WESTERN ASSET TRUST INC, 497, 1997-11-10

WESTERN ASSET TRUST INC
497, 1997-11-10

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PROSPECTUS
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
INTERMEDIATE PORTFOLIO
LIMITED DURATION PORTFOLIO
LONG DURATION PORTFOLIO
SHORT DURATION PORTFOLIO
MONEY MARKET 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
Core Portfolio, Intermediate Portfolio, Limited Duration Portfolio, Long
Duration Portfolio, Short Duration Portfolio and Money Market 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 Core, Intermediate,
Limited Duration, Long Duration and Short 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, 1997, 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., (626) 844-9400.

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

Dated: October 30, 1997

<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............................................... 32
Exchange Privilege................................................. 33
How Net Asset Value is Determined.................................. 34
Dividends and Other Distributions.................................. 34
Federal Tax Treatment of Dividends and Other Distributions......... 35
Management of the Fund............................................. 36
Other Information.................................................. 38
Appendix........................................................... 41

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 Core Portfolio, Intermediate Portfolio,
Limited Duration Portfolio, Long Duration Portfolio, Short Duration Portfolio
and Money Market 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.

PROSPECTUS

<PAGE>

WESTERN ASSET

DOLLAR-WEIGHTED
PORTFOLIO AVERAGE DURATION
- --------- ----------------
Core Within (plus/minus) 20% of the average duration
of the domestic bond market as a whole,
as determined by the Adviser

Intermediate Two to four years

Limited Duration One to three years

Long Duration At least eight years

Short Duration Six to fifteen months

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.

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, 1997 had approximately $4.8 billion aggregate assets
under management and private accounts totaling approximately $27.3 billion. The
Administrator also serves as investment adviser or manager to investment
companies with assets of approximately $9.5 billion as of the same date. See
"The Fund's Investment Adviser," page 36, and "The Fund's Administrator," page
37.

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.

PROSPECTUS

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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 32, 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," page 34 and "Federal Tax Treatment of
Dividends and Other Distributions," page 35.

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 38.

PROSPECTUS

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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, 1997. 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) .40% .25% .00% .25% .20%
Other expenses (after expense
reimbursement) .10% .20% .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%, 0.10% AND 0.50% OF AVERAGE NET ASSETS; FOR INTERMEDIATE
PORTFOLIO, 0.35%, 0.20% AND 0.55% OF AVERAGE NET ASSETS; FOR LIMITED DURATION
PORTFOLIO, 0.30%, 0.90% AND 1.20% 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.

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.

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S><C>
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
</TABLE>

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.

PROSPECTUS

<PAGE>
WESTERN ASSET

FEE WAIVERS

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 October 30, 1998. 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.

The financial information in the tables that follow has been obtained
from the financial statements which have been audited by Price Waterhouse LLP,
independent accountants.

FINANCIAL HIGHLIGHTS
CORE PORTFOLIO

The Core Portfolio's financial statements for the year ended June 30,
1997, and the unqualified report of Price Waterhouse LLP thereon, are included
in the Core Portfolio's 1997 Annual Report to Shareholders and are incorporated
by reference in the Statement of Additional Information.

PROSPECTUS

<PAGE>

WESTERN ASSET

YEARS ENDED JUNE 30, 1997 1996 1995 1994 1993 1992 1991(A)
- ------------------------------------------------------------------------------------------------
<S><C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period $110.46 $112.17 $105.02 $116.64 $112.04 $106.28 $100.00
------- ------- ------- ------- ------- ------- -------
Net investment income(B) 7.05 6.70 6.82 5.64 6.57 6.90 6.66
Net realized and unrealized
gain (loss) on
investments, options and
futures 1.86 (1.36) 7.19 (6.28) 8.71 8.72 4.28
------- ------- ------- ------- ------- ------- -------
Total from investment
operations 8.91 5.34 14.01 (0.64) 15.28 15.62 10.94
------- ------- ------- ------- ------- ------- -------
Distributions to
shareholders from:
Net investment income (6.51) (6.61) (6.86) (6.11) (6.72) (7.11) (4.66)
Net realized gain on
investments (.07) (.44) -- (4.87) (3.96) (2.75) --
------- ------- ------- ------- ------- ------- -------
Total distributions (6.58) (7.05) (6.86) (10.98) (10.68) (9.86) (4.66)
------- ------- ------- ------- ------- ------- -------
Net asset value, end of
period $112.79 $110.46 $112.17 $105.02 $116.64 $112.04 $106.28
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Total return 8.27% 4.86% 14.12% (.89)% 14.52% 15.61% 11.01%(C)
RATIOS/SUPPLEMENTAL DATA:
RATIOS TO AVERAGE
NET ASSETS:
Expenses(B) .50% .50% .50% .50% .50% .50% .65%(D)
Net investment income(B) 6.4% 6.3% 7.0% 6.0% 6.0% 6.7% 8.0%(D)
Portfolio turnover rate 384.8% 266.0% 257.90% 272.49% 313.05% 299.65% 177.25%(D)
Net assets, end of period
(in thousands) $508,353 $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 $22,402, $111,421, $69,442, $66,823, $71,911, AND $128,262 WERE
WAIVED FOR THE YEARS ENDED JUNE 30, 1997, 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 0.50% FOR THE YEAR ENDED
JUNE 30, 1997, .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)NOT ANNUALIZED.

(D)ANNUALIZED.

PROSPECTUS

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WESTERN ASSET
FINANCIAL HIGHLIGHTS
INTERMEDIATE PORTFOLIO

The Intermediate Portfolio's financial statements for the year ended June
30, 1997 and the unqualified report of Price Waterhouse LLP thereon, are
included in the Intermediate Portfolio's 1997 Annual Report to Shareholders and
are incorporated by reference in the Statement of Additional Information.

