Edgar Filing: WESTERN ASSET CLAYMORE US TREASURY INFLATION PRO SECU FUND

As filed with the Securities and Exchange Commission on September 25, 2003

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1933 Act File No. 333-107150
1940 Act File No. 811-21403

U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2

/X/ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/X/ Pre-Effective Amendment No. 2
/ / Post-Effective Amendment No. _____________________
and
/X/ REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
/X/ Amendment No. 2

Western Asset/Claymore U.S. Treasury Inflation Protected
Securities Fund
(Exact Name of Registrant as Specified in Declaration of Trust)

117 East Colorado Boulevard
Pasadena, California 91105
(Address of Principal Executive Offices)
(Number, Street, City, State, Zip Code)

(626) 844-9400
(Registrant's Telephone Number, including Area Code)

Gregory B. McShea
c/o Western Asset Management Company
117 East Colorado Boulevard
Pasadena, California 91105
(Name and Address (Number, Street, City, State, Zip Code) of Agent for Service)

Copies of Communications to:

Bryan Chegwidden, Esq. Leonard B. Mackey, Jr., Esq.
Ropes & Gray LLP Clifford Chance US LLP
45 Rockefeller Plaza 200 Park Avenue
New York, NY 10111-0087 New York, NY 10166

Approximate Date of Proposed Public Offering:

As soon as practicable after the effective date of this Registration Statement

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If any of the securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. / /

It is proposed that this filing will become effective (check appropriate
box)

/X/ when declared effective pursuant to Section 8(c)
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
TITLE OF SECURITIES BEING REGISTERED REGISTERED UNIT PRICE(1) FEE(2)
------------------------------------ ----------------- ------------------ ------------------ ------------

Common Shares, no par value 33,333,333 Shares $ 15.00 $ 499,999,995 $ 40,450
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(1) Estimated solely for the purpose of calculating the registration fee.

(2) $1.22 of which has previously been paid.

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such dates as the Commission, acting pursuant to said Section 8(a),
may determine.

The information in this prospectus is not complete and may be changed. The Fund
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED SEPTEMBER 25, 2003

PROSPECTUS

[Western Asset Logo] [Claymore Logo]

SHARES
WESTERN ASSET/CLAYMORE
U.S. TREASURY INFLATION PROTECTED SECURITIES FUND

COMMON SHARES OF BENEFICIAL INTEREST
$15.00 PER SHARE

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INVESTMENT OBJECTIVES. Western Asset/Claymore U.S. Treasury Inflation
Protected Securities Fund (the "Fund") is a newly organized, diversified,
closed-end management investment company. The Fund's primary investment
objective is to provide current income. Capital appreciation, when consistent
with current income, is a secondary investment objective.

NO PRIOR HISTORY. Because the Fund is newly organized, its common shares
have no history of public trading. Shares of closed-end investment companies
frequently trade at a discount from their net asset value. The risks of
investing in a newly organized, closed-end investment company may be greater for
investors expecting to sell their shares in a relatively short period after
completion of the public offering. The common shares have been authorized for
listing on the New York Stock Exchange, subject to notice of issuance, under the
symbol "WIA."

(CONTINUED ON FOLLOWING PAGE)

INVESTING IN THE COMMON SHARES INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISKS" SECTION BEGINNING ON PAGE 26 OF THIS PROSPECTUS.

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PER SHARE TOTAL
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Public offering price.................................. $15.00 $
Sales load(1).......................................... $.675 $
Estimated offering expenses(2)......................... $.03 $
Proceeds to the Fund................................... $14.295 $

(1) The Fund has agreed to pay the underwriters $.005 per common share as a
partial reimbursement of expenses incurred in connection with the
offering. For a description of other compensation paid to the
underwriters by the Fund and Western Asset Management Company, see
"Underwriting."

(2) Total offering costs borne by the Fund are expected to be $ .
Western Asset Management Company and Claymore Securities, Inc. have
agreed to (i) pay the amount by which the Fund's offering costs (other
than the sales load) exceed $.03 per common share and (ii) reimburse
all of the Fund's organizational expenses. To the extent that the
Fund's offering costs are less than $.03 per common share, up to .10%
of the public offering price of the securities sold in this offering,
up to such expense limit, will be paid to Claymore Securities, Inc. as
compensation for the distribution services it provides to the Fund. See
"Underwriting."

The underwriters may also purchase up to additional common shares at
the public offering price, less the sales load, within 45 days from the date of
this prospectus to cover overallotments.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

The common shares will be ready for delivery on or about , 2003.

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

MERRILL LYNCH & CO. LEGG MASON WOOD WALKER
INCORPORATED

RBC CAPITAL MARKETS ADVEST, INC. BB&T CAPITAL MARKETS ROBERT W. BAIRD & CO.

J.J.B. HILLIARD, W.L. LYONS, JANNEY MONTGOMERY SCOTT LLC MCDONALD INVESTMENTS INC.
INC.
MORGAN KEEGAN & COMPANY, INC. QUICK & REILLY, INC. STIFEL, NICOLAUS & COMPANY
INCORPORATED
WR HAMBRECHT & CO. WEDBUSH MORGAN SECURITIES CLAYMORE SECURITIES, INC.
INC.

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The date of this prospectus is , 2003.

(CONTINUED FROM PREVIOUS PAGE)

PORTFOLIO CONTENTS. Under normal market conditions, the Fund will invest at
least 80% of its total managed assets in U.S. Treasury Inflation Protected
Securities ("U.S. TIPS"). U.S. TIPS are fixed income securities issued by the
U.S. Department of the Treasury, the principal amounts of which are adjusted
daily based upon changes in the rate of inflation (currently represented by the
non-seasonally adjusted Consumer Price Index for All Urban Consumers). The Fund
may also invest up to 20% of its total managed assets in corporate bonds or
other securities and instruments. The Fund intends to limit its investments to
U.S. dollar-denominated securities and instruments, and will not invest in bonds
that are below investment grade quality at the time of purchase. Investment
grade quality bonds are bonds rated within a rating agency's four highest grades
(Baa or BBB or higher by Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Rating Group ("S&P") or Fitch Ratings ("Fitch") or a similar
rating of another nationally recognized rating agency) or bonds that are unrated
but judged to be of comparable quality by the Fund's investment advisor. The
Fund may enter into short sales, use reverse repurchase agreements and dollar
rolls, and engage in other types of transactions, including derivative
transactions (such as options, futures contracts and swaps), for risk management
purposes or as part of its investment strategies. The Fund currently expects
that the average effective duration of its portfolio will range between zero and
15 years, although this target duration may change from time to time. "Total
managed assets" means the total assets of the Fund (including any assets
attributable to leverage) minus accrued liabilities (other than liabilities
representing leverage). There can be no assurance that the Fund will achieve its
investment objectives.

INVESTMENT ADVISOR. Western Asset Management Company will act as investment
advisor to the Fund. See "Management of the Fund."

LEVERAGE. The Fund currently anticipates issuing preferred shares in an
aggregate amount of approximately 33% of its total managed assets to buy
additional investments. Such preferred shares, together with other forms of
leverage (including reverse repurchase agreements and dollar roll transactions),
may not exceed 38% of the Fund's total managed assets. The practice of issuing
preferred shares or utilizing borrowings in order to increase the Fund's assets
for investment purposes is known as "leverage" and will create special risks.
The Fund currently expects to use reverse repurchase agreements, short sales,
futures contracts, options, swaps, dollar rolls and/or other transactions that
may in certain circumstances be considered leverage. To the extent that the Fund
covers its obligations under such transactions, as described under "Preferred
Shares and Other Leverage," such transactions (other than reverse repurchase
agreements and dollar roll transactions) will not be considered leverage for
purposes of the Fund's policy on the amount of leverage it may incur. However,
these transactions, even if covered, represent a form of economic leverage and
will create special risks. See "Risks--Leverage Risk" and "Preferred Shares and
Other Leverage."

You should read this prospectus, which contains important information about
the Fund, before deciding whether to invest in the common shares, and retain it
for future reference. A Statement of Additional Information dated ,
2003, containing additional information about the Fund, has been filed with the
Securities and Exchange Commission and is incorporated by reference in its
entirety into this prospectus, which means that it is part of the prospectus for
legal purposes. You can review the table of contents of the Statement of
Additional Information on page 50 of this prospectus. You may request a free
copy of the Statement of Additional Information by calling 1-800-345-7999 or by
writing to the Fund, or obtain a copy (and other information regarding the Fund)
from the Securities and Exchange Commission's web site (http://www.sec.gov).

The Fund's common shares do not represent a deposit or obligation of, and
are not guaranteed or endorsed by, any bank or other insured depository
institution, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency.

TABLE OF CONTENTS

PAGE
----

Prospectus Summary.................................................... 4
Summary of Fund Expenses.............................................. 15
The Fund.............................................................. 17
Use of Proceeds....................................................... 17
The Fund's Objectives, Strategies and Investments..................... 17
Preferred Shares and Other Leverage................................... 24
Risks................................................................. 26
How the Fund Manages Risk............................................. 33
Management of the Fund................................................ 35
Net Asset Value....................................................... 36
Distributions......................................................... 37
Dividend Reinvestment Plan............................................ 38
Description of Shares................................................. 39
Anti-Takeover and Other Provisions in the Declaration of Trust........ 41
Repurchase of Fund Shares; Conversion to Open-End Fund................ 43
Tax Matters........................................................... 44
Underwriting.......................................................... 46
Servicing Agent....................................................... 48
Custodian and Transfer Agent.......................................... 49
Legal Matters......................................................... 49

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. THE FUND HAS NOT, AND THE UNDERWRITERS HAVE NOT,
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES
YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. THE
FUND IS NOT, AND THE UNDERWRITERS ARE NOT, MAKING AN OFFER OF THESE SECURITIES
IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT OF THIS PROSPECTUS. THE FUND'S BUSINESS, FINANCIAL
CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE THAT DATE.
THE FUND WILL AMEND OR SUPPLEMENT THIS PROSPECTUS TO REFLECT MATERIAL CHANGES TO
THE INFORMATION CONTAINED IN THIS PROSPECTUS TO THE EXTENT REQUIRED BY
APPLICABLE LAW.

PROSPECTUS SUMMARY

THIS IS ONLY A SUMMARY. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION
THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE COMMON SHARES OF THE FUND. YOU
SHOULD REVIEW THE MORE DETAILED INFORMATION CONTAINED IN THIS PROSPECTUS AND IN
THE STATEMENT OF ADDITIONAL INFORMATION.

THE FUND................ Western Asset/Claymore U.S. Treasury Inflation
Protected Securities Fund is a newly organized,
diversified, closed-end management investment company.
Throughout this prospectus, Western Asset/ Claymore
U.S. Treasury Inflation Protected Securities Fund is
referred to simply as the "Fund." See "The Fund."
THE OFFERING............ The Fund is offering common shares of
beneficial interest at $15.00 per share through a
group of underwriters led by Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"). The
common shares of beneficial interest are called
"common shares" throughout this prospectus. An
investor must purchase at least 100 common shares
($1,500) in order to participate in this offering. The
Fund has given the underwriters an option to purchase
up to additional common shares to cover orders
in excess of common shares. Western Asset
Management Company and Claymore Securities, Inc. have
agreed to (i) pay the amount by which the Fund's
offering costs (other than the sales load, but
including a $.005 per common share reimbursement of
expenses to the underwriters) exceed $.03 per common
share and (ii) reimburse all of the Fund's
organizational expenses. See "Underwriting."
INVESTMENT ADVISOR...... Western Asset Management Company, a wholly owned
subsidiary of Legg Mason, Inc., serves as the
investment advisor to the Fund. Subject to supervision
by the Board of Trustees, Western Asset Management
Company is responsible for managing the investment
activities of the Fund and certain of the Fund's
business affairs and other administrative matters. The
Fund will pay Western Asset Management Company an
annual fee, payable monthly, in an amount equal to
.40% of the Fund's average weekly assets. See
"Management of the Fund--Investment Advisor" for more
information about Western Asset Management Company and
how this fee is calculated. Western Asset Management
Company is referred to as "Western Asset" in this
prospectus.
INVESTMENT OBJECTIVES... The Fund's primary investment objective is to provide
current income. Capital appreciation, when consistent
with current income, is a secondary investment
objective. No assurance can be given that the Fund
will achieve its investment objectives.
INVESTMENT POLICIES..... Under normal market conditions, the Fund will invest
at least 80% of its total managed assets in U.S. TIPS.
U.S. TIPS are fixed income securities issued by the
U.S. Department of the Treasury, the principal amounts
of which are adjusted daily based upon changes in the
rate of inflation (currently represented by the
non-seasonally adjusted Consumer Price Index for All
Urban Consumers). The Fund may also invest up to 20%
of its total managed assets in corporate bonds or
other securities and instruments. The Fund intends to
limit its investments to U.S. dollar-denominated
securities and instruments,

and will not invest in bonds that are below investment
grade quality at the time of purchase. Investment
grade quality bonds are bonds rated within a rating
agency's four highest grades (Baa or BBB or higher by
Moody's, S&P or Fitch or a similar rating of another
nationally recognized rating agency) or bonds that are
unrated but judged to be of comparable quality by
Western Asset. The Fund may enter into short sales,
use reverse repurchase agreements and dollar rolls,
and engage in other types of transactions, including
derivative transactions (such as options, futures
contracts and swaps), for risk management purposes or
as part of its investment strategies. The Fund
currently expects that the average effective duration
of its portfolio will range between zero and 15 years,
although this target duration may change from time to
time. See "The Fund's Objectives, Strategies and
Investments."
INVESTMENT PHILOSOPHY... Western Asset is exclusively a fixed income manager.
Its mission is to remain a leader in diversified fixed
income management by operating a seamlessly
integrated, global enterprise, exercising
uncompromising standards of excellence in all aspects
of its business. Its objective is to create for its
clients diversified, value-oriented portfolios that
are managed for the long term.
OPPORTUNISTIC TRADING. Western Asset believes that
significant inefficiencies exist in the fixed income
markets. The firm utilizes an opportunistic approach
that actively seeks to identify and capitalize on
inefficiencies in the fixed income markets.
TEAM APPROACH. Western Asset's philosophy centers upon
a team approach. Portfolios are managed by uniting
groups of specialists dedicated to different market
sectors. The investment responsibilities of each group
are distinct, but success comes from the fluid and
constant interaction that unites these groups into a
single team. The Fund's investments will be the
responsibility of the firm's Investment Strategy
Group, which is currently chaired by Western Asset's
Chief Investment Officer and which also currently
includes the firm's Deputy Chief Investment Officer,
its Senior Economist and the head of each sector
group.
RISK MANAGEMENT. Western Asset incorporates a variety
of risk reduction strategies in the management of its
portfolios. The firm also employs a dedicated risk
management team whose sole function is to monitor
investment risk.
PREFERRED SHARES AND
OTHER
LEVERAGE................ The Fund may issue preferred shares of beneficial
interest ("preferred shares"), enter into reverse
repurchase agreements or dollar roll transactions,
and/or borrow money in order to buy additional
securities. This practice is known as "leverage." The
Fund anticipates that, within one to three months
after completion of this offering, it will offer
preferred shares representing approximately 33% of the
Fund's total managed assets, as measured immediately
after the issuance of the preferred shares. If the
Fund offers preferred shares, the costs of that
offering will be borne immediately by holders of
common shares ("Common

Shareholders") and result in a reduction of the net
asset value of the common shares. Such preferred
shares, together with other forms of leverage
(including reverse repurchase agreements and dollar
roll transactions), will not exceed 38% of the Fund's
total managed assets. "Total managed assets" means the
total assets of the Fund (including any assets
attributable to leverage) minus accrued liabilities
(other than liabilities representing leverage). For
purposes of calculating "total managed assets," the
liquidation preference of any preferred shares
outstanding is not considered a liability. The Fund
currently expects to enter into reverse repurchase
agreements and/or dollar roll transactions for
leveraging purposes, initially as a substitute for all
or a portion of the preferred shares it plans to issue
during the period prior to their issuance and
thereafter, to the extent determined by Western Asset,
up to 38% of total managed assets (together with other
forms of leverage). Although the Fund does not
currently intend to borrow from banks or other
financial institutions or issue commercial paper in
order to leverage its portfolio, it may do so in the
future. Bank borrowings and outstanding commercial
paper issued by the Fund will be included when
calculating the amount of the Fund's outstanding
leverage.
In addition to the forms of leverage described above,
the Fund currently expects to use short sales, futures
contracts, options, credit default swaps, and/or other
transactions that may in certain circumstances be
considered leverage. To the extent that the Fund
covers its obligations under such transactions, as
described under "Preferred Shares and Other Leverage,"
such transactions will not be considered leverage for
purposes of the Fund's policy on the amount of
leverage it may incur. However, these transactions,
even if covered, represent a form of economic leverage
(although they will not be considered "leverage" for
purposes of calculating total managed assets) and will
involve special risks. The precise amount of leverage,
if any, used by the Fund may vary from time to time,
and the Fund will not necessarily incur the leverage
described above. Leverage involves special risks.
There is no assurance that the Fund will issue
preferred shares or otherwise use leverage, or that,
if preferred shares are issued or leverage is
otherwise used, the Fund's leveraging strategy will be
successful. See "Risks--Leverage Risk."
During periods in which the Fund is using leverage,
the fees paid to Western Asset and Claymore
Securities, Inc., the Fund's servicing agent, will be
higher than if the Fund did not use leverage, because
the fees paid will be calculated on the basis of the
Fund's average weekly assets, including the proceeds
from the issuance of preferred shares and other
leverage. See "Management of the Fund--Investment
Management Agreement" and "Servicing Agent."
It is anticipated that dividends with respect to
preferred shares and/ or interest with respect to
other forms of leverage will be based on shorter-term
interest rates that would be periodically reset. The
Fund intends to invest the proceeds from the issuance
of preferred

shares or the use of other forms of leverage
principally in intermediate- and longer-term bonds. So
long as the Fund's portfolio provides a higher rate of
return (net of Fund expenses) than dividend rates on
preferred shares and interest rates on other forms of
leverage, as reset periodically, the use of these
forms of leverage will allow Common Shareholders to
receive a higher current return than if the Fund were
not leveraged. If, however, shorter-term interest
rates rise relative to intermediate- and longer-term
interest rates or the rate of return on the Fund's
portfolio, dividend rates on preferred shares and
interest rates on other forms of leverage could exceed
the rate of return on intermediate- and longer-term
U.S. TIPS and other investments held by the Fund,
reducing the return to Common Shareholders.
There can be no assurance that the use of leverage
will result in a higher yield on the common shares.
When leverage is employed, the net asset value and
market price of the common shares and the yield to
Common Shareholders will be more volatile. Leverage
will cause the Fund's net asset value to fall more
sharply in response to increases in interest rates
than it would have in the absence of leverage. In
addition, preferred shares, if issued, are expected to
pay cumulative dividends, which may tend to increase
leverage risk and may result in less income for Common
Shareholders. See "Preferred Shares and Other
Leverage," "Description of Shares--Preferred Shares"
and "Risks--Leverage Risk."
DISTRIBUTIONS........... The Fund intends to distribute to Common Shareholders
monthly dividends of all or a portion of its net
investment income after the payment of dividends and
interest, if any, owed with respect to the use of
leverage. The Fund expects to declare the initial
monthly dividend on the common shares within
approximately 45 days of the completion of this
offering and to pay that initial monthly dividend
approximately 60 to 90 days after the completion of
this offering. Unless an election is made to receive
distributions in cash, Common Shareholders will
automatically have all dividends and distributions
reinvested in additional common shares under the
Fund's Dividend Reinvestment Plan. See "Dividend
Reinvestment Plan."
LISTING................. The common shares have been authorized for listing on
the New York Stock Exchange, subject to notice of
issuance, under the symbol "WIA." See "Description of
Shares--Common Shares."
SERVICING AGENT......... Claymore Securities, Inc., a registered broker-dealer,
will act as servicing agent to the Fund. Claymore
Securities, Inc. provides supervision, management or
servicing on approximately $3.3 billion in assets
through closed-end funds, defined portfolios and
separately managed accounts.
For its services, Claymore Securities, Inc. will
receive an annual fee from the Fund, payable monthly
in arrears, which will be based on the Fund's average
weekly assets during such month, in an amount equal to
.15% of the Fund's average weekly assets. For more
information on how this fee is calculated, see
"Servicing Agent."

ADMINISTRATOR, CUSTODIAN
AND TRANSFER AGENT.... Legg Mason Fund Adviser, Inc., an affiliate of Western
Asset, will serve as the Fund's administrator. State
Street Bank & Trust Company will serve as custodian of
the Fund's assets. EquiServe Trust Company, N.A. and
its affiliate, EquiServe, Inc. (together,
"EquiServe"), will serve as the Fund's transfer agent,
dividend disbursing agent and registrar. See
"Management of the Fund--Administrator" and "Custodian
and Transfer Agent."
MARKET PRICE OF
SHARES................ Shares of closed-end investment companies frequently
trade at prices lower than net asset value. Shares of
closed-end investment companies like the Fund that
invest in investment grade bonds have during some
periods traded at prices higher than net asset value
and during other periods traded at prices lower than
net asset value. In general, shares of closed-end
investment companies trade at prices lower than net
asset value more frequently than such shares trade at
prices higher than net asset value. The Fund cannot
assure Common Shareholders that the common shares will
trade at a price higher than or equal to net asset
value in the future. Net asset value will be reduced
immediately following the offering by the sales load
and the amount of offering costs paid by the Fund. In
addition to net asset value, market price may be
affected by such factors relating to the Fund or its
portfolio holdings as the Fund's use of leverage,
dividends paid (which are in turn affected by
expenses), call protection, interest rate movements,
dividend stability, portfolio credit quality,
liquidity, market supply and demand and general market
and economic conditions and other factors. See
"Preferred Shares and Other Leverage," "Risks,"
"Description of Shares" and "Repurchase of Fund
Shares; Conversion to Open-End Fund" in this
prospectus, and the Statement of Additional
Information under "Repurchase of Common Shares;
Conversion to Open-End Fund." The common shares are
designed primarily for long-term investors, and an
investor should not purchase common shares if he or
she intends to sell them shortly after purchase.
SPECIAL RISK
CONSIDERATIONS........ NO OPERATING HISTORY. The Fund is a newly organized,
diversified, closed-end management investment company
with no operating history.
INVESTMENT RISK. An investment in the Fund is subject
to investment risk, including the possible loss of the
entire amount that you invest.
......................... MARKET DISCOUNT RISK. Shares of closed-end
managementinvestment companies frequently trade at a
discount from their net asset value, and the Fund's
shares may trade at a price that is less than the
initial offering price. Net asset value will be
reduced immediately following the initial offering by
a 4.5% sales load charge and offering costs paid by
the Fund. The risk of investing in a newly organized
closed-end investment company may be greater for
investors who sell their shares in a relatively short
period of time after completion of the initial
offering. The common shares are designed for long-term
investors and should not be treated as trading
vehicles.

INTEREST RATE RISK. Interest rate risk is the risk
that the bonds in the Fund's portfolio (including U.S.
TIPS) will decline in value because of increases in
market interest rates. The prices of longer-term bonds
generally fluctuate more than prices of shorter-term
bonds as interest rates change. Because the Fund will
invest primarily in intermediate- to longer-term
bonds, the common share net asset value and market
price per share will fluctuate more in response to
changes in market interest rates than if the Fund
invested primarily in shorter-term bonds. Because
market interest rates are currently near their lowest
levels in many years, there is a greater risk that the
Fund's portfolio will decline in value. The Fund's use
of leverage, as described below, will increase
interest rate risk. See "Risks--Leverage Risk."
RISKS RELATING TO U.S. TIPS. The value of
inflation-protected securities such as U.S. TIPS
generally fluctuates in response to changes in real
interest rates, which are in turn tied to the
relationship between nominal interest rates and the
rate of inflation. Therefore, if inflation were to
rise at a faster rate than nominal interest rates,
real interest rates might decline, leading to an
increase in value of U.S. TIPS. In contrast, if
nominal interest rates increased at a faster rate than
inflation, real interest rates might rise, leading to
a decrease in value of U.S. TIPS. Although the
principal value of U.S. TIPS declines in periods of
deflation, holders at maturity receive no less than
the par value of the bond. However, if the Fund
purchases U.S. TIPS in the secondary market whose
principal values have been adjusted upward due to
inflation since issuance, the Fund may experience a
loss if there is a subsequent period of deflation. If
inflation is lower than expected during the period the
Fund holds U.S. TIPS, the Fund may earn less on the
securities than on conventional bonds. Any increase in
principal value of U.S. TIPS caused by an increase in
the index is taxable in the year the increase occurs,
even though the Fund will not receive cash
representing the increase at that time. As a result,
the Fund could be required at times to liquidate other
investments, including when it is not advantageous to
do so, in order to satisfy its distribution
requirements as a regulated investment company under
the Code. See "Tax Matters."
If real interest rates rise (I.E., if interest rates
rise due to reasons other than inflation), the value
of the U.S. TIPS in the Fund's portfolio will decline.
In addition, because the principal amount of U.S. TIPS
would be adjusted downward during a period of
deflation, the Fund will be subject to deflation risk
with respect to its investments in these securities.
The daily adjustment of the principal value of U.S.
TIPS is currently tied to the non-seasonally adjusted
Consumer Price Index for All Urban Consumers, which is
calculated monthly by the U.S. Bureau of Labor
Statistics. The Consumer Price Index for All Urban
Consumers is a measurement of changes in the cost of
living, made up of components such as housing, food,
transportation and energy. There can no assurance that
such index will accurately

measure the real rate of inflation in the prices of
goods and services.
The U.S. Treasury only began issuing
inflation-protected securities in 1997, and the market
for such securities may be less developed or liquid,
and more volatile, than certain other securities
markets as a result. The U.S. Treasury currently
issues U.S. TIPS in only ten-year maturities, although
U.S. TIPS with different maturities have been issued
in the past and may be issued in the future.
CREDIT RISK. Credit risk is the risk that one or more
bonds in the Fund's portfolio will decline in price,
or fail to pay interest or principal when due, because
the issuer of the bond experiences a decline in its
financial status.
LOWER GRADE AND UNRATED SECURITIES RISK. Although the
Fund will not invest in securities that are below
investment grade quality at the time of purchase, the
Fund is not required to dispose of a security if a
rating agency or Western Asset downgrades its
assessment of the credit characteristics of a
particular issue. As a result the Fund may, from time
to time, hold bonds of below investment grade quality.
Lower grade securities, or equivalent unrated
securities, which are commonly known as "junk bonds,"
typically entail greater potential price volatility
and may be less liquid than higher-rated securities.
Lower grade securities are regarded as having
predominately speculative characteristics with respect
to the issuer's capacity to pay interest and repay
principal. These securities may also be more
susceptible to real or perceived adverse economic and
competitive industry conditions than higher-rated
securities. Unrated securities may be less liquid than
comparable rated securities and involve the risk that
Western Asset may not accurately evaluate the
security's comparative credit rating. Analysis of the
creditworthiness of issuers of lower grade securities
may be more complex than for issuers of higher-quality
debt obligations. To the extent that the Fund holds
lower grade and/or unrated securities, the Fund's
success in achieving its investment objectives may
depend more heavily on Western Asset's credit analysis
than if the Fund held exclusively higher-quality and
rated securities.
LEVERAGE RISK. The use of leverage--through the
issuance of preferred shares and borrowing of money
and, under certain circumstances, reverse repurchase
agreements, short sales, futures contracts, credit
default swaps, dollar roll transactions and other
investment techniques--to purchase additional
investments creates an opportunity for increased
common share net investment income dividends and
capital appreciation, but also creates special risks
for Common Shareholders. The Fund's leveraging
strategy may not be successful. Leverage is a
speculative technique that may expose the Fund to
greater risk and increased costs. Increases and
decreases in the value of the Fund's portfolio will be
magnified when the Fund uses leverage. As a result,
leverage will cause greater changes in the Fund's net
asset value. The Fund will also have to pay dividends
with respect to preferred shares and/or interest with
respect to

other forms of leverage, which may reduce the Fund's
return. This expense may be greater than the Fund's
return on the underlying investments.
It is anticipated that dividends with respect to
preferred shares and/or interest with respect to other
forms of leverage will be based on shorter-term
interest rates that would be periodically reset. The
Fund intends to invest the proceeds from the issuance
of preferred shares or the use of other forms of
leverage principally in intermediate- and longer-term
bonds. So long as the Fund's portfolio provides a
higher rate of return (net of Fund expenses) than
dividend rates on preferred shares and interest rates
on other forms of leverage, as reset periodically, the
use of leverage will allow Common Shareholders to
receive a higher current return than if the Fund were
not leveraged. If, however, shorter-term interest
rates rise relative to intermediate- and long-term
interest rates or the rate of return on the Fund's
portfolio, dividend rates on preferred shares and
interest rates on other forms of leverage could exceed
the rate of return on intermediate- and longer-term
bonds and other investments held by the Fund, reducing
the return to Common Shareholders. There can be no
assurance that the use of leverage will result in a
higher yield on the common shares. When leverage is
employed, the net asset value and market price of the
common shares and the yield to Common Shareholders
will be more volatile. The use of leverage will cause
the Fund's net asset value to fall more sharply in
response to increases in interest rates than it would
in the absence of the use of leverage. In addition,
preferred shares, if issued, are expected to pay
cumulative dividends, which may tend to increase
leverage risk.
Leverage creates two major types of risks for Common
Shareholders: the likelihood of greater volatility of
net asset value and market price of the common shares
because changes in the value of the Fund's assets,
including investments bought with the proceeds from
the use of leverage, are borne entirely by the Common
Shareholders; and the possibility either that common
share net investment income will fall if the interest
and dividend rates on leverage rise or that common
share net investment income will fluctuate because the
interest and dividend rates on leverage vary.
In addition, under certain circumstances, Common
Shareholders may not receive dividends, but holders of
preferred shares may, because preferred shares have
priority of payment over common shares. The issuance
of preferred shares will also alter the voting power
of Common Shareholders. If the Fund has preferred
shares outstanding, two of the Fund's Trustees will be
elected by the holders of preferred shares, voting
separately as a class. The remaining Trustees of the
Fund will be elected by holders of common shares and
preferred shares voting together as a single class. In
the unlikely event that the Fund fails to pay
dividends on preferred shares for two years, holders
of the preferred shares would be entitled to elect a
majority of the Trustees of the Fund.

ISSUER RISK. The value of a corporate debt instrument
may decline for a number of reasons that directly
relate to the issuer, such as management performance,
financial leverage and reduced demand for the issuer's
goods and services.
SMALLER COMPANY RISK. The general risks associated
with corporate debt obligations are particularly
pronounced for securities issued by companies with
smaller market capitalizations. These companies may
have limited product lines, markets or financial
resources, or may depend on a few key employees. As a
result, they may be subject to greater levels of
credit, interest rate and issuer risk. Securities of
smaller companies may trade less frequently and in
less volume than more widely held securities, and
their values may fluctuate more sharply than other
securities. Companies with medium-sized market
capitalizations may have risks similar to those of
smaller companies.
COUNTRY RISK. Investments in securities of non-U.S.
issuers (including those denominated in U.S. dollars)
involve certain risks not typically associated with
investments in domestic issuers. For example, the
value of those investments may decline in response to
unfavorable political and legal developments,
unreliable or untimely information, or economic and
financial instability. Settlement procedures outside
the U.S. may also involve additional risks. The risks
described in this paragraph will be greater to the
extent the Fund invests in securities of issuers based
in developing or "emerging market" countries.
PREPAYMENT RISK. Many fixed income securities,
especially those issued at high interest rates,
provide that the issuer may repay them early. Issuers
often exercise this right when interest rates decline.
Accordingly, holders of securities that may be called
or prepaid may not benefit fully from the increase in
value that other fixed income securities experience
when rates decline. Furthermore, the Fund reinvests
the proceeds of the payoff at current yields, which
are lower than those paid by the security that was
paid off.
REINVESTMENT RISK. Reinvestment risk is the risk that
income from the Fund's portfolio will decline if and
when the Fund reinvests the proceeds from matured,
traded or called bonds at market interest rates that
are below the portfolio's current earnings rate. A
decline in income could affect the common shares'
market price or their overall returns.
DERIVATIVES RISK. The Fund may invest in a variety of
derivative instruments for investment or risk
management purposes, such as options, futures
contracts and swaps. Derivatives are subject to a
number of risks described elsewhere in this
prospectus, such as interest rate risk, leverage risk
and management risk. The Fund will be subject to
credit risk with respect to the counterparties to the
derivatives contracts purchased by the Fund. If a
counterparty becomes bankrupt or otherwise fails to
perform its obligations under a derivatives contract,
the Fund may obtain only a limited recovery or may
obtain no recovery in such circumstances.

Derivative transactions also involve the risk of
mispricing or improper valuation, the risk of
ambiguous documentation and the risk that changes in
the value of a derivative may not correlate perfectly
with an underlying asset, interest rate or index.
Suitable derivative transactions may not be available
in all circumstances, and there can be no assurance
that the Fund will engage in these transactions to
reduce exposure to other risks when that would be
beneficial or that these transactions will be
successful.
INFLATION/DEFLATION RISK. Inflation risk is the risk
that the Fund's assets or income from the Fund's
investments may be worth less in the future as
inflation decreases the value of money. As inflation
increases, the real value of the Fund's portfolio
could decline. Inflation risk is expected to be
greater with respect to the Fund's investments in
securities or instruments other than U.S. TIPS.
Deflation risk is the risk that prices throughout the
economy may decline over time--the opposite of
inflation. Deflation may have an adverse effect on the
creditworthiness of issuers and may make issuer
default more likely, which may result in a decline in
the value of the Fund's portfolio. Because the
principal amounts of U.S. TIPS would be adjusted
downward during a period of deflation, the Fund will
be subject to deflation risk with respect to its
investments in such securities.
TURNOVER RISK. The length of time the Fund has held a
particular security is not generally a consideration
in investment decisions. A change in the securities
held by the Fund is known as "portfolio turnover." As
a result of the Fund's investment policies, under
certain market conditions the Fund's turnover rate may
be higher than that of other investment companies.
Portfolio turnover generally involves some expense to
the Fund, 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 transaction costs and
could give rise to a greater amount of taxable capital
gains.
MANAGEMENT RISK. The Fund is subject to management
risk because it is an actively managed investment
portfolio. Western Asset will apply investment
techniques and risk analyses in making investment
decisions for the Fund, but there can be no guarantee
that these will produce the desired results.
ANTI-TAKEOVER PROVISIONS. The Fund's Agreement and
Declaration of Trust includes provisions that could
limit the ability of other entities or persons to
acquire control of the Fund, convert the Fund to
open-end status or change the composition of the Board
of Trustees. See "Anti-Takeover and Other Provisions
in the Declaration of Trust." These provisions could
have the effect of depriving Common Shareholders of
opportunities to sell their common shares at a premium
over the then current market price of the common
shares.

MARKET DISRUPTION AND GEOPOLITICAL RISKS. The war with
Iraq, its aftermath and the continuing occupation of
the country by coalition forces are likely to have a
substantial impact on the U.S. and world economies and
securities markets. The duration and nature of the war
and occupation and the potential costs of rebuilding
the Iraqi infrastructure and political systems cannot
be predicted with any certainty. Terrorist attacks on
the World Trade Center and the Pentagon on
September 11, 2001 closed some of the U.S. securities
markets for a four-day period, and the occurrence of
similar events cannot be ruled out. The war and
occupation, terrorism and related geopolitical risks
have led, and may in the future lead, to increased
short-term market volatility and may have adverse
long-term effects on U.S. and world economies and
markets generally. Those events could also have an
acute effect on individual issuers or related groups
of issuers. These risks could also adversely affect
securities markets, interest rates, auctions,
secondary trading, ratings, credit risk, inflation,
deflation and other factors relating to the common
shares.
CERTAIN AFFILIATIONS. Certain broker-dealers may be
considered to be affiliated persons of the Fund and/or
Western Asset. Absent an exemption from the Securities
and Exchange Commission or other regulatory relief,
the Fund is generally precluded from effecting certain
principal transactions with affiliated brokers, and
its ability to purchase securities being underwritten
by an affiliated broker or a syndicate including an
affiliated broker or to utilize affiliated brokers for
agency transactions is subject to regulatory and other
restrictions. This could limit the Fund's ability to
engage in securities transactions and take advantage
of market opportunities.

SUMMARY OF FUND EXPENSES

The following table and the expenses shown below assume the use of leverage,
through the issuance of preferred shares representing 33% of total managed
assets of the Fund and the use of reverse repurchase agreements representing 5%
of total managed assets of the Fund, for an aggregate amount of leverage equal
to 38% of the Fund's total managed assets (in each case measured after the
issuance of such leverage), and show the Fund expenses as a percentage of net
assets attributable to common shares. Footnote 3 to the table also shows Fund
expenses as a percentage of net assets attributable to common shares, but
assumes that no preferred shares or reverse repurchase agreements are issued or
outstanding.

SHAREHOLDER TRANSACTION EXPENSES
Sales load (as a percentage of offering price)............ 4.50%
Offering expenses borne by the Fund (as a percentage of
offering price)......................................... .20%(1)
Dividend reinvestment plan fees........................... None(2)

PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO
COMMON SHARES (ASSUMING THE
ISSUANCE OF PREFERRED
SHARES AND REVERSE
REPURCHASE AGREEMENTS)(3)(4)
----------------------------

ANNUAL EXPENSES
Management fees................................. .65%
Interest payments on reverse repurchase
agreements(5)................................... .08%
Other expenses.................................. .48%
Total annual expenses........................... 1.21%

---------

(1) Western Asset and Claymore Securities, Inc. have agreed to (i) pay the
amount by which the Fund's offering costs (other than the sales load, but
including a $.005 per common share reimbursement of expenses to the
underwriters) exceed $.03 per common share (.20% of the offering price) and
(ii) reimburse all of the Fund's organizational expenses.

(2) A Common Shareholder that directs the plan agent to sell common shares held
in a dividend reinvestment account will pay brokerage charges.

(3) The table presented below in this footnote estimates what the Fund's annual
expenses would be stated as percentages of the Fund's net assets
attributable to common shares but, unlike the table above, assumes that no
preferred shares or reverse repurchase agreements are issued or outstanding.
In accordance with these assumptions, the Fund's expenses would be estimated
as follows:

PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO
COMMON SHARES (ASSUMING NO
PREFERRED SHARES OR REVERSE
REPURCHASE AGREEMENTS ARE
ISSUED OR OUTSTANDING)
---------------------------

ANNUAL EXPENSES
Management fees................................. .40%
Other expenses.................................. .30%
Total annual expenses........................... .70%

(4) If the Fund offers preferred shares, costs of that offering, estimated to be
approximately 1.0% of the total dollar amount of the preferred share
offering, will be borne immediately by Common Shareholders and result in a
reduction of the net asset value of the common shares. Assuming the issuance
of preferred shares in an amount equal to 33% of the Fund's total managed
assets (after their issuance) and that the Fund issues 20,000,000 common
shares, these offering costs are estimated to be $1,521,725, or $.08 per
common share (.51% of the offering price of the common shares). These
offering costs are not included among the expenses shown in this table.

(5) This amount reflects interest rate payments on reverse repurchase agreements
representing 5% of the Fund's total managed assets. The use of reverse
repurchase agreements beyond this amount, for example, as a substitute for
preferred shares during the period before their issuance, would cause this
estimate to increase accordingly. The amount shown in the table assumes an
interest rate of 1.55%. The interest rate costs of any reverse repurchase
agreements will vary over time based on market conditions.

The purpose of the table above is to help investors understand all fees and
expenses that a Common Shareholder would bear directly or indirectly. The Other
Expenses shown in the table and related footnote are based on estimated amounts
for the Fund's current fiscal year (calculated on an annualized basis) and
assume that the Fund issues approximately 20,000,000 common shares. If the Fund
issues fewer common shares, all other things being equal, these expenses as a
percentage of net assets will increase. See "Management of the Fund" and
"Dividend Reinvestment Plan."

The following example illustrates the expenses (including the sales load of
$45, estimated offering expenses of this offering of $2 and the estimated costs
of issuing preferred shares, assuming the Fund issues preferred shares
representing 33% of the Fund's total managed assets (after their issuance), of
$5.07) that a Common Shareholder would pay on a $1,000 investment in common
shares, assuming (1) total annual expenses of 1.21% of net assets attributable
to common shares (assuming the issuance of preferred shares and the use of
reverse repurchase agreements), and (2) a 5% annual return:*

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------

Total Expenses Incurred....... $63 $85 $110 $180

---------

* THE EXAMPLE ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE ASSUMED. The
example assumes that the estimated "Other Expenses" set forth in the Annual
Expenses table are accurate and that all dividends and distributions are
reinvested at net asset value. Moreover, the Fund's actual rate of return
may be greater or less than the hypothetical 5% annual return shown in the
example.

THE FUND

The Fund is a newly organized, diversified, closed-end management investment
company registered under the Investment Company Act of 1940 and the rules and
regulations thereunder, as amended (the "1940 Act"). The Fund was organized as a
Massachusetts business trust on July 14, 2003 pursuant to an Agreement and
Declaration of Trust (as amended, the "Declaration"), which is governed by the
laws of The Commonwealth of Massachusetts. As a newly organized entity, the Fund
has no operating history. The Fund's principal office is located at 117 East
Colorado Boulevard, Pasadena, California 91105, and its telephone number is
(626) 844-9400.

USE OF PROCEEDS

The net proceeds of the offering of common shares will be approximately
$ (or if the underwriters exercise the overallotment option in
full) after payment of the sales load and estimated offering costs paid by the
Fund. The Fund will invest the net proceeds of the offering in accordance with
the Fund's investment objectives and policies as stated below. It is presently
anticipated that the Fund will be able to invest substantially all of the net
proceeds in U.S. TIPS and other investments that meet its investment objectives
and policies within three months after the completion of the offering. Pending
such investment, it is anticipated that the proceeds will be invested in
short-term investment grade securities.

THE FUND'S OBJECTIVES, STRATEGIES AND INVESTMENTS

INVESTMENT OBJECTIVES

The Fund's primary investment objective is to provide current income.
Capital appreciation, when consistent with current income, is a secondary
investment objective. No assurance can be given that the Fund will achieve its
investment objectives.

PORTFOLIO CONTENTS AND MANAGEMENT STRATEGIES

GENERAL. Under normal market conditions, the Fund will invest at least 80%
of its total managed assets in U.S. TIPS. U.S. TIPS are fixed income securities
issued by the U.S. Department of the Treasury, the principal amounts of which
are adjusted daily based upon changes in the rate of inflation (currently
represented by the non-seasonally adjusted Consumer Price Index for All Urban
Consumers, calculated with a three-month lag). The Fund may invest up to 20% of
its total managed assets in corporate bonds or other securities and instruments.
The Fund will invest primarily in bonds that, in the opinion of Western Asset,
provide current income and, when consistent with current income, may have the
potential for capital appreciation. When consistent with the Fund's investment
objectives, Western Asset may, but is not required to, use a variety of
derivative instruments for risk management purposes or as part of its investment
strategies. See "Derivatives" below.

The Fund currently anticipates leveraging its portfolio by issuing preferred
shares in an aggregate amount of approximately 33% of its total managed assets.
In addition, the Fund expects to enter into reverse repurchase agreements and/or
dollar roll transactions for leveraging purposes, initially as a substitute for
all or a portion of the preferred shares it plans to issue during the period
prior to their issuance and thereafter, to the extent determined by Western
Asset, up to 38% of total managed assets (together with other forms of
leverage). The Fund also currently expects to use short sales, futures
contracts, options, credit default swaps and other investment techniques that
may in certain circumstances be considered leverage. The Fund may (but is not
required to) cover its commitments under these transactions by the segregation
of liquid assets or by entering into offsetting transactions or

owning positions covering its obligations. To the extent these transactions are
so covered, investment in these transactions will not be considered leverage for
purposes of the Fund's policy on the amount of leverage it may incur. However,
such transactions, even if so covered, represent a form of economic leverage
(although they will not be considered "leverage" for purposes of calculating
total managed assets), and thus entail special risks. See "Risks--Leverage
Risk." While the Fund does not currently anticipate borrowing funds from banks
or other financial institutions in order to leverage its portfolio, it may do so
in the future.

Upon Western Asset's recommendation, during temporary defensive periods
(including the period during which the net proceeds of this offering or of the
offering of the preferred shares are being invested) and in order to keep the
Fund's cash fully invested, the Fund may invest up to 100% of its total managed
assets in short-term investments, including, but not limited to, U.S. government
securities, certificates of deposit, bankers' acceptances, commercial paper and
repurchase agreements. Such periods will not be considered "normal market
conditions" for purposes of the 80% test described above. The Fund may not
achieve its investment objectives under these circumstances.

The Fund may borrow money in an amount up to 5% of its total assets as a
temporary measure for extraordinary or emergency purposes, including the payment
of dividends and the settlement of securities transactions that otherwise might
require untimely dispositions of Fund securities. Such borrowings are not
considered leverage for purposes of the Fund's policy on the amount of leverage
it may incur.

