Limited
Duration Portfolio as of October 17, 1996:


   Name and Address                                     % of Ownership
                                                             As of
                                                        October 17, 1996


Western Michigan University                                  94.14%
Investment & Endowment Mgmt.
1083 Seibert Admin. Bldg.
Kalamazoo, MI 49008

HFA Investment Partnership                                    5.85%
1201 3rd. Ave. Ste. 2000
Seattle, WA 98101-3000


         The  following  chart  contains  the name,  address and  percentage  of
ownership  of each person who is known by the Fund to own of record five percent
or more of the  outstanding  shares  of the  Limited  Duration  Portfolio  as of
October 17, 1996:


                                       28

<PAGE>


   Name and Address                                     % of Ownership
                                                             As of
                                                        October 17, 1996

Western Michigan University                                   94.14%
Investment & Endowment Mgmt.
1083 Seibert Admin. Bldg.
Kalamazoo, MI 49008

Northwestern Trust Co.                                         5.85%
601 Union Street, Ste. 3600
Seattle, WA 98101


Performance Information

         The Fund may,  from time to time,  include  the  total  return  for its
Portfolios  in marketing  materials or reports to  shareholders  or  prospective
investors.  Quotations  of average  annual total return for a Portfolio  will be
expressed  in  terms  of the  average  annual  compounded  rate of  return  of a
hypothetical investment in the Portfolio over periods of one, five and ten years
(up to the life of the Portfolio), calculated pursuant to the following formula:
P (1 + T)n = ERV (where P = a hypothetical  initial  payment of $1,000,  T = the
average  annual  total  return,  n =  number  of  years,  and  ERV = the  ending
redeemable  value of a hypothetical  $1,000 payment made at the beginning of the
period).  All total return figures reflect the deduction of a proportional share
of Portfolio expenses on an annual basis and assume that all dividends and other
distributions are reinvested when paid.

         The Core Portfolio's total returns as of June 30, 1996 were as follows:
                                                           Average
                                 Cumulative                Annual
                                Total Return            Total Return

One Year                            4.86%                   4.86%
Five Years                         57.01%                   9.44%
Life of Fund(A)                    74.29%                  10.01%


(A) Fund's inception - September 4, 1990.



                                       29

<PAGE>



         The Intermediate  Portfolio's total returns as of June 30, 1996 were as
follows:
                                                           Average
                                 Cumulative                Annual
                                Total Return            Total Return

One Year                            4.70%                   4.70%
Life of Fund(A)                    15.26%                   7.35%


(A) Fund's inception - July 1, 1994.


         The Limited Duration Portfolio's total returns as of June 30, 1996 were
as follows:

                                   Cumulative
                                  Total Return

Life of Fund(A)                       0.76%


(A) Fund's inception - May 1, 1996.

         The current  annualized  yield for the Money Market  Portfolio is based
upon a specified  seven-day period and is computed by determining the net change
in the value of a hypothetical  account in the Portfolio.  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
prescribed  above),  raising  the sum to a power  equal to 365 divided by 7, and
subtracting one.

         The Fund's  performance may fluctuate daily depending upon such factors
as the average  maturity of its securities,  changes in investments,  changes in
interest  rates  and  variations  in  operating  expenses.   Therefore,  current
performance  does not provide a basis for determining  future  performance.  The
fact that the Fund's performance will fluctuate and that shareholders' principal
is not  guaranteed  or insured  should be  considered  in  comparing  the Fund's
performance with the performance of fixed-income  investments.  In comparing the
performance 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
performance and whether there are any special charges that may reduce the yield.

Custodian, Transfer Agent and Dividend-Disbursing Agent

         State Street Bank and Trust Company, P.O. Box 1790, Boston,
Massachusetts 02105, serves as custodian of the Fund's assets.  Boston Financial
Data Services, Inc., P.O. Box 953, Boston, Massachusetts  02103 serves as
transfer and dividend-disbursing agent and administrator of various shareholder
services.  Shareholders who request an historical transcript of their account
will be charged

                                       30

<PAGE>



a fee based upon the number of years  researched.  The Fund  reserves the right,
upon 60 days'  written  notice,  to make  other  charges to  investors  to cover
administrative costs.