YEARS ENDED JUNE 30, 1997 1996 1995
- --------------------------------------------------------------------------------------------------
<S><C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $104.83 $107.36 $100.00
------- ------- -------
Net investment income(A) 5.49 5.41 3.86
Net realized and unrealized gain (loss) on investments,
options and futures 3.00 (.06) 6.02
------- ------- -------
Total from investment operations 8.49 5.35 9.88
------- ------- -------
Distributions to shareholders from:
Net investment income (5.42) (5.35) (2.47)
Net realized gain on investments (.71) (2.53) (.05)
------- ------- -------
Total distributions (6.13) (7.88) (2.52)
------- ------- -------
Net asset value, end of year $107.19 $104.83 $107.36
------- ------- -------
------- ------- -------
Total return 8.32% 5.15% 10.08%

RATIOS/SUPPLEMENTAL DATA:
RATIOS TO AVERAGE NET ASSETS:
Expenses(A) .45% .50% .50%
Net investment income(A) 6.33% 6.28% 6.11%
Portfolio turnover rate 419.26% 841.89% 764.45%
Net assets, end of year (in thousands) $224,497 $66,079 $20,313
</TABLE>

- ------------------
(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 $158,505, $130,938 AND $29,571 WERE WAIVED FOR THE YEARS ENDED
JUNE 30, 1997, 1996 AND 1995, RESPECTIVELY. IN THE ABSENCE OF THIS LIMITATION,
THE RATIO OF EXPENSES TO AVERAGE NET ASSETS WOULD HAVE BEEN 0.55%, 1.03% AND
1.60%, RESPECTIVELY.

PROSPECTUS

<PAGE>

WESTERN ASSET

FINANCIAL HIGHLIGHTS
LIMITED DURATION PORTFOLIO

The Limited Duration Portfolio's financial statements for the year ended
June 30, 1997 and the unqualified report of Price Waterhouse LLP thereon, are
included in the Limited Duration Portfolio's 1997 Annual Report to Shareholders
and are incorporated by reference in the Statement of Additional Information.

YEARS ENDED JUNE 30, 1997 1996(A)
- ---------------------------------------------------------------------------------------------------
<S><C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $100.76 $100.00
------- -------
Net investment income(B) 5.94 .84
Net realized and unrealized gain (loss) on investments 1.34 (.08)
------- -------
Total from investment operations 7.28 .76
------- -------
Distributions to shareholders from:
Net investment income (5.31) --
Net realized gain on investments (.37) --
------- -------
Total distributions (5.68) --
------- -------
Net asset value, end of period $102.36 $100.76
------- -------
------- -------
Total return(C) 7.42% .76%

RATIOS/SUPPLEMENTAL DATA:
RATIOS TO AVERAGE NET ASSETS:
Expenses(B) .40% .50%(D)
Net investment income(B) 6.24% 5.58%(D)
Portfolio turnover rate 435.47% 1,042.0%(D)
Net assets, end of period (in thousands) $26,537 $16,110
</TABLE>

- ------------------
(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 $60,550 AND $7,212 WERE WAIVED FOR THE YEAR ENDED JUNE 30, 1997
AND THE PERIOD ENDED JUNE 30, 1996, RESPECTIVELY. IN THE ABSENCE OF THIS
LIMITATION, THE RATIO OF EXPENSES TO AVERAGE NET ASSETS WOULD HAVE BEEN 1.20%
AND 0.80%, RESPECTIVELY.
(C)NOT ANNUALIZED.
(D)ANNUALIZED.

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 1997 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 forward commitment
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

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

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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 enter into forward commitment
transactions; lend securities to brokers, dealers and other financial
institutions to earn income; and borrow money for temporary or emergency
purposes. See "Forward Commitments," 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.

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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 Lehman Brothers
Aggregate 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.

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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 Fannie Mae ("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

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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.

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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

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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 Baa or better by Moody's or BBB 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

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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 26.

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

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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.

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VARIABLE AND FLOATING RATE SECURITIES

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

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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

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.

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FORWARD COMMITMENTS

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

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

Each Portfolio (other than the Money Market Portfolio) may also enter
into a forward commitment to sell only those securities it owns and will do so
only with the intention of actually delivering the securities. The use of
forward commitments enables a Portfolio to hedge against anticipated changes in
interest rates and prices. In a forward sale, a Portfolio does not participate
in gains or losses on the security occurring after the commitment date. Forward
commitments to sell securities also involve a risk of loss if the seller fails
to take delivery after the value of the securities has declined. A Portfolio
will direct its custodian to place the securities subject to a forward
commitment in a separate account. Forward commitment transactions involve
additional risks similar to those associated with investments in options and
futures contracts. See "Options and Futures Contracts."

The Fund does not expect that any Portfolio's purchases of forward
commitments will at any time exceed, in the aggregate, 20% of that Portfolio's
total assets.

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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, 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.

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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 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.

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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 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

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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 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.

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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, Intermediate Portfolio and
Limited Duration Portfolio for the fiscal year ended June 30, 1997 were 384.8%,
419.26% and 435.47%, respectively. 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 35. 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

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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 (626)
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.

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 34.
Investors who wish to purchase Fund shares through the contribution of
securities should contact the Fund at (626) 844-9400 for instructions. Investors
who purchase Fund shares

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WESTERN ASSET

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 (626) 844-9400; or (3) by wire communication with State
Street. In each case, the investor should first notify the Fund at (626)
844-9400 of the intention to redeem. No charge is made for redemptions.
Shareholders who wish to be able to redeem by telephone or wire communication
must complete an authorization form in advance.

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

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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 (626) 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 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

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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 (626)
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.

