WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
REPORT TO SHAREHOLDERS
FOR THE NINE MONTHS ENDED MARCH 31, 1998
This report and the financial statements contained herein are submitted for the
general information of the shareholders of Western Asset Trust Limited Duration
Portfolio. The report is not intended for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
<PAGE>
May 26, 1998
Dear Shareholder:
Enclosed are financial statements for the Western Asset Trust Limited Duration
Portfolio for the nine month period ending March 31, 1998.
The fund's total return modestly exceeded that of its benchmark, the Merrill
Lynch 1-3 Year Index, returning 5.42% (net) vs. 5.19% as major strategies
produced mostly positive but, on balance, limited incremental value. The fund
benefited from a longer than market duration posture which it held for most of
the period, and yield curve strategies correctly anticipated the periods when
short- and long-term interest rates moved by greater and lesser degrees relative
to each other. Corporate sector exposure had little impact on returns as yield
spreads were roughly unchanged, while a modest overweighting to the mortgage
sector benefited from tightening spreads, though the portfolio's emphasis on
discount coupons under-performed somewhat.
Also, as you should be aware by now, the Western Asset Trust Portfolios are
being incorporated into a new institutional mutual fund family, LM Institutional
Fund Advisors, which is expected to become effective June 1, 1998. We greatly
appreciate your cooperation with this shift and are working actively to make it
as seamless as possible. While the format will be changing, there is, of course,
to be no change in Western Asset's advisory services for the portfolio. The
fiscal year-end has been changed to March 31 and, therefore, we have prepared an
earlier-than-usual financial statement for the Western Asset Trust Limited
Duration Portfolio that reflects this change.
Should you have any questions regarding the enclosed statement or the new
institutional mutual fund family, please feel free to call.
Sincerely,
/s/ W. Curtis Livingston
__________________________
W. Curtis Livingston
President
Enclosure
<PAGE>
[Western Asset Logo Appears Here]
Western Asset Trust
Limited Duration Portfolio
PORTFOLIO MANAGER: Western Asset Management Investment Strategy Group
The fund's performance was, on balance, favorably impacted by market conditions
in the nine months ended March 31, 1998, as interest rates generally declined
for most of the period. The fund's total return modestly outperformed that of
its benchmark, the Merrill Lynch 1-3 Year Index, returning 5.42% (net) vs.
5.19%, as major strategies produced limited incremental return. The fund
benefited from a longer than market duration posture which it held for most of
the period, and yield curve strategies correctly anticipated the periods
when short- and long-term interest rates moved by greater and lesser degrees
relative to each other. Corporate sector exposure had little impact on returns
as yield spreads were roughly unchanged, while a modest overweighting to the
mortgage sector benefited from tightening spreads, though the portfolio's
emphasis on discount coupons underperformed somewhat.
AVERAGE ANNUAL TOTAL RETURN THROUGH MARCH 31, 1998
WAT Ltd* ML 1-3 yr
-------- ---------
9 Months 5.4% 5.2%
Since Inception 7.1% 6.5%
[GRAPH APPEARS HERE - SEE PLOT POINTS BELOW]
WESTERN ASSET TRUST MERRILL LYNCH
LIMITED DURATION PORTFOLIO (NET) 1-3 YEAR INDEX
-------------------------------- --------------
5/1/96 $1,000,000 $1,000,000
6/30/96 1,006,700 1,009,300
9/30/96 1,023,713 1,025,953
12/31/96 1,049,920 1,045,447
3/31/97 1,056,535 1,052,347
6/30/97 1,082,300 1,075,603
9/30/97 1,106,393 1,096,685
12/31/97 1,124,599 1,115,000
3/31/98 1,141,042 1,131,390
Past performance is not necessarily indicative of future results. Investment
return and principal value will fluctuate, so that, when redeemed, an investor's
shares may be worth more or less than their original cost. The Fund's inception
date was April 30, 1996. The Merrill Lynch 1-3 Year Index includes US treasuries
and agency securities with maturities ranging from 1 to 3 years.
*Since inception (April 30, 1996), Western Asset has voluntarily waived all of
their fees and the Fund's administrator has voluntarily waived a portion of
their fees. Total return for the Fund would have been lower if the fees had not
been waived.
