<DOCUMENT>
<TYPE>497
<SEQUENCE>1
<FILENAME>d497.txt
<DESCRIPTION>PREFERRED SHARES OFFERING 497 FILING
<TEXT>
<PAGE>

                                                  Filed Pursuant to Rule 497(h)
                                                     Registration No. 333-90854

PROSPECTUS
[LOGO] WESTERN ASSET
                                  $72,000,000
                        WESTERN ASSET PREMIER BOND FUND
             TAXABLE AUCTION MARKET PREFERRED SHARES ("AMPS"/SM/)
                            1,440 SHARES, SERIES M
                            1,440 SHARES, SERIES W
                   LIQUIDATION PREFERENCE $25,000 PER SHARE
                               ----------------

      Western Asset Premier Bond Fund (the "Fund") is a recently organized,
diversified, closed-end management investment company. The Fund's investment
objective is to provide current income and capital appreciation by investing
primarily in a diversified portfolio of investment grade bonds.

      THE OFFERING.  The Fund is simultaneously offering 1,440 Series M Taxable
Auction Market Preferred Shares ("Series M AMPS") and 1,440 Series W Taxable
Auction Market Preferred Shares ("Series W AMPS"). These shares are referred to
together in this prospectus as "AMPS." The AMPS will not be listed on any
exchange. Generally, investors may only buy and sell the AMPS through an order
placed at an auction with or through a broker-dealer that has entered into an
agreement with the auction agent, or in a secondary market that certain
broker-dealers may maintain. These broker-dealers are not required to maintain
a market in the AMPS, and a secondary market, if one develops, may not provide
investors with liquidity.

      PORTFOLIO CONTENTS.  Under normal market conditions, the Fund expects to
invest substantially all (but in any event at least 80%) of its total managed
assets in bonds and at least 65% of its total managed assets in bonds that at
the time of investment are investment grade quality. 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"), Fitch Ratings ("Fitch") or another nationally recognized
rating agency) or bonds that are unrated but judged to be of comparable quality
by the Fund's investment advisors. The Fund may invest up to 35% of its total
managed assets in bonds of below investment grade quality (commonly referred to
as "junk bonds") at the time of investment. 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. The Fund
may invest in securities or instruments other than bonds (including preferred
stock) and may invest up to 10% of its total managed assets in instruments
denominated in currencies other than the U.S. dollar. "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
objective.

      INVESTMENT ADVISOR.  Western Asset Management Company, a wholly owned
subsidiary of Legg Mason, Inc., will act as investment advisor to the Fund. See
"Management of the Fund."

      INVESTING IN THE AMPS INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISKS"
SECTION BEGINNING ON PAGE 22 OF THIS PROSPECTUS. THE MINIMUM PURCHASE AMOUNT OF
THE AMPS IS $25,000.

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

<TABLE>
<CAPTION>
                                          PER SHARE    TOTAL
                                          ---------    -----
<S>                                       <C>       <C>
Public offering price....................  $25,000  $72,000,000
Sales load...............................     $250     $720,000
Proceeds, before expenses, to the Fund(1)  $24,750  $71,280,000
</TABLE>

      (1)Not including offering expenses payable by the Fund estimated to be
         $458,000.

      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 underwriter is offering the AMPS subject to various conditions. The
underwriter expects to deliver the AMPS, in book-entry form, through the
facilities of The Depository Trust Company on or about September 20, 2002.

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

                              MERRILL LYNCH & CO.

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


               The date of this prospectus is September 18, 2002

"AMPS" is a registered service mark of Merrill Lynch & Co.

<PAGE>

(CONTINUED FROM PREVIOUS PAGE)

      You should read this prospectus, which contains important information
about the Fund, before deciding whether to invest and retain it for future
reference. A Statement of Additional Information, dated September 18, 2002,
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 51 of this prospectus. You may request a free
copy of the Statement of Additional Information by calling 1-877-844-8800 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).

      Investors in AMPS will be entitled to receive cash dividends at an annual
rate that may vary for the successive dividend periods for the AMPS. The
dividend rate for the initial dividend period will be 1.95% for Series M AMPS
and 1.95% for Series W AMPS. The initial dividend period for the AMPS is from
the date of issuance through September 30, 2002 for Series M AMPS and through
October 16, 2002 for Series W AMPS. For subsequent dividend periods, the AMPS
will pay dividends based on a rate generally set at auctions held every seven
days for Series M AMPS and every 28 days for Series W AMPS. Generally,
investors may only buy or sell AMPS through an order placed at an auction with
or through a broker-dealer in accordance with the procedures specified in this
prospectus. Prospective purchasers should carefully review the auction
procedures described in this prospectus, and should note:

       .a buy order (called a "bid") or sell order is a commitment to buy or
        sell AMPS based on the results of an auction; and

       .purchases and sales will be settled on the next business day after the
        auction.

      The AMPS have a liquidation preference of $25,000 per share, plus any
accumulated, unpaid dividends. The AMPS also have priority over the Fund's
common shares of beneficial interest, no par value ("common shares"), as to
distribution of assets as described in this prospectus. See "Description of
AMPS." The Fund may redeem AMPS as described under "Description of AMPS --
Redemption."

      Broker-dealers may maintain a secondary trading market in the AMPS
outside of the auctions; however, they have no obligation to do so, and there
can be no assurance that a secondary market for the AMPS will develop or, if it
does develop, that it will provide holders with a liquid trading market (I.E.,
trading will depend on the presence of willing buyers and sellers, and the
trading price will be subject to variables to be determined at the time of the
trade by such broker dealers). A general increase in the level of interest
rates may have an adverse effect on the secondary market price of the AMPS, and
an investor that sells AMPS between auctions may receive a price per share of
less than $25,000.

      The AMPS 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.

      The AMPS will be senior to the Fund's outstanding common shares. The AMPS
are not listed on an exchange. The Fund's common shares are traded on the New
York Stock Exchange under the symbol "WEA." It is a condition of closing this
offering that the AMPS be offered with a rating of "Aaa" from Moody's and of
"AAA" from Fitch.

<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                               PAGE
                                                               ----
<S>                                                            <C>
Prospectus Summary............................................   4
Financial Highlights..........................................  14
The Fund......................................................  14
Use of Proceeds...............................................  15
Capitalization................................................  15
Portfolio Composition.........................................  16
The Fund's Objective, Strategies and Investments..............  16
Risks.........................................................  22
How the Fund Manages Risk.....................................  29
Management of the Fund........................................  30
Description of AMPS...........................................  32
The Auction...................................................  39
Net Asset Value...............................................  43
Description of Capital Structure..............................  43
Anti-Takeover and Other Provisions in the Declaration of Trust  45
Repurchase of Fund Shares; Conversion to Open-End Fund........  46
Tax Matters...................................................  47
Underwriting..................................................  49
Custodian and Transfer Agent; Auction Agent...................  49
Legal Matters.................................................  50
Available Information.........................................  50
Table of Contents for the Statement of Additional Information.  51
</TABLE>

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

      Please see page 52 for important privacy policy information.

      YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. THE FUND HAS NOT, AND THE UNDERWRITER HAS 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 UNDERWRITER IS 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.

      UNTIL OCTOBER 13, 2002 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE THE AMPS, 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.


                                      3

<PAGE>

                              PROSPECTUS SUMMARY

      THIS IS ONLY A SUMMARY. THIS SUMMARY MAY NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE AMPS. YOU SHOULD
REVIEW THE MORE DETAILED INFORMATION CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, ESPECIALLY THE INFORMATION SET FORTH UNDER
THE HEADING "RISKS."

THE FUND..................   Western Asset Premier Bond Fund is a recently
                             organized, diversified, closed-end management
                             investment company. Throughout the prospectus,
                             Western Asset Premier Bond Fund is referred to as
                             the "Fund." The Fund commenced investment
                             operations on March 28, 2002 upon the closing of
                             an initial public offering of 10,000,000 common
                             shares. As of September 5, 2002, the Fund had
                             11,000,497 common shares outstanding and total
                             managed assets of approximately $147,000,000. The
                             Fund's common shares are traded on the New York
                             Stock Exchange under the symbol "WEA." See "The
                             Fund." The Fund's principal office is located at
                             117 East Colorado Boulevard, Pasadena, California
                             91105, and its telephone number is (626) 844-9400.

THE OFFERING..............   The Fund is offering 1,440 Series M AMPS, no par
                             value, and 1,440 Series W AMPS, no par value, each
                             at a purchase price of $25,000 per share plus
                             dividends, if any, that have accumulated from the
                             date the Fund first issues the AMPS. The AMPS are
                             offered by Merrill Lynch, Pierce, Fenner & Smith
                             Incorporated ("Merrill Lynch").

                             The AMPS entitle their holders to receive cash
                             dividends at an annual rate that may vary for the
                             successive dividend periods for the AMPS. In
                             general, except as described under "--Dividends on
                             AMPS" below and "Description of AMPS--Dividends
                             and Rate Periods," the dividend period for the
                             Series M AMPS will be seven days, and the dividend
                             period for the Series W AMPS will be 28 days. The
                             auction agent will determine the dividend rate for
                             a particular rate period by an auction conducted
                             on the business day immediately prior to the start
                             of that rate period. See "The Auction."

                             The AMPS are not listed on an exchange. Instead,
                             investors will generally buy or sell AMPS in an
                             auction by submitting orders to broker-dealers
                             that have entered into an agreement with the
                             auction agent.

                             Generally, investors in AMPS will not receive
                             certificates representing ownership of their
                             shares. The securities depository (The Depository
                             Trust Company or any successor) or its nominee for
                             the account of the investor's broker-dealer will
                             maintain record ownership of AMPS in book-entry
                             form. An investor's broker-dealer, in turn, will
                             maintain records of that investor's beneficial
                             ownership of AMPS.

INVESTMENT ADVISOR
  AND SUBADVISOR..........   Western Asset Management Company, a wholly owned
                             subsidiary of Legg Mason, Inc., serves as the
                             investment advisor to the Fund. Western Asset
                             Management Company's principal office is located at

                                      4

<PAGE>

                             117 East Colorado Boulevard, Pasadena, California
                             91105. Subject to the general supervision of the
                             Board of Trustees, Western Asset Management
                             Company is responsible for managing, either
                             directly or through others hired for these
                             purposes, the investment activities of the Fund
                             and 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 0.55% of the
                             average weekly value of the Fund's total managed
                             assets. Western Asset Management Company Limited
                             ("WAML"), an affiliate of Western Asset Management
                             Company, has been selected to furnish a continuing
                             investment program for the non-U.S. dollar
                             denominated assets of the Fund and will make
                             investment decisions relating to such assets.
                             Western Asset Management Company will pay a
                             portion of the fees it receives from the Fund to
                             WAML in return for WAML's services as subadvisor
                             at an annual rate of 0.425% of the average weekly
                             value of the Fund's total managed assets that WAML
                             manages. Western Asset Management Company and WAML
                             are referred to as "Western Asset" in this
                             prospectus.

INVESTMENT OBJECTIVE......   The Fund's investment objective is to provide
                             current income and capital appreciation by
                             investing primarily in a diversified portfolio of
                             investment grade bonds. No assurance can be given
                             that the Fund will achieve its investment
                             objective.

INVESTMENT POLICIES.......   Under normal market conditions, the Fund will
                             invest substantially all (but in any event at
                             least 80%) of its total managed assets in bonds,
                             including corporate bonds, U.S. government and
                             agency securities and mortgage-related securities,
                             and at least 65% of its total managed assets in
                             bonds that at the time of investment are
                             investment grade quality. 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, Fitch or another nationally
                             recognized rating agency) or bonds that are
                             unrated but judged to be of comparable quality by
                             Western Asset. The Fund may invest up to 35% of
                             its total managed assets in bonds of below
                             investment grade quality (commonly referred to as
                             "junk bonds") at the time of investment. 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. The Fund may invest
                             in securities or instruments other than bonds
                             (including preferred stock) and may invest up to
                             10% of its total managed assets in instruments
                             denominated in currencies other than the U.S.
                             dollar. The Fund currently expects that the
                             average effective duration of its portfolio will
                             range between 3.5 and 7 years, although this
                             target duration may change from time to time. See
                             "The Fund's Objective, Strategies and Investments."
LEVERAGE..................   The Fund anticipates that, immediately after
                             completion of the offering of AMPS, the AMPS
                             (together with any other outstanding forms of
                             leverage) will represent approximately 33 1/3% of
                             the Fund's total managed assets. The precise
                             amount of leverage used by the Fund may

                                      5

<PAGE>

                             vary from time to time, but the Fund will not
                             incur leverage (including AMPS and other forms of
                             leverage) in an amount exceeding 38% of its 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.

                             Although the Fund may in the future offer other
                             preferred shares, the Fund does not currently
                             intend to offer preferred shares other than the
                             AMPS offered in this prospectus. The Fund may use
                             other instruments that may be considered leverage
                             under certain circumstances, including reverse
                             repurchase agreements, credit default swaps,
                             dollar rolls and other investment techniques.
                             Although the Fund does not currently intend to
                             borrow from banks and other financial institutions
                             in order to leverage its portfolio, it may do so
                             in the future. Bank borrowings will be included
                             when calculating the amount of the Fund's
                             outstanding leverage.

                             The Fund generally will not utilize leverage if it
                             anticipates that it would result in a lower return
                             to holders of the Fund's common shares ("Common
                             Shareholders") over time. Use of financial
                             leverage creates an opportunity for increased
                             income for Common Shareholders, but, at the same
                             time, creates the possibility for greater loss
                             (including the likelihood of greater volatility of
                             dividends on the common shares and of the net
                             asset value and market price of the common
                             shares), and there can be no assurance that the
                             Fund's use of leverage will be successful. Because
                             the fees received by Western Asset are based on
                             the total managed assets of the Fund (including
                             assets represented by the AMPS and other
                             leverage), Western Asset has a financial incentive
                             for the Fund to issue the AMPS and incur other
                             leverage. See "Risks--General Risks of Investing
                             in the Fund--Leverage Risk."

SPECIAL RISK CONSIDERATIONS  RISKS OF INVESTING IN THE AMPS.  Before investing
                             in the AMPS, you should consider certain risks
                             carefully. The primary risks of investing in AMPS
                             are:

                              .  the Fund will generally not be permitted to
                                 declare dividends or other distributions with
                                 respect to your AMPS or redeem your AMPS
                                 unless the Fund meets certain asset coverage
                                 requirements, as discussed in "Description of
                                 AMPS--Rating Agency Guidelines and Asset
                                 Coverage";

                              .  if an auction fails, you may not be able to
                                 sell some or all of your AMPS;

                              .  because of the nature of the market for the
                                 AMPS, you may receive less than the price you
                                 paid for your AMPS if you sell them outside of
                                 the auction, especially when market interest
                                 rates are rising;

                                      6

<PAGE>

                              .  a rating agency could downgrade the rating
                                 assigned to the AMPS, which could affect the
                                 liquidity of your investment;

                              .  the Fund may be forced to redeem your AMPS to
                                 meet regulatory or rating agency requirements,
                                 and may voluntarily redeem your shares in
                                 certain circumstances;

                              .  in certain circumstances the Fund may not earn
                                 sufficient income from its investments to pay
                                 dividends on AMPS;

                              .  if interest rates rise, the value of the
                                 Fund's investment portfolio may decline,
                                 reducing the asset coverage for the AMPS; and

                              .  if an issuer of a bond in which the Fund
                                 invests experiences financial difficulties or
                                 defaults, or if an issuer in which the Fund
                                 invests is affected by other adverse market
                                 factors, there may be a negative impact on the
                                 income and/or asset value of the Fund's
                                 investment portfolio, which will make it more
                                 difficult for the Fund to pay dividends on the
                                 AMPS and will reduce asset coverage for the
                                 AMPS.

                             In addition to the risks described above, certain
                             general risks relating to an investment in the
                             Fund may under certain circumstances reduce the
                             Fund's ability to pay dividends and meet its asset
                             coverage requirements on the AMPS. These risks
                             include:

                             LIMITED OPERATING HISTORY.  The Fund is a recently
                             organized, diversified, closed-end management
                             investment company that has been operational for
                             less than six months.

                             INTEREST RATE RISK.  Interest rate risk is the
                             risk that the bonds in the Fund's portfolio 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 Fund's net
                             asset value will fluctuate more in response to
                             changes in market interest rates than if the Fund
                             invested primarily in shorter-term bonds. If
                             intermediate- and longer-term rates rise, the
                             value of the Fund's investment portfolio may
                             decline, reducing asset coverage on the AMPS. The
                             Fund's use of leverage, as described below, will
                             increase interest rate risk. See "Risks - General
                             Risks of Investing in the Fund - Leverage Risk."

                             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. The Fund may
                             invest up to 35% of its total managed assets in
                             bonds that are not rated, at the time of
                             investment, Baa/BBB or above by Moody's, S&P,
                             Fitch or another nationally recognized rating
                             agency or that are unrated but judged to be of
                             comparable quality by Western Asset. The prices of
                             these lower grade bonds are more sensitive to
                             negative developments, such as a decline in the
                             issuer's revenues or a general economic downturn,
                             than are the prices of higher

                                      7

<PAGE>

                             grade securities. Bonds of below investment grade
                             quality (commonly referred to as "junk bonds") are
                             predominately speculative with respect to the
                             issuer's capacity to pay interest and repay
                             principal when due, and therefore involve a
                             greater risk of default. Bonds in the lowest
                             investment grade category may also be considered
                             to possess some speculative characteristics by
                             certain rating agencies. Lower grade bonds tend to
                             be less liquid than investment grade bonds, and
                             investments in lower grade bonds will expose the
                             Fund to greater risks than if the Fund owned only
                             higher grade securities.

                             LEVERAGE RISK.  The Fund is offering the AMPS in
                             order to purchase additional assets for investment
                             purposes. This practice is known as "leverage."
                             Leverage risk includes the risk associated with
                             the issuance of AMPS to leverage the Fund's common
                             shares. The Fund may also use other instruments
                             that may be considered leverage under certain
                             circumstances, including reverse repurchase
                             agreements, credit default swaps, dollar rolls and
                             other investment techniques, each of which (to the
                             extent that it is considered leverage) will
                             amplify the effects of leverage on the Fund's
                             portfolio.

                             If the dividend rate on the AMPS and interest
                             rates (if applicable) on other forms of leverage,
                             as reset periodically, exceed the net rate of
                             return on the Fund's portfolio, the use of
                             leverage will result in a lower net asset value
                             than if the Fund were not leveraged, and the
                             Fund's ability to pay dividends and to meet its
                             asset coverage requirements on the AMPS would be
                             reduced.

                             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.

                             COUNTRY RISK AND CURRENCY RISK.  The Fund's
                             investments in non-U.S. issuers and in instruments
                             denominated in currencies other than the U.S.
                             dollar involve special risks. For example, the
                             value of these investments may decline in response
                             to unfavorable political and legal developments,
                             unreliable or untimely information, or economic
                             and financial instability. The value of
                             instruments denominated in these currencies may
                             fluctuate based on changes in the value of such
                             currencies relative to the U.S. dollar, and a
                             decline in applicable exchange rates could reduce
                             the value of such securities held by the Fund.
                             Settlement procedures outside the U.S. may also
                             involve additional risks. The risks described in
                             this paragraph will be greater to the extent that
                             the Fund invests in securities of issuers based in
                             or instruments denominated in the currencies of
                             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

                                      8

<PAGE>

                             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.

                             MORTGAGE-RELATED SECURITIES RISK.   The Fund may
                             invest in a variety of mortgage-related
                             securities, including commercial mortgage
                             securities and other mortgage-backed instruments.
                             Rising interest rates tend to extend the duration
                             of mortgage-related securities, making them more
                             sensitive to changes in interest rates. In
                             addition, mortgage-related securities are subject
                             to prepayment risk, as discussed above. The Fund's
                             investments in other asset-backed securities are
                             subject to risks similar to those associated with
                             mortgage-related securities.

                             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.

                             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,
                             credit risk, leverage risk and management risk.
                             Derivative transactions also involve the risk of
                             mispricing or improper valuation 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, if used,
                             will be successful.

                             INFLATION RISK.   Inflation risk is the risk that
                             the value of assets or income from the Fund's
                             investments will be worth less in the future as
                             inflation decreases the value of money.

                             ANTI-TAKEOVER PROVISIONS.   The Fund's Agreement
                             and Declaration of Trust (as amended and restated,
                             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.

                             RECENT DEVELOPMENTS.   As a result of the
                             terrorist attacks on the World Trade Center and
                             the Pentagon on September 11, 2001, many U.S.
                             securities markets were closed for all or a
                             portion of a four-day period. These terrorist
                             attacks and related events have led to increased
                             short-term market volatility and may have
                             long-term effects on U.S. and world economies and
                             markets. A similar disruption of the financial
                             markets could adversely impact interest rates,
                             auctions, secondary

                                      9

<PAGE>

                             trading, ratings, credit risk, inflation and other
                             factors relating to securities or other financial
                             instruments.

TRADING MARKET............   The AMPS will not be listed on a stock exchange.
                             Instead, you may buy or sell AMPS at a periodic
                             auction by submitting orders to a broker-dealer
                             that has entered into a separate agreement with
                             the auction agent (a "Broker-Dealer") or to a
                             broker-dealer that has entered into an agreement
                             with a Broker-Dealer. In addition to the auctions,
                             Broker-Dealers and other broker-dealers may
                             maintain a separate secondary trading market in
                             AMPS, but may discontinue this activity at any
                             time. You may transfer shares outside of auctions
                             only to or through a Broker-Dealer, a
                             broker-dealer that has entered into a separate
                             agreement with a Broker-Dealer, or other persons
                             as the Fund permits. There can be no assurance
                             that a secondary trading market for the AMPS will
                             develop or, if it does develop, that it will
                             provide holders of AMPS with liquidity of
                             investment. See "The Auction."

RATINGS...................   The Fund will issue the AMPS only if the AMPS have
                             received a credit quality rating of "Aaa" from
                             Moody's and of "AAA" from Fitch.

DIVIDENDS ON AMPS.........   The table below shows the dividend rates, the
                             dividend payment dates and the number of days for
                             the initial rate periods on each series of AMPS
                             offered in this prospectus. For subsequent
                             dividend periods, AMPS will pay dividends based on
                             a rate set at auctions normally held every seven
                             days in the case of Series M AMPS and every
                             28 days in the case of Series W AMPS. In most
                             instances, dividends are payable on the first
                             business day following the end of the rate period.
                             The rate set at auction will not exceed the
                             maximum applicable rate. See "Description of
                             AMPS--Dividends and Rate Periods."
                             Dividends on AMPS will be cumulative from the date
                             the shares are first issued and will be paid out
                             of legally available funds.
<TABLE>
<CAPTION>
         INITIAL                       DIVIDEND PAYMENT  SUBSEQUENT
         DIVIDEND DATE OF ACCUMULATION DATE FOR INITIAL   DIVIDEND     NUMBER OF DAYS IN
  AMPS     RATE     AT INITIAL RATE      RATE PERIOD     PAYMENT DAY  INITIAL RATE PERIOD
  ----   -------- -------------------- ---------------- ------------- -------------------
<S>      <C>      <C>                  <C>              <C>           <C>
Series M   1.95%   September 20, 2002  October 1, 2002  Every 7 days          11
Series W   1.95%   September 20, 2002  October 17, 2002 Every 28 days         27
</TABLE>

                             Notwithstanding the schedule above, the Fund may,
                             subject to certain conditions, designate special
                             rate periods of more than seven days for the
                             Series M AMPS and other than 28 days for the
                             Series W AMPS. The Fund may not designate a
                             special rate period unless sufficient clearing
                             bids were made in the most recent auction. In
                             addition, full cumulative dividends and any
                             amounts due with respect to mandatory redemptions
                             or optional redemptions must be paid in full or
                             deposited with the auction agent. The Fund also
                             must have received confirmation from Moody's and
                             Fitch or any substitute rating agency that the
                             proposed special rate period will not adversely

                                      10

<PAGE>

                             affect such agency's then-current rating on the
                             AMPS and the lead Broker-Dealer designated by the
                             Fund, initially Merrill Lynch, must not have
                             objected to the declaration of a special rate
                             period. The dividend payment date for a special
                             rate period will be set out in the notice
                             designating the special rate period.

                             The Fund currently expects to declare a special
                             rate period under circumstances in which it has
                             the opportunity to secure an advantageous dividend
                             rate on the AMPS, although it may choose not to do
                             so. These circumstances could include, among
                             others (i) if Western Asset Management Company
                             believes that interest rates will rise more than
                             market expectations over a particular period or
                             (ii) if long-term interest and dividend rates are
                             lower than short-term interest and dividend rates
                             for a particular period.

LIQUIDATION PREFERENCE....   The liquidation preference (that is, the amount
                             the Fund must pay to holders of AMPS if the Fund
                             is liquidated) for AMPS will be $25,000 per share,
                             plus accumulated but unpaid dividends, if any,
                             whether or not earned or declared.
ASSET MAINTENANCE.........   Under revised Article 12 set forth in Amendment
                             No. 1 to the Fund's Bylaws (the "Bylaws
                             Amendment," attached as Appendix B to the
                             Statement of Additional Information), which
                             establishes and fixes the rights and preferences
                             of each series of AMPS, the Fund must maintain:

                              .  asset coverage on the AMPS as required by the
                                 rating agency or agencies rating the AMPS, and

                              .  asset coverage of at least 200% with respect
                                 to senior securities that are stock, including
                                 the AMPS, as discussed in "Description of
                                 AMPS--Rating Agency Guidelines and Asset
                                 Coverage."

                             In the event that the Fund does not maintain (or
                             cure a failure to maintain) these coverage tests,
                             some or all of the AMPS will be subject to
                             mandatory redemption. See "Description of
                             AMPS--Redemption."

                             Based on the composition of the Fund's portfolio
                             as of September 5, 2002, the Fund estimates that
                             the asset coverage of the AMPS, as measured
                             pursuant to the Investment Company Act of 1940 and
                             the rules and regulations thereunder, as amended
                             (the "1940 Act"), would be approximately 303% if
                             the Fund were to issue all of the AMPS offered in
                             this prospectus, representing approximately
                             33 1/3% of the Fund's total managed assets. This
                             asset coverage will change from time to time.

MANDATORY REDEMPTION......   If the Preferred Shares Basic Maintenance Amount
                             or the 1940 Act Preferred Shares Asset Coverage
                             (each as defined in the Bylaws Amendment and
                             discussed in "Description of AMPS--Rating Agency
                             Guidelines and Asset Coverage") is not maintained
                             or restored in a timely manner, the AMPS will be
                             subject to mandatory redemption, out

                                      11

<PAGE>

                             of funds legally available, at the redemption
                             price of $25,000 per share, plus an amount equal
                             to dividends thereon (whether or not earned or
                             declared) accumulated but unpaid to (but not
                             including) the date fixed for redemption. Any such
                             redemption will be limited to the minimum number
                             of AMPS necessary to restore the Preferred Shares
                             Basic Maintenance Amount or the 1940 Act Preferred
                             Shares Asset Coverage, as the case may be. The
                             Fund's ability to make such a mandatory redemption
                             may be restricted by the provisions of the 1940
                             Act. See "Description of AMPS--Redemption."

OPTIONAL REDEMPTION.......   The AMPS are redeemable at the option of the Fund,
                             in whole or in part, on the second business day
                             preceding any dividend payment date at the
                             redemption price of $25,000 per share, plus an
                             amount equal to the accumulated but unpaid
                             dividends (whether or not earned or declared) to
                             (but not including) the date fixed for redemption.
                             See "Description of AMPS--Redemption."

                             Although the AMPS are subject to redemption under
                             certain circumstances as described above and under
                             "Description of AMPS-- Mandatory Redemption," the
                             AMPS may not be redeemed at a shareholder's option
                             at net asset value, unlike the shares of an
                             open-end mutual fund.

VOTING RIGHTS.............   The 1940 Act requires that the holders of any
                             outstanding series of AMPS and any other
                             outstanding preferred shares, voting together as a
                             single class separate from the Common
                             Shareholders, have the right to elect at least two
                             Trustees of the Fund at all times and to elect a
                             majority of the Trustees if two years' dividends
                             on any outstanding series of the AMPS or any other
                             preferred shares are unpaid until all unpaid
                             dividends on all series of the AMPS and any other
                             preferred shares are paid (or otherwise provided
                             for). The holders of AMPS and any other
                             outstanding preferred shares will vote as a
                             separate class (and, in certain circumstances, the
                             holders of each series of AMPS will vote as a
                             separate class) on certain other matters as
                             required under the Declaration, the Fund's Bylaws,
                             as amended (the "Bylaws"), or the 1940 Act. See
                             "Description of AMPS--Voting Rights." Each common
                             share, each of the AMPS, and each share of any
                             other series of preferred shares of the Fund is
                             entitled to one vote per share.

FEDERAL INCOME TAXATION...   The distributions with respect to any series of
                             AMPS (other than distributions in redemption of
                             AMPS subject to Section 302(b) of the Internal
                             Revenue Code of 1986, as amended (the "Code"))
                             will constitute dividends to the extent of the
                             Fund's current or accumulated earnings and
                             profits, as calculated for federal income tax
                             purposes. Such dividends generally will be taxable
                             as ordinary income to holders. Distributions of
                             net capital gains (I.E., the excess of net
                             long-term capital gains over net short-term
                             capital losses) that are designated by the Fund as
                             capital gain dividends will be treated as
                             long-term capital gains in the hands of holders
                             receiving such distributions. The Internal Revenue
                             Service (the "IRS") currently requires that a
                             regulated

                                      12

<PAGE>

                             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
                             each series of the AMPS in proportion to the total
                             dividends paid to each class during or with
                             respect to such year. Ordinary income dividends
                             and dividends qualifying for the dividends
                             received deduction will similarly be allocated
                             between and among classes. See "Tax Matters."

CUSTODIAN, AUCTION AGENT,
  TRANSFER AGENT, DIVIDEND
  PAYING AGENT AND
  REGISTRAR...............   State Street Bank & Trust Company serves as the
                             Fund's custodian. Deutsche Bank Trust Company
                             Americas serves as auction agent, transfer agent,
                             registrar, dividend paying agent and redemption
                             agent for the AMPS.


                                      13

<PAGE>

                       FINANCIAL HIGHLIGHTS (UNAUDITED)

      The financial highlights table set forth below is intended to help you
understand the Fund's recent financial performance. Information contained in
the table below under the headings "Per Share Operating Performance" and
"Ratios/Supplemental Data" shows the unaudited operating performance of the
Fund from the commencement of the Fund's investment operations on March 28,
2002 through June 30, 2002. Because the Fund is recently organized and
commenced investment operations on March 28, 2002, the table covers fewer than
fourteen weeks of operations, during which a substantial portion of the Fund's
portfolio was held in temporary investments pending investment in bonds and
other investments that meet the Fund's investment objective and policies.
Accordingly, the information presented may not provide a meaningful picture of
the Fund's operating performance.

<TABLE>
<CAPTION>
                                                                                FOR THE PERIOD FROM
                                                                                  MARCH 28, 2002*
                                                                                      THROUGH
                                                                                   JUNE 30, 2002
                                                                                -------------------
                                                                                    (UNAUDITED)
<S>                                                                             <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period...........................................      $  14.32
Income from Investment Operations:
   Net Investment Income.......................................................      $   0.32
   Net Realized and Unrealized Gain/(Loss) on Investments......................      $  (0.74)
       Total from Investment Operations........................................      $  (0.39)
Less Dividends and Distributions to Shareholders from:
   Net Investment Income.......................................................      $  (0.21)
   Net Realized Gain on Investments............................................      $     --
   Return of Capital...........................................................      $     --
       Total Dividends and Distributions to Shareholders.......................      $  (0.21)
Net Increase/(Decrease) in Net Assets..........................................      $  (0.63)
Net Asset Value, End of Period.................................................      $  13.69
Per Share Market Value, End of Period..........................................      $  14.45
Total Return on NAV............................................................         (2.81)%(1)
Total Investment Return on Market Value........................................         (2.20)%(1)
RATIOS/SUPPLEMENTAL DATA:
   Net Assets, End of Period (in thousands)....................................      $149,809
   Ratio of Expenses to Average Weekly Net Assets (excluding interest expense).          0.95%(2)
   Ratio of Expenses to Average Weekly Net Assets (including interest expense).          1.58%(2)
   Ratio of Net Investment Income to Average Daily Net Assets..................          8.55%(2)
   Portfolio Turnover Rate.....................................................          79.5%(1)
</TABLE>
--------
*  Date of commencement of operations
(1)Not annualized
(2)Annualized

                                   THE FUND

      The Fund is a recently organized, diversified, closed-end management
investment company registered under the 1940 Act. The Fund was organized as a
Massachusetts business trust on December 17, 2001 pursuant to the Declaration,
which is governed by the laws of The Commonwealth of Massachusetts. The Fund's
principal office is located at 117 East Colorado Boulevard, Pasadena,
California 91105, and its telephone number is (626) 844-9400.

                                      14

<PAGE>

      The Fund commenced operations on March 28, 2002, upon the closing of an
initial public offering of 10,000,000 of its common shares. The proceeds of
such offering were approximately $142,950,000 after the payment of
organizational and offering expenses. In connection with the initial public
offering of the Fund's common shares, the underwriters for the common shares
were granted an option to purchase up to an additional 1,500,000 common shares
to cover over-allotments. On April 25, 2002 and May 14, 2002, such underwriters
purchased, in each case at a price of $14.325 per common share, an additional
500,000 and 400,000 common shares of the Fund, respectively, pursuant to the
over-allotment option. The Fund's common shares are traded on the New York
Stock Exchange under the symbol "WEA."

                                USE OF PROCEEDS

      The net proceeds of the offering of AMPS will be approximately
$70,822,000 after payment of the estimated offering costs (not expected to
exceed $458,000) and the sales load. The Fund will invest the net proceeds of
the offering in accordance with the Fund's investment objective and policies as
stated below. It is presently anticipated that the Fund will use the net
proceeds of the offering to purchase bonds and other investments that meet its
investment objective and policies and/or to repay certain currently outstanding
reverse repurchase agreements. Pending such use, it is anticipated that the
proceeds will be invested in short-term investment grade securities.

                                CAPITALIZATION

      The following table sets forth the unaudited capitalization of the Fund
as of September 5, 2002, and as adjusted to give effect to the issuance of the
AMPS offered hereby (including estimated offering expenses and sales load of
$1,178,000).

<TABLE>
<CAPTION>
                                                              ACTUAL      AS ADJUSTED
                                                           ------------  ------------
<S>                                                        <C>           <C>
Series M AMPS, no par value (no shares issued; 1440 shares
  issued, as adjusted, at $25,000 per share liquidation
  preference)............................................. $          0  $ 36,000,000
Series W AMPS, no par value (no shares issued; 1440 shares
  issued, as adjusted, at $25,000 per share liquidation
  preference)............................................. $          0  $ 36,000,000

                                                                         ------------
                                                                         $ 72,000,000

                                                                         ============
Common shares, no par value, unlimited shares authorized,
  11,000,497 shares issued and outstanding................  157,248,742   156,070,742
Undistributed net investment income.......................    1,294,383     1,294,383
Accumulated net realized gain/loss on investment
  transactions............................................     (390,011)     (390,011)
Net unrealized appreciation/(depreciation) on investments.  (11,112,771)  (11,112,771)
                                                           ------------  ------------
Net assets................................................ $147,040,343  $217,862,343
                                                           ============  ============
</TABLE>

                                      15

<PAGE>

                             PORTFOLIO COMPOSITION

      The following table sets forth certain information with respect to the
composition of the Fund's investment portfolio as of September 5, 2002, based
on the highest rating assigned each investment.

<TABLE>
<CAPTION>
                                                     VALUE
         CREDIT RATING                               (000)     PERCENT*
         -------------                            ------------ --------
         <S>                                      <C>          <C>
         Aaa/AAA................................. $ 29,023,967   13.6%
         Aa/AA...................................    9,392,902    4.4
         A/A.....................................   34,801,468   16.4
         Baa/BBB.................................   63,949,674   30.0
         Ba/BB...................................   35,159,424   16.5
         B/B.....................................   37,052,764   17.4
         Caa/CCC.................................    2,279,985    1.1
         Unrated+................................    1,184,286    0.6
                                                  ------------  -----
            TOTAL................................ $212,844,471  100.0%
                                                  ============  =====
</TABLE>
--------
+ Refers to securities that have not been rated by Moody's, S&P, Fitch or
  another nationally recognized rating agency. See "The Fund's Objective,
  Strategies and Investments--Portfolio Contents and Management Strategies."
* Less than 65% of the Fund's total managed assets were invested in investment
  grade securities as of September 5, 2002 due to downgrades in the ratings of
  certain securities subsequent to their purchase by the Fund.

               THE FUND'S OBJECTIVE, STRATEGIES AND INVESTMENTS

INVESTMENT OBJECTIVE

      The Fund's investment objective is to provide current income and capital
appreciation by investing primarily in a diversified portfolio of investment
grade bonds. No assurance can be given that the Fund will achieve its
investment objective.

PORTFOLIO CONTENTS AND MANAGEMENT STRATEGIES

      GENERAL.  Under normal market conditions, the Fund will invest
substantially all (but in any event at least 80%) of its total managed assets
in bonds, including corporate bonds, U.S. government and agency securities and
mortgage-related securities. The Fund will invest primarily in bonds that, in
the opinion of Western Asset, provide current income and may have the potential
for capital appreciation. Investments held by the Fund may take various forms,
including, but not limited to, notes, bills, debentures, convertible
securities, warrants attached to debt securities, bank debt obligations and
loan participations and assignments.

      The Fund may invest in securities or instruments other than bonds
(including preferred stock) and may invest up to 10% of its total managed
assets in instruments denominated in currencies other than the U.S. dollar. The
Fund may also invest in securities of other closed-end or open-end investment
companies that invest primarily in bonds or other securities or instruments of
the types in which the Fund may invest directly. As a stockholder in an
investment company, the Fund would bear its ratable share of that investment
company's expenses in addition to the Fund's own expenses. See "Other
Investment Companies" below. When consistent with the Fund's investment
objective, Western Asset may, but is not required to, use a variety of
derivative instruments to earn income, facilitate portfolio management and
mitigate risks, including currency risk. See "Derivatives" below.

                                      16

<PAGE>

      The Fund anticipates that, immediately after completion of the offering
of AMPS, the AMPS (together with any other outstanding forms of leverage) will
represent approximately 33 1/3% of the Fund's total managed assets. In addition
to issuing preferred shares, the Fund may use other instruments that may be
considered leverage under certain circumstances, including reverse repurchase
agreements, credit default swaps, dollar rolls and other investment techniques.
The Fund may (but is not required to) cover its commitments under these
instruments by the segregation of liquid assets, equal in value to the amount
of the Fund's commitments, or by entering into offsetting transactions or
owning positions covering its obligations. To the extent these instruments are
so covered, investment in the instruments will not be considered "leverage" by
the Fund. 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 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.
Short-term investments will be counted as bonds for purposes of the 80% test
described above. The Fund may not achieve its investment objective 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.

      The Fund cannot change its investment objective without the approval of
the holders of a "majority of the outstanding" common shares and preferred
shares (including the AMPS), voting together as a single class. In addition,
the holders of a "majority of the outstanding" preferred shares (including the
AMPS) voting separately as a class would have to approve any change in the
Fund's investment objective. 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 AMPS--Voting Rights" for additional information
with respect to the voting rights of holders of AMPS.

      The Fund may not change its policy to invest at least 80% of its total
managed assets in bonds unless it provides shareholders with at least 60 days'
written notice of such change.

      CREDIT QUALITY.  Under normal market conditions, the Fund expects to
invest at least 65% of its total managed assets in bonds that at the time of
investment are investment grade quality. 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, Fitch or 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. 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 have equivalent ratings) to make principal and interest payments than is
the case for higher quality bonds. The Fund may invest up to 35% of its total
managed assets in bonds that are not rated, at the time of investment, Baa/BBB
or above by Moody's, S&P, Fitch or another nationally recognized rating agency
or that are unrated but judged to be of comparable quality by Western Asset. As
described under "Risks--General Risks of Investing in the Fund--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 lowest rated bonds in which the Fund may invest are
securities rated in the category "C" or determined by Western Asset to be of
comparable quality. The Fund may purchase unrated securities (which are not
rated by a rating agency) if Western Asset determines that the securities are
of comparable quality to rated securities that the Fund may purchase.

                                      17

<PAGE>

      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, 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--General Risks of Investing in the Fund--Lower Grade and Unrated
Securities Risk."

      The credit quality policies described above apply only at the time a
security is purchased, and 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 credit quality policies described
above, 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
3.5 and 7 years. 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%. The target duration of the Fund's portfolio may change from
time to time.

INVESTMENTS

      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.

      U.S. GOVERNMENT SECURITIES.  The Fund may invest in U.S. government
securities, which 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.

      MORTGAGE-RELATED SECURITIES.  Mortgage-related securities are debt
instruments that provide periodic payments consisting of interest and/or
principal that are derived from or related to payments of interest and/or
principal on underlying mortgages. Additional payments on mortgage-related
securities may be made out of

                                      18

<PAGE>

unscheduled prepayments of principal resulting from the sale of the underlying
property, refinancing or foreclosure, net of fees or costs that may be incurred.

      The Fund may invest in commercial mortgage-related securities. Commercial
mortgage-related securities represent an interest in, or are secured by,
mortgage loans secured by commercial property, such as industrial and warehouse
properties, office buildings, retail space and shopping malls, multifamily
properties and cooperative apartments, hotels and motels, nursing homes,
hospitals, and senior living centers. These securities may pay fixed or
adjustable rates of interest. The commercial mortgage loans that underlie
commercial mortgage-related securities have certain distinct risk
characteristics. Commercial mortgage loans generally lack standardized terms,
which may complicate their structure. Commercial properties themselves tend to
be unique and difficult to value. Commercial mortgage loans tend to have
shorter maturities than residential mortgage loans, and may not be fully
amortizing, meaning that they may have a significant principal balance, or
"balloon" payment, due on maturity. In addition, commercial properties,
particularly industrial and warehouse properties, are subject to environmental
risks and the burdens and costs of compliance with environmental laws and
regulations.

      Other mortgage-related securities in which the Fund may invest include
residential mortgage-related securities, mortgage pass-through securities,
collateralized mortgage obligations ("CMOs"), mortgage dollar rolls, CMO
residuals, stripped mortgage-backed securities ("SMBSs"), interests in real
estate mortgage investment conduits, adjustable rate mortgages, real estate
investment trusts ("REITs"), including debt and preferred stock issued by
REITs, and other securities that directly or indirectly represent a
participation in, or are secured by and payable from, mortgage loans on real
property. The mortgage-related securities in which the Fund may invest include
those with fixed interest rates, those with interest rates that change based on
multiples of changes in a specified index of interest rates, and those with
interest rates that change inversely to changes in specified interest rates, as
well as those that do not bear interest.

      The Fund may also invest in other types of asset-backed securities that
are offered in the marketplace. Please see "Investment Objectives and
Policies--Mortgage-Related and Other Asset-Backed Securities" in the Statement
of Additional Information for a more detailed description of the types of
mortgage-related and other asset-backed securities in which the Fund may invest
and their related risks.

      LOWER GRADE SECURITIES.  The Fund may invest up to 35% of its total
managed assets in bonds that are not rated, at the time of investment, Baa/BBB
or above by Moody's, S&P, Fitch or another nationally recognized rating agency
or that are unrated but judged to be of comparable quality by Western Asset.
The lowest rated bonds in which the Fund may invest are securities rated in the
category "C" or determined by Western Asset to be of comparable quality.
Securities rated "C" are considered highly speculative and may be used to cover
a situation where the issuer has filed a bankruptcy petition but debt service
payments are continued. While such debt will likely have some quality and
protective characteristics, those characteristics are outweighed by large
uncertainties or major risk exposure to adverse conditions. 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."

      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. 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 with a value at least equal to the Fund's
obligation under the agreements, adjusted daily. To the extent assets are
segregated, these instruments will not be considered "leverage" by the Fund.
Reverse repurchase agreements may expose the Fund to greater fluctuations in
the value of its assets and render the

                                      19

<PAGE>

segregated assets unavailable for sale or other disposition. Reverse repurchase
agreements may be viewed as a borrowing by the Fund to the extent a segregated
account is not established.

      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.

      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 has occurred. These payments are based on the
difference between an interest rate applicable to the relevant issuer less a
benchmark interest rate for a given maturity. 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.

      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.

      NON-U.S. SECURITIES AND CURRENCIES.  The Fund may invest up to 10% of its
total managed assets in instruments denominated in currencies other than the
U.S. dollar. To the extent the Fund invests in such instruments, the value of
the total managed assets of the Fund as measured in U.S. dollars will be
affected by changes in exchange rates. Generally, the Fund's currency exchange
transactions will be conducted on a spot (I.E., cash) basis at the spot rate
prevailing in the currency exchange market. The cost of the Fund's currency
exchange transactions will generally be the difference between the bid and
offer spot rate of the currency being purchased or sold. In order to protect
against uncertainty in the level of future currency exchange rates, the Fund is
authorized to enter into various currency exchange transactions. See
"Risks--General Risks of Investing in the Fund--Currency Risk."  The limitation
regarding instruments denominated in non-U.S. currencies applies only at the
time a security is purchased, and the Fund is not required to dispose of
securities if, due to market movements, greater than 10% of the Fund's assets
are invested in securities denominated in non-U.S. currencies.  The Fund may
also invest without limit in securities of non-U.S. issuers denominated in U.S.
dollars.

      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.

      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

                                      20

<PAGE>

prices of debt securities. Holders of preferred stock may suffer a loss of
value if dividends are not paid. Under ordinary circumstances, preferred stock
does not carry voting rights.

      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, currencies or currency exchange 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--General Risks
of Investing in the Fund--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" by
the Fund.

      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 to
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. 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 up to 10% of its total
managed assets 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. This limitation applies only
at the time a security is purchased, and the Fund is not required to dispose of
securities if, due to market movements, greater than 10% of the Fund's assets
are invested in securities of other investment companies. The Fund may invest
in other

                                      21

<PAGE>

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 the AMPS, 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 section entitled
"Risks--General Risks of Investing in the Fund--Leverage Risk," 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 "bonds" 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 objective 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
objective. In addition, Western Asset may use investment techniques and
instruments that are not specifically described herein.

                                     RISKS

      Risk is inherent in all investing. Before investing, you should consider
carefully the following risks, which you assume when you invest in AMPS.

RISKS OF INVESTING IN THE AMPS

      INTEREST RATE RISK.  The AMPS pay dividends based on shorter-term
interest rates. The Fund invests assets attributable to the AMPS principally in
intermediate- and longer-term, typically fixed rate bonds, the interest rates
on which are typically, although not always, higher than shorter-term interest
rates. Both shorter-term and intermediate- to longer-term interest rates may
fluctuate. If shorter-term interest rates rise, dividend rates on the AMPS may
rise so that the amount of dividends to be paid to holders of AMPS exceeds the
income from the intermediate- and longer-term bonds and other investments
purchased by the Fund with assets attributable to the AMPS. Because income from
the Fund's entire investment portfolio (not just the portion of the portfolio
purchased with assets attributable to the AMPS) is available to pay dividends
on the AMPS, however, dividend rates on the AMPS would need to exceed the
Fund's net portfolio income by a wide margin before the Fund's ability to pay
dividends on the AMPS would be jeopardized. If intermediate- to longer-term
interest rates rise, this could negatively impact the value of the Fund's
investment portfolio, reducing the amount of assets serving as asset coverage
for the AMPS.

      AUCTION RISK.  You may not be able to sell your AMPS at an auction if the
auction fails, I.E., if there are more AMPS offered for sale than there are
buyers for those shares. Also, if you place a bid order (an order to retain
AMPS) at an auction only at a specified rate, and that rate exceeds the rate
set at the auction, your order will be deemed an irrevocable offer to sell your
AMPS, and you will not retain your AMPS. Additionally, if you

                                      22

<PAGE>

buy shares or elect to retain AMPS without specifying a rate below which you
would not wish to buy or continue to hold those shares, and the auction sets a
below-market rate, you may receive a lower rate of return on your shares than
the market rate for similar investments. Finally, the dividend period for the
AMPS may be changed by the Fund, subject to certain conditions and with notice
to the holders of the AMPS, which could also affect the liquidity of your
investment. See "Description of AMPS" and "The Auction."

      SECONDARY MARKET RISK.  If you try to sell your AMPS between auctions,
you may not be able to sell any or all of your shares, or you may not be able
to sell them for $25,000 per share or $25,000 per share plus accumulated
dividends. Changes in interest rates could affect the price you would receive
if you sold your shares in the secondary market, particularly if the Fund has
designated a special rate period (a dividend period of more than seven days in
the case of Series M AMPS and other than 28 days in the case of Series W AMPS).
Broker-dealers that maintain a secondary trading market (if any) for the AMPS
are not required to maintain this market, and the Fund is not required to
redeem shares if either an auction or an attempted secondary market sale fails
because of a lack of buyers. The AMPS are not registered on a stock exchange or
the National Association of Securities Dealers Automated Quotations, Inc.
("NASDAQ") stock market. If you sell your AMPS to a broker-dealer between
auctions, you may receive less than the price you paid for them, especially
when market interest rates have risen since the last auction or during a
special rate period.

      RATINGS AND ASSET COVERAGE RISK.  While it is a condition to the closing
of the offering that Moody's assigns a rating of "Aaa" and Fitch assigns a
rating of "AAA" to the AMPS, these ratings do not eliminate or necessarily
mitigate the risks of investing in AMPS. In addition, Moody's, Fitch or another
rating agency then rating the AMPS could downgrade the AMPS, which may make
your shares less liquid at an auction or in the secondary market. If a rating
agency downgrades the AMPS, the Fund may (but is not required to) alter its
portfolio in an effort to improve the rating, although there is no assurance
that it will be able to do so to the extent necessary to restore the prior
rating. See "--General Risks of Investing in the Fund--Turnover Risk." In
addition, the Fund may be forced to redeem your AMPS to meet regulatory or
rating agency requirements. The Fund may also voluntarily redeem AMPS under
certain circumstances. See "Description of AMPS--Redemption." The asset
coverage requirements imposed by a rating agency may limit the Fund's ability
to invest in certain securities or utilize certain investment techniques that
Western Asset might otherwise consider desirable. See "Description of
AMPS--Rating Agency Guidelines and Asset Coverage" for a description of the
rating agency guidelines with which the Fund must currently comply.

      RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS.  Restrictions imposed
on the declaration and payment of dividends or other distributions to the
holders of the Fund's common shares and AMPS, both by the 1940 Act and by
requirements imposed by rating agencies, might impair the Fund's ability to
maintain its qualification as a regulated investment company for federal income
tax purposes. While the Fund intends to redeem AMPS to enable the Fund to
distribute its income as required to maintain its qualification as a regulated
investment company under the Code, there can be no assurance that such
redemptions can be effected in time to meet the requirements of the Code. See
"Tax Matters."

GENERAL RISKS OF INVESTING IN THE FUND

      LIMITED OPERATING HISTORY.  The Fund is a recently organized,
diversified, closed-end management investment company that has been operational
for less than six months.

      INTEREST RATE RISK.  Interest rate risk is the risk that bonds (and the
Fund's total managed assets) will decline in value because of changes in
interest rates. 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. 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 Fund's net asset value will fluctuate
more in response

                                      23

<PAGE>

to changes in market interest rates than if the Fund invested primarily in
shorter-term bonds. The Fund's use of leverage will increase interest rate
risk. See "--Leverage Risk."

      The Fund may utilize certain strategies, including swaps, futures
contracts, options on futures and options based on indices 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."

      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, a 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.  The Fund may invest up to 35%
of its total managed assets in bonds that are not rated, at the time of
investment, Baa/BBB or above by Moody's, S&P, Fitch or another nationally
recognized rating agency or that are unrated but judged to be of comparable
quality by Western Asset. Investing in 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 invests in lower
grade and/or unrated securities, the Fund's success in achieving its investment
objective may depend more heavily on Western Asset's credit analysis than if
the Fund invested exclusively in higher-quality and rated securities.

      LEVERAGE RISK.  The Fund utilizes leverage on an ongoing basis for
investment purposes. Leverage risk includes the risk associated with the
issuance of the AMPS. The Fund may also use other instruments that may be
considered leverage under certain circumstances, including reverse repurchase
agreements, credit default swaps, dollar rolls and other investment techniques,
each of which (to the extent that it is considered leverage) will amplify the
effects of leverage on the Fund's portfolio. The Fund may (but is not required
to) cover its commitments under these instruments by the segregation of liquid
assets, equal in value to the amount of the Fund's commitments, 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

                                      24

<PAGE>

the Fund (see "Description of Capital Structure") and (2) investment in these
instruments will not be considered "leverage" by the Fund. Although the Fund
does not currently intend to borrow from banks and other financial institutions
in order to leverage its portfolio, it may do so in the future. Bank
borrowings, to the extent used, would add additional leverage to the Fund's
portfolio.

      If the dividend rates on the AMPS and the interest rates on other forms
of leverage (if applicable) exceed the net rate of return on the Fund's
portfolio, the use of leverage will result in a lower net asset value than if
the Fund were not leveraged, and the Fund's ability to pay dividends and meet
its asset coverage requirements on the AMPS will be reduced. Because the
intermediate- to longer-term bonds included in the Fund's portfolio will
typically pay fixed rates of interest while the dividend rate on the AMPS and
interest rates on other forms of leverage will be adjusted periodically, this
could occur even when both long-term and short-term interest rates rise.
Similarly, any decline in the net asset value of the Fund's investments could
result in the Fund being in danger of failing to meet its asset coverage
requirements or of losing its expected "Aaa" and "AAA" ratings on the AMPS. In
an extreme case, the Fund's current investment income might not be sufficient
to meet the dividend requirements on the AMPS. In order to counteract such an
event, the Fund might need to liquidate investments in order to fund a
redemption of some or all of the AMPS. There is no assurance that the Fund's
leveraging strategy will be successful.

      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 be
effective. 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 Fund's net asset value 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 common 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 or reduce asset
coverage on the AMPS.

      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 reduce asset coverage on the AMPS. 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 total managed
assets of the Fund (including assets represented by AMPS and other leverage),
Western Asset has a financial incentive for the Fund to issue AMPS and incur
other leverage.

      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 they 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
lesser volume than more widely held securities, and their values may fluctuate
more

                                      25

<PAGE>

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. 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, imposition of
currency exchange controls or restrictions on the repatriation of currency,
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.

      CURRENCY RISK.  The Fund may invest in instruments denominated in
currencies other than the U.S. dollar, the value of which may be affected by
changes in the rates of exchange between those currencies and the U.S. dollar.
Currency exchange rates can be volatile and may be affected by, among other
factors, the general economic condition of a country, the actions of the U.S.
and other governments or central banks, the imposition of currency controls,
and speculation. A security may be denominated in a currency that is different
from that of the country where the issuer is domiciled. A decline of applicable
exchange rates could reduce the value of securities held by the Fund that are
denominated in the affected currency.

      The Fund may from time to time attempt to hedge a portion of its currency
risk using a variety of techniques, including currency futures, forwards, or
options, although it is not required to do so. However, these instruments may
not always work as intended, and in certain cases the Fund may be worse off
than if it had not

                                      26

<PAGE>

used a hedging instrument. For most emerging market currencies, there are not
suitable hedging instruments available. See "--Derivatives Risk."

      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.

      MORTGAGE-RELATED SECURITIES RISK.  Mortgage-related securities represent
an interest in a pool of mortgages. When market interest rates decline, many
mortgages are refinanced, and mortgage-related securities are paid off earlier
than expected. Prepayments may also occur on a scheduled basis or due to
foreclosure. The effect on the Fund's return is similar to that discussed above
for prepayment risk.

      When market interest rates increase, the market values of
mortgage-related securities decline. At the same time, however, mortgage
refinancings and prepayments slow, which lengthens the effective maturities of
these securities. As a result, the negative effect of the rate increase on the
market value of mortgage-related securities is usually more pronounced than it
is for other types of fixed income securities, potentially increasing the
volatility of the Fund's portfolio.