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

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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. If a shareholder has elected to receive dividends and/or other
distributions in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividends and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.

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.

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.

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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.

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 sixteen open-end investment
company portfolios and one closed-end investment company which together had
assets under management of approximately $4.8 billion as of September 30, 1997.
The Adviser also renders investment advice to private

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WESTERN ASSET

accounts with assets under management of approximately $27.3 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.

Effective October 30, 1997, Western Asset's Investment Strategy Group
became responsible for the day-to-day management of each Portfolio. 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 investment
adviser or manager to seventeen open-end investment companies. These funds had
aggregate assets under management of about $9.5 billion as of September 30,
1997.

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

PROSPECTUS
<PAGE>

WESTERN ASSET

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 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

PROSPECTUS

<PAGE>
WESTERN ASSET

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 15, 1997, Western Michigan University and University
Athletic Association 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 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

PROSPECTUS

<PAGE>

WESTERN ASSET

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 Lehman Brothers Aggregate Bond Index, the Lehman
Brothers Intermediate Government Corporate Bond Index and the Lehman Brothers
Long Government Corporate 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.

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, 1997

PROSPECTUS

<PAGE>

(THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.)

<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
1306 Concourse Dr.
Linthicum, MD 21090

COUNSEL Munger, Tolles & Olson LLP
355 South Grand Avenue
Los Angeles, CA 90071

PROSPECTUS

<PAGE>

Prospectus

WESTERN ASSET TRUST, INC.
International Securities Portfolio
Corporate Securities Portfolio
Mortgage 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, 1997, 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., (626) 844- 9400.

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

Dated: October 30, 1997

<PAGE>

TABLE OF CONTENTS
-----------------
Page
----

Prospectus Summary 1

Expense Information 3

Financial Highlights 4

Investment Objectives and Policies 6

Description of Securities and Investment Techniques 8

Purchase of Shares 19

Redemption of Shares 19

How Net Asset Value is Determined 20

Dividends and Other Distributions 20

Federal Tax Treatment of Dividends and Other Distributions 21

Management of the Fund 22

Other Information 24

Appendix 26

<PAGE>

PROSPECTUS SUMMARY

THE FUND

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 6.

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.

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.

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. 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.

<PAGE>

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 6, and "Description of Securities and Investment Techniques,"
page 8.

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, 1997, had approximately
$4.8 billion in aggregate assets under management and private accounts totaling
approximately $27.3 billion. The Administrator also serves as investment adviser
or manager to seventeen investment companies with assets of approximately $9.5
billion as of that date. See "The Fund's Investment Adviser" and "The Fund's
Administrator," page 22.

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 Fund has no plan under Rule 12b-1
imposing fees for distribution expenses. See "Purchase of Shares," page 19.

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 19.

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

<PAGE>

reinvested, unless cash payment is requested. See "Dividends and Other
Distributions," page 20 and "Federal Tax Treatment of Dividends and Other
Distributions," page 21.

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, 1997. 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 .100% .204%
----- -----
Total Fund Operating Expenses
(after fee waivers) .250% .279%
==== =====

- ------------------
(A) The expenses of the Portfolios for the current fiscal year have been reduced
by voluntary fee waivers . 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%, 0.204% and 0.679% 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.

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-------- ------- ------- --------
<S><C>
Domestic Portfolios $ 3 $ 8 N/A N/A
International Portfolio $ 3 $ 9 $16 $35
</TABLE>

<PAGE>

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 October 30, 1998. In
addition, Western Asset has voluntarily waived for calendar year 1997 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 23. These
agreements are voluntary and may be terminated by Western Asset at any time.

FINANCIAL HIGHLIGHTS

The financial information in the table that follows has been obtained
from financial statements which have been audited by Price Waterhouse LLP,
independent accountants.

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, 1997 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.

FINANCIAL HIGHLIGHTS
INTERNATIONAL SECURITIES PORTFOLIO

The International Portfolio's financial statements for the year ended June
30, 1997, and the report of Price Waterhouse LLP thereon, are included in the
International Portfolio's 1997 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 (626) 844-9400. Investors should understand that all the
following information should be read in conjunction with such audited financial
statements and related notes.

<PAGE>

Years Ended June 30, 1997 1996 1995 1994 1993(A)
- ----------------------------------------------------------------------------------------------------------------------------
<S><C>
Per Share Operating
Performance:
Net asset value, beginning of
period $95.16 $92.10 $93.76 $105.53 $100.00
------------------------------------------------------------------------------
Net investment income(B) 5.29 5.78 6.29 6.94 3.21
Net realized and unrealized gain
(loss) on investments and forward
currency contracts and currency
translations 6.27 3.56 (1.04) (7.36) 2.59
------------------------------------------------------------------------------
Total from investment operations 11.56 9.34 5.25 (0.42) 5.80
------------------------------------------------------------------------------
Distributions to shareholders
from:
Net investment income (9.11) (6.28) (0.63) (8.64) (0.27)
Net realized capital gain -- -- -- (2.71) --
Tax return of capital -- -- (6.28) -- --
------------------------------------------------------------------------------
Total distributions (9.11) (6.28) (6.91) (11.35) (0.27)
------------------------------------------------------------------------------
Net asset value, end of period $97.61 $95.16 $92.10 $93.76 $105.53
==============================================================================
Total return(C) 12.83% 10.36% 6.03% (1.14)% 5.81%

Ratios/Supplemental Data:
Ratios to average net assets:

Expenses(B) 0.28% 0.26% 0.28% 0.30% 0.45%(D)
Net investment income(B) 6.11% 6.02% 5.67% 5.53% 6.08%(D)

Portfolio turnover rate 290.56% 348.40% 355.03% 571.18% 249.94%(D)
Net assets, end of period (in
thousands) $303,698 $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 $1,054,708, $970,680, $480,824, $572,322 and $136,356
were waived for the years ended June 30, 1997, 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 0.68%,
0.66%, 0.68% and 0.70% for the years ended June 30, 1997, 1996, 1995 and 1994,
and 0.85% for the period January 7, 1993 (commencement of operations) to June
30, 1993.
(C) Not annualized for periods of less than a full year.
(D) Annualized

<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 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.

