LM INSTITUTIONAL FUND ADVISORS I INC, 497, 1998-10-29

LM INSTITUTIONAL FUND ADVISORS I INC
497, 1998-10-29

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LM INSTITUTIONAL FUND ADVISORS I

PROSPECTUS
June 1, 1998
As Revised July 22, 1998

IMPORTANT INFORMATION!

This Prospectus offers shares in eleven, no-load mutual funds comprising LM
Institutional Fund Advisors I, Inc. (each a "Portfolio"). The Portfolios, which
are intended to serve as investment vehicles for institutional investors such as
pension plans, endowments and foundations, offer two classes of shares: the
Institutional Class and the Financial Intermediary Class.

This Prospectus explains concisely what you should know before investing in the
Portfolios. Please read it carefully and keep it for future reference. You can
find more detailed information in the June 1, 1998 statement of additional
information (the "SAI"), as amended from time to time. For a free copy of the
SAI or other information, call LM Institutional Fund Advisors ("LMIFA") at
1-888-42-LMIFA (1-888-425-6432). The SAI has been filed with the Securities and
Exchange Commission ("SEC") and is incorporated into this prospectus by
reference.

THE WESTERN ASSET HIGH YIELD PORTFOLIO AND WESTERN ASSET GLOBAL STRATEGIC INCOME
PORTFOLIO MAY INVEST ALL OF THEIR ASSETS IN LOWER-RATED BONDS, COMMONLY KNOWN AS
"JUNK BONDS." INVESTMENTS OF THIS TYPE ARE SUBJECT TO A GREATER RISK OF LOSS OF
PRINCIPAL AND NONPAYMENT OF INTEREST. INVESTORS SHOULD CAREFULLY ASSESS THE
RISKS ASSOCIATED WITH AN INVESTMENT IN THESE PORTFOLIOS. FOR MORE INFORMATION
CONCERNING THESE RISKS, SEE "COMMON INVESTMENT POLICIES AND TECHNIQUES; RISK
FACTORS."

PORTFOLIO PAGE
- --------------------------------------------------------------------------------
Western Asset Government Money Market
Portfolio...................................................................13
Western Asset Money Market Portfolio..........................................13
Western Asset Limited Duration Portfolio......................................14
Western Asset Intermediate Portfolio..........................................14
Western Asset Intermediate Plus Portfolio.....................................14
Western Asset Core Portfolio..................................................14
Western Asset Core Plus Portfolio.............................................14
Western Asset High Yield Portfolio............................................16
Western Asset Non-U.S. Fixed Income
Portfolio...................................................................17
Western Asset Global Strategic Income
Portfolio...................................................................18
Western Asset Enhanced Equity Portfolio.......................................20

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.

FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND INVOLVE RISK,
INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.

AN INVESTMENT IN THE WESTERN ASSET GOVERNMENT MONEY MARKET PORTFOLIO OR THE
WESTERN ASSET MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT EITHER PORTFOLIO WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.

<PAGE>

TABLE OF CONTENTS

PROSPECTUS SUMMARY.............................................................4

EXPENSE INFORMATION............................................................6
Western Asset Government Money Market Portfolio...........................6
Western Asset Money Market Portfolio......................................6
Western Asset Limited Duration Portfolio..................................7
Western Asset Intermediate Portfolio......................................7
Western Asset Intermediate Plus Portfolio.................................7
Western Asset Core Portfolio..............................................8
Western Asset Core Plus Portfolio.........................................8
Western Asset High Yield Portfolio........................................8
Western Asset Non-U.S. Fixed Income Portfolio.............................9
Western Asset Global Strategic Income Portfolio...........................9
Western Asset Enhanced Equity Portfolio...................................9

FINANCIAL HIGHLIGHTS..........................................................10
Western Asset Limited Duration Portfolio.................................11
Western Asset Intermediate Portfolio.....................................11
Western Asset Core Portfolio.............................................12

DESCRIPTION OF EACH PORTFOLIO AND ITS INVESTMENT STRATEGY.....................13
Western Asset Government Money Market Portfolio..........................13
Western Asset Money Market Portfolio.....................................13
Western Asset Limited Duration Portfolio.................................14
Western Asset Intermediate Portfolio.....................................14
Western Asset Intermediate Plus Portfolio................................14
Western Asset Core Portfolio.............................................14
Western Asset Core Plus Portfolio........................................14
Western Asset High Yield Portfolio.......................................16
Western Asset Non-U.S. Fixed Income Portfolio............................17
Western Asset Global Strategic Income Portfolio..........................18
Western Asset Enhanced Equity Portfolio..................................20

COMMON INVESTMENT POLICIES AND TECHNIQUES; RISK FACTORS.......................21
Foreign Securities.......................................................21
Options and Futures......................................................23
Foreign Currency Exchange Transactions...................................23
Preferred Stocks and Convertible Securities..............................24
Debt and Fixed Income Securities.........................................25
Commercial Paper and Other Short-term Investments........................29
Loan Participations and Assignments......................................29
Indexed Securities and Structured Notes..................................30
Forward Commitments......................................................30
Restricted and Illiquid Securities.......................................30
Securities of Other Investment Companies.................................31
Repurchase Agreements....................................................31
Reverse Repurchase Agreements and Other Borrowing........................31
Loans of Portfolio Securities............................................31
Duration.................................................................32
Portfolio Turnover.......................................................32
Alternative Investment Strategies........................................32
New Investment Products..................................................32
Investment Policies......................................................32

<PAGE>

PERFORMANCE DATA..............................................................33

MANAGEMENT OF THE PORTFOLIOS..................................................34
Board of Directors.......................................................34
Manager, Advisers and Portfolio Managers.................................34
Distributors.............................................................35
Portfolio Transactions...................................................35
Expenses.................................................................35

ORGANIZATION AND HISTORY......................................................36

PURCHASE OF SHARES............................................................36
Initial Investment.......................................................36
Additional Investments...................................................37
Other Purchase Information...............................................37
Retirement Plans.........................................................37
Account Registration Changes.............................................38

DISTRIBUTION PLANS............................................................38

REDEMPTION OF SHARES..........................................................38
Signature Guarantee......................................................39

EXCHANGE PRIVILEGE............................................................39

NET ASSET VALUE...............................................................39

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS...................................40

TAX INFORMATION...............................................................41

APPENDIX A -- SECURITIES RATINGS.............................................A-1

<PAGE>

PROSPECTUS SUMMARY

COMPARISON OF THE PORTFOLIOS

The following chart provides general information about each Portfolio. It is
qualified in its entirety by the more complete descriptions of the Portfolios
appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
PORTFOLIOS INVESTMENT OBJECTIVES PRIMARY INVESTMENTS
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Western Asset Obtain high current income consistent with U.S. Government money market instruments.
Government Money Market liquidity and conservation of principal.
Portfolio
- ---------------------------------------------------------------------------------------------------------------------
Western Asset Money Obtain high current income consistent with Money market instruments.
Market Portfolio liquidity and conservation of principal.
- ---------------------------------------------------------------------------------------------------------------------
Western Asset Limited Maximize total return, consistent with Short and intermediate maturity fixed income
Duration Portfolio prudent investment management and liquidity securities. Overall duration normally 1-3
needs, by investing to obtain the average years.
duration specified for the Portfolio.
- ---------------------------------------------------------------------------------------------------------------------
Western Asset Maximize total return, consistent with Short and intermediate maturity fixed income
Intermediate Portfolio prudent investment management and liquidity securities. Overall duration normally 2-4
needs, by investing to obtain the average years.
duration specified for the Portfolio.
- ---------------------------------------------------------------------------------------------------------------------
Western Asset Maximize total return, consistent with Short and intermediate maturity fixed income
Intermediate Plus prudent investment management and liquidity securities, including foreign currency
Portfolio needs, by investing to obtain the average denominated securities and lower-rated
duration specified for the Portfolio. securities. Overall duration normally 2-4
years.
- ---------------------------------------------------------------------------------------------------------------------
Western Asset Core Maximize total return, consistent with Broad range of fixed income securities.
Portfolio prudent investment management and liquidity Overall duration currently expected to be 4-6
needs, by investing to obtain the average years.
duration specified for the Portfolio.
- ---------------------------------------------------------------------------------------------------------------------
Western Asset Core Plus Maximize total return, consistent with Broad range of fixed income securities,
Portfolio prudent investment management and liquidity including foreign currency denominated
needs, by investing to obtain the average securities and lower-rated securities.
duration specified for the Portfolio. Overall duration currently expected to be 4-6
years.
- ---------------------------------------------------------------------------------------------------------------------
Western Asset High Maximize total return, consistent with Lower-rated fixed income securities.
Yield Portfolio prudent investment management.
- ---------------------------------------------------------------------------------------------------------------------
Western Asset Non-U.S. Maximize total return, consistent with Foreign fixed income securities.
Fixed Income Portfolio prudent investment management.
- ---------------------------------------------------------------------------------------------------------------------
Western Asset Global Income and capital appreciation. Domestic and foreign fixed income securities,
Strategic Income including lower-rated fixed income
Portfolio securities.
- ---------------------------------------------------------------------------------------------------------------------
Western Asset Enhanced Long-term total return. S&P 500 derivatives and stocks, and a broad
Equity Portfolio range of fixed income securities.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

GENERAL

LM Institutional Fund Advisors I, Inc. (the "Corporation") is comprised of a
variety of separate investment portfolios. The Corporation was organized as a
Maryland corporation on May 16, 1990.

MANAGER AND ADVISERS

LM Institutional Advisors, Inc. (the "Manager" or "LMIA") serves as the
investment manager to each Portfolio. Western Asset Management Company ("Western
Asset") is the investment adviser to each of the Portfolios other than the
Western Asset Non-U.S. Fixed Income Portfolio. With respect to the Western Asset
Intermediate Plus, Western Asset Core Plus, and Western Asset Global Strategic
Income Portfolios, Western Asset shares this responsibility with Western Asset
Global Management Limited ("WAGM"). WAGM also serves as the investment adviser
to the Western Asset Non-U.S. Fixed Income Portfolio. Collectively Western Asset
and WAGM are referred to herein as "Advisers" and individually as the "Adviser."

CERTAIN RISK FACTORS

In addition to the typical risks of investing in securities, and in fixed income
securities in particular (as well as equity securities for the Western Asset
Enhanced Equity Portfolio), the Portfolios may be subject to certain special
risks. These risks include the risks associated with investing in: foreign
markets and the securities of foreign issuers (these risks increase to the
extent a Portfolio invests in emerging markets); derivative securities (which
tend to be more volatile than the underlying security); and lower-rated
securities (high yield or junk bonds). See "Description of Each Portfolio and
Its Investment Strategy" and "Common Investment Policies and Techniques; Risk
Factors" for more information about which Portfolios are likely to be subject to
the foregoing risks and a description of other risks to which the Portfolios are
subject.

PURCHASE OF SHARES

The Portfolios offer two classes of shares: Institutional Class and Financial
Intermediary Class. Shares in the Financial Intermediary Class bear a 12b-1 fee.
See "Distribution Plans" for more information. The minimum initial investment is
$1 million, subject to certain exceptions. See "Purchase of Shares."

REDEMPTIONS AND EXCHANGES

Shares of each Portfolio may be redeemed without cost at the relevant net asset
value per share next determined after receipt of the redemption request. The
redemption price may be more or less than the purchase price. See "Redemption of
Shares." Shares of any Portfolio may be exchanged on the basis of relative net
asset values for shares of the same class of any other Portfolio or of any
portfolio of LM Institutional Fund Advisors II, Inc. See "Exchange Privilege."

DIVIDENDS AND DISTRIBUTIONS

The Western Asset Government Money Market Portfolio and the Western Asset Money
Market Portfolio declare dividends daily (out of their net investment income for
that day) and pay dividends monthly. Each of the other Portfolios declares and
pays dividends quarterly out of its net investment income for that quarter.
Distributions of net realized capital gains are made annually. All dividends and
distributions will be reinvested automatically at net asset value in additional
shares of the same class of the same Portfolio, unless cash payment is
requested. See "Dividends and Distributions to Shareholders."