      Prepayments may cause losses on securities purchased at a premium. At
times, some of the mortgage-related securities in which the Fund may invest
will have higher than market interest rates and therefore will be purchased at
a premium above their par value. Unscheduled prepayments, which are made at
par, will cause the Fund to experience a loss equal to any unamortized premium.

      Mortgage-related securities are sold in different classes that have
different levels of risk. The Fund may invest in junior classes of
mortgage-related securities that may have a rating below investment grade and
therefore are riskier investments than higher rated securities. See "--Lower
Grade and Unrated Securities Risk." The Fund's investments in other
asset-backed securities are subject to risks similar to those associated with
mortgage-related securities.

      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 Fund's
net asset value or reduce asset coverage on the AMPS.

      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, indexes or
currencies. 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. Derivative transactions also involve the risk
of mispricing or improper valuation 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

                                      27

<PAGE>

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. Derivative 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 derivative 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.

      Swaps will tend to shift the Fund's investment exposure from one type of
investment to another. For example, if the Fund agrees to exchange payments in
U.S. dollars for payments in a currency other than the U.S. dollar, the swaps
would tend to decrease the Fund's exposure to U.S. interest rates and increase
its exposure to non-U.S. dollar currency rates and non-U.S. interest rates.

      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 derivative contract, the Fund may experience significant delays in
obtaining any recovery under the derivative contract in bankruptcy or other
reorganization proceedings. The Fund may obtain only a limited recovery or may
obtain no recovery in such circumstances.

      INFLATION RISK.  Inflation risk is the risk that the value of assets or
income from an investment will be worth less in the future as inflation
decreases the value of money. As inflation increases, the real value of the
AMPS and distributions can decline. However, during periods of rising
inflation, dividend rates on the AMPS would likely increase, which would tend
to offset this risk.

      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 mutual funds. 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. The
Fund currently anticipates that its turnover rate will be approximately 150%
per annum. This turnover rate will likely change over the life of the Fund.

      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.

      RECENT DEVELOPMENTS.  As a result of the terrorist attacks on the World
Trade Center and the Pentagon on September 11, 2001, many U.S. securities
markets were closed for all or a portion of a four-day period. These terrorist
attacks and related events have led to increased short-term market volatility
and may have long-term effects on U.S. and world economies and markets. A
similar disruption of the financial markets could adversely impact interest
rates, auctions, secondary trading, ratings, credit risk, inflation and other
factors relating to securities or other financial instruments.

      CERTAIN AFFILIATIONS.  Certain broker-dealers may be considered to be
affiliated persons of the Fund and/or Western Asset due to their possible
affiliations with Legg Mason, Inc., the parent of 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

                                      28

<PAGE>

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 any preferred shares (including
the AMPS) 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
(including the AMPS) voting as a separate class. Only those limitations
expressly designated as such are fundamental investment limitations. All other
policies or restrictions may be changed without shareholder approval.

      The Fund may not concentrate investments in a particular industry, as
that term is used in the 1940 Act, the rules or regulations thereunder or
applicable orders of the Securities and Exchange Commission or interpretations
of its staff, as such statute, rules, regulations, orders or interpretations
may be amended from time to time ("concentration" is currently interpreted
under the 1940 Act to mean investment of 25% or more of the Fund's total assets
in a single industry).

      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.

      The Fund's industry concentration policy described above does not
preclude it from focusing investments in issuers in a group of related
industries (such as different types of technology issuers). 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 also invest without
limitation in bankers' acceptances under certain circumstances.

      The Fund is 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 ratings on the AMPS of "Aaa" from
Moody's and "AAA" from Fitch, and may become subject to additional guidelines
in the future. See "Description of AMPS--Rating Agency Guidelines and Asset
Coverage." The Fund does not anticipate that such guidelines will have a
material adverse effect on the Fund's ability to achieve its investment
objectives. See "Investment Objectives and Policies" and "Investment
Restrictions" in the Statement of Additional Information.

QUALITY OF INVESTMENTS

      The Fund expects to invest at least 65% of its total managed assets in
bonds that at the time of investment are investment grade quality. Investment
grade quality means that such bonds are rated by a nationally recognized rating
agency within a rating agency's four highest grades (Baa or BBB or higher by
Moody's, S&P, Fitch or another nationally recognized rating agency) or are
unrated but judged to be of comparable quality by Western Asset.

                                      29

<PAGE>

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 (for example, by declaring a
special rate period with respect to one or more series of AMPS). The Fund may
also attempt to reduce leverage by redeeming or otherwise purchasing AMPS
(subject to the restrictions discussed under "Description of AMPS--Redemption")
or reducing any holdings in reverse repurchase agreements, credit default
swaps, dollar rolls or other instruments that create leverage. As explained
above under "Risks--General Risks of Investing in the Fund--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, options on futures or options based on
currencies, an index of longer-term securities or other instruments. 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
will offset some or all of the loss incurred on the Fund's investments due to
adverse changes in interest rates or currency exchange rates or other factors.
There is no assurance that these hedging strategies 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. In addition, in accordance with the rating agency
guidelines described in this prospectus, the Fund's ability to use hedging
transactions may be limited in order to obtain and maintain ratings on the
AMPS. For more information about these restrictions, see "Description of
AMPS--Rating Agency Guidelines and Asset Coverage" and the Bylaws Amendment,
which is attached as Appendix B to the Statement of Additional Information.

                            MANAGEMENT OF THE FUND

TRUSTEES AND OFFICERS

      There are currently seven Trustees of the Fund, one of whom is an
"interested person" (as defined in the 1940 Act) and six 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. Subject to the general supervision of the
Board of Trustees, Western Asset is responsible for managing, either directly
or through others hired for these purposes, the investment activities of the
Fund and the Fund's business affairs and other administrative matters.

                                      30

<PAGE>

INVESTMENT ADVISOR AND SUBADVISOR

      Western Asset Management Company serves as the investment advisor of the
Fund. Western Asset Management Company, 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 Management Company is located at 117 East
Colorado Boulevard, Pasadena, California 91105. Total assets under management
by Western Asset Management Company were approximately $89.7 billion as of June
30, 2002.

      Western Asset Management Company has retained an affiliate, WAML, to
serve as subadvisor to the Fund. WAML, under the supervision of Western Asset
Management Company, furnishes a continuing investment program for the non-U.S.
dollar denominated assets in the Fund and makes investment decisions relating
to such assets. WAML, 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. WAML is located at 155 Bishopsgate, London,
England. Total assets under management by WAML were approximately $12.1 billion
as of June 30, 2002.

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, Senior Economist and
the head of each sector group.

INVESTMENT MANAGEMENT AGREEMENT AND PORTFOLIO MANAGEMENT AGREEMENT

      Pursuant to an investment management agreement between Western Asset
Management Company and the Fund, the Fund has agreed to pay Western Asset
Management Company an annual management fee payable on a monthly basis at the
annual rate of 0.55% of the average weekly value of the Fund's total managed
assets for the services and facilities it provides. Because the fees received
by Western Asset Management Company are based on the total managed assets of
the Fund (including assets represented by preferred shares and other leverage),
Western Asset Management Company has a financial incentive for the Fund to
issue preferred shares and incur other leverage, which may create a conflict of
interest. The investment management agreement automatically terminates on
assignment. The investment management agreement may also be terminated on not
more than 60 days' written notice by Western Asset Management Company to the
Fund or by the Fund to Western Asset Management Company.

      Pursuant to a portfolio management agreement between Western Asset
Management Company and WAML, Western Asset Management Company will pay a
portion of the fees it receives from the Fund to WAML in return for WAML's
services at the annual rate of 0.425% of the average weekly value of the Fund's
total managed assets that WAML manages. The portfolio management agreement
automatically terminates on assignment. The portfolio management agreement may
also be terminated on not more than 60 days' written notice by Western Asset
Management Company to WAML or by WAML to Western Asset Management Company, or
by the Fund at any time by written notice to each advisor.

      In addition to the fees of Western Asset Management Company, the Fund
pays all other costs and expenses of its operations, including compensation of
its Trustees (other than those affiliated with Western Asset), custodial
expenses, transfer agency and dividend disbursing expenses, listing expenses,
legal fees, expenses of independent auditors, expenses of repurchasing shares,
expenses of issuing the AMPS, expenses of preparing, printing and distributing
prospectuses, shareholder reports, notices, proxy statements and reports to
governmental agencies, and taxes, if any.

                                      31

<PAGE>

ADMINISTRATOR

      Under the terms of an administration agreement among Princeton
Administrators, L.P. (the "Administrator"), the Fund and Western Asset
Management Company (the "Administration Agreement"), the Administrator performs
or arranges for the performance of certain administrative services necessary
for the operation of the Fund, including maintaining certain of the books and
records of the Fund, preparing certain reports and other documents required by
U. S. federal securities laws and regulations, responding to inquiries from
Fund shareholders, overseeing the calculation of and distributing for
publication the net asset value of the Fund's common shares and providing the
Fund with certain administrative office facilities. For the services rendered
and the facilities furnished, Western Asset Management Company (and not the
Fund) will pay the Administrator a monthly fee at the annual rate of 0.125% of
the Fund's average weekly total managed assets, subject to a monthly minimum
fee of $12,500. The Fund is a party to the Administration Agreement solely for
purposes of the limitation of liability of and indemnification of the
Administrator. The Administration Agreement will continue in effect until
terminated by any party upon 60 days' prior written notice.

                              DESCRIPTION OF AMPS

THE FOLLOWING IS A BRIEF DESCRIPTION OF THE TERMS OF THE AMPS. FOR A MORE
COMPLETE DESCRIPTION OF THE AMPS, PLEASE REFER TO THE DETAILED DESCRIPTION OF
THE AMPS IN THE BYLAWS AMENDMENT, WHICH IS ATTACHED AS APPENDIX B TO THE
STATEMENT OF ADDITIONAL INFORMATION. CERTAIN OF THE CAPITALIZED TERMS USED
HEREIN ARE DEFINED IN THE BYLAWS AMENDMENT.

GENERAL

      Under the Declaration, the Fund is authorized to issue preferred shares
having such par value and such preferences, voting powers, terms of redemption,
if any, and special or relative rights or privileges (including conversion
rights, if any) as determined by the Board of Trustees, without the approval of
Common Shareholders. The AMPS are preferred shares of beneficial interest with
no par value. Each series of AMPS will have a liquidation preference of $25,000
per share, plus an amount equal to accumulated but unpaid dividends (whether or
not earned or declared). The AMPS of each series will rank on a parity with
shares of any other series of preferred shares of the Fund as to the payment of
dividends and the distribution of assets upon liquidation. The AMPS carry one
vote per share on all matters on which such shares are entitled to vote. The
AMPS, when issued by the Fund and paid for pursuant to the terms of this
prospectus, will 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 preemptive, exchange or conversion rights. Any
AMPS repurchased or redeemed by the Fund will be classified as authorized and
unissued preferred shares without designation as to series. The AMPS will not
be subject to any sinking fund, but will be subject to mandatory redemption and
optional redemption under certain circumstances described below.

DIVIDENDS AND RATE PERIODS

      GENERAL.  The following is a general description of dividends and rate
periods for the AMPS. The initial rate period for the Series M AMPS will be 11
days, and the dividend rate for this period will be 1.95%. The initial rate
period for the Series W AMPS will be 27 days, and the dividend rate for this
period will be 1.95%. Subsequent rate periods generally will be seven days in
the case of the Series M AMPS and 28 days in the case of the Series W AMPS, and
the dividend rates for those periods will generally be determined by auction.
Further description of the auction procedures can be found below under "The
Auction" and in the Bylaws Amendment, which is attached as Appendix B to the
Statement of Additional Information. The Fund, subject to certain conditions,
may change the length of subsequent rate periods by designating them as special
rate periods. See "--Designation of Special Rate Periods" below.

                                      32

<PAGE>

      DIVIDEND PAYMENT DATES.  Dividends on AMPS will be payable when, as and
if declared by the Board, out of legally available funds in accordance with the
Declaration, the Bylaws and applicable law. Dividend periods generally will
begin on the first business day after an auction. If dividends are payable on a
day that is not a business day, then dividends will generally be payable on the
next business day, or as otherwise specified in the Bylaws Amendment. The Fund,
at its discretion, may establish dividend payment dates in respect of any
special rate period of AMPS consisting of more than seven days for the Series M
AMPS and other than 28 days for the Series W AMPS, provided that such dates
shall be set forth in the notice of special rate period relating to such
special rate period and certain other conditions are met.

      Dividends will be paid through the Depository Trust Company ("DTC") on
each dividend payment date. The dividend payment date will normally be the
first business day after the dividend period ends. DTC, in accordance with its
current procedures, is expected to distribute dividends received from the
auction agent in same-day funds on each dividend payment date to members of DTC
that will act on behalf of existing or potential holders of AMPS ("Agent
Members"). These Agent Members are in turn expected to distribute such
dividends to the persons for whom they are acting as agents. However, each of
the current Broker-Dealers has currently indicated to the Fund that dividend
payments will be available in same-day funds on each dividend payment date to
customers that use a Broker-Dealer or a Broker-Dealer's designee as Agent
Member.

      CALCULATION OF DIVIDEND PAYMENT.  The Fund computes the dividend per
share of each series of AMPS by multiplying the applicable rate for such series
of shares in effect by a fraction. The numerator of this fraction will normally
be seven for Series M AMPS and 28 for Series W AMPS (I.E., the number of days
in the rate period) and the denominator will normally be 360. If the Fund has
designated a special rate period, then the numerator will be the number of days
in the special rate period, and the denominator will normally be 360. In either
case, this rate is then multiplied by $25,000 to arrive at the dividend per
share.

      Dividends on the AMPS will accumulate from the date of their original
issue. For each dividend payment period after the initial rate period, the
dividend rate will be the dividend rate determined at auction, except as
provided in the Bylaws Amendment. The dividend rate that results from an
auction will not be greater than the maximum applicable rate described below.

      The maximum applicable rate for any regular rate period will be the
applicable percentage (set forth in the table below) of the applicable "AA"
Financial Composite Commercial Paper Rate (as defined below). The applicable
percentage for any regular rate period will generally be determined based on
the lower of the credit rating or ratings assigned to the AMPS by Moody's and
Fitch on the auction date for such period. If Moody's or Fitch or both shall
not make such rating available, the rate shall be determined by reference to
equivalent ratings issued by a substitute rating agency. In the case of a
special rate period, (1) the maximum applicable rate will be specified by the
Fund in the notice of special rate period for such dividend payment period, (2)
the applicable percentage will be determined on the date two business days
before the first day of such special rate period and (3) the reference rate
will be the applicable "AA" Financial Composite Commercial Paper Rate (for a
rate period of fewer than 183 days) or the Treasury Index Rate (as defined
below) (for a rate period of 183 days or more).

                      APPLICABLE PERCENTAGE PAYMENT TABLE
<TABLE>
<CAPTION>
                                                  APPLICABLE
                           CREDIT RATINGS         PERCENTAGE
                           --------------         ----------
                       MOODY'S          FITCH
                       -------          -----
                   <S>              <C>           <C>
                   "Aa3" or higher  AA- or higher    150%
                     "A3" to "A1"     A- to A+       200%
                   "Baa3" to "Baa1" BBB- to BBB+     225%
                     Below "Baa3"    Below BBB-      275%
</TABLE>

      The "'AA' Financial Composite Commercial Paper Rate" is the rate on
commercial paper issued by corporations whose bonds are rated AA by S&P as made
available by the Federal Reserve Bank of New York or,

                                      33

<PAGE>

if such rate is not made available by the Federal Reserve Bank of New York, the
arithmetical average of such rates as quoted to the auction agent by certain
commercial paper dealers designated by the Fund.

      The "Treasury Index Rate" is the average yield to maturity for certain
U.S. Treasury securities having substantially the same length to maturity as
the applicable dividend period for a series of AMPS. For a more detailed
description, please see the Bylaws Amendment.

      Prior to each dividend payment date, the Fund is required to deposit with
the auction agent sufficient funds for the payment of declared dividends. As
specified in the Bylaws Amendment, auctions will generally not be held if the
Fund fails to make such deposit. In such a situation, dividends for the next
dividend period would normally be paid at the maximum applicable rate. The Fund
does not intend to establish any reserves for the payment of dividends.

      The Board of Trustees may amend the maximum applicable rate to increase
the percentage amount by which the reference rate described above is multiplied
to determine the maximum applicable rate shown without the vote or consent of
the holders of AMPS, including each series, or any other shareholder of the
Fund, but only with confirmation from each rating agency then rating the AMPS
that such action will not impair such agency's then-current rating of the AMPS,
and after consultation with the Broker-Dealers, provided that immediately
following any such increase the Fund could meet the Preferred Shares Basic
Maintenance Amount test discussed below under "--Rating Agency Guidelines and
Asset Coverage."

      RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS.   While the AMPS are
outstanding, the Fund generally may not declare, pay or set apart for payment,
any dividend or other distribution in respect of its common shares (other than
in additional common shares or rights to purchase common shares). In addition,
the Fund generally may not call for redemption or redeem any of its common
shares (except by conversion into or exchange for shares of the Fund ranking
junior to the AMPS as to the payment of dividends and the distribution of
assets on liquidation). However, the Fund is not confined by the above
restrictions if:

      . immediately after such transaction, the discounted value of the Fund's
        portfolio (I.E., the aggregate value of the Fund's portfolio according
        to criteria set forth by each rating agency then rating the AMPS) would
        be equal to or greater than the Preferred Shares Basic Maintenance
        Amount and the 1940 Act Preferred Shares Asset Coverage would be
        satisfied (see "--Rating Agency Guidelines and Asset Coverage" below);

      . full cumulative dividends on each series of AMPS due on or prior to the
        Fund's most recently ended dividend period have been paid or have been
        declared and sufficient funds for the payment thereof deposited with
        the auction agent; and

      . the Fund has redeemed the full number of AMPS required to be redeemed
        by any provision for mandatory redemption.

      The Fund generally will not declare, pay or set apart for payment any
dividend on any class or series of shares of the Fund ranking, as to the
payment of dividends, on a parity with the AMPS unless the Fund has declared
and paid full cumulative or the same proportionate share of dividends on the
AMPS through the most recent dividend payment date. When the Fund has not paid
dividends in full upon a series of the AMPS through the most recent dividend
payment date or upon any class or series of shares of the Fund ranking, as to
the payment of dividends, on a parity with such series of AMPS through their
most recent respective dividend payment dates, the amount of dividends declared
per share on such series of AMPS and such other class or series of shares will
in all cases bear to each other the same ratio that accumulated dividends per
share on such series of AMPS and such other class or series of shares bear to
each other.

      DESIGNATION OF SPECIAL RATE PERIODS.  The Fund may, in certain
situations, in consultation with the lead Broker-Dealer (initially Merrill
Lynch), declare a special rate period on the AMPS. To declare a special rate

                                      34

<PAGE>

period, the Fund will give notice (a "notice of special rate period") to the
auction agent and to each Broker-Dealer. The notice will request that the next
succeeding rate period for the AMPS be a number of days evenly divisible by
seven and not more than 1,820 as specified in such notice. The Fund may not
request a special rate period unless sufficient clearing bids for the AMPS were
made in the most recent auction. In addition, full cumulative dividends and any
amounts due with respect to mandatory redemptions or optional redemptions must
be paid in full or deposited with the auction agent. The Fund also must have
received confirmation from Moody's and Fitch or any substitute rating agency
that the proposed special rate period will not impair such agency's
then-current rating of the AMPS and the lead Broker-Dealer designated by the
Fund must not have objected to the declaration of a special rate period. The
Fund may provide that, in order to redeem AMPS at the Fund's option during a
special rate period, the Fund must pay to holders of the AMPS a "redemption
premium" in addition to the redemption price per share of $25,000, plus an
amount equal to the accumulated but unpaid dividends. A notice of special rate
period will specify whether the shares of a particular series of AMPS will be
subject to optional redemption during such special rate period and, if so, the
redemption premium, if any, required to be paid by the Fund in connection with
such optional redemption.

      The Fund's declaration of a special rate period may affect the liquidity
of your investment. A special rate period would be longer than a regular rate
period, and you would be unable to sell AMPS in an auction for a corresponding
longer period of time. If you sell your AMPS between auctions, you may receive
less than the price you paid for them, especially when market interest rates
have risen. The risks described in this paragraph will become greater as the
length of the special rate period increases.

VOTING RIGHTS

      Except as otherwise described in this prospectus and in the Statement of
Additional Information or as otherwise set forth in the Declaration or the
Bylaws or required by law, holders of AMPS will have equal voting rights with
Common Shareholders and holders of any other preferred shares of the Fund (each
class having one vote per share) and will vote together with Common
Shareholders and any other preferred shares as a single class.

      Holders of outstanding preferred shares of the Fund, including AMPS,
voting as a separate class, are entitled to elect two of the Fund's Trustees.
The remaining Trustees are elected by Common Shareholders and holders of
preferred shares, including AMPS, voting together as a single class. In
addition, if at any time, dividends (whether or not earned or declared) on any
outstanding preferred shares of the Fund, including AMPS, are due and unpaid in
an amount equal to two full years of dividends, and sufficient cash or
specified securities have not been deposited with the auction agent for the
payment of such dividends, the sole remedy of holders of the outstanding
preferred shares of the Fund is that the number of Trustees constituting the
Trustees will be automatically increased by the smallest number that, when
added to the two Trustees elected exclusively by the holders of preferred
shares as described above, would constitute a majority of the Trustees. The
holders of preferred shares of the Fund will be entitled to elect such Trustees
at a special meeting of holders of preferred shares held as soon as practicable
and at all subsequent meetings at which Trustees are to be elected. The terms
of office of the persons who are Trustees at the time of that election will
continue. If the Fund thereafter pays in full (or otherwise provides for) all
dividends payable on all outstanding preferred shares of the Fund, the special
voting rights stated above will cease and the terms of office of the additional
Trustees elected by the holders of the preferred shares will automatically
terminate.

      Unless a higher percentage is provided for under the Declaration or the
Bylaws or applicable law, the Fund will not, without the affirmative vote or
consent of the holders of at least a majority (as defined in the 1940 Act) of
the AMPS outstanding at the time (voting together as a separate class), except
as noted below:

      (a) authorize, create or issue any class or series of shares ranking
          prior to or on a parity with the AMPS with respect to payment of
          dividends or the distribution of assets on liquidation, or authorize,
          create or issue additional shares of AMPS, unless, in each case, the
          Fund obtains written confirmation from Moody's (if Moody's is then
          rating AMPS) or Fitch (if Fitch is then rating AMPS) that such
          authorization, creation or issuance would not impair the rating then
          assigned by such rating agency to the AMPS, in which case the vote or
          consent of the holders of the AMPS is not required;

                                      35

<PAGE>

      (b) amend, alter or repeal the provisions of the Bylaws Amendment if such
          amendment, alteration or repeal would affect adversely the
          preferences, rights or powers expressly set forth in the Declaration
          or the Bylaws of holders of a series of AMPS; or

      (c) authorize the Fund's conversion from a closed-end to an open-end
          investment company.

      For purposes of the foregoing, no matter shall be deemed adversely to
affect any preference, right or power of a holder of AMPS unless such matter
(i) adversely alters or abolishes any preferential right of the AMPS;
(ii) creates, adversely alters or abolishes any right in respect of redemption
of such shares; or (iii) creates or adversely alters (other than to abolish)
any restriction on transfer applicable to such shares. To the extent not
prohibited by the Declaration, the Bylaws or applicable law, if any action with
respect to which holders of AMPS are granted voting rights under the Bylaws
Amendment would adversely affect the rights of one or more series of AMPS in a
manner different from any other series of AMPS, the Fund will not approve any
such action without the affirmative vote or consent of the holders of at least
a majority (as defined in the 1940 Act) of the outstanding shares of each such
affected series (each such affected series voting separately as a class). The
vote of holders of any series described in this paragraph will in each case be
in addition to a separate vote of the requisite percentage, if any, of common
shares and/or preferred shares necessary to authorize the action in question.

      Unless a higher percentage is provided for under the Declaration or the
Bylaws or applicable law, the affirmative vote of the holders of a majority (as
defined in the 1940 Act) of the outstanding AMPS, voting together as a single
class, will be required to approve any plan of reorganization (including
bankruptcy proceedings) adversely affecting such shares or 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 investment restrictions designated as
fundamental under "Investment Restrictions" in the Statement of Additional
Information and changes in the Fund's subclassification as a closed-end
investment company. However, to the extent permitted by applicable law, no vote
of Common Shareholders, either separately or together with holders of preferred
shares as a single class, is necessary to take the actions contemplated by
(a) and (b) above.

      The foregoing voting provisions will not apply with respect to AMPS if,
at or prior to the time when a vote is required, such shares have been
(i) redeemed or (ii) called for redemption and sufficient funds have been
deposited in trust to effect such redemption.

      If a series of preferred shares other than the AMPS is issued in the
future, it is anticipated that such series would have voting rights comparable
to those described above.

RATING AGENCY GUIDELINES AND ASSET COVERAGE

      In connection with the Fund's receipt of a rating of "Aaa" from Moody's
and a rating of "AAA" from Fitch with respect to the AMPS, the Fund is required
to maintain assets having in the aggregate a discounted value at least equal to
the Preferred Shares Basic Maintenance Amount. The Preferred Shares Basic
Maintenance Amount includes the sum of (a) the aggregate liquidation preference
of the preferred shares then outstanding (including the AMPS) and (b) certain
accrued and projected payment obligations of the Fund, including without
limitation any accrued and projected dividends on the preferred shares then
outstanding (including the AMPS).

      Moody's and Fitch have each established separate guidelines for
calculating discounted value. These guidelines specify discount factors that
the Fund must apply to various types of securities in its portfolio for
purposes of calculating whether the discounted value of the Fund's assets
equals the Preferred Shares Basic Maintenance Amount (with the level of
discount generally becoming greater as the credit quality of a security becomes
lower). In addition, under the guidelines, certain types of securities
(including securities in which the Fund may otherwise invest) are not eligible
for inclusion in the calculation of the discounted value of the Fund's
portfolio. Such ineligible securities may include, for example, certain
privately placed debt securities (other than Rule 144A securities) and debt
securities of certain non-U.S. issuers. Accordingly, although the Fund may
invest in such securities to the extent set forth herein, it is currently
anticipated that they will not constitute a significant

                                      36

<PAGE>

portion of the Fund's portfolio under normal circumstances. The rating agency
guidelines for calculating discounted value do not impose any limitations on
the percentage of the Fund's assets that may be invested in ineligible assets,
and the amount of ineligible assets included in the Fund's portfolio at any
time may vary depending upon the rating, diversification and other
characteristics of the eligible assets included in the portfolio.

      In addition, the Fund is required by the 1940 Act, as well as by the
rating agency guidelines, to maintain asset coverage of at least 200% with
respect to senior securities that are equity securities, including the AMPS
("1940 Act Preferred Shares Asset Coverage"). The Fund's 1940 Act Preferred
Shares Asset Coverage is tested as of the last business day of each month in
which any senior equity securities are outstanding. The minimum required 1940
Act Preferred Shares Asset Coverage amount of 200% may be increased or
decreased if the 1940 Act is amended. Based on the composition of the portfolio
of the Fund and market conditions as of September 5, 2002, the 1940 Act
Preferred Shares Asset Coverage with respect to all of the Fund's preferred
shares, assuming the issuance on that date of all AMPS offered hereby and
giving effect to the deduction of the related offering costs and sales load
estimated at $1,178,000, would have been computed as follows:

<TABLE>
<S>                                         <C> <C>          <C> <C>
 Value of Fund assets less liabilities not
      constituting senior securities        =   $217,862,343 =   302.59%

-------------------------------------------     ------------
Senior securities representing indebtedness     $72,000,000
                   plus
 liquidation value of the preferred shares
</TABLE>

      In the event the Fund does not timely cure a failure to maintain (a) a
discounted value of its portfolio equal to the Preferred Shares Basic
Maintenance Amount or (b) the 1940 Act Preferred Shares Asset Coverage, in each
case in accordance with the requirements of the rating agency or agencies then
rating the AMPS, the Fund will be required to redeem AMPS as described under
"--Redemption--Mandatory Redemption" below.

      In addition to the requirements described above, the rating agency
guidelines impose restrictions on the Fund's use of certain financial
instruments or investment techniques that the Fund might otherwise utilize. For
example, the guidelines limit the use of certain hedging transactions such as
futures contracts and options. The guidelines also limit the use of certain
other investment techniques, including borrowing of money, short sales, loans
of portfolio securities, and reverse repurchase agreements. For a complete
description of such restrictions, see the Bylaws Amendment, which is attached
as Appendix B to the Fund's Statement of Additional Information.

      The Fund may, but is not required to, adopt any modifications to the
guidelines that may be established by Moody's or Fitch. Failure to adopt any
such modifications, however, may result in a change in the ratings described
above or a withdrawal of ratings altogether. In addition, any rating agency
providing a rating for the AMPS may, at any time, change or withdraw any such
rating. The Trustees may, without shareholder approval, amend, alter or repeal
any or all of the definitions and related provisions that have been adopted by
the Fund pursuant to the rating agency guidelines in the event the Fund
receives written confirmation from Moody's or Fitch, as the case may be, that
any such amendment, alteration or repeal would not impair the rating then
assigned to the AMPS.

      As recently described by Moody's and Fitch, a preferred stock rating is
an assessment of the capacity and willingness of an issuer to pay preferred
stock obligations. The rating on the AMPS is not a recommendation to purchase,
hold or sell those shares, inasmuch as the rating does not comment as to market
price or suitability for a particular investor. The rating agency guidelines
described above also do not address the likelihood that an owner of AMPS will
be able to sell such shares in an auction or otherwise. The ratings are based
on current information furnished to Moody's and Fitch by the Fund and Western
Asset and information obtained from other sources. The ratings may be changed,
suspended or withdrawn as a result of changes in, or the unavailability of,
such information. The Fund's common shares have not been rated by a nationally
recognized statistical rating organization.

                                      37

<PAGE>

      A rating agency's guidelines will apply to the AMPS only so long as the
rating agency is rating the shares. The Fund will pay certain fees to Moody's
and Fitch for rating the AMPS. A more detailed description of how Moody's and
Fitch calculate discounted value and the other limitations imposed by the
rating agencies is contained in the Bylaws Amendment, which is attached as
Appendix B to the Fund's Statement of Additional Information.

LIQUIDATION

      Subject to the rights of holders of any series or class or classes of
shares ranking on a parity with AMPS with respect to the distribution of assets
upon liquidation of the Fund, upon a liquidation of the Fund (whether voluntary
or involuntary), the holders of AMPS then outstanding will be entitled to
receive and to be paid, out of the assets of the Fund available for
distribution to its shareholders, before any payment or distribution will be
made on the common shares or any other class of shares of the Fund ranking
junior to the AMPS, an amount equal to the liquidation preference with respect
to such AMPS ($25,000 per share), plus an amount equal to all dividends thereon
(whether or not earned or declared by the Fund, but excluding the interest
thereon) accumulated but unpaid to (but not including) the date of final
distribution in same-day funds in connection with the liquidation of the Fund.
If such assets of the Fund are insufficient to make the full liquidation
payment on the outstanding AMPS, no distribution shall be made on any shares of
any other class or series of preferred shares ranking on a parity with the AMPS
with respect to the distribution of assets upon such liquidation unless
proportionate distributive amounts shall be paid on the AMPS, ratably, in
proportion to the full distributable amounts for which holders of all such
parity shares are respectively entitled upon such liquidation. After the
payment to the holders of AMPS of the full preferential amounts provided for as
described herein, the holders of AMPS as such will have no right or claim to
any of the remaining assets of the Fund.

      For purposes of the foregoing paragraph, a liquidation of the Fund does
not include:

      . the sale of all or any portion of the property or business of the Fund;

      . the merger or consolidation of the Fund into or with any business trust
        or other entity; or

      . the merger or consolidation of any business trust or other entity into
        or with the Fund.

REDEMPTION

      MANDATORY REDEMPTION.  The Fund is required to maintain (a) a discounted
value of eligible portfolio securities equal to the Preferred Shares Basic
Maintenance Amount and (b) the 1940 Act Preferred Shares Asset Coverage.
Eligible portfolio securities for the purposes of (a) above will be determined
from time to time by the rating agencies then rating the AMPS. If the Fund
fails to maintain such asset coverage amounts and does not timely cure such
failure in accordance with the requirements of the rating agencies that rate
the AMPS, the Fund must redeem all or a portion of the AMPS. This mandatory
redemption will take place on a date that the Trustees specify out of legally
available funds in accordance with the Declaration, the Bylaws and applicable
law, at the redemption price of $25,000 per share, plus accumulated but unpaid
dividends (whether or not earned or declared) to (but not including) the date
fixed for redemption. In determining the number of AMPS required to be redeemed
in accordance with the foregoing, the Fund will allocate the number of shares
required to be redeemed to satisfy the Preferred Shares Basic Maintenance
Amount or the 1940 Act Preferred Shares Asset Coverage, as the case may be, pro
rata among the AMPS and any other preferred shares of the Fund subject to
redemption or retirement. The mandatory redemption will be limited to the
number of AMPS and any other preferred shares necessary to restore the required
discounted value or the 1940 Act Preferred Shares Asset Coverage, as the case
may be.

      OPTIONAL REDEMPTION.  The Fund, at its option, may redeem the AMPS, in
whole or in part, out of legally available funds. Any optional redemption will
occur on the second business day preceding any dividend payment date at the
optional redemption price per share of $25,000, plus an amount equal to
accumulated but

                                      38

<PAGE>

unpaid dividends (whether or not earned or declared) to (but not including) the
date fixed for redemption, plus the premium, if any, specified in a special
redemption provision. No AMPS may be redeemed if the redemption would cause the
Fund to violate the 1940 Act. The Fund has the authority to redeem the AMPS for
any reason and may redeem all or part of the outstanding AMPS if it anticipates
that the Fund's leveraged capital structure will result in a lower rate of
return to Common Shareholders for any significant period of time than that
obtainable if the common shares were unleveraged. The Fund may exercise such
redemption option as to either of the two series of AMPS and as to some or all
of the shares of each series, subject to certain limitations. The optional
redemption of shares of a series will, if less than all the shares of a series
are redeemed, be made on a pro rata basis.

      The Fund will not make any optional redemption unless (i) the Fund has
available certain deposit securities with maturities or tender dates not later
than the day preceding the applicable redemption date and having a value not
less than the amount (including any applicable premium) due to holders of the
AMPS by reason of the redemption of the AMPS on such date fixed for the
redemption and (ii) the Fund has eligible assets with an aggregate discounted
value at least equal to the Preferred Shares Basic Maintenance Amount (both
before and after giving effect to such redemption).

      Notwithstanding the foregoing, if unpaid dividends exist with respect to
shares of a series of AMPS (whether or not earned or declared), no shares of
such series shall be redeemed (by either mandatory redemption or optional
redemption) unless all outstanding shares of such series are simultaneously
redeemed; provided, however, that this limitation will not apply to an
otherwise lawful purchase or exchange offer made on the same terms to the
holders of all outstanding shares of such series.

      Although the AMPS are subject to redemption under certain circumstances
as described above and under "--Mandatory Redemption," the AMPS may not be
redeemed at a shareholder's option at net asset value, unlike the shares of an
open-end mutual fund.

                                  THE AUCTION

GENERAL

      Under the Bylaws Amendment, the applicable rate for the AMPS for each
rate period after the initial rate period will generally be the rate that
results from an auction conducted as set forth in the Bylaws Amendment and
summarized below. In such an auction, persons determine to hold or offer to
sell AMPS regardless of the rate set by the auction or offer to purchase or
sell AMPS based on specific dividend rates bid by them. See the Bylaws
Amendment for a more complete description of the auction process.

      AUCTION AGENCY AGREEMENT.  The Fund will enter into an auction agency
agreement with the auction agent (currently, Deutsche Bank Trust Company
Americas) which provides, among other things, that the auction agent will
follow the auction procedures set forth in the Bylaws Amendment to determine
the applicable rate for AMPS so long as the applicable rate for AMPS is to be
based on the results of an auction.

      The auction agent may terminate the auction agency agreement upon notice
to the Fund no earlier than 60 days after such notice (30 days after such
notice, if the auction agent has not been paid). If the auction agent should
resign, the Fund will attempt to appoint another qualified institution to act
as auction agent. The Fund may remove the auction agent provided that prior to
such removal the Fund has entered into an agreement with a successor auction
agent to perform substantially similar services.

      BROKER-DEALER AGREEMENTS.  Each auction requires the participation of one
or more Broker-Dealers. The auction agent will enter into agreements with one
or more Broker-Dealers selected by the Fund that provide for the participation
of those Broker-Dealers in auctions for AMPS ("Broker-Dealer Agreements").

                                      39

<PAGE>

      The auction agent will pay to each Broker-Dealer after each auction, from
funds provided by the Fund, a service charge that will generally be at the
annual rate of 1/4 of 1% of the stated value ($25,000 per share) of the AMPS
held by a Broker-Dealer's customers upon settlement in an auction.

      The Fund may request the auction agent to terminate one or more
Broker-Dealer Agreements at any time upon five days' notice, provided that at
least one Broker-Dealer Agreement is in effect after such termination.

AUCTION PROCEDURES

      Prior to the submission deadline on each auction date for the AMPS, each
customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
(or, if applicable, the auction agent) as a beneficial owner of AMPS may submit
the following types of orders with respect to AMPS to that Broker-Dealer:

       1. Hold Order -- indicating its desire to hold AMPS without regard to
          the applicable rate for shares of such series for the next rate
          period.

       2. Bid -- indicating its desire to purchase or hold the indicated number
          of AMPS at $25,000 per share if the applicable rate for shares of
          such series for the next rate period is not less than the rate
          specified in the bid. A bid order by an existing holder will be
          deemed an irrevocable offer to sell AMPS at $25,000 per share if the
          applicable rate for shares of such series for the next rate period is
          less than the rate specified in the bid.

       3. Sell Order -- indicating its desire to sell AMPS at $25,000 per share
          without regard to the applicable rate for shares of such series for
          the next rate period.

      A beneficial owner of AMPS may submit different types of orders to its
Broker-Dealer with respect to different AMPS then held by the beneficial owner.
A beneficial owner that submits a bid to its Broker-Dealer having a rate higher
than the maximum applicable rate on the auction date will be treated as having
submitted a sell order to its Broker-Dealer. A beneficial owner that fails to
submit an order to its Broker-Dealer will ordinarily be deemed to have
submitted a hold order to its Broker-Dealer. However, if a beneficial owner
fails to submit an order for some or all of its shares to its Broker-Dealer for
an auction relating to a rate period of more than 91 days, such beneficial
owner will be deemed to have submitted a sell order for such shares to its
Broker-Dealer. A sell order constitutes an irrevocable offer to sell the AMPS
subject to the sell order. A beneficial owner that offers to become the
beneficial owner of additional AMPS is, for the purposes of such offer, a
potential holder as discussed below.

      A potential holder is either a customer of a Broker-Dealer that is not a
beneficial owner of AMPS but that wishes to purchase AMPS or a beneficial owner
that wishes to purchase additional AMPS. A potential holder may submit bids to
its Broker-Dealer in which it offers to purchase AMPS at $25,000 per share if
the applicable rate for the next rate period is not less than the rate
specified in such bid. A bid placed by a potential holder specifying a rate
higher than the maximum applicable rate on the auction date will not be
accepted.

      The Broker-Dealers in turn will submit the orders of their respective
customers who are beneficial owners and potential holders to the auction agent.
Unless otherwise permitted by the Fund, the Broker-Dealers will designate
themselves as existing holders of shares subject to orders submitted or deemed
submitted to them by beneficial owners. They will also designate themselves as
potential holders of shares subject to orders submitted to them by potential
holders. However, neither the Fund nor the auction agent will be responsible
for a Broker-Dealer's failure to comply with these procedures. Any order placed
with the auction agent by a Broker-Dealer as or on behalf of an existing holder
or a potential holder will be treated the same way as an order placed with a
Broker-Dealer by a beneficial owner or potential holder. Similarly, any failure
by a Broker-Dealer to submit to the auction agent an order for any AMPS held by
it or customers who are beneficial owners will be treated as a beneficial
owner's failure to submit to its Broker-Dealer an order in respect of AMPS held
by it. A

                                      40

<PAGE>

Broker-Dealer may also submit orders to the auction agent for its own account
as an existing holder or potential holder, provided that it is not an affiliate
of the Fund.

      There are sufficient clearing bids in an auction if the number of shares
of a series of AMPS subject to bids submitted or deemed submitted to the
auction agent by Broker-Dealers for potential holders with rates equal to or
lower than the maximum applicable rate for shares of such series is at least
equal to the sum of the number of applicable AMPS subject to sell orders
submitted or deemed submitted to the auction agent by Broker-Dealers for
existing holders and the number of applicable AMPS subject to bids specifying
rates higher than the maximum applicable rate for shares of such series
submitted or deemed submitted to the auction agent by Broker-Dealers for
existing holders. If there are sufficient clearing bids, the applicable rate
for the relevant AMPS for the next succeeding rate period thereof will be the
lowest rate specified in the submitted bids that, taking into account such rate
and all lower rates bid by Broker-Dealers as or on behalf of existing holders
and potential holders, would result in such existing holders and potential
holders owning the relevant AMPS available for purchase in the auction.

      If there are not sufficient clearing bids, the applicable rate for the
next rate period will be the maximum applicable rate on the auction date. If
there are not sufficient clearing bids, beneficial owners of AMPS that have
submitted or are deemed to have submitted sell orders may not be able to sell
in the auction all shares subject to such sell orders. If all of the applicable
outstanding AMPS are the subject of submitted hold orders, then the rate period
following the auction will automatically be the same length as the preceding
rate period and the applicable rate for the next rate period will be the
seven-day "AA" Financial Composite Commercial Paper Rate for the Series M AMPS
and the thirty-day "AA" Financial Composite Commercial Paper Rate for the
Series W AMPS.

      The auction procedures include a pro rata allocation of shares for
purchase and sale, which may result in an existing holder continuing to hold or
selling, or a potential holder purchasing, a number of AMPS that is different
from the number of shares specified in its order. To the extent the allocation
procedures have that result, Broker-Dealers that have designated themselves as
existing holders or potential holders in respect of customer orders will be
required to make appropriate pro rata allocations among their respective
customers.

      Settlement of purchases and sales will be made on the next business day
(which is also a dividend payment date) after the auction date through DTC.
Purchasers will make payment through their Agent Members in same-day funds to
DTC against delivery to their respective Agent Members. DTC will make payment
to the sellers' Agent Members in accordance with DTC's normal procedures, which
currently provide for payment against delivery by their Agent Members in
same-day funds.

      The auctions for AMPS will normally be held every seven days in the case
of Series M AMPS and every 28 days in the case of Series W AMPS, and each
subsequent rate period will normally begin on the following business day.

      The first auction for the Series M AMPS will be held on September 30,
2002, the business day preceding the dividend payment date for the initial
dividend period. Thereafter, except during special rate periods, auctions for
the Series M AMPS normally will be held every seven days thereafter, and each
subsequent dividend period for the Series M AMPS normally will begin on the
following business day.

      The first auction for the Series W AMPS will be held on October 16, 2002,
the business day preceding the dividend payment date for the initial dividend
period. Thereafter, except during special rate periods, auctions for the Series
W AMPS normally will be held every 28 days thereafter, and each subsequent
dividend period for the Series W AMPS normally will begin on the following
business day.

                                      41

<PAGE>

      The following is a simplified example of how a typical auction works.
Assume that the Fund has 1,000 outstanding AMPS of either series and three
current holders. The three current holders and three potential holders submit
orders through broker-dealers at the auction:

<TABLE>
<S>                                 <C>                                <C>

Current Holder A................... Owns 500 shares, wants to sell all Bid order of 4.1% rate for all
                                    500 shares if auction rate is less 500 shares
                                    than 4.1%

Current Holder B................... Owns 300 shares, wants to hold     Hold order--will take the auction
                                                                       rate

Current Holder C................... Owns 200 shares, wants to sell all Bid order of 3.9% rate for all 200
                                    200 shares if auction rate is less shares
                                    than 3.9%

Potential Holder D................. Wants to buy 200 shares            Places order to buy 200 shares at or
                                                                       above 4.0%

Potential Holder E................. Wants to buy 300 shares            Places order to buy 300 shares at or
                                                                       above 3.9%

Potential Holder F................. Wants to buy 200 shares            Places order to buy 200 shares at or
                                                                       above 4.1%
</TABLE>

      The lowest dividend rate that will result in all 1,000 AMPS continuing to
be held is 4.0% (the offer by D). Therefore, the dividend rate will be 4.0%.
Current holders B and C will continue to own their shares. Current holder A
will sell its shares because A's dividend rate bid was higher than the dividend
rate. Potential holder D will buy 200 shares and potential holder E will buy
300 shares because their bid rates were at or below the dividend rate.
Potential holder F will not buy any shares because its bid rate was above the
dividend rate.

      For further description of the auction procedures, please see the Bylaws
Amendment, which is attached as Appendix B to the Statement of Additional
Information.

SECONDARY MARKET TRADING AND TRANSFER OF AMPS

      The underwriter is not required to make a market in the AMPS. The
Broker-Dealers (including the underwriter) may maintain a secondary trading
market for the AMPS outside of auctions, but they are not required to do so.
There can be no assurance that a secondary trading market for AMPS will develop
or, if it does develop, that it will provide holders of AMPS with liquidity of
investment. AMPS will not be registered on any stock exchange or on the NASDAQ
market. Investors who purchase AMPS in an auction (particularly if the Fund has
declared a special rate period) should note that, because the dividend rate on
such shares will be fixed for the length of that dividend period, the value of
such shares may fluctuate in response to the changes in interest rates, and may
be more or less than their original cost if sold on the open market in advance
of the next auction thereof, depending on market conditions.

      You may sell, transfer, or otherwise dispose of AMPS only in whole shares
and only:

      . pursuant to a bid or sell order placed with the auction agent in
        accordance with the auction procedures;

      . to a Broker-Dealer; or

      . to such other persons as may be permitted by the Fund; provided,
        however, that (x) if you hold your AMPS in the name of a Broker-Dealer,
        a sale or transfer of your AMPS to that Broker-Dealer, or to another
        customer of that Broker-Dealer, will not be considered a sale or
        transfer for purposes of the

                                      42

<PAGE>

        foregoing limitation if that Broker-Dealer remains the existing holder
        of the AMPS immediately after the transaction; and (y) in the case of
        all transfers, other than through an auction, the Broker-Dealer (or
        other person, if the Fund permits) receiving the transfer will advise
        the auction agent of the transfer.

                                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 no less frequently
than Thursday of each week and on the last business day of each month. 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 common share net asset value, 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. The values of investments quoted in currencies other
than the U.S. dollar are translated into U.S. dollars at current exchange rates
or at such other rates as the Trustees or persons acting at their direction 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 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. This will also be true for
currency rates to the extent the Fund uses currency rates that are established
prior to the close of the New York Stock Exchange.

                       DESCRIPTION OF CAPITAL STRUCTURE

      The Fund is an unincorporated business trust established under the laws
of The Commonwealth of Massachusetts by the Declaration. The Declaration
provides that the Trustees of the Fund may authorize separate classes of shares
of beneficial interest. The Declaration authorizes an unlimited number of
common shares of beneficial interest and the Trustees have authorized 2,880
preferred shares of beneficial interest. Preferred shares (such as the AMPS)
may be issued in one or more series, with such par value and with such rights
as determined by the Board of Trustees, by action of the Board of Trustees
without the approval of the Common Shareholders. For a description of the AMPS,
see "Description of AMPS." The following table shows the number of (i) shares
authorized and (ii) shares outstanding, for each class of authorized securities
of the Fund as of September 5, 2002.


                                      43

<PAGE>

<TABLE>
<CAPTION>

                    NUMBER    NUMBER HELD BY OR FOR    NUMBER
TITLE OF CLASS    AUTHORIZED THE ACCOUNT OF THE FUND OUTSTANDING
--------------    ---------- ----------------------- -----------
<S>               <C>        <C>                     <C>
Common Shares.... Unlimited             0            11,000,497
Preferred Shares
   Series M AMPS.     1,440*            0                     0
   Series W AMPS.     1,440*            0                     0
</TABLE>
--------
* Assumes the authorization of 2,880 AMPS by the Board of Trustees prior to the
  issuance of the AMPS.

      Common Shareholders are entitled to share equally in dividends declared
by the Board of Trustees payable to Common Shareholders and in the net assets
of the Fund available for distribution to Common Shareholders after payment of
the preferential amounts payable to holders of any outstanding preferred shares
of beneficial interest. Neither Common Shareholders nor holders of preferred
shares have conversion rights or the right to cause the Fund to redeem their
shares. Upon liquidation of the Fund, after paying or adequately providing for
the payment of all liabilities of the Fund and the liquidation preference with
respect to any outstanding preferred shares, and upon receipt of such releases,
indemnities and refunding agreements as they deem necessary for their
protection, the Trustees may distribute the remaining assets of the Fund among
the Common Shareholders.

      Pursuant to the Fund's Dividend Reinvestment 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 Trust Company, N.A. as agent for the
Common Shareholders, unless the Common Shareholder elects to receive cash. The
Fund and Equiserve Trust Company, N.A. reserve the right to amend or terminate
the Dividend Reinvestment Plan.

      Common Shareholders will vote with the holders of any outstanding AMPS or
other preferred shares on each matter submitted to a vote of Common
Shareholders, except as described under "Description of AMPS--Voting Rights"
and except as otherwise required by the Declaration, the Bylaws or applicable
law.

      Shareholders of each class or series are entitled to one vote for each
share held. Except as provided under "Description of AMPS--Voting Rights" and
except as otherwise required by the Declaration, the Bylaws or applicable law,
holders of preferred shares, including AMPS (voting as a separate class) are
entitled to elect two Trustees, and the remaining Trustees will be elected by
holders of common shares and preferred shares, voting as a single class.

      So long as any AMPS or any other preferred shares are outstanding, Common
Shareholders will not be entitled to receive any dividends or other
distributions from the Fund, unless at the time of such declaration, (1) all
accrued dividends on AMPS have been paid and (2) the value of the Fund's total
assets (determined after deducting the amount of such dividend or other
distribution), less all liabilities and indebtedness of the Fund not
represented by "senior securities" (as defined in the 1940 Act), is at least
300% of the aggregate amount of senior securities representing indebtedness (to
the extent any such senior securities are outstanding) and at least 200% of the
aggregate amount of any senior securities representing indebtedness plus the
aggregate liquidation value of the outstanding preferred shares (expected to
equal the aggregate original purchase price of the outstanding preferred shares
plus any accrued and unpaid dividends thereon, whether or not earned or
declared and on a cumulative basis). In addition to the requirements of the
1940 Act, the Fund is required to comply with other asset coverage requirements
as a condition of the Fund obtaining a rating of the AMPS from rating agencies.
These requirements include an asset coverage test more stringent than under the
1940 Act. See "Description of AMPS--Dividends and Rate Periods--Restrictions on
Dividends and Other Distributions."

      The Fund will send unaudited reports at least semi-annually and audited
financial statements annually to all of its shareholders.

                                      44

<PAGE>

      Common shares of the Fund commenced trading on the New York Stock
Exchange on March 26, 2002. On September 5, 2002, the net asset value per
common share was $13.37, and the closing price per common share on the New York
Stock Exchange was $14.10.

OTHER ISSUES RELATING TO THE AMPS

      Under the 1940 Act, the Fund is permitted to have outstanding more than
one series of preferred shares of beneficial interest as long as no single
series has priority over another series as to the distribution of assets of the
Fund or the payment of dividends. Neither Common Shareholders nor holders of
preferred shares have pre-emptive rights to purchase any AMPS or any other
preferred shares that the Fund may issue.

        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) or (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.

      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 no
shareholder authorization would be required by the Declaration, but may 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 Bylaws.

                                      45

<PAGE>

      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 objective and
policies. The provisions of the Declaration described above could have the
effect of 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 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. Common 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.

      If the Fund converted to an open-end company, it would be required to
redeem all preferred shares (including the AMPS) 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 objective. 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
common 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.

                                      46

<PAGE>

                                  TAX MATTERS

      The following federal income tax discussion is based on the advice of
Ropes & Gray, counsel to the Fund, and reflects provisions of the Code,
existing Treasury Regulations, rulings published by the IRS, and other
applicable authority, as of the date of this prospectus. These authorities are
subject to change by legislative or administrative action. 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 and local taxes.

      The Fund intends to qualify each year for taxation as a regulated
investment company eligible for treatment under the provisions of Subchapter M
of the Code. 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.

      In order for any portion of any distributions to holders of AMPS to be
eligible to be treated as capital gain dividends, the AMPS must be treated as
equity for federal income tax purposes. Based in part on certain
representations made by the Fund to Ropes & Gray relating to the lack of any
present intention to redeem or purchase AMPS at any time in the future, it is
the opinion of Ropes & Gray that the AMPS will constitute equity for federal
income tax purposes. This opinion relies in part on a published ruling of the
IRS stating that certain auction rate preferred stock similar in many material
respects to the AMPS represents equity. The opinion of Ropes & Gray represents
only its best legal judgment and is not binding on the IRS or the courts. If
the IRS were to assert successfully that variable rate preferred stock such as
the AMPS should be treated as debt for federal income tax purposes,
distributions on AMPS (including distributions designated by the Fund as
capital gain dividends) would be taxable as ordinary income (as opposed to
capital gains). Ropes & Gray has advised the Fund that, should the IRS pursue
in court the position that the AMPS should be treated as debt for federal
income tax purposes, the IRS would be unlikely to prevail.

      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 and among 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 IRS 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.

      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 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 redemption, which may
result in transaction expenses and gain at the Fund level and in further
distributions.

      The Fund's investments in certain debt obligations 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.

                                      47

<PAGE>

      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
taxable as ordinary income, assuming the Fund has sufficient current or
accumulated earnings and profits. 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 gains from the sale
of investments that the Fund owned for more than one year will be taxable as
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.
Distributions are taxable to shareholders even if they are paid from income or
gains earned by the Fund before a shareholder's investment (and thus were
included in the price the shareholder paid). Any gain resulting from the sale
or exchange of Fund shares will generally also be subject to tax.

      The Fund's investments in non-U.S. securities may be subject to non-U.S.
withholding taxes. In that case, the Fund's yield on those securities would be
decreased. Shareholders generally will not be entitled to claim a credit or
deduction with respect to foreign taxes. In addition, the Fund's investments in
non-U.S. securities or currencies other than the U.S. dollar may increase or
accelerate the Fund's recognition of ordinary income and may affect the timing
or amount of the Fund's distributions.

      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.

      The Fund generally is required to withhold and remit to the U.S. Treasury
a percentage of the taxable dividends and other distributions paid to any
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 will be (i) 30% for amounts
paid during 2002 and 2003, (ii) 29% for amounts paid during 2004 and 2005, and
(iii) 28% for amounts paid during 2006 through 2010. The backup withholding
rate will be 31% for amounts paid after December 31, 2010, unless Congress
enacts tax legislation providing otherwise. In order for a foreign investor to
qualify for exemption from the back-up withholding tax rates and for reduced
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 advisers in this regard.

      If, in connection with the designation of a special rate period, (i) the
Fund provides in a notice of special rate period that the Fund may redeem all
or part of a series of AMPS and that upon such redemption the holders of that
series of AMPS may receive a premium in addition to receipt of a redemption
price per share equal to the sum of $25,000 plus an amount equal to the
accumulated but unpaid dividends thereon during the whole or any part of the
special rate period, (ii) based on all the facts and circumstances at the time
of the designation of the special rate period the Fund is more likely than not
to redeem such series of AMPS during the special rate period, and (iii) the
premium to be paid upon redemption during such special rate period exceeds a
specified de minimis amount, it is possible that the holders of such series
will be required to accrue the premium as a dividend (to the extent of the
Fund's earnings and profits).

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

                                      48

<PAGE>

                                 UNDERWRITING

      Subject to the terms and conditions of a purchase agreement dated
September 18, 2002, the underwriter named below has agreed to purchase, and the
Fund has agreed to sell to such underwriter, the number of AMPS set forth below.