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
STATEMENT OF NET ASSETS
March 31, 1998
(Amounts in Thousands)
<TABLE>
<CAPTION>
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
CORPORATE BONDS AND NOTES 10.16%
BANKING AND FINANCE 6.97%
BankAmerica Capital III 6.16% 01/15/27 $500 $486(A)
First National Bank 6.50% 01/14/00 500 503
IBM Credit Corporation 5.79% 03/20/00 1,000 998
MCN Investment Corp. 6.30% 04/02/01 800 800
Traveler's Group, Inc. 7.30% 05/15/02 700 722
------------
3,509
MEDIA AND ENTERTAINMENT 1.97%
Time Warner PATS 4.90% 07/29/99 500 490(B)
TCI Communications, Inc. 6.82% 09/15/10 500 501
------------
991
FOOD, BEVERAGE AND TOBACCO 1.22%
Philip Morris Companies, Inc. 6.95% 06/01/06 600 617
Total Corporate Bonds and Notes
(Identified Cost - $5,092) 5,117
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS 48.63%
United States Treasury Notes 43.12 5.375% 01/31/00 3,000 2,989
United States Treasury Notes 5.50% 02/29/00 9,500 9,482
United States Treasury Notes 6.00% 08/15/00 350 353
United States Treasury Notes 5.75% 11/15/00 940 943
United States Treasury Notes 5.375% 02/15/01 3,000 2,982
United States Treasury Notes 6.50% 05/31/02 900 927
United States Treasury Notes 5.50% 02/28/03 890 885
United States Treasury Notes 5.50% 03/31/03 900 895
United States Treasury Notes 5.75% 08/15/03 300 301
United States Treasury Notes 7.875% 11/15/04 500 559
United States Treasury Notes 7.00% 07/15/06 1,300 1,405
------------
United States Treasury Notes 21,721
INDEXED SECURITIES 5.51
United States Treasury Notes 3.625% 01/15/08 1,610 1,592(F)
Fannie Mae Inflation Linked 5.122% 03/13/02 1,220 1,181(A)
------------
2,773
Total U.S Government & Agency Obligations
(Identified Cost - $24,461) 24,494
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
STATEMENT OF NET ASSETS
March 31, 1998
(Amounts in Thousands)
<TABLE>
<CAPTION>
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED 5.81%
SECURITIES
FIXED-RATE SECURITIES 4.30%
Fannie Mae 7.00% 08/01/13 $428 $437
Fannie Mae 6.00% 04/01/13 1,600 1,574(E)
Freddie Mac 10.15% 04/15/06 89 89
Government National Mortgage Association 9.25% 03/15/01 66 68
------------
2,168
VARIABLE-RATE SECURITIES 1.51%
Government National Mortgage Association 7.00% 09/20/20 475 487(C)
Government National Mortgage Association 7.00% 08/20/22 264 271(C)
------------
758
Total U.S. Government Agency Mortgage-backed Securities
(Identified Cost - $2,929) 2,926
- ------------------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES 7.25%
FIXED-RATE SECURITIES
Aesop Funding II LLC 6.40% 10/20/03 200 203(B)
Bridgestone/Firestone Master Trust 6.17% 07/01/03 500 502
FASCO Auto Trust 6.65% 11/01/01 153 154
Fleet Finance Home Equity Trust 6.70% 10/16/06 87 87
Fleetwood Credit Corp Grantor Trust 6.75% 03/15/10 448 452
Irwin Home Equity Corporation 6.65% 04/15/05 150 151
Long Beach Acceptance Auto Grantor Trust 6.69% 09/25/04 837 839(B)
Long Beach Acceptance Auto Grantor Trust 6.85% 10/25/03 645 646(B)
Merrill Lynch Mortgage Investors, Inc. 9.20% 01/15/11 108 108
Onyx Acceptance Grantor Trust 6.35% 10/15/03 375 376
Tyron Mortgage Funding, Inc. 6.35% 05/20/01 60 60
World Omni Automobile Lease Securitization Trust 6.05% 11/25/01 76 76
------------
Total Asset-backed Securities
(Identified Cost - $3,648) 3,654
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
STATEMENT OF NET ASSETS
March 31, 1998
(Amounts in Thousands)
<TABLE>
<CAPTION>
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
MORTGAGE-BACKED SECURITIES 10.74%
FIXED-RATE SECURITIES 7.53%
Chevy Chase Home Loan Trust 6.55% 01/20/18 $698 $703
Cityscape Home Equity Loan 7.40% 09/25/28 794 803(B)