<PAGE>

EXPENSE INFORMATION

Expenses are one of several factors to consider when investing. The following
tables contain annualized expense information about the Portfolios based on the
most recent nine month fiscal period (in the case of the Western Asset Limited
Duration Portfolio, the Western Asset Intermediate Portfolio and the Western
Asset Core Portfolio) or amounts expected to be incurred in the current fiscal
year (in the case of the other Portfolios). Information for the Western Asset
Limited Duration Portfolio, the Western Asset Intermediate Portfolio and the
Western Asset Core Portfolio has been restated to give effect to revised
investment advisory and administration arrangements recently approved by
shareholders. The examples show the cumulative expenses attributable to a
hypothetical $1,000 investment over specified periods, assuming a 5% annual
return and redemption at the end of each period. The paragraph following the
tables and examples contains additional information about the tables, the
examples and the Portfolios' expenses.

WESTERN ASSET GOVERNMENT MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INSTITUTIONAL FINANCIAL
CLASS INTERMEDIARY CLASS INSTITUTIONAL CLASS EXAMPLE
------------- ------------------ -----------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES None None 1 year $ 4
3 years $13
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

<CAPTION>
FINANCIAL INTERMEDIARY
CLASS EXAMPLE
-----------------------------
<S> <C> <C> <C> <C>
Management Fees .15% .15% 1 year $ 5
(reflecting expense limitations) 3 years $16
12b-1 Fees None .10%
Other Expenses .15% .15%
------------- ------
Total Operating Expenses
(reflecting expense limitations) .30% .40%
============= ======
</TABLE>

WESTERN ASSET MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INSTITUTIONAL FINANCIAL
CLASS INTERMEDIARY CLASS INSTITUTIONAL CLASS EXAMPLE
------------- ------------------ -----------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES None None 1 year $ 4
3 years $13
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

<CAPTION>
FINANCIAL INTERMEDIARY
CLASS EXAMPLE
-----------------------------
<S> <C> <C> <C> <C>
Management Fees .15% .15% 1 year $ 5
(reflecting expenses limitations) 3 years $16
12b-1 Fees None .10%
Other Expenses .15% .15%
------------- ------
Total Operating Expenses
(reflecting expense limitations) .30% .40%
============= ======
</TABLE>

<PAGE>

WESTERN ASSET LIMITED DURATION PORTFOLIO
<TABLE>
<CAPTION>
INSTITUTIONAL FINANCIAL
CLASS INTERMEDIARY CLASS INSTITUTIONAL CLASS EXAMPLE
------------- ------------------ -----------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES None None 1 year $ 4
3 years $13
5 years $22
10 years $51
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

<CAPTION>
FINANCIAL INTERMEDIARY
CLASS EXAMPLE
-----------------------------
<S> <C> <C> <C> <C>
Management Fees .00% .00% 1 year $ 7
(reflecting expenses limitations) 3 years $21
12b-1 Fees None .25% 5 years $36
Other Expenses .40% .40% 10 years $81
------------- ------
Total Operating Expenses
(reflecting expense limitations) .40% .65%
============= ======
</TABLE>

WESTERN ASSET INTERMEDIATE PORTFOLIO
<TABLE>
<CAPTION>
INSTITUTIONAL FINANCIAL
CLASS INTERMEDIARY CLASS INSTITUTIONAL CLASS EXAMPLE
------------- ------------------ -----------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES None None 1 year $ 5
3 years $14
5 years $25
10 years $57
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

<CAPTION>
FINANCIAL INTERMEDIARY
CLASS EXAMPLE
-----------------------------
<S> <C> <C> <C> <C>
Management Fees .33% .33% 1 year $ 7
(reflecting expenses limitations) 3 years $22
12b-1 Fees None .25% 5 years $39
Other Expenses .12% .12% 10 years $87
------------- ------
Total Operating Expenses
(reflecting expense limitations) .45% .70%
============= ======
</TABLE>

WESTERN ASSET INTERMEDIATE PLUS PORTFOLIO
<TABLE>
<CAPTION>
INSTITUTIONAL FINANCIAL
CLASS INTERMEDIARY CLASS INSTITUTIONAL CLASS EXAMPLE
------------- ------------------ -----------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES None None 1 year $ 5
3 years $14
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

<CAPTION>
FINANCIAL INTERMEDIARY
CLASS EXAMPLE
-----------------------------
<S> <C> <C> <C> <C>
Management Fees .30% .30% 1 year $ 7
(reflecting expenses limitations) 3 years $22
12b-1 Fees None .25%
Other Expenses .15% .15%
------------- ------
Total Operating Expenses
(reflecting expense limitations) .45% .70%
============= ======
</TABLE>

<PAGE>

WESTERN ASSET CORE PORTFOLIO
<TABLE>
<CAPTION>
INSTITUTIONAL FINANCIAL
CLASS INTERMEDIARY CLASS INSTITUTIONAL CLASS EXAMPLE
------------- ------------------ -----------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES None None 1 year $ 5
3 years $16
5 years $28
10 years $63
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

<CAPTION>
FINANCIAL INTERMEDIARY
CLASS EXAMPLE
-----------------------------
<S> <C> <C> <C> <C>
Management Fees .44% .44% 1 year $ 8
(reflecting expenses limitations) 3 years $24
12b-1 Fees None .25% 5 years $42
Other Expenses .06% .06% 10 years $93
------------- ------
Total Operating Expenses
(reflecting expense limitations) .50% .75%
============= ======
</TABLE>

WESTERN ASSET CORE PLUS PORTFOLIO
<TABLE>
<CAPTION>
INSTITUTIONAL FINANCIAL
CLASS INTERMEDIARY CLASS INSTITUTIONAL CLASS EXAMPLE
------------- ------------------ -----------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES None None 1 year $ 5
3 years $16
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

<CAPTION>
FINANCIAL INTERMEDIARY
CLASS EXAMPLE
-----------------------------
<S> <C> <C> <C> <C>
Management Fees .35% .35% 1 year $ 8
(reflecting expenses limitations) 3 years $24
12b-1 Fees None .25%
Other Expenses .15% .15%
------------- ------
Total Operating Expenses
(reflecting expense limitations) .50% .75%
============= ======
</TABLE>

WESTERN ASSET HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
INSTITUTIONAL FINANCIAL
CLASS INTERMEDIARY CLASS INSTITUTIONAL CLASS EXAMPLE
------------- ------------------ -----------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES None None 1 year $ 6
3 years $18
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

<CAPTION>
FINANCIAL INTERMEDIARY
CLASS EXAMPLE
-----------------------------
<S> <C> <C> <C> <C>
Management Fees .40% .40% 1 year $ 8
(reflecting expenses limitations) 3 years $26
12b-1 Fees None .25%
Other Expenses .15% .15%
------------- ------
Total Operating Expenses
(reflecting expense limitations) .55% .80%
============= ======
</TABLE>

<PAGE>

WESTERN ASSET NON-U.S. FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
INSTITUTIONAL FINANCIAL
CLASS INTERMEDIARY CLASS INSTITUTIONAL CLASS EXAMPLE
------------- ------------------ -----------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES None None 1 year $ 6
3 years $18
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

<CAPTION>
FINANCIAL INTERMEDIARY
CLASS EXAMPLE
-----------------------------
<S> <C> <C> <C> <C>
Management Fees .35% .35% 1 year $ 8
(reflecting expenses limitations) 3 years $26
12b-1 Fees None .25%
Other Expenses .20% .20%
------------- ------
Total Operating Expenses
(reflecting expense limitations) .55% .80%
============= ======
</TABLE>

WESTERN ASSET GLOBAL STRATEGIC INCOME PORTFOLIO
<TABLE>
<CAPTION>
INSTITUTIONAL FINANCIAL
CLASS INTERMEDIARY CLASS INSTITUTIONAL CLASS EXAMPLE
------------- ------------------ -----------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES None None 1 year $ 6
3 years $18
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

<CAPTION>
FINANCIAL INTERMEDIARY
CLASS EXAMPLE
-----------------------------
<S> <C> <C> <C> <C>
Management Fees .40% .40% 1 year $ 8
(reflecting expenses limitations) 3 years $26
12b-1 Fees None .25%
Other Expenses .40% .40%
------------- ------
Total Operating Expenses
(reflecting expense limitations) .80% 1.05%
============= ======
</TABLE>

WESTERN ASSET ENHANCED EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INSTITUTIONAL FINANCIAL
CLASS INTERMEDIARY CLASS INSTITUTIONAL CLASS EXAMPLE
------------- ------------------ -----------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES None None 1 year $ 7
3 years $21
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

<CAPTION>
FINANCIAL INTERMEDIARY
CLASS EXAMPLE
-----------------------------
<S> <C> <C> <C> <C>
Management Fees .40% .40% 1 year $ 9
(reflecting expenses limitations) 3 years $29
12b-1 Fees None .25%
Other Expenses .25% .25%
------------- ------
Total Operating Expenses
(reflecting expense limitations) .65% .90%
============= ======
</TABLE>

The tables are provided to help you understand the expenses of investing in
a Portfolio and your share of the Portfolio's operating expenses. The management
fees shown in the table for each Portfolio reflect voluntary expense limitations
currently in effect, which are expected to continue through the current fiscal
year. The following table shows

<PAGE>

what management fees and total operating expenses would be for each of the
Portfolios in the absence of the expense limitations. The information in the
table for the Western Asset Limited Duration Portfolio, the Western Asset
Intermediate Portfolio and the Western Asset Core Portfolio has been annualized
and has been restated to give effect to revised investment advisory and
administration arrangements, the net effect of which was to increase the
contractual rate of the management fee by 0.05% on an annual basis and eliminate
administrative fees.

<TABLE>
<CAPTION>
TOTAL
MANAGEMENT OPERATING
FEE EXPENSES
WITHOUT WITHOUT
PORTFOLIO CLASS LIMITATION LIMITATION
- --------- ----- ---------- ----------
<S> <C> <C> <C>
Western Asset Government Money Market Portfolio Institutional 0.20% 0.35%
Financial Intermediary 0.20% 0.45%
Western Asset Money Market Portfolio Institutional 0.20% 0.35%
Financial Intermediary 0.20% 0.45%
Western Asset Limited Duration Portfolio Institutional 0.35% 0.95%
Financial Intermediary 0.35% 1.20%
Western Asset Intermediate Portfolio Institutional 0.40% 0.52%
Financial Intermediary 0.40% 0.77%
Western Asset Intermediate Plus Portfolio Institutional 0.40% 0.55%
Financial Intermediary 0.40% 0.80%
Western Asset Core Portfolio Institutional 0.45% 0.51%
Financial Intermediary 0.45% 0.76%
Western Asset Core Plus Portfolio Institutional 0.45% 0.60%
Financial Intermediary 0.45% 0.85%
Western Asset High Yield Portfolio Institutional 0.55% 0.70%
Financial Intermediary 0.55% 0.95%
Western Asset Non-U.S. Fixed Income Portfolio Institutional 0.45% 0.65%
Financial Intermediary 0.45% 0.90%
Western Asset Global Strategic Income Portfolio Institutional 0.45% 0.85%
Financial Intermediary 0.45% 1.10%
Western Asset Enhanced Equity Portfolio Institutional 0.55% 0.75%
Financial Intermediary 0.55% 1.00%
</TABLE>

Other expenses for the Western Asset Limited Duration Portfolio, in the
absence of any expense limitations, would be 0.60%.

"Other expenses" are based on estimated amounts for the current fiscal year
in the case of each of the Portfolios other than the Western Asset Limited
Duration Portfolio, the Western Asset Intermediate Portfolio and the Western
Asset Core Portfolio, which are based on the most recent nine month period. THE
EXAMPLES DO NOT REPRESENT PAST OR FUTURE EXPENSE LEVELS. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN. Federal regulations require the examples to
assume a 5% annual return, but actual annual returns will vary. As a result of
Rule 12b-1 fees, long-term shareholders of the Financial Intermediary Class may
pay more than the economic equivalent of the maximum sales charge permitted by
the National Association of Securities Dealers, Inc.