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.

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 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.

<PAGE>

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
16 and "Risks of Futures, Options and Forward Contracts," page 17. Each
Portfolio may enter into forward commitment transactions; lend its securities to
brokers, dealers and other financial institutions to earn income; and borrow
money for temporary or emergency purposes. See "Forward Commitments," page 15.

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.

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.

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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 Fannie Mae ("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-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

<PAGE>

now issues guaranteed mortgage certificates, on which it guarantees semi-annual
interest payments and a specified minimum annual payment of principal.

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
"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.

<PAGE>

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 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.

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.

<PAGE>

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 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.

<PAGE>

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 very weak 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. The economy is now recovering
from a period of weak growth. The German Central Bank has reacted by raising
interest rates. This was also done to satisfy the requirement for rate
convergence in front of the expected single currency in Europe. Inflation
remains at very moderate levels.

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 15.

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

<PAGE>

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.

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

<PAGE>

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 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

<PAGE>

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.

FORWARD COMMITMENTS

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

Each Portfolio may also enter into a forward commitment to sell only
those securities it owns and will do so only with the intention of actually
delivering the securities. The use of forward commitments enables a Portfolio to
hedge against anticipated changes in interest rates and prices. In a forward
sale, a Portfolio does not participate in gains or losses on the security
occurring after the commitment date. Forward commitments to sell securities also
involve a risk of loss if the seller fails to take delivery after the value of
the securities has declined. A Portfolio will direct its custodian to place the
securities subject to a forward commitment in a separate account. Forward
commitment transactions involve additional risks similar to those associated
with investments in options and futures contracts. See "Options and Futures
Contracts."

The Fund does not expect that any Portfolio's purchases of forward
commitments will at any time exceed, in the aggregate, 20% of that Portfolio's
total assets.

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.

<PAGE>

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.

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 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.

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

<PAGE>

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.

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

<PAGE>

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.

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, 1997 was 290.56%. 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.

<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
20. Investors who wish to purchase Fund shares through the contribution of
securities should contact the Fund at (626) 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 (626) 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.

Requests for redemption should indicate:

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

<PAGE>

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.

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 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.

<PAGE>

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. If a shareholder has elected
to receive dividends and/or other distributions in cash and the postal or other
delivery service is unable to deliver checks to the shareholder's address of
record, such shareholder's distribution option will automatically be converted
to having all dividends and other distributions reinvested in additional shares.
No interest will accrue on amounts represented by uncashed distribution or
redemption checks.

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
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.

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

<PAGE>

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.

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 ("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 sixteen open-end investment
company portfolios and one closed-end investment company which together had
assets under management of approximately $4.8 billion as of September 30, 1997.
Western Asset also renders investment advice to private accounts with fixed
income assets under management of approximately $27.3 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 investment adviser
or manager to nine other open-end investment companies with

<PAGE>

a total of seventeen portfolios. These funds had aggregate assets under
management of about $9.5 billion as of September 30, 1997. 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," below. 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 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 October 30, 1998. In addition, Western Asset has voluntarily waived
for calendar year 1997 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

<PAGE>

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.

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.

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.

<PAGE>

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.

<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.

<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
1306 Concourse Drive
Linthicum, MD 21090

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

Prospectus

October 30, 1997

<PAGE>

WESTERN ASSET TRUST, INC.
International Securities Portfolio
Corporate Securities Portfolio
Mortgage 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,
1997, 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
(626) 844-9400.

Dated: October 30, 1997

<PAGE>

TABLE OF CONTENTS
-----------------

Page
----

Additional Information About Investment Limitations and Policies 3

Valuation of Portfolio Shares 18

Management of the Fund 19

Principal Holders of Securities 24

Purchases and Redemptions 25

Portfolio Transactions and Brokerage 25

Additional Tax Information 36

Other Information 28

Financial Statements 29

Appendix A - Ratings of Securities A-1

<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. Because the International Portfolio is non-diversified, it is
only required to comply with this limitation for each of its fiscal quarter ends
as prescribed by the Internal Revenue Code;

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;

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;

<PAGE>

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.

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.

<PAGE>

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 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.

<PAGE>

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 $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.

<PAGE>

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 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.

<PAGE>

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.

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.

<PAGE>

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

<PAGE>

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 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.

<PAGE>

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 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

<PAGE>

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 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."

<PAGE>

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, 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,

<PAGE>

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 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

<PAGE>

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 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.

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.

<PAGE>

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 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.

<PAGE>

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
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.

<PAGE>

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.

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.

<PAGE>

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, [68] (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., [75] Director; Director of Pacific American Income
Shares, Inc., Bank Plus (holding company for Fidelity Federal Bank), ICN
Pharmaceuticals, Inc. and TCW Convertible Securities Fund, Inc. (management
investment company); formerly: Chairman of the Board of First Interstate
Bancorp.

Dr. Richard C. Gilman, [74] (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.

*W. Curtis Livingston, III, [54] (1) President and Director; President,
Director and Chief Executive Officer of Western Asset Management Company
(investment management firm and the investment adviser to the Fund), December
1980-present; President, Pacific American Income Shares, Inc.; Director, Legg
Mason, Inc.