The Fund cannot change its investment objectives without the approval of the
holders of a "majority of the outstanding" common shares and, if any preferred
shares are issued, the preferred shares voting together as a single class. In
addition, the holders of a "majority of the outstanding" preferred shares voting
separately as a class would have to approve any change in the Fund's investment
objectives. Under the 1940 Act, a "majority of the outstanding" shares (whether
voting together as a single class or voting as a separate class) means (1) 67%
or more of the outstanding shares present at a meeting, if the holders of more
than 50% of the shares are present or represented by proxy, or (2) more than 50%
of the outstanding shares, whichever is less. See "Description of
Shares--Preferred Shares--Voting Rights" and the Statement of Additional
Information under "Description of Shares--Preferred Shares" for additional
information with respect to the voting rights of holders of preferred shares.

So long as and to the extent it is required by applicable law, the Fund will
not change its policy to invest, under normal market conditions, at least 80% of
its total managed assets in U.S. TIPS unless it provides shareholders with at
least 60 days' written notice of such change.

CREDIT QUALITY. The Fund will not invest in bonds that are below investment
grade quality at the time of purchase. Investment grade quality bonds are bonds
rated within a rating agency's four highest grades (Baa or BBB or higher by
Moody's, S&P or Fitch or a similar rating of another nationally recognized
rating agency) or bonds that are unrated but judged to be of comparable quality
by Western Asset. If a bond is rated differently by two or more nationally
recognized rating agencies, Western Asset may rely on the higher rating if it
believes that rating to be more accurate. The Fund expects that the initial
dollar-weighted credit quality of its bond portfolio (upon full investment of
the proceeds of the offering) will be AA, and that, under normal market
conditions, substantially all of the Fund's assets will be of investment grade
quality. However, the portfolio's credit quality will vary from time to time.
Changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity for bonds that are graded Baa or BBB (or that are of
comparable quality) to make principal and interest payments than is the case for
higher quality bonds. Although the Fund will not invest in bonds that are below
investment grade quality at the time of purchase, the Fund is not required to

dispose of a security if a rating agency or Western Asset downgrades its
assessment of the credit characteristics of a particular issue. As a result, the
Fund may from time to time hold bonds of below investment grade quality. As
described under "Risks--Lower Grade and Unrated Securities Risk," bonds of below
investment grade quality are regarded as having predominately speculative
characteristics with respect to the issuer's capacity to pay interest and repay
principal and are commonly referred to as "junk bonds." The Fund may purchase
unrated securities (which are not rated by a rating agency) if Western Asset
determines that the securities are of a quality comparable to rated securities
that the Fund may purchase.

The Fund's credit quality policies depend in part on credit ratings
developed by rating agencies such as Moody's, S&P and Fitch. Rating agencies are
private services that provide ratings of the credit quality of debt obligations,
including convertible securities. Ratings assigned by a rating agency are not
absolute standards of credit quality and do not evaluate market risks. Rating
agencies may fail to make timely changes in credit ratings and an issuer's
current financial condition may be better or worse than a rating indicates. The
ratings of a debt security may change over time. Rating agencies monitor and
evaluate the ratings assigned to securities on an ongoing basis. As a result,
rated debt instruments held by the Fund could receive a higher rating (which
would tend to increase their value) or a lower rating (which would tend to
decrease their value) during the period in which they are held. See "Risks--
Lower Grade and Unrated Securities Risk."

The credit quality policies described in this prospectus and the Statement
of Additional Information apply only at the time a security is purchased, and,
as noted above, the Fund is not required to dispose of a security if a rating
agency or Western Asset downgrades its assessment of the credit characteristics
of a particular issue. In determining whether to retain or sell such a security,
Western Asset may consider such factors as its assessment of the credit quality
of the issuer of the security, the price at which the security could be sold and
the rating, if any, assigned to the security by other rating agencies. For
purposes of the Fund's credit quality policies, the Fund will consider a bond
that has been assigned any rating by a rating agency within the category Baa/BBB
to be rated Baa/BBB grade by such rating agency (E.G., a bond rated BBB- will be
considered to be a bond graded BBB). Appendix A to the Statement of Additional
Information contains a general description of Moody's, S&P's and Fitch's ratings
of debt securities.

DURATION. As part of the management of the Fund, Western Asset will manage
the effective duration of the Fund's portfolio. The Fund currently expects that
the average effective duration of its portfolio will range between zero and 15
years, although this target duration may change from time to time. Effective
duration measures the expected sensitivity of market price to changes in
interest rates, taking into account the effects of structural complexities. Each
year of duration represents an expected 1% change in the price of a bond for
every 1% change in interest rates. For example, if a bond has a duration of four
years, its price will fall about 4% when interest rates rise by 1%. Conversely,
the bond's price will rise about 4% when interest rates fall by 1%.

INVESTMENTS

U.S. TIPS. Under normal market conditions, the Fund will invest at least 80%
of its total managed assets in U.S. TIPS. U.S. TIPS are fixed income securities
issued by the U.S. Department of the Treasury, the principal amounts of which
are adjusted daily based upon changes in the rate of inflation (currently
represented by the non-seasonally adjusted Consumer Price Index for All Urban
Consumers, calculated with a three-month lag).

with maturities of five, ten or thirty years. U.S. TIPS pay interest on a
semi-annual basis, equal to a fixed percentage of the inflation-adjusted
principal amount. The interest rate on these bonds is fixed at issuance, but
over the life of the bond, this interest may be paid on an increasing or
decreasing principal value that has been adjusted for inflation. Repayment of
the original bond principal upon maturity (as adjusted for inflation) is
guaranteed even during a period of deflation. However, because the principal
amount of U.S. TIPS would be adjusted downward during a period of deflation, the
Fund will be subject to deflation risk with respect to its investments in these
securities. In addition, the current market value of the bonds is not
guaranteed, and will fluctuate. If the Fund purchases U.S. TIPS in the secondary
market whose principal values have been adjusted upward due to inflation since
issuance, the Fund may experience a loss if there is a subsequent period of
deflation. If inflation is lower than expected during the period the Fund holds
a U.S. TIPS, the Fund may earn less on the security than on a conventional bond.

Investing in U.S. TIPS involves certain risks. See "Risks--Risks Relating to
U.S. TIPS." The Fund may invest in inflation-protected securities with other
structures or characteristics as such securities become available in the market.
It is currently expected that other types of inflation-protected securities
would have characteristics similar to those described above.

U.S. GOVERNMENT SECURITIES. The Fund intends to invest primarily in U.S.
TIPS, which are a type of U.S. government security, and may also invest in other
types of U.S. government securities. U.S. government securities are obligations
of, or guaranteed by, the U.S. government, its agencies or government-sponsored
enterprises. U.S. government securities include a variety of securities that
differ in their interest rates, maturities and dates of issue. Securities issued
or guaranteed by agencies or instrumentalities of the U.S. government may or may
not be supported by the full faith and credit of the United States or by the
right of the issuer to borrow from the U.S. Treasury. U.S. government securities
are subject to interest rate risk, and, in some cases, may be subject to credit
risk.

CORPORATE BONDS. The Fund may invest in corporate bonds. The investment
return of corporate bonds reflects interest on the security and changes in the
market value of the security. The market value of a corporate bond generally may
be expected to rise and fall inversely with interest rates, and may also be
affected by the credit rating of the corporation, the corporation's performance,
perceptions of the corporation in the marketplace and general market liquidity.
The value of the intermediate- and longer-term corporate bonds in which the Fund
generally will invest normally fluctuates more in response to changes in
interest rates than does the value of shorter-term corporate bonds. There is a
risk that the issuers of corporate bonds may not be able to meet their
obligations on interest or principal payments at the time called for by a bond.

REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL TRANSACTIONS. A reverse
repurchase agreement is a portfolio management technique in which the Fund
temporarily transfers possession of a portfolio instrument to another person,
such as a financial institution or broker-dealer, in return for cash, which the
Fund then uses to purchase additional investments. At the same time, the Fund
agrees to repurchase the instrument at an agreed upon time (normally within
seven days) and price, including an interest payment. While engaging in reverse
repurchase agreements, the Fund may maintain cash or securities in a segregated
account or may otherwise enter into positions that would cover such obligations.
To the extent assets are segregated or the Fund's obligation is otherwise
"covered" (as described in "Preferred Shares and Other Leverage--Other Forms of
Leverage"), these instruments will not be considered leverage for purposes of
the 1940 Act, and thus will not be subject to the 300% asset coverage test
described under "Preferred Shares and Other Leverage." However, the Fund
considers such instruments to be leverage for purposes of its policy on the
amount of leverage it may incur. Under current market conditions, the Fund
currently expects to engage in reverse repurchase agreements and dollar roll
transaction during the period prior to the issuance of any preferred shares, as
a

substitute form of leverage for all or a portion of such preferred shares.
Reverse repurchase agreements may expose the Fund to greater fluctuations in the
value of its assets and render the segregated assets unavailable for sale or
other disposition.

The Fund may also enter into dollar roll transactions in which the Fund
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 a dollar
roll transaction the Fund forgoes 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 Fund 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 the Fund 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, the Fund may be adversely affected. In addition, the
interest costs associated with reverse repurchase agreements and dollar roll
transactions will reduce the Fund's net asset value and could, in some
circumstances, leave the Fund worse off than if it had not used such
instruments. For purposes of calculating the Fund's total managed assets, any
liability associated with reverse repurchase agreements or dollar roll
transactions will not be taken into account.

SHORT SALES. A short sale is a transaction in which the Fund sells an
instrument that it does not own in anticipation that the market price will
decline. The Fund may use short sales for investment and risk management
purposes. When the Fund engages in a short sale, it must borrow the security
sold short and deliver it to the counterparty. The Fund may have to pay a fee to
borrow particular securities and would often be obligated to pay over any
payments received on such borrowed securities. The Fund's obligation to replace
the borrowed security will be secured by collateral deposited with the lender,
which is usually a broker-dealer, and/or with the Fund's custodian. The Fund may
not receive any payments (including interest) on its collateral. Short sales
expose the Fund to the risk that it will be required to cover its short position
at a time when the securities have appreciated in value, thus resulting in a
loss to the Fund. Although it does not currently expect to do so under normal
market conditions, the Fund may engage in so-called "naked" short sales where it
does not own or have the immediate right to acquire the security sold short at
no additional cost, in which case the Fund's losses could be unlimited.

CREDIT DEFAULT SWAPS. The Fund may enter into credit default swap contracts
for investment purposes and to leverage its portfolio. As the seller in a credit
default swap contract, the Fund would be required to pay the par (or other
agreed-upon) value of a referenced debt obligation to the counterparty in the
event of a default by a third party, such as a corporate issuer, on the debt
obligation. In return, the Fund would receive from the counterparty a periodic
stream of payments over the term of the contract provided that no event of
default had occurred. These payments are based on the difference between an
interest rate applicable to the relevant issuer and a benchmark interest rate
for a given maturity. If no default occurred, the Fund would keep the stream of
payments and would have no payment obligations. As the seller, the Fund would
effectively add leverage to its portfolio because, in addition to its total
managed assets, the Fund would be subject to investment exposure on the notional
amount of the swap.

For hedging purposes, the Fund may also purchase credit default swaps, in
which case it would make periodic payments to the counterparty in exchange for
the right to receive the notional value of the underlying debt obligation in the
event of a default. The Fund may (but is not required to) cover any accrued but
unpaid net amounts owed to a swap counterparty through the segregation of liquid

assets. To the extent assets are segregated, these transactions will not be
considered leverage for purposes of the Fund's policy on the amount of leverage
it may incur.

LOANS OF PORTFOLIO SECURITIES. The Fund may lend its portfolio securities in
order to earn income. The Fund will receive collateral in cash or high quality
securities at least equal to the current value of the loaned securities. The
Fund earns interest on the securities it lends and income when it invests the
collateral for the loaned securities. These loans will be limited to 33 1/3% of
the value of the Fund's total assets.

DERIVATIVES. The Fund may, but is not required to, use a variety of
derivative instruments for risk management purposes or as part of its investment
strategies. Generally, derivatives are financial contracts whose value depends
upon, or is derived from, the value of an underlying asset, reference rate or
index, and often may relate to individual debt instruments, interest rates,
commodities and related indexes. Examples of derivative instruments that the
Fund may use include options contracts, futures contracts, options on futures
contracts, warrants and swaps. The Fund's use of derivative instruments involves
risks different from, or possibly greater than, the risks associated with
investment directly in securities and other more traditional investments. See
"Risks--Derivatives Risk."

WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT TRANSACTIONS. The Fund
may buy and sell bonds on a when-issued, delayed delivery or forward commitment
basis, with settlement occurring at a later date, normally within 45 days of the
trade date. These transactions involve risk because no interest accrues on the
bonds prior to settlement and because the value of the bonds at time of delivery
may be less (or more, in the case of a sale by the Fund) than cost (or the
agreed upon price). When such transactions are outstanding, the Fund may
segregate until the settlement date assets determined to be liquid by Western
Asset in an amount sufficient to meet its obligations. To the extent assets are
segregated, these transactions will not be considered leverage for purposes of
the Fund's policy on the amount of leverage it may incur.

PREFERRED STOCK. The Fund may invest in preferred stock. 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. Holders of preferred stock may also suffer a loss of value if
dividends are not paid. Under ordinary circumstances, preferred stock does not
carry voting rights.

STRUCTURED NOTES AND RELATED INSTRUMENTS. The Fund may invest in
"structured" notes and other related instruments, which are privately negotiated
debt obligations the principal and/or interest of which is determined by
reference to the performance of a benchmark asset or market (an "embedded
index"), such as selected securities or an index of securities, or the
differential performance of two assets or markets, such as indices reflecting
bonds. Structured instruments may be issued by corporations and banks as well as
by governmental agencies. Structured instruments frequently are assembled in the
form of medium-term notes, but a variety of forms are available and may be used
in particular circumstances. The terms of such structured instruments normally
provide that their principal and/or interest payments are to be adjusted upwards
or downwards (but ordinarily not below zero) to reflect changes in the embedded
index while the structured instruments are outstanding. As a result, the
interest and/or principal payments that may be made on a structured product may
vary widely, depending on a variety of factors, including the volatility of the
embedded index and the effect of changes in the embedded index on principal
and/or interest payments. Western Asset may utilize structured instruments for
investment purposes and also for risk management purposes, such as to reduce the
duration and interest rate sensitivity of the Fund's portfolio.

While structured instruments may offer the potential for a favorable rate of
return from time to time, they also entail certain risks. Structured instruments
may be less liquid than other debt securities, and the price of structured
instruments may be more volatile. In some cases, depending on the terms of the
embedded index, a structured instrument may provide that the principal and/or
interest payments may be adjusted below zero. Structured investments may also
involve significant credit risk and risk of default by the counterparty.
Although structured instruments are not necessarily illiquid, Western Asset
believes that most structured instruments are illiquid. Like other sophisticated
strategies, the Fund's use of structured instruments may not work as intended.
If the value of the embedded index changes in a manner other than that expected
by Western Asset, principal and/or interest payments received on the structured
instrument may be substantially less than expected. In addition, if Western
Asset uses structured instruments to reduce the duration of the Fund's
portfolio, this may limit the Fund's return when having a longer duration would
be beneficial (for instance, when interest rates decline).

OTHER INVESTMENT COMPANIES. The Fund may invest in securities of other
closed-end or open-end investment companies that invest primarily in bonds or
other securities and instruments of the types in which the Fund may invest
directly. The Fund may invest in other investment companies during periods when
it has large amounts of uninvested cash, such as the period shortly after the
Fund receives the proceeds of the offering of its common shares or preferred
shares, during periods when there is a shortage of attractive bonds available in
the market, or when Western Asset believes share prices of other investment
companies offer attractive values. The Fund may invest in investment companies
that are advised by Western Asset or its affiliates to the extent permitted by
applicable law and/or pursuant to exemptive relief from the Securities and
Exchange Commission. As a stockholder in an investment company, the Fund will
bear its ratable share of that investment company's expenses, and would remain
subject to payment of the Fund's management fees and other expenses with respect
to assets so invested. Common Shareholders would therefore be subject to
duplicative expenses to the extent the Fund invests in other investment
companies. Western Asset will take expenses into account when evaluating the
investment merits of an investment in an investment company relative to
available bond investments. In addition, the securities of other investment
companies may also be leveraged and will therefore be subject to the same
leverage risks described herein. As described in the sections entitled
"Risks--Leverage Risk" and "Preferred Shares and Other Leverage," the net asset
value and market value of leveraged shares will be more volatile and the yield
to shareholders will tend to fluctuate more than the yield generated by
unleveraged shares. Other investment companies may have investment policies that
differ from those of the Fund. In addition, to the extent the Fund invests in
other investment companies, the Fund will be dependent upon the investment and
research abilities of persons other than Western Asset. For purposes of the
Fund's investment policies, an investment in such investment companies will be
(1) treated as an investment in U.S. TIPS (to the extent the underlying
investment company invests under normal market conditions at least 80% of its
total assets in U.S. TIPS) and (2) assigned a credit rating deemed appropriate
by Western Asset.

NEW SECURITIES AND OTHER INVESTMENT TECHNIQUES. New types of securities and
other investment and hedging practices are developed from time to time. Western
Asset expects, consistent with the Fund's investment objectives and policies, to
invest in such new types of securities and to engage in such new types of
investment practices if Western Asset believes that these investments and
investment techniques may assist the Fund in achieving its investment
objectives. In addition, Western Asset may use investment techniques and
instruments that are not specifically described herein.

PREFERRED SHARES AND OTHER LEVERAGE

PREFERRED SHARES

Under current market conditions, the Fund anticipates that it will offer
preferred shares, within one to three months of the completion of this offering,
representing approximately 33% of the Fund's total managed assets, measured
immediately after the issuance of the preferred shares. There is no assurance
that the Fund will issue preferred shares.

If issued, the preferred shares would have complete priority upon
distribution of assets over the common shares. The issuance of preferred shares
will leverage the common shares. The use of leverage involves special risks, and
there is no assurance that the Fund's leveraging strategy will be successful.
Although the timing and other terms of the offering of the preferred shares will
be determined by the Fund's Board of Trustees, the Fund expects to invest the
net proceeds of the preferred shares in intermediate- to longer-term bonds and
other instruments in accordance with the Fund's investment objectives and
policies. The preferred shares will pay dividends based on shorter-term rates
(which would be redetermined periodically by an auction or similar process). So
long as the Fund's portfolio is invested in securities that provide a higher
rate of return than the dividend rate of the preferred shares (after taking
expenses into consideration), the issuance of preferred shares will allow Common
Shareholders to receive a higher current rate of return than if the Fund were
not so leveraged.

Changes in the value of the Fund's portfolio (including investments bought
with the proceeds of the preferred shares offering) will be borne entirely by
the Common Shareholders. If there is a net decrease (or increase) in the value
of the Fund's investment portfolio, the leverage will decrease (or increase) the
net asset value per common share to a greater extent than if the Fund were not
leveraged. During periods in which the Fund is using leverage, the fees paid to
Western Asset and to Claymore Securities, Inc. as shareholder servicing agent
will be higher than if the Fund did not use leverage because the fees paid will
be calculated on the basis of the Fund's average weekly assets, including the
proceeds from the issuance of preferred shares or other leverage. See
"Risks--Leverage Risk" and "Management of the Fund--Investment Advisor" and
"Servicing Agent." In addition, fees and expenses paid by the Fund are borne
entirely by the Common Shareholders (and not by the holders of preferred shares,
if any). These include costs associated with any offering of preferred shares by
the Fund (which costs are estimated to be approximately 1.0% of the total dollar
amount of a preferred share offering), which will be borne immediately by the
Common Shareholders (as will the costs associated with any borrowings or other
forms of leverage utilized by the Fund) and result in a reduction of the net
asset value of the common shares.

Under the 1940 Act, the Fund is not permitted to issue preferred shares
unless immediately after such issuance the Fund meets the applicable asset
coverage requirements of the 1940 Act (the "1940 Act Asset Coverage Test"). This
test requires that the value of the Fund's total assets, less all liabilities
and indebtedness not representing senior securities (as defined in the 1940
Act), be at least 200% of the liquidation value of the outstanding preferred
shares and the amount of certain other outstanding forms of leverage.
"Liquidation value" means the original purchase price of the shares being
liquidated plus any accrued and unpaid dividends. In addition, the Fund is not
permitted to declare any cash dividend or other distribution on its common
shares unless, at the time of such declaration, the 1940 Act Asset Coverage Test
is satisfied. If preferred shares are issued, the Fund intends, to the extent
possible, to purchase or redeem preferred shares from time to time to the extent
necessary in order to meet the 1940 Act Asset Coverage Test. If the Fund has
preferred shares outstanding, two of the Fund's Trustees will be elected by the
holders of preferred shares, voting separately as a class. The remaining
Trustees of the Fund will be elected by holders of common shares and preferred
shares voting together as a single class. In the unlikely event that the Fund
fails to pay dividends on preferred

shares for two years, holders of the preferred shares would be entitled to elect
a majority of the Trustees of the Fund.

The Fund may be subject to certain restrictions imposed by guidelines of one
or more rating agencies that may issue a rating or ratings for preferred shares
issued by the Fund. These guidelines may impose asset coverage and portfolio
composition requirements that are more stringent than those imposed on the Fund
by the 1940 Act or the Fund's own policies. Such guidelines could limit the
Fund's investment flexibility and affect the return on the common shares.
However, it is not currently anticipated that these covenants or guidelines will
significantly impede Western Asset from managing the Fund's portfolio in
accordance with the Fund's investment objectives.

EFFECTS OF LEVERAGE

Assuming that the Fund issues preferred shares and enters into reverse
repurchase agreements equal to 38% of the Fund's total managed assets and that
the average annual preferred share dividend rate and reverse repurchase
agreement interest rate are 1.55%, the income generated by the Fund's portfolio
(net of estimated expenses) must exceed .59% in order to cover the dividend
payments on the preferred shares and interest payments on the reverse repurchase
agreements. Of course, these numbers are merely estimates used for illustration.
Actual preferred share dividend rates and reverse repurchase agreement interest
rates will vary frequently and may be significantly higher or lower than the
rate estimated above.

The following table is designed to illustrate the effect of leverage on
common share total return, assuming investment portfolio total returns
(consisting of income and changes in the value of investments held in the Fund's
portfolio) of -10%, -5%, 0%, 5% and 10%. These assumed investment portfolio
returns are hypothetical figures and are not necessarily indicative of the
investment portfolio returns experienced or expected to be experienced by the
Fund. The table further reflects the issuance of preferred shares and the use of
reverse repurchase agreements representing in the aggregate 38% of the Fund's
total managed assets and the Fund's currently projected annual preferred share
dividend rate and reverse repurchase agreement interest rate of 1.55%.

Assumed Portfolio Total
Return
(Net of Expenses)...... (10.00)% (5.00)% 0 % 5.00% 10.00%
Common Share Total
Return................. (17.08)% (9.01)% (.95)% 7.11% 15.18%

Common share total return is composed of two elements--the common share
dividends paid by the Fund (the amount of which is largely determined by the net
investment income of the Fund after paying dividends on preferred shares) and
gains or losses on the value of the securities the Fund owns. As required by
Securities and Exchange Commission rules, the preceding table assumes that the
Fund is more likely to suffer capital losses than to enjoy capital appreciation.
For example, to assume a total return of 0%, the Fund must assume that the net
investment income it receives on its investments is entirely offset by losses in
the value of those investments. This table reflects the performance of the
Fund's portfolio and not the performance of the Fund's common shares, the value
of which will be determined by market forces and other factors.

OTHER FORMS OF LEVERAGE

In addition to the issuance of preferred shares, the Fund may use a variety
of other strategies to leverage its portfolio. The Fund currently expects to use
reverse repurchase agreements, short sales, options, futures contracts, credit
default swaps, dollar rolls and/or other investment techniques for these
purposes. The Fund may (but is not required to) cover its commitments under
these instruments by the segregation of liquid assets or by entering into
offsetting transactions or owning positions covering its obligations. To the
extent these instruments are so covered, (1) they will not be considered "senior

securities" under the 1940 Act and therefore will not be subject to the 300%
asset coverage requirement otherwise applicable to forms of leverage other than
preferred shares issued by the Fund (see below) and (2) investments in these
instruments (other than reverse repurchase agreements and dollar roll
transactions) will not be considered leverage for purposes of the Fund's policy
on the amount of leverage it may incur or considered "leverage" for purposes of
total managed assets. The Fund's use of preferred shares, reverse repurchase
agreements or dollar roll transactions (whether or not covered) and other forms
of leverage will not exceed 38% of its total managed assets, measured
immediately after the issuance of the leverage. Although the Fund does not
currently intend to borrow from banks or other financial institutions or issue
commercial paper in order to leverage its portfolio, it may do so in the future.
By adding additional leverage, these strategies have the potential to increase
returns to Common Shareholders, but also involve additional risks, including
those leverage risks described above with respect to preferred shares.
Additional leverage will increase the volatility of the Fund's investment
portfolio and could result in larger losses than if the strategies were not
used.

Under the 1940 Act, the Fund generally is not permitted to engage in most
forms of leverage other than preferred shares (including through the use of bank
borrowings, the issuance of commercial paper or the use of reverse repurchase
agreements, credit default swaps, dollar roll transactions and other derivatives
to the extent that these instruments are not covered) unless immediately after
the issuance of the leverage the Fund has satisfied the asset coverage test with
respect to indebtedness prescribed by the 1940 Act, I.E., the value of the
Fund's total assets less liabilities (other than the leverage and other senior
securities) is at least 300% of the principal amount of such leverage. In
addition, the Fund is not permitted to declare any cash dividend or other
distribution on common shares unless, at the time of such declaration, such
asset coverage test is satisfied. If the Fund borrows, it intends, to the extent
possible, to prepay a portion of the principal amount of the borrowing to the
extent necessary in order to maintain the required asset coverage. Failure to
maintain certain asset coverage requirements could result in an event of
default.

RISKS
NO OPERATING HISTORY

The Fund is a newly organized, diversified, closed-end management investment
company with no operating history.

INVESTMENT RISK

An investment in the Fund is subject to investment risk, including the
possible loss of the entire amount that you invest.

MARKET DISCOUNT RISK

Shares of closed-end management investment companies frequently trade at a
discount from their net asset value, and the Fund's shares may trade at a price
that is less than the initial offering price. Net asset value will be reduced
immediately following the initial offering by a 4.5% sales load charge and
offering costs paid by the Fund. The risk of investing in a newly organized,
closed-end investment company may be greater for investors who sell their shares
in a relatively short period of time after completion of the initial offering.
The common shares are designed for long-term investors and should not be treated
as trading vehicles.

INTEREST RATE RISK

Interest rate risk is the risk that bonds (and the Fund's total managed
assets) will change in value because of changes in interest rates. This is true
of all bonds, including U.S. TIPS. Generally, bonds

will decrease in value when interest rates rise and increase in value when
interest rates decline. This means that the net asset value of the Fund will
fluctuate with interest rate changes and the corresponding changes in the value
of the Fund's bond holdings. Because market interest rates are currently near
their lowest levels in many years, there is a greater risk that the Fund's
portfolio will decline in value. The value of the intermediate- and longer-term
bonds in which the Fund generally will invest normally fluctuates more in
response to changes in interest rates than does the value of shorter-term bonds.
Because the Fund will invest primarily in intermediate-to-longer-term bonds, the
common share net asset value and market price per share will fluctuate more in
response to changes in market interest rates than if the Fund invested primarily
in shorter-term bonds. The Fund's use of leverage will increase common share
interest rate risk. See "--Leverage Risk."

The Fund may utilize certain strategies, including swaps, futures contracts,
options on futures and options based on U.S. Treasury securities, for the
purpose of reducing the interest rate sensitivity of the portfolio, although
there is no assurance that it will do so or that such strategies will be
successful. See "How the Fund Manages Risk--Hedging and Related Strategies."

RISKS RELATING TO U.S. TIPS

The value of inflation-protected securities such as U.S. TIPS generally
fluctuates in response to changes in real interest rates, which are in turn tied
to the relationship between nominal interest rates and the rate of inflation.
Therefore, if inflation were to rise at a faster rate than nominal interest
rates, real interest rates might decline, leading to an increase in value of
U.S. TIPS. In contrast, if nominal interest rates increased at a faster rate
than inflation, real interest rates might rise, leading to a decrease in value
of U.S. TIPS. Although the principal value of U.S. TIPS declines in periods of
deflation, holders at maturity receive no less than the par value of the bond.
However, if the Fund purchases U.S. TIPS in the secondary market whose principal
values have been adjusted upward due to inflation since issuance, the Fund may
experience a loss if there is a subsequent period of deflation. If inflation is
lower than expected during the period the Fund holds a U.S. TIPS, the Fund may
earn less on the security than on a conventional bond.

Any increase in principal value caused by an increase in the index
(described below) is taxable in the year the increase occurs, even though the
Fund will not receive cash representing the increase at that time. As a result,
the Fund could be required at times to liquidate other investments, including
when it is not advantageous to do so, in order to satisfy its distribution
requirements as a regulated investment company under the Code. See "Tax
Matters."

If real interest rates rise (I.E., if interest rates rise for reasons other
than inflation (for example, due to changes in currency exchange rates)), the
value of the U.S. TIPS in the Fund's portfolio will decline. Moreover, because
the principal amount of U.S. TIPS would be adjusted downward during a period of
deflation, the Fund will be subject to deflation risk with respect to its
investments in these securities.

The daily adjustment of the principal value of U.S. TIPS is currently tied
to the non-seasonally adjusted Consumer Price Index for All Urban Consumers,
which is calculated monthly by the U.S. Bureau of Labor Statistics. The Consumer
Price Index for All Urban Consumers, which is calculated using a three-month lag
for purposes of determining the principal value of U.S. TIPS, is a measurement
of changes in the cost of living, made up of components such as housing, food,
transportation and energy. There can no assurance that such index will
accurately measure the real rate of inflation in the prices of goods and
services. The three-month lag in the calculation of the Consumer Price Index for
All Urban Consumers could have a negative impact on the value of U.S. TIPS under
certain market conditions.

The U.S. Treasury only began issuing inflation-protected securities in 1997,
and the market for such securities may be less developed or liquid, and more
volatile, than certain other securities markets as a result. The U.S. Treasury
currently issues U.S. TIPS in only ten-year maturities, although U.S. TIPS with
different maturities have been issued in the past and may be issued in the
future.

CREDIT RISK

Credit risk is the risk that the Fund could lose money if the issuer of a
debt obligation, or the counterparty to a derivatives contract, reverse
repurchase agreement, loan of portfolio securities or similar transaction, is
unable or unwilling to make timely principal and/or interest payments, or
otherwise to honor its obligations. In addition, a bond held by the Fund could
decline in price because the issuer of the bond experiences or is perceived to
experience a decline in its financial status.

Not all U.S. government securities are backed by the full faith and credit
of the United States. Some securities, such as securities issued by Freddie Mac,
are backed only by the credit of the issuing agency or instrumentality.
Accordingly, credit risk exists with respect to these securities.

LOWER GRADE AND UNRATED SECURITIES RISK

Although the Fund will not invest in bonds that are below investment grade
quality at the time of purchase, the Fund is not required to dispose of a
security if a rating agency or Western Asset downgrades its assessment of the
credit characteristics of a particular issue. As a result, the Fund may from
time to time hold bonds of below investment grade quality. Holding lower grade
securities involves special risks in addition to the risks associated with
investments in investment grade debt obligations. While offering a greater
potential opportunity for capital appreciation and higher yields, lower grade
securities typically entail greater potential price volatility and may be less
liquid than higher-rated securities. Lower grade securities are regarded as
having predominately speculative characteristics with respect to the issuer's
capacity to pay interest and repay principal and are commonly referred to as
"junk bonds." These securities may also be more susceptible to real or perceived
adverse economic and competitive industry conditions than higher-rated
securities. Debt securities in the lowest investment grade category may also be
considered to possess some speculative characteristics.

The market values of lower grade securities tend to reflect individual
developments of the issuer to a greater extent than do higher-quality
securities, which tend to react mainly to fluctuations in the general level of
interest rates. Certain emerging market governments that issue lower grade
securities are among the largest debtors to commercial banks, governments and
supra-national organizations such as the World Bank, and may not be able or
willing to make principal and/or interest payments as they come due.

Unrated securities may be less liquid than comparable rated securities and
involve the risk that Western Asset may not accurately evaluate the security's
comparative credit rating. Analysis of the creditworthiness of issuers of lower
grade securities may be more complex than for issuers of higher-quality debt
obligations. To the extent that the Fund holds lower grade and/or unrated
securities, the Fund's success in achieving its investment objectives may depend
more heavily on Western Asset's credit analysis than if the Fund held
exclusively higher-quality and rated securities.

LEVERAGE RISK

The use of leverage--through the issuance of preferred shares and borrowing
of money and, under certain circumstances, reverse repurchase agreements, short
sales, futures contracts, credit default

swaps, dollar roll transactions and other investment techniques (see "Preferred
Shares and Other Leverage--Other Forms of Leverage")--to purchase additional
investments creates an opportunity for increased common share net investment
income dividends, but also creates special risks for Common Shareholders.
Leverage is a speculative technique that will expose the Fund to greater risk
and increased costs. Increases and decreases in the value of the Fund's
portfolio will be magnified when the Fund uses leverage. As a result, leverage
may cause greater changes in the Fund's net asset value. The Fund will also have
to pay dividends with respect to preferred shares and/or interest with respect
to other forms of leverage, which may reduce the Fund's return, and this
dividend and interest expense may be greater than the Fund's return on the
underlying investment. There is no assurance that the Fund's leveraging strategy
will be successful.

If leverage is employed, the net asset value and market value of the common
shares will be more volatile, and the yield to Common Shareholders will tend to
fluctuate with changes in the shorter-term dividend rates on any preferred
shares and interest rates on other forms of leverage. The Fund anticipates that
any preferred shares, at least initially, would likely pay cumulative dividends
at rates determined over relatively shorter-term periods, by providing for the
periodic redetermination of the dividend rate through an auction or similar
process. See "Description of Shares--Preferred Shares." Likewise, the Fund
anticipates that interest rates on other forms of leverage, if incurred, will
also be based on shorter-term rates. The rates of return on
intermediate-to-longer-term bonds, such as those in which the Fund expects
primarily to invest, are typically, although not always, higher than
shorter-term rates of return. If the interest and dividend rates on leverage
approach the net rate of return on the Fund's investment portfolio, the benefit
of leverage to Common Shareholders will be reduced. If the interest and dividend
rates on leverage exceed the net rate of return on the Fund's portfolio, the
leverage will result in a lower rate of return to Common Shareholders than if
the Fund were not leveraged. Because market interest rates are currently near
their lowest levels in many years, there is a greater risk that the Fund's
portfolio will decline in value. Since the intermediate- and longer-term bonds
included in the Fund's portfolio will typically pay fixed rates of interest
while the interest rates on the leverage will be adjusted periodically, this
could occur even when both longer-term and shorter-term rates rise. In addition,
the Fund will pay (and Common Shareholders will bear) any costs and expenses
relating to the use of any leverage. Accordingly, there can be no assurance that
the use of leverage would result in a higher yield or return to Common
Shareholders.

Similarly, any decline in the net asset value of the Fund's investments will
be borne entirely by Common Shareholders. Therefore, if the market value of the
Fund's portfolio declines, any leverage will result in a greater decrease in net
asset value to Common Shareholders than if the Fund were not leveraged. Such
greater net asset value decrease will also tend to cause a greater decline in
the market price for the common shares. In these cases, the Fund might be in
danger of failing to maintain the required 200% asset coverage on the preferred
shares or the required 300% asset coverage on forms of leverage other than
preferred shares, or of losing its expected AAA/Aaa ratings on the preferred
shares. In an extreme case, the Fund's current investment income might not be
sufficient to meet the dividend requirements on the preferred shares. This could
occur, for example, if the yield curve becomes inverted (I.E., short term
interest rates are higher than long term interest rates). In order to counteract
such an event, the Fund might need to liquidate investments in order to pay a
dividend on preferred shares or fund a redemption of some or all of the
preferred shares. Liquidation at times of low bond prices may result in capital
loss and may reduce returns to Common Shareholders.

While the Fund may from time to time consider reducing leverage in response
to actual or anticipated changes in interest rates in an effort to mitigate the
increased volatility of current income and net asset value associated with
leverage, there can be no assurance that the Fund will actually reduce leverage
in the future or that any reduction, if undertaken, will benefit the Common
Shareholders. Changes in the future direction of interest rates are very
difficult to predict accurately. If the Fund

were to reduce leverage based on a prediction about future changes to interest
rates, and that prediction turned out to be incorrect, the reduction in leverage
would likely operate to reduce the income and/or total returns to Common
Shareholders relative to the circumstance where the Fund had not reduced
leverage. The Fund may decide that this risk outweighs the likelihood of
achieving the desired reduction to volatility in income and share price if the
prediction were to turn out to be correct, and determine not to reduce leverage
as described above.

The Fund may invest in the securities of other investment companies. Such
securities may also be leveraged and will therefore be subject to the leverage
risks described above. Such additional leverage may in certain market conditions
serve to reduce the net asset value of the Fund's common shares and the returns
to Common Shareholders.

The Fund may also invest in derivative instruments, which may amplify the
effects of leverage and may adversely affect the Fund's net asset value per
share and income and distributions to Common Shareholders. See "--Derivatives
Risk" and the Statement of Additional Information under "Investment Objectives
and Policies--Derivative Instruments."

Because the fees received by Western Asset are based on the average weekly
assets of the Fund (including assets represented by preferred shares and other
leverage), Western Asset has a financial incentive for the Fund to issue
preferred shares and incur other leverage, which may create a conflict of
interest between Western Asset and the Common Shareholders. The fees paid to
Claymore Securities, Inc. are also based on the average weekly assets of the
Fund.

ISSUER RISK

The value of a corporate debt instrument may decline for a number of reasons
that directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services.

SMALLER COMPANY RISK

The general risks associated with corporate debt obligations are
particularly pronounced for securities issued by companies with smaller market
capitalizations. These companies may have limited product lines, markets or
financial resources or may depend on a few key employees. As a result, they may
be subject to greater levels of credit, interest rate and issuer risk.
Securities of smaller companies may trade less frequently and in less volume
than more widely held securities, and their values may fluctuate more sharply
than the values of other securities. Companies with medium-sized market
capitalizations may have risks similar to those of smaller companies.

COUNTRY RISK

Investments in securities of non-U.S. issuers (including those denominated
in U.S. dollars) involve certain risks not typically associated with investments
in domestic issuers. The values of these securities are subject to economic and
political developments in the countries and regions where the companies operate
or are domiciled, or where the securities are traded, such as changes in
economic or monetary policies, and to changes in exchange rates. Values may also
be affected by restrictions on receiving the investment proceeds from a country
other than the United States.

In general, less information is publicly available about these companies
than about U.S. companies. These companies are generally not subject to the same
accounting, auditing and financial reporting standards as are U.S. companies.

Some securities issued by non-U.S. governments or their subdivisions,
agencies and instrumentalities may not be backed by the full faith and credit of
the issuing government. Even where a security is backed by the full faith and
credit of a government, it may be difficult for the Fund to pursue its rights
against such government in that country's courts. Some countries and governments
have defaulted on principal and interest payments.

In addition, the Fund's investments in non-U.S. securities may be subject to
the risk of nationalization or expropriation of assets, confiscatory taxation,
political or financial instability and adverse diplomatic developments.
Dividends or interest on, or proceeds from the sale of, these securities may be
subject to withholding taxes, and special U.S. tax considerations may apply.

In addition to brokerage commissions, custodial services and other costs
relating to investment in non-U.S. countries are generally more expensive than
in the United States. Such markets have at times been unable to keep pace with
the volume of securities transactions, making it difficult to conduct such
transactions. The inability of the Fund to make intended securities purchases
due to settlement problems could cause the Fund to miss attractive investment
opportunities. An inability to dispose of a security due to settlement problems
could result in losses to the Fund due to subsequent declines in the value of
the security.

Investment in securities of issuers based in developing or "emerging market"
countries entails all of the risks of investing in securities of non-U.S.
issuers outlined above, but to a heightened degree. Emerging market countries
typically have economic and political systems that are less fully developed, and
can be expected to be less stable than those of more advanced countries. For
example, the economies of such countries can be subject to rapid and
unpredictable rates of inflation or deflation. Low trading volumes may result in
a lack of liquidity and in price volatility. Emerging market countries may have
policies that restrict investment by foreigners, or that prevent foreign
investors from withdrawing their money at will.

PREPAYMENT RISK

Many fixed income securities, especially those issued at high interest
rates, provide that the issuer may repay them early. Issuers often exercise this
right when interest rates decline. Accordingly, holders of securities that may
be called or prepaid may not benefit fully from the increase in value that other
fixed income securities experience when rates decline. Furthermore, the Fund
reinvests the proceeds of the payoff at current yields, which are lower than
those paid by the security that was paid off. Prepayments may cause losses on
securities purchased at a premium, and unscheduled prepayments, which will be
made at par, will cause the Fund to experience a loss equal to any unamortized
premium.

REINVESTMENT RISK

Reinvestment risk is the risk that income from the Fund's portfolio will
decline if and when the Fund reinvests the proceeds from matured, traded or
called bonds at market interest rates that are below the portfolio's current
earnings rate. A decline in income could affect the common shares' market price
or their overall returns.

DERIVATIVES RISK

The Fund may engage in a variety of transactions using "derivatives," such
as futures, options, warrants and swaps. Derivatives are financial instruments
whose value depends upon, or is derived from, the value of something else, such
as one or more underlying investments or indexes. Derivatives may be traded on
organized exchanges, or in individually negotiated transactions with other
parties

(these are known as "over-the-counter"). The Fund may use derivatives both for
hedging and non-hedging purposes, including for purposes of enhancing returns.
Although Western Asset has the flexibility to make use of derivatives, it may
choose not to for a variety of reasons, even under very volatile market
conditions.

Derivatives involve special risks and costs and may result in losses to the
Fund. The successful use of derivatives transactions requires sophisticated
management, and the Fund will depend on Western Asset's ability to analyze and
manage derivatives transactions. Derivatives transactions also involve the risk
of mispricing or improper valuation, the risk of ambiguous documentation and the
risk that changes in the value of a derivative may not correlate perfectly with
an underlying asset, interest rate or index. The prices of derivatives may move
in unexpected ways, especially in abnormal market conditions. Some derivatives
are "leveraged" and therefore may magnify or otherwise increase investment
losses to the Fund. See "--Leverage Risk." The Fund's use of derivatives may
also increase the amount of taxes payable by shareholders. As a result, the
Fund's use of derivatives (whether used for hedging purposes or otherwise) may
result in a lower return than if it had not used derivatives.

Other risks arise from the potential inability to terminate or sell
derivatives positions. A liquid secondary market may not always exist for the
Fund's derivatives positions. In fact, many over-the-counter instruments will
not be liquid. Derivatives instruments may be subject to wide fluctuations in
market value, and the Fund may be subject to significant delays in disposing of
them. Accordingly, the Fund may be forced to close derivatives positions at less
than fair market value or may not be able to close them when Western Asset
believes it is desirable to do so.

The Fund will be subject to credit risk with respect to the counterparties
to the derivative contracts purchased by the Fund. If a counterparty becomes
bankrupt or otherwise fails to perform its obligations under a derivatives
contract, the Fund may experience significant delays in obtaining any recovery
under the derivatives contract in bankruptcy or other reorganization
proceedings. The Fund may obtain only a limited recovery or may obtain no
recovery in such circumstances.

INFLATION/DEFLATION RISK

Inflation risk is the risk that the Fund's assets or income from the Fund's
investments may be worth less in the future as inflation decreases the value of
money. As inflation increases, the real value of the Fund's portfolio could
decline. Inflation risk is expected to be greater with respect to the Fund's
investments in securities or instruments other than U.S. TIPS. Deflation risk is
the risk that prices throughout the economy may decline over time--the opposite
of inflation. Deflation may have an adverse effect on the creditworthiness of
issuers and may make issuer default more likely, which may result in a decline
in the value of the Fund's portfolio. Because the principal amounts of U.S. TIPS
would be adjusted downward during a period of deflation, the Fund will be
subject to deflation risk with respect to its investment in such securities.

TURNOVER RISK

The length of time the Fund has held a particular security is not generally
a consideration in investment decisions. A change in the securities held by the
Fund is known as "portfolio turnover." As a result of the Fund's investment
policies, under certain market conditions the Fund's turnover rate may be higher
than that of other investment companies. Portfolio turnover generally involves
some expense to the Fund, 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 transaction costs and could give
rise to a greater amount of taxable capital gains.

MANAGEMENT RISK

The Fund is subject to management risk because it is an actively managed
investment portfolio. Western Asset will apply investment techniques and risk
analyses in making investment decisions for the Fund, but there can be no
guarantee that these will produce the desired results.

ANTI-TAKEOVER PROVISIONS

The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund, convert the Fund to open-end
status or change the composition of the Board of Trustees. See "Anti-Takeover
and Other Provisions in the Declaration of Trust." These provisions in the
Declaration could have the effect of depriving Common Shareholders of
opportunities to sell their common shares at a premium over the then-current
market price of the common shares.