International Mortgage Acceptance Corp. 12.25% 03/01/14 193 219
JP Morgan Commercial Mortgage Finance 6.939% 12/26/28 430 436
Merrill Lynch Mortgage Investors, Inc. 6.69% 11/21/28 234 237
Morgan Stanley Capital I 6.85% 02/15/20 690 700
Resolution Trust Corporation 8.40% 07/25/24 51 50
Structured Asset Securities Corp. 7.75% 02/25/28 637 643
------------
3,791
VARIABLE-RATE SECURITIES 3.21%
CBA Mortgage Corp. 7.76% 12/01/03 500 501(C)
Merrill Lynch Mortgage Investors, Inc. 6.54% 09/15/17 1,100 1,119(C)
------------
1,620
Total Mortgage-backed Securities
(Identified Cost - $5,369) 5,411
- ------------------------------------------------------------------------------------------------------------------------------------
YANKEE BONDS 2.41%
FIXED-RATE SECURITIES
Cable and Wireless Communications 6.375% 03/06/03 420 420(D)
Petroliam Nasional Berhad 6.625% 10/18/01 300 283(B,D)
YPF Sociedad Anonima 7.50% 10/26/02 498 509(D)
------------
Total Yankee Bonds
(Identified Cost - $1,212) 1,212
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND EQUITY INTERESTS 2.05%
Black Rock 2001 Term Trust, Inc. 119 shrs 1,033
Total Common Stocks and Equity Interests
(Identified Cost - $988) 1,033
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
STATEMENT OF NET ASSETS
March 31, 1998
(Amounts in Thousands)
<TABLE>
<CAPTION>
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
SHORT-TERM INVESTMENTS 15.32%
CORPORATE 0.99%
Heller Financial 6.27% 05/20/98 $500 $500
MORTGAGE-BACKED SECURITY 0.51%
CRIIMI MAE Financial Corporation 6.77% 05/30/98 260 259(B)
U.S. GOVERNMENT OBLIGATIONS 0.39%
United States Treasury Bills 5.12% 09/03/98 200 196
YANKEE BONDS 1.01%
Hydro Quebec 9.75% 09/29/98 500 509(D)
REPURCHASE AGREEMENT 12.37%
J. P. Morgan Securities, Inc.
6.00% dated 3/31/98, to be repurchased at $6,232 on 4/1/98
(Collateral: $6,190 Fannie Mae Medium-term Notes, 6.77%
due 5/18/00, value $6,515) 6,231 6,231
ACTUAL
CONTRACTS
---------
OPTIONS PURCHASED 0.05%
Eurodollar Future Call June 98, Strike Price $94.25 23 6
Eurodollar Future Call Dec 98, Strike Price $94.00 13 10
U.S. Treasury Bond Future Call Sept 98, Strike $124.00 8 8
------------
24
Total Short-Term Investments
(Identified Cost - $7,718) 7,719
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
STATEMENT OF NET ASSETS
March 31, 1998
(Amounts in Thousands)
<TABLE>
<CAPTION>
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Total Investments (Identified Cost - $51,417) 102.37% $51,566
Other Assets Less Liabilities (2.37)% (1,195)
------------
NET ASSETS CONSISTING OF:
Accumulated paid-in-capital applicable to
490 shares outstanding $49,607
Undistributed net investment income 488
Undistributed net realized gain on investments 125
Unrealized appreciation of investments 151
-------
NET ASSETS 100.00% $50,371
------------
NET ASSET VALUE PER SHARE $102.71
------------
ACTUAL APPRECIATION/
EXPIRATION CONTRACTS (DEPRECIATION)
---------- --------- --------------
OPTIONS WRITTEN
U.S. Treasury Bond Future Call, Strike Price $124.00 May 98 8 $2
</TABLE>
- -------------------------------------------------------------------
(A) Indexed Security - The rate of interest earned on this type of security is
tied to the London Interbank Offered Rate (LIBOR), the Consumer Price Index
(CPI) or the one year Treasury Bill rate. The coupon rate is the rate as of
March 31, 1998.
(B) Rule 144a Security - A security purchased pursuant to Rule 144a under the
Securities Act of 1933 which may not be resold subject to that rule except
to qualified buyers.
(C) The coupon rate shown on the variable securities is the rate at March 31,
1998. This rate varies with the weighted average coupon of the underlying
loans.