- --------------------------------------------------------------------------------

FINANCIAL HIGHLIGHTS

The tables on the following pages present financial highlights for the Western
Asset Limited Duration Portfolio, the Western Asset Intermediate Portfolio and
the Western Asset Core Portfolio. This information, including the information
for the five most recent fiscal years, has been audited by Price Waterhouse LLP.
The "Report of Independent Accountants" and financial statements included in the
Portfolios' Annual Reports for the 1998 fiscal year are incorporated by
reference in this Prospectus and in the SAI. Each Portfolio's Annual Report,
which contains unaudited performance information, is available without charge
upon request. The following information should be

<PAGE>

read in conjunction with the Portfolios' audited financial statements and
related notes. The following information does not reflect a 10-for-1 stock split
that occurred on June 17, 1998. No information is provided with respect to the
other Portfolios because they had not commenced operations as of the date of
this Prospectus.

WESTERN ASSET LIMITED DURATION PORTFOLIO
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
MARCH 31, JUNE 30,
---------------------------------------
1998(A) 1997 1996(B)
---------------------------------------
<S> <C> <C> <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 has been changed from June 30 to March 31.
(B) For the period May 1, 1996 (commencement of operations) to June 30, 1996.
(C) Net of investment advisory fees waived pursuant to a voluntary expense
limitation of 0.50% until June 30, 1996 and 0.40% until October 30, 1998;
and a voluntary administrative expense waiver of 0.05%. Pursuant to this
limitation, advisory fees of $76,000, $60,550 and $7,212 were waived for the
nine months ended March 31, 1998, 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 0.95%, 1.20% and
0.80%, respectively.
(D) Not Annualized.
(E) Annualized.

WESTERN ASSET INTERMEDIATE PORTFOLIO
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
MARCH 31, JUNE 30,
---------------------------------------------------
1998(A) 1997 1996 1995
---------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................................. $ 107.19 $ 104.83 $107.36 $100.00
---------------------------------------------------
Net investment income (B)........................................... 4.55 5.49 5.41 3.86
Net realized and unrealized gain (loss) on investments, options and
futures........................................................... 2.34 3.00 (0.06) 6.02
---------------------------------------------------
Total from investment operations.................................... 6.89 8.49 5.35 9.88
---------------------------------------------------
Distributions to shareholders from:
Net investment income............................................. (4.59) (5.42) (5.35) (2.47)
Net realized gain on investments.................................. (0.97) (0.71) (2.53) (0.05)
---------------------------------------------------
Total distributions................................................. (5.56) (6.13) (7.88) (2.52)
---------------------------------------------------
Net asset value, end of year........................................ $ 108.52 $ 107.19 $104.83 $107.36
===================================================
Total return(B)..................................................... 6.59%(C) 8.32% 5.15% 10.08%
RATIOS/SUPPLEMENTAL DATA:
RATIOS TO AVERAGE NET ASSETS:
Expenses (B)...................................................... 0.45%(D) 0.45% 0.50% 0.50%
Net investment income (B)......................................... 5.78%(D) 6.33% 6.28% 6.11%
Portfolio turnover rate............................................. 401.40%(D) 419.26% 841.89% 764.45%
Net assets, end of year (in thousands).............................. $ 293,531 $224,497 $66,079 $20,313
</TABLE>

- ---------------
(A) The year end has been changed from June 30 to March 31.
(B) Net of investment advisory fees waived pursuant to a voluntary expense
limitation of 0.50% until June 30, 1996 and 0.45% until October 30, 1998;
and a voluntary administrative expense waiver of 0.05%. Pursuant to this
limitation, advisory fees of $142,000, $158,505, $130,938 and $29,571 were
waived for nine months ended March 31, 1998 and 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 0.52%, 0.55%, 1.03%
and 1.60%, respectively.
(C) Not Annualized.
(D) Annualized.

<PAGE>

WESTERN ASSET CORE PORTFOLIO
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31, YEARS ENDED JUNE 30,
-------------------------------------------------------------------------------------------
1998(A) 1997 1996 1995 1994 1993 1992 1991(E)
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 112.79 $ 110.46 $ 112.17 $ 105.02 $ 116.64 $ 112.04 $106.28 $100.00
-------------------------------------------------------------------------------------------
Net investment income(B)............ 4.87 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........................... 4.89 1.86 (1.36) 7.19 (6.28) 8.71 8.72 4.28
-------------------------------------------------------------------------------------------
Total from investment operations.... 9.76 8.91 5.34 14.01 (0.64) 15.28 15.62 10.94
-------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income............. (5.28) (6.51) (6.61) (6.86) (6.11) (6.72) (7.11) (4.66)
Net realized gain on
investments..................... (1.37) (0.07) (0.44) (4.87) (3.96) (2.75) -- --
-------------------------------------------------------------------------------------------
Total distributions................. (6.65) (6.58) (7.05) (6.86) (10.98) (10.68) (9.86) (4.66)
-------------------------------------------------------------------------------------------
Net asset value, end of period...... $ 115.90 $ 112.79 $ 110.46 $ 112.17 $ 105.02 $ 116.64 $112.04 $106.28
===========================================================================================
Total return(B)..................... 8.91%(C) 8.27% 4.86% 14.12% (0.89)% 14.52% 15.61% 11.01%(C)
RATIOS/SUPPLEMENTAL DATA:
RATIOS TO AVERAGE NET ASSETS:
Expenses (B)...................... 0.50%(D) 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.65%(D)
Net investment income (B)......... 6.0%(D) 6.4% 6.3% 7.0% 6.0% 6.0% 6.7% 8.0%(D)
Portfolio turnover rate............. 226.9%(D) 384.8% 266.0% 257.90% 272.49% 313.05% 299.65% 177.25%(D)
Net assets, end of period (in
thousands)........................ $ 617,676 $508,353 $453,699 $336,774 $205,959 $135,886 $92,892 $43,076
</TABLE>

- ---------------
(A) The year end has been changed from June 30 to March 31.
(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 $30,000, $22,402, $111,421, $69,442, $66,823,
$71,911, and $128,262 were waived for the nine months ended March 31, 1998
and 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 nine
months ended March 31, 1998, 0.50% for the year ended June 30, 1997, 0.53%
for the years ended June 30, 1996 and 1995, 0.58% for the year ended June
30, 1994, 0.57% for the year ended June 30, 1993, 0.70% for the year ended
June 30, 1992, and 0.81% for the period September 4, 1990 to June 30, 1991.
(C) Not Annualized.
(D) Annualized.
(E) For the period September 4, 1990 (commencement of operations) to June 30,
1991.

<PAGE>

DESCRIPTION OF EACH PORTFOLIO AND ITS INVESTMENT STRATEGY

The investment objective and policies for each Portfolio are stated below. The
Portfolios are not intended to be a complete investment program, and there is no
assurance that any Portfolio will achieve its investment objective. Please see
"Common Investment Policies and Techniques; Risk Factors" and the SAI for
additional information concerning the Portfolios' investment programs and the
risks associated with investing in the Portfolios. Each of the Portfolios may
from time to time depart from the policies described below for temporary
"defensive" purposes. See "Common Investment Policies and Techniques; Risk
Factors -- Alternative Investment Strategies" for more information.

WESTERN ASSET GOVERNMENT
MONEY MARKET PORTFOLIO

Adviser: Western Asset
Objective: Obtain high current income consistent with
liquidity and conservation of principal.

The Portfolio invests only in U.S. Government obligations, repurchase agreements
with respect to such instruments and debt obligations of "supranational
organizations" as described below. U.S. Government obligations include: (1) U.S.
Treasury obligations, which differ only in their interest rates, maturities and
times of issuance, and (2) obligations issued or guaranteed by U.S. Government
agencies and 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
Governmental 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) the
discretionary authority of the U.S. Government to purchase certain obligations
of an agency or instrumentality (such as securities issued by Fannie Mae) or (d)
only the credit of the instrumentality (such as the securities issued by Freddie
Mac). In the case of obligations not backed by the full faith and credit of the
U.S. Government, the Portfolio must look 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. The U.S. Government does not
insure or guarantee the market value of the Portfolio's shares.

Although the Portfolio attempts to maintain a stable net asset value of $1.00
per share, the Portfolio, of course, cannot guarantee a net asset value of $1.00
per share. In an attempt to maintain a stable net asset value per share, the
Portfolio pursues several practices intended to minimize the effect of interest
rate fluctuations. The Portfolio will not purchase instruments having a
remaining term to maturity of more than 397 days, will maintain an average
maturity, computed on a dollar-weighted basis, of 90 days or less, and will buy
only high quality securities which Western Asset believes present minimal credit
risk. The Portfolio may invest in variable and floating rate obligations that
have stated maturities in excess of 397 days if such obligations comply with
conditions established by the SEC. Securities held by the Portfolio as
collateral for repurchase agreements and other collateralized transactions may
have remaining maturities in excess of 397 days.

The Portfolio also may invest in fixed income securities issued by
"supranational organizations," which are entities designated or supported by a
government or governmental entity to promote economic development, and include,
among others, the Asian Development Bank, the European Community, the European
Investment Bank, the Inter-American Development Bank, the International Monetary
Fund, the United Nations, the International Bank for Reconstruction and
Development ("World Bank") and the European Bank for Reconstruction and
Development. These organizations have no taxing authority and are dependent upon
their members for payments of interest and principal. Moreover, the lending
activities of such supranational entities may be limited to a percentage of
their total capital (including "callable capital" contributed by members at an
entity's call), reserves and net income.

The Portfolio may purchase or sell securities on a forward commitment basis. To
the extent permitted by applicable law, the Portfolio may also engage in reverse
repurchase agreements and other borrowings. See "Common Investment Policies and
Techniques; Risk Factors".

WESTERN ASSET MONEY MARKET PORTFOLIO

Adviser: Western Asset
Objective: Obtain high current income consistent with
liquidity and conservation of principal.

The Portfolio invests 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; municipal obligations;
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

<PAGE>

principal amount of the instrument is insured by the Federal Deposit Insurance
Corporation; and commercial paper and other short-term investments. The
Portfolio may also invest in repurchase agreements involving any of the
foregoing 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
Western Asset to be of comparable quality.

Although the Portfolio attempts to maintain a stable net asset value of $1.00
per share, the Portfolio, of course, cannot guarantee a net asset value of $1.00
per share. In an attempt to maintain a stable net asset value per share, the
Portfolio pursues several practices intended to minimize the effect of interest
rate fluctuations. The Portfolio will not purchase instruments having a
remaining 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. The Portfolio
may invest in variable and floating rate obligations that have stated maturities
in excess of 397 days if such obligations comply with conditions established by
the SEC. Securities held by the Portfolio as collateral for repurchase
agreements and other collateralized transactions may have remaining maturities
in excess of 397 days. The Portfolio may purchase or sell securities on a
forward commitment basis, and will invest only in U.S. dollar-denominated
securities.

High quality money market instruments can be divided into two categories: "first
tier" securities and "second tier" securities. An instrument 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 Western Asset to be of
comparable quality, is a "first tier" security. "Second tier" securities are all
other high quality securities. The Portfolio may not invest more than 5% of its
total assets in first tier securities of any one issuer (other than the U.S.
Government, its agencies or instrumentalities), except on a temporary basis. The
Portfolio may not invest more than 1% of its total assets, or $1 million,
whichever is greater, in the second tier securities of any one issuer, and may
not invest more than 5% 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.

The Portfolio's foreign investments (all of which will be U.S.
dollar-denominated) subject the Portfolio to investment risks different from
those associated with domestic investments. For additional information
concerning these risks, see "Common Investment Policies and Techniques; Risk
Factors -- Foreign Securities" below. To the extent permitted by applicable law,
the Portfolio may also engage in reverse repurchase agreements and other
borrowings. See "Common Investment Policies and Techniques; Risk Factors".