<TABLE>
<CAPTION>
                                                 NUMBER OF NUMBER OF
                                                 SERIES M  SERIES W
                    UNDERWRITER                    AMPS      AMPS
                    -----------                  --------- ---------
           <S>                                   <C>       <C>
           Merrill Lynch, Pierce, Fenner & Smith
                    Incorporated................   1,440     1,440
                                                   -----     -----
                    Total.......................   1,440     1,440
                                                   =====     =====
</TABLE>

      The purchase agreement provides that the obligations of the underwriter
to purchase the shares included in this offering are subject to the approval of
certain legal matters by counsel and to other conditions, including, without
limitation, the receipt by the underwriter of customary closing certificates,
opinions and other documents and the receipt by the Fund of "Aaa" and "AAA"
ratings on the AMPS from Moody's and Fitch, respectively, as of the time of the
offering. The underwriter is obligated to purchase all the AMPS sold under the
purchase agreement if any of the AMPS are purchased. In the purchase agreement,
the Fund, Western Asset Management Company and WAML have agreed to indemnify
the underwriter against certain liabilities, including liabilities arising
under the Securities Act of 1933, or to contribute payments the underwriter may
be required to make for any of those liabilities.

      The underwriter proposes to initially offer some of the AMPS directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the AMPS to certain dealers at the public offering price
less a concession not in excess of $137.50 per share. The sales load the Fund
will pay of $250 per share is equal to 1% of the initial offering price of the
AMPS. After the initial public offering, the underwriter may change the public
offering price and the concession. Investors must pay for any AMPS purchased on
or before September 20, 2002.

      The Fund anticipates that the underwriter may from time to time act as a
broker or dealer in executing the Fund's portfolio transactions after it has
ceased to be an underwriter.

      The Fund anticipates that the underwriter or its affiliates may, from
time to time, act in auctions as a broker-dealer and receive fees as set forth
under "The Auction." The underwriter is an active underwriter of, and dealer
in, securities and acts as a market maker in a number of such securities, and
therefore can be expected to engage in portfolio transactions with, and perform
services for, the Fund.

      The principal business address of Merrill Lynch is 4 World Financial
Center, New York, New York 10080.

      The settlement date for the purchase of the AMPS will be September 20,
2002, as agreed upon by the underwriter, the Fund and Western Asset Management
Company pursuant to Rule 15c6-1 under the Securities Exchange Act of 1934.

                  CUSTODIAN AND TRANSFER AGENT; AUCTION AGENT

      The custodian of the assets of the Fund is State Street Bank & Trust
Company, 225 Franklin Street, Boston, Massachusetts 02110. The custodian
performs custodial and certain fund accounting services.

                                      49

<PAGE>

      Deutsche Bank Trust Company Americas, 100 Plaza One, 6th Floor, Jersey
City, New Jersey 07311, serves as the auction agent, transfer agent, registrar,
dividend paying agent and redemption agent for the AMPS.

      EquiServe Trust Company, N.A., 150 Royall Street, Canton, Massachusetts
02021, serves as the Fund's transfer agent, registrar, dividend disbursement
agent and shareholder servicing agent for the Fund's common shares, as well as
agent for the Fund's Dividend Reinvestment Plan for common shares.

                                 LEGAL MATTERS

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

                             AVAILABLE INFORMATION

      The Fund is subject to certain informational requirements under the
federal securities laws and in accordance therewith is required to file
reports, proxy statements and other information with the United States
Securities and Exchange Commission (the "SEC"). Any such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the SEC, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Reports, proxy statements and other information
concerning the Fund can also be inspected at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005.

      Additional information regarding the Fund and the AMPS is contained in
the Registration Statement on Form N-2, including amendments, exhibits and
schedules thereto, relating to such shares filed by the Fund with the SEC. This
prospectus does not contain all of the information set forth in the
Registration Statement, including any amendments, exhibits and schedules
thereto. For further information with respect to the Fund and the shares
offered hereby, reference is made to the Registration Statement. Statements
contained in this prospectus 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.

      A copy 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. The SEC maintains a Web site (http://www.sec.gov) that
contains the Registration Statement, other documents incorporated by reference,
and other information the Fund has filed electronically with the SEC, including
proxy statements and reports filed under the Securities Exchange Act of 1934.

                                      50

<PAGE>

                           TABLE OF CONTENTS FOR THE
                      STATEMENT OF ADDITIONAL INFORMATION

<TABLE>
<CAPTION>
                                                               PAGE
                                                               ----
<S>                                                            <C>
Use of Proceeds...............................................   1
Investment Objectives and Policies............................   1
Investment Restrictions.......................................  44
Management of the Fund........................................  47
Investment Advisor and Subadvisor.............................  58
Portfolio Transactions........................................  61
Distributions.................................................  63
Description of Shares.........................................  63
Additional Information Concerning the Auctions for AMPS.......  64
Anti-Takeover and Other Provisions in the Declaration of Trust  66
Repurchase of Common Shares; Conversion to Open-End Fund......  68
Tax Matters...................................................  70
Performance-related, Comparative and Other Information........  76
Custodian, Transfer Agent and Dividend Paying Agent...........  78
Independent Accountants.......................................  79
Counsel.......................................................  79
Registration Statement........................................  80
Financial Statements..........................................  81
Appendix A - Description of Securities Ratings................ A-1
Appendix B - Amendment No. 1 to Bylaws........................ B-1
</TABLE>


                                      51

<PAGE>

================================================================================


                                  $72,000,000
                        WESTERN ASSET PREMIER BOND FUND
             TAXABLE AUCTION MARKET PREFERRED SHARES ("AMPS"/SM/)

                            1,440 SHARES, SERIES M
                            1,440 SHARES, SERIES W

                   LIQUIDATION PREFERENCE $25,000 PER SHARE

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

                              MERRILL LYNCH & CO.


                              SEPTEMBER 18, 2002

"AMPS" IS A REGISTERED SERVICE MARK OF MERRILL LYNCH & CO.

================================================================================

<PAGE>


                         WESTERN ASSET PREMIER BOND FUND

                       STATEMENT OF ADDITIONAL INFORMATION


                               September 18, 2002


         Western Asset Premier Bond Fund (the "Fund") is a recently organized,
diversified closed-end management investment company.



         This Statement of Additional Information relating to the Series M
Taxable Auction Market Preferred Shares and Series W Taxable Auction Market
Preferred Shares of the Fund (collectively, "AMPS"SM) is not a prospectus, and
should be read in conjunction with the Fund's prospectus relating thereto dated
September 18, 2002 (the "Prospectus"). This Statement of Additional Information
does not include all information that a prospective investor should consider
before purchasing AMPS, 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 toll-free 1-877-844-8800. 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.



<PAGE>



                                TABLE OF CONTENTS

USE OF PROCEEDS ......................................................   1
INVESTMENT OBJECTIVES AND POLICIES ...................................   1
INVESTMENT RESTRICTIONS ..............................................  44
MANAGEMENT OF THE FUND ...............................................  47
INVESTMENT ADVISOR AND SUBADVISOR ....................................  58
PORTFOLIO TRANSACTIONS ...............................................  61
DISTRIBUTIONS ........................................................  63
DESCRIPTION OF SHARES ................................................  63
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR AMPS ..............  64
ANTI-TAKEOVER AND OTHER PROVISIONS IN THE DECLARATION OF TRUST .......  66
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND .............  68
TAX MATTERS ..........................................................  70
PERFORMANCE-RELATED, COMPARATIVE AND OTHER INFORMATION ...............  76
CUSTODIAN, TRANSFER AGENT AND DIVIDEND PAYING AGENT ..................  78
INDEPENDENT ACCOUNTANTS ..............................................  79
COUNSEL ..............................................................  79
REGISTRATION STATEMENT ...............................................  80
FINANCIAL STATEMENTS .................................................  81
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS ....................... A-1
APPENDIX B - AMENDMENT NO. 1 TO BYLAWS ............................... B-1



      This Statement of Additional Information is dated September 18, 2002.


"AMPS" is a registered service mark of Merrill Lynch & Co.


                                       -i-

<PAGE>


                                 USE OF PROCEEDS


         The net proceeds of the offering of AMPS of the Fund will be
approximately $70,822,000 after payment of offering costs and sales load.

         The Fund will invest the net proceeds of the offering in accordance
with the Fund's investment objective and policies as stated below and in the
Prospectus. It is presently anticipated that the Fund will use the net proceeds
of the offering to purchase bonds and other investments that meet its investment
objective and policies and/or to repay certain currently outstanding reverse
repurchase agreements. Pending such use, it is anticipated that the proceeds
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.

Corporate Bonds

         The Fund may invest in a wide variety of 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. The Fund will invest in U.S.
dollar-denominated corporate bonds and may also invest in bonds denominated in
foreign currencies in accordance with the Fund's investment objectives and
policies as described in the Prospectus. The Fund has the flexibility to invest
in corporate bonds that are below investment grade quality. See "- High Yield
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 section
of the Statement of Additional Information, 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 Western Asset Management Company Limited ("WAML," and together with
Western Asset, the "Advisors"), the Fund's investment advisor and subadvisor,
respectively, has made a credit quality assessment. See Appendix A to this


                                       -1-

<PAGE>


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

                                       -2-

<PAGE>

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.

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 Advisors 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 "- High Yield 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


                                       -3-

<PAGE>

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.

         The Fund will treat investments in convertible debt securities as bonds
for purposes of its investment policies.

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, the Fund may invest without limit in U.S.
dollar-denominated obligations of foreign banks and in foreign bank obligations
denominated in foreign currencies. 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


                                       -4-

<PAGE>

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 an unsecured loan 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,
when investing in 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 (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 require the Fund to treat both
the lending bank or other lending institution and the


                                       -5-

<PAGE>

corporate borrower as "issuers" for the purposes of determining whether the Fund
has investedmore 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.

         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 an 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 an 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. 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


                                       -6-

<PAGE>

discount accrued on zero-coupon bonds, step-ups and PIKs. Because the Fund will
not on acurrent 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 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.

High Yield Securities ("Junk Bonds")

         As described under "The Fund's Objective, Strategies and Investments"
in the Prospectus, the Fund has the flexibility to invest up to 35% of its total
managed assets in debt securities not rated Baa by Moody's or BBB by S&P or
Fitch or higher, or in securities that are unrated but judged to be of
comparable quality by an 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 Advisors seek 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


                                       -7-

<PAGE>

judgment may play a greater role in the valuation because there is less
reliable, objective dataavailable. 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 an 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 Advisors do not rely
solely on credit ratings when selecting securities for the Fund and develop
their own independent analysis of issuer credit quality. Because of this, the
Fund's performance may depend more on an Advisor's own credit analysis than in
the case of a fund investing in higher-rated securities.

         The Fund is not required to dispose of a security in the event that a
rating agency or an Advisor downgrades its assessment of the credit
characteristics of a particular issue. In determining whether to retain or sell
such a security, an 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 some or all of its total assets 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 may also invest up to 10% of its total managed
assets in debt instruments denominated in foreign currencies (of both developed
and "emerging market" countries).


                                       -8-

<PAGE>

         The U.S. dollar-denominated foreign securities in which the Fund may
invest include 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"),
European Depository Receipts ("EDRs") 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. EDRs are
foreign currency-denominated receipts similar to ADRs, are issued and traded in
Europe and are publicly traded on exchanges or over-the-counter in the United
States. GDRs may be offered privately in the United States and also trade in
public or private markets in other countries. ADRs, EDRs 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, EDRs 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 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, are issued in
various currencies (primarily the U.S. dollar) 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


                                       -9-

<PAGE>

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. Changes in foreign exchange rates will affect
the value of those securities which are denominated or quoted in currencies
other than the U.S. dollar.

         The Fund's investments in foreign currency-denominated debt obligations
and hedging activities will likely produce a difference between its book income
and its taxable income. This difference may cause a portion of the Fund's income
distributions to constitute returns of capital for tax purposes or require the
Fund to make distributions exceeding book income to qualify as a regulated
investment company for federal tax purposes.

         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; currency devaluations and
other currency exchange rate fluctuations; greater social, economic and


                                       -10-

<PAGE>


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 and on the Fund's ability to exchange local currencies for U.S. dollars;
unavailability of currency hedging techniques in certain emerging market
countries; 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 Transactions

         The Fund also may purchase and sell foreign currency options and
foreign currency futures contracts and related options (see "- Derivative
Instruments" below), and may engage in foreign currency transactions either on a
spot (cash) basis at the rate prevailing in the currency exchange market at the
time or through forward foreign currency exchange contracts ("forwards") with
terms generally of less than one year. The Fund may engage in these transactions
in order to protect against uncertainty in the level of future foreign exchange
rates in


                                       -11-

<PAGE>

the purchase and sale of securities. The Fund may also use foreign currency
options and foreign currency forward contracts to increase exposure to a foreign
currency or to shift exposure to foreign currency fluctuations from one country
to another. Suitable currency hedging transactions may not be available in all
circumstances and an Advisor may decide not to use hedging transactions that are
available.

         A forward involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts may be bought or sold to protect the Fund against a
possible loss resulting from an adverse change in the relationship between
foreign currencies and the U.S. dollar or to increase exposure to a particular
foreign currency. Open positions in forwards used for non-hedging purposes will
be covered by the segregation with the Fund's custodian of liquid assets and are
marked to market daily. Although forwards are intended to minimize the risk of
loss due to a decline in the value of the hedged currencies, at the same time,
they tend to limit any potential gain which might result should the value of
such currencies increase. The cost to the Fund of engaging in forward currency
contracts varies with factors such as the currency involved, the length of the
contract period and the market conditions then prevailing. Because forward
currency contracts are usually entered into on a principal basis, no fees or
commissions are involved. When the Fund enters into a forward currency contract,
it relies on the counterparty to make or take delivery of the underlying
currency at the maturity of the contract. Failure by the counterparty to do so
would result in the loss of some or all of any expected benefit of the
transaction. Secondary markets generally do not exist for forward currency
contracts, with the result that closing transactions generally can be made for
forward currency contracts only by negotiating directly with the counterparty.
Thus, there can be no assurance that the Fund will in fact be able to close out
a forward currency contract at a favorable price prior to maturity. In addition,
in the event of insolvency of the counterparty, the Fund might be unable to
close out a forward currency contract. In either event, the Fund would continue
to be subject to market risk with respect to the position, and would continue to
be required to maintain a position in securities denominated in the foreign
currency or to maintain cash or liquid assets in a segregated account. The
precise matching of forward currency contract amounts and the value of the
securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the forward
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot market to the extent such foreign currencies
are not covered by forward currency contracts. The projection of short term
currency market movements is extremely difficult, and the successful execution
of a short term hedging strategy is highly uncertain.

         Forwards will be used primarily to adjust the foreign exchange exposure
of the Fund with a view to protecting the outlook, and the Fund might be
expected to enter into such contracts under the following circumstances, among
others:

         Lock In. When an Advisor desires to lock in the U.S. dollar price on
the purchase or sale of a security denominated in a foreign currency.



                                       -12-

<PAGE>


         Cross Hedge. If a particular currency is expected to decrease against
another currency, the Fund may sell the currency expected to decrease and
purchase a currency that is expected to increase against the currency sold in an
amount approximately equal to some or all of the Fund's portfolio holdings
denominated in the currency sold.

         Direct Hedge. If an Advisor wants to eliminate substantially all of the
risk of owning a particular currency, and/or if an Advisor believes that the
Fund can benefit from price appreciation in a given country's debt obligations
but does not want to hold the currency, it may employ a direct hedge back into
the U.S. dollar. In either case, the Fund would enter into a forward contract to
sell the currency in which a portfolio security is denominated and purchase U.S.
dollars at an exchange rate established at the time it initiated a contract. The
cost of the direct hedge transaction may offset most, if not all, of the yield
advantage offered by the foreign security, but the Fund would hope to benefit
from an increase (if any) in the value of the debt obligation.

         Proxy Hedge. An Advisor might choose to use a proxy hedge, which may be
less costly than a direct hedge. In this case, the Fund, having purchased a
security, will sell a currency whose value is believed to be closely linked to
the currency in which the security is denominated. Interest rates prevailing in
the country whose currency was sold would be expected to be close to those in
the United States and lower than those of securities denominated in the currency
of the original holding. This type of hedging entails greater risk than a direct
hedge because it is dependent on a stable relationship between the two
currencies paired as proxies and the relationships can be very unstable at
times.

         Costs of Hedging. When the Fund purchases a foreign bond with a higher
interest rate than is available on U.S. bonds of a similar maturity, the
additional yield on the foreign bond could be substantially reduced or lost if
the Fund were to enter into a direct hedge by selling the foreign currency and
purchasing the U.S. dollar. This is what is known as the "cost" of hedging.
Proxy hedging attempts to reduce this cost through an indirect hedge back to the
U.S. dollar.

         It is important to note that hedging costs are treated as capital
transactions and are not, therefore, deducted from the Fund's dividend
distribution and are not reflected in its yield.

         Tax Consequences of Hedging. Under applicable tax law, the Fund's
hedging activities may result in the application of the mark-to-market and
straddle provisions of the Code. Those provisions could result in an increase
(or decrease) in the amount of taxable dividends paid by the Fund and could
affect whether dividends paid by the Fund are classified as capital gains or
ordinary income.

Foreign Currency Exchange-Related Securities


         Foreign Currency Warrants. Foreign currency warrants, such as Currency
Exchange Warrants(SM) ("CEWs"(SM)), are warrants that entitle their holders to
receive from their issuer an amount of cash (generally, for warrants issued in
the United States, in U.S. dollars) that is calculated pursuant to a
predetermined formula and based on the exchange rate between a specified foreign
currency and the U.S. dollar as of the exercise date of the warrant. Foreign
currency warrants generally are exercisable upon their issuance and expire as of
a specific date




                                       -13-

<PAGE>


and time. Foreign currency warrants have been issued in connection with U.S.
dollar-denominated debt offerings by major corporate issuers in an attempt to
reduce the foreign currency exchange risk that, from the point of view of the
prospective purchasers of the securities, is inherent in the international debt
obligation marketplace. Foreign currency warrants may attempt to reduce the
foreign exchange risk assumed by purchasers of a security by, for example,
providing for a supplement payment in the event that the U.S. dollar depreciates
against the value of a major foreign currency such as the Japanese Yen. The
formula used to determine the amount payable upon exercise of a foreign currency
warrant may make the warrant worthless unless the applicable foreign currency
exchange rate moves in a particular direction (e.g., unless the U.S. dollar
appreciates or depreciates against the particular foreign currency to which the
warrant is linked or indexed). Foreign currency warrants are severable from the
debt obligations with which they may be offered, and may be listed on exchanges.
Foreign currency warrants may be exercisable only in certain minimum amounts,
and an investor wishing to exercise warrants who possesses less than the minimum
number required for exercise may be required either to sell the warrants or to
purchase additional warrants, thereby incurring additional transaction costs. In
the case of any exercise of warrants, there may be a time delay between the time
a holder of warrants gives instructions to exercise and the time the exchange
rate relating to exercise is determined, during which time the exchange rate
could change significantly, thereby affecting both the market and cash
settlement values of the warrants being exercised. The expiration date of the
warrants may be accelerated if the warrants should be delisted from an exchange
or if their trading should be suspended permanently, which would result in the
loss of any remaining "time values" of the warrants (i.e., the difference
between the current market value and the exercise value of the warrants), and,
if the warrants were "out-of-the-money," in a total loss of the purchase price
of the warrants. Warrants are generally unsecured obligations of their issuers
and are not standardized foreign currency options issued by the Options Clearing
Corporation ("OCC"). Unlike foreign currency options issued by the OCC, the
terms of foreign exchange warrants generally will not be amended in the event of
government or regulatory actions affecting exchange rates or in the event of the
imposition of other regulatory controls affecting the international currency
markets. The initial public offering price of foreign currency warrants is
generally considerably in excess of the price that a commercial user of foreign
currencies might pay in the interbank market for a comparable option involving
significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to significant foreign exchange risk, including risks arising from
complex political or economic factors.


         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




                                       -14-

<PAGE>


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 an 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



                                       -15-

<PAGE>


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.



                                       -16-

<PAGE>


         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



                                       -17-

<PAGE>



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.

         CMOs that are issued or guaranteed by the U.S. Government or by any of
its agencies or instrumentalities will be considered U.S. Government securities
by the Fund, while other CMOs, even if collateralized by U.S. Government
securities, will have the same status as other privately issued securities for
purposes of applying the Fund's diversification tests.

         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.



                                       -18-

<PAGE>


         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




                                       -19-

<PAGE>


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" and
subject to the Fund's limitations on investment in illiquid securities.

         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"
and subject to the Fund's limitations on investment in illiquid securities.

         Other Asset-Backed Securities. Similarly, the Advisors expect 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



                                       -20-

<PAGE>

investment objectives and policies, the Advisors 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 to the extent that its
interest rate varies by a magnitude that exceeds the magnitude of the change in
the index rate of interest. 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, an 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



                                       -21-

<PAGE>


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.

Inflation-Indexed Bonds

         The Fund may invest in inflation-indexed bonds, which are debt
obligations whose value is periodically adjusted according to the rate of
inflation. Two structures are common. The U.S. Treasury and some other issuers
utilize a structure that accrues inflation into the principal value of the bond.
Most other issuers pay out the Consumer Price Index accruals as part of a
semiannual coupon.

         Inflation-indexed securities issued by the U.S. Treasury have
maturities of approximately five, ten or thirty years, although it is possible
that securities with other maturities will be issued in the future. The U.S.
Treasury securities pay interest on a semi-annual basis equal to a fixed
percentage of the inflation-adjusted principal amount. For example, if the Fund
purchased an inflation-indexed bond with a par value of $1,000 and a 3% real
rate of return coupon (payable at 1.5% semi-annually), and the rate of inflation
over the first six months was 1%, the mid-year par value of the bond would be
$1,010 and the first semi-annual interest payment would be $15.15 ($1,010 times
1.5%). If inflation during the second half of the year resulted in the whole
year's inflation equaling 3%, the end-of-year par value of the bond would be
$1,030 and the second semi-annual interest payment would be $15.45 ($1,030 times
1.5%).

         If the periodic adjustment rate measuring inflation falls, the
principal value of inflation-indexed bonds will be adjusted downward, and
consequently the interest payable on these securities (calculated with respect
to a smaller principal amount) will be reduced. Repayment of the original bond
principal upon maturity (as adjusted for inflation) is guaranteed in the case of
U.S. Treasury inflation-indexed bonds, even during a period of deflation.
However, the current market value of the bonds is not guaranteed and will
fluctuate. The Fund may also invest in other inflation-related bonds which may
or may not provide a similar guarantee. If a guarantee of principal is not
provided, the adjusted principal value of the bond repaid at maturity may be
less than the original principal amount.

         The value of inflation-indexed bonds is expected to change in response
to changes in real interest rates. Real interest rates in turn are tied to the
relationship between nominal interest rates and the rate of inflation.
Therefore, if the rate of inflation rises at a faster rate than nominal interest
rates, real interest rates might decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increase at a
faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed bonds.



                                       -22-

<PAGE>

         While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.

         The periodic adjustment of U.S. inflation-indexed bonds is tied to the
Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly
by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in
the cost of living, made up of components such as housing, food, transportation
and energy. Inflation-indexed bonds issued by a foreign government are generally
adjusted to reflect a comparable inflation index calculated by that government.
There can be no assurance that the CPI-U or any foreign inflation index will
accurately measure the real rate of inflation in the prices of goods and
services. Moreover, there can be no assurance that the rate of inflation in a
foreign country will be correlated to the rate of inflation in the United
States.

         Any increase in the principal amount of an inflation-indexed bond will
be considered taxable ordinary income, even though investors do not receive
their principal until maturity.

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


                                       -23-

<PAGE>


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, 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.



                                       -24-

<PAGE>


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 in an amount sufficient to meet such commitments.

         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 purposes of the Fund's limitation on illiquid investments. 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, currencies, 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


                                       -25-

<PAGE>


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 an Advisor to
forecast interest rates and other economic factors correctly. If an 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 an 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 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



                                       -26-

<PAGE>


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.

         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.



                                       -27-

<PAGE>


         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 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.

         Generally, OTC foreign currency options used by the Fund are
European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.

         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 objectives. 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.


                                       -28-

<PAGE>


        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.

         Foreign Currency Options. The Fund may buy or sell put and call options
on foreign currencies for investment purposes or as a hedge against changes in
the value of the U.S. dollar (or another currency) in relation to a foreign
currency in which the Fund's securities may be denominated. The Fund may buy or
sell put and call options on foreign currencies either on exchanges or in the
over-the-counter market. A put option on a foreign currency gives the purchaser
of the option the right to sell a foreign currency at the exercise price until
the option expires. A call option on a foreign currency gives the purchaser of
the option the right to purchase the currency at the exercise price until the
option expires. Currency options traded on U.S. or other exchanges may be
subject to position limits which may limit the ability of the Fund to reduce
foreign currency risk using such options.

         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) and U.S. Government securities, as well as
purchase put and call options on such futures contracts.

         A futures contract on an index or interest rate 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 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: 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 German mark; the Japanese yen; the French franc;
the Swiss franc; 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



                                       -29-

<PAGE>


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.

         To comply with applicable rules of the Commodity Futures Trading
Commission ("CFTC") under which the Fund avoids being deemed a "commodity pool"
or a "commodity pool operator," the Fund intends generally to limit its use of
futures contracts and futures options to "bona fide hedging" transactions, as
such term is defined in applicable regulations, interpretations and practice.
For example, the Fund might use futures contracts to hedge against anticipated
changes in interest rates that might adversely affect either the value of the
Fund's debt obligations or the price of the debt obligations that the Fund
intends to purchase. The Fund's hedging activities may include sales of futures
contracts as an offset against the effect of expected increases in interest
rates and purchases of futures contracts as an offset against the effect of
expected declines in interest rates. Although other techniques could be used to
reduce the Fund's exposure to interest rate fluctuations, the Fund may be able
to hedge its exposure more effectively and perhaps at a lower cost by using
futures contracts and futures options.

         The Fund will only enter into futures contracts and futures options
which 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




                                       -30-

<PAGE>


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. 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."

         Limitations on Use of Futures and Futures Options. As noted above, the
Fund generally intends to enter into positions in futures contracts and related
options only for "bona fide hedging" purposes. To the extent that the Fund
enters into futures contracts and related options on a CFTC-regulated exchange
that are not for bona fide hedging purposes, the aggregate initial margin and
premiums required to establish these positions (excluding the amount by which
options are "in-the-money" at the time of purchase) may not exceed 5% of the
liquidation value of the Fund's portfolio, after taking into account unrealized
profits and unrealized losses on any contracts the Fund has entered into. (In
general, a call option on a futures contract is "in-the-money" if the value of
the underlying futures contract exceeds the strike, i.e., exercise, price of the
call; a put option on a futures contract is "in-the-money" if the value of the
underlying futures contract is exceeded by the strike price of the put.) This
policy does not limit to 5% the percentage of the Fund's assets that are at risk
in futures contracts and related 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




                                       -31-

<PAGE>


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.

         To the extent that securities with maturities greater than one year are
used to segregate assets to cover the Fund's obligations under futures contracts
and related options, such use 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



                                       -32-

<PAGE>

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.

         Additional Risks of Non-U.S. or Currency Related Derivatives. Options
on securities, futures contracts, options on futures contracts, and options on
currencies may be traded on foreign exchanges. Such transactions may not be
regulated as effectively as similar transactions in the United States; may not
involve a clearing mechanism and related guarantees; and are subject to the risk
of governmental actions affecting trading in, or the prices of, foreign
securities. Some foreign exchanges may be principal markets so that no common
clearing facility exists and a trader may look only to the broker for
performance of the contract. The value of such positions also could be adversely
affected by (i) other complex foreign political, legal and economic factors,
(ii) lesser availability than in the United States of data on which to make
trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States and (v) lesser
trading volume. In addition, unless the Fund hedges against fluctuations in the
exchange rate between the U.S. dollar and the currencies in which trading is
done on foreign exchanges, any profits that the Fund might realize in trading
could be eliminated by adverse changes in the exchange rate, or the Fund could
incur losses as a result of those changes. The Fund's use of such instruments
may cause the Fund to realize higher amounts of short-term capital gains
(generally taxed to shareholders at ordinary income tax rates) than if the Fund
had not used such instruments.

         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



                                       -33-

<PAGE>

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 an 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 Commodity Exchange Act ("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



                                       -34-

<PAGE>



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 the AMPS or any variable rate
borrowing. 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 of beneficial interest of the Fund ("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.


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


                                       -35-

<PAGE>


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 of the Fund's shares. Some U.S. Government
securities, such as 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




                                       -36-

<PAGE>


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 Fund's portfolio manager 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.



                                       -37-

<PAGE>

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. 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, 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
Advisors 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.



                                       -38-

<PAGE>


         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
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 holders of AMPS ("AMPS Holders") to elect a majority of the Trustees of
the Fund.


         As described elsewhere in this section, 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 "The Fund's
Objective, Strategies and Investments" in the Prospectus. The Fund may (but is
not required to) cover its commitment under these instruments by the segregation
of liquid assets, equal in value to the amount of the Fund's commitment, or by
entering into offsetting transactions or owning positions covering its
obligations. In that case, the instruments 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.
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


                                       -39-

<PAGE>


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 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 at least
equal to the amount of any forward purchase commitment, 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 an Advisor's ability to predict interest rates and prepayments correctly.
There is no assurance that dollar rolls can be successfully employed.


                                       -40-

<PAGE>

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 theoretically 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.


                                       -41-

<PAGE>

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 an
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 Advisors manage 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


                                       -42-

<PAGE>

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 an
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 reasonable
negotiated 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 an 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.


                                       -43-

<PAGE>

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 an 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 or


                                       -44-

<PAGE>

interpretations of its staff, as such statute, rules, regulations, orders or
interpretations may be amended from time to time.

         (2) Not concentrate investments in a particular industry as
concentration is defined under the 1940 Act, the rules or regulations thereunder
or applicable orders of the SEC or interpretations of its staff, as such
statute, rules, regulations, orders or interpretations may be amended from time
to time. 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 or
interpretations of its staff, as such statute, rules, regulations, orders or
interpretations 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 or interpretations of its staff, as such statute,
rules, regulations, orders or interpretations may be amended from time to time.

         With respect to fundamental investment limitations of the Fund numbered
(1) through (4), the fundamental investment limitations set forth above restrict
the Fund's ability to engage in certain practices and purchase securities and
other instruments to the extent permitted by, or consistent with, the 1940 Act.
Relevant limitations of the 1940 Act are described below, which are based either
on the 1940 Act itself, the rules or regulations thereunder, or interpretations
promulgated by the SEC or its staff. As such, these limitations of the 1940 Act
are not "fundamental"; that is, the limitations will change as the statute,
rules, regulations or 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
Objective, Strategies and Investments" and "Risks - General Risks of Investing
in the Fund - 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 1/3% 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, dollar rolls, the purchase of
securities on margin, short sales, or the writing of puts on portfolio
securities, may be considered senior


                                       -45-

<PAGE>


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, equal
in value to the amount of the Fund's commitment, 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 AMPS are a senior security. See the Prospectus under the heading
"Description of Capital Structure" for more information.


         Fundamental Investment Restriction (2). "Concentration" is interpreted
under the 1940 Act to mean investment of 25% or more of the Fund's total assets
in a single industry. If the Fund were to "concentrate" its investments in a
particular industry, investors would be exposed to greater risks because the
Fund's performance would be largely dependent on that industry's performance.
The Fund has not reserved the right to concentrate in any industry. For purposes
of this limitation, the Fund does not consider certificates of deposit or
banker's acceptances issued by domestic branches of U.S. or foreign banks to be
in a single industry. If, in the future, these instruments are considered to be
in the same industry, the Fund reserves the freedom of action to concentrate in
such an industry. The Fund currently expects that it would invest in such
instruments in an amount equal to 25% or more of its total assets 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 focusing
investments in issuers in a group of related industrial sectors (such as
different types of technology issuers).

         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.


                                       -46-

<PAGE>


         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 any preferred shares (including the AMPS) voting
together as a single class, and of the holders of a majority of the outstanding
preferred shares (including the AMPS) 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 an 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, an
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.


         The Fund may not change its policy to invest at least 80% of its total
managed assets in bonds unless it provides shareholders with at least 60 days'
written notice of such change. For purposes of the 80% test above, the Fund will
consider an instrument, including a synthetic instrument, a bond if, in the
judgment of an Advisor, it has economic characteristics similar to a bond. Such
instruments would include, but are not limited to, futures contracts and related
options, mortgage-related securities, asset-backed securities, reverse
repurchase agreements and dollar rolls.


         It is a condition of the issuance of the AMPS that they be issued with
a credit quality rating of "Aaa" from Moody's and "AAA" from Fitch. In order to
obtain and maintain the required ratings, the Fund will be required to comply
with investment quality, diversification and other guidelines established by
Moody's 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 holders of Common Shares ("Common
Shareholders") or its ability to achieve its investment objective. Moody's 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.



                                       -47-

<PAGE>

         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.

<TABLE>
<CAPTION>

                                                                                            Number of
                                                                                        Portfolios In
                                             Term of Office     Principal Occupation(s)    Fund Complex         Other
                         Position(s)         and Length of       During the Past Five      Overseen by      Directorships
     Name and Age       with the Fund         Time Served                Years              Trustee(1)     Held by Trustee
     ------------       -------------      ----------------    ------------------------   --------------   ---------------

<S>                     <C>                <C>                 <C>                        <C>             <C>
Ronald J. Arnault       Trustee            Term expires in     Trustee and Vice                 13              None
Age 59                  (2)                2003; served        Chairman, Occidental
                                           since 2002          College; Member, Board
                                                               of Directors, The Center
                                                               Theater Group.
                                                               Formerly: President, RJA
                                                               Consultants (energy
                                                               industry financial
                                                               consultants) (1997 to
                                                               2001); Executive Vice
                                                               President, Chief
                                                               Financial Officer and
                                                               Director of Atlantic
                                                               Richfield Company.

John E. Bryson          Trustee            Term expires in     President of Edison              13        Director of The
Age 59                  (3) (4) (5)        2003; served        International (electric                    Boeing Company
                                           since 2002          power generator,                           and The Walt
                                                               distributor and                            Disney Company
                                                               structured finance
                                                               provider) (since January
                                                               2000); Chairman and
                                                               Chief Executive Officer
                                                               of Edison International
                                                               (since October 1990);
                                                               Director of the W.M.
                                                               Keck Foundation.
                                                               Formerly: Chairman and
                                                               Chief Executive Officer
                                                               of Southern California
                                                               Edison Company (1990 to
                                                               1999).
</TABLE>


                                       -48-

<PAGE>

<TABLE>
<CAPTION>

                                                                                            Number of
                                                                                          Portfolios In
                                             Term of Office     Principal Occupation(s)    Fund Complex         Other
                         Position(s)         and Length of       During the Past Five      Overseen by      Directorships
     Name and Age       with the Fund         Time Served                Years              Trustee(1)     Held by Trustee
     ------------       -------------      ----------------    ------------------------   --------------   ---------------

<S>                     <C>                <C>                 <C>                        <C>             <C>
Anita L. DeFrantz       Trustee            Term expires in     President of the Amateur         13              None
Age 49                  (2)                2004; served        Athletic Foundation of
                                           since 2002          Los Angeles (since
                                                               1987); President of Kids
                                                               in Sports (since 1994);
                                                               Vice President, FISA,
                                                               the International Rowing
                                                               Federation (since 1993).
                                                               Also, board member of
                                                               the Amateur Athletic
                                                               Foundation of Los
                                                               Angeles (since 1987),
                                                               International Olympic
                                                               Committee (since 1986),
                                                               the United States
                                                               Olympic Committee
                                                               Executive Board (since
                                                               1977), and National
                                                               Museum of American
                                                               History (since 1999).

William G. McGagh       Trustee and        Term expires in     Consultant, McGagh               13              None
Age 73                  Chairman of the    2004; served        Associates (corporate
                        Trustees           since 2002          financial consulting)
                        (3) (5)                                (since January 1989).
                                                               Formerly: Senior Vice
                                                               President, Chief
                                                               Financial Officer and
                                                               Director of Northrop
                                                               Grumman Corporation
                                                               (defense, aerospace and
                                                               cyberspace products);
                                                               Chairman of the Board of
                                                               the John Tracy Clinic;
                                                               Chairman of the Board of
                                                               the Los Angeles
                                                               Orthopedic Hospital;
                                                               Member of the Regents
                                                               Council of Mount St.
                                                               Mary's College.
</TABLE>


                                       -49-

<PAGE>

<TABLE>
<CAPTION>
                                                                                            Number of
                                                                                          Portfolios In
                                             Term of Office     Principal Occupation(s)    Fund Complex         Other
                         Position(s)         and Length of       During the Past Five      Overseen by      Directorships
     Name and Age       with the Fund         Time Served                Years              Trustee(1)     Held by Trustee
     ------------       -------------      ----------------    ------------------------   --------------   ---------------

<S>                     <C>                <C>                 <C>                        <C>             <C>
William E. B. Siart     Trustee            Term expires in     Chairman of the Board,           13        Director of
Age 55                  (2) (3) (4) (5)    2005; served        Walt Disney Concert Hall                   Sybron Dental
                                           since 2002          I, Inc. (since 1998);                      Specialties, Inc.
                                                               Chairman of the Board of
                                                               Excellent Education
                                                               Development (ExED LLC)
                                                               (since 2000); Member of
                                                               the Board of Trustees of
                                                               the University of
                                                               Southern California;
                                                               Member of the Board of
                                                               Directors of the
                                                               Performing Arts Center
                                                               of Los Angeles County;
                                                               Director of the Los
                                                               Angeles Philharmonic.
                                                               Formerly: President and
                                                               Chief Executive Officer
                                                               of ExED LLC (1998 to
                                                               2000); Chairman (1995 to
                                                               1996), Chief Executive
                                                               Officer (1995 to 1996),
                                                               and President (1990 to
                                                               1996) of First
                                                               Interstate Bancorp.

Louis A. Simpson        Trustee            Term expires in     President and CEO,               13        Director of AT&T
Age 65                  (2) (4) (5)        2005; served        Capital Operations of                      and HNC Software
                                           since 2002          GEICO Corporation (since
                                                               May 1993); Trustee for
                                                               the Cate School, the
                                                               University of California
                                                               San Diego Foundation,
                                                               the Urban Institute and
                                                               the Woodrow Wilson
                                                               National Fellowship
</TABLE>

                                       -50-

<PAGE>

<TABLE>
<CAPTION>

                                                                                            Number of
                                                                                          Portfolios In
                                             Term of Office     Principal Occupation(s)    Fund Complex         Other
                         Position(s)         and Length of       During the Past Five      Overseen by      Directorships
     Name and Age       with the Fund         Time Served                Years              Trustee(1)     Held by Trustee
     ------------       -------------      ----------------    ------------------------   --------------   ---------------

<S>                     <C>                <C>                 <C>                        <C>             <C>
                                                               Foundation; Chair, the
                                                               Scripps Institution of
                                                               Oceanography Council.
                                                               Formerly: Director,
                                                               Science Applications
                                                               International
                                                               Corporation (SAIC) (1999
                                                               to 2002); Vice Chairman
                                                               of the Board, GEICO
                                                               Corporation (1985 to
                                                               1993); Senior Vice
                                                               President and Chief
                                                               Investment Officer of
                                                               GEICO Corporation and
                                                               Government Employees
                                                               Insurance Company (1979
                                                               to 1985); President and
                                                               CEO of Western Asset
                                                               Management Company (1977
                                                               to 1979).

                                                               --------------------------
                                                                  Interested Trustee

Ronald L. Olson (6)     Trustee            Term expires in     Senior Partner, Munger,          13        Director of
Age 61                  (3)                2005; served        Tolles & Olson (a law                      Edison
                                           since 2002          partnership); Chairman                     International,
                                                               of the Board, RAND                         City National
                                                               Corporation (nonprofit                     Corporation and
                                                               institution).                              Berkshire
                                                                                                          Hathaway, Inc.

                                                               --------------------------
                                                                       Officers

James W. Hirschmann     President          Served since 2001   Director, President and         N/A               N/A
III                                        (7)                 Chief Executive Officer,
Age 41                                                         Western Asset, March
                                                               1999 to present;
                                                               Member, Board of
                                                               Directors of
                                                               Independent

</TABLE>

                                       -51-

<PAGE>

<TABLE>
<CAPTION>

                                                                                            Number of
                                                                                          Portfolios In
                                             Term of Office     Principal Occupation(s)    Fund Complex         Other
                         Position(s)         and Length of       During the Past Five      Overseen by      Directorships
     Name and Age       with the Fund         Time Served                Years              Trustee(1)     Held by Trustee
     ------------       -------------      ----------------    ------------------------   --------------   ---------------

<S>                     <C>                <C>                 <C>                        <C>             <C>
                                                               Colleges and
                                                               Universities;
                                                               Member, Board of
                                                               Trustees of
                                                               Widener College;
                                                               President,
                                                               Western Asset
                                                               Funds, Inc. and
                                                               Pacific American
                                                               Income Shares,
                                                               Inc. Formerly:
                                                               Director of
                                                               Marketing,
                                                               Western Asset,
                                                               April 1989 to
                                                               1999; Vice
                                                               President and
                                                               Director of
                                                               Marketing,
                                                               Financial Trust
                                                               Corporation (bank
                                                               holding company),
                                                               1988 to 1989;
                                                               Vice President of
                                                               Marketing,
                                                               Atalanta/Sosnoff
                                                               Capital
                                                               (investment
                                                               management
                                                               company), 1986 to
                                                               1988.

Ilene S. Harker         Vice President     Served since 2001   Director of Compliance          N/A               N/A
Age 47                                     (7)                 and Controls, Western
                                                               Asset, 1978 to present;
                                                               Vice President, Pacific
                                                               American Income Shares,
                                                               Inc., since April 1996;
                                                               Vice President, Western
                                                               Asset Funds, Inc., since
                                                               November 1990.
                                                               Formerly: Secretary of
                                                               Pacific American Income
                                                               Shares, Inc., 1993 to
                                                               1996.

S. Kenneth Leech        Vice President     Served since 2001   Chief Investment                N/A               N/A
Age 48                                     (7)                 Officer, Western Asset,
                                                               1998 to present; Vice
                                                               President, Western Asset
</TABLE>


                                       -52-

<PAGE>


<TABLE>
<CAPTION>

                                                                                            Number of
                                                                                          Portfolios In
                                             Term of Office     Principal Occupation(s)    Fund Complex         Other
                         Position(s)         and Length of       During the Past Five      Overseen by      Directorships
     Name and Age       with the Fund         Time Served                Years              Trustee(1)     Held by Trustee
     ------------       -------------      ----------------    ------------------------   --------------   ---------------

<S>                     <C>                <C>                 <C>                        <C>             <C>

                                                               Funds, Inc. and Pacific
                                                               American Income Shares,
                                                               Inc. Formerly: Director
                                                               of Portfolio Management,
                                                               Western Asset, 1990 to
                                                               1998; Senior Trader,
                                                               Greenwich Capital, 1988
                                                               to 1990; Fixed Income
                                                               Manager of The First
                                                               Boston Corporation
                                                               (holding company; stock
                                                               and bond dealers), 1980
                                                               to 1987; Portfolio
                                                               Manager of National Bank
                                                               of Detroit, 1977 to 1980.


Marie K. Karpinski      Treasurer and      Served since 2001   Vice President, Legg            N/A               N/A
Age 53                  Principal          (7)                 Mason Wood Walker,
                        Financial and                          Incorporated, 1992 to
                        Accounting                             present; Vice President
                        Officer                                and Treasurer of all
                                                               Legg Mason retail funds
                                                               (open-end investment
                                                               companies), 1986 to
                                                               present; Vice President
                                                               and Treasurer of Legg
                                                               Mason Charles Street
                                                               Trust, Inc. (open-end
                                                               investment company) and
                                                               Western Asset Funds,
                                                               Inc.; Treasurer and
                                                               Principal Financial and
                                                               Accounting Officer of
                                                               Pacific American Income
                                                               Shares, Inc., 2001 to
                                                               present.  Formerly:
                                                               Assistant


</TABLE>


                                       -53-

<PAGE>

<TABLE>
<CAPTION>


                                                                                            Number of
                                                                                          Portfolios In
                                             Term of Office     Principal Occupation(s)    Fund Complex         Other
                         Position(s)         and Length of       During the Past Five      Overseen by      Directorships
     Name and Age       with the Fund         Time Served                Years              Trustee(1)     Held by Trustee
     ------------       -------------      ----------------    ------------------------   --------------   ---------------

<S>                     <C>                <C>                 <C>                        <C>             <C>
                                                               Treasurer of
                                                               Pacific American Income
                                                               Shares, Inc., 1988 to
                                                               2001; Assistant Vice
                                                               President, Legg Mason
                                                               Wood Walker,
                                                               Incorporated, 1989 to
                                                               1992.


Erin K. Morris          Assistant          Served since 2001   Assistant Treasurer             N/A               N/A
Age 35                  Treasurer          (7)                 (2001 to present) of:
                                                               Legg Mason Income Trust,
                                                               Legg Mason Cash Reserve
                                                               Trust, Legg Mason Tax
                                                               Exempt Trust, Legg Mason
                                                               Tax-Free Income Fund and
                                                               Pacific American Income
                                                               Shares, Inc.; Manager,
                                                               Fund Accounting, Legg
                                                               Mason Wood Walker,
                                                               Incorporated (2000 to
                                                               present).  Formerly:
                                                               Assistant Manager, Fund
                                                               Accounting, Legg Mason
                                                               Wood Walker,
                                                               Incorporated (1993 to
                                                               2000).


Lisa G. Hathaway        Secretary          Served since 2001   Senior Compliance               N/A               N/A
Age 40                                     (7)                 Officer, Western Asset;
                                                               Member of the Board of
                                                               Directors of Southern
                                                               California Dollars for
                                                               Scholars; Secretary,
                                                               Western Asset Funds,
                                                               Inc. and Pacific
                                                               American Income Shares,
                                                               Inc.  Formerly:
                                                               Assistant Vice
                                                               President, Fund Business
                                                               Management, Capital
                                                               Research and Management
                                                               Company (an investment
                                                               management firm), 1990
                                                               to 1999.
</TABLE>

                                       -54-

<PAGE>

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

(1) Each Trustee also serves as a Director for Pacific American Income Shares,
Inc. (closed-end investment company) and Western Asset Funds, Inc. (open-end
investment company), which are considered part of the same Fund Complex as the
Fund.
(2) Member of the Audit Committee of the Board of Trustees.
(3) Member of the Executive Committee of the Board of Trustees.
(4) Member of the Nominating Committee of the Board of Trustees.
(5) Member of the Compensation Committee of the Board of Trustees.
(6) Because Mr. Olson's law firm provides legal services to the Advisors, Mr.
Olson is an "interested person" (as defined in Section 2(a)(19) of the 1940 Act)
of the Fund and the Advisors.
(7) 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, 2001, 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, 2001, 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, an
Executive Committee, a Nominating Committee and a Compensation Committee. The
Audit Committee meets with the Fund's independent accountants to review, among
other things, the financial statements of the Fund. The Executive




                                       -55-

<PAGE>


Committee may meet from time to time between Board meetings in order to consider
relevant items requiring its consideration. The Nominating Committee meets to
select nominees for election as Trustees of the Fund. It is not the policy of
the Nominating Committee to consider nominees recommended by shareholders. The
Compensation Committee meets to review and determine Trustee compensation for
services to the Fund. Because the Fund has only recently been organized, neither
the Board of Trustees nor any Committees held meetings in 2001.

         As of September 5, 2002, 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 Advisors, any one or
more of the Underwriters or any one or more affiliates of any of the foregoing.
Mr. Simpson was previously an officer and employee of Western Asset. As
indicated in the table above, each officer of the Fund is affiliated with the
Advisors.


         In accordance with the Fund's staggered board (see "Anti-Takeover and
Other Provisions in the Declaration of Trust"), the Common Shareholders and the
AMPS Holders of the Fund will elect Trustees to fill the vacancies of Trustees
whose terms expire at each annual meeting of shareholders. If any AMPS are
outstanding, the AMPS Holders, voting as a separate class, will elect two
Trustees and the remaining Trustees shall be elected by Common Shareholders and
AMPS Holders, voting together as a single class. AMPS Holders will be entitled
to elect a majority of the Fund's Trustees under certain circumstances.

         Officers and Trustees of the Fund who are affiliated persons of the
Fund, the Advisors or one or more of the Underwriters receive no salary or fees
from the Fund. Each other Trustee of the Fund (including Mr. Olson, who is an
"interested person" of the Fund) receives a fee of $10,000 annually for serving
as a Trustee of the Fund, and a fee of $2,000 and related expenses for each
meeting of the Board of Trustees attended. The Chairman of the Trustees receives
an additional $2,500 per year for serving in that capacity. Audit Committee
members receive $1,000 for each meeting, and the Audit Committee Chairman
receives an additional $1,000 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, 2002. For the
calendar year ended December 31, 2001, the Trustees received the compensation
set forth in the following table for serving as trustees of other funds in the
"Fund Complex."


                                       -56-

<PAGE>
<TABLE>
<CAPTION>

                                                                                                       Total Compensation from
                              Estimated Compensation           Pension or                            the Fund Complex Paid to
                               from the Fund for the       Retirement Benefits    Estimated Annual      the Trustees for the
      Name of Trustee           Fiscal Year Ending          Accrued as Part of      Benefits Upon       Calendar Year Ending
      ---------------            December 31, 2002*           Fund Expenses          Retirement          December 31, 2001**
                                 ------------------           -------------          ----------          -------------------
<S>                           <C>                          <C>                   <C>                  <C>
Ronald J. Arnault                      $18,000                     N/A                   N/A                   $30,000
John E. Bryson                         $18,000                     N/A                   N/A                   $27,500
Anita L. DeFrantz                      $18,000                     N/A                   N/A                   $30,000
William G. McGagh                      $20,500                     N/A                   N/A                   $34,500
William E. B. Siart                    $18,000                     N/A                   N/A                   $30,500
Louis A. Simpson                       $18,000                     N/A                   N/A                   $30,500

                                                      -------------------
                                                      Interested Trustee

Ronald L. Olson                        $18,000                     N/A                   N/A                   $24,500
</TABLE>
-----------------

         * 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.

         ** Pacific American Income Shares, Inc. and Western Asset Funds, Inc.
are considered to be in the same "Fund Complex" as the Fund. This column does
not include estimated compensation from the Fund.

         The Fund has no employees. Its officers are compensated by Western
Asset.

Shareholders


         As of September 5, 2002, 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.



                                       -57-

<PAGE>



<TABLE>
<CAPTION>
Shareholder                                  Number of Common        Percentage of the Fund's
                                                  Shares                Outstanding Shares
                                                                     as of September 5, 2002

<S>                                         <C>                           <C>
Cede & Co., 55 Water Street, 25th Floor         10,978,960                    99.8%
New York, New York 10041-0001
</TABLE>




                        INVESTMENT ADVISOR AND SUBADVISOR

Investment Advisor

         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. As more
fully discussed below, Western Asset has retained WAML, its affiliate, to serve
as the Fund's subadvisor.

         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, furnishes continuously an investment program for the Fund and makes
investment decisions on behalf of the Fund and places all orders for the
purchase and sale of portfolio securities, subject always to the Fund's
investment objectives, policies and restrictions; provided that, so long as WAML
serves as the subadvisor for the Fund, Western Asset's obligation under the
Investment Management Agreement with respect to the portion of the Fund managed
by WAML is, subject always to the control of the Trustees, to determine and
review with WAML the investment policies of the Fund.

         Subject to the control of the Trustees, Western Asset also manages,
supervises and conducts the other affairs and business of the Fund, furnishes
office space and equipment, 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 Advisors, without cost, certain research, statistical and quotation services
of value to them or their respective affiliates in advising the Fund or their
other clients. In so doing, the Fund may incur greater brokerage commissions and
other transactions costs than it might otherwise pay.



                                       -58-

<PAGE>



         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 0.55% of the average weekly value of the Fund's total managed
assets for the services and facilities it provides. "Total managed assets" means
the total assets of the Fund (including any assets attributable to leverage)
minus accrued liabilities (other than liabilities representing leverage). The
liquidation preference of any AMPS outstanding is not considered a liability.
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 Advisors, 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, 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.

Subadvisor

         WAML, a wholly owned subsidiary of Legg Mason, Inc., serves as
subadvisor for the Fund pursuant to a portfolio management agreement (the
"Portfolio Management Agreement") between WAML and Western Asset. Under the
Portfolio Management Agreement, subject always to the control of the Trustees
and the supervision of Western Asset, WAML's obligation is to furnish
continuously an investment program for the non-U.S. dollar denominated assets in
the Fund, to make investment decisions on behalf of such portion of the Fund and
to place all orders for the purchase and sale of portfolio securities and all
other investments for such portion of the Fund. Under the Portfolio Management
Agreement, Western Asset pays a portion of the fees it receives from the Fund to
WAML in return for WAML's services, at the annual rate of 0.425% of the average
weekly value of the Fund's total managed assets that WAML manages.

         Certain Terms of the Investment Management Agreement and Portfolio
Management Agreement. The Investment Management Agreement and the Portfolio
Management Agreement were each approved by the Trustees of the Fund (including
all of the Trustees who are not "interested persons" of the Advisors). The
Investment Management Agreement and Portfolio Management Agreement will each
continue in force with respect to the Fund for two years from their respective
dates, and from year to year thereafter, but only so long as their 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 relevant 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. Each of the Investment Management Agreement
and Portfolio Management Agreement automatically terminates on assignment. The
Investment Management Agreement may be terminated on not more than 60 days'
written notice by Western



                                       -59-

<PAGE>

Asset to the Fund or by the Fund to Western Asset. The Portfolio Management
Agreement may be terminated on not more than 60 days' written notice by Western
Asset to WAML or by WAML to Western Asset, or by the Fund at any time by notice
to each Advisor.

         The Investment Management Agreement and the Portfolio Management
Agreement each provide that Western Asset or WAML, as applicable, 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 and Portfolio
Management Agreement. The Board of Trustees, including a majority of the
independent Trustees, considered and approved the Investment Management
Agreement and the Portfolio Management Agreement (the "Management Agreements")
at an in-person meeting held on February 5, 2002. As noted above, each Trustee
also serves as a director for Pacific American Income Shares, Inc. and Western
Asset Funds, Inc., investment companies managed by the Advisors that principally
invest in fixed income securities. As a result, the Trustees, in their
collective years of service as directors of such funds, have gained significant
knowledge regarding matters such as the fees and expenses of investment
companies comparable to the Fund; the services generally provided by investment
advisors to an investment company; the benefits of the advisory relationship to
an investment advisor; and the operations and prior performance of the Advisors.


         In arriving at their decision to approve the Management Agreements, the
Trustees met with representatives of the Advisors, including relevant investment
advisory personnel, and reviewed information prepared by the Advisors and
materials provided by fund counsel. As part of their review, the Trustees
examined the Advisors' ability to provide high quality investment management
services to the Fund. The Trustees considered, with respect to the Advisors, the
investment philosophy and research and decision-making processes of each
Advisor; the experience of the key advisory personnel responsible for the Fund;
the ability of the Advisors to attract and retain capable research and advisory
personnel; the capability and integrity of the senior management and staff of
the Advisors; the level of skill required to manage the Fund; and the investment
performance of other investment companies advised by the Advisors. The Trustees
further took into account current and developing conditions in the financial
services industry, including increasing competition among investment companies,
and noted the economic outlook and the general investment outlook in the markets
in which the Fund would invest. Based on the foregoing, the Trustees concluded
that the Advisors' investment process, research capabilities and philosophy were
well suited to the Fund given the Fund's investment objective and policies.