*Ronald L. Olson, [56] (2) (3) Director; Senior Partner, Munger, Tolles
& Olson LLP (a law partnership); Director of Pacific American Income Shares,
Inc.

*Louis A. Simpson, [60] (1) (4) Director; President and CEO, Capital
Operations of Government Employees Insurance Company (GEICO Corporation) since
May 1993; Director of Pacific American Income Shares, Inc., Potomac Electric
Power Company, Potomac Capital Investment Corporation, Thompson PBE, COHR, Inc.
and Salomon Inc. Formerly: Vice Chairman of GEICO (1985-1993); Senior Vice
President and Chief Investment Officer of GEICO (1979-1985); President and CEO
of Western Asset Management Company.

Ronald J. Arnault, [54] Director; President of RJA Consultants (energy
industry financial consulting); member, Board of Governors of The Music Center
of Los Angeles and the Center Theatre Group. Formerly: Executive Vice
President, Chief Financial Officer and Director of ARCO; Director of Vastar
Resources, Inc., ARCO Chemical Company, SunAmerica, Inc. and Brookings
Institution.

William E. B. Siart [50] Director; Director of Pacific American Income
Shares, Inc. Formerly: Chairman (1995-1996), Chief Executive Officer
(1995-1996), President (1990-1996) of First Interstate Bancorp. Member of the
Board of Trustees of the University of Southern California.

Donna E. Barnes, [37] Secretary; Secretary, Pacific American Income
Shares, Inc., April 1996 - present; 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, [37] Vice President; Portfolio Manager of Western
Asset Management Company, 1994 - present; 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.

<PAGE>

Kent S. Engel, [50] Vice-President; Managing 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, [40] Vice President; Portfolio Manager of Western
Asset Management Company, 1994 - present; formerly: Senior Portfolio Manager of
Legg Mason, Inc., 1992-1994; Portfolio Manager of T. Rowe Price Associates,
Inc., 1985-1992.

Scott F. Grannis, [48] Vice President; Economist, Western Asset
Management Company, 1989 present; Vice President of Pacific American Income
Shares, Inc.; formerly: Vice-President, Leland O'Brien Rubinstein (investment
advisory firm), 1986-89.

Ilene S. Harker, [42] Vice President; Managing Director, Administration
and Controls, Western Asset Management Company, 1978-present; Vice President,
Pacific American Income Shares, Inc., since April 1996; Formerly: Secretary of
the Fund and Secretary of Pacific American Income Shares, Inc., 1993-1996.

James W. Hirschmann, III, [37] Vice-President; Managing Director,
Marketing, Western Asset Management Company, April 1989-present and Western
Asset Global Management Limited, January 1997- 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, [48] Vice-President and Treasurer; Vice-President
and Treasurer of nine Legg Mason funds (open-end investment companies);
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.

Randolph L. Kohn, [50] Vice-President; Managing Director, Client
Services, Western Asset Management Company, 1984-present.

S. Kenneth Leech, [43] Vice-President; Managing Director, Portfolio
Management, Western Asset Management Company, May 1990-present; formerly:
Portfolio Manager of Greenwich Capital, 1988-1990; Fixed Income Manager of The
First Boston Corporation (holding company; stock and bond dealers), 1985- 1987.

Edward A. Moody, [47] Vice-President; Portfolio Manager, Western Asset
Management Company, 1985-present.

Joseph L. Orlando, [37] Vice-President; Marketing Executive of Western
Asset Management Company, 1992-present; formerly: Regional Manager of T. Rowe
Price Associates (investment management firm), January 1988 - July 1992.

Steven T. Saruwatari, [32] Assistant Treasurer; Senior Financial
Officer, Western Asset Management Company, 1995-present; 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, [38] Vice-President: Managing Director and Portfolio
Manager, Western Asset Management Company, 1991 - present; formerly: Portfolio
Manager and Trader of Security Pacific Investment Managers, Inc. (investment
management company), 1989-1991.

<PAGE>

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 Distributors 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, 1997.

COMPENSATION TABLE
------------------
<TABLE>
<CAPTION>

=========================================================================================================
Aggregate Compensation From Total Compensation From Fund
Name of Person and Position the Fund* and Complex Paid to Directors**
- ---------------------------------------------------------------------------------------------------------
<S><C>
William G. McGagh -
Chairman of the Board and Director $12,000 $20,400
- ---------------------------------------------------------------------------------------------------------
Dr. Richard C. Gilman - Director $10,500 $18,500
- ---------------------------------------------------------------------------------------------------------
Ronald L. Olson - Director $10,500 $18,600
- ---------------------------------------------------------------------------------------------------------
W. Curtis Livingston, III - President
and Director None None
- ---------------------------------------------------------------------------------------------------------
Norman Barker, Jr. - Director $10,000 $20,400
- ---------------------------------------------------------------------------------------------------------
Louis A. Simpson - Director $10,500 $18,600
- ---------------------------------------------------------------------------------------------------------
William E. B. Siart - Director $500 $500
- ---------------------------------------------------------------------------------------------------------
Ronald J. Arnault - Director $0 $0
- ---------------------------------------------------------------------------------------------------------
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, 1997.

** Represents aggregate compensation paid to each director during the
calendar year ended December 31, 1996. The complex consists of the
Fund and Pacific American Income Shares, Inc.

<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 8, 1997. 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 $1,252,466 (prior to fees waived of $1,054,708), $970,680 (prior
to fees waived of $970,680) and $480,824 (prior to fees waived of $480,824) for
the years ended June 30, 1997, 1996 and 1995, respectively.

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.

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 8, 1997.

<PAGE>

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, 1997, 1996 and 1995, the Administrator received administrative
fees from the International Portfolio of $197,758, $182,007 and $90,158,
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 8, 1997.