WESTERN ASSET LIMITED DURATION
PORTFOLIO

WESTERN ASSET INTERMEDIATE
PORTFOLIO

WESTERN ASSET INTERMEDIATE PLUS
PORTFOLIO

WESTERN ASSET CORE PORTFOLIO

WESTERN ASSET CORE PLUS PORTFOLIO

Advisers: Western Asset (each Portfolio) and WAGM (non-U.S. portion of the
Western Asset Intermediate Plus and Western Asset Core Plus
Portfolios)
Objective: 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 sale of
futures and options.

As set forth below, the Portfolios differ from one another primarily in the
range of duration and/or in the proportion of assets invested in certain types
of securities. Further, the Western Asset Intermediate Plus Portfolio and the
Western Asset Core Plus Portfolio (the "Western Asset Plus Portfolios") differ
from the other Portfolios in the percentage of their assets that they may invest
in securities of foreign issuers, in non-U.S. dollar-denominated securities and
in non-investment grade debt 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 "Common Investment Policies and Techniques; Risk Factors"
for a further explanation of the term "duration" and its application to various
fixed income securities.

<PAGE>

The 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 at the time of purchase Baa
or better by Moody's Investors Service ("Moody's") or BBB or better by Standard
& Poor's ("S&P"), securities comparably rated by another NRSRO or, if unrated,
determined by an Adviser to be of comparable quality; mortgage- and other
asset-backed securities; and U.S. dollar-denominated obligations of foreign
governments or their subdivisions, agencies and instrumentalities, international
agencies or supranational organizations. The Portfolios may also invest in other
securities or investments, including certificates of deposit, time deposits and
bankers' acceptances issued by domestic and foreign banks and denominated in
U.S. dollars and commercial paper and other short-term investments, and may
engage in repurchase agreements and reverse repurchase agreements. See "Common
Investment Policies and Techniques; Risk Factors" for more information.

Each Portfolio is authorized to invest up to 25% of its total assets in the
securities of foreign issuers. However, each Portfolio, other than the Western
Asset Plus Portfolios, presently intends to limit such investments to securities
denominated in U.S. dollars. Each of the Western Asset Plus Portfolios may
invest up to 20% of its total assets in the non-dollar denominated securities of
foreign issuers. See "Common Investment Policies and Techniques; Risk
Factors -- Foreign Securities" for more information.

Each Portfolio, other than the Western Asset Plus Portfolios, may invest up to
5% of its net assets in debt securities that are rated at the time of purchase
below investment grade but rated at least B or higher by an NRSRO or, if
unrated, determined by an Adviser to be of comparable quality. Each of the
Western Asset Plus Portfolios may invest up to 15% of its total assets in debt
securities that are rated at the time of purchase below investment grade but
rated at least B or higher by an NRSRO or, if unrated, determined by an Adviser
to be of comparable quality. See the Appendix to the Prospectus for a
description of Moody's, S&P's and Fitch Investors Service, Inc.'s ratings
applicable to fixed income securities and "Common Investment Policies and
Techniques; Risk Factors -- Debt and Fixed Income Securities -- Lower-Rated
Securities" for more information concerning fixed income securities of below
investment grade quality. If the rating of a security in which a Portfolio has
invested falls below the minimum rating in which the Portfolio is permitted to
invest, the Portfolio will either dispose of that security within a reasonable
time or hold the security for so long as the relevant Adviser determines
appropriate for that Portfolio, having due regard for market conditions, tax
implications and other applicable factors.

Each 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 or for non-hedging
purposes. Each Portfolio may also purchase and sell options on debt securities.
See "Common Investment Policies and Techniques -- Options and Futures."

Each Portfolio also may purchase preferred stocks, structured notes, municipal
securities, convertible securities, pay-in-kind securities and zero coupon
bonds, may purchase or sell securities on a forward commitment basis, lend its
portfolio securities, and borrow money for temporary or emergency purposes. See
"Common Investment Policies and Techniques; Risk Factors" for more information
about these practices.

In selecting securities for each Portfolio, the Advisers 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 Advisers' outlook for the
U.S. and foreign economies, the financial markets and other factors.

The composition of the Portfolios is as follows:

WESTERN ASSET 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 other Portfolios because
its average duration will be shorter.

WESTERN ASSET INTERMEDIATE PORTFOLIO AND
WESTERN ASSET INTERMEDIATE PLUS PORTFOLIO . . .

invest in a portfolio with a dollar-weighted average duration normally ranging
between two and four years. The total rate of return for each of these
Portfolios is expected to exhibit less volatility than that of the Western Asset
Core Portfolio or the Western Asset Core Plus Portfolio because its average
duration will be shorter.

WESTERN ASSET CORE PORTFOLIO AND
WESTERN ASSET CORE PLUS PORTFOLIO . . .

invest in a portfolio with a dollar-weighted average duration that will normally
stay within (plus/minus) 20% of what Western Asset believes to be the average
duration of

<PAGE>

the domestic bond market as a whole, but may have a longer or shorter duration
during periods of unusual market conditions, as judged by Western Asset. Western
Asset bases its analysis of the average duration of the domestic bond market on
bond market indices which it believes to be representative. Western Asset
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 these Portfolios is currently expected to range
between four and six years. Portfolio holdings will be focused in areas of the
bond market (based on quality, sector, coupon, maturity, country or currency)
which the relevant Adviser believes to be relatively undervalued.

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

With respect to the Western Asset Plus Portfolios, Western Asset will determine
the relative portion of a Portfolio's assets that is allocated to foreign
securities (and therefore to the investment discretion of WAGM).

WESTERN ASSET HIGH YIELD PORTFOLIO

Adviser: Western Asset
Objective: Maximize total return, consistent with prudent investment
management. "Total return" includes interest from underlying
securities, capital gains and appreciation on the securities held
in the Portfolio, and gains from the sale of futures and options.

Under normal market conditions, the Portfolio will invest at least 75% of its
total assets in U.S. dollar-denominated debt or fixed income securities of
non-governmental domestic issuers that are rated below investment grade by one
or more NRSROs or are of a comparable quality as determined by Western Asset.
These securities are commonly known as "junk bonds" or "high yield bonds."
Western Asset expects that, under normal market conditions, all or substantially
all of the Portfolio's assets will be invested in such securities.
Non-investment grade securities and certain investment grade securities have
speculative characteristics and are therefore more volatile. A rating in the
lowest category indicates that the security is highly speculative and may be in
default or in danger of default as to principal and interest. Lower-rated
securities generally provide greater income than higher-rated securities, but
are subject to greater market fluctuations and risks of loss of income and
principal than higher-rated securities. See "Common Investment Policies and
Techniques; Risk Factors -- Debt and Fixed Income Securities -- Lower-Rated
Securities" for more information concerning fixed income securities of below
investment grade quality.

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

The Portfolio may also invest in the following U.S. dollar-denominated
securities: mortgage- and other asset-backed securities; municipal obligations;
variable and floating rate debt securities; commercial paper and other
short-term investments; various corporate obligations (including preferred
stock, convertible securities, zero coupon securities and pay-in-kind
securities); common stocks and warrants; and certificates of deposit, fixed time
deposits and bankers' acceptances issued by domestic banks. The Portfolio may
also engage in repurchase agreements, reverse repurchase agreements and dollar
roll transactions. For more information, see "Common Investment Policies and
Techniques; Risk Factors".

The Portfolio may invest up to 25% of its total assets in non-U.S.
dollar-denominated foreign securities. See "Common Investment Policies and
Techniques; Risk Factors -- Foreign Securities" for more information concerning
such investments.

<PAGE>

WESTERN ASSET NON-U.S. FIXED INCOME PORTFOLIO

Adviser: WAGM
Objective: Maximize total return, consistent with prudent investment
management. "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
from favorable changes in foreign currency exchange rates.

Under normal market conditions, the 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 other baskets of currencies may further develop.
WAGM anticipates that, under normal market conditions, all or substantially all
of the Portfolio's assets will be invested in securities of foreign issuers.
WAGM will manage the investments of the Portfolio across different international
bond markets so that, under normal market conditions, the Portfolio's assets
will be invested in securities of foreign issuers representing at least three
foreign countries. WAGM 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 WAGM believes relevant.

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

The Portfolio's foreign investments subject the Portfolio to greater risks than
those associated with domestic investments. See "Common Investment Policies and
Techniques; Risk Factors -- Foreign Securities" for more information concerning
these risks.

Within the limits described above, the Portfolio may invest in a variety of
securities, including: 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; foreign currency exchange-related securities, including
foreign currency warrants; obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities; mortgage-and other asset-backed
securities; variable and floating rate debt securities; commercial paper and
other short-term investments; corporate obligations (including preferred stock,
convertible securities, zero coupon securities and pay-in-kind securities);
certificates of deposit, fixed time deposits and bankers' acceptances; loan
participations and assignments; indexed securities and structured notes; and
repurchase agreements collateralized by any security in which it may invest. The
Portfolio may also engage in reverse repurchase agreements and dollar roll
transactions and may borrow money for temporary or emergency purposes. See
"Common Investment Policies and Techniques; Risk Factors" for more information.

The Portfolio may invest up to 25% of its net assets in securities that are
rated at the time of purchase below investment grade or are of comparable
quality at the time of purchase as determined by WAGM. These securities are
commonly known as "junk bonds" or "high yield bonds." It is likely that a
substantial portion of these securities will be issued by issuers located in
emerging market countries. As a result, these securities are subject to special
risks. See "Common Investment Policies and Techniques; Risk Factors" for more
information concerning lower-rated securities and securities issued by issuers
located in emerging market countries. In evaluating the credit risk of a foreign
debt security, the Portfolio may use ratings assigned by rating agencies
recognized in the primary market for those securities. In the event that the
rating of any security held by the Portfolio falls below its rating at the time
of purchase, the Portfolio will not be obligated to dispose of such security and
may continue to hold the security if, in the opinion of WAGM, such investment is
considered appropriate in the circumstances.

The Portfolio also may buy or sell interest rate futures contracts and options
on fixed income instruments and bond indices and options on interest rate
futures contracts to hedge against changes in the value of securities it owns or
anticipates purchasing or for non-hedging purposes. The Portfolio may buy or
sell foreign currencies, foreign currency options, or foreign currency futures
contracts and related options, and may enter into foreign currency forward
contracts and other foreign currency exchange transactions 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
Portfolio also may engage in such transactions for purposes of increasing
exposure to a particular foreign currency or to shift exposure to foreign
currency fluctuations from one country to another. See "Common Investment
Policies and Techniques; Risk Factors" for more information about these
practices.

<PAGE>

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

It is anticipated that from time to time over 25% of the Portfolio's assets may
be invested in securities of issuers located in a single country, which is
currently expected to be the case with respect to both Japanese and 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 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 Portfolio will
concentrate in these countries or other countries when such circumstances
suggest the potential of a relatively higher return from such concentration. The
investment of a substantial amount of the Portfolio's assets in securities of
issuers from any such country 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.

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
anticipation of the expected single currency in Europe. Inflation remains at
very moderate levels.

WESTERN ASSET GLOBAL STRATEGIC INCOME PORTFOLIO

Adviser: WAGM (Non-U.S. portion) and Western Asset (U.S. portion)
Objective: Income and capital appreciation.

The Portfolio seeks to achieve its investment objective by allocating and
reallocating its assets primarily among various types of U.S. dollar-denominated
and foreign currency-denominated fixed income securities, including mortgage-
related and asset-backed securities; U.S. and foreign investment-grade corporate
securities; U.S. and foreign non-investment grade corporate securities;
sovereign debt obligations of developed nations; and debt obligations of
corporate and governmental issuers in developing countries, which are sometimes
referred to as emerging markets countries. Under normal market conditions, the
Portfolio will invest at least 80% of its total assets in securities of issuers
representing at least three countries, one of which may be the U.S., and at
least 65% of its total assets in income producing securities.