(D) Yankee Bond - Dollar denominated bond issued in the U.S. by foreign
entities.
(E) When issued security - Security purchased on a delayed delivery basis. Final
settlement amount and maturity date have not yet been announced.
(F) United States Treasury Inflation - Indexed Security - U.S. Treasury
securities whose principal value is adjusted daily in accordance with
changes in the Consumer Price Index. Interest is calculated on the basis of
the current adjusted principal value.
See notes to financial statements.
6
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
STATEMENT OF OPERATIONS
(AMOUNT IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE FOR THE YEAR
MONTHS ENDED ENDED ENDED
MARCH 31, 1998 (A) JUNE 30, 1997
------------------------------- ------------------------------
<S> <C>
INVESTMENT INCOME:
Interest $1,549 $1,340
Dividends 24 2
------------------------------- ------------------------------
1,573 1,342
Total income
EXPENSES:
Advisory fee 76 60
Administrative fee 12 10
Custodian fees 49 61
Directors' fees 16 20
Legal and audit fees 29 37
Organizational expense 12 16
Registration fees 41 36
Reports to shareholders 3 2
Transfer agent and shareholder servicing expense 1 1
Other expenses 1 1
------------------------------- ------------------------------
240 244
Less fees waived and reimbursed (139) (161)
------------------------------- ------------------------------
Total expenses, net of waivers and reimbursement 101 83
------------------------------- ------------------------------
NET INVESTMENT INCOME 1,472 1,259
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) on investments, options
and futures 132 140
Change in unrealized appreciation of
investments, options and futures 138 26
------------------------------- ------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 270 166
------------------------------- ------------------------------
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS $1,742 $1,425
------------------------------- ------------------------------
</TABLE>
(A) The year end for Western Asset Trust, Inc. - Limited Duration Portfolio
has been changed from June 30 to March 31. See notes to financial
statements.
7
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
(AMOUNT IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE FOR THE YEAR MAY 1, 1996 (B)
MONTHS ENDED ENDED TO
MARCH 31, 1998 (A) JUNE 30, 1997 JUNE 30, 1996
------------------------ ----------------------- -----------------------
<S> <C>
CHANGE IN NET ASSETS:
Net investment income $1,472 $1,259 $134
Net realized gain (loss) on investments,
options and futures 132 140 (12)
Change in unrealized appreciation
of investments, options and futures 138 26 (13)
------------------------ ----------------------- -----------------------
Change in net assets resulting
from operations 1,742 1,425 109
Distributions to shareholders from:
Net investment income (1,337) (1,012) -
Net realized gain on investments (103) (60) -
Change in net assets from
Fund share transactions 23,532 10,074 16,000
------------------------ ----------------------- -----------------------
Change in net assets 23,834 10,427 16,109
NET ASSETS:
Beginning of period 26,537 16,110 1
------------------------ ----------------------- -----------------------
End of period (including
undistributed net investment
income of $488, $381,
and $134, respectively) $50,371 $26,537 $16,110
------------------------ ----------------------- -----------------------
</TABLE>
(A) The year end for Western Asset Trust, Inc. - Limited Duration Portfolio has
been changed from June 30 to March 31.
(B) Commencement of Operations
See notes to financial statements
8
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
FINANCIAL HIGHLIGHTS
Contained below is per share operating performance data for a share of
common stock outstanding throughout each period shown, total investment return,
ratios to average net assets and other supplemental data.
<TABLE>
<CAPTION>
FOR THE FOR THE MAY 1, 1996 (B)
NINE MONTHS ENDED YEAR ENDED TO
MARCH 31, 1998 (A) JUNE 30, 1997 JUNE 30, 1996
----------------------- ------------------ --------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $102.36 $100.76 $100.00
Net investment income (C) 4.33 5.94 0.84
Net realized and unrealized gain (loss)
on investments, options and futures 1.09 1.34 (0.08)
----------------------- ------------------ --------------------
Total from investment operations 5.42 7.28 0.76
----------------------- ------------------ --------------------
Distributions to shareholders from:
Net investment income (4.72) (5.31) -
Net realized gain on investments (0.35) (0.37) -
----------------------- ------------------ --------------------
Total distributions (5.07) (5.68) -
----------------------- ------------------ --------------------
Net asset value, end of period $102.71 $102.36 $100.76
======================= ================== ====================
Total return (C) 5.42%(D) 7.42% 0.76%(D)
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses (C) 0.40%(E) 0.41% 0.50%(E)
Net investment income (C) 5.82%(E) 6.24% 5.58%(E)
Portfolio turnover rate 373.00%(E) 435.47% 1,042%(E)
Net assets, end of period
(in thousands) $50,371 $26,537 $16,110
</TABLE>
- -----------------------------------------
(A) The year end for Western Asset Trust, Inc. - Limited Duration Portfolio has
been changed from June 30 to March 31.