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 April 8, 1997.

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

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 October 30, 1998.
In addition, Western Asset has voluntarily waived for calendar year 1997 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.

<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 International
Portfolio as of October 15, 1997:

============================================================================================
Name and Address % of Ownership
As of
October 15, 1997
============================================================================================
<S><C>
AT&T 15.25%
One Oak Way, Room 3ED146
Berkeley Heights, N.J. 07922
- --------------------------------------------------------------------------------------------
AT&T Long Distance 14.03%
One Oak Way
Berkeley Heights, NJ 07922
- --------------------------------------------------------------------------------------------
IBM 13.71%
3001 Summer Street
Stanford, CT 06905
- --------------------------------------------------------------------------------------------
Lockheed Master Trust 10.45%
6801 Rockledge Drive
Bethesda, MD 20817
- --------------------------------------------------------------------------------------------
Northwest Airlines 10.41%
5104 Northwest Drive
St. Paul, MN 55111
- --------------------------------------------------------------------------------------------
Florida P&L Group Pension Plan 8.46%
700 Universe Blvd.
Juno Beach, FL 33408
- --------------------------------------------------------------------------------------------
Southern Baptist 8.29%
2401 Cedar Springs Road
Dallas, TX 75221
============================================================================================
</TABLE>

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 15, 1997:

<PAGE>

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 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

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,

<PAGE>

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 years ended June 30, 1997 and 1996, the International Portfolio
paid $15,440 and $9,685, respectively, in brokerage commissions on futures and
options transactions. For the year ended June 30, 1995, 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.

<PAGE>

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.

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

<PAGE>

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.

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)(exponent n) = ERV (where P = a hypothetical initial payment of $1,000,
T = the average annual total return, n = number of years, and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of the
period). All total return figures reflect the deduction of a proportional share
of Portfolio expenses on an annual basis and assume that all dividends and other
distributions are reinvested when paid.

<PAGE>

The International Securities Portfolio's returns as of June 30, 1997 were as
follows:

Average
Cumulative Annual
Total Return Total Return
------------ ------------
One Year 12.83% 12.83%
Life of Fund(A) 38.12% 7.47%

- -------------
(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, 1306 Concourse Drive, Suite 100, Linthicum, Maryland
21090, 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.

FINANCIAL STATEMENTS

The Statement of Assets and Liabilities as of June 30, 1997 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, 1997, 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, 1997,
the Statement of Assets and Liabilities as of June 30, 1997, the Statement of
Operations for the year ended June 30, 1997, the Statement of Changes in Net
Assets for the years ended June 30, 1997 and 1996; and the Financial Highlights
for the periods presented, 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, 1997, are hereby
incorporated by reference in this Statement of Additional Information.

<PAGE>

WESTERN ASSET TRUST, INC.
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1997

<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, 1997. 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.

<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
Corporate Securities Portfolio and Mortgage Securities Portfolio (two of the
nine portfolios comprising Western Asset Trust, Inc.) at June 30, 1997, 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

Linthicum, Maryland
October 30, 1997

<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.

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

A-1

<PAGE>

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.

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-2

<PAGE>

WESTERN ASSET TRUST, INC.
Core Portfolio
Intermediate Portfolio
Limited Duration Portfolio
Long Duration Portfolio
Short Duration Portfolio
Money Market 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 -- Core Portfolio, Intermediate Portfolio, Limited
Duration Portfolio, Long Duration Portfolio, Short Duration Portfolio and Money
Market 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, 1997,
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., (626) 844-9400.

Dated: October 30, 1997

<PAGE>

TABLE OF CONTENTS
-----------------

Page
----

Additional Information About Investment Limitations and Policies 3

Valuation of Portfolio Shares 13

Management of the Fund 14

Purchases and Redemptions 19

Exchange Privilege 20

Portfolio Transactions and Brokerage 20

Additional Tax Information 21

Other Information 22

Principal Holders of Securities 23

Financial Statements 28

Appendix A - Ratings of Securities A-1

<PAGE>

ADDITIONAL INFORMATION ABOUT INVESTMENT LIMITATIONS AND POLICIES

(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;

(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

<PAGE>

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

<PAGE>

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

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.

Asset-Backed Securities

<PAGE>

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.

Bank Obligations

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

<PAGE>

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. 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

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

<PAGE>

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.

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

<PAGE>

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.

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.

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.

<PAGE>

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:

(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 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.

<PAGE>

(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.

(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

<PAGE>

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 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.

<PAGE>

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.

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.

<PAGE>

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.

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

*Ronald L. Olson, [56] (2) (3) Director; Senior Partner, Munger, Tolles
& Olson LLP (a law partnership); Director of Pacific American Income Shares,
Inc.

<PAGE>

Randolph L. Kohn, [50] Vice-President; Managing Director, Client
Services, Western Asset Management Company, 1984-present.

<PAGE>

Edward A. Moody, [47] Vice-President; Portfolio Manager, Western Asset
Management Company, 1985-present.

- --------------------
(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.

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.

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, 1997.

<PAGE>

COMPENSATION TABLE
------------------
<TABLE>
<CAPTION>

=========================================================================================================
Aggregate Compensation From Total Compensation From Fund
Name of Person and Position the Fund* and Complex Paid to Directors**
- ---------------------------------------------------------------------------------------------------------
<S><C>
William G. McGagh -
Chairman of the Board and Director $12,000 $20,400
- ---------------------------------------------------------------------------------------------------------
Dr. Richard C. Gilman - Director $10,500 $18,500
- ---------------------------------------------------------------------------------------------------------
Ronald L. Olson - Director $10,500 $18,600
- ---------------------------------------------------------------------------------------------------------
W. Curtis Livingston, III - President
and Director None None
- ---------------------------------------------------------------------------------------------------------
Norman Barker, Jr. - Director $10,000 $20,400
- ---------------------------------------------------------------------------------------------------------
Louis A. Simpson - Director $10,500 $18,600
- ---------------------------------------------------------------------------------------------------------
William E. B. Siart - Director $500 $500
- --------------------------------------------------------------------------------------------------------
Ronald J. Arnault - Director $0 $0
- ---------------------------------------------------------------------------------------------------------
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, 1997.