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

Mortgage-related securities in which the Portfolio may invest include mortgage
obligations collateralized by mortgage loans or mortgage pass-through
certificates. Asset-backed securities in which the Portfolio may invest include
obligations collateralized by credit card receivables, automotive loans and
leases as well as home equity loans.

Investment grade securities in which the Portfolio may invest include bonds,
debentures and notes of U.S. and foreign corporate issuers and warrants on the
same. At the time of purchase, these securities will be rated at least
investment grade by an NRSRO or, if not rated, will be deemed by Western Asset
or WAGM to be of comparable quality.

The Portfolio may invest up to 100% of its assets in securities that are rated
at the time of purchase below investment grade or are of comparable quality at
the time of purchase

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as determined by WAGM or Western Asset. These securities are commonly known as
"junk bonds" or "high yield bonds." The Portfolio may invest in securities that
have an NRSRO's lowest rating, or in non-rated securities deemed by WAGM or
Western Asset to be of comparable quality. Such ratings indicate that the
obligations are highly speculative and may be in default or in danger of default
as to principal and interest. High-yielding corporate fixed income securities of
foreign issuers in which the Portfolio may invest will include securities of
companies, wherever organized, that have their principal business activities and
interests outside the United States. A substantial portion of these securities
may be issued by issuers located in emerging market countries. As a result,
these securities are subject to special risks. See "Common Investment Policies
and Techniques; Risk Factors" below for more information concerning lower-rated
securities and securities issued by issuers located in emerging market
countries. In evaluating the credit risk of a foreign debt security, the
Portfolio may use ratings assigned by rating agencies recognized in the primary
market for those securities. In the event that the rating of any security held
by the Portfolio falls below its rating at the time of purchase, the Portfolio
will not be obligated to dispose of such security and may continue to hold the
security if, in the opinion of WAGM or Western Asset, such investment is
considered appropriate in the circumstances.

The Portfolio also may invest in securities issued by supranational
organizations, which are entities designated or supported by a government or
governmental entity to promote economic development, and include, among others,
the Asian Development Bank, the European Community, the European Investment
Bank, the Inter-American Development Bank, the International Monetary Fund, the
United Nations, the International Bank for Reconstruction and Development
("World Bank") and the European Bank for Reconstruction and Development. These
organizations have no taxing authority and are dependent upon their members for
payments of interest and principal. Moreover, the lending activities of such
supranational entities may be limited to a percentage of their total capital
(including "callable capital" contributed by members at an entity's call),
reserves and net income. Sovereign and supranational debt obligations in which
the Portfolio invests may have an NRSRO's lowest rating or may be securities
deemed by WAGM to be of comparable quality.

As noted above the Portfolio may also invest in debt obligations of private and
governmental issuers in countries with developing economies, which are sometimes
referred to as emerging market countries. These investments include "Brady
Bonds"; bonds issued as a result of a debt restructuring plan; Eurobonds;
domestic and international bonds issued under the laws of a developing country;
and emerging market loans. For more information concerning the risks associated
with investments in emerging markets, see "Common Investment Policies and
Techniques; Risk Factors -- Foreign Securities."

The Portfolio's investments may be denominated in either U.S. dollars or a
variety of other currencies. The Portfolio's foreign investments subject the
Portfolio to greater risks than those associated with domestic investments. See
"Common Investment Policies and Techniques; Risk Factors -- Foreign Securities"
for more information concerning these risks.

The Portfolio may invest in a variety of other securities, including: foreign
currency exchange-related securities, including foreign currency warrants;
shares of other investment companies; variable and floating rate debt
securities; commercial paper and other short-term investments; corporate
obligations (including preferred stock, convertible securities, zero coupon
securities and pay-in-kind securities); municipal obligations; certificates of
deposit, fixed time deposits and bankers' acceptances; loan participations and
assignments; indexed securities and structured notes; and repurchase agreements.
The Portfolio may engage in reverse repurchase agreements and dollar roll
transactions, borrow money for temporary or emergency purposes, loan its
portfolio securities and purchase or sell securities on a forward commitment
basis. See "Common Investment Policies and Techniques; Risk Factors" for more
information.

In addition, the Portfolio may buy or sell bond or interest rate futures
contracts and options on fixed income instruments and bond indices and options
on bond or interest rate futures contracts to hedge against changes in the value
of securities it owns or anticipates purchasing or for non-hedging purposes. The
Portfolio may buy or sell foreign currencies, foreign currency options, or
foreign currency futures contracts and related options, and may enter into
foreign currency forward contracts and other foreign currency exchange
transactions 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 Portfolio also may engage in such
transactions for purposes of increasing exposure to a particular foreign
currency or to shift exposure to foreign currency fluctuations from one country
to another. See "Common Investment Policies and Techniques; Risk Factors" for
more information about these practices.

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company. The Portfolio is therefore more susceptible to risks associated with
particular issuers and with the economic, political or regulatory issues in a
particular country or group of countries than would a diversified portfolio.

WESTERN ASSET ENHANCED EQUITY PORTFOLIO

Adviser: Western Asset
Objective: Long-term total return. "Total return" includes all interest,
dividends and other income, net of expenses, paid on the
Portfolio's investments, as well as all realized and unrealized
gains and losses.

The Portfolio's assets will be comprised of two components: an equity component
and a fixed income component. As more fully described below, Western Asset
attempts to manage the equity component so that the Portfolio generally
maintains full exposure to the U.S. equity market as represented by the S&P 500
Index (the "Index"). Western Asset attempts to manage the Portfolio's fixed
income component in order to generate interest and gains in excess of the
Portfolio's expenses, including transaction costs related to its investments. By
investing in both components, the Portfolio expects that its performance will
approximate that of the Index, with the extent to which the Portfolio
outperforms or underperforms the Index depending largely on whether the fixed
income component has earned sufficient amounts to offset the Portfolio's
expenses.

EQUITY COMPONENT. The Portfolio's equity component invests in common stocks that
are represented in the Index ("S&P stocks"), stock index futures, options on
stock indexes, options on stock index futures and other derivative instruments
that are based on the Index ("S&P derivatives"). The Portfolio may invest in any
combination of S&P stocks and S&P derivatives. Western Asset will determine the
appropriate mix of S&P stocks and S&P derivatives for the Portfolio based on
current market conditions and the expected costs and returns of each, while
seeking to control and limit overall risk. Based on current market conditions,
Western Asset currently expects that the Portfolio's equity component will
invest predominantly, and likely exclusively, in S&P derivatives. To the extent
S&P stocks are purchased by the Portfolio, the Portfolio will not be limited to
purchasing S&P stocks in the same proportion as such stocks are weighted in the
Index.

The Index is composed of 500 selected common stocks, most of which are listed on
the New York Stock Exchange ("Exchange"). S&P chooses the stocks to be included
in the Index solely on a statistical basis. The weightings of stocks in the
Index are based on each stock's relative total market value, that is, its market
price per share times the number of shares outstanding. Stocks represented
currently in the Index represent approximately two-thirds of the total market
value of all U.S. publicly traded common stocks.

Positions in S&P derivatives will be entered into only to the extent they
constitute permissible positions for the Portfolio according to applicable rules
of the Commodity Futures Trading Commission ("CFTC"). From time to time Western
Asset may be constrained in its ability to use S&P derivatives by, among other
things, CFTC rules or an unanticipated inability to close out positions when it
would be most advantageous to do so. For more information about S&P derivatives,
see "Common Investment Policies and Techniques; Risk Factors -- Options and
Futures."

The Portfolio is neither sponsored by nor affiliated with S&P. The Portfolio
will seek to remain invested in S&P stocks and S&P derivatives even when the
Index is declining.

FIXED INCOME COMPONENT. The fixed income component will invest primarily in the
following types of securities: obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities; fixed income securities of
non-governmental domestic or foreign issuers; municipal securities; mortgage-
and other asset-backed securities; preferred stocks; and obligations of foreign
governments or their subdivisions, agencies and instrumentalities, international
agencies or supranational entities. The fixed income component may also invest
in other securities or instruments, including certificates of deposit, time
deposits and bankers' acceptances issued by domestic and foreign banks and
commercial paper and other short-term investments, and may engage in repurchase
agreements, reverse repurchase agreements and other borrowings and purchase or
sell futures contracts and options. Up to 10% of the Portfolio's net assets may
be invested in lower-rated securities (i.e., securities rated below investment
grade at the time of purchase or unrated securities of comparable quality at the
time of purchase) and up to 20% of its net assets may be invested in foreign
securities. The fixed income component may engage in foreign currency exchange
transactions in connection with its foreign investments. For more information,
see "Common Investment Policies and Techniques; Risk Factors."

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COMMON INVESTMENT POLICIES AND TECHNIQUES; RISK FACTORS

Some or all of the Portfolios may engage in the following investment practices
and techniques to the extent described in this Prospectus. See the SAI for a
further description of the uses, risks and costs of these practices.

FOREIGN SECURITIES

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

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

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

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

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

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

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

Economies in emerging market countries generally are dependent heavily upon
international trade and, accordingly, have been and may continue to be affected
adversely by economic conditions, trade barriers, exchange controls,

<PAGE>

managed adjustments in relative currency values and other protectionist measures
imposed or negotiated by the countries with which they trade.

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

To the extent an emerging market country faces a liquidity crisis with respect
to its foreign exchange reserves, it may increase restrictions on the outflow of
any foreign exchange. Repatriation is ultimately dependent on the ability of a
Portfolio to liquidate its investments and convert the local currency proceeds
obtained from such liquidation into U.S. dollars. Where this conversion must be
done through official channels (usually the central bank or certain authorized
commercial banks), the ability to obtain U.S. dollars is dependent on the supply
of such U.S. dollars through those channels and, if available, upon the
willingness of those channels to allocate those U.S. dollars to the Portfolio.
In such a case, a Portfolio's ability to obtain U.S. dollars may be adversely
affected by any increased restrictions imposed on the outflow of foreign
exchange. If the Portfolio is unable to repatriate any amounts due to exchange
controls, it may be required to accept an obligation payable at some future date
by the central bank or other governmental entity of the jurisdiction involved.
If such conversion can legally be done outside official channels, either
directly or indirectly, a Portfolio's ability to obtain U.S. dollars may not be
affected as much by any increased restrictions except to the extent of the price
which may be required to be paid for the U.S. dollars.

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

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

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

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

DEPOSITARY RECEIPTS. American Depositary Receipts, or "ADRs," are securities
issued by a U.S. depositary (usually a bank) and represent a specified quantity
of underlying non-U.S. securities on deposit with a custodian bank as
collateral. A foreign issuer of the security underlying an ADR is generally not
subject to the same reporting requirements in the United States as a domestic
issuer. Accordingly, the information available to a U.S. investor will be
limited to the information the foreign issuer is

<PAGE>

required to disclose in its own country and the market value of an ADR may not
reflect undisclosed material information concerning the issuer or the underlying
security. ADRs may also be subject to exchange rate risks if the underlying
securities are denominated in foreign currency. The Portfolios may also invest
in similar non-U.S. instruments issued by foreign banks or trust companies such
as "GDRs" and "EDRs." For purposes of its investment policies, each Portfolio
will treat ADRs and similar instruments as equivalent to investment in the
underlying securities.

OPTIONS AND FUTURES

A futures contract is an agreement between the parties to buy or sell a
specified amount of one or more securities, units of an index or currencies at a
specified price and date; futures contracts are generally closed out by the
parties in advance of that date for a cash settlement. Under an option contract,
one party generally has the right to require the other to buy or sell a
specified amount of securities, units of an index, currencies or futures
contracts, and may exercise that right if the market price of the underlying
instrument moves in a direction advantageous to the holder of the option.
Options with respect to securities indices typically call for cash settlement
instead of delivery of the securities that comprise the index. Options and
futures are generally considered to be "derivatives."