Independent Accountants

         Price  Waterhouse  LLP, 7 St. Paul Street,  Baltimore,  Maryland 21202,
have been selected by the Board of Directors to serve as the Fund's  independent
accountants.

Legal Counsel

         Munger,  Tolles & Olson, 355 South Grand Avenue, Los Angeles, CA 90071,
serves as legal counsel to the Fund.

                              FINANCIAL STATEMENTS

         The Core  Portfolio's  Portfolio  of  Investments  as of June 30, 1996;
Statement of Assets and Liabilities as of June 30, 1996; Statement of Operations
for the year ended  June 30,  1996;  Statement  of Changes in Net Assets for the
years ended June 30, 1996 and June 30, 1995;  the Financial  Highlights  for the
same periods and the period  September 4, 1990  (Commencement  of Operations) to
June 30,  1991;  the Notes to  Financial  Statements  and the related  Report of
Independent  Accountants,  all of which  are  included  in the Core  Portfolio's
Annual  Report to  Shareholders  for the year  ended June 30,  1996,  are hereby
incorporated by reference in this Statement of Additional Information.

         The  Intermediate  Portfolio's  Portfolio of Investments as of June 30,
1996;  Statement of Assets and  Liabilities  as of June 30,  1996;  Statement of
Operations for the year ended June 30, 1996;  Statement of Changes in Net Assets
for the years ended Jjune 30, 1996 and une 30, 1995;  the  Financial  Highlights
for the same periods;  the Notes to Financial  Statements and the related Report
of  Independent  Accountants,  all of which  are  included  in the  Intermediate
Portfolio's  Annual Report to Shareholders for the year ended June 30, 1996, are
hereby incorporated by reference in this Statement of Additional Information.

         The Limited  Duration  Portfolio's  Portfolio of Investments as of June
30, 1996;  Statement of Assets and Liabilities as of June 30, 1996; Statement of
Operations for the year ended June 30, 1996;  Statement of Changes in Net Assets
for the year ended Jjune 30, 1996; the Financial Highlights for the same period;
the  Notes  to  Financial  Statements  and the  related  Report  of  Independent
Accountants,  all of which are  included  in the  Limited  Duration  Portfolio's
Annual  Report to  Shareholders  for the year  ended June 30,  1996,  are hereby
incorporated by reference in this Statement of Additional Information.

         The audited Statement of Assets and Liabilities as of June 30, 1996 for
the Money Market, Short Duration and Long Duration Portfolios and the Reports of
Independent Accountants are shown on the following pages.

                                       31

<PAGE>



                           WESTERN ASSET TRUST, INC.
                      STATEMENT OF ASSETS AND LIABILITIES
                                 June 30, 1996

<TABLE>
<CAPTION>
                                                                      Long            Short        Money
                                                                      Duration        Duration     Market
                                                                      Portfolio       Portfolio    Portfolio
<S><C>
Assets
  Cash                                                                $ 1,000         $ 1,000      $ 1,000
  Deferred organization and initial offering costs                     31,000           9,000       31,000
Total assets                                                           32,000          10,000       32,000

Liabilities
  Accrued organization expenses and initial offering costs             31,000            9,000      31,000
Total liabilities                                                      31,000            9,000      31,000

Net Assets - Offering and redemption price of $100.00 per share
with 10 shares each outstanding of the Long Duration and Short
Duration Portfolios and $1.00 per share with 1,000 shares outstanding
of the Money Market Portfolio (5,000,000,000 shares par value $.001
per share authorized)                                                 $ 1,000          $ 1,000     $ 1,000