MARKET DISRUPTION AND GEOPOLITICAL RISKS

The war with Iraq, its aftermath and the continuing occupation of the
country by coalition forces are likely to have a substantial impact on the U.S.
and world economies and securities markets. The duration and nature of the war
and occupation and the potential costs of rebuilding the Iraqi infrastructure
and political systems cannot be predicted with any certainty. Terrorist attacks
on the World Trade Center and the Pentagon on September 11, 2001 closed some of
the U.S. securities markets for a four-day period, and the occurrence of similar
events cannot be ruled out. The war and occupation, terrorism and related
geopolitical risks have led, and may in the future lead, to increased short-term
market volatility and may have adverse long-term effects on U.S. and world
economies and markets generally. Those events could also have an acute effect on
individual issuers or related groups of issuers. These risks could also
adversely affect individual issuers and securities markets, interest rates,
auctions, secondary trading, ratings, credit risk, inflation, deflation and
other factors relating to the common shares.

CERTAIN AFFILIATIONS

Certain broker-dealers may be considered to be affiliated persons of the
Fund and/or Western Asset. Absent an exemption from the Securities and Exchange
Commission or other regulatory relief, the Fund is generally precluded from
effecting certain principal transactions with affiliated brokers, and its
ability to purchase securities being underwritten by an affiliated broker or a
syndicate including an affiliated broker or to utilize affiliated brokers for
agency transactions is subject to regulatory and other restrictions. This could
limit the Fund's ability to engage in securities transactions and take advantage
of market opportunities.

HOW THE FUND MANAGES RISK

INVESTMENT LIMITATIONS

The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. Certain of these
limitations (two of which are listed below) are fundamental and may not be
changed without the approval of the holders of a majority (as defined in the
1940 Act) of the outstanding common shares and, if issued, preferred shares
voting together as a single class, and the approval of the holders of a majority
(as defined in the 1940 Act) of the outstanding preferred shares voting as a
separate class. Only those limitations expressly designated as such are
fundamental investment limitations. All other polices or restrictions may be
changed without shareholder approval.

The Fund may not invest 25% or more of its total assets, except as noted
below, in a particular industry or group of industries.

As a diversified investment company under the 1940 Act, the Fund currently
may not, with respect to 75% of the Fund's total assets, purchase the securities
of any issuer, except securities issued or guaranteed by the U.S. government or
any of its agencies or instrumentalities or securities of other investment
companies, if, as a result, (i) more than 5% of the Fund's total assets would be
invested in the securities of that issuer, or (ii) the Fund would hold more than
10% of the outstanding voting securities of that issuer.

As described in the Statement of Additional Information, the Fund's industry
concentration policy described above does not preclude it from investing 25% or
more of its total assets in issuers in a group of industries (such as different
types of technology issuers) under certain circumstances. Securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities will not
be considered to represent an industry. In addition, as described in the
Statement of Additional Information, the Fund may invest 25% or more of its
total assets in certificates of deposit or bankers' acceptances issued by
domestic branches of U.S. or foreign banks under certain circumstances.

The Fund may become subject to guidelines which are more limiting than the
investment restrictions set forth above or in the Statement of Additional
Information in order to obtain and maintain a rating or ratings from Moody's,
S&P and/or Fitch on the preferred shares that it intends to issue, including
restrictions on its ability to incur leverage through the use of reverse
repurchase agreements, credit default swaps, futures contracts, short sales,
options, dollar rolls or related investments. Such guidelines could limit the
Fund's investment flexibility and affect the return on the common shares.
However, it is not currently anticipated that these guidelines will
significantly impede Western Asset from managing the Fund's portfolio in
accordance with the Fund's investment objectives and policies. See "Investment
Objectives and Policies" and "Investment Restrictions" in the Statement of
Additional Information.

QUALITY OF INVESTMENTS

The Fund will not invest in bonds that are below investment grade quality at
the time of purchase. Investment grade quality means that such bonds are rated
by a nationally recognized rating agency within the rating agency's four highest
grades (Baa or BBB or higher by Moody's, S&P or Fitch or a similar rating of
another nationally recognized rating agency) or are unrated but judged to be of
comparable quality by Western Asset.

MANAGEMENT OF INVESTMENT PORTFOLIO AND CAPITAL STRUCTURE TO LIMIT LEVERAGE RISK

The Fund may take certain actions if market conditions change (or the Fund
anticipates such a change) and the Fund's leverage begins (or is expected) to
affect Common Shareholders adversely. In order to attempt to offset such a
negative impact of leverage on Common Shareholders, the Fund may shorten the
average maturity or duration of its investment portfolio (by investing in
shorter-term, high quality securities) or may reduce its indebtedness or extend
the maturity of outstanding preferred shares. The Fund may also attempt to
reduce leverage by redeeming or otherwise purchasing preferred shares or
reducing any holdings in reverse repurchase agreements, credit default swaps,
futures, short sales, options, dollar rolls or other instruments that create
leverage. As explained above under "Risks--Leverage Risk," the success of any
such attempt to limit leverage risk depends on Western Asset's ability to
predict interest rate or other market changes accurately. Because of the
difficulty of making such predictions, the Fund may not be successful in
managing its interest rate exposure in the manner described in this paragraph.

If market conditions suggest that additional leverage would be beneficial,
the Fund may sell previously unissued preferred shares or preferred shares that
the Fund previously issued but later repurchased or may utilize reverse
repurchase agreements, credit default swaps, dollar roll transactions or other
forms of leverage, including bank borrowings.

HEDGING AND RELATED STRATEGIES

The Fund may use various investment strategies designed to limit risk and to
preserve capital. These hedging strategies may include, among others, the use of
swaps, futures contracts, short sales, options on futures or options based on
U.S. Treasury securities, an index of longer-term securities or other
instruments. Under current market conditions, the Fund initially intends to
hedge 100% of the value of its portfolio by purchasing put options that should
increase in value if interest rates were to rise significantly. Income earned by
the Fund from many hedging activities will be treated as capital gain and, if
not offset by net realized capital loss, will be distributed to shareholders in
taxable distributions. If effectively used, hedging strategies can offset some
or all of the loss incurred on the Fund's investments due to adverse changes in
interest rates or inflation rates or other factors. There is no assurance that
these hedging strategies (including the purchase of put options described above)
will be available at any time, that Western Asset will use them for the Fund if
available or that they will be successful if used. Hedging transactions involve
costs and may result in losses to the Fund. Under some circumstances (E.G., if
interest rates decline, or if interest rates rise, but not to a significant
extent), the Fund might have been better off not attempting to hedge its
portfolio or a portion of its portfolio, because the hedging strategies would
not have been successful (and thus the Fund's net asset value would have
declined) and the Fund would have incurred costs (E.G., the price paid to
purchase the put options) to establish such hedging positions.

MANAGEMENT OF THE FUND

TRUSTEES AND OFFICERS

There are currently five Trustees of the Fund, two of whom are "interested
persons" (as defined in the 1940 Act) and three of whom are not "interested
persons." The names and business addresses of the Trustees and officers of the
Fund and their principal occupations and other affiliations during the past five
years are set forth under "Management of the Fund" in the Statement of
Additional Information.

INVESTMENT ADVISOR

Subject to the supervision of the Board of Trustees, Western Asset is
responsible for managing the investment activities of the Fund and certain of
the Fund's business affairs and other administrative matters. Western Asset,
established in 1971 and since 1986 a wholly-owned subsidiary of Legg Mason,
Inc., acts as investment advisor to institutional accounts, such as corporate
pension plans, mutual funds and endowment funds. Western Asset is located at
117 East Colorado Boulevard, Pasadena, California 91105. Total assets under
management by Western Asset and its London-based affiliate, Western Asset
Management Company Limited, were approximately $126.6 billion as of June 30,
2003.

PORTFOLIO MANAGERS

Western Asset does not employ individual portfolio managers to determine the
investments of the Fund. Instead, the Fund's investments will be the
responsibility of Western Asset's Investment Strategy Group, which is currently
chaired by Western Asset's Chief Investment Officer and which also currently

includes Western Asset's Deputy Chief Investment Officer, its Senior Economist
and the head of each sector group.

INVESTMENT MANAGEMENT AGREEMENT

Pursuant to an investment management agreement between Western Asset and the
Fund (the "Investment Management Agreement"), the Fund has agreed to pay Western
Asset an annual management fee payable on a monthly basis at the annual rate of
..40% of the Fund's average weekly assets for the services it provides. "Average
weekly assets" means the average weekly value of the total assets of the Fund
(including any assets attributable to leverage) minus accrued liabilities (other
than liabilities representing leverage). For purposes of calculating "average
weekly assets," neither the liquidation preference of any preferred shares
outstanding nor any liabilities associated with any instruments or transactions
used by Western Asset to leverage the Fund's portfolio (whether or not such
instruments or transactions are "covered" as described in this prospectus) is
considered a liability. With respect to reverse repurchase or dollar roll
transactions, "average weekly assets" includes any proceeds from the sale of an
asset of the Fund to a counterparty in such a transaction, in addition to the
value of the underlying asset as of the relevant measuring date. Because the
fees received by Western Asset are based on the average weekly assets of the
Fund (including assets represented by preferred shares and other leverage),
Western Asset has a financial incentive for the Fund to issue preferred shares
and incur other leverage, which may create a conflict of interest between
Western Asset and the Common Shareholders. The Investment Management Agreement
automatically terminates on assignment (as defined in the 1940 Act). The
Investment Management Agreement may also be terminated on not more than 60 days'
written notice by Western Asset to the Fund or by the Fund to Western Asset.

EXPENSES

In addition to the fees of Western Asset, the Fund pays all other costs and
expenses of its operations, including compensation of its Trustees (other than
those who are "interested persons" of the Fund within the meaning of the 1940
Act), fees of the servicing agent and administrator, custodial expenses,
transfer agency and dividend disbursing expenses, listing expenses, legal fees,
expenses of independent auditors, expenses of repurchasing shares, expenses of
issuing any preferred shares, expenses of preparing, printing and distributing
prospectuses, shareholder reports, notices, proxy statements and reports to
governmental agencies, and taxes, if any.

ADMINISTRATOR

Under an Administrative Services Agreement with the Fund, Legg Mason Fund
Adviser, Inc. (the "Administrator"), an affiliate of Western Asset, provides
certain administrative and accounting functions for the Fund, including, among
others, coordination of the services provided by the Fund's service providers
(including the custodian, transfer agent, counsel and independent accountants),
preparation, review and filing of various required reports and SEC forms, and
the provision of certain office space and personnel necessary to the Fund's
operations. In consideration of these services, the Fund will pay the
Administrator a fee, paid monthly, at an annual rate of $100,000.

NET ASSET VALUE

Net asset value per common share will be determined for the Fund as of the
close of regular trading on the New York Stock Exchange on each day the New York
Stock Exchange is open. In the event that it is not practicable to calculate the
Fund's net asset value on any business day for which a calculation is required,
the Fund's net asset value for that day may be calculated subsequently. The New
York Stock Exchange is normally closed on all national holidays and Good Friday.
To calculate

the Fund's net asset value per common share, the Fund's assets are valued and
totaled, liabilities are subtracted, and the resulting net assets are divided by
the number of common shares outstanding.

Portfolio securities and other assets for which market quotations are
readily available are valued at current market value as determined by pricing
services, broker-dealer quotations or other approved methods. Securities with
remaining maturities of 60 days or less are generally valued at amortized cost.
Unless certain unusual circumstances occur (including those described in the
following paragraph), fixed income securities for which daily market quotations
are not readily available will, to the extent appropriate under the
circumstances, 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 Trustees or persons
acting at their direction. Because of time zone differences, non-U.S. exchanges
and securities markets will usually be closed prior to the time of the closing
of the New York Stock Exchange. The principal markets for fixed income
securities also generally close prior to the close of the New York Stock
Exchange. Consequently, values of non-U.S. investments and fixed income
securities will be determined as of the earlier closing of such exchanges and
markets. However, events affecting the values of such non-U.S. investments and
fixed income securities may occasionally occur between the earlier closings of
such exchanges and markets and the closing of the New York Stock Exchange that
will not be reflected in the computation of the net asset value. If an event
that is likely materially to affect the value of such investments occurs during
such period, then such investments may be valued at fair value as determined in
good faith by the Trustees or persons acting at their direction.

DISTRIBUTIONS

The Fund intends to distribute to Common Shareholders monthly dividends of
all or a portion of its net investment income after payment of dividends to
holders of preferred shares and interest in connection with other forms of
leverage (if applicable). It is expected that the initial monthly dividend on
the Fund's common shares will be declared within approximately 45 days, and paid
approximately 60 to 90 days, after completion of this offering. The Fund expects
that all or a portion of any capital gain will be distributed at least annually.

In order to satisfy a requirement for qualification as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), an investment company, such as the Fund, must distribute each year at
least 90% of its net investment income, including the original issue discount
accrued on inflation-indexed bonds, zero-coupon bonds, step-ups and
payment-in-kind securities. Because the Fund will not on a current basis receive
cash payments from the issuers of these securities in respect of accrued
original issue discount, in some years the Fund may have to distribute cash
obtained from selling other portfolio holdings of the Fund. In some
circumstances, such sales might be necessary in order to satisfy cash
distribution requirements even though investment considerations might otherwise
make it undesirable for the Fund to sell securities at such time. Under many
market conditions, investments in such securities may be illiquid, making it
difficult for the Fund to dispose of them or determine their current value.
Please see "Tax Matters--Original Issue Discount and Payment-in-Kind Securities"
in the Statement of Additional Information.

Various factors will affect the level of the Fund's income, including the
asset mix, the average maturity of the Fund's portfolio, the amount of leverage,
if any, utilized by the Fund and the Fund's use of hedging. To permit the Fund
to maintain a more stable monthly distribution, the Fund may from time to time
distribute less than the entire amount of income earned in a particular period.
The

undistributed income would be available to supplement future distributions. As a
result, the distributions paid by the Fund for any particular monthly period may
be more or less than the amount of income actually earned by the Fund during
that period. Undistributed income will add to the Fund's net asset value, and,
correspondingly, distributions from undistributed income will be deducted from
the Fund's net asset value. Common Shareholders will automatically have all
dividends and distributions reinvested in common shares of the Fund issued by
the Fund or purchased in the open market in accordance with the Fund's Dividend
Reinvestment Plan unless an election is made to receive cash. See "Dividend
Reinvestment Plan."

DIVIDEND REINVESTMENT PLAN

Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), all Common
Shareholders whose shares are registered in their own names will have all
dividends, including any capital gain dividends, reinvested automatically in
additional common shares by EquiServe, as agent for the Common Shareholders (the
"Plan Agent"), unless the Common Shareholder elects to receive cash. A Common
Shareholder may elect not to participate in the Plan and to receive all
dividends in cash by contacting the Plan Agent at the address set forth in this
section below. An election to receive cash may be revoked or reinstated at the
option of the Common Shareholder.

In the case of record shareholders such as banks, brokers or other nominees
that hold common shares for others who are the beneficial owners, the Plan Agent
will administer the Plan on the basis of the number of common shares certified
from time to time by the record shareholder as representing the total amount
registered in such shareholder's name and held for the account of beneficial
owners who are to participate in the Plan. Shareholders whose shares are held in
the name of a bank, broker or nominee should contact the bank, broker or nominee
for details. Such shareholders may not be able to transfer their shares to
another bank or broker and continue to participate in the Plan. All
distributions to investors who elect not to participate in the Plan (or whose
broker or nominee elects not to participate on the investor's behalf) will be
paid in cash by check mailed to the record holder by EquiServe, as the Fund's
dividend disbursement agent.

Unless a Common Shareholder (or a Common Shareholder's broker or nominee)
elects not to participate in the Plan, the number of common shares that the
Common Shareholder will receive will be determined as follows:

(1) if common shares are trading at or above net asset value (minus
estimated brokerage commissions that would be incurred upon the
purchase of common shares on the open market) on the payment date,
the Fund will issue new shares at the greater of (i) the net asset
value per common share on the payment date and (ii) 95% of the
market price per common share on the payment date; or

(2) if common shares are trading below net asset value (minus estimated
brokerage commissions that would be incurred upon the purchase of
common shares on the open market) on the payment date, the Plan
Agent will receive the dividend or distribution in cash and will
purchase common shares in the open market, on the New York Stock
Exchange or elsewhere, for the participants' accounts. It is
possible that the market price for the common shares may increase
before the Plan Agent has completed its purchases. Therefore, the
average purchase price per share paid by the Plan Agent may exceed
the market price on the payment date, resulting in the purchase of
fewer shares than if the dividend or distribution had been paid in
common shares issued by the Fund. The Plan Agent will use all
dividends and distributions received in cash to purchase common
shares in the open market on or shortly after the payment date, but
in no event later

than the ex-dividend date for the next distribution. Interest will
not be paid on any uninvested cash payments.

A Common Shareholder may withdraw from the Plan at any time by giving notice
to the Plan Agent and such termination will be effective if notice is received
by the Plan Agent one business day prior to a distribution record date. If a
Common Shareholder withdraws or the Plan is terminated, the Common Shareholder
will receive a certificate for each whole share in its account under the Plan
and will receive a cash payment for any fraction of a share in that account. At
the Common Shareholder's option, the Plan Agent will sell the shares and send
the Common Shareholder the proceeds, minus brokerage commissions.

The Plan Agent maintains all Common Shareholders' accounts in the Plan and
gives written confirmation of all transactions in the accounts, including
information Common Shareholders may need for tax records. Common shares in an
account will be held by the Plan Agent in non-certificated form. Any proxy a
Common Shareholder receives will include all common shares the Common
Shareholder has received under the Plan.

There is no brokerage charge for reinvestment of dividends or distributions
in common shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.

Automatically reinvested dividends and distributions are taxed in the same
manner as cash dividends and distributions.

The Fund and the Plan Agent reserve the right to amend or terminate the
Plan. There is no direct service charge to participants in the Plan; however,
the Fund reserves the right to amend the Plan to include a service charge
payable by the participants. Additional information about the Plan may be
obtained from EquiServe Trust Company, N.A., P.O. Box 43010, Providence, Rhode
Island 02940-3010.

DESCRIPTION OF SHARES

COMMON SHARES

The Declaration authorizes the issuance of an unlimited number of common
shares. The common shares will be issued without par value. All common shares
have equal rights to the payment of dividends and the distribution of assets
upon liquidation. Common shares will, when issued, be fully paid and, subject to
matters discussed in "Anti-Takeover and Other Provisions in the Declaration of
Trust," non-assessable, and will have no pre-emptive or conversion rights or
rights to cumulative voting. Whenever preferred shares are outstanding, Common
Shareholders will not be entitled to receive any distributions from the Fund
unless (1) all accrued dividends on preferred shares and interest with respect
to certain forms of the Fund's indebtedness have been paid, (2) asset coverage
(as defined in the 1940 Act) tests with respect to the preferred shares and
certain forms of indebtedness of the Fund are satisfied after giving effect to
the distributions and (3) other requirements imposed by any rating agency or
rating agencies rating any preferred shares issued by the Fund have been met.
See "Preferred Shares" below.

The common shares have been authorized for listing on the New York Stock
Exchange, subject to notice of issuance. The Fund intends to hold annual
meetings of shareholders so long as the common shares are listed on a national
securities exchange and such meetings are required as a condition to such
listing.

Unlike open-end funds, closed-end funds like the Fund do not continuously
offer shares and do not provide daily redemptions. Rather, if a shareholder
determines to buy additional common shares or sell shares already held, the
shareholder may do so by trading through a broker on the New York Stock Exchange
or otherwise. Shares of closed-end investment companies frequently trade on an
exchange at prices lower than net asset value. Shares of closed-end investment
companies like the Fund that invest in investment grade bonds have during some
periods traded at prices higher than net asset value and during other periods
have traded at prices lower than net asset value. In general, shares of
closed-end investment companies trade at prices lower than net asset value more
frequently than such shares trade at prices higher than net asset value. The
Fund's Declaration limits the ability of the Fund to convert to open-end status.
See "Anti-Takeover and Other Provisions in the Declaration of Trust."

Because the market value of the common shares may be influenced by such
factors as dividend levels (which are in turn affected by expenses and other
factors), call protection, dividend stability, portfolio credit quality,
interest rate movements, net asset value, relative demand for and supply of such
shares in the market, general market and economic conditions, and other factors
beyond the control of the Fund, there can be no assurance that the common shares
will trade at a price equal to or higher than net asset value in the future. The
common shares are designed primarily for long-term investors, and an investor
should not purchase common shares of the Fund if he or she intends to sell them
shortly after purchase. See "Preferred Shares and Other Leverage" and the
Statement of Additional Information under "Repurchase of Common Shares;
Conversion to Open-End Fund."

PREFERRED SHARES

The Declaration authorizes the issuance of an unlimited number of preferred
shares. The preferred shares will be issued in one or more classes or series,
with such par value and rights as determined by the Board of Trustees, by action
of the Board of Trustees without the approval of Common Shareholders.

The Fund's Board of Trustees has indicated its intention to authorize an
offering of preferred shares (representing approximately 33% of the Fund's total
managed assets) approximately one to three months after completion of the
offering of common shares. Any such decision is subject to market conditions and
to the Board's continuing belief that leveraging the Fund's capital structure
through the issuance of preferred shares is likely to achieve the benefits to
Common Shareholders described in this prospectus. Although the terms of the
preferred shares will be determined by the Board of Trustees (subject to
applicable law and the Declaration) if and when it authorizes a preferred shares
offering, it is expected that the preferred shares, at least initially, would
likely pay cumulative dividends at rates determined over relatively shorter-term
periods, with the periodic redetermination of the dividend rate happening
through an auction or a similar process. The Board of Trustees has indicated
that the preference on distribution, liquidation preference, voting rights and
redemption provisions of the preferred shares will likely be as stated below.

LIMITED ISSUANCE OF PREFERRED SHARES. Under the 1940 Act, the Fund could
issue preferred shares so long as the Fund meets the 1940 Act Asset Coverage
Test. In addition, the Fund is not permitted to declare any cash dividend or
other distribution on its common shares unless the 1940 Act Asset Coverage Test
is satisfied immediately after the declaration. If the Fund sells all the common
shares discussed in this prospectus and preferred shares are issued, the
liquidation value of the preferred shares immediately after their issuance is
expected to be approximately 33% of the value of the Fund's total managed
assets. The Fund intends, to the extent possible, to purchase or redeem
preferred shares, if necessary, to ensure compliance with the 1940 Act Asset
Coverage Test.

DISTRIBUTION PREFERENCE. The preferred shares have complete priority over
the common shares as to distribution of assets. Therefore, under certain
circumstances, preferred shareholders may receive dividends when Common
Shareholders do not.

LIQUIDATION PREFERENCE. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, holders of
preferred shares will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus
accumulated and unpaid dividends thereon, whether or not earned or declared)
before any distribution of assets is made to Common Shareholders. After payment
of the full amount of the liquidating distribution to which they are entitled,
the holders of preferred shares will not be entitled to any further
participation in any distribution of assets by the Fund.

VOTING RIGHTS. Preferred shares are required to be voting shares. Except as
otherwise provided in the Declaration or the Fund's Bylaws or otherwise required
by applicable law, holders of preferred shares will vote together with Common
Shareholders as a single class.

Holders of preferred shares, voting as a separate class, will also be
entitled to elect two of the Fund's Trustees. The remaining Trustees will be
elected by Common Shareholders and holders of preferred shares, voting together
as a single class. In the unlikely event that two full years of accrued
dividends are unpaid on the preferred shares, the holders of all outstanding
preferred shares, voting as a separate class, will be entitled to elect a
majority of the Fund's Trustees until all dividends in arrears have been paid or
declared and set apart for payment.

The 1940 Act also requires that, in addition to any approval by shareholders
that might otherwise be required, the approval of the holders of a majority of
the outstanding preferred shares, voting separately as a class, would be
required to (1) adopt any plan of reorganization that would adversely affect the
preferred shares, and (2) take any action requiring a vote of security holders
under Section 13(a) of the 1940 Act, including, among other things, changes in
the Fund's subclassification as a closed-end investment company or changes in
its fundamental investment restrictions.

REDEMPTION, PURCHASE AND SALE OF PREFERRED SHARES. The terms of the
preferred shares may provide that they are redeemable at certain times, in whole
or in part, at the original purchase price per share plus accumulated dividends.
The terms may also state that the Fund may tender for or purchase preferred
shares and resell any shares so tendered. Any redemption or purchase of
preferred shares by the Fund will reduce the leverage applicable to common
shares, while any resale of preferred shares by the Fund will increase such
leverage. See "Preferred Shares and Other Leverage."

The discussion above describes the Board of Trustees' present intention with
respect to a possible offering of preferred shares. If the Board of Trustees
determines to authorize such an offering, the terms of the preferred shares may
be the same as, or different from, the terms described above.

As of the date of this prospectus, Western Asset owned of record and
beneficially 6,981 common shares, constituting 100% of the outstanding shares of
the Fund, and thus, until the public offering of the common shares is completed,
will control the Fund.

ANTI-TAKEOVER AND OTHER PROVISIONS IN THE DECLARATION OF TRUST

The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to convert the Fund to
open-end status. The Fund's Trustees are divided into three classes. At each
annual meeting of shareholders, the term of one class will expire, and each
Trustee elected to that class will hold office for a term of three years. The
classification of the Board of

Trustees in this manner could delay for an additional year the replacement of a
majority of the Board of Trustees. In addition, subject to any voting powers of
Common Shareholders or holders of preferred shares, the Declaration provides
that a Trustee may be removed only for cause and only (1) by action of at least
seventy-five percent (75%) of the outstanding shares of the classes or series of
shares entitled to vote for the election of such Trustee, at a meeting called
for the purpose, or (2) by at least seventy-five percent (75%) of the remaining
Trustees.

As described below, the Declaration grants special approval rights with
respect to certain matters to members of the Board who qualify as "Continuing
Trustees," which term means a Trustee who either (1) has been a member of the
Board for a period of at least thirty-six months (or since immediately after the
initial registered public offering of the Fund's common shares, if less than
thirty-six months); (2) was nominated to serve as a member of the Board of
Trustees by a majority of the Continuing Trustees then members of the Board; or
(3) prior to the sale of the common shares pursuant to an initial public
offering only, serves as a Trustee.

The Declaration requires the affirmative vote or consent of at least
seventy-five percent (75%) of the Board of Trustees and holders of at least
seventy-five percent (75%) of the Fund's shares (including common and preferred
shares) to authorize certain Fund transactions not in the ordinary course of
business, including a merger or consolidation or sale or transfer of Fund
assets, unless the transaction is authorized by both a majority of the Trustees
and seventy-five percent (75%) of the Continuing Trustees (in which case
shareholder authorization would not be required by the Declaration, but might be
required in certain cases under the 1940 Act). The Declaration also requires the
affirmative vote or consent of holders of at least seventy-five percent (75%) of
each class of the Fund's shares entitled to vote on the matter to authorize a
conversion of the Fund from a closed-end to an open-end investment company,
unless the conversion is authorized by both a majority of the Trustees and
seventy-five percent (75%) of the Continuing Trustees (in which case
shareholders would have only the minimum voting rights required by the 1940 Act
with respect to the conversion). In addition, the Declaration provides that the
Fund may be terminated at any time by vote or consent of at least seventy-five
percent (75%) of the Fund's shares or, alternatively, by vote or consent of both
a majority of the Trustees and seventy-five percent (75%) of the Continuing
Trustees. The Declaration also requires the approval of both a majority of the
Trustees and seventy-five percent (75%) of the Continuing Trustees for certain
extraordinary distributions from the Fund to shareholders. See "Anti-Takeover
and Other Provisions in the Declaration of Trust" in the Statement of Additional
Information for a more detailed summary of these provisions.

The Trustees may from time to time grant other voting rights to shareholders
with respect to these and other matters in the Fund's Bylaws.

The overall effect of these provisions is to render more difficult the
accomplishment of a merger or the assumption of control by a third party. They
provide, however, the advantage of potentially requiring persons seeking control
of the Fund to negotiate with its management regarding the price to be paid and
facilitating the continuity of the Fund's investment objectives and policies.
The provisions of the Declaration described above could have the effect of
depriving Common Shareholders of opportunities to sell their common shares at a
premium over the then current market price of the common shares by discouraging
a third party from seeking to obtain control of the Fund in a tender offer or
similar transaction. The Board of Trustees of the Fund has considered the
foregoing anti-takeover provisions and concluded that they are in the best
interests of the Fund.

The foregoing is intended only as a summary and is qualified in its entirety
by reference to the full text of the Declaration and the Fund's Bylaws, both of
which are on file with the Securities and Exchange Commission.

Under Massachusetts law, shareholders could, in certain circumstances, be
held personally liable for the obligations of the Fund. However, the Declaration
contains an express disclaimer of shareholder liability for debts or obligations
of the Fund and requires that notice of such limited liability be given in each
agreement, obligation or instrument entered into or executed by the Fund or the
Trustees. The Declaration further provides for indemnification out of the assets
and property of the Fund for all loss and expense of any shareholder held
personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund would be unable to meet its
obligations. The Fund believes that the likelihood of such circumstances is
remote.

REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND

The Fund is a closed-end investment company and as such its shareholders
will not have the right to cause the Fund to redeem their shares. Shares of a
closed-end investment company frequently trade at prices lower than net asset
value. The Fund's Board of Trustees will regularly monitor the relationship
between the market price and net asset value of the common shares. Although the
Fund has no present intention of repurchasing the common shares or taking other
actions in response to any discount to net asset value, if the common shares
were to trade at a substantial discount to net asset value for an extended
period of time, the Board may consider, among other things, the repurchase of
common shares on the open market or in private transactions, the making of a
tender offer for such shares or the conversion of the Fund to an open-end
investment company. The Fund cannot assure you that its Board of Trustees will
decide to take or propose any of these actions, or that share repurchases or
tender offers will actually reduce market discount.

If the Fund converted to an open-end company, it would be required to redeem
all preferred shares then outstanding (requiring in turn that it liquidate a
portion of its investment portfolio), and the common shares would likely no
longer be listed on the New York Stock Exchange. In contrast to a closed-end
investment company, shareholders of an open-end investment company may require
the company to redeem their shares at any time (except in certain circumstances
as authorized by or under the 1940 Act) at their net asset value, less any
redemption charge that is in effect at the time of redemption. The Fund expects
that it would pay all such redemption requests in cash, but reserves the right
to pay redemption requests in securities or through a combination of cash and
securities. If such full or partial payment in securities were made, investors
may incur brokerage costs in converting such securities to cash. The Fund
reserves the right to impose a sales load on its shares if it converts into an
open-end investment company. If the Fund converted into an open-end company, the
differences in risks and operational requirements between closed-end and
open-end investment companies could affect the Fund's ability to achieve its
investment objectives. Conversion to an open-end investment company would also
require a shareholder vote under certain circumstances. See "Anti-Takeover and
Other Provisions in the Declaration of Trust."

Before deciding whether to take any action if the common shares trade below
net asset value, the Board would consider all relevant factors, including the
extent and duration of the discount, the liquidity of the Fund's portfolio, the
impact of any action that might be taken on the Fund or its shareholders, and
market considerations. Based on these considerations, even if the Fund's shares
should trade at a substantial discount for an extended period of time, the Board
of Trustees may determine that, in the interest of the Fund and its
shareholders, no action should be taken. See the Statement of Additional
Information under "Repurchase of Common Shares; Conversion to Open-End Fund" for
a further discussion of possible action to reduce or eliminate such discount to
net asset value.

TAX MATTERS

The following federal income tax discussion is based on the advice of
Ropes & Gray LLP, counsel to the Fund, and reflects provisions of the Code,
existing Treasury regulations, rulings published by the Internal Revenue Service
(the "Service"), and other applicable authority, as of the date of this
prospectus. These authorities are subject to change by legislative or
administrative action, possibly with retroactive effect. The following
discussion is only a summary of some of the important tax considerations
generally applicable to investments in the Fund. For more detailed information
regarding tax considerations, see the Statement of Additional Information. There
may be other tax considerations applicable to particular investors. In addition,
income earned through an investment in the Fund may be subject to state, local
and foreign taxes.

The Fund intends to elect to be treated and to qualify each year for
taxation as a regulated investment company eligible for treatment under the
provisions of Subchapter M of the Code. In order for the Fund to qualify as a
regulated investment company, it must meet an income and asset test each year.
If the Fund so qualifies and satisfies certain distribution requirements, the
Fund will not be subject to federal income tax on income distributed in a timely
manner to its shareholders in the form of dividends or capital gain
distributions.

To satisfy the distribution requirement applicable to regulated investment
companies, amounts paid as dividends by the Fund to its shareholders, including
holders of its preferred shares, must qualify for the dividends-paid deduction.
If the Fund realizes a long-term capital gain, it will be required to allocate
such gain between the common shares and any preferred shares issued by the Fund
in proportion to the total dividends paid to each class during the year in which
the income is realized. In certain circumstances, the Service could take the
position that dividends paid on the preferred shares constitute preferential
dividends under Section 562(c) of the Code, and thus do not qualify for the
dividends-paid deduction. The Fund believes this position, if asserted, would be
unlikely to prevail.

If at any time when preferred shares are outstanding the Fund does not meet
applicable asset coverage requirements, it will be required to suspend
distributions to Common Shareholders until the requisite asset coverage is
restored. Any such suspension may cause the Fund to pay a 4% federal excise tax
(imposed on regulated investment companies that fail to distribute for a given
calendar year, generally, at least 98% of their net investment income and
capital gain net income) and income tax on undistributed income or gains, and
may, in certain circumstances, prevent the Fund from qualifying for treatment as
a regulated investment company. The Fund may redeem or purchase preferred shares
in an effort to comply with the distribution requirement applicable to regulated
investment companies and to avoid income and excise taxes. The Fund may have to
dispose of portfolio securities to generate cash for such redemptions, which may
result in transaction expenses and gain at the Fund level and in further
distributions.

The Fund's investments in certain debt obligations (including U.S. TIPS) may
cause the Fund to recognize taxable income in excess of the cash generated by
such obligations. Thus, the Fund could be required at times to liquidate other
investments, including when it is not advantageous to do so, in order to satisfy
its distribution requirements.

The Fund may at times buy investments at a discount from the price at which
they were originally issued, especially during periods of rising interest rates.
For federal income tax purposes, some or all of this market discount will be
included in the Fund's ordinary income and will be taxable to shareholders as
such when it is distributed.

For federal income tax purposes, distributions of investment income are
generally taxable as ordinary income. Whether distributions of capital gains are
taxed as ordinary income or capital gains is determined by how long the Fund
owned the investments that generated such capital gains, rather than how long a
shareholder has owned his or her shares. Distributions of net gains from the
sale of investments that the Fund owned for more than one year and that are
properly designated by the Fund as capital gain dividends will be taxable as
long-term capital gains. Distributions of gains from the sale of investments
that the Fund owned for one year or less will be taxable as ordinary income. For
taxable years beginning on or before December 31, 2008, distributions of
investment income designated by the Fund as derived from "qualified dividend
income" will be taxed in the hands of individuals at the rates applicable to
long-term capital gain, provided holding period and other requirements are met
at both the shareholder and Fund levels. The Fund does not expect a significant
portion of Fund distributions to be derived from qualified dividend income. Any
gain resulting from the sale or exchange of Fund shares generally will be
taxable as capital gains.

Long-term capital gain rates applicable to individuals have been temporarily
reduced--in general, to 15% with lower rates applying to taxpayers in the 10%
and 15% rate brackets--for taxable years beginning on or before December 31,
2008.

Under current law, the backup withholding tax rate is 28% for amounts paid
through 2010 and will be 31% for amounts paid after December 31, 2010. The Fund
may be required to apply backup withholding to taxable distributions or
redemption proceeds payable to a shareholder. Please see "Tax Matters" in the
Statement of Additional Information for additional information about backup
withholding tax rates.

This section relates only to federal income tax consequences of investing in
the Fund; the consequences under other tax laws may differ. Common Shareholders
should consult their tax advisors as to the possible application of foreign,
state and local income tax laws to Fund dividends and capital distributions.
Please see "Tax Matters" in the Statement of Additional Information for
additional information regarding the tax aspects of investing in the Fund.

UNDERWRITING

Subject to the terms and conditions stated in a purchase agreement dated
, 2003, each underwriter named below, for which Merrill Lynch, Pierce,
Fenner & Smith Incorporated is acting as representative, has severally agreed to
purchase, and the Fund has agreed to sell to such underwriter, the number of
common shares set forth opposite the name of such underwriter.

NUMBER OF
UNDERWRITER COMMON SHARES
----------- ------------------

Merrill Lynch, Pierce, Fenner & Smith
Incorporated.......................
Legg Mason Wood Walker, Incorporated..........
RBC Dain Rauscher Inc.........................
Advest, Inc...................................
BB&T Capital Markets, a division of Scott &
Stringfellow, Inc...............................
Robert W. Baird & Co. Incorporated............
J.J.B. Hilliard, W.L. Lyons, Inc..............
Janney Montgomery Scott LLC...................
McDonald Investments Inc., a KeyCorp
Company.........................................
Morgan Keegan & Company, Inc..................
Quick & Reilly, Inc...........................
Stifel, Nicolaus & Company, Incorporated......
W.R. Hambrecht & Co., LLC.....................
Wedbush Morgan Securities Inc.................
Claymore Securities, Inc......................
------------------
Total..............................
==================

The purchase agreement provides that the obligations of the underwriters to
purchase the shares included in this offering are subject to the approval of
certain legal matters by counsel and to certain other conditions. The
underwriters are obligated to purchase all the common shares sold under the
purchase agreement if any of the common shares are purchased. In the purchase
agreement, the Fund and Western Asset have agreed to indemnify the underwriters
against certain liabilities, including liabilities arising under the Securities
Act of 1933, as amended, or to contribute payments the underwriters may be
required to make for any of those liabilities.

COMMISSIONS AND DISCOUNTS

The underwriters propose to initially offer some of the common shares
directly to the public at the public offering price set forth on the cover page
of this prospectus and some of the common shares to certain dealers at the
public offering price less a concession not in excess of $ per share. The
sales load the Fund will pay of $.675 per share is equal to 4.5% of the initial
offering price. The underwriters may allow, and the dealers may reallow, a
discount not in excess of $ per share on sales to other dealers. After the
initial public offering, the public offering price, concession and discount may
be changed. Investors must pay for any common shares purchased on or before
, 2003.

The following table shows the public offering price, estimated offering
expenses, sales load and proceeds to the Fund. The information assumes either no
exercise or full exercise by the underwriters of their overallotment option.

PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------

Public offering price.......... $15.00 $ $
Sales load..................... $.675 $ $
Estimated offering expenses.... $.03 $ $
Proceeds to the Fund........... $14.295 $ $

The offering costs, which may include the reimbursement of certain expenses
of Western Asset and Claymore Securities, Inc., are estimated at $ and
are payable by the Fund. The Fund has agreed to pay the underwriters $.005 per
common share as a partial reimbursement of expenses incurred in connection with
the offering. Western Asset and Claymore Securities, Inc. have agreed to (i) pay
the amount by which the Fund's offering costs (other than the sales load, but
including the reimbursement of expenses described in the preceding sentence)
exceed $.03 per common share (the "Reimbursement Cap") and (ii) reimburse all of
the Fund's organizational expenses.

Claymore Securities, Inc. will provide distribution assistance in connection
with the sale of the common shares of the Fund. Generally, Claymore Securities,
Inc. pays a fee of .10% of the offering amount to employees who assist in
marketing securities. In connection with this distribution assistance, Claymore
Securities, Inc. will enter into an underwriter participation agreement with the
Fund. To the extent that the Fund has not otherwise paid offering costs equal to
the Reimbursement Cap, the Fund will pay up to .10% of the public offering price
of the securities sold in this offering up to the Reimbursement Cap to Claymore
Securities, Inc. as payment for its distribution assistance. Claymore
Securities, Inc. is a registered broker-dealer and a member of the National
Association of Securities Dealers.

OVERALLOTMENT OPTION

The Fund has granted the underwriters an option to purchase up to
additional common shares at the public offering price, less the sales
load, within 45 days from the date of this prospectus solely to cover any
overallotments. If the underwriters exercise this option, each will be
obligated, subject to conditions contained in the purchase agreement, to
purchase a number of additional shares proportionate to that underwriter's
initial amount reflected in the above table.

PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS

Until the distribution of the common shares is complete, Securities and
Exchange Commission rules may limit underwriters and selling group members from
bidding for and purchasing the Fund's common shares. However, the
representatives may engage in transactions that stabilize the price of the
common shares, such as bids or purchases to peg, fix or maintain that price.

If the underwriters create a short position in the common shares in
connection with the offering, I.E., if they sell more common shares than are
listed on the cover of this prospectus, the representatives may reduce that
short position by purchasing common shares in the open market. The
representatives may also elect to reduce any short position by exercising all or
part of the overallotment option described above. The underwriters also may
impose a penalty bid, whereby selling concessions allowed to syndicate members
or other broker-dealers in respect of the common shares sold in this offering
for their account may be reclaimed by the syndicate if such common shares are
repurchased by the syndicate in stabilizing or covering transactions. Purchases
of the common shares to stabilize the price or to reduce a short position may
cause the price of the common shares to be higher than it might be in the
absence of such purchases.

Neither the Fund nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common shares. In addition, neither
the Fund nor any of the underwriters makes any representation that the
representatives will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.

The Fund has agreed not to offer or sell any additional common shares for a
period of 180 days after the date of the purchase agreement without the prior
written consent of the underwriters, except for the sale of the common shares to
the underwriters pursuant to the purchase agreement and certain transactions
relating to the Fund's Dividend Reinvestment Plan.

The Fund anticipates that the underwriters may from time to time act as
brokers or, after they have ceased to be underwriters, dealers in executing the
Fund's portfolio transactions. The underwriters are active underwriters of, and
dealers in, securities and act as market makers in a number of such securities,
and therefore can be expected to engage in portfolio transactions with the Fund.

The common shares will be sold to ensure that New York Stock Exchange
distribution standards (I.E., round lots, public shares and aggregate market
value) will be met.

OTHER RELATIONSHIPS

Western Asset has also agreed to pay from its own assets additional
compensation to Merrill Lynch. This additional compensation will be payable
quarterly at the annual rate of .15% of the Fund's average weekly assets during
the continuance of the Investment Management Agreement or other advisory
agreement between Western Asset and the Fund. Merrill Lynch has agreed to
provide certain after-market support services to Western Asset designed to
maintain the visibility of the Fund on an ongoing basis and to provide relevant
information, studies or reports regarding the Fund and the closed-end investment
company industry. The total amount of these additional payments, plus the amount
paid by the Fund as the $.005 per common share partial reimbursement to the
underwriters and any amount paid by the Fund to Claymore Securities, Inc. for
its distribution assistance, will not exceed 4.5% of the total price to the
public of the common shares sold in this offering.

One or more of the underwriters of the common shares may also act as an
underwriter of the Fund's preferred shares.

The address of Merrill Lynch, Pierce, Fenner & Smith, Incorporated is
4 World Financial Center, New York, New York 10080. The address of Claymore
Securities, Inc. is 210 N. Hale Street, Wheaton, Illinois 60187.

SERVICING AGENT

Claymore Securities, Inc. (the "Servicing Agent") acts as servicing agent to
the Fund pursuant to a servicing agreement (the "Servicing Agreement"). The
Servicing Agent's duties include developing and maintaining a website for the
Fund; assisting in the review of materials made available to shareholders to
assure compliance with applicable laws, rules and regulations; assisting in the
dissemination of the Fund's net asset value, market price and market discount or
premium; maintaining ongoing contact with brokers whose clients hold or may have
an interest in acquiring Fund shares; replying to information requests from
shareholders or prospective investors; and aiding in secondary market support
for the Fund through regular written and oral communications with the Fund's New
York Stock Exchange specialist and the closed-end fund analyst community.

As compensation for its services, the Fund pays the Servicing Agent an
annual fee payable monthly in arrears, which will be based on the Fund's average
weekly assets during such month, in an amount equal to 0.15% of the Fund's
average weekly assets. The fees payable by the Fund to the Servicing

Agent generally will be higher during periods in which the Fund is utilizing
leverage. For more information about how average weekly assets are calculated,
see "Management of the Fund--Investment Management Agreement."

The Servicing Agreement is effective on the date the Fund's registration
statement is declared effective and will terminate unless approved annually by
the Board of Trustees of the Fund. The Servicing Agreement is terminable upon 30
days' notice by the Fund and 60 days' notice by the Servicing Agent.

Claymore Securities, Inc. specializes in the creation, development and
distribution of investment solutions for advisors and their valued clients. The
Servicing Agent is a member of the National Association of Securities Dealers
and is registered as a broker-dealer. The Servicing Agent has limited experience
servicing registered investment companies.

CUSTODIAN AND TRANSFER AGENT

The custodian of the assets of the Fund is State Street Bank & Trust
Company, 150 Newport Avenue AFB/4N, North Quincy, Massachusetts 02171. The
Custodian performs custodial and certain fund accounting services.

EquiServe, 150 Royall Street, Canton, Massachusetts 02021, serves as the
Fund's transfer agent, registrar, and dividend disbursing agent, as well as
agent for the Fund's Dividend Reinvestment Plan.