The Portfolios may buy, sell and write options and futures for hedging purposes
and, to the extent permitted by applicable law, for non-hedging purposes, such
as to earn additional income. Futures contracts and options may also be used for
other non-hedging purposes, such as to simulate full investment in underlying
securities while retaining a cash balance for Portfolio management purposes, as
a substitute for direct investment in a security, to facilitate trading, to
reduce transaction costs, or to seek higher investment returns when a futures
contract or option is priced more attractively than the underlying security or
index.

The use of options and futures involves certain investment risks and transaction
costs. These risks include (1) difficulty in predicting movements in the prices
of individual securities or an index, fluctuations in the general securities
markets or in market sectors and movements in interest rates and currency
markets; (2) imperfect correlation, or no correlation at all, between movements
in the price of options and futures contracts, movements in the price of the
underlying instruments, index or currencies and movements in the securities or
currencies that are the subject of a hedge; (3) the fact that skills needed to
use these instruments are different from those needed to select a Portfolio's
other investments; (4) the possible lack of a liquid secondary market for any
particular instrument 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 fact that, although use of
these instruments for hedging purposes can reduce the risk of loss, they can
also reduce the opportunity for gain, or even result in losses, by offsetting
favorable price movements in hedged investments. There can be no assurance that
a Portfolio's use of futures contracts or options will be successful. Moreover,
in the event that an anticipated change in the price of the instruments, index
or currencies that are the subject of the strategy does not occur, the Portfolio
might have been in a better position had it not used that strategy at all.
Options and futures traded on U.S. or other exchanges may be subject to position
and daily fluctuation limits, which may limit the ability of a Portfolio to
reduce risk using such options and futures and may limit their liquidity.

The use of options and futures contracts for speculative purposes, e.g., to
enhance income or to increase a Portfolio's exposure to a particular security or
type of security or a particular foreign currency, subjects the Portfolio to
additional risk. The use of options and futures to hedge an anticipated purchase
also subjects a Portfolio to additional risk until the purchase is completed or
the position is closed out.

Many options on securities are traded primarily on the over-the-counter ("OTC")
market. OTC options are two-party contracts with price and other terms
negotiated between buyer and seller and generally do not have much, if any,
liquidity. 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
instruments or currencies underlying the option or otherwise fulfill its
obligations under the contract. Failure by the dealer to do so would result in
the loss of the premium paid by that Portfolio as well as the loss of the
expected benefit of the transaction. OTC options may be considered "illiquid
securities" for purposes of each Portfolio's investment limitations.

FOREIGN CURRENCY EXCHANGE TRANSACTIONS

Each Portfolio that may invest in securities that are denominated in foreign
currencies may engage in a variety of foreign currency exchange transactions to
protect against uncertainty in the level of future exchange rates. These

<PAGE>

transactions may be engaged in connection with the purchase and sale of
portfolio securities ("transaction hedging") and to protect the value of
specific portfolio positions ("position hedging").

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

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

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

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

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

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

PREFERRED STOCKS AND CONVERTIBLE SECURITIES

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

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

The value of a convertible security is a function of (1) its yield in comparison
with the yields of other securities of comparable maturity and quality that do
not have a conversion privilege and (2) its worth, at market value, if converted
into the underlying common stock. A convertible security may be subject to
redemption at the option of the issuer at a price established in the convertible
security's

<PAGE>

governing instrument. If a convertible security held by a Portfolio is called
for redemption, the Portfolio will be required to (1) permit the issuer to
redeem the security, (2) convert it into the underlying common stock or (3) sell
it to a third party. Any of these actions could have an adverse effect on a
Portfolio's ability to achieve its investment objective.

DEBT AND FIXED INCOME SECURITIES

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

U.S. GOVERNMENT OBLIGATIONS. U.S. Government securities include (1) U.S.
Treasury bills (maturity of one year or less), U.S. Treasury notes (maturity of
one to ten years) and U.S. Treasury bonds (maturities generally greater than ten
years) and (2) obligations issued or guaranteed by U.S. Government agencies or
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Government (such as GNMA certificates); (b) the
right of the issuer to borrow an amount limited to a specific line of credit
from the U.S. Government (such as obligations of the Federal Home Loan Banks);
(c) the discretionary authority of the U.S. Government to purchase certain
obligations of agencies or instrumentalities (such as securities issued by
Fannie Mae); or (d) only the credit of the instrumentality (such as securities
issued by Freddie Mac). In the case of obligations not backed by the full faith
and credit of the United States, a Portfolio must look principally to the agency
or instrumentality issuing or guaranteeing the obligation for ultimate repayment
and may not be able to assert a claim against the United States itself in the
event the agency or instrumentality does not meet its commitments. Neither the
U.S. Government nor any of its agencies or instrumentalities guarantees the
market value of the securities they issue. Therefore, the market value of such
securities will fluctuate in response to changes in interest rates.

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

MORTGAGE-RELATED SECURITIES. Mortgage-related securities represent an interest
in a pool of mortgages made by lenders such as commercial banks, savings and
loan institutions, mortgage bankers and others. Mortgage-related securities may
be issued by governmental, government-related or non-governmental entities, and
provide regular payments which consist of interest and, in most cases,
principal. In contrast, other forms of debt securities normally provide for
periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. In effect, payments on mortgage-related
securities are a "pass-through" of the payments made by the individual borrowers
on their mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments to holders of mortgage-related securities are
caused by repayments resulting from the sale of the underlying property,
refinancing or foreclosure, net of fees or costs 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.
Although mortgage-related securities are issued with stated maturities of up to
forty years, unscheduled or early payments of principal and interest on the
underlying mortgages may shorten considerably the securities' effective
maturities. The volume of prepayments of principal on a pool of mortgages
underlying a particular mortgage-related security will influence the yield of
that security, and the principal returned to a Portfolio may be reinvested in
instruments whose yield may be higher or lower than that which might have been
obtained had such prepayments not occurred. When interest rates are declining,
such prepayments usually increase, and reinvestments of such principal
prepayments will be at a lower rate than that on the original mortgage-related

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security. An increase in mortgage prepayments could cause the Portfolio to incur
a loss on a mortgage-related security that was purchased at a premium. On the
other hand, a decrease in the rate of prepayments, resulting from an increase in
market interest rates or other causes, may extend the effective maturities of
mortgage-related securities, increasing their sensitivity to changes in market
interest rates and potentially increasing the volatility of a Portfolio's
shares. The rate of prepayment may also be affected by general economic
conditions, the location and age of the mortgages, and other social and
demographic conditions. In determining the average maturity or duration of a
mortgage-related security, a Portfolio's Adviser must apply certain assumptions
and projections about the maturity and prepayment of such security; actual
prepayment rates may differ. Because of prepayments, mortgage-related securities
may have less potential for capital appreciation during periods of declining
interest rates than other securities of comparable maturities, although they may
have a similar risk of decline in market value during periods of rising interest
rates.

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

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

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

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

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

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

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.

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

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

Each type of asset-backed security also entails unique risks depending on the
type of assets involved and the legal structure used. For example, credit card
receivables are generally unsecured obligations of the credit card holder and
the debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due.
There have also been proposals to cap the interest rate that a credit card
issuer may charge. In some transactions, the value of the asset-backed security
is dependent on the performance of a third party acting as credit enhancer or
servicer. Furthermore, in some transactions (such as those involving the
securitization of vehicle loans or leases) it may be administratively burdensome
to perfect the interest in the underlying collateral, and the underlying
collateral may become damaged or stolen.

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

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

The two principal classifications of municipal obligations are "general
obligation" and "revenue" bonds. "General obligation" bonds are secured by the
issuer's pledge of its faith, credit and taxing power. "Revenue" bonds are
payable only from the revenues derived from a particular facility or class of
facilities or from the proceeds of a special excise tax or other specific
revenue source such as the corporate user of the facility being financed. IDBs
and PABs are usually revenue bonds and are not payable from the unrestricted
revenues of the issuer. The credit quality of IDBs and PABs is usually directly
related to the credit standing of the corporate user of the facilities.

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

<PAGE>

political and demographic conditions affecting the particular state.

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

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

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

The prices of debt securities fluctuate in response to perceptions of the
issuer's creditworthiness. Generally, lower-rated securities offer a higher
current yield than that provided by higher grade issues, but also involve higher
risks. Debt securities rated C by an NRSRO are bonds on which no interest is
being paid and which can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Debt securities rated D by an NRSRO are
bonds that are in default or arrears and have questionable value. Lower-rated
securities are especially affected by adverse changes in the industries in which
the issuers are engaged and by changes in the financial condition of the
issuers. Highly leveraged issuers may also experience financial stress during
periods of rising interest rates.

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

The market for lower-rated securities is generally thinner and less active than
that for higher quality debt securities, which may make it difficult for a
Portfolio to value its securities or may limit a Portfolio's ability to sell
such securities at fair value. As a result, judgment plays a greater role in
pricing such securities than is the case for securities having more active
markets. Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of lower-rated
securities, especially in a thinly traded market.

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

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

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

COMMERCIAL PAPER AND OTHER SHORT-TERM INVESTMENTS

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

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

LOAN PARTICIPATIONS AND ASSIGNMENTS

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

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

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

<PAGE>

vulnerable to adverse changes in economic or market conditions.

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

INDEXED SECURITIES AND
STRUCTURED NOTES

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

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

FORWARD COMMITMENTS

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

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

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

Forward commitment transactions involve additional risks similar to those
associated with investments in options and futures contracts. See "Options and
Futures Contracts." It is not expected 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 the sale would
otherwise be desirable. No securities for which there is not a readily available
market ("illiquid securities") will be acquired by any Portfolio if such
acquisition would cause the aggregate value of illiquid securities to exceed 15%
of the Portfolio's net assets (10% of net assets for the Western

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Asset Money Market Portfolio and the Western Asset Government Money Market
Portfolio).

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

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

SECURITIES OF OTHER INVESTMENT COMPANIES

Investments in other investment companies may involve the payment of substantial
premiums above the net asset value of such issuers' portfolio securities, and
the total return on such investments will be reduced by the operating expenses
and fees of such investment companies, including advisory fees. The Portfolios
may invest in both closed-end and open-end investment companies.

REPURCHASE AGREEMENTS

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

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.
While engaging in reverse repurchase agreements, each Portfolio will maintain
cash or securities in a segregated account at its custodian bank with a value at
least equal to the Portfolio's obligation under the agreements, adjusted daily.
Reverse repurchase agreements may expose a Portfolio to greater fluctuations in
the value of its assets and renders the segregated assets unavailable for sale
or other disposition.

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

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

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

LOANS OF PORTFOLIO SECURITIES

A Portfolio may lend its portfolio securities, provided that cash or equivalent
collateral, equal to at least 100% of the market value of the securities loaned,
is continuously maintained by the borrower with the Portfolio. During the

<PAGE>

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

DURATION

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

PORTFOLIO TURNOVER

The turnover rates of the Western Asset Limited Duration Portfolio, the Western
Asset Intermediate Portfolio and the Western Asset Core Portfolio for the nine
month period ended March 31, 1998 on an annualized basis were 373%, 401.4% and
226.9%, respectively. While it is impossible to predict portfolio turnover
rates, the Western Asset Enhanced Equity Portfolio, the Western Asset
Intermediate Plus Portfolio, the Western Asset Core Plus Portfolio, the Western
Asset High Yield Portfolio, the Western Asset Non-U.S. Fixed Income Portfolio
and the Western Asset Global Strategic Income Portfolio expect that their
average turnover rate will not exceed 400%, 400%, 400%, 200%, 200% and 200%,
respectively.