         In addition, the Trustees reviewed, with respect to all of the
Advisors' responsibilities under the Management Agreements, the anticipated
quality of the Advisors' services with respect to regulatory compliance and
compliance with the investment policies of the Fund; the nature, cost, scope and
anticipated quality of the services provided to the Fund and its shareholders
under the Management Agreements (in light of the Trustees' knowledge of fees and
expense ratios of closed-end investment companies investing principally in fixed
income securities); and the delegation of Western Asset's responsibility for
certain administrative services to Princeton Administrators, L.P. The Trustees
also considered conditions that might affect the Advisors' ability to provide
high quality services to the Fund in the future under the



                                       -60-

<PAGE>



Management Agreements, including the Advisors' business reputation, financial
condition and operational stability.

         The Trustees further evaluated potential benefits of the advisory
relationship to the Advisors, including, among others, the estimated
profitability of the Fund to the Advisors; and the direct and indirect benefits
that each Advisor may receive from its relationship with the Fund. In this
regard, the Trustees took into account services provided by Legg Mason Wood
Walker, Incorporated as principal underwriter with respect to the initial public
offering of the Fund's common shares. The Trustees also noted the fact that,
because the advisory fees paid to Western Asset by the Fund are based on the
Fund's total managed assets, including assets representing leverage, Western
Asset has a financial incentive for the Fund to issue preferred shares and use
other forms of leverage, which may create a conflict of interest between Western
Asset and the Fund's shareholders.

         In their deliberations with respect to these matters, the Trustees were
advised by their independent counsel, who are independent of the Advisors within
the meaning of the SEC rules regarding the independence of counsel. The Trustees
weighed the foregoing matters in light of the advice given to them by their
independent counsel as to the law applicable to the review of investment
advisory contracts. In arriving at a decision, 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 Management
Agreements, 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 Management Agreements was in the best interest of
the Fund and its shareholders.


Codes of Ethics

         The Fund, Western Asset and WAML 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 Advisors 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



                                       -61-

<PAGE>


involved (including the Fund). Some securities considered for investments by the
Fund may also be appropriate for other clients served by the Advisors, 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 Western Asset or WAML 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 Western Asset or WAML, as applicable. Western
Asset or WAML 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 Advisors place all orders for the purchase and sale of portfolio
securities, options, futures contracts and other instruments for the Fund and
buy and sell such securities, options, futures and other instruments for the
Fund through a substantial number of brokers and dealers. In so doing, the
Advisors use their 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 Advisors, having in mind the Fund's best interests, consider
all factors they deem 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 Advisors may receive research services from many broker-dealers with which
the Advisors place the Fund's portfolio transactions. The Advisors 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



                                       -62-

<PAGE>

and recommendations as to the purchase and sale of securities. Some of these
services are of value to the Advisors in advising various of their clients
(including the Fund), although not all of these services are necessarily useful
and of value in managing the Fund. Neither the management fee paid by the Fund
to Western Asset nor the portfolio management fee paid by Western Asset to WAML
is reduced because the Advisors and their 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 Advisors.

                                  DISTRIBUTIONS


         See "Description of AMPS - Dividends and Rate Periods" and "Description
of Capital Structure" in the Prospectus for information related to distributions
made to Fund shareholders.

         For tax purposes, the Fund is currently required to allocate net
capital gain and other taxable income, if any, among the Common Shares, the
Series M AMPS and the Series W AMPS in proportion to total dividends paid to
each class for the year in which such capital gain or other taxable income is
realized.

         While any AMPS 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 accrued dividends on AMPS have been paid, (2) the value of
the Fund's total assets (determined after deducting the amount of such dividend
or other distribution), less all liabilities and indebtedness of the Fund not
represented by "senior securities" (as defined in the 1940 Act), is at least
300% of the aggregate amount of senior securities representing indebtedness (to
the extent any such senior securities are outstanding) and at least 200% of the
aggregate amount of any senior securities representing indebtedness plus the
aggregate liquidation value of the outstanding preferred shares (expected to
equal the aggregate original purchase price of the outstanding preferred shares
plus any accrued and unpaid dividends thereon, whether or not earned or declared
and on a cumulative basis), (3) the Fund has redeemed the full number of AMPS
and any other preferred shares outstanding required to be redeemed by any
provision for mandatory redemption, and (4) other requirements imposed by any
rating agencies rating any AMPS 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."



                                       -63-

<PAGE>


         The Fund has paid dividends, in each case in the amount of $.10625 per
Common Share, on May 31, 2002, June 28, 2002, July 31, 2002 and August 30, 2002.


                              DESCRIPTION OF SHARES

Common Shares


         The Fund's Declaration authorizes the issuance of an unlimited number
of Common Shares. The Common Shares currently outstanding have been 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. The Common Shares currently outstanding have been fully paid and, subject
to matters discussed in "Anti-Takeover and Other Provisions in the Declaration
of Trust - Shareholder Liability" below, are non-assessable, and have no
pre-emptive or conversion rights or rights to cumulative voting. At any time
when the Fund's AMPS are outstanding, Common Shareholders will not be entitled
to receive any distributions from the Fund unless all accrued dividends on AMPS
have been paid, asset coverage (as defined in the 1940 Act) with respect to AMPS
and senior securities representing indebtedness (to the extent any such senior
securities are outstanding) would be at least 200% and 300%, respectively, after
giving effect to such distributions, and other requirements imposed by any
rating agencies rating any AMPS issued by the Fund have been met. See "- AMPS"
below. See "Description of AMPS - Dividends and Rate Periods - Restrictions on
Dividends and Other Distributions," "Description of AMPS - Rating Agency
Guidelines and Asset Coverage" and "Description of Capital Structure" in the
Prospectus.


         The Common Shares are listed on the New York Stock Exchange. 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 primarily 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 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. See "Repurchase of Common Shares; Conversion to Open-End Fund" below
and the Fund's Prospectus under "Repurchase of Fund Shares; Conversion to
Open-End Fund."




                                       -64-

<PAGE>




AMPS

         See "Description of AMPS" and "Description of Capital Structure" in the
Prospectus for information relating to the AMPS. Revised Article 12 set forth in
Amendment No. 1 to the Fund's Bylaws (the "Bylaws Amendment"), which establishes
many of the terms of the AMPS, is set forth in its entirety in Appendix B to
this Statement of Additional Information.


                        ADDITIONAL INFORMATION CONCERNING
                              THE AUCTIONS FOR AMPS

General


          Auction Agency Agreement. The Fund will enter into an auction agency
agreement with the auction agent (currently, Deutsche Bank Trust Company
Americas) which provides, among other things, that the auction agent will follow
the auction procedures set forth in the Bylaws Amendment for purposes of
determining the applicable rate for AMPS so long as the applicable rate for such
shares is to be based on the results of an auction.


          Broker-Dealer Agreements. Each auction requires the participation of
one or more broker-dealers that have entered into a separate agreement with the
auction agent (each, a "Broker-Dealer"). The auction agent will enter into
broker-dealer agreements with one or more Broker-Dealers selected by the Fund
that provide for the participation of those Broker-Dealers in auctions for AMPS.


          Securities Depository. The Depository Trust Company ("DTC") will act
as securities depository for the agent members with respect to each series of
AMPS. One certificate for each series of the AMPS will be registered in the name
of Cede & Co., as nominee of DTC. Such certificates will bear a legend to the
effect that such certificate is issued subject to the provisions restricting
transfers of AMPS contained in the Bylaws. Prior to the commencement of the
right of AMPS Holders to elect a majority of the Fund's Trustees, as described
under "Description of AMPS - Voting Rights" in the Prospectus, Cede & Co. will
be the holder of record of all AMPS, and owners of such shares will not be
entitled to receive certificates representing their ownership interest in such
shares.

          DTC, a New York-chartered limited purpose trust company, performs
services for its participants, some of whom (and/or their representatives) own
DTC. DTC maintains lists of its participants and will maintain the positions
(ownership interests) held by each such participant (the "agent member") in
AMPS, whether for its own account or as a nominee for another person. Additional
information concerning DTC and the DTC depository system is included as an
Exhibit to the Registration Statement of which this Statement of Additional
Information forms a part.


                                       -65-

<PAGE>

Auction Agent

          The auction agent will act as agent for the Fund in connection with
auctions. In the absence of bad faith or negligence on its part, the auction
agent will not be liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties under the auction
agency agreement.


          The auction agent may rely upon, as evidence of the identities of the
existing holders of AMPS, the auction agent's registry of existing holders, the
results of auctions and notices from any Broker-Dealer (or other person, if
permitted by the Fund) with respect to transfers described under "The Auction"
in the Prospectus and notices from the Fund. The auction agent is not required
to accept any such notice for an auction unless it is received by the auction
agent by 3:00 p.m., New York City time, on the business day preceding such
auction.

          The auction agent may terminate the auction agency agreement upon
notice to the Fund on a date no earlier than 60 days after such notice (30 days
after such notice, if the auction agent has not been paid). If the auction agent
should resign, the Fund will attempt to appoint a successor auction agent. The
Fund may remove the auction agent provided that prior to such removal the Fund
shall have entered into an agreement with a successor auction agent to perform
substantially similar services.


Broker-Dealers


         After each auction for shares of each series of AMPS, the auction agent
will pay to each Broker-Dealer, from funds provided by the Fund, a service
charge that will generally be at the annual rate of 1/4 of 1% of the stated
value ($25,000) of the AMPS held by such Broker-Dealer's customers upon
settlement in such auction.


         The Broker-Dealer agreement provides that a Broker-Dealer (other than
an affiliate of the Fund) may submit orders in auctions for its own account,
unless the Fund notifies all Broker-Dealers that they may no longer do so, in
which case Broker-Dealers may continue to submit hold orders and sell orders for
their own accounts. Any Broker-Dealer that is an affiliate of the Fund may
submit orders in auctions, but only if such orders are not for its own account.
If a Broker-Dealer submits an order for its own account in any auction, it might
have an advantage over other bidders because it would have knowledge of all
orders submitted by it in that auction; such Broker-Dealer, however, would not
have knowledge of orders submitted by other Broker-Dealers in that auction.

         The Fund may request the auction agent to terminate one or more
Broker-Dealer agreements at any time upon five days' notice, provided that at
least one Broker-Dealer agreement is in effect after such termination.



                                       -66-

<PAGE>


         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 AMPS Holders,
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 in
securities effected by the Fund or such series or




                                       -67-

<PAGE>



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 either (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) or (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.


                                       -68-

<PAGE>


         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 do not have the right to cause the Fund to redeem their shares.
Instead, the Fund's Common Shares trade in the open market at a price that will
be a function of several factors, including dividend levels (which are in turn
affected by expenses and other factors), net asset value, call protection,
price, dividend stability, 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 AMPS are
outstanding, the Fund may not purchase, redeem or otherwise acquire any of its
Common Shares unless (1) full cumulative dividends on each series of AMPS and
any other preferred shares outstanding due on or prior to the date of the
transaction have been declared and paid or have been declared and sufficient
funds for the payment thereof deposited with the auction agent, (2) the value of
the Fund's total assets (determined after deducting the acquisition price of the
Common Shares), less all liabilities and indebtedness of the Fund not
represented by "senior securities" (as defined in the 1940 Act), is at least
300% of the aggregate amount of senior securities representing indebtedness (to
the extent any such senior securities are outstanding) and at least 200% of the
aggregate amount of any senior securities representing indebtedness plus the
aggregate liquidation value of the outstanding preferred shares (expected to
equal the aggregate original purchase price of the outstanding preferred shares
plus any accrued and unpaid dividends thereon, whether or not earned or declared
and on a cumulative basis), (3) the Fund has redeemed the full number of AMPS
and any other preferred shares outstanding required to be redeemed by any
provision for mandatory redemption, and (4) other requirements imposed by any
rating agencies rating any AMPS issued by the Fund have been met.


         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.


                                       -69-

<PAGE>


         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 AMPS voting together as a single class, and the
holders of a "majority of the outstanding" AMPS 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 AMPS 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 objective.


         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 AMPS are outstanding will increase the leverage applicable to the
outstanding Common Shares then remaining. See the Fund's Prospectus under "Risks
- General Risks of Investing in the Fund - 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



                                       -70-

<PAGE>


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 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 from dividends, interest,
         payments with respect to certain securities loans, and gains from the
         sale 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;

         (b) distribute with respect to each taxable year at least 90% of the
         sum of its investment company taxable income (which includes the
         excess, if any, of net short-term capital gains over net long-term
         capital losses for such year) and its net tax-exempt income; and

         (c) 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
         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 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, 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
(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, including
any distributions of net tax-exempt income and net long-term capital gains,
would be taxable to shareholders as ordinary income, assuming the Fund had
sufficient current or accumulated earnings and profits. Such distributions
generally would be eligible 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 and net
capital gain. Nonetheless, the Fund may


                                       -71-

<PAGE>


retain for investment its net capital gain. However, if the Fund retains 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 (i) will be required to include in
income for federal income tax purposes, as long-term capital gain, their share
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 liability (if any) and to claim refunds to the
extent the credit exceeds such liability. 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 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. The Fund intends generally to make
distributions sufficient to avoid imposition of the 4% excise tax.


         Fund Distributions. Based on the opinion of Ropes & Gray, the Fund
believes that the AMPS will be treated as equity for U.S. federal income tax
purposes. Distributions from the Fund will be taxable to shareholders as
ordinary income to the extent derived from investment income and net short-term
capital gains, assuming the Fund had sufficient current or accumulated earnings
and profits. 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.


         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 the amount of cash allocated to the shareholder for the
purchase of shares on its behalf.

         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.



                                       -72-

<PAGE>



         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, Series M AMPS and
Series W AMPS in proportion to the total dividends paid to each class with
respect to such tax year. Dividends qualifying and not qualifying for the
dividends-received deduction will similarly be allocated between and among
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 its shares, and
thereafter as capital gain. A return of capital is not taxable, but it reduces
the shareholder's tax basis in its shares, thus reducing any loss or increasing
any gain on a subsequent taxable disposition by the shareholder of its 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 AMPS Holders, and only thereafter to distributions made to Common
Shareholders. As a result, the AMPS Holders will receive a disproportionate
share of the distributions treated as dividends, and the Common Shareholders
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 12 months. 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 Capital Gains Dividends or
designated undistributed capital gains 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 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 AMPS 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 AMPS
held, or considered to be held, by



                                       -73-

<PAGE>



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 AMPS, 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 AMPS held by an AMPS
Holder 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 AMPS Holders 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
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 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. 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.


                                       -74-

<PAGE>

         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.

         Options, Futures, Forward Contracts and Swap Agreements. The Fund's
transactions in options, futures contracts, hedging transactions, forward
contracts, 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 (i) as a dividend to the extent of the
Fund's remaining earnings and profits (including earnings and profits arising
from tax-exempt income), (ii) thereafter, as a return of capital to the extent
of the recipient's basis in the shares, and (iii) thereafter, as gain from the
sale or exchange of a capital asset. If the Fund's book income is less than
taxable income, the Fund could be required to make distributions exceeding book
income to qualify as a regulated investment company that is accorded special tax
treatment.

         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 Currency Transactions. The Fund's transactions in foreign
currencies, foreign currency-denominated debt obligations and certain foreign
currency options, futures contracts and forward contracts (and similar
instruments) may give rise to ordinary income or loss to the extent such income
or loss results from fluctuations in the value of the foreign currency
concerned.

         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.


                                       -75-

<PAGE>


         Passive Foreign Investment Companies. Investment by the Fund in certain
"passive foreign investment companies" ("PFICs") could subject the Fund to U.S.
federal income tax (including interest charges) on distributions received from
the company or on proceeds received from the disposition of shares in the
company, which tax cannot be eliminated by making distributions to Fund
shareholders. However, the Fund may elect to treat a PFIC as a "qualified
electing fund" (a "QEF election"), in which case the Fund will be required to
include its share of the company's income and net capital gains annually,
regardless of whether it receives any distribution from the company. The Fund
also may make an election to mark the gains (and to a limited extent losses) in
such holdings "to the market" as though it had sold and repurchased its holdings
in those PFICs on the last day of the Fund's taxable year. Such gains and losses
are generally treated as ordinary income and loss. The QEF and mark-to-market
elections may accelerate the recognition of income (without the receipt of cash)
and increase the amount required to be distributed by the Fund to avoid
taxation. Making either of these elections therefore may require the Fund to
liquidate other investments (including when it is not advantageous to do so) to
meet its distribution requirement, which also may accelerate the recognition of
gain and affect the Fund's total return.

         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 a
"foreign person" within the meaning of the Code 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 permanent establishment in the United States, and the
shares held by such beneficial holder are effectively connected with such
permanent establishment and, in addition, 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
unless (i) the shares in question are effectively connected with a permanent
establishment in the United States of the beneficial holder and such gain 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 and certain other conditions are met.

         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.




                                       -76-

<PAGE>


         Backup Withholding. The Fund generally is required to withhold and
remit to the U.S. Treasury a percentage of the taxable dividends and other
distributions paid to any 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 will be (i)
30% for amounts paid during 2002 and 2003, (ii) 29% for amounts paid during 2004
and 2005, and (iii) 28% for amounts paid during 2006 through 2010. The backup
withholding rate will be 31% for amounts paid after December 31, 2010, unless
Congress enacts tax legislation providing otherwise.

         In order for a foreign investor to qualify for exemption from the
backup withholding tax rates and for reduced 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.

         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

         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.

         From time to time, the Fund and/or the Advisors may report to
shareholders or to the public in advertisements concerning the performance of
the Advisors as advisors to clients other than the Fund, or on the comparative
performance or standing of the Advisors in relation to other money managers. The
Advisors 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 organizations.

         Performance information for the Fund or for other investment companies
or accounts managed by the Advisors 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
Advisors, should be considered in light of the Fund's investment objective 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


                                       -77-

<PAGE>


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.

         Advisors. From time to time, the Advisors or the Fund may use, in
advertisements or information furnished to present or prospective shareholders,
information regarding the Advisors including, without limitation, information
regarding the Advisors' 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 Advisors' overall investment management performance
contained in third-party reports or publications. Western Asset was founded in
1971. The Advisors have traditionally served an institutional clientele, with a
minimum advisory client account size of $75 million and an average client
relationship of over $390 million as of December 31, 2001. As of December 31,
2001, the Advisors managed over $94 billion in assets for 241 clients. The
Advisors employ over 180 professionals around the world who are dedicated solely
to fixed-income management, and their product, sector and credit specialists
have an average of 14 years of experience. The Advisors have offices in
Pasadena, London, and Singapore.

         Advertisements for the Fund may make reference to certain other open-
or closed-end investment companies managed by the Advisors. In 1973, Western
Asset introduced Pacific American Income Shares, Inc. (NYSE: PAI), an
unleveraged, investment grade, closed-end bond fund. In 1990, 1994 and 1998,
Western Asset introduced Western Asset Core Portfolio (WAFTFX), Western Asset
Intermediate Portfolio (WATIX) and Western Asset Core Plus Portfolio (WACPX),
respectively. Each of these investment companies, other than Pacific American
Income Shares, Inc., is an open-end investment company that does not employ
leverage. Each of the investment companies above does not have policies
identical to those of the Fund.

         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. For instance, such advertisements may note, if
applicable, that corporate bond yield spreads in relation to the 10-Year U.S.
Treasury bond are near their 10-year highs, while short-term yields are near
their 30-year lows. For these purposes, corporate bond yields may be measured by
various indices, such as the Bloomberg 10-year BBB Industrial Index, an
unmanaged index made up of over 150 U.S. dollar industrial bonds with an
equivalent rating of BBB. Advertisements and related materials may also note the
Advisors' belief that yields on intermediate- and long-term bonds offer
attractive current yields and set forth yields on other investments, including,
without limitation, 3-month T-Bills, 10-year Treasury bonds and 30-year Treasury
bonds.

         The Fund's advertising materials may also compare the performance of
investment companies with differing investment styles, objectives or portfolio
contents. Returns for investment companies that invest primarily in bonds may be
compared with returns of investment companies investing primarily in equities.
For example, the Fund may cite information published by Barron's on February 4,
2002 that the average 2001 returns of the 50 top-performing bond funds
outperformed the average 2001 returns of the 50 top-performing equity funds,
where such funds were selected from a universe of the funds most used in defined
contribution plans. Such materials may also assert that, in an uncertain equity
environment, bonds can provide an attractive alternative to equity investments.


                                       -78-

<PAGE>

         Advertising or related material may from time to time refer to the
Advisors' judgment as to the attractiveness of an investment in closed-end
investment companies such as the Fund. Such materials may include specific and
general assessments and forecasts regarding the U.S. economy, corporate credit
quality, yield spreads, bond prices and other factors, as well as the impact of
such factors on the Fund.

         The Fund. The Fund's listing of the Common Shares on the New York Stock
Exchange is expected to provide liquidity, convenience and daily price
visibility through electronic services and in newspaper stock tables.

         The offering period for the Common Shares began on March 4, 2002 and
ended on March 25, 2002. The first trade date for the Common Shares was March
26, 2002, with a settlement date of March 28, 2002. The initial offering of the
Common Shares carried a commission to brokers of $0.45 per share (3.00% of the
offering price).

         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. 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.


         For the period from March 28, 2002 (commencement of the Fund's
operations) through September 5, 2002, the Fund's net decrease in net assets
resulting from investment operations was $10,208,399.

               CUSTODIAN, TRANSFER AGENT AND DIVIDEND PAYING AGENT

         State Street Bank & Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, serves as custodian for the assets of the Fund. The
custodian performs custodial and fund accounting services.


         Deutsche Bank Trust Company Americas, 100 Plaza One, 6th Floor, Jersey
City, NJ 07311, serves as auction agent, transfer agent, registrar, dividend
paying agent and redemption agent for the AMPS.



                             INDEPENDENT ACCOUNTANTS

         PricewaterhouseCoopers, LLP, Suite 2100, 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, 885 Third Avenue, New York, New York 10022, passes upon
certain legal matters in connection with shares offered by the Fund, and also
acts as counsel to the Fund.


                                       -79-

<PAGE>

                             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 Securities and Exchange Commission (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.


                                       -80-

<PAGE>

                              FINANCIAL STATEMENTS

         The Statement of Assets and Liabilities of the Fund dated as of March
8, 2002, and the Statement of Operations for the one-day period ending March 8,
2002, including the Notes thereto, and the report of PricewaterhouseCoopers LLP
thereon dated March 19, 2002, included in the Fund's Statement of Additional
Information dated March 25, 2002, relating to the Common Shares, is hereby
incorporated by reference into this Statement of Additional Information, which
means that such Statement of Assets and Liabilities and the Notes thereto are
considered to be a part of this Statement of Additional Information. The
Statement of Additional Information for the Common Shares was filed
electronically with the SEC on March 26, 2002 (Accession No.
0000927016-02-001650).


                                       -81-

<PAGE>

                         WESTERN ASSET PREMIER BOND FUND
                       STATEMENT OF ASSETS AND LIABILITIES

                                  June 30, 2002

                                   (unaudited)

(Amounts in Thousands)
<TABLE>
<CAPTION>

Assets

<S>                                                                                                     <C>
Investments, at value (cost $235,578)                                                                   $  228,331
Cash                                                                                                         5,313
Receivable from brokers for proceeds on securities sold short                                                8,479
Interest receivable                                                                                          4,606
Receivable for securities sold                                                                               3,968
Dividends receivable                                                                                            29
Variation margin receivable for futures contracts                                                                6
                                                                                                        -----------
   Total assets                                                                                            250,732
                                                                                                        -----------
Liabilities

Reverse repurchase agreement and interest payable                                                           78,658
Payable for investments purchased                                                                           13,412
Short Sales (proceeds $8,479)                                                                                8,486
Call options written (proceeds $218)                                                                           153
Investment management fee payable                                                                               50
Administration fee payable                                                                                      15
Accrued expenses and other liabilities                                                                         149
                                                                                                        -----------
   Total liabilities                                                                                       100,923
                                                                                                        -----------
Net Assets                                                                                              $  149,809
                                                                                                        -----------
Capital

Common stock, no par value, unlimited number of shares authorized, 10,927 shares issued and
  outstanding (Note 6)                                                                                  $  156,477
Undistributed net investment income                                                                          1,021
Accumulated net realized gain on investments, options, futures and short sales                                 110
Net unrealized depreciation on investments, options and futures                                             (7,792)
Net unrealized depreciation on short sales transactions                                                         (7)
                                                                                                        -----------
Net Assets                                                                                              $  149,809
                                                                                                        -----------
Net asset value per share of common stock:

   ($149,809 / 10,947 shares of common stock issued and outstanding)                                    $    13.69
                                                                                                        -----------
</TABLE>


                        See Notes to Financial Statements


                                       -82-

<PAGE>


                         WESTERN ASSET PREMIER BOND FUND
                             STATEMENT OF OPERATIONS
              For the period March 28, 2002* through June 30, 2002
                                   (unaudited)

(Amounts in Thousands)
<TABLE>
<CAPTION>
Investment Income:

<S>                                                                                                       <C>
   Interest                                                                                               $  3,930
   Dividends                                                                                                    29
                                                                                                        -----------
      Total income                                                                                           3,959
                                                                                                        -----------
Expenses:

   Advisory fee                                                                                                167
   Administrative fee                                                                                           49
   Trustees' fees                                                                                               48
   Audit and legal fees                                                                                         27
   Custodian fees                                                                                               27
   Registration fees                                                                                            20
   Reports to shareholders                                                                                      19
   Transfer agent and shareholder servicing fee                                                                  6
   Other expenses                                                                                                8
                                                                                                        -----------
      Total operating expenses                                                                                 371
      Interest expense                                                                                         247
                                                                                                        -----------
         Total expenses                                                                                        618
                                                                                                        -----------
Net Investment Income                                                                                        3,341
                                                                                                        -----------
Net Realized and Unrealized Gain (Loss) on Investments:
   Realized gain (loss) on:
      Investments                                                                                              318
      Futures                                                                                                 (209)
      Options                                                                                                    1
                                                                                                        -----------
                                                                                                               110

   Change in unrealized gain (loss) on investments, options, futures and short sales                        (7,799)
                                                                                                        -----------
Net realized and unrealized gain (loss) on investments                                                      (7,689)
                                                                                                        -----------
Change in net assets resulting from operations                                                            $ (4,348)
-------------------------------------------------------------------------------------------------------------------
</TABLE>


*Commencement of operations


                        See Notes to Financial Statements


                                       -83-

<PAGE>


                         WESTERN ASSET PREMIER BOND FUND
                       STATEMENT OF CHANGES IN NET ASSETS
              For the period March 28, 2002* through June 30, 2002
                                   (unaudited)

(Amounts in Thousands)
<TABLE>
<CAPTION>

                                                                                                   FOR THE PERIOD
                                                                                                       ENDED
                                                                                                   JUNE 30, 2002
-------------------------------------------------------------------------------------------------------------------
Change in Net Assets:
<S>                                                                                               <C>
   Net investment income                                                                                $    3,341
   Net realized gain (loss) on investments, options, futures and short sales                                   110
   Change in unrealized appreciation (depreciation) of investments, options, futures and short
     sales                                                                                                  (7,799)
                                                                                                        -----------
   Change in net assets resulting from operations                                                           (4,348)
                                                                                                        -----------
Distributions to shareholders:

   From net investment income                                                                               (2,320)
                                                                                                        -----------
Capital Transactions:

   Proceeds from initial offering                                                                          156,143
   Offering costs                                                                                             (327)
   Reinvestment of dividends resulting in the issuance of common stock                                         561
                                                                                                        -----------
   Change in net assets                                                                                    149,709
                                                                                                        -----------
Net Assets:

   Beginning of period                                                                                         100
   End of period                                                                                        $  149,809
                                                                                                        -----------
   Undistributed net investment income                                                                  $    1,021
                                                                                                        -----------
-------------------------------------------------------------------------------------------------------------------
</TABLE>

* Commencement of operations

                        See Notes to Financial Statements



                                       -84-

<PAGE>


                         WESTERN ASSET PREMIER BOND FUND
                             STATEMENT OF CASH FLOWS
                       For the Period Ended June 30, 2002*
                                   (unaudited)


(Amounts in Thousands)
<TABLE>
<CAPTION>
Increase (Decrease) in Cash
<S>                                                                                                    <C>
Cash flows provided from (used for) operating activities:

   Interest and dividends received(a)                                                                   $     (789)
   Expenses paid                                                                                              (157)
   Interest expense paid                                                                                       (76)
   Purchase of long-term portfolio investments                                                            (399,773)
   Proceeds from sale of long-term portfolio investments                                                   175,149
   Net purchases in excess of proceeds from sales of short-term portfolio investments                       (1,079)
   Margin variation from futures transactions                                                                 (825)
   Net premiums received from written options transactions                                                     218
                                                                                                        -----------
   Net cash provided from (used for) operating activities                                                 (227,332)
                                                                                                        -----------
Cash flows provided from (used for) financing activities:

   Net cash provided from initial public offering                                                          155,916
   Net cash provided from reverse repurchase agreements                                                     78,488
   Cash dividends paid to shareholders                                                                      (1,759)
                                                                                                        -----------
   Net cash provided from (used for) financing activities                                                  232,645
                                                                                                        -----------
Net increase in cash                                                                                         5,313
   Cash at beginning of period                                                                                  --
                                                                                                        -----------
   Cash at end of period                                                                                $    5,313
                                                                                                        -----------
Reconciliation of Net Decrease in Net Assets Resulting from
  Operations to Net Cash Used for Operating Activities

Net decrease in net assets resulting from operations                                                    $   (4,348)
                                                                                                        -----------
   Increase in investments                                                                                (235,865)
   Net realized gain on investments transactions                                                              (110)
   Net change in unrealized appreciation/depreciation on investments                                         7,799
   Increase in receivable for securities sold                                                               (3,968)
   Increase in interest receivable                                                                          (4,636)
   Increase in payable for securities purchased                                                             13,412
   Increase in interest expense payable                                                                        170
   Increase in accrued expenses and other liabilities                                                          214
                                                                                                        -----------
      Total adjustments                                                                                   (222,984)
                                                                                                        -----------
Net cash provided by (used for) operating activities                                                   $  (227,332)
                                                                                                        -----------
-------------------------------------------------------------------------------------------------------------------
</TABLE>


*March 28, 2002 (commencement of operations)
(a)Amount is negative due to purchased interest that is in interest receivable
but not considered income.


See Notes to Financial Statements


                                       -85-

<PAGE>


                         WESTERN ASSET PREMIER BOND FUND
                             SCHEDULE OF INVESTMENTS
                                  June 30, 2002
                                   (unaudited)


(Amounts in Thousands)
<TABLE>
<CAPTION>

                                                     % OF                       MATURITY
                                                  NET ASSETS       RATE           DATE         PAR       VALUE
                                                 -----------------------------------------------------------------
<S>                                               <C>             <C>          <C>          <C>       <C>
Long-Term Securities                                    151.7%

Corporate Bonds and Notes                                93.8%
Aerospace/Defense                                         3.2%
Northrop Grumman Corporation                                        7.750%       2/15/31     $ 1,000   $    1,091L
Raytheon Company                                                    6.750%       8/15/07       1,000        1,062L
Raytheon Company                                                    7.200%       8/15/27       1,000        1,021
Systems 2001 Asset Trust                                            6.664%       9/15/13       1,459        1,551B
                                                                                                       ------------
                                                                                                            4,725

Apparel                                                   0.6%
Levi Strauss & Co.                                                  7.000%       11/1/06         500          415
Russell Corporation                                                 9.250%       5/1/10          500          515B
                                                                                                       ------------
                                                                                                              930

Auto Parts and Equipment                                  0.7%
American Axle & Manufacturing Inc.                                  9.750%       3/1/09        1,000        1,060
                                                                                                       ------------
Automotive                                                3.4%
Asbury Automotive Group Inc.                                        9.000%       6/15/12         500          483B
DaimlerChrysler NA Holdings Corp.                                   7.300%       1/15/12       1,000        1,047L
DaimlerChrysler NA Holdings Corp.                                   8.500%       1/18/31       1,000        1,106L
Ford Motor Company                                                  7.450%       7/16/31       2,700        2,513L
                                                                                                       ------------
                                                                                                            5,149

Banking and Finance                                      19.2%
Bank of America Corporation                                         7.400%       1/15/11       1,250        1,369L
Bank One Corporation                                                5.900%      11/15/11       1,250        1,249L
Boeing Capital Corporation                                          6.500%       2/15/12       1,000        1,048L
CIT Group Inc.                                                      7.750%       4/2/12        2,000        1,969L
Credit Suisse First Boston, USA                                     6.500%       1/15/12       2,250        2,268L
Ford Motor Credit Company                                           7.250%      10/25/11       1,700        1,708L
Fuji JGB Inv LLC                                                    9.870%      12/29/49       2,000        1,736B,C
General Electric Capital Corporation                                6.000%       6/15/12         700          697L
General Motors Acceptance Corporation                               7.000%       2/1/12        2,000        2,003L
H&E Equipment and Finance                                          11.125%       6/15/12         500          475B
Household Finance Corporation                                       8.000%       7/15/10         610          644L
Household Finance Corporation                                       7.000%       5/15/12       1,060        1,054L
J.P. Morgan Chase & Co.                                             6.625%       3/15/12       1,750        1,800L
Lehman Brothers Holdings Inc.                                       6.625%       1/18/12       1,500        1,521L
Morgan Stanley Dean Witter & Co.                                    6.600%       4/1/12        2,000        2,038L
Orion Power Holdings, Inc.                                         12.000%       5/1/10          500          420
PCA LLC/PCA Finance Corp                                           11.875%       8/1/09          500          495B
Qwest Capital Funding, Inc.                                         7.250%       2/15/11       1,000          560
Qwest Capital Funding, Inc.                                         7.750%       2/15/31       1,000          520L
</TABLE>



                                       -86-

<PAGE>


SCHEDULE OF INVESTMENTS (CONTINUED)
Western Asset Premier Bond Fund


(Amounts in Thousands)
<TABLE>
<CAPTION>

                                                     % OF                       MATURITY
                                                  NET ASSETS       RATE           DATE         PAR       VALUE
                                                 -----------------------------------------------------------------
<S>                                               <C>             <C>          <C>          <C>       <C>
Corporate Bonds and Notes (CONTINUED)

Banking and Finance (continued)

The Goldman Sachs Group, Inc.                                       6.600%       1/15/12     $ 1,500   $    1,528L
UCAR Finance Inc.                                                  10.250%       2/15/12         500          510B
US Bank NA                                                          6.375%       8/1/11          750          779L
Verizon Global Funding Corp.                                        4.250%       9/15/05       1,300        1,367D
Verizon Global Funding Corp.                                        6.125%       6/15/07         750          746
Verizon Global Funding Corp.                                        0.000%       5/15/21         500          270D,I
                                                                                                       ------------
                                                                                                           28,774

Building Materials                                        0.8%
Atrium Companies, Inc.                                             10.500%       5/1/09          500          511
Nortek, Inc.                                                        9.875%       6/15/11         750          757
                                                                                                       ------------
                                                                                                            1,268

Cable                                                     0.5%
Charter Communications Holdings, LLC                                8.625%       4/1/09        1,000          670
                                                                                                       ------------
Chemicals                                                 2.5%
Huntsman International LLC                                          9.875%       3/1/09          500          501B
IMC Global Inc.                                                    11.250%       6/1/11          500          540
Lyondell Chemical Company                                           9.625%       5/1/07          500          478
Millenium America Inc.                                              9.250%       6/15/08         250          255B
The Dow Chemical Company                                            6.125%       2/1/11        2,000        2,015L
                                                                                                       ------------
                                                                                                            3,789

Commercial Services                                       0.6%
Coinmach Corporation                                                9.000%       2/1/10          875          888B
                                                                                                       ------------
Consumer Products                                         0.3%

Salton, Inc.                                                       10.750%      12/15/05         500          503
                                                                                                       ------------
Containers and Packaging: Paper and Plastic               0.9%
Graphic Packaging Corp.                                             8.625%       2/15/12         500          516B
Packaging Corp. of America                                          9.625%       4/1/09          250          270
Stone Container Corporation                                         9.750%       2/1/11          500          535
                                                                                                       ------------
                                                                                                            1,321

Diversified Services                                      1.4%
Loews Corporation                                                   3.125%       9/15/07       2,500        2,178D,L
                                                                                                       ------------
Electric                                                  5.1%
American Electric Power Company, Inc.                               6.125%       5/15/06         750          764
Dominion Resources, Inc.                                            8.125%       6/15/10       1,500        1,685L
Exelon Generation Co. LLC                                           6.950%       6/15/11       2,000        2,071L
</TABLE>



                                       -87-

<PAGE>


SCHEDULE OF INVESTMENTS (CONTINUED)
Western Asset Premier Bond Fund


(Amounts in Thousands)
<TABLE>
<CAPTION>

                                                     % OF                       MATURITY
                                                  NET ASSETS       RATE           DATE         PAR       VALUE
                                                 -----------------------------------------------------------------
<S>                                               <C>             <C>          <C>          <C>       <C>
Corporate Bonds and Notes (CONTINUED)

Electric (continued)

Mirant Americas Generation LLC                                       8.300%       5/1/11      $   750   $      600
Mirant Americas Generation LLC                                       9.125%       5/1/31          750          536
Niagra Mohawk Power Corporation                                      7.750%      10/1/08        1,500        1,683L
The AES Corporation                                                  9.500%       6/1/09          500          330
                                                                                                       ------------
                                                                                                             7,669

Energy                                                     3.3%
Calpine Corporation                                                  8.500%      2/15/11          750            5 3
CMS Energy Corporation                                               9.875%      10/15/07         660          495
FirstEnergy Corp.                                                    5.500%      11/15/06         750          734
FirstEnergy Corp.                                                    6.450%      11/15/11       1,500        1,456L
FirstEnergy Corp.                                                    7.375%      11/15/31       1,000          949L
TXU Corp.                                                            6.375%      6/15/06          750          771
                                                                                                       ------------
                                                                                                             4,908

Entertainment                                              1.4%
Regal Cinemas, Inc                                                   9.375%       2/1/12        1,000        1,035B
Six Flags, Inc.                                                      9.750%      6/15/07        1,000        1,025
                                                                                                       ------------
                                                                                                             2,060

Environmental Services                                     4.0%
Allied Waste North America Incorporated                             10.000%       8/1/09        1,000          983
Republic Services, Inc.                                              6.750%      8/15/11        2,000        2,060L
Waste Management, Inc.                                               7.375%       8/1/10        1,000        1,038L
Waste Management, Inc.                                               7.375%      5/15/29        2,000        1,944L
Waste Management, Inc.                                               7.750%      5/15/32           40           40B
                                                                                                       ------------
                                                                                                             6,065

Food, Beverage and Tobacco                                 4.8%
Fleming Companies, Inc.                                             10.625%      7/31/07        1,000          980
Nabisco Inc.                                                         7.550%      6/15/15        1,500        1,731L
Philip Morris Companies Inc.                                         7.750%      1/15/27        1,000        1,060L
R.J. Reynolds Tobacco Holdings, Inc.                                 7.750%      5/15/06        2,000        2,152L
Roundy's, Inc.                                                       8.875%      6/15/12          660          658B
Sara Lee Corporation                                                 6.250%      9/15/11          500          518
                                                                                                       ------------
                                                                                                             7,099

Gaming                                                     2.8%
Ameristar Casinos, Inc.                                             10.750%      2/15/09          500          536
Boyd Gaming Corporation                                              9.500%      7/15/07          500          505
Circus & Eldorado Circus                                            10.125%       3/1/12          500          510B
Harrah's Operating Company, Inc.                                     8.000%       2/1/11        1,000        1,082L
Isle of Capri Casinos, Inc.                                          9.000%      3/15/12          500          505B
Mandalay Resort Group                                               10.250%       8/1/07        1,000        1,049
</TABLE>



                                       -88-

<PAGE>


SCHEDULE OF INVESTMENTS (CONTINUED)
Western Asset Premier Bond Fund


(Amounts in Thousands)
<TABLE>
<CAPTION>

                                                     % OF                       MATURITY
                                                  NET ASSETS       RATE           DATE         PAR       VALUE
                                                 -----------------------------------------------------------------
<S>                                               <C>             <C>          <C>          <C>       <C>
Corporate Bonds and Notes (CONTINUED)

Gas and Pipeline Utilities                                7.5%
Duke Energy Field Services LLC                                      7.875%       8/16/10     $   750   $      796L
Dynegy Holdings Inc.                                                8.125%       3/15/05         750          578
Dynegy Holdings Inc.                                                8.750%       2/15/12       1,850        1,378
El Paso Corporation                                                 7.875%       6/15/12         500          503B,L
El Paso Corporation                                                 7.750%       1/15/32       2,450        2,272L
Kinder Morgan, Inc.                                                 6.650%       3/1/05        1,000        1,049L
Peabody Energy Transportation                                       9.625%       5/15/08       1,000        1,058
Texas Eastern Transportation                                        5.250%       7/15/07         750          749
The Williams Companies, Inc.                                        7.500%       1/15/31       2,000        1,436L
The Williams Companies, Inc.                                        8.750%       3/15/32       1,700        1,385B,L
                                                                                                       ------------
                                                                                                           11,204

Healthcare                                                1.5%
Fresenius Medical Care Capital Trust II                             7.875%       2/1/08          500           45
Hanger Orthopedic Group, Inc.                                      10.375%       2/15/09         500          520B
Magellan Health Services, Inc.                                      9.375%      11/15/07       1,000          750B
Rotech Healthcare Inc.                                              9.500%       4/1/12          500          510B
                                                                                                       ------------
                                                                                                            2,230

Home Building                                             0.7%
Schuler Homes, Inc.                                                 9.375%       7/15/09         500          510
The Ryland Group, Inc.                                              9.750%       9/1/10          500          541
                                                                                                       ------------
                                                                                                            1,051

Industrial Products                                       0.3%
Johnsondiversey Inc.                                                9.625%       5/15/12         415          434B
                                                                                                       ------------
Insurance                                                 0.3%
Willis Corroon Corporation                                          9.000%       2/1/09          500          515
                                                                                                       ------------
Lodging/Hotels                                            1.9%
Extended Stay America, Inc.                                         9.875%       6/15/11         965          984
Felcor Lodging Limited Partnership                                  9.500%       9/15/08         500          508
Meristar Hospitality Operation/Finance                             10.500%       6/15/09         500          505B
Venetian Casino Resort LLC                                         11.000%       6/15/10         779          784B
                                                                                                       ------------
                                                                                                            2,781

Machinery                                                 2.0%
AGCO Corporation                                                    9.500%       5/1/08          750          793
Joy Global Inc.                                                     8.750%       3/15/12         750          767
NMHG Holdings Co.                                                  10.000%       5/15/09         295          299B
Terex Corporation                                                  10.375%       4/1/11        1,000        1,075
                                                                                                       ------------
                                                                                                            2,934
</TABLE>




                                       -89-

<PAGE>


SCHEDULE OF INVESTMENTS (CONTINUED)
Western Asset Premier Bond Fund


(Amounts in Thousands)
<TABLE>
<CAPTION>

                                                     % OF                       MATURITY
                                                  NET ASSETS       RATE           DATE         PAR       VALUE
                                                 -----------------------------------------------------------------
<S>                                               <C>             <C>          <C>          <C>       <C>
Corporate Bonds and Notes (CONTINUED)
Media                                                     3.3%
AOL Time Warner Inc.                                                6.875%       5/1/12      $ 1,000   $      922L
Chancellor Media CCU                                                8.000%       11/1/08         500          495
Entravision Communications Corporation                              8.125%       3/15/09         250          251B
Liberty Media Corporation                                           3.750%       2/15/30       3,020        1,359D
LIN Holdings Co.                                                   10.000%       3/1/08          275          253G
Mediacom LLC/Mediacom Capital Corp.                                 9.500%       1/15/13         500          433
News America Holdings Incorporated                                  6.625%       1/9/08          300          302
News America Holdings Incorporated                                  8.875%       4/26/23         400          424
Paxson Communications Corporation                                  10.750%       7/15/08         500          480
                                                                                                       ------------
                                                                                                            4,919

Medical Care Facilities                                   1.4%
Beverly Enterprises, Inc.                                           9.625%       4/15/09         500          512
Extendicare Health Services, Inc.                                   9.350%      12/15/07         500          465
HEALTHSOUTH Corporation                                            10.750%       10/1/08       1,000        1,105
                                                                                                       ------------
                                                                                                            2,082

Office Equipment and Supplies                             0.1%
Xerox Corporation                                                   0.570%       4/21/18         250           14D
                                                                                                       ------------
Oil and Gas                                               2.0%
Anadarko Finance Company                                            6.750%       5/1/11          750          785
Anadarko Finance Company                                            7.500%       5/1/31        1,000        1,067L
Mission Resources Corporation                                      10.875%       4/1/07          625          512
Tesoro Petroleum Corporation                                        9.625%       4/1/12          250          229B
Vintage Petroleum, Inc.                                             7.875%       5/15/11         500          452
                                                                                                       ------------
                                                                                                            3,045

Paper and Forest Products                                 2.8%
Georgia-Pacific Corp.                                               8.875%       5/15/31         500          471
Potlatch Corporation                                               10.000%       7/15/11       1,000        1,095
Weyerhaeuser Company                                                6.750%       3/15/12       1,500        1,553B,L
Weyerhaeuser Company                                                7.375%       3/15/32       1,000        1,015B,L
                                                                                                       ------------
                                                                                                            4,134

Real Estate                                               0.3%
Ventas Realty LP                                                    8.750%       5/1/09          340          343B
Ventas Realty LP                                                    9.000%       5/1/12          160          164B
                                                                                                       ------------
                                                                                                              507

Retail                                                    0.9%
Saks Incorporated                                                   9.875%       10/1/11         500          502
The Gap, Inc.                                                       6.900%       9/15/07       1,000          913
                                                                                                       ------------
                                                                                                            1,415
</TABLE>



                                       -90-

<PAGE>


SCHEDULE OF INVESTMENTS (CONTINUED)
Western Asset Premier Bond Fund


(Amounts in Thousands)
<TABLE>
<CAPTION>

                                                     % OF                       MATURITY
                                                  NET ASSETS       RATE           DATE         PAR       VALUE
                                                 -----------------------------------------------------------------
<S>                                               <C>             <C>          <C>          <C>       <C>
Corporate Bonds and Notes (CONTINUED)

Semiconductors                                            0.3%
Amkor Technology, Inc.                                              9.250%       2/15/08     $   427   $      348
Amkor Technology, Inc.                                             10.500%       5/1/09          113           79
                                                                                                       ------------
                                                                                                              427

Telecommunications                                        6.1%
AT&T Corp.                                                          7.300%      11/15/11       2,000        1,660B,L
BellSouth Corporation                                               6.000%      10/15/11       2,000        2,022L
Crown Castle International Corp.                                    9.375%       8/1/11          128           80
EchoStar DBS Corporation                                            9.375%       2/1/09          631          584
Insight Midwest                                                    10.500%       11/1/10         663          620
Nextel Communications, Inc.                                         9.375%      11/15/09         345          175
Qwest Corporation                                                   6.875%       9/15/33         373          261
Rural Cellular Corporation                                          9.750%       1/15/10         250          120
SBC Communication Inc.                                              6.250%       3/15/11       1,000        1,024L
Sprint Capital Corporation                                          6.000%       1/15/07       1,500        1,169
Sprint Capital Corporation                                          8.375%       3/15/12       1,000          828L
Triton PCS, Inc.                                                    8.750%      11/15/11         500          307L
WorldCom, Inc.                                                      7.875%       5/15/03         616          105J
WorldCom, Inc.                                                      7.500%       5/15/11       1,000          150J
                                                                                                       ------------
                                                                                                            9,105

Textiles                                                  0.5%
Interface, Inc.                                                    10.375%       2/1/10          750          799B
                                                                                                       ------------
Transportation                                            6.4%
Delta Airlines, Inc.                                                6.718%       1/2/23        3,750        3,862
Kansas City Southern Railway                                        9.500%       10/1/08         275          297
Union Pacific Corporation                                           6.125%       1/15/12       2,000        2,037L
US Airways, Inc.                                                    6.760%       4/15/08       1,652        1,608
US Airways, Inc.                                                    8.360%       1/20/19       1,878        1,797
                                                                                                       ------------
                                                                                                            9,601

Total Corporate Bonds and Notes

  (Identified Cost--$145,254)                                                                              140,575
                                                                                                       ------------
Asset-backed Securities                                   9.6%
Fixed Rate Securities                                     9.5%
Conseco Finance Securitizations Corp. 2000-4                        7.730%       4/1/32        2,000        2,139
Conseco Finance Securitizations Corp. 2002-1                        6.681%       12/1/32       2,851        2,959
Conseco Recreational Enthusiast Consumer
  Trust 2000-A                                                      8.480%      11/15/20       1,500        1,628
Detroit Edison Securitization Funding LLC
  2001-1                                                            6.620%       3/1/16        2,121        2,266
Green Tree Financial Corporation 1992-2                             9.150%       1/15/18       1,500        1,454
</TABLE>



                                       -91-

<PAGE>


SCHEDULE OF INVESTMENTS (CONTINUED)
Western Asset Premier Bond Fund


(Amounts in Thousands)
<TABLE>
<CAPTION>

                                                     % OF                       MATURITY
                                                  NET ASSETS       RATE           DATE         PAR       VALUE
                                                 -----------------------------------------------------------------
<S>                                               <C>             <C>          <C>          <C>       <C>
Asset-backed Securities (CONTINUED)                       9.6%

Fixed Rate Securities (continued)                         9.5%
Green Tree Financial Corporation 1999-4                            6.970%      5/1/31     $    1,500   $    1,587
Saxson Asset Securities Trust 2000-2                               8.370%     7/25/30          2,000        2,161
                                                                                                       ------------
                                                                                                           14,194

Indexed Securities                                        0.1%
Korea Asset Funding Ltd. 2000-1A                                   4.010%     2/10/09            234          235B,E
                                                                                                       ------------
Total Asset-backed Securities
  (Identified Cost--$14,049)                                                                                14,429
-------------------------------------------------------------------------------------------------------------------
Mortgage-backed Securities                                6.2%
Fixed Rate Securities                                     6.1%
Asset Securitization Corporation 1996-D2                           6.920%     2/14/29            681          724
Commercial Mortgage Acceptance Corporation
  1997-ML1                                                         6.735%     12/15/30         1,802        1,906
Commercial Mortgage Acceptance Corporation

  1997-ML1                                                         6.570%     12/15/30         1,250        1,316
Deutsche Mortgage and Asset Receiving

  Corporation 1998-C1                                              6.538%     6/15/31          2,000        2,114
Enterprise Mortgage Acceptance Company 1998-1                      6.110%     1/15/25            391          393B
Enterprise Mortgage Acceptance Company 1999-1                      6.420%     10/15/25           479          354B
GMAC Commercial Mortgage Security
  Incorporated 1998-C1                                             6.700%     5/15/30            631          663
GMAC Commercial Mortgage Security
  Incorporated 1998-C1                                             6.974%     5/15/30          1,000        1,030
Nomura Asset Securities Corporation 1996-MD5                       7.120%     4/13/39            520          564
                                                                                                       ------------
                                                                                                            9,064

Stripped Securities                                       0.1%
LB-UBS Commercial Mortgage Trust 2001-C3                           0.989%     6/15/36          3,276          196B,F
                                                                                                       ------------
Total Mortgage-backed Securities

  (Identified Cost--$9,152)                                                                                 9,260
-------------------------------------------------------------------------------------------------------------------
U.S. Government Agency

  Mortgage-backed Securities                              5.7%
Fixed Rate Securities                                     5.7%
Government National Mortgage Association                           6.500%      1/1/20           8,30        8,486
                                                                                                       ------------
Total U.S. Government Agency
  Mortgage-backed Securities

  (Identified Cost--$8,455)                                                                                 8,486
</TABLE>



                                       -92-

<PAGE>


SCHEDULE OF INVESTMENTS (CONTINUED)
Western Asset Premier Bond Fund


(Amounts in Thousands)
<TABLE>
<CAPTION>

                                                     % OF                       MATURITY
                                                  NET ASSETS       RATE           DATE         PAR       VALUE
                                                 -----------------------------------------------------------------
<S>                                               <C>             <C>          <C>          <C>       <C>
Yankee BondsA                                            35.9%
Banking and Finance                                       4.1%
Arcel Finance Limited                                              5.984%      2/1/09          1,200        1,218B,L
Burlington Resources Finance                                       7.400%     12/1/31          1,700        1,778B,L
PDVSA Finance Ltd.                                                 8.500%     11/16/12         2,000        1,750L
Petrozuata Finance, Inc.                                           8.220%      4/1/17          2,000        1,340B,L
                                                                                                       ------------
                                                                                                            6,086
</TABLE>



                                       -93-

<PAGE>


SCHEDULE OF INVESTMENTS (CONTINUED)
Western Asset Premier Bond Fund


(Amounts in Thousands)
<TABLE>
<CAPTION>

                                                     % OF                       MATURITY
                                                  NET ASSETS       RATE           DATE         PAR       VALUE
                                                 -----------------------------------------------------------------
<S>                                               <C>             <C>          <C>          <C>       <C>
Yankee Bonds (CONTINUED)

Building Products                                           0.7%
Ainsworth Lumber Co. Ltd.                                             13.875%     7/15/07     $ 1,000   $   1,120
                                                                                                       ------------
Chemicals                                                   0.6%
Avecia Group plc                                                      11.000%      7/1/09         875         871
                                                                                                       ------------
Electric                                                    2.9%
Hydro-Quebec                                                           6.300%     5/11/11       2,000       2,120L
Korea Electric Power (KEPCO) Corporation                               7.750%      4/1/13       2,000       2,222L
                                                                                                       ------------
                                                                                                            4,342

Energy                                                      1.4%
Petroliam Nasional Berhad (Petronas)                                   7.750%     8/15/15       2,000       2,127B,L
                                                                                                       ------------
Entertainment                                               0.1%
Alliance Atlantis Communications Inc.                                 13.000%     12/15/09        107         118
                                                                                                       ------------
Foreign Government                                         19.4%
Dominican Republic                                                     9.500%     9/27/06         370         390B
Federative Republic of Brazil                                         14.500%     10/15/09        710         533
Federative Republic of Brazil                                         12.000%     4/15/10         870         574
Federative Republic of Brazil                                          3.125%     4/15/12         600         318E
Federative Republic of Brazil                                          8.000%     4/15/14       4,926       3,072
Federative Republic of Brazil                                         11.000%     8/17/40       1,140         638
Republic of Bulgaria                                                   2.812%     7/28/11       1,955       1,738E
Republic of Bulgaria                                                   2.812%     7/28/12       2,100       1,911E
Republic of Bulgaria                                                   8.250%     1/15/15         160         159B
Republic of Columbia                                                  11.750%     2/25/20       2,490       2,436
Republic of Equador                                                   12.000%     11/15/12        515         366B
Republic of Ecuador                                                    5.000%     8/15/30         750         379B,G
Republic of Panama                                                     9.625%      2/8/11       1,600       1,552
Republic of Panama                                                     4.750%     7/17/14       1,713       1,413G
Republic of Peru                                                       4.500%      3/7/17       4,128       2,993G
Republic of Philippines                                                9.875%     1/15/19       1,570       1,560
Republic of Philippines                                               10.625%     3/16/25       2,120       2,191
Republic of Turkey                                                    11.750%     6/15/10         190         172
Republic of Turkey                                                    11.875%     1/15/30         190         162
Russian Federation                                                     8.250%     3/31/10         990         974
Russian Federation                                                     5.000%     3/31/30       1,390         965G
Ukraine Government                                                    11.000%     3/15/07         334         339
United Mexican States                                                  8.375%     1/14/11       1,020       1,058
United Mexican States                                                 11.500%     5/15/26       2,460       3,121L
                                                                                                       ------------
                                                                                                           29,014
</TABLE>



                                       -94-

<PAGE>


SCHEDULE OF INVESTMENTS (CONTINUED)
Western Asset Premier Bond Fund


(Amounts in Thousands)
<TABLE>
<CAPTION>

                                                     % OF                       MATURITY
                                                  NET ASSETS       RATE           DATE         PAR       VALUE
                                                 -----------------------------------------------------------------
<S>                                               <C>             <C>          <C>          <C>       <C>
Yankee Bonds (CONTINUED)

Insurance                                                   0.9%
Residential Reinsurance LTD                                          6.800%       6/1/05     $   300   $      300E
XL Capital Finance (Europe) plc                                      6.500%      1/15/12       1,000        1,035L
                                                                                                       ------------
                                                                                                            1,335

Loan Participations                                         1.9%
Banagricola DPR Funding                                              2.890%      3/15/10       2,500        2,494B,E
Morocco A Loan                                                       2.687%       1/1/09         400          354
                                                                                                       ------------
                                                                                                            2,848

Manufacturing (Diversified)                                 1.7%
Tyco International Group SA                                          6.375%      10/15/11      1,000          766L
Tyco International Group SA                                          6.875%      1/15/29       2,615        1,855L
                                                                                                       ------------
                                                                                                            2,621

Oil and Gas                                                 1.5%
Anderson Exploration Ltd.                                            6.750%      3/15/11       2,000        2,032L
Western Oil Sands Inc.                                               8.375%       5/1/12         250          251B
                                                                                                       ------------
                                                                                                            2,283

Transportation                                              0.7%
Canadian Pacific Railway                                             6.250%      10/15/11      1,000        1,024
                                                                                                       ------------
Total Yankee Bonds
  (Identified Cost--$56,546)                                                                               53,789
-------------------------------------------------------------------------------------------------------------------
Preferred Stocks                                            0.5%
CSC Holdings Inc.                                                                                 10          670
                                                                                                       ------------
Total Preferred Stocks

  (Identified Cost--$999)                                                                                     670
                                                                                                       ------------
Total Long-Term Securities

  (Identified Cost--$234,455)                                                                             227,209
-------------------------------------------------------------------------------------------------------------------
</TABLE>



                                       -95-

<PAGE>


SCHEDULE OF INVESTMENTS (CONTINUED)
Western Asset Premier Bond Fund


(Amounts in Thousands)
<TABLE>
<CAPTION>

                                                     % OF                       MATURITY
                                                  NET ASSETS       RATE           DATE         PAR       VALUE
                                                 -----------------------------------------------------------------
<S>                                               <C>             <C>          <C>          <C>       <C>
Short-Term Securities                                       0.7 %
U.S. Government and Agency Obligations                      0.7 %
Fannie Mae                                                            1.690%      8/14/02     $    50   $       50
Fannie Mae                                                            1.710%      8/14/02          50           50
Fannie Mae                                                            1.710%      8/14/02         525          524H
Fannie Mae                                                            1.880%      8/14/02         125          125H
Federal Home Loan Bank                                                1.680%      8/14/02         175          174
Federal National Mortgage Association                                 1.710%      8/14/02         200          199
                                                                                                       ------------
                                                                                                             1,122
Total Short-Term Securities
  (Identified Cost--$1,123)                                                                                  1,122
-------------------------------------------------------------------------------------------------------------------
Total Investments

  (Identified Cost--$235,578)                             152.4 %                                          228,331
Other Assets Less Liabilities                             (52.4)%                                          (78,522)
                                                                                                       ------------
Net Assets                                                100.0 %                                       $  149,809
                                                                                                       ------------
Short Sales

Government National Mortgage Association
(Identified Proceeds--$8,479)                                         6.500%       8/1/20       8,300       (8,486)
                                                                                                       ------------
</TABLE>

<TABLE>
<CAPTION>
                                                                              ACTUAL              APPRECIATION
                                                           EXPIRATION        CONTRACTS           (DEPRECIATION)
                                                  -----------------------------------------------------------------
<S>                                                    <C>                  <C>                   <C>
Futures Contracts WrittenK
Euro Dollar 90 Day                                             March 2003            100                   $ (212)
U.S. Treasury Note Futures                                 September 2002            230                     (366)
U.S. Treasury Note Futures                                 September 2002             10                      (17)
U.S. Treasury Note Futures                                 September 2002             10                      (15)
                                                                                                       ------------
                                                                                                             (610)

Options WrittenK

U.S. Treasury Note Futures Call, Strike Price $106.00         August 2002            200                      $65
                                                                                                       ------------
</TABLE>
A Yankee Bond - A dollar-denominated bond issued in the U.S. by foreign
  entities.