LEGAL MATTERS

Certain legal matters in connection with the common shares will be passed
upon for the Fund by Ropes & Gray LLP, New York, New York, and for the
underwriters by Clifford Chance US LLP. Clifford Chance US LLP may rely as to
certain matters of Massachusetts law on the opinion of Ropes & Gray LLP.

TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION

PAGE
----

Use of Proceeds....................................................... 1
Investment Objectives and Policies.................................... 1
Investment Restrictions............................................... 33
Management of the Fund................................................ 36
Investment Advisor and Administrator.................................. 44
Portfolio Transactions................................................ 46
Distributions......................................................... 47
Description of Shares................................................. 48
Anti-Takeover and Other Provisions in the Declaration of Trust........ 50
Repurchase of Common Shares; Conversion to Open-End Fund.............. 52
Tax Matters........................................................... 54
Performance-Related, Comparative and Other Information................ 59
Proxy Voting Policies and Procedures.................................. 62
Custodian, Transfer Agent and Dividend Disbursement Agent............. 62
Independent Accountants............................................... 62
Counsel............................................................... 62
Registration Statement................................................ 62
Report of Independent Auditors........................................ 64
Financial Statements.................................................. 65
Appendix A--Description of Securities Ratings......................... A-1
Appendix B--Proxy Voting Policies and Procedures...................... B-1

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Until October 20, 2003 (25 days after the date of this prospectus), all
dealers that buy, sell or trade the common shares, whether or not participating
in this offering, may be required to deliver a prospectus. This is in addition
to the dealer's obligation to deliver a prospectus when acting as an underwriter
and with respect to its unsold allotments or subscriptions.

[Western Asset Logo] [Claymore Logo]

WESTERN ASSET/CLAYMORE

U.S. TREASURY INFLATION PROTECTED

SECURITIES FUND

COMMON SHARES OF BENEFICIAL INTEREST
$15.00 PER SHARE

-----------------
PROSPECTUS
-----------------

MERRILL LYNCH & CO.
LEGG MASON WOOD WALKER
INCORPORATED

RBC CAPITAL MARKETS
ADVEST, INC.
BB&T CAPITAL MARKETS
ROBERT W. BAIRD & CO.
J.J.B. HILLIARD, W.L. LYONS, INC.
JANNEY MONTGOMERY SCOTT LLC
MCDONALD INVESTMENTS INC.
MORGAN KEEGAN & COMPANY, INC.
QUICK & REILLY, INC.

STIFEL, NICOLAUS & COMPANY
INCORPORATED
WR HAMBRECHT & CO.
WEDBUSH MORGAN SECURITIES INC.

CLAYMORE SECURITIES, INC.

, 2003

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

The information in this Statement of Additional Information is not complete
and may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not an offer to sell these securities and
it is not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.

SUBJECT TO COMPLETION -- DATED SEPTEMBER 25, 2003

WESTERN ASSET/CLAYMORE U.S. TREASURY INFLATION PROTECTED
SECURITIES FUND

STATEMENT OF ADDITIONAL INFORMATION

September 25, 2003

Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund
(the "Fund") is a newly organized, diversified, closed-end management investment
company.

This Statement of Additional Information relating to common shares of the
Fund ("Common Shares") is not a prospectus, and should be read in conjunction
with the Fund's prospectus relating thereto dated September 25, 2003 (the
"Prospectus"). This Statement of Additional Information does not include all
information that a prospective investor should consider before purchasing Common
Shares, and investors should obtain and read the Prospectus prior to purchasing
such shares. A copy of the Prospectus may be obtained without charge by calling
1-800-345-7999. You may also obtain a copy of the Prospectus on the web site
(http://www.sec.gov) of the Securities and Exchange Commission (the "SEC").
Capitalized terms used but not defined in this Statement of Additional
Information have the meanings ascribed to them in the Prospectus.

TABLE OF CONTENTS

PAGE
----

USE OF PROCEEDS 1
INVESTMENT OBJECTIVES AND POLICIES 1
INVESTMENT RESTRICTIONS 33
MANAGEMENT OF THE FUND 36
INVESTMENT ADVISOR AND ADMINISTRATOR 44
PORTFOLIO TRANSACTIONS 46
DISTRIBUTIONS 47
DESCRIPTION OF SHARES 48
ANTI-TAKEOVER AND OTHER PROVISIONS IN THE DECLARATION OF TRUST 50
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND 52
TAX MATTERS 54
PERFORMANCE-RELATED, COMPARATIVE AND OTHER INFORMATION 59
PROXY VOTING POLICIES AND PROCEDURES 62
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSEMENT AGENT 62
INDEPENDENT ACCOUNTANTS 62
COUNSEL 62
REGISTRATION STATEMENT 62
REPORT OF INDEPENDENT AUDITORS 64
FINANCIAL STATEMENTS 65
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS A-1
APPENDIX B - PROXY VOTING POLICIES AND PROCEDURES B-1

This Statement of Additional Information is dated September 25, 2003.

USE OF PROCEEDS

The net proceeds of the offering of Common Shares of the Fund will be
approximately $____________ (or $____________ if the Underwriters exercise the
overallotment option in full) after payment of the estimated offering costs
borne by the Fund.

Pending investment in U.S. Treasury Inflation Protected Securities ("U.S.
TIPS") and other investments that meet the Fund's investment objectives and
policies, the net proceeds of the offering will be invested in short-term
investment grade securities.

INVESTMENT OBJECTIVES AND POLICIES

The investment objectives and general investment policies of the Fund are
described in the Prospectus. Additional information concerning the
characteristics of certain of the Fund's investments is set forth below.

INFLATION-INDEXED BONDS

Under normal market conditions, the Fund will invest at least 80% of its
total managed assets in U.S. TIPS. U.S. TIPS are fixed income securities issued
by the U.S. Department of Treasury, the principal amounts of which are adjusted
daily based upon changes in the rate of inflation (currently represented by the
non-seasonally adjusted Consumer Price Index for All Urban Consumers, calculated
with a three-month lag). The Consumer Price Index for All Urban Consumers
("CPI-U") calculated by the U.S. Department of Treasury for the first day of
each calendar month is the CPI-U for the third preceding calendar month. For
example, the CPI-U used for April 1 in any year is the CPI-U for January of that
year, which is reported in February. The factor used to calculate the principal
amount of a U.S. TIPS each day is determined by a linear interpolation between
the CPI-U for the first day of the month and the CPI-U on the first day of the
next month.

The U.S. Treasury currently issues U.S. TIPS in only ten-year maturities,
although it is possible that U.S. TIPS with other maturities will be issued in
the future. U.S. TIPS have previously been issued with maturities of five, ten
and thirty years. U.S. TIPS pay interest on a semi-annual basis, equal to a
fixed percentage of the inflation-adjusted principal amount.

The interest rate on these bonds is fixed at issuance, but over the life of
the bond, this interest may be paid on an increasing or decreasing principal
value that has been adjusted for inflation. Repayment of the original bond
principal upon maturity (as adjusted for inflation) is guaranteed even during a
period of deflation. However, because the principal amount of U.S. TIPS would be
adjusted downward during a period of deflation, the Fund will be subject to
deflation risk with respect to its investments in these securities. In addition,
the current market value of the bonds is not guaranteed, and will fluctuate. If
the Fund purchases U.S. TIPS in the secondary market whose principal values have
been adjusted upward due to inflation since issuance, the Fund may experience a
loss if there is a subsequent period of deflation. If inflation is lower than
expected during the period the Fund holds a U.S. TIPS, the Fund may earn less on
the security than on a conventional bond. For more information about certain
risks relating to investments in U.S. TIPS, see "Risks -- Risks Relating to U.S.
TIPS" in the Fund's Prospectus.

The Fund may invest in inflation-indexed securities with other structures
or characteristics as such securities become available in the market. Most other
issuers, including non-U.S. governments, their agencies or instrumentalities and
corporations, currently pay out the Consumer Price Index accruals as part of a
semi-annual coupon. It is currently expected that other types of
inflation-indexed securities would have characteristics similar to those
described above.

In order to satisfy a requirement for qualification as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), an investment company, such as the Fund, must distribute each year at
least 90% of its net investment income, including the original issue discount
accrued on U.S. inflation-indexed bonds. For federal income tax purposes, any
increase in the principal amount of an inflation-indexed bond will be original
issue discount which is taxable as ordinary income in the year accrued, even
though investors do not receive their principal, including any increases
thereto, until maturity. See "Tax Matters--Original Issue Discount and
Payment-in-Kind Securities" below. Because the Fund will not, on a current
basis, receive cash payments from the issuer of these securities in respect of
accrued original issue discount, in some years the Fund may have to distribute
cash obtained from selling other portfolio holdings of the Fund. In some
circumstances, such sales might be necessary in order to satisfy cash
distribution requirements even though investment considerations might otherwise
make it undesirable for the Fund to sell securities at such time. Under many
market conditions, investments in U.S. inflation-indexed bonds may be illiquid,
making it difficult for the Fund to dispose of them or determine their current
value.

CORPORATE BONDS

The Fund may invest in a wide variety of U.S. dollar-denominated debt
obligations of varying maturities issued by U.S. and foreign corporations
(including banks) and other business entities. Bonds are fixed or variable rate
debt obligations, including bills, notes, debentures and similar instruments and
securities. Bonds generally are used by corporations and other issuers to borrow
money from investors. The issuer pays the investor a fixed or variable rate of
interest and normally must repay the amount borrowed on or before maturity.
Certain bonds are "perpetual" in that they have no maturity date. Although the
Fund will not invest in bonds of below investment grade quality (as defined in
the Prospectus) at the time of purchase, due to fluctuations in the credit
characteristics of a particular issue, the Fund may from time to time hold
corporate bonds of less than investment grade quality. See "-Lower Grade
Securities ("Junk Bonds")" below.

The Fund's investments in corporate bonds are subject to a number of risks
described in the Prospectus and elaborated upon elsewhere in this Statement of
Additional Information and the Prospectus, including interest rate risk, credit
risk, lower grade and unrated securities risk, issuer risk, smaller company
risk, foreign risk, currency risk, inflation risk and management risk.

COMMERCIAL PAPER

Commercial paper represents short-term unsecured promissory notes issued in
bearer form by corporations such as banks or bank holding companies and finance
companies. The Fund may invest in commercial paper of any credit quality
consistent with the Fund's investment objectives and policies, including unrated
commercial paper for which Western Asset Management Company ("Western Asset" or
the "Advisor"), the Fund's investment advisor, has made a credit quality
assessment. See Appendix A to this Statement of Additional Information for a
description of the ratings assigned by Moody's Investor Services, Inc.
("Moody's"), Standard & Poor's Rating Services ("S&P") and Fitch Ratings
("Fitch") to commercial paper. The rate of return on commercial paper may be
linked or indexed to the level of exchange rates between the U.S. dollar and a
foreign currency or currencies.

PREFERRED STOCK

Preferred stock represents an equity interest in a company that generally
entitles the holder to receive, in preference to the holders of other stocks
such as common stocks, dividends and a fixed share of the proceeds resulting
from a liquidation of the company. Some preferred stocks also entitle their
holders to receive additional liquidation proceeds on the same basis as holders
of a company's common stock, and thus also represent an ownership interest in
that company. As described below, the Fund may invest in preferred stocks that
pay fixed or adjustable rates of return. The value of a company's preferred
stock may fall as a result of factors relating directly to that company's
products or services. A preferred stock's value may also fall because

of factors affecting not just the company, but companies in the same industry or
in a number of different industries, such as increases in production costs. The
value of preferred stock may also be affected by changes in financial markets
that are relatively unrelated to the company or its industry, such as changes in
interest rates or currency exchange rates. In addition, a company's preferred
stockholders are generally paid dividends and liquidation proceeds only after
the company makes required payments to holders of its bonds and other debt. For
this reason, the value of the preferred stock will usually react more strongly
than bonds and other debt to actual or perceived changes in the company's
financial condition or prospects. Preferred stocks of smaller companies may be
more vulnerable to adverse developments than those of larger companies.

FIXED RATE PREFERRED STOCKS. Some fixed rate preferred stocks in which the
Fund may invest, known as perpetual preferred stocks, offer a fixed return with
no maturity date. Because they never mature, perpetual preferred stocks act like
long-term bonds and can be more volatile than other types of preferred stocks
that have a maturity date and may have heightened sensitivity to changes in
interest rates. The Fund may also invest in sinking fund preferred stocks. These
preferred stocks also offer a fixed return, but have a maturity date and are
retired or redeemed on a predetermined schedule. The shorter duration of sinking
fund preferred stocks makes them perform somewhat like intermediate-term bonds
and they typically have lower yields than perpetual preferred stocks. The Fund
may also invest in fixed rate preferred stocks other than perpetual preferred
stocks and sinking fund preferred stocks.

ADJUSTABLE RATE AND AUCTION PREFERRED STOCKS. Typically, the dividend rate
on an adjustable rate preferred stock is determined prospectively each quarter
by applying an adjustment formula established at the time of issuance of the
stock. Although adjustment formulas vary among issues, they typically involve a
fixed premium or discount relative to rates on specified debt securities issued
by the U.S. Treasury. Typically, an adjustment formula will provide for a fixed
premium or discount adjustment relative to the highest base yield of three
specified U.S. Treasury securities: the 90-day Treasury bill, the 10-year
Treasury note and the 20-year Treasury bond. The premium or discount adjustment
to be added to or subtracted from this highest U.S. Treasury base rate yield is
fixed at the time of issue and cannot be changed without the approval of the
holders of the stock. The dividend rate on other preferred stocks in which the
Fund may invest, commonly known as auction preferred stocks, is adjusted at
intervals that may be more frequent than quarterly, such as every 49 days, based
on bids submitted by holders and prospective purchasers of such stocks and may
be subject to stated maximum and minimum dividend rates. The issues of most
adjustable rate and auction preferred stocks currently outstanding are
perpetual, but are redeemable after a specified date at the option of the
issuer. Certain issues supported by the credit of a high-rated financial
institution provide usually for mandatory redemption prior to expiration of the
credit arrangement. In addition, no redemption can usually occur if full
cumulative dividends are not paid. Although the dividend rates on adjustable and
auction preferred stocks are generally adjusted or reset frequently, the market
values of these preferred stocks may still fluctuate in response to changes in
interest rates. Market values of adjustable preferred stocks also may
substantially fluctuate if interest rates increase or decrease once the maximum
or minimum dividend rate for a particular stock is approached.

EQUITY SECURITIES

The Fund may directly or indirectly invest its assets in equity securities.
Among other risks, prices of equity securities generally fluctuate more than
those of other securities. The Fund may experience a substantial or complete
loss on an individual stock. These risks may affect a single issuer, industry or
section of the economy or may affect the market as a whole.

CONVERTIBLE SECURITIES AND SYNTHETIC CONVERTIBLE SECURITIES

The Fund may invest in convertible securities, which are bonds, debentures,
notes or other securities that entitle the holder to acquire common stock or
other equity securities of the same or a different issuer.

Convertible securities have general characteristics similar to both debt and
equity securities. The Advisor will generally evaluate these instruments based
on their debt characteristics.

A convertible security generally entitles the holder to receive interest
paid or accrued until the convertible security matures or is redeemed, converted
or exchanged. Before conversion, convertible securities have characteristics
similar to non-convertible debt obligations. Convertible securities rank senior
to common stock in a corporation's capital structure and, therefore, generally
entail less risk than the corporation's common stock, although the extent to
which such risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a debt obligation.

Because of the conversion feature, the price of the convertible security
will normally fluctuate in some proportion to changes in the price of the
underlying asset, and will therefore be subject to risks relating to the
activities of the issuer and/or general market and economic conditions. The
income component of convertible securities may tend to cushion the securities
against declines in the price of the underlying asset. However, the income
component of convertible securities will typically cause fluctuations in the
value of such securities based upon changes in interest rates and the credit
quality of the issuer. In addition, convertible securities are often lower-rated
securities. See "-Lower Grade Securities ("Junk Bonds")" below.

A convertible security may be subject to redemption at the option of the
issuer at a predetermined price. If a convertible security held by the Fund is
called for redemption, the Fund would be required to permit the issuer to redeem
the security and convert it to underlying common stock, or would sell the
convertible security to a third party, which may have an adverse effect on the
Fund's ability to achieve its investment objectives.

The Fund may invest in so-called "synthetic convertible securities," which
are composed of two or more different securities whose investment
characteristics, taken together, resemble those of convertible securities. For
example, the Fund may purchase a non-convertible debt security and a warrant or
option. The synthetic convertible security differs from the true convertible
security in several respects. Unlike a true convertible security, which is a
single security having a unitary market value, a synthetic convertible security
comprises two or more separate securities, each with its own market value.
Therefore, the "market value" of a synthetic convertible security is the sum of
the values of its debt component and its convertible component. For this reason,
the values of a synthetic convertible security and a true convertible security
may respond differently to market fluctuations.

BANK OBLIGATIONS

Bank obligations in which the Fund may invest include certificates of
deposit, bankers' acceptances and fixed time deposits. Certificates of deposit
are negotiable certificates that are issued against funds deposited in a
commercial bank for a definite period of time and that earn a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Fixed time deposits are bank
obligations payable at a stated maturity date and bearing interest at a fixed
rate. Fixed time deposits may be withdrawn on demand by the investor, but may be
subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. There are generally no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits. The Fund may also hold funds on deposit with its custodian bank in an
interest-bearing account for temporary purposes.

Subject to the Fund's limitation on concentration in the securities of
issuers in a particular industry or group of industries, the Fund may invest
without limit in U.S. dollar-denominated obligations of foreign banks.
Obligations of foreign banks involve certain risks associated with investing in
foreign securities described under "-Foreign (Non-U.S.) Securities" below,
including the possibilities that their liquidity could be impaired because of
future political and economic developments, that their obligations may be less
marketable than comparable obligations of U.S. banks, that a foreign
jurisdiction might impose withholding taxes on interest income payable on those
obligations, that foreign deposits may be seized or nationalized, that foreign
governmental restrictions such as exchange controls may be adopted which might
adversely affect the payment of principal and interest on those obligations and
that the selection of those obligations may be more difficult because there may
be less publicly available information concerning foreign banks or the
accounting, auditing and financial reporting standards, practices and
requirements applicable to foreign banks may differ from those applicable to
U.S. banks. Foreign banks are not generally subject to examination by any U.S.
Government agency or instrumentality.

LOAN PARTICIPATIONS AND ASSIGNMENTS

The Fund may purchase participations in commercial loans. Such indebtedness
may be secured or unsecured. Loan participations typically represent direct
participations in a loan to a corporate borrower, and generally are offered by
banks or other financial institutions or lending syndicates. The Fund may
participate in such syndications, or can buy part of a loan, becoming a part
lender. When purchasing loan participations, the Fund assumes the credit risk
associated with the corporate borrower and may assume the credit risk associated
with an interposed bank or other financial intermediary. The participation
interests in which the Fund intends to invest may not be rated by any nationally
recognized rating service.

A loan is often administered by an agent bank acting as agent for all
holders. The agent bank administers the terms of the loan, as specified in the
loan agreement. In addition, the agent bank is normally responsible for the
collection of principal and interest payments from the corporate borrower and
the apportionment of these payments to the credit of all institutions which are
parties to the loan agreement. Unless, under the terms of the loan or other
indebtedness, the Fund has direct recourse against the corporate borrower, the
Fund may have to rely on the agent bank or other financial intermediary to apply
appropriate credit remedies against a corporate borrower.

A financial institution's employment as agent bank might be terminated in
the event that it fails to observe a requisite standard of care or becomes
insolvent. A successor agent bank would generally be appointed to replace the
terminated agent bank, and assets held by the agent bank under the loan
agreement should remain available to holders of such indebtedness. However, if
assets held by the agent bank for the benefit of the Fund were determined to be
subject to the claims of the agent bank's general creditors, the Fund might
incur certain costs and delays in realizing payment on a loan or loan
participation and could suffer a loss of principal and/or interest. In
situations involving other interposed financial institutions (E.G., an insurance
company or government agency) similar risks may arise.

Purchasers of loans and other forms of direct indebtedness depend primarily
upon the creditworthiness of the corporate borrower for payment of principal and
interest. If the Fund does not receive scheduled interest or principal payments
on such indebtedness, the Fund's share price and yield could be adversely
affected. Loans that are fully secured offer the Fund more protection than
unsecured loans in the event of non-payment of scheduled interest or principal.
However, there is no assurance that the liquidation of collateral from a secured
loan would satisfy the corporate borrower's obligation, or that the collateral
can be liquidated.

The Fund may invest in loan participations with credit quality comparable
to that of issuers of its securities investments. Indebtedness of companies
whose creditworthiness is poor involves substantially greater risks, and may be
highly speculative. Some companies may never pay off their indebtedness, or may

pay only a small fraction of the amount owed. Consequently, to the extent the
Fund holds indebtedness of companies with poor credit, the Fund bears a
substantial risk of losing the entire amount invested.

The Fund limits the amount of its total assets that it will invest in any
one issuer or in issuers within the same industry or group of industries (see
"Investment Restrictions"). For purposes of these limits, the Fund generally
will treat the corporate borrower as the "issuer" of indebtedness held by the
Fund. In the case of loan participations where a bank or other lending
institution serves as a financial intermediary between the Fund and the
corporate borrower, if the participation does not shift to the Fund the direct
debtor-creditor relationship with the corporate borrower, SEC interpretations
currently require the Fund to treat both the lending bank or other lending
institution and the corporate borrower as "issuers" for the purposes of
determining whether the Fund has invested more than 5% of its total assets in a
single issuer. Treating a financial intermediary as an issuer of indebtedness
may restrict the Fund's ability to invest in indebtedness related to a single
financial intermediary, or a group of intermediaries engaged in the same
industry, even if the underlying borrowers represent many different companies
and industries. The Fund reserves the right to treat the corporate borrower as
the issuer of such participations to the extent permitted by applicable law,
regulations, or SEC staff interpretations or orders in the future.

Loans and other types of direct indebtedness may not be readily marketable
and may be subject to restrictions on resale. In some cases, negotiations
involved in disposing of indebtedness may require weeks to complete.
Consequently, some indebtedness may be difficult or impossible to dispose of
readily at what the Advisor believes to be a fair price. In addition, valuation
of illiquid indebtedness involves a greater degree of judgment in determining
the Fund's net asset value than if that value were based on available market
quotations, and could result in significant variations in the Fund's daily share
price. At the same time, some loan interests are traded among certain financial
institutions and accordingly may be deemed liquid. As the market for different
types of indebtedness develops, the liquidity of these instruments is expected
to improve. In addition, the Fund currently intends to treat indebtedness for
which there is no readily available market as illiquid for purposes of the
Fund's limitation on illiquid investments. Investments in loan participations
are considered to be debt obligations for purposes of the Fund's investment
restriction relating to the lending of funds or assets.

Investments in loans through a direct assignment of the financial
institution's interests with respect to the loan may involve additional risks to
the Fund. For example, if a loan is foreclosed, the Fund could become part owner
of any collateral, and would bear the costs and liabilities associated with
owning and disposing of the collateral. In addition, it is conceivable that,
under emerging legal theories of lender liability, the Fund could be held liable
as co-lender. It is unclear whether loans and other forms of direct indebtedness
offer securities law protections against fraud and misrepresentation. In the
absence of definitive regulatory guidance, the Fund relies on the Advisor's
research in an attempt to avoid situations where fraud or misrepresentations
could adversely affect the Fund.

ZERO-COUPON BONDS, STEP-UPS AND PAYMENT-IN-KIND SECURITIES

Zero-coupon securities are debt obligations that do not entitle the holder
to any periodic payments of interest either for the entire life of the
obligation or for an initial period after the issuance of the obligations. Like
zero-coupon bonds, "step-up" bonds pay no interest initially but eventually
begin to pay a coupon rate prior to maturity, which rate may increase at stated
intervals during the life of the security. Payment-in-kind securities (PIKs) pay
dividends or interest in the form of additional securities of the issuer, rather
than in cash. Each of these instruments is typically issued and traded at a deep
discount from its face amount. The amount of the discount varies depending on
such factors as the time remaining until maturity of the securities, prevailing
interest rates, the liquidity of the security and the perceived credit quality
of the issuer. The market prices of zero-coupon bonds, step-ups and PIKs
generally are more volatile than the market prices of debt instruments that pay
interest currently and in cash and are likely to respond to changes in interest
rates and perceived credit quality of the issuer to a greater degree than are
other types of securities having similar maturities and credit

quality. As discussed above in connection with inflation-indexed bonds, the
distribution requirements applicable to regulated investment companies require
that the Fund distribute 90% of its net investment income, including the
original issue discount accrued on zero-coupon bonds, step-ups and PIKs. As a
result, in some years the Fund may have to distribute cash obtained from selling
other portfolio holdings of the Fund, even though investment considerations
might otherwise make it undesirable for the Fund to sell securities at such
time. Under many market conditions, investments in zero-coupon bonds, step-ups
and PIKs may be illiquid, making it difficult for the Fund to dispose of them or
determine their current value.

LOWER GRADE SECURITIES ("JUNK BONDS")

Although the Fund will not invest in bonds that are below investment grade
quality (as defined in the Prospectus) at the time of purchase, the Fund is not
required to dispose of a security if a rating agency or the Advisor downgrades
its assessment of the credit characteristics of a particular issue. As a result,
the Fund may from time to time hold bonds of below investment grade quality.
Such investments may include debt securities not rated Baa by Moody's or BBB by
S&P or Fitch or higher, or securities that are unrated but judged to be of
comparable quality by the Advisor. These securities are sometimes referred to as
"high yield" securities or "junk bonds."

Investments in high yield securities generally provide greater income and
increased opportunity for capital appreciation than investments in higher
quality securities, but they also typically entail greater price volatility and
principal and income risk, including the possibility of issuer default and
bankruptcy. High yield securities are regarded as predominantly speculative with
respect to the issuer's continuing ability to meet principal and interest
payments. Debt securities in the lowest investment grade category also may be
considered to possess some speculative characteristics by certain rating
agencies. In addition, analysis of the creditworthiness of issuers of high yield
securities may be more complex than for issuers of higher quality securities.

High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in high yield security prices because the advent
of a recession could lessen the ability of an issuer to make principal and
interest payments on its debt obligations. If an issuer of high yield securities
defaults, in addition to risking payment of all or a portion of interest and
principal, the Fund may incur additional expenses to seek recovery. In the case
of high yield securities structured as zero-coupon, step-up or payment-in-kind
securities, their market prices will normally be affected to a greater extent by
interest rate changes, and therefore tend to be more volatile than securities
which pay interest currently and in cash. The Advisor seeks to reduce these
risks through diversification, credit analysis and attention to current
developments and trends in both the economy and financial markets.

The secondary market on which high yield securities are traded may be less
liquid than the market for investment grade securities. Less liquidity in the
secondary trading market could adversely affect the price at which the Fund
could sell a high yield security and could adversely affect the daily net asset
value of the shares. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and liquidity of high
yield securities, especially in a thinly traded market. When secondary markets
for high yield securities are less liquid than the market for investment grade
securities, it may be more difficult to value the securities because such
valuation may require more research, and elements of judgment may play a greater
role in the valuation because there is less reliable, objective data available.
During periods of thin trading in these markets, the spread between bid and
asked prices is likely to increase significantly and the Fund may have greater
difficulty selling its portfolio securities. The Fund will be more dependent on
the Advisor's research and analysis when investing in high yield securities.

A general description of Moody's, S&P's, and Fitch's ratings of securities
is set forth in Appendix A to this Statement of Additional Information. The
ratings of Moody's, S&P and Fitch represent their opinions as to the quality of
the securities they rate. It should be emphasized, however, that ratings are
general and are not absolute standards of quality. Consequently, debt
obligations with the same maturity, coupon and rating may have different yields
while obligations with the same maturity and coupon with different ratings may
have the same yield. For these reasons, the use of credit ratings as the sole
method of evaluating high yield securities can involve certain risks. For
example, credit ratings evaluate the safety of principal and interest payments,
not the market value risk of high yield securities. Also, credit rating agencies
may fail to change credit ratings in a timely fashion to reflect events since
the security was last rated. The Advisor does not rely solely on credit ratings
when selecting securities for the Fund and develops its own independent analysis
of issuer credit quality. Because of this, the Fund's performance may depend
more on the Advisor's own credit analysis than in the case of a fund investing
in higher-rated securities.

As noted above, the Fund is not required to dispose of a security in the
event that a rating agency or the Advisor downgrades its assessment of the
credit characteristics of a particular issue. In determining whether to retain
or sell such a security, the Advisor may consider such factors as the Advisor's
assessment of the credit quality of the issuer of such security, the price at
which such security could be sold and the rating, if any, assigned to such
security by other rating agencies.

FOREIGN (NON-U.S.) SECURITIES

The Fund may invest in U.S. dollar-denominated debt obligations of foreign
issuers, including foreign corporate issuers, foreign banks (see "-Bank
Obligations" above), foreign governments and their respective sub-divisions,
agencies and instrumentalities, government-sponsored enterprises, international
agencies and supra-national government entities. The Fund does not currently
anticipate holding non-U.S. dollar-denominated investments but reserves the
flexibility to invest, from time to time, in debt instruments denominated in
foreign currencies (of both developed and "emerging market" countries) upon the
recommendation of the Advisor.

The U.S. dollar-denominated foreign securities in which the Fund may invest
include, among others, Eurodollar obligations and "Yankee Dollar" obligations.
Eurodollar obligations are U.S. dollar-denominated certificates of deposit and
time deposits issued outside the U.S. capital markets by foreign branches of
U.S. banks and by foreign banks. Yankee Dollar obligations are U.S.
dollar-denominated obligations issued in the U.S. capital markets by foreign
banks. Eurodollar and Yankee Dollar obligations are generally subject to the
same risks that apply to domestic debt issues, notably credit risk, market risk
and liquidity risk. Additionally, Eurodollar (and to a limited extent, Yankee
Dollar) obligations are subject to certain sovereign risks. One such risk is the
possibility that a sovereign country might prevent capital, in the form of
dollars, from flowing across its borders. Other risks include adverse political
and economic developments; the extent and quality of government regulation of
financial markets and institutions; the imposition of foreign withholding taxes;
and the expropriation or nationalization of foreign issuers.

The Fund may also invest in American Depository Receipts ("ADRs") or Global
Depository Receipts ("GDRs"). ADRs are U.S. dollar-denominated receipts issued
generally by domestic banks and represent the deposit with the bank of a
security of a foreign issuer. GDRs may be offered privately in the United States
and also trade in public or private markets in other countries. ADRs and GDRs
may be issued as sponsored or unsponsored programs. In sponsored programs, an
issuer has made arrangements to have its securities trade in the form of ADRs or
GDRs. In unsponsored programs, the issuer may not be directly involved in the
creation of the program. Although regulatory requirements with respect to
sponsored and unsponsored programs are generally similar, in some cases it may
be easier to obtain financial information from an issuer that has participated
in the creation of a sponsored program.

The Fund also may invest in U.S. dollar denominated Brady Bonds. Brady
Bonds are securities created through the exchange of existing commercial bank
loans to sovereign entities for new obligations in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented in a number of countries, including:
Argentina, Bolivia, Brazil, Bulgaria, Costa Rica, the Dominican Republic,
Ecuador, Jordan, Mexico, Niger, Nigeria, Panama, Peru, the Philippines, Poland,
Uruguay, and Venezuela.

Brady Bonds may be collateralized or uncollateralized and are actively
traded in the over-the-counter secondary market. Brady Bonds are not considered
to be U.S. Government securities. U.S. dollar-denominated, collateralized Brady
Bonds, which may be fixed rate par bonds or floating rate discount bonds, are
generally collateralized in full as to principal by U.S. Treasury zero-coupon
bonds having the same maturity as the Brady Bonds. Interest payments on these
Brady Bonds generally are collateralized on a one-year or longer rolling-forward
basis by cash or securities in an amount that, in the case of fixed rate bonds,
is equal to at least one year of interest payments or, in the case of floating
rate bonds, initially is equal to at least one year's interest payments based on
the applicable interest rate at that time and is adjusted at regular intervals
thereafter. Certain Brady Bonds are entitled to "value recovery payments" in
certain circumstances, which in effect constitute supplemental interest payments
but generally are not collateralized. Brady Bonds are often viewed as having
three or four valuation components: (i) the collateralized repayment of
principal at final maturity; (ii) the collateralized interest payments; (iii)
the uncollateralized interest payments; and (iv) any uncollateralized repayment
of principal at maturity (the uncollateralized amounts constitute the "residual
risk").

Most Mexican Brady Bonds issued to date have principal repayments at final
maturity fully collateralized by U.S. Treasury zero-coupon bonds (or comparable
collateral denominated in other currencies) and interest coupon payments
collateralized on an 18-month rolling-forward basis by funds held in escrow by
an agent for the bondholders. A significant portion of the Venezuelan Brady
Bonds and the Argentine Brady Bonds issued to date have repayments at final
maturity collateralized by U.S. Treasury zero-coupon bonds (or comparable
collateral denominated in other currencies) and/or interest coupon payments
collateralized on a 14-month (for Venezuela) or 12-month (for Argentina)
rolling-forward basis by securities held by the Federal Reserve Bank of New York
as collateral agent.

Brady Bonds involve various risk factors including residual risk and the
history of defaults with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds. There can be no assurance that Brady
Bonds in which the Fund may invest will not be subject to restructuring
arrangements or to requests for new credit, which may cause the Fund to suffer a
loss of interest or principal on any of its holdings.

Investing in the securities of foreign issuers involves special risks and
considerations not typically associated with investing in U.S. companies. These
include: differences in accounting, auditing and financial reporting standards,
generally higher commission rates on foreign portfolio transactions, the
possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country), political instability which can
affect U.S. investments in foreign countries and potential restrictions on the
flow of international capital. In addition, foreign securities and dividends and
interest payable on those securities may be subject to foreign taxes, including
taxes withheld from payments on those securities. Foreign securities often trade
with less frequency and volume than domestic securities and therefore may
exhibit greater price volatility.

To the extent the Fund invests in non-U.S. instruments, the following
guidelines will apply in determining the Fund's net asset value. The values of
such securities and investments are translated into U.S. dollars at current
exchange rates or at such other rates as the Trustees or persons acting at their
discretion may determine in computing net asset value. Because of time zone
differences, non-U.S. exchanges and securities markets and non-U.S. currency
markets will usually be closed prior to the time of closing of the New York
Stock Exchange. Consequently, the values of non-U.S. securities and investments
will be determined as of the

earlier closing of such exchanges and markets. Events affecting the values of
such non-U.S. securities and investments may occasionally occur between the
earlier closings of such exchanges and markets and the closing of the New York
Stock Exchange that will not be reflected in the computation of the net asset
value. If an event that is likely materially to affect the value of such
securities or investments occurs during such period, then such securities or
investments may be valued at fair value as determined in good faith by the
Trustees or persons acting at their discretion.

EMERGING MARKET SECURITIES. The risks of investing in foreign securities
are particularly high when securities of issuers based in or denominated in
currencies of developing (or "emerging market") countries are involved.
Investing in emerging market countries involves certain risks not typically
associated with investing in U.S. securities, and imposes risks greater than, or
in addition to, risks of investing in foreign, developed countries. These risks
include: greater risks of nationalization or expropriation of assets or
confiscatory taxation; greater social, economic and political uncertainty and
instability (including the risk of war); more substantial government involvement
in the economy; less government supervision and regulation of the securities
markets and participants in those markets; controls on foreign investment and
limitations on repatriation of invested capital; the fact that companies in
emerging market countries may be smaller, less seasoned and newly organized
companies; the difference in, or lack of, auditing and financial reporting
standards, which may result in unavailability of material information about
issuers; the risk that it may be more difficult to obtain and/or enforce a
judgment in a court outside the United States; and greater price volatility,
substantially less liquidity and significantly smaller market capitalization of
securities markets. In addition, a number of emerging market countries restrict,
to various degrees, foreign investment in securities, and high rates of
inflation and rapid fluctuations in inflation rates have had, and may continue
to have, negative effects on the economies and securities markets of certain
emerging market countries. Also, any change in the leadership or politics of
emerging market countries, or the countries that exercise a significant
influence over those countries, may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring and adversely affect
existing investment opportunities.

SOVEREIGN DEBT. Investment in sovereign debt can involve a high degree of
risk. The governmental entity that controls the repayment of sovereign debt may
not be able or willing to repay the principal and/or interest when due in
accordance with the terms of the debt. A governmental entity's willingness or
ability to repay principal and interest due in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the governmental entity's policy toward the International Monetary Fund and the
political constraints to which a governmental entity may be subject.
Governmental entities may also depend on expected disbursements from foreign
governments, multilateral agencies and others to reduce principal and interest
arrearages on their debt. The commitment on the part of these governments,
agencies and others to make such disbursements may be conditioned on a
governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may further
impair such debtor's ability or willingness to service its debts in a timely
manner. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt (including the Fund) may be requested to participate
in the rescheduling of such debt and to extend further loans to governmental
entities. There is no bankruptcy proceeding by which sovereign debt on which
governmental entities have defaulted may be collected in whole or in part.

FOREIGN CURRENCY EXCHANGE-RELATED SECURITIES

PRINCIPAL EXCHANGE RATE LINKED SECURITIES. Principal exchange rate linked
securities ("PERLs"(SM)) are debt obligations the principal on which is payable
at maturity in an amount that may vary based on

the exchange rate between the U.S. dollar and a particular foreign currency
at or about that time. The return on "standard" principal exchange rate
linked securities is enhanced if the foreign currency to which the security
is linked appreciates against the U.S. dollar, and is adversely affected by
increases in the foreign exchange value of the U.S. dollar; "reverse"
principal exchange rate linked securities are like "standard" securities,
except that their return is enhanced by increases in the value of the U.S.
dollar and adversely impacted by increases in the value of foreign currency.
Interest payments on the securities are generally made in U.S. dollars at
rates that reflect the degree of foreign currency risk assumed or given up by
the purchaser of the notes (I.E., at relatively higher interest rates if the
purchaser has assumed some of the foreign exchange risk, or relatively lower
interest rates if the issuer has assumed some of the foreign exchange risk,
based on the expectations of the current market). Principal exchange rate
linked securities may in limited cases be subject to acceleration of maturity
(generally, not without the consent of the holders of the securities), which
may have an adverse impact on the value of the principal payment to be made
at maturity.

PERFORMANCE INDEXED PAPER. Performance indexed paper ("PIPs"(SM)) is U.S.
dollar-denominated commercial paper the yield of which is linked to certain
foreign exchange rate movements. The yield to the investor on performance
indexed paper is established at maturity as a function of spot exchange rates
between the U.S. dollar and a designated currency as of or about that time
(generally, the index maturity two days prior to maturity). The yield to the
investor will be within a range stipulated at the time of purchase of the
obligation, generally with a guaranteed minimum rate of return that is below,
and a potential maximum rate of return that is above, market yields on U.S.
dollar-denominated commercial paper, with both the minimum and maximum rates of
return on the investment corresponding to the minimum and maximum values of the
spot exchange rate two business days prior to maturity.

MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES

The Fund may invest in mortgage-related securities, and in other
asset-backed securities (unrelated to mortgage loans) that are offered to
investors currently or in the future. Mortgage-related securities are interests
in pools of residential or commercial mortgage loans, including mortgage loans
made by savings and loan institutions, mortgage bankers, commercial banks and
others. Pools of mortgage loans are assembled as securities for sale to
investors by various governmental, government-related and private organizations.
The value of some mortgage-related or asset-backed securities in which the Fund
may invest may be particularly sensitive to changes in prevailing interest
rates, and, like other debt obligations, the ability of the Fund to utilize
these instruments successfully may depend in part upon the ability of the
Advisor to forecast interest rates and other economic factors correctly. See
"-Mortgage Pass-Through Securities" below. Certain debt obligations are also
secured with collateral consisting of mortgage-related securities. See
"-Collateralized Mortgage Obligations ("CMOs")" below.

The rate of prepayments on underlying mortgages will affect the price and
volatility of a mortgage-related security, and may have the effect of shortening
or extending the effective maturity of the security beyond what was anticipated
at the time of purchase. Early repayment of principal on some mortgage-related
securities (arising from prepayments of principal due to the sale of the
underlying property, refinancing, or foreclosure, net of fees and costs which
may be incurred) may expose the Fund to a lower rate of return upon reinvestment
of principal. Also, if a security subject to prepayment has been purchased at a
premium, the value of the premium would be lost in the event of prepayment. Like
other debt obligations, when interest rates rise, the value of a
mortgage-related security generally will decline; however, when interest rates
are declining, the value of mortgage-related securities with prepayment features
may not increase as much as other debt obligations. To the extent that
unanticipated rates of prepayment on underlying mortgages increase the effective
maturity of a mortgage-related security, the volatility of such security can be
expected to increase.

Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (in the case of

securities guaranteed by the Government National Mortgage Association (the
"GNMA")) or guaranteed by agencies or instrumentalities of the U.S.
Government (in the case of securities guaranteed by the Federal National
Mortgage Association (the "FNMA") or the Federal Home Loan Mortgage
Corporation (the "FHLMC"). The principal governmental guarantor of
mortgage-related securities is the GNMA. GNMA is a wholly owned U.S.
Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit
of the U.S. Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools of
mortgages insured by the Federal Housing Administration (the "FHA"), or
guaranteed by the Department of Veterans Affairs (the "VA").

Government-related guarantors (I.E., not backed by the full faith and
credit of the U.S. Government) include the FNMA and the FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (I.E., not insured or guaranteed by any government
agency) residential mortgages from a list of approved sellers/servicers which
includes state and federally chartered savings and loan associations, mutual
savings banks, commercial banks, credit unions and mortgage bankers.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the U.S. Government. Instead, they are supported only by the discretionary
authority of the U.S. Government to purchase the agency's obligations.

FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a
government-sponsored corporation formerly owned by the twelve Federal Home Loan
Banks and now owned entirely by private stockholders. FHLMC issues Participation
Certificates ("PCs") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal, but PCs are not backed by the full faith and
credit of the U.S. Government. Instead, they are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations.

Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the
underlying mortgage loans as well as the guarantors of the mortgage-related
securities. Pools created by such non-governmental issuers generally offer a
higher rate of interest than government and government-related pools because
there are no direct or indirect government or agency guarantees of payments
in such pools. However, timely payment of interest and principal of these
pools may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance and letters of credit. The
insurance and guarantees are issued by governmental entities, private
insurers and the mortgage poolers. There can be no assurance that the private
insurers or guarantors can meet their obligations under the insurance
policies or guarantee arrangements. Although the market for such securities
is becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable.

Mortgage-related securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the Fund's
industry concentration restrictions (see "Investment Restrictions") by virtue of
the exclusion from that test available to all U.S. Government securities. In the
case of privately issued mortgage-related securities, the Fund takes the
position that mortgage-related securities do not represent interests in any
particular "industry" or group of industries. The assets underlying such
securities may be represented by a portfolio of first lien residential mortgages
(including both whole mortgage loans and mortgage participation interests) or
portfolios of mortgage pass-through securities issued or guaranteed by GNMA,
FNMA or FHLMC. Mortgage loans underlying a mortgage-related security may in turn
be insured or guaranteed by the FHA or the VA. In the case of private issue
mortgage-related securities whose underlying assets are neither U.S. Government
securities nor U.S. Government-insured mortgages, to the extent that real

properties securing such assets may be located in the same geographical region,
the security may be subject to a greater risk of default than other comparable
securities in the event of adverse economic, political or business developments
that may affect such region and, ultimately, the ability of residential
homeowners to make payments of principal and interest on the underlying
mortgages.

COMMERCIAL MORTGAGE-BACKED SECURITIES. Commercial mortgage-backed
securities include securities that reflect an interest in, and are secured by,
mortgage loans on commercial real property. The market for commercial
mortgage-backed securities developed more recently and in terms of total
outstanding principal amount of issues is relatively small compared to the
market for residential single-family mortgage-backed securities. Many of the
risks of investing in commercial mortgage-backed securities reflect the risks of
investing in the real estate securing the underlying mortgage loans. These risks
reflect the effects of local and other economic conditions on real estate
markets, the ability of tenants to make loan payments and the ability of a
property to attract and retain tenants. Commercial mortgage-backed securities
may be less liquid and exhibit greater price volatility than other types of
mortgage- or asset-backed securities.

MORTGAGE PASS-THROUGH SECURITIES. Mortgage pass-through securities are
securities representing interests in "pools" of mortgage loans secured by
residential or commercial real property. Interests in pools of mortgage-related
securities differ from other forms of debt obligations, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In effect, these
payments are a "pass-through" of the monthly payments made by the individual
borrowers on their residential or commercial mortgage loans, net of any fees
paid to the issuer or guarantor of such securities. Additional payments are
caused by repayments of principal resulting from the sale of the underlying
property, refinancing or foreclosure, net of fees or costs which may be
incurred. Some mortgage-related securities (such as securities issued by the
GNMA) are described as "modified pass-through." These securities entitle the
holder to receive all interest and principal payments owed on the mortgage pool,
net of certain fees, at the scheduled payment dates regardless of whether or not
the mortgagor actually makes the payment.

COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOs"). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semi-annually. CMOs may
be collateralized by whole mortgage loans, but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC or
FNMA, and their income streams. The issuer of a CMO may elect to be treated as a
real estate mortgage investment conduit (a "REMIC"), a pass-through vehicle
created to issue multi-class mortgage-backed securities. The characteristics of
and risks relating to REMICs are substantially similar to those of CMOs.

CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a DE FACTO breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.

In a typical CMO transaction, a corporation ("issuer") issues multiple
series (E.G., A, B, C, Z) of CMO bonds (the "Bonds"). Proceeds of the Bond
offering are used to purchase mortgages or mortgage pass-through certificates
(the "Collateral"). The Collateral is pledged to a third party trustee as
security for the Bonds. Principal and interest payments from the Collateral are
used to pay principal on the Bonds in the order A, B, C, Z. The Series A, B and
C Bonds all bear current interest. Interest on the Series Z Bond is accrued and
added to principal and a like amount is paid as principal on the Series A, B or
C Bond currently being paid off. When the Series A, B and C Bonds are paid in
full, interest and principal on the Series Z Bond begin to be paid

currently. With some CMOs, the issuer serves as a conduit to allow loan
originators (primarily builders or savings and loan associations) to borrow
against their loan portfolios.

FHLMC COLLATERALIZED MORTGAGE OBLIGATIONS. FHLMC CMOs are debt obligations
of FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are made
semi-annually, as opposed to monthly. The amount of principal payable on each
semi-annual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which in turn is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payments of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because of the "pass-through" nature of all
principal payments received on the collateral pool in excess of FHLMC's minimum
sinking fund requirement, the rate at which principal of the CMOs is actually
repaid is likely to be such that each class of bonds will be retired in advance
of its scheduled maturity date.

If collection of principal (including prepayments) on the mortgage loans
during any semi-annual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.

Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.

OTHER MORTGAGE-RELATED SECURITIES. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgage-backed
securities. Other mortgage-related securities may be equity or debt securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.

CMO RESIDUALS. CMO residuals are mortgage securities issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.

The cash flow generated by the mortgage assets underlying a series of CMOs
is applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
IO class of stripped mortgage-backed securities. See "-Stripped Mortgage-Backed
Securities" below. In addition, if a series of a CMO includes a class that bears
interest at an adjustable rate, the yield to maturity on the related CMO
residual will also be extremely sensitive to changes in the level of the index
upon which interest rate adjustments are based. As described below with respect
to stripped mortgage-backed securities, in certain circumstances the Fund may
fail to recoup some or all of its initial investment in a CMO residual.

CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has developed fairly recently and CMO residuals currently may
not have the liquidity of other more established securities trading in other
markets. Transactions in CMO residuals are generally completed only after
careful review of the characteristics of the securities in question. In
addition, CMO residuals may, or pursuant to an exemption therefrom, may not,
have been registered under the Securities Act of 1933, as amended (the "1933
Act"). CMO residuals, whether or not registered under the 1933 Act, may be
subject to certain restrictions on transferability, and may be deemed illiquid.

STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed securities
("SMBS") are derivative multi-class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose entities
of the foregoing.

SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the "IO" class), while
the other class will receive all of the principal (the "PO" class). The yield to
maturity on an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and a rapid
rate of principal payments may have a material adverse effect on the Fund's
yield to maturity from these securities. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, the Fund may fail
to recoup some or all of its initial investment in these securities even if the
security is in one of the highest rating categories.

Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were developed fairly recently. As a result, established trading markets have
not yet developed and, accordingly, these securities may be deemed illiquid.

OTHER ASSET-BACKED SECURITIES. Similarly, the Advisor expects that other
asset-backed securities (unrelated to mortgage loans) will be offered to
investors in the future and may be purchased by the Fund. Several types of
asset-backed securities have already been offered to investors, including
Certificates for Automobile Receivables(SM) ("CARS(SM)"). CARS(SM) represent
undivided fractional interests in a trust whose assets consist of a pool of
motor vehicle retail installment sales contracts and security interests in
the vehicles securing the contracts. Payments of principal and interest on
CARS(SM) are passed through monthly to certificate holders, and are
guaranteed up to certain amounts and for a certain time period by a letter of
credit issued by a financial institution unaffiliated with the trustee or
originator of the trust. An investor's return on CARS(SM) may be affected by
early prepayment of principal on the underlying vehicle sales contracts. If
the letter of credit is exhausted, the Fund may be prevented from realizing
the full amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage
or loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Consistent with the Fund's investment objectives and policies, the Advisor
also may invest in other types of asset-backed securities.

Non-mortgage asset-backed securities involve risks that are not presented
by mortgage-related securities. Primarily, these securities do not have the
benefit of the same security interest in the underlying collateral. Credit card
receivables are generally unsecured, and the debtors are entitled to the
protection of a number of state and Federal consumer credit laws which give
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of automobile

receivables permit the servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that
of the holders of the related automobile receivables. In addition, because of
the large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have an effective security interest in all of the
obligations backing such receivables. Therefore, there is a possibility that
recoveries on repossessed collateral may not, in some cases, be able to
support payments on these securities.

VARIABLE AND FLOATING RATE SECURITIES

Variable and floating rate securities provide for a periodic adjustment in
the interest rate paid on the obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective obligations. The adjustment
intervals may be regular, and range from daily up to annually, or may be event
based, such as based on a change in the prime rate.

The Fund may invest in floating rate debt instruments ("floaters") and
engage in credit spread trades. The interest rate on a floater is a variable
rate which is tied to another interest rate, such as a corporate bond index or
Treasury bill rate. The interest rate on a floater resets periodically,
typically every six months. While, because of the interest rate reset feature,
floaters provide the Fund with a certain degree of protection against rising
interest rates, the Fund will participate in any declines in interest rates as
well. A credit spread trade is an investment position relating to a difference
in the prices or interest rates of two bonds or other securities, where the
value of the investment position is determined by movements in the difference
between the prices or interest rates, as the case may be, of the respective
securities or currencies.

The Fund may also invest in inverse floating rate debt instruments
("inverse floaters"). The interest rate on an inverse floater resets in the
opposite direction from the market rate of interest to which the inverse floater
is indexed. An inverse floating rate security may exhibit greater price
volatility than a fixed rate obligation of similar credit quality.

A floater may be considered to be leveraged in an economic sense to the
extent that its interest rate varies by a magnitude that exceeds the
magnitude of the change in the index rate of interest. However, the Fund does
not currently consider floaters to be "leverage" for purposes of its policy
on the amount of leverage it may incur or for purposes of calculating total
managed assets. The higher degree of leverage inherent in some floaters is
associated with greater volatility in their market values. With respect to
purchasable variable and floating rate instruments, the Advisor will consider
the earning power, cash flows and liquidity ratios of the issuers and
guarantors of such instruments and, if the instruments are subject to a
demand feature, will monitor their financial status to meet payment on
demand. Such instruments may include variable amount master demand notes that
permit the indebtedness thereunder to vary in addition to providing for
periodic adjustments in the interest rate. The absence of an active secondary
market with respect to particular variable and floating rate instruments
could make it difficult for the Fund to dispose of a variable or floating
rate note if the issuer defaulted on its payment obligation or during periods
that the Fund is not entitled to exercise its demand rights, and the Fund
could, for these or other reasons, suffer a loss with respect to such
instruments. In determining average-weighted portfolio maturity, an
instrument will be deemed to have a maturity equal to either the period
remaining until the next interest rate adjustment or the time the Fund
involved can recover payment of principal as specified in the instrument,
depending on the type of instrument involved.

EVENT-LINKED BONDS

The Fund may invest in "event-linked bonds." Event-linked bonds, which are
sometimes referred to as "catastrophe bonds," are debt obligations for which the
return of principal and payment of interest is contingent

on the non-occurrence of a specific "trigger" event, such as a hurricane or
an earthquake. They may be issued by government agencies, insurance
companies, reinsurers, special purpose corporations or other on-shore or
off-shore entities. If a trigger event causes losses exceeding a specific
amount in the geographic region and time period specified in a bond, the Fund
may lose a portion or all of its principal invested in the bond. If no
trigger event occurs, the Fund will recover its principal plus interest. For
some event-linked bonds, the trigger event or losses may be based on
company-wide losses, index-portfolio losses, industry indices or readings of
scientific instruments rather than specified actual losses. Often
event-linked bonds provide for extensions of maturity that are mandatory, or
optional at the discretion of the issuer, in order to process and audit loss
claims in those cases when a trigger event has, or possibly has, occurred. In
addition to the specified trigger events, event-linked bonds may also expose
the Fund to certain unanticipated risks including but not limited to issuer
(credit) default, adverse regulatory or jurisdictional interpretations and
adverse tax consequences.

Event-linked bonds are a relatively new type of financial instrument. As
such, there is no significant trading history of these securities, and there can
be no assurance that a liquid market in these instruments will develop. Lack of
a liquid market may impose the risk of higher transaction costs and the
possibility that the Fund may be forced to liquidate positions when it would not
be advantageous to do so. Event-linked bonds are typically rated.

REAL ESTATE INVESTMENT TRUSTS

Real estate investment trusts ("REITs") pool investors' funds for
investment primarily in income producing real estate or real estate related
loans or interests. Under the Code, a REIT is not taxed on income it distributes
to its shareholders if it complies with several requirements relating to its
organization, ownership, assets, and income and a requirement that it generally
distribute to its shareholders at least 95% of its taxable income (other than
net capital gains) for each taxable year. REITs can generally be classified as
Equity REITs, Mortgage REITs, and Hybrid REITs. Equity REITs, which invest the
majority of their assets directly in real property, derive their income
primarily from rents. Equity REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage REITs, which invest the
majority of their assets in real estate mortgages, derive their income primarily
from interest payments. Hybrid REITs combine the characteristics of both Equity
REITs and Mortgage REITs.

While the Fund will not generally invest in real estate directly, to the
extent it invests in REITs, it may be subject to risks similar to those
associated with the direct ownership of real estate. These risks include
declines in the value of real estate, risks related to general and local
economic conditions, dependency on management skill, heavy cash flow
dependency, possible lack of availability of mortgage funds, overbuilding,
extended vacancies of properties, increased competition, increases in
property taxes and operating expenses, changes in zoning laws, losses due to
costs resulting from the clean-up of environmental problems, liability to
third parties for damages resulting from environmental problems, casualty or
condemnation losses, limitations on rents, changes in neighborhood values and
in the appeal of properties to tenants and changes in interest rates.

In addition to these risks, REITs may be affected by changes in the value
of the underlying property owned by the trusts, or by the quality of any credit
they extend. Further, REITs are dependent upon management skills and generally
may not be diversified. REITs are also subject to heavy cash flow dependency,
defaults by borrowers and self-liquidation. In addition, REITs could possibly
fail to qualify for tax-free pass-through of income under the Code or to
maintain their exemptions from registration under the Investment Company Act of
1940, and the rules and regulations thereunder, each as amended from time to
time (the "1940 Act"). The above factors may also adversely affect a borrower's
or a lessee's ability to meet its obligations to the REIT. In the event of a
default by a borrower or lessee, the REIT may experience delays in enforcing its
rights as a mortgagee or lessor and may incur substantial costs associated with
protecting its investments. The Fund may invest in certain "special purpose"
REITs that invest their assets in specific real estate sectors, such

as hotel REITs, nursing home REITs or warehouse REITs, and are therefore
subject, in addition to the foregoing risks, to the risks associated with
adverse developments in any such sectors.

The Fund's investment in a REIT may require the Fund to accrue and
distribute income not yet received or may result in the Fund making
distributions which constitute a return of capital to shareholders for federal
income tax purposes. In addition, distributions by the Fund from REITs will not
qualify for the corporate dividends-received deduction.

DELAYED FUNDING LOANS AND REVOLVING CREDIT FACILITIES

The Fund may also enter into, or acquire participations in, delayed funding
loans and revolving credit facilities. Delayed funding loans and revolving
credit facilities are borrowing arrangements in which the lender agrees to make
loans up to a maximum amount upon demand by the borrower during a specified
term. A revolving credit facility differs from a delayed funding loan in that as
the borrower repays the loan, an amount equal to the repayment may be borrowed
again during the term of the revolving credit facility. Delayed funding loans
and revolving credit facilities usually provide for floating or variable rates
of interest. These commitments may have the effect of requiring the Fund to
increase its investment in a company at a time when it might not otherwise be
desirable to do so (including a time when the company's financial condition
makes it unlikely that such amounts will be repaid). To the extent that the Fund
is committed to advance additional funds, it will at all times segregate liquid
assets with its custodian as required by the 1940 Act and SEC staff orders and
interpretations thereunder.

The Fund may invest in delayed funding loans and revolving credit
facilities with credit quality comparable to that of issuers of its securities
investments. Delayed funding loans and revolving credit facilities may be
subject to restrictions on transfer, and only limited opportunities may exist to
resell such instruments. As a result, the Fund may be unable to sell such
investments at an opportune time or may have to resell them at less than fair
market value. The Fund currently intends to treat delayed funding loans and
revolving credit facilities for which there is no readily available market as
illiquid. For a further discussion of the risks involved in investing in loan
participations and other forms of direct indebtedness, see "-Loan Participations
and Assignments." Participation interests in revolving credit facilities will be
subject to the limitations discussed in "-Loan Participations and Assignments."
Delayed funding loans and revolving credit facilities are considered to be debt
obligations for the purposes of the Fund's investment restriction relating to
the lending of funds or assets by the Fund.

DERIVATIVE INSTRUMENTS

In pursuing its investment objectives, the Fund may purchase and sell
(write) both put options and call options on securities, swap agreements, and
securities indexes, and enter into interest rate and index futures contracts and
purchase and sell options on such futures contracts ("futures options") to add
leverage to the portfolio, for hedging purposes, for duration management or as
part of its overall investment strategy. For example, the Fund may use
derivatives in an attempt to protect against possible changes in the market
value of the Fund's portfolio resulting from trends in the bond markets and
changes in interest rates, to protect the Fund's unrealized gains in the value
of its portfolio securities, to facilitate the sale of such securities for
investment purposes, to establish a position in the securities markets as a
temporary substitute for purchasing particular securities and to enhance income
or gain. The Fund also may enter into swap agreements with respect to interest
rates, securities indexes and other assets and measures of risk or return. The
Fund may also use other types of instruments that are currently available or
that may be introduced in the future, including other types of options, futures
contracts or futures options, provided that their use is consistent with the
Fund's investment objectives.

The value of some derivative instruments in which the Fund may invest may
be particularly sensitive to changes in prevailing interest rates, and, like the
other investments of the Fund, the ability of the Fund to utilize these
instruments successfully may depend in part upon the ability of the Advisor to
forecast interest rates and other economic factors correctly. If the Advisor
incorrectly forecasts such factors and has taken positions in derivative
instruments contrary to prevailing market trends, the Fund could be exposed to
the risk of loss.

The Fund might not employ any of the strategies described below, and no
assurance can be given that any strategy used will succeed. If the Advisor
incorrectly forecasts interest rates, market values or other economic factors in
utilizing a derivatives strategy for the Fund, the Fund might have been in a
better position if it had not entered into the transaction at all. Also,
suitable derivative transactions may not be available in all circumstances. The
use of these strategies involves certain special risks, including a possible
imperfect correlation, or even no correlation, between price movements of
derivative instruments and price movements of related investments. While some
strategies involving derivative instruments 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 related investments or otherwise, due to the
possible inability of the Fund to purchase or sell a portfolio security at a
time that otherwise would be favorable or the possible need to sell a portfolio
security at a disadvantageous time because the Fund is required to maintain
asset coverage or offsetting positions in connection with transactions in
derivative instruments and due to the possible inability of the Fund to close
out or to liquidate its derivatives positions. Income earned by the Fund from
many derivative strategies will be treated as capital gain and, if not offset by
net realized capital loss, will be distributed to shareholders in taxable
distributions.

OPTIONS ON SECURITIES, SWAP AGREEMENTS AND INDEXES. The Fund may purchase
and sell both put and call options on securities, swap agreements or indexes in
standardized contracts traded on domestic or other securities exchanges, boards
of trade, or similar entities, or quoted on NASDAQ or on an over-the-counter
market, and agreements, sometimes called cash puts, which may accompany the
purchase of a new issue of debt obligations from a dealer.

An option on a security (or an index) is a contract that gives the
holder of the option, in return for a premium, the right to buy from (in the
case of a call) or sell to (in the case of a put) the writer of the option
the security underlying the option (or the cash value of the index) at a
specified exercise price at any time during the term of the option. The
writer of an option on a security has the obligation upon exercise of the
option to deliver the underlying security upon payment of the exercise price
or to pay the exercise price upon delivery of the underlying security. Upon
exercise, the writer of an option on an index is obligated to pay the
difference between the cash value of the index and the exercise price
multiplied by the specified multiplier for the index option. (An index is
designed to reflect features of a particular securities market, a specific
group of financial instruments or securities, or certain economic indicators.)

The Fund will generally write call options and put options only if they are
"covered." In the case of a call option on a debt obligation or other security,
the option is "covered" if the Fund owns the security underlying the call,
segregates cash or other liquid assets in the amount of the security's value or
has an absolute and immediate right to acquire that security without additional
cash consideration (or, if additional cash consideration is required, cash or
other liquid assets in such amount are segregated on the Fund's records) upon
conversion or exchange of other securities held by the Fund. For a call option
on an index, the option is covered if the Fund maintains with its custodian
liquid assets, in an amount equal to the contract value of the index. A call
option is also covered if the Fund holds a call on the same security or index as
the call written where the exercise price of the call held is (i) equal to or
less than the exercise price of the call written, or (ii) greater than the
exercise price of the call written, provided the difference is maintained by the
Fund in segregated liquid assets. A put option on a security or an index is
"covered" if the Fund segregates liquid assets equal to the exercise price. A
put option is also covered if the Fund holds a put on the same security or index
as the put written where the exercise price of the put held is (i) equal to or
greater than the exercise price of the put

written, or (ii) less than the exercise price of the put written, provided
the difference is maintained by the Fund in segregated liquid assets. The
Fund may also cover options that it writes using other permitted methods.

If an option written by the Fund expires unexercised, the Fund realizes a
capital gain equal to the premium received at the time the option was written.
If an option purchased by the Fund expires unexercised, the Fund realizes a
capital loss equal to the premium paid. Transaction costs must also be included
in these calculations. Prior to the earlier of exercise or expiration, an
exchange traded option may be closed out by an offsetting purchase or sale of an
option of the same series (type, exchange, underlying security or index,
exercise price, and expiration). There can be no assurance, however, that a
closing purchase or sale transaction can be effected when the Fund desires.

The Fund may sell put or call options it has previously purchased, which
could result in a net gain or loss depending on whether the amount realized on
the sale is more or less than the premium and other transaction costs paid on
the put or call option which is sold. Prior to exercise or expiration, an option
may be closed out by an offsetting purchase or sale of an option of the same
series. The Fund will realize a capital gain from a closing purchase transaction
if the cost of the closing option is less than the premium received from writing
the option, or, if it is more, the Fund will realize a capital loss. If the
premium received from a closing sale transaction is more than the premium paid
to purchase the option, the Fund will realize a capital gain or, if it is less,
the Fund will realize a capital loss. The principal factors affecting the market
value of a put or a call option include supply and demand, interest rates, the
current market price of the underlying security or index in relation to the
exercise price of the option, the volatility of the underlying security or index
and the time remaining until the expiration date.

The premium paid for a put or call option purchased by the Fund is an asset
of the Fund. The premium received for an option written by the Fund is recorded
as a deferred credit. The value of an option purchased or written is marked to
market daily and is valued at the closing price on the exchange on which it is
traded or, if not traded on an exchange or no closing price is available, at the
mean between the last bid and asked prices.

The Fund may write covered straddles consisting of a combination of a call
and a put written on the same underlying security. A straddle will be covered
when sufficient assets are deposited to meet the Fund's immediate obligations.
The Fund may use the same liquid assets to cover both the call and put options
where the exercise price of the call and put are the same, or the exercise price
of the call is higher than that of the put. In such cases, the Fund will also
segregate liquid assets equivalent to the amount, if any, by which the put is
"in the money."

For more information regarding options on swap agreements, see "-Swap
Agreements" below.

OVER-THE-COUNTER ("OTC") OPTIONS. Unlike exchange-traded options, which are
standardized with respect to the underlying instrument, expiration date,
contract size and strike price, the terms of OTC options (options not traded on
exchanges) generally are established through negotiation with the other party to
the option contract. While this type of arrangement allows the Fund great
flexibility to tailor the option to its needs, OTC options generally involve
greater risk than exchange-traded options, which are guaranteed by the clearing
organization of the exchanges where they are traded. Thus, when the Fund
purchases an OTC option, it relies on the counterparty from whom it purchased
the option to make or take delivery of the underlying investment upon exercise
of the option. Failure by the counterparty to do so would result in the loss of
any premium paid by the Fund as well as the loss of any expected benefit of the
transaction.

Closing transactions can be made for OTC options only by negotiating
directly with the counterparty, or by a transaction in the secondary market if
any such market exists. There can be no assurance that the Fund will in fact be
able to close out an OTC option position at a favorable price prior to
expiration. In the event of
20

insolvency of the counterparty, the Fund might be unable to close out an OTC
option position at any time prior to its expiration, if at all. In addition,
OTC options are considered illiquid by the SEC.

RISKS ASSOCIATED WITH OPTIONS ON SECURITIES, SWAP AGREEMENTS AND INDEXES.
There are several risks associated with transactions in options on securities,
swap agreements and indexes. For example, there are significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objective. A decision as to whether, when and how to use options involves
the exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.

During the option period, the covered call writer has, in return for the
premium on the option, given up the opportunity to profit from a price increase
in the underlying security above the exercise price, but, as long as its
obligation as a writer continues, has retained the risk of loss should the price
of the underlying security decline. The writer of an option has no control over
the time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying security at the exercise price. If a put
or call option purchased by the Fund is not sold when it has remaining value,
and if the market price of the underlying security remains equal to or greater
than the exercise price (in the case of a put), or remains less than or equal to
the exercise price (in the case of a call), the Fund will lose its entire
investment in the option. Also, where a put or call option on a particular
security is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the price of the
related security.

There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. If the Fund were unable to close out an
option that it had purchased on a security, it would have to exercise the option
in order to realize any profit or the option may expire worthless. If the Fund
were unable to close out a covered call option that it had written on a
security, it would not be able to sell the underlying security unless the option
expired without exercise. As the writer of a covered call option, the Fund
forgoes, during the option's life, the opportunity to profit from increases in
the market value of the security covering the call option above the sum of the
premium and the exercise price of the call.

If trading were suspended in an option purchased by the Fund, the Fund
would not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it has purchased.
Except to the extent that a call option on an index written by the Fund is
covered by an option on the same index purchased by the Fund, movements in
the index may result in a loss to the Fund; however, such losses may be
mitigated by changes in the value of the Fund's securities during the period
the option was outstanding.

FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may invest in
interest rate futures contracts and options thereon ("futures options"). The
Fund may also purchase and sell futures contracts on corporate debt obligations
(to the extent they are available), U.S. Government securities and other market
measures, as well as purchase put and call options on such futures contracts.

A futures contract on an index or interest rate or other market measure is
an agreement pursuant to which two parties agree to take or make delivery of an
amount of cash equal to the difference between the value of the index or
interest rate or other market measure at the close of the last trading day of
the contract and the price at which the index or interest rate contract was
originally written. Although the value of an index might be a function of the
value of certain specified securities, no physical delivery of these securities
is made. A public market exists in futures contracts covering a number of
indexes as well as financial instruments, including, among others: U.S. Treasury
bonds; U.S. Treasury notes; GNMA Certificates; three-month U.S. Treasury bills;
90-day commercial paper; bank certificates of deposit; Eurodollar certificates
of deposit; the

Australian dollar; the Canadian dollar; the British pound; the Japanese yen;
the Mexican peso; and certain multinational currencies, such as the euro. It
is expected that other futures contracts will be developed and traded in the
future.

The Fund may purchase and write call and put futures options. Futures
options possess many of the same characteristics as options on securities and
indexes (discussed above). A futures option gives the holder the right, in
return for the premium paid, to assume a long position (call) or short position
(put) in a futures contract at a specified exercise price at any time during the
period of the option. Upon exercise of a call futures option, the holder
acquires a long position in the futures contract and the writer is assigned the
opposite short position. In the case of a put option, the opposite is true.

Futures contracts and futures options generally are standardized and traded
on a U.S. or other exchange, board of trade or similar entity, or quoted on an
automated quotation system.

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

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

Although some futures contracts call for making or taking delivery of
the underlying securities, generally these obligations are closed out prior
to delivery by offsetting purchases or sales of matching futures contracts
(involving the same exchange, underlying security or index, and delivery
month). If an offsetting purchase price is less than the original sale price,
the Fund realizes a capital gain, or if it is more, the Fund realizes a
capital loss. Conversely, if an offsetting sale price is more than the
original purchase price, the Fund realizes a capital gain, or if it is less,
the Fund realizes a capital loss. The transaction costs must also be included
in these calculations.

The Fund may write covered straddles consisting of a call and a put
written on the same underlying futures contract. The Fund may cover a
straddle in several ways including the following. A straddle will be covered
when sufficient assets are deposited to meet the Fund's immediate
obligations. The Fund may use the same liquid assets to cover both the call
and put options where the exercise price of the call and put are the same, or
the exercise price of the call is higher than that of the put. In such cases,
the Fund will also segregate liquid assets equivalent to the amount, if any,
by which the put is "in the money."

The Fund is operated by a person who has claimed an exclusion from the
definition of the term "commodity pool operator" under the Commodity Exchange
Act (the "CEA"), and, therefore, such person is not subject to registration or
regulation as a pool operator under the CEA.

LIMITATIONS ON USE OF FUTURES AND FUTURES OPTIONS. When purchasing a
futures contract, the Fund will maintain with its custodian (and mark-to-market
on a daily basis) liquid assets, that, when added to the amounts deposited with
a futures commission merchant as margin, are equal to the market value of the
futures contract. Alternatively, the Fund may "cover" its position by purchasing
a put option on the same futures contract with a strike price as high or higher
than the price of the contract held by the Fund.

When selling a futures contract, the Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that are equal to the market
value of the instruments underlying the contract. Alternatively, the Fund may
"cover" its position by owning the instruments underlying the contract (or, in
the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Fund's custodian).

When selling a call option on a futures contract, the Fund will maintain
with its custodian (and mark-to-market on a daily basis) liquid assets that,
when added to the amounts deposited with a futures commission merchant as
margin, equal the total market value of the futures contract underlying the call
option. Alternatively, the Fund may cover its position by entering into a long
position in the same futures contract at a price no higher than the strike price
of the call option, by owning the instruments underlying the futures contract,
or by holding a separate call option permitting the Fund to purchase the same
futures contract at a price not higher than the strike price of the call option
sold by the Fund.

When selling a put option on a futures contract, the Fund will maintain
with its custodian (and mark-to-market on a daily basis) liquid assets that
equal the purchase price of the futures contract, less any margin on deposit.
Alternatively, the Fund may cover the position either by entering into a short
position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the strike price of
the purchased put option is the same as or higher than the strike price of the
put option sold by the Fund.

Segregation of assets to cover the Fund's obligations under futures
contracts and related options will not eliminate the leverage risk arising from
such use, which may tend to exaggerate the effect on net asset value of any
increase or decrease in the market value of the Fund's portfolio, and may
require liquidation of portfolio positions when it is not advantageous to do so.

The requirements for qualification as a regulated investment company also
may limit the extent to which the Fund may enter into futures, futures options
or forward contracts. See "Tax Matters."

RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. There can be no guarantee
that there will be a correlation between price movements in the hedging vehicle
and in the Fund securities being hedged. In addition, there are significant
differences between the securities and futures markets that could result in an
imperfect correlation between the markets, causing a given hedge not to achieve
its objectives. The degree of imperfection of correlation depends on
circumstances such as variations in speculative market demand for futures and
futures options, including technical influences in futures trading and futures
options, and differences between the financial instruments being hedged and the
instruments underlying the standard contracts available for trading in such
respects as interest rate levels, maturities and creditworthiness of issuers. A
decision as to whether, when and how to hedge involves the exercise of skill and
judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of market behavior or unexpected interest rate trends.

Futures contracts on U.S. Government securities historically have reacted
to an increase or decrease in interest rates in a manner similar to that in
which the underlying U.S. Government securities reacted. To the extent, however,
that the Fund enters into such futures contracts, the value of such futures will
not vary in direct proportion to the value of the Fund's holdings of debt
obligations. Thus, the anticipated spread between the price of the futures
contract and the hedged security may be distorted due to differences in the
nature of the markets. The spread also may be distorted by differences in
initial and variation margin requirements, the liquidity of such markets and the
participation of speculators in such markets.

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

There can be no assurance that a liquid market will exist at a time when
the Fund seeks to close out a futures contract or a futures option position, and
the Fund would remain obligated to meet margin requirements until the position
is closed. In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.

SWAP AGREEMENTS. The Fund may enter into swap agreements with respect to
interest rates, currencies, indexes of securities and other assets or
measures of risk or return. The Fund may also enter into options on swap
agreements ("swap options"). These transactions are entered into in an
attempt to obtain a particular return when it is considered desirable to do
so, possibly at a lower cost to the Fund than if the Fund had invested
directly in an instrument that yielded that desired return. Swap agreements
are two-party contracts entered into primarily by institutional investors for
periods ranging from a few weeks to more than one year. In a standard "swap"
transaction, two parties agree to exchange the returns (or differentials in
rates of return) earned or realized on particular predetermined investments
or instruments, which may be adjusted for an interest factor. The gross
returns to be exchanged or "swapped" between the parties are generally
calculated with respect to a "notional amount," I.E., the return on or
increase in value of a particular dollar amount invested at a particular
interest rate or in a "basket" of securities representing a particular index.
Forms of swap agreements include interest rate caps, under which, in return
for a premium, one party agrees to make payments to the other to the extent
that interest rates exceed a specified rate, or "cap"; interest rate floors,
under which, in return for a premium, one party agrees to make payments to
the other to the extent that interest rates fall below a specified rate, or
"floor"; and interest rate collars, under which a party sells a cap and
purchases a floor or vice versa in an attempt to protect itself against
interest rate movements exceeding given minimum or maximum levels. The Fund
may use interest rate caps, floors and collars to a substantial degree in
connection with its leveraging strategies. See "-Certain Interest Rate Swap
Transactions" below. A swap option is a contract that gives a counterparty
the right (but not the obligation) to enter into a new swap agreement or to
shorten, extend, cancel or otherwise modify an existing swap agreement, at
some designated future time on specified terms. The Fund may write (sell) and
purchase put and call swap options.

Most swap agreements entered into by the Fund would calculate the
obligations of the parties to the agreement on a "net basis." Consequently, the
Fund's current obligations (or rights) under a swap agreement will generally be
equal only to the net amount to be paid or received under the agreement based on
the relative values of the positions held by each party to the agreement (the
"net amount"). The Fund's current obligations under a swap agreement will be
accrued daily (offset against any amounts owed to the Fund). The Fund may

use swap agreements to add leverage to the portfolio. The Fund may (but is
not required to) cover any accrued but unpaid net amounts owed to a swap
counterparty through the segregation of liquid assets. Obligations under swap
agreements so covered will not be construed to be "senior securities" for
purposes of the Fund's investment restriction concerning senior securities or
borrowings.

Whether the Fund's use of swap agreements or swap options will be
successful in furthering its investment objectives will depend on the Advisor's
ability to predict correctly whether certain types of investments are likely to
produce greater returns than other investments. Because they are two-party
contracts and because they may have terms of greater than seven days, swap
agreements may be considered to be illiquid. Moreover, the Fund bears the risk
of loss of the amount expected to be received under a swap agreement in the
event of the default or bankruptcy of a swap agreement counterparty. The Fund
will enter into swap agreements only with counterparties that meet certain
standards of creditworthiness. The swaps market is a relatively new market and
is largely unregulated. Swap agreements of the type the Fund will enter into are
generally exempt from most provisions of the CEA and, therefore, are not
regulated as futures or commodity option transactions under the CEA. It is
possible that developments in the swaps market, including potential government
regulation, could adversely affect the Fund's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.

Depending on the terms of the particular option agreement, the Fund will
generally incur a greater degree of risk when it writes a swap option than it
will incur when it purchases a swap option. When the Fund purchases a swap
option, it risks losing only the amount of the premium it has paid should it
decide to let the option expire unexercised. However, when the Fund writes a
swap option, upon exercise of the option the Fund will become obligated
according to the terms of the underlying agreement.

CERTAIN INTEREST RATE SWAP TRANSACTIONS. As described above, the Fund
may enter into interest rate swaps and caps. Interest rate swaps involve the
Fund's agreement with the swap counterparty to pay a fixed rate payment in
exchange for the counterparty paying the Fund a variable rate payment that
may be structured so as to approximate the Fund's variable rate payment
obligation on any preferred shares of beneficial interest that the Fund may
issue ("Preferred Shares") or any variable rate borrowing or other form of
leverage with a variable cost. The payment obligation would be based on the
notional amount of the swap. The Fund may use an interest rate cap, which
would require the Fund to pay a premium to the cap counterparty and would
entitle the Fund, to the extent that a specified variable rate index exceeds
a predetermined fixed rate, to receive from the counterparty payment of the
difference based on the notional amount. The Fund may use interest rate swaps
or caps with the intent to reduce or eliminate the risk that an increase in
short-term interest rates could have on the performance of the Common Shares
as a result of the Fund's investments and capital structure, and may also use
these instruments for other hedging or investment purposes. Such transactions
involve costs, however, and may not be successful.

CREDIT DEFAULT SWAPS

The Fund may enter into credit default swap contracts for investment
purposes and to add leverage to the portfolio. As the seller in a credit default
swap contract, the Fund would be required to pay the par (or other agreed-upon)
value of a referenced debt obligation to the counterparty in the event of a
default by a third party, such as a U.S. or foreign corporate issuer, on the
debt obligation. In return, the Fund would receive from the counterparty a
periodic stream of payments over the term of the contract provided that no event
of default has occurred. If no default occurs, the Fund would keep the stream of
payments and would have no payment obligations. As the seller, the Fund would
effectively add leverage to its portfolio because, in addition to its total
managed assets, the Fund would be subject to investment exposure on the notional
amount of the swap.

The Fund may also purchase credit default swap contracts in order to hedge
against the risk of default of debt securities held in its portfolio, in which
case the Fund would function as the counterparty referenced in

the preceding paragraph. This would involve the risk that the investment may
expire worthless and would only generate income in the event of an actual
default by the issuer of the underlying obligation (as opposed to a credit
downgrade or other indication of financial instability). It would also
involve credit risk - that the seller may fail to satisfy its payment
obligations to the Fund in the event of a default.

STRUCTURED NOTES AND OTHER HYBRID INSTRUMENTS

The Fund may invest in "structured" notes, which are privately negotiated
debt obligations where the principal and/or interest is determined by reference
to the performance of a benchmark asset or market, such as selected securities
or an index of securities, or the differential performance of two assets or
markets, such as indices reflecting taxable and tax-exempt bonds. Depending on
the terms of the note, the Fund may forgo all or part of the interest and
principal that would be payable on a comparable conventional note. The rate of
return on structured notes may be determined by applying a multiplier to the
performance or differential performance of the referenced index(es) or other
asset(s). Application of a multiplier involves leverage which will serve to
magnify the potential for gain and the risk of loss. The Fund may use structured
notes to add leverage to the portfolio and for investment as well as risk
management purposes, such as to reduce the interest rate sensitivity of the
Fund's portfolio (and thereby decrease the Fund's exposure to interest rate
risk). Like other sophisticated strategies, the Fund's use of structured notes
may not work as intended; for example, by reducing the duration of the Fund's
portfolio, structured notes may limit the Fund's return when having a longer
duration would be beneficial (for instance, when interest rates decline).
Because structured notes of the type in which the Fund anticipates it will
invest typically involve no credit enhancement, their credit risk generally will
be equivalent to that of the underlying investments.

The Fund may invest in other types of "hybrid" instruments which combine
the characteristics of securities, futures, and options. For example, the
principal amount or interest rate of a hybrid could be tied (positively or
negatively) to the price of some commodity, currency or securities index or
another interest rate (each a "benchmark"). The interest rate or (unlike most
debt obligations) the principal amount payable at maturity of a hybrid
security may be increased or decreased, depending on changes in the value of
the benchmark. Hybrids can be used as an efficient means of pursuing a
variety of investment goals, including duration management and increased
total return. Hybrids may not bear interest or pay dividends. The value of a
hybrid or its interest rate may be a multiple of a benchmark and, as a
result, may be leveraged and move (up or down) more steeply and rapidly than
the benchmark. These benchmarks may be sensitive to economic and political
events that cannot be readily foreseen by the purchaser of a hybrid. Under
certain conditions, the redemption value of a hybrid could be zero. Thus, an
investment in a hybrid may entail significant market risks that are not
associated with a similar investment in a traditional, U.S.
dollar-denominated bond that has a fixed principal amount and pays a fixed
rate or floating rate of interest. The purchase of hybrids also exposes the
Fund to the credit risk of the issuer of the hybrids. These risks may cause
significant fluctuations in the net asset value of the Fund.

Certain issuers of structured products such as hybrid instruments may be
deemed to be investment companies as defined in the 1940 Act. As a result, the
Fund's investments in these products may be subject to limits applicable to
investments in investment companies and may be subject to restrictions contained
in the 1940 Act. Structured products are typically sold in private placement
transactions, and there currently is no active trading market for structured
products.

U.S. GOVERNMENT SECURITIES

U.S. Government securities are obligations of, or guaranteed by, the U.S.
Government, its agencies or instrumentalities. The U.S. Government does not
guarantee the net asset value or market price of the Fund's shares. Some U.S.
Government securities, such as U.S. TIPS and Treasury bills, notes and bonds,
and securities guaranteed by the GNMA, are supported by the full faith and
credit of the United States; others, such as those of

the Federal Home Loan Banks, are supported by the right of the issuer to
borrow from the U.S. Treasury; others, such as those of the FNMA, are
supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government will
provide financial support to U.S. Government-sponsored instrumentalities if
it is not obligated to do so by law. U.S. Government securities include
securities that have no coupons, or have been stripped of their unmatured
interest coupons, individual interest coupons from such securities that trade
separately and evidences of receipt of such securities. Such securities may
pay no cash income, and are purchased at a deep discount from their value at
maturity. See "Zero-Coupon Bonds, Step-Ups and Payment-In-Kind Securities."
Custodial receipts issued in connection with so-called trademark zero-coupon
securities, such as CATs and TIGRs, are not issued by the U.S. Treasury, and
are therefore not U.S. Government securities, although the underlying bond
represented by such receipt is a debt obligation of the U.S. Treasury. Other
zero-coupon Treasury securities (E.G., STRIPs and CUBEs) are direct
obligations of the U.S. Government.

MUNICIPAL BONDS

The Fund may invest in municipal bonds which pay interest that, in the
opinion of bond counsel to the issuer (or on the basis of other authority
believed by the Advisor to be reliable), is exempt from federal income taxes
("municipal bonds"), although dividends that the Fund pays that are attributable
to such interest will not be tax-exempt to shareholders of the Fund.

Municipal bonds share the attributes of debt obligations in general, but
are generally issued by states, municipalities and other political subdivisions,
agencies, authorities and instrumentalities of states and multi-state agencies
or authorities. The municipal bonds that the Fund may purchase include general
obligation bonds and limited obligation bonds (or revenue bonds), including
industrial development bonds issued pursuant to former federal tax law. General
obligation bonds are obligations involving the credit of an issuer possessing
taxing power and are payable from such issuer's general revenues and not from
any particular source. Limited obligation bonds are payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise or other specific revenue source.
Tax-exempt private activity bonds and industrial development bonds generally are
also revenue bonds and thus are not payable from the issuer's general revenues.
The credit and quality of private activity bonds and industrial development
bonds are usually related to the credit of the corporate user of the facilities.
Payment of interest on and repayment of principal of such bonds is the
responsibility of the corporate user (and/or any guarantor).

Municipal bonds are subject to credit and market risk. Generally, prices of
higher quality issues tend to fluctuate less with changes in market interest
rates than prices of lower quality issues and prices of longer maturity issues
tend to fluctuate more than prices of shorter maturity issues. Prices and yields
on municipal bonds are dependent on a variety of factors, including general
money-market conditions, the financial condition of the issuer, general
conditions of the municipal bond market, the size of a particular offering, the
maturity of the obligation and the rating of the issue. A number of these
factors, including the ratings of particular issues, are subject to change from
time to time. Information about the financial condition of an issuer of
municipal bonds may not be as extensive as that which is made available by
corporations whose securities are publicly traded. Obligations of issuers of
municipal bonds are subject to the provisions of bankruptcy, insolvency and
other laws, such as the Federal Bankruptcy Reform Act of 1978, affecting the
rights and remedies of creditors. Congress or state legislatures may seek to
extend the time for payment of principal or interest, or both, or to impose
other constraints upon enforcement of such obligations. There is also the
possibility that as a result of litigation or other conditions, the power or
ability of issuers to meet their obligations for the payment of interest and
principal on their municipal bonds may be materially affected or their
obligations may be found to be invalid or unenforceable.

WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT TRANSACTIONS

The Fund may purchase or sell securities on a when-issued, delayed delivery
or forward commitment basis. When such purchases are outstanding, the Fund will
segregate until the settlement date liquid assets in an amount sufficient to
meet the purchase price. Typically, no income accrues on securities the Fund has
committed to purchase prior to the time delivery of the securities is made,
although the Fund may earn income on securities it has segregated.

When purchasing a security on a when-issued, delayed delivery, or forward
commitment basis, the Fund assumes the rights and risks of ownership of the
security, including the risk of price and yield fluctuations, and takes such
fluctuations into account when determining its net asset value. Because the Fund
is not required to pay for the security until the delivery date, these risks are
in addition to the risks associated with the Fund's other investments. If the
Fund remains substantially fully invested at a time when when-issued, delayed
delivery, or forward commitment purchases are outstanding, the purchases may
result in a form of leverage.

When the Fund has sold a security on a when-issued, delayed delivery, or
forward commitment basis, the Fund does not participate in future gains or
losses with respect to the security. If the other party to a transaction
fails to deliver or pay for the securities, the Fund could miss a favorable
price or yield opportunity or could suffer a loss. The Fund may dispose of or
renegotiate a transaction after it is entered into, and may sell when-issued,
delayed delivery or forward commitment securities before they are delivered,
which may result in a capital gain or loss. When-issued, delayed delivery or
forward commitment transactions may be considered securities in themselves,
and involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date, which risk is in addition to the risk
of decline in the value of the Fund's other assets. Where such purchases are
made through dealers, the Fund relies on the dealer to consummate the sale.
The dealer's failure to do so may result in the loss to the Fund of an
advantageous yield or price. There is no percentage limitation on the extent
to which the Fund may purchase or sell securities on a when-issued, delayed
delivery, or forward commitment basis.

REPURCHASE AGREEMENTS

For the purposes of maintaining liquidity and achieving income or
otherwise, the Fund may enter into repurchase agreements with domestic
commercial banks or registered broker/dealers. A repurchase agreement is a
contract under which the Fund would acquire a security for a relatively short
period (usually not more than one week) subject to the obligation of the
seller to repurchase and the Fund to resell such security at a fixed time and
price (representing the Fund's cost plus interest). In the case of repurchase
agreements with broker-dealers, the value of the underlying securities (or
collateral) will be at least equal at all times to the total amount of the
repurchase obligation, including the interest factor. The Fund bears a risk
of loss in the event that the other party to a repurchase agreement defaults
on its obligations and the Fund is delayed or prevented from exercising its
rights to dispose of the collateral securities. This risk includes the risk
of procedural costs or delays in addition to a loss on the securities if
their value should fall below their repurchase price. The Advisor will
monitor the creditworthiness of the counterparties.

BORROWING

The Fund may borrow money to the extent permitted under the 1940 Act as
interpreted, modified or otherwise permitted by regulatory authority having
jurisdiction, from time to time. The Fund may from time to time borrow money to
add leverage to the portfolio. The Fund may also borrow money for temporary
administrative purposes.

Under the 1940 Act, the Fund generally is not permitted to engage in
borrowings unless immediately after a borrowing the value of the Fund's total
assets less liabilities (other than the borrowing and other senior

securities) is at least 300% of the principal amount of such borrowing. In
addition, the Fund is not permitted to declare any cash dividend or other
distribution on the Common Shares unless, at the time of such declaration,
such asset coverage test is satisfied. If the Fund borrows, it intends, to
the extent possible, to prepay all or a portion of the principal amount of
the borrowing to the extent necessary in order to maintain the required asset
coverage. Failure to maintain certain asset coverage requirements could
result in an event of default and entitle the holders of the Fund's "senior
securities" that represent "indebtedness" (within the meaning of the 1940
Act) to elect a majority of the Trustees of the Fund.