(B) Commencement of Operations.
(C) Net of advisory fees waived pursuant to a voluntary expense limitation of
0.40%. In the absence of this limitation, the ratio of expenses to average
net assets would have been 0.95% for the nine months ended March 31, 1998,
1.21% for the year ended June 30, 1997, and 0.80% for the period ended June
30, 1996.
(D) Not annualized
(E) Annualized
See notes to financial statements
9
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
(AMOUNT IN THOUSANDS)
1. SIGNIFICANT ACCOUNTING POLICIES:
The Western Asset Trust, Inc. ("Corporation") is registered under the Investment
Company Act of 1940, as amended. The Western Asset Trust Limited Duration
Portfolio ("Fund"), a diversified, open-end management investment company, is
one of the portfolios established by the Corporation. The Fund was organized on
May 16, 1990 and had no operations prior to May 1, 1996, other than those
related to organizational matters.
SECURITY VALUATION
Portfolio securities are valued based upon market quotations. When market
quotations are not readily available, securities are valued based on prices
received from recognized broker-dealers in the same or similar securities. The
amortized cost method of valuation is used for debt obligations with 60 days or
less remaining to maturity.
OPTIONS AND FUTURES
The current market value of a traded option is the last sale price or, in the
absence of a sale, the mean between the closing bid and asked price. Futures
contracts are marked-to-market on a daily basis. As a contract's value
fluctuates, payments known as variation margin are made to or received from the
futures commission merchant.
INVESTMENT INCOME AND DISTRIBUTIONS TO SHAREHOLDERS
Net investment income for dividend purposes is recorded on the accrual basis and
consists of interest and dividend income less expenses. Bond premium and
original issue discount are amortized for financial reporting and tax purposes
using the effective interest method over the period to maturity of the security
and serve to reduce or increase interest income.
Distributions are determined on a tax basis and may differ from net investment
income and realized gain for financial reporting purposes.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
SECURITY TRANSACTIONS
Security transactions are recorded on the trade date. Realized gains and losses
from securities transactions are reported on the identified cost basis.
DEFERRED ORGANIZATIONAL EXPENSES
Deferred organizational expenses of $79 are being amortized on a straight-line
basis through April 2001.
USE OF ESTIMATES
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from these estimates.
FEDERAL INCOME TAXES
No provision for federal income or excise taxes is required since the Fund
intends to continue to qualify as a regulated investment company and distribute
all of its taxable income to its shareholders.
2. FINANCIAL INSTRUMENTS:
As part of the Fund's investment program, the Fund utilizes repurchase
agreements, options and futures contracts. The nature and risk of these
financial instruments and the reasons for using them are set forth more fully in
the Corporation's Prospectus and Statement of Additional Information.
REPURCHASE AGREEMENTS
All repurchase agreements are fully collateralized by obligations issued by the
U.S. Government or its agencies and such collateral is in the possession of the
Fund's custodian. Risks arise from the possible delay in recovery or potential
loss of rights in the collateral should the issuer of the repurchase agreement
fail financially.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
FINANCIAL INSTRUMENTS - CONTINUED
OPTION TRANSACTIONS
A call option gives the option holder the right to purchase the underlying
security at a specified price until a specified date. A put option gives the
option holder the right to sell the underlying security at a specified price
until a specified date. Risks arise from the possible illiquidity of the
options market and from movements in security values. Call and put options
written by the Fund and related premiums received during the period were as
follows:
<TABLE>
<CAPTION>
CALLS PUTS
---------------------------------------------------------------------------
CONTRACTS PREMIUMS CONTRACTS PREMIUMS
- ------------------------------------------------------------------------------------------- ----------------------------------
<S> <C>
Options outstanding at June 30, 1997 - - 5 $4
Options written 200 $132 26 11
Options closed (192) (128) (31) (15)
Options expired - - - -
Options exercised - - - -
- ------------------------------------------------------------------------------------------- ----------------------------------
Options outstanding at March 31, 1998 8 $4 - $ -
=========================================================================================== ==================================
</TABLE>
FUTURES
The Fund may enter into futures contracts in connection with its interest rate
management strategy. Risks arise from the possible illiquidity of the futures
market and from the possibility that a change in the value of a contract may not
correlate with changes in interest rates. The open long and short futures
positions and related appreciation or depreciation at March 31, 1998 are
described at the end of the "Statement of Net Assets".