B Rule 144a Security - A security purchased pursuant to Rule 144a under the
  Securities Act of 1933 which may not be resold subject to that rule except to
  qualified institutional buyers. These securities represent 22.6% of net
  assets.

C The coupon rates shown on variable rate securities are the rates at June 30,
  2002. These rates vary with the weighted average coupon of the underlying
  loans.

D Convertible Bond - Bond may be converted into common stock of the company.

E Indexed Security - The rate of interest on this type of security is tied to
  the London Interbank Offer Rate (LIBOR). The coupon rate is as of June 30,
  2002.

F Stripped Security - Security with interest-only payment streams. For
  interest-only securities, the amount shown as principal is the notional
  balance used to calculate the amount of the interest due.

G Stepped-coupon security - A security with a predetermined schedule of interest
  or dividend rate changes at which time it begins to accrue interest or pay
  dividends.

H Collateral to cover futures contracts.

I Zero-coupon Bond - A bond with no periodic interest payments which is sold at
  such a discount as to produce a current yield to maturity.

J Bond is in default as of June 30, 2002.

K Options and futures are described in more detail in the Notes to Financial
  Statements.

L Securities, or portions thereof, held as collateral for reverse
  repurchase agreements.

                        See Notes to Financial Statements



                                       -96-

<PAGE>


                         WESTERN ASSET PREMIER BOND FUND
                          NOTES TO FINANCIAL STATEMENTS
                                  June 30, 2002
                                   (unaudited)

(Amounts in Thousands)

1.       Significant Accounting Policies:
Western Asset Premier Bond Fund (the "Fund") is registered under the Investment
Company Act of 1940 as a diversified, closed-end management investment company.
The Fund commenced operations on March 28, 2002.


The Fund's investment objective is to provide current income and capital
appreciation by investing primarily in a diversified portfolio of investment
grade bonds. The Fund currently seeks to achieve its investment objective by
investing substantially all of its assets in bonds, including corporate bonds,
U.S. government and agency securities and mortgage-related securities. The
ability of the issuers of the securities held by the Fund to meet their
obligations might be affected by economic developments in a specific state,
industry or region.


The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.

Security Valuation

Securities owned by the Fund for which market quotations are readily available
are valued at current market value. Current market value means the last sale
price of the day or, in the absence of any such sales, the bid price obtained
from quotation reporting systems, pricing services or other approved methods.
Other assets and securities for which no quotations are readily available are
valued at fair value as determined in good faith by the Board of Trustees or
persons acting under their supervision. In determining fair value, the Board and
management consider all relevant qualitative and quantitative information
available. The factors considered in making such valuations are subject to
change over time and are reviewed periodically. The values assigned to fair
value investments are based on available information and do not necessarily
represent amounts that might ultimately be realized, since such amounts depend
on future developments inherent in long-term investments. Further, because of
the inherent uncertainty of valuation, such estimated values may differ
significantly from the values that would have been used had a ready market for
the investments existed, and the differences could be material. Securities with
remaining maturities of 60 days or less are generally valued at amortized cost.


Foreign Currency Transactions

Assets and liabilities initially expressed in terms of non-U.S. currencies are
translated into U.S. dollars at the closing daily rate of exchange. Purchases
and sales of securities and income and expenses are translated into U.S. dollars
at the prevailing market rates on the dates of such transactions. The effects of
changes in non-U.S. currency exchange rates on investment securities and other
assets and liabilities are included with the net realized and unrealized gain or
loss on investment securities.

Reverse Repurchase Agreements

The Fund may enter into reverse repurchase agreements. Under the terms of a
reverse repurchase agreement, the Fund sells a security subject to an obligation
to repurchase the security from the buyer at an agreed upon time and price
thereby determining the yield during the buyer's holding period. A reverse
repurchase agreement involves the risk that the market value of the collateral
retained by the Fund may decline below the price of the securities the Fund has
sold but is obligated to repurchase under the agreement. In the event the buyer
of securities under a repurchase agreement files for bankruptcy or becomes
insolvent, the Fund's use of the proceeds of the agreement may be restricted
pending a determination by the party, or its trustee or receiver, whether to
enforce the Fund's obligation to repurchase the securities. In entering into
reverse repurchase agreements, the Fund will maintain cash, US Government
securities or other liquid high grade debt obligations at least equal in value
to its obligations with respect to reverse repurchase agreements. Under normal
circumstances the Fund will not enter into reverse repurchase agreements if
entering into such agreements would cause more than one-third of the value of
their respective total assets to be subject to such agreements at the time of
entering into such agreements.



                                       -97-

<PAGE>

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Western Asset Premier Bond Fund

(Amounts in Thousands)

Options, Futures and Swap Agreements

The current market value of an exchange traded option is the last sale price or,
in the absence of a sale, the price obtained by reference to broker-dealer
quotations. Futures contracts are valued daily at the settlement price
established by the board of trade or exchange on which they are traded. Futures
contracts are marked-to-market on a daily basis. As the contract's value
fluctuates, payments known as variation margin are made to or received from the
futures commission merchant. Swap agreements are priced daily based upon
quotations from brokers and the change, if any, is recorded as unrealized
appreciation or depreciation.


Short Sales

The Fund may sell a security it does not own in anticipation of a decline in the
market price of that security. The Fund must then borrow the security sold short
and deliver it to the dealer that brokered the short sale. A gain, limited to
the price at which the security was sold short, or a loss, potentially unlimited
in size, will be recognized upon the termination of the short sale. With respect
to each short sale, the Fund must maintain collateral in a segregated account
consisting of cash or liquid securities with a value at least equal to the
current market value of the shorted securities, marked-to-market daily. Short
sales are not permitted in the Fund when the dollar amount of all securities
sold short would exceed 25% of the net assets of the Fund. Fees paid to brokers
to borrow securities in connection with short sales are considered part of the
cost of short sale transactions. The Fund generally sell short for hedging
rather than speculative purposes.


Distributions to shareholders

Net investment income for dividend purposes is recorded on the accrual basis and
consists of interest and dividends less expenses. All premiums and discounts are
amortized for financial reporting and tax purposes using the effective interest
method over the period to maturity of the security and serve to reduce or
increase interest income. Dividend income is recorded on the ex-dividend date.
Dividends from net investment income are paid monthly. Distributions are
determined in accordance with income tax regulations, which may differ from
generally accepted accounting principles; accordingly, periodic
reclassifications are made within the Fund's capital accounts to reflect income
and gains available for distribution under tax regulations.


Security Transactions

Security transactions are recorded on the trade date. Realized gains and losses
from security transactions are reported on an identified cost basis for both
financial reporting and federal income tax purposes.


Use of Estimates

The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from these estimates.


Federal Income Taxes

No provision for federal income or excise taxes is required since the Fund
intends to continue to qualify as a regulated investment company and distribute
all of its taxable income to its shareholders.


2. Financial Instruments:

Forward Foreign Currency Exchange Contracts

The Fund may use various instruments, including forward foreign currency
exchange contracts, to help manage its currency exposure. Forward foreign
currency exchange contracts are marked-to-market daily using forward foreign
currency exchange rates supplied by an independent pricing service. The change
in the contract's market value is recorded by the Fund as an unrealized gain or
loss. When a contract is closed or delivery is taken, the Fund records a
realized gain or loss equal to the difference between the value of the contact
at the time it was opened and the value at the time it was closed.




                                       -98-

<PAGE>

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Western Asset Premier Bond Fund

(Amounts in Thousands)

The use of forward foreign currency exchange contracts does not eliminate
fluctuations in the underlying prices of the Fund's securities, but it does
establish a rate of exchange that can be achieved in the future. These contracts
involve market risk in excess of amounts reflected in the Financial Statements.
Although contracts used for hedging purposes limit the risk of loss due to the
decline in the value of the hedged currency, they also limit any potential gain
that might result should the value of the currency increase. In addition, the
Fund could be exposed to risks if the counterparties to the contracts are unable
to meet the terms of their contracts. The Fund had no outstanding contracts as
of June 30, 2002.


Option Transactions

A call option gives the option holder the right to purchase the underlying
security at a specified price until a specified date. A put option gives the
option holder the right to sell the underlying security at a specified price
until a specified date. The risk in writing a covered call option is that the
Fund may forego the opportunity for profit if the market price of the underlying
security increases and the option is exercised. The risk in writing a put option
is that the Fund may incur a loss if the market price of the underlying security
decreases and the option is exercised. In addition, there is a risk the Fund may
not be able to enter into a closing transaction because of an illiquid secondary
market or, for over-the-counter options, because of the counterparty's inability
to perform. Activity in call and put options during the period was as follows:

<TABLE>
<CAPTION>

                                                                  CALLS                           PUTS
                                                       ------------------------------------------------------------
                                                         CONTRACTS      PREMIUMS        CONTRACTS        PREMIUMS
                                                       ------------------------------------------------------------
<S>                                                    <C>              <C>             <C>             <C>
Options outstanding at March 28, 2002*                            --           --                 --            --
Options written                                                  211   $      227                 11    $       10
Options closed                                                    11           (9)                11           (10)
Options expired                                                   --           --                 --            --
Options exercised                                                 --           --                 --            --
                                                       -------------   ----------        -----------    -----------
Options outstanding at June 30, 2002                             200   $      218                 --            --
                                                       -------------   ----------        -----------    -----------
*commencement of operations
</TABLE>

Swap agreements

The use of swaps involves risks that are different from those associated with
ordinary portfolio securities transactions. Swap agreements may be considered to
be illiquid. Although the Fund will not enter into any swap agreement unless the
Adviser believes that the other party to the transaction is creditworthy, the
Fund does bear the risk of loss of the amount expected to be received under a
swap agreement in the event of the default or bankruptcy of the agreement
counterparty. The Fund had no open swap agreements at June 30, 2002.


Futures

Upon entering into a futures contract, the Fund is required to deposit with the
broker an amount of cash or cash equivalents equal to a percentage of the
contract amount. This is known as the "initial margin". Subsequent payments
("variation margin") are made or received by the Fund each day, depending on the
daily fluctuation in the value of the contract. The daily changes in contract
value are recorded as unrealized gains or losses and the Fund recognizes a gain
or loss when the contract is closed.

The Fund may enter into futures contracts in connection with its interest rate
management strategy or for other purposes. Risks arise from the possible
illiquidity of the futures market and from the possibility that a change in the
value of a contract may not correlate with changes in interest rates. The open
short futures positions and related appreciation or depreciation at June 30,
2002 are described at the end of the "Schedule of Investments".




                                       -99-

<PAGE>

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Western Asset Premier Bond Fund

(Amounts in Thousands)

Short Sales

The Fund may engage in short selling as part of its investment strategy and to
offset potential declines in long positions in securities in the Fund's
portfolio. In a short sale transaction, the Fund sells, or borrows, a security
it does not own in anticipation that the market price of that security will
decline. Until the Fund replaces the borrowed security, it will provide
collateral to the broker-dealer to cover its short position. Securities sold
short at June 30, 2002, and their related market values and proceeds, are
described at the end of the "Schedule of Investments".


Reverse Repurchase Agreements

Under a reverse repurchase agreement, the Fund sells securities and agrees to
repurchase them at a mutually agreed upon date and price. At the time the Fund
enters into a reverse repurchase agreement, it will segregate, on its books,
liquid assets having a value at least equal to the repurchase price. For the
period ended June 30, 2002, the average amount of reverse repurchase agreements
outstanding was approximately $63,705 and the daily weighted average interest
rate was 1.66%.


3. Portfolio Transactions:
Purchases and sales of investment securities (excluding short-term investments,
U.S. government securities and U.S. government agencies) aggregated $297,413 and
$116,610, respectively, for the period ended June 30, 2002. There were purchases
of $115,772 and sales of $62,167 of U.S. government and government agency
obligations for the period ended June 30, 2002.

At June 30, 2002, the cost of securities of the Fund for federal income tax
purposes was substantially the same as the cost for financial reporting
purposes. Accordingly, gross unrealized appreciation of investments was $2,727
and gross unrealized depreciation of investments was $10,526, resulting in net
unrealized depreciation of $7,799.


4. Capital:
Of the 10,946,913 shares of common stock outstanding at June 30, 2002, Western
Asset Management Company owned 7,087 shares (share amounts are not in
thousands).


5. Securities Loaned:
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. As of June 30, 2002, there were no securities on loan.


6. Transactions with Affiliates and Certain Other Parties:
The Fund has an Investment Management Agreement with Western Asset Management
Company ("Western Asset"). Pursuant to the terms of the management agreement,
the Fund pays Western Asset an annual fee, payable monthly, in an amount equal
to 0.55% of the average weekly value of the Fund's total managed assets.
Pursuant to a portfolio management agreement between Western Asset and Western
Asset Management Company Limited ("WAML"), Western Asset pays a portion of the
fees it receives from the Fund to WAML at an annual rate of 0.425% of the
average weekly value of the Fund's total managed assets that WAML manages.


Under the terms of an Administration Agreement among the Fund, Western Asset and
Princeton Administrators, L.P. (the "Administrator"), Western Asset pays the
Administrator a monthly fee at an annual rate of 0.125% of the Fund's average
weekly total managed assets, subject to a monthly minimum fee of $12,500 (not in
thousands).


Western Asset and WAML are wholly owned subsidiaries of Legg Mason, Inc.



                                       -100-

<PAGE>

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Western Asset Premier Bond Fund

(Amounts in Thousands)

7. Trustee Compensation (dollar amounts are not in thousands):
Each Trustee currently receives a fee of $10,000 annually for serving as a
Trustee of the Fund, and a fee of $2,000 and related expenses for each meeting
of the Board of Trustees attended. The Chairman of the Board receives an
additional $2,500 per year for serving in that capacity. Audit Committee members
receive $1,000 for each meeting, and the Audit Committee Chairman receives an
additional $1,000 annually. Other committee members receive $500 per meeting.



                                       -101-

<PAGE>





                                   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 an Advisor to be of
comparable quality). The percentage of a 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 an Advisor.

         Investment Grade Debt Securities are those rated in one of the four
highest rating categories or, if unrated, deemed comparable by an 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

<PAGE>

         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

<PAGE>

         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

<PAGE>

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

<PAGE>

         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

<PAGE>

         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

<PAGE>

         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.

AA

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.

A

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

<PAGE>

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

BB

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.

B

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

<PAGE>

         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

<PAGE>

                                   APPENDIX B

                         WESTERN ASSET PREMIER BOND FUND

                            AMENDMENT NO. 1 TO BYLAWS

         WHEREAS, Section 1 of Article III of the Amended and Restated Agreement
and Declaration of Trust dated February 5, 2002 (the "Declaration of Trust") of
Western Asset Premier Bond Fund (the "Trust"), a copy which is on file in the
Office of the Secretary of State of The Commonwealth of Massachusetts, provides
that the trustees of the Trust (the "Trustees") may, without shareholder
approval, authorize one or more classes of shares (which classes may be divided
into two or more series), shares of each such class or series having such
preferences, voting powers, terms of redemption, if any, and special or relative
rights or privileges (including conversion rights, if any), as the Trustees may
determine;

         WHEREAS, Section 7(c) of Article IX of the Declaration of Trust
provides that the Trustees may amend and repeal the Bylaws of the Trust to the
extent that such Bylaws and applicable law do not reserve that right to the
shareholders of one or more classes or series of shares of the Trust; and

         WHEREAS, pursuant to authority expressly vested in the Trustees by
Section 1 of Article III of the Declaration of Trust, the Trustees have
authorized, in addition to the Trust's common shares, a class of 2,880 preferred
shares, without par value, liquidation preference $25,000 per share plus an
amount equal to accumulated but unpaid dividends thereon, if any (whether or not
earned or declared), divided into one series of 1,440 preferred shares and one
series of 1,440 preferred shares, designated respectively Series M Taxable
Preferred Shares and Series W Taxable Preferred Shares.

     NOW, THEREFORE, the Bylaws of the Trust are hereby amended as follows:

         1.  ARTICLE 12 shall be redesignated ARTICLE 13 and shall be amended in
         its entirety as follows:

                                   ARTICLE 13

                             Amendment to the Bylaws

13.1 General. Subject to paragraph 4 of Part I of Article 12 and except to the
extent that the Declaration of Trust or applicable law requires a vote or
consent of Shareholders or a higher vote or consent by the Trustees and/or
Continuing Trustees, these Bylaws may be amended, changed, altered or repealed,
in whole or part, only by resolution of a majority of the Trustees and a
majority of the Continuing Trustees then in office at any meeting of the
Trustees, or by one or more writings signed by such Trustees and Continuing
Trustees.

         2.  A new ARTICLE 12 shall be added as follows:



                                       B-1

<PAGE>

                                   ARTICLE 12

                          Shares of Beneficial Interest

12.      The Trust has an unlimited number of Common Shares, without par value,
which may be issued from time to time by the Trustees.

         12.1  Statement Creating Two Series of Taxable Preferred Shares.

                                   DESIGNATION

         SERIES M: A series of 1,440 shares of preferred shares of beneficial
interest, without par value, liquidation preference $25,000 per share plus
accumulated but unpaid dividends, if any, thereon (whether or not earned or
declared), is hereby designated "Series M Taxable Auction Market Preferred
Shares" and is referred to below as "Series M." Each of the 1,440 shares of
Series M issued on September 20, 2002 shall, for purposes hereof, be deemed to
have a Date of Original Issue of September 20, 2002; have an Applicable Rate
for its Initial Rate Period equal to 1.95% per annum; have an initial Dividend
Payment Date of October 1, 2002; and have such other preferences, voting
powers, terms of redemption and special or relative rights or privileges, in
addition to those required by applicable law or set forth in the Declaration of
Trust, as amended and restated, applicable to Series M, as set forth in Part I
and Part II of this Article 12. Any shares of Series M issued thereafter shall
be issued on the first day of a Rate Period of the then outstanding shares of
Series M, shall have, for such Rate Period, an Applicable Rate equal to the
Applicable Rate for shares of such series established in the first Auction for
shares of such series preceding the date of such issuance; and shall have such
other preferences, voting powers, terms of redemption and special or relative
rights or privileges, in addition to those required by applicable law or set
forth in the Declaration of Trust applicable to Series M, as set forth in Part I
and Part II of this Article 12. The Series M shall constitute a separate series
of preferred shares of beneficial interest of the Trust, and each share of
Series M shall be identical except as provided in this Section 12.1.

         SERIES W: A series of 1,440 shares of preferred shares, of beneficial
interest without par value, liquidation preference $25,000 per share plus
accumulated but unpaid dividends, if any, thereon (whether or not earned or
declared), is hereby designated "Series W Taxable Auction Market Preferred
Shares" and is referred to below as "Series W," and, together with Series M, the
"Preferred Shares." Each of the 1,440 shares of Series W issued on September
20, 2002 shall, for purposes hereof, be deemed to have a Date of Original
Issue of September 20, 2002; have an Applicable Rate for its Initial Rate
Period equal to 1.95% per annum; have an initial Dividend Payment Date of
October 17, 2002; and have such other preferences, voting powers, terms of
redemption and special or relative rights or privileges, in addition to those
required by applicable law or set forth in the Declaration of Trust, as amended
and restated, applicable to Series W, as set forth in Part I and Part II of this
Article 12. Any shares of Series W issued thereafter shall be issued on the
first day of a Rate Period of the then outstanding shares of Series W, shall
have, for such Rate Period, an Applicable Rate equal to the Applicable Rate for
shares of such series established in the first Auction for shares of such series
preceding the date of such issuance; and shall have such other preferences,
voting powers, terms of


                                       B-2

<PAGE>


redemption and special or relative rights or privileges, in addition to those
required by applicable law or set forth in the Declaration of Trust applicable
to Series W, as set forth in Part I and Part II of this Article 12. The Series W
shall constitute a separate series of preferred shares of beneficial interest of
the Trust, and each share of Series W shall be identical except as provided in
this Section 12.1.

                                   DEFINITIONS

         As used in Parts I and II of this Section 12.1, the following terms
shall have the following meanings (with terms defined in the singular having
comparable meanings when used in the plural and vice versa), unless the context
otherwise requires:

             (a)  "'AA' Financial Composite Commercial Paper Rate," on any date
      for any Rate Period of shares of a series of Preferred Shares, shall mean
      (i) (A) in the case of any Rate Period of 7 Rate Period Days or fewer, the
      interest equivalent of the 7-day rate and, in the case of any Rate Period
      of eight or more but fewer than 49 Rate Period Days, the interest
      equivalent of the 30-day rate; provided, however, that if such Rate Period
      is a Minimum Rate Period and the "AA" Financial Composite Commercial Paper
      Rate is being used to determine the Applicable Rate for shares of such
      series when all of the Outstanding shares of such series are subject to
      Submitted Hold Orders, then the interest equivalent of the 7-day rate in
      the case of Series M and the interest equivalent of the 30-day rate in the
      case of Series W, and (B) in the case of any Special Rate Period of (1) 49
      or more but fewer than 70 Rate Period Days, the interest equivalent of the
      60-day rate, (2) 70 or more but fewer than 85 Rate Period Days, the
      arithmetic average of the interest equivalent of the 60-day and 90-day
      rates, (3) 85 or more but fewer than 99 Rate Period Days, the interest
      equivalent of the 90-day rate, (4) 99 or more but fewer than 120 Rate
      Period Days, the arithmetic average of the interest equivalent of the
      90-day and 120-day rates, (5) 120 or more but fewer than 141 Rate Period
      Days, the interest equivalent of the 120-day rate, (6) 141 or more but
      fewer than 162 Rate Period Days, the arithmetic average of the 120-day and
      180-day rates, and (7) 162 or more but fewer than 183 Rate Period Days,
      the interest equivalent of the 180-day rate, in each of the above cases on
      commercial paper placed on behalf of issuers whose corporate bonds are
      rated "AA" by S&P or the equivalent of such rating by S&P or another
      Rating Agency, as made available on a discount basis or otherwise by the
      Federal Reserve Bank of New York for the Business Day next preceding such
      date; or (ii) in the event that the Federal Reserve Bank of New York does
      not make available any such rate, then the arithmetic average of such
      rates, as quoted on a discount basis or otherwise, by the Commercial Paper
      Dealers to the Auction Agent for the close of business on the Business Day
      next preceding such date. If any Commercial Paper Dealer does not quote a
      rate required to determine the "AA" Financial Composite Commercial Paper
      Rate, the "AA" Financial Composite Commercial Paper Rate shall be
      determined on the basis of the quotation or quotations furnished by the
      remaining Commercial Paper Dealer or Commercial Paper Dealers and any
      Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
      selected by the Trust to provide such rate or rates not being supplied by
      any Commercial Paper Dealer or Commercial Paper Dealers, as the case may
      be, or, if the Trust does not select any such Substitute Commercial Paper
      Dealer or Substitute Commercial Paper Dealers, by the remaining Commercial
      Paper Dealer or



                                       B-3

<PAGE>


remaining Commercial Paper Dealers. For purposes of this definition, the
"interest equivalent" of a rate stated on a discount basis (a "discount rate")
for commercial paper of a given number of days' maturity shall be equal to the
quotient (rounded upwards to the next higher one-thousandth (.001) of 1%) of (A)
the discount rate divided by (B) the difference between (x) 1.00 and (y) a
fraction, the numerator of which shall be the product of the discount rate times
the number of days until such commercial paper matures and the denominator of
which shall be 360.

             (b)  "Accountant's Confirmation" shall have the meaning specified
in paragraph 6(c) of Part I of this Section 12.1.

             (c)  "Affected Series" shall have the meaning specified in
paragraph 4(c)(i) of Part I of this Section 12.1.

             (d)  "Affiliate" shall mean, for purposes of the definition of
"Outstanding," any Person known to the Auction Agent to be controlled by, in
control of or under common control with the Trust; provided, however, that no
Broker-Dealer controlled by, in control of or under common control with the
Trust shall be deemed to be an Affiliate, nor shall any corporation or any
Person controlled by, in control of or under common control with such
corporation one of the trustees, directors or executive officers of which is a
Trustee be deemed to be an Affiliate solely because such trustee, director or
executive officer is also a Trustee.

             (e)  "Agent Member" shall mean a member of or participant in the
Securities Depository that will act on behalf of a Bidder.

             (f)  "All Hold Rate" means the 7-day "AA" Financial Composite
Commercial Paper Rate in the case of Series M, and the 30-day "AA" Financial
Composite Commercial Paper Rate in the case of Series W.

             (g)  "Annual Valuation Date" shall mean the last Business Day of
each April of each year.

             (h)  "Applicable Rate" shall have the meaning specified in
paragraph 2(e)(i) of Part I of this Section 12.1.

             (i)  "Approved Foreign Nations" shall have the meaning set forth
in paragraph (iv) of the definition of "Fitch Eligible Assets."

             (j)  "Approved Price" means the "fair value" as determined by the
Trust in accordance with the valuation procedures adopted from time to time by
the Trustees and for which the Trust receives a mark-to-market price (which, for
the purpose of clarity, shall not mean Market Value) from an independent source
at least semi-annually.

             (k)  "Auction" shall mean each periodic implementation of the
Auction Procedures.

             (l)  "Auction Agent" shall mean the entity appointed as such by a
resolution of the Trustees in accordance with paragraph 5 of Part II of this
Section 12.1.


                                       B-4

<PAGE>


             (m)  "Auction Date," with respect to any Rate Period, shall mean
the Business Day next preceding the first day of such Rate Period.

             (n)  "Auction Procedures" shall mean the procedures for conducting
Auctions set forth in Part II of this Section 12.1.

             (o)  "Available Preferred Shares" shall have the meaning specified
in paragraph 3(a) of Part II of this Section 12.1.

             (p)  "Bank Loans" shall mean direct purchases of, assignments of,
participations in and other interests in (a) any bank loan or (b) any loan made
by an investment bank, investment fund or other financial institution, provided
that such loan under this clause (b) is similar to those typically made,
syndicated, purchased or participated by a commercial bank or institutional loan
investor in the ordinary course of business.

             (q)  "Beneficial Owner," with respect to shares of a series of
Preferred Shares, means a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or, if applicable, the Auction Agent) as a holder
of shares of such series.

             (r)  "Bid" and "Bids" shall have the respective meanings specified
in paragraph 1(a) of Part II of this Section 12.1.

             (s)  "Bidder" and "Bidders" shall have the respective meanings
specified in paragraph 1(a) of Part II of this Section 12.1; provided, however,
that neither the Trust nor any affiliate thereof shall be permitted to be a
Bidder in an Auction, except that any Broker-Dealer that is an affiliate of the
Trust may be a Bidder in an Auction, but only if the Orders placed by such
Broker-Dealer are not for its own account.

             (t)  "Brady Bonds" shall mean securities created through the
exchange of existing commercial bank loans to sovereign entities for new
obligations in connection with a debt restructuring under a plan introduced by
former U.S. Secretary of the Treasury Nicholas F. Brady.

             (u)  "Broker-Dealer" shall mean any broker-dealer, commercial bank
or other entity permitted by law to perform the functions required of a
Broker-Dealer in Part II of this Section 12.1, that is a member of, or a
participant in, the Securities Depository or is an affiliate of such member or
participant, has been selected by the Trust and has entered into a Broker-Dealer
Agreement that remains effective.

             (v)  "Broker-Dealer Agreement" shall mean an agreement between the
Auction Agent on behalf of the Trust and a Broker-Dealer pursuant to which such
Broker-Dealer agrees to follow the procedures specified in Part II of this
Section 12.1.

             (w)  "Business Day" shall mean a day on which the New York Stock
Exchange is open for trading and which is neither a Saturday nor a Sunday nor
any other day on which banks in The City of New York, New York, are authorized
by law to close.


                                       B-5

<PAGE>


           (x)  "Canadian Bonds" shall have the meaning set forth in paragraph
(iv) of the definition of "Fitch Eligible Assets."

           (y)  "Closing Transactions" shall have the meaning specified in
paragraph 10(a)(i)(A) of Part I of this Section 12.1.

           (z)  "CMOs" shall have the meaning set forth in paragraph (viii) of
the definition of "Moody's Eligible Assets" below.

           (aa) "Code" means the Internal Revenue Code of 1986, as amended.

           (bb) "Commercial Paper Dealers" shall mean Lehman Commercial Paper
Incorporated, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and any other commercial paper dealer selected by the Trust as to
which Moody's, Fitch or any substitute Rating Agency then rating the Preferred
Shares shall not have objected or, in lieu of any thereof, their respective
affiliates or successors, if such entity is a commercial paper dealer.

           (cc) "Common Shares" shall mean the common shares of beneficial
interest of the Trust.

           (dd) "Corporate Debt Securities" shall have the meaning set forth in
paragraph (iv) of the definition of "Fitch Eligible Assets."

           (ee) "Cure Date" shall mean the Preferred Shares Basic Maintenance
Cure Date or the 1940 Act Cure Date, as the case may be.

           (ff) "Date of Original Issue," with respect to shares of a series of
Preferred Shares, shall mean the date on which the Trust initially issued such
shares.

           (gg) "Declaration of Trust" shall mean the Trust's Agreement and
Declaration of Trust in effect from time to time.

           (hh) "Deposit Securities" shall mean cash and portfolio securities
rated at least A2 (having a remaining maturity of 12 months or less), P-1,
VMIG-1 or MIG-1 by Moody's or A (having a remaining maturity of 12 months or
less), A1 or F-1 by Fitch

           (ii) "Discounted Value," as of any Valuation Date, shall mean (i)
with respect to a Fitch Eligible Asset or Moody's Eligible Asset that is not
currently callable as of such Valuation Date at the option of the issuer
thereof, the quotient of the lesser of the Market Value thereof and the par
value thereof divided by the Fitch Discount Factor for a Fitch Eligible Asset or
the Moody's Discount Factor for a Moody's Eligible Asset; or (ii) with respect
to a Fitch Eligible Asset or Moody's Eligible Asset that is currently callable
as of such Valuation Date at the option of the issuer thereof, the quotient of
(1) the lesser of the Market Value and call price thereof divided by (2) the
Fitch Discount Factor for Fitch Eligible Assets or the Moody's Discount Factor
for Moody's Eligible Assets.


                                       B-6

<PAGE>


           (jj) "Dividend Payment Date," with respect to shares of a series of
Preferred Shares, shall mean any date on which dividends are payable on shares
of such series pursuant to the provisions of paragraph 2(d) of Part I of this
Section 12.1.

           (kk) "Dividend Period," with respect to shares of a series of
Preferred Shares, shall mean the period from and including the Date of Original
Issue of shares of such series to but excluding the initial Dividend Payment
Date for shares of such series and any period thereafter from and including one
Dividend Payment Date for shares of such series to but excluding the next
succeeding Dividend Payment Date for shares of such series.

           (ll) "Existing Holder," with respect to shares of a series of
Preferred Shares, shall mean a Broker-Dealer (or any such other Person as may be
permitted by the Trust) that is listed on the records of the Auction Agent as a
holder of shares of such series.

           (mm) "Exposure Period" shall mean the period commencing on a given
Valuation Date and ending 49 days thereafter.

           (nn) "Failure to Deposit," with respect to shares of a series of
Preferred Shares, shall mean a failure by the Trust to pay to the Auction Agent,
not later than 12:00 Noon, New York City time, (A) on the Business Day next
preceding any Dividend Payment Date for shares of such series, in funds
available on such Dividend Payment Date in The City of New York, New York, the
full amount of any dividend (whether or not earned or declared) to be paid on
such Dividend Payment Date on any share of such series or (B) on the Business
Day next preceding any redemption date in funds available on such redemption
date for shares of such series in The City of New York, New York, the Redemption
Price to be paid on such redemption date for any share of such series after
Notice of Redemption is mailed pursuant to paragraph 8(c) of Part I of this
Section 12.1; provided, however, that the foregoing clause (B) shall not apply
to the Trust's failure to pay the Redemption Price in respect of Preferred
Shares when the related Notice of Redemption provides that redemption of such
shares is subject to one or more conditions precedent and any such condition
precedent shall not have been satisfied at the time or times and in the manner
specified in such Notice of Redemption.

           (oo) "FFCB," "FHLB," "FHLMC" and "FNMA" shall have the respective
meanings set forth in paragraph (viii) of the definition of "Moody's Eligible
Assets" below.

           (pp) "FHLB, FNMA and FFCB Debentures" shall have the meaning set
forth in paragraph (viii) of the definition of "Moody's Eligible Assets" below.

           (qq) "Fitch" shall mean Fitch Ratings and its successors.

           (rr) "Fitch Discount Factor" shall mean, for purposes of determining
the Discounted Value of any Fitch Eligible Asset, the percentage determined as
follows. The Fitch Discount Factor for any Fitch Eligible Asset other than the
securities set forth below will be the percentage provided in writing by Fitch.

              (i)  Corporate Debt Securities: The percentage determined by
     reference to the rating of the Corporate Debt Security in accordance with
     the table set forth below.


                                       B-7

<PAGE>


<TABLE>
<CAPTION>
                                                                                                             Not Rated
         Term to Maturity of                                                                                 or Below
         Corporate Debt                     AAA          AA           A            BBB           BB             BB
         Security(1)                      --------     -------      -------      --------      -------      -----------
-----------------------------------
<S>                                       <C>          <C>          <C>          <C>           <C>          <C>
3 years or less ......................    106.38%      108.11%      109.89%      111.73%       129.87%      151.52%
5 years or less (but longer than 3        111.11%      112.99%      114.94%      116.96%       134.24%      151.52%
years) ...............................
7 years or less (but longer than 5        113.64%      115.61%      117.65%      119.76%       135.66%      151.52%
years) ...............................
10 years or less (but longer than 7       115.61%      117.65%      119.76%      121.95%       136.74%      151.52%
years) ...............................
15 years or less (but longer than 10      119.76%      121.95%      124.22%      126.58%       139.05%      151.52%
years) ...............................
More than 15 years ...................    124.22%      126.58%      129.03%      131.58%       144.55%      151.52%
</TABLE>

       _____________________


              (1) If a security is not rated by Fitch but is rated by two other
         Rating Agencies, then the lower of the ratings on the security from the
         two other Rating Agencies will be used to determine the Fitch Discount
         Factor (e.g., where the S&P rating is A- and the Moody's rating is
         Baa1, a Fitch rating of BBB+ will be used). If a security is not rated
         by Fitch but is rated by only one other Rating Agency, then the rating
         on the security from the other Rating Agency will be used to determine
         the Fitch Discount Factor (e.g., where the only rating on a security is
         an S&P rating of AAA, a Fitch rating of AAA will be used, and where the
         only rating on a security is a Moody's rating of Ba3, a Fitch rating of
         BB- will be used). If a security is not rated by any Rating Agency, the
         Trust will use the percentage set forth under "Not Rated or Below BB"
         in this table.

              The Fitch Discount Factors presented in the immediately preceding
         table apply to Corporate Debt Securities that are Performing and have a
         Market Price determined by a Pricing Service or an Approved Price. The
         Fitch Discount Factor noted in the table above for a Corporate Debt
         Security rated B by Fitch shall apply to any non-Performing Corporate
         Debt Security with a price equal to or greater than $0.90. The Fitch
         Discount Factor noted in the table above for a Corporate Debt Security
         rated CCC by Fitch shall apply to any non-Performing Corporate Debt
         Security with a price less than $0.90 but equal to or greater than
         $0.20. If a Corporate Debt Security does not have a Market Value
         determined by a Pricing Source or an Approved Price, a rating two
         rating categories below the actual rating on the Corporate Debt
         Security will be used (e.g., where the actual rating is A-, the rating
         for Corporate Debt Securities rated BB- will be used). The Fitch
         Discount Factor for a Corporate Debt Security issued by a limited
         partnership that is not a Rule 144A Security shall be the Discount
         Factor determined in accordance with the table set forth above
         multiplied by 105%.

              The Fitch Discount Factors presented in the immediately preceding
         table will also apply to (i) interest rate swaps and caps, whereby the
         rating of the counterparty to the swap or cap will be the rating used
         to determine the Fitch Discount Factor in the table; and (ii) Tradable
         Credit Baskets, whereby the ratings in the table will be applied to the
         underlying securities and the Market Value of each underlying security
         will be its proportionate amount of the Market Value of the Tradable
         Credit Baskets. The Fitch Discount Factors presented in the immediately
         preceding table will also apply to corporate obligations backed by a
         guaranty, a letter of credit or insurance issued by a


                                       B-8

<PAGE>


         third party. If the third-party credit rating is the basis for the
         rating on the obligation, then the rating on the third party will be
         used to determine the Fitch Discount Factor in the table. The Fitch
         Discount Factors presented in the immediately preceding table will also
         apply to preferred trust certificates, the rating on which will by
         determined by the underlying debt instruments in the trust, unless such
         preferred trust certificates are determined by Fitch to qualify for a
         traditional equity discount factor, in which case the Fitch Discount
         Factor shall be 370%.

              (ii)  Short-term instruments: The Fitch Discount Factor applied to
         short-term portfolio securities, including without limitation Corporate
         Debt Securities, Short Term Money Market Instruments and municipal debt
         obligations, will be (A) 100%, so long as such portfolio securities
         mature, or have a demand feature at par exercisable within, the
         Exposure Period; and (B) 125%, so long as such portfolio securities
         neither mature nor have a demand feature at par exercisable within the
         Exposure Period. A Fitch Discount factor of 100% will be applied to
         cash.

              (iii) U.S. Government Securities and U.S. Treasury Strips:


              Time Remaining to Maturity                         Discount Factor
              --------------------------                         ---------------
              1 year or less                                          102%
              2 years or less (but longer than 1 year)                103%
              3 years or less (but longer than 2 years)               105%
              4 years or less (but longer than 3 years)               107%
              5 years or less (but longer than 4 years)               109%
              7 years or less (but longer than 5 years)               112%
              10 years or less (but longer than 7 years)              114%
              Greater than 10 years                                   122%

              (iv) Rule 144A Securities: The Fitch Discount Factor applied to
         Rule 144A Securities will be 110% of the Fitch Discount Factor which
         would apply were the securities registered under the Securities Act.

              (v)  Asset-backed and mortgage-backed securities: The percentage
         determined by reference to the asset type in accordance with the table
         set forth below.

<TABLE>
<CAPTION>
              Asset Type (with time remaining to maturity, if applicable)                          Discount Factor
              ----------                                                                           ---------------
              <S>                                                                                  <C>
              U.S. Treasury/agency securities (10 years or less) ............................            118%
              U.S. Treasury/agency securities (greater than 10 years) .......................            127%
              U.S. agency sequentials (10 years or less) ....................................            128%
              U.S. agency sequentials (greater than 10 years) ...............................            142%
              U.S. agency principal only securities .........................................            236%
              U.S. agency interest only securities ..........................................
                   (with Market Value greater than $0.40) ...................................            498%
              U.S. agency interest only securities ..........................................
                   (with Market Value less than or equal to $0.40) ..........................            214%
              AAA LockOut securities, interest only .........................................            236%
              U.S. agency planned amortization class bonds (10 years or less) ...............            115%
              U.S. agency planned amortization class bonds (greater than 10 years) ..........            136%
              AAA sequentials (10 years or less) ............................................            118%
              AAA sequentials (greater than 10 years) .......................................            135%
              AAA planned amortization class bonds (10 years or less) .......................            115%
</TABLE>


                                       B-9

<PAGE>


<TABLE>
<CAPTION>
              Asset Type (with time remaining to maturity, if applicable)                        Discount Factor
              ----------                                                                         ---------------
              <S>                                                                                <C>
              AAA planned amortization class bonds (greater than 10 years) ..................          140%
              Jumbo mortgages rated AAA/1/ ..................................................          123%
              Jumbo mortgages rated AA/1/ ...................................................          130%
              Jumbo mortgages rated A/1/ ....................................................          136%
              Jumbo mortgages rated BBB/1/ ..................................................          159%
              Commercial mortgage-backed securities rated AAA ...............................          131%
              Commercial mortgage-backed securities rated AA ................................          139%
              Commercial mortgage-backed securities rated A .................................          148%
              Commercial mortgage-backed securities rated BBB ...............................          177%
              Commercial mortgage-backed securities rated BB ................................          283%
              Commercial mortgage-backed securities rated B .................................          379%
              Commercial mortgage-backed securities rated CCC or not rated ..................          950%
</TABLE>

              _______________
              /1/   Applies to jumbo mortgages, credit cards, auto loans, home
              equity loans, manufactured housing and prime mortgage-backed
              securities not issued by a U.S. agency or instrumentality.

              (vi)  Bank Loans: The percentage determined by reference to the
           Fitch Loan Category in accordance with the table set forth below.

                          Fitch Loan Category             Discount Factor
                          -------------------             ---------------
                          A ........................             126%
                          B ........................             157%
                          C ........................             184%
                          D ........................             433%


              (vii) Municipal debt obligations: The Fitch Discount Factor
           applied to municipal debt obligations will be the percentage
           determined by reference to the table set forth below:

<TABLE>
<CAPTION>
                                                      Fitch Rating Category
         exposure period               AAA/1/   AA/1/    A/1/    BBB/1/   F1/2/  Unrated/3/
         ---------------               ---      --       -       ---      --     -------
         <S>                           <C>      <C>      <C>     <C>      <C>    <C>
         7 weeks .................     151%     159%     166%    173%     136%   225%
         8 weeks or less but
         greater than 7 weeks ....     154%     161%     168%    176%     137%   231%
         9 weeks or less but
         greater than 8 weeks ....     158%     163%     170%    177%     138%   240%
</TABLE>

         _____________
         /1/Fitch rating.
         /2/Municipal debt obligations rated by Fitch which do not mature, but
         have a demand feature at par exercisable, in 30 days and which do not
         have a long-term rating.
         /3/If a security is not rated by Fitch but is rated by two other
         Rating Agencies, then the lower of the ratings on the security from the
         two other Rating Agencies will be used to determine the Fitch Discount
         Factor (e.g., where the S&P rating is A- and the Moody's rating is
         Baa1, a Fitch rating of BBB+ will be used). If a security is not rated
         by Fitch but is rated by only one other Rating Agency, then the rating
         on the security from the other Rating Agency will be used to determine
         the Fitch Discount Factor (e.g., where the only rating on a security is
         an S&P rating of AAA, a Fitch rating of AAA will be used, and where the
         only rating on a security is a Moody's rating of Ba3, a Fitch rating of
         BB- will be used). If a security is not rated by any Rating Agency, the
         Trust will use the percentage set forth under "Unrated" in this table.


                                       B-10

<PAGE>


              (viii) Foreign Bonds: The Fitch Discount Factor (A) for (1) a
         Foreign Bond the principal of which (if not denominated in U.S.
         dollars) is subject to a currency hedging transaction or (2) a Foreign
         Bond the principal of which is denominated in U.S. dollars, will be the
         Fitch Discount Factor that would otherwise apply to such Foreign Bonds
         in accordance with paragraph (i) of this definition of "Fitch Discount
         Factor," or (B) for (1) a Foreign Bond the principal of which (if not
         denominated in U.S. dollars) is not subject to a currency hedging
         transaction or (2) a bond issued by a corporation, limited liability
         company or limited partnership domiciled in, or the government or any
         agency, instrumentality or political subdivision of, a nation other
         than an Approved Foreign Nation, will be 370%.

              (ix)   Structured Notes: The Fitch Discount Factor applied to
         Structured Notes will be (A) in the case of a corporate issuer, the
         Fitch Discount Factor determined in accordance with paragraph (i) under
         this definition, whereby the rating on the issuer of the Structured
         Note will be the rating on the Structured Note for purposes of
         determining the Fitch Discount Factor in the table in paragraph (i);
         and (B) in the case of an issuer that is the U.S. government or an
         agency or instrumentality thereof, the Fitch Discount Factor determined
         in accordance with paragraph (iii) under this definition.

              (x)    Convertible debt securities: The Fitch Discount Factor
         applied to convertible debt securities is (A) 200% for investment grade
         convertibles and (B) 222% for below investment grade convertibles so
         long as such convertible debt securities have neither (x) conversion
         premiums greater than 100% nor (y) a yield to maturity or yield to
         worst of greater than 15.00% above the relevant Treasury curve.

              The Fitch Discount Factor applied to convertible debt securities
         which have conversion premiums of greater than 100% is (A) 152% for
         investment grade convertibles, and (B) 179% for below investment grade
         convertibles so long as such convertible debt securities do not have a
         yield to maturity or yield to worst of greater than 15.00% above the
         relevant Treasury curve.

              The Fitch Discount Factor applied to convertible debt securities
         which have a yield to maturity or yield to worst of greater than 15.00%
         above the relevant Treasury curve is 370%.

              (xi)   Preferred securities: The percentage determined by
         reference to the rating of a preferred security in accordance with the
         table set forth below.

<TABLE>
<CAPTION>
                                                         Fitch Rating Category
         Preferred Security(1)          AAA       AA       A       BBB         BB     Not Rated or
         ---------------------          ---       --       -       ---         --     ------------
                                                                                        Below BB
                                                                                        --------
         <S>                          <C>       <C>      <C>       <C>       <C>      <C>
         Taxable Preferred ......     130.58%   133.19%  135.91%   138.73%   153.23%    161.08%
         Dividend Received
         Deduction (DRD)
         Preferred ..............     163.40%   163.40%  163.40%   163.40%   201.21%    201.21%
</TABLE>


                                       B-11

<PAGE>


         ____________
         /1/If a security is not rated by Fitch but is rated by two other Rating
         Agencies, then the lower of the ratings on the security from the two
         other Rating Agencies will be used to determine the Fitch Discount
         Factor (e.g., where the S&P rating is A- and the Moody's rating is
         Baa1, a Fitch rating of BBB+ will be used). If a security is not rated
         by Fitch but is rated by only one other Rating Agency, then the rating
         on the security from the other Rating Agency will be used to determine
         the Fitch Discount Factor (e.g., where the only rating on a security is
         an S&P rating of AAA, a Fitch rating of AAA will be used, and where the
         only rating on a security is a Moody's rating of Ba3, a Fitch rating of
         BB- will be used). If a security is not rated by any Rating Agency, the
         Trust will use the percentage set forth under "Not Rated or Below BB"
         in this table.

                (ss)  "Fitch Eligible Asset" shall mean

                (i)   cash (including interest and dividends due on assets rated
         (A) BBB or higher by Fitch or the equivalent by another Rating Agency
         if the payment date is within five Business Days of the Valuation Date,
         (B) A or higher by Fitch or the equivalent by another Rating Agency if
         the payment date is within thirty days of the Valuation Date, and (C)
         A+ or higher by Fitch or the equivalent by another Rating Agency if the
         payment date is otherwise within the Exposure Period) and receivables
         for Fitch Eligible Assets sold if the receivable is due within five
         Business Days of the Valuation Date, and if the trades which generated
         such receivables are (A) with counterparties having a long-term debt
         rating of at least BBB- from Fitch or the equivalent from another
         Rating Agency or (B) with counterparties having a Short Term Money
         Market Instrument rating of at least F1+ by Fitch or the equivalent by
         another Rating Agency;

                (ii)  Short Term Money Market Instruments so long as (A) such
         securities are rated at least F1+ by Fitch or the equivalent by another
         Rating Agency, (B) in the case of demand deposits, time deposits and
         overnight funds, the supporting entity is rated at least A by Fitch or
         the equivalent by another Rating Agency, or (C) in all other cases, the
         supporting entity (1) is rated at least A by Fitch or the equivalent by
         another Rating Agency and the security matures within three months or
         (2) is rated at least AA by Fitch or the equivalent by another Rating
         Agency and the security matures within six months;

                (iii) U.S. Government Securities and U.S. Treasury Strips;

                (iv)  debt securities if (A) such securities have been
         registered under the Securities Act or are restricted as to resale
         under federal securities laws but are eligible for resale pursuant to
         Rule 144A under the Securities Act as determined by the Trust's
         investment manager or portfolio manager acting pursuant to procedures
         approved by the Trustees; and (B) such securities are issued by (1) a
         U.S. corporation, limited liability company or limited partnership,
         (2) a corporation, limited liability company or limited partnership
         domiciled in Argentina, Australia, Brazil, Chile, France, Germany,
         Italy, Japan, Korea, Mexico, Spain, the United Kingdom, or any country
         represented in the JP Morgan Emerging Markets Bond Index Plus (the
         "Approved Foreign Nations"), (3) the government of any Approved Foreign
         Nation or any of its agencies, instrumentalities or political
         subdivisions, including Brady Bonds (the debt securities described in
         clauses (2) and (3) being referred to collectively as "Foreign Bonds"),
         (4) a corporation,limited liability company or limited partnership
         domiciled in Canada or (5) the Canadian government or any of its
         agencies, instrumentalities or political subdivisions (the debt


                                       B-12

<PAGE>


         securities of Canadian issuers being referred to collectively as
         "Canadian Bonds"). Foreign Bonds held by the Trust will qualify as
         Fitch Eligible Assets only up to a maximum of 20% of the aggregate
         Market Value of all assets constituting Fitch Eligible Assets.
         Similarly, Canadian Bonds held by the Trust will qualify as Fitch
         Eligible Assets only up to a maximum of 20% of the aggregate Market
         Value of all assets constituting Fitch Eligible Assets. Notwithstanding
         the limitations in the two preceding sentences, Foreign Bonds and
         Canadian Bonds held by the Trust will qualify as Fitch Eligible Assets
         only up to a maximum of 30% of the aggregate Market Value of all assets
         constituting Fitch Eligible Assets. In addition, bonds which are issued
         in connection with a reorganization under U.S. federal bankruptcy law
         ("Reorganization Bonds") will be considered debt securities
         constituting Fitch Eligible Assets if (a) they provide for periodic
         payment of interest in cash in U.S. dollars or euros; (b) they do not
         provide for conversion or exchange into equity capital at any time over
         their lives; (c) they have been registered under the Securities Act or
         are restricted as to resale under federal securities laws but are
         eligible for trading under Rule 144A promulgated pursuant to the
         Securities Act as determined by the Trust's investment manager or
         portfolio manager acting pursuant to procedures approved by the
         Trustees; (d) they were issued by a U.S. corporation, limited liability
         company or limited partnership; and (e) at the time of purchase at
         least one year had elapsed since the issuer's reorganization.
         Reorganization Bonds may also be considered debt securities
         constituting Fitch Eligible Assets if they have been approved by Fitch,
         which approval shall not be unreasonably withheld. All debt securities
         satisfying the foregoing requirements and restrictions of this
         paragraph (iv) are herein referred to as "Corporate Debt Securities";

              (v)    preferred stocks if (A) dividends on such preferred stock
         are cumulative, (B) such securities provide for the periodic payment of
         dividends thereon in cash in U.S. dollars or euros and do not provide
         for conversion or exchange into, or have warrants attached entitling
         the holder to receive, equity capital at any time over the respective
         lives of such securities, (C) the issuer of such a preferred stock has
         common stock listed on either the New York Stock Exchange or the
         American Stock Exchange, (D) the issuer of such a preferred stock has a
         senior debt rating or preferred stock rating from Fitch of BBB- or
         higher or the equivalent rating by another Rating Agency. In addition,
         the preferred stocks issue must be at least $50 million;

              (vi)   asset-backed and mortgage-backed securities;

              (vii)  Rule 144A Securities;

              (viii) Bank Loans;

              (ix)   municipal debt obligation that (A) pays interest in cash
         and (B) is part of an issue of municipal debt obligations of at least
         $5 million, except for municipal debt obligations rated below A by
         Fitch or the equivalent rating by another Rating Agency, in which case
         the minimum issue size is $10 million;

              (x)    Tradable Credit Baskets (e.g., Traded Custody Receipts or
         TRACERs and Targeted Return Index Securities Trust or TRAINS);


                                       B-13

<PAGE>


              (xi)   convertible debt and convertible preferred stocks; and

              (xii)  any other security or instrument approved by Fitch.

         Financial contracts, as such term is defined in Section 3(c)(2)(B)(ii)
of the 1940 Act, not otherwise provided for in this definition may be included
in Fitch Eligible Assets, but, with respect to any financial contract, only upon
receipt by the Trust of a writing from Fitch specifying any conditions on
including such financial contract in Fitch Eligible Assets and assuring the
Trust that including such financial contract in the manner so specified would
not affect the credit rating assigned by Fitch to the Preferred Shares.