As described elsewhere in this section and in the Prospectus, the
Fund also may enter into certain transactions, including reverse repurchase
agreements, credit default swap contracts and other derivative instruments
that can constitute a form of borrowing or financing transaction by the Fund.
The Fund may enter into these transactions in order to add leverage to the
portfolio. See "Preferred Shares and Other Leverage" in the Prospectus. The
Fund may (but is not required to) cover its commitment under these
instruments by the segregation of liquid assets or by entering into
offsetting transactions or owning positions covering its obligations. To the
extent these instruments are so covered, (1) they will not be considered
"senior securities" under the 1940 Act and therefore will not be subject to
the 300% asset coverage requirement otherwise applicable to borrowings by the
Fund and (2) investments in these instruments (other than reverse repurchase
agreements and dollar roll transactions) will not be considered leverage for
purposes of the Fund's policy on the amount of leverage it may incur or
considered "leverage" for purposes of calculating the Fund's total managed
assets. Although this Statement of Additional Information describes certain
permitted methods of segregating assets or otherwise "covering" such
transactions for these purposes, such descriptions are not complete. The Fund
may cover such transactions using other methods currently or in the future
permitted under the 1940 Act or orders issued by the SEC thereunder. For
these purposes, interpretations and guidance provided by the SEC staff may be
taken into account when deemed appropriate by the Fund. Borrowing will tend
to exaggerate the effect on net asset value of any increase or decrease in
the market value of the Fund's portfolio. Money borrowed will be subject to
interest costs which may or may not be recovered by appreciation of the
securities purchased. The Fund also may be required to maintain minimum
average balances in connection with such borrowing or to pay a commitment or
other fee to maintain a line of credit; either of these requirements would
increase the cost of borrowing over the stated interest rate.

REVERSE REPURCHASE AGREEMENTS

The Fund may enter into reverse repurchase agreements and economically
similar transactions in order to add leverage to the portfolio or for hedging
or cash management purposes. A reverse repurchase agreement involves the sale
of a portfolio-eligible security by the Fund, coupled with its agreement to
repurchase the instrument at a specified time and price. Under a reverse
repurchase agreement, the Fund continues to receive any principal and
interest payments on the underlying security during the term of the
agreement. Reverse repurchase agreements involve leverage risk and the risk
that the market value of securities retained by the Fund may decline below
the repurchase price of the securities sold by the Fund which it is obligated
to repurchase. The Fund may (but is not required to) segregate liquid assets,
equal (on a daily mark-to-market basis) to its obligations under reverse
repurchase agreements. To the extent that positions in reverse repurchase
agreements are not so covered, such transactions would be subject to the
Fund's limitations on borrowings, which would, among other things, restrict
the aggregate of such transactions (plus any other borrowings) to one-third
of the Fund's total assets less liabilities (other than the borrowings and
other senior securities). Also, reverse repurchase agreements involve the
risk that the market value of the securities retained in lieu of sale by the
Fund in connection with the reverse repurchase agreement may decline in
price. If the buyer of securities under a reverse repurchase agreement files
for bankruptcy or becomes insolvent, such buyer or its trustee or receiver
may receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds
of the reverse repurchase agreement may effectively be restricted pending
such decision. Also, the Fund would bear the risk of loss to the extent that
the proceeds of the reverse repurchase agreement are less than the value of
the securities subject to such agreement.

The Fund also may effect simultaneous purchase and sale transactions that
are known as "sale-buybacks." A sale-buyback is similar to a reverse repurchase
agreement, except that in a sale-buyback, the counterparty who purchases the
security is entitled to receive any principal or interest payments made on the
underlying security pending settlement of the Fund's repurchase of the
underlying security.

DOLLAR ROLLS

A "dollar roll" is similar to a reverse repurchase agreement in certain
respects. In a "dollar roll" transaction the Fund sells a security to a dealer
and simultaneously agrees to repurchase a similar security (but not the same
security) in the future at a pre-determined price. During the period between the
sale and repurchase, the Fund will not be entitled to receive interest and
principal payments on the securities sold. A "dollar roll" can be viewed, like a
reverse repurchase agreement, as a collateralized borrowing in which the Fund
pledges a security to a dealer to obtain cash. However, unlike reverse
repurchase agreements, the dealer or other party with which the Fund enters into
a dollar roll transaction is not obligated to return the same securities as
those originally sold by the Fund, but only securities which are "substantially
identical." To be considered "substantially identical," the securities returned
to the Fund generally must: (1) if applicable, be collateralized by the same
types of underlying mortgages and be issued by the same agency and be part of
the same program; (2) have a similar original stated maturity; (3) have
identical net coupon rates; (4) have similar market yields (and therefore
price); and (5) satisfy "good delivery" requirements, meaning that the aggregate
principal amounts of the securities delivered and received back must be within
2.5% of the initial amount delivered.

As with reverse repurchase agreements, to the extent that positions in
dollar roll agreements are not covered by segregated liquid assets, such
transactions would be subject to the Fund's restrictions on borrowings.

Proceeds of the sale will be invested in additional instruments for the
Fund, and the income from these investments will generate income for the Fund.
If such income does not exceed the income, capital appreciation and gain or loss
that would have been realized on the securities sold as part of the dollar roll,
the use of this technique will diminish the investment performance of the Fund
compared with what the performance would have been without the use of dollar
rolls. Dollar roll transactions involve the risk that the market value of the
securities the Fund is required to purchase may decline below the agreed upon
repurchase price of those securities. The Fund's right to purchase or repurchase
securities may be restricted. Successful use of mortgage dollar rolls may depend
upon the Advisor's ability to predict interest rates and prepayments correctly.
There is no assurance that dollar rolls can be successfully employed.

SHORT SALES

The Fund may make short sales of securities as part of its overall
portfolio management strategy and to offset potential declines in long positions
in securities in the Fund's portfolio. A short sale is a transaction in which
the Fund sells a security it does not own in anticipation that the market price
of that security will decline.

When the Fund makes a short sale on a security, it must borrow the security
sold short and deliver it to the broker-dealer through which it made the short
sale as collateral for its obligation to deliver the security upon conclusion of
the sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any accrued interest and dividends on such borrowed
securities.

If the price of the security sold short increases between the time of the
short sale and the time the Fund replaces the borrowed security, the Fund will
incur a loss; conversely, if the price declines, the Fund will realize

a capital gain. Any gain will be decreased, and any loss increased, by the
transaction costs described above. The successful use of short selling may be
adversely affected by imperfect correlation between movements in the price of
the security sold short and the securities being hedged.

To the extent that the Fund engages in short sales, it will provide
collateral to the broker-dealer. A short sale is "against the box" to the extent
that the Fund contemporaneously owns, or has the right to obtain at no added
cost, securities identical to those sold short. The Fund may also engage in
so-called "naked" short sales (I.E., short sales that are not "against the
box"), in which case the Fund's losses could be unlimited, in cases where the
Fund is unable for whatever reason to close out its short position. The Fund has
the flexibility to engage in short selling to the extent permitted by the 1940
Act and rules and interpretations thereunder.

ILLIQUID SECURITIES

The term "illiquid securities" means securities that cannot be disposed of
within seven days in the ordinary course of business at approximately the amount
at which the Fund has valued the securities. Illiquid securities are considered
to include, among other things, written over-the-counter options, securities or
other liquid assets being used as cover for such options, repurchase agreements
with maturities in excess of seven days, certain loan participation interests,
fixed time deposits which are not subject to prepayment or provide for
withdrawal penalties upon prepayment (other than overnight deposits), and other
securities whose disposition is restricted under the federal securities laws
(other than securities issued pursuant to Rule 144A under the 1933 Act and
certain commercial paper).

Illiquid securities may include privately placed securities, which are sold
directly to a small number of investors, usually institutions. Unlike public
offerings, such securities are not registered under the federal securities laws.
Although certain of these securities may be readily sold, others may be
illiquid, and their sale may involve substantial delays and additional costs. In
addition, restricted securities may sell at a price lower than similar
securities that are not subject to restrictions on resale.

PORTFOLIO TRADING AND TURNOVER RATE

Portfolio trading may be undertaken to accomplish the investment objectives
of the Fund in relation to actual and anticipated movements in interest rates.
In addition, a security may be sold and another of comparable quality purchased
at approximately the same time to take advantage of what the Advisor believes to
be a temporary price disparity between the two securities. Temporary price
disparities between two comparable securities may result from supply and demand
imbalances where, for example, a temporary oversupply of certain bonds may cause
a temporarily low price for such bonds, as compared with other bonds of like
quality and characteristics. The Fund may also engage in short-term trading
consistent with its investment objectives. Securities may be sold in
anticipation of a market decline (a rise in interest rates) or purchased in
anticipation of a market rise (a decline in interest rates) and later sold, or
to recognize a gain.

A change in the securities held by the Fund is known as "portfolio
turnover." The Advisor manages the Fund without regard generally to restrictions
on portfolio turnover. The use of certain derivative instruments with relatively
short maturities may tend to exaggerate the portfolio turnover rate for the
Fund. Trading in debt obligations does not generally involve the payment of
brokerage commissions, but does involve indirect transaction costs. The use of
futures contracts may involve the payment of commissions to futures commission
merchants. High portfolio turnover (E.G., greater than 100%) involves
correspondingly greater expenses to the Fund, including brokerage commissions or
dealer mark-ups and other transaction costs on the sale of securities and
reinvestments in other securities. The higher the rate of portfolio turnover of
the Fund, the higher these transaction costs borne by the Fund generally will
be. Transactions in the Fund's portfolio securities may result in realization of
taxable capital gains (including short-term capital gains which are generally
taxed to shareholders at ordinary income tax rates). The trading costs and tax
effects associated with portfolio turnover may adversely affect the Fund's
performance.

The portfolio turnover rate of the Fund is calculated by dividing (a) the
lesser of purchases or sales of portfolio securities for the particular fiscal
year by (b) the monthly average of the value of the portfolio securities owned
by the Fund during the particular fiscal year. In calculating the rate of
portfolio turnover, there is excluded from both (a) and (b) all securities,
including options, whose maturities or expiration dates at the time of
acquisition were one year or less.

WARRANTS TO PURCHASE SECURITIES

The Fund may invest in warrants to purchase debt or equity securities. Debt
obligations with warrants attached to purchase equity securities have many
characteristics of convertible bonds and their prices may, to some degree,
reflect the performance of the underlying stock. Debt obligations also may be
issued with warrants attached to purchase additional debt securities at the same
coupon rate. A decline in interest rates would permit the Fund to buy additional
bonds at the favorable rate or to sell the warrants at a profit. If interest
rates rise, the warrants would generally expire. Warrants do not carry with them
the right to dividends or voting rights with respect to the securities that they
entitle their holder to purchase, and they do not represent any rights in the
assets of the issuer. As a result, warrants may be considered more speculative
than certain other types of investments. In addition, the value of a warrant
does not necessarily change with the value of the underlying securities and a
warrant ceases to have value if it is not exercised prior to its expiration
date.

SECURITIES LOANS

Subject to the Fund's "Investment Restrictions" listed below, the Fund
may make secured loans of its portfolio securities to brokers, dealers and
other financial institutions amounting to no more than one-third of its total
assets (including such loans). The risks in lending portfolio securities, as
with other extensions of credit, consist of possible delay in recovery of the
securities or possible loss of rights in the collateral should the borrower
fail financially. However, such loans will be made only to broker-dealers
that are believed by the Advisor to be of relatively high credit standing.
Securities loans are made to broker-dealers pursuant to agreements requiring
that loans be continuously secured by collateral consisting of U.S.
Government securities, cash or cash equivalents (negotiable certificates of
deposit, bankers' acceptances or letters of credit) maintained on a daily
mark-to-market basis in an amount at least equal at all times to the market
value of the securities lent. The borrower pays to the Fund, as the lender,
an amount equal to any dividends or interest received on the securities lent.
The Fund may invest only the cash collateral received in interest-bearing,
short-term securities or receive a fee from the borrower. In the case of cash
collateral, the Fund typically pays a rebate to the lender. Although voting
rights or rights to consent with respect to the loaned securities pass to the
borrower, the Fund, as the lender, retains the right to call the loans and
obtain the return of the securities loaned at any time on reasonable notice,
and it will do so in order that the securities may be voted by the Fund if
the holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. The Fund may also call such loans in
order to sell the securities involved. When engaged in securities lending,
the Fund's performance will continue to reflect changes in the value of the
securities loaned and will also reflect the receipt of either interest,
through investment of cash collateral by the Fund in permissible investments,
or a fee, if the collateral is U.S. Government securities. The Fund may lend
its portfolio securities so long as the terms and the structure of such loans
are not inconsistent with all regulatory requirements, including the
requirements of the 1940 Act and the New York Stock Exchange. The Fund may
pay fees in connection with loaned securities, so long as such fees are set
forth in a written contract and approved by the Fund's Board of Trustees.

PARTICIPATION ON CREDITORS COMMITTEES

The Fund may from time to time participate on committees formed by
creditors to negotiate with the management of financially troubled issuers of
securities held by the Fund. Such participation may subject the Fund to expenses
such as legal fees and may make the Fund an "insider" of the issuer for purposes
of the federal securities laws, and therefore may restrict the Fund's ability to
trade in or acquire additional positions in

a particular security when it might otherwise desire to do so. Participation
by the Fund on such committees also may expose the Fund to potential
liabilities under the federal bankruptcy laws or other laws governing the
rights of creditors and debtors. The Fund would participate on such
committees only when the Advisor believes that such participation is
necessary or desirable to enforce the Fund's rights as a creditor or to
protect the value of securities held by the Fund.

COLLATERALIZED BOND OBLIGATIONS

The Fund may invest in collateralized bond obligations ("CBOs"), which are
structured products backed by a diversified pool of high yield public or private
fixed income securities. The pool of high yield securities is typically
separated into tranches representing different degrees of credit quality. The
top tranche of CBOs, which represents the highest credit quality in the pool,
has the greatest collateralization and pays the lowest interest rate. Lower CBO
tranches represent lower degrees of credit quality and pay higher interest rates
to compensate for the attendant risks. The bottom tranche specifically receives
the residual interest payments (i.e., money that is left over after the higher
tiers have been paid) rather than a fixed interest rate. The return on the
bottom tranche of CBOs is especially sensitive to the rate of defaults in the
collateral pool.

MEZZANINE INVESTMENTS

The Fund may invest in certain high yield securities known as mezzanine
investments, which are subordinated debt securities which are generally issued
in private placements in connection with an equity security (e.g., with attached
warrants). Such mezzanine investments may be issued with or without registration
rights. Maturities of mezzanine investments are typically seven to ten years,
but the expected average life is significantly shorter at three to five years.
Mezzanine investments are usually unsecured and subordinate to other obligations
of the issuer.

PROJECT LOANS

The Fund may invest in project loans, which are fixed income securities of
issuers whose revenues are primarily derived from mortgage loans to
multi-family, nursing home and other real estate development projects. The
principal payments on these mortgage loans will be insured by agencies and
authorities of the U.S. Government.

SHORT-TERM INVESTMENTS / TEMPORARY DEFENSIVE STRATEGIES

Upon the Advisor's recommendation, for temporary defensive purposes and in
order to keep the Fund's cash fully invested, including the period during which
the net proceeds of the offering are being invested, the Fund may invest up to
100% of its total managed assets in high-quality, short-term debt instruments.
Such investments may prevent the Fund from achieving its investment objectives.

INVESTMENT RESTRICTIONS

FUNDAMENTAL INVESTMENT RESTRICTIONS

The Fund may (except as noted below):

(1) Borrow money, make loans or issue senior securities to the fullest
extent permitted by the 1940 Act, the rules or regulations thereunder or
applicable orders of the SEC, as such statute, rules, regulations or orders may
be amended from time to time.

(2) Not invest 25% or more of its total assets in a particular industry
or group of industries. Securities issued or guaranteed by the U.S. Government
or its agencies or instrumentalities will not be considered to represent an
industry.

(3) Underwrite securities to the fullest extent permitted by the 1940 Act,
the rules or regulations thereunder or applicable orders of the SEC, as such
statute, rules, regulations or orders may be amended from time to time.

(4) Purchase or sell commodities, commodities contracts, futures contracts
and related options, options, forward contracts or real estate to the fullest
extent permitted by the 1940 Act, the rules or regulations thereunder or
applicable orders of the SEC, as such statute, rules, regulations or orders may
be amended from time to time.

The fundamental investment limitations set forth above restrict the Fund's
ability to engage in certain practices and purchase securities and other
instruments other than as permitted by, or consistent with, the 1940 Act.
Relevant limitations of the 1940 Act are described below. These limitations are
based either on the 1940 Act itself, the rules or regulations thereunder or
applicable orders of the SEC. In addition, interpretations and guidance provided
by the SEC staff may be taken into account, where deemed appropriate by the
Fund, to determine if a certain practice or the purchase of securities or other
instruments is permitted by the 1940 Act, the rules or regulations thereunder or
applicable orders of the SEC. As such, these limitations of the 1940 Act are not
"fundamental;" that is, the limitations will change as the statute, rules,
regulations or orders (or, if applicable, interpretations) change, and no
shareholder vote will be required or sought.

Fundamental Investment Restriction (1). Under the 1940 Act, the Fund may
only borrow up to one-third of the value of its total assets less liabilities
(other than liabilities representing senior securities). For more information on
leverage and the risks relating thereto, see "The Fund's Objectives, Strategies
and Investments," "Preferred Shares and Other Leverage" and "Risks - Leverage
Risk" in the Prospectus.

The 1940 Act also restricts the ability of any closed-end fund to lend.
Under the 1940 Act, the Fund may only make loans if expressly permitted to do so
by the Fund's investment policies, and the Fund may not make loans to persons
who control or are under common control with the Fund. Thus, the 1940 Act
effectively prohibits the Fund from making loans to certain persons when
conflicts of interest or undue influence are most likely present. The Fund may,
however, make other loans which if made would expose shareholders to additional
risks, such as the failure of the other party to repay the loan. The Fund
retains the flexibility to make loans to the extent permitted by its investment
policies, other than loans of securities, which will be limited to 33?% of the
Fund's total assets.

The ability of a closed-end fund to issue senior securities is severely
circumscribed by complex regulatory constraints under the 1940 Act that
restrict, for instance, the amount, timing, and form of senior securities
that may be issued. Certain portfolio management techniques, such as reverse
repurchase agreements, credit default swaps, futures contracts, dollar rolls,
the purchase of securities on margin, short sales, or the writing of puts on
portfolio securities, may be considered senior securities unless appropriate
steps are taken to segregate the Fund's assets or otherwise cover its
obligations. To the extent the Fund covers its commitment under these
transactions, including by the segregation of liquid assets, such instrument
will not be considered a "senior security" by the Fund and therefore will not
be subject to the 300% asset coverage requirement otherwise applicable to
borrowings by the Fund (or, as the case may be, the 200% asset coverage
requirement applicable to Preferred Shares).

Under the 1940 Act, a "senior security" does not include any promissory
note or evidence of indebtedness where such loan is for temporary purposes only
and in an amount not exceeding 5% of the value

of the total assets of the issuer at the time the loan is made. A loan is
presumed to be for temporary purposes if it is repaid within sixty days and
is not extended or renewed.

The Preferred Shares, if offered, will be a senior security. See the
Prospectus under the heading "Preferred Shares and Other Leverage" and this
Statement of Additional Information under the heading "Description of Shares -
Preferred Shares" for more information.

Fundamental Investment Restriction (2). If the Fund were to invest 25% or
more of its total assets in a particular industry or group of industries,
investors would be exposed to greater risks because the Fund's performance would
be largely dependent on the performance of that industry or industries. For
purposes of this limitation, the Fund may invest 25% or more of its total assets
in certificates of deposit or banker's acceptances issued by domestic branches
of U.S. or foreign banks for temporary defensive purposes or in order to keep
the Fund fully invested, including the period during which the net proceeds of
the offering are being invested. The Fund's industry concentration policy does
not preclude it from investing 25% or more of its total assets in issuers in a
group of industries (such as different types of technology issuers) for
temporary defensive purposes or in order to keep the Fund fully invested,
including during the period during which the net proceeds of the offering are
being invested.

Fundamental Investment Restriction (3). The 1940 Act prohibits a
diversified closed-end fund from underwriting securities in excess of 25% of its
total assets.

Fundamental Investment Restriction (4). This restriction would permit
investment in commodities, commodities contracts (E.G., futures contracts or
related options), options, forward contracts or real estate to the extent
permitted under the 1940 Act. However, it is unlikely that the Fund would
make such investments, other than the use of futures contracts and related
options, options, forward contracts and certain real estate-related
instruments as explained in the Prospectus and this Statement of Additional
Information. The Fund, however, would like the ability to consider using
these investment techniques in the future. Commodities, as opposed to
commodity futures, represent the actual underlying bulk goods, such as
grains, metals and foodstuffs. Real estate-related instruments include real
estate investment trusts, commercial and residential mortgage-backed
securities, and real estate financings, and such instruments are generally
sensitive to factors such as changes in real estate values and property
taxes, interest rates, cash flow of underlying real estate assets,
overbuilding, and the management skill and creditworthiness of the issuer.

The restrictions listed above are fundamental policies of the Fund. Except
as described herein, the Fund, as a fundamental policy, may not alter these
policies without the approval of the holders of a majority of the outstanding
Common Shares and Preferred Shares voting together as a single class, and of the
holders of a majority of the outstanding Preferred Shares voting as a separate
class. For purposes of the foregoing, "majority of the outstanding," when used
with respect to particular shares of the Fund (whether voting together as a
single class or voting as separate classes), means (i) 67% or more of such
shares present at a meeting, if the holders of more than 50% of such shares are
present or represented by proxy, or (ii) more than 50% of such shares, whichever
is less.

Unless otherwise indicated, all limitations applicable to the Fund's
investments (as stated above and elsewhere in this Statement of Additional
Information and the Prospectus) apply only at the time a transaction is entered
into. Any subsequent change in a rating assigned by any rating service to a
security (or, if unrated, deemed by the Advisor to be of comparable quality), or
change in the percentage of the Fund's assets invested in certain securities or
other instruments, or change in the average maturity or duration of the Fund's
investment portfolio, resulting from market fluctuations or other changes in the
Fund's total assets, will not require the Fund to dispose of an investment. In
the event that rating agencies assign different ratings to the same security,
the Advisor will determine which rating it believes best reflects the security's
quality and risk at that time, which may be the higher of the several assigned
ratings.

Under normal market conditions, the Fund will invest at least 80% of its
total managed assets in U.S. TIPS (as defined in the Prospectus). So long as and
to the extent it is required by applicable law, the Fund will not change the
policy described in the foregoing sentence unless it provides shareholders with
at least 60 days' written notice of such change. For purposes of such 80% test,
the Fund will consider instruments, including synthetic instruments, U.S. TIPS
if, in the judgment of the Advisor, they have economic characteristics similar
to U.S. TIPS.

The Fund intends to apply for ratings for its Preferred Shares from Moody's
and/or S&P and Fitch. In order to obtain and maintain the required ratings, the
Fund may be required to comply with investment quality, diversification and
other guidelines established by Moody's, S&P and/or Fitch. Such guidelines will
likely be more restrictive than the restrictions set forth above. The Fund does
not anticipate that such guidelines would have a material adverse effect on
Common Shareholders or its ability to achieve its investment objectives. The
Fund presently anticipates that any Preferred Shares that it intends to issue
would be initially given the highest ratings by Moody's ("Aaa") or by S&P or
Fitch ("AAA"), but no assurance can be given that such rating or ratings will be
obtained. No minimum rating is required for the issuance of Preferred Shares by
the Fund. Moody's, S&P and Fitch receive fees in connection with their ratings
issuances.

MANAGEMENT OF THE FUND

TRUSTEES AND OFFICERS

The business of the Fund is managed under the general direction of the
Fund's Board of Trustees. Subject to the provisions of the Fund's Amended and
Restated Agreement and Declaration of Trust (the "Declaration"), its Bylaws and
Massachusetts law, the Trustees have all powers necessary and convenient to
carry out this responsibility, including the election and removal of the Fund's
officers.

The Trustees and officers of the Fund, their ages, and a description of
their principal occupations during the past five years are listed below.
Except as shown, each Trustee's and officer's principal occupation and
business experience for the last five years have been with the employer(s)
indicated, although in some cases the Trustee or officer may have held
different positions with such employer(s). Unless otherwise indicated, the
business address of the persons listed below is c/o Western Asset Management
Company, 117 East Colorado Blvd., Pasadena, CA 91105.

NUMBER OF
PORTFOLIOS IN
PRINCIPAL FUND OTHER
TERM OF OFFICE OCCUPATION(S) COMPLEX DIRECTORSHIPS
POSITION(S) AND LENGTH OF DURING THE PAST FIVE OVERSEEN BY HELD BY
NAME AND AGE(1) WITH THE FUND TIME SERVED YEARS TRUSTEE TRUSTEE
--------------- ------------- ----------- ----- ------- -------

Peter Erichsen Trustee and Term expires in Vice President, General
Age: 47 Chairman of the 2005; served Counsel and Secretary of
Trustees since August 2003 the J. Paul Getty Trust
(2) (3) (2001-present); Governor
of the Philadelphia
Stock Exchange.
Formerly: Vice President
and General Counsel of
the University of
Pennsylvania (1997-

2001).

Ronald Nyberg Trustee Term expires in Founding partner of Trustee of MBIA
Age: 50 (2) (3) 2005; served Nyberg & Gustafson, a Capital/Claymore
since August 2003 law firm specializing in Municipal Funds
corporate law, estate (3 Funds) (2003-
planning and business present); Trustee
transactions (2000- of Advent Claymore
present). Formerly: Convertible
Executive Vice Securities & Income
President, General Fund (2003-present).
Counsel and Corporate
Secretary of Van Kampen
Investments, an
investment advisory firm
(1982-1999); Associate
at Querrey & Harrow, a
law firm (1978-1982).

Ronald E. Toupin, Jr. Trustee Term expires in Formerly: Vice President, Trustee of MBIA
Age: 45 (2) (3) 2006; served Manager and Portfolio Capital/Claymore
since August 2003 Manager of Nuveen Asset Municipal Funds (3
Management, an investment Funds) (2003-present);
advisory firm (1998- Trustee of Advent
1999), Vice President and Claymore Convertible
Portfolio Manager of Securities & Income
Nuveen Investment Advisory Fund (2003 - present).
Corporation, an investment
advisory firm (1992-1999),
Vice President and Manager
of Nuveen Unit Investment
Trusts (1991-1998) and
Assistant Vice President
and Portfolio Manager of
Nuveen Unit Trusts
(1988-1990), each of John
Nuveen & Company, Inc.
(1982 - 1999).

INTERESTED TRUSTEES

Nicholas Dalmaso Trustee Term expires in Senior Managing Director Trustee of MBIA
Age: 38 2004; served and General Counsel of Capital/Claymore
(4) since August 2003 Claymore Securities, Municipal Funds
Inc. (2001-present); (3 Funds) (2003-
Trustee of Advent present).
Claymore Convertible
Securities & Income Fund
(2003 - present);
Director, Vice President
and Assistant Secretary
of F&C/Claymore
Preferred Securities
Income Fund, Inc. (2002
- present) and Flaherty
& Crumrine/Claymore
Total Return Fund, Inc.
(2003 - present);
Manager of Claymore Fund
Management Company LLC
(2002 - present); Vice
President of Boyar Value
Fund (2003 - present).
Formerly: Assistant
General Counsel of John
Nuveen and Company, Inc.
(1999-2001); Vice
President and Associate
General Counsel of Van
Kampen Investments
(1992-1999); Associate
at Cantwell and
Cantwell, a law firm
(1991-1992).

Randolph L. Kohn Trustee and Term expires in Formerly: Director,
Age: 56 President 2006; served Global Client Services
(5) since August 2003 and Marketing, Western
(6) Asset Management Company
(1984-2002); Director
(1996-2001) and Chairman
(2000-

2001), Arroyo
Seco, Inc.; Director of
Marketing, American
Express Asset Management
(1982- 1984); Director
of Marketing, First
Asset Management (1979-
1982); Marketing
Executive, Kemper
Financial Services
(1975-1979).

OFFICERS

Gregory B. McShea Vice President Served since Head of Compliance, N/A N/A
Age: 37 August 2003 Western Asset Management
(6) Company (2003-
present). Formerly:
Associate General
Counsel and
Compliance Director,
Private Client Group, Legg
Mason Wood Walker,
Incorporated, a brokerage
firm ("LMWW") (1997-2003);
Associate, Weinberg &
Green LLC, a law firm
(1992-1997).

Marie K. Karpinski Treasurer Served since Vice President, LMWW N/A N/A
Age: 54 August 2003 (1992-present); Vice
(6) President and Treasurer
100 Light Street of all Legg Mason retail
Baltimore, MD 21202 funds, open-end
investment companies
(1986-present); Vice
President and Treasurer
of Legg Mason Charles
Street Trust, Inc., an
open-end investment
company; Treasurer and
Principal Financial and
Accounting Officer of

Pacific American Income
Shares, Inc. (closed-end
investment company),
Western Asset Funds,
Inc. and Western Asset
Premier Bond Fund
(2001-present).
Formerly: Assistant
Treasurer of Pacific
American Income Shares,
Inc. (1988-2001).

Erin K. Morris Assistant Served since Assistant Vice President N/A N/A
Age: 36 Treasurer August 2003 of LMWW (2002- present);
(6) Assistant Treasurer of
100 Light Street Legg Mason Income Trust,
Baltimore, MD Inc., Legg Mason Cash
21202 Reserve Trust, Legg
Mason Tax Exempt Trust,
Inc. (open-end
investment companies),
Legg Mason Tax-Free
Income Fund, Pacific
American Income Shares,
Inc., Western Asset
Funds, Inc. and Western
Asset Premier Bond Fund
(2001-present); Manager,
Fund Accounting, LMWW
(2000-present).
Formerly: Assistant
Manager, Fund
Accounting, LMWW
(1993-2000).

Anne S. Kochevar Secretary Served since Vice President, N/A N/A
Age: 40 August 2003 Compliance, Claymore
(6) Securities, Inc.
210 N. Hale Street (2002-present);
Wheaton, IL 60187 Advertising

Principal,
Allstate Financial
Services (2001-2002);
Compliance Coordinator,
John Nuveen & Company,
Inc. (2000-2001); Vice
President & Compliance
Director of: Van Kampen
Management Inc., an
investment advisory firm
(1999-2000); Van Kampen
Investments (1992-2000);
Van Kampen Investment
Advisory Corp.
(1999-2000); Van Kampen
Funds Inc. (1999-2000);
Van Kampen Asset
Management Inc.
(1999-2000); Van Kampen
Advisors Inc. (1999-
2000).

----------

(1) It is expected that upon completion of the offering of the Common
Shares (or, if applicable, the completion of the offering of the Preferred
Shares), Michael Larson will be elected by the current Trustees to serve as
a Trustee. Mr. Larson serves as Chief Investment Officer for William
H. Gates III (1994-present). In addition, Mr. Larson is a director of
Pan American Silver Corp., a silver mining, development and exploration
company (2000-present) and is also a director of Extend America, Inc., a
telecommunications company (2002-present).

(2) Member of the Audit Committee of the Board of Trustees.
(3) Member of the Governance and Nominating Committee of the Board of
Trustees.

(4) Mr. Dalmaso may be deemed an "interested person" (as defined in section
2(a)(19) of the 1940 Act) of the Fund on the basis of his position as an
officer of Claymore Securities, Inc., the Fund's shareholder servicing
agent and an Underwriter (as disclosed above), and his ownership of an
interest therein.
(5) Mr. Kohn is an "interested person" (as defined above) of the Fund on
the basis of his former employment with Western Asset and certain of its
affiliated entities (as disclosed above), as well as his ownership of
certain shares of common stock of Legg Mason, inc., Western Asset's parent
company.

(6) Each officer shall hold office until his or her respective successor is
chosen and qualified, or in each case until he or she sooner dies, resigns,
is removed with or without cause or becomes disqualified.

As of December 31, 2002, no Trustee beneficially owned securities of the
Fund or securities of any registered investment companies overseen or to be
overseen by the Trustee in the same "family of investment companies" as the
Fund.

As of December 31, 2002, Ronald A. Nyberg was the indirect beneficial owner
of a $114,266 bond issued by Merrill Lynch & Co., Inc., the parent company of
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), a
principal underwriter of the Fund with respect to the offering of the Common
Shares. As of August 15, 2003, Mr. Nyberg no longer held any security issued by
Merrill Lynch.

As of December 31, 2002, no Trustee who is not an "interested person" (as
defined in Section 2(a)(19) of the 1940 Act) of the Fund, and none of his or her
family members, had beneficial or record ownership in securities of an
investment adviser or principal underwriter of the Fund, or an entity (other
than a registered investment company) directly or indirectly controlling,
controlled by, or under common control with an investment adviser or principal
underwriter of the Fund.

The Fund's Board of Trustees has established an Audit Committee and a
Governance and Nominating Committee, each currently comprised of Messrs.
Erichsen, Nyberg and Toupin. Mr. Nyberg currently chairs the Governance and
Nominating Committee. Mr. Toupin currently chairs the Audit Committee. The
Audit Committee provides oversight with respect to the accounting and
financial reporting policies and practices of the Fund and, among other
things, considers the selection of independent public accountants for the
Fund and the scope of the audit and approves all significant services
proposed to be performed by those accountants on behalf of the Fund. The
Governance and Nominating Committee meets to select nominees for election as
Trustees of the Fund and consider other matters of Board policy. It is not
the policy of the Governance and Nominating Committee to consider nominees
recommended by shareholders. Because the Fund has only recently been
organized, neither the Board of Trustees nor any Committees held meetings in
2002.

As of September 23, 2003, the Fund's officers and Trustees as a group owned
less than 1% of the outstanding Common Shares.

Except as noted below, none of the independent Trustees has ever been a
director, officer, or employee of, or a consultant to, the Advisor, any one or
more of the Underwriters or any one or more affiliates of any of the foregoing.
As indicated in the table above, each officer of the Fund, except Ms. Kochevar,
is affiliated with the Advisor.

In accordance with the Fund's staggered board (see "Anti-Takeover and Other
Provisions in the Declaration of Trust"), the Common Shareholders and the
holders of Preferred Shares ("Preferred Shares"), if any, of the Fund will elect
Trustees to fill the vacancies of Trustees whose terms expire at each annual
meeting of shareholders. If any Preferred Shares are outstanding, holders of the
Preferred Shares ("Preferred Shareholders"), voting as a separate class, will
elect two Trustees and the remaining Trustees shall be elected by Common
Shareholders and Preferred Shareholders, voting together as a single class, in
each case in accordance with the Fund's staggered board structure. Preferred
Shareholders will be entitled to elect a majority of the Fund's Trustees if two
years' dividends on any Preferred Shares are unpaid until all unpaid dividends
are paid (or otherwise provided for by the Fund).

Officers and Trustees of the Fund who are affiliated persons of the
Fund, the Advisor, Claymore Securities, Inc. ("Claymore") or one or more of
the Underwriters (including Claymore) receive no salary or fees from the
Fund. Each other Trustee of the Fund receives a fee of $8,000 annually for
serving as a Trustee of the Fund, and a fee of $1,000 and related expenses
for each meeting of the Board of Trustees attended. The Chairman of the
Trustees receives an additional $1,500 per year for serving in that capacity.
Audit Committee members receive $500 for each meeting, and the Audit
Committee Chairman receives an additional $1,500 annually. Other committee
members receive $500 per meeting.

It is estimated that the Trustees will receive the amounts set forth in the
following table for the fiscal year ending December 31, 2003. For the calendar
year ended December 31, 2002, no Trustee served as a trustee of other funds in
the same "Fund Complex" as the Fund.

TOTAL COMPENSATION
PENSION OR FROM THE FUND
ESTIMATED COMPENSATION RETIREMENT ESTIMATED COMPLEX PAID TO THE
FROM THE FUND FOR THE BENEFITS ACCRUED ANNUAL BENEFITS TRUSTEES FOR THE
FISCAL YEAR ENDING AS PART OF FUND UPON CALENDAR YEAR ENDING
NAME OF TRUSTEE DECEMBER 31, 2002* EXPENSES RETIREMENT DECEMBER 31, 2002
--------------- ------------------ -------- ---------- -----------------

Peter Erichsen $ 6,458 N/A N/A N/A

Ronald Nyberg $ 5,833 N/A N/A N/A

Ronald E. Toupin, Jr. $ 6,458 N/A N/A N/A

INTERESTED TRUSTEES

Nicholas Dalmaso $ 0 N/A N/A N/A

Randolph L. Kohn $ 0 N/A N/A N/A

----------
* Since the Fund has not completed its first full fiscal year, compensation
is estimated based upon future payments to be made by the Fund during the
current fiscal year.

The Fund has no employees. Its officers are compensated by Western Asset
or, in the case of Ms. Kochevar, Claymore.

SHAREHOLDERS

As of September 23, 2003, the following persons owned of record the number
of Common Shares noted below, representing the indicated percentage of the
Fund's outstanding shares as of such date and, except as noted below, no other
person owned of record or, to the knowledge of the Fund, owned beneficially 5%
or more of any class of shares of the Fund.

NUMBER OF PERCENTAGE OF THE FUND'S
COMMON OUTSTANDING SHARES
SHAREHOLDER SHARES AS OF SEPTEMBER 23, 2003
----------- ------ ------------------------

Western Asset Management Company, a California corporation 6,981 100%

It may not be possible for matters subject to a vote of a majority of the
outstanding voting securities of the Fund to be approved without the affirmative
vote of a "controlling" shareholder, and it may be possible for such matters to
be approved by a controlling shareholder without the affirmative vote of any
other shareholders.

INVESTMENT ADVISOR AND ADMINISTRATOR

Western Asset serves as investment advisor to the Fund pursuant to an
investment management agreement (the "Investment Management Agreement") between
it and the Fund. Western Asset is a wholly-owned subsidiary of Legg Mason, Inc.,
a publicly traded financial services holding company.

Western Asset, subject to the supervision of the Board of Trustees, is
responsible for managing, either directly or through others selected by Western
Asset, the investments of the Fund. Western Asset also furnishes to the Board of
Trustees periodic reports on the investment performance of the Fund.

Under the terms of the Investment Management Agreement, subject to such
policies as the Trustees of the Fund may determine, Western Asset, at its
expense, will furnish continuously an investment program for the Fund and will
make investment decisions on behalf of the Fund and place all orders for the
purchase and sale of portfolio securities, subject always to the Fund's
investment objectives, policies and restrictions.

Subject to the control of the Trustees, Western Asset also manages,
supervises and conducts certain other business affairs of the Fund, provides
bookkeeping and certain clerical services (or subcontracts for such services)
and pays all salaries, fees and expenses of officers and Trustees of the Fund
who are affiliated with Western Asset. As indicated under "Portfolio
Transactions -- Brokerage and Research Services," the Fund's portfolio
transactions may be placed with broker-dealers which furnish the Advisor,
without cost, certain research, statistical and quotation services of value to
the Advisor or its affiliates in advising the Fund or its other clients. In so
doing, the Fund may incur greater brokerage commissions and other transactions
costs than it might otherwise pay.

Pursuant to the Investment Management Agreement, the Fund has agreed to pay
Western Asset an annual management fee, payable on a monthly basis, at the
annual rate of .40 % of the Fund's average weekly assets for the services it
provides. "Average weekly assets" means the average weekly value of the total
assets of the Fund (including any assets attributable to leverage) minus accrued
liabilities (other than liabilities representing leverage). For purposes of
calculating "average weekly assets," neither the liquidation preference of any
preferred shares outstanding nor any liabilities associated with any instruments
or transactions used by Western Asset to leverage the Fund's portfolio (whether
or not such instruments or transactions are "covered" as described in this
prospectus) is considered a liability. With respect to reverse purchase or
dollar roll transactions, "average weekly assets" includes any proceeds from the
sale of an asset of the Fund to a counterparty in such a transaction, in
addition to the value of the underlying asset as of the relevant measuring date.
All fees and expenses are accrued daily and deducted before payment of dividends
to investors.

Except as otherwise described in the Prospectus, the Fund pays, in addition
to the investment management fee described above, all expenses not assumed by
Western Asset, including, without limitation, fees and expenses of Trustees who
are not "interested persons" of the Fund, interest charges, taxes, brokerage
commissions, listing fees, expenses of issue of shares, fees and expenses of
registering and qualifying the Fund and its classes of shares for distribution
under federal and state laws and regulations, charges of custodians, servicing
agents and administrators, auditing and legal expenses, expenses of determining
net asset value of the Fund, reports to shareholders, expenses of meetings of
shareholders, expenses of printing and mailing prospectuses, proxy statements
and proxies to existing shareholders, and its proportionate share of insurance
premiums and professional association dues or assessments. The Fund is also
responsible for such nonrecurring expenses as may arise, including litigation in
which the Fund may be a party, and other expenses as determined by the Trustees.
The Fund may have an obligation to indemnify its officers and Trustees with
respect to such litigation.

CERTAIN TERMS OF THE INVESTMENT MANAGEMENT AGREEMENT. The Investment
Management Agreement was approved by the Trustees of the Fund (including all of
the Trustees who are not "interested persons" of the Advisor). The Investment
Management Agreement will continue in force with respect to the Fund for two
years
44

from its date, and from year to year thereafter, but only so long as its
continuance is approved at least annually by (i) vote, cast in person at a
meeting called for that purpose, of a majority of those Trustees who are not
"interested persons" of the Advisor or the Fund, and by (ii) the majority
vote of either the full Board of Trustees or the vote of a majority of the
outstanding shares of all classes of the Fund. The Investment Management
Agreement automatically terminates on assignment. The Investment Management
Agreement may be terminated on not more than 60 days' written notice by
Western Asset to the Fund or by the Fund to Western Asset.

The Investment Management Agreement provides that Western Asset shall not
be subject to any liability in connection with the performance of its services
thereunder in the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations and duties.

TRUSTEE APPROVAL OF THE INVESTMENT MANAGEMENT AGREEMENT. The Board of
Trustees, including a majority of the independent Trustees, considered and
approved the Investment Management Agreement at an in-person meeting held on
August 21, 2003.

In arriving at their decision to approve the Investment Management
Agreement, the Trustees met with representatives of the Advisor and reviewed
information prepared by the Advisor and materials provided by fund counsel. As
part of their review, the Trustees examined the Advisor's ability to provide
high quality investment management services to the Fund. The Trustees were
provided with information on the investment philosophy and research and
decision-making processes of the Advisor; the investment management fees charged
by certain other Funds investing primarily in U.S. TIPS and certain other
products available from Western Asset for investments in U.S. TIPS; the Fund's
hedging strategies and its use of leverage; and the level of skill required to
manage the Fund. Based on the foregoing, the Trustees concluded that the
Advisor's investment process, research capabilities and philosophy were well
suited to the Fund given the Fund's investment objectives and policies.

In addition, the Trustees reviewed, with respect to all of the Advisor's
responsibilities under the Investment Management Agreement, information
regarding the nature, cost, scope and anticipated quality of the services
provided to the Fund and its shareholders under the Investment Management
Agreement. The Trustees were also provided with information regarding other fees
to be paid by the Fund or other parties in connection with the offering of the
Fund's Common Shares, including certain fees payable to Claymore (as described
in the Prospectus) and certain fees to be paid to Merrill Lynch by Western Asset
for ongoing after-market services (as described in the Prospectus).

The Trustees further evaluated potential benefits of the advisory
relationship to the Advisor, including the direct and indirect benefits that the
Advisor may receive from its relationship with the Fund. In this regard, the
Trustees took into account services provided by affiliates of the Advisor to the
Fund, including services provided by Legg Mason Wood Walker, Incorporated as a
principal underwriter with respect to the initial public offering of the Fund's
common shares and the engagement of Legg Mason Fund Adviser, Inc. (the
"Administrator") as the Fund's administrator. The Trustees noted the fact that,
because the advisory fees paid to Western Asset by the Fund are based on the
Fund's average weekly assets, including assets represented by preferred shares
and other leverage, Western Asset has a financial incentive for the Fund to
issue preferred shares and incur other leverage, which may create a conflict of
interest between Western Asset and the Fund's shareholders.

In arriving at a decision to approve the Investment Management Agreement,
the Trustees, including the independent Trustees, did not identify any single
matter as all-important or controlling, and the foregoing summary does not
detail all the matters considered. The Trustees judged the terms and conditions
of the Investment Management Agreement, including the investment advisory fees,
in light of all of the surrounding circumstances. Based upon their review, the
Trustees, including all of the independent Trustees, determined, in

the exercise of their business judgment, that approval of the Investment
Management Agreement was in the best interest of the Fund and its
shareholders.