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

ALTERNATIVE INVESTMENT STRATEGIES

At times a Portfolio's Adviser may judge that conditions in the securities
markets make pursuing the Portfolio's typical investment strategy inconsistent
with the best interests of its shareholders. At such times, the Adviser may
temporarily use alternative strategies, primarily designed to reduce
fluctuations in the value of the Portfolio's assets. In implementing these
defensive strategies, a Portfolio may invest without limit in a variety of
securities that the Adviser believes present less risk to a Portfolio, including
equity securities, debt securities, preferred stocks, U.S. Government and agency
obligations, cash or money market instruments, or in other securities the
Adviser considers consistent with such defensive strategies. As a result of
these strategies, the Portfolios may invest up to 100% of their assets in
securities of U.S. issuers. It is impossible to predict when, or for how long, a
Portfolio will use these alternative strategies.

NEW INVESTMENT PRODUCTS

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

INVESTMENT POLICIES

The investment objective of each of the Western Asset Core, the Western Asset
Limited Duration, the Western Asset Intermediate and the Western Asset Money
Market Portfolio are "fundamental." Except for investment policies designated as
fundamental in this Prospectus or the SAI, the investment policies described in
this Prospectus and in

<PAGE>

the SAI are not fundamental policies. Changes to fundamental investment policies
require shareholder approval; the Directors may change any non-fundamental
investment policy without shareholder approval.

- --------------------------------------------------------------------------------

PERFORMANCE DATA

Advertisements and other communications to shareholders or prospective investors
may include performance information about a Portfolio. "Yield" for each class of
shares of a Portfolio (other than the Western Asset Money Market Portfolio and
the Western Asset Government Money Market Portfolio) is calculated by dividing
the annualized net investment income per share during a recent 30-day period by
the maximum public offering price per share of the class on the last day of that
period. Yield for the Western Asset Money Market Portfolio and the Western Asset
Government Money Market Portfolio is derived from the income generated by an
investment in a Portfolio over a stated seven-day period. This income is
"annualized," i.e., 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. "Effective yield" is calculated
similarly but assumes that the income earned by an investment is reinvested.

"Total return" is a measurement of the overall change in value, including
changes in share price and assuming reinvestment of distributions, of an
investment in a Portfolio. "Cumulative total return" shows a Portfolio's
performance over a specific period of time. "Average annual total return" for
the one-, five- and ten-year periods (or for the life of a class, if shorter)
through the most recent calendar quarter represents the average annual
compounded rate of return on an investment of $1,000 in a Portfolio invested at
the maximum public offering price.

Investment performance, which will vary, is based on many factors, including
market conditions, portfolio composition, Portfolio operating expenses and the
class of shares the investor purchases. Investment performance also often
reflects the risks associated with a Portfolio's investment objective and
policies. These factors should be considered when comparing a Portfolio's
investment results with those of other mutual funds and other investment
vehicles. Performance information is based on historical performance and should
not be viewed as representative of a Portfolio's future performance. The
investment return and principal value of an investment in a Portfolio (other
than the Western Asset Money Market Portfolio and the Western Asset Government
Money Market Portfolio, which attempt to maintain a stable net asset value per
share) will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.

Quotations of investment performance for any period when an expense limitation
was in effect will be greater than if the limitation had not been in effect.
Portfolio performance may be compared to that of various indexes. See the SAI.

<PAGE>

MANAGEMENT OF THE PORTFOLIOS

BOARD OF DIRECTORS

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

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

------------------------------------------------------

MANAGER, ADVISERS AND
PORTFOLIO MANAGERS

The Portfolios are managed by the Manager. Each Portfolio pays the Manager a
monthly fee based on the average net assets of the Portfolio at the following
rates:

<TABLE>
<CAPTION>
MANAGEMENT FEE
(ANNUAL PERCENTAGE OF
PORTFOLIO AVERAGE NET ASSETS)
- --------- ---------------------
<S> <C>
Western Asset Money Market Portfolio........................................................... 0.20%
Western Asset Government Money Market Portfolio................................................ 0.20%
Western Asset Limited Duration Portfolio....................................................... 0.35%
Western Asset Intermediate Portfolio........................................................... 0.40%
Western Asset Intermediate Plus Portfolio...................................................... 0.40%
Western Asset Core Portfolio................................................................... 0.45%
Western Asset Core Plus Portfolio.............................................................. 0.45%
Western Asset High Yield Portfolio............................................................. 0.55%
Western Asset Non-U.S. Fixed Income Portfolio.................................................. 0.45%
Western Asset Global Strategic Income Portfolio................................................ 0.45%
Western Asset Enhanced Equity Portfolio........................................................ 0.55%
</TABLE>

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

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

<TABLE>
<CAPTION>
PORTFOLIO ADVISER ADVISORY FEE
- --------- ------- ------------
<S> <C> <C>
Western Asset Money Market Portfolio Western Asset 0.15%
Western Asset Government Money Market Portfolio Western Asset 0.15%
Western Asset Limited Duration Portfolio Western Asset 0.30%
Western Asset Intermediate Portfolio Western Asset 0.35%
Western Asset Intermediate Plus Portfolio Western Asset/WAGM 0.35%
Western Asset Core Portfolio Western Asset 0.40%
Western Asset Core Plus Portfolio Western Asset/WAGM 0.40%
Western Asset High Yield Portfolio Western Asset 0.50%
Western Asset Non-U.S. Fixed Income Portfolio WAGM 0.40%
Western Asset Global Strategic Income Portfolio Western Asset/WAGM 0.40%
Western Asset Enhanced Equity Portfolio Western Asset 0.50%
</TABLE>

<PAGE>

EXPENSE LIMITATIONS. The Manager and Advisers have voluntarily agreed to waive
their 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
0.30% of the Portfolio's average daily net assets for such month for the Western
Asset Government Money Market and Western Asset Money Market Portfolios, 0.40%
of the Portfolio's average daily net assets for such month for the Western Asset
Limited Duration Portfolio, 0.45% of the Portfolio's average daily net assets
for such month for the Western Asset Intermediate and Western Asset Intermediate
Plus Portfolios, 0.50% of the Portfolio's average daily net assets for such
month for the Western Asset Core and Western Asset Core Plus Portfolios, 0.55%
of the Portfolio's average daily net assets for such month for the Western Asset
High Yield and Western Asset Non-U.S. Fixed Income Portfolios, 0.65% of the
Portfolio's average daily net assets for such month for the Western Asset
Enhanced Equity Portfolio, and 0.80% of the Portfolio's average daily net assets
for such month for the Western Asset Global Strategic Income Portfolio, until
July 31, 1999.

WESTERN ASSET. Western Asset, a wholly owned subsidiary of Legg Mason, Inc.,
acts as investment adviser to institutional accounts, such as corporate pension
plans, mutual funds and endowment funds, as well as to individual investors.
Total assets under management by Western Asset were approximately $38.3 billion
as of March 31, 1998. The address of Western Asset is 117 East Colorado
Boulevard, Pasadena, CA 91105.

WAGM. WAGM, a wholly owned subsidiary of Legg Mason, Inc., acts as investment
adviser to institutional accounts, such as corporate pension plans, mutual funds
and endowment funds, as well as to individual investors. Total assets under
management by WAGM were approximately $3.2 billion as of March 31, 1998. The
address of WAGM is 155 Bishopsgate, London, England.

PORTFOLIO MANAGERS. Neither Western Asset nor WAGM employs individual portfolio
managers to determine the investments of a Portfolio. Instead, the day-to-day
management of the Portfolios' investments will be the responsibility of their
respective investment strategy groups.

DISTRIBUTORS

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

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

PORTFOLIO TRANSACTIONS

Each Portfolio's Adviser places all orders for the purchase and sale of
portfolio investments with brokers or dealers selected by it in its discretion.
It will seek the best price and execution of each Portfolio's orders. However,
the Adviser may pay higher commission rates than the lowest available when it
believes it is reasonable to do so in light of the value of brokerage and
research services provided by the broker effecting the transaction. The Adviser
may also consider sales of shares of the Portfolio (or other Portfolios or other
funds managed by it or its affiliates, to the extent permitted by applicable
law) in selecting broker-dealers to execute Portfolio transactions.

Some securities considered by an Adviser for purchase by a Portfolio may also be
appropriate for other clients served by the Adviser. Transactions in such
securities will be allocated among the Portfolios and such other clients in a
manner considered fair and reasonable by the Adviser.

EXPENSES

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

<PAGE>

ORGANIZATION AND HISTORY

LM Institutional Fund Advisors I, Inc. ("LM Institutional I") was incorporated
in Maryland on May 16, 1990. Prior to May 29, 1998, LM Institutional I was known
as "Western Asset Trust, Inc." Each Portfolio is an open-end, diversified
management company, except for Western Asset Non-U.S. Fixed Income Portfolio and
Western Asset Global Strategic Income Portfolio, which are non-diversified
companies. The Directors of the Corporation may, without shareholder approval,
create, in addition to the Portfolios, other series of shares representing
separate investment portfolios. Any such series may be divided without
shareholder approval into two or more classes of shares having such terms as the
Directors may determine.

The Corporation has a total of 13.1 billion shares of common stock at par value
$0.001. Each share has one vote, with fractional shares voting proportionally.
Voting on matters pertinent only to a particular Portfolio, such as the adoption
of an investment advisory contract for that Portfolio, is limited to that
Portfolio's shareholders. Shares of all classes of a Portfolio will vote
together as a single class except when otherwise required by law or as
determined by the Directors. Shares are freely transferable, are entitled to
dividends as declared by the Directors, and, if a Portfolio were liquidated,
would receive the net assets of that Portfolio. Voting rights are not
cumulative, and all shares of the Portfolios are fully paid and nonassessable
and have no preemptive or conversion rights.

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

- --------------------------------------------------------------------------------

PURCHASE OF SHARES

INITIAL INVESTMENT

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

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

Purchases of shares can be made by wiring federal funds to State Street Bank and
Trust Company. Purchases of shares of the Western Asset Money Market Portfolio
or the Western Asset Government Money Market Portfolio may ONLY be made by
federal funds wire. Before wiring federal funds, the investor must first
telephone the Portfolio at 1-888-42-LMIFA 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 and class of shares to be purchased;
amount being wired; and name of the wiring bank.

Funds should be wired through the Federal Reserve System to:

State Street Bank and Trust Company
ABA #011-000-028
DDA #99046096
LM Institutional Fund Advisors [insert name of
Portfolio]
[Insert your account name and number]

<PAGE>

The wire should state that the funds are for the purchase of shares of a
specific Portfolio and include the account name and number. With respect to
Portfolios whose policy is to declare dividends daily, if a purchase order for
shares is received prior to 12:00 noon, Eastern time, and payment in federal
funds is received by the Transfer Agent by the close of the federal funds wire
on the day the purchase order is received, dividends will accrue starting that
day. If a purchase order is received after 12:00 noon, Eastern time, and payment
in federal funds is received by the Transfer Agent by the close of the federal
funds wire on the day the purchase order is received, or as otherwise agreed to
by the relevant Portfolio, the order will be effected at that day's net asset
value, but dividends will not begin to accrue until the following business day.

Shares may also be purchased and paid for by the contribution of eligible
portfolio securities, subject in each case to approval by the Manager. Approval
will depend on, among other things, the nature and quality of the securities
offered and the current needs of the Portfolio in question. Securities offered
in payment for shares will be valued in the same way and at the same time the
Portfolio values its portfolio securities for purposes of determining net asset
value. See "Net Asset Value," below. Investors who wish to purchase Portfolio
shares through the contribution of securities should contact the Portfolio at
1-888-42-LMIFA for instructions. Investors should also realize that at the time
of contribution they may be required to recognize a gain or loss for tax
purposes on securities contributed. The Portfolio has full discretion to reject
any securities offered as payment for shares. As described below, each Portfolio
may offer Financial Intermediary Class shares that are offered primarily through
financial intermediaries. Each Portfolio may pay financial intermediaries for
their services out of that class's assets pursuant to the class's distribution
plan or otherwise. Legg Mason and its affiliates (including the Manager and the
Advisers) may also from time to time, at their own expense, make payments to
financial intermediaries that sell shares of the Portfolios or to other parties
in connection with the sale of shares. If investors effect transactions through
a broker or agent, investors may be charged a fee by that broker or agent.