         Where the Trust sells an asset and agrees to repurchase such asset in
the future, the Discounted Value of such asset will constitute a Fitch Eligible
Asset and the amount the Trust is required to pay upon repurchase of such asset
will count as a liability for the purposes of the Preferred Shares Basic
Maintenance Amount. Where the Trust purchases an asset and agrees to sell it to
a third party in the future, cash receivable by the Trust thereby will
constitute a Fitch Eligible Asset if the long-term debt of such other party is
rated at least A- by Fitch or the equivalent by another Rating Agency and such
agreement has a term of 30 days or less; otherwise the Discounted Value of such
purchased asset will constitute a Fitch Eligible Asset.

         Notwithstanding the foregoing, an asset will not be considered a Fitch
Eligible Asset to the extent that it has been irrevocably deposited for the
payment of (i)(A) through (i)(E) under the definition of Preferred Shares Basic
Maintenance Amount or to the extent it is subject to any Liens, except for (A)
Liens which are being contested in good faith by appropriate proceedings and
which Fitch has indicated to the Trust will not affect the status of such asset
as a Fitch Eligible Asset, (B) Liens for taxes that are not then due and payable
or that can be paid thereafter without penalty, (C) Liens to secure payment for
services rendered or cash advanced to the Trust by its investment manager or
portfolio manager, the Trust's custodian, transfer agent or registrar or the
Auction Agent and (D) Liens arising by virtue of any repurchase agreement.

         Portfolio holdings as described below must be within the following
diversification and issue size requirements in order to be included in Fitch's
Eligible Assets:

<TABLE>
<CAPTION>
         Security Rated At     Maximum Single        Maximum Single          Minimum Issue Size
         Least                   Issuer(1)           Industry(1),(2)         ($ in millions)(3)
         <S>                   <C>                   <C>                     <C>
         AAA                           100%                  100%                   $100
         AA-                            20%                   75%                   100
         A-                             10%                   50%                   100
         BBB-                            6%                   25%                   100
         BB-                             4%                   16%                    50
         B-                              3%                   12%                    50
         CCC or Below                    2%                    8%                    50
</TABLE>

     (1) Percentages represent a portion of the aggregate market value of
         Corporate Debt Securities.


                                       B-14

<PAGE>


     (2)  Industries are determined according to Fitch Industry Classifications,
          as defined herein.
     (3)  Preferred stock has a minimum issue size of $50 million.

          (tt) "Fitch Hedging Transaction" shall have the meaning specified in
     paragraph 10(b)(i) of Part I of this Section 12.1.

          (uu) "Fitch Industry Classification" means, for the purposes of
     determining Fitch Eligible Assets, each of the following industry
     classifications:

        1.   Aerospace & Defense
        2.   Automobiles
        3.   Banking, Finance & Real Estate
        4.   Broadcasting & Media
        5.   Building & Materials
        6.   Cable
        7.   Chemicals
        8.   Computers & Electronics
        9.   Consumer Products
        10.  Energy
        11.  Environmental Services
        12.  Farming & Agriculture
        13.  Food, Beverage & Tobacco
        14.  Gaming, Lodging & Restaurants
        15.  Healthcare & Pharmaceuticals
        16.  Industrial/Manufacturing
        17.  Insurance
        18.  Leisure & Entertainment
        19.  Metals & Mining
        20.  Miscellaneous
        21.  Paper & Forest Products
        22.  Retail
        23.  Sovereign
        24.  Supermarkets & Drugstores
        25.  Telecommunications
        26.  Textiles & Furniture
        27.  Transportation
        28.  Utilities

         The Trust shall use its discretion in determining which industry
classification is applicable to a particular investment.

          (vv) "Fitch Loan Category" means the following four categories (and,
     for purposes of this categorization, the Market Value of a Fitch Eligible
     Asset trading at par is equal to $1.00):


                                       B-15

<PAGE>


              (i)   "Fitch Loan Category A" means Performing Bank Loans which
         have a Market Value or an Approved Price greater than or equal to
         $0.90.

              (ii)  "Fitch Loan Category B" means: (A) Performing Bank Loans
         which have a Market Value or an Approved Price of greater than or equal
         to $0.80 but less than $0.90; and (B) non-Performing Bank Loans which
         have a Market Value or an Approved Price greater than or equal to
         $0.85.

              (iii) "Fitch Loan Category C" means: (A) Performing Bank Loans
         which have a Market Value or an Approved Price of greater than or equal
         to $0.70 but less than $0.80; (B) non-Performing Bank Loans which have
         a Market Value or an Approved Price of greater than or equal to $0.75
         but less than $0.85; and (C) Performing Bank Loans without an Approved
         Price rated BB- or higher by Fitch. If a security is not rated by Fitch
         but is rated by two other Rating Agencies, then the lower of the
         ratings on the security from the two other Rating Agencies will be used
         to determine the Fitch Discount Factor (e.g., where the S&P rating is
         A- and the Moody's rating is Baa1, a Fitch rating of BBB+ will be
         used). If a security is not rated by Fitch but is rated by only one
         other Rating Agency, then the rating on the security from the other
         Rating Agency will be used to determine the Fitch Discount Factor
         (e.g., where the only rating on a security is an S&P rating of AAA, a
         Fitch rating of AAA will be used, and where the only rating on a
         security is a Moody's rating of Ba3, a Fitch rating of BB- will be
         used).

              (iv)  "Fitch Loan Category D" means Bank Loans not described in
         any of the foregoing categories.

         Notwithstanding any other provision contained above, for purposes of
determining whether a Fitch Eligible Asset falls within a specific Fitch Loan
Category, to the extent that any Fitch Eligible Asset would fall within more
than one of the Fitch Loan Categories, such Fitch Eligible Asset shall be deemed
to fall into the Fitch Loan Category with the lowest applicable Fitch Discount
Factor.

              (ww)  "Foreign Bonds" shall have the meaning set forth in
     paragraph (iv) of the definition of "Fitch Eligible Assets."

              (xx)  "Forward Commitments" shall have the meaning specified in
     paragraph 10(a)(iv) of Part I of this Section 12.1.

              (yy)  "GNMA" shall have the meaning set forth in paragraph (viii)
     of the definition of "Moody's Eligible Assets" below.

              (zz)  "Holder," with respect to shares of a series of Preferred
     Shares, shall mean the registered holder of such shares as the same appears
     on the record books of the Trust.

              (aaa) "Hold Order" and "Hold Orders" shall have the respective
     meanings specified in paragraph 1(a) of Part II of this Section 12.1.


                                       B-16

<PAGE>


     (bbb) "Independent Accountant" shall mean a nationally recognized
accountant, or firm of accountants, retained by the Trust that is with respect
to the Trust an independent public accountant or firm of independent public
accountants under the Securities Act of 1933, as amended from time to time.

     (ccc) "Initial Rate Period," with respect to Series M, shall be the period
from and including the Date of Original Issue thereof to but excluding October
1, 2002, and, with respect to Series W, shall be the period from and including
the Date of Original Issue thereof to but excluding October 17, 2002.

     (ddd) "Late Charge" shall have the meaning specified in paragraph
2(e)(i)(B) of Part I of this Section 12.1.

     (eee) "Lead Broker-Dealer" shall mean a Broker-Dealer designated as the
"lead" Broker-Dealer by the Trust from time to time in its discretion.
Initially, the Lead Broker-Dealer shall be Merrill Lynch, Pierce, Fenner & Smith
Incorporated.

     (fff) "Lien" shall mean any material lien, mortgage, pledge, security
interest or security agreement of any kind, but shall not include assets
segregated on the Trust's books for regulatory or other reasons.

     (ggg) "Liquidation Preference," with respect to a given number of Preferred
Shares, means $25,000 times that number.

     (hhh) "Market Value" of any asset of the Trust shall be the market value
thereof determined by any pricing service designated by the Trust and approved
by Moody's and Fitch, if Moody's and Fitch are then rating the Preferred Shares,
and from any substitute Rating Agency then rating the Preferred Shares (the
"Pricing Service"). Market Value of any asset shall include any interest accrued
thereon. The Pricing Service shall value portfolio property at the lower of the
quoted bid price and the mean between the quoted bid and ask price or the yield
equivalent when quotations are readily available. Securities and other property
for which quotations are not readily available shall be valued at fair value as
determined by the Pricing Service, using methods which include consideration of:
yields or prices of securities of comparable quality, type of issue, coupon,
maturity and rating; indications as to value from dealers; and general market
conditions. The Pricing Service may employ electronic data processing techniques
and/or a matrix system to determine valuations. If the Pricing Service fails to
provide the Market Value of any securities, such securities shall be valued at
the lower of two bid quotations (at least one of which shall be in writing)
obtained by the Trust from two dealers who are members of the National
Association of Securities Dealers, Inc. and are making a market in such
securities. If two bid quotations are not readily available for any securities,
such securities shall be valued at fair value on a consistent basis using
methods determined in good faith by the Trustees. Futures contracts and options
are valued at closing prices for such instruments established by the exchange or
board of trade on which they are traded or, if market quotations are not readily
available, are valued at fair value as determined by the Pricing Service or, if
the Pricing Service is not able to value such instruments, shall be valued at
fair value on a consistent basis using methods determined in good faith by the
Trustees. All other assets


                                       B-17

<PAGE>


     will be valued at fair value on a consistent basis using methods determined
     in good faith by the Trustees.

          (iii) "Maximum Rate" means, on any date on which the Applicable Rate
     is determined, the applicable percentage of the Reference Rate, on the date
     of such Auction determined as set forth below based on the lower of the
     credit rating assigned to the Preferred Shares by Moody's or Fitch subject
     to upward but not downward adjustment in the discretion of the Trustees
     after consultation with the Broker-Dealers and subject to paragraph 4(d) of
     Part I of this Section 12.1; provided that immediately following any such
     increase the Trust would be in compliance with the Preferred Shares Basic
     Maintenance Amount. If Moody's or Fitch or both shall not make such ratings
     available, the rate shall be determined by reference to equivalent ratings
     issued by a substitute Rating Agency.

         ----------------------------------------------------------------
                      Credit Ratings
                      --------------                      Applicable
         ----------------------------------------------
              Moody's                    Fitch            Percentage:
              -------                    -----            -----------
         ----------------------------------------------------------------

         ----------------------------------------------------------------
           "Aa3" or higher            AA- or higher          150%
         ----------------------------------------------------------------
             "A3" to "A1"               A- to A+             200%
         ----------------------------------------------------------------
           "Baa3" to "Baa1"           BBB- to BBB+           225%
         ----------------------------------------------------------------
             Below "Baa3"              Below BBB-            275%
         ----------------------------------------------------------------


          (jjj) "Minimum Rate Period" shall mean any Rate Period consisting of 7
     Rate Period Days for Series M and 28 Rate Period Days for Series W.

          (kkk) "Moody's" shall mean Moody's Investors Service, Inc., a Delaware
     corporation, and its successors.

          (lll) "Moody's Discount Factor" shall mean, for purposes of
     determining the Discounted Value of any Moody's Eligible Asset, the
     percentage determined as follows. The Moody's Discount Factor for any
     Moody's Eligible Asset other than the securities set forth below will be
     the percentage provided in writing by Moody's.


                                       B-18

<PAGE>


              (i) Corporate debt securities: The percentage determined by
         reference to the rating on such asset with reference to the remaining
         term to maturity of such asset, in accordance with the table set forth
         below.

<TABLE>
<CAPTION>
                                                                          Moody's Rating Category

Term to Maturity of
Corporate Debt Security                            Aaa        Aa         A        Baa        Ba          B        Caa     Unrated/1/
-----------------------                            ---        --         -        ---        --          -        ---     -------
<S>                                               <C>        <C>       <C>        <C>       <C>        <C>        <C>     <C>
1 year or less .................................  109%       112%      115%       118%      119%       125%       205%      225%
2 years or less (but longer than 1 year) .......  115%       118%      122%       125%      127%       133%       205%      225%
3 years or less (but longer than 2 years) ......  120%       123%      127%       131%      133%       140%       205%      225%
4 years or less (but longer than 3 years) ......  126%       129%      133%       138%      140%       147%       205%      225%
5 years or less (but longer than 4 years) ......  132%       135%      139%       144%      146%       154%       205%      225%
7 years or less (but longer than 5 years) ......  139%       143%      147%       152%      156%       164%       205%      225%
10 years or less (but longer than 7 years) .....  145%       150%      155%       160%      164%       173%       205%      225%
15 years or less (but longer than 10 years) ....  150%       155%      160%       165%      170%       180%       205%      225%
20 years or less (but longer than 15 years) ....  150%       155%      160%       165%      170%       190%       205%      225%
30 years or less (but longer than 20 years) ....  150%       155%      160%       165%      170%       191%       205%      225%
Greater than 30 years ..........................  165%       173%      181%       189%      205%       221%       221%      225%
</TABLE>

         ____________
         /1/ Unrated corporate debt securities, which are corporate debt
         securities rated by neither Moody's nor S&P, are limited to 10% of
         discounted Moody's Eligible Assets. If a corporate debt security is
         unrated by Moody's but is rated by S&P, a rating two numeric ratings
         below the S&P rating will be used (e.g., where the S&P rating is AAA, a
         Moody's rating of Aa2 will be used; where the S&P rating is AA+, a
         Moody's rating of Aa3 will be used). If a corporate debt security is
         unrated by both Moody's and S&P, the Trust will use the percentage set
         forth under "Unrated" in this table.

             The Moody's Discount Factors presented in the immediately
         preceding table will also apply to Moody's Eligible Assets and to
         Moody's rated credit baskets (e.g., TRACERs), whereby the ratings in
         the table will be applied to the underlying securities and the Market
         Value of each underlying security will be its proportionate amount of
         the Market Value of the TRACER. The Moody's Discount Factors presented
         in the immediately preceding table will also apply to corporate debt
         securities that do not pay interest in U.S. dollars or euros, provided
         that the Moody's Discount Factor determined from the table shall be
         multiplied by a factor of 110% for purposes of calculating the
         Discounted Value of such securities.

             (ii)  Preferred stock: The Moody's Discount Factor for preferred
         stock shall be (A) for preferred stocks issued by a utility, 146%; (B)
         for preferred stocks of industrial and financial issuers, 209%; and (C)
         for auction rate preferred stocks, 350%.

             (iii) Short-term instruments: The Moody's Discount Factor applied
         to short-term portfolio securities, including without limitation
         corporate debt securities, Short Term Money Market Instruments and
         municipal debt obligations, will be (A) 100%, so long as such portfolio
         securities mature or have a demand feature at par exercisable within
         the Exposure Period; (B) 115%, so long as such portfolio securities
         mature or have a demand feature at par not exercisable within the
         Exposure Period; and (C) 125%, if such securities are not rated by
         Moody's, so long as such portfolio securities are rated at least
         A-1+/AA or SP-1+/AA by S&P and mature or have a demand feature at par
         exercisable within the Exposure Period. A Moody's Discount Factor of
         100% will be applied to cash.


                                       B-19

<PAGE>


              (iv)   U.S. Government Agency Securities and U.S. Treasury Strips:

<TABLE>
<CAPTION>
                                                               U.S. Government
                                                              Agency Securities          U.S. Treasury Strips
         Remaining Term to Maturity                            Discount Factor             Discount Factor
         --------------------------                            ---------------             ---------------
         <S>                                                  <C>                        <C>
         1 year or less                                             107%                         107%
         2 years or less (but longer than 1 year)                   113%                         115%
         3 years or less (but longer than 2 years)                  118%                         121%
         4 years or less (but longer than 3 years)                  123%                         128%
         5 years or less (but longer than 4 years)                  128%                         135%
         7 years or less (but longer than 5 years)                  135%                         147%
         10 years or less (but longer than 7 years)                 141%                         163%
         15 years or less (but longer than 10 years)                146%                         191%
         20 years or less (but longer than 15 years)                154%                         218%
         30 years or less (but longer than 20 years)                154%                         244%
</TABLE>

              (v)    Rule 144A Securities: The Moody's Discount Factor applied
         to Rule 144A Securities for Rule 144A Securities which do not have
         registration rights within one year will be 1.3 times the Moody's
         Discount Factor which would apply were the securities registered under
         the Securities Act.

              (vi)   Bank Loans: The Moody's Discount Factor applied to senior
         Bank Loans ("Senior Loans") shall be the percentage specified in the
         table below opposite such Moody's Loan Category:

                             Moody's Loan Category               Discount Factor
                             ---------------------               ---------------
                                      A                                118%
                                      B                                137%
                                      C                                161%
                                      D                                222%
                                      E                                222%

              (vii)  Asset-backed securities (including auto- and credit
         card-backed securities with Moody's ratings of Aa or Aaa): The Moody's
         Discount Factor applied to asset-backed securities shall be 131%.

              (viii) Mortgage-backed securities: The Moody's Discount Factor
         applied to collateralized mortgage obligations, planned amortization
         class bonds and targeted amortization class bonds shall be determined
         by reference to the weighted average life of the security and whether
         cash flow is retained (i.e., controlled by a trustee) or excluded
         (i.e., not controlled by a trustee), in accordance with the table set
         forth below.

<TABLE>
<CAPTION>
         Remaining Term to Maturity                          Cash Flow Retained           Cash Flow Excluded
         --------------------------                          ------------------           ------------------
         <S>                                                 <C>                          <C>
         3 years or less                                          133%                            141%
         7 years or less (but longer than 3 years)                142%                            151%
         10 years or less (but longer than 7 years)               158%                            168%
         20 years or less (but longer than 10 years)              174%                            185%
         Greater than 20 years                                    205%                            213%
</TABLE>


                                       B-20

<PAGE>


              The Moody's Discount Factor applied to residential mortgage
         pass-throughs (including private-placement mortgage pass-throughs)
         shall be determined by reference to the coupon paid by such security
         and whether cash flow is retained (i.e., controlled by a trustee) or
         excluded (i.e., not controlled by a trustee), in accordance with the
         table set forth below.

                Coupon          Cash Flow Retained           Cash Flow Excluded
                ------          ------------------           ------------------
                  5%                   166%                         173%
                  6%                   162%                         169%
                  7%                   158%                         165%
                  8%                   154%                         161%
                  9%                   151%                         157%
                 10%                   148%                         154%
                 11%                   144%                         154%
                 12%                   142%                         151%
                 13%                   139%                         148%
             Adjustable                165%                         172%

         The Moody's Discount Factor applied to fixed-rate pass-throughs that
         are not rated by Moody's and are serviced by a servicer approved by
         Moody's shall be determined by reference to the table in the following
         paragraph.

              The Moody's Discount Factor applied to whole loans shall be
         determined by reference to the coupon paid by such security and whether
         cash flow is retained (i.e., controlled by a trustee) or excluded
         (i.e., not controlled by a trustee), in accordance with the table set
         forth below.

                Coupon          Cash Flow Retained           Cash Flow Excluded
                ------          ------------------           ------------------
                  5%                   172%                         179%
                  6%                   167%                         174%
                  7%                   163%                         170%
                  8%                   159%                         165%
                  9%                   155%                         161%
                 10%                   151%                         158%
                 11%                   148%                         157%
                 12%                   145%                         154%
                 13%                   142%                         151%
             Adjustable                170%                         177%


              (ix) Municipal debt obligations: The Moody's Discount Factor
         applied to municipal debt obligations shall be the percentage
         determined by reference to the rating on such asset and the shortest
         exposure period set forth opposite such rating that is the same length
         as or is longer than the Exposure Period, in accordance with the table
         set forth below (provided that any municipal obligation (excluding any
         short-term municipal obligation) not rated by Moody's but rated by S&P
         shall be deemed to have a Moody's rating which is one full rating
         category lower than its S&P rating):


                                       B-21

<PAGE>


<TABLE>
<CAPTION>
            exposure period       Aaa/1/   Aa/1/    A/1/     Baa/1/   Other/2/  (V)MIG-1/3/    SP-1+/4/   Unrated/5/
            ---------------       ---      --       -        ---      -----     --------       ----       -------
          <S>                     <C>      <C>      <C>      <C>      <C>       <C>            <C>        <C>
          7 weeks                 151%     159%     166%     173%     187%      135%           148%       225%

          8 weeks or less but
          greater than seven
          weeks                   154%     161%     168%     176%     190%      137%           149%       231%

          9 weeks or less but
          greater than eight
          weeks                   158%     163%     170%     177%     192%      138%           150%       240%
</TABLE>

          ------------
          /1/ Moody's rating.
          /2/ Municipal debt obligations not rated by Moody's but rated BBB by
          S&P.
          /3/ Municipal debt obligations rated MIG-1 or VMIG-1, which do not
          mature but have a demand feature at par exercisable in 30 days and
          which do not have a long-term rating.
          /4/ Municipal debt obligations not rated by Moody's but rated SP-1+ by
          S&P, which do not mature or have a demand feature at par exercisable
          in 30 days and which do not have a long-term rating.
          /5/ Municipal debt obligations rated less than Baa3 or not rated
          by Moody's and less than BBB or not rated by S&P, not to exceed 10% of
          Moody's Eligible Assets.

            (x) Structured Notes: The Moody's Discount Factor applied to
          Structured Notes will be (A) in the case of a corporate issuer, the
          Moody's Discount Factor determined in accordance with paragraph (i)
          under this definition, whereby the rating on the issuer of the
          Structured Note will be the rating on the Structured Note for purposes
          of determining the Moody's Discount Factor in the table in paragraph
          (i); and (B) in the case of an issuer that is the U.S. government or
          an agency or instrumentality thereof, the Moody's Discount Factor
          determined in accordance with paragraph (iii) under this definition as
          if the U.S. government or the agency or instrumentality thereof were a
          municipality.

            (mmm) "Moody's Eligible Assets" means

            (i)  cash (including interest and dividends due on assets rated (A)
          Baa3 or higher by Moody's if the payment date is within five Business
          Days of the Valuation Date, (B) A2 or higher if the payment date is
          within thirty days of the Valuation Date, and (C) A1 or higher if the
          payment date is otherwise within the Exposure Period) and receivables
          for Moody's Eligible Assets sold if the receivable is due within five
          Business Days of the Valuation Date, and if the trades which generated
          such receivables are (A) settled through clearing house firms with
          respect to which the Trust has received prior written authorization
          from Moody's or (B) (1) with counterparties having a Moody's long-term
          debt rating of at least Baa3 or (2) with counterparties having a
          Moody's Short Term Money Market Instrument rating of at least P-1;

            (ii) Short Term Money Market Instruments so long as (A) such
          securities are rated at least P-1, (B) in the case of demand deposits,
          time deposits and overnight funds, the supporting entity is rated at
          least A2, or (C) in all other cases, the supporting entity (1) is
          rated A2 and the security matures within one month, (2) is rated A1
          and the security matures within three months or (3) is rated at least
          Aa3 and the security matures within six months; provided, however,
          that for purposes of this definition, such instruments need not meet
          any otherwise applicable Moody's rating criteria;


                                       B-22

<PAGE>


            (iii) U.S. Government Securities and U.S. Treasury Strips;

            (iv)  Rule 144A Securities;

            (v)   Performing Senior Loans and other Bank Loans approved by
          Moody's;

            (vi)  Corporate debt securities if (A) such securities are rated Caa
          or higher by Moody's; (B) such securities provide for the periodic
          payment of interest in cash in U.S. dollars or euros, except that such
          securities that do not pay interest in U.S. dollars or euros shall be
          considered Moody's Eligible Assets if they are rated by Moody's or
          S&P; (C) for securities which provide for conversion or exchange into
          equity capital at some time over their lives, the issuer is rated at
          least B3 by Moody's and the discount factor will be 250%; (D) for debt
          securities rated Ba1 and below, no more than 10% of the original
          amount of such issue may constitute Moody's Eligible Assets; (E) such
          securities have been registered under the Securities Act or are
          restricted as to resale under federal securities laws but are eligible
          for resale pursuant to Rule 144A under the Securities Act as
          determined by the Trust's investment manager or portfolio manager
          acting pursuant to procedures approved by the Trustees, except that
          such securities that are not subject to U.S. federal securities laws
          shall be considered Moody's Eligible Assets if they are publicly
          traded; and (F) such securities are not subject to extended
          settlement.

            Notwithstanding the foregoing limitations, corporate debt securities
          not rated by Moody's but which have an S&P rating shall not exceed 10%
          of the aggregate Discounted Value of all Moody's Eligible Assets for
          purposes of determining whether the Discounted Value of Moody's
          Eligible Assets equals or exceeds the Preferred Shares Maintenance
          Amount. In addition, Eligible Assets must: (i) not have filed for
          bankruptcy within the past three years; (ii) be current on all
          principal and interest in their fixed income obligations; (iii) be
          current on all preferred stock dividends; and (iv) possess a current,
          unqualified auditor's report without qualified, explanatory language;

            (vii) Preferred stocks if (A) dividends on such preferred stock are
          cumulative, (B) such securities provide for the periodic payment of
          dividends thereon in cash in U.S. dollars or euros and do not provide
          for conversion or exchange into, or have warrants attached entitling
          the holder to receive, equity capital at any time over the respective
          lives of such securities, (C) the issuer of such a preferred stock has
          common stock listed on either the New York Stock Exchange or the
          American Stock Exchange, (D) the issuer of such a preferred stock has
          a senior debt rating from Moody's of Baa1 or higher or a preferred
          stock rating from Moody's of Baa3 or higher and (E) such preferred
          stock has paid consistent cash dividends in U.S. dollars or euros over
          the last three years or has a minimum rating of A1 (if the issuer of
          such preferred stock has other preferred issues outstanding that have
          been paying dividends consistently for the last three years, then a
          preferred stock without such a dividend history would also be
          eligible). The preferred stocks must also have the following
          diversification requirements: (X) that the preferred stock issue be
          greater than $50 million and (Y) that the maximum holding by the Trust
          of preferred stock of each issue be $5 million. In addition, preferred
          stocks issued by transportation companies will not be considered
          Moody's Eligible Assets;


                                       B-23

<PAGE>


          (viii) Asset-backed and mortgage-backed securities:

               (A) Asset-backed securities if (1) such securities are rated at
          least Aa3 by Moody's or at least AA by S&P, (2) the securities are
          part of an issue that is $250 million or greater, or the issuer of
          such securities has a total of $500 million or greater of asset-backed
          securities outstanding at the time of purchase of the securities by
          the Trust and (3) the expected average life of the securities is not
          greater than 4 years;

               (B) Collateralized mortgage obligations ("CMOs"), including CMOs
          with interest rates that float at a multiple of the change in the
          underlying index according to a pre-set formula, provided that any CMO
          held by the Trust (1) has been rated Aaa by Moody's or AAA by S&P, (2)
          does not have a coupon which floats inversely, (3) is not portioned as
          an interest-only or principal-only strip and (4) is part of an
          issuance that had an original issue size of at least $100 million;

               (C) Planned amortization class bonds ("PACs") and targeted
          amortization class bonds ("TACs"), provided that such PACs or TACs are
          (1) backed by certificates of either the Federal National Mortgage
          Association ("FNMA"), the Government National Mortgage Association
          ("GNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC")
          representing ownership in single-family first lien mortgage loans with
          original terms of 30 years, (2) part of an issuance that had an
          original issue size of at least $10 million, (3) part of PAC or TAC
          classes that have payment priority over other PAC or TAC classes, (4)
          if TACs, TACs that do not support PAC classes, and (5) if TACs, not
          considered reverse TACs (i.e., do not protect against extension risk);

               (D) Consolidated senior debt obligations of Federal Home Loan
          Banks ("FHLBs"), senior long-term debt of the FNMA, and consolidated
          systemwide bonds and FCS Financial Assistance Corporation Bonds of
          Federal Farm Credit Banks ("FFCBs") (collectively, "FHLB, FNMA and
          FFCB Debentures"), provided that such FHLB, FNMA and FFCB Debentures
          are (1) direct issuance corporate debt rated Aaa by Moody's, (2)
          senior debt obligations backed by the FHLBs, FFCBs or FNMA, (3) part
          of an issue entirely denominated in U.S. dollars and (4) not callable
          or exchangeable debt issues;

               (E) Mortgage pass-throughs rated at least Aa by Moody's and
          pass-throughs issued prior to 1987 (if rated AA by S&P and based on
          fixed-rate mortgage loans) by Travelers Mortgage Services, Citicorp
          Homeowners, Citibank, N.A., Sears Mortgage Security or RFC - Salomon
          Brothers Mortgage Securities, Inc., provided that (1) certificates
          must evidence a proportional, undivided interest in specified pools of
          fixed or adjustable rate mortgage loans, secured by a valid first
          lien, on one- to four-family residential properties and (2) the
          securities are publicly registered (not issued by FNMA, GNMA or
          FHLMC);

               (F) Private-placement mortgage pass-throughs, provided that (1)
          certificates represent a proportional undivided interest in specified
          pools of fixed-rate mortgage loans, secured by a valid first lien, on
          one- to four-family residential properties, (2)


                                       B-24

<PAGE>


          documentation is held by a trustee or independent custodian, (3) pools
          of mortgage loans are serviced by servicers that have been approved by
          FNMA or FHLMC and funds shall be advanced to meet deficiencies to the
          extent provided in the pooling and servicing agreements creating such
          certificates, and (4) pools have been rated Aa or better by Moody's;

               (G) Whole loans (e.g., direct investments in mortgages), provided
          that (1) at least 65% of such loans (a) have seasoning of no less than
          6 months, (b) are secured by single-family detached residences, (c)
          are owner-occupied primary residences, (d) are secured by a
          first-lien, fully documented mortgage, (e) neither are currently
          delinquent (30 days or more) nor were delinquent during the preceding
          year, (f) have loan-to-value ratios of 80% or below, (g) carry normal
          hazard insurance and title insurance, as well as special hazard
          insurance, if applicable, (h) have original terms to maturity not
          greater than 30 years, with at least one year remaining to maturity,
          (i) have a minimum of $10,000 remaining principal balance, (j) for
          loans underwritten after January 1, 1978, FNMA and/or FHLMC forms are
          used for fixed-rate loans, and (k) such loans are whole loans and not
          participations; (2) for loans that do not satisfy the requirements set
          forth in the foregoing clause (1), (a) non-owner occupied properties
          represent no greater than 15% of the aggregate of either the
          adjustable-rate pool or the fixed-rate pool, (b) multi-family
          properties (those with five or more units) represent no greater than
          15% of the aggregate of either the adjustable-rate pool or the
          fixed-rate pool, (c) condominiums represent no greater than 10% of the
          aggregate of either the adjustable-rate pool or the fixed-rate pool,
          and any condominium project must be 80% occupied at the time the loan
          is originated, (d) properties with loan-to-value ratios exceeding 80%
          represent no greater than 25% of the aggregate of either the
          adjustable-rate pool or the fixed-rate pool and the portion of the
          mortgage on any such property that exceeds a loan-to-value ratio of
          80% is insured with Primary Mortgage Insurance from an insurer rated
          at least Baa3 by Moody's and (e) loan balances in excess of the
          current FHLMC limit plus $75,000 represent no greater than 25% of the
          aggregate of either the adjustable-rate pool or the fixed-rate pool,
          loan balances in excess of $350,000 represent no greater than 10% of
          the aggregate of either the adjustable-rate pool or the fixed-rate
          pool, and loan balances in excess of $1,000,000 represent no greater
          than 5% of the aggregate of either the adjustable-rate pool or the
          fixed-rate pool; (3) no greater than 5% of the pool of loans is
          concentrated in any one zip code; (4) the pool of loans contains at
          least 100 loans or $2 million in loans per servicer; (5) for
          adjustable-rate mortgages ("ARMs"), (a) any ARM is indexed to the
          National Cost of Funds index, the 11th District Cost of Funds index,
          the 1-year Treasury or the 6-month Treasury, (b) the margin over the
          given index is between 0.15% and 0.25% for either cost-of-funds index
          and between 0.175% and 0.325% for Treasuries, (c) the maximum yearly
          interest rate increase is 2%, (d) the maximum life-time interest rate
          increase is 6.25% and (e) ARMs may include Federal Housing
          Administration and Department of Veterans Affairs loans; and (6) for
          "teaser" loans, (a) the initial discount from the current ARM market
          rate is no greater than 2%, (b) the loan is underwritten at the market
          rate for ARMs, not the "teaser" rate, and (c) the loan is seasoned six
          months beyond the "teaser" period;


                                       B-25

<PAGE>


              (ix)   Any municipal debt obligation that (A) pays interest in
         cash, (B) does not have a Moody's rating, as applicable, suspended by
         Moody's, and (C) is part of an issue of municipal debt obligations of
         at least $5,000,000, except for municipal debt obligations rated below
         A by Moody's, in which case the minimum issue size is $10,000,000;

              (x)    Structured Notes and Moody's rated credit baskets (e.g.,
         TRACERs);

              (xi)   Financial contracts, as such term is defined in Section
         3(c)(2)(B)(ii) of the 1940 Act, not otherwise provided for in this
         definition but only upon receipt by the Trust of a letter from Moody's
         specifying any conditions on including such financial contract in
         Moody's Eligible Assets and assuring the Trust that including such
         financial contract in the manner so specified would not affect the
         credit rating assigned by Moody's to the Preferred Shares; and

              (xii)  Any other security or instrument approved by Moody's.

         In addition, portfolio holdings as described above must be within the
following diversification and issue size requirements in order to be included in
Moody's Eligible Assets:

<TABLE>
<CAPTION>
                              Maximum Single          Maximum Single          Minimum Issue Size
          Ratings/1/           Issuer/2,3/             Industry/3,4/           ($ in millions)/5/
          -------              ------                  --------                ---------------
          <S>                 <C>                     <C>                     <C>
          Aaa                     100%                      100%                       $   100
          Aa                       20%                       60%                           100
          A                        10%                       40%                           100
          Baa                       6%                       20%                           100
          Ba                        4%                       12%                           506
          B1-B2                     3%                        8%                           506
          B3 or below               2%                        5%                           506
</TABLE>

          ------------
          /1/Refers to the preferred stock and senior debt rating of the
          portfolio holding.
          /2/Companies subject to common ownership of 25% or more are
          considered as one issuer.
          /3/Percentages represent a portion of the aggregate Market Value of
          corporate debt securities.
          /4/Industries are determined according to Moody's Industry
          Classifications, as defined herein.
          /5/Except for preferred stock, which has a minimum issue size of $50
          million.
          /6/Portfolio holdings from issues ranging from $50 million to $100
          million are limited to 20% of the Trust's total assets.

          Where the Trust sells an asset and agrees to repurchase such asset in
the future, the Discounted Value of such asset will constitute a Moody's
Eligible Asset and the amount the Trust is required to pay upon repurchase of
such asset will count as a liability for the purposes of the Preferred Shares
Basic Maintenance Amount. Where the Trust purchases an asset and agrees to sell
it to a third party in the future, cash receivable by the Trust thereby will
constitute a Moody's Eligible Asset if the long-term debt of such other party is
rated at least A2 by Moody's and such agreement has a term of 30 days or less;
otherwise the Discounted Value of such purchased asset will constitute a Moody's
Eligible Asset. For the purposes of calculation of Moody's Eligible Assets,
portfolio securities which have been called for redemption by the issuer thereof
shall be valued at the lower of Market Value and the call price of such
portfolio securities.


                                       B-26

<PAGE>


         Notwithstanding the foregoing, an asset will not be considered a
Moody's Eligible Asset to the extent that it has been irrevocably deposited for
the payment of (i)(A) through (i)(E) under the definition of Preferred Shares
Basic Maintenance Amount or to the extent it is subject to any Liens, except for
(A) Liens which are being contested in good faith by appropriate proceedings and
which Moody's has indicated to the Trust will not affect the status of such
asset as a Moody's Eligible Asset, (B) Liens for taxes that are not then due and
payable or that can be paid thereafter without penalty, (C) Liens to secure
payment for services rendered or cash advanced to the Trust by its investment
manager or portfolio manager, the Trust's custodian, transfer agent or registrar
or the Auction Agent, (D) Liens arising by virtue of any repurchase agreement
and (E) Liens created by virtue of the Trust's investment activity.

          (nnn) "Moody's Hedging Transaction" shall have the meaning specified
     in paragraph 10(a)(i) of Part I of this Section 12.1.

          (ooo) "Moody's Industry Classification" means, for the purposes of
     determining Moody's Eligible Assets, each of the following industry
     classifications (or such other classifications as Moody's may from time to
     time approve for application to the Preferred Shares):

       1. Aerospace and Defense: Major Contractor, Subsystems, Research,
          Aircraft Manufacturing, Arms, Ammunition

       2. Automobile: Automobile Equipment, Auto-Manufacturing, Auto Parts
          Manufacturing, Personal Use Trailers, Motor Homes, Dealers

       3. Banking: Bank Holding, Savings and Loans, Consumer Credit, Small Loan,
          Agency, Factoring, Receivables

       4. Beverage, Food and Tobacco: Beer and Ale, Distillers, Wines and
          Liquors, Distributors, Soft Drink Syrup, Bottlers, Bakery, Mill Sugar,
          Canned Foods, Corn Refiners, Dairy Products, Meat Products, Poultry
          Products, Snacks, Packaged Foods, Candy, Gum, Seafood, Frozen Food,
          Cigarettes, Cigars, Leaf/Snuff, Vegetable Oil

       5. Buildings and Real Estate: Brick, Cement, Climate Controls,
          Contracting, Engineering, Construction, Hardware, Forest Products
          (building-related only), Plumbing, Roofing, Wallboard, Real Estate,
          Real Estate Development, REITs, Land Development

       6. Chemicals, Plastics and Rubber: Chemicals (non-agricultural),
          Industrial Gases, Sulfur, Plastics, Plastic Products, Abrasives,
          Coatings, Paints, Varnish, Fabricating

       7. Containers, Packaging and Glass: Glass, Fiberglass, Containers made
          of: Glass, Metal, Paper, Plastic, Wood or Fiberglass

       8. Personal and Non-Durable Consumer Products (Manufacturing Only):
          Soaps, Perfumes, Cosmetics, Toiletries, Cleaning Supplies, School
          Supplies


                                       B-27

<PAGE>


         9.   Diversified/Conglomerate Manufacturing

         10.  Diversified/Conglomerate Service

         11.  Diversified Natural Resources, Precious Metals and Minerals:
              Fabricating, Distribution

         12.  Ecological: Pollution Control, Waste Removal, Waste Treatment and
              Waste Disposal

         13.  Electronics: Computer Hardware, Electric Equipment, Components,
              Controllers, Motors, Household Appliances, Information Service
              Communicating Systems, Radios, TVs, Tape Machines, Speakers,
              Printers, Drivers, Technology

         14.  Finance: Investment Brokerage, Leasing, Syndication, Securities

         15.  Farming and Agriculture: Livestock, Grains, Produce, Agriculture
              Chemicals, Agricultural Equipment, Fertilizers

         16.  Grocery: Grocery Stores, Convenience Food Stores

         17.  Healthcare, Education and Childcare: Ethical Drugs, Proprietary
              Drugs, Research, Health Care Centers, Nursing Homes, HMOs,
              Hospitals, Hospital Supplies, Medical Equipment

         18.  Home and Office Furnishings, Housewares, and Durable Consumer
              Products: Carpets, Floor Coverings, Furniture, Cooking, Ranges

         19.  Hotels, Motels, Inns and Gaming

         20.  Insurance: Life, Property and Casualty, Broker, Agent, Surety

         21.  Leisure, Amusement, Motion Pictures, Entertainment: Boating,
              Bowling, Billiards, Musical Instruments, Fishing, Photo Equipment,
              Records, Tapes, Sports, Outdoor Equipment (Camping), Tourism,
              Resorts, Games, Toy Manufacturing, Motion Picture Production
              Theaters, Motion Picture Distribution

         22.  Machinery (Non-Agricultural, Non-Construction, Non-Electronic):
              Industrial, Machine Tools, Steam Generators

         23.  Mining, Steel, Iron and Non-Precious Metals: Coal, Copper, Lead,
              Uranium, Zinc, Aluminum, Stainless Steel, Integrated Steel, Ore
              Production, Refractories, Steel Mill Machinery, Mini-Mills,
              Fabricating, Distribution and Sales of the foregoing

         24.  Oil and Gas: Crude Producer, Retailer, Well Supply, Service and
              Drilling


                                       B-28

<PAGE>


         25.  Printing, Publishing, and Broadcasting: Graphic Arts, Paper, Paper
              Products, Business Forms, Magazines, Books, Periodicals,
              Newspapers, Textbooks, Radio, T.V., Cable Broadcasting Equipment

         26.  Cargo Transport: Rail, Shipping, Railroads, Rail-car Builders,
              Ship Builders, Containers, Container Builders, Parts, Overnight
              Mail, Trucking, Truck Manufacturing, Trailer Manufacturing, Air
              Cargo, Transport

         27.  Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail
              Order Catalog, Showroom

         28.  Telecommunications: Local, Long Distance, Independent, Telephone,
              Telegraph, Satellite, Equipment, Research, Cellular

         29.  Textiles and Leather: Producer, Synthetic Fiber, Apparel
              Manufacturer, Leather Shoes

         30.  Personal Transportation: Air, Bus, Rail, Car Rental

         31.  Utilities: Electric, Water, Hydro Power, Gas

         32.  Diversified Sovereigns: Semi-sovereigns, Canadian Provinces,
              Supra-national Agencies

The Trust will use its discretion in determining which industry classification
is applicable to a particular investment in consultation with the Independent
Accountant and Moody's, to the extent the Trust considers necessary.

              (ppp)  "Moody's Loan Category" means the following five categories
     (and, for purposes of this categorization, the Market Value of a Moody's
     Eligible Asset trading at par is equal to $1.00):

              (i)    "Moody's Loan Category A" means Performing Senior Loans
         which have a Market Value or an Approved Price greater than or equal to
         $0.90.

              (ii)   "Moody's Loan Category B" means: (A) Performing Senior
         Loans which have a Market Value or an Approved Price of greater than or
         equal to $0.80 but less than $0.90; and (B) non-Performing Senior Loans
         which have a Market Value or an Approved Price greater than or equal to
         $0.85.

              (iii)  "Moody's Loan Category C" means: (A) Performing Senior
         Loans which have a Market Value or an Approved Price of greater than or
         equal to $0.70 but less than $0.80; and (B) non-Performing Senior Loans
         which have a Market Value or an Approved Price of greater than or equal
         to $0.75 but less than $0.85.


                                       B-29

<PAGE>


            (iv)  "Moody's Loan Category D" means Senior Loans not falling
     within any of the previous categories and which have a Market Value or an
     Approved Price less than $0.75.

            (v)   "Moody's Loan Category E" means non-Senior Loans which have a
     Market Value or an Approved Price.

          Notwithstanding any other provision contained above, for purposes of
determining whether a Moody's Eligible Asset falls within a specific Moody's
Loan Category, to the extent that any Moody's Eligible Asset would fall in more
than one of the Moody's Loan Categories, such Moody's Eligible Asset shall be
deemed to fall into the Moody's Loan Category with the lowest applicable Moody's
Discount Factor.

              (qqq) "1940 Act" shall mean the Investment Company Act of 1940, as
     amended from time to time.

              (rrr) "1940 Act Cure Date," with respect to the failure by the
     Trust to maintain the 1940 Act Preferred Shares Asset Coverage (as required
     by paragraph 5 of Part I of this Section 12.1) as of the last Business Day
     of each month, shall mean the last Business Day of the following month.

              (sss) "1940 Act Preferred Shares Asset Coverage" shall mean asset
     coverage, as defined in Section 18(h) of the 1940 Act, of at least 200%
     with respect to all outstanding senior securities of the Trust which are
     shares of beneficial interest, including all outstanding Preferred Shares
     (or such other asset coverage as may in the future be specified in or under
     the 1940 Act as the minimum asset coverage for senior securities which are
     shares or stock of a closed-end investment company as a condition of
     declaring dividends on its common shares or stock).

              (ttt) "Notice of Redemption" shall mean any notice with respect
     to the redemption of Preferred Shares pursuant to paragraph 8(c) of Part I
     of this Section 12.1.

              (uuu) "Notice of Special Rate Period" shall mean any notice with
     respect to a Special Rate Period of Preferred Shares pursuant to
     paragraph 3(d)(i) of Part I of this Section 12.1.

              (vvv) "Order" and "Orders" shall have the respective meanings
     specified in paragraph 1(a) of Part II of this Section 12.1.

              (www) "Outstanding" shall mean, as of any Auction Date with
     respect to shares of a series of Preferred Shares, the number of shares
     of such series theretofore issued by the Trust except, without duplication,
     (i) any shares of such series theretofore cancelled or delivered to the
     Auction Agent for cancellation or redeemed by the Trust as provided in
     paragraph 8(f) of Part I of this Section 12.1, (ii) any shares of such
     series as to which the Trust or any Affiliate thereof shall be an Existing
     Holder and (iii) any shares of such series represented by any certificate
     in lieu of which a new certificate has been executed and delivered by the
     Trust.


                                       B-30

<PAGE>


          (xxx)  "PACs" shall have the meaning set forth in paragraph (viii) of
     the definition of "Moody's Eligible Assets" above.

          (yyy)  "Performing" shall mean, with respect to any asset that is a
     Bank Loan or other debt, the issuer of such investment is not in default of
     any payment obligations in respect thereof.

          (zzz)  "Person" shall mean and include an individual, a partnership, a
     corporation, a trust, an unincorporated association, a joint venture or
     other entity or a government or any agency or political subdivision
     thereof.

          (aaaa) "Potential Beneficial Owner," with respect to shares of a
     series of Preferred Shares, shall mean a customer of a Broker-Dealer that
     is not a Beneficial Owner of shares of such series but that wishes to
     purchase shares of such series, or that is a Beneficial Owner of shares of
     such series that wishes to purchase additional shares of such series.

          (bbbb) "Potential Holder," with respect to shares of a series of
     Preferred Shares, shall mean a Broker-Dealer (or any such other person as
     may be permitted by the Trust) that is not an Existing Holder of shares of
     such series or that is an Existing Holder of shares of such series that
     wishes to become the Existing Holder of additional shares of such series.

          (cccc) "Preferred Shares" shall have the meaning set forth under
     "DESIGNATION" above.

          (dddd) "Preferred Shares Basic Maintenance Amount," as of any
     Valuation Date, shall mean the dollar amount equal to the sum of: (i)(A)
     the product of the number of Preferred Shares outstanding on such date
     multiplied by $25,000 (plus the product of the number of shares of any
     other series of preferred shares outstanding on such date multiplied by the
     liquidation preference of such shares), plus any redemption premium
     applicable to the Preferred Shares (or other preferred shares) then subject
     to redemption; (B) the aggregate amount of dividends that will have
     accumulated at the respective Applicable Rates (whether or not earned or
     declared) to (but not including) the first respective Dividend Payment
     Dates for the Preferred Shares outstanding that follow such Valuation Date
     (plus the aggregate amount of dividends, whether or not earned or declared,
     that will have accumulated in respect of other outstanding preferred shares
     to, but not including, the first respective dividend payment dates for such
     other shares that follow such Valuation Date); (C) the aggregate amount of
     dividends that would accumulate on shares of each series of Preferred
     Shares outstanding from such first respective Dividend Payment Date
     therefor through the 49th day after such Valuation Date, at the Maximum
     Rate (calculated as if such Valuation Date were the Auction Date for the
     Dividend Period commencing on such Dividend Payment Date) for a 7-day
     Dividend Period of shares of such series to commence on such Dividend
     Payment Date, multiplied by the Volatility Factor (except that for those
     days during the period described in this clause (C) in respect of which the
     Applicable Rate in effect immediately prior to such Dividend Payment Date
     will remain in effect pursuant to clause (B) that are also included in the
     period described in clause (C), the dividend for purposes of


                                       B-31

<PAGE>


     calculation would accumulate at the Applicable Rate in effect for purposes
     of clause (B) in respect of those days); (D) the amount of anticipated
     expenses of the Trust for the 90 days subsequent to such Valuation Date;
     (E) the amount of any indebtedness or obligations of the Trust senior in
     right of payment to the Preferred Shares; and (F) any current liabilities
     as of such Valuation Date to the extent not reflected in any of (i)(A)
     through (i)(E) (including, without limitation, any payables for portfolio
     securities of the Trust purchased as of such Valuation Date and any
     liabilities incurred for the purpose of clearing securities transactions);
     less (ii) the value (i.e., for purposes of current Fitch and Moody's
     guidelines, the face value of cash, short-term securities rated, in the
     case of Fitch, F1 by Fitch or the equivalent by another Rating Agency, or,
     in the case of Moody's, MIG-1, VMIG-1 or P-1 by Moody's, and short-term
     securities that are the direct obligation of the U.S. government, provided
     in each case that such securities mature on or prior to the date upon which
     any of (i)(A) through (i)(F) become payable, otherwise the Discounted
     Value) of any of the Trust's assets irrevocably deposited by the Trust for
     the payment of any of (i)(A) through (i)(F).

          (eeee) "Preferred Shares Basic Maintenance Cure Date," with respect to
     the failure by the Trust to satisfy the Preferred Shares Basic Maintenance
     Amount (as required by paragraph 6(a) of Part I of this Section 12.1) as of
     a given Valuation Date, shall mean the seventh Business Day following such
     Valuation Date.

          (ffff) "Preferred Shares Basic Maintenance Report" shall mean a report
     signed by the President, Treasurer or any Senior Vice President or Vice
     President of the Trust which sets forth, as of the related Valuation Date,
     the assets of the Trust, the Market Value and the Discounted Value thereof
     (seriatim and in aggregate), and the Preferred Shares Basic Maintenance
     Amount.

          (gggg) "Pricing Service" shall have the meaning specified in the
     definition of "Market Value" above.

          (hhhh) "Quarterly Valuation Date" shall mean the last Friday of the
     last month of each fiscal quarter of the Trust in each fiscal year of the
     Trust, commencing on September 30, 2002, provided that if such day is not a
     Business Day, then the immediately preceding Business Day.

          (iiii) "Rate Period," with respect to shares of a series of Preferred
     Shares, shall mean each of the Initial Rate Period of shares of such series
     and any Subsequent Rate Period, including any Special Rate Period, of
     shares of such series.

          (jjjj) "Rate Period Days," for any Rate Period or Dividend Period,
     means the number of days that would constitute such Rate Period or Dividend
     Period but for the application of paragraph 2(d) of Part I of this Section
     12.1 or paragraph 3(b) of Part I of this Section 12.1.

          (kkkk) "Rating Agency" means a nationally recognized statistical
     rating organization.


                                       B-32

<PAGE>


          (llll) "Redemption Price" shall mean the applicable redemption price
     specified in paragraph 8(a) or paragraph 8(b), as the case may be, of Part
     I of this Section 12.1.

          (mmmm) "Reference Rate" means the applicable "AA" Financial Composite
     Commercial Paper Rate (for a Dividend Period of fewer than 183 days) or the
     applicable Treasury Index Rate (for a Dividend Period of 183 days or more).

          (nnnn) "Reorganization Bonds" shall have the meaning set forth under
     paragraph (iv) of the definition of "Fitch Eligible Assets."

          (oooo) "Rule 144A Securities" shall mean securities which are
     restricted as to resale under federal securities laws but are eligible for
     resale pursuant to Rule 144A under the Securities Act as determined by the
     Trust's investment manager or portfolio manager acting pursuant to
     procedures approved by the Trustees.

          (pppp) "S&P" shall mean Standard & Poor's Rating Group and its
     successors.

          (qqqq) "Securities Act" shall mean the Securities Act of 1933, as
     amended from time to time.

          (rrrr) "Securities Depository" shall mean The Depository Trust Company
     and its successors and assigns or any other securities depository selected
     by the Trust which agrees to follow the procedures required to be followed
     by such securities depository in connection with the Preferred Shares.

          (ssss) "Sell Order" and "Sell Orders" shall have the respective
     meanings specified in paragraph 1(a) of Part II of this Section 12.1.

          (tttt) "Senior Loans" shall have the meaning set forth in paragraph
     (vi) of the definitions of "Moody's Discount Factor."

          (uuuu) "Series M" shall mean the Series M Taxable Auction Market
     Preferred Shares.

          (vvvv) "Series W" shall mean the Series W Taxable Auction Market
     Preferred Shares.

          (wwww) "Short Term Money Market Instruments" shall mean the following
     types of instruments if, on the date of purchase or other acquisition
     thereof by the Trust, the remaining term to maturity thereof is not in
     excess of 180 days (or 270 days for instruments rated at least Aaa for
     purposes of determining Moody's Eligible Assets):

        (i)  commercial paper rated either F1 by Fitch or A-1 by S&P if such
       commercial paper matures in 30 days or P-1 by Moody's and either F1+ by
       Fitch or A-1+ by S&P if such commercial paper matures in over 30 days;

        (ii) demand or time deposits in, and banker's acceptances and
       certificates of deposit of (A) a depository institution or trust company
       incorporated under the laws of the United


                                       B-33

<PAGE>


          States of America or any state thereof or the District of Columbia or
          (B) a United States branch office or agency of a foreign depository
          institution (provided that such branch office or agency is subject to
          banking regulation under the laws of the United States, any state
          thereof or the District of Columbia);

               (iii) overnight funds;

               (iv)  U.S. Government Securities; and

               (v)   Eurodollar demand or time deposits in, or certificates of
          deposit of, the head office or the London branch office of a
          depository institution or trust company if the certificates of
          deposit, if any, and the long-term unsecured debt obligations (other
          than such obligations the ratings of which are based on the credit of
          a person or entity other than such depository institution or trust
          company) of such depository institution or trust company have (1)
          credit ratings on each Valuation Date of at least P-1 from Moody's and
          either F1+ from Fitch or A-1+ from S&P, in the case of commercial
          paper or certificates of deposit, and (2) credit ratings on each
          Valuation Date of at least Aa3 from Moody's and either AA- from Fitch
          or AA- from S&P, in the case of long-term unsecured debt obligations;
          provided, however, that in the case of any such investment that
          matures in no more than one Business Day from the date of purchase or
          other acquisition by the Trust, all of the foregoing requirements
          shall be applicable except that the required long-term unsecured debt
          credit rating of such depository institution or trust company from
          Moody's, Fitch and S&P shall be at least A2, A and A, respectively;
          and provided further, however, that the foregoing credit rating
          requirements shall be deemed to be met with respect to a depository
          institution or trust company if (1) such depository institution or
          trust company is the principal depository institution in a holding
          company system, (2) the certificates of deposit, if any, of such
          depository institution or trust company are not rated on any Valuation
          Date below P-1 by Moody's, F1+ by Fitch or A-1+ by S&P and there is no
          long-term rating, and (3) the holding company shall meet all of the
          foregoing credit rating requirements (including the preceding proviso
          in the case of investments that mature in no more than one Business
          Day from the date of purchase or other acquisition by the Trust); and
          provided further that the interest receivable by the Trust shall not
          be subject to any withholding or similar taxes.

          (xxxx) "Special Rate Period," with respect to shares of a series of
     Preferred Shares, shall have the meaning specified in paragraph 3(a) of
     Part I of this Section 12.1.

          (yyyy) "Special Redemption Provisions" shall have the meaning
     specified in paragraph 8(a)(i) of Part I of this Section 12.1.

          (zzzz) "Structured Notes" shall mean privately negotiated debt
     obligations where the principal and/or interest 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.


                                       B-34

<PAGE>


          (aaaaa) "Submission Deadline" shall mean 1:30 P.M., New York City
     time, on any Auction Date or such other time on any Auction Date by which
     Broker-Dealers are required to submit Orders to the Auction Agent as
     specified by the Auction Agent from time to time.

          (bbbbb) "Submitted Bid" and "Submitted Bids" shall have the respective
     meanings specified in paragraph 3(a) of Part II of this Section 12.1.

          (ccccc) "Submitted Hold Order" and "Submitted Hold Orders" shall have
     the respective meanings specified in paragraph 3(a) of Part II of this
     Section 12.1.

          (ddddd) "Submitted Order" and "Submitted Orders" shall have the
     respective meanings specified in paragraph 3(a) of Part II of this Section
     12.1.

          (eeeee) "Submitted Sell Order" and "Submitted Sell Orders" shall have
     the respective meanings specified in paragraph 3(a) of Part II of this
     Section 12.1.