ADMINISTRATIVE SERVICES

Pursuant to an Administrative Services Agreement between the Fund and the
Administrator, an affiliate of Western Asset, the Administrator performs or
arranges for the performance of certain administrative and accounting functions
for the Fund, including: (i) oversight of the maintenance of the Fund's books
and records which are maintained by the Fund's custodian and the Fund's transfer
agent; (ii) calculation and publication of the Fund's net asset value daily;
(iii) preparation of financial information for the Fund's reports to
shareholders; (iv) preparation of all tax returns to be filed by the Fund; (v)
oversight, or preparation, of performance calculations, expense budgets and
expense ratios and the Fund's periodic dividends and distributions; (vi)
preparation of reports required by any stock exchange on which the Fund's shares
are listed; (vii) preparation and filing of Forms N-SAR and N-CSR; (viii)
preparation, or review, of ratings agencies' asset coverage tests with respect
to the issuance of preferred securities (as needed); and (ix) oversight of any
stock purchase or dividend reinvestment program authorized by the Fund. In
consideration of these services, the Fund will pay the Administrator a fee, paid
monthly, at an annual rate of $100,000.

CODES OF ETHICS

The Fund, Western Asset, LMWW and Claymore have adopted codes of ethics
under Rule 17j-1 of the 1940 Act. These codes permit personnel subject to the
codes to invest in securities, including securities that may be purchased or
held by the Fund. Text-only versions of the codes of ethics may be viewed online
or downloaded from the EDGAR Database on the SEC's internet web site at
www.sec.gov. You may also review and copy those documents by visiting the SEC's
Public Reference Room in Washington, DC. Information on the operation of the
Public Reference Room may be obtained by calling the SEC at 202-942-8090. In
addition, copies of the codes of ethics may be obtained, after mailing the
appropriate duplicating fee, by writing to the SEC's Public Reference Section,
450 5th Street, N.W., Washington, DC 20549-0102 or by e-mail request at
publicinfo@sec.gov.

PORTFOLIO TRANSACTIONS

INVESTMENT DECISIONS AND PORTFOLIO TRANSACTIONS

Investment decisions for the Fund and for the other investment advisory
clients of the Advisor are made with a view to achieving their respective
investment objectives. Investment decisions are the product of many factors in
addition to basic suitability for the particular client involved (including the
Fund). Some securities considered for investments by the Fund may also be
appropriate for other clients served by the Advisor, including accounts of
employees and affiliates. Thus, a particular security may be bought or sold for
certain clients even though it could have been bought or sold for other clients
at the same time. If a purchase or sale of securities consistent with the
investment policies of the Fund and one or more of these clients served by the
Advisor is considered at or about the same time, transactions in such securities
will be allocated among the Fund and clients in a manner deemed fair and
reasonable by the Advisor. The Advisor may aggregate orders for the Fund with
simultaneous transactions entered into on behalf of its other clients so long as
price and transaction expenses are averaged either for that transaction or for
the day. Likewise, a particular security may be bought for one or more clients
when one or more clients are selling the security. In some instances, one client
may sell a particular security to another client. There may be circumstances
when purchases or sales of portfolio securities for one or more clients will
have an adverse effect on other clients.

BROKERAGE AND RESEARCH SERVICES

There is generally no stated commission in the case of fixed income
securities, which are traded in the over-the-counter markets, but the price
paid by the Fund usually includes an undisclosed dealer commission or
mark-up. In underwritten offerings, the price paid by the Fund includes a
disclosed, fixed commission or discount retained by the underwriter or
dealer. Transactions on U.S. stock exchanges and other agency transactions
involve the payment by the Fund of negotiated brokerage commissions. Such
commissions vary among different brokers. Also, a particular broker may
charge different commissions according to such factors as the difficulty and
size of the transaction.

The Advisor places all orders for the purchase and sale of portfolio
securities, options, futures contracts and other instruments for the Fund and
buys and sells such securities, options, futures and other instruments for the
Fund through a substantial number of brokers and dealers. In so doing, the
Advisor uses its best efforts to obtain for the Fund the most favorable price
and execution available, except to the extent it may be permitted to pay higher
brokerage commissions as described below. In seeking the most favorable price
and execution, the Advisor, having in mind the Fund's best interests, considers
all factors it deems relevant, including, by way of illustration, price, the
size of the transaction, the nature of the market for the security, the amount
of the commission, the timing of the transaction taking into account market
prices and trends, the reputation, experience and financial stability of the
broker-dealer involved and the quality of service rendered by the broker-dealer
in other transactions.

It has for many years been a common practice in the investment advisory
business for advisors of investment companies and other institutional investors
to receive research services from broker-dealers which execute portfolio
transactions for the clients of such advisors. Consistent with this practice,
the Advisor may receive research services from many broker-dealers with which
the Advisor places the Fund's portfolio transactions. The Advisor may also
receive research or research credits from brokers which are generated from
underwriting commissions when purchasing new issues of debt securities or other
assets for the Fund. These services, which in some cases may also be purchased
for cash, include such matters as general economic and security market reviews,
industry and company reviews, evaluations of securities and recommendations as
to the purchase and sale of securities. Some of these services are of value to
the Advisor in advising various of its clients (including the Fund), although
not all of these services are necessarily useful and of value in managing the
Fund. The management fee paid by the Fund to the Advisor is not reduced because
the Advisor and its affiliates receive such services.

As permitted by Section 28(e) of the Securities Exchange Act of 1934, an
Advisor may cause the Fund to pay a broker-dealer which provides "brokerage and
research services" (as defined in such Act) to the Advisor an amount of
disclosed commission for effecting a securities transaction for the Fund in
excess of the commission which another broker-dealer would have charged for
effecting that transaction.

The Fund may use broker-dealers that are affiliates (or affiliates of
affiliates) of the Fund and/or the Advisor.

DISTRIBUTIONS

The Fund intends to distribute to Common Shareholders monthly dividends of
all or a portion of its net investment income after payment of dividends to
Preferred Shareholders and interest in connection with other forms of leverage
(if applicable). As described in the Fund's Prospectus, initial distributions to
Common Shareholders are expected to be declared approximately 45 days, and paid
approximately 60 to 90 days, from the completion of the offering of the Common
Shares, depending on market conditions. The Fund expects that all or a portion
of any capital gain will be distributed at least annually.

Various factors will affect the level of the Fund's income, including the
asset mix, the average maturity of the Fund's portfolio, the amount of leverage
utilized by the Fund and the Fund's use of hedging. To permit the Fund to
maintain a more stable monthly distribution, the Fund may from time to time
distribute less than the entire amount of net investment income earned in a
particular period. Such undistributed net investment income would be available
to supplement future distributions, including distributions which might
otherwise have been reduced by a decrease in the Fund's monthly net income due
to fluctuations in investment income or expenses, or due to an increase in the
dividend rate on the Fund's outstanding Preferred Shares. As a result, the
distributions paid by the Fund for any particular period may be more or less
than the amount of net investment income actually earned by the Fund during such
period. Undistributed net investment income will be added to the Fund's net
asset value and, correspondingly, distributions from undistributed net
investment income will be deducted from the Fund's net asset value.

Common Shareholders will automatically have all dividends and distributions
reinvested in Common Shares of the Fund issued by the Fund or purchased in the
open market in accordance with the Fund's Dividend Reinvestment Plan unless an
election is made to receive cash. See "Dividend Reinvestment Plan" in the Fund's
Prospectus.

While any Preferred Shares are outstanding, the Fund may not declare any
cash dividend or other distribution on its Common Shares unless at the time of
such declaration (1) all accumulated dividends on the Preferred Shares have been
paid, (2) the asset coverage (as defined in the 1940 Act) of the Fund is at
least 200% of the liquidation value of any outstanding Preferred Shares
(together with certain forms of indebtedness) and (3) other requirements imposed
by any rating agency or agencies rating any Preferred Shares issued by the Fund
have been met. These latter limitations on the Fund's ability to make
distributions on its Common Shares could cause the Fund to incur income and
excise tax and, under certain circumstances, impair the ability of the Fund to
maintain its qualification for taxation as a regulated investment company. See
"Tax Matters."

DESCRIPTION OF SHARES

COMMON SHARES

The Fund's Declaration authorizes the issuance of an unlimited number of
Common Shares. The Common Shares will be issued without par value. All Common
Shares of the Fund have equal rights as to the payment of dividends and the
distribution of assets upon liquidation of the Fund. Common Shares will, when
issued, be fully paid and, subject to matters discussed in "Anti-Takeover and
Other Provisions in the Declaration of Trust - Shareholder Liability" below,
non-assessable, and will have no pre-emptive or conversion rights or rights to
cumulative voting. At any time when the Fund's Preferred Shares are outstanding,
Common Shareholders will not be entitled to receive any distributions from the
Fund unless all accrued dividends on Preferred Shares have been paid, asset
coverage (as defined in the 1940 Act) with respect to Preferred Shares and
certain forms of indebtedness would be at least 200% and 300%, respectively,
after giving effect to such distributions, and other requirements imposed by any
rating agency or agencies rating any Preferred Shares issued by the Fund have
been met. See "-Preferred Shares" below.

The Common Shares have been approved for listing on the New York Stock
Exchange, subject to notice of issuance. The Fund intends to hold annual
meetings of shareholders so long as the Common Shares are listed on a national
securities exchange and such meetings are required as a condition to such
listing.

Shares of closed-end investment companies may frequently trade at prices
lower than net asset value. Shares of closed-end investment companies like
the Fund that invest in debt obligations have during some periods traded at
prices higher than net asset value and during other periods traded at prices
lower than net asset value. There can be no assurance that Common Shares or
shares of other similar funds will trade at a price higher than net asset
value in the future. Net asset value will be reduced immediately following
the offering of Common Shares after payment of the sales load and offering
expenses borne by the Fund. Net asset value

generally increases when interest rates decline, and decreases when interest
rates rise, and these changes are likely to be greater in the case of a fund,
such as the Fund, having a leveraged capital structure. Whether investors
will realize gains or losses upon the sale of Common Shares will not depend
upon the Fund's net asset value but will depend entirely upon whether the
market price of the Common Shares at the time of sale is above or below the
original purchase price for the shares. Since the market price of the Fund's
Common Shares will be determined by factors beyond the control of the Fund,
the Fund cannot predict whether the Common Shares will trade at, below, or
above net asset value or at, below or above the initial public offering
price. Accordingly, the Common Shares are designed primarily for long-term
investors, and investors in the Common Shares should not view the Fund as a
vehicle for trading purposes. See "Repurchase of Common Shares; Conversion to
Open-End Fund" and the Fund's Prospectus under "Preferred Shares and Other
Leverage."

PREFERRED SHARES

The Declaration authorizes the issuance of an unlimited number of Preferred
Shares. The Preferred Shares may be issued in one or more classes or series,
with such par value and rights as determined by the Board of Trustees of the
Fund, by action of the Board of Trustees without the approval of the Common
Shareholders.

The Fund's Board of Trustees has indicated its intention to authorize an
offering of Preferred Shares (representing approximately 33% of the Fund's total
managed assets immediately after the time the Preferred Shares are issued)
within approximately one to three months after completion of the offering of
Common Shares, subject to market conditions and to the Board's continuing belief
that leveraging the Fund's capital structure through the issuance of Preferred
Shares is likely to achieve the benefits to the Common Shareholders described in
the Prospectus and this Statement of Additional Information. Although the terms
of the Preferred Shares, including their dividend rate, voting rights,
liquidation preference and redemption provisions, will be determined by the
Board of Trustees (subject to applicable law and the Declaration) if and when it
authorizes a Preferred Shares offering, the Board has stated that the Preferred
Shares would likely pay cumulative dividends at relatively short-term periods,
by providing for the periodic redetermination of the dividend rate through an
auction or similar process. The liquidation preference, preference on
distribution, voting rights and redemption provisions of the Preferred Shares
are expected to be as stated below.

LIMITED ISSUANCE OF PREFERRED SHARES. Under the 1940 Act, the Fund could
issue Preferred Shares with an aggregate liquidation value of up to one-half of
the value of the Fund's total assets less all liabilities and indebtedness not
representing senior securities (as defined in the 1940 Act) ("Asset Coverage
Assets"), measured immediately after issuance of the Preferred Shares.
"Liquidation value" means the original purchase price of the shares being
liquidated plus any accrued and unpaid dividends. In addition, the Fund is not
permitted to declare any cash dividend or other distribution on its Common
Shares unless the liquidation value of the Preferred Shares is less than
one-half of the value of the Fund's Asset Coverage Assets (determined after
deducting the amount of such dividend or distribution) immediately after the
distribution. If the Fund sells all the Common Shares and Preferred Shares
discussed in this Prospectus, the liquidation value of the Preferred Shares is
expected to be approximately 33% of the value of the Fund's total managed
assets. The Fund intends to purchase or redeem Preferred Shares, if necessary,
to maintain applicable asset coverage requirements.

DISTRIBUTION PREFERENCE. The Preferred Shares have complete priority over
the Common Shares as to distribution of assets.

LIQUIDATION PREFERENCE. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, Preferred
Shareholders will be entitled to receive a preferential liquidating distribution
(expected to equal the original purchase price per share plus accumulated and
unpaid dividends thereon, whether or not earned or declared) before any
distribution of assets is made to Common Shareholders. After payment of the full
amount of the liquidating distribution to which they are entitled, Preferred
Shareholders will not be entitled to any further participation in any
distribution of assets by the Fund. A

consolidation or merger of the Fund with or into any Massachusetts business
trust or corporation or a sale of all or substantially all or any portion of
the assets of the Fund shall not be deemed to be a liquidation, dissolution
or winding up of the Fund.

VOTING RIGHTS. In connection with any issuance of Preferred Shares, the
Fund must comply with Section 18(i) of the 1940 Act which requires, among
other things, that Preferred Shares be voting shares. Except as otherwise
provided in the Declaration or the Fund's Bylaws or otherwise required by
applicable law, Preferred Shareholders will vote together with Common
Shareholders as a single class.

In connection with the election of the Fund's Trustees, Preferred
Shareholders, voting as a separate class, will also be entitled to elect two of
the Fund's Trustees, and the remaining Trustees shall be elected by Common
Shareholders and Preferred Shareholders, voting together as a single class. In
addition, if at any time dividends on the Fund's outstanding Preferred Shares
shall be unpaid in an amount equal to two full years' dividends thereon, the
holders of all outstanding Preferred Shares, voting as a separate class, will be
entitled to elect a majority of the Fund's Trustees until all dividends in
arrears have been paid or declared and set apart for payment.

The affirmative vote of the holders of a majority (as defined in the 1940
Act) of the outstanding Preferred Shares, voting as a separate class, shall be
required to (1) adopt any plan of reorganization that would adversely affect the
Preferred Shares, or (2) approve any action requiring a vote of security holders
under Section 13(a) of the 1940 Act, including, among other things, the
conversion of the Fund from a closed-end to an open-end company or changes in
the investment restrictions described as fundamental policies under "Investment
Restrictions." The class or series vote of Preferred Shareholders described
above shall in each case be in addition to any separate vote of the requisite
percentage of Common Shares and Preferred Shares necessary to authorize the
action in question.

The foregoing voting provisions will not apply with respect to the Fund's
Preferred Shares if, at or prior to the time when a vote is required, such
shares shall have been (1) redeemed or (2) called for redemption and sufficient
funds shall have been deposited in trust to effect such redemption.

REDEMPTION, PURCHASE AND SALE OF PREFERRED SHARES BY THE FUND. The terms of
the Preferred Shares may provide that they are redeemable at certain times, in
whole or in part, at the original purchase price per share plus accumulated
dividends, that the Fund may tender for or purchase Preferred Shares and that
the Fund may subsequently resell any shares so tendered for or purchased. Any
redemption or purchase of Preferred Shares by the Fund will reduce the leverage
applicable to Common Shares, while any resale of shares by the Fund will
increase such leverage.

The discussion above describes the Fund's Board of Trustees' present
intention with respect to a possible offering of Preferred Shares. If the Board
of Trustees determines to authorize such an offering, the terms of the Preferred
Shares may be the same as, or different from, the terms described above, subject
to applicable law and the Declaration.

ANTI-TAKEOVER AND OTHER PROVISIONS IN THE DECLARATION OF TRUST

SHAREHOLDER LIABILITY

Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration contains an express disclaimer of shareholder liability for acts or
obligations of the Fund and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Fund or
the Trustees. The Declaration also provides for indemnification out of the
Fund's property for all loss and expense of any shareholder held personally
liable on account of being or having been a shareholder. Thus, the risk of a
shareholder incurring financial loss on

account of shareholder liability is limited to circumstances in which such
disclaimer is inoperative or the Fund is unable to meet its obligations, and
thus should be considered remote.

ANTI-TAKEOVER PROVISIONS

As described below, the Declaration includes provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Trustees, and could
have the effect of depriving shareholders of opportunities to sell their shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund.

The Fund's Trustees are divided into three classes (Class I, Class II and
Class III), having initial terms of one, two and three years, respectively. At
each annual meeting of shareholders, the term of one class will expire and each
Trustee elected to that class will hold office for a term of three years. The
classification of the Board of Trustees in this manner could delay for an
additional year the replacement of a majority of the Board of Trustees. In
addition, subject to any voting powers of Common Shareholders or Preferred
Shareholders, the Declaration provides that a Trustee may be removed only for
cause and only (i) by action of at least seventy-five percent (75%) of the
outstanding shares of the classes or series of shares entitled to vote for the
election of such Trustee, at a meeting called for such purpose, or (ii) by at
least seventy-five percent (75%) of the remaining Trustees.

Except as provided in the next paragraph, the affirmative vote or consent
of at least seventy-five percent (75%) of the Board of Trustees and at least
seventy-five percent (75%) of the shares of the Fund outstanding and entitled to
vote thereon is required to authorize any of the following transactions (each a
"Material Transaction"): (1) a merger, consolidation or share exchange of the
Fund or any series or class of shares of the Fund with or into any other person
or company, or of any such person or company with or into the Fund or any such
series or class of shares; (2) the issuance or transfer by the Fund or any
series or class of shares of any securities issued by the Fund or such series or
class to any other person or entity for cash, securities or other property (or
combination thereof), excluding sales of securities of the Fund or such series
or class in connection with a public offering and issuances of securities of the
Fund or such series or class pursuant to a dividend reinvestment plan adopted by
the Fund; or (3) a sale, lease, exchange, mortgage, pledge, transfer or other
disposition by the Fund or any series or class of shares (in one or a series of
transactions in any twelve-month period) to or with any person of any assets of
the Fund or such series or class having an aggregate fair market value of
$1,000,000 or more, except for transactions effected by the Fund or such series
or class in the ordinary course of its business. The same affirmative votes are
required with respect to any shareholder proposal as to specific investment
decisions made or to be made with respect to the Fund's assets or the assets of
any series or class of shares of the Fund.

Notwithstanding the approval requirements specified in the preceding
paragraph, the Declaration requires no vote or consent of the Fund's
shareholders to authorize a Material Transaction if the transaction is approved
by a vote of both a majority of the Board of Trustees and seventy-five percent
(75%) of the Continuing Trustees (as defined below), so long as all other
conditions and requirements, if any, provided for in the Fund's Bylaws and
applicable law (including any shareholder voting rights under the 1940 Act) have
been satisfied.

In addition, the Declaration provides that the Fund may be terminated at
any time by vote or consent of at least seventy-five percent (75%) of the Fund's
shares or, alternatively, by vote or consent of both a majority of the Board of
Trustees and seventy-five percent (75%) of the Continuing Trustees (as defined
below). A vote of both a majority of the Board of Trustees and seventy-five
percent (75%) of the Continuing Trustees (as defined below) is required for
distributions to the Fund's shareholders (in one or a series of distributions)
during any twelve-month period of any property (in cash, shares or otherwise)
with an aggregate fair market value in excess of 110% of the income and gains
(accrued or realized) of the Fund during such twelve-month period.

In certain circumstances, the Declaration also imposes shareholder voting
requirements that are more demanding than those required under the 1940 Act in
order to authorize a conversion of the Fund from a closed-end to an open-end
investment company. See "Repurchase of Common Shares; Conversion to Open-End
Fund" below.

The Trustees may from time to time grant other voting rights to
shareholders with respect to these and other matters in the Fund's Bylaws.

As noted, the voting provisions described above could have the effect of
depriving Common Shareholders of an opportunity to sell their Common Shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Fund in a tender offer or similar transaction. In the
view of the Fund's Board of Trustees, however, these provisions offer several
possible advantages, including: (1) requiring persons seeking control of the
Fund to negotiate with its management regarding the price to be paid for the
amount of Common Shares required to obtain control; (2) promoting continuity and
stability; and (3) enhancing the Fund's ability to pursue long-term strategies
that are consistent with its investment objectives and management policies. The
Board of Trustees has determined that the voting requirements described above,
which are generally greater than the minimum requirements under the 1940 Act,
are in the best interests of the Fund's Common Shareholders generally.

A "Continuing Trustee," as used in the discussion above, is any member of
the Fund's Board of Trustees who (i) has been a member of the Board for a period
of at least thirty-six months (or since immediately after the initial registered
public offering of the Fund's Common Shares, if less than thirty-six months),
(ii) was nominated to serve as a member of the Board of Trustees by a majority
of the Continuing Trustees then members of the Board or (iii) prior to the first
sale of shares pursuant to an initial public offering only, serves as a Trustee.

The foregoing is intended only as a summary and is qualified in its
entirety by reference to the full text of the Declaration and the Fund's Bylaws,
both of which have been filed as exhibits to the Fund's registration statement
on file with the SEC.

LIABILITY OF TRUSTEES

The Declaration provides that the obligations of the Fund are not binding
upon the Trustees of the Fund individually, but only upon the assets and
property of the Fund, and that the Trustees shall not be liable for errors of
judgment or mistakes of fact or law. Nothing in the Declaration, however,
protects a Trustee against any liability to which he would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office.

REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND

The Fund is a closed-end investment company and as such its shareholders
will not have the right to cause the Fund to redeem their shares. Instead, the
Fund's Common Shares will trade in the open market at a price that will be a
function of several factors, including the Fund's use of leverage, dividend
levels (which are in turn affected by expenses and other factors), net asset
value, call protection, dividend stability, portfolio credit quality and
liquidity, relative demand for and supply of such shares in the market, general
market and economic conditions and other factors. Shares of a closed-end
investment company may frequently trade at prices lower than net asset value.

Notwithstanding the foregoing, at any time when the Fund's Preferred Shares
are outstanding, the Fund may not purchase, redeem or otherwise acquire any of
its Common Shares unless (1) all accrued dividends on Preferred Shares have been
paid and (2) at the time of such purchase, redemption or acquisition, the asset
coverage (as defined in the 1940 Act) of the Fund (determined after deducting
the acquisition price of the

Common Shares) is at least 200% of the liquidation value of the outstanding
Preferred Shares (expected to equal the original purchase price per share
plus any accrued and unpaid dividends thereon) (together with certain other
forms of indebtedness).

Subject to its investment limitations, the Fund may borrow to finance the
repurchase of shares or to make a tender offer. Interest on any borrowings to
finance share repurchase transactions or the accumulation of cash by the Fund in
anticipation of share repurchases or tenders will reduce the Fund's net income.
Any share repurchase, tender offer or borrowing that might be approved by the
Board of Trustees would have to comply with the Securities Exchange Act of 1934,
as amended, and the 1940 Act and the rules and regulations thereunder.

The Declaration requires the affirmative vote or consent of holders of at
least seventy-five percent (75%) of each class of the Fund's shares entitled to
vote on the matter to authorize a conversion of the Fund from a closed-end to an
open-end investment company, unless the conversion is authorized by both a
majority of the Board of Trustees and seventy-five percent (75%) of the
Continuing Trustees (as defined above under "Anti-Takeover and Other Provisions
in the Declaration of Trust -- Anti-Takeover Provisions"). This seventy-five
percent (75%) shareholder approval requirement is higher than is required under
the 1940 Act. In the event that a conversion is approved by the Trustees and the
Continuing Trustees as described above, the minimum shareholder vote required
under the 1940 Act would be necessary to authorize the conversion. Currently,
the 1940 Act would require approval of the holders of a "majority of the
outstanding" Common Shares and Preferred Shares voting together as a single
class, and the holders of a "majority of the outstanding" Preferred Shares
voting as a separate class, in order to authorize a conversion.

If the Fund converted to an open-end company, it would be required to
redeem all Preferred Shares then outstanding (requiring in turn that it
liquidate a portion of its investment portfolio), and the Fund's Common Shares
likely would no longer be listed on the New York Stock Exchange. Shareholders of
an open-end investment company may require the company to redeem their shares on
any business day (except in certain circumstances as authorized by or under the
1940 Act) at their net asset value, less such redemption charge, if any, as
might be in effect at the time of redemption. The Fund expects that it would pay
all such redemption requests in cash, but reserves the right to pay redemption
requests in securities or through a combination of cash and securities. If
payment in securities were made, investors may incur brokerage costs in
converting such securities to cash. The Fund reserves the right to impose a
sales load on its shares if it converts into an open-end company. In order to
avoid maintaining large cash positions or liquidating favorable investments to
meet redemptions, open-end companies typically engage in a continuous offering
of their shares. Open-end companies are thus subject to periodic asset in-flows
and out-flows that can complicate portfolio management. If the Fund converted to
an open-end company, the differences in risks and operational requirements
between closed-end and open-end investment companies could affect the Fund's
ability to achieve its investment objectives.

To the extent the Fund repurchases its shares at prices below net asset
value, such repurchases will result in an increase in the net asset value of
those shares that remain outstanding. However, there can be no assurance that
share repurchases or tenders at or below net asset value will result in the
Fund's shares trading at a price equal to their net asset value. Nevertheless,
the fact that the Fund's shares may be the subject of repurchase or tender
offers at net asset value from time to time, or that the Fund may be converted
to an open-end company, may reduce any spread between market price and net asset
value that might otherwise exist.

In addition, a purchase by the Fund of its Common Shares will decrease the
Fund's total assets which would likely have the effect of increasing the Fund's
expense ratio. Any purchase by the Fund of its Common Shares at a time when
Preferred Shares are outstanding will increase the leverage applicable to the
outstanding Common Shares then remaining. See the Fund's Prospectus under "Risks
-- Leverage Risk."

Before deciding whether to take any action if the Fund's Common Shares
trade below net asset value, the Board of Trustees would consider all
relevant factors, including the extent and duration of the discount, the
liquidity of the Fund's portfolio, the impact of any action that might be
taken on the Fund or its shareholders and market considerations. Based on
these considerations, even if the Fund's shares should trade at a substantial
discount for an extended period of time, the Board of Trustees may determine
that, in the interest of the Fund and its shareholders, no action should be
taken.

TAX MATTERS

TAXATION OF THE FUND. The Fund intends to elect to be treated and to
qualify each year as a regulated investment company under Subchapter M of the
Code. In order to qualify for the special tax treatment accorded regulated
investment companies and their shareholders, the Fund must, among other things:

(a) derive at least 90% of its gross income for each taxable year from
dividends, interest, payments with respect to certain securities loans, and
gains from the sale or other disposition of stock, securities or foreign
currencies or other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business
of investing in such stock, securities or currencies; and

(b) diversify its holdings so that, at the end of each quarter of the
Fund's taxable year, (i) at least 50% of the market value of the Fund's
total assets is represented by cash and cash items, U.S. government
securities, securities of other regulated investment companies, and other
securities limited in respect of any one issuer to a value not greater than
5% of the value of the Fund's total assets and not more than 10% of the
outstanding voting securities of such issuer and (ii) not more than 25% of
the value of the Fund's total assets is invested in the securities (other
than those of the U.S. Government or other regulated investment companies)
of any one issuer or of two or more issuers which the Fund controls and
which are engaged in the same, similar, or related trades or businesses.

If the Fund qualifies as a regulated investment company that is accorded special
tax treatment and distributes with respect to each taxable year at least 90% of
the sum of its investment company taxable income (as that term is defined in the
Code without regard to the deduction for dividends paid--generally taxable
ordinary income and the excess, if any, of net short-term capital gains over net
long-term capital losses) and its net tax-exempt interest income, for such year,
the Fund will not be subject to federal income tax on such income distributed in
a timely manner to its shareholders in the form of dividends (including Capital
Gain Dividends, as defined below).

If the Fund failed to qualify as a regulated investment company accorded
special tax treatment in any taxable year, the Fund would be subject to tax on
its taxable income at corporate rates, and all distributions from earnings and
profits, including any distributions of net tax-exempt income and net long-term
capital gains, generally would be taxable to shareholders as ordinary income.
Such distributions generally would be eligible (i) to be treated as qualified
dividend income in the case of shareholders taxed as individuals, and (ii) for
the dividends received deduction in the case of corporate shareholders. In
addition, the Fund could be required to recognize unrealized gains, pay
substantial taxes and interest and make substantial distributions before
requalifying as a regulated investment company that is accorded special tax
treatment.

The Fund intends to distribute at least annually to its shareholders all or
substantially all of its investment company taxable income (computed without
regard to deductions for dividends paid) and any net tax-exempt interest, and
may distribute its net capital gain. The Fund may also retain for investment its
net capital gain. If the Fund does retain any net capital gain or any investment
company taxable income, it will be subject to tax at regular corporate rates on
the amount retained. If the Fund retains any net capital gain, it may designate
the retained amount as undistributed capital gains in a notice to its
shareholders who, if subject to federal income tax on long-term capital gains,
(i) will be required to include in income for federal income tax purposes, as
long-term capital gain, their shares of such undistributed amount, and (ii) will
be entitled to credit

their proportionate shares of the tax paid by the Fund on such undistributed
amount against their federal income tax liabilities, if any, and to claim
refunds to the extent the credit exceeds such liabilities. For federal income
tax purposes, the tax basis of shares owned by a shareholder of the Fund will
be increased by an amount equal under current law to the difference between
the amount of undistributed capital gains included in the shareholder's gross
income and the tax deemed paid by the shareholder under clause (ii) of the
preceding sentence.

Treasury regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain, to elect to treat
all or part of any net capital loss, any net long-term capital loss or any net
foreign currency loss incurred after October 31 as if it had been incurred in
the succeeding year.

If the Fund fails to distribute in a calendar year at least an amount equal
to the sum of 98% of its ordinary income for such year and 98% of its capital
gain net income for the one-year period ending October 31 of such year, plus any
retained amount from the prior year, the Fund will be subject to a nondeductible
4% excise tax on the undistributed amounts. For these purposes, the Fund will be
treated as having distributed any amount for which it is subject to income tax.
A dividend paid to shareholders in January of a year generally is deemed to have
been paid by the Fund on December 31 of the preceding year, if the dividend was
declared and payable to shareholders of record on a date in October, November or
December of that preceding year. Except as discussed above, the Fund intends
generally to make distributions sufficient to avoid imposition of the 4% excise
tax.

FUND DISTRIBUTIONS. Distributions from the Fund generally will be taxable
to shareholders as ordinary income to the extent derived from investment income
and net short-term capital gains. Distributions of net capital gains (that is,
the excess of net gains from the sale of capital assets held more than one year
over net losses from the sale of capital assets held for not more than one year)
properly designated as capital gain dividends ("Capital Gain Dividends") will be
taxable to shareholders as long-term capital gain, regardless of how long a
shareholder has held the shares in the Fund. Distributions from capital gains
are generally made after applying any available capital loss carryovers.
Long-term capital gain rates applicable to individuals have been temporarily
reduced--in general, to 15% with lower rates applying to taxpayers in the 10%
and 15% rate brackets--for taxable years beginning on or before December 31,
2008.

For taxable years beginning on or before December 31, 2008, provided
holding period and other requirements are met, the Fund may designate
distributions of investment income derived from dividends of U.S. corporations
and some foreign corporations as "qualified dividend income." Qualified dividend
income will be taxed in the hands of individuals at the rates applicable to
long-term capital gain, provided these same holding period and other
requirements are met by the shareholder. The Fund does not expect a significant
portion of Fund distributions to be derived from qualified dividend income.

Dividends (including Capital Gain Dividends) will be taxable as described
above whether received in cash or in shares. A shareholder whose distributions
are reinvested in shares will be treated as having received a dividend equal to
either (i) the fair market value of the new shares issued to the shareholder, or
(ii) if the shares are trading below net asset value, the amount of cash
allocated to the shareholder for the purchase of shares on its behalf in the
open market.

Dividends of net investment income received by corporate shareholders of
the Fund may qualify for the 70% dividends received deduction generally
available to corporations to the extent of the amount of qualifying dividends
received by the Fund from domestic corporations for the taxable year. However,
in light of the Fund's investment policies, the Fund does not expect to receive
a significant amount of qualifying dividends.

The Internal Revenue Service currently requires that a regulated investment
company that has two or more classes of stock allocate to each such class
proportionate amounts of each type of its income (such as ordinary income and
capital gains) based upon the percentage of total dividends distributed to each
class for the

tax year. Accordingly, the Fund intends each year to allocate Capital Gain
Dividends between and among its Common Shares and any series of its Preferred
Shares in proportion to the total dividends paid to each class with respect
to such tax year. Dividends qualifying and not qualifying for (a) treatment
as qualified dividend income and (b) the dividends received deduction, if
any, will similarly be allocated between and among the two (or more) classes.

RETURN OF CAPITAL DISTRIBUTIONS. If the Fund makes a distribution to a
shareholder in excess of the Fund's current and accumulated earnings and profits
in any taxable year, the excess distribution will be treated as a return of
capital to the extent of the shareholder's tax basis in his or her shares, and
thereafter as capital gain. A return of capital is not taxable, but it reduces
the shareholder's tax basis in his or her shares, thus reducing any loss or
increasing any gain on a subsequent taxable disposition by the shareholder of
his or her shares. Where one or more such distributions occur in any taxable
year of the Fund, the available earnings and profits will be allocated, first,
to the distributions made to the holders of any outstanding preferred shares of
beneficial interest in the Fund (including the Preferred Shares), and only
thereafter to distributions made to Common Shareholders. As a result, the
holders of any outstanding preferred shares of beneficial interest in the Fund
(including the Preferred Shares) will receive a disproportionate share of the
distributions treated as dividends, and the holders of the Common Shares will
receive a disproportionate share of the distributions treated as a return of
capital.

Dividends and distributions on the Fund's shares are generally subject to
federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when the Fund's net asset value reflects gains that are either unrealized, or
realized but not distributed. Such realized gains may be required to be
distributed even when the Fund's net asset value also reflects unrealized
losses. Distributions are taxable to a shareholder even if they are paid from
income or gains earned by the Fund prior to the shareholder's investment (and
thus included in the price paid by the shareholder).

SALE OR REDEMPTION OF SHARES. The sale, exchange or redemption of Fund
shares may give rise to a gain or loss. In general, any gain or loss realized
upon a taxable disposition of shares will be treated as long-term capital gain
or loss if the shares have been held for more than one year. Otherwise, the gain
or loss on the taxable disposition of Fund shares will be treated as short-term
capital gain or loss. However, any loss realized upon a taxable disposition of
shares held for six months or less will be treated as long-term, rather than
short-term, to the extent of any long-term capital gain distributions received
(or deemed received) by the shareholder with respect to the shares. All or a
portion of any loss realized upon a taxable disposition of Fund shares will be
disallowed if other substantially identical shares of the Fund are purchased
within 30 days before or after the disposition. In such a case, the basis of the
newly purchased shares will be adjusted to reflect the disallowed loss.

From time to time the Fund may make a tender offer for its Common Shares.
It is expected that the terms of any such offer will require a tendering
shareholder to tender all Common Shares and dispose of all Preferred Shares
held, or considered under certain attribution rules of the Code to be held, by
such shareholder. Shareholders who tender all Common Shares and dispose of all
Preferred Shares held, or considered to be held, by them will be treated as
having sold their shares and generally will realize a capital gain or loss. If a
shareholder tenders fewer than all of its Common Shares, or retains a
substantial portion of its Preferred Shares, such shareholder may be treated as
having received a taxable dividend upon the tender of its Common Shares. In such
a case, there is a remote risk that non-tendering shareholders will be treated
as having received taxable distributions from the Fund. Likewise, if the Fund
redeems some but not all of the Preferred Shares held by a Preferred Shareholder
and such shareholder is treated as having received a taxable dividend upon such
redemption, there is a remote risk that Common Shareholders and non-redeeming
Preferred Shareholders will be treated as having received taxable distributions
from the Fund. To the extent that the Fund recognizes net

gains on the liquidation of portfolio securities to meet such tenders of
Common Shares, the Fund will be required to make additional distributions to
its Common Shareholders.

ORIGINAL ISSUE DISCOUNT AND PAYMENT-IN-KIND SECURITIES. Current federal tax
law requires the holder of a U.S. Treasury or other fixed income zero-coupon
security to accrue as income each year a portion of the discount at which the
security was issued, even though the holder receives no interest payment in cash
on the security during the year. In addition, payment-in-kind securities will
give rise to income which is required to be distributed and is taxable even
though the fund holding the security receives no interest payment in cash on the
security during the year.

Some of the debt obligations (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by the Fund may be (and all
zero-coupon debt obligations acquired by the Fund will be) treated as debt
obligations that are issued originally at a discount. Generally, the amount of
the original issue discount ("OID") is treated as interest income and is
included in taxable income (and is required to be distributed) over the term of
the debt security, even though payment of that amount is not received until a
later time, usually when the debt security matures. Increases in the principal
amount of U.S. TIPS and other inflation-indexed debt instruments will be treated
as OID. A portion of the OID includable in income with respect to certain
high-yield corporate debt obligations (including certain payment-in-kind
securities) may be treated as a dividend for certain U.S. federal income tax
purposes.

Some of the debt obligations (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by the Fund in the
secondary market may be treated as having market discount. Generally, any gain
recognized on the disposition of, and any partial payment of principal on, a
debt security having market discount is treated as ordinary income to the extent
the gain, or principal payment, does not exceed the "accrued market discount" on
such debt security. Market discount generally accrues in equal daily
installments. The Fund may make one or more of the elections applicable to debt
obligations having market discount, which could affect the character and timing
of recognition of income.

Some debt obligations (with a fixed maturity date of one year or less from
the date of issuance) that may be acquired by the Fund may be treated as having
acquisition discount, or OID in the case of certain types of debt obligations.
Generally, the Fund will be required to include the acquisition discount, or
OID, in income over the term of the debt security, even though payment of that
amount is not received until a later time, usually when the debt security
matures. The Fund may make one or more of the elections applicable to debt
obligations having acquisition discount, or OID, which could affect the
character and timing of recognition of income.

If the Fund holds the foregoing kinds of securities, it may be required to
pay out as an income distribution each year an amount which is greater than the
total amount of cash interest the Fund actually received. Such distributions may
be made from the cash assets of the Fund or by liquidation of portfolio
securities, if necessary. The Fund may realize gains or losses from such
liquidations. In the event the Fund realizes net capital gains from such
transactions, its shareholders may receive a larger capital gain distribution
than they would in the absence of such transactions.

HIGHER-RISK SECURITIES. The Fund may invest to a significant extent in debt
obligations that are in the lowest rating categories or are unrated, including
debt obligations of issuers not currently paying interest or who are in default.
Investments in debt obligations that are at risk of or in default present
special tax issues for the Fund. Tax rules are not entirely clear about issues
such as when the Fund may cease to accrue interest, original issue discount or
market discount, when and to what extent deductions may be taken for bad debts
or worthless securities and how payments received on obligations in default
should be allocated between principal and income. These and other related issues
will be addressed by the Fund when, as and if it invests in such securities, in
order to seek to ensure that it distributes sufficient income to preserve its
status as a regulated investment company and does not become subject to U.S.
federal income or excise tax.

ISSUER DEDUCTIBILITY OF INTEREST. A portion of the interest paid or accrued
on certain high yield discount obligations owned by the Fund may not be
deductible to the issuer. If a portion of the interest paid or accrued
on certain high yield discount obligations is not deductible, that portion will
be treated as a dividend for purposes of the corporate dividends received
deduction. In such cases, if the issuer of the high yield discount obligations
is a domestic corporation, dividend payments by the Fund may be eligible for the
dividends received deduction to the extent of the deemed dividend portion of
such accrued interest. Interest paid on debt obligations owned by the Fund, if
any, that are considered for tax purposes to be payable in the equity of the
issuer or a related party will not be deductible to the issuer, possibly
affecting the cash flow of the issuer.

OPTIONS, FUTURES, FORWARD CONTRACTS AND SWAP AGREEMENTS. The Fund's
transactions in options, futures contracts, hedging transactions, forward
contracts, swap agreements, straddles and foreign currencies will be subject to
special tax rules (including mark-to-market, constructive sale, straddle, wash
sale and short sale rules), the effect of which may be to accelerate income to
the Fund, defer losses to the Fund, cause adjustments in the holding periods of
the Fund's securities, convert long-term capital gains into short-term capital
gains and convert short-term capital losses into long-term capital losses. These
rules could therefore affect the amount, timing and character of distributions
to shareholders.

Certain of the Fund's hedging activities (including its transactions, if
any, in foreign currencies or foreign currency-denominated instruments) are
likely to produce a difference between its book income and its taxable income.
If the Fund's book income exceeds its taxable income, the distribution (if any)
of such excess generally will be treated as described above under "--Return of
Capital Distributions."

REMICs AND REITs. The Fund may invest in REMICs and certain REITs holding
interests in REMICs. Income generated by a residual interest in a REMIC may be
passed through to the holders of the Fund. Such income (i) cannot be offset by
net operating losses, (ii) will constitute unrelated business taxable income and
(iii) in the case of foreign shareholders will not qualify for a reduction in
U.S. withholding taxes. In addition, if a holder of the Fund is a "disqualified
organization" under the U.S. tax law the Fund itself will be subject to tax on
the income from the residual interest allocable to that organization.

FOREIGN TAXATION. Income received by the Fund from sources within foreign
countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the U.S. may reduce or
eliminate such taxes. Shareholders generally will not be entitled to claim a
credit or deduction with respect to foreign taxes.

SHARES PURCHASED THROUGH TAX-QUALIFIED PLANS. Special tax rules apply to
investments through defined contribution plans and other tax-qualified plans.
Shareholders should consult their tax advisors to determine the suitability of
shares of the Fund as an investment through such plans and the precise effect of
an investment on their particular tax situation.

NON-U.S. SHAREHOLDERS. Under U.S. federal tax law, dividends other than
Capital Gain Dividends paid on shares beneficially held by a person who is
not a U.S. person within the meaning of the Code (i.e., a "foreign person")
are, in general, subject to withholding of U.S. federal income tax at a rate
of 30% of the gross dividend, which rate may, in some cases, be reduced by an
applicable tax treaty. Dividends are subject to withholding even if they are
funded by income or gains (such as portfolio interest, short-term capital
gains, or foreign-source dividend and interest income) that, if paid to a
foreign person directly, would not be subject to withholding. However,
Capital Gain Dividends will generally not be subject to withholding of U.S.
federal income tax. If a beneficial holder who is a foreign person has a
trade or business in the United States, and the dividends are effectively
connected with the conduct by the beneficial holder of a trade or business in
the United States, the dividend will be subject to U.S. federal net income
taxation at regular income tax rates.

Under U.S. federal tax law, a beneficial holder of shares who is a foreign
person is not, in general, subject to U.S. federal income tax on gains (and is
not allowed a deduction for losses) realized on the sale of such shares of the
Fund or on Capital Gain Dividends unless (i) such gain or Capital Gain Dividend
is effectively connected with the conduct of a trade or business carried on by
such holder within the United States or (ii) in the case of an individual
holder, the holder is present in the United States for a period or periods
aggregating 183 days or more during the year of the sale or Capital Gain
Dividend and certain other conditions are met.

If you are eligible for the benefits of a tax treaty, any effectively
connected income or gain will generally be subject to U.S. federal income tax on
a net basis only if it is also attributable to a permanent establishment
maintained by you in the United States.

A beneficial holder of shares who is a foreign person may be subject to
state and local tax and to the U.S. federal estate tax in addition to the
federal tax on income referred to above.

BACKUP WITHHOLDING. The Fund generally is required to withhold and remit to
the U.S. Treasury a percentage of the taxable distributions and redemption
proceeds paid to any individual shareholder who fails to properly furnish the
Fund with a correct taxpayer identification number ("TIN"), who has
under-reported dividend or interest income, or who fails to certify to the Fund
that he or she is not subject to such withholding. The backup withholding tax
rate is 28% for amounts paid through 2010. The backup withholding tax rate will
be 31% for amounts paid after December 31, 2010.

In order for a foreign investor to qualify for exemption from the backup
withholding tax rates under income tax treaties, the foreign investor must
comply with special certification and filing requirements. Foreign investors in
the Fund should consult their tax advisors in this regard. Backup withholding is
not an additional tax. Any amounts withheld may be credited against the
shareholder's U.S. federal income tax liability, provided the appropriate
information is furnished to the Internal Revenue Service.

RECENT TAX SHELTER REPORTING REGULATIONS. Under recently promulgated
Treasury regulations, if a shareholder recognizes a loss on disposition of the
Fund's shares of $2 million or more for an individual shareholder or $10 million
or more for a corporate shareholder, the shareholder must file with the Internal
Revenue Service a disclosure statement on Form 8886. Direct shareholders of
portfolio securities are in many cases excepted from this reporting requirement,
but under current guidance, shareholders of a regulated investment company are
not excepted. Future guidance may extend the current exception from this
reporting requirement to shareholders of most or all regulated investment
companies. The fact that a loss is reportable under these regulations does not
affect the legal determination of whether the taxpayer's treatment of the loss
is proper. Shareholders should consult their tax advisers to determine the
applicability of these regulations in light of their individual circumstances.