</TABLE>

                  NOTES TO STATEMENT OF ASSETS AND LIABILITIES

         A. Western Asset Trust, Inc. ("Corporation"),  was organized on May 16,
1990. The Long Duration  Portfolio,  Short  Duration  Portfolio and Money Market
Portfolio  ("Portfolios")  constitute  three of the nine portfolios  established
under the  Corporation at June 30, 1996.  The Portfolios  have had no operations
other than those matters related to their  organization  and  registration as an
investment  company  under the  Investment  Company  Act of 1940 and the sale of
their shares. Western Asset Management Company ("Western Asset"), a wholly owned
subsidiary  of Legg Mason,  Inc. (a financial  services  holding  company),  has
provided the initial  capital for the Portfolios by purchasing 10 shares each of
the Long Duration  Portfolio and Short  Duration  Portfolio at $100.00 per share
and 1,000 shares of the Money Market  Portfolio at $1.00 per share.  Such shares
were acquired for  investment  and can be disposed of only by  redemption.  Legg
Mason Wood Walker,  Incorporated  ("Legg Mason"),  a wholly owned  subsidiary of
Legg Mason,  Inc. and a member of the New York Stock Exchange,  and Arroyo Seco,
Inc., a wholly owned  subsidiary of Western Asset,  act as  distributors  of the
Portfolios' shares.

         B. Deferred  organization and initial offering costs represent expenses
incurred in connection with the Portfolios'  organization  and will be amortized
on a straight line basis over five years  commencing  on the  effective  date of
each  Portfolio's  initial  sale of shares to the public.  The  Portfolios  have
agreed to reimburse  Western  Asset for the  organization  expenses  advanced by
Western  Asset.  The advances  are  repayable on demand but must be fully repaid
within five years from the commencement of operations.  The proceeds realized by
Western  Asset or any holder  thereof upon  redemption  during the  amortization
period of any of the shares  constituting  initial  capital will be reduced by a
proportionate  amount of unamortized  deferred  organization  expenses which the
number of initial  shares  redeemed  bears to the number of initial  shares then
outstanding.

                                       32

<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Shareholders
of Western Asset Trust, Inc.

In our opinion,  the accompanying  statements of assets and liabilities  present
fairly, in all material respects,  the financial position of Western Asset Trust
Long Duration  Portfolio,  Short  Duration  Portfolio,  Money Market  Portfolio,
Corporate  Securities  Portfolio and Mortgage Securities  Portfolio (five of the
nine  portfolios  comprising  Western  Asset Trust,  Inc.) at June 30, 1996,  in
conformity  with  generally  accepted  accounting  principles.  These  financial
statements are the responsibility of the Trust's management;  our responsibility
is to express an opinion on these financial  statements based on our audits.  We
conducted our audits of these financial  statements in accordance with generally
accepted auditing standards which require that we plan and perform the audits to
obtain reasonable  assurance about whether the financial  statements are free of
material  misstatement.  An audit included examining,  on a test basis, evidence
supporting the amounts and  disclosures in the financial  statements,  assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.



/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP


Baltimore, Maryland
August 30, 1996


<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  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 risks appear somewhat larger than in Aaa securities.

         A-Bonds which are rated A possess many favorable investment  attributes
and are to be considered 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 sometime 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 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
maintenance  of other terms of the contract  over any long period of time may be
small.

Description of Standard & Poor's corporate bond ratings:

         AAA-This  is the  highest  rating  assigned  by Standard & Poor's to an
obligation  and  indicates an extremely  strong  capacity to pay  principal  and
interest.

         AA-Bonds  rated  AA also  qualify  as  high-quality  debt  obligations.
Capacity to pay  principal  and interest is very strong,  and in the majority of
instances they differ from AAA issues only in small degree.

         A-Bonds  rated A have a strong  capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.


                                      A-1

<PAGE>


         BBB-Bonds rated BBB are regarded as having an adequate  capacity to pay
principal  and  interest.  Whereas they  normally  exhibit  adequate  protection
parameters,  adverse  economic  conditions  or changing  circumstances  are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.

         BB, B, CCC, CC-Bonds rated BB, B, CCC and CC are regarded,  on balance,
as  predominately  speculative  with  respect to the  issuer's  capacity  to pay
interest and repay principal in accordance with the terms of the obligation.  BB
indicates  the  lowest  degree  of  speculation  and CC the  highest  degree  of
speculation.  While such bonds will  likely  have some  quality  and  protective
characteristics,  these are  outweighed  by large  uncertainties  or major  risk
exposure to adverse conditions.

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 stock.

         Aa-An issue which is rated "Aa" is  considered a  high-grade  preferred
stock. This rating indicates that there is a reasonable  assurance that 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.


                                      A-2


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