          (fffff) "Subsequent Rate Period," with respect to shares of a series
     of Preferred Shares, shall mean the period from and including the first day
     following the Initial Rate Period of shares of such series to but excluding
     the next Dividend Payment Date for shares of such series and any period
     thereafter from and including one Dividend Payment Date for shares of such
     series to but excluding the next succeeding Dividend Payment Date for
     shares of such series; provided, however, that if any Subsequent Rate
     Period is also a Special Rate Period, such term shall mean the period
     commencing on the first day of such Special Rate Period and ending on the
     last day of the last Dividend Period thereof.

          (ggggg) "Substitute Commercial Paper Dealer" shall mean Credit Suisse
     First Boston or Morgan Stanley & Co., Incorporated or their respective
     affiliates or successors, if such entity is a commercial paper dealer;
     provided, however, that none of such entities shall be a Commercial Paper
     Dealer.

          (hhhhh) "Substitute U.S. Government Securities Dealer" shall mean The
     First Boston Company or Merrill Lynch, Pierce, Fenner & Smith Incorporated
     or their respective affiliates or successors, if such entity is a U.S.
     Government securities dealer; provided, however, that none of such entities
     shall be a U.S. Government Securities Dealer.

          (iiiii) "Sufficient Clearing Bids" shall have the meaning specified in
     paragraph 3(a) of Part II of this Section 12.1.

          (jjjjj) "TACs" shall have the meaning set forth in paragraph (viii) of
     the definition of "Moody's Eligible Assets."

          (kkkkk) "Tradable Credit Baskets" and "TRACERs" shall mean Traded
     Custody Receipts representing direct ownership in a portfolio of underlying
     securities.

          (lllll) "Treasury Bill" shall mean a direct obligation of the U.S.
     Government having a maturity at the time of issuance of 364 days or less.

          (mmmmm) "Treasury Bonds" shall mean United States Treasury Bonds or
     Notes.


                                       B-35

<PAGE>


     (nnnnn) "Treasury Futures" shall mean futures and related options on
Treasury Bills, Treasury Bonds and/or Treasury Notes.

     (ooooo) "Treasury Index Rate" shall mean the average yield to maturity for
actively traded marketable U.S. Treasury fixed interest rate securities having
the same number of 30-day periods to maturity as the applicable Dividend Period,
determined, to the extent necessary, by linear interpolation based upon the
yield for such securities having the next shorter and next longer number of
30-day periods to maturity, treating all Dividend Periods with a length greater
than the longest maturity for such securities as having a length equal to such
longest maturity, in all cases based upon data set forth in the most recent
weekly statistical release published by the Board of Governors of the Federal
Reserve System (currently in H.15 (519)); provided, however, if the most recent
such statistical release shall not have been published during the 15 days
preceding the date of computation, then the foregoing computations shall be
based upon the average of comparable data as quoted to the Trust by at least
three U.S. Government Securities Dealers.

     (ppppp) "Treasury Note" shall mean a direct obligation of the U.S.
Government having a maturity at the time of issuance of five years or less but
more than 364 days.

     (qqqqq) "Trust" shall mean Western Asset Premier Bond Fund.

     (rrrrr) "Trustees" shall mean the trustees of the Trust.

     (sssss) "U.S. Government Securities" shall mean direct obligations of the
United States or of its agencies or instrumentalities that are entitled to the
full faith and credit of the United States and that, other than Treasury Bills,
provide for the periodic payment of interest and the full payment of principal
at maturity or call for redemption.

     (ttttt) "U.S. Government Securities Dealer" shall mean Lehman Government
Securities Incorporated, Goldman, Sachs & Co., Salomon Brothers Inc., Morgan
Guaranty Trust Company of New York and any other U.S. Government Securities
dealer selected by the Trust as to which Moody's (if Moody's is then rating the
Preferred Shares) or Fitch (if Fitch is then rating the Preferred Shares) shall
not have objected, and in each case their respective affiliates or successors,
if such entity is a U.S. Government Securities dealer.

     (uuuuu) "U.S. Treasury Securities" shall mean direct obligations of the
United States Treasury that are entitled to the full faith and credit of the
United States.

     (vvvvv) "U.S. Treasury Strips" shall mean securities based on U.S. Treasury
Securities created through the Separate Trading of Registered Interest and
Principal of Securities program of the U.S. Treasury.

     (wwwww) "Valuation Date" shall mean, for purposes of determining whether
the Trust is maintaining the Preferred Shares Basic Maintenance Amount, the last
Business Day of each week.

     (xxxxx) "Volatility Factor" shall mean 1.6.


                                       B-36

<PAGE>


     (yyyyy) "Voting Period" shall have the meaning specified in paragraph
4(b)(i) of Part I of this Section 12.1.

     (zzzzz) "Winning Bid Rate" shall have the meaning specified in paragraph
3(a) of Part II of this Section 12.1.


                                       B-37

<PAGE>


                                    PART I.

1.   Number of Authorized Shares.

         The number of authorized shares constituting Series M shall be 1,440
shares, and the number of authorized shares constituting Series W shall be 1,440
shares.

2.   Dividends.

         (a) Ranking. The shares of a series of the Preferred Shares shall rank
on a parity with each other, with shares of any other series of the Preferred
Shares and with shares of any other series of preferred shares as to the payment
of dividends by the Trust and the distribution of assets upon liquidation of the
Trust.

         (b) Cumulative Cash Dividends. The Holders of shares of any series of
Preferred Shares shall be entitled to receive, when, as and if declared by the
Trustees, out of funds legally available therefor in accordance with the
Declaration of Trust and applicable law, cumulative cash dividends at the
Applicable Rate for shares of such series, determined as set forth in paragraph
2(e) of this Part I, and no more, payable on the Dividend Payment Dates with
respect to shares of such series determined pursuant to paragraph 2(d) of this
Part I. Holders of Preferred Shares shall not be entitled to any dividend,
whether payable in cash, property or shares, in excess of full cumulative
dividends, as herein provided, on Preferred Shares. No interest, or sum of money
in lieu of interest, shall be payable in respect of any dividend payment or
payments on Preferred Shares which may be in arrears, and, except to the extent
set forth in paragraph 2(e)(i) of this Part I, no additional sum of money shall
be payable in respect of any such arrearage.

         (c) Dividends Cumulative from Date of Original Issue. Dividends on
shares of any series of Preferred Shares shall accumulate at the Applicable Rate
for shares of such series from the Date of Original Issue thereof.

         (d) Dividend Payment Dates and Adjustment Thereof. Dividends shall be
payable on shares of Series M for the Initial Rate Period on October 1, 2002,
and on each 7/th/ day thereafter, and on shares of Series W for the Initial Rate
Period on October 17, 2002, and on each 28/th/ day thereafter (each date being a
"Dividend Payment Date"); provided, however, that:

              (i)  if the day on which dividends would otherwise be payable on
shares of such series is not a Business Day, then such dividends shall be
payable on such shares on the first Business Day that falls after such day; and

              (ii) notwithstanding this paragraph 2(d), the Trust in its
discretion may establish the Dividend Payment Dates in respect of any Special
Rate Period of shares of a series of Preferred Shares consisting of more than 7
Rate Period Days for Series M and other than 28 Rate Period Days for Series W;
provided, however, that such dates shall be set forth in the Notice of Special
Rate Period relating to such Special Rate Period, as delivered to the Auction
Agent, which Notice of Special Rate Period shall be filed with the Secretary of
the Trust; and further provided that (1) any such Dividend Payment Date shall be
a Business Day when determined (and if not a Business Day at the time of
payment, the


                                       B-38

<PAGE>


         provisions of clause (i) above will apply) and (2) the last Dividend
         Payment Date in respect of such Special Rate Period shall be the
         Business Day immediately following the last day thereof, as such last
         day is determined in accordance with paragraph 3(b) of this Part I; and

                (iii) notwithstanding the above, if for any reason a Dividend
         Period for a series of Preferred Shares is scheduled to begin on the
         same day and end on the same day as a Dividend Period for another
         series of Preferred Shares, then the last day of such Dividend Period
         for the series of Preferred Shares designated by the Trust shall be the
         second Business Day next succeeding such scheduled day unless the Trust
         obtains the opinion of tax counsel referred to in this paragraph.
         Subject to the limitation in the next sentence, if for any reason a
         Dividend Payment Date cannot be fixed as described above, then the
         Trustees shall otherwise fix the Dividend Payment Date. In no event,
         however, may the Dividend Period of any series of Preferred Shares be
         co-extensive with any Dividend Period of any other series of Preferred
         Shares unless the Trust has received an opinion of tax counsel that
         having such co-extensive periods will not affect the deductibility, for
         federal income tax purposes, of dividends paid on the different series
         of Preferred Shares.

           (e)  Dividend Rates and Calculation of Dividends.

                (i) Dividend Rates. The dividend rate on Preferred Shares of
         any series during the period from and after the Date of Original Issue
         of shares of such series to and including the last day of the Initial
         Rate Period of shares of such series shall be equal to the rate per
         annum set forth with respect to shares of such series under
         "DESIGNATION" above. For each Subsequent Rate Period of shares of such
         series thereafter, the dividend rate on shares of such series shall be
         equal to the rate per annum that results from an Auction for shares of
         such series on the Auction Date next preceding such Subsequent Rate
         Period; provided, however, that if:

                     (A) an Auction for any such Subsequent Rate Period is not
              held for any reason other than as described below in paragraphs
              2(e)(i)(B)-(D), the dividend rate on shares of such series for
              such Subsequent Rate Period will be the Maximum Rate for shares of
              such series on the Auction Date therefor;

                     (B) any Failure to Deposit shall have occurred with respect
              to shares of such series during any Rate Period thereof (other
              than any Special Rate Period consisting of more than 364 Rate
              Period Days or any Rate Period succeeding any Special Rate Period
              consisting of more than 364 Rate Period Days during which a
              Failure to Deposit occurred that has not been cured), but, prior
              to 12:00 Noon, New York City time, on the third Business Day next
              succeeding the date on which such Failure to Deposit occurred,
              such Failure to Deposit shall have been cured in accordance with
              paragraph 2(f) of this Part I and the Trust shall have paid to the
              Auction Agent a late charge ("Late Charge") equal to the sum of
              (1) if such Failure to Deposit consisted of the failure timely to
              pay to the Auction Agent the full amount of dividends with respect
              to any Dividend Period of the shares of such series, an amount
              computed by multiplying (x) 200% of the Reference Rate for the
              Rate Period during which such Failure to Deposit occurs on the
              Dividend


                                       B-39

<PAGE>


                  Payment Date for such Dividend Period by (y) a fraction, the
                  numerator of which shall be the number of days for which such
                  Failure to Deposit has not been cured in accordance with
                  paragraph 2(f) of this Part I (including the day such Failure
                  to Deposit occurs and excluding the day such Failure to
                  Deposit is cured) and the denominator of which shall be 360,
                  and multiplying the rate obtained by the aggregate Liquidation
                  Preference of the outstanding shares of such series and (2) if
                  such Failure to Deposit consisted of the failure timely to pay
                  to the Auction Agent the Redemption Price of the shares, if
                  any, of such series for which Notice of Redemption has been
                  mailed by the Trust pursuant to paragraph 8(c) of this Part I
                  of this Section 12.1, an amount computed by multiplying (x)
                  200% of the Reference Rate for the Rate Period during which
                  such Failure to Deposit occurs on the redemption date by (y) a
                  fraction, the numerator of which shall be the number of days
                  for which such Failure to Deposit is not cured in accordance
                  with paragraph 2(f) of this Part I (including the day such
                  Failure to Deposit occurs and excluding the day such Failure
                  to Deposit is cured) and the denominator of which shall be
                  360, and multiplying the rate obtained by the aggregate
                  Liquidation Preference of the outstanding shares of such
                  series to be redeemed, no Auction will be held in respect of
                  shares of such series for the first Subsequent Rate Period
                  thereof thereafter and the dividend rate for shares of such
                  series for such Subsequent Rate Period will be the Maximum
                  Rate for shares of such series on the Auction Date for such
                  Subsequent Rate Period;

                        (C) any Failure to Deposit shall have occurred with
                  respect to shares of such series during any Rate Period
                  thereof (other than any Special Rate Period consisting of more
                  than 364 Rate Period Days or any Rate Period succeeding any
                  Special Rate Period consisting of more than 364 Rate Period
                  Days during which a Failure to Deposit occurred that has not
                  been cured), and, prior to 12:00 Noon, New York City time, on
                  the third Business Day next succeeding the date on which such
                  Failure to Deposit occurred, such Failure to Deposit shall not
                  have been cured in accordance with paragraph 2(f) of this Part
                  I or the Trust shall not have paid the applicable Late Charge
                  to the Auction Agent, no Auction will be held in respect of
                  shares of such series for the first Subsequent Rate Period
                  thereof thereafter (or for any Rate Period thereof thereafter
                  to and including the Rate Period during which (1) such Failure
                  to Deposit is cured in accordance with paragraph 2(f) of this
                  Part I and (2) the Trust pays the applicable Late Charge to
                  the Auction Agent (the condition set forth in this clause (2)
                  to apply only in the event Moody's or Fitch is rating such
                  shares at the time the Trust cures such Failure to Deposit),
                  in each case no later than 12:00 Noon, New York City time, on
                  the fourth Business Day prior to the end of such Rate Period),
                  and the dividend rate for shares of such series for each such
                  Subsequent Rate Period shall be a rate per annum equal to the
                  Maximum Rate for shares of such series on the Auction Date for
                  such Subsequent Rate Period (but with the credit rating for
                  shares of such series, for purposes of determining such
                  Maximum Rate, being deemed to be Below Baa3 (if Moody's is
                  rating the Preferred Shares) and Below BBB- (if Fitch is
                  rating the Preferred Shares); or


                                       B-40

<PAGE>


                        (D) any Failure to Deposit shall have occurred with
                  respect to shares of such series during a Special Rate Period
                  thereof consisting of more than 364 Rate Period Days, or
                  during any Rate Period thereof succeeding any Special Rate
                  Period consisting of more than 364 Rate Period Days during
                  which a Failure to Deposit occurred that has not been cured,
                  and, prior to 12:00 Noon, New York City time, on the fourth
                  Business Day preceding the Auction Date for the Rate Period
                  subsequent to such Rate Period, such Failure to Deposit shall
                  not have been cured in accordance with paragraph 2(f) of this
                  Part I or, in the event Moody's or Fitch is then rating such
                  shares, the Trust shall not have paid the applicable Late
                  Charge to the Auction Agent (such Late Charge, for purposes of
                  this subparagraph (D), to be calculated by using, as the
                  Reference Rate, the Reference Rate applicable to a Rate Period
                  (x) consisting of more than 182 Rate Period Days and (y)
                  commencing on the date on which the Rate Period during which
                  Failure to Deposit occurs commenced), no Auction will be held
                  in respect of shares of such series for such Subsequent Rate
                  Period (or for any Rate Period thereof thereafter to and
                  including the Rate Period during which (1) such Failure to
                  Deposit is cured in accordance with paragraph 2(f) of this
                  Part I and (2) the Trust pays the applicable Late Charge to
                  the Auction Agent (the condition set forth in this clause (2)
                  to apply only in the event Moody's or Fitch is rating such
                  shares at the time the Trust cures such Failure to Deposit),
                  in each case no later than 12:00 Noon, New York City time, on
                  the fourth Business Day prior to the end of such Rate Period),
                  and the dividend rate for shares of such series for each such
                  Subsequent Rate Period shall be a rate per annum equal to the
                  Maximum Rate for shares of such series on the Auction Date for
                  such Subsequent Rate Period (but with the credit rating for
                  shares of such series, for purposes of determining such
                  Maximum Rate, being deemed to be Below Baa3 (if Moody's is
                  rating the Preferred Shares) and Below BBB- (if Fitch is
                  rating the Preferred Shares)) (the rate per annum at which
                  dividends are payable on shares of a series of Preferred
                  Shares for any Rate Period thereof in accordance with this
                  Section 12.1 being herein referred to as the "Applicable Rate"
                  for shares of such series).

                  (ii) Calculation of Dividends. The amount of dividends per
              share payable on shares of a series of Preferred Shares on any
              date on which dividends shall be payable on shares of such series
              shall be computed by multiplying the Applicable Rate for shares of
              such series in effect for such Dividend Period or Dividend Periods
              or part thereof for which dividends have not been paid by a
              fraction, the numerator of which shall be the number of days in
              such Dividend Period or Dividend Periods or part thereof and the
              denominator of which shall be 360; and multiplying the rate
              obtained by $25,000.

                  (f)  Curing a Failure to Deposit. A Failure to Deposit with
              respect to shares of a series of Preferred Shares shall have been
              cured with respect to any Rate Period of shares of such series if,
              within the respective time periods described in paragraph 2(e)(i)
              above, the Trust shall have paid to the Auction Agent (A) all
              accumulated and unpaid dividends on shares of such series and (B)
              without duplication, the Redemption Price for shares, if any, of
              such series for which Notice of Redemption has been mailed by the
              Trust pursuant to paragraph 8(c) of this Part I of this Section
              12.1; provided, however, that the foregoing clause (B) shall not
              apply to the Trust's failure to pay the Redemption Price in
              respect of


                                       B-41

<PAGE>


      Preferred Shares when the related Notice of Redemption provides that
      redemption of such shares is subject to one or more conditions precedent
      and any such condition precedent shall not have been satisfied at the time
      or times and in the manner specified in such Notice of Redemption.

            (g) Dividend Payments by Trust to Auction Agent. The Trust shall pay
      to the Auction Agent, not later than 12:00 Noon, New York City time, on
      the Business Day next preceding each Dividend Payment Date for shares of a
      series of Preferred Shares, an aggregate amount of funds available on the
      next Business Day in The City of New York, New York, equal to the
      dividends to be paid to all Holders of shares of such series on such
      Dividend Payment Date.

            (h) Auction Agent as Trustee of Dividend Payments by Trust. All
      moneys paid to the Auction Agent for the payment of dividends (or for the
      payment of any Late Charge) or the Redemption Price shall be held in trust
      for the payment of such dividends (and any such Late Charge) or Redemption
      Price by the Auction Agent for the benefit of the Holders specified in
      paragraph 2(i) of this Part I of this Section 12.1. Any moneys paid to the
      Auction Agent in accordance with the foregoing but not applied by the
      Auction Agent to the payment of dividends (and any such Late Charge) will,
      to the extent permitted by law, be repaid to the Trust at the end of 90
      days from the date on which such moneys were so to have been applied.

            (i) Dividends Paid to Holders. Each dividend on Preferred Shares
      shall be paid on the Dividend Payment Date therefor to the Holders thereof
      as their names appear on the record books of the Trust on the Business Day
      next preceding such Dividend Payment Date.

            (j) Dividends Credited Against Earliest Accumulated But Unpaid
      Dividends. Any dividend payment made on Preferred Shares shall first be
      credited against the earliest accumulated but unpaid dividends due with
      respect to such shares. Dividends in arrears for any past Dividend Period
      may be declared and paid on any date as may be fixed by the Trustees,
      without reference to any regular Dividend Payment Date, to the Holders as
      their names appear on the record books of the Trust on the record date
      fixed by the Trustees, not exceeding 15 days preceding the payment date
      thereof.

3.       Designation of Special Rate Periods.

            (a) Length of and Preconditions for Special Rate Period. The Trust,
      in consultation with the Lead Broker-Dealer, may designate any succeeding
      Subsequent Rate Period of shares of a series of Preferred Shares as a
      "Special Rate Period" consisting of a specified number of Rate Period Days
      evenly divisible by 7 and not more than 1,820, subject to adjustment as
      provided in paragraph 3(b) of this Part I. A designation of a Special Rate
      Period with respect to any series of Preferred Shares shall be effective
      only if (A) notice thereof shall have been given in accordance with
      paragraph 3(c) and paragraph 3(d)(i) of this Part I, (B) an Auction for
      shares of such series shall have been held on the Auction Date immediately
      preceding the first day of such proposed Special Rate Period and
      Sufficient Clearing Bids for shares of such series shall have existed in
      such Auction, (C) if any Notice of Redemption shall have been mailed by
      the Trust pursuant to paragraph 8(c) of this Part I


                                       B-42

<PAGE>


      with respect to any shares of such series, the Redemption Price with
      respect to such shares shall have been deposited with the Auction Agent,
      (D) if such redemption is subject to one or more conditions precedent,
      each such condition shall have been satisfied at the time or times and in
      the manner specified in such Notice of Redemption, (E) full cumulative
      dividends and any amounts due with respect to mandatory redemptions and
      optional redemptions shall have been paid in full or deposited with the
      Auction Agent, (F) the Trust shall have obtained written confirmation from
      Moody's and Fitch, if Moody's and Fitch are then rating the Preferred
      Shares, and from any substitute Rating Agency then rating the Preferred
      Shares that such proposed Special Rate Period will not impair the rating
      then assigned by Moody's, Fitch or such substitute Rating Agency to the
      Preferred Shares, and (G) the Lead Broker-Dealer shall not have objected
      to the declaration of the proposed Special Rate Period in writing. In the
      event the Trust wishes to designate any succeeding Subsequent Rate Period
      for shares of a series of Preferred Shares as a Special Rate Period
      consisting of more than 28 Rate Period Days, the Trust shall notify
      Moody's (if Moody's is then rating such series) and Fitch (if Fitch is
      then rating such series) in advance of the commencement of such Subsequent
      Rate Period that the Trust wishes to designate such Subsequent Rate Period
      as a Special Rate Period and shall provide Moody's (if Moody's is then
      rating such series) and Fitch (if Fitch is then rating such series) with
      such documents as they may reasonably request.

            (b) Adjustment of Length of Special Rate Period. In the event the
      Trust wishes to designate a Subsequent Rate Period as a Special Rate
      Period, but the day following what would otherwise be the last day of such
      Special Rate Period is not a Friday that is a Business Day in the case of
      Series M and a Thursday that is a Business Day in the case of Series W,
      then the Trust shall designate such Subsequent Rate Period as a Special
      Rate Period consisting of the period commencing on the first day following
      the end of the immediately preceding Rate Period and ending, in the case
      of Series M, on the first Thursday that is followed by a Friday that is a
      Business Day preceding what would otherwise be such last day, and, in the
      case of Series W, the first Wednesday that is followed by a Thursday that
      is a Business Day preceding what would otherwise be such last day.

            (c) Notice of Proposed Special Rate Period. If the Trust proposes to
      designate any succeeding Subsequent Rate Period of shares of a series of
      Preferred Shares as a Special Rate Period pursuant to paragraph 3(a) of
      this Part I, not less than 20 (or such lesser number of days as may be
      agreed to from time to time by the Auction Agent) nor more than 30 days
      prior to the date the Trust proposes to designate as the first day of such
      Special Rate Period (which shall be such day that would otherwise be the
      first day of a Minimum Rate Period), notice shall be (i) published or
      caused to be published by the Trust in a newspaper of general circulation
      to the financial community in The City of New York, New York, which
      carries financial news, and (ii) mailed by the Trust by first-class mail,
      postage prepaid, to the Holders of shares of such series. Each such notice
      shall state (A) that the Trust may exercise its option to designate a
      succeeding Subsequent Rate Period of shares of such series as a Special
      Rate Period, specifying the first day thereof and the Maximum Rate
      applicable to such Special Rate Period, and (B) that the Trust will, by
      11:00 A.M., New York City time, on the second Business Day next preceding
      such date (or by such later time or date, or both, as may be agreed to by
      the Auction Agent) notify the Auction Agent and each Broker-Dealer of
      either (x) its determination, subject to certain conditions, to exercise
      such option,


                                       B-43

<PAGE>


      in which case the Trust shall specify the Special Rate Period designated,
      or (y) its determination not to exercise such option.

            (d)  Notice of Special Rate Period. No later than 11:00 A.M., New
      York City time, on the second Business Day next preceding the first day of
      any proposed Special Rate Period of shares of a series of Preferred Shares
      as to which notice has been given as set forth in paragraph 3(c) of this
      Part I (or such later time or date, or both, as may be agreed to by the
      Auction Agent and each Broker-Dealer), the Trust shall deliver to the
      Auction Agent and each Broker-Dealer either:

            (i)  a notice ("Notice of Special Rate Period") stating (A) that the
      Trust has determined to designate the next succeeding Rate Period of
      shares of such series as a Special Rate Period, specifying the same and
      the first day thereof, (B) the Maximum Rate for such Special Rate Period
      (which shall be determined on the second Business Day next preceding the
      first day of such Special Rate Period), (C) the Auction Date immediately
      prior to the first day of such Special Rate Period, (D) that such Special
      Rate Period shall not commence if (1) an Auction for shares of such series
      shall not be held on such Auction Date for any reason or (2) an Auction
      for shares of such series shall be held on such Auction Date but
      Sufficient Clearing Bids for shares of such series shall not exist in such
      Auction, and (E) whether the shares of a particular series of Preferred
      Shares will be subject to optional redemption during such Special Rate
      Period and, if so, the redemption premium, if any, required to be paid by
      the Trust in connection with such optional redemption, such notice to be
      accompanied by a Preferred Shares Basic Maintenance Report showing that,
      as of the third Business Day next preceding such proposed Special Rate
      Period, Moody's Eligible Assets and Fitch Eligible Assets (if Moody's and
      Fitch are then rating the series in question) each have an aggregate
      Discounted Value at least equal to the Preferred Shares Basic Maintenance
      Amount as of such Business Day; or

            (ii) a notice stating that the Trust has determined not to exercise
      its option to designate a Special Rate Period of shares of such series and
      that the next succeeding Rate Period of shares of such series shall be a
      Minimum Rate Period.

            (e)  Failure to Deliver Notice of Special Rate Period. If the Trust
      fails to deliver either of the notices described in paragraphs 3(d)(i) and
      3(d)(ii) of this Part I (and, in the case of the notice described in
      paragraph 3(d)(i) of this Part I, a Preferred Shares Basic Maintenance
      Report to the effect set forth in such paragraph (if either Moody's or
      Fitch is then rating the series in question)) with respect to any
      designation of any proposed Special Rate Period to the Auction Agent by
      11:00 A.M., New York City time, on the second Business Day next preceding
      the first day of such proposed Special Rate Period (or by such later time
      or date, or both, as may be agreed to by the Auction Agent), the Trust
      shall be deemed to have delivered a notice to the Auction Agent with
      respect to such Special Rate Period to the effect set forth in paragraph
      3(d)(ii) of this Part I. In the event the Trust delivers to the Auction
      Agent a notice described in paragraph 3(d)(i) of this Part I, it shall
      file a copy of such notice with the Secretary of the Trust, and the
      contents of such notice shall be binding on the Trust. In the event the
      Trust delivers to the Auction Agent a notice described in paragraph
      3(d)(ii) of this Part I, the Trust will provide Moody's (if Moody's is


                                       B-44

<PAGE>


      then rating the series in question) and Fitch (if Fitch is then rating the
      series in question) with a copy of such notice.

4.    Voting Rights.

            (a) One Vote Per Share of Preferred Shares. Except as otherwise
      provided herein or in the Declaration of Trust or as otherwise required by
      law, (i) each Holder of Preferred Shares shall be entitled to one vote for
      each share of Preferred Shares held by such Holder on each matter
      submitted to a vote of shareholders of the Trust, and (ii) the holders of
      outstanding preferred shares, including each share of the Preferred
      Shares, and of Common Shares shall vote together as a single class;
      provided, however, that, at any meeting of the shareholders of the Trust
      held for the election of Trustees, the holders of outstanding preferred
      shares, including the Preferred Shares, represented in person or by proxy
      at said meeting shall be entitled, as a class, to the exclusion of the
      holders of all other securities and classes of shares of beneficial
      interest of the Trust, to elect two Trustees of the Trust, each Preferred
      Share entitling the holder thereof to one vote. Subject to paragraph 4(b)
      of this Part I, the holders of outstanding Common Shares and preferred
      shares, voting together as a single class, shall elect the balance of the
      Trustees.

            (b) Voting for Additional Trustees.

                (i) Voting Period. Except as otherwise provided in the
      Declaration of Trust or as otherwise required by law, during any period in
      which any one or more of the conditions described in subparagraphs (A) or
      (B) of this subparagraph (b)(i) shall exist (such period being referred to
      herein as a "Voting Period"), the number of trustees constituting the
      Trustees shall be automatically increased by the smallest number that,
      when added to the two Trustees elected exclusively by the holders of
      preferred shares, including the Preferred Shares, would constitute a
      majority of the Trustees as so increased by such smallest number, and the
      holders of preferred shares, including the Preferred Shares, shall be
      entitled, voting as a class on a one-vote-per-share basis (to the
      exclusion of the holders of all other securities and classes of shares of
      beneficial interest of the Trust), to elect such smallest number of
      additional Trustees, together with the two Trustees that such holders are
      in any event entitled to elect. A Voting Period shall commence:

                    (A) if at the close of business on any Dividend Payment Date
                accumulated dividends (whether or not earned or declared) on any
                outstanding preferred shares, including the Preferred Shares,
                equal to at least two full years' dividends shall be due and
                unpaid and sufficient cash or specified securities shall not
                have been deposited with the Auction Agent for the payment of
                such accumulated dividends; or

                    (B) if at any time holders of preferred shares, including
                the Preferred Shares, are entitled under the 1940 Act to elect a
                majority of the Trustees of the Trust.

      Upon the termination of a Voting Period, the voting rights described in
      this subparagraph (b)(i) shall cease, subject always, however, to the
      revesting of such voting rights in the


                                       B-45

<PAGE>


         holders of preferred shares upon the further occurrence of any of the
         events described in this subparagraph (b)(i).

              (ii)  Notice of Special Meeting. As soon as practicable after the
         accrual of any right of the holders of preferred shares, including the
         Preferred Shares, to elect additional Trustees as described in
         paragraph 4(b)(i) of this Part I, the Trust shall so notify the Auction
         Agent and a special meeting of such holders shall be called by mailing
         a notice of such special meeting to such holders, such meeting to be
         held not less than 10 nor more than 20 days after the date of mailing
         of such notice. If the Trust fails to send such notice to the Auction
         Agent or if such special meeting is not called, it may be called by any
         such holder on like notice. The record date for determining the holders
         entitled to notice of and to vote at such special meeting shall be the
         close of business on the fifth Business Day preceding the day on which
         such notice is mailed. At any such special meeting and at each meeting
         of holders of preferred shares, including the Preferred Shares, held
         during a Voting Period at which Trustees are to be elected, such
         holders, voting together as a class (to the exclusion of the holders of
         all other securities and classes of shares of beneficial interest of
         the Trust), shall be entitled to elect the number of Trustees
         prescribed in paragraph 4(b)(i) of this Part I on a one-vote-per-share
         basis.

              (iii) Terms of Office of Existing Trustees. The terms of office of
         all persons who are Trustees of the Trust at the time of a special
         meeting of Holders and holders of other preferred shares to elect
         Trustees shall continue, notwithstanding the election at such meeting
         by the Holders and such other holders of the number of Trustees that
         they are entitled to elect, and the persons so elected by the Holders
         and such other holders, together with the two incumbent Trustees
         elected by the Holders and such other holders of preferred shares and
         the remaining incumbent Trustees elected by the holders of the Common
         Shares and preferred shares, shall constitute the duly elected
         Trustees.

              (iv)  Terms of Office of Certain Trustees to Terminate upon
         Termination of Voting Period. Simultaneously with the termination of a
         Voting Period, the terms of office of the additional Trustees elected
         by the Holders and holders of other Preferred Shares pursuant to
         paragraph 4(b)(i) of this Part I shall automatically terminate, the
         remaining Trustees shall constitute the Trustees of the Trust and the
         voting rights of the Holders and such other holders to elect additional
         Trustees pursuant to paragraph 4(b)(i) of this Part I shall cease,
         subject to the provisions of the last sentence of paragraph 4(b)(i) of
         this Part I.

          (c) Holders of Preferred Shares to Vote on Certain Other Matters.

              (i)   Increase in Capitalization; Voluntary Petition for
         Bankruptcy. So long as any Preferred Shares are outstanding, the Trust
         shall not, without the affirmative vote or consent of the Holders of at
         least a "majority of the outstanding Preferred Shares" (unless a higher
         percentage is provided for herein or in the Declaration of Trust or by
         applicable law), in person or by proxy, either in writing or at a
         meeting, voting as a separate class, authorize, create or issue any
         class or series of shares ranking prior to or on a parity with the
         Preferred Shares with respect to the payment of dividends or the
         distribution of assets upon dissolution, liquidation or winding up of
         the affairs of the Trust, or authorize, create


                                       B-46

<PAGE>


         or issue additional shares of any series of Preferred Shares (except
         that, notwithstanding the foregoing, but subject to the provisions of
         paragraph 10(c)(ii) of this Part I, the Trustees, without the vote or
         consent of the Holders of Preferred Shares, may from time to time
         authorize and create, and the Trust may from time to time issue,
         additional shares of any series of Preferred Shares or classes or
         series of other preferred shares ranking on a parity with Preferred
         Shares with respect to the payment of dividends and the distribution of
         assets upon dissolution, liquidation or winding up of the affairs of
         the Trust if the Trust receives written confirmation from Moody's (if
         Moody's is then rating the Preferred Shares) and Fitch (if Fitch is
         then rating the Preferred Shares) that such authorization, creation or
         issuance would not impair the rating then assigned by such Rating
         Agency to the Preferred Shares). So long as any Preferred Shares are
         outstanding, the Trust shall not, without the affirmative vote or
         consent of the Holders of at least a "majority of the outstanding
         Preferred Shares" (unless a higher percentage is provided for herein or
         in the Declaration of Trust or by applicable law), in person or by
         proxy, either in writing or at a meeting, voting as a separate class,
         file a voluntary application for relief under Federal bankruptcy law or
         any similar application under state law for so long as the Trust is
         solvent and does not foresee becoming insolvent.

         For purposes of paragraph 4 of this Part I, "majority of the
         outstanding Preferred Shares" (or a series thereof) 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.

         To the extent not prohibited by these Bylaws, the Declaration of Trust
         or applicable law, if any action with respect to which Holders of
         Preferred Shares are granted voting rights under paragraph 4 of this
         Part I (including without limitation paragraphs 4(c) and 4(d)) would
         adversely affect the rights of one or more series (the "Affected
         Series") of Preferred Shares in a manner different from any other
         series of Preferred Shares, the Trust will not approve any such action
         without the affirmative vote or consent of the Holders of at least a
         "majority of outstanding shares" of each such Affected Series
         outstanding at the time, in person or by proxy, either in writing or at
         a meeting (each such Affected Series voting as a separate class).

              (ii) 1940 Act Matters. Unless a higher percentage is provided for
         herein or in the Declaration of Trust or by applicable law, (A) the
         affirmative vote of the Holders of at least a "majority of the
         outstanding Preferred Shares," voting as a separate class, shall be
         required to approve any conversion of the Trust from a closed-end to an
         open-end investment company and (B) the affirmative vote of the Holders
         of a "majority of the outstanding Preferred Shares," voting as a
         separate class, shall be required to approve any plan of reorganization
         (as such term is used in the 1940 Act) adversely affecting such shares.
         The affirmative vote of the Holders of at least a "majority of the
         outstanding Preferred Shares," voting as a separate class, shall be
         required to approve any action not described in the first sentence of
         this paragraph 4(c)(ii) requiring a vote of security holders of the
         Trust under section 13(a) of the 1940 Act. In the event a vote of
         Holders of Preferred Shares is required pursuant to the provisions of
         section 13(a) of the 1940 Act, the Trust shall, not later than ten
         Business Days prior to the date on which such vote is to be taken,
         notify Moody's (if Moody's is then rating the Preferred Shares) and
         Fitch


                                       B-47

<PAGE>


         (if Fitch is then rating the Preferred Shares) that such vote is to be
         taken and the nature of the action with respect to which such vote is
         to be taken. The Trust shall, not later than ten Business Days after
         the date on which such vote is taken, notify Moody's (if Moody's is
         then rating the Preferred Shares) and Fitch (if Fitch is then rating
         the Preferred Shares) of the results of such vote.

              (d) Board May Take Certain Actions Without Shareholder Approval.
      The Trustees, without the vote or consent of the shareholders of the
      Trust, may from time to time amend, alter or repeal any provision of this
      Section 12.1 if such amendment, alteration or repeal would not adversely
      affect the preferences, rights or powers of the Holders of Preferred
      Shares expressly set forth in the Declaration of Trust or Bylaws;
      provided, however, that the Trustees receive written confirmation from
      Moody's (such confirmation being required to be obtained only in the event
      Moody's is then rating the Preferred Shares) or Fitch (such confirmation
      being required to be obtained only in the event that Fitch is then rating
      the Preferred Shares) that any such amendment, alteration or repeal would
      not impair the ratings then assigned by Moody's (if Moody's is then rating
      the Preferred Shares) or Fitch (if Fitch is then rating the Preferred
      Shares) to Preferred Shares. To the extent any shareholder vote is
      required under paragraph 4(d) of this Part I, (i) the affirmative vote of
      the Holders of at least a "majority of outstanding Preferred Shares" shall
      be required (unless a higher percentage is provided for herein or in the
      Declaration of Trust or by applicable law) and (ii) holders of Common
      Shares will have no rights unless required by law.

         For purposes of the foregoing and paragraph 4(c) above, no matter shall
be deemed adversely to affect any preference, right or power of a Holder of
Preferred Shares unless such matter (a) adversely alters or abolishes any
preferential right of the Preferred Shares; (b) creates, adversely alters or
abolishes any right in respect of redemption of such shares; or (c) creates or
adversely alters (other than to abolish) any restriction on transfer applicable
to such shares.

         Notwithstanding the foregoing, the Trustees may, without the vote or
consent of the Holders of the Preferred Shares, from time to time amend, alter
or repeal any or all of the provisions of paragraph 10 of this Part I, as well
as any or all of the definitions of the terms listed below (and any terms
defined within, or related to, such definitions), and any such amendment,
alteration or repeal will be deemed not to affect the preferences, rights or
powers of the Preferred Shares or the Holders thereof, provided the Trustees
receive written confirmation from Moody's (if Moody's is then rating the
Preferred Shares) and Fitch (if Fitch is then rating the Preferred Shares) that
any such amendment, alteration or repeal would not impair the ratings then
assigned to the Preferred Shares by Moody's (if Moody's is then rating the
Preferred Shares) or Fitch (if Fitch is then rating the Preferred Shares):


                                       B-48

<PAGE>


Accountant's Confirmation           Moody's Eligible Assets
Annual Valuation Date               Moody's Hedging Transactions
Approved Foreign Nations            Moody's Industry Classifications
Bank Loans                          Moody's Loan Category
Brady Bonds                         1940 Act Cure Date
Canadian Bonds                      1940 Act Preferred Shares Asset Coverage
Closing Transactions                PACs
CMOs                                Performing
Corporate Debt Securities           Preferred Shares Basic Maintenance Amount
Deposit Securities                  Preferred Shares Basic Maintenance Cure Date
Discounted Value                    Preferred Shares Basic Maintenance Report
Exposure Period                     Pricing Service
FFCB                                Reorganization Bonds
FHLB                                Senior Loans
FHLB, FNMA and FFCB Debentures      Short Term Money Market Instruments
FHLMC                               Structured Notes
Fitch Discount Factor               TACs
Fitch Eligible Assets               TRACERs
Fitch Hedging Transactions          Tradable Credit Baskets
Fitch Industry Classifications      Treasury Bill
Fitch Loan Category                 Treasury Bonds
FNMA                                Treasury Futures
Foreign Bonds                       Treasury Note
Forward Commitments                 U.S. Government Securities
GNMA                                U.S. Treasury Securities
Independent Accountant              U.S. Treasury Strips
Market Value                        Valuation Date
Maximum Rate                        Volatility Factor
Moody's Discount Factor

         (e) Voting Rights Set Forth Herein Are Sole Voting Rights. Unless
     otherwise required by law, the Holders of Preferred Shares shall not have
     any relative rights or preferences or other special rights other than those
     specifically set forth herein.

         (f) No Preemptive Rights or Cumulative Voting. The Holders of Preferred
     Shares shall have no preemptive rights or rights to cumulative voting.

         (g) Voting for Trustees Sole Remedy for Trust's Failure to Pay
     Dividends. In the event that the Trust fails to pay any dividends on the
     Preferred Shares, the exclusive remedy of the Holders shall be the right to
     vote for Trustees pursuant to the provisions of this paragraph 4.

         (h) Holders Entitled to Vote. For purposes of determining any rights of
     the Holders to vote on any matter, whether such right is created by this
     Section 12.1, by provisions of the Declaration of Trust, by statute or
     otherwise, no Holder shall be entitled to vote any Preferred Share and no
     Preferred Share shall be deemed to be "outstanding" for the purpose of
     voting or determining the number of shares required to constitute a quorum
     if, prior to or


                                       B-49

<PAGE>


     concurrently with the time of determination of shares entitled to vote or
     shares deemed outstanding for quorum purposes, as the case may be, the
     requisite Notice of Redemption with respect to such shares shall have been
     mailed as provided in paragraph 8(c) of this Part I and the Redemption
     Price for the redemption of such shares shall have been deposited in trust
     with the Auction Agent for that purpose. No Preferred Share held by the
     Trust or any Affiliate of the Trust (except for shares held by a
     Broker-Dealer that is an Affiliate of the Trust for the account of its
     customers) shall have any voting rights or be deemed to be outstanding for
     voting or other purposes.

5.     1940 Act Preferred Shares Asset Coverage.

       The Trust shall maintain, as of the last Business Day of each month in
which any Preferred Shares are outstanding, the 1940 Act Preferred Shares Asset
Coverage.

6.     Preferred Shares Basic Maintenance Amount.

          (a) So long as Preferred Shares are outstanding, the Trust shall
     maintain, on each Valuation Date, and shall verify to its satisfaction that
     it is maintaining on such Valuation Date, Fitch Eligible Assets having an
     aggregate Discounted Value equal to or greater than the Preferred Shares
     Basic Maintenance Amount (if Fitch is then rating the Preferred Shares) and
     Moody's Eligible Assets having an aggregate Discounted Value equal to or
     greater than the Preferred Shares Basic Maintenance Amount (if Moody's is
     then rating the Preferred Shares).

          (b) (1) On or before 5:00 P.M., New York City time, on the third
     Business Day after a Valuation Date on which the Trust fails to satisfy the
     Preferred Shares Basic Maintenance Amount, and on the third Business Day
     after the Preferred Shares Basic Maintenance Cure Date with respect to such
     Valuation Date, the Trust shall complete and deliver to Moody's (if Moody's
     is then rating the Preferred Shares) and Fitch (if Fitch is then rating the
     Preferred Shares) and the Auction Agent (if either Moody's or Fitch is then
     rating the Preferred Shares) a Preferred Shares Basic Maintenance Report as
     of the date of such failure or such Preferred Shares Basic Maintenance Cure
     Date, as the case may be, which will be deemed to have been delivered to
     the Auction Agent if the Auction Agent receives a copy or telecopy, telex
     or other electronic transcription thereof and on the same day the Trust
     mails to the Auction Agent for delivery on the next Business Day the full
     Preferred Shares Basic Maintenance Report.

          (2) The Trust shall also deliver a Preferred Shares Basic Maintenance
     Report to:

             (i)  the Auction Agent (if either Moody's or Fitch is then rating
       the Preferred Shares) as of the last Friday of each calendar month (or,
       if such day is not a Business Date, the immediately preceding Business
       Day), and

             (ii) Moody's (if Moody's is then rating the Preferred Shares) and
       Fitch (if Fitch is then rating the Preferred Shares) as of any Quarterly
       Valuation Date, in each case on or before the third Business Day after
       such day.


                                       B-50

<PAGE>


         A failure by the Trust to deliver a Preferred Shares Basic Maintenance
Report pursuant to the preceding sentence shall be deemed to be delivery of a
Preferred Shares Basic Maintenance Report indicating the Discounted Value for
all assets of the Trust is less than the Preferred Shares Basic Maintenance
Amount, as of the relevant Valuation Date.

             (c) Within ten Business Days after the date of delivery of a
      Preferred Shares Basic Maintenance Report in accordance with paragraph
      6(b) of this Part I relating to a Quarterly Valuation Date that is also an
      Annual Valuation Date, the Trust shall cause the Independent Accountant to
      confirm in writing to Moody's (if Moody's is then rating the Preferred
      Shares), Fitch (if Fitch is then rating the Preferred Shares) and the
      Auction Agent (if either Moody's or Fitch is then rating the Preferred
      Shares):

                (i)   the mathematical accuracy of the calculations reflected in
         such Preferred Shares Basic Maintenance Report (and in any other
         Preferred Shares Basic Maintenance Report, randomly selected by the
         Independent Accountant, that was prepared by the Trust during the
         quarter ending on such Annual Valuation Date),

                (ii)  that, in such Preferred Shares Basic Maintenance Report
         (and in such randomly selected Preferred Shares Basic Maintenance
         Report), the Trust determined in accordance with this Section 12.1
         whether the Trust had, at such Annual Valuation Date (and at the
         Valuation Date addressed in such randomly selected Preferred Shares
         Basic Maintenance Report), Moody's Eligible Assets (if Moody's is then
         rating the Preferred Shares) of an aggregate Discounted Value at least
         equal to the Preferred Shares Basic Maintenance Amount,

                (iii) that, in such Preferred Shares Basic Maintenance Report
         (and in such randomly selected Preferred Shares Basic Maintenance
         Report), the Trust determined in accordance with this Section 12.1
         whether the Trust had, at such Annual Valuation Date (and at the
         Valuation Date addressed in such randomly selected Preferred Shares
         Basic Maintenance Report), Fitch Eligible Assets (if Fitch is then
         rating the Preferred Shares) of an aggregate Discounted Value at least
         equal to the Preferred Shares Basic Maintenance Amount,

                (iv)  that, in such Preferred Shares Basic Maintenance Report
         (and in such randomly selected Preferred Shares Basic Maintenance
         Report), the Trust determined whether the Trust had, at such Annual
         Valuation Date (and at the Valuation Date addressed in such randomly
         selected Preferred Shares Basic Maintenance Report), met the Preferred
         Shares Basic Maintenance Amount in accordance with this Section 12.1,

                (v)   with respect to the Fitch ratings on portfolio securities
         of the Trust (if Fitch is then rating the Preferred Shares), the issuer
         name, issue size and coupon rate, if any, listed in such Preferred
         Shares Basic Maintenance Report verified by the Independent Accountant
         by reference to Bloomberg Financial Services or another independent
         source approved in writing by Fitch (if Fitch is then rating the
         Preferred Shares), and the Independent Accountant shall provide a
         listing in its letter of any differences,


                                       B-51

<PAGE>


                (vi)   with respect to the Moody's ratings on portfolio
         securities of the Trust (if Moody's is then rating the Preferred
         Shares), the issuer name, issue size and coupon rate, if any, listed in
         such Preferred Shares Basic Maintenance Report verified by the
         Independent Accountant by reference to Bloomberg Financial Services or
         another independent source approved in writing by Moody's (if Moody's
         is then rating the Preferred Shares), and the Independent Accountant
         shall provide a listing in its letter of any differences,

                (vii)  with respect to the bid or mean price (or such
         alternative permissible factor used in calculating the Market Value)
         used for purposes of valuing securities in the Trust's portfolio, that
         the Independent Accountant has traced the price from the accounting
         records of the Trust to the price listed in such Preferred Shares Basic
         Maintenance Report and verified that such information agrees (in the
         event such information does not agree, the Independent Accountant will
         provide a listing in its letter of such differences), and

                (viii) with respect to such confirmation to Moody's (if Moody's
         is then rating the Preferred Shares) and Fitch (if Fitch is then rating
         the Preferred Shares), that the Trust has satisfied the requirements of
         paragraph 10 of this Part I of Section 12.1

(such information is herein called the "Accountant's Confirmation").

             (d) Within ten Business Days after the date of delivery of a
      Preferred Shares Basic Maintenance Report in accordance with paragraph
      6(b)(1) of this Part I relating to any Valuation Date on which the Trust
      failed to satisfy the Preferred Shares Basic Maintenance Amount, and
      relating to the Preferred Shares Basic Maintenance Cure Date with respect
      to such failure to satisfy the Preferred Shares Basic Maintenance Amount,
      the Trust shall cause the Independent Accountant to provide to Moody's (if
      Moody's is then rating the Preferred Shares), Fitch (if Fitch is then
      rating the Preferred Shares) and the Auction Agent (if either Moody's or
      Fitch is then rating the Preferred Shares) an Accountant's Confirmation as
      to such Preferred Shares Basic Maintenance Report.

             (e) If any Accountant's Confirmation delivered pursuant to
      paragraph 6(c) or 6(d) of this Part I shows that an error was made in the
      Preferred Shares Basic Maintenance Report for a particular Valuation Date
      for which such Accountant's Confirmation was required to be delivered, or
      shows that a lower aggregate Discounted Value for the aggregate of all
      Moody's Eligible Assets (if Moody's is then rating the Preferred Shares)
      or Fitch Eligible Assets (if Fitch is then rating the Preferred Shares),
      as the case may be, of the Trust was determined by the Independent
      Accountant, the calculation or determination made by such Independent
      Accountant shall be final and conclusive and shall be binding on the
      Trust, and the Trust shall accordingly amend and deliver the Preferred
      Shares Basic Maintenance Report to Moody's (if Moody's is then rating the
      Preferred Share), Fitch (if Fitch is then rating the Preferred Shares) and
      the Auction Agent (if either Moody's or Fitch is then rating the Preferred
      Shares) promptly following receipt by the Trust of such Accountant's
      Confirmation.


                                       B-52

<PAGE>


             (f) On or before 5:00 p.m., New York City time, on the first
      Business Day after the Date of Original Issue of any Preferred Shares, the
      Trust shall complete and deliver to Moody's (if Moody's is then rating the
      Preferred Shares) and Fitch (if Fitch is then rating the Preferred Shares)
      a Preferred Shares Basic Maintenance Report as of the close of business on
      such Date of Original Issue. Within ten Business Days of such Date of
      Original Issue, the Trust shall cause the Independent Accountant to
      deliver in writing to the Auction Agent (if either Moody's or Fitch is
      then rating the Preferred Shares), Moody's (if Moody's is then rating the
      Preferred Shares) and Fitch (if Fitch is then rating the Preferred Shares)
      an Accountant's Confirmation as to such Preferred Shares Basic Maintenance
      Report.

             (g) On or before 5:00 p.m., New York City time, on the third
      Business Day after:

               (i)   the Trust shall have redeemed Common Shares,

               (ii)  the ratio of the Discounted Value of Moody's Eligible
         Assets to the Preferred Shares Basic Maintenance Amount is less than or
         equal to 125%, if Moody's is then rating the Preferred Shares,

               (iii) the ratio of the Discounted Value of Fitch Eligible Assets
         to the Preferred Shares Basic Maintenance Amount is less than or equal
         to 110%, if Fitch is then rating the Preferred Shares, or

               (iv)  whenever requested by Moody's (if Moody's is then rating
         the Preferred Shares) or Fitch (if Fitch is then rating the Preferred
         Shares),

the Trust shall complete and deliver to Moody's (if Moody's is then rating the
Preferred Shares) or Fitch (if Fitch is then rating the Preferred Shares), as
the case may be, a Preferred Shares Basic Maintenance Report as of the date of
such event.

7.       Restrictions on Dividends and Other Distributions.

             (a) Dividends on Shares Other Than the Preferred Shares. Except as
      set forth in the next sentence, no dividends shall be declared or paid or
      set apart for payment on the shares of any class or series of shares of
      beneficial interest of the Trust ranking, as to the payment of dividends,
      on a parity with the Preferred Shares for any period unless full
      cumulative dividends have been or contemporaneously are declared and paid
      on the shares of each series of the Preferred Shares through its most
      recent Dividend Payment Date. When dividends are not paid in full upon the
      shares of each series of the Preferred Shares through its most recent
      Dividend Payment Date or upon the shares of any other class or series of
      shares of beneficial interest of the Trust ranking on a parity as to the
      payment of dividends with the Preferred Shares through their most recent
      respective dividend payment dates, all dividends declared upon a series of
      the Preferred Shares and any other such class or series of shares of
      beneficial interest ranking on a parity as to the payment of dividends
      with such series of the Preferred Shares shall be declared pro rata so
      that the amount of dividends declared per share on such series of the
      Preferred Shares and such other class or series of shares of beneficial
      interest shall in all cases bear to each other the same ratio that
      accumulated dividends per share on such series of the Preferred Shares and
      such other class or series of shares of beneficial interest bear to each
      other (for purposes of this sentence, the


                                       B-53

<PAGE>


     amount of dividends declared per share on a series of the Preferred Shares
     shall be based on the Applicable Rate for such share for the Dividend
     Periods during which dividends were not paid in full).

           (b) Dividends and Other Distributions with Respect to Common Shares
     Under the 1940 Act. The Trustees shall not declare any dividend (except a
     dividend payable in Common Shares), or declare any other distribution, upon
     the Common Shares, or purchase Common Shares, unless in every such case the
     Trust maintains, at the time of any such declaration or purchase, the 1940
     Act Preferred Shares Asset Coverage after deducting the amount of such
     dividend, distribution or purchase price, as the case may be.

           (c) Other Restrictions on Dividends and Other Distributions. For so
     long as any Preferred Shares are outstanding, and except as set forth in
     paragraph 7(a) and paragraph 9(c) of this Part I, (A) the Trust shall not
     declare, pay or set apart for payment any dividend or other distribution
     (other than a dividend or distribution paid in shares of, or in options,
     warrants or rights to subscribe for or purchase, Common Shares or other
     shares, if any, ranking junior to the Preferred Shares as to the payment of
     dividends and the distribution of assets upon dissolution, liquidation or
     winding up) in respect of the Common Shares or any other shares (other than
     the Preferred Shares) of the Trust ranking junior to or on a parity with
     the Preferred Shares as to the payment of dividends or the distribution of
     assets upon dissolution, liquidation or winding up, or call for redemption,
     redeem, purchase or otherwise acquire for consideration any Common Shares
     or any other such junior shares (except by conversion into or exchange for
     shares of the Trust ranking junior to the Preferred Shares as to the
     payment of dividends and the distribution of assets upon dissolution,
     liquidation or winding up), or any such parity shares (except by conversion
     into or exchange for shares of the Trust ranking junior to or on a parity
     with Preferred Shares as to the payment of dividends and the distribution
     of assets upon dissolution, liquidation or winding up), unless (i) full
     cumulative dividends on shares of each series of Preferred Shares through
     its most recently ended Dividend Period shall have been paid or shall have
     been declared and sufficient funds for the payment thereof deposited with
     the Auction Agent and (ii) the Trust has redeemed the full number of
     Preferred Shares required to be redeemed by any provision for mandatory
     redemption pertaining thereto, and (B) the Trust shall not declare, pay or
     set apart for payment any dividend or other distribution (other than a
     dividend or distribution paid in shares of, or in options, warrants or
     rights to subscribe for or purchase, Common Shares or other shares, if any,
     ranking junior to Preferred Shares as to the payment of dividends and the
     distribution of assets upon dissolution, liquidation or winding up) in
     respect of Common Shares or any other shares of the Trust ranking junior to
     Preferred Shares as to the payment of dividends or the distribution of
     assets upon dissolution, liquidation or winding up, or call for redemption,
     redeem, purchase or otherwise acquire for consideration any Common Shares
     or any other such junior shares (except by conversion into or exchange for
     shares of the Trust ranking junior to Preferred Shares as to the payment of
     dividends and the distribution of assets upon dissolution, liquidation or
     winding up), unless immediately after such transaction the Discounted Value
     of Moody's Eligible Assets (if Moody's is then rating the Preferred Shares)
     and Fitch Eligible Assets (if Fitch is then rating the Preferred Shares)
     would each at least equal the Preferred Shares Basic Maintenance Amount.


                                       B-54

<PAGE>


8.   Redemption.

         (a) Optional Redemption.