GENERAL. The federal income tax discussion set forth above is for general
information only. Prospective investors should consult their tax advisors
regarding the specific federal tax consequences of purchasing, holding, and
disposing of shares of the Fund, as well as the effects of state, local and
foreign tax law and any proposed tax law changes.

PERFORMANCE-RELATED, COMPARATIVE AND OTHER INFORMATION

The Fund may be a suitable investment for a shareholder who is thinking of
adding bond investments to his portfolio to balance the appreciated stocks that
the shareholder is holding.

PERFORMANCE-RELATED INFORMATION. The Fund may quote certain
performance-related information and may compare certain aspects of its portfolio
and structure to other substantially similar closed-end funds as categorized by
Lipper, Inc. ("Lipper"), Morningstar Inc. or other independent services.
Comparison of the Fund

to an alternative investment should be made with consideration of differences
in features and expected performance. The Fund may obtain data from sources
or reporting services, such as Bloomberg Financial ("Bloomberg") and Lipper,
that the Fund believes to be generally accurate.

COMPARATIVE INFORMATION. From time to time, the Fund's advertisements or
information furnished to present or prospective shareholders may refer to the
returns and yields offered by various types of investments, as well as the yield
spreads on such investments.

The Fund and/or the Advisor may report to shareholders or to the public in
advertisements concerning the performance of the Advisor as advisor to clients
other than the Fund, or on the comparative performance or standing of the
Advisor in relation to other money managers. The Advisor also may provide to
current or prospective private account clients, in connection with standardized
performance information for the Fund, performance information for the Fund gross
of fees and expenses for the purpose of assisting such clients in evaluating
similar performance information provided by other investment managers or
institutions. Comparative information may be compiled or provided by independent
ratings services or by news organization.

Performance information for the Fund or for other investment companies or
accounts managed by the Advisor may also be compared to various unmanaged
indexes or to other benchmarks, some of which may not be available for direct
investment. Any performance information, whether related to the Fund or the
Advisor, should be considered in light of the Fund's investment objectives and
policies, the characteristics and quality of the Fund, and the market conditions
during the time period indicated, and should not be considered to be
representative of what may be achieved in the future.

Past performance is not indicative of future results. At the time Common
Shareholders sell their shares, they may be worth more or less than their
original investment. At any time in the future, yields and total return may be
higher or lower than past yields and total return, and there can be no assurance
that any historical results will continue.

INFLATION. The Fund's advertising or related materials may from time to
time discuss the effects of inflation. One of the primary drawbacks to a
fixed-rate investment is the negative impact that inflation can have on an
investment's real future return. Inflation is generally defined as an increase
in the level of consumer prices or as a decline in the purchasing power of
money. For investors in long-term fixed-rate investments, exposure to inflation
can theoretically put them in a position whereby their investment is now worth
less purchasing power than when they made the initial investment, despite what
may have been an attractive stated return at the time. Such materials may assert
that it is this erosion of purchasing power that has historically disappointed
investors seeking the relative quality of traditional fixed-rate investments.

U.S. TIPS. Advertising or related materials may discuss the structure and
characteristics of U.S. TIPS. U.S. TIPS may provide an attractive alternative to
other government-backed or fixed-rate investments. U.S. TIPS are the only
yield-bearing securities directly linked to inflation that are backed by the
full faith and credit of the U.S. government. Unlike a direct investment in U.S.
TIPS, however, an investment in the Fund is not guaranteed and may at any time
be worth more or less than the price originally paid for it.

U.S. TIPS, also referred to as inflation-indexed securities, were designed
to protect investors and the future value of these fixed-income investments from
the adverse effects of inflation. As of 7/31/03, the total market value of U.S.
TIPS was approximately $187 billion and the average daily trading volume was
over $4.5 billion in market value.

Fund advertisements may also discuss the expected tax characteristics of
investing in U.S. TIPS and the Fund. By investing in the Fund, individual
investors alter one of the tax aspects of investing directly in U.S. TIPS. When
individual investors invest directly in U.S. TIPS, they are subject to income
tax each year on any

net inflation adjustments to the principal value of the U.S. TIPS, even
though they do not receive the full benefit of those adjustments until the
U.S. TIPS mature. Thus, individual investors investing directly in U.S. TIPS
may have to pay income taxes on adjustments to the principal value of U.S.
TIPS even though they do not receive any current income in respect of those
adjustments. Because the Fund must distribute an amount to its shareholders
each year equal to substantially all its income, including amounts
attributable to the net inflation adjustments, a shareholder receiving cash
dividends will always receive cash sufficient to pay the tax attributable to
such adjustments. However, since the Fund may not have sufficient income to
make the required distributions, it may have to sell securities at times it
would not otherwise have done so in order to obtain such income. Under
current tax regulations, the portion of the Fund's dividends directly
attributable to U.S. TIPS coupon income and adjustments to principal is
expected to be exempt from state and local income tax in certain states.
Investors should consult with their tax advisors with respect to the effects
of their investments on their particular tax situations.

ADVISOR. From time to time, the Advisor or the Fund may use, in
advertisements or information furnished to present or prospective shareholders,
information regarding the Advisor including, without limitation, information
regarding the Advisor's investment style, countries of operation, organization,
professional staff, clients (including other registered investment companies),
assets under management and performance record. These materials may refer to
opinions or rankings of the Advisor's overall investment management performance
contained in third-party reports or publications. The Advisor was founded in
1971 and is one of the world's premier fixed-income managers, with offices in
Pasadena, London and Singapore. Exclusively focused on fixed-income, the Advisor
managed, as of 6/30/03, over $126 billion in assets for over 328 institutional
clients in 21 countries. The Advisor's client base includes several of the
largest companies in the world as well as numerous public entities, healthcare
organizations, foundations and public pension plans. For the Fund, the Advisor
intends to employ proprietary risk management techniques that were developed
specifically to enhance other leveraged funds.

THE FUND. As of August 26, 2003, it was expected that the underwriters will
purchase the Common Shares offered in the Prospectus (other than any shares
purchased pursuant to the overallotment option described in the Prospectus) on
September 23, 2003, that the Common Shares will begin trading on the New York
Stock Exchange on September 24, 2003, and that the purchase referred to above
will be settled on September 25, 2003.

The following chart depicts the Fund's anticipated model portfolio
allocations as of August 15, 2003. The data is as of 8/15/03 and is subject to
change based on current market conditions at the time at which the net proceeds
of the offering of the Common Shares are invested. The Fund's asset allocation
will vary over time and the allocation below may not be representative of the
Fund's portfolio at the close of the offering or thereafter.

ANTICIPATED MODEL PORTFOLIO ALLOCATIONS

TYPE OF SECURITY ANTICIPATED PERCENTAGE ALLOCATION
---------------- ---------------------------------

U.S. TIPS 80%
(Backed by the full faith and
credit of the U.S. Government)

Investment Grade Corporate Bonds 20%
--

AAA 1%
A 6%
Baa 13%

The Fund, in its advertisements, may refer to pending legislation from time
to time and the possible impact of such legislation on investors, investment
strategy and related matters.

PROXY VOTING POLICIES AND PROCEDURES

The Trustees of the Fund have adopted the proxy voting policy of Western
Asset (the "Policy") as the Proxy Voting Policies and Procedures of the Fund.
The Policy governs in determining how proxies relating to the Fund's portfolio
securities are voted. A copy of the Policy is attached as Appendix B to this
Statement of Additional Information.

CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSEMENT AGENT

State Street Bank & Trust Company, 150 Newport Avenue AFB/4N, North Quincy,
Massachusetts 02171, serves as custodian for the assets of the Fund. The
custodian performs custodial and fund accounting services.

EquiServe Trust Company, N.A. and its affiliate, EquiServe, Inc., 150
Royall Street, Canton, Massachusetts 02021, serve as the transfer agent,
registrar and dividend disbursing agent for the Common Shares, as well as agent
for the Dividend Reinvestment Plan relating to the Common Shares.

INDEPENDENT ACCOUNTANTS

PricewaterhouseCoopers LLP, 250 W. Pratt Street, Baltimore, Maryland 21201,
serves as independent accountants for the Fund. PricewaterhouseCoopers LLP
provides audit services, tax return preparation and assistance and consultation
in connection with the review of SEC filings to the Fund.

COUNSEL

Ropes & Gray LLP, 45 Rockefeller Plaza, New York, New York 10111-0087,
passes upon certain legal matters in connection with shares offered by the Fund,
and also acts as counsel to the Fund.

REGISTRATION STATEMENT

A registration statement on Form N-2, including any amendments thereto,
relating to the shares of the Fund offered hereby, has been filed by the Fund
with the SEC, Washington, D.C. The Fund's Prospectus and this Statement of
Additional Information do not contain all of the information set forth in the
registration

statement, including any exhibits and schedules thereto. For further information
with respect to the Fund and the shares offered or to be offered hereby,
reference is made to the Fund's registration statement. Statements contained in
the Fund's Prospectus and this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference. Copies of the
registration statement may be inspected without charge at the SEC's principal
office in Washington, D.C., and copies of all or any part thereof may be
obtained from the SEC upon the payment of certain fees prescribed by the SEC.

REPORT OF INDEPENDENT AUDITORS

To the Board of Trustees and Shareholder of Western Asset/Claymore
U.S. Treasury Inflation Protected Securities Fund:

In our opinion, the accompanying statement of assets and liabilities and the
related statement of operations present fairly, in all material respects, the
financial position of the Western Asset/Claymore U.S. Treasury Inflation
Protected Securities Fund (the "Fund") at September 9, 2003, and the results of
its operations for the one day then ended, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit of these financial statements in accordance with accounting
principles generally accepted in the United States of America, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

PricewaterhouseCoopers LLP
Baltimore, Maryland
September 24, 2003

FINANCIAL STATEMENTS

WESTERN ASSET/CLAYMORE U.S. TREASURY INFLATION PROTECTED SECURITIES FUND
STATEMENT OF ASSETS AND LIABILITIES

SEPTEMBER 9, 2003

ASSETS:
Cash $ 100,003
Receivable from Investment Adviser and Servicing Agent 55,000
------------
Total Assets 155,003
------------

LIABILITIES:
Accrued Organizational Expenses 55,000
------------

Net Assets (6,981 shares of beneficial interest issued and outstanding;
unlimited shares authorized) $ 100,003
------------

Net asset value per share $ 14.325
------------

STATEMENT OF OPERATIONS
ONE DAY ENDED SEPTEMBER 9, 2003

Investment income $ -
------------

Organizational expenses 55,000
Less: Reimbursement from Investment Adviser and Servicing Agent (55,000)
------------
Net Expenses -
------------

Net Investment Income $ -
------------

NOTES

1. ORGANIZATION

Western Asset/Claymore U.S Treasury Inflation Protected Securities Fund
(the "Fund") is a diversified, closed-end management investment company
organized as a Massachusetts business trust on July 14, 2003, which has had no
operations other than the sale and issuance of 6,981 shares of beneficial
interest at an aggregate purchase price of $100,003 to Western Asset Management
Company (the "Investment Adviser"). The Investment Adviser and Claymore
Securities, Inc. have agreed to pay the amount by which the offering costs of
the Fund (other than the sales load) exceed $0.03 per share.

2. ACCOUNTING POLICIES

The preparation of the financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the

reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from these estimates.

3. AGREEMENTS

The Fund has entered into an Investment Advisory Agreement with the
Investment Adviser, which provides for payment of a monthly fee computed at the
annual rate of 0.40% of the Fund's average weekly assets. "Average weekly
assets" means the average weekly value of the total assets of the Fund
(including any assets attributable to leverage) minus accrued liabilities (other
than liabilities representing leverage). For purposes of calculating "average
weekly assets", neither the liquidation preference of any preferred shares
outstanding nor any liabilities associated with any instrument or transactions
used by the Investment Adviser to leverage the Fund's portfolio (whether or not
such instruments or transactions are "covered" as described in the prospectus)
is considered a liability.

Claymore Securities, Inc. will act as servicing agent for the Fund. For
its services, Claymore Securities, Inc. ("Servicing Agent") will receive an
annual fee from the Fund, payable monthly in arrears, which will be based on
the Fund's average weekly assets in a maximum amount equal to 0.15% of the
Fund's average weekly assets.

Under an Administrative agreement with the Fund, Legg Mason Fund Adviser,
Inc. (the "Administrator"), an affiliate of Western Asset, provides certain
administrative and accounting functions for the Fund. In consideration of these
services, the Fund will pay the Administrator a fee, paid monthly, at an annual
rate of $100,000.

4. FEDERAL INCOME TAXES

The Fund intends to qualify as a "regulated investment company" and as such
(and by complying with the applicable provisions of the Internal Revenue Code of
1986, as amended) will not be subject to Federal income tax on taxable income
(including realized capital gains) that is distributed to shareholders.

5. RECEIVABLE FROM INVESTMENT ADVISOR AND SERVICING AGENT

The Investment Adviser and Servicing Agent have agreed to reimburse the
Fund for all organizational expenses.

APPENDIX A

DESCRIPTION OF SECURITIES RATINGS

The Fund's investments may range in quality from securities rated in the
lowest category to securities rated in the highest category (as rated by
Moody's, S&P or Fitch or, if unrated, determined by the Advisor to be of
comparable quality). The percentage of the Fund's assets invested in securities
in a particular rating category will vary. The following terms are generally
used to describe the credit quality of debt securities:

HIGH QUALITY DEBT SECURITIES are those rated in one of the two highest
rating categories (the highest category for commercial paper) or, if unrated,
deemed comparable by the Advisor.

INVESTMENT GRADE DEBT SECURITIES are those rated in one of the four highest
rating categories or, if unrated, deemed comparable by the Advisor.

BELOW INVESTMENT GRADE, HIGH YIELD SECURITIES ("JUNK BONDS") are those
rated lower than Baa by Moody's or BBB by S&P or Fitch and comparable
securities. They are deemed predominately speculative with respect to the
issuer's ability to repay principal and interest.

Following is a description of Moody's, S&P's and Fitch's rating categories
applicable to debt securities.

MOODY'S INVESTORS SERVICE, INC.

CORPORATE AND MUNICIPAL BOND RATINGS

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

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

A-1

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 a 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.

Moody's bond ratings, where specified, are applicable to financial
contracts, senior bank obligations and insurance company senior policyholder and
claims obligations with an original maturity in excess of one year. Obligations
relying upon support mechanisms such as letter-of-credit and bonds of indemnity
are excluded unless explicitly rated. Obligations of a branch of a bank are
considered to be domiciled in the country in which the branch is located.

Unless noted as an exception, Moody's rating on a bank's ability to repay
senior obligations extends only to branches located in countries which carry a
Moody's Sovereign Rating for Bank Deposits. Such branch obligations are rated at
the lower of the bank's rating or Moody's Sovereign Rating for the Bank Deposits
for the country in which the branch is located. When the currency in which an
obligation is denominated is not the same as the currency of the country in
which the obligation is domiciled, Moody's ratings do not incorporate an opinion
as to whether payment of the obligation will be affected by the actions of the
government controlling the currency of denomination. In addition, risk
associated with bilateral conflicts between an investor's home country and
either the issuer's home country or the country where an issuer branch is
located are not incorporated into Moody's ratings.

Moody's makes no representation that rated bank obligations or insurance
company obligations are exempt from registration under the U.S. Securities Act
of 1933 or issued in conformity with any other applicable law or regulation. Nor
does Moody's represent any specific bank or insurance company obligation is
legally enforceable or a valid senior obligation of a rated issuer.

A-2

Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classified from Aa through Caa in its corporate bond rating system. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.

CORPORATE SHORT-TERM DEBT RATINGS

Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.

Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:

PRIME-1: 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 many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.

PRIME-2: 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 but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.

PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.

NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime
rating categories.

STANDARD & POOR'S RATINGS SERVICES

ISSUE CREDIT RATING DEFINITIONS

A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program
(including ratings on medium term note programs and commercial paper programs).
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation and takes into account the
currency in which the

A-3

obligation is denominated. The issue credit rating is not a recommendation to
purchase, sell, or hold a financial obligation, inasmuch as it does not comment
as to market price or suitability for a particular investor.

Issue credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
credit rating and may, on occasion, rely on unaudited financial information.
Credit ratings may be changed, suspended, or withdrawn as a result of changes
in, or unavailability of, such information, or based on other circumstances.

Issue credit ratings can be either long-term or short-term. Short-term
ratings are generally assigned to those obligations considered short term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days -- including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term rating addresses the put feature, in addition to
the usual long-term rating. Medium-term notes are assigned long-term ratings.

Issue credit ratings are based, in varying degrees, on the following
considerations: likelihood of payment -- capacity and willingness of the obligor
to meet its financial commitment on an obligation in accordance with the terms
of the obligation; nature of and provisions of the obligation; protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.

The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above. (Such differentiation applies when an entity has
both senior and subordinated obligations, secured and unsecured obligations, or
operating company and holding company obligations.) Accordingly, in the case of
junior debt, the rating may not conform exactly with the category definition.

CORPORATE AND MUNICIPAL BOND RATINGS

INVESTMENT GRADE

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

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

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

A-4

BBB: An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.

SPECULATIVE GRADE

Obligations rated BB, B, CCC, CC, and C are regarded as having
predominately speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least 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: An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.

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

CCC: An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.

CC: An obligation rated CC is currently highly vulnerable to nonpayment.

C: A subordinated debt or preferred stock obligation rated C is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The C rating may be used to cover a situation
where a bankruptcy petition has been filed or similar action taken, but payments
on this obligation are being continued. A C also will be assigned to a preferred
stock issue in arrears on dividends or sinking fund payments, but that is
currently paying.

CI: The rating CI is reserved for income bonds on which no interest is
being paid.

D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.

Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

A-5

Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.

r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.

The absence of an "r" symbol should not be taken as an indication that an
obligation will exhibit no volatility or variability in total return.

N.R.: This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.

Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.

COMMERCIAL PAPER RATING DEFINITIONS

A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from A for the
highest quality obligations to D for the lowest. These categories are as
follows:

A-1: A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.

A-2: A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.

A-3: A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.

A-6

B: A short-term obligation rated B is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.

C: A short-term obligation rated C is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation.

D: A short-term obligation rated D is in payment default. The D rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.

A commercial paper rating is not a recommendation to purchase, sell or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
Standard & Poor's by the issuer or obtained from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.

FITCH RATINGS

A brief description of the applicable Fitch Ratings ("Fitch") ratings symbols
and meanings (as published by Fitch) follows:

LONG-TERM CREDIT RATINGS

INVESTMENT GRADE

AAA

Highest credit quality. 'AAA' ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.

Very high credit quality. 'AA' ratings denote a very low expectation of credit
risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.

High credit quality. 'A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be

A-7

more vulnerable to changes in circumstances or in economic conditions than is
the case for higher ratings.

BBB

Good credit quality. 'BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.

SPECULATIVE GRADE

Speculative. 'BB' ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.

Highly speculative. 'B' ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.

CCC, CC, C

High default risk. Default is a real possibility. Capacity for meeting financial
commitments is solely reliant upon sustained, favorable business or economic
developments. A 'CC' rating indicates that default of some kind appears
probable. 'C' ratings signal imminent default.

DDD, DD, and D

Default. The ratings of obligations in this category are based on their
prospects for achieving partial or full recovery in a reorganization or
liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve as
general guidelines. 'DDD' obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued interest. 'DD' indicates
potential recoveries in the range of 50%-90%, and 'D' the lowest recovery
potential, I.E., below 50%. Entities rated in this category have defaulted on
some or all of their obligations. Entities rated 'DDD' have the highest prospect
for resumption of performance or continued operation with or without a formal
reorganization process. Entities rated 'DD' and 'D' are generally undergoing a
formal reorganization or liquidation process; those rated 'DD' are likely to
satisfy a higher portion of their outstanding obligations, while entities rated
'D' have a poor prospect for repaying all obligations.

A-8

SHORT-TERM CREDIT RATINGS

A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.

F1 Highest credit quality . Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.

F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.

F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in
a reduction to non-investment grade.

B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.

C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.

D Default. Denotes actual or imminent payment default.

"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the 'AAA' long-term rating
category, to categories below 'CCC', or to short-term ratings other than 'F1'.

'NR' indicates that Fitch does not rate the issuer or issue in question.

'Withdrawn': A rating is withdrawn when Fitch deems the amount of information
available to be inadequate for rating purposes, or when an obligation matures,
is called, or refinanced.

'Rating Watch': Ratings are placed on Rating Watch to notify investors that
there is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. Rating Watch is typically resolved over a relatively
short period.

A Rating Outlook indicates the direction a rating is likely to move over a
one to two year period. Outlooks may be positive, stable, or negative. A
positive or negative Rating Outlook does not imply a rating change is
inevitable. Similarly, companies whose outlooks are 'stable' could be downgraded
before an outlook moves to positive or negative if circumstances warrant such an
action. Occasionally, Fitch may be unable to identify the fundamental trend. In
these cases, the Rating Outlook may be described as evolving.

A-9

APPENDIX B

PROXY VOTING POLICIES AND PROCEDURES

BACKGROUND

Western Asset Management Company ("WA") and Western Asset Management Company
Limited ("WAML") (together "Western Asset") have adopted and implemented
policies and procedures that we believe are reasonably designed to ensure that
proxies are voted in the best interest of clients, in accordance with our
fiduciary duties and SEC Rule 206(4)-6 under the Investment Advisers Act of 1940
("Advisers Act"). Our authority to vote the proxies of our clients is
established through investment management agreements or comparable documents,
and our proxy voting guidelines have been tailored to reflect these specific
contractual obligations. In addition to SEC requirements governing advisers, our
proxy voting policies reflect the long-standing fiduciary standards and
responsibilities for ERISA accounts. Unless a manager of ERISA assets has been
expressly precluded from voting proxies, the Department of Labor has determined
that the responsibility for these votes lies with the Investment Manager.

In exercising its voting authority, Western Asset will not consult or enter into
agreements with officers, directors or employees of Legg Mason Inc. or any of
its affiliates (except that WA and WAML may so consult and agree with each
other) regarding the voting of any securities owned by its clients.

POLICY

Western Asset's proxy voting procedures are designed and implemented in a way
that is reasonably expected to ensure that proxy matters are handled in the best
interest of our clients. While the guidelines included in the procedures are
intended to provide a benchmark for voting standards, each vote is ultimately
cast on a case-by-case basis, taking into consideration Western Asset's
contractual obligations to our clients and all other relevant facts and
circumstances at the time of the vote (such that these guidelines may be
overridden to the extent Western Asset deems appropriate).

PROCEDURES

RESPONSIBILITY AND OVERSIGHT

The Western Asset Compliance Department ("Compliance Department") is responsible
for administering and overseeing the proxy voting process. The gathering of
proxies is coordinated through the Corporate Actions area of Investment Support
("Corporate Actions"). Research analysts and portfolio managers are responsible
for determining appropriate voting positions on each proxy utilizing any
applicable guidelines contained in these procedures.

CLIENT AUTHORITY

Prior to August 1, 2003, all existing client investment management agreements
("IMAs") will be reviewed to determine whether Western Asset has authority to
vote client proxies. At account start-up, or upon amendment of an IMA, the
applicable client IMA are similarly reviewed. If an

B-1

agreement is silent on proxy voting, but contains an overall delegation of
discretionary authority or if the account represents assets of an ERISA plan,
Western Asset will assume responsibility for proxy voting. The Client Account
Transition Team maintains a matrix of proxy voting authority.

PROXY GATHERING

Registered owners of record, client custodians, client banks and trustees
("Proxy Recipients") that receive proxy materials on behalf of clients should
forward them to Corporate Actions. Prior to August 1, 2003, Proxy Recipients of
existing clients will be reminded of the appropriate routing to Corporate
Actions for proxy materials received and reminded of their responsibility to
forward all proxy materials on a timely basis. Proxy Recipients for new clients
(or, if Western Asset becomes aware that the applicable Proxy Recipient for an
existing client has changed, the Proxy Recipient for the existing client) are
notified at start-up of appropriate routing to Corporate Actions of proxy
materials received and reminded of their responsibility to forward all proxy
materials on a timely basis. If Western Asset personnel other than Corporate
Actions receive proxy materials, they should promptly forward the materials to
Corporate Actions.

PROXY VOTING

Once proxy materials are received by Corporate Actions, they are forwarded to
the Compliance Department for coordination and the following actions:

a. Proxies are reviewed to determine accounts impacted.

b. Impacted accounts are checked to confirm Western Asset voting
authority.

c. Compliance Department staff reviews proxy issues to determine any
material conflicts of interest. (See conflicts of interest section of
these procedures for further information on determining material
conflicts of interest.)

d. If a material conflict of interest exists, (i) to the extent
reasonably practicable and permitted by applicable law, the client is
promptly notified, the conflict is disclosed and Western Asset obtains
the client's proxy voting instructions, and (ii) to the extent that it
is not reasonably practicable or permitted by applicable law to notify
the client and obtain such instructions (e.g., the client is a mutual
fund or other commingled vehicle or is an ERISA plan client), Western
Asset seeks voting instructions from an independent third party.

e. Compliance Department staff provides proxy material to the appropriate
research analyst or portfolio manager to obtain their recommended
vote. Research analysts and portfolio managers determine votes on a
case-by-case basis taking into account the voting guidelines contained
in these procedures. For avoidance of doubt, depending on the best
interest of each individual client, Western Asset may vote the same
proxy differently for different clients. The analyst's or portfolio
manager's basis for their decision is documented and maintained by the
Compliance Department.

B-2

f. Compliance Department staff votes the proxy pursuant to the
instructions received in (d) or (e) and returns the voted proxy as
indicated in the proxy materials.

TIMING

Western Asset personnel act in such a manner to ensure that, absent special
circumstances, the proxy gathering and proxy voting steps noted above can be
completed before the applicable deadline for returning proxy votes.

RECORDKEEPING

Western Asset maintains records of proxies voted pursuant to Section 204-2 of
the Advisers Act and ERISA DOL Bulletin 94-2. These records include:

a. A copy of Western Asset's policies and procedures.

b. Copies of proxy statements received regarding client securities.

c. A copy of any document created by Western Asset that was material to
making a decision how to vote proxies.

d. Each written client request for proxy voting records and Western
Asset's written response to both verbal and written client requests.

e. A proxy log including:
1. Issuer name;
2. Exchange ticker symbol of the issuer's shares to be voted;
3. Council on Uniform Securities Identification Procedures ("CUSIP")
number for the shares to be voted;
4. A brief identification of the matter voted on;
5. Whether the matter was proposed by the issuer or by a shareholder
of the issuer;
6. Whether a vote was cast on the matter;
7. A record of how the vote was cast; and
8. Whether the vote was cast for or against the recommendation of the
issuer's management team.

Records are maintained in an easily accessible place for five years, the first
two in Western Asset's offices.

DISCLOSURE

Part II of both the WA Form ADV and the WAML Form ADV contain a description of
Western Asset's proxy policies. Prior to August 1, 2003, Western Asset will
deliver Part II of its revised Form ADV to all existing clients, along with a
letter identifying the new disclosure. Clients will be provided a copy of these
policies and procedures upon request. In addition, upon request, clients may
receive reports on how their proxies have been voted.

B-3

CONFLICTS OF INTEREST

All proxies are reviewed by the Compliance Department for material conflicts of
interest. Issues to be reviewed include, but are not limited to:

1. Whether Western Asset (or, to the extent required to be considered
by applicable law, its affiliates) manages assets for the company
or an employee group of the company or otherwise has an interest in
the company;

2. Whether Western Asset or an officer or director of Western Asset or
the applicable portfolio manager or analyst responsible for
recommending the proxy vote (together, "Voting Persons") is a close
relative of or has a personal or business relationship with an
executive, director or person who is a candidate for director of
the company or is a participant in a proxy contest; and

3. Whether there is any other business or personal relationship where
a Voting Person has a personal interest in the outcome of the
matter before shareholders.

VOTING GUIDELINES

Western Asset's substantive voting decisions turn on the particular facts and
circumstances of each proxy vote and are evaluated by the designated research
analyst or portfolio manager. The examples outlined below are meant as
guidelines to aid in the decision making process.

Guidelines are grouped according to the types of proposals generally presented
to shareholders. Part I deals with proposals which have been approved and are
recommended by a company's board of directors; Part II deals with proposals
submitted by shareholders for inclusion in proxy statements; Part III addresses
issues relating to voting shares of investment companies; and Part IV addresses
unique considerations pertaining to foreign issuers.

I. Board Approved Proposals

The vast majority of matters presented to shareholders for a vote involve
proposals made by a company itself that have been approved and recommended by
its board of directors. In view of the enhanced corporate governance practices
currently being implemented in public companies, Western Asset generally votes
in support of decisions reached by independent boards of directors. More
specific guidelines related to certain board-approved proposals are as follows:

1. Matters relating to the Board of Directors

Western Asset votes proxies for the election of the company's nominees
for directors and for board-approved proposals on other matters relating
to the board of directors with the following exceptions:

a. Votes are withheld for the entire board of directors if the board
does not have a majority of independent directors or the board does
not have nominating,

B-4

audit and compensation committees composed solely of independent
directors.

b. Votes are withheld for any nominee for director who is considered
an independent director by the company and who has received
compensation from the company other than for service as a director.

c. Votes are withheld for any nominee for director who attends less
than 75% of board and committee meetings without valid reasons for
absences.

d. Votes are cast on a case-by-case basis in contested elections of
directors.

2. Matters relating to Executive Compensation

Western Asset generally favors compensation programs that relate
executive compensation to a company's long-term performance. Votes are
cast on a case-by-case basis on board-approved proposals relating to
executive compensation, except as follows:

a. Except where the firm is otherwise withholding votes for the entire
board of directors, Western Asset votes for stock option plans that
will result in a minimal annual dilution.

b. Western Asset votes against stock option plans or proposals that
permit replacing or repricing of underwater options.

c. Western Asset votes against stock option plans that permit issuance
of options with an exercise price below the stock's current market
price.

d. Except where the firm is otherwise withholding votes for the entire
board of directors, Western Asset votes for employee stock purchase
plans that limit the discount for shares purchased under the plan to
no more than 15% of their market value, have an offering period of 27
months or less and result in dilution of 10% or less.

3. Matters relating to Capitalization

The management of a company's capital structure involves a number of
important issues, including cash flows, financing needs and market
conditions that are unique to the circumstances of each company. As a
result, Western Asset votes on a case-by-case basis on board-approved
proposals involving changes to a company's capitalization except where
Western Asset is otherwise withholding votes for the entire board of
directors.

a. Western Asset votes for proposals relating to the authorization of
additional common stock.

B-5

b. Western Asset votes for proposals to effect stock splits (excluding
reverse stock splits).

c. Western Asset votes for proposals authorizing share repurchase
programs.

4. Matters relating to Acquisitions, Mergers, Reorganizations and Other
Transactions

Western Asset votes these issues on a case-by-case basis on
board-approved transactions.

5. Matters relating to Anti-Takeover Measures

Western Asset votes against board-approved proposals to adopt
anti-takeover measures except as follows:

a. Western Asset votes on a case-by-case basis on proposals to ratify or
approve shareholder rights plans.

b. Western Asset votes on a case-by-case basis on proposals to adopt
fair price provisions.

6. Other Business Matters

Western Asset votes for board-approved proposals approving such routine
business matters such as changing the company's name, ratifying the
appointment of auditors and procedural matters relating to the
shareholder meeting.

a. Western Asset votes on a case-by-case basis on proposals to amend a
company's charter or bylaws.

b. Western Asset votes against authorization to transact other
unidentified, substantive business at the meeting.

II. Shareholder Proposals

SEC regulations permit shareholders to submit proposals for inclusion in a
company's proxy statement. These proposals generally seek to change some aspect
of a company's corporate governance structure or to change some aspect of its
business operations. Western Asset votes in accordance with the recommendation
of the company's board of directors on all shareholder proposals, except as
follows:

1. Western Asset votes for shareholder proposals to require shareholder
approval of shareholder rights plans.

2. Western Asset votes for shareholder proposals that are consistent with
Western Asset's proxy voting guidelines for board-approved proposals.

B-6

3. Western Asset votes on a case-by-case basis on other shareholder
proposals where the firm is otherwise withholding votes for the entire
board of directors.

III. Voting Shares of Investment Companies

Western Asset may utilize shares of open or closed-end investment companies to
implement its investment strategies. Shareholder votes for investment companies
that fall within the categories listed in Parts I and II above are voted in
accordance with those guidelines.

1. Western Asset votes on a case-by-case basis on proposals relating to
changes in the investment objectives of an investment company taking
into account the original intent of the fund and the role the fund plays
in the clients' portfolios.

2. Western Asset votes on a case-by-case basis all proposals that would
result in increases in expenses (e.g., proposals to adopt 12b-1 plans,
alter investment advisory arrangements or approve fund mergers) taking
into account comparable expenses for similar funds and the services to
be provided.

IV. Voting Shares of Foreign Issuers

In the event Western Asset is required to vote on securities held in foreign
issuers - i.e. issuers that are incorporated under the laws of a foreign
jurisdiction and that are not listed on a U.S. securities exchange or the NASDAQ
stock market, the following guidelines are used, which are premised on the
existence of a sound corporate governance and disclosure framework. These
guidelines, however, may not be appropriate under some circumstances for foreign
issuers and therefore apply only where applicable.

1. Western Asset votes for shareholder proposals calling for a majority of
the directors to be independent of management.

2. Western Asset votes for shareholder proposals seeking to increase the
independence of board nominating, audit and compensation committees.

3. Western Asset votes for shareholder proposals that implement corporate
governance standards similar to those established under U.S. federal law
and the listing requirements of U.S. stock exchanges, and that do not
otherwise violate the laws of the jurisdiction under which the company
is incorporated.

4. Western Asset votes on a case-by-case basis on proposals relating to (1)
the issuance of common stock in excess of 20% of a company's outstanding
common stock where shareholders do not have preemptive rights, or (2)
the issuance of common stock in excess of 100% of a company's
outstanding common stock where shareholders have preemptive rights.

B-7

PART C - OTHER INFORMATION

Item 24: Financial Statements and Exhibits

1. Financial Statements:

Registrant has not conducted any business as of the date of this filing,
other than in connection with its organization. Financial Statements indicating
that the Registrant has met the net worth requirements of Section 14(a) of the
1940 Act are filed herewith as part of the Statement of Additional Information.

2. Exhibits:

a.1 Agreement and Declaration of Trust dated July 14, 2003. (1)

a.2 Amended and Restated Agreement and Declaration of Trust dated August 21,
2003. (2)

b. Amended and Restated By-Laws of Registrant dated August 21, 2003. (2)

c. None.

d.1 Article III (Shares) and Article V (Shareholders' Voting Powers and
Meetings) of the Agreement and Declaration of Trust. (2)

d.2 Article 10 (Shareholders' Voting Powers and Meetings) of the By-Laws of
Registrant. (2)

d.3 Form of Share Certificate of the Common Shares, filed herewith.

e. Terms and Conditions of Dividend Reinvestment Plan, filed herewith.

f. None.

g.1 Form of Investment Management Agreement between Registrant and Western
Asset Management Company ("Western Asset"), filed herewith.

h.1 Form of Underwriting Agreement, filed herewith.

h.2 Form of Underwriter Participation Agreement, filed herewith.

h.3 Form of Master Selected Dealer Agreement. (2)

h.4 Form of Master Agreement among Underwriters. (2)

h.5 Form of Additional Compensation Agreement, filed herewith.

i. None.

j. Form of Custodian Agreement between Registrant and State Street Bank and
Trust Company, filed herewith.

k.1 Form of Transfer Agency and Service Agreement among Registrant, EquiServe
Trust Company, N.A. and EquiServe, Inc., filed herewith.

k.2 Form of Servicing Agreement between Registrant and Claymore Securities,
Inc. ("Claymore"), filed herewith.

k.3 Form of Administrative Services Agreement between Registrant and Legg
Mason Fund Adviser, Inc., filed herewith.

l. Opinion and consent of Ropes & Gray LLP, filed herewith.

m. None.

n. Consent of PricewaterhouseCoopers LLP, filed herewith.

o. None.

p. Subscription Agreement of Western Asset, filed herewith.

q. None.

r.1 Code of Ethics of Registrant and Western Asset. (2)

r.2 Code of Ethics of Legg Mason Wood Walker, Incorporated. (2)

r.3 Code of Ethics of Claymore, filed herewith.

s. Powers of Attorney for each Trustee and Officer, (2) and filed herewith.

----------

(1) Incorporated by reference from the Registrant's initial Registration
Statement on Form N-2, File No. 333-107150, filed on July 18, 2003.

(2) Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registrant's initial Registration Statement on Form N-2, File No.
333-107150, filed on August 27, 2003.

Item 25: Marketing Arrangements

See Exhibits h.1, h.2, h.3 and h.4 of Item 24 of this Registration
Statement, including Sections 2, 3(a)(x), 3(a)(xiii), 6, 7 and 10 of
Exhibit h.1 and Sections 1, 4, 5, 7, 8, 19 and 20 of Exhibit h.4.

Item 26: Other Expenses of Issuance and Distribution

Securities and Exchange Commission fees $40,450*
National Association of Securities Dealers, 50,500*
Inc. fees

Printing and engraving expenses $415,000*
Legal fees 250,000*
New York Stock Exchange listing fees 40,000*
Accounting expenses 15,000*
Underwriter reimbursement 150,000*
Miscellaneous expenses 20,000*
---------
Total $980,950*

Western Asset Management Company and Claymore Securities, Inc. have
agreed to (i) pay the amount by which the Fund's offering costs (other than
the sales load) exceed $.03 per common share and (ii) reimburse all of the
Fund's organizational expenses.

* Estimated Expense.

Item 27: Persons Controlled by or under Common Control with Registrant

Not applicable.

Item 28: Number of Holders of Securities

At September 23, 2003

TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------------------- ------------------------

Common Shares, no par value 1

Item 29: Indemnification

Reference is made to Article VIII, Sections 1 through 4, of the
Registrant's Agreement and Declaration of Trust, which is incorporated by
reference herein.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to trustees, officers and
controlling persons of the Registrant by the Registrant pursuant to the
Registrant's Agreement and Declaration of Trust, its By-Laws or otherwise, the
Registrant is aware that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and, therefore, is unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by trustees, officers or controlling
persons of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustees, officers or controlling persons in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

Item 30: Business and Other Connections of Investment Adviser

Western Asset is an investment adviser registered with the Securities and
Exchange Commission under the Investment Advisers Act of 1940. The following is
a list of other substantial business activities in which directors, officers or
partners of Western Asset have been engaged as director, officer, employee,
partner or trustee.

Bruce D. Alberts Chief Financial Officer, Western Asset

James W. Hirschmann III President, CEO and Director, Western Asset
Managing Director and Director, WAML

Gavin L. James Director of Global Client Services, Western Asset

S. Kenneth Leech Chief Investment Officer, Western Asset
Director, WAML

Gregory B. McShea Secretary and Head of Compliance, Western Asset

Timothy C. Scheve Director, Western Asset
Senior Executive Vice President, Legg Mason, Inc.
Senior Executive Vice President and Director, LMWW
Manager, Brandywine
Manager, Royce
Director, Barrett
Director, Berkshire
Director, Bartlett
Director, LMCM
Director, LMFA
Director, LMFM
Director, LMT
Director, WAML
Director, PCM

Edward A. Taber III Director, Western Asset
Executive Vice President, Legg Mason, Inc.
Manager, Brandywine
Director, Legg Mason Holdings Limited
Director, LM Holdings Limited
Director, Batterymarch
Director, LMCM
Director, WAML
Director, LMREI
Director, LMFA

Stephen A. Walsh Deputy Chief Investment Officer, Western Asset

Addresses for Item 30:

Barrett Associates, Inc. ("Barrett")
90 Park Avenue
New York, NY 10016

Bartlett & Co. ("Bartlett")
36 East Fourth Street
Cincinnati, OH 45202

Batterymarch Financial Management, Inc. ("Batterymarch")
200 Clarendon Street
Boston, MA 02116

Berkshire Asset Management, Inc. ("Berkshire")
46 Public Square, Suite 700
Wilkes-Barre, PA 18701

Brandywine Asset Management, LLC ("Brandywine")
Three Christina Centre, Suite 1200
201 North Walnut Street
Wilmington, DE 19801

Legg Mason Capital Management, Inc. ("LMCM")
100 Light Street
Baltimore, MD 21202

Legg Mason Fund Adviser, Inc. ("LMFA")
100 Light Street
Baltimore, MD 21202

Legg Mason Funds Management, Inc. ("LMFM")
100 Light Street
Baltimore, MD 21202

Legg Mason Holdings Limited
155 Bishopsgate
London EC2M 3XG England

Legg Mason, Inc.
100 Light Street
Baltimore, MD 21202

Legg Mason Real Estate Investors, Inc. ("LMREI")
100 Light Street
Baltimore, MD 21202

Legg Mason Trust, fsb ("LMT")
100 Light Street
Baltimore, MD 21202

Legg Mason Wood Walker, Incorporated ("LMWW")
100 Light Street
Baltimore, MD 21202

LM Holdings Limited
32 Harbor Exchange Square
London E149GE England

PCM Holdings, Inc. ("PCM")
100 Light Street
Baltimore, MD 21202

Royce & Associates LLC ("Royce")
1414 Avenue of the Americas
New York, NY 10019

Western Asset Management Company ("Western Asset")
117 East Colorado Boulevard
Pasadena, CA 91105

Western Asset Management Company Limited ("WAML")
155 Bishopsgate
London EC2M 3XG England

Item 31: Location of Accounts and Records

The account books and other documents required to be maintained by the
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the Rules thereunder will be maintained at the offices of State Street Bank &
Trust Company, 150 Newport Avenue AFB/4N, North Quincy, Massachusetts 02171,
Legg Mason Fund Adviser, Inc., 100 Light Street, Baltimore, Maryland 21202
and/or EquiServe Trust Company, N.A., 150 Royall Street, Canton, MA 02021.

Item 32: Management Services

Not applicable.

Item 33: Undertakings

1. Registrant undertakes to suspend the offering of its Common Shares
until it amends the prospectus filed herewith if (1) subsequent to the effective
date of its registration statement, the net asset value declines more than 10
percent from its net asset value as of the effective date

of the registration statement or (2) the net asset value increases to an amount
greater than its net proceeds as stated in the prospectus.

2. Not applicable.

3. Not applicable.

4. Not applicable.

5. The Registrant undertakes that:

a. For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant under Rule
497(h) under the Securities Act of 1933 shall be deemed to be part of
this registration statement as of the time it was declared effective; and

b. For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of the securities at
that time shall be deemed to be the initial bona fide offering thereof.

6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of a written or oral request, any Statement of Additional Information.

Notice

A copy of the Agreement and Declaration of Trust of Western
Asset/Claymore U.S. Treasury Inflation Protected Securities Fund (the "Trust"),
together with all amendments thereto, is on file with the Secretary of the
Commonwealth of Massachusetts, and notice is hereby given that this instrument
is executed on behalf of the Trust by any officer or trustee of the Trust as an
officer or trustee and not individually and that the obligations of or arising
out of this instrument are not binding upon any of the Trustees of the Trust or
shareholders of the Trust individually, but are binding only upon the assets and
property of the Trust.

SIGNATURE PAGE

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Pasadena and State of California, on the 25th day of
September, 2003.

WESTERN ASSET/CLAYMORE U.S.
TREASURY INFLATION PROTECTED
SECURITIES FUND

By: /s/ Randolph L. Kohn*
-------------------------
Randolph L. Kohn
President

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:

SIGNATURE TITLE DATE
--------- ----- ----

/s/ Randolph L. Kohn* President and Trustee September 25, 2003
-------------------------------
Randolph L. Kohn

/s/ Nicholas Dalmaso* Trustee September 25, 2003
-------------------------------
Nicholas Dalmaso

/s/ Peter Erichsen* Trustee September 25, 2003
-------------------------------
Peter Erichsen

/s/ Ronald Nyberg* Trustee September 25, 2003
-------------------------------
Ronald Nyberg

/s/ Ronald E. Toupin, Jr.* Trustee September 25, 2003
-------------------------------
Ronald E. Toupin, Jr.

/s/ Marie K. Karpinski* Treasurer September 25, 2003
------------------------------- and Principal
Marie K. Karpinski Financial and
Accounting Officer

*By: /s/ Gregory B. McShea
--------------------------
Gregory B. McShea
Attorney-in-Fact

Date: September 25, 2003

EXHIBIT INDEX

EXHIBIT EXHIBIT NAME
------- ------------

d.3 Form of Share Certificate of the Common Shares.

e. Terms and Conditions of Dividend Reinvestment Plan.

g.1 Form of Investment Management Agreement.

h.1 Form of Underwriting Agreement.

h.2 Form of Underwriter Participation Agreement.

h.5 Form of Additional Compensation Agreement.

j. Form of Custodian Agreement.

k.1 Form of Transfer Agency and Service Agreement.

k.2 Form of Servicing Agreement.

k.3 Form of Administrative Services Agreement.

l. Opinion and consent of Ropes & Gray LLP.

n. Consent of PricewaterhouseCoopers LLP.

p. Subscription Agreement of Western Asset.

r.3 Code of Ethics of Claymore.

s. Powers of Attorney.