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

ADDITIONAL INVESTMENTS

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

OTHER PURCHASE INFORMATION

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

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

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

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

RETIREMENT PLANS

Shares of the Portfolios are available for purchase by retirement plans,
including 401(k) plans, 403(b) plans and Individual Retirement Accounts
("IRAs"). The administrator of a plan or employee benefits office can provide
participants or employees with detailed information on how to participate in the
plan and how to elect a Portfolio as an investment option. Participants in a
retirement or savings plan may be permitted to elect different investment
options, alter the amounts contributed to the plan, or change how contributions
are allocated among investment options in accordance with the plan's specific
provisions. The plan administrator or employee benefits office should be
consulted for details. For questions about participant accounts, participants
should contact their employee benefits office, the plan administrator, or the
organization that provides recordkeeping services for the plan. Investors who
purchase shares through retirement plans should be aware that the plan
administrator may aggregate purchase and redemption orders of participants in
the plan. Therefore, there may be a delay between the time the investor places

<PAGE>

an order with the plan administrator and the time the order is forwarded to LMIA
or the Transfer Agent for execution.

ACCOUNT REGISTRATION CHANGES

Changes in registration or account privileges may be made in writing to the
Portfolio. Signature guarantees may be required. See "Signature Guarantee"
below.

All correspondence must include the account number and must be sent to:

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

- --------------------------------------------------------------------------------

DISTRIBUTION PLANS

The Board of Directors has adopted Distribution Plans pursuant to Rule 12b-1
under the 1940 Act with respect to shares of the Financial Intermediary Class of
each Portfolio. Under the terms of each Plan, a Portfolio is permitted to pay,
out of the assets of the Financial Intermediary Class of the Portfolio, in an
amount up to 0.40% on an annual basis of the average daily net assets of that
class, Legg Mason, financial intermediaries and other parties that provide
services in connection with or are otherwise involved in the distribution of
shares or administration of plans or programs that use Portfolio shares as their
funding medium, and to reimburse certain other distribution-related expenses and
payments. Payments under the Plans are currently limited to an annual rate of
.25% of average daily net assets (.10% for the Western Asset Money Market
Portfolio and the Western Asset Government Money Market Portfolio). For more
information regarding the Plans and their terms, see the SAI.

- --------------------------------------------------------------------------------

REDEMPTION OF SHARES

Portfolio shares may be redeemed through three methods: (1) by sending a written
request for redemption to LM Institutional Fund Advisors at P.O. Box 17635,
Baltimore, Maryland 21297-1635; (2) by calling the Portfolio at 1-888-42-LMIFA;
or (3) by wire communication with the Transfer Agent. In each case, the investor
should first notify the Portfolio at 1-888-42-LMIFA of the intention to redeem.
No charge is made for redemptions. Shareholders who wish to be able to redeem by
telephone or wire communication must complete an authorization form in advance.
Redemptions over $10,000,000 may be initiated by telephone, but must be
confirmed in writing prior to processing. With respect to telephone redemptions
or transfers, the Transfer Agent will process orders based on instructions from
a shareholder, or any person claiming to act as his or her representative, who
can provide it with his or her account registration and address as it appears on
its records. The Transfer Agent will employ these and other reasonable
procedures to confirm that instructions communicated by telephone are genuine;
if it fails to employ reasonable procedures, the Transfer Agent may be liable
for any losses due to unauthorized or fraudulent instructions.

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

Requests for redemption should indicate:

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

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

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

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

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, each Portfolio
reserves the right to postpone the payment date when the Exchange is closed,
when trading is restricted, or during other periods as permitted by federal
securities laws, or to take up to

<PAGE>

seven days to make payment upon redemption if the Portfolio involved could be
adversely affected by immediate payment. Redemption proceeds may also be paid in
kind at the discretion of the Portfolio. Shareholders who receive a redemption
in kind may incur costs to dispose of such securities.

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 a Portfolio 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 Portfolio by calling 1-888-42-LMIFA.

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

SIGNATURE GUARANTEE

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

- --------------------------------------------------------------------------------

EXCHANGE PRIVILEGE

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

The exchange privilege is not intended as a vehicle for short-term trading.
Excessive exchange activity may interfere with portfolio management and have an
adverse effect on all shareholders. In order to limit excessive exchange
activity and in other circumstances where a Portfolio believes doing so would be
in its best interest, the Portfolio reserves the right to revise or terminate
the exchange privilege, limit the amount or number of exchanges or reject any
exchange. For further information concerning the exchange privilege, or to make
an exchange, please contact the Portfolio at 1-888-42-LMIFA.

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NET ASSET VALUE

Net asset value per share of each class of shares is determined daily for each
Portfolio as of the close of regular trading on the Exchange (normally 4:00
p.m., Eastern time), on every day that the Exchange is open, by subtracting the
Portfolio's liabilities attributable to a given class of shares from its total
assets attributable to the class and dividing the result by the number of shares
of that class outstanding. Net asset value will not be determined on days on
which the Exchange is closed.

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

<PAGE>

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

Other assets and securities for which no quotations are readily available are
valued at fair value as determined in good faith by the Directors or persons
acting at their direction. The values of foreign securities quoted in foreign
currencies are translated into U.S. dollars at current exchange rates or at such
other rates as the Directors or persons acting at their direction may determine
in computing net asset value.

Because of time zone differences, foreign exchanges and securities markets will
usually be closed prior to the time of the closing of the Exchange and values of
foreign investments will be determined as of the earlier closing of such
exchanges and securities markets. However, events affecting the values of such
foreign securities may occasionally occur between the earlier closings of such
exchanges and securities markets and the closing of the Exchange which will not
be reflected in the computation of the net asset value. If an event materially
affecting the value of such foreign securities occurs during such period, then
such securities will be valued at fair value as determined in good faith by the
Directors or persons acting at their direction.

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

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DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS

The Western Asset Money Market Portfolio and the Western Asset Government Money
Market Portfolio declare as a dividend at the close of regular trading on the
Exchange each business day, to shareholders of record as of 12:00 noon, Eastern
Time, that day, substantially all of their net investment income since the prior
business day's dividend. The Western Asset Money Market Portfolio and the
Western Asset Government Money Market Portfolio pay dividends monthly. The other
Portfolios declare and pay dividends quarterly out of their net investment
income for that quarter. Distributions of net realized capital gains are made
annually.

Shareholders may elect to receive dividends and distributions in one of four
ways:

1) Receive both dividends and other distributions in shares of the same
class of the distributing Portfolio;

2) Receive dividends in cash and other distributions in shares of the same
class of the distributing Portfolio;

3) Receive dividends in shares of the same class of the distributing
Portfolio and other distributions in cash; or

4) Receive both dividends and other distributions in cash.

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

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

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.

<PAGE>

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

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TAX INFORMATION

Each Portfolio intends to qualify as a "regulated investment company" for
federal income tax purposes and to meet all other requirements necessary for it
to be relieved of federal taxes on income and gains it distributes to
shareholders. Each Portfolio will distribute substantially all its net
investment income and net realized capital gains to its shareholders on a
current basis.

Distributions from a Portfolio (whether paid in cash or reinvested in shares of
the Portfolio) will be taxable to shareholders (other than IRAs, other qualified
retirement plans and other tax-exempt investors) as ordinary income to the
extent derived from the Portfolio's investment income and net short-term gains.
Distributions of net capital gains (that is, the excess of net gains from
capital assets held for more than one year over net losses from capital assets
held for not more than one year) will be taxable as long-term capital gains.

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

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

A Portfolio's investments in foreign securities may be subject to withholding
taxes at the source on dividend or interest payments. In that case, a
Portfolio's yield on those securities would be decreased.

If at the end of a Portfolio's fiscal year more than 50% of the value of its
total assets represents securities of foreign corporations, the Portfolio may
make an election to treat any foreign taxes paid by it as paid by its
shareholders. In this case, shareholders who are U.S. citizens, U.S.
corporations and, in some cases, U.S. residents generally will be required to
include in U.S. taxable income their pro rata share of such taxes, but may then
generally be entitled to claim a foreign tax credit or deduction (but not both)
for their share of such taxes. A shareholder's ability to claim a foreign tax
credit or deduction in respect of foreign taxes paid by a Portfolio may be
subject to certain limitations (including a holding period requirement,
applicable to both a Portfolio and its shareholders, imposed by the Taxpayer
Relief Act of 1997).

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

Investment in an entity that qualifies as a "passive foreign investment company"
under the Code could subject a Portfolio to a U.S. federal income tax or other
charge on certain "excess distributions" with respect to the investment, and on
the proceeds from disposition of the investment.

Early each year each Portfolio will notify its shareholders of the amount and
tax status of distributions paid during that year.

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

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APPENDIX A -- SECURITIES RATINGS

The following rating services describe rated securities as follows:

MOODY'S INVESTORS SERVICE, INC.

BONDS

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 edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

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

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

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

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

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

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

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

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

NOTES

MIG 1/VMIG 1 -- This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.

MIG 2/VMIG 2 -- This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.

COMMERCIAL PAPER

Issuers rated PRIME-1 (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by 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.

Issuers rated PRIME-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.

A-1

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STANDARD & POOR'S

BONDS

AAA -- Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA -- Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.

A -- Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.

BBB -- Debt rated "BBB" is 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 to pay interest and repay principal for
debt in this category than in higher rated categories.

BB-B-CCC-CC-C -- Debt rated "BB", "B", "CCC", "CC" and "C" is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "C" the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.

BB -- Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB" rating.

B -- Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.

CCC -- Debt rated "CCC" has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The "CCC" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.

CC -- The rating "CC" typically is applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.

C -- The rating "C" typically is applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.

D -- Bonds rated "D" are in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The "D" rating also will be used
on the filing of a bankruptcy petition if debt service payments are jeopardized.

NOTES

SP-1 -- Strong capacity to pay principal and interest. Those issues determined
to possess overwhelming safety characteristics are given a plus sign (+)
designation.

SP-2 -- Satisfactory capacity to pay principal and interest.

SP-3 -- Speculative capacity to pay principal and interest.

COMMERCIAL PAPER

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

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

A-3 -- Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.

FITCH INVESTORS SERVICE, INC.

AAA -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.

AA -- Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA.

A-2

<PAGE>

A -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.

BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have an adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.

BB -- Bonds considered to be speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.

B -- Bonds are considered highly speculative. Bonds in this class are lightly
protected as to the obligor's ability to pay interest over the life of the issue
and repay principal when due.

CCC -- Bonds have certain characteristics which, with passing of time, could
lead to the possibility of default on either principal or interest payments.

CC -- Bonds are minimally protected. Default in payment of interest and/or
principal seems probable.

C -- Bonds are in actual or imminent default in payment of interest or
principal.

DDD -- Bonds are in default and in arrears in interest and/or principal
payments. Such bonds are extremely speculative and should be valued only on the
basis of their value in liquidation or reorganization of the obligor.

SHORT TERM RATINGS

Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.

The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.

F-1+ -- Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.

F-1 -- Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+".

F-2 -- Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as for issues assigned "F-1+" and "F-1" ratings.

F-3 -- Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate; however,
near-term adverse changes could cause these securities to be rated below
investment grade.

F-S -- Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are vulnerable
to near-term adverse changes in financial and economic conditions.

D -- Default. Issues assigned this rating are in actual or imminent payment
default.

LOC -- The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.

A-3

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LM INSTITUTIONAL FUND ADVISORS I

CUSTODIAN
State Street Bank and Trust Co.
P.O. Box 1713
Boston, Massachusetts 02105

TRANSFER AGENT AND SHAREHOLDER SERVICING AGENT
Boston Financial Data Services
P.O. Box 953
Boston, Massachusetts 02103

COUNSEL
Ropes & Gray
One International Place
Boston, Massachusetts 02110

INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
250 W. Pratt Street
Baltimore, Maryland 21201

DISTRIBUTORS
Legg Mason Wood Walker, Incorporated
100 Light Street
P.O. Box 1476
Baltimore, Maryland 21203-1476

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

LMIFA PRS 1 (10/98)