** Represents aggregate compensation paid to each director during the
calendar year ended December 31, 1996. The complex consists of the Fund
and Pacific American Income Shares, Inc.

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 as amended on February
8, 1996, 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 as amended on February 8, 1996, 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 8, 1997.

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.

For the Core Portfolio, the Adviser received $2,006,880 (prior to fees
waived of $22,402), $1,548,346 (prior to fees waived of $111,421) and $963,008
(prior to fees waived of $69,442) for the years ended June 30, 1997, 1996 and
1995, respectively. For the Intermediate Portfolio, the Adviser received
$568,685 (prior to fees waived of $158,505), $130,938 (prior to fees waived of
$130,938) and $29,571 (prior to fees waived of $29,571) for the years ended June
30, 1997, 1996 and 1995, respectively. For the Limited Duration

<PAGE>

Portfolio, the Adviser waived all advisory fees for the year ended June 30, 1997
and 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 8,
1997 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.

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 $250,860,
$193,547 and $120,376 for the years ended June 30, 1997, 1996 and 1995,
respectively. For the Intermediate Portfolio, the Administrator received fees of
$81,241 for the year ended June 30, 1997 and waived all administrative fees for
the years ended June 30, 1996 and1995. For the Limited Duration Portfolio, the
Administrator received fees of $10,092 and $1,202 (prior to fees waived of $69)
for the year ended June 30, 1997 and the period May 1, 1996 (commencement of
operations) to June 30, 1996.

<PAGE>

The Fund's Distributor

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 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.

<PAGE>

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.

The Fund has authorized one or more brokers to accept purchase and
redemption orders on the Fund's behalf. Such brokers are authorized to designate
other intermediaries to accept purchase and redemption orders on the Fund's
behalf. So long as such authorization is effective, the Fund will be deemed to
have received a purchase or redemption order when an authorized broker or, if
applicable, a broker's authorized designee, accepts the order, which will be
priced at the net asset value for the applicable Portfolio next computed after
the order is accepted by such an authorized broker or the broker's authorized
designee.

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.

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, 1997 and 1996, the Core
Portfolio's portfolio turnover rates were 384.8% and 266.0%, respectively; the
Intermediate Portfolio's portfolio turnover rates were 419.26% and 841.89%,
respectively; and the Limited Duration Portfolio's portfolio turnover rates were
435.47% and 1,042.0% (annualized), respectively.

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

<PAGE>

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.

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. Brokerage commissions paid on futures and options transactions were as
follows: for the years ended June 30, 1997, 1996 and 1995, the Core Portfolio
paid $150,548, $97,148 and $59,330, respectively; the Intermediate Portfolio
paid $50,835, $11,655 and $5,970, respectively; and the Limited Duration
Portfolio paid $7,170 and $0 for the years ended June 30, 1997 and the period
ended June 30, 1996. No brokerage commissions were paid by any Portfolio to
affiliated persons.

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.

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

<PAGE>

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.

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.

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,

<PAGE>

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.

PRINCIPAL HOLDERS OF SECURITIES

=============================================================================
Name and Address % of Ownership
As of
October 15, 1997
=============================================================================
<S><C>
BHP Copper-Group 6.58%
7400 N. Oracle Road
Suite 200
Tucson, AZ 85704
- -----------------------------------------------------------------------------
Newspaper and Mail Deliverers' Publishers' Pension Fund 7.24%
41-18 27th Street
Long Island City, NY 11101-3825
- -----------------------------------------------------------------------------
Houghton Mifflin Company Pension Plan 5.39%
222 Berkeley Street
Boston, MA 02116-3764
- -----------------------------------------------------------------------------
Thompson Consumer Electronics, Inc. 7.24%
600 North Sherman Drive
Indianapolis, IN 46201-2598
=============================================================================
</TABLE>

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 15, 1997:

=============================================================================
Name and Address % of Ownership
As of
October 15, 1997
=============================================================================
<S><C>
Northern Trust Company 11.31%
50 S. LaSalle Street
Chicago, IL 60675
- -----------------------------------------------------------------------------
State Street Bank & Trust Company 16.86%
Solomon Willard Bldg.
Enterprise Drive
North Quincy, MA 02171
- -----------------------------------------------------------------------------
Newspaper and Mail Deliverers' Publishers' Pension Fund 7.24%
41-18 27th Street
Long Island City, NY 11101-3825
- -----------------------------------------------------------------------------
Bankers Trust 9.55%
648 Grassmere Park Road
2nd Floor
Nashville, TN 37211
=============================================================================
</TABLE>

<PAGE>

=============================================================================
Name and Address % of Ownership
As of
October 15, 1997
=============================================================================
<S><C>
Harvard Industries Inc. 7.22%
2502 N. Rocky Point Drive
Tampa, FL 33607
- -----------------------------------------------------------------------------
Allergan Inc. 7.63%
2525 Dupont Drive
P.O. Box 19534
Irvine, CA 92713-9354
- -----------------------------------------------------------------------------
Anne Arundel County MD Master Trust 10.88%
44 Calvert Street
Annapolis, MD 21404
- -----------------------------------------------------------------------------
Harn Industries 15.75%
P.O. Box 554
Milwaukee, WI 53201
- -----------------------------------------------------------------------------
MA Hanna Master Trust 13.67%
200 Public Square
Cleveland, OH 44114-2301
=============================================================================
</TABLE>