           (i)   Subject to the provisions of subparagraph (v) of this paragraph
     8(a), Preferred Shares of any series may be redeemed from time to time, at
     the option of the Trust, in whole or in part, on the second Business Day
     preceding any Dividend Payment Date for shares of such series, out of funds
     legally available therefor, at a redemption price per share equal to the
     sum of $25,000 plus an amount equal to accumulated but unpaid dividends
     thereon (whether or not earned or declared) to (but not including) the date
     fixed for redemption; provided, however, that (1) shares of a series of
     Preferred Shares may not be redeemed in part if after such partial
     redemption fewer than 300 shares of such series would remain outstanding;
     (2) unless otherwise provided, shares of a series of Preferred Shares are
     redeemable by the Trust during the Initial Rate Period thereof only on the
     second Business Day next preceding the last Dividend Payment Date for such
     Initial Rate Period; and (3) subject to subparagraph (ii) of this paragraph
     8(a), the Notice of Special Rate Period relating to a Special Rate Period
     of shares of a series of Preferred Shares, as delivered to the Auction
     Agent and filed with the Secretary of the Trust, may provide that shares of
     such series shall not be redeemable during the whole or any part of such
     Special Rate Period (except as provided in subparagraph (iv) of this
     paragraph 8(a)) or shall be redeemable during the whole or any part of such
     Special Rate Period only upon payment of such redemption premium or
     premiums as shall be specified therein (the provisions set forth in clauses
     (1) through (3) being referred to herein as the "Special Redemption
     Provisions").

           (ii)  A Notice of Special Rate Period relating to shares of a series
     of Preferred Shares for a Special Rate Period thereof may contain Special
     Redemption Provisions only if the Trustees, after consultation with the
     Broker-Dealer or Broker-Dealers for such Special Rate Period of shares of
     such series, determine that such Special Redemption Provisions are in the
     best interest of the Trust.

           (iii) If fewer than all of the outstanding shares of a series of
     Preferred Shares are to be redeemed pursuant to subparagraph (i) of this
     paragraph 8(a), the number of shares of such series to be redeemed shall be
     determined by the Trustees, and such shares shall be redeemed pro rata from
     the Holders of shares of such series in proportion to the number of shares
     of such series held by such Holders.

           (iv)  Subject to the provisions of subparagraph (v) of this paragraph
     8(a), shares of any series of Preferred Shares may be redeemed, at the
     option of the Trust, in whole but not in part, out of funds legally
     available therefor, on the first day following any Dividend Period thereof
     included in a Rate Period consisting of more than 182 Rate Period Days if,
     on the date of determination of the Applicable Rate for shares of such
     series for such Rate Period, such Applicable Rate equaled or exceeded on
     such date of determination the Treasury Index Rate for such Rate Period, at
     a redemption price per share equal to the sum of $25,000 plus an amount
     equal to accumulated but unpaid dividends thereon (whether or not earned or
     declared) to (but not including) the date fixed for redemption.


                                       B-55

<PAGE>


            (v)  The Trust may not on any date mail a Notice of Redemption
         pursuant to paragraph 8(c) of this Part I in respect of a redemption
         contemplated to be effected pursuant to this paragraph (a) unless on
         such date (1) the Trust has available Deposit Securities with maturity
         or tender dates not later than the day preceding the applicable
         redemption date and having a value not less than the amount (including
         any applicable premium) due to Holders of Preferred Shares by reason of
         the redemption of such shares on such redemption date and (2) the
         Discounted Value of Moody's Eligible Assets (if Moody's is then rating
         the Preferred Shares) and Fitch Eligible Assets (if Fitch is then
         rating the Preferred Shares) each at least equals the Preferred Shares
         Basic Maintenance Amount, and each would at least equal the Preferred
         Shares Basic Maintenance Amount immediately subsequent to such
         redemption if such redemption were to occur on such date. The Trust
         shall not be required to have available Deposit Securities as described
         in clause (1) of this subparagraph (v) in respect of a redemption of
         any series of Preferred Shares, in whole or in part, contemplated to be
         effected pursuant to paragraph 8(a) where such redemption is subject to
         the issuance of shares of any other series of preferred shares of
         beneficial interest of the Trust.

         (b) Mandatory Redemption. The Trust shall redeem, at a redemption price
     equal to $25,000 per share plus accumulated but unpaid dividends thereon
     (whether or not earned or declared) to (but not including) the date fixed
     by the Trustees for redemption, certain of the Preferred Shares, if the
     Trust fails to have either Moody's Eligible Assets (if Moody's is then
     rating the Preferred Shares) or Fitch Eligible Assets (if Fitch is then
     rating the Preferred Shares) with a Discounted Value greater than or equal
     to the Preferred Shares Basic Maintenance Amount or fails to maintain the
     1940 Act Preferred Shares Asset Coverage, in accordance with the
     requirements of the Rating Agency or Agencies then rating the Preferred
     Shares, and such failure is not cured on or before the Preferred Shares
     Basic Maintenance Cure Date or the 1940 Act Cure Date, as the case may be.
     The number of Preferred Shares to be redeemed shall be equal to the lesser
     of:

            (i)  the minimum number of Preferred Shares, together with all other
         preferred shares subject to redemption or retirement, the redemption of
         which, if deemed to have occurred immediately prior to the opening of
         business on the Cure Date, would have resulted in the Trust's having
         Moody's Eligible Assets (if Moody's is then rating the Preferred
         Shares) and Fitch Eligible Assets (if Fitch is then rating the
         Preferred Shares) with a Discounted Value greater than or equal to the
         Preferred Shares Basic Maintenance Amount or maintaining the 1940 Act
         Preferred Shares Asset Coverage, as the case may be, on such Cure Date
         (provided, however, that if there is no such minimum number of
         Preferred Shares and other preferred shares the redemption or
         retirement of which would have had such result, all Preferred Shares
         and other preferred shares then outstanding shall be redeemed), and

            (ii) the maximum number of Preferred Shares, together with all other
         preferred shares subject to redemption or retirement, that can be
         redeemed out of funds expected to be legally available therefor in
         accordance with the Declaration of Trust and applicable law.


                                       B-56

<PAGE>


      In determining the Preferred Shares required to be redeemed in accordance
      with the foregoing, the Trust shall allocate the number required to be
      redeemed to satisfy the Preferred Shares Basic Maintenance Amount or the
      1940 Act Preferred Shares Asset Coverage, as the case may be, pro rata
      among Preferred Shares and other preferred shares (and, then, pro rata
      among each series of Preferred Shares) subject to redemption or
      retirement.

The Trust shall effect such redemption on the date fixed by the Trust therefor,
which date shall not be earlier than 20 days nor later than 40 days after such
Cure Date, except that if the Trust does not have funds legally available for
the redemption of all of the required number of the Preferred Shares and other
preferred shares which are subject to redemption or retirement or the Trust
otherwise is unable to effect such redemption on or prior to 40 days after such
Cure Date, the Trust shall redeem those Preferred Shares and other preferred
shares which it was unable to redeem on the earliest practicable date on which
it is able to effect such redemption. If fewer than all of the outstanding
shares of a series of Preferred Shares are to be redeemed pursuant to this
paragraph 8(b), the number of shares of such series to be redeemed shall be
redeemed pro rata from the Holders of shares of such series in proportion to the
number of shares of such series held by such Holders.

           (c) Notice of Redemption. If the Trust shall determine or be required
      to redeem shares of a series of Preferred Shares pursuant to paragraph
      8(a) or 8(b) of this Part I, it shall mail a Notice of Redemption with
      respect to such redemption by first-class mail, postage prepaid, to each
      Holder of the shares of such series to be redeemed, at such Holder's
      address as the same appears on the record books of the Trust on the record
      date established by the Trustees. Such Notice of Redemption shall be so
      mailed not less than 20 nor more than 45 days prior to the date fixed for
      redemption. Each such Notice of Redemption shall state:

               (i)   the redemption date;

               (ii)  the number of Preferred Shares to be redeemed and the
      series thereof;

               (iii) the CUSIP number for shares of such series;

               (iv)  the Redemption Price;

               (v)   the place or places where the certificate(s) for such
      shares (properly endorsed or assigned for transfer, if the Trustees shall
      so require and the Notice of Redemption shall so state) are to be
      surrendered for payment of the Redemption Price;

               (vi)  that dividends on the shares to be redeemed will cease to
      accumulate on such redemption date; and

               (vii) the provisions of this paragraph 8 under which such
      redemption is made.

If fewer than all shares of a series of Preferred Shares held by any Holder are
to be redeemed, the Notice of Redemption mailed to such Holder shall also
specify the number of shares of such series to be redeemed from such Holder. The
Trust may provide in any Notice of Redemption relating to a redemption
contemplated to be effected pursuant to paragraph 8(a) of this Part I that


                                       B-57

<PAGE>


such redemption is subject to one or more conditions precedent and that the
Trust shall not be required to effect such redemption unless each such condition
shall have been satisfied at the time or times and in the manner specified in
such Notice of Redemption.

           (d) No Redemption Under Certain Circumstances. Notwithstanding the
      provisions of paragraphs 8(a) or 8(b) of this Part I, if any dividends on
      shares of a series of Preferred Shares (whether or not earned or declared)
      are in arrears, no shares of such series shall be redeemed unless all
      outstanding shares of such series are simultaneously redeemed, and the
      Trust shall not purchase or otherwise acquire any shares of such series;
      provided, however, that the foregoing shall not prevent the purchase or
      acquisition of outstanding shares of such series pursuant to the
      successful completion of an otherwise lawful purchase or exchange offer
      made on the same terms to Holders of all outstanding shares of such
      series.

           (i) Absence of Funds Available for Redemption. To the extent that any
      redemption for which Notice of Redemption has been mailed is not made by
      reason of the absence of legally available funds therefor in accordance
      with the Declaration of Trust and applicable law, such redemption shall be
      made as soon as practicable to the extent such funds become available.
      Failure to redeem Preferred Shares shall be deemed to exist at any time
      there is a Failure to Deposit with respect to a redemption specified in a
      Notice of Redemption.

Notwithstanding the fact that the Trust may not have redeemed Preferred Shares
for which a Notice of Redemption has been mailed, dividends may be declared and
paid on Preferred Shares and shall include those Preferred Shares for which a
Notice of Redemption has been mailed.

           (e) Auction Agent as Trustee of Redemption Payments by Trust. All
      moneys paid to the Auction Agent for payment of the Redemption Price of
      Preferred Shares called for redemption shall be held in trust by the
      Auction Agent for the benefit of Holders of shares so to be redeemed.

           (f) Shares for Which Notice of Redemption Has Been Given Are No
      Longer Outstanding. Provided a Notice of Redemption has been mailed
      pursuant to paragraph 8(c) of this Part I, upon the deposit with the
      Auction Agent (on the Business Day next preceding the date fixed for
      redemption thereby, in funds available on the next Business Day in The
      City of New York, New York) of funds sufficient to redeem the Preferred
      Shares that are the subject of such notice, dividends on such shares shall
      cease to accumulate and such shares shall no longer be deemed to be
      outstanding for any purpose, and all rights of the Holders of the shares
      so called for redemption shall cease and terminate (including without
      limitation voting rights), except the right of such Holders to receive the
      Redemption Price, but without any interest or other additional amount,
      except as provided in subparagraph 2(e)(i) of this Part I. Upon surrender
      in accordance with the Notice of Redemption of the certificates for any
      shares so redeemed (properly endorsed or assigned for transfer, if the
      Trustees shall so require and the Notice of Redemption shall so state),
      the Redemption Price shall be paid by the Auction Agent to the Holders of
      Preferred Shares subject to redemption. In the case that fewer than all of
      the shares represented by any such certificate are redeemed, a new
      certificate shall be issued, representing the unredeemed shares, without
      cost to the

                                       B-58

<PAGE>


   Holder thereof. The Trust shall be entitled to receive from the Auction
   Agent, promptly after the date fixed for redemption, any cash deposited with
   the Auction Agent in excess of:

           (i)  the aggregate Redemption Price of the Preferred Shares called
      for redemption on such date, and

           (ii) all other amounts to which Holders of Preferred Shares called
      for redemption may be entitled.

Any funds so deposited that are unclaimed at the end of 90 days from such
redemption date shall, to the extent permitted by law, be repaid to the Trust,
after which time the Holders of Preferred Shares so called for redemption may
look only to the Trust for payment of the Redemption Price and all other amounts
to which they may be entitled. The Trust shall be entitled to receive, from time
to time after the date fixed for redemption, any interest on the funds so
deposited.

           (g)  Compliance with Applicable Law. In effecting any redemption
      pursuant to this paragraph 8, the Trust shall use its best efforts to
      comply with all applicable conditions precedent to effecting such
      redemption under the 1940 Act and any applicable Massachusetts law, and
      shall effect no redemption except in accordance with the 1940 Act and any
      applicable Massachusetts law.

           (h)  Only Whole Preferred Shares May Be Redeemed. In the case of any
      redemption pursuant to this paragraph 8, only whole Preferred Shares shall
      be redeemed, and in the event that any provision of the Declaration of
      Trust would require redemption of a fractional share, the Auction Agent
      shall be authorized to round up so that only whole shares are redeemed.

9.     Liquidation Rights.

           (a)  Ranking. The shares of a series of Preferred Shares shall rank
      on a parity with each other, with shares of any other series of preferred
      shares and with shares of any other series of Preferred Shares as to the
      distribution of assets upon dissolution, liquidation or winding up of the
      affairs of the Trust.

           (b)  Distributions upon Liquidation. Upon the dissolution,
      liquidation or winding up of the affairs of the Trust, whether voluntary
      or involuntary, the Holders of Preferred Shares then outstanding shall be
      entitled to receive and to be paid out of the assets of the Trust
      available for distribution to its shareholders, before any payment or
      distribution shall be made on the Common Shares or on any other class of
      shares of the Trust ranking junior to the Preferred Shares upon
      dissolution, liquidation or winding up, an amount equal to the Liquidation
      Preference with respect to such shares plus an amount equal to all
      dividends thereon (whether or not earned or declared but excluding the
      interest thereon) accumulated but unpaid to (but not including) the date
      of final distribution in same-day funds. After the payment to the Holders
      of the Preferred Shares of the full preferential amounts provided for in
      this paragraph 9(b), the Holders of Preferred Shares as such shall have no
      right or claim to any of the remaining assets of the Trust.


                                       B-59

<PAGE>


           (c) Pro Rata Distributions. In the event the assets of the Trust
      available for distribution to the Holders of Preferred Shares upon any
      dissolution, liquidation, or winding up of the affairs of the Trust,
      whether voluntary or involuntary, shall be insufficient to pay in full all
      amounts to which such Holders are entitled pursuant to paragraph 9(b) of
      this Part I, no such distribution shall be made on account of any shares
      of any other class or series of preferred shares ranking on a parity with
      the Preferred Shares with respect to the distribution of assets upon such
      dissolution, liquidation or winding up unless proportionate distributive
      amounts shall be paid on account of the Preferred Shares, ratably, in
      proportion to the full distributable amounts for which holders of all such
      parity shares are respectively entitled upon such dissolution, liquidation
      or winding up.

           (d) Rights of Junior Shares. Subject to the rights of the holders of
      shares of any series or class or classes of shares ranking on a parity
      with the Preferred Shares with respect to the distribution of assets upon
      dissolution, liquidation or winding up of the affairs of the Trust, after
      payment shall have been made in full to the Holders of the Preferred
      Shares as provided in paragraph 9(b) of this Part I, but not prior
      thereto, any other series or class or classes of shares ranking junior to
      the Preferred Shares with respect to the distribution of assets upon
      dissolution, liquidation or winding up of the affairs of the Trust shall,
      subject to the respective terms and provisions (if any) applying thereto,
      be entitled to receive any and all assets remaining to be paid or
      distributed, and the Holders of the Preferred Shares shall not be entitled
      to share therein.

           (e) Certain Events Not Constituting Liquidation. Neither the sale of
      all or substantially all, or any portion of, the property or business of
      the Trust, nor the merger or consolidation of the Trust into or with any
      business trust or other entity nor the merger or consolidation of any
      business trust or other entity into or with the Trust shall be a
      dissolution, liquidation or winding up, whether voluntary or involuntary,
      for the purposes of this paragraph 9.

10.    Futures and Options Transactions:  Forward Commitments.

           (a) If Moody's is rating any Preferred Shares, then:

           (i) For so long as any Preferred Shares are rated by Moody's, the
      Trust will not buy or sell futures contracts, write, purchase or sell call
      options on futures contracts or purchase put options on futures contracts
      or write call options (except covered call options) on portfolio
      securities unless it receives written confirmation from Moody's that
      engaging in such transact0ions would not impair the ratings then assigned
      to such Preferred Shares by Moody's, except that the Trust may purchase or
      sell exchange-traded futures contracts based on any index approved by
      Moody's or Treasury Futures, and purchase, write or sell exchange-traded
      put options on such futures contracts and purchase, write or sell
      exchange-traded call options on such futures contracts (collectively,
      "Moody's Hedging Transactions"), subject to the following limitations:

                    (A)   the Trust will not engage in any Moody's Hedging
               Transaction based on any index approved by Moody's (other than
               transactions which terminate a futures contract or option held by
               the Trust by the Trust's taking an


                                       B-60

<PAGE>


               opposite position thereto ("Closing Transactions")) which would
               cause the Trust at the time of such transaction to own or have
               sold:

                         (I)  outstanding futures contracts based on such index
                              or indicies exceeding in number 10% of the average
                              number of daily traded futures contracts based on
                              such index or indicies in the 30 days preceding
                              the time of effecting such transaction as reported
                              by The Wall Street Journal; or

                         (II) outstanding financial futures contracts based on
                              any index approved by Moody's having a Market
                              Value exceeding 50% of the Market Value of all
                              portfolio securities of the Trust constituting
                              Moody's Eligible Assets owned by the Trust (other
                              than Moody's Eligible Assets already subject to a
                              Moody's Hedging Transaction);

                     (B) the Trust will not engage in any Moody's Hedging
               Transaction based on Treasury Futures (other than Closing
               Transactions) which would cause the Trust at the time of such
               transaction to own or have sold outstanding futures contracts
               based on Treasury Futures having an aggregate Market Value
               exceeding 80% of the aggregate Market Value of all portfolio
               securities of the Trust constituting Moody's Eligible Assets
               owned by the Trust (other than Moody's Eligible Assets already
               subject to a Moody's Hedging Transaction) and rated Baa or above
               by Moody's (or, if not rated by Moody's, rated A or above by S&P)
               (for purposes of the foregoing, the Trust shall be deemed to own
               futures contracts that underlie any outstanding options written
               by the Trust);

                     (C) the Trust will engage in Closing Transactions to close
               out any outstanding futures contract based on any index approved
               by Moody's if the amount of open interest in such index as
               reported by The Wall Street Journal is less than an amount to be
               mutually determined by Moody's and the Trust; and

                     (D) the Trust will not enter into an option or futures
               transaction unless, after giving effect thereto, the Trust would
               continue to have Moody's Eligible Assets with an aggregate
               Discounted Value equal to or greater than the Preferred Shares
               Basic Maintenance Amount.

               (ii)  For purposes of determining whether the Trust has Moody's
           Eligible Assets with an aggregate Discounted Value that equals or
           exceeds the Preferred Shares Basic Maintenance Amount, the Discounted
           Value of Moody's Eligible Assets which the Trust is obligated to
           deliver or receive pursuant to an outstanding futures contract or
           option shall be valued as follows:

                     (A) assets subject to call options written by the Trust
               which are either exchange-traded and "readily reversible" or
               expire within 49 days after the date as of which such valuation
               is made shall be valued at the lesser of:

                         (I)  Discounted Value and


                                       B-61

<PAGE>


                  (II) the exercise price of the call option written by the
Trust;

               (B) assets subject to call options written by the Trust not
         meeting the requirements of clause (A) of this sentence shall have no
         value;

               (C) assets subject to put options written by the Trust shall be
         valued at the lesser of:

                  (I)  the exercise price and

                  (II) the Discounted Value of the subject security; and

               (D) where delivery may be made to the Trust with any security of
         a class of securities, the Trust shall assume that it will take
         delivery of the security with the lowest Discounted Value.

         (iii) For purposes of determining whether the Trust has Moody's
     Eligible Assets with an aggregate Discounted Value that equals or exceeds
     the Preferred Shares Basic Maintenance Amount, the following amounts shall
     be subtracted from the aggregate Discounted Value of the Moody's Eligible
     Assets held by the Trust:

               (A) 10% of the exercise price of a written call option;

               (B) the exercise price of any written put option;

               (C) where the Trust is the seller under a futures contract, 10%
         of the settlement price of the futures contract;

               (D) where the Trust is the purchaser under a futures contract,
         the settlement price of assets purchased under such futures contract;

               (E) the settlement price of the underlying futures contract if
         the
         Trust writes put options on a futures contract; and

               (F) 105% of the Market Value of the underlying futures contracts
         if the Trust writes call options on a futures contract and does not own
         the underlying contract.

         (iv)  The Trust will not enter into any contract to purchase securities
     for a fixed price at a future date beyond customary settlement time (other
     than such contracts that constitute Moody's Hedging Transactions that are
     permitted under paragraph 10(a)(i) of this Part I), except that the Trust
     may enter into such contracts to purchase newly issued securities on the
     date such securities are issued ("Forward Commitments"), subject to the
     following limitations:

               (A) the Trust will maintain in a segregated account cash, cash
         equivalents or short-term, fixed-income securities rated P-1, MTG-1 or
         MIG-1 by Moody's and maturing prior to the date of the Forward
         Commitment with a


                                       B-62

<PAGE>


               Market Value that equals or exceeds the amount of the Trust's
               obligations under any Forward Commitments to which it is from
               time to time a party or long-term fixed income securities with a
               Discounted Value that equals or exceeds the amount of the Trust's
               obligations under any Forward Commitment to which it is from time
               to time a party; and

                  (B) the Trust will not enter into a Forward Commitment unless,
               after giving effect thereto, the Trust would continue to have
               Moody's Eligible Assets with an aggregate Discounted Value equal
               to or greater than the Preferred Shares Maintenance Amount.

         For purposes of determining whether the Trust has Moody's Eligible
         Assets with an aggregate Discounted Value that equals or exceeds the
         Preferred Shares Basic Maintenance Amount, the Discounted Value of all
         Forward Commitments to which the Trust is a party and of all securities
         deliverable to the Trust pursuant to such Forward Commitments shall be
         zero.

           (b) If Fitch is rating any Preferred Shares, then:

               (i) For so long as any Preferred Shares are rated by Fitch, the
         Trust will not buy or sell futures contracts, write, purchase or sell
         call options on futures contracts or purchase put options on futures
         contracts or write call options (except covered call options) on
         portfolio securities unless it receives written confirmation from Fitch
         that engaging in such transactions would not impair the ratings then
         assigned to such Preferred Shares by Fitch, except that the Trust may
         purchase or sell exchange-traded futures contracts based on any index
         approved by Fitch or Treasury Futures, and purchase, write or sell
         exchange-traded put options on such futures contracts and purchase,
         write or sell exchange-traded call options on such futures contracts
         (collectively, "Fitch Hedging Transactions"), subject to the following
         limitations:

                   (A) the Trust will not engage in any Fitch Hedging
               Transaction based on any index approved by Fitch (other than
               Closing Transactions) which would cause the Trust at the time of
               such transaction to own or have sold outstanding futures
               contracts based on such index exceeding in number 10% of the
               average number of daily traded futures contracts based on such
               index in the 30 days preceding the time of effecting such
               transaction as reported by The Wall Street Journal;

                   (B) the Trust will not engage in any Fitch Hedging
               Transaction based on Treasury Futures (other than Closing
               Transactions) which would cause the Trust at the time of such
               transaction to own or have sold outstanding futures contracts
               based on Treasury Futures having an aggregate Market Value
               exceeding 80% of the aggregate Market Value of all Fitch Eligible
               Assets owned by the Trust (other than Fitch Eligible Assets
               already subject to a Fitch Hedging Transaction) and rated BBB or
               above by Fitch (or, if not rated by Fitch, rated Baa or above by
               Moody's; or, if not rated by Moody's, rated A or above by S&P)
               (for


                                       B-63

<PAGE>


              purposes of the foregoing, the Trust shall be deemed to own
              futures contracts that underlie any outstanding options written by
              the Trust);

                     (C) the Trust will engage in Closing Transactions to close
              out any outstanding futures contract based on any index approved
              by Fitch if the amount of open interest in such index as reported
              by The Wall Street Journal is less than an amount to be mutually
              determined by Fitch and the Trust; and

                     (D) the Trust will not enter into an option or futures
              transaction unless, after giving effect thereto, the Trust would
              continue to have Fitch Eligible Assets with an aggregate
              Discounted Value equal to or greater than the Preferred Shares
              Basic Maintenance Amount.

              (ii)  For purposes of determining whether the Trust has Fitch
         Eligible Assets with an aggregate Discounted Value that equals or
         exceeds the Preferred Shares Basic Maintenance Amount, the Discounted
         Value of Fitch Eligible Assets which the Trust is obligated to deliver
         or receive pursuant to an outstanding futures contract or option shall
         be valued as follows:

                     (A) assets subject to call options written by the Trust
              which are either exchange-traded and "readily reversible"
              or expire within 49 days after the date as of which such valuation
              is made shall be valued at the lesser of:

                         (I)  Discounted Value and

                         (II) the exercise price of the call option written by
                              the Trust;

                     (B) assets subject to call options written by the Trust not
              meeting the requirements of clause (A) of this sentence shall
              have no value;

                     (C) assets subject to put options written by the Trust
                         shall be valued at the lesser of:

                         (I)  the exercise price and

                         (II) the Discounted Value of the subject security; and

                     (D) where delivery may be made to the Trust with any
                         security of a class of securities, the Trust shall
                         assume that it will take delivery of the security with
                         the lowest Discounted Value.

              (iii) For purposes of determining whether the Trust has Fitch
         Eligible Assets with an aggregate Discounted Value that equals or
         exceeds the Preferred Shares Basic Maintenance Amount, the following
         amounts shall be subtracted from the aggregate Discounted Value of the
         Fitch Eligible Assets held by the Trust:

                     (A) 10% of the exercise price of a written call option;


                                       B-64

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                  (B) the exercise price of any written put option;

                  (C) where the Trust is the seller under a futures contract,
              10% of the settlement price of the futures contract;

                  (D) where the Trust is the purchaser under a futures contract,
              the settlement price of assets purchased under such futures
              contract;

                  (E) the settlement price of the underlying futures contract if
              the Trust writes put options on a futures contract; and

                  (F) 105% of the Market Value of the underlying futures
              contracts if the Trust writes call options on a futures contract
              and does not own the underlying contract.

              (iv) The Trust will not enter into any contract to purchase
         securities for a fixed price at a future date beyond customary
         settlement time (other than such contracts that constitute Fitch
         Hedging Transactions that are permitted under paragraph 10(b)(i) of
         this Part I), except that the Trust may enter into Forward Commitments,
         subject to the following limitations:

                  (A) the Trust will maintain in a segregated account cash, cash
              equivalents or short-term, fixed-income securities rated F-1 by
              Fitch (or, if not rated by Fitch, rated P-1, MTG-1 or MIG-1 by
              Moody's) and maturing prior to the date of the Forward Commitment
              with a Market Value that equals or exceeds the amount of the
              Trust's obligations under any Forward Commitments to which it is
              from time to time a party or long-term fixed income securities
              with a Discounted Value that equals or exceeds the amount of the
              Trust's obligations under any Forward Commitment to which it is
              from time to time a party; and

                  (B) the Trust will not enter into a Forward Commitment unless,
              after giving effect thereto, the Trust would continue to have
              Fitch Eligible Assets with an aggregate Discounted Value equal to
              or greater than the Preferred Shares Maintenance Amount.

         For purposes of determining whether the Trust has Fitch Eligible Assets
         with an aggregate Discounted Value that equals or exceeds the Preferred
         Shares Basic Maintenance Amount, the Discounted Value of all Forward
         Commitments to which the Trust is a party and of all securities
         deliverable to the Trust pursuant to such Forward Commitments shall be
         zero.

               (c) For so long as any Preferred Shares are outstanding and
     Moody's or Fitch is, or both are, rating such shares, the Trust will not,
     unless it has received written confirmation from Moody's or Fitch or both,
     as applicable, that any such action would not impair the rating then
     assigned by such Rating Agency to such shares, engage in any one or more of
     the following transactions:


                                       B-65

<PAGE>


         (i) borrow money, except that the Trust may, without obtaining the
     written confirmation described above, borrow money for the purpose of
     clearing securities transactions if:

               (A) the Preferred Shares Basic Maintenance Amount would continue
         to be satisfied after giving effect to such borrowing and

               (B) such borrowing:

                   (I) is privately arranged with a bank or other person and is
                       evidenced by a promissory note or other evidence of
                       indebtedness that is not intended to be publicly
                       distributed; or

                  (II) is for "temporary purposes," is evidenced by a promissory
                       note or other evidence of indebtedness and is in an
                       amount not exceeding 5% of the value of the total assets
                       of the Trust at the time of the borrowing (for purposes
                       of the foregoing, "temporary purposes" means that the
                       borrowing i s to be repaid within sixty days and is not
                       to be extended or renewed);

         (ii)  except as provided in paragraph 4 of this Part I, issue
     additional shares of any series of Preferred Shares or any class or series
     of shares ranking prior to or on a parity with Preferred Shares with
     respect to the payment of dividends or the distribution of assets upon
     dissolutions, liquidation or winding up of the Trust, or reissue any
     Preferred Shares previously purchased or redeemed by the Trust;

         (iii) engage in any short sales of securities;

         (iv)  lend securities;

         (v)   merge or consolidate into or with any other corporation or
     entity;

         (vi)  change the Pricing Service; or

         (vii) enter into reverse repurchase agreements.

11.      Miscellaneous.

          (a)  Amendment of This Section to Add Additional Series. Subject to
     the provisions of paragraph 10(c)(ii) of this Part I, the Trustees may, by
     resolution duly adopted, without shareholder approval (except as otherwise
     provided by this Section 12.1 or required by applicable law), amend this
     Section 12.1 to (1) reflect any amendments hereto which the Trustees are
     entitled to adopt pursuant to the terms of this Section 12.1 without
     shareholder approval or (2) add additional series of Preferred Shares or
     additional shares of a series of Preferred Shares (and terms relating
     thereto) to the series and Preferred Shares theretofore


                                       B-66

<PAGE>


     described thereon. Each such additional series and all such additional
     shares shall be governed by the terms of this Section 12.1.

          (b)  No Fractional Shares. No fractional shares of Preferred Shares
     shall be issued.

          (c)  Status of Preferred Shares Redeemed, Exchanged or Otherwise
     Acquired by the Trust. Preferred Shares which are redeemed, exchanged or
     otherwise acquired by the Trust shall return to the status of authorized
     and unissued preferred shares without designation as to series.

          (d)  Board May Resolve Ambiguities. To the extent permitted by
     applicable law, the Trustees may interpret or adjust the provisions of this
     Section 12.1 to resolve any inconsistency or ambiguity or to remedy any
     formal defect, and may amend this Section 12.1 with respect to any series
     of Preferred Shares prior to the issuance of shares of such series.

          (e)  Heading Not Determinative. The headings contained in this Section
     12.1 are for convenience of reference only and shall not affect the meaning
     or interpretation of this Section 12.1.

          (f)  Notices. All notices or communications, unless otherwise
     specified in the Bylaws of the Trust or this Section 12.1, shall be
     sufficiently given if in writing and delivered in person or mailed by
     first-class mail, postage prepaid.

                                    PART II.

1.      Orders.

          (a)  Prior to the Submission Deadline on each Auction Date for shares
     of a series of Preferred Shares:

               (i) each Beneficial Owner of shares of such series may submit to
        its Broker-Dealer by telephone or otherwise information as to:

                    (A) the number of Outstanding shares, if any, of such series
               held by such Beneficial Owner which such Beneficial Owner desires
               to continue to hold without regard to the Applicable Rate for
               shares of such series for the next succeeding Rate Period of such
               shares;

                    (B) the number of Outstanding shares, if any, of such series
               held by such Beneficial Owner which such Beneficial Owner offers
               to sell if the Applicable Rate for shares of such series for the
               next succeeding Rate Period of shares of such series shall be
               less than the rate per annum specified by such Beneficial Owner;
               and/or

                    (C) the number of Outstanding shares, if any, of such series
               held by such Beneficial Owner which such Beneficial Owner offers
               to sell without regard


                                       B-67

<PAGE>


               to the Applicable Rate for shares of such series for the next
               succeeding Rate Period of shares of such series;

and

               (ii) one or more Broker-Dealers, using lists of Potential
        Beneficial Owners, shall in good faith, for the purpose of conducting a
        competitive Auction in a commercially reasonable manner, contact
        Potential Beneficial Owners (by telephone or otherwise), including
        Persons that are not Beneficial Owners, on such lists to determine the
        number of shares, if any, of such series which each such Potential
        Beneficial Owner offers to purchase if the Applicable Rate for shares of
        such series for the next succeeding Rate Period of shares of such series
        shall not be less than the rate per annum specified by such Potential
        Beneficial Owner.

        For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, of information referred to in clause (i)(A), (i)(B), (i)(C) or
(ii) of this paragraph 1(a) is hereinafter referred to as an "Order" and
collectively as "Orders," and each Beneficial Owner and each Potential
Beneficial Owner placing an Order with a Broker-Dealer, and such Broker-Dealer
placing an order with the Auction Agent, is hereinafter referred to as a
"Bidder" and collectively as "Bidders"; an Order containing the information
referred to in clause (i)(A) of this paragraph (a) is hereinafter referred to as
a "Hold Order" and collectively as "Hold Orders"; an Order containing the
information referred to in clause (i)(B) or (ii) of this paragraph (a) is
hereinafter referred to as a "Bid" and collectively as "Bids"; and an Order
containing the information referred to in clause (i)(C) of this paragraph (a) is
hereinafter referred to as a "Sell Order" and collectively as "Sell Orders."

               (b) (i) A Bid by a Beneficial Owner or an Existing Holder of
     shares of a series of Preferred Shares subject to an Auction on any Auction
     Date shall constitute an irrevocable offer to sell:

                         (A)  the number of Outstanding shares of such series
                    specified in such Bid if the Applicable Rate for shares of
                    such series determined on such Auction Date shall be less
                    than the rate specified therein;

                         (B)  such number or a lesser number of Outstanding
                    shares of such series to be determined as set forth in
                    clause (iv) of paragraph 4(a) of this Part II if the
                    Applicable Rate for shares of such series determined on such
                    Auction Date shall be equal to the rate specified therein;
                    or

                         (C)  the number of Outstanding shares of such series
                    specified in such Bid if the rate specified therein shall be
                    higher than the Maximum Rate for shares of such series, or
                    such number or a lesser number of Outstanding shares of such
                    series to be determined as set forth in clause (iii) of
                    paragraph 4(b) of this Part II if the rate specified therein
                    shall be higher than the Maximum Rate for shares of such
                    series and Sufficient Clearing Bids for shares of such
                    series do not exist.


                                       B-68

<PAGE>


               (ii) A Sell Order by a Beneficial Owner or an Existing Holder of
        shares of a series of Preferred Shares subject to an Auction on any
        Auction Date shall constitute an irrevocable offer to sell:

                         (A)  the number of Outstanding shares of such series
               specified in such Sell Order; or

                         (B)  such number or a lesser number of Outstanding
               shares of such series as set forth in clause (iii) of paragraph
               4(b) of this Part II if Sufficient Clearing Bids for shares of
               such series do not exist; provided, however, that a Broker-Dealer
               that is an Existing Holder with respect to shares of a series of
               Preferred Shares shall not be liable to any Person for failing to
               sell such shares pursuant to a Sell Order described in the
               proviso to paragraph 2(c) of this Part II if (1) such shares were
               transferred by the Beneficial Owner thereof without compliance by
               such Beneficial Owner or its transferee Broker-Dealer (or other
               transferee person, if permitted by the Trust) with the provisions
               of paragraph 6 of this Part II or (2) such Broker-Dealer has
               informed the Auction Agent pursuant to the terms of its
               Broker-Dealer Agreement that, according to such Broker-Dealer's
               records, such Broker-Dealer believes it is not the Existing
               Holder of such shares.

               (iii) A Bid by a Potential Beneficial Holder or a Potential
        Holder of shares of a series of Preferred Shares subject to an Auction
        on any Auction Date shall constitute an irrevocable offer to purchase:

                         (A)  the number of outstanding shares of such series
               specified in such Bid if the Applicable Rate for shares of such
               series determined on such Auction Date shall be higher than the
               rate specified therein; or

                         (B)  such number or a lesser number of Outstanding
               shares of such series as set forth in clause (v) of paragraph
               4(a) of this Part II if the Applicable Rate for shares of such
               series determined on such Auction Date shall be equal to the rate
               specified therein.

          (c)  No Order for any number of Preferred Shares other than whole
     shares shall be valid.

2.      Submission of Orders by Broker-Dealers to Auction Agent.

          (a)  Each Broker-Dealer shall submit in writing to the Auction Agent
     prior to the Submission Deadline on each Auction Date all Orders for
     Preferred Shares of a series subject to an Auction on such Auction Date
     obtained by such Broker-Dealer, designating itself (unless otherwise
     permitted by the Trust) as an Existing Holder in respect of shares subject
     to Orders submitted or deemed submitted to it by Beneficial Owners and as a
     Potential Holder in respect of shares subject to Orders submitted to it by
     Potential Beneficial Owners, and shall specify with respect to each Order
     for such shares:

               (i)  the name of the Bidder placing such Order (which shall be
        the Broker- Dealer unless otherwise permitted by the Trust);


                                       B-69

<PAGE>


               (ii)  the aggregate number of shares of such series that are the
        subject of such Order;

               (iii) to the extent that such Bidder is an Existing Holder of
        shares of such series:

                         (A)  the number of shares, if any, of such series
               subject to any Hold Order of such Existing Holder;

                         (B)  the number of shares, if any, of such series
               subject to any Bid of such Existing Holder and the rate specified
               in such Bid; and

                         (C)  the number of shares, if any, of such series
               subject to any Sell Order of such Existing Holder; and

               (iv)  to the extent such Bidder is a Potential Holder of shares
        of such series, the rate and number of shares of such series specified
        in such Potential Holder's Bid.

          (b)  If any rate specified in any Bid contains more than three figures
     to the right of the decimal point, the Auction Agent shall round such rate
     up to the next highest one thousandth (.001) of 1%.

          (c)  If an Order or Orders covering all of the outstanding Preferred
     Shares of a series held by any Existing Holder is not submitted to the
     Auction Agent prior to the Submission Deadline, the Auction Agent shall
     deem a Hold Order to have been submitted by or on behalf of such Existing
     Holder covering the number of Outstanding shares of such series held by
     such Existing Holder and not subject to Orders submitted to the Auction
     Agent; provided, however, that if an Order or Orders covering all of the
     Outstanding shares of such series held by any Existing Holder is not
     submitted to the Auction Agent prior to the Submission Deadline for an
     Auction relating to a Special Rate Period consisting of more than 91 Rate
     Period Days, the Auction Agent shall deem a Sell Order to have been
     submitted by or on behalf of such Existing Holder covering the number of
     Outstanding shares of such series held by such Existing Holder and not
     subject to Orders submitted to the Auction Agent.

          (d)  If one or more Orders of an Existing Holder are submitted to the
     Auction Agent covering in the aggregate more than the number of Outstanding
     Preferred Shares of a series subject to an Auction held by such Existing
     Holder, such Orders shall be considered valid in the following order of
     priority:

               (i)   all Hold Orders for shares of such series shall be
        considered valid, but only up to and including in the aggregate the
        number of Outstanding shares of such series held by such Existing
        Holder, and if the number of shares of such series subject to such Hold
        Orders exceeds the number of Outstanding shares of such series held by
        such Existing Holder, the number of shares subject to each such Hold
        Order shall be reduced pro rata to cover the number of Outstanding
        shares of such series held by such Existing Holder;

               (ii)  (A) any Bid for shares of such series shall be considered
        valid up to and including the excess of the number of Outstanding shares
        of such series held by such


                                       B-70

<PAGE>


     Existing Holder over the number of shares of such series subject to any
     Hold Orders referred to in clause (i) above;

                         (B) subject to subclause (A), if more than one Bid of
               an Existing Holder for shares of such series is submitted to the
               Auction Agent with the same rate and the number of Outstanding
               shares of such series subject to such Bids is greater than such
               excess, such Bids shall be considered valid up to and including
               the amount of such excess, and the number of shares of such
               series subject to each Bid with the same rate shall be reduced
               pro rata to cover the number of shares of such series equal to
               such excess;

                         (C) subject to subclauses (A) and (B), if more than
               one Bid of an Existing Holder for shares of such series is
               submitted to the Auction Agent with different rates, such Bids
               shall be considered valid in the ascending order of their
               respective rates up to and including the amount of such excess;
               and

                         (D) in any such event, the number, if any, of such
               Outstanding shares of such series subject to any portion of Bids
               considered not valid in whole or in part under this clause (ii)
               shall be treated as the subject of a Bid for shares of such
               series by or on behalf of a Potential Holder at the rate therein
               specified; and

               (iii) all Sell Orders for shares of such series shall be
        considered valid up to and including the excess of the number of
        Outstanding shares of such series held by such Existing Holder over the
        sum of shares of such series subject to valid Hold Orders referred to in
        clause (i) above and valid Bids referred to in clause (ii) above.

          (e)  If more than one Bid for one or more shares of a series of
     Preferred Shares is submitted to the Auction Agent by or on behalf of any
     Potential Holder, each such Bid submitted shall be a separate Bid, with the
     rate and number of shares therein specified.

          (f)  Any Order submitted by a Beneficial Owner or a Potential
     Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction
     Agent, prior to the Submission Deadline on any Auction Date, shall be
     irrevocable.

3.      Determination of Sufficient Clearing Bids, Winning Bid Rate and
        Applicable Rate.

          (a)  Not earlier than the Submission Deadline on each Auction Date for
     shares of a series of Preferred Shares, the Auction Agent shall assemble
     all valid Orders submitted or deemed submitted to it by the Broker-Dealers
     in respect of shares of such series (each such Order as submitted or deemed
     submitted by a Broker-Dealer being hereinafter referred to individually as
     a "Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as
     the case may be, or as a "Submitted Order" and collectively as "Submitted
     Hold Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may
     be, or as "Submitted Orders") and shall determine for such series:

               (i)   the excess of the number of Outstanding shares of such
        series over the number of Outstanding shares of such series subject to
        Submitted Hold Orders (such excess being hereinafter referred to as the
        "Available Preferred Shares" of such series);


                                       B-71

<PAGE>


           (ii) from the Submitted Orders for shares of such series whether:

                     (A) the number of Outstanding shares of such series subject
               to Submitted Bids of Potential Holders specifying one or more
               rates equal to or lower than the Maximum Rate for shares of such
               series;

                  exceeds or is equal to the sum of:

                     (B) the number of Outstanding shares of such series subject
               to Submitted Bids of Existing Holders specifying one or more
               rates higher than the Maximum Rate for shares of such series; and

                     (C) the number of Outstanding shares of such series subject
               to Submitted Sell Orders

               (in the event such excess or such equality exists (other than
               because the number of shares of such series in subclauses (B) and
               (C) above is zero because all of the Outstanding shares of such
               series are subject to Submitted Hold Orders), such Submitted Bids
               in subclause (A) above being hereinafter referred to collectively
               as "Sufficient Clearing Bids" for shares of such series); and

           (iii) if Sufficient Clearing Bids for shares of such series exist,
      the lowest rate specified in such Submitted Bids (the "Winning Bid Rate"
      for shares of such series) which if:

                     (A) (I) each such Submitted Bid of Existing Holders
               specifying such lowest rate and (II) all other such Submitted
               Bids of Existing Holders specifying lower rates were rejected,
               thus entitling such Existing Holders to continue to hold the
               shares of such series that are subject to such Submitted Bids;
               and

                     (B) (I) each such Submitted Bid of Potential Holders
               specifying such lowest rate and (II) all other such Submitted
               Bids of Potential Holders specifying lower rates were accepted;

               would result in such Existing Holders described in subclause (A)
               above continuing to hold an aggregate number of Outstanding
               shares of such series which, when added to the number of
               Outstanding shares of such series to be purchased by such
               Potential Holders described in subclause (B) above, would equal
               not less than the Available Preferred Shares of such series.

           (b) Promptly after the Auction Agent has made the determinations
      pursuant to paragraph 3(a) of this Part II, the Auction Agent shall advise
      the Trust of the Maximum Rate for shares of the series of Preferred Shares
      for which an Auction is being held on the Auction Date and, based on such
      determination, the Applicable Rate for shares of such series for the next
      succeeding Rate Period thereof as follows:


                                       B-72

<PAGE>


           (i)   if Sufficient Clearing Bids for shares of such series exist,
      that the Applicable Rate for all shares of such series for the next
      Succeeding Rate Period thereof shall be equal to the Winning Bid Rate for
      shares of such series so determined;

           (ii)  if Sufficient Clearing Bids for shares of such series do not
      exist (other than because all of the Outstanding shares of such series are
      subject to Submitted Hold Orders), that the Applicable Rate for all shares
      of such series for the next succeeding Rate Period thereof shall be equal
      to the Maximum Rate for shares of such series; or

           (iii) if all of the Outstanding shares of such series are subject to
      Submitted Hold Orders, that the Dividend Period next succeeding the
      Auction shall automatically be the same length as the immediately
      preceding Dividend Period and the Applicable Rate for all shares of such
      series for the next succeeding Dividend Period thereof shall be the All
      Hold Rate.

4.    Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
      Allocation of Shares.

      Existing Holders shall continue to hold the Preferred Shares that are
subject to Submitted Hold Orders, and, based on the determinations made pursuant
to paragraph 3(a) of this Part II, the Submitted Bids and Submitted Sell Orders
shall be accepted or rejected by the Auction Agent and the Auction Agent shall
take such other action as set forth below:

       (a) If Sufficient Clearing Bids for shares of a series of Preferred
   Shares have been made, all Submitted Sell Orders with respect to shares of
   such series shall be accepted and, subject to the provisions of paragraphs
   4(d) and 4(e) of this Part II, Submitted Bids with respect to shares of such
   series shall be accepted or rejected as follows in the following order of
   priority and all other Submitted Bids with respect to shares of such series
   shall be rejected:

           (i)   Existing Holders' Submitted Bids for shares of such series
      specifying any rate that is higher than the Winning Bid Rate for shares of
      such series shall be accepted, thus requiring each such Existing Holder to
      sell the Preferred Shares subject to such Submitted Bids;

           (ii)  Existing Holders' Submitted Bids for shares of such series
      specifying any rate that is lower than the Winning Bid Rate for shares of
      such series shall be rejected, thus entitling each such Existing Holder to
      continue to hold the Preferred Shares subject to such Submitted Bids;

           (iii) Potential Holders' Submitted Bids for shares of such series
      specifying any rate that is lower than the Winning Bid Rate for shares of
      such series shall be accepted;

           (iv)  each Existing Holder's Submitted Bid for shares of such series
      specifying a rate that is equal to the Winning Bid Rate for shares of such
      series shall be rejected, thus entitling such Existing Holder to continue
      to hold the Preferred Shares subject to such Submitted Bid, unless the
      number of Outstanding Preferred Shares subject to all such Submitted Bids
      shall be greater than the number of Preferred Shares ("remaining shares")


                                       B-73

<PAGE>


      equal to the excess of the Available Preferred Shares of such series over
      the number of Preferred Shares subject to Submitted Bids described in
      clauses (ii) and (iii) of this paragraph 4(a), in which event such
      Submitted Bid of such Existing Holder shall be rejected in part, and such
      Existing Holder shall be entitled to continue to hold Preferred Shares
      subject to such Submitted Bid, but only in an amount equal to the number
      of Preferred Shares of such series obtained by multiplying the number of
      remaining shares by a fraction, the numerator of which shall be the number
      of Outstanding Preferred Shares held by such Existing Holder subject to
      such Submitted Bid and the denominator of which shall be the aggregate
      number of Outstanding Preferred Shares subject to such Submitted Bids made
      by all such Existing Holders that specified a rate equal to the Winning
      Bid Rate for shares of such series; and

           (v)   each Potential Holder's Submitted Bid for shares of such series
      specifying a rate that is equal to the Winning Bid Rate for shares of such
      series shall be accepted but only in an amount equal to the number of
      shares of such series obtained by multiplying the number of shares in the
      excess of the Available Preferred Shares of such series over the number of
      Preferred Shares subject to Submitted Bids described in clauses (ii)
      through (iv) of this paragraph 4(a) by a fraction, the numerator of which
      shall be the number of Outstanding Preferred Shares subject to such
      Submitted Bid and the denominator of which shall be the aggregate number
      of Outstanding Preferred Shares subject to such Submitted Bids made by all
      such Potential Holders that specified a rate equal to the Winning Bid Rate
      for shares of such series.

       (b) If Sufficient Clearing Bids for shares of a series of Preferred
   Shares have not been made (other than because all of the Outstanding shares
   of such series are subject to Submitted Hold Orders), subject to the
   provisions of paragraph 4(d) of this Part II, Submitted Orders for shares of
   such series shall be accepted or rejected as follows in the following order
   of priority and all other Submitted Bids for shares of such series shall be
   rejected:

           (i)   Existing Holders' Submitted Bids for shares of such series
      specifying any rate that is equal to or lower than the Maximum Rate for
      shares of such series shall be rejected, thus entitling such Existing
      Holders to continue to hold the Preferred Shares subject to such Submitted
      Bids;

           (ii)  Potential Holders' Submitted Bids for shares of such series
      specifying any rate that is equal to or lower than the Maximum Rate for
      shares of such series shall be accepted; and

           (iii) Each Existing Holder's Submitted Bid for shares of such series
      specifying any rate that is higher than the Maximum Rate for shares of
      such series and the Submitted Sell Orders for shares of such series of
      each Existing Holder shall be accepted, thus entitling each Existing
      Holder that submitted or on whose behalf was submitted any such Submitted
      Bid or Submitted Sell Order to sell the shares of such series subject to
      such Submitted Bid or Submitted Sell Order, but in both cases only in an
      amount equal to the number of shares of such series obtained by
      multiplying the number of shares of such series subject to Submitted Bids
      described in clause (ii) of this paragraph (b) by a


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<PAGE>


      fraction, the numerator of which shall be the number of Outstanding shares
      of such series held by such Existing Holder subject to such Submitted Bid
      or Submitted Sell Order and the denominator of which shall be the
      aggregate number of Outstanding shares of such series subject to all such
      Submitted Bids and Submitted Sell Orders.

           (c) If all of the Outstanding shares of a series of Preferred Shares
   are subject to Submitted Hold Orders, all Submitted Bids for shares of such
   series shall be rejected.

           (d) If, as a result of the procedures described in clause (iv) or (v)
   of paragraph 4(a) or clause (iii) of paragraph 4(b) of this Part II, any
   Existing Holder would be entitled or required to sell, or any Potential
   Holder would be entitled or required to purchase, a fraction of a share of a
   series of Preferred Shares on any Auction Date, the Auction Agent shall, in
   such manner as it shall determine in its sole discretion, round up or down
   the number of Preferred Shares of such series to be purchased or sold by any
   Existing Holder or Potential Holder on such Auction Date as a result of such
   procedures so that the number of shares so purchased or sold by each Existing
   Holder or Potential Holder on such Auction Date shall be whole Preferred
   Shares.

           (e) If, as a result of the procedures described in clause (v) of
   paragraph 4(a) of this Part II, any Potential Holder would be entitled or
   required to purchase less than a whole share of a series of Preferred Shares
   on any Auction Date, the Auction Agent shall, in such manner as it shall
   determine in its sole discretion, allocate Preferred Shares of such series
   for purchase among Potential Holders so that only whole shares of Preferred
   Shares of such series are purchased on such Auction Date as a result of such
   procedures by any Potential Holder, even if such allocation results in one or
   more Potential Holders not purchasing Preferred Shares of such series on such
   Auction Date.

           (f) Based on the results of each Auction for shares of a series of
   Preferred Shares, the Auction Agent shall determine the aggregate number of
   shares of such series to be purchased and the aggregate number of shares of
   such series to be sold by Potential Holders and Existing Holders and, with
   respect to each Potential Holder and Existing Holder, to the extent that such
   aggregate number of shares to be purchased and such aggregate number of
   shares to be sold differ, determine to which other Potential Holder(s) or
   Existing Holder(s) they shall deliver, or from which other Potential
   Holder(s) or Existing Holder(s) they shall receive, as the case may be,
   Preferred Shares of such series. Notwithstanding any provision of the Auction
   Procedures to the contrary, in the event an Existing Holder or Beneficial
   Owner of a series of Preferred Shares with respect to whom a Broker-Dealer
   submitted a Bid to the Auction Agent for such shares that was accepted in
   whole or in part, or submitted or is deemed to have submitted a Sell Order
   for such shares that was accepted in whole or in part, fails to instruct its
   Agent Member to deliver such shares against payment therefor, partial
   deliveries of Preferred Shares that have been made in respect of Potential
   Holders' or Potential Beneficial Owners' submitted Bids for shares of such
   series that have been accepted in whole or in part shall constitute good
   delivery to such Potential Holders and Potential Beneficial Owners.

           (g) Neither the Trust nor the Auction Agent nor any affiliate of
   either shall have any responsibility or liability with respect to the failure
   of an Existing Holder, a Potential


                                       B-75

<PAGE>


   Holder, a Beneficial Owner, a Potential Beneficial Owner or its respective
   Agent Member to deliver Preferred Shares of any series or to pay for
   Preferred Shares of any series sold or purchased pursuant to the Auction
   Procedures or otherwise.

5.   Auction Agent.

     For so long as any Preferred Shares are outstanding, the Auction Agent,
duly appointed by the Trust to so act, shall be in each case a commercial bank,
trust company or other institution independent of the Trust and its affiliates
(which, however, may engage or have engaged in business transactions with the
Trust or its affiliates), and at no time shall the Trust or any of its
affiliates act as the Auction Agent in connection with the Auction Procedures.
If the Auction Agent resigns or for any reason its appointment is terminated
during any period that any Preferred Shares are outstanding, the Trustees shall
attempt to appoint another qualified commercial bank, trust company or
institution to act as the Auction Agent. The Auction Agent's registry of
Existing Holders of a series of Preferred Shares shall be conclusive and binding
on the Broker-Dealers. A Broker-Dealer may inquire of the Auction Agent between
3:00 p.m. on the Business Day preceding an Auction for a series of Preferred
Shares and 9:30 a.m. on the Auction Date for such Auction to ascertain the
number of shares of such series in respect of which the Auction Agent has
determined such Broker-Dealer to be an Existing Holder. If such Broker-Dealer
believes it is the Existing Holder of fewer shares of such series than specified
by the Auction Agent in response to such Broker-Dealer's inquiry, such
Broker-Dealer may so inform the Auction Agent of that belief. Such Broker-Dealer
shall not, in its capacity as Existing Holder of shares of such series, submit
Orders in such Auction in respect of shares of such series covering in the
aggregate more than the number of shares of such series specified by the Auction
Agent in response to such Broker-Dealer's inquiry.

6.   Transfer of Preferred Shares.

     Unless otherwise permitted by the Trust, a Beneficial Owner or an Existing
Holder may sell, transfer or otherwise dispose of Preferred Shares only in whole
shares and only pursuant to a Bid or Sell Order placed with the Auction Agent in
accordance with the procedures described in this Part II or to a Broker-Dealer;
provided, however, that (a) a sale, transfer or other disposition of Preferred
Shares from a customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer as the holder of such shares to that Broker-Dealer or another
customer of that Broker-Dealer shall not be deemed to be a sale, transfer or
other disposition for purposes of this paragraph 6 if such Broker-Dealer remains
the Existing Holder of the shares so sold, transferred or disposed of
immediately after such sale, transfer or disposition and (b) in the case of all
transfers other than pursuant to Auctions, the Broker-Dealer (or other Person,
if permitted by the Trust) to whom such transfer is made shall advise the
Auction Agent of such transfer.

7.   Global Certificate.

Prior to the commencement of a Voting Period, (i) all of the shares of a series
of Preferred Shares outstanding from time to time shall be represented by one
global certificate registered in the name of the Securities Depository or its
nominee and (ii) no registration of transfer of shares of a series of Preferred
Shares shall be made on the books of the Trust to any Person other than the
Securities Depository or its nominee.

September 18, 2002

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