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
3. PORTFOLIO TRANSACTIONS:
Purchases and sales of portfolio securities (excluding short-term, U.S.
Government securities, written and purchased options and futures contracts) for
the nine months ended March 31, 1998, aggregated $20,517 and $15,227,
respectively. Purchases and sales of U.S. Government securities aggregated
$90,079 and $74,929, respectively for the same period.
At March 31, 1998, the cost of securities for federal income tax purposes was
$51,418 Aggregate gross unrealized appreciation for all securities in which
there was an excess of value over tax cost was $221 and aggregate gross
unrealized depreciation for all securities in which there was an excess of tax
cost over value was $73.
4. FUND SHARE TRANSACTIONS:
At March 31, 1998, there were 5,000,000 shares of common stock of the
Corporation authorized at $.001 par value. Transactions in Fund shares were as
follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED FOR THE YEAR ENDED FOR THE PERIOD ENDED
MARCH 31, 1998 JUNE 30, 1997 JUNE 30, 1996
-------------------------------- ------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------- ------------------------------- -------------------------------
<S> <C>
Sold 382 $39,150 113 $11,502 160 $16,000
Reinvestment of
Distributions 14 1,440 10 1,072 0 0
Repurchased (165) (17,058) (24) (2,500) 0 0
- -------------------------------------------------------- ------------------------------- -------------------------------
Net change 231 $23,532 99 $10,074 160 $16,000
======================================================== =============================== ===============================
</TABLE>
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
5. TRANSACTIONS WITH AFFILIATES:
The Fund has an administration agreement with Legg Mason Fund Adviser, Inc.
("Administrator"), a corporate affiliate of Legg Mason Wood Walker, Incorporated
("Legg Mason"), a member of the New York Stock Exchange and the distributor for
the Fund. Under this agreement, the Administrator provides the Fund with
administrative services for which the Fund pays a fee at an annual rate of 0.10%
of average daily net assets of the Fund. The Administrator has voluntarily
agreed to indefinitely limit its annual fee to 0.05% of the Fund's average daily
net assets. At March 31, 1998, $2 was due to the Administrator.
Western Asset Management Company ("Adviser"), a corporate affiliate of the
Administrator and Legg Mason, serves as investment adviser to the Fund. The
Adviser is responsible for the actual investment activity of the Fund, for which
the Fund pays a fee at an annual rate of 0.50% of average daily net assets of
the Fund. The Adviser has voluntarily agreed to indefinitely limit its fee to
0.30% of average daily net assets and to further waive its fees and reimburse
the Fund to the extent necessary to limit the total expenses to an annual rate
of 0.40% of the Fund's average daily net assets. Pursuant to this agreement,
advisory fees of $76 were waived and reimbursements of $63 were made for the
nine months ended March 31, 1998. At March 31, 1998, $26 was due from the
Advisor as reimbursement for expenses paid in excess of the 0.40% annual limit.
14
<PAGE>
1306 Concourse Drive Telephone 410 412 3000
Suite 100
Linthicum, MD 21090-1020
Price Waterhouse LLP [Logo Appears Here]
Report of Independent Accountants
To the Board of Directors of Western Asset Trust, Inc. and
Shareholders of Western Asset Trust Limited Duration Portfolio
In our opinion, the accompanying statement of net assets, and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Western Asset Trust Limited Duration Portfolio (the "Fund"), (one of the
portfolios constituting Western Asset Trust, Inc.) at March 31, 1998, and the
results of its operations, the changes in its net assets and the financial
highlights for each of the fiscal periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund'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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes 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, which included confirmation of securities at March 31, 1998 by
correspondence with the custodian and brokers, and where appropriate, the
application of alternative auditing procedures for unsettled security
transactions, provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
__________________________
PRICE WATERHOUSE LLP
Linthicum, Maryland
April 30, 1998