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
15, 1997:

=============================================================================
Name and Address % of Ownership
As of
October 15, 1997
=============================================================================
<S><C>
Marshall & Ilsley Trust Co. 15.75%
1000 N. Water Street
Milwaukee, WI 53202
- -----------------------------------------------------------------------------
First Union National Bank 7.94%
401 S. Tryon Street
Charlotte, NC 28202
- -----------------------------------------------------------------------------
Northern Trust Company 13.67%
50 LaSalle Street
Chicago, IL 60675
- -----------------------------------------------------------------------------
Key Trust 10.66%
P.O. Box 94870
Cleveland, OH 44101
- -----------------------------------------------------------------------------
State Street Bank & Trust 10.88%
P.O. Box 1992
Boston, MA 02105
=============================================================================
</TABLE>

<PAGE>

=============================================================================
Name and Address % of Ownership
As of
October 15, 1997
=============================================================================
<S><C>
Mac & Co. 7.63%
Mellon Bank NA
Pittsburgh, PA 15230
=============================================================================
</TABLE>

=============================================================================
Name and Address % of Ownership
As of
October 15, 1997

=============================================================================
<S><C>
Western Michigan University 42.75%
Investment & Endowment Mgmt.
1083 Seibert Admin. Bldg.
Kalamazoo, MI 49008
- -----------------------------------------------------------------------------
University Athletic Assoc. 25.35%
P.O. Box, 14485
Gainesville, FL 32604
- -----------------------------------------------------------------------------
Good Shephard Medical 23.92%
P.O. Box 160
Westerville, OH 43086
- -----------------------------------------------------------------------------
Northwestern Trust Co. 7.97%
600HFA Bldg.
914 S. 8th Street
Minneapolis, MN 55404
=============================================================================
</TABLE>

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 15, 1997:

<PAGE>

=============================================================================
Name and Address % of Ownership
As of
October 15, 1997
=============================================================================
<S><C>
Western Michigan University 42.75%
Investment & Endowment Mgmt.
1083 Seibert Admin. Bldg.
Kalamazoo, MI 49008
- -----------------------------------------------------------------------------
University Athletic Assoc. 25.35%
P.O. Box, 14485
Gainesville, FL 32604
- -----------------------------------------------------------------------------
Strafe & Co. 23.92%
P.O. Box 160
Westerville, OH 43086
- -----------------------------------------------------------------------------
Northwestern Trust Co. 7.97%
600HFA Bldg.
914 S. 8th Street
Minneapolis, MN 55404
=============================================================================
</TABLE>

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)(exponent n) = ERV (where P = a hypothetical initial payment of $1,000,
T = the average annual total return, n = number of years, and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of the
period). All total return figures reflect the deduction of a proportional share
of Portfolio expenses on an annual basis and assume that all dividends and other
distributions are reinvested when paid.

The Core Portfolio's total returns as of June 30, 1997 were as follows:

Average
Cumulative Annual
Total Return Total Return
------------ ------------
One Year 8.27% 8.27%
Five Years 47.05% 8.02%
Life of Fund(A) 88.71% 9.76%

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

<PAGE>

The Intermediate Portfolio's total returns as of June 30, 1997 were as
follows:

Average
Cumulative Annual
Total Return Total Return
------------ ------------

One Year 8.32% 8.32%
Life of Fund(A) 25.40% 7.83%

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

The Limited Duration Portfolio's total returns as of June 30, 1997 were
as follows:

Average
Cumulative Annual
Total Return Total Return
------------ ------------

One Year 7.42% 7.42%
Life of Fund(A) 8.23% 7.01%

- ------
(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 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.

<PAGE>

Independent Accountants

Price Waterhouse LLP, 1306 Concourse Drive, Linthicum, Maryland 21090,
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, CA 90071,
serves as legal counsel to the Fund.

FINANCIAL STATEMENTS

The Core Portfolio's Portfolio of Investments as of June 30, 1997;
Statement of Assets and Liabilities as of June 30, 1997; Statement of Operations
for the year ended June 30, 1997; Statement of Changes in Net Assets for the
years ended June 30, 1997 and 1996; the Financial Highlights for the periods
presented; 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, 1997, are hereby
incorporated by reference in this Statement of Additional Information.

The Intermediate Portfolio's Portfolio of Investments as of June 30,
1997; Statement of Assets and Liabilities as of June 30, 1997; Statement of
Operations for the year ended June 30, 1997; Statement of Changes in Net Assets
for the years ended June 30, 1997 and 1996; the Financial Highlights for the
periods presented; 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, 1997, are
hereby incorporated by reference in this Statement of Additional Information.

The Limited Duration Portfolio's Portfolio of Investments as of June
30, 1997; Statement of Assets and Liabilities as of June 30, 1997; Statement of
Operations for the year ended June 30, 1997; Statement of Changes in Net Assets
for the years ended June 30, 1997 and 1996; the Financial Highlights for the
periods presented; 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, 1997, are
hereby incorporated by reference in this Statement of Additional Information.

The audited Statement of Assets and Liabilities as of June 30, 1997 for
the Money Market, Short Duration and Long Duration Portfolios and the Reports of
Independent Accountants are shown on the following pages.

<PAGE>

WESTERN ASSET TRUST, INC.
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1997

<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, 1997. 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.

<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 and Money Market Portfolio
(three of the nine portfolios comprising Western Asset Trust, Inc.) at June 30,
1997, 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

Linthicum, Maryland
October 30, 1997

<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.

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.

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

A-1

<PAGE>

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